Open Text Corp (OTEX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Open Text Corporation Second Quarter Fiscal Year 2012 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, February 1, 2012. I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations.

Thank you and good afternoon. I would like to take this opportunity to welcome Open Text President and CEO Mark Barrenechea. Also with me today is Open Text's CFO, Paul McFeeters. As with our previous calls, we'll read prepared remarks, followed by a question-and-answer session.

The call will last approximately one hour, with a replay available shortly thereafter. I would also like to direct investors to the Investor Relations section of our website, where we have posted an updated PowerPoint.

Please note that during the course of this conference call we may make statements relating to the future performance of Open Text that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information -- statements, excuse me -- made today.

Certain material factors or assumptions were applied in drawing any such conclusion, or while making any such forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusions, forecast, or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing the conclusion or making the forecast or projection as reflected in the forward-looking information.

As well as risk factors that may affect the future performance and results of Open Text are contained in Open Text Form 10-K and Form 10-Qs, as well as in our press release that was issued earlier today, each of which may be found on our website. We undertake no obligation to update these forward looking statement unless required by law.

In addition, our conference call will include a discussion of certain non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release, which may be found on our website. With that, I'll hand the call over to Paul McFeeters.

Turning to the financial results, I will highlight our second-quarter fiscal 2012. Total revenue for the quarter was $321 million, up 20% compared to $267 million for the same period last year. License revenue for the quarter was $90 million, up 13% compared to $79 million reported for the same period last year.

Maintenance revenue for the quarter was $165 million, up 21%, compared to $137 million in the previous year. Services and other revenue in the quarter was $66 million, up 29%, compared to $52 million in the same period last year.

Gross margin for the quarter, before amortization of acquired technology, remained relatively consistent this quarter at 73.8%, compared to 74.7% in the same period last year. The decrease was primarily related to the initial write-down in maintenance revenue of $1.7 million, due to the acquisitions of Metastorm and Global 360.

Pre-tax adjusted (inaudible) margins before interest expense and stock compensation was approximately $99 million this quarter, compared to $84 million in Q2 last year.

Adjusted net income increased 15% to $82 million this quarter, from $71 million in the same quarter last year. Adjusted EPS was $1.39 on a diluted basis, up 14% from $1.22 per share for the same period a year ago. The sequential effect of foreign currency movement on adjusted EPS for Q2 was a negative $0.03. The adjusted tax rate for the quarter is 14%, the same as it was for last fiscal year.

Net income for the second quarter in accordance with GAAP was $47 million, or $0.81 per share on a diluted basis, compared to $37 million, or $0.64 per share on a diluted basis from the same period a year ago. There were approximately 58.7 million shares outstanding on a fully diluted basis for the second quarter.

Operating cash flow was approximately $45 million compared to $40 million in the same quarter last your. On a year-to-date basis, operating cash flow was $90 million compared to $89 million in the same period last year. Cash flow year-to-date has been impacted by three days of additional DSO, representing a timing difference of approximately $12 million, and changes in working capital of $8 million.

On the balance sheet at December 31, 2011, deferred revenue was $237 million, compared to [$256] million as of June 30, 2011. Accounts receivable was $167 million, compared to $155 million at the end of the last fiscal year. Day sales outstanding were 47 days as of December 31, 2011, compared to 49 days at June 30, 2011, and 44 days at the end of Q2 of fiscal 2011.

During the quarter we closed our financing by way of a term loan A of $600 million and an available operating line of $100 million. Our pricing on the term loan A is LIBOR plus 2.50% with no foreign LIBOR. If our debt/EBITDA ratio reaches 1.5 to 1, our rate drives the LIBOR plus 2.25%. Our current ratio is 1.8. Our net addition to cash was $314 million after repaying the previous term loan B in the amount of $285 million and a revolver in the amount of $49 million.

There is no change to our pre-tax adjusted operating model for this quarter, and we expect our annual operating net margin model to continue to be in the range of 25% to 30%. Our recent acquisitions continue to have an impact on the overall operating margins in FY12, as we continue to bring them up to Open Text operating model. We anticipate that this will improve through the year, but will not be fully on target until fiscal 2013.

The full details of our operating model are available on our website. Now I'll turn the call over to Mark.

Thank you, Paul, and welcome, everyone, to our FY 2012 Q2 earnings call. Let me start with saying I am thrilled to join Open Text as CEO and be located out of Waterloo, Ontario. I come to Open Text with 20 years of leadership experience in the high-tech industry, primarily in enterprise software.

These 20 years include being President and Chief Executive Officer at Silicon Graphics, Executive Vice President and Chief Technology Officer at Computer Associates, as well as Senior Vice President of Applications Development and a member of the Executive Management Team at Oracle. These previous leadership experiences place me in a unique position to bring Open Text to the next level of success.

I'd like to spend the time today on two things -- an overview of our strong Q2 results, as well my initial observations on Open Text, including our strategic opportunity and my initial set of priorities.

Let me start with the quarter. Q2 revenue was $321.5 million, with license revenue of $89.7 million and adjusted earnings of $1.39. All three results were record highs for Open Text. I'm very pleased with the quality of Q2 revenue. License revenue grew 37.8% quarter-over-quarter, and 13.3% year-over-year. Further, nearly 50% of our license revenue was sourced from new customers.

The Americas contributed 53% of total revenue, EMEA performed well in a tough economic environment, with a 40% contribution, and APJ, albeit on a smaller base, had strong growth while contributing 7% of total revenues. The maintenance business was strong, and our professional services margins have improved for three quarters in a row. There were seven transactions over $1 million and 22 additional deals over $500,000.

The integration of Metastorm and Global 360 is proceeding as planned, and we expect to see revenues this fiscal year more in line with our historical acquisition models, which is a 15% revenue decline in the first year of combined operations.

Overall, our business performed well despite continuing economic uncertainty in many parts of the world. Also within the quarter, we held our first annual user conference, we held our annual user conference, Content World, in Orlando Florida. It was another successful event for us, with over 1,400 attendees. We also made several important product announcements during the quarter, with the underlying theme of access to information. Let me spend a moment and walk you through these.

First, Tempo. Tempo Client Server Addition is a new module integrated into our core ECM suite. It is a no-training-required, thus easy to use secured document sharing product that allows enterprise users to share and manage content on smartphones, tablets, PCs, or laptops while synchronizing information across these devices. It has the attributes of the cloud, but inside the firewall. Tempo goes GA this quarter.

We also released Open Text Portal Site Management so users can gain access to SAP ERP content through one piece of software. We also released Open Text auto-classification for unstructured data, giving organizations a powerful way to manage their attention and disposition of high-volume, low-touch content, such as social media, e-mail, office documents, and legacy content.

We took our business process management software mobile, allowing organizations to initiate, approve, and participate in BPM processes from any device.

We also announced major enhancements to Version 2 of Open Text Web and Social Analytics, which allows for deep real-time web usage and social interaction insights, so customers can identify actionable trends, and optimize for online initiatives.

It was a good product quarter but an even better customer quarter. Hydro 1 in Canada is simplifying their customer care in field service processes with our ECM software. Peabody Energy in the US has extended their core ECM usage into e-mail management. Salzgitter AG, a leading European steel and technology company, has extended their ECM usage with our SAP vendor invoice management software.

Taco Bell's web presence is now powered by our web experience management software and hosted at Open Text. Tenet Healthcare Corporation, one of the largest investor-owned healthcare delivery systems in the United States, purchased the Open Text ECM suite as a resource to enhance their document and records management functionality and efficiency. Volkswagen Finance in China is deploying our ECM suite for dealer contract management.

I wanted to spend time on customers from the quarter because these examples illustrate our strategic opportunity, and ultimately why I joined Open Text. There are four reasons that convinced me Open Text will lead the market. Number one, ECM is far from mature. Open Text is best position to continue to gain share over EMC and Documentum and IBM and FileNet.

We view Microsoft as a partner today as we build products on top of SharePoint, and web experience management is essential as we orchestrate content together, both inside and outside the firewall. Core ECM is clearly important to us, and the market is far from mature.

Number two reason, process-enabling core ECM. We call this BPM, and as you know, we have made two strategic acquisitions in this space. Three, delivering packaged applications that are content-centric, not transaction-centric. There are many enterprise applications that will benefit from a content-centric orientation, such as invoice management, expense management, claims processing, contract management, loan processing, field service, search, and many more.

The style of these applications require a foundation of ECM and BPM. Longer-term, as categories evolve, the market will include ECM, BPM and DI. Open Text is uniquely positioned to not only capture these opportunities, but also create them.

We have 4,600 employees focused on ECM and BPM, proven products, global operations, and scale in 31 countries. Many markets we have either lightly penetrated or are not touching at all, strong financials, and a stellar customer base to build upon. Perhaps most importantly, Open Text employees are the experts in content management. What I see inside that perhaps you can't see outside is the amazing passion and talent at Open Text.

Further, we have strong partnerships with all our application providers, and unique technology that open these platforms for content processes and application. Our relationship with SAP is strong, our relationship with Microsoft continues to emerge, and our relationship with Oracle is an untapped opportunity.

Let me transition to our FY12 financial model, go-forward operations, and an initial view of my priorities. As for the FY12 financial model, I feel confident in our previously announced pre-tax adjusted operating margin target. As for operations, my priorities are pretty straightforward -- grow the business, improve our efficiency, and continue with strong earnings.

As for growing the business, we need a multi-path execution strategy with a strong emphasis on license growth. This means an optimized direct go-to-market sales force companioned with a world-class channel, increased emphasis on large technology partners that expand our distribution capabilities, selectively filling territory coverage.

A stronger presence in key markets and verticals such as US federal, US commercial, Japan, the bricks, as well as manufacturing. I also see opportunity where we can add more value to customers in our maintenance offering. We will continue to acquire.

We just spend a little more time on the channel. Open Text is well-positioned to have a larger and more robust channel and partner program. First, through Tier 1 ERP providers; second, through significant Tier 2 application providers; and third, a larger SI am FSI network.

As for improving our efficiency, best-in-class businesses get more efficient year-over-year. 30 days into Open Text I can already see paths to releasing unlocked value in some of our processes and approaches to running the business. As we unlock that value, we unlock dollars that can be reinvested back into the business. Strong earnings and cash flow remain a priority.

In summary, we are in the right double-digit market -- ECM, BPM, archiving, fax, text analytics, et cetera. Our target model for R&D expense is between 14% and 16% of total revenues. We are in the right markets with the right spend. But there is a disconnect between market growth rates, our spend, and our growth.

To me, that is the opportunity, and the basic solve is an optimized selling model, and separating growth products versus sustaining margin products, so as a Company, we have more focus while maintaining operating margins. For all these reasons, the future has never looked better for Open Text.

Before I open the call for questions, I want to recognize the incredible contribution from John Shackleton and his many years of service here at Open Text. We all wish him the best in his future endeavors. With that, I would like to open the call for your questions.

(Operator Instructions)

Richard Tse, Cormark Securities.

Yes, thank you. A couple quick questions here. Mark, how would you say your style on the outset differs from John's, in light of the priorities that you're focusing on?

Again, I would keep style aside for a moment, and I think let's just talk about the opportunity and the priorities and we can come back to style. I'd just like to reinforce the opportunities that I see here in the first 30 days. Number one continues to be core ECM share gains. It's going to be a unifying narrative for us, we are competing very effectively against IBM and EMC, and you're going to see us dial-up in this market for core ECM market share gains. Second, the BPM market. Again third, if I look at what we're doing with SAP and Microsoft, we're probably under 10% penetrated in their installed bases.

We're just in the first inning of a nine-inning game of continuing to build an ecosystem around the core ERP providers. I look at our distribution capability, there's just opportunity in key verticals. You look at the public sector, this should be in the top three verticals of what we do. Manufacturing isn't highlighted as a key vertical at all. Then when you drive down in Japan, US commercial, and federal, these are opportunities for us that we're just not connecting at scale our product to the customers. That's the opportunity that in my first 30 days seems to be pretty clear.

Right.

In terms of priorities, I think I can state this pretty simply, it's earnings and license growth. That quickly deconstructs into delivering a solid FY 2012, balancing organic growth with acquired growth, while continuing to be margin-focused. That might be a stronger emphasis on that balance, first leading with acquisitions, and probably a stronger orientation towards strategic operations, which is going to hopefully translate into improved efficiency. Certainly our out-of-the-gate hope is that we can unlock some value and free up dollars so we can re-invest in the business without affecting our margin profile.

Is your bonus structure similar to the one that John had as outlined in your circulars?

I think my comp plan's filed already, on file. You can take a read of that.

Okay. A bit of a loaded question here, but I know you've gone through your priorities, but if you had to change a single thing right now, in terms of what you've seen in the past 30 days, what would that be?

I would say a stronger emphasis on the core ECM market. Again, we're competing very effectively against EMC and IBM. We released an investor deck today, I don't know if folks had a chance to see it. If not, please go to our website. We added a slide in there that sort of shows the overall trend of IBM and EMC and us. We're on an up-tick, they're on a down-tick. So if there was one thing, I'll say increasing the narrative around gaining share in the core market, because it's far from mature.

That's great, thank you,.

Thank you.

Brian Freed, Wunderlich Securities.

Thanks for taking my call, and congratulations Mark. Looking forward to continuing to deal with you.

Thanks Brian. You're not going to ask me an E and O question today, are you?

No, but I did want to -- since I'm pretty familiar with your background and you mentioned Oracle as a currently promising -- but as yet untapped -- opportunity, given your history with Oracle, can you talk a little bit about how you think you might be able to leverage those past relationships and that past history to move Oracle into a tapped opportunity and a revenue-producing partner?

Sure, great question Brian. I would -- first of all, the relationships are there. I've spoken to the leadership team at Oracle already, and the door is open for us. If I make a contract to the SAP relationship, because I think it will open up -- or maybe make a little clear the opportunity with Oracle is one of the reasons our SAP relationship is very strong is that first starts with our products. Our products are well-integrated and differentiated from travel expense management, vendor invoice management. We have -- we add clear value to customers, and third, we are very well-aligned in our field organizations, from senior leadership down to individual AEs, account executives, throughout the world. So compelling product, clear alignment, education down to the AE level.

When I look at the Oracle opportunity, we still have a little work to do on our product, to have that bright line value and differentiation. The door is open for us to build that strategic alliance to help Oracle customers. But it's sort of a tale of two different stories. One is a more mature product versus a less-mature product, but Oracle is certainly very interested in working with us.

Okay, thanks.

Kris Thompson, National Bank Financial.

Great, thanks Mark and welcome to Canada.

Thank you.

I just want to chat a little bit about the December quarter. A lot of people were a bit paranoid about lower than normal budget flush, looks like you guys have managed to escape that. How did you guys escape that crisis? In your recent discussions with customers, do you think spending's going to slow a little bit in half one? Maybe you could give us an idea of the spend into half one and half two of the calendar year, if you don't mind?

Sure. I wasn't obviously here through Q2, but I can give you a sense of what I am seeing my first 30 days in. The first is why customers are considering us. I can already see a very strong clustering of reasons. One, compliance and regulation. The need to manage bigger and unstructured data. Information security remains top of mind. Mobility cloud and reducing costs by globalizing and standardizing on best practices. In my first 30 days with the sales force and customers, you can already see a very strong buying consideration with Open Text solutions. I think that pairs very well to uncertain economic times.

Now in a tougher economy, look, we're going to control what we can control, and what we control is where we place our team, what verticals we go after, what opportunities we try to develop, spending more time and insight in pipeline. I don't see any change in economic environment quarter over quarter. But I'll tell you that the clustering of why folks are considering Open Text seemed pretty compelling, both in an up or in a down economy.

Okay, that's helpful. You did mention the Tempo solution in your prepared remarks. Can you give us an idea of the pricing model for that solution, and the climb interest so far? Maybe if you could provide some materiality to your revenue profile going forward, so we can get our heads around it, if that's really going to be a big driver this year, or is it a few years away still?

Sure. In terms of the approach to pricing, we are -- Tempo is an additional charged-for module on top of ECM. So it's not part of an ECM ULA or bundle. You have to -- the initial version of Tempo is an additional module on top of an already deployed and paid-for license, so it's additional revenue. We don't give guidance for the year, Paul may want to comment on the go-forward-looking revenue, but right now there are no revenue projections for it or nor change to our model for the year.

Okay, fair enough, and just one more for me. Actually Paul, just on the CapEx,, it looked a little bit hotter than I was expecting in the quarter. Did you have some more CapEx in the Waterloo, for your new building there? Are you done? And what's the normal maintenance level of CapEx going forward on a quarterly basis?

Yes Kris, did have a final CapEx for the Waterloo building was in this quarter, about $4 million. So if you back that out, that would be our normal run. We CapEx in about the mid-20s as our ongoing operating CapEx. This year, we picked up that additional $4 million as I said. That should be pretty well it for Waterloo now going forward.

Okay, thanks for taking my questions, guys. All the best.

Thanks.

Scott Penner from TD Newcrest.

Thanks. First of all Paul, on the charge this quarter, it's a little less than I was expecting. I was expecting more around the $15 million mark. Maybe you could just talk us through whether there's some still to come, and then what the cash outflow was for this quarter?

You mean on special charges?

Yes.

Yes, it was $5 million, the cash out-flow was $4 million for the quarter. I would say for the balance of the year, approximately $7 million, and most of that should show up as a charge in Q3. But the cash for the balance of the year will be something less than that, because a lot of that $7 million now is for facilities which flows out over time. Cash for the balance of the year probably about $4 million, and then the balance of about $6.5 million through the end of the fiscal year.

All right. Mark, if I could just ask, you made a comment on the integration of the BPM assets, and I just want to be clear on what you said. I think you said a 15% revenue decline in the first year from -- of operations. I think the guys there were only saying about 10% decline on the license revenue. I wanted to clear that up.

Yes, 15% license revenue reduction

License revenue, okay. Paul, do you have the revenue and earnings contribution from Global 360?

The revenue is $20 million. We are about minus -- from a GAAP standpoint, we lost about $2 million, but from an adjusted standpoint it was accretive about $0.06.

Okay, and then lastly for me Mark, just on the integration of those -- the BPM businesses, there was a timeline laid out where first there would be integration of the two Global 360 and Metastorm separate from the mothership, and then it would be integrated and cross-selling would come from that. I want to just set some expectations as to when we should assume that we are going to start to see some really significant cross-selling opportunities come in and really contribute to the revenue side?

My expectation would be it would kick off FY 2013 with the worldwide sales force, better trained, better equipped, building pipeline, and starting to see some wins. I'd like to see the junction of FY 2013 with BPM fully integrated.

Okay, that's helpful. Lastly, the margin on the professional services was quite a bit higher than it was last quarter, and quite a bit higher than I think most people were expecting. You said last quarter that the Company was feeling a little pinched on professional services capacity. Just wanted to know if you could update us on how you are feeling about that, and whether the margin is likely to come back down to the 20% level?

I think our longer-term projection is in that range. We certainly obviously showed good margins. We had full utilization, and as you know in the past, Scott, we had provided services at below optimum rates for certain acquisitions situations. We didn't really have any of that experience this quarter. From a capacity standpoint, as you can see us, yes, we would continue to look to hire in that area, which is of course good news. But I think sustainable margins are more in that 20% range that we've discussed in the past.

Okay, thanks, I'll pass the line.

Mike Abramsky with RBC Capital Markets.

Thanks very much. Hi Mark, and welcome. Mark, welcome to hear your comments on why you joined and how you looked at the Company, and those are very positive. I was wondering, based on your experience and knowledge of not only the software companies you've worked with, but others, and also what you see going forward as the kind of global environment? Where do you think -- or do have any thoughts that you're formulating on where Open Text maybe needs to be shore up to reduce risk to the business model? And maybe bring its model more to maximize the opportunities ahead of it?

Mike, I will start with the first, why I joined. This is a very good Company going to great. I've tried to find that one liner, and the best one-liner I have is the Snapple ad in the US, which is the best stuff on Earth just gets better. I view this as a very good Company. And the opportunity to bring the business to the next big milestone of $1 billion to $2 billion while having amazingly strong earnings felt like a real good match with my skill sets, and the market opportunity. I 'm thrilled to be here, and those are some of the basic reasons I joined.

In terms of the opportunity, my initial thoughts here remain, and I don't mean to be repetitive, but when you look at the core market, the core ECM market, it's far from mature. I know it's an existing market, but there will be a leader that emerges with clear market share ownership, the leader in the market gets the lion share of the profits. We're best-positioned to go capture that market opportunity. Second is content has to be process enable. Bringing on two strong assets like Metastorm and Global 360 to have that second pillar of our go-to-market with BPM is pretty appealing.

Third is, you look at what Oracle and SAP have achieved, and the scale of their companies, it's all around transactional-based applications. But there's a view that as applications get more mobile, more social, on newer type of devices, can there be a class of applications that emerge that are more content-centric, from case management to loan processing, to things such as field service. That looks like a real opportunity to me outside looking in, and as well as now inside looking out. Those are some of the reasons I joined, and some of the things that make me pretty excited about the opportunity.

Okay, that's helpful. Open Text is traditionally traded at a discount to peers. I think it may be fair to say partially because of some lack of visibility to organic growth, given the acquisition-centric model, as well as other decisions taken such as lack of guidance. I'm not asking -- because I'm sure you're unprepared at this point to state whether you're going to change policy or not, but I just wondered if you felt that with your focus on organic growth, that you think some of the issues that have led to those decisions may become more easier or different in the future?

Fair enough, Mike. As you know, we're not providing guidance, but we do provide a target model today. Paul and I have -- we're not going to change any of the metrics or sort of key disclosure around elements for FY 2012. But as we get into FY 2013, Paul and I will evaluate if there other ways we want to describe the business going forward. But for FY 2012, this quarter, through the end of the fiscal year, we are not going to change any of the metrics we've set out on.

Okay. Lastly, do think we should set up for any expectations for either investments or impacts to growth in margins that could be transitional related to your coming on board with some of the plans that you've seen, either short-term or longer-term?

I'd amplify two statements I've made. As we look towards strategic operations, I can already see opportunity to start to unlock some value and free up dollars. Those freed-up dollars I'm going to look to re-invest, right? So they're neutral to the model. We're going to continue to have a strong emphasis on our operating margin targets, regardless of the strategy we go down.

Okay, thank you.

Paul Steep, Scotia Capital.

Thanks, welcome Mark.

Thank you, Paul.

First question sort of falls on what we've just been discussing. Going back over the call here so far, you've talked a lot about unifying the narrative, dialing up the emphasis in core ECM. The question would be, what do you need to do there? You talked a little, and I would read from your prior statement that investment aren't going up, maybe they shift around a bit. What also is the timing? When do think you'd be in place that you'd be ready to run your new playbook?

Well, it's going to be for the most part pretty steady as you go in FY 2012. We have five months left FY 2012. Right? We're here in early February. Been on board for 30 days, I'm going to continue to listen, assess, gain perspective. We're going to take an evolutionary approach here through FY 2012, and I'd look towards our FY 2013 plans of where we may dial certain things up or dial things down. I want to send a clear message that it's steady as you go in FY 2012.

I want to make sure here in the early days I don't lose the opportunity to talk to as many employees, as many customers, as many analysts, as many investors as I can, to keep forming the opinion on our priorities. These are my initial views. It's steady as you go in FY 2012, some evolutionary change will happen in FY 2012, look towards FY 2013, where we dial certain things up certain things down.

Okay, to tag on to that point, or the other question that got raised from your comments here, you talked more about focusing in and highlighting growth products versus sustaining market products. When do you think we sort of talk to that? Is it sort of, we'll revisit these things come June, and get more feedback from you prior to then? Or what should people expect?

I think this will start to get into the cadence of the business almost right away, actually. Let me spend a little time on that I've talked about optimize selling, and sort of separating growth and sustaining value. On the direct -- on how we go to market on the direct side, there's certainly some coverage gaps that I'd like to see balanced. The planning for that and the adjustment for that, we're not going to wait for a long time to do. US commercial, US public sector, I look at the New York tri-state area, Japan, India, as areas that are deserving more coverage, either direct or indirect.

I'm evaluating the channel on our indirect business, and as you segment this, we obviously have our technology partners, as SAP/Oracle/Microsoft. We have business transformation partners like Accenture and Deloitte, there are others to add there. In EMEA, Atos Origin T-systems, others to add there. In the US, Raytheon and Northrop, but there's a good list of top-six FSIs that would like our channel team to start opening some doors with. And in APJ, we're just starting on a channel, with Tata TCS, Wipro emphasis, as well as Mitsubishi in Japan.

When I talk about the optimized selling model, it's really kind of picking higher-value areas that we'd like to be in and balancing our investments, and starting to elevate the channel in our ecosystem. And on separating the growth for sustaining value, I'd like our sales organization really to major in the majors. Majoring the majors is focused on license growth, but the customer service organizations to major on sustaining value. As we start to separate that gradually, that gives the sales force more focus, easier opportunity to train SEs, easier ability for SEs to understand the core products, and hopefully increase our win rate.

Fair enough. The last one, just to make sure -- all that was great and helped clarify things. The last one you sort of flagged, is it fair to state out of your comments tonight -- you talked about balancing acquisitions versus organic growth in the next year that really we're going to likely see an evolution here, and you're going to focus on these fundamental changes, and we're unlikely to see any sort of big deals unless something fantastic falls out of the sky on us?

Yes, so two things there. I want to emphasize evolution versus revolution, and let me just comment on acquisitions. Acquisitions are a clear core competency of the business, and we will continue to acquire. As I look at the basic categories that are interesting, I think of three categories that are interesting and one category that's a little less interesting. The three categories that are interesting are those opportunities where we can gain core market share. Second would be relevant market segments -- BPM was a relevant market segment that we entered via acquisition. Of course, you have a third category which I wouldn't take off the table, but a little less prominent right now are those transformative acquisitions. The category I'm much less interested in is small-point technology buy.

Okay. Great, thanks a lot.

Thanos Moschopoulos, BMO Capital Markets

Hi, good afternoon, welcome on board, Mark.

Thank you.

As we look at the deal strength in the past quarter, good volume of larger deals, and good mix of revenue coming from new customers. Are there any one or two areas that really stood out in driving that, be it transactional ECM through the SAP relationship, or SharePoint-related solutions? Was there one or two big factors in that strength, or was it across the board, across the product portfolio?

I would start with maybe geography, and then drill below that. If we just run by the numbers, APJ and Latin America were certainly strong, and I would say that was driven by an SAP relationship and ecosystem. Certainly the US held their own within the quarter. Within Europe, I would say that two GOs that stood out for us, contribute well, was Germany and France. I look at that more as core market gains versus ecosystem partners.

Okay. Then in terms of product areas, are there any -- you mentioned that you see core ECM as a good opportunity. Any other specific areas that you think will be instrumental in driving accelerated growth going forward?

Certainly core ECM, BPM, and I would also put out there our WCM products as well.

Okay. And then finally just a question for Paul. We saw the maintenance margin come down a little bit relative to the prior quarter. Is there any dynamic there we should be aware of?

No, not particularly in a trend area. I would say it's -- from our own perspective, I think it's trending pretty much to where we think, although to your point, it did come down a little bit. I think just a little different balance with some of our third-party software in that mix, and that varies from quarter to quarter.

Okay. That's great, I will pass the line. Thank you.

Thank you.

Sera Kim, JMP Securities.

Hi, good evening and welcome to Open Text. I'm just wondering, in terms of the geographic areas you talked about seeing strength in France and Germany, are there any areas of specific concern that you're seeing as we look ahead in the pipeline? Also, I'm wondering if you can comment on emerging markets and what your strategy is there. Do still expect to use partners like SAP to penetrate those markets, or are you looking to add direct representation in those areas, as well?

Sure, thanks Sera, for the question. I'd say if there's one area where I'm spending a little more time than others it continues to be Europe. Certainly not a surprise for anyone. And 40% of our Q2 revenues came from EMEA. Certainly, probably one of the tougher economies out there right now. What I certainly like about our business in Europe is that we have more scale in Germany anywhere else, and it's the best economy in Europe. And to a large degree, because we have a lot of revenues and cost matched, we have some natural hedging built into our business in Europe. I'm certainly spending more time thinking about Europe than any other geography as an area to be watchful of.

In terms of the bricks, Brazil, Russia India China, we're doing well in Brazil. We have a good team there. We have good partnerships there, and it's certainly a highlight for us for everything in Latin America. India is an untapped opportunity for us. We have over 300 employees in India. We have a large R&D facility there, and we haven't really tapped into yet that ecosystem from TCS, Infosys, and Wipro, and certainly with my Oracle background, I have a lot of contacts and a lot of relationships, and a lot of experience in the market.

I'm not as educated on Russia and our business in Russia yet. In China, we have a nice win within the quarter and would certainly be leveraging our SAP relationship there. Two out of three, I'd go Brazil and India. I'm quite enthused about Russia, not educated yet, and we had a nice win in China are certainly trying to build off our SAP relationship.

Okay, great. Last question, earlier in the call you mentioned some coverage gaps in -- I think you said federal commercial and manufacturing. In terms of -- what's your go-to-market strategy in those areas to help you increase you penetration?

Sure, we'll just take US federal. We just hired a new leader of US federal, based out of the DC area, comes with a lot of experience, both in the DOD and the intelligence communities in the US. Starts with leadership and focus. We just hired a nice leader there, as well as, a lot of customers buy indirect through FSIs. So, new leadership, as well as working with the implementers who participate or drive a lot of the solution architecture. In Japan, it's a market that we historically haven't done an acquisition in, we've built that team organically. I think they need a little more attention and perhaps a little more investment. In Japan through the years, I hope we'll really emerge as a top contributor for us. I think that's good old-fashioned execution and prioritization on a country like Japan.

What percentage of revenues is coming from Japan, and where do want it to go?

All of APJ, Sera, is about 7%, and I would say Japan's probably less than half that.

Okay great, thank you.

Eyal Ofir, Canaccord Genuity.

Thanks for taking my question, welcome aboard, Mark. Just very high level, as you're looking out into the pipeline, obviously you talked about some of the opportunities in Europe and Germany, specifically, and I'm assuming you've still seen a lot of stuff in the US. Can you talk about geographically where you're seeing the biggest opportunities in your pipeline, and what gets you excited in some of the more emerging areas?

I would just re-emphasize what I said. We have a strong Americas business, and looking at US commercial and US federal certainly is of high interest and high impact. We still have opportunities clearly in Canada, as well, building out even more in the public sector here in Canada, both at the provincial as well as federal level, and making sure that our top contributors in Europe, UK, Germany and France, are getting all the support that they need. I'd say those are the majors for EMEA right now, in terms of the pipeline in the second half of the year.

In terms of the products that are driving some of the pipeline, is it primarily core ECM, or are you starting to see some of the new products launched late last year starting to come into the pipeline, such as Tempo? What kind of feedback have you gotten so far from some of the new products from customers?

Yes, I'm going to probably have to defer that to our next call. Certainly, what I'm seeing most in the pipeline right now, 30 days in, really revolve around ECM, BPM, WCM -- and I'm majoring in the majors right now, I work through our 4,600-person company. That's certainly what I'm seeing the most of. In terms of tempo, we're just going GA. The initial reaction is very favorable. This is an easy-to-use, easy-to-install, no-training-required module that works across multiple devices. It feels very much like almost a consumer application in its ease of use.

There's a lot of excitement and enthusiasm around the offering. Our first target is going after the install base and trying to extend share and the license within the install base. Our second version of the product will be more focused around bringing new customers to the Open Text family. Quite a bit of interest and enthusiasm, a beautiful UI and operating module, first targeted install base, second version of the product will be targeted more toward expanding the install base.

Okay thanks. One last question from me. You talked about your approach to growing in emerging markets, but if you exclude India and China when you look at APJ, and obviously Japan as well, are you looking to more -- some form of direct sales there, like increase the head count? Or are you still focused on leveraging the current partner ecosystem?

APJ is traditionally and indirect business. I would classify my first observations that we're following a very good model in APJ, which is where you have a direct assist selling force. We have direct account executives at APJ. They have partners there opening doors, we go in to direct assist in a selling model. APJ is typically, given the size of the geography, much more of a channel orientation versus building a direct-sales force. Having said that I think there are some select places where we do want direct sales reps, such as Japan.

Okay, thanks, I will pass the line.

Blair Abernethy, Stifel Nicolaus.

Thank you, and welcome aboard, Mark.

Happy to be here, thank you.

Just to questions. One on the government vertical side, and your thoughts there, then secondly, organic growth. On the government vertical side, could you just give us your sense of the selling environment out there now? Obviously with all the macro concerns in Europe and the goings-on. How was your Q2 in Europe on the government side, and how is -- how are their budgets looking in 2012?

I have no problem saying I don't know an answer to something, and particularly on the government side in Europe, I'm not as close to that, so Paul, I don't know if you have any view of that? But 30 days in, I'm not as close to that on the EMEA government side.

Blair, I would say that the overall government vertical stayed about the same as the previous quarter, and we do have good representation registered from Europe and from the UK, so it would've been steady business. We didn't break it down by geography, other than the overall vertical's 11%.

11%. Okay, great. Secondly Mark, just on -- if you look out over the next year, what do think are the highest-impact steps or areas that you can go after for -- to help step up the organic license growth in the business? I know I'm probably going to sound like a broken record, but number one, core ECM share market gains. Number two is getting our worldwide sales force trained, educated, well-equipped, to be able to sell business process management. I'd say those are the two big-ticket items for us as we look at organic growth. Great, thank you. Paul, just on the quarter, any large deals, like deals over $2 million or $3 million?

No. The $1 million-plus deals were -- there was no single large deal in that place.

Okay, great. Thanks very much.

Mike Nemeroff, Morgan Keegan.

Thanks for taking my questions. Mark, congratulations on the job. I'm looking at the presentation on the web, and one of the growth drivers it says BI, and I joined the call a little bit late. Could you expand on this intelligence and how you think that's going to drive some core growth going forward?

Sure, thanks for the question Michael. I walked through sort of what we looked at, the immediate opportunities, core ECM business cost of management, sort of a second phase of content-centric applications, and even longer-term, looking at the content category evolving into more of an information category that encompasses ECM, BPM, and BI.

Our immediate opportunity obviously is in our core market and BPM, medium-term application is in longer-term as the category evolves. We're going to consider looking at partners, building or buying, as this category evolves. I don't see this as a short-term contributor to revenue, but more as a directional statement as where we think the category is going to go. We'll follow the evolution of the category and start to think about whether we're going to partner, build, or buy.

Great. A couple of quick ones for Paul. I was wondering if you wouldn't mind giving us the revenue contribution from Metastorm in the quarter, and then also total what the license contribution from the BPM businesses was total. Then also, I just have a question on deferred revenue. Seemed to be down a little bit more than I was expecting, if you can comment on that please?

Sure, Mike. I'm going to hesitate on the first question because, as you know, we don't separate the revenues on net of global we have, because we have in our queue. Perhaps I'll help you out a little bit more than that, typically. As Mark indicated, we're about expecting a 15% drop in license revenue in the first year, as opposed to previously announced maybe 10%, so I would say if you have the last quarter, go down a little bit from that, not significantly. It was also accretive. I mentioned G60 was accretive by $0.06, and Metastorm was also in that range of accretive for the adjusted earnings. That's probably the most disclosure I'll present on that one.

Deferred revenue continues, our renewal rate's do continue to be at 92%. It's where we think it should be. As you know, deferred revenue decreases every quarter, and I know you know that, and you said it was down a little bit more than you thought. It's in line with what we're expecting, and we're not seeing any change in our (inaudible) rates, in that 92% range.

Great, I'll pass it along, thanks very much.

Thank you. At this time, I'd like to turn the conference back over to Mr. Secord for closing comments.

Thank you, and thank you everybody for joining us. Just a reminder, Open Text will be presenting at a couple of conferences in the quarter, including the Stifel Financial Conference on February 9 in greater LA area, and the Morgan Stanley conference on February 27 in the San Francisco area. With that, we thank you all for joining us, and we'll talk to next quarter.

Ladies and gentlemen this does conclude our conference for today, and we thank you for your participation. At this time, you may now disconnect.