Open Text Corp (OTEX) 2012 Q3 法說會逐字稿

Good Afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Open Text Corporation third-quarter fiscal year 2012 financial results conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question-and-answer session.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Tuesday, May 1, 2012 at 5.00 PM Eastern time. I will now turn the conference over to Mr. Greg Secord, the Vice President Investor Relations. Please go ahead, sir.

Thank you, and good afternoon. With me today is Open Text President and CEO Mark Barrenechea, as well as our CFO Paul McFeeters. As with our previous calls, we will read prepared remarks, followed by a question-and-answer session. The call will last approximately an hour, with replay available shortly thereafter. I'd also like to direct investors to the Investor Relations section of our website, where we have posted an updated power point that will be referred to in this call. Within the next 48 hours, we'll also post a summary table in the Investor Relations section of our website that highlights Open Text's historical trend in financial metrics. Please note that during the course of this conference call we may make statements relating to the future performance of Open Text that contains 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 statements made today. Certain material factors or assumptions were applied in drawing any such conclusion, or while making any such forecast or productions, as reflected in the forward-looking information.

Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing the conclusion while making the forecast or projection as reflected in the forward-looking information, as well as the risk factors that may affect the future performance and results of Open Text, are contained in Open Text Form 10-K and 10-Q, as well as in our press release issued earlier today, each of which may be found on our website. We undertake no obligation to update these forward-looking statements 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. And with that, I'll hand the call over to Paul McFeeters.

Thank you, Greg. Turning to the financial results, I will highlight our third quarter of fiscal year 2012. Total revenue for the quarter was $292 million, up 11% compared to $263 million for the same period last year. Regionally, the Americas contributed 53%, EMEA 38%, and Asia-Pacific 8%. License revenue for the quarter was $61 million, down 10% compared to $68 million reported for the same period last year.

Customer support revenue for the quarter was $166 million, up 16% compared to $142 million in the previous year. Our customer support renewals continue to be approximately 92%. Service and other revenue in the quarter was $65 million, up 25% compared to $52 million in the same period last year. Gross margin for the quarter, before amortization of acquired technology, was slightly lower this quarter at 71%, compared to 73.3% in the same period last year. The lower margin was primarily due to a lower proportion of license revenues and the impact of Global 360 and MetaStorm. The pretax adjusted operating margin was $73.6 million this quarter, compared to $64.1 million in Q3 last year, an increase of 15%. Adjusted net income increased 11% to $59.2 million this quarter from $53.4 million in the same quarter last year. Adjusted earnings per share was $1.01 on diluted basis, up 11% from $0.91 per share for the same period a year ago.

GAAP net income for the third quarter was $35 million, or $0.59 per share on a diluted basis, compared to $36 million or $0.61 per share on a diluted basis for the same period a year ago. There are approximately 59 million shares outstanding on a fully diluted basis for the third quarter. Sequential effect of foreign currency movement on adjusted earnings per share for Q3 was a negative $0.01. Total revenue on a year-to-date basis was $902 million, up 21% compared to $748 million for the same period last year. Regionally, the Americas contributed 53%, EMEA 38%, and Asia-Pacific 9%. License revenue on a year-to-date basis was $216 million, up 14% compared to $190 million reported for the same period last year.

On a year-to-date basis, customer support revenue was up 20%, and service and other revenue was up 30% over the previous year-to-date results. Pretax adjusted operating income on a year-to-date basis was $245 million, compared to $211 million for the same period last year, an increase of 16%. Adjusted net income on a year-to-date basis increased 15% to $201 million, from $176 million for the same period last year. Year-to-date adjusted earnings per share was $3.43 per share on a diluted basis, up 13.6% from $3.02 per share for the same period a year ago. On a year-to-date basis, GAAP net income was $117 million, or $2 per share on a diluted basis, compared to $95 million, or $1.63 per share on a diluted basis for the same period a year ago. The adjusted tax rate for the quarter and year is 14%, the same as it was for the last fiscal year. Operating cash flow was $97 million, compared to $82 million in the same quarter last year. Operating cash flow before the impact of specialty charges was $100 million, compared to $87 million in the same period last year. We incurred special charges in the quarter in the amount of $5.1 million, relating to our restructuring plans, and another $1.4 million relating to acquisition and integration costs. We expect to incur an additional $5 million relating to further restructuring actions in our fourth quarter of fiscal 2012 through the first quarter of fiscal 2013.

On the balance sheet at March 31, 2012, deferred revenue was $303 million, compared to $237 million as of December 31, 2011, and $266 million at June 30, 2011. The increase in deferred revenue in the current quarter is due to the higher percentage of customer maintenance contracts being renewed at December 31. Accounts receivable was $176 million, compared to $155 million at the end of the last fiscal year. Day sales outstanding were 54 days as of March 31, 2012, compared to 49 days at June 30, 2011 and 49 days at the end of Q3 of fiscal 2011. At March 31, 2012, our head count was approximately 4,600 employees, and is comprised of 1,250 in R&D, 770 in customer support, 980 in services, 970 in sales and marketing, and 630 in G&A.

There was no change to our pretax 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 FY '12 as we continue to bring them up to Open Text's operating model. We anticipate that this will improve for the year, but will not be fully on target until fiscal '13. The full details of our operating model are available on our website. Now I will turn the call over to Mark.

Thank you, Paul, and welcome, everyone, to our fiscal '12 Q3 earnings call. I have much to go over today. The quarter year-to-date results, the remainder of the fiscal year, our market opportunity, changes I've made to the business to capture that opportunity, today's announced acquisition of EasyLink, and my priorities.

Let me start with the quarter in our year-to-date results. First and foremost, the quarter did not meet my standards on performance. While we had record earnings for a third quarter, and our adjusted operating margins were in line, license performance was poor. And two out of three is not good enough. With that said, we moved swiftly on sales execution issues, created a stronger organizational structure, generated record Q3 cash flows, announced the acquisition of EasyLink, and the Open Text opportunity has never been more compelling. Let me expand.

Q3 license performance was a disappointment due to sales execution issues within both our North America and BPM Groups. First, the vacancies and turnover in the sales force have been increasing in the past quarters, has resulted in a meaningful under capacity to deliver against our expanding expected license numbers. Second, the merging together of our two acquisitions, Metastorm and Global 360, resulted in significant disruption in their performance. Further, these acquisitions were not being integrated into Open Text. I've taken swift action on these execution issues. We are expanding our quota carrying sales force by over 20%, with the main focus being in the US, UK, Germany, and emerging markets. We expect to have these positions filled over the next two to three quarters. The increased selling capacity will be cost neutral, and funded by efficiency gains, and not impact our margin profile. Further, we have not had a head of sales for over two years. I have initiated an external search for an industry veteran who will have responsibility for all licensed, professional services, and field operations. I am pleased with the candidates that have been identified, and we are looking forward to announcing this appointment when we complete the search.

As relates to BPM, I have changed the leadership and all BPM teams have now been fully integrated into their respective geographies or functions. This integration allows for the BPM sales force to fully leverage our global investments, strengths, and scale, such as our install base, professional services, demand generation, partners, and operations. And further, this expands our selling capabilities because all Open Text account executives can now sell the BPM solution. In the first 30 days, I can already see improved pipeline and momentum.

As I highlighted on our Q2 earnings call, I would be focused on Adjusted Operating Income. This remains my focus while we build more predictability into our license performance. To that point, on a year-to-date basis, we are up 16% in Adjusted Operating Income year-over-year. For full year FY '12, I see this financial metric remaining strong. As for Q4, I'm expecting our license performance to improve sequentially, but still not at the performance levels I'd expect longer term. We have moved swiftly to take corrective actions, and are confident that our organizational changes and enhancements will have a positive impact on our execution moving forward. Let me transition.

We are winning in the market. And let me turn to customer wins within the quarter. BlueScope Steel, the leading steel company in Australia/New Zealand, has extended their use of e-mail archiving across their organization as part of an infrastructure consolidation program. Sumitomo Heavy Industries in Japan is simplifying their business processes for outsourcing services within finance, HR, and procurement by leveraging our ECM software. NTT Comware in Japan is strengthening their information management foundation with our ECM solution. It supports their billing processes and outsourcing services. News International and Trinity in the UK, two leading media organizations, have standardized their publisher solutions on our CEM software.

On the product front, let me focus on two areas. We announced that Tempo is generally available in both the enterprise and express edition, a new offering that features easy sharing of content in private clouds. Both editions offer enterprise level records management and security features. The end market for this product is very large and very exciting, and early indicators point to a high level of interest from both our existing ECM customers and new prospects. We also announced version 10 of our extended ECM for SAP solutions. Version 10 includes support for SAP customer relationship management, and SAP supplier relationship management applications.

Now let me turn to our market opportunity. Our opportunity is to grow from our strength in heritage in enterprise content management into a larger category of enterprise information management. We call this EIM. This would expand our addressable market from approximately $5 billion to approximately $13 billion. 120 days into the business, this has become a shared vision and aspiration for the entire leadership team. At today's investor presentation, we defined the five key markets for EIM. Our goal is to lead in each of these markets. Let me walk through them one by one.

ECM is a $4.6 billion market growing at 9.9% CAGR. We have been focused in this market for 20 years, and are the market leader. The market is far from mature, and we have lots of room to grow and gain share. BPM is a $2.6 billion market growing at 7.2% CAGR. We have been in this market for about 1 year. This is a strategic market for us, and we are in it for the long term. Information exchange is a $3.2 billion market growing at 11.4% CAGR. We have been in this market for over five years and our announced acquisition of EasyLink will create more strength in this market for us. Customer experience management, also known as CEM, is a $1.35 billion market growing at 14.3% CAGR. We have been in this market for five years and are a top four supplier today. E-discovery is a $1.4 billion market growing at 15.9% CAGR. We have some great assets in this market and will continue to focus on this area.

These suites of software fit naturally together in order to manage and gain value from big data, all the structured and unstructured information from the world's leading companies. Customers are looking to Open Text to solve these big data challenges. Information governance, information exchange, information processes, and information security. And they want us to do this on premise, in the cloud, and mobile. The public web is less than 10% of content. The deep web, that is, corporate information inside the firewall, is greater than 90% of all the content, and is now measured in zettabytes. Big data on the deep web is the right place for Open Text to focus with enterprise information management. We will be rolling out this expanded vision and new products and services expected in early FY '13, to our customers and partners, and will be organizing an investor day in early September to walk investors through this strategy in detail. It will be a great opportunity to interact with the leadership team as we update you on our exciting market opportunity.

Let me take you through the organizational changes I made in order to capture the EIM opportunity. Prior to Q4, we were operating under a hybrid business unit/general manager leadership model. This model served us well in the ECM market as we scaled the business to $1 billion in annual revenues. On the first day of Q4, we transitioned the business to a functional model, whereby we'll have one leader for each of our key customer facing functions. This model will better support the business as we strive towards our next great milestone of $2 billion in annual revenues.

Let me highlight the changes. James McGourlay now leads our worldwide customer service organization. Walter Kohler now leads our worldwide professional services organization. Both Walter and James are Open Text veterans, and I'm confident in their ability to lead these groups. Each of our geography leaders, Dave Wareham in EMEA, Steve Best in the Americas, and Graham Pullen in APJ are now focused on license and license growth. Steve Best replaces our previous leader for the Americas. Steve is a world-class experienced sales executive and an Open Text veteran, so his transition into this role is natural and immediately impactful. These changes will build a leadership team commensurate with the market opportunity, a business model that scales with greater ease and efficiencies, functional accountability, and provide the attention and focus necessary to grow license sales and earnings. I'm pleased with our progress on forming a stronger organizational structure and leadership team, and we can now review -- and you can now review our executive team on our website.

Let me turn to our other news of the day, our announced acquisition of EasyLink. EasyLink is headquartered in Atlanta, Georgia, and is a global provider of cloud-based messaging services for a wide array of data types. Fax, e-mail, SMS, voice, EDI, and other data types. The trailing 12 month revenues were $186 million, they have approximately 550 employees and have operations at approximately 20 countries. The revenue splits are 60% Americas, 23% APJ, and 17% EMEA, and they operate profitably. This acquisition will provide us additional scale in information exchange and the cloud. Once we are together, we would also expect cross sell opportunities between our mutual customers. Open Text has offered $7.25 per share in cash for a purchase price of approximately $310 million. The EasyLink Board of Directors has unanimously approved the transaction. The transaction is expected to close by mid to late summer 2012, subject to EasyLnk's shareholder approval, certain regulatory approvals, and customary closing conditions. Upon close, we expect the acquisition to be immediately accretive.

Let me end the prepared remarks with my key priorities. First, expanding our opportunity from the content experts to enterprise information management, which would expand our addressable market from $5 billion to $13 billion with a blended growth rate of approximately 10%. Second, we will measure our business against market growth rates. I'm focused on building a sales engine that grows and gains market share. Third, exploiting both organic and acquired opportunities to reach our next big milestone of $2 billion in annual revenues, and capture the EIM opportunity. And fourth, and as I will continue to emphasize, we remain Adjusted Operating Income focused, with strong earnings and cash flow.

After my first 120 days on the job, I'm even more excited about the Open Text market and long-term growth potential. We are the market leader in ECM, and this heritage positions us to be the market leader in EIM. Our pipeline of opportunities is strong, we are expanding our sales force, and I'm highly focused on putting the Company in the best position to capitalize on our large and dynamic market opportunities. Our opportunities are unbounded. With that, I'll hand the call back to our operator for your questions.

Thank you. Richard Tse, Cormark Securities. Please go ahead.

Thanks. So, Mark, just to start off, before you came on board, you had a nice run over the course of the year. So, what happened that this quarter a is sort of turned around here on your watch? I know you are new to the job and I know you are making some changes, but it seems that the progression post acquisitions in the past have turned over very quickly in terms of execution, but Metastorm and 360 haven't been as successful.

Well, I will continue to highlight that we had sales execution issues in North America and within BPM, and as I said on the script, an accumulated deficit and sales capacity. And I have acted swiftly on the sales execution issues. I have transitioned the business to a functional model where we have one head of CS, one head of Professional Services, and our geographic leaders have transitioned from a general manager model to only focus on license. And we have open directs to grow our sales -- our license sales force capacity by 20%. So, in short, we had leadership execution issues and an accumulated deficit in sales capacity.

Just switching gears here in terms of the acquisition, my understanding that from your comments tonight is that Metastorm and Global 360 really haven't been that successful in terms of the, let's call it the integration or the upsell. So, in the midst of that, why are you making a decision here to take on another acquisition before that is actually integrated?

Well, let me take each of those, there are two parts, I think to that -- to the question. The first is BPM. The changes we've made to BPM, and they are already showing positive results in momentum, is when we did the acquisition of BPM, we kept it as a separate unit. And we've kept it as a separate unit, in my opinion, too long. And there was somewhat of a culture clash between the two businesses. So, we have integrated that now, where CS is part of CS, PS is part of CS, and the licence team is part of the field. We've also now turned on our entire sales force to be able to sell BPM, and I would expect significantly better results, actually, in Q4 on BPM than we had in Q3. We waited too long to do the integration, and actually the thoughts, maybe, were not integrated at all. So, I changed that course to integrate.

So I think we are on a good path. I can already see momentum, and I'm expecting quite a different outcome in Q4 in license. With that said, PS remain strong, and our renewals remain strong within BPM. As it relates to EasyLink, it's a different story here. We have a mature business and our FDD group, our fax distribution and documentation group, a very mature organization, been part of Open Text for quite sometime. And we see synergies between our business and EasyLink's business in the core messaging business. Second is the ability to leverage the EasyLink infrastructure for moving a variety of our solutions into the cloud. So the differences are -- it's two major businesses coming together versus perhaps two rivals and to culture clashes.

Okay. And just one final quick one. Based on your experience with some of these changes, I'm sure you probably have implemented in other organizations. How long, typically, let's give it a quarterly basis, until you are at full force here, is that one, two quarter event or what's the history been?

We are going to measure these in months, actually. On the CS side, we are off and running very hard. On the professional services side, the synergies of bringing together the PS teams has almost an immediate effect. And on the license side, we're providing the field more focus. Starting in Q3, our geographies had three things to focus on, our geographic leaders, and today they have one, which is license. So I would expect in Q4 our license performance to improve over Q3, and I would hope it would continue to improve into the year. So I'd be measuring the changes on the license side over the next two to three months given the -- two to three quarters -- over the capacity we are going to have. And I would think that the CS and PS changes are going to be immediately impactful.

Okay, great. Thank you.

Kris Thompson, National Bank Financial. Please go ahead.

Great, thanks. Mark, on the EasyLink, can you just tell us how the technology will aid Open Text's competitive position against the usual suspects like IBM, EMC, and HP? And how it benefits your partnerships with SAP, Microsoft, and Oracle?

Thanks for the question, Chris. The first I would say as it will provide us additional scale, and scale is always a good thing in a competitive environment. They also have different pieces of functionality between -- our distribution -- our messaging products and the EasyLink products. For example, we have archive capability that we can now offer, or would be able to offer, to EasyLink customers. We have BPM solutions that we can offer to EasyLink customers. And, EasyLink infrastructure will be beneficial to Open Text products where we can bring our FDD products into the cloud, and we are hopeful we can bring our ECM products and potentially Tempo products into the cloud, into their global infrastructure.

Also, with our capital structure, there have been some geographies where EasyLink has not been able to invest, and we think we'll be able to provide that investment to create a greater distribution. I would say this really doesn't touch too much, SAP, Microsoft, or Oracle, but it's rather within Open Text proper that it will -- we'll be able to provide more products to EasyLink current customers, EasyLink infrastructure will be at a leverage for our products, and then thirdly, we see opportunity in other countries that they have not been able to get off the ground.

Okay, that's helpful. And with the IBMs and EMCs, did they provide similar solutions, or is it a different competitor landscape?

It's a different competitive landscape.

Okay. Last for me. Paul, on the maintenance renewal rates, you mentioned they were 92%, but can you give us an idea of the robustness of the pricing in the market? Are you getting some price hikes there?

Yes, Chris, we are continuing to get some price increases on our renewals. We mentioned in the past, perhaps pre-2008, we might have gone into the 3% to 5% range, now we're more in the 1% to 3% range. It's been consistently that for about the last two years.

Okay, thanks guys.

Brian Freed, Wunderlich Securities. Please go ahead.

Good afternoon. Two quick questions. First, Mark, as you look to drive this shift to functional model, can you talk about any changes you've made to the sales incentive structure, either at the field or regional management level?

Yes, Brian, thanks for the question. We are going to complete fiscal year '12 before looking at the compensation plan. Our new fiscal year starts July 1. And the changes come to July 1 will be very simple. Our geographic leaders today have a basket of metrics, PS, CS, License, Adjusted Operating Income and other metrics. Come July 1st, they will have a license metric. So the model -- the compensation model will match the function. CS will be measured on CS, PS will be measured on PS, and license will be measured on license. Everyone will always continue to have a margin component to what they do. So, I am actually quite excited that the functional responsibility will be matched to the compensation plan more closely -- or, rather, perfectly aligned come July 1.

Okay. And then my second question for you, Paul. If you look at the shortfall, what's the relative split, would you guess, between the ECM business in North America and the BPM business?

Well, mostly in revenues, I guess I'll answer roughly 50/50.

Okay, thanks.

Blair Abernethy, Stifel Nicolaus & Company. Please go ahead.

Thanks very much. Just a couple questions on the Q3. Mark, I wonder if you would just characterize the deals that -- the shortfall here. Was it more deals lost or slipped, and is -- what's your sense on the pipeline as you've entered Q4 versus as you entered Q3?

Sure, Blair, thanks for the question. Well, first and foremost, the execution issues are 100% ours, 100% under our control, and 100% hours to fix. So they're all in our control. As you probably saw in our investor deck within the quarter, we announced only one deal over $1 million, compared to last quarter we had seven deals over $1 million in Q3, last year we had five. So when I look at our pipeline, I always think of pipeline along five attributes. I think of it size, velocity, quality, conversion rates, and the age of opportunities within the pipeline. And where we struggled most was on the conversion of our -- of larger deals within the quarter. And that's sales execution. We are not seeing competitive pressures. We certainly have seen some deals move clearly across quarter boundaries, but it is all within our control. There is no change to competitive dynamics.

Okay, great. And in terms of the sales rep capacity, what is -- how many quarter carrying reps do you have today?

So we break our total sales number, which is just a little under -- Paul is grabbing the number for me.

970 in total, 442 --

Yes, so 970 in total, and then 442 for our quarter carrying sales, which includes overlays. And we'll be expanding that by 20% effective immediately. And fund it within our current cost structure by efficiencies we've gained that will not impact our margin profile.

Okay, great. And the last question for me, just on the SAP's contribution in the quarter. In the past, SAP's license contribution would be recognized one quarter in arrears, and I'm -- sometimes that moves around a little. Can you just describe what they contributed to your business this quarter?

Yes, Blair, it's Paul. Well, they continue to be in excess of 10%. I just, as it has been for some time, I just wanted to add a clarification though, which we haven't in the past, is that a lot of our SAP transactions do involve the participation of our direct sales force. So we are looking at this now more as an influence as well as a partner-led transaction. So while it's still at in excess of 10%, I want to be clear that our direct sales force is also participating in these transactions.

Okay. And just to follow on that, Paul. The SAP had troubles executing in North America, did -- was there any read through for Open Text in Q3?

Blair, the execution issues for us in Q3 are 100% on us. 100% on us.

Okay, thank you.

Stephanie Price, CIBC World Markets. Please go ahead.

Hi, gentlemen. Could you talk a bit more about the revenue and earnings contribution from Global 360 and Metastorm in the quarter, just given that you're talking about BPM as one of the factors for the miss in the license revenues?

Yes, Stephanie, Paul. We are just only breaking out this year, as you know the contribution from Global 360, and we're not segmenting our information in our queue, so I'm not really going to be doing it here. As I mentioned earlier to a question about the miss, both Meta and Global contributed to, perhaps, lower expectations than the -- that we might have had. It is still accretive, both operations are still accretive, because as you know, we will take the cost out. And as we reported, our earnings period over period have gone up, operating 16% year-to-date, net income 15 -- 14% year-to-date. So they definitely have contributed to the accretive earnings. But on the revenue side, on the license, again, Mark mentioned doing well on the CS renewals, doing well on professional services. But, due to integrating those two NDs, pre-integrating the Open Text, they are responsible for, or what may be perceived as a miss there, of about 50% of that miss. That's the best I can answer the question without disclosing segmented information.

Okay. And on the efficiency gains that are to pay for the sales force increase in capacity, is that the $5 million in restructuring you were talking about earlier?

Some of that is still -- well, that's what I was discussing in terms of the accretive ness of the acquisitions. That restructuring is still primarily 360. A little bit of what Mark referred to as efficiencies within the quarter. Some of that will be marked Q4 and Q1, as I referred to in my remarks

Okay. And in terms of the EIM strategies you outlined, Mark, could you talk a bit about what other acquisitions that you might be in, what holes you still have to fill to broaden that strategy?

Stephanie, thanks for the question. So, again, we see five markets here. ECM, BPM, information exchange, customer experience management, and E-discovery. These are the five markets that we see contributing to managing all the unstructured and structured big data inside the firewall. We are going to look opportunistically across those five sectors. As I highlighted on our last earnings call, I'd be looking a bit more towards medium to larger size acquisitions that are more meaningful to the contribution as we look to capture this opportunity and march towards our next big milestone of $2 billion in revenues. Each market is a little different. ECM is more, probably, about functional components. BPM is still for scale. CEM is still a defining market. And, we have some good starter assets in E-discovery but don't have the scale there yet. Maybe that -- hopefully, that's helpful, Stephanie.

Okay, great. Thank you.

Scott Penner, TD Securities. Please go ahead.

Thanks. Just looking at the consensus going in for licensed revenue versus what was reported is -- call it a delta of about $14 million. I know we're not exactly exact here, but is it correct to think that $7 million of the miss, let's say, came from the BPM side, and the other was the sales execution in North America?

Yes, Scott, it's Paul. You know, I did give approximate numbers. We -- yes, absolutely on the BPM because of the challenges of integrating those two together, and not bringing in Open Text. It had a meaningful impact on -- against our plan. I'm not going to speak against the street's numbers, but again, it's our plan. And I gave a very general range between that impact of approximately half, and our own, call it, execution issues on the other front impact, again, against our own internal plan. Not speaking to your number.

And Scott, if I can, I'd like to add one component there, to put in perspective the change we made, which is enormously positive. Alright, we went from an independent business unit called BPM, with independent account executives selling in their accounts, to one sales force that can all sell BPM. So rough numbers, we went from 50 people with a license to sell to 500 people with a license to sell starting in Q4. Now, we have a lot of training to do and a lot of education to do, so I'm not suggesting we 10x the sales force over a weekend, but adding 10%, 20%, 30%, 40% more capacity now is about training and awareness. And quarter over quarter, in the first 30 days of Q4, I can see a lot more momentum.

Okay, thanks for that, Mark. When you outlined the EIM market in general, what additional competitors does that bring into the mix when you expand what you consider to be your market opportunity?

Well, I think at the end of the day when you start looking at a category of between $10 billion and $20 billion, I would look towards both IBM and HP ultimately as our top competitors across these two segments.

Okay. And then the acquisition of the EasyLink, when I just took a quick look at their revenues for the -- it looks like the vast majority, well, the majority of their revenue comes from, as they defined it, fax services. So, I just want to get a sense whether this is a technology buy or a customer base expansion that you think you can leverage down the road, or was it really about acquiring cloud capabilities?

I think it's a mixture of two things. We like their products and their offerings, both within their -- across the board. And second, being able to add additional capabilities to that. We obviously have to complete the transaction. We are targeting summer for that, but we see our ability -- we like their products and services, and we see additional products and services we can add to their infrastructure.

Second is the cloud. Customers are asking Open Text to deliver on premise, in the cloud, and mobile. And, they're a global infrastructure. It's an infrastructure we would like to invest in and expand to be able to deliver the Open Text capabilities in the cloud. So we like their offering, we see things we can add to it. We like their road map, and we also like their infrastructure to be able to build out our cloud.

And just to be clear, Blair's question earlier, the deals that you didn't have the execution on in the quarter, are all of those deals still live in your pipeline?

I'm sorry, I don't understand the question.

The deals that you cited for the execution issues in Q4, are those deals still live?

I'm sorry, I thought we were on acquisition deals versus pipeline deals. Yes, we -- no, we didn't see an effect of economy, we didn't see affect of deal shrinkage. It was execution. So a goodly portion of those deals are still active, and we are still working them.

Okay. How long do you think it will take you, Mark, to get the organization to, on that 10% blended growth rate of the EIM business?

Yes, we're on dual execution paths, right? One is organic, and the second is acquired. On the organic side, I would look toward an increased rate of growth in FY '13 organically. In FY '14, getting closer to market growth rates.

Okay, thank you very much.

Paul Steep, Scotia Capital. Please go ahead.

Great, thanks. Mark, maybe just to loop back at EasyLink for a second, maybe you could give us a little bit more color around the stability of the base in the business there? It seems like it's more of a services business. How much of that is under long-term contract that's fairly sticky for you folks?

I'm sorry, Paul, just a little difficult hearing the first part. This is EasyLink?

Yes, EasyLink. How much of it's contracted longer-term, or over a one to three year period in terms of a recurring business?

I'm not sure it is disclosed in their Qs and Ks, the periodicity of their contracts. I'm going to have to go back and check their disclosures to confirm.

Okay. How much of your business, then, would you try to shift over? Where I'm going with this is on a revenue recognition basis, do we need to think about, as you bring in a services business and a SaaS Model, how much should we model in a change in the operating model going forward?

Yes, Paul, it's Paul. Clearly, they're a public company as you know. So I think if you look at their financial reporting, I wouldn't think that ours -- we would expect to continue to disclose that business, along with the business that Mark referred to that we have already are in, our fax distribution business, either separately on the face of the financials or disclosed in our MDNA. So, I think the answer is look how they report and assume that we would be on-boarding that kind of reporting view.

Fair enough. The last one for me would just be on BPM. 15% license decline, is that the number we're tracking to at this point? I know we've talked a lot on the call about a disappointment here. That was sort of the number we talked about, February 1st. Is it of on that par into the back half?

Certainly, when we talked about on the acquisition of these -- I think at that time we talked more about 10% to 15%, so clearly on the license only it would be greater than that to date. Mark talked about expectations much more positively going forward. Clearly, it was more than the 10% to 15% that we anticipated when we acquired them. Again, having said that, strong CS, strong PS, not that far off the contribution of the accretive contribution we were expecting. Because sales costs are fairly high in relations to license revenues. So, I still want to point out that what we might have missed on license, we made up for some of that on our earnings, and that's why our earnings stayed strong quarter over quarter in year-to-date over year-to-date. It was much closer in our expectation on the bottom line because of cost management and because of revenues from CS and PS.

Great, thanks.

Sera Kim, GMP securities. Please go ahead.

Hi, good evening. Just to clarify that last question, you're planning to break out EasyLink services revenue either separately or in MDA going for -- once the acquisition closes?

Yes, I think it's of the size and uniqueness that we will be doing that.

Okay. I think in the past you had mentioned, as you grow -- I know cloud is still really small budding part of that -- your business. So, in the future as you grow your cloud business, would that be all included together or would EasyLink just be segmented separately?

I would assume that we would be including all of our cloud business together.

Okay. And just for clarification, earlier you mentioned that you're seeing immediate impact from consolidating and the BPM operations. So, keeping in mind that it does take time to wrap up sales capacity and to train them, when do you think you'll start to see a positive impact in North America for license revenue growth?

Well, we are expecting, and we can see early signs of it, that we will see a positive impact within this quarter. Quarter over quarter. Obviously, we would see more impact kind of rolling into FY '13. The business model change is, instead of having two separate sales forces, one small, one large, that all quarter carrying account executives are able to engage their customers and accounts for BPM opportunities. So I am expecting in Q4 an immediate impact of the -- a positive immediate impact of a change, and even a more fuller impact in FY '12 -- FY '13.

Okay. So just to be clear, there are two issues that caused your license sales weaknesses. One was issues on the BPM side but another was on execution issues in North America sales, overall, for license revenues? Is that not correct?

Yes, first was North American -- North American and BPM execution issues. And second was this accumulated deficit in sales capacity. So I put execution and sales capacity as two issues. Perhaps it's 1-A, North America, 1-B, BPM, and two, the deficit of sales capacity.

Okay, so sorry, just addressing the deficit in sales capacity, what is the reason for the turnover that you've seen, and how long do you think it will take to see a positive impact from the increase in sales capacity that you expect for the next couple quarters?

We're immediately expanding our sales force by 20%, we've opened those racks. We're looking primarily in North America, UK, Germany, emerging markets. We would expect over the next two to three quarters to have those positions filled.

Just last question. You mentioned that you didn't see any impact from the economy. I'm just wondering if you can comment on the decline in Europe? Was that related to the BPM issues, or was there anything else that was impacting that weakness?

Yes, I'll talk about the economy in general and Paul can talk about anything within the geographies. We haven't seen any change in economic buying behaviors related to economies quarter over quarter. Europe is still cautious environment, that has not changed. One thing gets solved and another thing comes up in Europe. So quarter over quarter, we're still cautious in Europe, but we haven't seen anything to change that caution. Our license disappointment in Q3 is related to our issues in execution. Paul, anything you want to add in geographic splits?

Well, geographic splits, by and large, have remained similar to last quarter, similar to a year ago.

Thank you.

Eyal Ofir, Canaccord Genuity. Please go ahead.

Thanks. Thanks for taking my question, guys. First of all, I'll ask the easy one for Paul. On the sales and marketing expense lines, I see it's actually up sequentially. My thought process when we see license revenue down as it is, was this due primarily to the increased integration of the BPM into the sales organization and training, or is there anything else in there?

That's a good question, Eyal. A little bit of what you said, just to make the answer, is yes. Also, we are getting in some cases some of the high-performing individuals are doing very well through the year, so changes that mix a little bit. So it's a combination of those two things.

Okay. And then, Mark, for you, there's two parts to my question. First off, on the BPM side, you talked about obviously having the sales reps now trained to sell BPM, but when do you expect to get some of your partners trained on BPM and expand on that indirect channel as well?

Certainly an FY '13 effort. Right now we're focused on getting our own productivity levels up, and again I'm trying to say it as simply as I can, if we are going from roughly a 50 person sales force to a 500 person sales force who can build pipeline and convert for BPM wins. That's our immediate focus, is getting our worldwide sales force trained, effective, to build pipeline and convert to revenue. In FY '13, when we complete that, we'll then turn outside our four walls and look towards more partners. Our biggest opportunity right now is within the Company, getting our worldwide sales force now up to speed and trained.

Okay. And have you also done some other internal changes like looking at the low producers and may be targeting them to -- for turnover, turn those guys over to maybe bring external parties to maybe take over?

Well, when we complete the year, my philosophy is to certainly look at low performers, do some turn there, and bring in fresh talent inside the company. So, we'll wait until the end of the fiscal year.

Okay, preventative. The last thing for you, on the partnerships. When you look beyond BPM, you talked about all the different new markets you want to attack. Is there any new type of partners you are looking to attract, or should we assume it's going to be what was seen to date in terms of partnerships?

I'd break that into two categories. Technology partnerships of SAP, Oracle, and Microsoft, and then distribution partners such as the system implementers. So those remain our two big focus areas, the large tech partners and increasing the efforts on system implementers.

Okay. So going forward it should be a similar type of split, and potentially increased fix, focus on system integrator's. That doesn't change when you look at the overall larger markets as you try to tighten them?

I would -- I break them into three categories, the technology partners, system implementers, and then the sell through relationships. And again, I'd work through them in priority of large tax system implementers and sell through.

Okay. Thanks. I'll pass the line.

Operator, I think we have time for one more question.

Paul Treiber, RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. How should we think about license seasonality going forward? Do you think some of the changes you're implementing will do some of the historical seasonality, or do you think it would actually increase it? And then, regarding Q4 license, you expect it up quarter over quarter, but do you think you will be able to see some year-over-year growth as well?

I'll start off, I think the second part is for Mark. Paul, this is Paul. It's hard now for us to make reference to historical seasonality because in the last two years, as I know you know, it's been less predictable or more volatile on that. So to answer your question specifically, I don't know if anything we are doing is going to change so much. There's definitely going to be seasonality to our business with of course Q4 and Q2 being stronger than Q1 and Q3. But as far percentages up and down, I'm much more hesitant now to suggest we look at historical views, and can't really tell you whether or not the increases and decreases of that seasonality will be more or less pronounced.

And, Paul, on the second part of the question, we're certainly looking towards Q4 to have sequential growth over Q3. We are not providing annual guidance or annual targets, but I will emphasize something I said in the script, that I remain focused on Adjusted Operating Income. And we're year-to-date, we're up 16% and operating -- Adjusted Operating Income year-over-year, and for the full year FY '12, expect to see this financial metric remaining strong.

Thank you. Mark, one last question. You've been at the Company, as you said, for 120 days now. What's been the feedback that you are getting from partners, customers, employees, and other stakeholders on the new vision for the company? And, has there been anything surprising that you can share, or is it mostly in line with your expectations?

Oh, I'd say that the reaction has been enormously positive. We look at our heritage and strengths in enterprise content management. We have the expertise, we have the vision, we have the experts to be able to bring together an expanded market category. So I'd say across all stakeholders, there has been a lot of enthusiasm, and a great esprit de corps to go out and win, and grow the business. So it's really quite empowering and refreshing to see such an esprit de corps.

Thanks, guys.

And I will now turn it over to Mr. Barrenechea for closing remarks.

Greg, over to you.

Okay, thanks for your questions. As I mentioned earlier, the PowerPoint is posted on the website within the next 48 hours, the trended financials will be there as well. Thank you all for attending the call, and good night.

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating, please disconnect your lines.