Open Text Corp (OTEX) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the OpenText Corporation third-quarter fiscal year 2013 financial results conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Wednesday, April 24, 2013. And I would now like to turn the conference over to Mr. Greg Secord, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, everybody. I would like to start the call off by reading of our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText 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 statements made today. Certain material factors or assumptions were applied in drawing any such conclusion, while making any such forecast or projection, as reflected in the forward-looking information. Additional information about the material factors that could 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 the drawing the conclusion while making a forecast or projection as reflected in the forward-looking information. As well as risk factors that may affect the future performance and results of OpenText are contained in OpenText Form 10-K and Form 10-Q, as well as in our press release that was issued earlier today. Each of which can be found on the 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. With that, I would like to welcome everybody to the call. With me today is OpenText President and CEO Mark Barrenechea, as well as our CFO, Paul McFeeters. As with previous calls, we will read prepared remarks, followed by 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 that will be referred to in the call. We've also posted a summary table highlighting OpenText historical-trended financial metrics. And with that, I will hand the call over to Paul McFeeters.

Thank you, Greg. Turning to the finance results, I will highlight our third quarter of fiscal year 2013. Total revenue for the quarter was $337.7 million, up 15.5% compared to [$232.3] million for the same period last year. Regionally, the Americas contributed 53.1%, EMEA 37.3% and Asia Pacific 9.6%. License revenue for the quarter was $69 million, up 13.3% compared to $61 million reported for the same period last year. We saw license revenue broken down by vertical sector as 19% from services, 18% from technology, 15% from consumer goods, 12% from financial services, 12% from basic materials, 10% from public sector, 6% from utilities, 5% for industrial goods, and 3% from healthcare. Cloud services revenue was $44.4 million for the quarter compared to $46.2 in the second quarter. Customer Support revenue for the quarter was $166.6 million, up [0.3]% compared to $166.1 million in the previous year. On a constant currency basis, Customer Support revenue grew by 2%. Professional Services and Other revenue in the quarter was $57.7 million, down 11.8% compared to $65.3 million in the same period last year. Professional Services margin was 16.3% in the current quarter versus 19.5% in the same period last year. We expect the margin to improve in Q4.

And year-to-date, our Professional Services margins are 22.5%, up from 20.3% year-to-date in fiscal '12. The Q3 impact of this from our internal targets are a negative $0.06 per share impact on EPS. Gross margin for the quarter before amortization of acquired technology was relatively stable at 71% for both the current quarter and the same period last year. Pre-tax adjusted operating margin before interest expense and stock compensation was $90.4 million this quarter, up 23% compared to $73.6 million in Q3 of last fiscal year. Adjusted net income increased by 25% to $74.2 million this quarter, up from $59.2 million in Q3 of the last fiscal year. On a year-to-date basis, adjusted net income was $244.4 million compared to $201.2 million in the same period last year, an increase of 22%. Adjusted EPS was $1.26 per share on a diluted basis, up from $1.01 per share in Q3 of the prior fiscal year, an increase of 25%. Operating costs for the quarter was $116.8 million compared to $96.6 million the same period of the prior fiscal year. On a year-to-date basis, operating cash flow was $253.3 million compared to $186.6 million in same period last year, an increase of $66.7 million or 36%.

The sequential effect of foreign currency movement on adjusted EPS for Q3 was a positive $0.02. On a year-over-year basis, foreign currency had a negative impact of $0.01. The adjusted tax rate for the quarter was 14%, the same as it was last fiscal year. On a GAAP basis, income from operations before interest and taxes for the third quarter was $40.9 million, up 50% from $27.3 million in the third quarter last year. GAAP net income before taxes was $37 million in the current quarter versus $20.7 million in the same period last year. Net income for the third quarter in accordance with GAAP was $25.8 million or $0.44 per share on a diluted basis, compared to $34.8 million or $0.59 per share on a diluted basis the same period a year ago. This year-over-year reduction in GAAP net income was entirely due to the impact of certain one-time tax benefits realized in Q3 of this fiscal 2012 that were not repeated in the current quarter.

There were approximately 59.1 million shares outstanding on a fully diluted basis for the third quarter of fiscal 2013. On the balance sheet at March 31, 2013, deferred revenues were $308 million compared to $286.6 million as at June 30, 2012, and $303.5 million as at March 31, 2012. Accounts receivable is $174.6 million compared to $163.6 million at June 30, 2012, and $ 176 million as at March 31, 2012. Days sales outstanding were 47 days at March 31, 2013 compared to 48 days as of June 30, 2012, and 54 days as at March 31, 2012. On March 31, 2013, our head count was approximately 5,100, comprised of 1,300 in R&D, 240 in Cloud services, 740 in Customer Support, 970 in Professional Services, 1,100 in Sales and Marketing, and 750 in G&A. Our Board of Directors approved a policy to declare quarterly non-cumulative dividends of $0.30 per share. The record day for this quarter's dividend is May 31, and the payment date is June 21.

On April 23, 2013, we entered into a settlement on a legacy EasyLink litigation matter relating to a patent infringement lawsuit filed by j2 Global Inc. The terms of the settlement include a one-time fee of $27 million, which after taxes equate to a $16 million financial statement adjustment to goodwill. This amount was built to the purchase price allocation for EasyLink and did not have an income statement impact. We disclosed these [listings] to this litigation in our previous 10-Qs. On March 5, we acquired Resonate Technology Limited, a company based in Cardiff, UK, for $20 million. Prior to acquiring Resonate, we were a primary customer, reselling their products. [Less] their revenue was mostly from [Multitext], and the consolidated impact of the acquisition will mostly affect our cost of sales, and not revenues. In our operating model, the full details [of the purchase] are available on our website. We show our expected annual operating net margin to be in the range of 26% to 30%. For fiscal 2013, we expect our adjusted operating margin to be in upper end of that range. Now I'll turn the call over to Mark.

Thank you, Paul. And welcome, everyone, to the fiscal '13 Q3 earnings call. We are committed to delivering value to our stockholders, to technology innovation, strategic acquisitions, and now through a dividend program. Over the last 12 months we have generated $333 million in operating cash flow, and we are running our business at record operating margins. We have always been committed to rewarding our stockholders' investment in OpenText. And the Board has decided that it is the right time to adopt a quarterly dividend program, and announced a $0.30 a share dividend. On an annual basis, this is roughly equivalent to 20% of our annual cash flow. We have built an engine at OpenText that delivers superior cash flows and value. Today's dividend program announcement is a clear indication of the Company's confidence in our financial model, EIM strategy and execution.

On to the quarter. Within Q3 we generated $338 million in revenues, up 16% year over year. Adjusted net income was $74 million, up 25% year over year. We generated a record cash flow of $117 million, up 21% year over year. Our fiscal 2013 target model range for adjusted margins is 26% to 30%. And we expect to finish the full fiscal year at the upper end of this range. Adjusted EPS was $1.26, up 24.8% year over year. Further, we delivered $69 million in license revenues, or 13% organic license growth year over year. The sales teams executed well against a solid pipeline. We closed eight license deals over $1 million, compared to five deals over $1 million last quarter, and one deal over $1 million in fiscal '12 Q3. Q3 ASP was $297,000, our highest ASP in six quarters. 39% of our sales were to new customers, 47% were partner-related. These metrics are right in line with our expectations.

As for industries, public sector, technology, financial services, services, consumer goods, and basic materials were all double-digit contributors. America's license contribution was 46%, EMEA 44%, and APJ 10%. EMEA and the Americas executed well within the quarter, and APJ was in line. We continue to invest in sales, and we expect these investments will yield results over time. As I discussed in the past, the investment areas include improved field leadership. There's a direct relationship between leadership and results. We have attracted a new generation of leadership to deliver against our EIM opportunity. Second, expanding our sales capacity and coverage, including emerging markets. This includes India, Latin America, South Africa and the sub-Sahara, Eastern Europe, to name a few. Improving our selling productivity. Cross-selling new products into our install base. Increased pipeline and revenue generation from our existing partners while attracting new partners and building new channels. Telesales, a newly formed group that will contribute in the coming quarters. And new product introduction into the field. Our sales strategy and execution is working. With Q3 performance and Q4 pipeline, we continue to expect second-half fiscal 2013 over second-half fiscal 2012 license growth.

Let me spend some time on our services lines. The Customer Support business performed at historic highs of $166.6 million in revenue. With adjusted margins of 83.6%, the renewal rates in the low 90% range, both metrics were in line with our expectations. The Cloud services businesses delivered $44.4 million in revenues within the quarter. And within the quarter, we delivered SecureiX, a new secured email service. In the first 30 days, we have approximately 100 companies trialing this new service. Our Cloud service delivers secure transactions, fax, EDI notifications, and now secure email. We are focusing on secure, enterprise-quality, reliable information exchange. As for our Professional Services business, we delivered $57.6 million in revenues and 16.8% in adjusted margins. Third-quarter revenues and margins were down due to timing of customer projects in North America and APJ. Customers clearly value OpenText Professional Services. And this is reflected in our margin performance. Year to date, our cumulative margin is 23%, up 11% year over year.

We also delivered seven new or upgraded products within the quarter. Let me walk through these by pillar. First discovery, our new product, InfoFusion. InfoFusion is our Information Access platform, and is now [GA], and is an important new product for us. This is a smart in-context enterprise search product allowing customers to fuse together content platforms with single sign-on, easy search, and semantic navigation. Next pillar, our BPM Assure. Our BPM focus is Assure. Assure provides pre-built processed components and a library of out-of-the-box solutions that accelerate time-to-market and time-to-value for horizontal line of business and applications, from case management across HR, IT, finance and more. Assure emphasizes our recent leadership position in the Forrester's smart process application wave, and points to a promising future in our BPM business.

In the next pillar, CEM, we introduced StreamServe 5.6. StreamServe is our market-leading customer communications platform. With enhanced usability, support for non-technical business users, to create high-impact communications in Microsoft Word and deep integration across CEM, BPM and ECM. StreamServe is built for high-volume, multi-channel customer communications across the web and print. Also in CEM, Media Management. Media Management is our next generation digital asset management solution. Media Management 7.2 is the proven market leader, recognized by Forrester and other energy analysts for helping marketing organizations create and manage their brand assets, and accelerate time-to-revenue for high-impact, multi-channel customer campaigns. In the information exchange pillar, we introduced SecureiX. This is our innovative, secure messaging platform for any secure email communication, an exciting growth at opportunity for us.

An ECM pillar, OpenText Archive, is our new solution for maximally scalable archival of critical enterprise information across SAP, Exchange, SharePoint and OpenText. We have integrated our archiving solutions into a single data management platform, providing faster times to deployment, single source for information for archiving and discovery, while allowing for reduced hardware costs. With OpenText Archive, we have offered enterprises a true, single source to truth, an ideal platform for compliance and discovery. And lastly, SAP Employee File Management. We continue to innovate in our SAP franchise with our new Employee File Management solution. With this software, we deliver on the promise of managing unstructured information, tied to back-end transitional systems and unstructured data. This is our unique position of strength, enabling us to truly manage unstructured content where effort may live within the enterprise, including ERP. It was a strong quarter of innovation, across the five pillars.

Let we turn to customer successes in the quarter. Freescale, who is extending its deployment with our information exchange solutions to build a virtual desktop infrastructure, allowing for a centralized virtual infrastructure for worldwide EDA application access. This has and will fully result in enhanced productivity for engineers, design wins, and quicker time to market, and thus increased revenues. The Planning Inspectorate, the UK government agency responsible for handling over 20,000 planning cases every year, has invested in OpenText Content Server, OpenText Template Workspaces, and OpenText StreamServe. This will enable them to greatly improved their efficiency and readiness for the changing planning landscape in the UK. RS Components, the trading brand of Electrocomponents plc, has invested in OpenText Archiving for SAP Solutions for robust, secure and easy access to all archived invoices. This has enabled them to be highly organized and has given them access to all the tools they need to leverage their global presence. Other customer wins include Hydro Quebec, CGI, Volvo, and Hoffman-LaRoche.

Let me provide a few additional important highlights from the quarter. Our executive management team is now complete with the hiring of Kevin Cochrane as our CMO. Kevin joins us from Adobe and brings to OpenText an incredible track record and perspective on the products. With the market strategies and [field enablement], Kevin is a real talent and a great addition to the executive leadership team. We completed the acquisition of Resonate Knowledge Technologies, aka RKT. RKT was an OpenText partner, and their products are fully integrated into our ECM products. RKT brings OpenText customers the ability to easily create compelling user interfaces and report-writing. Ease-of-use is a main focus for us to drive further adoption of content server.

Further to this, our customers can expect us to place more of an emphasis on the developer and developer software. The developer makes all things possible. And we see a opportunity to create a larger ecosystem around our software and our Company. Further, OpenText was honored as being named the SAP 2013 Pinnacle Award winner, as SAP's number one go-to-market partner. The relationship between SAP and OpenText has never been stronger. We had a strong Q3 with SAP. And I'm pleased to announce that OpenText will be supporting SAP's HANA platform, and offering a set of products and upgrades for OpenText SAP customers to leverage the HANA platform. Our first native HANA solution will be available in the second half of the calendar year.

Let me wrap up my prepared remarks by saying our sales strategy, our EIM strategy, and our financial model are working. Our operating cash flows increased 21% year over year. We expect to complete fiscal 2013 in the upper end of our target range for adjusted operating margins. Our adjusted EPS is up 25% year over year. I'm pleased with our 13% organic license growth. And we expect second-half over second-half license growth. We are investing in products in the sales force, which I'm confident will yield results. We are committed to delivering value to our stockholders through technology innovation, strategic acquisitions, and now a quarterly dividend program. With that, let's open the call for your questions.

Thank you, sir.

(Operator Instructions)

Thanos Moschopoulos with BMO Capital Markets.

Mark, can you provide some color around the spending environments? Over the past month, we have obviously seen some slower software from the likes of Oracle, IBM and SAP. And in the context of that climate, you have delivered a good license number. And so can you talk about how customer demand progressed in the quarter? And how the demand environment is shaping up from your perspective as you look forward into Q4?

Sure, thanks, Thanos. What we are seeing is steady demand around our governance compliance and risk management solutions. I would say growing demand around security, mobility, cloud and smart applications. And an untapped demand around the developer. And these are the aspects that I see driving our pipeline, part of our delivery in Q3. And our expected second-half over second-half organic license growth. Now in terms of the economy, we all read the same economists and newspapers. And most economists have a G8 advanced economies in Eurozones between 1% and 2% growth of course. But we are focused on our plans and what we control. And again, we see steady demand in governance compliance with growing demand around security, mobility, clouds, smart apps, and really quite an untapped opportunity around the developer.

And now should we be thinking about organic license growth in Q4 specifically as well? Or do you really want to focus your guidance more around second half?

Yes, we don't give quarterly guidance, as you know. My comments are second-half over second-half.

Okay. And one more for me. The cloud revenue was down a little bit relative to Q2. And so was that currency or was that some fall-out as you're integrating EasyLink?

I do not think it is either, actually. When we look at the business, it's our third quarter operating the business. And we look at -- we've set the expectation for the first year that annual revenues will be flattish. Now, again, we bought a business that had declining revenues, and this year we are looking to have the revenues be flattish. And I think when we come in on an annual basis, we will be right where we expected to be.

Great, thanks, Mark. I will pass the line.

Richard Tse with Cormark Securities.

Mark, in terms of your description of the service revenue decline, timing of deals. Can you elaborate on that a little bit more?

I will re-emphasize. When we look at PS, obviously we would have liked to have done better in PS. But the net impact is roughly $0.06, as Paul highlighted in PS. We don't always control -- we don't control the timing of customer acceptances. In this case, we had some project delays in North America and in APJ that contributed to the down-tick in revenue. Notice again year-to-date, our adjusted margin is 23%, up 11% year over year. And PS will be back on track in a quarter or two.

Okay. And then in your previous comments, you've talked about increasing the sales capacity. I think the numbers have been about 20%. Are you fully there now, in terms of the sales capacity? And secondly, related to that, are all these sales guys in the position to sort of hit their full stride on quota? Are they all trained up now? And if you can maybe elaborate on that, that would helpful.

We hit our internal goals of capacity at the end of December. And it takes us two to four quarters to get a new AE fully onto quota and up to productivity. Of course, not all AEs make it, right? For whatever reason. But we are at our capacity at the end of December, at the end of Q2. And it takes us anywhere between two and four quarters to get an AE to be productive.

So essentially, based on that, you would probably think that coming in a new fiscal year, the sales momentum should accelerate, no?

You know, next quarter we will talk about our FY '14 plan.

Okay. And just one final question. What is the environment like for acquisitions today? And how are you going to balance that against the organic growth initiatives?

Yes, I will point to my macro comment is, we are going to -- we are committed to delivering value through technology innovations, strategic acquisitions, and now a dividend. We will continue to acquire. There has not been a lot of M&A activity in the market over the last 90 days. We are patient, we look for value, we know what we want, and we will remain patient.

Okay, thank you.

Scott Penner with TD Securities.

Mark, just two questions for you, if I may. I would like to ask, first of all, if you would repeat what you were talking about the SAP HANA, what sort of product you're talking about to plug into HANA, and whether this will be -- the goal is to have this as part of the re-seller solution?

Sure thing. So we've looked at HANA, and we think there is value for OpenText to have an in-memory solution for ECM. So customers who are searching millions of documents, millions of invoices, doing work on X millions of semi-structured/unstructured documents, we think our joint customers can benefit from having that in-memory versus living on slower disk. And I am real proud and pleased to say that we will natively support HANA, specifically ECM, as an in-memory offering, leveraging HANA. And we will have it as part of the re-sale relationship at SAP.

And timing is second half of this calendar year? Is that right?

That's correct, second half of the calendar year.

Okay. Other question for you, Mark, would be just the products that you ran through on the different pillars of EIM. Where do you think the most opportunities are? Is it with the InfoFusion that you talked more about, or some of the other solutions?

Yes, it is -- I will poke on a few. I think our Archive Solution is really quite phenomenal. We had a standalone Archive Solution for SAP, a different standalone solution for Exchange, SAP, SharePoint, [Rs]. They are now integrated. They have an integrated back end, integrated user experience. So Archive, I am quite excited about. I also think the BPM Assure Solution, in having a flexible case management solution that can go across multiple lines of business. And also highlight, of course, InfoFusion. We are working on version 2, and some interesting things there. I will note a fourth that wasn't in the script, it's really our Tempo line. Tempo Box plus Tempo Social. And we unveiled in our EIM days Temple Note. Not unlike Evernote. All three solutions integrated together -- Tempo Box, Tempo Social, Temple Note. To the same back end as Content Server and Archive. Temple Note goes G8 at the end of this quarter. So I think the Tempo series is easy to understand by customers, easy to understand by the sales force. So Archive, our Tempo line, InfoFusion and BPM Assure would be my top four.

I appreciate it, I will pass the line, thank you.

Thanks, Scott.

Tom Liston with Cantor Fitzgerald.

Mark, you alluded to it a bit. But can you talk about what the main [callister] on the dividend was, and how it relates to -- is M&A activity look like it's slowing down a bit? Or is it just simply -- okay, we can borrow money cheaply if you want to get there? And as important in going forward, whether triggers potentially increase that. Including talking about organic growth and is the step function investment kind of done obviously beyond growing investment? Can you talk about a bit the levers and why now, and what might potentially increase that down the road?

Sure, thanks, Tom. I will start with why a dividend? First and foremost, we want to widen our investor base. And we think by issuing a dividend, we will be able to open up new conversations and attract a new class to our stock. And we think that is good for everybody. Second is our commitment to delivering value, not just through innovation or acquisitions, but now a dividend. I point to the fantastic engine we have built to deliver superior cash flows. We had record cash flows of $117 million in the quarter, up 20% year over year. Last four quarters, up $333 million of operating cash flow. And our business is getting more efficient, and our expectation to finish the full year at the upper end of our adjusted margin target range. So for all of those reasons, the Board felt it was the right time to initiate a dividend. We have all the cash we need to operate our business, to invest in product, to acquire companies, and now to issue a dividend.

A quick follow-up. On the license revenue, one of the most impressive aspects was the size of big deals and the number of big deals. Can you attribute that to anyone, whether it's a vertical or just sales force getting properly up to speed? Or a couple of key partners? Is there one or two angles there that contributed to the large deals being up so substantially year over year?

I would say it was just broad-based good execution. We had large deals in every [geo]. So I just think good execution.

Great, thanks. I will pass the line.

Paul Treiber with RBC Capital Markets.

Just going back to license revenue again. Despite the environment, as you mentioned, the execution was very good. Did you see any impact from Eastern March or sequestration? Or did you -- were you able to manage around that, and that is just a reflection on your new operations team you put in place and the sales force ramping up?

Paul, thanks for the question. Look, we are pleased with the $69 million in license, 13% growth year over year. So it was just [perry full stop]. We are pleased with that. We are focused on building our plans around what we control. And again, you look at the G8 advanced economies of the Eurozone, the GDP projection for 2013 is 1% to 2%. So license growth is hard-fought, we hard fought for our 13% growth. Sequester is not helpful. We executed around it, but it is not certainly not helpful. What we are focused on, what I have the teams focused on, is what we own and what we control. I think our emerging market focus has been a good hedge against some of the advanced economies. And I will point back to where we are seeing some growing demand -- around security and security solutions. Which is sort of a new secular -- sort of a new segment for us. Mobility as well, a high-driven demand for mobility. And smart applications, our new Assure Solution we are quite hopeful around. So a $69 million, we are pleased with execution, we are aware of the backdrop of 1% to 2% growth, and I would say we navigated around it quite well in the quarter.

And speaking very broadly about perhaps the trend in win rates over the last several quarters from last year, and also the growth in the pipeline. Would you say both those metrics are ramping in line with your expectations at a very high level as a sales force? And this sales force comes on board and there is less change in the organization.

Yes, I am pleased with our pipeline growth. And bringing Kevin Cochrane onboard. Kevin has been onboard a couple of months, and he is just a joy to work with. He is a product-oriented CMO, a go-to-market specialist. And just sales force-friendly and pipeline as first principle and first mission. So Kevin is going to have quite a impact on the business. I'm pleased with our pipeline growth. And that also gives us the confidence of the second-half over second-half license growth that I commented on earlier. In terms of win rates, I'm not necessarily seeing any differences in the dynamics per se.

Great, thanks. One more and then I'll pass the line. You didn't mention the quarterly license model. Is that model still intact?

A quarterly license model?

Sorry, the quarterly seasonal license model.

Yes, Paul. This is Paul. Yes, I think every time I commented on that in the past, I've also made the comment that if we look back over the last couple of years, there has been too much variability to have, I'll call it a consistent range. So the only thing I would comment on is that certainly from a seasonality standpoint, we would expect Q4 to be higher than Q3. And that's probably the best I can offer at this point.

Okay, thanks very much. I'll pass the line.

Thank you, Paul.

Kris Thompson with National Bank Financial.

Paul, just on the maintenance renewals, the cash generated from your deferred revenue this quarter was strong. But it was a bit lower than I expected, and the year over year was down. Can you give us some color on that figure?

Yes, well, first of all, I think obviously our cash costs were quite strong. So there wouldn't be anything to do if -- Kris, you're asking about the actual renewal rate in itself has stayed consistent as Mark remarked, down in the low 90s. If anything, it will just be a timing -- it would only be a timing on the collections. Although, again, I think our collections overall is very, very strong. And as you see, the deferred revenue is up, as you expect. There's always a high percentage of renewals, as we've indicated in the past, on December. And there's usually a little bit of lag on that volume for collections in the very first quarter of renewal. So I think you'll see that recover up in the second -- or, I'm sorry, in the fourth quarter.

Okay, that's good. And just, I don't know, Paul or Mark, on the 8 multi-million dollar deal that you did, can you give us some color on how many were existing versus new customers?

I would say looking at the list, it looks pretty well in line with our general new versus existing. I'd say sort of a 40 new, 60 existing.

Okay. Because the last couple of quarters you've been focusing, I think, to use your words, filling more modules into your customer base. Is that still a strategy? Or as it looks like, is it your new sales people bringing in new relationships and getting you into some new customers? Is that what we are experiencing?

I think is a variety of things. It's -- the install base is certainly a focus for us in bringing new products or existing products, to be able to expand the number of modules existing customers use. Our capacity expansion includes places where we have not covered before. I highlighted some of the emerging markets. That's helping as well. So I would say it is new coverage and install based-focus.

Okay, just on the financial services vertical. Just to pick a weak area, it looked like it was down year over year. What's happening in that vertical? Is it some new products that you require there? Or did you just have some slippage there?

No, there is really nothing to highlight there. I don't see any dynamic change. I think it's just quarter to quarter mix and variability.

Okay, guys, I will leave it there. Thanks a lot.

Blair Abernethy with Stifel Nicolaus.

Just a couple of things. Paul, just on the Resonate acquisition. What was their approximate annual revenue run rate?

Yes, Blair, we are not disclosing any revenue run rate on that. And as I said in my comments, when you bring it together with OpenText, really we were their primary customer. And so since we are reselling that product, it won't really change our revenue run rate. It will affect our cost of sales, but we're not disclosing the amount.

Okay. And on the maintenance revenue, the maintenance base, if you will. What -- you talked a little bit about the renewals. How about the pricing environment for maintenance contracts? Particularly in Europe, given the ongoing recession there.

We don't see any real difference in the trend. I mean, we are still, where we can, getting some increases over renewals. Hardly any -- sort of negotiating down. Maintenance has always been a mainstay for us in terms of getting the renewal rates where they have been quite consistent, getting some increases on it. And we really have not seen much downward movement from either cancellation or reduction of renewal rates.

Okay, great. And then on the partner side of the equation, obviously SAP continues to be your leading partner. But I want to perhaps drill in a bit more on some of the other partners outside of SAP and how they have been performing for you?

We look at our partner mix within the quarter. And roughly 47% touching partners, that is a fine ratio for us. Look, we are still focused on surrounding Microsoft SharePoint. So SAP and Microsoft are the two most visible. We are making progress in -- what I would say as in-country volume partners. Our partner program is also building -- think of the top five partners in France, top five partners in Germany, top five partners in the UK. And those partners won't have maybe as much a brand recognition as some of the larger software houses. That's been a real focus from the partner team as well. We are taking a multi-tier strategy. We are looking for large strategic partners like SAP, a technology partner relationship, some distributors, as well as what I would call in-country, value-added partners. And we think that's the right strategy for us.

Okay, great. And one last quick one. I'm not sure if I missed this or not. But what is the current sales rep head count?

We haven't disclosed any actual headcount, Blair, for a few quarters now.

So you're not going to -- are you going to give it on an annual basis?

No. Because we have a fair mix in the type of sales people that we've talked about in the past. So we should talk about total sales and marketing, which is 1,100 people.

Fair enough. Thanks very much, guys.

Paul Steep with Scotia Capital.

Mark, maybe you can talk just back on the dividend. What is the target pay ratio or maybe how did the Board think about setting that initial level of dividend? More importantly, what sort of growth target or plan going forward?

Paul, this is Paul. We looked at in terms of what we thought was available operating cash mix, if you will. And we said this is about 20% of our annual operating cash. And that's generally how the Board looked at it. Leaving a significant amount of cash, of course, available for continuing with our acquisitions. From a growth standpoint, we can't specify how the dividends will grow over time. But we have targeted a percentage of cash flow, and you've seen our cash flow increase compounded 25% over last seven years. Probably how we will think about it as the Board makes a declaration quarter to quarter and year to year.

That helps. The last one then, for you as well. Just a clarification on the litigation. Does that clear up the Captaris piece, and does it basically put in place a longer-term license around that?

Yes and yes.

Great. Thanks, guys.

Stephanie Price with CIBC.

Just getting back to the cloud and the cloud revenue that you saw in the quarter. Can you talk a bit about how much of your products are actually have been rolled out in the cloud so far? And where you are with those initiatives and what the customer response has been?

Thanks, Stephanie. So we have two (technical difficulty) offerings. We have the EasyLink products that are fully in the cloud, platform as a service, as we call it. And our second component, a much smaller component, though a component we are looking to grow, is our managed hosting services. And I would say that our ECM platform is fully within the available set for managed hosting today, a good part of the CEM offering. And BPM and IX is next. So I would say about half of our products are available in MHS for the cloud. And probably over the next year, as we -- you know, our philosophy here as we go through the next release cycle, we want to make sure that those products are integrated into our Cloud services layer. To be able to provide all the services necessary for management, monitoring, billing, customer care support. So I would think over the next year as we go through every release cycle, our products will be available on prem and in our cloud.

Okay. And then just a last one for me. On the cross-selling initiative, can you talk a bit about how those are going in the role of the EIM strategy? How has the uptick been so far?

So two questions there. I will start with integrated EIM. I'd like to say that integration is never done. But in certain places, you'll hit critical mass. And we're making good progress. You look at our Archive Solution, that is now integrated. You look at StreamServe, that is now integrated into ECM, and more fully into CEM. Our Tempo Social, now integrated into our ECM offerings. The basic philosophy we are taking, the next release of our software, and the next major release for all our components, they are also cloud-enabled. And we're looking over a two to three release cycle to get deeper integration of user experience, text back, and data. So I would say the integration is going well across our products, and we are beginning to see it, both in StreamServe, media management, Tempo series, Archive. And we're just slow and steady, release after release, more deeply integrating. In terms of cross-selling, we have educated and enabled the field with we think the materials they need, and they are armed and off in cross-selling.

Okay, great, thank you.

Michael Nemeroff with Credit Suisse.

Nice job on the license. Just one quick follow-up on the license, though. I've been asked by a couple of people -- was there any contributions from Resonate in the license line this quarter?

No, none.

I'm sorry. That was a no?

Sorry, that was a no. It closed in March and there will be no real contribution there.

Okay, thanks, Paul. And then also just following up on some of the deferred revenue questions. I'm looking at the deferred revenue. And the growth was obviously a little bit -- it's slower this quarter than it was -- I have to go back a couple of years to see it this slow. You commented that there was no pricing degradation on the renewals. And I was just wondering, what's the explanation for that deferred revenue deceleration?

I think one way of looking at it is there is actual earned -- I know your question is on deferred. But just on the recognized CS, it was a constant currency 2% growth. So one explanation is, on the balance sheet, we actually have a lower -- a negative effect on currency on the balance sheet than from a year ago. So going back to our metrics that we track, renewal rates are the same as we've had in the past, our actual year-over-year constant currency bill from CS is 2%, which has also been constant for the last year or so.

Okay, great. Thanks very much, guys.

Thanks, Michael.

Rekesh Kumar with Susquehanna.

You talked about a [CP] HANA and how you're trying to leverage that within [inman] information in the future. But if you look at ERP the last year, the growth has been moving from the ERP applications to [alec vic dernasis]. So is the lack of growth in the ERP products impacting some of your growth in the [CP house]?

No, we see this as additive to what we are doing. We support -- if you think of the major ERP objects that we support in SAP today, we support accounts receivable through our Vendor and Voice Management Solution, we support the employee object through our Employee File Management Solution. We also have an Asset Management module talking to their transactional asset components. We think there is a lot of room to grow just within ERP, whether that ERP is on prem in their cloud. So we look at this as an additive solution for those customers who are running ERP in-memory, or running those components in-memory. We see still an enormous opportunity straight within ERP, whether it's on prem or in their cloud, in addition to supporting their new technology platform, HANA.

Just, I have a follow-up quickly on Microsoft [wearing that] 2013. Any color on the type of work [in news cases] around the new release that you are doing?

Yes, again, when we look at 2013, we see it as a -- basically a technology upgrade from Microsoft. We don't see it as a large functional advancement. In fact, we see them going more mid-market than into the Global 10,000. Deeper integration to dynamics, a deeper integration to communicator. And some of their marketing and field activities really look at SharePoint being pushed into the mid-market. More global -- a majority of our revenues come from Global 10,000s and large governments. So we look at SharePoint primarily as a technology upgrade, not a functional upgrade. And with that upgrade, Microsoft also moving more to the mid-market.

Thank you. That's it for me.

Richard Tse with Cormark Securities.

Yes, just one follow-up on the services again, Mark. So it was [off here] a bit. Would it mean that those customers did not take the liberty of the license, and that would be to come? Or is it recognized -- I'm trying to get a sense of sort of an incremental revenue stream will come with that when the Professional Services come back on?

Richard, thanks for the question. No, it's purely related to the PS revenue, not license revenue.

Yes, isn't there like a license component to that as well?

Richard, Paul, no. No, in many cases, customers will purchase for the software. And then plan for when they can get the resources internally as well as externally for applying Professional Services. So it's very common, in fact, to have a license sale, and have a Professional Services engagement.

Okay, all right, thanks.

There are no further questions in the queue. I'd like to turn the conference back over to Mr. Barrenechea for closing remarks.

Very good. I'd like to leave you with a few select highlights from the quarter. Record cash flows, a dividend program, expected annual adjusted margins in the upper end of our fiscal '13 target model range, 13% year-over-year organic license growth, an expected second-half over second-half license growth. Our EIM strategy and financial model are working. Thank you, everyone, for participating today. And that ends today's call.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.