Open Text Corporation (OTEX) Q3 2011 Earnings Report, Transcript and Summary

Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Corp. Third Quarter Fiscal Year 2011 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Wednesday, April 27, 2011, at 5 p.m. Eastern Time. I will now turn the conference over to Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Thank you, and thank you for joining us everybody. Please note that during the course of this conference call, we may make projections or other forward-looking statements relating to the future performance of Open Text or its subsidiaries. These oral statements may contain forward-looking information, and actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing a conclusion or while making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors or assumptions that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclusion while making a forecast or projection as reflected in the forward-looking information are contained in Form 10-K and Form 10-Qs of Open Text, as well as in our press release that was issued earlier today. Now with that, I'll turn the call over to Paul.

Thank you, Greg. I will highlight the results of the third quarter. Total revenue for the quarter was $263 million, up 24% compared to $213 million for the same period last year. License revenue for the quarter was $67.8 million, up 37% compared to $49.5 million reported for the same period last year. Maintenance revenue for the quarter was $143.1 million, up 15% compared to $124.4 million for the same period last year. Services and other revenue in the quarter was $52 million, up 34% compared to $38.8 million in the same period last year. Gross profit for the third quarter before amortization of acquired technology was 72%, which remained consistent compared with Q3 last year. Adjusted operating margin increased 11% to $64.1 million this quarter from $57.8 million in Q3 last year. Adjusted net income increased 30% to $52.5 million this quarter from $40.3 million in the third quarter last year. Third quarter adjusted EPS was $0.90 on a diluted basis, up 29% from $0.70 per share for the same period a year ago. The adjusted tax rate for the quarter is 14%. We expect the FY'11 adjusted tax rate to be between 12% and 14% and cash taxes to be in the 5% to 10% range. Net income for the third quarter, in accordance with GAAP, was $35.8 million or 61% per share on a diluted basis, compared to $13.1 million or $0.23 per share on a diluted basis for the same period a year ago. There were approximately 58.4 million shares outstanding on a fully diluted basis for the quarter. Operating cash flow in the quarter was $82.3 million compared to $78 million in the same period last year, an increase of $4.3 million. On a year-to-date basis, operating cash flow was $171.3 million compared to $115 million in the same period last year, an increase of $56.3 million. After the impact of cash paid relating to special charges, year-to-date operating cash flow was $188 million compared to $140.4 million for the first nine months last year. Turning to the balance sheet at March 31, 2011, deferred revenue was $258 million compared to $230 million as of June 30, 2010, and accounts receivable was $150 million compared to $132 million at the end of last year. Day sales outstanding were 49 days as of March 31, 2011, compared to 50 days at the end of last year and 52 days at the end of Q3 last year. The sequential affect of foreign currency movement on adjusted EPS was a negative $0.01. We closed the acquisitions of Metastorm and weComm during the quarter. Total consideration, net of cash, required for these 2 acquisitions, were $168.7 million and $20.2 million, respectively. These acquisitions, together with StreamServe, were $0.06 accretive to our EPS for the current quarter. There's 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%. The full details of our operating model are available on our website and in our press release. Now I'll turn the call over to John.

Thank you, Paul. Hello, everyone, and thank you for joining us today. I'm pleased with our third quarter results. We had strong revenue in all geographies and are on track to meet our annual goals. Our pipeline visibility and predictability are improving, and we are pleased with how our pipeline management is progressing. As Paul mentioned, we generated $67.8 million of license revenue in the quarter. Geographically, Americas were responsible for 51% of revenue; Europe, 40%; with Asia Pac at 9%, despite the situation in Japan. Of the license revenue, approximately 46% came from new customers and 54% from our install base. We had 14 transactions over $500,000 and an additional 10 transactions over $1 million. This compares to 8 transactions over $500,000 and 5 transactions over $1 million a year ago. Average transaction size was approximately $250,000, slightly down from the same quarter last year which reflects our building pipeline of new customers. The larger transactions in the quarter came from public sector, financial services, IT services and consumer goods. Once again, compliance-based solutions were responsible for many of the large deals, but we're also seeing an increase in productivity-driven solutions such as our ERP integration offerings and most recently, the BPM products from Metastorm. Examples of customers that bought in the quarter include Loblaw, Canada's largest food distributor. They purchased the Metastorm Enterprise suite to help facilitate and accelerate Loblaw's enterprise transformation initiative. The goal is to help manage, optimize and control their global business operations. MMM Group, a Canadian program management, planning, engineering and geometrics firm, purchased Open Text Lifecycle Management [Open Text Content Lifecycle Management] and Open Text Everywhere. Open Text will provide users across the organization with a central repository to store and share information and help improve collaboration over multiple locations and projects. CLM [Content Lifecycle Management] will deliver records management functions and capabilities to provide full lifecycle management around the company's engineering documents. Spin Master, a children's entertainment company, purchased Open Text Media Management and Extended ECM for SAP. The solution will assist Spin Master with a new product development process, replacing manual tasks and improving collaboration with partners. Media Management workflow capabilities will ensure that their production, reuse and publication process work seamlessly together. One of the largest global pharmaceutical and healthcare companies located in New Jersey purchased the Media Management Hosting Service offering from Open Text. The company will use Open Text Media Management as its central repository for rich media marketing content. And finally, North Carolina Department of Transportation purchased Open Text Extended ECM for SAP Solutions. In Q3, we saw our license revenue broken down by vertical as: 18% from financial services, 17% from service industries, 15% from technology, 13% from public sector, 12% from natural resources and base materials, 8% from healthcare, 8% from consumer goods and 6% from industrial goods. Despite government spending cutbacks, we continue to see strength with international governments and are pleased with how this vertical is building in our pipeline. Approximately 40% of our license revenue in the quarter came from partners and resellers. Our SAP relationship is performing well. Also, our close working relationship with Microsoft had positive impact in the quarter and is yielding a significant number of opportunities in the pipeline. We continue to work closely with Microsoft on application integration, joint sales and marketing efforts. The Oracle relationship is progressing, with Oracle also influencing some key transactions in the quarter. We continue to build on the source code that Oracle shared with us last year. This code-sharing agreement is part of an effort to integrate tighter ECM functionality from Open Text in Oracle's Fusion Middleware and provide joint selling opportunities. We closed the quarter with a combined sales force of over 400 quota-carrying sales executives, up from 364 last quarter. With the addition of Metastorm sales representative, we have more than sufficient capacity to support our annual plan. Maintenance retention rates in the quarter remained the same, in the low 90s range, and I'm pleased with the customer retention rates from our recently closed acquisitions. On February 18, we announced that we had closed the acquisition of Metastorm, recognizing the importance of BPM [business process management] to both our ECM and mobility strategies. We plan to integrate Metastorm's products into the Open Text ECM Suite. The industry analysts tell us that BPM is a fast-growing market, and we're cross-training our sales teams to take advantage of the high growth expectations from this business. The integration of StreamServe continues to progress well, and we're encouraged by the uptake of the StreamServe products within our existing base. In the quarter, we also acquired London-based weComm to further our mobility strategy. weComm has key technology that will allow Open Text to help its customers create and deploy mobile apps cost effectively across various mobile platforms and devices. This technology will advance our position in the mobility market. The acquisition of weComm is also yielding value for the organization. Mobile apps have been deployed at several Open Text events on numerous devices, all driven from a common code. In addition to mobility, things are going well with our social media for the workplace offerings. Recognition for the use of our social collaboration systems by the G-20 has led to numerous additional sales opportunities around the world. Beyond government agencies, corporations are also using social media for the workplace. For example, U-Haul has deployed Open Text social media to help manage its U Car Share and U-Box programs. Turning to product announcements in the quarter, we announced a new release of Web Experience Management. This offering enables marketing organizations to extend digital media to online audiences, including tablets and smartphone users. This is the first offering utilizing the integrated weComm technology. We also announced the availability of Open Text Application Governance & Archiving for Microsoft SharePoint 2010. This provides integrated end-to-end management of SharePoint 2010 sites across an entire enterprise. We also announced that Metastorm's M3 modeling application will be delivered by the Microsoft Windows Azure platform. This, along with Open Text current Azure-based offerings are key contributors to our cloud strategy. Example of customer cloud wins this quarter include a large North American financial institution using Content Server with records management in the cloud for content publishing of its public-facing website. A global fast food chain with large amounts of digital storage to manage is using Open Text Media Management in the cloud as its central repository. And finally, a Canadian provincial government agency selected Open Text Content Lifecycle Management to manage its content in a fully hosted cloud environment. About content base in Europe, we saw a record turnout with over 1,000 in attendance to see the product suites, including offerings from our StreamServe, Metastorm and weComm groups. We're encouraged by the recent uptick in customer interest in workflow, document output and extended EPR (sic) [ERP] integration. While we continue to see appliance -- sorry, while we continue to see compliance as a strong business driver, demand for productivity-centric applications like these have created additional opportunities in our pipeline. In the quarter, we conducted a study with AIM, which analyzed the benefits and efficiencies of content management. This study highlighted how productivity of administrative staff can be increased on average by 33% through the use of workflow, scanned forms and automated data capture. Another interesting discovery was the improvement efficiency for providing employees with smartphone access, estimated to be at 20% to 25% productivity gain. The full report is available for download from the Open Text website. Gartner just released the 2010 ECM marketshare overview, and we are pleased to see that our position has increased once again, and we are now neck-in-neck as the number 1 ECM vendor in the world. Turning to the outlook for the remainder of FY 2011. The industry analysts are telling us they expect ECM license revenue to grow an average of 7% to 11.5% through 2015. While we're not providing specific guidance, we feel confident with our targets and business model. From a seasonality perspective, we work through the year on refining our pipeline management process. As a result, Q3 has been much smoother than last year, and we're expecting these efforts will continue to have a similar smoothing effect on Q1 and Q3 next year. So in summary, it was a good quarter, with strong license revenue results. I'm encouraged by the growth and consistency in our pipeline, and we're tracking well to our annual profitability model for the rest of the year and remain positive on the outlook for fiscal 2012. With that, I'd like to open the line for questions.

[Operator Instructions] Our first question comes from the line of Mike Abramsky with RBC Capital Markets.

John, you talked earlier about demand, just kind of focusing on demand, and you made some comments in your press release about improvement. And this is the second quarter. It's also, I think, the strongest license, if I'm not correct, you've had in 3 years. So can you just give us a sense of what are both the tailwinds and headwinds that we might see from you in terms of demand. And also, are you seeing any government weakness, because obviously that's been kind of a focus here and abroad. And then finally, on the issue of demand, are you expecting more uptake from your cross-selling opportunities from your acquisitions or from partner as a driver or from the BPM opportunity? There's 3 questions, so.

Yes. So on the -- so you're correct on the license, this is probably the fastest-growing license revenue we've had in a couple of years. And really, we're seeing that in all geographies, probably the tailwind is government, surprisingly, even with the government cutbacks, et cetera, we're still seeing significant growth in this area mainly because they're focusing on productivity where they're having to reduce budgets, do it with less people, so business process automation, et cetera, is important. And so obviously, we're helping in that. We are seeing the social media and mobility applications pick up, and we also are seeing, as you mentioned, cross-selling opportunities both from the StreamServe, using StreamServe in our customer base, as well as with weComm and Metastorm selling into our customer base.

So how -- what inning are we in, or can you give us some sense of the scope of the cross-selling opportunity from Metastorm and StreamServe ahead and when you kind of expect that to...

We're just in the beginning, but the pipeline is building nicely. And we're very pleased with the demand that we're seeing, particularly with the StreamServe, is doing very well.

And then on your partner revenues, I think you were talking about last Analyst Day about Oracle shaping up, and now you've started to comment that there were some key transactions in the quarter. Could you be a little bit more specific and maybe use a couple of examples and also talk about do you see that as significant as SAP or kind of #2?

What I would say today is that SAP is pretty much right on target. They have -- we had a good quarter with them, continues to be, go very well. Microsoft is probably picking up also on that. We had a very good quarter with Microsoft, working with SharePoint integrations, applications for SharePoint. And the Oracle is, we're still building on the source code that they built, and we're expecting in next quarter and quarters after that to see that stuff picking up. It's been much more of a still-in-development phase from Oracle at this standpoint, but I would say that so, SAP continuing as we expected, Microsoft slightly better than we've expected this past quarter, and we still have hopes that the Oracle is coming along nicely.

And then lastly, John, you saw a little bit more dilution from Metastorm than, I think, maybe The Street was expecting. I just wondered if you could talk a little bit about how that might play through?

You mean -- Mike, it's Paul. You mean on dilution on margins, you mean?

Yes, yes.

Yes. Overall, even StreamServe, we've only been operating for 5 months. Between StreamServe and Metastorm, if I could answer it that way, it would have a margin contraction of just over 1%.

And on that, Mike, we would see, given the potential growth in this area, it will probably take 12 months to 2 years to get on to the full margin, our operating model, but we expect to see some certain growth with that. Also, within that mobility space, we are looking at increased investment in R&D if you see, look at our R&D numbers, they're a little higher than normal because we do see this mobility application as an opportunity for further growth as well.

Our next question comes from the line of Scott Penner with TD Newcrest.

Just a few questions around the acquisitions. Paul, I assume it's going to be in the 10-Q as well, so could you just give us what the revenue was if you can't break it out, StreamServe and Metastorm?

StreamServe was $16 million, Metastorm was $12 million.

Okay. At Metastorm, $12 million was quite a bit higher than what you would expect, just showing a run rate calculation, it's just kind of when the revenue fell during the quarter?

That's right. The answer to that is correct. I would -- to your point, Scott, it's a good point. I would normalize it going forward.

And then, just to be clear, John, I think you said, you just said that the Metastorm, I guess given the growth potential, you're looking at a 12- to 24-month timeframe to get it on your operating model?

That's right. We're -- while we would see the usual kind of synergies around back office and senior management, we do want to focus a little more on the sales and marketing and give them some room for growth in that area.

Okay. And then just before I leave that, I believe last quarter you said that Metastorm, the percentage of license revenue was in line or a little bit higher than you guys do in the core business. Is that safe to assume that it held true within that $12 million?

That's right. That's right, Scott.

Okay. And then also, Paul, if you could just sort of walk us through what the outlook is on, any sort of integration charges or really what is left to come as far as charges going forward.

Yes, we would have probably another, I would say, between approximately $5 million to $6 million going forward in terms of future charges. And then the -- just give me one second, on the quarter, for the quarter, this Q3, we had -- sorry, about $5 million of cash payments on the charges to date. Restructuring was about $4.4 million.

Right. Yes. That $5 million to $6 million going forward, does that include what you would anticipate for Metastorm or is that just what you've got arranged so far?

I would put that with what we anticipate. To John's point, in Metastorm, there's so much had changed there. We have senior management and back-office integrations whereas the sales force are remaining some what intact and even R&D. That's why it's going to take longer to get on the operating model.

Okay, thank you for with that. And then just, John, you mentioned in your comments on a little gentler seasonality in Q3 and then looking forward, I'm just trying to define what that could mean for the normal Q4 spike, presumably that means it's not going to be a level it was last year. I mean are we back to looking at 10% to 15% up in the Q4 and the core business?

So I think you're right, Scott. If you go back 2 years to the traditional -- which we consider the traditional model, I think you're looking at 20% to 30% up in Q4.

Our next question comes from Richard Tse with Cormark Securities.

Guys, just a quick question here or a couple of quick questions, first on the M&A environment. So with all these acquisitions, are you guys going to take a breather right now for the integration or do you have an active acquisition strategy going forward still?

The acquisitions of Metastorm and StreamServe, et cetera, are going very well. They tuck under pretty closely, so we would -- you will see other acquisitions coming, Richard.

Okay. And with respect to the discussion on cloud, you guys are talking about this more. Can you give us a sense of what percentage are your revenue today is represented by cloud versus what it was last year, and also comment on any customer that have shifted over this model? And actually, I'm not clear on where it sits on your income statement. Is it in the license number, is it in the service number?

So I'll let Paul answer that. So let me start with given the market. Up until this year, we -- it's been kind of very minimal revenues from cloud. And what we've really seen is, while we've seen a lot of our existing customers very interested in it, asking if we have that capability, there have been very few that have taken us up in that. What we have found in the beginning is also customers that use our products behind their firewall have now offering cloud applications. So for example, a pharmaceutical company that uses our products for research and development behind the firewall now using the clinical trials functions as in a cloud service. So we're seeing a number of customers that will use both models, and it's only recently that we're beginning to see customers looking for just the cloud model. And so, I'll let Paul answer on the accounting side.

Yes. Richard, the actual revenue on our -- just the pure hosting, in some cases, our hosting is only, it's not the size of it per se. We're hosting the application so the license there would still be in license revenue. As we have -- as we're introducing more SAP-type pricing, that will be included in the maintenance line.

Okay. And just, I guess, on the previous question, if you look at the cost base today and look in sort of R&D, sales and marketing and G&A, shouldn't we really expect any downtick in those numbers for the next couple of quarters given your commentary about the, I guess, the 1- to 2-year integration period?

That's generally true, yes. I mean I would make one other comment on a onetime pickup charge this quarter on our long-term incentive plan, which is really a 3-year plan, which is ending this fiscal year, we had a onetime tick of about $4 million. That won't repeat next quarter.

Our next question comes from the line of Chris Thompson with National Bank Financial.

John or Paul, maybe can you talk, with the gross margin on your services revenue, it looks like it's just under 16%. I haven't seen it that low for about 4 years.

That's right. Usually, it's in the 18% range, and it was a little low this quarter, mainly U.S. as we're looking at moving some folks, really doing some cross-training in the areas of SAP and Microsoft. We have strong demand in both those areas, and so it's -- we've been doing quite a bit of training in that area. In Europe, the margins have continued to be high, but this past quarter was low in the U.S.

So those should accelerate back towards the 20% range?

We should have those back to 18% over the next couple of quarters.

Okay. I guess just on the ASP, they're at 250k. So it reflected a pipeline. Could you just elaborate a little bit on that, because again, I haven't seen that, that low for a while.

Usually, on the -- it's usually around that 300 mark for the last couple of years. But typically, if you look at the model, what we see with our customers is, they'll typically do a pilot in the 100,000 to 200,000 range to begin. Then after 6 months to 9 months, they'll buy more again in the 200 to 500 range. And then after a year, 2 years, they'll be looking at the larger transactions. I think the lowering reflects, as you noticed, these usually are existing customers to new customers, it's usually in that 73 range. So this quarter, we've had a much higher new customer range which is in these pilots and pilot projects that they've been doing.

Okay. That was going to be my next question. That makes a lot of sense. So that's why, John, you sound very confident in your pipeline outlook for the remainder of this year.

Well, both. Both that. We are seeing lots of newer customers coming in, but also the pipeline management that we're looking at, where we're looking at 2, 3 quarters out, that gives us time to do field marketing, reactions, if the supermarket looks a little week. And so, that's giving us the confidence of seeing the transparency there as well.

Okay. I think as of last quarter, there were still 2 remaining government contracts that were pushed out. Did you close those? Is that some of the reason for the license strength this quarter?

Yes, yes, that's correct, but we do see additional government contracts as well.

Okay. And just to high level here, I mean, Tom [Thomas Jenkins] was talking about the China opportunity at one of your conferences last year. Can you just give us any anecdotal evidence of what you guys are doing in China and where do you think that revenue profile is going to have to really start to make some material difference?

Well, I think a couple of things. One is we are seeing interest in China and other Asia Pac countries. Cloud would obviously be a natural for them. And we are seeing significant interests. It hasn't turned, certainly, to a little bit of revenue but not a lot at this point. But we're also seeing other countries, Russia, Brazil and India are also picking up in the opportunities in these areas as well.

Okay. And my last one here for Paul, just on the CapEx this quarter, could you remind us how much was for the new Waterloo building and how much is remaining, so we can get a better idea of your maintenance CapEx going forward?

If I could give you a to-date number, we spent about $17 million on the building. And that total would be $24 million, and the balance of that will be in Q4 and Q1.

Our next question comes from the line of Stephanie Price with CIBC.

Just on the cross-selling. Could you talk a bit about where you are with rolling out Metastorm to your sales force?

So we're actually -- we're keeping the Metastorm sales force focused on their traditional selling into, they're usually selling into functional managers rather than CIOs. And so we're continuing to have them do that, but we're also looking at some of our large accounts in both North America and Europe and then bringing them into those accounts with our sales people. So it would be like a joint-selling effort in those large accounts. So we're testing it that way first.

Okay. And in terms of geographically, can you talk a bit about where you're seeing the most momentum? And also, if there was any impact from the situation in Japan.

Good, that's a very question. So one is, on the momentum side, this quarter was -- the good news is, it was across-the-board. Europe had a good time, a good situation. The Canadians, very strong in Canada this time. And while Japan, obviously, with the effect there, that had an effect with the Japanese numbers but we were able to make that up with Australia and the rest of Asia. We're able to make up those numbers, so. And even in Japan, even though it was at the last month, obviously, it was nothing. They actually, the prior 2 months, did very well. So it was fairly short term. And while we did have some damage to facilities, all our staff were okay. And I think it's going to take a few quarters to get back, but they are very resilient and working towards getting back to normal.

Okay, great. And in terms of the partnerships, Microsoft, you mentioned saw a positive impact in the quarter. Can you talk a little bit about what you're seeing year-over-year, and also the partnership in general, where it is, the stage it's at right now?

Yes. I think, so year-over-year we've seen significant growth in the partnership, in joint selling opportunities, both work around SharePoint where it's basically we provide the white space and the additional functionality that SharePoint doesn't have. But also building applications on top of SharePoint that allow access to our SAP applications or to our Oracle applications that provide users of SharePoint, additional functionality. So on both those areas, both SharePoint DOD certification for records management and interfacing to SAP and Oracle are the two areas we see the most growth. Often, fairly significant-sized transactions.

Our next question comes from the line of Paul Steep with Scotia Capital.

One quick one for Paul. Just on the write-down in deferreds, Paul, for Metastorm and StreamServe for next year, how much did you sort of reduce the deferred maintenance line?

The balance sheet was from $2.2 million on -- I think this quarter is only about $250,000. So for the next year, it's about -- we put a schedule on the press release on that, I think.

Our next question comes from the line of Sera Kim with GMP Securities.

Just on the pipeline, is it more concentrated to certain vertical markets like the markets that you've seen recent strength in or have you been able to pick up strength in other vertical markets for the recent acquisition?

The -- I would say that the weakest market was government, particularly, like in Europe, where they were having with the recent elections, et cetera. What we have seen is that pickup significantly. But I think the good news is, it's pretty much across all verticals. We've seen financial services, strong. Telco, technology, very strong. Utilities, come back. So it's pretty much across-the-board.

Okay, great. And is -- what percentage of the pipeline would you say is for a compliance-related solution versus productivity-related applications you were talking about earlier?

I think this is what's interested me more. Usually, it's like 60% -- 70% compliance, 30% what I would call productivity. I'm seeing the productivity is picking up. So I would say, maybe, if it was 60% before, I'd see it moving closer toward the high-50s but we are seeing that product, which we feel for growth and ROI, for our customers, we see the productivity areas is almost the next maturity step, if you will. So we're quite pleased to see that growing.

Okay. And when you talk about productivity, are you including mobility and social media in there as well?

That's exactly, yes, very much so. We're seeing, particularly in governments, we're seeing mobility and social media as a major use, as a productivity gain for them.

And have you've seen meaningful revenues from those 2 areas yet or is that kind of something we can expect in...

Yes, it's actually started. So we saw a little bit in Q2, but we saw it much more in Q3.

And just last question. What percentage of your existing customer base would you say have upgraded to the ECM 2010? I know it's still pretty early, so over what time period do you think that people would be upgrading?

It's up -- they're either upgrading or have notified us that they will be upgrading, something like 60%, much higher than I expected, that they'll be upgrading within the next 12 months.

Our next question comes from the line of Eyal Ofir with Canaccord Genuity.

I have a quick question for Paul on some of the OpEx line items. It was noted that there was about $4 million of one-time expense in the quarter. Was an embedded into 1 line item or was that across-the-board?

It's across-the-board. It's about only a bit on cost of sales; about a $1 million in R&Ds; sales and marketing, $1 million; and G&A, $2 million.

Okay. And then the other question was, in terms of the R&D, obviously that increased sequentially, pretty significantly, and you guys talked about a part of that being from the acquisition but also a part of it being from, specific to investments in the mobility side. Can you specify how much of it was related to acquisition versus the R&D related to mobility?

So are you asking how much R&D has gone up because of the acquisition itself?

Yes. Just kind of split between how much you got from the acquisitions, but also how much you're internally investing to the mobility side.

We'll come back to you on the acquisition-specific part of that question. Just give me one moment. I mean acquisitions overall in the quarter were about $22 million across-the-board. And just trying to get the breakout between line, mobility -- and remember it, John, I think the increase in mobility has pretty much been the last 3 to 6 months.

That's right.

As soon as we break, we'll get back to you on the specific breakout.

Okay. And then on the mobility front, I mean, this is going to be an ongoing R&D initiative that we should be expecting so there's no onetime items that we can, maybe, expect in the...

I think you should see a little bit. If recall it off the top of my head -- Paul will get back to you on the specific numbers, but I think it's like a 1.5% increase. I would see it for the next couple of quarters, but then it should get back to normal.

Okay, that's good. And then, John, for you from a from a strategic go-to-market strategy perspective, when you look at emerging markets, you talked about China earlier in the call, but obviously emerging markets could become a very meaningful growth opportunity for the company. Is there a strategy you're using within your own sales organization or are you looking to some of your reseller partners to drive that out for you?

We're actually looking it up to our reseller in all of the markets except Brazil, where we, with the acquisition of Vignette, they had quite a strong presence down there, so we do have a strong team down there. But even in Latin America, we are working with our partners down there as well.

Okay. And you're starting to see some of that building your pipeline or is that [indiscernible] from the traditional markets?

No, we're seeing that in the pipeline. Brazil has grown significantly this year, probably over 200% growth this past year in Brazil alone.

Your next question comes from the line of Brian Freed with Wunderlich Securities.

I've got two quick questions. The first, on the competitive landscape, if you look out at the peers, I think EMC had a 32% year-over-year decline in license revenue, 10% overall. Can you talk a little about what you're seeing with your major competitors and what seems to be driving your share gain?

It's -- if you look at the traditional competitors IBM, EMC and then SharePoint would be the other, yes, we have seen increases against both EMC and IBM from a competitive standpoint. I think some of it is, the focus is, all we do is ECM. So we're not a hardware vendor, we're not in the professional services business trying to generate custom applications. And so we are seeing a lot of our customers looking for much more fast deployment, easy to use and a lot of customization, total cost of ownerships, so against our traditional competitors, that's how we usually beat them. And with SharePoint, as over the past few years, as they are now deployed in large -- in many cases, customers will have to 200, 300 instances of SharePoint. How do I now manage those instances and how, now that I use this, what else could I be doing that could be effective. And so we are seeing that SharePoint is becoming quite an additional market for us of expansion. So while you could say it's a competitor, it also has been a good source of additional revenue for us.

Okay. And then and my second question is, when you look at the initiative you have in the productivity side with semantics, mobility, social media and BPM, can you talk a little bit about either internal or external benchmarks that you guys are driving towards and what you would point us to as we track your success?

Yes, the -- a couple of things that I would say, the AIM study that showed that there's productivity within workers using smartphones, et cetera, has a significant increase, 30%-plus, we're interestingly seeing -- so anybody with highly distributed workforces: military, police, ambulance, et cetera. So in fact, the government is doing quite a bit of interest in this area. And again, it's everything from being able to submit your expenses with your receipts from your smartphone by taking photographs of the receipts, hitting the turnaround -- because it's all automated, the turnaround in expense payment as well as the ability to have much better control over your expenses, is a major -- just an example of an opportunity. But everything from military using smartphones in the battlefield, if you will, and communicating back with headquarters, et cetera, are showing tremendous productivity gains. So there's a whole spectrum of applications, smart applications, using this technology.

Great. As we look at your success in the segment, are there any metrics you'd point us to that we can use to kind of benchmark your progress in gaining momentum and share in that segment?

Right. It's -- we have to look at it, obviously, one thing that was touched on earlier as we start looking at cloud computing and software as a service, as it gets to a certain point, we will try -- we'll break that out as a separate line item. Even though it might be in the maintenance line, we'll actually show how that is growing once it reaches a certain critical mass. And what we will try to do is give you some color on these productivity versus compliance applications. We'll try and give you a little more color on that.

Our next question comes from the line of Derrick Wood with Susquehanna International Group. [Susquehanna Financial Group]

Great. A couple of questions for you, Paul. Could you describe the $4 million charge again, what that was related to?

Yes. There's a long-term incentive plan in place for a number of senior people in the company, which is a 3-year plan based on company performance against peer group and average earnings per share. So we can't value that against peer groups. We can amortize that normally to the, if you will, the 12 quarters. So there's a bit of a catch-up in Q3 for that for, for about $4 million, as I mentioned.

And that goes away next quarter?

Yes.

Okay. And then, you've given this a back, how much the percentage of license revenue from SAP?

It's running consistently around 10%.

And the -- could you comment on the foreign currency benefit on revenue and maybe deferred revenue, if you had that?

I won't -- we don't breakout the specific line by line item. I said the sequential foreign currency was a negative $0.01. What we do there, Derrick, is we provide in the press release a percentage of revenue in expenses in each of the major currencies.

Okay. And then on the weComm, is there a -- do you have any color on the revenue run rate for that business?

It was -- it's minor, around a couple of million dollars.

Yes, it was around a couple of million dollars. They've been in business for about 10 years, doing some very significant R&D around the whole mobile app framework, but they're really at a point where they were about to start monetizing that with some of the mobile carriers. Even like Turner Broadcasting uses it for their NBC -- their basketball organization where you can see all the clips and scores and all that kind of stuff. That's using weComm to deploy that.

That's a couple million dollars annual or quarter?

Annual.

Yes, it was annual. Obviously, they didn't have a very, very large, in fact they didn't have any sales force, really. It's really a technology company. But obviously, we think we can capitalize on that.

Okay. And then lastly, just curious on Metastorm, how much of the revenue is coming from the channel and are you planning on doing anything to change your efforts relative to the direct, indirect mix?

So our intent is to keep the sales force, the Metastorm sales force intact, both keep them selling into the markets they've been selling into, but obviously then, cross-sell into our large accounts with that. And we certainly want to keep their partner ecosystem as well. I'm not sure -- Paul, do you have that mix of number? It's about the same as ours, if I remember, our partners. They might be slightly less. It might be 30% of partners, the revenue for them at this point.

Our next question comes from the line of Blair Abernethy with Stifel, Nicolaus. Blair Abernethy - Stifel, Nicolaus & Co., Inc.: John, just a little more on the indirect channel, and I guess I'm looking for some more color on your relationship with SAP at this juncture. Doing $6 million, $7 million a quarter is good for you guys. It's a pretty miniscule piece for SAP given their revenue base of $19 billion. So what I'm wondering is, is how much investment is SAP putting into you guys this year relative to the last couple of years? And how much opportunity is there in this relationship for Open Text?

They are seeing significant growth on their side. Looking at next year, they're looking at quite a jump in growth on our revenues. I'd say there's 2 places. If you look at their kind of major mature audiences in Europe and North America -- even in North America, we're seeing significant growth for them, but we're -- I think where the interest for both of us substantially is in the emerging markets, sort of the places like China, Australia, et cetera, where we're working very closely together in those areas. We just won the -- we expect to receive the Pinnacle Award from them this year, again, which is their award to their best partners. So we think if they are very happy with the relationship, they're investing a significant amount of money in their go-to-market process for their teams. So I would see it continuing to grow. Blair Abernethy - Stifel, Nicolaus & Co., Inc.: Do you have a sense, John, of how many of their reps are actively selling your products? I'm trying to get a feel for, you've got 400 reps out there, how much manpower is SAP throwing at this?

Maybe I can answer it this way: when we started, probably, 8 years ago when we acquired IXOS, IXOS were in SAP's top 2%. So it was only in the very large client base. Now just about any public company using SAP needs this -- needs our products, so it has opened up to much more of their customer base than it ever was before and seems to be, as looking at even some of these markets like China and Latin America where they're not as large customers or not as large companies, they are looking for this kind of product. So I can't quantify how many of their thousands of sales force are selling it, but it seems it's -- I could maybe get that for you, Blair, if that would help. Blair Abernethy - Stifel, Nicolaus & Co., Inc.: Okay. Now that's great. One other question or just switching to the other side, now your direct sales force. Your reps, now, you said somewhere above 400, let's call it 400 sales reps, John, what are sort of your -- can you give us a sense of what the annual targets are for these guys at this point? Is that a mixed of inside and outside in that 400? I'm trying to get a feel for what's the direct -- the direct relationship of quota-carrying guys.

Right. So in that, there is a little bit of inside, a little bit of partner relationships or partners relationship that have incremental quota. And then the kind of core direct sales people, that quota is typically around $2.5 million, $3 million, which is a mixture of license, first-year maintenance and a little bit of professional services. Something like $2 million of licensing, if you will.

Our next question comes from the line of Ralph Garcea with Northland Capital partners.

Just some quick questions here. On the productivity side, what's the biggest seller? Are your customers seeing ROIs in the 12-month timeframe or shorter or longer? And then...

That's a very good question, Ralph. They're looking for a payback within their budgeted year. So if they're budgeting for the spend this year, they're looking for payback within that same budget year.

And are these pilots easier to implement and test? I would gather they are versus the compliance one, and that's why you're seeing some growth here.

Right. Well, that part of it, it also has -- if you look at us versus some of the competition, ours is much easier to install, not a lot of customization, et cetera. So it allows them to do that.

Okay. On the mobility and social media side, are you using those apps as a loss leader to sell the full suite or entice the base to upgrade? Or I mean what sort of revenue ticket are you putting next to some of these apps?

Yes. It depends if they're just using the new user interface that you saw, like in the G-20, whether they're using that as part of their traditional products or if they're using a specific application, a mobile app like I mentioned, the expense management, where you're looking at paying per seat for that kind of access and ability. So some customer -- what we would see is, if you're looking at this whole mobile apps space, we're looking at somewhere between $5 and $15 per seat for depending on what kind of app that it is, certainly not lots. When we talk about pilots that we've done in the social media, mobile apps space, half of those are paid pilots.

And if -- just on the large deals over $1 million, was there any concentration either geographically or by vertical?

No. That was the good point, it was actually Europe, Canada and Asia Pac, and it cross over, everything from financial services to government to what you call consumer goods.

And it was really only the 2 government ones that sort of carried over, so -- and the other 8 were unused in the quarter that you were working through the pipeline.

Yes. That's right.

Our next question comes from the line of Gabriel Leung with Paradigm Capital.

I guess, when you look back over the past few years, a big part of your focus had been on, I guess, cost containment, sort of the operating margins, what not. It sounds like, based on your comments today that there seems to be a greater willingness to invest more into the business. Now is that, do you think, a reflection of some discussions you're having with your customers on their own appetite to spend on your solutions, number one, and number 2, how quickly do you think you can convert these higher-level investments into a reacceleration in license growth, recognizing the fact that this quarter was obviously a very good one for license revenues?

Right. I think, to answer the first one, we still will work within the model that we've always used. So when we talk about R&D spend, it's somewhere in that 14% to 16% model. We don't see going outside of that model. We still -- sales and marketing spend, we're still looking in that 23%, 25% model. You won't see us going beyond that. So while -- if we can see that the, for example, the BPM market is supposed to grow at 20% this coming year, we will be monitoring and watching that but it will still be within our overall model that we'll do that. We're not going to do a Google.

Okay. And then secondly on talking a little bit more about cloud and the cloud offerings, as that portion of the business ramps up, how do you think that would affect, maybe, your revenues and margins? Obviously, the revenue recognition there is a little bit more different from your traditional license maintenance services.

Right. What we're actually seeing is that, as I mentioned earlier, many of our existing customers want both, so that there are instances they want to keep behind the firewall with all the security with that. With some of the total generics software as a service cloud, it's often new customers, so it's incremental revenue anyway. So I know what you're trying to get to, and I think what we're trying to do is obviously manage that process. And from what we're seeing, what's happening naturally, we don't think it should have that much of an impact on our total revenue -- overall revenue or margins for that matter.

We have no further questions at this time. Please continue.

Again, thanks for all your questions, everyone. In summary, we'd like to mention, we obviously had a good license revenue, pipeline remained strong, we're very comfortable with our annual margin and profitability targets, and we're looking forward to next quarter. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.