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Open Text Corporation (NASDAQ:OTEX)

F1Q2011 Earnings Conference Call

October 27, 2010 5 PM ET

Executives

Greg Secord – VP, IR

Paul McFeeters – CFO

John Shackleton – President & CEO

Analysts

Scott Penner – TD Newcrest

Mike Abramsky – RBC Capital Markets

Tom Liston – Versant Partners

Richard Gray – Cormark Securities

Chris Thompson – National Bank Financial

Dushan Batrovic – Dundee Securities

Eyal Ofir – Canaccord Genuity

Blair Abernethy – Stifel Nicolaus

Gabriel Leung – Paradigm Capital

Stephanie Price – CIBC World Markets

Chris Lee – GMP Securities

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Corporation FQ1 2011 financial results conference call. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Wednesday, October 27, 2010, at 5:00 pm eastern time. I will now turn the conference over to Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Greg Secord

Good afternoon and thank you for joining us. Please note that during the course of the conference call we may make projections or other forward-looking statements relating to the future performance of Open Text or its subsidiaries. These are all statements that 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 forward-looking forecast or projection as reflected in the forward-looking information are contained in Form 10K and Form 10Q for Open Text as well as in our press release that was issued earlier today.

Before I get started, I would just like to comment on some recent and upcoming investor events. As I mentioned last quarter on September 13th Open Text held an analyst briefing at the Microsoft Campus in Redmond, Washington. With 11 representatives of Microsoft management participating, this briefing outlined the value our ECM suite brings to the Microsoft partnership. As a reminder, the presentation materials from the Microsoft analyst briefing are available in the investor relations section of our website.

In two weeks, on Wednesday, November 10th, we’ll be hosting an analyst and investor day at Content World, our annual users conference being held in Washington, D.C. The analyst briefing runs all day on Wednesday and features exclusive opportunities to meet with partners like Oracle and SAP, as well as the chance to meet with various Open Text executives. We will present a detailed overview of the product road map and host open discussions on our product development strategies. We integrate the analyst day with our regular conference program and allow our investors and analyst attendees freedom to meet and speak with customers at their leisure. If you’re interested in attending please email me directly and we’ll have someone from the IR team provide you with all the registration details.

And with that, I’ll turn the call over to Paul.

Paul McFeeters

Thank you, Greg. I will highlight results of our Q1. Total revenue for the quarter was $217 million, up 3% compared to $211 million for the same period last year. License revenue for the quarter was $42.6 million, down 10% compared to $47.3 million reported for the same period last year. Maintenance revenue for the quarter was $130 million, up 5% compared to $124 million for the same period last year. Services and other revenue in the quarter was $45 million, up 11%, compared to $40 million in the same quarter last year.

Gross margin for the current quarter, before amortization of acquired technology was 73%, which remained unchanged from the same period last year. Gross margins for each of our revenue lines in the quarter were 92% for license, 85% for customer support, and 22% for services. Gross margins for the same quarter last year were 93% for license, 83% for customer support, and 18% for services.

Pretax adjusted operating income increased 29% year over year, from $48 million, or 22.7% in Q1 last year, to $62.1 million, or 28.6%, in the Q1 of this year. Adjusted net income increased 52% year over year, from $32.8 million to $50 million in the Q1 of this year. Q1 adjusted EPS was $0.86 on a diluted basis, up from $0.58 per share the same period a year ago. The adjusted tax rate for the quarter is 14%. We expect the fiscal year ‘11 tax rate to be in the 12% to 14% range, and cash taxes to be in the 5% to 10% range.

Net income for the Q1 in accordance with GAAP was $21.7 million, or $0.38 per share on a diluted basis, compared to $1.7 million, or $0.03 per share on a diluted basis for the same period a year ago. There are approximately 57.9 million shares outstanding on a fully diluted basis for the quarter.

Operating cash flow in the quarter was $48.9 million, compared to $4.5 million in the same period last year. Absent the impact of restructuring and direct acquisition-related costs incurred in the quarter, operating cash flow would have been approximately $56 million for the quarter versus approximately $14 million in the same period last year.

On the balance sheet at September 30th, 2010, deferred revenue was $222 million compared to $230 million as of June 30th, 2010, and accounts receivable was $104 million, compared to $132 million at the end of last year. Day sales outstanding were 43 days as of September 30th, compared to 50 days for the previous quarter and 58 days at the end of Q1 last year. The sequential effect of foreign currency movement was a positive $0.03 per share.

We did not make any new acquisitions during the quarter, however we did announce today our acquisition of StreamServe, a leading provider of business communications solutions. Total consideration for this acquisition is expected to be approximately $71 million and approximately $62 million net of cash acquired. The purchase consideration is subject to customary purchase price and holdback adjustment. StreamServe’s revenue run rate is approximately $50 million on an annual basis and we expect this acquisition to be slightly accretive to our operations.

There were no changes 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%. Full details of our operating model are available on our website. Now I’ll turn the call over to John.

John Shackleton

Thank you, Paul. Hello everyone, and thank you for joining us. While I was pleased with our earnings I was disappointed with our license sales performance this quarter. License revenue came in lighter than planned, mainly due to a slowdown in IT spend in Europe, particularly in the UK which was impacted by the elections. As Paul said, in the quarter we generated $42.6 million in license revenue, with North America responsible for 54% of revenue, Europe for 37%, and with the remaining 9% coming from Asia-PAC. Of note, Latin America did well, as did Canada and Asia-PAC.

Of the license revenue, approximately 34% came from new customers and 66% from our installed base. We had three transactions over $500,000, and an additional two transactions over $1 million. This compared to six transactions over $500,000 and three transactions over $1 million last year. Average transaction size was approximately $280,000, down slightly from $320,000 in the same quarter last year.

Despite the lightness in Q1, the pipeline is looking strong and we are confident we’ll make up this quarter’s shortfall in the remaining months of fiscal 2011. We continue to see strength in the government vertical, and we’re still seeing large transactions on the horizon, but these transactions typically have longer sales cycles. Some of these are in Europe; many are elsewhere including regions like Latin America, which has recently been showing strong sales results.

An example of this is Porto Seguro, a large insurance-provided base in Brazil. Porto Seguro purchased Open Text Web Management Portal social communities for their intranet and extranet. These are some of our newly released products. AGL Energy, Australia’s largest renewable energy company, purchased Open Text Extended ECM for SAP solutions. It also purchased Email Archiving for Lotus Notes and Microsoft Exchange, and archiving and content lifecycle management for Microsoft Sharepoint.

In Q1 we saw license revenue broken down by vertical as 21% from technology, 18% from services, 16% from financial services, 16% for public sector, 8% for natural resources and bas materials, and 7% for healthcare. Once again, compliance-based solutions were responsible for approximately 60% of our license sales. From a sales operations standpoint, we closed the quarter with a combined sales force of over 323 quota-carrying sales executives, slightly down from 340 last quarter. With the current number of sales reps we have sufficient capacity to support our pipeline goals. Maintenance retention in the quarter remained high at over 93%.

On the partner front, we announced a complete set of products and services to manage large numbers of Microsoft Sharepoint 2010 sites from creation through archiving. As I mentioned last quarter, we also signed an agreement with Oracle to share technologies that leverage Oracle performance and platform code, and to deliver a new suite of ECM solutions for archiving, e-discovery, and legal risk mitigation. The Oracle agreement is progressing on plan.

Turning to new products in the quarter, we announced the release of Open Text ECM Suite 2010. This is the largest release effort in the company’s history to create the industry’s most comprehensive, fully integrated ECM solutions suite. In the quarter we also announced the availability of a new integration between Open Text’s Web Management, formally the Vignette Content Management, and Open Text’s Media Management, which was designed to help customers shorten the content creation and deployment lifecycle for their media.

As Paul mentioned, earlier this afternoon we announced an agreement to acquire StreamServe. StreamServe will provide document output and customer communication management software to the Open Text ECM suite. StreamServe solutions are designed for easy integration with ERP, supply chain management, and applications including SAP, Oracle, and Lawson. StreamServe has an established reseller partnership with SAP, making it a natural fit with Open Text’s SAP partner strategy. Based in Sweden, StreamServe will also expand our presence in Northern Europe. StreamServe employees and customers will be present at Content World, our annual users conference, held in Washington, D.C., in two weeks’ time.

Turning to our outlook for the remainder of fiscal year ‘11, the industry analysts continue to tell us that they expect ECM license revenue to grow on an average of 6% to 8% between now and 2013. We’ve taken a look at these expectations and our pipeline and remain comfortable with our business model. So in summary it was a very strong quarter for profits and cash flow, but light on license revenue. While we see some economies struggling in Europe and to a lesser degree in the US, our pipeline remains strong and we’ll make up the Q1 shortfall throughout the rest of the fiscal year.

With our ECM functionality, as well as several new products being brought to market this quarter, we are well positioned to grow market share in the coming year, and as usual, we’ll continue to manage to the bottom line. With that, I’d like to open the line for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Your first question comes from Scott Penner with TD Newcrest. Please go ahead.

Scott Penner – TD Newcrest

Thanks. Just first of all, Paul, just to clarify, I think you said or implied there was a $7 million impact from cash restructuring in the quarter?

Paul McFeeters

That’s correct.

Scott Penner – TD Newcrest

What is left to come if anything this year?

Paul McFeeters

Probably between another $6 million and $7 million of cash throughout the year.

Scott Penner – TD Newcrest

Okay. And then John, just to hear your guidance or statement on the industry analyst outlook, I just want to make sure I’m clear versus what you were saying last quarter. 6% to 8% between now and 2013, I believe last quarter you said 4% to 8%. I’m just wondering if you’re actually feeling more optimistic about it or whether you’re saying this now, between now and 2013, means that there could be a lot of volatility in the meantime.

John Shackleton

Oh no, Scott, what I really was saying is some of the analysts have increased their outlook, so basically we’re saying the average has moved up a little bit – it’s more in the 6% to 8% range versus the 4% to 8% range.

Scott Penner – TD Newcrest

Okay. And then just there’s been some commentary that, specifically that you are losing large customers to Microsoft Sharepoint. I wondered if you could address that directly and then just give an update on how Microsoft is affecting you with Sharepoint 10 so far.

John Shackleton

Yeah. What I would say is most of our customers who use Sharepoint, and if they use Sharepoint on a large basis, come to realize that our products can help them manage those instances and expand and exceed their instances. So most of our large customers, many of them have Sharepoint, use our products as well. I would say that certainly over the last 18 months revenues from our Microsoft customers have increased, not declined, because of the ability to enhance and expand the Sharepoint experience. So any issues of customers going away, we’ve seen very little customers who- In fact, we had a number of customers years ago who went to Sharepoint and felt that they could migrate and just rely on Sharepoint; they’ve now come back in full force and now use the full suite of our products. So in fact we see that Microsoft and our partnership with Microsoft has increased our market, not decreased it.

Scott Penner – TD Newcrest

And just lastly for me, on the acquisition of StreamServe, the- I guess you said “slightly accretive,” Paul. What should we look at for the quarterly progression? Is it going to be dilutive in the first quarter? And then how long does it take to get to the operating model?

Paul McFeeters

It will be actually slightly accretive (inaudible) this quarter, just slightly this quarter. And operating model I would say would be out one year, to get an operating model.

Scott Penner – TD Newcrest

Okay. Thanks, guys.

John Shackleton

Thank you, Scott.

Operator

Your next question comes from Mike Abramsky with RBC Capital Markets. Please go ahead.

Mike Abramsky – RBC Capital Markets

Yeah, thanks very much. So John, just again on the kind of macro outlook in your comments about market share. Are you, when you talk about making up for the rest of the year, does that come from kind of a view that you’ll get benefits from projects launched for next quarter and you’re seeing sort of an interim slip? Or is there more of a more fundamental slip on some larger deals or delays, and you think that it’s more of a back half phenomenon starting at the beginning or in January? What is, how do you…

John Shackleton

Yeah, Mike, it’s a mix of what you’re saying. We are seeing larger deals and in Q1 we had a number of very large deals that slipped. A number of those have since come in; three, I believe, of about eight. So we are seeing there’s a longer cycle but in general I would see us make that slip over the next three quarters. It should be fairly easy to make that up so I don’t see any major change to what’s gone on. This has been kind of, particularly in Europe it’s been tough because of the elections for the UK, but in general we see they’re delays, not budgets being shut down.

Mike Abramsky – RBC Capital Markets

Okay, and Europe has just gone through a major budget review as I’m sure you’re aware. Do you see perhaps some sustained overhang from that review?

John Shackleton

I think there’s many companies outside of government that are being cautious. The government areas that we’re working in still have the budgets, so that while many budgets have been cut certainly in the state and local levels, but in the military side we have not seen any cuts at this point in time.

Mike Abramsky – RBC Capital Markets

Okay. And then your EBIDTA margins came in very strong and towards the high end of your $25 million to $30 million guidance. And I think you maintained that guidance through the rest of the year, but can you give us a sense of what levers you’ve left to pull in terms of maintaining your margins potentially at those levels?

Paul McFeeters

Mike, it’s Paul. Well, as you saw in the Q1, as you said, we’re well within our range. We keep thinking about our range though for the year, and even though the StreamServe as a percentage wasn’t large they all have a slight erosion on margin until we get them on operating model, which as I said for StreamServe will be out kind of a year. So I think we’ll just, for now we’ll reiterate our range as that $25 million to $30 million for the year.

Mike Abramsky – RBC Capital Markets

Okay.

John Shackleton

But we feel comfortable with the range. There’s nothing that should change it dramatically.

Mike Abramsky – RBC Capital Markets

Okay. Well you guys always do a good job of delivering good margins, even in tough environments, and you certainly did so this quarter. And then lastly, one Sharepoint question: I acknowledge you reflect that you’re adjusting, that clients are, that there’s till relevance obviously for Open Text. At the same time Sharepoint 2010 is only just starting to get deployed, so is it possible that (inaudible) story in the market with regards to how Sharepoint will impact your business or not?

John Shackleton

No. Most of our, many of our large customers are deploying the 2010 already, and what we still see are the key issues around records management, DOD certification, etc., ability to manage multiple instances of Sharepoint, etc., as well as our digital asset management and all the other products that surround it. Actually, so what we’re seeing is the release is complementing, and many of our major customers, very large customers, need that whole breadth of product suite. So as many people attended the Redmond meeting, I think it was very clear that both us and Microsoft see this as expanding our markets and opportunity to partner even further together.

Mike Abramsky – RBC Capital Markets

Okay, John, thanks.

John Shackleton

Okay, Mike.

Operator

Your next question comes from Tom Liston with Versant Partners. Please go ahead.

Tom Liston – Versant Partners

Alright, thank you. Good afternoon. Just on the license question, when you look at your cost, which was obviously well managed this quarter, certainly R&D and sales and marketing were lowish ends of the range, even with a bit of a shortfall in license. So how do you look at those levers and connect the two? Cause if you’re pulling back maybe on sales and marketing resources, pulling back on development, maybe if you lever that up a bit you could get a higher license number. How do you look at the coordination between the two? Maybe more resources means deals can close in a more meaningful way. So help us understand, as you cut that how does it affect potential future license?

John Shackleton

I’d say two things, Tom. One, we’re certainly not pulling back on development. Our budgets are still the same. I do believe in development we can improve our productivity. Some of the things we’re doing on a global basis I think will improve our productivity in development, but we’re certainly not reducing costs in that area.

On the sales side, the slight decrease is typical of the year end where you look at your top performers and kind of do some cleaning out of the lower performers. That will, so obviously that will come back. And again, I think we can do- We’ve got some great sales people out there who I believe can be more productive. So while we don’t really need cost increases to hit the targets that we have, there’ll always be some change in the turnover as we try and improve. But I think we can get productivity out of our sales force as well and we can certainly hit those numbers. So I don’t think by adding more sales people you’re necessarily going to increase revenues.

Tom Liston – Versant Partners

Sure. And just on StreamServe, I apologize if it was mentioned but when does it close? Can you also give us a flavor for who their revenue components are broken out? Growth rates? Rough profitability type margins historically?

Paul McFeeters

Yeah, Tom. It closed today and so that’s why the announcement came out today – we just closed it. It’s kind of a typical software model between 25% to 30% licenses, 45% to 50% maintenance and 20% to 30% services.

Tom Liston – Versant Partners

And I think they have a few OEM agreements as well, that sort of channel. How are those recognized or how–

John Shackleton

Yeah, the OEM agreements are with SAP and Lawson and a couple of others, and it’s pretty much the same as ours as the revenues are recognized and passed to us. The only difference is their revenue is by text if you will, or by page of paper, and so it’s a slightly different, rather than seeks, but they have a set number. And obviously, as people bulk up by the number of documents they’re outputting they’re discounted, but the revenue is clearly recognized on an annual basis.

Tom Liston – Versant Partners

Okay, and just rough historical growth rates and profitability, margins?

Paul McFeeters

You know, growth has been, well it hasn’t been significant growth; some growth. And margins are in the lower end. It’s positive but kind of at the lower end of the scale.

Tom Liston – Versant Partners

Okay. And do you have a handle on any restructuring charges?

John Shackleton

No, it’s too early because we just closed the transaction.

Tom Liston – Versant Partners

Okay, fair enough. I’ll pass the line.

Operator

Your next question comes from Richard Gray with Cormark Securities. Please go ahead.

Richard Gray – Cormark Securities

Hey, Paul. Just on the revenue with respect to StreamServe. What would you expect to sort of see cut off of that $59 million run rate, once you typically sort of ratchet down the revenue base? Would that be typical of previous transactions?

John Shackleton

It might. This is John, Richard. It might be slightly less than traditional of the 20% to 30%. There is no product overlap whatsoever, as well as with the strong relationship with SAP and Oracle and others. We think we can integrate it fairly quickly. So while there might be an initial dip as the integration’s going on, we’re anticipating it won’t be as large as usual.

Richard Gray – Cormark Securities

Okay. And I guess getting back to the Sharepoint question, have you guys lost any core ECM platform Livelink customers to Sharepoint?

John Shackleton

Not in our… Years ago we might have lost them but most of them have come back. Recently we have not seen any. And most customers take a long time to move all their content, etc. Our maintenance results, I would have thought, would reflect if there were any major migration away, and as I said, we see most of our companies that we coexist – they use Sharepoint at the front end for their Outlook and documents, and they use us at the backend for managing a lot of those systems as well as things like digital asset management, web content management, etc., which Sharepoint doesn’t provide.

Richard Gray – Cormark Securities

Right, and I guess (inaudible). You seem confident that you’re going to pick up from the losses after this quarter. Can you sort of get into the specifics as to why that’s the case? Have you had some sort of a commitment that you can maybe give us some specificity on why you have that confidence you do?

John Shackleton

Well, one of the interesting things, the main slowdown was in Europe where they were forecasting to hit pretty much their targets, and this was centered around the $500,000 to $1 million plus deals; and we haven’t lost any of them, they’ve just simply been delayed – of which three of them have come in already.

Richard Gray – Cormark Securities

Okay, but you can’t say anything more specific than that, I guess.

John Shackleton

Nope. It’s, it was a surprise to us because they were forecasting and they have been very accurate in their forecasting in the past, and if you look at what- We obviously have looked at what the delays were. It was mainly these larger deals that have just delayed. We had a little bit, particularly in Europe but a little bit in the US, too, where we saw the same big deals that were just taking longer to close; the cycles were taking longer to close. If we look at the pipeline, there are very large deals continuing in there. One of them has come in. This quarter we’ve been able to chunk it somewhat so it will help us in other years, but some of these deals have been different. We try to chunk them so that it makes it more predictable, but they’re just too big to be chunked.

Richard Gray – Cormark Securities

What would be the largest deal in that pipeline?

John Shackleton

It’s certainly double-digit millions.

Richard Gray – Cormark Securities

Alright.

John Shackleton

The one we just closed was in the single digits but quite a sizeable deal.

Richard Gray – Cormark Securities

Right. Okay, thank you.

Operator

Your next question comes from Chris Thompson with National Bank Financial. Please go ahead.

Chris Thompson – National Bank Financial

Great, thanks. John, maybe just touch on the Oracle relationship here. You mentioned it’s progressing as planned – can you just update us on what the plan is over the next two to three quarters?

John Shackleton

Yeah. So the plan really is to both train our sales force, train their sales force, support the existing customer base around this product and get them up and making sure that they’re comfortable. So that’s really over the next two quarters. But we’re actually seeing the pipeline in that area building faster than expected, so we didn’t expect to see much revenue this quarter and now we do.

Chris Thompson – National Bank Financial

So if you wanted to kind of align our expectations here, is it maybe two years to get to the 10% level? What’s your internal budget?

John Shackleton

Yeah, actually that’s our internal goal, is to get there within two years, two and a half years now with a half year to go.

Chris Thompson – National Bank Financial

Okay. And did you mention the SAP contribution to license this quarter? Is it 10% or more?

John Shackleton

It’s in that 10% range. Yeah, pretty much standard for the year.

Chris Thompson – National Bank Financial

Okay, and just back to Europe here. I don’t want to beat a dead horse here but all the commentary out of pretty well every other vendor that’s reported this quarter said “Europe is really strong, SAP,” even point out Germany as a very strong region this morning. Is it just a couple large deals that are getting pushed or do we have to start worrying that you’re maybe getting some customers here that you’re not maybe seeing yet.

John Shackleton

Yeah, it was mainly large deals that were pushed out, particularly in the UK. Germany, while they were having tough times we are seeing it begin to come back. We see leading indicators that that is picking up. But in general it was more the UK in particular had a tough time.

Chris Thompson – National Bank Financial

Okay. And Paul, maybe on the CAPEX, can you outline how much of that CAPEX is for the Waterloo expansion this quarter and how we should model that for the rest of the year? I think it’s going to pick up.

Paul McFeeters

Yes, that’s right. About $2 million this quarter, so model it for the year around probably $22 million through the fiscal year, probably fairly evenly now for the next three quarters, a $4 million to $5 million range.

Chris Thompson – National Bank Financial

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

John Shackleton

Thank you.

Operator

Your next question comes from Dushan Batrovic with Dundee Securities. Please go ahead.

Dushan Batrovic – Dundee Securities

Hi, thank you. John, there has been a time in the past when you would comment on first call consensus for the next quarter. This time I don’t think you made a comment. Anything to read into that?

John Shackleton

No, I think we’re comfortable with the plan.

Dushan Batrovic – Dundee Securities

Full year and quarterly?

John Shackleton

Certainly full year.

Paul McFeeters

Dushan, we’re not commenting on first call. We didn’t last quarter either. We’re just talking about focusing on our own plan, achieving the results for our own plan which we have identified – license number did not, other numbers exceeded it of course. So I would say just to be clear no, we’re not commenting as of the beginning of this fiscal year on first call.

Dushan Batrovic – Dundee Securities

Okay. And given that you’ve had a couple of deals that have already been signed this quarter, would we too assume then that maybe the seasonality for Q2 might be a bit higher than typical?

John Shackleton

If you looked at last year, we’re seeing it- As I said, while we’re trying to obviously smooth out this seasonality, it does look more like last year.

Dushan Batrovic – Dundee Securities

Okay. The deals that slipped, did those deals grow in size? I mean is that one of the things that contributed to them slipping, that they just, the scope and the magnitude grew?

John Shackleton

So not really. The scope was large in size to begin with, so obviously because of that size and particularly in this economy it takes higher levels of approval. Many times executives are flying around the world and getting that approval takes time, so a couple were literally where the final guys who had to sign were not there. And those have since come in. But we are also seeing, I think because of the economy they are trying to negotiate much stronger, and using end of quarter to put additional pressure on, significant pressure that we don’t feel that it’s worth doing that. The value of our products, obviously they close a month later and we get the price that we feel is appropriate.

Dushan Batrovic – Dundee Securities

Okay. A question on your OPEX, it was down quite a bit sequentially. Is it fair to assume that you’re pretty comfortable with ballpark as to where your OPEX is right now? Or would you expect even more sequential declines going forward?

Paul McFeeters

No, I think that’s probably the low water mark. I mean, we would be managing within our margin range as we reiterate that, but I don’t think you’d be looking for any sequential significant decreases in the operating expenses.

Dushan Batrovic – Dundee Securities

I guess another way to ask the question is, is your operating margin, will the growth be more based on revenue growth or further cost cutting?

Paul McFeeters

I think the cost cutting is already in place for the year and it would be revenue growth to hit the upper end of the range.

Dushan Batrovic – Dundee Securities

Okay. Last question from me, and we’ll probably hear this at your analyst day, but any new updates on your mobile offering as far as uptake on any pilots out there, how things are going?

John Shackleton

Yep. We have our first customer in the US and the first customer in Europe on this, and you’ll get a good update as well as see some of the stuff that’s going on. We have about six products coming out in this area, so we’re seeing that as part of the growth as well. But yes, the initial reception’s been very positive.

Dushan Batrovic – Dundee Securities

Okay, I’ll leave it there. Thank you.

John Shackleton

Thank you, Dushan.

Operator

Your next question comes from Eyal Ofir with Canaccord Genuity. Please go ahead.

Eyal Ofir – Canaccord Genuity

Thank you very much. Just to clarify, you talk about the deal slippage – are you going to see that made up in the rest of the fiscal year or the next quarter?

John Shackleton

To be conservative, we’re looking at it throughout the fiscal year. So I think two things: one is, the slippage that happened in Q1, we will see it in Q2, but some of the concerns we have is there are quite a few large deals in the pipeline so we’re anticipating that there’ll be some delays in those as well. So while we feel comfortable hitting the annual guidelines that we’ve got or annual targets that we’ve got on a quarter to quarter basis, it’s much more difficult.

Eyal Ofir – Canaccord Genuity

Okay. So then when we look at seasonality, to (inaudible) the previous question, it shouldn’t be quite the same sequential growth rate that we saw last year in the Q2 then.

John Shackleton

So usually, I certainly believe Q2 will pick up as it usually does. I think Q3 should be better than last year, but Q4 the usual.

Eyal Ofir – Canaccord Genuity

Okay, okay. That’s good. And not to beat a dead horse again on Europe, outside of the UK and Germany as you talked of earlier, were there any other countries that were relatively weak for you this quarter? And are you seeing some competitive pressures, maybe not from a specific competitor – maybe more from a pricing standpoint?

John Shackleton

The only thing I would add is that Southern Europe last year came on very strong and so we expect it to grow again this year. Q1 it kind of did not grow as fast as was expected; my supposition is mainly because they’re all on vacation. So but we do see Southern Europe growing this coming year but it’s fairly flat from last year. But as we said, the key one was really the UK, and Germany to some extent.

Eyal Ofir – Canaccord Genuity

Okay. And then I guess (inaudible) was also related to government contracts.

John Shackleton

Yep, yep.

Eyal Ofir – Canaccord Genuity

Okay, perfect. I think that’s it for me, thanks.

John Shackleton

Thanks.

Operator

Your next question comes from Blair Abernethy with Stifel. Please go ahead.

Blair Abernethy – Stifel Nicolaus

Thank you. John, just a couple of questions on, just in terms of the new customer wins this quarter. I’m wondering if you could just give us a little more color on what you see them buying. What are the new customers being attracted to you for? And who’s driving that – is it your direct sales force or more partner-driven?

John Shackleton

It depends, Blair, is the short answer. So interestingly enough, what we have seen declining for the past 18 months or so are things like web content management and social media, some of the things like that. We’re now seeing beginning to pick up, and for example the new customers like in Brazil, the insurance company, are buying around this whole intranet, extranet, social media for customers, etc. We’re also seeing that in governments around, particularly for military, etc., where they’re looking at government-in-a-box social media tied to their corporate systems. So the integration of structured and unstructured data is playing very well.

And so, and I would say it’s probably 50/50. If you’re looking at places like China where we don’t have much of a presence, we are working very closely with our partners there, like SAP. But there are places like Brazil, particularly there we’re seeing a lot of interest in the media space, so the television broadcasting, that kind of thing. We have our expertise in that area so we’re doing quite a bit of that on our own. But I would say on the new customer base, I’d say 50/50 between working with partners and working direct.

Blair Abernethy – Stifel Nicolaus

Okay, great. And John, in terms of the government vertical in the US specifically, I’m wondering if you could just give us a little more color on how that performed this quarter.

John Shackleton

Not, not- Again, probably that was caused by delays in the US whereas Canada did very well. And the interesting thing, a lot of the things we’re doing with the Canadian government is of interest to the US government.

Blair Abernethy – Stifel Nicolaus

Okay. And finally, just maintenance pricing. What are your plans this year for maintenance? Are you going to- I think you usually do a January price increase – is that still in the works this year?

Paul McFeeters

Blair, it’s Paul. We renew, no – we continue to renew contracts as they come do. We do have a larger percentage that come due in December, but on every renewal our team looks to increase the price slightly due to increased costs.

John Shackleton

1% or 2%.

Blair Abernethy – Stifel Nicolaus

Okay, great. Thanks guys.

John Shackleton

Thank you, Blair.

Operator

Your next question comes from Gabriel Leung with Paradigm Capital. Please go ahead.

Gabriel Leung – Paradigm Capital

Thanks. A question for you, Paul – interest expense, was there anything unusual in the number? The figure looked a little bit higher than the previous quarter run rates.

Paul McFeeters

Yes, there was a $1.8 million non-cash charge, I’ll call it, for setting up really a reversal of FIN48, FIN48 being kind of the tax reserves if you will for potential future outcomes. Most of this is set up as a result of the acquisitions that we’ve done and some uncertainty around their tax positions – we’ll set up different positions. We do disclose this in our notes in our 10Q which you’ll see tomorrow. So yes, and therefore, as a result of that there was an additional $1.8 million charge. That may never turn into a cash and it ultimately could get reversed, but we have to accrue it as though it might someday get paid out.

Gabriel Leung – Paradigm Capital

Alright, so that was in the interest expense, and that won’t show up I guess next quarter.

Paul McFeeters

That’s correct. That won’t show up again next quarter.

Gabriel Leung – Paradigm Capital

And then John, just in terms of your commentary on your growth potential, the 6% to 8% figure you were talking to, in the past in terms of your guidance you’ve always alluded to sort of annual growth rates. The last quarter it was 4% to 8% on an annual basis. I just want to be clear, when you’re talking about 6% to 8% you mean that on an annual basis, right?

John Shackleton

That’s right.

Gabriel Leung – Paradigm Capital

Constant currency with acquisitions in there?

John Shackleton

Without acquisitions.

Gabriel Leung – Paradigm Capital

Without acquisitions, okay.

Paul McFeeters

Without acquisitions.

Gabriel Leung – Paradigm Capital

Okay. That’s great, thank you.

John Shackleton

Thank you.

Operator

Your next question comes from Stephanie Price with CIBC. Please go ahead.

Stephanie Price – CIBC World Markets

Hi. I’m wondering, you’ve talked about compliance as a growth driver. Can you talk a bit about what parts of your business are seeing declines? You mentioned web content management and I’m wondering about the Hummingbird business as well and whether these declines are impacting the license declines you saw in the quarter.

John Shackleton

That’s a very good question. If we look at our pipeline, the web content management and DAM, the digital asset management, look very strong, are coming up and a couple of the big ones were around that. But year over year we did see a decline, particularly around the small-, medium-size companies for products like Red Dot. And so that is an area we will be focusing on in the coming months to build that out. So on the small- and mediums, particularly in Europe, we did see the economy effect that more so than the larger (inaudible). So but again, it would be in the web content management, digital asset management areas for the smaller companies.

Stephanie Price – CIBC World Markets

Okay. And in terms of the acquisition environment, can you talk a bit about the environments and what you’re seeing there?

John Shackleton

Well, at the macro level we’re seeing some ridiculous values being brought in front, but we’re still being obviously very conservative, very cautious, and we do see quite a lot of pipeline in this area. So things like StreamServe – $50 million in revenue. We see quite a few of that size, but we also see a smaller number in the $100 million to $200 million range. And so over the coming year you’ll see us begin to be more active again.

Stephanie Price – CIBC World Markets

Great, thank you.

John Shackleton

Thank you, Stephanie.

Operator

Your next question comes from Chris Lee with GMP Securities. Please go ahead.

Chris Lee – GMP Securities

Hi guys, this is Chris Lee here for Sera Kim. Just quickly, did you say StreamServe was $15 million or $50 million, 5-0?

John Shackleton

5-0.

Chris Lee – GMP Securities

Okay, good. And last quarter you said that you had a number of customers who were waiting for you to release your new ECM suite. Can you talk about what kind of interest you’ve been seeing on that so far?

John Shackleton

We’ve seen quite a lot of interest from our existing customers. The real, where there will be, should be after the user conference which is in two weeks, that’s really when we expect it to pick up and start with migrations early in the January/February timeframe.

Chris Lee – GMP Securities

Okay, and you said that’s from current customers, not new customers?

John Shackleton

Right, that’s correct.

Chris Lee – GMP Securities

Thanks, guys.

Operator

Your next question comes from Richard Gray with Cormark Securities. Please go ahead.

Richard Gray – Cormark Securities

Hi, just a couple of quick follow-up questions. Is it true that StreamServe is also resold by Adobe? And I guess what’s the nature of that relationship after Adobe acquired (inaudible)?

John Shackleton:

You might be right, Richard, but I don’t believe so. It’s certainly sold by SAP.

Richard Gray – Cormark Securities

Okay, alright.

John Shackleton

But if it were I think it might continue for a while.

Richard Gray – Cormark Securities

Right.

John Shackleton

But let me get back to you on that one, Richard.

Richard Gray – Cormark Securities

Okay.

John Shackleton

It’s not been in any briefing I’ve had.

Richard Gray – Cormark Securities

How much did you acquire in terms of tax pools?

Paul McFeeters

Sorry, Richard, I don’t have that information right now, either.

Richard Gray – Cormark Securities

Okay. Alright, thank you.

Operator

(Operator Instructions) There are no further questions. Please continue.

John Shackleton

Okay. Thank you, everyone. Just to summarize, we remain focused on margin and profitability. We have a strong pipeline and we’ll continue to focus on our customer base. Positive outlook for the rest of 2011. And so we thank you for your questions and look forward to seeing many of you at the user conference in the next two weeks. Thank you.

Operator

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

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