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Executives

Paul McFeeters - Chief Financial Officer

John Shackleton - Chief Executive Officer, President and Director

Greg Secord - Vice-President of Investor Relations

Analysts

Kris Thompson - National Bank Financial, Inc.

Mike Abramsky - RBC Capital Markets, LLC

Paul Steep - Scotia Capital Inc.

Richard Tse - Cormark Securities Inc.

Stephanie Price

James Wood - Susquehanna Financial Group, LLLP

Gabriel Leung - Paradigm Capital, Inc.

Scott Penner - TD Newcrest Capital Inc.

Eyal Ofir - Canaccord Genuity

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Sera Kim - GMP Securities, Ltd.

Tom Liston - Versant Partners Inc.

Open Text (OTEX) Q2 2011 Earnings Call February 2, 2011 5:00 PM ET

Operator

Good evening, ladies and gentlemen, and thank you for standing by. Welcome to the Open Text Corp. Second Quarter Fiscal Year 2011 Financial Results Conference Call. [Operator Instructions] I will now turn the conference over to your host, Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Greg Secord

Thank you, and thank you, everyone, for joining us. 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 the Form 10-K and Form 10-Qs of Open Text, as well as in our press release that was issued earlier today.

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

Paul McFeeters

Thank you, Greg. I will highlight the results for our second quarter. Total revenue for the quarter was $267.5 million, up 8% compared to $247.8 million for the same period last year. License revenue for the quarter was $79.2 million, up 9% compared to $72.7 million reported for the same period last year. Maintenance revenue for the quarter was $136.7 million, up 5% compared to $130.3 million for the same period last year. Services and other revenue in the quarter was $51.6 million, up 15% compared to $44.8 million in the same period last year.

Gross margin for the second quarter before amortization of acquired technology was 75%, which remained consistent compared with the same period last year. Adjusted operating income increased 18% to $84.5 million or 32% adjusted operating margin from $71.4 million or 29% adjusted operating margin in Q2 last year.

Adjusted net income increased 41% to $70.5 million this quarter from $50.1 million in the second quarter last year. Second quarter adjusted earnings per share was $1.21 on a diluted basis, up from $0.87 per share for the same period a year ago. The adjusted tax rate for the quarter was 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 second quarter, in accordance with GAAP, was $37.1 million or $0.64 per share on a diluted basis compared to $21.2 million or $0.37 per share on a diluted basis for the same period a year ago. There were approximately 51.8 million shares outstanding on a fully diluted basis for the quarter.

Operating cash flow in the quarter was $40 million compared to $32.5 million in the same period last year, an increase of $7.5 million. After the impact of special charges incurred in the quarter, operating cash flow would've been $45 million for the quarter versus $40 million in the same period last year.

On a year-to-date basis, operating cash flow was $89 million compared to $37 million in the same period last year, an increase of $52 million. Absent the impact of cash paid relating to special charges, we did operating cash flow with $101 million compared to $54 million for the first six months last year.

On the balance sheet, at December 31, 2010, deferred revenue was $214 million compared to $230 million as of June 30, 2010, and accounts receivable was $135 million compared to $132 million at the end of last year. Days sales outstanding were 44 days as of December 31, 2010, compared to 50 days at the end of last year and 52 days at the end of Q2 last year.

The sequential effect of foreign currency movement on adjusted earnings per share was a positive $0.02. In comparison to the second quarter of last year, the foreign currency impact on adjusted earnings per share was a negative $0.06.

We closed the StreamServe acquisition on October 27, 2010. Total consideration for this acquisition was $57.2 million net of cash acquired. StreamServe was accretive to our operational results and contributed $0.03 to our adjusted earnings per share for the 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.

Today, we announced that we entered into a definitive merger agreement with Metastorm, a leading provider of Business Process Management, Business Process Analysis and Enterprise Architecture software. Total consideration for this acquisition is expected to be approximately $172 million net of cash acquired. The purchase consideration is subject to customary purchase price and holdback adjustments.

Metastorm's revenue run rate is approximate the $70 million to $75 million on an annual basis and is breakeven on profits and slightly positive on an EBITDA basis. Transaction is expected to close in our third quarter and is subject to customary approvals and Metastorm stockholder consent. At that time, we will issue more information with regard to our integration plan.

Now I'll turn the call over to John.

John Shackleton

Thank you, Paul. Hello, everyone, and thank you for joining us today. I'm very pleased with our second quarter results. We are on track for our year, and all geographies had excellent results throughout the quarter.

As Paul mentioned, we generated $79.2 million of license revenue in the quarter. Geographically, the Americas were responsible for 53% of revenue, Europe, 41% with the remaining 6% coming from Asia Pac. Of the license revenue, approximately 37% came from new customers and 63% from our install base.

We had 13 transactions over $500,000, an additional six transactions over $1 million. This compared to nine transactions over $500,000 and six transactions over $1 million a year ago. Average transaction size was approximately $290,000, which is relatively unchanged from last quarter. The larger transactions in the quarter came from the public sector, financial services, high-tech manufacturing and the petrochemical industries.

Examples of customers that bought in the quarter include SABIC, one of the world's top petrochemical companies in Saudi Arabia. They purchased Open Text ECM Suite to provide their 37,000 users around the world with a single integrated ECM solution but included integration with SAP, with Microsoft SharePoint. An Open Text strategic alliance with SAP and Microsoft were key factors in the SABIC's selection of us.

Another customer was Scottish and Southern Energy, one of the largest energy companies in the U.K. They purchased several components of the Open Text ECM Suite, including Content Lifecycle Management and e-mail archiving for both Microsoft Exchange and IBM Lotus Notes.

Trinity Mirror, one of the U.K.'s largest newspaper publishers, purchased Open Text Content Management, the complete suite of Open Text Content Analytics and Open Text Semantic Navigation. Trinity Mirror will implement the suite to manage high volumes of incoming content feeds and rich media, which are expected to dramatically increase during the 2012 Olympic Games in London.

Fonterra, a leading multinational dairy company, extended its investment in Open Text technology with the purchase of Content Server, Extended ECM for SAP, Contract Management and CLM Services for SharePoint. The Open Text ECM Suite will facilitate the sharing of information and knowledge to ensure compliance and address risk management across the organization.

In Q2, we saw license revenue broken down by vertical as 20% from technology, 16% from services, 15% from financial services, 15% from natural resources and base materials, 11% from public sector, 6% from healthcare, 6% from consumer goods, 6% for industrial goods and 5% from utilities. Once again, compliance-based solutions were responsible for approximately 60% to 70% of license sales. And despite government spending cutbacks, we continued to see pipeline gains in the government vertical over the long term.

From a sales operation standpoint, we closed the quarter with a combined sales force of over 364 quota-carrying sales execs, up from 323 last quarter. With the addition of StreamServe sales reps plus some recent hires, we now have more than sufficient capacity to meet our annual plan.

Maintenance retention rates in the quarter remained the same, roughly in the low 90s. License revenue from partners and resellers was approximately 38% in the quarter. SAP continues to track well at approximately 10% of annual license sales.

With Microsoft, we announced that we recertified our records management and Microsoft solutions against the DoD standards. We're the only leading ECM vendor to have certified solutions with SharePoint 2010.

The Oracle relationship is progressing well, with Oracle influencing one of the larger transactions in the quarter. With SAP, we announced a series of enhancements to our extended ECM for the use with SAP solutions. These enhancements will allow users to access shared workspace and collaborate on content relating to SAP business transactions.

At Content World in November, we profiled Open Text ECM Suite 2010. This is the largest product release in our company's history. All the major components of this suite are now shipping and actually drove several key transactions this quarter.

Also at Content World, we showcased a new release of Open Text Everywhere, our mobile ECM offering, enabling businesses, users to gain access to critical content and processes from their iPads and iPhones.

Open Text Social Media was once again used as the social forum for the G-20, this time in Seoul, South Korea, and we're encouraged by the demand we're seeing for our Social Workplace solution. Currently, we have close to 40 customers and process installations using these new products.

This week, we announced the availability of Open Text portal solutions. It brings together content from Open Text ECM Suite and many other sources into a single, highly flexible and personalized interface for Internet, extranet and customer-facing websites.

As you may recall, last quarter, we announced the agreement to acquire StreamServe, adding document output and customer communication management software to the Open Text ECM Suite. This quarter, we introduced Open Text StreamServe Persuasion version 5, which helps increase the efficiency of document-based communications and improves customer engagement with easy integration with ERP systems.

As Paul mentioned, today, we announced that we have reached an agreement to acquire Metastorm, a provider of software for Business Process Management, Business Process Analysis, as well as enterprise and business architecture. We look forward to welcoming their employees and customers after the transaction closes, which should be by the end of the current quarter. Once it's closed, we'll be happy to share our integration and go-to-market plans with you.

Turning to our outlook for the remainder of FY 2011. The industry analysts are telling us they expect the ECM license revenue to grow at an average of 7% to just over 10%, slightly up from last quarter. This will be through 2013. And while we're not providing guidance, we feel confident with our business model. From a seasonality perspective, we're working hard to smooth out our pipeline, and we've been focusing on reviewing our sales forecast in detail and our pipeline visibility and predictability is improving.

So in summary, we had an excellent quarter across the board. We exceeded our margin targets, delivering record profits for our shareholders and are tracking to our model for the rest of the year. We remain positive on the outlook for fiscal 2011.

With that, I'd like to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Scott Penner from TD Newcrest.

Scott Penner - TD Newcrest Capital Inc.

Just first of all, John, you mentioned that ECM Suite 2010 drove some of the key transactions in the quarter. Is this existing customers that are buying new modules within the suite or something different?

John Shackleton

That's correct, Scott. It is existing customers buying and upgrading their suite.

Scott Penner - TD Newcrest Capital Inc.

And that is about the time frame that you'd expected it to happen in?

John Shackleton

It's happened slightly ahead of what we'd expected. I was expecting it more within this quarter, I expected it to start beginning.

Scott Penner - TD Newcrest Capital Inc.

In your commentary about some of the key deals, I seem to notice, and maybe it's just ones that you're highlighting, more deals where there are both SAP integrations and some for Microsoft integrations. Is that fair to say that you're seeing more of that type of business?

John Shackleton

It is. We're seeing it particularly where customers are looking to either reduce expense or to maybe build new services, et cetera by integrating both the unstructured data and structured around their ERP system. So we're seeing quite a bit of that in the pipeline.

Scott Penner - TD Newcrest Capital Inc.

And in the StreamServe acquisition, maybe to ask this in a way that you can answer, just last quarter, I think you mentioned that the run rate was $50 million revenue, it was about 25% to 30% of license revenue. If we were to do the math for the two months, is that about the contribution?

Paul McFeeters

Yes. Scott, it's Paul. Yes, we could use the same metrics.

James Wood - Susquehanna Financial Group, LLLP

So there wasn't a significant drop off in business as there sometimes is?

John Shackleton

No. They were pretty much right on plan.

Scott Penner - TD Newcrest Capital Inc.

The Metastorm deal, according to some numbers that are out there, it looks like about 48% or so of their top line, at least as these last numbers, was license revenue. Is that about the mix?

Paul McFeeters

It's a bit less than that. We're not going to break out the revenue mix. It's a little higher, as you point out. I think the last public information was for 2008, so you'd expect the maintenance revenue line to increase as a percentage, but it's...

John Shackleton

It's pretty close to our model, I think, Scott.

Operator

Your next question comes from Tom Liston from Versant Partners.

Tom Liston - Versant Partners Inc.

Just overall, with the -- especially the top line of license revenue being robust, could you give us some of the dynamics in the quarter in terms of what did well? Do you feel you're taking it more from competition opposed to maybe the markets growing nicely? It seems it's from some of the industry analysts and then certainly some enterprise software companies, there is a bit of a pickup and certainly, your more cyclical verticals seem to be outperforming, and new customers were a good number too. So could you just talk about overall environment and how much you see sort of trending over 2011?

John Shackleton

I think, Tom, some -- quite a bit of it was the -- as you saw, we had a slow start in Q1. Some of this, particularly around governments, where they were delaying -- even though they had the budget, they were delaying, or in some cases, they were cutting. But what we have seen is -- the good news was across the board, both Americas, Europe look strong. It seemed that the U.K., Germany had come back well. Asia Pac looks good, and the good news is the pipeline is building. So there is clearly an interest in this area, where the people believe they can either save money or make money with these products. So from a pipeline standpoint, it's probably the healthiest pipeline I've seen in quite a while.

Tom Liston - Versant Partners Inc.

And so do you have a sense on their calendar 2011 budgets? And it looks like they're increasing their ECM use. And the second question related is do you feel like your win rate's higher versus your competition?

John Shackleton

The competition is pretty much the same. We would say so. We're also seeing -- as Scott pointed out, we're seeing more work integrating with Microsoft SharePoint, as well as with SAP and Oracle. So we are seeing this more of the integration of the structured data with the unstructured data to build application solutions around that. Competitive-wise, we've been doing well there for probably the last 18 months, two years. I would say that win rates are pretty much the same.

Tom Liston - Versant Partners Inc.

And Metastorm, can you give us a sense, Paul, roughly, kind of top line growth over the last few years? And secondly, do you have any early indications if that might impact your tax rate?

John Shackleton

Actually, let me answer on the growth, Tom. Usually, when we do an acquisition, we look at licenses declining somewhere in the 20% to 30% range. We believe because of the BPM is in a growth area as well as it's a good fit to what we're doing, we don't see the decline in licenses as much. In fact, we expect them to be fairly flat with their last year results. On the tax situation, I'll let Paul answer that one.

Paul McFeeters

Yes. Tom, I mean, we will just be able to get into our tax planning post-acquisition. It certainly won't affect the effective tax rate of 12% to 14%.

Tom Liston - Versant Partners Inc.

Do you know the percentage of revenue from government?

Paul McFeeters

For this segment or...

Tom Liston - Versant Partners Inc.

For Metastorm.

John Shackleton

Down slightly this quarter.

Operator

Your next question comes from Paul Steep from Scotia Capital.

Paul Steep - Scotia Capital Inc.

John, maybe worth talking about or just looping back post last quarter how Europe's turned out or what the turnaround there is sort of shook out like this quarter post the results last time.

John Shackleton

Yes. I'd say two things, Paul. One was the catch-up of the deals that did slip in Q1. They did come in, as well as the pipeline, which we've been focusing on heavily, has been building nicely in Europe. So we feel that it is much more predictable. We don't see another lag. So all in all, we're pretty encouraged with the pipeline there.

Paul Steep - Scotia Capital Inc.

And in the U.S., how has that trended? Like last quarter was good, but it was a little shaky during a part of the last year.

John Shackleton

We've been seeing, in fact, the Americas in general, both North America and Latin America, picking up, Canada doing well. And we've seen that been building steadily for the last two or three quarters, and it looks to be continuing to build nicely.

Operator

Your next question comes from Richard Tse from Cormark Securities.

Richard Tse - Cormark Securities Inc.

John, could you give us a little bit of rationale behind this Metastorm acquisition? Maybe give us a sense on how does this transaction came about? And how you plan on targeting it into your current base?

John Shackleton

Right. A couple of things I would say, Richard, is as we mentioned earlier, there is a lot more interest of linking structured data from SAP Oracle ERP systems to their unstructured data. And we see the workflow, obviously, is being the glue to be able to do that efficiently. And while we've had workflow for quite a while, I believe we haven't had enough critical mass to really grow this area. It is, obviously, a growth piece of the ECM Suite. And the second piece of it is with mobile computing, we really, again, see the workflow piece of it being the glue that will allow people using their iPads or smartpads, smartphones to be able to access corporate data on the road, anything they could see at their desktops. So we see it as strategically important going forward in the mobile area.

Richard Tse - Cormark Securities Inc.

Over the course of the year, would you look at, I guess, integrating into the ECM Suite? Or can you just give us a sense on how that would work?

John Shackleton

We'll actually give you more detail as we -- once the deal is completed at the next call. But yes, we'd see it integrating pretty fast.

Richard Tse - Cormark Securities Inc.

And just a quick question for Paul, on your other expenses, there was $6 million there. It seems to be a pretty sizable number relative to past quarters. What was that coming from?

Paul McFeeters

Yes. Still foreign exchange book loss, not cash loss and foreign exchange of subsidiary balances.

Operator

Your next question comes from Kris Thompson from National Bank Financial.

Kris Thompson - National Bank Financial, Inc.

Just back to the Metastorm here, do we need to think a little bit more about the segmentation of the revenue between the three buckets that you've outlined there, the BPM, BPA and the Enterprise Architecture? Is it mostly BPM? And just the reason I'm asking is -- I mean, just the quick look we've had so far, it looks like SAP and Oracle are important players in that space. I'm just wondering if there's going to be some channel conflict there with your new partner, Oracle and, obviously, you're existing one, SAP. And maybe I don't think that Microsoft is a big player here. Is that really the reason why you wanted to acquire this company? It looks like there's a lot of integration going on with SharePoint with these guys.

John Shackleton

Right. So Kris, to answer the first question, we wouldn't see breaking it out. Really, when you're looking at Business Process Management, the Analytics and the Architecture are a piece of that. So when people buy it, they typically buy the whole package. Secondly, the Metastorm product is basically .Net so obviously, Microsoft-centric and so we would see helping with the SharePoint and building the Microsoft relationship. We do have, have had for quite a while, the Java product, which we use with Oracle and with SAP. We don't see that much channel conflict in these areas. Typically, the workflows interface to the SAP and Oracle workflows anyway. So it's not -- it's really coexisting, not replacing.

Kris Thompson - National Bank Financial, Inc.

So I guess -- what about your existing install base, is there a lot of overlap with these guys? I mean, can you just maybe just give us an idea of -- maybe Richard was trying to go here. How do you guys learned about this opportunity? Did one of your key partners come to you and say, "Hey, just have a look at this. It makes a lot of sense?" Can you provide any more color there?

John Shackleton

It was -- so the interest was particularly around the Microsoft relationship and building on that relationship, so that was a key area. But if you look at workflow, business process workflow in general, the sales people, the consultants, it really doesn't matter which tool you're using. It's all the same. So we think with the critical mass of a Metastorm, we can do a lot more work in this area, whether be in Java or .Net.

Kris Thompson - National Bank Financial, Inc.

And can you give us an idea of the number of employees they have? Is it 300, 350? Or is that too high?

Paul McFeeters

Yes, about 350 employees.

Kris Thompson - National Bank Financial, Inc.

And John, while we have you here, just can you give a little bit more color on your Oracle road map, just an update?

John Shackleton

Yes. As I mentioned, the Oracle piece is going well. With the AP solutions as well as the archiving, we're building that, and the relationship is pretty much on track. And I'm very pleased with that relationship.

Kris Thompson - National Bank Financial, Inc.

And just finally, for Paul, just on the Waterloo build out, can you break out your growth CapEx or I guess, what you've spent in Waterloo and the new building and how much is left?

Paul McFeeters

It's about $7.5 million. The total CapEx on that will be just around $22 million. The balance should be expended pretty much in the next two quarters.

Kris Thompson - National Bank Financial, Inc.

So this quarter was about $5.5 million?

Paul McFeeters

About $5.5 million, yes.

Operator

Your next question comes from Stephanie Price from CIBC World Markets.

Stephanie Price

Could you talk a bit about new customer wins in the quarter, what they were buying and who was driving it, whether it was the direct sales force or partners?

John Shackleton

It was a mix, Stephanie. It was probably half and half with SAP, particularly on the larger deals. Actually, it was pretty much with SAP and with Microsoft and then, obviously, the one I mentioned with Oracle. But I would say 50-50 with partners.

Stephanie Price

And in terms of what they were buying, compliance sounds like it's still the biggest product out there you're seeing.

John Shackleton

It was compliance, but it was also linking. As I said, the ERP modules, most the whole suite of the ERP systems, with archiving and e-mail management, records management, that kind of thing.

Stephanie Price

And last quarter, you talked about eight large deals in the pipeline post-Q1. Did all those now close? Or could we expect from those to move into Q3?

John Shackleton

Six of the eight did close. Were part of that, and the other two government ones we do expect to close.

Operator

Your next question comes from Mike Abramsky from RBC Capital Markets.

Mike Abramsky - RBC Capital Markets, LLC

So Metastorm looks like a good acquisition. It's got quite a lot of enterprise customers, and it's kind of an extension, I think, of your current business. It looks like you paid a little bit more, if I'm calculating this correctly, than you do previously for other acquisitions. And I'm just wondering if that is just because of the quality of the business and the opportunity there, and if that may actually expand your acquisition pipeline a bit because of your willingness to kind of pay a little bit more here?

Paul McFeeters

It's on multiple, yes. Mike, it's Paul. It's from about 2.2% to 2.3%, at the lower end of the revenue range that I quoted. So it's a little bit more, not significantly more. And also, previously -- John can answer the second part of the question. But it was previously indicated that their revenue mix is a little higher, license and typically what we do when we pick them up. So that contributes a little bit to that, but as I said, it wasn't that much over some of the software-related businesses.

John Shackleton

And we see less of a decline in revenues as we integrate them, so that helped a little bit. In answer to your question, the pipeline for acquisitions we see it's quite healthy. And obviously, as I mentioned earlier, particularly with smartphone mobile computing, we see workflow as the glue to a major, very important piece of that. And you're right, it does expand the kind of closed technologies associated with us.

Mike Abramsky - RBC Capital Markets, LLC

And basically, based on your cash flow, it looks like you could do at least one of these size every kind of 8 to 12 months.

Paul McFeeters

That'd be fair, Mike. Yes.

Mike Abramsky - RBC Capital Markets, LLC

And then Metastorm, I think EBIT margins are somewhere around 7% or 8%. Yours are at 30%. So if you're talking about sustainability of your margins then either or you're bringing in them pretty quickly into your model, or you have some parts of your business that are doing really well, like even maybe some of the legacy parts of your business or both. So could you just give us some perspective on that?

Paul McFeeters

We've been looking at acquisitions. I think we try to make it clear that, to your point, if we're picking up companies with slighted [ph] (0:36:25) profit that we talked about then, yes. There's a little bit of drag on the operating margin. Although I do want to point out, as you would well know, that it's going to be fairly accretive, because we're using cash to acquire it. Just StreamServe, that lower revenue was $0.03 accretive this quarter, and we just closed it to the quarter. So yes, it will have some initial dilution. And I think it depends on -- as John indicated, this one would not draw up in revenue. We wouldn't expect, like some of the other ones, but at the same time, it might take a little longer to get up to the upper end of the range of our margins and start adding to the net margin.

John Shackleton

But that's how you should think of it, Mike. As we said, as we see growth in some of these portfolio of products, we would see the growth offset some of the profitability, where some of the other products in the portfolio are extremely profitable, higher than the norm. So if you look at across the portfolio, we should be somewhere in our model range as we advertised.

Mike Abramsky - RBC Capital Markets, LLC

With regard to sort of what happened in Q1, with regard to the miss, going forward now, you're tone -- is this a change in tone, John, from previously, where you talked more about both execution and also potential limited visibility to demand? You seem to be talking a little bit more about now confidence in your pipeline domestically and going forward. Is this a shift in that visibility?

John Shackleton

I would say on a macro level, we don't see the economy, on a global basis, getting that much better anytime soon, although we are seeing the pipeline for our products building nicely. But to the second piece of you said, from an operational execution standpoint, we have spent a significant amount of time on looking at the pipeline, scrubbing the pipeline, building the pipeline and looking at the predictability of the pipeline. And we’ve been tracking over the last two quarters, I feel much more comfortable with that.

Operator

Your next question comes from Sera Kim from GMP Securities.

Sera Kim - GMP Securities, Ltd.

I'm just wondering -- I understand that there was some catch-up with the Q1 delays, but I'm just wondering were there any deals that you were expecting in future quarters that got pulled ahead into Q2.

John Shackleton

Not really, Sera. No, we feel -- as I said, it was really the -- if we look at last quarter, where I mentioned that the shortfall in Q1 we'd make up throughout the year, we're getting pretty close to that. And so we feel -- looking at the pipeline for the remainder of the year, we feel pretty comfortable with that.

Sera Kim - GMP Securities, Ltd.

And given the strong results in Q2, how should we look at seasonality for the balance of the year?

Paul McFeeters

That's a little more difficult, because we're not giving guidance. Sera, this is Paul. We kind of asked -- look at kind of history, I'm looking at that, and when I see history, as you know, we were a little more volatile last year and of course, Q1 this year. So maybe look prior to last year for the seasonality trends. Certainly, Q3 does go down from Q2 and in Q4, it rises again.

Sera Kim - GMP Securities, Ltd.

And earlier, you mentioned that the pipeline is the healthiest that you've seen in a while and that you've scrubbed it, so you've got -- you're pretty comfortable with it. So in your pipeline, how many deals would you consider to be kind of these larger-sized deals? And would these be related to enterprise-wide type deployments or just customers buying more and more components of it?

John Shackleton

Given the tough budgets for our customers, we always try to chunk some of these deals. And in fact, some of the ones that we've done this past quarter, even fairly large ones, do have follow-on business in both coming within the next two quarters but also in the following years. So as we -- we are seeing bigger deals overall, but we're also trying to offset that with spreading them and making them up with smaller transactions as well. And so as we've been focusing on the pipeline, we think as we build the pipeline, we have more opportunity to balance the big ones with the small ones.

Sera Kim - GMP Securities, Ltd.

And I guess with these larger deals, and I understand that they are chunked, does it require larger services component? And I'm just wondering if you feel that you've got sufficient capacity.

John Shackleton

In general, that tends to be the case. And with capacity-wise -- so as you might have seen, our professional services has picked up year-over-year. And to date, we have good capacity. We're continuing to look at this area to make sure we have the right skills. Particularly, as now, we look at Metastorm, we think that professional services in that area will be needed. So we probably will do more in that area. But in general, we're in pretty good shape for the professional services, but to answer your question, yes. The bigger deals do tend to have more professional services with them.

Sera Kim - GMP Securities, Ltd.

I think earlier, in your commentary, you mentioned 40 customers in progress for installations for Social Media. Did I hear right? And also, what verticals are you seeing the greatest demand for this?

John Shackleton

The government is -- obviously, as they've seen the program and used it at the G-20, they are the main leaders but actually, also high-tech as well. So quite a few of our customer base have seen it and want to use it, but I would say government -- of the 40, the government is predominant at this point.

Operator

Your next question comes from Gabriel Leung from Paradigm Capital.

Gabriel Leung - Paradigm Capital, Inc.

I just want to go back to Metastorm for a second. John, I know you haven't closed the transaction yet, but can you give us a little more color into Metastorm's, I guess, vertical segmentation, where they were strong in? And also, as you look into the Metastorm customer base, can you give us a sense of what sort of ECM deployment they have in place? Is there a lot of Open Text? Or is it a lot of your competing vendors?

John Shackleton

So to answer the first, I would say they're strong in pharmaceutical and government would be their strengths. But if you look at their customer list, it's very similar to ours. So a lot of joint customers that are using our products, although they do have a number of very large customers that we don't have. So that would also be good follow-on business for that. But as I said, pharmaceutical and government would be the key ones I would see to focus.

Gabriel Leung - Paradigm Capital, Inc.

Just moving on to your partnerships. SAP continues to plug along nicely. It looks like you're getting some pretty good traction on the Microsoft side now. And I think based on the last update that we had with Microsoft and yourselves, it sounded like they were planning on putting more resources in place for, I guess, fiscal 2011, both yours and Microsoft's. Are you finding that that's what's driving a lot of the new business on the license side now? Is a lot of it being driven on the Microsoft side? Or is this still being driven by customer demand? What do you think?

John Shackleton

Yes. I think it's more by customer demand, where they're seeing that building using these applications, that they can save money or make money by integrating the structured and unstructured applications. And so we are seeing that demand build up. A second piece of it is for a while there, we were not seeing a lot of interest around web content management, where obviously, people are not going to spend money updating their websites if budgets are tight, but we're beginning to see much more use of the portal where, again, they're taking advantage of their ERP systems with their customer information systems, et cetera to provide new services or streamline processes for their business to save money. So I would say it is more customer driven.

Gabriel Leung - Paradigm Capital, Inc.

I guess in your preamble, in terms of the outlook anyways, you talked about smoothing out some of the deal flow of the pipeline, that sort of thing. So should we take that to mean that we could potentially see less seasonality than has been the case in the past? Or was that just a general comment on how you're viewing the pipeline right now?

John Shackleton

My goal is to try and smooth it out. I obviously failed in Q1, where it was lagged, but the goal is to smooth it out and try and do that. And I think, generally, I think we're going to be able to do that over time.

Operator

Your next question comes from Blair Abernethy from Stifel, Nicolaus.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Just a quick one for you, Paul and then something for you, John. Paul, on the large deals, can you give us a little more color? Were there any deals over sort of $3 million or $4 million?

John Shackleton

Well, there would be one.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

Was that over $5 million? Over $6 million?

John Shackleton

Okay, no. There were a couple of multi-million, but including professional services. Related to a comment that was made before, there were a couple like that, which is fairly big.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

I missed the very first part of the call. Did you give any revenue contribution from StreamServe this quarter?

Paul McFeeters

We didn't, but it's $13 million. It'll be in the 10-Q, so I didn't mention it, but it's $13 million.

Blair Abernethy - Stifel, Nicolaus & Co., Inc.

And then just John, I wonder if you can give me a little more color on the government -- what you're seeing in the government vertical in the various geographies? This has always been an important vertical for you, and what areas -- obviously we know a number of governments are under stress. What areas are you guys seeing that you're getting new business in?

John Shackleton

I'd say that there were two key areas -- actually, three. One would be they're looking at eGovernment, so how can they provide services to the citizenry at a lower price and more efficiently. The second is they're trying to look internally. So for example, like this whole Social Media. If you think of it, Facebook but secure, with records management, et cetera, where they're using to collaborate within government. And then the third area, particularly around mobile computing, we're seeing the highly mobile workforce. So military, police, et cetera are using, in fact, leading edge, some pretty neat applications in this space.

Operator

Your next question comes from Eyal Ofir from Canaccord Genuity.

Eyal Ofir - Canaccord Genuity

First off, can you guys talk a little bit more about the mobile applications and what you're seeing in terms of the customer demand? Are you starting to see that coming through? And when should we expect in 2011 to start seeing a ramp there?

John Shackleton

I think so. The interest in this area is everything from things like expense management on a global basis, where they can submit their expenses, track their expenses, approve expenses but also applications in the field. So everything from military, training in the field. And that's to just-in-time training, where they might be trying to do something. What to do. They can download and use that in line. So there's a number of interesting applications that are being created and workflow, obviously, is a major piece of that. And you will see us over this coming year building applications in this space then really start ramping in 2012.

Eyal Ofir - Canaccord Genuity

And then just on the -- going to the OpEx lines, I know that, obviously, sales and marketing was up pretty significantly this quarter. You had a pretty good license revenue so that's expected. But in terms of how much do you know that we should we be building into that line into Q3, can you guys just talk about what you're baseline should be before the acquisition and then what it should look like after?

Paul McFeeters

I think that the way I'd look at that is do the six months. And I think if you combine Q1 and Q2 together as a percentage, that would be a good indicator for the balance of the year.

Operator

Your next question comes from Scott Penner from TD Newcrest.

Scott Penner - TD Newcrest Capital Inc.

Just a follow-up. First of all, Paul, did you say that StreamServe was $13 million?

Paul McFeeters

Yes. Remember, there's two months in this quarter, Scott.

Scott Penner - TD Newcrest Capital Inc.

I mean, if you analyze that, that's upwards of $80 million, which is a fair side higher than $50 million. Is $50 million still the number on a more annualized basis?

Paul McFeeters

Well, having said the $13 million there is a little more skewing on -- there's still more skewing. It doesn't come in as evenly as maintenance. And so it will still be the annualized number we gave you at the acquisition day.

Scott Penner - TD Newcrest Capital Inc.

Just John, with the -- I guess, well it could be viewed as a reboot of the Duet relationship between SAP and Microsoft. Can you just remind us -- I mean, I don't remember it ever being much of a factor competitively for you before, but if you could just sort of run through the history there.

John Shackleton

Yes. So basically, Microsoft and SAP built a relationship, originally, where from the Outlook, you could access, I believe it was only two or three modules like SAP, HR so that you could get into SAP without knowing anything about SAP, but it was only on a couple of modules. This time around, they're looking more to interface to the SharePoint as opposed to Outlook. And again, we see it as actually an opportunity for us, because we can provide the records management, documentation security capability, so we're actually looking to work with both the two partners to build solutions in this area. And obviously, with the Metastorm as well, provide workflows around those applications. So it's an opportunity. It's early days yet as to what they're going to be doing.

Operator

[Operator Instructions]

John Shackleton

Okay. Thank you, operator. So just to recap, we had an excellent quarter for license revenue. Our pipeline remains strong, and we remain committed to delivering on our margin and profitability targets for the year. Thank you again for your questions, and thank you for attending.

Operator

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

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