Executives
John Ederer - VP, IR
James R. Tolonen - CFO and Sr. VP, Finance and Administration
John Schwarz - CEO
Analysts
Adam Holt - JP Morgan
Michael Briest - UBS
Ed Maguire - Merrill Lynch
Adam Wood - Exane BNP Paribas
Steve Ashley - Robert W. Baird
Mike Abramsky - RBC Capital Markets
Mohammed Moawalla - Goldman Sachs
Keith Weiss - Morgan Stanley
Stefan Slowinski - Société Générale
Frank Sparacino - First Analysis
TRANSCRIPT SPONSOR |
Business Objects (BOBJ) Q2 2007 Earnings Call July 25, 2007 8:00 AM ET
Operator
Good morning, my name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Business Objects General Announcement Conference Call. [Operator Instructions].
Thank you. I would now like to turn the call over to John Ederer, Vice President of Investor Relations.
John Ederer - Vice President, Investor Relations
Okay. Thank you. Thank you, and welcome to the conference call to discuss our financial results for the second quarter of fiscal 2007. Joining me on the call today from Business Objects are Chief Executive Officer, John Schwarz and Chief Financial Officer, Jim Tolonen.
Today's call includes a set of slides that accompany the speakers' comments. The press release and slides are available on the Investor Relations section of our website.
During the course of today's presentation, our executives will make forward-looking statements, including statements regarding our expected financial performance for the third quarter and full year 2007, our product and business strategies, our identification and integration of acquired companies, the impact of acquisitions on our product strategies and capabilities and on our business and operating results, our anticipated product innovation and our new product introductions. We wish to caution you that such statements are just predictions based on management's current expectations or beliefs and that actual events or results may differ materially.
We refer you to documents we filed with the SEC, including Form 10-K for the year ended December 31, 2006 and Form 10-Q for the quarter ended March 31, 2007. These documents identify important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements. These potential risks and uncertainties include, but are not limited to fluctuations in our quarterly and yearly operating results, our ability to integrate acquired companies and products successfully, to estimate and increase our profitability, to attract and retain customers, to protect our intellectual property rights, to defend litigation and regulatory reviews successfully, to succeed in our mid-market strategy and our on-demand offerings and the impact of our debt service obligations on our operating results and our ability to raise additional capital. We assume no duty to confirm, update or revise the financial forecast for the third quarter or the year or any other forward-looking information in this call as a result of new developments or otherwise.
Today, we will be discussing our results of a U.S. GAAP as well as a non-GAAP basis. These non-GAAP results, also sometimes called pro forma results, exclude write-off of in-process research and development charges, amortization of purchased intangibles, stock based compensation expense and other non-recurring or non-cash charges. We use these additional non-GAAP measures as we believe they give useful operating information in addition to the U.S. GAAP results. A reconciliation of U.S. GAAP to non-GAAP financial statements is available on our press release and on our Investor Relations webpage.
With that, I will turn the call over to Jim Tolonen to review our financial results for the second quarter.
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Thanks John. Good morning, good afternoon and thank you to all of you for joining us on this call today. The second quarter of 2007 was another quarter of consistent execution on both our strategic objectives and our financial goals, with revenues coming in at the high end of our guidance and non-GAAP EPS exceeding our guidance. In terms of some of the highlights, first, we had a very strong and balanced revenue performance this quarter. We posted double digit year-over-year growth in all geographies, in all lines of business including license, maintenance and consultant and in all product lines including EPM, IDD and EIM.
Second, we continue to make good progress on our profitability improvement goals with both U.S. GAAP and non-GAAP operating margins up substantially year-over-year for the quarter. These margin improvements are providing us with tremendous leverage in driving earnings per share growth much faster than our revenue growth.
And third, we significantly increased our cash balance through a convertible bond offering and by continued strong cash flow from operations, which gives us the financial flexibility to pursue our strategic acquisitions such as Cartesis and Inxight and to return value to shareholders through our stock repurchase program.
Looking in more detail at our financial results for the second quarter, total revenues were $363 million, up 23% year-over-year. Net income on a U.S. GAAP basis was $22 million or $0.22 per share, up 175% compared to $8 million or $0.08 a share for the second quarter of 2006. Non-GAAP net income was $47 million, or $0.48 per share with non-GAAP earnings per share up 65% compared to $0.31 in the year ago quarter.
The acquisition of Cartesis closed on June 1st, which contributed $13 million in total revenue for the one month in our quarter and about $0.01 to our non-GAAP earnings per share. U.S. GAAP expenses for the second quarter also included restructuring charge of $5 million principally relating to this acquisition of Cartesis. If we exclude Cartesis, total revenue for the quarter would have been $350 million and at the high end of our guidance range, while our non-GAAP EPS would have been $0.47 per share, exceeding our guidance range.
Currency did provide revenue benefit this quarter, accounting for approximately four percentage points of our total revenue growth. The currency also caused operating expenses to increase offsetting virtually all of the revenue benefit at the operating profit line.
Our convertible bond offering and the repurchase of 2 million shares outstanding during the quarter did not have a material impact on our results for the second quarter. The acquisition of Inxight, which we did close just after quarter-end on July 3rd, had no impact on quarter two.
Looking at revenue first, our total revenue growth of 23% was driven by strong growth in all revenue lines. Our license revenue for the second quarter were $149 million, up 21% year-over-year, and included approximately $600 million from Cartesis. License revenue growth continued to be driven by very rapid expansion in the Enterprise Performance Management and the Enterprise Information Management and as expected, license revenues for Information Discovery and Delivery or IDD returned to growth this quarter.
Turning to maintenance, we had another very strong quarter with revenues of $152 million up 23% year-over-year with Cartesis contributing about $1.5 million in maintenance revenue in the quarter, after a write-down of approximately $2.5 million of deferred revenue due to purchase accounting adjustments. Overall, our maintenance renewals have remained in the 90% plus range, and we continue to have success in up-selling premium maintenance packages. In addition, the renewal of maintenance revenue from acquired companies and currency exchange rates also improved year-over-year comparisons.
Finally, Global Services revenue for the quarter were $62 million, up 29% year-over-year. In general, our emphasis with Global Services this year has been a more balanced approach to both revenue growth and margin improvement, and our Global Services margins did improve this quarter. In addition, Cartesis contributed approximately $5.8 million in services revenue in quarter two. In the future we do not intend to provide this level of detail on the Cartesis acquisition.
From a geographic standpoint, we were very pleased to see the continuing trend of all divisions contributing to double-digit growth in the second quarter and John will comment more on some of these trends that we are seeing in the different geographies.
In terms of profitability, our U.S. GAAP operating margin improved by 4 percentage points to 9% in the second quarter versus 9% in the year ago quarter. And similarly, our non-GAAP operating margin improved by 5 percentage points in the second quarter, reaching 18% versus 13% in quarter two a year ago. The improvements were driven both by higher gross margins, and better leverage on sales and marketing and research and development expenses. On a non-GAAP basis, gross margin improved 80% as compared to 78% last year, based on the strength of product related revenues including license and maintenance, as well on our improving Global Services margins.
Additionally on a non-GAAP basis, sales and marketing expenses declined by 2 points to 38% pf revenue and research and development declined by 1 point to 15% of revenue compared to quarter two last year. In general, we are benefiting from the scale of becoming a $1.5 billion company, continuing programs to improve our productivity and leverage on our prior year acquisitions.
Turning to the balance sheet, we significantly increased our cash position this quarter, following the completion of our $600 million convertible bond offering in May. In addition, we generated approximately $64 million in cash flow from operations during the three months ended June 30th. These cash increases were partially offset by payments of approximately $30 million for Cartesis and $80 million for our share repurchase program. And as a result, we finished the quarter with $929 million in total cash and equivalents which was up $417 million from the beginning of the year, and $292 million in the quarter. Just after the end of the quarter, we also closed the acquisition of Inxight for approximately $75 million in cash.
Total deferred revenues continued to grow, reaching $347 million at June 30th 2007, up $53 million from December 31st.
And finally, accounts receivable on a day sales outstanding basis, did increase to 88 days for quarter two, as compared to 73 days in quarter two last year and 83 days last quarter. This was primarily due to inclusion of Cartesis in our June numbers which meant that we had the full impacts of their accounts receivable on the balance sheet, but only one month of revenue benefit.
Looking ahead for the remainder of the year. We are providing financial guidance on both the U.S. GAAP and on a non-GAAP basis. We are raising or revenue and our non-GAAP EPS guidance for fiscal 2007 to reflect the solid results that we delivered over the first half of the year, as well as the inclusion of Cartesis and Inxight. We are also adjusting our U.S. GAAP EPS guidance to reflect a restructuring charge we took in the quarter, and the expected higher level of expense related to the amortization of intangible assets from the acquisition of Cartesis and the Inxight. For the year, Cartesis and Inxight are expected to add approximately $65 million to $70 million in our total revenue for the second half of fiscal 2007, approximately $78 million to $83 million for the full year including the one month in quarter two.
Lost deferred revenue due to purchase accounting is expected to be approximately $10 million for the first half of 2007 on these acquisitions. They are expected to be diluted in the third quarter by approximately $0.04 to $0.06 per share due in part to lost deferred revenue and integration expenses.
As we previously indicated, our objective is to make our acquisitions neutral to accretive within 12 months, and we believe we will be ahead of that pace with Cartesis and Inxight. Our revised annual guidance reflects continued strong double digit revenue growth and non-GAAP margin expansion despite the dilution from these acquisitions.
In summary, our revised guidance for fiscal year 2007 consists of total revenue of $1.52 billion to $1.53 billion. U.S. GAAP diluted earnings per share of $0.83 to $0.91 and non-GAAP diluted earnings of $2.02 to $2.10 per share. Our guidance for the third quarter of 2007 consists of total revenues of $382 million to $387 million. Our U.S. GAAP diluted earnings of $0.16 to $0.20 and non-GAAP diluted earnings of $0.43 to $0.47 per share. The U.S. GAAP guidance assumes an effective tax rate of 43% for the third quarter and full year and 2007, while the non-GAAP guidance assumes an effective tax rate of 33% for the third quarter and full year 2007.
And finally, this guidance is based on a U.S. dollar to euro exchange rate of $1.36 per euro. And the U.S. dollar to Canadian dollar exchange rate of $0.96 per Canadian dollar.
With that, I will turn the call over to John Schwarz to provide additional detail on the quarter and our growth strategies. John.
John Schwarz - Chief Executive Officer
Thank you, Jim. And let me add my thanks to all of you for joining us on the call today, as well as to again thank my team for their continued focus and execution on all fronts of the business.
As Jim has just highlighted for you, our team executed very well across all geographies, and across all product lines, delivering 23% total revenue growth, and 21% license revenue growth, improving operating margin and non-GAAP EPS, which exceeded expectations. We also made several important strategic moves during the quarter that extended our leadership position, and changed the game versus the competition.
In June, we completed the acquisition of Cartesis and improved our ability to sell EPM in large enterprises, and to deliver a complete BI solution for the CFO. In early July, we completed the acquisition of Inxight, marking the first foray of a BI company into the realm of unstructured data. The inclusion of unstructured data in our IDD and EIM offerings, allows customers to integrate all of their business data, both internal and external. Finally, we continue to release new applications that exploit Web 2.0 technologies and enable us to provide BI to a broader community of users.
From a geographic standpoint, we are seeing good execution and double digit revenue growth in all regions. And further, with all geographies on a solid growth trajectory this year, we are generating a much more consistent result for the company, overall.
The Americas division continued its multi-year trend of double digit growth with total revenues of $189 million for the second quarter, up 13% year-over-year and against a very tough comparison to last year. This is not predominantly organic growth in the Americas, as First Logic was included in the year-ago quarter. Key drivers for the remainder of the year will be the growth in mid-market and up-selling new products in the enterprise market including EPM and EIM solutions as well as the recently released Business Objects XI Productivity Suite.
EMEA division has demonstrated solid growth over the last three quarters with total revenue of $147 million for the second quarter, up 38% year-over-year and up 29% across the currencies. EMEA division benefited the most from the acquisition of Cartesis. But even without Cartesis, growth in EMEA would have been very respectable at 26% reported and 18% in constant currencies. We're also pleased with the solid improvement in our consulting business in EMEA, and the addition of Cartesis should amplify this trend.
Finally, the APJ division continues to accelerate, with total revenues up $27 million for the second quarter, up 37% year-over-year. The APJ division had particularly strong performance on Australia, in New Zealand and Japan. Our investments in APJ are clearly paying off, as this was the fastest growing region on an organic basis and we expect a substantial opportunity for growth over the second half of the year.
Looking ahead, we expect that continued product innovation that extends the reach and utility of business intelligence will drive the next wave of growth for the company. At our User Group Meeting in Berlin in May, we launched several new product including BusinessObjects Crystal Decisions Professional, which is our second targeted offering for the mid-market customers this year. EPM Performance Suite, which includes integrated profit management technology from the acquisition of ALG last fall. And Information OnDemand which extends our Software-as-a-Service BI offering by incorporating data from third-party providers such as Dun & Bradstreet and Thomson Financial.
Earlier in the quarter we officially launched Business Objects Mobile. BusinessObjects XI Productivity Suite and BusinessObjects Xcelsius for the Enterprise. Early interest in these products has been very encouraging and provides us with many opportunities to reengage with our more than 44,000 customers worldwide.
In addition, products by BusinessObjects Crystal Decisions, both standard and professional editions and BI OnDemand help us target new customers in the mid-market plus all divisions of enterprise customers. In the future, you should expect us to bring to market consistent stream of technology innovation and product releases for both the enterprise market and the mid-market, both for on-premise as well as OnDemand deployment.
Over the last two to three years, we have supplemented our own product innovation with strategic acquisitions. These acquisitions have enabled us to fill product gaps and to rapidly build scale in areas such as Enterprise Performance Management and Enterprise Information Management. Our track record has been very successful and I believe we have developed unmatched expertise in identifying the right targets, integrating acquired technologies and organizations, and then leveraging our market leading position in IDD and our global distribution capability to capture cross-selling opportunities.
At the core of our success, is the BusinessObjects XI platform. The products from our recent acquisitions including SRC, Medience, Infomersion, Firstlogic and ALG, have all been integrated to the XI platform by now. And product roadmaps are already in place through the same with Cartesis and Inxight. We now have approximately 65% of our customers, either fully migrated or in process of migrating to the XI creating a bigger base of customers ready to move forward with new solutions.
To give you an example of the value that can be created. Cable and Wireless, one of the world’s leading international communications companies successfully migrated the BusinessObjects XI Release 2 with more than 2,500 users across that business. Now standardized on Business Objects, they will use our EIM solutions including data quality technology to deploy an information management strategy, which will improve customer service and lower support costs by merging and cleansing data for SAP, Oracle and other legacy applications.
The Cartesis acquisition marks an important step in our strategy of building out the industry’s best performance management platform. Through this combination we will have the market’s broadest offering for the CFO and other line of business users from analytics to profitability to consolidations, and one that appeals to the CIO because it is built on the industry’s leading integrated BI infrastructure. The need for a solution that satisfies the requirements of both the CFO and the CIO is becoming increasingly critical, and that was clearly evident at LifePoint Hospitals this quarter. The CIO at LifePoint needed a solution that could scale across 50 hospitals and 2,000 end users. The CFO on the other hand had other business users, needed a solution that could monitor patient traffic, reimbursements, cost associated with supplies and patient care and other metrics. Additionally, we have a goal of reducing budget cycle times by 14%. The combination of our EPM products with the BusinessObjects XI platform was exactly what the customers erre looking for. And incidentally, was a competitive win against Oracle.
Cartesis will even further strengthen our position with the CFO. And given the relative side of this transaction, and the opportunity we see in the marketplace, we are focusing on an aggressive integration plan. Integration of Cartesis is made somewhat easier by the highly complementary nature of the two companies.
From a product standpoint, there is very little overlap. Cartesis brings strength in financial reporting and consolidations, as well as governance, risk and compliance. Our historical EPM footprint was focused on planning and budgeting scorecards and analytics, activity based costing and of course the integration with our BI platform.
And key principle of our product roadmap is basing the foundation of the Business Objects EPM Suite on a single integrated data model. This will ensure that all data and metadata is in one place for operational use by all EPM obligations and for trusted reporting, analysis, dashboarding and scorecarding.
In early July, we completed the acquisition of Inxight and become the first BI Company with the capability to span both structured and unstructured data. Inxight brings a compelling combination of text analytics, federated search and visualization capabilities to the BusinessObjects XI platform. For example with the addition of Inxight technology we will further extend enterprise search and seamlessly integrate with the traditional BI query and reporting approach. Going beyond basic keyword searches, Inxight's federated search and extraction capabilities extend the value of search engines by instantly clustering and filtering results from multiple search engines including for example, the Google Search Appliance.
These products support the analysis and understanding of relationships, of trends, timelines and patterns in data that would otherwise go unnoticed. As you might expect this type of technology also has broad applications for governance and law enforcement and Inxight has had a tremendous success in the federal sector, most notably, with the Intelligence Agencies.
In terms of the market opportunities, it is estimated that more than 80% of organizational data resides outside of structure databases and data warehouses including information on emails, documents, NOSE fields and web content. Together with Inxight we will enable customers to easily discover, manage and analyze unstructured content from both within and outside of their organizations. This is a very exciting opportunity for us and now, another key differentiator versus the competition.
While product innovation is a critical element for our continued success, equally sold is the continued expansion of our global distribution and solution selling capabilities. We’re extending the geographic reach of our direct sales and consulting groups in Europe and particularly in Asia. We are also enhancing our relationship with key systems integrators and other partners. We’re extending our reach into the mid-market with the training of over 1,800 partners on the new BusinessObjects Crystal Decision product suite. We’re developing a specialized sales force to target the CFO and other business line executives by industry, capable of leading the relationship of working in alignment with our core BI sales organization. And we are increasingly selling more end-to-end solutions, incorporating multiple elements of our BI portfolio, as I highlighted earlier with LifePoint and Cable and Wireless.
To summarize our call today, Q2 was a solid quarter marked by confident execution. We produced consistent and balanced revenue growth with double digit growth in all geographies and all product lines. This performance demonstrates our capability to extend our leadership in one of the most attractive markets in the software industry. Our customers respect the value brought by a solution provider, which is integrated, open, broad, and delivers on its promises.
This quarter was also highlighted by many strategic objectives we achieved including the rollout of many new products for the enterprise market, the mid-market, and on-demand as well as the acquisition of Cartesis and Inxight. Overall we’re making very good progress against our key growth strategies. Strategies to lead in end-to-end BI, to expand our strategic global services, to gain significant share in the mid-market, to further extend our global sales coverage, and to develop innovative new offerings such as BI On-Demand and others. Critically we are executing well on our margin improvement objectives.
So, thank you for joining us this quarter. And I’ll now turn the call back to the operator to open up the lines to your questions.
Question and Answer
Operator
[Operator Instructions].
Our first question comes from Adam Holt with JP Morgan.
Adam Holt - JP Morgan
Good morning, and thanks for taking my question. I had two questions on the core business, the IDD business. You've mentioned that it would reaccelerate to grow in the quarter, and I was wondering, that the comparison should get easier as we head into the back half of the year. Obviously you are starting to see much better upgrade activity within 65% of the base now on XI. Could you talk a little bit about what your expectations are for growth maybe even accelerating a little bit in the back half and are you past the inflection point with the upgrade, within the installed base where you are starting to see a lot more new module attached as well?
John Schwarz - Chief Executive Officer
Well, I would characterize the progress as steady, and as against our targets that we have established, in fact more than two years ago, now that we first launched the XI platform. And so, the progress is on plan, the progress is enabled by additional releases that have lodged into the marketplace over the last six to nine months. And it's kind of where we expected and forecasted it to be. I would caution against assuming a significant acceleration, if you will, but rather project on a trajectory that we have been on for the past two or three quarters.
Adam Holt - JP Morgan
And if I could just ask a follow-up on the Cartesis guidance looking forward, could you talk a little bit about what some of the assumptions are for synergies, either revenue synergies brought from the transaction or cost synergies? Thanks very much.
John Schwarz - Chief Executive Officer
Let me start on the cost side. Obviously, the restructuring charges announced in some of the rather aggressive return to an accretive mode of operation will signal that we are intending to execute fairly aggressive, inspiration [ph] strategy including elimination of some overlaps and duplicate costs. So, a lot of work being done on that score. There isn’t a lot of overlap on the product side, as we suggested. However, as in any case, there are overlaps in G&A structure, overlaps in some of our go-to-markets operations and in customer support. And those are being eliminated on a rapid timescale.
As far as co-studying [ph] the synergies, that was one of the driving justification for the acquisition. We believe that the 200 or so, consultants that Cartesis brings to the table, especially since the majority of them are located in New York, we expect we substantially extend our footprint in the EMEA marketplace. In so far as the expansion of the selling capability, we expect to take our EPM sales force, which is particularly strong in North America and help Cartesis with selling in the U.S. and Canada, potentially in the Latin Americas as well. While Cartesis will help us in Europe, with selling EPM because they had a strong team over there, we are building our Asian team pretty much from scratch in that neither Cartesis small Business Objects core has had a lot of EPM presence there today. So that’s still a market to be invested in. So just a same, a significant selling as well as cost synergies are expected and are planned on.
Adam Holt - JP Morgan
Great, thank you.
Operator
Your next question comes from Michael Briest with UBS.
Michael Briest - UBS
Good afternoon, thanks very much. A couple of questions. Firstly, on the $1 million deal count that was just fixed in the quarter, which is relatively low, I wonder could you say whether there was any split at the end of the quarter or any issues on that side. And then, on the competitive environment, can you talk a bit about what to think of Oracle-Hyperion, what their offering is, and how you encountering that? Thank you.
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Sure Michael. On the $1 million deal count, we had seven transactions, which is… I am sorry six transactions over a $1 million which would not be a large number but a good solid number for us in the quarter. And perhaps consistent with other quarters that we have been seeing is a slightly lower amount of over a million, but a very large amount in that next category down for us. So I think the highest quarter ever in terms of transactions between $200,000 and $1 million. So very good strength in that next year down.
John, perhaps you want to comment on the competition or any of market things we are seeing in Oracle-Hyperion offerings.
John Schwarz - Chief Executive Officer
We have not come across any real significant head-to-head competition beyond what we’ve traditionally seen from Oracle and Hyperion. They are still obviously putting their story together and have not been physically effective in delivering a combined, clear, integrated picture for the customers. And so, I would not characterize the selling environment as being any different than what we have seen prior to the acquisition of Hyperion.
Michael Briest - UBS
Thank you. Just one follow-up, if I may. Could you give us an idea of what you’re planning for Inxight, and the timing of installation into XI? Thank you.
John Schwarz - Chief Executive Officer
On Cartesis, you mean specifically?
Michael Briest - UBS
On Inxight specifically.
John Schwarz - Chief Executive Officer
Inxight, I am sorry. We are going to be releasing integrated products starting in September or in the current quarter, in fact, as we are plugging the Inxight technology into our portfolio. And obviously this is a lightweight integration, as I would call it, with additional more discreet integration into the actual XI platform coming in later this year, early next year. But it is a rapid integration, by any standard.
Michael Briest - UBS
Great, thank you.
Operator
Your next question comes from Ed Maguire with Merrill Lynch.
Ed Maguire - Merrill Lynch
Yes, good morning. Could you comment on the product mix in the different regions, whether you were seeing any different... different trends between the U.S. and Europe, in particular?
John Schwarz - Chief Executive Officer
Well let me start with Asia, just for a change base here. Clearly Asia is building the BI market momentum and our presence in Asia, our investment in our marketing in Asia has significantly contributed to that. But Asia is significantly behind the curve of the, what I would call, the more mature BI world in the Americas and in Europe. And so, in Asia we are still predominantly core BI or IDD.
In Europe, we have seen a very rapid adoption of the EIM and EPM platforms extending the IDD footprint. And so I would say, in the last three or six months, we have seen the emergence of Europe, as a full configured end-to-end BI market opportunity, which we have seen in the Americas for quite some time. And so, yes there is an evolution taking place in the mature markets as well as in the, what I would call, emerging markets as customers begin to understand the value of the performance management, deployment of BIs as opposed to just reporting and analytics which was the traditional use of the Business Intelligence. This was lagging in the Americas, but it is now fully evident in Europe and we hope and expect in Asia, shortly as well.
Ed Maguire - Merrill Lynch
And just a follow-up on operating margins, it looks like sales and marketing in R&D has declined quarter-over-quarter. As a percentage of sales, where do you see the incremental leverage as you look forward to… towards your longer term goals with areas to pull costs out of that model?
John Schwarz - Chief Executive Officer
Well, as we had indicated in our Berlin conference, we believe that there still is opportunity to increase productivity in both our sales and marketing areas as well as in R&D, as certainly as measured in terms of percentage of revenue. We have gained this quarter a point each, or a couple points in fact in sales and marketing. We think there are still one or two points to be gained over the next 12 to 18 months on the marketing and sales side, and perhaps another point or so, maybe two points on the R&D side, as we begin to streamline the operations as we focus on the integration of technologies, and as we gain benefit from the skills we have acquired with Cartesis and Inxight.
Ed Maguire - Merrill Lynch
Thank you.
Operator
Your next question comes from Adam Wood with Exane BNP Paribas.
Adam Wood - Exane BNP Paribas
I just had two questions. The first one is on the services and gross margins. Obviously, a great performance there in terms of the improvement. Can you just help us to understand which side that comes from? We’ve seen it's more on the actual [professional services business? And whether that type of margin profile is sustainable, going forward?
And then really just following up on a couple of your comments and a couple of your other questions, talking about the 65% of the installed base is now either migrating to or are on XI. I think from what we’ve heard from you in the past suggests that the percentage is higher in the Americas, and maybe even we're getting to the stage when most of the installed base are either through or in that process. What should we expect from the Americas going forward? Should we maybe expect that geography to slow slightly as that upgrade matures? Or should we expect maintenance or even acceleration as they start to search and buy new products?
John Schwarz - Chief Executive Officer
Well that’s quite a breadth of questions. So let me start with the second part and I’ll ask you to restate the first one when I finish. Clearly, the migration process is moving along very well. We reported being around 50% of the population kind of in the process of migration in the last quarter. We’re running at 65% or better now. And if you look at the pipeline and the customers’ intention to buy and to migrate, it is a chock full off people who are lining up to execute.
We still have another release of XI to complete and that’s expected to come out late this year or early next year. That will deliver some additional, compelling functionality, especially for heavily deployed V5 or Version 5 or Version 6 customers. So there is still, both in the Americas and in Europe for that matter a significant line-up of large clients who have planned but not begun the execution of the migration, waiting for this next release. So there's still, if you will, gold to be mined, in that context.
Now very importantly, the customers that have begun the migration process and are getting comfortable with the quality and the functionality of XI are also beginning to invest in new projects. We’re seeing the adoption of the EPM platforms around the XI solution. Obviously EIM is in fact becoming almost a co-sell or by-products of the IDD platform. And so much more depth and extension of the technology is taking place, beyond just migrating the reporting or analytics that had been part of the previous footprint.
So we’re very comfortable that the product has legs, that the technology evolution have laid out is attractive to customers. That they are seeing opportunity to not just to migrate but to invest deeper in the BI products stack. And very importantly, to begin to use BI in a more strategic deployment rather than just as a passive reporting, which is the more traditional view.
So across the board, I think you can expect, not just maintenance to continue to be a healthy part of our business as customers renew their commitments to the platform but also new licenses in terms of new seats and new functionality being deployed on top of the strength of the XI platform.
Adam Wood - Exane BNP Paribas
So I mean, given the new product coming out will there be no reason to assume that the Americas growth should start slowing on the license side as the XI migration matures?
John Schwarz - Chief Executive Officer
No, I think the X migration, in fact if you will recall what we had originally said about XI, we actually thought the XI migration was slowing the revenue from licenses down as customers were spending a lot of the effort and energy on migration, but not on deploying new seats or new functionality. Now that that migration bubble, if you will, has passed or it’s in the process of passing, w e see the return of customers actually buying new licenses, new seats, new functions.
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
And with regards to your first question Adam, on Services gross margins, certainly the primary cause of that is our great growth of 29% year-over-year and it’s led by the consulting side, although the education fees much smaller is also up year over year. And it’s really across the board. It’s in utilization, in rates and in a higher quality of business, as we move up to more strategic consulting engagements and solution selling. Overall, this quarter, up about 4% in gross margin on the Global Services business, 4 percentage points.
John Schwarz - Chief Executive Officer
And also add to that, that as in selling licenses, the performance of the consulting team has become much more consistent across the geographies. Last year we were struggling outside of the Americas with the profitability of our consultancy. This year the team has become much more focused and much more… much better managed, if you will, across the world. And so we have less of a drag, if you will, on the performance of the organization from the small international parts of our business.
Adam Wood - Exane BNP Paribas
That’s great. Thank you very much.
Operator
Your next question comes from Steve Ashley with Robert W. Baird.
Steve Ashley – Robert W. Baird
Thank you. First of all Jim, I was wondering maybe qualitatively if you could comment on whether the IDD business showed sequential license revenue growth in the period?
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Yes, it did. And I think what we commented on was all… that we’re not going to get into all of the great details of the product granularity, going forward. We did say, all of our segments, all of our product families were double digit up year over year. So that should be helpful in letting you figure that out.
Steve Ashley – Robert W. Baird
Sure. And then I just want to clarify that in terms of both acquisitions being baked into the guidance, then on a non-GAAP basis diluted $0.04 to $0.06 in the third quarter, but accretive on a full year basis, implying that in the fourth quarter, they would be profitable.
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
That’s probably, we didn’t get into quite that level of granularity and breaking that out. What we’ve said and you can see it in the totals, since we’ve raised the revenue for the full year and raised the earnings per share that we believe that we will see leverage in the combined business over that period of time. And from that instance, we’ve said that they are dilutive in Q3. You can assume that we will, on a combined basis for quarter four be actually moving into accretion from those… from the total business in quarter four.
Steve Ashley – Robert W. Baird
And what kind of share count should we be thinking about? Or does your guidance imply for the third quarter and full year?
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Just about a $0.5 million up from our quarter, from our ending quarterly basis. You get a little bit of pick-up from the weighted average of the shares that we repurchased that only got a partial quarter in Q2. So relatively flat in the quarter three and then picking up again in quarter four.
Steve Ashley – Robert W. Baird
And then just lastly, I think you said kind of that your goal was to extend EBIT margins 200 basis points a year through 2010. Does that remain your stated goal?
John Schwarz - Chief Executive Officer
Yes, nothing has changed to make us feel that that’s not the right target for Q4.
Steve Ashley – Robert W. Baird
Thank you very much.
Operator
Your next question comes from James Clark with Credit Suisse
James Clark – Credit Suisse
Good morning gentlemen, thank you. I have three questions. The first was trying to focus on the core business, without the effect of the acquisition in the second half of the year. You’ve certainly given some pointers here. But, your guidance change certainly implies improved margin prospect for the full year. Can you help us get to where you see the margins for the business, excluding Cartesis and Inxight, for the full year now within that guidance range?
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Well as you know, Jim, we don’t give margin guidance. Many people try to compute it and figure it out from of course our earnings per share and our revenue numbers. And, but I think you’re on track there in saying that the core business slightly improving to make up for some of the dilution caused by the acquisitions. I don’t know if we’ll get all of it by the end of the year, but certainly well on track to get to that point on an integrated basis quickly.
James Clark – Credit Suisse
Because it sounds like for this year you're actually tracking a little ahead of that beyond that 200 basis points a year margin improvement?
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Excluding, yes, excluding the dilution caused by the acquisition, certainly that would be true.
James Clark – Credit Suisse
Exactly. The second one was just a clarification on the tax rate. In the second quarter, the tax rate looked a little lower than your guidance rate for the year, and certainly in the Q [ph] so far. Can you help us sort of understand the quarter-to-quarter tax changes through this year and whether there is an opportunity for full year tax rates to come down?
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
Our guidance in the rate is really the same, 43% on a GAAP and 33% on a Non-GAAP. It can vary slightly within the quarter based on what’s kind of called discrete entries to the small adjustments that run through the tax rate calculation on a real time basis. We try to give a full year target on what we expect that combined rate would be. And I would say that it hasn’t changed dramatically in the last quarter.
James Clark – Credit Suisse
Okay. Thank you very much.
Operator
Your next question comes from Mike Abramsky with RBC Capital Markets.
Mike Abramsky – RBC Capital Markets
Yes, thanks very much. I just briefly want to go back to the large versus medium sized transaction for the quarter. Can you just give us a little bit more color as to what’s going on? We have seen a little bit of slowdown for example in Cognos' large transactions as well in Q1, possibly due to some disruption in larger sales cycles because of industry consolidation. But you have obviously very, very healthy smaller or mid sized transaction size. Could you just give us your perspective on what’s driving that?
John Schwarz - Chief Executive Officer
Well let me start and perhaps Jim can chime in as we go. If you take a look at the typical annual budget process that customers go through, I would think that that budget process has been about on par with previous year’s experience. The process is getting slightly more complicated with the addition of the EPM suite to our portfolio in that, the EPM Suite, which is primarily focused on planning, budgeting and if you will, the governance risk management type solutions, tends to be more skewed towards the first half of the year, because customers are deploying and testing in the second half of the year. And, so we clearly have seen that phenomenon taking place, certainly in the first quarter maybe tailing off into second quarter a little bit.
On the core business, the performance is about on par both in the large transactions and the mid sized transactions and we would expect that, as we move into the second half of the year, we will see the fulfillment of a planning… of the plans the customers have put in place early this year will come in the guise of large transactions coming on full boil, if you will, in the third and fourth quarter. So, no dramatic change in market behavior as a result of consolidation or otherwise.
We are seeing customers being a little bit more time sensitive, if you will, in the way that they deploy their IT implementations. And this is I believe true not just for BI but for other components as well in that customers tend to break their projects into smaller pieces and run more projects, but the projects themselves are a little bit smaller in scope. And that is what’s contributing to the larger number of the mid sized deals because these mid sized deals are taking place in large enterprises, not necessarily just in the mid-market.
Mike Abramsky – RBC Capital Markets
And you feel you have a product set that is aligned to that trend.
John Schwarz - Chief Executive Officer
We absolutely do. Not just the product set, but even our sales methodology and sales approach is very much, if you will, in tune with that behavior, as evidenced by our success in the third quarter.
Mike Abramsky – RBC Capital Markets
Thanks very much.
Operator
Your next question comes from Mohammed Moawalla with Goldman Sachs.
Mohammed Moawalla - Goldman Sachs
Good morning. Can you comment a little bit around pricing pressure, and also around the growth in the U.S. to just help us understand how much of that was customers buying incremental functionality and seats versus the success you are having in just in the mid-market in terms of new customers?
John Schwarz - Chief Executive Officer
Yes, the performance in terms of mid-market versus enterprise was pretty much on historical trends. We have not seen any dramatic shifts. We have roughly a third of our business or so, a little bit more than a third is coming from mid-market. Little bit less than two-thirds from the enterprise. The boundary that we draw around that is roughly $1 billion sized enterprise. And the performance mirrors our previous reports in this regard. The large enterprise, as I reported, is very focused on kind of the quick hit implementations, obligations that are easy to deploy and rapidly deployed either to derive instant benefit or instant return on investments. The mid-market of course is much more focused on packaged offerings that do not require lot of IT deployment resource to enable.
And so, we are working in the large enterprise using our direct sales force and the systems integrator organizations. We are working in the mid-market with our direct sales force at the very high-end, but mostly with systems integrators and solutions providers as well as of course, as you know, in our case the OEM business plays a big role.
So across the board, Mo, the behavior is consistent. It is relatively predictable. And we are not seeing any significant trends that will seem to disrupt our previous experience in this regard.
James R. Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration
And couple of other comments on that, Mo. As regards the new customers, about a little over 1,200 are similar to recent trends that are in the quarter. And with regard to your question on functionality, I would say again with probably 67% to 70% of our customers being repeat and our EPM and EIM growing faster than the IDD. Obviously, a lot of that is new functionality to existing customers.
Mohammed Moawalla - Goldman Sachs
Great. And can you just comment on this pricing environment around the IDD business. I mean, is there any sort of pressure there and what the magnitude could IDD be better, growth be better by, was it not for that pricing pressure.
John Schwarz - Chief Executive Officer
The way I characterize the pricing environment, Mo, is that customers have budgets for BI. They are spending their budgets on BI and the budgets are growing. What customers do expect is more for their money. So we, as I believe the rest of the industry, is faced with having to extend the functionality, add content, add value to the transaction to retain the full value of the opportunity. That is not different from what we saw a year ago, two years ago. In fact I think it's a constant in the software world today. But as long as the value is there, the budgets are being deployed and the revenue is generated as we traditionally have.
Mohammed Moawalla - Goldman Sachs
Okay. Maybe if I can, just one follow up on Inxight. When do you think Inxight, in terms of cross selling potential, begin to have a meaningful impact around IDD growth. Is it 2008 or could that be as early as the second half of this year?
John Schwarz - Chief Executive Officer
Cross selling of what?
Mohammed Moawalla - Goldman Sachs
Of Inxight into the installed base and the impact on the IDD growth rate.
John Schwarz - Chief Executive Officer
It should have an immediate impact because there is a pent up demand for customers to begin to understand the unstructured part of their data content. But I think we have a learning cycle to go through to figure out exactly how to position the Inxight technology inside both our EIM and IDD platforms. So we have seen a pent up demand in customers. In fact they have called us, literally the day we have announced the acquisition, with an interest to understand how we intend to integrate and deploy and how they might benefit from that new technology. But I would say too early to predict the precise impact its going to have on the cross selling with our IDD or EIM platforms. At this point in time, we are guiding the Inxight impact on revenue to be in a sense as it stands alone and we will learn over the current quarter, over the next quarter how the traction is taking place and how customers are deploying and then perhaps can guide with respect to what the cross-sell might look like.
Mohammed Moawalla - Goldman Sachs
Okay. Thanks very much.
Operator
Your next question comes from Keith Weiss with Morgan Stanley.
Keith Weiss - Morgan Stanley
Thank you, guys. Very nice quarter. I was wondering if you could A, give us some detail around quota-carrying reps, of where that ended up and perhaps talk a little bit about where you guys are looking for overall headcount to trend over the remainder of the year. You now have the headcount, by my calculation, about 22% above where you were last year. How do you see that trending throughout the rest of the year?
John Schwarz - Chief Executive Officer
Our actual quota-carrying sales reps, if you exclude the Cartesis and Inxight people are about flat with where we were a quarter ago.
Keith Weiss - Morgan Stanley
But how many do Cartesis and Inxight have?
John Schwarz - Chief Executive Officer
We are bringing on board about 30, 35 new reps from those two organizations around the world. So on top of our 638, we will be adding about 30, maybe 35 additional sales reps that come from those acquisitions. And I don’t think that you should see… you should expect our headcount to grow between now and the year-end. I think we are pretty much kind of where we needed to be. At this point in time we are hiring of… very specific skills in very specific areas of the business, but not adding significant numbers of people to the company.
Keith Weiss - Morgan Stanley
Excellent.
Operator
Your next question comes from Stefan Slowinski with Société Générale.
Stefan Slowinski - Société Générale
Yes, good afternoon. A question regarding Cartesis, if you could just come back to that subject. It seems like your communication has become increasingly aggressive in terms of having closed the deal earlier than expected. It looks like you are taking more aggressive restructuring than anticipated and a deal is going to be accretive before the end of this year. What’s really caused you to take this more aggressive stance towards Cartesis? Is it just opportunistic or is it driven by customers wanting to see this integration happen before moving forward with larger projects? And looking out to 2008, can this therefore be more accretive than you had originally anticipated?
John Schwarz - Chief Executive Officer
So just on the current year, we’d always had very aggressive and very, if you will have rapid integration plans. The reason why we had not guided thus in the early going is that the transaction was subject to various regulatory approvals and we weren't sure when those would actually be received. So having in fact passed those approvals early in the cycle, we have adopted a very rapid approach to both the integration and the bringing the company to an accretive position within our portfolio. So, that’s been very good, and we are comfortable that the transaction is proceeding on an aggressive schedule, in fact on a schedule, which I think is as aggressive as possibly we could have made it.
Going forward into next year, I would be a little bit more cautious as I was with the Inxight acquisition. We have a lot to learn. The Cartesis team is a well oiled machine. They have a strong presence in Europe. They have done a relatively good job of trying to transition into the Americas as well. But there is a lot of investment, a lot of effort required to actually execute on that strategy. So, work to be done making Cartesis more effective in the Americas and us adopting the EMEA team and learning from them across the entire EPM suite.
I would say from here on into ’08, the EPM suite, overall, becomes a more dominant part of our portfolio, more dominant part of our footprint as a percentage of our overall business. But that is not to discount to rest of our offering. Both the IDD and the EIM solutions and the markets in which they are targeted are very strong businesses in their own right, and I would expect all three to be competing for our attention and competing for customers', for customers' budgets.
Stefan Slowinski - Société Générale
Okay. And do we… should we expect anymore restructuring charges associated with the acquisitions in the second of the year or have they all been absorbed in Q2?
John Schwarz - Chief Executive Officer
No. They have not all been absorbed in Q2, but they have all been reflected in the guidance that we have provided today.
Stefan Slowinski - Société Générale
Okay. Thank you.
Operator
At this time we will take two more questions. Your next question comes from the line of Frank Sparacino with First Analysis.
Frank Sparacino - First Analysis
Hi guys. John, I am just curious, when you look at Cartesis and you look at the growth opportunity in the U.S., do you feel like you have a critical mass of customer references and also a presence here to really make an impact?
John Schwarz - Chief Executive Officer
You mean, bigger than what we already have? Yes we do. We have by far the strongest BI team, by far the strongest customer base, by far the best brand, by far the most recognition from the analysts in the industry as a leader. And all of these points are very important as customers make their purchase decisions.
The one area that we have to do more work on is getting more attention from the systems integrators. As you might expect, deploying a major BI solution is not a simple task for any customer even those that have a significant IT capability in-house. They typically do ask for help from us or systems integrators for consulting type skills to help to deploy. And the industry is short of those skills in aggregate. If you took all of the SI operators for that matter and not just in North America, but around the world and added up their resources, we're short of the demand in the marketplace in this regard. And so that’s the one area where I think we need to add additional resources ourselves and obviously what they had to retain the attention of the SIs as they are being wooed by some of the other partners or other players in the marketplace.
Operator
And our last question comes from Robert Schwartz with Jefferies & Company.
Robert Schwartz - Jefferies & Company
Thanks so much for squeezing me in. John, you mentioned three sort of efforts in the field, extending the reach of direct sales in the EMEA and APAC. The mid-market training of EPM or partners for the mid-market. And then an overlay team. Maybe you could help us better understand what the overlay, where you are with that overlay team and what it’s roles are and how it integrates with what you acquire with Cartesis, so that you don’t have conflict? And when might we see mid-market training results and a reflection in mid-market sales of BOCD?
John Schwarz - Chief Executive Officer
Okay. So the body of the overlay sales structure is really an attempt to develop our overall selling capability around our EMP and EIM offerings, without undermining relationships that we already have in the customers organization, which was traditionally built by the IDD team. And so we have build an overlay structure where specialists that are particularly skilled at selling to the CFO as in the case of EPM or people who are particularly adept at understanding and managing the date infrastructure solutions, which is what we sell around the EIM offerings, are designed to give the specialists, the opportunity to focus on those customers and on those requirements. But while they are in the account specializing on these particular opportunities we have our IDD team, IDD team for our, if you will, core sales force, managing the overall relationship.
Over time, as we develop that credibility as an EPM and EIM provider in the eyes of our customer that matches our credibility as a kind of core BI provider, we might end up bifurcating the sales force and ending up with sales teams that are specialized and focused, but not overlaid in the sense where they had been in the marketplace in parallel with each other.
We are probably another year away from getting to that point. And so at this point in time you should see us, you should look to us to continue to invest and enhance this overlay structure. It seems to be working very well. The overlay is particularly powerful in allowing the cross-sell, because where the EPM or EIM sales reps come across an IDD opportunity, they obviously invite their IDD colleague to come and deliver the core BI functionality and vice versa where we end up with an understanding or an opportunity to sell a planning solution, we bring an EPM person to the table.
This is also helpful with the integration of Cartesis, inside another acquisition. Their sales reps are specialists in a given field and we out them into our portfolio as overlay salespeople. They retain their specialty but they get the cross-selling full, from the rest of the go-to-market structure.
Robert Schwartz - Jefferies & Company
In the mid-market, maybe we might see an inflection there?
John Schwarz - Chief Executive Officer
We already have. The mid-market continues to gain, velocity continues to gain, footprint continues to gain an importance to our business. However the enterprise has been doing so well that the mid-market had a hard time, shifting the proportion of the revenue dramatically in its direction. We still believe that the mid-market gives a better long-term opportunity or more… let’s say less penetrative overall opportunity than the enterprise, and therefore will likely have more growth as time goes on. We would expect that the mid-market over time becomes as much as half of our overall business. But the drift or the shift in that direction is perhaps a little slower than we anticipated.
Robert Schwartz - Jefferies & Company
In the partner training, were you in that 1,800… are you done with that?
John Schwarz - Chief Executive Officer
We are not done. We have about double that number of partners. And so we have yet to train the other half.
Robert Schwartz - Jefferies & Company
Okay. Thank you very much.
John Schwarz - Chief Executive Officer
Okay. So with that, let me thank you all for joining us today. Thank you for your kind work and for your insightful questions. We are going to be available for one on one call as today or this week progresses. And I am looking forward to seeing you on the road, various conferences that we'll be attending in the rest of this year. Thanks, and have a good day.
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