Business Objects Q3 2007 Earnings Call Transcript

Business Objects (BOBJ)
Q3 2007 Earnings Call
October 24, 2007, 8:00 AM ET

Executives

John Ederer - VP, IR
Jim Tolonen - CFO and Sr. VP, Finance and Administration
John Schwarz - CEO

Analysts

Mohammed Moawalla - Goldman Sachs
Elizabeth Buckley - Arete Research
Frank Sparacino - First Analysis
Michael Briest - UBS
Robert Schwartz - Jefferies
Keith Weiss - Morgan Stanley
Tom Roderick - Thomas Weisel Partners
James Clark - Credit Suisse
Sasa Zorovic - Goldman Sachs

Presentation


Operator

Good morning. My name is Alwis, and I will be your conference operator today. At this time, I like to welcome everyone to the Q3 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now like to turn today's conference call over to John Ederer, VP of Investor Relations. Sir, you may begin your conference.

John Ederer - Vice President, Investor Relations

All right. Thank you and welcome to the conference call to discuss our financial results for the third quarter of fiscal 2007. Joining me on the call today is Business Objects' Chief Executive Officer, John Schwartz; 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. We wish to caution you that such statements are just predictions based on management's current expectations or beliefs that actual events or results may differ materially. We refer you to documents we filed with the Securities and Exchange Commission including Form 10-K for the year ended December 31, 2006 and Form 10-Q for the quarter ended June 30, 2007 as well as today's presentation slides for the risks associated with these forward-looking statements.

Due to potential changes in customer buying behavior resulting from the pending transaction with SAP, the anticipated impact of the transaction on Business Objects' expenses, and uncertainty regarding the timing of the closing of the tender, Business Objects anticipates less fourth quarter predictability than usual and is thus suspending its forward-looking financial guidance. Due to the combination of the actual third quarter results being less than previous guidance and the potential impact of the pending transaction on the fourth quarter results, investors should no longer rely upon the guidance statements made in Business Objects' press release issued on July 25, 2007.

Today, we will be discussing our results on a US 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 US GAAP results. A reconciliation of US GAAP to non-GAAP financial statements is available on our press release and on our Investor Relations webpage.

I will now turn the call over to Jim Tolonen to review our financial results for the third quarter.

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

Thanks John, and thanks to all of you for joining us on this call today. The results for third quarter of 2007 came in at the high end of the preliminary range that we provided on October 7 followed below the original guidance from our second quarter conference call. Shortfall revenue to our original guidance was due to lower than expected license revenue, which in turn had a negative impact on margin and EPS and also as expected, the EPS margins were negatively impacted by the short-term dilutive impact of Cartesis and Inxight, our two recent acquisitions that closed in June and July respectively.

While overall the third quarter was below our expectations, there were many highlights. Good total revenue growth was driven primarily by continued strength in both our maintenance and global services businesses. Expenses were controlled such that the full earnings impact related to revenue shortfall was mitigated. Our balance sheet and cash flow from operations continue to remain very strong with operating cash flow more than offsetting the cash use from our Inxight acquisition. We moved very quickly to integrate Cartesis and Inxight and we have much hard work behind this now. And finally we made good progress on the global initiatives that continue to drive long-term margin expansion.

Looking at our specific financial results for the third quarter, our total revenues were $369 million, up 19% year-over-year, up 15% in constant currency. Our net income on a US GAAP basis was $6 million or $0.07 per share, which compares to $20 million or $0.21 per share in the third quarter of 2006. The current quarter numbers included a charge of approximately $7 million or $0.05 a share for the Decision Warehouse legal settlement.

Our non-GAAP net income was $38 million or $0.39 per share, compared to $39 million or $0.41 per share in the year-ago quarter. Our total revenue growth of 19% in the third quarter of 2007 was driven by growth in all of our revenue lines. License revenues were $139 million, up 6% year-over-year, up 2% in constant currencies and all product lines contributed to license growth on a reported basis. Our maintenance revenues were $163 million, up 27% year-over-year, up 22% in constant currency. Overall maintenance renewals have remained in the 90% plus range and we continue to have success in upselling premium maintenance profits.

Finally our services revenues, including consulting and training, were $67 million, up 34% year-over-year, 31% in constant currency, with continued strong organic growth as well as the inclusion of Cartesis driving services growth back above 30% this quarter.

From a geographic standpoint, we're pleased to see the continuing trend of all divisions contributing double-digit year-over-year total revenue growth for the third quarter. Our America's revenues were $198 million, up 13% year-over-year and representing solid growth against tough comparisons last year.

Revenues for our EMEA were $145 million, up 29% year-over-year, 21% in constant currency with EMEA region having turned in steady performance this year, but also benefiting from the acquisition of Cartesis in quarter three and improved global services performance. And finally revenues for our Asia-Pacific and Japan or APJ region were $26 million, up 16% year-over-year. Our growth in APJ slowed slightly from recent quarters. It was against tougher comparisons from a very strong third quarter of 2006.

In terms of profitability, our US GAAP operating margin declined to 3% in the third quarter versus 10% in the year-ago quarter. US GAAP margin was negatively impacted by the license shortfall, the inclusion of Cartesis and Inxight acquisitions in the quarter as well as the one-time decision warehouse settlement. On a non-GAAP basis, our operating margin was 15% in the third quarter versus 17% in the year-ago quarter. And this decrease was partially due to the license shortfall although offset somewhat by good expense controls. Also, the Cartesis and Inxight had a negative impact on margins this quarter as the deferred revenue lost due to purchase accounting and the full cost synergies have not yet been realized.

On a nine-month year-to-date basis, our non-GAAP operating margin is up approximately 140 basis points compared with the same period last year as we continue to scale and drive operating efficiencies.

Looking ahead continued margin expansion remains one of our top priorities. We generated $213 million in cash flow from operations for the nine months ended December 30th. We finished the quarter with $931 million in total cash equivalents, which was up $418 million for December 31st and up $2 million from the end of the prior June quarter despite using approximately $77 million of the acquisition of Inxight during the quarter.

Total deferred revenues remained strong at $339 million at September 30th, up $46 million in December 31, 2006. And finally accounts receivable on a days sales outstanding basis improved sequentially to 82 days from quarter three from 88 days in quarter two.

Before I hand the call over to John, I would like to discuss some events, which have occurred since the SAP tender offer announcement on October 7. This is for informational purposes only and is neither an offer device nor a solicitation of an offer to sell any Business Objects securities. On October 10th, SAP AG filed documents for the French Ministry of Economy. Its approval from the French Ministry of Economy is a condition to the opening of the tender offer. On October 18th, an independent expert completed a fairness opinion report concluding that the terms of the transaction are appropriate and fair to the holders of the various Business Objects securities.

This week on Monday, October 22, several events took place. SAP filed a preliminary or draft prospectus on the proposed transaction called the note

d’information with the AMF, the French Financial Regulator similar to the US SEC. As with the approval from the French Ministry of Economy, initiation of the tender offer is contingent on AMF approvals. Business Objects also filed the AMF a draft prospectus called a note on response, which formalize our Board of Directors’ recommendation for holders of Business Objects securities to tender their shares, warrant, and convertibles bonds in the upcoming tender offer. This draft document also includes the independent expert report, a Goldman Sachs fairness opinion and the terms and conditions of the tender offer.

And also this week SAP and Business Objects have filed appropriate documents with the antitrust division of the European Commission and US Federal Trade Commission. As previously announced, SAP intends to launch the US and French tender offers once approvals from the AMF and the French Ministry of Economy and other regulatory bodies have been obtained. This tender offer is expected to open in Q4 and close during Q1 under the assumption that SAP at that time will have achieved at least 50.01% of the Business Objects' outstanding voting rights on a fully diluted basis.

With that I will turn the call over to John to provide some additional details on the quarter and on our strategies. Thank you.

John Schwarz - Chief Executive Officer

Thank you Jim. And good morning or good afternoon to all of you joining us on the call today. As Jim... as Jeff shared with you, the third quarter was not what we or for that matter you were expecting. While our maintenance in Global Services business performed very well, deal delays impacted our license sales in all geographies. More specifically we saw weakness in the UK public sector while change in government leadership has delayed spending. And in the financial services sector globally where concerns over the credit markets have deferred or reduced some purchases.

Additionally, internal distractions from integrating two key acquisitions and the takeover speculation have surfaced in September also has some impact on license sales. Despite some of the temporary issues we face during the quarter, our business remains fundamentally strong. We continue to generate double-digit year-over-year growth in all geographies. We added over 1,100 new customers and 20,000 new subscribers to our OnDemand platform. We launched many new innovative products for both enterprise customers and the mid-market customers. We have been rapidly integrating products from Cartesis and Inxight on to the XI platform, and the demand for these solutions is growing in all geographies. And we extended our go-to market reach with partners including new strategic alliances with Intuit and Adobe, and a significantly expanded relationship with IBM, which strengthen both our technology leadership as well as adding to our go-to market effectiveness.

BI remains a top-spending priority for customers. And with new technologies in performance management in search, in unstructured data and OnDemand, we are making our solutions attractive to an ever-widening range of business users and developers. In the third quarter, we pressed on with our innovation and product releases for both the enterprise market and the mid-market for both on premise as well as on demand. In August, we announced the EPM XI suite, which includes a range of solutions for the financial business user. This represents the integration of the Cartesis and ALG acquisitions onto the XI platform, and it's the first solution to offer a complete view of performance from forecast to profitability and cost analysis through the financial close, all from a single integrated suite exploiting a shared data model.

Likewise in September, we integrated two key inside capabilities with the XI platform. The first is Business Objects Text Analysis, which provides an automated way for users to extract, categorize and summarize vast demands of text information in the same manner as they do with their structured data, directly from Crystal Reports, from that [ph] intelligence documents or dashboards.

The second is the Business Objects Intelligent Search, which allows users to search external and internal sources and filter results by comparing the relevance of people, places, events and concepts making it easier to find key documents in search results and turning that data into meaningful business information. Last week at our Inxight User Conference in Orlando, we announced the much-awaited release of Crystal Reports 2008. Crystal Reports 2008 continues the tradition of reporting excellence and innovation, delivering actionable data for any organization with a comprehensive step of new features for the business user, for report designers and for application developers alike.

We also introduced BusinessObjects Polestar, the first solution that brings together the simplicity and speed of search with the reach and trusted analytics of business intelligence. Polestar is a fully integrated powerful new feature for the Business Objects XI platform that allows simple keyword searches to find traditional and unstructured business information from across an entire landscape of enterprise data.

In the mid-market, our momentum remains unmatched. The newly named BusinessObjects Edge Series enables the most complete and functionally rich product offering. The series includes standard edition providing the core BI capability, a professional edition with information integration and data quality components, and finally a premium edition with performance management components, all generally available now.

In the OnDemand category, we hit several major milestones. We announced the availability of information on-demand and online store where companies can instantly access external data from third-party providers by Thomson Financial, Dun & Bradstreet and eBay in pre-built customizable reports and dashboards. They can now marry what is happening in the outside world with the internal data. Additionally with our BI OnDemand offering, we help customers to adopt the full range of our BI solution and access their data warehouses on a hosted infrastructure. This eliminates the needs to worry about migrating to new releases or managing complex IT environments and security. We also benefit from this business model with lower maintenance cost and customers on the most current version of our technology combined with integrated applications from our partners.

Plus in addition to our product innovation, we continue to expand existing partnerships and forge new relationships with other industry leading companies. During the third quarter, we signed a new strategic alliance with Adobe Systems. We jointly developed new technology that will dramatically improve the productivity of information workers. We've agreed to collaborate with Adobe to combine technologies that will transform static application and dashboards into dynamic, intelligent and connected experiences for the business user.

We also signed a new OEM agreement with Intuit to provide QuickBooks' customers of enterprise solutions with access to best of breed BI. As part of the agreement, Intuit QuickBooks online service will leverage Business Objects, visual attractive dashboard tools to give users easy access across stability and sales via the Internet or sales data via the Internet and allowing them to evaluate their business performance in real time.

And finally, just last week we significantly expanded our partnership with IBM to develop and distribute pre-integrated data warehousing and BI solutions. As part of the agreement, IBM will include a starter edition of Business Objects BI solutions with the IBM DB2 and IBM DB2 warehouse. And in addition we at Business Objects will distribute and resell IBM's DB2 warehouse with our Business Objects XI and enterprise performance management solutions. This agreement will deliver significant value and choice to our mutual customers and partners by providing market leading business intelligence on IBM's proven and reliable information infrastructure as well as exploiting IBM's considerable channel reach and customer access.

These agreements as well as our other alliance relationships are expected to remain in force after the completion of the SAP acquisition of Business Objects. As we have demonstrated through our product innovation and alliance partnerships, our strategy has been and remains to be the most broad, the most integrated and open platform in the industry. Our pending transaction with SAP does not alter that commitment. In fact one of the prominent reasons the SAP partnership was so attractive to us is precisely because their vision for next generation of open heterogeneous business user applications mirrors our vision very closely.

SAP's applications for the business user has the next high growth opportunity and recognizes that this market requires an open approach with highly flexible information centric tools and applications residing on the market leading platforms. This is why we will add the SAP performance management portfolio to ours, retain our brand and operate as a separate unit within the SAP group in both the product and the go-to-market functions.

The proposed combination provides many opportunities for synergies. To begin with total BI revenues for the resulting combined entity are expected to be about $2 billion, further extending our leadership in the industry.

We really inherit a number of SAP developed technologies that will enrich our offering such as in memory analytics, workflow management, Master data management and governance, risk and compliance management solutions. Our analytical capabilities will be enriched by SAP's business process and industry sector know-how. Our benchmarking and dashboarding tools will be embedded in SAP's core applications. And SAP services and channels will significantly enhance our scope and capacity.

Since the proposed acquisition by SAP became public, it has been very well received by customers and employees alike. We are confident that the match is a win-win solution for everyone including customers, partners and employees at both companies though perhaps not for a competition.

In closing, while we reported that our third quarter results were impacted by short-term environmental factors, we do not believe these results are indicative of a diminished market interest in BI solutions or in our ability to execute on this opportunity. Importantly, we remain committed to improving our margin performance. The demand for our solution is strong and the market continues to put more emphasis on performance management. User adoption across the enterprise continues to grow and we continue to shape our products to become increasingly relevant to the business user making our solutions transparent from within any application and making BI simpler to use, more relevant, more accurate, and more pervasive.

Finally, the mid-market opportunity is not realizing at the rate that we expected. We have a complete product offering available today and that fact combined with our strong direct and indirect channel and with the SaaS offering, the software-as-a-service offering mean that we're bringing rich yet simple solutions at the right price points to small and medium-sized businesses everywhere. Simply stated, the momentum for information democracy is growing. It is an exciting time to see the innovation and the hard work of our employees and partners validated and soon to be extended by the portfolio, the domain expertise and the presence of SAP.

Thank you for joining us this quarter. And I will now turn the call back to the operator to open up the lines for your questions.

Question and Answer

Operator

[Operator Instructions] Your first question comes from the line of Mohammed Moawalla with Goldman Sachs.

Mohammed Moawalla – Goldman Sachs

Yes good morning. John, can you elaborate a little bit around some of the weakness in the quarter and just indicate whether some of these deals that potentially moved were lost to competition or you're still hopeful about closing them at some point in the future?

John Schwarz - Chief Executive Officer

Yes. Hi Mohammed. Absolutely, we are very much expecting the deals that did not close in Q3 to in fact close in this quarter or the following quarter. So, now these are not losses. We as I commented previously experienced delays and deferrals, and we are very much tracking these deals in an ongoing fashion.

Mohammed Moawalla - Goldman Sachs

Okay. And then secondly, just I don't know you may not be able to comment on this fully, but as you look at obviously your combined portfolio with SAP, can you perhaps talk about where the real big opportunities lie for you, perhaps by the product segments within the portfolio in terms of where you expect to see the most significant potential acceleration? And then perhaps comment around the timing of that, is this likely to be more sort of 12 months out from now once you are sort of integrated or do you see these benefits kicking in fairly immediately once the merger takes place in Q1 next year?

John Schwarz - Chief Executive Officer

Well, there are some benefits that ought to be realized very quickly, Mohammed. First of all, obviously as we align our go-to market strength, we can begin to cover customers more effectively, we can begin to make the SAP customer more comfortable with the... both Business Objects solutions. We can begin to address the cross selling and up selling opportunities as we go to our respective segments in the marketplace. Secondly, in the mid-market, we both have... based on channels combined about 5000 different channel partners. I would expect that the opportunity to bundle some of our mid market and their mid market solutions make the overall solution more comprehensive is a very interesting place to start seeing some upside. I would expect that we can relatively quickly begin to integrate some of our technologies. We've talked about embedding some of our analytic solutions if you will in the SAP applications. We talked about the opportunity to adopt some of the SAP portfolio in our own portfolio to make our performance, management solution more compete, more comprehensive with the arrival of, for instance the GRC solution from SAP. Likewise on the EIM side, SAP has a solution for market... data management, which we very much need in our portfolio. So we will be adopting that component. And so it goes, we always are very early in the planning cycle for how these integrations will takes place. But I would expect that you will see an almost immediate pickup in opportunity, and it will grow overtime as we integrate and deliver more comprehensive offers.

I'd like to very much stress though that nothing we are going to do is going to be for SAP only. We are going to maintain our overall open heterogeneous nature, and we are going to sell the business intelligence suite across the entire marketplace including continue to sell on top of the Oracle platform.

Mohammed Moawalla – Goldman Sachs

Okay. And then maybe just finally, you obviously looked at both organic and [inaudible] growth as an independent entity. Given that within SAP you now function as essentially a separate division, will that... do you expect that strategy to change or do you feel that that combined portfolio you've would be sufficient in terms of at least addressing the significant opportunities ahead of you?

John Schwarz - Chief Executive Officer

Well, I will answer that in two ways. One is to say that the immediate combination [inaudible] some of the things that we would have to go acquire for ourselves. And so we have... if you are instantly adding into our portfolio, those things that would have been the next natural things for us to go by, so that helps. In the longer term, the innovation in the software industry is legend, or it is a legendary part of our business overall. And I would expect that some of the smaller BC funded organizations will continue to crop up that solve issues that customers need to solve and that we will be very much in the markets to acquire those type of organizations in the future.

Mohammed Moawalla – Goldman Sachs

Okay. That's great. Thank you very much.

John Schwarz - Chief Executive Officer

Okay.

Operator

Your next question comes from the line of Elizabeth Buckley with Arete Research.

Elizabeth Buckley – Arete Research

Yes, good morning, good afternoon. Could you give us just a sense of the constant currency growth trends by product line. You mentioned that reported licenses grew in every product line. Could you just give us a bit more detail on the constant currency growth trends that you saw for the different segments for BI, or IDD etcetera?

John Schwarz - Chief Executive Officer

Well, in general we're pretty well balanced between currencies. It is about 4%

across-the-board this year… this quarter on revenue from the conversion to US dollars from our 12 other currencies. So… and that is pretty well evenly split across the currencies because of the revenue from those product lines is relatively evenly split between the US dollars and non-US dollar revenue.

Elizabeth Buckley – Arete Research

I guess I was just trying to get a sense of the relative performance of IDD versus EIM over the quarter as I am trying to understand the shortfall?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

It is probably in the relatively in the mix that the products have traditionally held. Certainly our EIM and EPM products continue to be the fastest growing. As we commented in the call, all three on a reported basis did contribute to positive growth.

Elizabeth Buckley – Arete Research

And on a constant currency basis, which ones were negative?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

We actually didn't get into that level of detail on the call. As you know we have stopped giving the great detail product right now, we could say that IDD was lower of the three in terms of overall growth.

Elizabeth Buckley – Arete Research

Okay. Could you also give us a sense of the license contribution of the Cartesis and Inxight acquisitions over the quarter? Thank you.

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

It was about... the total revenue for the Cartesis plus Inxight was about $21 million, about $5 million of that from license.

Elizabeth Buckley – Arete Research

$5 million from licenses. Okay. All right. Thank you.

Operator

Your next question comes from the line of Frank Sparacino with First Analysis.

Frank Sparacino – First Analysis

Hi guys, just one question on Cartesis. It is fair to say that the Cartesis growth on a year-over-year basis was negative?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

Actually we didn't... obviously they weren't publicly reporting a year earlier, so that is a little bit hard to call. We also under normal purchase accounting would have lost all of the deferred maintenance from this first quarter. So the compare is really not quite fair. I don't actually know how to fairly answer that question.

Frank Sparacino - First Analysis

Okay. And then from a pipeline perspective, Jim...

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

Actually I do want to add one other thing just as a general comment so people are clear on that. Cartesis like many other companies in the financial EPM space has their strongest quarter in their Q2. That has been traditional and in fact their fiscal year end was June 30th year end. Their Q1 traditionally being weaker and that's really a trend in the industry that financial products are often purchased in Q2 that we installed in Q3 could be run for either the annual budgeting cycle or to be fully up functional and tested by quarter one. So they have a normal seasonal pattern of a higher Q2 and a lower Q3 last year as well as this year.

Frank Sparacino - First Analysis

All right.

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

I interrupted, because I wanted to give a full answer on your previous question.

Frank Sparacino - First Analysis

Thank you. And then just one last question for either one of you. I'm curious on the weakness in the financial services vertical on a global basis. I guess it is not a surprise that you would see that here in the US. But I guess a little bit surprised you would see it on a global basis. Just curious what the factors are internationally, is that the same here in the US? Thanks.

John Schwarz - Chief Executive Officer

It seems that the crisis did not stop in the US. The crisis that reverberated around the world starting here obviously with the subprime mortgage process problem. But in terms of the actual shared risk that fell out of that seems that have been fairly well represented in Europe as well as in North America. So, we saw it certainly in Europe and North America. I am not sure we could claim that we saw in Asia as dramatically as we saw it here. And obviously, we are hoping that given the relative return to normal trading if you will in the financial sector that we will see the financial sector comeback in the fourth quarter.

Operator

Okay. Your next question comes from the line of Michael Briest with UBS.

Michael Briest - UBS

Thank you. Good afternoon.

John Schwarz - Chief Executive Officer

Hello Michael.

Michael Briest - UBS

Hi John. Could you talk a little bit about how you see Cartesis [inaudible] together, whether within the weakness within the quarter Cartesis was particularly affected, because I imagine customers or potential customers would have been aware of the overlap there. And then also talking about business warehouse within SAP, that decided to crop up on your list of areas that you would be responsible for. Is that because you definitely want to say [inaudible] data warehouse level?

John Schwarz - Chief Executive Officer

Good questions. I think it's too early to give you a very clear answer. On the first one, we're regularly meeting and sorting these issues out. And so give us another couple of weeks before we can answer with some degree of precision on what will happen to the overlap on our planning side. On the business warehouse side, you're absolutely right. Business warehouse solutions remain part of the SAP portfolio. We'll obviously implement on top of it as we already do today, but not exclusively. We'll be working with other organizations' warehouses and use them as a vehicle for providing data into our business intelligence solutions.

Michael Briest - UBS

And then just one follow-up. In terms of the XI adoption levels, you have been giving that metric for the last few quarters where we are. Can you say where we got to in Q3 and where you think the spending cycle is?

John Schwarz - Chief Executive Officer

Yes, we're approaching 70% of the custom population, having begun the migration or in process into migration to XI, and about half that number are currently done, finished. So we're now at 30%, 35% completion range at this point in time.

Michael Briest - UBS

And I've just one follow-up with Jim really in terms of the Canadian Dollar, which is I believe quite a lot stronger this quarter. Did that have any impact on the bottomline, can you just give us the effect of currency on revenue?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

All right, I did mention currency about 4% impact on revenue, a tad larger than that on expense with both the euro and the dollar strengthening... Canadian dollar strengthening relative to the US dollars, but again being naturally hedged, it was offset to a slight decimal percent affected operating profit line.

Michael Briest - UBS

Okay. Thank you very much.

Operator

Your next question comes from the line of Robert Schwartz with Jefferies.

Robert Schwartz - Jefferies

Yes please. Besides financial services, I'm wondering where else you might have seen some weaknesses as you were back on the last quarter and in particular verticals, was it by a size of company, something that might generalize particularly in Europe?

John Schwarz - Chief Executive Officer

There were no other obvious industry sectors that would have shown a dramatic change in behavior quarter-to-quarter or year-on-year. What was surprising to us was that we've seen about an equivalent amount of weakness if you will in new license sales in all of the regions of the world. Each region performed pretty much on par with respect to other regions of our business. And so it seems to us that this was really a combination of the factors that we've talked about, not just the financial sector issue. The financial sector issue was a contributing factor, but it seems to me that the… particularly the UK Government scenario was a significant confusion factor as well, as the rumors and various distractions floating around the M&A activity, both in our own domain as we work through the Cartesis and Inxight integration as well as publicly with respect to the questions the customers were asking after the rumors began to float in September.

Robert Schwartz - Jefferies

Switching gears, I'm curious about your observations about the OnDemand opportunity for BI, for Business Objects. Maybe you can give us some metrics if you can share them about adoption of OnDemand solutions, where you're seeing strength, does it extend beyond the SMB market into the enterprise, and how fast do you think that can grow for you?

John Schwarz - Chief Executive Officer

Yes, great questions. So first of all from an overall market perspective, the adoption and the acceptance of software-as-a-service as a viable secular trusted option has clearly reached a level of some maturity in customers of all sizes and shapes certainly in Europe and North America and for that matter in Japan, have concluded that SaaS is a viable alternative and have begun to adopt that way. Today, it is still primarily a lower end of the marketplace phenomenon, mid-market, maybe even high end of the mid-market, but secondary markets. We see relatively few large corporations moving in that direction, but nevertheless there are some, and again Japan will be an interesting market where the large companies seem to have concluded that this is not a bad way for them to move. I would expect that again using IDC's forecast or for that matter Gartner’s forecast that the SaaS market will become 30% or 40% of the mid-market opportunity, and it will have some significant penetration in the enterprise as well, though hard to call what that one would look like. The value of it from our perspective is that we are able to get customers on board the most current version of technology without expecting them to migrate without having to worry about multiple versions of the technology, shifting around multiple different on-premise implementations. So, there are great benefits to us as a company in terms of cost of managing technology. And that is obviously benefit to the customers in that they can pay as they can go, they can sign up users one at a time, they can implement instantly without having to convert or migrate or do work in their own rights. So it is a powerful new vehicle and it has both cost as well as usability advantages, and I would expect it to continue to grow rapidly.

Robert Schwartz - Jefferies

Just as a follow-up. When you see an OnDemand customer or an opportunity, is it pretty clear that it is OnDemand. Are you seeing customers that are weighing both on-premise and OnDemand checking up the economics, or do they come to you and say we're looking for a SaaS solution?

John Schwarz - Chief Executive Officer

In the mid-market, it is pretty clear when customers come that they want an OnDemand solution, because they typically do not have the infrastructure to run something as complex as BI in-house. In the enterprise, it tends to be an economic discussion. They have the infrastructure in-house, but they are weighing the pros and cons, the expense, the capital dollars versus expense dollars, the lead time to implementation. And so it is much more of an economics dialogue that ultimately is an ROI decision.

Robert Schwartz - Jefferies

Thank you very much. Good luck to you and your team on the merger.

John Schwarz - Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of [inaudible] with Merrill Lynch.

Unidentified Analyst

Hi, hello. Can you maybe talk about your growth prospects as part of the SAP family? If I look at the growth opportunity, you talked a lot about the growth opportunities in BI and how that market has under-penetrated, but it seems to be growing the license at a slower rate in SAP. Can you maybe talk about the benefits you see from just more than cost selling as part of the SAP? I am just specifically thinking about the pushback you might have experienced from large accounts from the Oracle and SAP account manager, since the competition you see emerging from Microsoft coming from a low end. Thanks.

John Schwarz - Chief Executive Officer

Okay. Well, where to start? If you look at the opportunity that exists with the SAP customers set, about 40% of our customers are also SAP customers. And we have had historically until about three years ago very strong relationship with SAP, where they actually remarketed some of our solutions. That atrophied let us say two years ago, and so we are able to go back to that customer set now with SAP's help, did not have that help for the last couple of years. That will have an instant impact in terms of opportunity to increment our sales to the SAP customers, customer set. Conversely there are a number of SAP customers that are not BOBJ customers and we expect that SAP is going to help us reach that customer set, and so we will be relying on their sales force to bring us into those opportunities. Then there is the opportunity to displace BI Solutions from other vendors inside the SAP accounts. We will obviously work on that much to the disagreement of our competition I'm sure. And then there is a set of new opportunities that we will go to work on. The new opportunity of the combined EPM suite where you will integrate our Cartesis, our ALG offerings with the consolidation planning offerings from SAP with the governance risk management and compliance from SAP, with some of the workflow management from SAP. We'll be taking our dashboard scorecards in embedding those in the SAP application suite, so you can have real-time operational BI within the application set that they provide. And then there is of course the mid-market as I commented earlier. We both bring between 2,500 and 3,000 vendors who are working with us already through the channel, team. These vendors are very keen on cross-pollinating their opportunity with the products from the other organizations. So, bundling the BI design solution from SAP, bundling the mid-market SAP platform and bundling our OnDemand and on-premises offerings with the Edge Series I think is a tremendous opportunity in the mid-markets to accelerate revenue opportunity there. So, across the board, there is a series of steps, some very tactical, early, some strategic steps that will be taken. But we believe it will have a significant upside impact on both of our businesses.

Unidentified Analyst

Okay. Will that have an impact as well on the trends of the BI standardization, because I could imagine that the SAP sales trends were probably slightly higher in your organization in terms of the approach points compared to your Business Objects and sales trends?

John Schwarz - Chief Executive Officer

It may happen and we would expect that will be one of the marketing slush that we will push on.

Unidentified Analyst

Okay. Perfect, thanks. Good luck guys.

John Schwarz - Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Keith Weiss with Morgan Stanley.

Keith Weiss – Morgan Stanley

Thank you for taking my question guys. I was wondering if you can talk a little bit to the split between direct and indirect revenues from looking at this directly, indirect revenue contribution to license was down from 48% last year to 46% this year, which seems to me to indicate that indirect revenues actually under performed direct revenues as far as year-over-year growth. How did... can you talk a little bit about the license in this in terms of how indirect contributed to that and versus the direct contributions within this?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

Sure, I think the first thing is recognizing that in indirect, we include also systems integrator. And so that could mean large enterprise deals also included in that indirect. So, it's not necessarily about small, medium and enterprise. It is about did our sales force close the transaction or did a partner, whether that's OEM or systems integrator. In fact that… roughly 50-50 mix has been quite constant overtime and changes quarter-to-quarter can be as little as a couple of transactions. So, I would not call that a significant difference.

Keith Weiss - Morgan Stanley

Okay, can you talk a little bit about maybe on the contribution to the mix from mid-market versus enterprises [inaudible] enterprise factor?

John Schwarz - Chief Executive Officer

I would say that's a good characterization. Yes, the mix was largely in 20 or 30 transactions at the high end of the marketplace.

Keith Weiss - Morgan Stanley

Okay. And then in terms of product, you talked about the distraction from integrating to acquisitions, Cartesis and Inxight in the quarter. Is there any relationship between that comment and perhaps any product focus, where some of the deal focus might have been, was the focus in any particular product segment or is that really across the board?

John Schwarz - Chief Executive Officer

It's been across the board, but I think your question does have merit in the sense that we have seen some customers asking questions about the overlap between our SRC planning tools and the Cartesis planning tools. And that has contributed to a couple of deferrals and in fact one loss. So, that confusion generated if you will from the overlap was a contributing factor, no question about that.

Keith Weiss - Morgan Stanley

Thanks John. Thank you very much, guys.

John Schwarz - Chief Executive Officer

Okay. Thanks.

Operator

Your next question comes from the line of Tom Roderick of Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

Hi, good morning. Thank you guys. John, you talked a little bit about the IBM deal and the announcement of the expanded strategic partnership there. Can you go into a little bit more detail and give us a sense for, is that a relationship that is effectively displacing what IBM was currently using on the DB and DB2 and DB2 warehouse side? And when you look at when that decision was made relative to the SAP announcement, can you just give us a sense of security that will continue as a partnership going forward now that you have aligned yourself with SAP?

John Schwarz - Chief Executive Officer

Let me answer the second part of the question first, which is absolutely… if you look at the chronology, the IBM announcement was made after the SAP announcement. So, IBM always knew that the SAP transaction was in the offing, and they still decided to proceed with the conclusion of the alliance agreement. We had been obviously working with IBM on that alliance agreement for a long time, much predating the discussion with SAP. And it had not made any difference to... the SAP discussion has not made any difference to IBM's desire to proceed. Now will our new enhanced or increased alliance around the DB2 warehouse platform somehow displace what IBM was doing with other partners in this regard? I would expect not. IBM like us operates on a very open basis, and none of these arrangements are exclusive. They are perfectly free to work with anybody who can help them deliver a stronger performance on the DB2 side as we're on the BI side. So, it is a combination, which is designed to enhance our respective reach to market, enhance our customer’s ability to adopt technologies in a more integrated fashion, but it's not exclusive.

Tom Roderick – Thomas Weisel Partners

Okay, great. Turning our attention here back to Cartesis. When you made the acquisition of Cartesis, I think they were called as being… described as a fairly services intentive type of sale. Can you describe how that services division has evolved with respect to internal staffing of professional service head versus the ability and willingness to pass some of those services... some of that services work along to your systems integrated partners? Thanks.

John Schwarz - Chief Executive Officer

Yes, we're making great progress in that regard and Cartesis actually was quite helpful. Cartesis in this context… Cartesis brought onboard I believe about 200 very highly skilled financial experts that help customers to design the right financial reporting, right financial consolidation approaches. And in that respect, we are now a trusted adviser to the CFO. That skill set does not exist in too many other places, and so it is helpful to our XI partners to have that knowledge that we've these highly skilled experts onboard. And we can extend that capability with these folks in joint services deployments. In general terms, we've made good progress in smoothing out and streamlining the relationships with our XI partners as well, where today our services team, our sales team are very much incented to bring partners on broad, very much incented to in fact where the partner would like to lead. Allow the partners to take the lead in the accounts or for us to take the lead if that is okay. So, we've now become much more able to smoothly and in great partnership way, deliver our combined services. And I think we're over whatever issues that may have been a year ago in this regard.

Tom Roderick – Thomas Weisel Partners

Great. Thanks John. Best of luck with the merger.

Operator

Your next question comes from the line of James Clark with Credit Suisse.

James Clark – Credit Suisse

Hi, good morning gentlemen. I have a couple of questions for you. The first relates to the [inaudible] product. I remember you were going to withdraw normal support for that product at the end of this year. How are you dealing with customers given the transition arrangements with the SAP deal?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

You mean specifically just version 5 of the...

James Clark - Credit Suisse

Specifically the legacy product that is due to come off before… otherwise we would have seen customers being forced to migrate. Are you going to change those arrangements given the SAP?

John Schwarz - Chief Executive Officer

No, there is no reason for us to change that. In fact if anything, I would hope it will help us accelerate customers to move over to the XI platform, those that have not yet moved.

James Clark - Credit Suisse

And you highlighted that a couple of years ago, the SAP relationship occupied for a little while. Could you remind us of some of the reasons why that happened?

John Schwarz - Chief Executive Officer

Sure. SAP used to resell the Crystal Reports solution, it was an OEM relationship. That OEM relationship ended in September of '06 I believe and it was sort of a on a slowing down trajectory even before that. So, it has been I would say good two years since we have had what I would call a significant go-to market assistance from SAP. So, that is all to reverse now that we have this new relationship going on.

James Clark - Credit Suisse

Okay. And when do you think you can go to customers with a definitive and [inaudible] and mindful of the comments you made about the impact from customer decision making earlier from the SAP Cartesis over that. When do you think you can get out to your customers and say this is what we are definitively going to market with?

John Schwarz - Chief Executive Officer

We are legally not able to make commitments to customers as a joint operation until the deal is closed. So, we cannot really make completely, if you will... can't make commitments if you will until sometime in the first quarter. We can provide statements of direction. We have already done so in the initial letters we have sent to our customers for both SAP and from ourselves, and we will be continuing to do that with incrementally more accurate or more complete statements of direction between now and the end of the year. But again keep in mind that we are legally constrained on what we can say or what we can promise as a combined operation.

James Clark - Credit Suisse

Okay. And one I suspect for Jim here. Could you give us the staff attrition metric for Q3 and perhaps for that in the context of Q2 in the prior year period?

Jim Tolonen - Chief Financial Officer and Senior Vice President, Finance and Administration

I am sorry which metric?

James Clark - Credit Suisse

Staff attrition.

John Schwarz - Chief Executive Officer

We are actually seeing lower attrition now than we did a year ago, and than we did even earlier this year, and this is true for both sales as well as other parts of our business. Substantially lower attrition in fact.

James Clark - Credit Suisse

My closing question. [inaudible] how many of those have you closed in?

John Schwarz - Chief Executive Officer

A handful.

James Clark - Credit Suisse

Thanks.

Operator

Your last question comes from the line of Sasa Zorovic with Goldman Sachs.

Sasa Zorovic – Goldman Sachs

Yes. So, my question would be regarding sort of this slowing in the quarter that we have seen. And what would you say… what percentage of... could you qualify somehow what percentage has left or you consider that it left or maybe has just closed as you mentioned in answering this last question. And what percentages went away to the competition or whatever, could you qualify that for us?

John Schwarz - Chief Executive Officer

Of the 40 top deals that we tracked, these are deals that are kind of six or seven digit, mostly seven digit numbers. We lost two, the rest are either closed or deferred.

Sasa Zorovic - Goldman Sachs

And then my final question then would be as follows. Namely, on one hand… can you reconcile the following for me? On one hand, you are sort of seeing that sort of specific weaknesses that you have seen in sort of financial services. But that has been on the other hand somewhat global and then you did mention sort of the UK Government. But then sort of this weakness has been somewhat verily broad, very global. I mean how is that just a specific weakness and it is not an overall trend?

John Schwarz - Chief Executive Officer

We don't believe it is a trend in the marketplace. It was a weakness in our own execution. And as I said I think that execution was primarily caused by the distraction we caused ourselves with the acquisitions that we have been pursuing as well as with the rumors about us being acquired, but ending up to be maybe a rumor.

Sasa Zorovic - Goldman Sachs

Thank you very much.

Operator

We have reached the allotted time for question and answer. Are there any closing remarks?

John Schwarz - Chief Executive Officer

No. Thank you operator. I think we have finished. Let me thank everybody for joining us on the conference call today, and we will be obviously open to take whatever follow-on questions you may lock directly to us as always. Thank you all and have a great day.

Operator

This concludes today's conference call. You may now disconnect.


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