Open Text Corporation (OTEX) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Open Text Corporation Second Quarter Fiscal Year 2012 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, February 1, 2012. And I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead.

Thank you, and good afternoon. I'd like to take this opportunity to welcome OpenText's President and CEO, Mark Barrenechea. Also with me today is OpenText's CFO, Paul McFeeters. As with our previous calls, we'll read our prepared remarks followed by a question-and-answer session. The call will last approximately one hour with a replay available shortly thereafter. I would also like to direct investors to the Investor Relations section of our website where we have posted an updated PowerPoint. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward-looking information -- statements made today. Certain material factors or assumptions were applied in drawing any such conclusion or while making any such forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing the conclusion or making the forecast or projection as reflected in the forward-looking information, as well as risk factors that may affect the future performance and results of OpenText are contained in OpenText's Form 10-K and Form 10-Qs, as well as in our press release that was issued earlier today, each of which may be found on our website. We undertake no obligation to update these forward-looking statements unless required by law. In addition, our conference call will include a discussion of certain non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release, which may be found on our website. And with that, I'll hand the call over to Paul McFeeters.

Thank you, Greg. Turning to the financial results, I will highlight our second quarter fiscal 2012. Total revenue for the quarter was $321 million, up 20% compared to $267 million for the same period last year. License revenue for the quarter was $90 million, up 13% compared to $79 million reported for the same period last year. Maintenance revenue for the quarter was $165 million, up 21% compared to $137 million in the previous year. Services and other revenue in the quarter was $66 million, up 29% compared to $50 million in the same period last year. Gross margin for the quarter, before amortization of acquired technology remained relatively consistent this quarter at 73.8% compared to 74.7% in the same period last year. The decrease is primarily related to the initial write-down of maintenance revenue of $1.7 million, due to the acquisitions of the Metastorm and Global 360. Pretax adjusted operating margin before interest expense and stock compensation was approximately $99 million this quarter compared $84 million in Q2 last year. Adjusted net income increased 15% to $82 million this quarter from $71 million in the same quarter last year. Adjusted EPS was $1.39 on a diluted basis, up 14% from a $1.22 per share for the same period a year ago. The sequential effect of foreign currency movement on adjusted EPS for Q2 was a negative $0.03. The adjusted tax rate in the quarter is 14%, the same as it was the last fiscal year. Net income for the second quarter in accordance with GAAP was $47 million or $0.81 per share on a diluted basis compared to $37 million or $0.64 per share on a diluted basis for the same period a year ago. There were approximately 58.7 million shares outstanding on a fully diluted basis for the second quarter. Operating cash flow was approximately $45 million compared to $40 million in the same quarter last year. On a year-to-date basis, operating cash flow was $90 million compared to $89 million in the same period last year. Cash flow year-to-date has been impacted by 2 days of additional DSO, reflected in the timing difference of approximately $12 million and changes in working capital of $8 million. On the balance sheet at December 31, 2011, deferred revenue was $237 million compared to $266 million as of June 30, 2011. And accounts receivable was $157 million compared to $155 million at the end of last fiscal year. Day sales outstanding were 47 days as of December 31, 2011 compared to 49 days at June 30, 2011 and 44 days at the end of Q2 of fiscal 2011. During the quarter, we closed our financing by way of a term loan A of $600 million and an available operating line of $100 million. Our pricing on the term loan A is LIBOR plus 250, with no floor in LIBOR. If our debt-to-EBITDA ratio reaches 1.5:1, our rate drives to LIBOR plus 2.25%. Our current ratio is 1.8. Our net addition to cash was $314 million, after repaying the previous term loan B in the amount of $285 million and our revolver in the amount of $49 million. There is no change in our pretax adjusted operating model for this quarter, and we expect our annual operating net margin model to continue to be in the range of 25% to 30%. Our recent acquisitions continue to have an impact in the overall operating margins in FY '12 as we continue to bring them up to OpenText operating model. We anticipate that this will improve for the year, but will not be fully on target until fiscal '13. The full details of our operating model are available on our website. Now I'll turn the call over to Mark.

Thank you, Paul, and welcome everyone to our FY '12 Q2 earnings call. Let me start with saying I am thrilled to join OpenText as CEO and be located out of Waterloo, Ontario. I come to OpenText with 20 years of leadership experience in the high-tech industry, primarily in enterprise software. These 20 years include: being President and Chief Executive Officer at Silicon Graphics; Executive Vice President and Chief Technology Officer at Computer Associates; as well as Senior Vice President of Applications, Development and a member of executive management team at Oracle. These previous leadership experiences place me in a unique position to bring OpenText to the next level of success. I'd like to spend the time today on 2 things, an overview of our strong Q2 results, as well my initial observations on OpenText, including our strategic opportunity and my initial set of priorities. Let me start with the quarter. Q2 revenue was $321.5 million, with license revenue of $89.7 million and an adjusted earnings of $1.39. All 3 results were record highs for OpenText. I'm very pleased with the quality of Q2 revenue. License revenue grew 37.8% quarter-over-quarter and 13.3% year-over-year. Further, nearly 50% of our license revenue was sourced from new customers. The Americas contributed 53% of total revenue, EMEA performed well in a tough economic environment with a 40% contribution and APJ, albeit on a smaller base, had strong growth while contributing 7% of total revenues. The maintenance business was strong and our professional services margins have improved for 3 quarters in a row. There were 7 transactions over $1 million and 22 additional deals over $500,000. The integration of Metastorm and Global 360 is proceeding as planned, and we expect to see revenues this fiscal year more in line with our historical acquisition model, which is a 15% revenue decline in the first year of combined operations. Overall, our business performed well despite continuing economic uncertainty in many parts of the world. Also within the quarter, we held our first Annual User Conference -- we held our Annual User Conference, Content World, in Orlando, Florida. It was another successful event for us with over 1,400 attendees. We also made several important product announcements during the quarter with the underlying theme of access to information. Let me spend a moment and walk you through these. First, Tempo. Tempo client server edition is a new module integrated into our core ECM Suite. It is a no training required that's easy to use, secure document sharing product that allows enterprise users to share and manage content on smartphones, tablets, PCs or laptops while synchronizing information across these devices. It has the attributes of the cloud, but inside the firewall. Tempo goes DA [ph] this quarter. We will also release OpenText Portal Site Management so users can gain access to SAP ERP content through one piece of software. We also released OpenText Auto-Classification for unstructured data, giving organizations a powerful way to manage their retention and disposition of high-volume, low-touch content such as social media, e-mail, office documents and legacy content. We took our business process management software mobile, allowing organizations to initiate, approve and participate in BPM processes from any device. We also announced major enhancements to version 2 of OpenText Web and Social Analytics, which allows for deep real-time Web usage and social interaction insights so customers can identify actionable trends and optimize their online initiatives. It was a good product quarter, but an even better customer quarter. Hydro One in Canada is simplifying their customer care and field service processes with our ECM software. Peabody Energy in the U.S. has extended their core ECM usage into Email Management. Salzgitter AG, a leading European steel and technology company, has extended their ECM usage with our SAP Vendor Invoice Management software. Taco Bell's Web presence is now powered by our Web Experience Management software and hosted at OpenText. Tenet Healthcare Corporation, one of the largest investor-owned healthcare delivery systems in the United States purchased the OpenText ECM Suite as a resource to enhance their document and records management functionality and efficiency. Volkswagen Finance in China is deploying our ECM Suite for dealer contract management. I wanted to spend time on customers from the quarter because these examples illustrate our strategic opportunity and ultimately why I joined OpenText. There are 4 reasons that convinced me OpenText will lead the market. Number one, ECM is far from mature. OpenText is best positioned to continue to gain share over EMC and Documentum and IBM and FileNet. We view Microsoft as a partner today as we build products on top of SharePoint, and Web Experience Management is essential as we orchestrate content together both inside and outside the firewall. Core ECM is clearly important to us, and the market is far from mature. Number two reason, process enabling core ECM. We call this BPM and as you know, we have made 2 strategic acquisitions in this space. Three, delivering packaged applications that are content-centric, not transaction-centric. There are many enterprise applications that will benefit from a content-centric orientation such as invoice management, expense management, claims processing, contract management, loan processing, field service, search and many more. The style of these applications require a foundation of ECM and BPM. Longer-term, as categories evolve, the market will include ECM, BPM and BI. OpenText is uniquely positioned to not only capture these opportunities, but also create them. We have 4,600 employees focused on ECM and BPM, proven products, global operations and scale in 31 countries. Many markets we have either lightly penetrated or not touching at all, strong financials and a stellar customer base to build upon. And perhaps most importantly, OpenText employees are the experts in content management. What I see inside that perhaps you can't see outside is the amazing passion and talent at OpenText. Further, we have strong partnerships with core application providers and unique technology that open these platforms for content, processes and applications. Our relationship with SAP is strong, our relationship with Microsoft continues to emerge, and our relationship with Oracle is an untapped opportunity. Let me transition to our FY '12 financial model, go-forward operations and an initial view of my priorities. As for the FY '12 financial model, I feel confident in our previously announced pretax adjusted operating margin target. As for operations, my priorities are pretty straightforward, grow the business, improve our efficiency and continue with strong earnings. As for growing the business, we need a multipath execution strategy with a strong emphasis on license growth. This means an optimized, direct, go-to-market sales force companioned with a world-class channel, increased emphasis on large technology partners that expands our distribution capabilities, selectively filling territory coverage, a stronger presence in key markets and verticals such as U.S. federal, U.S. commercial, Japan, the BRIC, as well as manufacturing. I also see opportunity where we can add more value to customers in our maintenance offering. We will continue to acquire. Let me just spend a little more time on the channel. OpenText is well positioned to have a larger and more robust channel and partner program. First, through Tier 1 ERP providers; second, through significant Tier 2 application providers; and third, a larger SI and FSI network. As for improving our efficiency, best-in-class businesses get more efficient year-over-year. 30 days into OpenText, I can already see a path to releasing unlocked value in some of our processes and approaches to running the business. As we unlock that value, we unlock dollars that can be reinvested back into the business. Strong earnings and cash flow remain a priority. In summary, we are in the right double-digit market: ECM, BPM, archiving, fax, text analytics, et cetera. Our target model for R&D expense is between 14% and 16% of total revenues. We are in the right markets with the right spend. But there is a disconnect between market growth rates, our spend and our growth. To me, that is the opportunity. And the basic solve is an optimized selling model and separating growth products for sustaining margin products so as a company, we have more focus while maintaining operating margin. For all these reasons, the future has never looked better for OpenText. Before I open the call for questions, I want to recognize the incredible contribution from John Shackleton and his many years of service here at OpenText. We all wish him the best in his future endeavors. With that, I'd like to open the call for your questions.

[Operator Instructions] We have a question from the line of Richard Tse with Cormark Securities.

A couple of quick questions here. Mark, how would you say your style at the outset differs from John's in light of the priorities that you're focusing on?

Well again, I would kick style aside for a moment. And I think we'll just talk about the opportunity and the priorities and we can come back to style. I’d just like to reinforce the opportunities that I see here in the first 30 days. Number one, continue to be core ECM share gains. It's going to be a unifying narrative for us. We're competing very effectively against IBM and EMC, and you're going to see us dial up in this market for core ECM market share gains. Second, the BPM market. Again third, if I look at what we're doing with SAP and Microsoft, we're probably under 10% penetrated in their install bases. So we're just in the first inning of a 9-inning game of continuing to build an ecosystem around the core ERP providers. And I look at our distribution capability, there's an opportunity in key verticals. If you look at the public sector, that should be the top 3 verticals of what we do. Manufacturing isn't highlighted as a key vertical at all. And then when you kind drive down at Japan, U.S. commercial and federal, these are opportunities for us that we're just not connecting at scale, our product to the customers. So that's the opportunity that in my first 30 days seems to be pretty clear. In terms of priorities, I think I can state this pretty simply, it's earnings and license growth. And that quickly deconstructs into delivering a solid FY '12, balancing organic growth with acquired growth while continuing to be margin focused. That might be a stronger emphasis on that balance, first leading with acquisition. And probably a stronger orientation towards strategic operation, which is going to hopefully translate to improved efficiency. And certainly, our out-of-the-gate hope is that we can unlock some value and free up dollars, so we can reinvest in the business without affecting our margin profile.

And is your bonus structure similar to the one that John had as outlined in your circulars?

I think my comp plan's filed already, on file. So you can take a read of that.

Okay. And then, this is sort of a loaded question here, but I know you've walked down through your priorities but if you had to change like a single thing right now in terms of what you've seen in the past 30 days, what would that be?

I would say a stronger emphasis on the core ECM market. Again, we're competing very effectively against EMC and IBM. We released an investor deck today. And I hope folks had a chance to see it. If not, please go to our website. We added a slide in there that sort of shows the overall trend of IBM and EMC and us. We're on uptick, they're on a downtick. So if there's one thing, I'd say increasing the narrative around gaining share in the core market, because it's far from mature.

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

Congratulations, Mark. But I did want to -- because I'm pretty familiar with your background and you mentioned Oracle is a currently promising but as yet untapped opportunity. Given your history with Oracle, can you talk a little bit about how you think you might be able to leverage those past relationships and that past history to Oracle into a tapped opportunity in a revenue-producing partner?

Sure. Great question, Brian. Well I would, first of all, the relationships are there. I've spoken to the leadership team at Oracle already, and the door is open for us. And if I make a contrast to the SAP relationship because I think it will open up or maybe look -- make a little clearer the opportunities with Oracle is one of the reasons our SAP relationship is very strong is that it first starts with our product, right? Our products are well integrated and differentiated from travel expense management, Vendor Invoice Management. We add clear value to customers. And third, we are very well aligned in our field organizations, from senior leadership down to individual AEs, account executives, throughout the world. So compelling product, clear alignment, education down to the AE level. When I look at the Oracle opportunity, we still have a little work to do on our product to have that bright line value and differentiation. The door is open for us to build that strategic alliance to help Oracle customers. But it's sort of a tale of 2 different stories. One is a more mature product versus a less mature product, but Oracle is certainly very interested in working with us.

And our next question comes from the line of Kris Thompson from National Bank Financial.

I just want to chat a little bit about the December quarter, a lot of people were a bit paranoid about lower than normal budget flush. It looks like you guys have managed to escape that. I mean, how did you guys escape that crisis? And in your recent discussions with the customers, do you think spending is going to be slow a little bit in half 1? And maybe you can just give us an idea of the spend into half 1 and half 2 of the calendar year, if you don't mind?

Sure. I wasn't obviously here through Q2, but I can give you a sense of what I'm seeing my first 30 days in. The first is why customers are considering us, and I can already see a very strong clustering of reasons. One, compliance and regulation, the need to manage bigger and unstructured data. Information security remains top of mind. Mobility cloud and reducing cost by globalizing and standardizing on best practices. So in my first 30 days with the sales force and customers, you can already see a very strong buying consideration with OpenText solutions. And I think that carries very well to uncertain economic times. Now in a tougher economy, look, we're going to control what we can control. And what we control is where we replace our team, what verticals we go after, what opportunities we try to develop, spending more time and insight in pipeline. I don't see any change in economic environment quarter-over-quarter. But I'd tell you that the clustering of why folks are considering OpenText seem pretty compelling both in an up or a down economy.

Okay, that's helpful. And you did mention the Tempo solution in your prepared remarks. Can you just give us an idea of the pricing model for that solution, and the client interest so far? And maybe if you could provide some materiality to your revenue profile going forward so we can get our heads around if that's really going to be a big driver this year or is it a few years away still?

Sure. So in terms of the approach to pricing, we are -- Tempo is an additional charged-for module on top of ECM. So it's not part of ECM hula or bundle. You have to -- the initial version of Tempo is an additional module on top of an already deployed and paid-for license, so it's additional revenue. We don't give guidance for the year. Paul may want to comment on the go-forward-looking revenue. But right now, there are no revenue projections for it nor change to our model for the year.

Okay, fair enough. And then just one more for me, actually, Paul, just on the CapEx, it looked a little bit hotter than I was expecting in the quarter. Did you have some more CapEx in the Waterloo for your new building there? Are you done, and what's the normal maintenance level of CapEx going forward on a quarterly basis?

Yes, Kris, we have a final CapEx for the Waterloo building that was in this quarter about $4 million. So if you back that out, that will be our normal run. We CapEx in about the mid-20s as our ongoing operating CapEx. So this year, we picked up that additional $4 million as I said. That should be pretty well it for Waterloo now going forward.

And our next question comes from the line of Scott Penner from TD Newcrest.

Just first of all, Paul, on the charge this quarter is a little less than I was expecting. I was expecting more around the $15 million mark. Maybe you could just talk us through whether there's still to come and what the cash outflow was for this quarter?

You mean around special charges?

Yes.

That was $5 million. The cash outflow was $4 million, $1.4 million for the quarter. I would say for the balance of the year, approximately $7 million and most of that will show up as a charge in Q3. But the cash for the balance of the year will be something less than that because a lot of that $7 million now is for facilities, which flows out over time. So cash for the balance of the year probably about $4 million and then the balance of about $6 million at the end of the fiscal year.

All right. Mark, if I could just ask, you made just a comment on the integration of the BPM assets, and I just want to be clear on what you said. I think you said a 15% revenue decline in the first year from -- of operations. I think the guys were only saying about 10% decline on the license revenue. So I just wanted to clear that up.

Yes, 15% license revenue reduction.

License revenue, okay. And, Paul, do you have the revenue and I guess the earnings contribution from Global 360?

The revenue is $20 million. We're about minus -- from a GAAP standpoint, we lost about $2 million. But from an adjusted standpoint, it was accretive about $0.06.

Okay. And then just, I guess lastly for me, Mark, just on the integration of those, the BPM businesses, there was a time line laid out where first there was the integration of the 2, Global 360 and Metastorm separate from the mothership and then it would be integrated and cross selling would come from that. I just -- I wanted to just kind of set an expectation on when we should assume that were going to start to see some really significant cross-selling opportunities come in and really contribute to the revenue side?

My expectation would be we'd kick off FY '13 with the worldwide sales force better trained, better equipped, building pipeline and starting to see some wins. So I'd like to see the junction of FY '13 with BPM fully integrated.

Okay, that's helpful. Just lastly, the margin on the professional services was quite a bit higher than it was last quarter and quite a bit higher than I think most people were expecting. You said last quarter that I guess the company was feeling a little pinched on professional services capacity. I just want to know if you could update us on how you're feeling about that and whether the margins are likely to come back down to the 20% level?

I think our longer-term projection is in that range. We certainly obviously showed good margins. We had full utilization and as you know in the past, Scott, we had provided services at below optimum rates for certain acquisition situations, so we didn't really have any of that experience this quarter. From a capacity standpoint, as you can see, yes, we would continue to look to hire in that area, which is of course good news. But I think sustainable margins are more in that 20% range that we've discussed in the past.

And our next question comes from the line of Mike Abramsky with RBC Capital Markets.

Mark, maybe -- welcome to hear your comments on why you joined and how you looked at the company and those are very positive. I'm just wondering based on your experience and knowledge of not only the software companies you've worked with but other's, and also what you see also going forward with the kind of global environment, where do you think -- or do you have any thoughts that you're formulating on where OpenText maybe needs to shored up to reduce risk to the business model and maybe bring its model more to maximize the opportunities ahead of it?

Well, Mike, I'll start the first why on why I joined. Look, this is a very good company going to great. And I try to find that one-liner and the best one-liner I have is a Snapple ad in the U.S. which is the best stuff on earth just gets better. I view this as a very good company. And the opportunity to bring the business to the next big milestone of $1 billion to $2 billion while having strong -- amazingly strong earnings felt like a real good match with my skill sets and the market opportunity. So I'm thrilled to be here, and those are some of the basic -- basic reasons I joined. In terms of the opportunity, my initial thoughts here remain, and I don't mean to be repetitive, but when you look at the core market, the core ECM market, it's far from mature. I know it's an existing market, but there will be a leader that emerges with clear market share ownership. The leader in the market gets a lion share of the profits. We're best positioned to go capture that market opportunity. Second is content, have to be process-enabled. And bringing on 2 strong assets like Metastorm and Global 360 to have that second pillar of our go-to-market with BPM is pretty appealing. And then third is, if you look at what Oracle and SAP have achieved in the scale of their companies, it's all around transactional-based applications. But there's a view that as applications get more mobile, more social on newer type of devices, can there be a class of applications that emerge that are more content-centric from case management to loan processing to things such as field service. And that looks like a real opportunity to me outside looking in, and as well as now inside looking out. So those are some of the reasons I joined and some of the things that make me pretty excited about the opportunity.

Okay, that's helpful. And OpenText is traditionally traded at a discount to peers. I think it may be fair to say partially because of some lack of visibility to organic growth, given the acquisition-centric model, as well as other decisions taken such as lack of guidance. And I'm just -- I'm not asking because I'm sure you're unprepared at this point to state whether you're going to change policy or not, but I just wondered if you felt that with your focus on organic growth that you think some of the -- some of those issues that have led to those decisions may become more easier or different than the future?

Fair enough, Mike. Well as you know, we're not providing guidance, but we do provide a target model today. And Paul and I have -- we're not going to do the metrics or sort of key disclosure around elements for FY '12. But as we get into FY '13, Paul and I will evaluate if there are other ways we want to describe the business going forward. But for FY '12 this quarter through the end of the fiscal year, we're not going to change any of the metrics we set out on.

Okay. And then lastly, do you think we should set up for any expectations for either investments or impacts to growth in margins that could be transitional really to your coming onboard with some of the some plans that you've seen either short term or longer term?

Well, I'd amplify 2 statements I've made, right, as we look for strategic operations, I can already see opportunity to start to unlock some value and free up dollars. And those freed up dollars, I'm going to look to reinvest, right, so they're neutral to the model. And we're going to continue to have a strong emphasis on our operating margin targets regardless of the strategy we do now.

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

And the first question sort of follows on what we've just been discussing. Going back over the call here so far, you talked a lot about unifying the narrative, dialing up the emphasis in core ECM. The question would be what do you need to do there. You talked a little on, I would read from prior statement that the investment levels aren't going up, maybe they shift around a bit. And what also is sort of the timing? When do you think you'd be in place that you'd be ready to run your new playbook?

Well it's going to be, for the most part, pretty steady as you go in FY '12. We have 5 months left FY '12, right? We're here in early February. So I've been onboard for 30 days. I'm going to continue to listen, assess, gain perspective. We're going to take in an evolutionary approach here through FY '12, and I look towards our FY '13 plans of where we may dial certain things up or dial things down. So I want to send sort of a clear message that it's steady as ago in FY '12. I want to make sure here in the early days I don't lose the opportunity to talk to as many employees, as many customers, as many analysts, as many investors as I can to keep forming the opinion on our priority. These are my initial views. So steady as you ago in FY '12, some evolutionary change will happen in FY '12. I look towards FY '13 where we dial certain things up and certain things down.

Okay. So I guess just to tag onto that point, the other question that sort of got raised from your comments here. You talked more about, I guess, focusing in and highlighting growth products versus sustaining market products. When do you think we sort of talk to that? Is this sort of we'll revisit these things come June and get more feedback from you prior to then, or what should people expect?

Yes, I think this will start to get into the cadence of the business almost right away actually. So let me spend a little time on that I talked about optimized selling and sort of separating growth and sustaining value. Now on the direct -- on how to we go to market on the direct side, there's certainly some coverage gaps that I'd like to see balanced. And the planning for that and the adjustment for that, we're not going to wait for a long time to do, U.S. commercial, U.S. public sector. I look at the New York Tri-State area, Japan, India as areas that are deserving more coverage, either direct or indirect. I'm evaluating the channel, our indirect business. And at this segment, we obviously have our technology partners as SAP, Oracle, Microsoft. We have business transformation partners like Accenture and Deloitte. There are others to add there. In EMEA, ATOS Origin, T-Systems, others to add there. In the U.S., Raytheon and Northrop, but there's a good list of top 6 FSIs that we'd like our channel team to start opening some doors with. And then APJ, we're just starting on a channel with the Tata, TCS, Wipro and Infosys, as well as Mitsubishi in Japan. So when I talk about the optimized selling model, it's really kind of picking higher value areas that we'd like to be in and balancing our investments and starting to elevate the channel in our ecosystem. And on separating the growth for sustaining value, I'd like our sales organization really to major in the majors. And majoring the majors is focused on license growth, but the customer service organization to major on sustaining value. And as we sort of start to separate that gradually, that gives the sales force more focus. These are opportunity to train SCs, easier ability for SCs to understand the core product and hopefully increase our win rate.

Fair enough. I guess a last one, just to make sure, although that was great and helped clarify things. Last one you sort of like -- is it fair to sort of state out of your comments tonight, you talked about balancing acquisitions versus organic growth in the next year, that really we're going to likely see an evolution here and you're going to focus on these fundamental changes and we're unlikely to see any sort of big deals unless something fantastic sort of falls out of the sky on us?

Paul, yes, so 2 things there. I want to emphasize evolution versus revolution and let me just comment on acquisition. Acquisitions are a clear core competency of the business, and we will continue to acquire. As I look at the basic categories that are interesting, I think of 3 categories that are interesting and 1 category that's a little less interesting. The 3 categories that are interesting are those opportunities where we can gain core market share. Second would be relevant market segments, BPM was a relevant market segment that we entered via acquisition. And of course you have a third category which I wouldn't take off the table, but a little less prominent right now were those transformative acquisitions. The category I'm much less interested in is small point technology buys.

And our next question comes from Thanos Moschopoulos from BMO Capital Markets.

As we look at the deal strengths in the past quarter, good volume of larger deals and good mix of revenue coming from new customers, are there any 1 or 2 areas that really stood out in driving that, be it transactional ECM through DS relationships or SharePoint-related solutions. Was there 1 or 2 big factors in that strength, or was it sort of across-the-board, across the product portfolio?

Well, I would start with maybe geography and then drill below that. If we just run by the numbers, APJ and Latin America were certainly strong, and I would say that was driven by an SAP relationship and ecosystem. Certainly, the U.S. held their own within the quarter. And within Europe, I would say that the 2 geos that stood out for us contributing well was Germany and France. Look at that probably more as core market gains versus ecosystem partners.

Okay. And then in terms of product areas, are there any -- you mentioned that you see core ECM as a good opportunity. Any other specific areas that you think will be instrumental in driving accelerated growth going forward?

Certainly core ECM, BPM and I would also put out there our WCM products as well.

Okay. And then finally just a question for Paul. We saw the maintenance margin come down a little bit relative to the prior quarter. Is there any dynamic there we should be aware of?

No, not particularly in a trend area. I would say it's a -- from our own perspective, I think it's trending pretty much to where we think -- to your point, it did come down a little bit. I think there's a little different balances on there with third-party software in that mix, and that varies from quarter-to-quarter.

And our next question is from the line of Sera Kim with GMP Securities.

I'm just wondering in terms of the geographic areas, you talked about seeing strength in France and Germany. Are there any areas of specific concern that you're seeing as we look ahead in the pipeline? And then also I'm wondering if you can comment on the emerging markets and to what your strategy is there? Do you still expect to use partners like SAP to penetrate those markets? Are you looking to a direct representation on those areas as well?

Sure. Thanks Sera for the question. I'd say if there's one area where I'm spending a little more time than others, it continues to be Europe. Certainly not a surprise for anyone, and 40% of our Q2 revenues came from EMEA. Certainly probably one of the tougher economies out there right now. What I certainly liked about our business in Europe is that we have more scale in Germany than anywhere else, and it's the best economy in Europe. And to a large degree because we have a lot of revenues and cost matched, we have some natural hedging built into our business in Europe. So I'm certainly -- I'm spending more time thinking about Europe than any other geography as an area to be watchful of. In terms of the BRICs, Brazil, Russia, India, China, we're doing well in Brazil. We have a good team there. We have good partners -- we have good partnerships there and it's certainly a highlight for us for everything in Latin America. India is an untapped opportunity for us. We have over 300 employees in India. We have a large R&D facility there, and we haven't really tapped into yet that ecosystem from TCS, Infosys and Wipro and certainly with my Oracle background, I have a lot of contacts and a lot of relationships, a lot of experience in that market. I'm not as educated on Russia in our business in Russia yet. And in China, we had a nice win within the quarter and we'd certainly be leveraging our SAP relationship there. So 2 out of 3, I'd go Brazil and India. I'm quite enthused about Russia, not educated yet and we had a nice win in China and are certainly trying to build off our SAP relationship.

Okay, great. And just last question, I guess earlier in the call you mentioned some coverage gaps in I think you said federal, commercial and manufacturing. In terms -- what's your go-to-market strategy in those areas to help you increase your penetration?

Sure. So we'll just take U.S. federal. We just hired a new leader of U.S. federal based out of the D.C. area and comes with a lot of experience both in the DoD and intelligence communities in the U.S. and starts with leadership and focus. So we just hired a nice leader there, as well as a lot of customers buy indirect through FSIs. So good leadership, as well as working with the federal system implementers who participate or drive a lot of the solution architecture. In Japan, it's a market that we historically haven't done an acquisition in. We built that team organically. I think they need a little more attention and perhaps a little more investment. And Japan, through the years, I hope will really emerge as a top contributor for us. So I think that's good old-fashioned execution and prioritization on a country like Japan.

And what percentage of revenues is coming from Japan and where do you want it to go?

All of APJ is about 7%. I would say Japan's probably less than half that.

And our next question comes from the line of Eyal Ofir from Canaccord Genuity.

So just a kind of very high level, as you're looking out into the pipeline, obviously you talked about some of the opportunities in Europe and Germany specifically, and some of you still see a lot within the U.S. Can you just talk about geographically where you're seeing the biggest opportunities in your pipeline and what gets you excited in some of the more emerging areas?

Well, I would just sort of reemphasize what I said, right? I mean, we have a strong Americas business and looking at U.S. commercial and U.S. federal, certainly is of high interest and high impact. We saw opportunities clearly in Canada as well building out even more in the public sector here in Canada, call that the provincial, as well as the federal level and making sure that our top contributors in Europe, U.K., Germany and France will get all the support that they need. So I'd say those are the majors for me right now in terms of the pipeline in the second half of the year.

Okay. And in terms of the products that are -- in driving some of the pipeline, is it primarily core ECM? Are you starting to see some of the new products launched late last year starting to come into the pipeline such as Tempo, and what kind of feedback have you gotten so far from some of the new products from customers?

Yes. I'm going to probably have to defer that to our next call. Certainly what I'm seeing most in the pipeline right now, 30 days in, really revolve around ECM, BPM, WCM. And again, I'm majoring in the majors right now as I work through our 4,600-person company. So that's really what I'm seeing the most of. In terms of Tempo, we're just doing GA. The initial reaction is very favorable. Now this is an easy to use, easy to install, no-training-required module that works across multiple devices. It feels very much like almost a consumer application in its ease of use. So there's a lot of excitement and enthusiasm around the offering. And our first target is going after the install base and trying to extend share and license within the installed base. Our second version of the product would be more focused around bringing new customers to the OpenText family. So quite a bit of interest and enthusiasm, beautiful UI and operating module, first target is the install base. Second version of the product will be targeted more towards expanding the install base.

Okay. And just one last question for me, you talked about your kind of approach to growing in emerging markets, if you exclude India and China when you looking at APJ and obviously Japan as well, are you looking to more -- some sort of more direct sales there and like increase the headcount, or are you still focused on leveraging the current partner ecosystem?

APJ is traditionally an indirect business. And I would sort of classify my first observation is that we're following a very good model in APJ, which is where you have a direct assist selling force. So we have direct account executives in APJ. They have partners there opening doors. We go in to direct, assist in a selling model. So APJ is -- typically given the size of the geography, much more of a channel orientation versus building a direct sales force. Having said that, I think there are some select places where we do want direct sales reps such as Japan.

And our next question comes from the line of Blair Abernethy from Stifel, Nicolaus. Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Just 2 questions, I guess, one on the government vertical side and your thoughts there and then secondly, organic growth. On the government vertical side, could you just give us your sense of the selling environment out there now obviously with all the macro concerns in Europe and the goings ons? How was your Q2 in Europe on the government side and how is -- how are their budgets looking in 2012?

Well, I have no problem saying I don't know an answer to something and particularly on the government side in Europe, I'm not as close to that. So Paul, I don't know if you have any view of that? For 30 days in, I'm not as close to that EMEA government side.

Yes, Blair, I would say that overall vertical stayed about the same as the previous quarter, and we do have good representation from Europe and from the U.K., so it would have been a steady business. We didn't break it down by geography out in the overall vertical of 11%. Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: 11%?

No. Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Okay, great. And secondly, Mark, just on, if you look out over the next year, what do you think are the highest impact steps or areas that you can go after for us to help step up the organic license growth of the business?

I know I'm probably going to sound like a broken record but number one, core ECM, share market gains. Number two is getting our worldwide sales force trained, educated, well equipped to be able to sell business process management. I'd say those are the 2 big-ticket items for us as we look at organic growth. Blair Abernethy - Stifel, Nicolaus & Co., Inc., Research Division: Great. And Paul, just on the quarter, any large deals like deals over $2 million or $3 million?

No, the $1 million-plus deals were -- there was no single large deal in that place.

And our next question comes from the line of Michael Nemeroff from Morgan Keegan. Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division: I'm looking at the presentation on the web, and one of the growth drivers that says BI, and I joined the call a bit late. Could you expand on business intelligence, and how do you think that's going to drive some core growth going forward?

Sure. Thanks for the question, Michael. I walked through sort of what we looked at, immediate opportunities, core ECM, business process management, sort of the second phase of content-centric applications and even longer-term looking at the content category evolving into more of an information category that encompasses ECM, BPM and BI. So our immediate opportunity obviously is in our core market and BPM. Medium-term application is in longer term as the category evolves. So we're going to consider looking at partners, building or buying, as this category evolves. I don't see this as a short-term contributor to revenue, but more as a directional statement as to where we think the category is going to go. We'll follow the evolution of the category and start to think about whether were going to partner, build or buy. Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division: Great. And then just a couple of quick ones for Paul, I was wondering if you wouldn't mind giving us the revenue contribution from Metastorm in the quarter? And then also, total what the license contribution from the BPM businesses was total? And then also, I just have a question on deferred revenue, it seemed to be down a little bit, a little bit more than I was expecting if you can comment on that please?

Sure, Mike. Well, I'm going to hesitate on the first question because as you know, we don't separate the revenues on Meta and Global we have, because we have in our Q. Perhaps I'll help you a little bit more than that. Typically, I mean, we're -- as Mark indicated, we're about -- expecting a 15% drop in license revenue in the first year as opposed to previously announced maybe 10%. So I would say if you have the last quarter, we're down a little bit from that, not significantly. It was also accretive, I mentioned Global 360 is accretive by $0.06, and Metastorm was also in that range of accretive for the adjusted earnings. That's probably the most disclosure I'll present on that one. Our deferred revenue continues, our renewal rates do continue to be at 92%. It's where we think it should be. As you know, deferred revenue increases every quarter, and I know you know that and you said it was down a little bit more than you thought. It's in line with what we're expecting and we're not seeing any change in our historical renewal rates from that 92% range.

And at this time, I'd like to turn the conference back over to Mr. Secord for closing comments.

Thank you, and thank you, everybody, for joining us. Just a reminder, OpenText will be presenting at a couple of conferences in the quarter, including a Stifel financial conference on February 9 in greater LA area, and the Morgan Stanley conference on February 27 in the San Francisco area. And with that, we thank you all for joining us and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation and that this time, you may now disconnect.