UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM

                    TO                    .

STELLENT, INC.

MINNESOTA		41-1652566
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NO.)

7500 FLYING CLOUD DRIVE		55344-3748
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

(952) 903-2000
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
7777 GOLDEN TRIANGLE DRIVE
EDEN PRAIRIE, MINNESOTA 55344
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)
Yes þ No o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No  þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.01 par value – 28,281,610 shares as of October 24, 2005.

 

 

STELLENT, INC.
Form 10-Q
Index

		PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets –September 30, 2005 and March 31, 2005			3
Condensed Consolidated Statements of Operations – Three months and six months ended September 30, 2005 and 2004			4
Condensed Consolidated Statements of Cash Flows – Three months and six months ended September 30, 2005 and 2004			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults upon Senior Securities			34
Item 4. Submission of Matters to a Vote of Security Holders			34
Item 5. Other Information			34
Item 6. Exhibits			35
Signatures			36
Exhibit Index			37
Certification by President & CEO Pursuant to Rule 13a-14(a)/15d-15(a) Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Executive Vice President, CFO, Secretary & Treasurer Pursuant to Rule 13a-14(a)/15d-15(a) Section 302 of the Sarbanes-Oxley Act of 2002
Certification by President & CEO Pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002
Certification by Executive Vice President, CFO, Secretary & Treasurer Pursuant to 18 U.S.C. Section 1350 Section 906 of the Sarbanes-Oxley Act of 2002

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STELLENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

		September 30,				March 31,
		2005				2005
ASSETS
Current assets:
Cash and cash equivalents		$	45,752			$	49,113
Short-term marketable securities			15,390				17,523
Trade accounts receivable, net			29,757				30,063
Prepaid royalties, current portion			706				965
Prepaid expenses and other current assets			4,556				3,884
Total current assets			96,161				101,548
Long-term marketable securities			8,767				6,114
Property and equipment, net			7,155				4,333
Prepaid royalties, net of current portion			793				1,044
Goodwill			74,395				67,640
Other acquired intangible assets, net			5,116				5,615
Other			936				1,358
Total assets		$	193,323			$	187,652
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,374			$	3,867
Deferred revenues, current portion			18,931				19,854
Commissions payable			2,571				2,419
Accrued expenses and other			10,751				7,867
Current installments of obligation under capital leases			176				170
Total current liabilities			33,803				34,177
Obligation under capital leases, net of current installments			373				—
Deferred revenues, net of current portion			975				946
Total liabilities			35,151				35,123
Shareholders’ equity:
Common stock			283				275
Additional paid-in capital			247,395				243,013
Unearned compensation			(232	)			(469	)
Accumulated other comprehensive income			343				966
Accumulated deficit			(89,617	)			(91,256	)
Total shareholders’ equity			158,172				152,529
Total liabilities and shareholders’ equity		$	193,323			$	187,652

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

STELLENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Revenues:
Product licenses		$	13,321			$	14,775			$	27,049			$	26,454
Services			6,938				5,042				12,098				9,400
Post-contract support			9,888				8,139				19,561				14,762
Total revenues			30,147				27,956				58,708				50,616
Cost of revenues:
Product licenses			815				1,068				1,975				2,360
Services			6,484				5,431				11,509				9,610
Post-contract support			1,956				1,179				3,806				2,297
Amortization of capitalized software from acquisitions			443				643				859				1,106
Total cost of revenues			9,698				8,321				18,149				15,373
Gross profit			20,449				19,635				40,559				35,243
Operating expenses:
Sales and marketing			11,712				10,931				23,148				20,720
General and administrative			2,812				3,057				5,982				5,581
Research and development			4,895				4,867				9,551				8,665
Acquisition-related sales, marketing and other costs			—				—				—				886
Amortization of acquired intangible assets and unearned compensation			210				175				374				354
Restructuring charges			648				—				665				2,461
Total operating expenses			20,277				19,030				39,720				38,667
Income (loss) from operations			172				605				839				(3,424	)
Other:
Interest income, net			478				149				893				343
Net income (loss) before income taxes			650				754				1,732				(3,081	)
Provision for income taxes			93				—				93				—
Net income (loss)		$	557			$	754			$	1,639			$	(3,081	)
Net Income (loss) per common share
Basic		$	0.02			$	0.03			$	0.06			$	(0.12	)
Diluted		$	0.02			$	0.03			$	0.06			$	(0.12	)
Weighted average common shares outstanding
Basic			28,101				26,720				27,815				25,300
Diluted			29,264				27,776				28,848				25,300

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

STELLENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

		SIX MONTHS ENDED
		SEPTEMBER 30,
		2005				2004
OPERATING ACTIVITIES
Net income (loss)		$	1,639			$	(3,081	)
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization			1,206				1,719
Amortization of intangible assets, acquisition expense and unearned compensation			1,256				1,459
Lease incentives			1,043				—
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable			857				(5,262	)
Prepaid expenses and other current assets			85				750
Accounts payable and other liabilities			(2,493	)			(1,067	)
Accrued liabilities			1,814				(48	)
Deferred revenue			(1,044	)			811
Accrued commissions			152				618
Net cash flows provided by (used in) operating activities			4,515				(4,101	)
INVESTING ACTIVITIES:
Maturities of marketable securities, net			(520	)			7,541
Purchases of property and equipment			(3,488	)			(930	)
Business acquisition costs, net of cash acquired			(5,439	)			(10,657	)
Net cash flows used in investing activities			(9,447	)			(4,046	)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants			1,902				950
Proceeds from issuance of stock under Employee Stock Purchase Plan and other			480				432
Payments under capital leases			(188	)			(241	)
Net cash flows provided by financing activities			2,194				1,141
Cumulative effect of foreign currency translation adjustment			(623	)			(29	)
Net decrease in cash			(3,361	)			(7,035	)
Cash and equivalents, beginning of period			49,113				44,165
Cash and equivalents, end of period		$	45,752			$	37,130
Supplemental disclosure of non-cash investing and financing activities:
Non-cash financing activity — issuance of common stock for business combination		$	2,008			$	41,416
Non-cash financing activity — assumption of stock option plan related to business combination		$	—			$	7,964
Non-cash investing and financing activity — purchase of equipment through capital leases		$	567			$	819

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

NOTE 1. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Quarterly Reports on Form 10-Q and instructions for Article 10 of Regulation S-X. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, have been recorded as necessary to present fairly Stellent, Inc’s (the “Company”) consolidated financial position, results of operations and cash flow for the periods presented. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Fiscal Year 2005 Annual Report on Form 10-K. The consolidated results of operations for the three and six month periods ended September 30, 2005 and 2004 are not necessarily indicative of the results that may be expected for any future period. References to fiscal years 2006 and 2005 represent the twelve months ended March 31, 2006 and 2005, respectively.

     The condensed consolidated balance sheet at March 31, 2005 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Such disclosures are contained in the Company’s Annual Report on Form 10-K.

     The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Revenue Recognition

     Revenue consists principally of software license, support, consulting and training fees. The Company recognizes revenue in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions, and Securities and Exchange Commission Staff Accounting Bulletin 104, Revenue Recognition.

     Product license revenue is recognized under SOP 97-2 when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable and supported and the arrangement does not require services that are essential to the functionality of the software.

     Persuasive Evidence of an Arrangement Exists - The Company determines that persuasive evidence of an arrangement exists with respect to a customer under, (i) a signature license agreement, which is signed by both the customer and the Company or, (ii) a purchase order, quote or binding letter-of-intent received from and signed by the customer, in which case the customer has either previously executed a signature license agreement with the Company or will receive a shrink-wrap license agreement with the software. The Company does not offer product return rights to end users or resellers.

     Delivery has Occurred - The Company’s software may be either physically or electronically delivered to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the billing terms of the arrangement or when the software is made available to the customer through electronic delivery. Customer acceptance generally occurs at delivery.

     The Fee is Fixed or Determinable - If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is typically recognized when the arrangement fee becomes due and payable. Fees due under an arrangement are generally deemed fixed and determinable if they are payable within twelve months.

     Collectibility is Probable and Supported - The Company determines whether collectibility is probable and supported on a case-by-case basis. The Company may generate a high percentage of our license revenue from our current customer base, for whom there is a history of successful collection. The Company assesses the probability of collection from new customers based upon the number of years the customer has been in business and a credit review process, which evaluates the customer’s financial position and ultimately its ability to pay. If the Company is unable to determine from the outset of an arrangement that collectibility is probable based upon the Company’s review process, revenue is recognized as payments are received.

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

     With regard to software arrangements involving multiple elements, the Company allocates revenue to each element based on the relative fair value of each element. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and has determined that it has sufficient VSOE to allocate revenue to consulting services and post-contract customer support (“PCS”) components of its license arrangements. The Company sells its consulting services separately, and has established VSOE on this basis. VSOE for PCS is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from PCS is recognized ratably over their respective terms, typically one year.

     The Company’s direct customers typically enter into perpetual license arrangements. The Company’s OEM group generally enters into term-based license arrangements with its customers, the term of which generally exceeds one year in length. The Company recognizes revenue from time-based licenses at the time the license arrangement is signed, assuming all other revenue recognition criteria are met, if the term of the time-based license arrangement is greater than twelve months. If the term of the time-based license arrangement is twelve months or less, the Company recognizes revenue ratably over the term of the license arrangement.

     Services revenue consists of fees from consulting services, PCS and out-of-pocket expenses reimbursed by the Company. Consulting services include needs assessment, software integration, security analysis, application development and training. The Company bills consulting services fees either on a time and materials basis or on a fixed-price schedule. In general, the Company’s consulting services are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation and generally do not require any significant modification or alteration for customer use. Customers purchase the Company’s consulting services to facilitate the adoption of its technology and may dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services. The Company recognizes revenue from consulting services as services are performed. The Company’s customers typically purchase PCS annually, and the Company prices PCS based on either a percentage of the product license fee or product list price, as applicable. Customers purchasing PCS receive product upgrades, Web-based technical support and telephone hot-line support. Unspecified product upgrades are not provided without the purchase of PCS. The Company typically has not granted upgrade rights in its license agreements. Specified undelivered elements are allocated a relative fair value amount within a license agreement and the revenue allocated for these elements are deferred until delivery occurs.

     Customer advances and billed amounts due from customers in excess of revenue recognized are recorded as deferred revenue.

Cost of Revenue

     The Company expenses all manufacturing, packaging and distribution costs associated with product license revenue as cost of revenues. The Company expenses all technical support service costs associated with service revenue as a cost of revenues. The Company also expenses amortization of capitalized software from acquisition as cost of revenues. The Company reports out-of-pocket expenses reimbursed by customers as revenue and the corresponding expenses incurred as costs of revenue.

Cash, Cash Equivalents, Marketable Securities and Investments in Other Companies

     Cash and Cash Equivalents: The Company considers all short-term, highly liquid investments that are readily convertible into known amounts of cash and have original maturities of three months or less to be cash equivalents.

     Marketable Securities: Investments in debt securities with a remaining maturity of one year or less at the date of purchase are classified as short-term marketable securities. Investments are held in debt securities of the United States government and with corporations that have the highest possible credit rating. Investments in debt securities with a remaining maturity of greater than one year are classified as long-term marketable securities. These investments are classified as held to maturity and recorded at amortized cost as the Company has the ability and positive intent to hold to maturity.

     Investments in Other Companies: Investments in other companies include investments in two non-public, start-up technology companies for which the Company uses the cost method of accounting. These investments are classified as long-term as the Company anticipates holding them for more than one year. The Company holds less than 20% interest in, and does not directly or indirectly exert significant influence over, any of the respective investees. During fiscal year 2005, the Company determined, based on its review of the financial statements of these companies, incremental financing that they received and discussions of business plans and forecasts with management of these companies, that a permanent decline in value had occurred. The Company recorded a remaining write-down of $1,136 on the investments in and advances to the companies during the fourth quarter of fiscal year 2005. At September 30, 2005, the recorded value of these investments was $0.

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Warranties

     The Company generally warrants its software products for a period of 30 to 90 days from the date of delivery and estimates probable product warranty costs at the time revenue is recognized. The Company exercises judgment in determining its accrued warranty liability. Factors that may affect the warranty liability include historical and anticipated rates of warranty claims, material usage, and service delivery costs. Warranty costs incurred have not been material.

Indemnification Obligations

     The Company generally undertakes intellectual property indemnification obligations in its software products or services agreements with customers. Typically these obligations provide that the Company will indemnify, defend and hold the customers harmless against claims by third parties that its software products or services infringe upon the copyrights, trademarks, patents or trade secret rights of such third parties. No such material claim has been made by any third party with regard to the Company’s software products or services.

Comprehensive Income (Loss)

     Other comprehensive income (loss) consist of gains or losses that under the accounting principles generally accepted in the United States of America are recorded as an element of shareholders’ equity and are excluded from operations. The following table represents comprehensive income (loss) for the six months ended September 30, 2005 and 2004:

		Six Months Ended
		September 30,
		2005				2004
Net income (loss)		$	1,639			$	(3,081	)
Other comprehensive income:
Foreign currency translation adjustments			(623	)			(29	)
Comprehensive income (loss)		$	1,016			$	(3,110	)

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Goodwill and Other Acquired Intangible Asset

     The Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, effective April 1, 2002 and, as a result, ceased to amortize goodwill at that time. The changes in the carrying amount of goodwill for the six months ended September 30, 2005 was as follows:

Balance as of April 1, 2005		$	67,640
Acquisition of Optika			131
Earn-out related to the acquisition of Stellent, S.A. De C.V.			100
Earn-out related to the acquisition of Ancept			133
Acquisition of e-Onehundred Group			6,405
Foreign currency translation			(14	)
Balance as of September 30, 2005		$	74,395

     Other acquired intangible assets by major intangible asset class at September 30, 2005 were as follows:

		Acquired				Amortization
		Value				Period in Years
Core technology		$	5,282				3
Customer base			2,955				3 to 10
		$	8,237			5.30 weighted
						average years

     The other intangibles have no significant residual values. There are no other intangible assets which are not subject to amortization. Gross carrying amounts and accumulated amortization of the other acquired intangibles were as follows for each major intangible asset class:

		As of September 30, 2005
		Gross
		Carrying				Accumulated
		Amount				Amortization				Net Balances
Core technology — capitalized software from acquisitions		$	5,282			$	(2,730	)		$	2,552
Customer base — intangible assets			2,955				(391	)			2,564
		$	8,237			$	(3,121	)		$	5,116

     Amortization expense for other acquired intangible assets for the six months ended September 30, 2005 and 2004 was $1,020 and $1,316, respectively.

     Estimated amortization expense for other acquired intangible assets is as follows for the years ending March 31:

2006 (remaining six months)		$	1,053
2007			1,720
2008			635
2009			313
2010			270
Thereafter			1,125
		$	5,116

Stock-based Compensation

     The Company’s shareholders approved a new stock option plan for employees and directors in August 2005. The intrinsic value method is used to value the stock options issued to employees and directors, and the Company accounts for those plans under the recognition and measurement principles of Financial Accounting Standards Board, Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. In the periods presented, no stock-based employee compensation cost is reflected in net income (loss), excluding the amortization of unearned compensation expense related to the Optika transaction, as all of the options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Had the fair value method been applied, the compensation expense would have been different in the periods presented. The following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value method for the following periods:

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net income (loss) as reported		$	557			$	754			$	1,639			$	(3,081	)
Add: Stock-based compensation included in net income (loss) as reported			119				108				213				144
Less: Total stock based employee compensation expense determined under fair value based method for all awards			(1,658	)			(3,497	)			(3,686	)			(6,519	)
Net loss pro-forma		$	(982	)		$	(2,635	)		$	(1,834	)		$	(9,456	)
Weighted average shares outstanding
Basic			28,101				26,720				27,815				25,300
Diluted			29,264				27,776				28,848				25,300
Net income (loss) per share as reported
Basic and diluted		$	0.02			$	0.03			$	0.06			$	(0.12	)
Net loss per share pro-forma
Basic and diluted		$	(0.03	)		$	(0.10	)		$	(0.07	)		$	(0.37	)

Employee based stock option plans assumptions:
		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Risk free interest yields			4.0	%			2.9	%			3.8	%			2.5	%
Dividend yield			—				—				—				—
Volatility factor of expected market price of Company’s stock			58	%			95	%			58	%			95	%
Weighted average expected life of options (years)			3.0				3.25				3.0				3.25

Employee stock purchase plan assumptions:
		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Risk free interest yields			3.1	%			1.3	%			3.1	%			1.3	%
Dividend yield			—				—				—				—
Volatility factor of expected market price of Company’s stock			44	%			45	%			44	%			45	%
Weighted average expected life of options (years)			0.5				0.5				0.5				0.5

New Accounting Pronouncements

     In November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance in this FSP addresses the determination of when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. The FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP amends FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. The guidance in this FSP nullifies certain requirements of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and supersedes EITF Abstracts, Topic D-44, Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The guidance in this FSP is required to be applied to reporting periods beginning after December 15, 2005. The Company plans on adopting this statement during its third quarter of fiscal year 2006 and does not believe that the adoption of the provisions of FAS 115-1 will have a material impact on its consolidated financial statements.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a restatement. The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not believe that the adoption of the provisions of SFAS No. 154 will have a material impact on the Company’s consolidated financial statements.

     In December 2004, FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, known as Statement 123(R). Statement 123(R) will, with certain exceptions, require entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements. The measurement of that cost will be based on the fair value of the equity or liability instruments issued. The Company is required to adopt Statement 123(R) in the first interim period beginning after its fiscal year 2006. As part of this adoption, the Company will begin expensing options effective April 1, 2006 and has also elected not to restate the prior period results. Based on the current amount of outstanding stock options that will vest on or after April 1, 2006, the Company anticipates recognizing approximately $3.2 million of compensation expense during fiscal year 2007. This amount will fluctuate depending on future stock options granted to or forfeited by employees and directors.

Note 2. Basic and Diluted Net Income (Loss) Per Common Share

     Basic net income (loss) per share is computed using the weighted average number of shares outstanding of common stock. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options and were excluded from the computation if their effect was anti-dilutive. The components of basic and diluted net income (loss) per share were as follows:

		Three Months Ended								Six Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net income (loss)		$	557			$	754			$	1,639			$	(3,081	)
Weighted average common shares:
Basic			28,101				26,720				27,815				25,300
Effect of dilutive stock options			1,163				1,056				1,033				—
Diluted			29,264				27,776				28,848				25,300
Net income (loss) per share as reported
Basic		$	0.02			$	0.03			$	0.06			$	(0.12	)
Diluted		$	0.02			$	0.03			$	0.06			$	(0.12	)

Note 3. Mergers and Acquisitions

     During the second quarter of fiscal year 2005 the Company acquired a Korean entity for a total of $205 in cash. $180 was recorded as goodwill and $25 was allocated to other intangible assets. Additional pro forma disclosures required under SFAS No. 141, related to this acquisition were not considered material.

     On June 20, 2005, the Company acquired certain assets of privately held e-Onehundred Group, a financial compliance solutions provider, for $5,000 in cash, 274 shares of the Company’s stock valued at $2,000 and a potential $2,000 cash earn-out over a one-year period based upon revenue performance. The Company also incurred approximately $300 in professional fees and other costs directly associated with this acquisition. Approximately $6,400 of the purchase price was allocated to goodwill, $520 was allocated to capitalized software and customer base, (which both will be amortized over a three year period), $551 was allocated to assets acquired and $177 was allocated to liabilities assumed in the acquisition. Additional pro forma disclosures required under SFAS No. 141 related to this acquisition were not considered material.

     On May 13, 2004, the Company acquired the outstanding shares of Stellent, S.A. De C.V. for approximately $750 in cash and assumed liabilities of $274, creating a business presence in Mexico. The Company is required to make contingent consideration payments (earn-out) for two years from the date of acquisition. Earn out amounts, which will be recorded as goodwill, cannot exceed $300 in the first year and $450 in the second year after the acquisition. As of September 30, 2005, the Company had accrued and recorded to goodwill approximately $234 related to this earn-out. Additional proforma disclosure required under SFAS No. 141, Business Combinations, related to this acquisition were not considered material.

     On May 28, 2004, the Company acquired all outstanding shares of Optika Inc. for $10,000 in cash, approximately 4,200 shares of the Company’s common stock valued at $41,416, the assumption of Optika’s outstanding common stock options, and direct acquisition costs of approximately $1,594. The Company acquired Optika in order to add to, or strengthen and expand, its Universal Content Management software in the areas of document imaging, business process management and compliance capabilities. The valuation of the Company’s stock was set at an average price at the time the merger agreement was signed, which was January 11, 2004. The fair value of Optika’s option plan of $7,964 was estimated as of January 11, 2004 using the Black-Scholes option-pricing model with the following assumptions: no estimated dividends, expected volatility of 95%, risk free interest rate of 2.5% and expected option terms of 3 years for all options.

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

     The total estimated purchase price is allocated to Optika’s net tangible and identifiable intangible assets based upon their estimated fair values as of the date of completion of the acquisition. The excess of the purchase price over the net tangible and identifiable intangible assets has been recorded as goodwill. A restructuring plan was adopted as a result of the acquisition. The acquisition restructuring charge relates to severance costs for terminated employees of $596 and facility closing costs of $263 primarily related to lease obligations. All amounts have been paid out as of September 30, 2005. Based upon the purchase price and valuation, the following represents the allocation of the aggregate purchase price to the acquired net assets of Optika:

Purchase price:
Cash		$	10,000
Transaction costs			1,594
Value of common stock issued			41,416
Value of stock option grants			7,964
Total purchase consideration paid		$	60,974
Fair value of assets acquired and liabilities assumed:
Cash		$	7,460
Accounts receivable			2,901
Fixed assets			471
Other assets			660
Accounts payable			(313	)
Accrued expenses			(1,433	)
Deferred revenue			(6,194	)
Acquisition restructuring charge			(859	)
Goodwill			51,286
Identifiable intangible assets			6,100
Unearned compensation			895
Total purchase price		$	60,974

     The estimate of unearned compensation was based on the fair market value of the unvested options as of May 28, 2004. Compensation expense will be recognized over the remaining vesting period of the options, which ranges from one month to 48 months, as each option grant vests.

     The fair value of the deferred revenue was determined in accordance with EITF 01-3, Accounting in a Business Combination for Deferred Revenue of an Acquiree. The Company considers PCS contracts to be legal obligations, and has estimated fair value of the PCS contracts based on prices in recent exchange transactions.

     The Company valued the identified intangible assets acquired using an appraisal. Identified intangible assets consist of:

						Estimated				Estimated
						Useful				Annual
		Fair Value				Life				Amortization
Core technology		$	3,400			3 years				$	1,133
Customer base			2,700			10 years					270
		$	6,100							$	1,403

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

     As part of the acquisition of Optika the Company also acquired net deferred tax assets of approximately $13,390. These deferred tax assets relate to net operating loss (“NOL”) carryforwards and the tax effects of temporary differences primarily related to deferred revenue, depreciation and amortization and other accrued expenses. The $51,286 allocated to goodwill is not deductible for tax purposes.

     Realization of the NOL carryforwards and the deferred tax temporary differences, which were acquired, are contingent on future taxable earnings. The deferred tax assets were reviewed for expected utilization using a more likely than not approach by assessing the available positive and negative evidence surrounding their recoverability.

     The Company has recorded a full valuation allowance against the net deferred tax assets, acquired or otherwise, due to the uncertainty of future taxable income, which is necessary to realize the benefits of the deferred tax assets. NOL carryforwards were approximately $34,803. These NOLs begin to expire in 2010 and are subject to annual utilization limits due to prior ownership changes.

     The Company will continue to assess and evaluate strategies that will enable the deferred tax asset, or portion thereof, to be utilized, and will reduce the valuation allowance appropriately at such time when it is determined that the more likely than not criteria is satisfied. Reversal of the valuation allowance will be applied first to reduce to zero any goodwill related to the acquisition, then to reduce to zero other noncurrent intangible assets related to the acquisition, and then to reduce income tax expense.

     The following unaudited pro forma condensed consolidated results of operations have been prepared as if the acquisition of Optika had occurred as of April 1, 2003:

		Six months ended
		September 30,
		2005				2004
Net revenues		$	58,708			$	53,166
Net income (loss)		$	1,639			$	(6,644	)
Net income (loss) per share
Basic		$	0.06			$	(0.26	)
Diluted		$	0.06			$	(0.26	)
Weighted average shares outstanding
Basic			27,815				25,300
Diluted			28,848				25,300

     The unaudited pro forma condensed consolidated results of operations are not necessarily indicative of results that would have occurred had the acquisition occurred as of April 1, 2003, nor are they necessarily indicative of the results that may occur in the future.

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Note 4. Contingencies

     The Company is a defendant, along with certain current and former officers and directors of the Company, in a putative class action lawsuit entitled In re Stellent Securities Litigation. The lawsuit is a consolidation of several related lawsuits (the first of which was commenced on July 31, 2003). The plaintiff alleges that the defendants made false and misleading statements relating to the Company and its future financial prospects in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In fiscal year 2005 a settlement was reached, subject to final documentation and preliminary and final court approval. No further expenses of any significance are anticipated with this lawsuit.

     Additionally, the Company is subject to various claims and litigation in the ordinary course of its business, including employment matters and intellectual property claims. Management does not believe the outcome of any current legal matters will have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Note 5. Restructuring Charges

     In connection with the integration of Optika and in connection with the Company’s plans to reduce costs and improve operating efficiencies, the Company adopted two restructuring plans during fiscal 2005. The initial restructuring took place during the first quarter which included the termination of 30 employees and the closure of the Company’s New York facility. Restructuring charges included in the Company’s net loss during the first quarter of fiscal year 2005 related to this plan were approximately $1,866 for terminated employee benefits and approximately $595 for excess facilities. A change of estimate and impairment charge related to this restructuring plan resulted in $32 and $35 additional expense being recognized in the fourth quarter of fiscal year 2005. The Company recognized an additional change in estimate related to the New York facility of $140 during the second quarter of fiscal year 2006. At September 30, 2005, approximately $588 remained to be paid in connection with these charges. The final restructuring plan was completed during the fourth quarter of fiscal year 2005, which included the termination of 25 employees and the closure of the Company’s Boise, Idaho and Mexican facilities. The expense recognized and included in the Company’s net loss during the fourth quarter of fiscal year 2005 related to these restructuring plans totaled $1,129, with approximately $990 related to terminated employee benefits and approximately $139 related to excess facilities which includes an impairment on fixed assets of $25. During the first quarter of fiscal year 2006, the Company recorded a change in estimate resulting in additional expense totaling $74 related to the closure of our Mexican operations. At September 30, 2005, approximately $188 remained to be paid in connection with this charge.

     During the second quarter of fiscal year 2006 the Company adopted a restructuring plan to reorganize its international sales operations and also consolidate certain general and administrative activities. This restructuring included the termination of 8 employees and the closure of the Company’s Brazilian facility. The expense recognized and included in the Company’s net income during the second quarter of fiscal year 2006 related to this restructuring totaled $508, of which approximately $321 related to terminated employee benefits and approximately $187 related to excess facilities and other exit costs. As of September 30, 2005 approximately $305 remained to be paid in connection with this charge.

     In total, overall employee termination benefit costs of $629 will be paid out through June 2006 and the other exit costs totaling $510 will be paid out through January 2007.

STELLENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

     Selected information regarding the restructuring charges and related accrued liabilities by restructuring plan is as follows:

		Second Quarter ‘03				First Quarter ‘04				First Quarter ‘05								Fourth Quarter ‘05								Second Quarter ‘06
		Other				Employee				Employee				Other				Employee				Other				Employee				Other
		Exit				Termination				Termination				Exit				Termination				Exit				Termination				Exit
		Costs				Benefits				Benefits				Costs				Benefits				Costs				Benefits				Costs				Total
Balance at April 1, 2003		$	304			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	304
Expense			—				396				—				—				—				—				—				—				396
Payments			(65	)			(245	)			—				—				—				—				—				—				(310	)
Change in estimate			360				—				—				—				—				—				—				—				360
Balance at June 30, 2003			599				151				—				—				—				—				—				—				750
Payments			(43	)			(38	)			—				—				—				—				—				—				(81	)
Balance at September 30, 2003			556				113				—				—				—				—				—				—				669
Payments			(43	)			(38	)			—				—				—				—				—				—				(81	)
Balance at December 31, 2003			513				75				—				—				—				—				—				—				588
Payments			(49	)			—				—				—				—				—				—				—				(49	)
Change in estimate			—				(69	)			—				—				—				—				—				—				(69	)
Balance at March 31, 2004			464				6								—				—				—				—				—				470
Expense			—				—				1,866				595				—				—				—				—				2,461
Payments			(48	)			—				(306	)			—				—				—				—				—				(354	)
Balance at June 30, 2004			416				6				1,560				595				—				—				—				—				2,577
Payments			(33	)			—				(794	)			(81	)			—				—				—				—				(908	)
Balance at September 30, 2004			383				6				766				514				—				—				—				—				1,669
Payments			(51	)			—				(391	)			(81	)			—				—				—				—				(523	)
Balance at December 31, 2004			332				6				375				433				—				—				—				—				1,146
Expense			—				—				—				—				990				114				—				—				1,104
Payments			(51	)			(6	)			(36	)			(87	)			(348	)			(7	)			—				—				(535	)
Change in estimate			—				—				32				—				—				—				—				—				32
Balance at March 31, 2005			281				—				371				346				642				107				—				—				1,747
Payments			(87	)			—				(91	)			(87	)			(265	)			(142	)			—				—				(672	)
Change in estimate			(57	)			—				—				—				27				47				—				—				17
Balance at June 30, 2005			137				—				280				259				404				12				—				—				1,092
Expense			—				—				—				—				—				—				321				187				508
Payments			(79	)			—				—				(91	)			(216	)			(12	)			(160	)			(43	)			(601	)
Change in estimate			—				—				—				140				—				—				—				—				140
Balance at September 30, 2005		$	58			$	—			$	280			$	308			$	188			$	—			$	161			$	144			$	1,139

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

     This Form 10-Q for the period ended September 30, 2005 contains certain forward-looking statements within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such forward-looking statements are based on the beliefs of our management as well as on assumptions made by, and information currently available to, us at the time such statements were made. When used in this Form 10-Q, the words approximate, anticipate, believe, estimate, expect, intend and similar expressions, as they relate us, are intended to identify such forward-looking statements. Although we believe these statements are reasonable, readers of this Form 10-Q should be aware that actual results could differ materially from those projected by such forward-looking statements as a result of the risk factors listed below. Readers of this Form 10-Q should consider carefully the factors listed below, as well as the other information and data contained in this Form 10-Q. We caution the reader, however, that such list of factors may not be exhaustive and that those or other factors, many of which are outside of our control, could have a material adverse effect on us and our results of operations. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth hereunder. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

OVERVIEW

     In 1997, we launched one of the first software product suites on the market that was fully developed and created expressly for Web-based content and document management. At the time, content management — today considered a critical component of an organization’s communication and information technology (IT) infrastructure — was an emerging technology used to help companies easily and quickly share information with employees, partners, customers and prospects using the World Wide Web.

     Currently, our solutions — which are comprised of Universal Content Management™ software and Content Components software — help customers worldwide solve business problems related to efficiently creating, managing, sharing and archiving critical information.

Universal Content Management Software

     Universal Content Management is our primary software product, consisting of a unified architecture and product which power multiple applications. These applications help organizations manage their business information over the web — such as records, legal documents (e.g. contracts, and other business documents), presentations, Web content and graphics — from the time it’s created to the time it’s archived or disposed of, so that employees, customers, partners and investors can more easily find, access and re-use that information. With our software, customers can increase employee productivity, reduce expenses and improve company-wide collaboration and communication.

     Stellent Content Server is a fully functional system providing secure, personalized delivery of business information. This repository provides a core set of content services — such as check-in/check-out, revision control, security, workflow, personalization and subscription — that help ensure users can access only the most current information as appropriate to their role or permissions. Stellent Content Server also provides a variety of repository services, including file storage, metadata and search.

     On top of Stellent Content Servers, users can add the five key elements of content management in our application modules — document management and imaging, Web content management, digital asset management, collaboration and records management — from a unified architecture, enabling customers to fully utilize their content management investment across the organization. We believe our tightly integrated products allow companies to implement content management applications using fewer products and consulting services than other content management offerings, which can lead to a lower total cost of ownership.

Content Component Software

     Our Content Components software makes information created in more than 370 common office software applications more accessible to the business users who need it. Other technology companies embed this software to enable their own solutions to extract text and metadata, provide a high-fidelity view of file contents, and convert files into any one of 10 output formats. Since business information is often difficult to access without the native software application in which it was created, our Content Components software empowers users to locate and view information without need of the software application that created the file installed on their desktop or handheld device. These technologies are also integrated into our Universal Content Management software.

     The Content Components software supports multiple operating systems and international environments, and enables access to documents in applications for diverse markets such as content management, search and retrieval, security and policy management, mobile and wireless, messaging, collaboration and publishing.

RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
REVENUES

		Three Months Ended September 30,												Six Months Ended September 30,
		2005				2004				Change				2005				2004				Change
		(in thousands, except for percentages)
Product licenses		$	13,321			$	14,775				(10	%)		$	27,049			$	26,454				2	%
Services			6,938				5,042				38	%			12,098				9,400				29	%
Post-contract support			9,888				8,139				21	%			19,561				14,762				33	%
Total		$	30,147			$	27,956				8	%		$	58,708			$	50,616				16	%
As a percentage of total revenue:
Product licenses			44	%			53	%							46	%			52	%
Services			23	%			18	%							21	%			19	%
Post-contract support			33	%			29	%							33	%			29	%

     Revenues totaled $30.1 million and $58.7 million for the second quarter and first half of fiscal year 2006, respectively, compared to $28.0 million and $50.6 million for the second quarter and first half of fiscal year 2005. Total revenues for the second quarter and first half of fiscal year 2006 were up $2.2 million and $8.1 million, or 8% and 16%, respectively, from the second quarter and first half of fiscal year 2005. The increase in revenue was due to an overall increase in our Universal Content Management software orders, an overall increase in our services and an increase in our post-contract support revenue as a result of supporting a larger installed base. We also added additional services revenue during fiscal year 2006 with our recent acquisition of the e-Onehundred group in June 2005. These increases in our Universal Content Management software were more than offset by a decrease in our Content Component software for the September 2005 quarter.

     As we license our products, whether on a perpetual basis for our Universal Content Management software or on a term basis for our Content Components software, our installed base of products increases. Since the rate of annual renewals of post contract customer support services on our Universal Content Management and Content Component software has remained high, our post contract customer support revenues have grown as our installed base of products has grown. Also, Universal Content Management revenues related to consulting services work can increase as a result of a larger installed base of products. We expect our installed base of products to continue to increase and our services and post-contract support revenue to grow.

Product Licenses

     Revenues generated from product licenses totaled $13.3 million and $27.0 million for the second quarter and first half of fiscal year 2006, respectively, a decrease of $1.5 million and an increase of $0.6 million, or (10%) and 2%, respectively, from $14.8 million and $26.5 million in the second quarter and first half of fiscal year 2005 respectively. The decrease in revenues for the second quarter of fiscal year 2006 compared to the second quarter of fiscal year 2005 relates to a reduction in our Content Component software orders in particular from a transaction approximately $5.5 million in license revenue in the September 2004 quarter. The increase in license revenue when comparing the first half of fiscal year 2006 to the first half of fiscal year 2005 was due to an overall increase in our Universal Content Management software sales, which included one transaction of approximately $2.8 million during the first quarter of fiscal year 2006. Although we continue to anticipate expenditures for information technology to remain soft for the rest of fiscal year 2006, we do expect our overall license revenue to increase in absolute dollars and should represent approximately 47% to 49% of our total revenue for the remainder of fiscal year 2006.

Services

     Revenues for services, consisting of consulting services, training and billable expenses, totaled $6.9 million and $12.1 million for the second quarter and first half of fiscal year 2006, respectively, increases of $1.9 million and $2.7 million, or 38% and 29%, respectively, from $5.0 million and $9.4 million in the second quarter and first half of fiscal year 2005 respectively. The increase in revenues for services was due to an increased number of consulting engagements associated with the increased number of new transactions sold during the first half of fiscal year 2006, as well as the e-Onehundred Group acquisition in June 2005. We anticipate that the percentage of service revenue to total revenue will continue to be approximately 18% to 20% during the remainder of fiscal year 2006.

     Generally, customers prefer to have us perform consulting services or supplement their internal information technology staff, a trend we believe will continue. Our consulting service revenue relates almost exclusively to our Universal Content Management software as our Content Components software is embedded in another company’s software and that company would typically perform the consulting services. Universal Content Management revenues related to consulting services work can increase as a result of a larger installed base of products. Because we expect the trend toward companies increasingly using the Web for communicating and publishing business information and the trend toward viewing information electronically to continue, we expect revenues attributable to consulting services to continue to increase. A decline in license revenues may result in fewer consulting services engagements.

Post-Contract Support

     Revenues for post-contract support for the second quarter and first half of fiscal year 2006 totaled $9.9 million and $19.6 million, respectively, increases of $1.8 million and $4.8 million, or 21% and 33%, respectively, from $8.1 million and $14.8 million in the second quarter and first half of fiscal year 2005 respectively. The increase in revenues for our post-contract support was due to supporting a larger customer installed base of Universal Content Management and Content Component products. We anticipate that the percentage of post-contract support revenue to total revenue will be approximately 32% to 34% for the remainder of fiscal year 2006 and that post-contract support revenue in absolute dollars will increase.

     As we license our products, whether on a perpetual basis for our Universal Content Management software or on a term basis for our Content Components software, our installed base of products increases. Since the rate of annual renewals of post-contract customer support services for our Universal Content Management and Content Component software has remained high, our post-contract customer support revenues grow because we have a larger installed base of products. Since post-contract customer support contracts are generally sold with each license transaction, a decline in license revenues may also result in a decline in customer support revenues. However, since post-contract customer support revenues are recognized over the duration of the support contract, the impact would lag behind a decline in license revenues.

COST OF REVENUES AND GROSS PROFIT

Cost of Revenues — General

		Three Months Ended September 30,												Six Months Ended September 30,
		2005				2004				Change				2005				2004				Change
		(in thousands, except for percentages)
Cost of product licenses		$	815			$	1,068				(24	%)		$	1,975			$	2,360				(16	%)
Cost of amortization of capitalized software from acquisitions			443				643				(31	%)			859				1,106				(22	%)
Cost of services			6,484				5,431				19	%			11,509				9,610				20	%
Cost of post-contract support			1,956				1,179				66	%			3,806				2,297				66	%
Total cost of revenues		$	9,698			$	8,321				17	%		$	18,149			$	15,373				18	%
Gross profit		$	20,449			$	19,635				4	%		$	40,559			$	35,243				15	%
As a percentage of total revenue:
Cost of product licenses			3	%			4	%							3	%			4	%
Cost of amortization of capitalized software from acquisitions			1	%			2	%							2	%			2	%
Cost of services			22	%			19	%							20	%			19	%
Cost of post-contract support			6	%			5	%							6	%			5	%
Total cost of revenues			32	%			30	%							31	%			30	%
Gross margin			68	%			70	%							69	%			70	%

     Total cost of revenues increased by $1.4 million and $2.8 million, or 17% and 18%, respectively, to $9.7 million and $18.1 million for the second quarter and first half of fiscal 2006 when compared to the same periods in fiscal year 2005. Total cost of revenues as a percentage of total revenues was 32% and 31% for the second quarter and first half of fiscal year 2006, compared to 30% for the same periods in fiscal year 2005. Overall gross profit increased by $0.8 million and $5.3 million, or 4% and 15%, to $20.4 million and $40.6 million for the second quarter and first half of fiscal year 2006 when compared to the second quarter and first half of fiscal year 2005. Total gross profit as a percentage of total revenues was 68% and 69% for the second quarter and first half of fiscal year 2006 compared to 70% for the same periods in fiscal year 2005. Although we were able to increase our overall gross profit dollars from generating higher levels of services and post-contract support revenue, our overall gross profit percentage was lower when comparing fiscal year 2006 to fiscal year 2005 due to a larger percentage of our revenue coming from services and post-contract support. Revenues generated from our services and post-contract support carry a lower gross margin percentage than our product license revenue.

Cost of Revenues — Product Licenses

		Three Months Ended September 30,												Six Months Ended September 30,
		2005				2004				Change				2005				2004				Change
		(in thousands, except for percentages)
Cost of product licenses		$	815			$	1,068				(24	%)		$	1,975			$	2,360				(16	%)
Cost of amortization of capitalized software from acquisitions			443				643				(31	%)			859				1,106				(22	%)
Total cost of product licenses		$	1,258			$	1,711				(26	%)		$	2,834			$	3,466				(18	%)
Gross profit — product licenses		$	12,063			$	13,064				(8	%)		$	24,215			$	22,988				5	%
As a percentage of product license revenue:
Cost of product licenses			6	%			7	%							7	%			9	%
Cost of amortization of capitalized software from acquisitions			3	%			4	%							3	%			4	%
Total cost of product license revenues			9	%			12	%							10	%			13	%
Product license gross margin			91	%			88	%							90	%			87	%

     Cost of revenues for product licenses. Cost of product licenses includes expenses incurred to manufacture, package and distribute our software products and related documentation, as well as costs of licensing third-party software embedded in or sold in conjunction with our software products. Cost of revenues for product licenses in the second quarter and first half of fiscal year 2006 totaled $1.3 million and $2.8 million, respectively, a decrease of $0.5 million and $0.6 million, from $1.7 million and $3.5 million in the second quarter and first half of fiscal year 2005. Gross profit as a percentage of revenues for product licenses was up to 91% and 90% for the second quarter and first half of fiscal year 2006 compared to 88% and 87% for the same periods in fiscal year 2005. The slight decrease in cost of revenues for product licenses was attributable to lower third-party software royalty costs associated with technology incorporated into certain Universal Content Management products and therefore was due to our product mix. During the first quarter of fiscal year 2006, we acquired the source code for our Sarbanes-Oxley Solution product from the e-Onehundred Group, which contributed to lower third-party royalty costs during the second quarter of fiscal year 2006. These reductions were partially offset by lower Content Component software product license revenue during the first quarter and first half of fiscal year 2006 when compared to the same period in the prior year, which carry a higher gross margin than our Universal Content Management software revenue.

     Amortization of Capitalized Software from Acquisitions. Cost of product license revenues related to amortization of capitalized software from acquisitions was approximately $0.4 million and $0.9 million for the second quarter and first half of fiscal year 2006 compared to $0.6 million and $1.1 million for the second quarter and first half of fiscal year 2005. The cost of revenues for amortization of capitalized software from acquisitions was attributable to the amortization of capitalized software obtained in the acquisition of certain assets of RESoft, Kinecta, Active IQ, Ancept, Optika and the e-Onehundred Group, in July 2001, April 2002, March 2003, August 2003, May 2004 and June 2005, respectively. The slight decrease in cost of revenues related to amortization of capitalized software from fiscal 2005 compared to fiscal 2006 was attributable to the completion of amortization of capitalized software related to our acquisition of Kinecta during our fiscal year 2005. This was partially offset by amortization expense recognized in connection with our acquisition of Optika starting in June of 2004 and the e-Onehundred Group in July of 2005. We acquired technology from the companies listed above for incorporation into our Universal Content Management products in order to maintain competitive functionality. We expect to continue to evaluate selective potential acquisitions. To the extent we consummate additional acquisitions, and depending on the structure of such acquisitions, the assets acquired and the consideration paid, our costs of revenues related to amortization of capitalized software from acquisitions may increase.

Cost of Revenues — Services

		Three Months Ended September 30,												Six Months Ended September 30,
		2005				2004				Change				2005				2004				Change
		(in thousands, except for percentages)
Services — cost of revenue		$	6,484			$	5,431				19	%		$	11,509			$	9,610				20	%
Gross profit — services		$	454			$	(389	)			217	%		$	589			$	(210	)			380	%
As a percentage of respective revenue:
Cost of services			93	%			108	%							95	%			102	%
Gross profit			7	%			(8	%)							5	%			(2	%)

     Cost of services revenues, consisting of personnel, billable and unbilled travel expenses and other operating expense, increased by $1.1 million and $1.9 million, or 19% and 20%, to $6.5 million and $11.5 million for the second quarter and first half of fiscal year 2006 when compared to the same period in the prior year. Gross profit as a percentage of revenues for services improved to 7% and 5% for the second quarter and first half of fiscal year 2006 compared to negative gross margin percentages of 8% and 2% for the same periods in fiscal year 2005. The increase in consulting service costs when comparing the second quarter of fiscal year 2006 to the second quarter of fiscal year 2005 is due to our acquisition of the e-Onehundred Group in June 2005. We have made significant changes in the first six months of fiscal year 2006, including the appointment of a new head of services in Europe, increasing our hourly billing rates, improving our utilization and implementing a web based time management system. We anticipate that our cost of consulting and training services as a percentage of total consulting and training revenue will decrease for the remainder of fiscal year 2006, as we believe that we will continue to improve the utilization of the combined service departments of Stellent, Optika and the e-Onehundred Group and from the changes described above.

     Since our support and service revenues have lower gross margins than our license revenues, our overall gross margins will typically decline if our support and service revenues increase as a percent of total revenues. Our cost of support and service revenues as a percentage of support and service revenues may vary from period to period, depending in part on whether the services are performed by our in-house staff, subcontractors or third-party system integrators. If our customers perform more services activities in-house or increase the use of third-party systems integrators, our support and service revenues and cost of support and service revenues realized on a per-customer basis may decline and result in lower gross margins.

Cost of Revenues — Post-Contract Support

		Three Months Ended September 30,												Six Months Ended September 30,
		2005				2004				Change				2005				2004				Change
		(in thousands, except for percentages)
Post-contract support — cost of revenue		$	1,956			$	1,179				66	%		$	3,806			$	2,297				66	%
Gross profit — post-contract support		$	7,932			$	6,960				14	%		$	15,755			$	12,465				26	%
As a percentage of respective revenue:
Post-contract support			20	%			14	%							19	%			16	%
Gross profit			80	%			86	%							81	%			84	%