Open Text Q1 2006 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Paul Steep - Scotia Capital - Analyst : John, if you could just comment on the reorganization of the Company. Has there been any realignment of senior management responsibilities post the restructuring that have helped sort of change things here in this quarter? What can we expect on that front going forward?

Question: Paul Steep - Scotia Capital - Analyst : Has there been a management change related to that at all? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Paul Steep - Scotia Capital - Analyst : In that he's rolling everything up globally then, so you've changed or sort of realigned from Germany and satellites sites to one base in Waterloo again?

Question: Paul Steep - Scotia Capital - Analyst : One final quick question was just on the partner side. Maybe you give us a benchmark level today in terms of the dollar value of business you're doing with SAP so that we can sort of track your progress going forward as you try to work on these partnerships.

Question: Scott Penner - TD Newcrest - Analyst : John, just on the million dollar deals, just any color you can add as to what products are sort of leading those deals and any influence of partners that you've seen, specifically on the larger deals?

Question: Scott Penner - TD Newcrest - Analyst : Would you characterize these large deals as being towards an enterprise standard? Or are they just larger installs of what may already be in place? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Scott Penner - TD Newcrest - Analyst : On the email archiving market in particular -- I know that's a source of excitement for you -- who are the competitors that you come up against? And are they -- do you ever see let's call it storage vendors other than EMC in the mix to try to create email archiving solutions from a storage standpoint?

Question: Tom Liston - Versant Partners - Analyst : First probably more for Alan. Can you comment just on if there was any particular impact in Q1 -- a positive impact from the restructuring? Or was

Question: Tom Liston - Versant Partners - Analyst : And that was spread mainly in the G&A? Or was it in all sorts of areas?

Question: Tom Liston - Versant Partners - Analyst : Have you outlined any targets for where you want to be sort of end of the year post-restructuring in terms of different line items as a percentage of revenue?

Question: Tom Liston - Versant Partners - Analyst : And where is the number of quota-carrying sales force currently as opposed to before the restructuring?

Question: Tom Liston - Versant Partners - Analyst : Is the change a result of being a proactive change? Or is it just the normal coming and going of different salespeople?

Question: Tom Liston - Versant Partners - Analyst : And finally, how much would you estimate the impact of the restructuring potentially having on your organic revenue growth for this coming year?

Question: Tom Liston - Versant Partners - Analyst : Yes, so obviously, you're cutting some people that contribute to revenue. What do you think the impact may be this coming year on your organic revenue growth outlook?

Question: Tom Liston - Versant Partners - Analyst : Will the Sarb-Ox probably at least be a bit less than last year? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Howard Lis - JMP Securities - Analyst : Can you give us a little more detail on the restructuring, exactly the number of staff that were let go? What your headcount now is? And then a little more color if you can please on the facilities that you are exiting from? Thanks.

Question: Howard Lis - JMP Securities - Analyst : Sorry. You said 15% you have or will let go? How many have been let go to date?

Question: Howard Lis - JMP Securities - Analyst : And the remainder are coming this quarter or--?

Question: Howard Lis - JMP Securities - Analyst : And is that just for projects and stuff that they are finishing off? Is that why there's a delay in--?

Question: Howard Lis - JMP Securities - Analyst : And just going back to one of the numbers you mentioned just I want to go over the cash restructuring costs. Did you say there was 3.4 million of cash restructuring costs in the quarter?

Question: Howard Lis - JMP Securities - Analyst : So of the 18 million charged -- and I think we talked a bit about this last quarter -- is the majority of that cash related?

Question: Howard Lis - JMP Securities - Analyst : So there's roughly almost 15 million of cast restructuring costs you did not incur yet. But when do expect that to pay out those expenses?

Question: Howard Lis - JMP Securities - Analyst : I got that for the overall charge you expect. But specifically for Q1, it is the same percentage roughly?

Question: Howard Lis - JMP Securities - Analyst : The 50, 30, 20 you made in the context of the overall 25 to $30 million charge you expect to take within the first half of the year?

Question: Howard Lis - JMP Securities - Analyst : And John, you started off by saying that overall revenue growth was in line with the industry. So you're saying the industry growth is in the single-digit range?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Congratulations on your progress this quarter. John, shed a little light on just confirming the coverage -- the forecast stance that you took last quarter that your current forecast excludes any big deals in this quarter that have -- in Q2, excuse me, that have not yet been signed?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And the second question is -- just trying to understand -- maybe this is more for Alan. Last time, you guided for 30 million of savings for the year due to the restructuring. About 35% of which is going to come into Q1 and Q2, which is about 10 million or about 6 -- I guess that would sort of you -- 4 million Q1, 6 million in Q2, sort of thereabouts. And therefore, just wondered if that's -- you just said I think that 3 million of it's coming in or came in this quarter. So does that mean that you are on track for another 7 million of savings next quarter?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And so you feel pretty comfortable that you are still on track for the full 30 million to come out this year?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And just a last question, John, the number of deals that you're doing, where you are targeting new customers, are those largely Livelink-related deals? Or are they other products in your product mix? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Mike Abramsky - RBC Capital Markets - Analyst : And in that case, are you seeing -- it's funny that you should say that you are doing wins against Palm Light (ph) and Documentum. They continue to say that they don't see you in their conference calls, and I am just wondering if you could reconcile that.

Question: Mike Abramsky - RBC Capital Markets - Analyst : You guys are probably passing each other on the way in and --

Question: Mike Abramsky - RBC Capital Markets - Analyst : -- don't see each other.

Question: Richard Tse - National Bank Financial - Analyst : A couple quick questions here. First, with respect to some of these other solutions that are coming out from companies like Oracle, are you guys going to start moving down to the lower end of the market to compete at that level? Or are you just going to stay where you are in terms of offering your applications, which you would argue was of greater depth?

Question: Richard Tse - National Bank Financial - Analyst : And if you look at the market today, it looks like -- because of the whole space has not been really growing that well. Can you kind of give some commentary in terms of why that is happening? What is the point of resistance here? Is it that the solutions are too complicated; they are too costly? What is sort of the consensus view from your customers?

Question: Richard Tse - National Bank Financial - Analyst : And one final one with respect to partnerships. Obviously, you talked about SAP. What about system integrators? A lot of your competitors are kind of using that as a pretty good channel? And arguably there are very few who are left over. What are your views on that?

Question: Robert Schwartz - Jefferies & Co - Analyst : The first question is really for Alan. You mentioned something about $10 million of financing related to the new facilities you are taking over. Could you just clarify what you meant by that? I sort of missed it.

Question: Robert Schwartz - Jefferies & Co - Analyst : So that means 10 million more of expenses then, correct, a quarter?

Question: Robert Schwartz - Jefferies & Co - Analyst : Now I see what you're saying; thank you. I noticed sequentially that customer support was down just a hair. And I don't think I've seen fall sequentially before, and I am wondering what would explain that?

Question: Robert Schwartz - Jefferies & Co - Analyst : Yes, wasn't it last quarter about 46.9. In this quarter, it is 46.6. Am I right there?

Question: Robert Schwartz - Jefferies & Co - Analyst : But you did haven't it last year. Was there a reason why it didn't happen last year, and it happened -- that would explain that?

Question: Robert Schwartz - Jefferies & Co - Analyst : So you think this is pure seasonality as explanation.

Question: Robert Schwartz - Jefferies & Co - Analyst : Great. You mentioned SAP and Microsoft as being partners. Others have asked about SAP. So let me ask about Microsoft. Maybe you can bring us

Question: Robert Schwartz - Jefferies & Co - Analyst : Did you see some business with them this quarter, or is that more of a thing in the future?

Question: Robert Schwartz - Jefferies & Co - Analyst : And then last, maybe you can help us (indiscernible) a couple of minor line items here. The 123 expense, should we think of it roughly the same going forward? And the G&A at 10.4 million, should we think of that on a cash basis going down at all? I know the implication is that the percent will go down. I didn't know if we should think about in Q2 for a cash basis going down.

Question: Robert Schwartz - Jefferies & Co - Analyst : I meant the stock-based comp charge -- I'm sorry, not the stock-based comp fee --

Question: Ed Maguire - Merrill Lynch - Analyst : How much cash do you think will be necessary to repurchase the remaining 5% of IXOS shares?

Question: Ed Maguire - Merrill Lynch - Analyst : Any thoughts on timing? Where you might be able to complete that?

Question: Ed Maguire - Merrill Lynch - Analyst : And just looking at the share count, it's lower. I just want to understand that you didn't do any buybacks. Is that just really a result that your repurchases last quarter were weighted toward the end of the quarter?

Question: Ed Maguire - Merrill Lynch - Analyst : In the June quarter? But I'm just trying to understand the share count was down about -- it looks like it was down about 2 million sequentially from the June quarter. I'm just trying to understand what was behind the lower share count.

Question: Ed Maguire - Merrill Lynch - Analyst : Had to do with the share price. And also just a follow-up on maintenance, as you have referenced it. It is a challenging market for software vendors. Are you seeing any pushback in terms of rates or pricing on maintenance renewals yet? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Damian Wojcichowsky - Credit Suisse First Boston - Analyst : Just quickly on the revenue guidance for next quarter. If I use the license mix in the high 20% to low 30% range of revenue, it looks like we are going to see at least a single-digit decline in license growth versus last year. Is there something that we should be thinking about last year's figures versus this year's that explains that? Or when should we expect to see resumption in license growth?

Question: Peter Misek - Canaccord Capital - Analyst : Just a first question, John, on the market, and I want to try and attack the pipeline a little differently. You appear to have grown just like you said in line with the market with your peers on the license side. So there's a pipeline issue for all these deals. Has there been any change in the pipeline -- size, shape, etc? Is there a budget flush? Just trying to understand the business and the pipeline.

Question: Peter Misek - Canaccord Capital - Analyst : Do you expect that your customers have a budget flush? Should we see something going on? Because a lot of the Fortune 1000, you listen to their calls and their budgets and you talk to them, they appear not to have declined their IT budgets in fact they appear to have grown them. And yet, ECM as a market just appears to have stalled. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Peter Misek - Canaccord Capital - Analyst : Just a last question for you, John. On product portfolio, do you think you're missing anything right now? You're steady state, and we should see you march forward on the product portfolio side if no other tuck-in acquisitions that are on the horizon?

Question: Peter Misek - Canaccord Capital - Analyst : Alan, just two quick questions. Firstly, you have done a really good job of disclosing when there's been a reversal of previous restructuring reserves. But on the 10-K, you had some facility closure costs and acquisition-related costs related to acquisitions in the last 18 months. Every quarter, it appears there is several 100,000, just over 1 million of adjustments to that. Can you help me understand where that flows through the income statement if at all?

Question: Peter Misek - Canaccord Capital - Analyst : So not like the restructuring reserves that you have that separate line item in your income statement?

Question: Peter Misek - Canaccord Capital - Analyst : Last question, in your K, you had a goodwill and intangible impairment test in April. And do you expect any discussion on it? I just found that odd. I talked to other companies, and it seemed a little bit different. Can you help me understand why the impairment was done at the end of April and not at your year end?

Question: Troy Garner - Morgan Keegan - Analyst : This is actually Troy Garner for Brian. Alan, you drew down your deferred revenues a fair amount. It looks a little bit more than seasonal. Going forward, can we think about your customer support revenue being stable or growing over time?

Question: Troy Garner - Morgan Keegan - Analyst : And your fully diluted share count, I don't know if you gave us that. If you were in an income position versus a GAAP loss position, did you give us that number?

Question: David Wright - BMO Nesbitt Burns - Analyst : I wonder if you could talk about what vertical market is showing your greatest promise right now. Is it the financial services sector that is spending a little more, or is it government or pharmaceuticals?

Question: David Wright - BMO Nesbitt Burns - Analyst : And as a result of this, if oil and gas spending is going on, is that also the most competitive area because everyone is going after those -- that growth area? Or do you have particular strengths in that market? without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: David Wright - BMO Nesbitt Burns - Analyst : A question on interpretation of the impact from your cost-cutting. I guess one way to ask the question would be -- if you ended up doing the revenues this year that you did last year, obviously, I'm hoping that you were growing. But if it ended up being the same number, would the EBITDA number be $35 million higher as a result of the cost-cutting?

Question: David Wright - BMO Nesbitt Burns - Analyst : So you're saying that you would have reported $0.43 -- you would report $0.43 higher EPS if you had done the cost-cutting and ended up doing the same revenues?

Question: David Wright - BMO Nesbitt Burns - Analyst : And so then also in that vein, looking at next quarter and the operating cost of sales, G&A and R&D, should we expect a sequentially down quarter, given your revenue guidance? Have the cost-cutting -- will it have kicked in so that the expenses of those three should they be down or flat to up?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay, well, that is what I asked then.

Question: David Wright - BMO Nesbitt Burns - Analyst : So you had assets in place to grow the business and you have trimmed off fat, which is not off the overall base.

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay, that is closer to what I was expecting then. So then on Q2 of the operating costs, would you expect to see them flat to up or sequentially down?

Question: David Wright - BMO Nesbitt Burns - Analyst : Yes.

Question: David Wright - BMO Nesbitt Burns - Analyst : And the last question just on DSOs -- creeped up a little bit; I'm not sure that it's that meaningful. But does it reflect anything like giving clients longer payment terms to be more competitive? Or is it that you were closing deals later in the quarter? Or is it just an anomaly?

Question: David Wright - BMO Nesbitt Burns - Analyst : I thought it was a little more than that, but that's fine. Thanks very much.

Question: Blair Abernethy - Clarus Securities - Analyst : Just on this past quarter, Alan, do you have a breakout of the revenue by vertical market?

Question: Blair Abernethy - Clarus Securities - Analyst : And in the quarter just in terms of partners, you have talked about Microsoft. How about Deloittes (ph)? Was there any revenue in Q1 with Deloittes and in particular any traction with the Sarbanes-Oxley solution?

Question: Blair Abernethy - Clarus Securities - Analyst : On your services margins this quarter, 11.5%, I don't know if you can -- can you fill us in a little bit more as to why that number was so low this quarter?

Question: Blair Abernethy - Clarus Securities - Analyst : And just a last question, Alan. In terms of your outlook for next quarter, it looks to me like you are sort of -- your license revenue is your biggest variable obviously. Half of your revenues contracted maintenance services, moves around 1 or 2 million a quarter. So you've given us quite a large range, and so most of that's going to fall into licenses. Sitting here in early November, I guess I am trying to understand -- why is it that you could be looking at 30 million in license or you could be looking at 40 million in license, considering there is no large deals in that number?

Question: Stephen Li - Raymond James - Analyst : Alan, just on the services margins again, so would you expect the margins to bounce back to over 20% with the restructuring benefit?