Open Text Q1 2007 Earnings Conference Call Transcript

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

Question: Tom Liston - Versant Partners - Analyst : Just on the deferred revenue question or comment, can you just give us some additional color on what you expect the write-down to look like, or at least a bit of a range on what you think the maintenance exits out of Hummingbird?

Question: Tom Liston - Versant Partners - Analyst : And remind us when Hummingbird's seasonally strong in terms of maintenance renewals?

Question: Tom Liston - Versant Partners - Analyst : John or Paul, just to clarify on your Hummingbird revenue comments, I think the earlier comment was just talking about the ECM part. Can you talk about expectations of connectivity? Or [does] that new comment about 20% overall reduction just hold more or less across the board?

Question: Tom Liston - Versant Partners - Analyst : So, mainly on the license side. And you're saying that, obviously, services and maintenance will hold in hopefully a little better than that.

Question: Tom Liston - Versant Partners - Analyst : Paul, on the expense side, just further clarification. On the 50 million in savings, is that from October 2nd to end of year, or is that some type of pro forma exiting the year?

Question: Tom Liston - Versant Partners - Analyst : So if we added pro forma Hummingbird and Open Text as they sat on October 2nd, you expect to save 50 million from that run rate?

Question: Tom Liston - Versant Partners - Analyst : And the 80 million is - sorry -- for over the course of the entire fiscal 2008? You're not expecting to be necessarily [lumpy] towards the back?

Question: Tom Liston - Versant Partners - Analyst : Finally, just a comment, John, on the Stellent acquisition. You obviously said while you don't see them much, how do you think your partnership may or may not change as a result of that acquisition?

Question: Paul Steep - Scotia Capital - Analyst : I guess just to finish on all the restructuring and integration issues, John, maybe you could talk a little bit about the breakdown, roughly, by staff areas to where you've sort of taken cost out. Is it more Hummingbird or Open Text, where the weighting is there? And sort of where, I guess, within the functional areas -- where you've leaned more towards.

Question: Paul Steep - Scotia Capital - Analyst : Fair enough. In terms of non-core products, are there any products already that you've sort of decommissioned, or we've scaled back on, or that might be, I guess, sold off in part or whole to other firms?

Question: Paul Steep - Scotia Capital - Analyst : I guess the next one was -- you came sort of somewhat out of the blue here tonight and talked a little bit about service and maintenance, and the revenues going better there going forward. What's, I guess, shown up in the first almost two months, not quite, since the deal closed that's changed?

Question: Paul Steep - Scotia Capital - Analyst : Last one. Paul, just a really small item here, housekeeping. You did have a reversal of restructuring item this quarter on the core Open Text. Can you just give us a heads up as to what sort of went on there?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Thanks very much. Could you just talk a little bit about customer attrition risk going forward? It would seem to me that it will likely be a bit of time before you can assess the full extent of that potential risk. 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 : What are your plans and timing for a product integration roadmap? And what are you communicating? What is the message you're delivering to Hummingbird customers at this time regarding support for their current software?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Last question. On your guided savings, I think earlier on your restructuring you were -- in the previous restructuring you had guided for some larger savings initially, and then I think the actual savings were a bit lower because you had to incorporate some additional costs that came up later, such as rehiring certain employees in some of the consolidated facilities, etcetera. How have you approached your assessment of what is, obviously, probably an upside surprise here on the expected consolidation savings in this case?

Question: Mike Abramsky - RBC Capital Markets - Analyst : I recall that -- I don't have the exact numbers in front of me, but I do recall that one quarter after the restructuring was in -- original restructuring, pre-Hummingbird, was announced, there was -- there was a number that was put out there that was lower than the number that was previously mentioned.

Question: Mike Abramsky - RBC Capital Markets - Analyst : Might have been at the low end of the range.

Question: Mike Abramsky - RBC Capital Markets - Analyst : But I remember -- pardon me for beating a dead horse here, but I do remember that on that call, I think it was [Alan] made a comment that there was some additional cost that came in to resolve and consolidate some facilities that -- so, I guess I just wanted to understand the level of confidence you have on these savings, which are, obviously, very strong, that you're not going to see them be undermined by subsequent costs. For example, you just talked about supporting all the products. Are there cost implications to doing that that could arise as you continue to work your way, as you say, through the existing Hummingbird acquisition issues?

Question: Peter Misek - Canaccord Capital - Analyst : Just a couple questions. I know you're not giving guidance, but maybe you can help us understand operating -- some operating items for '07 and '08. Just reiterating some of the statements you made, in terms of revenue decline, call it 20%, that's approximately 40 million off of Hummingbird; write-downs, we're looking at about 15 million. Can you just confirm that? That's about 55 million, plus you have -- sorry -- against that you have about 50 million of savings. So, '07 from an accretive dilutive perspective is kind of a wash. Where you really start to make money off this deal is in '08. Is that correct?

Question: Peter Misek - Canaccord Capital - Analyst : John, in terms of strategically, if the ECM market is growing 8%, you're now the biggest independent vendor, I would think that you're going to want to try and use that to gain market share. And I would think that internally you guys would be disappointed if you just grew at the market. What strategies are you going to use to sort of gain market share? It sounds like of the [independent vendor], you have actually a unique selling proposition. Have you outlined the -- I know you're going to market with Microsoft and with Oracle and with SAP. But sort of beyond those areas, how are you going to sort of (multiple speakers) 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: Barbara Coffey - Kaufman Bros - Analyst : Just a couple quick questions. I don't think I caught the percentage of business that came through partnerships this quarter. And then, it speaks to -- some of the restructuring speaks to your closing about 38 facilities. I do not cover Hummingbird. About how many facilities did they have?

Question: Barbara Coffey - Kaufman Bros - Analyst : So, are you saying that Hummingbird had --

Question: Barbara Coffey - Kaufman Bros - Analyst : And then, on the partnership side, what was Hummingbird? Did they have a partnership profile as well?

Question: Izet Elmazi - TD Newcrest - Analyst : It's Izet Elmazi on behalf of Scott Penner. Just a question on the competitive environment. In their last quarter, one of your competitors in the legal market said they continued to have some customers cross over to their product, and a number of employees as well. If you can just comment on that.

Question: Izet Elmazi - TD Newcrest - Analyst : Okay. If you could just comment on the support revenue for this quarter. It was a little lighter than we had expected. Your comments going forward seem very positive, and you've actually guided up on that. Was this quarter's pause just simply hesitant customers waiting for some more news on the roadmap?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Just wanted to see if I can get some more clarity, John, around the notion of the decline. Your expectation of the decline in revenue is, I guess, now around the 20% range from Hummingbird. Could you just add some color? Is it more around some verticals that you're not interested in, or some products? Just if you can give us some more color around that.

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : But I presume in addition -- I guess, on the outside, with the 20% decline expectation, you also expect some potential cross-sell opportunities with your existing solution base into the Hummingbird customer base, I presume.

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Paul, just with respect to the accounting for the deferred rev on Hummingbird, just to clarify -- at the outset you're going to see a reduction in deferred revenue by about 15 million, and that's going to impact the income statement maintenance revenue as well?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : So in effect we're going to see somewhat of a short period inflated growth rate next year as the 15 million comes onside?

Question: David Shore - Desjardins Securities - Analyst : A couple questions. John, just on the connectivity business. Have you given any further thought to -- you talked about operating that as a separate business. Are the plans to keep that or perhaps sell that?

Question: David Shore - Desjardins Securities - Analyst : Just a housekeeping one. The IXOS -- what's left to buy, and how much would that cost?

Question: Duncan Stewart - Orion Securities - Analyst : A quick kind of clarification up front, going from the 10-K. Any comment on the section 1b conversation with the SEC? 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: Duncan Stewart - Orion Securities - Analyst : Right. But that's an ongoing conversation; it's not resolved?

Question: Duncan Stewart - Orion Securities - Analyst : Next question. Given the restatement -- I don't want to call it a restatement; sorry -- the reclassification of some of your support revenue down into service, may I assume as we go through each quarter you will effectively change the Q2 '06 Q3 and Q4 numbers the same way you've changed the Q1?

Question: Duncan Stewart - Orion Securities - Analyst : Good. Because I was kind of wondering what happened about your service revenues, because it's exactly 1.9 off, so now I know why. The FBI, 2.4 million; that was all in license?

Question: Duncan Stewart - Orion Securities - Analyst : And is that all in the quarter just reported, or is it spread out a bit?

Question: Duncan Stewart - Orion Securities - Analyst : That's unusually lumpy for a single quarter, isn't it? 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: Duncan Stewart - Orion Securities - Analyst : If I remember also, going from your August analyst day, the briefing -- sorry -- that was July, wasn't it? Sorry; the July analyst day. You talked about having 20% of revenues from partner sales -- sorry. I think at that time you talked about 30% target for partner sales by end of year. [Again], if I heard correctly, you said 20 on the call.

Question: Duncan Stewart - Orion Securities - Analyst : Just to clarify, that would be at 20, you and Hummingbird together, or just kind of the Open Text ECM stuff?

Question: Duncan Stewart - Orion Securities - Analyst : (indiscernible) they're already kind of higher at 30-ish, does that imply that sort of Open Text ECM will be kind of [sort of] 16, 17 on its own?

Question: Duncan Stewart - Orion Securities - Analyst : I sympathize with that.

Question: Duncan Stewart - Orion Securities - Analyst : This cost savings you give us here, 50 million in current fiscal year and 80 in '08, those are both headcount [RIF] as well as facility savings, correct? That's all in one? That's the whole package? 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: Steven Li - Raymond James - Analyst : John, on the connectivity side, are you seeing competitors trying to convert Hummingbird customers? And if so, how successful have they been?

Question: Steven Li - Raymond James - Analyst : So you would be expecting some growth from connectivity this year?

Question: Steven Li - Raymond James - Analyst : Just one more question. If you look at the Hummingbird ECM pipeline, any differences in terms of deal size? Is there a similar proportion of large deals, or is it more skewed to the mid-size deals? Thank you.

Question: Richard Tse - National Bank Financial - Analyst : Just one quick question here with respect to the cost savings. You said it's headcount facility. So, should we assume that all the 50 and 80 million are going to hit your adjusted operating EPS, or is there sort of an amortization of intangibles component here? 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 - GMP Securities - Analyst : Most of my questions have been asked already. I just wanted to go back to the Stellent purchase by Oracle. Can you just comment further in terms of you sort of said they're not somebody you encounter, as they're much smaller. But does this not raise the specter that perhaps Oracle would be -- try to sort of bundle in what they've got, and potentially elbow their way into some of these deals that you're not finding Stellent in today?

Question: Howard Lis - GMP Securities - Analyst : So what is your understanding of why they did it?

Question: Howard Lis - GMP Securities - Analyst : With respect to guidance, did you say it will be probably not until the Q3 results are out that you'll be providing guidance?

Question: Howard Lis - GMP Securities - Analyst : So it's either going to be at the end of when the next quarter is reported, or the quarter after that? 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.