Open Text Q1 2009 Earnings Conference Call Transcript

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

Question: Tom Liston - Versant Partners - Analyst : Hi, thank you, good afternoon. On Captaris, can you talk a little more about the rationale for acquiring them there? They look to us that they are in a bit of organic growth and [new] decline over the last few years, and certainly wou8ld be guided to further decline of license. Can you talk about the cash payback that you looked at when you bought this, and why this versus other use of cash?

Question: Tom Liston - Versant Partners - Analyst : Is three to five years sort of a proxy?

Question: Tom Liston - Versant Partners - Analyst : Okay, great.

Question: Tom Liston - Versant Partners - Analyst : Absolutely. Just going back to Open Text, Paul, on the DSOs, I'm a bit confused. The DSOs are excellent, but you talking about collections not being as good at the end of the quarter. Can you explain that again?

Question: Tom Liston - Versant Partners - Analyst : Okay, there you go. And that, I assume, explains the deferred revenue issue because obviously year-over-year it doesn't look the best, and sequentially didn't look good in terms of normal patterns. Can you confirm it's currency, and talk about your renewal rates?

Question: Tom Liston - Versant Partners - Analyst : And restructuring of $20 million, is there any writedown and intangibles or anything? Or is that mainly a cash outlay? 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: Tom Liston - Versant Partners - Analyst : Okay. Just finally, John, you explained it finally well, but the issue - the industry [announcements] have very optimistic about spending. We are starting to see that being corrected a bit. But you have seemed very confident. So what do you talk to your own customers about, that the some of the others, like SAP and EMC and such, you know, they are seeing something different than you're seeing in terms of confidence about their outlook, so can you explain why your outlook is a little more bullish than the industry?

Question: Tom Liston - Versant Partners - Analyst : Great. I'll pass the line. Thanks, guys.

Question: Paul Steep - Scotia Capital - Analyst : Good evening. John, maybe you can talk about some the partnerships that, you know, obviously you're in deeper with SAP now with some of their best run now offerings. Maybe you can talk a little bit, as much as you can, around how those are performing in the market? You gave us a rundown on that but some of those partners, namely SAP, had a bit of a hiccup in the last quarter, how that impacted you or not, as it were?

Question: Paul Steep - Scotia Capital - Analyst : And the last one for me, just to be -- if you can talk a little bit about the consulting side. It looked a little bit weaker this quarter, the last downturn, it was a tougher part of the business you have managed, what you have done so far there? And then Paul, if you can just confirm the head count now is? That would be great.

Question: Paul Steep - Scotia Capital - Analyst : I'm sorry, total company.

Question: Paul Steep - Scotia Capital - Analyst : Yes.

Question: Paul Steep - Scotia Capital - Analyst : Pardon me?

Question: Paul Steep - Scotia Capital - Analyst : Thanks, guys. 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/Waterhouse Securities - Analyst : Thank you. Just -- John, just to get a handle on the head count, or what could be involved in the head count reduction, the last number that Captaris disclosed I believe was 600 heads in Q2. How many do they have at closing, and I guess what is the combined number of employees in the organization that you're taking 20% off - or 10% off?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. And when we are thinking of the benchmarks of the $20 million and then the $40 million, is the basis for that, I guess, the combined September quarter operating costs?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. And just, John, you commented on the - again, the growth guidance and the industry analyst range. Last quarter you gave the range of 10% to 13%, and that time expected it to be in the upper end of that. I'm just wondering if you can give us some - a little bit more, you know, numbers around what you're now expecting and then, you know, relative to your answer to that, is some of the head count reduction that we are seeing, I guess, to protect the margins in what could be a much slower revenue environment? 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/Waterhouse Securities - Analyst : Okay. And then just -- lastly, John, if you can comment on any of the, you know, early [upgrade] revenue opportunities, pipeline for I guess Hummingbird customers adopting some of the Open Text products, and are you still - given your conversations, are you expecting that to sort of take place in earnest following the content [loan]?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Great. Okay, thank you.

Question: Richard Tse - National Bank Financial - Analyst : Hi, John. Quick question here. You said that business remains on track, and you said that your pipeline is fairly strong, and you're taking this big haircut in terms of restructuring. Is that -- should we read that largely to be -- that's to get Captaris onto your operating model? Because if everything is strong as you indicated, and it's not due to Captaris, then the margins would be pretty significant in terms of the outlook right now, no?

Question: Richard Tse - National Bank Financial - Analyst : Okay. When you look at Captaris, and you talked about the typical decline post-acquisitions, what was the percentage of revenue coming from licenses for Captaris?

Question: Richard Tse - National Bank Financial - Analyst : Okay. And one final one here -- I may have missed this -- but the number of deals, some of your big deals here, you said you have seven over $1 million, five over $500,000. How many of those were influenced by your key partners here?

Question: Richard Tse - National Bank Financial - Analyst : And the main partners there would be?

Question: Richard Tse - National Bank Financial - Analyst : So it was across the board on all of those?

Question: Richard Tse - National Bank Financial - Analyst : Okay. Thank you.

Question: Dushan Batrovic - Canaccord Adams - Analyst : Hi, thank you. Let me ask a hypothetical. Would you have announced any restructuring had you not announced Captaris?

Question: Dushan Batrovic - Canaccord Adams - Analyst : Probably not. Okay. So -- so -- I guess you're looking to be cautious here based on what you're seeing on the macro front, but this is an opportunity really to deal with overlap with Captaris more than anything else, given the strength in the pipeline?

Question: Dushan Batrovic - Canaccord Adams - Analyst : Okay. And the cautiousness that you're talking about, is that first-hand experience or is that more looking at SAP's results, reading the headlines, or how much of did that did you actually see in the quarter and looking out?

Question: Dushan Batrovic - Canaccord Adams - Analyst : Got it. Okay. And last one, just can you remind us, what did you say about accretion in Q3, was it? You're looking for the deal to be accretive?

Question: Dushan Batrovic - Canaccord Adams - Analyst : Got it. Thank you.

Question: Brian Freed - Morgan Keegan & Co. - Analyst : Thank you for taking my call. On the deferred revenue, could you give a little bit more clarity in terms of what the dollar impact of currency was to your deferred revenue balance in the quarter?

Question: Brian Freed - Morgan Keegan & Co. - Analyst : Okay. And then secondly, with respect to OEM customers for Captaris, I know they have had some historically, do you think you will be able to retain any of those relationships, and what was the revenue contribution of those?

Question: Brian Freed - Morgan Keegan & Co. - Analyst : Okay.

Question: Brian Freed - Morgan Keegan & Co. - Analyst : Okay.

Question: Paul Lechem - CIBC World Markets - Analyst : Thank you, good evening. Just wondering on the two small acquisitions you made in the quarter, [Spice] or [Indymotion], was there any revenue contribution from those?

Question: Paul Lechem - CIBC World Markets - Analyst : Okay. And in the press release your comments, I think, John you say you're maintaining your current earnings target for the year. Is that the sort of profitability model that Paul gave us? Or what do you mean by that?

Question: Paul Lechem - CIBC World Markets - Analyst : In the press release it quotes John as saying, "We maintain our current earnings target for the year." I'm not sure what that is.

Question: Paul Lechem - CIBC World Markets - Analyst : Before the Captaris acquisition?

Question: Paul Lechem - CIBC World Markets - Analyst : So we put the modification on top of those current consensus numbers?

Question: Paul Lechem - CIBC World Markets - Analyst : All right. And the last question -- just going back on SAP, given that they are an important partner of yours, have there been any change in sales, influenced deals coming through that channel?

Question: Paul Lechem - CIBC World Markets - Analyst : Okay, good. That's it for me. Thank you.

Question: David Shore - Research Capital - Analyst : Thank you. Good evening, you guys. In light of the issue you had with the accounts receivable at the end of the quarter, are you making any changes to your collection policies? And if so, can you describe them?

Question: David Shore - Research Capital - Analyst : Okay. As far as partner revenue goes, are you still targeting roughly 40% coming from partners, or have you looked at that in light of the current environment, of maybe that changing? 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 Shore - Research Capital - Analyst : Okay, and sorry I didn't catch if you said, what was the percentage of license revenue from new customers in the quarter?

Question: David Shore - Research Capital - Analyst : Okay. Thanks, John.

Question: David Wright - BMO Capital Markets - Analyst : Thank you very much. There have been a number of Red Dot announcements. The product line seems to be moving extremely well. Do you have a sense you're gaining market share, and who are you impacting at this point, do you think?

Question: David Wright - BMO Capital Markets - Analyst : So you're not seeing the impact on any one or two competitors specifically?

Question: David Wright - BMO Capital Markets - Analyst : Okay. 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 Capital Markets - Analyst : Okay. Great. On the connectivity side, can you comment at all on that business? And do you anticipate it, with the slowdown in the economy and perhaps employees being reduced across a number of industries, do you see that side of the business impacted at all?

Question: David Wright - BMO Capital Markets - Analyst : So really, you know, we have heard lots of scary things about the economy and employment and layoffs and that, but you as yet haven't really - certainly from September it was a great quarter and as yet, you aren't really seeing it in your business at all? Is that correct?

Question: David Wright - BMO Capital Markets - Analyst : Right. So you're obviously in a good space.

Question: David Wright - BMO Capital Markets - Analyst : Yes. How about - the combined number of sales reps after you do your restructuring, what number are you shooting for?

Question: David Wright - BMO Capital Markets - Analyst : Okay. And lastly, often you have given out business by sector. Do you have that available? 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 Capital Markets - Analyst : Great. Congratulations. Thanks a lot.

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Thank you. Paul, I just want to touch base on the restructuring and also I guess on Captaris's existing business. They had a sizable hardware and appliances business that they call appliances. What are you going to do with that business? Is that something you are going to continue on? And how will you report that business?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay. Great.

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay. Great. And, Paul, I'm just wondering if you could -- you skipped over a facet in terms of the expense savings you're expecting for the last three quarters of this year. Could you just walk through that again? 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: Blair Abernethy - Thomas Weisel Partners - Analyst : That's based on your current run rate now, and Captaris's as of now or as of the end of June when they last reported?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay, great. One other question. Just in terms of the partners, John, you've talked a lot about the some software partners. What about the SI partners? What's going on on that side? I'm wondering if you can tell us who is kind of leading the charge there for you? And in terms of your partner revenue, can you give us a sense of what the split would be between, you know, the SAP and Microsofts of the world versus the SI partners? How much are the SI partners contributing to the overall model?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay, great. Thank you very much, gentlemen.

Question: Ralph Garcea - Haywood Securities Inc. - Analyst : Good evening, gentlemen.

Question: Ralph Garcea - Haywood Securities Inc. - Analyst : A quick question. If you look at Captaris's geographic breakdown, they were weaker in Europe. Was that just a function of they didn't have the sales capacity there, or was there something around their product lines that sort of dictated that revenue split? And given your presence there, can you leverage their product into Europe?

Question: Ralph Garcea - Haywood Securities Inc. - Analyst : And I know, you know, the question was asked, but on a combined sales force, will you look at cutting that by 10% or will you more cut on the G&A side on some of the other redundant areas and just focus on growing that sales capacity?

Question: Ralph Garcea - Haywood Securities Inc. - Analyst : Okay, thank you.

Question: Steven Li - Raymond James & Associates - Analyst : Thank you. Just a couple quick questions. Paul, the $20 million charge, how much is severance and facilities?

Question: Steven Li - Raymond James & Associates - Analyst : 75% on the -

Question: Steven Li - Raymond James & Associates - Analyst : Okay, great. And John, any comments on linearity in the quarter? Was it consistent throughout, and how are things so far in October? Thanks.

Question: Steven Li - Raymond James & Associates - Analyst : And so far in October, John?

Question: Steven Li - Raymond James & Associates - Analyst : Okay, great, thanks.

Question: Gabriel Leung - Paradigm Capital - Analyst : Thanks. Just going based to Captaris, just based on the last few calls, it sounded like you had a couple of large deal opportunities in the pipeline that they expected to close over the course of the remainder of calendar '08, including some with the German government. John, any chance you can comment around what the pipeline is looking like for the remainder of the year?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay. And John, another question. Just want to get your thoughts, just get your expanded comments around your forward outlook. You had mentioned that you think Open Text will grow sort of at the high end of what the industry growth consensus is, whatever that shakes out to be?

Question: Gabriel Leung - Paradigm Capital - Analyst : When you talking about that, are you talking about that for Open Text as a stand-alone entity or on a combined basis?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay. And when you say that, do you mean that on a reported or constant currency basis? Just given what is going on with the US dollar and the Euro and the pound?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay. And one question for you, Paul. What was the gain or the loss reported from your interest rate collar this quarter? And I presume that would be your net interest expense?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay, perfect. Thank you.

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Thanks. Just one clarification on the comment that you are comfortable with the bottom line. What you meant to say is you're comfortable with the consensus for this year as it stands right now, plus you would expect some accretion related to Captaris?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Right. And just looking at the - your comment about the run rate licenses at Captaris down 25%, 30% first year, you expect the other lines of business absent a purchase accounting to be pretty much in line with where they have been?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. And do you have any feel for what those purchase accounting adjustments will be yet, Paul?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay, great. Just want to clear that up. Thanks.

Question: Richard Tse - National Bank Financial - Analyst : Just want to follow up on Captaris. How will this affect your relationship on the image capture side with Kofax? They have an image capture component as well.

Question: Richard Tse - National Bank Financial - Analyst : Great. Thank you.