Open Text Q2 2005 Earnings Conference Call Transcript

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

Question: Paul Steep - Scotia Capital - Analyst : John, maybe you can talk a little bit about Hitachi and what you're seeing in any metrics runs for the data archiving or email archiving market and some of the success you are seeing there?

Question: Paul Steep - Scotia Capital - Analyst : Great. And Alan, could you maybe just clarify one thing in terms of the timing for the IXOS minority interest closeout? And that would be it. Thanks.

Question: Tom Westin - Dalhousie Merchants - Analyst : Just in terms of the guidance, obviously, we've been through two quarters, and we look at the year-to-date numbers. And for example, we take the Q3 midpoint; you could essentially get a large number for Q4, something like a 27-percent sequential increase. Could you just talk about the dynamics and again obviously you could beat Q3 as well, but what you're seeing specifically that you could potentially get toward the upper end specifically revenue guidance range? 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 Westin - Dalhousie Merchants - Analyst : Are these deals probably -- look more like they're going to come towards Q4 rather than Q3? Or do you think there's some potential for a few to come in the next quarter?

Question: Tom Westin - Dalhousie Merchants - Analyst : And quickly -- did you give a partner revenue or indirect channel revenue number for the quarter? And where do you see that headed in about 12 months?

Question: Scott Penner - TD Newcrest - Analyst : John, I just wanted to ask -- you mentioned the SAP in North America. I wonder if you could just kind of give a little bit more information about the North American distribution model. Specifically, how SAP has been ramping up?

Question: Scott Penner - TD Newcrest - Analyst : Okay, and just to -- Alan, you mentioned the SOX expenses as part of the year guidance. Is that -¡ could I take that $10 million to be a surprise to you relative to the beginning of the year? Or is that about what you thought it would be? 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 : Could you give us a little bit more color again on these channel partners given -- I think some of the questions around visibility forward that arose in Q1. How do you get visibility when you are working with these partners in terms of comfort around your forecast? Which ones do you expect to be the strongest and maybe even which applications and geographies?

Question: Mike Abramsky - RBC Capital Markets - Analyst : I guess the question there, John, is -- this is obviously still a new set of relationships at that level. So how do you feel about the comfort level? Or how do you get a comfortable level from what you're hearing when you do that joint planning?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Last question -- how much of your current remaining guidance for the top line in the rest of the year is dependent on the European cross-sell into the existing customer base of Livelink?

Question: Mike Abramsky - RBC Capital Markets - Analyst : So, a significant portion, would you say? 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 : So, it is additional large compliance deals or whatever in North America, would that be sort of upside to what you're seeing in the pipeline through the partners in that cross-sell right now?

Question: Andrey Glukhov - Southwest Securities - Analyst : John, could you elaborate as far as the services are concerned -- what is the progress that you guys made in selling those solution bundles you talked about on the Analyst Day?

Question: Andrey Glukhov - Southwest Securities - Analyst : So what would you expect is the services margin target for you as ending the year?

Question: Andrey Glukhov - Southwest Securities - Analyst : And lastly, could you guys update us on your acquisitions strategy?

Question: Andrey Glukhov - Southwest Securities - Analyst : Is there any particular area you're looking into?

Question: Ed McGuire - Merrill Lynch - Analyst : Could you provide an update on your product release plans for the first half of '05 and specifically an update on progress on Project Avalanche?

Question: Ed McGuire - Merrill Lynch - Analyst : Okay. I don't know if you can quantify it or provide some color. But just in terms of the distribution of large deals and deals across the quarter -- what was coming from new customers? What's coming from existing customers? Is there a way to provide some color on 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.

Question: Ed McGuire - Merrill Lynch - Analyst : And just one final question -- wanted to touch on the competitive landscape in the records management area. Who do you encounter on a regular basis? Who would you consider the most common competitors? And what is your strategy really for commanding the disproportionate share of the market?

Question: Richard Tse - National Bank Financial - Analyst : Just one quick question here -- if you look at your former guidance for the current quarter that you're in now that you just reported, it was 100 to 106 million in revenue and 18 to 26 in EPS. And now that you have 114.7 million in revenue, why aren't you taking up your guidance? Can you kind of walk through the rationale on why you haven't done that?

Question: Richard Tse - National Bank Financial - Analyst : Okay and I guess related -- if you look at your operating costs for the year, you've already kind of run through the G&A lines. But in terms of R&D and the other lines, I guess at the -- sales and marketing, you cannot really talk about at this point. Developments going to be pretty much at 16 million here going forward for the next 3 quarters?

Question: Nate Swanson - ThinkEquity - Analyst : Going back to SOX, I know you still have 6 months to go. But can you give us a sense of where you are at in terms of Section 404 compliance around documenting internal controls? And then maybe just as a follow-on, will section 404 TP out of the M&A market over the near-term?

Question: Nate Swanson - ThinkEquity - Analyst : On any thoughts or comments as to what you expect your SOX compliance budget to look like for '06? Any visibility in terms of when those expenses might taper off?

Question: Nate Swanson - ThinkEquity - Analyst : Just one quick one in terms of guidance -- in terms of your seasonal natural patterns and what not, should I take your comments around the sequential growth flat to down slightly to go to the license revenue line? Or is that specific to total revenues? 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: Nate Swanson - ThinkEquity - Analyst : Okay. So your thought would be that it would trend roughly the same?

Question: Nate Swanson - ThinkEquity - Analyst : As a percentage of total revenues?

Question: Barbara Coffey - Brean Murray - Analyst : I actually have two. Can you speak a bit about the driver behind the sudden growth and need for services in Europe? Europe seems to be particularly strong. Are their particular regulations or compliance things that they are trying to meet?

Question: Barbara Coffey - Brean Murray - Analyst : And on the strength in Europe -- is it across the board or focused in a particular industry vertical?

Question: Barbara Coffey - Brean Murray - Analyst : And when you are competing internationally like this, are you seeing the same types -- the same competitors as you do domestically?

Question: Brandon Austin - Trott Securities - Analyst : Actually all of my questions have been answered. Thanks a lot.

Question: Steve Cainagin - Jefferies & Company - Analyst : Hi, this is Steve Cainagin (ph) for Rob Schwarzt. I noticed it looks as if goodwill is sequentially higher by 9 million. Can you shed any light on that? And were there any additional liabilities associated with acquisitions taken on?

Question: Steve Cainagin - Jefferies & Company - Analyst : And may I ask, I noticed your cash flow is exceeding your income this quarter. Your cash flow from operations. And I wondered if you can shed any light on kind of the strength of cash flows going forward. Do you expect that pattern to continue as we go forward here?

Question: David Wright - BMO Nesbitt Burns - Analyst : Just coming back to an acquisition question and timing -- so Tom, from what you said, it sounds like we shouldn't expect other acquisitions in the current fiscal year?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. And you are feeling that things are well under, since you are so complete with IXOS that you could handle another acquisition at this point?

Question: David Wright - BMO Nesbitt Burns - Analyst : And John, coming back to something you said about -- business is very strong in Germany. So you are doing well, that is kind of opposite to what I've heard from many other companies. So is the IXOS base of business? I'm just surprised that Germany is as strong as it is.

Question: David Wright - BMO Nesbitt Burns - Analyst : Question for Alan -- just on cost-cutting that has occurred already. Would there be anymore, not more cost-cutting, but should we see sort of lower-cost perhaps on the G&A line in Q3, as a result of efforts that have already been done?

Question: David Wright - BMO Nesbitt Burns - Analyst : And just on the balance sheet -- I noticed that the tax number, the deferred tax asset rose. What drove that -- your future tax asset long-term?

Question: Martin Cecchetto - UBS - Analyst : For John -- I think you mentioned that you're seeing a short of sales cycle. Was that particular to compliance driven mandates?

Question: Martin Cecchetto - UBS - Analyst : So you said, customers are anxious to meet deadlines there. Are those internal deadlines? Or are there still some deadlines moving forward with Sarbanes-Oxley beyond 404 that you think can drive revenue?

Question: Martin Cecchetto - UBS - Analyst : And beyond 404, are there things that you think will drive revenue as far as the (indiscernible) for Sarbanes-Oxley? 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: Martin Cecchetto - UBS - Analyst : And I missed the number that you said was proportion of your license revenue that you said that it was around --

Question: Damian Wojcichowsky - Credit Suisse First Boston - Analyst : Couple of questions -- first, can you talk about your foreign exchange impact on year-over-year revenue growth?

Question: Damian Wojcichowsky - Credit Suisse First Boston - Analyst : And the second question is -- on the recent FileNet results, we saw that FileNet basically made their quarter on a deal that accounted for 12 percent of their revenue. They are talking about going after much larger deals. It would appear that you guys are probably moving into that same market with your product strategy. How are you going to avoid having to make such large deals to make your quarter?

Question: Damian Wojcichowsky - Credit Suisse First Boston - Analyst : Is that the natural state of affairs for you? Or do you to actually have to make adjustments to your sale strategy than to do 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.

Question: Brandon Austin - Trott Securities - Analyst : Just a bit of a -- I want to devle a bit into the professional services. Usually Q2 is a pretty decent quarter for you guys professional service wise due to the conferences and stuff. Do you have a sense of how much of that professional service revenue came from the conferences. And two -- when you guys adjust your headcount to allow yourselves not to do so much outsourcing, where do you expect gross margins on professional services to kind of end up?

Question: Brandon Austin - Trott Securities - Analyst : Okay. So you're saying like 2.5 million came from live linkup then?

Question: Brandon Austin - Trott Securities - Analyst : Oh, of the increase.

Question: Scott Penner - TD Newcrest - Analyst : I just wanted to ask, Hitachi and the other storage vendors, traditionally IXOS resellers -- have they shown an interest in carrying a broader line of your products?

Question: Scott Penner - TD Newcrest - Analyst : Is there any application that you can see as being a natural tie-on to a storage sale?

Question: Justin Q - Desjardin Securities - Analyst : Just a quick question -- I missed the geographic breakdown. If I could just get that from you, John, I would appreciate it. Thanks.

Question: Justin Q - Desjardin Securities - Analyst : I'm sorry, Alan.