Open Text Q2 2006 Earnings Conference Call Transcript

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

Question: Paul Steep - Scotia Capital Inc - Analyst : Hi, John, maybe if you could chat a little bit just about your view towards growth in the market. Again, this quarter, I guess you guys gave a pretty large range of revenue guidance that implies plus 5 to down 5% year-on-year in terms of growth. Really, what do you see out there in the spending environment since we have heard EMC and others point to a more robust market? Is there something there missing or that we're not catching?

Question: Paul Steep - Scotia Capital Inc - Analyst : So in terms of the sales force then, you've said these transition are pretty much completed. I missed the part -- it sounded like you were going to add a couple of those sales bodies this quarter?

Question: Paul Steep - Scotia Capital Inc - Analyst : So you're going to look obviously then six months out, hopefully that the pipeline starts to improve to see growth come back or --?

Question: Paul Steep - Scotia Capital Inc - Analyst : Okay.

Question: Paul Steep - Scotia Capital Inc - Analyst : Alan, I missed a little comment you made in made in terms of how much cash was going out in the current quarter for restructuring.

Question: Paul Steep - Scotia Capital Inc - Analyst : Perfect, thanks, guys.

Question: Richard Tse - National Bank Financial - Analyst : Hi, John. I just wanted to sort of get your impressions in terms of revenue. Have they sort of based at this level, or are you expecting to eliminate some more profitable revenue here going forward?

Question: Richard Tse - National Bank Financial - Analyst : And with respect your global head of sales, you sort of mentioned this at your user conference -- where do you stand on filling that spot?

Question: Richard Tse - National Bank Financial - Analyst : Okay. And finally with respect to guidance, you've sort of taken a conservative approach with guidance. Could you give us some sort of sense of how you you've out your guidance together this quarter? Is it consistent with your prior quarter?

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

Question: Tom Liston - Versant Partners - Analyst : Hi, thanks, good afternoon. First, can you -- you gave some examples. Can you characterize some of the other large deals, maybe the ones that are over 500K in terms of, were they collaboration, e-mail archiving, et cetera, and what verticals stood out?

Question: Tom Liston - Versant Partners - Analyst : And the compliance-related deals, specifically (indiscernible) [box] and early days we commented about it being a very manual process and we heard some of your comments from DeLoitte at your analyst day. But can you comment on where we are on the takeup of that technology curve as we go forward here in the next handful of quarters?

Question: Tom Liston - Versant Partners - Analyst : Finally, just related, is there a way you can talk at a high level about the growth rates in some of the faster-growing areas, such as records management and e-mail archiving, versus some of the products you are maybe underinvesting or maybe slower growth areas, like Web content, for example?

Question: Tom Liston - Versant Partners - Analyst : At 7 to 9%, I assume records management and archiving are growing slightly faster, but some of the other areas are growing slower -- is that the --?

Question: Tom Liston - Versant Partners - Analyst : Okay, thank you.

Question: Scott Penner - TD Newcrest - Analyst : Thanks, just a couple of things. Alan, on the financial statements, there seems to be, in the cost of license, it's a lot lower than I had expected. And there is a note there that says it excludes some amortization. Could you just walk me through what is happening there?

Question: Scott Penner - TD Newcrest - Analyst : Okay, but there is absolutely no change to the accounting for cost of licensing?

Question: Scott Penner - TD Newcrest - Analyst : John, I also wanted to ask you, you've obviously done a great job of maximizing the profitability of the Company. What do you think -- you're obviously starting to invest for growth. What do you think the margin level can look like as you sort of resume let's say at the 7 to 10% corporate levels of growth. How do you -- for instance, does the margin dip back down towards the 15% if you hit the 10% growth? Just give me some idea of how that is going to fall out. 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 : And margins are your pretax adjusted?

Question: Scott Penner - TD Newcrest - Analyst : Alan, one more thing. I missed your comment on the FX that you made on the -- I would imagine it was on the operating income line.

Question: Scott Penner - TD Newcrest - Analyst : Okay, great. Thank you.

Question: Mike Abramsky - RBC Capital Markets - Analyst : Hi, guys. You have sort of two strategies now, one obviously some cost-cutting restructuring, the other of rebuilding and moving into new products. And I am just wondering, does one -- how do you balance one versus the other? Most notably, you seem pretty steady with your cost-cutting plans. What are you perhaps compromising or not on sales and marketing and product initiatives to achieve those?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Your European strength, it was nice to see that recover, particularly in Germany. I think last quarter, Germany was fairly distracted at the government level because of elections. And I'm just wondering, is this kind of blip, or are you going to see ongoing strength there?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. And finally, on the breakdown of your deals, could you give us a sense of, you said 20% revenue is from new customers, but what percent of your customers are actually new? In another words, of those transactions, are the majority existing Livelink customers who are doing expansion

Question: Mike Abramsky - RBC Capital Markets - Analyst : So how would you break out some of those transactions? Is that proportional to the way the transactions break out in terms of new customers?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Well, you have noted for example 12 transactions over 500K. So, is one-third of those from new customers? Is that true of the larger transactions?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And the larger transactions as well?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Would that be the same breakdown in your pipeline as well on a go-forward basis?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay, great. Thank you very much.

Question: Howard Lis - JMP Securities - Analyst : Good afternoon, gentlemen. Most of my questions actually have been asked and answered. I just wanted to go back to your comments on SAP and Microsoft. And back of the analyst day and around that time, you had talked about how you were sort of, if I can use the term, taking a back seat to allowing for example the user to choose their interface of choice and access Livelink through Microsoft interface as an example. Can you elaborate a bit on how that has played out and how that is affecting your sales channel?

Question: Howard Lis - JMP Securities - Analyst : Okay. And in terms of your partnership, your increased partnership emphasis, (technical difficulty).

Question: Duncan Stewart - Oregon Securities - Analyst : One quick question. The way I've sort of looked at it, modeled operating expenses, is I sort of look at a basket of R&D sales and marketing in G&A. And I kind of took what you guys were suggesting in terms of cost-cutting on a quarter-by-quarter basis and my number was in fact relatively close to what you actually reported. However, there were significant deviations if you will, like R&D was lower than I thought, whereas for example, G&A was a little higher. It would make sense that it would be difficult for you to cut costs perfectly evenly between those three baskets. So going forward, should we sort of look at more of an ongoing -- you're kind of going to get all of them down over time, maybe at different rates, or should we be taking the various percentage levels of R&D or G&A as representative of what they're likely going to be in going forward quarters? 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 - Oregon Securities - Analyst : In percentage terms, or in absolute dollar terms?

Question: Duncan Stewart - Oregon Securities - Analyst : Yes. I think this is a reasonable question to ask. This is seasonally a pretty good quarter for you guys historically. So given that you're looking at R&D to be in the 14 to 17 range, it would be fair of us to model that going forward, that one is probably going to climb --.

Question: Duncan Stewart - Oregon Securities - Analyst : Is it low? Just if I remember from the Livelink day, you guys talked about having to -- some of the people you were working on products that you said really didn't want to focus and there were new ones coming up to speed. Should we just view this low level as part of that transition?

Question: Duncan Stewart - Oregon Securities - Analyst : So you will be hiring those people going forward?

Question: Duncan Stewart - Oregon Securities - Analyst : One quick thing, and it's sort of trivial, but I just would not mind hearing the answer. Why bother doing a mortgage? What was the rationale behind that, given that you have cash on the balance sheet and so forth? Is that tax efficiency or --? 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 - Oregon Securities - Analyst : Fair enough. Thank you very much.

Question: Howard Lis - JMP Securities - Analyst : I was asking a question about partnerships. You talked about instilling new aspects into your compensation system to drive the sales guys to work more with the partners. What was the percentage driven through partners, and how is that progressing?

Question: Howard Lis - JMP Securities - Analyst : Okay, great. And the with respect to your vertical or industry solutions that you talked about again back at the analyst day in terms of your desire to develop more of those and sort of establish a new group called solutions development, as I recall it to do that, where do you stand on staffing that group with development expertise? And how do you plan to -- how and when do you plan to roll that into the sales force's hands when the products are available?

Question: Howard Lis - JMP Securities - Analyst : And when do you expect the first solutions to roll out, and what verticals would you prioritize?

Question: Howard Lis - JMP Securities - Analyst : And the timing?

Question: Howard Lis - JMP Securities - Analyst : Great, thanks very much.

Question: Robert Schwartz - Jeffries & Co - Analyst : You had a great improvement in your service margin this quarter, and I was wondering if you could help us think about how we should think about it going forward?

Question: Robert Schwartz - Jeffries & Co - Analyst : When I model your maintenance, it looks like it was down sequentially, and I'm wondering if there's a reason for it [in] Q1?

Question: Robert Schwartz - Jeffries & Co - Analyst : I was just talking about it being down from Q1. 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: Robert Schwartz - Jeffries & Co - Analyst : That's fair enough. FileNET I believe is charging for some of its upgrades for some of its products. I'm wondering if you could take -- have you been able to take advantage of that at all?

Question: Robert Schwartz - Jeffries & Co - Analyst : Anyplace in particular where you really haven't had any new products or regions?

Question: Robert Schwartz - Jeffries & Co - Analyst : Thank you very much.

Question: David Wright - BMO Nesbitt Burns - Analyst : I was wondering just how large your largest deal was in the quarter?

Question: David Wright - BMO Nesbitt Burns - Analyst : Really, okay. And in your guidance, I'm not sure what you did last quarter, but I thought you had sort of left million-dollar deals out of your guidance. Are million-dollar deals in your guidance for the coming quarter? 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 : Okay. And your restructuring, are there products that are being affected by the restructuring? Like, are there some product lines that we could assume are not going to be that prominent going forward?

Question: David Wright - BMO Nesbitt Burns - Analyst : So you give them an upgrade path of some kind?

Question: David Wright - BMO Nesbitt Burns - Analyst : And, lastly, I guess just trying to figure out how far we are through restructuring and the benefit we'll get. If I look at an EBIT number, which would exclude your restructuring, it came in just about 15 million, so about 14%. If you were to do this level of revenue next year, should I assume that you would be around the 20% level?

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

Question: David Wright - BMO Nesbitt Burns - Analyst : Thank you very much. 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 - DesJardins Securities - Analyst : Thanks, good evening. With the IXOS shares that are left, how much would it cost you to buy out the rest? And when can we expect that to finally get done?

Question: David Shore - DesJardins Securities - Analyst : Do you have timing as to when you can see closing that out?

Question: David Shore - DesJardins Securities - Analyst : Okay. The rest of my questions were answered. Thanks.

Question: Nate Swanson - ThinkEquity - Analyst : Hi, guys. I was wondering if you could talk about expectations as you look at the pipeline, both large deals and ASPs sequentially from Q2 to Q3?

Question: Nate Swanson - ThinkEquity - Analyst : Okay. And for large deals, any you've closed yet this quarter?

Question: Nate Swanson - ThinkEquity - Analyst : Okay, thanks. And then I'm just wondering, what is you thought on future M&A opportunities for you? It is been awhile since you have done any of your large ones for sure.

Question: Nate Swanson - ThinkEquity - Analyst : Okay, thank you.

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Just an extension of Howard's question on the partnership side. And I guess the goal is to get the partnership revenue representing about 30%, up from call it the 12% currently. How are you managing that dynamic I guess from the direct sales guys, where I guess some of their commissions may be leaving their pockets because of the focus on partnership revenue?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : And even though -- I presume that also applies to the Deloittes of the world as well? 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: Lawrence Rhee - Genuity Capital Markets - Analyst : Good to know. On the financials side, just noticed the CapEx kind of ticked up to the $8 million mark. It is that comment you expect going forward or (indiscernible)?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : That's it for me, thank you.

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : Hi, guys. A couple of quick questions. Were any of the 12 deals indirect-led I guess, or how you sort of recognize those 12 deals? Were there any through Deloitte or any of your partner channels?

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : No, the 12 large --.

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : And what was the split geographically? Sort of the same they way you have it, or where they predominantly North America on the larger deals? 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: Ralph Garcea - Credit Suisse First Boston - Analyst : Have you ever given this split of sort of driven revenues and UK revenues on their own?

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : Have you given a ratio of the European revenues -- how much Germany would be of that split?

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : In the German revenues, you have confidence that it wasn't a one quarter phenomenon here.

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : Is it really tied to the sort of the growth and strength that SAP was seeing, or just the fact that you sort of regrouped there and are selling more (MULTIPLE SPEAKERS).

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : Lastly, following up on the services margin question. You have gone back and forth down to the 10% level, up to the 20% level. What gives you the confidence that you're going to be able to maintain it north of 20? 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: Ralph Garcea - Credit Suisse First Boston - Analyst : Thank you.

Question: Peter Misek - Cannacord Adams - Analyst : Good evening. Just a couple of minor items. On the cash-flow statement, I noticed that accounts receivable was not as much of a drag last year. And I'm just trying to understand what happened December 31 '04 that we had a big drag of 15 million and it's only a drag of 3.3 million and DSOs seemed kind of flat. I'm just trying to understand what happened there.

Question: Peter Misek - Cannacord Adams - Analyst : That was a great number, but December 31 '04 was a change in operating assets of about 15 million, and this quarter, it was 3.3 million with DSOs flattish and revenues flattish.

Question: Peter Misek - Cannacord Adams - Analyst : If I look at your statement of changes and cash-flow statement, it looks like on the changes in operating assets and liabilities, we had an outflow in December 31, 2004 due to accounts receivable of about 15 million, or negative, a change in asset. And then on December 31 '05, we saw --.

Question: Peter Misek - Cannacord Adams - Analyst : Are we through 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: Peter Misek - Cannacord Adams - Analyst : We're through that.

Question: Peter Misek - Cannacord Adams - Analyst : No, the average is good. I guess I'm hoping that it stays there. In terms of the sales force, it's kind of been interesting surveying some geographies of the sales force. It appears the mood in Germany has gotten a little bit better, your sales force. Is that because they are selling more, or have you done anything specific that has caused them to be happier?

Question: Peter Misek - Cannacord Adams - Analyst : The last question is really around Microsoft. And as we look at the new version of Exchange that's coming out, and I know, John, you've been very bullish on the e-mail archiving. And I look at the feature set, and it looks like it has -- okay, not call of your features for e-mail archiving and compliance, et cetera, and mapping, but it looks like they have copied a fair bit there. How do you manage that partnership? It seems kind of --.

Question: Peter Misek - Cannacord Adams - Analyst : I will sneak in one last one. They have been pretty aggressive in the on-demand software services oriented architecture, and they are starting to launch a lot of Ajax-enabled applications. Do you have any plans on this front? Are you going to go to market with them on that front? That would be helpful. 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 - Cannacord Adams - Analyst : There's nothing specific yet, but you're absolutely evaluating it now?

Question: Peter Misek - Cannacord Adams - Analyst : Perfect, thank you.

Question: Scott Penner - TD Newcrest - Analyst : I may have missed it, but did you give the application areas of the $3 million deals?

Question: Scott Penner - TD Newcrest - Analyst : (indiscernible)?

Question: Scott Penner - TD Newcrest - Analyst : No, (indiscernible).

Question: Scott Penner - TD Newcrest - Analyst : Great, thank you.