Open Text Q2 2007 Earnings Conference Call Transcript

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

Question: Scott Penner - TD Newcrest - Analyst : Maybe I will just start off by asking you to split out, if you would, the connectivity revenue from the total number and where in the revenue lines it sits.

Question: Scott Penner - TD Newcrest - Analyst : Maybe, then, I'll switch right away to just a discussion of the impact of the Hummingbird business in total on the licensure revenue. Are you going to give that out?

Question: Scott Penner - TD Newcrest - Analyst : Yes, I'm just a little bit surprised you wouldn't separate out the connectivity revenue, seen how it is a -- you call it zero growth business, and it's a fairly material chunk of the revenue.

Question: Scott Penner - TD Newcrest - Analyst : John, just let me just qualify some of the comments that you made on the partner revenue. Did you say that the Open Text partner revenue itself doubled year over year?

Question: Scott Penner - TD Newcrest - Analyst : And maybe I will come back on this connectivity side. Because I just -- if you could separate out the sales force, for instance, the number of reps that are actually selling the ECM?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Could you just talk about your decision not to provide or resume providing guidance? You have had several months to now scrub the pipeline, a quarter looks clean. When do you expect to resume it, and what are some of the issues that are preventing you from doing so at this point?

Question: Mike Abramsky - RBC Capital Markets - Analyst : You mean you're expecting next quarter, or you think you're going to have another quarter where you still -- in other words, you are basically saying you need three full quarters before you can actually get comfort around that pipeline?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Your OpEx results are very positive. They are somewhat lower overall now than your prestated Open Text business model for 15% R&D, 30% sales and marketing and 10% G&A. Can you comment on how sustainable expenses are going to be at these levels as a percent of revenue?

Question: Mike Abramsky - RBC Capital Markets - Analyst : So they are not temporary results of restructuring or other things; you see this as not only sustainable but perhaps more efficiencies to come into your OpEx as a percent of revenue?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. The service margins -- I think you made a comment earlier on the delay in restructuring of professional services headcount. So do you expect those to recover, and how quickly do you expect -- obviously, you're seeing that you do, but how much do you expect them to recover and how quickly?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Just a question maybe you can explain why your tax rate was much lower and how do we think about modeling a sustainable tax rate.

Question: Mike Abramsky - RBC Capital Markets - Analyst : So now you are reporting actual cash taxes?

Question: Mike Abramsky - RBC Capital Markets - Analyst : That's a departure from kind of historical procedure for Open Text?

Question: Mike Abramsky - RBC Capital Markets - Analyst :

Question: Paul Steep - Scotia Capital - Analyst : Just since we are -- I understand your reluctance to provide the Hummingbird data. Quick back-of-the envelope math here shows flat year-over-year license numbers, depending on what you want to assume. If we sort of look inside that, you call that RedDot as a point of strength. We have seen competitors drive strong double-digit growth. Where are you at, and where do you sort of see yourselves at, post the next couple quarters as you work through the noise here on the acquisition?

Question: Paul Steep - Scotia Capital - Analyst : Fair enough. The maintenance renewal cycle -- just to be clear, there have not been any glitches, no issues in terms of -- because I'm assuming the high cash balances are really going to reflect in in the March quarter as you basically have most of the clients on calendar year end renewals. Does it seem fair that there were no hitches on either the Open Text or the Hummingbird side?

Question: Paul Steep - Scotia Capital - Analyst : So that brings me to the next point, which is long-term debt repayment and where you see that target level at and how aggressive you are going to be in driving the debt down over the next few quarters.

Question: Paul Steep - Scotia Capital - Analyst : Can you sort of elaborate a little bit, I guess, as to what you see the acquisition environment versus paying down debt?

Question: Paul Steep - Scotia Capital - Analyst : You have done a bunch of facilities closure. I guess the only really meaningful one here would be, actually, a question on subletting. You had an excessive amount of space from IXOS in Germany. Any luck on placing that space?

Question: Tom Liston - Versant Partners - Analyst : Just on license revenue again, if you can answer, can give us either Hummingbird's last year license revenue in the quarter and/or at least some color on what the reduction might be, given that you have already said you're looking at a 20% overall reduction in overall Hummingbird revenue, and maintenance is obviously not going to drop as much. Is it at least fair to assume that there was a 25%-ish, 30% reduction in license revenue year over year in this quarter?

Question: Tom Liston - Versant Partners - Analyst : But can you comment on this December quarter? Give us some color on what Hummingbird would have been down on license revenue? 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 : Back on Paul's maintenance renewal question, would I assume to date you're seeing plus 90% on both sides of the business in renewals?

Question: Tom Liston - Versant Partners - Analyst : Can give us some further color on the Oracle/Microsoft partnerships and what type of influence they are having on some deals, in either the current quarter or what the pipeline looks like?

Question: Tom Liston - Versant Partners - Analyst : With Oracle, was there any delays as people try to figure out what's going on with the Stellant or even internally there at Oracle, or what are the cause for some of the --?

Question: Tom Liston - Versant Partners - Analyst : Paul, I apologize if you've [re-entered] this. But the cash outlay before, for restructuring -- you said between Q2 and Q3 was $25 million to $27 million. It looks like there were $17.8 million or so out in Q2. Is there any update on that type of guidance for Q3? Does it look like just the net of that 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 Liston - Versant Partners - Analyst : So it would sort of be less than $10 million and above $6.5 million, $7 million?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Could you just comment in terms of the percentage of revenue that came from the legal vertical, which I presume is still Hummingbird's strong suit?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : So is that the 2% to 3% apples-to-apples with your other verticals that you highlighted earlier in your prepared remarks?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Secondly, you probably heard on the Interwoven call they mentioned that 12 or 13 of their new customers were ex Hummingbird/Open Text customers. Is there a concern about some departures of customers to competitors, or what are you doing to kind of, hopefully, alleviate that?

Question: Richard Tse - National Bank Financial - Analyst : Could you talk a bit about the spending environment generally for ECM? We have seen some decent numbers from the comps. What areas are hot, and has that environment changed in general? Or can you give us a sense of where that stands right now?

Question: Richard Tse - National Bank Financial - Analyst : With respect to the license environment, how should we view this going forward? I know you are not giving guidance, but is the mandate here to preserve or grow the earnings and you are wanting to sacrifice licenses to do that? Should we read it that way?

Question: Richard Tse - National Bank Financial - Analyst : One final question with respect to the connectivity business. Should we sort of just make this broad assumption here that if you look at Hummingbird when it was operating on its own, it really didn't change that much each quarter? Should we make that broad assumption here that you are following on that same path?

Question: Steve Koneg - Jefferies & Company - Analyst : A question on the Hummingbird deferred. Can you remind me why -- I think just a portion of it was written down. Can you tell us how much was written down? Then secondly, I just wanted to ask one more question about cost reduction opportunities 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: Steve Koneg - Jefferies & Company - Analyst : So $5.1 million is already written down in the $13 million to go?

Question: Steve Koneg - Jefferies & Company - Analyst : Okay, and there's $13 million to go, if I understand correctly?

Question: Steve Koneg - Jefferies & Company - Analyst : The net of $8 million to go. A question on cost reduction. I understand that there's more opportunity for cost reduction in services. Are there opportunities in other areas such as more offices, et cetera? Or do you believe that you've achieved the cost reduction or that you planned for those and now we are in a process of achieving those? Or are there more to come, potentially?

Question: Howard Lis - GMP Securities - Analyst : Most of my questions have been asked and answered, and maybe I missed this. But you had talked about a large charge of $32 million to $35 million expected in this quarter. I saw the $4.8 million on the income statement. Where is the rest of the charge? 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 : Are there any further special charges anticipated?

Question: David Wright - BMO Capital Markets - Analyst : RedDot -- I'm not sure if I remember this correctly, but is there something in February of the acquisition being finalized with -- the acquisition was finalized, but between Hummingbird and RedDot integration? Are there any integration issues coming up with RedDot in the near-term?

Question: David Wright - BMO Capital Markets - Analyst : So that's that product integration?

Question: David Wright - BMO Capital Markets - Analyst : Because my understanding was it was being run as a separate entity, essentially. I thought that there was a date somewhere around now, February or March, where Hummingbird would be able to integrate other operations aside from just products. Is there a deadline like that coming up, that will give you an opportunity to cut out some more costs? 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 : Is there a RedDot sales team, or marketing team or anything like that?

Question: David Wright - BMO Capital Markets - Analyst : I'm surprised you describe it as a unique market, considering your breadth. But I guess that's how you are running it. When you look at the sales reps, so you had 148; now you have 210. I can understand that you would keep the connectivity people because that's a totally different market, and it sounds like you have kept some of the RedDot people. So I guess, of the Hummingbird salespeople in the DM front, would you have kept many of those at all?

Question: David Wright - BMO Capital Markets - Analyst : So in understanding how sales territories went together and the issues that could be around that, this was not a case where you took the top 20% of both organizations and then mixed the other ones? Did you essentially eliminate the Hummingbird side of things and kept the Open Text salespeople?

Question: David Wright - BMO Capital Markets - Analyst : You have answered my other questions. 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: Iell Efir - Canaccord Adams - Analyst : It's Iell Efir and [Hafalpina Misic]. A quick question for you around the deferred revenue write-down. You said that there was a net $8 million left. Could you just tell us how long you will be writing that piece off? Is it over the next two quarters, or is over the next three?

Question: Iell Efir - Canaccord Adams - Analyst : So that's the total, so the $13 million was only the contracts for the one year; is that correct?

Question: Iell Efir - Canaccord Adams - Analyst : Can you guys make a comment if it's skewed towards more of the connectivity business versus the enterprise side on the Hummingbird?

Question: Iell Efir - Canaccord Adams - Analyst : So it's all based on services, it would have been all services revenue?

Question: Steven Li - Raymond James - Analyst : Just a couple of clarifications. Would you highlighted the seasonality for the May quarter, historically it has been down 8% to 9% sequentially. That's about how much we should be expecting? 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 : Then just on the tax rate, so we should be modeling 10% to 15% going forward?

Question: Gabriel Leung - Paradigm Capital - Analyst : First, on the partner revenue contributions you talked about Open Text doubling that on a year-on-year basis. Was that mostly driven by your three key partnerships?

Question: Gabriel Leung - Paradigm Capital - Analyst : Can you talk a little bit about where your three partners are in terms of getting their sales force up and running and marketing the integrated message?

Question: Gabriel Leung - Paradigm Capital - Analyst : Secondly, on the issues around the expected 20% revenue falloff from Hummingbird, can you talk about during Q2 whether or not you experienced any of that falloff? 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: Gabriel Leung - Paradigm Capital - Analyst : But you did experience some falloff, but you just expected more of it to show up over the course of the next little while?

Question: Gabriel Leung - Paradigm Capital - Analyst : Lastly, just helping me understand the maintenance, deferred maintenance write-off, there's $8 million more to be written off over the course of the next three quarters, it sounds like. So how should I be looking for this on a go-forward basis, then? In Q2 you reported $78 million in reported maintenance. All else being equal, if you had 100% maintenance renewal, should I look for that to drop by -- $8 million divided by three, say $2 million, so $76 million in revenues? Is that what I should be seeing?

Question: Gabriel Leung - Paradigm Capital - Analyst : Once the year runs out, we should see a healthy boost on the maintenance line just because this issue is gone now; right?

Question: Scott Penner - TD Newcrest - Analyst : John, you presumably now have the position of kind of a go-to partner in this industry. You kind of called that out at the last investor and analyst day. Can you give us any anecdotal reports that that is happening?

Question: Scott Penner - TD Newcrest - Analyst : You mentioned that now, as the largest and kind of de facto ECM player that you have become a go-to partner for a lot of SI's. Can you just give us some of anecdotes that that is happening?

Question: Scott Penner - TD Newcrest - Analyst : Have you seen renegades from FileNet and what have you come over and really signed up with you guys?

Question: Scott Penner - TD Newcrest - Analyst : Right.

Question: Scott Penner - TD Newcrest - Analyst : I just wanted to talk again about the seasonality. You reminded us about the seasonality, presumably, that the March quarter is a little weaker. You mentioned that on a previous question. But just to be clear, that typical 8% to 9% is going to be magnified as you continue to kind of pair off on profitable revenue.

Question: Scott Penner - TD Newcrest - Analyst : Okay, but you said that you are still getting out of -- you are still basically getting up to that 20% attrition of the Hummingbird revenue. So presumably, that's going to be higher this year?

Question: Scott Penner - TD Newcrest - Analyst : When do you think you will have reached that kind of baseline revenue level that you're talking about?

Question: Scott Penner - TD Newcrest - Analyst : What is the basis that we should use to, then, compare you to that 20% number? We have the June quarter for Hummingbird. Are you referring basically to the annualized Q4 numbers that we don't have?

Question: Scott Penner - TD Newcrest - Analyst : Okay, no, I'm just talking about that 20% attrition number from the Hummingbird revenue. What is the basis for comparing you to that 20% number? Is it the --?

Question: Paul Lechem - CIBC World Markets - Analyst : I just wanted to try and understand the sales outlook a little bit over the next few quarters because, just revisiting some of the questions that have been asked, clearly, you have laid off a lot of your sales headcounts over the last quarter -- by my calculation almost 40% of your combined sales reps. Plus you're closing down direct sales in a number of direct territories and moving those to partners. I just don't understand, how are you going to avoid a lot of the turmoil that we saw with the IXOS acquisition on the sales front over the next two, three quarters? Who is actually going to be doing the sales, given you have actually made a lot of cuts on the sales force?

Question: Paul Lechem - CIBC World Markets - Analyst : Can you talk a little bit about what you're doing with the sales pipeline, how you're actually going down through the various sales opportunities to make sure that some of the volatility we saw following the IXOS acquisition might not recur this time?

Question: Paul Lechem - CIBC World Markets - Analyst : Just in terms of the Hummingbird sales forecast or pipeline that you got when you acquired the company, can you describe what has happened in terms of your scrubbing that pipeline? Have you made major changes, or is pretty much as it was when you got it?

Question: Garrett Becker - Merrill Lynch - Analyst : This is actually Garrett Becker for Ed. Maybe, perhaps, you could talk a little bit about the cross selling. You mentioned earlier that you are focused on that. Maybe you could give us a little color and also maybe quantify that?

Question: Garrett Becker - Merrill Lynch - Analyst : Any chance you could give us what the Hummingbird deferred balance was at the end of September? I may have missed 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: Garrett Becker - Merrill Lynch - Analyst : Yes.

Question: Garrett Becker - Merrill Lynch - Analyst : 6-0?

Question: Garrett Becker - Merrill Lynch - Analyst : I wonder if you could talk a little bit about government. You mentioned that was pretty strong. We've seen some companies in other sectors have a little bit of troubles in the US, at least, with the continuing resolution and some of the budgetary changes going on there. I wonder if you could maybe talk a little bit about what you're seeing?

Question: David Wright - BMO Capital Markets - Analyst : When I look at the cost for Hummingbird, the number is a little higher than I expected. Is there anything you can comment there about why the number is as high as it is?

Question: David Wright - BMO Capital Markets - Analyst : Yes. So the purchase price of Hummingbird is $384 million plus you have got another $18 million of acquisition costs. But what I had planned on was a number $50 million to $70 million lower.

Question: David Wright - BMO Capital Markets - Analyst : Yes, okay. (multiple speakers) So that's probably too detailed a question to go over on a call like this. I appreciate that, and I have netted things out. It's just that I'm surprised the number is where it is.

Question: David Wright - BMO Capital Markets - Analyst : Well, the number that is netted out against your assets is $385 million, roughly, plus the acquisition costs of about $18 million. But when I had done the accounting from my standpoint I thought that number would be lower. So maybe I'll follow up with you afterwards to discuss why it is what it is. I just thought, if I asked, you might say, oh, yes, that's because of -- some, I don't know. Some extra charge or something. I'll leave it as it is. Thanks very much; I'll talk to you afterwards.