Open Text Q2 2009 Earnings Conference Call Transcript

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

Question: Mike Abramsky - RBC Capital Markets - Analyst : Thanks very much. John, on that last point, you're comfortable with the first call top and bottom line? That seems to be actually perhaps a slight improvement to your visibility in terms of your comments last quarter where you said you were comfortable 90 days out.

Question: Mike Abramsky - RBC Capital Markets - Analyst : Is that a fair interpretation? And can you explain why that might be, what's causing that?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. How do you feel about your sales coverage in this environment, and are you -- in giving that kind of -- I guess it's not a forecast but obviously an outlook or comfort statement with what's going on and what is expected. What -- how do you feel about the risk of revenue volatility or changes in visibility, given the environment? What kind of -- can you give us some sense as to what's giving you confidence, given sort of the volatility that's going on out there?

Question: Mike Abramsky - RBC Capital Markets - Analyst : The diversification by vertical and geography -- could you -- more than usual could you explain that a bit?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Then lastly, you're pro forma EBIT margins look like they hit an all-time high. Can you just talk a little bit about how you were able to achieve this? It looks like your G&A is at an all-time low as a percent of revenue, and is this -- how do we think about kind of the trend going forward in the future quarters?

Question: Scott Penner - TD Newcrest - Analyst : Paul, maybe to just quickly clarify that last comment, you said you didn't expect to push up against it in Q3, but in Q4 you'd revisit that given the pace of the restructuring, I guess. Does that mean revisit your guidance on the operating model, or the restructuring itself? 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 : Right. Okay. And Paul, again, the support revenue -- I assume just the marginal jump over Q1 is a function of the currency?

Question: Scott Penner - TD Newcrest - Analyst : Okay. But there were some -- was there some negative currency effects on support?

Question: Scott Penner - TD Newcrest - Analyst : And just the services margin, you made some comments about utilization and some higher margin hardware pass-throughs. Is this a sustainable level going forward?

Question: Scott Penner - TD Newcrest - Analyst : And just -- John, just for you -- the split when you look into the pipeline, is it still maintaining about that 70/30 on the compliance I guess versus the ROI type projects? And are these projects -- again, last time you made reference to instances of I think it was like tables optimization at SAP. Are these still the kind of applications that are driving 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: Scott Penner - TD Newcrest - Analyst : And just lastly, John, one clarification. The $4 million deals, are those all deals that were signed in the December quarter, or are some of those -- and if so, could you give the number? -- some of those just chunks of previously taken or signed deals?

Question: Tom Liston - Versant Partners - Analyst : Not to beat up the forecast too much here, but a lot of the comments out there are from partners, and certainly some of your competitors talk about just really difficult to forecast anything. And one of the comments was -- that we've heard is, it's a just-in-time budgeting type environment. And we have heard a lot about CFOs not finalizing budgets, and I have a real hard time pinning down numbers. Are you finding that they are piecing out portions just because of the need involved with your solutions. Or what gives you confidence where -- given your partners aren't willing to put a number out there and CFOs don't have a final number? Is it the CIOs talking, or the CFOs? And how do you reconcile that?

Question: Tom Liston - Versant Partners - Analyst : That's good. Just to confirm -- and Paul might have given a number. Was it about 92% renewals this quarter as well?

Question: Tom Liston - Versant Partners - Analyst : How do you -- when you look at your customer base -- and certainly I haven't matched it all up, but there are some decent sized layoffs going on with I assume some folks that are using Livelink as a seat -- where do feel that number sort of bottoms out here in the coming quarters as guys look to say, okay, we don't need those licenses or those maintenance contracts anymore?

Question: Tom Liston - Versant Partners - Analyst : Two quick ones. License at Captaris -- is it basically in line with your previous guidance of being down probably from 20% to 30%?

Question: Tom Liston - Versant Partners - Analyst : Finally, just Paul, other income -- obviously you know some of the parts in there, but that's a big number this quarter. It's worth going through some of the pieces there. 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 : Is there anything else that's material?

Question: Paul Steep - Scotia Capital - Analyst : John, maybe you could just talk a little bit about strength within specific partners and how that played out this quarter.

Question: Paul Steep - Scotia Capital - Analyst : The only other one I would have would be just are there any major compliance initiatives out there? Like the last time through in '01 we had [SOX] and we had some of the other compliance projects that were broadly being initiated. Is there anything else that would as a macro trend sort of explain some of the strengths out there that you've seen in the quarter?

Question: Paul Steep - Scotia Capital - Analyst : Last one just for Paul. You've done a good job on the working cap. Anything we should think about on the DSOs in terms of any reversals there? It looks like it's moved to sort of a new lower level. Any big changes on that front, or is this sort of the new norm?

Question: Richard Tse - National Bank Financial - Analyst : Hi, John. Can you talk a bit about the competitive landscape? Some of your competitors showed a bit of softness this quarter. And if you look at Interwoven -- sort of your perspective on why they are sort of wanting to sell at this time. And any color you can provide on that that would be helpful.

Question: Richard Tse - National Bank Financial - Analyst : And then just with respect to sort of the deals today, is there sort of any change in how they are getting done -- meaning the timing of these things as well as the potential for increased discounting on licenses?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : Just a couple of things, Paul. I wonder if you could just walk us through the changes in your headcount from the September quarter, just given your core business, where it's gone, and then what the Captaris business did. 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 Canada - Analyst : Okay. So the 240 is basically out of your OpEx in the second quarter; right?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : Okay. And then the 160 is coming out over the next two quarters?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : Again, just on this -- on the restructuring expenses that -- the $11.5 million that you've booked so far, it's -- how much of that was cash?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : And the income statement restructuring was purely the Open Text side of the restructuring?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : And then the other income expense -- or the other expense of 12.5 -- was that all forex? 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 Canada - Analyst : What are your plans in terms of debt reduction?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : Great. And then just on your deal metrics -- on the large deals, you said four deals over $1 million?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : What -- were there any sort of multimillion-dollar deals in there, anything over $2 million or $3 million?

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : Great. And last question. John, just -- I wonder if you can just expand a little bit on the government business -- it seemed to be a pretty big contributor in the quarter -- and sort of where was that coming from? Across Canada, the UK, Australia -- that kind of thing.

Question: Blair Abernethy - Thomas Weisel Partners Canada - Analyst : Any notable new customers in 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: Dushan Batrovic - Canaccord Adams - Analyst : The drop in the high-tech manufacturing vertical, is there anything besides some of the macro weakness or general quarterly lumpiness to make note of here? Is this a vertical that should come back to where it has been as far as being one of the dominant verticals that you participate in?

Question: Dushan Batrovic - Canaccord Adams - Analyst : Any of the smaller deals -- I mean, the deals that you signed that were in between (technical difficulty) $500,00 and $1 million, would you categorize any of those as being the type that could have been larger but were split up into smaller pieces because of a customer's reluctance to put more cash up front?

Question: Dushan Batrovic - Canaccord Adams - Analyst : So it sounds like those deals do have an opportunity to grow.

Question: Dushan Batrovic - Canaccord Adams - Analyst : There's been a lot of discussion around compliance. One of your competitors or one of the other industry players out there -- Autonomy coming after Interwoven -- do you see them becoming -- is that a company that you would encounter more often based on compliance being a motivator in many of the deals that are being signed these days?

Question: Lawrence Rhee - Blackmont Capital - Analyst : With respect to your compliance offerings, you've talked about compliance driving growth for the better part of close to two years I think, and it's obviously continued to drive growth in this current time period. When you look into your pipeline and opportunities, how much of a runway do you think remains in terms of compliance driving growth?

Question: Lawrence Rhee - Blackmont Capital - Analyst : With respect to various verticals, do you see any other verticals that may have not been a big contributor recently that could represent bigger opportunities with respect to compliance down the road?

Question: Lawrence Rhee - Blackmont Capital - Analyst : And just with respect to financial services having a nice spike up in terms of contribution to the quarter, would you view that as a red flag, or just a bigger opportunity for you in this 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: Barbara Coffey - Kaufman Bros. - Analyst : Good afternoon. In working with the system integrators, which you've done more of recently --

Question: Barbara Coffey - Kaufman Bros. - Analyst : Are they particularly good at certain verticals, or are there certain compliance issues that they have packaged your products with? So I'm wondering, are your direct sales force going after different opportunities than the system integrators? And sort of how to look at that dynamic?

Question: Barbara Coffey - Kaufman Bros. - Analyst : And do they have any different kind of sales cycle length time that -- approach than what you're (multiple speakers) the other side of your businesses?

Question: Steven Li - Raymond James - Analyst : John, back in November you announced SAP would be reselling your product. Can you talk about the initial traction you're seeing? And are there more potential apps coming for SAP?

Question: Steven Li - Raymond James - Analyst : Right. And can you maybe talk about the areas you're looking at?

Question: Steven Li - Raymond James - Analyst : Great. And John, maybe can you also comment on just the overall deal flow from [SA] (technical difficulty) given some of the challenges they've had.

Question: Steven Li - Raymond James - Analyst : Yes. Is it still strong or has it -- is it down with the market?

Question: Ralph Garcea - Haywood Securities - Analyst : Just a couple of quick questions. On the government side -- again, another great quarter and you keep showing success at the federal level across most countries. Do you see an opportunity there at provincial state levels, local levels -- if you look at Australia through Europe and that -- where that market is probably three, four ex as large as is the federal market you've been successful in?

Question: Ralph Garcea - Haywood Securities - Analyst : Is it different price points there when you go on a per-seat level, or do sort of strike an enterprise deal with the entity like he did with the Canadian deal (multiple speakers)

Question: Ralph Garcea - Haywood Securities - Analyst : Then I guess a quick one for Paul. Given the pipeline on the services side, do you think the utilization rates -- from the Open Text perspective you can maintain those levels going into the second half of fiscal '09 and then the rest of the calendar year?

Question: Ralph Garcea - Haywood Securities - Analyst : Is that keeping the same rates in the respective geographies, or do you sort of have SWAT teams that -- US guys that you would send into a European engagement? Or how are you managing (multiple speakers)

Question: Gabriel Leung - Paradigm Capital - Analyst : I've got a couple of quick things for you, Paul. First, can you remind us again how much cash restructuring costs there are to pay out?

Question: Gabriel Leung - Paradigm Capital - Analyst : Yes. How much you paid out I guess this quarter, and how much remains to be paid out.

Question: Gabriel Leung - Paradigm Capital - Analyst : Secondly, just given where LIBOR rates are now, should we expect to see that interest expense line start to come down a little bit, or is the interest collar you have in place going to offset some of the benefits there, at least until it expires over the -- I think later this year.

Question: Gabriel Leung - Paradigm Capital - Analyst : Great. And then just on the services line, any chance you can break (technical difficulty) to how much of the services revenues were associated with hardware resells?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay. So it will look at the 10-Q I guess for that. Just lastly for you, John -- you might want to answer this; you might not want to. But just on the pending Interwoven acquisition, and I guess given the lack of sizable independent ECM venders left in the space along with your stated desire to remain independent -- at least for the time being -- do you think it's worth it for you to pursue Interwoven to gain the real estate, or do you think there's just no chance of that ever happening?

Question: Marx Schappel - The Benchmark Company - Analyst : Good evening. Just one question. Paul, I was wondering if you could just clarify one more time the $12.5 million charge on the other income line.