Open Text Q3 2005 Earnings Conference Call Transcript

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

Question: Mike Abramsky - RBC Capital Markets - Analyst : John, I heard you -- I think I heard you say that all of the slipped deals have since closed? Is that correct?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Why maintain the widened Q4 guidance? Now that they have closed, wouldn't that increase the possibility of you being able to get into the higher end of that range?

Question: Mike Abramsky - RBC Capital Markets - Analyst : What risks do you see in maintaining conservatism that could, given what is in your pipeline right now, stretch that out, I guess?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. Just on the area of you receiving more of a broader -- broader demand, excuse me, for your integrated DCN platform. Do you see clients -- we have had some feedback that some clients are sort of waiting -- not of yours, but just in the industry for more of a strategy to be put in place, given that they are making decisions that are larger on content management. I am just wondering if you are seeing this kind of dynamic?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. And last question on e-mail archiving -- the ECM solution has to be bundled, I understand, with your archiving solution. And to some extent, doesn't that raise the cost versus sort of lower cost point e-mail archiving solutions from like Veritas, KDS and EMC?

Question: Scott Penner - TD Newcrest - Analyst : Alan, maybe just to start, if you could talk about the services margin for the quarter. It looked -- it was a little bit weaker than what I was expecting. And I guess the target for that and what sort of timeframe?

Question: Scott Penner - TD Newcrest - Analyst : Does that mean that we -- that is the margin that we should be looking for on a quarterly basis?

Question: Scott Penner - TD Newcrest - Analyst : Does that change your overall sort of historic 75% view on gross margin?

Question: Scott Penner - TD Newcrest - Analyst : Right. And at this point, Alan, again can you talk about the -- what sort of excess dollar value in G&A is related to your SOX expenses? And to the extent you can, what percentage of that is sort of onetime? 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 : Okay, and maybe just finally again, Alan, given your gross margin comment, can I read into that that the operating -- the expected operating margin range has fallen by 5%, as well?

Question: Scott Penner - TD Newcrest - Analyst : Full year this year?

Question: Scott Penner - TD Newcrest - Analyst : And on a sort of normalized basis, historically it has been 15 to 20%.

Question: Scott Penner - TD Newcrest - Analyst : Okay. I am just talking about what you'd normally present as the 15 to 20% range, it includes a 75% gross margin. Should we be adjusting that 15 to 20% for the lower view on gross margin?

Question: Scott Penner - TD Newcrest - Analyst : And on a normalized basis, should we be adjusting that, as well?

Question: Scott Penner - TD Newcrest - Analyst : Okay, and maybe, John, if you would, just on the new customer revenue that you are getting, have you also seen those new customer deals take on more of a multiproduct profile, and have they also gotten larger?

Question: Paul Steep - Scotia Capital - Analyst : First off, in terms of the Q4 guidance, maybe you could give us a couple of your thoughts around what you would see the license mix sort of looking like going forward that is sort of baked into your numbers on a broad basis? Is there any meaningful change from what we have historically seen?

Question: Paul Steep - Scotia Capital - Analyst : Okay, that's helpful. So if that is sort of the case then we have likely seem some fall off in one of the product lines organically, based on the data you gave us from IXOS a year ago. I am just wanting to understand what sort of maybe changed a little bit in the buying dynamics in terms of the product set out there in the market?

Question: Paul Steep - Scotia Capital - Analyst : Okay, so in specific terms around the product, we are talking likely data archiving business primarily?

Question: Paul Steep - Scotia Capital - Analyst : Okay, fair enough. And then, I guess on the services margin, I am just trying to understand what has changed in maybe the mix of services that you are delivering that is causing a little bit of that pressure. Is it -- are we seeing somehow a higher percentage of training, a higher usage of contractors.

Question: Paul Steep - Scotia Capital - Analyst : So would we then expect at some point that you are going to ramp, or do you see this as sort of temporary -- sorry, ramp southing, that is in services? Or is this sort of a temporary blip that you are going to try to keep the bench lean?

Question: Paul Steep - Scotia Capital - Analyst : Okay. And then the last one from me. Just maybe, Alan, can you just update us on the status of the buyback? As far as sort of our math works, the 2.5 million shares announced and began on September 7 was fully exhausted in roughly the last quarter. Will you book the exercise in option to increase the allotment on that, or plan any exchanges on that?

Question: Paul Steep - Scotia Capital - Analyst : That would be how much more, Alan, just in terms of thinking about it going forward -- like another 5%? 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: Andrey Glukhov - Southwest Securities - Analyst : John, first of all, are you guys implementing in the upcoming quarter additional incentives for the salesforce similar to what you did back in the December quarter?

Question: Andrey Glukhov - Southwest Securities - Analyst : Okay. And then, Alan, to follow up on some of the questions on the business model. Looking at sort of '05 software revenue, it is probably going to shakeout around 35% of your overall revenue. So do you think that the business model is shifting from 40/40/20 to more like, I don't know, 35 and then 50 maintenance, and the delta in services?

Question: Andrey Glukhov - Southwest Securities - Analyst : Do you think it can gravitate longer-term to what, about 30%?

Question: Andrey Glukhov - Southwest Securities - Analyst : And then lastly, on the 3% year-over-year revenue growth adjusted for acquisitions you cited, is that number adjusted for the fact that last year you had only one month of IXOS?

Question: Ed Maguire - Merrill Lynch - Analyst : Good afternoon. Alan, I wonder if you could just provider us an update on the status of Sarbanes-Oxley efforts? I know you had mentioned that you are spending more, but could you just give us a idea of your comfort level that you guys will be able to get everything filed in time?

Question: Ed Maguire - Merrill Lynch - Analyst : Okay. A more general question for John, there has been some concern about Europe, particularly, Germany, the economy there. What is your sense of how the macroeconomic conditions may impact your confidence in the business and your customers' willingness to spend in this environment?

Question: Ed Maguire - Merrill Lynch - Analyst : Okay. And I guess a final question about earlier this quarter, Microsoft bought Groove Networks and made Ray Ozzie one of the CPOs. Just your high-level thoughts in terms of how you may change your positioning, whether there might be a risk that it could confuse buyers or cause any freezing in the markets as people try to suss (ph) out what their strategy might be?

Question: Ed Maguire - Merrill Lynch - Analyst : So you see it really more as a partnership opportunity? 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: Greg Smith - Haywood Securities - Analyst : I just want to go back to -- a little license revenue. You said some slipped deals have since closed. Can you tell me what that license revenue impact might have been in the third quarter?

Question: Greg Smith - Haywood Securities - Analyst : Sorry, it would have about brought you to your previous guidance or --?

Question: Greg Smith - Haywood Securities - Analyst : Yes, sure. Any progress on the distribution channel side, especially after the LiveLinkUp in Europe?

Question: Greg Smith - Haywood Securities - Analyst : Was there any impact in the third quarter on the channel? 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: Greg Smith - Haywood Securities - Analyst : And one final question here, what percentage of the channel did you expect to have in 2006? What is your kind of goal?

Question: Richard Tse - National Bank Financial - Analyst : Just a couple of quick ones here. On the R&D, it was, I guess, significantly higher than last quarter. Can you comment on that, Alan?

Question: Richard Tse - National Bank Financial - Analyst : Yes. And just sort on the competitive environment. I don't know if you have had any sort of update there, John, but I would be interested see if you are seeing sort of pricing pressure, because I think Documentum is in the market now pricing fairly aggressively. And have you seen that impact your business at all?

Question: Richard Tse - National Bank Financial - Analyst : Okay, and one final question. It seems like Documentum is becoming very strategic to EMC. And in terms of consolidation, do you have any sort of commentary as to why we haven't seen a move from some of the other storage 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: Martin Cecchetto - UBS - Analyst : John, a question for you. You have talked about in the past hiring sales reps with more experiencing -- working with Enterprise type deals. Can you talk about progress there, and how long you think it will be until you have a more Enterprise-oriented salesforce? That is, stable going forward and more able to close these large deals consistently?

Question: Martin Cecchetto - UBS - Analyst : So is training required with these sales reps? Will it take a bit more time, or are you --?

Question: Martin Cecchetto - UBS - Analyst : Great. On the vertical side, you have talked about new tailored solutions for various verticals. Can you just talk about how these have changed since maybe a year ago -- prior to IXOS, maybe?

Question: Martin Cecchetto - UBS - Analyst : Okay, and just maybe lastly a follow-up to Ed's question on SharePoint, I think you talked about a new product, Livelink for SharePoint. Can you give us a bit of detail on how that integrates together with SharePoint, and --? 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 : I wonder if we could just go back to the partner discussions that you had. I wasn't quite clear on your answer in terms of -- so your services margins are running a little lower than what they were in the past. So what are you doing with the partners, and what do you expect to get out of it?

Question: David Wright - BMO Nesbitt Burns - Analyst : So is this kind of an OEM strategy, where you are plugging your product into these others, and that is why you are getting a lower margin, but hopefully you get a broader reach?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. So the -- sorry, I think you used the term body shop. But with those guys, is this something that is -- like it sounded like this was sort of a permanent or a semipermanent move down in your business model. So is there something that you are selling into an area where you realize that you need to do more handling with the customers, and is that is why this is more of a longer-term thing? 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, great. Could you tell me about Optura?

Question: David Wright - BMO Nesbitt Burns - Analyst : Great. And then how much id you pay for that?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. And what sort of revenues would they be bringing you on an annual basis?

Question: David Wright - BMO Nesbitt Burns - Analyst : What was their headcount?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. But would they be annual revenues that you can tack in of 5 to $10 million?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. So that was done February 14, was it?

Question: David Wright - BMO Nesbitt Burns - Analyst : Do you think you have other acquisitions like this to do to round out the SAP solution?

Question: David Wright - BMO Nesbitt Burns - Analyst : So is there quite a bit of opportunity here that can help you build out a solution, or is it kind of tacking on here and there?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay, that sounds promising. And just coming back to R&D for a second, would you expect, given where your solution is, that normally you run at 15%, but are you kind of running ahead of that in the coming year? Should we anticipate higher than 15% expense for the coming year?

Question: Nate Swanson - Think Equity Partners - Analyst : Just a couple of housekeeping questions. First, what was the average deal size for the quarter, and also for the deals that slipped that you have closed since the end of the quarter?

Question: Nate Swanson - Think Equity Partners - Analyst : Okay, were there any 7 figure deals in there?

Question: Nate Swanson - Think Equity Partners - Analyst : Okay. And then can you also go through sales headcount at the end of the quarter?

Question: Nate Swanson - Think Equity Partners - Analyst : Okay. And that's roughly flat? 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 - Think Equity Partners - Analyst : Okay. And then can you just walk us back through -- in terms of the lengthening sales cycles the upfront cost that you cited for your customers. Can you just walk us through again what those upfront costs are?

Question: Steve Cane - Jefferies & Company - Analyst : This is Steve Cane (ph) again for Rob Schwartz. Just a quick question or two here. I am wondering are you still seeing the ECM market overall as growing at 10 to 15%, and are you internally continuing to target that level of organic growth?

Question: Steve Cane - Jefferies & Company - Analyst : Okay, terrific. Great. Thank you. And one just quick follow-up question. Will you be able to report no material deficiencies in internal controls at the time you file your Q? Is that known yet?

Question: Steve Cane - Jefferies & Company - Analyst : When you file the Q, will be you be able to report that there are no material deficiencies in controls?

Question: Barbara Coffey - Brean Murray - Analyst : A couple of quick questions. When you had spoken about IXOS and Livelink for awhile some of your salespeople were trained in both; other times, you had dedicated salesforce for some and the others. Can you speak to where that stands now? And also on the partnerships, are for example SAP and Deloitte selling the full solutions, or really just the archiving?

Question: Barbara Coffey - Brean Murray - Analyst : And did you find that the integrated versus split salesforces at all responsible, perhaps for deals slipping, or where they not related?

Question: Blair Abernathy - Claris Securities - Analyst : Frankly, I just wanted to clarify a couple of things. John, could you just walk me through the reversal on the minority interest? It looks to me like it sort of positively impacted your adjusted EPS by a couple of cents. And I want to make sure I understand what was going on there, and whether that is going to recur again?

Question: Blair Abernathy - Claris Securities - Analyst : Okay, and so if we go back to Cassel (ph) statement, you spent 3.5 million on IXOS this quarter. How much does that take you up to, and what cost is remaining for you to purchase the rest of the business?

Question: Blair Abernathy - Claris Securities - Analyst : Okay. And will the balance of the cost -- somewhere in the same range?

Question: Blair Abernathy - Claris Securities - Analyst : Okay. Any idea when you anticipate that that will be completed? 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 Abernathy - Claris Securities - Analyst : So this year, next year --?

Question: Blair Abernathy - Claris Securities - Analyst : Okay. And John, --.

Question: Blair Abernathy - Claris Securities - Analyst : Right. Just, John, on the Deloitte partnership, I am just wondering at this -- this has been going on, I guess, since last October time frame when you announced it last fall. How many customers have you actually closed and implemented with Deloitte's for Sarbanes-Oxley solution at this point?

Question: Blair Abernathy - Claris Securities - Analyst : Okay, and when you are piloting, are these -- are there competitors in there piloting as well, or has that sort of decision been made before you (multiple speakers)?

Question: Ralph Garbia - Credit Suisse First Boston - Analyst : Just a couple of questions on the archiving side. Was there any revenues in the quarter from the e-mail archiving for Lotus product?

Question: Ralph Garbia - Credit Suisse First Boston - Analyst : I thought maybe you were preselling it before the European conference. Okay. So there was zero from that (multiple speakers).

Question: Ralph Garbia - Credit Suisse First Boston - Analyst : Okay, and then on the IXOS side in North America now with the SAP relationship. One, have you recovered most of the back licenses that were sort of outstanding there that were the lower hanging fruit? And two, SAP had a half decent license quarter this quarter. What sort of lag do you have before you start seeing IXOS license revenue coming out of that relationship? 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 Garbia - Credit Suisse First Boston - Analyst : And then, I guess, related to that with some of the partnerships that you have developed now, both on the OEM side, SAP, the storage guys -- you ended the quarter with 160 quota. Where do you sort of see that number at the end of next fiscal year?

Question: Ralph Garbia - Credit Suisse First Boston - Analyst : On headcount side for quota carrying sales guys -- you are at 160, and what sort of number (multiple speakers)?

Question: Scott Penner - TD Newcrest - Analyst : Just a couple of other things, John. On the partner channel, have you seen any of the storage vendors that you work with start to have discussions with you about either reselling or getting involved with a broader suite of your products?

Question: Scott Penner - TD Newcrest - Analyst : But you have had -- you have (multiple speakers).

Question: Scott Penner - TD Newcrest - Analyst : Right. And on the SAP, I would be interested in any comments that you have had on you ability to go back into those customers that are thought to be archiving solution and sell them more of your product?