Open Text Q3 2006 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 just chat a little bit about the license sales. You have, obviously, seen some significant headwinds, and you did talk about pruning some unprofitable revenues. Maybe you can go over what more -- if there is more pruning to be done, or why the outlook is essentially down continued into Q4. And then maybe an update on where the global head of sales search is at?

Question: Paul Steep - Scotia Capital - Analyst : The cost savings this year -- we have dropped from sort of 30 million to 25 for 2006. What sort of changed since we last talked in February that would alter the view for the current fiscal year?

Question: Paul Steep - Scotia Capital - Analyst : And then the margins on license sales, gross margins there were 86% this quarter. Why the hit, Alan?

Question: Mike Abramsky - RBC Capital Markets - Analyst : John, could you talk about the trend a little bit in your achievement relative to your guidance? Q1 and Q2, it looks like you came in fairly close to the high-end of guidance. This quarter, you came in at the low-end of guidance. I realize Q1 is weak, but it seems your normal policy is to exclude unclosed deals at the low-end. So what perhaps might have occurred that changed for you at the time you gave your guidance, which was 32 days into the quarter? And how are your close rates doing on these larger deals, relative to the last couple of quarters?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Can you just give us some insight as to what is different about this quarter than the last two, where those slippages didn't occur?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And has that also played into the reason for your flat guidance for next quarter?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay, just a little bit more on this pruning unprofitable revenue. Is there -- we thought sort of post IXOS a lot of this was done. So, where is this, or where was this kind of still coming from, and how did this emerge?

Question: Tom Liston - Versant Partners - Analyst : Just a follow-up to Paul's question on the Q4 guidance. If we were to assume that maintenance and services are relatively flat, the license -- the low-end of the guidance would assume that license goes to somewhere around 27 million, which is down about 10 million year-over-year. So, what events would have to occur and what product areas would have to fall short such that you'd hit that bottom-end of the guidance?

Question: Tom Liston - Versant Partners - Analyst : And on the deferred revenue and maintenance, could Alan first comment on any currency impacts year-over-year on both these items? Second, any further comments on renewals would be helpful. And third, some of the competitors and other software companies are talking about more pricing pressure, whether it be on a renewal or perhaps an upfront negotiation on a new large deal. Are you seeing any of that in the industry?

Question: Tom Liston - Versant Partners - Analyst : And General Dynamics a few days ago announced a $9.6 million deal to implement Livelink for the U.S. Air Force. Can you quantify your contribution to that project and talk about when the revenue will be recognized? 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 : There's no additional licenses related to this?

Question: Scott Penner - TD Newcrest - Analyst : Alan, just first of all, on the restructuring charge, I think you had mentioned last quarter that there would be a stub of a 3 million charge this quarter. Given your comments about the shifting of the restructuring and the fact you're still expecting the same savings next year, is there a group of employees that you have decided not to terminate? Or what accounts for that difference?

Question: Scott Penner - TD Newcrest - Analyst : With this sort of unplanned attrition -- is this out of norm for you?

Question: Scott Penner - TD Newcrest - Analyst : I also wanted to ask, John, just in general, you have seen some pretty good -- arguably, some pretty good results from FileNet, with mid-teens software growth year-over-year, and the documented business as well. It seems like you guys are going in a different direction, yet the competitive environment, as you say, hasn't really changed. How do we sort of view 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: Scott Penner - TD Newcrest - Analyst : And when you say you are shifting back to growth more, John, I think last quarter, you made the comment that you see kind of a market growth of 7 to 9%. When you talk about shifting to growth mode, is that the kind of numbers that we should be sort of expecting? And is that sort of number consistent with your current cost base?

Question: Howard Lis - GMP Securities - Analyst : Can you comment, please, on the maintenance contract renewal rates you experienced this quarter, and compare that to last year's level, please?

Question: Howard Lis - GMP Securities - Analyst : And those percentages are based on the number of contracts or the dollar value of the maintenance contract?

Question: Howard Lis - GMP Securities - Analyst : And on a dollar basis, how would that look?

Question: Howard Lis - GMP Securities - Analyst : Great. And then, as you look into next year, I know you have got the restructuring done, and your costs -- you said you're sort of satisfied with where they are at. Can you give us a sense of where you see the growth opportunities for new licenses, which have waned a bit here in this quarter, seemed weak? (indiscernible)

Question: Howard Lis - GMP Securities - Analyst : Where do you stand now on your stock buybacks?

Question: Howard Lis - GMP Securities - Analyst : So nothing came out of the most recent quarterly Board meeting to pursue that?

Question: Richard Tse - National Bank Financial - Analyst : John, just a question on the timeline for recovery and license growth. I know you are not giving guidance, obviously, for next year. But what is your target to actually start -- for us to get to a point where we actually see license growing again? 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: Richard Tse - National Bank Financial - Analyst : And the fact that you guys are sort of shifting towards more of a solution sell as opposed to an infrastructure sell, doesn't that mean that the number of potential seats you can sell is reduced as a result of that?

Question: Robert Schwartz - Jefferies & Company - Analyst : Your service margins were better this quarter, and I was wondering if you can help us understand why, and whether you expect that current margin is indicative of what we should see going forward.

Question: Robert Schwartz - Jefferies & Company - Analyst : I was wondering how many salespeople you finished the quarter with versus what you started with, and what your plans are to hire going forward?

Question: Robert Schwartz - Jefferies & Company - Analyst : Do you think you have any other execution issues -- I don't know how you felt about execution this quarter -- but any other execution issues you need to address in the field? 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 - Jefferies & Company - Analyst : My last question really addresses Europe and maybe the IXOS products. I was wondering, outside of -- did Europe come in as you expected, better than you expected? And if you look at the IXOS products as a group, did they perform as you expected worldwide, or were you disappointed?

Question: Duncan Stewart - Orion Securities - Analyst : I think this first question is probably for Alan. The issue with the cost of license revenues -- given that the last two quarters have seen sort of weaker-than-run-rate license revenues, does that -- is there any structural reason why that pushes the -- as you said, the flowthrough component of it up?

Question: Duncan Stewart - Orion Securities - Analyst : Okay, so it -- I mean, listen, I am not trying to take two data points and make a draw line; I was just curious. I guess one of the things that sort of jumped out at me as I look at the statement of operations, I look at the sales and marketing costs. And I guess I find them -- that 24.7 -- I find them slightly higher than -- kind of if I take the various money you are expecting to save this year as a result of the restructuring, I am a little surprised sales and marketing isn't a little lower. Also, given that license was not that high this quarter, you would expect there to be fewer costs associated with that.

Question: Duncan Stewart - Orion Securities - Analyst : As a follow-up to that, you said that the number -- the headcount on sales was more or less the same, but as always, some people walked onstage, some people walked off. Was the turnover -- what would the turnover in the quarter have been on that base?

Question: Duncan Stewart - Orion Securities - Analyst : In the press release you talk about license growth actually -- sorry, not license -- revenue for the whole quarter would have been up if you minimize the impact if you exclude foreign exchange. That is just talking about the Euro and U.S. dollars, right?

Question: Duncan Stewart - Orion Securities - Analyst : Euro and Canadian. But Canadian is not a significant effect at the revenue side?

Question: Duncan Stewart - Orion Securities - Analyst : And finally, a fairly happy question. I was just down at NAB, National Association of Broadcasters show, and you guys with Artesia had an entire digital asset management section. And frankly, I was blown away. The product was just super, and really great traffic through the booth. You talked about some of the parts of Open Text growing sort of faster than your sort of overall ECM space. Will digital asset management fall into that? Kind of what number -- there seems almost to be an inflection point here on the DAM side. Sort of I throw around numbers in my head of sort of 15 to 20% annual growth for at least a couple of years. Would you guys agree with 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: Duncan Stewart - Orion Securities - Analyst : Have you ever broken out -- well, since you bought them, I think it was a fair number of quarters ago -- roughly, kind of what percent of revenues is Artesia, or do you not give that?

Question: Duncan Stewart - Orion Securities - Analyst : You know what? You are not alone. There were a lot of really happy people taking the booth tour.

Question: Ed Maguire - Merrill Lynch - Analyst : Going beyond the search for a head of sales, could you comment just on where you are, how satisfied you are with the folks you have in key management roles, and any other positions that you are currently looking to fill or expand?

Question: Ed Maguire - Merrill Lynch - Analyst : And Alan, in your new role, can you comment at least what may be different about your current role? I know you have been focused a lot on cost reductions, but are there any areas that you as still low-hanging fruit? 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 Maguire - Merrill Lynch - Analyst : In your new role for strategic initiatives, you will be focused on additional cost reductions. And I am just wondering if you could provide just a little bit more color around areas where you feel like you are going to be spending a lot of time.

Question: Nate Swanson - ThinkEquity - Analyst : All of my questions have been answered.

Question: David Wright - BMO Nesbitt Burns - Analyst : I wanted to come back to the Artesia question for a minute. If you describe it as your best product, but it doesn't have significant growth, and it is not a significant dollar value, maybe you are putting your best foot forward, but to have a booth at NAB, I would think, would be a significant cost. Are you investing properly there?

Question: David Wright - BMO Nesbitt Burns - Analyst : In the category. 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 : Over what timeframe would you expect to start to see the growth? Is this a three to six-month cycle, or longer?

Question: David Wright - BMO Nesbitt Burns - Analyst : How does Duet change the opportunity for Open Text? You have, obviously, had a software product that reads information out of SAP in that. So how does it help you or challenge you?

Question: David Wright - BMO Nesbitt Burns - Analyst : What does the product do that helps you?

Question: David Wright - BMO Nesbitt Burns - Analyst : So it is them accessing the SAP information; now they have data that they need to store somewhere, so then they --

Question: David Wright - BMO Nesbitt Burns - Analyst : But Open Text's role is one that comes on after they have got this information, now what do they do with it.

Question: David Wright - BMO Nesbitt Burns - Analyst : Interesting. How would you characterize the selling environment? From recent conferences that I have been to in the content management field, it seems that there were a ton of people there; they were going into the various booths, including Open Text booths, and very interested in what the products are, yet the results today are kind of at the weak end. So what is it? Is it that people are interested, but they are still -- they don't have their checkbook out? What is the issue?

Question: Blair Abernethy - Clarus Securities - Analyst : John, first on the R&D side of things, can you just give us some sense there of what your investment plans are? What product areas are you focusing on? And also, are you looking at rationalizing or sunsetting any of the products that you have acquired over the last couple of years?

Question: Blair Abernethy - Clarus Securities - Analyst : If you were to look at the R&D organization today, and you were to split the people between -- the development team between products and solutions, can you do it that way? Would you say it is 25% on solutions, 50 or 75% on products?

Question: Blair Abernethy - Clarus Securities - Analyst : Great. And what's the leadership of the R&D organization look like today?

Question: Blair Abernethy - Clarus Securities - Analyst : And this quarter, your R&D expenses are around 14% of your revenues. Was there any onetime items in there, or credits in there that sort of made that number artificially down? 14% seems like a fairly low number.

Question: Blair Abernethy - Clarus Securities - Analyst : Alan, just one last -- just one question. With Q4 coming up, have you guys looked at or revisited any of the restructuring costs or acquisition-related costs that have been out there now, since we are kind of entering our -- we'll be entering, I guess, our third year for a lot of these acquisitions? 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. any adjustments to that that you are expecting, or asset impairments that you might look to do to clean up, now that you are sort of at the end of the restructuring road?

Question: Blair Abernethy - Clarus Securities - Analyst : And what is the cost for the balance of the IXOS at this point?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Just quickly with respect to the FX, could you just tell me what impact you are going to see from the appreciation of the Canadian dollar? And then maybe you can just help us with what percentage of your expenses would be spent in Canadian dollars?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : That's great. And one more thing. With respect to some of the delayed deals, John, that you mentioned, can you quantify the number of deals that were delayed this quarter? And with -- I guess we're one month past the quarter end; have any of those deals closed, and have you lost any of those deals to competitors?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : We're talking about $1 million plus deals that you were talking about?