Open Text Q3 2007 Earnings Conference Call Transcript

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

Question: Tom Liston - Versant Partners - Analyst : Just on the SAP announced this afternoon or I guess maybe it was this morning. Can you talk about the incentives that you are offering their sales force and how that has changed and as well I think there was a comment that SAP can now directly support the two products that are part of this announcement and had does that affect your mainstream?

Question: Tom Liston - Versant Partners - Analyst : Okay and can you talk about in terms of their sales force, have they been -- I know they were familiar with the product but haven't been been fully trained in the product and, again, what incentives do they have that might have differed than the partnership before?

Question: Tom Liston - Versant Partners - Analyst : And with your Oracle partnership, I think it was a couple of weeks ago that they had talked about the [Stellant] roadmap. In your conversation with Oracle has anything changed, if any, in terms of their plans with you vis a vis perhaps building out the Stellant assets that they have acquired?

Question: Tom Liston - Versant Partners - Analyst : And Paul, just on the maintenance renewals, now that we have the combined company, where do you see sitting in terms of, obviously, it was a strong quarter in terms of renewals, but where does that sit as a percentage of the year? You know obviously (inaudible) be around 25%. Obviously it looks like it is ahead of that. With the combined company, where do you see that percentage being? 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 : Yes.

Question: Tom Liston - Versant Partners - Analyst : That's perfect. And just the last question and I'll pass along. Just on the revenue mix, the target model obviously calls for the 30 to 35% product license this quarter was below that. When are you seeing it trend back toward the model? And the second part of that is the gross margin assumption the target model is obviously a fair bit above where Q3 hit. Again where do you see that, when do you see that coming towards the target model?

Question: Tom Liston - Versant Partners - Analyst : And on the gross margin.

Question: Mike Abramsky - RBC Capital Markets - Analyst : You've had about six months now post Hummingbird. Could you just discuss why a little bit more you're fussy on withholding guidance? You talked previously about wanting to scrub the pipeline, get better visibility, just give us a bit better understanding as to what is the issue here?

Question: Mike Abramsky - RBC Capital Markets - Analyst : I guess like how material are some of these additional obligations, contract obligations, the kinds of things that could pop up? Are there just a bunch of small ones or are there still some large either contracts or relationships, etc.. that could potentially provide volatility to Hummingbird's performance?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And are these negotiations that you are working through or is this a due diligence?

Question: Mike Abramsky - RBC Capital Markets - Analyst : So you're really trying to get a sense of the reliability of those sales teams associated with those regions in terms of the forecasting that they have in their pipeline?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And your confidence in their being able to deliver that?

Question: Mike Abramsky - RBC Capital Markets - Analyst : On the flip side of the partner issue is that of competition. Could you just give us a bit of an update or maybe an overview as to the state of competition from these same partners who, obviously, have done things in their space. I mean Oracle's clearly [done], but SharePoint obviously historically and even more recently particularly with their recent push is obviously very ECM-centric. So could you talk about the impacts that you are seeing there?

Question: Mike Abramsky - RBC Capital Markets - Analyst : In Europe is SAP still kind of a leading sales pipeline for IXOS-related archiving sales?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Lastly, obviously you are moving to try to create and unify or at least provide integration path for the various products in your portfolio. But there are still products it seems from your announcements, Artesia, Red Dot, Connectivity that really have their own life, their own market opportunity. What is your strategy in the longer term? Is it to integrate those, keep them separate and then going forward and when you think about acquisitions do you look to those as more fitting into an overall product strategy? Or are you more content to bring in products that can purely add to say more customer base? More selling, more growth, etc.?

Question: Richard Tse - National Bank Financial - Analyst : Couple questions here. First on the cost side. There's sort of a noticeable decline in some of your cost lines like R&D and Sales and Marketing. So should we assume that we are at a level now that might be sustainable? Or how should we look at that, Paul?

Question: Richard Tse - National Bank Financial - Analyst : And then with respect to the seasonal lit between Q3 and Q4 and notwithstanding the fact that you are not giving guidance, (inaudible) just that you are on a historical path? Nothing has been a surprise so is it safe to assume that we are going to see that sequential lift as in previous years?

Question: Richard Tse - National Bank Financial - Analyst : On the revenue side as well?

Question: Richard Tse - National Bank Financial - Analyst : Yes I guess my question probably revolves more around the license side of the business. Like, you've been through this aggression for some time. When do you think you are going to get a meaningful organic acceleration in licenses here? 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 : One final question here. What's your take today on further acquisitions here in the tryout, too much lockdown this market and make yourselves to go to guys. Is that in the cards now that you are whiling away past Hummingbird?

Question: Scott Penner - TD Newcrest - Analyst : Paul, you just mentioned on the cost side that things are pretty much stable. Does that mean the cost base heading into Q4 is pretty much as it is right now?

Question: Scott Penner - TD Newcrest - Analyst : And then just to extend that as you start thinking about growth next year, at market rate is this a cost structure that can support -- you know when you start talking about that 8 to 10% growth, is this a cost structure that you can support that on?

Question: Scott Penner - TD Newcrest - Analyst : And then I wanted to ask, too, about the support revenue for the quarter versus Q2. It looks like if you were to adjust for the respective deferred write-offs in the quarter, that it didn't really climb. In fact it may have even declined sequentially. So I wanted to just understand what the dynamic is 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: Scott Penner - TD Newcrest - Analyst : So there's nothing there -- that's what I'm trying to get at is there is really nothing to say that the products that you exited last year that those made in the contracts are now coming up for what turns out to be nonrenewal?

Question: Scott Penner - TD Newcrest - Analyst : And Paul as well if you can just talk me through what the deferred tax -- deferred tax reduction is on the casual statement?

Question: Scott Penner - TD Newcrest - Analyst : Is that expected to continue, I guess?

Question: Howard Lis - GMP Securities - Analyst : Just want to go back to this whole discussion about guidance and try to better understand again why you are not providing at least a range. I mean the whole point of providing a range is there is obviously a lot of gray area in interpreting the quality and the probabilities and the sales pipeline. You've had as mentioned before six months worth of experience here. This I would say was -- Hummingbird, that is, was a much more, sort of consistent performer in terms of its results. So, again, why is you are not providing guidance at least a range of a guidance and do you expect to do so at the end of the fiscal year? And when you do it at the end of the fiscal will it be on a quarterly or an annual basis? Thank you. 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 : So when do you expect to start providing guidance? You say after a full year. So that would be in another two quarters?

Question: Robert Schwartz - Jefferies & Co. - Analyst : Microsoft Office SharePoint Server is widely viewed as starting to freeze the market. I'm wondering how you are seeing that? How you are combating it and what effect it is having on you and how you go to market against it?

Question: Robert Schwartz - Jefferies & Co. - Analyst : As a positive driver maybe you could help us understand the metrics for this past quarter. How many deals were with Microsoft SharePoint? What percent of the revenue? Maybe some examples of some customers who are in SharePoint? You gave one. Could you give us some more?

Question: Robert Schwartz - Jefferies & Co. - Analyst : Were any of the 500K deals with SharePoint?

Question: Robert Schwartz - Jefferies & Co. - Analyst : And if we look at the margin on customer support, it came in around 84% similar to -- better than last quarter but less than I think we would have expected so much for improvement. Should we expect that for next quarter as well? That margin?

Question: Robert Schwartz - Jefferies & Co. - Analyst : Because of scale?

Question: David Wright - BMO Capital Markets - Analyst : I was looking for a comment on basically marketing and the average deal price. It seems over the years that the average deal size is not going to (inaudible) cutdown a little bit but I'm imagining that you are selling more components. So perhaps you could look into it for me and are you able -- is there a way that there are certain aspects of the deals that you are selling are in fact getting larger but other ones are shrinking so the average deal size is staying -- ?

Question: David Wright - BMO Capital Markets - Analyst : Have you got a number for us? 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 : And a clarification, I think you said partner revenue was about 30% -- 37% I think you had said. And is that of license sales or total revenue? How do you -- ?

Question: David Wright - BMO Capital Markets - Analyst : Great. That's what I thought. Thanks very much. My other questions were answered.

Question: Gabriel Leung - Paradigm Capital - Analyst : Just got a couple of housekeeping questions for you, Paul. During the conference call you had talked about continuing to be involved in a couple of lower margin consulting mandates probably inherited from the Hummingbird side. Can you quantify that amount for us on the services line? And maybe your expectations of when some of these mandates might be completed?

Question: Gabriel Leung - Paradigm Capital - Analyst : Right and that's the function of getting rid of some of these (multiple speakers) contracts. Okay. And just lastly can you give us the headcount at the end of the quarter?

Question: Brian Freed - Morgan Keegan - Analyst : Could you please throw some light on the impact of currency on revenue this quarter? I guess with the weakening dollar I just want to know how that played out.

Question: Scott Penner - TD Newcrest - Analyst : Paul, what is the deferred revenue, support revenue write-off that you expect next quarter?

Question: Scott Penner - TD Newcrest - Analyst : John, I just wanted to come back to the DMX. Is this -- just remind me is this out in the market for Hummingbird for customers right now?

Question: Scott Penner - TD Newcrest - Analyst : And what is DMX expected to be generally available for -- ?

Question: Scott Penner - TD Newcrest - Analyst : And isn't a no charge -- no charge transition for customers?

Question: Scott Penner - TD Newcrest - Analyst : And how quickly do you expect that to have any meaningful takeout? Do you have a good read from a customer base? It always seemed like there was a real hodgepodge of versions of Hummingbird out there within their customers?

Question: Steve Coning - Jefferies & Co. - Analyst : Just two quick ones. One on library services. Enterprise library services. Can you give us some color on how that's coming and where we might see some impact from that in the near future? Secondly, just a question back to the SharePoint question. How long -- do you have a sense of how long it will take the market for customers to get their arms around what SharePoint isn't good at and what it is good at? Some of them are probably grappling with it now, but is that -- three months, six months for them to really understand SharePoint well?

Question: Garrett Becker - Merrill Lynch - Analyst : This is actually Garrett for Ed Maguire. Just wondering, I may have missed this but could you talk a little bit about the environment for U.S. Federal spending?

Question: Garrett Becker - Merrill Lynch - Analyst : Any chance you can maybe give us a breakout of what that was?

Question: Garrett Becker - Merrill Lynch - Analyst : For USA?

Question: Garrett Becker - Merrill Lynch - Analyst : Maybe just going back again to the partner sales. You said 37% of licenses. Any idea -- is most of that partner influenced? Is any of that actually resold by partners?

Question: Garrett Becker - Merrill Lynch - Analyst : That is very helpful and I think that's all I have. Thanks. 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 : On connectivity, now that you have had a chance to look at it a little bit. Any further thoughts on your plans in that area? And, also, could you comment at all on the business itself? It had been in a slight decay. If you are keeping it have you got any plans to grow that business?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Just following the follow on bandwagon here, just following on Richard's question, but maybe just getting a little bit more specific on seasonality because I think you were talking about license. But on overall growth, your prior model -- the prior one you published was that Q4 kind of pre Hummingbird was generally up 10 to 15%. But the last two years it has been up 4. So how do we think about sort of proper seasonality for the combined company for Q4?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Yes I'm just trying to understand to the extent you can help us just understand how does the combined company behave seasonally? And to the extent that you are able to help us understand that?