Open Text Q3 2010 Earnings Conference Call Transcript

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

Question: Mike Abramsky - RBC Capital Markets - Analyst : Yes, John, just on your comments, did you say you were comfortable with F10 First Call EPS? And then you said something about we are in range of Q4. Does that mean range of Q4 consensus? And also does that include Nstein and Burntsand impacts?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay and what was in Nstein --? So that means that you feel that you are about basically about $5 million behind is what this quarter is setting you back in terms of license?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay and what -- what would -- and then on the EPS side, just to clarify what you're comfortable with.

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay so normally you talk about -- I think you had previously talked about FX being a natural hedge. And this time you are talking about it having an EPS impact. I think you normally just have it on the top line. So what is the impact of FX to your top line and what is going on with regard to your hedge on EPS?

Question: Mike Abramsky - RBC Capital Markets - Analyst : So if you sort of take out the impact of Nstein and Burntsand, is the kind of shortfall to your prior -- slight shortfall to your prior outlook? Is that largely on FX or is that some slowing in transaction momentum or stretch out of deals or what is going on there?

Question: Tom Liston - Versant Partners Inc. - Analyst : Thank you. Good afternoon. Just on the license revenue. Could you talk a little bit more about whether the shortfall was more WCM or it's probably not eDiscovery, but archiving or what have you? Obviously Vignette last year did about $7 million and that is probably down, but if you look at last year's numbers in Vignette and look at some of your peers that are growing, what is sort of the delta there between those two things?

Question: Tom Liston - Versant Partners Inc. - Analyst : And I guess you are kind of suggesting it anyway, but do you feel it is more of a time issue where maybe December was a little ahead and then June will catch up a bit? Or does this make you start to rethink the acquisition strategy a little bit toward companies that might give you a bit of growth on the top line rather than trying to manage the cash flow, the revenue declines. Is that --?

Question: Tom Liston - Versant Partners Inc. - Analyst : Why is that? Is it just budgeting at year end versus a new year and -- or what --?

Question: Tom Liston - Versant Partners Inc. - Analyst : Sure makes sense. (multiple speakers). 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 Inc. - Analyst : And just real quick for Paul, [Law] documented that the company is hiring fairly aggressively in Canada. Some of that's moving jobs from other parts in the Open Text organization back to Canada, but some of it is new. Is there concern there with the Canadian dollar where it is or are you 25% of expenses in Canadian dollars, that increases with the Canadian dollar being strong, is that something you're maybe perhaps rethinking?

Question: Richard Tse - National Bank Financial - Analyst : Hello Paul, just a question on maintenance here. So your support went down from $130 million last quarter to $[124] million for this quarter. Was that all due to seasonality? Sort of the FX?

Question: Richard Tse - National Bank Financial - Analyst : So what was the number in terms of FX versus the impact on support? 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 : Okay, well, what about the renewal rates, I guess for maintenance and (multiple speakers)?

Question: Richard Tse - National Bank Financial - Analyst : With respect to the services, you sort of signaled interest in services with the Burntsand acquisition. Is that something that you are thinking of pressing further on with bigger transactions in that area?

Question: Richard Tse - National Bank Financial - Analyst : Sorry. I don't want to sort of belabor the point on maintenance, but if you circle back here and I understand that pickup you had last quarter, but to have it sort of decline subsequent to your sort of signing those maintenance contracts, but -- that's --. I really don't understand how that's [worked] in terms of decline and I think it would certainly help if you would provide more color on the FX impact here.

Question: Richard Tse - National Bank Financial - Analyst : Okay, all right. Thanks.

Question: Richard Tse - National Bank Financial - Analyst : Okay. Thanks.

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Thanks. John, first of all, just to make sure I've got this right. Last quarter, you mentioned that normal seasonality on the license side would be up 5 to 15%. And in Q4 I think you just said you expect to be up 20 to 30%. Is that right?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Sorry. Now I'm completely confused. The -- just so what is now the normal seasonality through the year for license revenue?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : And that's on license revenue?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. And on the -- just on the Vignette side, last quarter, I think you disclosed the revenue amount (multiple speakers) contribution. Is that available this quarter?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : And then just in terms of that big swing on seasonality, I mean that's a pretty massive change from before. Is this just a -- I mean, it's tough to really pinpoint what it's a function of, but is it mainly the timing of these large deals? When do you think they are closure in the year?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. Paul, I think you may have gotten to the fact that there was about an $8 million cash restructuring in the quarter. Is that right?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay and what is --

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : What is left to go as far as the workforce restructuring in Q4?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. And then just lastly, you mentioned the $0.03 FX impact us this quarter on an adjusted EPS. Now on, just on the pretax operating line, I mean that would suggest that a relatively lousy quarter for license revenue. We were still comfortably above the 22 to 27% range. I am just trying to figure out what --? You know, are you waiting to potentially change that to target range in the next year? Is there any reason to think you should not be above that range next year? 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: Paul Lechem - CIBC World Markets - Analyst : Thank you, good afternoon. Just on the seasonality again. Do you see the same type of seasonality out of your direct sales force as you do out of the channel?

Question: Paul Lechem - CIBC World Markets - Analyst : What can you do to smooth this out in the future? Is there anything you can do because it seems you are going in the wrong direction here and -- I'm also trying to figure out, so first of all what can you do to smooth it out? Secondly how much of this is related to the economic environment and how much will smooth out naturally when things get back on a more even keel?

Question: Paul Lechem - CIBC World Markets - Analyst : How do you get comfort that Q4 will actually be where you are saying it is going to turn out? How do you actually get comfort of where the pipeline will actually hit in terms of quarters? 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: Paul Lechem - CIBC World Markets - Analyst : What's your coverage, your pipeline coverage at this point in time? Has that been moving around?

Question: Paul Lechem - CIBC World Markets - Analyst : Well how much do you have in your pipeline versus your budgeted numbers for the year?

Question: Paul Lechem - CIBC World Markets - Analyst : Has that remained stable?

Question: Paul Lechem - CIBC World Markets - Analyst : And is the seasonality as bad in North America as it is in Europe or is there any difference?

Question: Paul Lechem - CIBC World Markets - Analyst : Just one last question, go back onto Richard's questions about the maintenance and I am trying to understand the FX impact. Because by my calculations, FX was a positive impact this quarter not a negative. So shouldn't that have helped push things up a little bit more or am I getting it wrong? 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: Paul Lechem - CIBC World Markets - Analyst : Negative year over year or negative versus Q1?

Question: Paul Lechem - CIBC World Markets - Analyst : Sequentially, okay.

Question: Paul Lechem - CIBC World Markets - Analyst : Okay and in the quarter -- last question, sorry, I did have one more. In the quarter how much was the annualized -- I think you are looking at $40 million in annualized cost savings from Vignette. What kind of run rate are you at right now?

Question: Paul Steep - Scotia Capital - Analyst : If we make it quick here and get beyond the quarter, John, maybe just talk a little bit about SharePoint 2010 and how that looks on the competitive landscape long term? How you think that sort of impacts the Company, and then maybe comment as well on the SAP side, the launch of the competing product from competitors here shortly on that platform, where you sort of see yourself in the market, and one quick follow-up for Paul. 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: Paul Steep - Scotia Capital - Analyst : Just around EMC launching the niche products in the next couple of weeks. What is your thought there with regard to SAP? I know it came up last call, but we might as well put it down this quarter.

Question: Paul Steep - Scotia Capital - Analyst : Fair enough. Why don't we talk more importantly, Paul, the free cash? It is going to build pretty dramatically here, based on my numbers. You know once we get beyond hedging and worrying about FX, what is the redeployment plan there besides tuck-unders like Burntsand? Is there thought about where that cash goes and how it returns to shareholders?

Question: Dushan Batrovic - Dundee Securities - Analyst : Thank you. I guess the question for me again is seasonality versus macro economic weakness out there. And maybe to ask the question a little bit differently is were there specific deals that you are tracking that might have slipped out of the quarter that you were counting on that -- that should have closed in the quarter? Have any of them -- if that is the case, have any of them actually been closed? And a second part of that is to what extent are you expecting a rebound in European -- in the European business thinking about what is happening in Greece and etc.? Are you banking on more comfort out of your enterprise accounts? 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 - Dundee Securities - Analyst : Any other deals that have since closed, were they seven-figure deals any of them?

Question: Dushan Batrovic - Dundee Securities - Analyst : Next question for me is your operating expenses were a bit lower than I was expecting. Did you accelerate any of the cost-cutting based on what you are seeing in the quarter or were you basically to plan on the cost-cutting side?

Question: Dushan Batrovic - Dundee Securities - Analyst : Was that in response to what you were seeing in terms of contract activity, though?

Question: Dushan Batrovic - Dundee Securities - Analyst : Last question for me is on the Burntsand acquisition. It's a relatively small deal, but I'm curious whether it signals more of a bigger move into Services side? Or is it just -- is it -- should we consider it more of a one-off?

Question: Dushan Batrovic - Dundee Securities - Analyst : So there's not much risk of call it channel conflict? Some of the third-party service providers that you deal with?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Good evening. Just one final clarification and I promise I won't ask any more questions on this. But just to understand Q3, so there was typical seasonality, but beyond the typical seasonality, there was some FX impact and then there were large government deals that took a little bit longer than what you were expecting. And then some orders in Europe got shipped. Is that kind of (multiple speakers)?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay but so it's more exaggerated than if we look next to your same quarter then would you expect the similar, exaggerated seasonality? 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: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay. And just in terms of pipeline, you mentioned that it's picked up. Would you be able provide us with any color in terms of your level of [cost sense] in terms of what your outlook is for next year? Would you say you are more -- you are feeling a little bit better about things today versus three months ago? Or would you say it is still the same in terms of feelings?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay. And within the pipeline, is it for a similar type of product that have seen strengthened before? Or are you seeing increased demand in some of the other stuff? Like, I think last quarter web content match had started to pick up.

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay. And these large deals, are they coming from your SAP relationship or outside of the SAP?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay. Great. And the mobility solution that you officially launched last quarter, would you be able to give us any feedback in terms of reception so far and --?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : What -- do you have an idea in terms or are you built to share what your targets are in terms of revenue [take] up for the first year?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay and just last question on your Professional Services as [far as things] -- it sounds like things are -- I mean, am I right in assuming that you have got pretty high-capacity utilization of your consultants and are you feeling a little bit constrained on that front?

Question: Derrick Wood - Wedbush Morgan Securities, Inc. - Analyst : Did you see anything different on the competitive front in the quarter that may have altered sale cycles?

Question: Derrick Wood - Wedbush Morgan Securities, Inc. - Analyst : Okay. And aside from the greater seasonality happening in Q3 and what you are expecting in Q4, are there things in the pipeline that are telling you that overall spending conditions are improving in Europe? Or are you still cautious as you look forward?

Question: Derrick Wood - Wedbush Morgan Securities, Inc. - Analyst : Then lastly, any update around partnering activity with Oracle? 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: Brian Freed - Morgan Keegan & Co., Inc. - Analyst : Good afternoon. Quick question. You guys talked about general weakness in Europe across the board. But if you look at the competitive landscape, EMC and IBM showed some improving trends in their ECM business. Given that you guys have been historically gaining share versus IBM and EMC, can you talk a little bit about what you saw that might have driven this trend in terms of product set or timing? That type of thing?

Question: Brian Freed - Morgan Keegan & Co., Inc. - Analyst : Yes. You guys have been gaining share versus them, but this quarter they seem to have reversed that trend a little bit.

Question: Brian Freed - Morgan Keegan & Co., Inc. - Analyst : Okay. And secondly if you look at the rollout of SharePoint 2010, do you see any risk that customers would delay implementations of Open Text products as they evaluate that, given your (multiple speakers)? 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: Eyal Ofir - Canaccord Adams - Analyst : Thanks. Just wanted to touch back on some of the questions you had on the OpEx levels, more specific to sales and marketing. Obviously you talked about seasonality coming into the fourth quarter, being a lot stronger. Should we anticipate sales and marketing expenses going up at similar -- a much higher seasonal effect, as well?

Question: Eyal Ofir - Canaccord Adams - Analyst : So is that in terms of just sequential growth or are you talking more in terms of a percentage of revenue?

Question: Eyal Ofir - Canaccord Adams - Analyst : Okay, perfect. And then the other question I had was did you guys specify in terms of how much indirect sales you guys had through the channel, through SAP, Oracle, Microsoft?

Question: Eyal Ofir - Canaccord Adams - Analyst : 38%. Can you just talk about a little bit on the Oracle partnership? How that is going? I know you talked a little bit earlier about seeing some stuff in the next quarter, but anything you can give us that gives us an indication that that is moving along? 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: Eyal Ofir - Canaccord Adams - Analyst : Okay. And then one final question for me. On the license side, are you seeing any pricing pressure at all from potentially there are some incumbents or smaller players in the market?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Just a question for you, Paul. On the -- in the past. you have been able to put through annual maintenance pricing increases. I'm just wondering where you stood on that this year and whether that was across the board. If you were able to do it or was it just specific on certain products?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Great. Just on the question of Burntsand, given it might close here in the next 30 to 60 days, I guess, are you including that in your outlook for the balance of the year?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay. And then just turning over to some of the new license sales, John, you know 35% of the business coming out of new customers. I'm wondering if you could expand on that a bit and give us some sense of what products are working for you out there now? I haven't -- we haven't heard you talk about Social Media today at all and also sort of what verticals might be working for 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: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay, great, and did you -- I don't think you updated us on the size of the sales force. Are there any sales force changes?