Open Text Corp Q3 2011 Earnings Conference Call Transcript

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

Question: Michael Abramsky - RBC Capital Markets - Analyst : John, you talked earlier about demand. Just kind of focusing on demand and you made some comments in your press release about improvement -- and this is the second quarter, it's also, I think, the strongest license, if I'm not incorrect, you have had in 3 years. So can you just give us a sense of what are both the tailwinds and headwinds that we might see from you in terms of demand? And also are you seeing any government weakness because obviously that is been a focus here and abroad. Then finally on the issue of demand, are you expecting more uptake from your cross-selling opportunities from your acquisitions or from partner as a driver or from the BPM opportunity? Three questions there.

Question: Michael Abramsky - RBC Capital Markets - Analyst : So, how -- what inning are we in? Or can you give us some sense of the scope of the cross-selling opportunities from Metastorm and StreamServe ahead? And when you kind of expect that to ramp up?

Question: Michael Abramsky - RBC Capital Markets - Analyst : And then on your partner revenues. I think you were talking that last analyst day about Oracle shaping up and now you started to comment that there were some key transactions in the quarter. Could you be a little bit more specific and maybe use a couple of examples and also talk about -- do you see that as significant as SAP or kind of number two?

Question: Michael Abramsky - RBC Capital Markets - Analyst : Okay and then lastly John. You saw a little bit more dilution from Metastorm than I think maybe The Street was expecting. And just wondered if you could talk a little bit about how that might play through?

Question: Michael Abramsky - RBC Capital Markets - Analyst : Yes. 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/Waterhouse Securities - Analyst : Just a few questions around the acquisitions. Paul, I assume it's going to be in the 10-Q as well, so could you just give us what the revenue was? If you can break it out, StreamServe and Metastorm?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. So that Metastorm $12 million is quite a bit higher than what you would expect just doing a run rate calculation. Is that when the revenue fell during the quarter?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay and then just to be clear, John. I think you said that the Metastorm, I guess given the growth potential, you are looking at a 12-month to 24-month time frame to get in on your operating model?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. And then just before I leave that, I believe last quarter you said that Metastorm the percentage of license revenue was in-line or a little bit higher than you guys do in the core business. Is that safe to assume that, that held true within that $12 million?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay. Then also, Paul, if you could walk us through what the outlook is on any sort of integration charges or really what is left to come as far as charges going forward?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Yes, that $5 million to $6 million going forward, does that include what you would anticipate for Metastorm or is that just what you have got arranged so far?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : Okay thank you for that. And then John you mentioned your comments on a little gentler seasonality in Q3 and then looking forward. I'm just trying to divine what that could mean for the normal Q4 spike, presumably that means it's not going to be the level it was last year. Are we back to looking at 10% to 15% up in a Q4 in the core business?

Question: Richard Tse - Cormark Securities - Analyst : Just a quick question here, or a couple of quick questions, first on the M&A environment. So with all these acquisitions, are you guys going to take a bit of a breather right now for the integration or do have an active acquisition strategy going forward still?

Question: Richard Tse - Cormark Securities - Analyst : Okay. In respect to the discussion on Cloud. You guys are talking about this more. Can you give us a sense of what percentage of your revenues today is represented by Cloud versus what it was last year? And also, comment on any customers that have shifted over to this model? Actually I'm not clear on where it sits on your income statement. Is in the license number or is it in the service number?

Question: Richard Tse - Cormark Securities - Analyst : Okay. And just, I guess on some of the previous questions. If you look at the cost base today and I'm looking sort of R&D, sales and marketing, G&A. We shouldn't really expect any down-tick in any of those numbers for the next couple of quarters given your commentary about the 1- to 2-year integration period?

Question: Kris Thompson - National Bank Financial - Analyst : John or Paul, maybe can you talk about the gross margin on your services revenue, it looks like it is just under 16%. I have not seen it that low for about 4 years.

Question: Kris Thompson - National Bank Financial - Analyst : So those should accelerate back towards the 20% range?

Question: Kris Thompson - National Bank Financial - Analyst : Okay and I guess just on the ESPs are at $250,000. You said it reflected a pipeline. Could you just elaborate a little bit on that because again have not seen that as low for awhile.

Question: Kris Thompson - National Bank Financial - Analyst : Okay. That was going to be the next question. That makes a lot of sense. So that's why John, you sound very confident in your pipeline and the outlook for the remainder of this 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: Kris Thompson - National Bank Financial - Analyst : Okay and I think as of last quarter there were still two remaining government contracts that were pushed out. Did you close those and is that some of the reason for the license strength this quarter?

Question: Kris Thompson - National Bank Financial - Analyst : And then just high-level here, Tom was talking about the China opportunity at one of your conferences last year. Can you just give us any anecdotal evidence of what you guys are doing in China and where you think that revenue profile is going to start to make a material difference?

Question: Kris Thompson - National Bank Financial - Analyst : Okay, my last one here for Paul. Just on the CapEx this quarter. Can you remind us how much was for the new Waterloo building and how much is remaining so we can get a better idea of your maintenance CapEx going forward?

Question: Stephanie Price - CIBC World Markets - Analyst : Just on the cross-selling. Could you talk a bit about where you are with rolling out Metastorm into your sales force? 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: Stephanie Price - CIBC World Markets - Analyst : Okay. And then in terms of geographically, can you talk a bit about where you're seeing the most momentum and also if there was any impact from the situation in Japan?

Question: Stephanie Price - CIBC World Markets - Analyst : Okay, great. And in terms of the partnerships, Microsoft you mentioned you saw a positive impact in the quarter. Could you talk a little bit about

Question: Paul Steep - Scotia Capital - Analyst : Just on the write-down in deferreds Paul for Metastorm and StreamServe for next year. How much did you reduce the deferred maintenance line?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Just on the pipeline. Is it more concentrated to certain vertical markets like the market that you've seen recent strength in, or have you been able to pick up strength in other vertical markets with the recent acquisition?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay great. And what percentage of the pipeline would you say is for compliance-related solution versus the productivity-related applications you were talking about earlier?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Okay, when you talk about productivity are you including Mobility and Social Media in there as well?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : And have you seen meaningful revenue from those two areas yet or is that kind of something we can expect it in 2012?

Question: Sera Kim - GMP Securities/Griffiths McBurney - Analyst : Great. And just last question. What percentage of your existing customer base would you say has upgraded to the ECM 2010? I know it's still pretty early, so over what time period do you think that people will be upgrading?

Question: Eyal Ofir - Canaccord Genuity - Analyst : Just in general, I have a quick question for Paul on some of the OpEx line items. You noted that there was about $4 million of one-time expense in the quarter. Was that embedded into one line item or was that across the board?

Question: Eyal Ofir - Canaccord Genuity - Analyst : Okay. Then the other question was in terms of the R&D, obviously that increased sequentially pretty significantly, and you guys talked about a part of that being from the acquisition but also a part of it being from specific to investment in the Mobility side. Can you just specify how much of it was related to acquisition versus the R&D related to Mobility?

Question: Eyal Ofir - Canaccord Genuity - Analyst : Yes, I'm just trying to understand the split between how much you got from the acquisitions, but also how much you internally invested into the Mobility side.

Question: Eyal Ofir - Canaccord Genuity - Analyst : And then on the Mobility front. This is going to be an ongoing R&D initiative that we should be expecting, so there's no one-time items that we could maybe --

Question: Eyal Ofir - Canaccord Genuity - Analyst : Okay that's good. And then John for you, from a strategic go-to-market strategy perspective when you look at emerging markets, you talked about China earlier in the call. But obviously emerging markets could become a very meaningful growth opportunity for the Company. Is there a strategy you are using within your own sales organization or are you looking to some of your reseller partners to drive that up for you?

Question: Eyal Ofir - Canaccord Genuity - Analyst : Okay, and are you starting to see some of that build in your pipeline or is your pipeline still turned to the traditional markets?

Question: Brian Freed - Wunderlich Securities - Analyst : I've got two quick questions. The first on the competitive landscape, as you look at the peers, I think EMC had a 32% year-over-year decline on license revenue. 10% overall. Can you talk a little bit about what you are seeing with your major competitors and what seems to be driving your share gain? 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 - Wunderlich Securities - Analyst : Okay and then my second question, as we look at the initiatives you have on the productivity side with Symantec, Mobility, Social Media and BPM. Can you talk a little bit about either internal or external benchmarks that you guys are driving towards? And what you would point us to as we track your success?

Question: Brian Freed - Wunderlich Securities - Analyst : Great. As we look at your success in the segment are there any metrics you would point us to that we can use to kind of benchmark your progress in gaining momentum and share in that segment?

Question: Derrick Wood - Susquehanna International Group - Analyst : A couple questions for you Paul. Could you describe the $4 million charge again, what that was related to?

Question: Derrick Wood - Susquehanna International Group - Analyst : And that goes away next quarter?

Question: Derrick Wood - Susquehanna International Group - Analyst : Then, you've given this in the past how much the percentage of license revenue from SAP?

Question: Derrick Wood - Susquehanna International Group - Analyst : And could you comment on the foreign currency benefit on revenue and maybe deferred revenue, if you have that?

Question: Derrick Wood - Susquehanna International Group - Analyst : Okay. And then on the weComm, do you have any color on the revenue run rate for that business?

Question: Derrick Wood - Susquehanna International Group - Analyst : And that is a couple million dollars annual or quarter?

Question: Derrick Wood - Susquehanna International Group - Analyst : Okay. And lastly, I'm just curious on Metastorm. How much of the revenue's coming from the channel and are you planning on doing anything to change your efforts relative to the direct-indirect mix?

Question: Blair Abernethy - Stifel Nicolaus & Company - Analyst : John just a little more on the indirect channel. I guess I'm looking for some more color on your relationship with SAP at this juncture. Doing $6 million, $7 million a quarter is good for you guys. It is a pretty miniscule piece for SAP given their revenue base of $19 billion, so what I am wondering is how much investment is SAP putting into you guys this year? Relative to the last couple of years and how much opportunity is there in this relationship for Open Text? 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 - Stifel Nicolaus & Company - Analyst : Do you have a sense John, of how many of their reps are actively selling your products? I'm trying to get a feel for -- you have got 400 reps out there, how much manpower is SAP throwing at this?

Question: Blair Abernethy - Stifel Nicolaus & Company - Analyst : Okay. No, that's great, thank you. Just one other question or just switching to the other side, now your direct sales force. Your reps now, you said somewhat above 400, let's call it 400 sales reps, John what are -- can you give us a sense of what the annual targets are for these guys at this point? Is that a mix of inside and outside in that 400 or I'm trying to get a feel for what is the direct relationship quota-carrying guys?

Question: Ralph Garcea - Northland Capital Partners Inc. - Analyst : Just some quick questions here. On the productivity side. What is the biggest seller? Are your customers seeing ROI's in the 12-month timeframe? Or shorter or longer? 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 Garcea - Northland Capital Partners Inc. - Analyst : And are these pilots easier to implement and test? I would gather they are versus the compliance ones and that's why you're seeing some growth here?

Question: Ralph Garcea - Northland Capital Partners Inc. - Analyst : Okay and on the Mobility and Social Media side. Are you using those apps as loss leaders to sell the full suite or enticed the base to upgrade? hat sort of revenue ticket are you putting next to some of these apps?

Question: Ralph Garcea - Northland Capital Partners Inc. - Analyst : And just on the large deals over $1 million? Was there any concentration either geographically or by vertical?

Question: Ralph Garcea - Northland Capital Partners Inc. - Analyst : It was really only the two government ones that sort of carried over, so -- and the other 8 were new (inaudible), you were working through the pipeline on. 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: Gabriel Leung - Paradigm Capital - Analyst : I guess when you look back over the past few years, a big part of your focus had been on cost containment, barring the operating margins and whatnot. It sounds like, based on your comments today, that there seems to be a greater willingness to invest more into the business. Now is that, you think a reflection of some of the discussions you're having with your customers on their own appetite to spend on your solutions, number one? And number two, how quickly do you think you can convert these higher-level investments into a re-acceleration in license growth, recognizing the fact that this quarter was obviously a very good one for license revenues?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay. And then secondly, you're talking a little bit more about Cloud and the Cloud offerings. As that portion of the business ramps up, how do you think that would affect your revenues and margins? Obviously the revenue recognition there is a little bit more different from your traditional license and maintenance services?