OpenText Corp Q3 2015 Earnings Call Transcript

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

Question: Richard Tse - Cormark Securities - Analyst : Yes, thank you, Mark. Really good to hear that you're doing well 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Richard Tse - Cormark Securities - Analyst : Yes, I had a question, in your absence. What parts of the strategy have been sort of put on hold? I'm guessing, there must be something, in terms of maybe the acquisitions? But maybe you can elaborate a little bit on that?

Question: Richard Tse - Cormark Securities - Analyst : Okay. And switching gears here to Actuate. Obviously, that's a new vertical for you guys. I think in your presentation, they are doing a run rate revenue of about $58 million or so, on an annual basis. What do you guys see as the opportunity for that business over the next 12 to 24 months?

Question: Richard Tse - Cormark Securities - Analyst : Okay. The reason I asked that question is that unlike GXS where there is credible cost synergies, I would have to think that this is probably more of a revenue synergy transaction. Not to sort of harp on that, so do you think this is a $200 million-plus opportunity for OpenText in the next two years here?

Question: Richard Tse - Cormark Securities - Analyst : Okay, and I have got one last question here, for John probably. What percentage of the cloud business operating costs are fixed? And that's it for me. Thanks.

Question: Richard Tse - Cormark Securities - Analyst : Great, thank you.

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : Thank you. Great to hear from you, Mark.

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : I had a few questions. John, Actuate had services and subscription revenues. Did I hear you correctly, that these are now part of the OpenText cloud revenues? 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : So where would the services -- the Actuate services, where would it be recognized in if were the OpenText different revenue?

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : Okay, great. And out of the 10 -- the seven figured here -- the press release says that were seven with iX, which I suppose were GSX and cloud, so there was no cloud non iX deals greater than $1 million, correct?

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : And last quarter, there was one?

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : Okay, that's fine. And any other metrics you can share on cloud subscription deals that are non iX? Last quarter, I think you gave us a number of new customers in managed services. 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : Okay. And then, one last question for me. On your OpEx, I would have expected a bit more on [rival] costs. So for example, cutting back on bonus accrual given the revenue miss. But as your lower -- your [Canadian] OpEx to shrink a little bit given the FX moves, but did not see it. So can you give us a bit more color about these unique expense items you referred to, or maybe even quantify it?

Question: Steven Li - Raymond James & Associates, Inc. - Analyst : Great, thanks.

Question: Philip Huang - Barclays Capital - Analyst : Good afternoon. Just a few quick ones for me. First, given the margin this quarter, I was wondering, excluding what you deem as one-time items, what was your non-GAAP operating margin in the quarter?

Question: Philip Huang - Barclays Capital - Analyst : Oh.

Question: Philip Huang - Barclays Capital - Analyst : But that includes one-time items that you -- including the expenses related to the acquisitions, and other one-time items, right? Or I'm just wondering if you would exclude all those, what the -- (multiple speakers)

Question: Philip Huang - Barclays Capital - Analyst : Okay, got it. And then, regarding Europe, I think you mentioned in your opening remarks, that EMEA continues to be a tough selling environment due to the economy there. I was just wondering what visibility you might have, and what your expectations are on the improvement in this region?

Question: Philip Huang - Barclays Capital - Analyst : Right. Got it. Do you think that the trend so far has been sort of weak? It's been trending weaker than you might have expected a couple of quarters ago?

Question: Philip Huang - Barclays Capital - Analyst : Got it. And then, final question for me, just regarding the new pricing models. This is I think, the first full quarter, whereas you guys have the new models in place. I was wondering if you would give us a little bit more color on your customer's reaction, how they are responding to these pricing models so far? Whether you're seeing more take-up in one category, versus another versus your expectations? Thanks.

Question: Philip Huang - Barclays Capital - Analyst : Thank you. Got it. Thank you so much.

Question: Kris Thompson - National Bank Financial - Analyst : Great. Thanks, Mark. Glad to have you on the call. At your user conference last year, the trade-in trade-up program was announced. Can you just give us an update on the program? Is it still live, and can you give us any indication of how successful it was or is?

Question: Kris Thompson - National Bank Financial - Analyst : Okay. Have you figured out why, or what your sales guys are saying about it?

Question: Kris Thompson - National Bank Financial - Analyst : Okay. That's helpful. And John, the cash flow was at a record high. Did you mentioned the FX impact in your cash flow this quarter?

Question: Kris Thompson - National Bank Financial - Analyst : Okay. The reason I'm asking is, because deferred revenue on the cash flow statement was $39 million, and same quarter last year, it was $60 million. I'm just trying to figure out the delta there.

Question: Kris Thompson - National Bank Financial - Analyst : Got you. I did remember you mentioned that. And just the last one then, while we are on maintenance revenues. How are those renewal rates, are you seeing existing customers swap into the subscription models?

Question: Kris Thompson - National Bank Financial - Analyst : And there, any license customers swapping into subscription models yet, or discussing that?

Question: Kris Thompson - National Bank Financial - Analyst : Okay. Thanks for taking my questions, and get well soon, Mark. Thanks.

Question: Paul Steep - Scotiabank - Analyst : Great, thanks. Good to hear you, Mark. I guess, the first question goes right to the cloud uptake point. You talked about that being a bit of a sales pause. Is it particularly around the license, is it -- how are we seeing that core ECM -- what's the impact on the core ECM business, in terms of sales cycle in the field?

Question: Paul Steep - Scotiabank - Analyst : That helps. And how should we think about where the base is, in terms of moving to 10.5, and then getting ready to go to SP1 over time? How much of that core base has sort of migrated over at this point?

Question: Paul Steep - Scotiabank - Analyst : Great. And I guess the last one for me is, just around the management -- obviously, you can't offset all the FX impact I know of, in skimming the Q here, in terms of some of the restructuring activities you've taken efforts on. How should we think about rolling into Q4, which is traditionally the strongest quarter here, your ability to offset some of the foreign exchange hit that we saw this quarter?

Question: Paul Steep - Scotiabank - Analyst : Great. Thanks, guys.

Question: Paul Steep - Scotiabank - Analyst : Do we have a -- I am trying to piece those out as we go here. Do we have a total quantum on those? Like I know there is a number of them that are pretty unusual, that are not going to show up ever again. Do we have sort of a ballpark, on what that total is?

Question: Paul Steep - Scotiabank - Analyst : I guess, the last one, and I promise I will leave you then -- (laughter) is the bad debt piece. You flagged that as well, at GSX -- it looks like you might have been GSX. It's hard to tell to what it was. 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Paul Steep - Scotiabank - Analyst : Fully provided. Whereas the question was hadn't, but you fully took it in Q3, and we think as best we know it, it's in there.

Question: Thanos Moschopoulos - BMO Capital Markets - Analyst : Hi, Mark, it's great to hear you on the call. And I'll start with a question for John. John, would you be able to provide the quarter-on-quarter impact of FX to revenue and EPS? Would you have those numbers handy?

Question: Thanos Moschopoulos - BMO Capital Markets - Analyst : Okay. It's sort of a related question, which is the sequential decline in cloud revenue from Q2 to Q3, was that [apparently] currency, or were there other factors that led to the decline?

Question: Thanos Moschopoulos - BMO Capital Markets - Analyst : Sure. And then, Mark, you commented on the macro environment in EMEA. How would you characterize the environment in other regions?

Question: Thanos Moschopoulos - BMO Capital Markets - Analyst : Okay, great. And then, just the last one for me. On the last call, I think you talked about Actuate showing maybe a 10% to 20% revenue decline before it stabilized. We saw a sharper decline I think this quarter. And so, would that 10% to 20% decline still be the way to think about it, as we look out over the next year? Or might it be a little bit steeper, taking into account some other factors?

Question: Thanos Moschopoulos - BMO Capital Markets - Analyst : Okay, I'll pass the line.

Question: Stephanie Price - CIBC World Markets - Analyst : Good afternoon, gentlemen. 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Stephanie Price - CIBC World Markets - Analyst : In terms of Q4, so looking at the fiscal Q4, I mean it typically is seasonally stronger. Could you talk a bit about what you're seeing in the pipeline, and how we should kind of think about it sequentially? And if it's different from historical?

Question: Stephanie Price - CIBC World Markets - Analyst : Okay. And then, moving onto the acquisition environment. It looks like valuations are creeping up here. Can you talk a bit about the acquisition environment, and whether you can still find reasonably-priced acquisitions out there?

Question: Stephanie Price - CIBC World Markets - Analyst : Great. And then, in terms of focus areas, are there any particular focus areas, you are looking at these days?

Question: Stephanie Price - CIBC World Markets - Analyst : Great. Thank you very much. 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Thanks, and good to hear, Mark, that your recovery is going as planned. So a few questions here So first off, just on -- going back to the cloud services line, you just touched about it. You noted that there's a bad debt expense, and I imagine if that there was a bad debt expense you would also -- sorry, a bad debt expense -- I'd imagine that the -- you would have also have impact on revenue due to some of these clients, obviously not recognizing the revenue from those clients. Do you guys have an indication of what the size of that impact is in the quarter?

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Okay. So do you know if these -- (multiple speakers) -- these clients, you are not sure if they are live, you mean, still live?

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Okay. Okay. I just figured there was [probably a direct link]. Okay. A second thing, just Mark, in terms of obviously subscription revenue, you're talking about how some of the clientele is looking up, shifting to subscriptions or SaaS, or managed services. In the quarter, obviously this decision-making process could have actually delayed some customer decisions as well. Have you seen some of that, and to what extent? And also, is there any way to size up kind of -- I guess, the pipeline for the subscription/SaaS model is, that you're seeing for the rest of the year?

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Yes. And then, I'm assuming the subscription, obviously still sits in your cloud revenue line versus the license revenue line?

Question: Eyal Ofir - Dundee Capital Markets - Analyst : So for the -- going to 2016, should we start baking in a lower contribution from the license side, versus what your guiding to, for 2015? From a corporate target standpoint?

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Okay. And then just lastly for you, John, on -- in terms of cost -- I know a lot of guys asked this question on the call. You haven't given the specific numbers. But in the terms of the actual margins, obviously, the numbers were 25.7%. You're still guiding to the model, and of 28% to 32%, [on long end of this year]. Should we assume the transition back into the 28% to be fairly quick, or is this going to be over a two to three quarter time frame?

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Okay. And then, going forward beyond that time, obviously, you had some one-time charges here, that aren't going to be repeated. Are you still comfortable long-term, that 28% to 32%? 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. APRIL 28, 2015 / 9:00PM, OTEX.TO - Q3 2015 OpenText Corp Earnings Call

Question: Eyal Ofir - Dundee Capital Markets - Analyst : Okay. That's fine. Thanks. I'll pass the line.