Open Text Q4 2005 Earnings Conference Call Transcript

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

Question: Tom Liston - Versant Partners - Analyst : There is still one big question out there that does need to be clarified. And if you could, tell us what, if any, communication you have had with the SEC Division of Enforcement within the past year or so?

Question: Tom Liston - Versant Partners - Analyst : And related, but not direct, can you comment on what are the main issues that might be outstanding that would cause you that you would not meet your -- sorry (ph), 10-Q filing deadline?

Question: Tom Liston - Versant Partners - Analyst : What issues are potentially outstanding that there was some uncertainty if you would meet the deadline or not?

Question: Paul Steep - Scotia Capital - Analyst : John, maybe you could talk a little bit about the restructuring relating to headcount, specifically the reductions that you have impacted on the Company in terms of the staff -- which departments have been impacted, and more importantly, which geographies you have shifted people towards?

Question: Paul Steep - Scotia Capital - Analyst : And just related to that, can you talk a little bit about which product areas? Is the education market, I guess, the focus in terms of new development? Or what other products might be -- we're going to see less of going forward?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Thanks, John. John, can you perhaps give us some insight as to whether you think that this restructuring is going to sort of be it, or do you think that there is a chance for additional restructuring or perhaps some shedding of some product lines or additional divisions?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay, does that -- are you suggesting there also will be some fairly high-level departures as part of the restructuring (technical difficulty) management here?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And because the restructuring is -- there is a piece split significantly with an R&D focus, you have got -- part of the feedback from the channel that we have had is that there is -- you do have now a complete suite, but there is perhaps still some work to be done on integrating that suite and doing it in a way that reduces the integration, perhaps on the implementation side of some of these deals. And I'm just wondering how you're going to manage -- keeping this kind of integration on track, while at the same time processing this restructuring?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. And just lastly, I think that given the consensus EPS on the Street and your reported EPS -- maybe this is more a question for you, Alan -- can you give us some insight into the larger SG&A charge and what is perhaps (ph) sustainable? Is that perhaps related to, for example, your SOX compliance? Or is it something else?

Question: Howard Lis - GNP securities - Analyst : Just a few more questions on the restructuring. Can you quantify for us the actual cash amount of restructuring that will be incurred in total -- how much will be in Q1, and how much will be this fiscal year? That is my first question. 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 - GNP securities - Analyst : Sorry, but is the cash amount equivalent to the actual charge, or is there a difference there?

Question: Howard Lis - GNP securities - Analyst : They are all cash items -- okay, great. And in terms of your buyback, you were active last quarter. Have you continued to be active, or do you plan to be active over the next quarter or so?

Question: Scott Penner - TD Newcrest - Analyst : John, can you just update us on the timing, and what are the major product releases that you're looking for, and whether this timing is impacted at all by the restructuring?

Question: Scott Penner - TD Newcrest - Analyst : Okay then, Alan, if I could ask -- you mentioned the ownership level of IXOS. Could you just give us what the remaining cash commitment is to buy in the outstanding stakes in both IXOS and Gauss? 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 : Okay. And then John, just back to you -- when you really step back, you're restructuring a business which still did 15% EBITDA in the past year -- you know, equal with the highest of your peers. What do you really think that on a normalized basis, given the revenue outlook that you may have internally, what do you think the margin levels for the Company should be?

Question: Richard Tse - National Bank Financial - Analyst : Just a quick question here. What are you doing in terms of driving revenue instead of sort of cutting your costs to get to profitability? Because when we look at the competitors in the market, you make a point that they have all sort of had lagging growth in revenue, but not all of them have. So are you just focusing on the cost here? What are you doing to kind of get the revenue back to where it was? It looks like you're blaming it on the market. But is there something internally that is wrong that needs to be fixed there?

Question: Richard Tse - National Bank Financial - Analyst : Okay, and I guess one final question here. If you look at the current quarter, you're arguably kind of well through it now. And we know that deals typically take -- close in the last couple of weeks here. But do you have a sense or a gauge of where we stand now relative to the prior quarter?

Question: Robert Schwartz - Jefferies & Co - Analyst : Yes, this is sort of tags onto the end of your last answer, which is sort of pipeline building. Your guidance basically is up year-to-year from September. And you said that this quarter was down organically about 5%. We do have Vista and Artesia to work in there, but I wonder why you think -- what gives you -- what is working, I guess, that leads you to believe that guidance should be up year on year, given the quarter that was just posted?

Question: Robert Schwartz - Jefferies & Co - Analyst : What I have heard on the call I think was a comment was that -- expect G&A going forward to be down about 1% as a percentage of revenue going forward. But it's up quite substantially year-to-year -- I mean, almost double what it was in fiscal '04, and maybe even more than that. And I'm wondering why it's at a permanently higher level, and why it shouldn't be coming down more than you guided to than say the 1%?

Question: Robert Schwartz - Jefferies & Co - Analyst : And just to sort of round out the operating expense guidance, because there are some moving pieces here, how should we think about R&D going forward? And in terms of sales and marketing as a percentage of revenue, anything you can help us 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: Peter Misek - Canaccord Capital - Analyst : First question is on your comments, John, you talked about that the ECM business appears to be slowing down. And yet, you bought a fair number of assets over the last couple of years that are sitting on your books at certain levels. I was curious to see that your restructuring charge did not include a fairly significant write-off of intangibles. And I know it's a non-cash item, but just a question around that?

Question: Peter Misek - Canaccord Capital - Analyst : In terms of actual product offerings going forward, there was a bit of buzz a couple of weeks ago that you may or may not be disposing of some assets such as Corechange. Did you dispose of any assets in the last quarter that you felt were underperforming that you no longer need?

Question: Peter Misek - Canaccord Capital - Analyst : Just a question for you, Alan. On the provision for recovery of restructuring that is in your supplemental information, where is that in the income statement? Because I see that you show it in the supplemental information and in your cash flow statement. But in the income statement, the recovery of restructuring -- is that in the gross profit calculation? Or is it in SG&A or somewhere else?

Question: Peter Misek - Canaccord Capital - Analyst : Oh, there it is -- yes. Okay. 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 : I'll just ask questions around your G&A expense again. Did I hear you say that Sarbanes-Oxley was a $12 million expense this year?

Question: David Wright - BMO Nesbitt Burns - Analyst : And in the quarter -- so it went up almost $5 million. Were there any particular onetime items in the quarter?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. So should we see a sequential decline? I know you planned for an annual decline. But should there be a quarterly sequential decline?

Question: David Wright - BMO Nesbitt Burns - Analyst : Okay. And then looking at the revenues, John, in licensed versus services, is the service number in the latest quarter -- is that something fairly flat? I mean last year, you had a sequential decline there. Are you continuing to expect that?

Question: Nate Swanson - ThinkEquity - Analyst : I was wondering if you could comment -- of the deals that slipped out of the June quarter, how many of those have closed thus far?

Question: Nate Swanson - ThinkEquity - Analyst : Okay, can you comment on where your quota sales headcount was at the end of the June quarter, and where you expect that to kind of bottom out after all the restructuring (multiple speakers)?

Question: David Shore - Desjardins Securities - Analyst : Most of my questions have been answered. But could you just break down the revenue by geography again for the quarter?

Question: David Shore - Desjardins Securities - Analyst : Okay. With the restructuring, you said the sales quota headcount is going to stay about flat. Has there been any changes to the senior sales staff?

Question: David Shore - Desjardins Securities - Analyst : Okay. And then finally, any comment on particular verticals that were strong in the quarter?

Question: Greg Rudy - Southwest Securities - Analyst : Yes, this is Greg Rudy (ph) sitting in for Andrey. In terms of your guidance, what have you baked in there for the rest of the quarter in terms of large transactions?

Question: Greg Rudy - Southwest Securities - Analyst : Okay, and what is your foreign exchange assumption for the guidance?

Question: Paul Steep - Scotia Capital - Analyst : Just a quick clarification, John, on an earlier comment -- have all 330 staff that are going to be exiting been informed, and when are they going to be leaving the organization?

Question: Brian Freed - Morgan Keegan - Analyst : Could you comment on the number of $1 million transactions you closed quarter to date?

Question: Brian Freed - Morgan Keegan - Analyst : Yes.

Question: Ed Maguire - Merrill Lynch - Analyst : One question I have is around stock compensation expense. And could you talk about what your stock comp expense would look like -- I guess you will be filing your K shortly. But what it is going to look like for '06 and going forward, and just your philosophy in terms of option grants versus restricted stock?

Question: Ed Maguire - Merrill Lynch - Analyst : Okay.

Question: Ed Maguire - Merrill Lynch - Analyst : I noticed there are one or two other companies that had June fiscal years are already giving guidance for what their GAAP expense is going to include. I just want to make sure -- do you guys need to report the stock compensation expense as part of your GAAP earnings in fiscal year '06?

Question: Ed Maguire - Merrill Lynch - Analyst : Okay, and just a question for John. Just broader -- you had made the comment that the whole ECM market seems to have underperformed a lot of the original expectations. And as you look across deals that may have slipped that you had expected to win, and some of the dynamics that are going on across your competitors, I mean, what could it be? What are the factors? Is it that the larger vendors may be playing a bigger role that wasn't anticipated before? Or are some of the drivers more service oriented rather than software oriented? Just some quick, high-level thoughts on that?

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : Just following on on the big deals again, can you mention who the competitors were, and why you did win on those three? What were the main factors hopefully other than price? 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 - Credit Suisse First Boston - Analyst : And did all of them require sort of a global pilot to show the scalability in that?

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : So would that be one of the reasons, I guess, you're seeing delays in the deals, as you have to roll these out?

Question: Ralph Garcea - Credit Suisse First Boston - Analyst : And just lastly, given the cost savings you are going to have with the restructuring in that, would you feel comfortable with sort of north of 50 million in cash flow in fiscal '06?

Question: Steven Li - Raymond James - Analyst : Just a couple of questions. John, when you talk about reverting back to EBIT margins, historical EBIT margins, are you also expecting gross margins to revert back to 75%?

Question: Steven Li - Raymond James - Analyst : Okay, and can you also tell me how much revenues came from Germany in Q4?

Question: Paul Lechem - CIBC World Markets - Analyst : John, you have mentioned a couple of times in the last couple of quarters that you are seeing deals get bigger. That is one of the reasons why you're seeing these delays. But the numbers don't really seemed to bear it out. You are saying the average deal size is roughly the same; only three transactions this quarter greater than 1 million. When do we actually see the numbers start to support your thesis, and when does it sort of reach sort of a stable situation where the larger deals, even though they are delayed, you start to come back into sort of a more stable pattern?

Question: Paul Lechem - CIBC World Markets - Analyst : Okay. I mean, you have been talking about it for maybe two or three quarters now, so (multiple speakers)

Question: Paul Lechem - CIBC World Markets - Analyst : And does the competitive dynamic change with these larger deals versus your traditional set of competitors? 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 : Okay. And my last question -- from the restructuring, on an apples-to-apples basis, is there any revenue impact from the number of people you let go? Most of them sound like they are not directly related to the customer (multiple speakers) sales part of it. But what would you say (multiple speakers) --?