Open Text Q4 2006 Earnings Conference Call Transcript

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

Question: Tom Liston - Versant Partners Inc. - Analyst : In the June quarter, several of the ECM vendors had a fairly solid quarter, particularly on the license front, guys like FileNet and Interwoven had nice year-over-year license growth, in contrast to your license growth. Can you comment on the delta between you and some of the other industry players out there?

Question: Tom Liston - Versant Partners Inc. - Analyst : Can you more specifically talk about what product groups that was driving gains in the teens versus what product groups are certainly lagging that?

Question: Tom Liston - Versant Partners Inc. - Analyst : What would be weak in the quarter year over year?

Question: Tom Liston - Versant Partners Inc. - Analyst : You commented on the partnerships; obviously there was some traction in the quarter. Can you comment on your expectations for both Microsoft this coming year? And I know it's early days for Oracle, but can you comment on what your expectations are for 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: Tom Liston - Versant Partners Inc. - Analyst : On the [ProServe], Paul commented how it was weak. But what specifically are you doing to address that number (multiple speakers) the margins?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : I just wanted to ask about what is in the initial reaction of your customers to the Hummingbird did that you have on the table? And I guess, depending on your answer, is there any sort of volatility, deal volatility, that you have factored into Q1?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : To clarify Tom's question, I think you just said that you expected the next two quarters, the percentage of revenue from channel partners to go up over 20%. Is that right?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : What is the timing for the 30% number?

Question: Paul Steep - Scotia Capital - Analyst : John, maybe you can talk a little bit, I know you don't specifically give license guidance, but if we sort of layer on what you have implied in the guidance based on the mix from last year, in the last couple of quarters, it looks like a pretty healthy bounce-back in licenses. I guess I'm curious as to what is in the pipeline or what gives you guys the confidence to put out sort of rough numbers in that range. Or is it not license and maybe something else that's going to hold the growth up here?

Question: Paul Steep - Scotia Capital - Analyst : Related to that, what sales changes or sales structure changes has John Wilkerson sort of made to-date or that you have made in conjunction with John in the early days here?

Question: Paul Steep - Scotia Capital - Analyst : On the partner side, since we are implying that you are going to ramp up in that area, does that imply added cost in the sales and marketing? Because traditionally you have had a fairly lean organization. Or is it simply reallocation of -- maybe it's more to Paul or both of you?

Question: Richard Tse - National Bank Financial - Analyst : What were the maintenance renewal rates this quarter? 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 : You know, you have kind of conceded the infrastructure war to guys like Oracle and Microsoft. What are your big customers like Siemens and Motorola saying about maybe considering their basic content services? Is there a risk here that they may get off maintenance and go to the competitor here?

Question: Richard Tse - National Bank Financial - Analyst : Just on your financials, there was this other expense here for, I think, 1.59. I'm not sure, you didn't really detail in the notes what that's all about. Can Paul comment on that?

Question: Blair Abernethy - Clarus Securities - Analyst : Could you just walk through, you talked a little bit about IXOS, but I just wanted to get a sense of what the ownership stake is today and how much more cash is required to close off that acquisition.

Question: Blair Abernethy - Clarus Securities - Analyst : Okay, about $12 million. In your R&D line this quarter, was there any investment tax credits in there at all? Or is this sort of a run rate that we should be looking at for R&D going forward? 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 - Clarus Securities - Analyst : $1 million this quarter?

Question: Blair Abernethy - Clarus Securities - Analyst : What was the head count and the breakout of head count in the quarter?

Question: Blair Abernethy - Clarus Securities - Analyst : How many quota-carrying reps?

Question: Howard Lis - GMP Securities - Analyst : Just with respect to the restructuring you have undertaken internally, what are the cash costs remaining in fiscal '07?

Question: Howard Lis - GMP Securities - Analyst : With respect to the pending acquisition of Hummingbird, have you started or when would you start evaluating what kind of operational synergies you can get at?

Question: Howard Lis - GMP Securities - Analyst : I know, but when would you actually start embarking on that process to figure out the savings?

Question: Steve Konig - Jefferies & Company - Analyst : On your guidance, as you move forward here, as you are reporting your revenues, not your guidance, will you be giving us an organic calculation with and without Hummingbird?

Question: Steve Konig - Jefferies & Company - Analyst : Okay. I assume, since you're not yet providing the Hummingbird guidance, for the purpose of standardization, you would like the analysts and the consensus numbers to reflect Open Text selling at this point?

Question: Steve Konig - Jefferies & Company - Analyst : Are you able to say in the quarter just past and in the guidance how much benefit from foreign exchange? 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: Steve Konig - Jefferies & Company - Analyst : How about in the guidance?

Question: Steve Konig - Jefferies & Company - Analyst : Are you able to say on a year-over-year basis whether it's a -- I assume it's a tailwind for you?

Question: Steve Konig - Jefferies & Company - Analyst : That's for the fiscal year, correct?

Question: Steve Konig - Jefferies & Company - Analyst : Lastly, are you seeing any change in the competitive environment due to the IBM and FileNet scenario?

Question: Ed Maguire - Merrill Lynch - Analyst : Could you talk about the go-to-market model for, in particular, the Microsoft and the Oracle relationships? Are you co-selling in a way that directly generates license sales for your partners? Are you working with Microsoft and Oracle to target their existing base? Ultimately, how much of a conversion process is there? I guess, as Richard had alluded earlier, in converting potential customers who might be running Livelink to either Oracle or Microsoft infrastructure?

Question: Ed Maguire - Merrill Lynch - Analyst : On Asia-Pacific, that's an area that you are not really focusing on right now. Kind of looking forward maybe post merger, at least strategically, how do you think about regions outside of the U.S., UK and Germany as far as areas you guys want to be putting emphasis on?

Question: Ed Maguire - Merrill Lynch - Analyst : For Paul, just on stock option plans over the next quarter or so, do you plan to issue options? Should we expect dilution at approximately the same rate we have seen over the last couple of quarters?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : Great job on the cost control, by the way. Starting on that, when we take a look at the cash costs of I think it was 6.8 still to come in '07 and '08, that really was more the accounting of cuts that have already been made. We're not expecting to see a whole lot more in reduction of actual spending on SG&A and so forth, right?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : So, in other words, if I take the exit rate on the year and adjust for seasonality, we are most of the way there?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : In terms of seasonality, speaking of which, now that North America -- you are seeing a lot of strength in North America relative to what you're seeing in Europe. Does that actually have any impact on the seasonality we would normally see, especially in the summer quarter, Q1?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : Speaking of that North American strength, I think you said you were up -- was it 14% in North America, actually, year over year?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : You probably don't track it exactly this way, but could you give me some sort of sense of what would license be, of that? In other words, in North America, license actually would have been up year over 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: Duncan Stewart - Orion Securities Inc. - Analyst : Just on North American license? Wow, that's quite strong. Okay, let's take a look at, I think, a question that was asked earlier. Implicit in your guidance, and I know you don't give license guidance quarter by quarter. Nonetheless, if you kind of assume service and support, where they kind of, if you will, ought to be, given seasonality and sort of normal run rates, it actually suggests that you will be positive on license growth in Q1. Nonetheless, at a substantially lower level than, for example, FileNet or Interwoven were, is it that you are still in the process of seeing various things moving around and that you actually believe that if your real organic license growth rate as you go through the year is unlikely to stay stuck at that sort of 3 or 4 or 5% number?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : What I am saying is that effect, as that goes on, should get stronger during the year?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : Okay, just checking. Acquisition-related costs -- in the three months ended in '06, so in the quarter of minus $3.2 million? Are those IXOS-related costs? Or are there other -- because you're now working sort of on another acquisition. So, of the $3.2 in the cash-flow statement?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : But small, I'm assuming?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : I believe that's my last question. Thank you very much.

Question: David Wright - BMO Capital Markets - Analyst : You gave us a breakout of your vertical industries. Going forward, where do you see the greatest opportunity to grow in those vertical industries?

Question: David Wright - BMO Capital Markets - Analyst : Yes?

Question: David Wright - BMO Capital Markets - Analyst : Just because of Hummingbird's relationships there?

Question: David Wright - BMO Capital Markets - Analyst : Is there another one that stands out as a great opportunity? I mean this financial one that opened up a little bit because of FileNet, or is it just going to be as competitive as ever?

Question: David Wright - BMO Capital Markets - Analyst : So no particular change there?

Question: David Wright - BMO Capital Markets - Analyst : I think in your opening comments, if I heard it right, you said that you particularly had an opportunity outside North America to lower your cost base. Did I hear that right? If so, what are you thinking about there?

Question: David Wright - BMO Capital Markets - Analyst : You may have been speaking about professional services; I don't --

Question: David Wright - BMO Capital Markets - Analyst : Okay, so, and how do you plan to do that?

Question: David Wright - BMO Capital Markets - Analyst : Is that with working with partners, or --?

Question: David Wright - BMO Capital Markets - Analyst : Obviously, you have identified the opportunity to improve your margins. Have you already set out on a plan, or is that plan just being put in place now? 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 : In the latest quarter the G&A expenses were a little bit higher than I modeled. So Paul, I'm just wondering, were there any one-time items in this quarter that might have boosted that and then it falls back next quarter? Or maybe there's costs that I wasn't planning on?

Question: David Wright - BMO Capital Markets - Analyst : To backpedal, maybe a discussion more about the large deal size. I think you said you had two over $1 million. What would it have been a year ago? And I think you said you had seven over $500,000 and what would that have been a year ago? Maybe you could talk about the environment.

Question: David Wright - BMO Capital Markets - Analyst : So what is the environment like? Are there large deal opportunities? It doesn't look like it's growing that much? Do you feel like it's coming back, or is this kind of the environment that we're in now for the foreseeable future?

Question: David Wright - BMO Capital Markets - Analyst : So we shouldn't particularly notice growth in that number for some time?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Just one question. With respect to your increased emphasis on partner-related revenue as you move up past the 20% to the 30% mark I guess over the [about next] four quarters, could we expect to see the commissions portion of sales and marketing come down as a percentage of revenue?

Question: Lawrence Rhee - Genuity Capital Markets - Analyst : Would that explain some of the potential decline or kind of the negative growth rates in license revenues over the past few quarters, because of the increased emphasis on partner-related revenue?

Question: Barbara Coffey - Kaufman Brothers - Analyst : When you look at shifting from this sort of 15%-17% level of partnership sales to a more 20%-plus, how does that alter how you take a look at your pipeline information and ability to look forward? Also, how do you make sure that you are close to enough to the accounts so that, if there are expanding -- opportunities to expand the Open Text platform in those organizations, you're there to do so?

Question: Barbara Coffey - Kaufman Brothers - Analyst : And the next pace of, how do you make sure that the end accounts see Open Text as distinct a little bit from SAP and Oracle, and you remain sort of on their radar screen to expand potential, be able to upsell? 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 : Last year, the margins on the services side actually in Q4 of '05 to Q1 of '06 dipped at that time, surprisingly, down to about 12% from 16%. Should we look for the same kind of seasonal effects or whatever call you in Q1?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : On the Hummingbird integration, presumably, John Wilkerson is going to be a key point man, should the deal go through on the integration. I wanted to ask the question, should we be concerned or why should we not be concerned that a guy that is two months into the job is now going to play a pivotal role in possibly a big integration?

Question: Scott Penner - TD Newcrest/Waterhouse Securities - Analyst : So he is not necessarily going to be the chief architect of any integration?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : In the whole shift from Open Text moving sort of away from the basic infrastructure stuff that Microsoft and so forth are going to be doing a little bit more of into those higher value-added applications, are these the sort of things that we're going to see coming as part of I think it's Livelink 10 is the next release?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : Those apps are not going to be separate from Livelink 10; a lot of them are going to be part of it?

Question: Duncan Stewart - Orion Securities Inc. - Analyst : Guidance range -- obviously, it's slightly tighter than the $10 million range you had last quarter. Then again, at an $8 million range, you guys are two months of the way through a three-month quarter. Why isn't it maybe even slightly narrower still, or is it the usual thing of linearity in the summer, not much happened in July and August? So you have still got a fair bit of variability in September?

Question: Blair Abernethy - Clarus Securities - Analyst : Can you give us an update on your progress with Deloitte in the Sarbanes-Oxley space?

Question: Blair Abernethy - Clarus Securities - Analyst : Did you have any wins there this quarter?

Question: Blair Abernethy - Clarus Securities - Analyst : Do you have a sense of how big the pipeline is, how many opportunities you might see there in the next three months, six months?

Question: Blair Abernethy - Clarus Securities - Analyst : What is the pricing look like on your Sarbanes-Oxley solution?

Question: Blair Abernethy - Clarus Securities - Analyst : $250,000?

Question: Blair Abernethy - Clarus Securities - Analyst : All in, what would the deal size be?

Question: Blair Abernethy - Clarus Securities - Analyst : Do you have some reference accounts at this stage that you can point to for people looking at the solution?

Question: Blair Abernethy - Clarus Securities - Analyst : In terms of your sales, you're license sales right now, what percentage of the deals are sort of traditional product sales, adding Livelink seats, adding modules, that kind of thing, versus a one-off solution sale targeted at a specific business problem?

Question: Blair Abernethy - Clarus Securities - Analyst : So on a new sale or a new customer, is it more than -- is it sort of 50-50, product versus solution? Or what would be the split you're seeing today?

Question: Steve Konig - Jefferies & Company - Analyst : I just wanted to build on the question earlier about the Hummingbird integration and contrast that with IXOS. I guess the question here is that IXOS was accompanied by a couple of rounds of restructuring or negative license growth, organically. Now that you are turning your focus to growing your licenses after improving your profitability, how can we be comfortable that the Hummingbird integration is going to accommodate the process of license growth as opposed to having to acquire more cost-cutting, et cetera?