Open Text Q4 2008 Earnings Conference Call Transcript

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

Question: Scott Penner - TD Newcrest - Analyst : John, you had mentioned last quarter, highlighted some of the activities you had in Web 2.0 technologies. I know one of the acquisitions was kind of based around that. Can you just give us an update, I guess, on that in general? And then some of your revenue diversity, whether compliance-related solutions are still around 60% to 70% of the licensed revenue?

Question: Scott Penner - TD Newcrest - Analyst : And just as far as the $1 million deals go, [I guess seven] is the highest number in quite some time -- can you just -- a little bit more detail on how many of those were in connection with partners, whether there were any -- of those deals, whether there were any really sizable deals? And then of the $1 million deals that were not in connection with partners, what was driving it?

Question: Scott Penner - TD Newcrest - Analyst : Okay. Just lastly for me is -- Paul, on the net interest expense, it looked quite a bit lower obviously than it has been for the past couple of quarters. Can you shed some light on what's in there? 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, so the $2.4 million is the hedge adjustment. What was it for the year?

Question: Scott Penner - TD Newcrest - Analyst : Okay, that's fine. Thank you.

Question: Paul Steep - Scotia Capital - Analyst : John, maybe we could talk a little bit license growth, just to follow on there, as to what's been really the driver of the strength throughout the year. Has a lot of it been through a combination of the existing upgrade cycle with DMX, the partner channel? Just trying to get a sense of the sustainability and the drive of that into '09.

Question: Paul Steep - Scotia Capital - Analyst : In terms of the upgrade cycle, we're still -- I guess, last quarter you had some small comments about it. It's still early stages, you see it running throughout '09 into '10? Or where are we in that?

Question: Paul Steep - Scotia Capital - Analyst : And the final one from me, just for Paul -- the other income of [$11.3 million], fairly material change over there. Just wanted to see what items popped up there in the quarter just because it was sort of out of normal.

Question: Paul Steep - Scotia Capital - Analyst : Perfect. Thanks, guys.

Question: Richard Tse - National Bank Financial - Analyst : John, just curious to see what you're targeting this year in terms of the partner contribution to your revenue? And I wanted to get a sense too on the partner side, would you say that all your sort of major partners that you've called out have sort of hit their stride? Or are we still fairly early in terms of their getting traction in their system there?

Question: Richard Tse - National Bank Financial - Analyst : So would you see that your partner contribution moving up to 40 plus percent 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: Richard Tse - National Bank Financial - Analyst : Okay. And in terms of your cash flow, I guess, you previously paid down some incremental debt here. I think you're holding back on that. Can you enlighten us on why you're continuing to do that?

Question: Richard Tse - National Bank Financial - Analyst : Okay. And just one quick one, a final question here. If you look at Scott's question on the Web 2.0 products, you suggested that you're getting some traction here now. Would that be over and above what you're forecasting as your fiscal '09 internal numbers? Or is that baked in here already?

Question: Richard Tse - National Bank Financial - Analyst : Okay, great. Thank you.

Question: Mike Abramsky - RBC Capital Markets - Analyst : Just in terms of the deals and momentum, would you characterize this as an unusual quarter? Did you see -- is this kind of a trend that you are seeing now because of the momentum you're building on partnerships and on the direct sales force execution? Is this something that we can expect to continue through the rest of the year as you talked about you're comfortable with [that] sort of outlook? 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: Mike Abramsky - RBC Capital Markets - Analyst : I'm sorry, I jumped on the call late, but did you talk about whether any of those specific deals were done in partnership with either Microsoft or Oracle or SAP?

Question: Mike Abramsky - RBC Capital Markets - Analyst : And was that deal significantly over $1 million?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. Because I know you did I think a large deal with Microsoft two quarters ago. Can you tell us a little bit about why -- I think it was two, you can correct me -- can you tell us a little bit about why you're seeing that kind of traction and under what situations, given that obviously SharePoint is at the same time a competitive product?

Question: Mike Abramsky - RBC Capital Markets - Analyst : So are those existing Livelink clients or new clients?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. And do you see SharePoint any time soon changing to address the kind of enterprise-wide scalability that you're able to fill at this time?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay. I'm going to ask this because I think it's the elephant in the room, John, and you can choose to comment or not, I suppose. The short position's obviously been a huge and constant factor. Is there -- you've now, I think, executed strongly eight quarters of beating the Street in a row; steady margins. Hummingbird has kind of closed successfully. Is there any issues there that you're asked about or that are related to that, that continue to dog it? Or is there any reason why the thing doesn't go away?

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay, great. Thank you very much, John.

Question: Mike Abramsky - RBC Capital Markets - Analyst : Okay, thanks.

Question: Lawrence Rhee - Blackmont Capital - Analyst : Can you just add some color, Paul, on the cost side? On the sales and marketing side, was it just a little bit higher than what we were looking for? Were there any kind of costs in there that you would categorize as one-time in the operating expense side? 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: Lawrence Rhee - Blackmont Capital - Analyst : Got you. And just -- could you just add some color -- obviously, the economic environment still remains shaky. Just add some color. Obviously, you guys had a great deal flow in the quarter, but just some color on the sales cycle process. Is it improving for you? Or how has it transitioned over the past couple of months?

Question: Lawrence Rhee - Blackmont Capital - Analyst : Okay, great. Thanks, guys.

Question: David Wright - BMO Capital Markets - Analyst : Could you talk about the large deal size? Did you have more than one over $2 million -- or sorry -- your number was eight -- was seven over $1 million. So I'm just wondering how large some of those deals are? 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 : Okay, great. And so I noticed that your average deal size is climbing. Is that because of the greater number of multimillion deals? Or are you actually selling more even on the smaller deals? Is the average deal size rising?

Question: David Wright - BMO Capital Markets - Analyst : Okay. So we should see from a seasonality point of view as we go into Q1, might expect a few -- fewer larger deals and therefore the average deal size --?

Question: David Wright - BMO Capital Markets - Analyst : Okay. And as your product becomes larger and more complicated, I'm just wondering if there is more of an opportunity for services revenue and revenue growth in looking at the business model. Is that something that's an opportunity or --?

Question: David Wright - BMO Capital Markets - Analyst : Very good. Thank you very much.

Question: Barbara Coffey - Kaufman Brothers, L.P. - Analyst : When you're taking a look at the sales cycles around the world in this past quarter, have you seen any additional thresholds, whether or not it's sign-offs or there is altering deal sizes so you can get smaller chunks done? And whether or not that has changed based on geography?

Question: Barbara Coffey - Kaufman Brothers, L.P. - Analyst : And do you see any difference between the process, whether or not it's -- when it's a direct sale versus whether or not it's with partners in the process and the timing it takes to get stuff completed?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Paul, I just wanted to ask you a little bit about the maintenance base. I'm wondering if you could just talk a little bit about how the renewal levels are there. And so what's the pricing environment looking like for maintenance renewals? And also just your sense on the Hummingbird maintenance base.

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay, great. And just on the sales and marketing side again, can you give us a sense of the -- where you're looking at taking that rep count in 2009 and what you have today, how much of the rep community is seasoned versus people that are still ramping? 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. And any change in the competitive landscape this quarter for you guys?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Okay, great. Thanks very much.

Question: Scott Penner - TD Newcrest - Analyst : John, just if you could get a little bit more into the acquisition strategy as it stands right now, a couple of fairly small deals in the quarter. You've previously talked about looking at solutions providers in areas like SAP. Is that still an area that we should look for you to be active in? And is there more material transactions on the horizon?

Question: Scott Penner - TD Newcrest - Analyst : Okay. You haven't -- you still see valuation as not being a hurdle in some of the deals you're looking at?

Question: Scott Penner - TD Newcrest - Analyst : Okay. And Paul, just what -- should we assume that the tax rate stays at kind of this 30% level in the 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: Scott Penner - TD Newcrest - Analyst : Okay. And lastly, John, just a little bit more on the status of the Hummingbird upgrade cycle. I think you started to get a little bit into this earlier, but do most of the Hummingbird base now have the Enterprise connect capability? And when do you expect some of the real upgrade license revenue to start hitting them?

Question: Scott Penner - TD Newcrest - Analyst : Okay, great. Thank you.

Question: Dushan Batrovic - Canaccord Capital - Analyst : Some of the big concerns out there are around software, IT spending across the board. Just wondering how well insulated you feel if the industry does not grow at the 10% to 13% that analysts predict, but 5% or 6%. Can you beat that number, given the focus on the compliance side, given the exposure to a broad base of verticals that will not be as necessarily hit as the broader IT markets?

Question: Dushan Batrovic - Canaccord Capital - Analyst : Can you just remind us what the rest of -- the 40% of the business that isn't tied to compliance, what that is driven by? 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 - Canaccord Capital - Analyst : Okay, thanks very much.

Question: Gabriel Leung - Paradigm Capital - Analyst : Thanks. Just a couple of quick things. The large deal in the quarter, could you comment on whether that was greater or less than 10% of total license revenues?

Question: Gabriel Leung - Paradigm Capital - Analyst : So, is it sort of between 5% to 10%, then (inaudible)?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay, fair enough. And as I look across the $0.5 million plus and $1 million plus deals, can you comment on what percentage of that was displacements? How much of that was existing customers? And of the displacements, what was some of the common -- the rationale for moving from a different platform over to you guys?

Question: Gabriel Leung - Paradigm Capital - Analyst : Fair enough. And Paul, the maintenance margins -- I think down to around 81% this quarter -- can you comment on that? And what your expectations would be heading into the next few quarters? Do you expect that to jump back to the 84%, 85% range again?

Question: Gabriel Leung - Paradigm Capital - Analyst : Okay, that's great. Thank you.

Question: Tom Liston - Versant Partners Inc. - Analyst : John, just on the -- nice bead on the quarter with license revenue. Obviously, there was a lot of -- you attributed it to competition being distracted, the sales execution, et cetera, and as much as aiding partners, and that's all true. Do you think there might have been a little bit of -- and when you talk to CIOs and such, do you think there might have been a little bit of folks out there saying that they're pulling in some of the spending because they -- into this quarter, because they're worried on the second half that the budgets might get reduced, given the macroeconomic backdrop?

Question: Tom Liston - Versant Partners Inc. - Analyst : Sure. Okay. And in Europe, you're not seeing any weakness? The economy there is obviously starting to turn as well?

Question: Tom Liston - Versant Partners Inc. - Analyst : Okay. And finally, just clarification. I believe you said your growth was -- and was it license at 15% -- sorry, 13% to 15% if you normalized it? Does that mean in constant currency? Is that the comment you made in your prepared remarks? 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 : Okay. Great. And that was for the year, right?

Question: Tom Liston - Versant Partners Inc. - Analyst : Thanks, John.

Question: Mark Schappel - The Benchmark Company - Analyst : A couple of questions. Paul, why did the net interest expense essentially go away in the quarter?

Question: Mark Schappel - The Benchmark Company - Analyst : Okay. And going forward, can we -- is it wise to go back to just modeling a more normalized interest expense?

Question: Mark Schappel - The Benchmark Company - Analyst : Okay. And then on the $11.3 million other income benefit, could you just review one more time -- I believe you said it was related to foreign exchange. It just seems like such a large change from prior quarters, though. I was wondering if you had any color on 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: David Wright - BMO Capital Markets - Analyst : Paul, looking at the balance sheet, there's quite a change to the tax positions. I was wondering what was driving that? Was it reclassification? Did it have to do with maybe the acquisitions you did? And will this affect cash flow in the coming year at all?

Question: David Wright - BMO Capital Markets - Analyst : Okay. And no -- did you buy tax loss carryforwards in those acquisitions and are they at all reflected in here?

Question: David Wright - BMO Capital Markets - Analyst : Okay, great. Thanks very much.