Open Text Q4 2009 Earnings Conference Call Transcript

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

Question: Scott Penner - TD Newcrest - Analyst : Thanks. Just first a couple of clarifications. Paul, I think you in your comments said -- are we to read into that then that Vignette is expected to be slightly dilutive in the first quarter?

Question: Scott Penner - TD Newcrest - Analyst : And the tax rate as well, it sounded like you were talking about going from -- we should be modeling 28% to 26% in the upcoming year. Is that right?

Question: Scott Penner - TD Newcrest - Analyst : And then John, just on the geographical split of revenue, Europe has been -- it seems to have been weak for a lot of vendors out there, and you are saying it was basically in line. Is that a -- is the split of revenue a function of where your WCM business is based?

Question: Scott Penner - TD Newcrest - Analyst : You mentioned particularly happy with the SAP relationship. Maybe you could just go into a little bit more detail to the extent you have deal specifics from SAP, and then I guess how you capitalize on the strength that you're seeing.

Question: Scott Penner - TD Newcrest - Analyst : And lastly, and this may not be something you can really even comment on, but the Vignette -- the last quarter that they had announced, the guidance at that point from the management there was basically for flat, possibly -- I guess is the word to say -- possibly flat revenue for the year. And you are now cautioning us to be modeling down 30% to 40%. Is there anything to describe that sort of discrepancy?

Question: Scott Penner - TD Newcrest - Analyst : Thanks, I'll pass the line.

Question: Tom Liston - Versant Partners - Analyst : Good afternoon, thank you. Just to confirm, it's $40 million to $50 million in cost savings, and the timing on that is exiting Q4, is it?

Question: Tom Liston - Versant Partners - Analyst : And the same thing with the model guidance including an increased range, that's not for the year, that would be kind of an exit-4Q type number, would it be?

Question: Tom Liston - Versant Partners - Analyst : For the fiscal year. So including some of the early dilutive affects and working through all 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 - Analyst : John, sorry if you've already said this, but the Vignette numbers that you base the drop on is based on the run-rate type numbers, and can you give us some color on how they did in the June quarter?

Question: Tom Liston - Versant Partners - Analyst : Sorry. The -- when you say a 20% to 30% drop in license is more like 30% to 40%, is that based on kind of March or trailing-12-month type numbers?

Question: Tom Liston - Versant Partners - Analyst : Finally, real quick on your professional services also, I think it's been the lowest -- as a percentage of revenue, that is -- for a number of quarters. Is it just some hesitation there? Or is there anything else going on that we should be looking into?

Question: Tom Liston - Versant Partners - Analyst : Great. Okay. Thank you, John and Paul.

Question: Richard Tse - National Bank Financial - Analyst : With respect to the WCM business, was that sort of the lions share of the shortfall to your numbers 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 : What would you expect in terms of the drag on the results in terms of recovering that revenue here?

Question: Richard Tse - National Bank Financial - Analyst : Is that like a one-quarter thing? You've obviously been talking to a lot of your accounts here. Is that going to pick up within a quarter or two? Or (multiple speakers)

Question: Richard Tse - National Bank Financial - Analyst : Just sort of a broad question. You've had a few acquisitions this year. What do you see sort of as a roadmap for Livelink as a whole going forward? Are you going to sort of try to move everyone on a single platform down the road? Maybe you can give us a little bit of color on that.

Question: Richard Tse - National Bank Financial - Analyst : Just a last one. Beyond the web content management, the other businesses, have they sort of shown any sign of weakness with this backdrop here? Or is this --

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

Question: Paul Steep - Scotia Capital - Analyst : Great. John, maybe we'll actually carry on on the product side. What's sort of the timing for the integrated platform? And I guess would the plan be to migrate that Vignette product over to RedDot? Because I remember they -- I think they were on a different architecture, as I recall.

Question: Paul Steep - Scotia Capital - Analyst : Then just three quick ones for Paul, just to throw them all in one batch here. I guess the Vignette tax shield, it was pretty substantial? If you could comment on that. Then on FX, we have license revenue of about 1.1 positive year on year. Is that sort of where it tracks in? And then finally, on your margin bump, is that one-time only, the extra bump in the model of 2% in '010? Or is that sort of ongoing, '010 and beyond?

Question: Paul Steep - Scotia Capital - Analyst : That's going to be -- how's that going to have to work out, Paul? Is it spread out over many years or is it spread (multiple speakers)

Question: Paul Steep - Scotia Capital - Analyst : Perfect, thanks guys. 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 - Morgan Keegan - Analyst : Good afternoon. I have two quick questions. First, if you kind of look at your core business and then back out maybe $20 million to $25 million [because you can't carry it], it looks like the organic revenue was down maybe 10% or so year over year. But the economy stabilizing and the WCM likely to improve after you -- now that you've got the Vignette acquisition closed, do you think that kind of bottoms and improves going forward?

Question: Brian Freed - Morgan Keegan - Analyst : Okay. And would you say the delta between what you did this quarter and flat single is really just the freeze in the WCM sector that (multiple speakers)

Question: Brian Freed - Morgan Keegan - Analyst : And then the second question, you guys announced a really nice win with the Province of Ontario. I know historically such wins tend to be pretty large in size, but roll out over a fairly long period. Can you talk a little bit about the scale and scope of that opportunity?

Question: Brian Freed - Morgan Keegan - Analyst : Have we seen any impact from that yet? Or is it all yet (multiple speakers)

Question: Brian Freed - Morgan Keegan - Analyst : Thanks so much.

Question: Barbara Coffey - Kaufman - Analyst : I have just a couple quick ones. Is there an average deal size? I didn't hear that in the text.

Question: Barbara Coffey - Kaufman - Analyst : And that was the other kind of question that I was -- you said there were six deals greater than $1 million last -- this quarter last year?

Question: Barbara Coffey - Kaufman - Analyst : How many were sort of greater than $500,000?

Question: Michael Abramsky - RBC Capital Markets - Analyst : Thanks. Could you just go into a little bit more about what's going on with the WCM shortfall? So is that largely from both Open Text and Vignette customers, as well as prospects? 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: Michael Abramsky - RBC Capital Markets - Analyst : So there could be an element that even if you early on do qualify the roadmap issue, where there still could be sluggishness.

Question: Michael Abramsky - RBC Capital Markets - Analyst : And I guess the question is, when you're comfortable with the kind of single digits, what is the risk that if some of those Open Text customers and prospects continue to kind of hold off on the WCM side?

Question: Michael Abramsky - RBC Capital Markets - Analyst : I guess --

Question: Michael Abramsky - RBC Capital Markets - Analyst : And would you sort of characterize the extended sales cycles and decision processes as longer this quarter than previous? Like just kind of characterize the trend over the last two or three quarters. Is it (multiple speakers)

Question: Michael Abramsky - RBC Capital Markets - Analyst : I guess the question is, are you seeing it extend, extend, extend, and do we -- would that like -- or like how long do you think that may -- that trend, will it continue to get longer? Or continue? 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: Michael Abramsky - RBC Capital Markets - Analyst : So what is it -- I guess on that -- in that environment, what is the basis for the single-digit growth? Where are you assuming that that will come from? And what kind of assumptions are you making on further delays in sales cycles (multiple speakers)

Question: Michael Abramsky - RBC Capital Markets - Analyst : Because those are areas that reduce headcount?

Question: Michael Abramsky - RBC Capital Markets - Analyst : So the ERP interfacing is the kind of where they would be able to eliminate some headcount.

Question: Michael Abramsky - RBC Capital Markets - Analyst : Sounds like you're going to be doing a fairly material restructuring of sales in Europe.

Question: Michael Abramsky - RBC Capital Markets - Analyst : So what is the potential disruption risk of that to things like account transition and territory reallocation and (multiple speakers) 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: Michael Abramsky - RBC Capital Markets - Analyst : Thanks John.

Question: Dushan Batrovic - Canaccord Capital - Analyst : Thank you. First one -- sorry, I know this was asked, but I'm still a little bit confused by the response. The 30% to 40% discount that we would apply to the sales, that's on Vignette's last reported quarter, so the March quarter?

Question: Dushan Batrovic - Canaccord Capital - Analyst : Thank you. Next, the geographic situation, it seems like it's changed a little bit since last quarter. I think you were talking about the Americas picking up a bit and Europe still lagging, and it sounds like this time around that has flipped. And (multiple speakers)

Question: Dushan Batrovic - Canaccord Capital - Analyst : Oh, okay. So it's not necessarily a comment on the macro (multiple speakers)

Question: Dushan Batrovic - Canaccord Capital - Analyst : Okay. Next from me is -- you've had a lot of experience with acquisitions in the past. Maybe you could point us to one that perhaps Vignette most closely resembles. Should we look at this as like a Hummingbird? Like a Captaris? Or something else that you have done in the past -- just as kind of the proxy?

Question: Dushan Batrovic - Canaccord Capital - Analyst : Last one from me is on the social media side, it sounds like a really interesting long-term opportunity. Maybe you could just tell us a little bit around what types of timelines we should be looking at for this new product to really start to make a dent in the financials.

Question: Dushan Batrovic - Canaccord Capital - Analyst : All right, thanks very much.

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Thanks very much. Just a couple of questions, Paul, for you, around gross margins. I'm wondering, the license margin was pretty strong this quarter. Was there any one-time items that sort of supported that? And then conversely, sort of on the service margins, if we look back over the last year or so, and we have had service margins that have been fairly weak. Do you see service margins, now that you're adding more bulk to the business, creeping up at any time?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Great. Paul, you had said -- in your prepared comments you talked about a tax adjustment of I think you said $0.04 or something. Can you just walk us through that?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : Then just on the large deals, I wonder if you'd just give us some color -- more color on the three large transactions, sort of what sort of products or what areas drove those deals? (technical difficulty)

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : I just had a couple more quick questions. Just on the large deals, I just want to get some sense of what are the solutions or what are -- what types of things are customers doing on -- I guess on the big three, but also even on the large 15 deals? Where are you getting traction in this weak market?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : And what are you seeing in the e-discovery space? 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. You're putting that in there. And one other question, if I can. Just on the legacy Hummingbird connectivity business, which in the past was fairly driven by employment levels, what have you seen in that business in 2009?

Question: Blair Abernethy - Thomas Weisel Partners - Analyst : That's great. Thank you very much.

Question: Scott Penner - TD Newcrest - Analyst : Just a couple things. One is, John or Paul, when you integrate the Vignette acquisition, you mentioned the PS margins being 18 to 20. Is there going to be a shock downward initially?

Question: Scott Penner - TD Newcrest - Analyst : Then the other thing is, the Hummingbird installed base, it was always presumably fairly hungry for new technology when you bought the company. Where is that in the upgrade cycle? Is that part of the ongoing model right now? Or is there still -- is it still a substantial opportunity to sell those people new technology?

Question: Scott Penner - TD Newcrest - Analyst : Is that upgrade revenue, is that in your thinking when you give that single-digit type growth rate? Or is that -- would we consider that additional opportunity?

Question: Scott Penner - TD Newcrest - Analyst : That's helpful, thank you.

Question: Ralph Garcea - Haywood Securities - Analyst : Just quickly on the government side, do you think with Ontario and the federal government rolling out, you can get to 20%-plus of revenue over the next three or four quarters?

Question: Ralph Garcea - Haywood Securities - Analyst : Ontario was 10 years, federal government was seven, I think? Or --?

Question: Ralph Garcea - Haywood Securities - Analyst : Is there other possibilities that are in some of the larger provinces?

Question: Ralph Garcea - Haywood Securities - Analyst : And then you've talked a lot about the SAP integration and the success there. What do you see in the future now with Oracle Fusion 11g middleware coming out and opportunities there now that that's a much slower product for you?

Question: Ralph Garcea - Haywood Securities - Analyst : Would the SharePoint opportunity and SAP sort of be a similar size right now? Or --?

Question: Ralph Garcea - Haywood Securities - Analyst : Thank you.

Question: Gabriel Leung - Paradigm Capital - Analyst : Thanks. John, just going back to the social media platform for a second. Can you talk about how bookings have trended for that product since you released it in -- I think it was in June? And whether or not some of your initial beta sites for the platform have converted into a -- or are planning to convert into a full deployment?

Question: Gabriel Leung - Paradigm Capital - Analyst : And just going back to your comments around the -- sort of the ECM on zero, flat, single -- flat to single-digit growth -- is your expectation for Open Text, at least on an organic basis, to continue to exceed sort of industry averages? 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 : And one question for you, Paul. Just on the G&A -- note that it ticked up a little bit sequentially. Was that just sort of some year-end costs? And we could expect that, on a standalone basis anyway, to sort of drop back down again in Q1?

Question: Gabriel Leung - Paradigm Capital - Analyst : Great, thanks.

Question: Richard Tse - National Bank Financial - Analyst : Just a quick question for you here. You didn't talk about the maintenance renewal rates here this past quarter. How do those stand right now?

Question: Richard Tse - National Bank Financial - Analyst : Have you been able to get price increases on the maintenance base, or is it essentially flat to last year?

Question: Richard Tse - National Bank Financial - Analyst : Thanks.