Open Text Corporation
Q3 2009 Earnings Call Transcript

Published: 7 May 2009

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Open Text Corporation Third Quarter Fiscal 2009 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today Wednesday, May 6th, at 5

[Greg Secord:]

Thank you. Hello everyone and thank you for joining us. My apologies for the delay. We wanted to wait for all the callers to be connected to the call. With me today are Paul McFeeters, our Chief Financial Officer; and John Shackleton, our President and Chief Executive Officer. And before we begin, I'd like to read the disclaimer. During the course of this conference call, we may make projections or other forward-looking statements relating to the future performance of Open Text or its subsidiaries. These oral statements may contain forward-looking information and actual results could differ materially from a conclusion, forecast or projection in the forward-looking information. Certain material factors or assumptions were implied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors or assumptions that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were implied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in Open Text's Form 10-K for the fiscal year ended June 30, 2008, and in our press release that was issued earlier today. And with that, I'd like to turn the call over to Paul.

[Paul McFeeters:]

Thank you, Greg. Turning to the financial results. For the third quarter of fiscal year 2009, total revenue for the quarter was 192 million, up 7% compared to 178.8 million for the same period, last year. In Q3, North America was responsible for 51% of our overall revenue, Europe 43% and remaining 6% coming from the rest of the world. License revenue for the quarter 51.9 million, compared to the 51.5 million we reported last year. Maintenance revenue for the quarter was 101.9 million, up 11% compared to 91.6 million last year. Professional services and other revenue in the quarter was 38.2 million, up 7% compared to 35.6 million in the same period last year. We reported third quarter adjusted net income of 31.4 million or $0.59 per share on a diluted basis, up 24% compared to 25.4 million or $0.48 per share on a diluted basis for the same period a year ago. Gross margins for the third quarter before amortization of acquired technologies were 73%, compared to 74% in the third quarter of last year. Customer support, gross margin was 83% in Q3 this year, compared to 84% in Q3 of the prior year. Professional services and other margins was 21%, compared to 19% last year. The increase in margin was tripled for better utilization rates and dripping of higher margin hardware revenues into this category. Pre-tax adjusted operating margins before interest expense was 24.4% in the third quarter, compared to 24.2% last year. With respect to our adjusted earnings, the effective tax rate for the quarter is 30%. Net income for the third quarter in accordance with GAAP was 22 million or $0.41 per share on a diluted basis, compared to 7.3 million or $0.14 per share on a diluted basis for same period a year ago. Fully diluted share account for the quarter was approximately 53.4 million shares. As of March 31, 2009 deferred revenue was 201 million compared to 179.5 million as of June 30, 2008. Accounts receivables as of March 31, 2009, 111.7 million compared to 134.4 million in June 30th, of last year. Day sales outstanding was 52 days as of March 31st, compared to 60 days in the June 30, 2008. Operating cash flow in the quarter was 72.9 million compared to 49.8 million in the same period of last year. Q3 is normally the strongest collections quarter of the year through the higher percentage of custom maintenance renewals at December 31st. As in previous quarters, we have added a chart in the press release to provide more visibility into the effect of foreign exchange on our operations, shows the percentage of revenues and expenses in U.S. and other major currencies. Net effect in our operating income due to FX is immaterial. However, we did see a significant impact on gross revenues and expenses compared to Q3 of fiscal 2008, as major currencies have declined anywhere from 15 to 25%, compared to the U.S. dollar. For example, of approximately 55% of our revenues are in foreign currency. And assuming an overall average decline in the U.S. dollar of 20%, would result in an impact year-over-year total revenues of approximately 20 million, versus same FX benefit or expenses as indicated but negligible effect on the bottom line. The change will reflect the effect of hedging of our operations. As confirmed last quarter, we will not be breaking out the financial effects in the Captaris acquisition, although it continues to be accretive. We are on track to have the Captaris business on our operating model by the end of our fiscal year. In Q1, we stated we will reduce worldwide employment by approximately 10%, running from a post-acquisition combined workforce of 3,600 reducing to 3,200. As of March 31st, we've acted on 70% or approximately 280 employees. We've made reductions for the most part will occur through the balance of the fiscal year. In addition, we will continue to rationalize operating facilities in both Open Text and Captaris. We also stated that the Open Text restructuring charge would be approximately 20 million, and this charge would be recorded in our statements of income. Breakout of the charge is 11 million for workforce and 9 million for facility. This quarter, we took a restructuring charge of 1.8 million. Year-to-date we've booked a 13.2 million restructuring charge, but the remaining is expected to be booked in Q4 and a portion in Q1 of FY '10. Approximately, 2.5 million cash was paid out during Q3 and year-to-date cash paid was 5 million. As part of our purchase accounting for Captaris, we also indicated that the cost for reducing the workforce and facilities will be approximately 20 million. The breakout of the charge is 11 million for workforce and 9 million for facilities. And our purchase price adjustment on the balance sheet, we have charged 15.6 million as of March 31st, the remaining 6.4 million to be a further adjustment to the purchase price in Q4 and Q1 FY '10. Approximately, 2.4 million was paid during Q3, year-to-date cash paid was 4.5 million. We continued to confirm that the cost savings in our operation as a result of these actions will be approximately 20 million for this fiscal year, with the run rate savings of approximately 40 million for the fiscal 2010. 9 million has been achieved to-date. As part of the acquisition accounting, the fair value of the acquired deferred revenue, customer support contract, the total adjustment for Captaris was 2 million and 500,000 was written down this quarter. Now, I'll turn to the company's pre-tax adjusted operating margin's model. We are confident in our plan to maintain expenses in the 14 to 15% range for development, 24 to 26% range for sales and marketing, 9 to 10% for G&A and 2% for depreciation. Our operating net margin will remain at the upper end of a publicized range of 20 to 25%. A copy of our business model is available on our website, part of the Investor PowerPoint presentation. We anticipated a reduction in our effective tax rate for fiscal 2009, no more than 28%. Although, we continued to use 30% for this quarter. Cash taxes as a percentage will also decrease 10 to 15% from previously reported 15 to 20%. As you're probably seeing, we've announced our intent to acquire Vignette for consideration of cash and shares. Proposed issue of shares will result in a dilution of approximately 6.7%, and a cash portion of the transaction will be fully funded by the combined cash of the entities will not require use of debt. Now, I'll turn the call over to John.

[John Shackleton:]

Thank you, Paul. Hello everyone. Thank you for joining us today. I'm happy with our performance in a difficult environment. I'm very pleased that we remained on our margin model and met our profit goals. I'm especially pleased with the strong cash flow from operations and satisfied with our constant currency revenue growth. As Paul mentioned, we generated $52 million in license revenue in the quarter. Out of this license revenue, 29% came from new customers, 71% came from our installed base. In the quarter, we had good performance in North America, which generated 51% of total sales; Europe was a little slower, generating approximately 43% of total sales, and Asia-Pac remained constant at 6%. Approximately, 60 to 70% of our license sales were driven by demand for compliance-based solutions, such as e-mail management, records management and eDiscovery. In addition, we're finding that there is renewed demand for our classic ECM solutions, which achieved rapid and measurable return on investment, particularly in the areas of streamlining and automating business processes. In Q3, we saw license revenue by vertical as 15% from government, 15% from high-tech manufacturing, 13% from energy, 9% from financial services, and 9% from consumer products. In the quarter, we saw good diversification, both by vertical sector and geography, with continued vertical strength in the areas of government, utilities and telcos. Taking a look at the transactions in the quarter, there were two transactions over $1 million and seven transactions in the 500,000 to 900,000 range. This trend reflects our sales model of chunking our larger deals into smaller parts that can be recognized over several quarters. This makes it easier for our customers to receive budget approval and shorten the sales cycle. Our average transaction size was approximately $370,000, up slightly from the same quarter last year. Examples of significant wins in the quarter include United Launch Alliance, a joint venture between Boeing and Lockheed Martin, which provides spacecraft launch services for the U.S. Government. We've purchased additional licenses for Content Lifecycle Management and Microsoft SharePoint integration to help manage the documentation of workflow processes required for their launch and for procedures of certification and authorization. Hydro One Networks which operates Ontario's high-voltage transmission systems purchase the Open Text ECM Suite for Content Life Cycle Management and CLM services for SharePoint. Open Text solutions were selected because of their ability to integrate into Hydro One's current platform, which includes SharePoint in SAP to help create a best-in-class information management technology platform. Burger King Holdings, the world's number two hamburg chain purchased SAP in voice management by Open Text and Kofax OCR. The Open Text solutions were selected because of their tight integration with SAP and Kofax to help provide a quicker implementation process and reduce total cost of ownership. Loblaw Companies Limited, Canada's largest food distributor has chosen the archiving of records management capabilities of the Open Test ECM Suite. And finally the Swiss Post purchased Open Text document access not having for SAP, the rollout of accounts payable and data archiving solutions. From a sales operations standpoint, we closed the quarter with a combined sales force of approximately 270 quarter carrying sales executives. License revenues from partners was approximately 49%, which is above our range of 30 to 40%, but we're expecting to move back to that range going forward. Our strategic partnerships with SAP, Oracle and Microsoft are doing well. And we will continue to focus on selling solutions that support our alignment with these partners. This quarter we announced that we acquired Vizible, a small Toronto based company for under $1 million. Vizible's 3-D digital media interface technology will further expand our digital asset management and web-to-data solutions. On the product side, we announced that our new eDiscovery solutions has been extended to Open Text eDOCS customers, now organizations particularly large legal departments will be able to significantly minimized the need for third-party processing and will be able to control the process of litigation by culling irrelevant information. Regarding Captaris, as Paul mentioned, the integration is slightly ahead of schedules and was accretive in the quarter. We expect the Captaris business to be on our full operational model by the end of the June fiscal year. Regarding Vignette, this addition would continue to reinforce our position as the largest independent ECM provider, and would further our market presence in ECM, with additional strength in web content management and provide strong record management expertise that will help in our compliance-based positioning with customers. Vignette has a very strong customer and partner base, and both would gain from an expanded solutions portfolio and the support of a much larger ECM company. We continued to see a strong pipeline despite the global economy, but with customers taking slightly longer for approvals. There is continued demand for compliance driven solutions as well as ERP integration products that produce rapid ROI. This was reinforced by our customers at our recent content day events in Germany and the UK, where we had record attendance. I also want to remind everyone that our license revenue seasonality trend in Q4 should be similar to what we've experienced in previous years. Obviously, this could be impacted by FX fluctuations. But our focus remains meeting our profit goals and cash flow goals for our shareholders and we'll continue to manage the business accordingly. Overall IT spend appears to be flat year-over-year. But the industry analysts are still suggesting security at ECM our key initiatives going forward. And while I leave it to the analyst to predict the ECM growth rate, we believe that we'll continue to perform at the top end of their range going forward. On that note, we're comfortable with the first call EPS consensus expectations for the fiscal year. And will update the street after our acquisition offer from Vignette as being voted on by their shareholders. Before we open the call to questions, I'd like to remind our participants that our offer is in front of Vignette shareholders. So please restrict your questions to issues covered in our press release early this morning. With that, I'd like to open the lines for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions). Your first question comes from Scott Penner with TD Newcrest. Please go ahead.

[Scott Penner:]

Thanks. John, just on the Captaris deal, I know it's one of the second quarter. But do you have any achievements of node on the cross selling side?

[John Shackleton:]

Actually, we're seeing some particularly in utilities in government, we're seeing with the Captaris OCR and our interface to SAP products, we're seeing some significant deals in those two areas.

[Scott Penner:]

Okay. And on the, I know as you said you are comfortable with the first call earnings guidance, and obviously last quarter you said you're comfortable with both top and bottom line.

[John Shackleton:]

Right.

[Scott Penner:]

Was that, by design that you're no longer?

[John Shackleton:]

It's mainly the FX fluctuations, but it's hard to calculate what they are going to be.

[Scott Penner:]

Okay.

[John Shackleton:]

But as we've seen with the natural hedge that we have, we're absolutely certain will not affect the bottom line.

[Scott Penner:]

Okay. And on the, just on the non-compliance related businesses, you mention the areas of payables. Do you have any new products coming up there?

[John Shackleton:]

Actually, we're seeing quite a number of new products that will be coming out on what we call back office streamlining processes. So a lot of workflow integrated with both SAP and Oracle. And then on the front office, particularly around our Web 2.0, the new visible products et cetera, we're seeing a number of product solutions areas there that you'll be seeing in the near future.

[Scott Penner:]

And then just lastly, what are you seeing as far as updates on the competitive landscape? What's going on with IBM and EMC?

[John Shackleton:]

For the past nine months, we have seen significant winds against them. They seem to have been in some kind of disruption probably with internal organizations et cetera. On a global level, it was interesting about two quarters ago, we saw U.S. particularly in the U.S. but North America in general where budgets were kind of being cut or were being held. We then saw a last quarter, we saw that in the UK and then this past quarter we saw in Germany. The good news is we're seeing a comeback in the U.S and we're beginning to see improvement in the UK. So that we're hoping that Germany will have a similar following within one more quarter that they should be back to spending in these areas as well. But on the competitive side what we're not seeing much competitive competition.

[Scott Penner:]

And just Paul, I think you mentioned, just want to clear on the tax rate, you mentioned it going to, did you say no more than 28% and what was the timing on that?

[Paul McFeeters:]

That's right Scott, no more 28% and that will be applicable for the fiscal year 2009.

[Scott Penner:]

Okay. So we should see some sort of say adjustment in the first quarter?

[Paul McFeeters:]

That's exactly Scott.

[Scott Penner:]

And on the interest expense Paul, that in the past there has been a fluctuation relative to some instruments there, were there any debt item or have any kind of impact again?

[Paul McFeeters:]

Yeah. This quarter Scott there was $800,000 credit on that non-cash mark-to-market, which is as you point out has caused the fluctuation. So credit of 800,000 was booked quarter.

[Scott Penner:]

Okay. And that, just to be clear, that is included in the adjusted EPS calculation?

[Paul McFeeters:]

Yes.

[Scott Penner:]

Okay. Thank you.

[Operator:]

Your next question comes from Tom Liston with Versant Partners. Please go ahead.

[Tom Liston:]

Hi. Thank you and good afternoon. John, just on the comments about the revenue guidance, I haven't double-checked the numbers. But I don't think Captaris moved that much sequentially since your last call at least, we simply has, but when... the last gave the guidance I don't think it moved much or a quality of numbers around how much that's moved versus your revenue stream?

[John Shackleton:]

Well, I think Tom there is... yeah it has moved again negatively, but what we're pointing out is going to be impacted year-over-year.

[Tom Liston:]

Okay. So in other words we talk... can we just talk about, it has weakened there in and we've talked one months in the quarter last time and there was some debate about the growth rate of ECM. And you said work taking out forecast and discounted extra this time. And even with the currency affects, there is still a, looks a license revenue mix. Can you talk about what has changed or if it has changed because it doesn't seem to be all this currency on a sequential basis since you last spoke about guidance in the market?

[John Shackleton:]

Yeah, so as well as the currency, you are right Tom. Is that there is, as we said particularly in Europe some slight delays in acquisitions, but we're beginning to see that pick up, we are against scrubbing the pipelines, discounting the pipelines even further. But having said that the pipeline is still very healthy.

[Tom Liston:]

Okay. And Paul on deferred revenue, the incremental gain you have sequentially that seasonal cause year-over-year it does. Is that mainly currency or can you just talk or renewals in general?

[Paul McFeeters:]

Sure I can. It is all currency. I know Tom it's all currency, its leaving effect on the balance sheet. Our renewals are staying in the 92, 93% range. So deferred revenue has not been adjusted as the old business that is only a result of adjusting foreign currencies on the balance sheet.

[Tom Liston:]

Okay. And finally, obviously you can talk specifically both Vignette total closes. But interestingly most of your acquisitions have been in at least some growth mode or a very minor decline when you've required and allowed you some time to move to you to get that on to your business model. Obviously last quarter Vignette's license are down 29%, overall revenues down 24%. What do you think your experience brings to be able to manage a company or a potential acquisition maybe in a larger decline mode than most of your historic acquisitions?

[John Shackleton:]

Actually Tom, I think both exhaust that have been declining like 30% previous two years to our takeover as well as Hummingbird that was declining significantly and then profitably. We turned that around fairly fast, that putting our products and with their products we're able to stop that. And again particularly protect the maintenance space. So, we think we've been yet, they have got a great customer base, some good products and we think within the space is now the leader, we think we can stop that dramatic fall off of that license. That maintenance has remained fairly study.

[Tom Liston:]

Okay. Thanks. I'll pass the line.

[John Shackleton:]

Thanks Tom.

[Operator:]

Your next question comes from Richard Tse with National Bank Financial. Please go ahead.

[Richard Tse:]

Hi guys. Just wondered if you can maybe comment at all in terms of when this deal does close? How long do you think it would take the cut over to your operating model? Will that be a sort of a one or two quarter event or how should we see that?

[Paul McFeeters:]

Yeah, Rich this is Paul. I think for now, the best we would offer you is that we were considered to be accretive in the first year of operations.

[Richard Tse:]

Okay.

[Paul McFeeters:]

So that when we closes, we can give more visibility at that point.

[Richard Tse:]

Right. And then with respect to the product line, strengthened web content margin, how would you see that sitting in with the existing RedDot offering that you have?

[John Shackleton:]

Yeah, there is couple of things. They have some very strong large customers, high-end, heavy lifting type applications, very similar to what we had with our Gal's product. They have also get some analytical products that are very strong as well. In addition, I think their records of management team, very strong people there. So, it would be great compliment to us.

[Richard Tse:]

So, would you be keeping sort of the both the divisions or you would be integrating products there?

[John Shackleton:]

Seeing as we don't kind of own the company.

[Richard Tse:]

Yeah.

[John Shackleton:]

It's probably not appropriate for us to comment on that.

[Richard Tse:]

Okay, fair enough. Just finally, with this being sort of the big remaining player out there in the public market. And with no certain big candidates left, what're you guys doing in terms of the new product development front? Last year I think you spent a lot of time talking about Web 2.0.

[John Shackleton:]

Right.

[Richard Tse:]

This mean fewer players out there for you to acquire this size. So, can you give us a gauge in terms of what's happening on the R&D front?

[John Shackleton:]

Right.

[Richard Tse:]

Any sorts of organic initiatives?

[John Shackleton:]

Yep. So, I think the key thing Richard is, if you put it this way; what we're seeing in today's market, are these issues around being able to rapid return on investment, streamlining business processes both back office and front office. If you look at most corporations, about 25% of their expense comes from the back office, 75% from the front office. So, helping customers reduce cost of their front office or improving costs improve their services to their customer, we're seeing as the key issues. And I think as you saw with the visible acquisition, we see this whole Web 2.0 rich media management is being key for our future, and that's where lot of the development process effort, development efforts are going.

[Richard Tse:]

Okay. Great. Thank you.

[John Shackleton:]

Thank you, Richard.

[Operator:]

Your next question comes from Joseph Borrie (ph) from Deutsche Bank. Please go ahead.

[Unidentified Analyst:]

Hi. Good evening. Thank you very much for taking my call. There is a couple of questions that's already been asked, but I have a couple of more. The first one is within the limit of what you can comment under the Vignette acquisition, can you give us a sense for the type of revenues synergies you are looking for by inter-rating the products, maybe with a couple of practical examples, I mean the specific verticals et cetera? And the second question I have is, my understanding is that the Vignette portal platform is actually using autonomous technology underlying it, assuming that the acquisition closed. Is that something that will continue that relationship from an OEM perspective or you would actually be replacing that with your own technology? Thank you.

[John Shackleton:]

So. On the last Joseph again, until we own the company, it's not appropriate. Once we, once it is approved we will absolutely provide you with the details of our plans of what we would do. But just to give you some general comments on your first question really about what might we do with the product. As we said they had some very strong brand names in the web content management that would, I believe, would allow us to support those companies more effectively, would be able to cross-sell some of our other products into those key customers. They have a very strong group of records management folks that are around compliance. We see this is a major growth areas for us around compliance. And so that would be a natural fit as well. So between the strong customer base that they have, the ability to cross-sell and up-sell and provide them more full of suite of products and support them more efficiently on a global basis, I think there would be the key. As a I said as well as the strong record management group that they have, which with 60% of our products selling into that space would be a natural add-on to our organization.

[Unidentified Analyst:]

Okay. Thank you very much. And if I may just add one last follow-up. Are you in a position to discuss what all the targets that you consider and eventually why did you choose Vignette? Thank you.

[John Shackleton:]

Well, I think within the ECM space, obviously Vignette was one of the last major player in this space. So it was a net as well as we felt from a both the geographic and product wise that were synergies there. Other areas, obviously, on a consideration would be as we look at streamlining back and front office, we would be looking at application solution vendors that work can be various.

[Unidentified Analyst:]

Okay, excellent, thank you very much.

[John Shackleton:]

Thank you, Joseph.

[Operator:]

Your next question comes from Paul Steep with Scotia Capital. Please go ahead.

[Paul Steep:]

Great, thanks. Well I'll take a shot at it one different way which is on the Vignette side. Is there any reason John or Paul to think that this deal would work any differently than your operating models to other prior deals, maybe with little more tempering given the economic climate?

[Paul McFeeters:]

I'll take that one Paul again, we would not really be able to talk about how we are operating or integrating this business before the acquisition, so appreciate you're trying to come at us but as you know we are coming that works very hard on getting our operating model.

[Paul Steep:]

Got it, fair enough. Actually one quick clarification from you, can you just remind us from a deferred revenue write-down for Captaris in the quarter?

[Paul McFeeters:]

So the total write-down on the acquisition was 2 million, the impact for this quarter was half a million.

[Paul Steep:]

Okay. Last one would be why would we assume I guess John that you guys wouldn't look to go maybe further field -- for further acquisitions in segments that would be adjacent things like BPM and other segments in and around the adjacent to ECM?

[John Shackleton:]

Actually that would be what we would look at.

[Paul Steep:]

Okay, fair enough. Thanks guys.

[John Shackleton:]

Thank you, Paul.

[Operator:]

[Lawrence Rhee:]

Hi, just a couple of questions with respect to Vignette if I may just from a high level, can you just add some cuts -- color around their customer base in and whether or not you can give in a percentage of what type of customer overlap there exists with Open Text and Vignette?

[Paul McFeeters:]

So couple of things, one is they have a smaller customer base but a fairly high brand -- image brand recognition base. A lot of overlap of customers, with very large customers we have a lot of joined customers and obviously we are well entrenched in those customers and would see a lot of synergies and cross selling potential in that customer base.

[Lawrence Rhee:]

Got you. And also with respect to just the price paid, would you be able to add some color whether or not -- were you guys the only players at the table or were there other vendor stepping around Vignette as well that you're aware?

[Paul McFeeters:]

Again I think that will all come out Lawrence as we get into it and all that information will be made available. It's probably a question you should ask them.

[Lawrence Rhee:]

Great, okay. And lastly just clarification, I had my notes with respect to the realized what 17 million in cost savings in the next two quarters which includes this March quarter and June quarter. Can you just quantify how much you -- of that 70 million you've realized the cost savings this particular quarter?

[Paul McFeeters:]

6 million this quarter, 9 million year-to-date.

[Lawrence Rhee:]

Okay 6 million this quarter. Great thanks guys.

[John Shackleton:]

Thanks Laurence.

[Operator:]

Your next question comes from Mike Abramsky with RBC Capital Markets. Please go ahead.

[Mike Abramsky:]

Thanks very much. John, I realized you have been quite consistent on saying you can't talk about Vignette. So I'll ask you question about Vignette. Are you reluctant to sort of comment at this point just is there are some chance that the deals doesn't get done?

[John Shackleton:]

No, I think it just natural prudence until it has been done it wouldn't be fair to the shareholders of Vignette to start making speculations of what we might and might not do. We don't foresee any problems. We think there are good joint synergies that would be good for both shareholders.

[Mike Abramsky:]

Okay. But is there a chance that the deal gets done in a different price or something substantially different than what we have seen at this point?

[John Shackleton:]

We don't anticipate any.

[Mike Abramsky:]

Okay. Just going back over sort of the last couple of quarters in both your outlook and also performance, could you reconcile for us here, comments have been fairly consistent on macro demand for compliance as well as your pipeline remaining healthy?

[John Shackleton:]

Yup.

[Mike Abramsky:]

But, in the last couple of quarters you've been pulling in your outlook in terms of what you're comfortable with first it was revenue and last quarter it was seasonality and a 90-day pipeline now it's just EPS. So are you seeing -- is revenue visibility declining on the deal delays because the economic department like I said in Europe et cetera--

[John Shackleton:]

Right.

[Mike Abramsky:]

Do you expect that to drop or you're just not sure, how do we think about the trend going forward?

[John Shackleton:]

It's a little bit of both so they said if you looked at the U.S. where we didn't lose deals it was just almost they stopped spending for 90 days and then started releasing the funds so that we -- that's now ticking up again. We saw that in the U.K, we now saw in Germany. Should we anticipate that we'll see that in Asia-Pac next quarter. And so we're just being a little even more conservative than we've been. The good news is that though we're not losing deals, they just are being delayed.

[Mike Abramsky:]

But does the delay give you some like I said is there a visibility to actually closing or is that's what's kind of more difficult to see as to sort of when those things will and if come true. Straight a way delay can be, we're just not getting the signature or delay means we sort to know we're getting it but it's kind of stretching out.

[John Shackleton:]

Right. And I think that what's happening is that people usually in the -- from a customer base, the usual sales cycle chain, there are being suddenly new requirements in that chain that the customer wants the -- let's say was the CIO. Suddenly, there are new requirements within that company that make them need to do certain things. So those additional steps if you will, that's -- but what's happening is they are closing and so it's the uncertainty on more steps going to be put into the space the visibility the knowledge that they're going to close is still there, it just has impacted us on the number of closes.

[Mike Abramsky:]

Okay. And is that kind of current comment on now focusing in EPS consensus reflective of still perhaps that currently lower visibility in the current quarter that you're in right now?

[John Shackleton:]

Actually, so what happened is in the U.S. we're now seeing that clarified and much more defined, U.K. is picked up, we're still anxious in Germany and then we're obviously we're saying other areas that we might experience the same thing so we're going to be additionally cautious because of that.

[Mike Abramsky:]

Okay. And then lastly just with regard Vignette and kind of high-end products. Are there any sort of low hanging fruit in your existing customer base or in Vignette's customer base for selling and sell through that look interesting to you?

[John Shackleton:]

Yes. Particularly the analytic tools that Vignette have but its I mentioned to Lawrence, we have a lot of large customers that share all our -- that we share as and so opening up that whole product suite to those customers we think will be a lot of low hanging fruit.

[Mike Abramsky:]

Okay.

[John Shackleton:]

They might have wanted but couldn't get as easily.

[Mike Abramsky:]

Okay. Thank you very much John.

[John Shackleton:]

Thank you.

[Operator:]

Your next question comes from Dushan Batrovic with Canaccord Adams. Please go ahead.

[Dushan Batrovic:]

Hi, thank you. So John it sounds like things did get a little bit worse since you spoke in January and I wanted to get a sense as to what that actually looked like and when that actually occurred was it was February, March I guess another question, I'm asking the question is around linearity in the quarter and so far what you've seen in April are you extrapolating April for the rest of the quarter when you say that you are comfortable with EPS or are you banking on any improvements this quarter?

[John Shackleton:]

For example, Germany if you'd asked in January our customers would have said there are no budget issues, everything is a go and then in March it was as the economy hit them, the GDP issues went from excellent to flat almost overnight that they certainly began to became cautious. And so we have -- it was almost like in the last weeks of March that this happened in Germany. So what we are doing is extrapolating and saying that could that happen in Asia-Pac how long will it take to recover in Germany -- what we found in the U.S. was typically 90 days, and then U.K., it picked about 90 days, so we are doing a little bit of extrapolation out of that. Then on top of that obviously is the FX who knows what's going to happen.

[Dushan Batrovic:]

When you mentioned that the big deal is being chunked up here has that process accelerated of late based on what you are saying in the economy?

[John Shackleton:]

We've been trying to accelerate that for the last 76 months.

[Dushan Batrovic:]

And could that impact your commentary around how we should think about license seasonality at some point?

[John Shackleton:]

It could eventually do that and we've continued to look so far and obviously when we do acquisitions like Captaris we continually look at, will that impact our normal seasonality. So far it hasn't but we'll continue to look at that, and obviously we've been yet -- we would need to look at that as well.

[Dushan Batrovic:]

Last question from me on Vignette. Obviously, any pressure in perhaps entering into this transaction a bit earlier than you would have ideally wanted to based on their own process of evaluating strategic alternatives? And I ask that because of the Captaris integration still hasn't fully been completed and economic conditions are kind of tough and --

[John Shackleton:]

Yeah, so I would say the Captaris integration is going very smoothly, a little ahead of schedule. And wouldn't really, the people who are integrating the Captaris team and would not be the same group that would integrate the Vignette team. And so no, this is... we see this as one of last large ECM vendors. We see them as very compatible and synergistic. So, this is a long-term strategic acquisition. The timing was, we weren't neither rushing nor delaying. We felt but it was the right time at the right price that was fair for both all constituents.

[Dushan Batrovic:]

Okay. Thank you.

[John Shackleton:]

Thank you, Dushan.

[Operator:]

Your next question comes from Gabriel Leung with Paradigm Capital. Please go ahead.

[Gabriel Leung:]

Thanks. Paul, just got two questions for you. First, just on the tax rate, just to confirm you said that the fiscal '09 tax rate should average around 28%, right?

[Paul McFeeters:]

Yeah. No, greater than 28%.

[Gabriel Leung:]

Okay. Any sense of what 2010 would look like for Open Text's standalone entity?

[Paul McFeeters:]

I'll comment on that if I could next quarter and give a better visibility for FY '10.

[Gabriel Leung:]

Okay. And then, just on the cost of debts for the remainder of the calendar year, which I think the color is still in effect, should we think about 5% as the cost of debt?

[Paul McFeeters:]

Yeah. I think that will be on the conservative side, which will be fine.

[Gabriel Leung:]

Okay. And then a question for you John. With regards to your outlook for the remainder of the year, I think you had commented that we should expect to see the same sort of seasonality as we had in the past, is that correct?

[John Shackleton:]

Yep.

[Gabriel Leung:]

I think previously you talked about in Q4, you typically see a 20 to 25% sequential improvement in license revenue, is that correct?

[John Shackleton:]

That's right.

[Gabriel Leung:]

Borrowing whatever for exchanges, right? And I think, just based on where spot rates are right now and the things remain unchanged, it looks like you are probably get a sequential benefit on the euro and the pound. So, I guess the question is all else being equal, are you saying we should expect to see maybe a 20 to 25% sequential increase in licensees?

[John Shackleton:]

We can't say that.

[Gabriel Leung:]

But that is implying? Okay, that's fine.

[John Shackleton:]

Any other questions, Gabe?

[Gabriel Leung:]

No, thanks.

[Operator:]

Your next question comes from Steven Li with Raymond James. Please go ahead.

[Steven Li:]

Thank you. John, one more question on Vignette. Would you characterize Vignette as having more overlap compared to a Captaris, which might lead to a stronger cost synergies?

[John Shackleton:]

I would certainly see Vignette as more Hummingbird like in the... they had a lot of similar overlap of products, but possibly a different, in the different market in some cases.

[Steven Li:]

Okay. And --

[John Shackleton:]

But certainly the cross-selling opportunities will be there.

[Steven Li:]

Okay, great. And can you also comment on what kind of evolution you saw at Captaris? Was it worse or better than your guided 30% evolution on the light sense?

[John Shackleton:]

No. It's cracking pretty close to what we expected.

[Steven Li:]

To what you guided?

[John Shackleton:]

Yep.

[Steven Li:]

And question for Paul. Can you actually give us what the impact was on the deferred revenues, the FX impact you talked about?

[Paul McFeeters:]

I cannot off the top. But I think if you could use the same kind of ratios I gave you for revenues, it was probably in that range.

[Steven Li:]

Okay. Thanks.

[Operator:]

Your next question comes from Blair Abernethy with Thomas Weisel Partners. Please go ahead.

[Blair Abernethy:]

Thank you. Just a couple of things here. On the cash that you have the balance sheet today, assuming you're going to use 40 to 50 million for this acquisition, of what you have left Paul, how much do you foresee as sort of your base working capital needs of cash?

[Paul McFeeters:]

Perhaps, we'll answer at Blair and we're reasonably comfortable, anything above a 100 million is not hard policy. There is no covenants or restrictions to do that, but that's kind of where we're comfortable.

[Blair Abernethy:]

Okay. And how much of your 237 million cash today is offshore versus U.S. based?

[Paul McFeeters:]

50% of it is in North America. However, we can access significant portion of the non-North American to transfers of funds without holding tax. So we could access the rest of it.

[Blair Abernethy:]

Okay. So, is there any with withholding tax on the offshore cash?

[Paul McFeeters:]

On net, no, none of that we would transfer with regulatory tax and we could sense a significant amount without withholding tax.

[Blair Abernethy:]

Okay. So given that scenario, what's your view towards further reducing your debt over the course of the next year with Vignette in the works?

[Paul McFeeters:]

I think we're kind of in the same position here. We're holding tax rates sorry, our debt rate is 5% of last. We think that's still a very effective rate and as we continue to look at opportunities and was continue to drop into the marketplace I think the order of cash preference like to remain with acquisitions.

[Blair Abernethy:]

Okay. Thank you. And shifting gears over to maintenance, you touched a little bit on maintenance renewals. What about the pricing environment on maintenance and sort of what have you done with the some of the Captaris businesses that has rolled in January?

[Paul McFeeters:]

Well, our team is doing an effective job of renewing, not only the percentage as we indicated but also in some cases getting increases, perhaps the rate of increases not as strong as in previous years. But certainly we are getting increases on average on our renewals.

[Blair Abernethy:]

Okay. So in that --

[John Shackleton:]

So another way of saying that we have seen pressures where customers are requesting certain things but we're working with those customers and are able to maintain that maintenance. We don't have a lot of shelf software out there. And so justifying the need for the maintenance is not too difficult for us.

[Blair Abernethy:]

Fair enough. John, just shifting gears over to you on the competitive landscape, I'm wondering if you can give us a sense of how you're seeing any changes out there with in the legal vertical with interwoven now with autonomy? And also, in terms of Oracle and Stellent, we're hearing they are showing up a little more often, are you seeing that?

[John Shackleton:]

Let me take that one first. From what we've seen, we've seen nothing of Oracle, Stellent to affect from what we've heard is most of that team have been totally depended that most of the Stellent executives are no longer with Oracle. So, certainly not seeing them. On the interwoven, they are, they've gone after the smaller legal firms. And we'd really haven't seen much of them or autonomy over the past 90 days we can -- obviously we will look as they go forward.

[Blair Abernethy:]

Okay, great.

[John Shackleton:]

So far no, the main competition has been IBM and EMC. And as we said, we continue to do well in those areas.

[Blair Abernethy:]

Okay, great. Thanks, John.

[John Shackleton:]

Thank you.

[Operator:]

Your next question comes from Paul Lechem with CIBC. Please go ahead.

[Paul Lechem:]

Thank you. Good afternoon. Just wanted to ask a little bit about the partner channel, this quarter you mentioned it was up 49% above your targeted range, what is anything was unusual this quarter that caused it to be that high?

[John Shackleton:]

The SAP was doing very well. Particularly as we do the Captaris, to OCR integrating business process work flows into the SAP applications. There's been a lot of opportunities and we see, when they did very well, we see the pipeline picking up there with them as well. So that SAP was probably the surprise. I know many of the analyst think that knowing SAP had a tough quarter that -- that might have affected us but in fact it was not the case.

[Paul Lechem:]

And when you give the 49% number and how do you actually define what a partner sale is it -- is it something that you have worked with you on or is it something they brought you -- how do you actually come up with that 49% number?

[Paul McFeeters:]

Paul, it's a direct -- we see the funds for them, so it's not if you are asking, it does not include any influence transaction. So it comes directly from the partners or through the channel.

[Paul Lechem:]

Excellent. And one more question maybe for you Paul has the guidance you've given for the profitability, the operating profit model. What would it take if anything to move you above your current guidance range, like how do you see this evolving over time?

[Paul McFeeters:]

Well, as you have seen us increase over the years I understand the question, we're at the upper end of that range and I've indicated in the past we'd review it at the end of the fiscal year this year, we might move that range up. So as we continue to benefit from the cost savings that we discussed this quarter it's only tempered by integrating acquisitions to one on model and bringing the model. So it's that combination Paul that we have to come up by the end of the year and give you better visibility on that. For now we're staying with the upper end of our range of 20 - 25.

[Paul Lechem:]

Excellent, thank you very much.

[John Shackleton:]

Thank you, Paul.

[Operator:]

Your next question comes from Ralph Garcea with Haywood Securities. Please go ahead.

[Ralph Garcea:]

Good afternoon. Just a couple of questions I guess following up on your March comments of the deal that were delayed, I don't know on the last couple of weeks of March, how many have closed through April and early May?

[John Shackleton:]

A good percent of them have closed. I don't know exactly but its cracked very well.

[Ralph Garcea:]

And of the original size of the deal, as you sort of had it in your pipeline. What do you say it's 20% less of what you had expected or 50% from that your chunking comment?

[John Shackleton:]

Let me make sure I understand what you said Ralph. Of what we were expecting last quarter that moved in is it the same -- are we expecting the same amount?

[Ralph Garcea:]

Yes, if you thought the deal was going to be 500,000 let's say the close of last couple of weeks. Did it close at 500 in April or--

[John Shackleton:]

Yes, pretty closed at the same amounts.

[Ralph Garcea:]

Okay. And then I mean as the process started with regards to Vignette and you were doing your due diligence. Was it -- were you getting feedback from customers I mean your partner channel that this would be a great business to integrate into the rest of your portfolio?

[John Shackleton:]

Yes. As I mentioned we have a lot of joint customers who in many cases suggested why hadn't we done this.

[Ralph Garcea:]

Just going back to your larger deals, you'd mentioned two or three on the share point side?

[John Shackleton:]

Yeah.

[Ralph Garcea:]

Which would you say SAP is share points now caught up to SAP with regards to size of your customer base, are they still, is SAP still --

[John Shackleton:]

But we're certainly seeing a lot of progress. I'm very happy with the Microsoft partnership.

[Ralph Garcea:]

Okay. And then just lastly, I mean Vignette's been predominately 65% Americas, 30% Europe?

[John Shackleton:]

Right.

[Ralph Garcea:]

Would you see the product roadmap going forward, selling Vignette into America and RedDot then goes for Europe et cetera? Or would you continue developing all three products?

[John Shackleton:]

Again, we can't mention that. We'll get back to you on in detail on that. But I would say that geographically it wouldn't be an issue. I would see on a worldwide basis.

[Ralph Garcea:]

And then I guess for Paul, sort of to what Paul was saying on the previous question. Assuming this deal closes and you get to a billion run-rate. It should be easy to increase that operating margin range from 25 up to 30%, given the scale?

[Paul McFeeters:]

Nothing's that easy Ralph. No, again I would just stay what I said. I mean we continue to work toward our operating model right now, upper end of 20 to 25 and as we move forward, what they've done to did that model. But I wouldn't project at this point that that's going move up. So we won't have the acquisition and we are able to talk about the integration.

[Ralph Garcea:]

Okay. Thank you.

[John Shackleton:]

Thank you, Ralph.

[Operator:]

Your next question comes from Blair Abernethy with Thomas Weisel Partners. Please go ahead.

[Blair Abernethy:]

Thanks. Just a quick follow-up Paul, I don't know if you've hit on this or not. But on your income statement you had a 11.5 -- 11.6 million in other income. Can you just walk us through what's in that number?

[Paul McFeeters:]

Yes, will be fairly its pretty much all FX again where that went the other way last quarter you know when it was remarked primarily all FX there, it's the same this time a little bit with the credit as you know this quarter.

[Blair Abernethy:]

Okay, that's great, thank you.

[Operator:]

Your next question comes from Dushan Batrovic with Canaccord Adams. Please go ahead.

[Dushan Batrovic:]

Sure just a quick follow-up, the tax rate comment 28% for the full year, I think would imply slightly lower tax rate for Q4, and when you talk about being comfortable with consensus EPS for Q4 does that, are you assuming that lower tax rate?

[Paul McFeeters:]

No, we are not.

[Dushan Batrovic:]

Okay. So you are assuming with the 30% tax rate?

[Paul McFeeters:]

Right.

[Dushan Batrovic:]

Perfect. Thank you.

[John Shackleton:]

Thank you, Dushan.

[Operator:]

Mr. Shackleton there are no further questions at this time, please continue.

[John Shackleton:]

Okay. Thank you for all your questions and just to wrap up on the quarter's highlights, we achieved our profit targets and generated strong cash flow and while we were impacted by the global economic slowdown, we believe the business remains on track and will continue to focus on meeting our profit goals, Captaris integration is accretive and will on the model by the end of June. And with the continued demand for compliance space solutions, we remain positive on our outlook for 2009 and beyond. And as I mentioned we are very comfortable with the EPS expectations on first call for FY 09. This concludes our call for today. And thank everyone for participating on your questions.

[Operator:]

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.