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Open Text Corporation (NASDAQ:OTEX)

F4Q09 (Qtr End 06/30/2009) Earnings Call

August 20, 2009 5:00 pm ET

Executives

Greg Secord - VP, IR

Paul McFeeters - CFO

John Shackleton - President and CEO

Analysts

Scott Penner - TD Newcrest

Tom Liston - Versant Partners

Richard Tse - National Bank Financial

Paul Steep - Scotia Capital

Brian Freed - Morgan Keegan

Barbara Coffey - Kaufman

Michael Abramsky - RBC Capital Markets

Dushan Batrovic - Canaccord Capital

Blair Abernethy - Thomas Weisel Partners

Ralph Garcea - Haywood Securities

Gabriel Leung - Paradigm Capital

Operator

Welcome to the Open Text Corporation Fourth Quarter Fiscal 2009 Financial Results Conference Call. (Operator Instructions).

I would like to remind everyone that this conference call is being recorded on August 20, 2009 at 5:00 PM Eastern Time. I will now turn the conference over to Mr. Greg Secord, Vice President, Investor Relations.

Greg Secord

Thank you. Hello everyone, thanks for joining us. With me today are Paul McFeeters, our Chief Financial Officer, and John Shackleton, our President and Chief Executive Officer. Before we begin I would 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 applied in drawing a conclusion, while 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 a conclusion, forecast or projection in the forward-looking information, and the material factors or assumptions that were applied in drawing a conclusion while making a forecast or projection as reflected in the forward-looking information, are contained in the Open Text Form 10-K for the fiscal year ended June 30, 2008 and in our press release that was issued earlier today.

With that, I'd like to turn the call over to Paul McFeeters.

Paul McFeeters

Thank you Greg. Turning to the financial results, I'll highlight our fourth quarter and then the fiscal year 2009. Total revenue for the quarter was $203 million, up 2% compared to $200 million for the same period last year. License revenue for the quarter was $63 million, down 8% compared to $68 million reported last year.

Maintenance revenue for the quarter was $104 million, up 10% compared to $95 million last year. Services and other revenue in the quarter was $36 million, down 3% compared to $37 million in the same period last year. We report fourth quarter adjusted net income of $39 million or $0.73 per share on a diluted basis, up 18% compared to $33 million or $0.63 per share for the same period a year ago.

Gross margin for the fourth quarter before amortization of acquired technology was 74.8%, compared to 73.9% in the fourth quarter last year. The increase was primarily due to higher margin for customer support. The pretax adjusted operating margin before interest expense was 26.5% in the fourth quarter, compared to 24.3% the same quarter last year. Adjusted tax rate for the quarter is 28%.

Net income for the fourth quarter, in accordance with GAAP was $19 million or $0.36 per share on a diluted basis, down 29% compared to $27 million or $0.51 per share on a diluted basis for the same period a year ago. There are approximately 54 million shares outstanding on a fully diluted basis for the quarter.

Operating cash flow in the quarter was $39 million, compared to $45 million in the same period last year. Net cash flow from operations for the fiscal year was $176 million, compared to cash flow from operations of $166 million in fiscal 2008. Note that in the current year, we had a one-time operating cash reduction of $10 million, due to excess tax benefit due to stock comp.

Turning now to our fiscal 2009 results; total revenue was $786 million, up 8% from $726 million in fiscal 2008. License revenue was $230 million, up 5% compared to $219 million last year, while maintenance revenue was $405 million, up 11% compared to $364 million last year. Services and other revenue increased 6% to $151 million.

For the fiscal year license revenue was 29% of overall revenue; product maintenance revenues accounted for 52%; the remaining 19% came from professional services. Gross margin for the fiscal year before amortization of acquired technology was 74%, up from 73.6% in the previous year.

Pretax operating margin before interest and stock comp was 25.2% for fiscal 2009, up from 24.3% last year. Adjusted net income for the fiscal year 2009 was $133 million or $2.49 per share on a diluted basis, up 24% compared to $107 million or $2.03 per share on a diluted basis for fiscal 2008.

As I stated last quarter, our overall fiscal 2009 tax rate for adjusted earnings, 28%, compared to 31% in the prior year. On a go-forward basis, for fiscal 2010, we expect the tax rate for adjusted earnings to reduce further 2%.

During the current quarter, the annual adjusted tax rate was just 28%. The adjustments recorded reflect a year-to-date amount that increases the EPS by $0.04 in the fourth quarter. In a press release, we included a chart to summarize the impact of this adjustment through each quarter in fiscal 2009.

We reported GAAP net income for the year of $57 million, or $1.07 per share on a diluted basis, up 7% compared to net income of $53 million or $1.01 per share on a diluted basis in fiscal 2008.

On the balance sheet at June 30, 2009, deferred revenue was $197 million compared to $180 million as of June 30, 2008. Accounts receivable was $115 million compared to $134 million at the end of last year.

Days sales outstanding was 51 days as of June 30, 2009 compared to 52 days for the previous quarter and 60 days at the end of Q4 last year.

On June 21, we announced that we completed our acquisition of Vignette. The aggregate value of the consideration paid was approximately $321 million to purchase the shares of Vignette. As part of the consideration, we issued approximately 3.4 million shares, bringing our current total shares outstanding to approximately 57 million on a diluted basis.

As part of acquisition accounting, we will fair value the acquired deferred revenue for customer support contracts. The details of this adjustment will be provided in next quarter's press release. However, I expect the range of this adjustment to be between $6 million and $8 million for the first year of operations. While we will not break out the financial effect of the acquired Vignette business, I will remind you that they were operating at a breakeven margin. We expect this acquisition to be neutral to the operations in Q2, accretive in Q3, and on our operating model by the end of this fiscal year.

As part of this acquisition, we stated we will reduce worldwide employment and continue to rationalize facilities in both Open Text and Vignette. We also stated that the Open Text and Vignette restructuring charge will be approximately $32 million to $40 million and a discharge will be recorded in our income statement. The charge is made up of $26 million to $31 million for workforce, $3 million to $5 million for facilities, and $3 million to $4 million for other charges.

The cost savings as a result of these actions will be an annual run rate savings of approximately $40 million to $50 million based on combined cost base, pre-merger. This will drive earnings growth this fiscal year to exceed top-line growth, as John will discuss shortly.

[Switching side] to the foreign exchange, as a result of our natural hedge in our operations, the net impact on the bottom-line was less than $0.01 EPS for the quarter and less than $0.02 EPS for the fiscal year.

I'll now turn to the company's pre-tax adjusted operating margin model. We're confident in our plan to maintain expenses in the 14% to 16% range for development, 24% to 26% range for sales and marketing, 9% to 10% for G&A, and 2% for depreciation. We will be increasing the range of our operating net margin from the former 20% to 25% to 22% to 27% for fiscal 2010.

Finally, I would like to remind the Street that we will be hosting a financial analyst briefing on Wednesday, October 28 during Content World, our annual users conference in Orlando, Florida. We plan to report our Q1 results the evening beforehand, on Tuesday, October 27. Please contact our Investor Relations department for more information.

Now, I'll turn the call over to John.

John Shackleton

Hello, everyone. Thank you for joining us today. Let me start by saying I am disappointed that we were slightly off on our Q4 revenue targets, mainly due to the WCM delays where customers were waiting to see our new WCM strategy with the announcement of the Vignette acquisition.

Over the past month, we've now been communicating our strategy to customers, and I believe this will help us going forward. While I am disappointed with the revenue, I am pleased that we grew our adjusted earnings by 24% on an annual basis, as Paul mentioned.

As for a revenue breakdown, North America was responsible for 47% of revenue, Europe 48%, with the remaining 5% coming from Asia-Pac. Europe was on target and Asia-Pac exceeded its target, while the shortfall occurred in North America.

Sales continue to be driven by demand for compliance and ERP based solutions. And we are particularly happy with the success around our SAP product sales. On an annual basis, we saw 50% of our revenue from North America, 45% from Europe, and 5% from Asia-Pac.

In the quarter, we generated $63 million in license revenue, 32% coming from new customers and 68% coming from our installed base.

In Q4, we saw license revenue broken down by vertical, as 29% from high-tech manufacturing, 18% from government, 15% from energy, 11% from pharma and life sciences, and 9% from financial services.

On an annual basis, we saw 28% from high-tech manufacturing, 15% from government, 11% from energy, 10% from financial services, and 7% from pharma and life sciences.

Taking a closer look at the transactions in the quarter, we had 15 transactions over $500,000, an additional three transactions over $1 million. This compared to six transactions over $1 million in our last year.

We had notable wins in the energy sector and with the US government. We saw our sales cycles getting a little longer, so we've been working with customers to structure smaller transaction, making it easier for them to achieve approvals.

Examples of significant wins in the quarter include Corus Entertainment, one of Canada's media and entertainment companies. They purchased the Open Text ECM suite for digital asset management and content lifecycle management. Corus is evolving its broadcasting operations infrastructure to an end-to-end digital environment, as well as reducing its dependency on paper documents. Open Text was selected primarily because of its extensive experience in the broadcast and entertainment industry. We are also currently working with Corus on a joint R&D effort.

Another customer was Nokia Siemens Network, continuing its infrastructure development, by adding to its existing core ECM system of the Open Text technology. The company plans to build the next extranet that will be used for collaboration with external business partners and replaces its existing employee information management system with the Open Text solution.

DuPont purchased additional Open Text licenses to support their SAP business practices, with the Open Text Document Access for SAP solutions. DuPont will have the ability to archive and link documents to SAP transactions outside of the core system, improving the overall performance of their entire enterprise solution.

From a sales operation standpoint, we closed the quarter with a combined sales force of over 269 quota-carrying sales execs. With Vignette, the number is now close to 300.

SAP, Oracle and Microsoft all continue to report increasing partner demand for solutions in archiving, records management and compliance. License revenue from partners and resellers was approximately 39% in the quarter and 35% for the full fiscal year. I am now satisfied that our channel strategy is properly balanced between our own direct sales and partner resales.

Turning to product announcements in the quarter, we announced the availability of Open Text Social Media, a major part of our Enterprise 2.0 strategy and the latest addition to the Open Text ECM Suite. The solution offers a natural and intuitive social media application, that gives people new ways of working productively together, through the web and mobile devices, while also meeting security and compliance demands by being integrated with a company's wider ECM system.

Also in the quarter, Open Text Social Media ranked in the highest category for ZDNet in their map of the 2009 marketplace for Social Media 2.0 vendors, well ahead of our competition from the traditional ECM market.

Also in the quarter, we announced that Open Text received the highest rating possible in Gartner's 2008 MarketScope for Records Management Report.

On the events side, we hosted Content World Europe, which was a big success with almost 2000 attendees in eight cities. In October, we'll also be hosting our North American Content World Conference in Orlando, Florida where we'll announce our detailed product roadmap and outline our product integration strategies for Vignette.

As Paul mentioned, we will also hold an analyst briefing on Wednesday, October the 28th.

With many strategic partners presenting and key customers in attendance, we will highlight a good cross-section of industries, including specific vertical and partner-based solutions.

Turning to Vignette, we are excited to welcome Vignette employees, customers and partners to the Open Text team. With Vignette as part as Open Text, we strengthened our leadership in ECM and created the largest Web Content Management vendor in the world.

Vignette customers will benefit from Open Text expanded ECM solution portfolio, Open Text strategic partnerships and integration with major enterprise player such ass SAP, Oracle and Microsoft and the support of the world's largest ECM solutions provider.

Vignette will also provide a key role in our strategy for social digital medial where fast growing user base has expectations for more personalized web interactions. Open Text will continue to support Vignette products and installed base including users of the previous versions of Vignette Content Management as well as Open Text existing Web Solutions products.

With the addition of Vignette, Open Text is now just over $900 million in revenues. So we're taking this opportunity to realign our sales organization on a global basis. The sales regions of North America, Europe and Asia-Pac will now be managed by three general managers owning sales, field marketing, professional services, customer support and partner support. We believe this structure will service well, as we grow over $1 billion.

On a personal note, John Wilkerson will be retiring this coming year, but will be helping me transition the organization to this new general manager model before he leaves us. We'd like to thank John for his tremendous efforts and dedication over the past three years.

Turning to our outlook for FY'10, industry analysts are telling us that IT spend is looking at negative 3% to 10%. I feel that we can continue to lead the ECM market and growth as we did last year and we will also manage to the bottom-line as we did last year.

I'd now like to provide some guidance on the expected revenue of the combined businesses. Historically, we said that, an acquired company's license revenue is expected to drop 20% to 30% in the first year after acquisition.

Taking into account, the Vignette's license revenue was dropping significantly for several quarters before the acquisition we're taking a more aggressive position, discounting this license revenue by 30% to 40%. I would also suggest that the street model professional service revenue from Vignette with the same 30% to 40% annual decline.

Vignette maintenance was also trending negatively in the 5% to 10% range annually, during the quarters leading up to the acquisition. While it's our primary focus to build and maintain relationships with newly acquired customers, we think the trend of Vignette's maintenance will continue to decline in the 5% to 10% range for at least the next couple of quarters.

I feel very confident with the margin model that Paul has outlined and I feel confident in delivering our profitability targets for the next fiscal year and expect to show double-digit EPS growth. I am comfortable with the First Call estimates for adjusted EPS for FY'10.

On final note, I am pleased to report that we were just ranked by Fortune Magazine as the seventh fastest growing company in the world in overall profits.

Now, I'd like to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Scott Penner with TD Newcrest..

Scott Penner - TD Newcrest

First, a couple of clarifications; Paul, in your comments you said [to read] into that then that Vignette is expected to be slightly dilutive in the first quarter?

Paul McFeeters

That's correct, Scott

Scott Penner - TD Newcrest

And the tax rate as well, we should be modeling 28% to 26% in the upcoming year. Is that right?

Paul McFeeters

Correct.

Scott Penner - TD Newcrest

John, just on the geographical split of revenue, Europe [seems to have] been weak for a lot of vendors out there, and you are saying it was basically in line. Is the split of revenue a function of where your WCM business is based?

John Shackleton

It is. We do see a lot of WCM business in the U.S., but interestingly, we saw Germany, that had been weak a previous quarter, come back fairly well this past quarter. So Europe did better than we expected.

Scott Penner - TD Newcrest

You mentioned particularly happy with the SAP relationship. Maybe you could just go into a little bit more details to the extent you have deal specifics from SAP, and then I guess how you capitalize on the strength that you're seeing.

John Shackleton

I think Scott obviously SAP had a tough last quarter, but what we found was is that working with their sales people, both North America and Europe, we were able to go back into their existing base and sell the archiving products and the Vendor Invoice Management products to that customer base. So even though they were having a tough time, we had quite a bit of success selling our products.

Scott Penner - TD Newcrest

Lastly, and this may not be something you can really even comment on, but in last quarter Vignette they had announced, the guidance at that point from the management there was basically flat, 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?

John Shackleton

Basically, if you saw the decline that they had was significant for probably eight quarters, before we took them over. A lot of what we've seen as we've talked to customers was customers that had been moving from their version 5 to version 7 products were having a tough time.

We think we can help them stabilize those issues, and for many of the new customers who are now at seven, it's a much more stable product. And so it's going to take us a little time to help customers get that cleaned up. But we actually then think we can start certainly stabilizing and growing the business.

Operator

Our next question comes from Tom Liston with Versant Partners.

Tom Liston - Versant Partners

Just to confirm, it's $40 million to $50 million in cost savings, and the timing on that is exiting Q4, is it?

Paul McFeeters

That's right, Tom.

Tom Liston - Versant Partners

And the same thing with the model guidance, including an increased range, that's not for the year, that would be kind of an [ex] Q4 type number, would it be?

John Shackleton

No, that's for the fiscal year.

Tom Liston - Versant Partners

For the fiscal year. So including some of the early dilutive affects and working through all that?

John Shackleton

That's correct.

Tom Liston - Versant Partners

John, sorry if you just answered this, but the Vignette numbers that you based 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?

John Shackleton

We can't comment on the June quarter, but it's on the - sorry, the run rates, Tom?

Tom Liston - Versant Partners

When you say, 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?

John Shackleton

That's correct. It's based on the last reported numbers.

Tom Liston - Versant Partners

And finally real quick on your professional services also, I think it’s been lowest as a percentage of revenue that is, for a number of quarters. Is that just some hesitation there or is there anything else going on that we should be looking into?

John Shackleton

It’s a little bit of hesitation. I think we’ve seen as part of some of the delays, we have seen a number of our customers, tightening budget, delaying projects, etcetera. But they’re certainly not cancelling projects, they’re just delaying, so we don’t see this as a concerned at this time.

Operator

Our next question is from Richard Tse with National Bank Financial.

Richard Tse - National Bank Financial

Hey John, with respect to the WCM business was that sort of the lion share of the short fall to your numbers in this quarter?

John Shackleton

That’s right.

Richard Tse - National Bank Financial

And, what would you expect in terms of the drag on the results in terms of recovering that revenue here? Is it like a one quarter thing, you’ve obviously been knocking to a lot of your account here that they’re going to pick up…

John Shackleton

We think it will pick up, Richard. In many cases, they’ve seen the road map that we’ve shown them. We see some interesting synergies between the two products and so from the customers that we talked to, it's been very positive.

Richard Tse - National Bank Financial

And just a sort of a broad question, you’ve had a few acquisitions this year, what do you see sort of as a road map for (inaudible) as whole going forward. Are you going to sort of try to move everyone on a single platform down the road. Can you give us a color on that?

John Shackleton

On the Web Content Management side what we are basically seeing is that the Vignette has the e-commerce very strong robust enterprise wide product. Where they had weaknesses, and one of the key concerns for customers was very difficult to customize, not user friendly. Whereas the web content product that we had, mainly the RedDot product easy user interface, easy to use, easy to customize.

So as we see putting the two together, we see some significant synergies in that area. We also see from the Vignette Portal product that that's going to help us in our social media product. So we are seeing some very interesting synergies that we hadn’t been thinking about, that we can use that product with our social medial Livelink product.

Richard Tse - National Bank Financial

Okay. And just a last one. Beyond the Web Content Management, the other businesses have they shown any sign of weakness for this backup here as this?

John Shackleton

No. Not really, Richard. We've actually set other than that, we've been pretty much on target. It's tough economy, obviously and things are slow, but we pretty much been hitting the numbers on the other product areas.

Operator

Our next question comes from Paul Steep with Scotia Capital.

Paul Steep - Scotia Capital

John, maybe we'll just actually carryon on the product side. What sort of the timing for the integrated platform, and I guess, would the plan be to migrate that Vignette product over to RedDot that [number] there. I think they are on a different architectures as I would recall?

John Shackleton

Actually, it probably be the other way, Paul, where we would migrate the RedDot to the Vignette platform. We will be showing a detailed road map at the conference in October, so I think you'll get a good clear. But it looks pretty interesting, the way that things are shaping up.

Paul Steep - Scotia Capital

Okay. And then just three quick ones for, Paul, just throw them all in one batch here. I guess the Vignette tax yield that was pretty substantial, if you could comment on that. Then on FX, we have license [revenue] of 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 2010 or is that sort of ongoing 2010 and beyond?

Paul McFeeters

I'll start in reverse order. The margin is expected to be ongoing. We would hope not to increase it and then go in reverse, so we are adjusting our model for FY10 and future. As in the past, I apologize, we don't comment on FX on the line-to-line basis but on the bottom-line as we did this time. We will have in the US some restructuring what you can bring forward in losses as a percentage of your acquisition costs. It's still significant enough and we'll be able to utilize that portion against our cash taxes always payable in our other U.S. operations.

Paul Steep - Scotia Capital

How's that going to have to work out, Paul? Is it spread out over many years or is it…?

Paul McFeeters

Yes, it is spread over many years, yes.

Operator

Our next question comes from Brian Freed from Morgan Keegan.

Brian Freed - Morgan Keegan

I have two quick questions. First, if you kind if look at your core business and backup maybe $20 million to $25 million from Captaris, It looks like your organic revenue was down maybe 10% or so year-over-year. The economy is stabilizing and now that you've got the Vignette acquisition closed, do you think that kind of bottoms and improves going forward?

Paul McFeeters

If you listen to the analyst, Brian, what we are hearing is that IT spend in general for the remainder of the year is anywhere from minus 3 to minus 10, but on the ECM side we are looking at flat to single-digit growth and we feel pretty comfortable with that.

Brian Freed - Morgan Keegan

Would you say the delta between what you did this quarter and flat and single is really just the freeze in the WCM side of your business?

John Shackleton

From what we are seeing, we think so.

Brian Freed - Morgan Keegan

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 rollout over a fairly long period. Can you talk a little bit about the scale and scope of that opportunity?

John Shackleton

I think we've mentioned before, it's a 10-year contract and the opportunity is the largest in our history. Particularly in today's environment, we see significant potential for growth with that contract where the needs around archiving and records management etcetera is pretty high, so we see that as a tremendous opportunity for us going forward.

Brian Freed - Morgan Keegan

Have we seen any impact from that yet or is it all…?

John Shackleton

A little bit in last quarter, but really minor. Obviously in the coming year, we would expect to see some significant revenue from that.

Operator

Our next question comes from Barbara Coffey with Kaufman.

Barbara Coffey - Kaufman

I have just a couple quick ones. Is there an average deal size? I didn't hear that in the text.

John Shackleton

It's roughly the same Barbara. The deal size is just somewhere in the 300 range, and pretty much been the same. As I mentioned last Q4 we had six multi-million dollar deals compared with the three, so I would've expected it to be down a little bit, but we did make up with some in the more of the $500,000 range.

Barbara Coffey - Kaufman

You said there were six deals greater than $1 million this quarter last year? How many were sort of greater than $500,000?

John Shackleton

I would have to check and get back to you on the numbers.

Operator

Our next question comes from Michael Abramsky with RBC Capital Markets.

Michael Abramsky - RBC Capital Markets

John 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?

John Shackleton

It was certainly from Open Text and customers and prospects where they wanted to see what might the impact on that be, but I also think, as Vignette has experienced, in these tough economic times people have been kind of holding off on doing anything around their websites unless it's really mission-critical.

Michael Abramsky - RBC Capital Markets

So there could be an element that even if you early on do qualify the roadmap issue, where there still could be sluggishness. 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 holds off on the WCM side?

John Shackleton

Right. What I would say Mike is that the synergies that we see as we have talked to Vignette customers and they see the whole portfolio, the products that they could use, as well as the roadmap that we have explained to them, people were very positive. So let me say it another way. Even if WCM stayed on its same course or at least bottomed out. We still feel comfortable growing the numbers.

Michael Abramsky - RBC Capital Markets

Would you sort of characterize the extended sale cycles and decision processes as longer this quarter than previous. Like just kind of characterize the trend of last two or three quarters.

John Shackleton

I would almost say, Mike, if you look just typically a six to nine month cycle, its now more like a nine to 12 months.

Michael Abramsky - RBC Capital Markets

I guess, the question is, are you seeing at extend, extend, extend, and how long do you think that trend will it continue to get longer continue?

John Shackleton

It's really hard to say. From what we are hearing today, many people are saying we are going to hold off until January to stop this project.

Michael Abramsky - RBC Capital Markets

In that environment, what is the basis for the single-digit growth? What are you assuming that that will come from and what kind of assumptions are you making on further delays of sale cycles?

John Shackleton

It’s a very good question, Mike, and what we are seeing is that, any areas where you can show rapid return on investments. So particularly around areas like our vendor and voice management, or our expense management, some of the things that we see interfacing to the ERP systems. They can see some significant quick ROIs. We are seeing interest in those areas.

Michael Abramsky - RBC Capital Markets

Because those are areas that reduce headcount?

John Shackleton

Reduced cost but also reduce cost in a very short timeframe.

Michael Abramsky - RBC Capital Markets

So the ERP interfacing is the kind from where they would be able to eliminate some headcount?

John Shackleton

Similarly to the thing, I mentioned, I think last quarter where say utility company can scan in their bills very quickly and interface that to an SAP system that can reduce their time to cash from days to hours. And so, really quick ROI easy ones.

Michael Abramsky - RBC Capital Markets

Okay. Sound like you are going to be doing a fairly material restructuring of sales in Europe?

John Shackleton

Actually on a worldwide basis where we are putting the general managers in place that we’ll have not only sales but professional services and all the other field marketing etcetera onto them, where they will managing their own P&Ls.

Michael Abramsky - RBC Capital Markets

So what is the potential disruption risk of that John to things like account transition and territory reallocation?

John Shackleton

On the territory allocation, and in fact it should help because these people have the resources in control at their finger tips closer to the customer. We’ve done it on limited basis for the past year and we’ve seen that it has been an improvement in the ease both the internal but also from our customer perspective.

We said we’ve been doing this gradually over the past year. We have the managers in place. These are very seasoned managers that have managed P&Ls and managed large teams of people. So we feel pretty confident that this will work well, as well as give us the ability to grow as we go forward.

Operator

Our next question comes from Dushan Batrovic with Canaccord Capital.

Dushan Batrovic - Canaccord Capital

Sorry I know this was asked, but I’m still a little bit confused by the response, the 30% to 40% discount that we’d applied to the sales that sound Vignette’s last reported quarter, the March quarter?

John Shackleton

Right.

Dushan Batrovic - Canaccord Capital

Next, the geographic situation, it seems like its 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 slipped and.

John Shackleton

Exactly, in fact it was Germany that was hurt in last quarter and Europe and North America we saw picking up. What we did see is more product related. In the US we did see a lot of activity, lot of pipeline, it was mainly around the WCM product areas.

Dushan Batrovic - Canaccord Capital

So, it's not necessarily a comment on the macro.

John Shackleton

Geographic, right. From a pipeline standpoint, we have seen good activity in North America.

Dushan Batrovic - Canaccord Capital

Next from me is, you've had a lot 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've done in the past just as kind of a proxy?

John Shackleton

From a organization standpoint, culture standpoint, what we see, is a bit like a Hummingbird. All these people know the technology, know our space, good cultural fit. I think the difference is obviously that Hummingbird wasn't in its larger decline as Vignette has been.

I think the difference is the surprise we've seen with the synergies of both the products and people with Vignette has been very positive. And the cultural fit. I think from all the acquisitions we've done the Vignette management team and people everyone we've met have been much more open, cooperative and it's gone very smoothly.

Dushan Batrovic - Canaccord Capital

Okay. And last one from me is on the Social Media side. It sounds like a really interesting long-term opportunity. Maybe if you 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?

John Shackleton

Again, I think you'll get a fairly good feel for it if you attend the October analyst meeting where we will be showing roadmaps. We're seeing particular interest in governments, and particularly around the areas of mobile computing as well, where many companies can see the advantage of being able to hit their mission-critical systems through their mobile phones being totally secure and yet integrate all the content.

Operator

Our next question comes from Blair Abernethy from Thomas Weisel Partners.

Blair Abernethy - Thomas Weisel Partners

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 we've 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?

Paul McFeeters

So the license margin, I would guide you more to the annual margin. Each quarter has a little different mix. What's really in that cost Blair is the third-party royalties, so it fluctuates from quarter-to-quarter somewhat based on the mix of what we sell and the royalties that drags with it. So I'd look more to the annual margin going forward.

Similarly on the service side, I think that we are settling in on a combined margin there, just I would say between 18 and 20, and I wouldn't draw that into that and I think that's how we'd think about it going forward.

John Shackleton

Right. I think particularly in this economy Blair that we want to work closely with customers, help customers, and so I don't see us increasing the margins on PS too much in the near future.

Blair Abernethy - Thomas Weisel Partners

Paul, 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?

Paul McFeeters

As you know through the year each of our fiscal quarters, one to three, we were using an operating after tax rate of 30%, so the adjustment at 28% for those previous quarters was equal to $0.04 and is applied and I put a chart in the press release, so you can see it later, but adjusted upwards EPS $0.01 in Q1, $0.02 in Q2, $0.01 in Q3, that's how the $0.04 was distributed. And as I said, I put that in a chart also at the end of the press release.

Blair Abernethy - Thomas Weisel Partners

Just on the large deals, one of you just give us more color on the three large transaction sort of what sort of products or what areas drove those deals? John, can you hear me, okay.

John Shackleton

Yes, I can.

Blair Abernethy - Thomas Weisel Partners

Okay. So, its Blair, I just said a couple more quick questions. Just on the large deals, I just want to get some sense of, what are the solutions or what types of things your customers are doing on the big three, but also even on the large 15 deals. Where are you getting traction in this weak market?

John Shackleton

So it's pretty much of a mix between areas around interfaces to their ERP systems, so they are using the content management with ERP, but also customers using Livelink with their Web Content Management as we've explained at the extranet. I would say a mix 50-50 between compliance based working typically with ERP systems and then the others around managing that content, particularly around managing their email archiving and that kind of thing.

Blair Abernethy - Thomas Weisel Partners

What do you see in the eDiscovery space?

John Shackleton

When I say compliance that's really is tied to eDiscovery, so quite a bit in that area.

Blair Abernethy - Thomas Weisel Partners

Okay, you are putting that in there. 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?

John Shackleton

We've seen a slight decline, but not as much as the decline when we took it over. So it's fairly stabilized, declining but we see opportunities to grow that business as well as cross sell our products into that customer base.

Operator

Our next question comes from Scott Penner with TD Newcrest.

Scott Penner - TD Newcrest

Just a couple of things, one is John or Paul and you integrate the Vignette acquisition, you mentioned the PS margin has been 18 to 20, is there going to be a shocked downward initially?

Paul McFeeters

No, no. I don't anything happened. Might be during the first quarter, but I don't think anything. We are not expecting anything dramatic.

Scott Penner - TD Newcrest

Okay. And the other thing is the Hummingbird installed base that was always presumably fairly hungry for new technology when you bought the company. I mean where is that in the upgraded cycle? Is that part of the ongoing model right now or are there still a substantial opportunity to sell those people new technology?

Paul McFeeters

So, yes to both. Really we've done well over the past two years of cross-selling and help supporting the existing Hummingbird base. But I think there is great potential to do a lot more.

Scott Penner - TD Newcrest

That upgrade revenue, is that in your thinking when you give that single-digit type growth rate or would you consider that additional opportunity?

John Shackleton

Really we would look at it this way. If the economy continues the way it is, supporting our existing base up-selling and cross-selling into that base, we will be the number one strategy that we will do and supporting our existing customer base.

We think we can, I think we can do it more efficiently in these areas. So I do think there is some upside, but just focusing on our basis, our penetration at the base in most cases is it being 20% max, so lots of opportunities.

Operator

Our next question comes from Ralph Garcea with Haywood Securities.

Ralph Garcea - Haywood Securities

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?

John Shackleton

That certainly is a possibility. We've never had a customer, I don't think go above 10, certainly not in the 10 years that I have been there. But there is a lot of work going on that I see potential.

Ralph Garcea - Haywood Securities

And Ontario was 10 years, federal government was seven I think or…

John Shackleton

That's right.

Ralph Garcea - Haywood Securities

And is there other possibilities within some of the larger provinces?

John Shackleton

Yes, absolutely. As well as even potential to grow within those, both the Ontario and federal, as well as some other things that we’re doing with the Canadian Governments would be applicable to other governments as well.

Ralph Garcea - Haywood Securities

You talked a lot about the SAP integration and the success there. What do you see in the future now with Oracle using 11g network coming out and opportunities there, now that there are so much [like] product for you.

John Shackleton

We’ve been very pleased with the growth of our relationship with Microsoft, we’ve been doing a lot of work this past year with them, and we’re seeing that coming along nicely. We do see indications with Oracle that they are very interested in some of the thing that we’re doing with JD Edwards and PeopleSoft etcetera. So we are beginning to see more, more work with this as well.

Ralph Garcea - Haywood Securities

Would the SharePoint opportunity and SAP sort of be a similar size rate now or…

John Shackleton

SAP is over largest but that the Microsoft SharePoint certainly has grown.

Operator

Our next question come from Gabriel Leung with Paradigm Capital.

Gabriel Leung - Paradigm Capital

John just going to back to the Social Media platform for a second. Can you talk about how bookings have trended for that product since you released in June, and whether or not some of your initial [beta] sites for the platform has converted into or are planning to convert into full deployments?

John Shackleton

To the last question, yes some are doing that. On the revenues at this point, some of them have been existing customers, that's really part of their maintains upgrade, that we’ve been working with. And again what we’ll be seeing is mainly trying to sell this in to our existing base.

Gabriel Leung - Paradigm Capital

Just going back to your comments around further ECM being flat to single digit growth. Is your expectation for Open Text based on an organic basis to continue to exceed sort of industry averages?

John Shackleton

That's the goal. We believe this past year, we did exceed our competition, but we got monthly share and I would see that continuing.

Gabriel Leung - Paradigm Capital

One question for you, Paul. Just on the G&A, we know that it pick up a little bit sequentially. Was that just sort of some year-end cost? So we could expect that on a standalone basis, anyway to sort of drop back down again Q1.

Paul McFeeters

That's right. I think, year-over-year we went from 9.7 to 9.4, so I look at it on that basis.

Operator

Our next question is a follow-up question with Richard Tse with National Bank Financial.

Richard Tse - National Bank Financial

You didn't talk about the maintenance renewal rates here this past quarter, how are those stand right now?

John Shackleton

It's still in the low 90s, Richard. For us, obviously the Vignette had been dropping slightly and our goal will be [taking] our hands around that as quickly as we can and stabilize that.

Richard Tse - National Bank Financial

You've been able to get price increases on a maintenance base or as it essentially flat to last year?

John Shackleton

A little increase, but not as much as what we'd usually do, so I would say pretty flat.

Richard Tse - National Bank Financial

Operator

(Operator Instructions) Mr. Shackleton, there are no further questions at this time, please proceed.

John Shackleton

Okay. Thank you everyone for your questions and just to wrap on the quarter's highlights, Q4 revenue was disappointing, but we had a decent year. We met all our profit goals in a very difficult environment. I am optimistic on our outlook for fiscal 2010. The acquisition of Vignette strengthens our ECM leadership position and the integration is on plan. We'd like to thank our employees and customers and partners for the tremendous support over this past year and going forward, we expect to see single-digit growth for revenues, double-digit growth for adjusted earnings.

So this concludes our call for today. Thank you everyone for participating and for your questions.

Operator

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

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Source: Open Text Corporation F4Q09 (Qtr End 06/30/2009) Earnings Call Transcript
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