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Open Text Corporation (NASDAQ:OTEX)

F2Q10 Earnings Call

February 3, 2010 5:00 pm ET

Executives

Greg Secord – Vice President Investor Relations

John Shackelton – President, Chief Executive Officer & Director

Paul J. McFeeters – Chief Financial Officer

Analysts

Scott Penner – TD Newcrest

Tom Liston – Versant Partners

Michael Abramsky – RBC Capital Markets

Richard Tse – National Bank Financial

Brian Freed – Morgan Keegan

Blair Abernethy – Thomas Weisel Partners

Paul Lechem – CIBC World Markets, Inc.

Derrick Wood – Wedbush Securities

Dushan Batrovic – Dundee Securities

Gabriel Leung – Paradigm Capital, Inc.

Operator

Welcome to the Open Text Corporation second quarter fiscal 2010 financial results conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. (Operator Instructions) I would like to remind everyone that this conference is being recorded today, Wednesday February 3, 2010 at 5 pm Eastern. I would now like to turn the conference over to Mr. Greg Secord, Vice President Investor Relations.

Greg Secord

With me today are John Shackelton, our President and Chief Executive Officer and Paul McFeeters, our Chief Financial Officer. During the course of the conference call we may make projections or other forward-looking statements relating to the future performance of Open Text or its subsidiary. 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 Open Text’s Form 10K for the fiscal year ended June 30, 2009 and Form 10Q for our first quarter ended September 30, 2009 as well as in our press release that was issued earlier today.

With that I would like to turn the call over to Paul McFeeters.

Paul J. McFeeters

Starting with the financial results for our second quarter and fiscal 2010, total revenue was $247.8 million up 19% compared to $207.7 million for the same period last year. License revenue was $72.7 million up 12% compared to $54.9 million reported last year. Maintenance revenue was $130.3 million up 30% compared to $100.4 million last year. Maintenance revenue was reduced by $600,000 as a result of purchase price adjustments related to the Vignette and Captaris acquisition.

Services and other revenue was $44.8 million up 6% compared to $42.4 million in the same period last year. We reported second quarter adjusted net income of $50.1 million or $0.87 per share on a diluted basis, up 47% compared to $34 million or $0.64 per share on a diluted basis the same period a year ago. The gross margin for the second quarter before amortization of acquired technology was 74.8% compared to 73.7% in the second quarter last year. The increase is primarily due to favorable revenue mix.

Professional services and other margin was 18.7% compared to 24.7% in the same quarter last year. A decrease in margin is primarily due to lower margins on acquired professional service contracts and some delayed implementations. The margin target for professional services is 20%. Pre-tax adjusted operating margin before interest expense was 28.8% in the second quarter compared to 25.9% in the same quarter last year. The adjusted tax rate for the quarter was 27%, the same as Q1 and down from 30% in the same quarter last year.

Operating cash flow in the third quarter was $32.5 million compared to $39.8 million in the same period last year. While net income was higher by $20 million there were restructuring cash payments of $7 million and negative working capital changes of $20 million, substantially a timing difference. Net income for the second quarter in accordance with GAAP was $21.2 million or $0.37 per share on a dilute basis compared to $.8 million or $0.01 per share on a dilutive basis the same period a year ago.

There were approximately 57.4 million shares outstanding on a fully diluted basis for the quarter. Foreign exchange movements positively impacted the current quarter’s adjusted earnings by less than $0.01 per share. The mark-to-market impact of the change in fair value of the interest rate collar was $1.2 million in the current quarter. The interest collar expired on December 31, 2009.

On the balance sheet at December 31, 2009 cash was $247.6 million compared with $275.8 million at June 30, 2009. In that period the net cash paid for the Vignette acquisition was $80.6 million. Accounts receivable was $143.4 million up from $115.8 million at the end of our June quarter. Days sales outstanding was 52 days as of December 31, 2009 compared to 58 days for the previous quarter and 53 days at the end of Q2 last year.

As part of the Vignette acquisition, we stated that we would reduce worldwide employment, continue to rationalize facilities at Open Text and Vignette. To date, we have recorded an expense within special charges of $20.6 million and expect to incur an additional charge of approximately $12 million made up of $9 million for work force reduction and $3 million for facilities.

The cost savings as a result of these actions continue to be line with our previous estimates at an annual run rate savings of approximately $40 million to $50 million compared to the combined cost space pre-acquisition. The acquisition of Vignette was accretive to our results in Q2 slightly ahead of our original plan.

Now, turning to the company’s pre-tax adjusted operating margin model. We are confident in our plan to maintain expenses in the 14% to 15% range for development, 24% to 26% for sales and marketing, 9% to 10% for G&A and 2% for depreciation. Our annual operating net margin is projected to be in the 22% to 27% range and we expect to operate at the upper end of that range.

I will now turn the call over to John.

John Shackelton

I’m very pleased with our performance this quarter. Sales were consistent across the board in all geographies and verticals. Our strong license revenue growth in the quarter brought us where we expected to be year-to-date. In Q2 North America was responsible for 50% of the revenue, Europe for 43% with the remaining 7% coming from Asia Pac, fairly consistent with Q2 in prior years.

The core ECM business did well driven by compliance based solutions. In the quarter we saw license revenue grow in most verticals with 22% from government, 19% from high tech and manufacturing, 15% from energy, 13% from financial services and 10% from healthcare and life sciences. Of this license revenue approximately 35% came from new customer and 65% of our install base. Most of our large transactions were from follow on sales to existing customers.

The average transaction size is approximately $290,000 slightly down from our last quarter’s $300,000. Examples of significant wins in the quarter include Suncor Energy, an Open Text customer since 2004. Suncor extended its Open Text ECM solutions to include content life cycle management, eForms and SAP integration. Marathon Oil extended their Open Text ECM deployment with SAP applications. Commerce Bank also extended its investment in Open Text and Air Liquide the world leader in industrial gases purchased Open Text content life cycle management and Open Text extended collaboration for about 14,000 users. They have been an Open Text customer since 2003.

In the quarter we had approximately 350 quota carrying sales executive. License revenues from partners and resellers was approximately 43% in the quarter. SAP continues to be our largest partner contributing approximately 10% of our license revenue in the quarter but Microsoft and ORACLE also influenced large transactions and continued to show increasing demand for solutions in archiving, records management and compliance.

This quarter we announced an expansion of our ECM solution for ORACLE applications with the introduction of new content access and accounts payable solutions. Regarding the Vignette integration, it’s progressing well and we are very encouraged by the synergies we see from the combined businesses. On the product side, we released Vignette content management 8.0 and enterprise scale Web Content Management solution which was requested by customers for enhancements that improved usability and included a new user interface and an ergonomic design that makes it easy for non-technical business users to create their own websites.

Keeping with our commitment to Vignette customers, we also released Vignette Portal 8.0 a solution that allows organizations to provide customers, employees and partners with a rich media Internet experience. At Content World in November we also demonstrated our soon to be released mobile offerings for the entire Open Text ECM suite. This will add many unique capabilities for our ECM customers and we see strong demand for these content applications on mobile devices. We are working with RIM, Apple and Motorola and others to position ourselves as the leader in ECM mobility.

Also in the quarter we were positioned in the Leader’s Quadrant of Gartner’s 2009 Magic Quadrant for Enterprise Content Management based on an evaluation of the Open Text completeness of vision and ability to execute. Industry analyst continue to tell us that IT spend in the environment for FY ’10 will still be challenging but they believe the ECM market will grow in the mid single digit range. We still believe we will be at the top of this range.

As a reminder, our revenue seasonality trends in the coming year should be similar to the seasonality we experienced in fiscal 2009. From a profitability standpoint we’re clearly on track with our 22% to 27% adjusted operating margin and expect to be in the upper end of that range as Paul mentioned. We’re also comfortable with current first call consensus estimates for Q3 and Q4.

Now, I’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Penner – TD Newcrest.

Scott Penner – TD Newcrest

Just first of all maybe on the Web Content Management side which has been a source of weakness for the past couple of quarters, did you see any of that spending come back which would be I guess a quarter ahead of what you had expected?

John Shackelton

Yes, we did Scott. It has come back and it was quite a bit of the license revenue came from that area.

Scott Penner – TD Newcrest

You mentioned that seasonality should be in the range of prior years, given the strong December quarter I would guess you would expect there is still some additional [inaudible] backlog?

John Shackelton

I would keep it within a range we’ve seen before. As you remember, Q3 we typically do zero to -5% of Q2 and then Q4 we usually do 5% to 15% of Q3. Really, traditional seasonality and that is for licenses.

Scott Penner – TD Newcrest

You mentioned a couple of large deals that tacked on SAP integration, how is it progressing from the SAP front on the new reseller agreement?

John Shackelton

It’s going very well. We were very pleased with the SAP relationship both in Europe and in North America and we’re also looking at some future additional products that they will be selling in to that channel.

Scott Penner – TD Newcrest

The Vignette [inaudible] and the Portal 8 release, how long do you expect until I guess all of the install base have those products, have it installed and are positioned to upgrade the functionality?

John Shackelton

Many of these large corporations typically do a major upgrade once every 12 months or so. So, I think to get in to their cycle of upgrades it’s going to take 18 months for the majority of the large installations.

Scott Penner – TD Newcrest

Then Paul just if you could remind me the mark-to-market that you said was $1.2 million this quarter, I’m pretty sure that’s in the adjusted income number? Just confirm that and what was the number positive or negative last quarter?

Paul J. McFeeters

Last quarter was about the same so the answer is yes it’s in the adjusted, it’s in the interest line in our financial statements. It was about the same last quarter. A year ago it was actually the other way, a charge of $1.5 just in case you’re comparing the year-over-year, that’s the big change in the interest line. So positive $1.2 last quarter, negative essentially $1.5 in Q2 of ’09?

Scott Penner – TD Newcrest

Just lastly again, Paul the deferred revenue balance on the balance sheet dipped as it always does in the December quarter but it seemed to dip by more than in past years.

Paul J. McFeeters

Unfortunately some of what you have to pick up is as you know the Vignette deferred revenues so there’s a delta there that you have to deal with and a little bit of as you know, the write downs on acquired deferred maintenance both with Captaris and Vignette. So adjusting for that we think it’s fairly normal or fairly seasonal as you point out to come down so period-over-period our analysis shows that it’s on a normalized basis.

Operator

Your next question comes from Tom Liston – Versant Partners.

Tom Liston – Versant Partners

Just a couple of questions around there was some comments obviously Microsoft and we’ve heard and you’re discussing ORACLE improving. Ca you quantify that anymore? You talked about the areas but can you give us a little more context on how they’re progressing and maybe some expectations for this year?

John Shackelton

Basically what we’re seeing with Microsoft we’d seen it initially pickup in the US, we’re now seeing more pickup in Europe and so in general kind of extending SharePoint installations, cooperating with the SharePoint products where we give them additional functionality, scalability, that kind of thing. It’s pretty much as I said now it’s where it started in the US, now it’s on a worldwide basis. On the ORACLE side we’re doing it in the area of PeopleSoft and particularly around expense management, that kind of thing. So we’re seeing some interesting pickup.

Tom Liston – Versant Partners

Has anything changed in go to market or resources invested such that an uptick has occurred?

John Shackelton

We have invested more on the ORACLE side, we already invested significantly in the Microsoft relationship so that’s pretty stable but we have invested recently in the ORACLE side of things. So, we would see certainly by the new fiscal year we should see increases in ORACLE activity.

Tom Liston – Versant Partners

Obviously you went through some leadership changes at your end. Can you just comment on those? And, are there any other pieces you need, maybe the next layer down as you take it to the next level?

John Shackelton

Obviously as we’re growing to be a $2 billion company we need to bring in execs who have been in that billion dollar plus organizations and so we’ve brought in people like Eugene who is our Chief Technology Officer, James Latham, now our new Chief Marketing Officer. These are guys with a lot of experience. Below that we think we’re pretty comfortable now with the team that we’ve got.

Tom Liston – Versant Partners

Just a quick one for Paul, you said the collar is off that debt now or when you applied it against the debt it’s done now?

Paul J. McFeeters

That’s right.

Tom Liston – Versant Partners

So that’s the reason you’re not paying down debt? Obviously it is the lower interest rate because it is still based on LIBOR, correct?

Paul J. McFeeters

That is correct.

Operator

Your next question comes from Michael Abramsky – RBC Capital Markets.

Michael Abramsky – RBC Capital Markets

John I just want to reconcile, you beat [Hanly] Street on the top line about $40 million and on the bottom line about $0.17 so why just say you’re comfortable with the next two quarters at Street because wouldn’t that sort of be lowering your guidance or outlook because last quarter you said you were comfortable with full year top line and bottom line?

John Shackelton

We are comfortable with full year top line and bottom line. Q1 was a little weak if you remember on the license and so we feel Q2 has made that license revenue up so we feel pretty comfortable in line.

Michael Abramsky – RBC Capital Markets

Right but at the last quarter – this is before The Street is obviously going to include this quarter in their numbers so why wouldn’t you flow through the numbers and say you’re now comfortable with higher than Street because you were comfortable with Q2, Q4 last quarter so if you’ve beaten them this quarter wouldn’t that flow through to a higher outlook?

John Shackelton

You could say that but we prefer to be conservative. In this economy you never know.

Michael Abramsky – RBC Capital Markets

I appreciate that and I don’t want to beat a dead horse here but are you then saying you have lower visibility now on last quarter and the last two quarters of the year or this is sort of an anomalous situation and maybe not sustainable through the end of the year? Why would you not now say, okay, we’re comfortable with Street plus 40 and Street plus $0.17?

John Shackelton

What we’re saying is that we feel year-to-date the two quarters together we’re exactly where we needed to be on our budget. We feel as looking at Q3 and Q4 we feel the first call estimates are in line with what we think and we’d leave it at that.

Michael Abramsky – RBC Capital Markets

On Vignette, what was the contribution in the quarter? And, is the license mix of Vignette you said was pretty high so I assume that’s above the normal 80% to 85% services that they comprise?

Paul J. McFeeters

The GAAP contribution for Vignette was $2 million. Total revenue was $30 and they were in the past typically one third in total revenue of license.

Michael Abramsky – RBC Capital Markets

So what is the case this quarter? Is it higher?

Paul J. McFeeters

No, it’s not higher. It’s not reducing quite as fast as John had anticipated which is why we’re doing better also this quarter that we said it became accretive so it’s less than that as a percentage. As you know we don’t break it out but it is a bit less than that as a percentage now.

Michael Abramsky – RBC Capital Markets

Then just to clarify kind of going forward, we should think about license the next couple of quarters you said down zero to 5% this level and then Q4 up 10% to 15% from that level?

John Shackelton

Yes, which would be in the range of the first call license revenues.

Michael Abramsky – RBC Capital Markets

SAP largest 10%, I think this is the first time you’ve sort of broken that out. Is that unusually large?

John Shackelton

For SAP this is their Q4 so this is usually their best quarter but it was certainly better than last year.

Michael Abramsky – RBC Capital Markets

Again, is that sustainable in terms of that contribution?

John Shackelton

I would say it’s sustainable but based on their seasonality. So obviously they always have a very strong Q4 but a fairly low Q1. But, we would expect to follow that seasonality but absolutely sustainable. We certainly see the pipeline growing with SAP. We’re very happy with that.

Operator

Your next question comes from Richard Tse – National Bank Financial.

Richard Tse – National Bank Financial

Just a couple of quick ones here, the tone sounds like it’s improved obviously. Can you give us a sense of what you’re hearing from your accounts versus last quarter? I think you seemed a bit more conservative last quarter obviously with these results you’re a bit more comfortable here?

John Shackelton

I think Richard the key was if you looked at last year as usually at our November Content World, last year we talked to a lot of our CIOs that were looking at starting new projects in the new year and some of that didn’t happen so we were being cautiously optimistic because we heard this year the same thing, that a lot of new projects were going to begin in the new year and this time they did so I think that’s where we were being cautious.

While we think the pipeline is certainly picking up I think there’s still an ongoing cautiousness from the IT spending, etc. that they’re being very careful where they put their money. Luckily, as the analyst point out one of the key areas that they are spending is in the ECM space.

Richard Tse – National Bank Financial

I guess specifically on the products, you mentioned compliance being the driver here. Can you give us a bit more color in terms of the product specifically in sort of the [inaudible].

John Shackelton

So a lot still around the compliance and discovery but as we mentioned earlier, we have seen a pick up this quarter in the Web Content Management side of things which was a pleasing area. The other piece would be we saw quite a bit in the integration to SAP applications.

Richard Tse – National Bank Financial

The with respect to some of the products you’ve been showcasing like the social media and the mobile ,what are you guys targeting in terms of the first year of those product launches of your base that you think would convert and sign up for those products?

John Shackelton

We’re see significant interest particularly in the government space for social media and mobile. For mobile particularly in the military side of things. It’s a little early to say, I could tell you better in Q4 as we release the products in next quarter what the pickup will be. Certainly in governments we see quite a tick up. We’re very bullish with what’s happening in the government space with mobile computing.

Operator

Your next question comes from Brian Freed – Morgan Keegan.

Brian Freed – Morgan Keegan

Real quick, as you look out at the competitive landscape you seem to be gaining or maintaining share versus the big guess like IBM and EMC but there’s a pretty large number of small SAS space competitors popping up on the radar screen. Can you talk a little bit about how you see the opportunities for ECM playing out in the software as a service market, how you look to address that over time?

John Shackelton

In the small to medium size companies we see software as a service as a great opportunity and we have services in that area, we will expand services in that area particularly again, governments are very interested in this. But, I would see it also more in as I said small to medium. We’re looking at this very closely, things like social media, digital asset management, etc. are naturals for this and so we’re talking to a number of our customer base. The interesting thing is I think we’ll see a blend of both.

So for the big corporations while they might do SAS or cloud computing for a specific application there will be still things they will want to keep very secure behind the firewall. It’s interesting that we see the SAS products mainly as a speed to deploy not so much as a cheaper alternative. If you’re looking where the IT organization is installing or upgrading new products once a year, if I can get it from an outside vendor within weeks or certainly months that’s an attractive alternative and that’s what many of the customers are looking for.

Operator

Your next question comes from Blair Abernethy – Thomas Weisel Partners.

Blair Abernethy – Thomas Weisel Partners

A couple of things, you’ve talked a little bit about the Vignette Web Content Management John, what’s happening over on the RedDot side?

John Shackelton

On the RedDot side again what we see is this is more for the small to medium sized companies. We see a big interest in that particularly in the European space and so we will actually be focusing and expanding the functionality of the RedDot product focused on that small to medium sized companies but also particularly around the software as a service opportunity with that product.

Blair Abernethy – Thomas Weisel Partners

Did that business grow year-over-year?

John Shackelton

It was probably flat year-over-year and again, I think as we mentioned before as people saw the Vignette acquisition they were holding off thinking, “Do we invest now? Do we wait and see what happens?” Now, I would expect it to pick up.

Blair Abernethy – Thomas Weisel Partners

In terms of your large deals, you didn’t break it down very much for us. Can you give us a sense of number of deals?

John Shackelton

There were six deals over $1 million and it was probably 50/50 between government and oil and gas utilities. Then, we saw quite an increase of deals in the $500,000 range. I don’t have that number at the top of my head but we’ll get it for you. I think it was around nine which was up from last year.

Blair Abernethy – Thomas Weisel Partners

Were there any deals north of $2 or $3 million, individual deals?

John Shackelton

A couple of those deals were north of $2 million, yes.

Blair Abernethy – Thomas Weisel Partners

Also, can you talk a little bit about the legal vertical which was obviously one of the core areas for Hummingbird and just sort of how you see that vertical playing out these days and what you’re doing in that market?

John Shackelton

What we see around eDiscovery is very hard market and while we see with the large law firms a great opportunity, we also though are selling more to the large corporation legal departments where they’re actually reducing their external legal costs. We see that as a much bigger market than selling to a specific law firm and that’s where our focus has been on eDiscovery and will continue to be.

Blair Abernethy – Thomas Weisel Partners

How has that vertical held up during the recession?

John Shackelton

Actually very well because of eDiscovery, particularly in the financial services area.

Blair Abernethy – Thomas Weisel Partners

Just another question on the sales side, what’s your rep count and sort of if you break out where the reps geographically are located now?

John Shackelton

The end of quarter headcount is 350 and it’s pretty much I would say 50% would be North America, 40%, 43%, 45% would be Europe and 6% Asia Pac. Pretty much as it followed the revenue.

Blair Abernethy – Thomas Weisel Partners

Last question for me, Paul just on the debt going forward what are your debt repayment plans?

Paul J. McFeeters

I think for the near term it would still be just to make the minimum 1% repayment.

Operator

Your next question comes from Paul Lechem – CIBC World Markets, Inc.

Paul Lechem – CIBC World Markets, Inc.

Going back to the license number in the quarter, should we view that sort of as a onetime catch up from the pent up demand of the Web Content Management customers holding off around the integration period of Vignette?

John Shackelton

Yes, and with also a little bit of catch up on Q1 where things got delayed a little bit. But, yes.

Paul Lechem – CIBC World Markets, Inc.

Your views on the pipeline and backlog at this point in time versus a quarter ago ex that kind of pent up demand, can you give some color around just the general sales activity?

John Shackelton

We see the pipelines stronger certainly but again, I think there is still with our CIOs a kind of cautious while they’re starting projects they’re concerned that their budgets might get cut again so they are being very cautious in the way they do things. Some of the things we’ve done again is the chunking of large deals so that we might break a deal up in to three quarters, four quarters, that kind of thing and we see people wanting to do that.

Paul Lechem – CIBC World Markets, Inc.

You made some changes to your US sales force in terms of organization and focus in the last year. Can you give us a sense of where that is at and what you are seeing? Have you completed that process? Is there more to come? What does it mean going forward?

John Shackelton

Basically, that focus was to focus more on the customer base to provide more support to that customer base and more of a large account management process. We have completed that process and we are seeing the results of that. I think again, one of the strong reasons for Q2 is that the US did have a good quarter. Having said that though, I think from a economic side of things the US is still probably hurting more than most countries.

Paul Lechem – CIBC World Markets, Inc.

On the SAP expanded reseller agreement you signed with them last quarter, is it too soon to give us any tangible evidence that it’s actually working? When should we start to see tangible signs and how can you sort of gage that?

John Shackelton

I think obviously a leading indicator is that SAP is coming back to us asking to sell more of our products so that’s an actual. I believe we are actually their fastest growing if not the most fastest growing partner, certainly in the top two and there’s a lot of interest around this area from the SAP rep so we certainly see significant growth this coming year looking at their pipeline.

Paul Lechem – CIBC World Markets, Inc.

Do you have insight in to their pipeline?

John Shackelton

Yes, we share our pipelines on a very regular basis. We have a very close working relationship with their field and yes, we share both our pipelines.

Paul Lechem – CIBC World Markets, Inc.

Then just two quick questions for Paul if I may, one is on the timing of the remaining Vignette restructuring charges, or I should say Vignette exclusively but the restructuring charges stemming from that acquisition? Are they still likely to be done by the end of this fiscal year?

Paul J. McFeeters

Certainly the charges Paul will be. There may be some continuing cash flow payments passing in the fiscal year but you should expect the balance I referred to of $12 million to be all accrued by the end of the fiscal year and charged to earnings by the end of the fiscal year.

Paul Lechem – CIBC World Markets, Inc.

On your amortization of intangibles is there anything expected to roll of the current level any time soon or should we expect it to kind of remain in this ballpark?

Paul J. McFeeters

It will remain in this ballpark including the Vignette of course increase for a few years. The schedule will show in the 10Q but it will remain at this level for a few years.

Operator

Your next question comes from Derrick Wood – Wedbush Securities.

Derrick Wood – Wedbush Securities

You said Web Content Management is picking up, obviously some of it due to some quarterly catch up. Aside from that, are you seeing greater willingness to spend or Web Content Management initiatives still a little lower in priority?

John Shackelton

I think Derrick you’re right, it is still a little lower in priority. I think the traditionally ECM compliance, document management, records management, interfacing to ERP systems is still the main driver but we have seen particularly for companies who are again in rich media, who do a lot of their commerce through websites have begun to open that up again and to initiate projects.

Derrick Wood – Wedbush Securities

It may be too early but what’s the feedback been on the 8.0 release?

John Shackelton

From the beta sites we’ve been working on it’s been very positive. One of the good things that has come of it is the products are much more stable, the way we do QA and releases are a little more reliable and consistent than they had been in the past. So the feedback we’ve got in general from the customers as well as a lot of the features in that release were kind of customer requested and they’ve been requested for probably two years. So there’s quite an interesting anticipation of using the product.

Derrick Wood – Wedbush Securities

Just to get some clarity still on the WCM side, the catch up was that more on the Vignette side or the RedDot side or a combination?

John Shackelton

It was a combination.

Derrick Wood – Wedbush Securities

In terms of the outlook you guys aren’t really changing your stance obviously at this point but what would it take for you to get more positive or better visibility or confidence in growth beginning to accelerate sustainably going forward?

John Shackelton

I think the key area of nervousness for me is the US economy. Very positive in Europe, very positive in Asia Pac, it’s just concern over the US. Canada also doing very well.

Derrick Wood – Wedbush Securities

Last question and I’ll let you go, on the SAP front can I get some clarity on how you guys record revenue? I thought it was in arrears and so a lot of that revenue would come in January. Has something changed or did SAP just have more of an upfront quarter?

Paul J. McFeeters

Well, basically in some cases it does follow the quarter but in the recent quarters more of the transactions that occurred happened early in the quarter so we were able to recognize it within the quarter.

Operator

Your next question comes from Dushan Batrovic – Dundee Securities.

Dushan Batrovic – Dundee Securities

Just to touch on your outlook one more time, I’m still trying to gage your level of conservatism there. Is it safe to assume that you’re leaving some room for - if the economy does deteriorate further some of the pipeline, some of the visibility that you have you’re leaving room for some of those to be severed or some of those projects to be cut just in case? Is that a fair way to interpret what you’re saying?

John Shackelton

If we looked at last year we had business in the pipeline that was very healthy that had been committed to that suddenly budgets got pulled back and while they had every intent of doing business they no longer had that budget so we’re just being cautious.

Dushan Batrovic – Dundee Securities

So if those projects don’t get cut then you should do a little better than perhaps your outlook?

John Shackelton

Yes.

Dushan Batrovic – Dundee Securities

Also, can you remind us of your priorities for cash right now? If you’re not really planning on paying much debt off in the near term what’s the plan for the cash?

Paul J. McFeeters

Again, we would have three uses that I have already spoke to. We’re not likely going after a reduction of debt. We do have an outstanding repurchase opportunity which is probably kind of second so first remains and has been for a while acquisition opportunities.

Dushan Batrovic – Dundee Securities

You still see a pretty good pipeline now?

John Shackelton

A very healthy pipeline. In fact, it’s probably picked up.

Dushan Batrovic – Dundee Securities

Last question for me is just on the sales organization side, some of the adjustments that you’ve made, quite often there are disruptions that come with those types of moves. Nothing is in the numbers, I mean the numbers were great this quarter but have you seen any, even anecdotally any disruptions that that might still have impacted your group over the past couple of quarters?

John Shackelton

Actually, we just had our achievers club this past week and very positive feelings. I feel very comfortable with the team on a global basis. We started this change over a year ago and so it really is just beginning to pay off we believe. We see there will be a stabilization now and we’ll continue to grow.

Operator

Your next question comes from Gabriel Leung – Paradigm Capital, Inc.

Gabriel Leung – Paradigm Capital, Inc.

Just going back to the discussion around acquisitions, in terms of priorities John are you focusing more on your traditional document management and web content management play or are you sort of looking beyond your core ECM offering to expand upon and can you talk about some of the things you’re looking at?

John Shackelton

So really what we’re looking at is in the traditional document management, etc. it might be more of a regional type thing where we might look to increase our footprint in Asia Pac or in Europe, there are certain areas where we need more professional services, actually in Canada also we need more professional services to help our customers implement our products on a more timely basis so that would be one.

The other area that we are looking at is also what we see in the application solutions for verticals so things like ECM for utility companies or for government, or media like BBC, etc. So they’d be companies with kind of vertical domain expertise providing the kind of ECM in to those areas. That’s where we see the major growth area being in government and government associated companies like utilities, healthcare, etc.

Gabriel Leung – Paradigm Capital, Inc.

Secondly, on the channel partner front I think there was some news over the last week or so about SAP starting to resell some document solutions within I believe it was the insurance and finance verticals. Any comments around that and how you see that playing out between your partnership with SAP?

John Shackelton

We see it really as normal business. We work with SAP but also with ORACLE, Microsoft, so SAP does the same with multiple vendors. We really have a very close relationship, it’s over 20 years old, with very tight integration to the SAP product. We expect, as I mentioned earlier, we are I think the fastest growing partner that I think they have and we certainly have talked to SAP executives that believe that will continue.

Gabriel Leung – Paradigm Capital, Inc.

The just talked about putting some more investments [inaudible] and hoping to get some benefits over the course of the year. Is your view that the ORACLE relationship will evolve very similar to SAP such that ORACLE reps with themselves start selling the Open Text suite?

John Shackelton

Absolutely. Our goal would be to obviously have a similar relationship with them but we’re already beginning to see that the sales reps are doing that, but absolutely. We’ll start with initial specific applications but we would see broadening that relationship.

Gabriel Leung – Paradigm Capital, Inc.

Last question for you Paul, obviously your target in terms of the cost synergies with the Vignette remain a $40 to $50 million on an annualized basis, but can you talk about I guess how much of that was recognized in fiscal Q2? I believe Q1 there was almost no synergies recognized, how about in Q2?

Paul J. McFeeters

Yes, we’re starting to track in Q2. I would put in a $3 to $5 million range for Q2.

Operator

Gentlemen there are no further questions at this time. Please continue.

John Shackelton

Thank you for your questions and just to highlight on Q2, we had a very good quarter with strong license sales bringing us where we expected year-to-date. We’re also pleased with our profitability this quarter generating increased operating margins and strong operational cash flow and we also saw the Vignette integration being slightly ahead of plan. With that, we’ll conclude the call for today and thanks everyone for participating.

Operator

Ladies and gentlemen this concludes the conference call for today. Thank you for your participation and you may now disconnect.

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Source: Open Text Corporation F2Q10 (Qtr Ending 12/31/09) Earnings Call Transcript
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