Open Text Corp (OTEX)

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Open Text CEO Discusses Q2 2011 Earnings Call Transcript
February 02, 2011

Good evening, ladies and gentlemen, and thank you for standing by. Welcome to the Open Text Corp. Second Quarter Fiscal Year 2011 Financial Results Conference Call. [Operator Instructions] I will now turn the conference over to your host, Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Greg Secord

Thank you, and thank you, everyone, for joining us. Please note that 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 that 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 or 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 Form 10-K and Form 10-Qs of Open Text, as well as in our press release that was issued earlier today.

And with that, I'll turn the call over to Paul.

Paul McFeeters

Thank you, Greg. I will highlight the results for the second quarter. Total revenue for the quarter was $267.5 million, up 8% compared to $247.8 million for the same period last year. License revenue for the quarter was $79.2 million, up 9% compared to $72.7 million reported for the same period last year. Maintenance revenue for the quarter was $136.7 million, up 5% compared to $130.3 million for the same period last year. Services and other revenue in the quarter was $51.6 million, up 15% compared to $44.8 million in the same period last year.

Gross margin for the second quarter before amortization of acquired technology was 75%, which remained consistent compared with the same period last year. Adjusted operating income increased 18% to $84.5 million or 32% adjusted operating margin from $71.4 million or 29% adjusted operating margin in Q2 last year.

Adjusted net income increased 41% to $70.5 million this quarter from $50.1 million in the second quarter last year. Second quarter adjusted earnings per share was $1.21 on a diluted basis, up from $0.87 per share for the same period a year ago. The adjusted tax rate for the quarter was 14%. We expect the FY '11 adjusted tax rate to be between 12% and 14% and cash taxes to be in the 5% to 10% range.

Net income for the second quarter, in accordance with GAAP, was $37.1 million or $0.64 per share on a diluted basis compared to $21.2 million or $0.37 per share on a diluted basis for the same period a year ago or approximately 51.8 million shares outstanding on a fully diluted basis for the quarter.

Operating cash flow in the quarter was $40 million compared to $32.5 million in the same period last year, an increase of $7.5 million. After the impact of special charges incurred in the quarter, operating cash flow would've been $45 million for the quarter versus $40 million in the same period last year.

On a year-to-date basis, operating cash flow was $89 million compared to $37 million in the same period last year, an increase of $52 million. Absent the impact of cash paid related to special charges, we did operating cash flow of $101 million compared to $54 million for the first six months last year.

On the balance sheet, at December 31, 2010, deferred revenue was $214 million compared to $230 million as of June 30, 2010, and accounts receivable was $135 million compared to $132 million at the end of last year. Days sales outstanding were 44 days as of December 31, 2010 compared to 50 days at the end of last year and 52 days at the end of Q2 last year.

The sequential effect of foreign currency movement on adjusted earnings per share was a positive $0.02. In comparison to the second quarter of last year, the foreign currency impact on adjusted earnings per share was a negative $0.06.

We closed the StreamServe acquisition on October 27, 2010. Total consideration for this acquisition was $57.2 million net of cash acquired. StreamServe was accretive to our operational results and contributed $0.03 to our adjusted earnings per share for the quarter. There's no changes to our pretax adjusted operating model for this quarter, and we expect our annual operating net margin model to continue to be in the range of 25% to 30%. The full details of our operating model are available on our website.

Today, we announced that we entered into a definitive merger agreement with Metastorm, a leading provider of Business Process Management, Business Process Analysis and Enterprise Architecture software. Total consideration for this acquisition is expected to be approximately $172 million net of cash acquired. The purchase consideration is subject to customary repurchase price and holdback adjustments.

Metastorm's revenue run rate is approximate the $70 million to $75 million on an annual basis and is breakeven on profits and slightly positive on an EBITDA basis. Transaction is expected to close in our third quarter and is subject to customary approvals and Metastorm stockholder consent. At that time, we will issue more information with regard to our integration plan.

Now I'll turn the call over to John.

John Shackleton

Thank you, Paul. Hello, everyone, and thank you for joining us today. I'm very pleased with our second quarter results. We are on track for our year, and all geographies had excellent results throughout the quarter.

As Paul mentioned, we generated $79.2 million of license revenue in the quarter. Geographically, the Americas were responsible for 53% of revenue, Europe, 41% with the remaining 6% coming from Asia Pac. Of the license revenue, approximately 37% came from new customers and 63% from our install base.

We had 13 transactions over $500,000, an additional 6 transactions over $1 million. This compared to nine transactions over $500,000 and six transactions over $1 million a year ago. Average transaction size was approximately $290,000, which is relatively unchanged from last quarter. The larger transactions in the quarter came from the public sector, financial services, high-tech manufacturing and the petrochemical industry.

Examples of customers that board in the quarter include SABIC, one of the world's top petrochemical companies in Saudi Arabia. They purchased Open Text ECM Suite to provide their 37,000 users around the world with a single integrated ECM solution but included integration with SAP, with Microsoft SharePoint. An Open Text strategic alliance with SAP and Microsoft were key factors in the SABIC's selection of us.

Another customer was Scottish and Southern Energy, one of the largest energy companies in the U.K. They purchased several components of the Open Text ECM Suite, including Content Lifecycle Management and e-mail archiving for both Microsoft Exchange and IBM Lotus Notes.

Trinity Mirror, one of the U.K.'s largest newspaper publishers, purchased Open Text Content Management, the complete suite of Open Text Content Analytics and Open Text Semantic Navigation. Trinity Mirror will implement the suite to manage high volumes of incoming content feeds and rich media, which are expected to dramatically increase during the 2012 Olympic Games in London.

Fonterra, a leading multinational dairy company, extended its investment in Open Text technology with the purchase of Content Server, Extended ECM for SAP, Contract Management and CLM Services for SharePoint. The Open Text ECM Suite will facilitate the sharing of information and knowledge to ensure compliance and address risk management across the organization.

In Q2, we saw license revenue broken down by vertical as 20% from technology, 16% from services, 15% from financial services, 15% from natural resources and base materials, 11% from public sector, 6% from healthcare, 6% from consumer goods, 6% for industrial goods and 5% from utilities. Once again, compliance-based solutions were responsible for approximately 60% to 70% of license sales. And despite government spending CapEx, we continued to see pipeline gains in the government vertical over the long term.

From a sales operation standpoint, we closed the quarter with a combined sales force of over 364 quota-carrying sales execs, up from 323 last quarter. With the addition of StreamServe sales reps plus some recent hires, we now have more than sufficient capacity to meet our annual plan.

Maintenance retention rates in the quarter remained the same, roughly in the low 90s. License revenue from partners and resellers was approximately 38% in the quarter. SAP continues to track well at approximately 10% of annual license sales.

With Microsoft, we announced that we recertified our records management and Microsoft solutions against the DoD standards. We're the only leading ECM vendor to have certified solutions with SharePoint 2010.

The Oracle relationship is progressing well, with Oracle influencing one of the larger transactions in the quarter. With SAP, we announced a series of enhancements to our extended ECM for the use with SAP solutions. These enhancements will allow users to access shared workspace and collaborate on content relating to SAP business transactions.

At Content World in November, we profiled Open Text ECM Suite 2010. This is the largest product release in our company's history. All the major components of this suite are now shipping and actually drove several key transactions this quarter.

Also at Content World, we showcased the new release of Open Text Everywhere, our mobile ECM offering, enabling businesses, users to gain access to critical content and processes from their iPads and iPhones.

Open Text Social Media was once again used as the social forum for the G-20, this time in Seoul, South Korea, and we're encouraged by the demand we're seeing for our Social Workplace solution. Currently, we have close to 40 customers and process installations using these new products.

This week, we announced the availability of Open Text portal solutions. It brings together content from Open Text ECM Suite and many other sources into a single, highly flexible and personalized interface for Internet, extranet and customer-facing websites.

As you may recall, last quarter, we announced the agreement to acquire StreamServe, adding document output and customer communication management software to the Open Text ECM Suite. This quarter, we introduced Open Text StreamServe Persuasion version 5, which helps increase the efficiency of document-based communications and improves customer engagement with easy integration with ERP systems.

As Paul mentioned, today, we announced that we have reached an agreement to acquire Metastorm, a provider of software for Business Process Management, Business Process Analysis, as well as enterprise and business architecture. We look forward to welcoming their employees and customers after the transaction closes, which should be by the end of the current quarter. Once it's closed, we'll be happy to share our integration and go-to-market plans with you.

Turning to our outlook for the remainder of FY 2011. The industry analysts are telling us they expect the ECM license revenue to grow at an average of 7% to just over 10%, slightly up from last quarter. This will be through 2013. And while we're not providing guidance, we feel confident with our business model. From a seasonality perspective, we're working hard to smooth out our pipeline, and we'll be focusing on reviewing our sales forecast in detail and our pipeline visibility and predictability is improving.

So in summary, we had an excellent quarter across the board. We exceeded our margin targets, delivering record profits for our shareholders and are tracking to our model for the rest of the year. We remain positive on the outlook for fiscal 2011.

With that, I'd like to open the line for questions.

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