Open Text Corp (OTEX) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the IXOS quarterly conference call. IXOS disclosed a date -- stock exchange, the financial results for Q1, SY04 (ph), which ended September 30th. The respective 6K disclosure went over the wire this morning and is available for download on our Web site along with the Q1 report. Please note that today's conference is also broadcasted over the Internet and recorded.

Replay information and presentation downloads are available through our IR Web site. In case you have any difficulties following the call or accessing the slides, please feel free to contact our IR hotline at 49 89-429-2400.

This analyst's conference call and Web cast is hosted by our CFO Peter Rau. He will discuss our financial and operational performance for the period under review. At the end of his presentation we appreciate your questions.

Before we get started with Peter's presentation, let me briefly read the disclaimer for today's conference, corporate statement.

Please note that except for historical information, matters discussed in today's conference call may contain forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

The factors that affect the company's future financial results are discussed in detail and the company's filing with the Securities and Exchange Commission dated December 23rd 2002 and June 30th 2003.

With that I'd like to hand over to Peter Rau.

Yes, Carla (ph), thank you very much. Ladies and gentlemen, on behalf of the IXOS executive board I will also like to welcome you to today's conference call. Now after all press releases and conferences in conjunction with the announcement of the M&A transaction, which - it was open text, I would like to return to our operational business over the course of this call.

So let me right jump in to the operational highlights of the first quarter of fiscal year 2003 - 2004 on page four of your presentation.

One highlight certainly was the international expansion of our partner phase program. Here we identified our business relationships with large system integrators in storage vendors. The ones I would like to mention in this call are both of which, you know, supported both the deals we did in the first quarter. It's bearing point -- you know, bearing point to us to strike deals with Aventis, the pharmaceutical group in France, and T Systems in Germany, you know, that supported us in larger deal with the LVA (ph) -- you know, that is an insurance association in Germany, you know, where we signed, you know, significant (INAUDIBLE) in the first quarter.

We were also able to report strong demand for integrated workflow in content management products. As a matter of fact, 19 percent of total licensed sales, you know, were coming from that end. Now this is mainly due to the successful "cross and up" selling potential, which we used successfully in the first quarter, as well as the roll out of the IXOS-eCON process product line, in particular in the US, India and Germany.

Now another highlight, you know, which we could report in the German region, is a transactional reviews (ph) we did with IZB Soft, you know, which is an IT service provider for the Loan and Savings Association in Germany.

And that was one of the largest revision projects in the banking industry or in the banking sector, you know, IXOS has been doing so far.

And this certainly, you know, will make, you know, IXOS products highly visible in the financial services and banking industry.

And last but not least, you know, the development of the document management interface for SAP Netweaver software was also introduced to the market.

Now let me go in a little bit more detail as far as, you know, the storage vendor partners are concerned on the next slide on page five. IXOS has become, you know, the leading provider of integrated storage and content solutions, in particular by signing an agreement with Hitachi.

That agreement accounts for, you know, development and distribution partnership with Hitachi on a worldwide basis. IXOS and Hitachi, you know, will be selling our Integrated Archiving And Enterprise Content Management software and storage solutions jointly in an OEM/Reseller contract depending upon, you know, what product we are talking about.

In addition, you know, we certainly and we reported on that already, we certainly also entered already into a partnership, you know, with HP, with Network Appliance, the SUN and also E&C, you know, that has been giving us -- all parties have been giving us great support and also a great number of belief (ph) in particular in the last quarter.

Now when we look at the next slide as far as the execution of our growth strategy is concerned, I think you know, we have made a big step forward. Coming from Q4, you know, where we did roundabout 35 percent of our total new licensed revenues, you know, with the new product initiatives and also the acquired products, that positive trend continued and we were able to accumulate 34 percent of our total new licensed revenues on those new initiatives.

So that has been in line with what we promised about two years ago, where, you know, Robert (ph), our CEO, you know, announced a 30 percent range, you know, of new product and new product initiatives over the course of the next two years and that's where we exactly are at this point in time.

Now coming to the next slide our revenues by business line -- double-digit growth, you know, is the scene of Q1 results and as you can see on the slide, you know, we were able to realize double-digit growth in all business lines of, you know, of our group's activities. Services certainly grew despite the negative market trend by 10 percent. Licenses, you know, a little better -- a little bit better than anticipated, in the magnitude of 15 percent plus and maintenance, 21 percent.

Now on the next slide, you know, we, we're putting together a couple of reasons, you know, why that happened. Licensed revenues, again, you know, the 15 percent increase was mainly coming from the Germany region, you know, where we had a plus of 59 percent, but also, you know, (INAUDIBLE) about in the Asia Pacific region, you know, with a plus of 317 percent on new licensed revenues.

Now that contribution, you know, to the apex figures mainly came from the Japanese marketplace, you know, where we did large deals, you know, with Fujitsu systems, with Mitsui and you know, which is the daughter company of the Russia pharmaceutical group.

Now services there, as I already mentioned, you know, grew by 10 percent and that is a clear signal to us, you know, that customers prefer one stop shopping, because you know, that clearly happened against the trends, you know, in the professional services industry and business.

Maintenance revenues up 21 percent, mainly because of the increase of our installed base, you know, the number of installations, went up by 31 percent from 2,100 to 2,800. So that was one reason you know, for that strong performance. And the other one is we hardly lose maintenance customers because of, highest degree of customer satisfaction in that regard.

Now when we look at the revenues by region, on the next slide, on page nine, you know, we certainly talked about Germany and you know, the 30 percent increase in MIA (ph), that is the European region excluding Germany came also out rather strongly. We were not satisfied certainly, you know, with the performance in the Americas, you know, where we had to record a 20 percent minus in overall revenue. Again followed by IXOS Software Earnings Conference Call the APEC region with a plus of 59 percent.

Now on page 10, you know, when we analyze, you know, these regional development a little bit. One more time our global presence, you know, has been proven or has proven a strategic strength of IXOS. So, the decline in the Americas could very well be offset, you know, by the positive development in the other regions.

The innovation (ph) remains one of IXOS growth drivers, and Germany certainly, you know, showed a superior performance over the course of the last quarter.

The Americas was behind internal and external expectations and that has already triggered, you know, action by management both here in Germany but also by top management in United States, you know, with regards to a reorganization of our sales force, you know, which is already under way.

And where we believe our successes, you know, can be expected in the next quarters. APEC (ph), achieved excellent growth rate. Again that was solely the result of the superior performance on the Japanese markets where we had, you know, where we were able to report a 70 percent increase on the top line.

Now, significant deals on page 11. Now this is just giving you a little bit of a flavor of new customers, you know, which came on board over the course of Q1. Aventis, you know, the pharmaceutical group, in France is worthwhile to mention as well as the Federal Mobil Corporation in the United States. I already did mention IZB Soft and LVA (ph), but also, you know, the Japanese customers contributed a lot to Q1's results.

Now one deal I would like to specifically talk about is you know, that IVB Soft deal on page 12. Now why was that deal so special? First of all it was the migration of 36 Sionic (ph) archives, a former competitor of ours, you know, which included 10 million or roundabout 10 million documents, you know, into an IXOS environment.

And it also included the implementation of our IXOS-eCON solutions suite. And this large transaction from -- according to old legacy type of software, you know, into state of the art Enterprise Content Management Software is certainly a key project, in the banking industry and enabled IXOS to, you know, present to the industry, a forceful solution for, you know, increased productivity and high efficiency in the industry.

Now let me move on to the next slide, you know, the financial highlights of the first quarter. Talked about the double-digit growth in all business lines, so that's resulted into a 16 percent revenue increase from 25.9 to 30.1 million Euros.

Growth margin remained stable or as a matter of fact they improved from 67 percent last year to 68 percent this year. So this means, you know, that despite continuous weak economy, you know, IXOS has been able -- will be able to maintain satisfactory growth margins. Upgrading costs went up by 14 percent but that increase is absolutely in line, you know, with the head count increase in particular as a result of M&A transactions we did in January this year, you know, when we acquired OP Three (ph) and Power Work (ph).

Our EBIT line improved by 13 percent. So we were able to reduce, you know, the quarterly or the projected quarterly loss by roundabout 13 percent. That's -- EBIT results includes roundabout 500 K Euros of amortization for intangibles, you know, which we had to capitalize as a result of the two M&A transactions.

You know, that's the capitalized software and other intangibles, you know, which had (ph) to be depreciated. So if we eliminate that, you know, we can report on an EBITA, you know, that improved by 33 percent in comparison to the last fiscal year's Q1 result.

Now, net income went up also by, you know, double-digit figure, 19 percent, mainly because of the fact that currency, you know, was a non-issue over the course of this quarter. You know, the total net effect of currency amounted to 300 K, so you know, that has been an unpleasant surprise.

Now moving on to the next slide, page 14, you know, the group P&L for the first quarter -- what I would like to particularly point out is the increase on the growth profit line. Again IXOS is able, you know, to cash in on strategies (ph). IXOS is able (ph) to, you know, to permanently improve productivity and hereby increasing growth profit margins. Operating expenses are well under control and most important of all, you know, the increase in operating expenses is below the increase of total revenues. And also, you know, when we look at the net income line, the financial results, you know, are positive one simply because of the elimination of the currency impact.

Now moving on to a more detailed operating expense analysis on slide 15, as you can see, you know, sales and marketing, you know, went up by 13 percent and so did R&D. That is, you know, mainly the additional expenditures as a result of the two acquisitions, you know of Power Work (ph) and OP Three (ph), you know, which you know, were not included in the financial statements in previous year's Q1. Now the increase in G&A, you know, was a mere six percent. That's a clear sign, you know, that, you know, we had been realizing, you know, synergies and that we have been able to realize significant cost savings in the G&A area. So all in all, you know, that amounted to a total operating expense increase to 14 percent.

Now let me move on to the IXOS balance sheet. Here nothing really can be reported on, you know, with one exception maybe. In Q1, you know, IXOS is always paying out, you know, the bonuses and other variable income portions and that normally results in a decline of the cash and cash equivalent position in conjunction with the decline of the accruals.

So what you can see on the IXOS balance sheet here is round about a four and a half million, five million drop of both cash and accruals and, you know, that contributed most, you know, to the reduction of the balance sheet total from 108 million to 100 million.

Now as far as our key ratios are concerned, on slide 17, nothing has really changed either. You know, we still can report, highly stable ratios and, the variances are barely visible in comparison to the June 30th figures, which we reported, you know, a quarter ago.

Now, summary and outlook. As far as Q1 is concerned we did achieve our targets -- respectively exceeded those targets. We are confirming our guidance, you know, which, where we said that we are expecting a revenue growth of a minimum of 10 percent over the course (ph) of the entire fiscal year 2003 - '04.

Growth margins, you know, will remain stable, you know, at previous year's levels. And again our operating expenses are expected to increase between five and ten percent -- you know, that's the annual figure. Again depending upon, you know, the course of business in this fiscal year.

So this brings me to the end of my presentation, ladies and gentlemen, and I can encourage you to ask questions, you know, with regard to further details. Thank you very much.

Thank you Mr. Rau. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press operator followed by "1" on your push button phones. If you wish to cancel your request, please press operator followed by "2."

Your questions will be answered in order they are received. If you are using speaker equipment today, pleased lift the handset before making your selection. One moment for the first question please. The first question comes from Mr. Thomas Becker (ph), please state your name, your company name, followed by your question.

Yes, thank you very much, Thomas Becker, HSBC -- three quick questions. First of all, what do you expect will be the potential of the Hitachi deal? Could you give us some ideas there?

Second is, currency gains. You had some currency gains in Q1. Do you expect same figure in Q2?

And the last question is, what measures have you taken, undertaken for the US is fairly weak on the sales line in Q1. What do you expect in Q2, what measures have you taken there?

OK, well let me start off with the last question -- this is in United States. You know, top management, you know, will get much deeper involved, you know, with business operations. As a matter of fact, you know, I have taken out one management layer and so in the future too, you know, Vice President, Sales, you know, will be reporting directly, to the CEO.

And in conjunction with that reorganization, you know, we have really tightened control, you know, over our sales organization with, say, much more immediate reporting line, into top management. I think you know, the fact that greater top management attention, will have a positive impact in particular on the closing of larger deals.

That's where we, you know, had a lacking performance in the past that we believe you know, that these measures certainly, you know, offset, you know, that, you know, top (INAUDIBLE) you know, to that development which we had experienced, over the last quarter, you know, we had lost too many deals in particular, the larger ones.

As far as currency gains are concerned, well, you know, that all depends on the development of the US dollar. But as I said in the annual (INAUDIBLE) conference and in the disclosure conferences, Q4 results, you know, we have taken precautionary measures in particular to eliminate, you know, the negative impact of currency translation adjustments.

So, you know, and that is what exactly happened, you know, and that's why you know, the impact from CTA you know, is irrelevant or has become irrelevant in the first quarter. And you know, the changes, you know, we had, which we have been realizing as far as the US dollar and dollar related currency, this Q1 versus last Q1 (INAUDIBLE) have not been, you know, that significant either.

Probably one assumes constant currency, yes, currency development in Q2, then probably on that assumption maybe we can assume that we will see in Q2 equal gain?

Well, again, you know, I'm not in the position to make any promises as far as currencies in this call, but, you know, if we don't see material changes as far as the US dollar and dollar related currency versus the Euro are concerned. You know, we are not going to see a big impact on financial results either.

OK.

Now as far as the potential of the Hitachi deal is concerned, well this is a partnership, you know, that is just or that has just started (INAUDIBLE) the sales will be kicking in about February - March time next year.

You know, the first step is to develop, you know, a joint piece of software, you know, which, you know, we will be selling, you know, in conjunction with the Hitachi hardware based on our standards of their products. So you know, the first step is the execution, so to speak of the development agreement.

The second step is, you know, to prepare the sales force and here both, you know, the full Hitachi sales force as well as the IXOS sales force, you know, will play an active role in that partnership.

And, now as far, you know, evaluating that potential is concerned, I think that's a little bit too premature. However, you know, our expectations, you know, are, you know, quite large. You know, Hitachi, made (INAUDIBLE) revenues in the magnitude of US $ 2.5 or 2.25 billion. A sales force of roundabout -- well they had about 2,700 employees here in operations. So, you know, that means a lot, you know, for an OEM business, you know, which, you know, includes IXOS software. Our expectation is that 20 percent of the total revenues of Hitachi can be accounted to software sales and you know, when we will be, you know, benefiting from that trend.

OK, probably one last thing and then I go away. US again -- do you expect to bounce back in the current quarter, in terms of (INAUDIBLE)?

Yes, we do. As I said, you know, we lost deals in the United States because, you know, we did not such a good closing job on the larger or some larger deals. And so that has, to some degree, you know, to do with the weak market still, but also -- it was also due to the fact, you know, that we could have done, you know, maybe a little bit better, you know, of a closing job. And in, as I said, you know, measures have been taken. So the clear expectation is, you know, that we will see improvement already in Q2.

This is Carla (ph).

Hi, Carla (ph).

Just a quick remark, I guess is essential in terms of the statements regarding the Hitachi deal. And Peter rightfully said that Hitachi is the other big storage vendor, which has (INAUDIBLE) sales 2.2 billion on a total scale covering all their offerings. With reference to all their sales attributable to software and services, that's a 20 percentile (ph). Please don't take it as a projection in terms our overall potential in benefiting in that deal. That's (INAUDIBLE) figure Peter was stating was the overall sales of Hitachi in the service and software sector where obviously IXOS, as key player in archiving and content management solutions will look into benefiting as a taking a decent portion in that regard. But it's not a projection from our side in terms of achieving such a huge target.

I understand that.

And the offering is already stated by Peter.

OK. Well thank you very much, my questions are answered.

Ladies and gentlemen, if you'd like to ask a question, please press star followed by "1" one on your push button phone. As a reminder, if you're using speaker equipment, please lift your handset before making your selection. The next question comes from Claude Volar (ph). Please state your name, company name, followed by your question.

Yes, hello, Claude Volar from HBB (ph) Group. And just a few short questions. The first one, do you disclose the exact number of the IZB (ph) deal, so just to get a flavor how much (INAUDIBLE) revenues would have been excluding this deal? Must have been, as you (INAUDIBLE) quite significant. The second one is regarding sales and marketing costs, which were surprisingly down, since I expected a bit more regarding your marketing offensive in the United States. So what should we expect there in the next quarters? And the last one is once again, for the time regarding the tax ratio what shall we expect there in the coming quarters?

OK, now we have an agreement with IZB (ph) not to disclose the, you know, deal size. But what I can tell you is that it's a seven-digit figure, a Euro figure. And again, you know, there will be another six digit Euro figure following, you know, in the next fiscal year, you know, after we have concluded the first stage, you know, of that project. You know, it's a fairly large project, you know, and it will take more than a year, you know, to really fully implement, not only our, you know and it will take more than a year, you know, to really fully implement, not only our, you know, complete eCON solution suites, but also, you know, to deliver all the services, you know, which IZB (ph), you know, has contracted from us. Now as far as the sales and marketing costs are concerned, sales and marketing did go up by 13 percent and so that is a significant increase of round about, you know, a million and a half. So yes, we did invest, you know, in particular in the marketing of our new product (ph) and as I said before, 19 percent of our total revenues, you know, were coming from the newly acquired products initiative, you know, both, you know, in the content management space as well as in the workflow or business process management space. And --- but certainly, you know, we were also able to use or to utilize, you know, synergy potentials and so there's (INAUDIBLE) sort of, you know, we're always talking about two directions of cost development. You know, in money, when it comes down to realizing synergies, but also investing money, you know, into the right marketing and then sales support programs. Now the last question, as far as the tax ratio is concerned, you know, we don't anticipate any significant changes. IXOS is still in the position to use tax laws (ph) as carry forwards, you know, we did do that over the course of last fiscal, in various regions, certainly not everywhere, because of, you know, lack of (INAUDIBLE). But you know, when profits kick in over the course of this year and that is clearly what our projection is calling for, you know, we will be able to utilize those tax laws of carry forwards. So we don't anticipate any changes as far as the tax ratio is concerned.

OK, thank you very much.

The next question comes from Mr. Jay (INAUDIBLE) Meyer. Please state your name, company name followed by your question.

Good afternoon, it's Jay (INAUDIBLE) from (INAUDIBLE). I have just three quick questions now. Maybe you disclosed it in the presentation, Peter. The services revenues were very strong in the quarter. Was this due to any particular reason, was it due to Germany -- was this a part of a large contract?

Well, it wasn't -- well, Germany came out quite strongly also on the services business. But, you know, that was not, you know, because of one huge deal and again, you know, IZB (ph) played a rather small role because, you know, we just signed, you know, the deal in the first quarter. So you know, the bulk of services you know, on that (INAUDIBLE) due to migration projects, you know, couldn't be delivered yet. No, I think you know, as much as we, you know, had a little bit of a dip in the services business in Q4, you know, we had a, rather positive development in Q1. You know, services business is projects business and you know, we were benefiting, you know, from the completion of you know, quite a good number of projects in Q1. So nothing extraordinary in all that happened in that segment.

OK, thank you very much.

Ladies and gentlemen, if you'd like to ask a question, please press "*" followed by "1" on your push button phone. The next question comes from Mr. Gregory Meyers. Please state your name, company name and your question.

Good afternoon, Gregory Meyers (ph), ING. I have two questions. The first question is could you give us the current value of the share offer of -X. You know the share offer business of Opendex shares and Opendex (INAUDIBLE).

And my second question is some news concerning the Opendex deal that has happened since the announcement of the - agreement. Has something happened here and what can you expect in the next season (ph). Thank you very much.

As far as you know any offer (ph), you know we are in the midst of a process that is predetermined by the German takeover company, so you know after the announcement of the transaction you know there's a four week time slot until Open takes the - you know has to submit the official offer with the German Baffin (ph) you know which is the equivalent of the Securities and Exchange Commission.

Now in case of foreign business (ph) the law also allows for an extension period of another four weeks. Now we do not foresee that it will take more than four weeks but we also cannot rule out that Opendex is asking for an extension of that deadline. So they are in the midst of creating the official offer and the next step will be the approval by Baffin (ph) and then the public announcement from Baffin (ph) that the official offer is available to IXOS shareholders.

As far as the current value is concerned I don't have the figure with me today but you can easily calculate that. You take today's Opendex share price and you may just regard the share split or you may just multiply it by two, whatever you prefer.

Convert (ph) it into euros at the current or today's noon buying rate and multiply that by the exchange ratios that is built into the business combination agreement and that is 0.261 IXOS shares, one Opendex share. And that is giving you - I'm sorry the other way round - and that is giving you the value of the share offer, and on top of that you have to add the value of the warrant and here you have to go through the same procedure with one exception. Here the ration is 0.0742 Opendex warrants (ph) for one IXOS share.

OK Thank you.

Excuse me there are no further questions at this time. Please continue with any other points you'd like to raise.

As there are no further questions we'd like to thank you for your participation and in closing I would like to find out that IXOS has closed it's Q2 and Half year results in February 3 2004. We would be delighted to welcome you again for this conference.

Thank you.

Thank you.

Ladies and gentlemen, this concludes IXOS Software earnings conference call. You can listen to the conference by dialing first four 9s 069, 589, 990568, and the pin code 132176 or on the IXOS software AG Internet page. This will be available one hour after the conference ends. Thank you for participating. You may now disconnect.