Welcome to the Open Text Corporation First Quarter 2015 Financial Results Conference Call. (Operator Instructions) At this time, I'd like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, sir.

Thank you good afternoon, everybody. I'd like to start the call with a reading of our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of Open Text that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from the conclusions, forecast or projection in the forward-looking statements made today. Certain material factors or assumptions that were applied in drawing any such conclusion while making any such forecast or projection as reflected in the forward-looking information, additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing the conclusion while making the forecast or projection as reflected in the forward-looking information as well as the risk factors that may project the future performance results of Open Text are contained in Open Text 's Forms 10-K and 10-Q, as well as in the press release that was distributed earlier today, each of which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call will include a discussion of certain non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release, which may be found on our website. And with that, I'd like to welcome everybody to the call. With me today is Open Text's President and CEO, Mark J. Barrenechea; as well as our Chief Financial Officer, John Doolittle. As with our previous calls, we will read prepared remarks followed by a question-and-answer session. The call will last approximately one hour, with the replay available shortly thereafter. I'd also like to direct investors to the Investor Relations section of our website where we have posted an updated PowerPoint that will be referred to during this call, as well as a summary table highlighting Open Text's historical trends and financial metrics. In the coming months, Open Text will be presenting at several investor conferences, notably TD Bank Investor Conference in Toronto on November 19th; and the CSFB Technology Conference in Phoenix on December 2nd. We'd also like to invite investors and financial analysts to the Open Text Investor Day held on Wednesday, November 12, during our Annual Enterprise World Users Conference in Orlando, Florida. Please contact the Investor Relations team for further details and to register to attend this event. And with that, I will hand the call over to John.

Greg, thank you very much. Good afternoon, everyone. Welcome to our call. I'm looking forward to meeting many of you at our Investor Day next month in Orlando. As you know, I started here about six weeks ago and I'm extremely impressed with the level of expertise and dedication to excellence I see here at Open Text. Turning to the first quarter fiscal 2015 results, I'm pleased with our overall financial performance, including our focus on cost and cash generation. Moving to the highlights, revenue for the quarter was $453.8 million, up 40% compared to $324.5 million for the same period last year. Regionally, the Americas contributed 54%, EMEA 36%, and APAC 10%. License revenue for the quarter was $58.6 million, up 6% compared to $55.3 million reported for the same period last year. License revenue broken down by industry sector was as follows: 25% from services, 16% from technology, 15% from public sector, 14% from basic materials, 12% from financial services, 6% from industrial goods, 5% each from consumer goods and healthcare and 2% from utilities. Cloud services revenue for the quarter was $150 million, up 260%, primarily due to GXS compared to $41.6 million in the same period last year. Cloud services gross margins were 61.3% in the current quarter compared to 65.7% for the same period last year. The decrease in cloud services margins year-over-year was in part due to one-time credits that were recorded in the first quarter of fiscal 2014. Customer support revenue for the quarter was $183.9 million, up 9% compared to $168.4 million in the same period last year. Customer support gross margin was relatively stable at 87.4% this quarter compared to 86.8% in the same period last year. Professional services and other revenue for the quarter was $61.3 million, up slightly from…

Thank you, John, and welcome everyone to our fiscal 2015 Q1 earnings call. Before I begin, let me express that our thoughts and our prayers are with those affected by the tragic events in Ottawa today. We're also very grateful to the first responders who put themselves in harm's way to secure the safety of others. All Open Text staff are safe and accounted for. Our thoughts and prayers are with all those affected today in Ottawa. I'm going to spend time today on our overall financial achievements, corporate strategy, growth initiatives, the economy, our leadership team and enterprise world. It was a record Q1 and there is much to be pleased with. Year-over-year, we've added $129 million in revenues, delivered strong adjusted operating margins of 34.3% and adjusted EPS of $0.97 through improving our efficiency and cost savings programs. Further, revenue was up 40%. Adjusted net income was up 46%. Adjusted cash flows were up 73%. Adjusted earnings per share were up 41%. And we announced our quarterly dividend program of $0.1725 per share. And since the inception of our dividend program, we have returned to shareholders 18% of operating cash flows. Overall, the team delivered to our revenue plan, while exceeding adjusted earnings. Our business model of intelligent growth delivered strong value against the backdrop of an increasingly difficult economic environment. While I'm pleased with the overall quarter, I'm not satisfied with 6% license growth. The primary factor that held back a double-digit growth rate was the economy. But let me also note that we have delivered positive year-over-year license growth for four consecutive quarters now, with the trailing 12-month growth rate of 11.9%. Our investments in intelligent growth are working. Let me take a few moments to review our corporate strategy. Open Text is focused on enabling…

(Operator Instructions) Our first question today comes from Kris Thompson of National Bank Financial.

Mark, last quarter you said that over 50% of your customer base was upgrading to version 10. Do you have any updates there?

We saw a little over 100 customers added to that last quarter. So we've added about a little over 100 customers upgrading. And we also think SP1 is going to help continue the momentum on Red Oxygen. We're taking a lot of our learning, attempting to accelerate, upgrade programs, also filling in some capabilities that folks are looking for. So I'd say we added about 100 customers last quarter and I'm looking forward to SP1 to help customers accelerate their path to the suite even faster.

Of the base that's upgraded to 10, what's the percentage that have gone through to 10.5?

I don't have the precise number in front of me of those that have gone from 10 to 10.5. We'll go look at that and get back to you.

Did you mention how much revenue or license revenue GXS contributed in the quarter?

I didn't, but I will, and it wasn't material to the overall license number.

One more thing that we used to get is the FX impact on EPS. I don't know if you have that handy.

I think I mentioned that in my remarks. It was $0.02 negative in the quarter, Kris.

The next question comes from Thanos Moschopoulos of BMO Capital Markets.

I realize you're not updating the target operating model at this point. But if we were to go by the model, that would assume a significant ramping in OpEx. And so just to clarify, do you have plans to ramp up you hiring at this point, or is that not something we should expect to see near term?

He made that clear from the beginning. On the operating model, I mentioned in the remarks, as you pointed out, that we're leaving the target model in place. We did come in over the top end on operating margin. So a number of reasons for leaving it the way it is. One is we're three months in, so it's still early days in the year. Mark did a great job of laying out some of the challenges in the economic environment that's around us. There are some issues on timing of expenses, you're right. And so we've looked at each of the expense lines this quarter, and we've looked at where those are going to be in the balance of the year. And we do expect some uptick on things like commissions and other compensation, some marketing increases. We talked about Enterprise World. Vacation accruals, as we progress through the year. And the last item, which Kris asked about is foreign exchange and the impact of the euro. It was negative in Q1. You know the trend has continued and we'll evaluate those each quarter. So we'd be taking a look at this at the end of the second quarter again. But that's the rationale for leaving it where it is.

Now OpEx was off quite a bit sequentially, even though I think you said headcount was relatively flat. And so other than commissions and year-end bonuses, what were the dynamics? Was there a lot of the costs you took out in terms of overhead at GXS?

There was some of that. Some costs in GXS came out. There were summer months. So vacation was taken in the summer months. And so vacation accrual wasn't where it normally is. We really did ratchet back on travel and held the line just generally on expenses. So that's why quarter-over-quarter, it's where it landed.

We talked about it on last call. We still had some GXS efficiencies that we expect to kind of leave in here in the coming quarters. So we saw a little bit of that as well.

It seems like the sequential drop-off was more pronounced in the Americas than other regions. Anything especially going on there or was that just more reflective of the fact that Q4 was exceptionally strong?

On the license side, our trailing 12-month average growth rate is 11.9%, and that's a good growth rate. In quarter, 6%, though we're not satisfied with 6%. And when we look at the Americas, as you said, we're coming off a strong Q4. There is nothing pronounced here. I'm happy with the team we've put in place, with the changes a couple of quarters ago. The only factor I might add is I think the economic impact. We struggled a bit in the Latin America, primarily dominated by the elections in Brazil. So as you know, there's nothing structural. There's nothing I'm looking to change in the Americas. I'm pleased with what we've done. We came off a strong Q4 in the Americas. And Latin America wasn't helpful. Brazil is a dominant force for us. And they held elections and re-elections last quarter.

The next question comes from Scott Penner of TD Securities.

First of all, the GXS business, just if you could give an update on whether the Open Text and GXS sales force are fully now up to speed for cross-selling and sort of what has been the initial reaction in the field about any additional application areas that you'd like to get into or feedback from customers on that?

Historically, when we purchased assets, we have historically described that we believe those assets in the short term have reduced revenues. We did not do that with GXS. Note that we had in our cloud services business delivered $150 million of revenues in the quarter, slightly up quarter-over-quarter, but not down historically like on other acquisitions. So the bringing together of the two organizations, I think that is reflective in our third quarter together that our revenues are on an uptick in the cloud. I'd also note that one of the big areas of opportunity was bringing the teams together in EMEA, our on-demand messaging services, our managed hosted services and managed services from GXS now collectively known as managed cloud services. And we delivered some strong wins in EMEA and are now going after which is a new market, which is the mid market, the IX, B2B, EDI mid market in EMEA. So I'm very pleased with how the sales forces for GXS, EasyLink and our professional services have come together as one team, revenue is up quarter-over-quarter in our third quarter together. And we're now going after new opportunities specifically in EMEA and we've announced some nice wins.

Mark, as you well see, we're seeing some enterprise vendors now that being hit really in the capital markets as perpetual license shifts towards SaaS to some extent. Just hoping you could address head on the notion that this transition in dynamic is still yet to come for Open Text.

I take a different view. Our customers are asking for a hybrid world and cloud is a big term. I've spent a little time on this one. We're an enterprise organization. We service highly regulated industries and it's a workload discussion, where do banks, the financial institutions, construction companies, pharmaceuticals, CPG companies want to place their workloads at the enterprise level. And our customers continue to ask for workloads on premise and on cloud, but not SaaS, in the cloud. And this is part of our managed cloud services, where we want to be able to provide hosting and economic benefit to be able to move the workloads, their computers into our cloud. We don't see SaaS competing with us in the enterprise. We don't see SaaS. In terms of a term license versus perpetual licenses, regardless of where you're putting those licenses, whether it's on prem, in our cloud or in a public cloud, we offer term today. We have for many, many years. I can't speak to what the other companies, Oracle or IBM or others are looking to achieve, we're not talking about. But we don't see SaaS as a competitive threat to Open Text. We do see the cloud as an advantage and then there is an economic model behind that cloud, which is either on perpetual or term, but we've offered term for a while. We grew 6% in license last quarter and trailing 12 months 11.9%.

The next question comes from Richard Tse of Cormark Securities.

What were you kind of tracking on licenses before the economy softened there? Can you give us a sense? Were you kind of looking at $65 million, $75 million license number? Just trying to get a sense on what that would have been.

Richard, you know that's probably hard for us to do. I mean we're clearly mindful of what consensus number was of $64 million. We delivered if you round up to $59 million. So we're mindful certainly of the consensus number. But we're primarily on our total revenue plan for the quarter. And as we came into September, there was a lot of accumulation of global and economic issues. Our thesis on our growth programs remain intact as well as fully funded. Our EIM suites are resonating. We have blue chip wins from customers. These are marquee customers. Our pipeline remains up coming into Q2. I'll note though on the change in customer buying behaviors. We haven't seen deals canceled. We haven't seen them shrinking. We did see deals deferred into the quarter. We've already closed some of them. We're monitoring that closely. So what was the net effect within the quarter? It's hard to quantify.

Related to the economy, did it kind of improve the market for acquisitions now in terms of the opportunities out there and maybe you can talk a little bit about what you're doing there right now, how active it is and some of the valuations of the market?

Well, I'd say that pipeline is up too, Richard. In up economies with free capital and valuations on earnings, you need to be very patient as a value buyer. And maybe down economies where maybe capital is a little tighter and valuations become more reasonable, though I still think we have room to go to become even more reasonable, that's only advantage to you as a value buyer. So we still look to put our $3 billion of capital to work in the next few years in the down economy. I wish we're an up economy, of course. Down economy though does advantage value buyers such as us. Our pipeline is up.

And then just one last question on cloud. Who do you guys as sort of the prominent players on a cloud size in your market or the market that you serve designated as EIM here? Is it Alfresco or are there any other players out there?

I would kind of look at it as maybe a bit bifurcated here. On the functional side, we're focused on IBM Sterling Commerce and having competitive wins on their platform as a service for EDI and B2B integration. And then you have some other competitors around there E2open, SPS and some others. But Sterling Commerce is sort of competitor number one in that. Second is managed cloud services. We want to be able to bring in the core EIM platforms for ECM, CEM, BPM. So IBM services or Oracle services, Microsoft Azure if you're hosting Microsoft technologies there.

The next question comes from Michael Nemeroff of Credit Suisse.

You mentioned there was a $0.02 FX impact to EPS. By my calculation, that's about $10 million in revenue. Is it fair to assume that the distribution of that FX effect on revenue follows the target model of about $1.5 million to $2 million on that FX effect?

Yeah, that'd be fair to say. I'm not sure that you've got the revenue number quite right. I'd call it closer to $5 million-ish. But that's mainly due to the euro and we have some natural cost hedge there as well. There is no reason why it shouldn't follow the target model in terms of the breakdown of revenue by category.

Last quarter, you had a very strong showing on the ELA sales, took up the ASPs quite meaningfully. Could you describe for us what the environment is for those ELA sales? Are people waiting for SP1 before they buy in on the ELA? Give us a sense for what happened. I know the macro wasn't impacted, but whether any other thing that customers are saying that they were pausing for?

No. So primarily driven by the economy, Michael. So our average deal size was up about 20% Q1 over Q1. I think last Q1, it was 268,000. This quarter it was 324,000. So up 20%. It's a meaningful up year-over-year. Our primary effect here was on the economy. SP1 will help. We're proactively taking the learnings that we had, accelerating the service pack, adding key capabilities to that service pack, things that accelerate new release of Media Manager, (inaudible). We've had some new usability enhancements in content server. We have a new business object browser we're putting in for SAP. We have some very compelling analytics going across our suites in a new CIO dashboard. And then we're taking our first six to nine months of learning on upgrades from customers and professional services. We thought to automate a few things and get it into SP1 and bringing that back to customers. So SP1 will be a very positive adder for us. But primarily it was driven by the economy last quarter.

Do you think that the economy has affected the way that you're thinking about the results for the fiscal year or is it still too early, given that it's only Q1?

Well, when I look at the issues that accumulated, there're issues are structural and then issues that are just temporal. The issues that we all read about feel a bit more temporal, short-term than long-term structural. So that feels a bit positive to me. Our pipeline is up, which is another positive for us. But we're going to be prudent and are going to assume that these uncertainties last for at least the short term, which means a quarter or two. So we're going to be a bit more judicious about expenses and continue to emphasize on cash flows and earnings and value.

The next question comes from Stephanie Price of CIBC World Markets.

In terms of SAP, I was wondering if you could spend a few minutes on them. I mean they've talked about a couple of back quarters here and license revenue moving to the cloud. Can you talk a bit about the partnership and how that's going and the percentage of license revenue you're seeing from them these days?

First, the partnership remains strategic and in a great position. We've added new products. We're soon to add a new business object browser with SP1. And the business contributed roughly 10% of license revenue in the quarter. And this relationship will endure. Products come and go, but the relationship endures. And as SAP moves to the cloud, we'll move to the cloud with them. But right now, the majority of what we do on premise. But as SAP business model shifts, we'll shift with them. And we'll introduce products to fill the spaces that we need to fill. We already offer our solutions in HANA and HANA operates in the cloud. Our traveling expense product is a service that runs behind some of their cloud services. So the relationship is strategic. We'll keep investing in products. We have a strong plan for the year. They contribute about 10% in the quarter. And we'll transition with them as they transition to the cloud.

Wondering if you could elaborate a bit on CapEx. It was a bit higher than we were expecting this quarter. Can you talk about that and also maybe a full year run rate expectation?

I think we had given you guidance of around $75 million to $80 million for the year. And you're right, we were high about $30 million in the quarter on CapEx. I'm still speaking to the call on the $75 million to $80 million for the year. So we had some purchases of servers to support our cloud offerings in the quarter, and they were fairly significant. And we wouldn't expect that to repeat. So $75 million to $80 million is I think where we'll land for the year.

And then just in terms of the services margin, it was lower than we expected as well. And I think you mentioned some cost being deferred. How should we kind of think about that going forward?

We were higher than we were last quarter. So we're in a 26% on professional services in the current quarter and it was 23% last year for same quarter. And I mentioned a couple of things. One is we appointed a new services leader and he took some proactive measures before the beginning of the quarter, eliminated some positions. So some of that will be ongoing savings, but a portion of that was timing. So we wouldn't expect to see the 26% continue. We'd see it come back more towards a normal run rate.

The next question comes from Paul Treiber of RBC Capital Markets.

Just on the margin topic, on gross margins for cloud services, it looks like it's been slightly above the target model for the last several quarters. What's been driving that just over the last several quarters? And should we expect it to continue to be sustained above the targets?

Part of what's driving our very strong margin performance in cloud, we're highly profitable in the cloud compared to others, is really sort of consolidation of cost across Open Text commercial, EasyLink networks and GXS networks. So the consolidation of data centers, networks and operations have contributed nicely.

And I think when the GXS acquisition closed, the goal was for it to be onboarded within 18 months or so. Just in light of the cost coming down, the integration is going at a faster pace than what you originally thought?

Yeah, I think we talked about maybe on last call where we originally had two years, then 18 months and then I think last call we felt we completed the majority of the integration, but there were still some areas of value to unlock in the coming quarters. This is certainly one of those areas. So the ability to consolidate data centers and its corresponding infrastructure is an area that's contributing to the margin.

The next question comes from Paul Steep of Scotia Capital.

Mark, maybe you can just clarify or put some context around this. We've all seen the headlines in the economic comments, but you've got a fairly broad-based network with EasyLink and GXS. Are some of your comments driven by what you're seeing transactionally there or is this driven more off of sentiment on the license side? Has there been a marked change over the networks in terms of delivering broad-based set of transactions?

I think it's a fairly well studied set of commentary, both from what we hear from our customers and we can anticipate in our infrastructure. We do see a lot. So I think it's well reasoned set of observations on sort of a change in customer buying behaviors last quarter and anticipating over the next couple of quarters.

How do we want to think about GXS in terms of the managed service penetration and the opportunity there over the coming quarters?

I think that is a significant opportunity for us. Many things I'm very excited about, this is one of them. We've added a couple of dozen customers last quarter into our managed cloud services, and that's going to put us up in the high 800s of Fortune 900 customers that are operating in Open Text cloud. 900 large enterprises who have moved either their information management, supply chain or B2B integration services to run in the Open Text cloud. We'll be speaking to this very directly at Enterprise World about new programs, new infrastructure that will continue to help customers accelerate into our managed cloud services. And this is an area where we can add hundreds and hundreds of customers to our infrastructure in the coming years.

The next question comes from Eyal Ofir of Clarus Securities.

Mark, obviously you talked about the macro, but it seems like you're also hauling the SP1 as potentially helping demand here. So is there also a function in the license number by clients delaying deploying until they see SP1 come out and actually go with the latest product?

It's not an unreasonable sort of conclusion. But I didn't see that. I primarily saw the economy last quarter. We came off a very strong Q4 and I primarily saw the economy last quarter. I'm sure there's a deal here and there waiting for something. But in terms of trends, I'm not hearing customers saying I'm waiting for SP1. SP1 is a bit more anticipatory where we know we can help and we're seeing things where we can help. So we're going to go help and accelerate that service pack. But I'd say primarily it's the economy.

One or other question was about potential deals slipping through and you mentioned there were a few. Would you be able to size that up for us from a license standpoint?

No, we're not putting out a quantum on it. We were mindful of the license incentives around $64 million. We delivered $59 million. Overall, that's close to 1% of revenues. But no, we're watching the deals that slipped. We're monitoring it. Deals haven't gone away. Deal sizes haven't shrunk. We've already closed a few. We're monitoring them closely.

In terms of the actual OpEx, obviously seasonality plays in here. But is there anything we should be normalizing for in one of the OpEx lines?

I did mention that on an earlier question. Yeah, you should look at the timing of some of the expenses. I do expect to see an uptick in commissions and other compensations, some marketing increase across as we do Enterprise World. So there will be some uptick. I'm not going to give you an exact number, but that's again why we're leaving the target model where it is.

The last question today comes from Rakesh Kumar of Susquehanna Financial Group.

Over the past couple of weeks, there has been some talk about EU looking into Luxembourg tax arrangements. I was hoping you could elaborate your thoughts on the development.

Just to put a background for those folks that aren't familiar with the issue, we did reorganize our IP several years ago. I had a look at that since I've come in. A lot of preparation went into that including obtaining advice outside experts. So I'm comfortable that company took all the right steps, but the years in question are under right it. The US has been looking at that. And more recently, as you pointed out, the EU has announced that they're taking a look at Ireland and Luxembourg. We are obviously watching that monitoring developments carefully. We've not heard anything from the EU. At this point, no reason to expect we will, but we're keeping our eye on those developments.

There are no further questions at this time. I'll now hand the call back over to Barrenechea for closing remarks.

Thank you, operator. There's a lot to be pleased with within Q1. Revenue up 40%, adjusted net income up 46%. Operating cash flow is up 73%, adjusted earnings up 41% and our quarterly dividend program. True to our DNA, we delivered a strong earnings quarter against the backdrop of a difficult global environment. Intelligent growth and a focus on value lead our business decisions. We lead with value and we invest in markets we know we can win in. Information management, compliance and B2B are the three key end markets we're going after. Total cost of ownership, product innovation, development options, go-to-market initiatives to take us there. Thank you, everyone, for your questions, and I look forward to seeing at Enterprise World in November. That concludes today's call.