Open Text Corporation (OTEX) Q2 2015 Earnings Report, Transcript and Summary

Welcome to the OpenText Corporation Second Quarter 2015 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead.

Thank you, operator and 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 OpenText 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 information and statements made today. Certain material factors or assumptions that were applied in drawing any such conclusion while making a 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 OpenText are contained in OpenText 's Forms 10-K and 10-Q, as well as in the press release which was distributed earlier this afternoon, 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 will 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, and 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 which highlights Open Text's historical trends and financial metrics. And with that, I will hand the call over to John.

Greg, thank you very much. First of all I want to welcome everybody to the call. Thank you very much for joining. This is my second OpenText earnings call and I'm now nearing five exciting months with the company. Turning to the financial results for the second quarter, as a headline, I am pleased with our focus on cash flow generation, expense management and bottom line performance in the quarter in spite of the headwinds in the currency markets. Total revenue for the quarter was $467.8 million and was up 29% compared to the $363.5 million for the same period last year and recurring revenue which we define as cloud services, customer support and professional services for the quarter was $392 million up 39% year-over-year compared to $282.3 million for the same period last year. Regionally, the Americas contributed 54%, EMEA 36%, and Asia Pac 10%. Foreign exchange volatility had an impact on our revenues this quarter and our overall results compared to rates from the second quarter of fiscal 2014 our revenues were negatively impacted by $15 million primarily due to the weakness in the euro. Cloud services revenue for the quarter was $151.3 million, up 259% compared to $42.1 million in the same period last year. The increase is primarily due to the inclusion of GXS. Cloud services gross margins remained stable at approximately 62% compared to the same period last year. Customer support revenue for the quarter was $179.5 million, up 2.9% compared to $174.4 million in the same period last year. Customer support gross margin remain relatively stable at approximately 87% compared to the same period last year. Professional services revenue for the quarter was $61.3 million, and was down 6.8% in the quarter compared to $65.8 million in the same period last year as a significant opponent of the revenue decline is due to the foreign exchange volatility. Professional services gross margin was 24% in the current quarter versus 22% in the same period last year. And the improved margins were primarily due to lower labor related expenses and a reduction in the use of sub contractors. On the license revenue for the quarter was $75.8 million was down 7% compared to $81.2 million reported for the same period last year. Decrease in license revenue is primarily due to the negative impact of foreign exchange and slower than expected growth from developing markets. License revenue broken down by industry sector is as follows; 20% for the services, 20% from financial services, 14% from technology, 11% from public sector, 8% from basic material and conglomerates, 8% from healthcare, 7% from consumer goods, 7% from utilities and 5% from industrial goods. Gross margin for the quarter before amortization of acquired technology and stock compensation was 72.2% compared to 74% in the same period last year. The change in gross margin was primarily due to a shift in the revenue mix. Pretax adjusted operating income before interest expense and stock compensation was $153.3 million or 32.8% this quarter, up 36% compared to $112.3 million in the second quarter of last year. Adjusted net income increased 26% to $118.8 million this quarter, up from $94 million in the second quarter of last year. Adjusted earnings per share at $0.97 on a diluted basis compared to $0.79 for the same period last year, up 23%. The year-over-year effect of foreign currency movement on our adjusted earnings per share for the second quarter was a negative $0.03 and negative $0.04 versus rates that were in effect at the beginning of the fiscal year. There is a reason to expect this trend to continue or worsen based upon the ongoing strength of the U.S. dollar. Adjusted tax rate for the quarter and the year remains at 18%, up 4% year-over-year and on a GAAP basis income from operations before interest and taxes for the second quarter was $110.6 million up 49.6% from $73.9 million in the second quarter of last year. Our GAAP income before taxes was $92.8 million in the current quarter versus $70.2 million in the same period last year. Net income attributable to OpenText for the second quarter in accordance was $74.3 million or $0.60 a share on a diluted basis compared to $53.5 million or $0.45 a share on a diluted basis last year. Our operating cash flow for the quarter was approximately $109 million, an increase of 80% compared to $60.9 million in the same period last year. Excluding the impact of special charges operating cash flow for the quarter was approximately $115 million compared to $69 million in the same period last year. A few comments on our capital structure. There were approximately 123 million shares outstanding on a fully dilutive basis for the second quarter fiscal 2015. On January 15, 2015 we issued $800 million of bonds with a 5.625% coupon and an 8 year maturity and concurrent with that transaction we used the proceeds from the bonds to repay in full or term loan A balance of $492 million. This was the first high yield bond offering from OpenText and it provides us a stronger, more flexible balance sheet as well as a better mix of fixed and floating debt exposure. It was a very strong debut for us in high yield markets. In return for all the positives that I mentioned, our cash interest expense will increase by approximately $8 million per quarter pretax compared to current floating rates. Additionally, we increased the limit on our revolver from $100 million to $300 million and we extended the tender to five years. On the balance sheet, customers for deferred revenues were $310.2 million compared to $349.9 million at June 30, and $259.8 million at December 31. The decrease in deferred revenues in this quarter compared to our last fiscal year end is due to the normal cyclicality of our business as typical our deferred maintenance revenues are at the lowest point at the end of a calendar year. Accounts receivable $258.2 million at December 31 compared to $292million at June 30 and $173 million at December 31. Our days sales were 50 at December 31, 2014 compared to 53 in June and 43 last December. At the end of December we had 8000 employees, that’s consistent with the prior quarter, 1,900 in R&D, 2000 in Cloud services, 700 in customer support, 1000 in professional services, 1,400 in sales marketing and 1000 in G&A. Our target operating model remains unchanged and is posted in the updated investor PowerPoint that which can be found in the Investor Relations section of our website. And finally on January 26, the board declared a cash dividend of $0.1725 per share for shareholders of record on February 26, 2015 payable on March 19, 2015. With that, I’d like to turn it over to Mark. Sir, over to you.

Very good, thank you John and welcome everyone to our fiscal 2015 Q2 earnings call. It’s been a very fast start to the calendar year for OpenText with the closing of two acquisitions, Informative Graphics and Acutate. Our inaugural bond offering which strengthens the balance sheet as John noted, as well as the introductions of many key products and service initiatives announced that enterprise world in November, most notably those related to the OpenText cloud. The closing of Acutate is a significant milestone for the company what allows us to bring Analytics everywhere within the OpenText ecosystem to our on premise installed base our OpenText cloud customers and to the broader developer community. We are entering the age of digital, and digital processes, digital content and a mindset of digital. Digitalization is key for all industries to deliver the next level of competitiveness and efficiencies. Fifteen years ago you could be Amazoned, today you could be Ubered which is a reflection of digitalization. OpenText is well positioned as our vision as a digital first world, and our key platforms allow customers to begin digitalization of their enterprise processes today such as the customer journey, supply chains, risk and governance, innovation and employee functions. EIM our business networks, the OpenText cloud and now analytics are key technology enablers to help enterprises transform into digital enterprises, and if you will raise the digital quotient. I am very excited about what 2015 will bring to our customers and to OpenText. Let me transition and spend a moment on our Q2 results and start at the highest levels. On a year-over-year basis, total revenues were $468 million up 29%. Our quarterly recurring revenues were $392 million or 84% of total revenues and up 39%. Cloud services revenues were $151 million up 259% including sequential growth. Majority of the growth is driven by our GXS acquisition. Licenses were $76 million down 7%. Adjusted net income up 26% operating cash flow up 80% our adjusted operating margin was 32.8% and our adjusted EPS was up 23%. I am pleased with our topline results up 29% our relentless focus on growing our cash flows up 80% and the business that is getting more efficient and delivered 32.8% adjusted operating margin. Year-to-date in constant currency we are tracking to our business plans. Customer support was 39% of our business, cloud services was 32%, license 16% and professional services 13%. As for total revenues by geography, the Americas was 54%, EMEA was 36% and APJ 10%. As for licenses, our ECM, CEM and BPM businesses performed well. We had lower than planned performance in our developing markets such as ASC [ph] in Central Europe, Middle East, Africa, Latin America, China and India. Last quarter I commented on some global macro issues that were creating a change in customer buying behaviors. Our licensed business was most affected by currency and our emerging markets performance. Within the quarter, we closed 15 deals over $1 million, 9 on premises and 6 in the cloud. Financial services and technology sectors saw double digit demand. Cloud customers in the quarters included Schneider Electric, Coca Cola, LinkedIn Financials, Mars and Nestle. On-premises customers in the quarter included DB Shankar [ph] IAG, Singapore Power, IGATE, and Fox Entertainment. OpenText core is now GA and available and I invite you to go to core at opentext.com where you can sign up and try it on your own. Core is our enterprise based SaaS offering for ECM that complements our EIM offerings. Our focus is on enterprise workloads. In the first two weeks we had a 10,000 new registrants and had 50,000 files uploaded. Enterprise customers can now enjoy consumer like benefits are purpose built for the enterprise. Let me spend a little more time on the OpenText Cloud. Over the last three fiscal years we have transitioned our business from zero cloud services revenues to a hybrid model, wherein fiscal 2015 our target model cloud services is 28% to 33% of revenues. Over this three-year time, we have made this transition while expanded our adjusted operating margin from roughly 27% in fiscal 2012 to 33.5% fiscal 2015 year-to-date. We’ve also near doubled our cash flows over the same transition period. Let me highlight some of the core OpenText Cloud facts. A third of our revenues are now from the cloud. We have a more key customer list that includes many of the top Fortune 5000 customers and the world’s leading supply chain company. We’re approaching 20 million annual transactions in our cloud. We run 25 core data centers worldwide where approximately 1,500 production racks and 150,000 square feet of raised floor space. 900 managed service customers, 60,000 cloud customers, 600,000 trading grid partners and near 2,000 dedicated staff. This is a very serious cloud effort and we are operating one of the world’s largest cloud infrastructure. We have been at the license for 20 years, and have optimized the mechanics of the business as reflected by our gross margin for example, on license. We have been at the cloud business for three years. And we are delivering gross margins already in the low 60s and we already operate a very profitable cloud. Just as we have optimized the mechanics of license, we expect to optimize mechanics of the cloud. As I talked about enterprise world we want to be better aligned to help customers consume software in services in today’s market. And that hybrid means choice and flexibility. That strong alignment is about offering a choice between purchasing a license, a subscription, managed services or even shared SaaS. As we kick off calendar 2015, the organization has launch cloud subscription, managed cloud services for all major products and Open Text core. And we now turn our attention to driving adoption. Our sales reps are now paid equally on a license as they are and what we call MCV or Minimum Contract Value. MCV is a guaranteed multiyear agreement for subscription or managed services. Our sale s force is now equally incented and motivated to sell a license for MCV. Customer consumption may move between revenue line and that assign with us. We are focused on wining the lifetime value of that customer on growing recurring revenue and on expanding margins and cash flows. And we have a successful demonstrated history of doing this over the last few years in our cloud transition. Let me briefly touch base on OTEX. I look at the OpenText Intelligent Growth System as a methodology that leads with and produces value. Over the last seven years we’ve achieved 15.4% revenue CAGR through a combination of year organic and acquired growth. In a most year acquired growth being larger – being a lager revenue contributor in organic growth. We continue with this model of a combination of organic and acquired growth. In any given year our performance can of course vary based on the economy, availability of the assets at the right price and of course the road execution. But in the long-term should balance appropriately to a reasonable CAGR. We make investments in organic prudently. We look for value in our acquisition. Let me turn to other big topic for the call and that is analytics. OpenText acquired Actuate, a leader in embedded analytics, to complement its existing information management and B2B integration offerings. OpenText customer using virtually any OpenText product will be able to add analytics to their existing deployment. An OpenText will leverage Actuate IP to offer a new breed of analytics that will provide insight across entire information flows. The acquisition of Actuate strengthen OpenText leadership in enterprise information management by adding power data analytics for structured, semi-structured and unstructured data. The capabilities to analyze the data, together with compelling visualization experience to allow enterprises to gain deeper insight, greater brand experience and better efficiencies. We close Actuate on January 16, just 11 days ago. The enterprise value upon closing was approximately $272 million, roughly 2.5 times trial 12-month revenues or roughly four times trailing 12 months maintenance revenue. We expect that the transaction to be slightly accretive to adjusted earnings in this fiscal year. And then fully on our operating model, by the end of fiscal 2016. Actually its head quartered in San Mateo, California and we plan on consolidated all our Silicon Valley operations in to San Mateo facility. Upon closing, Actuate had approximately 500 employees with roughly 72% to the revenue in North America and 28% rest of the world. Actuate revenues were declining at the time of acquisition given their business model shift from license to the cloud. Consistent with previous acquisitions, we could see revenue decline 10%to 20%. We look to stabilize this decline and then grow the business over time. Further, we have also immediately aligned Actuate to the OpenText business model of allowing a customer to consume the way they want to via a license or subscription or managed services. Actuate’s goal, is to be the leader and delivery personalized analytics and insights by increasing the richest, interactivity and effectiveness of enterprise information. Actuate is focused on big data analytic for powerful, easy to use predictive businesses. They’re also focus on embedded analytics delivering built-in analytic capabilities for data-driven application. Some of the Actuate more key customers include the Royal Air force, NAFCO, HSBC, Scotia Bank, Johnson Controls, CGI, Lufthansa and Shell. Some of the Actuate’s more key embedded partners include NetApp, Cisco, NCR, P [ph] systems, Dell and GE Healthcare. There was a solid opportunity and driving further adoption of embedded analytics, as our customers ask for easy to use and ease to understand analytic. Organizations require intelligence from their data. Finally, the value of the brick developer community cannot be over looked. There are $3.5 million brick developers globally and this will help us expand overall focus on the development community. Actuate has been focused on analytics for 20 years. They are leader in the force to wave. I see three large technology platforms, data store, statistics and visualization, Actuate comes of all three. Back data store, easy to use statistical algorithm, visual data mining, GUI, high-speed columnar data base, business friendly interface and a large statistical library. Let me summarize the OpenText opportunity for Actuate. Greater EMEA and APJ distribution were only 28% of their business -- was only 28% of their business outside of North America. We have an opportunity to increase their non-North American distribution. Continue with embed analytics and attract more partners. Integrate Actuate with our EIM and offering analyst for the EIM install base. We have always been a source for big data. We can now delivery predictive intelligence. Integrate Actuate in our information exchange business next and offer analytics across our business network and the trading grid. And last excess to $3.5 million brick developers globally. The opportunity is far and wide with Actuate and I’m delighted to welcome the company, customers and employees to OpenText. In addition to Actuate we also closed Informative Graphics on July 5th. Informative Graphics has been long time partner of OpenText deliver three products; Brava, Redact-It and Blazon. Brava allows customers to view, annotate, redact and published renditions of any file. Redact-It allows customers to find and reacts proprietary instead of redact proprietary and sensitive connect from a document. And Blazon automates the document transformation process to create renditions according to predefine business rules. The Informative Graphics products are pre-integrated for EIM suites. And from a financial perspective we look at the acquisition more as a purchase to reduce our cost of sale. Some of the Information Graphics key customers included the U.S. EPA, Bayer, Genentech, McKesson, Samsung, CSC, Xerox and Chevron. In summary it’s been a fast start to kind of year 2015 for OpenText with the closing for two acquisitions, Informative Graphics and Actuate. Our inaugural bond offering as w e strengthen the balance. As well as many key products and service initiatives coming out of enterprise world most notably though is in the OpenText Cloud. The closing of Actuate is significantly for us, who allows us to bring analytics everywhere within the OpenText installed base cloud and the developers community. OpenText could not be better position as our vision is a digital first world. And our key platforms while customers begin digitalization of enterprise processes today, such as the customer journey, supply chain, risk in governance, invasion and employee function. The IM are business network, the OpenText Cloud and now analytics, our key technology enablers to help enterprise transform to a digital enterprise and if you will raised their digital portion. We have demonstrated we can expand margins and cash flows as we on board more cloud services revenues and our recurring revenue is now over 80%. I’m pleased with our Q2 performance and year-to-date in constant currency. We’re on track to our business plan. With that, I’d like to open the floor to your questions.

Thank you. [Operator Instructions] The first question is from Kris Thompson of National Bank Financial. Please go ahead.

Great. Thanks, Mark. I just like to talk about the Actuate deal for couple minutes here. I believe they are discontinuing their perpetual offering and I think I heard you say, you are going to reintroduce that?

That is correct. So we’ve already -- if you will sort of align them to the OpenText model where we will allow customers to consume the -- a license, a subscription or managed services.

Okay. And can you give us a little bit of color on how you plan on integrating their team with you guys?

We’re going to keep them as standalone organization as we come out of the gate. We see them as a strong shared services team to both deliver on if you will their own business plan as well as adoption across our EIM suites. So we’re to keep them as a unified sales force reporting up into John Hunter and let them have at it.

Okay. And what about channel conflict, do you think any conflict there with some of your key partners SAP and Microsoft for instance.

No. Not at all, we’ve heard no conflicts at all. So it’s been relatively good reaction, so we haven’t heard any conflicts.

Okay. Last one maybe John or Mark, you said that you expected to be accretive, slightly accretive in 2015, is that before or after the higher interest expenses associated with the new debt?

Mark was talking especially about Actuate when you made that comment Kris.

Okay. So you’re not just asking about debt to this detail.

No, not all. No, no,

Got it. Okay. Thanks guys. Appreciate it.

Yes. Thanks Kris.

Next question is from of Richard Tse of Cormark Securities. Please go ahead.

Yes, thanks. Mark, could you I guess give us a gauge on the size of potential opportunity for actually you install base, I’m sure guys have done some kind of rough math on that just kind of give us an impression what that could be?

Yes. Richard without kind of associated a number with it, let’s me just speak conception ally about it. We’ve come a long way as a business without providing a modern analytic package to our customers. We haven’t had a resell agreement with other packages in the market. RKT was sort of a reporting package to work in specifically inside certain compartments of ECM. And that’s why I’m excited about the opportunity because we haven’t gone to market with a formal analytics package. We like what Actuate does on it owns for embedded analytic as well as they’re a developer community, but driving adoption patient in our sweets and then adoptions for ECM, BPM, we think is powerful. On acquisition we tend not to bake in revenue synergies. There are unexpected upsides for us. But we’ve never go into market with an analyst’s package and that’s why I’m pretty excited about Actuate.

Okay. And then just switching gears a little bit, you guys are offering quite a spectrum of pricing models right now. Can you give us impression of which mall you found the most popular among your existing and perspective customers?

Well, yes, consumption model, so I’ll call them consumption models. Look we’re just coming out of the gate. Now we announce that enterprise world that we would be basically taking the GXS managed service and offering that globally within our core EIM suits and we kick that off in early January. We talked about subscription at enterprise world, but kick that off early January and we talked about OpenText core and that’s now gone GA here over the last couple of weeks. So we’re really just kicking of the calendar year by offering that full spectrum of consumption model. Now I’ll provide a little bit of color. We had a couple of customers who kind of went to this model early for us last quarter, City of Madrid, New Zealand Ministry of the environment. Where historically they maybe have been license or they decided to consume via subscription because that matched up best with their budgets and how best they wanted to consume. But I think it’s early to tell.

Okay. Fair enough. And this is sort of I guess hard question, but I haven’t seen any data out there on this patent infringement case against box. I think they over turn one of 400, I think 400, 500 cases you guys had within that broad case. What’s the status is that right now?

We got a trial next week.

Okay. All right. Looking forward to hearing the outcome of that. Thanks guys.

Yes. Thanks Richard.

The next question is from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.

Hi, good afternoon. Mark just going back to licenses should I takeaway these at the – I guess more developed markets performed more or less in line with your expectations or is there any weakness there?

No. Thanos, our license business was really primarily affected by currency in our developing markets. If we go back and look at our offer of data points here. If we go back and look at our trailing 12 months organic license right now, its drop to 6%, last quarter it was 11% to 12%. Now all in it would be 8%. But the in quarter performance is the two things that affected at the most was currency and our emerging market performance. And our organic growth over the trailing 12 months is 6% and all in 8%.

And just to be clear that’s – those are constant currency number or no?

No. That was just a straight up numbers. I think constant currency that would be higher.

Okay. And should we think about that developing market weakness persisting into the current quarter or is it too early to tell?

I think it’s too early to tell. I mean we took a position a couple of quarters ago on the economy. We feel it was prudent to be cautions on investment and maybe unfortunately we will kind of write and what we were seeing. If anything its turn to little more volatile with outside of the U.S., the U.S. is strong, U.S. currency is strong. But outside of the U.S. with FX, volatility, price of oil volatility, deflation worries in EMEA, I think we were wise to kind of take our cautious position and that cautious position remains.

Okay. And then just last one for John, our maintenance renewal still tracking about visibility has there been any change there?

No change. Low 90s, same as last quarter.

Great. And I’ll pass the line.

Yes. Thanks Thanos.

The next question is from Scott Penner of TD Securities. Please go ahead.

Thanks. Just first of all, Mark, what has been the feedback on the core products since you guys unveil the enterprise world and do you think the use case sets up the product against box or drop box?

Well, I wouldn’t say again its dropbox, but look the first two weeks of unabated, uncontrolled assess if you will. You can core.Opentext.com, the world can go sign up and use it. That’s been very favorable. I mean, this is an asset we build from the ground up. We took all our ECM and enterprise experiences and created a new platform. We’re going to add more applications to it over time. And first two weeks have been positive.

And with the upcoming release of SP1, I think given your geographical the answer is no, but did you see that having any real impact on license revenue or customer renewals?

No, no, no.

Okay. Richard asked a good question about the and you made a good answer about the couple customers went early to subscription instead of license revenue, did that, were those sizeable deals?

One of them was greater than a billion.

Okay. One last question for John and this is what is – what’s going on if you could flesh out the special charges, look like there was a reversal this quarter and then following on that have you guys formulated the plan for charges related to Actuate?

So the answer to the second part of the question is no, we haven’t, we’re working on that Scott, so nothing to announce there as yet. There was a reversal of a sales tax liability that was set up on our previous acquisition. And we had some fairly news in a couple of jurisdictions in the U.S. and so there was a reversal of an accrual that had been previously and that came through special charges. So that’s why you’re seeing the credit.

Excluding Actuate should we expect any additional charges for the next couple of quarters?

I think we got about 5-ish million dollars left on GXS, so we’re expecting to finish up our GXS integration over the next couple of quarters so you may see a bit come on through GXS.

Okay. Appreciate it. Thank you.

The next question is from Philip Huang of Barclays Capital. Please go ahead.

Thanks. Good afternoon. Question on sort of the installed base upgrade to red oxygen. I was wondering what improvements have you seen on the cross-selling, deal side seems like its continuing to grow. I think it’s up 5% year-over-year this quarter, I was wondering if you could see that growth accelerate from herewith SP1 in months?

Yes, Phil, thanks for the question. So year-over-year the deal size up I think 272 to 289 so that’s a good indicator. We don’t have any additional metrics we’re going to put today. We looking towards SP1 the kind of be, kind of that – kind of next way for us before blue carbon. So we’re happy with the average deal size increasing year-over-year and we’ll get more data when we bring SP1 fully to market.

Got it. And how quickly would your customers be able to see added functionality from Actuate on the new integrated platform.

We already have –we’ve already released – we are working in parallel at some of the open source version of Brad [ph] and conjunctive with the close we’ve offered some integration packs day one.

I see, got it. And then switching gears to more like the macro environment for a second, can you maybe talk a little bit about the sales cycle under current environment. Are you seeing any improved visibility since the last quarter as it remain relatively lower than normal, and if so how sales team matching through to a space of lower visibility?

Yes. I wouldn’t say we have any lower visibility, in fact let’s say our visibility is reasonable good actually. As we come into the year. Our new CMO Adam is pipeline oriented and very focused on driving pipeline globally. I talked earlier about we took a – we thought it was prudent to take a conservative financial positioned given net FX deflation worries price of oil. I see here strong sense of commitment in moral around having our sales reps being equally incented whether it’s a license or [Indiscernible] MCV. And that’s been a strong motivator for the sales force. We required a multiyear agreement, guaranteed agreement, GXS is operated this way for almost near decade. We learned. We took some of the best things from and easy link and some of things from the industry and put our kind of own program in place. But the motivator and I think if the economy remains conscious just like we saw in United Barcelona Madrid rather as well as the New Zealand Ministry. Subscription can be an easier path to kind of come on board as a new customer maybe perhaps as a license.

Got it. And then, final one from me. If my calculation is correct you’re roughly a knife through your acquisition target of $3 billion for five years, can you maybe give us an update on how much liquidity you currently have two for acquisitions, so your view on the current environment for accretive opportunities whether you see maybe if there is opportunities for tuck-ins or more maybe platform size deals? Thanks.

Yes. So, Philip really two part question there. One is liquidity which I’ll take and then Mark will take the pipeline. So we finished the quarter with $543 million of cash. We, as we said we went to market on a bond deal we were very successful with that. We upsized our revolver from $100 million to $300 million. So overall our liquidity and combined with that we generate cash every month, every quarter. So our liquidity position has never been stronger. Mark, you want to talk about the pipeline.

Yes sure, thanks. So looking Informative Graphics and Actuate in my prepared remarks I talked on the script, but we continue to be active in working our pipeline within corporate development. So we’ll continue to work our pipeline and Corp. death is 100% network.

Got it. And then sir, just to clarify question for John, so based on that calculation is it roughly or like just over $1 billion dollars in terms of liquidity for deploy available for acquisitions currently?

Well it’s at a point in time reflection Phillip so I’m looking at it how much cash do we have on the balance sheet at the moment. So we finished the year at 542, of course we paid for Actuate then we had another $300 million come on from the bond deals so we are about flat there. We’ve got incremental $200 million liquidity from the revolver and then we are generating cash every month and every quarter. So looking out over the next several years we believe we can keep our capital structure intact, have a very conservative debt load and at the same time still finance these acquisitions.

Great. Thank you very much guys.

Yes, thanks Phillip.

The next question is from Paul Steep of Scotia Capital. Please go ahead.

Great, thanks. Mark, maybe you could talk just a bit cloud deals in general and more to OpenText Core which I know is just launched. What targets do the sales team or do they have any targets in terms of selling cloud or license. It sounds like they are agnostic that are you pushing the team to sort of try to gain more experience around selling on the cloud side and the traditional business?

Paul thanks for the question. Now we want customers to consume that’s best for them. And I’ve never believed that you get the corporate result you want by really manipulating the way or encouraging a rep to sell the way corporate wants to sell versus the way a consumer or customer wants to consume. So we’re agnostic, we’re agnostic as to whether it’s a license or MCV as I said in my script we are – I don’t want to sound professorial here, right but if we look over the last three years we are very pleased with our growth in recurring revenues, the ability –our demonstrative performance of improving adjusted operating margins as we’ve transitioned to a third of our revenues in the cloud, a significant contrast of the other companies were profitable. In a lot of ways four years ago what licensed in the high 20s as the mix of our business to where year-to-date it’s 14% to 15%. We’ve de-risked that revenue line significantly. So that’s why we want to go faster and offering the full choices for customers of how they want to come on board. So we’re agnostic to the revenue line. We’re not agnostic, in fact we have a very strong point of view that we want to win the maximum customer life time value whether it’s a license, subscription men at services, combination of all three.

Great. Just on the cloud as well since presumably the majority in this quarter and you indicated one likely was sort of co-related over the $6 million plus deals. Of those though what are we seeing in terms of the I guess the core GXS business are there new clients, old clients are they upsizing or renewals. I think some context run GXS given what we are at would be I think useful and helpful. Thanks.

Yes I would say in the – yes I guess we didn’t call it that much script, but for our managed services business we brought on board roughly 40 new customers in our managed services business over the last quarter.

Great. And that was up, I think you were tracking it 8 years or something before so that it’s a significant lift there if I’m not mistaken, but I’ll go back and check that. The last part would be what’s been the move to version 10 in the sort of the core base as a final point. Thanks.

Yes fair enough. I would highlight Coca Cola and LinkedIn as two new customers. I am clearly very more key names. Those are new customers to OpenText and both of them specifically into managed services. I’m going to – when we get SP1 out we’ll come back with some more metrics, I think it will be more meaningful of the discussion on installed base

Sound great. Thanks.

Thank you.

The next question is from Michael Nemeroff of Credit Suisse. Please go ahead.

Hi, this is [Indiscernible] in for Michael. Thanks for taking the question. Just a couple of housekeeping questions from me. John, can you quantify what the revenue contribution was from GSX this quarter, was there any benefit to license and also given the significant effects impact of total revenue can you quantify the individual impact to license class support service lines.

We don’t break out the license coming from GXS but it was immaterial this quarter as well as the last quarter. Second quarter was FX by line items that you asked.

Correct.

Yes, I can give you that so. If I look at, I’ll give you second quarter versus rates at the beginning of the year. So the impact overall was $16 million, license $3.5 million, Cloud was about $3.5, customer support was just over 6 and services was around 3.

Great, thanks. And relative to your I guess revenue expectations where actually you had mentioned kind of the 10% to 20% decline year-over-year, but how does that look like from a revenue mix perspective considering their revenue, ongoing revenue transition.

Yes no comment on where we think it’s going to fall. If we sell a license it will go on the license line, if it’s a subscription it will go on the cloud services line. So as we get a little more experience would actually will talk, will talk more about it.

All right. Thanks very much.

Next question is from Paul Treiber of RBC Capital Markets. Please go ahead.

Well thanks very much. I was wondering if you could speak about the efficiencies that you are seeing in the business over last year, so and in particular just in regards to sales and marketing it looks like it dropped from about 22% a year ago down to 19% currently. Is that coming from GXS or is it related also to efficiencies in the traditional enterprise software or core OpenText business?

Yes I think it’s a combination I mean. The marketing expense is up overall, but down as a percentage of revenue, you’re right. And that not really is the inclusion of the additional revenue from GXS. Overall the business we’ve continued to headcount we were 8000 people overall in total, this is the same this quarters versus the last quarter and the quarter before. So we are really managing the overall expenses of the business as Mark talked about and sales and marketing is a product of the GXS inclusion of revenue.

And then could you just delve into further on the prudent cost options that you took just how are you implementing those so you don’t overly constraint the spending particular when you have some new product launches on the roadmap?

So Paul, I’d say we’ve been leveraging our Manila and India facilities over the last year, very, very well. We are also looking at a stronger force ranking system where we put programs and initiatives that we think will drive our pipe and revenue and are accelerating through good visibility and executive review, some of our consolidation programs or facilities data centers, network and operations.

Okay, good to hear. Just lastly, just on the emerging markets license business, did you see the [Indiscernible] of performance, do you attribute that more towards external factors or is it related to execution in the quarter. And then what changes do you think are necessary, or would you make to improve performance going forward?

Well I’m not one to hesitate to say it’s on us with execution, but in this particular case I already said over the last quarter my fate’s more macro factors. And in a lot of ways we just have to – we remain very committed to these markets. We are not going to add additional markets right now. We are doing deeper reviews in each of the markets but I would say it’s more oriented towards macro for its execution.

Okay, guys thank you. I’ll pass the line.

Next question is from Stephanie Price of CIBC World Markets. Please go ahead.

Good evening.

Hi Stephanie…

Hi just a bit of follow on to the last question there. Can you talk a bit about the channel and partner strategy. I think that’s the way you may be entering these emerging markets like the [Indiscernible] and maybe the mix between those traditional partners such as SAP?

Yes so our SAP relationship remains strong. We had a good ECM quarter which includes are SAP application business. I was pleased with the performance. Our channel influence was roughly third of our business, I think 36% maybe a little higher than a third of our business relatively consistent perform year-over-year. And we are making progress with some of the larger as size especially as we think about digitalization and analytics SI [ph] such as Deloitte, Accenture, Capgemini, Mackenzie as well. We’re making a steady progress with some of the larger SI.

Okay. And then in terms of your sales force, I mean not simply stable over the last couple of quarters as well. Can you comment if there is any changes you are looking at there or if you are happy with the organization as it is?

I’m happy with the organization. The only change we’ve made is to set and motivate every quarter carrying rep whether it be a license or MCV.

Great. And then final question for me, just around the competitive situation. So has there been any changes in the quarter that you saw?

Pretty consistent to my comment at enterprise world. We are paying attention closely to the HP break up as well as the Symantec break up and as well as we soft and a few other secular competitors.

Okay, thanks.

This concludes the question and answer session. I will hand the call back over to Mr. Barrenechea for closing remarks.

Very good. Thank you everyone for joining. As we enter calendar year 2015 we enter the year with a very strong line up around digitalization, cloud and analytics. A third of our revenues are now delivered in the cloud and over 80% of our revenues are occurring. Total revenues were up 28.7%, operating cash flow is up 80%, adjusted operating margins 32.8% and adjusted EPS up 22.8%. We are pleased with our top and bottom line performance in Q2. Thank you for joining the call and that concludes today’s remarks.