Open Text Corporation (OTEX) Q3 2015 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Third Quarter 2015 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [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 would like to start the call with the 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 a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions 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 a conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion while making a forecast or projection as reflected in the forward-looking information, as well as the risk factors that may project the future performance results of OpenText, are contained in OpenText's Form 10-K and 10-Q as well as in our press release that 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 maybe found on our website. And with that, I'd like to welcome everybody to the call. With me today is OpenText 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 a replay available shortly thereafter. I would also like to direct investors to the Investor Relations section of our website where we posted an updated PowerPoint that will be referred to during this call, as well as a summary table highlighting OpenText'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 everyone to the call. And second of all, I am very pleased -- Greg and I are very pleased to be sitting here in person with Mark in our Silicon Valley Actuate Office. Mark, it's great to see you. And look forward to your comments shortly.

Yeah. Look forward and thanks John.

Yeah. So turning to the financial results for the third quarter of fiscal year 2015, as noted in my quote in the press release foreign exchange had a very significant impact on our top line, bottom line and in our comparatives for the quarter. Compared to Q3, 2014 revenues were negatively impacted by $30.9 million and adjusted EPS negatively impacted by $0.07. Total revenue for the quarter was $447.6 million, up 1% compared to $442.8 million for the same period last year. And on a constant currency basis using rates in factoring Q3 2014 total revenue was $478.5 million, up 8.1%. Regionally the Americas contributed 58%, EMEA 33%, and Asia-Pacific 9%. Recurring revenue for the quarter was $383.6 million, up 4% year-over-year compared to $369.7 million for the same period last year. On a constant currency basis recurring revenue was $408.2 million, up 10%. I would like to now take a closer look at the components of recurring revenue. First cloud services revenue for the quarter was $143.8 million, up 12% from $128.4 million in the same period last year and up 17% on a constant currency basis. The increase is primarily from the GXS stub period, which had a revenue in North America and EMEA. Cloud services gross margins decreased to approximately 58% in the quarter from 62% in the same period last year. Margins were impacted by bad debt expense, the timing of certain other expenses and the non-occurrence of certain one-time credits that will not repeat. Customer support revenue for the quarter was $184.3 million, up 2% compared to $180.3 million in the same period last year and up 10% on a constant currency basis. Customer support gross margins remained relatively stable at approximately 87% compared to the same period last year. Professional services and other revenue for the quarter was $55.5 million, down 9% compared to $61 million in the same period last year, however only down 2% on a constant currency basis. Professional services gross margins 20% in the quarter versus 19% in the same period last year. The improved margins were primarily due to lower labor related expenses, associated with lower revenue attainment and a reduction in the use of our subcontractors. Margins are off since last quarter primarily on account of Actuate which had historically low services margins, non-recurring impact of one-time charges and some timing differences on expenses. In terms of license revenue for the quarter $64 million, it was down 12% compared to $73.1 recorded for the same period last year, down 4% on constant currency basis. The decrease in license revenue was primarily due to EMEA, where we continue to see selling challenges in an overall tough economic environment. Gross margin for the quarter before amortization of acquired technology and stock compensation 70.8% compared to 71.3% in the same period last year. Year-over-year gross margin slightly lower primarily because of revenue mix and margin variances. Pretax adjusted operating income before interest expense, stock compensation was $115.2 million this quarter, down 11% compared to $129 million in Q3 of last fiscal year, and on a constant currency basis adjusted operating income $125.9 million, down 2% compared to Q3 of last fiscal year. Adjusted net income decreased by 21% to $80.6 million in this quarter, down from $102.6 million in Q3 of last fiscal year. On a constant currency basis, adjusted net income decreased by 13% to $88.9 million. Adjusted earnings per share $0.66 on a diluted basis compared to $0.84 for the same period last year, down 21%. On a constant currency basis, adjusted earnings per share was $0.73 on a diluted basis down 13%. Overall, adjusted earnings per share was negatively impacted primarily by foreign exchange fluctuations, industrial interest expense, our lower license revenue and the four-point percentage increase in our adjusted tax rate from 14 to 18. During the quarter we closed the acquisition of Actuate and IGC for approximately $332 million and $40 million respectively and in the quarter Actuate contributed $14.5 million of revenue after reduction for purchase price adjustment of approximately $3 million. Actuate's adjusted operating margin would have been approximately breakeven, but for this purchase price adjustments of revenue. The adjusted tax rate for the quarter was 18%, an increase of 4% from the same period last year. On a GAAP basis income from operations before interest and taxes for the third quarter was $52.6 million, down 21% from $66.8 million in the third quarter of last year. GAAP income before taxes $26.2 million in the current quarter versus $58.8 million in the same period last year. The decrease in income is primarily due to the higher interest expense on account of our high yield bond issue, foreign exchange losses and amortization expense from new acquisitions. Net income attributable to OpenText for the third quarter in accordance with GAAP was 26.6 or $0.22 a share on a diluted basis compared to 45.8 or $0.38 a share on a diluted basis same period last year. The company achieved its highest ever operating cash flow, and we are very pleased about that. At $143.1 million an increase of 1% compared to $141.4 in the same period last year. We are pleased with our strong working capital management in the quarter. There were approximately 123.1 million shares outstanding on a fully diluted basis for the third quarter of 2015. Moving to the balance sheet. Deferred revenues were $384.8 million compared to $349.9 million at June 30th and $352 million at March 31st. A big change this quarter was the contribution of Actuate to $35 million attributable to deferred revenue in the quarter. Accounts receivable was $251.8 million compared to $292 million at June 30, 2014 and $257.3 million at March 31st. Days sales were 51 compared to 53 and 52 in the previous periods. At March 31st, our headcount was approximately 8,700, 2,200 in R&D, 2,100 in cloud, 800 in customer support, a 1,000 in professional services, 1,500 in sales and marketing and 1,100 in G&A. If you back out the acquisitions of Actuate and IGC, headcount was 8,200 and was relatively flat compared to our headcount of 8,100 in March of last year. Part of our commitment to bring value to our shareholders on April 27th, the Board declared a cash dividend of $0.20 per share for shareholders of record on May 29, 2015 payable on June 19, 2015. This is an increase of 16% from the last declared cash dividend of $0.1725 per share. The target model that we issued at the beginning of the year remained unchanged, and we will provide the usual update for next fiscal on our next call. And last thing I would like to do is just point to slide nine in the investor deck that was sent out. And I just wanted to make sure that everyone on the call was aware of these key financial metrics. You can see that we've broken this down into three buckets. The first is foreign exchange. I have covered that pretty clearly, but just points out 33% of our revenue is from Europe. Here is the impact in the quarter and year-to-date from foreign exchange. And then we have also line-by-line given you our 12 months trailing growth rates for each of our revenue line items. And lastly just to confirm the tax rate for the remainder of this fiscal year remains at 18%. Obviously, we will update next year when we update you on the next call. And interest expense is expected to remain at approximately $18 million per quarter. So that's the end of my presentation. Very pleased to be turning the call over to Mark.

Thank you, John and welcome everyone to our fiscal 2015 Q3 earnings call. The global economy in our industry are experiencing a fair amount of change, and in that change we see great opportunity for OpenText. The strengthening of the U.S. dollar, lowering GDP growth rates, energy prices and political conflicts are top of mind when we look at the global landscape today. It is not an easy selling environment in many countries. Further, our technology industry has transitioned to what I would call the subscription economy. Customers want more choice and flexibility on how they consume technology. What has not changed in our view is that great companies to return long-term value to their shareholders, focus on capital allocation, profitability, earnings and cash flow. I put OpenText firmly in this category. Let me start with foreign exchange and the strengthening of the U.S. dollar. As a reminder, we are a Canadian company whose reporting currency is the U.S. dollar. Over the last 12 to 14 months, the euro has moved against the U.S. dollar from $1.37 to $1.10. The Canadian dollar has moved from $1.05 to $0.80 U.S. approximately. Within Q3, the euro alone moved 7% against the U.S. dollar. With that in mind I would like draw your attention to our press release and ensure you see our constant currency table and their effects within the quarter. In Q3 alone FX had $30 million negative impact on revenue. It’s a negative impact of $0.07 on adjusted earnings. Year-to-date revenue has been negatively affected $42 million and adjusted earnings negatively affected $0.09. It goes without saying our business performance is subject to foreign exchange. These are very unique moments in foreign exchange and what are we doing about it and what's in our control. Well, we will continue to manage to the bottom line and strong cash flows. Within Q3, we had record operating cash flow of $143 million. Over the last two years, we returned $156 million to shareholders via our quarterly dividend program, which is now entering its third year. With our dividend target being 20% to trailing 12-month operating cash flows and the consistent strength in our operating cash flows, we are again raising our quarterly dividend as John mentioned now to $0.20 per share. We continue to look at hedging various expenses as we look to extend our existing investment and labor resources at our Philippines, Indian and Canadian facilities where and when we add new employees. At the end of the day, we may continue to have revenue volatility due to foreign exchange. We believe we can add value to shareholders by continuing to carefully manage our bottom line, generating solid cash flows and, of course, our dividend program. Let me transition a bit to the cloud. We have entered what I would like to call the subscription economy, where consumers and enterprise customers alike want more choice. And by choice we mean the ability to subscribe to a service whether that service be on-premise, hosted in the OpenText cloud or hosted in somebody else’s cloud or the ability to gain access to OpenText capabilities via SaaS model or web-based services. Across the industry, we see the largest technology firms such as IBM, Oracle, SAP and Microsoft leading with the message of cloud. At OpenText we continue to see our business solution as hybrid. Delivering for our customers both on-premise and in the cloud and presently there's a strong interest in the cloud based solution and cloud based economic aka subscription pricing. Over the last couple of years, we've gone near zero in cloud services revenue to $143 million this quarter. We run on our cloud services at industry-leading margin and are bright line profitable. As many of you know, the majority of cloud businesses out there in the industry today are not profitable. And that is not sustainable for those company's long-term. We by contrast have built our cloud business on a business model that we can scale via our own and acquisition and have chosen profits over hypergrowth. In November 2014 at Enterprise World, we introduced the full range of cloud service options. That would go operational in January of 2015. These options are now available to customers which include a three-year subscription to our software, new managed services for the enterprise business, new SaaS offerings like OpenText Core and other options as well. We have been delivering cloud services for a couple of years now, supported by strong and expanding recurring revenue, up 10% in constant currency this quarter, and a total of recurring revenues at 86% within the quarter. We have also grown our adjusted margin over this multiyear period, as well as grown our cash flows. In our first 90 days with these new options we've seen solid interest from our enterprise and iX customers. To be crystal clear, we're agnostic to whether a customer purchases a license or subscription or managed services from OpenText. Rather, we are focused on winning the customer and capturing the lifetime value of that relationship. As we've said in the past, we expect and planned for this expansion of customer choice. In many ways a subscription after three years could be more economically beneficial to OpenText than a license. We will continue to manage the key metrics. They include recurring revenues, adjusted net income, and cash flows. At the end of the day, we will continue to invest in world-class products for our customers in whatever way they wish to consume them. John has covered the quarter well and let me add a few additional in quarter remarks. And I will speak about customers and our direction over the next 12 months. We do not meet our financial objectives for the quarter and let me summarize it. Our revenue was affected by FX and new customers considering our cloud solutions. Our cloud services business was up. Our maintenance business was up. Our license business was down. For PS, we focus more on margin contribution versus optimizing revenue and when we deliver margins to the low 20s, we are pleased. Our profit was affected by FX and some unique items in the quarter, such as acquisition costs, PPA expense, bad debt expense and litigation expense to name a few. Our cash flows were a record high. As I mentioned early in the script, it does remain a tough selling environment to many countries as well. Let me spend a little bit of time on customers, and I would like at add some highlights as well as spend time on our direction. We had a good quarter for enterprise customers selecting OpenText. New iX business included Manulife, Hasbro, Cordys and Roche Diagnostic. New ECM, ECM business included the State of Maine, which also included our new BravoSolution from IGC, T-Mobile for customer portals, Central Hudson for engineering documents and the ECB as new regulations are instituted across the European banking system. New BPM business included pillar who bought our client management solution, OptumInsight who extended their process suite platform and Trustmark who actually purchased Execute360. Analytics included Hartford Insurance for Plaintiff streaming, Bank of Nova Scotia using our technology in customer facing application, and Fujitsu for our reporting from the cloud. We are focused on leading and winning the digital transformation for enterprise customers. As you can see from the quarter customer wins we are winning key enterprise accounts. Within the quarter we closed on our Actuate acquisition and entered the analytics market with two leading industry products in BIRT iHub for operations reporting and dashboarding and BIRT analytics for forecasting and predictive analytics. This is an exciting opportunity for our customers and partners. We see opportunity and standalone analytics, embedded analytics as well as providing context-rich integration into our EIM offering. Within the quarter, we delivered integrations into ECM for reporting big data analysis, as well as an iX offering to analyze trading grid data. We also completed many of the back-office integrations within the quarter and expect Actuate to be fully integrated and on our operating model within 12 months of the acquisition date. Within the quarter, we also delivered SP1. One key capability in SP1 is process center for SAP, integrated into our content tweak or extended ECM products giving users end-to-end visibility to their SAP processors, sales orders, invoices, delivery notes, and many others. These applications include new highly technical machine learning capabilities, to capture and memorize both formats and metadata making it easier for SAP customers to find data rapidly. We also delivered a new media management solution with a robust creative review module. We've already seen several of our large media customers migrating to the solution like Target and 20th Century Fox. Further, we delivered a new contract management module built on top of process suite that supports both the buy and sell side contract lifecycle and this, of course, is fully integrated with content suite. Next for us is Blue Carbon which will focus on several new areas. Blue Carbon is an important release for us as this will be our third year focused on EIM and integrated suites of software to deliver a digital enterprise. We expect to have initial deliveries of Blue Carbon at the end of this calendar year, but in the meantime, our sales force and customers remained focused on the robust SP1 suite of products. Our top focus in Blue Carbon is on completing key information flows, capture to disposition, create to published, procure to pay, incident to resolution. It took ERP 20 years to deliver complete information flows for back-office automation. Now in a process as comprehensive enough, touches enough employees or customers and you can fully automate it end-to-end with one piece of software for one supplier with little to no integration services, you create a catalyst for your software. This is our objective with Blue Carbon and three years to focus commitment and investment with the EIM. We'll also include a new release of content server with a new user experience layer for the modern knowledge worker and also new releases of StreamServe, InfoFusion and Auto-Classification. Also a new release of our Process Suite, which will enhance the application development process and more integration into smart workflows. A business analyst will truly be able to develop application to extend the Process Suite without any programming required. Over the next 12 months, we will lead with cloud, analytics, SP1 and complete suites of software with Blue Carbon. Of course, these key innovations are not yet fully reflected in our financial results. Let me also provide a brief update on myself. In February, company announced I was to undergo leukemia treatment over the next 100 days. We remain on that plan and I'm making good progress. Although I have cut back, I might travel; I've remained fully engaged to the day-to-day strategy and decision-making of the company. Let me thank everyone for their well wishes, your support has been warming and inspiring and at times very creative. I can't thank you enough for the support. Let me move to conclude my prepared remarks. The headlights for me in Q3 are foreign exchange, cloud, some unique expense items, strong cash flows and a strong product lineup. The U.S. dollar strengthened so dramatically, it clearly had effect on our top and bottom line. But we were able to deliver solid cash flows and a 16% increase in our dividend program. We also had unique expense items that we do not see as reoccurring. And we see an opportunity to manage expenses in people as foreign exchange volatility present itself. As John stated, we reaffirmed our FY 2015 target model which remains unchanged. Over the last two years, we have delivered a solid cloud services business, which continues to gain more interest for customer. We've recently launched new subscription SaaS and managed service options in January, and early indications are positive. We're also entering a new business area for the company, analytics we're not yet even 90 days into it. Our product and services line-up strengthen in Q3 with cloud analytics in SP1 and Blue Carbon scheduled for the end of the calendar year represent three years of commitment and investment to delivering an integrated suite of software for EIM and enabling customers to deliver a digital enterprise. Again, OpenText is committing to leading and winning the digital enterprise with the EIM for customers through our own innovation and through acquisitions. With that, I'd like to turn the call over to the operator for your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today is from Richard Tse with Cormark Securities. Please go ahead.

Yes. Thank you, Mark really good to hear that you're doing well here.

Thanks, Richard. Good to hear.

Yeah. I had a sort of question. In your absence, what parts of the strategy have been through put on hold, I'm guessing it must be something in terms of maybe the acquisition, but maybe you can elaborate a little bit on that?

Yeah. Sure. Thanks. Well, I haven't been absent, so I remained fully engaged in the business on strategy, key decisions. We set-up an operating committee with myself, Gordon and John and I really describe nothing's been on hold for the company. The company is bigger than any one person including me and it's been full steam ahead, Richard.

Okay. And sort of switching gears here to Actuate obviously that's kind of a new vertical for you guys, I think in your presentation they are doing a run rate revenue of $58 million or so on an annual basis, what you guy see as the opportunity for that business over the next 12 to 24 months?

John is looking at the numbers. Look we're very excited about bringing analytics into OpenText. We've -- in a lot of ways we've come so far without analytics as an offering to our customers. So, first and foremost, we like the standalone opportunity that Actuate brings just in and of itself. And we very much like the embedded market which differentiates ourselves for maybe a Cognos and BusinessObject. Secondly, there is large scale opportunity for us as we deeply integrate Actuate into our ECM offering and into our iX cloud services and we've delivered both of those initial integrations. So, customers who have spent the last five, 10 years of bringing lots of data into a content suite, now have a very robust tool to do dash boarding forecasting and big data analysis and we've just recently delivered that integration. The second integration that we've provided at the end of the quarter was an integration between Actuate in our trading grid. So, our many thousands of customers can now analyze supplier and product performance and SLAs within the trading grid. So, analytics is a real good opportunity for us. We've been at this business roughly 90 days now. We like the standalone opportunity, the embedded opportunity, and the integration opportunity leading with content suite and exchange suite.

Yeah, just on the numbers Richard, on the service, it would look like 14.5 for the quarter; as I mentioned we took revenue here $3 million, they are coming off a pretty good fourth quarter and so this quarter was a little low, so I think that run rate that you mentioned is fairly low.

Okay. The reason I asked that question is that unlike GXS, where there is incredible cost synergies, I would have to think that this is probably more of a revenue [parity] [ph] transaction. Not to sort of harp on that, so do you think this is a $200 plus million opportunity for OpenText in the two years here?

It’s certainly an opportunity, Rich. I wouldn't get down to a specific number. And look, in some ways, we’re off to a little slower start than usual on an acquisition. We've been as you say focused a bit more on getting those revenue synergies than maybe the expense synergies coming out of the gate because we do see that opportunity. And like I said in my prepared remarks, by the end of the first year, they will be fully integrated and fully on our operating model. But we're off to a little slower start on the expense side, perhaps as a trade-off of trying to do more integration and focus a little more on the revenue side.

Okay. And I have got one last question here for John probably, what percentage of the cloud business operating costs are fixed? And that's it for me thanks.

Richard, I’ll have to take that one and come back to you. Off the top of my head, I don't know exactly what percentage of the cloud expense are fixed. So, leave that with me I’ll come back to you. Greg and I’ll get back to you.

Okay, great. Thank you.

The next question is from Steven Li with Raymond James. Please go ahead.

Thank you. Great to hear from you Mark.

Thank you, Steven.

I had a few questions. John, Actuate had services and subscription revenues; did I hear you correctly about these are now part of OpenText cloud revenues?

No, we're breaking Actuate out into the specific line items Steven. That’s not what I said. What I said was that we had -- when we looked at the purchase price accounting, we're forced to take a $3 million revenue haircut on the deferred revenue balance that we inherited, but in terms of the underlying revenues where booking goes to the appropriate line items.

So, where would the service -- the Actuate services where would it be recognizing, if it will be OpenText different revenue?

License would be in license, customer support would be in customer support, cloud would be in cloud.

PS would be in PS.

Yeah.

Okay, great. And out of 10, seven figure deals, the press release states there were seven [indiscernible] iX which I suppose were GXS and cloud. So there was no cloud non-iX deal greater than $1 million, correct?

That's true. Yeah.

And last quarter there was one?

Greg, do you have that -- I don't have that handy. I don't recall there being one last quarter, Steven, but…

Okay, that's fine. And any other metrics you can share on cloud subscription deals that are non-iX; last quarter I think you gave us a number of new customers in managed services.

Yeah, fair enough, Steven. We just -- part of the synergy or opportunity, probably a better word, between GXS and core OpenText on the acquisition was being able to extend their managed services which they do wonderfully to our enterprise customer. And we've officially launched that at scale across the organization globally and select datacenters in each of our geographies, they are going to offer to our enterprise customers those managed services. So, we've been really in earnest at it for about 90 days. And the initial reaction is very good, I'd expect to talk about a couple significant wins in this quarter actually when we get to our call in July. But we've been at it about 90 days, the interest is very solid. We're going to win customers this quarter for enterprise, managed services and subscription, leveraging the GXS infrastructure. So, still early days and we'll be talking about some wins this quarter on the next call.

Okay. And then one last question for me, on your OpEx, I would have expected a bit more valuable cost, so for example, cutting back on bonus approval given the revenue mix, but also your Canadian OpEx to shrink a little bit given the FX moves, but did not see it, so can you give us a bit more color about these unique expense items you referred to maybe even quantify it?

Yeah. Well, a couple of things Steven. So, one thing on OpEx you've got to keep in mind is the inclusion of Actuate. So, as I mentioned from a headcount point of view excluding Actuate and IGC, we're basically flat quarter-over-quarter, so we haven't been adding a lot of headcount. We continue to focus on expense management, but you really do need to factor in each of the OpEx line is the inclusion of Actuate. You're right, we did see some benefit from foreign exchange, but as Mark said we did have some one-time adjustments as well and as an example of that, you read about the litigation we had with Fox. We did not -- we had a settlement or a jury, a verdict, but we've not had a settlement with Fox. So, we've not book the revenue, but we're carrying those costs and that was several million dollars in the quarter. So, that's an example of a one-time OpEx item and also factor in Actuate.

Great. Thanks.

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

Hi. Good afternoon. Quick one for me. First given the margin this quarter, I was wondering excluding what you deem as one-time items, what was your non-GAAP operating margin in the quarter?

Well, it's in the release the Philip. I'm not sure. Adjusted operating margin for the quarter was 25.7%.

But that includes one-time items that you -- including the service expenses related to the acquisitions and other one-time items, right or I'm just wondering if you would exclude all those what would be--?

We haven't unbundled those things. I've highlighted a few of them. But we haven’t unbundled them to provide another view of operating margin. Those are all items that belong there. We’re just pointing them out from a timing and one-time point of view.

Okay got it. And then regarding Europe, I think you mentioned in your opening remarks that EMEA continues to be a tough selling environment due to the economy there. I'm just wondering what visibility you might have and what your expectations are on the improvement in this region?

Yeah. Phillip thanks for the question. Mark, here. Well look, I think it’s -- when we -- I think our Q just got filed and you'll be able to see kind of the trends year-over-year and it will be -- you better see the EMEA trends, so that's why it led to EMEA. Look I mean, we’ve been building business in the Sub-Sahara out of South Africa, Middle East, Eastern Europe, Russia, or rather CIS and certainly the Eastern European and CIS effects have led into our dot region, which primarily is Germany. So, our headlines for us is FX had a $30 million revenue impact in the quarter, partly transitioned to the cloud and some of the macro effects in EMEA. And we just have to work through those issues. I don’t have a -- I can't really predict when those things will come back, if you will. I mean maybe it's a quarter or two, but it's really a global macro issue right now.

Great, got it. And do you think that the trend so far has been sort of weak -- trending weaker than you might have expected couple of quarters ago?

Well, I think if there's a bright spot, I would say that I don't know if I get this number precisely right, but I think I read it in AFT that, close to 4,000 companies have exposure to Eastern Europe and Russia. And that effect has sort of now blessed through the system update where we're kind of seeing in hiding defect of companies in Germany who have CE, CIX exposure. So, perhaps we're the kneader [ph] of that and of those companies, what we call the dark region, Germany, Austria, and Switzerland.

Got it. And then final question for me, just regarding the new pricing models. This is I think the first full quarter where you guys have the new models in place. I was wondering if you would give us a little bit more color on your customers' reaction how they are responding to these pricing models so far, whether you’re seeing more take up in one category versus another versus your expectations. Thanks.

Yeah thanks Phillip, thanks for that question. I would say we're not going to get into pipeline dated today, but initial reaction has been very favorable. And I'd say that subscription is probably leading ahead of managed services, managed services is a -- maybe a longer-term consideration -- not where the consideration takes a bit more time given the outsourcing of the infrastructure. But I'd say the leading, kind of, I would put subscription managed services and maybe SaaS as one, two and three. Our first option--

Thank you. Got it. Thank you so much.

Thanks Phil.

The next question is from Kris Thompson of National Bank Financial. Please go ahead.

Great. Thanks Mark. Glad to have you in the call. At your user conference last year, the trade-in, trade-up program was announced. Can you just give us an update on that program? Is it still live? And can you give us any indication of how successful it was or is? A – Mark Barrenechea: Hey, Kris. Thanks for the question. We've been added maybe four months and its generated interest, but hasn't really translated into revenue at this point. So, certainly its generated interest and discussion, but really hasn't generated into revenue at this point. Q – Kris Thompson: Okay. Have you figured out why or what your sales guys are saying about it? A – Mark Barrenechea: Well, it's -- you know, I think with the delivery of SP1 -- SP1 was very focused on making it easier to upgrade and to really deploy our suite. So that was -- the biggest input that we got was, try to take the cost, upgrades are for all enterprise customers very expensive. We're not alone in that. And can you take the expense out and maybe professional services out of the equation as much as you can. So, our one learning from that program was can we get capabilities to make it easier for customers to upgrade and not just upgrade, but deploy into production. So SP1 which we delivered fully by the end of the quarter has those capabilities in its package. So let's keep watching it and I think SP1 will be helpful. Q – Kris Thompson: Okay. That's helpful. And John, the cash flow was at a record high did you mention the FX impact in your cash flow this quarter? A – John Doolittle: I didn't mention the FX impact on the cash flow, Kris. But it would have been significant as well. Q – Kris Thompson: Okay. The reason I'm asking is because deferred revenue on the cash flow statement was 39 million and in same quarter last year it was 60 million, I am just trying to figure out the delta there? A – John Doolittle: Well, big chunk of the deferred revenue impact was Actuate, right -- this quarter. Q – Kris Thompson: Got you. I did remember you mentioned that. And just the last one then, well on maintenance revenues. How were those renewal rates? Are you seeing existing customers swap in to the subscription models? A – Mark Barrenechea: Renewal rates are maintaining a very strong in the low 90s. Q – Kris Thompson: And there are any licensed customers swapping into subscription models there or discussing that? A – Mark Barrenechea: For sure, Kris. As we talked about in the script, when I look at the licensed business, maybe take just a moment to speak bit about the licensed business directly. We really had three impacts to the business foreign exchange, second customers either transitioning or considering transition to the cloud, and then, kind of, year-over-year EMEA performance due to those, sort of, macro issues we talked about. So those are the three things that sort of affected the licensed business. Buy I also want to take the opportunity to emphasize that we are more focused on recurring revenues that were 86% of our revenues in the quarter and our top three metrics are recurring revenues, adjusted net income and cash flows. But for sure we had some customers who -- existing customers who are paying maintenance, who are considering transitioning to the cloud and new customers, of course, are considering a subscription model or hosted model. And we think that's just fine, because we are agnostic to what revenue line they fall on. We’re looking for the lifetime value. Q – Kris Thompson: Okay. Thanks for taking my questions and get well soon Mark. Thanks. A – Mark Barrenechea: All right. Thanks Kris.

The next question is from Paul Steep with Scotia Capital. Please go ahead. Q – Paul Steep: Great, thanks. Good to hear you Mark. I guess the first question goes right to the cloud uptake point. You talked about that being in bit of a sales pause, is it particularly around the licensed, is it -- how are we seeing that core ECM? What's the impact in the core ECM business in terms of sales cycle in the field? A – Mark Barrenechea: Let me just, I guess, note that. Again, in constant currency, our cloud business was up 17% year-over-year and that's a nice growth rate year-over-year. And directly on the ECM side, we introduced OpenText Core in full general availability for self-service registration and use last quarter, and I don't have the total subscriber count in front of me. But I think in the first quarter were over 20,000-25,000 subscribers to the service in the first quarter of having OpenText Core in production, which is a full multi-tenant, SaaS solution, hosted on cloud in a public instance for those workloads appropriate for that type of deployment. We're also offering OpenText Core as a private deployment. And if you like its capabilities, you like its multi-tenancy we will go host a private instance for you. So I think we have a very robust offering both on-premise with content suite, and now companion to that OpenText Core as a SaaS offering. That helpful Paul? Q – Paul Steep: That helps. And how should we think about where the base is in terms of moving to 10 five and then getting ready to go to SP1 over time, how much of that core basis sort of migrated over at this point? A – Mark Barrenechea: Yeah, I don't have the installed base metrics in front of me today. But there's still plenty of customers to be able to target -- install base customers to be able to target with SP1. I also think our new SAP Process Center is going to be very, very helpful. There have been some point vendors out there recently acquired who have some capabilities around -- beyond just invoicing management. So our content -- contact center within SP1 for SAP is really a big new innovation for us to go into our installed base in the SAP installed base. So I think point one is that there's still plenty of install base customers to target with SP1 in general. And secondly, our new SAP release is really quite robust and I think will be really interesting for existing and new extended ECM customers. Q – Paul Steep: Great. And I guess the last one for me is just around the management. Obviously, you can't offset all the FX impact, I know you've skimming the Q here in terms of some of the restructuring activities you've taken efforts on, how should we think about rolling into Q4 which is traditionally the strongest quarter here, your ability to sort of offset some of the foreign exchange hit we saw this quarter? A – John Doolittle: Well, I mean, Paul, we're doing everything we can to remain, as I said, focused on all of the OpEx line items restricting headcount growth, making sure that travel is only for customer facing meetings. But this is unprecedented in terms of the foreign exchange volatility and the Euro has continued to depreciate. It's been up a little bit over the last couple of days. But it's down on a quarterly average, so it makes it very, very challenging to offset that depreciation. But we will continue to be focused on the bottom-line and doing whatever we can to manage our costs. Q – Paul Steep: Great. Thanks John. A – Mark Barrenechea: Yeah. And Paul, the only thing I would add to John's good comments there is that within Q3 we had a series of unique one-time expense items as well that we don't see recurring in Q4 going forward. Q – Paul Steep: Do we have a -- I'm trying to piece those out as we go here, do we have total quantum on those? Like I know there is a number of them that are pretty unusual that are not going to show up ever again, do we have a sort of a ballpark on what that total is? A – John Doolittle: Well, we have the litigation expense on Box, that's several million dollars. We've got the Actuate revenue here that we will see some of that in the fourth quarter, but that was $3 million, won't be as much in the fourth quarter. Obviously, foreign exchange, depending upon where the foreign exchange ends up next quarter. But those are examples of one-off items. Q – Paul Steep: I guess the last one and then I promise I’ll leave you then, is the bad debt piece. You've flagged that as well as GXS. It looks like it might have been GXS, it’s hard to tell what it was…. A – John Doolittle: Yeah. That's what it was. It was bad debt expense within GXS, that’s another item, you are absolutely right. And we've had GXS for year in the handful of customers, where we get balances that crept up on the earmark and we have taken a provision there. And Mark and I are all over this. We're going to collect on those receivables and we’re try and collect on as many as we can and this won't be a recurring item. We've got a program in place to go after this. Q – Paul Steep: So fully provided with. Where -- the question was that you fully took it in Q3 and we think as best we know it's in there. A – John Doolittle: Yes. For those customers where outstanding for year we took -- fully provided for those. Q – Paul Steep: Perfect. Thank you. Get well Mark. A – Mark Barrenechea: Thanks Paul.

The next question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead. Q – Thanos Moschopoulos: Hi, Mark. It's great to hear you on the call. And start with a question for John. John would you be able to provide the quarter-on-quarter impact of FX to revenue and EPS would you have those number handy? A – John Doolittle: Yes. I will grab them while you ask your next question. Q – Thanos Moschopoulos: Okay. Sort of a related question which is the sequential decline in cloud revenue from Q2 to Q3, was that predominantly currency or where there other factors that led to decline? A – Mark Barrenechea: Well, I would certainly point to currency, Thanos, and of course year-over-year in constant currency up 17%. So I am not too concerned on the quarter-over-quarter performance, but rather the year-over-year performance. Q – Thanos Moschopoulos: Sure, and then Mark, you commented on the macro environment in EMEA, how would you characterize the environment and other regions? A – Mark Barrenechea: Well, the -- I think the only other global comment I’d provide is in emerging markets with -- for us that would include Brazil and South America and India and China for us. But I think the only other comment would be really looking at a fast growth markets for us or emerging markets that still aren’t kind of reaching their full potential. A – John Doolittle: Hey, Thanos on the Q3 versus Q2 FX, I don't have those numbers in front of me. We've done those calculations, so right after call Greg will call you with those numbers. Q – Thanos Moschopoulos: Okay, great. And then just last one for me, on the last call, I think you about Actuate showing maybe a 10% to 20% revenue decline before it’s stabilized. We saw sharper decline I think this quarter and so with that 10% to 20% decline sort of still be the way to think about it as we look out over the next year or might be little bit steeper taking into account some other factors? A – John Doolittle: No, I think we’re still comfortable with the 10% to 20% decline. Like I said, there are couple of factors that play in, in making the revenue numbers this quarter look particularly low. The purchase price accounting haircut, number one. They are coming off a strong quarter in the fourth quarter. So as we look out we're still comfortable in the 10% to 20% range, Thanos. Q – Thanos Moschopoulos: Okay. Thanks for that slide. A – John Doolittle: Yeah.

The next question is from Stephanie Price with CIBC. Please go ahead. Q – Stephanie Price: Good afternoon gentlemen. A – John Doolittle: Hi Stephanie. A – Mark Barrenechea: Hi, Steph. Q – Stephanie Price: In terms of Q4, so looking at fiscal Q4, I mean it typically is seasonally stronger, could you talk a bit about what you're seeing in the pipeline and how we should kind of think about it sequentially, and if it’s different from historical? A – John Doolittle: Yeah, Stephanie we are not -- as you know, we haven't got guidance up there for Q4. I have reaffirmed the target model. You're right, Q4 is sequentially stronger than Q3 and if you kind of work your way through the model that's what you would expect to see. But we’re not giving out any pipeline data today. I think Mark already covered that. Q – Stephanie Price: Okay. And then moving on to the acquisition environment, it looks like valuations are kind of creeping up here. Could you talk a bit about the acquisition environment and whether you can still find sort of reasonably priced acquisitions out there? A – Mark Barrenechea: Hi Stephanie, Mark here. Thanks for the question. You are right that we’ve seen -- I think we’ve seen two things over the last quarter or two is, we've seen valuations go up, and we've seen some unusual buyers in the market as well, maybe not your traditional buyers. Nothing is going to change our view or method or sense of valuation here at OpenText. We classify ourselves as value buyers. We prefer to do the hard and heavy lifting to be able to gain the value from an asset. And we continue to look in our traditional value ranges, and there is no scarcity of assets, if you will. But there is no doubt that valuation have crept up a bit, but also add that we've seen some nontraditional buyers come into the market as well. We will remain patient and stick to our method of -- on our approached evaluation. Q – Stephanie Price: Okay. Great. And then in terms of focus areas are there any particular focus areas you're looking at these days? A – Mark Barrenechea: I intend not to get into specifics. We're not looking to expand the definition of EIM, we like the pillars plus analytics. But we will look at filling -- you know, we typically start with a white space analysis, and we typically don't call for market share. So we tend to start at a white space analysis of what want to fill. But, again, I would emphasize we're not looking to expand the definition of EIM. We like the pillars plus analytics and we continue to look towards white spaces within those categories. Q – Stephanie Price: All right. Thank you very much. A – Mark Barrenechea: Thank you, Steph.

The next question is from Eyal Ofir with Dundee Capital Markets. Please go ahead. Q – Eyal Ofir: Thanks, and good to hear Mark that your recovery is going as planned. So, let me ask few questions here. First off, just on -- going back to the cloud services, you just touched about it. You know that there is a bad debt expense. I imagine that it was a bad debt expense you would saw that bad debt expense, I imagine that it would also have impact on revenue due to some of these clients -- obviously, you did not recognize revenue from those clients, do you guys having an indication what the size of that impact is in the quarter? A – John Doolittle: No. They are two different things. The bad debt expense that I was talking about was on historical receivables where they were outstanding for a period of time, so not necessarily lengthen in any way to whether or not we recognized revenue for the quarter. Q – Eyal Ofir: Okay. So just these -- these clients did not shift, they are live, you mean still live? A – John Doolittle: Well, it could be -- could be some we had revenues in the quarter, there could be others. It could be disputes. There's not a direct link between whether or not we took a bad debt provision or whether or not we recognized revenue on our particular customer in the quarter. Q – Eyal Ofir: Okay. Okay, I just figured this play a direct link. Okay, second thing, just Mark in terms of -- obviously, subscription revenue, you're talking about how some of the clientele was looking up as you are shifting to subscription or SaaS or managed services. In the quarter, obviously this decision-making process could've actually delayed some customer decisions as well. Have you seen some of that and to what extent? And also is there any way to size up kind of, I guess, the pipeline for the subscriptions for SaaS model is that you're seeing for the rest of the year? A – Mark Barrenechea: Eyal, thanks for the question. I'm not going to get into pipeline data today. As I said in my prepared remarks, the interest is pretty strong and the early feedback is very encouraging 90 or 100 days after introducing those options. And you look at our license business, there is some portion of it that will transition to a subscription, SaaS or managed services. And we have been -- this is our third year now offering cloud services in a cloud model, so we're well into this transition if you will. But, yeah, I'm sure the number one effect on license was FX. Number two, consideration for the cloud and then third performance and EMEA. So no doubt some customers are considering subscription or managed services over and on-premise and we are agnostic to it and, again a subscription after three years is economically more beneficial to OpenText. Q – Eyal Ofir: And I'm assuming this subscription, obviously, still sits in your cloud revenue line versus the licensed revenue line? A – Mark Barrenechea: Yes, it would. And… Q – Eyal Ofir: So going to 2016, should we start kind of baking in a lower contribution from the license side versus what you are guiding to 2015 from a corporate target standpoint? A – John Doolittle: Like we said, we will be back with the target model for 2016 on the next call. Q – Eyal Ofir: Okay. And then just lastly for you John in terms of cost, a lot of guys asked this question on the call. You haven’t given the specific numbers. But in terms of the actual margins, obviously the numbers were 25.7. You are still guiding to the model of 28% to 32% long -- this year, should we assume that transition back into the 28% to be fairly quick or is it going to be over a two to three quarter timeframe? A – John Doolittle: Well, what I said specifically is, you are right, we’re 25.7 this quarter. Year-to-date, we were higher and so when you build that all in, we're comfortable in operating margin between 28 and 32 for the year. So even though we were lower this quarter, we’ve been higher the first two quarters and so when you blend it all together with our expectations for the fourth quarter, that's where we think we will land in the 28 to 32. Q – Eyal Ofir: Okay. And then going forward beyond that time, obviously you had some one-time charges here that aren’t going to be repeated. Are you still comfortable kind of long-term with that 28 to 32? A – John Doolittle: Well, no, because what we’re going to do is we’re going to update the model for you on the next call. So I am not going to give you 2016 guidance -- not guidance, but I'm not going to give you the target model here today. But we will provide it on the next call. Q – Eyal Ofir: Okay. That's fine. Thanks for that. A – John Doolittle: Just while we’re waiting for the next question just for Thanos, I did grab those numbers for you Thanos, so just here they are, Q3 over Q2, revenue impact negative 17 million and negative $0.05 EPS.

That concludes the time allocated for questions on today's call. I will now hand the call back over to Mr. Barrenechea for closing remarks.

Well, thank you everyone for joining today's call. My concluding remarks would be pretty brief. I would just like to note that year-to-date on a constant currency basis revenue is up 30% and adjusted EPS up 15%. And over the trailing 12 months and constant currency our licensed growth rate is 6%. Thank you for joining the call and look forward to speaking soon.