Open Text Corporation (OTEX) Q2 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Second Quarter Fiscal 2018 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] I’d now like to turn the conference over to Greg Secord, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ben, and good afternoon, everyone. On the call today is OpenText’s Vice Chairman, Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Chief Financial Officer, John Doolittle. We’ll have some prepared remarks, which will be followed by a question-and-answer session. This call will last approximately 60 minutes with the replay available shortly thereafter. I’d like to take a moment and direct investors to the front page of the Investor Relations section of our website, where we have posted presentation that will be referred to during the call. And now, I’ll proceed 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. 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 as well as risk factors that may project the future performance results of OpenText are contained in OpenText’s Form 10-K and recent 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 may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I’ll hand the call over to John.

Okay. Greg, thank you very much. Welcome to the call, everybody. Before I get to the numbers just wanted to acknowledge that I'll be leaving the company in September after four great years. I'm extremely proud of our accomplishments, the OpenText team is amazing and I'm pleased to be able to announce this news on a high note with such a strong quarter. Until September I am fully committed and dedicated at driving performance and ensuring there is a seamless transition. Okay, so let's go through the numbers. My references will all be rounded in millions of U.S. dollars and compared to the same period of the prior fiscal year unless I indicate otherwise. Total revenue for the quarter was $734 million, up 35% from last year, $720 million on a constant currency basis up 33%. Revenue was negatively impacted by $13 million due to acquisition accounting rules, positively impacted by $14 million due to foreign exchange. Year-to-date total revenue was $1375 million, up 33% from last year or $1356 million on a constant currency basis up 31%. Total annual recurring revenue was $516 million up 31% from last year or $508 on a constant currency basis up 29%. Year-to-date annual recurring revenue was $1005 million up 30% from last year $995 on a constant currency basis up 29%. License revenue for the quarter was $135 million up 38% from last year or $131 million on a constant currency basis up 34%. Year-to-date license revenue $213 million up 35% from last year or $208 million on a constant currency basis, up 31%. Cloud revenue for the quarter was $208 million up 19% from last year and new MCV bookings this quarter were approximately $65 million up compared to $54 million in the same period last year. Year-to-date cloud revenue is approximately $402 million up 17% from last year and foreign exchange and cloud revenue was to minimum some quarter and year-to-date. Customer support revenue for the quarter was $308 million up 40% from last year or $301 million on a constant currency basis up 37%. Our customer renewal rate was in the low 90s similar to last year. Year-to-date CS revenue approximately $603, up 40% from last year to $593 million on a constant currency basis up 38%. Professionals services revenue for the quarter was 83 million up 65% from last year 81 million on a constant currency basis up 61%. Year-to-date PS revenue was approximately 156 million up 54% from last year 152 on a constant currency basis up 50%. Next foreign exchange for the quarter FX positively impacted revenue by 14 million and at a positive $0.02 impact on adjusted EPS. The effect of the positive 14 million by revenue type customer support 7 million, license 5 million and PS 2 million. Year-to-date FX positively impacted revenue by approximately 19 million and had a positive $0.03 impact and adjusted EPS. The effect of the positive 19 million by revenue type customer support 10 million, license 6 million PS 3 million. Gross margin for the quarter were as follows license margin 97% down slightly from 98% last year mainly due to mix of products. Cloud margin 57 down slightly from 58% last year mainly due to the impact of the recent acquisitions. Customer support margin was 89% up from 88% last year and PS margin was 22% up compared to 20% last year, reflecting positive integration activities. Adjusted operating income 268 this quarter up 45% and adjusted operating margin was approximately 36% compared to 34% last year. Year-to-date adjusted operating income 469, up 40% and adjusted operating margin is 34% compared to 32% last fiscal year. We are tracking to our fiscal 2018 adjusted operating margin target model of 32% to 35%. Adjusted EBITDA was 290 for the quarter up 45% adjusted EBITDA margin 39.5% compared to 36.8 last year. Year-to-date adjusted EBITDA was 510, up 39% and year-to-date adjusted EBITDA margin was 37.1 compared to 35.4 last year. Adjusted net income was 203 this quarter, up by 52% on a constant currency basis, adjusted net income was 197 up by 48%. You are seeing a positive impact of margin improvement as a result of bringing our recent acquisitions under the OpenText adjusted operating margin model. Year-to-date adjusted net income was 346 up 45% from last year and 338 up 42% on a constant currency basis. Interest expense of 34 in the quarter which is one with the estimated run rate we previously disclosed. And adjusted earnings per share for the quarter was $0.76 per share on a diluted basis, compared to $0.54 per share for the same period last year, up 41% and 37% on a constant currency basis at $0.74 per share on a diluted basis. Year-to-date adjusted earnings per share was $1.30, compared to $0.97 last year, up 34% and on a constant currency basis a $1.27 up 31%. GAAP net income for the quarter was 85, $0.32 a share on a diluted basis, up compared to 45 or $0.18 a share on a diluted basis last year. Year-to-date GAAP income of 122 or $0.46 per share and last year year-to-date GAAP net income of 958, but this included a onetime tax benefit of 876 that was recorded on the account of the company's internal reorganization which further consolidated our intellectual property within Canada. Operating cash flow with the highest Q2 operating cash flows in our history at 167 up 56% year-over-year. This achievement was primarily due to an increase in net income of 111 after adjusted for non-cash operating activities partially offset by decrease in working capital items of 52. I'm really pleased with our cash flow performance this quarter. And I would like to point out that historically the third quarter of our fiscal year has been our strongest quarter for operating cash flow. In the balance sheet, we ended the quarter with 476 of cash, 627 of deferred revenue. We have a very solid balance sheet with improving leverage ratios that are now below our indicated threshold less than 3 times. Now turning to tax update and starting with U.S. tax reform. I'd now like to discuss the impact to our Q2 results as a result of the recent changes to U.S. corporate income tax law which were acted on December 22, 2017. First of all, we did not see any material impacts in fiscal 2008 or in 2019, 2018 to 2019 from U.S. tax reforms. The corporate tax rate reduction is effective for OpenText as of January 1, 2018 and accordingly will reduce our U.S. federal statutory rate to approximately 28% in fiscal '18 and 21% in fiscal '19. As such we have reduced our adjusted tax rate from 15% to 14% for fiscal 2018 and we will update this as we normally do in the fourth quarter. This quarter we reported a one-time tax expense of 15 necessitated by the new legislation. Approximately 8 of this expense is a non-cash charge related to the re-measurement of US deferred tax assets and liabilities and 7 relates to the taxation of unremitted earnings of non-US subs owned directly or indirectly by US subs of OpenText. The taxation of the unremitted earnings will be paid over eight years as provided by the legislation. These are provisional amounts and will be finalized on or before December 22nd 2018, and like all corporate tax payers we continue to assess the long-term implications of the tax reforms and will update you for any material impact to our tax analysis or plan. Regarding the IRS matter there's nothing new to report, we will continue to keep you updated of any material new developments, we have revised the disclosure of our estimated aggregate liability in our 10-Q to 600, up slightly from previous disclosures solely related to estimated interest that has accrued. ECB update, the margin performance for ECB improved by approximately 800 basis points from last quarter to 33%. We're pleased that ECB is now integrated and on OpenText adjusted operating margin model as planned. Give you an update on ASC 606 the new revenue recognition accounting rules, just take a minute to update you on these new rules under US GAAP. ASC 606 is applicable to us effective July 1st 2018 and we will be reporting revenues under these rules for the first time for the quarter ended September 30th 2018. We'll adopt the new accounting standard using a cumulative effect approach as live under the rules. We will establish a project team with a primary objective of evaluating the effect the new standard will have on our business processes, systems, controls and results. Although the new rules provide guidance on recognitions and measuring the revenues across all revenue streams, the impact seems limited to our accounting for implementation services within a cloud arrangement and accounting for on premise subscription offerings. We continue to assess the impact these new accounting rules will have on our fiscal '19 results and if material will provide you with updates with regard to the expected impact. And onto our 2021 aspirations, the organization is stronger than ever and utilizing the principles of the OpenText business system. We integrated the largest acquisition in our history. This foundation gives us confidence to raise our aspirational target model for 2021. We raised our aspirations by 200 basis points in anticipated adjusted operating margin for fiscal 2021 to be 36 to 40% and please see the aspirational model in our IR presentation which has been updated accordingly. Board of Directors declared a cash dividend of $0.132 per share for shareholders of record on March 2nd 2018 payable March 23rd 2018. And with that I will turn it over to Mark.

Thank you, John and welcome, everyone. I've five topics to cover on today's call. First, I want to start with an overview of our business model and first principles. Even if some this is repetitive I want to bring it all together in one place for today's call and future reference. Second, I'd like to discuss selected highlights from our terrific Q2 results where we delivered strong positive organic growth, record annual recurring revenue and solid operating cash flows. Third, provide an update on our recent acquisitions and M&A in general, next discuss the Madhu and John CFO transition and lastly, provide a few comments on Q3 and the second half of fiscal 2018, then I'll open the call for your questions. I want to start today's call speaking to our business model, our first principles and our approach to where we play and how we win. In many ways I'm reemphasizing what is well chronicle for OpenText. The OpenText market strategy is centered on enterprise information management. The EIM market is large, growing and strategic to enterprise customers therefore has high profits. EIM is enabling key trends such as new content platforms, new customer experiences, business networks, digitalization, securities, governance, internet of things and artificial intelligence. Enterprise customers are the world's largest 10,000 businesses and I use a short hand to describe them and that is the G10K, G for global. EIM is creating intelligent and connected enterprises, intelligent EIM automation, intelligent cloud, more intelligent endpoints, unlocking the value of enterprise information through AI and insight. Businesses are becoming more connected and faster 24 billion humans connected to the Internet in potentially over the next decade 1 trillion machines on the same network. Mobile is consuming the world and businesses are integrating their transactions of other businesses and networks over the internet. EIM is a long-term market opportunity. OpenText has evolve over series of strategic errors, given the expanding demands of our customer is tight. We have grown our EIM portfolio from where we started in search, the enterprise content management, to business process management customer experience management discovery, to the business networks and more recently to securities, the internet of things and artificial intelligence. We have been very successful in expanding our market thesis, our vision in addressable market because we bring out customers with us. And this is reflected in our annual recurring revenue numbers. Organizations come differently and depending on what you include or exclude, EIM is approximately 40 billion addressable market. We have also evolved our business model from a license centric model to an ARR centric model, on premise deployments to managed services. We capture this opportunity by examining strategic EIM areas and applying value-based businesses that further advance our EIM vision and our financial profile. We lead with M&A growth, all trends into integration and innovation that yields organic growth. This implies that in any given year the number companies we acquire can vary but over the long term and with 58 acquisitions completed, we have a clear history of performance in trends. A first principle is operational excellence, this is firmly rooted in our corporate DNA. Look no further from ECD, what is now operating at 33% adjusted margin after OpenText just only in the business for 12 months. Covisint and Guidance Software were losing money, and after first quarter of ownership they are now profitable. Operational excellence drives intelligent growth. This is an OpenText term where we create new product introductions, positive organic growth and customer coverage expansion. Intelligent growth drives ARR, adjusted operating margin and operating cash flows. We deploy our capital measured by simple metrics, cash-based analysis, roll it and create payback period over five to seven years. This is the engine to power the acquisitions. Again, acquisitions continue to be a leading growth driver, looks at a strength within this quarter ARR are 516 million, adjusted operating margin of 36.5% and then adjusted EBITDA margin up 39.5%. Our acquisition activity continues and there is no scarcity of EIM companies for us to consider. We have ample target assets, leadership bandwidth and available capital. Another first principle of the OpenText business system is learning and continuous improvement. We have our OpenText point of view and we learn from ourselves. We also learn from other high performing software companies with strong operation, high margins and strong cash flows as well as from large conglomerate, like the Danaher or Roper Technology on their business systems in capital deployment. Let me start with a few of our learning moments and how we take a long view. Over 6 years as we transitioned against from a license centric business to an ARR centric business we've transitioned from PS deployment to a power house and managed services. We advanced from zero cloud revenues to our first $200 million plus cloud service this quarter and we've advanced from the mid-20s of adjusted operating margin to 26.5% here in Q2. And today we increased our aspirations to land between 36% to 40% adjusted operating margins by the end of 2021. We integrated our acquisitions while delivering continues innovation to our product line. Release 16 has been very successful for us and our approach to rapid releases via our enhancement pack series the EP series is evidence of this. EP3 is showing strong customer demand and we're on track to deliver EP4 next quarter. Our tax rate is efficient, we have $100 million of acquired revenues this implies of pulling $200 million of capital at two times revenue multiples. Over the long term by consistently adding revenues acquired of these multiples expanding margins and cash flows maintaining that effective cash tax rate, we faced the trifecta that demonstrates how we generate enough free cash to self-fund our acquisitions. This all feeds back into operational excellence. The cycle repeats, learns and improves. We called this the OpenTech business system. We look at our business on annual cycles not quarterly cycles. And we look at our business system over the last 10 years not to 6 years but 10 years, revenues have grown from $596 million to trailing 12 months of $2.6 billion, Cloud has grown from zero to trailing 12 months of $763 million, ARR has grown from $288 million to a trailing 12 months of $1.9 billion, adjusted operating margin has grown from 22% to 33% post operating cash flow has grown from $111 million to trailing 12 months of $493 million. We introduced the dividend program from zero to trailing 12 months of $134 million return to shareholders. Now over the last 10 years, we've completed 30 acquisitions with the simple average of 3 per fiscal year. I want to bring this all together today to talk about the OpenText business system, our first principles and our point of view. In short, this is where we say and how we want to win and we'll continue to over back to this in the future. Let me move on to Q2 highlights and year-over-year comparison. I'm extremely proud that OpenText has been added to the TSX 60, the 60 most valued companies in Canada. This is a recognition of our achievements, our future potential and the -- core the company. I'm very humbled by this and with this -- want to thank everyone who contributed to this success, this is a shared success for OpenText. We had a tremendous Q2 and end to calendar year 2017, all revenue lines and all geographies grew. Total revenue was 734, up 35%, Americas delivered $419 million in revenue and grew 32%, EMEA delivered $243 million of revenue increased 38%, and Asia Pacific and Japan APJ delivered $73 million of revenue and grew 47%. We had strong positive organic growth in Q2. Annual recurring revenue is $516 million up 31%, this is another record high for the company. ARR is the key revenue metric for OpenText. ARR was 1.7 billion last fiscal year we've grown ARR every year for the last five years and combined the cloud and license renewal rate are among the best in technology. Customer satisfaction, fast adoption, business value, strong product roadmap these all drive ARR. Within ARR cloud revenue was 208 million up 19% year over year and customer support was 208 million with 40% year over year growth as John noted earlier. We have 30 deals over 1 million in value, 14 in the cloud, 16 on premise. Key customer wins included LA County, Air France, KLM, Pandora Media and Electronics, Peabody and Zodiac Aerospace. We delivered a record 135 million of licenses or 38% year over year growth and 65 million of new MCV or 20% growth. As I highlighted for the past couple of years hybrid is the destination, hybrid is not a way station along the journey, hybrid is the destination. As important if you license an MCV together again, the main difference between a license and MCV is simply a customer deployment choice. Customer interest remains high in our digital platform security AI as well as our managed service offering, PS revenue was 38 million and up 65% and we deliver a gross margin of 21.7%. We are focused on higher value services such as managed services and updates, optimized for long term value over short term contracts. We run a world class PS organization where customers place their trust in OpenText every day. On our book of business 18% originated from new customer and 44% is influenced by a partner. We have strong support from our indirect channels, ecosystem partners, site partners, our bar network, new OEMs and our inside sales team. Industries have contributed 10% or more included technologies, financial services, consumer goods, services in general in the public sector. Adjusted operating income was 268 million or up 36.5% and again adjusted EBITDA was 290 million or 39.5%. Operating cash flow of a 167 million, up a 100 million quarter over quarter and up 60 million year over year, cash on hand, 476 million and we have ample cash flows, ample capacity for M&A and we are well within all our operating covenants as John noted are ending debt to EBITDA ratio was under three times. These [indiscernible] Q2 results and our field and operation teams performed very well. We move on to the third topic which is M&A. Over the last 12 months we completed three acquisitions, the ECD business from DELL-EMC, Dell EMC, Covisint Corporation and Guidance Software and we're on our internal business plans for each of them. Further we remain active in the market and continue to build our pipeline. There is no doubt that last year was an extraordinary year with the onboarding of ECD kind of like four years ago when we onboarded TXS. As a reminder our ten-year total revenue CAGR at 14% in a peak year we had 26% year over year revenue growth and in a low year we were flattish on revenue but optimized extremely for margin performance. That total CAGR of course includes FX, acquired and organic growth contribution. A few comments on ECD, integration is now complete and we are on our internal plans. ECD is now on our operating model with adjusted operating margin of 33%, with respond to low margin business onto the OpenText operating model in just 12 months. Customers are very happy with our progress, support and product roadmap. In Q2 we had strategic ECD win at the U.S. WorldMeds, Tata Consultancy Services and CBA, ConvaTec and Syngene. There are numerous ECD senior leaders that have taken leadership roles within OpenText. Our APAC leader and various country managers reporting into Ted, our customer elite program leader reporting into James and senior engineering leadership reporting directly into me, with the light of the leadership and talent and expertise that we have assembled from ECD. We continue to cross-pollinate our installed bases with extended ECD for ASP CDM and archiving solution. Customers are making application platform decision that can spend decade or more and we completing and competing rather and more opportunities today than we were a year ago. With integration now complete our focus turns to further efficiencies, innovation, more customer adoption and of course revenue growth. Let me turn to Covisint and Guidance for a moment. Both Covisint and Guidance are profitable, and we remain on track to have them fully integrated within the first 12 months of operation. We purchased Covisint for their core auto business, which performs well and we continue to explore their early releases of identity and access management and the Internet of Things and the long-term potential of these two markets. Guidance is a more mature business, in electronic discovery and information security. [indiscernible] plus guidance are simply better together. Q2 with information security the leading products of course being NK. We have customer wins within law enforcement, defense and intelligence. End cases running on 40 million endpoints today and represents the strategic long-term opportunity as well as artificial intelligence in Magellan. Guidance Software's annual conference and fuse will continue. We will be in Las Vegas this May 21 through May 24 and the conference will center on government security and AI. I plan on being there and delivering the keynote and perhaps we will see many of you there. Next let me provide some comments on our CFO transition. I announced today that Madhu Ranganathan CFO of 24/7 a leading company for AI and customer experience software who joined OpenText at EBP and CFO affective April 2. John will continue as CFO to April 2 as well and will remain with the company until September 20, ensuring the successful transition. I'm very pleased to welcome Madhu to OpenText, a Silicon Valley veteran, a highly experienced global finance executive. Madhu brings over 25 years of strategic and financial leadership experience with a deep operational focus in software, hardware and text enabled service businesses. Madhu is formally a Pricewaterhouse LLP, both an MBA in finance in the University of Massachusetts, and is a certified public accountant in Chartered Account of India. I want to deeply thank John for his four years of great service at OpenText and let me recognize his contributions, his professionalism, his integrity and his commitment to the transition period. I wish him all the best on his continued journey he has set out to accomplish a set of goals and he did. Thank you deeply John. And lastly let me conclude with some Q3 and summary comments. As noted above it was a tremendous Q2. $734 million of revenue and 35% year-over-year growth record annual recurring revenues of $560 million and 31% year-over-year growth, strong positive organic growth, adjusted operating margins of 36.5% and adjusted dividend margin of 39.5%, OCF of $167 million and in cash on hand of $476 million, net debt-to-EBITDA ratio under 3 times. We have strong execution in Q2. We also have some help with $14 million of revenue from FX, a handful of large share of -- wins, we benefited from some end of your customer spending. The quarter truly shows the power the potential power of our business engine and robust business model. As we look into Q3, it is traditionally our strongest quarter for OCF and our lowest for revenues in any given fiscal year. We expect this usual historical seasonality in this Q3. Q4 is typically a seasonally strong quarter. And we expect that same historical seasonality as well. Also, as I noted in the press release today, we are introducing our fiscal 2021 adjusted operating margin range of 36% to 40%, reflecting the continuous strength and strengthening of our operations and the scaling of our business. We'll update you on our progress over the coming quarters. And needless to say, the place within this range could vary based on the timing of any given acquisition. We're also confirming our fiscal 2018 target model, including adjusted operating margin. And as for a final recap comment, I'd like to add this and a little bit from John's script. The new U.S. Tax Cut and Jobs Act could have no material effect in fiscal '18 and fiscal '19 and in fact we lowered our adjusted tax rate for fiscal '18 to 14% as John noted. AIC 606 impact seems limited, we'll update you more as we get into '18, but again the impact seems limited. GDPR and Brexit actually sitting huge demand for our software and our services as plans to look to become more compliant and that mainly the -- copy of software. And current NAFTA discussions are not expected to have any effect on us. Our IP is mainly in Canada and we have a separate U.S. entity for selling to the U.S. government that has been placed in many years and these are some of the cornerstones of the current NAFTA discussions. With these remarks, let me open the call for your questions.

Thank you. We will now begin the question-and-answer-session. [Operator Instructions]. The first question comes from Phillip Huang of Barclays. Please go ahead.

Hi thanks good afternoon. Couple of questions for me. First on the -- I was wondering if you could provide an update on cross selling into your recent acquisitions. Obviously, this isn't your first rodeo. I guess I'm curious what you might have learned in terms of selling to these new relationships specifically for documents. Where are some of solutions that are relatively easy in terms of cross sells to make. And what are some of the things that are little bit more complex to give a little longer to realize based on what you've learned so far.

Great question, Phillip. And I appreciate it. Look, I think some of that what we've learned through time is that we need to be laser focused and with focus comes our results. And bringing extended SAP a big strength of ours into the document from installed base, customer experience management as well as our managed service offerings has really created opportunity for us. I think the next wave is going to include products like guidance and security for our information forensic as well as AI in Magellan. So, it's always about a fulfilling a customer needs, so we're laser focusing your sales force. And quite candidly I think we saw some of the results of that in Q2 with very strong positive organic growth. I'd say it's about understanding the customer needs, laser focusing your sales force, getting them engaged and picking the best of your portfolio to get into the installed base.

Any surprises so far in terms of what you've learned versus what you're expecting, obviously you were planning the integration well even before. So, I was wondering if you sort of compare it to your expectations heading in? were there any sort of differences?

Well, of course I'll note that we're done with the integration and just delivered fantastic operating margin in Q2 of 33%. And then winding back, large asset integrations take time. Your reissuing comp plans, HR letters, employment letters, you're not buying a company so you have to integrate all the systems and people. And that takes a little time, if I rewind the cost maybe we could have done a better job communicating kind of some of that complexity in the early days. On the foot side of that, we felt we could get ECD to be within our model from kind a low margin into the 30s in 12 months or the team accomplished that just an incredible journey. Right now, we're on to more efficiencies and more season and more growth.

Great. I want to touch on the margin as my second question. Your 2021 aspiration is certainly impressive. Since the 40%, I was wondering if you could elaborate a bit on the visibility you have behind that aspiration quite imagine that the scale benefit from document and with the significant driver behind that. So, any color would be helpful. thanks.

Yeah, very good thanks for that question as well. Well we come out with that new range with confidence and visibility. It's going to be around continuing to scale our cloud managed services and renewals business. Continue to scale through our indirect business. And it's about scaling revenues faster than our cost of course and more automation, more automation in the business. So, I'm looking to kind scale revenues through the sales force or indirect channels continue to scale our support organization and doing this on lower cost as well as more automation in the business. John anything you want to add.

Yeah. I do said Mark, Phil it's a as we talk about when we laid out the 2020 model it's a programmatic locate every line on the P&L and increasing license margins and PS margins and reducing OpEx and scale so I agree with Mark that will continue in the progress, we have seen tremendous progress and that will continue and that what gives us confidence into the future.

And I look at Q2 that gives the organization confidence and 36.5% adjusted operating margin and 39.5% adjusted EBITDA.

Our next question comes from Richard Tse of National Bank Financial. Please go ahead.

So, when your press release referred specifically to cross sale up sale opportunities as kind of a focus this year. Does that mean you are kind of a lot more focused this year relative to previous years on organic growth?

I think the short answer is yes, but I think we can walk into gum quite candidly with the scale of the business continue to prosecute M&A opportunity, and deliver organic growth. In Q2 again we had strong positive organic growth. We have great stability and the sales force. We have greater scale. We have cycle of new product introductions with EP3 EP4, Magellan which is very topical and a great interest in our new security offerings from Guidance. So, look I think we have to do multiple things simultaneously. M&A will continue to be the lead growth driver. And I'm complimented [ph] with organic growth.

And John can you give us impression of the initial uptick you are getting on that?

Sure, we won numerous customers last quarter both in analytics and in AI. And I'm not sure the precise count here but we are running near 100 proofs of concepts in our installed base and we are learning a lot. We are learning a lot around deep integration into EIM, new workflows and used cases from everything from field service to customer journey optimization, where we want to compete and it think this is where we want to play and where we want to win is AI integrated into EIM. We are not looking for wins kind of standalone AI platform but we will some of those. We want to go out and capture the entire content installed base from documental and content suite. We want to go out and win the entire business network. We want to go out and win our million trading partners and ex filling of commerce over our network for AI. So, this is going to be a very steady state of progression. EP4 has a whole new wave of features in it for Magellan for our first wave of learning. But we had wins in Q2. We have a lot of proof of concepts going on. Our learning it way up on what we need to continue to deliver in the product and I think a very key philosophical point is its AI integrated into our automation is where we're going to have very long-term benefits for our customers and eventually flow through the revenue.

That's helpful thank you. And then just on Covisint and in Guidance, now that you're through ECD. With the synergies from those subsequent transactions scale fairly evenly over the sort of 12 months from which you've acquired them or is that front end loaded or back end loaded.

I'd say it's sort of even linearity there.

Okay. And then last question I can't hoping to ask John, what you're going to be doing in September there?

I think Richard, lots of things on my list but I am going to be totally focused for the next few months the job through April and then making sure there is a seamless transition to all. I will give you an update later on in terms of what the plans are for September.

Our next question comes from Thanos Moschopoulos with BMO Capital Markets. Please go-ahead sir.

Hi good afternoon. Mark revenues obviously came in well above the guidance you provided for the quarter and so if we look at the sources of strength can you provide some color on what drove that. Is there anything specific you call out? Was it maybe just a great macro environment, was it may be seeing the first to their cross-selling initiatives. Any color you can provide on that front?

Yeah thanks Thanos. I think it's a handful of things. Our acquisitions performed very well. And that was what one big contributor. Second is customer interest in our EP series, so just that kind of core organic demand. And the field was very focused in its execution. So, acquisition performance is to go our product cycle. Again, we have some help from FX. We had a handful of larger deals and those things are certainly helpful in any given quarter. But I would highlight two things, acquisition performance and focus and execution the sales force on organic growth.

Okay. Now you mentioned that Q3 will be seasonally weaker as it typically the case over the year. But given how strong this quarter was should we look for a larger than typical seasonal drop for your coming quarter or is there no reason to think that.

I'll state in my prepared remarks, that Q3 is typically our strongest cash flow quarter and our lowest in revenue. And we expect to see that usual historic seasonality.

And maybe one last one, just given the margin performance this quarter, it would seem that you're well positioned to maybe breakthrough the top end of your full year margin target. Any mitigating factors that we should aware of that might prevent that?

I will have to go back to my prepared remarks and confirming our 2018 rate.

Yeah, we're only in second quarter. So, we're going to stick with the range we put out.

Our next question comes from Stephanie Price, who's with CIBC. Please go ahead.

Could you talk a bit about the current competitive landscape and what you're seeing in terms of the competitors out there for the ECM fleet specifically.

Yeah sure, thanks. Thanks for the question. I didn't have anything in my prepared remarks today. So, I'd have the question. On the kind a EIM fleet from our content platform digitalization business network through AI and Managed Services. It's IBM that remains the macro competitor. And as you've seen from a series of campaigns we've run and number one campaigns in customer testimonials, IBM remains kind of the center piece of our study. How to beat them, and then how-to kind of show our value over their platform. We also have a -- we look very closely at vertical competitors, like Viva, iconic and others. And I think this is a next wave of our evolution is more and more vertical capabilities. We have a strong new engineering and construction module out. We have a new QMS clinical trials in pharmaceutical and biotech module out from inspired through ECD. And we put a press release out of couple of days ago on pack life which is a kind of filed sync and share collaborative workflow that's competitive against Box if you will and a win against Box. We still see Box in the midmarket but there are some collaborative workflows and we're though competing now with our latest release of core and pack life is an example of a win against Box. And let me kind of give you a new expression out there. I look at Box really as a feature not a company. And with our latest release of core, wins like pack. I think it's going to open up a new set of used cases and workflows for us to go after.

Great thank you. And then in terms of the reseller agreement you announced this ENC. Can you talk some incremental size of that opportunity? Like hos should we think about that?

Yeah. We're excited about sort of turning the corner from a buyer if you will to a build demand relationship. And what we're going to focus on initially are the larger more complex information lifecycle management environments so info archive. Big content platform deployments. And these typically will go into large insurance companies, financial services, government installations that nearly take tight hardware integration to sort of that information lifecycle management platform. So, it's really, I'd say very strategic view of larger more kind of integrated platform opportunities in the larger businesses. And that's where we're going to start and then build from that.

Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead, sir.

Thanks very much. I just wanted to turn our attention to the capital allocation for a moment. Previously, you gave an outlook to deploy $3 billion in acquisitions over several years. Do you have an update for that? And then if you can give us specific number, how should we think generally speaking the financial capacity to make acquisitions particularly in light of leverage and free cash flow generation?

Paul, obviously a great quarter in terms of operating cash flow and EBITDA and our leverage ratios coming down accordingly to below 3. And really no constraints from a covenant point of view on our bank dealer revolver. We are well below any kind of threshold there so we have a lot of capacity. And then as Mark and I have said obviously we want to maintain a conservative balance sheet. You have seen the leverage ratio has come down which is freeing up capacity each and every month. And so, as Mark said in his script we have got lots of capacity to do acquisitions and still maintain a conservative balance sheet.

And then in terms of the broader M&A strategy for EIM. Are there -- within the pillars that you have outlined are you still -- is it started to go deeper within those pillars or do you see any opportunity to expand among the pillars overtime?

I'm very pleased Paul with the breath of our market visibility if you will across our definition of EIM. We have been very successful not just be in ECM or CEM or business process management, we have our business network our internet of things AI and security now. So, it's a much wider playing field, the TAM is about 40 billion. So, it's giving us kind of wider berth of course you will, in the market for M&A. We continue to look at white species we want to fill while species as aggressively as we can. We would like vertical opportunities as well, and occasionally geographic opportunity. But I would say while space and verticals within our definition of EIM is very long-lasting strategy for us.

And then someone related to that is the -- with EMC, CECP now being owned for about a year or so you are controlling a lot more than messaging around I guess EIM in the market are you seeing customers beginning to think more strategically from a buying decision point of the universal EIM versus point solutions?

Absolutely, it’s a fantastic point. And this is why we are coming in behind more global SIs, the global system implementers such as Accenture, Deloitte, TCS, Dell EMC, which may not be technically ETSI but they have obviously huge echo system around them. They are customers who are looking more broadly at in information strategy, a digitalization strategy that can touch everything from managed services to a content platform, supply chains, business network analytics information and security. So, there is a lot of goodness happening in our ability to sell higher in an organization, wider solutions but we will also need a little more help in doing that and thus our GSI partnership.

[Operator Instructions] The next question comes from Paul Steep with Scotia Capital. Please go ahead.

Mark can you just talk a little bit about the field force. I think it seems like we have seen a period here of a much stronger field execution than I can remember in an exceptionally long time at OpenText. What's changed and do you think the stability there is now ingrained in the organization?

I think I'm very pleased with how we are organized. We have [indiscernible] leading professional services and managed services and that’s a very unique buyer in his characteristics. And you just see the stellar results in Q2 from professional services. We have James McGourlay leading one renewals organization, and we with almost two decades of experience here, the cloud looks a lot like on premise for us and in order to run a renewables organization. We brought all those things together and we have one renewals organization under James McGourlay and that's completely separate from our hunters in the field. So, we got a point of view where we organized around PS and managed services and printed. We had our renewals organizations with James and his great leadership and that hunter organization is led by an Open Tech veteran, Simon Ted Harrison. But I think that the org structure has helped I think the focus of 3 key executives driving their revenue lines, a product cycle and a strong acquisition contribution, all came together in Q4. But most importantly I'm going to look at the structure and the leadership we have across Ted, James and [indiscernible].

Our next question comes from Steven Li of Raymond James. Please go ahead.

Hey thanks. Mark, just wanted to dig a little deep on the go-to-market with Global SIs. you've talked about some of the initiatives in the past. Are you keen with the progress and any SIs being typically worthy?

Yeah fair enough Steven. You've got to get a partner approach in your culture. You can't kind a bounce in and out. You have to have some real staying power here over the long term and build a partner mentality. And we're doing that, we put a great leader in place, you probably saw Patty Smith at Enterprise World, who now leads all worldwide partners and alliances for us. Our ecosystem partners, like SAP, AT&T, Dell EMC, our Global SIs, Accenture, Deloitte, TCS, CAP our value-added resellers, OEM and inside sales. Specifically, on the GSI side, I would point to probably TCS and Accenture where we have a lot of momentum right geographies. But it's a holistic view from our ecosystem partners to GSIs to way the stuff in our organization, go wider in our breadth, and get us into more strategic opportunity.

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

Alright very good. John, once again thanks for your incredible service to OpenText. And look forward to working together over the coming months and through September. So, thank you. Thanks for joining today and for your questions. This quarter, I'll be attending the Goldman Sachs conference on February 14 in San Francisco and we hope to see you there. So, thanks everyone, thanks for your time today. This ends today's call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.