Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation's First Quarter Fiscal 2019 Earnings 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. I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. On the call today is OpenText's Vice Chair, Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, which will be followed by a question-and-answer session. The call will last approximately 60 minutes, with a replay available shortly thereafter. I'd like to take a moment and direct investors to the Investor Relations section of our website, investors.opentext.com, where we have posted three sets of presentations that will be referred to during today's call. First, our OpenText Strategy Presentation that includes annual fiscal 2018 metric; second, our Q1 Supplement Presentation that includes information and financials specific to our quarter; and the third presentation with additional information about our agreement to acquire Liaison Technologies. 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 the actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information, as well as risk factors that may project future performance results of OpenText are contained in OpenText's recent forms 10-K and 10-Q as well as in our press release, which was distributed earlier this afternoon, which also 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 in other materials, which are available on our website. And with that, I'll hand the call over to Mark.

Thank you, Greg. Hello, everyone, and thank you for joining us today as we provide our first quarter update relative to our progress against the company's annual plan. Let me also encourage you to have our press release and IR presentation in front of you as we go through our call today as well as our corporate presentation and press release announcing we have entered into an agreement to acquire Liaison. Last quarter, as we kicked off the new fiscal year, we clearly highlighted the metrics that matter. Our business is annual. We look towards long-term trends, not quarterly variances. Our key business metrics include annual recurring revenue or ARR, adjusted EBITDA, and operating cash flow or OCF. Fiscal 2019 objectives included low-single-digit organic growth and fiscal 2021 objectives included adjusted EBITDA of 38% to 40% and operating cash flow of $1 billion. Let me start the call by saying we remain on that plan. And in Q1, we delivered to the key business metrics. In fact, this was our best Q1 ever. Let me walk you through those key metrics. Total revenue was $667 million, up 4% year-over-year. Annual recurring revenue was $520 million and 78% of total revenues, up 6% year-over-year. Let me note, two years ago in Q1 of fiscal 2017, our total revenue for the quarter was $492 million. Our ARR this quarter of $52 million is larger than total revenues of two years ago, demonstrating the significance of our focus on ARR and our transition to a recurring revenue business. Within ARR, cloud was $208 million, up 7%; customer support was $312 million, up 6% year-over-year, with 90% margin. Cloud was 58% margin. On an absolute dollar basis, ARR was up $30 million year-over-year. Non-recurring revenues were down slightly by $4 million. Our increases in…

Mark, thank you. And hello, and thank you all for joining us today. During our last earnings call, we shared with you our communication framework. We shared our fiscal 2018 annual organic growth and return on invested capital, ROIC, and indicated that we will provide those key metrics at the end of each fiscal year. We directionally provided that subject to our quarterly variability, our organic growth will be in the low-single-digits for the full year of fiscal 2019. We also introduced quarterly factors to provide additional quarter-to-quarter visibility into general market factors and some short-term context that may affect our quarterly results but are not relevant to the long-term health or strategic nature of our business. The objective of such a communication framework of annual metrics, quarterly factors along with management commentary is to help you model OpenText in a way that is closely aligned to how we see the business and reduce unnecessary short-term trading volatility for our long-term shareholders. And now turning to our quarterly financial results, and similar to prior quarters, my references will all be rounded in millions of U.S. dollars and compared to the same period in the prior fiscal year. Total revenue for the quarter was $667 million, up 4% from last year, or $669 million on a constant currency basis, also up 4%. Our geographical split of revenues in Americas, EMEA and APJ was 58%, 32% and 10% percent respectively, and that was consistent with the prior year. During the first quarter, we had 14 deals over $1 million in value. Same as last year, nine in the OpenText Cloud versus seven in prior year, and five on on-premise versus seven in the prior year. We delivered $77 million in license revenues, down 2% compared to the prior year, and $56 million…

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

Hi. Thanks. Good afternoon. The first question for Mark on the macro environment. You mentioned in your remarks some of the headwinds, including the trade tensions and FX markets. Obviously, you have solutions to help customers sort of deal with such evolving macro environment. But I was wondering from your conversations with customers, are you seeing any hesitation on their spending plans or perhaps looking to shift spending towards certain solutions over others? And also do you see any particular vertical that perhaps might be more exposed or vulnerable than others?

Phillip, thank you for the question. If you kind of look through the earnings season here, we're probably on the second half of sort of the earnings calls, if you will. So we have the benefit of being a bit more, if you will, into the calendar year. Look, we all read the same newspapers and kind of read the same headlines. To repeat, it's growing discussion around tariffs. And it's not just putting tariffs in place but now seeing the next set of phases of that where certain industries may have done some pre-buys and now they see price increases. It's in that maybe third phase of a five-stage process. Certainly, you can see vendors increasing prices, some wage inflation as well, and growing narrative around what would a recession look like and when would it arrive. But we're not seeing that translate today into pipeline changes or spending differences. But the narrative is way up. And the next step is to see it translate. But the narrative is very high. We think we're in a good position regardless of the economic scenario, whether the economy is up or down. And this is a mature team. I've lived through up economies and down economies. And our structuring puts us in a great place to have a more optimized cost structure, more agile. Our solution portfolio has helped customers navigate through all scenarios, moving manufacturing facilities, getting leaner, more digitalization. And if market valuations change as a consolidator with a value point of view and a healthy balance sheet, we're in a strong position to gain share quickly. So, to answer the question, it hasn't translated directly into any pipeline change. We watch it closely. We all read the same headline, and we're ready for all scenarios, up or down.

That's very helpful. I was wondering, just curious, when your sales team go out to the customer with the sort of conversations talking a little bit more about the narrative in the case of recession and such, are there specific solutions that you guys are pitching a little bit more or are you sort of modifying the pitch to customers a little bit in order to kind of help them prepare for the changing macro-environment?

Certainly is. I would describe it as a – we can help support a growth message for the Global 10,000. We could help support a value message for the Global 10,000. And part of that value message is, time to transition to the OpenText Cloud. We can help you reduce your labor. We can help you move your physical environment into a digital. You need to move a plant from China to Southeast Asia. You need – you can't go in a market and get very extensive skills. So I will lead with in support of our recurring revenues that our number-one message to customers in a downtick would be migrate to the OpenText Cloud.

That's helpful, Mark. And maybe a quick question for Madhu as well. I don't know if I missed it, but what was the impact in the quarter from ASC 606 and also FX?

No. Sure thing. On 606, it's actually in our 10-Q. There was about $4 million – about $3.8 million of positive impact to revenue. And then when you consider the cost side of it as well, it's about $4 million positive from a margin standpoint. And on FX, as I shared, we saw about $12.4 million of negative impact to revenue in Q1 as you compared to the exchange rates in Q4.

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

Yes. Congratulations on the acquisition here. I wanted to sort of ask sort of along that line from the context on the M&A funnel. Has the environment changed in any way over the past, let's call it, six months here from last year?

Richard, thanks for the question. Mark here. I'll reemphasize that it's good planning by any large business to be ready for sort of all scenarios, and up scenarios and down scenarios. And we're going to help our customers navigate through both. Certainly, as market valuations shift a bit, we're in a great position given our value-oriented approach. I would say that our pipeline activity in M&A is up. We're engaged in more conversations, and we think that's a good thing as a consolidator. So, yeah, there's been a difference over the last six months.

Okay. And then with respect to organic growth, I know you guys are probably not providing that this quarter. But if I could sort of look back at that single-digit target that you have here, what would you say kind of like are the top – the greatest opportunities from an organic perspective of all your product lines here?

I'd highlight top three. It's, one, transition to the OpenText Cloud, and our continued ability to migrate existing customers and have them maintain the ownership of their license, grow our customer support revenue. I'll take this as an opportunity just to do a shout out for the $312 million of support revenue, up 6%. We hit 90% margin. First time, 90% margin. This is upper-right-hand quadrant performance of customer support, which really shows the value of that experience and that engagement and the satisfaction and the value they're gaining from our platform. So the number one path on organic growth is that it continued transition in additive nature to the OpenText Cloud in recurring revenues. Second is driving security – security into our entire installed base. And let me just pause there. I'd say those are probably the two largest ones.

Okay. And one last one from me. You made a comment earlier in your remarks about some wage inflation. And we certainly sort of noticed that across the board in some other names. Like, to what degree are you sort of seeing that across the base? Is it coming across all areas of business from R&D to sales, or is it sort of localized in one specific operating cost line?

Yeah. I would – I'd say it's primarily oriented in the U.S. right now. It's a sort of unique scenario in the United States where you have GDP growth higher than unemployment. And that's an interesting phenomenon. So a few years ago, we've decided that we were going to double down candidly in Canada, India and Philippines. And that's worked out pretty well for us. But in terms of wage inflation, I'll just point to the macro indicators in the U.S. where GDP growth is higher than unemployment rates. So everyone is fighting for those – for more jobs. And we continue to expand our employee bases in Canada, India and the Philippines.

Okay. And sorry, I just want to slip this one in as well. Do your targets incorporate sort of that level in inflation when it comes to your margins here going forward?

Yes, they do. It's an all-in scenario.

Okay. Thank you.

The next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead, sir.

Hi, good afternoon. Mark, if I'm doing the math correctly, it seems like organic growth will be relatively flat in the first half of 2019. And so that would imply that your guidance for low-single-digit organic growth for the full year is back-end loaded. So I guess, firstly, I don't know if you can comment on whether my math is correct. But secondly, could you comment on whether there would be reasons to expect an acceleration in organic growth in the second half?

Yeah. Thanks for the question, Thanos. I'll go back to my prepared remarks. We're on target to grow low-single-digit organically this year. In terms of our Q2 quarterly factors, it is a tougher Q2 compare. As we go back to Q2 last year, we had a lot of acquisition revenue from Covisint and Guidance in Q2 of last year. And we're going to update annually on the actual quantum of organic growth. We had positive organic growth in Q1. And you'll have to run your model of how you want to spread that out and what number you want to use. But I'll confirm we had positive organic growth in Q1, tougher compare in Q2, and we're on target to grow low-single-digit organically for the fiscal year. Madhu, anything you'd like to add to that?

No, I agree with that. And thank you, Mark. Yeah.

Okay. Thank you. That comment was very helpful. On Liaison, just one question I have is, can you comment on whether there is any specific concentration from a vertical industry perspective? It seems like there've been doing a lot in life sciences. Or is it quite diversified there?

Yeah. Thank you for that. We're very excited about Liaison. They are – we'll come out with the business case once we close them. I'm sure you'll go look at public sources and understand the better business more fulsomely. In terms of industries, they are business-to-business integration, they are application to application integration. These are markets where MuleSoft plays, where Informatica plays, as well as our traditional markets. We've posted on our investor site the magic quadrant. The upper right hand quadrant is ourselves, GXS and IBM, as well as some new markets of MuleSoft and Informatica. That puts us into verticals such as heavy and industrial processing, puts us into pharmaceuticals, the strong process industries, if you will. So it's a nice industry add to where Covisint was in auto and transportation, GXS was in CPG and retail more so, and Liaison more in process and heavy industry.

Great. And one just last one for me. I know that you've had Documentum for a while longer, any change in maintenance renewal rates or has that been holding steady? Thank you.

I think you see the power of the acquisition and the integration right here in the quarter. Again, I'll go to support revenue of $312 million, up 6%; 90% margin. This is the power of scale. And as we – two years ago – if you'll allow me to kind of make this point, two years ago, fiscal 2017 Q1, our total revenue for the company – this is pre-Documentum, total revenue for the company was $492 million, total revenue. Today, our annual recurring revenue is $520 million, bigger than all of total revenue from Q1. So it was an asset purchase. Asset purchases take a little longer. We all know it's, as we talked many quarters ago, fully integrated. I think you're seeing the power of that integration, the scale, better renewal rates flowing into the business, up 6% year-over-year, $312 million, 90% margin.

Great. Thanks. I'll pass the line.

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

Good afternoon.

Hey, Steph.

You've talked quite a bit about the cloud on the call. Can you just give us a bit of an update on the early interest in the uptake in OT2 and what the pipeline for the cloud solutions in general is looking like here?

Steph, thanks for the question. I introduced some new language in my script. We're changing the emphasis. We're talking about cloud and off-cloud, off-cloud being our non-recurring revenue of license and PS. And so we have our off-cloud solutions and our cloud solution. So we're going to introduce some new language here clearly with the emphasis on cloud. Three major swimlanes for our cloud. First is our business network cloud. And that is our value-added network, that is our on demand messaging. This is where Covisint and ANX added a lot of value. Liaison will provide enormous value there in the business network cloud. The second is our managed services where we bring customers' environments into the OpenText Cloud and we run them fully. It could be a content services cloud, could be a supply chain cloud. We had two great wins in the quarter. L'Oreal moving into our managed services on a global basis. We won Opel to come into our managed services cloud. And our third swimlane is our new OT2 platform, which is our public environment, multi-tenant SaaS platform. And we're on now quarterly releases. We have our next quarter release going out in two weeks actually. So OT2 18.4. Our naming convention will first see the year, 2018, 2019, 2020, and the next stop will be the quarter. So OT2 18.4 goes into full production. And our subscribers are up. Our revenue is up. And I expect when we start to get into fiscal 2020, it's going to have a contribution to the business opening up that third swimlane. And if I can kind of go back to a couple of questions ago, that'll probably be the third driver for organic growth. It's sort of new revenues coming in through OT2.

Great. Thank you. And then in terms of partners, you announced the partnership with NessPRO in Israel this quarter. Can you talk a bit about new partnerships in other regions that you would like to enter with partners?

Steph, yeah, thank you. Thank you for that. I had a comment in my prepared remarks talking a little bit about extending our sales coverage. And we've put a team in place. It's a long-term investment. It's about culture and continuous progress within the organization. And it's all around partners and alliances. A simpler way to kind of say is just indirect sales. Right? We've got our direct sales force, and we go out and engage directly. And we have our indirect sales force that is partners and alliances. So the biggest thrust in there is the global system implementers. Accenture, Deloitte and companies of that ilk. And we're making great progress there. We've refined our value-added resellers. And we're getting closer to the hyperscalers that we – we announced at Enterprise World where we'll now run our managed services on the Google Cloud platform, on Azure, as well as Amazon. And then we have our own inside sales that will go to market with a variety of solutions. So we're going to continue to highlight it. It's a cost-effective way to get coverage in a variety of countries that we may not be in or account coverage and doing that at a high efficiency and low cost.

Great. Thank you very much.

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

Thanks very much, and good afternoon. Just in regards to the commentary momentum that you're seeing in cloud relative to license or off-cloud, could you just – is there any way to quantify it? I know it's been a couple of quarters since you have disclosed MCV, but a-million-dollar-plus cloud deals are up year-over-year. So any sort of additional commentary just in regards to momentum in the cloud and what you're seeing on the bookings side?

Well, I mean, I'd kind of point to the recurring revenue up on an absolute – put percentages aside for a moment because percentages may not tell the full story because you need both the numerator and denominator. So if we look at our annual recurring revenue within the quarter, it's up on an absolute basis, $30 million, and our non-recurring revenue is down $4 million. So the percent up is 6%, and on the non-recurring, the percent down is 4%. But I think the absolute number tells a story right there. ARR up on an absolute basis, $30 million, and non-recurring down just $4 million.

Okay. And then just shifting to M&A and Liaison, I mean, you're not disclosing financials or commenting on at this point. But just speaking generally, is your – is the target still typically to bring acquisitions in line with your margin target or within one year? And is there any reason why Liaison would deviate from that model?

Correct. Our model is to onboard a business within the first year. And based on what we see here, I wouldn't expect Liaison to vary from that.

All right. Thank you. I'll pass the line.

The next question comes from Walter Pritchard with Citigroup. Please go ahead, Walter.

Hi. Question first for Mark. On the growth side, I'm wondering given – it feels like in this macro, which has been good for a while, everybody including yourself has had a pretty good price umbrella in enabling growth through pricing and price optimization. Can you help us understand maybe looking historically how much of a help that's been? And I assume if we're getting a little bit tougher macro, that probably becomes a tougher lever to pull.

Walter, thanks for the question. It's an interesting set of economic scenarios. It's not sort of a traditional set of variables. Right? We look at the U.S., which for a lot of companies is 50% of their business, where you have GDP is still higher than unemployment. So the biggest concern really is inflation and as inflation slow things down, generally speaking. You see Oracle raising prices. I got an e-mail from Microsoft today raising prices. And we're in the market too, raising our prices around our customer support. We announced at Enterprise World our Prime Protect, which is bringing up a couple of hundred basis points. Our RCS program, we look at our PS rate cards, and we're adjusting for FX and thus bringing up our PS rate cards as well. I think on the renewal side, we are focused on cost of living adjustment in the mechanics of a very large contract annuity base, both in the cloud and off-cloud. But when it comes to selling a new license or selling a new long-term cloud agreement, you still have to compete on value. And it's a value-based sell and thus an ROI-based sell. So I think it's a mixture of you have mechanics where you got to adjust for FX and some inflation, which we're doing our share of. But in kind of new longer term contract, you're still competing on value. Is that helpful?

And then for Madhu on – yeah, it does. Thank you, Mark. And then for Madhu, on the cloud margin side, I know we've talked quite a bit about that the last several quarters. And you've given us a little bit of a different view on the cloud makeup, which understanding one of the pieces is pretty small right now. But as we think about the margins in cloud and sort of mix helping to drive margins, can you help us understand how that would play out? And then also, are there any things we should be watching over the next few quarters that are – that do help to enable those margins to go higher in cloud rather than scale.

No, it's a great question. So there are probably three aspects to it, and mix is certainly one of those. But also keep in mind, as we continue to drive the productivity and efficiency, we also need to continue to invest in the cloud. And hence our direction to you, although it's improved in Q1 to 58%, to keep it at those levels, that balances off the productivity efficiency as well as the investment that we need to make. And I think looking longer term, we've said this before, I think getting into the 60%s, low-60%s on the cloud margin, we've talked about it, but that is a much longer-term goal. But this year, I would encourage that we look at it at the Q1 levels as we balance off the three aspects we talked about.

Okay. Great. Thank you.

You're welcome.

Okay. Ben, to the next question, please.

The next question comes from Blair Abernethy of Industrial Alliance Securities. Please go ahead.

Thanks very much. Mark, I wonder if you could just shed a little more color on how progress is – how you're making progress on moving what would be sort of traditional license, on-premise license customers to managed services, and whether or not they're opting to go or look at OT2, or how you're sort of managing that shift. And I guess the other side of the question is, what's the revenue lift opportunity of just taking an on-premise side and going to managed services with this existing license versus going to, say, OT2?

Yeah. Fair enough. And Blair, thanks for the question. I'll start with sort of a principle-based answer. And excuse me if I'm repeating myself from a couple of years ago, but it's an important principle. We took a different stance than other companies. Our view was we have a very large install base, a very important install base, and we weren't interested in substituting that revenue – that maintenance revenue and substituting it for a cloud dollar, if you will. Our principle – and we were willing to give things up for that. Our principle was to go after the dollar add, not the dollar substitute, if you will. And that's paid off. Where our customers enjoy owning the license, it has economic value. In fact, it's more economical for our customer to own a license. If they want to own it for more than – I always like use the number 42 months as 42 months solves a lot of things. But our experience shows after 42 months, it's more economic to own that license than it is to be in a subscription. So we made that principal decision. Other companies went for the substitution approach. And I think that's paid off for us. Again, I won't repeat the ARR numbers from the quarter. I think you see that principal decision flowing through our P&L today. So it's an add. And it's an add of the infrastructure opportunity. It's an add of the application management opportunity. And now that as they migrate into the cloud, customers reduce their labor, increase their dependence on us. It's the opportunity add of future solutions on top of that. So I'm not going to put a – it's hard to put a quantum on it, but I would open up those three areas of its infrastructure dollars, its application management dollars and its new solution dollars on top of that. In terms of OT2, we're being very selective on the workloads because, again, we don't want to substitute a dollar. We want a dollar add. So we tend to be adding new features and new workloads into OT2. So we can – we will see that as, again, additive dollars to what we're doing, not substituting existing dollar.

Okay. That's very helpful. Thanks, Mark. And then just shifting gears to – one of your organic growth drivers is competitive replacement. Can you just give us an update on how you're proceeding there? And in particular, with the fact that you've got – yeah, you've had the Documentum business with you for some time as well. So how are you doing in the market competitively?

Well, Blair, I don't want to come off with a hubris-type answer. But that's a $34 billion question. And in the marketplace, I will point to IBM. And I look at IBM's recent decision in the marketplace, and it's going to be an opportunity for OpenText. They're going to be focused on this new, very expensive thing they're doing, and we're going to stay focused on FileNet, Sterling Commerce. I thought Watson was what they're going to lead with. Sounds like they're going to lead with open source. So we're going have an opportunity on analytics as well. So, on the competitive replacement front, we talked about a few quarters ago that we're going to be laser-focused on IBM, and that's even more acute today.

Okay. Great. Thanks very much, Mark.

The next question comes from Daniel Chan of TD Securities. Please go ahead.

Hi, guys. Just wondering if you can comment on the seasonality. It seems like seasonality was a bit more pronounced this quarter. I think in the last five years, it's been down about 2% to 3% sequentially, and this quarter we saw about 12%. Is there anything specific to this quarter that we should be thinking about? And should we see more seasonality as we move through the rest of the fiscal year.

Dan, thanks for the question. No, I don't believe so. We came off a very strong Q4, rolling into Q1, and our Q2 has a slightly tougher compare year-over-year, just given all the Covisint and Guidance acquisition revenue from a year ago. So no change to our views of seasonality. I would just note we came off a very strong Q4, and we just have a slightly tougher compare given Guidance and Covisint over a year ago.

Okay. And I just had a follow-up question on the margins. This is the second quarter you've got about 37% EBITDA margins. Is this kind of the new level and we move higher here as you move towards your fiscal 2019 goals? And what are the kind of the puts and takes that will get you to either the high end of that range and to the lower end of that range?

You're going to take that?

Over to Madhu.

Sure, sure. Thanks for the question there. As we shared in the commentary, we do have the ups and downs in the margins as well. Right? So your Q2 is going to be a bit higher and Q3 lower, but Q2 again -- Q2 and Q4, there's a comparison there as well. I would still point out to our target model range. We have baked in the number one. You talked about the drivers. The whole essence of doing the restructuring early on in the fiscal year, we've baked that into our target model. So I would continue to look at our target models for that. And when you think about the balance of investments, I answered the earlier questions in the cloud. We really have to balance between the efficiencies we'll do to "fund investment" we'll do to keep the cloud at the Q1 levels as well. That's how we would look at FY 2019.

Great. Thank you.

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

Ben, thank you. And thank you, everyone, for joining today. Madhu, thank you for your remarks. I'd just like to recap that we focused on and we continue to focus on the metrics that matter: ARR, up 6%, $520 million within the quarter; cloud, up 7%, a 58% margin; support had a record margin of 90%, up 6% to $312 million; adjusted EBITDA of 37% or $246 million, up 250 basis points; OCF of $171 million, up 155%; and then the cash of $788 million. And we're very excited about the acquisition we announced today of Liaison Technologies. Thank you for joining. And we'll speak to you all very soon. Thank you.

Thank you.

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