Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation’s Second Quarter Fiscal 2019 Earnings Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. On the call today is OpenText’s 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 to direct investors to the Investor Relations section of our website, investors.opentext.com, where we posted three presentations that will be referred to during today’s call. First is titled OpenText Investor Presentation; the second is titled Q2 Financial and Business Results, which includes information and financials specific to our quarterly results; and the third presentation with additional information about our announced acquisition of Catalyst Repository Systems. In February and March, OpenText management is looking forward to visiting with investors in Canada, the United States and Europe. We will also be participating in the Morgan Stanley Technology, Media and Telecom Conference in San Francisco on Monday February 25, with Mark presenting in a fireside chat that day. I’m happy to highlight that Enterprise World Europe is taking place in Vienna, Austria this year. European investors are welcome to join us on this customer event for an opportunity to learn about OpenText, watch Mark’s keynote presentation on Wednesday March 13, and meet our customers and partners on site. In addition, we’ll be visiting London for investor meetings in March. Please feel free to reach to me or the IR team directly, if you’re interested in arranging a meeting in London or attending Enterprise World Vienna. 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 future performance results of OpenText are contained in OpenText’s recent forms 10-K and 10-Q as well as in our press release that was distributed earlier this afternoon, which may also 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 Mark.

All right. Thank you, Greg, and hello, everyone, and thank you for joining us today as we provide our fiscal 2019 Q2 update. It’s my first earnings call from a polar vortex, so I’d like to welcome everyone. Let me encourage you to have our press release and IR presentations in front of you as we go through our call today. Further, let me continue to emphasize, we view our business on an annual basis. We are now at the midpoint of fiscal 2019, and our key financial metrics remain centered on annual recurring revenues, or ARR; adjusted EBITDA and the dollars are always more important than the percentages; operating cash flow, or OCF; and a return on invested capital, as we would like to say, ROIC. I’m pleased with our results from the quarter and our progress at the midpoint of the year. Q2 is a solid data point along the path to our fiscal 2021 aspirations. Let me go through a few quarterly highlights. Total revenue of $735 million, up 10% quarter-over-quarter, with 1.5% year-over-year growth in constant currency. Record annual recurring revenue, ARR, of $530 million, up 2.6% year-over-year and 72% of total revenue; adjusted EBITDA of $308 million, or 42%; PS margin at 24%; CS margin at 90%; and cloud margin at 60%. OCF of $189 million, up 14% year-over-year; ending cash of $595 million; net debt to adjusted EBITDA of 1.9 times, well under two, 35 deals over $1 million, 16 in the cloud, 19 off-cloud, 15 private – 15 new private cloud customers. We completed the acquisition of Liaison, customer support renewal rate in the low-90s, cloud renewal rates in the mid-90s, positive organic growth, and let me highlight a few key customer wins from the quarter. The International Committee of the Red Cross,…

Mark, thank you, and hello, and thank you all for joining us today. During Q2, we maintained a laser focus on operations and productivity in every line of business and it shows in our results. And turning to the details of our quarterly results and similar to prior quarters, my references will be compared to the same period in the prior fiscal year. Total revenue for the quarter was $735 million, up 0.1%, or up 1.5% on a constant currency basis. As we look – as we continue to look at our business on an annual basis and let me note that year-to-date, total revenue was $1.4 billion, up 2%, or 2.9% on a constant currency basis. The geographical split of revenues for the quarter was Americas, 57%; EMEA, 33%; and APJ, 10%, consistent with the prior year. Annual recurring revenue was $530 million for the quarter, up 2.6%, or 3.9% on a constant currency basis. Our cloud revenue was particularly strong in the quarter at $219 million, up 5.3%, or 6.3% on a constant currency basis. We also generated $67.9 million in new MCV, up slightly compared to $65.1 million in Q2 last year. Our customer support revenue was $310 million, up 0.7%, or up 2.2% on a constant currency basis. We delivered $133 million in license revenues, down 1.8% and essentially flat on a constant currency basis. Our professional services revenues were $73 million, down from $83 million, 12.2%, or 10.1% on a constant currency basis. Turning to the details of our margin performance in Q2. As you can see by our improved adjusted gross margins and adjusted EBITDA margins, we continue to maintain a clear and deep operating view into all aspects of our business. GAAP gross margin for the quarter was 69%, up 170 basis points.…

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

Good afternoon.

Hi, Steph.

Hi. Obviously, acquisition spending has been very followed the last couple of months. Can you talk a bit about the acquisition environments and what you’re seeing in terms of the pipeline of large and small deals?

Yes, Stephanie, thanks for the question. As we come here into calendar year 2019, the top of the pipeline activity is stronger, I think, with market volatility, the – or the tail end of the effects of the U.S. tax rate increases from last year. And I think as markets kind of lean a little more towards volatility, it advantages buyers, consolidators like ourselves. So we have high capacity. Top of the pipeline activity is stronger and we’re going to remain very strategic and disciplined in how we do due diligence and effectuate our acquisitions. But as we talked about last time, I think last call, I do think calendar 2019 is going to see more activity in the market.

Great, thanks. And then in terms of revenues, you obviously came in at the top-end of the guidance you provided for the quarter. Can you give us some color on some of the sources of strength with the cross-selling geographic regions that were strong?

Well, I’ll point to one of the key highlights in the call, which is the cloud. License performed well for sure. What we’ve talked about over the last few calls is that, we’re going to tap the accelerator on the OpenText Cloud. So more focused on training and education and certification of our 12,000 employees, bringing more capability to market, some upgrade of services and our managed services, new OT2 platform. So I’d really point to the cloud and how we’re looking to tap on the accelerator. We’re also executing very well. So in our off-cloud business, just the very – the EP series is showing extreme strength and stickiness, if you will, and that’s translating into an off-cloud renewal rate in the low-90s and great margin performance. That’s really reflective of the strength of our off-cloud business as well. So I’d point to those two things in looking at the ARR up near 3% year-over-year.

Great. And maybe I’ll sneak one more in. Now that you’ve had Covisint in guidance for a little over a year. Can you talk about any positive or negative surprises that came out of the integration than what you’ve seen in terms of cross-selling?

Yes, fair enough. I’ll take it maybe one at a time. Covisint – when we purchased Covisint, they were shrinking and losing money. And we felt we could arrest that decline and turn them profitable and we’ve done that. And it’s – and that’s reflected in our 42% blended adjusted EBITDA. We have a great opportunity Internet of Things. And I’d call one reflection on Covisint, that I’m still very hopeful that our IoT – the base business is exactly what we expected and we always have to sort of upside thesis around the Internet of Things and we’re still very hopeful around it. We’re beginning to win new Identity and Access Management business, IAM business, I think, we call it IAM actually as an acronym, IAM, and we’ve learned a lot about Okta, O-K-T-A, probably the primary competitor in the Identity and Access Management space and I don’t talk a lot about them. That’s sort of the space we’re going to target in Identity and Access Management. On guidance software, it’s – we’re very pleased with the security aspects of it. We didn’t enter guidance for their eDiscovery capabilities. Part of the thesis was, they had outsourced all their renewals and we had to in-source that and bring that into our mechanism. We’ve now completed that. That might have taken a quarter – one or two quarters as little longer than we wanted to do. So that would be my reflection, right? Covisint is what we thought it would be on the base business and still has its upside in Identity and Access Management as well as IoT. We love the security aspects of guidance and we’re sort of completing the – we’ve completed the in-sourcing of the renewals business. There’s still great promise on the security side.

Great. Thank you very much.

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

Yes, thank you. I’m actually surprised to see you have so much opportunity in your longer standing silos like Catalyst and the Discovery market. My question is, are you thinking more about fortifying those silos or would you kind of consider expand into new market segments here?

Richard, thanks for the question. Look, we have really kind of – I think of this in two vectors. We continue – Microsoft speaks broadly around a horizontal platform. And I think that’s good – that’s a good narrative and a good place to learn, where we have great opportunity to be this horizontal platform for content services, business network, application-to-application integration, Identity and Access Management, doesn’t need a lot of verticalization. The other vector is vertical apps. And there are a variety of really key industries for us, financial services, which is our largest industry, retail and CPG, which – a lot of strength came from GXS. We’re strong in engineering and construction. And there’s a whole set of verticals, healthcare government. But the legal tech sector is a great vertical. It’s sort of where the content rich, process oriented, high security, needs around information, AI analytic deep machine learning. The legal vertical is estimated to be about $3.5 billion in size. So we’re going to go out and prosecute all these key verticals for us through the years. We’re strong in financial services today, manufacturing. Auto has always been a strong industry. We’re building strength in legal tech, and I think you’ll continue to see us both build on our own and acquire on a vertical basis.

Okay. And I think in your conference call remarks, you talked about Coca-Cola and FedEx, I think, from a supply chain perspective. Just wondering you can sort of elaborate on that a little bit more color?

Sure. So, if we look at Coca-Cola, it’s certainly on the supply chain and distribution. FedEx is more logistics and transportation.

And that’s – what was that, specifically sort of loading all the data related to that into your cloud, or just a bit more color if you have that?

Yes, fair enough. Let me – let’s think what we can publish out there, Richard, on both the customers and see how we can get into more depth. So once you leave us with that and maybe we’ll get a case study out on both of them.

Okay, fair enough. All right. I’ll leave with that. Thanks.

The next question comes from Phillip Huang of Barclays. Please go ahead, sir.

Hi, thanks. Good afternoon, and congrats on the solid quarter. Mark, you pointed to continued global recession concerns in your remarks similar to the last quarterly call. Just wanted to sort of get an update on your visibility on any impact to your pipeline or what your visibility is to – for the business?

Fair enough. Yes, I called it out last quarter in our quarterly factors, I’ll call it out again. And what I’m calling out is just sort of a general sentiment. If we look at the World Economic Forum and many of the headlines that came out of Davos over the last two weeks, the sentiment is quite different than a year ago. Now we haven’t seen it impact our pipeline. We haven’t seen it affect our business at this point. But I think it’s worthy of calling out that it remains a concern and it’s more in the headlines of all the papers that we read. But we’re not yet affected or calling out a change in our pipeline.

Got it. That’s helpful. And then maybe one for Liaison. You’re – obviously, you’re paying a price appeals multiple that is above your historical average. Just wanted to maybe get your sense on what are some of the things that we should be aware of that support at the valuations of the deal? The strategic rationale obviously makes a lot of sense just wondering on the financial side, but do you also expect to see above the average growth and/or margins once the business is fully integrated?

Yes, fair enough, and it’s a good question. I think, it’s always important to look at deals, both on their own and in a basket, right? And in a basket with Catalyst, $385 million of capital deployed, $145 million of trailing 12-month revenues, or 2.3 times multiple. So I think that – one that basket – of two deals is important around 2.3 times. Standalone, it’s just under 3 times, so it’s a little closer to the range – higher end of the range of the HP acquisitions that we did. Ultimately, it’s about ROIC, right, return on invested capital. And we believe this will overturn a high teens ROIC to us and Catalyst will be even slightly better than that when we get it integrated into our model. But to support kind of the very high twos, if you will, on Liaison, we – we’re going to grow it. And part of that thesis is, they’re not yet in Europe and we got a strong basis in Europe, which you access. So we can bring the technology to Europe. I think one of the best comparison in the market is a MuleSoft of how Mule is doing application-to-application level integration. We don’t have those capabilities today. We’re – we didn’t have them before Liaison. We were more kind of deeper of this EDI transaction talking to this EDI transaction versus repository of all these roles of how does that safety talk to DocuSign, right? How does Oracle speak to Adobe. And you can think of a database of 4,000, 5,000 application integration roles that we can now sit in the business network and allow a 1 million-plus trading partners to say, how does app talk to app, plus EDI protocol talk to DEI protocol. We think that’s a big opportunity that app to app level integration. So our case here is, once we get through the first year and when we get through our PPA and integration disruption, which is typical of all the deals we do. We have a strong plan to grow the revenue.

Got it. No, that’s very helpful. And then maybe one for Madhu. Just looking at the seasonality for the two acquisitions, it looks like Liaison, you’re expecting $41 million in the back-half of 2019, which seems like pretty evenly split between the quarters. But Catalyst seems like it’s seasonally a little bit lighter in the back-half of this fiscal year. Am I reading that correctly just – even after adjusting for the PPA?

No, thank you for the question. Yes, and a little bit no. Catalyst is two months out of this quarter and three months in the last quarter, right, like Liaison, we closed in the middle of December.

Right.

So you see kind of the 12-month effect and plus some seasonality. But I would definitely take the one-month timing into consideration.

Got it. Thank you very much.

Sure, thanks. Yes, thank you.

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

Hi, good afternoon. Mark, can you update us on the traction you’re getting with OT2, since I think it’s been a couple of quarters since you’ve launched it. Was that a contributor to the cloud strength this quarter, or is it still relatively early days for that offering?

Yes, it’s still relatively early. We had a couple nice – we had a few nice wins, for sure, that we’re calling out. But it’s still early days. The stronger contribution was certainly on the value-added network and on-demand messaging in the business network, very strong contribution from the private cloud, but a beginning contribution from OT2. Hightail actually did well within the quarter. Our own new and native SaaS OT2 apps both UK and HS. So it’s still early days, but they contributed it.

Okay.

But OT2 contribute it.

Okay, good to hear. And you mentioned that you would expect PS revenue to be stable going forward. It sounds like that’s a decision to offload more of that lower margin work to your partners. Is that having an impact with respect to partner engagement and the level of new license and cloud bookings coming through that channel, or would you expect a change on that front going forward as a result of them do more of the work?

Yes, it’s a good question. It’s exactly as you highlighted it. We still may have a little pressure on the revenue line as we continue to transition out maybe lower value service – lower value services down values in the eye of the beholder, right, what we view as high – lower value is high value to a partner, because it’s more in their implementation thesis. What we want to do is to be the experts in OpenText and getting the big value-added OpenText software versus maybe some run rate implementation services. So values in the eye of the beholder. But what we view as high – low value, we are transitioning to partners. They like it, helps them build more demand. So it’s a nice virtuous cycle that flows. So maybe a little – still a little more pressure on the revenue line. But in general, the absolute dollar performance should remain consistent. And again, it – that strategy produced 24% margin in Q2. So we’re – it’s the right strategy for us.

Okay. Just a modeling question for Madhu. Madhu, when you’re talking about the Q3 factors, you said licenses would be within the range of between 2019 operating model. Did you mean for Q3 specifically, or did you mean on a full-year basis?

I meant on a full-year basis.

Okay. Okay, thank you.

Thank you, again.

Yes. And operator, as we go into our next question, I’d like to just touch based on what Richard asked for – Richard on Coca-Cola. It’s really kind of core Coca-Cola talking to bottlers now on our business network. And in FedEx, it’s really fleet management, so I just wanted to add that. Thank you, operator.

The next question comes from Paul Steep who is from Scotia Capital. Please go ahead, sir.

Good evening. Mark, can you talk a little bit about cloud? You talked about the pipeline being a third cloud-driven. Can you talk about what the momentum looks like across the broader set? Are you getting – seeing that start to pull through? I know you’ve always been agnostic, but how that’s developing and what changes you may be making in the sales force around that?

Paul, thanks for the question. We’re – we still see the world as hybrid and hybrid is the destination, it’s not a waypoint. So I – again, in the 60-40, 40-60, I’m not ready to say 70-30. But there’s no doubt that when I look at for OpenText today, the greatest opportunity is cloud. We’re only 20% penetrated into the installed base today, whether it be for business network, managed services, OT2 is so young and new. We haven’t even began to tap the opportunity with the hyperscalers. So it doesn’t change our thesis of hybrid, but unequivocally, the greatest opportunity for the company today is driving the adoption of the network, of the private cloud and new native SaaS workloads.

Great. Two quick follow-ups for Madhu largely here. Cloud margins at 60%, we saw a rebound there. Is that exceptional in terms of anything unusual in the quarter? Should we think of that is achievable going forward? And then the other one for you, with regards to IRS, can you just remind us of what were at dollar was for the contested value? And then maybe a broad brush of what the next step actually is? Thank you.

Sure. I’ll take the second one first. We are at, I think, the $770 million in terms of our estimate of exposure, right, again, it’s a disclosure rights. And as a follow-up to that, as we – as I stated in my prepared remarks, we continue to stand very strongly by our positions, our technical positions and we continue to be [indiscernible] competitive amounts and the IRS thesis on it. Back to cloud margin, But I would say is, we did really well. As Mark mentioned, we are all going to invest in the cloud, so it’s going to be – it’s going to depend on the business need and what happens in one quarter versus the other. And as you know, we’re on-boarding Liaison and Catalyst into the business, and they’re both cloud services. And hence, our direction that, I think about the cloud margin still on an annual basis in the 57% and the 59% we have on our FY 2019 target model.

Thank you.

Sure.

The next question comes from Matthew Wells who is with Citi. Please go ahead.

Hi, good afternoon. On the backdrop of M&A integration and the 100 bps headwind, it looks like you maintained the EBITDA margin expectations of 36% to 38%? And does this account for Catalyst integration headwinds? And what’s gives you confidence here?

Yes, Matthew, thanks for the question. Yes, we – to answer your question, it factors in Catalyst for sure. We – I said we’ll get them on our operating model within the first 12 months, might get there actually a little sooner, right? So we’re not calling out Catalyst for any special effect, if you will, here. Liaison is a little larger, if you will. So in Q3 and Q4, it will have a slight impact to the growth basically of adjusted EBITDA. So we’re confident in the range of 36% to 38%. We’ve got great visibility into the – into our expense run rate. We – we’re very disciplined in that visibility. We know the investments in hand. We’ve only got five months to go right to the end of the year. So it’s the visibility. It’s our integration, history and expertise. We can – have great visibility into Catalyst and Liaison. So we’re confident in the 36% to 38% on the year.

Okay, that – that’s really helpful. And then switching gears, I just have a question on as OpenText continues to partner with public cloud providers, how are you investing on the opportunity? And do you see any risk of clients churning from the OpenText Cloud to these providers?

Yes, it’s an interesting question. We own and operate our own infrastructure. We’ve been – we’ve built our OT – we’ve acquired and built our cloud from zero over the last six years, we worked from 0 to almost $1 billion run rate annually. So we’ve got a lot of experience over the last year. The first workload that we think the hyperscalers can help us with – help our customers with is sort of secondary and tertiary workloads around disaster recovery backup. We’re not in every market today, but Google is in various markets, so always is AWS. So I think with those secondary, almost and sometimes tertiary workloads of Discovery – sorry, DR backup, they’re going to be helpful with. When we put our private cloud, our public cloud is not going to run on a hyperscaler. So OT2 is not intended to run in a hyperscaler, it’s our private cloud. And when we have certain workloads of Google’s the closest, customers will still get a better SLA from OpenText. And – but good enough SLA in a third party of cloud environment and that’s okay with us. We still want to win that the software platform – the OpenText software piece, third-party can’t win that. We’re going to win – we’re going to provide the application performance management and then the transformation services to leverage and use our software. So, we’re going after that value stack, not the hosted piece, if you will, with the hyperscalers. So there’s really no risk to lose anything, it’s just sort of a trade-off of the SLA is whether you are in the OpenText Cloud or run in a hyperscaler.

Thanks. That’s a great color.

This concludes the question-and-answer session. I would now like to hand the call back over to Mr. Barrenechea for any closing remarks.

Very good. Well, I’d like to thank you for joining us today, and I’d like to conclude leaving with three things. Our top three messages that we wanted to convey today is that, the OpenText Cloud is the greatest opportunity in front of us. Two, we’ve completed two acquisitions over the last 60 days, again, put $380 million of capital to work for trailing 12-month revenues of $145 million, all cloud revenue, high-teens ROIC expected 2.3 times revenue multiple and in the short-term, it was a very solid quarter with ARR $530 million, up 3% and adjusted EBITDA of 42% and operating cash flow of $190 million, up 14%, resulting in positive organic growth. Thanks for joining us today, and we’ll look forward to seeing you in our investor conferences. Have a good day.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.