Open Text Corporation (OTEX) Q1 2020 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2020 Conference Call. [Operator Instructions] I would now like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.

Thank you operator, and good afternoon everyone. On the call today is OpenText 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. This call will last approximately 60 minutes, with a replay available shortly thereafter. I would like to take a moment and direct investors to the Investor Relations section of our website investors.opentext.com, where we have posted two presentations that will supplement our prepared remarks today. First, our strategic overview titled OpenText Investor Presentation, and the second titled Q1 FY 2020 Financial and Business Results, includes information and financials specific to our quarterly results, notably, our updated quarterly factors on page number seven. In November and December, OpenText management is pleased to meet with investors throughout Canada, the US and Europe, and we look forward to attending the following conferences. The Bernstein Technology Innovation Summit on November 6 in New York, the TD Securities Technology Conference on November 14 in Toronto, the RBC Capital Markets TIMT Conference on November 19 in New York, the Credit Suisse Technology Conference on December 3 in Scottsdale, and The NASDAQ Investor Conference held in association with Morgan Stanley on December 4 in London, and also the Barclays Global Technology Media and Telecom Conference on December 11 and 12 in San Francisco. Please feel free to reach out to me or the IR team for additional information. 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 statement. 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 Form 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, 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 Mark.

Thank you, Harry. A good afternoon to everyone, and thank you for joining today's call. Let me start with an additional thank you to those who participated in our Annual Investor Conference last month in New York City. We asked for, and appreciate your feedback, we listened, and the OpenText leadership team presented our strategic vision and operational plans for stronger OpenText. Our trust is earned every day with our customers, and it is our planning that gives us confidence and our strategy and operational delivery. This is our 19th consecutive quarter of year-over-year growth and constant-currency, led by our double-digit cloud growth. The strong Q1 results we are announcing today is a continuation of that long-term perspective and the team's continuous commitment to excellence. 19th consecutive quarters of year-over-year growth is the textbook definition of durable. We laid out a clear purpose-driven strategy during Investor Day, help companies unlock their information advantage, be the leading platform for Enterprise Information Management, deliver the best hybrid cloud for customer experiences, and a relentless focus on operational excellence and efficiency and continued to hire, develop and retain the best, most diverse, inclusive talent in our workforce. In today's digital era, Enterprise Information Management is a strategic and mission critical platform for enterprise customers. We also laid out a value creation playbook during Investor Day. That playbook includes recurring revenue growth, margin expansion with margin gains above 40% adjusted EBITDA, reinvested for future growth; that includes innovation, products, sales capacity and customer coverage, accretive and strategic acquisitions, strong cash flows, customer-driven innovation, made disciplined capital structure and approach to dividends. In addition to our purpose-driven strategy and value creation playbook, we presented our fiscal 2020 business profile that included low single-digit organic growth plus additive M&A revenues, high single-digit cloud growth, customer support with constant to low single-digit growth, license business -- constant year-over-year and professional services constant year-over-year and continued optimization for margin, continuing to expand EBITDA margin, and a longer-term view for fiscal 2022 aspirations of 38% to 40% adjusted EBITDA and $1 billion to $1.1 billion of operating cash flows. The OpenText business is an annual business, we view annually, we ask you to view it annually. And I'm pleased with our start to fiscal year 2020, and constant-currency with approximate numbers. Total revenues of $707 million and 6% growth. The team delivered the highest Q1 revenues in the company's history. We also had positive organic growth within the quarter. Annual recurring revenues up $557 million were up 7% year-over-year, representing 79% of total revenues, driven by our cloud revenues of $239 million, which increased significantly by 15% year-over-year. Customer support was up 2% to $317 million, license was up 3% to $79 million, CS [ph] was constant year-over-year. Our adjusted EBITDA dollars are up 5% to $259 million and trailing 12 month cash flows are up 4% to $842 million. Let me spend a moment on some key customer wins within the quarter. The UK Department of Work and Pensions has depended upon OpenText Extreme since 2009 to create multichannel notifications, The UK Benefit System. Having successfully used the software now for over a decade, the DWP has further modernized their Extreme environments now into the OpenText Cloud. AAA, the Auto Club Group represents over 9.4 million members and is one of the largest AAA clubs, after selecting OpenText Identity and Access Management in May of last year, AAA has recently expanded that partnership with OpenText to manage 16 million digital identities to support growth and expansion, all in the OpenText Cloud. Third one, I'd like to highlight is the Deutsche Bank, a German multinational Investment Bank and financial services company selected OpenText Magellan, to provide the ability to seamlessly transform complex data and to compelling visualizations and graphs and charts and tables and diagrams for all their lending businesses. I 'd just like to highlight Daiichi Jitsugyo a leading Japan consulting firm offering customer solutions that combine manufacturing, marketing and services, which selected OpenText Extended ECM for their pharmaceutical business unit, due to its complexity with SAP and ability to effectively manage their creation review and approval of new pharmaceutical trials. And lastly, the International Committee of the Red Cross, based in Geneva, Switzerland selected OpenText Media Management to capture, store, manage, distribute, retrieve and archive its multimedia assets with the ability to support its mobile workforce in areas with poor network connectivity, while also providing a very high-level security for confidential assets. But the cloud and hybrid are the dominant themes here, the cloud migration is a once in 20-year shift within enterprise software, our hybrid cloud strategy is resonating with customers, and I'd like to expand on that a little bit. First, it's about providing customers choice and completing the need, as I 'd like to say; that is about focusing on running anywhere and allowing customers to consume anyway. Run anywhere, consume anyway. By run anywhere, we mean off-cloud, our cloud, somebody else's cloud. By consume anyway, we mean to consume by license or subscription, and it's all integrated, both off-cloud and on cloud. Combined, this is hybrid and it completes the need for our customers. Second, it's about modernization, and offering customers the latest enterprise-class solutions and a seamless API agnostic, compelling user experience, managed by OpenText, managed by a third-party or managed by the customer themselves. At Enterprise World in Investor Day, we detailed our next generation platform called Cloud Editions or CE and OT2. OpenText Cloud Additions is our EIM software mated to the cloud and OT2 is the EIM platform services available for direct consumer consumption. We're on-track to the delivery in Q4 of this fiscal year. CE and OT2 is a cloud-first approach. We have successfully transitioned into a modern cloud company, servicing the information need to the world's largest enterprises and governments. Let me turn my remarks to Q2. Q2 is historically a strong quarter for the company and our Q2 outlook is favorable. While we have not seen any material impacts to our business due to macro related factors, we have taken prudent steps regarding customer spending environments in the UK, due to Brexit uncertainty, especially Europe due to a slowdown in manufacturing and China due to trade tensions. Our US business is looking solid. Over 50% of our revenues and profits are located in the United States. The US dollar also remains very strong compared to other currencies and this has caused a short-term FX revenue headwind. I'd just like to recall that in fiscal 2019, the FX revenue impact was a negative $53 million. In Q1 fiscal 2020, this most recent Q1, the FX revenue impact was a negative $10 million and Madhu will get into that in more detail, and we now expect a total revenue impact of a negative $35 million to revenues in fiscal 2020. This is an industry challenge, not an OpenText specific challenge. Let me add some additional Q2 financial color. We are expecting Q1 to Q2 sequentially, high single-digit revenue growth, and this includes a negative $10 million of FX revenue impact. Low-to-single digit operating expense increase and flat adjusted EBITDA dollars, sequentially, as we complete the integration of Catalyst and Liaison customers infrastructure employees, we'll have the integration of these two acquisitions complete within the quarter. You will see, these items presented in the quarterly factors section of our investor materials. Again, Q2 is a seasonally strong quarter for OpenText and our outlook for the second quarter is favorable. I'd like to leave you with a few key thoughts before I turn the call over to Madhu. First, our Q1 results are a continuation of our long-term planning and execution, and another strong data point to the long-term durable nature of the OpenText business. We delivered the strongest Q1 revenue in the history of the company, and our 19th consecutive quarter of year-over-year revenue growth in constant-currency. Second, in constant currency, we had growth in all the right places with 15% growth in the OpenText Cloud, 7% growth in recurring revenues, and our adjusted EBITDA dollars expanded by 5%. This is growth in all the right places. Third, our balance sheet continues to strengthen. Trailing 12 month OCF is up 4%, we had approximately -- we ended the quarter with approximately $1 billion in cash and a $750 million undrawn revolver, supporting our total growth strategy. Our net debt is $1.6 billion, our trailing 12 month adjusted EBITDA dollars is $1.1 billion and that leaves our net debt to adjusted EBITDA ratio, just dividing the two numbers at 1.5 times. Fourth, the company is ready for all scenarios. The continued adoption of hybrid cloud by our customers, we're well positioned to capture EIM share both in the United States and globally. We are the market leader in content services and business networks. We're focused on gaining share with our upcoming cloud additions in OT2, balanced and natural hedging on our cost structure that reduces FX volatility to earnings. We are a patient and disciplined strategic acquirer and our balance sheet is strong. We are confident in executing to our long-term fiscal 2022 aspirations, while delivering to our short-term fiscal 2020 targets that we outlined at Investor Day, just last month. OpenText is durable in both up and down of times. With that, it's my pleasure to turn the call over to Madhu Ranganathan, OpenText's Chief Financial Officer. Madhu?

Thank you Mark and hello, and thank you all for joining us today. Our first quarter of fiscal 2020, it reflects the focus and operational performance, strong expense management and continuing to build on our balance sheet strength. And turning to the details of our quarterly results, similar to prior quarters, my references will be in the millions of USD and compared to the same period in the prior fiscal year. Also as a reminder, during our first quarter fiscal 2020, the impact of foreign exchange was once again meaningful. In our press release, you will see the impact of FX, across the entire P&L, in all revenue streams and our earnings. So, let me start the revenues and earnings. There was a $10 million FX impact to revenue during the quarter, total revenues for the quarter were $696.9 million, up 4.5%, a $706.6 million up 5.9% on a constant-currency basis. On earnings per share, GAAP earnings per share for the quarter was $0.27 per share, up from $0.13 per share for the same period last year. And let me outline the reasons; first of all, higher revenues this quarter, and second, lower depreciation and completion of the required amortization period of certain technology assets for accounting purposes, and restructuring charges, as well as higher interest income. Our tax provision was also lower due to certain reversals during the quarter. This led to an increase in net income of $38 million year-over-year, up 105%. Non-GAAP earnings per share for the quarter was $0.54 on a diluted basis, up from $0.60 per share for the same period last year of $0.65 up $0.05 per share on a constant-currency basis. And, let me now share with you all other details of our results. The geographic split of total revenues in the first quarter was Americas 60%, EMEA 30%, and APJ 10%. The main vertical sectors are financial services, business services, consumer goods, technology, public sector and healthcare contributed 85% of our annual recurring revenue. Our annual recurring revenues were $549.6 million for the quarter, up 5.8% or $556.6 million, up 7.1% on a constant-currency basis. Annual recurring revenues as a percent of total revenues increased 79% for the quarter and reflecting similar seasonal strength to our first quarter last year, and inclusive of contribution from our cloud-based Liaison and Catalyst acquisition. Our cloud revenues were particularly strong in the quarter at $237.3 million, up 14% of $239.3 million up 15% on a constant-currency basis. Customer support revenues were $312.3 million for the quarter, up 0.2% or $317.3, up 1.8% on a constant-currency basis. Our customer support renewal rate was up slightly to approximately 92%. Our license revenues for the quarter was $77.9 million, up 1.3% of $79.1 million up 2.9% on a constant-currency basis. Our professional services revenues were $69.4 million for the quarter, down 1.7% or 70.8%, up 0.2% on a constant-currency basis. Turning to margins; GAAP gross margin for the quarter was 67.2%, up 110 basis points compared to same period last year. Our adjusted gross margin for the quarter was 73.1%, down 30 basis points compared to same period last year, and primarily due to dilutive margin impact of Liaison and Catalyst. Also, on an adjusted basis, Cloud margin was 57.1% during the quarter, down from 58% in Q1 last year and reflecting our reflecting our integration activities for Catalyst and Liaison. Customer support margin was 90.7% during the quarter, up from 90.3% in Q1 last year. Our license margin was 97% during the quarter, up from 95% in Q1 last year. Our professional services margin was 22.1% during the quarter, up from 20.3% in Q1 last year. Our goal remains to optimize the Professional Services business for higher margins. Adjusted EBITDA was $254.2 million this quarter, up 3.2% year-over-year or $258.6 million, up 5% on a constant-currency basis. Adjusted EBITDA margin was 36.5%, down 40 basis points compared to 36.9% in Q1 last year, and continuing to the reflect seasonality as well as integration of Liaison and Catalyst acquisitions. Our GAAP net income for the quarter was $74.4 million, up from $36.3 million in the same period last year, again primarily as a result of the reasons I mentioned earlier, when discussing the year-over-year increase in GAAP EPS. Our adjusted net income in the quarter was $173.5 million, up 7.4% from last year or $177.2 million, up 9.8% on a constant-currency basis. As a reminder, the fiscal 2020 target model range for adjusted EBITDA margin is 38% to 39%. It is important to continue to look at our margins on an annual basis. Turning to operating cash flows for the quarter; we generated $137 million compared to $171 million in the same period last year. There were two primary reasons, which I will outline here. Our strong license quarter in Q3 2019 and even stronger collections in Q4, both resulted in annual operating cash flows of $876 million during fiscal 2019. And given the strong performance in Q3 and Q4, we saw lower opening AR accounts receivable in Q1 FY 2020 versus Q1 fiscal 2019 by 5% or $24 million. In addition, as we acquired Liaison and Catalyst during fiscal 2019, we carried higher expenses into Q1 2020 compared to Q1 2019. Our operating framework is more efficient than the same quarter last year, with DSOs at 54 days, lower by two days compared to Q1 fiscal 2019. We are on track to grow OCF in fiscal 2020, and remain focused on achieving operating cash flows of $1 billion to $1.1 billion in fiscal 2022, as we continue to apply automation and human based efficiencies into our working capital framework. Turning to balance sheet; we ended the quarter with approximately $1 billion in cash, compared to $941 million on June 30 of fiscal year-end or 6% higher. Our consolidated net leverage ratio was 1.5x and remains at strongest level in two years, and well within our external covenant ratio 4 time. In terms of our ongoing IRS matter, we are in the appeals phase. The standard IRS process continues and our resolve remains strong, as we vigorously defend our position. On the revolver, as mentioned in our earnings release, we have amended our revolving credit facility to increase the capacity to $750 million, up from $450 million and restate the five-year maturity from 2022, to 2024. This amendment is aligned with OpenText's size and ensures with ample capacity to support our total growth strategy. On the shelf, you will also note in our press release that we are renewing our universal Canadian shelf prospectus as part of ordinary course renewal timing. Under Canadian rules, a shelf prospectus is effective but for 25 months, and our previous shelf expired in September 2019. We are renewing with a $1.5 billion capacity under the Canadian shelf. And again, simply aligning with OpenText growth since our last filing during August 2017. Turning to our dividend program. Today we announced a quarterly dividend of $0.1746 per share payable on December 19, 2019. As a reminder, our dividend rate is based on distributing approximately 20% of our trailing 12 months operating cash flows. Turning to fiscal 2020 target operating model and long-term aspirations. Our fiscal 2020 target model remains unchanged. As a reminder, the model is included in our Q1 investor presentation posted on our IR website. We remain on track to meeting our fiscal 2022 long-term aspirations of 38% to 40% adjusted EBITDA, with margins above this range, reinvested back into the business for future growth, including product, sales capacity and coverage. $1 billion to $1.1 billion operating cash flow during fiscal 2022 remains our long-term aspirations. So, let me summarize and reiterate the quarterly factors that we anticipate for upcoming fiscal Q2. I would refer you back to Mark's commentary, as well as slide 7 in our quarterly business and financial highlights on our IR website. As we look at where foreign currency rates are today, as well as geographic components of our business, we know that the FX headwind was $10 million to revenues in Q1 and we expect the FX headwind in Q2 to also be $10 million. We're also expecting approximately $35 million annual FX headwind for fiscal 2020. We expect operating expenses in Q2 to be up, low to mid-single-digits compared to Q1 and our adjusted EBITDA, in dollars to be flat year-over-year as we complete the integration of Catalyst and Liaison. So, in summary, Q1 results came in line with our expectations and we continue to progress into a seasonally strong Q2 and remain focused on our fiscal 2020 and long-term targets. We are very pleased with how we have further strengthened our balance sheet to execute against our total growth strategy. And finally, I'd like to thank you, our shareholders, whose trust and confidence we greatly value and the OpenText team for their deeply committed efforts. I would now like to turn the call for your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Raimo Lenschow of Barclays.

Hi, congratulations to a great start. I have two questions. Mark in Q4, you talked a little bit about uneven performance, especially outside of the US, and this quarter, the license number looks really good -- the overall numbers really good. Could you talk a little bit towards what you're seeing in terms of end demand at the moment. And then I have one follow-up?

Yes, thanks for the question. We're -- I mean, it's end of October, right and it's 60 days to the end of the calendar year in our Q2. And Q2 is our seasonally strong quarter for us. Now, as I said in my prepared remarks, we feel pretty confident coming into Q2, our seasonally strong quarter and ending the year with a fair amount of confidence. The US pipeline and demand, despite the headline, if you will, is strong. The issues in Europe are I think well chronicled for most companies at this point and we see similar things, which is basically German manufacturing, and I think there is just a new normal in Asia-Pacific. Most companies have sort of set themselves into a strategy of -- if you're in China servicing China, you have your manufacturing plant, fueling in for more capacity, you've -- you're well on your way of migrating to another location. And as I'd like to say, if you don't know your landed cost, you can't plan a supply chain. So, I think most folks know their landed costs right now. So, I think it's -- the world's gotten a bit more defined, and we've been able to build our strategy along that -- what's more defined than it was 90 days ago, and that gives us the confidence going into Q2.

Perfect, okay. That's really helpful. And then the last couple of days there was a lot of noise around M&A with micro strategy and all that stuff there. Can you maybe remind us again like you talked about the capacity you have, but also like what's driving your decision making. What are the criteria that we should really look out for?

Yes. So, well let me kind of address the first part, which is the rumor and speculation. We don't respond to rumor and speculation, but in this case, we did very uniquely because I think it's very important that we provide clarity of our position, if there is any uncertainty, and you can always expect that from me and the team. So, as a rule, we don't respond to rumors and that sort of thing, but it was important, and you can always expect it from me and the team to provide clarity, so we did in our press release. In terms of first of our strategy. Look, our balance sheet is amazingly strong with 1 billion in cash, $750 million undrawn revolver, a net debt-to-adjusted EBITDA ratio of 1.5 times compared to our covenants of four trailing 12 month cash flows, and we have a slide in our investor deck that shows the self-funding nature of our M&A and if you just look back over the last 12 months, we've generated $600 million of available cash that could have been used for M&A on a self-funded basis. I like our value playbook, and nothing is changing our value playbook. The balance sheet is strong. We're going to remain patient and strategic buyers and as equity and valuations decline in a volatile market, we'll be in a much better position. But, we're not changing our value playbook and we're patient and strategic allocators of capital. And I do expect in this fiscal year -- in fiscal 2020 deploy capital and get deals done.

Okay, perfect. Thank you.

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

Yes, thank you. At your recent Investor Day, you laid out a bunch of objectives for 2020, I think increasing wallet share in the base and then penetration to the Global 10,000. So, either today or going forward, are you going to be able to share metrics in terms of the performance on those objectives?

Richard, thanks for the question. We'll take that under consideration. I think it's a good ask and I think, at least, on an least annual basis, we can provide a bit more insight into the Global 10,000. So, leave that with us and we'll think about it.

Okay, great. And then with respect to the last question I guess from the previous analyst. Can you maybe give us a sense of what the acquisition environment is like today, are the valuations better from that standpoint?

Yes. I'll sort of re-emphasize some comments I made last month in New York, where it felt as if valuations had peaked and we're on the, just turning to the back side -- just the curve is bent, we're just over in the back side of the curve of valuations, and it still feels that way. Our top of the funnel pipeline is very active or engage on a volume basis on more deals and feels like on the other side of the peak of some valuations. Counter to that, right, I mean money still remains pretty inexpensive, I think negative interest rates push people to putting money to work and not putting it into banks, if you will, but our data -- the OpenText data we've tracked pretty -- very disciplined shows activity up in stages progressing.

Okay. And just one clarification, I think in your prepared comments you said that Q1 or Q2 is going to be single-digit increase in revenue, and I think you referred to it on a quarterly basis, sequential. I think in your presentation, it sort of implies, it's year-to-year. Can you clarify that?

Yes. My comments are sequential -- is that right team? Yes, they're sequential. Q1 to Q2.

Okay, all right. Thank you.

Our next question comes from Daniel Jester of Citi Research.

Thanks for taking my question. Just sticking with the M&A theme the upsizing of the revolver, should we read into anything of that in terms of your desire or willingness to maybe do a little bit of a larger transaction than you have historically?

Daniel, Mark here. Thanks for the question. No, I wouldn't read anything into it, the timing is just good for us as we kick off the year with our shelf need at renewing, so, we made it commensurate with the shelf, and we are in the market looking at all sizes, small -- as I'd like to say small, medium and large, the larger transactions are usually a bit more strategic and if there are opportunities in the market of that -- of that size, but I wouldn't read into the revolver of kind of changing our playbook or our store -- just historical deal size. We continue our line of value playbook, we think Relic is the most important metric. At the end of the day, if it's two things, it's got to be the right company at the right price that yields the right return as measured by a return on invested capital.

Thank you. And then just to follow up on some of the comments on margins. The integration of Liaison and Catalyst, you called that out as something that it might be a bit of a headwind on margins sequentially, we're 10 months or 11 months past those acquisition. So, is this the last quarter where we're going to see maybe a little bit of incremental cost there, and maybe just help us frame how we should be thinking about that over the next couple of quarters? Thanks.

Yes, thanks David, insightful question. This is the last quarter for us to integrate Liaison and Catalyst, and both of these businesses are cloud businesses, and they come with infrastructure, they come with servers and storage, they come with a large networking environment, redundancy, disaster recovery, systems migrating vendors from one -- third-party vendors from one cost structure to our cost structure. So, this is the last quarter of all that work. So, we will be complete with Catalyst and Liaison by the end of December. So, this is the last quarter where we're going to have that work in that expense, and we'll see a little of that expense in the quarter and that's our quarterly factors [ph], but will be complete, we're well on track. As an acquirer, we set out to get to synergies in 12 months. Many other acquirers, it takes some 24 months to 36 months to get to that point of synergies. We get there rapidly within 12 months. So, we'll be done with Liaison and Catalyst integration by the end of December, and then we'll be on the new cost structure starting in January.

Great, thank you very much.

Thank you. Our next question comes from Thanos Moschopoulos of BMO Capital Markets.

Hi, good afternoon. Madhu would you happen to have the sequential impact that FX had on revenue for the quarter?

The sequential impact, yes I do. We called out approximately $10 million in Q1.

Sorry, I thought that was a year-over-year impact. Was that the impact -- I am talking about Q4 FX rates relative to Q1 FX rates.

Understood. It is year-over-year impact and the sequential impact, I think it is around $6 million.

$6 million. And then secondly, if I look at your cloud revenue, I think it may have dipped a little bit sequentially on an FX adjusted basis if I'm doing the math correctly. And any color on that? Is there some Q1 seasonality with respect to B2B messaging, transaction volumes for example?

Yes, Thanos, I'll take that. In reported currency, cloud at 14% and constant currency up 15% I think as I look at recurring revenues in total and recurring revenues ARR year-over-year up 6%. So, you put a little FX in there, you put a little mix in there as well, it just created that variance sequentially, if you will. So, we're on target for our growth targets -- we're on target for our growth objectives for cloud this year, but I would just point to mix and FX in the sequential nature of the cloud. I wouldn't point to seasonality.

Okay. And then finally, you started implementing the significant maintenance price increase, several months ago. Can you provide any color as to what proportion of the customer base might be on the new maintenance pricing at this point?

Yes, I won't get into what percent, but all new business is on that new rate now going forward. So, we're on the other side of all new business, and we're now kind of hitting -- you have to get -- kind of get through one renewal cycle, this is roughly on the maintenance side, about one-year contracts. So, all new renewal contracts also has that price being built into it, and as customers negotiate and we defend our position, and we defend the position because we've added new services, you're getting 24/7, you're getting all our digital access for that increased price. So, the reaction has been very favorable, actually that it's not just the price increase, but we're finding new capabilities and services for those additional charges. So, we're in a really good position to see the benefit of that in the coming quarters.

And Thanos, this is Madhu; just chime in, and I stand corrected. So, when you look at comparison to prior quarter rates and not the year-over-year rate that we shared, which I believe was your question, the negative impact was $2.5 million.

$2.5 million. Okay, great. Thank you. I'll pass the line.

Thank you.

Our next question comes from Paul Steep of Scotia Capital.

Great evening. Mark, maybe you could talk a little bit about the maintenance line here, we've seen it I guess static for sort of six quarters or seven quarters. Can you talk maybe a little bit as it relates, presumably to some of the discussion around cloud, as to what you're doing to either move maintenance higher or has there been -- focused more actively transition or shift some of the revenues towards the cloud line?

Yes, thank you for that. We're not interested in flipping maintenance to cloud. So, we're not interested in substituting revenue, we're interested in new revenues. So customers understand that they're making a long-term deployment choice, and I highlighted a couple of customers made a decade-long choice that it is more cost effective to continue to license the technology than to subscribe to it. In constant currency, our maintenance was up 1.8%, right? 1.8% in the quarter and that's reflective of our strategy of -- we don't provide guidance, nor do we allow customers to flip maintenance into cloud; rather you must buy additive new revenue. So, again, we're up 1.8% in maintenance, also look at the renewal rate, low 90s, and it was up by 92%. So, you got the confidence, you got the renewal rate, you're seeing the maintenance grow and that's all aligned to our strategy that if you're going to -- if you're going to own the technology long-term, maintenance is a better way to go than a subscription. It's reflected in our numbers.

Great, thanks. One quick clarification, just on M&A. How should we be thinking about maybe legacy deals you would have thought of versus the mix of a higher focus on maybe newer SaaS-based business. How is the pipeline looking in terms of the shift towards more cloud-based deals? Thanks guys.

Interesting question. At the end of the day, we like recurring revenues, right. So -- and that can come in two forms. So, maintenance or pure cloud. Those are recurring revenue, some PS businesses look very recurring to us as well. And if you just look at the -- the first 24, 25 years of our history, most of our acquisitions were off-cloud. But, if you look at starting with EasyLink, GXS, ANX, Covisint, Liaison, Catalyst, these were all Hightail, these were all cloud-based companies. We're building the capability to be a cloud consolidator. Just as we have been historically regarded as an off-cloud consolidator. And I think one of the things I am going to use this opportunity to highlight again from EasyLink, GXS, ANX, Covisint, Liaison, Catalyst, Hightail we are building this capability of being a cloud consolidator -- that is unique in the marketplace. And to be able to have a cloud business as we highlight, we feel -- we're at a $1 billion run rate, and having this infrastructure that's our own, and the team to be able to operate this is phenomenal, it's really a long-term differentiator for us. Paul, nothing changes our view of [indiscernible]; whether it's SaaS-based asset, private cloud or recurring revenue, it's got to be the right company, at the right price with the right return.

Thank you.

[Operator Instructions] Our next question comes from Stephanie Price of CIBC.

Good afternoon. So, OpenText is holding a 24-City Cloud Summit this fall. I was hoping you could talk a bit about the uptake on the summit and how clients are thinking about the move to the cloud and the feedback on OpenText Cloud offerings right now?

Yes. Thanks, Stephanie. Yes, we're doing a major city tour and expo, and the focus of that, we're going to cloud Summit we got a code name for it, which is a destination innovation. Migrating to the cloud is not about cost out, right it's about your next platform is about innovation, agility, speed, modernizing the platform. So, a big focus of the Cloud Summit is targeting at that kind of meat of our installed base they are running off cloud, in migration and modernization to the OpenText Cloud. So, we're looking at our installed base plus new clients come join us at the Cloud Summit and we're going to outline a migration and modernization path to either private cloud or to our SaaS workloads, things like Core, Federated Content Services, our new cloud additions, OT2 services, E-signature, now live integration to video in collaboration with Hightail, modern capture in the cloud, archive in the cloud, record management in the cloud, business network, in the cloud, SAP integration, in the cloud, support for Google, support for SAP in their recent announcement with Microsoft, in the cloud. So, the Cloud Summit is really meant to go into our installed base and provide these kind of clear journey maps to go from off cloud to cloud. And in terms of attendance, it's phenomenal, the response we're getting into the Four Continent 24-City Tour coming up over the next three months to four months.

Great, thanks. And then, I wanted to focus for a minute on the partner channel. And I was hoping you could talk a little bit about it and how you think about the growth on that side of the business, as you target the G10K?

Sorry, Steph, could you repeat that please. I'm sorry.

Sorry, I was asking about the partner channel, and how you think about the growth on that side of the business, as you target the G10K?

Yes, it remains healthy and strong and there are multiple kind of layers to this, there are kind of the value-added partners who can bring us into an industry, or to a set of clients, and it's really where they have relationships. We don't have kind of a volume channel -- it's not what our channel is about, it's really about -- I like to emphasize the V part, V, value, and if you got a relationship, or know an industry then we get close to you. A company called Iron Capital [ph], we have Force Value [ph], these are partners who are more mid-sized SME, but they have a relationship with clients and industries. You then have -- where we have OEM relationships like McKesson, Cerner, Cannon for developing IP on top of our technology, and then way up on top, you have the global system implementers, and we're focused on about a dozen of them. And then lastly, relationship with the new hyperscalers who are just out there trying to build as much demand as they can. So, we want to be real close to them, both on the demand capability and as well as key capability they can provide like Google Cloud platform. So, we're not -- don't look at our partner channel for volume, but really for value, in those areas.

Okay, great, thanks very much.

Thank you.

Thank you. Our next question comes from Paul Treiber of RBC Capital Markets.

Thanks very much and good afternoon. It is nice to see organic growth -- a positive organic growth this quarter. Among your core products, were there any ones that were particularly stronger contributors to organic growth this quarter that you'd like to call out?

Paul, thanks for joining the call and thanks for the question. I'd point to where we have leadership and scale, right. I would look towards content services and how we've really modernized the platform both off-cloud and cloud and also, I look towards our value-added network as businesses have been moving supply chains around in locations, that core part of our value-added network in ODM volumes are certainly up. So, I look towards kind of the core of our business in content services and kind of the network side of business networks.

And then, also could you provide or elaborate additionally, on SAP after the announcement -- the partnership -- the expanded partnership you announced earlier this year, how are you seeing pipeline and customer interest build related to that on the cloud side, and then also just in regards to the license side business at SAP, how that's tracking ahead of the rollout of its new cloud products?

Yes. And Paul, just to make sure I didn't hear you wrong on your previous question, I think you asked, did we have positive organic growth? And the answer is yes. So, we did have positive organic growth within Q1, so I just want to make sure I heard your question right, and make sure I answered it. We had positive organic growth in the quarter.

No. You heard that right. I was asking what drove the positive organic growth this quarter?

Yes, I was curious you said -- it was good to see positive growth or if you asked, did we have positive growth. I just wanted to reinforce, we had positive organic growth within the quarter. So, thank you. In relation to SAP. I've always said it this way that products come and go, relationships endure. And our relationship with SAP endures. And they've had a leadership change at SAP, but we have relationships all throughout and in their new leadership, we have great relationships with the team. SAP has selected us for their next generation content services platform in the SAP cloud and that work is going along great. So, they remain a strategic partnership. Our plan remains great, no disruption, based on the leadership changes and in fact with their recent partnership with some other hyperscalers, we see it as great news, because it's just going to continue to reinforce our installed base in the pace of their migration to the product. So, we see that all as possible.

Okay. Good to hear. I'll pass the line.

Okay. Thanks, Paul. Appreciate it.

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

All right. I'd like to thank everyone for joining the call today, and look I'm going to end where I sort of started with Investor Day and using one word, which is durable and we like the durable nature of our business, and it's been 19 consecutive quarters of year-over-year growth in constant currency. Thanks for joining the call today, and we'll speak soon. Thank you.

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