Greg Secord - Vice President, Investor Relations John Doolittle - Chief Financial Officer Mark Barrenechea - President and Chief Executive Officer.

Kris Thompson - National Bank Financial Thanos Moschopoulos - BMO Capital Markets Scott Penner - TD Securities Richard Tse - Cormark Securities Michael Nemeroff - Credit Suisse Stephanie Price - CIBC World Markets Paul Treiber - RBC Capital Markets Paul Steep - Scotia Capital Eyal Ofir - Clarus Securities Rakesh Kumar - Susquehanna Financial Group.

Welcome to the Open Text Corporation First Quarter 2015 Financial Results Conference Call. (Operator Instructions) At this time, I'd like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, sir..

Thank you good afternoon, everybody. I'd like to start the call with a 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 Open Text that contain forward-looking information.

While these forward-looking statements represent our current judgment, actual results could differ materially from the conclusions, forecast or projection in the forward-looking statements made today.

Certain material factors or assumptions that were applied in drawing any such conclusion while making any such forecast or projection as reflected in the forward-looking information, additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing the conclusion while making the forecast or projection as reflected in the forward-looking information as well as the risk factors that may project the future performance results of Open Text are contained in Open Text 's Forms 10-K and 10-Q, as well as in the press release that was distributed earlier today, each of which may be found on our website.

We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call will include a discussion of certain non-GAAP financial measures.

Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release, which may be found on our website. And with that, I'd like to welcome everybody to the call. With me today is Open Text's President and CEO, Mark J.

Barrenechea; as well as our Chief Financial Officer, John Doolittle. As with our previous calls, we will read prepared remarks followed by a question-and-answer session. The call will last approximately one hour, with the replay available shortly thereafter.

I'd also like to direct investors to the Investor Relations section of our website where we have posted an updated PowerPoint that will be referred to during this call, as well as a summary table highlighting Open Text's historical trends and financial metrics.

In the coming months, Open Text will be presenting at several investor conferences, notably TD Bank Investor Conference in Toronto on November 19th; and the CSFB Technology Conference in Phoenix on December 2nd.

We'd also like to invite investors and financial analysts to the Open Text Investor Day held on Wednesday, November 12, during our Annual Enterprise World Users Conference in Orlando, Florida. Please contact the Investor Relations team for further details and to register to attend this event. And with that, I will hand the call over to John..

25% from services, 16% from technology, 15% from public sector, 14% from basic materials, 12% from financial services, 6% from industrial goods, 5% each from consumer goods and healthcare and 2% from utilities.

Cloud services revenue for the quarter was $150 million, up 260%, primarily due to GXS compared to $41.6 million in the same period last year. Cloud services gross margins were 61.3% in the current quarter compared to 65.7% for the same period last year.

The decrease in cloud services margins year-over-year was in part due to one-time credits that were recorded in the first quarter of fiscal 2014. Customer support revenue for the quarter was $183.9 million, up 9% compared to $168.4 million in the same period last year.

Customer support gross margin was relatively stable at 87.4% this quarter compared to 86.8% in the same period last year. Professional services and other revenue for the quarter was $61.3 million, up slightly from $59.1 million in the same period last year.

And professional services gross margin was 26% in the quarter versus 23.1% for the same period last year. And the increase in margins here was a result of certain proactive steps taken by the new leader of the services organizations to improve efficiency and the delay in timing of certain expenses.

Gross margin for the quarter before amortization of acquired technology and stock compensation was 71.6% compared to 73.9% for last year's first quarter. And the decrease was primarily due to a change in the overall product mix, notably this addition of cloud revenue from GXS.

Pretax adjusted operating income before interest expense and stock compensation was $155.7 million this quarter, up 57% compared to $99.2 million in Q1 of last fiscal year. Adjusted net income increased by 45% to $118.6 million this quarter, up from $81.5 million in Q1 of last fiscal year.

Adjusted earnings per share at $0.97 on a diluted basis and that compares to $0.69 for the same period last year, up 41%. The sequential effect of foreign currency movement on adjusted earnings per share for the first quarter was negative $0.02 primarily due to the weakening euro. Our adjusted tax rate for the quarter was 18%.

That's in line with forecasted rate that we announced in the fourth quarter 2014. And for fiscal 2015, we anticipate the rate to continue to be 18%. This is based on our current forecast of earnings expected to be realized in our various tax jurisdictions within our existing business model and structure.

On a GAAP basis, income from operations before interest and taxes for the quarter was $103 million, up 98% from $52 million in the first quarter last year. Net income in accordance with GAAP, $64.6 million, $0.53 a share on a diluted basis for the current quarter compared to $30.6 million or $0.26 per share on a diluted basis same period a year ago.

Operating cash flow, $138.5 million, that's an increase of 73% compared to $79.9 million in the same period last year. 122.9 million shares outstanding on a fully diluted basis for the first quarter of fiscal 2015.

On the balance sheet at September 30, 2014, deferred revenues were $320 million compared to $349.9 million as of June 30, 2014, $281.8 million at September 30, 2013. Accounts receivable was $239.8 million at the end of September compared to $292.9 million at June and $153.4 million at September 2013.

Our days sales were 48 at the end of the period compared to 53 at the end of June and 43 at the end of September last year. We had approximately 8,000 employees on September 30th comprised of 1,900 in R&D, 2,000 in cloud services, 700 in customer support, 1,000 in professional services, 1,400 in sales and marketing and 1,000 in G&A.

And this is relatively flat to where we were last quarter. Our adjusted operating margin was 34.3%, which is above the high end of our target operating model range for fiscal 2015. However, we are not adjusting our target operating model range at this stage as it's early in fiscal 2015.

Market is going to spend more time on this, but there's significant global economic uncertainty that everyone is aware of and we'll review the model again at the end of the second quarter. I can confirm that on October 22nd, Board declared a cash dividend of $0.1725 per share for shareholders of record on November 21, 2014.

And once again, to conclude and in summary, overall I'm pleased with our performance in the quarter including our cost management, cash flow from operations and earnings for the quarter. Now I'll turn the call over to Mark for his remarks..

Thank you, John, and welcome everyone to our fiscal 2015 Q1 earnings call. Before I begin, let me express that our thoughts and our prayers are with those affected by the tragic events in Ottawa today. We're also very grateful to the first responders who put themselves in harm's way to secure the safety of others.

All Open Text staff are safe and accounted for. Our thoughts and prayers are with all those affected today in Ottawa. I'm going to spend time today on our overall financial achievements, corporate strategy, growth initiatives, the economy, our leadership team and enterprise world. It was a record Q1 and there is much to be pleased with.

Year-over-year, we've added $129 million in revenues, delivered strong adjusted operating margins of 34.3% and adjusted EPS of $0.97 through improving our efficiency and cost savings programs. Further, revenue was up 40%. Adjusted net income was up 46%. Adjusted cash flows were up 73%. Adjusted earnings per share were up 41%.

And we announced our quarterly dividend program of $0.1725 per share. And since the inception of our dividend program, we have returned to shareholders 18% of operating cash flows. Overall, the team delivered to our revenue plan, while exceeding adjusted earnings.

Our business model of intelligent growth delivered strong value against the backdrop of an increasingly difficult economic environment. While I'm pleased with the overall quarter, I'm not satisfied with 6% license growth. The primary factor that held back a double-digit growth rate was the economy.

But let me also note that we have delivered positive year-over-year license growth for four consecutive quarters now, with the trailing 12-month growth rate of 11.9%. Our investments in intelligent growth are working. Let me take a few moments to review our corporate strategy.

Open Text is focused on enabling a digital first world, enabling our customers to simplify their information platforms through automation, transforming their operations with new technologies and modern deployment option and accelerating the flow of information through the use of our business network.

Information management, compliance and B2B are the three key end markets we want to win and lead in. Our end markets are built on five key EIM pillars of ECM, CEM, IX, BPM and Discovery. Collectively, we call this Enterprise Information Management.

Our customers are asking for hybrid deployment on premises and in the cloud, and we're having deeper conversations about workload placement and well-defined data zones for data sovereignty requirements. Workload placement helps customers decide what information is right for the cloud and data zones defined what countries data is in.

Not all workloads are right for the cloud. Data zones are a requirement for a global cloud. We operate our business within a framework that we call the Open Text Intelligent Growth System, where we believe in five core principles of financial performance, operational excellence, innovation, customer engagement and customer/partner loyalty.

We lead with value and invest in markets we can win. Let me talk about a few key Q1 achievements. Our revenues are highly recurring where customer support was 41% of our business, cloud was a third at 33%, and PS and license each at approximately 13%.

We're focused on technologies, assets and business practices that increase recurring revenues and the lifetime value of a customer relationship. For total revenue, Americas was 54%, EMEA 36% and APJ 10%. Our license business delivered $58.6 million. Some key license wins include Mercedes Benz, L'Oréal, BHP and PBS.

PBS will be joining me on the main stage at Enterprise World. We had three transactions over $1 million. Nine transactions were between $500,000 and $1 million. Our average deal size was $324,000, up 21% from $268,000 from last year. Partners influenced 46% of license sales, while new account sales were 23%.

Our EIM suite upgrades for information security and compliance remain key revenue drivers, and we completed over 100 10.5 upgrade in Q1. Our cloud services business delivered $150 million in revenues on adjusted gross margins of 61.3%. Our cloud is highly profitable. Americas contributed 64%, EMEA 24% and APAC 12%.

We added $108 million of revenues year-over-year and had slight growth quarter-over-quarter. We had key wins at Toyota Digital, Michelin, PNC, Unilever and Agavo and others.

Enabling a fully automated procure-to-pay flow within complex supply chains is a key revenue driver as well as EMEA expansion opportunities with new partnerships and new EMEA-based telesales team focused on building these market opportunities. Our customer support business delivered $184 million of revenue on adjusted gross margins of 87.4%.

Americas contributed 53%, EMEA contributed 39% and APAC contributed 8%. For existing customers, we're focused on driving more adoption of our premium programs and more customer self-service through the internet, which ultimately drives more retention. Our professional services business delivered $61.3 million on adjusted gross margins of 26%.

Americas contributed 48%, EMEA 44% and APAC 8% of revenues. Our professional services are well valued by our customers, as reflected by our margin profile, which is best in industry. On last earnings call, I highlighted our key fiscal 2015 growth programs. Let me provide an update today.

First was our product innovation and adoption of our EIM suites and B2B services, which topped the list.

We had notable wins such as (inaudible) L'Oréal, PETRONAS, BHP Billiton and Talisman Energy, The Canadian Mortgage and Housing Corporation purchased our complete range of EIM suites in order to digitize 100% of their business processes for increased efficiencies and cost effectiveness. Two, B2B expansion programs to EMA and other services.

We are expanding our EDI footprint in the EMEA SMB market with new cloud offerings and out-of-the-box mappings. We've recently launched a European on-demand messaging note in disaster recovery and are working with our carriers to extend our relationships further into Europe. The third growth driver I highlighted last call was our compliance solutions.

This quarter, we won Salt River Project, a water and power utility-based organization in Phoenix, Arizona. The Salt River Project is using Open Text solutions to reduce their amount of unmanaged content and meet regulatory and compliance regulations while reducing risk.

Telekom Malaysia purchased a solution based on extended ECM and profusion and capture technologies. It helped them capture and manage financial records in preparation for the Malaysian government rollout of the GSC this year. Transitioning customers to managed services and accelerating their journey to the cloud is also a priority for us.

We had 15 new customers within the quarter including Michelin, PNC Bank and Mitsubishi Trust and Banking, Keysight Technologies, Bel Fuse and IFS. Michelin signed a multiyear contract to help them manage increasing B2B exchange volumes as well as prepare a competitive advantage in business partner management.

PNC contracted Open Text to migrate and onboard over 5,000 of the commercial plans to the new file transmission platform.

Mitsubishi Trust and Banking Corporation will be using Open Text managed services to replace their legacy web services with a state-of-the-art custody portal, allowing them to effectively compete with much larger financial services organizations.

Toyota Digital has contracted our multi-year premium support for managed services in order to expand their B2B connections to Toyo Group OEMs and tier-1 suppliers. So the next area of growth programs, which we highlighted, that I want to provide an update on is partners and alliances, which is a key initiative here in fiscal 2015.

We had 35 partners in the first quarter, 15 in EMEA including the Saudi Business Machines, Intelligence, Unisystem; nine in the Americas including Indra Brasil, IP Security Canada, ClearInfo and Synnex,Corporation California; and 11 signed up in APAC including Infosys, Japan Computer Services and Simbus Technologies.

Product-driven wins in the quarter included Johnson Controls who purchased our SAP solution in order to unify its SAP templates and business processes across three divisions of the enterprise.

And so our next growth initiatives on our established markets where our first priority is to improve our sales yield per account executive becoming more productive through training and education and certification. In our fast growth markets, our first priority is more account coverage. And for inside sales, we're operational in EMEA now.

Our global account team is now established with their first 20 accounts on a global basis. The team is focused on intelligent growth, leading with value and then investing in markets we can win. Let me spend a moment on the economy.

During Q1, the geopolitical and economic issues began to grow and accumulate and ultimately had an effect on customer buying behavior.

Issues range from Ebola in Africa, ISIS in Middle East, the Russia-Ukraine conflict, the UK-Scotland vote, Brazilian elections, German production, the unbalance of currencies followed then by protest in Hong Kong and then IMS global growth downgrade. At some accumulation point, customer buying behavior has changed and we saw this in September.

We believe it is prudent to assume these issues will continue over the short term and thus we'll prioritize more on value while this uncertainty is present. Our intelligent growth approach puts value first, while investing in markets we can win. You've seen us operate this way in the past, including Q1.

Value is principle one always in the Open Text DNA.

We'll also be emphasizing to our customers the value we can offer in key areas including reducing the cost of the information needs by standardizing on Open Text, a transition to managed services to lower operating and capital cost, and the ability to reduce people cost by fully automating their EIM platforms and cost of ownership, which is topical and offers our customers immediate and measurable benefits.

Also within the quarter, we strengthened and completed our leadership team. As you know, John Doolittle joined us as CFO, and I'd like to take this opportunity to say how much I appreciate John's contribution since his arrival. Adam Howatson was promoted to Chief Marketing Officer.

Maybe you have come to know Adam through his various IR meetings and presentations. Adam is off to an amazing start. He is a 15-year veteran of Open Text and among the best natural born marketers I've ever met. Lisa Zangari joined us as our global leader for HR, and Lisa represents an incredible advocate for our workforce. Lisa joins us from IAMGOLD.

John, Lisa and Adam are all based in Ontario with a broader leadership team and myself. Also, Gary Weiss was promoted to lead a newly formed corporate cloud group to drive corporate-wide acceleration programs on all things cloud. January will mark my third anniversary at Open Text.

As I look to the next three years and the opportunities in front of us, this is the experienced leadership team I want to turn the market opportunity into a reality. I couldn't be more pleased with the team that we have assembled. On to Enterprise World 2014, Enterprise World, our annual innovation event, is just three weeks away.

Our customers are going to be very interested in our announcements. It's going to be an important event as well as a fun event with comedian Martin Short joining me on stage during our keynotes. As Greg mentioned earlier, our Financial Analyst Day will be on Wednesday, November 12. I hope you'll be able to join us on site in Orlando, Florida.

Let me preview some of the key Enterprise World announcements. First, we've decided to provide a comprehensive service pack that we're calling SP1, Service Pack 1, and accelerate key new capabilities for all our EIM suites. We expect SP1 to be available next quarter.

SP1 will provide new capabilities across our suites from analytics, systems management, applications such contract management and much more as well as a more automated upgrade program, making easier for customers to adopt to our new suites. We're taking our learnings from over the last six months and incorporating it into SP1.

The details of SP1 will be discussed at Enterprise World. Second will be on billing the next generation of the Open Text Cloud that will provide new capabilities, programs and services in order to help customers accelerate their transition to our cloud.

These new cloud capabilities will be available conjunctive with SP1 over the next 90 days and provide the customers immediate value to reduce their operating cost. Expect some very important announcements here at Enterprise World.

Third and longer-term, project Blue Carbon, we'll be providing an overview of project Blue Carbon, our next major release beyond SP1. Blue Carbon will focus on the frictionless flow of information within the digital enterprise, which will be a major EIM milestone not just for Open Text, but for our customers and industry at large.

It will help customers transition from suites to complete information flows from on-premise to the cloud, from the grid to business network and from data centers to data zones. We expect that Blue Carbon will be an important event in the EIM marketplace as well as deliver more application, analytics and cloud enablement.

These will be the key messages at Enterprise World. More capabilities and faster time to suites via SP1, acceleration to the cloud and a stronger EIM future with Blue Carbon. We hope to see you there. Let me wrap up my prepared remarks. Our EIM vision, our products and our services are resonating with customers.

We can see this in a more key customer wins we've achieved and the value we're delivering for companies such as Michelin, L'Oréal, PETRONAS and Toyota. We are competing against HP, IBM, Microsoft, companies 50 times our size, and we are beating them and we are winning. We need to compete more.

While I'm pleased with the overall quarter, I was not satisfied with 6% license growth. Again, we've delivered positive year-over-year license growth for four consecutive quarters now with a trailing 12-month growth rate of 11.9% in license, but we could have done more in the quarter and we would have done more except for the economy.

We are assuming this cautious environment remains for the short term and we're emphasizing messaging and programs both inside and outside the company. Value is in our DNA. And as I said in my first earnings call nearly three years ago, above all things, we'll be focused on adjusted net income, which was up 45% year-over-year in Q1.

We've kicked off our fiscal 2015 growth programs, which remain fully funded, and we are full steam ahead on these programs. The team is focused on intelligent growth. We continue to strengthen our leadership team and this is the team that captured the EIM market opportunity. I couldn't be more pleased with this leadership team.

Acquisitions are core to our business model, and we will continue to acquire. We look to put $3 billion of capital to work over the next few years. And I'm excited about our Enterprise World where we'll discuss SP1, new cloud programs in the future with project Blue Carbon.

I expect SP1 and our new cloud programs to be available next quarter and add immediate value for customers. With that, I'd like to open the call up to your questions..

(Operator Instructions) Our first question today comes from Kris Thompson of National Bank Financial..

Mark, last quarter you said that over 50% of your customer base was upgrading to version 10.

Do you have any updates there?.

We saw a little over 100 customers added to that last quarter. So we've added about a little over 100 customers upgrading. And we also think SP1 is going to help continue the momentum on Red Oxygen. We're taking a lot of our learning, attempting to accelerate, upgrade programs, also filling in some capabilities that folks are looking for.

So I'd say we added about 100 customers last quarter and I'm looking forward to SP1 to help customers accelerate their path to the suite even faster..

Of the base that's upgraded to 10, what's the percentage that have gone through to 10.5?.

I don't have the precise number in front of me of those that have gone from 10 to 10.5. We'll go look at that and get back to you..

Did you mention how much revenue or license revenue GXS contributed in the quarter?.

I didn't, but I will, and it wasn't material to the overall license number..

One more thing that we used to get is the FX impact on EPS. I don't know if you have that handy..

I think I mentioned that in my remarks. It was $0.02 negative in the quarter, Kris..

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

I realize you're not updating the target operating model at this point. But if we were to go by the model, that would assume a significant ramping in OpEx.

And so just to clarify, do you have plans to ramp up you hiring at this point, or is that not something we should expect to see near term?.

He made that clear from the beginning. On the operating model, I mentioned in the remarks, as you pointed out, that we're leaving the target model in place. We did come in over the top end on operating margin. So a number of reasons for leaving it the way it is. One is we're three months in, so it's still early days in the year.

Mark did a great job of laying out some of the challenges in the economic environment that's around us. There are some issues on timing of expenses, you're right. And so we've looked at each of the expense lines this quarter, and we've looked at where those are going to be in the balance of the year.

And we do expect some uptick on things like commissions and other compensation, some marketing increases. We talked about Enterprise World. Vacation accruals, as we progress through the year. And the last item, which Kris asked about is foreign exchange and the impact of the euro. It was negative in Q1.

You know the trend has continued and we'll evaluate those each quarter. So we'd be taking a look at this at the end of the second quarter again. But that's the rationale for leaving it where it is..

Now OpEx was off quite a bit sequentially, even though I think you said headcount was relatively flat.

And so other than commissions and year-end bonuses, what were the dynamics? Was there a lot of the costs you took out in terms of overhead at GXS?.

There was some of that. Some costs in GXS came out. There were summer months. So vacation was taken in the summer months. And so vacation accrual wasn't where it normally is. We really did ratchet back on travel and held the line just generally on expenses. So that's why quarter-over-quarter, it's where it landed..

We talked about it on last call. We still had some GXS efficiencies that we expect to kind of leave in here in the coming quarters. So we saw a little bit of that as well..

It seems like the sequential drop-off was more pronounced in the Americas than other regions.

Anything especially going on there or was that just more reflective of the fact that Q4 was exceptionally strong?.

On the license side, our trailing 12-month average growth rate is 11.9%, and that's a good growth rate. In quarter, 6%, though we're not satisfied with 6%. And when we look at the Americas, as you said, we're coming off a strong Q4. There is nothing pronounced here. I'm happy with the team we've put in place, with the changes a couple of quarters ago.

The only factor I might add is I think the economic impact. We struggled a bit in the Latin America, primarily dominated by the elections in Brazil. So as you know, there's nothing structural. There's nothing I'm looking to change in the Americas. I'm pleased with what we've done. We came off a strong Q4 in the Americas. And Latin America wasn't helpful.

Brazil is a dominant force for us. And they held elections and re-elections last quarter..

The next question comes from Scott Penner of TD Securities..

First of all, the GXS business, just if you could give an update on whether the Open Text and GXS sales force are fully now up to speed for cross-selling and sort of what has been the initial reaction in the field about any additional application areas that you'd like to get into or feedback from customers on that?.

Historically, when we purchased assets, we have historically described that we believe those assets in the short term have reduced revenues. We did not do that with GXS.

Note that we had in our cloud services business delivered $150 million of revenues in the quarter, slightly up quarter-over-quarter, but not down historically like on other acquisitions. So the bringing together of the two organizations, I think that is reflective in our third quarter together that our revenues are on an uptick in the cloud.

I'd also note that one of the big areas of opportunity was bringing the teams together in EMEA, our on-demand messaging services, our managed hosted services and managed services from GXS now collectively known as managed cloud services.

And we delivered some strong wins in EMEA and are now going after which is a new market, which is the mid market, the IX, B2B, EDI mid market in EMEA. So I'm very pleased with how the sales forces for GXS, EasyLink and our professional services have come together as one team, revenue is up quarter-over-quarter in our third quarter together.

And we're now going after new opportunities specifically in EMEA and we've announced some nice wins..

Mark, as you well see, we're seeing some enterprise vendors now that being hit really in the capital markets as perpetual license shifts towards SaaS to some extent. Just hoping you could address head on the notion that this transition in dynamic is still yet to come for Open Text..

I take a different view. Our customers are asking for a hybrid world and cloud is a big term. I've spent a little time on this one. We're an enterprise organization.

We service highly regulated industries and it's a workload discussion, where do banks, the financial institutions, construction companies, pharmaceuticals, CPG companies want to place their workloads at the enterprise level. And our customers continue to ask for workloads on premise and on cloud, but not SaaS, in the cloud.

And this is part of our managed cloud services, where we want to be able to provide hosting and economic benefit to be able to move the workloads, their computers into our cloud. We don't see SaaS competing with us in the enterprise. We don't see SaaS.

In terms of a term license versus perpetual licenses, regardless of where you're putting those licenses, whether it's on prem, in our cloud or in a public cloud, we offer term today. We have for many, many years. I can't speak to what the other companies, Oracle or IBM or others are looking to achieve, we're not talking about.

But we don't see SaaS as a competitive threat to Open Text. We do see the cloud as an advantage and then there is an economic model behind that cloud, which is either on perpetual or term, but we've offered term for a while. We grew 6% in license last quarter and trailing 12 months 11.9%..

The next question comes from Richard Tse of Cormark Securities..

What were you kind of tracking on licenses before the economy softened there? Can you give us a sense? Were you kind of looking at $65 million, $75 million license number? Just trying to get a sense on what that would have been..

Richard, you know that's probably hard for us to do. I mean we're clearly mindful of what consensus number was of $64 million. We delivered if you round up to $59 million. So we're mindful certainly of the consensus number. But we're primarily on our total revenue plan for the quarter.

And as we came into September, there was a lot of accumulation of global and economic issues. Our thesis on our growth programs remain intact as well as fully funded. Our EIM suites are resonating. We have blue chip wins from customers. These are marquee customers. Our pipeline remains up coming into Q2.

I'll note though on the change in customer buying behaviors. We haven't seen deals canceled. We haven't seen them shrinking. We did see deals deferred into the quarter. We've already closed some of them. We're monitoring that closely. So what was the net effect within the quarter? It's hard to quantify..

Related to the economy, did it kind of improve the market for acquisitions now in terms of the opportunities out there and maybe you can talk a little bit about what you're doing there right now, how active it is and some of the valuations of the market?.

Well, I'd say that pipeline is up too, Richard. In up economies with free capital and valuations on earnings, you need to be very patient as a value buyer.

And maybe down economies where maybe capital is a little tighter and valuations become more reasonable, though I still think we have room to go to become even more reasonable, that's only advantage to you as a value buyer. So we still look to put our $3 billion of capital to work in the next few years in the down economy.

I wish we're an up economy, of course. Down economy though does advantage value buyers such as us. Our pipeline is up..

And then just one last question on cloud.

Who do you guys as sort of the prominent players on a cloud size in your market or the market that you serve designated as EIM here? Is it Alfresco or are there any other players out there?.

I would kind of look at it as maybe a bit bifurcated here. On the functional side, we're focused on IBM Sterling Commerce and having competitive wins on their platform as a service for EDI and B2B integration. And then you have some other competitors around there E2open, SPS and some others.

But Sterling Commerce is sort of competitor number one in that. Second is managed cloud services. We want to be able to bring in the core EIM platforms for ECM, CEM, BPM. So IBM services or Oracle services, Microsoft Azure if you're hosting Microsoft technologies there..

The next question comes from Michael Nemeroff of Credit Suisse..

You mentioned there was a $0.02 FX impact to EPS. By my calculation, that's about $10 million in revenue.

Is it fair to assume that the distribution of that FX effect on revenue follows the target model of about $1.5 million to $2 million on that FX effect?.

Yeah, that'd be fair to say. I'm not sure that you've got the revenue number quite right. I'd call it closer to $5 million-ish. But that's mainly due to the euro and we have some natural cost hedge there as well. There is no reason why it shouldn't follow the target model in terms of the breakdown of revenue by category..

Last quarter, you had a very strong showing on the ELA sales, took up the ASPs quite meaningfully. Could you describe for us what the environment is for those ELA sales? Are people waiting for SP1 before they buy in on the ELA? Give us a sense for what happened.

I know the macro wasn't impacted, but whether any other thing that customers are saying that they were pausing for?.

No. So primarily driven by the economy, Michael. So our average deal size was up about 20% Q1 over Q1. I think last Q1, it was 268,000. This quarter it was 324,000. So up 20%. It's a meaningful up year-over-year. Our primary effect here was on the economy. SP1 will help.

We're proactively taking the learnings that we had, accelerating the service pack, adding key capabilities to that service pack, things that accelerate new release of Media Manager, (inaudible). We've had some new usability enhancements in content server. We have a new business object browser we're putting in for SAP.

We have some very compelling analytics going across our suites in a new CIO dashboard. And then we're taking our first six to nine months of learning on upgrades from customers and professional services. We thought to automate a few things and get it into SP1 and bringing that back to customers. So SP1 will be a very positive adder for us.

But primarily it was driven by the economy last quarter..

Do you think that the economy has affected the way that you're thinking about the results for the fiscal year or is it still too early, given that it's only Q1?.

Well, when I look at the issues that accumulated, there're issues are structural and then issues that are just temporal. The issues that we all read about feel a bit more temporal, short-term than long-term structural. So that feels a bit positive to me. Our pipeline is up, which is another positive for us.

But we're going to be prudent and are going to assume that these uncertainties last for at least the short term, which means a quarter or two. So we're going to be a bit more judicious about expenses and continue to emphasize on cash flows and earnings and value..

The next question comes from Stephanie Price of CIBC World Markets..

In terms of SAP, I was wondering if you could spend a few minutes on them. I mean they've talked about a couple of back quarters here and license revenue moving to the cloud.

Can you talk a bit about the partnership and how that's going and the percentage of license revenue you're seeing from them these days?.

First, the partnership remains strategic and in a great position. We've added new products. We're soon to add a new business object browser with SP1. And the business contributed roughly 10% of license revenue in the quarter. And this relationship will endure. Products come and go, but the relationship endures.

And as SAP moves to the cloud, we'll move to the cloud with them. But right now, the majority of what we do on premise. But as SAP business model shifts, we'll shift with them. And we'll introduce products to fill the spaces that we need to fill. We already offer our solutions in HANA and HANA operates in the cloud.

Our traveling expense product is a service that runs behind some of their cloud services. So the relationship is strategic. We'll keep investing in products. We have a strong plan for the year. They contribute about 10% in the quarter. And we'll transition with them as they transition to the cloud..

Wondering if you could elaborate a bit on CapEx. It was a bit higher than we were expecting this quarter.

Can you talk about that and also maybe a full year run rate expectation?.

I think we had given you guidance of around $75 million to $80 million for the year. And you're right, we were high about $30 million in the quarter on CapEx. I'm still speaking to the call on the $75 million to $80 million for the year. So we had some purchases of servers to support our cloud offerings in the quarter, and they were fairly significant.

And we wouldn't expect that to repeat. So $75 million to $80 million is I think where we'll land for the year..

And then just in terms of the services margin, it was lower than we expected as well. And I think you mentioned some cost being deferred.

How should we kind of think about that going forward?.

We were higher than we were last quarter. So we're in a 26% on professional services in the current quarter and it was 23% last year for same quarter. And I mentioned a couple of things. One is we appointed a new services leader and he took some proactive measures before the beginning of the quarter, eliminated some positions.

So some of that will be ongoing savings, but a portion of that was timing. So we wouldn't expect to see the 26% continue. We'd see it come back more towards a normal run rate..

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

Just on the margin topic, on gross margins for cloud services, it looks like it's been slightly above the target model for the last several quarters.

What's been driving that just over the last several quarters? And should we expect it to continue to be sustained above the targets?.

Part of what's driving our very strong margin performance in cloud, we're highly profitable in the cloud compared to others, is really sort of consolidation of cost across Open Text commercial, EasyLink networks and GXS networks. So the consolidation of data centers, networks and operations have contributed nicely..

And I think when the GXS acquisition closed, the goal was for it to be onboarded within 18 months or so.

Just in light of the cost coming down, the integration is going at a faster pace than what you originally thought?.

Yeah, I think we talked about maybe on last call where we originally had two years, then 18 months and then I think last call we felt we completed the majority of the integration, but there were still some areas of value to unlock in the coming quarters. This is certainly one of those areas.

So the ability to consolidate data centers and its corresponding infrastructure is an area that's contributing to the margin..

The next question comes from Paul Steep of Scotia Capital..

Mark, maybe you can just clarify or put some context around this. We've all seen the headlines in the economic comments, but you've got a fairly broad-based network with EasyLink and GXS.

Are some of your comments driven by what you're seeing transactionally there or is this driven more off of sentiment on the license side? Has there been a marked change over the networks in terms of delivering broad-based set of transactions?.

I think it's a fairly well studied set of commentary, both from what we hear from our customers and we can anticipate in our infrastructure. We do see a lot. So I think it's well reasoned set of observations on sort of a change in customer buying behaviors last quarter and anticipating over the next couple of quarters..

How do we want to think about GXS in terms of the managed service penetration and the opportunity there over the coming quarters?.

I think that is a significant opportunity for us. Many things I'm very excited about, this is one of them. We've added a couple of dozen customers last quarter into our managed cloud services, and that's going to put us up in the high 800s of Fortune 900 customers that are operating in Open Text cloud.

900 large enterprises who have moved either their information management, supply chain or B2B integration services to run in the Open Text cloud. We'll be speaking to this very directly at Enterprise World about new programs, new infrastructure that will continue to help customers accelerate into our managed cloud services.

And this is an area where we can add hundreds and hundreds of customers to our infrastructure in the coming years..

The next question comes from Eyal Ofir of Clarus Securities..

Mark, obviously you talked about the macro, but it seems like you're also hauling the SP1 as potentially helping demand here.

So is there also a function in the license number by clients delaying deploying until they see SP1 come out and actually go with the latest product?.

It's not an unreasonable sort of conclusion. But I didn't see that. I primarily saw the economy last quarter. We came off a very strong Q4 and I primarily saw the economy last quarter. I'm sure there's a deal here and there waiting for something. But in terms of trends, I'm not hearing customers saying I'm waiting for SP1.

SP1 is a bit more anticipatory where we know we can help and we're seeing things where we can help. So we're going to go help and accelerate that service pack. But I'd say primarily it's the economy..

One or other question was about potential deals slipping through and you mentioned there were a few.

Would you be able to size that up for us from a license standpoint?.

No, we're not putting out a quantum on it. We were mindful of the license incentives around $64 million. We delivered $59 million. Overall, that's close to 1% of revenues. But no, we're watching the deals that slipped. We're monitoring it. Deals haven't gone away. Deal sizes haven't shrunk. We've already closed a few. We're monitoring them closely..

In terms of the actual OpEx, obviously seasonality plays in here.

But is there anything we should be normalizing for in one of the OpEx lines?.

I did mention that on an earlier question. Yeah, you should look at the timing of some of the expenses. I do expect to see an uptick in commissions and other compensations, some marketing increase across as we do Enterprise World. So there will be some uptick.

I'm not going to give you an exact number, but that's again why we're leaving the target model where it is..

The last question today comes from Rakesh Kumar of Susquehanna Financial Group..

Over the past couple of weeks, there has been some talk about EU looking into Luxembourg tax arrangements. I was hoping you could elaborate your thoughts on the development..

Just to put a background for those folks that aren't familiar with the issue, we did reorganize our IP several years ago. I had a look at that since I've come in. A lot of preparation went into that including obtaining advice outside experts. So I'm comfortable that company took all the right steps, but the years in question are under right it.

The US has been looking at that. And more recently, as you pointed out, the EU has announced that they're taking a look at Ireland and Luxembourg. We are obviously watching that monitoring developments carefully. We've not heard anything from the EU. At this point, no reason to expect we will, but we're keeping our eye on those developments..

There are no further questions at this time. I'll now hand the call back over to Barrenechea for closing remarks..

Thank you, operator. There's a lot to be pleased with within Q1. Revenue up 40%, adjusted net income up 46%. Operating cash flow is up 73%, adjusted earnings up 41% and our quarterly dividend program. True to our DNA, we delivered a strong earnings quarter against the backdrop of a difficult global environment.

Intelligent growth and a focus on value lead our business decisions. We lead with value and we invest in markets we know we can win in. Information management, compliance and B2B are the three key end markets we're going after. Total cost of ownership, product innovation, development options, go-to-market initiatives to take us there.

Thank you, everyone, for your questions, and I look forward to seeing at Enterprise World in November. That concludes today's call..

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