Greg Secord - Open Text Corp. John Marshall Doolittle - Open Text Corp. Stephen Murphy - Open Text Corp. Mark J. Barrenechea - Open Text Corp..

Richard Tse - National Bank Financial, Inc. Stephanie Price - CIBC World Markets, Inc. Paul Treiber - RBC Capital Markets Phillip Huang - Barclays Capital Canada, Inc. Steven Li - Raymond James Ltd. Daniel Chan - TD Securities, Inc. Paul Steep - Scotia Capital, Inc. Eyal Ofir - Dundee Securities Ltd..

Welcome to the Open Text Corporation Second Quarter 2017 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. I would like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead..

Thank you, operator, and good afternoon, everybody. On the call today is OpenText Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; our Chief Financial Officer, John Doolittle; and our President, Steve Murphy. We will read prepared remarks, followed by a question-and-answer session.

The call will last approximately 60 minutes, with the replay available shortly thereafter. I'd like to take a moment and direct investors to the front page of the Investor Relations section of our website, where we've posted PowerPoints that will be referred to during this call. And now, I'll proceed with the reading of our Safe Harbor statement.

Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information.

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

Certain material factors and assumptions were applied in drawing any such conclusion while making a forecast in a projection as reflected in the forward-looking information.

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 and the material factors or assumptions that were applied in drawing the conclusion while making a forecast or projection, as reflected in the forward-looking information, as well as risk factors that may project future performance results of OpenText are contained in OpenText Form 10-K and 10-Q as well as in the press release that was distributed earlier this afternoon, each of which may be found on our website.

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

Reconciliation of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I'll hand the call over to John Doolittle..

License, 98% stable year-over-year; Cloud, 58% compared to 60% last year; Customer Support, 88%, stable year-over-year; Professional Services, 20% compared to 24% last year but up from 19% in Q1.

Adjusted operating income was $185 million this quarter, up 7%, and foreign exchange did not have a material impact on adjusted operating income this quarter. Year-to-date adjusted operating income was $336 million, up 5%. Adjusted net income increased by 9% to $133 million this quarter, and year-to-date adjusted net income was $239 million, up 6%.

Interest expense was $28 million in the quarter and $55 million year-to-date, which is in line with our estimated run rate of approximately $28 million per quarter, as previously provided.

With the additional $250 million of senior notes issued this quarter, which I'll go into more detail later, we expect the future run rate for interest expense to be approximately $32 million per quarter.

Adjusted earnings per share for the quarter was $54 million compared to $50 million for the same period last year, up 8%, no impact from foreign exchange. As mentioned earlier, the issuance of common shares from our public equity offering in December had a negative impact of approximately $0.01 per share.

Adjusted earnings per share year-to-date, $0.97 on a post share split diluted basis compared to $0.92 for the same period last year, up 5%, and 7% on a constant currency basis at $0.98. GAAP net income for the quarter was $45 million, $0.18 per share on a post split diluted basis, down compared to $88 million or $0.36 per share on a diluted basis.

The impact was mainly due to an increase in tax expense of approximately $27 million. And as a reminder, in July 2016, we implemented our IP reorganization to consolidate ownership management and development over intellectual property in Canada.

Associated with this, we are recognizing a significant portion of our global income in Canada for tax purposes, which gives rise to a non-cash deferred tax expense, resulting from the use of the tax assets at the Canadian statutory rate. This is the primary reason for our higher tax expense this quarter. Our adjusted tax rate remains 15%.

GAAP net income year-to-date, $958 million or $3.89 per share compared to $129 million or $0.53 prior year. We recorded, as I mentioned, a significant tax benefit last quarter of $876 million tied to the IP reorganization.

To talk about the ECD acquisition, the ECD acquisition was purchased by OpenText Canada and now resides as part of our Canadian-based IP portfolio.

In the quarter, there were approximately 247.5 million shares outstanding on a weighted average basis and, year-to-date; there were approximately 246.1 million shares outstanding on a weighted average basis.

Operating cash flow for the quarter was $107 million, down 14% primarily due to an increase in taxes paid of $14 million relating to a one-time gain arising from our recent IP reorganization and increased interest payments of $17 million associated with the senior notes that we issued in May.

Offsetting these items, very solid cash collections in the quarter and a reduction in DSO despite the acquisitions. The balance sheet deferred revenues were $412 million compared to $411 million at June 2016. In terms of a tax update, there is nothing new to report on our ongoing discussions with the IRS.

We'll continue to keep you updated on any new material developments. Our adjusted tax rate for the quarter was 15% and is expected to be the same for the remainder of this fiscal year. We see no impact on the rate as a result of ECD. Accounts receivable was $316 million at December 2016 compared to $286 million at June.

Days sales outstanding were 52 compared to 53 at June 2016 and 54 of Q2 last year. And I'll highlight an example of the progress that we've made here. I mentioned Recommind, the DSOs on our last call, and we've reduced Recommind's DSO by 20 days since the acquisition.

Also yesterday, our board of directors declared a cash dividend of $0.115 per share for shareholders of record on March 3 payable on March 23, 2017. On December 20, we issued an additional $250 million principal amount of our senior notes at a premium price of $102.75.

The additional notes have identical terms with our previously issued senior notes 2026. The outstanding aggregate principal amount of both notes after taking into consideration this add-on is now $850 million.

So let me turn now to the ECD acquisition, and I'll make some comments on the accounting, financing, restructuring, revenues and, lastly, our combined operating model. In terms of accounting, the results of ECD will be consolidated in our financial results beginning January 23.

So keep in mind that for Q3, we will not record revenues for the period from January 1 to January 22. Financing and liquidity. We were delighted with the result of our financing package. As noted earlier, we raised close to $600 million in equity with zero discount to the price at announcement.

In addition, our high-yield notes were issued at a premium, and our ratings were confirmed or improved. Our liquidity position today remains very solid with approximately $400 million of cash, solid operating cash flow.

And we are announcing today that we have increased our bank revolver from $300 million to $450 million as recognition of the growth of the company. To partially finance the acquisition and for general corporate purposes, we drew $225 million from our revolver in January.

We expect this to be repaid with excess cash over the next few quarters as this is temporary. Restructuring. In accordance with our business model and goals, we are announcing today a restructuring plan to streamline our operations following the ECD acquisition.

We expect a substantial portion of the approximately $50 million charge will be incurred during the remainder of fiscal 2017. These costs primarily relate to work force and facility consolidations.

While we anticipate annualized savings of approximately $60 million to be achieved from our restructuring efforts, the savings achieved during the remainder of fiscal 2017 are expected to be largely offset by one-time ECD integration costs. Revenues of ECD.

So just to the level set, this is a business with historical revenues of approximately $580 million annually. Now let me provide everyone with a starting point for the next few quarters. ECD's revenue for the quarter ended March 31, 2016 was approximately $134 million, and for the quarter ended June 30, 2016 was approximately $148 million.

For OpenText's upcoming Q3 quarter ended March 31, 2017, we will have two months of ECD revenue versus three. For the next four quarters, the accounting rules dictate a deferred revenue haircut that will result in a reduction in revenues, which we anticipate will be approximately $50 million.

We estimate approximately half of this will impact revenues in Q3 and Q4 of this fiscal. And lastly, we expect revenues to be down by 5% to 10% from historical levels for the next few quarters before they normalize. And Mark will elaborate on the reasons for this.

Turning now to our external model for fiscal 2017, the former ECD Business operated in the mid-20%s on an apples-to-apples basis. You can appreciate the impact that revenue adjustments will have on the operating margin in the near-term.

In spite of this, we expect ECD to be on our target model within the next 12 months, and we reaffirm our target model for the year of between 30% and 34%. As I noted on a previous call, we expected to start at the lower end and build to the high end. We got to the high end a little sooner.

With the addition of ECD, I expect the next couple of quarters to be at the lower end with an average for the full fiscal year in the middle of the range. We are also affirming our fiscal 2020 aspirations of non-GAAP operating margin of 34% to 38%, 90% recurring revenue.

Details on these and other metrics mentioned today are contained in the Investor Presentation posted on our website. Now, I'll turn the call over to Steve Murphy..

Cloud revenue was up 17% year-over-year. We had eight new MCV deals greater than $1 million. Cloud customer successes in the quarter include Siemens, Trimfoot and Premier Medical Group. We added 43 new managed services customers in Q2, which brings our total managed services customers to 1,176.

MCV did reduce slightly from $57 million to $54 million compared to the same quarter last year. This does tend to ebb and flow quarter to quarter. Average MCV deal size increased to $400,000 compared to $381,000 year-over-year. And in this case, 23% financials, 20% services, 18% consumer goods and 17% technology saw the most demand for cloud.

Let me get a little specific on some key customer wins. We do value our customer-centric culture and it drives our success. So, CenturyLink, global communications hosting cloud IT services company, purchased Qfiniti Observe to record calls for compliance management and allow users to selectively capture calls for quality assurance. Next, Siemens.

Siemens is one of the world's largest producers of energy efficient resource saving technologies, signed a five-year managed services agreement with us, OpenText, to run their web-based P2P communication platform for 80,000 suppliers across three different regions.

Next, the Defense Logistics Agency within the Department of Defense expanded its investment in the OpenText Enterprise Information Management Solution to further advance the Agency's support for its customers. Philips, with 70,000 employees, is consolidating their IT landscape into an integrated cloud environment.

Philips has chosen to work with OpenText to establish their document and records management standards. Children's footwear maker Trimfoot was looking to move to the cloud after retiring their legacy EDI platform. Trimfoot selected OpenText B2B managed services for the expertise and overall industry knowledge it can deliver.

A long-standing OpenText customer, Bruce Power, extended its investment in OpenText Enterprise Information Management Solutions by selecting Content Suite 16 and Engineering Document Management as the platform for the enterprise.

And then last, a really big win for us, our OpenText Analytics unit gained the world's largest car manufacturer as a new customer. OpenText Analytics Information Hub serves as an integrated retailer reporting tool for the German market with over 1,200 dealerships and 12,000 users. Let's talk a bit about Customer Support.

We continue to see strong performance from our CS business under the leadership of James McGourlay. Our gross margins for Customer Support are 88%, while our customer retention rates are best-in-class at 90.5%. I expect that our CS business will only improve with scale.

On the Professional Services front, we've got a stronger, more efficient Professional Services business. Our margins were 20% while our overall bookings grew 17% year-over-year. It's a great proof point that our performance improvement in PS is not a one-off and, again, I expect that this business will continue to improve with scale.

A few comments on the ECD acquisition. I'd like to extend a warm welcome to all new customers, partners and colleagues from ECD. The combination of the OpenText and ECD talent and products represent a massive opportunity as together we become the market leader in ECM.

This acquisition expands the OpenText EIM offering with industry packaged solutions, along with domain expertise and deep customer relationships across the globe. The expanded channel presence and deeper participation in select geographies will make OpenText the EIM vendor of choice for organizations across the global markets.

Customers and partners can rest assured that we will continue to protect their investments, and we will deliver additional value by leveraging the strength of our joint EIM offerings. Speaking of customers, I'm very pleased that we see very little customer overlap in the field.

This has made account planning and quotas, and in general field coordination much easier. With one combined field organization, we will be able to cover 1,000 new accounts. The future opportunity lies in cross-selling.

In this case, training and account planning have already begun with the goal that every account executive will be able to sell every product. I see three main areas where the acquisition drives growth initiatives, and let me outline those for you. Vertical expertise within the Documentum sales group is best-in-class; it's outstanding.

Their proven approach to industry-based account development will build the foundation of our solution selling capability. Geographical coverage has improved in key areas. Whether in Asia Pacific or the Eastern Bloc, we now have critical mass in regions where we previously had little or no account coverage. Partner network.

The partner network will enrich and expand. As we inherit new partnerships, we also bring a network of system integrators and VARs to support this regional presence. A broader product portfolio puts us in a better position with the most-desirable SIs and resellers and gives us even greater diversification within our partner programs.

And finally, our managed service offering brings strategic value, and this goes in both directions. The hybrid model is both competitive advantage and a cross-sell opportunity within the new ECD customer base. To put it simply, customers can accurately weigh the costs and benefits of either model and then work with us to do what's best for them.

So in summary, I'd like to leave you with few key points. Our business model is scaling; we delivered strong quarterly revenue performance, showing double-digit growth in License, Cloud and Customer Support. We're winning and we're growing organically.

By continuing to focus on driving sustainable organic growth initiatives while driving efficient operations and cost discipline to improve margin and cash flow. We have the experience and infrastructure to scale and continue to lead this market.

With ECD acquisition complete, we are positioned in the right market at the right time with the best product suite in EIM. And with that, I will hand it over to our CEO, Mark Barrenechea.

Mark?.

capturing new share in key verticals; cross-selling solutions; migrating workloads to the OpenText cloud; geographic expansion opportunity; and a new market opportunity for the entire OpenText install base, which is Information Lifecycle Management. In a phrase, we're in full execution mode.

This is a market, business model, install base, partner channel and product line that is right in our power alley. We have never been better prepared to receive a business and begin executing. And in the four months of pre-integration planning, the time was very well utilized.

Our approach to performance is deep day one integration, and we achieved that. We integrated our accounts and sales force with near zero overlaps. We integrated our renewal processes, practices and teams. We integrated engineering, professional services, technical support and all our operational teams.

We removed layers of management where necessary, and picked the best talent in their respective areas. This resulted in the restructuring plan that John highlighted, which we'll complete in the coming months. In the first two weeks after the acquisition the reaction from employees, customers, partners is overwhelmingly positive.

And we know what we need to do. In summary, we had a strong first six months to fiscal 2017 and a solid end to the calendar year with record revenues of $543 million. Our competitive position has never been stronger, and we have clear priorities to winning the second half of fiscal 2017. We are attracting the best talent in the EIM market.

And with ECD now part of OpenText, we're in full execution mode. The first few quarters will be about integration, and then growth and then margin optimization. And on a final note, let me add, I've just completed my fifth year at OpenText, and it still feels like day one. There is no boundary to our opportunities.

Enterprise software is recreating itself as the very nature of computing has changed. And OpenText is well positioned to play a leading role in this industry transformation. And I am so proud of the leadership in the company. They are focused on the right things to create sustainable and long-term value for our customers and shareholders.

Operator, with that, I'd like to open the call to questions..

We will now begin the question-and-answer session. The first question comes from Richard Tse with National Bank Financial. Please go ahead..

Thank you. Mark, you're getting pretty close to your $3 billion of capital deployment target on acquisitions.

Would you be in a position anytime soon to sort of increase that target?.

Hey, Richard. Thanks for the question. We clearly have to update that $3 billion number. Look, the model – so I'd like to kind of remove that $3 billion target, if you will. That's sort of an old number and sort of an old-style metric for us. Our model rejuvenates itself, if you will. We'll bring an asset on board. We'll get it integrated.

We'll get it on to our operating model. It will generate cash flows, and then that capital becomes available to redeploy. We clearly have work to do to integrate ECD, which we're in full execution mode on, but it's also an active market. So we're continuing to evaluate acquisition candidates.

So we haven't hit a pause or stop button in corporate development, but we're very mindful of the work that we need to do in the next quarter or two to integrate ECD. So, I'd like to kind of just maybe hit a reset button on that $3 billion. Our model rejuvenates itself, if you will. And we're continuing to evaluate acquisition candidates..

Okay. Thanks. So you guys have done a ton of acquisitions and some meaningfully large ones here.

When you say integrated, should we assume that those products are running on a single platform and that they're sort of interoperable with each other? And I ask that question because when you look at your innovation chart in your deck and you're moving to Project BANFF and then YOHO eventually, is there an opportunity to actually scale your margins when they do become fully integrated?.

Well, I would – as a rule, what we're trying to do is, in the next big release cycle, be able to bring the products on to an OpenText standard platform. So, every time we get to a major release is when that – if we acquire – when we acquire a technology platform, the next major release, we look to have it integrated on to our platform.

I think probably the bigger opportunity on more technology integration is the ease to sell the next module, if you will, versus maybe margin performance. It's being able to be inside a customer and turn on modules two, three and four because of the common technology, if you will.

So I'd look more towards efficiency of sale versus margin expansion as the big opportunity there..

Okay. And just a last one for Steve, if I might. Steve, clearly a much bigger company with a lot more products. When you look at the sales force, I know you touched on it, but I was wondering if you could give us a bit more color in terms of how that sales force is going to be structured.

Are they all going to sell all the products? Give us a sense of how you divide the markets in terms of size, et cetera? Just wanted a better understanding on that. Thanks..

Yeah, the first rule is geographic coverage, just making sure we have strong leadership, accountability and coverage by every major region. Within those regions, within our matrix, we do have specialization but there is cross-sell.

So, for instance, within Enterprise Content sales, that person could also be selling Discovery and Analytics and vice versa. So I think that this is a great fit along every one of those criteria as far as the kinds of things we sell, the customers we talk to, the purchase process we're working in. But again, it's geography first.

It's either industry specialization or product specialization next. And then, on top of that, we layer a cross-sell where it makes sense..

Okay. That's great. Thanks, guys..

Sure..

Thanks, Richard..

The next question is from Stephanie Price with CIBC. Please go ahead..

Hi. Can you talk....

Hey, Stephanie..

Hey.

Can you talk a bit more about cross-selling products into your customer base? And how should we think about the potential with ECD and the progress that you've made potentially on the couple of acquisitions you've done recently?.

Yes, you bet. A couple of things about cross-selling that I look at would be, when we take on an acquisition like this and we look at account planning and quota at the rep level, and you basically Venn diagram where do we have people who were selling the same things to the same person. And the good news here is, almost nowhere.

ECD had focused really, really high at the top of the pyramid, the Global 100, Global 200.

We're kind of more across the first half of the Global 10,000, and there's a lot of room for those people that are selling ECD to a specific customer to keep doing that and sell OpenText, our product or sell Analytics, sell Discovery, sell the Autonomy products as far as CEM and the customer management product.

I think that from a size of the sale, the price point it sells at, the signature authority and the type of product, there's just a fantastic fit. It's a home run as far as cross selling. As far as the compensation goes, we won't stack compensation but what I'll typically do is, I'll do a split ahead of time.

It's well understood so there's some teaming, and we'll do a 60/40 or something like that just to make sure that all parties cooperate, communicate, but I won't stack compensation because that wouldn't fit the model. And I don't think anyone else that's making good margins here does that..

Okay. Thanks..

Sure..

And then, in terms of competitive positioning in the core ECM market, can you talk a bit about your positioning now that you've acquired ECD?.

Sure thing. Thanks, Stephanie. We continue to be primarily focused, as Steve intimated, on the global 10,000. And the majority of those workloads are on premise with some of the workloads in the cloud, and thus are hybrid model. And we now see our primary competitor as FileNet, and we're going to continue to differentiate.

We're going to differentiate against FileNet now with being able to have our CEM capabilities and our Discovery capabilities and fill out Enterprise Information Management, just like in the days of ERP when customers wanted sort of integrated financials and supply chain and HR and then move to eBusiness suites.

So we're very focused on FileNet, the features and capabilities, and being able to offer more of a suite approach and a hybrid approach against FileNet. So, for us, it's all eyeballs on FileNet..

Great. Thank you..

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

Thanks very much. I just wanted to hone in a little bit more on your comment about the revenue normalizing back to historical levels.

Considering that when we look at the public filings from EMC, the Documentum's revenue has been declining for a couple of years, do you expect that that revenue to stabilize? Or is that going to naturally stabilize? Or do you expect some potential revenue synergies through cross-selling to help you get back up to those historical levels?.

Paul, Mark here. Thanks for the question. We fundamentally believe we can grow Documentum, as I said, from sort of day one of the announcement through today.

Step one here is, as John highlighted, we have purchase price accounting to work through, and then next is just sort of the normal integration activities where we expect to see the business, in addition to that BPA, down 5% to 10% for the integration activities we go through, sort of those typical sort of activities.

And we expect that for a few quarters, right? In Q3, plus some, and you'll have to apply some judgment there. And of course, it depends on execution as well.

From there, we believe we can grow the business through cross-selling opportunity, being able to migrate and sell additional cloud services, being able to sell additional EIM capabilities such as EIM and Discovery. But we fundamentally believe we can grow the business over time from their historical levels..

Okay. Good to understand. Shifting to R&D and spending, it's up significantly this quarter.

I assume a lot of that's from acquisitions, but can you speak to perhaps the organic growth per se in R&D spend? And what are the key priorities for R&D spending from here?.

So, yeah, on the R&D side, I don't have the exact ratio in front of me, John, but it's – falls (42:40), the increase is most likely due to the two HP acquisitions and the Recommind acquisition that we did. They're operating on different ratios than us, so that's probably what accounts for the increase in the spend.

In terms of the priority, obviously we're on-boarding Documentum and verticals at this point. CEM is a strategic market for us and we're leading in CCM and competing very nicely in CEM as a big priority.

And we'll talk more and more about Magellan as we get that closer to Enterprise World, so this combination of Discovery and Analytics going against a richer and more integrated EIM platform. So content services, CEM, and I'd say Analytics and Discovery are the things that are certainly dominating my time internally right now..

One last one for John.

Just in regards to the acquisition being structured as an asset purchase, in terms of working capital build up, how much do you anticipate and in over what time period would you expect that?.

Yeah, I don't know a number, Paul. But it is fair to say and we saw this with the HP acquisition, we're not getting receivables, so the receivables will be billed as revenues come in. And it'll take a couple of quarters, I think, to normalize itself. And so that would be my expectation.

I expect good working capital performance from the underlying business this quarter given our revenues..

Okay, thanks. I pass the line..

Yeah..

Thanks, Paul..

The next question is from Phillip Huang with Barclays. Please go ahead..

Hi, thanks. Good afternoon. Just a couple of clarification questions on the integration process just for modeling purposes.

So, in terms – for the initial decline due to – revenue decline due to the set of normal integration process, do you expect it to be more front-end loaded with bigger declines at the beginning or pretty evenly spread out over the next several quarters?.

I'd probably say, our experience sort of suggest evenly declined – evenly spread, if you will..

I gave you, Phil. I gave you the historical numbers, so you can get some sense of the seasonality that was in the underlying business..

Yes..

Right. Got it. Okay. That's helpful. And then secondly....

Philip, I don't mean to interrupt but just I'll take it as an opportunity, if you well. These are normal activities, right. We have AEs working on contract innovations, right. And customers learning more about the joint portfolio that we have to offer.

So just this activity that goes on as you integrate a business, where, I don't know if this is our 57th or 58th acquisition, so we tend to model down that first year of revenue for the normal activity..

Right, got it. And just so that I've got it clear in my head, so ECD was declining basically around mid-teens range over the – I guess, more recent history. And then, on top of that, there is going to be 5% to 10%. So basically, for next several quarters....

Phil, they've been declining – yeah, they've been declining about 2% to 3% per year..

Yeah, low single digits..

2% to 3% per year..

Yeah..

Got it. Okay. Got it.

And so we just added to the 5% to 10% over the next several quarters and then basically moderates from there before it returns to growth?.

That's the reasonable way to think about it, yeah..

Got it.

And then, maybe if – I was wondering, just further on Mark's remarks regarding the process of integration, would you be able to elaborate a little bit about the types of revenues or contracts that you're thinking of that will kind of go down in the near-term? Is it mainly lower margin relationships or is there anything that you can kind of help us soft of better understand that process?.

Hey. Murphy here. What I do think is – what I will say here is, we will scrutinize everything as far as business-by-business, deal-by-deal, margin-by-margin. And what we're going to get is a business that was operating in the 20%s. And we want to get it on the OpenText model within 12 months, which I think we will.

And part of that's going to be better quality as far as the sales cycle and expectations around margin. But I do expect that to answer your question, there'll be license deals, for instance, that take a little longer, because we're going to expect more as far as the quality of the contract versus – or the SLAs.

With Professional Services, I look very carefully at all businesses out there, and I'll expect that that business migrates towards our 20-or-better-percent. I think I don't have anything other than a weighted average.

And I take a look at the current source of revenue and say, I'm probably going to equally apply it, maybe a little more to the Professional Services..

Right. That's super helpful. And then, a final one from me.

Even though ECD is the biggest deal in your company's history, I mean, just given how well you know the business, is it fair to assume that you expect a relatively straightforward integration process? It sounds like you guys never really hit the pause button in terms of looking at future M&A opportunities, but I was wondering if you could kind of maybe comment a bit on that?.

Yeah. Let me – thanks a lot. Though ECD is larger on a purchase price, we actually on-boarded more employees with GXS when we – with the GXS acquisition. And ECD is slightly larger revenues, if you will. So, the two are kind of comparable in scale, even though ECD, the purchase price is a little larger than GXS.

We integrated day one the people, and that's done. So, the sales force, we went down – Murphy and team went down multiple layers and picked the best management teams and plugged them into the GOs and regions. We integrated literally day one the renewals team, engineering is plugged in, legal, HR, IT.

So, the people side is plugged into the organization coming out of the gate. And we had fourth months roughly of pre-integration planning.

And we were able to use that time really well to study and understand the teams, and thus being able to, two weeks later, as John highlighted, announce our restructuring plan, which is a thoughtful plan of now understanding the mutual teams and where there is overlap and efficiency to gain..

That is very helpful. Thanks very much..

The next question is from Steven Li with Raymond James. Please go ahead..

Thank you. Just a quick one for me.

John, the $60 million of cost savings, do you get that in year one or is it more back-end loaded and therefore in year two?.

Yeah, Steven. So we'll try and take, as I mentioned, substantially all of the people actions this fiscal year, but we do have some one-time integration costs for ECD. So I'm not expecting to see net savings in the next couple of quarters. We'll realize substantially all the savings in fiscal 2018. And there is a facilities component as well.

It's a much smaller savings relative to the people, but it will take longer to implement. So that's the way it will roll out..

So, the way I should think about it is – your comment is ECD is on-boarded on the operating model within 12 months, and then there's going to be a little bit more from the restructuring after that?.

Yes..

In terms of cost savings..

Well, the cost savings – it's a combination. We're going to onboard ECD and we're going to get it to our operating model, and the restructuring is part of that..

Yeah. Okay. Sounds good. Thanks..

Okay. Yeah..

Thanks, Steven..

The next question is from Daniel Chan with TD Securities. Please go ahead..

Hi, guys.

Just on the $60 million, is that the final number that you expect from this integration or do you think it can go higher from here?.

That's our best estimate at the moment..

Is there opportunity for it to go higher in 2018 though?.

We'll have to wait and see. We'll come back to everybody. We're in early days here. It's the best estimate we have. And we'll re-up on 2018 before we start the fiscal..

Okay..

So that's our number..

All right. Got it..

Yeah..

And then, just switching gears from – on the license deal, the deal size increased significantly this quarter.

So, can you talk about the drivers behind that and whether you believe this is sustainable?.

Yeah. A couple of things. I've been here about a year, and I think one of the first things we focused on was the selling higher and getting access to the executive suite.

And holding the line on pricing and taking a look at, as far as internal controls and discounts, how do we make sure that deal-by-deal we get as much as we possibly can? And as far as account reviews, really just the really basic mundane things around account planning and close plants.

And I think that while I don't see this going up exponentially, I think that it will continue to improve, and I think that we will see more and more of a sales force that has the confidence to close seven-figure deals and word-of-mouth gets out, right. People see the commissions made on these and they're excited to do it, and it's a role model.

So, I think it's here to stay, and I think we'll do more and more of these. But it's something that builds over time based on really those fundamental building blocks, which is where I'm focusing..

Can you give us any update on Release 16? How is that doing? And was that a contributor to any of the license deal size?.

It's definitely contributing. I think one of the cases that I gave, I don't think it was Siemens. Who was it? We had a big Release 16 win with Bruce Power, and I think that – yes, it is contributing..

Great. Thank you..

Thanks, Daniel..

The next question is from Paul Steep with Scotia Capital. Please go ahead..

Great. Hey, Mark, could you talk a little bit about what the biggest key product opportunity you see out there for ECD being in terms of what you think you can leverage in the base not only within the technology side, but maybe Steve can comment a little bit on where he sees the largest lift as well? Thanks..

Paul, thanks. It's like having three beautiful daughters and I have to pick one, if you only give me one. So I would – look, I think there are a handful of opportunities that seem equally attractive right now. Being able to bring CEM to the Documentum – Documentum, you wind the clock back five years, right.

In a lot of ways, OpenText and Documentum were very focused on ECM. We placed a big bet on Big Data sources like ERP and email, and then grew into this EIM approach and vision. Documentum sort of doubled down on core ECM, content management. And they were two different strategies and we ended up in two different places.

They went a little deeper into verticals and we went wider in breadth of capability. So, when we look into the 5,000 customers today, they are very deep and rich experts in content management and vertical expertise, but they don't have the customer experience management capabilities.

They don't have the deep ERP capabilities like SAP, and they don't have the analytic capabilities. So, I'd kind of rank CEM, ERP, SAP and analytics as sort of top of the chart to go into the install base and cross-selling..

Yeah. And the only thing I would add is that, within pharma and life sciences, they have an outstanding solution. It demos great. All the content. They have industry vertical expertise with their solution consultants, and they beat just about everybody there that we do now, right. So I think that that goes both ways.

We've got a lot of lifescience pharma coverage that they never had. So as far as the cross-sell, that's a slam dunk. And we will work that without revealing too much information, we're working that immediately. That's a huge source of upside..

And Paul, I'll take the opportunity as well to go the other way, which is – I think, there is a gem in the Documentum portfolio, which is InfoArchive. As these data sources get bigger in age, as they get larger and they age more, information lifecycle management becomes more and more important.

Being able to archive or if we have real time access over four, five, six years they have automated policies to demote and age infrastructure into deeper archiving. So we hope to bring InfoArchive to the entire OpenText install base over time. So that'd be a gem from ECD that we hope to bring to the broader OpenText portfolio..

I was going to leave it there but I've got to ask on that. So on InfoArchive, Mark, I think they bought it about a year ago. It was relatively small, maybe $60 million in net revenue is what we calculated out.

Where did it sort of track out at the end of the time it was independent, because that was a fast-growing piece of Documentum?.

Yes. I won't – Paul, I won't break out the revenue per se, but it is a – they've done a fantastic job on the technology, understanding how to scale it. It is being used in some of the world's largest financial services organizations, and we're quite excited to introduce it to OpenText customers..

Great. Thank you..

The next question is from Eyal Ofir with Dundee Capital Markets. Please go ahead..

Thanks. Thanks for taking my question. I'll start off just with John. Can you just clarify one thing for me? I think you pointed that you're going to hit the midpoint of your operating margin targets for the fiscal year, but I think that included the one-time integration cost.

Is that correct?.

Correct..

Okay.

So if we back those out, you should actually be higher than the midpoint?.

Well, I mean, they're going to be in there when we report. So, I would – that's why left them in, right..

Okay.

But you'll be able to identify how much they are though?.

Certainly we can, yeah..

Okay. Perfect. That's fine.

And then, just for Mark and Steve, in terms of the ECD acquisition, how much of the revenue was actually driven by the partner network? And what do you think – how do you guys go about managing that channel, I guess without overwhelming them with the new cross-sell opportunity here?.

What I am willing to say, the level of detail, is if you do a pie chart of what they sell direct versus channel versus OEM, very similar to our traditional business.

What was the second part of your question?.

In terms of managing the channel, so I imagine over time you're going to try and get the channel to also cross-sell the OpenText offerings.

So how are you guys going to manage that? How long would that take to bring the channel on board as well?.

Yes. Yes. With a few exceptions, most of their channel does already do business with us. There are a few big players in the SI and VAR space that are new. So that will take time; it won't happen overnight. But we'll take – that's not going to happen overnight. That'll take a little time.

It doesn't hurt though that maybe three out of four of the bigger partners already know us pretty well, OpenText.

Mark?.

No, I think that's right on. I mean, we shared some larger global centers (59:40) like Accenture and Deloitte. And I think we've probably added a few of strength (59:45) like Atos and Cerner..

Yeah..

But overall, it's sort of the same playbook, right, for the GSIs?.

Yeah. The ECM offering, the content server as far as the concept is similar enough that I don't think there'll be massive retraining about what it is that we've acquired if they already understand our content server.

It's just the collateral varies by vertical and they've got some – for instance, in pharma, they've got some collateral that's just dynamite, and yeah, that will take some training..

Okay. Okay, great. And then, Mark, for you from just on the M&A side of the equation though, obviously you've done a significant amount over the last 12 months.

How should we think about what your thoughts would be for the next ones? I'm assuming it would be in a different category within the IM pie? Because you probably want to see the Documentum and the ECM portion of OpenText integrate and get that going. So I imagine it's other verticals you're looking at.

What gets you excited, I guess, in the M&A pipeline?.

Yes. Fair enough, Eyal. Yeah, I wouldn't want to put another swimmer in the same swim lane as ECD right now, if you will. But if we look across the other sort of technology groups, yeah, I think there are all sort of open and fair game to consider. So, it's still sort of a rich pipeline market.

I don't want to get into any particular swim lane or vertical, if you will. But, yeah, I mean, the ECM and information management group, they have a lot to do here in the coming months. I wouldn't want to get them distracted. But the rest of the company, certainly we're still open for business in corporate development..

Okay.

And you guys are pretty comfortable now following the HP acquisitions and you're all integrated in those transactions and you can actually move on to the next one?.

Yeah, for sure. And usually one of the indicators are when the dialogue changes, right. When the dialogue changes....

The honeymoon's over..

Yeah. And we're talking about growth plans and growth initiatives versus data integration. So I can usually just delve in the narrative and emails when the integration is done good (01:01:58) the narrative changes..

Okay. Great. Before I pass the line, just one more question. You guys hit it out of the park on the License side this quarter. Should we assume more seasonality into the next quarter? And then, also from a macro standpoint, what are your thoughts? And then I'll pass the line. Thanks..

Thanks for the question. I don't think we want to get into seasonality at all. I mean, I would – as part of my opening remarks, we executed to our internal plan in the first half of the year. And we feel we're on our plan for the second half of the year. But I prefer not to get into any seasonality comment..

Okay, great. Thanks..

All right. Very good. Yeah, I'd like to thank everyone for joining us today. I will end where I started on our remarks, where I want to thank John and Steve for their commentary. We're executing the plan. We had a solid Q2.

And we delivered to our internal plan for the first half of the year, and we're on our internal plan for the second half, and very excited about our opportunities with ECD. So thank you for joining today. And we'll speak with everyone soon..

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