You for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2018 Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask I'd now like to turn the conference over to Greg Secord, Vice President of Investor Relations.
Please go ahead.
Thank you, operator, and good afternoon, everyone. On the call today is OpenText's Vice Chairman, Chief Executive Officer and Chief Technology Officer, Mark J. Barronshaa and our Chief Financial Officer, John Doolittle. We'll have some prepared remarks, which will be followed by a question and answer session. This call will last approximately 60 minutes with a replay available shortly thereafter.
I'd like to take a moment and direct investors to the front page of the Investor Relations section of our website, where we posted presentations that will be referred to during the call. And now, I'll proceed with reading our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward looking information. While these forward looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward looking statements made today. Certain material factors and assumptions were applied in drawing any such conclusion.
Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward looking information as well as risk factors that may project future performance results of OpenText are contained in OpenText's Form 10 ks and recent 10 Q as well as in our 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. Reconciliations of any non GAAP financial measures to their most directly compatible GAAP measures may be found within our public filings and other materials, which are available on our website. With that, I'll hand the
call over to John. Okay, Greg. Thank you. Welcome to the call, everyone. Let's go through the numbers and my references will all be rounded in 1,000,000 of U.
S. Dollars and compared to the same period of the prior fiscal year, once I indicate otherwise. Total revenue for the quarter of $6.41 up 30% from last year, dollars 6.36 up 29% on a constant currency basis. Revenue was negatively impacted by 12% due to acquisition accounting rules and positively impacted by 5% due to foreign exchange. Total annual recurring revenue of $49,000 up 29% from last year and $487,000 up 28% on a constant currency basis.
License revenue for the quarter of $78,000 up 29% from last year and $77,000 up 27% on a constant currency basis. Cloud revenue for the quarter of 194%, up 14% from last year and 195%, up 15% in constant currency. New MCB bookings this quarter were approximately 67,000 up 30% compared to 52% in the same period last year. Customer support revenue for the quarter of $2.95 up 41% from last year and $2.92 up 39% in constant currency. Our customer renewal rate is in the low 90s similar to last year.
Professional services and other revenue for the quarter of 73, up 43% from last year and 72% up 40% in constant currency. Next, foreign exchange for the quarter. Foreign exchange positively impacted revenue by $0.05 and had a positive $0.01 impact on adjusted EPS. The effect of the positive $0.05 by revenue type is broken down as follows: customer support, 3 professional services, 2 license, 1 and cloud was negatively impacted by 1. Gross margins for the quarter were as follows: license margin of 96%, up from 94% last year, mainly from a decrease in third party technology costs.
Cloud margin of 56% compared to 59% last year, down primarily due to recent acquisitions. Customer support margin of 89%, up slightly compared to 88% last year and professional services margin of 19% stable compared to last year. Adjusted operating income of 201 this quarter, up 33% and adjusted operating margin was relatively stable, approximately 31%. Foreign exchange did not impact our adjusted operating margin materially. On a constant currency basis, adjusted operating margin was 31%.
We're tracking towards our fiscal 2018 adjusted operating margin target of between 32% 35%. Adjusted EBITDA was 220% this quarter, up 32% over last year. Adjusted net income of 143% this quarter, up by 35%. On a constant currency basis, adjusted net income was 141, up by 34%. We were seeing positive impact of margin improvement as a result of bringing our acquisitions onto the OpenText operating model.
We expect to realize the full benefit of our recent acquisitions in fiscal 2018. Interest expense was 33 in the quarter, which is in line with the estimated run rate we previously disclosed. And as a result of our additional drawing in the revolver this quarter to fund the acquisitions, we expect our interest expense to increase to approximately $0.34 per quarter for the remainder of fiscal 2018. Adjusted earnings per share for the quarter of $0.54 per share on a diluted basis compared to $0.43 per share for the same period last year, up 26% and up 23% on a constant currency basis at $0.53 per share on a diluted basis. GAAP net income for the quarter of $0.37 or $0.14 per share on a diluted basis down compared to $9.13 or $3.73 a share on a diluted basis.
The decrease in GAAP net income for the quarter was mainly due to a significant one time tax benefit of $8.76 realized in the Q1 of fiscal 2017 that was specifically tied to the IP reorganization and did not reoccur in fiscal 2018. We implemented a new ERP system this quarter. Since July, we transitioned from our legacy ERP systems to a new consolidated SAP HANA platform. As everyone can appreciate an ERP conversion of this scale is a complex undertaking and I'm very pleased with this accomplishment. Operating cash flow for the quarter was 67%, down 9% year over year.
The decrease was in part due to the timing of TSA payments and the expected funding of working capital for Covisint in guidance. DSO was relatively stable and I expect stronger operating cash flow performance in Q2 and we're on track for the full fiscal year. On the balance sheet, we ended the quarter with $3.76 of cash, dollars 6.36 of deferred revenue. During the quarter, OpenText acquired Covisint in guidance for approximately $71,000,000 $2.21 in cash consideration respectively, net of cash acquired. Given the timing of when these acquisitions closed during the quarter, they did not materially contribute to our top line.
We expect they will be on our operating model within the next 12 months. As a result of positive EBITDA and lower debt, we expect our debt ratios to improve through the balance of the year. Lower ratios will provide us with improved capacity to support our future M and A growth and we see a clear path to gross leverage ratio below 3 by year end. Tax update, nothing new to report on our ongoing discussions with the IRS, but we will continue to keep you updated on any material new developments. We revised the disclosure of our estimated aggregate liability in the 10 Q to 5.90, up from previous disclosures solely related to estimated interest that has accrued.
Our adjusted tax rate for the quarter was approximately 15% and is expected to be the same for the remainder of the fiscal year. ECD update, revenues for ECD were on plan this quarter. The integration of the business is going well margin performance for this business improved by approximately 600 basis points from last quarter to approximately 25%. ECD is expected to be on OpenText adjusted operating margin model by January 2018. Our Board of Directors declared a cash dividend of $0.132 per share shareholders of record on December 1, 2017 payable on December 20, 2017.
That concludes my remarks. I'll turn it over to Mark.
Thank you, John, and welcome, everyone. I have 4 topics to cover on today's call. First, Q1 highlights, where we had record annual recurring revenue and positive organic growth. 2nd, acquisition highlights from ECD and our two recent acquisitions of Covisint and Guidance Software. 3rd, I want to emphasize the long term durability of our business and acquisition model.
And lastly, speak to Q2 and our fiscal 2018 expectations. Then we'll open the call to your questions. So let me start with Q1 highlights and year over year compares. We had a strong start to the fiscal year, as John noted. All revenue lines in all geographies experienced growth.
Americas grew 27%, EMEA grew 34% and APJ grew 38%. Total revenue was $641,000,000 up 30%, and again, we had positive organic growth within Q1. Annual recurring revenue was $489,000,000 up 29%. This is a record high for the company. ARR is the key revenue metric for OpenText.
ARR was $1,700,000,000 last fiscal year, and we've grown ARR every year for the last 5 years, and combined cloud and license renewal rates are among the best in technology. Customer satisfaction, product adoption, gaining business value and a strong product road map drives ARR. We had 14 deals, over $1,000,000 in value, 7 in the cloud, 7 on premise. Key customer wins included Nestle, Intuit, Bank of New YorkMellon, AAA, Health and Human Services Agency of San Diego, InterPlex and the U. S.
Army. We delivered $78,000,000 of licenses or 29% growth and $67,000,000 of new MCV or 30% growth. It's important to view license and MCV together, the main difference being a license in MCV is a customer deployment choice. Professional services revenue and margin are on track. We are focused on higher value services such as managed services and upgrades and will optimize for profit over faster revenue growth.
We run a world class BS organization where customers place their trust in OpenText every day. On our book of business, 28% originated from new customers and 40% was influenced by a partner. We had strong support both from our large SI partners and our global partner network. And as for geographic breakout, Americas was 59% of our business EMEA 31% and APJ 10%. Industries that contributed 10% or more include services, financial services, healthcare, CPGretail, basic materials and technology.
As John also noted, we fully transitioned to our new ERP platform, SAP HANA S4. It's a key part of our digital transformation as we execute our M and A strategy, growth plans and a focus on growing adjusted EBITDA. Adjusted EBITDA was $220,000,000 or 34%, up 32% year over year. We also closed 2 key acquisitions in the quarter, CovaSint and Guidance Software. And let me wrap up my Q1 highlights and speaking just briefly about AI.
Gallo Winery has selected OpenText Magellan. Gallo is the largest winery in the world and poise over 6,500 people, manages over 90 brands and deliver products in over 90 countries. Gallo looks to better understand their customers and further optimize their manufacturing and purchasing decisions, and we're honored to be their trusted partner, as they deploy artificial intelligence. Had a strong start to the fiscal year, and, we're pleased with these results. On to acquisitions.
Over the last 8 months, we've completed 3 key acquisitions: the ECD business from Dell EMC, COSINT Corporation and Guidance Software, and we are on track for each of them. Let me start with ECD. We're on target for revenues, margins, integration and customer success. The team is executing well to our internal business plans. For example, we've expanded ECD's margin profile from 13% to 25%, I mean that's effectively a double since we've owned the business, demonstrating the strength of the OpenText business model.
In Q1, we had ECD customer wins with CSL, Southern Company and Tata Power, who has been a long term longtime customer of OpenText. The recent Gartner Industry Report highlighting OpenText as the market leader in the content services platforms is also a strong reference point for our strategic rationale for this transaction. It is no longer content management, it's now content services, like our managed services. We are also cross pollinating our installed bases with extended ECM for SAP, CEM solutions, customer experience management and our archiving solutions. Customers are making application and platform decisions that can span a decade or more, and we are competing in more opportunities today than we were a year ago.
Over the next 90 days, we expect to complete the vast majority of integration activities and have ECD on our target margin model. Come January, our focus and program shift from integration to performance It's going to be an exciting year, too, for ECD. On the Covisint. On July 26, we closed the acquisition. We paid approximately $71,000,000 net of cash or 1x their last reported annual revenue.
Let me start off by saying we purchased a business that is strategically interesting: Automotive Supply Chain, the Internet of Things and Identity and Access Management. Covington customers are more confident in their purchasing decisions now that they're part of OpenText. As you know, we purchased and on boarded a business that was not aligned to the OpenText operating model. As we talked about on our last call, Covisint will begin to be accretive to earnings in the second half of the fiscal year. We've owned the business for just 90 days in Q1, and we have completed the majority of our restructuring.
As we apply the principles of the OpenText business system to our ongoing integration, we'll have focus on our target model within the 1st 12 months of operations. The base automotive business is strong. The upside to our internal business plans include both the Covisint Internet of Things and their new Identity and Access Management solutions. These are 2 new exciting areas for OpenText to bring to our installed base. We had key wins with Cisco, General Motors and AAA within the quarter.
Let me provide some comments on Guidance Software. On September 14, we closed the acquisition. We paid approximately $221,000,000 net of cash or 2x their last reported annual trailing 12 month revenues. The acquisition strengthens our leadership position in electronic discovery and opens up a new market in information security. Guidance runs on over 35,000,000 endpoints today.
This is a new installed base for us to build on. We've owned Guidance software for 2 weeks in Q1, and it had no significant revenue impact. We'll have guidance software on our target model within the 1st 12 months of operations. Initial engagement with customers, employees, resellers and partners has been extremely positive, and we'll provide more updates on our next call. Let me talk a little bit and spend a few minutes on my 3rd topic, the long term durability of our business and acquisition model.
Our model starts with 1st principles of operational excellence. Operational excellence drives intelligent growth, where we target new product introductions, low single digit organic growth and customer coverage expansion. Intelligent Growth drives annual recurring revenues, adjusted EBITDA and operating cash flow. We deploy our capital measured by simple metrics on a cash basis, return on invested capital ROIC and clear payback periods. This is the engine that powers our strategic acquisitions.
Acquisitions continue to be our leading growth driver. Look to the strength of our ARR and our adjusted EBITDA and its contribution in Q1. The EIM market is large, growing, strategic to enterprise customers and affords high profits. Our acquisition activity continues, and there are no scarcity of EIM companies for us to consider for acquisition. We can learn from high performing software companies as they deliver adjusted EBITDA margin percentages in the 40s.
This is what I call peak EBITDA. Our tax rate is efficient. For every $100,000,000 of acquired revenues, employees implies deploying $200,000,000 of capital at 2x revenue multiples. Over the long term, with expanding EBITDA and cash flows and an efficient cash tax rate, this trifecta demonstrates how our acquisitions are self funded. This then all feeds back into operational excellence, and the cycle repeats, learns and improves.
So those are a few comments on our business and M and A model. Now let me transition to my 4th topic, which is Q2 and fiscal 2018 expectations, and then conclude and then I'll conclude my prepared remarks. Again, it was a strong start to the fiscal year, $641,000,000 of revenue and 30% year over year growth, record annual recurring revenue, or ARR, of 489,000,000 dollars 29% year over year growth. We had positive organic growth in the quarter, adjusted EBITDA of 34%. We closed 2 key acquisitions, and ECD is on track.
My first summary point is this. We enter fiscal 2018 well aligned to market and customer demand drivers, and we're at the beginning of a new product cycle with offerings such as Release 16 EP2 and soon EP3, Magellan and AI, Covisint and the Internet of Things, guidance and information security, info archive and information lifecycle management, team site and media manager and customer experience management as well as our Discovery solutions. So we're very aligned to how analysts are thinking about the market, market trends and customer demand drivers. For my second summary point, we are very focused on operations today. A strong balance sheet, operating cash flow growth, margin improvements to the base business and acquisitions and completing the integrations of ECD, Covisint and Guidance Software.
And as John highlighted, we expect strong Q2 OCF operating cash flow and we're on track for the full fiscal year. And lastly, as we think about Q2, we expect it to be seasonally strong. Our internal revenue expectations, and that is all in revenue, all revenue, including any FX impact, we expect mid to high single digit F 'eighteen Q1 to fiscal 'eighteen Q2 sequential revenue growth. Again, quarter over quarter sequentially, we're expecting all in revenue growth of mid to high single digit. We're also confirming our annual target model for margin.
And as we said on our last call, we expect stronger margin contribution in the second half of the fiscal year. And with these remarks, we'd like to open up the call to your questions.
Thank you. We will now begin the question and answer session. The first question comes from Paul Treiber, who is with RBC Capital Markets. Please go ahead, sir.
Thanks very much and good afternoon. Just wanted to focus on the strength in ARR versus last quarter. Are there any trends you can outline in terms of like maintenance renewal rates or in terms of like new cloud bookings beyond what you've already mentioned that drove the quarter over quarter growth?
Paul, this is Mark. Welcome to the call and thanks for the question. Well, we look towards previous quarters and years, MCV bookings that drive us that take the time to deploy and customers to go live and then flow into revenue. So I would highlight that number 1. And I'd look to the strength of our and that's organic activities.
I would look towards the strength of our M and A model. The businesses that we've been purchasing have high recurring revenue businesses either in the cloud or in maintenance and third, strong renewal rates in the long term stickiness and importance of EIM.
And then just turning to sales force for a moment, like with the start of the new fiscal year, how is the integration of ECD into OpenText sales force gone? Has there been any sort of meaningful churn in that as they came over? And then what are the key priorities for both sales forces now?
Well, the integration is, as we've talked, I think last quarter, completely done and completely integrated. It's one go to market team today. Our turnover has been in line with market norms, so nothing really to call out there. And as we talked and as I mentioned a little earlier, we had positive organic growth in the quarter, and that's reflective of stability in the field, us executing and starting to see some of our cross selling programs come to fruition, such as information life cycle management, which was strong within the quarter, bringing extended ECM for SAP into the Documentum base. And we have now other opportunities with solutions like Identity and Access Management to bring into our trading grid partners and security and guidance into the full install base.
So integration done and completed a while back in late spring, early summer. Retention rates high and right in turnover, right in line with industry numbers and another quarter of positive organic growth.
And just lastly for me, you mentioned the seasonality going into Q2. Is there anything unusual versus the normal track record that you see there perhaps related to ECD in any way? And then related to that, the Release 16 product cycle, it sounds like you're quite upbeat on it. Would that play into some of the strength you may see in the December quarter?
No, I kind of take the question, Paul, this way. With our recent acquisitions, does it kind of change the rhythm of the business as we get into the last quarter of the calendar year or Q2? No, no, I don't see that at all. I think it's kind of that typical ICT last quarter to the year. And again, I'll take it as an opportunity go back to my prepared remarks that sequentially, Q1 to fiscal last quarter to this quarter, our internal expectations are to see mid- to high single digit all in revenue growth.
So typical seasonality, the rhythm of the business hasn't changed with the acquisitions.
The next question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead, sir.
Hi, good afternoon. Mark, you typically don't provide guidance. So just curious as to what prompted you to do it this time around. It's certainly appreciated, but just curious as to what prompted you to provide the guidance.
We just wanted to ensure that clarity given 3 acquisitions in the year. So just a very simple, we wanted to make sure that everyone had the clarity given Covastin guidance and ECD, real simple.
Fair enough. It seems like license revenues had a larger than typical sequential decline. And I'm wondering, I think you alluded to in your remarks, would you say that's because of maybe more customers opting for a cloud deployment as opposed to an on premise deployment?
Yes. Dana, it's a fair question. Of course, total revenue, it was a strong quarter. But I really feel you need to look at license and MCV together because customers just going to make we want to win the customer, as we've always said. We're agnostic on to what revenue line it falls as long as we win the customer.
And in Q1, we had more customers choose cloud over on premise. It wasn't quite so in Q4, right? So with license, I think $78,000,000 versus $87,000,000 year over year, but MCV was up strongly, $67,000,000 versus $52,000,000 year over year, all in kind of stable. So it's really customer choice.
I would agree, Mark. It ebbs and flows Thanos, and I think it's very tough to call 1 quarter a trend. As Mark said, last quarter it was the opposite. So look at them together, I think.
But all in, we couldn't be more pleased with ARR. It was a record quarter for ARR.
Fair enough. And just one last one for me. John, could you tell us what the ECD margins would have been if not for the acquisition accounting impact? I mean, based on my math, I'm coming up with 31%, but I don't know if I'm doing the math correctly or not. Thanks.
Yes, I don't have that off the top of my head Thanos, but it was 25% on a reported basis as I said. And I think we've given you the PPA waterfall so you can probably back into it or get pretty close.
Fair enough. Thanks. I'll pass the line.
Okay. Yes. Yes. Thanks, Dan.
The next question comes from Paul Steep with Scotia Capital. Please go ahead.
Great. Thanks. Mark, could you maybe talk a little bit about, with the new SAP, the transition of the product over to SAP's latest product set, what you see the potential looking like there and maybe how that played into the quarter or how it's playing into the next couple of quarters? Thanks.
Paul,
thanks for the question. The partnership has never been stronger. And as I like to say, products will come and go, but the relationship endures. And the relationship between OpenText and SAP is a very special relationship. And it really has never been stronger.
And with the SAP prioritization of cloud and HANA, And as they go out and excite their installed base, we're right there next to them exciting their installed base. And we now as we've had a 15 year relationship on prem and we have that full relationship now on cloud. And we're learning to sell with them in the cloud over the last few quarters. And I think we're starting to see wins turn into revenue there as well. So how does it affect our road map To your question, we're fully supportive of Hana and all those initiatives, And we're fully enabled.
And we'll continue to remain fully compliant and fully exploited of all their latest technologies.
Great. I guess my last one for tonight would just be on, if we think about guidance, you've talked about obviously bringing it onto the model. I was thinking more about the opportunity and you could talk to the opportunity that guidance gives you while it's small in bringing it back into the base on core content server? How we should actually think about what that opportunity looks like long term? Thanks.
Yes, fair enough. Thanks, Paul. And look, we there's our zone of businesses we really like on acquisitions and then there is a very special place within those zones when you can find a business that you can protect the base, as we can here in discovery, but can we unlock upside through new initiatives. I think guidance software really fits into that kind of unique zone within our zone we like to play in. And so strong path on electronic discovery, great complement with RECOMINE.
But the upside for us is to really unlock the information forensics and information security. They operate on approximately 35,000,000 endpoints today. And what we're working on in our roadmap is to get those 35,000,000 endpoints speaking to our content services platform, right? That will unlock some value. Get those 35,000,000 endpoints talking to Magellan, so we can analyze those behaviors and other interesting things on the endpoints.
So we'll report along here as we go quarter by quarter, but we really like the base business, clear path to getting it to our operating model. And looking at those 2 ways, integration to content services and having those endpoints talk to Magellan to unlock some upside for information security and forensic.
Great. Thank you.
Thanks, Paul.
Our next question comes from Philip Hong of Barclays. Please go ahead.
Hi, thanks. Good evening. Wanted to go back to the ECE margins. Question maybe for longer term, just given the overlap with your existing business, I'd imagine that contribution margin contribution can be quite significant once you've fully optimized the business over time. So not sure if you guys necessarily look at it this way, but what do you think ECD's theoretical margin contribution could be in the longer term, not just within the 12 months of closing the transaction?
You've obviously given us a cost synergies number, but was just wondering if there's any upside to that, if any at all? Thanks.
Yes. I mean, it's a good question, Philip. And we I'm not going to give you a specific answer in terms of where we think ECD's theoretical margin might go to. But look, we've made a lot of progress so far. I think our Q1 was somewhere around 13%.
This quarter was 25%. We're committed to get on our operating model by the end of the next quarter. And it's all part and parcel of us getting to our 2020 aspirational model of 34% to 38%, which is driving improvements across the board including in ECD.
Right. That's helpful. So it's I guess directionally, you guys look at it as certainly above sort of where OpenText's current margin would be achievable. Just given the nature of the transaction, it strikes me as it certainly would be higher than where OpenText currently is.
Well, let me take just one example, maintenance and renewals. That is a business that gets more efficiencies with scale. And as we look as we brought on board the recurring revenues from ECD, that is a business that systems scale for support, they scale for customer self service. Renewal agents scale given the business models are completely identical. So that's a good example where 1 plus 1 can equal a little more than 2.
Right. No, that's very helpful. Maybe last one for me. Just wanted to ask you for an update on the runoff of the lower margin professional services contract, where we are on that and where do you see sort of like the remainder sort of falling off? Are we almost done there?
That's it for me. Thanks.
Yes, fair enough. Thanks, Philip. I mean, in the quarter, we had 19%, I think, for the 18.8%, 19% for PS margins, up from roughly 15% last quarter. So clearly, real good progress and really strong PS growth year over year, dollars 73,000,000 versus 51,000,000 dollars or, 43% year over year. I do want to I want to temper that just by saying we're going after high value dollars in PS.
So we're more focused on the margin versus those type of revenue growth numbers. But we're happy when they come along as it did. So I'd say another 1 to 2 quarters on that low margin business. You saw good progress in this quarter with the margin profile up from 15% to 19%.
There are no more questions at this time. I'll now hand the call back over to Mr. Baron Shea for any closing remarks.
All right. Well, thank you, everyone, and thanks for joining today. This quarter, members of the team will be attending the RBC Conference in Toronto and the Barclays Conference in San Francisco, and we hope to see you there. And that concludes today's call. Thank you.
Thanks, everyone.
This concludes today's conference call. You may disconnect your lines. Thanks for participating and have a pleasant day.