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Open Text Corp  (NASDAQ:OTEX)
Q1 2019 Earnings Conference Call
Oct. 31, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation First Quarter Fiscal 2019 Earnings 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 questions. (Operator Instructions)

I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, sir.

Greg Secord -- Vice President, Investor Relations

Thank you operator and good afternoon everyone. On the call today is OpenText Vice Chair Chief Executive Officer and Chief Technology Officer Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan.

We have some prepared remarks, which will be followed by a question-and-answer session. The call will last approximately 60 minutes with a replay available shortly thereafter.

I'd like to take a moment and direct investors to the Investor Relations section of our website, investors.opentext.com, where we have posted three sets of presentations that will be referred to during today's call. First, our OpenText Strategy Presentation that includes annual fiscal 2018 metrics. Second, our Q1 Supplement Presentation that includes information and financials specific to our quarter. And the third presentation is with additional information about our agreement to acquire Liaison Technologies.

And now, I'll proceed with the reading of our safe harbor statement. Please note that during the course of this conference call we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such conclusion. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information, as well as risk factors that may project the future performance results of OpenText are contained in OpenText's recent Forms 10-K and 10-Q, as well as in our press release which was distributed earlier this afternoon, which also may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law.

In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and in other materials which are available on our website.

And with that, I'll hand the call over to Mark.

Mark J. Barrenechea -- Chief Executive Officer

Thank you, Greg. Hello, everyone, and thank you for joining us today as we provide our first quarter update relative to our progress against the Company's annual plan. Let me also encourage you to have our press release and IR presentation in front of you as we go through our call today, as well as our corporate presentation and press release announcing, we have entered into an agreement to acquire Liaison. Last quarter, as we kicked off the new fiscal year, we clearly highlighted the metrics of that matter. Our business is annual. We look toward long-term trends not quarterly variances. Our key business metrics include annual recurring revenue or ARR, adjusted EBITDA and operating cash flow or OCF. Fiscal 2019 objectives included low-single-digit organic growth and fiscal 2021 objectives included adjusted EBITDA of 38% to 40% and operating cash flow of $1 billion.

Let me start the call by saying, we remain on that plan. And then in Q1 we delivered to the key business metrics. In fact, this was our best Q1 ever. Let me walk you through those key metrics. Total revenue was $667 million, up 4% year-over-year. Annual recurring revenues was $520 million and 78% of total revenues, up 6% year-over-year. Let me note, two years ago in Q1 of fiscal 2017, our total revenue for the quarter was $492 million. Our ARR this quarter of $52 million is larger than total revenues of two years ago, demonstrating the significance of our focus on ARR and our transition to a recurring revenue business. Within ARR, cloud was $208 million, up 7%. Customer support was $312 million, up 6% year-over-year, with 90% margin. Cloud was 58% margin. On an absolute dollar basis, ARR was up $30 million year-over-year, non-recurring revenues were down slightly by $4 million. Our increases in recurring revenues far outweigh any slight quarterly decline in non-recurring.

After Enterprise World, I noted, we were going to tap the gas pedal on cloud and recurring revenues, and you can see that reflected in these results today. Adjusted EBITDA was solid at $246 million, or 37% of revenues, up 250 basis points year-over-year. Operating cash flow was solid at $171 million, up 155% year-over-year. Ending cash was $788 million, up $105 million quarter-over-quarter. And adjusted EPS was $0.60, up $0.06, or 11% year-over-year.

And we are issuing our quarterly dividend of $0.1518 per share, that is 22 quarters of consecutive dividend payments. Let me recommunicate our principle of a dividend rate based on approximately 20% of our trailing 12-month cash flow assessed annually each spring. As we grow cash flow, we expect to grow our dividend. It's very simple.

Recurring revenue is the core of our business. Now, recurring revenue is just that recurring, steady, predictable, value-based for customers and for OpenText. It's customer experience-oriented. It's strategic based on experience and the customer relationships that drive long-term purchasing decisions. And as we service marquee customers, we participate in long-term partnerships, transformative projects and high-margin engagements. This is why global brands select OpenText such as Citibank, FedEx, General Motors, AT&T, LaRoche, Nestle, Bank of Montreal, Cargo, British American Tobacco, Fujitsu and companies like Canon.

I'm very proud of the team, their accomplishments and the trajectory of the business. Our focus is on the world's largest and best run businesses. Global CEOs are certainly talking more about tariffs, taxes, goods and wage inflation, recession timing and geopolitical issues creating constraints. OpenText is focused on helping the world's leading businesses transform, compete and win in the fourth industrial revolution, both in up economies and in down ones. OpenText has a proven track record in performing within all these scenarios and we are ready for all these scenarios today.

We're investing over $300 million in direct R&D this fiscal year for our on-cloud and off-cloud products and services. We have a world-class set of products, innovations, industry vertical focus and marquee customers to go win in the $100 billion total addressable market. We are focused on winning in our core markets of content services, business networks and cloud, while growing security, AI and IoT. This is the intelligent and connected enterprise strategy that we laid out in Enterprise World this July.

We continue to strengthen our business model with recurring revenues at 78% of our total revenues and our margins are expanding to best-in-class territory. Our sales coverage expands in a steady and cost-effective way through indirect sales such as global system implementers, our value-added resellers, cloud hyperscalers and our own inside sales efforts.

As customers face tariffs in goods and wage inflation, we help them get lean with digital, intelligent and connected cloud solutions, security and analytics and AI. They can reduce their cost structure and get more secure as they transition to the OpenText Cloud.

I was speaking with a CEO recently who is moving a production plant from China to Southeast Asia due to tariffs, lower labor cost and capacity constraints. Perhaps (ph) it may take them up to six months to make the physical move, they just need to unplug and replug into the OpenText Cloud for their digital supply chain and go. We are taking this opportunity to refocus and execute in our core solution markets of content services, B2B networks and cloud services, and then our core go-to-market sales theaters of North America, Western Europe, Japan and Australia, New Zealand. We have limited emerging market downside exposure, but we have upside growth potential in all those markets.

Restructuring efforts announced in August along with the productivity enhancements leave us rightsized, ahead of the curve and more agile. Our balance sheet is strong. We are a proven consolidated with our value-oriented point of view. We are ready to effectively deploy our capital, and that's reflected in our announcement today with Liaison Technologies, which I'll speak to in a moment. And our future framework is built on the power of our market leadership and our global expertise in talent and performance metrics at our foundation.

The technology infrastructure sector has few companies with our profile, multi-billion dollars in revenue, a consistent track record of delivering total growth, margins and cash flows, disciplined capital allocation, but equal opportunities and up and down markets. We are firmly in the upper right-hand quadrant when compared to our sector peers with a long-term strategic plan to deliver shareholder value.

I'd like to spend a few moments on Q2. We expect the quarter to be seasonally strong with sequential revenue growth in the mid- to high-single digits. As I note, I made similar comments last Q1. Also, we have a tougher year-over-year comparison due to the Covisint and Guidance acquisition revenues in Q2 of last year. Further, we introduced quarterly factors last quarter. These factors -- these are factors that may affect our results and we ask you to incorporate these into your analysis of our business. Our Q2 factors include: a reminder that our business is annual and quarters will vary; Q2 is seasonally strong; we have a tougher year-over-year comparison, as noted earlier; tariffs, goods and wage inflation; more public discussions on the nature of the next recession and its timing; continued US dollar strength against the euro, pound, Canadian dollar and yen; and continued cloud investment on the OpenText site.

Let me turn a bit to Liaison. We announced earlier today, we signed a definitive agreement to acquire Liaison. Liaison is a leading provider of cloud-based enterprise application integration and data management solutions. They are based in Alpharetta, Georgia and have approximately 475 employees and 4,000 global enterprise customers. As our customers digitize and integrate their global value chains, Liaison is a powerful transformation agent and will compliment our GXS, EasyLink, Covisint and ANX platforms and further add to our cloud growth. The transaction value is $310 million, we'll use cash on hand and we will provide our business case and business update upon closing. The acquisition is subject to customary closing conditions and we expect to close over the next 90 days. I look forward to welcoming Liaison customers, partners, trading partners and employees to OpenText and our global platform.

In summary, we focused on the metrics that mattered and delivered our best Q1. These were solid metrics of annual recurring revenue, adjusted EBITDA and operating cash flow coupled with margin expansion. We have a strong balance sheet and as a proven aggregator, we have the capital to put to work. Our Q1 restructuring has created a right-sized organization and ahead of the curve to outperform in all economic scenarios. We have momentum in the OpenText cloud with our business network, managed services and our new OT2 and SaaS applications.

We continue to track to our fiscal 2019 target model and our fiscal '21 adjusted EBITDA and OCF goals. In a shifting landscape we plan to take share from competitors. We are ready for all scenarios and positioned to ensure all our stakeholders win our customers, employees, partners, communities and shareholders. While markets may become volatile, OpenText will perform.

It's my pleasure to hand the call over to our CFO, Madhu Ranganathan. Madhu?

Madhu Ranganathan -- Chief Financial Officer

Mark, thank you, and hello and thank you all for joining us today. During the last earnings call, we shared with you our communication framework. We shared our fiscal 2018 annual organic growth and return on invested capital, ROIC, and indicated that we will provide those two metrics at the end of each fiscal year. We directionally provided that subject to a quarterly variability, our organic growth will be in the low-single digits for the full year of fiscal 2019.

We also introduced quarterly factors to provide additional quarter-to-quarter visibility into general market factors and some short-term context and that may affect our quarterly results but are not relevant to our long-term health of strategic nature of our business. The objective of such a communication framework of annual metrics, quarterly factors along with management commentaries is to help you model OpenText in a way that is closely aligned to how we see the business and reduce unnecessary short-term trading volatility for our long-term shareholders.

And now turning to our quarterly financial results and similar to prior quarters, my references will all be rounded in millions of US dollars and compared to the same period in the prior fiscal year. Total revenue for the quarter was $667 million, up 4% from last year, or $669 million on a constant currency basis, also up 4%. Our geographical split of revenues in Americas, EMEA and APJ was 58%, 32% and 10%, respectively, and that was consistent with the prior year. During the first quarter, we had 14 deals over $1 million in value same as last year, nine in the OpenText Cloud versus seven in the prior year and five on on-premise versus seven in the prior year. We delivered $77 million in license revenues, down 2% compared to the prior year and $56 million in new MCV, down 16% compared to the prior year.

Annual recurring revenue was $520 million for the quarter, up 6% on both the reported and constant currency basis. The geographical split was consistent among the regions relating to our annual recurring revenue components of cloud and customer support revenues. Professional services revenues were $71 million, down slightly from $73 million in the year-ago same period.

And now to foreign exchange. As mentioned in our last call, we expected fiscal 2019 revenues to be negatively impacted by FX of approximately 6.2 (ph). To give you a perspective, our Q1 revenues were down $12 million over Q4 due to FX. And looking into a basket of currencies, we expect Q2 revenues to continue to be negatively impacted by FX.

Turning to margin performance. We continue to have a clear and deep operating lens into all aspects of our business as shown in our results for adjusted gross margin and high carry through to adjusted EBITDA. Our adjusted gross margin for the quarter was 73% with consistent improvement in annual recurring revenue lines; cloud was 58%, up slightly from 57% last year; customer support was 90%, up slightly from 89% last year; our license margin was 95%, down slightly from 96% last year; and professional services margin was 20% stable compared to last year.

Our adjusted EBITDA was $246 million this quarter, up 12% year-over-year. Adjusted EBITDA margin was 37% an increase of approximately 250 basis points compared to 34% in the prior fiscal year.

Our adjusted earnings per share for the quarter was $0.60 on a diluted basis, up 11% compared to $0.54 per share in the same period last year.

GAAP net income for the quarter was $36 million, or $0.13 per share on a diluted basis compared to $37 million, or $0.14 per share for the same period last year. The decrease was primarily driven by FX losses incurred this quarter compared to FX gains recognized last year.

Operating cash flows were up 155% year-over-year to $171 million. Our diligence and collections and the long-term commitment to optimizing DSOs were key drivers and remain at the foundation of our operational performance, although a cash flow can fluctuate quarter-to-quarter given the underlying seasonality in our business.

And now turning to the balance sheet. We ended the quarter with $788 million of cash and $626 million of deferred revenue. As of September 30, our consolidated net leverage ratio was 1.7 times well within our external debt covenant ratio of 4 times and down from a peak of 2.6 times from a year ago.

And now an update on restructuring. During our last call, we outlined the restructuring initiative which was successfully executed during Q1. While the majority of the 29 charges in current Q1, the remainder will be incurred through our fiscal 2019. Our estimate of savings is consistent with our updates during last quarter. We expect to realize approximately $20 million during fiscal 2019 with about two-thirds expected to accrue during the second half of fiscal 2019. The full benefits of approximately $50 million expected to be realized in fiscal 2020 and beyond, the impact of restructuring is already factored in our fiscal 2019 target model.

And with respect to the IRS matter, there is nothing new to report on our ongoing process with the IRS. We will continue to keep you updated on any material new developments.

And now with respect to our operating model. Mark shared with you the quarterly factors earlier in the call. As you heard from Mark, we are getting more productive. During the first quarter, we had solid metrics across the P&L and the balance sheet. And you see it on the face of income statement, adjusted EBITDA, operating cash flows, and confidence in our FY'19 target model, which remains unchanged and posted on our Investor Relations website.

In addition to Mark's comments on revenues, let me walk you through our margin and expenses. With respect to gross margins, our license and customer support growth margins have been well optimized. We expect cloud margins to remain at the improved Q1 level during the second quarter of fiscal 2019 and annually remaining within our FY 2019 target model. We still expect PS margins to remain on our model between 18% to 20%.

And now for sales and marketing. Certain expenses such as commissions and incentives, they do follow revenue goals and they increase as the year progresses based on quota attainments as is typical for a technology business.

Specific to R&D, as Mark mentioned, we remain very proud of and committed to our R&D investments. Five years ago, our R&D investment was $177 million annually compared to $323 million in fiscal 2018, an increase of 82%. As we continue to invest in fiscal 2019, please look to our target model for the range of spending.

G&A spending is expected to be within our target model at the mid- to high-end of the range. As for overall expenses analogy (ph), our history would suggest that Q2 was a peak margin for the year, Q3 is a low point of the fiscal year and Q4 is a strong margin quarter albeit below Q2 levels. We suggest you build out your models for remainder of the year accordingly.

During our last quarter, we updated our interest and other expense range for the year, which is expected to be between $144 million and $149 million in the fiscal year, while our adjusted tax rate remains at 14% for the fiscal year.

And with respect to Liaison Technologies, further details on Liaison's expected financial contribution and integrated business plan will be disclosed following close of the transaction. We advise you to not model Liaison's integrated financials until such time.

And now turning to our long-term targets. As Mark mentioned, our fiscal 2021 targets remain the same. Our adjusted EBITDA margin in fiscal 2021 of 38% to 40%, our plans are in place and we are in full execution mode. Automation in cloud, in customer on-boarding and customer support and renewals is our focus. People to increase our Center of Excellence participation in India, Philippines and Canada and further strengthening of our worldwide procurement organization to optimize over $1 billion of spend annually. And you can see the progress to our FY'21 goals even within this quarter in the cloud margin of 58% and CS margins at 90%. To reiterate, our quarters could vary but our plans are in place and we are executing.

And now for the operating cash flows target of $1 billion annually as we exit fiscal 2021. We have multiple scenarios to achieve this objective and it is a combination of facts, including M&A, organic growth, productivity gains and margin expansion. We have confidence and flexibility in terms of how we choose to turn the dials to get there.

In summary, we remain on track for our FY'19 target model. And subject to quarterly variability, low-single digit organic growth for fiscal 2019. And looking into a basket of currencies, we expect Q2 revenues to continue to be negatively impacted by FX. While considering FX and the seasonal strength in Q2, as Mark mentioned, we see sequential revenue growth in the mid- to high-single digits. As a reminder, during Q2 of last fiscal year our revenues included a full quarter of Covisint and Guidance acquisitions, which contributed to a higher sequential growth rate. Well optimized license and customer support gross margins, while maintaining cloud gross margins at our improved Q1 levels of 58%. Our directional trends in sales and marketing, R&D and G&A based on the details I had provided earlier.

And lastly, as a reminder, we advise you to not include Liaison Technologies financials and an integrated model until we provide you with further details following closing of the transaction.

The OpenText team is a dynamic group and extremely talented. I want to take this opportunity to thank the team for their deep commitment to our first quarter initiatives and the continued focus on productivity and efficiency. We look forward to meeting with many of you during the November and December timeframe as part of our investor meetings in Canada and the United States. We appreciate your support and close alignment to all aspects of our communication framework. For the benefit of our long-term shareholders, whose trust and confidence we greatly value.

I would now like to open the call for your questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Phillip Huang of Barclays. Please go ahead, sir.

Phillip Huang -- Barclays -- Analyst

Hi. Thanks. Good afternoon. And the first question for Mark on the macro environment. You mentioned in your remarks some of the headwinds including the trade tensions and FX markets. Obviously, you have solutions to our customers sort of deal with such evolving macro environment. But I was wondering from your conversation with customers, are you seeing any hesitation on their spending plans or perhaps looking to shift spending toward certain solutions over others? And also, do you see any particular verticals that perhaps might be more exposed or vulnerable than others?

Mark J. Barrenechea -- Chief Executive Officer

Phillip, thank you for the question. If you kind of look to the earnings season here, we're probably on the second half of sort of the earnings calls, if you will. So we have the benefit of being a bit more, if you will, into the calendar year. Look, we all read the same newspapers and kind of read the same headlines. To repeat, it's growing discussion around tariffs and it's not just putting tariffs in place but now seeing the next set of phases of that where certain industries may have done some pre-buys and now they see price increases. It's in that maybe third phase of a five-stage process.

Certainly, you can see vendors increasing prices, some wage inflation as well and growing narrative around what would a recession look like and when would it arrive. So, we're not seeing that to translate today into pipeline changes or spending differences, but the narrative is way up. And the next step is to see it translate but the narrative is very high. We think we're in a good position regardless of the economic scenario, whether the economy is up or down. And this is a mature team. I've lived through up economies and down economies. And our restructuring puts us in a great place to have a more optimized cost structure, more agile. Our solution portfolio has helped customers navigate through all scenarios, moving manufacturing facilities, getting leaner, more digitalization. And if market valuations change, as a consolidator value point of view and a healthy balance sheet, we're in a strong position to gain share quickly.

So, to answer the question, it hasn't translated directly into any pipeline change. We watch it closely. We all read the same headline and we're ready for all scenarios, up or down.

Phillip Huang -- Barclays -- Analyst

That's very helpful. And I was wondering just curious when your sales team go out to the customer with the sort of conversations talking a little bit more about the narrative in the case of recession and such. Are there specific solutions that you guys are pitching a little bit more or are you sort of modifying the pitch to your customers a little bit in order to kind of help them prepare for the changing macro environment?

Mark J. Barrenechea -- Chief Executive Officer

Certainly is. I would describe it as a we can help support a growth message for the Global 10000. We could help support a value message for the Global 10000. And part of that value message is time to transition to the OpenText Cloud. We can help you reduce your labor. We can help you move your physical environment into a digital. You need to move a plant from China to Southeast Asia, you need -- you can't go in a market and get very expensive skills. So I will lead with in support of our recurring revenues that our number one message to customers in a downtick would be migrate to the OpenText Cloud.

Phillip Huang -- Barclays -- Analyst

That's helpful, Mark. And maybe a quick question for, Madhu, as well. I don't know if I missed it but what was the impact in the quarter from ASC 606 and also FX?

Madhu Ranganathan -- Chief Financial Officer

Sure thing. On 606, it's actually in our 10-Q. There was about $4 million, about $3.8 million of positive impact to revenue. And then when you consider the cost side of it as well, it's about $4 million positive from a margin standpoint. And on FX, as I shared before, about $12.4 million of negative impact to the revenue in Q1 as you compare to the exchange rates in Q4.

Operator

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

Richard Tse -- National Bank Financial -- Analyst

Yes. So congratulations on the acquisition here. I want to sort of ask sort of along that line some context on the M&A funnel. Has the environment changed in any way over the past, let's call it, six months here from last year?

Mark J. Barrenechea -- Chief Executive Officer

Richard, thanks for the question. Mark here. I'll reemphasize that it is good planning by any large business to be ready for sort of all scenarios, and up scenarios and down scenarios. And we're going to help our customers navigate through both. Certainly, as market valuations shift a bit, we're in a great position, given our value-oriented approach. I would say that our pipeline activity and M&A is up. We're engaged in more conversations, and we think that's a good thing as a consolidator. So, yes, there has been a difference over the last six months.

Richard Tse -- National Bank Financial -- Analyst

Okay. And then with respect to organic growth, I know you guys are probably not providing that this quarter. But if I could sort of look back at that single-digit target that you have here. What would you say kind of like the top -- the greatest opportunities from an organic perspective of all your product lines here?

Mark J. Barrenechea -- Chief Executive Officer

I'd highlight top three. It's one, transition to the OpenText Cloud. And our continued ability to migrate existing customers and have them maintain the ownership of their license, grow our customer support revenue. I'll take this as an opportunity just to shout out with the $312 million of support revenue, up 6% we'll get 90% margin, first time 90% margin. This is upper right-hand quadrant performance of customer support, which really shows the value of that experience and that engagement and the satisfaction and the value they're gaining from our platform. So the number one path on organic growth is that, it continued transition and additive nature to the OpenText Cloud and recurring revenues.

Second is driving security. Security into our entire installed base. Let me just pause there, I'd say those are probably the two largest ones.

Richard Tse -- National Bank Financial -- Analyst

Okay. And one last one for me. You made a comment earlier in your remarks about some wage inflation and we certainly noticed that across the board in some other names like. To what degree are you sort of seeing that across the base? Is it coming across all areas of business from R&D to sales, or is it sort of localized in one specific operating cost line?

Mark J. Barrenechea -- Chief Executive Officer

Yeah. I would say, it's primarily oriented in the US right now. It's a unique scenario in the United States where you have GDP growth higher than unemployment. And that's an interesting phenomenon. So few years ago we've decided that we were going to double down candidly in Canada, India, in Philippines. And that's worked out pretty well for us. But in terms of wage inflation, I'll just point to the macro indicators in the US where GDP growth is higher than unemployment rate. So everyone is fighting for those -- for more jobs, and we continue to expand our jurisdiction -- our employee basis in Canada, India and the Philippines.

Richard Tse -- National Bank Financial -- Analyst

Okay. Sorry, I just want to slip this up one, though. Does your targets incorporate some of that level of inflation and when it comes to your margins here going forward?

Mark J. Barrenechea -- Chief Executive Officer

Yes they do. It's an all-in scenario.

Richard Tse -- National Bank Financial -- Analyst

Okay. Thank you. Thanks.

Operator

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

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Hi, good afternoon. Mark if I'm doing the math correctly, it seems like organic growth will be relatively flat in the first half of '19. And so, that would imply that your guidance for a low-single digit organic growth for the full year is back-end loaded. So, I guess, firstly, I know if you can comment whether my math is correct. But secondly, could you comment on whether there would be reasons to expect an acceleration in organic growth in the second half?

Mark J. Barrenechea -- Chief Executive Officer

Yeah. Thanks for the question, Thanos. I'll go back to my prepared remarks, we're on target to grow low-single digit organically this year. In terms of our Q2 quarterly factors, it is a tougher Q2 compare because if you go back to Q2 last year we had a lot of acquisition revenue from Covisint and Guidance in Q2 of last year. And we're going to update annually on the actual quantum of organic growth. We grew -- we had positive organic growth in Q1. And you'll have to run your model of how you want to spread that out and what number you want to use. But I'll confirm, we had positive organic growth in Q1, tougher compare in Q2, and we're on target to grow low-single digit organically for the fiscal year.

Madhu, anything you'd like to add to that?

Madhu Ranganathan -- Chief Financial Officer

No. I agree with that. Thank you, Mark. Yeah.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Okay. Thank you. That comment was very helpful. On Liaison's one question I have is, can you comment on whether there is any specific concentration from a vertical industry perspective, it seems like they're doing a lot in life sciences or is it quite diversified there?

Mark J. Barrenechea -- Chief Executive Officer

Yeah. Thank you for that. We're very excited about Liaison. They are -- we'll come out with the business case once we close. I'm sure you'll go look at public sources and understand the better business more fulsomely.

In terms of industries, their business-to-business integration, their application-to-application integration, these are markets where MuleSoft plays, where Informatica plays, as well as our traditional markets. We posted on our investor site the Magic Quadrant, the upper right-hand quadrant is ourselves, you access in IBM, as well as some new markets of MuleSoft and Informatica. That puts us into verticals such as heavy industrial processing, puts us into pharmaceuticals, strong process industries, if you will. So it's a nice industry add to where Covisint was in auto and transportation, GXS was in CPG and retail more so, and Liaison more in process and heavy industries.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. And one just last one for me, I know you have Documentum for a while longer, any change in maintenance renewals rates or is that been holding steady? Thank you.

Mark J. Barrenechea -- Chief Executive Officer

I think you see the power of the acquisition and the integration right here in the quarter. Again, I'll go to support revenue of $312 million, up 6%, 90% margin. This is the power of scale. And as we -- two years ago, if you allow me to kind of make this point, two years ago, fiscal '17 Q1, our total revenue for the Company, this is pre-Documentum, total revenue for the Company was $492 million, total revenue. Today, our annual recurring revenue is $520 million, bigger than all of total revenue from Q1. So it was an asset purchase. Asset purchases take a little longer. We all know it's -- as we talked many quarters ago, fully integrated but I think you're seeing the power of that integration, the scale, better renewal rates flowing into business, up 6% year-over-year, $312 million, 90% margin.

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Great. Thanks. I'll pass the line.

Operator

The next question comes from Stephanie Price, whose with CIBC. Please go ahead.

Stephanie Price -- CIBC -- Analyst

Good afternoon.

Mark J. Barrenechea -- Chief Executive Officer

Hey, Steph.

Stephanie Price -- CIBC -- Analyst

You've talked a little bit about the Cloud on the call. Can you just give us a bit of an update on the early interest and the uptake in OT2? And what the pipeline for the cloud solutions in general is looking like here?

Mark J. Barrenechea -- Chief Executive Officer

Steph, thanks for the question. I introduced some new language in my script, I'm -- we're changing the emphasis. We're talking about cloud and off-cloud. Off-cloud being our non-recurring revenue of license and PS. And so, we have our off-cloud solutions and our cloud solutions. So we're going to introduce some new language here. Clearly, with the emphasis on cloud.

Three major swim lanes to our cloud. First is our business network cloud, and that is our value-added network, that is our on demand messaging. This is where Covisint and ANX added a lot of value. Liaison will provide enormous value there in the business network cloud.

The second is our managed services, where we bring customers, environments into the OpenText Cloud and we run them fully. It could be a content services cloud, it could be a supply chain cloud. We had two great wins in the quarter. L'Oreal moving into our managed services on a global basis. We won Oppo to come into our managed services cloud.

And then our third swim lane is our new OT2 platform, which is our public environment, multi-tenant SaaS platform. And we're on our quarterly releases. We have our next quarter release going out in two weeks actually. So OT2 18.4, our naming convention will first be the year '18, '19, '20. And the next stop will be the quarter. So OT2 18.4 goes into full production. And our subscribers are up. Our revenue is up. And I expect when we start to get into fiscal '20 it's going to have a contribution to the business, opening up that third swim lane.

And if I can kind of go back to a couple of questions ago that probably be the third driver to our organic growth is sort of new revenues coming in through OT2.

Stephanie Price -- CIBC -- Analyst

Great. Thank you. And then in terms of partners, you announced the partnership with NessPRO in Israel this quarter. Can you talk a bit about new partnerships in other regions that you would like to enter with partners?

Mark J. Barrenechea -- Chief Executive Officer

Steph, yes, thank you for that. I had a comment in my prepared remarks talking a little bit about extending our sales coverage. And we put a team in place, it's a long-term investment, it's about culture and continuous progress within the organization. And it's all around partners and alliances. A simpler way to kind of say, it's just indirect sales, right? We got our direct sales force and we go out and engage directly, and then we have our indirect sales force, that is partners and alliances.

So the biggest for us in there is the global system implementers, Accenture, Deloitte, and companies of that, who are making a great progress there. We've refined our value-added resellers, and we're getting closer to the hyperscalers that we announced at Enterprise World, where we'll now run our managed services on the Google Cloud platform on Azure, as well as Amazon. And then we have our own inside sales that we'll go-to-market with a variety of solutions. So we're going to continue to highlight it, it's a cost-effective way to get coverage in a variety of countries that we may not be in or account coverage and doing that at a high efficiency and low cost.

Stephanie Price -- CIBC -- Analyst

Great. Thank you very much.

Operator

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

Paul Treiber -- RBC Capital Markets -- Analyst

Thanks very much and good afternoon. Just in regards to the commentary momentum that you're seeing in cloud relative to license or off-cloud. Could you just -- is there any way to quantify it? I know it's been a couple of quarters since you haven't disclosed MCV but $1 million plus cloud deals are up year-over-year. So any sort of additional commentary just in regards to momentum in the cloud and what you're seeing in the booking side?

Mark J. Barrenechea -- Chief Executive Officer

Well, I mean, I'd kind of point to the recurring revenue up on an absolute -- put percentages aside for a moment because percentages may not tell the full story because you need both the numerator and denominator. But if you look at our annual recurring revenue within the quarter, it's up on an absolute basis $30 million. And our non-recurring revenue is down $4 million. So the percent up is 6% and on the non-recurring, may percent down is $4 million, but I think the absolute number tells the story, right there. ARR up on an absolute basis $30 million and non-recurring down just $4 million.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. And then just shifting to M&A and Liaison, I mean, you're not disclosing financials or commenting on this point. But just speaking generally, is your -- is the target still typically to bring acquisitions in line with your margin target within one year? And is there any reason why Liaison would deviate from that model?

Mark J. Barrenechea -- Chief Executive Officer

Correct. Our model is to on-board a business within the first year, and based on what we see here I won't expect Liaison to vary from that.

Paul Treiber -- RBC Capital Markets -- Analyst

Okay. Thank you. I'll pass the line.

Operator

The next question comes from Walter Pritchard with Citigroup. Please go ahead, Walter.

Walter Pritchard -- Citigroup -- Analyst

Hi. A question first for Mark. On the growth side, I'm wondering, given -- it feels like in this macro which has been good for a while, everybody including yourselves has had pretty good price umbrella in enabling growth through pricing and price optimization. Can you help us understand may be looking historically how much of a help that's been and I assume if we get in a little bit tougher macro that probably becomes a tougher lever to pull?

Mark J. Barrenechea -- Chief Executive Officer

Walter, thanks for the question. It's an interesting set of economic scenarios, it's not sort of a traditional set of variables, right? We look at the US, which for a lot of companies is 50% of their business, where you'll have GDP is still higher than unemployment. So, the biggest concern really is inflation and as inflation slow things down generally speaking. You see Oracle raising prices. I got an email from Microsoft today raising prices.

And we're in the market too raising our prices around our customer support. We announced at Enterprise World, our Prime Protect, which is bringing up a couple of hundred basis points our RCS program. We look at our PS rate cards and we're adjusting for FX and thus bringing up our PS rate cards as well.

I think on the renewal side, we are all focused on cost of living adjustment and the mechanics of a very large contract annuity base, both in the cloud and off-cloud. But when it comes to selling a new license or selling a new long-term cloud agreement, you still have to compete on value. And it's a value-based sale and that's an ROI-based sale. So I think it's a mixture of -- you have mechanics where you got to adjust for FX and some inflation, which we're doing our share of. But in kind of new longer-term contracts, you're still competing on value. If that's helpful?

Walter Pritchard -- Citigroup -- Analyst

And then for, Madhu, on --. Yeah, it does. Thank you, Mark. And then for, Madhu, on the cloud margin side you talked quite a bit about that the last several quarters. And you've given us a little bit of different view on the cloud makeup, which understanding one of the pieces is pretty small right now. But as we think about the margins in cloud and sort of mix helping to drive margins, can you help us understand how that would play out? And then also, is there any things we should be watching over the next few quarters that are -- that you help to enable those margins to go higher rather and harder (ph) than scale?

Madhu Ranganathan -- Chief Financial Officer

No, it's a great question. So there are probably three aspects to it and mix is certainly one of those. But also keep in mind, as we continue to drive the productivity and efficiency we also need to continue to invest in the cloud. And hence, our direction to you, although it's improved in Q1 to 58% to keep it at those levels, that balances off the productivity, efficiency, as well as the investment that we need to make. And I think looking longer-term we've shared this before, I think getting into the 60s, low-60s on the cloud margin we've talked about it, but that is a much longer-term goal. But this year I would encourage that we look at it at the Q1 levels as we balance off the three aspects we talked about.

Walter Pritchard -- Citigroup -- Analyst

Okay. Great. Thank you.

Madhu Ranganathan -- Chief Financial Officer

You're welcome.

Operator

Okay. Ben, to the next question, please.

The next question comes from Blair Abernethy of Industrial Alliance Securities. Please go ahead.

Blair Abernethy -- Industrial Alliance Securities -- Analyst

Thanks very much. Mark, I wonder if you could just shed a little more color on our how progress is -- how you're making progress on moving what would be sort of traditional license -- on-premise license customers to managed services? And whether or not they're opting to go or look at OT2, or how are you sort of managing that shift?

And, I guess, the other side of the question is, what's the revenue lift opportunity of just taking an on-premise guy and going to managed services with his existing license versus going to say OT2?

Mark J. Barrenechea -- Chief Executive Officer

Yes. Fair enough and Blair, thanks for the question. I'll start with sort of a principle-based answer and excuse me, if I'm repeating myself from a couple years ago. But it's an important principle because we took a different stance than other companies. Our view was we have a very large install base, very important install base. And we weren't interested in substituting that revenue, that maintenance revenue and substituting it for a cloud dollar, if you will. Our principle -- and we were willing to give things up for that.

Our principle was to go after the dollar add, not the dollar substitute, if you will. And that's paid off, where our customers enjoy owning the license. It has economic value. In fact, it's more economical for our customer to own a license. If they want to own it for more than -- I was like using them for 42 months, it's -- 42 months solves a lot of things. But our experience shows after 42 months it's more economic to own that license than it is to be in a subscription. So, we made that principle decision, other companies went for the substitution approach. And I think that's paid off for us. Again, I won't repeat the ARR numbers from the quarter, I think you see that principle decision flowing through our P&L today. So it's an add. And it's an add of the infrastructure opportunity, it's an add of the application management opportunity, and now that as they migrate into the cloud, customers reduce their labor, increase their dependence on us, it's the opportunity add future solutions on top of that. So I'm not going to put a -- it's hard to put a quantum on it, but I would open up those three areas of -- it's infrastructure dollars, it's application management dollars and it's new solution dollars on top of that.

In terms of OT2, we're being very selective on the workloads because again we don't want to substitute a dollar. We want a dollar add. So we tend to be adding new features, new workloads into OT2. So we will see that as again additive dollars to what we're doing not substituting existing dollars.

Blair Abernethy -- Industrial Alliance Securities -- Analyst

Okay. That's very helpful. Thanks, Mark. And then just shifting gears to one of your organic growth drivers is competitive replacement. Can you just give us an update on how you're proceedings there? And particular with the fact that you've got -- you've had the Documentum business with you for sometime as well. So how are you doing in the market competitively?

Mark J. Barrenechea -- Chief Executive Officer

Well, Blair, I don't want to come off with a hubris-type answer. But that's the $34 billion question and -- in the marketplace. I will point to IBM. And I look at IBM's recent decision in the marketplace, and it's going to be an opportunity for OpenText. They're going to be focused on this new very expensive thing they're doing and we're going to stay focused on filing it, Sterling Commerce. I thought Watson was what they're going to lead with, it sounds like they're going to lead with open source. So we're going to have an opportunity on analytics as well. So on the competitive replacement front, we talked about a few quarters ago that we're going to be laser focused on IBM and that's even more acute today.

Blair Abernethy -- Industrial Alliance Securities -- Analyst

Okay. Great. Thanks very much, Mark.

Operator

The next question comes from Daniel Chan of TD Securities. Please go ahead.

Daniel Chan -- TD Securities -- Analyst

Hi, guys. Just wondering if you can comment on the seasonality. It seems like seasonality was a bit more pronounced this quarter. I think in the last five years it's been down about 2% to 3% sequentially and this quarter we saw about 12%. Is there anything specific to this quarter that we should be thinking about and should we see more seasonality as we move through the rest of the fiscal year?

Mark J. Barrenechea -- Chief Executive Officer

Dan, thanks for the question. No, I don't believe so. We came off a very strong Q4 rolling into Q1 and our Q2 has a slightly tougher compare year-over-year just given all the Covisint and Guidance acquisition revenue from a year ago. So no change to our views of seasonality. I would just note, we came off a very strong Q4 and we just have a slightly tougher compare giving guidance in Covisint a year ago.

Daniel Chan -- TD Securities -- Analyst

Okay. And I just had a follow-up question on the margins, this is a second quarter you've got about 37% EBITDA margins. Is this kind of the new level and we move higher here as move toward your fiscal '19 goals? And what are the kind of the puts and takes that will get you to either the high end of that range and to the lower end of that range?

Madhu Ranganathan -- Chief Financial Officer

You want to take that?

Mark J. Barrenechea -- Chief Executive Officer

Over to Madhu.

Madhu Ranganathan -- Chief Financial Officer

Sure. Thanks for the question there. As we shared in the commentary, we do have the ups and downs in our margins as well, right. So your Q2 is going to be a bit higher and Q3 lower but Q2 again Q2 and Q4 there's a comparison there as well. I would still point out to our target model range. We have baked in, number one, you talked about the drivers. The whole essence of doing the restructuring early on in the fiscal year we've baked that into our target model.

So I would continue to look at our target model for that. And when you think about the balance of investments, I answered the questions in the cloud. We really have to balance between the efficiencies we'll do to "fund investment will do to keep the cloud at the Q1 levels as well. That's how we would look at FY'19.

Daniel Chan -- TD Securities -- Analyst

Great. Thank you.

Operator

This concludes time allocated for questions on today's call. I will now hand the call back over to Mark Barrenechea for any closing remarks.

Mark J. Barrenechea -- Chief Executive Officer

Ben, thank you and thank you, everyone, for joining today. Madhu, thank you for your remarks. And I just like to recap that we focused on the -- and we continue to focus on the metrics that matter: ARR up 6%, $520 million within the quarter; cloud up 7% at 58% margin; support hit a record margin of 90%, up 6% to $312 million; adjusted EBITDA up 37% or $246 million, up 250 basis points; OCF of $171 million, up 155%; and then the cash at $788 million. And we're very excited about the acquisition we announced today of Liaison Technologies.

Thank you for joining, and we'll speak to you all very soon. Thank you.

Madhu Ranganathan -- Chief Financial Officer

Thank you.

Operator

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

Duration: 56 minutes

Call participants:

Greg Secord -- Vice President, Investor Relations

Mark J. Barrenechea -- Chief Executive Officer

Madhu Ranganathan -- Chief Financial Officer

Phillip Huang -- Barclays -- Analyst

Richard Tse -- National Bank Financial -- Analyst

Thanos Moschopoulos -- BMO Capital Markets -- Analyst

Stephanie Price -- CIBC -- Analyst

Paul Treiber -- RBC Capital Markets -- Analyst

Walter Pritchard -- Citigroup -- Analyst

Blair Abernethy -- Industrial Alliance Securities -- Analyst

Daniel Chan -- TD Securities -- Analyst

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