OpenText Reports First Quarter Fiscal Year 2018 Financial Results

Summary of Quarterly Results

(in millions except per share data)

Q1 FY18

Q1 FY17

$ Change

% Change
(Y/Y)

Q1 FY18 in
CC*

% Change in
CC*

Revenues:

Cloud services and subscriptions

$193.9

$169.7

$24.2

14.2

%

$194.8

14.8

%

Customer support

295.4

210.2

85.2

40.5

%

292.3

39.0

%

Total annual recurring revenues**

$489.3

$379.9

$109.4

28.8

%

$487.0

28.2

%

License

78.2

60.7

17.6

29.0

%

77.2

27.3

%

Professional service and other

73.2

51.1

22.1

43.2

%

71.6

40.1

%

Total revenues

$640.7

$491.7

$149.0

30.3

%

$635.9

29.3

%

GAAP-based operating income

$87.1

$74.1

$13.1

17.6

%

Non-GAAP-based operating income ₍₁₎

$201.1

$151.4

$49.7

32.9

%

$198.9

31.4

%

GAAP-based operating margin

13.6

%

15.1

%

n/a

(150)

bps

Non-GAAP-based operating margin ₍₁₎

31.4

%

30.8

%

n/a

60

bps

31.3

%

50

bps

GAAP-based EPS, diluted ₍₂₎₍₃₎

$0.14

$3.73

($3.59)

(96.2)

%

Non-GAAP-based EPS, diluted _(1)(2)(4)

$0.54

$0.43

$0.11

25.6

%

$0.53

23.3

%

GAAP-based net income attributable to OpenText ₍₃₎

$36.6

$912.9

($876.3)

(96.0)

%

Adjusted EBITDA ₍₁₎

$219.9

$166.6

$53.3

32.0

%

Operating cash flows

$67.1

$73.5

($6.3)

(8.6)

%

⁽¹⁾ Please see note 2 "Use of Non-GAAP Financial Measures" below

⁽²⁾ As a result of the two-for-one share split, effected January 24, 2017 by way of a share sub-division, all comparative period per share data and number of Common Shares outstanding in this press release are presented on a post share split basis.

⁽³⁾ Recorded a significant tax benefit in Q1 FY17 of $876.1 million. This significant tax benefit is specifically tied to the Company's internal reorganization and applied to Q1 FY17 only and as a result does not continue in future periods.

⁽⁴⁾ Please also see note 14 to the Company's Condensed Consolidated Financial Statements on Form 10-Q. Reflective of the amount of net tax benefit arising from the internal reorganization assumed to be allocable to the current period based on the forecasted utilization period.

Note: Individual line items in tables may be adjusted by non-material amounts to enable totals to align to published financial statements.

*CC: Constant currency for this purpose is defined as the current period reported revenues/expenses/earnings represented at the prior comparative period's foreign exchange rate.

**Annual recurring revenue is defined as the sum of Cloud services and subscriptions revenue and Customer support revenue.

Summary of Quarterly Results

Q1 FY18

Q4 FY17

Q1 FY17

% Change

(Q1 FY18 vs
Q4 FY17)

% Change

(Q1 FY18 vs
Q1 FY17)

Revenue (million)

$640.7

$663.6

$491.7

(3.4)

%

30.3

%

GAAP-based gross margin

65.1

%

66.9

%

66.6

%

(180)

bps

(150)

bps

GAAP-based operating margin

13.6

%

16.0

%

15.1

%

(240)

bps

(150)

bps

GAAP-based EPS, diluted₍₁₎₍₂₎

$0.14

$0.17

$3.73

(17.6)

%

(96.2)

%

Non-GAAP-based gross margin ₍₃₎

72.2

%

73.6

%

71.5

%

(140)

bps

70

bps

Non-GAAP-based operating margin ₍₃₎

31.4

%

33.1

%

30.8

%

(170)

bps

60

bps

Non-GAAP-based EPS, diluted _(2)(3)(4)

$0.54

$0.60

$0.43

(10.0)

%

25.6

%

⁽¹⁾ Recorded a significant tax benefit in Q1 FY17 of $876.1 million. This significant tax benefit is specifically tied to the Company's internal reorganization and applied to Q1 FY17 only and as a result does not continue in future periods.

⁽²⁾ As a result of the two-for-one share split, effected January 24, 2017 by way of a share sub-division, all comparative period per share data and number of Common Shares outstanding in this press release are presented on a post share split basis.

⁽³⁾ Please see note 2 "Use of Non-GAAP Financial Measures" below

⁽⁴⁾ Please also see note 14 to the Company's Condensed Consolidated Financial Statements on Form 10-Q. Reflective of the amount of net tax benefit arising from the internal reorganization assumed to be allocable to the current period based on the forecasted utilization period.

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars, except share data)

September 30, 2017

June 30, 2017

ASSETS

(unaudited)

Cash and cash equivalents

$

376,390

$

443,357

Accounts receivable trade, net of allowance for doubtful accounts of $6,861 as of September 30, 2017 and $6,319 as of June 30, 2017

457,758

445,812

Income taxes recoverable

25,972

32,683

Prepaid expenses and other current assets

98,526

81,625

Total current assets

958,646

1,003,477

Property and equipment

245,378

227,418

Goodwill

3,576,224

3,416,749

Acquired intangible assets

1,560,370

1,472,542

Deferred tax assets

1,214,631

1,215,712

Other assets

94,718

93,763

Deferred charges

40,588

42,344

Long-term income taxes recoverable

5,865

8,557

Total assets

$

7,696,420

$

7,480,562

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

323,261

$

342,120

Current portion of long-term debt

382,760

182,760

Deferred revenues

567,475

570,328

Income taxes payable

30,524

31,835

Total current liabilities

1,304,020

1,127,043

Long-term liabilities:

Accrued liabilities

46,689

50,338

Deferred credits

4,644

5,283

Pension liability

61,235

58,627

Long-term debt

2,386,415

2,387,057

Deferred revenues

68,963

61,678

Long-term income taxes payable

167,484

162,493

Deferred tax liabilities

92,034

94,724

Total long-term liabilities

2,827,464

2,820,200

Shareholders' equity:

Share capital and additional paid-in capital

265,288,304 and 264,059,567 Common Shares issued and outstanding at September 30, 2017 and June 30, 2017, respectively; authorized Common Shares: unlimited

1,642,502

1,613,454

Accumulated other comprehensive income

49,518

48,800

Retained earnings

1,899,203

1,897,624

Treasury stock, at cost (1,093,280 shares at September 30, 2017 and 1,101,612 at June 30, 2017, respectively)

(27,342)

(27,520)

Total OpenText shareholders' equity

3,563,881

3,532,358

Non-controlling interests

1,055

961

Total shareholders' equity

3,564,936

3,533,319

Total liabilities and shareholders' equity

$

7,696,420

$

7,480,562

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands of U.S. dollars, except share and per share data)

(Unaudited)

Three Months Ended September 30,

2017

2016

Revenues:

License

$

78,231

$

60,656

Cloud services and subscriptions

193,853

169,687

Customer support

295,404

210,206

Professional service and other

73,199

51,115

Total revenues

640,687

491,664

Cost of revenues:

License

2,960

3,845

Cloud services and subscriptions

84,330

70,292

Customer support

32,791

25,738

Professional service and other

59,459

41,343

Amortization of acquired technology-based intangible assets

43,960

23,135

Total cost of revenues

223,500

164,353

Gross profit

417,187

327,311

Operating expenses:

Research and development

77,629

58,572

Sales and marketing

122,822

95,148

General and administrative

48,915

38,197

Depreciation

18,878

15,270

Amortization of acquired customer-based intangible assets

43,789

33,608

Special charges

18,031

12,454

Total operating expenses

330,064

253,249

Income from operations

87,123

74,062

Other income (expense), net

10,224

6,699

Interest and other related expense, net

(33,288)

(27,275)

Income before income taxes

64,059

53,486

Provision for (recovery of) income taxes

27,369

(859,425)

Net income for the period

$

36,690

$

912,911

Net (income) loss attributable to non-controlling interests

(94)

(27)

Net income attributable to OpenText

$

36,596

$

912,884

Earnings per share?basic attributable to OpenText

$

0.14

$

3.76

Earnings per share?diluted attributable to OpenText

$

0.14

$

3.73

Weighted average number of Common Shares outstanding?basic

264,802

242,910

Weighted average number of Common Shares outstanding?diluted

266,235

244,742

Dividends declared per Common Share

$

0.1320

$

0.1150

As a result of the two-for-one share split, effected January 24, 2017 by way of a share sub-division, all comparative period per share data and number of Common Shares outstanding in these Condensed Consolidated Financial Statements are presented on a post share split basis.

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

(Unaudited)

Three Months Ended September 30,

2017

2016

Net income for the period

$

36,690

$

912,911

Other comprehensive income?net of tax:

Net foreign currency translation adjustments

906

1,219

Unrealized gain (loss) on cash flow hedges:

Unrealized gain (loss) - net of tax expense (recovery) effect of $463 and ($128) for the three months ended September 30, 2017 and 2016, respectively

1,285

(355)

(Gain) loss reclassified into net income - net of tax (expense) recovery effect of ($287) and ($5) for the three months ended September 30, 2017 and 2016, respectively

(797)

(17)

Actuarial gain (loss) relating to defined benefit pension plans:

Actuarial gain (loss) - net of tax expense (recovery) effect of ($83) and ($593) for the three months ended September 30, 2017 and 2016, respectively

(115)

1,538

Amortization of actuarial (gain) loss into net income - net of tax (expense) recovery effect of $42 and $62 for the three months ended September 30, 2017 and 2016, respectively

56

147

Unrealized net gain (loss) on marketable securities - net of tax effect of nil for the three months ended September 30, 2017 and 2016, respectively

?

(112)

Release of unrealized gain on marketable securities - net of tax effect of nil for the three months ended September 30, 2017 and 2016, respectively

(617)

?

Total other comprehensive income (loss), net, for the period

718

2,420

Total comprehensive income

37,408

915,331

Comprehensive (income) loss attributable to non-controlling interests

(94)

(27)

Total comprehensive income attributable to OpenText

$

37,314

$

915,304

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(Unaudited)

Three Months Ended September 30,

2017

2016

Cash flows from operating activities:

Net income for the period

$

36,690

$

912,911

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization of intangible assets

106,627

72,013

Share-based compensation expense

8,235

8,140

Excess tax expense (benefits) on share-based compensation expense

?

(5)

Pension expense

1,035

1,190

Amortization of debt issuance costs

1,298

1,323

Amortization of deferred charges and credits

1,117

2,146

Loss on sale and write down of property and equipment

163

?

Release of unrealized gain on marketable securities to income

(841)

?

Deferred taxes

5,947

(875,824)

Share in net (income) loss of equity investees

512

(5,529)

Other non-cash charges

?

1,033

Changes in operating assets and liabilities:

Accounts receivable

5,162

16,169

Prepaid expenses and other current assets

(2,808)

(1,189)

Income taxes and deferred charges and credits

9,148

3,221

Accounts payable and accrued liabilities

(64,476)

(30,599)

Deferred revenue

(38,480)

(26,109)

Other assets

(2,227)

(5,440)

Net cash provided by operating activities

67,102

73,451

Cash flows from investing activities:

Additions of property and equipment

(30,449)

(20,665)

Proceeds from maturity of short-term investments

?

9,212

Purchase of Guidance Software,  net of cash acquired

(220,765)

?

Purchase of Covisint Corporation, net of cash acquired

(71,279)

?

Purchase of HP Inc. CCM Business

?

(312,198)

Purchase of Recommind, Inc.

?

(170,107)

Purchase of HP Inc. CEM Business

?

(7,289)

Other investing activities

(4,206)

(123)

Net cash used in investing activities

(326,699)

(501,170)

Cash flows from financing activities:

Excess tax (expense) benefits on share-based compensation expense

?

5

Proceeds from Revolver

200,000

?

Proceeds from issuance of Common Shares from exercise of stock options and ESPP

21,825

5,310

Repayment of long-term debt and revolver

(1,940)

(2,000)

Debt issuance costs

?

(1,330)

Payments of dividends to shareholders

(35,017)

(27,791)

Net cash provided by (used in) financing activities

184,868

(25,806)

Foreign exchange gain (loss) on cash held in foreign currencies

7,762

4,712

Increase (decrease) in cash and cash equivalents during the period

(66,967)

(448,813)

Cash and cash equivalents at beginning of the period

443,357

1,283,757

Cash and cash equivalents at end of the period

$

376,390

$

834,944

(1)

All dollar amounts in this press release are in U.S. Dollars unless otherwise indicated.

(2)

Use of Non-GAAP Financial Measures: In addition to reporting financial results in accordance with U.S. GAAP, the Company provides certain financial measures that are not in accordance with U.S. GAAP (Non-GAAP).These Non-GAAP financial measures have certain limitations in that they do not have a standardized meaning and thus the Company's definition may be different from similar Non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus it may be more difficult to compare the Company's financial performance to that of other companies. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded in the calculation of these Non-GAAP financial measures both in its reconciliation to the U.S. GAAP financial measures and its consolidated financial statements, all of which should be considered when evaluating the Company's results.

The Company uses these Non-GAAP financial measures to supplement the information provided in its consolidated financial statements, which are presented in accordance with U.S. GAAP. The presentation of Non-GAAP financial measures are not meant to be a substitute for financial measures presented in accordance with U.S. GAAP, but rather should be evaluated in conjunction with and as a supplement to such U.S. GAAP measures. OpenText strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure. The Company therefore believes that despite these limitations, it is appropriate to supplement the disclosure of the U.S. GAAP measures with certain Non-GAAP measures defined below.

Non-GAAP-based net income and Non-GAAP-based EPS, attributable to OpenText, are calculated as GAAP-based net income or earnings per share, attributable to OpenText, on a diluted basis, after giving effect to the amortization of acquired intangible assets, other income (expense), share-based compensation, and Special charges (recoveries), all net of tax and any tax benefits/expense items unrelated to current period income, as further described in the tables below. Non-GAAP-based gross profit is the arithmetical sum of GAAP-based gross profit and the amortization of acquired technology-based intangible assets and share-based compensation within cost of sales. Non-GAAP-based gross margin is calculated as Non-GAAP-based gross profit expressed as a percentage of total revenue. Non-GAAP-based income from operations is calculated as income from operations, excluding the amortization of acquired intangible assets, Special charges (recoveries), and share-based compensation expense. Non-GAAP-based operating margin is calculated as Non-GAAP-based income from operations expressed as a percentage of total revenue.

Adjusted earnings (loss) before interest, taxes, depreciation and amortization (Adjusted EBITDA) is calculated as GAAP-based net income, attributable to OpenText, excluding interest income (expense), provision for income taxes, depreciation and amortization of acquired intangible assets, other income (expense), share-based compensation and Special charges (recoveries).

The Company's management believes that the presentation of the above defined Non-GAAP financial measures provides useful information to investors because they portray the financial results of the Company before the impact of certain non-operational charges. The use of the term "non-operational charge" is defined for this purpose as an expense that does not impact the ongoing operating decisions taken by the Company's management and is based upon the way the Company's management evaluates the performance of the Company's business for use in the Company's internal reports. In the course of such evaluation and for the purpose of making operating decisions, the Company's management excludes certain items from its analysis, including amortization of acquired intangible assets, Special charges (recoveries), share-based compensation, other income (expense), and the taxation impact of these items. These items are excluded based upon the manner in which management evaluates the business of the Company and are not excluded in the sense that they may be used under U.S. GAAP.

The Company believes the provision of supplemental Non-GAAP measures allow investors to evaluate the operational and financial performance of the Company's core business using the same evaluation measures that management uses, and is therefore a useful indication of OpenText's performance or expected performance of future operations and facilitates period-to-period comparison of operating performance (although prior performance is not necessarily indicative of future performance). As a result, the Company considers it appropriate and reasonable to provide, in addition to U.S. GAAP measures, supplementary Non-GAAP financial measures that exclude certain items from the presentation of its financial results.

The following charts provide (unaudited) reconciliations of U.S. GAAP-based financial measures to Non-U.S. GAAP-based financial measures for the following periods presented:

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the three months ended September 30, 2017.

(In thousands except for per share amounts)

Three Months Ended September 30, 2017

GAAP-based

Measures

GAAP-based
Measures
% of Total
Revenue

Adjustments

Note

Non-GAAP-
based

Measures

Non-GAAP-
based
Measures

% of Total
Revenue

Cost of revenues

Cloud services and subscriptions

$

84,330

$

(522)

(1)

$

83,808

Customer support

32,791

(329)

(1)

32,462

Professional service and other

59,459

(597)

(1)

58,862

Amortization of acquired technology-based intangible assets

43,960

(43,960)

(2)

?

GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%)

417,187

65.1

%

45,408

(3)

462,595

72.2

%

Operating expenses

Research and development

77,629

(1,626)

(1)

76,003

Sales and marketing

122,822

(3,088)

(1)

119,734

General and administrative

48,915

(2,073)

(1)

46,842

Amortization of acquired customer-based intangible assets

43,789

(43,789)

(2)

?

Special charges (recoveries)

18,031

(18,031)

(4)

?

GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%)

87,123

13.6

%

114,015

(5)

201,138

31.4

%

Other income (expense), net

10,224

(10,224)

(6)

?

Provision for (recovery of) income taxes

27,369

(2,191)

(7)

25,178

GAAP-based net income / Non-GAAP-based net income, attributable to OpenText

36,596

105,982

(8)

142,578

GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText

$

0.14

$

0.40

(8)

$

0.54

(1)

Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.

(2)

Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.

(3)

GAAP-based and Non-GAAP-based gross profit stated in dollars, and gross margin stated as a percentage of total revenue.

(4)

Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results.

(5)

GAAP-based and Non-GAAP-based income from operations stated in dollars, and operating margin stated as a percentage of total revenue.

(6)

Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results.

(7)

Adjustment relates to differences between the GAAP-based tax provision rate of approximately 43% and a Non-GAAP-based tax rate of approximately 15%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and "book to return" adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 15%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense.

(8)

Reconciliation of GAAP-based net income to Non-GAAP-based net income:

Three Months Ended September 30, 2017

Per share diluted

GAAP-based net income, attributable to OpenText

$

36,596

$

0.14

Add:

Amortization

87,749

0.33

Share-based compensation

8,235

0.03

Special charges (recoveries)

18,031

0.07

Other (income) expense, net

(10,224)

(0.04)

GAAP-based provision for (recovery of ) income taxes

27,369

0.10

Non-GAAP-based provision for income taxes

(25,178)

(0.09)

Non-GAAP-based net income, attributable to OpenText

$

142,578

$

0.54

Reconciliation of Adjusted EBITDA

Three Months Ended September 30, 2017

GAAP-based net income, attributable to OpenText

$

36,596

Add:

Provision for (recovery of) income taxes

27,369

Interest and other related expense, net

33,288

Amortization of acquired technology-based intangible assets

43,960

Amortization of acquired customer-based intangible assets

43,789

Depreciation

18,878

Share-based compensation

8,235

Special charges (recoveries)

18,031

Other (income) expense, net

(10,224)

Adjusted EBITDA

$

219,922

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the three months ended June 30, 2017.

(In thousands except for per share amounts)

Three Months Ended June 30, 2017

GAAP-based

Measures

GAAP-based
Measures
% of Total
Revenue

Adjustments

Note

Non-GAAP-
based

Measures

Non-GAAP-
based
Measures

% of Total
Revenue

Cost of revenues

Cloud services and subscriptions

$

79,588

$

(390)

(1)

$

79,198

Customer support

35,224

(313)

(1)

34,911

Professional service and other

58,028

(449)

(1)

57,579

Amortization of acquired technology-based intangible assets

43,288

(43,288)

(2)

?

GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%)

444,038

66.9

%

44,440

(3)

488,478

73.6

%

Operating expenses

Research and development

81,301

(1,777)

(1)

79,524

Sales and marketing

129,541

(2,450)

(1)

127,091

General and administrative

47,499

(2,755)

(1)

44,744

Amortization of acquired customer-based intangible assets

42,594

(42,594)

(2)

?

Special charges (recoveries)

19,461

(19,461)

(4)

?

GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%)

106,452

16.0

%

113,477

(5)

219,929

33.1

%

Other income (expense), net

11,178

(11,178)

(6)

?

Provision for (recovery of) income taxes

39,000

(10,731)

(7)

28,269

GAAP-based net income / Non-GAAP-based net income, attributable to OpenText

46,137

113,030

(8)

159,167

GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText

$

0.17

$

0.43

(8)

$

0.60

(1)

Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.

(2)

Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.

(3)

GAAP-based and Non-GAAP-based gross profit stated in dollars, and gross margin stated as a percentage of total revenue.

(4)

Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results.

(5)

GAAP-based and Non-GAAP-based income from operations stated in dollars, and operating margin stated as a percentage of total revenue.

(6)

Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results.

(7)

Adjustment relates to differences between the GAAP-based tax provision rate of approximately 46% and a Non-GAAP-based tax rate of approximately 15%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and "book to return" adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 15%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense.

(8)

Reconciliation of GAAP-based net income to Non-GAAP-based net income:

Three Months Ended June 30, 2017

Per share diluted

GAAP-based net income, attributable to OpenText

$

46,137

$

0.17

Add:

Amortization

85,882

0.32

Share-based compensation

8,134

0.03

Special charges (recoveries)

19,461

0.07

Other (income) expense, net

(11,178)

(0.04)

GAAP-based provision for (recovery of ) income taxes

39,000

0.15

Non-GAAP-based provision for income taxes

(28,269)

(0.10)

Non-GAAP-based net income, attributable to OpenText

$

159,167

$

0.60

Reconciliation of Adjusted EBITDA

Three months ended June 30, 2017

GAAP-based net income, attributable to OpenText

$

46,137

Add:

Provision for (recovery of) income taxes

39,000

Interest and other related expense, net

32,372

Amortization of acquired technology-based intangible assets

43,288

Amortization of acquired customer-based intangible assets

42,594

Depreciation

17,190

Share-based compensation

8,134

Special charges (recoveries)

19,461

Other (income) expense, net

(11,178)

Adjusted EBITDA

$

236,998

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the three months ended September 30, 2016.

(In thousands except for per share amounts)

Three Months Ended September 30, 2016

GAAP-based

Measures

GAAP-based
Measures
% of Total
Revenue

Adjustments

Note

Non-GAAP-
based

Measures

Non-GAAP-
based
Measures

% of Total
Revenue

Cost of revenues

Cloud services and subscriptions

$

70,292

$

(360)

(1)

$

69,932

Customer support

25,738

(235)

(1)

25,503

Professional service and other

41,343

(445)

(1)

40,898

Amortization of acquired technology-based intangible assets

23,135

(23,135)

(2)

?

GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%)

327,311

66.6

%

24,175

(3)

351,486

71.5

%

Operating expenses

Research and development

58,572

(1,743)

(1)

56,829

Sales and marketing

95,148

(2,820)

(1)

92,328

General and administrative

38,197

(2,537)

(1)

35,660

Amortization of acquired customer-based intangible assets

33,608

(33,608)

(2)

?

Special charges (recoveries)

12,454

(12,454)

(4)

?

GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%)

74,062

15.1

%

77,337

(5)

151,399

30.8

%

Other income (expense), net

6,699

(6,699)

(6)

?

Provision for (recovery of) income taxes

(859,425)

878,017

(7)

18,592

GAAP-based net income / Non-GAAP-based net income, attributable to OpenText

912,884

(807,379)

(8)

105,505

GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText

$

3.73

$

(3.30)

(8)

$

0.43

(1)

Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.

(2)

Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.

(3)

GAAP-based and Non-GAAP-based gross profit stated in dollars, and gross margin stated as a percentage of total revenue.

(4)

Adjustment relates to the exclusion of Special charges (recoveries) from our Non-GAAP-based operating expenses as Special charges (recoveries) are generally incurred in the periods relevant to an acquisition and include one-time, non-recurring charges or recoveries that are not indicative or related to continuing operations, and are therefore excluded from our internal analysis of operating results.

(5)

GAAP-based and Non-GAAP-based income from operations stated in dollars, and operating margin stated as a percentage of total revenue.

(6)

Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results. Other income (expense) also includes our share of income (losses) from our holdings in non-marketable securities investments as a limited partner. We do not actively trade equity securities in these privately held companies nor do we plan our ongoing operations based around any anticipated fundings or distributions from these investments. We exclude gains and losses on these investments as we do not believe they are reflective of our ongoing business and operating results.

(7)

Adjustment relates to differences between the GAAP-based tax recovery rate of approximately 1,607% and a Non-GAAP-based tax rate of approximately 15%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income. Such excluded expenses include amortization, share-based compensation, Special charges (recoveries) and other income (expense), net. Also excluded are tax benefits/expense items unrelated to current period income such as changes in reserves for tax uncertainties and valuation allowance reserves, and "book to return" adjustments for tax return filings and tax assessments. Included is the amount of net tax benefits arising from the internal reorganization assumed to be allocable to the current period based on the forecasted utilization period. In arriving at our Non-GAAP-based tax rate of approximately 15%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense.

(8)

Reconciliation of GAAP-based net income to Non-GAAP-based net income:

Three Months Ended September 30, 2016

Per share diluted

GAAP-based net income, attributable to OpenText

$

912,884

$

3.73

Add:

Amortization

56,743

0.23

Share-based compensation

8,140

0.03

Special charges (recoveries)

12,454

0.05

Other (income) expense, net

(6,699)

(0.02)

GAAP-based provision for (recovery of ) income taxes

(859,425)

(3.51)

Non-GAAP-based provision for income taxes

(18,592)

(0.08)

Non-GAAP-based net income, attributable to OpenText

$

105,505

$

0.43

Reconciliation of Adjusted EBITDA

Three months ended September 30, 2016

GAAP-based net income, attributable to OpenText

$

912,884

Add:

Provision for (recovery of) income taxes

(859,425)

Interest and other related expense, net

27,275

Amortization of acquired technology-based intangible assets

23,135

Amortization of acquired customer-based intangible assets

33,608

Depreciation

15,270

Share-based compensation

8,140

Special charges (recoveries)

12,454

Other (income) expense, net

(6,699)

Adjusted EBITDA

$

166,642

(3)

The following tables provide a composition of our major currencies for revenue and expenses, expressed as a percentage, for the three months ended September 30, 2017 and 2016:

Three Months Ended September 30, 2017

Three Months Ended September 30, 2016

Currencies

% of Revenue 

% of Expenses* 

% of Revenue 

% of Expenses* 

EURO

21

%

14

%

22

%

14

%

GBP

6

%

6

%

7

%

7

%

CAD

4

%

11

%

4

%

12

%

USD

60

%

52

%

58

%

53

%

Other

9

%

17

%

9

%

14

%

Total

100

%

100

%

100

%

100

%

*Expenses include all cost of revenues and operating expenses included within the Condensed Consolidated Statements of Income, except for amortization of intangible assets, share-based compensation and Special charges (recoveries).