OpenText Reports Second Quarter Fiscal Year 2018 Financial Results

Summary of Quarterly Results

(in millions except per share data)

Q2 FY18

Q2 FY17

$ Change

% Change
(Y/Y)

Q2 FY18 in
CC*

% Change
in CC*

Revenues:

Cloud services and subscriptions

$208.1

$175.1

$33.1

18.9

%

$207.2

18.3

%

Customer support

308.1

219.7

88.4

40.3

%

301.2

37.1

%

Total annual recurring revenues**

$516.2

$394.7

$121.5

30.8

%

$508.4

28.8

%

License

135.2

97.8

37.5

38.3

%

130.6

33.6

%

Professional service and other

83.0

50.2

32.7

65.2

%

80.9

61.0

%

Total revenues

$734.4

$542.7

$191.7

35.3

%

$719.8

32.6

%

GAAP-based operating income

$166.6

$107.2

$59.5

55.5

%

Non-GAAP-based operating income ₍₁₎

$267.9

$184.5

$83.4

45.2

%

$262.0

42.0

%

GAAP-based operating margin

22.7

%

19.7

%

n/a

300

bps

Non-GAAP-based operating margin ₍₁₎

36.5

%

34.0

%

n/a

250

bps

36.4

%

240

bps

GAAP-based EPS, diluted ₍₂₎

$0.32

$0.18

$0.14

77.8

%

Non-GAAP-based EPS, diluted ₍₁₎₍₃₎

$0.76

$0.54

$0.22

40.7

%

$0.74

37.0

%

GAAP-based net income attributable to OpenText ₍₂₎

$85.1

$45.0

$40.1

89.0

%

Adjusted EBITDA ₍₁₎

$290.1

$199.8

$90.3

45.2

%

Operating cash flows

$166.6

$107.0

$59.6

55.7

%

Summary of YTD Results

(in millions except per share data)

FY18 YTD

FY17 YTD

$ Change

% Change

(Y/Y)

FY18 YTD in
CC*

% Change
in CC*

Revenues:

Cloud services and subscriptions

$402.0

$344.7

$57.2

16.6

%

$402.0

16.6

%

Customer support

603.5

429.9

173.6

40.4

%

593.5

38.1

%

Total annual recurring revenues**

$1,005.4

$774.6

$230.8

29.8

%

$995.4

28.5

%

License

213.5

158.4

55.1

34.8

%

207.8

31.2

%

Professional service and other

156.2

101.3

54.8

54.1

%

152.5

50.5

%

Total revenues

$1,375.1

$1,034.4

$340.7

32.9

%

$1,355.7

31.1

%

GAAP-based operating income

$253.7

$181.2

$72.5

40.0

%

Non-GAAP-based operating income ₍₁₎

$469.0

$335.9

$133.1

39.6

%

$460.9

37.2

%

GAAP-based operating margin

18.5

%

17.5

%

n/a

100

bps

Non-GAAP-based operating margin ₍₁₎

34.1

%

32.5

%

n/a

160

bps

34.0

%

150

bps

GAAP-based EPS, diluted ₍₂₎

$0.46

$3.89

($3.43)

(88.2)

%

Non-GAAP-based EPS, diluted ₍₁₎₍₃₎

$1.30

$0.97

$0.33

34.0

%

$1.27

30.9

%

GAAP-based net income attributable to OpenText ₍₂₎

$121.7

$957.9

($836.2)

(87.3)

%

Adjusted EBITDA ₍₁₎

$510.1

$366.4

$143.6

39.2

%

Operating cash flows

$233.7

$180.5

$53.3

29.5

%

⁽¹⁾

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

⁽²⁾

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.

⁽³⁾

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

Q2 FY18

Q1 FY18

Q2 FY17

% Change

(Q2 FY18 vs
Q1 FY18)

% Change

(Q2 FY18 vs
Q2 FY17)

Revenue (million)

$734.4

$640.7

$542.7

14.6

%

35.3

%

GAAP-based gross margin

67.3

%

65.1

%

69.0

%

220

bps

(170)

Bps

GAAP-based operating margin

22.7

%

13.6

%

19.7

%

910

bps

300

Bps

GAAP-based EPS, diluted₍₁₎

$0.32

$0.14

$0.18

128.6

%

77.8

%

Non-GAAP-based gross margin ₍₂₎

73.9

%

72.2

%

73.8

%

170

bps

10

Bps

Non-GAAP-based operating margin ₍₂₎

36.5

%

31.4

%

34.0

%

510

bps

250

Bps

Non-GAAP-based EPS, diluted ₍₂₎₍₃₎

$0.76

$0.54

$0.54

40.7

%

40.7

%

Summary of Year to Date Results

Q2 FY18 YTD

Q2 FY17 YTD

% Change

Revenue (million)

$1,375.1

$1,034.4

32.9

%

GAAP-based gross margin

66.3

%

67.9

%

(160)

Bps

GAAP-based operating margin

18.5

%

17.5

%

100

Bps

GAAP-based EPS, diluted₍₁₎

$0.46

$3.89

(88.2)

%

Non-GAAP-based gross margin ₍₂₎

73.1

%

72.7

%

40

Bps

Non-GAAP-based operating margin ₍₂₎

34.1

%

32.5

%

160

Bps

Non-GAAP-based EPS, diluted ₍₂₎₍₃₎

$1.30

$0.97

34.0

%

⁽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⁾

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

⁽³⁾

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)

December 31, 2017

June 30, 2017

ASSETS

(unaudited)

Cash and cash equivalents

$

476,014

$

443,357

Accounts receivable trade, net of allowance for doubtful accounts of $8,503 as of December 31, 2017 and $6,319 as of June 30, 2017

511,969

445,812

Income taxes recoverable

23,861

32,683

Prepaid expenses and other current assets

101,063

81,625

Total current assets

1,112,907

1,003,477

Property and equipment

260,896

227,418

Goodwill

3,578,976

3,416,749

Acquired intangible assets

1,468,378

1,472,542

Deferred tax assets

1,158,836

1,215,712

Other assets

96,612

93,763

Deferred charges

39,204

42,344

Long-term income taxes recoverable

23,412

8,557

Total assets

$

7,739,221

$

7,480,562

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

318,008

$

342,120

Current portion of long-term debt

382,760

182,760

Deferred revenues

557,873

570,328

Income taxes payable

30,084

31,835

Total current liabilities

1,288,725

1,127,043

Long-term liabilities:

Accrued liabilities

47,379

50,338

Deferred credits

4,005

5,283

Pension liability

62,213

58,627

Long-term debt

2,385,709

2,387,057

Deferred revenues

68,934

61,678

Long-term income taxes payable

176,222

162,493

Deferred tax liabilities

77,182

94,724

Total long-term liabilities

2,821,644

2,820,200

Shareholders' equity:

Share capital and additional paid-in capital

265,625,515 and 264,059,567 Common Shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively; authorized Common Shares: unlimited

1,650,217

1,613,454

Accumulated other comprehensive income

47,521

48,800

Retained earnings

1,949,503

1,897,624

Treasury stock, at cost (714,169 shares at December 31, 2017 and 1,101,612 at June 30, 2017, respectively)

(19,250)

(27,520)

Total OpenText shareholders' equity

3,627,991

3,532,358

Non-controlling interests

861

961

Total shareholders' equity

3,628,852

3,533,319

Total liabilities and shareholders' equity

$

7,739,221

$

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 December 31,

Six Months Ended December 31,

2017

2016

2017

Revenues:

License

$

135,244

$

97,764

$

213,475

$

158,420

Cloud services and subscriptions

208,121

175,061

401,974

344,748

Customer support

308,070

219,656

603,474

429,862

Professional service and other

82,970

50,228

156,169

101,343

Total revenues

734,405

542,709

1,375,092

1,034,373

Cost of revenues:

License

4,587

2,391

7,547

6,236

Cloud services and subscriptions

90,418

73,150

174,748

143,442

Customer support

33,194

27,349

65,985

53,087

Professional service and other

64,985

40,295

124,444

81,638

Amortization of acquired technology-based intangible assets

47,128

24,848

91,088

47,983

Total cost of revenues

240,312

168,033

463,812

332,386

Gross profit

494,093

374,676

911,280

701,987

Operating expenses:

Research and development

80,304

64,721

157,933

123,293

Sales and marketing

129,142

102,651

251,964

197,799

General and administrative

48,985

39,914

97,900

78,111

Depreciation

22,071

15,301

40,949

30,571

Amortization of acquired customer-based intangible assets

46,268

33,815

90,057

67,423

Special charges

715

11,117

18,746

23,571

Total operating expenses

327,485

267,519

657,549

520,768

Income from operations

166,608

107,157

253,731

181,219

Other income (expense), net

5,547

(3,558)

15,771

3,141

Interest and other related expense, net

(34,092)

(27,743)

(67,380)

(55,018)

Income before income taxes

138,063

75,856

202,122

129,342

Provision for (recovery of) income taxes

53,146

30,822

80,515

(828,603)

Net income for the period

$

84,917

$

45,034

$

121,607

$

957,945

Net (income) loss attributable to non-controlling interests

194

(12)

100

(39)

Net income attributable to OpenText

$

85,111

$

45,022

$

121,707

$

957,906

Earnings per share—basic attributable to OpenText

$

0.32

$

0.18

$

0.46

$

3.92

Earnings per share—diluted attributable to OpenText

$

0.32

$

0.18

$

0.46

$

3.89

Weighted average number of Common Shares outstanding—basic

265,504

245,653

265,153

244,282

Weighted average number of Common Shares outstanding—diluted

266,857

247,501

266,549

246,123

Dividends declared per Common Share

$

0.1320

$

0.1150

$

0.2640

$

0.2300

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

(unaudited)

Three Months Ended December 31,

Six Months Ended December 31,

2017

2016

2017

2016

Net income for the period

$

84,917

$

45,034

$

121,607

$

957,945

Other comprehensive income (loss) —net of tax:

Net foreign currency translation adjustments

(1,446)

(11,526)

(540)

(10,307)

Unrealized gain (loss) on cash flow hedges:

Unrealized gain (loss) - net of tax expense (recovery) effect of ($60) and ($252) for the three months ended December 31, 2017 and 2016, respectively; $403 and ($380) for the six months ended December 31, 2017 and 2016, respectively

(168)

(698)

1,117

(1,053)

(Gain) loss reclassified into net income - net of tax (expense) recovery effect of ($141) and ($33) for the three months ended December 31, 2017 and 2016, respectively; ($428) and ($38) for the six months ended December 31, 2017 and 2016, respectively

(391)

(91)

(1,188)

(108)

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

Actuarial gain (loss) - net of tax expense (recovery) effect of ($153) and $1,077 for the three months ended December 31, 2017 and 2016, respectively; ($236) and $484 for the six months ended December 31, 2017 and 2016, respectively

(48)

2,823

(163)

4,361

Amortization of actuarial (gain) loss into net income - net of tax (expense) recovery effect of $43 and $57 for the three months ended December 31, 2017 and 2016, respectively; $85 and $119 for the six months ended December 31, 2017 and 2016, respectively

56

134

112

281

Unrealized net gain (loss) on marketable securities - net of tax effect of nil for the three and six months ended December 31, 2017 and 2016, respectively

—

512

—

400

Release of unrealized gain on marketable securities - net of tax effect of nil for the three and six months ended December 31, 2017 and 2016, respectively

—

—

(617)

—

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

(1,997)

(8,846)

(1,279)

(6,426)

Total comprehensive income

82,920

36,188

120,328

951,519

Comprehensive (income) loss attributable to non-controlling interests

194

(12)

100

(39)

Total comprehensive income attributable to OpenText

$

83,114

$

36,176

$

120,428

$

951,480

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(unaudited)

Three Months Ended December 31,

Six Months Ended December 31,

2017

2016

2017

2016

Cash flows from operating activities:

Net income for the period

$

84,917

$

45,034

$

121,607

$

957,945

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

Depreciation and amortization of intangible assets

115,467

73,964

222,094

145,977

Share-based compensation expense

7,158

7,572

15,393

15,712

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

—

(537)

—

(542)

Pension expense

834

871

1,869

2,061

Amortization of debt issuance costs

1,234

1,331

2,532

2,654

Amortization of deferred charges and credits

1,117

2,146

2,234

4,292

Loss on sale and write down of property and equipment

—

—

163

—

Release of unrealized gain on marketable securities to income

—

—

(841)

—

Deferred taxes

38,427

7,591

44,374

(868,233)

Share in net (income) loss of equity investees

(316)

(464)

196

(5,993)

Other non-cash charges

—

—

—

1,033

Changes in operating assets and liabilities:

Accounts receivable

(54,620)

(15,713)

(49,458)

456

Prepaid expenses and other current assets

(2,575)

13,074

(5,383)

11,885

Income taxes and deferred charges and credits

(7,565)

(12,841)

1,583

(9,620)

Accounts payable and accrued liabilities

(8,023)

6,604

(72,499)

(23,995)

Deferred revenue

(10,366)

(21,633)

(48,846)

(47,742)

Other assets

958

20

(1,269)

(5,420)

Net cash provided by operating activities

166,647

107,019

233,749

180,470

Cash flows from investing activities:

Additions of property and equipment

(25,488)

(11,609)

(55,937)

(32,274)

Proceeds from maturity of short-term investments

—

—

—

9,212

Purchase of Guidance Software,  net of cash acquired

(8,510)

—

(229,275)

—

Purchase of Covisint Corporation, net of cash acquired

—

—

(71,279)

—

Purchase of HP Inc. CCM Business

—

(2,802)

—

(315,000)

Purchase of Recommind, Inc.

—

—

—

(170,107)

Purchase of HP Inc. CEM Business

—

—

—

(7,289)

Purchase consideration for acquisitions completed prior to Fiscal 2017

—

143

—

143

Other investing activities

(3,855)

(440)

(8,061)

(563)

Net cash used in investing activities

(37,853)

(14,708)

(364,552)

(515,878)

Cash flows from financing activities:

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

—

537

—

542

Proceeds from issuance of long-term debt and revolver

—

256,875

200,000

256,875

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

7,797

5,391

29,622

10,701

Proceeds from issuance of Common shares under public Equity Offering

—

604,223

—

604,223

Repayment of long-term debt and revolver

(1,940)

(2,000)

(3,880)

(4,000)

Debt issuance costs

—

(2,825)

—

(4,155)

Equity issuance costs

—

(18,127)

—

(18,127)

Payments of dividends to shareholders

(34,811)

(27,859)

(69,828)

(55,650)

Net cash provided by (used in) financing activities

(28,954)

816,215

155,914

790,409

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

(216)

(20,979)

7,546

(16,267)

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

99,624

887,547

32,657

438,734

Cash and cash equivalents at beginning of the period

376,390

834,944

443,357

1,283,757

Cash and cash equivalents at end of the period

$

476,014

$

1,722,491

$

476,014

$

1,722,491

Notes

(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 December 31, 2017.

(In thousands except for per share amounts)

Three Months Ended December 31, 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

$

90,418

$

(462)

(1)

$

89,956

Customer support

33,194

(327)

(1)

32,867

Professional service and other

64,985

(603)

(1)

64,382

Amortization of acquired technology-based intangible assets

47,128

(47,128)

(2)

—

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

494,093

67.3

%

48,520

(3)

542,613

73.9

%

Operating expenses

Research and development

80,304

(1,587)

(1)

78,717

Sales and marketing

129,142

(2,095)

(1)

127,047

General and administrative

48,985

(2,084)

(1)

46,901

Amortization of acquired customer-based intangible assets

46,268

(46,268)

(2)

—

Special charges (recoveries)

715

(715)

(4)

—

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

166,608

22.7

%

101,269

(5)

267,877

36.5

%

Other income (expense), net

5,547

(5,547)

(6)

—

Provision for (recovery of) income taxes

53,146

(22,095)

(7)

31,051

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

85,111

117,817

(8)

202,928

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

$

0.32

$

0.44

(8)

$

0.76

(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 38% and a Non-GAAP-based tax rate of approximately 13%; 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 13%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense. In addition, as a result of the changes in US tax reform legislation that was enacted on December 22, 2017 through the Tax Cuts and Jobs Act, the Company has reassessed its Non-GAAP-based tax rate to be approximately 14% for the six months ended December 31, 2017, down from 15%. Pursuant to this, the Non-GAAP-based tax rate of approximately 13% for the three months ended December 31, 2017 includes a one-time cumulative catch up of recoveries and charges, as though the Company's Non-GAAP-based tax rate was 14% as of July 1, 2017.

(8)

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

GAAP-based net income, attributable to OpenText

$

85,111

$

0.32

Add:

Amortization

93,396

0.35

Share-based compensation

7,158

0.03

Special charges (recoveries)

715

—

Other (income) expense, net

(5,547)

(0.02)

GAAP-based provision for (recovery of ) income taxes

53,146

0.20

Non-GAAP-based provision for income taxes

(31,051)

(0.12)

Non-GAAP-based net income, attributable to OpenText

$

202,928

$

0.76

Reconciliation of Adjusted EBITDA

Three Months Ended December 31, 2017

GAAP-based net income, attributable to OpenText

$

85,111

Add:

Provision for (recovery of) income taxes

53,146

Interest and other related expense, net

34,092

Amortization of acquired technology-based intangible assets

47,128

Amortization of acquired customer-based intangible assets

46,268

Depreciation

22,071

Share-based compensation

7,158

Special charges (recoveries)

715

Other (income) expense, net

(5,547)

Adjusted EBITDA

$

290,142

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the six months ended December 31, 2017.

(In thousands except for per share amounts)

Six Months Ended December 31, 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

$

174,748

$

(984)

(1)

$

173,764

Customer support

65,985

(656)

(1)

65,329

Professional service and other

124,444

(1,200)

(1)

123,244

Amortization of acquired technology-based intangible assets

91,088

(91,088)

(2)

—

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

911,280

66.3

%

93,928

(3)

1,005,208

73.1

%

Operating expenses

Research and development

157,933

(3,213)

(1)

154,720

Sales and marketing

251,964

(5,183)

(1)

246,781

General and administrative

97,900

(4,157)

(1)

93,743

Amortization of acquired customer-based intangible assets

90,057

(90,057)

(2)

—

Special charges (recoveries)

18,746

(18,746)

(4)

—

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

253,731

18.5

%

215,284

(5)

469,015

34.1

%

Other income (expense), net

15,771

(15,771)

(6)

—

Provision for (recovery of) income taxes

80,515

(24,286)

(7)

56,229

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

121,707

223,799

(8)

345,506

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

$

0.46

$

0.84

(8)

$

1.30

(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 40% and a Non-GAAP-based tax rate of approximately 14%; 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 14%, we analyzed the individual adjusted expenses and took into consideration the impact of statutory tax rates from local jurisdictions incurring the expense. We also took into consideration changes in US tax reform legislation that was enacted on December 22, 2017 through the Tax Cuts and Jobs Act.

(8)

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

Six Months Ended December 31, 2017

Per share diluted

GAAP-based net income, attributable to OpenText

$

121,707

$

0.46

Add:

Amortization

181,145

0.68

Share-based compensation

15,393

0.06

Special charges (recoveries)

18,746

0.07

Other (income) expense, net

(15,771)

(0.06)

GAAP-based provision for (recovery of) income taxes

80,515

0.30

Non-GAAP based provision for income taxes

(56,229)

(0.21)

Non-GAAP-based net income, attributable to OpenText

$

345,506

$

1.30

Reconciliation of Adjusted EBITDA

Six Months Ended December 31, 2017

GAAP-based net income, attributable to OpenText

$

121,707

Add:

Provision for (recovery of) income taxes

80,515

Interest and other related expense, net

67,380

Amortization of acquired technology-based intangible assets

91,088

Amortization of acquired customer-based intangible assets

90,057

Depreciation

40,949

Share-based compensation

15,393

Special charges (recoveries)

18,746

Other (income) expense, net

(15,771)

Adjusted EBITDA

$

510,064

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