OpenText Reports Third Quarter Fiscal Year 2018 Financial Results

Summary of Quarterly Results

(in millions except per share data)

Q3 FY18

Q3 FY17

$ Change

% Change

(Y/Y)

Q3 FY18 in
CC*

% Change
in CC*

Revenues:

Cloud services and subscriptions

$209.1

$177.1

$32.0

18.1

%

$204.0

15.2

%

Customer support

312.3

263.4

48.8

18.5

%

297.9

13.1

%

Total annual recurring revenues**

$521.4

$440.5

$80.8

18.3

%

$501.8

13.9

%

License

84.1

87.2

(3.1)

(3.6)

%

80.0

(8.3)

%

Professional service and other

80.4

65.4

15.0

23.0

%

75.3

15.3

%

Total revenues

$685.9

$593.1

$92.7

15.6

%

$657.1

10.8

%

GAAP-based operating income

$102.3

$65.3

$37.1

56.8

%

Non-GAAP-based operating income ₍₁₎

$204.1

$172.6

$31.5

18.2

%

$193.4

12.1

%

GAAP-based operating margin

14.9

%

11.0

%

n/a

390

bps

Non-GAAP-based operating margin ₍₁₎

29.8

%

29.1

%

n/a

70

bps

29.4

%

30

bps

GAAP-based EPS, diluted

$0.22

$0.08

$0.14

175.0

%

Non-GAAP-based EPS, diluted ₍₁₎₍₃₎

$0.54

$0.45

$0.09

20.0

%

$0.51

13.3

%

GAAP-based net income attributable to OpenText

$58.8

$21.6

$37.2

172.0

%

Adjusted EBITDA ₍₁₎

$227.2

$189.1

$38.1

20.2

%

Operating cash flows

$270.7

$156.3

$114.4

73.2

%

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

$611.1

$521.9

$89.2

17.1

%

$606.1

16.1

%

Customer support

915.8

693.3

222.5

32.1

%

891.3

28.6

%

Total annual recurring revenues**

$1,526.8

$1,215.2

$311.7

25.6

%

$1,497.4

23.2

%

License

297.6

245.6

51.9

21.1

%

287.8

17.1

%

Professional service and other

236.6

166.7

69.9

41.9

%

227.7

36.6

%

Total revenues

$2,061.0

$1,627.5

$433.5

26.6

%

$2,012.9

23.7

%

GAAP-based operating income

$356.1

$246.5

$109.6

44.5

%

Non-GAAP-based operating income ₍₁₎

$673.1

$508.5

$164.6

32.4

%

$654.3

28.7

%

GAAP-based operating margin

17.3

%

15.1

%

n/a

220

bps

Non-GAAP-based operating margin ₍₁₎

32.7

%

31.2

%

n/a

150

bps

32.5

%

130

bps

GAAP-based EPS, diluted ₍₂₎

$0.68

$3.88

($3.20)

(82.5)

%

Non-GAAP-based EPS, diluted ₍₁₎₍₃₎

$1.84

$1.42

$0.42

29.6

%

$1.78

25.4

%

GAAP-based net income attributable to OpenText ₍₂₎

$180.5

$979.5

($799.0)

(81.6)

%

Adjusted EBITDA ₍₁₎

$737.3

$555.5

$181.7

32.7

%

Operating cash flows

$504.4

$336.8

$167.7

49.8

%

⁽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

Q3 FY18

Q2 FY18

Q3 FY17

% Change

(Q3 FY18 vs
Q2 FY18)

% Change

(Q3 FY18 vs
Q3 FY17)

Revenue (million)

$685.9

$734.4

$593.1

(6.6)

%

15.6

%

GAAP-based gross margin

64.6

%

67.3

%

64.5

%

(270)

bps

10

bps

GAAP-based operating margin

14.9

%

22.7

%

11.0

%

(780)

bps

390

bps

GAAP-based EPS, diluted

$0.22

$0.32

$0.08

(31.3)

%

175.0

%

Non-GAAP-based gross margin ₍₁₎

71.6

%

73.9

%

71.2

%

(230)

bps

40

bps

Non-GAAP-based operating margin ₍₁₎

29.8

%

36.5

%

29.1

%

(670)

bps

70

bps

Non-GAAP-based EPS, diluted ₍₁₎₍₃₎

$0.54

$0.76

$0.45

(28.9)

%

20.0

%

Summary of Year to Date Results

Q3 FY18 YTD

Q3 FY17 YTD

% Change

Revenue (million)

$2,061.0

$1,627.5

26.6

%

GAAP-based gross margin

65.7

%

66.6

%

(90)

bps

GAAP-based operating margin

17.3

%

15.1

%

220

bps

GAAP-based EPS, diluted₍₂₎

$0.68

$3.88

(82.5)

%

Non-GAAP-based gross margin ₍₁₎

72.6

%

72.2

%

40

bps

Non-GAAP-based operating margin ₍₁₎

32.7

%

31.2

%

150

bps

Non-GAAP-based EPS, diluted ₍₁₎₍₃₎

$1.84

$1.42

29.6

%

⁽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.

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

March 31, 2018

June 30, 2017

ASSETS

(unaudited)

Cash and cash equivalents

$

605,497

$

443,357

Accounts receivable trade, net of allowance for doubtful accounts of $9,007 as of March 31, 2018 and $6,319 as of June 30, 2017

515,012

445,812

Income taxes recoverable

42,880

32,683

Prepaid expenses and other current assets

105,657

81,625

Total current assets

1,269,046

1,003,477

Property and equipment

264,859

227,418

Goodwill

3,592,598

3,416,749

Acquired intangible assets

1,391,413

1,472,542

Deferred tax assets

1,142,385

1,215,712

Other assets

99,732

93,763

Deferred charges

39,148

42,344

Long-term income taxes recoverable

21,696

8,557

Total assets

$

7,820,877

$

7,480,562

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

295,165

$

342,120

Current portion of long-term debt

282,760

182,760

Deferred revenues

689,189

570,328

Income taxes payable

33,685

31,835

Total current liabilities

1,300,799

1,127,043

Long-term liabilities:

Accrued liabilities

52,688

50,338

Deferred credits

3,366

5,283

Pension liability

62,996

58,627

Long-term debt

2,385,322

2,387,057

Deferred revenues

72,176

61,678

Long-term income taxes payable

171,174

162,493

Deferred tax liabilities

75,376

94,724

Total long-term liabilities

2,823,098

2,820,200

Shareholders' equity:

Share capital and additional paid-in capital

267,266,442 and 264,059,567 Common Shares issued and outstanding at March 31, 2018 and June 30, 2017, respectively; authorized Common Shares: unlimited

1,689,997

1,613,454

Accumulated other comprehensive income

51,810

48,800

Retained earnings

1,973,129

1,897,624

Treasury stock, at cost (694,169 shares at March 31, 2018 and 1,101,612 at June 30, 2017, respectively)

(18,823)

(27,520)

Total OpenText shareholders' equity

3,696,113

3,532,358

Non-controlling interests

867

961

Total shareholders' equity

3,696,980

3,533,319

Total liabilities and shareholders' equity

$

7,820,877

$

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 March 31,

Nine Months Ended March 31,

2018

2017

2018

2017

Revenues:

License

$

84,113

$

87,227

$

297,588

$

245,647

Cloud services and subscriptions

209,102

177,109

611,076

521,857

Customer support

312,279

263,436

915,753

693,298

Professional service and other

80,385

65,358

236,554

166,701

Total revenues

685,879

593,130

2,060,971

1,627,503

Cost of revenues:

License

3,098

4,008

10,645

10,244

Cloud services and subscriptions

94,264

77,225

269,012

220,667

Customer support

33,820

34,442

99,805

87,529

Professional service and other

64,246

55,529

188,690

137,167

Amortization of acquired technology-based intangible assets

47,303

39,285

138,391

87,268

Total cost of revenues

242,731

210,489

706,543

542,875

Gross profit

443,148

382,641

1,354,428

1,084,628

Operating expenses:

Research and development

83,522

77,086

241,455

200,379

Sales and marketing

129,987

117,498

381,951

315,297

General and administrative

54,817

44,828

152,717

122,939

Depreciation

23,093

16,557

64,042

47,128

Amortization of acquired customer-based intangible assets

46,762

40,825

136,819

108,248

Special charges

2,644

20,586

21,390

44,157

Total operating expenses

340,825

317,380

998,374

838,148

Income from operations

102,323

65,261

356,054

246,480

Other income (expense), net

11,140

1,424

26,911

4,565

Interest and other related expense, net

(34,534)

(31,734)

(101,914)

(86,752)

Income before income taxes

78,929

34,951

281,051

164,293

Provision for (recovery of) income taxes

20,129

13,239

100,644

(815,364)

Net income for the period

$

58,800

$

21,712

$

180,407

$

979,657

Net (income) loss attributable to non-controlling interests

(6)

(96)

94

(135)

Net income attributable to OpenText

$

58,794

$

21,616

$

180,501

$

979,522

Earnings per share—basic attributable to OpenText

$

0.22

$

0.08

$

0.68

$

3.91

Earnings per share—diluted attributable to OpenText

$

0.22

$

0.08

$

0.68

$

3.88

Weighted average number of Common Shares outstanding—basic

266,572

263,329

265,619

250,538

Weighted average number of Common Shares outstanding—diluted

267,764

265,440

266,954

252,469

Dividends declared per Common Share

$

0.1320

$

0.1150

$

0.3960

$

0.3450

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

(unaudited)

Three Months Ended March 31,

Nine Months Ended March 31,

2018

2017

2018

2017

Net income for the period

$

58,800

$

21,712

$

180,407

$

979,657

Other comprehensive income (loss) —net of tax:

Net foreign currency translation adjustments

3,823

2,725

3,283

(7,582)

Unrealized gain (loss) on cash flow hedges:

Unrealized gain (loss) - net of tax expense (recovery) effect of ($338) and $125 for the three months ended March 31, 2018 and 2017, respectively; $65 and ($254) for the nine months ended March 31, 2018 and 2017, respectively

(935)

348

182

(705)

(Gain) loss reclassified into net income - net of tax (expense) recovery effect of ($112) and $14 for the three months ended March 31, 2018 and 2017, respectively; ($540) and ($24) for the nine months ended March 31, 2018 and 2017, respectively

(311)

40

(1,499)

(68)

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

Actuarial gain (loss) - net of tax expense (recovery) effect of $413 and ($64) for the three months ended March 31, 2018 and 2017, respectively; $177 and $420 for the nine months ended March 31, 2018 and 2017, respectively

1,648

686

1,485

5,047

Amortization of actuarial (gain) loss into net income - net of tax (expense) recovery effect of $45 and $59 for the three months ended March 31, 2018 and 2017, respectively; $130 and $178 for the nine months ended March 31, 2018 and 2017, respectively

64

139

176

420

Unrealized net gain (loss) on marketable securities - net of tax effect of nil for the three and nine months ended March 31, 2018 and 2017, respectively

—

(541)

—

(141)

Release of unrealized gain on marketable securities - net of tax effect of nil for the three and nine months ended March 31, 2018 and 2017, respectively

—

—

(617)

—

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

4,289

3,397

3,010

(3,029)

Total comprehensive income

63,089

25,109

183,417

976,628

Comprehensive (income) loss attributable to non-controlling interests

(6)

(96)

94

(135)

Total comprehensive income attributable to OpenText

$

63,083

$

25,013

$

183,511

$

976,493

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(unaudited)

Three Months Ended March 31,

Nine Months Ended March 31,

2018

2017

2018

2017

Cash flows from operating activities:

Net income for the period

$

58,800

$

21,712

$

180,407

$

979,657

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

Depreciation and amortization of intangible assets

117,158

96,667

339,252

242,644

Share-based compensation expense

5,080

6,661

20,473

22,373

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

—

(1,044)

—

(1,586)

Pension expense

965

892

2,834

2,953

Amortization of debt issuance costs

1,303

1,127

3,835

3,781

Amortization of deferred charges and credits

941

2,146

3,175

6,438

Loss on sale and write down of property and equipment

326

—

489

—

Release of unrealized gain on marketable securities to income

—

—

(841)

—

Deferred taxes

18,266

(22,011)

62,640

(890,244)

Share in net (income) loss of equity investees

307

(160)

503

(6,153)

Write off of unamortized debt issuance costs

—

833

—

833

Other non-cash charges

—

—

—

1,033

Changes in operating assets and liabilities:

Accounts receivable

(6,240)

(37,551)

(55,698)

(37,095)

Prepaid expenses and other current assets

(5,152)

(18,119)

(10,535)

(6,234)

Income taxes and deferred charges and credits

(23,651)

11,190

(22,068)

1,570

Accounts payable and accrued liabilities

(19,779)

40,516

(92,278)

16,521

Deferred revenue

123,550

54,659

74,704

6,917

Other assets

(1,197)

(1,215)

(2,466)

(6,635)

Net cash provided by operating activities

270,677

156,303

504,426

336,773

Cash flows from investing activities:

Additions of property and equipment

(27,101)

(17,797)

(83,038)

(50,071)

Proceeds from maturity of short-term investments

—

—

—

9,212

Purchase of Hightail Inc.

(20,466)

—

(20,466)

—

Purchase of Guidance Software,  net of cash acquired

—

—

(229,275)

—

Purchase of Covisint Corporation, net of cash acquired

—

—

(71,279)

—

Purchase of ECD Business

—

(1,622,394)

—

(1,622,394)

Purchase of HP Inc. CCM Business

—

—

—

(315,000)

Purchase of Recommind, Inc.

—

—

—

(170,107)

Purchase consideration for acquisitions completed prior to Fiscal 2017

—

—

—

(7,146)

Other investing activities

(3,118)

(2,450)

(11,179)

(3,013)

Net cash used in investing activities

(50,685)

(1,642,641)

(415,237)

(2,158,519)

Cash flows from financing activities:

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

—

1,044

—

1,586

Proceeds from issuance of long-term debt and revolver

—

225,000

200,000

481,875

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

36,442

15,967

66,064

26,668

Proceeds from issuance of Common shares under public Equity Offering

—

—

—

604,223

Repayment of long-term debt and revolver

(101,940)

(1,940)

(105,820)

(5,940)

Debt issuance costs

—

(2,045)

—

(6,200)

Equity issuance costs

—

(1,345)

—

(19,472)

Purchase of treasury stock

—

(4,245)

—

(4,245)

Payments of dividends to shareholders

(35,168)

(30,303)

(104,996)

(85,953)

Net cash provided by (used in) financing activities

(100,666)

202,133

55,248

992,542

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

10,157

10,714

17,703

(5,553)

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

129,483

(1,273,491)

162,140

(834,757)

Cash and cash equivalents at beginning of the period

476,014

1,722,491

443,357

1,283,757

Cash and cash equivalents at end of the period

$

605,497

$

449,000

$

605,497

$

449,000

(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 March 31, 2018.

(In thousands except for per share amounts)

Three Months Ended March 31, 2018

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

$

94,264

$

(135)

(1)

$

94,129

Customer support

33,820

(277)

(1)

33,543

Professional service and other

64,246

(122)

(1)

64,124

Amortization of acquired technology-based intangible assets

47,303

(47,303)

(2)

—

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

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

443,148

64.6

%

47,837

(3)

490,985

71.6

%

Operating expenses

Research and development

83,522

(993)

(1)

82,529

Sales and marketing

129,987

(1,496)

(1)

128,491

General and administrative

54,817

(2,057)

(1)

52,760

Amortization of acquired customer-based intangible assets

46,762

(46,762)

(2)

—

Special charges (recoveries)

2,644

(2,644)

(4)

—

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

102,323

14.9

%

101,789

(5)

204,112

29.8

%

Other income (expense), net

11,140

(11,140)

(6)

—

Provision for (recovery of) income taxes

20,129

3,612

(7)

23,741

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

58,794

87,037

(8)

145,831

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

$

0.22

$

0.32

(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 26% 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:

Three Months Ended March 31, 2018

Per share diluted

GAAP-based net income, attributable to OpenText

$

58,794

$

0.22

Add:

Amortization

94,065

0.35

Share-based compensation

5,080

0.02

Special charges (recoveries)

2,644

0.01

Other (income) expense, net

(11,140)

(0.04)

GAAP-based provision for (recovery of) income taxes

20,129

0.07

Non-GAAP-based provision for income taxes

(23,741)

(0.09)

Non-GAAP-based net income, attributable to OpenText

$

145,831

$

0.54

Reconciliation of Adjusted EBITDA

Three Months Ended March 31, 2018

GAAP-based net income, attributable to OpenText

$

58,794

Add:

Provision for (recovery of) income taxes

20,129

Interest and other related expense, net

34,534

Amortization of acquired technology-based intangible assets

47,303

Amortization of acquired customer-based intangible assets

46,762

Depreciation

23,093

Share-based compensation

5,080

Special charges (recoveries)

2,644

Other (income) expense, net

(11,140)

Adjusted EBITDA

$

227,199

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the nine months ended March 31, 2018.

(In thousands except for per share amounts)

Nine Months Ended March 31, 2018

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

$

269,012

$

(1,119)

(1)

$

267,893

Customer support

99,805

(933)

(1)

98,872

Professional service and other

188,690

(1,322)

(1)

187,368

Amortization of acquired technology-based intangible assets

138,391

(138,391)

(2)

—

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

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

1,354,428

65.7

%

141,765

(3)

1,496,193

72.6

%

Operating expenses

Research and development

241,455

(4,206)

(1)

237,249

Sales and marketing

381,951

(6,679)

(1)

375,272

General and administrative

152,717

(6,214)

(1)

146,503

Amortization of acquired customer-based intangible assets

136,819

(136,819)

(2)

—

Special charges (recoveries)

21,390

(21,390)

(4)

—

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

356,054

17.3

%

317,073

(5)

673,127

32.7

%

Other income (expense), net

26,911

(26,911)

(6)

—

Provision for (recovery of) income taxes

100,644

(20,674)

(7)

79,970

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

180,501

310,836

(8)

491,337

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

$

0.68

$

1.16

(8)

$

1.84

(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 36% 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:

Nine Months Ended March 31, 2018

Per share diluted

GAAP-based net income, attributable to OpenText

$

180,501

$

0.68

Add:

Amortization

275,210

1.03

Share-based compensation

20,473

0.08

Special charges (recoveries)

21,390

0.08

Other (income) expense, net

(26,911)

(0.10)

GAAP-based provision for (recovery of) income taxes

100,644

0.37

Non-GAAP based provision for income taxes

(79,970)

(0.30)

Non-GAAP-based net income, attributable to OpenText

$

491,337

$

1.84

Reconciliation of Adjusted EBITDA

Nine Months Ended March 31, 2018

GAAP-based net income, attributable to OpenText

$

180,501

Add:

Provision for (recovery of) income taxes

100,644

Interest and other related expense, net

101,914

Amortization of acquired technology-based intangible assets

138,391

Amortization of acquired customer-based intangible assets

136,819

Depreciation

64,042

Share-based compensation

20,473

Special charges (recoveries)

21,390

Other (income) expense, net

(26,911)

Adjusted EBITDA

$

737,263

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