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Open Text Corporation (NASDAQ:OTEX)

Morgan Stanley Technology, Media & Telecom Conference \

February 26, 2013 6:15 p.m. ET

Executives

Mark Barrenechea – President and CEO

Analysts

Ed Liu - Morgan Stanley

Ed Liu - Morgan Stanley

Yep. Okay, great. Welcome everyone. I am Ed Liu from Morgan Stanley. With us here today we’ve got Mark Barrenechea, the CEO of Open Text. We’ll have a Q&A format and towards the end we’ll open it up to questions to the audience. So I’ll kick it off here. Mark, you’ve been on the job as a CEO for a year now. Can you update us on the changes you’ve made in the executive team, sales managements and field organization over the past year?

Mark Barrenechea

Sure. Thanks for the question. Welcome everyone. I’ll just kick off by asking folks to go through our investor section on our website to look at our safe harbor statement.

Thanks for the question. If I look back over the last year, we put in place a lot of change in the business, lot of positive change. We’ve onboarded new CEO over the last year. We’ve expanded our selling capacity of our sales force by 20%. We introduced a new strategy in the market that we call enterprise information management, it’s giving us a wider deeper discussion in the global 10,000. We were in the cloud business a year ago, we are today with an acquisition of EasyLink, and I onboarded eight executives into the business, all towards the eye of going after what we see to be close to a $20 billion opportunity in structured information. We’ve done that while getting more efficient to the business.

We run a very efficient business, that efficient business only got more efficient over the last 12 months where we've grown our adjusted operating margin from 25 points to 32 points. We’ve grown cash flows quarter over quarter. So those are some of the changes that we put in place over the last year all towards going to capture this opportunity that we call enterprise information management.

Ed Liu - Morgan Stanley

So let’s touch on this EIM positioning of Open Text. Can you talk about some of the specific sub-markets that you’re most focused on and some of the growth dynamics within those markets?

Mark Barrenechea

Yeah, when we look at we're targeting the global 10000 enterprise businesses and the best way to think of enterprise information management is ERP focuses on automating transactions for structured information. That’s roughly 20% of companies of an enterprise information. The other 80% is unstructured and that’s where we’re focused. We’re focused on find, discovering, analyzing, migrating, bringing into managed platforms that unstructured information and on top of that building applications – building more and more apps on top of our platform, standalone apps and apps integrated into the ERP. We divide that into what we call a five-pillar strategy, enterprise content management growing roughly about 7% a year through this process management, customer experience management, information exchange and discovery. All right, so those five pillars have roughly an aggregate CAGR of 10% over the next five years. We think those five pillars make up the majority of open (ph) enterprise information management.

Ed Liu - Morgan Stanley

Great. You talked about EasyLink and your move into the cloud. Can you talk about the opportunities in cloud based applications and where is Open Text heading as it relates to cloud?

Mark Barrenechea

Yeah, well our vision is that the world is a hybrid world. It’s neither all on-premise, it’s neither all on the cloud but rather customers are looking to deploy their capability in kind of the right environment. We call that a hybrid world, some things will live on premise, some things will live in the cloud. All our software in the coming years, let’s call, the next two years will be obviously continued to be on-premise but also be offered in the cloud, all our software will be offered in both environments. EasyLink, when we typically make an acquisition, we usually model the target down 10% to 30%. With EasyLink we do the integration interruption. We did not do that with EasyLink, we model our business flat for the first year, and we saw enough demand – where if there was any integration risk, there was enough demand to kind of build that. And in fact, our first quarter, we had a very fine first-quarter, in the second-quarter we grew EasyLink quarter over quarter.

Roughly of over 20,000 customers we just introduced two new services, capture and archive. We’ll soon introduce secure e-mail into the cloud, and our vision is to have any to any communication, secure communication for all the important data types, whether CDI, SMS, broadcast voice, fax and now capture and soon security.

Ed Liu - Morgan Stanley

So you hit on some of these -- your vision, maybe if you step back, how is Open Text addressing the key customer paying points, what are those paying points?

Mark Barrenechea

Yeah, well, I would say they’re sort of clustered around three big areas for enterprise information management. The first is governance compliance risk management, whether it be companies all in Basel requirements, Sarbanes-Oxley requirements, drawing internal procedures, approval authority, audit readiness, governance compliance risk management is sort of one of the big buying considerations. Second would be efficiency and productivity of a business process where the structured side of a transaction may be automated, let’s go look at an unstructured side, there are lot of HR processes where employee may be row in a database but there can be hundreds of millions of unstructured data that needs to be managed secured, searched, correlated to increase productivity and efficiency of a corporate process.

I’d say the third area is probably around growing revenues. So these are kind of the three buying demands we’re trying to center on which is governance compliance and risk management, let’s go secure the business. Second is productivity efficiency, let’s go arm the business, and in those processes for structured information that we can grow, let’s go grow the business.

Ed Liu - Morgan Stanley

So round those key areas of focus on the product side, what are the key areas of innovation that you are focused on?

Mark Barrenechea

Yeah, well historically we have been regarded as the consolidator, a very good consolidator in our space. And we’re transitioning into innovation and in November at enterprise world, our annual customer event we unveiled about a dozen products and the things that we look at as growth drivers coming into calendar ’13, our maybe the top two or three by pillar, we’re certainly looking at kind of refreshing the install base with content server 10 service pack two, CS10 SP2. We have a new cloud version of that called temple box, and we introduced Open Text Archive. We step in our archive product, we’re now all integrated into one. So whether you're looking to archive, exchange sharepoint, SAP file systems, Gmail or Microsoft 365 Office, those are all integrated into one product. So three big innovations from us on the ECM side, BPM.

We introduced a new set of applications that we call Open Text Assure. These are information oriented applications that talk that run standalone, talk to SAP, or talk to Oracle. On the CEM pillar, we introduced our latest media manager product digital asset management helping organizations to continue to digitize, monetize other assets, new to both social as well as we’re about to bring to market WAM 8.5 all in HTML 5 which is our next generation Oracle product. We introduced archive capture in the cloud and it’s a info fusion with GS. So there is a pretty good lineup for us last year that we announced at enterprise world, as we transition from a consolidator to an innovator.

Ed Liu - Morgan Stanley

To talk about info fusion, what’s the early reception been to that initiative?

Mark Barrenechea

Very, very positive. The part of unstructured information that lives in a lot of places, in a lot of format. When you have – when you think of ERP you have a single language to speak called SQL. And regardless of whether you’re SAP app, an Oracle app, info app, whatever, you speak one language called SQL. In the unstructured world, you speak many languages and InfoFusion interconnects to those repository, creates an information access platform for some of us old timers that are aware, that can talk to a lot of repository, get single sign-on access, search, ability to move content between those repositories. We’re solving an important need of creating information architecture and platform against across disparate information systems. So initial interests have been very positive.

Ed Liu - Morgan Stanley

Maybe shift gears a little bit, in the history of Open Text there has been a series of acquisitions that have been successful, successfully integrated to help grow the business. What is -- one year into the job, what is the strategy going forward as it relates to M&A and acquisitions?

Mark Barrenechea

And good question, that remains a priority for the business. We've had incredible discipline of being a thematic buyer of looking at companies to come into the Open Text family around the theme of unstructured information. We’ve been disciplined in how we do it, disciplined in our theme and we've been disciplined on onboarding those acquisitions to our operating model within a year. And that created a very successful track record of M&A as a consolidator. We will continue to acquire. I look at our business model of having an incredible financial foundation, what I said day one into the business was we are going to protect our operating margins, we’re going to get more efficient, we’re going to free up investment to go grow the sales force and go grow organic license and expand our share through M&A. We’re looking within our five pillars, not looking at 6 or 7 pillars. We’re a disciplined buyer, we’re value oriented and we look on board any acquisition to our target model in the first year.

Ed Liu - Morgan Stanley

That’s helpful. What about new geographies, where else are you looking to expand tele sales specific organization (ph).

Mark Barrenechea

Sure, we’re still a relatively young company when it comes to distribution, and we have our direct sales organization, we are building a new tele sales organization, AK inside sale. We have our strategic partnerships like SAP. We have our volume partnerships, and we have system implementers, let’s just call that the broad multi-channel distribution network building. On the direct side, I think of our emerging markets that we've been hiring into emerging EMEA with for us is Poland, Czech Republic, Russia, Turkey, Middle East, South Africa, emerging EMEA. We’ve just up Latin America on as a fourth GO for us. We’ve brought on-board a great leader for Latin America based out of Brazil (inaudible). He comes to us from – he is ex-Microsoft employee. If you think of APJ five, six years ago it was low single-digit contributor to our business, last quarter it was 11% APJ. So we see as much as opportunity in Latin America as we do in APJ. So we have just aboard a great leader, we’re looking at Brazil, Mexico, Argentina, Peru and Chile.

And in APJ, ANZ remains a focus for us, Japan we’ve got some scale there with EasyLink, India, Southeast Asia and we’re starting to investigate what China will look for us over time.

Ed Liu - Morgan Stanley

And then you touched on some of your distribution relationship and partnership. Can you give us an update on the SAP relationship which you mentioned?

Mark Barrenechea

SAP today is stronger than it was a year ago. They are a strategic partner. And I can't see an edge – I can’t see a boundary yet to the relationship. That’s a beautiful thing. We go to market around a dozen products. There is more products we can go to market with. We recently announced that we will be supporting Hana as a platform for our products. I still can’t see an edge, a limit to what we can do on the product side. We’re roughly 10% penetrated into their install base. We have a long way – we have been at this for six years and we’re 10% penetrated, so there’s more room to deploy jointly with customers. And third, geographically there are a whole continent we’re not focused on together. So it’s a great relationship, it’s stronger today than it was a year ago. I think it’s a model of how to build a technology partnership with joint account planning, joint commission and a killer product between the structured and unstructured.

Ed Liu - Morgan Stanley

And then I guess touching on, (inaudible) in just a minute, a couple more questions there. In terms of some of these bigger players, in terms of the landscape can you give a view as to the competitive landscape and how you see that evolving?

Mark Barrenechea

Sure, thanks. Our strategy to be number one or two in each of our five pillars, and compete best of breed on each of those categories. Second, have key integration across those dollars like Capture or Archive. And when we’re number one or two in each of the five pillars, we’re the top two in ECM, top two in information exchange today. So we are top two, two out of five, we’re not going to rest till we’re number one or two in each of the five pillars. And then key integrations across by capture to archive. That will create some real barriers competitively. And if I look pillar by pillar I’d say competitively -- the competitive environment is trending positive for us. If I look at autonomy and candidly the chaos over there that’s a positive for us. We look at information exchange, we have a fair amount of momentum in that customer experience management. We primarily see Adobe in that space and they tend to be trailing more towards the CMO versus CIO, look at business process management, we have a new set of applications, only two years old in that segment. And in the top five, we have a new release of software and then in ECM, we have one of the most comprehensive strategies around huge cases, and of course the competition there is IBM, Microsoft and EMC. So if anything I’d say competitively it’s trending positive for us.

Ed Liu - Morgan Stanley

Okay. Why don’t we go ahead and open up the audience for the questions?

Question-and-Answer Session

Unidentified Analyst

(inaudible) quite strong, can you kind of get into that the details of what you did, also in light of the fact that you’ve brought on a company and yet almost held costs flat year over year. Can we expect those cost levels to hold steady or the stuff that you need to do to add, you’ve talked about sales of 20% (inaudible)?

Mark Barrenechea

Well, the organization responded very well to a lot of our -- we went from – go back in April we went from geographic model to consolidated functional models, and some of the costs associated with that sort of flowed through the business at this point and the companies responded well with a lot of our efficiency gains. At the end of the day I'm quite happy with where the margin profile is. We’re not looking to expand the margin profile. Now mind you our target range in an annual range, in any given quarters it will fluctuate but the range is an annual range. So we believe that the way to unlock the value of the company to grow license organically hold our margin profile steady, though it’s slightly up for the year. But I would say that transition from the geographic to functional model has freed up some costs.

Unidentified Analyst

(Questions Inaudible)

Mark Barrenechea

We had some redundant functions than maybe in CS, PS and when we consolidated down to one CS or PS organization, we would have freed up some costs.

Unidentified Analyst

So Gartner or third party are saying that the markets that you’re focused on are probably the growth markets, I think you did a great job in terms of reporting on the cost side, last quarter it seems to be organic license (inaudible) somewhat disappointing and it seems like a) who you think you’re losing share to right now, and then b) how do you reverse it?

Mark Barrenechea

So fair enough. I am not happy with – nor is the organization satisfied with our license performance in Q1 and Q2 and each of them have their own sort of particular narrative. When I look at the second half of our fiscal year our Q3 and Q4 we’re expecting to grow organically second half of fiscal ‘13 over second half fiscal ’12. You are right your reasons, one, we've expanded the sales force by 20%. We have a pipeline that is stronger and has grown. We have new products that we've introduced. We went through some of that earlier and we have a lot less change in the organization, go positive change. So that kind of gives us the confidence of looking second half ‘13 over second half ’12 that we would – that we expect to grow organic license. Last quarter license were roughly 76 million, we had good performance in EMEA, good performance in APJ. We had a good book of business in the Americas albeit we had some deals that pushed that we weren’t able to close on the fiscal cliff if you will.

Unidentified Analyst

If I remember correctly in your models, at least North America was going to be on a year-over-year basis – Asia Pacific is relatively strong, North America (inaudible).

Mark Barrenechea

That’s we’re emphasizing that, that EMEA did fine for license, APJ did fine for license and though with one business in the government and one business in the industries that were affected by the cliff, we had some deals that pushed. But when we look second half over second half we’re looking for organic license growth second half over second half.

Unidentified Analyst

I realized mostly the ballpark coming in the first half was U.S. down relative to (inaudible)

Mark Barrenechea

I don’t have the U.S. numbers. I am sorry.

Unidentified Analyst

Could you just elaborate a little bit on – is Mr. Jenkins listed as the chief strategy officer, as the Chairman of the board, is that correct? I am just trying to get a feel for – I was in the Army for a long time. So I am just wondering who is setting the strategy then, you’re the CEO, so who is the high in commander kind of – I am just

Mark Barrenechea

I am going to avoid the Alec moment. Let’s just start there. Tom is chairman of the board and chief strategy officer, and he is a fantastic partner in the business. Tom has been in this industry for 20 years, he is wicked smart and as CEO one of my number-one responsibilities to leverage all the talent around me to advance the business. So Tom is a fantastic asset for Open Text. And he has a key contributor strategy, no one individual on strategy, right. The Board contributes, Tom contributes, the executive team contributes, we get inputs from customers, partners and Tom is just a fantastic contributor to the business. So you are correct on his title and his role.

Unidentified Analyst

(Questions Inaudible)

Mark Barrenechea

Roughly 10%.

Unidentified Analyst

Just a quick question, how do you guys see a like the newcomers, like Box.Net, Alfresco from a competitive standpoint?

Mark Barrenechea

I will take them individually and then add one to it as well. I look at FreshCo what I hear is a good open source, yes, they are one of the open source providers, one, it’s a open source solution, two, I hear it’s more departmental, it’s really ECM-ish, and it doesn’t scale. I hear it repeatedly it doesn’t scale. So if you are interested in sort of texting the orders, right, it may be a fine place to start but you don’t want to grow up to be it and it doesn’t scale.

In terms of Box, there is – it’s like the box board, I mean I have seen dozens of box pop up around having a box provider and there is lot of attention there. I think it’s a wrong focus. What’s much more interesting is it builds your platform, right because we’re focused on the global 10,000, we’re focused on building app on top of ECM, and integrating it deeply into ERP. And we have a mid-market solution that’s fast into the cloud, the U.S. is really fascinated with it but you’re not going to take German data from borders and sort of use this type of solution. What’s much more interesting is the social platform, just like we did with Portal five or six years ago, and went out into read platform enterprises, have different relationship with enterprise software, we’re doing the same with social. Social is a platform, it’s a new way to interface and to enterprise software. We are seeing calls to our help desk decline to a zero and when a new employee comes onboard post the status and message internally and it cordially helps them, communities want cross-border, and it's a new way to get the content as they collaborate. So on FreshCo, open source doesn’t scale, box, mid-market U.S. centric, I think social is a much more interesting platform.

Unidentified Analyst

Can you talk about how you realigned the sales force, I think it used to be like by product, now it’s more sales people can sell those products, is that right? Can you just get into the detail?

Mark Barrenechea

Yeah, there is just some basic philosophy and only so many ways to organize, you can either organize by product or organize by account. And we chose to organize by account and we were first geographically oriented and our geographic leaders had a lot of functions reporting into them, as CS, PS, field marketing, license, operation in their respective geography. We moved to a functional model where we have CS organization, one PS organization, one marketing organization and one license sales force. Concurrently with that transition to that sort of functional alignment we went from a product model to an account model. Global 10,000, I am an AE account executive, which accounts do I have?

Now what I expect from our AE is that they are going to know their accounts, and they are going to know something in our product at least one of the pillars, like ECM. They’re going to know two of the pillars, fantastic. Behind them is a set of specialty teams to help them advance an opportunity where they may not know the domain. So we have a BPM specialty sales force, ECM specialty sales force, that will help partner with that AE. That transition is complete. We've also expanded the quota carrying sales force by 20%, we completed that in December and we are more in the narrative of execution and introducing new products during calendar ’13.

Unidentified Analyst

That might be some of the reasons for the license weakness in the last two quarters through realignment.

Mark Barrenechea

Yeah, as CEO I get like (inaudible) big firm right? I get externalities or I get execution. It’s execution. And in change management it’s execution. Change though positive, it’s execution. So our softness in license in the first half is all execution. Even though change is positive, it’s no change.

Ed Liu - Morgan Stanley

I think we have time for one more question. All right, well thank you Mark.

Mark Barrenechea

Thank you.

Ed Liu - Morgan Stanley

Thanks everyone for coming.

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