Open Text Corporation
Q4 2016 Earnings Call Transcript

Published: 28 Jul 2016

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Fourth Quarter and Fiscal Year 2016 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would like to turn the conference over to Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

[Greg Secord:]

Thank you, operator, and good afternoon, everyone. I'd like to welcome you to today's call. With me today is OpenText's, CEO and CTO, Mark J. Barrenechea; our CFO, John Doolittle and our President, Steve Murphy. As with our previous calls, we'll read prepared remarks followed by a question-and-answer session. The call will last approximately an hour with a replay available shortly thereafter. I'd like to take a moment and direct investors to the Investor Relations section of our website, where we posted PowerPoints that will be referred to during the call, including our quarterly supplemental update on the financial results and an update to the strategy presentation from our May 12 Investor Day. I encourage all of our investors to download both presentations. As with previous quarters, we have updated a summary table, highlighting OpenText's historical trended financial metrics, both PowerPoints and our trended financial spreadsheet are downloadable from the front page of our IR section of our website. And with that, I'll proceed to the reading of our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or a projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such conclusion while making a forecast or projection, as reflected in the forward looking information. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion while making a forecast or projection as reflected in the forward-looking information, as well as the risk factors that may project the future performance results of OpenText are contained in OpenText's Forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, each of which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call will include a discussion of certain non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release and Investor materials which may be found on our website. And with that, I'll hand the call over to John.

[John Marshall Doolittle:]

Okay, Greg. Thank you very much. Welcome to the call everyone and apologies we were a couple of minutes late. We were having some phone difficulties here in Toronto. Let's go through the numbers. My references will all be in millions of U.S. dollars unless indicated otherwise. Total revenue for the quarter remained stable at $484 million compared to $483 million for the same period last year. For fiscal 2016, total revenue was $1.824 billion, down 1% compared to $1.852 billion for 2015 and up 3% on a constant currency basis. Recurring revenue for the quarter was $398 million, up 3% compared to $386 million for the same period of last year. For fiscal 2016, recurring revenue was $1.541 billion, down 1% compared to $1.558 billion for 2015 and up 3% on a constant currency basis. Next, the impact of foreign exchange. Foreign exchange did not have a material impact on our revenues or adjusted EPS during the quarter. However, for the full-year 2016, our revenues were negatively impacted by $80 million compared to fiscal 2015, and adjusted EPS was negatively impacted by $0.12. The negative effect of $80 million by revenue type is broken down as follows

[Stephen Murphy:]

Hey, thanks, John. So let me get into my intro. It's been seven months since I joined OpenText and I'm pleased to say that the organization is exactly what I'd expected. We're a business with a world-class product offering and a high integrity group of folks. We're passionate about making our customers extremely successful. I was brought in to focus on driving efficient operations and to help grow our revenue, while improving margin and cash flow. There is opportunity of balanced cost discipline with driving sustainable organic growth initiatives. My mission hasn't changed. I'm pleased with our progress. Let me talk a little bit about Q4 and our fiscal year overview. I'd like to take a quick look at the quarter performance. We had a strong Q4 for our customer support and cloud businesses. MCV is showing improvement and we see growth in the cloud in both North America and Europe, where large deals are becoming more prevalent. We've achieved stability in the field with key leaders in place across the board. This includes senior leaders in place for professional services, customer support, license sales and cloud. We have a structure and a leadership team that is stable and scaling well. At a time when the software industry is changing rapidly and we are acquisitive, this stability is of great value. Let me share some quick stats for the quarter. We had 10 on-premise license deals greater than $1 million. The geographic split of total revenue was Americas 58%, EMEA 33% and Asia Pac 9%. On-premise customer successes in the quarter include Nevada State Controller's Office, Schwan Cosmetics, Kamehameha Schools, eMeter Corporation, APA Group, State of Iowa, KUKA Manufacturing. In terms of industry breakdown, financial, services, technology, and public sector industries saw the most demand. Let me give you some quick cloud stats. Q4 cloud revenue was up 5% year-over-year in constant currency and we had 10 new MCV cloud deals greater than $1 million, cloud customer successes in the quarter include Red Hat and s.Oliver. We added 38 new managed service customers in Q4, which brings our total managed service customers to 955. We had 20% MCV growth from $56 million to $67 million compared to the same quarter last year. An average deal size for MCV increased 42% to $587,000 compared to $413,000 last year. Financials, services, technology and consumer goods saw the most demand for cloud. Let me give you some quick annual stats. On an annual basis, we grew MCV bookings by 6% over fiscal 2015, reflecting continued strength in our business network and enterprise businesses. Our average MCV deal size was up for the year by 8% as we see the strategic nature of our deployments driving increase in both the size and the scope of cloud transactions. Let me talk a little bit about some specific customer wins. In the cloud for starters, Red Hat. Red Hat has selected OpenText B2B Managed Services to support its growth initiatives and provide a best-in-class experience for its customers. Red Hat and OpenText will expand the existing B2B program around the globe as well as implement additional transactions in support of the order to cash cycle. Next State of Iowa. State of Iowa is creating a digital platform as a service, or PaaS, to support its internal customers. The initial project is to implement OpenText Enterprise Content Management, ECM, for their department of administrative services, integrated with their ERP system. The goal here is to extend ECM (18

[Mark J. Barrenechea:]

Hey, Steve, thanks for the great update. Really appreciate it. There are two topics I'd like to cover today. First, a review of our fiscal 2016 highlights, and second, an outline of our key objectives for fiscal 2017 and the year ahead. Fiscal 2016 was the most extraordinary and foundational year for OpenText. In constant currency, we grew revenues 3% to $1.9 billion, expanded adjusted operating margin by 240 basis points to 33.3%, and delivered $447 million in adjusted operating income, up 5% year-over-year. These results are all-time highs for OpenText. When I joined the company four-and-a-half years ago, our adjusted margins were 27%. Improving our margin performance by over 600 basis points is a fundamental reset in our performance, allowing us to input acquired and organic revenues into a more efficient engine and output, more cash flow. This engine will continue to translate into shareholder value for many years to come. We defined our hybrid strategy as real cloud and recurring revenues, hold constant our license revenues and expand margins. Our hybrid strategy is working. In constant currency for fiscal 2016, our cloud services business was $620 million and our license business remained relatively constant on an absolute basis as we added more cloud revenues and expanded our margins. We outlined our hybrid model as a strategic goal for the company and have achieved this four years in a row. In fiscal 2013, our license revenues were $273 million; in fiscal 2014, $306 million; in fiscal 2015, $294 million; and in fiscal 2016, $284 million. While over the same period, our cloud revenues have grown from zero to $260 million and our margins have expanded to over 33%. Our hybrid strategy is working and the transformation to this model is complete. In relation to our business and market strategy, at our annual Investor Day in May, we outlined our comprehensive approach to M&A and shareholder value creation. We called it strategy to value creation. M&A is our leading growth driver. We outlined four major elements in May to our business and market strategy. Our EIM market strategy; our M&A focus, number two; third, the OpenText business system; and fourth, creating superior shareholder value. Our EIM market strategy places us in the center of a $40-billion-plus market, a market of transformative value for customers as they move to digital platforms. And EIM attracts more key enterprise customers from all industries and all geographies. It is a market that also affords strong margins and cash flows, as compared to other hardware or software sectors, and there are hundreds of EIM acquisition targets. We made a key decision in fiscal 2016 that M&A will be our leading growth driver, evolved our corporate resources and focus, while leveraging our proven approach from deal sourcing to company integration and reinforcing a returns-oriented mandate. The OpenText business system unlocks value and is differentiated from other business systems given its focus on integration, integrated sales forces, integrated R&D and integrated operations. Integration is the operative word. Within M&A models, OpenText is a platform operator and the OpenText business system is performance-centric. The outcome of these tenants is creating superior value by focusing on our cash flow growth by focusing on our large recurring revenue base and executing to our policy of disciplined capital allocation. You only have to look over the last 100 days in our four announced acquisitions to see the OpenText business system in action. As a basket, we are acquiring approximately $300 million of revenues, while putting $750 million of capital to work. In January, I streamlined and realigned my executive team to enable greater accountability in future scale of OpenText. Muhi Majzoub was promoted to lead our products cloud services and IT; Gordon Davies was promoted to lead both our legal organization and corporate development; John Doolittle was promoted to lead finance, human resources and operations; and Steve Murphy joined us to lead all customer-facing activities. I could not be more proud of my entire executive leadership team. The structure and team is performing and you see that in our results. Let me recap the last 100 days, which have just been extraordinary. The announcement and closing of the customer experience software assets of HP Inc.; the announcement to acquire the CCM Assets of HP Inc., which we will close on very soon; the announcement and closing of ANXe; the announcement and closing of Recommind, our IP reorganization into Canada, Enterprise World 2016 in Nashville, and our plans for OpenText Magellan. And here's the finer point of it all. With Release 16 and our recent acquisitions, we're the only enterprise software provider to complete the business process flow of engagement to insight. Engagement, capture, content, process, collaboration, discover, exchange, and insight. All of the technical capabilities needed to digitize, automate, and manage information-based business and digital processes. OpenText is the only vendor capable of providing such a comprehensive and cohesive digital platform. There was a time in ERP, when there were 1,000 providers at some level of ERP capabilities. Then the market consolidated around Oracle and SAP because they were able to automate the seminal ERP process flow, campaign to cash. The seminal EIM process flow is engagement to insight and only OpenText can automate this. It was a foundational year for the company. On to fiscal 2017, I have never been more excited at the beginning of a fiscal year as I am today. Fiscal 2017 is shaping up to be a year of growth, growth driven by M&A, plus our organic efforts. We'll continue to make acquisitions, expand market share and drive innovation. In our recent acquisition announcements, all combined, we discussed annual revenues between $290 million to $230 million. By annualized, we mean full-year revenues when we own these businesses for a full year. Given the timing of the closures, we are expecting approximately $300 million of acquired revenues in fiscal 2017 along with double-digit growth on all revenue lines. As well, we're expecting double-digit adjusted operating income growth for the fiscal year. Further please note that Q1 will be a partial quarter of acquired revenues. And it's not until Q2 that we expect to have a full quarter of acquired revenues. We expect our revenues and margins to ramp accordingly throughout the year. All around, it's going to be an exciting fiscal 2017. Let me provide a few words on margin. We delivered great margins in fiscal 2016. We are not raising our target models in fiscal 2017, but we expect to be on the high-end of the margin range. Now given the timing of our acquisitions and need to onboard assets to our operating model, we expect to grow into the high-end of the range as our fiscal year progresses. We also expect to continue to make value-based acquisitions in fiscal 2017. We have a strong balance sheet with $1.3 billion in cash, available cash through our credit facilities and a $1 billion shelf prospectus we filed in May, and, of course, our future cash flow. I know our fiscal 2016 operating cash flow was $526 million. On this arithmetic, we have approximately $3 billion of available capital to put to work on the right opportunities. In many ways, our available capital keeps regenerating itself with growing and net new cash flows. Let me also note by way of example, on every $500 million of revenues we acquire, our model suggests we should add $0.70 of adjusted EPS. And this should only get stronger as we get more efficient with automation and scale. The state and outlook for EIM are excellent. As for organic growth, as Steve discussed, we have a strong product lineup for fiscal 2017. Release 16 is our flagship solution featuring Cloud 16 and Sweet 16 packages for cloud-based and on-premise customers, respectively; our field organization of partner network; our engaging customers for upgrades and upsells. There have been thousands of downloads and hundreds of customers presently working Release 16 since its full launch in late April. And we are on target to deliver Release 16 EP1 in October, which will create new opportunities with large ecosystem partners such as SAP, including SuccessFactors and Hybris, Salesforce.com, Accenture, Deloitte and E&Y. We're also expanding the reach of our keystone Extended ECM solutions by offering a new solution specifically designed for government. As in most major markets, U.S., Canada, Germany, Japan and the UK, there are new laws around electronic information for citizens and public policy. We hope to capture that opportunity through EP1 and the release of Extended ECM for government built on OpenText Release 16. Managed services remain a top priority and growth initiative for us in fiscal 2017. And by the end of Q1, we will have overall 1,100 customers who have outsourced their processes, data, or people to the OpenText Cloud. We added 38 new customers in Q4, including Allstate, ExxonMobil, Lloyds Bank, and Red Hat, and more. Recommind brings over 130 new managed service customers, and Recommind recently closed two impressive multi-year, multi-dollar MCV transactions. First, with a large auto customer involved with a multinational investigation and litigation; and, second, with a large multi-national bank using Perceptive Analytics for derivative contracts, extraction and analysis. But customer response to OpenText Magellan, our next-generation analytics offering, is extremely promising. Magellan is directly targeted at the IBM Watson market and will be deeply integrated with our voice, data, image, natural language and semantic processing, text mining and numeric engines. We'll also incorporate Apache Spark as an open algorithmic engine. This will make available thousands of algorithms, an open language to create new algorithms and empower our customers to unlock the value of their enterprise information. Magellan will be another key differentiator for OpenText and we expect it to be available in the second half of 2017. In many ways, Magellan is the promise of EIM. Centralize joint structure data, secure it, govern it, build apps with Release 16, automate it completely from engagement to insight, then unlock the value through Magellan. Our performance in 2016 and our plans for 2017 each reinforce our 2020 aspirations. 90% or greater recurring revenues, 50% of our business in the cloud and adjusted operating margins between 34% and 38%. Each year we progress towards these aspirations. I'm often asked how we'll get to 50% cloud revenues by 2020 and my answer is simple

[Operator:]

We will now begin the question-and-answer session. The first question today is from Paul Steep of Scotia Capital. Please go ahead.

[Paul Steep:]

Great, thanks. Mark, maybe you could talk just a little bit about analytics and what you've seen over the past year and where you're at now in terms of the number of deals that have analytics into them and the uptake within the base. And maybe that is a prerequisite to Magellan or not a prerequisite.

[Mark J. Barrenechea:]

Sure. Let me just start with – we're obviously very pleased with our Actuate acquisition. And it met its business plan for fiscal 2016. It onboarded extremely well and we met our financial goals for the year. One of its key differentiators is its embeddability. We won some fantastic business throughout the year. And you also saw how quickly we were able to integrate Actuate into Release 16, which we presented at Enterprise World in November and presented it again just a couple of weeks ago in Nashville. So embeddability is really key for us. And look, it's going to be a key differentiator and one of the catalysts for Release 16. On the basis of that, the next version of Actuate will keep all its embeddability, its reporting, its visualization. But by opening it up to Apache Spark and open algorithms as well as bringing together all our other engines into this platform, we think it will be another key differentiator for us.

[Paul Steep:]

Great, that helps. One final one to clarify is Cloud 16. Can you maybe talk a little bit about what you've seen in terms of the base and migration and the willingness of clients to shift over there? Thanks.

[Mark J. Barrenechea:]

Yeah, I would maybe say two things and look for comments from Steve as well. I'd say, firstly, we have great new capability. In the U.S., our new Healthcare Direct protocol, we're seeing an uptick in interest because of that new protocol. MCV – excuse me, Managed Services is just so pivotal for us. We have our VAN. We have our on-demand messaging network. These are transactional networks. They're important. But on top of that is vertical apps like ANX, Healthcare Direct, but Managed Services. And by the end of this quarter, we'll have over 1,100 customers again who have outsourced their environments to OpenText. And 1,100 enterprise customers, marquee customers, that's getting some real critical mass to it. Steve, I don't know if there's anything you'd like to add to that.

[Stephen Murphy:]

I would just add that at this point we have hundreds of customers that are either live or going live on Release 16.

[Paul Steep:]

Great. Thanks, guys.

[John Marshall Doolittle:]

Thanks, Paul.

[Mark J. Barrenechea:]

Yeah, thanks, Paul.

[Operator:]

The next question is from Steven Li of Raymond James. Please go ahead.

[Steven Li:]

Thank you. And just a couple of questions for me. John, I thought with the exit from Luxembourg, your adjusted tax rate was going up. How are you bringing it back down and are there any cash outflow implications as you consolidate your IP into Canada?

[John Marshall Doolittle:]

Yeah, thanks, Steven. There are nominal cash outflows as we consolidate, so it's a very small amount of cash outflow. And as I mentioned in my remarks, we're bringing the IP back into Canada at fair market value with a tax base that's equal to fair market value. And that's essentially the way we're going to lower our tax rate to 15%.

[Steven Li:]

Okay. And Mark, maybe a couple of questions for you on the macro. In Europe, was there any impact from Brexit on deal closures at the end of the quarter? And do you expect any impact in Q1?

[Mark J. Barrenechea:]

Yeah. Steve, thanks for the question. The answer is very simple. We had little to no effect on Brexit. It's less than 5% of our revenues. UK is less than 5% of our revenues. We moved our operations, our EMEA ops out of the UK into Germany a few years ago and we just haven't seen any effect. And we think in a lot of ways, it's either going to be neutral to us. It actually might be a slight positive because people need to buy more software for governance. So the net effect to us are going to be neutral to maybe slightly positive. Now, a more global statement as we look into 2017 is FX volatility is going to remain out there, for sure. You do have the Brexit. For us, we see it again to be neutral to maybe a slight benefit. Who knows where the U.S. election is going to go. You continue to have some Russian risk, I think, and some risk around terrorism, kind of all in in global risk. It remains a volatile world. And we've taken our strategy with M&A to be able to grow our business both from M&A as well as organic growth. And I think we're in a pretty good position if global risk increases.

[Steven Li:]

Great. And the last one for me, Mark. The license revenues was quite weak in the Americas for Q4. Was there a specific region and any changes you've made? Thanks.

[Mark J. Barrenechea:]

Steve, any comments on that?

[Stephen Murphy:]

Yeah, so we have made some leadership changes. And we've got a new head of license sales for North America. (43

[Steven Li:]

Okay. Thanks, guys.

[Stephen Murphy:]

You bet.

[Operator:]

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

[Paul Treiber:]

Thanks very much. I was just hoping, could you comment and perhaps clarify some of the growth or the growth rates of MCV in 2016? I think you mentioned it was 6%. It does look like it was below the target that you gave out last year. Are those two numbers the right numbers to compare like from the apples-to-apples point of view? And then how should we think about the variance between the two?

[Mark J. Barrenechea:]

So we ended the year at $211 million for MCV. And John, what's the growth rate for the year? I can't find it quickly year-over-year.

[John Marshall Doolittle:]

5%.

[Mark J. Barrenechea:]

Yeah, 5%. So $211 million is the right number. And we're expecting much stronger growth in fiscal 2017. And you are correct, we put out a larger target for us in MCV. And it was our first year in doing that. And there were some uncertainty in that. And yes, you're correct, we missed the number though we still grew year-over-year. And I'd expect it to grow faster as we get into 2017. At the same time, our hybrid strategy is we're allowing customers to kind of choose where they want to place the workload. So we're sort of agnostic as to what revenue line a customer workload falls on. And our goal is to, as we increase those recurring revenues, to expand our margin as we did. So yes, we came in under our aspirations for 2016 on MCV. The number was $211 million and I'd expect it to grow faster in 2017.

[Paul Treiber:]

Thank you for explaining that. How should we think about your bullishness for 2017? What are the signs that you're seeing that lead you to be bullish? And then maybe could you just elaborate on the reasons for the shortfall in 2016. Is it product-related timing? Anything would be helpful there.

[Mark J. Barrenechea:]

Yeah. So I go back to we're going to see approximately $300 million of revenues onboarded from acquisitions. And when we look at our product roadmap of Release 16, the default product fully shipping, EP1 opening up new ecosystem partners and Magellan in the second half of the year; the product lineup keeps getting stronger. And we expect to continue to make acquisitions in 2017. And when I look at the shortfall in Q4, really what's top of mind is a few pennies though they're important in Q4, which was primarily the EPS missed related to professional services, which I believe we have under control for Q1.

[Paul Treiber:]

Okay. Just lastly, just looking at the target model for 2017, the margin model; you mentioned that acquisitions would take time to ramp up to your margin model. How do we think about organic investments in 2017?

[Mark J. Barrenechea:]

Well, I'll start on the product side and Stephen can talk about the field side. The organic investments again are – we are accelerating our capabilities through an enhancement pack series as, quite candidly, our competitors falter a bit in the marketplace. So EP1 is a very important release for us to support sales force, to support success factors, open up government opportunities for new regulations. And EP2 will support Magellan. So that's a pretty good investment for us as we accelerate those enhancement packs, accelerate those capabilities as our competitors falter a bit in the market. Steve, do you want to talk about some of the field investments for a minute?

[Stephen Murphy:]

Yeah. So we discuss organic growth in the low single digits. And we have staffed up with account executives, salespeople and the solution consultants, field engineers that support them to the point where as of now, early in the year, we are fully staffed to meet what we've guided to, which is organic growth in the low single digits. And that's been a concerted and steady effort over the last six or seven months as far as bringing in high-quality salespeople and making sure that we retain our high-quality salespeople. We've also invested in top executive talent. And at this point, all of our senior leadership positions in the field are filled with experienced people who know what they're doing.

[Paul Treiber:]

All right, thank you. I'll pass the line.

[John Marshall Doolittle:]

Sure.

[Operator:]

The next question is from Stephanie Price of CIBC World Markets. Please go ahead.

[Stephanie Price:]

Good evening.

[John Marshall Doolittle:]

Hi, Stephanie.

[Mark J. Barrenechea:]

Hi, Stephanie.

[Stephanie Price:]

So you touched on the competitive landscape in an earlier question. Could you just walk through what you're seeing there and where OpenText is gaining traction?

[Mark J. Barrenechea:]

Yeah, sure thing. So look, there was a critical mass moment in ERP when the market really considered just a handful of providers because they could – this is software and service. You're here to automate. And a handful of ERP providers was able to automate campaign to cash. And the market rallied around that because they could fully automate a seminal process. Engagement to insight is that process for EIM. And I think as we bring onboard Recommind, as we bring onboard the HP Inc. assets and add Magellan. There I can't see another company in the marketplace that can provide this flow. I ultimately believe that our ultimate competition is IBM. From IBM Watson – from Watson to FileNet, Sterling Commerce, their Tivoli for business process management. So when we look at the point providers, from the usual suspects of Documentum, Kofax, SharePoint, Box, Adobe, Pegasystems, they're starting to continue to get more and more niched features, while we keep expanding capabilities to engagement insights. The HP Inc., assets really strengthen that engagement piece. That whole box of discovery we filled force with Digest (50

[Stephanie Price:]

Okay, thanks. And then, on Magellan, can you give us an idea of the scope of the offering and what features it's going to focus on?

[Mark J. Barrenechea:]

Yeah. I would point to two large improvements while maintaining our strength around visualization reporting and embeddability. New capability, one, is Apache Spark, opening up the platform to bring in the Spark engine that will allow for ETL, data integration, a recommendation engine, as well as real-time streaming and thousands of open algorithms. IBM Watson is closed. You don't own the IP when you create an algorithm and you're using proprietary tools to do all the AI, machine learning and algorithmic work. By bringing in Spark, it's all going to be open and we'll be able to leverage thousands of algorithms. I'd say the second big capability is we're going to bring together all our existing engines on to the platform. Voice, natural language processing, image processing, and making those engines integrated and available under the actuate engines.

[Stephanie Price:]

Great. Thank you very much.

[Mark J. Barrenechea:]

Thanks, Stephanie.

[John Marshall Doolittle:]

Thanks, Stephanie.

[Operator:]

The next question is from Eyal Ofir of Dundee Capital Markets. Please go ahead.

[Eyal Ofir:]

Thanks for taking my questions. First one is, just can you guys provide us with the contribution or revenue contribution from the acquired assets in the quarter?

[John Marshall Doolittle:]

As I said in my script, I'm not going to give you the exact number. It was nominal both from a revenue point of view and an earnings point of view.

[Eyal Ofir:]

Okay. And in terms of thinking about the integration, Mark, maybe talk a bit more on the strategic side. Obviously, the HP assets is a more of a carve-out. So how do you look at integrating those assets? Are they more complicated to integrate? And how has the first tranche gone so far?

[Mark J. Barrenechea:]

Yeah. So let me go through them one by one. So we have the CEM assets from HP Inc., such as TeamSite, MediaManager, Optimost and a few others. And quite candidly, we like asset deals. It's the ability for us to, to some degree, pick the assets and liabilities that we're interested in. And it's usually the hardest of the work for an acquirer and it's the hardest work because you can unlock the most value. So we actually like these difficult situations because we can unlock the most value. So TeamSite, in particular, is a market leader for engagement, website development, electronic form, the beginning of the whole process. So it's integrated extremely well into the business. And this will be a strong quarter for them. We have not yet closed on the CCM Assets from HP and it's probably the larger and the stronger of the two. But we expect to close on it very, very soon. And once we're – probably at our next Investor Conference or next call, we'll give an update on the CCM Assets. ANXe, strong recurring revenues. They were a partner of ours before the acquisition. And as Steve commented in his script, an incredibly strong team, strong recurring revenues. And then, I think as we noted when we originally announced it, they were at a relatively high EBITDA already. So they're onboarded to our model right away. And so we're quite pleased with that. And Recommind is going to turn out to be just incredibly strategic asset for us. It's a box we haven't been strong in. And it's a very timely acquisition as well. I noted two recent wins. It's now closed. And we'll get it on our operating model. And they were a privately-held business. We'll get them on to our operating model in two quarters to three quarters. But strategically, it's incredible value.

[Eyal Ofir:]

Okay. Great. And before I pass the line, just one more question. On Release 16, have you noticed any difference in the sales cycle? Obviously, it's a potentially bigger ticket sale item and clients could also look at other vertical applications alongside it so...

[Stephen Murphy:]

Yeah, hey. Steve Murphy here. So what we have noticed is that – and I can reflect on a couple of the sales cycles. I was very, very involved with Q4. The deal size increases, and there's a degree of integration across all the different modules. For instance, when we sell ECM, Release 16 has a degree of integration with business process management in something like case management, entity modeling that expands the deal size. And I think that is probably the single biggest difference. And someone asked earlier about the competitive landscape. That's where we're different unlike a Documentum, or another company, this is a narrow focus. We've gotten engagement to insight. And with Release 16, a customer might be in the sales cycle for content management and finally they want to buy something else, because of the degree to which Release 16 integrates all of the capabilities we have.

[Eyal Ofir:]

Okay. So that could also mean that the sales cycle is a bit longer, then, right (56

[Mark J. Barrenechea:]

No, I have not observed that to be the case.

[Eyal Ofir:]

Okay. Okay. That's great. And then, just finally, on the PS, I think – I don't know if it was John or Mark made the comment. I think the margin profile was a bit lower this quarter. And you said you're already on track for fiscal Q1. I just wanted to confirm that that is the case that PS margins are back up.

[Stephen Murphy:]

Yeah. We said that the plan is on track. And a quarter ago, we guided for two quarters to three quarters to get back to our target margin range of 20% and the plan is on track. So we're a quarter into that. Probably another quarter or two quarters to get to our target margin range. Any additional comments?

[John Marshall Doolittle:]

No, I agree with that, Steve.

[Eyal Ofir:]

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

[Stephen Murphy:]

You bet.

[Operator:]

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

[Blair H. Abernethy:]

Yeah. Thank you. Following on the last question, if we can talk a little bit about the sales and marketing margins. If I look at your fiscal 2016 to 2017 model, you've raised the range – the target model range in 2017 versus what you were going in at 2016. What's changing there?

[John Marshall Doolittle:]

You're talking about the sales and marketing in costs, Blair?

[Blair H. Abernethy:]

Yes.

[John Marshall Doolittle:]

Yeah. I think Steve hit the nail on the head when he said that he's built up the sales team over the last couple of quarters. And whereas we entered 2016 with a smaller sales force, we built up the sales force heading into fiscal 2017 and it's reflected in the sales and marketing margin.

[Blair H. Abernethy:]

Okay. Okay. And just on the Recommind acquisition, where will you be allocating revenue? What revenue line should we expect to be impacted by the Recommind? And if you can do the same for the – even though the second tranche of the HP assets hasn't closed, just wondering what's going into – what I would term as on-premise versus what's going into cloud?

[John Marshall Doolittle:]

Yes. So, on Recommind it will be cloud and on the HP deals, I think it will be reflective of our...

[Mark J. Barrenechea:]

It's sort of a normal mix. Yeah, it's sort of a normal distribution.

[John Marshall Doolittle:]

Yeah.

[Mark J. Barrenechea:]

And Recommind will be majorly cloud.

[John Marshall Doolittle:]

Yeah.

[Blair H. Abernethy:]

Okay. Great. Thanks, guys.

[John Marshall Doolittle:]

Yeah. Thanks, Blair.

[Operator:]

This concludes the time allocated for questions on today's call. I would like to turn it back over to Mr. Barrenechea for closing remarks.

[Mark J. Barrenechea:]

Very good. Thank you and thank you for joining us today. Just a summary of our key messages. Fiscal 2017 will be a year led by M&A growth. We expect approximately $300 million in revenue growth from these acquisitions. All revenue lines should grow double-digit as well as double-digit adjusted operating income growth and as well as the benefits of our recentralization of IP back into Canada. With that, I'd like to thank you for your time and I couldn't be more excited about fiscal 2017. Thank you for the call.

[John Marshall Doolittle:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.