Open Text Corporation (OTEX) Q4 2015 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Fourth Quarter and Fiscal Year 2015 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. At this time, I would like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead.

Thank you, Brad and good afternoon everybody. I would like to welcome you to today's call and with me is OpenText's President and CEO, Mark J. Barrenechea as well as our Chief Financial Officer, John Doolittle. As with our previous calls we will read prepared remarks followed by a question-and-answer session. The call will last approximately one hour with a replay available shortly thereafter. I would like to take a moment to direct our Investors to the Investor Relations section of our website where we posted two PowerPoints that will be referred to during today's call. First is our standard quarterly supplemental update on the financial results and the second PowerPoint is the new strategic overview presentation highlighting our leadership position in the EIM marketplace with supporting stats on both our historical performance and cloud transition initiatives. I encourage all of our investors to download both presentations. As in previous quarters we have updated a summary table highlighting OpenText's historical trends and financial metrics. Some of these metrics have been expanded to include additional detail on our cloud business under the tab Trended Financials. As a reminder both PowerPoints and our trended financial spreadsheets are downloadable from the front page of our IR section of our website. And with that I will 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 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 Form 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, which may be found on our website. And with that, I will hand the call over to John.

Okay Greg, thank you very much. Welcome to the call everybody, thank you for joining. I will start out with a comment I am very pleased with our bottom line and cash performance in the quarter and for the fiscal year. Adjusted operating income was up 14% year-over-year, 19% on a constant currency basis, and operating cash flow was 523 million up 25% year-over-year. Turning to the financial results, I will discuss our fourth quarter fiscal year 2015 and then provide an update on our tax situation. Let me start with an overview of the impact of foreign exchange. In the fourth quarter compared to the same period last year, our revenues were negatively impacted by 45 million and adjusted operating income negatively impacted by 17 million. By line item the 45 million negative impact is broken down as follows; license 12 million, cloud 9 million, customer support 18 million, and PS 6 million. For the fiscal year 2015 our revenues were negatively impacted by 84 million compared to the last fiscal year and adjusted operating income was negatively impacted by 27.6 million. By line item the 84 million is broken down as follows; license 20 million, cloud services and subscription 18 million, CS 34 million and professional services 12 million. And this headwind continues into fiscal 2016 and I’ll return to this point later. So let’s turn to the quarter and the fiscal year results. First on revenues, total revenue for the quarter was 482.7 million down 2% compared to 494 million but up 7% in constant currency. For the year total revenue was 1851.9 million up 14% compared to 1.64 billion in fiscal 2014 or up 19% on a constant currency basis. Recurring revenue was 385.6 million for the quarter down 2% compared to 395.2 and up 6% in constant currency. For the year recurring revenue was 1.557 billion up 18% compared to 1.318 billion in fiscal 2014 and up 23% in constant currency. License revenue for the quarter 97.1 million down 2% compared to 98.9 million but up 10% in constant currency. For the year license revenue was 294.3 down 4% compared to 305.8 million in fiscal 2014 but up 3% in constant currency. Cloud services and subscriptions for the quarter was a 149 million down 2% compared to 151.9 million but up 4% in constant currency. For the year cloud was 605.3 million up 62% compared to 373.4 million in fiscal 2014 and up 67% in constant currency. Customer support, 184.2 million for the quarter stable compared to a 183.9 million but up 10% in constant currency and for the year customer support revenue was 731.8 million up 4% compared to 707 million in fiscal 2014 and up 8% in constant currency. Professional services and other revenue for the quarter was 52.4 million down 12% compared to 59.4 million or down 2% in constant currency. For the year professional services and other revenue was 220.5 million down 8% compared to 238.4 million in 2014, down 2% in constant currency. Now to gross margins and the bottom line license margins remain constant at approximately 96% both on a quarter and a fiscal year basis. Cloud services margins decreased to approximately 60% compared to 62% fourth quarter last year but we are up from 58% in Q3. Customer support margins remain relatively stable at approximately 87% on a quarter and for the fiscal year. Professional services margins 18% for the quarter compared to 17% in the same period last year. For the year professional service and margin was 21% compared to 20% in fiscal 2014. The fourth quarter PS margin was impacted negatively by approximately 2 percentage points as we reclassified approximately 3.3 million out of PS into the cloud services line. So you should look to the full year PS margin as more indicative of the run rate. Actuates revenues were 19.6 million this quarter compared to 14.5 million last quarter. Actuates bottom line was 3.5 million versus the loss of a 100,000 last quarter. The purchase price adjustment on revenue was 2.5 million in this quarter and 2.9 million last quarter respectively. Adjusted operating income was a 148.6 million for the quarter down 8% compared to a 162.2 million. For the year adjusted operating income was 572.8 million up 14% compared to 502.7 million last year. Adjusted net income a 106.9 million for the quarter, down 17% compared to a 128.7 million for the year. Adjusted net income was 424.9 million up 4% compared to 406.8 million in fiscal 2014. Adjusted earnings per share $0.87 on a diluted basis down 17% compared to $1.05. For the year adjusted earnings per share was $3.46 up 3% compared to $3.37 in fiscal 2014. In tax, the adjusted tax rate for the quarter and for the fiscal year was 18%, an increase of some 4% from fiscal 2014. I expect our adjusted tax rate for fiscal 2016 to be 20%. This increase is a result of having proportionately more income in the U.S. and has nothing to do with the tax matters that I will provide commentary on in a minute. On a GAAP basis income from operations for the quarter was 82.5 million down 23% from 107.7 million and for the year it was 348.7 million, up 16% from 300.5 million in fiscal 2014. Net income attributable -- net income for the quarter was 68.8 or $0.56 per share on a diluted basis compared to 88.1 or $0.72 per share on a diluted basis. For the year net income was 234.3 million, $1.91 per share compared to 218.1 million or $1.81 per share -- sorry $1.91 this year, $1.81 last year. Now the balance sheet and cash flows, there were approximately 122.9 million shares outstanding on a fully diluted basis for the fourth quarter of fiscal 2015. Operating cash flow for the quarter was approximately $131.8 million, a decrease of 2% compared to $134.9 million last year. For the year our operating cash flow was $523 million, an increase of 25% compared to $417.1 million last year. On a balance sheet deferred revenues were up 386.3 million compared to 349.9 million. Difference is attributable to the acquisitions of Actuate and IGC. Accounts receivable 284.1 million compared to 292.9 million last year June 30th. Our day sales were 53, same as they were in June of last year. July 28th, the Board declared a cash dividend of $0.20 per share, for shareholders of record on August 28th, payable September 18th 2015. So, now I would like to turn to our tax situation that we have outlined in the press release and give you some background. In relation to a previously disclosed tax examination, we recently received from the IRS a draft proposed tax adjustment of 280 million to our U.S. Federal taxes on a 2010 IP transfer. And we are expecting another proposed tax adjustment of approximately 80 million to our U.S. federal taxes related to a subsequent IP transfer plus in each case proposed penalties and interest. No show in gross amount of these combined is approximately 550 million. We strongly disagree with the IRS's position and intend to vigorously contest the proposed adjustments. That said these are large numbers and we take the proposed adjustments very seriously. We received expert tax advice in the form of an opinion from Deloitte's in connection with the reorganization. We remain comfortable with our position and a strong indication of this is that we have not got any accruals for these matters in our financial statements. While we expect this situation will take some time to play out, it is business as usual for us. Our liquidity position is very strong and supports all of our various commitments including in these matters. Our cash position is currently at about 750 million, at the end of the year it is 720 million. Unused committed revolver capacity is 300 million, a five year committed facility undrawn. Operating cash flow of 500 million in fiscal 2015 and a gross leverage ratio of 2.6 at fiscal year-end, well below our internal targets and the targets of the rating agencies. The IRS proposed adjustments are a onetime response to the IP transfers in 2010, 2012 and did not affect subsequent tax years or a global operating structure. To reiterate our effective tax rate outlook for fiscal 2016 will be approximately 20% on a non-GAAP basis. So, in summary on the year, very pleased with our bottom line and cash performance in the quarter and for the year. Adjusted operating margin, adjusted operating income up 14% year-over-year, 19% on a constant currency basis, and operating cash flow of 523 million up 25% year-over-year. With respect to the U.S. tax matter we remain very comfortable in our position and we will vigorously defend ourselves. Our seven year revenue CAGR is 14% led by acquisitions and augmented by profitable organic growth. Our cost control discipline and ability to integrate acquisitions efficiently is the strong foundation of our business and enables us to grow margins as we onboard these acquisitions. In fiscal 2015 we had a negative FX impact of 84 million on revenues and FX headwinds continued in fiscal 2016 as evidenced by the change in euro rates year-over-year. July 14, 2014 the euro was at 136 to the U.S. dollar, July 1, 2015 it was 112. We have increased our adjusted operating model to a range of 30% to 34% for fiscal 2016 and as Mark will discuss we have a long-term aspirational goal for the company of achieving 34% to 38% adjusted operating margins in fiscal 2020. So thank you very much. Mark I will turn it over to you now.

Thank you John, and welcome everyone to our fiscal 2015 Q4 earnings call. It is great being back operating the business. Before I begin my remarks on the company, our business strategy and financial results, let me add a few additional comments on tax and structure by starting with some history and perspective. In 2010 we undertook a reorganization to centralize the management and ownership of our intellectual property. Why? With nearly 40 acquisitions completed by that point in time decentralized management of that global portfolio was non efficient. So we did the reorganization to among other things simplify the management of our IP ownership. After significant input from experts including the opinion from Deloitte that John referenced, we effectuated a structure at Luxemburg. We are 5 years into that structure. Centralized management is the correct way to manage our large acquired IP portfolio. We continuously evaluate our structure looking at the best ways to manage and optimize our business. You expect that of management we are committed to delivering that. There are two sets of issues here that I want to highlight one is backward looking and one set is forward looking. In looking backwards we received a draft note but as John highlighted from the IRS. Tax audits are normal course for large businesses like OpenText, look no further than the Google, and Amazon to the world. We strongly disagree with the position taken by the IRS and intend to vigorously contest their proposed adjustments to our taxes. We remained comfortable with our position and consistent with that view, we have not taken any reserves. Now let us look forward. As John noted our fiscal 2016 non-GAAP tax rate outlook is 20%. Beyond fiscal 2016 we do not see any issues that will prevent us from continuing to optimize the way we manage our IP or from having an effective and appropriate tax rate. In summary we are addressing our backward looking issue expect a 16 non-GAAP rate of 20% and are confident in our approach and options beyond 2016. Now back to the business. Our business strategy is working. Digital is changing business at unprecedented speeds and companies have no choice but to adopt digitalization to survive. OpenText enterprise information management brings together the core elements needed to drive that digital transformation. First is data and information, this is the management of information flows and driving engaging experiences by revolutionizing the way information is created, consumed, and stored as well as the complex processes that surround them. Second is information exchange. This is the ability to facilitate efficient, secure, and compliant exchange of information inside and across organizations. Third is analytics whereby companies can utilize enterprise data and big data to generate insights and actively improve their businesses. With these core EIM elements we are very well positioned to help customers holistically with their digital journey both on and off premise. And by helping customers with both on premise and off, we call this our hybrid strategy and the intent is to take customer paced approach to innovations including our cloud products. Also our cloud strategy is targeted at new spent from existing and new customers targeted at new workloads and not targeted at cannibalization or revenue substitutions. Our business strategy based on intelligent growth enabled by OTEX, the OpenText Intelligent Growth System, OTIGS has focused on 5 operating principles to deliver value. Financial performance, customer partner loyalty, talent development, product management and operational excellence. Further OTEX enables us to acquire companies and quickly integrate and optimize them. Beyond onboard companies through our operating model within one to two years typically extract significant cost and optimize their financial returns. We have acquired over 50 companies under this model investing 3.8 billion in capital over 20 years. We have the pipeline in cash to continue with acquisitions this year and we expect to invest as previously stated 3 billion in the coming years. At fiscal 2015 we delivered 1.9 billion in total revenues up 14% year-over-year or 19% in constant currency, with a recurring revenue for the year of 1.6 billion up 18% for 23% in constant currency. Our adjusted operating margin was 31% and we generate cash flows of 0.5 billion. Our business strategy is working. Let us talk about cloud. In three fiscal years we have delivered a cloud business generating over 600 million in revenues, gross margins of low 60s and highly profitable. We were not born in SAS but we are reborn in cloud. Looking beyond the financial it is uniquely important, we have also built wide and deep cloud expertise within the company and have emerged as leaders in all things cloud for the enterprise. We only have more to learn and we will but we have reached a tipping point level of competency in the cloud which makes us experts. Cloud is a new growth area for the company and in May we announced a restructuring the company to better enable the digital transformation. We look to remove layers in the organization, go more direct to the customer, create technical services organization responsible for customer lifetime value, and accelerated time to revenue. Align the sales organization to be laser focused on their key buying domains and continue the expansion of margin and cash flows. As I said in May, I had strong confidence this alignment would yield immediate positive results and it did. The restructuring is now behind us and bright-line working. In constant currency, we delivered in Q4 527 million of revenues, 31.4% of adjusted operating margin, and adjusted EPS of $0.98. Our sales organization is focused, producing, and highly motivated as we enter fiscal 2016. They are very excited about the ability to capture new spend and multiple years of spend in a single upfront transaction via managed services or simply a subscription. In fiscal 2015 our cloud revenues were 605 million or 23 million in constant currency derived from three main sources. First, managed services, which is managed applications and hosting services. This is where we bring together in a whole list of service for customers, the ability to outsource the EIM processes to OpenText. Second, second source of revenue is our business network for the trading grade and messaging. This is our value added network for EDI, on demand messaging, and other enterprise message types. Our vision is to deliver any message in any format, anywhere in the world fast, reliably, and secure. And the third main source is applications as a service to enter both at SAS and as a subscription. These include our active applications for order management, electronic invoicing, treasury management, and core our new SAS ECM solution. In total we have approximately 65,000 customers running our cloud. Further as we have said in the past we operate our own global cloud infrastructure. This is a strategic differentiator on security, customer data sovereignty, agility, network reliability, and all the benefits of built for purpose. We operate over 50 data center locations around the world comprising of poor data centers all their way through satellite pops for secure and reliable message delivery. We just finished our third full year of running a cloud business and I am pleased with our progress. In constant currency from 623 million of revenues, adjusted gross margin in the low 60s, bright-line profitable, a globally owned and secure platform 65,000 customers, massive learning of all things cloud inside the organization. New products and services as we enter fiscal 2016, the analytics opportunity which I will talk to in a few moments and many other things. With all of these positives, there have been questions around our cloud transitions and the effects on our overall business model. In listening over the last couple of quarter I have heard three areas of concern, first is where margins erode; two, the transition/substitution model; and third, provide us with more data in fiscal 2016 around the cloud. Let us unpack these one by one but we had another year of experience under our belts. So let's start on margin. Over the last three years cloud service again have grown to zero to 33% of our revenues while license have remained relatively insistent on an actual basis but decreasing as an overall percent of the business. Over the same period we have expanded adjusted operating margins from 27% to 31% or 400 basis points. Now let us look forward as we enter fiscal 2016, we are raising our annual target model for adjusted operating margin to 30% to 34% and presenting a 20-20 margin aspiration of 34% to 38% and we are raising our cloud services revenue percentages to 31% to 36%. Said simply we continue to expect operating margin to expand regardless of where our customers deploy our technology. The concern that operating margin would erode while we on board cloud services revenues is not founded in three years of fact. By three years effects results are to me the best indicator to answer any question about margin and long term efficiency potential of our business. On transition and substitution models, again we have another year of experience and this is really important, we have analysis closely in fact about other to do so as well including the consultant firm McKinsey our strategy for existing customers is not to substitute a dollar of license for a dollar of subscription that is not our strategy. Rather our strategy is to capture new spent from existing or new customers with long-term contracts. Managed services addresses new needs and new spend. We packaged together license, maintenance, professional services, and hosting fees into one price and one offering delivering significantly more value than just the license. Our business network is about delivering any message anywhere in the world and to continue to grow subscribers and add new vertical or application centric services. This quarter and I am pleased to discuss this, we will be delivering new on demand capabilities for the healthcare industry in North America. Our SAS applications are addressing new workloads not available before such as electronic invoicing, order management, and treasury management. When we look at a sampling of enterprise cloud customers over the last six months, the majority consists of new bookings. This is very encouraging and exactly what we want. Our hybrid strategy is working. We are coming off a good Q4 delivering 97 million of license revenues or 109 million in constant currency. Further we expect on demand to remain an important part of our business. Over the last three years license has been relatively consistent in absolute dollars but gradually declining as a total percent of our revenues given we have on board new cloud revenues. And the third thing we’ve heard is on more data. Here the key external data points that will help keep track of our cloud progress in fiscal 2016. First is MCV, minimal contract value. MCV represents the minimum new contract value of a cloud arrangement. In Q4, our total MCV bookings were 62 million. In fiscal 2014 we booked 116 million of MCV, in fiscal 2015 we booked 211 million, and in fiscal 2016 we are targeting between 280 million and 320 million of MCV. This is between 30% and 50% MCV growth year-over-year. Next metric total cloud customers, we enter fiscal 2016 with 65,000 customers. Managed service customers we start fiscal 2016 with 819 live customers that manage services up from 731 last year. Annual recurring revenue target is 82% to 86% for fiscal 2016 up from 80% to 84% in the previous year with actuals of 84%. Cloud renewal rates another key metric are in the mid 90s. I know license renewal rates are in the low 90s both are strong performers cloud deals over 1 million. In Q4 we closed 11 deals in the cloud over 1 million in fiscal 2015 we closed 31. Our business and financial strategy are working. We enter fiscal 2016 with strong interest from our customers, new cloud metrics, confidence from a strong Q4, and a motivated sales organization to capture new spent and new opportunity. As it relates to Q4 and full fiscal year highlights John has walked you through that in our strong performance but I’d to add a few couple of highlights here. First and foremost we look at our business on an annual basis. This is why we provide annual target ranges. None of us were pleased with Q3 performance, however we delivered a solid Q4 and it is an example of what we are capable of with focus and execution. Further on an annual basis we delivered to our internal plan on revenue and over achieved on adjusted operating margin. Let me spend some time on customers. Global brands are selecting and trusting the OpenText cloud. I’d like to walk through a few of these wins. Within the enterprise group we deliver wins at wholesome in Switzerland for information management, Daimler Finance for leasing and contract management, the Australian DOD for SAP share point information management, metro links were content and discovery management and T-Mobile for customer communication management. We also won Haynes and TBA for new cloud services, each incremental revenue opportunities to OpenText. Within our IX group we won new business for managed services at the known U.S. AA Intel Alstrom [ph] for supply chain management. Some of the world's largest and most respected organizations trusting the OpenText cloud for their B2B needs. Within our analytics group we delivered key wins at Kronos, NorthStar Steel, and Dell. As for the business network win, we new business at Eden Corporation, BSN Sports, Checkpoint Systems, and the BBC. For active applications we won new business at Danone [ph], Volkswagen, Barclays, Marks & Spencer, and Jaguar. I also want to highlight that our Americas business in fiscal 2015 exceeded 1 billion in revenues for the first time in our history. Let me transition to capital allocation and M&A. Our 70 year growth CAGR, our revenue growth CAGR is 14%. And we have led with acquisitions and augmented our revenues with profitable organic growth. We look at ourselves to be a fishing capital allocators with both financial and human capital. First, we have put a quarterly dividend program in place that since its inception has paid out for nine quarters with a total cash distribution of 180 million. We looked to allocate 20% of our trailing 12 month operating cash flows to our dividend program and assess our dividend rate on an annual basis. If you extrapolate that out over the next three years we could distribute a few $100 million in additional dividends. Second, let me provide an update on our venture investments. We have committed 100 million venture investments across a variety of funds. Canada's VCAP program, CR [ph] Capital in Silicon Valley and our new venture fund which we call the OpenText Enterprise Application Fund or OTEAF for short. The OpenText fund is now fully funded and up and running. The OpenText $100 million venture commitment is now part of 1.5 billion of committed capital in the above fund. We look forward to selecting the best companies from these funds to resell their products or consider as acquisition candidates. Our venture strategy is to find new revenues, acquisition incubation, and a return on capital. Third, we are value buyers. When we do the valuation analysis of our own company suggest a strong potential return. To that end we announced today a buyback program of up to 200 million. As for our M&A, our approach to value based assets have not changed. We are going to double the size of our corporate development team this year and we have the pipeline and available cash to continue with acquisitions this year and we expect to close multiple and meaningful acquisitions within the fiscal year. As it relates to human capital, we enter fiscal 2016 with approximately 25% of our workforce in India and the Philippines. This provides us a foundation to globally source labor, drive around the clock processes and innovation, and provide efficient services to our customers and ourselves. Next let me move on to fiscal 2016 and speak about five key operating pillars for the year. Pillar one, expanding our EIM market leadership. We will focus on new customer wins, install based management through new programs, competitive replacements, industry awareness, and delivering Blue Carbon in the second half of fiscal 2016. Blue Carbon is on track for delivery this fiscal year. It is our more significant release in the history of the company. Blue Carbon will include new applications for information centric users, complete integrated information flows from capture the disposition, create to consume, purchase to pay, issue the resolution, as well as embed analytics and predictive analysis a new user experienced. Pillar two, expanding focus on cloud services both on premise and off. We have four revenue streams, cloud services and subscription, professional services, license and maintenance. They are all important to us. As I described above, cloud is about new customers and new revenues. Cloud is a long-term growth opportunity and clearly a key pillar for fiscal 2016 and beyond. Pillar three for us is analytics. For 20 years we have been building information platforms and for the last three years delivering business networks. And now we can offer the analytics and predictive tools necessary for EIM. This is a new and exciting area for the company. While we will continue to deliver standalone analytics and predictive analysis like for Dell as example, lever the embedded opportunity like Kronos, Actuate is now integrated into content suite so we can drive installed base sales with analytics. In the next 90 days Actuate will be hosted within the OpenText cloud and we will present our customers with the new analytics as a service. In the second half of fiscal 2016, analytics will be integrated into our managed cloud services or supply chain analytics. As a reminder Actuate turned profitable last quarter. It will be an important year for us in analytics, that’s our fourth pillar, strengthening our go to market. In cloud we are focused on removing layers, getting closer to the customer, presenting them with experts in each of our key domains, capturing lifetime value having partners who add incremental value in delivering the world only complete and integrated EIM cost service. Our sales and leadership changes are complete and working. In fiscal 2016 we’ll continue to strengthen our demand generation, relentlessly focused on quality of service delivery and customer satisfaction, augmenting a direct sales force with value added partners, embracing a stronger emphasis on expanding strategic partnerships that add value. Today I am pleased to announce a new dimension to our SAP relationship. We intend to provide a commercial bridge between our business networks to SAP and rebuck [ph] customers can leverage the value of the OpenText van and manage services. Our customer relationships are expanding now into the cloud via today’s announcement including our support with HANA. It’s an important step forward with our SAP relationship. And the last color for fiscal 2016 is Pillar 5 and this is our financial performance. As we embrace OTEG, the OTEG model we need to deliver to our top and bottom line goals. Our growth programs for the year are multi horizon strategic objectives, grow via acquisitions and organically and continue to act like owners on locking more value from within the business. I was not pleased with our Q3 performance we were covered well in Q4 and in fiscal 16 we need to build on that confidence and momentum. Let me wrap up my prepared remarks. We finished fiscal 2015 on strong performance, our restructuring behind us, the organization aligned and focused to deliver on digitalization. Customers have no choice but to adopt digitalization and we are in great position to capture this opportunity. Our sales force is excited about going after new areas of spend via all our cloud options, analytics, install base and upgrade programs, and in the second half of the year Blue Carbon. We were not born SAS but as I like to say we are reborn cloud. In constant currency we delivered 623 million of cloud revenues and 61 points of adjusted gross margin. We are managing a global cloud infrastructure supporting 65,000 customers. We have done this while improving our margins in overall corporate performance. I am extremely proud of what this organization has delivered and it is simply amazing. Our business strategy is working, our cloud strategy is working, our cash flows are working. We continue to see the world as hybrid. Our license and PS businesses are performing on a consistent basis in terms of their absolute dollar contribution. As we look into fiscal 2016 on a percent of total revenues we are raising our business targets on recurring revenues, cloud revenues, and gradually lowering licensed NPS again on a total percent of contribution. On adjusted operating margin we are raising our targets for fiscal 2016 and have set longer term aspirational goals of 34% to 38%. We have the pipeline and available cash to continue with acquisitions this year, to continue with our quarterly dividend program, and up to a $200 million share buyback which we announced today. And as John referenced we have a strong liquidity position. Let me end with something very tangible that is visible to employees but may not be as visible outside the company looking inside. We left our company and sales kick offs this year in early July with more energy than I’ve ever seen. Our employees are excited and highly motivated to capture the digital opportunity. With that I’d like to turn the call over to the operator and look forward to your questions.

[Operator Instructions]. Our first question today comes from Steven Li of Raymond James. Please go ahead.

Thank you. John, the gross amount for the tax issue 550 how do you reconcile that with the 280 and 80?

Hey Steven, how are you? There are three components to the gross notional amount. One is the amount of tax that’s in the press release and the second and third components are interest and penalty. So the difference between the amount you see in the press release and the 550 they will talk about are interest and penalties.

Okay, and if I understood you, so even if IOS position stands your 20% tax rate going forward does not change, so this is a onetime issue?

Yes, it is -- Steven the issue is the outbound transfer for the IP back in 2010 and so it's the IRS is objecting to that transfer and seeking to tax it. And so looking back to 2010 issue on a go forward basis the current structure stands and that is why we are calling the rate at 20%.

Is there a possibility of an assessment for 2013 to 2015, so was there any other asset transfers of the Global 360?

No, there weren’t. So we don’t expect any assessments of this nature. Obviously we are constantly under audit by the IRS and other authorities so we are always going to have assessments for this and that. But on this particular matter we don’t expect any additional assessments.

Alright, just one last one, so this was -- this earnings report was significantly better with the preannouncement. Did the market improve that much in the last few weeks and how is that climate being maintained so far in Q1? Thank you.

I see, thanks for the question, Mark here. When we did our mid-June update we talked about a variety of things. One of which is we wanted to give an update on FX, and John if I got the numbers right for fiscal 2015, half the FX impact was just in Q4 line. Right, so part of that update was on FX. Second part of that update was on our cloud strategy and the resulting organization and the restructuring behind that which is done and working very well. And Q4 is an example of what we -- what the business is capable of with extreme focus and execution. We executed extremely well around the world in all our major geographies and product lines and as a highlight of what we are capable of when we fire on all cylinders. I also think it is an example of why we give annual target ranges versus quarterly because we really want to look at our business on annual basis. But it is under a specific results for the quarter as an example of what we are capable of when we fire on all cylinders.

That is great, thanks Mark.

Yeah, thank you.

The next question is from Phillip Huang of Barclays Capital. Please go ahead.

Hi, thanks. Good afternoon. I was wondering if you could give us an update to the sales cycle for your customers are transitioning to the cloud or hybrid solution, I think you mentioned last quarter typically it does lengthen by couple of quarters or so. I was wondering based on your experience whether that has -- is that still your view or has the refocused execution actually made the sales cycle not as long as before?

Thanks for the question. Well, first I will just highlight that our strategy is a hybrid strategy, right. We don’t believe that everything is cloud or off premise or everything is on premise. Customers are taking really a paced approach to where they wanted to play the technology on or off presence. And so we have taken the strategy that the world is hybrid and is going to remain hybrid for some time. As we have talked about in this cloud transition we have gone from zero revenues to a third of our business over three years while holding license where licenses is performing really quite at a consistent basis over the last three years. And our strategy is to target new spend and we will go out and sample our transactions from January on the enterprise. The near majority of them are new spend. It is not cannibalization, it is not substitution. It is new spend that we are going after. So, I think with all that and with another year of experience, we are in this for our third full year of cloud and we still have more things to learn as a cloud company. Right, 20 years of experience we get a license called out in five minutes. Getting cloud code out or multimillion dollar opportunities isn’t five minutes, it is a little longer. But I think ultimately the sales cycles are starting to look a lot like license.

Okay, that is very helpful. And also on the margin side, obviously very encouraged to see decreased target margin range, so wondering if you could elaborate a little bit on the key drivers supporting this. I know you got three years of track record to back this but was wondering if there is any drivers that you can point to over the next 12 to 18 months or so that you expect to drive this type of improvement in your margin despite the transition to a thicker mix of cloud revenues in your business? Thanks.

Hey Phil, this is John. So let me take the fiscal 2016 part of that and Mark can elaborate on the longer term. The first point to is restructuring and Mark talked about that. We announced that in May 22, we’re virtually done that restructuring on the people side and so we expect to see call it about 75% of the expected annual savings in fiscal 2016. The facility piece it’s going to take us a little longer as we waited on the last call. But of course you know the world doesn’t stand still and you can’t look at that reduction in isolation so that’s a big part of the reason why we expect to see overall adjusted operating margin increase. We continue to see significant headwinds on FX as we talked about and we are investing. We are investing in cloud and other strategic area so we put all that in the blender for next year. You know we are comfortable with the growth and margin that we are seeing. And then Mark maybe a comment on in terms of longer term.

Sure. If we look at maybe aspirational 2020 goals if you will I think the opportunity falls into three main categories. The first is automation, we ourselves are going through on assessing all our processes, all our systems to ensure we lead the way ourselves on digitalization and that’s going to represent an opportunity to get more efficient as a business, so automation and digitalization. Second is labor, and how we globally source our labor, provide services, and where we place that labor that’s why our Southeast Asian operations are real important to us and now 25% of our business and that will help us scale cost effectively. In the third, quite candidly just taking out third party product. You go across license and PS, cloud as well and just maniacal focus of we’ve acquired a lot of things and they come with third party technologies, they are moving those third party technologies in a paced and deliberate manner gives us an opportunity to continue to look towards continually to improve the efficiency of the business. So automation, digitalization, placing labor in the right places of the world, and taking up third party cost gives us the confidence in those aspirational goals.

Got it, it is very helpful. Thanks very much.

Thanks Phil.

The next question comes from Richard Tse of Cormark Securities. Please go ahead.

Thank you. Mark I was wondering you can help me reconcile the margin profile moving up. You got sort of 30 point difference when it comes to license and cloud margins yet you are ticking your margin profile, is it I am guessing on the operating cost side and if so maybe you can sort of walk me through on how that works?

Hey Richard, that was a big part of the question that I just answered and if you look at the restructuring so we committed to $50 million in annual savings and that was the people part of the savings and that’s as I said virtually all behind us. So that is probably the single biggest contributor to our confidence in being able to increase the bottom line margin.

Okay and I guess on Steven’s question, there is obviously a big difference between the guidance you gave back in May and the results there which were vastly better. Now at that time in point -- point in time you talked about the environment being fairly soft, now has the environment improved since then or is this purely because of the execution that you talked to?

I’ll continue to a point to focus and execution. The team was very excited with our changes in mid May. We talked about removing layers and getting closer to customers, and they delivered with extreme focus and execution. I also believe that the competitive environment is improving for us. If you allow me to spend a moment on that, when I look at I talked about two competitors the first is EMC and Documentum and we are very focused on competitive replacements here. We have Core and they really don’t have an online strategy which is helping us. We now have the analytics and they do not and that’s helpful for us. We have a business network, integrating your complete information flows in various industries and in various corporate functions like treasury management, cash management, electronic invoicing is helpful, like to have that integration. And with Blue Carbon and information flows, I really don’t see how they are going to catch up. So we are very focused on Documentum. Next is IBM and we had a good quarter against IBM. We are very laser focused on them. On Filenet we beat them at Daimler, T-Mobile, Prudential, U.S. Department of State, and we have Core and Blue Carbon and they basically abdicated their online ECM solutions to another party. On Sterling Commerce we beat them at large counts including [indiscernible] Marks & Spencer, ADP as well as Hasbro. On Cognos and Maximo we replace them at NorthStar and Barclays. And this is my favorite actually, that IBM Life sciences is turning off Filenet and going with the OpenText content suite. And we’ll be live next month so I guess the headline is IBM selects OpenText for content management. So what’s new, right, the organization had extreme focus and execution in Q4 and it worked. It is an example of what we can do and we continue quarter-over-quarter, release-over-release to strengthen our competitive position and I would like to highlight that strength over Documentum and IBM today.

Okay, that’s really helpful. Just one last question related to the tax issue like when do you guys figure that you are going to be at a point you resolve this or this is a decision one way or another and I guess related to that, I think in Canada and over these situations you have to sort of put up half the cash and I guess you are suggesting that’s not the case you are not creating liability but I just want to see them how the mechanics work behind this?

Yes Richard, its different in the U.S. you don’t have to put up the cash. And so this will play out in one or two ways, either it will get settled or it will go to court and the timeframe on that is a little unpredictable at the moment. At this stage we receive what’s called the draft so it’s a draft assessment and we are expecting to get another draft assessment. So it’s really tough to say at the moment how long it’s going to take to play out. I mean it’s not going to be settled over the next month or two that’s for sure. It’s going to take some time. So we commit to keep you updated as things evolve.

Okay, thank you.

The next question comes from Kris Thompson of National Bank. Please go ahead.

Great, thanks Mark just to go onto the preannouncement one last time, I am assuming that was mostly on some license catch-up and what I want to understand is should we be a little bit cautious looking into Q1. I mean is there going to be some normal Q1 seasonality where you may be pulled some deals, I figured wouldn’t close or we should be a bit cautious on our Q1 license number?

Kris thanks for the question. I can’t speak to Q1, we don’t give guidance but I’ll go back to my script right where over the last three years our license and PS business have really been performing on an absolute basis consistently, right. And think of that consistency continuing as we onboard additional cloud revenues either via acquisitions or organically. But the key emphasis is on the consistency of the performance of the license business.

Okay, were there any 8 digit license deals in the quarter?

How many as 8 digit.

No, they weren’t.

No 8 digits.

And just on the corp dev team, can you...

Couple of 7 digits.

Can you just give us an idea of the corp dev team how many bodies you have there now. You said you are playing on doubling and maybe just confirm that you are still focusing within your 5 pillars?

Yes, fair enough. So we remained very focused on EIM and all that means to us and we are not looking to expand into ERP or other types of technologies. We are looking to -- we expect to close transactions this year, we got the pipeline, and cash to do that, translate into multiple and meaningful acquisitions in fiscal 2016 and we are basically doubling the team from half a dozen to a dozen.

Okay, thanks a lot guys.

Thank you.

Thanks Chris.

The next question comes from Paul Steep of Scotia Capital. Please go ahead.

Great, thanks. Mark, maybe you can just on the latest SAP partnership, maybe we can go back and talk a little bit about the scope and the timing and maybe even what the potential of that new deal with Ariba means and maybe SAP in general how that relationship has now evolved?

Thanks for the question Paul. My philosophy is relationships though on products may come and go. And we continue to have a very strategic, on premise relationship with SAP and there is still more life in that for sure. When we look to future growth areas, SAP certainly is driving all things cloud. So we’ve actually worked through a few things with them. We have pricing models now in place where they can bring our technology into their cloud economic model. We support HANA which is their main deployment platform for all things cloud. And now more structurally on transactions we and this integration will be done over the next 90 days or so. So, it’s not a significant amount of work. There are large business network and our large business network will have a completely integrated commercial bridge. So traffic can flow between the two networks and that will allow existing and new Ariba customers to take advantage of our trading grid. They’ll win on Ariba, we will win on our trading grid. And for some of their cross gate customers we would look to bring them in as managed service customers. That were probably very deep integration into our van to our value added network. So there are multiple layers of goodness here. One is we have new economics in place for our overall technology. We are supporting HANA which is their main cloud deployment platform and then three, the commercial bridge will allow further strengthening to their Ariba platform, they will provide network revenues to us, and there will be a broader set of customers that will -- who will require a deep integration into our van, we will be able to provide them managed service.

Great and two quick cleanup questions then one, just post the 2016 sales kick off is there anything we should think about or note in the sales compensation that changed heading into 2016 that is either going to further incent the sales teams to go after cloud wins or again is it sort of an agnostic view that you’ve traditionally had.

Yes I think the plans are pretty much the same year-over-year. I think what’s different is seeing Rex down on stage who won large cloud deals and in getting commensurate commission checks. And being able to kind of feed off that’s how you do it and that’s what I can make and in having those kind of aha moments by example I think we are very powerful for the Florida organization. The plans are basically the same year-over-year but the examples of wins and the commensurate motivation professionally and monetary behind that was very evident that kick off.

Okay and then the last one just to put this IRS thing hopefully to bed, it was very clear that you’ve not reserved for this, can you just comment on with the Board and the Audit Committee did they go and get a second opinion that would have obviously led you to not take the reserve, obviously there was clearly meetings about this?

Paul as I said in my commentary obviously we take this very seriously and we have examined over the course of time the original opinion. We’ve got the right experts to help us look at the notice of proposed assessment and so there are a lot of great minds that went into coming up with the conclusion that we did. And so we are comfortable with that conclusion from an accounting point of view we hear around this table and the Board as well.

Perfect, thank you.

Paul we mind all our statements.

They are out today.

Thank you.

Alright, well that’s going to wrap up the call today. I’d like to thank you for your time. In summary we see good demand drivers coming into 2016 for digitalization, security, analytics, information management delivered strong fiscal 2015 results. Our cloud strategy is working three full years of experience under our belt and we are raising our business targets for fiscal 2016 as we highlighted and we have announced to buy back up to $200 million today. I would like to thank you for your time.

This concludes today's conference call, you may now disconnect your lines. Thank you for participating and have a pleasant day.