Open Text Corporation (OTEX) Q1 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter 2016 Financial Results 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. [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 and good afternoon everyone. I would like to welcome you to today's call. 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 Investors to the Investor Relations section of our website where we posted two PowerPoints that will be referred to during this call. The first is our quarterly supplemental update on the financial results and the second PowerPoint is our annual strategic overview presentation from July outlining our leadership positioning in the EIM marketplace with supporting stats outlined both our historical performance and cloud transition initiatives. I encourage all of our listeners to download both presentations. As in previous quarters, we have updated an updated summary table highlighting OpenText's historical trends and financial metrics. Both these PowerPoints and our financial spreadsheets are downloadable from the front page of the IR section of our website. OpenText will be hosting an Investor Day in Las Vegas on Wednesday, November 11, during Enterprise World, our annual users conference. If you’re interested in attending or just want to find out more information, please contact our Investor Relations team. We will also be at several Investor Conferences in the coming months including Cantor Fitzgerald, TD and RBC conferences in Toronto, the Credit Suisse Investor Conference in Phoenix, Arizona as well as the Barclays Technology Conference in San Francisco for more information and all of this and all of our Investor Events on the 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 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 in our website. And with that, I will hand the call over to John.

Very good. Thank you, Greg. Welcome to the call everyone. Let’s go through the numbers and my references today will all be in millions of U.S. dollars unless I indicate otherwise, first the impact of foreign exchange. The first quarter compared to the same period last year, our revenues were negatively impacted by 34 million. Adjusted operating income negatively impacted by 9 million and adjusted EPS by $0.06. The negative effect of 34 million by revenue type is broken down as follows; license 5 million, cloud services and subscriptions 9 million, customer support 15 million, and Professional Services another 5 million. Total revenue for the quarter was 435 million, down 4% compared to 454 million for the same period last year, but up 3% on a constant currency basis. Recurring revenue for the quarter was 383 million, down 3% year-over-year compared to 396 for the same period last year but up 4% on a constant currency basis. License revenue for the quarter was 51 million down 12% compared to 58 million reported for the same period last year down 4% in constant currency. Cloud services revenue for the quarter was a 148 million, down 4% compared to 154 million in the same period last year but up 1% in constant currency. Customer support revenue for the quarter was 186 million, up 1% compared to 184 million in the same period last year and up 9% in constant currency. Professional services and other revenue for the quarter was 50 million, down 14% compared to 58 million in the same period last year and down 4% in constant currency. Now I’ll turn to gross margins for the quarter. License margins remain stable at approximately 95%. Cloud services and subscriptions 60% compared to 61% in the same period last year. Customer support margin was 89% compared to 88% in the same period last year and Professional services was 23% for the quarter compared to 25% in the same period last year. Now to adjusted operating income before interest expense and stock compensation was a 148 million this quarter down 5% compared to 156 million in Q1 of last year. Adjusted net income decreased by 13% to 103 million this quarter, down from 119 million in Q1 of the last fiscal. The decrease was primarily due to lower operating income, higher interest expense and an increase in the company’s adjusted tax rate from 18 to 20. We expect to continue to see an adjusted tax rate of 20% for the remainder of this fiscal year. Adjusted earnings per share $0.84 on a diluted basis compared to $0.97 for the same period last year down 13%. On a GAAP basis, income from operations was 76.5 million down 25.8% from 103 million in the first quarter of last year. This decrease is due to lower revenue of 19, higher OpEx of 14 million which is primarily related to our special charges and these negative impacts were partially offset by lower cost of sales of 7. Net income for the quarter was 41 million or $0.34 on a diluted basis compared to 64.6 million or $0.53 on a diluted basis in the first quarter of last year. There were approximately 122.6 million shares outstanding on a fully diluted basis for the first quarter and during the quarter, we repurchased 1.1 million common shares. These were purchased late in the quarter under our NCID program and due to the timing of these repurchases, it did not have an impact on our reported EPS. Actuated a good quarter and they are now on our operating model. Operating cash flow was 92.7 million for the quarter, decrease of 33% compared to 138.5 million in the same period last year. There were a number of specific items in the quarter both operating and other that are worth noting, our share buyback, interest payments on our high yield notes and restructuring payments are unique to this quarter compared to Q1 of last year. Our DSO trade payables were stable. Driving cash flow improvements continues to be one of our top priorities. With respect to the balance sheet at September 30, deferred revenues were 351 million compared to 386 million and the decrease is the result of normal seasonality. Accounts receivable was 234 at September 30, 2015 compared to 284 at June 30, 2015. Day sales were 48 at September compared to 53 at June and 48 in previous year at September. Just a couple of comments on our FY16 external target model that’s published on the IR website. They said in the press release, I’m really pleased with our margin performance this quarter but it is early days. Our target model is an annual model as you know with three more quarters to go to complete the year. The fact is there is still lot of economic uncertainty out there. The currency markets remain unstable, so even with the strong first quarter from a margin point of view, we are maintaining our fiscal 2016 non-GAAP operating margin target of 30% to 34%. Tax update, as previously announced and disclosed in our Form 10-K and discussed in our current 10-Q, we received the first of two expected drop notice of proposed adjustments on July 17 and we continue to expect to receive the second one. We have not received this yet. We recently announced our intention to acquire Daegis in an all cash transaction for approximately 14 million and Mark will provide details on the transaction. In October 28, 2015 the Board declared a cash dividend of $0.20 per share for shareholders of record on November 27, 2015 payable on December 18, 2015. So that’s it from my prepared remarks. I’ll turn it over to Mark.

Thank you, John and welcome everyone to fiscal 2016 Q1 earnings call. Let me start by sharing with everyone that personally I feel great and I look forward to seeing all of you at Enterprise World in two weeks time. Fiscal 2016 is teed up to be a transformative year for OpenText as we increase our focus on digital transformation and we see more customers adopting our managed services. We are poised to deliver project Blue Carbon, our next major EIM release which will be unveiled at Enterprise World. Project Blue Carbon is the enabling platform for digitalization, full of new and compelling innovations for customers. Our improved margin engine will generate greater long term cash flows and we continue to deliver smart capital allocation through our dividend program, our buyback program and meaningful M&A transaction. The IT industry is going through sweeping changes, perhaps the most change I’ve seen in my 30 years in the industry. The market has progressed from the adoption of internet technologies to leveraging the flexibility, efficiencies and speed of the cloud is now seeking full digital transformation to ensure continued successful operation in hyper competitive and hyper connecting markets. A great example of this is seen to the latency of analytics where requirements have progressed from reporting and visualization to analysis and predictability. It was once a better way to compete a task about improving pure human efficiency. Today, digital is about fundamentally impacting business which is about prediction, an analysis of in-human amounted data, it’s about automation and disrupting markets with technology. This is inning one for digitalization. As an all things both in life and in business being stagnant is usually the unsafe place to be because when you are stagnant you are the target. Change is always the safest choice. Those technology firms that embrace change in our successful outfit keep their customers central to that change. They must come with you on any technology shift and they must come with you on your digital transformation. This year we have witnessed the Symantec split BMC, Compuware, Tibco, Dell and Informatica going private, SolarWinds is about to join those ranks. We have HP splitting into two companies and making announcements. They will be exiting the cloud infrastructure business. We have Dell and Silver Lake’s proposal to purchase EMC and you have SaaS, PaaS and IaaS firms finding their rightful place in the market. This market is advancing and consolidating. As a largest independent provider of EIM solutions, OpenText is singularly poised to capitalize on this disruption. I see three core elements underlying these changes. First, enterprises have changed the way they consume technology. While most enterprises are hybrid today and we see them remaining hybrid, they are consuming more cloud based solutions from IaaS and SaaS to managed services and subscriptions and increasingly preferring to work with vendors who can see their needs. Enterprises also change while they purchase and they’re not interested in [indiscernible] interfaces and helpdesks. They are interested in digital, security, analytics, lightweight applications, mobility and the cloud with an eye towards leveraging a changing workplace, millennial workforce, a changing way to connect with their customers, the need to move faster with more purpose. Digitalization affects every industry and profound in numerous ways. It is increasingly obvious that the options are simple, digital or dying. Many predict that half of today’s incumbents will not thrive in the digital world. Let’s consider some examples. Insurance companies need deeper analytics and direct relationships with their consumers to provide optimized services. This is done with Big Data Analytics. Insurance agents will ultimately go away, they will be disinter-mediated by digital. Banks need to automate everything from personal to retail banking to institutional investing, it’s about automation, efficiency and improved digital customer service and customer experience not to mention security. Construction is modeling, planning, and testing in a virtual world before sable hits the ground. In government, citizens are looking for immediate access to their information, services on demand and digital interaction with their presiding administration. Logistics is moving to one hour delivery and maximum efficiency on warehousing, stocking patterns and customer purchasing prediction and on it goes, digital changes everything. Third, a growing percentage of the world is in a state of uncertainty and we live in a time where 1% to 2% GDP growth is normal particularly for the world’s most developed economies. Emerging markets are slowing, China is slowing, there are deflationary concerns. The strength of the U.S. dollar has created foreign exchange challenges. Even the automotive ecosystem in EMEA in the pharmaceutical giant have recently paused which should be short term, mining, construction and other capital intensive markets have slowed as well and as predicted by industry experts, it looks like IT spending may be slowing as well, commodities are down, oil prices are down. In fact even the Q3 U.S. GDP growth index has been raised downward today to 1.4%. It is our view that the amount of uncertainty was on an uptick in September. We see these changes and uncertainties as opportunities. Firstly, we are pursuing a deep strategic focus on digitalization which will help customers differentiate, grow and become more efficient. Digitalization is about creating a better way to live, and a better way to work, a better way to innovate, a better way to engage customers, a better way to leverage the supply chain, a better way to scale, a better way to gain insights, and a better way to control your business. I will come back to Blue Carbon later and how Blue Carbon will help customers create a better way to live and work. Secondly, our Cloud strategy is about capturing new spend and manage services and hosting service services to help customers balance between OpEx and CapEx. We are not however interested in revenue substitution. We see our license business remaining stable on an absolute dollar basis. Cloud is now one-third of our revenue and looking out at of fiscal 2020 aspirations we expect Cloud to ultimately be about 50% of revenues. We also expect more than 90% of our revenues to be recurring. And we’ve talked about in the past announcements, we have successfully made this transition to cloud while significantly expanding margin. The third opportunity I see is with the OpenText intelligent growth system or OTIGS as we call it. It is our operational DNA by using OTIGS to guide our recent restructuring programs we have created an even stronger earnings engine with OpenText. We remain confident in our 2020 aspirations of generating annual adjusted operating margins between 34% and 38%. Fourthly, M&A is at the core of our business model. We are a platform operator, we acquire businesses within our six strategic markets ECM, BPM, CEM, iX, Discovery, and Analytics collectively we call these platforms EIM. We seek value based assets that have higher recurring revenues and we do our analysis on a cash basis with clear ROI goals and payback time line. Once acquired, we integrate new assets into one of our core platforms extracting redounding cost and leveraging our distribution channels and operational capacity. This core discipline allows us to efficiently on board new assets to our operating model. We expect to complete multiple acquisitions this year that have ample liquidity cash and capacity. Lastly, our capital allocation strategy is working and is focused on shareholder return. The foundation of the strategy is a strong margin engine and generating strong cash flows. Combined with our dividend program at 20% of trailing 12-month operating cash flow, our buyback program and M&A the opportunity before us is strong. To summaries, the IT industry is going through a large-scale change and uncertainty is to be expected. But OpenText is well positioned to deliver shareholder value by capturing the opportunity in the Cloud and the need for customer digitalization. We would do this through compelling internal product innovation, meaningful M&A, a strong earnings engine, and a compelling capital allocation strategy. Let me spend some time on Q1. In constant currency, we grew total revenues 3% and we grew recurring revenues 4%. As John said, we had a negative 34 million total revenue impact in the quarter due to FX. This is roughly a negative effect of 8% on revenues. Assuming currencies do not decline further, we expect to see two more quarters of these large negative foreign exchange impacts on revenues. I know a year ago the euro was a 1.27 and the euro closed today at 1.09. As John highlighted, license was negatively affected $5 million, Cloud negatively affected 9 million, customer support negatively affected 15 million, and PS negatively affected 5 million on the revenue line. Currency is masking the strength of our business right now. We started the new fiscal year a little slower on revenue and MCB than I wanted to see and I am not concerned. Our Q2 pipeline is strong. Within the quarter, partner license revenues were 38%. We also recently announced major updates to our partner program. The new program is creating a Cloud ready partner ecosystem. The more value a partner brings to OpenText and our customers, the more we will invest directly in them. First, we have a greater focus on larger scale and global value added partners such as SAP, AT&T, Deloitte and Accenture. Second, we will now pay a referral fee on any partner opportunities closed. Third, we will no longer pay recurring revenue fees to partners. It’ll take us about a year to fully make this transition. And fourth in general partners can no longer sell both license and professional services simultaneously. Geographic book-of-business was 58% Americas, 34% EMEA, 8% APAC. Our Americas business was up 2% year-over-year. , : With our announcement to acquire Daegis we will add to our discovery platform and we had a nice actually set of customer wins this quarter, including Amazon, Deloitte, Delta Airline, Daimler, and Blue Cross Blue Shield. I’m also pleased with how our field changes for May are resonating inside and outside the company. The new cost structure and efficiency is showing in the P&L and our field programs are reflective in the strength of our Q2 pipeline. We have the right team and the right solutions to win. Let me transition to project Blue Carbon in enterprise world a bit. We are gearing up for the largest customer event of the year taking place between November 8 and 13 in Las Vegas, Nevada at the MGM Grand. We are expecting over 2000 attendees and over 300 partners. The conference will illuminate how digitalization is creating a better way to work. The platform to enable this is Project Blue Carbon, OpenText Next Generation of EIM software for on premises and Cloud customers alike. Blue Carbon is on track for beta and first customer shipments this quarter and generally available in our fiscal Q3 or calendar Q1. Project Blue Carbon will translate into the following release names. OpenText Suite 16 and OpenText Cloud 16. OpenText Suite 16 will feature deep integration inter and intra sub sites. Content suite, process suite, experience suite and analytics suite. Newly discovery will be a pay for add-on option to content suite and info fruition our updated enterprise search platform will be included with content suite for free. Suite 16 is available on premises and as a managed service. Analytics integration will be available in all the Suites and we will be providing support for new open stack that includes the post scratch database hoping customers to further lower the total cost of ownership. Suite 16 also fully movable enabled via Applet [ph]. OpenText Cloud 16 includes Suite 16 as a subscription and as a managed service. It also includes OpenText core, our next generation SAS ECM platform designed for enterprise use. And make no mistake we plan on winning in this market. We also introduced, we’ll also introduce archive centre in the Cloud for SAP, Oracle, Microsoft Exchange, the OpenText Suites and Gmail. Cloud 16 will also include analytics as a stand-alone service, analytics as a service for the supply chain and a new state of the grid reporting solution, which illuminates important and interesting statistical data across our billions of transactions and trillions of dollars worth of completed commerce. This solution allows customers to answer questions like our manufacturing transactions up or down month over month, year-over-year. Our retail transactions up or down will be able to report against information by geography, industry, customer, time, product or set of other facet. Cloud 16 will also include our next-generation transportation and logistics module. And lastly, we will be on a quarterly schedule for our Cloud 16 solutions where we update functionality every 90 days or at the speed of the Cloud. Project Blue Carbon will be unveiled to enterprise world as OpenText Suite 16 and OpenText Cloud 16. With release 16, we plan to drive aggressive new customer acquisition, upgrade and competitive replacement programs. It’s time. I hope you will be able to join us at Enterprise World as we get into the potential of our next-generation platform. Our Investor and Analyst Day takes place on Wednesday, November 11 and we expect to have some fun with Mike Myers keynoting that morning and please contact Greg or Sonya for more details on the November 11 event. Let me summarize today’s remarks. I am pleased our restructuring actions are behind us and that those actions have delivered at even stronger margin and earnings engine. Cash flow is our ultimate business objective. Our adjusted operating target model for fiscal 2016 remains unchanged as John talked about and we are reiterating our 2020 aspirations, 50% of our revenue from cloud and 90% recurring revenue and an annual adjusted operating margin between 34% and 38%. Our disciplined approach to capital allocation is focused on shareholder return. Optimizing for cash flow, dividends at 20%, TTM operating cash flow, our buyback program and value based M&A. We expect to complete additional transactions this year and we have plenty of capacity to put to work smartly. FX continues to be a challenge for us on the top line with a negative 34 million total revenue impact. Seeing past these FX challenges in constant currency, we grew total revenues 3% and recurring revenues 4%. Again assuming today’s currency rates remain stable, we expect another two quarters of these large FX movements to finally get behind us. The uptick and uncertainty though it seemed short term, it did affect some end of quarter buying decisions, however I’m not concerned. Our Q2 pipeline is strong and we have the right field leadership team in place to go execute against the opportunity. Project Blue Carbon, Suite 16 and Cloud 16 is on track for beta and delivery and focused on helping customers create a better way to work via digitalization. Our approach to cloud via managed and hosting services is additive revenues to the company and Cloud 16 is a significant step forward to the OpenText cloud including quarterly updates, core archiving analytics, next generation transportation logistics and the state of the grid visibility. While E16 is a strongest software release in the history of the company and as I said earlier we plan to drive aggressive new customer acquisition, upgrade and competitive replacement programs. With all this in mind, we expect fiscal 2016 to be a transformative year for OpenText. With that, I’d like to turn the call over to the operator for your questions.

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Kris Thompson of National Bank, please go ahead.

Great, thank you. Mark, it looks and sounds like more than $50 million of annual savings were achieved from the restructuring. Can you quantify what the savings are actually and if they are fully reflected in Q1? And also maybe for John, if we should expect anymore restructuring expenses related to this restructuring in future quarters?

Yeah. So, Kris, when we announced the restructuring I think we said that the total cost was expected to be somewhere around $25 million and you will note that the charge this quarter was around $17 million. So we got to virtually all of the people related costs. Obviously it didn’t all happen on the first day of the quarter but they were for the most part frontend loaded in the quarter and the facilities will take a fair bit longer. So there may have been some minor facilities closed during the quarter but that will take longer to realize.

Okay. And while I have you John, just on the IRS last quarter, I think you mentioned that potential liability is around 550 million and I’m hearing that it may be increasing?

No, not at all, Kris. We received the – just to backup what we announced last quarter is we received one drop notice of proposed adjustment and we were expecting to receive the second. Based on the input we had from the IRS when we added both of those things up and included penalties and interest that was the gross possible number and that hasn’t changed.

Okay. Just my last one Mark for you on the Dell acquisition of EMC, can you just may be give us some comments on what you think that might mean for you guys opportunity wise? Thank you.

Yeah, Kris, thanks for the question. Well, I’m pretty excited about what I see in Suite 16 and Cloud 16 and we’ll be unveiling all those details in two weeks and we will have our first customer shipments in the next few weeks. Roughly we’ve put 300 million of R&D into this release, it’s the largest investment in EIM software and it’s time to get more aggressive and going after new customer acquisition, more aggressive and compelling upgrade programs including programs to upgrade into the cloud, our cloud and it will be time to get more aggressive on competitive programs from FileNet, Documentum, Alfresco, Interwoven, and HP-Autonomy. So Suite 16 and Cloud 16 is a very meaningful release for the company and I’m quite eager to show the world in the next couple of weeks.

Great, thanks. Looking forward to learning more about it at your show, see you there.

Thanks, Kris.

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

Hi, thanks. Good afternoon. Just wanted to touch on the cloud and how additive it’s been to the business. Certainly your goal is to grow cloud meaning from new revenue resources including acquisitions overtime. I was wondering if you might be able to give us some color around how that’s going to evolve since the launch of our full cloud solutions in January. How much of the growth for cloud has been from new revenue sources from your perspective?

Well, Phillip, let me just kind of walk through what it is and just may be remind everyone a little bit of what it is since it’s new, all right. so we are not interested in substituting a license for a subscription and in fact we disallow it by – we don’t go after that business, the field is not incentive to do it and we don’t have contracts to go and do it. what we are looking to do is either for new customers or for existing customers is to sell additional services to that license business which includes hosting fees in our cloud and complete managed services fees in our cloud that includes we’ll install a software, we’ll manage the software, we’ll operate the platform, we’ll manage the data environment, we’ll back it up for you, we’ll upgrade it, we are the experts on our stack and with Suite 16 and Cloud 16 we will actually take all the database cost out of that environment for you as well with our new support of an open source stack. Now we kind of wrapped that up into a term that we call MCV, minimal contract value, and when we talk about MCV, this is the net new value, right. So if we had an existing MCV arrangement in place for 1 million and renewed for 1 million, we will talk about MCV of zero. But if we had an existing arrangement at 1 million and grew that to 3 million, we talk about MCV of 2 million or any new in MCV would be added in that as well. So this quarter, we added 41 million of new MCV to the business and I’ve noted that renewal rate is actually higher. And that renewal rate is in the mid 90s all blended which is a higher renewal rate in the low 90s of our maintenance business. So the short of it is, we’re going after new spend. Customers are going to continue to buy a license in maintenance while we want to go after the infrastructure and the managed services which are new revenue stream.

That’s really helpful. Just on the topic of that, would you – just based on your current sales strategy, would you assume maybe more pronounced seasonality on your marketing costs between the quarters going forward? Do you think you expect for the fiscal Q4 is going to be a big marketing spend quarter as you kind of see your strategy play through?

Phil, it’s John. So traditionally the second quarter is a big marketing spend quarter for us. Mark talked about the Enterprise World and that is we typically see higher marketing expense in the second quarter.

Got it, that’s very helpful. And then last one just looking at your buyback obviously you repurchased 50 million of shares this quarter to get advantage of the current share valuation. Should we view your buyback as any indication on the availability of large acquisition opportunities at all or do you also see room for both acquisitions and buybacks in the foreseeable future? Thanks.

Yes, Phil. So as Mark pointed out, I mean we operate the OpenText intelligent growth model, which is making sure that we think about returns for all of our stakeholders. We have plenty of liquidity available. So, we finished the quarter with over $700 million in cash, got lots of additional capacity to the extent we needed. So, we can continue to repurchase shares if we decide to and fulfill our M&A strategy.

That’s really helpful. Thanks very much guys.

Thanks, Phil.

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

Yes thanks. Mark, despite the currency, the Cloud growth has been, I guess flat, I think constant currency grew by 1.4%, given that you guys have won a number of MCV new deals this past few quarters when do you guys actually going to see the cloud piece start to pick up and accelerate here, is that later this year, maybe give us a sense when that would be?

Richard thanks for the question. Yes there is no doubt that currency mask it’s a bit and as you will say in constant currency it is up a couple points year-over-year. Look, I am looking towards Suite 16 and Cloud 16 as the next catalyst for us. As I highlighted in the call script that Cloud 16 is a significant step forward for us. We will have our next generation core platform, which really hasn’t generated, really contributed yet on the revenue side. We will be putting archive center in the cloud, which is completely new and quite expanded, you know SAP, Oracle, Microsoft, our own Suites and Gmail. Analytics will be a big push as well and we recently introduced Analytics as a standalone service in the Cloud, but with Cloud 16 it will be integrated into the GSX platform. So, that is new and additive and the state of the grid solution, I just, I can’t, I get very excited about it being able to do deep packet inspection. I had an engineer call it, it’s the Splunk for B2B because we are able to do deep packet inspection among our transactions and then aggregate that information and obviously we’ll able to commercialize and sell that information to say as manufacturing transactions up or down as retail up and down in Germany. So, Richard I look towards Cloud 16 and Suite 16 really as our next catalyst to grow.

Okay. And for many of us who have been following the name for a long time this is obviously been largely a growth plan acquisition story and I think if you sort of look forward you talked about a number of acquisitions this year, can you give us a sense of what you think about the contribution from acquisitions versus organic when it comes to growth, you know these acquisitions to more or really represent 70% of your growth targets or give us a sense where that comes from?

Yeah, sure thing. I will reiterate our model, right. Our model is, we look for organic growth in the low single digits and we look for acquired growth to get us into double digits. Some years are little more than that, some years are little less than that given the market opportunity, but our overall framework for growth, revenue growth is, we try to take our to internal innovation and execution given our margin profile and smartly grow organically low single-digit and then through M&A get us into double digit. And that’s the model we’ve operated on over the last decade as that model remains in place, some years it is a little better, some years it is a little less.

And one last question, you guys are obviously in different markets now, you’ve got ECM, Analytics, little bit of EDI, where are you seeing the most traction today and I guess it probably will change after early 2016 as it stands today, where was that strength this quarter? Thanks.

Yeah. I would say where a lot of interest is coming from is really our core right now around ECM. The digitalization journey starts with consolidation of platforms and a consolidation of unstructured data. So, a lot of the strength we’ve seen is sort of in the core of what we do via ECM and the interest is very high in Analytics. We have come a long way as a company without really ever having a formal Analytics solution and with them actually now on board on our operating model fully integrated into the business with Cloud 16 and Suite 16 fully integrated across our suites and integrated into the Cloud there’s been a lot of interest in understanding what we can offer via Analytics.

That’s great. See you in a couple of weeks.

Yeah. Thanks, Richard.

[Operator Instructions] The next question comes from Paul Steep of Scotia Capital, please go ahead.

Great thanks. Mark, maybe you could talk just a little bit, you mentioned it in the Q that you released about increasing the rate of flexibility for customers and the fact that you’re agnostic, maybe talk about your interactions with the customers and how we from the outside should be thinking with that rate of adoption in terms of the overall growth rate as you see clients explore and examine some of the cloud options?

Yeah, I think there are, Paul there are two things. One is we’ve talked about or maybe three things, our longer term model of getting recurring revenues to 90% of total revenues, that’s a very important milestone. Second is having our license business remain consistent on an absolute basis and watching the MCV number, which is minimal contract value, new contract value that will ultimately turn into revenue via the cloud. So, those are the three markers that we’re certainly watching which translates into the flexibility which is getting our business to 90% or greater recurring, we’ve held our license business consistent on an absolute basis, for the last three years. We expect that to continue and the MCV number is new for us, we put that metric out there this year. The renewal rates are more impressive than our already impressive maintenance business and I’m watching the growth of that MCV number.

Okay. Fair enough, the other question that sort of popped when you touched on it briefly in the script, as your drive towards being a $2 billion company hopefully sometime soon, how are you feeling of both expense or control, obviously there was a senior sales change towards the end of mid last year middle of the year, where were you at in terms of your thinking about the need to maybe broaden out the team even more, are you satisfied at this point?

I am satisfied at this point. I actually feel we have the - part of the last restructuring that we did, we looked at stands and layers and wanted to make sure that we were aligned without kind of being this bureaucratic large organization, we wanted to remain very lean and nimble and we got those changes done quickly as you’ve seen sort of reflected and I’m quite pleased with Ted and George who lead the bulk of the field. George focused on the iX world and Ted very focused on the EIM platform. So, I like the structure, feels good inside and I like the organization, feels good inside and outside the company and I’m not looking to make any additional changes at all to that org structure.

Fantastic thanks, look forward to see more.

All right, thanks Paul.

Next question comes from Eyal Ofir of Dundee Capital Markets, please go ahead.

Great, thanks. Thanks for taking my question. Just first off on your commentary on Blue Carbon obviously you guys are pretty excited about that and it’s going to beta this quarter, so traditionally the December quarter has been pretty strong from a seasonality standpoint over the first fiscal quarter. So should we be assuming that some of that could be deferred into Q3 or how should we think about the license revenue here into Q2 and Q3?

Eyal, thanks for the question. Historically, we haven’t seen a delay due to an upcoming release. Customers have immediate needs and they want to get going and if they are in maintenance, they get the next version of the software. So uncertainly just at the Red Oxygen transition, we didn’t see a pause, I’m not anticipating a pause here as we unveil Blue Carbon. We will actually also talk about the next release post Blue Carbon and customers appreciate being able to do multiyear planning with us now. So historically we haven’t – my last four years, we haven’t seen a pause as we transitioned between releases. I’ll add I talked about a strong Q2 pipeline, let me offer up maybe a little more insight into that. the reason I feel good about that strong pipeline is really due to mix. It’s about mix in geography, it’s about mix in deal sizes, it’s about mix in industries and also a mix of on premise and cloud/MCV deals. So that’s why that’s a little more of the underlying detail behind the strength of the Q2 pipeline.

Okay, good. Just on your comment on MCV, do you guys have – is there like an average period of MCV like this revenue is recognized over a three year timeline or is it – it’s like an average time contract length you can talk to?

Yeah, we typically do three to five year deals on MCV and we’ll book a deal, a guaranteed contract and then we have to work to get the customer live and then we start the monthly billing from that Go Live part.

Okay, perfect. And before I pass the line, last question from me, Actuate, do you guys have a number of how much revenue recognized on the Actuate side and then it seems like also you guys have integrated with this restructuring, you’ve already integrated them potentially to your OpEx target margins. How is that gone and where are you guys out there and then I’ll pass the line. Thank you.

Yeah, so thanks for the question. We haven’t put out a number for Actuate revenue this quarter but it is reasonably consistent with the numbers we put out when we announced the acquisition. And I did say in my script Actuate did have a good quarter and is now on our operating model, and so the integration of that has gone very well and we are on or ahead of schedule.

Okay great, thanks. I’ll pass the line. Thank you.

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

Thanks very much. Good afternoon. I just want to follow-up on one of Richard’s questions on cloud growth. Could you quantify either the revenue or MCV mix between the business network like the GSX or EasyLink versus SaaS or software subscription revenue or could you speak to the general growth rates in those two segments.

So, Paul, let me take a crack at it first and then head it to John. So we are not getting below that number right now to say which segment or pillar it’s coming from but the majority of this is MCV, not SaaS revenues. So SaaS hasn’t really kicked in for us if you will, most of that MCV number is multiyear managed services right now.

Okay, that’s good to understand. Is there any I know you mentioned it won’t be cannibalistic but additive but could we see some license shift out of the license number and into the MCV number?

Well, let me approach that via our model. And I think the answer is plainly in our model which is our aspiration here is to get to 90% or greater recurring, the other part is license. That’s a good modeling exercise to say what is that look like and our margin aspirations of 34 to 38. So I’ll just remind everyone that the thing that’s not recurring as we defined in our model has license. Do I think some license business will migrate to a managed service? Sure, thanks and that’s okay because with the latter at its expense you’d hold on to the asset, you would pay your maintenance for the asset, but you’re coming to us to either manage it on-site, which we do today for the Government of Alberta, which we do today for the European Central Bank or you’ll ask us to lift that license and maintenance up move it into our cloud but pay for infrastructure and managed services. So, yeah I do think we can see some of the license business move to the Cloud services line, which is okay because there will be additional revenues and I again will re-highlight our goal of getting to 90% or greater recurring revenues.

Okay, thanks. Just wanted to shift to your capital structure just in light of comments on M&A and then also the recent share repurchases, how do you think about your capital structure, you completed a successful high yield offering earlier this year, would you continue to use high yield to augment the existing liquidity that you have?

Paul, it’s John. So, as we talked about before we did do the high-yield issue about a year ago just under a year ago and that was an opportunistic financing. We took advantage of a very frothy high-yield market, which was great. We did it for a few reasons, one is to balance out our fixed floating ratios and so we’ll continue to look at that as we move along. We’re pretty happy with our capital structure rate now, as I mentioned we’re pretty happy with our liquidity position. So, we’ll continue to look at the capital structure as we move forward and high yield is just one of many tools that we might use.

Okay thank you, I’ll pass it on.

[Operator Instructions] the next question is from Varun Choyah of CIBC World Markets, please go ahead.

Good afternoon gentlemen, just two quick ones from me. Going back to the MCV you mentioned that most of it is from the multi-M managed services deals, do you have like any sort of growth targets or like how MCV is going to grow over time on a year-over-year basis??

Yeah, we have a target model goal this year MCV between 280 million and 320 million.

And that’s pretty much the managed service, do you have any …

I think and if I’m recalling the fiscal 2015 number was 211 million.

Correct.

Yeah, so fiscal 2015, 211 million, fiscal 2016, 280 million to 320 million.

And I know you said you haven’t really touched on the SaaS from a contract value perspective, but is it safe to say that once you start seeing all of these SaaS deals, would it be like multiples of the existing managed service MCV?

No, I think managed services is going to remain the bulk of - the lead of what we do for some time, but our next generation core, OpenText core we’re going to unveil and demo main stage in two weeks and that will be our first real SaaS opportunity to generate revenue, but managed services is going to remain the lead for quite some time.

Great. And switching gears to the M&A front, what sort of targets like look attractive to you, any specific vertical in your business, is it more on the Analytics side, is it more on the augmenting the content side or do you feel you have a good mix of functionality in your offerings?

Yeah, I typically don’t get into any details - typically I never get into any details, not just typically as to where we are looking in M&A. At the top of our pipeline we usually lead we’re trying to fill wide spaces, I’m happy with the pillars we’re in. I’m not looking to get outside of EIM at this point. There is plenty of white space within EIM, so top of our funnel is just filling wide spaces in the current markets we’re in.

Great that’s all I got, I’ll pass the line, thanks.

Okay. Thank you.

This concludes time allocated for questions on today’s call. I will now hand the call back over to Mr. Barrenechea for closing remarks.

All right, thanks everyone for joining us today and I’m very optimistic about fiscal 2016 and look at it to be a transformative year for us. Our strong earnings engine got even stronger. Our ultimate financial goal is cash flow. Our capital allocation approach I think is market leading with our view on dividend buybacks and how we generate return from M&A. We have a catalyst release coming up for us with Suite 16 and Cloud 16 and we’re looking forward to drive aggressive new customer acquisition upgrade and competitive replacement programs and our customers will get their first shipments Suite 16 and Cloud 16 this quarter. I hope you will be able to join us at Enterprise World and I look forward to seeing you all there. Thanks for your time today.