Open Text Corporation (OTEX) Q4 2017 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation Fourth Quarter Yearend 2017 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] I would now like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, Sir.

Thank you, operator, and good afternoon, everyone. On the call today is OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Chief Financial Officer, John Doolittle. We will read prepared remarks, which will be followed by a question-and-answer session. I would like to take a moment and direct investors to the front page of the Investor Relations Section of our website, where we have posted presentation that will be referred to during this call. And now, I'll proceed with 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. 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 as well as risk factors that may project the future performance results of OpenText are contained in OpenText Form 10-K 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 may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I'll hand the call over to John.

Okay. Greg, thank you very much. Welcome to the call, everybody. Let's go through the numbers and my references will all be rounded in millions of U.S. dollars and compare to the same period of the prior fiscal year unless I indicate otherwise. Total revenue for the quarter of $664 million up 37% from last year and $675 million up 40% on a constant currency basis. Revenue is negatively impacted by $14 million due to acquisition accounting rules and by $12 million due to foreign exchange. Fiscal 2017 total revenue of $2291 million up 26% from last year, $2317 million up 27% on a constant currency basis. Total annual recurring revenue defined as the sum of cloud and customer support revenue was $471 million up 35% from last year and $479 million up 37% on a constant currency basis. Fiscal 2017 total annual recurring revenue of $1687 million up 25% from last year and $1705 million up 27% on a constant currency basis. License revenue for the quarter of $123 million up 43% from last year and $126 million up 46% on a constant currency basis. Fiscal 2017 license revenue of $369 million up 30% from last year and $373 million up 31% on a constant currency basis. Cloud revenue for the quarter of $184 million up 17% from last year and $186 million up 19% in constant currency. New MCV bookings this quarter were approximately $78 million up compared to $67 million in the same period last year. Fiscal 2017 cloud revenue of $705 million up 17% from last year and $712 million up 18% on a constant currency basis. Customer support revenue for the quarter of $288 million up 49% from last year and $293 million up 52% in constant currency. Fiscal 2017 customer support revenue of $981 million up 31% from last year and $993 million up 32% on a constant currency basis. Our customer renewal rate was in the low 90s similar to last year. Professional services and other revenue for the quarter of $69 million up 43% from last year and $71 million up 47% in constant currency. Fiscal 2017 professional services and other revenue of $235 million up 22% from last year and $239 million up 24% on a constant currency basis. Next foreign exchange for the quarter, foreign exchange is negatively impacted revenue by $12 million and had a negative $0.01 impact on adjusted EPS. The negative effect of the $12 million by revenue type is broken down as follows; customers were $5 million, cloud $3 million, PS $2 million and license $2 million. Fiscal 17 foreign exchange negatively impacted revenue by $26 million and negatively impacted adjusted EPS by $0.03. The negative effect of $26 million by revenue type is as follows; customer support $12 million, cloud $6 million, PS $4 million and license $4 million. Other gross margins for the quarter were as follows; license margin was 97%, up from 96% last year, cloud was 57% compared to 59% last year, down primarily due to recent acquisitions, customer support margin was 88% up compared to 87% last year, professional service margins was 15%, up slightly compared to 14% of last year and I expect to see improvement during fiscal '18 as ECD professional services alliance with our fiscal 2018 target model. Adjusted operating income and margin was $220 million this quarter up 39% and adjusted operating margin was 33% up 40 basis points over last year. On a constant currency basis, adjusted operating income was $223 million up 41%. For fiscal 2017, adjusted operating income was $728 million up 18% and adjusted operating margin was 32% in the middle of our published annual target range compared to 34% last year and on a constant currency basis, adjusted operating income was $736 million up 19% compared to last year. Adjusted EBITDA was $237 million this quarter up 37%. For fiscal 2017 adjusted EBITDA was $793 million up 18% and we've added adjusted EBITDA to our external reporting and investor materials as we believe it is a helpful measure of the long-term success of Open Text's business model. Adjusted net income increased by 46% to $159 million this quarter. On a constant currency basis, adjusted net income was $162 million up approximate 48% and for fiscal 2017, adjusted net income was $518 million up 20% and on a constant currency basis it was $524 million up 21%. Interest expense was $32 million in the quarter, which is in line with the estimated run rate we provided in our investor material and we've updated our fiscal 2018 target model to be in the range of $125 million to $130 million. Adjusted earnings per share for the quarter was $0.60 on a diluted basis compared to $0.45 for the same period last year up 33% and up 36% on a constant currency basis at $0.61. Adjusted earnings per share for the year $2.02 per share on a diluted basis compared to $1.77 for the same period last year, up 14% and up 16% on a constant currency basis at $2.05. GAAP net income for the quarter was $46 million $0.17 per share on a diluted basis down compared to $86 million or $0.35 per share on a diluted basis. The decrease in GAAP net income for the quarter was mainly due to increase in interest expense of $10 million and an increase in tax expense of $53 million and these increases were partially offset by the increase in other income. GAAP net income for fiscal 2017 was $1,026 or $4.01 compared to $284 or $1.17. The increase was primarily due to a significant tax benefit of $8.76 specifically tied to the IP reorganization that occurred, consolidating our intellectual property candidate and ensures appropriate legal protections for our consolidated IP, simplifies legal accounting and tax compliance and improves our global cash management. Consistent with this planning, the recent acquisition of the ECD business was purchased by OpenText Canada and now resides as part of our Canadian-based IP portfolio. The increase in that income was offset by an increase in interest expense of $43 million. Operating cash flow as mention, adjusted EBITDA for fiscal '17 was $793 million up 18%. Additionally, we saw revenue growth of 26% and our receivables grew year-over-year by $160 million, while we maintained relatively flat DSOs whilst on-boarding acquisitions. Operating cash flow for the quarter was $102 million, down 14% year-over-year, reflecting growth in receivables, higher interest, onetime tax cost associated with the IP migration and onetime cost associated with our fiscal '17 restructuring plan. In terms of the receivables growth, I noted the DSOs above, but the important point is that we had a strong Q4 with an emphasis on June and these receivables could not be collected in fiscal '17. The good news is that this bodes well for operating cash flows in Q1. Operating cash flow for the year was $439 million down 16% year-over-year for similar reasons as I noted above. On the balance sheet, we ended the fiscal year with $443 million of cash $632 million of deferred revenue. We remain focused on expanding operating cash flows as we head into fiscal 2018. Our net debt to EBITDA is slightly above 3 given the transformative fiscal year we just completed and we expect that ratio to fall below 3 in fiscal 2018. In tax, there's nothing new to report on our ongoing discussions with the IRS, but we will continue to keep you updated on any material new developments. While there is no update on this front, we have revised the disclosure of our estimated aggregate liability in the 10-K to $585 million up from the previous $575 million solely related to estimating interest that has accrued. To reiterate our adjusted tax rate for the quarter, was approximately 15% and is expected to be the same for the next fiscal year. On ECD, ECD delivered on plan and we're pleased with the overall performance. Total revenues from ECD were $113 million during the quarter $193 million for the fiscal year and adjusted operating margin was approximately 19% for the quarter an increase of approximate 600 basis points over the prior quarter. I'll remind you that we provided deferred revenue waterfall table of the one-time total ECD adjustment of $52 million in our IR deck. The Board of Directors declared a cash dividend of $0.20 per share to shareholders of record on September 1, 2017 payable on September 22, 2017. Now to the fiscal '18 target model, fiscal '18 will be a year of operating cash flow growth, margin expansion and further strengthening of our balance sheet. Our adjusted operating margin target for fiscal 2018 is a range of 32% to 35% and we expect to start at the low end of the range with similar seasonality to fiscal 2017. We're not providing revenue targets today; however, I would like to highlight our proven track record of historical 10-year revenue compounded annual growth rate of approximately 14%. I'll remind all of you of our typical Q1 dynamics. In terms of recent acquisitions on July 26, we closed our previously announced acquisition of Covisint, a leading cloud platform for building identity, automotive and Internet of things applications for approximately $103 million. Over the next fiscal year, we expect the revenue run rate from Covisint to be down approximately 25% to 30% from their publicly reported numbers due to the usual purchase price accounting and first year integration disruptions. We expect minimal revenue in Q1. Covisint will be on our cloud gross margin immediately, but they will not be accretive to the bottom line for the second half of fiscal 2018. On July 26, 2017, we also announced that we entered into a definitive agreement to acquire Guidance, a leading provider forensic security solutions for approximately $240 million. The acquisition is expected to close during the first quarter of fiscal 2018, subject to customary closing conditions. And with that, I'll turn it over to Mark.

Thank you, John and welcome everyone. I want to speak to three key items today and before we open the call to your question, our Q4 and fiscal 2017 highlights, fiscal 2018 and the key barometer for our business. Let me start with some Q4 highlights. We had solid revenue performance of $664 million up 37% year-over-year, annual recurring revenue or ARR was $471 million up 35% year-over-year. ARR is driven by customer satisfaction, business value derived from our software and services and continue with innovation, resulting in strong renewal rates. ARR is a key barometer of our business as well as ALM and OCF, this is part of our central theses. We had 37 deals over $1 million in value, 18 in the cloud, 19 on premise. Our license size was stable at $387,000, new MCV was $78 million up 16% year-over-year with an average size at $70,000. On our book of business 25% originated from new customers and 28% was influenced by partners. Geographically, Americans was 60% of our business, EMEA 30% and APJ 10%. Industries that contributed 10% or more included services -- financial services, CPG retail and technology. Key customer wins included Deutsche Bundesbank for our ECM, patch and engineering and construction management, County of Los Angeles, NASA Langley, Panasonic, State of Tennessee, Volkswagen for analytics, Anthem for CEM and Blue Cross four ID benefit cards and plan statements. These are Marquis organization making key automation decisions, leveraging Open Text innovation. And lastly it was a record enterprise world with an estimated 5,000 attendees, 400 partners, 230 session and 120 customer speakers. We plan on hosting Enterprise World next year in Toronto as well. As for the full fiscal year, we delivered approximately $2.3 billion in total revenues and we delivered against what we said we're going to do and that was to increase our pace of acquisitions and delivered double-digit revenue growth across all our revenue lines. We had positive organic growth in fiscal '17, our annual recurring revenues were $1.69 billion up 25% year-over-year. Year-over-year as well we increased our total revenue by $467 million onboarded 2,000 new employees and expanded our EIM total addressable market to approximately $35 billion, providing wider aperture for our long-term strategic flexibility and the optionality for the business. We acquired the Enterprise Content division of Dell EMC and are now the worldwide leader in content services against IBM. We acquired Recommind and are leading in the discovery market. We also took in unprofitable business here and made that profitable in the first 12 months of operations. So, to demonstrating the power of our M&A model. We acquired HP CEM and HP CCM and strengthened our market position and customer experience management. We're leading the market in B2B supplier networks and closed ANX and recently closed Covisint, extending our B2B leadership against IBM. With Covisint, we have entered the market for the Internet of things, auto supplier portal as well as digital identity management. We recently announced our intention to acquire Guidance Software an information forensic company to strengthen our information platform and discovery offerings. We asked a lot of our teams and the key word that comes to mind is leadership. They provided leadership and execution in their professional domains and for our customers and for their fellow employees. It is a team dedicated to our purpose as the information company and transforming the digital marketplace. I also think it is helpful to let our fiscal 2015 with an historical trend at it speaks directly to our culture. Over 10-year period total revenue CAGR is 14%. Revenue has grown from $596 million to $2.3 billion. Adjusted operating margins have expanded from 22% to 32%. Operating cash flow CAGR is 15%, that's all over a 10-year period. Over a five-year period, our ARR CAGR is 21% where ARR has grown from $657 million to approximately $1.7 billion. Our adjusted EBITDA CAGR is 18% where adjusted EBITDA has grown from $351 million $793 million. Our business model scales and it scales for three basic reasons. First, we acquire within a market thesis of enterprise information management. This market thesis provides a rich pipeline of opportunity, common business models to optimize against and a cohesive message that we can bring to our customers. Second, we are disciplined on our approach to M&A from the diligent, valuation methodology, investment returns and operational execution. Third, we integrate, we integrate products, sales forces and business operations and practices. I can't see a boundary to our business or our business model. As we through our new fiscal year, fiscal 2018, let me make a few macro points, fiscal 2018 will be a year of operating cash flow growth as John noted, margin expansion and revenue growth, which will all further strengthen our balance sheet. We expect the second half of fiscal 2018 to be stronger than the first half. Our adjusted operating margin model for fiscal 2018 is a target range of 32% to 35% and we expect to start at the low end of this range, similar seasonality in fiscal 2017. Please recall ECD will be on our margin model in the second half of the year. As John noted, we are not providing revenue targets today. However, I too would like to highlight our proven track record of historical 10-year revenue CAGR of 14% and we expect typical Q1 dynamics as we start a new fiscal year during the summer months in North America and Europe. We are watching macro issues that could affect customer demand in places such as South Africa, Brazil, Middle East, Russia and China. We all read the same headlines. As for our Professional Services business, we're focused on higher value services, such as managed services and upgrades around software and we'll optimize profit over faster revenue growth. Covisint is now closed. Over the next year, we expect the revenue run rate from Covisint to be down approximately 25% to 30% from their publicly reported numbers due to the usual purchase price accounting or PPA and the usual first-year integration disruptions. Covisint will be on our cloud gross margin model immediately and Covisint will not be accretive to earnings until the second half of this fiscal year. We're modeling minimal Q1 revenues. We expect Guidance Software to close within the current quarter and we'll provide more detail at the closing and we have a long-term opportunity to continue to improve the operations and margins to increase automation, improved processes and people related to the expenses. I've used the term intelligent growth in the past and I'd like to emphasize this term today. We use the word Intelligent because it is not growth at all costs. Rather it is profitable growth. Fiscal '18 will be no exception. If we can only optimize for one thing that one thing, we would optimize for our margin dollar over a nonprofitable revenue dollar. Three principles guide us; execution, leadership and predictability. Execution within our business and our business model. Leadership with our customers and our products and predictability in our approach and results. ARR is well aligned to these three principles. Growth initiatives are very granular. I would like to say that growth is granular and it takes time. Our acquisitions give us an opportunity always to rebalance and expand account coverage as we integrate new sales forces into Open Text. We're working closely with global system implementers like Accenture, Tata, Deloitte, ENY, Capgemini to expand our sales covere strategically and cost effectively and for many of you who were at Enterprise World, you saw them very directly over that week. We have new offerings in cloud managed services AI and the Internet of Things positions Open Text well in key market trends and customer interest and we have a large install base to further promote the adoption of key offerings, such as upgrading to Release 16, information lifecycle management or ILM, customer experience management, Discovery and competitive replacements against IBM Lexmark and others. In summary, it was a strong Q4 and a transformative fiscal '17. I'm very proud of the team and their accomplishment in a most extraordinary year for the business. For those who attended Enterprise World, you could see their dedication, their professionalism and their commitment firsthand. The key barometers for our business include annual recurring revenues or ARR, adjusted operating margin or AOM and operating cash flow or OCF everything feeds these metrics. We are introducing adjusted EBITDA this year as John noted as we think it's an important metric and makes it easier to benchmark Open Text and other large software companies. We believe in intelligent growth. This is leading with M&A-driven revenue growth, complemented with positive organic growth and profitability overgrowth at all cost philosophy. Execution, leadership and predictability guides us. Lastly leveraging our large install base. We enter fiscal '18 well aligned to customer demand drivers and the beginnings of a new product cycle with offerings such as Release 16 EP2, Magellan NAI, Covisint and IOT and digital identity and for archive and information lifecycle management, team site media management and CEM as well as our discovery solutions. We intend to leverage these opportunities both through our direct sales force and our partners. With that, let me open the call to your questions.

Thank you. We'll now begin the question-and-answer session. [Operator instructions] The first question comes from Phillip Huang of Barclays. Please go ahead sir.

Hi. Thanks. Good evening. I was wondering, great to see the progress on the ECD margin expansion. The summary you provided on Slide 16 is helpful in terms of what's left to be done, but just trying to get a sense as to whether most of the heavy lifting is now behind us and whether you see any risk to achieving the 600 or 700 basis point margin improvement over the next couple of quarters? Is it just a matter of process at this point to getting to 30% to 34%?

Phillip, hey thanks for the question, Mark here. We like Slide 16, because I think it lays out our progress quarter-by-quarter. We're very confident in the second half of the fiscal year that ECD will be on the Open Text margin profile and reflective of that confidence john and I raised the target model coming year into the year to 32% to 35% as you saw both in the deck and in our prepared remark and look at August and it's five months away to the end of the year and what progress we've made since announcing the acquisition in January. So, it's relatively low risk. All our plans are in place. We've already integrated engineering. We've integrated the sales forces. We have some remaining systems and TSA work to do, but all our plans are laid out to complete that work by the end of the fiscal year.

Phil, when you do a deal of this size, an asset deal like that, the heavy lifting is done in the first couple of quarters and as you know we had a restructuring plan that we executed in fiscal Q3 and Q4. So that sets us up for the fiscal '18.

That's great to hear. So, with that -- I don't want to say in the bag, but thinking toward -- looking forward to cross-selling, cross-selling opportunity, I was wondering if you could maybe give some update on the progress in educating the sales force and maybe the customers and the products for cross-selling and up-selling, thanks?

Yes, fair enough. Thanks Phillip. So, when I think of our three big drivers for both acquisition and organic growth, we're quite focused on competitive replacements, specifically against IBM and Lexmark. Two is leveraging the install base and that means cross-selling. We've selected a couple key products, few key product offerings such as information lifecycle management, customer experience management and our SAP solutions as well as bringing a handful of new offerings to market such as Magellan NAI and then third, is continuing to scale cost effectively, not just through our direct sales force, but also our partnerships with global system implementers. So, the sales forces are integrated. We enter the fiscal year well aligned and they're trained. Now they have to go out and of course learn by doing and build that experience deal by deal through the year, but we come into the year well aligned, well-educated.

That's great. Thanks very much.

Next question comes from Richard Tse with National Bank Financial. Please go-ahead sir.

Yes. Thank you. At Enterprise World, there is certainly a lot of fanfare around Magellan, there seem to be a tremendous amount of interest. I was wondering given that's probably one of the most interesting product releases you guys have had in a few years, what was the post-event feedback that you received on that product release here?

Richard, Mark here. Thanks for the question and thanks for being at Enterprise World, look, we're excited about Magellan and there are I think three fundamental things, the first is we have the market permission that Open Text given we've been automating for 20 years some of the world's largest data archives and turning those archives into an active information likes by unlocking customer value through algorithms and visualization and in the world call that AI and the feedback on that was just very positive coming out of Enterprise World. Second, our approach compared to Watson is we're taking an open approach and they're taking a closed approach. Now to say the third thing that I'm hearing back is the ease-of-use and the affordability of our solution. So, it's been very solid feedback. It's still early days. I want to kind of marry that excitement both with we're not ready to put Magellan into our financial model at this point and we're going to continue to monitor our first sales cycles and first wins. But the early returns are a lot of excitement from our employees and our customers but we're not quite ready to put it into our financial model.

Okay. On that note in terms of the financial model, but could you maybe do some broad strokes to help us frame what the addressable market size would be within the Open Text space like is it something that will carry across the entire customer base, just to give us a sense of how big that could be?

Well I think it's going to be applicable to every customer eventually right. Again, I emphasize that we're not ready to set any financial expectations or put this in our financial model, but I think it's going to be broadly applicable into our installed base. It's clearly interesting to our business and more customers who are looking for supplier and titrating grid algorithms and optimization. It's going to be applicable to customer experience management and algorithms and insights around customers and content analytics to both the Documentum as well as content suite customers. So, it's going to be broadly applicable into our enterprise install base.

Okay. And just still last one for me. On ECG, you had that asset for a little bit of time now. Can you maybe give us an update whether there have been any surprises in terms of both the opportunities and the challenges and how you read that, thank you?

Yeah, thanks Richard. I'll get my views and John as well. I would say on the upside, I'm really impressed with the expertise and the talent in the organization and the vibrancy. On the product side, information lifecycle management is just a gem that we're going to be able to bring across our entire installed base and as in all asset yields they take time. You'll get a surprise here and there on legal structural lease in this country and you thought you knew it inside and out and so just on the operational side, you always get a surprise or two on an asset deal, but the strength of our corporate development and operations is we know how to power through them and get things done very well. So, the people, the importance of the technology, a gem in information lifecycle management and there is always a surprise or two in an asset deal. John, anything?

Just to emphasize the people, that's the thing that I take away, the quality of the team, the attitude they fit right in, number of ECD folks on our leadership level now and really contributing into the acquisition.

Okay. That's great. Thank you.

Yeah, thanks Richard.

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

Great. Thanks, Mark, I guess you've held true to your words post when we last met last month and you've continued to be busy on M&A. Can you give us context around how we should think about the pace of M&A here given the integration process as well as maybe the comments around the shelf filing as well tonight?

Yeah, sure thanks. So, look our M&A strategy just remain consistent and constant. It's the best way to say it. We have all work over the next five months to complete what we've started to get ECD on our operating model and we're very confident of that. Covisint is now completed and I've actually gone out and see my first customers on Covisint over the last week and it's not just the Internet of Things or auto supplier portals. I think one of the interesting gems in here in Digital Identity Management. But everyone can read their P&L right and we have work to do as we noted and that's work we know we need to do. I won't comment on guidance at this point other than we're obviously to get that completed in due course and with normal closing conditions. So, for M&A it's just only constant and consistent. I'll within the context of intelligent growth and on the shelf, it's normal course filing just as we refresh that shelf. John is there anything…

Paul, just a really simple refresh, the U.S. shelf needed to be refreshed from a timeline point of view and we just took the opportunity to refresh the Canadian one as well. So very simple straightforward.

So, no change to our approach and M&A and we're going to remain consistent to our previous practices.

Okay. On the cloud transition, I guess you made a few changes to the operating model here and going forward. Maybe talk about like has anything changed in the market or is this just merely you incorporating a working through the numbers from the various acquisitions and I got one quick follow-up for John?

Yeah Paul, I am not sure what you mean by a change. Maybe you're seeing something or hearing something…

Are you talking margins or…

No, I was talking the revenue mix model at the top of the model that you shifted things around a little bit as well as the 20/20 move on the goal recurring. I know you recognizing the strip that the professional services number?

On the -- maybe just a comment on annual recurring, over the previous year we had PS in that number, and we took PS out because we just thought it would be easier to benchmark, cloud and maintenance if you will in ARR. So, it's easier for you to do your benchmarks of us against other businesses. On the PS side, look we’ve gone for the high value dollar. And, that consist of managed services, it consists of working with our OpenText customers for new installations, upgrade and new application the development. Some PS over time has also migrated into the cloud line, as things have gone on more to come in and services. So, I think the ARR is warm more of a peer industry definition. They will help you benchmark us better. On the PS side, we’re continuing to go after those high value dollars. John, on the model?

Yes, just going to say, so just on the mix issue that you allude to. As you all know we brought in ECD, the cloud business with ECD was not nearly significant is within OpenText and that’s a real opportunity for us to build. But this is just a realization that, we get the benefit of ECD, changes the mix of cloud versus above the rest of the line items.

Great. And just a last quick for you, John. If you cadet the Q3 to Q4, if you had the actual impact from the Dell EMC TSA that let us do it on an apples to apples basis, that would be helpful? So, thanks.

Other than to say that TSA rules off through the year. As we mentioned last time, and we built that - we will take on that with an OpenText and we built that into our operating model. So, I don't have the actual TSA numbers quarter-over-quarter. But it will be sliding-scale downwards.

Thanks.

The next question comes from Thanos Moschopoulos of BMO Capital Markets.

Since, there was good moment with large sales this third quarter, certainly a good uptake in million dollars deal and average deal sizes. Is that partly ECD impact or is that reflective of clients buying more modules across the suite as part of their deployments?

Hi, Thanos, Mark here. I think it’s partly reflected, the seasonality of our businesses, those are Q4. Also, we -- I think part of the strength of our offerings as well. So, I would but I probably point little more just to the seasonality of the business given it was Q4.

I guess on a year-over-year basis, it was still quite a notable uptake in million-dollar deals. Even more of an increase than the revenue increase would imply, which is why is asking about trend?

I am not ready to draw a trend line were executed well within the third quarter and we thank you for.

Then in the ECD revenues, you guided for a 5% to 10% decline at the time of acquisition and looking at the numbers this quarter, it seems may have been a bit more than that, if I just for the acquisition accounting. And I realize it can be some third quarterly. But overall would you say that the revenues are tracking in line with your initial expectations?

Yes, we are on our plans for sure.

And then finally, Mark. Can you give us an update on the competitive environment post ECD? One thing I’ve been in hearing in particular is that, there has been uptick in terms of customers migrating from IBM FileNet to Content Suite. Is that something you are seeing as well and more broadly, I would describe the landscape post ECD?

Thanks for the question. I have the organization focused on IBM, no doubt. And when we bring document them into organization and we look at what we can do versus FileNet, it’s very clear. Our ERP integrations notably SAP and Oracle differentiates us against IBM's FileNet our differentiates again IBM’s FileNet. Our information lifecycle management, our discovery solution. integration of Microsoft, such as Office 365. These customers are real strong choice in the marketplace. I think a compelling choice and we had particular wins in this area. U.S. steel, Southern Edison, the VW and GDPR. When we look at our B2B network offerings against Sterling Commerce. Why do you think that we can just clearly offer that IBM can? Whether it be in ISO, SWIFT or HIPAA compliance areas, product catalogs, we have a whole list and we won Costco last third quarter versus IBM Sterling Commerce. On the analytics side, we say AI, but we should expand that to include analytics and AI and put Cognos in that category as well against Watson and we had a couple nice wins against the Cognos and Barclays and Vertex and on the CEM side Anthem. Anthem is a nice win against the offerings from IBM on CEM. With Anthem, we’re going to be unified communication to 74 million folks subscribe to Anthem. So, yes, we have the organization very focused on IBM very factually non-emotionally across FileNet, Sterling Commerce, Watson, Cognos and CEM and focused on those differentiators and we had some real nice wins.

Great. Thanks. I’ll pass the line.

The next question comes from Stephanie Price of CIBC.

Hi, Stephanie.

Can you give us an update on the partner network, post recent acquisition? You mentioned I think in your prepared remarks. Where have you added some strength just given the recent deals?

Very specific question, but I would point to new partners such as Sterner and healthcare. I would look towards, TCS, Tata as a very good example. Tech Mahindra, with Covisint, CISCO with Covisint would be four examples Stephanie.

And in terms of your operating margin target, can you talk about the puts and takes, what will put you at kind of the higher end versus lower end of the target?

Well Stephanie, big part of this is the ECD integration and as we talk about we made 600 basis in improvements. We’re on path to deliver within 12 months ECD under operating model. So, that’s a big part of growing the operating margin. Of course, I will point to the restructuring that we executed in Q3 and Q4 as well to the positions us well from an operating margin point of view in fiscal ’18. So, I am not going to give, whether we’re going to end up at the 32 or the 35. But we kind of given you color in terms of where we think we’re going to go throughout the year.

And then maybe…

If I could just jump in and John correct me if I have it wrong. But without the numbers aside for a moment. If we look, kind of how we executed in 16 from 17, right. It’s completing acquisition integration and then continuing with our automation and labor placement if you will around the world. Those are the three big levers.

And just finally on cross-selling, you touched on it earlier. But I was wondering if you could talk a little bit about how the sales team is incented to cross sell and any wins that you’ve seen recently?

Stephanie, thanks for the question. We don’t at OpenText, I know I said this before, not recently, we don’t put product line third quarters out there in the field. There are -- we just don’t believe in that, it’s hard for me take a rep and to lose France and know what products are best n sell to lose franchise as an example. So, I think an overall third quarter number. But we get to emphasize the training and through materials and corporate resources, what’s - that’s available for them and the tools available to them. So, we do that through influence and education versus through specific quota systems. And we just picked the handful information, life cycle management, CEM, SAP solutions and discovery, those are solutions we are looking to have the field very, very focused on. We had a large U.S. transportation company as an example that was just a clear win from that we seller our effort. I think Southern Edison would be another good example of some of those efforts as well.

Great. Thank you very much.

The next question comes from Steven Li of Raymond James. Please go ahead, sir.

Thank you. Couple of questions for me. Mark at a high level can you maybe talk about Guidance Software and how it fits with your eDiscovery and Recommind? Is there any overlap in functionalities or opportunities to cross sell? Thanks.

Yes. So, I’d say there are two main pieces here. The first is, the Discovery Solution which is End Case, which is really Discovery at the end point. What Recommind does very well is once the data comes back centralized, trying to go through 10 million documents and find the needle in the haystack. So that ability to do the analytics finding that key piece of information is a big strength of Recommind. What Guidance does is, on the endpoint, end point discovery called End Case. So, it’s complementary to the Discovery, I imagine having 10,000 laptops and having to collected data from those 10,000 laptops to come back to Recommind. The second thing that Guidance, we’re interested in from a go to market and technology is having that technology and some of the newer products around information forensic and providing insights into cyber as well as to the forensics of the information. So, complementary to Discovery and new data forensics opportunity.

Great. Thanks. And then I have a partner question for you Mark. So, I saw your partner revenue as a percentage drop with document in the last two quarters. Is it an anomaly or is it actually an appropriately going forward given your earlier comments? Thanks.

Yeah. I haven't been -- it hasn’t hit my radar that the channel, the influenced number from partner is varying right because of an acquisition, I’ll go look at that a little more closely. I can tell you certainly that the interest from the global system implementers are very strong in our number. So, I don't see any anomalies or any change in behaviors. So, I guess it might be an opportunity then.

And quick one for John. For your cash flow from ops, you talked about a couple of one-time items. Can you go through those again and maybe try to quantify them? Thanks.

Yeah. Sure, Steven. So first of all, and most importantly accounts receivable. So, you'll take a look at the K and you’ll see that receivables grew from the third quarter to the fourth quarter by about 85 million. And that's truly a function of a very good fourth quarter, and in a very busy June. And so, as a consequence of that, it’s very are difficult to collect receivables for sales in the month of June. So that's number one. Number two, is our interest expense or interest cash cost is up and that's no surprise. Fiscal 17 was a year of investment and we haven't realized the full benefits of those investments yet. So, interest expense and another component. And there were some one-time tax costs related to the IP migration and I don't have the exact number on that, but the approximate $25 million is probably the right ballpark for that. So those really are the three things with an emphasis on receivables.

And that $25 million, that’s for the whole year, right?

Yes.

Okay. Thanks.

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

Thanks so much and good afternoon. Just a couple of questions on M&A. I think the acquisition of Covisint in guidance probably came sooner than most would have expected just in light of ECD and the size of it. What’s your thoughts on M&A capacity from an operations point of view and then also operationally what’s the typical bottleneck that you may see. And then how - what’s comfort level in the company's ability to integrate multiple acquisitions at the same time?

Paul, let me take a part of that. If I look at Covisint, George Schultz will be leading in our --- is leading that in our business network group. So, in terms of our go-to-market and engineering, it’s out of content services one line. So, it’s a different swim line in the company. And in terms of guidance that’s been a difference swim line as well, that’s with Gary Weiss in Discovery and Analytics. We don't necessarily have the ability to control the timing of an acquisition and when you're ready your sort of ready if you. I'm certainly not ready, company is not ready to put a acquisition behind ECD in the content services one lane as I like to say because we still have work ahead of us between here and the end of the year. There is no doubt that the teams, the operations teams have been busy. The common service teams, finance, IT, legal, but I think they've executed extremely well, and you see that in our Q4 results. We’re certainly mindful of making sure, we don’t clog a swim lane. By look at Covisint and guidance and there are in two completely different swim lanes for the company.

And in terms of the general acquisition integration or margin expansion plans. How important is off shoring either to India or customer support in the Philippines. Particularly for some of these smaller businesses that may not have used it in the past?

Look, they are in a software and cloud business, you have three levers. You have automation and you have to continuously automate. The second is people, people expense. There is no doubt that part of the OpenText playbook is leveraging our centers of excellence in Canada and the Philippines and India, and that’s an opportunity to typically across our acquisitions and then third is, leverage infrastructure cost and scale. We spent our first 25 years scaling up our business model on prem and over the last five years, we’ve been scaling up our cloud infrastructure. So, when we bring in ANX on board, we’re leveraging GXS and EasyLink. We bring Covisint on board, we’re leveraging the three acquisitions before that in the cloud infrastructure. We bring Documentum on board and what they call DAS or Documentum as a service. So, the levers are automation, people and infrastructure. And that allows us to continue scale our margin through time.

Last one for me. Just in regards to target model, maintenance margins are up either 200 basis points of targets of 200 basis points and that’s driving up the gross margin guidance, target. What’s driving the increase there?

Automation and people.

Okay. Thank you. I’ll pass the line.

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

Mark, I just wanted to ask you about post your user conference, what’s the adoption rate looking for your customers moving up to Suite 16 and as you’re seeing the move, are they adding seats or are they adding new modules, what sort of a trends you are seeing in adoption?

Thanks for the question. It’s one of our top opportunities. When we talk about driving organic growth, there are really three pieces, there is competitive replacements, there is the installed base and our scaling partners. It’s our three-play book and in the installed base, the largest play we have is continue to upgrade customers to Release 16 and getting them to add capacity, more seas or buy new module. And really 16 EP2 is now in market. I’ve learned through the years, that these enterprise were leases or three to four year runs if you will from release to release. The feedback is strong on release 16, that’s why we kept, what we call this enhancement pack CREs going. So, feedback is good and it’s still our top opportunity.

Okay, great. One more quick one if I could. In the European Union, they are moving ahead as you are aware of with general data protection regulation next year - around basically harmonizing a lot of the consumer protection laws. And is there an opportunity there for OpenText either to sell new product or does it help to expand usage of some of your current European customers content management systems?

Short answer Blair is yes and it's -- I think -- I want to give two answers here. The first is when we look at case management, contract management having data zones in our business network, we can offer that right. So that's what we offer. So, you need all your documents for GDPR in fact our win at both over filing that was all about GDPR. You need to run a supply chain and keep all that data processes and people in Europe because the GDPR or a Data Protection Agreements called DPAs will have those data zones. So, I think it's going to differentiate us and that compliance need we've always been very strong in compliance and regulations that will help us. I also think longer term as more of these country regulations come in place HIPAA in the U.S. GDPR in Western Europe, Data Protectorate is in Brazil begins to separate the market a bit between those who can really scale and this it's one of the reasons on our cloud margin it's a little below 60% because we're investing for security. We're investing for data zones but I think also philosophically that at the Internet fragments because of GDPR, because of DPA, because of HIPAA it will separate other companies out and strengthen Open Text long term.

Okay. Great. Thanks very much Mark.

Okay. Thank you, Blair.

So, I think we're going to wrap up the call and thank you for joining today and thank you for your questions. This quarter we will be attending the Citibank Global Tech Conference in New York as well as the TD Bank Technology Conference in Toronto and Deutsche Bank's Technology Conference in Las Vegas and we hope to see you there. That concludes today's call.

Thanks everyone.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.