Open Text (OTEX) Mark J. Barrenechea on Q4 2016 Results - Earnings Call Transcript

| About: Open Text (OTEX)

Open Text Corp. (NASDAQ:OTEX)

Q4 2016 Earnings Call

July 27, 2016 5:00 pm ET

Executives

Greg Secord - Vice President-Investor Relations

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Stephen Murphy - President

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Analysts

Paul Steep - Scotia Capital, Inc. (Broker)

Steven Li - Raymond James Ltd. (Broker)

Paul Treiber - RBC Capital Markets

Stephanie Price - CIBC World Markets, Inc.

Eyal Ofir - Dundee Capital Markets

Blair H. Abernethy - Industrial Alliance Securities

Operator

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Fourth Quarter and Fiscal Year 2016 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

I would like to turn the conference over to Mr. Greg Secord, Vice President, Investor Relations. Please go ahead.

Greg Secord - Vice President-Investor Relations

Thank you, operator, and good afternoon, everyone. I'd like to welcome you to today's call. With me today is OpenText's, CEO and CTO, Mark J. Barrenechea; our CFO, John Doolittle and our President, Steve Murphy. As with our previous calls, we'll read prepared remarks followed by a question-and-answer session. The call will last approximately an hour with a replay available shortly thereafter.

I'd like to take a moment and direct investors to the Investor Relations section of our website, where we posted PowerPoints that will be referred to during the call, including our quarterly supplemental update on the financial results and an update to the strategy presentation from our May 12 Investor Day. I encourage all of our investors to download both presentations.

As with previous quarters, we have updated a summary table, highlighting OpenText's historical trended financial metrics, both PowerPoints and our trended financial spreadsheet are downloadable from the front page of our IR section of our website. And with that, I'll proceed to the reading of our Safe Harbor statement.

Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or a projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such conclusion while making a forecast or projection, as reflected in the forward looking information.

Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion while making a forecast or projection as reflected in the forward-looking information, as well as the risk factors that may project the future performance results of OpenText are contained in OpenText's Forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, each of which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law.

In addition, our conference call will include a discussion of certain non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release and Investor materials which may be found on our website.

And with that, I'll hand the call over to John.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Okay, Greg. Thank you very much. Welcome to the call everyone and apologies we were a couple of minutes late. We were having some phone difficulties here in Toronto. Let's go through the numbers. My references will all be in millions of U.S. dollars unless indicated otherwise.

Total revenue for the quarter remained stable at $484 million compared to $483 million for the same period last year. For fiscal 2016, total revenue was $1.824 billion, down 1% compared to $1.852 billion for 2015 and up 3% on a constant currency basis. Recurring revenue for the quarter was $398 million, up 3% compared to $386 million for the same period of last year.

For fiscal 2016, recurring revenue was $1.541 billion, down 1% compared to $1.558 billion for 2015 and up 3% on a constant currency basis.

Next, the impact of foreign exchange. Foreign exchange did not have a material impact on our revenues or adjusted EPS during the quarter. However, for the full-year 2016, our revenues were negatively impacted by $80 million compared to fiscal 2015, and adjusted EPS was negatively impacted by $0.12.

The negative effect of $80 million by revenue type is broken down as follows: License $15 million; cloud $19 million; customer support $33 million; and professional services $13 million. License revenue for the quarter was $86 million, down 11% compared to $97 million for the same period last year. For the full-year 2016, license revenue was $284 million, down 4% compared to $294 million in fiscal 2015 and up 2% on a constant currency basis.

Cloud services and subscriptions revenue for the quarter was $157 million, up 5% compared to $149 million last year. For the full-year 2016, cloud services and subscription revenue was $601 million, down 1% compared to $605 million in 2015 and up 2% in constant currency.

New MCV bookings this quarter were $67 million, compared to $56 million in the same period last year, up 20%. For the full-year 2016, new MCV bookings were $211 million, compared to $199 million in 2015, up 6%. Customer support revenue for the quarter was $193 million, up 5% compared to $184 million for the same period last year. For the full year 2016, customer support revenue was $746 million, up 2% compared to $732 million during 2015 and up 6% in constant currency.

Professional services and other revenue for the quarter was $48 million, down 8% compared to $52 million for the same period last year. For the full-year 2016, professional services and other revenue was $193 million, down 12% compared to $221 million during 2015 and down 7% in constant currency. Steve will comment on our plans to improve the results in professional services.

Gross margins for the quarter were as follows: License margins remained stable at 96%; cloud services and subscription was 59%, compared to 61% same period last year; customer support at 87% compared to the same period last year, stable; professional services was 14% compared to 18% in the same period last year. And this decrease in margin was primarily caused by integration efforts for recently acquired assets and lower-than-expected revenue.

Gross margins for the full-year 2016, license remained stable at approximately 96%; cloud was 59% compared to 61% last year; customer support was 88% compared to 87%; and professional services was 19% compared to 22%.

Adjusted operating income was $158 million this quarter, up 6% compared to $149 million in Q4 of last year. On a constant currency basis, adjusted operating income was $155 million, up 4%. For the full-year, adjusted operating income was $617 million, up 8% compared to $573 million during fiscal 2015. On a constant currency basis, it was up – it was $635 million, up 11%. Adjusted operating income was up on both the quarter and annual basis as a result of the decrease in operating expenses of approximately 13% and 49%, respectively, primarily resulting from ongoing expense managements.

Adjusted net income increased 2% to $109 million this quarter, up from $107 million in Q4 of last year. This is primarily due to a $9 (07:00) increase in adjusted operating income that was partially offset by higher interest as a result of the high-yield notes issued in Q4 fiscal 2016 and higher taxes due to change in the company's adjusted tax rate from 18% to 20%.

For the full year, adjusted income was $432 million, up 2% from $425 million, and up $22 million or 5% on a constant currency basis. The increase is primarily due to an increase in adjusted operating income of $44 million, partially offset by higher interest as a result of the high-yield note issued in Q3 of fiscal 2015 and Q4 of fiscal 2016 and our higher adjusted tax rate as I mentioned.

Interest expense was $22 million in the fourth quarter, up from $18 million last year. On an annual basis, interest expenses is $76 million, up $22 million, again due to the high-yield notes raised in fiscal 2015 and fiscal 2016, offset by approximately $2 million of income earned from our cost base investments. And going forward, we estimate our quarterly run rate for interest expense to be approximately $28 million.

Adjusted earnings per share for the quarter was $0.89 on a diluted basis compared to $0.87 for the same period last year, up 2%. For the full year, adjusted earnings per share was $3.54 compared to $3.46 for fiscal 2015, up 2% and 6% on a constant currency basis of $3.66.

GAAP net income for the quarter was $0.86 or $0.71 per share on a diluted basis compared to $0.69 or $0.56 per share on a diluted basis in Q4 of last year. For the full year, net income was $2.84 or $2.33 per share compared to $2.34 or $1.91 per share on a diluted basis in fiscal 2015.

There were approximately 122 million shares outstanding on a fully diluted basis both for the fourth quarter of fiscal 2016 and on an annual basis. Operating cash flow for the quarter was $119 million, down 10% compared to $132 million in the same period last year. Net income increased $18 million and our two working capital items, accounts receivable and accounts payable added $11 million.

However, there was a significant change in deferred tax assets, resulting from the IP organization, which I will talk about later in the call and some timing delays in customer support renewals, plus the impact of acquisitions on deferred revenues, when combined, reduce our operating cash flow by $46 million. Driving cash flow improvements continues to be a top priority of mine and the company's. For fiscal 2016, operating cash was $526 million, up 1% compared to $523 million for last year.

On the balance sheet at June 30, deferred revenues were $411 million compared to $386 million at June 30, and the increase is due primarily to the impact of our acquisitions in the fourth quarter. Accounts receivable was $286 million at June 30 compared to $284 million at June 30, 2015 and our day sales outstanding were unchanged at 53.

During the quarter, we announced that we closed a high-yield debt offering of $600 million in unsecured notes at 5.875% due 2026. So with the addition of these high-yield notes, we are suggesting investors' model interest expense of $28 million per quarter going forward, as I mentioned before.

We announced four acquisitions during Q4, closed two transactions in the quarter. We acquired customer experience management assets from HP and acquired ANXe, a cloud-based information exchange network. These businesses did not contribute meaningful revenues or earnings in the quarter.

Closed the acquisition of Recommind, a provider of the eDiscovery and information analytics solution, on July 20 and the financial results of Recommind will be consolidated with the company in our first quarter of fiscal 2017.

On July 20, we announced that we'd signed an additional agreement to acquire certain customer communication management assets from HP. This transaction is expected to close during the first quarter of fiscal 2017 and is subject to customary regulatory approvals and closing conditions. The combined purchase price of these four transactions is approximately $750 million. We plan to have all four acquisitions on to our operating model within 12 months of their respective acquisition dates.

Now to the external model, fiscal 2017 non-GAAP operating margin target remains at 30% to 34% and the model and support information is contained in our investor presentations on our website. We are also affirming our fiscal 2020 aspirations of non-GAAP operating margin of 34% to 38% and a revenue mix that would reflect 50% of our revenues from cloud as part of 90% recurring revenue portfolio in 2020. And Mark will give further information on the external target model.

Now for a tax update. Let me start with an update on the IRS draft NOPA matter regarding historical years. There remains no update to provide at this time. We still have not received the second expected draft NOPA and the status remains as previously disclosed. We are continuing to monitor and I'd reiterate our strong disagreement with the IRS's position expressed in their draft NOPA from last year. We will provide an update following any material developments.

Now to the bigger news in the quarter. Looking back to 2010, we announced our plan to consolidate our intellectual property to create operational effectiveness. We chose Luxembourg for the consolidation and along with this effectiveness came certain tax advantages.

Fast-forward seven years, we find ourselves in a situation where IP is not consolidated, but that continues to be our objective. Additionally, the international tax environment has dramatically changed and our tax rate has been climbing every year.

With that as a backdrop, we examined a number of options and we decided to reorganize in order to consolidate our intellectual property into Canada. This achieves our goal of operational effectiveness through consolidated ownership, management and development of our IP.

As a consequence of the reorganization, the IP enters Canada with a tax base equal to fair market value and this will allow us a stable and predictable platform for years to come. As a result of the reorganization, as well as the integration of recently completed acquisitions, we released a $35 million reserve or valuation allowance primarily related to certain Canadian deferred tax assets in the fourth quarter of fiscal 2016, which contributed to the lower GAAP tax rate in fiscal 2016 compared to 2015.

We also expect to recognize a material tax benefit currently expected to be several hundred million dollars in the first quarter of fiscal 2017 associated with the creation of a deferred tax asset resulting from the reorganization. We expect this to materially reduce our GAAP income tax rate for fiscal 2017, which is anticipated to be significantly below zero.

Our adjusted tax rate for fiscal 2017 is expected to be approximately 15% and is indicative of our anticipated cash tax rate. We calculate this rate by dividing anticipated current tax provision for the period by adjusted pre-tax income.

The illustration of this adjusted tax rate is anticipated to be more representative of the actual cash tax burden on adjusted earnings and we believe is more aligned with financial market expectations. Please refer to our investor presentation on our website for more details. On July 26, 2016, the board declared a cash dividend of $0.23 per share for shareholders of record on August 26, 2016, payable on September 16, 2016.

Lastly, on to our NCIB program, I confirm that we did not repurchase any shares in the fourth quarter under our expiring share purchase plan. However, on July 26, our board authorized a new share repurchase plan for the repurchase of up to $200 million of our common shares, if considered advisable from time to time.

Thank you. And I will turn over the call to Steve Murphy. Steve?

Stephen Murphy - President

Hey, thanks, John. So let me get into my intro. It's been seven months since I joined OpenText and I'm pleased to say that the organization is exactly what I'd expected. We're a business with a world-class product offering and a high integrity group of folks. We're passionate about making our customers extremely successful.

I was brought in to focus on driving efficient operations and to help grow our revenue, while improving margin and cash flow. There is opportunity of balanced cost discipline with driving sustainable organic growth initiatives. My mission hasn't changed. I'm pleased with our progress.

Let me talk a little bit about Q4 and our fiscal year overview. I'd like to take a quick look at the quarter performance. We had a strong Q4 for our customer support and cloud businesses. MCV is showing improvement and we see growth in the cloud in both North America and Europe, where large deals are becoming more prevalent.

We've achieved stability in the field with key leaders in place across the board. This includes senior leaders in place for professional services, customer support, license sales and cloud. We have a structure and a leadership team that is stable and scaling well.

At a time when the software industry is changing rapidly and we are acquisitive, this stability is of great value. Let me share some quick stats for the quarter. We had 10 on-premise license deals greater than $1 million. The geographic split of total revenue was Americas 58%, EMEA 33% and Asia Pac 9%.

On-premise customer successes in the quarter include Nevada State Controller's Office, Schwan Cosmetics, Kamehameha Schools, eMeter Corporation, APA Group, State of Iowa, KUKA Manufacturing.

In terms of industry breakdown, financial, services, technology, and public sector industries saw the most demand. Let me give you some quick cloud stats. Q4 cloud revenue was up 5% year-over-year in constant currency and we had 10 new MCV cloud deals greater than $1 million, cloud customer successes in the quarter include Red Hat and s.Oliver.

We added 38 new managed service customers in Q4, which brings our total managed service customers to 955. We had 20% MCV growth from $56 million to $67 million compared to the same quarter last year. An average deal size for MCV increased 42% to $587,000 compared to $413,000 last year. Financials, services, technology and consumer goods saw the most demand for cloud.

Let me give you some quick annual stats. On an annual basis, we grew MCV bookings by 6% over fiscal 2015, reflecting continued strength in our business network and enterprise businesses. Our average MCV deal size was up for the year by 8% as we see the strategic nature of our deployments driving increase in both the size and the scope of cloud transactions.

Let me talk a little bit about some specific customer wins. In the cloud for starters, Red Hat. Red Hat has selected OpenText B2B Managed Services to support its growth initiatives and provide a best-in-class experience for its customers. Red Hat and OpenText will expand the existing B2B program around the globe as well as implement additional transactions in support of the order to cash cycle.

Next State of Iowa. State of Iowa is creating a digital platform as a service, or PaaS, to support its internal customers. The initial project is to implement OpenText Enterprise Content Management, ECM, for their department of administrative services, integrated with their ERP system. The goal here is to extend ECM (18:22) and extend that into the State agencies.

The solutions will help the State of Iowa to take full advantage of the opportunities offered through digital transformation. KUKA, a large German manufacturer of industrial robots, automates contract management with OpenText Extended ECM for SAP. This quarter, they extended their investment at OpenText to optimize their sales process.

And lastly, the Nevada State Controller's Office purchased OpenText Information Hub, or iHub, for its reporting needs. iHub conforms with the other data management products deployed by the State of Nevada Controller's Office and offers many ways to share analytic content securely with their teams.

Talk a bit about customers. At the heart of any great company is a loyal customer base. With a culture of customer first, OpenText remains committed to customer care and satisfaction. We value this culture and we will fiercely protect it as a key driver of our success.

It's worth repeating. Customers don't buy from companies, but rather they buy from people. We are a software company with our focus in the right place, squarely on the customer. We have the skills and products to solve our customers' toughest problems. This positions us to win new business and repeat business again and again.

Enterprise world was a great opportunity to see this in action, engaging customers, better understanding their business challenges and celebrating their successes in deploying OpenText products.

Let me touch a bit on our partners. OpenText also has a healthy ecosystem of strategic partners and system integrators. Our global partner program is gaining traction and we remain committed to building these relationships. The premise is simple, if partners invest in us, we will invest in them. We have a significant stable of global SIs and bars including SAP, Accenture and Deloitte that are industry and regionally focused. In many cases, it's better to have a partner service a region, where we don't have a presence and we continue to support their initiatives with significant marketing and resource commitments.

Talk a bit about sales. Turning to our sales organization, I have a lot of confidence in both our accounts planning and sales execution in the field. As I mentioned earlier, structure and leadership is scaling well. We have world class leaders in the field. The energy and enthusiasm they express for the business is contagious. We are competing and winning. Release 16 is a rallying point for our field to upskill and bring a truly differentiated product to our many sales cycles. Sales enablement and field readiness is key, taking advantage of customer upgrade opportunities and competitive replacements; again, leveraging Release 16.

Our salespeople know how our products solve our customers' toughest problems. They sell this differentiated value in a way that best serves the needs of the customer. There is also strategic value in our managed services offering. I can't stress enough that our hybrid model is a big competitive advantage. We know that the customer ultimately makes the decision on which model to deploy and we respect that process.

We provide a consultative environment where the customer can accurately weigh the costs and benefits of either model for their situation and then work with us to do what is best for them.

Release 16. Speaking of our product portfolio, as I mentioned in May at our Investor Conference in New York, I am focused on growing healthy and sustain organic revenue for OpenText. And I'm convinced that Release 16 will help us to achieve this. The dialog about Release 16 with customers is strategic.

And I think that it's exciting to have this level of innovation and an integrated platform that offers such a compelling value proposition. The field has been fully trained, are engaged with customers and enter into this product cycle with enthusiasm and laser focus on the immediate business problems that we can solve.

Let me touch on professional services, PS update. We're on schedule to deliver on a stronger, more efficient professional services organization. With a new leader in place and one quarter into our plan to improve PS revenue, utilization and margin performance, we have a great foundation to build on our improvements to the professional services organization.

Turning to acquisitions, as John mentioned, we have recently announced four acquisitions, and to-date, we've closed three acquisitions. Our customer support organization under the leadership of James McGourlay is already seeing traction out of the integrated assets we acquired. Onboarding the acquired revenue and integrating teams and product sets are core competencies at OpenText. We're good at it. It's in our DNA. We have foundation and structure to scale and we're executing a plan.

I see synergies for both sets of HP assets and we have a strong leader already in place with full knowledge of the products. We brought together a great set of products that fit both organizationally and from a one-stop shop perspective. ANXe is firing on all cylinders with great products and strong leaders. It's been a seamless transition in our business network. ANXe revenue is highly recurring and is proven to be a very good fit.

So a quick summary before I hand off to Mark. We delivered strong annual performance in our recurring revenues. Specifically, growing cloud and customer support, while expanding margins and growing adjusted operating income. License sales have been consistent on an absolute dollar basis and our PS business has stabilized and is on track with our improvement initiatives.

With deep customer loyalty, we're positioned in the right market at the right time with the best product suite in EIM. We're leveraging our leadership position to achieve market share gains through sales enablement, field readiness, customer upgrades and competitive replacements and takeout. We have stability in the balance sheet. We've got stability in the field and we've got stability in our management team. I absolutely believe in our overall ability and our business plan and our ability to achieve the business plan.

So over to you, Mark.

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Hey, Steve, thanks for the great update. Really appreciate it. There are two topics I'd like to cover today. First, a review of our fiscal 2016 highlights, and second, an outline of our key objectives for fiscal 2017 and the year ahead. Fiscal 2016 was the most extraordinary and foundational year for OpenText. In constant currency, we grew revenues 3% to $1.9 billion, expanded adjusted operating margin by 240 basis points to 33.3%, and delivered $447 million in adjusted operating income, up 5% year-over-year. These results are all-time highs for OpenText.

When I joined the company four-and-a-half years ago, our adjusted margins were 27%. Improving our margin performance by over 600 basis points is a fundamental reset in our performance, allowing us to input acquired and organic revenues into a more efficient engine and output, more cash flow. This engine will continue to translate into shareholder value for many years to come.

We defined our hybrid strategy as real cloud and recurring revenues, hold constant our license revenues and expand margins. Our hybrid strategy is working. In constant currency for fiscal 2016, our cloud services business was $620 million and our license business remained relatively constant on an absolute basis as we added more cloud revenues and expanded our margins.

We outlined our hybrid model as a strategic goal for the company and have achieved this four years in a row. In fiscal 2013, our license revenues were $273 million; in fiscal 2014, $306 million; in fiscal 2015, $294 million; and in fiscal 2016, $284 million. While over the same period, our cloud revenues have grown from zero to $260 million and our margins have expanded to over 33%. Our hybrid strategy is working and the transformation to this model is complete.

In relation to our business and market strategy, at our annual Investor Day in May, we outlined our comprehensive approach to M&A and shareholder value creation. We called it strategy to value creation. M&A is our leading growth driver. We outlined four major elements in May to our business and market strategy. Our EIM market strategy; our M&A focus, number two; third, the OpenText business system; and fourth, creating superior shareholder value.

Our EIM market strategy places us in the center of a $40-billion-plus market, a market of transformative value for customers as they move to digital platforms. And EIM attracts more key enterprise customers from all industries and all geographies. It is a market that also affords strong margins and cash flows, as compared to other hardware or software sectors, and there are hundreds of EIM acquisition targets.

We made a key decision in fiscal 2016 that M&A will be our leading growth driver, evolved our corporate resources and focus, while leveraging our proven approach from deal sourcing to company integration and reinforcing a returns-oriented mandate.

The OpenText business system unlocks value and is differentiated from other business systems given its focus on integration, integrated sales forces, integrated R&D and integrated operations. Integration is the operative word. Within M&A models, OpenText is a platform operator and the OpenText business system is performance-centric.

The outcome of these tenants is creating superior value by focusing on our cash flow growth by focusing on our large recurring revenue base and executing to our policy of disciplined capital allocation. You only have to look over the last 100 days in our four announced acquisitions to see the OpenText business system in action.

As a basket, we are acquiring approximately $300 million of revenues, while putting $750 million of capital to work. In January, I streamlined and realigned my executive team to enable greater accountability in future scale of OpenText. Muhi Majzoub was promoted to lead our products cloud services and IT; Gordon Davies was promoted to lead both our legal organization and corporate development; John Doolittle was promoted to lead finance, human resources and operations; and Steve Murphy joined us to lead all customer-facing activities. I could not be more proud of my entire executive leadership team. The structure and team is performing and you see that in our results.

Let me recap the last 100 days, which have just been extraordinary. The announcement and closing of the customer experience software assets of HP Inc.; the announcement to acquire the CCM Assets of HP Inc., which we will close on very soon; the announcement and closing of ANXe; the announcement and closing of Recommind, our IP reorganization into Canada, Enterprise World 2016 in Nashville, and our plans for OpenText Magellan.

And here's the finer point of it all. With Release 16 and our recent acquisitions, we're the only enterprise software provider to complete the business process flow of engagement to insight. Engagement, capture, content, process, collaboration, discover, exchange, and insight. All of the technical capabilities needed to digitize, automate, and manage information-based business and digital processes.

OpenText is the only vendor capable of providing such a comprehensive and cohesive digital platform. There was a time in ERP, when there were 1,000 providers at some level of ERP capabilities. Then the market consolidated around Oracle and SAP because they were able to automate the seminal ERP process flow, campaign to cash. The seminal EIM process flow is engagement to insight and only OpenText can automate this. It was a foundational year for the company.

On to fiscal 2017, I have never been more excited at the beginning of a fiscal year as I am today. Fiscal 2017 is shaping up to be a year of growth, growth driven by M&A, plus our organic efforts. We'll continue to make acquisitions, expand market share and drive innovation. In our recent acquisition announcements, all combined, we discussed annual revenues between $290 million to $230 million. By annualized, we mean full-year revenues when we own these businesses for a full year.

Given the timing of the closures, we are expecting approximately $300 million of acquired revenues in fiscal 2017 along with double-digit growth on all revenue lines. As well, we're expecting double-digit adjusted operating income growth for the fiscal year. Further please note that Q1 will be a partial quarter of acquired revenues. And it's not until Q2 that we expect to have a full quarter of acquired revenues. We expect our revenues and margins to ramp accordingly throughout the year. All around, it's going to be an exciting fiscal 2017.

Let me provide a few words on margin. We delivered great margins in fiscal 2016. We are not raising our target models in fiscal 2017, but we expect to be on the high-end of the margin range. Now given the timing of our acquisitions and need to onboard assets to our operating model, we expect to grow into the high-end of the range as our fiscal year progresses. We also expect to continue to make value-based acquisitions in fiscal 2017. We have a strong balance sheet with $1.3 billion in cash, available cash through our credit facilities and a $1 billion shelf prospectus we filed in May, and, of course, our future cash flow.

I know our fiscal 2016 operating cash flow was $526 million. On this arithmetic, we have approximately $3 billion of available capital to put to work on the right opportunities. In many ways, our available capital keeps regenerating itself with growing and net new cash flows.

Let me also note by way of example, on every $500 million of revenues we acquire, our model suggests we should add $0.70 of adjusted EPS. And this should only get stronger as we get more efficient with automation and scale. The state and outlook for EIM are excellent. As for organic growth, as Steve discussed, we have a strong product lineup for fiscal 2017. Release 16 is our flagship solution featuring Cloud 16 and Sweet 16 packages for cloud-based and on-premise customers, respectively; our field organization of partner network; our engaging customers for upgrades and upsells.

There have been thousands of downloads and hundreds of customers presently working Release 16 since its full launch in late April. And we are on target to deliver Release 16 EP1 in October, which will create new opportunities with large ecosystem partners such as SAP, including SuccessFactors and Hybris, Salesforce.com, Accenture, Deloitte and E&Y.

We're also expanding the reach of our keystone Extended ECM solutions by offering a new solution specifically designed for government. As in most major markets, U.S., Canada, Germany, Japan and the UK, there are new laws around electronic information for citizens and public policy. We hope to capture that opportunity through EP1 and the release of Extended ECM for government built on OpenText Release 16.

Managed services remain a top priority and growth initiative for us in fiscal 2017. And by the end of Q1, we will have overall 1,100 customers who have outsourced their processes, data, or people to the OpenText Cloud. We added 38 new customers in Q4, including Allstate, ExxonMobil, Lloyds Bank, and Red Hat, and more.

Recommind brings over 130 new managed service customers, and Recommind recently closed two impressive multi-year, multi-dollar MCV transactions. First, with a large auto customer involved with a multinational investigation and litigation; and, second, with a large multi-national bank using Perceptive Analytics for derivative contracts, extraction and analysis. But customer response to OpenText Magellan, our next-generation analytics offering, is extremely promising. Magellan is directly targeted at the IBM Watson market and will be deeply integrated with our voice, data, image, natural language and semantic processing, text mining and numeric engines. We'll also incorporate Apache Spark as an open algorithmic engine. This will make available thousands of algorithms, an open language to create new algorithms and empower our customers to unlock the value of their enterprise information.

Magellan will be another key differentiator for OpenText and we expect it to be available in the second half of 2017. In many ways, Magellan is the promise of EIM. Centralize joint structure data, secure it, govern it, build apps with Release 16, automate it completely from engagement to insight, then unlock the value through Magellan.

Our performance in 2016 and our plans for 2017 each reinforce our 2020 aspirations. 90% or greater recurring revenues, 50% of our business in the cloud and adjusted operating margins between 34% and 38%. Each year we progress towards these aspirations. I'm often asked how we'll get to 50% cloud revenues by 2020 and my answer is simple: We will acquire our way there while also growing our cloud revenue organically.

Let me wrap up my comments. Fiscal 2017 will be a year of double-digit growth across all our revenue lines as we onboard approximately $300 million of acquired revenues. We should also see double-digit growth for our adjusted operating income. We'll continue to acquire with over $3 billion of available capital that regenerates itself with new acquisitions and our operating improvements. Release 16 EP1 will open up new opportunities and new partnerships.

Our recent acquisitions enable OpenText to deliver on the vision of engagement to insight. No other single company can provide this fundamental and complete platform. And lastly and most importantly, Magellan will deliver on the promise of EIM, enabling customers to gain insight and unlock the value of their enterprise information. I have never been more excited about a new fiscal year.

With that, I'd like to open up the call to your questions.

Question-and-Answer Session

Operator

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

Paul Steep - Scotia Capital, Inc. (Broker)

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

Paul Steep - Scotia Capital, Inc. (Broker)

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

Stephen Murphy - President

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

Paul Steep - Scotia Capital, Inc. (Broker)

Great. Thanks, guys.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Thanks, Paul.

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Yeah, thanks, Paul.

Operator

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

Steven Li - Raymond James Ltd. (Broker)

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

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

Steven Li - Raymond James Ltd. (Broker)

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Yeah. Steve, thanks for the question. The answer is very simple. We had little to no effect on Brexit. It's less than 5% of our revenues. UK is less than 5% of our revenues. We moved our operations, our EMEA ops out of the UK into Germany a few years ago and we just haven't seen any effect. And we think in a lot of ways, it's either going to be neutral to us. It actually might be a slight positive because people need to buy more software for governance.

So the net effect to us are going to be neutral to maybe slightly positive. Now, a more global statement as we look into 2017 is FX volatility is going to remain out there, for sure. You do have the Brexit. For us, we see it again to be neutral to maybe a slight benefit. Who knows where the U.S. election is going to go. You continue to have some Russian risk, I think, and some risk around terrorism, kind of all in in global risk. It remains a volatile world. And we've taken our strategy with M&A to be able to grow our business both from M&A as well as organic growth. And I think we're in a pretty good position if global risk increases.

Steven Li - Raymond James Ltd. (Broker)

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Steve, any comments on that?

Stephen Murphy - President

Yeah, so we have made some leadership changes. And we've got a new head of license sales for North America. (43:48) is very happy with the skills he brings and his background as far as different places he's sold. I think that we will see – based on my observation of John (43:58) and his team, we will see steady improvement in license sales in North America.

Steven Li - Raymond James Ltd. (Broker)

Okay. Thanks, guys.

Stephen Murphy - President

You bet.

Operator

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

Paul Treiber - RBC Capital Markets

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

5%.

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

Paul Treiber - RBC Capital Markets

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

Paul Treiber - RBC Capital Markets

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

Stephen Murphy - President

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

Paul Treiber - RBC Capital Markets

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Sure.

Operator

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

Stephanie Price - CIBC World Markets, Inc.

Good evening.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Hi, Stephanie.

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Hi, Stephanie.

Stephanie Price - CIBC World Markets, Inc.

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Yeah, sure thing. So look, there was a critical mass moment in ERP when the market really considered just a handful of providers because they could – this is software and service. You're here to automate. And a handful of ERP providers was able to automate campaign to cash. And the market rallied around that because they could fully automate a seminal process.

Engagement to insight is that process for EIM. And I think as we bring onboard Recommind, as we bring onboard the HP Inc. assets and add Magellan. There I can't see another company in the marketplace that can provide this flow. I ultimately believe that our ultimate competition is IBM. From IBM Watson – from Watson to FileNet, Sterling Commerce, their Tivoli for business process management.

So when we look at the point providers, from the usual suspects of Documentum, Kofax, SharePoint, Box, Adobe, Pegasystems, they're starting to continue to get more and more niched features, while we keep expanding capabilities to engagement insights. The HP Inc., assets really strengthen that engagement piece. That whole box of discovery we filled force with Digest (50:59) and now we've really solidified with Recommind and then insight on our next version with Magellan.

Stephanie Price - CIBC World Markets, Inc.

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Yeah. I would point to two large improvements while maintaining our strength around visualization reporting and embeddability. New capability, one, is Apache Spark, opening up the platform to bring in the Spark engine that will allow for ETL, data integration, a recommendation engine, as well as real-time streaming and thousands of open algorithms.

IBM Watson is closed. You don't own the IP when you create an algorithm and you're using proprietary tools to do all the AI, machine learning and algorithmic work. By bringing in Spark, it's all going to be open and we'll be able to leverage thousands of algorithms. I'd say the second big capability is we're going to bring together all our existing engines on to the platform. Voice, natural language processing, image processing, and making those engines integrated and available under the actuate engines.

Stephanie Price - CIBC World Markets, Inc.

Great. Thank you very much.

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Thanks, Stephanie.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Thanks, Stephanie.

Operator

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

Eyal Ofir - Dundee Capital Markets

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

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

Eyal Ofir - Dundee Capital Markets

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Yeah. So let me go through them one by one. So we have the CEM assets from HP Inc., such as TeamSite, MediaManager, Optimost and a few others. And quite candidly, we like asset deals. It's the ability for us to, to some degree, pick the assets and liabilities that we're interested in. And it's usually the hardest of the work for an acquirer and it's the hardest work because you can unlock the most value. So we actually like these difficult situations because we can unlock the most value.

So TeamSite, in particular, is a market leader for engagement, website development, electronic form, the beginning of the whole process. So it's integrated extremely well into the business. And this will be a strong quarter for them. We have not yet closed on the CCM Assets from HP and it's probably the larger and the stronger of the two. But we expect to close on it very, very soon. And once we're – probably at our next Investor Conference or next call, we'll give an update on the CCM Assets.

ANXe, strong recurring revenues. They were a partner of ours before the acquisition. And as Steve commented in his script, an incredibly strong team, strong recurring revenues. And then, I think as we noted when we originally announced it, they were at a relatively high EBITDA already. So they're onboarded to our model right away. And so we're quite pleased with that.

And Recommind is going to turn out to be just incredibly strategic asset for us. It's a box we haven't been strong in. And it's a very timely acquisition as well. I noted two recent wins. It's now closed. And we'll get it on our operating model. And they were a privately-held business. We'll get them on to our operating model in two quarters to three quarters. But strategically, it's incredible value.

Eyal Ofir - Dundee Capital Markets

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

Stephen Murphy - President

Yeah, hey. Steve Murphy here. So what we have noticed is that – and I can reflect on a couple of the sales cycles. I was very, very involved with Q4. The deal size increases, and there's a degree of integration across all the different modules. For instance, when we sell ECM, Release 16 has a degree of integration with business process management in something like case management, entity modeling that expands the deal size. And I think that is probably the single biggest difference.

And someone asked earlier about the competitive landscape. That's where we're different unlike a Documentum, or another company, this is a narrow focus. We've gotten engagement to insight. And with Release 16, a customer might be in the sales cycle for content management and finally they want to buy something else, because of the degree to which Release 16 integrates all of the capabilities we have.

Eyal Ofir - Dundee Capital Markets

Okay. So that could also mean that the sales cycle is a bit longer, then, right (56:50).

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

Eyal Ofir - Dundee Capital Markets

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

Stephen Murphy - President

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

No, I agree with that, Steve.

Eyal Ofir - Dundee Capital Markets

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

Stephen Murphy - President

You bet.

Operator

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

Blair H. Abernethy - Industrial Alliance Securities

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

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

Blair H. Abernethy - Industrial Alliance Securities

Yes.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

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

Blair H. Abernethy - Industrial Alliance Securities

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

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

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Yeah.

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

And Recommind will be majorly cloud.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Yeah.

Blair H. Abernethy - Industrial Alliance Securities

Okay. Great. Thanks, guys.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Yeah. Thanks, Blair.

Operator

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

Mark J. Barrenechea - Chief Executive Officer & Chief Technology Officer

Very good. Thank you and thank you for joining us today. Just a summary of our key messages. Fiscal 2017 will be a year led by M&A growth. We expect approximately $300 million in revenue growth from these acquisitions. All revenue lines should grow double-digit as well as double-digit adjusted operating income growth and as well as the benefits of our recentralization of IP back into Canada.

With that, I'd like to thank you for your time and I couldn't be more excited about fiscal 2017. Thank you for the call.

John Marshall Doolittle - Executive Vice President & Chief Financial Officer

Thank you.

Operator

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

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