Open Text's (OTEX) CEO Mark Barrenechea on Q4 2014 Results - Earnings Call Transcript

| About: Open Text (OTEX)

Open Text Corporation (NASDAQ:OTEX)

Q4 2014 Earnings Conference Call

July 30, 2014 05:00 pm ET

Executives

Greg Secord - Vice President, Investor Relations

Paul McFeeters - Chief Financial Officer, Chief Administrative Officer

Mark Barrenechea - President, Chief Executive Officer, Director

Analysts

Kris Thompson - National Bank Financial

Blair Abernethy - Cantor Fitzgerald

Richard Tse - Cormark Securities

Michael Nemeroff - Credit Suisse

Paul Steep - Scotia Capital

Stephanie Price - CIBC

Eyal Ofir - Clarus Securities

Scott Penner - TD Securities

Operator

Welcome to the Open Text Corporation Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Greg Secord, Vice President, Investor Relations. Please go ahead, sir.

Greg Secord

Thank you, Operator. Good afternoon, everybody. I'd like to start the call with a 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 Open Text that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from our conclusions, forecast or projection in the forward-looking statements made today.

Certain material factors or assumptions were applied in drawing any such conclusion while making any 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 the conclusion, forecast or projection in the forward-looking information and the material factors or assumptions that were applied in drawing the conclusion while making the forecast or projection as reflected in the forward-looking information, as well as the risk factors that may project the future performance results of Open Text, are contained in Open Text 's Forms 10-K and 10-Q, as well as in our press release that was distributed earlier today, each of which may be found on our website.

We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call will include a discussion of certain non-GAAP financial measures. Reconciliations of all non-GAAP financial measures to their most directly comparable GAAP measures have been included in today's press release, which may be found on our website.

With that, I'd like to welcome everybody to the call. With me today is Open Text's President and CEO, Mark J. Barrenechea; as well as our Chief Financial Officer, Paul McFeeters.

As with our previous calls, we will read prepared remarks followed by a question-and-answer session. The call will last approximately one hour, with the replay available shortly thereafter. I would also like to direct investors to the Investor Relations section of our website, where we have posted an updated PowerPoint that will be referred to during the call, as well as a summary table highlighting Open Text's historical trend and financial metrics.

In the coming months, Open Text will be presenting at several investor conferences, notably RBC Markets Technology Conference in Toronto on September 3rd, The Citi Global Technology Conference in New York City on September 4th. The Deutsche Bank Technology Conference in Las Vas on September 11.

More details about these and all other investor events in the Investor Relations section of the Open Text website.

With that, I will hand the call over to Paul.

Paul McFeeters

Thank you, Greg. Turning to the financial results I will highlight our fourth quarter then fiscal year 2014. Total revenue for the quarter was $494 million, up 42% compared to $347.3 million for the same period last year.

Regionally, the Americas contribute 35%, EMEA 34% and Asia Pacific 11%.

License revenue for the quarter was $99.7 million, up 27% compared to $78.8 million reported in the same period last year. The acquisition of GXS contributes $1.5 million of licenses revenue this quarter. We saw license revenue broken down by vertical sectors 22% from basic materials, 15% from technology, 15% from services, 15% from financial services, 9% from public sector, 9% from industrial goods, 7% from consumer goods, 6% from healthcare and 5% from utilities.

Cloud services revenue for the quarter was $149 million, up 255% compared to $42 million in the same period last year. Cloud services gross margins were 62.5% in the current quarter compared to 57.8% for the same period last year.

The acquisition GXS contributed $107 million of cloud services revenue this quarter. The increase in cloud services margin was primarily due to efficiency in network operations and telecom savings. The margin was positively impacted by 90 basis points, due to the reversal of previous sales tax accruals.

Customer support revenue for the quarter was $184 million, up 12% compared to $155 million in the same period last year. Customer support gross margins were 86.8% in the current quarter compared to 84.6% for the same period last year. The acquisition of GXS contributed $7.3 million of customer support revenues. The increased in customer support margins was primarily due to a reduction third-party technology cost and operational efficiencies.

Professional services and other revenue for the quarter was $61.6 million compared to $61.7 million in the same period last year. Professional services gross margin was 17.1% in the current quarter versus 20.4% for the same period last year.

Gross margin for the quarter before amortization of acquired technology and stock compensation were 72.9%, same as last year's fourth quarter. Pre-tax adjusted operating income before interest expense and stock compensation was $162.2 million this quarter up 58.2% compared $102.4 million in Q4 of the last fiscal year.

Adjusted operating margin was 32.8%, up 330 basis points compared to 29.5% in the prior year. Adjusted net income increased 52% to $128.7 million this quarter, up from $84.7 million in Q4 of last fiscal year. Adjusted earnings per share were $0.05 per share on a diluted basis compared to $0.72 for the same period last year, up 46%. There was no effect on sequential earnings per share from currency exchange rates.

The adjusted tax rate for the quarter was 15%, an increase of 1% from the same period last year. I will speak to this increase later in my remarks.

On a GAAP basis, income from operations before interest and taxes for the fourth quarter was $107.7 million, up 117.7% from $49.5 million in the fourth quarter last year. GAAP net income before taxes was $98 million in the current quarter versus $41.3 million in the same period last year. Net income attributable the Open Text for the fourth quarter in accordance GAAP was $88.1 million or $0.72 per share on a diluted basis compared to $42.2 million or $0.36 per share on a diluted basis in the same period a year ago.

Operating cash flow for quarter was approximately $135 million compared to $65.2 million in the same period last year. Excluding the impact of special charges, operating cash flow for the quarter was approximately was $142 million compared to $71 million in the same period last year.

Our operating cash flow increase in the current quarter compared to the same quarter last year and accounted for favorable working capital of $43 million and increased net income before the impact of the non-cash items of $27 million. There were approximately 122.5 million shares outstanding on a fully diluted basis post stock split for the fourth quarter of fiscal 2014.

Turning now to our fiscal 2014 results, total revenue was $1,625 billion up 19.2% compared to $1,360 billion in fiscal 2013. Regionally, the Americas contributed 54%, EMEA 36% and Asia-Pacific 10%.

License revenue for the year was $309.2 million, up 10.6% compared to $279.6 million recorded for fiscal 2013. GXS contributed approximately $2.6 million of license revenue this fiscal year. We saw license revenue broken down by vertical sectors, 16% from services, 15% from basic materials, 15% from financial services, 14% from public sector, 13% from technology, 8% from healthcare, 7% from consumer goods, 7% from industrial goods and 4% from utilities.

Cloud services revenue for the year was $361 million, up 108% compared to $174 million last year. Cloud services gross margins were 62.5% in the current quarter compared to 58.4% from last year. The acquisitions of GXS contributed approximately $195.5 million of cloud services revenues this year. The increase in cloud service margin was primarily due to efficiency in network operations and telecom savings. The margin was positively impacted by 80 basis points, due to the reversal of previous sales tax accruals.

Customer support revenue for the year was $707 million, up 7.4% compared to $658 million in fiscal 2013. Customers support gross margins were 86.4% in the current quarter compared to 83.8% for the same period last year. GXS contributed approximately $13.1 million of customer support revenue. The increase in customer support margins was primarily due to a reduction in third-party technology costs and operational efficiencies.

Professional services other revenue for the year was $247 million, down slightly by 1.7% compared to $252 million in fiscal 2013. The Professional services gross margin was relatively stable at 20.4% in the current year versus 21.8% for fiscal 2013.

Gross margin for the year before amortization of acquired technology and stock compensation was 72.9% compared to 71.2% for fiscal 2013. Pre-tax adjusted operating income before interest expenses and stock compensation was $502.7 million this year, up 25.8% compared to $399.6 million for fiscal 2013.

Adjusted operating margin was 30.9% compared to 29.3% in the prior year. Adjusted net income increased by 23.6% to $406.8 million this year, up from to $329.1 million from fiscal 2013, adjusted earnings per share was at $3.37 per share on a diluted basis compared to $2.79 for fiscal 2013.

On a GAAP basis, income from operations before interest and taxes for fiscal 2014 was $300.5 million, up 52% from $197.7 million in fiscal 2013. GAAP net Income before taxes was $276.5 million in the current year versus $178.2 million in fiscal 2013. Net income of attributable to Open Text for the year in accordance with GAAP was $218.1 million or $1.81 per share on a diluted basis - $148.5 million or $1.26 per share on a diluted basis for fiscal 2013.

Operating cash flow for the year was $417 million compared to $319 million in fiscal 2013. Excluding impact of special charges, operating cash flow for the year was approximately $448 million compared to $339 million in fiscal 2013. Operating cash flow increased for the fiscal year compared to the same period last year and account favorable working capital move of $49 million and increased net income before the impact of non-cash items of $49 million.

During the current year, we accrued $19 million in special charges on account of our Open Text-GXS restructuring plan. We expect to accrue an additional $11 million during fiscal 2015 for remaining activities under this plan, primarily related to integration costs and facility abandonments. On a cash basis, we paid our $8 million on this plan during fiscal 2014 and expect to payout an additional $15 million in fiscal 2015. The balance will be paid in years after 2015.

On the balance sheet as of June 30, 2014 deferred revenues were $350 million compared to $294.2 million as of June 30, 2013. Accounts receivables $293 million June 30, 2014 compared to $175 million at June 30, 2013.

Day sales outstanding were 53 days at June 30, 2014 compared to 43 days at June 30, 2013. Open Text DSO was 49 days and GXS DSO was 69 days. At June 30, 2014, our headcount was approximately 8,000 compared to 1,900 in R&D, 2,000 cloud services, 700 in customer support, 1,000 professional services, 1,400 in sales marketing and marketing and 1,000 in G&A.

Our target operating model was posted on our website in the Investor Relations section. We have revised the model for fiscal 2015 from what we have previously shown for the second half of fiscal 2014. We have increase the range for gross margins for product license, cloud services and product maintenance each by 100 basis points. We have also increased the range for non-GAAP operating margin to 28% to 32%. The company's adjusted tax rates was 15% in the fourth quarter of 2014 fiscal year.

In fiscal 2015, we anticipate an increase to 18% based on current forecasted earnings to be realized in various tax jurisdictions within our existing business model and structure. This increase is largely due to the higher proportion of GXS earnings expected to be earned in the group's U S operations.

On July 30, 2014, the board declared a cash dividend of $17.25 per share for shareholders of record in August 29, 2014, payable on September 19, 2014.

Now, I will turn the call over to Mark.

Mark Barrenechea

Thank you, Paul. Welcome everyone to our Q4 full year earnings call for fiscal 2014. We had a record Q4, a record fiscal year and we have positive momentum as we enter fiscal 2015, a fiscal year that I expect to be driven by value, growth and leadership.

There are four main topics that I am looking to speak to today. First, a review of Q4 and full year results as well as key accomplishments throughout the fiscal year. Second, I would like to speak to our business model. The Open Text business model is unique, compelling. We called it the Open Text Intelligent Growth Business System or OTIGS for short. I think it's important that you better understand how we think, how we operate and the priorities within that model. Third, our appointment of John Doolittle as our new CFO. Fourth, our top priorities, as we enter our new fiscal year 2015. These are the four topics I am going to spend time on today before I take your questions and that's the full agenda, so let's get right into it.

We are well aligned to the strategic priorities of our customers, including our vision, our products, our services, our customer engagement model and our roadmap. The Open Text vision is to enable a digital-first world. In the past, I have spoken about our products direction in terms of four functional pillars, our functional pillars. Many of you are familiar with these, ECM, CEM, iX, BPM and Discovery. We remained focused on being number one in each of these functional pillars.

As a company, our strength and uniqueness to get the crossroads of information management, B2B integration and compliance.

The more we can help our customers simplify, transform and accelerate their information needs, the more successful will be. Collectively, this is what we call enterprise information management or EIM. We have never been more aligned to those priorities of our customers and you can see this in our Q4 and full year results for fiscal 2014.

Let me highlight a few Q4 results, license revenue of $100 million, up 26.5% year-over-year, cloud services revenues of $148.9 million, up 255% year-over-year and CS revenue of $183.9 million, up 11.5% year-over-year. These results are reflective of our new suites, field's leadership and execution, the GXS acquisition performing and customer engagement and customer satisfaction.

Our operations continue to get more efficient as our business model scales and you can see this in our in-quarter adjusted operating margin of 32.8%, up 330 basis points and adjusted EPS of $1.05, up 45.8% year-over-year.

Let me further note that within the quarter, adjusted cloud margin was 62.5%, adjusted CS margin was 86.8% on a gross basis. I highlight this, because we are profitable in our cloud. It's in our DNA, and non-profitable models are simply not sustainable. In fact, customers seem to be very cautious of companies that do not make money. You are handing your data and your workloads and your keys to your company to the businesses that if they do not turn profitable, will ultimately fail.

Americas contributed 55% of our revenues, EMEA 34% and APJ 11%. Our partner business influenced 30% of our license business. Our EIM suites formally named Project Red Oxygen, in the Open Text Cloud are resonating with new and existing customers alike with 22% of our license revenue sourced from new customers.

Our average deal size grew to 429,000 with 16 transaction over $1 million in the quarter, as well as 10 Open Text cloud bookings over $1 million, and we won 50 new managed services customers.

Financial, services, materials and technology industries each contributed to over 10% of our book of our business.

Joy Global chose our SAP solutions over Microsoft, to optimize and simplify the process of creating, managing, monitoring and routing purchase orders and invoices, all while having a single point of access to their business data and documents.

AppWorks was another great win. We will be automating the supply chain processes between their customers and suppliers in over 20 countries. This was the win against IBM. Cameron International standardizing in our EIM for their digitization strategy.

Southern California Ericson selected your SharePoint product AGA to ensure SharePoint is compliant for their enterprise information. FMC Technologies in North America selected Content Suite. Barclays and Standard Bank have upgraded are now live in our new suites, over half of our installed base of our upgraded or in the process of upgrading to version 10, which is a necessary step to version 10.5.

Close to 500 customers have license keys to Content Suite Version 10.5 now. BP in EMEA has selected our Content Suite, and will be replacing FileNet and Documentum as they create shared services centered across BP.

Ralph Lauren chose our Experience Suite over IBM to manage the brand and media assets and for enterprises selected our Process Suite, including Case Management. We remained focus on executing to a world-class product lifecycle as we introduce important offerings like our new suites and new cloud services offerings. As I said earlier, we had 26 transactions over $1 million, 16 in license and 10 in cloud services.

Turning to our annual results, let me highlights a few numbers. License revenue of $309 million, up 10.6%, Cloud Services revenue $361 million, up 107.8% year-over-year, CS revenue of $707 million, up 7.4%and total revenue of $1.62 billion, up 19.2%.

We grew license 10.6% year-over-year and our organic license growth rate was 8% year-over-year. Cloud Services revenues are up due to our GXS acquisition and improved exclusion. Our CS revenues and margins are up due to great execution, leadership and more automation in the business.

License revenue for the fiscal year 2014 was up across all geographies, we added $9 million in Americas, up 7%, we added $11 million in EMEA, up 9%, and we added $9 million in APJ, up 33%, all year-over-year numbers.

Total revenues were up across all geographies, more geographies. We had $138 million in Americas, $94 million in EMEA and $27 million in APJ. We finished the year with a 30.9% adjusted margin and we grew our adjusted EPS by 21% to $3.37.

Needless to say I'm very pleased with our Q4 and full fiscal year 2014 and I would like to extend my congratulations to our 8,000 colleagues at Open Text for delivering a record year. Our solid financial performance is obvious by today's announced results, our operations keep improving and you can see this in our margins. We also increased our dividend by 15% in the fiscal year, intelligent growth is working and delivering. We integrated four businesses in fiscal 2014, GXF, Cordys, RKT and ICCM. We delivered our EIM suites and transitioned from delivery to adoption, we also grew our business to a point where Cloud Services is a significant percentage of our business and 20% larger than our license business.

However, we do see customer needs as hybrids and our results reflect this. The Open Text approach is to complete the need for our customers to provide customers with the ability to own the asset, AKA, our license, deploy at their location of choice, their place, our place or a third-party place or use our cloud-based services for a monthly fee. We successfully made this transition in fiscal '14. Finally, we also received the SAP Pinnacle Award for the seventh consecutive year and we will continue to partner with SAP in hopes of winning it eight years in a row.

Beyond the numbers and the accomplishments of the fiscal year, I see our leadership team and organization, of 8,000 professionals who are motivated, focused and dedicating themselves to winning and driving the business further and farther than where we are today. We are not just here to win, but to take Open Text to a new level of success. That is the most special, I think of all of our accomplishments in fiscal 2014.

Let me transition to the second topic today, our business system. We operate utilizing a differentiated business system, which we call the Open Text Intelligent Growth Business System. There are five key elements to our business system, financial performance, operational excellence, innovation, customer and partner loyalty and employee talent management.

Let me get into the Open Text Intelligent Growth Business System a little deeper by walking through each element and the metrics behind each.

On our financial performance element, we prioritized on revenue, net income and cash flow growth, capital allocation and returns and enhancing shareholder value.

On our operational excellence element, we focused on our strategic planning process, value stream mapping, AKA, how we prioritize, a lean six sigma methodology across the organization, and process digitalization.

On our innovation element, we focus on ideation, AKA, time to product, delivering the best platform, product adoption and competitive differentiation.

On our customer and partner loyalty element, we are building a trusted engagement model, a customer view centered on lifetime value, referenceability and a Voice of the Customer partner program.

On our talent development element, we focused on values and culture, fostering a lean, learning-oriented organization, supporting retention and advancement and embracing awards and recognition for the success of our colleagues.

For each element of metric, we have an internal measurement system, we use to track our progress towards excellence. We measure in tactical metrics that are straightforward to understand, measurable and are repeatable.

To highlight a view of our internal metrics, we use growth rates, renewal rates, market share metrics, number of quadrants we are in, costumer coverage percentages and the net promoter score or NPS. Each metric within an element, we have a measurement for.

Collectively, this is our business system. When we put OTIGS in motion, as we did in fiscal 2014, we expected outcomes such as value, growth and leadership. I'll come back to these expected outcomes in a moment when I speak to fiscal 2015.

Today I also announced the appointment of a new CFO, John Doolittle, after an extensive market search. John is a seasoned senior executive with more than 20 years of financial experience, including most recently as CFO for Mattamy Homes Limited, and previously Nortel. John has the breadth of financial skills, experience and leadership, to take our financial organization and our company to the next level of scale, efficiency and growth.

I am very much looking forward to working with John and having him join my leadership team. John will replace Paul in early September as our CFO. Paul and John will work together on a textbook transition through the end of September, which point Paul will retire.

Let me further add a very warm note of appreciation to Paul. Paul has served as our CFO for eight years. His career spans nearly 40 years and I thank him for his extraordinary service to the company. Paul and I have spent almost three years together on the road with investors, at conferences, board meetings, management meetings, trains, planes and automobiles and many late, yet wonderful nights. Paul, I wish you and your family all the best health, happiness and friendship in your retirement. Fair winds and following seas my friend, looking forward.

Let's look forward to fiscal 2015. I have the organization focused on further accelerating the benefits of our established business system. As I said earlier, with the Open Text Intelligent Growth Business System in action, we expect value, growth and leadership.

First and foremost, we lead with value. This is value for our shareholders through our financial results, product innovations, returns from investments and acquisitions as well as our dividend programs. Value in creating transformative solutions and the value our customers gained through the use of our products and services, at enterprise this year, we will unveil our next generation product platform code named Blue Carbon.

Value created in our enriched distribution system, which gets stronger and stronger year-over-year and the value gained through strong employee engagement with talent advancement, we have also created value through margin expansion. When you look at our adjusted operating margins over the last few years, we have expanded our margins at an incredible pace and delivered 31% in fiscal 2014.

As we look into fiscal 2015, we are raising our adjusted operating margin target model range to 28% to 32%. First and foremost, we lead with value and value is a fundamental foundational discussion at Open Text.

Second is growth. John Hunter is doing a great job in field operations across license, cloud services, professional services and alliances. Muhi Majzoub has our innovation teams aligned to our customer priorities and now working on project Blue Carbon. James McGourlay is driving customer service revenues, worldwide support and the Voice of the Customer programs.

For fiscal 2015, we are also investing in growth programs. Let me walk you through some of those key growth initiatives. First, we are in the middle of a strong product cycle with our EIM suites and B2B services and we will continue to drive adoption across our installed base, attracting new customers through partners, competitive replacement programs and a new global account team and focus. We will also unveil our plans for Blue Carbon at Enterprise World in November.

Blue Carbon will be centered on Cloud Services, Applications and Analytics, and will be a natural extension from our current suites. We hope to take our current strong product cycle and make it even stronger with Blue Carbon.

Two, we look to expand our B2B integration efforts, not just in large enterprises and on-boarding new trading partners, both new efforts going deeper into the mid-market. I would further note that EMEA has opportunity to be a greater scale for us in B2B.

We are placing more emphasis on one of our existing core strengths which is our compliant solutions, by driving more awareness, more engineering and more training and ultimately more revenue and adoption. I have seen reports that discuss over 500 new laws are passed each week globally. We can help solve larger opportunities in regulated industries. This is a fantastic opportunity for the company by unlocking an existing strength.

We will continue to transition customers to our cloud-based managed services. This is item four as I spoke earlier. We won 50 new customers in Q4 and have close to 800 customers running in our managed services. Our cloud is global, enterprise ready and highly secure with local data zones for data sovereignty. Our fifth element in our growth agenda is we have made progress with our partners, yet there is still more we can do.

Our alliance organization is more closely aligned to our field organization in fiscal '15 and is focused on strengthening our managed partner program, increasing the quality of our VARs and going deeper, deeper with our core SI. We are focused on both, transactions as well as long as long-term partnerships and opportunity development.

Number six, in our established markets, our first priority is to improve our yield. That is, get more productive through training and education. In our fast growth markets, our first priority is more account coverage. For inside sales, we are expanding operations from North America, now into Western Europe. We have also established a new global account team as we entered fiscal 2015.

Further, we will continue to acquire and I look to put $3 billion of capital to work over the next few years. We are clearly ahead of schedule with the on-boarding of GXS to the Open Text operating model. With that, the organization is now looking forward and ready to on-board other potential assets as and when appropriate.

These are our key growth initiatives as we enter fiscal 2015, product innovation adoption, B2B, growth, EMEA and mid-market, compliant and regulated industries, accelerated transition to managed services, alliances, direct distribution in fast growth markets, established markets, inside sales new global account teams and potential acquisitions.

Let me transition to leadership. Leadership is most fundamentally about change and your ability to elevate and take advantage of new opportunities. We will continue to drive awareness and brand behind our vision of enabling a digital first world. We are looking to deliver leadership with our expertise in information management, B2B integration and compliance, employee leadership programs and advancing our talent, products in the upper-right weight waves or quadrants, leadership in our strategic planning process and high impact outcomes, leadership from the results of our customers, the results that our customers achieve through the use of our products and services and leadership in our business systems.

I expect fiscal 2015 to be a year of value, growth and leadership and building on a momentum from a record 2014.

With that, I would like to open the call to your questions. Operator, I would like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. The first question comes from Kris Thompson, National Bank Financial. Please go ahead.

Kris Thompson - National Bank Financial

Great. Thanks. Congratulations again, guys, on a great end of the fiscal year. Paul, just for you on the target operating margin, should we hop into that range right out of the gate in Q1 or are you going to work towards that towards the end of the year?

Paul McFeeters

Well, it's an annual model, so as you know we still have seasonality in our quarters, so I won't respond to your question quarterly. As you can see how we ended our fiscal year, I think, it was reasonably clear that we are pushing the upper end of that range already, but I will just make the comment for the year and not for the quarters.

Kris Thompson - National Bank Financial

Good stuff. Mark, for you on the average deal size this quarter, I think that is a record and the number of license generated from your installed base again is another record. Can you just tell us is there is any unusually large transactions in there?

Should we start thinking about licensed revenue from new customers as a major driver looking forward the next few quarters when you get more traction with your recently introduced product suites? Thanks, guys.

Mark Barrenechea

Yes, Kris. Thanks for the question. We had 16 transactions over $1 million in license and 10 transactions over $1 million for Cloud Services. No asterisk on the $100 million of license. It was a good blend of deals in those 16 and we are not calling any one out of those 16. Look, what drove the solid license performance was we are in the middle of a very strong product cycle with our EIM suites, the field is very focused, great leadership, executing well and, we talked last quarter, we are executing on 9 out of 10 cylinders and we executed on 10 out of 10 cylinders in the quarter.

We also have some momentum as we come here into '15, but I will hold on to that for a moment.

Kris Thompson - National Bank Financial

Thanks. I will pass the line.

Mark Barrenechea

Thanks, Kris.

Operator

Thank you. The next question comes from Blair Abernethy from Cantor Fitzgerald. Please go ahead.

Blair Abernethy - Cantor Fitzgerald

Thanks very much. Nice quarter guys. I guess, just two questions for you, Mark, on the license side. First off, could you call out some strength in any one of your pillars i.e. discovery versus business process management or ECM, any one of those that might have been driving your business more than the others?

Mark Barrenechea

Blair, we had a good quarter across our pillars. I mean, we had some strong competitive replacements in the ECM stack, we had some nice wins in CEM, such as Ralph Lauren. Process Suite, which is really the coming together of many acquisitions for us, Cordys, ICCM, Assure, Global, Meta, coming together in a unified product platform. We had some nice case management wins.

Our strategy of integrating deeper into ERP continues to work well for us as well as opening the platform up to developers, so we had strength and good wins in each of our pillars, ECM, CEM, BPM. I would call those three out.

Blair Abernethy - Cantor Fitzgerald

Okay. Great. Then if I look at your new target model for fiscal '15, and if we sort of reverse engineer the cloud services and maintenance businesses, which are fairly stable and professional services which hasn't really changed that much in the last few years, you kind of come up with a range on your license that if it is going to be 15% to 20% of total revenue, kind of, kicks out $275 million to $380 million. That's a pretty broad range. That's like negative 10% to plus 20 odd percent. Do you have a sense of where you think or where you expect your license to fall next year that might be a little bit narrower than that range?

Mark Barrenechea

Appreciate the question. We look at the full year for 2014, we ended the year just around 11%. Organically for the year, we delivered 8% year-over-year growth and the market is growing between 10% and 11%. As I've said previously, this train, the next stop is growing at the market rate, our internal target is still to try to drive to the market rate of growth. I'm not here to give guidance or to narrow the range. You will need to do that work as you see fit, but we had 11% blended in the year. Organically, it was 8%. Note the markets growing between 10% and 11% and we continue to think of that as our next big milestone.

Blair Abernethy - Cantor Fitzgerald

Okay. Great. Thanks, guys.

Operator

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

Richard Tse - Cormark Securities

Yes. Thank you. Mark, you addressed some notable wins here against some competitors. Could you maybe give us a feel of what your win rates would be across all of those silos that you point to?

Mark Barrenechea

Richard, we don't kind of get down to that level externally against win rates. We win more than we lose. I would like to compete in more RFPs. We are still a relatively young company striving for more coverage both, in established markets and fast-growth markets. IBM has perfect account covers. There is not an account IBM doesn't cover. We just don't have that scale, yet, thus we try to up for that and augment that with partners' alliances, so we win more than we lose.

I would like to compete in more RFPs, because we win more than we lose. Our partner efforts will get us in more opportunities, but we don't get pillar-by-pillar by win or loss rate.

Richard Tse - Cormark Securities

Okay. I guess related question. Has the competitive environment changed any over the past 6 to 12 months here? Obviously IBM is in the mix, but maybe a comment about what EMC is doing and some of the upstarts in the market?

Mark Barrenechea

Fair enough, so we are competing effectively against Documentum in EMC and we are actually looking to do more focus on competitive replacement programs here in '15, so we are competing effectively against some of the incumbents in ECM, Documentum and FileNet. Our latest release of ECM with a full HML5 JAVA stack, CCS stack, a very modern technology stack, is competing well against Adobe. I feel what we are on a positive uptick competitively on the license side.

On the cloud side, I would probably point out Sterling Commerce as our top competitor over on the B2B integration and we too feel like we are on a competitive uptick against that as well, so I would say the large enterprise providers, the teams are feeling that we are competing fairly well at this point against Documentum, FileNet, Adobe Marketing Cloud, Pega as well as IBM Sterling Commerce. When we can bring it all together in a suite-deal or unified information platform, we become even more differentiated.

Richard Tse - Cormark Securities

Okay. Then just one last question on GXS, You come up with a plan to sort of drive those products into your existing base and where are you at there and what would that opportunity be for you guys?

Mark Barrenechea

It's certainly one of the things we are focused on is being able to bring GXS into the Open Text installed base, so we have programs and incentives in place to do that this year, Richard. It's still very early days, probably one of our top Greenfield opportunities, we have already won some accounts that are kind of crossover accounts, companies like Tata Steel , Schneider Electric are a couple of customers I would call out that have some portion of core EIM products that are now GXS customers as well.

Richard Tse - Cormark Securities

That's great. Thank you, Mark.

Mark Barrenechea

Thank you, Richard.

Operator

The next question comes from Michael Nemeroff from Credit Suisse. Please go ahead.

Michael Nemeroff - Credit Suisse

Hey, guys. Thanks for taking my questions. Mark for you on the license front this quarter, could you give us maybe a sense of the split of term license versus perpetual licenses? I know that with the bundles things change a little bit.

Mark Barrenechea

Yes. Paul, maybe you have a closer metric on that?

Paul McFeeters

Yes. We had about between five and seven term licenses, Mike, in the quarter.

Michael Nemeroff - Credit Suisse

Were those five to seven greater than $1 million?

Paul McFeeters

Not all, but they were sizeable.

Michael Nemeroff - Credit Suisse

Okay. Then, Paul, for you, I guess, first, it has been a pleasure working with you and congratulations on your retirement. On the tax line you, called out 18%, I think, for fiscal '15. Is that sustainable going forward? Should we model that in for '16 and out years?

Paul McFeeters

The best information I have today, things will change, obviously, in out years, so I can't give you a better number to model than the 18%, but I would never want to commit beyond what I see in the short-term, which is the 18% number.

Michael Nemeroff - Credit Suisse

Will you adjust any of the expenses to try and offset the 300-basis point improvement or will you just bite the bullet, so to speak, on the tax?

Paul McFeeters

Well, I think, you know, Mike, and certainly under Mark's leadership here, we are very focused on the bottom-line and the value proposition and we have increased our margins quite significantly, so I know the company will continue to be focused that way, but it's hard to. The taxes kind of what it is and we have done a pretty effective job over time of optimizing our tax position, I think as you know and I think we are continuing to do that even at the rate that we have stated.

Michael Nemeroff - Credit Suisse

Lastly for Mark, on the number of sales people you have currently, any changes or what kind of an increase should we expect in the number of sales capacity that you plan to add through fiscal '15?

Mark Barrenechea

Yes, Mike. Thanks for the question. I will talk about the areas. I would say that our priority for us to add all funded within our margin and our targets, but not get down to kind of an absolute number. Some of our larger opportunities include our fast-growth markets where we are looking for more coverage. We see mid-market opportunity in our B2B business, as well as inside sales expansion into EMEA and a new global account team that's going to be quite laser-focused on some of our top customers as well as additional capacity in our established markets, so I would say that's probably the rank order of where we are looking to put quota-carrying sales professionals in fiscal '15.

Michael Nemeroff - Credit Suisse

Could you give me a percentage increase instead of 10%, 15% increase in that neighborhood?

Mark Barrenechea

No.

Michael Nemeroff - Credit Suisse

Okay. Thanks, again, Paul. Pleasure. Thanks very much.

Paul McFeeters

Yes. Thanks, Mike.

Operator

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

Paul Steep - Scotia Capital

Thanks. Mark, maybe you could talk to in the cloud area, the trends drove those large transactions? Then, I guess, secondly, where in terms of managed services the long-term target might be?

Mark Barrenechea

First question sort of trends, I would say platform consolidation, global nature of supply chain, security and compliance. Those would be the sort of the top themes that I saw of getting to a provider that has a kind of a trusted network global, ability to on-board many thousands of trading partners and provide the service level agreements necessary to run supply chains that can push commerce or transactions in the many hundreds of millions of dollars, so I would say those would be the trends that I saw on how we differentiated. I am sorry, what was the second part of the question?

Paul Steep - Scotia Capital

The second part it was just related to managed services. I think, before to deal with GXS, they were around 45%, I believe of their revenues. What is the target to sort of lift that percentage maybe higher over time here aspirationally?

Mark Barrenechea

I am not so much focused on a percent of revenue, because I think, we have opportunities in the band business, which is getting just more traffic on the network with or without managed services. If I look at over the last, what, two quarters between kind of core Open Text and core GXS, we have added close to 100 new managed service customers in our first six months. We are up to about 800 companies running either their information management or B2B integration or compliance platform in the Open Text cloud, managed by Open Text professionals, so we will obviously want to keep growing that, we are going to add upgrade cycles. It's a good juncture to say, upgrade and upgrade to our cloud, upgrade to our managed services, so we are keeping this as a top priority, but I am not focused on whether it is 45% of the mix with band services. I would like to grow them both.

Paul Steep - Scotia Capital

Fair enough. Paul, congratulations on the retirement. Thanks a lot.

Paul McFeeters

Thanks, Paul.

Operator

Thank you. The next question comes from Stephanie Price from CIBC. Please go ahead.

Stephanie Price - CIBC

Good afternoon.

Paul McFeeters

Hi.

Stephanie Price - CIBC

Hi. In terms of cross-selling between the different EIM pillars, can you give us a sense of what inning we are in there and how much more there is much more possibility with cross-selling and how you see that opportunity?

Mark Barrenechea

Yes. Thanks for the question. It's still early days. I mean, the suites, and this is our second full quarter, I think now, of having the suites in the market and the suites make for, that cross-selling makes the enablement of the deployment much more easy and straightforward. We are still in the early innings of customers fully adopting either our information platform or fully adopting our B2B solutions, so still early days and a good opportunity for us.

Stephanie Price - CIBC

Great. Then in terms of acquisitions, can you give us a bit more sense of what verticals are looking interesting to you at the moment and how we should be thinking about acquisitions?

Mark Barrenechea

Yes. Fair enough, so I typically don't get into too much detail here, so I won't get into geos or verticals, but I think the piece of information that I wanted to provide today is that, with kind of the on-boarding of GXS to our operating model, sooner than expected, the organization is ready now to be back to sort of business as usual, if you will, in how we operate in corporate development and ready to on-board any potential acquisition as and when appropriate, We are sort of back to our normal cadence in corporate development now that we are tracking ahead of schedule on the on-boarding of GXS. I won't get into any verticals or industries.

Stephanie Price - CIBC

Great. Thank you very much.

Mark Barrenechea

Thank you.

Operator

Thank you. The next question comes from Eyal Ofir from Clarus Securities. Please go ahead.

Eyal Ofir - Clarus Securities

Thank you very much. Congratulations guys on a great quarter.

Mark Barrenechea

Thanks, Eyal.

Eyal Ofir - Clarus Securities

I just wanted to touch base on, you talked, I think, in the opening remarks about half the client base now is upgraded to version 10. I think that's actually a very important data point. Is there any way - upgrade are in process, is there any way to split kind what percentage has been upgraded and what percentage is currently in process? I guess in terms of the outlook as well, in terms of the upgrade cycle to version to10.5 here, how long you think this upgrade cycle will last?

Mark Barrenechea

I'm not going to split out kind of there or are in process. If you're in process, I expect to get there. That's right, so the customers have that gotten there are in the process of getting to version 10, which is an important data point, thanks for highlighting it, because it is sort of that platform where folks then move on to 10.5, which is project Red Oxygen, or EIM suites. Upgrade cycles can range from if there has been less customizations and it's out of the box it can be a 30-day process. If it's heavily customized and deep integrated, it can be sort of a two to three-quarter exercise, always outliers on both sides of that.

To be clear, our suites are the default shipping product now, so as we bring in new customers on board and win new customers and new logos, they are seeing our EIM suites, right? That is what they see in a new sales cycle. Then have the opportunity in our installed base to get them upgraded and then adopting new modules. I feel pretty confident this product cycle will keep us going all the way through Blue Carbon. We will kind of unveil the details of that in November.

Eyal Ofir - Clarus Securities

Okay. Sounds great, then just wanted to ask about this as well. The transition here in the quarter itself, do you see more of the license revenue growth due to the upgrade to version 10 or are you seeing some bigger transition here to 10.5 or is that still coming?

Mark Barrenechea

Again, our default sale is on our suites, so we have new customers. There are certainly always folks always buying capacity, right, so you get capacity sales but it is new suites leadership and field execution that drove the strong license performance.

Eyal Ofir - Clarus Securities

Okay. Great. Just one more question before I pass the line. In terms of going out into new markets, obviously, you talked about additional channels you can open up here, especially with this upgrade cycle coming, you are also penetrating that new accounts, where do you think you can add more from a channel standpoint? More regionally, is it specific to maybe a large global organization? What should we looking for from you guys to do over the next call it 6 to 12 months in terms of partnerships and I will pass the line after that. Thanks.

Mark Barrenechea

I think there are three key opportunities in partners and alliances. First, consistent with what I said in the past, I think the VAR business, value-added resellers is an incredible opportunity for us. Being able to get the right VARs and the right countries, getting multiple VARs in the right countries to adopt our solution is just an incredible distribution opportunity for us.

Second is deeper with select system implementers and I think we are in a very strong position now, where we have an integrated suite for information management, B2B integration and a more highlighting our strength in compliance that we can attract some of the larger practices in the global Sis and bring our offerings to their practice to drive transformation for customers.

Then third is continue to seek other large strategics and working together in the marketplace like SAP, so to me those are the three areas that I think can be a catalyst for our business, not just in a quarter, but in the years to come is strong alliances with SIs, building the world's best VAR program outside of GA and working to find a few larger strategic transformative partnerships.

Eyal Ofir - Clarus Securities

Okay. Perfect. I will pass the line. I just want to say, also to Paul, congrats on the retirement. Great working with you for the last eight years. Thanks.

Paul McFeeters

Thanks, Eyal.

Operator

Thank you. The next question comes from Scott Penner from TD Securities. Please go ahead.

Scott Penner - TD Securities

Mark, could you give an update on the AppWorks initiative, just in terms of, I don't know, what kind of metrics you track internally there, but it always seems like there is a nice growth adjunct to me in terms of new licenses to the core. I wondering what you can provide.

Mark Barrenechea

Scott, thanks for the question. I actually don't have the AppWorks metrics handy today of all things. Part of the strength of our ECM pillar within the quarter, we have made a couple of strategic choices here that resonating. The first is, we have decided to take ECM and deeply integrate it to ERP, differentiates us.

Second is opening up the platform for developers, and we saw a few wins in the quarter that were directly related to AppWorks, the ability to embed, extend, expand our Content Suite and Experience Suite, because of AppWorks, and that services layer, so I will follow up and see if we have some metrics on the subscriber growth. I don't have that handy today, Scott.

Scott Penner - TD Securities

Okay. The Cloud Services business picked up, what look like more than just the extra piece of GXS in the quarter, is that a function of some growth in the EasyLink business or is that more of a function of the growth in the managed services side?

Mark Barrenechea

I would probably say a little more directed at managed services.

Scott Penner - TD Securities

Okay. Then lastly just so I understand here, you said half of the installed base has version 10.4. Was that right?

Mark Barrenechea

About half of the installed base is either upgraded to or in process of upgrading to version 10.

Scott Penner - TD Securities

Okay.

Mark Barrenechea

10.5, when we say project Red Oxygen that equals version 10.5, to get to 10.5, we want people to go through version 10.

Scott Penner - TD Securities

Okay. Now, that's clear. Thank you.

Operator

Thank you. I would now like to pass the call back to Mr. Barrenechea.

Mark Barrenechea

Operator, thank you. Thank you for joining the call today. I couldn't be more pleased with our record Q4 in fiscal 2014 performance. You guys now have the numbers, you can also see some of the larger, more transformative, transactions with 26 deals over $1 million.

I would like to leave you with the thought of, that as we enter fiscal 2015, we have some momentum. We are aligned to our customer priorities, we have field leadership and focus and we have added to our [leadership] of John Doolittle today.

We are in a strong product cycle and we have laid out a practical, achievable, growth agenda, as well, in fiscal '15, leveraging our product cycle, new B2B markets, compliance, continuing to transition customers to managed services, partners and alliances and leveraging everything from established markets to our new global account teams and we are ready to consider more acquisitions.

Thanks for joining today. I look forward to seeing you at our upcoming investor conferences.

Operator

Thank you. Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.

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