IntraLinks Holdings, Inc. (NYSE:IL) Q2 2016 Earnings Conference Call August 3, 2016 4:30 PM ET
Dean Ridlon - VP of IR
Ron Hovsepian - President and CEO
Chris Lafond - CFO
Jeff Van Rhee - Craig Hallum
Chris Speros - Stifel Nicolaus
Sarkis Sherbetchyan - B. Riley & Company
Glenn Mattson - Ladenburg Thalmann
Good afternoon, and welcome to the Intralinks Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Dean Ridlon. Please go ahead.
Thank you, operator, and good afternoon. Welcome to Intralinks Holdings second quarter financial results conference call for the quarter ended June 30th 2016. With me today are Ron Hovsepian, Intralinks' President and Chief Executive Officer; and Chris Lafond, Intralinks' Chief Financial Officer.
Some of our discussion today will contain forward-looking statements which may include projected financial results, including projected future backlog growth, direction or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities and other forward-looking topics.
These statements are neither promises nor guarantees, but are subject to a variety of risks and uncertainties, many of which are beyond our control, and any of which could cause our actual results to differ materially from those contemplated in these forward-looking statements. For a listing of the risks that could cause actual results to differ, please see our latest Form 10-K, 10-Q, and other reports filed with the SEC, as well as the factors identified in today's press release.
In our prepared remarks today, we will refer primarily to non-GAAP financial measures. Definitions of these financial measures, as well as reconciliations to the corresponding GAAP financial measures are included in our earnings release and in the accompanying financial tables that we issued in connection with this earnings call and are available on the Investor section of our corporate Web site.
The information contained in our quarterly earnings release and the comments and remarks of the representatives of Intralinks Holdings, Inc. made during this conference call are integrally related, and as such are intended to be disseminated and understood together. Intralinks undertakes no obligation to update or revise this information except as required by the Federal Securities Laws.
Today's call is available via telephone and webcast. The telephone replay will be available after the conclusion of this call for one week from the date of this call. And the webcast will be available on the Investor section of our corporate Web site. To access the press release or the webcast replay, please consult the Investor section of our corporate Web site.
On today's call, Ron will provide an update on the progress we have made in the execution of our strategy and against our priorities for 2016. And then, Chris will provide with details on our second quarter financial results. After these remarks, we will take your questions.
With that, let me turn the call over to Ron.
Thank you, Dean. Good afternoon everyone, and thank you for joining us. I will start our call today by discussing the driving forces of the secure content collaboration market and our uniquely differentiated position to capture it. Then I will update you on the progress we've made against the 2016 priorities we shared with you at the start of this year, and finally, I will share some highlights on our Q2 performance.
The market for our secured content collaboration is evolving rapidly and in the way we expected, only faster. Enterprises around the world are facing exponential acceleration in security threats and data breaches, which could result in a loss of most critical, sensitive, and confidential data, and potentially significant financial and reputational exposure.
With growing regulatory pressures imposed by more and more countries around the globe, enterprises are increasingly focused on how collaboration is occurring across their business and beyond their corporate firewalls.
The modern work environment adds additional risk as employees increasingly access critical data instantly on multiple devices including their personal computers, tablets, and mobile phones, and then drop this sensitive and confidential business content into consumer grade document cloud storage applications and share it with multiple people outside of their companies.
We are in the midst of an explosion in the amount of data that is moving to the cloud, and much of this data is critical to cross boundary business processes. They must balance ease of use with security and control. So it should be no surprise that cyber risk and information security are now board level agenda items.
This digital business environment is fueling demand for our services today. And we expect demand to increase over the new few years. I believe Intralinks is well-positioned to capture the market opportunity this evolving environment is creating. The trends I just described create a clear and compelling need for exactly what we offer.
Our customers need to manage the secured externalization of sensitive content leveraging their existing systems of record. Customers are able to accomplish this using our advanced security, distributed storage and processing, seamless integration with desktop authoring applications like Word and PowerPoint, and APIs for integration. These are the foundations of our content collaboration network.
Let me now update you on the progress we have made on our priorities for 2016. We have continued to evolve our platform to unable our customers to address the challenges they face while operating in this environment. We have seen significant growth in customer adoption for our secured content collaboration service and an increasing number of use cases. And, we have continued invest in scaling the Intralinks' platform to meet that increased demand.
In addition, we've continued to drive our market leadership in several key areas, including security and governance. For most people, the term security suggests complicity and friction for users. To the contrary, our most recent releases have made our security simple and scalable enough to use across the entire enterprise.
First, we enhanced our Intralinks' VIA offering with advanced administrative controls that allow our customers to monitor usage and manage users app scale. This enables them to deploy Intralinks enterprise wide and still maintain tight controls over sharing and collaboration.
Second, we introduced for general availability a patent pending feature we call offline information rights management or IRM. This is an industry first. Our customers can now protect entire workspaces using our plug-in free IRM, synchronize them to local desktop, and access and edit those files even when they are not connected to the internet or to the Intralinks' platform. This makes Intralinks' file level controls truly portable and friction free while affording the best protection against data loss in the market.
We believe these enhancements will drive much wider adoption of our solution. As we look forward into the rest of 2016, we'll continue to extend our position in the market by addressing our customer's most critical data privacy and data sovereignty needs when we roll out our architecture for distributed storage and processing of content. We also have been enhancing our go-to-market capabilities by implementing our prudent sales model globally, adding sales capacity, and improving sales productivity.
During our first quarter call, we talked about our efforts to implement a sales model globally following our success in North America. Our sales model focuses on customers in regulated industries or industries that need to share high value content beyond their corporate firewalls.
As a result, we continue to target companies in financial services, life sciences, energy, and IP-intensive manufacturing as we believe enterprises in these industries have the most urgent need for security, auditability, compliance tools, and usability that our platform offers.
We have also recognized that purchasing decisions are being made by line of business leaders which will be our primary focus inside global 2000 companies. While our sales efforts are targeting these line of business leaders, we also remain engaged with CIOs, CISOs, and other individuals inside these organizations because we recognize that they will have significant influence on enterprise wide technology decisions.
Over our 20-year history, we have cultivated relationships with many enterprises in our target verticals and enjoyed being on pre-approved or so-called Whitelist, which helps to expedite the presale security and compliance review part of the selling process. In many instances, this gives us an advantage over the competition as in some cases they are excluded from being involved in an RFP process since they have improving their products or services meet the security and compliance criteria these important technology influences have established for their organizations.
While we have found that our focus on the most critical business processes in these large customers tends to lengthen the sales cycle, once we have engaged with the customer, that customer tends to be much stickier over time. For example, in Q2 our client removal rate for clients that spent over $100,000 with us was over 95%. And clients that spent over 250k, it was a 100%. These renewal rates highlight the fact that when clients engage and adopt our solutions, they stay with us.
In addition, we've shown that can leverage these long term relationships and expand our business into multiple new use cases across the enterprise. And as we look ahead, we know that we have significant opportunities to further penetrate a large number of our existing customers.
Given the opportunities in both existing and new customers, we continue to add sales capacity to help us capitalize on the sizeable opportunity we see. At the beginning of the year, we stated that our goal is to increase total sales capacity 30% over year end 2015 across the business. But the majority of those new heirs focused on selling into enterprise.
While we made very good progress improving our sales coverage our M&A use case during the first half of the year, we are slightly behind our original enterprise hiring plan. Expand our sales talent has been very positive for the company. And, we are excited by how this expands our reach and coverage.
At the same time, we are mindful that it will take some time for our new sales people to reach full productivity. On average, it takes roughly 18 months for a new enterprise sales person to reach target efficiency. Given this, it's important keep in mind that the full benefits of this additional sales headcount are not anticipated to be realized until the third and fourth quarters of this year and into 2017.
To help our sales force sell more effectively, we continue to invest in marketing programs that are designed to increase awareness among our target industries. We have made great strides in developing our brand around a unified single value proposition and accelerating demand creation.
Our new securing business beyond boundaries messaging is resonating with customers, resulting in more inbound engagement on our redesigned Web site and a 30% year-over-year increase in press coverage for the company.
We have also launched a new set of integrated demand generation programs focused on the enterprise, resulting in doubling the response rates to our campaigns. And an industry analyst Gartner's latest Magic Quadrant report on the enterprise file sync in share market, Intralinks is now recognized as a visionary. All these efforts are paying off and we continue to add important new customers to our roster and expand existing relationships, particularly in North America where model is most mature.
An example of this is one of the world's largest wealth managers that has now selected the Intralinks' platform as the secure content backbone to power its frontend client portal for a 70,000 of the manager's most valuable high net worth clients. This is a new Intralinks' VIA customer for us. And as part of this agreement, Intralinks' will handle the secured distribution of client investment material which often included personally identifiable information while maintaining the bank's existing look and feel.
This firm selected Intralinks for its financial industry leadership, knowledge, bank rate security, powerful APIs, and complex entitlement and permissioning controls. We expect this one use case by itself has the potential to generate $2-4 million of revenue annually when fully implemented. And this implementation gives us an important foothold inside this customer, so we can now look additional use case opportunities to grow the relationship.
Additionally, we believe that this use case can be repeated at other large financial institutions. An example of how a relationship with a new enterprise like this can expand beyond the initial use case as with a large financial services firm that is headquartered in Europe. The relationship is now expanded to over 60 live projects running across the company. Our annual revenue from this customer has grown approximately 15 fold since the first use case was implemented, turning it into a multi-million dollar account. We have many other examples of this type of expansion.
We also established a relationship with Inovio, a large biotech firm and innovator in fighting cancer and infectious diseases. As Inovio's business continues to grow, they look to Intralinks to help manage their business development and alliance activities replacing an incumbent provider. Inovio chose to work with Intralinks because of our superior and differentiated secure core technology as well as the future extensibility and value of our platform to support multiple business solutions across operational, commercial, and clinical use cases. This is another example of how our strategy of gaining footholds within clients, positions us for further expansion is working.
We had a third important win with a large government contractor who needed to implement a single, standard process to enable external collaboration and control over sensitive information being shared with its supplier base. With pending government regulations and limited internal resources, the company was looking for an enterprise approach to meet the needs of all of the U.S. sites.
We won this business because we are able to meet the company's critical requirements around data encryption, authentication in both data and data center security. This company is implementing Intralinks VIA as the external communication platform for sharing confidential information.
Now let me spend a few minutes going a little deeper on our largest and most established use case. Our M&A business has performed well regardless of how the overall M&A market is behaving. The strong relationships we have established with the various players involved in the M&A market over our 20-year history, provides a steady flow of opportunities.
During Q2, we saw a strong performance with accelerated year-over-year bookings growth over Q1. Importantly, we saw record deal count in EMEA and record North America new business. While we told you earlier that the majority of our sales hiring was on the enterprise side, we also continue to add capacity focused on this M&A use case. We expect this additional sales capacity to set us up for a strong second half.
As I mentioned last quarter, we had some challenges in Europe in the first quarter that we addressed and today we are pleased with the progress the team is making. The second quarter results in Europe improved significantly, for our M&A use case and are improving in line with our expectations for our enterprise business. We expect that it would take until the second half to see meaningful progress in rebuilding our European pipeline and accelerating revenue growth.
Finally, let me discuss our efforts to improve profitability. At the beginning of the year, we talked about our long term goal of driving to a 20% non-GAAP operating margin. We've been moving as quickly as we can to reduce G&A expenses without impacting the business and our efforts are progressing faster than we originally planned for this year.
As a result, we have raised our profit guidance for the year and are seeing the opportunities to accelerate our efforts to further reduce costs. Chris will talk more about this during his remarks. Overall, we have delivered solid first half results, meeting the expectations we set for both first and second quarters.
I would now like to turn the call over to our CFO, Chris Lafond, who'll take you through the details of our financial performance for the quarter and give you more color on our guidance for the rest of the year. Chris?
Thanks, Ron, and good evening, everyone. As Ron mentioned, the evolution of the secure content collaboration market is fueling increasing demand for our services. This demand coupled with our differentiated value proposition, our highly leverageable cloud-based platform and our excellent business model that emphasizes recurring revenue and strong client retention rates positioned us to deliver double-digit revenue growth, higher operating margins and increasing free cash flow in 2016 and into the future.
I'll begin with a review of our results for the second quarter, review our outlook for 2016 and then we'll open up the call to your questions. Beginning with Q2, we had another solid quarter with both revenue and non-GAAP operating income coming in at the high-end of our expectations.
Revenue for Q2 was $73 million, an increase of 7% on a constant currency basis and 6% on an actual currency basis. In Q2, Enterprise revenue ended the quarter at $29 million, up 10% on a constant currency basis. M&A revenue for Q2 was $36.8 million up 7% on a constant currency basis and DCM revenue was $7.1 million.
Our revenue remains highly recurring with approximately 98% coming from subscriptions and support revenue with the balance coming from professional services and other fees. In Q2, our client retention rate for customers that spend over $100,000 with us was over 95%. And for customers that spend over $250,000 with us, it was 100%. These retention rates highlight the fact that when clients engage and adopt our solutions, they tend to stay.
Consistent with our strategy to lend and expand, we leverage these relationships to expand our business into multiple new use cases and add additional users. We are investing in our customer adoption processes and expect to further improve both client and dollar retention rates over time. In addition, to expanding existing relationships, we also continue to add new clients. Over the past 12 months, we've added over 180 new Intralinks VIA customers. And in Q2 alone, we added over 60.
As we shared on our earnings calls this year, a key business metric for future enterprise revenue growth is the growth in annualized recurring revenue or ARR. As a reminder, ARR is defined as the annualized value of all renewable subscription contracts in effect at a specific point in time without regard to the duration of the contract. ARR is a metric commonly used by many SaaS companies to discuss the health of their business. Continued acceleration and new business growth with our sales expansion and sales productivity improvement plans coupled with strong retention rates will drive acceleration in ARR.
In the second quarter, ARR increased 7% year-over-year on a constant currency basis. Going forward, this metric replaces enterprise backlog growth as our key business metric for future enterprise revenue growth. As we mentioned during our Q1 earnings call, we made several operational changes to correct the execution issues we experienced in Europe last quarter and expect that the impact of those changes would result in ARR acceleration in the second half of the year. On a global basis, we expect to end the year with ARR growth in the mid-teens.
During the quarter, we experienced continued strong ARR growth in Intralinks VIA, which enables multiple use cases in addition to our traditional due diligence and financing use cases and remains an important contributor to ARR growth. In Q2, global Intralinks' VIA ARR continued to increase in the 20% range year-over-year.
In addition to our renewable subscriptions, our strategic project revenue is also consistent and recurring with the largest use case being M&A due diligence using our Virtual Data Room solution. Our proven ability to quickly provide an easy to use and highly secure platform for critical projects result in a revenue stream that has consistently grown at double-digit rates year-after-year.
Given our 20 year history of expertly supporting over $30 trillion of strategic projects, we have developed deep relationships across the financial services industry. These relationships produce a highly recurring flow of projects. We currently have approximately 4,700 active M&A projects, representing an increase of 11% over the number at the end of Q2 2015.
On a geographic basis, in Europe our Q2 deal count reached an all-time high and increased 30% year-over-year, providing confidence in our efforts to address the execution issues we experienced in Q1. And in North America, our Q2 new business bookings were the highest ever. The strong growth in deal count and new business globally during Q2 provides the foundation for acceleration in M&A revenue in the second half. I would also point out that the long-term relationships we have developed with our M&A customers provide great cross-sell opportunities for Intralinks VIA. We're capitalizing on this and Ron highlighted a few examples earlier.
Overall, we delivered solid year-over-year revenue growth are experiencing continued demand from clients and remain confident in our ability to deliver double-digit annual revenue growth over the long term.
Moving down the income statement, our gross profit for the second quarter was $53.2 million or 73% of revenue consistent with prior periods. Gross profit includes approximately $2.3 million of non-cash expenses related to the amortization of intangible assets and stock based compensation. As Ron discussed, we continue to make investments in our sales force based upon our confidence in the market opportunity.
We expect sales effectiveness and productivity to improve during the back half of 2016 and into 2017 as the average sales rep tenure increases and we expand existing customer relationships with additional users and use cases.
Over time, all of this will provide a source of operating leverage as the cost to acquire a customer decreases. It's important to note that we are funding this sales investment, while at the same time improving our overall operating margin. Our focus on tightly controlling G&A expense across the entire company has been and will continue to be a significant contributor to operating margin expansion while also funding these sales investments.
In Q2, G&A expense declined year-over-year by 330 basis points as a percentage of revenue. This was our lowest level of G&A expense as a percent of revenue in nearly three years. We believe our continuing focus in this area of expense will provide us with a significant opportunity for operating leverage as we drive further G&A reductions and leverage our infrastructure to support a much larger business.
Product development expense was approximately 10% of revenue in Q2 consistent with the level it had been over the past few years. The total cost of our product development efforts combines this expense category and capitalizes software development which can be found on our cash flow statement and was approximately 19% of revenue in Q2 consistent with our expectations and flat with last year.
On a constant currency basis, non-GAAP operating margin was 5.9%, an increase of approximately 390 basis points year-over-year and 6.1% on an actual currency basis. Non-GAAP operating margin excludes $6.1 million of non-cash amortization of intangible assets and $2.8 million of non-cash stock-based compensation expense.
Turning now to cash, cash and investments were $38.4 million at June 30. Operating cash flow continues to improve over 2015 and we remain on track for positive free cash flow for the full year. We are focusing on utilizing our cash for initiatives in investments that create shareholder value. We continue to believe that repurchasing our shares is a compelling use of capital. Since we began the $20 million share repurchase program, we've used approximately $11.5 million of cash to repurchase approximately 1.4 million shares.
I will now turn to our business outlook for the remainder of 2016. At the start of this year, we communicated that our focus on cost management and margin expansion would increase non-GAAP operating margin in 2016 by approximately two points to 6%.
Our efforts to expand profit margins and free cash flow are progressing faster than we originally planned for this year and we are accelerating our efforts to rationalize our cost structure. As a result, we've increased our non-GAAP adjusted operating margin guidance for the year by an additional two points to 8%. In addition, we see further near-term margin expansion opportunities that would drive non-GAAP adjusted operating margin to the 12% to 14% range in 2017 which puts us on track to deliver our 20% target.
In addition, operating cash flow increased almost 60% in the first half of 2016 as compared to the same period in 2015. We expect to accomplish the improvement in margin and cash flow while making the investments necessary to continue driving double-digit revenue growth.
As we expand profit margins, we also continue to execute on our top priorities for 2016 including investing in the expansion of our sales capacity. Based on this investment, we expect to see our enterprise pipeline building into Q3 and our bookings to accelerate as we move through the second half.
After a 40% increase in pipeline year-over-year in Q2, pipeline is up another 20% sequentially entering Q3 compared to the same time last quarter. This pipeline growth provides the foundation for revenue acceleration in 2017 as we increased the base of annualized recurring revenue from organizations with renewable subscriptions.
Before providing details of our guidance, let me spend a moment on foreign exchange rates. Our guidance is based on the spot rates in early January. We have made no attempt in our guidance to anticipate any strengthening or weakening of the U.S. dollar from these foreign exchange rates.
Our expectation of the full year impact of foreign exchange remains unchanged and we still expect a negative impact from foreign exchange rate changes of approximately 100 basis points to 150 basis points on our constant currency revenue growth rate during 2016. As a reminder of the majority of our non-U.S. dollar based revenue and expense is denominated in euros and British pounds. The details of our guidance can be found in our press release issued earlier today. For the full year 2016, we are maintaining our previously issued revenue guidance of approximately $300 million to $306 million or up 10% to 12% on a constant currency basis, and we currently expect to be at the lower end of that range.
On a principal market basis, we now expect our M&A business to grow in the low-teens in 2016, as compared to our original expectation of around 10%. We expect the percentage change in full year revenue for DCM to be in the range of its first half performance and we expect enterprise revenue growth for the full year to accelerate slightly from our first half growth rate. In addition, because of our efforts to expand margins are progressing faster than we originally planned for this year and because we are accelerating our efforts to rationalize our cost structure.
We now expect non-GAAP operating income for the full year 2016 to be between $23.5 million and $25 million, an increase of 120% to 133% over 2015 on a constant currency basis versus our previous guidance of $17 million to $19 million. This would lead to a year-over-year increase in operating margin of approximately 400 basis points on a constant currency basis.
Our GAAP net income and EPS guidance assumes non-cash stock-based compensation expense will be approximately $11.4 million and amortization of intangible assets will be approximately $24.2 million. In addition, we expect depreciation and amortization will be approximately $27 million and interest expense will be approximately $4.5 million for the year. We also expect to improve cash flow as we grow our business.
For the full year 2016, we now expect cash from operations to exceed 40 million, an increase of at least 30% over 2015. Our expectation for total capital expenditures and capitalized software development has come down to approximately 31 million. Recall that we previously communicated that we expected free cash flow to be breakeven to slightly positive in 2016. Given the acceleration in margin expansion we are achieving, we are now confident that we will deliver positive free cash flow this year with further acceleration in 2017.
For the third quarter, we expect total revenue to be between $75 million and $76 million, an increase of 9% to 10% on a constant currency basis, and non-GAAP operating income of between $6 million and $6.5 million. Our GAAP net income and EPS guidance for the quarter assumes non-cash stock based compensation expense of approximately $3.1 million and amortization of intangible assets of approximately $6.1 million. In addition, we expect depreciation and amortization of approximately $6.8 million and interest expense of approximately $1.1 million.
So to summarize, we delivered solid results in Q2 and during the first half of the year. Our efforts to expand profit margin and increase cash flow are progressing faster than originally planned and we are accelerating our efforts to rationalize our cost structure. We expect to deliver double-digit revenue growth in 2016, while at the same time significantly expanding our operating margins and generating positive free cash flow. The combination of our proven business model, sales investment and cost reduction opportunities provide us with the platform to accelerate our financial performance and expand operating margin significantly in 2016 and 2017.
Demand for our services is strong, and as a result, we are well-positioned for double-digit revenue and earnings growth and increasing returns to our shareholders over the long-term.
Now, I'll turn the call back over to the operator, and we'll be happy to take your questions. Operator?
We will now begin the question-and-answer session [Operator Instructions]. First question is from Jeff Van Rhee of Craig Hallum. Please go ahead.
Jeff Van Rhee
Hey, guys. Congrats. Numbers look good, especially really driving the leverage there, but several questions for me, specifically on the sales hiring, as you look at the -- you hit your targets on the M&A side as you said you fell short on the enterprise side, just expand a bit same processes, same machine, are the right skill sets just more difficult to hit there with respect to enterprise and then at what point do you think you'll be to that 30% do you get there this quarter?
Yes. This is Ron, Jeff. From my perspective, it's a combination of we have got the right profile, we feel and we're seeing the results there based on some of the pipeline growth that Chris had highlighted and the growth of that team. From my perspective, the enterprise piece is a combination of taking our sales management out of territory to do the volume of interviews and then the second part of it is the actual absorption and adoption and training of getting those people on-boarded for us, that's probably the biggest influence on it from my perspective.
The second part is when you combine it with the EMEA turnover that we had talked about that was the other piece that plays a role in that that's bringing the number down a little bit. And then in terms of completion that is a top focus for us in Q3.
Jeff Van Rhee
Yes, yes. Okay. And while you are on the sales side, I think, you talked about that 18-month ramp to productivity obviously, as we think about the capacity you are adding here and map what that means for bookings in progress, can you give us a sense of where the reps tend to be 12 months out 18 months is full productivity like what do they typically accomplish by 12 months?
Right now, we're still learning that pattern. So we -- I think the sample set is too small to be statistically valid on the ones that were here from last year, but what I would say is that in general, we're looking at all the industry norms for what it would take for cash and for pipe to get these guys up to the right levels. And what Chris had highlighted is our growth in that pipeline continues to head in the right direction.
From my perspective, I think seeing the pipeline grow just this quarter on a quarter-over-quarter basis 20%, which built on top of a 40% growth rate. Those are pretty when you combine those two. Those are pretty strong growth numbers.
Jeff Van Rhee
And just to be clear, I was little confused on the 40%. Was the prior number, the 40% growth was that one year-over-year?
Yes. Yes, and then the quarter over that, the Q2 -- the 2Q quarter was 20% on top of that.
Jeff Van Rhee
Sequential? Okay, got it. And then just two other quickies from me then the -- with respect to the ARR now we've got, do we -- I think you said, in the future we're not going to have the short-term backlog growth. Do we still get the short-term backlog growth for enterprise this quarter?
No. What we said, Jeff, was that as you recall, throughout the last few quarters we've talked about really improving our reporting, improving the metrics. So we've done a lot of work internally to make sure that we have the systems and the reporting capabilities to do more of the reporting that SaaS companies are doing today, right. ARR is a metric most SaaS company's use, retention rates are things that most SaaS companies use. So we've been very focused on driving that improvement. We think these are the right metrics and to keep people focus on the right things, we think this is the right one and we've been as you know rolling this out over the last few quarters and sensitizing people to moving to these metrics.
Jeff Van Rhee
Got it. Okay, then last one from me, you mentioned the large wealth manager was 70,000 high net worth clients and you're going to manage the reporting. Can you just expand on that engagement? I'm curious what the relationship was with Intralinks, if at all prior to this engagement, namely was this upsell-based on an existing sort of financial services relationship, did you come in clean with a use case, just tell me more about how you got there?
Sure. Absolutely came in clean. It's a whole new area of the business, where we didn't have any penetration. So it's part of the line of business selling that we emphasized. And this is the teams getting out to the different lines of business. It is a customer that we already have an established M&A relationship on the other side of the house, where they help us sell-through to our end customers, as you know. But this use case was very specifically built out around those high net worth partners and managers that we're focused on that are running their funds. So this is in the alternative investments arena is where we have the success. And so this is new customer for us inside or new function or department inside of -- of a customer today. Then where we have, what I would call M&A penetration, but no other massive penetration or big penetration. So this is really in that new VIA range of customer. Does that answer your question?
Jeff Van Rhee
It does. Just one brief follow-up, in terms of the getting the deal done, how key was the original relationship and any introductions that that might have led that might have come from that as opposed to it not having any meaningful impact on the cycle, how would you gauge that?
In terms of getting to the line of business person that was a brand new relationship, which I think is important. When you got into the technical part of the team, this is where being white-listed and having some of the pre-approvals and people knowing our brand, inside that financial services, that obviously was a positive to us, so, showing up with the right financial model, the right bank rate security. Really positioned us well to accelerate that process, I think it would have or pick off some of the competition candidly as we got -- as they kept drilling down at each stop. The good news is we had a warm welcome into IT and a warm welcome into securities you would imagine but because at least they knew us and we've been through their processes. But in terms of core line of business that was really new. So it's a really good story of us taking advantage of our position in the market.
Jeff Van Rhee
Okay. Great. Thanks so much.
The next question is from Gur Talpaz of Stifel. Please go ahead.
Hi, this is actually Chris Speros on for Gur. I know that, you mentioned that you are not going to provide us with the enterprise backlog growth for this quarter or going forward. But could you sort of give us an idea if that growth re-accelerated in Q2 in a way that would have made, it seems if you were approaching that -- you are on pace to reach that 20% year-over-year enterprise backlog growth targets that you had laid out at the start of the year.
Yes. Thanks for the question. If you recall, we talked about last quarter, ARR backlog being up about 8%. So we are kind of consistent with last quarter, what we had talked to you about as well as that some of the challenge we had in Europe, we thought we would take into the second half to really take hold. I think we talked about on the enterprise side, what we talked about on the call is we're seeing some really good performance moving in the right direction, particularly in the M&A side, but we're also seeing some of the initial signs in backlog -- sorry, pipeline build and other things building there. So our expectation as we move ahead here is that, we see acceleration into Q3 and further acceleration into Q4 as that capacity builds and matures through the year.
Great. Also can you talk about the drivers of Europe being behind schedule on the original hiring plan? And what operating income in the bottom line would have looked like if you had completed the near entirety of that plan as originally scheduled in Q2?
Yes. So as Ron mentioned, we've made some really nice progress through the first part of the year on expanding our sales capacity. As we talked about last quarter, we had some turnover in Europe, so I think again, just to reiterate, we've done a really nice job of adding the additional capacity, finding the right people, bring them on board, we're doing a really nice job with that. We had a little of those turnover challenges that we think we're getting our way through and we'll start to see that as Ron said in the third quarter and beyond that continue to build that sales force.
In terms of the impact of the P&L, I wouldn't say it's significant given the timing of when the people would've been on board, so I would not say it's a significant impact to the Q2 results as the result of being a bit behind on our hiring plan.
Got you, got you, great. And one more question, if I may. It sounds like Europe really bounced back sequentially from Q1. Was this turnaround driven solely by the fixing of the execution issue that plagued Europe in Q1 or were there some other macro drivers as well?
This is Ron. I didn't see any macros at this point. What I would say it was just execution and focus and the team over there, our leader over there did a very, very nice job driving it and as Chris said in his comments that, that performance really was a record deal comp performance in Q2, which is really important for setting us up to see the revenue flow through in Q3 and Q4 for those deals, so that was very important. And as Chris said in his comments, we need to maintain that good performance to ensure that we hit the plan the way we want to and the way we've guided.
All right. Thanks, guys. I appreciate it.
The next question is from Sarkis Sherbetchyan of B. Riley & Company. Please go ahead.
Yes, thanks for taking my question guys. Next, you guide up here on the operating income line, would you mind maybe discussing just kind of the puts and takes here as we kind of move through Q3 and Q4 here. Is it really a function of a nice step down in G&A?
Yes, thanks for the question. As we have talked about throughout the year, we felt there was a significant opportunity, multiple points of opportunity in the G&A line, so we've been aggressively going after that. And as we talked about, there were a number of things there that we thought we could improve, including rationalizing systems, which we've done a really nice job of and are all coming online and we're getting benefits with those.
Including revisiting the either outsourcing or in-sourcing of certain activities, and as we continue to scale and grow rationalizing those and getting them into the right place. Looking at all of our processes across the company and as we fix those processes, while a lot of that might be in the G&A side, those have benefits across the rest of the business. So you will continue to see other parts of the business also have improved cost as a percent of revenue, as we move through the year. So the benefits that we're focused on will have broader implications outside of the G&A functions.
No, good, that's helpful. And then next, can you maybe help me understand your strategy with respect to channel partners here? I know you're making a nice push into aggressively investing in the sales and marketing front, but does it make some sense also direct effort towards building deeper relationships with maybe some high profile partners there?
Hey Sarkis, this is Ron. The answer is yes. For us, it was a question of timing. We want to make sure that we did three things. We got our beach head accounts in place with the good references because partners need that. Second thing, partners need is access to the technology and we've now done that, so you can go to developers.intralinks.com and get to our platform and begin to use the services in -- with very modern language with the ability to use nouns and verbs to make those calls, which is what the -- what those partners want.
And then the third area that it also requires is you have to develop some of the IP to give to the partner to enable them. That's what we're working on right now is, is when you go through an integration at a larger customer, we do that. So we do have good anecdotal stories with several partners at this point, but we're heading towards scaling that up and making that a focus as we go over the next 12 to 18 months, so you'll hear more from us on that in the future. But the answer is yes. We need to do more with partners and that will give us more leverage.
All right. Thanks. That'll be all from me.
The next question is from Glenn Mattson of Ladenburg Thalmann. Please go ahead.
Hi, good evening everybody. On the ARR, did I miss it? Did you give the growth rate, but you didn't give the absolute dollar number, is that right?
Yes. We have been reporting growth rates similar to the way we had been reporting the previous metric and at the end of the year, we will likely provide additional color on that. So, yes, we've just been providing the growth.
And that was up 7% that's the number you gave, right.
7% growth this quarter, 8% last quarter, yes.
Right. Okay. And is your entire enterprise -- is your entire enterprise revenue represented by that number or is it a portion of enterprise?
It's the vast majority of it. We do have a few longer-term project based deals that would be in the enterprise revenue line, but the vast majority of it is represented by ARR.
Okay, great. And one other thing, I might have missed it. Did you give 2017, Chris, guidance for profit margins or did -- I might have missed that, did you say that?
Yes. What we said that -- so two things, right, just to reiterate. We put a significant focus as you know on managing cost and looking for opportunities to take advantage of our scale and drive cost towards that target of the 15% to 20% operating margin target that we set for ourselves. So for the rest of this year, we now expect this year to end at 8%. I said, earlier that we would -- we see clear line of sight to 2017 being in the 12% to 14% range which sets us up really nicely to very quickly get to that 15 to 20% range. So, that's kind of where we currently see things given the progress we've made.
And the new, I mean the old math was 400 basis points of G&A and offset partially by 200 basis point increase in sales for kind of a 200 basis point annual increase in margins, what's the new math driving this, much better…
We still will be making the sales investment as I said right. So, we will continue to make that investment and we are seeing more of the opportunity, absolutely certainly a good chunk of that's coming out of G&A. But as I said, some of the changes we're making also have impacts across the rest of the organization. So you'll see in the other areas, lower cost as a percent of revenue as we improve processes that really touch the whole business. So you still assume G&A is a big part of that, but you'll see the other pieces. Now on the sales side, you will continue to see investment there offset possibly by some of the savings opportunities we're seeing that will also hit the sales and marketing side.
Okay, great. That's exciting and then lastly maybe, Ron, as far as Europe goes, nice to see it bounce back, anything just kind of standard question this quarter for every company is the Brexit question, but also in particular how it relates to you, is there an acceleration or deceleration in the adoption of some of the Data Sovereignty Laws that we expect to come that will help drive your business?
Yes, in terms of the overall Brexit impact, most of the conversation has been around the M&A piece of it and so from my perspective, I think it's something still to be determined at this point. From our overall business, the U.K. itself and at a global level from a deal count perspective, globally I think last year, the U.K. accounted for about 5%, 6% of the overall deal count globally. So while it's material to our European business, what we've actually seen is actually is really nice uptick inside of our -- inside of our business in Southern Europe, that's been very healthy from my perspective.
So I feel good about Brexit right now. I think that story is still unfolding and we're watching it very, very, closely. There is basically two theories it will have a negative impact and it will be a positive impact a bit of a rush to make transactions happen. At this point, the numbers are similar to seasonally adjusted numbers from prior year, so I don't see anything one-way or the other that would indicate anything out of the norm right now at this point, but obviously, we're watching it closely.
Our execution was at a record level though. And I really compliment our team there and what they did and the North America team had a record new business quarter for us as well. So both of the M&A team overall globally really, really performed extremely well and made for a heck of a good comeback, so which is what we needed and now we'll just like I said have to maintain that performance.
And any update on the progress for data sovereignty adoption?
Yes. In terms of demand, we see that demand continuing to grow. The major regulatory item that's driving it is due out in 2018 is when companies have to adhere to it. So we're seeing the noise and all the chatter continue to grow and build there. From our platform perspective, we plan on delivering that capability this quarter and we'll deliver it on the platform and we'll deliver it over in Europe and in Germany as we committed to get done last year. So that's still on track to get done and we are excited about what that can mean to us in the long-term.
Okay. Great. Thanks for the update.
Yes, thank you.
There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Ron Hovsepian for closing remarks.
Great, thank you. Thank you everyone for joining us today. I really wanted to leave you with three key points from my perspective what this quarter represented and some of the positioning we are doing.
Overall, the EMEA M&A business performed extremely well on a deal count basis which I think really positions us well for the achieving the second half revenue plan that we had laid out for all of you. Two, adding the capacity that we had thought about adding inside the enterprise selling is starting to yield results as we look at the pipeline. I referenced the year-over-year pipeline grew at 40% for Q1 and then on a sequential basis it grew another 20% again this past quarter.
So those pieces are starting to line up. We shared with you the customer example of what we had won this quarter after a lengthy sales cycle that has a great opportunity to generate $2 million to $4 million and the ability to expand off of that. And then finally, the third core point is our efforts to improve our leverage in our model are paying off as we raise the operating margin as a percent of revenue to 8% for this year and changing our or introducing our outlook for next year of 12% to 14% for 2017 which puts us right on track for that long-term goal of 15% to 20% operating margin. And so I feel really good that these critical efforts are starting to pay off, timing and sequencing doesn't always line up perfectly, but I feel very good that these pieces are coming together, the right way and the way that we had hoped in a general manner.
So with that, I'd like to close the call and thank everyone for their attendance.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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