Q2 2020 Earnings Call
[music].
Thank you for standing by this is the conference operator welcome to the open text Corporation second quarter fiscal 2020 conference call. As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question Q simply press star and one on your Touchtone phone should anyone need assistance during the conference call. They may signal, operator by pressing star and zero on their telephone I.
I would now like to turn the conference over to Harry Blount Senior Vice President Investor Relations. Please go ahead.
Thank you aerial and good afternoon, everyone on the call today is open text, Chief Executive Officer, and Chief Technology Officer, Mark Jay Bear in trade and our executive Vice President and Chief Financial Officer, We do racking up.
We have some prepared remarks, which will be followed by a question and answer session.
This call will last approximately 60 minutes with the replay available shortly thereafter.
I want to take a moment indirect investors to the Investor Relations section of our website investors Dot open tax dot com.
Where we have posted two presentations that will supplement our prepared remarks today.
First our strategic overview duck titled Open text Investor presentation January 2020.
The second titled Q2.
Why 2020 financial and business results includes information and financials specific to our quarterly results, notably our updated quarterly factors on page eight.
In February and March open tax management is pleased to meet with investors throughout Canada, and the United States. We look forward to attending the following conferences. The eight capital digital disruption Forum on February 27th in Toronto, The Morgan Stanley Technology Media and Telecom conference on March 3rd in San Francisco.
And see Ibcs Tech tour on March for March Sim in Ottawa.
Please feel free to reach out to me or the IR team for additional information.
And now we'll proceed with the reading 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 contains forward looking information.
While these forward looking statements represent our current judgment actuals <unk> actual results could differ materially from a conclusion forecast or projection in the forward looking statements made today.
Certain material factors and assumptions were applied in drawing any such statement.
Additional information about the material factors that could cause actual results to differ materially from a conclusion forecast or projection.
The forward looking information as well as a risk factors that May project future performance results of open text are contained in open text. Recent 10 recent forms 10-K, and 10-Q as well as in our press release that was distributed earlier this afternoon, and which may be found on our website.
We undertake no obligation to up you. These forward looking statements unless required to do so by law. In addition, our conference call May include discussions a certain non-GAAP financial measures reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available.
On our website.
And with that I will hand, the call over to Mark.
Thank you very good afternoon, everyone.
Thank you for joining today's call.
There are variety of key topics I'd like to discuss today, our strategy, including the momentum of our cloud business and how the intelligent edge is going to play a larger role for open tax.
I could carbonite and our roadmap ahead.
I'd like to discuss today, our strong Q2 results.
Our go to market opportunity in partner strategy.
The general M&A environment as we see it.
And we introduced a guiding principle durable in September 2019.
I spent some time on that today and the Opentext operating model and lastly, our financial outlook, both short and longer term.
Let me jump right in and speak to this strategy the cloud.
And what I call the intelligent edge.
We have successfully transformed into a modern cloud company.
Servicing the information needs of the world's largest enterprises in government.
And with Carbonite, we will bring the cloud and information management to customers of all sizes.
Zero cloud revenue in 2012 to today, our cloud business has grown at 30% CAGR.
And the Opentext cloud is on track to be the largest business segment in physical 21.
Approaching three XR license business.
Larger than our maintenance business.
We've built the cloud business and delivered incredible growth.
While expanding license expanding maintenance expanding adjusted EBITDA and expanding cash flows our guide once to find new revenue dollars not substitute and existing dollar or another one.
This highlights our culture, the open text way and the open tax business system.
We now have three primary cloud businesses, a scale and significant total growth opportunities within each.
Business that work content services and cyber resilience.
The business network, we have won the world's largest most advanced business that works.
The business is benefiting from the structural changes in global trade increased and changing terrorists.
Privacy compliance and ethical trade.
Secular trends that aren't likely to change any time soon.
Content services when a data economy, you can't create an information advantage unless you have all the right data and the right place at the right time, and the same business contacts and always keep it up to date.
Our content services business is benefiting from the move to digitize standardized and centralized information from all sources human and machine.
Structured and unstructured to create sustainable information advantage.
Where the market and innovation leader in content services, both in the cloud and off cloud.
Cyber resilience.
We're also in a distributor nomadic data economy with data generated from billions of humans it end points.
Inside and outside the organization, including suppliers partners customers and contractors.
This environment creates significant challenges for corporate security officers to protect their environments.
Carbonite security.
Carbonic security cloud enables us to offer holistic security solutions enterprise customers and all of the endpoints that touch their network, including small medium businesses and professional consumers.
We continue to drive rapid innovation across all of our cloud platforms. The upcoming release of Cloud addition is an important waypoint on that journey.
20 dot too we have more of a staff we have more staff services and customers will never have to upgrade again.
Our cloud business has never been stronger and partners and customers alike are recognizing our leadership position.
We connected with thousands of customers and prospects in our recent 24 City cloud tour.
Now shifting the cloud has profound long term business impacts the enables us to simplify our go to market improved sales productivity.
Hi speed to market and increased responses responsiveness to real time changing customer needs. The net effect is higher customer renewal rates and satisfaction and increasing annual renewal rates are they are our annual recurring revenues a our are increasing the print that increasing the predictability of the business.
Turning force this shift checkout, our new home page on dumped up does that open tax dotcom you will see for simple piles now on our home page log onto the Opentext cloud I encourage you to close the on it and see the a 15 on SaaS services, we have a livewatch opentext dot com second tile get support.
Third tile the developer and for contact us.
Let's not just about the cloud and it's also about the edge.
The intelligent edge.
Some estimates speak to one trillion endpoints over the next 10 years by 2030.
Including all vehicles machinery.
Engines brake systems medical devices, Wearables smart cellphones laptops tablets robot.
And more.
The edge is to find the shape of the cloud.
Fine square human innovate work and play.
It defines the expanding role machines will have in our society.
Carbonite open text can uniquely offer cloud and edge solutions.
For intelligent connected and secure information management.
Let me give you a big number 100 million.
Open text software is now running on 100 million endpoint, but by our estimates.
It is opportunity as purest form and I'd like to say, but I'd like to say, it's your edge.
On it.
Well also see the benefits of this scale and we have a clear path to drive our cloud business, we expect cloud margins to expand from the high fiftys into the mid Sixtys supporting our fiscal year 22 aspirations.
Finally, I think it's important to recognize that we have given our customers choice on how they want to do business with us in the cloud and off cloud.
We have successfully grown our cloud business without sacrificing our license revenues or margins.
Turning to Carbonite.
I'm pleased to announce that we completed the acquisition of Carbonite on December 24.
Welcome, our new employees customers and partners to open tax.
Carbonite is a leading provider of cloud based subscription backup disaster recovery.
Endpoint security and threat intelligence.
The mining Carbonite data protection backup and document retention endpoint protection threat intelligence solutions, and our goal and our gold standard encase products will provide a comprehensive cyber resilience solution for customers that we believe unmatched in the industry. That's why we use the term cyber resilience.
Yes.
The acquisition is our most significant since the purchase of del N C.
Oh, it's enterprise content division, including documentation and significantly enhances opentext business mix and predictability.
And strategic on multiple doctors and I'd like to walk through them today first.
Carbonite brings us leadership in the third pillar, the large and growing cyber resilience market.
Complementing our leadership positions in content services and business network.
It is expected to increase the annualized run rate of our cloud subscription businesses significantly improved the future productivity.
Predictability rather of our revenue stream.
Third Carbonite brings 16000, new channel partners to open tax they knew route to market that complements.
Our strong.
Hi sales capabilities with Carbonite, we cannot deliver world class information management solution to customers of all shapes and sizes.
Fourth we evolve from E M I am.
From Enterprise information management, the information management, expanding our vision of products help again, all size customers from the largest enterprises.
Improvements mid sized companies, so small companies and professional consumers.
And to round out our strategic rationale the cloud opportunity is of course massive and I've called it a once in 20 your opportunity but equally important.
The answer to the cloud.
We work innovate on end points on the edge of the cloud the edges mobile expanding smart and very personal.
Opentext opportunity just got larger by embracing the edge.
Let me also spend a few moments top for long term growth opportunities for Carbonite.
First.
And it's pretty straightforward.
Expand the MSP and RM channels and increase our reach.
Second unlock the OEM opportunity with bright cloud.
If you're not familiar with this service please check out dot dot dot dot dot cloud dot com or simply go to open text I'll comment, but on the log on the cloud button to look at bright cloud. It is a great solution that.
Authenticates every you RL that it processes.
Third expand the carbonite opportunity within the Opentext enterprise, what I call file integrity.
Carbon I can provide endpoint data protection as well as ensure the authenticity and.
Integrity of every file which flows through content services and our business network.
And fourth bring Carbonite into Europe via open text scale.
We'll be focusing on these top four value place among others to pursue long term growth opportunities.
Let me turn onto our Q2 results.
This is our twentyth consecutive quarter of year over year total revenue growth. It is also our twentyth consecutive quarter of year over year cloud revenue growth.
Our talent and leadership our World class. They delivered exceptional Q2 results in a volatile selling environment, Let me walk through our results and all my remarks are on constant currency and with year over year comparisons.
We had record total revenue of 700 782 million up 6.3% record a are a 571 million up 7.8% to 73% of total revenue cloud up 14% license up 6% CS up 3%.
NPS down slightly a 3% we had positive organic growth within the quarter.
Adjusted EBITDA dollars of 323 million up 5% and then adjusted EBITDA margin of 41.4%.
Since margin of 98% cloud margin of 58% CS margin of 91% MPS margin of 24%.
EPS of 86 cents up 77.5% operating cash flows of 207 million up 9.6% any cash flow of 675 million net debt to adjusted EBITDA ratio of three up 2.3 time.
All cloud renewal rates for a strong in the low ninetys cloud renewal rates toward the mid to high nineties.
We had 45, new managed service customers, including HSBC Archer Daniels Midland and Wells Fargo.
Let me touch on some customer wins within the quarter.
The first the Netherlands Ministry of Economic Affairs and climate policy.
Does the ministry that overseas national policies, including commercial International Industrial trade investment policy as well as all energy renewable strategy climate change and environmental policies.
The Ministry selected open tax information management solutions to digitize and automate government processes across multiple part mens through a single platform in the cloud, enabling them to accelerate renewable energy and policies to support a stronger climate.
I also like to highlight a second when the German Ministry of Justice and Rheinland Clementine.
Together with three other state traditional administration selecting open text intelligent capture to digitize up to 100 million pages of incoming documents in a thousand workplaces as part of the introduction of electronic Court records to accelerate the delivery of fair and just decisions.
These are just a couple of highlights.
Customer wins can be seen our investor deck.
Talk little bit about go to market.
Our go to market and partners.
Partners, Our force multiplier, where our partner oriented company with a long history of success with best in class companies, such as Sep Salesforce Microsoft.
Global system, Implementers and many more some of these relationships.
Our a decade decades strong.
In early 2019, we announced a partnership with Google we expanded that relationship over the summer have begun to see meaningful traction in the marketplace.
The talent culture to make partner successful and will continue this track record of successful Carbonite.
Let me spend a moment on this crack still well has joined Opentext leadership team as executive Vice President of SMB and consumer from Carbonite, where he was the chief revenue Officer, and Craig will report to me directly Craig brings decades of experience in partner commercial sales, most notably from Citrix.
One of the keys to carbon any success of the ability to deliver a high value product that low incremental cost.
Their cloud platform to 300000 SMB customers.
We see significant opportunities to enhance the breadth and depth of their products improved profitability and expand geographically beyond the companys predominantly us market I talked about this has one of the value plays will allow we'll pursue.
And Harrison of course will continue lead our enterprise sales business reporting to me targeting with global 10000.
Which includes a 10000 largest organizations governments and companies in the world.
We remain committed to doubling RG 10-K covered from 40%, 80% and the next three years through both direct sales and partnerships.
Let me emphasize from our Investor day, any margin gains above 40% will be reinvested to drive sales growth across enterprise and SMB.
We recently added a new global account management organization for example, within the enterprise.
Provide later laser focused on our top enterprise.
Customers.
One enterprise team can focus on the enterprise customers.
Thanks, SMB and consumer channel and focus on SMB and the consumer as we leverage these new routes to market.
We now have complete go to market coverage.
The more we can connect a customer to an open tax product more we went.
Let me transition little bit to the M&A environment.
Before we touch on the wider M&A environment I'd like to point, you to the strong liquidity and balance sheet slide and the Q2 fiscal year 2000 financial and business results presentation on our website.
Our strong cash flows enabled us to rapidly pay down debt incurred by the document from acquisition.
We expect to repeat this will carbonite to reduce our net leverage ratio from three point Skews me from 2.3 times today to less than two times within the next four to five quarters.
Now for the M&A environment now, we see an extended market period of modest global growth.
Low cost of capital in a volatile macro environment due to geopolitical and trade disruptions and time such as these companies tend to shed assets.
This creates an opportunity for patient and strategic acquirers like open text.
Carbonite represents our ninth cloud acquisition, including Easylink, GNSS, Recommind annex Covisint, hi, tail catalyst and liaison.
We are proven track record of success.
We remain committed to acquiring value based assets and unlocking value using the open text businesses.
It is this discipline.
It has enabled us to acquire nine cloud companies at value prices and deliver high teens ROIC.
Our primary focus is on the successful accretive integration of Carbonite and getting it on our target model by the end of fiscal 21 or sooner.
At the same time, we still have an active pipeline of opportunities we are evaluating.
Well continue to be an opportunistic strategic acquirer why we build out our information management platform.
I'd like to turn to.
And emphasize the word durable up from our Investor day in September .
On the durability of the open Tech operating model in our financial outlook, both short and long term.
Spoke earlier about 20 consecutive quarters of year over year total growth 20 consecutive quarters of year over year cloud revenue growth.
Our annual recurring revenues now represent 96% of total revenue up from 65% from a few years ago and expanding our customer support renewals are in excess of 90% and our cloud renewal rates are in the mid to high nineties.
Our trailing 12 month operating cash flow is 860 million and Carbonite will further the predictability of our business.
This is the definition of durable.
Let me get on to the macro in our quarterly factors.
We are expecting.
Again for our quarterly factors were expecting low double digit revenue growth in Q3 fiscal 20.
On a year over year basis. This includes Carbonite and FX.
non-GAAP total operating expenses to be approximately 30% higher in Q3 fiscal 20 on a sequential basis.
In Q2 fiscal 20 of 286.1 million in Q3 fiscal 20, adjusted EBITDA dollars to be flat to slightly up on a year over year basis, you will see all these items presented in the quarterly factor section of our investor materials.
We view our business annually.
For the full fiscal year 20 inclusive of Carbonite in FX, Let me update you on our business targets.
Expect a 195 to 200 million of new Carbonite revenues for the second half of fiscal 2000.
And this is after PPA or purchase price adjustments in any typical disruption factor.
As we integrate the business.
Year over year license growth in the low mid single digits.
Year over year cloud growth in the low to mid 20%.
Customer support constant to low single digit growth professional services constant dollars year over year and margin expansion.
Positive organic growth.
Positive.
Growth.
Year over year increase in adjusted EBITDA dollars year over year increase in adjusted.
S.
And carbonite will be accretive to adjusted EPS.
This fiscal year.
I'm pleased to confirm that we're on track to meet our fiscal 22 aspirations of adjusted EBITDA and Hosea, that's 38% to 40% adjusted EBITDA and 1 billion to 1.1 billion of operating cash flows.
As a reminder, as previously you had highlighted we plan to discuss any physical 21 target once we complete physical 20, and conjunctive with that we'll communicate our annual dividend approach now aligned to our fiscal years.
Turning to the changing global macro environment and our quarterly factors, we have highlighted a few areas in our investor presentation that the potential to impact customer spending environment.
Global recession concerns.
Great and tear force.
Europe , you asked me and U.S. manufacturing slowdown the Corona virus as was the golf nations and depending Brexit.
Well I will have not seen any material impacts to our business due to macro related factors and our business in China is de Minimis. We've all read the same newspapers remain mindful of global events. Despite the macro environment, we remain confident and ready for any economic environment with our durable business model, we're poised to cap.
Relies on a structural shifts and global trade.
Yes dollars remains the U.S. dollar being strong compared to other currencies.
And this has caused a short term FX revenue headwind.
In Q2 fiscal 20, the FX revenue impact was a negative 10.2 million.
We continue to expect a total FX revenue impact of negative 35 million to our revenues in fiscal 2000.
As a reminder, over 50% of our revenue and profits are in the us.
And Carbonites revenues.
Our U.S. centric and any investor materials, you'll see 58% of total revenues are from the Americas.
On the earnings front Opentext continue to utilized balanced the natural hedging and our cost structure that reduces FX volatility.
Earnings.
Let me summarize.
In summary.
I want to reinforce that the company is focused and ready for all scenarios. The continued adoption of hybrid cloud buyer enterprise customers.
Our gaining share with our upcoming Cloud addition.
Winning the cyber resilience and the SMB consumer markets widening our aperture to include the intelligent edge.
We're well positioned to capture our existing information management shared both in the United States in globally, and we are the market leader on content services and business networks in a rising leader in cyber security.
We are a patient and disciplined strategic acquire or.
Opentext is part of a new generation cloud company inventing the future of business.
And we have a once in a 20 year opportunity help our customers migrate to the cloud reinvent their business processes and provide secure and resilient platforms from end points through two identity.
Ill then my recur prepared remarks here and what Thats my pleasure to turn the call over to Madu, Robyn often opentext Chief financial officer, but.
Thank you Mark and thank you all for joining us today.
First of all of a huge welcome to all members of Carbonite.
Opentext and Carbonite teams worked diligently together to close a second quarter and integration has commenced with strength.
We close Carbonite on December 24, and getting the eight days in Q2, Carbonite contributed 9.5 million in revenues and a net loss of 2.7 million on a GAAP basis, primarily on account of intangible amortization and onetime fees, especially charges.
Carbonite was accretive on a non-GAAP basis.
As we turn to the details of a quarterly results.
Financials as discussed on inclusive of Carbonites eight days of contribution.
Please note that our updated fiscal 2000 target model is included in our Q2 investor presentation posted on the IR website and will be addressed in my comments.
Long term Cisco 22 expectations remain unchanged.
Similar to prior quarters, my references will be in millions of you ft and compared to the same period in the prior fiscal year.
And let me start with revenues and earnings.
Total revenues of 771.6 million up 4.9% are up 6.3% on a constant currency basis foreign exchange continues to be meaningful there was a 10 million FX negative impact to revenue in the quarter.
Yet to date total revenues of 1.5 billion up 4.7% or up 6.1% in a constant currency basis.
Earnings per share for the quarter GAAP earnings per share denuded with 40 cents up from 39 cents.
And in the quarter non-GAAP earnings per share diluted with 84 cents up from 80 cents or up six cents on a constant currency basis.
On a year to date basis GAAP earnings per share diluted was 67 cents up from 52 cents in primarily due to increase in revenue.
You had to date non-GAAP earnings per share diluted.
Was $1.48 cents up eight cents or up 11 cents per share on a constant currency basis.
The geographical split of revenues of total revenues for the quarter with America's 58% EMEA, 33% at EPG, 9%.
Annual decoding revenues of 560.8 up 6.5% or up 7.8% and constant currency basis, yet to date annual recurring revenue was 1.1 billion up 6.1% or up 7.4% on a constant currency basis.
Annual ticketing revenues as a percent of total revenues with 70% for the quarter up from 72% in the prior year and 76% year to date up from 75% to the prior yet.
Our cloud revenues, a particularly strong at 248.3 up 13.3% or up 14.1% on a constant currency basis year to date cloud revenues of 485.60.
6% or up 14.5% in a constant currency basis.
Customer support revenues at 215.5 up 1.7% or 3.3% up and constant currency basis year to date customer support revenues were 627.8 up 29% are up 2.6% and constant currency basis. Okay.
To support the newest late was up slightly to approximately 92% from 92% last quarter.
License revenues of 138.1 up 4% or up 5.6% on a constant currency basis year to date license revenues at 216 up 3% or up 4.6% in a constant currency basis.
Our professional services revenues were 69.6 down 4.5%.
2.9% in constant currency basis year to date professional services revenues were 139 down 3.1% are down 1.4% on a constant currency basis.
Turning to margin.
GAAP gross margin was 69.9% up 90 basis points, yet to date GAAP gross margin was 68.6% up 100 basis points.
Adjusted gross margin was 75.5% down 20 basis point, yet to date adjusted gross margin was 74.4% also down 20 basis points. During both periods adjusted gross margin is well within the range of a fiscal 2000 target model.
Also on an adjusted basis cloud margin was 58.4% in 130 basis point improvement from Q1 fiscal 20, but down from 59.7% last year.
Yet to date cloud margin was 57.8% down from 58.9%.
Customer support margin was 90.7% up from 90% yet to date customer support margin was 90.7% up from 90.2%.
License margin was 97.8% up from 97.2%.
To date license margin was 97.5% up from 96.4%.
Professional services margin was 23.5% and consistent with last year.
Yet to date professional services margin with 22.8% up from 22%.
Adjusted EBITDA was 317 million up 2.8% or up 4.9% on a constant currency basis margin wise this that person's 41.1% down slightly compared to 41.9% last year.
Year to date, adjusted EBITDA was 571.2 million up 3% caught up 4.9% in constant currency basis margin wise this that person, 38.9% down slightly by 60 basis points.
Our adjusted net income was 227 million up 5.2% or up 8.1% on a constant currency basis.
Yet to date adjusted net income was 400.5 million up 6.1% or up 8.8% on a constant currency basis.
GAAP net income was 107.5 million up 2.9% year to date GAAP net income was 181.9 billion up 29.2% and primarily due to increase in revenues.
Turning to operating cash flows.
It was 207.2 million an increase of 9.6% year to date operating cash flows at 344.7 million.
Owned by 4.4%.
Connection efficiencies that domains strong without cutting the quarter DBSO at 57 days lower by two days compared to Q2 fiscal 19, improving all aspects of working capital efficiencies open text and Carbonite will be a key focus for us.
Our balance sheet from a balance sheet perspective, we ended the quarter with approximately 675 million in cash compared to approximately 999 million in Q1 fiscal 20 down in a large might show due to cash used to compete the carbonite acquisition and looking back our efforts to build balance sheet strength over the past set for fiscal year the.
Paid off our consolidated net leverage ratio was 2.3 times. We also remain confident that ability to bring on that leverage ratio down below two times in the next four to five quarters.
The acquisition of Carbonite as mentioned on December 24, 2019 required Carbonite for 1.4 billion financed by cash on hand at our existing developer. We have recorded 7500 introduction and Carbonites deferred revenue as purchase price allocation adjustment I will refer you to the slight carbon.
Night update and revenue impact in our Q2 Investor Relations presentation posted on our website and in our 10-Q for further details.
For the second half of fiscal 20, we expect carbonites revenue to be between 195 to 200 million after PA and typically business disruption of up to 10% due to integration activities. As a reminder, we expect carbonite to be an operating model by the end of fiscal is 21.
Carbonite integration and restructuring plan, we have committed to a top fall and fast integration of Carbonite into Opentext Carbonite would be accretive during fiscal 20, we expect the integration to be completed by the end of fiscal 21 or sooner.
Today, but announcing the restructuring plans that integrates carbonite into open text and also includes streamlining operations that open text. The anticipated cost is expected to be approximately 26 to 44 million.
The restructuring activities, but.
It to be completed by the end of fiscal 21, and once completed open text anticipate annualized cost savings of approximately 37 to 41 million.
We expect any savings realized during the remainder of fiscal 20 to be largely offset by onetime carbonite integration cost, but the majority of the financial benefit to be realized benefits come 21.
Our fiscal 2000 target operating model and long term aspirations.
Executing well two up business flat.
Impact of restructuring has been considered in the fiscal 2000 target model framework that for sharing with you today.
Highlight the following changes.
With the acquisition of Carbonite, we have increased the contribution of cloud revenues from 31% to 35% to study 4% to 38%.
We expect a 100 basis points increase in our annual net annual ticketing revenue range of 75% to 77%.
It also increasing the fiscal 2000 target model ranges for non-GAAP cloud gross margins to 58% to 60%.
We expect carbonite to be accretive and increase the adjusted EBITDA dollars. This is reflected in the adjusted EBITDA margin dream to 36% to 37% Cisco's target model.
Please refer to our IR deck for further details of other aspects of our target model.
Our fiscal 2002 aspirations.
We remain on track to meet up the scope 22 long term aspirations are current fiscal 2002 aspirations include.
38% to 40% adjusted EBITDA with margins above this range reinvested the future growth.
Including product sales capacity partners and marketing.
1 billion to 1.1 billion operating cash flows during fiscal 2002.
But the inclusion of Carbonite, we see upside opportunities to our operating cash flows, which we will update during our annual fiscal 2000 earnings call.
A quarterly factors and let me summarize yet and reiterate the quarterly factors that we anticipate for upcoming cutesy I would emphasize a few items as we look at what FX rates are today as one of the geographical components of our business.
We note that the FX headwind for the first half of fiscal 20 was 20 million to revenues. We've continued we expect approximately 35 million annually FX had been for fiscal 20 inclusive of Carbonite.
And Furthermore, inclusive of Carbonite, we expect low double digit revenue growth in Q3 on a year over year base.
Expects non-GAAP total operating expenses in Q3 to be up approximately 30% compared to Q2 fiscal 20 of 286.1 million. As we include a full quarter of Carbonites operations and season, it increases the leading to an annual performance cycle.
Adjusted EBITDA dollars to be flat to slightly up on a year over year basis.
Attacks update with respect to the Ioannis matchup.
We remain at the appeal space. The standard Ioannis process continues that unresolved remains strong as the vigorously defend our position.
Dividends turning to our dividend program today, we announced a quarterly dividend of 17.46 cents per share payable on March 20 2020.
Our rate is based in distributing approximately 20% about trailing 12 month operating cash flows and to reiterate our annual dividend approach would be communicated following a fiscal year event.
In summary, we are pleased with our Q2 results we have kicked off the integration of Carbonite with strengthens remained focus on up to 20 in long term targets and finally I'd like to thank you our shareholders, who trust and confidence we greatly value and the open text team for their deeply committed efforts.
And now I would like to turn the call or what's the operator for questions.
Okay. Thank you we will now begin the question and answer session.
Anyone who wishes to ask a question May press star and one on their touched on telephone to join the question Q.
You will hear a tone acknowledging your request if you are using a speakerphone. Please pick up your handset before pressing any Keith.
If you wish to remove yourself from the question Q. Please press Star then to once again to join the question Keith. Please press Star then one now.
Our first question comes from Raimo Lenschow of Barclays.
Hey, Thanks for taking my question.
I had a couple of quick ones first Mark can you.
Moving on to Carbonite for like a bit over a month now can you just see what's your strategy around cyber resilience what was the initial customer feedback that you've seen so far.
Yes, thanks for the question the.
The feedback has been amazingly.
Positive.
The to very natural extension to want to.
Provide.
In our information management strategy.
The protection and resiliency of information not just the kind of the management of it in content services or the exchanging conductivity of it through business network.
But now would be of or bill provide data protection and.
Security threat intelligence around it so so.
I'd say extremely positive and.
It's a very talented workforce.
We love the channel that they have built.
The cultures are coming together very very nicely and we have opportunities both ways.
We have product to be able to revive the SMB channel.
From open text and the ability to take data protection in bright cloud into the enterprise.
So.
When things are natural they.
They tend to come together.
Okay perfect. Thank you and indeed.
Quick question, because you're kind of holding the bonds to very launcher off the lontra, leading software vendors like.
I have like a bigger global footprint than our people what are you seeing in terms of enter moms.
Jeremy Chris a couple of quarters that was something that you highlighted if I look at the results. It looks like everything is kind of going well out there.
Yeah. It's.
Yes, I said and in my in my remarks, and sort of our quarterly factors.
We're expecting positive organic growth this year on on an annual basis.
The M&A environment continues to be.
Healthy for us and building pipeline, but a hot spots around the world sort of continue to include manufacturing.
You got to be continue to watch trade and tariffs, it's a bit on predictable and the our business is a little is de Minimis in China.
Obviously, we're all watching the prone to virus very carefully and how that might affect travel transportation.
And Dave a few other sectors, but.
Well, if we look at our results of.
Total revenues.
Up near five.
5% and reported.
7% in constant currency, we're seeing a stronger demand for.
For digitalization in our solutions.
Okay, perfect and one last question.
The cash flow was fair just operating cash flow was a very strong this quarter, what any particular drivers you wanted to point out too.
And as I've said in my comments, we continue to pursue sort of the working capital framework on Dsos. The two days in a lower than prior years.
And you should sort of expected to see that gradual progress.
As we as the as we get into fiscal 20, and 21 as well.
Perfect. Okay. Thank you comment today again.
Thank you. Thank you. Our next question comes from Daniel Jester of Citibank.
Yes. Thank you for taking my question good afternoon, everyone.
So Mark you mentioned in your prepared remarks about the 24 City Cloud tour that you hosted this fall I'm just wondering if you could get share with us some of the feedback you got from that and specifically I'm wondering if you learned anything that revise is kind of your expectations for the cloud additions launch later this.
Yeah.
Yes. Thanks, Thanks for the question.
We're.
You're not just reflect and back ofer.
Seven years of growing from.
Zero [laughter] cloud revenues to the incredible scale, we have today in.
Ill looking back it's a 30% CAGR over near near near seven years, the quarter up 14% and we kind of revised upwards. Our 20, our fiscal 20 view to where we're going to see about 20% plus growth in the cloud the cloud or it was about a part of our cloud which is our.
Managed services and that's primarily what the cloud for four was about about the enterprise and about managed services and then just reinforces that.
In the enterprise.
We differentiate on being able to allow customers to.
Get third competitive advantage by really tailoring software to their needs.
Both in the business network and in content services, we have those things that are more standard via via satellite core.
And our new E signature offering and then things even more standard right that.
That work, that's going to be at more volume through SMB, but specifically to the question. The cloud tour was really about managed services, having customers migrate from off cloud to the Opentext cloud and we have thousands of customers today that run off cloud.
And what we learned is.
Continue to stay on your hybrid strategy and managed services has a big role in the Opentext future.
Great. Thank you and then just to follow up.
One of the points you stressed a lot in your tax today was about the durability of of the business model and now yes.
Acquisition of Carbonite has made you more durable does that change how you view your balance sheet.
You also sound pretty positive out the M&A environment, So given the increased durability of the business.
Would you look to deploy your balance sheet differently in the future.
Thank you.
Yes, yes. Thank you thanks for the question.
Yes, our.
We were all about annual recurring revenues, whether it comes from the cloud or comes from maintenance right and the really.
They both have similar durability.
Hi, longevity high renewal rates, great margin, so its cloud or or very recurring maintenance and thats, what we like in the and the during the durability now becomes as cloud gross and they are ours gross the predictability of our.
Our business gets.
A little better every quarter gets more better if that proper English every year year over year and you can see that percent increasing there's a few years ago. We're in the mid to low sixtys, where the mid Seventys. This year will creep up into the mid to high Seventys.
Our next year, so we really like that.
Predictability, we're off so a patient deployer of of capital.
We're sitting at about 2.3 times.
Ratio will be back under two times in four to five quarters.
We're going to remain strategic we're going to remain.
Patient and right now over the next.
Quarter to to.
The most value we can unlock is via the Carbonite integration.
Getting carbonite web will integrate it getting them integrated into open text.
Initiating.
Completing our restructuring plan.
Growing their SMB channel.
Getting Europe up and running and getting a couple of wins in the Opentext enterprise and Thats really where are the most value. We can unlock right now over the next one one to two quarters.
Thank you very much.
Our next question comes from Richard Tse of National Bank financial.
Yes. Thank you.
I was wondering you need to do anything with the prior portfolio to sell onto the SMB channel. Obviously, it seems like harmonize brand pretty extensive channel there and kind of curious to see whether you need to reaching the products in anyway.
Our Richard Hey, it's Mark Thanks for Thanks for question, Thanks for joining the call.
No not present youre working on to the focus is to.
To look at a handful of solutions. That's currently in our portfolio and get greater distribution through the Carbonite.
Channel take a couple of examples a few examples.
First is encase.
We bring a digital forensics to the enterprise up but the product is.
Built for law enforcement organizations, which look a lot like SM.
SMB organization so.
In the first half of calendar 20 here right. We got Carbonite focused on Carbonite. So then pickup encase and bringing that into the SMB market.
We also Easylink solutions.
That have historically been a portion of which is as SMB oriented so encase product ready to go.
Easylink.
Ready to go high tail, I think will benefit as well off from that channel. So phase one is the most value. We can unlock is getting the carbonite integration complete.
And getting that kind of well established second is to bring existing product.
That we have to the channel and I think products.
Core and E signature grow and mature.
I think it'd be very natural fit for the high end of SMB and for the enterprise as well.
Which would be a little more like phase phase three.
Chris I hope that that's helpful.
Closets. Thanks so.
I guess, maybe in a related question with respect to one initiatives you talked about your Investor day in the fall in regards to targeting in the global 10000, you may begin progress update in terms of where you are there.
Yes, we don't have a specific count today, except to say that.
We expect to have our coverage doubled and I think near two thirds of the GE 10-K covered over the next 10 years, one piece of update I did provide today's we put a new global account management team in place.
Recently and that team is.
Fully in place operational.
What we brought a couple of existing Oh.
We recast if you will some some of our great internal talent, we went outside and brought some new talent in.
We have a great leader been why to Paris, leading this group for us.
And we're targeting our top 100 accounts and just giving those top 100 accounts.
Laser focused one sort of.
Account executive to manage all the opportunity across a general Motors for example.
Or across a.
British petroleum as as examples so.
We're we're marching towards near 60, 570% coverage over the next two and a half years or so from when we stated that goal and one big step was putting that global account management team in place, which has now established.
Okay, Great and just one last quick one from me.
There's no doubt you've got the capacity for Nash the do more acquisitions here.
You have the capacity to do it from management personnel perspective, and maybe sort of what's what's your willingness to sort of do more acquisitions over the next 12 months.
Considering that you just close carbonite.
Yes, it's.
Well the financial capacity is certainly there.
You know we set up.
The integration of Carbonite, we take this has an opportune talk a bit about the integration of.
Our as our new SMB consumer group.
And a little language. If you will we think Carbonites that was the public company of course, we think is two strong three strong product line lines here Carbonite Webroot and bright cloud those are three product lines underneath the Carbonite banner. The enterprise team is is on effect.
Good.
Hi, This integration Craig's reporting to me directly on how Lowness, great engineer reporting into really awesome and all the back offices are our direct line integrate chart, a HR finance to finance legal or illegal.
So.
The enterprise team is unaffected.
By this except that they are even more product to sell so this bandwidth on the on the enterprise side.
But right now over the next.
A couple of months in quarter of court half the greatest value. We can do is to unlock those value plays and side of Carbonite, but while noted we got the balance sheet.
We continue our top of pipeline.
Companies tend to shut assets in environments like this and I'll note that the enterprise team is really unaffected by.
Carbonite structurally unaffected by the acquisition and integration.
That's great. Thank you.
Our next question comes from Thanos Moschopoulos of BMO capital markets.
Hi, good afternoon, Mark with respect to the restructuring you mentioned that part of it will be for streamlining the business outside of Carbonite I thought you were already running quite a tight ship. So could you expand on on will be doing there.
Yeah, It's Tom.
Yes.
I've always appreciate it but the snapple logo, which is the best things on Earth keep getting better so we.
We do run a tight ship as you well no, but we also need to challenge ourselves to keep getting better.
And so the restructuring is.
Sort of two parts the first part is.
Completing the acquisition of the into completing the integration of Carbonite webroom and integrating that into open tax while study very thoughtful.
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We believe in quick integration and quick cost out and hair care. We are in January .
Really 30 days.
35 days after the acquisition and we got our plans.
Defined and announced the other part of this is.
In looking at how we would integrate carbonite into Opentext.
We have some opportunities to leverage better our our centers of excellence.
Carbonite had to outsourced parts of engineering in India.
Outsourced support.
Third party.
And.
Through that aperture, we're able to scale up a little more India, Philippines, Canada through our centers of excellence, but took this as an opportunity to look across Opentext and.
Complete some of those opportunities.
Great and then in terms of.
On the M&A front you establish the portfolio group recently I saw that you did a small tuck in this quarter.
Can you update us in terms of.
I find the smaller deals you're seeing and the cadence that we might see there.
Yes.
Well remiss to not mentioned our prepared remarks.
The facts guys that we acquired and.
That was a.
A reseller.
Of.
Fax business, primarily in the US great style acquisition for us.
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A known entity of good.
Small but solid.
Add of of new revenues.
It will it will actually it's small, but it will exceed the corporate ROIC.
I have a high return on invested capital.
And those are the type deals were looking to do through LPG other portfolio growth.
So there are other building a very robust pipeline and we'll we'll get the LPG deals done here in calendar 2000. So just watch the base watch this space will get deals done here and LPG in fiscal 2000 calendar 2000.
Thanks, Mark up offline.
Our next question comes from Paul Treiber of RBC capital markets.
Thanks very much. Good afternoon, just was hoping you could follow up in last comment just on the integration plan for Carbonite at a high level. How does the plan your game plan differ from prior acquisitions, particularly in light of the SMB and consumer channel that they have and what do you see is the biggest opportunities.
And then potentially also the the potential challenges that you may need to address with it.
Yes, Paul Thanks for the question.
So three parts and there the first is perhaps how does this differ than previous integrations.
So on the kind of supporting operations finance HR IP I'd like traditional back office dozen different off.
It's straight line integration functional integration.
What's different is we're really keeping a go to market grouped together under crack.
And having a report to me directly.
Our integration philosophy.
Is really to integrate at the business unit level and into gain that go to market strength. So Craig's organization in the complete organization they on their demand generation the on their presales.
They own sales so going on support as well for supports deeply integrated into the process. So cracks organization has a slightly wider scope and really owns that SMB and consumer go to market. So coming out of the gate here, we're going to keep the oil and keep this more as a general.
General Management group business unit.
I'm going to market.
Powell, who is going to lead engineerings going to.
Report directly into movie.
And look we're we're serious about cyber resilience and we're we're serious about the edge and we're serious about SMB.
And just like we did in content services, where over 25 years we've.
We completed near 60 acquisitions in the business network, we've completed near 15 acquisitions and you can expect us to.
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Deploy capital and innovate.
In this group as well so the plan is just slightly different where we're having a wider scope responsibility with.
Craig as we set up the SMB group.
Opportunity right.
This opportunity to expand their OEM group.
And bright cloud I'm very excited about bright cloud dot com and what that can bring.
There are just getting started and msps and Rms.
Roughly 16000 out of a total market opportunity of 60000.
International expansion, and then very select but high power value plays.
To bring.
Into the enterprise like data protection filing file integrity and the OEM opportunity.
Challenges.
Its a.
It's minimizing disruption.
And.
Talent right, we got to still war on talent and we got to keep fighting for the best people and high retention rates.
This concludes time allocated for questions on today's conference call I'll now hand, the call back over to Mr. Baron shape for closing remarks.
Alright, well, our prepared remarks, we'll longer than usual tonight, but we had a lot. We wanted to communicate so we do and I. Thank you for joining our call. This evening and hope you have a great evening. So thank you very much to thank you all.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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