Q2 2020 Earnings Call
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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, an 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 shape, and our executive Vice President and Chief Financial Officer, New Ragen up and.
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.
I would like to take a moment indirect investors to the Investor Relations section of our website investors Dot open text dot com, where we have posted two presentations that will supplement our prepared remarks today.
First our strategic overview deck titled Open text Investor presentation January 2020.
The second titled Q2, and 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 text 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 20 Sevens 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 5th in Ottawa.
Please feel free to reach out to me or the IR team for additional information.
And now I will 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 contain forward looking information.
While these forward looking statements represent our current judgment actuals 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 statements.
Additional information about the material factors that could cause actual results to differ materially from a conclusion forecast or projection.
In the forward looking information as well as a risk factors that May project future performance results of Opentext are contained in Opentext. 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 update these forward looking statements unless required to do so by law. In addition, our conference call May include discussions of certain non-GAAP financial measures reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available.
On our website.
And with that I 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.
Second Carbonite and our roadmap ahead.
I'd like to discuss today, our strong Q2 results.
Our go to market opportunity and partner strategy.
The general M&A environment as we see it.
And we introduced a guiding principle durable in September 2019.
Hi to spend 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 the strategy the cloud.
And what I call the intelligent edge.
We have successfully transformed into a modern cloud company.
Servicing the information need to the world's largest enterprises and governments.
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 fiscal 2001.
Approaching three XR license business.
And larger than our maintenance business.
We felt the cloud business and delivered incredible growth.
While expanding license expanding maintenance expanding adjusted EBITDA and expanding cash flows our guide wants to find new revenue dollars not substitute and existing dollar for another one.
With highlights our culture, the open text way and the Opentext business system.
We now have three primary cloud businesses of scale and significant total growth opportunities within each.
Business network content services and cyber resilience.
The business network, we have won the world's largest most advanced business networks.
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, we're in a data economy, you can't create an information advantage unless you have all the right data in the right place after eight 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 cumin and machine.
Structured and unstructured to create a 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 distributed nomadic data economy with data generated from billions of humans and endpoints.
Inside and outside the organizations, including suppliers partners customers and contractors.
This environment creates significant challenges for corporate security officers to protect their environments.
Permanent security.
While the Carbonex security cloud enables us to offer holistic security solutions enterprise customers and all 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.
So 20 dock too we have more of a staff, we have more SaaS services and customers will never have to upgrade again.
Our cloud business has never been stronger in partners and customers alike are recognizing our leadership position.
We connected with thousands of customers and prospects in our recent 24 City cloud tour.
The shift to the cloud has profound long term business impacts that enables us to simplify our go to market improved sales productivity.
Speed to market and increase responses responsiveness to real time changing customer needs. The net effect is higher customer renewal rates and satisfaction and increasing annual renewal rates are our annual recurring revenues are increasing from the present, increasing the predictability of the business.
Turning force this shift checkout, our new home page on dubbed up does that open tax dotcom, you will see for simple tiles now on our home page log onto the Opentext cloud I encourage you to clicked on it and see the.
15 on SaaS services, we have a live off Opentext dot com second tile get support third tile the developer and fourth contact us.
Let's not just about the cloud it is also about the edge.
The intelligent edge.
Some estimates speak to a one trillion endpoints over the next 10 years by 2030.
Including all vehicles and scenery.
Engines brake systems medical devices, Wearables smart cell phones, laptops tablets robots and more.
The edge is defined the shape of the cloud.
Defines who are human innovate work and play.
A defined to expanding role machines will have in our society.
When carbonite Opentext can uniquely offer cloud and edge solutions for intelligent connected and secure information management.
Let me give you a big number 100 million.
Opentext software is now running on a 100 million endpoints and by by our estimates. This is opportunity is purest form now I'd like to say as I'd like to say, it's your edge.
Own it.
We'll 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 Sixty's.
According 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.
Let me turn 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 Opentext.
Carbonite is a leading provider of cloud based subscription backup disaster recovery.
Endpoint security and threat intelligence.
Combining carbonates data protection backup and document retention endpoint protection threat intelligence solutions.
Our goal and our gold standard encased products will provide a comprehensive cyber resilience solution for customers that we believes unmatched.
In the industry, that's why we use the term cyber resilience yeah.
The acquisition is our most significant since the purchased of del AMC.
I was enterprise content division, including documentation and significantly enhances opentext business mix and predictability.
Its strategic on multiple vector that 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.
Second 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 and a new route to market that complements.
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Our strong.
Enterprise 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 to I am from in from Enterprise Information management, the information management, expanding our vision of products to again, all sized customers from the largest enterprises.
Governments mid sized companies salt 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 wants and 20 year opportunity, but equally important is the edge of the cloud we work in innovate on end points on the edge of the cloud the edges mobile expanding smart and very personal.
The opentext opportunity just got larger by embracing the edge.
Let me also spend a few moments in our top for long term growth opportunities for Carbonite.
First.
And it's pretty straightforward.
Expand the MSP and our ma'am channels and increase our reach.
Second unlock the OEM opportunity with bright cloud.
If you're not familiar with this service please check out dubbed Updip top right that cloud dotcom or simply got Opentext dot com and click on the laws on the cloud button to look at bright cloud is a great solution that.
Authenticates.
Every you RL that it processes.
Third expand the carbonite opportunity within the Opentext enterprise feel what I call file integrity.
Carbonite 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 Opentext 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 in constant currency in with year over year comparison.
We had record total revenue of 700 782 million of 6.3% Records a are a 571 million up 7.8% to 73% to 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%.
License margin of 98% cloud margin of 58% CS margin of 91% MPS margin of 24%.
Adjusted EPS of 86 cents up seven 7.5% operating cash flows of 207 million up 9.6% and a cash flow of 675 million net debt to adjusted EBITDA ratio of Threeq of 2.3 times.
Off cloud renewal rates were strong in the low ninetys cloud renewal rates towards 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.
Is the ministry that overseas national policies, including commercial international and 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 partners through a single platform in the cloud, enabling them to accelerate renewable energy and policies to support a stronger climates.
I'd also like to highlight a second when the German Ministry of Justice and Rhineland Clementine.
Together with three other state traditional administration selecting open text intelligent capture to digitize up to 100 million pages of incoming documents and a 1000 workplaces as part of the introduction of Electronics Court records to accelerate the delivery of fair and just decisions.
So just a couple highlights full customer wins can be seen our investor deck.
Talk little bit about go to market.
Our go to market and partners.
Partners are forced multiplier, where our partner oriented company with a long history of success with best in class companies, such as S&P Salesforce Microsoft.
Global system, Implementers and many more some of these relationships.
Our 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.
We have the talent culture to make partner successful and will continue this track record of successful Carbonite.
Let me spend a moment on this crack Stilwell 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 and partner commercial sales, most notably from Citrix.
One of the keys decarbonize, except to the ability to deliver a high value products at low incremental costs.
In 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 that Harrison of course will continue lead our enterprise sales business reporting to me targeting the globe.
We will 10000.
Which includes a 10000 largest organizations governments in companies in the world.
We remain committed to doubling RG 10-K covered from 40% to 80% in 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 focused on the enterprise customers.
Covenants, SMB and consumer channel and focus on SMB into 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 text product more we win.
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 in 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.
And we expect to repeat this will carbonite to reduce our net leverage ratio from three point skews be 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 accepts.
This creates an opportunity for patient and strategic acquirers like Opentext.
Carbonite represents our ninth cloud acquisition, including Easylink, GSS, 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 business system.
It is this discipline that has enabled us 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.
We will 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 from our Investor day in September .
On the durability of the open text operating model in our financial outlook, both short and long term and I 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.
We 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 typically 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 LCF growth.
Year over year increase in adjusted EBITDA dollars year over year increase in adjusted.
EPS.
And carbonite will be accretive to adjusted EPS This fiscal year.
Im pleased to confirm that we're on track to meet our fiscal 22 aspirations of adjusted EBITDA in Oceania Thats, 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 fiscal 2000 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 impact customer spending environment.
Global recession concerns.
Great and tear force.
Europe , you asked me and us manufacturing slowed down the Corona virus as well as the golf nations and the pending Brexit.
Well I will have not seen any material impacts to our business due to macro related factors in 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 the structural shifts in 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.
And 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 Carbonize 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 continues to utilize balanced the natural hedging and our cost structure that reduces FX volatility.
Earnings.
Let me summarize.
In summary.
I want to reinforce that accompanies focused and ready for all scenarios, but continued adoption of hybrid cloud by our enterprise customers.
Our gaining share with our upcoming cloud additions.
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 and 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 companies 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 endpoints through two identity.
Ill then my recur prepared remarks here and what Thats my pleasure to turn the call over to redo Robin often opentext Chief financial officer reduce.
Thank you Mark.
Thank you all for joining us today.
First followed a huge welcome to the mid to all members of Carbonite, the Opentext and Carbonite teams worked diligently together to close the 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 a special charges.
Carbonite was accretive on a non-GAAP basis.
As we turn to the details of a quarterly results also 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 smiles absences will be in millions of you ft and compared to the same period in the prior fiscal years.
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 diluted was 40 cents up from 39 cents.
And in the quarter non-GAAP earnings per share Denuded was 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.
Yet 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, 32% and ABT eight 9%.
Annual decoding revenues of 563.8 up 6.5% or up 7.8% in a constant currency basis year to date annual recurring revenue was 1.1 billion up 6.1% are 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 year.
Our cloud revenues, a particularly strong at 248.3 up 13.3% or up 14.1% in constant currency basis year to date cloud revenues of 485.6 up 13.6% or up 14.5% in a constant currency basis.
Our customer support revenues at 315.5 up 1.7% or 3.3% up on a constant currency basis year to date customer support revenues with 627.8 up 29% are up 2.6% in a constant currency basis.
A customer support to new as lead was up slightly to approximately 92% from 92% last quarter.
License revenues of 138.1 up 4% or up 5.6% in a constant currency basis year to date license revenues at 216 up 2% or up 4.6% in a constant currency basis.
Our our professional services revenues of 69.6 down 4.5% or down 2.9% in constant currency basis, yet to date professional services revenues were 139 down 3.1% are down 1.4% on a constant currency basis.
Turning to margins.
GAAP gross margin was 69.9% up 90 basis points, yet to date GAAP gross margin was 68.6% up 100 basis points.
Our adjusted gross margin was 75.5% down 20 basis points year 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 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 with 90.7% up from 90% year 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 scepter since 41.1% down slightly compared to 41.9% last year.
Year to date, adjusted EBITDA was 571.2 million up 2% or up 4.9% in constant currency basis margin wise this that person's 38.9% down slightly by 60 basis points.
Our adjusted net income was 227 million up 5.2% or up 8.1% in a constant currency basis.
Yet to date adjusted net income was 400.5 million up 6.1% or up 8.8% in a constant currency basis.
GAAP net income was 107.5 million up 2.9% year to date GAAP net income was 181.9 million 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 down by 4.4%.
Our collection efficiencies domains strong with our current quarter DBSO at 57 days lower by two days compared to Q2 fiscal 19, improving all aspects of working capital efficiencies that open text and Carbonite will be a key focus for us.
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 in our ability to bring on net 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, and our existing devolved book, we have recorded 75 million deduction and Carbonites deferred revenue as purchase price allocation adjustment I will refer you to this slide core 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 asked to 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 21.
Carbonite integration and restructuring plan.
We have committed to a top faults and fast integration of Carbonite into Opentext Carbonite will be accretive during fiscal 2000, we expect the integration to be completed by the end of fiscal 21 or sooner.
Today, but announcing the restructuring plan that integrates carbonite into Opentext and also includes streamlining operations that open text. The anticipated cost is expected to be approximately 26 to 44 million.
These restructuring activities and says based it to be completed by the end of fiscal 21, and once completed Opentext 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 with the majority of the financial benefit to be realized in fiscal 21.
Our fiscal 2000 target operating model and long term aspirations.
Executing well to our business plan.
Impact of restructuring has been considered in the fiscal 2000 target model framework that for sharing with you today.
We highlight the following changes.
With the acquisition of Carbonite, we have increased the contribution of cloud revenues from 31% to 35% to 34% to 38%.
We expect a 100 basis points increase in our annual debt and that annual recurring revenue earnings of 75% to 77%.
But 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 range of 36% to 37% Cisco 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 our fiscal 22 long term aspirations are current fiscal 2002 aspirations include.
38% to 40% adjusted EBITDA with margins above this range reinvested for future growth.
Including product sales capacity partners and marketing.
1 billion to 1.1 billion operating cash flows during fiscal 2002.
With the inclusion of Carbonite, we see upside opportunities to our operating cash flows, which we will update during our annual fiscal 2000 earnings call.
Our quarterly factors and let me summarize hit and reiterate the quarterly factors that we anticipate our upcoming cutesy I would emphasize a few items as we look at where 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 with 20 million to revenues, we continue to expand.
At approximately 35 million annual FX headwind for fiscal 2000 inclusive of Carbonite.
And Furthermore, inclusive of Carbonite, we expect to low double digit revenue growth in Q3 on a year over year basis.
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 relating to our annual performance cycle.
Our adjusted EBITDA dollars to be flat to slightly up on a year over year basis.
Our tax update with respect to Ioannis matches.
We remain in the face the standard I have this process continues and unresolved remained strong as the vigorously defend deposition.
Dividends turning to our dividend programs today, we announced a quarterly dividend of 17.46 cents per share payable on March 22020.
Our rate is based in distributing approximately 20% of our trailing 12 month operating cash flows and to validate our annual dividend approach would be communicated following our fiscal year event.
In summary, we are pleased with our Q2 results get kicked off the integration of Carbonite with strengthens remain focused on our fiscal $2000 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 with a deeply committed efforts.
And now I would like to turn the call over to the operator for questions.
Operator. 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 atone 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 Q. 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. So we view our own carbonite for like a bit over a month now can you just see what's your strategy around cyber resilience most of the initial customer feedback than 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 and content services or the exchanging conductivity of it through business network.
But now would be of Orrville provide data protection and.
The security and threat intelligence around it so so.
I'd say extremely positive and.
It's a very talented workforce.
We we love the channel that they have built.
Other 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 and bright cloud into the enterprise.
So.
When things are natural day.
They tend to come together.
Okay, perfect can you think and indeed.
Quick question, because you are kind of holding the bond with the very launcher off the lontra, leading software vendors like.
You have like a bigger global footprint than our people what are you seeing in terms of end demand.
Altera and because a couple of quarters that was something that you highlighted the if I look at the results. It looks like everything is kind of going well out there.
Yes, it's.
As I said them and in my in my remarks, and sort of our quarterly factors.
Yeah.
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 for the hot spots around the world sort of continue to include our 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.
A few other sectors, but.
Well, if we look at our results of.
Total revenues up near five.
A 5% in reported in your 7% in constant currency, we're seeing a stronger demand for.
For digitalization in our solutions.
Okay, Perfect and then one last question and.
The cash flow was various operating cash flow was a very strong this quarter with any particular drivers you wanted to point out too.
Tom.
I mean as I've said in my comments, we continued into sort of the working capital framework on Dsos. The two days in as little as in prior years.
And you should sort of expected to see that gradual progress.
As the as the as you get into fiscal 20, and 21 as well.
Perfect. Okay. Thank you congratulations.
Thank you. Thank you. Our next question comes from Daniel Jester of Citibank.
Yes. Thank you for taking my question and 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 revises kind of your expectations for the cloud additions launch later this.
This year.
Yes. Thanks, Thanks for the question.
You know were.
You're not just reflecting back over.
Seven years of growing from.
Zero.
Cloud revenues to the incredible scale, we have today in.
It all looking back at 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 to cloud tore it was about a part of our cloud which is our managed services and that's primarily with the cloud for four was about the but 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 SaaS like core.
And our new E signature offering and then things even more standard right that.
That were move 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 tech 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. Thank you thanks for the question.
Yes, our.
We were all about annual recurring revenues, whether it comes from the cloud.
Our comes from maintenance right in the really.
They both have similar durability.
Hi, longevity high renewal rates, great margins, so its cloud or or very recurring maintenance and thats, what we like in the in the door and the durability.
Ill now becomes as cloud gross and they are ours gross the predictability of our business gets a little better every quarter gets more better that proper English every year year over year end in you can see that percent increasing theres a few years ago. We're in the mid to low 60.
For the mid Seventys this year will creep up into the mid to high Seventys.
Our next year, so we really like that.
Predictability were also a patient deployer of of capital.
We're sitting at about 2.3 times.
Ratio will be back under two times in Florida to five quarters.
But 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 tax.
Initiating.
And completing our restructuring plan.
Growing their SMB channel are getting Europe up and running and getting a couple of wins in the Opentext enterprise and that's really where the 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 if you need to do anything with the product portfolio to sell into the SMB channel. Obviously, it seems like harmonize brand pretty extent channel there and kind of curious to see whether you need to reject the products in anyway.
Our Richard Hey, it's Mark Thanks for things like question, Thanks for joining the call.
No at present, we are working on the focus is to.
To to look at a handful 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 our 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 are we got Carbonite focused on carbonite build on pickup encase and bringing that into the 70 a market.
We also easylink solutions that have historically been Esa a portion of which is as SMB oriented so encase product ready to go.
Easy link.
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 stack it is to bring existing products.
On that we have to the channel.
And I think products as 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 you hope that so that's helpful.
Plaza. Thanks so.
I guess, maybe in a related question with respect to one initiatives you talked about during Investor day in the fall in regards to targeting in the global 10000, they maybe give us a 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 in.
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 in 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 of some of our great internal talent, we went outside and brought some new talent in.
We have a great leader been while out of Paris, leading this group for us.
And we're targeting our top 100 accounts and just giving those top 100 counts.
Laser focus one sort of.
Account executive to manage all the opportunity across a general Motors for example.
Tom 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 is now established.
Okay, Great and just one last quick one for me.
There's no doubt you've got the capacity financially to do more acquisitions here.
Do 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 if you just closed carbonite.
Yes, it's.
For the financial capacity is certainly there.
It will we set up.
The integration of Carbonite, we take this as an opportune talk a bit about the integration of.
Our asked our new SMB consumer group.
And a little language. If you will we think Carbonites that was the public company of course, we think it's too 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 internally.
And all the back offices are our direct line integrate HR to HR finance to finance legal legal IP to I'd.
So the enterprise team is unaffected.
By this except that they are even more product to sell so there's bandwidth on the on the enterprise side.
But right now over the next.
A couple of months in quarter Acorda half the the greatest value. We can do is to unlock those value plays insider carbonite, but well noted we get the balance sheet.
We continue our top of pipeline.
Companies tend to shut assets and environments like this and I'll note that the enterprise team is really unaffected bye bye.
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 as high chip. So could you expand on on will be doing there.
Yes, it's Tom.
Yes, I I've always appreciate it.
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 yourself 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.
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 that outsourced support onto a third party.
And through that aperture, we're able to scale up a little more India, Philippines, Canada onto our centers of excellence, but took this as an opportunity to local cross 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 the pipeline of smaller deals you're seeing and the cadence that we might see there.
Yes.
Well remiss to not mentioned our prepared remarks saw the facts guys that we we acquired and.
That was a.
A reseller of our fax business, primarily in the US great style acquisition for us.
A known entity of good.
Small but solid.
Add of new revenues.
It will it will look actually it's small, but it will exceed the corporate ROIC.
We'll have a high return on invested capital and those will type deals were looking to do through LPG other portfolio growth.
Sole Durham other building, a very robust pipeline and we'll all we'll get to LPG deals done here in calendar 2000. So just watch the base watch this space, we will get deals done here and LPG in fiscal 2000, a calendar 2000.
Thanks, Mark up offline.
Our next question comes from Paul Treiber of RBC capital markets.
Thanks again very much. Good afternoon, just was hoping you to follow up in last comment just on the integration plan for Carbonite.
Hi level, how does the plan your game plan differ from prior acquisitions.
In light of the SMB and consumer channel that they have and what do you see is the biggest opportunities and then the and potentially also the the potential challenges that you may need to address with it.
Yes, Paul Thanks for the question.
So three parson 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 are they on their demand generation the on their presales.
They own sales are going on support as well for supports deeply integrated into the process. So thats 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 the towards general management group.
Business unit.
I'm going to market.
Powell, who is going to lead engineering is 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.
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 in msps and Rms.
Roughly 16000 out of a total market opportunity of 60000.
International expansion, and then very select but high power value place.
To bring.
Into the enterprise like data protection violent file integrity and the OEM opportunity.
Challenges it's.
It's minimizing disruption.
And.
Talent right, we got to still a war on talent and we got to keep fighting for the best people and high retention rate.
This concludes time allocated for questions on today's conference call I will 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 aman do and I. Thank you for joining our call. This evening and hope you have a great evening. So thank you very much it. 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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