Q4 2020 Open Text Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the open text Corporation fourth quarter and year end fiscal 2020 conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll 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 signaling operator, operator by pressing star and zero on their telephone.
I'd now like to turn the conference over to Harry Bloat, Senior Vice President Investor Relations. Please go ahead.
[music].
Thank you operator, and good afternoon, everyone on the call today is open text, Chief Executive Officer, and Chief Technology Officer, Mark Jay Baron shape, and our executive Vice President and Chief Financial Officer, Madu Reagan Nathan.
We have some prepared remarks, which will be followed by a question and answer session. This call will last approximately 60 minutes with a replay available shortly thereafter.
I'd 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 titled Open text Investor presentation August 2020.
Second titled Q4, and fiscal 2020 financial results includes information and financial specific to our quarterly results, notably our updated quarterly factors on page eight.
During the most of August and September open tax management will be pleased to virtually meet with investors at the following conferences.
<unk> annual technology, Internet and Communications conference on August 11.
The Imos virtual technology summit on August 26.
Cities Global Technology Virtual conference on September eight.
So what's your bank Technology conference on September 14.
And Jefferies Virtual software conference on September 15th.
In addition, I'm pleased to announce that will eat we will be hosting an investor day on Thursday November 12.
Virtual event will consist of our annual Investor update featuring strategic presentations from key members of our executive leadership team.
Please save the date and your calendar in contact investors at open text Dot Com to register for the event.
Please feel free to reach out to me or the other or the IR team for additional information.
And now I will proceed with the reading of our Safe Harbor statement.
Please note that during the course of this conference call. We may make statements relating to the future performance of open text that contain forward looking information. While these forward looking statements represent our current judgment 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 conclusion forecast or projection in the forward looking information.
Well as risk factors included including in relation to the current global pandemic that May project future performance results of open Texstar contained an open text recent forms 10-K, and 10-Q as well as in our press release that was distributed earlier this afternoon, 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 and thank you for joining todays call.
I wish everyone health, well being and happy to.
A lot six month.
I have made it very clear that digital technologies are the key to business resilient.
And durability.
Organizations that own their digital got capacity will recover faster and emerge stronger.
On this ongoing crisis.
Resilience is the ability to recover quickly durability is permanent.
The ability through this strategy or fourth.
And it also very clear that while the crisis process, there will be economic volatility and uncertainty and there will be challenges and opportunities alike.
Fiscal 2020 with a seminal year for open tax.
The rallied around the principles are Brazilian durability.
Thanks and opportunity.
Got it through this difficult time.
The pandemic has validated our purpose to help cut or companies digitized and transform.
Now more than ever customers Trust, and relying open type products and expertise to help them digitize their business.
They navigate through a changing global environment.
The World runs on information from the debate on true.
So global pandemic response to the modern civil rights movement. The fact is information is more important.
Than ever.
For nearly 30 years, we had helped the company on a global basis.
Across all industries, built culture, or something going with our information management software and expertise.
Our leadership position and information management management has never been stronger.
And customers of all sizes continue the trust open Tac as they reset to a new equilibrium at work at home and that play.
The preemptive action, we took at the beginning of the pandemic are enabling us now to make significant investments in sales products and more automation.
Positioning us to compete better and to gain market share regardless of the economic scenarios ahead.
Let me begin.
Discussing our at 20 result in accomplishment.
For fiscal 20 open text delivered record revenue.
Record annual recurring revenue record cloud revenue record gross margin dollars.
Record operating cash flow and record free cash flow all during the most challenging economic period in our lifetime.
Total revenue of 3.1 billion up 8% year over year.
Record annual recurring revenue was 2.4 billion up 13% year over year and now 78% of total revenue 300, that's higher than fiscal 19.
Cloud revenues of 1.2 billion up 20% year over year.
347, Bips margin increased to 61%.
Record customer support revenues of 1.3 billion up 2% year over year with a 25 bid margin increased to 90.4%.
We also clean up yeah with record enterprise customer support renewal rate of 93.8%.
We generated 1.15 billion up adjusted EBITDA dollars up 4% or 37% of total revenue.
Record operating cash flow of 955 million up 9% year over year record free cash flow of 882 million up 9% or 28.4% of revenue.
Leased out we're gonna be using free cash flow going forward.
Birth, the operating cash flows.
We ended the quarter with 1.69 billion in cash and a net leverage ratio approximately two top.
Looking back from fiscal 11 through today, just looking back a little bit through today.
Our has expanded from 54% to 78% of total revenue.
Cloud revenues have grown from zero to 1.2 billion or 37% total revenue.
License, because only 13% of our business today compared to nearly 30% in fiscal 11.
And we have to lever strong gross margins overtime, regardless of the mix of business that strong gross margins in the low to mid Seventys and we expect anyway.
Improvement and the future and we've grown adjusted EBITDA from the high Twentys.
Hi, 30 from fiscal 11 through today.
Opentext business models based on recurring revenue, which has significantly predictable strong margin and strong cash flow and we've de risked away from a volatile license led model.
An exceptional accomplishment and the softer industry.
Let me transition to provide a few highlights from the quarter.
Within Q4 total revenue was up 827 million up 11% year over year. They are our of 658 million.
Up 18% year over year, they are with 79.5% of total revenue.
Cloud revenue of 333 million up 38%.
Adjusted EBITDA of 317 million up 12% and a 38.4% margin.
Oh, Seattle up 284 million up 22% within the quarter and free cash flow of 263 million up 21% within the quarter.
And then constant currency. This quarter also represents a 22nd consecutive quarter of year over year growth in total revenue and a are.
What alcohol force company with a rich install base of customer.
The second consecutive quarter cloud, it's become a largest revenue line.
Gross margins were 31.3% for the year.
And 65.1% for the quarter.
And we have more room for margin improvement through scale mix and more automation.
The cloud business continues to scale it won't get more efficient.
Overall, it was a great quarter by all natural and I'm. So proud of my colleagues for their focus and commitment to our customers.
We continue to generate cash.
Well and have returns in the right places.
Leveraging the increase predictability that they are brings to our business model, while we continue to take market share.
We had many notable customer wins in Q4 that included the National Institute of allergy and infectious diseases, and <unk> <unk> or the NIH, which we announced today.
Becton Dickinson rapid radiology, U.S. Defense Health Agency, Panasonic Michelin Mark the Williams company.
Amway, let me highlight two today.
The National Institute of allergy and infectious diseases.
It's a leading a research to understand treat and prevent infection.
Logic, and our genetic diseases, including Cobot 19.
The and I I D is expanding its partnership would open text and selected open text content suite.
And at work to support enterprise wide.
Business operations to advance the NIH mission.
Now turning discovery and to help we're very proud of our partnership with the NIH.
Rapid radiology, one of the largest teleradiology provider in the U.S.
Oh, they selected Opentext business that work to streamline the delivery of radiology test result to.
Well electronic medical records.
The open text business network solution delivers the Industrys only cloud integration of service.
<unk> interoperability between all electronic medical records systems, and the long term care market, ensuring a seamless delivery of clinical result between providers and improving patient care.
This is particularly important the move to increase remote work as physicians and nurses are able to review lab results online and support purse and and support personnel interview orders remotely.
These wins highlight how information management is relevant to an imperative and that digital technologies are the key business resilient and durability.
Customer purchasing decisions in the quarter continue to support the acceleration to get to tie.
And the demand trends, we outlined and all last call.
Content services is being driven by the urgent need to digitize and migrate to the cloud.
Content services saw particular strength in health care and government.
Well, we also notable wins in other industries the momentum in content services as a direct result.
All the investments made in both R&D and vertical go to market since our acquisition of document them.
And business that work, we saw volumes begin to recover to the quarter at supply chain reconfiguration continues.
Offset by lower secure messaging volume and some impacted industries.
And cyber resilience, we strong Oh, we saw very strong quarter given work from anywhere is here to stay.
And digital experience.
Yes to supporting a customer through their entire lifecycle vis a via and an omni channel delivery digital delivery direct to consumer and contact less experiences.
Our cloud based digital experience.
I will become even stronger what's some of our upcoming quarterly product releases.
Turning to our F 20 acquisitions Carbonite delivered another strong quarter of operations.
Validating our expansion into SMBC market and enhancing the strength of our cyber resiliency offering.
Carbonite delivered 116 million of revenues in Q4, or 235 million since the date of acquisition and continues to be accretive to adjusted earnings and cash flows and is on track.
To be on our operating model by the end of fiscal 21.
Fiscal 21, well, we will release, new security enterprise offerings.
That leverage the capability the Carbonite webroot bright cloud integrate it with our existing encase offerings.
We had other notable akashi accomplishments in fiscal 2000.
We strengthened it extended partnerships with Google and Amazon as part of our open text anywhere strategy.
Enhanced our long our longstanding relationship with Sep <unk> cloud based content management.
We launched our next generation platform the Opentext cloud additions in April.
CE 20, dot too and recently extended our content services technology for Microsoft HM.
Four years ago, we were leasing product every 15 month.
Today, we are releasing product every 90 days each release has more feature.
And 20 Dot three is on schedule for this quarter.
Delivery speed and capability is a long term competitive advantage you know we used to get haircut every six weeks, but now we really software every 12 weeks.
Finally, we were recognized by essay P.S. their Pinnacle award winner at U.S.J.P. solution extension provider of the year with our 13th consecutive year.
And by I'd see an aspire for a leadership and customer Communications management.
Let me transition to begin to look for it to the quarters in years ahead, we continue to execute on our total growth strategy.
Retain grow and acquire that we outlined are all last Investor day from New York City.
Let me touch base briefly on each of these three pillars.
First retain.
We have a rich install base of customers customer support in cloud renewal a highly are highly predictable business.
That continues to expand in parallel with our growth in the cloud.
We remain committed to giving customers choice and how they buy our products, where they deploy our products and giving them world class support maintenance and update right.
Customer support is an important contributor to our a R.R. and we achieved the highest enterprise customer retention our history. This year at 93.8% and enterprise cloud renewal in the mid nineties.
As good as it is we can we continue to see opportunities to improve.
How.
Compelling new features and expanded product offerings.
Faster cloud native product releases products designed with automation for Upsells and increased consumption built in.
And apply are best in class customer support capabilities to our SMB Si channel.
Second pillar of growth.
We intend on growing and taking share regardless of the economic environment through continued investments in sales coverage partnerships cross selling opportunities and product innovation that'd be double click on each one of those first continued a broad and sales coverage and expand our salesforce in fiscal 2001.
Second continue to deepen sales coverage for the expansion of specialized sales groups, especially in the public sector security life Sciences and legal tax.
Third deepen relationships with enterprise partners, such as I say, P., Google Amazon and Microsoft.
Go the number of partners and our SMB channel.
In addition, each of our specialty sales unit.
Has built a partnership growth strategy.
Cross selling our products.
We will introduce an enterprise ready security platform in the second half of fiscal 21 that leverages. The combined capabilities Carbonite Webroot bright cloud and then case. We're also now selling select open tax products, such as Opentext core and high tail throw our enhanced SMB channel.
And finally, we are delivering more products to market at a faster pace than ever before.
Opened actually future product releases will include more SAS offerings self service Onboarding Cmos app to App and cloud to cloud been a cloud to cloud integration and new industry specific capabilities.
Third pillar is acquisition.
We continue to be a strategic disciplined value based buyer of companies.
This is an important aspect of our total growth strategy.
With these strategic acquisitions, we're better positioned to expand our product portfolio and improve our ability to innovate.
We have the proven track record of integration and we will continue to acquire businesses that deepened and strengthen our platform.
We believe return on invested capital ROIC is the best measure of success of our strategy in fiscal 20, we achieved a ROIC of 17.6%, which remains consistent with our target range in the upper teens.
We have a robust robust pipeline of acquisition opportunities that span the entire portfolio and up companies of all sizes. We do expect to close deals in fiscal 2001. These are all three pillars retain grown acquire.
Let me turn to business outlook.
First and foremost we view our business as an annual business.
And its annual performance an annual trends over the long term that create value.
90 day cycles are just too short a measure.
The economic volatility remains high and will persist during the global pandemic.
We have some customer area negatively impacted like auto airline to retail construction services.
We have some areas positively affected like government.
Customer experience banishment security and walk from anywhere technology. However, as of today, a positive do not outweighed the negative given the global crisis.
What that introduction, let me detail our annual business outlook for fiscal 21.
We expect on a year over year basis.
Well as it relates to revenue.
<unk> revenue to grow low double digits.
Customer support revenue to be constant.
They are to grow mid single digit.
License and professional services businesses to decline.
Which is consistent with the trends in the broader softer industry impacted by the pandemic and consistent with our multiyear transition to cloud and they are.
Total revenue to be constant and perhaps we got a few points of growth should the economy recovers sooner, but constant total revenue was our base case and this volatile economy.
On innovation, let me call out.
Engineering investments to expand to 12% to 14%.
Revenues.
Continuing on our business outlook on non-GAAP non-GAAP margin cloud margin targets, expanding 500 basis points.
63% to 65%.
Total gross margin targets, improving 100 bed.
To 74% to 76%.
Adjusted EBITDA targets, expanding 200 basis points to 37, 38%.
Lastly, as noted earlier, we expect to deploy capital via acquisitions in fiscal 21, our balance sheet and pipeline are strong.
The strength our business model and operating excellence is demonstrated an annual historical results and strong F 21 business outlook.
For fiscal 21, Q1, we expect total revenue to increase high single digit year over year, and adjusted EBITDA dollars to increase low double digits.
Capex is expected to be neutral in the quarter.
As for our fiscal 23 aspirations are three your aspiration.
In light of a global crisis, we're simply shifting our F 22 aspirations for adjusted EBITDA and cash flows out 12 months the fiscal 23, if the economy recovers sooner well adjust the aspirations as appropriate.
Specifically our F 23, adjusted EBITDA margin aspiration is in the range of 38% to 40% not fiscal 23 free cash flow aspiration is point 9 billion to 1 billion remember, we're moving to free cash flow of course operating cash flow.
Well continues to represent upper caught pile performance and adjusted EBITDA and free cash flow.
Also note that a long term growth planning remains unchanged and we expect to continue to reinvest incremental adjusted EBITDA.
Margin above 40%.
Back into the business supporting our long term objective of driving further organic growth at a normalized demand environment.
Today, we declared a regular dividend quarterly dividend up 17 point 46 cents per share the same as the prior quarter.
Open text strongly both believes in returning value to its shareholders.
And we intend on holding our dividend constant during that pandemic subject to board approval.
Today I'm also pleased to announce that our inaugural corporate citizen report will be released on our website next week.
On August 14th.
And I encourage everyone to read it.
And the age of information disruption, we see opportunity use technology for the greater good and we aspire to unlock the potential to advance.
The cycle goals and accelerate positive change.
That's an oral report establishes R.E.S.G. baseline.
And we intend to hold ourselves accountable to and we will report to you annually. We welcome your feedback and continuing.
And contributing to about a world.
To summarize my prepared remarks, the world runs on information.
And we're the leader and information management against the backdrop of the most challenging economic environment in our lifetime, we delivered record results because we have the products that matter customer relationships that matter a balance sheet that gives customers confident that we will deliver on our commitments and then experienced leadership team.
Team that is ready for all scenarios.
We're in a new equilibrium in a new world and we intend to gain market share regardless of the economic environment.
Because we are delivering more product innovation to the market faster than in our history.
We continue to make investments and initiatives that will generate further and future organic growth.
Our cloud first company that is committed to providing our rich installed base of customers the choice of cloud off cloud.
Integration in a combination of both.
We remain committed to our proven total growth strategy and we'll deploy capital when the right opportunity presents itself.
We also remain highly disciplined and our dedicated to driving shareholder returns through growth in free cash flows transparent communication and return of capital through dividends.
On behalf of open text, we commend the brave women and men serving on the front lines of this pandemic.
Giving us healthy safe and productive.
I'd like to thank our shareholders oil customers partners and 14000 plus employees for all contributing to our success in fiscal 2020.
I'm, so proud of the resilience and durability that open text employees continue to demonstrate opentext truly represents the culture of humble and hungry and our resolve is only strengthened by the energy and transformative impact of our customers such as the Eni, Hey, I'd, the U.S. Defense Health Agency Panna.
Sonic Merck and Williams companies, the most trusted companies truly trust opened to.
It's my pleasure to turn the call over to me do about an awesome Opentext Chief financial officer, but do.
Got it thank you Bob and thank you all for joining us today.
I'll just go 20 wasn't bound picking yet in many respects one where the open text stoppage next month came through its solid financial develops I'm humbled and tried to shared with you today.
I will speak to Q4 different the 20, that's got 21 topic model and our long capacities Q4 investor presentation, but our focus just on the IR website will also be to put you in my comments all references would have been millions of U.S.P. and compared to five yep.
Let me talk with revenues or not.
Total revenue for the quarter, but 820.6 up 10.6% or up 12.2% on a constant currency basis. So if it's got 20 I told US revenues at 3.1 billion up 8.4.
Or up 9.7% on a constant currency basis.
It wasn't on favorable FX impact to revenue of 12 million in Q4, and 37 million in can pick up to 20.
But you've got the total revenue India Americans, 61%.
<unk>, 30%.
Good night.
And use the coatings revenues for the quarter, let's say 57.5 up 18% 19.
19.5% constant currency basis, but it's got 28, our 2.4 billion up 12.9% or up 14.1% on a constant currency basis I.
As a percentage of total revenue <unk>, 80% for the quarter instead of me [laughter] 20 up from 75% inserts Goodnight.
Oh revenues were particularly strong at 232.6, but Q4 up 37.5% or 38% on a constant currency basis for fiscal 2000 cloud revenues of 1.2 billion up 27.5% or up 28.4% on a constant.
Basis, the growth was primarily driven by continued success in prisons networks and the integration Carbonite up cloud the new ones. They can to quote as a means to them at night.
Customer support revenues, but 221 died in Q4 up 2.1% or up 4.7% on a constant currency basis Opus go 20 customer support that use the 1.3 billion up 2.2% or up 2.7% on a constant currency basis.
Well, it's a new ones they cut 20 with Mandy Pope offends, reflecting the strength of our this installed base even during cold at times.
Oh got Muse with Jefferson's on licenses professional services revenues of 169.1 in Q4 down 11% and 676.5, it puts the plane down 5.1%.
License revenues of 105.8 in Q4 down 11.6 defense or down 10.2% and upon some currency basis.
Good 20 license revenues of 402.9 down 5.9%, Oh down 4.5 depends on a constant currency basis, primarily corporate delayed.
Professional services revenues of 63.3 in Q4 down, 10.1%, Oh down 7.7% on a constant currency basis for fiscal <unk> 20, PS seven, but 273.6 down 4% and down 2.2% on a constant currency basis in line with.
Declining by.
Turning to GAAP net income and GAAP earnings per share, but both impacted but carbonite acquisition fleet.
Hi, Carbonite acquisition debated.
Especially charges due to heavy since it's not.
GAAP net income.
<unk> in Q4.
60 points, you put that and primarily due to 47 million of intangible amortization from Carbonite.
Before we begin, especially charges relating to lobby and construction.
'cause funny GAAP net income was 234 point you down 18%.
Adjusted net income was 217.8 can you walk up 12% or up 12.5% it upon some kind of.
So if it goes 20 adjusted net income was 784.5 up 5.2% or up 7.3% on a constant currency basis.
GAAP earnings per share dilute it was 10 cents in Q4 down from 47 cents.
[laughter] twin down 20 cents from a dollar than success.
Non-GAAP O'neil said you need it was 80 cents in Q4 up eight cents from 72 cents and also up eight cents on a constant currency basis, Let's just go 20, it was $2 United spend 15 cents from 2.76 or up 18 cents per share on a constant currency.
Turning to margins that gross margin for the quarter, but 68.5 times up 20 basis points, [laughter] 20, plus 67.7% up 10 basis points I.
Adjusted gross margin for the quarter.
5.8% up 160 basis points I supposed to come 27 equal points like up 40 basis points, both solid improvement on a go to the.
Oh, so on an adjusted basis cloud margin was 65.1%.
One and 61.2% purpose for 20 up some 57.8% driven by continued improvement and higher even though 80 girls Majid some carbonite Japanese which are predominantly club.
From a support margin was 90.1% the coupon and 90.4 person for fiscal 2000 up from 90.1% effective continued strong performance I.
As I think margin was 96.8% for Q4 and was 97.2% with Cisco 20 up from 96.6, but that's a professional services margin was 24.1% so Q4 and was 22.7%.
20 up from 41.8.
Adjusted EBITDA was 17.4 this quarter up 11.8% bought up 12.1, [laughter] constant currency basis. So if it's going to 20 adjusted EBITDA was 1.1 billion upsell points, you defense or up 5.7% at a constant currency basis.
You can it 36.9% margin down from 38.4% I'd be integrate two quarters of Carbonite and try it excludes 20 talked models range of 35% to 36%.
But I'll just go to what do you target model. We ended fiscal 20 at spot at the high end of Hot topic. Martin. Thank you know that me in any of the coatings revenue cloud. This margin overall gross margin adjusted EBITDA margin.
Turning to operating cash, but it was excellent performance.
280.3 for the quarter and effective 954.5, Cisco trend up 8.9% I see cash looks at the 20 was strong at 882 million an increase of 8.5%.
Yes, so what's 51 days compared to 56 days in Q4 nights.
I've continued investment in operation into humans, and the integration of Carbonite back to high production efficiencies lower due yet so and strong cash conversion cycle. Additionally, during Q4, we deployed approximately 41 billion in tax payments, primarily as a result for the kids that definitely an action in the United States that book.
For the fiscal 2000, and other quoted 19th latest tax reprogram 50 mph needs just sort of will be paid during the 21 and 22.
He has built a tight and you know deals timeframe, but internally to closely monitor customer trends and the main watchful of economic backdrop as it relates to both enterprise and SMB customer base.
Looking ahead, we are introducing detached metrics and along to my space.
Turning to the balance sheet, we ended the year with approximately 1.7 billion in cash given our strong cash flow performance.
[laughter] millions of all the main strong as a preemptive measures in the current environment.
Consolidated net leverage ratio, it's 2.4 times that improvement.
0.25 times last quarter.
An update on Carbonite Q4 is a second full quarter that caused an exercise up toobin shops record of integration experience is being illustrated carbonite is supposed to be acquisition on December 20, or 29 P. The integration activities have remained steadfast in every aspect of the business go to market products and engineer.
Adding gionee and system you see people out of those Carbonite delivered another strong quarter without adding to critical elements of a financial model I hear the cutting revenue.
Jim I, just EBITDA and working capital we remain on target to get Carbonites, what operating model ended fiscal 2021.
Now let restructuring plan.
During the quarter will be implemented Cobra gibbins restructuring activities to streamline operations that use real estate that I'm was as previously announced you about fiscal Q3 earnings call, we incurred approximately 54 million, especially charges relating to these activities during the quarter.
After the merger, we anticipate annualized savings of approximately 65 million to 75 million once completed.
Mentioned innovation of the savings just started the 21 incorporated in our target markets <unk>.
Well. These factors so let me summarize the quarterly factor, we anticipate upcoming Q1 also provided it up quality Deco the IR website on a year over year basis.
Q ones, it's going to anyone FX impact to be constant.
Revenues to increase high digit and adjusted EBITDA dollars to employees and then those happen.
That's starting to discuss what different topic.
We published a modest today as a reminder, isn't good enough what do we tackled the IR website <unk>.
First answer the first time they are expected in the range of 80% to 82% of total revenues up from upstream biscuits 20 years old of 78.2% of Sevens.
Oh, so for the first time type services and subscriptions revenue to increase to arrange a 41% to 43% up from 37.2% customer support was amazing range at 38, 22.0, God revenues license to decrease to where they tend to 30% and professional services to decrease.
They just 6% to 9% expanding gross margins by 100 basis points to a range of 70, 476% and adjusted EBITDA margin change also expanded to 37 that doesn't get [laughter].
Let me provide more context of expansion of margins throughout our history as the mix of licensing probably shifted they have continually expanded the gross margins from 72.2% in fiscal 16 to 74.5.
20.
We expect this trend to continue as a cloud cuts company. This installed base of customers that high renewal rates and high and expanding and wonder cutting back.
Our cloud revenue should grow in the low double digit sitting for 21, but gross margin target model being just looking for 50 and 65% aided by Carbonite, but no 80, plus margin along with continued improvements just scared mix and automation.
The customer support revenues remain constant didn't put 21, our expanded product offering compelling features including big design automation, but upsells will enable us to maintain at even striking though the gross margins, but customer support.
Expanded gross margins linked 74 to seven 6% will enable us to fully integrate carbonite expanded R&D investments, where they get truck to 14% of revenue.
And did what an adjusted EBITDA of a 37.
And and that's a long term expeditions as outlined in Matson my hobby upon them going under the coding that when expanding margin has been a highly successful much I get jodys open text, we expect that tend to continue after reflected in a long term activation.
Looking at this is completely targeting adjusted EBITDA activations of 38% to 40% undermining you have applied to the invest any margin gains above 40% into additional growth initiatives.
I loved about patients would it be that's yeah. That's got 23 or FCS target is 900 million through one thing and I see it targets, it's one thing into 1.1, but.
But attacks subject the I'd imagine that assuming you hate absolved remains strong as we continued to vigorously defend deposition.
Finally, turning to our dividend program today, we announced a quarterly dividend to 17.46 cents per share payable on September 20 2020.
Organic growth in an annual and go to think you'll be.
And just putting Devon, our interim named it continues to be a key indicator <unk> organic growth in constant currency.
Organically that 0.5% getting sits between.
Total organic revenue was down 1.3% in constant currency bidding for the 20 impacted primarily by license volatility dependent and global macro environment, noting that people are tracking towards positive organic growth in picks up 20 try it again.
I'm trying to though I'll touch on invested capital.
17% compared to 18.7% last year, which remains within our target range to be in the upper teens.
But in summary, we humbly and proud we take a solid that's got 20 dissolved attracts long just strong you navigate the macro environment challenges, it's going to 21 and the downtown.
We believe that both position to take market share regardless of economic environment, and finally, especially thinking the entire open pits community for the incredible efforts and to our shareholders, except some confidence he paid who value and wishing each if you all 50, it could happen I would now like to turn the call well, we'll take questions operator.
Thank you you will now begin the question answer session anyone who wishes to ask a question May Press Star then one on their touchtone telephone to join the question Q, you'll hear a tone acknowledging your request.
If you are using a speakerphone. Please ensure you lift the handset before pressing any keys, if you wish to remove yourself from the question Q you May press star and to anyone who has a question My press star and one at this time.
Our first question comes from Lima, Raimo Lenschow of Barclays. Please go ahead.
Hey, this is Frank on for Raimo, Congrats on another really strong quarter Oh, just one for me on the customer conversations. So last quarter, you mentioned that dependent make made things very binary where if you had at need you bought something bought a very quickly I could you give us a little bit more color into how those customer conversations kind of progress throughout the quarter.
Yes, thank mark here. Thanks for thanks for the question Yeah, just like I kicked off my introductory remarks on the script.
The last six months of just made a very clear that due to technologies are the other key that business resilience and and durability.
So you know we've seen very solid conversations around.
Uh huh core digitalization or the ability to support a walk from anywhere environment.
Data management collaboration workflows.
Electronic signatures. So that's a that's an area that we think will that we'll continue to or accelerate fraud.
Second is in the world of contact list.
And direct to consumer.
We've seen a a real strong interest in our digital experience platform, which isn't which was another place of Ah of strength for us. So the conversations on digital continue to accelerate.
They are right in the core of our wheelhouse of content services.
Plus our technologies of work from anywhere.
And customer customer experiences and our customer experience platform supporting direct to consumer and in contact with Ah Ah activities.
Great. Thank you guys.
Our next question comes from Stephanie price of C.I.B.C. World markets. Please go ahead.
Good evening.
Hi Def.
Well she could dig into the Cisco 21 revenue expectations, a little bit more and I guess I'm I'm talking about the puts and takes legend expectation of constant revenue gross maybe specifically of any off club business and the cloud ex Carbonite.
I'm sure thinks that they thanks for the play on Ah. Thanks for the question.
He does we look into fiscal 21.
We are you know, we expect cloud revenue to grow low double digits.
Customer support revenue to remain constant or in the year.
And you know that that's sort of models out annual recurring revenue to grow in the mid single digits.
And you know we're communicating today that we expect license professional services to decline sort of consistent with the broader trends the softer industry.
Impacted by.
The pandemic and the defer all by some companies have transactions here in the short term airlines.
<unk> auto.
Hospitality retail those industries are down for US you don't wall something industries up like government health care manufacturing work from home.
But the I'm the the up Barry I don't off that all the down areas. At this point. So we think it's prudent to kind of look at a license in professional services to decline.
And that brings out to that brings us a total revenue, which oh, we're expecting to be constant.
A year over year, but you know if we get some help from the economy, we're hoping to get a few points of growth, but that's a that's more dependent on the economy that off so I'll I'll also note, we're not losing took competitor.
Right in fact, we see competitive strength. This is more <unk> driven by the demand environment. A then by a competitive environment within cloud.
You know, we see Carbonite unplanned.
Our managers are managed services remains strong, but the transactional volumes as we talked about last call did decline.
Our full lows.
And we're increasing again.
But the new volumes don't completely offset the affected Oh volumes. If you will we haven't lost customers and we're not losing to competitors.
But again, we did see you know as we talked the last time.
Volumes were down well off those lows now.
Okay. Great. Thanks, that's good color and then in terms of Carbonite sounds like it's still doing well can you talk a little bit, but the demand you're seeing especially in the SMB market there.
Yeah we've.
Oh, the business has been incredibly resilient and our first a six seven months a of owning it.
We you know whiny back to December when we closed the.
The transaction our thesis was that it's not just the cloud alone its cloud plus the edge.
And no edge or.
No cloud no cloud no edge and here, we are all on the edge so to speak [laughter] working from everywhere. So the to go hand in hand, and we really like the that the technologies of data protection threat intelligence threat protection, and but having those technologies.
The available from walk from from anywhere.
So we're pleased to our progress we're on target to complete the the the integration.
Here in fiscal <unk> 21, or the business has been on our internal plan. The SMB channel has been very resilient.
And we've actually had one of the areas of where demand is up.
It's actually all work from home technologies walk from anywhere technology.
Great very pleased club.
Thanks, so much that color I'll pass the line.
Our next question comes from Dinos Metropolis of BMO capital markets. Please go ahead.
Hi, good afternoon, Mark just extending them carbonite clearly much stronger than you'd expect that so we've got more be outs, a churn holding in better than you expected or new customer activity being stronger than expected or combination of both.
Yeah, it's a it's a basket of activities.
The.
Overall, the business has been amazing <unk> resilient here during the pandemic, the let's take it and its pieces the OEM part of the business a bright cloud been very resilient in fact, we've added.
Up here in the first six months, a few dozen new OEM embedded partners [noise].
The SMB channel.
Our channels, probably a little more resistant than others. Since we have larger rmn that helped consolidate smbs for us.
Renewal rates for and consumers.
<unk> have been very strong given workout work from anywhere.
And our new kind of direct marketing activities has has shown some early signs of promise.
Actually found all says we come into fiscal 2001, one of our big efforts is cross selling and having our enterprise team now green carbonite or to the to the enterprise.
Also on plan on all our integration systems.
People et cetera, so the combination of renewals combination of some new demand of walk from anywhere.
And some early signs of cross selling into the enterprise.
And you mentioned a launching a core in high tail through the channel a timing a bad and how may depend to make a effect P.P. upticking might see that regard.
Yeah, it's like the start of any new fiscal year gives you an opportunity to Oh do new things and align your organization. So are we launched.
In July just a few weeks ago.
I'm, having or SMBC teams bring core share course signature and high tail through the SMB channel. So we've only been added for a few weeks, but it is very relevant then applicable and in a very.
Elaborate trouble sales play from how they bring Carbonite and web route to market. So we've only been added for a few weeks and well keep you updated as we go along here in fiscal 21.
Great. Thanks, a lot like.
Our next question comes from Paul steep of Scotia capital. Please go ahead.
Mark could you talk a little bit about.
What changes if any you need to sales comp or key metrics that might be looking to drive greater cloud revenues into fiscal 2021, and maybe further de emphasize the license side of the business. Thanks.
Yeah, Paul Thanks for the question you don't we have we've had great stability in our sales organization both the leadership.
Or.
Sort of field structure, we call them selling hub.
You asked U.S., the East, Canada, Southern Europe, we called them.
Oh selling hubs if you will.
I mean, we had great stability in kind of our named account a model on the and specifically in the enterprise says we come into fiscal 21.
Leadership very stable structure very stable.
Ah you know, we haven't changed our comp plans coming into fiscal 21, a and AG is incented to hit an annual number or that can be either retired through MCV.
The cloud guaranteed <unk> cloud contract or or license.
And it's really driven by how the customer wants to consume.
Oh I've never believed that.
Clinical back at corporate we can tell in AG and to loose, France and their customers into loose right Oh, how they should consume so we haven't made any changes we certainly go when and to advocate cloud first in what we're doing.
We have though made some changes around account prioritization.
The sizing a little less the affected industries like airlines and auto and spending more time on health care of government.
And manufacturing football no changes to the comp plants coming into fiscal 21.
Great one quick follow up to that clarification embedded in the numbers next year with to further acceleration of cloud.
Is there an implicit assumption that 20 dots free or the security offering actually force broader migration at the base. Thank you.
We are a cloud first company.
We are Oh, it's very clear in our history of how we have transition to an a or two or annual recurring revenue.
We expect for fiscal <unk> 21.
To be you know between 80% to 82% of our business.
We're releasing every 90 days.
Or new product releases.
And you don't we released first into the cloud.
So customer, we're still going to support customer choice of how they consume.
We have one code line for cloud and off cloud, we released first into the cloud.
Oh, there's great benefit to being the cloud, it's our largest opportunity. We will of course continue to sell licenses and support hybrid but it is a cloud first world and 20 Dollarsthree certainly supports those principles.
Thank you.
Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Hey, Thank you.
Mark I think you said you guys are still going to be acted on acquisitions. Here. My question is can you maintained the same level cadence in terms of enough.
In terms of magnitude it.
Can you also still pursue these larger opportunities assuming you know this backdrop continues for another.
Four quarters or so.
Oh I believe we can you know, we we have a very experienced team.
Very experienced processes that have great leader, Doug Parker of the organization.
Oh, we have our approach and methodology, we also know that market's intimately.
And I mean, there are apple target within our core markets upon kind of services business network digital experience platform cyber resilience and advanced technology.
I wouldn't want to enter a new market segment I'm at this point in time, while the pandemic.
Present.
Hi, Ritu, we know our our core markets extremely well we know those competitors.
Oh, all we know their business model.
And it is apple pipeline an opportunity for us.
So it it's steady as we go on M&A, where our balance sheets ready our team is ready other pipelines, a little stronger and we expect to deploy capital in fiscal 2001, the pandemic isn't that benefit without of course, our due diligence is going to include.
Help how cold it 19, it has affected a potential target and our customers [laughter] me. So that's an important feltl.
But it doesn't slow down or or are actually that back to kind of the target set for us.
Okay. That's fair thanks.
I don't know, there's a fair question sort of looking at your investor deck.
Did you guys had when you had the Investor day down your answer to the growth drivers was a one expanding into the GE 10000 customer base and then too.
Expanding adoption within his song 74000 customers.
Oh, I'm, sorry, given the backdrop, but can you give us maybe a sense of whether you answer and push that are those injections out to your next thing yesterday and looking at 2020, along or did you make quite a bit progress on that ER and 2020.
[noise], Yeah, I don't recall [laughter] excuse me, let me just got it.
Hello drinking water there I don't recall the specific metrics might do maybe you have them that we had in the.
In New York Investor deck, but I can say.
Of course, two of our greatest <unk> enterprise sales opportunities is expanding the jet <unk> expanding the GE 10-K, and we did expand coverage.
One of things. We then in fiscal plenty is we put a new global account management team in place.
And I'm I'm I'm real pleased and excited about that dedicated team.
I'm looking at global accounts, and we expanded the coverage I'll, let me do kind of if the if there was a specific number there and Richard a cross selling its install base the greatest opportunity is cloud.
And continue to drive managed services, which is private cloud.
Cross selling opportunities all like customer experience management work from home technologies Carbonite.
And other offerings and upgrading into 20 that 220 dot treat the GE 10-K installed base remain front and center for us for growth.
Yeah, Okay, well. Thank you Bob you can just should I was just at a if you look at our investor deck on page 25, we continue to each state that go out in terms of dumped into college of global 10-K that makes you guys like Mark said actually comes incentive for.
Okay. Thank you.
Yeah.
Thank you and Richard It's also an important point if I can just add to it you know in a time of like like this.
Its important to leverage existing relationships and that's why the installed base is so important work trusted provider.
We got a proven track record.
And be able to go into our installed base elaborate stacked history.
A track record up of delivering benefits and and balance sheet strength to sell the next module. The next platform is a it's a long term strength for us and one that will help us gainshare.
Oh were smaller less stable competitors.
Our next question comes from Paul Treiber of RBC capital markets. Please go ahead.
Thanks, very much and good afternoon.
In regards to Bobby outlook for fiscal 21 in regard Smith pandemic do you see that the headwinds as it delays on the pandemic weighing both equally on license and cloud for new bookings for are you seeing cloud demand is more resilient or even increasing.
Whereas the majority the headwinds are on licenses.
Although for the question.
I'd say the following.
Renewals have been amazingly resilient for us as you can see in the numbers.
You know renewals are not just support.
Our it it's the ability to get value from the software its ability to speak experts its product updates.
It security.
Patches.
And update services is you can see in the numbers that's been amazingly strong for us.
Year over year growth, great margins Hot pipe high renewal rates.
There there is certainly in a time of crisis it it's accelerated.
Customer interest in time to value.
So I would put the emphasis on time to value. So if we can show time to value in a man. Its service that could include a license a time to value in our cloud, there's really a premium on time to value.
As you and that's you know through time, we've been on an A.R.R. and cloud transition.
Where.
Back in fiscal 11, Oclock you know cloud was.
Excuse me license was near 30% of our business in today's 13% of our of our met.
So I think they know the pet or the pandemic is revealing.
The need for time to value and we still can provide that regardless.
The way of customer consumed.
But but it also does put a a bit of an emphasis on cloud because typically you can get time to value in our managed service.
On one of our SAS offerings.
And then following up on that you know cloud additions just launched how's the pipeline building versus your expectations.
And you know how he anything in terms of bookings or MCV for cloud products. This past quarter, you don't need without providing specific number but just you know how was that that the new deal closed environment for cloud This cross corner.
As you.
So are you know what were 20 back too and that 20 about three Oh almost here you know the reaction 20 dot to has been written really very very favorable.
No we but we're on the E P releases and getting features out.
And use it and you see it and ER and the renewal rates just how strong they are.
You also see and I think a strong cloud number from from from fiscal <unk> fiscal 20.
So.
Customers have have really liked our ability to release quickly.
We're getting better at <unk> at having customer be able to consume it very quickly.
And you know we've solved for the leasing every 90 days we've.
We've solved for having it run anywhere with through containers were now solving for the ease of consumption and the and the automatic way to turn on on on on new modules.
So first take is very very positive.
And as I highlighted script I think that has a long term differentiator for us, but do you think it as a series of things. It's getting the time down is getting the features up it's getting it to run anywhere.
It's it's now turning into the ability to consume it much more quickly.
And automatically turn on new capability.
Okay. Thanks, taking my questions.
This concludes the question and answer session I will hand, the call back over to Mr. Baron check for closing remarks.
All right well look I like to thank everyone for joining todays today's call and again I wish everyone, a whole health well being and happiness and look forward to continuing to to engage here in the coming days and weeks and say you digitally and our upcoming conferences they can be joining.
Today's call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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