Q4 2019 Earnings 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 queue simply press Star then one on your Touchtone phone to anyone need assistance during the conference call that May signal, an operator by pressing star and zero on their telephone I would now let's turn the conference over to Harry Blount Senior Vice President of Global Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone.
On the call today is Opentext, Chief Executive Officer, and Chief Technology Officer, Mark J. bear in shape, and our executive Vice President and Chief Financial Officer, Matt Do Ragen 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 would like to take a moment and direct investors to the Investor Relations section of our website.
Investors Dot open textile Tom.
Well, we have posted two presentations that will supplement our prepared remarks today.
The first is our strategic overview.
Titled Open text Investor presentation.
The second is titled Q4, and that's 2019 financial and business results includes information and financial specific to our quarterly and that's why 2019 results, notably our updated quarterly factors on page nine.
In August and September open tax management is looking forward to meeting with investors in Canada, and the United States, We will be attending the Keybanc technology leadership Forum on August 12 in Vail, Colorado as well as the Citi Technology Conference on September Fiveth in New York, Please feel free to reach out to me or the Investor relations team directly for more information.
And now I'd like to tell you about an exciting event coming up for open text open text is pleased to announce that will be we will be participating in the NASDAQ opening bell ceremony as at the NASDAQ market site in New York Times Square on September 5th.
The event will be live live streamed at 920 I am on the Investor Relations website.
And finally, I'd like to remind institutional investors and equity analysts that open text will be hosting an investor day on the morning of Friday September six at the lot New York Palace.
This event will consist of our annual Investor update featuring strategic presentations from key members of our executive leadership team.
Please contact Investor is that open text dot com to RSVP and confirm your attendance for those unable to attend presentation material as well as listen only teleconference and audio cast will be publicly available on the Investor Relations website.
And now I will proceed with the reading of our Safe Harbor statement.
Please note during the course of this conference call. We may make statements relating to the future performance of Opentext 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 statement.
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 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 web site.
And with that I'm going to hand, the call over to Mark.
Thank you Harry.
Good afternoon to everyone and thank you for joining todays call.
I'm pleased to announce record open text fiscal 2019 results. If there was a one word to describe opentext historical.
Long lasting well made sustainable.
Durability stems from a business model centered on value creation, and up or down markets and stable a volatile times.
We delivered record results in markets that are increasingly volatile just look at the U.S. news today on another 10%, China tariff and the hard Brexit discussions last week in England.
Opentext results are built with the continued trust from our customers.
And places the company in a great position for the years ahead, we are a company focused on total gross cash returns and disciplined value creation.
Let me speak to this bigger picture before I get into the shorter term.
In constant currency, we finished fiscal 2019 at 2.92 billion in total revenues up 4% year over year.
Our cloud revenues grew by double digits to 918.6 million up 11% year over year.
Our organic growth was positive, but under 1% for the year and our our grew organically by 1.5%.
Our growth would have been even higher if not for the short term external effects of a strong us dollar trade wars tariffs and the temporary slowdown across Asia.
Q4 revenues were affected by 22 million due to foreign exchange and $53 million for the full year.
I have more to say on growth in a few minutes.
As reported our adjusted EBITDA dollars 1.1 billion or 38.4% up 210 basis points year over year.
Operating cash flows were 876 million up 24% year over year, our ending cash balance was $941 million.
And we had a net consolidated debt ratio of 1.5 times.
This is growth and value in all the right places.
The headline for fiscal 2019 is record total revenues record cloud revenues record adjusted EBITDA dollars and record operating cash flows.
With the trust of our customers.
And the expertise and excellence of our employees. This momentum continues into fiscal 2020.
And our priorities remain consistent total growth.
Cash flow expansion.
And disciplined value creation.
I'd like to highlight a number of achievements since our last call.
We announced a broader and deeper relationship with safety. We are the de facto content services platform the largest business software company in the world off cloud and now in the cloud.
We announced a deeper relationship with Google We are now their preferred partner for enterprise information management services for the class.
We announced a strategic relationship with Mastercard for the cloud to help companies increase.
Financial efficiencies across our global supply chain, starting with the automotive industry.
The collaboration will better enable companies irrespective of size or location or technical capability to build increase trust and security and to trading partner relationships.
I also want to thank Coca Cola, Intel Citibank, and the South African National Parks for joining us at enterprise World.
And turning their respective transformative journeys leveraging opentext technologies.
The most trusted companies Trust Opentext.
We announced a cloud first world with Opentext cloud additions Opentext business network and OTI to services.
Fiscal 20 represents for open text that cloud first approach.
And an enhanced product cycle for the second second half of fiscal 2000.
We also had some major customer wins in the quarter that you can see in our investor materials, including Cormark BMW and others.
Now I'd like to highlight Verdecanna technologies. They are the market leader and then 10 collections there'll be standardizing on our business network technology to digitize and make everything machine readable that end to end collection process from sourcing to collections to payment to final resolution, including integration Court system.
The enterprise software landscape has changed in our competitive position has never been stronger.
We enter fiscal 2020 recognized as leaders by Gartner Forrester and ITC in our core markets of content services and business networks, and we were recently recognized as a leader in the developer community well that works said differently Opentext is the standard for organizing storing and moving critical data throughout in between enterprises.
Our Magellan product puts us in a strong position to extend our leadership and to helping our customers mind their data for actionable insights.
In any case puts us in a position to secure.
Opentext total growth strategy is a powerful trifecta of three motions retain Roe and acquire.
Over the last five years, our CAGR revenues are cumulative average growth rate for revenues is 12%.
As we plan and execute for the coming years, I'm optimistic and confident.
That we can continue our strong growth rates, recognizing some years, maybe up and some years maybe down.
Let me expand on retain.
We have over 10000 customers that trust open text everyday and that customer Trust has created a durable opentext.
Hi, durable I mean, 75% of our revenues are occurring renewal rates are in the nineties and for the first time, our annual support margins top 90%.
Our net promoter scores are among the best in enterprise software and continue to improve opentext. Our ability is rooted in our great software and what takes great software great employees and great customers.
Let me expand on growth, we have an amazing opportunity within our installed base.
To expand product adoption and migrate customers to the Opentext cloud.
It is now a cloud first world and open text is in a marquee position to be a strategic provider of public cloud platform that provides for an information advantage not just cost reduction.
We are planning on both broadening and deepening our coverage within the global 10000, and we have a tremendous opportunity to grow our business within our existing customer base and product set.
We expect our investments in product and go to market programs to create further organic growth.
Go to market investments include important elements, such as sales capacity expansion.
Our inside sales organization going global.
And a stronger geographic orientation, and Asia, Japan, Latin America Africa, Middle East and Central Europe .
We expect this to expand account coverage and deal coverage and create greater market and customer intimacy.
Open tax is now within an ideal adjusted EBITDA range of 38% to 40%.
We set out to be a productivity leader and we arrived here a bit ahead of plan and with a lot of strength.
This is upper quartile performance.
And any excess above this range, we intend to use to fund growth.
And.
And to create more value.
On acquire we continue to be a strategic and disciplined buyer of companies and the coming years M&A will continue to be our leading growth contributor we run a value play book and we will remain patient and prudent buyers.
As a strategic buyer of assets ROIC return on invested capital is the most important financial metric with any deal and in fiscal 2019, we expanded our ROIC to 18.7%.
High teens ROIC is an ideal place to be for our business model our balance sheet has never been healthier any level of M&A.
This is a trifecta of total growth retain grow and acquire these are proven elements within the opentext business system.
Let me bring this all together in fiscal 19 in constant currency, we grew revenues 4%.
We grow cloud 11%.
Positive organic growth, though I would have been higher if not for the external factors, we mentioned earlier.
As reported we achieved an adjusted EBITDA margin of 38% operating cash flow of $876 million any cash $941 million and a net debt ratio of 1.5 times.
Our last five year growth Cagar between fiscal 14, and 19 is 12% ROIC of 18.7%.
And we have strong momentum.
Coming out of enterprise world that heading into fiscal 2000.
Now looking a bit more into fiscal 20, let me provide a few comments on our growth profile growth profile.
We are planning for another record year of total revenues record cloud record EBITDA dollars and record operating cash flow.
We expect total growth in the low single digits. This is factoring in any new acquisitions.
Cloud growth rates expected to be in the high high high single digits.
Our license and PS businesses constant year over year.
Organic growth in the low single digits, and we are increasing our adjusted EBITDA target range from 36% to 38% to a new range of 38% to 39%.
Looking even beyond fiscal 20, I'm optimistic and confident as well about the outer years now we don't give guidance, but we remain on a long term trajectory of robust.
Total growth right the five year CAGR is 12%.
We will continue to acquire using the proven open text value playbook and the Opentext business systems five years ago, we were integrating business into a 30% margin company.
Future acquisitions will be integrated into a high Thirtys margin company.
We achieve acquisitions far faster and the Opentext business system, then other companies do.
We are planning for organic growth in the low single digits.
Some of the asked me why not use market rates well, here's why market rates are bad indicators as to include large buckets of unprofitable revenue.
Cloud should grow and in the high single digits.
And the adjusted EBITDA margin range longer term, we continue to look at 38% to 40%. This is upper quartile performance and we're right where we need to be.
Productivity gains above this range as mentioned earlier will be invested back into the business for growth.
And value creation.
I want to personally thank all our customers partners and technical experts who joined us.
For our 2019 enterprise World events in Europe , Asia, and North America over the last few months across these three events.
We directly connected with thousands of customers and partners I deeply believe we are now in a post ERP era do we really need more process advantage no.
What company is needed to unlock the value of their information to gain the information advantage and in fact create new business models and become information company.
As I discussed in my Enterprise World Kino, if you're an auto manufacturer are you just a car company or an industry for though are you a car company and an insurance company for example.
Opentext can help our customers move beyond process advantage to information advantage and create new business models based on information and insights.
We are all information companies and this is the future of business.
We operate at scale.
We are moving to high impact quarterly product releases that our cloud first not finally.
All cloud is a strategic platform for Opentext, we're helping customers gain maximum value from their all cloud investments expand their usage and value and grow into the open text cloud with new investments in new workloads.
Such as the Opentext cloud managed services Opentext cloud additions and Opentext 42.
By the end of fiscal 2020 with OTI two we plan to enable the next generation of Iot platforms by providing and selling SaaS based services as I discussed in my keynote enterprise World.
As a reminder, our business network is already 100% in the cloud.
The open text 20 doctoral releases very important milestone for the company next year. When we will begin to offer cloud based Iot services at scale hosted and managed in the open text cloud services to include capture signature archive content management output management and identity.
Yes, I am is designed to help customers create intelligent and connected enterprise and gain that information advantage.
We're helping customers unlock the value of their information managed and secure the growing menace of information sprawl fine fine and protect their endpoint again, tacking breaching and bad behaviors.
We are taxing identity to everything and we believe we can enable the circular economy through digital and ethical supply chains.
Let me wrap up my comments.
Open tax is a durable company all long lasting well made sustainable.
And the leadership team is humble and hungry and ready for all scenarios in the market.
In closing even in a seasonably lighter Q1, we will grow year over year.
The fundamentals of the company are rock solid we're poised to continue strong cloud growth at upper quartile corporate margins and cash flows.
Our products market recognition and brand image has never been stronger it's a post ERP urban companies do not need more process. Our process advantage. They are information they need the information advantage and we are the best partner to provide that.
Let me end my remarks.
What Q1 quarterly factors.
Again quarterly factors are not long term strategic factor is a rather short term items to consider in your modeling.
Global recession concerns continue Brexit Asia, and other Gi geopolitical events trade in trade tariff war. So look at the headline news this afternoon out of the us.
US GDP is slowing for recent US Bureau of economic analyst reports the BA came out with reports this week as well.
Our Q1 seasonality lighter quarter due to summer vacations, thus fewer selling days.
Q1, FX headwinds could be as high as 12 million.
Down from $22 million last quarter, and 20, FX headwinds would be about 25 million.
Q1, operating expenses to be down sequentially, 4% to 6%.
And Q1, adjusted EBITDA to be down sequentially between 100 to 150 basis points I. Thank you for your time and attention today and hope you will join me and the leadership team at our Investor Day in New York on September six.
I look forward to taking your questions Aptamer do complete circle.
Her remarks, but doable.
Thank you Mark and Hello, and thank you all for joining us today.
Q4, and fiscal 2019 dissolve the effect on on Pavlovian operational performance investment and strong expense management and capital optimization.
So now turning to the details of our quarterly and annual results and similar to prior quarters. My references will be in millions of U.S. and compared to the same period in the prior fiscal yet.
During the fourth quarter and fiscal 2019, FX negative impact with meaningful you will see the impact of FX across the entire piano all revenue segments and our earnings pointing to upward performance when measured on a constant currency basis.
And let me start with revenues and earnings.
On revenues there was a 22 million negative FX impact during the quarter added 53 million negative FX impact to revenue for the full fiscal year.
Total revenues for the quarter was 747 down 0.9% plus 769 up 2% on a constant currency basis.
For the fiscal year total revenues were $2.87 billion up 1.9% from last year, a 2.92 billion up 2.8% on a constant currency basis.
Our earnings per share GAAP earnings per share for the quarter was 27 cents per share up from 23 cents per share for the same period last year.
For the fiscal year GAAP earnings per share.
Lets one dollar six cents on a diluted basis up from 91 cents per share in the pie.
Adjusted earnings per share for the quarter of 72 cents on a diluted basis no change from 72 cents per share for the same period last year of 74 cents up two cents per share on a constant currency basis.
For the fiscal year adjusted earnings per share was $2.76 up 20 cents from $2 up to six in the prior year or $2 79 up 23 cents per share on a constant currency basis.
So now let me share with you all the other details of our results.
The geographical spread of total revenues in the Americas, 59%, EMEA, 32% and LPG, 9%.
Annual decoding revenues, but 557 for the quarter up 4.2% of 572 up 7% on a constant currency basis for the fiscal year annual decoding revenues, but $2.16 billion up 4.6% from last year of $2.19 billion up 6.2% on a constant currency basis.
Annual recurring revenues as a percentage of total revenues remained solid at 74.6% and 75.1% respectively for the quarter and for the fiscal year.
Our cloud revenues are particularly strong in the quarter up to 42.
Ask 11% up to 47 up 13.1% on a constant currency basis.
For the year cloud revenues, when I know eight up 9.5% or 919 on a constant currency basis up 10.8%.
Customer support revenues were 315 for the quarter down, 8.5% or 325 up 2.7% on a constant currency basis.
For the year customer support revenues by 1.25 billion up 1.2% from last year, a 1.27 billion up 3.1% on a constant currency basis.
Our customer support the new uptake was consistent with prior quarters and prior years out approximately 91%.
I'd license revenues for the quarter were 120 down 14.4% 124 down 11.3% on a constant currency basis.
License revenues for the fiscal year with 248 down 2.2% from last year or 439.4% on a constant currency basis due to call that out per quarter had very strong license revenue and in general the license revenues of quarterly volatility and as mentioned at an annual basis of license revenues remain constant.
Professional services revenue with 70 for the quarter down 7.7% of seven to Threed down 8.1% on a constant currency basis.
For the year professional services revenues were 285 down 9.9% from last year or 293 down 7.4% on a constant currency basis. Our goal as we stated earlier is to target higher margin PS business and leverage our partner network.
And with respect to assay six centssix in Q4 assay six a six impact was de Minimis.
A detailed that available in the Form 10-K filed today.
The accounting rules require companies to provide comparisons to assay six so five only during the first 12 months of the year of adoption. Accordingly, Q4 will be our last quarter to put the comparison and beginning fiscal 20, we will report on the assay six a six only.
Turning to margins, we are very pleased with our margin performance in the quarter and into fiscal year GAAP gross margin for the quarter was 68% up 80 basis points from last year and GAAP gross margin for the fiscal year was also 68% up 140 basis points over the same period last year adjusted gross margin for the quarter was 74.2% up 20 basis points over the same quarter last year for the fiscal year adjusted gross margin was 74.1% and improvement of 110 basis points.
Also on an adjusted basis cloud margin was 57.2% during the quarter for fiscal 2019 cloud margin was 57.8% up from 56.2% in fiscal 2018.
Our customer support margin was 90.4% during the quarter for fiscal 2019 customer support margin was 90.1% up from 89.2% in fiscal 2018.
I'd license margin was 96.6% during the quarter for fiscal 2019, I'd license margin was also 96.6% slightly down from 96.9% in fiscal 2018.
Our professional services margin was 22.2% during the quarter.
For fiscal 2019 professional services margin was 21.8% up from 20.5% in fiscal 2018.
Adjusted EBITDA was 284 this quarter up 0.8% year over year adjusted EBITDA margin was 38% an increase of 60 basis points compared to 37.4% in Q4 last year.
For fiscal 2019, adjusted EBITDA was $1.1 billion up 7.8% compared to the prior year and adjusted EBITDA margin for the year was 38.4% and improvement of over 200 basis points compared to 36.2% in fiscal 2018.
GAAP net income for the quarter was $72 million up from 61.7 million for the same period last year.
Our fiscal 2019, GAAP net income was $285.5 million up from $242.2 million for the same period last year.
Our adjusted net income in the quarter was $194.4 million up 1.1% from last year or up 4.7% on a constant currency basis.
Fiscal 2019, adjusted net income was $744.7 million up 8.9% compared to the same period last year or up 10.2% on a constant currency basis.
Now turning to the fiscal 2019 target model.
We shared our target model at the start of the year with you all and you will see that we ended fiscal 2019 solidly meeting expectations of a target model on all elements overall adjusted EBITDA margin for the year was 38.4% above the target model range of 36% to 38% and reflecting a very deep operating plans that we place on all aspects of our business large medium and small.
Turning to operating cash flow for the quarter, we generated 230 million up 12.6% year over year.
During this fiscal year, our annual operating cash flows was a record $876 million up 23.8% year over year.
Our performance reflects the cash flow engine built well to be optimized to be optimized continually and support open text is it acquired operating investments that our total growth initiatives.
And let's turn to the balance sheet, we ended the year with.
941 million in cash of 37.8% increase year over year.
Consolidated net leverage ratio at 1.5 times, it's the strongest level in two years and well within our external debt covenant ratio of four times.
In terms of the ongoing IRS matter I'd refer you back to Mark's comments in our last call. The standard Ionis process continues as we head into the appeals phase out as all remain strong as the vigorously defend that position.
And turning to dividend our dividend program continues to be a very important component of our capital allocation strategy and today, we announced a quarterly dividend of 17.46 cents per share as a reminder, our dividend rate is based in distributing approximately 20% of our trailing 12 month operating cash flows.
Going forward, our dividend rate will continue to be assessed annually with the next update occurring this time next year to align with our fiscal year performance.
Turning to organic growth angelic at the start of the year. We provided two metrics that we agreed to update at the end of each fiscal year on a historical basis annual organic growth in total revenue and return on invested capital Joel.
These have been included in the Investor materials, we posted on our IR website today.
For the year and constant currency total organic growth was positive, but below 1%, which was impacted by the external factors that mark highlighted earlier annual recurring revenue grew organically in constant currency and 1.5% during fiscal 2019.
Our return on invested capital ROIC was 18.7% compared to last year of 17.5% given higher profitability.
So, let's turn to fiscal 2020 target operating model and our long term aspirations.
So today, we published our fiscal 2020 targets, which as a reminder is included in the Investor presentation on our website and consistent with our practice the fiscal 2020 target model provides annual ranges to our operating model.
Please do refer to Mark's commentary earlier as you talked about the components of our total club. It's retain go and acquire as you look at the share of revenue segments to total revenue.
Target for fiscal 20, the full year impact on revenue for catalyst in the US on acquisition is expected to increase the cloud services and subscriptions range from 28% to 32% to 31% to 45% with the offset in the customer support range of 42% to 46% to 40% to 44%.
As we both have a target model for fiscal 20, we maintain our fiscal 19 margin and expense ranges across all elements of our model, while we shifted upward our adjusted EBITDA range from 36% to 38% to 38% to 39% moving the low end up by 200 basis points and the high end up by 100 basis point, we have been and continue to remain focused on profitable growth.
Our focus on growth will also be that I pay such as our cloud.
An update on interest and adjusted tax rate, our our fiscal 2000 target models, we interest expenses remains at $140 million to $145 million and adjusted tax rate also domains at 14%.
Our fiscal 2022 aspirations as you can see that shifting our three year target range to fiscal 2022.
Our long term aspirations now looking at fiscal 2022 will be 38% to 40% adjusted EBITDA with margins above this range reinvested back into the business for growth and value creation.
$1 billion to $1.1 billion operating cash flows during fiscal 2022.
And let me summarize and reiterate the quarterly factors that we anticipate for our upcoming fiscal Q1.
Q1 is seasonally a lighter quarter for all of the factors that mark outlined in his commentary.
We should also be mindful of the global recession concerns remain.
As we look at where FX rates are today as one of the geographical component of our business. We expect FX headwind in Q1 could be as high as $12 million and we're expecting approximately 25 million FX headwinds during fiscal 2000.
Q1, operating expenses is expected to be down sequentially by 46%.
Q1, adjusted EBITDA margin is expected to be down by 100 to 150 basis points.
So in summary, we are very pleased with our fiscal 2019 results and we look forward to fiscal 2020, and our long term targets.
As you may have observed we have significantly expanded our internal bandwidth to connect with investor community.
With the leadership of Harry plant, along with Black Sea caught in the team we look forward to engaging with our stakeholders share the strength of the open text business models and the opportunities that lie ahead of us.
On September six as our Investor Day in New York, We look forward to seeing you all there.
And finally I'd like to thank our shareholders, whose trust and confidence we greatly value and the open text team. So that we committed efforts.
I would now like to like to open the call for your questions operator.
Thank you.
We will now begin the question and answer session.
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The first question comes from Stephanie price, whose with CBC. Please go ahead.
Good afternoon.
Hi, Stephanie.
I was hoping you could talk a little bit more about the macro environment, you've mentioned a headwinds around trade tensions and FX prior quarters in this quarter as well have you seen any changes in customer buying patterns given the uncertainty and can you talk a little bit about the impact on the pipeline.
Yes, I mean.
There is no there's no doubt that.
Terrorists.
Our top line right just look at today's headlines out of the U.S. of another 10% and that and that does bleed into kind of is the corporate psyche and effecting.
Do I want to spend money for growth or do I want to do more call cost out strategy. So I do think the market is a.
Bit more cautious today then it then it was not a 90 days ago.
With that said, we are very durable business, we don't see a slowdown in our pipeline, but we certainly are seeing kind of the tone of caution out there.
And this is why we've transitioned our business to a recurring business.
75% of our business and <unk> and recurring revenues, we had incredible margin and cash flow expansion in the year and whether we have one or 2% variance up on the top line, we were able to grow margins able to grow.
Our cash.
Cash flows.
So as I look into Q1, we're going to grow year over year I look into fiscal 20, we're going to grow year over year by using the environment is a bit more cautious.
Okay, and when you think about that more volatile potentially environment can you talk a little bit about the acquisition environment are you seeing that impact in the pipeline at all or valuations coming down.
<unk> environment changed at all.
Yeah, we're going to.
M&A will continue to be our leading growth driver as to as I said in my prepared remarks.
Our pipeline is.
A growing.
And we expect to get deals done here in in fiscal in fiscal 2000.
So on valuations in the public markets do do remain a bit high we are seeing some private equity funds at kind of the end of their lives and assets.
Getting ready to.
Turn.
But let me let me confirm that M&A is going to remain our our leading growth driver our our M&A pipeline is up.
And we expect to get deals done this fiscal year at our value playbook.
Okay, Great and just one more maybe this is for mid do in terms of R&D. So when you look at your target fiscal 20 model percentage of.
Revenue in terms of R&D hasn't changed at all and when you think about the cost associated moving to cloud and the quarterly product releases in the cloud can you talk a little bit how we should see R&D going forward.
Yes sure thing thanks, Stephanie so with so when you look at the dollar spend of R&D side. We continue to look at how much of that spend is in the innovation bucket tenants into that and added to the maintenance bucket and keep in mind, we've expanded R&D workforce across the globe and we not only have USBC crescent centers of excellence around so I would say we are able to use that R&D dollars much more effectively and you specifically talked about cloud investments and.
That's also why we maintained our gross margin in the cloud at 57 to 59, where some of the cloud investment is going into that line.
And the dollar of spend maybe flat to relatively flat, but I can tell you. The people growth is high and the productivity we get from the people crowd is also very high support both innovation and maintenance.
Okay, great. Thank you very much.
Okay.
Yes. Thank you so thanks Stephanie.
For those on the call. We do ask that you. Please limit yourself to two questions in the interest of time.
The next question comes from Richard Tse with National Bank Financial. Please go ahead Sir.
Yes. Thank you.
Just wondering.
Notwithstanding your comments on organic growth. It has been soft for for some time I'm kind of curious to see or are there any hurdles from an open tax perspective.
That you would need to clear to sort of accelerate that pace of growth here.
Well Richard Thanks for the question.
Yes fiscal 18.
Getting constant currency, we grew 2.5%.
Our fiscal 19.
All in.
We were positive but under 1% are our was 1.5% growth in 19, and we're targeting low single digit organic growth right and.
And M&A faster than that and we are targeting cloud high single digits.
So we're not far from the goal on kind of the next way station for us on on organic growth.
If if not for the external factors in Q4, right, which were out of our control of FX tariffs that affected the.
As you know a temporary pause in Asia, and let's not confuse that with a long term strategic Ness of Asia. It also paulson pub expect public sector spending.
You can see that in and some of that some of our tables.
Organic growth would have been higher so in fiscal 18, we're right, where we want to be at 2.5%.
This year positive.
But a little lower due to the factors in Q4 and they are 1.5%.
So we're not far from where we want to be low single digit organic growth I like our total CAGR, though 12% over the last five years and ultimately it is about the EBITDA dollars, we generated 1.1 billion and 24% year over year expansion of cash flows, we're almost there and low single digit organic growth.
Okay, that's fair.
With respect to your comments on the professional services.
Those are moving away from the lower margin business.
Using your partner is a bit more how should we think about that going forward is this sort of kind of coming into the zone, where we're at this baseline or.
Just kind of get a perspective I guess for modeling.
This company.
Yeah.
Yes, again, I like I like the approach of constant year over year, So odd I'd model constant and 20 over 19.
Look look at our Q4 margins NPS, 21.6% and we closed the year.
At 20.
So we run a world class PS organization, we set out to go after the higher margin business and we captured it.
I'll put our business next to the best drawn PS organizations, we generate better margin than the world's largest firms and we're modeling constant year over year and that's a good place to be that gives our partners a lot of room like Google and.
And Sep and the global global aside to do what they need to do we're able to capture that.
The high value work to us so continue to model constant year over year, and that's right, where we want to be in and the margin is ideal at 20.
Okay, great. Thank you.
The next question comes from Thanos Moschopoulos with BMO capital markets. Please go ahead, Sir Hi, Good afternoon, a question from it do in terms of your organic growth calculation for fiscal 2008 that includes an adjustment for the $46 million six impact year over year or no.
You mean organic growth specifically the 19 bank.
Sorry for 19 or 18, yes.
Yes.
Weve calculated organic growth consistently as we've done before and I would say when you look at Tom licenses, specifically six if I had to fix a sex tilt lessons as a part of our growth.
So these are again, new incremental businesses the team has gone out and secured from customers.
50 answer your question Weve calculated organic goes consistently as we've done in the past.
Okay, but to be clear, you're using an AC six or six number over and you see six so far denominator just make sure I understand is that correct.
Yes, and Thats, what he will do going forward as well.
Okay Fair enough different question Mark when you sell a cloud deal can you speak to the type of attach rate you're seeing for the Opentext cloud as opposed to customers hosting with the public cloud provider and has there been any discernible trend in that metric or would you expect that to change on the back of the Google partnership.
Yeah.
Look I think the.
You know, we had double digit cloud growth in the year as we talked about and as I look into 20, I talked about high single digit cloud growth for fiscal 2000.
And our partners are going to help contribute to that.
Google is going to help contribute sep is going to help contribute.
Two that we're not seeing kind of a.
No we don't.
Produce a metric to says X percent is in which cloud provider. If you will it's an interesting question. Let me, let me think about that.
But I do I do think and I haven't seen a meaningful movement in the percent if you will.
Evolving let me think about that as a.
So its a metric, but theres no doubt that the Google raw deeper Glu Google relationship.
It's going to it's going to grow the business.
Now being the S&P de facto partner or the Sep cloud for content services going forward I will contribute to growth as well.
And I guess the implication is over time that should maybe help cloud margins, if the infrastructure burdens being shouldered by somebody else correct.
If I have no no no cost it should help margin [laughter], if I have lower costs no to lower cost that should help margins yet [laughter]. Okay. I will pass the line. Thank you.
Thank you.
The next question comes from Walter per charters with Citigroup. Please go ahead Walter.
Hi, Thanks question for Mark around the three year kind of assumptions you have embedded in the three year plan I'm wondering multitenant SaaS, just how you're thinking about adoption there both in the market generally as well as movies you make to two.
Come out with products. So forth is as cloud adoption continues in your eyes.
Product.
Yes Walter.
Thanks for that look I think we're.
You know, we're we're being fairly conservative and factoring in what I'd call our core applications.
And our OTI to services.
A key a public multitenant SaaS.
The second half of this year is a big product cycle for us what we called 20 dot too.
Yes, 20, being the calendar year dot to being the quarter, where we're going to enter the market providing at scale.
Enterprise consumable services.
For core Ian capabilities, we already have customers in production about the 20 that will allow customers to do this on their own.
We're also making incredible progress.
With our core Clap, we introduced electronic signatures.
So we havent factored into our statements of high single digit cloud growth.
Our margin expansion target so a multitenant SaaS is factored into that.
But I can also say, we're being a little conservative and how it's an how it's contributing.
In the model.
And then obviously I'm gonna do I guess, the easier dynamics seem like they're little bit out of your control I was little bit surprise for you to call a temporary does feel like things maybe.
Just worsening as you look at maybe three months over three months or six months over six months, especially Mark you highlighted just you treat new trade tariffs this morning.
What makes you think those are temporary or how are you thinking about temporary is that just being a 2020 dynamic I'm just curious what you're factoring into that into the forecast really.
Yes so.
But they were my words silver do I'll take that question [laughter] I'm, a I'm being optimistic there they're temporary I mean, ultimately we need to in my opinion, Oh, we have to come at the governments have to come to two to two a resolution.
And.
When I say temporary I, probably I mean, a couple of quarters could they be longer than that sure, but I'm I'm going to be optimistic that it's temporary.
Again, let's not be confused the importance of Asia in the global economy.
So by temporary yes, they are factored into our views for 20 already and by temporary I mean, one to two more quarters.
Okay. Thank you.
Thank you all.
The next question comes from Howard Weil on Chris with Veritas Investment Research. Please go ahead Sir.
Oh, thank you.
I just wanted to kind of turn to a discussion are on organic growth Mark you had mentioned that.
Asia Pacific was a little weaker did you guys look into what.
Constant currency organic growth rate is just for that region maybe.
No we don't break it down by that's a pretty granular metric and no we don't get down to sub geographies for.
You are asking for a revenue line and eight in a sub location, but no we don't get down to it to that to that level and publication.
Okay, that's fair.
And then just went on the six and six impact on maybe you mentioned in Q4, it was a less material than in prior quarters is that I'm just as a result, the less term license sales that in Q4, and if so what kind of factors drove less licenses that just a slowdown in the demand that you were talking about.
Yeah. Thank you, but then like thank you for that so it was down maybe two if you want to take six or six I'll take the license question yes.
Yeah. So in the fourth quarter. It was it was it was de Minimis and ER.
The life the license business also kind of grows throughout the year and I'll, let mark expand on it I don't know so six or six was 3.3 0.7 $3.7 million of though.
So quite de Minimis over total total revenues yes.
Look license was down and.
Yes. This is why we picked two metrics, which is recurring revenue and cash flow for the company.
And they are all was up at constant currency, 1.5% for the year and we had record operating cash flows.
Up 24% year over year.
I'd also note that third quarter license was strong and there can be.
Variances per quarter, while license was down in Q4.
And it's basically FX.
In Asia as we talk as we talked about which we think is temporary and I don't want the world to confuse that with the importance of Asia.
In our in our continued investment in importance in our business model.
Right no that makes sense. So I guess you would attribute a lot of that shoot you just really a regional factors.
And thats ways lighting sales were slower in Q4.
External elements absolutely.
The next question comes from Paul steep with Scotia Bank. Please go ahead.
Hi evening, so on Mark can you talk a little bit about go to market resources, you talked about a boost there maybe talk about the timing of when you see that contributing and then the size or the magnitude of the adds that you're sort of looking to do at one quick follow up.
Yeah, well thanks, Thanks for the question.
A couple of important points in there.
One is.
Yes, we're raising the EBITDA target this year.
Last year were 36 to 38. This year was 38 to 39. So the bottom ends up 200 bips to the top end is up a 100 bips.
And we closed fiscal 19.
Just over 38% and adjusted EBITDA. This is upper clock tile performance of all software companies and I just want to make the point is that 38 to 40 is the ideal zone for Opentext.
In some of the world's largest software companies don't operate in this zone and we chose to be a productivity leader and we got here faster than others and I'm very happy to be in this range. Some ranges you're happy with I'm happy with 38 to 40 ROIC I'm happy at 18 point 0.7, right. What we are above our range and EBITDA, we will use any excess above that to invest in growth and to invest in that and value creation. So I just want to be very clear I'm very happy with the range. We're in and we raised the target range coming into 20.
The investment.
If not an investment would otherwise increase the EBITDA range.
We're looking at.
The expansion into.
Our core markets North America.
You asked Canada Western Europe .
And.
Well, we have a stronger geographic focus and Latin America South Africa.
Middle East.
APAC and Japan, I'm, knocking it to a specific quantum on the capacity expansion.
But we are expanding capacity coming into 2000 were also taken our inside sales and going global with it.
So I would really note three things Paul one is.
Stronger geographic coverage can create more intimacy in Korea more intimacy in Japan March Missy and New Zealand. If you will second is taking inside sales.
Our global and then third is capacity.
Expansion that will allow us to get deeper into the global 10000 and have more account coverage more account coverage means more RP coverage.
Great. The quick follow up on it from a do on NSC six to five to six of 619 fiscal 19, we saw a benefit there in thinking about fiscal 20 should we consider a reversal there or simply think that it was a one time benefit.
F 2019 that won't materially compact F 20. Thanks.
Thank you again for the question I would say it was a onetime accounting requirement for 12 months.
And again I emphasize that these are new businesses such that the sales team won with the customers.
We are required to show the differences and we did so going forward in 20, we're going to be showing on the one accounting to the pixel. Thanks, if that makes sense.
Thank you.
Yep.
Got it thank you as well.
The next question comes from Paul Treiber with RBC capital markets. Please go ahead Sir.
Okay. Thanks, very much and good afternoon, just wanted to follow up on the term licenses and I don't want to thank so much about the the accounting, but more just on the business the nature of the products or the deployments that you're that you're selling like I recognize its term license can you clarify what leads to term license revenue.
The shouldn't know shipping and marketing spend as well so.
Think about the purchase by any customer.
In terms of a period of time it could be a two year three year on a five year term license rights and <unk> and again the commitment the advantage here. The benefit here is the committing for a longer period of time, which is exactly what we want from a business standpoint.
And that includes obviously the licenses it could include services, it's going into to support as well.
So it's really sort of extending the period of time not doesn't have the purchase but in terms of the commitment to the customer to us.
And and Paul Let me, let me emphasize the term business has always been very small for US. Historically this has not been a large business. It wasn't a large business in our large.
Vehicle for us in fiscal 19, we are more focused on cloud subscriptions.
As you can see in our cloud growth numbers, some customers choose to do a term license.
That's all if they'd like to purchase that way, we will enable it.
Yes at the end of that term they may not even on the IP at the end of the term I actually think term licenses are not the.
Best long term value for our customers and how to procure or something.
And as you know as you saw in Q4 was de Minimis. It was 3.7 sits at 3.8 million. So we much prefer and the vast majority of what we do our cloud subscriptions.
And to further clarify in regards to that deals with Hyperscalers can you recognize that revenue on a term license basis or on a on a ratable basis.
From a from a cloud subscription as as it says that it will be on a ratable basis, what a term license dispatches as we described earlier.
That would be an upfront basis.
So regardless of if it's a hyperscaler or deploy it to the customer your facilities to be recognized in that manner.
Yes, it's the nature of the deal itself, yes, yes, that's right.
Yes, a fallback, let's make two two distinctions.
There is our technology, and then where you want to run it Okay and then what services you may want to wrap around it right.
So.
Well customer can buy a license and choose to run it anywhere.
They could procure that license as a term very small part of our business I know said focus here in fiscal 19 diminished Miss in Q4.
It uptick.
Won't have the visibility go going forward, but you could run that anywhere as well what we do on our managed services come along and provide us.
A subscription around the whole thing.
Right into the cloud will provide upgrade services, where the application performance management, we provide all the details services.
And provide you back just one dial tone in one service.
Up for that software. So you can buy the license run anywhere including Hyperscalers.
You could buy a term by it run it anywhere you like or we could wrap all our services around that and it becomes a.
Managed service.
This concludes the question and answer session I would now like to hand, the call back over to Mr. Barron shave for any closing remarks.
All right I'd like to thank everyone for joining us today, and we very much look forward to seeing you at our Investor Day in New York City on September six that concludes 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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