Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation conference call. As a reminder, all participants are on a 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 and the one on your touch-tone phone. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. I would now like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Thank you. Please go ahead.
Thank you, and good morning, everyone. With me on the call today is Open Text Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea, and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks followed by a question and answer session. This call will last approximately 30 minutes, with a replay available shortly thereafter. I'd like to take a moment and direct investors to the investor relations section of our website, investors.opentext.com, where we posted a presentation that will be referred to during this call. Now I'll proceed with the reading of our safe harbor statement. Please note during the course of this conference call, we may make statements relating to future performance of Open Text, as well as in relation to today's acquisition announcement 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 today. Certain material factors and assumptions were applied in drawing any such statement. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information, as well as risk factors that may project future performance results of Open Text are contained in Open Text recent Forms 10-K and 10-Q, as well as in our press release that was distributed earlier this morning, 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 and 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. With that, I'll hand the call over to Mark.
Thank you, Harry, good morning, we have exciting news to share with you on our announcement today to acquire Carbonite. We're also providing, as Harry mentioned, an investor deck that can be found on investors.opentext.com and believe you'll find it informative. Let me get right into it. Today, we announced a definitive agreement to acquire Carbonite. Founded in 2005, Carbonite is a market leader in cloud-based data protection and endpoint security to small and medium-sized companies, or SMB, including prosumers, that is professional users. They've created an amazing business, scaled cloud service operations, and a superior channel distribution organization. Data protection and endpoint security are strategic industrial markets that are relevant to all size customers: enterprise, SMB, and prosumers. The total addressable market or TAM for these end markets is over $15 billion and growing mid to high single-digit.
Cloud, security, information protection, and endpoints are all strategic EIM considerations. We've included these areas in our strategic TAM and market analysis since our acquisition of Guidance Software and including our most recent investor day materials. Open Text is already providing technologies directly in or adjacent to these areas. Guidance Software, for example, for endpoint detection and response and digital forensics. Core for collaboration, share, and data retention and protection, and InfoArchive for data backup management and governance in the enterprise. Carbonite is the first vendor to combine data protection and endpoint security, and together with Open Text, will be in a market-leading position for total endpoint protection that also includes digital forensics and endpoint response. Let me speak a little to Open Text as a consolidator and our commitment to deploy capital.
The acquisition represents our ninth cloud acquisition, including EasyLink, GXS, Recommind, ANX, Covisint, Hightail, Catalyst, Liaison, and as announced today, Carbonite. This places Open Text as a leading cloud consolidator. All assets combined will be approaching two exabytes under management, 100 million endpoints, millions of subscribers, and cloud operations at hyperscale. Scale matters in the cloud. Let me speak about the transaction and the terms of the agreement, which are a continuation of our total growth strategy. Total purchase price of approximately $1.42 billion inclusive of Carbonite cash and debt, or $23 per share via a tender offer. Carbonite published their Q3 September results this morning with Q3 revenue of $126 million and adjusted EBITDA of 30%, trailing 12-month revenue of $405 million, and trailing 12-month adjusted EBITDA of 29%.
On the revenue side, their trailing 12-month TTM does not include the full effect of Webroot revenue, as Carbonite has only been including Webroot financials for two full quarters. On adjusted EBITDA, we are onboarding a business that is operating well above where ECD or GXS was at the time of acquisitions. This is approximately 2.8 times trailing 12-month revenues when you annualize for Webroot. On a reported TTM basis, excluding the full annual revenue contribution from Webroot, the ratio would be 3.5 times. We don't think that's the right way to look at it. Carbonite has strong recurring annual revenues or ARR. Approximately 90% of the business is recurring. We are modeling low single-digit organic growth once the business is integrated. There is no equity consideration, no dilution, no transition services agreement in this transaction. We'll be using our existing balance sheet cash and existing revolver.
You can expect significant expansion of cloud revenues, cloud margin, adjusted EBITDA dollars, and cash flows in fiscal 2021, our first full year of operations. We expect these strong cash flows to continue to grow our dividend. Our net leverage ratio is currently under 2x. Carbonite will bring the ratio to a modest 2.5x. Within 4-6 quarters, we expect our ratio to be back below 2x. We can also expect the transaction to be accretive in fiscal 2021, and we expect a combination of growth, cash flows, and invested capital to deliver high teens ROIC on a standalone basis. The transaction is expected to close within 90 days from today. Let me also highlight the strength of the operating team that has the proven experience to integrate acquisitions and create sustaining value. In 2013, we acquired GXS for $1.16 billion.
In 2016, we acquired ECD for $1.62 billion. These businesses have been successfully integrated into Open Text and are creating sustained value. We look forward to applying the Open Text business system methods and disciplines to Carbonite, and we're targeting to have Carbonite on our operating model within the first 18 months. That is, no later than the end of fiscal 2021. We have strong confidence in our approach and our playbook and our experience from GXS Documentum and our many other cloud acquisitions to deliver upon the expectations. I hope these summary comments are helpful. As per our normal practice, financial projections and target models will be provided upon the closing of the transaction, including any updates to our FY 2020 target model and longer-term aspirations. Few additional comments on Carbonite. 1,500 employees and world-class talent in security, data protection, and cloud operations at scale. Their talent is amazing.
14,000 premium managed security providers or MSPs, VARs, and OEMs. This distribution channel is a superior channel. I have seen many of them through my 30 years of experience. 300,000 small and medium-sized businesses, seven million end users, 50 million endpoints being protected, 250 petabytes plus under management, over 200 patents. Carbonite is mainly a U.S. business with key locations in Boston, Massachusetts, Lewiston, Maine, Salt Lake City, Broomfield, Colorado, and San Diego, California. There is also a good-sized team in Mississauga, Ontario, Canada. Some key non-North American locations include Dublin, Derby, U.K., Sydney, Australia, Tokyo, Japan, and Paris, France. In summary, today's announcement meets all the criteria for a strategic acquisition by Open Text. Carbonite is a market leader in a strategic end market.
Endpoints are mission-critical. We like the large customer install base of SMBs, MSPs, and prosumers, as well as their superior distribution organization. The transaction is financially compelling. We expect significant cloud revenue growth, cloud margin expansion, adjusted EBITDA dollar expansion, cash flow expansion, dividend growth to be accretive in fiscal 2021 and funded from our balance sheet and existing facilities. Lastly, I like the focus. Our enterprise team can focus on the enterprise. SMB prosumer can focus on SMB prosumer as we leverage this new route to market. We have many existing Open Text products that will benefit from this focus and new route. The more we can connect a customer to Open Text products, the more we win.
I'd like to conclude my remarks with a thank you to the brave men, women, and families who have honored Canada and the United States with their service and sacrifice on this Remembrance and Veterans Day. We remember and say thank you on this November 11th. With that, let me open the call to your questions. Operator, if you could do that, we'd appreciate it. Thank you.
Thank you. We will now be beginning the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone to join the question queue. You will hear a tone acknowledging your request. If you are using a speakerphone, please ensure to lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. Our first question is coming from Raimo Lenschow of Barclays. Please go ahead.
Hey, congrats on the deal. Quick question, Mark, on you've been an enterprise player and now this is very much getting into the SMB space. Can you talk a little bit about the motivation there? You mentioned some of that call, but then I'm also wondering about what's the kind of cross-sell opportunities?
Yeah. Well, you broke up a little bit there on your cellphone. Let me try to take this. First is, we see Carbonite relevant in all channels. We're going to go to market three ways, enterprise, SMB, and prosumer. Professional users, professional consumers, and I like to call them prosumers. So we see Carbonite relevant in all three areas. Second is, there's Open Text product that's gonna benefit from the Carbonite channel. This is an impressive, superior channel, organization that they've built over the last 14 years. It's world-class, I've seen many of them. For example, us being able to bring our Guidance Software into their SMB distribution. Being able to bring Core, our Box competitor product into the SMB channel. The largest Box use case is data protection. Some other, our Hightail offering as well.
I think it's quite a nice relationship where number 1, we see EIM relevant three ways, enterprise, SMB, prosumer. We see the ability to bring data protection and security into the enterprise, and we see the opportunity to bring endpoint detection and response Guidance Software and Core into the SMB channel. We think it's quite a nice relationship. Let me also talk about our business network endpoints. We have posted 2 million trading partners and 100 million end users on our business network, doing commerce all day long. We have an opportunity to go out to an additional 100 million end users, who are connecting or doing a transaction on our cloud, and we can bring the Carbonite capability. We think there's just amazing cross-pollination, if you will, between the two businesses.
Okay, perfect. That makes total sense. Thank you.
Thank you. Our next question is coming from Stephanie Price of CIBC. Please go ahead.
Good morning.
Morning, Steph.
talk a bit about the integration in terms of difficulty, in terms of what the biggest challenge might be. You mentioned margins in a 30% range, you also mentioned kind of an 18-month timeline onto the Open Text model.
Yeah. Stephanie, thanks for the question. I like using sports analogies, and I think every day you gotta come into the office as if it's opening day. You take nothing for granted. As I look at integrating Carbonite into Open Text, we got a lot of experience from larger scale, GXS and Documentum, and the business is mainly U.S., so that's a real pro for us. Real positive that's mainly a U.S. business, so we don't have the big complexities of international. It's a pure purchase, so we don't have the complexities of a TSA or asset carve-out. They have very solid systems. There's some work to do between Webroot and Carbonite. It's a pretty straight line integration given it's U.S., it's a business directly into our scaled systems. We gave 18 months versus our usual 12 months to give us a little buffer.
Many companies don't get full synergies until three years out. The Open Text model is very accelerated at 12 months. We gave ourselves a little more time with 18 months, and would hope to beat it.
Okay, perfect. Just one last quick one from me. Can you comment on any tax implications? You mentioned it's mainly U.S. Should the tax rate remain relatively unchanged?
Do you want me to take them Mark?
Sure.
Yeah. Stephanie, thanks for the question. We will need to do more work. Having said that, I will say if you look at Carbonite's public disclosures, their effective tax rates have been less than 20%, barring some one-time adjustments and valuation allowances. As you know, our starting point with the Canadian statutory rate is about 26.5%. I think combining the two, we definitely expect to get tax efficiencies over, say, one to three periods.
Great. Thank you.
Thank you. Our next question is coming from Thanos Moschopoulos of BMO Capital. Please go ahead.
Hi. Good morning. Mark, can you clarify what Carbonite's mix was as far as prosumer versus SMB versus enterprise?
Sure. We're looking at, let's call it less than 10% enterprise, closer to 50% SMB, maybe a little closer to 40% consumer prosumer.
Okay. That's helpful. Then, as far as direct versus indirect sales, what was their focus?
Mainly through the channel, a vast majority through their MSPs, VARs, and OEMs. Mainly a channel business.
Are there any channels that you need to maybe de-emphasize or exit? Such as OEM, for example, is that something you're going to look to leverage?
Absolutely. I'm just going to the investor deck for a moment. Let me get to the page quickly. Just bear with me for a moment. It's in the appendix on slide 16. Their BrightCloud Threat Intelligence, for example, is a new service around threat hunting and threat intelligence. There are some very impressive OEMs within that business. Names you would recognize the top 10 technology companies in the world, top 10 clouds in the world, which we're part of. This is an OEM business, the BrightCloud Threat Intelligence, and it's a real gem in the portfolio, I think highlights the OEM opportunity. We just love the Superior channel. We're looking to help them get on a global platform with OpenText, really actually bring up the OEM piece of the business and give them more product from OpenText.
Great. Finally from Madhu, is it too early to talk about the level of deferred revenue write-down we should anticipate?
If we could come back to that at the time we close, I think that'll be the best thing for us. Of course, Carbonite has its own disclosures on their deferred revenue, but when we acquire, it's going to be our PPA that's going forward. I would say if you can wait until the closing when we come back, it'd be great.
Okay, thanks. Congrats on the deal. I'll pass the line back.
Thank you.
Yep. Thanks, Thanos.
Thank you. Our next question is coming from Paul Treiber of RBC Capital Markets. Please go ahead.
Thanks so much. Good morning. Just hoping if you can elaborate on potential revenue synergies or cross-sell synergies with Open Text, particularly bringing Carbonite's portfolio to Open Text's enterprise customer base and then also into the international markets.
Sounds great, Paul. Thanks for joining the call. I look at the largest ecosystem we have inside of OpenText, and that starts with our business network and the end users, where we partner with Nestlé and FedEx and Starbucks on our supply to Citibank, and how through that business network, we get to an endpoint. We have close to 100 million end users in our ecosystem. We're definitely going to leverage and be able to target those 100 million end users with the Carbonite offering. That's the simplest way to talk about Carbonite synergies into OpenText. Carbonite is mainly a U.S. business. We have scaled operations in relevant markets, U.K., Germany, France, Japan, Australia, Singapore. These are direct markets where we can leverage our presence, our marketing, our operation of multi-thousand employees and customers to help them connect Carbonite into the enterprise.
That's the second synergy. I think those are the two largest ones.
With Webroot, obviously Carbonite has a bigger piece of the endpoint protection market. Can you just refresh your thoughts on endpoint protection, and how you see that as being, I guess, as synergies or strategic with or an integral part of enterprise information management and how you see it evolving going forward?
Yeah. We look at all the information that kind of rests on an endpoint. We think that information needs to be secured and managed, whether it's in the cloud or on an endpoint. Look, if there's no endpoint, there's no cloud. If there's no cloud, there's no endpoint. It's endpoints and deep servers out in the cloud. As I like to say, own your edge. You got to own your edge. That edge is gonna be a mobile device. It's gonna be the Internet of Things. It's gonna be a desktop, a laptop, a cell phone, an industrial IoT. Own your edge. It's edge on in the age of cloud. We think the management of information, whether on the edge or back at corporate, is really important for enterprise information management.
Webroot plus Carbonite plus Guidance is the most robust endpoint protection platform that we can see in the marketplace, covering both the endpoint detection, response, digital forensic, security, and data protection. All that together, the term is all of that combined is EPP, endpoint protection. That's why we think it's an important part of EIM.
Great. Thanks. Taking my questions.
Great.
Thank you. Our next question is coming from Paul Steep of Scotia Capital. Please go ahead.
Great morning. Mark, maybe just on that last question, can you talk about how we should think about maybe the investment behind more aggressively going after the EPP market now that you combine that? You obviously get the feedback from Guidance in just having an EDR product. What that opportunity looks like, and whether that's maybe one of the gating factors relating to the longer than normal integration timeframe, or secondly, if there's another assumption or reason for sort of maybe the slightly longer lead time there. Thanks.
Just a little bit about our history, right? We started as a search company, went into content management, went into customer experience management, which is all new types of information. We then expanded into eDiscovery and other functional areas. We brought in GXS, ANX, Covisint, and Liaison, where recognized information needs to be exchanged between organizations, but the information still needs to be managed. Same thing with the endpoint. It is very clear in the age of cloud that the endpoint is a strategic place to have software and capability. On your edge, whether it's an industrial IoT all the way through a smart device, a laptop. It's a pivotal platform to have software on. We learned a lot when we bought Ivanti Software, and you rightfully called it, the market is called EDR, enterprise detection and response. It's a larger market.
It's gone into data protection, security protection, threat hunting, threat analysis, and we got a whole conference on this, starting tonight by the way, in Vegas, called Enfuse. We think we have the right level investment with Carbonite. I think when we look at Guidance plus Webroot plus Carbonite, this is a scaled business, and I think the right level of investment to have a winning platform on and to meet all our financial objectives. We gave ourselves a little more room to your second question. We typically say 12 months, but we outlined 18 months from today. If it takes us 90 days to close, you're only down to 15 months. Which is a little longer than 12 months. By the end of fiscal 2021, this is a very large cloud operation.
250 petabytes plus, millions of end users, high security environment, cloud operations, I just want to give us a little more time to perfectly integrate it into our combined cloud operations at scale. It's not just people, it's also physical things that we need to integrate. I'm just giving ourselves a little more time.
Fair enough. I guess the last one on it, since it is actually a material part of Carbonite's business, what do you think the opportunity looks like to move on the data backup side towards more of the traditional Open Text base and offer that through the data centers and the network? Thanks.
Oh, I think it's significant. I think the opportunity is significant. Allow me that the number one use case for Box is data protection. The opportunity to go to all our enterprise users and say, you can protect that endpoint with Core, with Carbonite, is quite significant. It's a very exciting use case that we're going to have front and center.
Thank you.
Thank you.
Thank you. Our next question is coming from Steven Li of Raymond James. Please go ahead.
Thank you. Hey, Mark. Just to clarify, you said accretive in fiscal 2021. It's also accretive in 2020, right? Even if you get just one quarter of Carbonite?
We haven't given any specifics on the current fiscal year, fiscal 2020. We will when we close. We expect to close in 90 days. If it's a little sooner or a little later, the timing's going to matter. Definitely accretive in fiscal 2021. We'll get our financial projections out for fiscal 2020 once we close. Remember, there'll be earnings accretion, there'll be no dilution, there's no TSA. As we typically do, allow us to close, and once we close, we'll get our projections out. Given it's going to close in the second half of our fiscal year, we want to be precise on the targets we provide. Be mindful, great cash flow, no dilution, earnings accretion. I mentioned fiscal 2021 because it's not subject to the timing of the close, and we can see very clearly the first full year model, if that's helpful.
Okay. Yep. No, that makes sense. Just Carbonite's organic growth recently, excluding acquisition, is that something that attracted you to Carbonite?
A lot of things attracted us. As I said in my prepared remarks, we're expecting to grow Carbonite low single digit in our model. This is an area we're coming into the acquisition with a strong model for growth.
Thank you. Our next question is coming from Richard Tse of National Bank. Please go ahead.
Thank you. Mark, I was wondering if you could actually give us a sense of the penetration rates of similar security products into your existing base today?
Yeah, Richard, thanks for the question. We put security front and center only about two years ago when we acquired Guidance. It's a low penetration rate for us. It's still early days, right? Part of what we like about Carbonite is their very impressive and superior route to market, their channel. That's going to help our base, if you will. I don't have a precise percent. Maybe it's around 10% penetration, but it's a relatively low penetration, thus high opportunity set for us.
I guess related to that question, given that they've been focusing on SMB, do you have to do anything with the product set to actually scale it into your enterprise base?
In our estimation, the Core service scales into the enterprise. When you have 7 million end users and 20, 50 petabytes of data in your service, that's upscale. I'm sure there are some capabilities to make it easier to manage 10,000 users in bulk, if you will. We have some work to do. It's more around polishing to bring to the enterprise versus sort of agility, scalability, reliability.
Ladies and gentlemen, this brings us to the end of the question and answer session. I will now turn the call back over to Mr. Barrenechea for closing comments.
All right. Well, I know we put a lot of information out this morning in a short amount of time. I thank everyone for joining the call on relatively short notice. We got a big week this week at Enfuse, right? This is our security conference, timing couldn't be better on today's announcement. I hope you join us in Vegas for Enfuse. We have Director Clapper giving our final keynote on Thursday to talk about the importance of cybersecurity. I thank you for joining today's call. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for participating, and have a pleasant day.