Welcome to the OpenText Corporation Second Quarter Fiscal 2021 Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. Call. After the presentation, there will be an opportunity to ask questions. Call.
I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.
Call. Thank you, operator, and good afternoon, everyone. On the call today is OpenText's Chief Executive Officer and Chief Technology Officer, call, Mark J. Barreneche and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Call.
We have some prepared remarks, which will be followed by a question and answer session. This call will last approximately 60 minutes conference call with a replay available shortly thereafter. I would like to take a moment and direct investors to the Investor Relations section that will supplement our prepared remarks today. The presentation includes information and financials specific to our quarterly results, call, notably our updated quarterly factors on Page 7 as well as a strategic overview. Call.
And now an update on Investor Day. I am pleased to announce that OpenText's executive team will be hosting a virtual Investor Day on Thursday, March call. To register, please visit our Investor Relations website or contact our IR team directly. Call. I would also like to announce that OpenText Management will be participating at the Morgan Stanley Conference on March 1 call.
We look forward to engaging with you in the coming weeks. I will now proceed with a reading of our Safe Harbor statement. Call. Please note that 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 call could differ materially from a conclusion, forecast or projection in the forward looking statements made today.
Call. Certain material factors and assumptions were applied in drawing any such statements. Call. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection call. In the forward looking information as well as risk factors, including in relation to the current global pandemic call that may project future performance results of OpenText are contained in OpenText's recent forms 10 ks call and 10 Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website.
Call. We undertake no obligations to update these forward looking statements unless required to do so by law. Call. In addition, our conference call may include discussions of certain non GAAP financial measures. Reconciliations of any non call.
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. Call. And with that, I am pleased to hand the call over to Mark.
Thank you, Harry, and a good afternoon to everyone and thank you for joining call. I want to open the call with a note of optimism. Over the last year, the world has experienced health, financial, call, social, political and environmental crises. While many of these crises continue call. And the effects are long lasting and have forever changed the way we work, live and love.
Green shoots are emerging all around us. Call. With an accelerating vaccine rollout, the prospects of a global economic recovery appear to be brightening. Today in the U. S, call.
More people have received their first dose of a COVID-nineteen vaccine than cases reported. Economists are increasingly predicting a strong call. Economic recovery in calendar 2021 due to a combination of rebounding demands, rising prices and low inventory levels.
Call. We're also so
much better informed today than we were a year ago. The transformative nature call. And we remain in the early stages of the fastest, deepest and most consequential technology disruption in the history call. Businesses are accelerating their digital capabilities and are placing greater emphasis on trusted global partners, time to call. Modern work, sustainable supply chains, stellar customer experiences and cloud plus edge computing.
Call. What has become clear is that the cloud plus network plus edge are inextricably linked. Call. Our new architecture and platform of cloud additions places OpenText Information Management demonstrably conference call in the middle of important demand conversations for companies of all sizes, large, medium and small. Call.
The previous 4 quarters at OpenText are reflective of the amazing strength and durability of our employees, call. Our company, our business model and the transformative aspects of our products. Over the last year, we have generated record $3,300,000,000 in trailing 12 month revenues, a record $1,100,000,000 in trailing 12 months free cash flows and invested $400,000,000 call. We settled with the IRS. We increased our dividend by 15%.
We announced the share repurchase program. We donated 4,000,000 meals to help with food and security at the end of last year. Call. We've achieved our highest employee engagement scores. We were named a Forbes Top 150 Employer.
Call. We delivered record fiscal 2021 Q2 revenues, which we'll get to in a moment. We introduced our new platform, Cloud Edition. Call. And we're on target to deliver adjusted EBITDA of 37% to 38% this fiscal year, and we are on target call to deliver annual recurring revenues or ARR of 81% to 83%, highlighting 2 key aspects of our business: 1st, call, the predictability of our business and second, we are a cloud company.
We made a statement, call. It was not just words that we would exit the pandemic stronger than we entered. The above results speak to our actions, call. Our progress, amazing employees and our culture. Humbly, these results provide OpenText with momentum and confidence as we enter calendar year 2021 and we are excited about the significant opportunities we can pursue with our cloud additions.
Call. Let me transition to our exceptional Q2. This quarter was highlighted by revenue growth, renewal rates, margin, cash flow call and positive organic ARR growth and reported currency. The team delivered an exceptional quarter. Many of our quarterly metrics are at historic highs.
Call. Let me walk through the results on a year over year basis. Total revenue of $856,000,000 up 11%,
conference call, the highest total revenue in
our history. Cloud revenue was $250,000,000 up 41%, the highest cloud revenue in our history and the largest revenue contributor customer support revenue of $334,000,000 up 6%, the highest CS revenue in our history call. ARR of $685,000,000 up 21%, the highest ARR in our history and at 80% of call. Total revenue, adjusted EBITDA of $361,000,000 or 42 percent adjusted EBITDA margin call and the highest adjusted EBITDA dollars in our history and free cash flows of $275,000,000 up 46%, best Q2 call. Let me provide a few additional comments.
The 41% growth in our cloud business was driven by our Carbonite acquisition, cloud additions, a rebound in our business network volumes and continued momentum in SMBC conference call and Enterprise Content Services. The 6% growth in our support and update business was driven by our customer centric 90 day release cycles call and AI Informed Engagement. We have over $2,000,000,000 in cash and committed liquidity at our disposal call. And our consolidated net leverage ratio has declined to 1.6x this quarter, reflective of the disciplined operations conference call, post acquisition of Carbonite. We continue to generate growth, cash and returns in the right places.
Call. We had many notable customer expansions and wins in Q2. We have a full list in our investor deck. Call. Please give the presentation a read, but let me highlight a few.
MedPro Group, a Berkshire Hathaway company, is a national leader in customized call. Insurance, claims and patient safety and risk solutions. MedPro Group is expanding its OpenText Extreme use call as it continues to modernize enterprise wide digital delivery processes. The Department of Work and Pensions in the U. K, a governmental body responsible for welfare, call.
And child maintenance chose OpenText Enterprise Content Solutions as an integral part of their end to end processing call for shared critical and sensitive content. Ferneri, one of the world's largest global ice cream companies headquartered in the U. K. Call. Edgarden UK expanded their commitment to OpenText B2B managed services and engaged with OpenText to build a service offering that allows them to call dynamically flex their supply chain.
Rivo Health, Minneapolis based provider healthcare solutions for call. Physician practices and ambulatory surgery centers expanded its investment in OpenText Cloud using call. Before I turn to our approach of total growth in December, call. We announced that we closed all past, present and future items related to dispute with the IRS. Call.
As part of the resolution, OpenText will pay $299,000,000 versus the disputed amount of approximately 830 call. While we maintain that our long standing position in this matter was in the right, we believe the settlement to be in the best interest of all call. Let me turn to growth and walk through our total growth strategy, which has 3 fundamental elements: call. Retain, grow and acquire. On retain, we delivered another exceptional quarter with Customer support renewal rates at 94% and non GAAP gross margins of 91.3%.
Call. Our cloud renewal rate, excluding Carbonite, was 96% and our non GAAP gross margins for total cloud call of 66.7 percent and its margin was up 830 basis points year over year. We call. We are seeing the direct benefits of leveraging more automation and automation based on OpenText to Geland and the direct benefits of scaled call. On Gro, we continue to ramp up our investments in products and sales.
We continue to grow our sales coverage call of the Global 10,000 customers and we are expanding our relationships with global partners, RMMs and MSPs. Call. We're on track on increasing our R and D investment in fiscal 2021 to support advancing the most exciting product roadmap in our history conference call with cloud additions. For the balance of fiscal 2021, our adjusted EBITDA margin will begin to reflect those increased investments. Call.
The principles behind our cloud additions include customer choice, run anywhere, number 1 2, conference call. 3, simplification. 5 clouds makes it easier to go to market call and easier to sell. The 4th principle is consumption. Deeper integration of capabilities enables ease of consumption.
Call. Our 5th principle is innovation. Rapid and continuous innovation every 90 days to provide accelerated call. Time to value and increased value for subscription, maintenance and our update services. And the 6th principle is to create new channels, call, such as our new API services to embed OpenText in the next generation of cloud businesses.
Delivering our capabilities at APIs will enable developers to include OpenText and speed their time to market. In October at OpenText World, call. We announced Cloud Edition 20.4, which featured our 5 clouds: Content Cloud, Business Network Cloud, Experience Cloud, Security and Protection cloud and our developer cloud based on our OT2 platform. In the weeks ahead, we'll be turning on cloud additions 21.1, call, which will provide thousands of new facets, features and enhancements. Our software development has always been deeply informed by customer feedback, call.
And here are some highlights of upcoming cloud additions. In the content cloud, we now fully support call. All major hyperscalers, GCP, Azure, AWS, integration to SAP and Salesforce, embedded analytics. Call. And by 21.4, the content cloud will be 100% recreated as a multi tenant SaaS public shared environment running on OT2.
Call. With Cloud Edition 21.4, customers will never have to upgrade again. Call. In the Business Network Cloud, we have added support for ethical supply chains, sustainability and support for the call, Circular Economy, as well as country specific support for invoicing tax and receiving. We now support invoicing tax and receiving in over conference call in 60 countries, enabling global supply chains that are sustainable and support the circular economy.
In the Experience Cloud, call. We are providing superior omnichannel experiences through seamless integration to result in enabling full social commerce and personalization call. Enabled by technology features and a long list of those features from notifications, messaging, document presentment and call. OpenText Magellan is now integrated for machine learning into the Experience Cloud. Call.
In our Security and Protection Cloud, within Bright Cloud Service Intelligence, we have now added cloud access security broker call. This is a key focus on our strategy and our strategy to help enforce data centric security policies and to prevent unwanted interactions. Call. Our threat intelligence products are centered on behavioral analysis, not signatures. In 21.2, we are call.
We are excited about our unified management console for RMMs and MSPs to enable complete integration of Webroot and Carbonite. Call. And the developer cloud, we now have over 25 live services, content service capture, signature, document presentment, call. Intelligent viewer workflow messaging, the list goes on, identity and threat intelligence. Our developer cloud, call.
Go check it out, developer. Opentext.com is expected to continue to organic growth in fiscal 'twenty 2. Call. This new strategic long term initiative for us is to embed our services in the next generation of cloud companies call. And it will add a new channel to go to market.
Delivering our capabilities as APIs will enable developers to include OpenText call and speed 3rd time to market. Our 3rd total growth strategy on acquire. We remain patient, disciplined, value based buyers call with returns based metrics and cash flow as key criteria. Provine is a great example of a growth asset that call. We are confident that we will continue to deliver on our strategic initiatives to create revenue growth and synergies for our cloud based, multichannel call.
Our liquidity, cash flow and balance sheet remain strong. The pipeline is also strong and we will deploy capital when the right opportunity arises. Call. Our total growth strategy of retain, grow and acquire is unique, massively scalable and delivering returns. Call.
Overall, we are a company that remains on offense with the intent of taking share regardless of the economic environment. Let me move on to financial outlook. We enter calendar 2021 with earned confidence. Call. An improving economy coupled with the best product portfolio in our history position us to gain share by capitalizing on the present conference call.
Call. We do well cover the details of our financial outlook for Q3 and fiscal 2021, but let me highlight the core call. We are increasing the investment in our product sales and our people. We have an improved demand outlook and we are raising our revenue growth outlook call today for the remainder of the fiscal year. Cloud revenue growth now to be in the high teens, ARR growth now to be in the high single to low double digit call.
And total revenue growth now to be in the mid single digit, up from constant. Orbotech believes strongly are turning value to shareholders. Call. Today, I'm pleased to announce that the Board of Directors has approved our quarterly dividend of $0.208 per share call for holders of record of March 5, 2021 and a payment date of March 26, 2021. Call.
Let me conclude my remarks where I began on a note of optimism. Today, we are playing offense with an improved outlook call for fiscal 2021. We had an exceptional quarter with record revenue and adjusted EBITDA dollars with ARR growth of 21%, call. Cloud growth of 41% and support growth of 6%. We have a strong balance sheet with a net leverage ratio of 1.6 times and call.
We settled with the IRS and put the matter behind us. Call. Last year's preemptive actions are replaced with energy and growth actions. Secular trends are strong, long lasting and OpenText is at the call. We're in the early innings of an important product cycle with cloud additions.
And our pace of innovation has call. It's never been faster with 90 day release cycles and an aggressive product roadmap. On behalf of OpenText, I would like to thank our shareholders, call. Our loyal customers, our partners and our 14,000 dedicated employees for all contributing to this success. Call.
And I am so proud of the resilience and durability that continues to be demonstrated. Call. We are looking forward to seeing you at our virtual Investor Day on March 11. You can register on OpenText Investor Relations website call or contact our Investor Relations team directly. Investor Day is a special opportunity for investors and analysts
call to gain a direct update from
OpenText leadership team on our strategic progress and future direction. The team is very excited to be with you. It's my pleasure now to turn the call over to Madhu Raghunathan, OpenText's Chief Financial Officer. Madhu, over to you.
Call. Thank you, Mark, and thank you all for joining us today. We had a strong second quarter call and a solid first half of the fiscal year twenty twenty one. Our preemptive responses at the onset of the global call. Our disciplined financial management has allowed us to support key growth initiatives, call maintained the resilience of our business model and this is reflected in our expanded margins and solid cash generation.
Call. I will speak to Q2, Q3 and our quarterly factors, our fiscal 2021 total growth strategy, call. Our fiscal 'twenty one annual target model ranges and our long term aspirations, all outlined in our Q2 investor presentation that is posted on our IR website today. All references will be in the 1,000,000,000 of USD unless noted otherwise and compared to the same period in the prior fiscal year. Call.
So let me start with revenues. Q2 total revenues for the quarter were $855,600,000 up 10.9% call, or up 8.8% on a constant currency basis, including a strong contribution from Cardenite as we completed the 1 year mark in December 2020. Call, there was a favorable FX impact to revenues of 16.2%. The geographical split of total revenues in the quarter call with America 60%, EME at 32% and Asia Pacific 8%. Year to date, call.
Total revenues were CAD1.659 billion, up 13% or up 11.5% on a constant currency basis. Call. Q2 annual recurring revenues were $684,900,000 up 21.5 percent or up 19.5 percent on a conference call. As a percent of total revenues, ARR annual recurring revenue was 80% for the quarter, call, up from 73% in the Q2 fiscal 2020. Here, I would like to highlight that we achieved positive organic call.
Thank you, everyone.
Our first question comes from the line of our
IRR growth during the quarter on a reported basis. Year to date, annual recurring revenues were CAD1.355 billion, call, up 21.7 percent or up 20.4% on a constant currency basis. As a percent of total revenues, call. Year to date ARR was 82%, up from 76% in the 1st 6 months of fiscal 2020. Q2 cloud revenues were particularly strong at 350.5%, up 41.1% or up 39.6% on a constant currency basis.
Call. Our cloud renewal rate excluding Carbonite was approximately 96%. Year to date, cloud revenues were 691.4 call, up 42.4 percent or up 41.5% on a constant currency basis. Q2 customer support revenues were call. Up 6% or up 3.6% on a constant currency basis.
Call. Our customer support renewal rate for Q2 was 94%. Across the business, our renewals performance remained strong. Call. Year to date, customer support revenues were $662,900,000 up 5.7% or up 4.2% in a constant currency basis.
Call. Q2 license revenues were 107.3%, down 22.3% or down 24.6% on a constant currency basis. Call. Year to date license revenues were 175.9%, down 18.6% or down 20.7% on a constant currency basis. Call.
Q2 professional services revenues were 63.4%, down 9% or down 11.4% on a constant currency basis. Call. Year to date, professional services revenues were $128,500,000 down 7.6% or down 10% on a constant currency basis. Call. Tax update.
Before we speak to net income and other related metrics, I want to again call out the IRS settlement we announced in December 22, 2020. Call. The IRS settlement provides finality to this long standing matter, putting it behind us as we move forward, and we believe it to be in the best interest of all stakeholders. Call. The settlement resulted in a charge of approximately $299 to the provision for income taxes.
We expect to make payments to the IRS call of approximately $287,000,000 during the Q3 of fiscal 'twenty one and some associated call. Q2 GAAP net loss was $65,500,000 compared to net income of $107,500,000 in the prior year, call, primarily driven by the tax provision relating to the IRS settlement. Year to date, GAAP net income was 37.9 compared to net income of $181,900,000 in the prior year. Q2 adjusted net income was 260.5 call, up 13.8% or up 11.1% on a constant currency basis. Year to date, adjusted net income was 502.3%, up 25.4 percent or up 22% on a constant currency basis.
Q2 GAAP loss per share diluted was $0.24 call, down to earnings per share diluted of $0.40 Year to date, GAAP earnings per share diluted was $0.14 call, down from $0.67 Q2 non GAAP earnings per share diluted was $0.95 up $0.11 from $0.84 and up 0 point 0 $8 on a constant currency basis. Call. Year to date, non GAAP earnings per share diluted was 1 point 84 dollars up 0.36 conference call from $1.48 and up $0.31 on a constant currency basis. Turning to margins. Call.
GAAP gross margin for the quarter was 70.5%, up 60 basis points. Year to date, GAAP gross margin was 69.8%, call, up 120 basis points. Non GAAP gross margin for the quarter was 77.1%, up 160 basis points. Call. Year to date, non GAAP gross margin was 76.8%, up 240 basis points.
For GAAP gross margins by revenue type, call. Please refer to our Q2 fiscal 2021 10 Q report as I mentioned filed today. Also on a non GAAP basis for the quarter, cloud margin was call, up from 58.4 percent driven by continued improvements in our cloud service delivery and a strong contribution from Carbonite. Call. Year to date, cloud margin was 66.9%, up from 57.8%.
For the quarter call. And year to date, customer support margin was 91.2%, up from 90.7% and reflected continued strong renewal performance. Call. For the quarter, license margin was 96%, down from 97.8%, primarily due to higher third party technology costs. Call.
Similar trends on a year to date basis as well. For the quarter, professional services margin was 27.5%, call, up from 23.5%, reflecting benefits received from lower travel while effectively delivering our solutions on a digital and remote basis. Call. Year to date, professional services margin was 28.4%, up from 22.8%. Please note that our call.
Total operating expenses for Q2 include restoration of compensation and benefits effective December 1, 2020 for all employees. Call. Adjusted EBITDA was $360,800,000 this quarter, up 13.8% or up 10.7% on a constant currency basis. Call. This represents 42.2 percent margin, up from 41.1% in the same quarter last year.
Call. Year to date, adjusted EBITDA was $703,100,000 up 23.1 percent or up 20.2% on a constant currency basis. Call. This represents 42.4 percent margin, up from 38.9% during the 1st 6 months of fiscal 'twenty. Call.
Turning to cash flows, it was consistent and solid performance with operating cash flows of $282,500,000 for the quarter, call, up 36.2 percent and free cash flows of $274,800,000 up 46.5 percent. Call. On a year to date basis, operating cash flows were 560.4%, up 49.8 percent call and free cash flows of 493.4 percent, up 61%. DSO was 47 days compared to 57 days in Q2 fiscal 'twenty. Call.
The year over year reduction of 10 days affects continuous measures to drive operational efficiencies in our working capital framework, particularly call, the call to collect process as well as positive contributions to the integration of CargoDyke. From a balance sheet perspective, we ended the quarter with approximately 1,500,000,000 call in cash given our strong cash flow performance. With the $600,000,000 revolver repayment in October 2020, we now have $750,000,000 undrawn call and fully available, bringing our total liquidity to $2,250,000,000 Our consolidated net leverage ratio is 1.6 times, call, an improvement from 1.82x last quarter. This is a strong place to be, solid execution in the quarter and a balance sheet that positions us well to executed our total growth strategy. Now turning to quarterly factors, total growth strategy and annual target model all available on our investor website.
Call. So first and foremost, let me reiterate that we do view our business as annual and quarters will vary. Long term value is created from sustained annual performance call, and 90 day cycles are way too short to measure. On quarterly factors, for the Q3 fiscal 'twenty one call. And compared to the same period in the prior year, we expect the following inclusive of FX.
First of all, FX tailwind of revenues of 10,000,000 to 15,000,000 call. Total revenue is constant, annual recurring revenue, ARR, constant to slightly up, adjusted EBITDA margin percentage call up 100 basis points to 200 basis points. For our full year fiscal 2021 total growth strategy, our first half of the fiscal year performance has been strong, call, particularly in the context of the global pandemic and we are very pleased to increase our outlook for the remainder of the fiscal year. We now expect the call. The following for our full fiscal year 2021 compared to fiscal year 2020.
High teens growth call. We are confident that we will continue to focus on cloud
revenue compared to our previous target of mid double digit.
Low single digit growth in customer support revenue is consistent conference call. High single to low double digit growth in annual recurring revenue compared to our previous target of high single digit. Call. No changes in license and CX revenue targets, which we see declining, and this is consistent with broader industry trends and its cloud adoption accelerate. Call.
Total revenue moved from constant to low single digits to mid single digit growth in fiscal 2021. Call. New M and A opportunities will remain additive to our model. Our fiscal 2021 annual target model, which includes our operating ranges, remains unchanged. Call.
However, I will highlight a few important points. Annual recurring revenue, ARR, range for fiscal 2021 expected at 81% call to 83% compared to 78.2% in fiscal 2020. Non GAAP gross margin change for fiscal 2021 expected at call to 76% compared to 74.5 percent in fiscal 2020. Adjusted EBITDA margin range for fiscal 2021 expected at 37 call to 38% compared to 36.9% in fiscal 2020. Our long term aspirations remain unchanged, call, targeting adjusted EBITDA margin of 38% to 40% and free cash flow of $900,000,000 to $1,000,000,000 for fiscal 'twenty three, call with a plan to reinvest any margin gains above 40% into additional growth initiatives.
In summary, well done to the OpenText team for delivering a solid Q2 queue and leading the way in digital working. As January 2021 rolled in, the OpenText team brought forward tremendous learnings and resilience call. As we look ahead to the second half of our fiscal year, a very special thank you for your amazing efforts. A thank you to our shareholders, the trust and confidence we greatly value. We look forward to engaging with all of you as part of our investor outreach and conferences and of course at our March 11 Investor Day.
Call. I wish you all continued safety and wellness. I would now like to open the call for questions. Operator?
Thank you. We will now begin the question and answer session. To join the question Call. Our first question comes from Raimo Lenschow of Barclays. Please go ahead.
Hey, congrats from me on a great quarter. Mark, you talked a little bit about the recovery or the green shoots of recovery you see everywhere. Call. And it's great to see the guidance because now it's fully organic what we see for next quarter. If you think about the next few quarters looking out and The guidance you're seeing in the Q4, is there an element of
call. Yes. Thank you for the question. Look, the if I wind back to a year ago, call. Our energy was very much on our preemptive sort of decisions that ultimately strengthened us call.
But if I look at the year ahead and certainly for the remainder of the fiscal year, which is through end of June, call? We see those green shoots. I mean, there are four things that come to mind. The first is modern work is really accelerating, content management, workflow, e signature, projects and collaboration. Call.
2nd is we see this rebound of our business and industries that are seeing an increase, call. Healthcare, retail, a lot of green shoots there for us on the business network. Call. Security has come front of mind post Solar Data Protection and the next generation of call. And then, Remo, you have all the, I think, the secular call.
And then, we're going to be looking at the cloud and the need to have that trusted partner on a global basis. So we feel like very sustained trends coming into the calendar year. And we've had 4 quarters of conference call through the pandemic. And each quarter has been getting sequentially stronger. Call.
So that's part of the reason for a bit more visibility into the fiscal year as we come into the second half. Call. And welcome to your second question.
Yes. Okay. Perfect. And then on the cloud, so we're now we're call. You're talking 21.2 and 21.4 sounds like you're really exciting then when it comes out.
What do you see in terms of customer interest in terms of how they are Kind of migrating over to the cloud. Do you see new workloads going into the cloud and the existing stuff is still call. Kind of staying on premise, do you see the migration starting? What's the momentum that you're seeing there? Thank you.
Call. Yes. Thank you for that. Look, at Investor Day, I plan to go much deeper on the kind of the status of cloud additions. Let me just give you a few examples.
I look at our content cloud and support for modern work. Call. We have new workloads and expanded work going on at the NIH in the U. S. And call.
European Central Bank. On the Experience Cloud, we have a new customer like PG and E and expanded workloads conference call for social commerce at L'Oreal. On the business network side, we're very excited about call. I know we're all very focused on the pandemic and rightfully so, but the greater challenge is really the environment and the circular economy. Call.
So our work in supporting very demonstrable features to support that circular economy with customers like Nestle. Our call. Protection cloud, doing work with Hyatt Thompson Reuters on our security and protection cloud. Call. And I'm really excited about how the developer cloud, everything as a public API is going to contribute to organic growth in fiscal 2022.
So it's all about the cloud additions. I think it's a mixture of taking off cloud current workloads to a private managed service. Call. It's about adding new workloads in our SaaS offerings. It's attracting new customers and also a new market of our API services.
And I plan to go in a lot more detail at Investor Day.
Call. Okay. I'm looking forward to that. Okay. Thank you.
Our next question comes from Stephanie Price of CIBC. Please go ahead. Conference. Good afternoon.
Hi, Stephanie.
Hi. I was hoping you could talk a little bit about which pieces of the cloud kind of drove that outperformance versus prior expectations? Did you see kind of outside growth in Carbonite or CE or Business Networks or how to kind of think about that
call. Yes. I would I'd point to 3 pieces. Call. On the content side, in the Content Cloud, again, for the call.
Reasons I just previously talked about, support for Modern Work. 2nd is the business network call. And the increase in volumes and nice new green shoots in a variety of industries. Call. And Carbonite overall just had a strong quarter from the data protection Carbonite side, Webroot and Threat Intelligence call as well as BrightCloud.
So those are the 3 standouts. Stephanie, I'd point to the Content Cloud, call. Business Network and Carbonite in general.
Okay. That's helpful. And within Carbonite, kind of thinking about the led opportunities here and the cross selling into the enterprise and the extension of the partner network. Just curious where we are in those initiatives or the call. Performance in ParqNet was really more a function of just the existing consumer market kind of driving that sales those sales?
Call.
Yes. There are 3 drivers. The first is just better running the existing business. Call. And it is a unique go to market.
And this is where conference. We sell to, we enable, we deploy to RMMs and MSPs. We don't really we don't We, of course, sell to some SMBs directly. But the vast majority of our business is through RMMs and MSP. Call.
It's a very unique channel. I know others are claiming they invented it. They didn't. That's okay. But our business is through this very unique call.
So 1 growth is just better managing that. 2 is increased innovation. I'm very excited about call. 21.2 in an integrated console, that delivers on the promise of integrating Carbonite and Webroot to move through that channel of R and M in MSRP. The third is uplifting from call.
Kind of upselling the product into the enterprise. And we started to see some green shoots call. I mentioned a few names, TD Securities, Hyatt, Thompson Reuters, Prudential, who call. Or using a mixture of Carbonite Data Protection or BrightCloud. Call.
So those are the three approaches, Stephanie, that we're looking to grow. It's just better managing the platform to RMMs and MSPs. Call. It's 2 accelerating innovation, things like CASB, things like an integrated consult, next generation of threat intelligence, Continuing to focus on behaviors for signatures and then what I call is upscaling the product into the enterprise. Call.
And we've begun to see some green shoots on the enterprise customers I just mentioned.
Great. Thank you very much.
Call. Our next question comes from Paul Steep of Scotia Capital. Please go ahead.
Great, thanks. Mark, maybe you could talk just call. Following up on the Content Cloud driving growth, can you give us a sense of what that multiyear migration cycle might look like? I know that might be call. Taking some of the excitement from the March day, but just in any context of where we are?
And then I have one quick follow-up.
Yes. Call. My team strongly encouraged me to save the gun call. Got it for Investor Day, if you will. But let me say it this way, Paul.
We are in literally the call. Earliest of innings, truly are. We're less than 10% migrated of our installed base conference call into our 5 clouds. So it is still the earliest of innings to conference call. Have our installed base fully on the Cloud Edition architecture and platform.
Call. And it's not just a lift and shift of the platform. We can manage it better. We can manage it at a lower price, We want to bring them to a modern environment. We want to manage the application stack.
We want to be able to expand workloads. We want to be able to bring them to all of information call. So I would just summarize that we're in the literally earliest of innings. We're less than 10% migrated call. Look, Cloud Edition is only going to be in the market just a little over a year.
So it remains the largest the single largest opportunity we have call? It's to migrate our install base.
Great. And then risk of wearing out my welcome call to make customers more or less agnostic about the purchase decision? Thanks folks.
Call. Yes. Thank you, Paul. I think you'll notice I didn't use the word license at all in my script. Call.
And the emphasis is all on cloud. Let me point to a few things. The first is our annual recurring call. We are now seeing revenue, ARR, with 80%. It's all about our call.
Microsoft, IBM, SAP, we are ahead of every one of those call. In terms of our transition to ARR, we're at 80%. We have a call. Our target model is 81% to 83% for the year. When you look at established companies like IBM, Microsoft, Oracle, SAP, we're ahead of every single one of them in where we are as ARR as a percent of our business.
Call. 2nd, I'd point to our support business, which is a support and update business, call. The ability to get security updates, the ability to get rapid new features that are relevant and easy to consume. That business grew 6%, call, as we noted. So our strategy is let customers decide this customer choice of how they want to consume.
Call. I said this many years ago, I am agnostic as to how they want to consume. We are opinionated call. And we've we're just going to grow call. Faster than everything else, as you're seeing.
So customers still have the choice. It's clearly cloud first. Call. ARR is leading and dominating. We're ahead of our peers and we're simply going to grow faster call.
And cloud and ARR versus that transactional side of the business. Thank you.
Call.
Yes. And Paul, if I can, maybe before we get to the last question, I just we don't philosophically believe that call. We should force it because it's still customer choice. And some companies are forcing it, but they're also at a lot lower call. And so it's really the ARR piece that call.
Is really a standout at 80%, not just at OpenText, but when measured to our peers.
Call. Thank you.
Our next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.
Hi, good afternoon. Mark, how would you characterize customer buying behavior in terms of call. Sales cycles, decision processes, deal sizes, is it starting to look a lot more similar to pre pandemic? Or are
we still in kind of
a weird environment in that regard?
Call? I would say it's returning it's not fully back to call. Pre pandemic, but it's a lot less uncertain and call? Bureaucratic than it was maybe in the first half of last year. There is call.
No doubt a greater emphasis. And I think this is new, so it's not pre pandemic or during pandemic. I just think this is new. Call. It is an emphasis on time to value, that there's an immediacy, there's time to value.
Call. And it's also a look to global trusted partners versus so less risk adverse. So it's a good question. Call. Deal sizes, I think, are slightly up.
I think decision cycles are slightly shrunk. I wouldn't say it's call. Fully back to pre pandemic, but it's more there than not. And time to value is certainly emphasized in the majority of our transactions. Call.
And then a question from Madhu. As I look at your guidance and your target model for the year, call.
That would seem to imply a
fair bit of gross margin compression in the second half in professional services and cloud. And so maybe just to clarify, would that be a function of comps being restored at prior levels, an expectation of travel expenses going up or maybe just conservatism on your part?
So So just quickly, as Mark also alluded, we are investing in the second half and we're investing not just putting Medic and Compaq, call, but also in terms of hires and building up for the next year. And from a gross margin perspective that also includes investments in cloud services and customer support as well.
Call. Presumably, maybe to improve capacity, right, if you're running at hot utilization and
seeing you had more capacity, would that be fair?
Call. Yes. Tim, that would be fair as well. Yes. Okay.
Thanks. I'll pass the line. Okay. Thank you.
Call. Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Call. Yes. Thank you. With respect to the shift here to the cloud, I'm just kind of curious, is there an opportunity to kind of create a bit of a step call. In terms of organic growth with that transition here?
Call. Richard, thanks for the question. As we noted in our script, We had in the quarter organic ARR growth on reported currency. And call. I expect to have organic growth in the cloud in the second half of the year.
Call. In terms of a step up, we'll maybe talk more about what that means. But I'm expecting cloud to grow organically, just to say it directly, call? Based on the factors we talked about.
Okay. Yes, I'm just asking because I was
sort of looking at slides 21 and 24 where you highlight your customers and the number of products that they're signed up for. And it seems like they're signing up for more. Call. And I guess the line of question is around as these platforms become more uniform, the ability to sell on that base, I would think should be easier, no, Which is why I'm asking a question, but I may have that.
Yes. Yes. And look, and if I can, I'll point to the principles I talked a little bit about. Call. And there are important principles behind cloud additions.
I think that's partly of what you're noting that call. Once migrated into the OpenText cloud, we have the ability to deploy the features call. And they don't have that friction in the system, right? The more integrated we get, call. Again, the less friction to more modules.
And as we get to more call. Product, the ease of both consumption in new modules. So it's no doubt that call. Cloud additions and running the cloud is going to give us the opportunity because of the integration call to deploy more capabilities and to have customers be able to consume more.
Call. Okay. That makes sense. With respect to acquisitions, I know you talked about sort of one part of your growth strategy. What does that environment call.
And I guess related to that, are you looking to sort of fortify the markets that you're currently in? Or would you kind of look at it expanding in Newmark's call. Sort of like what you did with Carbonite and Security?
Yes. Well, let me take it as an opportunity. I'll answer the question directly, but I'm going to take it as an opportunity to highlight how we believe we create value. Call? Number 1, these are co number 1, number 1, number 1 organic growth call.
And that's top of the list. And as we look into the remainder of the second half of the call. Fiscal year and the calendar year, we're clearly emphasizing organic growth today and also the step up in our outlook. Call. 2 of number 1 is margin.
Call. And we've just been on a stellar track to continue to become more efficient, more productive as a company. And the third way the third number one is capital, capital deployment and capital efficiency. Call. We're very focused on the capital we've deployed.
Getting full value for Carbonite, getting full value for Liaison. Documentum wasn't that long ago. Call. And the Documentum puts us right in the middle of modern work for a lot of companies. Call.
And then there's new capital deployment. Now on the new capital deployment, which was I think part of the basis of your question, is we're going to remain a value buyer. Call. We have the management and leadership bandwidth. We have a net debt ratio of 1.6, approaching call.
Sort of recent lows, if you will. And I'm very happy with the markets we're in today. So call. I'm not looking to create a new market, Richard, but rather kind of gaining share in what we have.
Call. Okay. And just one last one related to acquisitions. Is your comfort level on leverage ratio,
call. I think it
was in the mid-3s, if I don't if I recall, but I'm not sure what it is today. Is it still around there?
Our net call. Leverage ratio is 1.6 today. And as we noted, we've chronicled historically call? That would be comfortable. Ideally, we're at 3, but we'll go above 3 if we need to call and then rapidly decrease that.
And I'll point again to Carbonite call, as well as Documentum where we rapidly delevered. Call. Look, we 3 is where just I think of it simply that, if the world goes really bad, like they'll cut off my debt in 3 years. Call. That's why I thought of a 3x ratio.
It's a relatively conservative ratio. Our covenants allow us to go higher than that, but we like operating around 3. We're call. Well below it. And if we need to go above 3%, we won't be bashful of the right asset.
But it will come with a rapid deleverage plan. Call. And as we've demonstrated, we can do it and have done it with Carbonite and Documentum.
Call.
Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.
Thanks very much and good afternoon. Just wanted to hone in to one product area in call. Which is e signature, it seems like that is probably one of the products that became strong adoption in this call. Now how do you see it within the large enterprise deals? Like is it bundled in there?
Or can you sell it as an incremental product offering? And call. The reason I bring it up is some of your competitors are doing quite well selling signatures, digital signatures. So should we expect similar growth? Or are you seeing similar growth
call. Yes, Walt, thank you for the question. We're excited about it and we sell it independently. Conference. We bought the source code to a company about a year ago, call.
And we created a product about 1.5 years ago, we created a product and a service. Call. And it's now fully integrated to Content Services and it's now a standalone product. Call. So call.
We expect it it is contributing and we're fully able to sell it as an independent module. And And it is an important part of modern work, part of workflow, part of collaboration, project management and ultimately signatures. Call. I'll highlight one customer, fully live. We're doing tens of thousands of signatures conference call.
The government of Ontario and who are fully live on our e signature product.
Call. This relates to the e signatures, but with the market, call. It seems like a lot of the growth is coming from SMB. It seems like there's other product categories as you look at like call. File sharing and whatnot where the growth has been driven by SMBs.
With the launch of your 21.4 products, call. The multi tenant SaaS on to the cloud, does that potentially open you up, open up Intexa to going direct in terms of addressing the SMB market?
Call. We still have with all our progress, we still have much call. We bring e signature to the enterprise. We haven't brought e signature to SMB. Call.
So our e signature success is through our enterprise sales force. This is one of the reasons we really love Carbonite because call. We see a lot of these solutions that are built both to scale up into the enterprise call and scale laterally into SMB. And this part of our great long term growth prospect is to be able to get that call. Multi channel way to market really humming.
So we now have our product like e signature for the enterprise, call. But we haven't brought it into the SMB world yet. So I mean I appreciate your comment, but it just highlights call. Why we brought on Carbonite and the opportunity for many of our key solutions. And it's one of the things that call.
As part of our strategic direction, it's able to bring product simultaneously to the enterprise and SMB. And we have a lot of learning to do there call. And lots of opportunity.
Okay. Thanks for taking my question.
Call. This concludes the question and answer session. I will now hand the call back over to Mr. Barreneche for closing remarks.
All right. Well, thank you very much. Call. We're obviously very excited about Q2 and playing offense in our improved outlook for fiscal 2021. Call.
We hope to see everyone at our virtual Investor Day on March 11. Please register on our website or contact Investor Relations. Call. The team is very excited to spend time with you to talk to provide updates on our strategic progress and our future direction. Thank you for joining us today.
Call. This concludes today's conference call. You may disconnect your lines.