Welcome to the OpenText Corporation Third Quarter Fiscal 2019 Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Greg Secord, Vice President of Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. On the call today is OpenText Chief Executive Officer and Chief Technology Officer, Mark J. Barreneche and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, which will be followed by a question and answer session. The call will last approximately 60 minutes with a replay available shortly thereafter.
I'd like to take a moment to direct investors to the Investor Relations section of our website, investors. Opentext.com, where we have posted 2 presentations that will supplement our prepared remarks today. The first is our strategic overview, which is titled OpenText Investor Presentation. The second, titled Q3 Financial and Business Results, includes information and financials specific to our quarterly results, notably our updated quarterly factors, which are on Page 8. In May June, OpenText Management is looking forward to meeting with investors in Canada and United States.
Please feel free to reach to me or the IR team directly for more information. And now I'd like to tell you about some exciting investor events coming up in the next few months. OpenText will be participating in the CIBC Technology Conference in Toronto on Tuesday, May 14 with Mark presenting as the launch keynote that day. OpenText is also pleased to invite institutional investors and financial analysts to attend our USES conference, OpenText Enterprise World on Tuesday, July 9, taking place at the Metro Toronto Convention Centre in Toronto. Note, this event takes place during quiet periods, so we will not offer an investor presentation or update on the company's performance or strategy.
The conference will offer an incredible opportunity for investors and financial analysts to learn more about OpenText and the company's latest innovations in Enterprise Information Management. It's a one stop opportunity to research the company, full conference access, providing a great environment for open dialogue with our customers and partners on-site. Please contact investors. Opentext.com or the IR team directly and we'll give you more information and our SVP for the event. In addition, we'll be holding a Capital Markets Day for investors in the morning of Friday, September 6th in New York.
This event will be our annual investor update, featuring strategic presentations from key members of our executive leadership team. Please save the date in your calendars, and we'll provide more details during our next earnings call. And with that, I'll proceed to reading of our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of 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 conclusion. 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 OpenText are contained in OpenText's recent forms 10 ks and 10 Q, as well as in our press release that was distributed earlier this afternoon, which of course may be found on our website. We undertake no obligation to update these forward looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non GAAP financial measures. Reconciliations of any non GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website.
And with that, I'll hand the call over to Mark.
Thank you, Greg, and hello, everyone, and I appreciate you joining for our fiscal 2019 Q3 call. Q3 is a continuation of our total growth strategy. Total revenues are up 7.7 percent to $738,000,000 annual recurring revenue or ARR is up 7.8 percent to $562,000,000 Cloud is up 16% to $243,000,000 all in constant currency. Also, adjusted EBITDA is up 320 basis points to 36.4 percent and operating cash flow is up 6% to $286,000,000 By all accounts, this is a solid quarter and customers are responding well to our Enterprise Information Management products or EIM, to our enterprise ready cloud and to our vision of the intelligent and connected enterprise. Our Enterprise World Europe and Asia events this quarter underscore all of this, with over 2,000 attendees, 500 partners, 100 sessions and 60 exhibitors.
Our revenue growth was driven by demand within our core offerings of content services and business networks and the emerging importance of our security and AI products. Demand the demand was both cloud and off cloud. Our margin expansion was driven by additional scale and efficiencies in our cloud and support businesses as well as product mix. Our cloud margin expanded 160 basis points year over year. As we look longer term, there continues to be ample opportunities to expand our margin.
We take the approach that the best run companies keep getting better year over year and we plan to keep improving and expanding. Year to date, our adjusted EBITDA is 38.5 percent already entering our fiscal 2021 aspirational range of 38 percent to 40%. We ended the quarter with $765,000,000 in cash and a net debt to adjusted EBITDA ratio of 1.7 times. This is the strongest level in 8 quarters and we have ample M and A capacity. Given this incredible execution, progress and outlook, we are raising our quarterly dividend by 15% today from $0.15.18 to $0.1746 per share.
6 years ago, we started our dividend program. Our 1st year dividend was 71,000,000 Our last 4 quarter dividends totaled $163,000,000 and we have returned to shareholders a total of $667,000,000 to date. Our capital allocation strategy continues to target returning 20% of our trailing 12 month operating cash flows to shareholders via our dividend program. Please note that going forward, we plan to more naturally align our annual dividend review with our annual results earning call. So that means our next annual dividend review will be during our Q4 fiscal 2020 call, not during our Q3 fiscal 2020 earnings call.
We'll remind everyone as we get closer to the date. We think that alignment to our annual calendar is a better way to do a dividend review. The OpenText leadership team is world class. They executed very well within the quarter, while also onboarding Liaison and Catalyst. And to note, both acquisitions are on target to be on the operating OpenText operating model and be fully integrated within the 1st 12 months.
It has also been 8 quarters since we acquired the ECD Documentum division from Dell EMC. Let's reflect on our incredible progress. We're now number 1 in Content Services, our core market with a $15,000,000,000 total addressable market, TAM, delivered double digit cloud growth, stellar margin 38.5 percent adjusted EBITDA year to date, dollars 647,000,000 OCF year to date, ample M and A capacity. We've rapidly delevered and have returned to our pre acquisition net debt to adjusted EBITDA levels. I noted earlier, we're currently at 1.7 times.
And through time, we have now returned $667,000,000 in cash dividends and growing far more than our $600,000,000 equity offering in December 2016. We delivered these results by putting in action the OpenText Business System. There are 5 key wins I'd like to highlight from the quarter as they reflect our strategy and our continued focus as an EIM software company. Tata Steel is a global provider of iron and steel generating approximately $200,000,000,000 in revenues. Tata will be leveraging the OpenText business network to digitize their supply chains.
It is a large and complex supply chain of sourcing, subcontractors, engineers, manufacturers, buying buyers and sellers. Norton Rose Fulbright is a global law firm of over 4,000 professionals and approximately $2,000,000,000 in revenues. Norton Rose will be leveraging our legal tech software to provide advanced analytics and machine learning for legal review and discovery of critical evidence. NCT Data is a multinational system integration company with 118,000 employees and approximately $19,000,000,000 in revenues. NTT DATA will be leveraging our content services platform for its clients worldwide.
The European Parliament is extremely important in today's world as the binding policy party for EU policy, governance and law reflecting 40 languages, hundreds of parliamentary members and over 11,000 employees. The European Parliament is standardizing on OpenText Content Services and our information platform. Canada is among the top 10 economies of the world, $1,800,000,000,000 in annual commerce, 400,000 government employees, a GCEV in country and the home both physically and culturally to OpenText. We are proud to announce that we have won the next generation digital platform for the Government of Canada. These Q3 wins highlight our strategy execution around the Global 10,000 or G10 are the world's largest companies, typically those greater than $2,000,000,000 in revenues as well as the world's largest governments and organizations.
This is the marquee market or EIM in organic growth. To date, we're only 1 third penetrated in the G10 and we can more than double OpenText in the coming years by focusing on and connecting the G10ks to our information platform. Let me also comment on our professional services. We run and operate one of the industry's most effective and profitable PS businesses. Over the last year, we've partnered more with global system integrators.
We have discontinued low margin contracts we inherited from acquisitions and more work is becoming standardized and moving into the OpenText cloud. Within Q3, we delivered $71,000,000 of revenues at 21% margin. You should expect the same levels of revenue here in Q4. Finally, let me provide a brief update on our IRS matter. The IRS matter is following a standard IRS process and we are now entering the appeals phase.
As the matter has progressed and we begin to enter the next phase, time has strengthened our resolve. We remain steadfast in our position that the IRS is wrong and we are vigorously defending our position. Let me transition my remarks to fiscal 2019 and the annual nature of our business. We plan on an annual basis. We measure ourselves annually.
Our recurring revenue is just that annual or ARR. We typically deliver large product releases annually and our customers budget annually while taking while thinking over multi year periods. We're an annual business and running our business on an annual cycle allows us to make better long term strategic and operational decisions centered on value creation. Quarters will vary, any low single digit quarterly variance is not meaningful in the context of our annual business. I'm excited about the growing basis of our annual recurring revenues.
In fiscal 2009 10 years ago, fiscal 2009, our annual recurring revenues was $405,000,000 We have grown ARR every year over the last 10 years, including this year. Our ARR this fiscal year is on track to be greater than 2,000,000,000 dollars representing 400% growth over the last 10 years. We're also on target for our fiscal 2019 business plan and we're on target for our fiscal 2019 target ranges and our fiscal 2021 aspirations. On our next earnings call, we'll recap fiscal 2019 and highlight fiscal 2020 targets as well as provide updated 3 year aspirations that will then include fiscal 2022. On our current annual trend, fiscal 2019 will be a strong year for ARR, cloud revenues, adjusted EBITDA and adjusted EBITDA dollars and cash flow.
Next, let us go through our Q4 quarterly factors. As a reminder, our quarterly factors are those key items for you to factor into your short term financial modeling. The items are important, but tactical and these items do not affect the long term nature of our business. Our Q4 factors include the following. Global recession concerns continue.
We all read the same newspapers, see the same concern around trade wars, tariffs, goods and wage inflation, prolonged Brexit uncertainty, GDPR and data regulation concerns. Secondly, the U. S. Dollar continues to be strong against the euro, pound, Canadian dollar and yen. Expect a Q4 negative revenue impact of approximately USD 20,000,000 due to FX when compared to the prior year.
3rd, our business is annual, as I said earlier, and quarters will vary. Given strong execution in Q3, do not expect the historical sequential revenue uplift in Q4 Q4 compared to Q3. Expect PS revenues to be consistent sequentially and Q3 revenues were 71,000,000 dollars Also Q4 is the last quarter of the fiscal year. We expect operating expenses to be up quarter over quarter of 4% to 6% given end of year expenses. And though Q4 is a seasonally higher quarter for adjusted EBITDA, it is historically lower than Q2.
And consistent with last quarter, we expect Liaison to negatively impact adjusted EBITDA by approximately 100 bps in Q4. Looking beyond the short term now, my 4th topic is to talk about the longer term, the next 12 to 24 months and how we plan on competing, growing and creating value. Let me step back and look at the big picture. Our business is incredibly strong. We have market leading retention rates in our support business, powerful product releases and incredible customer loyalty.
Our core business is tremendous and is about 75% recurring and coming from highly predictable revenue sources. This will grow stronger as more workloads and customers move to the OpenText Cloud, as more digital transformation happens, as security requirements grow and the market transitions to Industry 4.0 and customers rely not just on automation, but AI and machine learning as well. Our flagship offering of Release 16 will have enhancement PAC 6 or EP6 delivered to customers this month. Release 16 EP6 has intelligent capture, continuous endpoint monitoring, wider integrations to all major ERP and CRM providers. Our Cloud Suite 19.2 includes a new Identity and Access Management platform, application to application integration and new track and trace capabilities.
OT2 has a large update for industry applications in financial services, pharma, legal and retail. We're already managing over 1,500,000 trading partners, 30,000,000 endpoints and 60,000,000 identities, all in the OpenText cloud. We built a comprehensive horizontal market leading information platform for digital transformation. Over the last 5 years via the OpenText Business System, we have deployed $4,500,000,000 in capital and $1,300,000,000 in R and D creating our intelligent information platform. We will continue to run our OpenText Business System playbook.
We'll continue to acquire strategically to then integrate and then to innovate and deepen and strengthen our intelligent information platform for customers. We are now on the other side of an inflection point, an important milestone where we can self fund our core M and A, High margin and effective tax rate, low CapEx and strong cash flows has put us into this new and powerful zone of self funding core M and A. The world's most trusted companies trust OpenText to transform into Industry 4.0. Let me wrap up my prepared remarks. Q3 is a continuation of our total growth strategy, growth from acquisitions and growth from organic execution.
It was a solid Q3 and we're on plan for fiscal 2019. The OpenText Cloud remains our greatest opportunity. Our enterprise cloud strategy is scaling into a $1,000,000,000 business. Our annual recurring businesses will be north of $2,000,000,000 this fiscal year and our adjusted EBITDA year to date is already in our fiscal 2021 aspirational range of 38% to 40%. We are well on track to a record fiscal year for annual operating cash flow and a return of capital.
Since the inception of our dividend program, we have returned to shareholders $667,000,000 and given our confident outlook, as we mentioned earlier, we are raising our annual dividend by 15%. We are the market leader in both of our core markets of content services and business networks. Our roadmap has never been stronger with additions like OT2, intelligent capture, new IAM and liaison application to application integration. Our total addressable market is $100,000,000,000 We have a strong balance sheet and getting stronger with ample M and A capacity deployed on the right targets at the right ROIC. Our M and A pipeline is active.
Our R and D pipeline is strong. I'm sure I'll see many of you before our Global Enterprise World event. I hope you can make the Toronto event July 9. Sir Tim Berners Lee, the inventor of the worldwide web will be joining me at Enterprise World and Sir Tim will be outlining a compelling vision of what's next over the World Wide Web. We look forward to our very bright future and thank you for the support of OpenText.
It's my pleasure to hand the call over to our CFO, Madhu. Madhu?
Thank you, Mark, and hello and thank you all for joining us today. Q3 results strongly reflect our collective efforts to maintain upper quartile operational performance, including integration work on 2 acquisitions. The results show consistent and significant improvements over last year across all key metrics. Now turning to details of our quarterly and year to date results and similar to prior quarters, my references will be in 1,000,000 of USD and compared to the same period in the prior fiscal year. As you will see from our results, the impact of foreign exchange was significant and broad across all lines of revenue at $19,000,000 during the quarter and $31,000,000 year to date given the strength of the USD since the start of our fiscal 2019.
Total revenues for the quarter were 719,000,000 dollars up 4.9 percent or up 7.7% on a constant currency basis. As we continue to look at our business on an annual basis, year to date, total revenues were $2,100,000,000 up 2.9% or up 4.5% on a constant currency basis. The geographical split of revenues in the quarter was Americas 61%, EMEA 30% and APJ 9%. Annual recurring revenues were $549,000,000 for the quarter, up 5.4% or up 7.8% on a constant currency basis. Year to date, annual recurring revenues were $1,600,000,000 up 4.7% from last year or up 6% on a constant currency basis.
Annual recurring revenues as a percentage of total revenues remained solid at 76.4% and 75.4%, respectively, for the quarter year to date. Our cloud revenues were particularly strong in the quarter at $239,000,000 up 14.1 percent or up 16.1% on a constant currency basis. We also generated 63,800,000 dollars in new MCV, up compared to $52,700,000 in Q3 last year. Year to date cloud revenues were $666,000,000 up 9% from last year or up 10% on a constant currency basis. Cloud renewals remain in the mid-90s range.
Our customer support revenues were $311,000,000 down 0.5 percent or up 2.3% on a constant currency basis. Year to date customer support revenues were $933,000,000 up 1.8% from last year or up 3.3% on a constant currency basis. Our customer support renewal rate was consistent with prior quarters and prior years at approximately 91%. Our license revenues were $99,000,000 up 17.4 percent or up 22.2 percent on a constant currency basis. Year to date license revenues were $308,000,000 up 3.6% from last year or up 5.9% on a constant currency basis.
Our professional service revenues were 71,000,000 dollars down 11.6 percent or down 8.4% on a constant currency basis. Year to date, professional service revenues were $215,000,000 down 9.3% from last year or down 7.1% on a constant currency basis. Turning to the details of our margin performance in Q3. GAAP gross margin for the quarter was 67%, up 2 10 basis points over the same period last year. Our adjusted gross margin for the quarter was 73%, up 140 basis points over the same quarter last year and primarily driven by scale and product mix.
Cloud was 57%, up from 55% last year. Customer support was 90%, up from 89% last year. Our license margin was 97%, up from 96% last year and professional services margin was 21%, up from 20% last year. FX had a negative impact on adjusted gross margin in the quarter by approximately $14,000,000 Our adjusted EBITDA was $262,000,000 this quarter, up 15% year over year. Adjusted EBITDA margin was 36.4 percent, an increase of 3 20 basis points compared to 33.2% in the prior fiscal year and driven by our deep operating lens into the business as well as the restructuring activities we first announced in our Q1 call.
Year to date, adjusted EBITDA was $816,000,000 up 10.5% compared to the same period last year. Adjusted EBITDA margin year to date was 38.5%, an increase of 2 70 basis points compared to 35 0.8% in the same period last year. GAAP net income for the quarter was $73,000,000 or $0.27 per share on a diluted basis, up from $59,000,000 or $0.22 per share for the same period last year. Year to date, GAAP net income was 214,000,000 dollars or $0.79 per share on a diluted basis, up from $181,000,000 or $0.68 per share for the same period last year. Our adjusted net income in the quarter was $173,000,000 up 18.6% year over year or up 21.2% on a constant currency basis.
Year to date adjusted net income was $550,000,000 up 12% compared to the same period last year or up 12.5% on a constant currency basis. Our adjusted earnings per share for the quarter was $0.64 on a diluted basis, up 18.5 percent from $0.54 per share for the same period last year. Year to date, our adjusted earnings per share was $2.04 up 10.9% from $1.84 for the same period last year. Our operating cash flows for the quarter were 286,000,000 dollars up 5.7% year over year. Year to date operating cash flows were $647,000,000 up 28.3% from the same period last year.
And turning to the balance sheet, we had $765,000,000 in cash, net of the $70,000,000 payment for Catalyst. Our consolidated net leverage ratio at 1.7 times is well within our external debt covenant ratio of 4 times and provides us with meaningful flexibility to execute on our total growth strategy. In the Q3, DSO was 60 days and compared to 67 days in the same quarter last year. We achieved record quarterly collections in the quarter. And overall, a huge applause to the OpenText teams for achieving such outstanding cash flow results while integrating 2 acquisitions in the quarter.
We continue to learn from and optimize our cash management framework. On dividend, as Mark indicated in his remarks, we are very pleased to be raising our quarterly dividend by 15% today, up from $0.158 to $0.176 per share. Our dividend program continues to be a very important component of our capital allocation strategy. And now for perspectives on our operating model. As Mark outlined, we remain on track to our fiscal 2019 target model, which as a reminder is included in our investor presentation on our IR website.
So let me summarize and reiterate the quarterly factors that we anticipate for our fiscal Q4. Q3 was negatively impacted by FX of $19,000,000 As we look at where the rates are today, as well as geographical level components of our business, we expect FX headwind in Q4 of approximately $20,000,000 Given strong execution in Q3, do not expect historical sequential uplift in Q4 compared to Q3. PS revenues in Q4 to remain constant sequentially and Q3 PS revenues were $71,000,000 At the last quarter of our fiscal year in Q4, we expect operating expenses to be up quarter over quarter in the range of 4% to 6% and given end of year expenses. With respect to adjusted EBITDA, Q4 is a seasonally higher quarter, although historically lower than Q2. And Liaison is expected to negatively impact adjusted EBITDA by approximately 100 basis points in Q4.
It is important to incorporate these quarterly factors as you model up for Q4. Note that Liaison and Catalyst remain on target to be on our operating model and to be fully integrated in the 1st 12 months. On the interest expenses, they remain as noted in our fiscal 2019 target model of $144,000,000 to 149,000,000 dollars and our adjusted tax rate remains at 14%. So turning to our long term targets, as Mark mentioned, with year to date adjusted EBITDA margin at 38 0.5% and year to date operating cash flows at $647,000,000 we are strongly on our way to adjusted EBITDA margin in fiscal 2021 of 38% to 40% and operating cash flows target of $1,000,000,000 annually as we exit fiscal 2021. On our next earnings call, we look forward to recapping fiscal 2019, sharing highlights of our expectations for fiscal 2020 and provide updated 3 year aspirations to include 2022.
At the start of the year, we introduced our communication framework and quarterly factors to help you model OpenText in a way that is closely aligned to how we see our business. And within that framework, there are 2 metrics at the end of each fiscal year that we will provide to you on a historical basis: annual organic growth and return on invested capital or ROIC. We will update you on both of these annual metrics during our next call. So before I conclude, I am really excited on behalf of Mark and the management team to welcome Harry Blount to OpenText. Harry has joined our team this week as Senior Vice President and Head of Investor Relations.
Harry brings decades of broad experiences and will oversee all aspects of our global Investor Relations strategy with the continued support and leadership of Greg Secord. Greg has served OpenText extremely well and with the addition of Harry's leadership, we're excited and confident that the enhanced Investor Relations team will help drive several important initiatives for us. So Harry, it will be great if you can share a few words.
Thank you. And thank you
to Mark, Madhu and Greg. I'm very excited to join the team and be part of the next phase of the company's growth. OpenText has built a strong leadership position in Enterprise Information Management driven by strong execution, financial discipline and our total growth strategy. I look forward to meeting many of you in the coming weeks and the very bright future ahead. Thank you, Madhu.
Thank you, Harry, and welcome again. So in summary, our Q3 results continued progress over the long term with you, our shareholders, whose trust and confidence we greatly value. During May June, we plan to engage with our investors and analysts through conferences and 1 on 1 meetings in Canada and the United States. Please do connect with Greg Secord for more information. So at this time, I would like to open the call for your questions.
Operator?
Thank you. We will now begin the question and answer session. Our first question comes from Philip Huang of Barclays.
Hi, thanks. Good afternoon. A couple of quick ones for me. First, I think maybe a question from Madhu on the strong license revenue. I was wondering if you could elaborate a little bit on that just given that it's seasonally light quarter.
Just based on your comments around the quarterly factors, I wanted to make sure I understood it correctly so that it was mainly driven by timing or pull forward of deals. I was just wondering if there was if it was at all driven by perhaps larger deal sizes or any other factors that you'd point out?
Phil, it's Mark here. I'll probably take the first one.
Hi, Mark.
And on the quarterly factors, Madhu Yes. Yes, hello. Madhu can certainly speak a little more deeply to the quarterly factors. We had a strong quarter in both cloud and off cloud and it was driven by competing very effectively against IBM. There is a new enterprise software landscape forming.
So we've always been agnostic as we transition to the cloud and transition to a recurring revenue focus, we are agnostic to how customers purchase, whether it be a license, a subscription, a managed service, other options in our cloud. So we're not calling out any larger deals. Q3 was continuation of our total growth strategy, both organically and acquisition. But I will note, we are competing very effectively in what I call the new enterprise software landscape that has a shrinking IBM presence in it.
Got you.
Thank you, Mark. And do you want to expand on your question on the quarterly factors so that I
Yes. No, just based on the comments around the sequential fiscal Q3 to Q4, not because of the strong execution. I was just trying to, I guess, piece together the puzzle whether it was driven by just a pull forward of deals into fiscal Q3 and that's why we're not seeing the historical bump into Q4 or was the strength driven by other factors that you would also point out? I think Mark answered part of the question on not calling out larger deal sizes, but I was wondering if there were any other factors that drove the strong license revenue this quarter.
Right. So Mark, I think addressed the license revenue. I would just reiterate just when you look at Q4 revenue, right, there are three factors. One is the FX and we are looking at where we sit today at about $20,000,000 impact to Q4. And back to the overall strong execution in Q3 license and the cloud, it's important to not expect the same historical sequential uplift in Q4.
And of course, professional services for all the reasons outlined, we do expect a constant PS revenues between Q3 and Q4.
I think the only thing
I would
add to Madhu's statement, if I can, is back to the remarks in the prepared remarks, we're an annual business, right? And any given quarter might vary a little here or there, but we're very focused on the annual nature of the business. And again, Philip, to the question, we're not calling out any big deals. We competed second, we competed very effective we're competing very effectively on what I call the new enterprise software landscape. We're competing effectively against those incumbents like IBM and others and we've got a strong outlook.
Got it. No, that's very helpful. And then just on the quickly on the global recessions concerns, I know it's a very similar wording that you put in, in the last quarterly factors as well. I was just wondering if you could give us an update on any visibility on potential impact to your pipeline. I know you mentioned that there wasn't any that you've noted in the last quarter.
So I was wondering what your thoughts are for an update on that comment.
Yes. We're keeping it in our quarterly factors. We don't see a change yet to the directory of our business. But I'll just continue to note, you don't know where Brexit still is going to land. There are some there are headline news around growth in Europe plateauing or shrinking slightly.
Typically what you would see is either the close dates moving out, deal size shrinking, more approvals coming into place. We're not seeing any of those statistical factors in our pipeline. But I think it's healthy to kind of continue to call out a headline kind of bullet in this category.
That's very helpful. Thanks very much.
Thank you. Thank you.
Our next question comes from Richard Tse of National Bank Financial.
Yes. Thank you. So I'm attending a conference this week and the theme of this event has largely been this explosion of data. It seems to be still a fairly big pay point for a lot of enterprises. I'm kind of just wondering in your role, I think on the technology side as well, what you see today as sort of your biggest challenges from your customers when it comes to data?
Richard, thanks for the question. I think I'll put my CTO hat on for a moment, a little more of a CTO question. Now I think back 10 years ago, I remember the headline, mobile eats the world. I think back a few years ago and we're all software companies, right? And maybe the headline this year or next year is for all data companies.
And how can each company unlock their data and monetize excuse me, leverage the data to make them smarter, a more effective competitor in the market or to use their data or data exhaust to go out into the market and go sell. And I think back over the last 10 years and ERP has really provided a process advantage. I think over the next 10 years, I look at EIM, we're here to provide the information advantage. So I think the biggest challenge right now when I look into the enterprise landscape is taking an inventory of the data. Is it in the right format?
And do I have the right tools to kind of unlock that data exhaust? I think the greatest challenge right now is I think everyone gets it, they understand it, the landscape is shifting from process automation to leveraging the data. So we see trends like platform consolidation, master data management, getting data into usable format, picking the right algorithms, right, to make yourself better or can you then get to a next step to sell your data, in the right way for that information advantage. So I think the and then of course is it secure, is it governed, does it meet the right privacy. I think Richard it's a great actual question and those are some of the immediate things that I see.
And I think we sit in a great place to help take advantage of it.
Yes. It sounds like you are. And I guess the context of my question is that when you look at products that you have like Magellan, for instance, do you think that we're in a position that your enterprise customers are currently evaluating it and we could see this potential that you kind of get a real material increase in those products? And also, I guess, what is the traction been like from Magellan lately?
Yes. I think there are 2 things. The first is Microsoft is a wide horizontal company, right? You mean you don't have the pharma version of Word, right? Or the paper and pulp version of Excel, right?
They are a wide horizontal platform. OpenText is a wide horizontal platform. And we want to get into the Global 10,000 and be the standard for the horizontal information platform. We want their supply chain, cash management, content services. We want to be the standard for that intelligent and information core of that wide horizontal platform.
And that is the largest opportunity in front of us to keep driving that type of penetration. On top of that, we're going to continue to deliver vertical applications. OT2 is coming to market with healthcare, financial services, legal tech applications. And then another pillar on top of that for a long term strategy is the AI and analytics with Magellan and of course securing that platform as well. So it's still early days with Magellan.
It is contributing to the P and L and it's a very strategic piece for us in the future.
Okay, great. And just one last one for me with respect to acquisitions. Have you changed the comfort level in terms of what your leverage ratio is? I forgot what it was last quarter, but if you just remind us that would be great. Thank you.
Yes. Thanks, Richard. No, we still believe in the same ratios that we think up to 3 times leverage is a comfortable zone. I think we all can take some confidence in looking back over the last 2 years. There's one thing for our management team to say what they believe in and then deliver data points of performance.
We said we would be comfortable going over that slightly in the short term and then rapidly delevering if we needed to. So we went up to about 3.3 times when we completed the Documentum EMC acquisition. And here we are 8 quarters later sitting at 1.7x of our net debt to adjusted EBITDA ratio. So our philosophy is consistent, hasn't changed of going up to 3 times. And I think we can take confidence that if we do need to go above it, we would rapidly delever just as we have shown.
That's great. Thank you.
Thank you as well.
Our next question comes from Walter Pritchard of Citi Research.
Hi, thanks. Couple of questions here. Mark, just on the IBM side, I'm wondering if you could call out which areas of the business are you seeing that? I mean, obviously, not a new trend, but they took the move to divest some assets this quarter. I'm curious which areas of the business are you seeing in particular that resonate positively in your sales pipeline and activity?
Yes. Thanks, Walter. I'd say 3 areas. The first is filing that. We've called out a few times where they have not been innovating as rapidly.
And the enterprise landscape is just changing. Excuse me, let me correct myself, has changed. And there really isn't a new set of enterprise software companies from Slack, ServiceNow, putting ourselves in this category as well As companies look to get that information advantage versus a process advantage, we've turned our platform into a cloud ready platform containerized. We have a SaaS version with OT2 and we can really come we have deep application integration, deep SaaS integration, integration to SAP, to Oracle, to Salesforce and we're just competing very effectively against a FileNet. The second area is IBM Sterling Commerce, which is their commerce platform.
And the commerce platform has evolved. It's evolved into an Identity and Access Management platform. We acquired Covisint Technologies and been able to bring in and bring to the version 2 and version 3, their Identity and Access platform. And I think we're up to almost or well over 10,000,000 IoT devices connected into our network. Our acquisition of Liaison has put us into the market of any to any integration.
I hate to throw out examples like this, but I'll use an example of MuleSoft, right, where we now have a library of 10,000 canonical connectors where we can tie ERP to ERP, cloud to cloud, process to process within our business network. So, we're competing very effectively against IBM and Sterling Commerce. And lastly, the IBM Cloud is sort of a clouds are not a place to go to just get a cost advantage. It needs to be a platform of innovation. And so I look at our cloud today and us being able to provide this full EIM stack.
And yes, we can provide a cost advantage and security, but we can also now provide it as a platform for innovation for the next generation of workloads. So these are 3 areas who are competing effectively: content services, commerce platform and the cloud.
Got it. And then maybe Mark for you as you brought this up on the call around, you said you sort of a new era and other side of inflection where you can self fund M and A, but then still mentioning 3x leverage. Is the takeaway here just as you get larger, you can do bigger deals? Or should we expect, I don't think if you're talking about self funding, you may be looking to take on less leverage going forward. Help us interpret what you were saying there?
Yes. I don't know if it's all of the above or look, it's always the right deal at the right price with the right ROIC. And it's really a very simple mantra for us. And we're our pipeline is active, as I like to say in small, medium and large categories. It's got to be the right company at the right price and the right ROIC.
Our model is different than other companies. We look to acquire, integrate and innovate. We've delivered a we're delivering a horizontal platform. So pipeline active, we have ample capacity. In general, we're able we think as a management philosophy up to 3 times, leverage is a good ratio.
To say it very simply, the world will go sideways. I like to pay my debt off in 3 years. I mean, that's the philosophy of a ratio. And if we take our cash flows and just very simply take out interest, take out dividend, take out CapEx, that puts us in a place to be able to self fund, self perpetuate our core M and A.
Okay, great. Thank you.
Our next question comes from Howard Leung of Veritas Investment Research.
Thanks. Thank you and thanks for taking my question. I had a few of them. The first one I'll start with is for the gross cloud margins. They're kind of at the 56%, 57% level now for a few years.
Can you maybe give some comments or some color around what could potentially drive it higher? And what you see is the result? Is why it's kind of stayed at that level?
Howard, welcome and thanks for the question. Mark here. So, we delivered 56.5 percent cloud margin in the quarter, up 150 basis points year over year. And we're in last quarter, we were just under 60% in cloud margin. Look, we're targeting medium term to be in the low 60s for our cloud margin.
And as we've onboarded new acquisitions like Liaison and Catalyst and making investments to grow in the cloud, cloud was $243,000,000 in constant currency this quarter up 16%. Margins have dipped a little bit below 60%. But all for the right reason, right? To grow the cloud, to onboard a couple of great acquisitions. And note the margin is up year over year 100 and 50 basis points.
And our target range for the year is between 57% and 59% and we're smack in that range. So it's right where we want it to be.
Okay. No, that's very helpful. And then the other one I wanted to touch on was on license revenues. It looks like for the quarter based on the MD and A there was a $70,000,000 impact from the 60 five 66 conversion. And I think that was just kind of acceleration of some of the license revenue licenses upfront.
Just want to find out for that $70,000,000 how many licenses were sold that contributed to the $17,000,000
dollars Howard, a very detailed question. We let me start sort of at conceptual piece, all right. So 1st and foremost for us, it's how it's all about how a customer wants to buy. And we don't go into the Global 10,000 and say you must buy this one way. It's all around how a customer wants to procure and deploy.
So if they want to do that in our cloud, off cloud license or in somebody else's cloud, we're all in, right? For us, it's all about the annual recurring revenue, adjusted EBITDA and cash flow. So, I'll just start at the principal level. It's all about how a customer wants to procure. 2nd, the 606 business, it's all new business for us, right?
These are brand new wins. These are new contracts. It's all new business for us. And 3rd, there is no alternative. It is GAAP and it is the standard.
There is no alternative for us. So I don't know if that answers your question or if there's another level to the question that you have.
I guess that I mean I completely understand it's not an accounting choice at all. It's just a change in the policy. I was just wondering for these new licenses, which you've signed for the quarter, if not in any way, I guess, pulling forward from future quarters, it's just kind of new business that you guys want?
No. New business, new wins.
Okay.
Very good wins.
Yes. Yes. No, it looks very strong this quarter. So that's good. Thanks guys.
That was really helpful.
Thank you, Howard. Appreciate it.
Howard, thank you as well. It's my big deal. Thank you.
No problem.
Our next question comes from Stephanie Price of CIBC World Markets.
Good afternoon. I just wanted to touch on services revenue for a minute. Mark, I
was hoping you can give us a bit of
an update on your thoughts on that services business and maybe go into a bit more detail the puts and takes that you mentioned prepared remarks?
Yes, sounds great. Thanks, Steph and thanks for the question. It's we run a very I think of our PS business sort of in 3 pillars. Pillar 1 is always accelerated time to value for the customer. And we run one of the best PS organizations inside a software company.
Our PS organization does an amazing job deploying our software, getting accelerated time to value. I'd put our organization up against anyone's any day. 2nd is, can you do that profitably? And I look back to companies like BMC, CA, other large enterprise companies who would run their PS businesses at no to negative margin. And that's just not in our philosophy.
It's not a loss leader. It's a profit center because there is value that we're delivering for customers. Regardless of our revenue levels, we've been able to deliver margins around 20%, which is in the zone of the world's best run PS businesses. The 3rd sort of pillar, if you will, is the quantum of the revenue. And we've taken as a strategy that we're going to bring on more global system implementers like NNTT, like TCS, Accenture, Deloitte, others.
And they're going to go out and put us into their framework. And we think we can grow the more strategic revenues of cloud by having that partnership. We're going to give up some PS revenues to do that and that's perfectly okay. 2nd is as more work becomes standard in the cloud, right, and it's configured, it's self-service, you need less of the PS organization and that's fine as well. And then thirdly, we acquire businesses that don't quite have our philosophy of how to run a PS business and we need to wean ourselves off that and complete deployments and then move on.
So I mean those are the three reasons why PS is down slightly. Other revenues are up and it's all for the right strategic reasons.
Great. Thanks. And then
in terms of your slide deck, the slide on selected customer and product expansion seems to be growing here. Hoping you can talk about cross sell opportunities in the installed base and whether they were a factor in the outperformance in the quarter?
Yes, we have thanks for calling it out. We have in our investor deck, I'm just reaching for it here, Slide 13, 14, 50, where we have selected customer and product expansions, where we're kind of showing businesses like Coca Cola, Fujitsu, GM, Nestle we're running multiple pillows for us. Look, we it is a key strategy for us is to have a strong portfolio of solutions to provide. I'd go back to some of my earlier comments around how we've expanded our offering and companies like IBM has not in content services and or the business network. I'd say the strength in the quarter was again I'll go back to our 2 core markets content services and business network and just keep widening the capabilities we're deploying.
Great. Thank you very much.
Thanks, Steph. And I look forward to joining CIBC on May 14.
Yes. Thank you as well.
Our next question comes from Thanos Moschopoulos of BMO Capital Markets.
Hi, good afternoon. With respect to your Q4 outlook, I'm just a little unclear on your commentary. So just to be very clear, are you suggesting there will be no quarter on quarter revenue uptick? Or are you suggesting that there may be a quarterly revenue uptick, but that it will be a more modest uptick than we've seen historically for Q4?
There will be we expect an uptick, just not as seasonally strong.
Okay, great. Yes, that's what I thought. I just want to confirm that point.
Yes. Thanks for the direct question.
In terms of cash flows, your cash flow was obviously up year over year as you highlighted, although your cash conversion of EBITDA was lower than for Q3 last year. Was that just because of a working capital drag from the 2 recent tuck in acquisitions?
Yes, Thanos, this is Madhu. I would say yes. And so the billings and the deferred revenue this quarter were also much higher, right? So that also contributed to the conversion, but the conversion is still very high, keep in mind.
Okay, fair enough. And just one last one for me. Was all the Liaison Catalyst revenue in the cloud services line or was it sprinkled in
some other lines as well?
It's predominantly the cloud services line.
Okay. Thanks. I'll pass the line.
Thank you as well.
Yes. Thanks, Aaron.
Our next question comes from Paul Treiber of RBC Capital Markets.
Thanks so much and good afternoon.
In regard to the license, I
want Hi, guys.
Hi, there. I don't want to beat a dead horse on it, but you mentioned in the fall net, I remember before when they were public, they had some very significant deals in the 8 figure range. Just hoping if you can put some bounds around the potential size of deals, if you can confirm there weren't any deals as large as in the figures?
FileNet, they've been private a long time. They've been private a long time. Thanos, we're not calling out any larger deals in the quarter. So I appreciate the commentary. It's again, we're competing very effectively in our 2 core markets and we're not here to call out any larger transaction.
Okay. That's fair. Just turning to Documentum or EMC ECD, when you mentioned that earlier,
how does the are you seeing documenting
customers migrate the latest versions of your products at a similar rate to the core OpenText customers and also consider your cloud at a similar rate as your core business?
Yes, Paul, thanks for the question. I could just say off the top of my head, I'm not seeing any real difference in a rate of upgrade or migration. I'll have to go back and kind of check the data, but I'm pretty data sensitive, but I don't nothing sort of jumping out at me as a different rate. In terms of embracing the cloud, this is a strong upsell opportunity for us. And customers are looking, I used this phrase a little earlier, a platform for innovation.
And our cloud allows our customers to get the latest and greatest software, to get a fuller stack of software, to remove the burdens of security and compliance and management uptime and really free their brains up to innovate. So yes, the ability to upsell managed services, to upsell SaaS workloads is a strong opportunity for us in the Documentum base. Okay. Thanks for taking my question. Thank you, Paul.
Our next question comes from Stephen Lee of Raymond James.
Hey guys. I have a question for Madhu. Yes, so Madhu, given 6 6
Thank you for the question. I'd go back to what Mark said earlier. Growth is growth and new business is new business and all of this is new business, right? So when we look at the Q4, we are looking at new businesses. And what I'd probably point out is and look at the $739,000,000 of revenue in constant currency.
And even if you took the $21,000,000 that we shared as sort of adjustment 605 to 606, it's $718,000,000 And if you do apples to apples, it was $686,000,000 in Q3 of last year, but $698,000,000 for $605,000,000 adjusted. We still grew from 6.98% to 7.18%. And I would encourage that's how you think about growth.
Okay. Thank you.
You're very welcome and thank you as well.
This concludes the question and answer session. I would like to turn the conference back over to Mr. Barreneche for any closing remarks.
All right. Thank you, Madhu. Thank you, Greg. Thank you, Harry. And thank you, everyone, for joining our call today.
I'm excited about the quarter, the direction of the business, our leadership in content services in the business network, the OpenText Cloud And you can obviously hear in my voice, I'm excited about the future. Hope to see you at the CIBC Conference in May in Enterprise World in July. And have a great rest of the week. Thank you for joining the call.
This concludes today's conference call. You may disconnect your lines.