Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Third Quarter Fiscal 2018 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 like to now 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's Vice Chair, Chief Executive Officer and Chief Technology Officer, Mark J. Berenshek 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 and direct investors to the Investor Relations section of our website, investors. Opentext.com, where material relating to today's call is posted. I'd also like to highlight that Infuze's 2018 OpenText's Annual Security Digital Investigations and eDiscovery Conference will be taking place in Las Vegas from May 21 to 24. During the conference, IR will host a product teach in lunch session for investors on Wednesday, May 23 with Mark Barreneche and Louis Massoud, our Head of Engineering. For those unable to attend on-site, presentation materials and audio webcast from the discussion will be made available on the Investor Relations section of our website.
I'd also like to remind everyone that Enterprise World OpenText Annual Users Conference will be taking place in Toronto again this year during the 2nd week of July. As part of that conference, we'll be holding OpenText Investor Day on Tuesday, July 10. For further details or to register to attend, please contact Investor Relations. We look forward to seeing you there. And now I'll proceed with the reading of our Safe Harbor statement.
Please note that during the course of this conference call, we may make statements relating to the future performance of 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 Form 10 ks and recent 10 Q, as well as in our press release that was distributed earlier this afternoon, each of which may be found on our website. We undertake no obligation to update these forward looking statements unless required to do so by law.
In addition, our conference call may include discussions of certain non GAAP financial measures. Reconciliations of all non GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and in other materials, which are available on our website. And with that, I'll hand the call over to Mark.
Thank you, Greg. And let me begin by welcoming Madhu Ranganathan to OpenText. I'm excited to have Madhu join the company to shape and scale the future of our operations and organization. Welcome, Madhu.
Thank you, Mark.
As you'll hear, OpenText could not be in a better position to deliver on its total growth strategy. We deliver growth through acquisitions. We deliver growth through our innovations and organic efforts. We deliver growth through expanding our sales distribution, both direct and indirect, all with an emphasis on expanding recurring revenues and operating cash flows. This is total growth.
In Q3, we delivered $686,000,000 in total revenues, up 16% year over year. Our annual recurring revenues were a record high of $521,000,000 up 18% year over year. Our cloud revenues were $209,000,000 up 18% year over year, and we had positive organic growth within the quarter. We generated a record $271,000,000 of operating cash flow, up 73% year over year. And let me also note on operating cash flow, it is up 62% quarter over quarter, up 43% from our previous high fiscal 2016 Q3 and up 50% year to date.
As some of you have written about, Q3 is a softer quarter for the company due to our seasonality, coupled with a tougher year over year compare. Some of you have also written about the great potential of OpenText being a cash flow centered business. As you see in our results today, OpenText delivered record recurring revenues and record operating cash flow. We also ended the quarter with $605,000,000 of cash on hand and a net debt to adjusted EBITDA ratio of 2.1x, down from 3x 12 months ago, positioning us right where we expected to be after the completed integration of our ECD acquisition. OpenText is a global business and geographically diversified.
You see this reflected in our customers, revenues, workforce and our global cloud platform. We're approaching 2,000 customers running their business in the OpenText Cloud located in the U. S, Western Europe, U. K, Canada, Japan, Asia, Brazil and more. We own and operate our own cloud platform, and this is a sign of more promising things to come.
The modern CEO agenda includes digital transformation, outsourced infrastructure into the cloud, customer experience centric organization, new supply chains, security, information insight and more. OpenText is leaning into all of these agenda items. Our customers view of our business over 10 year our customers view our business over a 10 year period at least as they make decade long technology decisions to support that CEO agenda. The nature of work and workforces are changing. CEOs deploying new digital core technologies that are the foundational pillars for the future.
Our market strategy is centered on the information company that incorporates these forward looking technologies. We estimate that market size to be $100,000,000,000 This momentum translates into all aspects of OpenText as we view our business financially on an annual basis and beyond rather than on a quarterly basis. When viewing OpenText year to date, our total revenues are up 27% from $1,630,000,000 to $2,060,000,000 and our annual recurring revenue is up 26% from $1,220,000,000 to 1 point $53,000,000,000 Our license business is up 21% from $246,000,000 to $298,000,000 and these results show our balance of total growth. OpenText has created incredible scale in our cloud business and year to date our cloud business has delivered $611,000,000 of revenues and is up 17%, and this is the right result. We are a hybrid business delivering both on premise and cloud Licenses, of course, remain important for our customers, and we expect licenses to grow, but the long term and faster growth will be within our cloud and recurring revenues.
We're also making key investments in our cloud for GDPR, security and more automation. And again, over time, we expect our cloud margin to expand as well, and this is factored into our targets in our fiscal 'twenty one aspirations. More recurring revenues will generate longer term cash flows and even more predictability in our business model. Madhu will take you through the complete results, but let me spend a few moments and look beyond the quarterly or year to date numbers. We have delivered significant sustained profitable growth by implementing our unique business system that we have formalized into the OpenText Business System.
This is important to highlight as it centers on our culture and how we work. Please look at the investor presentation posted earlier on our website. You will see that our business system starts with total growth. We apply operational excellence methods and tools. We focus our execution on key metrics such as annual recurring revenues and operating cash flows.
This feeds into our disciplined capital allocation approach where ROIC is always the one metric in doing a deal. Also, the Schul strategic acquisitions, where we value and integrate separate, where integration and value separate OpenText from others. We then complete the circle in a well formed strategy that brings us back to total growth. This is OpenText. This is what we're centered on.
This is how we work. Based on the current strong and expected cash flow, we are raising our quarterly dividend by 15% to $0.151 per share. We have also modeled our dividend distribution through the lens of 20% of trailing 12 month cash flows approximately. As we grow our cash flow, we grow our dividend. We have returned close to $500,000,000 to shareholders via our dividend policy and we have increased our dividend 15% every year since we started our dividend program, all based on the strength of our cash flow and our capital allocation model.
Let me also re highlight the importance of our fiscal 2021 aspirations of landing adjusted operating margin between 36% 40%. When you look at our current robust performance, trajectory and our aspirations, we expect the OpenText business model to produce USD 1,000,000,000 in operating cash flow per year as we exit fiscal 2021, subject, of course, to the mix and timing of total growth and margin. We are ready for all competitors. We are ready for the modern CEO agenda. We are actively working our M and A pipeline with a solid balance sheet, and we are preparing for 2 major customer events, Enfuse in May and Enterprise World in July.
We will be showcasing our digital platform and new applications, cloud and managed services, information and endpoint security, AI and the Internet of Things. We expect to attract thousands of customers and partners, and I hope you will join us so you can experience OpenText directly. As it relates to our Q4, let me again highlight we are a hybrid business, and we intend to go faster in the cloud, and we are making key investments in our cloud, and recurring revenues generate more predictability and long term cash flow growth. I want to comment on one further item before I close and turn the call over to Madhu. We are enthusiastic about the opportunities ahead for OpenText.
We're confident in our ability to deliver shareholder value through expanding annual recurring revenues and operating cash flow. We have developed and maintained a long term strategic vision, have always been transparent and approachable quarter over quarter, year over year, and that will not change. As you can see from our investor deck in my comments today, we have a proven growth strategy, strong liquidity and a balance sheet, a prescriptive annual target model and a defined path to fiscal 2021. Let's highlight our performance by comparing the period of calendar year 12 to the trailing 12 months to the last trailing 12 months. Total revenue is up 114 percent from $1,300,000,000 to $2,700,000,000 annual recurring revenue up 167 percent from $748,000,000 to $2,000,000,000 cloud revenue up 764 percent from 92,000,000 to $795,000,000 adjusted operating margin up 400 basis points from 29% to 33% adjusted operating cash flow up 94% from $313,000,000 to $607,000,000 and adjusted EPS up 92% from $1.27 to $2.44 And that's the that's our performance by comparing the period of calendar 12 to the last trailing 12 months.
Further, over the last 20 years, OpenText has delivered 15 51% return against the NASDAQ's 343% return or said differently, we've outperformed the exchange by 4.5 times. As such, we believe that OpenText is in a position of strength and that our experienced leadership team plus our strategy for total growth gives us a market advantage as the information company. We are confident in our ability to deliver long term annual recurring revenues and operating cash flow expansion and add significant shareholder value over both the near and long term as it's evident from our value enhancing acquisitions such as GXS, Actuate, Documentum and Guidance. In closing, let me say to our shareholders on behalf of over 12,000 colleagues at OpenText, we're just getting warmed up. OpenText is an organization focused on making an impact and helping our customers be wildly successful.
OpenText is the information company that enables intelligent and connected enterprises and aspiring a new way to work. This is why companies like ADP, Corsair, MBTA, Progressive Insurance, Swiss Life, the U. S. Census Bureau, the National Grid and the City of Philadelphia selected OpenText last quarter. Just a few weeks ago, I was on stage with the refugee agency of the United Nations, and they talked about how information is changing lives for the good.
For example, when you're a refugee, you have very little, but the U. N. Is using retinal scans at ATM machines to distribute needed funds at the right place to the right people at the right time. It is humbling. This is why we are so deeply motivated about being the information company.
Madhu, over to you.
Great. Thank you, Mark, and hello, everyone. Before I get into the financial details for the quarter ended March 31, I wanted to share how excited I am to be part of OpenText. To Mark and the team at OpenText, thank you for a great opportunity. It is a highly talented and proficient team at OpenText who have built a very differentiated model over the years and I'm ready to be part of the next phase of success here.
I know Mark and I will be meeting with many of you during the coming days weeks and really looking forward to it. So now let's go through the numbers. And similar to prior quarters, my references will all be rounded in 1,000,000 of USD and compared to the same period of the prior fiscal year unless I indicate otherwise. Total revenue for the quarter was $686,000 up 16% from last year or $657,000,000 on a constant currency basis, up 11%, and revenue was positively impacted by $29,000,000 due to foreign exchange and negatively impacted by $6,000,000 due to acquisition accounting rules. Year to date, total revenue was $2,0.61 up 27% from last year or $2,013 on a constant currency basis up 24%.
Annual recurring revenue was $5.21 up 18% from last year or $502 on a constant currency basis, up 14%. Year to date, annual recurring revenue was $15.27 up 26% from last year or $14.97 on a constant currency basis, up 23%. License revenue for the quarter was 84%, down 4% from last year or 80% on a constant currency basis, down 8%. Year to date, license revenue was 2.98%, up 21% from last year or 2.88% on a constant currency basis, up 17%. Cloud revenue for the quarter was 2.09%, up 18% from last year or 204 on a constant currency basis, up 15%.
New MCV bookings during the quarter were 53, up slightly compared to 52 in the same period last year. Year to date cloud revenue was 6.11, up 17% from last year or 606% on a constant currency basis, up 16%. The customer support revenue for the quarter was 312%, up 19% from last year or 2.98 on a constant currency basis, up 13%. Year to date customer support revenue was 9.16 dollars up 32% from last year or $8.91 on a constant currency basis, up 29%. Our customer renewal rate this quarter was in the low 90s and similar to last year.
Professional services revenue for the quarter was 80%, up 23% from last year or 75% on a constant currency basis, up 15%. Year to date, PS revenue was $2.37 up 42% from last year or $2.28 on a constant currency basis, up 37%. Next, the impact of foreign exchange. For the quarter, the foreign exchange positively impacted revenue by 29 dollars and had a positive $0.03 impact on adjusted EPS. The effect of this by revenue type is broken down as license 4, cloud services and subscriptions 5, customer support 15 and PS5.
On a year to date basis, foreign exchange positively impacted revenue by $0.48 and had a positive $0.06 impact on adjusted EPS. The effect of this by revenue type is broken down as license 10, cloud services and subscriptions 5, customer support 24 and PS9. And now to gross margins. For the quarter, the gross margins were as follows. License margin was 96%, up slightly from 95% last year cloud margin was 55%, down slightly from 56% last year Customer support margin was 89%, up compared to 87% last year.
PS margin was 20%, up compared to 15% last year and reflecting efficiencies from post acquisition integration activities. For the next section, as I discuss our income and operating margin details, I did want to reiterate that we are tracking to our fiscal 2018 adjusted operating margin target model of 32% to 35%. For the quarter, adjusted operating income was 204 percent, up 18% and adjusted operating margin was 30% compared to 29% last year. We are seeing the positive impact of margin improvement as a result of bringing our recent acquisitions into the OpenText adjusted operating margin model. Year to date, adjusted operating income was 6.73 percent, up 32% and adjusted operating margin was 33% compared to 31% last fiscal year.
Adjusted EBITDA was 2.27% this quarter, up 20%. Adjusted EBITDA margin was 33% compared to 32% in the prior fiscal year. Year to date adjusted EBITDA was 7.37%, up 33%. Year to date adjusted EBITDA margin was 36% compared to 34% in the prior fiscal year. Adjusted net income was 1.46% this quarter, up by 22%.
On a constant currency basis, adjusted net income was 1.37%, up by 14%. Year to date, adjusted net income was 491, up 37% from last year and was 475, percent, up 33% on a constant currency basis. Interest expense was 35% in the quarter, which was $1,000,000 higher than our previously disclosed run rate of $34,000,000 Adjusted earnings per share for the quarter was $0.54 on a diluted basis compared to $0.45 per share for the same period last year, up 20% and up 13% on a constant currency basis at $0.51 per share. Year to date adjusted earnings per share on a diluted basis was $1.84 compared to $1.42 last year, up 30%. On a constant currency basis, adjusted earnings per share was $1.78 up 25 percent.
GAAP net income for the quarter was $0.59 or $0.22 per share on a diluted basis, up compared to $0.22 or $0.08 per share for the same period last year. Year to date, GAAP net income was 1.81 dollars or $0.68 per share compared to $9.80 or $3.91 per share for last year. However, as previously mentioned, prior year to date GAAP net income included a one time tax benefit of $8.76 that was recorded on account of the company's internal reorganization to further consolidate our intellectual property back within Canada. And now turning to operating cash flows. As Mark mentioned, we had the highest operating cash flows in our history at 2.71%, up 73% year over year.
This achievement was attributable to an increase in net income of 96% after adjusting for non cash operating activities and an increase in working capital items of $18,000,000 We had significant collections during the quarter from customers renewing annual maintenance contracts at the end of December 2017. Year to date operating cash flows was $504,000,000 up 50% year over year. On the balance sheet, we ended the quarter with $605,000,000 of cash and $7.61 of deferred revenue. We reduced our debt by $100 with a repayment on our revolver. As previously mentioned last quarter, we focused on building a very solid balance sheet and improving leverage ratios.
And moving to tax update. So let me now discuss the impact of the U. S. Tax reforms for this quarter. The corporate tax rate reduction was effective for OpenText as of January 1, 2018, and accordingly will reduce our U.
S. Federal statutory rate to approximately 28% in fiscal 2018 21% in fiscal 2019. As previously mentioned, we have accordingly revised our adjusted tax rate from 15% to 14% for fiscal 2018. As we normally do, we will provide an update to our adjusted tax rate in Q4. In Q2, we recorded a provisional expense of $15,000,000 that was necessitated by the new legislation.
Approximately $8,000,000 of this expense is a non cash charge that related to the remeasurement of U. S. Deferred tax assets and liabilities and 7 relates to the taxation of unlimited earnings of non U. S. Subs owned directly or indirectly by U.
S. Subs of OpenText. The taxation of unremitted earnings will be paid over 8 years by the as provided by the legislation. In the current quarter, we recorded an additional $5,000,000 non cash charge that related to the remeasurement of U. S.
Deferred tax assets and liabilities based on adjustments in underlying tax balances. Note that these adjustments are provisional and will be finalized on or before December 22, 2018. We continue to assess the implications of the U. S. Tax reform and will update you for any material impact to our tax analysis or plans.
And regarding the IRS matter, there is nothing new to report. We will continue to keep you updated on any material new developments. I will now update you briefly on ASC 606. I want to reiterate from the last quarter that the new revenue recognition rules under U. S.
GAAP, ASC 606, is applicable to OpenText effective July 1, 2018, and we will be reporting revenues under these rules for the first time for the quarter ending September 30, 2018. Although the new rules provide guidance on recognition and measurement of revenues across all revenue streams, the impact seems limited to our accounting for implementation services within a cloud arrangement and accounting for on premise subscription offerings. We continue to assess the impact with the new accounting rules will have on our FY 2019 results and if material, we will provide you with updates with regard to the expected impact. With that, I will turn my comments to our 2021 aspirations. As mentioned last quarter, we raised our 2021 aspirations for adjusted operating margin by 200 basis points for a range between 36% 40%.
Please see our 2021 aspirations in our IR presentation on our website. The team at OpenText has fully embraced the approach of total growth combined with operational excellence and disciplined capital allocation. Our collective efforts and high focus will support us in achieving our fiscal 2021 aspirational adjusted operating margin and produce $1,000,000,000 in operating cash flows per year as we exit fiscal 2021, subject of course to the mix and timing of total growth and margin. As far as outlook for the remainder of fiscal 2018, we are a hybrid business as we continue to grow faster in the cloud. With respect to our expenses, as you saw in the Q3, we continue to invest throughout the year in cost of revenue and operating expenses, particularly relating to OpenText Cloud.
In addition, our Q4 generally includes expenses that relate to year end target attainment based on specific annual sales compensation plans. On May 8, 2018, our Board of Directors approved a 15% increase in cash dividends from $0.1320 to $0.158 per share for shareholders of record on June 8, 2018 and payable on June 29, 2018. And thank you once again to Mark and the OpenText team. I will turn the call back over to Greg.
Operator, can we poll for questions, please?
Certainly. We will now begin the question and answer Our first question comes from Philip Huang of Barclays.
Hi, good afternoon guys. I wanted to ask you first on the $1,000,000,000 operating cash flow target for 2021. I was wondering if you could maybe give us some directional color as to how much of it will come from just growing and optimizing your existing assets versus an acceleration or further acquisitions that you see?
Philip, thanks for the question. Mark here. There are multiple paths as you just highlighted. We have our path of acquisitions. We have our path of organic growth.
We have our path of increasing efficiency as reflected in our margin through continuing to balance our global workforce and getting more automated in our business. So it's we have many paths to get there within what we call total growth, either through acquisition, optimizing what we have and organic growth. And that gives us the confidence to put that aspiration forward today of $1,000,000,000 in OCF exiting fiscal 2021.
That's helpful. In the range of possible outcomes in terms of getting there, obviously, I guess the timing of acquisitions, those are perhaps a little bit harder to fully be within your control. Is there anything specific that you need to like are there specific assumptions that we should be making? I'm just even thinking in terms of the way we model to get to $1,000,000,000 cash flow, I'm just wondering sort of even directionally what we should be assuming when it comes to what's achievable through margin expansion and through obviously you have a target for the margin expansion. Just trying to figure out exactly where the different what's the easiest path to get there, if you will?
I know there's obviously multiple paths to get there, but what would be the sort of default scenario, I guess, to get to the $1,000,000,000 operating cash flow?
Yes, for sure. And a multiple path, will be multiple models. The way I think of it is relatively simple. I think of our base business And the you look at our margin, our efficiency optimization through the years
and
optimizing the base business, getting between the 36% 40% adjusted operating margin by fiscal 2021. So it's obviously a key variable in the model. The next is an organic growth rate. We had organic growth again within Q4. And I think that will produce a baseline where then you can factor in some historical M and A.
And you can play with those sort of 3 to 4 variables and that will land you in your model.
Right. No, that's helpful. And I guess with the expected rapid growth in cash flows over the coming years, how should we think about your capital allocation? Does anything change at all? Your leverage is set to come down pretty quickly, I would imagine.
Just wondering if would your ideal scenario be to accelerate acquisition to the extent that you could make that happen and opportunities present themselves? Or would you also consider perhaps returning some additional capital?
Yes. So a lot in there. I certainly part of what I'd like you and others to take away from today is us targeting the $1,000,000,000 in annual OCF as we exit fiscal 'twenty one. We as we do and I talked, we raised our dividend by 15% today. It's based on the strength and trajectory of the business.
We've modeled our dividend on 20% to trailing 12 month cash flows. We've raised it we've raised our dividend 15% every year since the inception of the dividend. And as we grow our cash flows under that model, we've continued to grow our dividend distribution. I'm real proud of our deleveraging, if you will, on a net debt to adjusted EBITDA ratio to from 3x down to 2.1x. And we evaluate other forms of buyback.
But right now, I still think applying it to acquisitions and our dividend policy and continuing to delever is the right use of capital.
Right. Final question for me. Looking to Q4, typically a very seasonally strong quarter for licensing cloud. Was wondering if we should expect a very similar seasonality this year and if there's any sort of one time type benefit or impact that we should keep in mind? Thanks.
Yes. Thanks, Phil. I think a couple of things. I would and I know Madhu would probably have a couple of comments as well here. I look at the economy and demand and demand and interest remain positive in the market.
We all read the same newspapers, and see the same headlines and there are things to keep watching for. Customers and consumers are watching tariffs, sanctions, data privacy, ethical supply chains, and we just need to continue to watch those topics. We don't provide guidance. And I'd go back to my comments that we're leaning more into the cloud, annual recurring revenues and stronger cash flows. And do I know if you have any comments on the expense side?
Yes, sure, Mark. And as I shared in my prepared remarks, from an expense investment perspective, we clearly invest throughout the year, right? And I think that's something to keep in mind. And I did allude to the Q4, there are several sales compensation plans that are annual in nature and you could see a pickup in sales expenses in the 4th quarter. But I do agree with Mark on the overall comments there.
Our next question comes from Richard Tse of National Bank Financial.
Yes. Thank you. Welcome aboard, Madhu.
Thank you.
I'm not sure this question is for you or Mark, but kind of at a high level, obviously, you've made a number of acquisitions in recent years. And I've asked this question in the past, but I'll ask it again is that obviously you've brought on a lot of complementary products. Can you help us understand or get a gauge of how well those products are being up sold into your existing base? And I was just trying to get a feel for that upselling, cross selling strategy and how it works and whether you have any metrics on that that you could share?
Richard, thanks for the question. I'll certainly take that one and maybe we'll do. We'll take it next quarter. But yes, let me take that. Going into our installed base is a great opportunity for us to go in and sell security, such as guidance.
If we're the enterprise platform for information management, let's go secure those endpoints. As we've built from the world's largest archives, we have the opportunity to go in and sell Magellan and AI. If we've deployed customer experience management, we have an opportunity to go in and sell content services. And if we're in there on a business network, we have opportunities to archive and other things. So I think through time, we've gotten more focused on kind of the key workloads and use cases in the enterprise and more targeted.
And in fact, I think you've seen that and reflected now in a variety of quarters of organic growth that we've talked about. I think the largest opportunity in front of us actually is to go faster in the cloud and to go in and we've taken a different approach where we're not looking to do revenue substitution. We're not looking to take a dollar of maintenance and substitute it for a dollar of cloud. What we've gone in to do is to say, if you own a license today, let's have you keep owning that license through maintenance, strong renewal rates, and let's go host that and provide a managed service in our cloud. I think that's one of the larger opportunities we have and it's somewhat reflected in our statements.
So we're going to go a little faster now in the cloud, given that we've built a lot of confidence and value over the last few years in scaling our cloud business from can't like from 0 to near $800,000,000 over 7 years. So it's an important question, and I'd say we've gotten more focused on key use cases. And the biggest opportunity that we the largest opportunity we see in front of us is having customers existing customers move their license into our managed service and or upfront selling new managed service.
Okay.
And I guess a related question on the organic growth is that are there sort of internal targets that you guys have set out in terms of the level of organic growth that you want here over the next 3 years?
We've talked about low single digit organic growth.
Okay. What was the organic growth this quarter, by the way?
As you know, we don't describe the actual quantum. We're just discussing positive, neutral and negative. It was another quarter of positive organic growth.
Okay. And then last question for me. Obviously, I think it's important to get some feel from you guys as to the state of the acquisition environment, whether it's valuations or the obstacle today or what the opportunity set is like. If you could give a bit of color on that, that would be great. Thank you.
Yes. Thank you, Richard. Well, I'd make 3 points. First point is when we view the business through the information company, we see a wider market. We see $100,000,000,000 total addressable market.
And through time, we started as a search company to the content experts, Enterprise Information Management and now the information company and bringing in markets like security, IoT, artificial intelligence, cloud businesses, my first point is it's widened the market opportunity for us. There is no scarcity of assets in our business model for us to go look at. 2nd is that M and A remains the centerpiece to our total growth strategy. And as our balance sheet gets stronger, our net debt to EBITDA adjusted EBITDA ratio and we continue to delever and our cash flows get stronger, M and A is a centerpiece to that strategy. And third, we are actively in the market.
We're actively in due diligence working our pipeline and we'll continue to close acquisitions.
Our next question comes from Stephanie Price of CIBC World Markets. Good afternoon.
Hi, Stephanie.
Mark, I was wondering if you could talk a bit about the investments. You've mentioned several times that you're making some investments in the cloud right now.
Yes, fair enough. Thanks, Daphne. Yes, I mean, if you'll allow me, I'll just talk a little bit about the cloud business, put the investments in context. We're close to 2,000 managed service customers now, 50,000 plus network customers on our value added network from messaging through cash ACH cash management, swift traffic, EDI. We've learned, scaled and delivered quite a bit over the last 6 years.
As I've noted, over the last 6 years from $92,000,000 to $795,000,000 that's 764 percent growth in the business. And we're winning platforms like ABB, U. S. Deal, John Deere, National Grid, Nestle and others. And we've learned a lot.
And part of the investments that we're making right now includes security, new standards coming out, data zones, GDPR. We can run a European managed service and all the people, data, systems remain in Europe or remains in Asia Pacific. So those are the type of investments around more automation, faster time to value, security, GDPR. And I'd note that we own and operate our own platform globally, right? We don't run our large cloud business in a 3rd party cloud.
We own and operate it. So those are some of the investments that we're making.
Okay, great. And then just briefly on EP3 sorry, EP4. I know you just released it. Wondering if you had any customer feedback so far and if you could talk about the parts of the suite that you're most excited about?
Yes. Thank you for that. So in Release 16 Enhancement Pack 4 or EP4 is in the market, and we're working on EP5. But on EP4, I'd provide just one thing and its security is job 1. There's a lot of competing priorities, but I'd tell you the one thing that I'm most excited about in early 16EP4 is all the security features and that we brought into the product, deploying information management as a secure digital platform, owning the endpoint to guidance and having that if you're designing nuclear power, engineering construction, financial services, power distribution, your endpoints need to be secure as well.
So if there's one thing, it's security. If there's 2 things, it's security and AI. And we were through a lot of proofs of concepts and early deployments. It hasn't translated yet into the P and L, but all our learning is way up on how to extract the value from our content platform and our business network. So if it's one thing, it's security.
If there's allow me 2 things, it's security and insight, with Magellan.
Perfect. Thank you very much.
Thank you, Stephanie.
Our next question comes from Paul Treiber of RBC.
Thanks very much and good afternoon. Just in regards to your comment on the expanded addressable market, the $100,000,000,000 market, what do you see as the company's greatest competitive advantage against incumbents in those markets? And then also related to that, I assume you'd enter those additional markets through acquisitions. How would the returns or other metrics or the integration of acquisitions in those new markets differ from the previous ones that you've done?
Paul, thanks for the question. I would say that just unequivocally, we're not looking to change our value methodology or approach to value that we've deployed through the years as that TAM has expanded. So we're going to apply the same discipline, the same OpenText business system into that expanded TAM. How are we and I'll translate maybe the first part of your question a little bit into how we're going to compete. And we're going to compete first in, 6 areas that we want to win in.
The first place is our digital platform, our digital core. We're becoming more of an applications company through our digital apps, our engineering and construction, case management, contract management, electronic invoicing. 3rd area is, of course, our digital B2B network. And it's not just a volume business, it's more capabilities from self-service, centralized trading grids. An interesting aspect is, last week in the news was an ethical supply chain.
Where was cobalt coming from in new electric cars? We had a we have a large auto company running on our business network. And what used to take 2 years, they wanted to deploy instantly of a new supplier screen for an ethical supply chain of those supplying cobalt into that business network. 3 other areas, AI, security and the developer. So first is, we're going to is there are 6 areas that we want to go win in.
2nd is going faster in the cloud through our managed services. And 3rd, I think we're going to differentiate and compete on our expertise as the information company clear path and rapid time to value in the Global 10,000. So 6 product areas, go faster than the cloud and our expertise.
Okay. And then just one more for me. Earlier in the presentation, you mentioned that ROIC is a key metric that you use to evaluate acquisitions. How in regards to the new cloud investments, how would the expected return on ROIC in those new investments in the cloud compare against the ROIC threshold that you use for acquisitions?
It's an interesting question of an internal ROIC versus an external ROIC. And maybe we want to get back to you on that. But maybe I would say this, on an external side, you got to for an external ROIC. I for an external ROIC. I guess internally, I'd look towards our adjusted operating margin and how that how we've expanded it over time and where we're looking to land that in fiscal 2021.
So I guess the short form is externally, You've taken out certain adjustments. It's mid to high teens internally. I guess I'd look at it as a blended rate of adjusted operating margin. Would you anything you'd add to that?
No, I agree completely.
Our next Our next question comes from Paul Steep of Scotiabank.
Mark, we've talked a little bit so far on the call about cloud, but you certainly sound more aggressive. They're looking to maybe accelerate the move there. What's changed either in your in the external environment or in your maybe go to market approach here today that we should be taking away from this call?
Yes, I would I'd say 2 things. I think we've hit a there's like there's going from 0 to 1, right? And then there's $0 to $500,000,000 maybe $0 to $500,000,000 $0 to $500,000,000 $0 to $500,000,000 and then approaching $1,000,000,000 business. We're in a very maturing stage and we've built confidence, a lot of experience and we've delivered a lot of value in our managed services. So I think one thing that's changed is just the experience, our customer feedback, and greater confidence in what we've delivered over the last 4, 5, 6 years.
2nd, I would say, in certain markets, customers are shedding IT expertise, just getting rid of it. And now they're now looking to us to provide all that expertise. I'd say maybe the second thing is just customer perspective. Through the years, they've shedded IT expertise. Now they're looking to us to provide it.
So I would highlight to those two things, Paul.
Okay. And welcome, Madhu. I'm not sure if this one's either for you or Mark. But if we look at this, I don't think anyone would ever accuse OpenText of being light on cost discipline or making sure the margins work. But your commentary tonight in the deck about increased automation and the opportunity to reduce cost and further drive OpEx margins, how should we think about that as we move to sort of your 2021?
Is this a year of investment and plans underway that maybe accelerate us into 2019 or where how should we think about that?
Sure. Big question and thank you for the welcome. When you look at the base of our business, right, when you look at the size of the operating expenses or the size of the cost of revenue and to your point and also what Mark said, they've been very disciplined even in acquisitions to bring them over to the OpenText model of the adjusting operating margin within a very defined period of time and we've hit those targets every single time. So that remains our overarching target. But as we grow, when you look at the scale of expenses we currently have in our infrastructure, in addition to making the right investments towards the cloud, as Mark said, there are always opportunities for being more efficient where there is a people based spend or sort of translating the people based spend with more automation.
So that's really what we're going to be focused on. I would think about it as 2 parallel streams, the internal efficiencies as well as the incremental investments Mark talked about.
Okay. Just to clarify that and then I'll leave the line here.
But I
guess, is there a larger program underway? We've gone through it numerous times over the years of larger cost takeout programs. Is there a specific program or is this just part of the ongoing cadence we've had for the last few years?
I would say the ongoing cadence that Mark and the team have had, and we're going to continue that. And you would expect in any business, we will keep doing a programmatic view of all the P and L items on a continuous basis. And there are rooms for automation. And Mark, do you want to add anything?
I was just going to say welcome, Madhu. So and that's to put this on your shoulders. But the, Paul, the dialogue as we scale from here forward and reduce perspective of how we can more efficiently grow revenues at a nonlinear expense trajectory. So I would just amplify the ongoing efforts and new insight with Midu's leadership.
And thank you, Mark. Perhaps I would add to that, coming from not just the software technology background, but also having services experience, I think it's going to be very helpful and again with a fresh insight. But really, I would say continuing the work Mark and the team have kicked off.
Great. Thank you.
Yes. Thank you.
Our next question comes from Thanos Moschopoulos of BMO Capital Markets.
Hi, good afternoon. G and A went up a fair bit sequentially even though G and A headcount was flat. Can you explain the dynamic there?
Sure. We did have some, I would say, infrastructure type of expenses. If you're looking at sequentially quarter over quarter, that's really where the increase came from.
And were those kind of one time in nature or will those continue into Q4 and beyond?
I would look at it as, again, we invest on an annual basis during each quarter, right? So this is more part of normal investments.
Okay. And maybe similarly, the cloud margins dipped sequentially. Does that also reflect a higher level of investment per the earlier comments? Or is there some other dynamic there?
Thanos, I'll take that one. Yes, it does reflect our investments. And over the coming quarters, we're going to continue those investments as we lean more into our cloud and recurring revenues. And we expect that to then expand margins from there. So yes, we're down slightly quarter over quarter or this year still in our blended margin range, which is the range of record, if you will.
And then we'll, from those investments begin to expand again. So we're just, if you will, just tapping the accelerator a bit on our investments. And as we go faster slightly faster into the cloud. And then we'll begin to grow the margin again.
Okay. And then finally, the percentage of license revenue coming from new clients, which is one of the metrics you report, that's been lower than typical over the last couple of quarters. Does that reflect the fact perhaps that you've been more focused on upselling to the existing base rather than hunting new accounts? Or should we not read too much into that metric?
No, it's an important metric. I think in the quarter, it was low 20s. In other quarters, it's been in the high 20s. It's still a very healthy number. And yes, it's still a little reflected that we're going into trying to do more of the cross selling that we talked about earlier and also kind of bringing our installed base forward into a modern cloud platform.
Great. Thanks. I'll pass the line.
Yes. Thanks, John.
Thank you.
Our next question comes from Walter Pritchard of Citi Research.
Hi, thanks. I'm wondering two questions kind of follow ups here. On the cloud side, have you or are you anticipating making any sales compensation changes that would encourage your salespeople in that direction? It sounds like you're not really encouraging substitution, but I'm curious on the new business side. And then just had a follow-up on the longer term model question after that.
Yes, Walter, thank you. So we already factor in annual contract value into our account executives variable comp. So I think we're one of the advantages of being a consolidator is when we do due diligence, we get to look at a lot of comp plans, a lot of business plans. And I think we have it right in how we give a blended target to our sales force or account executives that they have a number to go make, whether it's through total annual contract value or license and maintenance, 1st year maintenance combined. So I think we have the plan right.
No anticipated changes. When we finish the fiscal year, we'll certainly look into F 2019 if there's any little tweaks. But I think we have it right.
Great. And then just on the longer term model side, I'm wondering your leverage ratios you've talked about in the past like 3x. Is that as we think about that cash flow number you're targeting yourselves on for 'twenty one, is it safe to assume the 3 times still applies? Thanks.
Yes. Well, I'm sorry, Walter. Thank you. Yes, I think our bank covenants are higher than that, but the management threshold that we've always looked at is around 3x. And as we look at the fiscal 2021 goal, yes, the 3x still remains.
I'll note that if we need to go above it slightly in the short term to do a strategic acquisition, we won't hesitate like we did in Documentum. And I think our track record over the last 12 months is a good indication of that where we need to go slightly above it and then within 12 months, we're dramatically below it. Operator,
we have time for one more.
Our next question comes from Blair Abernethy of Industrial Alliance.
Thanks very much. Mark, I was just wondering if you could provide us with a little more color on the license side of things. I guess two questions here. One is around the sort of the cadence of the distribution of deals from the December quarter to the March quarter, you fairly well outperformed, I would say,
in the December quarter and that seems to maybe have has that drawn down part of what we experienced this quarter? Blair, thank you for the question. And you said it correctly, and maybe I'll just use my words to it that Q2 and Q3 balance each other out. And we look at our business on an annual basis.
Okay. And the second question is, again, around the license side. What impact are you seeing at this stage from GDPR? It's been in the works for a couple of years now, but the deadline is a couple of weeks away. Is that helping you, hurting you?
Where are you seeing how are you seeing your customers react to this?
Yes. Thank you for that. I'm seeing customers react. I know there's I think it's the May 20 4, which is the deadline, and it's a removal of the U. S.
Safe harbor, progress to the EU director at May 24 is a date for GDPR. I see customers really looking at it in the long term. I've seen customers use it as an opportunity to drive just general process change around HR and other types of systems. But I actually see customers taking a long term view of information security, information governance. And with Cambridge Analytica and others in the news, I'm starting to see North American customers going, maybe we should adopt something similar even if there's not legislation yet.
So I think things like Brexit will actually drive some enterprise demand. You might need 2 licenses instead of 1 ultimately or 2 subscriptions versus 1. And I think GDPR is actually a longer term demand driver, and I'm starting to see some North American customers look at similar solutions.
Okay, great. Thanks for the clarity.
I will now hand the call back over to Mr. Baron Shea for closing remarks.
All right. Well, I'd like to thank everyone for joining us today as we walk through our total growth strategy as we're targeting $1,000,000,000 in annual operating cash flow per year as we exit fiscal 'twenty one and on our great cash flow performance in the quarter. And I hope you'll join us at Enfuse and Enterprise World, and we look forward to speaking to everyone soon. Thank you so much.