Thank you for standing by. This is the conference operator. Welcome to the Open Text 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. To join the question queue, simply press star and one on your touch tone phone. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. I would like to now turn the conference over to Greg Secord, Vice President of Investor Relations. Please go ahead.
Thank you operator. On the call today is Open Text Vice Chair, Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea, and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, 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 Enfuse 2018, Open Text's annual security digital investigations and eDiscovery conference, will be taking place in Las Vegas from May 21st to 24th. During the conference, IR will host a product teach-in lunch session for investors on Wednesday, May 23rd with Mark Barrenechea and Muhi S. Majzoub, our Head of Engineering.
For those unable to attend on site, presentation materials and audio webcast from the investor relations section of our website. I'd also like to remind everyone that Enterprise World, Open Text's annual users conference, will be taking place in Toronto again this year during the second week of July. As part of that conference, we'll be holding Open Text Investor Day on Tuesday, July 10th. For further details or to register to attend, please contact investor relations. We look forward to seeing you there. 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 Open Text 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 Open Text, are contained in Open Text Form 10-K 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. With that, I'll hand the call over to Mark.
Thank you, Greg. 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 million in total revenues, up 16% year-over-year. Our annual recurring revenues were a record high of $521 million, up 18% year-over-year. Our cloud revenues were $209 million, up 18% year-over-year, and we had positive organic growth within the quarter. We generated a record $271 million of operating cash flow, up 73% year-over-year.
Let me also note on operating cash flow, it is up 62% quarter-over-quarter, up 43% from our previous high in 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 million of cash on hand and a net debt to adjusted EBITDA ratio of 2.1 times, down from 3 times 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. 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 organizations, new supply chains, security, information insight, and more. OpenText is leaning into all of these agenda items. 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 are 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 billion. 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 $1.63 billion to $2.06 billion, and our annual recurring revenue is up 26%, from $1.22 billion to $1.53 billion. Our license business is up 21%, from $246 million to $298 million. These results show our balance of total growth. OpenText has created incredible scale in our cloud business. Year-to-date, our cloud business has delivered $611 million of revenues and is up 17%. This is a right result. We are a hybrid business delivering both on-premise and cloud solutions.
Our customers and partners are accelerating cloud adoption, as you can see in our results today. We too are moving faster into the cloud. Licenses, of course, remain important for our customers. We expect licenses to grow. 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. Again, over time, we expect our cloud margin to expand as well. This is factored into our targets in our fiscal 2021 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. 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. This also fuels strategic acquisitions, 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 $0.1518 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 million 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% and 40%.
When you look at our current robust performance trajectory and our aspirations, we expect the OpenText business model to produce $1 billion 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&A pipeline with a solid balance sheet, and we are preparing for two major customer events, Enfuse in May and Enterprise World in July. We'll 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 and 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 2012 to the last trailing 12 months. Total revenue is up 114%, from $1.3 billion to $2.7 billion. Annual recurring revenue up 167%, from $748 million to $2 billion. Cloud revenue up 764%, from $92 million to $795 million. Adjusted operating margin up 400 basis points from 29% to 33%. Adjusted operating cash flow up 94%, from $313 million to $607 million. Adjusted EPS up 92%, from $1.27 to $2.44. That's our performance by comparing the period of calendar 2012 to the last trailing 12 months.
Over the last 20 years, OpenText has delivered 1,551% return against the NASDAQ's 343% return, or said differently, we've outperformed the exchange by 4.5 times. 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 is 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 in 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. The UN 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.
Thank you, Mark, and hello, everyone. Before I get into the financial details for the quarter ended March 31st, I want 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 and weeks, and really looking forward to it. Now let's go to the numbers, similar to prior quarters, my references will all be rounded in millions of USD and compared to the same period of the prior fiscal year, unless I indicate otherwise.
Total revenue for the quarter was $686, up 16% from last year, or $657 on a constant currency basis, up 11%. Revenue was positively impacted by $29 due to foreign exchange and negatively impacted by $6 due to acquisition accounting rules. Year to date, total revenue was $2,061, up 27% from last year, or $2,013 on a constant currency basis, up 24%. Annual recurring revenue was $521, up 18% from last year, or $502 on a constant currency basis, up 14%. Year to date, annual recurring revenue was $1,527, up 26% from last year, or $1,497 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 $298, up 21% from last year, or $288 on a constant currency basis, up 17%.
Cloud revenue for the quarter was $209, 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 $611, 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 $298 on a constant currency basis, up 13%. Year to date customer support revenue was $916, up 32% from last year, or $891 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 $237, up 42% from last year, or $228 on a constant currency basis, up 37%. Next, the impact of foreign exchange. For the quarter, the foreign exchange positively impacted revenue by $29 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 PS $5. On a year to date basis, foreign exchange positively impacted revenue by $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 PS $9. 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%-35%. For the quarter, adjusted operating income was $204, 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 $673, up 32%, and adjusted operating margin was 33% compared to 31% last fiscal year. Adjusted EBITDA was $227 this quarter, up 20%.
Adjusted EBITDA margin was 33% compared to 32% in the prior fiscal year. Year to date, adjusted EBITDA was $737, up 33%. Year to date adjusted EBITDA margin was 36% compared to 34% in the prior fiscal year. Adjusted net income was $146 this quarter, up by 22%. On a constant currency basis, adjusted net income was $137, up by 14%. Year to date, adjusted net income was $491, up 37% from last year, and was $475, up 33% on a constant currency basis. Interest expense was $35 in the quarter, which was $1 million higher than our previously disclosed run rate of $34. 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%. GAAP net income for the quarter was $59, or $0.22 per share on a diluted basis, up compared to $22 or $0.08 per share for the same period last year. Year to date, GAAP net income was $181, or $0.68 per share compared to $980 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 $876 that was recorded on account of the company's internal reorganization to further consolidate our intellectual property back within Canada. Now turning to operating cash flows.
As Mark mentioned, we had the highest operating cash flows in our history at $271, 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. 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, up 50% year-over-year. On the balance sheet, we ended the quarter with $605 of cash and $761 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. Moving to tax update. Let me now discuss the impact of the U.S. tax reforms for this quarter.
The corporate tax rate reduction was effective for Open Text as of January 1st, 2018, and accordingly will reduce our U.S. federal statutory rate to approximately 28% in fiscal 2018 and 21% in fiscal 2019. As previously mentioned, we have accordingly revised an 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 that was necessitated by the new legislation. Approximately $8 of these 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 Open Text. The taxation of unlimited earnings will be paid over eight years as provided by the legislation.
In the current quarter, we recorded an additional five 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 22nd, 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. 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 1st, 2018, and we will be reporting revenues under these rules for the first time for the quarter ending September 30th, 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 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% and 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 billion 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 third quarter, we continue to invest throughout the year in cost of revenue and operating expenses, particularly relating to OpenText Cloud. Our fourth quarter generally includes expenses that relate to year-end target attainments based on specific annual sales compensation plans. On May 8th, 2018, our board of directors approved a 15% increase in cash dividends from $0.1320 to $0.1518 per share for shareholders of record on June 8th, 2018, and payable on June 29th, 2018. 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 session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone to join the question queue. You will hear a tone acknowledging your request. If you are using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. Our first question comes from Philip Huang of Barclays.
Hi. Good afternoon, guys. Wanted to ask you first on the $1 billion operating cash flow target for 2021. 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. We have many paths to get there within what we call total growth, either through acquisition, optimizing what we have, and organic growth. That gives us the confidence to put that aspiration forward today of $1 billion 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.
Sure.
Are there specific assumptions that we should be making? I'm just even thinking in terms of the way we model to get to a $1 billion 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've given us target for the margin expansion.
Yeah.
Just trying to figure out exactly 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 billion operating cash flow?
Yeah, for sure. Multiple paths, there'll be multiple models. The way I think of it is relatively simple. I think of our base business and you look at our margin, our efficiency optimization through the years, and just optimizing the base business, getting between the 36%-40% adjusted operating margin by FY 2021. That's obviously a key variable in the model. The next is a organic growth rate. We had organic growth again within Q4. I think that will produce a baseline where then you can factor in some historical M&A.
You can play with those sort of three to four variables, and that will land you in your model.
Right. No, that's helpful. 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 acquisitions to the extent that you could make that happen and opportunities present themselves, or would you also consider perhaps returning some additional capital?
Yeah. A lot in there. Certainly, part of what I'd like you and others to take away from today is us targeting the $1 billion in annual OCF as we exit fiscal 2021. As Madhu 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% of trailing 12-month cash flows. We've raised our dividend 15% every year since the inception of the dividend. As we grow our cash flows under that model, we've continued to grow our dividend distribution. I'm real proud of our de-leveraging, if you will, on a net debt to adjusted EBITDA ratio to-
Yeah
from three times down to 2.1 times. We evaluate other forms of buyback. Right now, I still think applying it to acquisitions and our dividend policy and continuing to de-lever is the right use of capital.
Right. Final question from me. Looking to Q4, typically a very seasonally strong quarter for license and cloud, I was wondering if we should expect a very similar seasonality this year. If there's any sort of one-time type benefit or impact that we should keep in mind. Thanks.
Yeah. Thanks, Philip. I think a couple things. I would, I know Madhu would probably have a couple of comments as well here. I look at the economy and demand and interest remain positive in the marketplace. We all read the same newspapers, see the same headlines, there are things to keep watching for. Customers and consumers are watching tariffs, sanctions, data privacy, ethical supply chains, we just need to continue to watch those topics. We don't provide guidance. I'd go back to my comments that we're leaning more into the cloud, annual recurring revenues and stronger cash flows. Madhu, I don't know if you have any comments on the expense side?
Yes. Sure, Mark. As I shared in my prepared remarks, from an expense investment perspective, we clearly invest throughout the year, right? I think that's something to keep in mind. I did allude to the fourth quarter, there are several sales compensation plans that are annual in nature, you could see a pickup in sales expenses in the fourth quarter. 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.
Oh, thank you.
Yeah. I'm not sure if this question's 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 upsold into your existing base? Yeah, just trying to get a feel for that upselling, cross-selling strategy and how it works, and whether you have any metrics on that you could share.
Richard, thanks for the question. I'll certainly take that one, and maybe we'll take it next quarter.
Okay.
Yeah, let me take that. Going into our install 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 some of 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. If we're in there on a business network, we have opportunity to sell archive and other things. I think through time, we've gotten more focused on kind of the key workloads and use cases in the enterprise, and more targeted. In fact, I think you've seen that and reflect it 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. 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 of 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 scaling from zero to near $800 million over seven years. It's an important question. I'd say we've gotten more focused on key use cases. The largest opportunity we see in front of us is having existing customers move their license into our managed service, and/or upfront selling new managed service.
Okay. 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 three 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. Last question from me, obviously, I think it's important I 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 comment on that, then that'd be great. Thank you.
Yep. Thank you, Richard. Well, I'd make three points. First point is when we view the business through the information company, we see a wider market. We see a $100 billion total addressable market. Through time, we've started as a search company to the content experts, Enterprise Information Management, and now the information company, 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. Second is that M&A remains the centerpiece to our total growth strategy. As our balance sheet gets stronger, our net debt to adjusted EBITDA ratio, we continue to de-lever, and our cash flows get stronger, M&A is a centerpiece to that strategy. Third, we are actively in the market.
We're actively into 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.
Yeah, fair enough. Thanks, Stephanie. If you allow me, I'll just talk a little bit about the cloud business, put the investments in that context. We're close to 2,000 managed service customers now. 50,000-plus network customers on our value-added network from messaging through ACH cash management, SWIFT traffic, EDI. We've learned, scaled, and delivered quite a bit over the last six years. As I've noted, over the last six years, from $92 million to $795 million. That's 764% growth in the business. We're winning platforms like ABB, U.S. Steel, John Deere, National Grid, Nestlé, and others. We've learned a lot. Part of the investments that we're making right now includes security, new standards coming out, data zones and GDPR, where we can run a European managed service and all the people data systems remain in Europe or remains in Asia Pacific.
Those are the type of investments around more automation, faster time to value, security, GDPR. I'd note that we own and operate our own platform globally, right? We don't run our large cloud business in a third-party cloud. We own and operate it. Those are some of the investments that we're making.
Great. Then just briefly on EP3, or 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.
Yeah. Thank you for that. Release 16, Enhancement Pack 4 or EP4 is in the market, and we're working on EP5. On EP4, I'd provide just one thing, and it's security is job one. There's a lot of competing priorities, I'd say the one thing that I'm most excited about in Release 16 EP4 is all the security features that we've brought into the product. Deploying information management as a secure digital platform, owning the endpoint through Guidance, and having that if you're designing nuclear power, engineering, construction, financial services, power distribution, your endpoints need to be secure as well. If there's one thing, it's security. If there's two things, it's security and AI. We're through a lot of proofs of concepts and early deployments.
It hasn't translated yet into the P&L, all our learning is way up on how to extract the value from our content platform and our business network. If it's one thing, it's security. If you allow me two 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. Good afternoon. Just in regards to your comment on the expanded addressable market, the $100 billion market, what do you see as the company's greatest competitive advantage against incumbents in those markets? 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. We're going to apply the same discipline, the same OpenText Business System into that expanded TAM. I'll translate maybe the first part of your question a little bit into how are we going to compete. We're going to compete first in six 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, e-invoicing. Third area is, of course, our digital B2B network. 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 have a large auto company running on our business network, what used to take 2 years, they want it to deploy instantly of a new supplier screen for an ethical supply chain of those supplying cobalt into that business network. Three other areas, AI security and the developer. First is there are 6 areas that we want to go win in. Second is going faster in the cloud through our managed services. Third, I think we're going to differentiate and compete on our expertise as the information company. Clear paths and rapid time to value in the Global 10,000. 6 product areas, go faster in the cloud, and our expertise.
Okay, just one more from me. Earlier in the presentation, you mentioned that ROIC is a key metric that you use to evaluate acquisitions. In regards to the new cloud investments, how would the expected return or 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. Maybe we want to get back to you on that. Maybe I would say this, on an external side, you got to count what adjustments you want. When you take out all your adjustments, we're operating in the mid to high teens for an external ROIC. I guess internally, I'd look towards our adjusted operating margin, and how we've expanded it over time, and where we're looking to land that in fiscal 2021. I guess the short form is externally, taking 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. Madhu, anything you'd add to that?
No, I agree completely.
Yep.
Yep.
Okay. Thank you. I'll pass the line.
Our next question comes from Paul Steep of Scotiabank.
Great. Thanks. Mark, we've talked a little bit so far on the call about cloud, you certainly sound more aggressive or looking to maybe accelerate the move there. What's changed either in the external environment or in your maybe go-to-market approach here today that we should be taking away from this call?
Yeah, I'd say two things. I think we've hit there's going from zero to one, right? Then there's zero to $500 million, maybe zero to half a million, zero to half a billion, then approaching a billion-dollar 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. I think one thing that's changed is just the experience, our customer feedback, and a greater confidence in what we've delivered over the last four, five, six years. Second, I would say in certain markets, customers are shedding IT expertise, just getting rid of it. 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.
I would highlight to those two things, Paul.
Mark and Vidya, I'm not sure if this one's either for you or Mark, if we look at this, I don't think anyone would ever accuse Open Text of being light on cost discipline or making sure the margins work. 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 how should we think about that?
Sure. Great question, and thank you for the welcome. You look at the base of our business, 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, we've been very disciplined, even in acquisitions, to bring them over to the Open Text model of the adjusted operating margin within a very defined period of time, and we've hit this target every single time. That remains our overarching target. As we grow, 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 translating the people-based spend with more automation. That's really what we're going to be focused on.
I would think about it as two parallel streams, the internal efficiencies as well as the incremental investments Mark talked about.
Okay. Just to clarify that, I'll leave the line here.
Sure.
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, we're going to continue that. You would expect in any business, we will keep doing a programmatic view of all the P&L items on a continuous basis. There are rooms for automation. Mark, do you want to add anything?
I was just going to say welcome, Madhu. Not to put this on your shoulders. Paul, the dialogue, as we scale from here forward, and Madhu's perspective of how we can more efficiently grow revenues at a nonlinear expense trajectory.
Yes.
I would just amplify the ongoing efforts and new insight with Madhu's leadership.
Thank you, Mark. Perhaps I would add to that. Coming from not just a software technology background, but also having services experience, I think it's going to be very helpful, and again, with a fresh insight. Really, I would say continuing the work Mark and the team have kicked off.
Great. Thank you.
Yeah. Thank you.
Our next question comes from Thanos Moschopoulos of BMO Capital Markets.
Hi, good afternoon. G&A went up a fair bit sequentially, even though G&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.
Were those 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. This is more part of normal investments.
Okay. 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. It does reflect our investments. The coming quarters, we're going to continue those investments as we lean more into our cloud and recurring revenues. We expect that to then expand margins from there. 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. Then we'll, from those investments, begin to expand again. We're just, if you will, just tapping the accelerator a bit on our investments. As we go slightly faster into the cloud, then we'll begin to grow the margin again.
Okay. Then finally, the percentage of licensed 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. Yeah, it's a little reflected that we're going in to try to do more of the cross-selling that we talked about earlier, and also bringing our install base forward into a modern cloud platform.
Great. Thanks. I'll pass the line.
Yep. Thanks, Thanos.
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. Just had a follow-up on the longer-term model question after that.
Yeah. Walter, thank you. We already factor in annual contract value into our account executives' variable comp. I think 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. I think we have it right in how we give a blended target to our salesforce or account executives that they have a number to go make, whether it's through annual contract value or license and first-year maintenance combined. I think we have the plan right. No anticipated changes. When we finish the fiscal year, we'll certainly look into FY 2019 if there's any little tweaks. I think we have it right.
Great. Just on the longer-term model side, I'm wondering, your leverage ratios, you've talked about the past like three times. Is that, as we think about that cash flow number you're charging yourselves on for 2021, is it safe to assume that three times still applies? Thanks.
Yeah. Well, I'm sorry, Walter. Thank you. Yeah, I think our bank covenants are higher than that, the management threshold that we've always looked to set is around 3 times. As we look at the fiscal 2021 goals, yeah, the 3 times 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. 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.
Great. Thank you.
Thank you, Walter.
Thank you.
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 or the distribution of deals from the December quarter to the March quarter. You fairly well outperformed, I would say, in the December quarter. Has that drawn down part of what we experienced this quarter?
Blair, thank you for the question. You said it correctly, and maybe I'll just use my words to it, that Q2 and Q3 balance each other out. We look at our business on an annual basis.
Okay. The second question is, again, around the license side.
Yeah.
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? 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 24th, which is the deadline, and it's the removal of the US Safe Harbor, progressed to the EU Directive. May 24th is the 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. I actually see customers taking a long-term view of information security, information governance. 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." I think things like Brexit will actually drive some enterprise demand. You might need two licenses instead of one, ultimately, or two subscriptions versus one.
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. Barrenechea 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 billion in annual operating cash flow per year as we exit fiscal 2021, and on our great cash flow performance in the quarter. I hope you'll join us at Enfuse and Enterprise World. We look forward to speaking to everyone soon. Thank you so much.
This concludes today's conference call. You may disconnect your lines.