Open Text Corp Q3 FY2020 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Open Text Corporation’s Third Quarter Fiscal 2020 Conference Call. Please note that all participants are in listen-only mode and this conference is being recorded. There will be a chance to ask questions after the presentation. I will now hand the call over to Harry Blount, Senior Vice President of Investor Relations. Please proceed.

Thank you, Operator, and good afternoon, everyone. On the call today is Open Text’s 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. This call will last approximately 60 minutes, with a replay available shortly thereafter. I would like to take a moment and direct investors to the Investor Relations section of our website, investors.opentext.com, where we have posted two presentations that will supplement our prepared remarks today. First, our strategic overview deck titled Open Text Investor Presentation April 2020. And the second titled Q3 FY2020 Financial & Business Results includes information and financials specific to our quarterly results, notably our updated Quarterly Factors on page 10. In May and June, Open Text management is pleased to virtually meet with investors at the following conferences. CIBC’s Technology and Innovation Conference on May 13th, Barclays Americas Select Franchise Conference on May 14th, Needham’s Technology and Media Conference on May 19th, Bernstein’s Strategic Decisions Conference on May 29th and Bank of America’s Merrill Lynch Global Technology Conference on June 4th. Please feel free to reach out to me or the IR team for additional information. And now I will proceed with a reading of our Safe Harbor statement. Please note, 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 today. Certain material factors and assumptions were applied in drawing any such statement. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information, as well as risk factors including in relation to the current global pandemic that may project future performance results of Open Text, are contained in Open Text recent Forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, 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 any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, I am very pleased to hand the call over to Mark.

Thank you, Harry. Good afternoon, everyone, and thank you for joining today’s call. On behalf of the Open Text community, we honor the brave women and men who are serving on the frontlines of this pandemic, including our healthcare professionals, first responders, infrastructure and cloud experts, food processors, and other essential workers who are keeping us healthy, safe, and productive. Our hearts are heavy with the loss of life and hardship, but during these challenging times, our spirits are lifted by hopes, acts of kindness, and courage. The health and well-being of our employees, as well as our customers and partners, is our top priority. I am pleased to share that the Open Text community is performing exceptionally well. This pandemic impacts every aspect of our work and lives. As we say in Canada, all together. I am inspired daily by the resilience and innovation of my colleagues. I am proud of the Open Text leadership, our employees, their commitment to customer experience, operational excellence, and their resilience during this pandemic. Although there is still a long journey ahead for humanity, we look forward to the return of in-person camaraderie soon. Open Text is a unique platform, a strong company, and we are well-positioned for significant moments in time. We will emerge from this stronger than we entered. Let me share some highlights from our Q3 financial performance. We reported record total revenues of $850 million, a year-over-year increase of 13% or $820 million in constant currency. This marks our 24th consecutive quarter of year-over-year growth in constant currency. We achieved record annual recurring revenues of $662 million, which is a 21% increase year-over-year, with our annual recurring revenue representing 81% of total revenues. Cloud revenues reached $340 million, up 42%, with margins increasing by 590 basis points to 63%. Customer support revenues also set a record at $323 million, an increase of 4%, with a margin of 90%. Our renewal rates remain robust in the upper quartile for both cloud and off-cloud services. The Americas accounted for 63% of our business, EMEA 29%, and APJ 8%, with a noticeable shift towards the United States. We generated $260 million in adjusted EBITDA, representing a margin of 31.8%, and recorded operating cash flows of $330 million, with trailing 12-month cash flows of $904 million. We closed the quarter with $1.4 billion in cash and a net leverage ratio of 2.25 times, which we anticipate will decrease in the upcoming quarters. We made significant strides during Q3. Key customer wins in critical infrastructure included Nestle, United Health Services, General Motors, Continental, Daihatsu, Diamond Pharmacy Services, and Pathos Lab Testing. We formed new partnerships with Amazon and Dun & Bradstreet, and acquired XMedius, enhancing our ARR in on-demand messaging with over 50,000 users. We established an Open Text U.S. public sector group to integrate all our activities in this area, covering civilian, defense, intelligence, and local and national laboratories. We released two Webroot reports focusing on cyber threats and consumer security behaviors, and announced a suite of innovative cloud offerings at Enterprise World Europe Digital with Cloud Editions 20.2. Our new citizen developer site is now live, enabling rapid development of content workflow applications crucial for digitalization. We successfully refinanced early in Q3, extending our debt maturities into 2024 and lowering our coupon rates. We transitioned to a work-from-home setup smoothly and had a strong Q3, engaging with customers through our enhanced Open Text digital zone which has facilitated more than 10,000 engagements. To summarize, our business has transformed significantly. In 2011, ARR was about 54% of revenue, with no cloud business; now, ARR stands at 81% of revenue, with cloud being our largest segment and license making up just 10%. We are now a cloud-centric company with high recurring revenues and will continue to support customer preferences for subscription or license purchases across cloud, off-cloud, or hybrid deployments. We are well-positioned to navigate short-term challenges and foster long-term growth. The pandemic accelerates discussions around digitalization and cloud transition, although affecting overall demand in heavily invested sectors like auto, airlines, hospitality, and retail. This moment establishes a critical opportunity for the transition to the cloud, and the urgency for digitization has never been clearer. We have a vast network of over two million trading partners and 60,000 customers on our trading grid, providing them a competitive edge in manufacturing adaptability. We have assisted many companies in transitioning to PPE production at extraordinary speeds in Q3 alone. At Open Text, we recognize the long-term changes in behaviors as opportunities to assist customers in automating their businesses leveraging our software and expertise through our recent innovations. I am particularly proud of Open Text’s contributions toward global pandemic responses, supporting sectors such as healthcare, biotech, government, energy, financial services, critical manufacturing, food and agriculture, telecommunications, and logistics. Let me discuss our proactive strategies at Open Text to address the shorter-term uncertainties and prepare for the new work environment. We believe it's essential to be decisive and clear. Our proactive approach includes maintaining a focus on total growth while investing for organic future growth and strengthening our cash position to capitalize on the right opportunities. ARR was 81% in Q3, and we expect to see the transition from licenses to cloud continue. Today, we are announcing a set of cost control measures and a restructuring program. This involves a temporary reduction in cash payroll expenses and discretionary spending while instituting permanent restructuring measures, including a shift to a hybrid work model and a 5% reduction in our workforce. These actions are estimated to decrease annual expenses by $65 million to $75 million. Maintaining a strong balance sheet is crucial. We wrapped up the quarter with $1.45 billion in cash and a 2.25 times leverage ratio, which we expect to decrease as we build cash reserves. We proactively drew $600 million on our revolver and with our refinancing in February, we extended our debt maturity, with our first maturity now four years away. Regarding Carbonite, our strategy aims to enhance Open Text's reach into cyber resilience and data protection. Carbonite's products are vital as businesses adapt to remote work. Its first quarter performance was strong, delivering $110 million in revenues and contributing positively to our adjusted earnings and cash flows. Looking ahead, we anticipate variability due to the current environment. In the first half of our fiscal year, we reported positive organic growth. Although our full-year organic growth may face challenges due to the pandemic, we project total revenue growth in the mid-to-high single digits. We foresee robust cloud growth of around 20% and stable customer support growth. However, we expect declines in license and other areas as we continue our cloud transition. We are updating our fiscal 2020 targets, with ARR expected to be between 76% and 78%, slightly lower adjusted EBITDA margins, and CapEx reducing to $72 million to $77 million. We will maintain our dividend program, reflecting our commitment to shareholder value. As we move forward, we aim to serve as the leading information management company globally, helping our customers accelerate their transformations through our platforms. We remain dedicated to growing our cash flow and maintaining a strong balance sheet while prioritizing transparent communication and ongoing engagement with stakeholders. I am proud of our solid Q3 performance and the commitment of our leadership team as we navigate this historic moment. We are confident we will emerge from this pandemic stronger than before due to the proactive choices we have made together.

Thank you, Mark, and thank you all for joining us today. Our Q3 results were solid and reflect our operational excellence and continued focus on our balance sheet. We are proud of the DNA and culture that Open Text possesses as we continue to optimize the structure, initiate and execute preemptive cost measures. With a strong balance sheet and a highly efficient operating framework, we are best positioned to address the shorter-term challenges and longer-term goals. And before I share my commentary on Q3, please note that my updated fiscal 2020 target model is included in our Q3 investor presentation posted on our IR website and will be addressed in my comments. Similar to prior quarters, my references will be in the millions of USD and compare to the same period in the prior fiscal year. Let me start with revenues and earnings. Total revenues were $814.7 million, up 13.3% or up 14.1% on a constant currency basis. Foreign exchange continues to be meaningful. There was a $6 million FX unfavorable impact to revenue in the quarter. Year-to-date, total revenues were $2.3 billion, up 7.6% or up 8.8% on a constant currency basis. Earnings per share, Q3 GAAP earnings per share diluted was $0.10, down from $0.27, primarily due to the incremental impact of amortization relating to the Carbonite acquisition. Q3 non-GAAP earnings per share diluted was $0.61, down from $0.64 or down $0.02 on a constant currency basis. Year-to-date, GAAP earnings per share diluted was $0.77, down from $0.79. Year-to-date, non-GAAP earnings per share diluted was $2.09, up $0.05 or up $0.10 per share on a constant currency basis. The geographical split of total revenues in the quarter was Americas 63%, EMEA 29%, and APJ 8%. Annual recurring revenue was $662.3 million, up 20.6% or up 21.3% on a constant currency basis. Year-to-date, ARR was $1.8 billion, up 11.1% or up 12.2% on a constant currency basis. Annual recurring revenues as a percent of total revenue was 81% for the quarter, up from 76% in the prior year and 78% year-to-date, up from 75% in the prior period. Our Cloud revenues were particularly strong at $339.5 million, up 42.3% or up 42.8% on a constant currency basis. Year-to-date cloud revenues were $825.1 million, up 23.9% or up 24.7% on a constant currency basis. Our cloud renewal rate remains in the mid-90s. Our customer support revenues were $322.9 million, up 3.9% or up 4.8% on a constant currency basis. Year-to-date, customer support revenues were $950.7 million, up 1.9% or 3.3% on a constant currency basis. Our customer support renewal rate remains in the low 90s. Our license revenues were $81.1 million, down 17.9% or down 17% on a constant currency basis, primarily due to the pandemic's impact on our license business during the quarter. Year-to-date, our license revenues were $297 million, down 3.7% or down 2.3% on a constant currency basis. Professional services revenues were $71.3 million, up 0.3% or up 1.5% on a constant basis. Year-to-date, professional services revenues were $210.3 million down 2% or down 0.4% on a constant currency basis. Turning to margin. GAAP gross margin was 65.4%, down 130 basis points again, primarily due to the incremental impact of intangible amortization from Carbonite. Year-to-date, GAAP gross margin was 67.5%, up 20 basis points. Adjusted gross margin was 73.3%, up 30 basis points. Year-to-date, adjusted gross margin was 74% down 10 basis points. During both periods, adjusted gross margin is well within the range of our fiscal 2020 target model. Also, on an adjusted basis, cloud margin was 62.5%, a 410 basis points improvement in Q2 fiscal ‘20 and up from 56.6% last year. Year-to-date, cloud margin was 59.7% up from 58%. Our customer support margin was 90.1%, up from 89.9%. Year-to-date, customer support margin was 90.5%, up from 90.1%. Our license margin was 96.9%, down from 97.3%. Year-to-date, license margin was 97.3%, up from 96.7%. Professional services margin was 21.2%, up from 20.9%. Year-to-date, professional services margin was 22.2%, up from 21.7%. Adjusted EBITDA was $259.5 million, down 0.9% or up 0.5% on a constant currency basis, margin-wise this represents 31.8%, down from 36.4%. Year-to-date, adjusted EBITDA was $830.7 million, up 1.8% or up 3.5% on a constant currency basis, margin-wise this represents 36.4%, down from 38.5%. As a reminder, both the quarter and year-to-date results include a full quarter of Carbonite’s financials. Our adjusted net income was $166.6 million, down 3.9% or down 2% on a constant currency basis. Year-to-date, adjusted net income was $566.8 million, up 3% or up by 4% on a constant currency basis. GAAP net income was $26 million, down 54.3%, primarily due to $48 million of incremental impact of intangible amortization from Carbonite. Year-to-date, GAAP net income was $207.9 million, down 2.7%. Turning to operating cash flow, we have adapted $329.6 million, an increase of 15.2%. Year-to-date operating cash flows of $674.3 million, up 4.3%. Q3 reflects continued solid performance and our well-integrated working capital framework. We had record collection. Q3 DSO was 51 days, an improvement of nine days compared to Q3 fiscal 2019, all notwithstanding the advent of the pandemic during March. Carbonite remained the three days for our working capital and despite our Q3 strength, we are mindful of and closely watching the short-term challenges ahead. From a balance sheet perspective, we ended the quarter with approximately $1.45 billion in cash, given strong cash flow performance and $600 million from a revolver drawn as a preemptive measure in the current environment. The proceeds from the revolver are represented within cash and cash equivalents. The refinancing announced in February further strengthened the balance sheet position, extending our earliest maturity to 2024 and the latest start to 2030, our consolidated net leverage ratio remains at 2.3 times. In a Carbonite update, Q3, as I said, is our first full quarter with Carbonite results. The integration is going well, and we remain on track to our target operating model by the end of fiscal ‘21 or sooner. The acquisition remains accretive to annual reporting revenues, cloud margins, adjusted EBITDA, and working capital. On the restructuring plan, today we announced a restructuring plan that will impact our global workforce and consolidate certain real estate facilities. As a result of the pandemic, more than 95% of our employees are currently working from home, and we are making plans for a hybrid future return to workplace strategy. We currently have approximately 120 offices around the world, and our intent over time will reduce over 50% of our global offices, impacting approximately 15% of our employees. The estimated cost of the real estate facilities restructuring is expected to be in the range of $65 million to $80 million. We have accrued and begun executing a workforce balancing program across various departments to further reduce our cost base in light of the economic uncertainty. We estimate severance costs to be in the range of $15 million to $20 million. The total cost of restructuring including workforce and facilities is expected to be approximately $80 million to $100 million. We expect to incur the restructuring expense during Q4 of this fiscal year. Once completed, we anticipate annualized expense savings of approximately $65 million to $75 million. Q4 savings would be minimal, and we expect substantial realization of savings during fiscal ‘21. We are also taking a number of additional preemptive measures, including deductions in discretionary spend and temporarily reducing the salaries of executive in leadership and other employees, as well as our Board of Directors. On the quarterly factors, let me summarize and reiterate the quarterly factors we anticipate for our upcoming Q4. As we look at where FX rates are today and the geographical components of our business, we know that the FX headwind, fiscal ‘20 year-to-date was $26 million to revenue. We expect approximately $40 million annual FX headwind for the full fiscal 2020. Furthermore, we expect Q4 total revenues to be flat to slightly down compared to Q3 ‘20, and we expect adjusted EBITDA dollars to be flat to slightly up compared to Q3 ‘20. Regarding the target operating model, let me highlight the following changes. Annual recurring revenue is being increased by 100 basis points to a range of 76% to 78%. Although we are not changing our target range for license revenue, we do expect a decline in fiscal ‘20 compared to fiscal ‘19. Our adjusted EBITDA margin is lowered by 100 basis points to a range of 35% to 36% and primarily reflects the anticipated impact of a pandemic during our fourth quarter. Capital expenditures to a range of $72 million to $77 million. We continue to see efficiencies in our capital expense. All other elements of our fiscal ‘20 target models remains unchanged. Our long-term aspiration, as Mark mentioned, we will update you on our fiscal 2021 plan and our long-term aspiration during the fiscal year call in early August for our usual cadence including adjusted EBITDA and a shift to free cash flow from operating cash flow. On the tax update, the IRS matter is still in the appeals phase and our results remain strong as we continue to vigorously defend our position. Regarding our dividend, we today announced a quarterly dividend of $0.1746 per share payable on June 19, 2020. Our rates remain sustained based on a target of distributing approximately 20% of our trailing 12 months operating cash flow. In summary, we are pleased with our Q3 results with strong cash flows, a solid balance sheet, and initiating a number of preemptive measures, in light of the current global pandemic, all of which would enable us to remain highly focused on delivering against our total growth strategy. The strength of our people, processes, and systems were on full display in the current environment this quarter and demonstrated the durability and resilience in our organization. We remain confident in continuing to benefit from this model as we look ahead. I would like to extend a special thank you to the teams at Open Text for the successful pivot and incredible efforts during the quarter, a thank you to our shareholders, whose trust and confidence we greatly value, and finally, I’d like to wish everyone an abundance of health and safety. I would now like to turn the call over to the operator for questions.

Thank you. Our first question comes from Raimo Lenschow of Barclays. Please go ahead.

Thank you. Congratulations on a strong Q3, and I hope everyone is staying healthy. Madhu, you’ve experienced downturns before. Can you share what you are monitoring in terms of conversion rates, pipeline building, and churn, especially now that you own Carbonite with a greater focus on SMBs? Help us understand how you plan to navigate the current situation. I have a follow-up as well.

Thank you for your question. We hope you and your family are doing well. Ultimately, our guiding principle will vary by industry since each sector has its unique challenges. The automotive industry differs from retail, healthcare, and hospitals. We're focusing on understanding our business dynamics and any structural changes specific to each industry. There's no doubt that we're seeing an increase in transformative discussions, particularly in areas like digital transformation, cloud computing, remote work, cybersecurity, and supply chain management. When we look at the industries facing the most challenges in the short term, they account for about 20% of our revenues. However, this is balanced by growth opportunities we're seeing in healthcare, pharmaceuticals, industrial manufacturing, and government sectors. Overall, for fiscal year 2020, we anticipate mid to high single-digit growth, although we had projected a slightly higher growth rate before the pandemic. We analyze the situation industry by industry, recognizing that while some sectors are seeing accelerated discussions, others face significant challenges. Regarding small and medium-sized businesses, we are carefully monitoring the situation. The Carbonite business includes both SMB and enterprise segments, as well as OEM, and our consumer direct business actually showed an increase in the third quarter. We didn’t see any negative impact in Q3, but we are keeping a close watch on this area. I'll pause here, and I believe you might have a follow-up question.

Yes, we are in familiar territory, but we are also navigating some uncharted areas in this. … kind of situation and can you talk a little bit about what are the signals or the metrics that you guys are going to focus on most in terms of kind of managing it and kind of making decisions in terms of like changing behavior or changing something? I mean you took very kind of decisive action already now, but like what’s the guiding principle for you here now as you go for the crisis?

We are clearly being proactive in our decisions, as we mentioned in our script. We believe it's better to be decisive than slow and incremental. I've learned this from my experiences with cancer treatment and during the great recession; you have to be prepared to face various challenges. We will monitor the three key areas in the market: testing, tracing, and treatment, and we'll analyze each industry specifically. We gain valuable insights through our business network about numerous industry trends. While we have the usual pipeline and metrics, our approach will be focused on each industry, tracking detailed metrics, as we know that recovery will occur one industry at a time.

Okay. Makes sense. Thank you, good luck.

Our next question comes from Paul Steep of Scotia Capital. Please go ahead.

Hi. Good evening, Mark. Could you talk... Hi. The cloud growth in the quarter, maybe measures you are taking whether you have done anything to actually accelerate the transition towards the cloud and sort of push even harder towards that direction beyond the acquisitions that we talked about earlier?

It’s somewhat before COVID that we made structural changes as we entered the fiscal year, prioritizing leadership and management. However, the pandemic has accelerated the shift to the cloud. Customers who have not previously been able to invest extensively in a robust technology platform are now seeing the importance. As a 15,000-person company operating from home, we processed trillions of transactions through our trading grid in the past hundred days. The discussions around cloud and digital transformation are speeding up because of the pandemic. We are committed to assisting our customers in making a swift transition, whether that involves consolidating content services for developing knowledge economies or utilizing our trading grid to quickly adjust supply chains. In Q3, we supported multiple customers transitioning from traditional manufacturing to onboard 2,000 new suppliers and adapt thousands of parts for PPE manufacturing, achieving this in record time. The pandemic is propelling these discussions forward, though we have not made any structural changes to our compensation plans to facilitate this.

Great. And then just a quick follow-up to provide some context for everyone on the call regarding what the team has accomplished with today’s announcement now that you have added another major cloud service provider on the public side. How have clients influenced your focus towards Azure and AWS? Thanks.

Yeah. Yeah. Sure. Thanks. So we announced our relationship and extended relationship with AWS today. And we have previously announced our relationship with SAP, Google. We have always partnered with Microsoft as well. 20.2 Cloud Editions, our cloud-first, native cloud applications are completely containerized, and we really have kind of completed the tech stack and now the business relationship side to give full choice to our customers. So if a customer has sort of standardized on AWS, if they have standardized on Google, they have standardized on Azure, we can seamlessly support their business decisions and their operating decisions, as well as our tech stack. So 20.2 is an important step, native cloud, cloud-first. AWS really is one of the last big pieces for us to firmly support, as I like to say completing the need and the choice for our customers.

Our next question comes from Stephanie Price of CIBC. Please go ahead.

Good afternoon and congrats on the quarter.

Yeah. Thanks, Step. Good to hear your voice.

You too. Thanks for the color on what you have seen, so first, just wondering if you could talk a little bit about what we have seen in the first couple of weeks of April? And maybe a related question, as regions start to open up, our prospective customers picking up where they left off or how quick are they to re-engage?

Software continues to show unusual patterns, especially at the end of the quarter. I am very pleased that we have successfully transitioned from a license-based model to a cloud business with highly recurring revenue. If I reflect on our operations, we have transactional work as well as network work. On the network side, things appear stable as we approach April. Looking back, at the end of the last calendar year, January showed a slight decline, February was a little lower, and March continued that trend, but in April, it seems to have reached a more stable state. It's too early to make any definitive statements, but during the first month of the quarter, it looks steady compared to the end of March. Globally, China has started to return to regular workplace activities, and Southern Europe is following suit. However, it's still early for Western Europe and North America, and there are regions such as India and South America that haven't stabilized yet. Overall, in terms of our business, we continue to see our transactional and network segments. The network segment appears stable compared to the end of March, but it's still too early for any predictions.

Okay. Thanks for that color. And then maybe for Madhu, just on the cloud margins this quarter obviously very, very strong. Just wondering if you could elaborate a bit on the strength, is it all related to the Carbonite integration? Should we kind of see this as the new run rate going forward?

Yeah. Great. I mean, it’s a great question. I would say think about it in three parts. One certainly we continue to optimize from an Open Text cloud perspective. Our cost framework and we certainly see the benefit of that. And Carbonite is our full quarter, and the predominant of Carbonite revenue is back, I mean in the cloud. And I also spoke about the CapEx efficiencies we are seeing. So I would say all three factors definitely contributed, and we talked previously about being in the low to mid-60s right? You should definitely look to us to be in the low 60s as we look ahead as well.

Great. Thank you very much.

Thank you.

Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Thank you very much and good afternoon. With the global shift to remote work in many organizations appearing to be structural and permanent, what do you think is the least understood challenge in this transition, including IT and the move to remote work? Additionally, from a strategic perspective, how do you see this shaping OpenText’s software portfolio going forward?

Thank you for the question. Many of us in tech are focused on technology-driven businesses. If I had walked into my management meeting last year and suggested that we send everyone home for two months to see how it goes, I would have expected to be dismissed. However, we've all had large-scale experiments, and many of us have been surprised by how effective remote work has been; in some cases, productivity has increased. This has given us a chance to rethink what returning to the workplace means. We are not limited in certain markets, which will expand our talent pools and allow us to consider a wider range of talent. I also believe this will transform content services, which fundamentally function as a knowledge platform. It's crucial to understand how to manage major processes and remote work without a solid knowledge base. Many of us were surprised by the productivity levels achieved during this period. Without having taken this step ourselves, we would not have seen these changes. I anticipate that hybrid work will lead to lasting changes and, in many ways, refresh content services, which reflects some of what we are observing.

Thanks for that. Just another question for me, in regard to Carbonite in the quarter it was significantly above our expectations, and then on a run rate basis, above your prior outlook now does the upside in the quarter specifically relate to work from home demand, and you did see, or was there another driver that drove the upside there?

I would mention a few points. One is the successful integration and execution, along with challenges in areas we discussed such as automotive, airlines, travel, hospitality, and oil. However, as the workforce transitioned to remote work—where home now includes office, school, and gym—many individuals are working from home. We observed high renewal rates and strong interest in our direct business to consumer and prosumer offerings. Thus, I would attribute the positive results to both integration and execution, as well as an increase in opportunity arising from the shift to remote work.

Okay. Thanks for taking my questions.

Our next question comes from Richard Tse of National Bank Financial. Please go ahead.

Yes. Thanks. So I understand that there’s certainly a potential for acceleration broadly on the other side, particularly in cloud. But this current crisis kind of uncovered any specific product areas that you can actually see outsize pick up an interest here that you weren’t really seeing before.

Richard, thanks for the question. Look, I think, the areas of focus and more conversation are around consolidation of content services, our core platform, a collaboration suite, and e-signature, lots of conversation, and protection of the home and end point. These are things that are certainly in the green column for us more so than they were pre-COVID.

Okay. And then you mentioned a bunch of different verticals like auto, airline, hospitality, obviously those are very, very challenging verticals, but yet when you sort of look at the kind of rain or the year, you still seem pretty optimistic, so obviously that’s pretty impressive. So if you were to say it was in a normalized state organic growth, can you maybe talk about what that would have been under kind of normal conditions?

Well, as I said, earlier, we are not going to talk about fiscal ‘21 yet, right? We will stay on our usual cadence, and we get to August we will talk about fiscal ‘21 as we usually do. For herein, which I am just going to talk at the fiscal year level, Richard. So for fiscal ‘20, we are expecting to see another growth year. Total growth in the mid-to-high single digits, cloud growth in the low 20s. In relation to organic growth which I think is your question. The first half of 2020 we had organic growth. Year-to-date and constant currency good organic growth in ARR, but two months ago organic growth will be challenged, right due to COVID. And whereas we have some there are heavily invested industries that have pressure as we all know. We have expansion discussions and other industries healthcare, pharma, industrial manufacturing. That does translate into short-term effects for us. As I said in my prepared remarks, our fiscal ’20 growth is expected, all in our fiscal ’20 growth expected to be in the mid to high single digits, and before COVID we expected higher growth. So we are still going to have a growth year. We are still expecting a growth year, but we clearly have growth impacts because of COVID.

Okay. And just one quick one for me, the last question in terms of acquisitions and maybe talk about the ability to pursue acquisitions here in the next few quarters and do you see a change here over those next few quarters in terms of the valuation into the marketplace? Thanks.

We are actively exploring opportunities in the market. It's clear that the pandemic will have a downward impact on valuations in the areas where we look for assets. We continue to strengthen our balance sheet, currently at 2.25 times leverage and decreasing. We will keep searching for the right opportunities at the right time. Any prospective buyer needs to recognize how the pandemic has affected businesses, which adds another layer to the due diligence process. We are focusing on identifying companies in our core markets that we are familiar with, particularly strong brands with high recurring revenues. Now is not the time to stray from our expertise. Therefore, we will continue engaging with companies, developing our pipeline, and having thorough discussions, ensuring we are ready for the right opportunities and assets when they arise.

Right. Thank you.

Our next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.

Hi. Good afternoon. Mark, can you speak to what you are seeing in your transaction-driven businesses like the trading grid, given that we have been going on our transaction volume is generally up a lot, down a lot. If they are down, to what extent your contractual minimums that might preserve some of the revenue?

Yeah. Thanks, Daniel. Well, I am not going to translate traffic. Traffic does it necessarily translate directly into revenue, right? We have over chase, we have under chase; some contracts are our yearly averages. So it’s not a direct relationship. There are places where we have seen increased traffic, if we look at pharmacy, healthcare, actually certain industrial manufacturers as well. We have also seen areas that have much lower traffic, of course, retail CPG auto. You add the pluses and minuses; the traffic is down overall, but doesn’t translate directly into kind of kilo character down doesn’t translate down that to a dollar down, if you will. So we factor that all in to how we look at the year. Again for fiscal ’20 we are expecting mid to high single-digit growth all-in. But overall to answer your question, the traffic is down where places that are positive; many places that are negative, but you add the positives and negatives it still equals a negative and we think it’s a short-term issue and we will wait to see the other side.

Great. Thanks. And in the current climate, are you seeing any pressure on DSOs, the customers asking for longer payment terms or for that matter, existing customers pushing for concessions on weakness of oil pricing or not to date?

Every industry is discussing longer payment terms and renewal rates. In the third quarter, we saw very strong renewal rates. Our position is strong because we provide a range of products that allow us to counter those discussions with additional offerings and consolidation opportunities. The maintenance and features of our service are essential for many industries. I am optimistic about our renewals. Companies are requesting longer payment terms, and we will act fairly in the short term, as everyone should. We will support the industries and customers who need our assistance, and our proactive measures also help mitigate any challenges. This collaborative spirit contributed to record cash flows in the third quarter.

This concludes the question-and-answer session. I will now hand the call back over to Mr. Barrenechea for closing remarks.

Okay. Well, thank you, everyone. This was certainly a very unique time and a seminal moment to have an earnings call. Our solid Q3 puts us in a great position to weather the short-term challenges ahead, with 21 consecutive quarters of year-over-year growth in constant currency, record revenues, record ARR 1%, and record cloud to $340 million, up 42%. We are maintaining our dividend and visibility, and our hearts and minds are with all those affected by this series of events and the pandemic. Thank you for joining today’s call, and we will see you at our conferences in the quarter. Thank you very much.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.