Earnings Call
Open Text Corp (OTEX)
Earnings Call Transcript - OTEX Q4 2020
Operator, Operator
Thank you for holding. This is the conference operator. Welcome to the Open Text Corporation Fourth Quarter and Year-End Fiscal 2020 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be a chance to ask questions. I will now pass the conference to Harry Blount, Senior Vice President, Investor Relations. Please proceed.
Harry Blount, Senior Vice President, Investor Relations
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 titled Open Text Investor Presentation August 2020. The second titled Q4 FY2020 Financial Results includes information and financials specific to our quarterly results, notably our updated Quarterly Factors on Page 8. During the month of August and September, Open Text management will be pleased to virtually meet with investors at the following conferences: Oppenheimer's Annual Technology Internet and Communications Conference on August 11th, BMO's Virtual Technology Summit on August 26th, Citi's Global Technology Virtual Conference on September 8th, Deutsche Bank Technology Conference on September 14th, and Jeffrey's Virtual Software Conference on September 15th. In addition, I'm pleased to announce that we will be hosting an Investor Day on Thursday, November 12th. This virtual event will consist of our annual investor update, featuring strategic presentations from key members of our executive leadership team. Please save the date in your calendar and contact investors at opentext.com to register for the event. Please feel free to reach out to me or the IR team for additional information. And now, I will 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 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 the risk factors including in relation to the current global pandemic that may project future performance results of OpenText are contained in OpenText's 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 will hand the call over to Mark.
Mark Barrenechea, CEO and Chief Technology Officer
Thank you, Harry. Good afternoon to everyone, and thank you for joining today's call. I wish everyone health, well-being, and happiness. The last six months have made it very clear that digital technologies are the key to business resilience and durability. Organizations that own their digital capacity will recover faster and emerge stronger from this ongoing crisis. Resilience is the ability to recover quickly; durability is permanent, the ability to resist stress before. It is also very clear that while the crises persist, there will be economic volatility and uncertainty, and there will be challenges and opportunities alike. Fiscal 2020 was a seminal year for OpenText. We rallied around the principles of resilience, durability, change, and opportunity to guide us through this difficult time. The pandemic has validated our purpose to help companies digitize and transform. Now more than ever, customers trust and rely on OpenText's products and expertise to help them digitize their business as they navigate through a changing global environment. The world runs on information — from the debate on truth, the global pandemic response to the modern civil rights movement. The fact is, information is more important than ever. For nearly 30 years, we have helped companies on a global basis across all industries build cultures of knowing with our information management software and expertise. Our leadership position in information management has never been stronger, and customers of all sizes continue to trust OpenText as they reset to a new equilibrium at work, at home, and at play. The preemptive actions we took at the beginning of the pandemic are enabling us now to make significant investments in sales, products, and more automation, positioning us to compete better and gain market share regardless of the economic scenarios ahead. Let me begin by discussing our 20 results and accomplishments. For fiscal 20, OpenText delivered record revenue, record annual recurring revenue, record cloud revenue, record gross margin dollars, operating cash flow, and record free cash flow, all during the most challenging economic period in our lifetime. Total revenue of $3.1 billion was up 8% year-over-year; record annual recurring revenue is $2.4 billion, up 13% year-over-year, and now 78% of total revenues, 305 basis points higher than fiscal 19. Cloud revenues of $1.2 billion were up 28% year-over-year, with a 347 basis point margin increased to 61%. Record customer support revenues of $1.3 billion were up 2% year-over-year, with a 25 basis point margin increased to 90.4%. We also completed the year with record enterprise customer support renewal rates of 93.8%. We generated $1.15 billion of adjusted EBITDA dollars, up 4%, or 37% of total revenues; record operating cash flow of $955 million, up 9% year-over-year; and record free cash flow of $882 million, up 9%, or 28.4% of revenue. Please note we're going to be using free cash flow going forward versus operating cash flows. We ended the quarter with $1.69 billion in cash and a net leverage ratio of approximately two times. Looking back from fiscal 11 through today, AAR has expanded from 54% to 78% of total revenues. Cloud revenues have grown from zero to $1.2 billion or 37% of total revenues. Licensed mix is only 13% of our business today compared to nearly 30% in fiscal 11. And we deliver strong gross margins over time, regardless of the mix of business that strong gross margins in the low to mid 70s, and we expect continuous improvements in the future. We've grown adjusted EBITDA from the high 20s to the high 30s from fiscal '11 through today. OpenText's business model is based on recurring revenue, which is significantly predictable, strong margin, and strong cash flows, and we've de-risked away from a volatile license-led model, which is an exceptional accomplishment in the software industry. Let me transition to provide a few highlights from the quarter. Within Q4, total revenues of $827 million were up 11% year-over-year; ARR of $658 million was up 18% year-over-year; ARR was 79.5% of total revenue; cloud revenue of $333 million was up 38%. Adjusted EBITDA of $317 million was up 12%, with a 38.4% margin; OCF was $284 million, up 22% within the quarter; and free cash flow of $263 million was up 21% within the quarter. In constant currency, this quarter also represents a 22nd consecutive quarter of year-over-year growth in total revenue and ARR. We are now a cloud-first company with a rich installed base of customers. For the second consecutive quarter, cloud has become our largest revenue line. Cloud gross margins are 31.3% for the year, and 65.1% for the quarter. We have more room for margin improvement through scale, mix, and more automation. As the cloud business continues to scale, it will become more efficient. Overall, it was a great quarter by all measures, and I’m so proud of my colleagues for their focus and commitment to our customers. We continue to generate cash growth and have returns in the right places, leveraging the increased predictability that they bring to our business model. We continue to take market share. We had many notable customer wins in Q4 that included the National Institute of Allergy and Infectious Diseases, the NIAID or NIH, which we announced today; Becton Dickinson; Rapid Radiology; U.S. Defense Health Agency; Panasonic; Michelin; Merck; The Williams Companies; and Amway. Let me highlight two today. The National Institute of Allergy and Infectious Diseases is the leading research entity focused on understanding, treating, and preventing infectious immunologic and allergenic diseases, including COVID-19. The NIAID is expanding its partnership with OpenText and selected OpenText content suite and AppWorks to support enterprise-wide business operations to advance the NIH mission of turning discovery into health. We’re very proud of our partnership with the NIH. Rapid Radiology is one of the largest teleradiology providers in the U.S. They selected OpenText Business Network to streamline the delivery of radiology test results to electronic medical records. The OpenText Business Network solution delivers the industry's only cloud integration service, providing interoperability between all electronic medical record systems and the long-term care market, ensuring seamless delivery of clinical results between providers and improving patient care. This is particularly important with the move to increase remote work, as physicians and nurses are able to review lab results online and support personnel can review orders remotely. These wins highlight how information management is relevant and imperative, and digital technologies are the key to business resilience and durability. Customer purchasing decisions in the quarter continued to support the acceleration to digitize and the demand trends we outlined in our last call. Content services are being driven by the urgent need to digitize and migrate to the cloud. Content services are a particular strength in healthcare and government, but we also saw notable wins in other industries. The momentum in content services is a direct result of the investments made in both R&D and vertical go-to-market since our acquisition of Documentum. In business network, we saw volumes begin to recover from the quarter as supply chain reconfiguration continues, offset by lower secure messaging volumes in some impacted industries. In cyber resilience, we saw a very strong quarter given that work-from-anywhere is here to stay. In digital experience, the shift to supporting customers through their entire lifecycle via an omni-channel digital delivery, direct-to-consumer, and contactless experiences. Our cloud-based digital experience will become even stronger with some of our upcoming quarterly product releases. Turning to our fiscal '20 acquisitions, Carbonite delivered another strong quarter of operations, validating our expansion into SMB markets and enhancing the strength of our cyber resiliency offerings. Carbonite delivered $116 million of revenues in Q4 or $235 million since the date of acquisition and continues to be accretive to adjusted earnings and cash flows and is on track to be on our operating model by the end of fiscal '21. In fiscal '21, we will release new security enterprise offerings that leverage the capabilities of Carbonite, Webroot, BrightCloud, integrated with our existing EnCase offerings. We had other notable accomplishments in fiscal ‘20: we strengthened and extended partnerships with Google and Amazon as part of our OpenText Anywhere strategy and enhanced our long-standing relationship with SAP for cloud-based content management. We launched our next-generation platform, the OpenText cloud editions in April, our CE20.2, and recently extended our content services technology for Microsoft Teams. Four years ago, we were releasing products every 15 months. Today, we are releasing products every 90 days. Each release has more features and 20.3 is on schedule for this quarter. Our delivery speed and capability is a long-term competitive advantage. We used to get haircuts every six weeks, but now we release software every 12 weeks. Finally, we were recognized by SAP as their Pinnacle Award winner as the SAP Solution Extensions Provider of the Year — our 13th consecutive year — and by IDC and Aspire for our leadership in customer communications management. Let me transition to look forward to the quarter and the years ahead. We continue to execute on our total growth strategy of retain, grow, and acquire that we outlined in our last investor day from New York City. Let me touch base briefly on each of these three pillars. First, retain: we have a rich installed base of customers. Customer support and cloud renewal represents a highly predictable business that continues to expand in parallel with our growth in the cloud. We remain committed to giving customers choice in how they buy our products, where they deploy our products, and giving them world-class support, maintenance, and update rights. Customer support is an important contributor to our ARR, and we achieved the highest enterprise customer retention in our history this year at 93.8% and enterprise cloud renewal in the mid 90s. As good as it is, we continue to see opportunities to improve: compelling new features, expanded product offerings, factor cloud-native product releases, products designed with automation for upsell and increased consumption built in, and applying our best-in-class customer support capabilities for the SMB channel. The second pillar is growth: we intend on growing and taking share regardless of the economic environment through continued investments in sales coverage, partnerships, cross-selling opportunities, and product innovation. Let me double click on each one of those. First, continue to broaden sales coverage and expand our sales force in fiscal '21. Second, continue to deepen sales coverage for the expansion of specialized sales groups, especially in the public sector, security, by scientists, and legal tax. Third, deepen relationships with enterprise partners such as SAP, Google, Amazon, and Microsoft, while increasing the number of partners in our SMB channel. In addition, each of our specialty sales units has built a partnership growth strategy for cross-selling our products. We will introduce an enterprise-ready security platform in the second half of fiscal '21 that leverages the combined capabilities of Carbonite, Webroot, BrightCloud, and EnCase. We're also now selling select OpenText products such as OpenText Core and Hightail for our enhanced SMB channel. Finally, we are delivering more products to market at a faster pace than ever before. OpenText's future product releases will include more SaaS offerings, self-service onboarding, seamless app-to-app and cloud-to-cloud integration, and new industry-specific capabilities. The third pillar is acquisitions. We continue to be a strategic, disciplined, value-based buyer of companies. This is an important aspect of our total growth strategy. With these strategic acquisitions, we are better positioned to expand our product portfolio and improve our ability to innovate. We have a proven track record of integration, and we will continue to acquire businesses that deepen and strengthen our platform. We believe return on invested capital (ROIC) is the best measure of success of our strategy, and in fiscal '20, we achieved a ROIC of 17.6%, which remains consistent with our target range in the upper teens. We have a robust pipeline of acquisition opportunities that span the entire portfolio of companies of all sizes, and we do expect to close deals in fiscal '21. These are all three pillars: retain, grow, and acquire. Let me turn to business outlook. First and foremost, we view our business as an annual business that has annual performance and trends over the long term that creates value. 90-day cycles are just too short to measure. The economic volatility remains high and will persist during the global pandemic. We have some customer areas that are negatively impacted, like auto, airlines, retail, construction, and services. We have some areas positively affected, like government, customer experience management, security, and work-from-anywhere technologies. However, as of today, the positives do not outweigh the negatives given the global crisis. With that introduction, let me detail our annual business outlook for fiscal '21. We expect on a year-over-year basis, as it relates to revenue, cloud revenue to grow in the low double digits, customer support revenue to remain constant, and the ARR to grow in the mid-single digits. Licensed and professional services businesses are expected to decline, which is consistent with the trends in the broader software industry impacted by the pandemic and consistent with our multi-year transition to cloud and ARR. For total revenue, we expect it to be constant, and perhaps we get a few points of growth if the economy recovers sooner. For constant total revenue, that is our base case in this volatile economy. On innovation, let me call out engineering investments to expand to 12% to 14% of revenues, and continue on our business outlook on non-GAAP margin: cloud margin targets expanding 500 basis points to 63% to 65%, total gross margin targets improving 150 basis points to 74% to 76%, and adjusted EBITDA targets expanding 200 basis points to 37% to 38%. Lastly, and as noted earlier, we expect to deploy capital via acquisitions in fiscal '21. Our balance sheet and pipeline are strong. The strength of our business model and operating excellence is demonstrated in our annual historical results and strong fiscal '21 business outlook. For fiscal '21 Q1, we expect total revenue to increase high single digits year-over-year and adjusted EBITDA dollars to increase low double digits. FX is expected to be neutral in the quarter. As for our fiscal '23 aspirations, with the global crisis, we are simply shifting our fiscal '22 aspirations for adjusted EBITDA and cash flows out 12 months to fiscal '23. If the economy recovers sooner, we will adjust the aspirations as appropriate, but specifically our fiscal '23 adjusted EBITDA margin aspiration is in the range of 38% to 40%. Our fiscal '23 free cash flow aspirations are $0.9 billion to $1 billion. Remember, we're moving to free cash flow from our operating cash flow. The outlook continues to represent upper-quadrant performance in adjusted EBITDA and free cash flow. Also note that our long-term growth planning remains unchanged, and we expect to continue to reinvest incremental adjusted EBITDA margin above 40% back into the business, supporting our long-term objective of driving further organic growth in a normalized demand environment. Today, we declared a regular quarterly dividend of $0.17,46 per share. The same as the prior quarter, OpenText strongly believes in returning value to its shareholders, and we intend on holding our dividend constant during the pandemic subject to board approval. Today, I'm also pleased to announce that our inaugural corporate citizen report will be released on our website next week on August 14th. I encourage everyone to read it. At the age of information disruption, we see opportunity to use technology for the greater good, and we aspire to unlock its potential to advance our goals and accelerate positive change. The annual report establishes our ESG baseline, and we intend to hold ourselves accountable, and we will report to you annually. We welcome your feedback in continuing to contribute to a better world. Let me summarize my prepared remarks. The world runs on information and we are the leader in information management against the backdrop of the most challenging economic environment in our lifetime. We delivered record results because we have the products that matter, customer relationships that matter, a balance sheet that gives customers confidence that we will deliver on our commitments, and an experienced leadership team that is ready for all scenarios. We're in a new equilibrium in a new world, and we intend to gain market share regardless of the economic environment, because we're delivering more product innovation to the market faster than in our history. We continue to make investments and initiatives that would generate further future organic growth. We are a cloud-first company that is committed to providing our rich install base of customers with the choice of cloud, all cloud integration, and a combination of both. We remain committed to our proven total growth strategy and will deploy capital when the right opportunity presents itself. We are also highly disciplined and dedicated to driving shareholder returns through growth and free cash flows, transparent communications, and we return capital through dividends. On behalf of OpenText, we commend the brave women and men serving on the front lines of this pandemic for keeping us healthy, safe, and productive. I'd like to thank our shareholders, our customers, partners, and 14,000 plus employees all contributing to our success in fiscal 2020. I'm so proud of the resilience and durability that OpenText employees continue to demonstrate. OpenText truly represents the culture of humble and hungry. Our resolve is only strengthened by the energy and transformative impact of our customers, such as the NIAID, the U.S. Defense Health Agency, Panasonic, Merck, and Williams Companies. The most trusted companies truly trust OpenText. It's my pleasure to turn the call over to Madhu Ranganathan, OpenText Chief Financial Officer. Madhu?
Madhu Ranganathan, Chief Financial Officer
Thank you, Mark. And thank you all for joining us today. Our fiscal 20 was a groundbreaking year in many respects, one where OpenText's operational excellence came through with its results. I'm humbled and proud to share them with you today. I will speak to Q4 of fiscal '20, fiscal '21 target model, and our long-term outlook. Please refer to the investor presentations that are posted on our IR website, as I will also refer to my comments. All references will be in millions of USD and compared to the prior fiscal year. Let me start with revenues and earnings. Total revenue for the quarter was $826.6 million, up 10.6%, or up 12.2% on a constant currency basis. For fiscal '20, our total revenue of $3.1 billion was up 8.4%, or up 9.7% on a constant currency basis. There was an unfavorable FX impact on revenue of $12 million in Q4 and $37 million in fiscal '20. The geographical split of total revenues for the year was: Americas 61%, EMEA 30%, and APJ 9%. Annual recurring revenues for the quarter were $657.5 million, up 18%, or up 19.5% on a constant currency basis. For fiscal '20, ARR was $2.4 billion, up 12.9%, or up 14.1% on a constant currency basis, as a percent of total revenues: ARR was 80% for the quarter and 78% for fiscal '20, up from 75% in fiscal '19. Our cloud revenues were particularly strong at $232.6 million in Q4, up 37.5%, or up 38.8% on a constant currency basis. For fiscal '20, cloud revenues were $1.2 billion, up 27.5%, or up 28.4% on a constant currency basis. The growth was primarily driven by continued successes within business networks and the integration of Carbonite. Our cloud renewal rate in the quarter remains in the mid-90s. Our customer support revenues were $324.9 million in Q4, up 2.1%, or up 4.7% on a constant currency basis. For fiscal '20, customer support revenues were $1.3 billion, up 2.2%, or up 3.7% on a constant currency basis. The approximate full renewal rate for fiscal '20 was 94%, reflecting the strength of our rich installed base even during COVID times. Off-cloud revenues, which represent our license and professional services revenues, were $169.1 million in Q4, down 11%, and $676.5 million in fiscal '20, down 0.1%. Our license revenues were $105.8 million in Q4, down 11.6%, or down 10.3% on a constant currency basis. For fiscal '20, license revenues were $402.9 million, down 5.9%, or down 4.5% on a constant currency basis, primarily due to COVID-related impacts. Our professional services revenues were $63.3 million in Q4, down 10.1%, or down 7.7% on a constant currency basis. Our fiscal '20 professional services revenues were $273.6 million, down 4%, and down 2.2% on a constant currency basis, in line with declining licenses. Turning to GAAP net income and GAAP earnings per share; they were both impacted by Carbonite acquisitions-related idle and special charges due to our recent cash flow. GAAP net income was $26.4 million in Q4, down 53.3%, primarily due to $47 million of intangible amortization from Carbonite and $74 million of special charges related to our recent restructuring. For fiscal '20, GAAP net income was $234.2 million, down 18%. Adjusted net income was $217.8 million in Q4, up 12%, or up 12.5% on a constant currency basis. For fiscal '20, adjusted net income was $784.5 million, up 5.2%, or 7.3% on a constant currency basis. GAAP earnings per share diluted was $0.10 in Q4, down from $0.47 and $0.86 in fiscal '20, down $0.20 from $1.06. Non-GAAP earnings per share diluted was $0.80 in Q4, up $0.08, and $0.32, and also up $0.08 on a constant currency basis. So for fiscal '20, it is $2.89 up $0.13 from $2.76 or up $0.18 per share on a constant currency basis. Turning to margins: GAAP gross margin for the quarter was 68.5%, up 20 basis points; and for fiscal '20, it was 67.7%, up 10 basis points. Adjusted gross margin for the quarter was 75.8%, up 160 basis points, and for fiscal '20, it was 74.5%, up 40 basis points, both solid improvements on a year-over-year basis. Also on an adjusted basis, cloud margin was 65.1% for Q4 and 61.2% for fiscal '20, up from 57.8%, driven by continued improvements and higher gross margins from Carbonite revenue, which are predominantly cloud-based. Our customer support margin was 90.1% for Q4 and 90.4% for fiscal '20, up from 90.1%. The second, we continued to deliver stronger performance. Our license margin was 96.8% for Q4, and was 97.2% for fiscal ‘20, up from 96.6%. Our professional services margin was 24.1% for Q4 and was 22.7% for fiscal ‘20, up from 41.8%. Adjusted EBITDA was $317.4 million this quarter, up 11.8%, or up 12.1% on a constant currency basis. For fiscal ‘20, adjusted EBITDA was $1.1 billion, up 4.2%, or up 5.7% on a constant currency basis. This represents a 36.9% margin down from 38.4% as we integrate four quarters of Carbonite and higher than our target model's range of 35% to 36%. Turning to operating cash flow: it was excellent performance at $280.3 million for the quarter and effective $954.5 million for fiscal ‘20, up 8.9%. Our free cash flows for fiscal ‘20 were strong at $882 million, an increase of 8.5%. Q4 DSO was 51 days, compared to 56 days in Q4 '19. Our continued investment in acquisitions and the integration of Carbonite led to higher collection efficiencies, lower DSOs, and strong cash conversion cycles. Additionally, during Q4, we declared approximately $41 million in tax payments primarily as a result of the CARES Act that was enacted in the United States in the first quarter of fiscal '20, and other COVID-19-related tax relief programs in EMEA. These deferrals will be paid during fiscal '21 and '22. We have built a tight and near real-time framework internally to closely monitor customer trends and remain watchful of the economic backdrop as it relates to both our enterprise and SMB customer base. As we look ahead, we are introducing free cash flow metrics into our long-term aspiration. Turning to the balance sheet: we ended the year with approximately $1.7 billion in cash, given our strong cash flow performance. Our $600 million revolver remains strong as a preemptive measure in the current environment. Our consolidated net leverage ratio is 2.04 times, which improved from 2.25 times last quarter. As an update on Carbonite, Q4 was the second full quarter with Carbonite results. Our proven track record of integration experience is illustrating through Carbonite. Since the close of the acquisition on December 24, 2019, the integration activities have remained steadfast in every aspect of the business: go-to-market, products and engineering, G&A, and systems. You see proof in our results. Carbonite delivered another strong quarter of results, adding critical elements to our financial model, including annual recurring revenues, cloud margin, adjusted EBITDA, and working capital. We remain on target to get Carbonite to align with our operating model by the end of fiscal 2021. Now, to our restructuring plan: during the quarter, we implemented COVID-driven restructuring activities to streamline operations and reduce real estate around the world, as previously announced during our fiscal Q3 earnings call. We incurred approximately $54 million of special charges related to these activities during the course. As a reminder, we anticipate annualized expense savings of approximately $65 million to $75 million once completed. The substantial realization of the savings is expected to start in fiscal '21 and incorporated into our target model for fiscal '21. Quarterly factors: let us summarize the quality factors we anticipate for upcoming Q1, also provided in our quarterly deck on the IR website. On a year-over-year basis, we expect Q1 fiscal '21 FX impact to be constant. Our revenues are anticipated to grow in three parts: adjusted EBITDA dollars are expected to increase in the low double digits. Now, turning to fiscal '21 target model: we published a model today, which is included in our quarterly deck on the IR website. For the first time, ARR is expected in the range of 80% to 82% of total revenues, up from our full fiscal '20 results of 78.2% of revenues. Also for the first time, cloud services and subscriptions revenues are expected to increase to a range of 41% to 42%, up from 37.2%. Our customer support will remain in the range of 38% to 42%. Off-cloud revenues from licenses are expected to decrease to a range of 10% to 13% and professional services to decrease to a range of 6% to 9%. We're expanding our gross margins by 100 basis points to a range of 74% to 76% and adjusted EBITDA margin rate also expanded to 37% to 38%. Let me provide more context on expanding margins. Throughout our history, as the mix of license and proudly shifted, they have continually expanded the gross margins from 72.2% in fiscal '15 to 74.5% in fiscal '20. We expect this trend to continue as a cloud shift company with a rich installed base of customers with high renewal rates and high and expanding annual recurring revenue. Our cloud revenue is expected to grow in the low double digits in fiscal '21, with gross margin targets ranging between 50% and 65%, aided by Carbonite in the low 80s gross margin along with continued improvements to scale and mix of automation. With respect to customer support, while revenues are expected to remain constant in fiscal '21, our expanded product offerings, compelling features including those designed for automation, will enable us to maintain and even improve gross margins for customer support. The expanded gross margin range of 74% to 76% will allow us to fully integrate Carbonite, expand our R&D investments to the level of 12% to 14% of revenue, and deliver an adjusted 37% to 38% margin. Our long-term aspirations, as outlined in March in my earlier comments, include growing annual recurring revenues and expanding margins, which has been a highly successful multi-year journey at OpenText. We expect that trend to continue as reflected in our long-term aspiration. Looking to fiscal '23, we’re targeting adjusted EBITDA aspirations of 38% to 40% and reminding you of our plan to reinvest any margin gains above 40% into additional growth initiatives. Our long-term aspirations include SPS. For fiscal '23, our SPS targets are $900 million to $1 billion, and our OCS target is $1 billion to $1.1 billion. For a tax update, the IRS matter is still pending appeal pace, and our results remain strong as we continue to vigorously defend that position. Finally, turning to our dividend program: today, we announced a quarterly dividend of $0.17 per share payable on September 25, 2020. Organic growth in an annual and year-over-year basis, annual recurring revenue (ARR) has remained a key indicator of our organic growth. In constant currency, our ARR grew organically by 0.5% for total fiscal '20. Total organic revenue was down 1.3% in constant currency during fiscal '20, primarily impacted by licensed volatility due to the pandemic and global macro environment, noting that we attracted to positive organic growth in fiscal '20 prior to the pandemic. Now turning to ROIC: our return on invested capital was 17.6%, compared to 18.7% last year, which remains within our target range of the upper teens. In summary, we humbly and proudly take a solid fiscal '20 result as a platform to strongly navigate the macro environmental challenges into fiscal '21 and the long term. We believe we're well positioned to take market share regardless of the economic environment. And finally, I want to especially thank the entire OpenText community for their incredible efforts, and to our shareholders who’s trust and competency we greatly value and wish you all safety and good health in the future.
Operator, Operator
We will now begin the question-and-answer session. Our first question comes from Raimo Lenschow of Barclays. Please go ahead.
Unidentified Analyst, Analyst
This is Frank on behalf of Raimo. Congrats on another really strong quarter. Just one from you in the customer conversations. Last quarter, you mentioned that the pandemic made things very binary, where if you had a need, you put something on board very quickly. Could you give a little bit more color into how those customer conversations progressed throughout the quarter?
Mark Barrenechea, CEO and Chief Technology Officer
Yes, thanks Mark here. Thanks for the question. Yes, just like I kicked off my introductory remarks on the script. The last six months have made it very clear that digital technologies are the key to this business's resilience and durability. So, we've seen very solid conversations around kind of core digitalization, the ability to support a work-from-anywhere environment as data management, collaboration, workflows, electronic signatures. So, that's an area that we think will continue to accelerate for us. Second is in the world of contactless and direct-to-consumer. We've seen a real strong interest in our digital experience platform, which was another place of strength for us. So, the conversations on digital continue to accelerate right in the core of our wheelhouse of content services, plus our technologies of work-from-anywhere and customer experiences, in our customer experience platform calling direct-to-consumer and in contactless activities.
Operator, Operator
Our next question comes from Stephanie Price of CIBC World Markets. Please go ahead.
Stephanie Price, Analyst
I guess you could dig into the fiscal '21 revenue expectations a little bit more. And I guess I'm talking about the puts and takes that led to an expectation of constant revenue growth, maybe specifically in the off-cloud business and the cloud X Carbonite?
Mark Barrenechea, CEO and Chief Technology Officer
As we look into fiscal '21, we expect cloud revenue to grow in the low double digits, customer support revenue to remain constant in the year, and that sort of models out annual recurring revenue to grow in the mid-single digits. We're communicating today that we expect licensed and professional services to decline sort of consistent with the broader trends in the software industry impacted by the pandemic and the deferral by some companies of transactions here in the short term, such as airlines, auto, hospitality, and retail, those industries are down for us. But we're also seeing industries off like government, healthcare, manufacturing, work-from-home; but the up areas don't offset the down areas at this point. So, we think it's prudent to kind of look at our licensed and professional services to decline. That brings us to total revenue, which we're expecting to be constant year-over-year, but if we get some help from the economy, we're hoping to get a few points of growth. But that's more dependent on the economy than us. I'll also note, we are not losing to competitors, right. In fact, we see competitive strengths. This is more driven by the demand environment than by a competitive environment. Within cloud, we see Carbonite on plan; our managed services remain strong; but the transactional volumes, as we talked about last call, did decline. We're off our lows and we're increasing again, but the new volumes don't completely offset the effective volumes, if you will. We have had a lot of customers. We're not losing to competitors. But again, we did see — as we talked about last time, volumes were down; we are off those lows now.
Stephanie Price, Analyst
Okay, great, thanks. That's good color. And then in terms of Carbonite, sounds like it's still doing well. Can you talk a little bit about the demand you're seeing especially in the SMB market there?
Mark Barrenechea, CEO and Chief Technology Officer
Yes, the business has been incredibly resilient in our first six, seven months of owning it. When we went back to December when we closed the transaction, our thesis was that it's not just the cloud alone — it's Cloud plus the Edge. No edge, no cloud; no edge and here we are, we are all on the edge so to speak, working from everywhere. The two go hand-in-hand and we really like the technologies of data protection, threat intelligence, and threat protection, and having those technologies available for work-from-anywhere. So, we're pleased with our progress. We're on target to complete the integration here in fiscal '21. The basis has been on our internal plan. The SMB channels have been very resilient. And we've actually found one of the areas where demand is up: it's actually in our work-from-home technology and work-from-anywhere technology. We are very pleased with our progress.
Operator, Operator
Our next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.
Thanos Moschopoulos, Analyst
Mark, just extending on Carbonite, clearly much stronger than you'd expected. So was that more about lower churn holding in better than expected or new customer activities being stronger than expected, or a combination of both?
Mark Barrenechea, CEO and Chief Technology Officer
Yes, it's a basket of activities. Overall, the business has been amazingly resilient here during the pandemic. Let's take it in pieces. The OEM part of the business, BrightCloud, has been very resilient. We’ve added a few dozen new embedded partners during the first six months. The SMB channel, our channels, are probably a little more resistant than others since we have larger RMMs that helped consolidate SMB for us. Renewal rates for end consumers have been very strong given work-from-anywhere, and our new kind of direct marketing activities have shown some early signs of promise. Actually, as we come into fiscal '21, one of our big efforts is cross-selling and having our enterprise teams now bring Carbonite to the enterprise. We are also on plan with all our integrations, systems, people, etc. So it's a combination of renewals, some new demand for work-from-anywhere, and some early signs of cross-selling into the enterprise.
Operator, Operator
Our next question comes from Paul Steep of Scotia Capital. Please go ahead.
Paul Steep, Analyst
Mark, could you talk a little bit about what changes, if any, you've made to sales compensation or key metrics that might drive greater cloud revenues into fiscal 2021 and maybe further deemphasize the license side of the business?
Mark Barrenechea, CEO and Chief Technology Officer
Paul, thanks for the question. We've had great stability in our sales organization, both the leadership and field structure. We call them selling hubs: U.S. West, U.S. East, Canada, Southern Europe — we call them these selling hubs. We've maintained great stability in our named account model, specifically in the enterprise. As we come into fiscal '21, leadership is very stable, structure is very stable, and we haven't changed our comp plans coming into fiscal '21. An account executive is incentivized to hit an annual number that can be either retired through MCV, guaranteed cloud contracts, or licenses. It really depends on how the customer wants to consume. I've never believed that, quote unquote, back at corporate, we can tell an account executive in Tallahassee, Florida, how their customer should consume. We haven’t made any changes; however, we certainly go in and advocate a cloud-first approach in what we're doing. We have made some changes around account prioritization, emphasizing a little less on impacted industries like airlines and auto, and spending more time on healthcare, government, and manufacturing. But no changes to the comp plan coming into fiscal '21.
Paul Steep, Analyst
One quick follow-up to that clarification: embedded in the numbers for next year with the further acceleration of cloud. Is there an implicit assumption that 20.3 or security offerings actually force broader migration to the base?
Mark Barrenechea, CEO and Chief Technology Officer
We are a cloud-first company. It's very clear in our history of how we have transitioned to annual recurring revenue, which we expect for fiscal '21 to be between 80% to 82% of our business. We're releasing new product releases every 90 days and we release first into the cloud. So, while we still will support customer choice on how they consume, we have one cloud line for cloud and off-cloud. We release first into the cloud. Another great benefit of being in the cloud is that it's our largest opportunity. We will, of course, continue to sell licenses and support hybrid, but it is a cloud-first world, and 20.3 certainly supports those principles.
Operator, Operator
Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Richard Tse, Analyst
Mark, I think you said you guys are still going to be active on acquisitions here. And my question is: can you maintain the same level of cadence in terms of the number of deals in terms of the magnitude? Can you still pursue these larger opportunities assuming this backdrop continues for another more quarters or so?
Mark Barrenechea, CEO and Chief Technology Officer
I believe we can. We have a very experienced team, with a great leader, Doug Parker, of the organization. We have our approach and methodology. We also know that markets intimately. There are ample targets within our core markets of content services, business network, digital experience platform, cyber resilience, and advanced technology. I wouldn't want to enter a new market segment at this point in time while the pandemic is present. But Richard, we know our core markets extremely well. We know those competitors, we know their business models, and there is ample pipeline and opportunity. So, steady as we go on M&A; our balance sheet is ready, our team is ready, and our pipeline for deals is stronger. We expect to deploy capital in fiscal '21; the pandemic isn't going to slow us down a craft. Our due diligence is going to include how COVID-19 has affected a potential target and our customers, so that’s an important part, but it doesn't slow down our passing effect on the target set.
Richard Tse, Analyst
Okay. That's fair. Thanks. I don't know if there's a fair question sort of looking at your investor deck where you have the investor day down in your growth drivers, which was about expanding into the 10,000 customer base, and then to expanding adoption within the 74,000 customers. I don't want to throw you off the backdrop, but can you give us maybe a sense of whether you've pushed those objectives out to your next investor day, or did you make quite a bit of progress on that in 2020?
Mark Barrenechea, CEO and Chief Technology Officer
Let me get a drink of water there. I don't recall the specific metrics; maybe you have them from our New York investor deck. But I can say across two of our greatest thought enterprise sales opportunities: expanding the G-10K, we did expand coverage. One of the things we did in fiscal '20 was put a new global account management team in place, and I'm real pleased and excited about that dedicated team looking at global accounts. And we expanded coverage to see if there was a specific number there. The cost volumes in the install base represent a great opportunity to cloud and continue to drive managed services. This includes private cloud, cross-selling opportunities, and upgrading into 20.2 and 20.3. So G-10K install base remains front and center for us for growth.
Madhu Ranganathan, Chief Financial Officer
I was just going to add. If you look at our investor deck on Page 25, we continue to do today that as a goal in terms of doubling the coverage of Global 10-K over the next few years, as Mark said, absolutely front and center for us.
Mark Barrenechea, CEO and Chief Technology Officer
And Richard, it's also an important point. In a time like this, it's important to leverage existing relationships. That's why the install base is so important. We're a trusted provider; we have a proven track record, and being able to go into our install base and leverage that history, our track record of delivering benefits, and balance sheet strength to sell the next module, the next platform is a long-term strength for us and one that will help us gain share over less stable competitors.
Operator, Operator
Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.
Paul Treiber, Analyst
Thanks very much and good afternoon. In regards to the outlook for fiscal '21, in regards to the pandemic, do you see the headwinds or the delays from a pandemic weighing both equally on licensing and cloud for new bookings? Are you seeing in cloud demand is more resilient or even increasing whereas the majority of the headwinds are on licenses?
Mark Barrenechea, CEO and Chief Technology Officer
Thanks for the question. I'd say the following: renewals have been amazingly resilient for us. As you can see in the numbers, renewals are not just support — it's the ability to get value from the software; its ability to speak to experts; product updates; its security; patches; and updates services. As you can see in the numbers, that's been strong for us: year-over-year growth, great margins, high renewal rates. In times of crisis, it accelerates customer interest and time to value. I would put the emphasis on time to value. If we can show time to value in a managed service that could include a license or time to value in our cloud — there's really a premium on time to value. As you know through time, we've been on an ARR and cloud transition where back in fiscal '11, cloud was — excuse me, licenses were near 30% of our business and today it’s 13% of our mix. I think the pandemic is revealing the need for time to value, and we still can provide that regardless of how a customer consumes. But it also puts a bit of an emphasis on cloud, so you typically get time to value in our managed service or in one of our SaaS offerings.
Paul Treiber, Analyst
Can you provide an update on how the pipeline is developing compared to your expectations, especially regarding bookings or MCV for cloud products in the last quarter? It would be helpful to understand the deal closing environment for cloud products during that time, without needing specific numbers.
Mark Barrenechea, CEO and Chief Technology Officer
As you know, with 20.2 and now 20.3 almost here, you see the reaction to 20.2 has been very favorable. We are on the VP releases and getting features out. You also see it in the strong cloud numbers from fiscal '20. Customers have really liked our ability to release quickly. We are getting better at having customers being able to consume it very quickly, and we solved for releasing every 90 days. We've solved for having it run anywhere with two containers. We're now solving for the ease of consumption and the automatic way to turn on new modules. So the first take is very, very positive. As I highlight in the script, this is a long-term differentiator for us. But I think of it as a series of things: getting the time down, getting the features up; it's getting it to run anywhere, it's now turning into the ability to consume it much more quickly and automatically turn on new capabilities.
Operator, Operator
This concludes the question-and-answer session. I will hand the call back over to Mr. Barrenechea for closing remarks.
Mark Barrenechea, CEO and Chief Technology Officer
All right, well, I'd like to thank everyone for joining today's call. And again, I wish everyone health, well-being, and happiness and look forward to continuing to engage in the coming days and see you digitally in our upcoming conferences. Thank you for joining today's call.
Operator, Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.