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Open Text Corp (OTEX 1.88%)
Q3Â 2020 Earnings Call
Apr 30, 2020, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation's Third Quarter Fiscal 2020 Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.
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 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 contains 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 maybe 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.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Thank you, Harry. Good afternoon, everyone, and thank you for joining today's call. On behalf of the Open Tech's community we honor the brave women and men who are serving on the frontlines of this pandemic, 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 remain heavy with the loss of life and hardship and during these difficult times our spirits are uplifted with hopes acts of kindness and courage.
The health and well-being of our employees is our first priority, as well as our customers and partners. I am pleased to highlight that the Open Text community is doing exceptionally well. This pandemic impacts every aspect of our work and lives.
As we say in Canada all together or tous ensemble. I am inspired every day by the resiliency and innovation of my colleagues. I am so proud of the Open Text leadership our employees their dedication to customer experience operational excellence and their resiliency during this pandemic.
While there remain and is still a long journey ahead for all of humanity, we look forward to our in-person camaraderie returning soon. Open Text is a unique platform a very strong company and we are well-positioned for that seminal moment in time. We will come out of this stronger than we went into it.
Let me spend a few moments on our Q3 financial highlights. We delivered record total revenues of $850 million up 13% year-over-year or $820 million in constant currency. This is our 24th consecutive quarter of total year-over-year growth in constant currency. We had record annual recurring revenues of $662 million, up 21% year-over-year. Our annual recurring revenue ARR was a record 81% of total revenues. Cloud revenues of $340 million up 42% with a 590 bps margin increase to 63%.
Record customer support revenues of $323 million up 4% with a margin of 90%. Our renewal rate remain strong in upper quartile both cloud and off-cloud. Americas with 63% of our business, EMEA 29% and APJ was 8% with a stronger shift to the United States.
We generated $260 million of adjusted EBITDA dollars or 31.8%, record operating cash flows of $330 million and trailing 12-month operating cash flows of $904 million. We ended the quarter with $1.4 billion in cash and a net leverage ratio of 2.25 times. We expect our net leverage ratio to decline in the coming quarters.
We advanced our business during Q3. Let me highlight a few key areas and more details to follow in my script. Notable customer wins in critical infrastructure industries included Nestle, United Health Services, General Motors, Continental, Daihatsu, Diamond Pharmacy Services and Pathos Lab Testing.
We announced new partnerships with Amazon and Dun & Bradstreet. We acquired XMedius, a data and voice solutions provider within a small base of over 50,000 that expands our ARR in on-demand messaging.
We formed a new Open Text U.S. public sector group bringing together all our U.S. public sector activities within one group, civilian, defense, intelligence, state, local and national laboratories.
We published two Webroot reports on cyber threats and consumer security behaviors. We announced a suite of cutting edge of new cloud capabilities at Enterprise World Europe Digital with Cloud Editions 20.2. Our new citizen developer site based on OT2 is live at developer.opentex.com.
The ability to rapidly build new content workflow forms based applications is essential for digitalization. And we completed a successful refinancing and early Q3 that extended our debt maturities into 2024 and lowered our coupon.
We seamlessly transitioned to a work from home environment and drove a solid Q3. We are engaging with customers and the prospects that in our scaled up Open Text digital zone. The Open Text digital zone enables events demos architectural design sessions pilots support deployments and customer operations. Open Text enterprise was therefore conducted in the digital zone last month and we have had over 10,000 engagements so far.
When you bring the all together here is the main point I want to highlight. As I commented on in previous call, our business is transformed. In 2011, ARR was approximately 54% of revenue. We had no cloud business, license was 26% of revenue and our adjusted EBITDA margins were in the 20s. Last quarter in Q3 ARR was 81% of revenue, cloud was our largest segment, license was 10% of revenue and our adjusted EBITDA was in the 30s.
By all measures we have reshaped our business into a cloud business with high recurring revenues. We will always honor how a customer wants to purchase subscription or license and how they want to deploy cloud off-cloud or hybrid. With that said, we are transformed and we are well-positioned to weather the short-term challenges and for long-term growth.
The pandemic is massively accelerating discussions on digitalization, cloud, the edge, but also impacting overall demand, especially in those industries there already heavily invested in, such as auto, airlines, hospitality, oil, travel and retail. But the pandemic has also strengthened our purpose to help companies transform.
I said a few quarters ago, this moment, this movement to the cloud is a once in a 20-year opportunity, this remain self and it will accelerate even faster now, once we get through all the demand challenges. Consider the need to digital -- to digitize as more urgent. Moving to the cloud is contactless for most customers businesses. The edge is as important as the cloud. Remote work is here to stay.
Working from home is an essential part of the new equilibrium. Home, school, gym, place of retreat or workshop all combined into one physical space and that space needs data and information and threat protection. We all work and live at the edge of the network and we are really delighted to be in this business with our Carbonite acquisition.
Building knowledge economies and collaboration is essential when you cannot be physically in an office, person-to-person and it's harder to build new relationships. Stellar customer experiences overall and especially with contactless retail, direct-to-consumer accelerate even faster, and finally, the need for digital agile and rapidly adaptable supply chain platforms.
We have over two million trading partners and 60,000 customers are running on our trading grid. Those customers on our grid have a large competitive advantage, as they can change their manufacturing output within days. We helped numerous companies transition to PPE in Q3 at record speeds just as an example.
At Open Text we see the changes in behaviors and long term structural shifts as opportunities to help our customers automate and transform their businesses with our software and expertise, leveraging our new OT2 services and 20.2 Cloud Editions for content services, business network, digital experience and cyber resiliency.
I am particularly proud of how Open Text has supported the global response to the pandemic and helping our customers through this seminal event. Healthcare and patient care with the NIAID, NHS, Cerner, McKesson, CBS and Cardinal Health. Biotech and pharmaceuticals Novartis and Novo Nordisk. Governments and defense NATO, USDOD, Government of Canada. Energy PG&E, BP, Sempra, Chevron. Financial services the ECB, Bank of England, BoA, Wells, JPMorgan. Critical manufacturing B. Braun, Bosch, Good morning, Siemens, Philips. Food and agriculture Nestle, Morris, Cargill. Telecommunications AT&T and Verizon. Transportation and logistics, Union Pacific, Nights, FedEx, UPS. We are all together with our customers through the seminal point in time.
Let me transition to the pre-emptive choices we have made at Open Text to whether the shorter term uncertainties and the new realities are returning to work. We believe it is better to be decisive and clear not slow and incremental.
Our pre-emptive choices include continuing to focus on total growth. We are going to get we are going to continue to make investments for future organic growth, grow our cash position and be in a position to deploy capital for the right opportunities, strengthening our already durable and resilient business model.
ARR was 81% in Q3 83% in Q3, our highest ARR percent in the history and with the launch of the cloud additions, we expect the shift from license to cloud to continue and to grow ARR being centered on strong operating cash flows, regardless of the macro environment.
To that end, we are announcing today a set of cost control measures and a restructuring program. This is a single decisive action not the first of multiple rolling actions. The cost control programs are temporary while the pandemic persists the restructuring programs are permanent.
The temporary programs include, we are reducing our anticipated cash payroll expenses for the last 45 days of fiscal '20 and for fiscal '21 based invariable, the CEO's totaled by 63%, Board of Directors fees by 15%, the executive leadership team by 15%, managers by 10% and our valued contributors by 5%, with some exceptions in India and in Philippines. We have also reduced discretionary spending, narrowed hiring to exceptional difference makers and instituted other cost measures.
The permanent restructuring programs include, our work from home has been amazingly productive, given this we decided not to reopen approximately 50% of our offices and institute a hybrid model with some employees continuing to work from home.
These are smaller offices and will -- and we will close them immediately and permanently and this only affects about 15% of our workforce. Our corporate offices, our centers of excellence, innovation centers and country head offices will remain open when we were able to do so.
Conjunctive with this, we commenced a rebalancing program that will reduce our workforce by up to 5%. We expect the workforce rebalancing and the strategic change in return to workplace to reduce annualized expenses by $65 million to $75 million a year.
Maintaining a very strong balance sheet is always a priority. We ended the quarter of $1.45 billion in cash and a 2.25 times leverage ratio and that ratio will decline as we build more cash. We drew $600 million of our revolver pre-emptively and with our refinancing in July -- in early February, we extended our maturities and lowered our coupon. Our first debt maturity is now four years away in 2024.
Let me provide some highlights on Carbonite. Our strategy in industrial market on Carbonite -- on the carbonized acquisition was to extend the Open Text influence into cyber resilience, data and information protection and to enable information in work at all endpoints, while our customers operate at the edge of the network.
The edge in the cloud need to work together with the rapid expansion of work from home in this long-term structural shift, Carbonite products become even more important for the enterprise, SMB and the consumer.
Carbonite had a solid first quarter of operation and we are on our internal business case for the acquisition. Carbonite delivered $110 million of revenues in its first quarter -- and its first quarter was immediately accretive to adjusted earnings and cash flows. You will see in our Investor materials that we had expected Carbonite -- we expect Carbonite to exceed our previous second half fiscal '20 range of $190 million to $200 million.
Carbonite contributed to our cloud growth. The combined operations improved our cloud margins into the low 60s and the integration on the business -- of the business remains on track. We are also watching closely SMB closures, spending cuts and potential bankruptcies. In Q4, we did not see an impact.
Let me spend a moment on the road ahead, given the environment -- and given the environment, we expect some variability. In the first half of our fiscal year, we had positive organic growth. Year-to-date and including Q3 and constant currency, we had positive organic growth in ARR. With two months to go, our full year organic growth will be challenged due to the pandemic and the macro events out of our control.
For the full fiscal year 2020, we are expecting total revenue growth in the mid-to-high single digits. We are also expecting strong cloud growth in the low 20% range and low single-digit customer support growth. License and PH should each decline year-over-year, as we continue our transition to the cloud and customers and highly invested industries navigate the pandemic.
We are keeping our fiscal '20 target model in place, while updating a few ranges today, ARR increasing to 76% to 78%, adjusted EBITDA margin decreasing slightly to 35% to 36% and capex reducing to $72 million to $77 million.
We are maintaining our dividend program, and today's dividend announcement is consistent with our previous practices at $17.46 per share. Open Text believe strongly to returning value to its shareholders and intends to maintain its dividend program.
For our usual cadence, we will update you in August on our fiscal 2021 plan and our three-year long -- and our three-year long term aspiration.
As a note, starting in August, we plan to shift our discussion away from OCF and shift that discussion to FCF, moving from operating cash flow to free cash flow starting in August. Again and I note our trailing 12-month OCF was $904 million, our strongest TTM in the history of the business.
Our Q4 factors include a highly foot market due to the pandemic health and economic crisis, disruption in many industries, auto, oil, energy, transportation, airlines, retail, disruption and supply chain availabilities.
And for Q4, we are modeling and expecting an FX headwind of $14 million -- approximately $14 million, revenues flat to slightly down sequentially quarter-over-quarter and adjusted EBITDA dollars flat to slightly up sequentially quarter-over-quarter.
Let me summarize my prepared remarks. We are shaped by our expenses and our minds view of what we envisage our new equilibriums to be. I lived and worked through the dotcom boom and bust 9/11 the great recession and my near-death experience with acute myeloid leukemia and subsequent bone marrow transplants.
Through my cancer treatment, I lost my immune system three times and was isolated for over 100 days. While none of this experience can fully prepare one for a pandemic and a great lockdown, they can inform your approach to actions, communications and transparency.
We are being pre-emptive with our choices at Open Text. We are going to lead as the best information management company in the world. We are going to help customers accelerate their transformations through our platform, digitalization, cloud, the ebb, cyber resilience and supply chains.
We are going to lean into the new workloads, use cases and structural shifts across the marketplace. Last summer I talked about doubling our sales coverage for the Global 10,000 over the next three years and investing $2 billion in R&D over the next five years and we remain committed to that level of innovation. This innovation is the underpinning of future organic growth.
Our software is hybrid and so that will be our work, as we intend to lead the way in remote work and the return to the workplace. We will continue our focus on growing recurring revenues and cash flow and cash. We operate with a strong balance sheet. We will be ready to report capital using our robot driven value based playbook for the right opportunities and we will maintain our commitment to shareholder return, dividends transparent communication and direct and ongoing engagement.
I am pleased with our solid Q3 baseline why we all managed through this seminal moment. The leadership team is committed to work smartly, selflessly and tirelessly through this crisis. We will come out of this pandemic stronger than we went into it in part because of the pre-emptive choices we have made, altogether, [indecipherable].
Let me end my prepared remarks here and with that is my pleasure to turn the call over Madhu Ranganathan, Open Text Chief Financial Officer. Madhu?
Madhu Ranganathan -- Executive Vice President and Chief Financial Officer
Thank you, Mark, and thank you all for joining us today. Our Q3 results were solid and reflect our operational excellence and it continued focus on our balance sheet. We are proud of the DNA and culture that Open Text as we continue to optimize the structure initiate and execute pre-emptive cost measures, with a strong balance sheet and a highly efficient operating framework they are best positioned to address the shorter term challenges and longer term.
And before I share my commentary on Q3, please note that I updated fiscal 2020 target model is included in our Q3 investor presentation posted on our IR website and will be addressed in my comments. And similar to prior quarters, my references will be in the millions of USD and compare to the same period in the prior fiscal year.
And 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 and 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 with Americas 63%, EMEA 29% and APJ 8%. Annual recurring revenue were $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 at the mid-90.
Our customer support revenues were $322.9 million up 3.9% or up 4.8% on 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-90.
Our license revenues at $81.1 million down 17.9% or down 17% on a constant currency basis primarily due to the pandemic impact and 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% and 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% percent 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 was 59.7% up to 58%.
Our customer support margin was 90.1% up to 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 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 are 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 remain 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 pre-emptive measure in the current environment. The proceeds from the revolver are represented within cash and cash equivalent. 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. This will reduce over 50% of our global offices, impacting approximately 15% 1-5 of our employees. The estimated cost of the real estate facilities restructuring and is expected to be in the range of $65 million to $80 million.
We have also accrued and begun executing a workforce the balancing program across various departments in order to further reduce our cost base in light of the economic uncertainty. We estimate severance cost 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 that substantial realization of savings during fiscal '21.
We are also taking a number of additional pre-emptive measures, including deduction, in discretionary spend and temporarily reducing the salaries of executive in a 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 as well as 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, expect Q4 total revenues to be flat to slightly down compared to Q3 '20, expect adjusted EBITDA dollars to be flat to slightly up compared to Q3 '20.
On the target operating model let me highlight the following changes. Annual recurring revenue is being increased 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 reflecting 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 and 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 IRS matter is still in the appeals phase and our results remain strong as we continue to vigorously defend our position.
Dividend, and finally turning our dividend program, today we 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 solid balance sheet and initiating a number of pre-emptive 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 and 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 of you an abundance of health and safety.
I would now like to turn the call over to the operator for questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from Raimo Lenschow of Barclays. Please go ahead.
Raimo Lenschow -- Barclays -- Analyst
Thank you. Congrats on a great Q3 and hope you all stay healthy and our thoughts are with you guys as well. The quick question for you, Madhu, you have seen kind of downturns before as well, like, if you think about the current situation, what's the -- can you talk a little bit about what you are kind of looking out for in terms of either like conversion rates versus pipeline building versus churn especially now that you own Carbonite with more SMB focus. Just kind of help us a little bit understand, like how trying to or will manage through the current situation? And then I have a follow-up.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. Very good, Raimo. Thanks for the question. We are well and wish you in your extended family the same. Look, I think at the end of the day, the guiding principle is going to be by industry, right? The -- every industry is going to be different. Auto is going to be different than retail, which is going to be different than healthcare and hospitals.
So we are taking an approach to understand our business and the patterns and any structural shifts industry-by-industry our approach that that we are taking. There's no doubt that in general there's an acceleration in transformative discussions. We highlight the ones that we are seeing digital, cloud, remote work, cyber, supply chains. When we add-up our revenues into those industries we think that are most challenged here in the short-term, it's upward to about 20% of our revenues.
Now that's balanced by expansion discussions that we are having in healthcare, pharma, industrial manufacturing and government. So it's -- when you kind of translate all those short-term effects together, for RF-20 we are expecting to grow mid to high single digits, but before COVID, we expected a slightly higher growth rate.
So we are taking a look at it by industry, industry-by-industry. You have places where across the Board there is accelerated discussions, but there are more challenges in certain industries and accelerants and others.
As it relates to SMB, we are clearly monitoring it. The Carbonite business isn't all SMB, there is a good portion that's enterprise, there is a good portion that is OEM which is enterprise, our consumer direct business was actually on an uptick in Q3, and of course, there is the SMB portion of the business. We saw no effects in Q3. We are clearly monitoring it very, very closely. So let me pause there and I think you said you might have a follow on or second part of your question.
Raimo Lenschow -- Barclays -- Analyst
Yeah. then -- it's we are in kind of we are in familiar, but we are also in uncharted territory a little bit in this...
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah.
Raimo Lenschow -- Barclays -- Analyst
...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 decision 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?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. So we are clearly being pre-emptive on our choices as you noted and we noted in our script we think it's better to be decisive of we are slow and incremental. Look, I learned that through my cancer treatment, I learned that through the great recession, right? And you just got to prepare to weather other challenges.
Look I know we are going to follow like most in -- out in the market I call the three Ts, right. We are going to track testing. We are going to track tracing and we are going to track treatment, as a general market. And we are going to track industry by industry.
We are going to look we get good insight through our business network on many industry trends and Raimo the best I think I can highlight right now. Yes, you have the usual pipeline and other metrics, but we are going to take a very industry by industry view.
In each industry those outgoing through every industry here. We are going to we are going to track and trace if you will that the detailed industry metrics, because this recovery is going to happen in industry at a time.
Raimo Lenschow -- Barclays -- Analyst
Okay. Makes sense. Thank you good luck.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Thank you.
Operator
Our next question comes from Paul Steep of Scotia Capital. Please go ahead.
Paul Steep -- Scotia Capital -- Analyst
Hi. The cloud growth in the quarter, maybe measures you are taking whether you have done anything to actually accelerate the transition toward the cloud and sort of push even harder toward that direction beyond the acquisitions that we talked about earlier?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Well, it's kind of pre-COVID. We did make structural changes coming into the fiscal year. We certainly part leadership and management priority on it. But Paul the pandemic is an accelerant to the transition to cloud. Customers who are not able to, I mean, we are not blessed and fortunate to have invested for many years in a very strong technology platform or information management technologies and we think about how we how we operate a 15,000 person company today working from home. Look we processed trillions of commerce through our trading grid over the last hundred days.
And the conversation to accelerate to the cloud to accelerate -- the conversations of cloud and digital are simply being accelerated due to the pandemic. And we are going to be here altogether to help our customers make that transition rapidly, whether it be consolidated content services to build knowledge economies, whether it be leveraging or trading grid to rapidly adapt supply chains.
We had numerous customers who we helped in Q3 that were going from traditional industry manufacturing who had a onboard 2,000 new suppliers, thousands and thousands of new parts to build a platform to build a move to PPE manufacturing and we were able to do that in record time. So they could go reconfigure that physical manufacturing space. So the pandemic is accelerating these conversations. We haven't had a change structurally our comp plans or anything like that to do this.
Paul Steep -- Scotia Capital -- Analyst
Great. And then just a quick follow-up on it maybe put context for people in the call round what [indecipherable] and the team has done with today's announcement now that you have added the other major cloud service provider on the public side and how clients or whether clients have sort of pulled you toward Azure and AWS? Thanks.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
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 they are 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, important steps 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.
Paul Steep -- Scotia Capital -- Analyst
Great. Thanks folks.
Operator
Our next question comes from Stephanie Price of CIBC. Please go ahead.
Stephanie Price -- CIBC -- Analyst
Good afternoon and congrats on the quarter.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. Thanks, Step. Good to hear your voice.
Stephanie Price -- CIBC -- Analyst
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 a 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 reengage?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. It's --software is still unusual where you sort of get the end of quarter activity and like I couldn't be more pleased that we have completed the transition from license business, really into a cloud business in a highly recurring revenue business.
I -- if I look at, we have the transactional work we do and then we have the network work that we do. And on the network side, it seems to be sort of stable coming into April, I would say, you had the end of last calendar year, you had January a bit down, you had February a little lower down, February, excuse me, March a little lower down and in April seems to be sort of a bit more of a steady state right now. It's too early to declare anything. But I would say, here in the first month of the quarter, it seems to have kind of been steady to where we from end of March.
If we just go around the world, China has certainly begin to return to workplace. Southern Europe has begun to return to workplace. I think it's still too early for Western Europe and North America yet and there are still places that are not plateaued, whether it be India or South America.
But from what we can see in our business, we have the transactional piece. We have the network piece. The network piece is sort of stable to where it was at the end of March, but I am just going to know it's still just too early to make any predictions.
Stephanie Price -- CIBC -- Analyst
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's integration should we kind of see this as the new run rate going forward?
Madhu Ranganathan -- Executive Vice President and Chief Financial Officer
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 predominant of Carbonite, of Carbonite revenues aren't 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 and you should definitely look to us to be in the low 60s as we look ahead as well.
Stephanie Price -- CIBC -- Analyst
Great. Thank you very much.
Madhu Ranganathan -- Executive Vice President and Chief Financial Officer
Thank you.
Operator
Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.
Paul Treiber -- RBC Capital Markets -- Analyst
Thanks very much and good afternoon. With the global move to work from home across a number of organizations it seems structural and permanent. As you are experiencing it firsthand, what do you think is perhaps the least understood about that the challenge in transitioning including IT and moving to work from home. And then as you think strategically how do you think that will -- how that help you further reshape Open Text's software portfolio to address that going forward?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. Yeah. Thanks for the question. I think many of us tech companies are very tech oriented businesses. If I walked into an office -- if I walked into my management team meeting last year, Monday morning and sat my team down and said look, we are all going to go send everyone home for the next two months and let's start see how it goes. I would have I thought it would have got locked out of the room.
Yeah, we have all now experimented at scale. Many of us have experimented at scale of having our work forces telework. And I think many of us have been surprised just how effective it is and in some cases productivity up and it works.
So for us we see it as an opportunity to think differently about what the new return to workplace looks like. We are not going to be constrained in certain markets. This will open up some talent pools for us to think more widely about the talent we can bring on Board.
And I also think it will reinvent content services by content services at its heart is a knowledge platform. Don't think about how you do a remote close, how you do many major processes when you have a remote workforce. If you don't have knowledge basis or knowledge economies as I call them it's very hard to work.
So I think on one hand many of us have been surprised at how productive it has been. None of us would have experimented like this on our own. I think you are going to see some permanent changes in that hybrid work. I think it's going to in a lot of ways reinvent reinvigorate content services and these are some of the things that we are seeing.
Paul Treiber -- RBC Capital Markets -- Analyst
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 does that specifically relate to work from home demand and you did see or was there another driver that drove the upside there?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
I would say a few things. One is good integration and execution, as well as there's going to be in those places that are somewhat as we talked about challenged, auto, airlines, travel, hospitality, oil.
But as the workforce moved home and home is more than just home and it's home, office, school, gym and many people at home, we did see high renewal rates and strong interest in our kind of direct business to consumer and prosumer. So I'd say it was a bit of the integration and execution, as well as an uptick in an opportunity due to the work from home at...
Paul Treiber -- RBC Capital Markets -- Analyst
Okay. Thanks for taking my questions.
Operator
[Operator Instructions] Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Richard Tse -- National Bank Financial -- Analyst
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 seen before.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
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.
Richard Tse -- National Bank Financial -- Analyst
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?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Well, as I said, on 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 and which I am just going to talk at the fiscal year level Richard. So for fiscal '20 we are expecting to see another growth here. So total growth in the mid-to-high single digits, cloud growth in the low 20s.
In relation to organic growth which I think is you should 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, right. Our F-20 growth is expected all in our F-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 here, but we clearly have growth impacts because of COVID.
Richard Tse -- National Bank Financial -- Analyst
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 quarter in terms of the valuation into the marketplace? Thanks.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. thanks. Thanks Richard. So it's -- we remain in the market pursuing opportunities. So there is no doubt that the pandemic is going to affect valuations downwards for the markets that we seek assets in.
We continue to build a strong balance sheet 2.25 times leverage and declining. But we are going to continue to pursue opportunity, the right opportunity at the right time. Clearly, any buyer has to understand the effects of the pandemic on that business. It requires yet another part of a playbook to do the due diligence.
So we are going to seek, it's a time to seek to seek companies in your core markets that you already know and that are just strong brands with high recurring revenues. I don't think it's a time to kind of get out of your wheel house.
So with that we are continuing to pursue opportunity to speak with companies, build our pipeline, continue to do deep discussions and for the right opportunity and the right to deliver asset will be prepared.
Richard Tse -- National Bank Financial -- Analyst
Right. Thank you.
Operator
Our next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
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?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
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 short-term issue and we will wait to see the other side.
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
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 our existing customers pushing for concessions on weakness of oil pricing or not to-date?
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Yeah. I think it's safe to say every industry is going to talk about longer payment terms and every industry is going to talk about renewal rates. We experienced in Q3 very strong renewal rates. And look we are in a great position, because we offer a suite of products. We are able to offset those conversations with more product, more services, consolidation opportunity, and look the maintenance and features in the service is what's running a lot of these essential industries.
So I think, we are in a great position to be able to maintain upper quartile renewal rates both cloud and off cloud, given, we take a platform, product portfolio approach, consolidation approach, where we own the platform that is essential in many businesses. So I feel really good on our renewables.
Every company is -- everyone is asking for a longer payment terms. We are going to do what's right and fair here in the short-term and as everyone should, as we say altogether. We will do what's right and fair for those industries and customers, who need our help, in our preventive actions also help offset anything and you saw that kind of altogether spirit actually take record cash flows in Q3.
Operator
This concludes the question-and-answer session. I will now hand the call back over to Mr. Barrenechea for closing remarks.
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
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%, 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 pandemic. Thank you for joining today's call and we will see you on our conferences in the quarter. Thank you very much.
Operator
[Operator Closing Remarks]
Duration: 69 minutes
Call participants:
Harry Blount -- Senior Vice President, Investor Relations
Mark Barrenechea -- Chief Executive Officer and Chief Technology Officer
Madhu Ranganathan -- Executive Vice President and Chief Financial Officer
Raimo Lenschow -- Barclays -- Analyst
Paul Steep -- Scotia Capital -- Analyst
Stephanie Price -- CIBC -- Analyst
Paul Treiber -- RBC Capital Markets -- Analyst
Richard Tse -- National Bank Financial -- Analyst
Thanos Moschopoulos -- BMO Capital Markets -- Analyst
