Open Text Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 11 speakers on the call.

Operator

Welcome to the OpenText Corporation First Quarter Fiscal 20 24 Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, simply press star and 1 on your touch tone phone. Should anyone need assistance during the conference Call to Amy signal an operator by pressing star and 0 on your telephone.

Operator

I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to OpenText Q1 Fiscal 20 24 Earnings Call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barronshade our Executive Vice President and Chief Financial Officer, Madhu Ranganathan and also joining us is Paul Dugan, Executive Vice President and Chief Customer Officer. Today's call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website.

Speaker 1

Earlier today, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, investors. Opentext.com. I'm pleased to inform you that OpenText Management will be participating at the following upcoming conferences: RBC's Capital Markets, Global Technology, Internet Media and Telecom Conference on November 14 in New York Needham's Virtual SaaS Conference on November 16 TD Securities Technology Conference on November 21 Toronto Bank of America Securities Leveraged Finance Conference on November 28 in Boca Raton Wells Fargo Technology Media and Telecom Summit on November 29 in Rancho Paulo Verdes, UBS Global Technology Conference on November 30 in Scottsdale, Scotiabank's Global Tech Conference on December 5 in San Francisco, NASDAQ's Investor Conference on December 5 in London and Barclays Global Technology Media and Telecom Conference on December 7 in San Francisco. And now on to our Safe Harbor.

Speaker 1

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 these material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward looking information as well as risk factors that may project future performance results of OpenText are contained in OpenText's recent forms 10 ks 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 statements unless required to do so by law.

Speaker 1

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, it's my pleasure to hand the call over to Mark. Harry, thank you. Thank you for joining us today.

Speaker 1

It's an exciting start to our new fiscal year 2024. We had record Q1 revenues of 1,430,000,000 double digit cloud revenue growth and adjusted EBITDA of 34.7%. It was another quarter of cloud organic growth, ARR organic growth and strong renewal rates in the mid-90s. Customers showed tremendous trust and confidence in OpenText during the quarter. Bombardier chose OpenText for their legal tech AI platform.

Speaker 1

CNP chose OpenText for large contract AI analysis. And Infosys chose OpenText for developer testing, automation and generation. Great information management is a prerequisite for great AI, and we intend to compete in and win both information management automation and AI. The OpenText business is best analyzed and measured on annual performance. We manage the business to longer cycles than 90 days, quarter.

Speaker 1

Thus our quarters do vary. Based on our strong Q1, our strong product cycle and forward visibility, We have confidence in our F24 constant currency targets, dollars 5,850,000,000 to $5,950,000,000 in revenues, 36% to 38% adjusted EBITDA, dollars 800,000,000 to $900,000,000 in free cash flows, including total revenue organic growth, 15% plus Enterprise Cloud Bookings Growth and Returning Micro Focus to Organic Growth. We are shifting from growth primarily driven by M and A to growth driven by product innovation and go to market execution. You can see our new total growth model with our F-twenty six aspirations on Slide 21 of our Investor Relations deck. And includes 15% plus enterprise cloud bookings growth, 7% to 9% cloud revenue growth, 2% to 4% ARR growth plus any future M and A and margin expansion plus dividends and buybacks and when all combined Yields return to shareholders.

Speaker 1

We are focused on the fundamentals that drive shareholder value. Slide 13 of our investor deck highlights our new shareholder value approach and how we intend to create value through 6 fundamentals. 1st, expand our competitive differentiation in information management, expand customer consumption, unlock new value areas such as SaaS and AI, expand our go to market, realized higher profit and cash flows from those higher revenues and continue to return capital to shareholders via our dividend programs and Future Share Buybacks. Let me walk you through each one of the value drivers. Competitive advantage is everything.

Speaker 1

We offer the most comprehensive information management platform in the market, affording customers many paths to value and paving the way for new value as the world embraces AI. And to accelerate these outcomes, we expect to invest up to 16% of revenues in R and D, and we expect these investments to support our F-twenty six growth aspirations of 7% to 9% organic cloud growth. Second, expanding our customer consumption is a threefold strategy. 1st, by being the market leader in each of our business clouds and driving more consumption within each content, experience, business networks, applications, automation, IT operations and security. Second, by embedding security and content across all of our business clouds and third, by providing customers choice and continuing to provide them choice off cloud, private cloud, public cloud, API cloud.

Speaker 1

We provide the flexibility to pair the right workload with the right consumption approach, so our customers can focus on the right model for their business. 3rd value driver, We have new value areas to unlock, very focused in SaaS and AI. While we are executing well overall and we have many programs to enhance value, We are very focused on unlocking new value from SaaS and AI. Titanium was SaaS driven. Titanium X is both AI and microfocus cloud driven, expect us to spend disproportional time in these areas.

Speaker 1

And for Q2, we expect to see 20% year over year growth in enterprise cloud bookings, another positive sign of unlocking new value. We will expand our go to market. We have one of the largest enterprise sales forces in software to enter F24 with clear market lanes and resources across strategic accounts, enterprise accounts, corporate and business accounts, as well as the home. We are making it easier for customers to connect with our products to consume more. Over 500 partners attended OpenText World as we relaunched our partner network focused on cloud and AI.

Speaker 1

You can already see our progress within strategic accounts such as Microsoft and SMB, SAP and Enterprise Business Applications, Google with cloud infrastructure and AI and AWS with mainframe modernization, a remarkable level of interest in our long term strategy. We also intend to realize higher profits and higher free cash flows from higher revenues. With our expanded mission in information management and greater operational scale, This provides us greater opportunity to automate and to use AI to drive even greater operational synergies. Higher Revenues and Higher EBITDA translates to increased cash flows, which is reflected in our F-twenty six aspirations of adjusted EBITDA of 38% to 40% and $1,500,000,000 plus in free cash flows. And we anticipate the operating leverage in future years to only get stronger as well and finally, capital allocation as a strategic value driver.

Speaker 1

Our capital allocation principle is to return approximately 20% of trailing 12 months free cash flows via dividends. Since fiscal 2013, we have returned $2,200,000,000 via dividends and share buybacks. And we expect that as our free cash flows grows, so do our dividends. And as our net leverage decreases below 3x, we would expect to return to our share buyback program. This is our new growth model and our new value creation approach as we shift from growth primarily driven by M and A to growth driven by product innovation and go to market execution.

Speaker 1

Let me close on a few points. OpenText is in a great position to help our customers build the next generation of work, the next generation of experience, the next generation of service management business fabrics and supply chains, and to do this with the highest levels of trust and security. I'm excited about our growth agenda, helping customers modernize their businesses and their information platform, helping them consolidate customer data into our information cloud, providing cyber tools to create trust and security, consuming more SaaS applications, helping developers be more productive and at the highest levels of quality and building AI platforms for humans. The promise of AI starts with great information management. Our Aviator AI software is built into our business clouds.

Speaker 1

Aviator platform embedded into our automation with pluggable language models Aviator Thrust building smarter applications Aviator Search, Interacting with Information in Whole New Ways Aviator IoT, Embracing the Next Generation of Device Generated Information and our individual Aviator Business Clouds. We are already working with customers to create exciting new AI personas via Aviators such as the next generation tech support assistant, a mortgage advisor, a claims adjuster, an HR business partner. As well we're working with customers to simply get more efficient via AI. You can start to see us unlocking AI value with our expected Q2 20% Year Over Year Growth in Enterprise Cloud Bookings. Our shift to a new total growth model, driven by innovation with emphasis on high quality growth, will enable us to deliver strong metrics for profitability and cash flows at scale.

Speaker 1

Our 6 fundamentals of new shareholder value will uniquely position us as a choice investment in the technology sector. My deepest appreciation to our 24,000 colleagues at OpenText, who live our mission every day to make our customers wildly successful. Our hearts pray for the hostages and innocent everywhere. And we join the global community in the hope of a peaceful and prosperous future for the Middle East region. May the one that brings peace, bring peace for all.

Speaker 1

Let me turn the call over to Paul Dugan, our Chief Customer Officer, who will speak to our renewal business, which grew organically in Q1. Then Paul will hand the call over to Madhu, our CFO, who will speak to our financials and outlook.

Speaker 2

Over to Paul. Great. Thank you, Mark. It's a privilege to be with all of you today to talk about our renewals business and the work we're doing to unlock value for our customers and shareholders. Before I do, let me tell you about my team, the customer success organization.

Speaker 2

We're responsible for renewals of cloud and off cloud subscriptions, professional services and cloud delivery and technical support. We brought these functions together following the Micro Focus acquisition and took on an enhanced mission called OpenText Love, Land Together, Operate, Value, Expand. OpenText Love means focusing on customer outcomes. It's all about turning promises made into promises delivered. When it comes to renewals, we believe if you deliver on those promises, customers succeed.

Speaker 2

And when they succeed, they stay with you and those relationships will grow over time. Today, I'll speak to 3 areas, the strength of our renewals, an update on micro focus and a few of the goals ahead for our team. First, OpenText has a strong record of maintaining exceptional and predictable renewal performance despite historic and disruptive world events, economic uncertainties and unprecedented strategies of the last decade, our renewal rates are unwavering. Q1 was no exception, finishing at 94% for cloud and off cloud excluding Micro Focus. Of course, renewal rates directly correlate to the value of products and services to our customers, but it's also a measure of operational excellence from our renewal systems, processes and controls to pricing and programs to the automation simplifying the transactional elements.

Speaker 2

Collectively, these also create a lifting force on renewal rates and help us protect and grow ARR over time. It's not just renewal rates either. All of our primary indicators are trending positively, on time renewals, past due contracts, cancellations, pricing at the point of sale and our annual price adjustment at renewal. These trends are the hallmarks of customer confidence and a tightly run world class renewal function. 2nd, as we shared before, raising the renewal rate on Micro Focus is a critical value unlocker.

Speaker 2

Identification and mitigation playbook, growth programs like an extended support offering and deep engagement with our sales and engineering leadership to shape overall consumption and expansion strategies. By the end of Q2, we'll have touched roughly 75% of the Micro Focus cloud and off cloud subscriptions. We expect to touch 90% by Feb 1. Quarter. As a result, we'll increasingly see the positive impacts of running the business in all the ways I described.

Speaker 2

And I'll give you 2 proof points on that impact. One. Back in February, we took on a business operating in the low 80s on renewal rate. Q1 ended in the mid-80s And it gives us now 2 consecutive quarters of improvement. We remain confident we'll end in the high 80s this year and expect to operate in the 90s in fiscal 2025.

Speaker 2

2, we did it for Documentum, taking renewals from the low 80s to the mid-90s where we are today. And now we are doing it for Micro Focus. And finally, looking to the future. It's all about growth. We already have a successful cloud renewal expansion motion in Business Networks and SMB.

Speaker 2

We're adding new offerings like a premium support upsell on our OpenText installed base, taking a very successful offering within the Micro Focus business, understanding the profile of customers that consume it and extending that to similar OpenText customers. We also announced a new customer renewal portal last month. More than 90% of our cloud renewal business is auto renewed. And with this new portal, we'll bring an automated and self-service option to our off cloud customers as well. As we do that, we plan to shift more renewal professionals to customer management versus renewal management and drive expansion across the entire customer base.

Speaker 2

Our overarching goal is to position renewals and the entire customer success organization to play a more prominent role in consumption, AI adoption and public cloud expansion. Let me close by saying thank you to our customers. Success as a team sport and the fantastic results we saw in Q1 ultimately represent your trust in OpenText. That trust is earned, not given, and we're committed to delivering on the promises we make to you every day. And with that, I'll hand the call over to Madhu.

Speaker 3

Thank you, Mark, and thank you, Paul. We appreciate all of you joining us today. So let me summarize the key points for today. Regarding Micro Focus, we expect to return Micro Focus to organic growth this fiscal year, driven by successful integration. And in particular today, you all received an excellent overview on renewals from Paul.

Speaker 3

In addition, we are delighted to share and we expect Micro Focus to be on our target operating model of 36% to 38% adjusted EBITDA this fiscal year as well. In Q1, OpenText executed extremely well in a volatile world with record Q1 revenues and year over year growth. Turning to our outlook. Our outlook fully reflects the performance we expect, bringing together 2 businesses with different seasonality trends and sales cycles. With Q1 actuals and Q2 quarterly factors, we remain on target for our internal plan.

Speaker 3

We expect a stronger second half and a seasonally strong Q4 at the end of fiscal year, including a return to organic growth for Micro Focus. These are important factors for our quarterization and we encourage the analysts to better balance your quarterly models. We remain fully on track to meet our fiscal 2024 targets and fiscal 2020 6 aspirations. You are hearing today that we are shifting from growth primarily driven by M and A to growth driven by product innovation and go to market execution. This is our new total growth model with our fiscal 2026 aspirations led by Cloud and ARR.

Speaker 3

My final summary point, we remain highly committed to shareholder value. And today we're sharing with you our new shareholder value approach to 6 fundamentals that Mark outlined earlier. So moving to our Q1 results, Please refer to the investor presentation as posted on our IR website. Starting on Page 24 of the presentation for the slide titled Q1 fiscal 2024 and trailing 12 month financial highlights. All references I will be making are in 1,000,000 of USD and compared to the same period in the prior fiscal year and on a reported basis understated otherwise.

Speaker 3

On a year over year basis, Enterprise Cloud bookings of $121,000,000 up 8% year over year. We had record Q1 cloud revenue of $451,000,000 up 11.5% and 10.9% in constant currency. Q1 ARR revenue of $1,150,000,000 up 59.1 percent 57.5 percent in constant currency and this represents over 81% of total revenue. This is 11th consecutive quarter of organic growth in constant currency for both cloud and ARR. Its record Q1 total revenue of $1,430,000,000 up 67.3% 65.4% in constant currency with Micro Focus contributing $563,000,000 in the quarter.

Speaker 3

And moving to other financial metrics, GAAP net income was $80,900,000 and this reflects increased operating expenses, amortization, special charges and interest expenses related to the acquisition of Micro Focus driving GAAP EPS of $0.30 GAAP gross margin of 71.4%, up from 69.7 percent and this reflects increased relative revenue contribution from customer support and license. Non GAAP gross margin of 77.3 percent, up from 75.2%, also reflecting increased relative revenue contribution from license and customer support. Adjusted EBITDA of $495,000,000 an increase of 62.8% year over year and 58.2% in constant currency. Our adjusted EBITDA margin was 34.7%. We expect micro focus on to our adjusted EBITDA model by the end of this fiscal year.

Speaker 3

Adjusted EPS of $1.01 continues to reflect this progress. Turning to DSOs. Our DSOs are 43 days, down slightly by 2 days compared to Q4, given Q1 seasonal factors. Micro Focus continues to perform well and our overall working capital performance remains strong. As stated in our last call, we expected Q1 free cash flows to be neutral to slightly negative as a result of interest, special charges and integration costs as well as seasonally lower working capital at the start of the fiscal year.

Speaker 3

We generated $47,000,000 in operating cash flows and $10,000,000 positive free cash flows in the quarter. Quarter. Starting from Q2, we expect free cash flows to grow on a year over year basis in each subsequent quarter. We remain on track to realize our fiscal 2024 FCF targets of $800,000,000 to $900,000,000 and achieve our fiscal 'twenty six aspirations. Now turning to the balance sheet, please refer to Page 26 of the investor presentation.

Speaker 3

We finished Q1 with $920,000,000 in cash and $8,900,000,000 of total long term debt. Our net leverage ratio was 3.6 times for the quarter. In Q3 and in our last call, we mentioned the net leverage ratio would fluctuate slightly over the next few quarters, while we remain on the path to a net leverage ratio of less than 3 times by the end of fiscal 2025 or sooner. We have completed approximately $560,000,000 of debt repayment since the close of Micro Focus transaction. Our revolver is now fully paid and we have begun to make discretionary principal payments on the term loan.

Speaker 3

Turning to our dividend program. On November 1, Our Board of Directors approved a quarterly cash dividend of $0.25 per common share. The record date for the next quarterly dividend is December 1, 2023 and the payment date December 20, 2023. And let's turn to our targets and aspirations. As Mark highlighted for Q2, we expect enterprise cloud bookings to grow 20% year over year.

Speaker 3

And let me comment on the SMB market. The SMB market has been the most impacted by the current macro environment. This trend has an impact on our cloud revenues, not on enterprise cloud bookings. During Q2, we expect to have a $10,000,000 to $15,000,000 revenue headwind from SMB. Our enterprise cloud business remains strong and expected to grow revenues organically in Q2 and the rest of the fiscal year.

Speaker 3

Quarter. As the SMB market gains more strength, we are well positioned to capture share and accelerate cloud revenue growth. Starting with our Q2 fiscal 'twenty four core refractories of our investor presentation. On a year over year basis, we expect revenue of $1,450,000,000 to 1,501,000,000 ARR of $1,100,000,000 to $1,130,000,000 FX revenue tailwind of approximately $10,000,000 to 15,000,000 adjusted EBITDA year over year, the margin between 36% 37% and reflects Micro Focus integration costs. FX adjusted EBITDA tailwind of approximately $5,000,000 to $10,000,000 Our fiscal 2024 targets in constant currency are provided on Page 30 of Investor Relations presentation.

Speaker 3

Mark spoke on fiscal 2024 target in his comments and let me provide a full summary. Total revenues of $5,850,000,000 to $5,950,000,000 Enterprise Cloud Bookings growth of 15% plus cloud revenues up 6% to 8%, customer support revenues up 40% to 42%, ARR up 24% to 26%, Total revenue growth of 30% plus with organic growth in the range of 1% to 2%, non GAAP gross margin in the range of 77% to 79%, total operating expenses of 42% to 44% of revenues, adjusted EBITDA margin of 36% to 38%. Two changes to our fiscal 2024 targets. At current exchange rates, we expect FX to be neutral, but also reducing our net interest expense for the year to be $550,000,000 to $570,000,000 and this reflects a 75 basis point reduction in the interest on our acquisition term loan. Our free cash flows are on track to achieve $800,000,000 to $900,000,000 which is our fiscal 2024 target range.

Speaker 3

Our fiscal 2026 aspirations remain unchanged. These are included in Page 32 of our investor presentation materials. We are reaffirming fiscal 2026 FCS aspirations of $1,500,000,000 plus We expect to realize higher adjusted EBITDA margins and free cash flows from higher revenues. And let me put these in numbers for you. And relative to fiscal 2023, our fiscal 2026 aspirations show revenues to be 40% higher, adjusted EBITDA to be 67% higher and free cash flow to be 129% higher.

Speaker 3

Our fiscal 2026 aspirations show a highly predictable and growing business at scale led by cloud and ARR. Acquisitions will remain additive to our future growth as we delever and capital flexibility returns. Lastly, please refer to our financial integration framework slide on Page 31, we have updated to reflect timing on system integration and global entity simplification. So in summary, our Micro Focus integration is ahead of plan and we expect to achieve important milestones in fiscal 2024. It's a return to organic growth and renewal rates in the high 80s and Micro Focus business to be on the OpenText operating model of adjusted EBITDA of 36% to 38%.

Speaker 3

Also as Mark mentioned, our shift to a new total growth model driven by innovation with emphasis on high quality growth will enable us to deliver strong metrics for profitability and cash flows at scale. Our 6 fundamentals of new shareholder value approach will uniquely position us as a choice investment in the technology sector. Our OpenText team members have proudly delivered a solid Q1 kicking off of fiscal 2024.

Speaker 2

Operator?

Operator

Pardon me, we're experiencing some technical difficulties. Please stand by. My apologies. We will now begin the question and answer session. You will hear a tone acknowledging your request.

Operator

Star and 1 at this time. The first question comes from Richard Tse with National Bank Financial. Please go

Speaker 4

ahead. Yes. Thank you. Can I ask Paul a question here?

Speaker 1

Richard, go right ahead.

Speaker 4

Okay. Paul, so from your vantage point, you've obviously been in the role and been successful at it. Like, what do you think has been the biggest, I guess most meaningful driver to increasing Micro Focus' renewal rate here.

Speaker 2

Hi, Richard. Great. Thank you for the question. Look, I think it comes down to 3 things. First, we move fast to get micro focus on our OpenText practices for Knowles, As I discussed in my prepared remarks.

Speaker 2

2nd, that also meant moving quickly to integrate the teams doing the work, getting renewals, doing renewals and sales doing sales. And we believe that when those lines are not clear, renewal rates tend to underperform. And I'd say, 3rd, as I speak to customers, I think that they also see our product roadmap and the other thing is we've unveiled in terms of our AI path And they recognize that information management is becoming really a gating factor to fully embracing those step functions. So I think all of those play a significant role in the decision to renew, and we can already empirically see that in the rental rates and the improvement we made since February.

Speaker 4

Okay, great. Thanks. So, Mark, your recent OpenText World was a great event, Certainly a ton of excitement around Aviator. What's sort of been the follow through since the event last month And maybe kind of give us a sense of the momentum from a product perspective.

Speaker 1

Thank you, Richard. As I said in my notes, continue the product cycle, customer engagement, clarity of our ability to provide practical value, all fed into our comments today in the call of increasing our bookings outlook for the quarter of 20% year over year growth. So we're definitely getting to the next phase of engagement to specific use cases. Product delivery in October, it's just November 2 or 3rd, so it's early November. We had the next wave of product delivery in January.

Speaker 1

We've engaged with customers with fantastic feedback from OpenText World, including 500 partners who are with us in Vegas and we're in engagements now and we're going to win our business. And you're going to see it reflected first in bookings and thus our 20% year over year growth expectations for the quarter.

Speaker 4

Okay. And then just a last one for me. Certainly appreciate the shift here to an organic growth focus, but I imagine you still have a fairly robust M and A team evaluating transactions. And so I'm just kind of curious, given the backdrop today, What's your sense of the acquisition landscape perhaps from an evaluation standpoint? And if you came across like a great opportunity, Would you be in a position you think to move on something within the next 12 to 18 months?

Speaker 1

Yes. Thanks, Richard. I have the organization focused on a singular powerful concept, Information Management. It's a $200,000,000,000 market. We are transition from M and A driven growth to organic growth.

Speaker 1

And that starts with a rich product pipeline, unlocking value in the cloud, new value areas of SaaS and AI, and that is a new that is an enhanced motion for us with expectations of 20% year over year growth in our enterprise bookings. So that's where we'll focus on a singular powerful concept. And we remain focused on a singular powerful concept. For sure, If we find an opportunity like we did recently with Kymatic, that can enhance a specific aspect of our product, In the context of our strategy, we won't be bashful at all, but we're focused on this singular powerful concept And our expanded mission in information management and being driven primarily by organic growth.

Speaker 4

Okay. Thanks for taking my questions.

Speaker 1

Thank you. Appreciate it.

Operator

The next question comes from Thanos Moschopoulos, BMO Capital Markets. Please go ahead.

Speaker 5

Hi, good afternoon. Also a question for Paul.

Speaker 1

Just to be clear,

Speaker 5

what remains on maximizing the renewals of Micro Focus? Is it primarily a

Speaker 1

question of going through the annual renewal cycle with all

Speaker 5

the customers or are there still some key steps that need to be done internally to really drive that organization to its potential?

Speaker 2

Yes, great question. It's a number of things. So, you nailed the first one, right? We got to we actually got to get to each of the renewals. And like I had said in my remarks, it will be mostly there by February.

Speaker 2

And look, I think the step functions for us from there are really kind of going to be value driven, the product roadmap, the conversations we're having around that. I think those are the things that really go into decision points on renewal. The things that we see today are really in large part decisions that were made 12 months ago. So you got to go rewind the clock back look at the product roadmap at that time and look at what was out in front of the customers at that point. So there's going to be some run out here, I think, of You're going to get these initial improvements and benefits from all the systems and all the processes and those sorts of things.

Speaker 2

And then the longer end of this is going to be all about The intrinsic value of our offering. And you saw it with Documentum. Like I mentioned, we started a very similar place, low 80s. The documentary business is running ahead of our average renewal rate. So we're in the mid-90s and we've been there for some time.

Speaker 2

So, there's confidence in our playbook. We've done it before. The

Speaker 1

scale with this, but it's still it

Speaker 2

comes down to these fundamentals.

Speaker 5

Great. And then Mark, just in terms of integrating the go to market, It sounds like you've done heavy lifting for integrating your internal teams. But as far as integrating the Micro Focus and OpenText channels, Where does that stand? How much opportunity remains on that front? And when do you expect to start capitalizing some of that?

Speaker 1

Yes. Thank you, Tiana. Thanks for the question. Yes, certainly, our direct sales forces are fully integrated and fully aligned as we kicked off the fiscal year. We have in the investor deck, I think it's Slide 18, where we talked about that segmentation, question.

Speaker 1

Really important. We've really matured as we scaled up to our current revenue letter levels are looking well beyond the full coverage out into the Global 10,000. We now have very formal segmentation and it's the segment it's very well aligned to how Oracle thinks of the world, SAP, Microsoft, we're now in that category, strategic accounts, enterprise accounts, corporate accounts, business accounts and home accounts, very well defined stratification, very defined go to market. We are one sales organization pursuing those market areas. Where we have more work to do is on the partner network that we launched in July.

Speaker 1

Partner networks by definition, they're networks. So they've got a lot of tentacles that go out over many, many years. We announced where our landing zone for all our partners, including Micro Focus Partners of deal registration. We announced where they can engage on selling cloud. We began the AI discussion with them, and where we want to be kicking off July 1 next year, takes systems, takes contracts, TICS execution, but we announced where we want to land come July 1.

Speaker 1

So there's a little work to do there between here in November and June of next year. But on the direct enterprise side, we're fully aligned. We're united. We're one organization. We have one organization on the new partner network, and we defined our landing zone of where we want to be July 1, announced different partners.

Speaker 1

We're working on all the details behind it. So that's the remaining work, Thanos.

Speaker 5

Great. Thanks, Michael. The

Operator

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

Speaker 1

Thanks very much and good afternoon. Just the your outlook to achieve 20% cloud bookings growth this quarter is great. And it seems like an inflection from Q1, which is only 8%. Is that the right way to characterize it? Is that new AI products are likely to drive an inflection in growth for OpenText?

Speaker 1

Or Is that reading too much into it and there's maybe just quarterly dynamics between Q1 and Q2? Paul, thanks for the question. Thanks for your first question to me. So I appreciate that. Just kidding.

Speaker 1

So No. Our 20% bookings growth, we're going to see our first AI bookings in that number. So AI is going to contribute. As we talked about 2 quarters ago, we announced our direction. We have a strong history over a decade of innovation in AI.

Speaker 1

We presented for customers how to get practical value. We announced our roadmap. Now we've delivered Wave 1. We're delivering Wave 2. And it's Being very well understood where we can start to unlock value across our platform being built in, our Thrust Services, Search, IoT and each of the Aviator Business Clouds.

Speaker 1

And it's interesting kind of a new language we're hearing from customers and we're helping them get there is that through our business clouds, we're helping them build these AI personas. So they have contract administrators today, Now they're going to go the AI persona of the contract administrator or mortgage advisor or technical support assistant. So now that 20% expected bookings growth year over year has AI contribution to it. Look, our Q1 is always seasonally light. And that's just it's our Q1.

Speaker 1

I know it's the world's Q3, but it's our Q1. And so our customers are trained that way. But no, that number reflects our next set of wins in AI, And I can't wait to present them to you. And you've had product releases and product cycles in the Pass. You sound quite enthusiastic about AI.

Speaker 1

Could you give us some context around how customer interest and the sales pipeline for your new AI products compare versus previous product releases? Well, sure. I think this is I'd say 2 things. The first is, I don't have to spend a dollar on marketing and AI. I mean, the whole world is talking about it.

Speaker 1

So that's sort of an interesting new dynamic, right? So customers are proactively engaging. The world is very focused on generative AI. We, of course, think the landing zone is General AI, because there's a lot more to it than just the generative aspect. So, Paul, dynamic number 1 that's different is The world's talking about it and it's got a big awareness aspect built in.

Speaker 1

2nd is we have very relevant product sitting on top of very large datasets that we've helped to build for our customers over the last year. And we believe this is the inflection point, the singular powerful concept that unlocks information management to its next level in the enterprise. There was inflection points for ERP and CRM of integrated e business suites. This is an inflection point for information management, to unlock the value of those data sets. So you got natural demand being driven by market and breakthroughs in technology, the baby speaks.

Speaker 1

And number 2, we have very relevant and very timely technology on top of our platform. And as I said at OpenText World, it is okay to speak this way. We were late in SaaS. We are not late in AI, and we're going to capture the opportunity here for the company. Thanks for taking

Speaker 5

the questions.

Speaker 1

Yes. Thank

Operator

you. The next question comes from Kevin Krishnaratne with Scotiabank. Please go ahead.

Speaker 6

Hey there, good evening. Just a couple of clarifications. You said Micro Focus contributed $563,000,000 in the quarter. Is that Correct. And if so, was that sort of within your expectations or is it going better?

Speaker 6

And do we have a margin for Micro Focus in the quarter?

Speaker 3

Yes, Kevin, it's Madhu here. Thank you. So yes, dollars 563,000,000 in revenue. And as we mentioned, the integration is going very well. We are ahead of our internal plan.

Speaker 3

And from a margin perspective, I would point you to the fact that, being ahead of the plan, we are able to the projected micro focus will be on our 36% to 38% this fiscal year, which is really the 1st full fiscal year since the transaction closed.

Speaker 6

Okay. And then a second clarification here just on the SMB dynamic. I think you had mentioned a $10,000,000 to 15,000,000 year over year revenue headwind, is that correct? I'm just curious, if you can dig into that a bit more and then remind us, if you can, on how big SMB is in your base?

Speaker 3

Yes. I mean, I'll comment and I'm sure Mark will chime in as well. So $10,000,000 to $15,000,000 revenue headwind is what we see in Q2. We pay attention to couple of cycles, obviously the PC cycles and of course all things associated with Microsoft as it intersects with our SMB business. Now having said that, I think Paul also mentioned in his note that we do have some products and innovation and new items to bring to market and we factored those into account for the second half of the fiscal year.

Speaker 3

And overall, we remain on target for our fiscal 24 revenues including the cloud revenue. Mark, anything to add?

Speaker 1

Yes, sure. Thank you, Madhu. This is not an OpenText challenge. This is a market challenge. And we all read the same headlines about the challenges in SMB.

Speaker 1

And SMB is less than 10% of our business. It's an important it's a new area for us. We've only been in this area 2 to 3 years. We're never going to realize our full potential information management if we can't get to that mid market. And we're much more interested in the mid market than the S, the small part of the market.

Speaker 1

So as Micro Focus actually Microsoft has recently said, It's the most important sector for them. And as they do well, we will do well. As PC shipments rebound, We will do better. We're also bringing new product into this area like our service management, Mid Market Business Network Capabilities. So, it's really not our challenge, it's the market's challenge right now.

Speaker 1

And we're so well positioned that as the market picks up, we're going to be a beneficiary of it. But we wanted to call it out, Just to be clear on our cloud momentum and help you model the business.

Speaker 6

Good stuff. I appreciate the color. I'll pass the line. Thanks.

Operator

The next question comes from Stephanie Price with CIBC. Please go ahead. Hi, good evening. I just want

Speaker 7

to circle back on the focus on achieving organic growth at Micro Focus in fiscal 2024. Just Curious if you can share what organic growth at Micro Focus was this quarter and how you expect to trend over the fiscal year? As you work towards organic growth at Micro, obviously, maintenance is going to be the key driver, but also curious if there's anything else we should be thinking about there as we think about Organic Growth and Business by the end of fiscal 2024.

Speaker 3

Yes, Stephanie, it's Madhu here. So I'll take the first part, how How to think about Micro Focus organic growth in the quarter. It's going to be a hard year over year compare. As we said in the last couple of calls, Our starting point is $2,300,000,000 of revenue. You take IFRS to GAAP, you take the Digital Safe divestiture And we did decide to shed some contracts and not carry them forward and $2,300,000,000 is really our baseline.

Speaker 3

And at $563,000,000 we've done well. It is our Q1 of this fiscal year and we do expect to grow organically in the entire year and everything you've heard so far on the Micro Focus integration, the customers, the partners, all of that is going to play a role for us to exceed the $2,300,000,000 number.

Speaker 1

Yes. And Steph, let me jump in as well. We're doing exactly what we said we would do. And we're going to show you Micro Focus every quarter for this fiscal year, but we don't have to through disclosure, but we're going to. You take $2,300,000,000 divided by 4, that's $575,000,000 Our Q1, seasonally small a light quarter for us in Q1, we delivered 563 and you'll see that momentum build.

Speaker 1

And it's really that simple. We are very confident where we're turning Micro Focus to organic growth. We're off to a great start. And as Paul talked about the renewals, our strong product cycle with private cloud, new SaaS offerings and SMAC's Fortify On Demand, NetIQ, UCMDB as SaaS, A first set of AI on top of Micro Focus, which they would never been able to get to, if not part of OpenText. So, we're doing exactly what we said we'd do.

Speaker 1

We're going to show you every quarter along the way and we're off to a great start at 563.

Operator

Perfect. Well, thank you so

Speaker 7

much for the color.

Speaker 1

Thank you.

Operator

The next question comes from Raimo Lenschow with Barclays. Please go ahead.

Speaker 8

Great. Thank you. This is Jeremy on for Raimo. Just wanted to follow-up on the SMB headwind that you called out. So is it having like Maybe an outsized impact on any of the business lines like with security having 6 in Carbonite, which is more SMB focused.

Speaker 8

Is it sort of showing up more there or really anything you call out there would be helpful? Thank you.

Speaker 1

Deputy Chairman, I would call it a headwind, maybe a light breeze. And we provided the additional color to help you model. That's really simple, right? So, there's no product to point to across the portfolio. Again, it's not us, it's the segment, right?

Speaker 1

PC shipments are clearly down, so there's less to sell into. Microsoft Had delayed certain programs. They've now recently declared this is the most important segment, so it's going to build momentum. So no, nothing specific to point to. I would not call it a headwind, maybe a light breeze.

Speaker 1

And it's a segment, it's not us, it's not something specific. And we're excited about being a beneficiary as PC shipments go up, As Microsoft builds their amazing machine here.

Speaker 8

Got it. Thank

Operator

you. The next question comes from Adhir Khatri with 8 Capital. Please go ahead.

Speaker 9

Hey, good evening, guys. Thanks for taking my questions. Maybe outside of the AI showing up in bookings and driving that 20% growth, Is there any other particular areas across the 6 markets that you've defined, Mark, that are really driving that confidence in the 20%?

Speaker 1

SaaS. So SaaS and AI. Titanium was focused on many things, but top of the stack was SaaS applications, having core content, core signature, core capture, core archive. Starting to get into the machine, SaaS based service management, which we call SMACs, SaaS based security through NetIQ SaaS based asset management with the Universal Configuration Management Database or DMDB. So getting additional products in there as well, mid market SaaS and business network.

Speaker 1

So, here I'd say it's 2 things. It's titanium delivered product, start to get in the market, build demand, win business and it's the 2nd value unlocker of AI starting to get its first win.

Speaker 9

Thanks, Mark. And then just on AI, you guys introduced a fairly robust product roadmap as well as products that are in market right now. Mark, any of those that are really kind of driving excitement or really driving, undue, excitement from your clients that you could speak to?

Speaker 1

Oh, I have to pick a child, which one I like. No, the we're going to follow I think it's going to follow where the data And the value that we can unlock. I'll start right in kind of our heritage in content management and building these aviator personas next to the human persona for the claims manager, the claims adjuster, the contract author. So content certainly is up there. I'd also say in Itom, we have a very large installed base around service management and the ability to create that AI aviator persona around the technical support shift in.

Speaker 1

So content, I, Tom, I would probably shout out, we're lead the way early. Now with that said, the general applicability of search, very interesting for us and a lot of workloads out there for machine generated and device generated content via IoT. But I would look to content in ITOM

Operator

question. The next question comes from Steve Ender with Citi. Please go ahead.

Speaker 10

Thanks for taking the questions. This is George on for Steve. I want to talk about the AI products at the Aviator, set of products. You guys were fairly quick out to market with them, which I think is a testament to that 90 day release cycle. But maybe you could just talk about the decision to monetize these when maybe some of your customers are in an experimental phase and I guess how are we thinking about the kind of timeline to revenue contributions?

Speaker 10

Thank you.

Speaker 1

Yes, George. Thank you for the question. As I said last quarter, until we have revenue signals. We're not going to kind of change our outlooks, if you will, Until today. And I look at Q2 and we're seeing we've gone through this whole cycle of the baby speaks through generative AI in the consumer world, the rise of algorithms, The ability to do that in the consumer world.

Speaker 1

We've worked with our partners, Google and others, to ensure there could be private environments. We have our own technology that we've advanced to do sort of aspects of the AI preparatory work for customers, Embedding Factorization. We've worked through a lot of the technology hurdles that pluggable language models because they're going to get very specific. And we've now with 23.4 have wave 1 of very practical capabilities. 24.1 brings the rest of the business clouds to very practical capabilities.

Speaker 1

And we're demonstrating how within content management, business network, in the ITOM space, in the developer space, where you can apply these aviator personas to sit next to the human to add significant value. So this is the next step and we're seeing the first demand signals and thus calling it out that we expect to see 20% bookings growth year over year.

Speaker 10

Got it. Yes, that's a really encouraging number. Maybe just to double click on that 20%, kind of loud and clear that AI and SaaS are the top two drivers. Is there any contribution from Micro Focus adoption of private cloud in there or is that maybe a little farther down

Speaker 1

the pipeline? There'll be some in there. Sure.

Speaker 10

Got it. Thanks for taking the questions and congrats on the quarter.

Speaker 5

Thanks, Troy.

Operator

The next question comes from Daniel Chan with TD Cowen. Please go ahead.

Speaker 4

Hey, Mark. Earlier you're mentioning that your customers are trained on your fiscal year end. Micro Focus's fiscal year end is in October. I know you've been trying to move some of those customers onto your timeline, but should we still expect a large number of their customers to still be on the Micro Focus fiscal year end?

Speaker 1

Look Dan, I think it's going to take a year or 2 to kind of get the full quarterization from the Micro Focus installed base. And thus Madhu's comments on paying attention to the quarterization and we spent a lot of time, Dew and T has spent a lot of time on the quarterly factors for Q2. And just a clear shout out balanced models in the second half of the year. So, look, we're making progress. We're going to always default to the customer and what the customer wants to do, But we're going to get to the open tax cycles, it will take a year or 2, but we'll get there.

Speaker 4

Sounds good. Thanks for that. And then appreciate the color on the SMB impact from the macro. Just wondering if there's any update on the enterprise

Speaker 3

question. And I assume you're referring to the cloud side. Things are looking strong. And certainly that's why we called out SMB. Going back to all that Mark said, in addition to the AI, the core solutions that we continue to build upon and innovate, There continues to be strong demand for those, all business clouds included, right?

Speaker 3

So on the enterprise side, cloud, non SMBs continues to be strong.

Speaker 1

Great. Thank you. Thank you. Yes. Thank you, Dan.

Operator

I will now hand the call back over to Mr. Barrenechea for closing remarks.

Speaker 1

Very good. Madhu, Paul, Thank you and thank you everyone for joining today. Look, we're very excited to engage with you and tell you more of our story and on our new model for growth. And we're going to be participating at many upcoming conferences as Harry noted, RBC Conference November 14, New York City the Needham SaaS Conference virtually on November 16, CD Security Conference November 21 in Toronto, which I'll personally be at the Wells Fargo Technology Summit 29th and Trancho Poros Verdes, the UBS Global Tech Conference November 30, Scottsdale, Scotia, December 5 in San Francisco. The Natradu is going to host the NASDAQ Investor Conference in London on December 5, and we'll be at the Barclays Global Tech Conference December 7 in San Francisco.

Speaker 1

We look forward to connecting with you, telling your story and maybe one that brings peace for all. That ends the call today, operator.

Operator

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

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Key Takeaways

  • Record Q1 results: Revenue of $1.43 billion (+67%), cloud revenue up 11.5%, adjusted EBITDA margin of 34.7%, and mid-90s renewal rates drove another quarter of organic ARR growth.
  • Fiscal 2024 targets reaffirmed: Revenue guidance of $5.85–$5.95 billion, 15%+ enterprise cloud bookings growth, 36–38% adjusted EBITDA margin, and $800–$900 million free cash flow.
  • New organic growth model: Shifting from M&A to product innovation and go-to-market execution with ~16% revenue invested in R&D, focusing on SaaS and AI to achieve 7–9% cloud revenue and 2–4% ARR organic growth.
  • Micro Focus integration ahead of plan: $563 million in Q1 revenue contribution, renewal rates improved from the low-80s to mid-80s with a target of high-80s by year-end and margins aligning to 36–38%.
  • AI and SaaS momentum: Launch of Aviator AI platform across business clouds and support services underpins a 20% year-over-year enterprise cloud bookings growth outlook for Q2.
AI Generated. May Contain Errors.
Earnings Conference Call
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