Open Text Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 13 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to the OpenText Corporation 4th Quarter Fiscal 2023 Financial Results 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

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

Speaker 1

Good afternoon, everyone, and welcome to OpenText's 4th quarter fiscal 2023 earnings call. With me on the call today are OpenText Chief Executive Officer and Chief Technology Officer, Mark J. Barreneche and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Today's call is being webcast live and investors. Opentext.com.

Speaker 1

I'm pleased to inform you that OpenText Management will be participating at the following upcoming conferences: The Virtual Oppenheimer Technology, Internet and Communications Conference on August 9 Deutsche Bank's Technology Conference on August 30 in Dana Point, California and Citi's Global Technology Conference on September 7 in New York. And now on to our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward looking information. While these forward looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward looking statements made today. Certain material factors and assumptions were applied in drawing any such statement.

Speaker 1

Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward looking information as well as risk factors that may project future performance results of 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 looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non GAAP financial measures. Reconciliations of any non GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, I am pleased to hand the call over to Mark.

Speaker 2

Thank you, Harry, and good afternoon, everyone, from Richmond Hill. As you can see, Q4 was another fantastic quarter and great end of the year, highlighted By record financial results, the successful integration of the Micro Focus acquisition, delivery of Cloud Editions 23.2 Project Titanium, announcement of Cloud Editions 25, Project Titanium X and today's announcement of OpenText dotai. We are a global leader in information management. Information management is essential for the next gen of AI and the next gen of business transformation. And just as the Internet changed everything, with AI everything must change.

Speaker 2

But before I get to the numbers, like to go over the journey that got us here. 3 years ago, we were delivering around $3,000,000,000 in revenues and I said we would transform Information Management by significantly expanding our mission, become a cloud centric company, grow organically, Double the business over the next 5 years and that we would return capital in a value accretive manner via dividends at a rate of approximately 20% trailing 12 months free cash flow per year. Well, as you can see, this has played out. I'm so proud of the team on delivering to our aspirations. In constant currency, Q4 revenues were 1,500,000,000 And F 'twenty three revenues were $4,600,000,000 or 32 percent total growth, led by cloud organic growth of 3.9%, ARR organic growth of 2.3% and total organic revenues of 1.2%.

Speaker 2

Looking ahead and in constant currency, fiscal 2024 target revenue ranges are between $5,850,000,000 to $5,950,000,000 or 30% plus total revenue growth. For F24, we are targeting positive organic growth, including a positive organic contribution from Micro Focus a year earlier than expected. Today, we announced a $1 per share annualized dividend program or $0.25 a quarter, subject to approvals, up from $0.31 annualized when we started our dividend program. We remain committed to our F-twenty six aspirations, which include total organic growth of 2% to 4%, cloud organic growth of 7% to 9%, Adjusted EBITDA margin expansion up to 40% and the doubling of our free cash flows to $1,500,000,000 plus The confidence in our targets reflect the agility and operational rigor of the OpenText business system. Within 5 months of closing Micro Focus, we have completed the business, the product, customer and organization integration.

Speaker 2

As we kick off fiscal 2024, we are 1 company focused on customer success and innovation that creates intelligent growth. Our momentum is driven by 3 fundamental advantages over our competitors: our ability to deliver comprehensive and differentiated information management technology 2nd, giving customers complete choice in how they deploy and consume our software and third, delivering best in class customer experience through our unique love model. This has been our journey. And let me speak to our competitive advantages and the relative sizes of our businesses. On Content and Business Network are popular among customers as we are the information management standard to integrate business systems from SAP, Salesforce, Oracle, NetSuite, ServiceNow, Epic, Microsoft and 100 more, while also integrating the business transactions between them.

Speaker 2

Content in BN represents approximately 60% of our business. Our cybersecurity solutions are attractively protecting actively protecting governments, defense organizations and enterprises of all sizes from identity through physical and soft assets. It's a fantastic platform, Has significant opportunity for growth and is approximately 20% of our business. Our ITOM solutions are all about architecting and changing the flow of information across customer critical hybrid assets and service experience. This is approximately 5% of our business.

Speaker 2

Our application automation is centered on helping highly trained professionals to use their precious time more efficiently by enhancing the developer experience And seamlessly modernizing off cloud workloads by moving, running and operating them in the cloud. This is approximately 10% of our business today. This differentiation has placed us in a fantastic position to further innovate with AI and help our customers transform yet again By combining a set of very important factors such as leveraging large data sets from our content platform, transactions from our business network, test scripts from our applications, automation, and IT and service information from Itom, from helping customers consolidate competitive platforms into our business cloud, and implementing key AI technologies from OpenText and others and now implementing new models. To be successful in AI, you need automation, Large datasets and new models. The better the automation, the better the data.

Speaker 2

The better the data, the better the AI. No data, No AI. We have implemented AI machine learning in vector databases for many years prior to the current AI breakthroughs. And our AI platform technology such as Magellan, Capture Machine Learning and new capabilities we added with Micro Focus acquisition, including Vertica and Idol. We have deep and proven experience with many customers running these technologies.

Speaker 2

Presently, AI and analytics are approximately 5% of our business. Today, we announced OpenText dotai, OpenText Aviator and OpenText Aviator Private Cloud and an elevation of our AI platform technologies. OpenText dot ai is our expanded AI strategy and roadmap. Please visit openText dot ai to learn More as we continue this journey with our customers. OpenText Aviators are Gen AI capabilities built into each of our business clouds that will allow customers to use large language models and to train their private data from OpenText Information Management and to do so with trust and security.

Speaker 2

OpenText Aviator Private Cloud offers customers the ability to leverage Aviator with highly specialized learning models in a secure private cloud environment. OpenText Aviator will initially support Google's Vertex and POM2 and open source language models such as Open Assist. We intend to support many specialized learning models, Applying the right model for the right job. Here are the 6 initial aviators. OpenText Content Aviator, Supporting conversational search and large scale document analysis OpenText Experience Aviator, transforming customer communications OpenText Business Network Aviator, generating business to business integrations OpenText Cybersecurity Aviator, enhancing threat management through behavioral analysis OpenText DevOps Aviator generating test platforms and generating trusted software and OpenText Itom Aviator redefining Level 1 support experiences.

Speaker 2

Our AI platform technologies, which I mentioned earlier, are available today. Aviator and Aviator Private Cloud capabilities will begin to be available with Cloud Editions 23.4 and be part of our 90 day release cycles. At OpenText, AI will be built in and we will progress with each release. Our initial AI R and D and capital investments are factored into our F24 R and D investment range of 14% to 16%. At present, we have not factored any Aviator revenues into our F24 plan.

Speaker 2

And once we see clear revenue signals, we'll update you. We believe the AI opportunity over the long term is significant. OpenText has a large role to play in AI and we intend to play it. Now I'll turn to Q4 and fiscal 2023 results. Madhu will provide deeper insights, but let me touch on a few key highlights in constant currency.

Speaker 2

For Q4, dollars 1,500,000,000 in total revenues, up 66.5 percent $455,000,000 in cloud revenues, up 10.6 percent Strong adjusted EBITDA margins of 31%. Our enterprise and cloud renewal rates in the mid-90s with Micro Focus renewal rates showing clear improvements and to the mid-80s. I want to thank FEMA, DHL, BNP Paribas, CNA, Renaissance, Walter, Vertex and Daikin for selecting OpenText Technology during the quarter. For FEMA and DHL, we're providing cybersecurity. For CNA and Renaissance, our content platform is essential to their business.

Speaker 2

BNP, a new DevSecOps platform with ValueEdge, a Micro Focus cloud win and Worta AI information platform for content tailoring. For the year fiscal 2023 in constant currency, dollars 4,600,000,000 in total revenues, up 32.2%, dollars 1,700,000,000 and cloud revenues up 13.3 percent dollars 1,500,000,000 in adjusted EBITDA dollars or 32.4 percent and free cash flows of 655,000,000 These results reflect the strength of our solutions in addressing the specific needs of customers across content, supply chains, developers, Now before I finish, Let me provide some initial thoughts for fiscal 2024. On Page 18 of our investor presentation, you'll see that we have delivered 3 consecutive years of accelerating organic cloud growth in constant currency. You will note from our F24 targets and F26 aspirations, We expect to continue this trend. We are targeting enterprise cloud bookings of 15% plus in 2024, up from 9.5% we delivered in 2023.

Speaker 2

Let me note that we grew enterprise cloud bookings by $57,000,000 sequentially From Q3 to Q4 were $108,000,000 to $164,000,000 Q4 bookings growth was strong at 12% year over year. We have solid momentum to the 15% plus. The expected acceleration is based on our pipeline, growing demand for the cloudification of Micro Focus products and our previous investments in titanium. F24 is going to be an unprecedented year as customers consume more information management capabilities, Consolidate away from competitive platforms, move more workloads into the OpenText Cloud, adopt security, digital operations and application automation, as customers begin to look to Next Gen AI capabilities. Further, the Micro Focus products have expanded our information management vision and provided foundational AI tools.

Speaker 2

Customer confidence is back, renewal rates expanding And we expect to return Micro Focus to organic growth this fiscal year, that is to exceed the $2,300,000,000 in revenues. I plan to show you our Micro Focus progress every quarter this fiscal year. Now on to our F24 outlook highlights In constant currency, total revenue is between $5,850,000,000 to $5,950,000,000 or 30 percent plus growth, Total organic growth of 1% to 2% or up $90,000,000 of new organic revenues in the year. To note, in fiscal 2023, We added $41,000,000 of new organic revenues and this year we expect to add up to $90,000,000 of new organic revenues. Total cloud growth of 6% to 8%, Enterprise cloud bookings of 15% plus, adjusted EBITDA margin of 36% to 38% and and growth of our free cash flow to a range of $800,000,000 to $900,000,000 There remains much news this earnings season on macro issues and demand environment.

Speaker 2

OpenText is well positioned to help our customers capture the next gen of transformation with our information management Business clouds, our cloud additions and, OpenText dotai. Our internal dashboards remain consistent with previous quarters, And we are playing offense right now to advance our unique opportunity. Once again, our F-twenty four targets do not yet have any Aviator revenues built in. I want to thank our customers for making fiscal, making fiscal 2023 such an enormous success and for your partnership and the trust you place in us. I want to thank our employees for advancing our customers' mission through innovation for their incredible and transformational work on the Micro Focus acquisition and providing an exemplary customer experience.

Speaker 2

We accomplished so much in fiscal 2023 To our customers, to our partners, to our new employees, to employees who have been with us for many years, I think you can all see we're in an amazing place And the best days remain ahead of OpenText and OpenText dotai. You are the source of our inspiration. I'd like to thank you again and I'd like to highlight that today we published our 4th Annual Corporate Citizenship Report. I'd encourage you to read it. The report reflects our core values and our culture as well as our commitments as we strive for a more sustainable and inclusive world and as we strive to create an even better company.

Speaker 2

We see corporate citizenship as both an imperative and a tremendous opportunity. And may the one that brings peace, brings peace for all. And with that, I'd like to turn the call over to Madhu.

Speaker 3

Great. Thank you, Mark, and thank you all for joining us today. Our fiscal year 2023 saw a strong finish with outstanding Q4 results driven by solid execution from the entire OpenText team. For Micro Focus, we are ahead of plan as you see in our financial results since the close of the acquisition on January 31. We are one company.

Speaker 3

It is our fiscal year end and consistent with earlier communication, we are providing you with additional disclosures. And let me outline the complete list of materials in our investor presentation. And let me draw your attention to a few key items. On Page 17, we are providing a view into the size of our high value businesses. On Page 18 is our annual organic growth disclosure highlighted by 3 consecutive years of accelerating cloud organic growth in constant currency.

Speaker 3

On Page 20, our target model, it highlights our expectation of returning Micro Focus to organic growth in fiscal 2024, 1 year ahead of plan. On Page 22, we have updated our financial integration framework to provide deeper insight and a clear path to doubling free cash flow by fiscal 2026. So moving to our Q4 results, please refer to Page 13 of the investor presentation. All references I'm making here are in 1,000,000 of USD and compared to the same period in the prior fiscal year and are on a reported basis understated otherwise. On a year over year basis, we had record enterprise cloud bookings of $166,000,000 up 9.7 percent 10.6 percent in constant currency.

Speaker 3

We had record ARR revenue of $1,200,000,000 up 56 0.4% 57.7 percent in constant currency, it represents 78% of total revenue. This was our 10th consecutive quarter of organic growth in constant currency for both cloud and ARR. A record total revenue of $1,500,000,000 up 65.2 percent and 66.5 percent in constant currency with Micro Focus contributing $602,000,000 in the quarter, strong renewals at 94% in enterprise cloud and 95% off cloud. And moving to other financial metrics. GAAP net income was a loss of 49,000,000 down from income of $102,000,000 with higher operating expenses, amortization, special charges and interest expenses related to the acquisition of Micro Focus.

Speaker 3

GAAP gross margin of 71.4% versus 70.2%, reflecting increased revenue contribution from license and customer support. Non GAAP gross margin of 76.9%, led by higher gross margin for the Micro Focus business and continued strong OpenText customer support performance. Adjusted EBITDA of $463,000,000 or 31 percent of revenue versus 314,000,000 of 34.8 percent of revenue, an increase of 47.6% year over year and 44.3% in constant currency. And breaking this down further, OpenText adjusted EBITDA margin was 32.9 percent and Micro Focus had an adjusted EBITDA margin of 28 0.4% in Q4, a significant improvement from 23.1% in Q3. We continue to make excellent progress bringing Micro Focus into our adjusted EBITDA model.

Speaker 3

We generated $115,000,000 in operating cash flows and $91,000,000 free cash flows in the quarter. Working capital performance remains strong. Our DSOs were 41 days compared to 43 days in the prior year. For full year fiscal 2023, on a year over year basis, enterprise cloud bookings of $528,000,000 up 9.5% year over year Cloud revenue of $1,700,000,000 up 10.8% 13.3% in constant currency ARR revenue of 3,600,000,000 up 26.2% 29.7% in constant currency and representing 81% of total revenue. Total revenue of $4,500,000,000 up 28.4% and 32.2% in constant currency with Micro Focus contributing $977,000,000 for the 5 months ended June 30.

Speaker 3

Foreign exchange in fiscal 2023 was a revenue headwind of $132,000,000 approximately half of this in customer support and 30% in cloud. And moving to other financial metrics for the full year, GAAP net income of $150,000,000 down from $397,000,000 with higher operating expenses, amortization, special charges and interest expenses related to the acquisition of Micro Focus. GAAP gross margin of 70.6 percent versus 69.6 percent, again reflecting increasing revenue contribution from license and customer support. Non GAAP gross margin for the year was 76.1%, supported by higher gross margin for the Micro Focus business as well as continued OpenText customer support performance. Adjusted EBITDA of $1,500,000,000 or 32.8 percent of revenue versus $1,300,000,000 or 36.2 percent of revenue, up 16.4% year over year and up 18.2% in constant currency.

Speaker 3

And breaking this down further, OpenText adjusted EBITDA margin was 34.7% and Micro Focus had an adjusted EBITDA margin of 26.3%. We generated $779,000,000 in operating cash flows in fiscal 2023 compared to $982,000,000 in the prior year, the decline primarily related to integration of the Micro Focus acquisition. Free cash flows in fiscal 2023 of $655,000,000 compared to $889,000,000 in the prior year. This performance was better than our target range of $580,000,000 to $620,000,000 and reflects strong collections and working capital performance as well as the rapid operational integration of Micro Focus. And Micro Focus contributed positive free cash flow for the year driven by their strong working capital performance.

Speaker 3

Free cash flow performance in fiscal 2023 provides a solid platform For our fiscal 2024 target range of $800,000,000 to $900,000,000 and our aspirations for fiscal 2026 of $1,500,000,000 plus. Turning to the balance sheet, please see Page 23 of the investor presentation. We finished Q4 with $1,200,000,000 in cash and $9,100,000,000 of total Long Term Debt. Our net leverage ratio was 3.5 times for Q4. Last quarter, we mentioned our net leverage ratio would fluctuate slightly over the next few quarters reflecting timing of investments and the impact of integration expenses and adjusted EBITDA.

Speaker 3

After we closed the quarter, we further reduced Our debt by $175,000,000 as part of our deleveraging program. We are committed to delivering a net leverage ratio of less than 3 times by the end of fiscal 2025 or sooner. Turning to our dividend program. Today, our Board of Directors approved A quarterly cash dividend of $0.25 per common share, the record date for the next quarterly dividend is September 1, 2023, and a payment date of September 22, 2023. The annualized dividend increases to $1 per share subject to quarterly Board approvals.

Speaker 3

Turning to our targets and aspirations. We present our business on a constant currency basis for our quarterly factors, targets and aspirations. Our Q1 fiscal 2024 quarterly factors on Page 21 of the investor presentation. On a year over year basis, we expect revenue of $1,360,000,000 to $1,410,000,000 reflecting Q1 seasonality ARR of $1,090,000,000 to 1,130,000,000 Adjusted EBITDA year over year margin percentage down 250 basis points to 350 basis points, again reflecting Micro Focus integration costs. As mentioned earlier, we view and plan our business on an annual basis and quarters will vary.

Speaker 3

Specifically on free cash flows, we are confident in our annual target of $800,000,000 to $900,000,000 Q1 is expected 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. Starting from Q2, We expect free cash flow growth on a year over year basis in each subsequent quarter. Our fiscal 2024 targets in constant currency are provided In Page 20 of our investor presentation, we look for enterprise cloud bookings growth to grow 15% plus year over year. Cloud revenues up 6% to 8% customer support revenues up 40% to 42% ARR up 24% to 26 percent total revenues of $5,850,000,000 to $5,950,000,000 representing growth of 30% plus Non GAAP gross margin range, 77% to 79% adjusted EBITDA range, 36% to 38%. At current exchange rates, FX would be a revenue tailwind of approximately $40,000,000 to $60,000,000 Our fiscal 2026 aspirations remain unchanged and these are included in page 24 of our investor presentation.

Speaker 3

And let me turn to the financial integration framework update on Page 22 of the investor presentation. We have actioned $260,000,000 Of our $400,000,000 cost savings with the balance expected to be completed in fiscal 2024, we have incurred $6,000,000 of the $70,000,000 integration expense with the balance expected to be completed in fiscal 2024. Finally, we have incurred $146,000,000 of the special charges. We expect $180,000,000 to $200,000,000 of the remaining for focus charges and expenses to be incurred in fiscal 2024 and the remaining $150,000,000 to $190,000,000 in fiscal 2025. All of these are outlined on Page 22 of the investor presentation.

Speaker 3

The related initiatives driving these spend include global entity simplification, tax structures and technology footprint optimization. These are fully reflected in our targets and aspirations. Turning to our free cash flow, we are reaffirming our fiscal 2024 free cash flow target range of $800,000,000 to $900,000,000 and our fiscal 2026 of $1,500,000,000 plus. Our fiscal 2026 FCS aspirations are more than double our fiscal 2023 free cash flow for the year. In summary, we are very pleased with our outstanding Q4 and full year performance.

Speaker 3

Our enhanced global size and scale enables us to deliver stellar metrics for gross margin, adjusted EBITDA and free cash flows driven by innovation and growth. On behalf of OpenText, I would like to thank our shareholders, loyal customers and partners. To the OpenText team members, you have proudly delivered Great milestones for fiscal 2023 and put us in a position for outstanding fiscal 2024. I'm looking forward to that exciting journey ahead. I will now request the operator to open the call for questions.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Richard Tse of National Bank Financial. Please go ahead.

Speaker 4

Yes. Thanks for taking my question here. Madhu, on Slide 22, when you talk about sort of the special charges, if I kind of look at Fire deck from the prior quarter. It looks like it's sort of gone up here a little bit and just wondering if you maybe unpack that for us a little bit To explain sort of why that increased here?

Speaker 3

Yes, absolutely. In fact, if you look at a couple of line items, We have actually gone down on the integration expense by about $10,000,000 and we've expanded the range to about $40,000,000 of the special charges. And again, these are the current estimates for the global entity simplification, tax structures, etcetera. So yes, through fiscal 2025, it's a net increase of about $30,000,000

Speaker 4

Okay. Thank you. Yes, it's probably a little bit too early for this, but obviously it seems like you're doing quite a good job in terms of this integration with Micro Focus. So As I look at your aspirational guidance going forward to, let's say, fiscal 'twenty six, I'm assuming here it does not include any acquisitions. So Just kind of wondering if you could maybe help us understand your thoughts and process around annual capital deployment targets When it comes to acquisitions, do you look at it that way or how should we think about that?

Speaker 2

Yes. Richard, Mark here and thank you for the question. At present, we're very focused on returning Micro Focus to organic growth this year, A year ahead of schedule and that's certainly where our energy is. 2nd, as I noted, we have a large role to play in AI and we intend to play it. So our focus and we had a in parallel large A set of announcements today about OpenText dotai, our strategy and roadmap for AI Our announced new product line called Aviators and discussion of our initial 6 Aviators that we expect to be available for sale next quarter.

Speaker 2

And within that framework, our R and D investments are between 14% to So we're very focused on delivering to our F 2020 For aspirations F 2026, and as you know, those are all organic. And certainly, as we bring approach our under 3x leverage, we'll certainly consider if we want to do acquisitions. But right now, We're focused on capturing the organic opportunity for us. And I'd also note on capital return, we brought a dividend up as well To $1 annualized per share.

Speaker 4

Okay, great. And just my last question, these Aviator within OpenText Current operations, I'm just really trying to understand maybe the use cases there. And I guess related, do you kind of see that having an impact in terms of the operating model, if that's The case, you're using Aviator within the company?

Speaker 2

How much time do we have, Richard? So Yes. The, our announcements today are around our initial product offering and our strategy and direction. There's a lot in there. How we're going to use idle as a way to translate information into useful vectors and metadata.

Speaker 2

How are we going to use Vertica As the vector database, not other people's technology, our technology, how we're going to bring embedding technologies in from open source And we're going to be poly model. We're going to support highly specialized language models for highly specialized jobs. We're talking about enterprise AI here, not consumer AI. And language models will be highly specialized. So our focus is getting that initial product to market, Doing that in a private trusted way as well in our private cloud, and elevating idle and Vertica and Magellan.

Speaker 2

If you just allow me for a moment, if we think of the role automation has played in the enterprise over the last 20 years, Before ERP Suites got integrated, G and A expense was up to 20% of P and Ls, right? Automation knocked G and A, Right, into the mid single digits. AI is different than automation, but AI is the next transformative aspects for enterprises. We will use Aviator to transform our own business over time. Initial areas that we'll consider, Support.

Speaker 2

Just as I talked about our ITOM aviator, our ability to transform Level 1 support. We have opportunities in our professional services of how we will generate code. We have opportunities how our engineers can transform how they test. So we'll have a whole Richard, we'll speak more and more about how we'll apply Aviators to our business And how we'll transform our cost structure and how we'll transform the revenue side, RFPs and sales. We have 20 years of RFP history, 200,000 RFPs.

Speaker 2

We'll put them in our vector database. We'll apply a language model and generate the best information out of it. So that will come in time. But right now, we're announcing our strategy, Our vision, our direction, our initial products, our initial R and D investment and then we will apply it to ourselves as well through time.

Speaker 4

Okay. Thanks for taking my questions.

Speaker 2

Thank you. Thank you.

Operator

The next question comes from Steve Enders of Citi. Please go ahead.

Speaker 5

Hi, this is George Curacao on for Steve. Thanks for taking the question and congrats on a great quarter. Did want to double click on the enterprise cloud bookings and just get some help on getting confident in the acceleration into next year. Was there any element of deal push outs from this year into next year

Operator

that you expect to close?

Speaker 5

Or I guess just any more color on how you guys are thinking about that?

Speaker 2

George, happy to and thanks for being on the call today. So just to recap the numbers, our cloud bookings in F23 were 9.5% And which we've already talked about Q1, Q2, Q3. In Q3, our bookings were constant at 108,000,000 In Q4, we had a strong bookings quarter, dollars 164,000,000 up 12% year over year. And so Q4 bookings was $164,000,000 and we got solid momentum to get to the 15% plus. And so that's based on pipeline, based on deals.

Speaker 2

So I mean the difference between 12% 15%, I wouldn't point to push deals At all, our momentum is up. So we delivered $164,000,000 in Q4, up 12%, And we got solid momentum to get to the 15% plus.

Speaker 5

Got it. Super helpful. And then just on the Aviator announcement, really exciting set of products. Maybe just any color on the kind of go to market and monetization strategy here. Is there anything kind of unique or I guess what would you kind of highlight there?

Speaker 2

Yes. I would say 2 things. There's 2 pricing models sort of emerging in the market. You certainly have Microsoft, I think, 3.65, you have Copilot, ChatGBT, GitHub, GitLab, They're ranging from $10 to $30 per user per month. And that sort of makes sense to me.

Speaker 2

You have kind of the other spectrum where you see Google pricing and others in the enterprise sort of based on process tokens. So when we turn GA in the next quarter, we'll introduce the pricing then. But some aviators will be more oriented towards user pricing per month, and the market sort of setting the rate right now, right, between $10 to $30 And there'll be other parts of what we do based more on sort of consumption. And our business network, by the way, is Priced on what we call kilo characters, which is the same thing as tokens. So When we deliver in 23.4, we'll announce the pricing.

Speaker 2

We'll probably have 2 models built for each aviator, 1 user based. And Again, the market is between $10 to $30 per user per month, and we'll have some aviators more oriented towards consumption, either based on Kind of tokens or keel character. But we thought through it and we'll get the right pricing for the right aviator.

Speaker 5

Great. Thanks for taking the questions.

Operator

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

Speaker 6

Hey there. Good evening. Just maybe one for me. Just on the Micro Focus returning to organic growth a little bit faster. How do we think about that in conjunction with the F24 guidance, which Correct me if I'm wrong, but I think it on the top end that came down a little bit from the preliminary guide that you gave in the last quarter.

Speaker 6

So can you just talk about Maybe perhaps what you're seeing in Otech's core to lead to that result. Thanks.

Speaker 2

Yes. Thanks, Kevin. Thanks for the question and thanks for being on the call today. Just to recap the numbers, right, in fiscal 2023, our total company organic growth was 1.2% Or $40,000,000 of new organic revenues we added in the year. So percent on top of our percent can be tricky, Right.

Speaker 2

But just real simple, organically, we grew 1.2%. We're committed to showing you that annually. And or said differently, we added $40,000,000 of new revenues. Our target for 24% is 1% to 2%, but on a much larger base. So that's 45,000,000 to $90,000,000 of new organic revenues in fiscal 2024 because it's on a much higher base, if you will.

Speaker 2

That's up to $90,000,000 almost $100,000,000 of new revenues here in fiscal 2024. As I said in my script, we have no Aviator revenues built in our model yet. And until we have the revenue signals, we're not going to add it. Look, we expect all our product lines to grow and we expect for I don't like speaking this way, but I'll say it this way. We're clearly expecting Micro Focus to return to organic growth and base OpenText to have organic growth as well, both having organic growth.

Speaker 2

And again, the 1% to 2% for fiscal 2024 is up to $90,000,000 of new revenues And we added $40,000,000 of new revenues last year.

Speaker 3

Yes. And Kevin, if I could just share just one last point in addition to what Mark said, the Last print versus this print to your point, please make note of the FX tailwind we have on Slide number 20 and the midpoint there is about 50,000,000

Speaker 6

Got it. Okay. Look, thanks a lot. I'll pass the line. Thank you.

Speaker 3

Thank you.

Operator

The next question comes from Paul Schreiber of RBC Capital Markets. Please go ahead.

Speaker 7

Thanks for taking the question. Just given your comments in the prepared remarks, Micro Focus is doing much better than you expected. Fundamentally, why is that? What has changed with the business? And then might have missed in the prepared remarks, but did you comment on renewal rates for Micro Focus this quarter and how that's been trending?

Speaker 2

Paul, happily and thanks for being with us today. So two things, we're executing. I'll wind the tape back. We're experienced acquirers, Experience Integrators, we had a vision around how to integrate the company and return it to organic growth and we're executing to it. And it's fundamentals, right?

Speaker 2

We've released a product roadmap, that's giving customers Confidence is back. We've integrated the renewals teams to the OpenText practices, The renewal practices. We've done our work with the field where the field sells new. They don't sell renew. We've gotten our systems aligned.

Speaker 2

And so we ended the We ended fiscal 2023 with microfocus renewals in the mid-80s, up from the low-80s, and we're on a trajectory to get the renewals to the High 80s this year. And, we've also announced our roadmap for the cloudification Of Micro Focus, we've delivered our first products and actually we announced the first win here, right, of BNP for ValueEdge in the cloud. And you can see in the investor deck 23.3, 23.4, 24.1, just a continued pace of more clarification, Right. We transform Documentum into the cloud, right. We will transform Micro Focus into the cloud.

Speaker 2

So it's those fundamentals that are giving us the confidence, plus the pipeline, plus our execution, That will return Micro Focus to organic growth this year. And I'm going to show you every quarter along the way and showing you the numbers.

Speaker 7

And in regards to Aviator, I mean, you sound very excited about the opportunity there in the product. How do we think about sizing it? And I know you're not giving it an outlook, but how do we compare it to some of The products you've had in the past, you've had Magellan in the past, you've had other large product launches in the past, how do we think about the magnitude in terms of the opportunity for Aviator?

Speaker 2

Yes. I'm not ready to put a TAM on it, all right? So it's a fair question. We're not ready to put a TAM on it. As I said in my remarks, I believe it to be a significant long term opportunity.

Speaker 2

And we're going to go after it the OpenText way. Fundamental innovation,

Speaker 8

we're going

Speaker 2

to deliver. We're going Show you the signals along the way for sort of predicting those. We don't have any aviator revenues built into our Any revenue built into our F24 model yet? So I think it's going to be relevant for every customer. It's going to be an independent set of products.

Speaker 2

It's clear that what automation did for the enterprise, I'm going to make the distinction AI can do for the enterprise. And you need automation. And the better the automation, the better the data. The better the data, the better the AI. We're extremely well positioned where we've been managing large data sets for thousands of customers in content.

Speaker 2

We are well positioned where we've been managing 1,000,000,000 of Business Network transactions. We're well positioned where we have the software and testing scripts in ADM. We're well positioned in ITOM with IT assets. So we're in the places where you can create value in the enterprise. There's a real I mean, the McKinsey report, I think, is great because it kind of their AI report, they have a nice grid of the places of the enterprise are going to be impacted.

Speaker 2

You look up into the right, It's the developer, it's content, it's contracting. It's the things I've just mentioned. So I'm not ready to put a TAM on it. Our products are Initial Aviators, will be available next quarter, be a showcase obviously in Vegas. And we'll announce our pricing and spend a little more time talking about the TAM when the product comes to market next quarter.

Speaker 7

Just one last question for me. Just Madhu, in regards to tax, Can you speak to the slope in the tax rate to 26? Obviously, it's a big jump to mid-twenty percent from 14%. And then does that reflect what's driving that increase? And does it reflect that the global minimum tax?

Speaker 3

Yes. So a few things. First of all, as we end up using up the Canadian attributes and we've talked about this before towards the end of fiscal 2024. That plays a role in the creep up of the rates. Now you slap in Micro Focus in here.

Speaker 3

Again, we're not talking about strategic tax initiatives. There's no immediate sort of relief from the statutory tax rate. We're absolutely using the U. K. Attributes of Micro Focus, but Micro Focus is a taxpayer on the U.

Speaker 3

S. Front and so is OpenText. So really the slope you're seeing is sort of the utilization expiry of the Canadian attributes of OpenText and adding on the U. S. Tax attributes for Micro Focus.

Speaker 3

Again, as I said, we will spend the next 12 to 18 months strategizing the next wave of tax optimization, but that is not factored in the slope you're referring to.

Speaker 7

Okay. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 3

Hi, good afternoon. Hi,

Speaker 2

Stephanie. Welcome to the call.

Speaker 9

Thank you. Thanks for the additional details on the revenue from each of the divisions and the breakout between the different content management, Just wanted to dig a little bit deeper into that. If you think about the mix of the different high value businesses as you look at into fiscal 'twenty six and beyond, Which of the businesses do you see as growing above the company's typical growth rate? And where do you really see the most opportunity here out of the high value businesses you've pointed out?

Speaker 2

Thanks, Stephanie. Thanks for the question. They each have their dynamics. Let me just start with, we promise Of the investor presentation, you can see content at 45%, cybersecurity at 20%, application automation 10%, Business Network, 15% IT Ops, 5% AI and Analytics, 5%. I'm not going to get down into growth rates for each one of them.

Speaker 2

So I'm not going to do that today. But we have clear opportunity in AI and analytics As we've talked about today, just clear opportunity. IT Operations Management, I'm very pleased with the private cloud and SaaS products that we're bringing to market. I think we have a significant opportunity there. And everyone needs cybersecurity.

Speaker 2

So we've been talking about kind of winning each of these Value stacks, right? And having select programs across all the value businesses. Cybersecurity It's an effort underway across all the value businesses. So as they say, I love all my children. They're each unique.

Speaker 2

But AI and analytics, obviously, significant opportunity, Very optimistic on IT ops, cybersecurity, deep opportunity. And an interesting thing about AI, Again, you have automation different than AI. And for customers to take advantage of AI, They need to be on some cloud platform private or public. They need to consolidate Their automation, and then take advantage of that enriched data through AI. And therefore, I believe that content management has opportunity to continue to grow, because there's more automation and more consolidation into that.

Speaker 9

Great. Thank you very much.

Speaker 2

Yes. Thank you.

Operator

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

Speaker 8

Hi, good afternoon. Mark, can you update us on

Speaker 10

where you stand as far as sales integration? And have you started to see any early cross selling or early days on that front?

Speaker 2

Yes. We're complete, Thanos, thank you for joining us today. I'd like to have you on the call. We're kicked off July 1, Salesforce fully integrated, Single global accounts team. We go to market by buyer.

Speaker 2

We've completed all our account assignments, singular comp plan. We're integrated and all that work was completed and implemented July 1. We have a single sales force Compensation system as well as an example. The areas so were complete. The second piece is, the Select cross selling.

Speaker 2

And again, security top of the list, idle top of the list as well. And so as part of our kickoff, which was just a couple of weeks ago, we laid out training for everybody. So it is early days on the cross selling, but we're really focused on 2 areas. It's security and it's metadata and AI tools.

Speaker 10

Great. And then, as far as leveraging your OpenText channel partnerships With respect to the micro products, how is that progressing?

Speaker 2

Well, we're very focused on sort of the top of the pyramid, which we announced Earlier this year, the next generation of our partner program, we now call it the OpenText Partner Network or OPN. And top of that pyramid are our top 10, Microsoft, Google, Amazon, SAP, Salesforce, DXC, Accenture, TCS and a few others. So That work is beginning to kind of speak holistically to Google, just holistically to DXC, holistically to Accenture. So still early days, but we've done the work to say these are the top 10, and we're going to kind of Pick key opportunities in each of them. Let me take an example, right?

Speaker 2

We had a great partnership with Google At OpenText, we're going to bring we're going to work together on mainframe modernization and moving more workloads into the Google Cloud. We had a great relationship with AWS hosting a lot of our SaaS products. Again, bringing application automation into the AWS relationship. So there's

Operator

The next question comes from Azir Qadri of 8 Capital. Please go ahead.

Speaker 11

Hey, good evening, guys. Thanks for taking my question. I wanted to ask on the Aviator product as well. Can you just give us a sense of Conversations with customers, Mark. Are they excited for what this product could do for their business?

Speaker 11

I mean, we, of course, we hear that these Products are just going to increase productivity, but are customers ready to deploy these products? And just based on those conversations, how do you see adoption Going for these customers as we move past the initial deployment in October?

Speaker 2

Yes. So look, our early conversations Informed us deeply and just 90 days ago, right, we're talking about early conversations. 90 days later, we've announced Aviator And we've announced Aviator Private Cloud. 90 days from now, we'll have our first Aviators in production, if you will, and with good deployments of a few customers as well. So these are our initial strategies, if you will.

Speaker 2

We're also going to build a practice area. So when I speak about Aviator Private Cloud, we've done we have a couple of very unique things that we can bring We obviously have our tools, idle, vertica, Magellan, unique. We don't have to go out and kind of rent those tools for others. We own them. The second unique thing is our managed services, our private cloud.

Speaker 2

Our customers want to be able to use their data privately securely. So Aviator Private Cloud is a strong avenue for our customers already in our private cloud who want to move to our private cloud to use their data privately and train their data privately and not bring it into some public domain. So we're going to build a practice area around this. So just like we have practice areas in Business Network, practice areas in Content, We have practice areas in AI and Language Models. So it's early days.

Speaker 2

We've announced the initial vision and direction, next set of products coming next quarter and we'll keep you updated along the way.

Speaker 11

Thanks Mark. Just for my second question to piggyback on Thanoson's question. Some of the early some of those early Micro Focus customers that you onboarded early in Post the acquisition, now that they've had a chance to really experience the combined company, the combined offerings that we've spoken about over the past two quarters, What's their initial feedback? And do you find that those initial synergies that you had envisioned are kind of playing out? Of course, I understand early days for that, but Just some initial thoughts

Speaker 8

on that would be great. Thank you.

Speaker 2

Returning them to organic growth this year. We maybe just to reiterate, confidence is back. Road map published, all the key aspects of the integration complete, codification has begun, Renewal rates up to mid-80s, pathway to high-80s, initial wins in the cloud And the pace of innovation, you can see some of the aviators being square in the middle of Micro Focus product lines and accelerating a Micro Focus to organic growth this year. So those are the indicators, right? And don't know much more to add to that, but those are the indicators.

Speaker 11

Thanks, Chris. I'll pass the line.

Speaker 2

Thank you. Thank you.

Operator

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

Speaker 12

Great. Thank you. This is Jeremy on for Raimo. I was just wondering if you could share Anything on how the Micro Focus free cash flow conversion is trending? I know that was a point of opportunity when the acquisition closed.

Speaker 12

And was just curious if you can maybe talk about any improvement there. Thank you.

Speaker 3

Yes, absolutely. It's Madhu here. Thanks for the question. So a couple of things. One, as we've shared, I'll start with adjusted EBITDA.

Speaker 3

The adjusted EBITDA in Q4 was 28%, Up 5 percentage points from although Q3 was only 3 months I mean like 2 months. And also fundamentally, the question was asked in terms of integration And even what are the reasons therefore, I will take all that Mark said in terms of product market customers to the working capital and the operational side, right? They have a strong customer base and as we applied our own operational rigor, the team were very receptive and you saw that. So I would say starting with adjusted EBITDA, we improved the working capital and that is really where you see from a free cash flow perspective, they positively contributed. So again, I'll answer the question in the second part as well.

Speaker 3

As you look into fiscal 2024, what we saw the adjusted EBITDA in Q4 will continue. And I see continued improvement in the working capital performance and all of that adds to our confidence in the $800,000,000 to $900,000,000 for 2024.

Speaker 12

Perfect. Thank you.

Operator

The next question comes from Stephen Lee of Raymond James. Please go

Speaker 8

ahead. Thank you. Hey, Mark, Madhu. I've got a quick one on organic growth in Q4. So if I take the 602 from Micro Focus out of Q4, I get a slight negative organic growth for Q4 for OpenText at constant currency.

Speaker 8

Given this is Q4, which seasonally probably stronger quarter for you guys, should we not have seen a stronger organic performance? And maybe any soft areas you want to call out, Mel?

Speaker 3

Yes. So Stephen, I mean, I'll take that. So when you look at Q4 and you take out Micro Focus, we are not seeing the negative organic growth. We are seeing positive organic growth as I shared And happy to walk through the numbers, I mean, if it will be helpful, but the numbers are all there. So I'll just say for Q4, When you factor in Micro Focus, we are positively growing organic growth, cloud as well as ARR in constant currency.

Speaker 3

Again, I want to emphasize that.

Speaker 8

Okay. Yes, I mean, I'm just taking the reported numbers and minus 602 When it's lower than last year?

Speaker 3

Yes. So when you take out the 602, again, as you see license from a constant currency perspective is down from a year over year in the quarter. And cloud is positive organic growth, customer support is positive organic growth, ARR is positive organic growth as well.

Speaker 8

Okay. And then just maybe housekeeping, Madhu. I couldn't try reading the MD and A, but did you actually disclose Micro Focus different revenue lines like license, maintenance and I think you did that last quarter. Thanks.

Speaker 3

Yes, we did. And I can share with you offline the page number of the 10 ks. We did call out The cloud services, I mean, I'm sorry, we called out the license. We also called out the customer support number for Micro Focus as well.

Speaker 8

Okay. I'll get it up signed from you. Thanks.

Speaker 3

Yes, absolutely. Thank you.

Operator

The next Question comes from Daniel Chan of TD Daniel, your line is open. Please go ahead. Daniel Chan, your line is open. Please go ahead.

Speaker 2

Okay, operator, there must be something Not working there. So I think we can go to let me go to wrap up. So I'd like to thank everyone for joining today's Call and we look forward to seeing you at the virtual Oppenheimer Technology, Internet and Communications Conference on August 9 Deutsche Bank, August 30th Citibank Global Technologies, September 7th. And we'll be reaching out and hope you can join us in Vegas at OpenText World in early October. Thanks for joining today's call.

Operator

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

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Key Takeaways

  • OpenText delivered record Q4 revenues of $1.5 billion (up 66.5% YoY) and full-year revenues of $4.6 billion (up 32%), with cloud revenues up 10.6% in Q4 and ARR organic growth of 2.3%.
  • The Micro Focus acquisition was fully integrated within five months, contributing $602 million in Q4 revenues and improving renewal rates to the mid-80s, with management targeting a return to positive organic growth from Micro Focus a year earlier than planned.
  • For fiscal 2024, OpenText forecasts constant-currency revenues of $5.85–5.95 billion (>30% growth), enterprise cloud bookings of 15%+, cloud revenue growth of 6–8%, adjusted EBITDA margins of 36–38%, and free cash flow of $800–900 million.
  • OpenText unveiled its expanded AI strategy—OpenText dotai—including six “Aviator” generative AI services across its business clouds and an Aviator Private Cloud, with no AI revenues yet baked into FY24 guidance and R&D investment set at 14–16% of revenues.
  • The board approved an increased annual dividend of $1.00 per share (up from $0.31) and accelerated debt reduction, targeting a net leverage ratio below 3× by the end of fiscal 2025.
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Earnings Conference Call
Open Text Q4 2023
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