Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the OpenTex Corporation third quarter fiscal 2021 earnings 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 then 1 on your touchstone phone. If anyone needs assistance during the conference call, they may signal an operator by pressing star and zero on the telephone. I would like to turn the conference over to Harry Blount, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. On the call today is Open Tech's Chief Executive Officer and Chief Technology Officer, Mark J. Baranchay. and our Executive Vice President and Chief Financial Officer, Madhu Raganathan. We have some prepared remarks, which will be followed by a question and answer session. This call will last approximately 60 minutes, with a replay available shortly thereafter. I would like to take a moment and direct investors to the investor relations section of our website, investors.opentex.com. where we have posted our consolidated investor presentation that will supplement our prepared remarks today. The presentation includes information and financials specific to our quarterly results, notably our updated quarterly factors on page seven, as well as a strategic overview. I'm pleased to announce that Open Text Management will be participating at the following upcoming conferences. CIBC's Technology and Innovation Conference on May 12. Needham Technology and Media Conference on May 18. Barclays America Select Franchise Conference on May 19. Bernstein's Annual Strategic Decisions Conference on June 4. Bank of America Merrill Lynch Global Technology Conference on June 8. The Baird Global Consumer Technology and Services Conference on June 9. and NASDAQ's virtual investor conference on June 15th. We look forward to virtual meeting with investors in the coming days and weeks. I will now proceed with the reading of our safe harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, Actual results could differ materially from a conclusion, forecast, or projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such statement. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast, or projection in the forward-looking information, as well as risk factors including in relation to the current global pandemic that may project future performance results of OpenText are contained in OpenText's recent 10Q and 10K, 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 this 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.

Thank you, Harry. A good afternoon to everyone, and thank you for joining today's call. What a difference a year makes. Today, we are announcing the strongest 12-month period in the history of the company. The global economic outlook has significantly improved. U.S. GDP projections are strong. And we are in a new product cycle with OpenTex Cloud Editions. And we just have passed 1 billion COVID vaccinations globally. We have endeavored over the last year to help our customers own and deploy digital capabilities. We have purposely leveraged the last year to accelerate innovation, increase our spending in innovation, transition to modern work, get more efficient, and dramatically strengthen our go-to-market. On our last earnings call in February, we spoke about green shoots. And on our investor day in March, we laid out our growth roadmap for fiscal 21, fiscal 22, and our fiscal 24 aspirations. And you can see our strong progress from within Q3 with ARR organic growth of 3.6% and cloud services organic growth of 4.5%. Volatility is still present, of course, but we are on the offense and investing in our growth trajectory. Our business is back to pre-COVID levels, except for some portions of automotive. And our confidence is high as we look to complete fiscal 21 with a return to organic growth and upward trajectory into fiscal 22. What a difference a year makes, and let me unpack this a little more. I'm deeply optimistic. The number of vaccines is growing daily, and vaccine rollouts provide reason for optimism in many regions. But the world does remain in a pandemic, and where you're located will impact how you are experiencing it right now. In our major markets, vaccines are generally becoming more available. Improvements and reopenings are accelerating. The International Monetary Fund is calling for 6% growth globally in 2021 and another strong growth here in 2022. And the markets in which Open Tech participates could grow even more strongly than this. And finally, we are watching the U.S. infrastructure bill proposals with great interest. as open tech should benefit from increased investments in many of these sectors, transportation, telecom, water utilities, supply chains, and hospitals. While the arrows are pointing upward, we recognize that economic recovery may be uneven and will vary by country due to the ongoing pandemic and other events like the global chip shortage. But let me leave you with no doubt that the positives now significantly outweigh the negatives. Our amazing foundation and future is based on a large and growing addressable market with an information management where we are the market leader, 80% plus recurring revenues. We have an enterprise install base of 75,000 customers, an expanding SMB and C channel through RMMs, MSPs, and VARs, a comprehensive go-to-market that includes direct, partners, channel, and digital services, to service customers of all sizes supported by our new digital zone. We have increased investments in sales. By the end of calendar 2023, we'll have full coverage of the global 10,000. Increased investment in R&D. Over the next five years, we'll invest $2 billion plus in innovation. A 90-day product release cycle that continues to rapidly bring new capabilities to market. our new Grow with Open Text program that defines clear value paths for customers and growth paths for open text, reduced friction in pre-sales, sales, post-sales, and back-office operations via our digital zone, a disciplined M&A strategy. So this foundation and future is based on, again, approximately $1.5 billion in cash and growing, and an economy that is projected to have strong GDP growth in the markets that matter to open text. Let me spend some time on Q3. We had another exceptional quarter highlighted by revenue growth, margin expansion, and strong renewal rates. Many of our quarterly metrics are at historic highs, but we walked through the results on a year-over-year basis as reported, unless otherwise stated. Total revenue of $833 million, up 2%, the highest Q3 in history. with ARR organic growth of 3.6% and cloud services organic growth of 4.5%. Total cloud revenue of $356 million, up 5%, the highest cloud revenue quarter in our history, as cloud remains our largest revenue contributor. The strength in cloud was led by our enterprise content services business and continued increase in business network volumes. Customer support revenues of $336 million, up 4%. The highest customer support revenue of any quarter in our history. ARR of $692 million, up 4%. That 83% of total revenue, the highest quarter in our history on a dollar basis. Adjusted EBITDA of $297 million, up 15% year over year. and 35.7% on a margin basis. Operating cash flows were $63.6 million, and free cash flows were $50.3 million, which includes the IRS payment of $290 million within the quarter. We have over $2.2 billion in cash and committed liquidity at our immediate disposal. I also want to highlight Q3 wins. We have a new battle rhythm created during the pandemic. Our process and our speed enable us to bring new innovations and capabilities to customers every 90 days. This is clear differentiation versus our competitors and is a driver of many of our key customer wins. Let me highlight a few. The Royal Bank of Canada, the second largest bank in Canada, selected the Open Text Business Network for commercial lending in a public cloud environment. Maersk. the largest container shipping company in the world, selected OpenText Enterprise Content Management with integrations to SAP and Microsoft 360 for better global records and invoice management in a hyperscaler environment. We have no further than Suez Canal for the importance of real-time information. United Nations Refugee Agency, the UNHCR, is deploying our extended ECM product in an OpenText cloud-managed services environment, enabling connection as well to Microsoft applications. Archer Daniels Midland, one of the world's largest food processing and commodities trading companies, selected our new cloud API services to connect its OpenText content system to its Salesforce.com deployment. Dell. renewed and expanded their commitment to the Open Text business network to help manage their growing supply chain. Johnson & Johnson upgraded their content suite platform and are migrating into an Open Text cloud managed services environment. Uniper, based in Germany, one of Europe's largest power producers, selected Archive Cloud API services to connect to their SAP applications. Perigo, a major Ireland-based manufacturer of private label, Over-the-Counter Pharmaceuticals selected the OpenTex cloud content in a win over Viva. And Deutsche Pension selected OpenTex Enterprise Cloud for personalized statement and communications to their stakeholders. Our 90-day innovation battle rhythm is clearly helping us win and win in key accounts. Let me turn my remarks to our unique retain, grow, and acquire total growth strategy. On retain, we delivered another exceptional quarter with customer support renewal rates at 94% and our cloud renewal rates excluding carbonite at 93%. I want to highlight the important enhancements we have been making to drive growth and increase customer value in this portion of our revenue. It is no longer just a maintenance business. It is turning into a customer value service. Our customer support customers can now receive warranty services, product updates, enhancements, upgrades, new versions, enhanced 24 by 7 support, full access to a digital knowledge base, security updates, compliance updates, privacy updates, and other enhancements. This suite of offerings in the 90-day release cycle increases the overall value of our product and service offerings. We believe this offering will drive higher customer satisfaction and continued growth and our customer support business. On to Grow. We announced Grow with OpenText at Investor Get Day. Grow with OpenText is a set of programs that brings together everything our customers need to transform their business, accelerate their growth, engage with their communities, and stay ahead of the competition. Our Cloud Editions is built on a single technology platform that enables customer choice through four different deployment options, off-Cloud, private cloud, public cloud, and our cloud API services. Here are the strategic programs for Grow with OpenText. For off-cloud customers, we are offering enhanced long-term extended support programs and now on-premise managed services, two brand-new revenue opportunities for OpenText. For customers that want to deploy Cloud Edition in OpenTek's private secure cloud, our managed service offering is ideal. We added 75 new private cloud customers in the quarter. We are already 100% available in the public cloud with our security and business network clouds. Content cloud will be available in Cloud Edition 21.4 and our experience cloud in Cloud Edition 22.2. Some notable areas of strength in the quarter included core capture, core capture for SAP, and core archive for extended ECM. We have added a new go-to-market, information management as a service via our cloud API services. There are over 25 services available today at developer.opentex.com. This is an important part of our future growth. At the forefront of our Grow with OpenText program is our cloud-based engagement platform, the OpenText Digital Zone. Available today, the Digital Zone allows us to connect with customers and prospects for events, seminars, pre-sales, design, proof of concept, support, and renewals. We do this digitally today. The OpenText Digital Zone will ultimately automate the vast majority of our customer engagement, and allow us to help scale revenues nonlinear to expense. And lastly, in our Grow with Open Tech set of programs is our Voyager Learning Services program that brings more professionals into the Open Tech ecosystem with skills, training, and certifications. With the release of Open Tech's Cloud Edition 21.2, we have never been better positioned to capitalize on some of the most powerful technologies post-pandemic trends. I'm going to spend a moment and just highlight our five clouds. Content cloud. The modern workforce wants control of their time and space. The workforce is forever changed. Employees must have simple access to accurate and timely information to do their jobs wherever they are, whenever they want it, for whatever device they are using and whatever language they communicate in. With a majority of business planning as a permanent shift to remote or hybrid work, Organizations must support the modern worker while simultaneously organizing their data to extract business insights and comply with record retention and customer privacy regulations while enabling product management, collaboration, sharing, capture, and e-signature. Business network class. Supply chains are constantly changing based on demand and supply and externalities. From the current global chip shortage, which is hurting auto manufacturing, to U.S.-China trade tensions, the research blockage of the Suez Canal, former supply shortages, and logistics today, supply chains have been under pressure to not just change, but to transform, and in many cases, regionalize. With 21 of the 25 largest global supply chains as customers, OpenText is the clear market leader. OpenText is in the early days of helping customers evolve and transform their supply chains to become more real-time, more local, and more sustainable, while simultaneously remaining compliant with global tax and tariff regulations. On to our third cloud, Experience Cloud. As engagement becomes digital, customers are demanding a more customer-centric, seamless, personalized, and exceptional service. and they are less forgiving of subpar interactions. I have always called this the Internet of Me. Digital technologies enable businesses to engage with their customers at every touchpoint to wow their customers. The Open Text Experience Cloud is an exciting part of our future growth and fully complements our thinking on information management. Security and Protection Cloud. During the pandemic, the number of off-cloud endpoints and remote workers skyrocketed, and cyber attacks increased by five times. The Open Tech Security and Protection Cloud provides the foundation for best-in-class cybersecurity, data protection, digital forensics, and endpoint security solutions for businesses of all size. We are committed to expanding our security business over the long term and providing the necessary protections for the edge, for the core, and for the cloud. for secure information management. And our last cloud, the OpenText Developer Cloud. The modern developer needs to deliver fast, reliably, and at scale, making it critical to select the right partners early in their innovation cycle. OpenText Developer Cloud provides information management as a service, making it faster and easier to build, expanding customized IAM applications, using the collection of cloud services, APIs, and SDKs. The OpenText Cloud API services, or IMAS, is already showing big wins and is opening a new route to market for OpenText. Overall, cloud growth remains our largest opportunity, and we are still in the early days of cloud edition adoption with approximately 20% of our customer base on the new platform. Cloud editions accelerates our ability to cross upsell and enable self-service access to more of our portfolio. On Acquire, We are committed to our M&A playbook, patient, disciplined, value-based buyers with return-based metrics and cash flows as key criteria. We always take the long view, and I encourage you to look at our annual rate of revenues we have onboarded via M&A over the last decade. Our liquidity, cash flow, and balance sheet remain strong. Our M&A pipeline is healthy, and we'll deploy capital when the right opportunity arises. Our continued cash flow and cash flow generation only enhances our financial position. We are very confident in our unique total growth strategy of retain, grow, and acquire. Let me turn to our financial outlook. At Investor Day, we laid out our growth strategy for fiscal 21, fiscal 22, and our aspirations for fiscal 24 based on, as I said above, our grow with open text programs, the strength of our new cloud additions, continuous improvements in our own execution and optimism, and the global economy. Today, based on our organic growth within Q3 and other factors, we're updating our financial outlook with an increase to our cloud revenue outlook. Let me summarize. For fiscal 21, total revenue growth of mid-single digit. Today, we are increasing our full fiscal 21 cloud revenue growth outlook to a range of 18% to 20% from the previous high teens. and we remain confident that we will deliver ARR organic growth here in fiscal 21. For fiscal 22, total organic revenue growth of 1% to 2%, organic cloud revenue growth of 3% to 4%, and we will comment on our fiscal 22 outlook on our next earnings call, but today we can see even more green shoots happening in fiscal 22. Our fiscal 24 long-term aspirations sustained total revenue organic revenue growth of 2% to 4%, ARR of 85%, adjusted EBITDA between 38% to 40%, and free cash flow of $1.1 billion to $1.2 billion. And, of course, any new M&A revenues or new margin dollars and new cash flows from M&A would be additive to the above outlook. The above F-22 outlook and F-24 aspirations are organic revenues, and they do not include any benefits from future M&A at this point in time. Madhu will comment as well here in a few moments. On our value creation strategy, it is predicated on growth, profitability, and capital efficiency. Growth, profitability, and capital efficiency. We have built a company that continues to deliver growth, upper quartile profitability, and cash flow regardless of the economic environment. This strategy enables us to drive shareholder returns through stock price appreciation, dividends, and periodic share buybacks. With this financial outlook, we could generate $5 billion plus in free cash flows over the next five years. That capital will enable great flexibility within our total growth and value creation strategies. Today, I'm pleased to announce that the Board of Directors has approved our quarterly dividend of 20.08 cents per share for holders of record on June 4th, 2021, with a payment date of June 25, 2021. Before I turn to my summary comments, let me touch on the Back to Workplace and corporate citizen initiatives here at OpenDeck. The past 12 months have been truly extraordinary, a shared journey. When our employees began to work from home last March, we didn't know how long this would last or exactly how we would adapt. We have shown that our productivity is up, our innovation is accelerated, and we are growing. We have heard from employees that they value and appreciate the flexibility that working from home is providing. The pandemic has forever changed the nature of work. Employees want more control of their time, more control of their space, and more personal advancements. OpenText remains in a voluntary work from anywhere through the end of this calendar year, and this approach is clearly working for our customers and for our employees. We have also began a phased return to the workplace, safely, of course, as per governmental rules and guidelines. We have also dedicated and decided that our return to the workplace will include a new flex work approach. That means providing our employees the option of weekly flex days in the office. On corporate citizenship, last August we published our foundational report, which reflects our corporate beliefs and culture of doing well by doing good and utilizing technology for the good. We continue to learn and improve. In the next corporate citizenship report, which we expect to publish this August, you will see the Open Text Employee Relief Fund expanded to $3 million USD, to continue to support our employees in the event of hardship incurred because of the pandemic, the expansion of our equity, diversity, and inclusion programs, and we are adopting the GRI reporting framework so it can more clearly articulate and measure our amazing investments and progress. In the past 12 months, we have experienced great disparities in fishers, not just at home but also around the world. This has deeply impacted me and the Open Text leadership team, and we are redoubling our efforts to do good, to create sustained positive change while doing well as an organization. The corporate citizenship report and our initiatives are so important to us. The last 12 months have been the best financial performance in the history of Open Text, and our forward momentum is even stronger. In closing, let me summarize. We delivered another exceptional quarter led by organic growth in cloud and ARR. Our cash, cash flow, and liquidity keeps getting stronger. We have increased visibility into the impact of the global economic recovery of our business, and this is creating upward momentum in our future outlook. We will benefit from many secular trends, including modern work, modern experiences, and the transformation of global supply chains. We are a cloud-first company with the best product portfolio in our history. We continue to invest in the drivers of future growth, and we have a great workforce that is increasing innovation cycles during the pandemic and leading the way to modern work. On behalf of OpenTex, I'd like to thank our shareholders, loyal customers, partners, and 14,000-plus dedicated employees across the globe for their contributions to the success. I am so proud of our culture and resilience in our employees that we can see them demonstrating every single day. What a difference a year makes. It's my pleasure to turn the call over to Madhu Raghunathan, Open Tech's Chief Financial Officer. Madhu.