Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation fourth quarter and 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 and 1 on your touchtone phone. Should anyone need assistance during the conference call, aiming signal and operator by pressing star and zero on your telephone. I would like to turn the conference over to Harry Blount, Senior Vice President, Investment 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. Berenshade, and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, which will be followed by a question and answer session. This call will last approximately 60 minutes with a replay available shortly thereafter. I would like to take a moment and direct investors to the investor relations section of our website, investors.opentex.com, where we have posted our consolidated investor presentation that will supplement our prepared remarks today. The presentation includes information and financial specific to our quarterly results, notably our updated quarterly factors on page nine, as well as a strategic overview. I am pleased to announce that Open Text Management will be participating at the following upcoming conferences, the Oppenheimer Technology Internet and Communications Conference on August 10th, the BMO Technology Summit on August 25th, the Deutsche Bank Technology Conference on September 10th, the Citibank Global Technology Conference on September 14th, and the Jefferies Software Conference on September 15th. We look forward to virtually meeting with investors in the coming 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 statements. 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 forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures and 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'm pleased to hand the call over to Mark.

Thank you, Harry. Good afternoon to everyone, and thank you for joining today's call. I'm thrilled with our progress. We're on the offensive, and let me walk you through it. Throughout fiscal 21, I've spoken about the economy reopening, a growing number of green shoots in our business, and open text being on the offensive. Our amazing fiscal 21 Q4 and annual results are another proof point of the open text of the future. We doubled the company over the last seven years to revenues of $3.39 billion and adjusted dividend dollars of $1.3 billion. We can double OpenText again over the next five to seven years. We have the vision, the market, the products, the talent, the business model, and the capital generation engine to double again. I am so proud of my OpenText colleagues for their incredible dedication, smart and hard work, I said we were ready for all scenarios a few calls ago, and these were not just words. It was action, and that is evidenced in our announced results of today. We have a return to organic growth, and organic growth is here to stay. The company is focused on accelerating our rate of organic growth, and you'll see that in our ambitions 2024 with our aspiration to achieve up to 4% total organic revenue growth. That 4% organic growth rate is without acquisitions. We also intend to continue to acquire smartly and strategically as a driver of future organic growth to achieve greater long-term competitive gains and even higher cash returns. Our balance sheet is solid and strengthens with every quarter. We ended the year at 1.45 times leverage. Our margin profile is upper-quartile. We ended the year at 38.8% adjusted EBITDA, and we are ready for the next transformative acquisition. OpenTech just turned 30, and we are a unique company with a proven, differentiated business model that we call the OpenTech business system. You know, there are three key points I want to make right up front. First, information management. OpenText created the information management market, a $34 billion market, growing at an 8% CAGR. We are the leader. The market is young, large, growing, and still fragmented. It delivers transformative value for customers of all sizes, and OpenText has presented the most meaningful vision and products, and we intend to lead all the way in this market. Market leaders tend to hold a significant percentage of their TAM, the lion's share of the profit, and we have a large set of growth ambitions ahead of us. So this leads me to my second point, our approach to growth. We believe in intelligent growth, which incorporates total growth and profitable growth. Total growth means growing our highest value business, cloud, the fastest, and unlocking accelerants to continuously improve our rate of growth. Total growth means moving beyond renewals and renewal rates and moving to growth and expansion rates in our feature and security update services. It's not just a maintenance update business anymore. And the second part of intelligent growth is profitable growth. Look, some companies grow at all costs. They consume bad business and lose money. We view that as a dangerous long-term proposition because it creates unhealthy cultures and unsustainable businesses. There's good cholesterol and bad cholesterol. Growth at any cost is bad cholesterol. At OpenText, we seek profitable growth. We always have. We always will. This is the good cholesterol, and we seek the lion's share of the market's profits in information management and a resilient long-term business model. This is intelligent growth. This leads me to my third point. When you bring together our $84 billion PAM plus our intelligent growth model, we can double open text again over the next five to seven years. I can say this with confidence. We are patient and steady and forward thinkers. We do the basics really well. And we believe competing and winning is not about being a great sprinter. Rather, it's excelling at triathlons, where you run, swim, and bike over great and long distances. We intend to put every dollar of capital we earn to work, to create value, through growth, both organically and through M&A, through innovation, through cash flow expansion, and through capital returns to shareholders. The more capital we generate, the more capital we intend to put to work. So I'm so excited about fiscal 22 and the years ahead. The best days of OpenTex are certainly in front of her. Let me turn to the here and now and the overview of our Q4 and Fiscal 21 results. Fiscal 21 was a stellar year of innovation, organic growth, margin expansion, and cash flow improvement. Customers are accelerating their investment in owning their digital capabilities, from modern work to digital-first supply chains to cyber resilience. We finished the year strong with an exceptional Q4 highlighted by record revenue, ARR, and cash flows. These Q4 results are on a year-over-year basis as reported unless dated otherwise. Record revenue of $894 million, up 8% organically, up 4% in constant currency. Record ARR of $694 million, representing 78% of total revenue, up 6% organically, up 2% in constant currency. Record cloud revenue of $360 million, up 8% organically, up 6% in constant currency. License revenue of $133 million, an increase of 25%, the strongest Q4 since 2018. adjusted EBITDA of $315 million and 35.2% on a margin basis. Operating cash flows were $296 million and free cash flows were $269 million. At our immediate disposal is approximately $2.4 billion in cash and committed liquidity. We saw strong momentum in cloud edition adoption, accelerated cloud bookings, and a rebound in licenses. We won new business at VMware, EDF, Revlon, Frenary, Deutsche Bank, Dell, and T-Mobile. These are in addition to the amazing wins throughout fiscal 21 at NIH, J&J, PG&E, Maersk, and Nestle. At EDF, we are the information platform for nuclear power. At VMware, we are part of their analytical, legal tech, and cyber resilience platform. At Deutsche Bank, we are their regulatory platform. At Revlon, we're digitizing their internal operations. At Dell, we are the connective tissue for the heart of their business, their supply chain. At T-Mobile, we are the digital record for 100 million customers from entitlement to billing. At the NIH, we are the digital and collaboration hub for infectious disease research and grant management. We're very grateful for our customers. Information management is transformative. We're helping our amazing customers create digital capabilities across modern work, supply chains, modern experiences, and to be cyber resilient. To compete and win in the fourth industrial revolution, information management is a strategic requirement. During the quarter, we purchased 2.5 million shares for a total consideration of 119 million. The share we purchased reflects the confidence and visibility in our business and outlook and future cash flows. I will now move to – I will have more to share on our future capital generation in a few minutes. Let me talk about the full fiscal year of 21, which was a record on the financial metrics that matter. These annual results are on a year-over-year basis as well, and as reported, unless stated otherwise. Record revenue of $3.39 billion, up 8.9% with positive organic growth. Record ARR of $2.7 billion, representing 81% of total revenue, up 13%, and up 2.7% organically. Record cloud revenue of $1.4 billion, up 21.6%, and up 3.2% organically. Record adjusted EBITDA of $1.3 billion, a margin of 38.8%, up 15% in dollars. and the highest full-year margin dollars and margin percent in our history. Operating cash flows were $876 million, and free cash flows were $812 million. Both measures include the impact of the $300 million IRS payment. Let me move on to annual targets, capital allocation, and our forward aspirations. Today we are providing our fiscal 22 targets and our fiscal 24 aspirations, which reflect our long-term confidence in a steady acceleration in organic growth. As a reminder, we run open text with an annual view, not a quarterly view. While we are still in a pandemic, and while the global economy is recovering, there are still near-term challenges, such as the Delta variant and other variants, inflation, supply chain shortages, and other structural changes. The world is still volatile. We have confidence in our fiscal 2022 targets, and our confidence extends to our ability to steadily accelerate organic growth to deliver our fiscal 24 aspirations and long-term strategy. For fiscal 22, we expect to deliver 3% to 4% organic cloud growth, 1% to 2% total organic revenue growth, and adjusted EBITDA targets of 37% to 38% as we increase our investments in our cloud and our people. If the economy continues to improve, we expect to do better. For fiscal 24, our aspirations include annual total revenue organic growth of 2% to 4%, 85% ARR, 38% to 40% adjusted EBITDA margins, and $1.2 billion plus in free cash flow. Earlier in my remarks, I spoke to our ambitions on doubling the company again, over the next five to seven years and our capital generation engine. Let me highlight that capital generation engine. With these ambitions, we expect to generate upwards of $6 billion in cumulative free cash flow over the next five years. We have been building revenue scale and revenue to cash high efficiency conversion over the last few years. and we will now see the fruit of that hard and smart work in this expected large-scale capital generation. Let's step back, and here is how I think about this. We have worked hard and smart to gain revenue scale and high efficiency in converting revenue to free cash flow. Today is another important inflection point. As we look forward over the next five years, we have the potential of generating up to $6 billion in free cash flows, and there are three key points. One, there is significant present value in that $6 billion. Two, we have a stellar track record of delivering returns on invested cash. And three, we intend to put every dollar to work. We are also announcing today an expanded shareholder return strategy. Our strategy has been to return approximately 20% of trailing 12-month cash flow, free cash flow to shareholders via dividends. We feel it's a good time to accelerate returns given the strength of our business and our new strategy is thus to target 33% of trailing 12-month free cash flows via dividends and now share buybacks. With our new strategy, we expect to keep share count constant. Let me also highlight when a transformative M&A opportunity presents itself, we reserve the optionality to shift our capital allocation strategy towards that opportunity. To date, we are announcing a 10% dividend increase to 22.09 cents per share. Let me transition and speak a bit to the underpinnings of our organic growth confidence, and that is our corporate program, Grow with OpenTax. This is our narrative for the year ahead, and I'll be returning back to this in our calls and our meetings ahead. We are early in a new product cycle with Open Text Cloud Editions. Our five cloud editions are focused on key strategic needs for large, medium, and small companies that create and are on the information management digital journey. Number one, master modern work via our content cloud. digital business networks via our business network cloud, power modern experiences via our experience cloud, be cyber resilient via our security and protection cloud, and build the API economy via our developer cloud. We also have important secular trends that are helping the business, continued remote work, the need to digitize, the need to be global, to be in the cloud, and to be secure. This translates into key programs to drive organic growth. They include a strong focus on our install base to help customers gain full value from their investment and expand their investments and transition to the cloud faster. Christina Langell joined us last year from Salesforce, and Christina is leading all our customer success teams and programs, including professional services. We have recently brought together all our renewal teams under Paul Dugan. Paul ran a $6 billion-plus renewal business at Oracle. We're also putting more of an emphasis on our international business, China, Japan, APAC, Latin America, Africa, Middle East. James McGurley, an open tech veteran, is now leading international sales. We also see an opportunity to grow our largest accounts and partners faster, as well as opening new opportunities with our developers and our developer cloud. This is led by an OpenText veteran, Ted Harrison, who also oversees all enterprise sales from North America and Europe, our largest market. Prentice leads our initiative to expand our mid-market presence, and this is all supported by our key investments in digital and automation to scale OpenText at less cost to create frictionless experiences between the company and our customers, which we call DNA 2.0, led by Renee McKenzie, our newly appointed CIO. It's an exciting year ahead. Grow with OpenText. We are aligned to our largest growth opportunities. We see clear positive secular trends. We have strong programs, and our leadership team is structured to drive growth. Let me now turn to corporate citizenship. OpenText has always upheld high standards of ethics, integrity, and business practices. It's important to do good while doing well, and those in a position to effectuate positive change should in the context of the business strategy. At Open Tech, we call this corporate citizenship. This is not a program. It's part of our DNA. Corporate citizenship is at the nexus of what we believe, our corporate purpose, how we run our company, and the transparent standards we set for ourselves, how we do business and how we conduct business, and a culture that is intentional, innovative, objective, and thus inclusive in always advancing. This is why corporate citizenship or ESG is so important. Today we released our second annual corporate citizenship report. It's a report to provide insight into the objectives we are setting for ourselves to be transparent on our goals and advancements and to hold a mirror to ourselves where we are not making progress fast enough. I'm pleased with the progress we've made, but we still have many kilometers to go. You'll see in the open text 2021 Corporate Citizen Report, we've adopted this year the GRI framework. We've defined our top four citizenship priorities of culture and human capital development, equity, diversity, and inclusion, data privacy and information security, and financial performance. We've also strengthened our human rights statement, supplier code of conduct, and tax transparency statement. and we expanded our data collection and processes to inform future goals and objectives. Further, today we are announcing a partnership with Lakehead University in northern and central Ontario. We intend to create a next-generation internship program for Indigenous students and fully fund this year up to 25 internships. I look forward to the partnership, offering a compelling pathway to digital jobs and learning from students, as they have much to teach us. We welcome your feedback on corporate citizenship. Let me wrap up my comments. It was a stellar year. We grew 8.9% to 3.39 billion in revenues and delivered 3.2% organic growth in the cloud. We generated 1.3 billion in adjusted dividend dollars with 38.8% margin. It's a stellar market, information management. It's strategic. in the fourth industrial revolution. Its size is $84 billion, with a CAGR of 8%. Organic growth is here to stay. We're investing, and we have incredible proof points with EDF, VMware, Dell, NIH, T-Mobile, and more. We have over 100,000-plus customers. We run 24 of the top 30 supply chains. We have greater than 50% penetration in the global 10,000, and we have more than 25% penetration with MSP partners. We have the Vision Talent Market and Capital Engine to double open text again over the next five to seven years. And we're focused on creating value, value for shareholders, customers, employees, and that centers on innovation, growth, profits, capital generation, and corporate citizenship. Let me thank our 14,000 employees plus. our customers, and our partners who are helping make fiscal 21 our best year ever and for creating a business built to last where the best years are in front of us. Stay healthy and stay safe. And it's my pleasure to turn the call over to Madhu Raghunathan, Open Tech's Chief Financial Officer and my great business partner. Madhu?

Great. Thank you, Mark. And thank you all for joining us today. Our record Q4 and fiscal 21 results have set a solid foundation for continued momentum into fiscal 22, as you just heard in Mark's excellent commentary. I will speak to Q4, fiscal 21, our quarterly factors, our fiscal 22 total growth strategy, our fiscal 22 annual target model ranges, and our long-term aspirations, all as outlined in our Q4 investor presentation that is posted on our IR website today. All references will be made in millions of USD and compared to the same period in the prior fiscal year. And let me start with revenues. Q4, total revenues for the quarter were $893.5, up 8.1% or up 4% in a constant currency basis. For fiscal 21, total revenues were $2.386 billion, up 8.9% or up 6.2% in a constant currency basis. There was a favorable effect impact to revenue of 34.1 in Q4 and 81.3 in fiscal 21. The geographical split of total revenues in the year was America's 61%, EMEA's 31%, and Asia Pacific's 8%. Q4 annual recurring revenues were 694.4, up 5.6%, or up 2.2% on a constant currency basis. And fiscal 21 annual recurring revenues were 2.741 billion, up 12.7%, or up 10.4% in a constant currency basis. As a percent of total revenues, ARR was 78% for the quarter, and 81% for fiscal 21, up from 78% in fiscal 20. Q4 cloud revenues were 360.2, up 8.3%, or up 6% in a constant currency basis. For fiscal 21, cloud revenues were $1.407 billion, up 21.6%, or up 20% on a constant currency basis. Our cloud renewal rate, excluding carbonite, was approximately 93%. Q4 customer support revenues were $334.3, up 2.9%, or down 1.8% on a constant currency basis. For fiscal 21, customer support revenues were $1.334 billion, up 4.6%, or up 1.7% in a constant currency basis. Our customer support renewal rate was 94%. Across the business, our renewal performance remained strong. Q4 license revenues were $132.5, up 25.3%, or up 17.8% in a constant currency basis. In fiscal 21, licensed revenues were $384.7, down 4.5% or down 8.6% on a constant currency basis. Our licensed business benefited from seasonal strength and increased customer confidence in our products and solutions to drive their digital capabilities. Q4 professional services revenues were 66.6, up 5.2%, or down 0.4% on a constant currency basis. For fiscal 21, professional services revenues were 259.9, down 5%, or down 8.6% on a constant currency basis. I would like to highlight that we achieved positive organic growth in both cloud and ARR during fiscal 21 on a reported and constant currency basis. Q4 GAAP net income was 181.3, up compared to net income of 26.4 in the prior year, primarily driven by higher revenues and lower COVID-related charges and increased other income from certain investment funds in which we are a limited partner. For fiscal 21, GAAP net income was 310.7, up compared to net income of 234.2 in the prior year, primarily driven by higher revenues, lower operating costs, and other income from certain investment funds in which we are a limited partner, partially offset for the tax expense relating to the IRS settlement. Q4 non-GAAP net income was 220.4, up 1.2% or down 2% on a constant currency basis. For fiscal 21, non-GAAP net income was 927.2, up 18.2% or up 14.3% on a constant currency basis. Q4 gap earnings per share diluted was $0.66, up from earnings per share diluted of $0.10. For fiscal 21, gap earnings per share diluted was $1.14, up from $0.86. Q4 non-gap earnings per share diluted was $0.80, the same as Q4 20, and down $0.02 on a constant currency basis. For fiscal 21, non-GAAP earnings per share diluted was $3.39, up 50 cents from $2.89 and up 39 cents in a constant currency basis. Turning to margins, GAAP gross margin for the quarter was 69.6%, up 110 basis points. For fiscal 21, GAAP gross margin was 69.4%, up 170 basis points. Non-GAAP gross margin for the quarter was 75.8%, consistent with Q4 fiscal 20. Our fiscal 21 non-GAAP gross margin was 76.1%, up 160 basis points. For GAAP gross margins by revenue stream, please refer to our fiscal 21 form 10-K report. Also, on an adjusted basis, Q4 cloud margin was 64.8%, down from 65.1%. For fiscal 21, cloud margin was 66%, up from 61.3%, driven by continued improvements in our cloud service delivery and strong contributions from Carbonite. Q4 customer support margin was 90.3%, up from 90.1%. For fiscal 21, customer support margin was 90.9%, up from 90.4%, both reflecting continued strong renewal performance. Q4 license margin was 96.7%, down from 96.8%. For fiscal 21, our license margin was 96.4%, down from 97.2%, both primarily due to higher third-party technology costs. Q4 professional services margin was 20.4%, down from 34.1%. For fiscal 21, our professional services margin was 25.1%, up from 22.7%. Our adjusted EBITDA was 314.8 this quarter, down 0.8%, or down 3.5% on a constant currency basis. This represents 35.2% margin, down from 38.4% in the same quarter last year. The year-over-year decline reflects year-end performance payments given our stronger sales performance during fiscal 21, as well as an $18 million special bonus approval to reward a broad group of our employees for excellent contributions and make these employees whole for compensation reductions taken at the onset of COVID. For fiscal 21, adjusted EBITDA was 1.315 billion, up 14.5%, or up 11.3% on a constant currency basis. This represents 38.8% margin, up from 36.9% in fiscal 20. Turning to operating and free cash flows. Our operating cash flow is at 296.2 for the quarter and 876.1 for fiscal 21. Free cash flow is at 268.8 for the quarter and 812.4 for fiscal 21. Fiscal 21 includes the IRS settlement payment of 299.6. DSO was 44 days for Q4 fiscal 21. And we can see fiscal 21 truly brought together a consistency in process improvements, driving levels of the cash conversion cycle, particularly in buildings and collections, each quarter to end at 44 days compared to 51 days in Q4 fiscal 20. As we look ahead, we will be increasing our investments in automation to maintain this level of working capital efficiency and prepare for significant long-term scales. From a balance sheet perspective, we ended the year with approximately $1.6 billion in cash and supported by our strong cash flow performance. We have a $750 million revolver on door and fully available, bringing our total cash and committed liquidity to approximately $2.4 billion. Our consolidated net leverage ratio is 1.45 times. The predictability of our business model, combined with the strength of balance sheet and visibility of our free cash flow, gives us the confidence to announce today what Mark referred to as our capital allocation strategy. We repurchased 2.5 million shares for a total of 119 million during Q4. Turning to quarterly factors, total growth strategy, and annual target model, all available in the Q4 fiscal 21 investor presentation on our website. As a reminder, we view our businesses annual, and quarters will vary. We note the uncertainty related to the pandemic, while our leading indicators continue to trend positive. For the first quarter of fiscal 22, compared to the same period in the prior year, we expect the following. Total revenue up low single digits reported organic growth. ARR, annual recurring revenue, up low single digits reported organic growth. Expect Q1 FX tailwind of $14 million. For the first quarter fiscal 22, compared to our fourth quarter results on a sequential basis, adjusted EBITDA margin percentage up 250 to 300 basis points. Our fiscal 22 total growth strategy. For a full year fiscal 22, compared to the same period of the prior year, we expect the following, inclusive of FX, As I speak to the percentages, note that all percentages represent organic growth. Any M&A will be additive. Total revenue, up 1% to 2%. Cloud revenue, up 3% to 4%. Customer support, constant to slightly up. Total ARR, annual recurring revenue, up low single digits. License to decline mid-single digits. Professional services to remain constant. And any M&A will be additive. For our full year of fiscal 2022 target model, today we published our fiscal 2022 target model, which highlights the predictability and profitability of our financial model. For fiscal 2022, we expect ARR in the range of 81% to 83% of total 21, results of 81%. Cloud services and subscriptions in a range of 41% to 43%. Customer support in a range of 39% to 41% compared to 39.4% for fiscal 21. Our license revenue to decline to a range of 9% to 11% versus 11.4% in fiscal 21. Our professional services in a range of 7% to 9%. Gross margin range is expected to be 75% to 77% compared to 76.1% in fiscal 21. Our adjusted EBITDA margin is 37% to 38% compared to 38.8% in fiscal 21. The adjusted EBITDA margin range for fiscal 22 reflects many investments. First and foremost, our employees and talent pool. Our fiscal 2022 reflects the full restoration of compensation for employees and an accelerated performance cycle, along with merit increases to commence October 1, 2021. In addition, our investments will continue in R&D, sales, channel coverage, and capacity. And DNA 2.0, which encompasses digital and automation initiatives across the company to reduce business friction and drive scale. These investments will afford us confidence and momentum into our fiscal 24 aspirations, which I will speak to now. Our multi-year aspirations remain growing ARR, annual recurring revenue, and driving an acceleration in organic growth by expanding our margins. For fiscal 24, we continue to expect total organic revenue growth of 2% to 4%, ARR of 85%, and adjusted EBITDA of 38% to 40%. We're increasing our free cash flow aspirations to $1.2 billion plus versus a prior range of $1.1 to $1.2 billion. On long-term taxes, in regards to modeling our business to fiscal 24, let me share a few comments on taxes. First, our adjusted effective tax rate will remain constant in fiscal 22 at 14%, up slightly in fiscal 23, and then expected to be in the low 20s in fiscal 24. Second, we don't expect any significant change to our historic run rate of cash taxes. We do have ongoing programs to optimize taxes based on expected long-term business mix and sources of income. So, in summary, Q4 was a stellar finish to a year of incredible performance, the learnings from which will elevate our internal momentum to even greater levels. As we have strongly kicked off our new fiscal 2022, well done to the open text team. We could not achieve this without you. We remain excited and committed to our outlook and aspirations and wishing you all continued safety and wellness. I would now like to open the call for your questions. Operator?

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone to join the question queue. You will hear a tone acknowledging your request. If you're using a speakerphone, please ensure you lift the handset before pressing any keys. If you wish to remove yourself from the question queue, you may press star and two. Anyone who has a question may press star and one at this time. The first question comes from Thanos Moskopoulos from BMO Capital Markets. Please go ahead.

Hi, good afternoon. Just looking at the strength in licenses, kind of surprised to see that. And could you clarify, was that driven by, you know, customers deploying on-premise, or is that more a function of people deploying on third-party cloud infrastructure, in which case you might be looking at the license line?

Yes, Anna, thank you for the question. Let me start at the high level, which is the direction of our business, remains the same. We have a great slide in our investor deck that talks about our proven business. It's called a proven durable business model that shows over the last eight, nine years of our recurring revenue going from 54% up to 81%, our licensed business going from 24% to roughly 11% of our business on an annual basis so the trend remains more cloud um we had some um strong platform wins in the quarter um that were oh you know could be as long as a decade-long platform win and um so that drove a bit more um license revenue in the quarter so again the trend is more cloud On an annual basis, you know, we're hoping to keep license relatively constant in terms of its absolute quantum. There's no change in our strategy at all. And those licenses can be deployed off cloud or in our cloud, if you will. So we will certainly see some additional services that follow from those licenses as we deploy them. Okay. And then on the – As we deploy them on behalf of our customers, right?

Yeah. Yeah. Okay. On the gross margin side, you're going from gross margins to be relatively consistent year over year. I would have thought we may have seen a bit of gross margin expansions. Just to clarify, is that maybe just conservatism on your part? Is it maybe some pandemic-related costs that are coming back, or is it reinvestments that are striking that dynamic?

Yeah, Panos, this is Madhu. I can take the question. Actually, if you look at our target model, we're going from 75% to 77% at the outset. It's the first time we've put a 7-7 on the outer end of the boundary, so I would say that. And you are going to see improvements in gross margin, both on the cloud side as well as the customer support side, notwithstanding, to your point, the investment that's talked about in the commentaries, that we will be making. But definitely take note of the 77% of the outer end of the gross margin target model.

Okay. And then finally, Mark, in terms of the timing for, I guess, the revised capital allocation strategy and the share buybacks, maybe if you could clarify, is that just a function of, you know, you now have a higher recurring revenue mix than in the past, maybe, you know, a stronger cash flow profile? Is that what's driving the timing of this? Or, you know, we'll get to that. Thanks.

Yeah, I think it's a combination of things that just brings us to the confidence in our increased cash flow generation. We spent the last five years building up revenue scale in a very efficient company. And from a dollar of revenue to free cash flow, that conversion rate is upper quartile in the industry. And we extrapolate that out five years. in a pretty straight line method from where we are, we see the ability to generate upwards to $6 billion in free cash flow over the next five years based on all the hard work that's gone on over the last few years. So with that, we decided to expand our return strategy from 20% per year to 33% per year. We'll maintain the optionality that when the – and the 66% because that's all the strategic flexibility we need. But if we need more than that, we reserve the right for that transformative deal. We like also holding our share count constant so we can better measure returns on a constant share basis. So for all those reasons of improved cash flow, stronger engine, confidence, looking out of $6 billion of a capital build, you know, the strong present value in those $6 billion as well, we increased our return strategy from 20% to 33%. Great. Thanks. I'll pass by. Yeah, thanks, Dan.

Yeah, thank you. The next question comes from Stephanie Price of CIBC. Please go ahead.

Thanks. Maybe just to follow on to Thanos' question, just in terms of the M&A environment and, you know, whether we should read into anything in terms of the increase in return on capital to shareholders in the New York M&A environment here.

Yeah, thanks, Stephanie. No, I think we can do two things at the same time, right? We... There is nothing to read into the M&A. You know, increasing our capital return strategy, as I said, is really built on the foundation and confidence of the strength of that capital generation engine, upwards of $6 billion over five years. And so here in the short term, going from 20% to 33% provides more value back to shareholders. We're going to remain an acquirer, a strategic acquirer that drives future organic growth. And we'll maintain all the optionality that when that M&A opportunity presents itself above the 66% that we have, that we will dial that other 13 points right back to M&A. So nothing to read into it. We're not changing our strategy. We're going to continue to acquire. We're looking for businesses that drive future organic growth. but we're always going to be returning value to you, to our shareholders. And this is another tool available to us right now.

Okay, I think that's helpful. And then in terms of constant currency cloud growth, it looks like it rose slightly in the quarter. Can you talk a bit about what you're seeing in that business and what the big driver of the increase was, whether it was new sales or cloud migration?

Yeah, it's – We're on the other side of the pandemic at this point. And, you know, I would, you know, note that over the last 90 days, and, you know, it takes a while to – there isn't necessarily a direct correlation to revenue, but over time it does translate into revenue. Our cloud volumes are up 25% to 30% over the last 90 days. That increased network traffic is really driven by what we've talked in the past about more regionalization and a move to more trusted suppliers. So there's a lot of activity right now going on within the business network. So where we had those industries affected that we – a year ago we talked about industries affected. We're on the other side of that. We've seen volumes return. It will turn into revenue going forward. The revenue growth is – around key wins, as we talked about, volumes returning, and also off-cloud customers moving into the cloud. So it's a combination of those things, Stephanie.

Great. Thanks so much.

The next question comes from Paul Steak from Scotia Capital. Please go ahead.

Good evening. Hey, Mark, could you talk a little bit about where you've seen in the cloud transition maybe the greatest engagement? And thinking about the next product cycle, which of the five CE products we'd expect to maybe be the leading drivers of growth coming into 2022? I've got two quick follow-ups.

Yeah, sounds great. I'm going to highlight three things. The first will be cloud edition is 21.4%. which we'll push out across our infrastructure October, November. And we're on target with delivering 21.4 cloud editions. And we will be at parity with all feature functions of content services in the cloud as we work off cloud. So 21.4 is a very important release. I've talked about customers will never have to upgrade again once we push 21.4 out into the market, and we're on track to do that. So that's a very important milestone for us. When we look at a business like Fox, We're going to be at complete parity for records management, archive, capture, workflow, our application layer, our regulatory platform. That will be available in SAS, public cloud, 21.4. That's a big release. Second is 22.2, which is April of next year, still in this fiscal year, which will have the same experience for our experience class. So everything we do for our digital experience platform will be on a parity in the cloud, public cloud staff as we have off cloud. And the third is I'm getting pretty – we're making good progress on our developer cloud. If you go to developer, you may not go there, but developer.opentex.com, we now have our 30 robust APIs available. And this is a future growth driver for us. And I think these are the three, Paul, that I would pay attention to is this movement. Within this fiscal year, we will have delivered public cloud SaaS versions at parity to all our off-cloud, and we will have opened up a new go-to-market via API services of what companies like Twilio do in the marketplace.

Great. The last two here. The first one would be on the capital allocation strategy. Can you just either reiterate or sort of put in context, has there been any change to your level of comfort in terms of overall leverage relating to M&A, i.e., should we read into this that given greater capital returns to people, you're willing to actually maybe stretch a little bit more on the balance sheet side. And then the second one, just for Madhu, can you just confirm that the normal Q4 to Q1 seasonality, which obviously got interrupted for all of us last year, should we be thinking that that normal seasonality pre-COVID applies?

Thanks, guys. Yeah, I'll take the first one and then give the second one to Madhu. You know, Paul, I still like our – up to three times. But as our quantum of adjusted EBITDA grows, so does the leveraged dollars. So we have 2.4 on the balance sheet today, heading up to three times of 1.3. That's another $4 billion. And in an increasing way, you could even add more. So we have plenty of capital, both cash and committed on the balance sheet, plenty in the future flows, both in that five-year, $6 billion free cash flow, or three times adjusted pivot up. We are not capital constrained to double the company again over the next five to seven years. Not capital constrained at all. If we needed to go above 3X, sure, we'd do it. We've had a track record to bring it down. Here we are sitting at 1.4 times, but I still like the three times ratio. Madhu?

Thank you, Mark. So, Paul, on your question, the pre-COVID seasonality, Q4 to Q1, I would say still remains. When you think about August and everyone wants to take more vacations this summer than they did last summer, and there's still some uncertainty out there. So that has been factored into Q factors. I would also point out, well, not quite seasonality. Our expense structure is different for all the reasons I outlined. We did have some COVID-related savings in Q1 of last year. that we've caught back on for all the right reasons, employees, other investments, and we see that in Q1 as well. But to wrap it around all of this, I would focus on organic growth. What we've shared for the key factors for Q1, the range of revenue increases, ARR increases, are all organic growth on a year-to-year basis, and we're quite excited about it.

Thank you.

The next question is Richard C. from National Bank Financial. Please go ahead.

Yes, thank you. So on the acquisitions, you know, you guys have opened up a bunch of product lanes over the past 10 years, you know, business network with GXS and then security with Carbonite. So as we look forward, are you planning on going deeper in some of these product lanes or is there sort of an option here to sort of open up a new lane?

Yeah, Richard, thanks for the question. I'm happy with the markets we're in. So, you know, I look at information management, $84 billion, 8% CAGR. We don't need to expand the market definition of information management right now. Over time, we have, but we have plenty of open space, within our chess boards within each of these market segments. So we're staying very focused on the current definition of information management. Okay.

And then on the page, I think it's page eight on your deck, you share some of the wins that you've had. I'm just trying to get a grasp on the competitive landscape and maybe if I look at this slide. The question is, are these new projects that you're taking on, are they replacing incumbents in terms of pushing out another player here?

Yeah, I'd say, I mean, everything is competitive, of course. VMware is a new platform. I look at EDF. This is a fantastic win for us. It's a decade-long decision. And it's a great expansion of our current platform. And I look at Revlon competitive with IBM, California State Hospital is competitive with Adobe, Cerner expansion of our current platform. So it's a mixture of some open space, some competitive wins, and expansion of our capabilities.

Okay. Okay. And just the last one, you know, we're all reading about, you know, the type of labor markets here and tech particularly. How are you seeing that in terms of your turnover and then perhaps the impact on your financials here going forward?

Thanks. Yeah, thanks, Richard. It's a great topic, and it's an unusual time and a time where you need to lean in as a CEO and a leadership team. And we consider ourselves a very purpose-driven organization, a very intentional one, one with high customer centricity. Pre-pandemic, we were far below the industry average in turnover. And there are just articles in the Globe and Mail and National Post this week about half of employees don't want to return to work, and financial institutions and other industries just you know, on overdrive hiring tech people, and that hiring looks towards successful companies to do recruiting. So we're doing better than the industry average on retention. We've got a great, you know, mission and purpose-driven culture. You heard Madhu speak about we've done a special bonus to our employees for their incredible results. We've accelerated a merit round. We have high flexibility in our work culture and work location. And, you know, we hold ourselves together via our mission and purpose of helping others excel. So we're beating the industry average, and we're going to keep investing in our people and in our products. Okay. That's great. Thank you.

Once again, if you have a question, please press star, then 1. The next question comes from Paul Kriber of RBC Capital Markets. Please go ahead. Thanks so much and good afternoon.

I wanted to help understand your assumptions for the year and also maybe to put Q4 into a better perspective. So, you know, the quarter saw higher growth both for organic revenue and cloud, organic cloud revenue. What's in your outlook? How do we sort of think about Q4 relative to the outlook for fiscal 22?

Yeah, I'll take that, Paul, and you may want to jump in as well. We're very focused on increasing our rate of organic growth. And I look at our fiscal 24 aspirations, and I think that is an important milestone for us. where we want to see total revenue growth, total revenue growth of 2% to 4%, and cloud would be much stronger underneath that. And so our investments are here to gradually accelerate that rate of organic growth. And thus that led us to our fiscal 22 outlook of 3% to 4% organic cloud growth and 1% to 2% of total revenue organic cloud growth. So we like those estimates right now while investing and gradually accelerating the rate of organic growth. And I'll say it's still a pandemic, and there's still volatility out there. And I think you've just got to be mindful of that. We're kicking off our fiscal year. Others kicked off their fiscal year in January. So we're also mindful that it's still a pandemic. So I like our – a 3% to 4% cloud organic growth for the year and accelerating to 2% to 4% total revenue growth by fiscal 2024. And if the economy does a little better, we'll do better as well.

A couple financial questions for Matthew. First, on travel and entertainment, for the last year, what's been the uplift from the lack of travel and entertainment on EBITDA margins And then with reopening over the next year or so, what's your expectations for or how much of travel entertainment are you building back into the coming year?

Yeah, thank you for the question. So on travel, I'm interested in the direct correlation to EBITDA. Just think about it in a way. It is an important number, but in terms of significance, I would say people payroll are sort of more than two-thirds of our expense. So think about it that way is what I would say. I think we saw a lot of impact in marketing events. sales events where all of it was done virtually. And we saw productivity increase and performance increase in those stats. As we look into fiscal 22, it is volatile with the Delta variant and everything else, but we have built in back to being together. If a customer wants us to be there, our sales team will be there. And same thing with actual professional services. So we have increased the amount of being in-person dollars. At the same time, we're balancing with the productivity we saw during COVID. So expect more digital, but do expect some in-person. But all of that has been based into our target model numbers.

And for this past year, though, the impact and the lack of travel, is it immaterial or is there any number to call out?

So maybe I would say the savings, the COVID-related savings, we didn't thank at all. We actually redirected them, reallocated them to what we've been referring to as digital automation initiatives to allow better and better work into the remote environment. So they were savings. We used them again for all other reasons.

That's helpful. And then just one last one. Just on the tax rate, just to clarify. Yes. So you put in the low 20% adjusted tax rate, but no change in the cash tax rate. Is that correct? And then why, what's driving that?

So from a cash taxes perspective, as I said, we see the numbers in our cash flow statement. And the cash taxes have actually ranged in 80 to 100 and slightly over $100 million, as you see in our cash flow statement in the last few years. Of course, higher incomes will pay higher cash taxes. So the primary reason for that is our IT position in Canada, we do have a cash tax benefit in Canada. And that continues as we look ahead. And that will be the key drivers. Plus, the several optimization programs we're continually involved in for the various sort of tax initiatives globally that also will help optimize the net cash outflow on taxes.

Okay. Thank you for your question.

Thank you. Thank you. I will now hand the call back over to Mr. Banshee for closing remarks.

Very good. Thank you. And thank you for joining us today. We're thrilled with our progress. And as we look out over the next few years, the next five to seven years, we believe we can double the company again. We doubled over the last seven years. We think we can double over the next five to seven. And we've also pivoted to organic growth, and organic growth is here to stay. And we look forward to seeing you at our upcoming conferences at Oppenheimer, BMO, Deutsche, Citi, and Jeffries. We have a big engagement plan for the coming weeks ahead, and we look forward to you attending our AGM as well. I'll be in person in Waterloo if you're in the neighborhood. Thanks for joining today, and that concludes today's call.

This concludes today's conference call.