Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation third quarter fiscal 2022 earnings conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. To join the question queue, simply press star then one on your touchtone phone. Should anyone need assistance during the conference call, They may signal an operator by pressing star and zero on their telephone. I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to OpenTech's third quarter 2022 earnings call. With me on the call today are OpenTech's Chief Executive Officer and Chief Technology Officer, Mark J. Baranchay, and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Please note that similarly to last quarter, our prepared remarks have been shortened to allow more time for the question and answer session. Today's call is being webcast live and recorded with a replay available shortly thereafter on the Open Text Investor Relations website. Earlier today, we posted our quarterly shareholder letter along with our press release and investor presentation. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, investors.opentext.com. I am pleased to inform you that OpenText Management will be participating at several upcoming conferences, including CIBC Technology and Innovation Conference on May 25th in Toronto, Jefferies Software Conference on June 1st in San Francisco, Bernstein's Annual Strategic Decisions Conference on June 3rd in New York, and Baird's Global Consumer Technology and Services Conference on June 6th, also in New York. And now on to our Safe Harbor Statement. Please note, 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 judgments, 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 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 recent forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, I'm very pleased to hand the call over to Mark.

Thank you, Harry, and welcome, everyone. Madhu and I are on the road spending time with employees and customers, and we're pleased to be hosting today's call together here in New York City. We had a strong Q3 with total revenues of $882 million or $899 million in constant currency, adjusted EBITDA of $284 million, and free cash flow of $306 million. We grew total revenues 5.9% year-over-year and 8% in constant currency, led by the strength in our cloud bookings and well above our results from a year ago, driven by demand in our content, business network, security, and data protection clouds. Our total cloud revenues grew 13% year over year, and 14.3% in constant currency, and topped 400 million of revenue in the quarter for the first time. These strong results come at a time of increasing challenges, from the continuing impact of COVID-19 and supply chain constraints, to the highest level of inflation that we've seen in decades, the currency decline, such as the euro and the yen, decreasing double-digit compared to the U.S. dollar, and now Russia's war in Ukraine. All these challenges reinforce our determination to remain vigilant, to protect the health and well-being of our teammates, and remaining agile to meet our customers' and partners' needs. At OpenText, we have dedicated ourselves to cloud-based innovations that power and protect information centered on information-based innovations. all sizes elevate themselves above these challenges and thrive in a world of hybrid work, digital transactions, and the need for security and information protection. Information management and the digitalization of business powers the economic inputs and outputs of the world's GDP. Information management is as essential as ERP and CRM in helping customers differentiate and scale build digital fabrics, connecting all their stakeholders, and doing more with less. OpenText is the market leader in information management, and we are the Switzerland for our customers, where we can integrate their many important workloads in their diverse digital fabrics. Our teammates continue to do an amazing job and remain confident in our ability to continue to deliver amazing results for all our stakeholders across a wide variety of scenarios. Please read our press release, my currently shareholder letter, and our investor deck. They're informative and we're eager to receive your feedback to better inform us as we strive to build the world's best information management company in the cloud at scale. Investor Day 22 is only 60 days ago. Our core message is, was, remains we are accelerating into the cloud. If you didn't attend, you'll find the materials and the recording on our website very informative. The leadership team did an amazing job detailing our approach to cloud acceleration. Let me recap three things. First, our TAM is large, total addressable market, $92 billion. So we have maximum strategic flexibility and to grow and to lead over the next decade. Our five strategic priorities highlighted up front in the presentation within that $92 billion TAM are clear. First, within our existing portfolio. We'll continue to transition our significant and valuable install base to the cloud. Once transitioned to the cloud in our cloud editions, we can uplift customers to more cloud consumption. Second, our future cloud platform. OpenText will continue to create compelling solutions with cloud editions that remove friction in the growing digital world. And the vast majority, the vast majority of our new customers start on the OpenText cloud. Third, new markets. We'll continue to expand our coverage reach to new customers. The global 10,000 over the next two years will grow in the medium and small business segment by expanding our MSPs. We're expanding our trading partners and our business network, and we're growing our new API business. For example, we have a new healthcare data company processing 25 million pages a month via our capture API natively written SAS running in the open text public cloud. Fourth, customer success in ecosystems. We'll continue to be the long-term navigator for our customers as they become fully digital companies. And fifth, our voice. We're going to continue to drive growth through compelling propositions. We're going to ensure every customer and every partner understands the value of working with open text. The third thing I wanted to recap from Investor Day is that we outlined our top growth programs that will serve as the centerpiece to our organic growth in the coming year. We're going to keep driving cloud edition adoption and customer migration, supporting customer deployment choices. If they want to run off cloud, in the cloud, as a managed service in the private cloud, adopt our public SaaS offering or via an API, we are building to respect customer choice regardless of the cloud option they pick. We look to achieve full global 10K coverage by the end of fiscal year 23. We look to disproportionately win share in our top customers and top ecosystems, and we call this winning the summit. This is our summit program. We're going to continue to go after competitive replacements against IBM, COFAX, Hyland, Datto, and SPS Commerce. We look to our international sales expansion, strengthen our world-class renewal business into an expansion business, and continue to build scaled partnerships. This is a partner-friendly company. Partners are a force multiplier, and we look to Microsoft in the mid-market, Google in the enterprise, AWS for large consumption, and application-level partnerships with SAP, Salesforce, ServiceNow, and deep technical partnerships with Oracle. After the quarter, let me provide a few highlights, and when we do, we'll go into the details. This is our best Q3 in our history. Another consecutive quarter of positive organic growth. The best cloud revenues in our history as we broke through $400 million a quarter run rate. Another strong quarter of double-digit new cloud bookings growth. An ARR mix of 83% of total revenues. Cloud and off-cloud renewal rates of 93% and 94% respectively. Our adjusted EBITDA of 32% plus in tracking to a plan as we integrate ZIX. Cash flows are $306 million or 35% free cash flow as percent of total revenue. We purchased and canceled the million shares in the quarter. We ended the quarter with $1.6 billion of cash and a net leverage ratio of 1.9 times. We are ready for the next acquisition to accelerate our cloud leadership. And the crescendo for every quarter are the amazing customer wins. And for Q3, they included the Bank of France. The Bank of France joins our information management network across EU member banks within our content cloud. Booz Allen Hamilton provides project management collaboration across its 29,000 employees for its clients within our content cloud. Echo Patrol, a leading petroleum company in Colombia and one of the four major petroleum companies in Latin America, migrated all their content from IBM to OpenText using OpenText Extended ECM. Singapore customs to build new cloud-based applications within our developer cloud. Society General extended a centralized OpenText archiving solution within our content cloud to support the merger of its retail banks. And the Philippine National Service of Investigations modeled after the U.S. FBI to leverage our security and protection cloud for forensics to manage and solve high-profile cases in the interest of the nation. A huge thank you to our customers for trusting us, for partnering with us as they build their future digital capabilities. As I look into Q4 and full fiscal year 22, let me provide some key points. Demand remains resilience. Two years ago, when the pandemic began, we took preemptive actions to build a stronger business. It was the right call for us at that time. We're doing the same today, and our preemptive actions are to accelerate investments, lean into the resiliency of that demand, increase our R&D investments, and increase our go-to-market investments so that we can accelerate our cloud growth. I hope you'll attend Open Tech Schools Europe, our event. where we will highlight the future of Open Text Information Management in the cloud. It will be a very future-oriented conference on our product and solutions in the cloud. I'll be hosting the event live in person from Munich. We're going to bring our European customers and employees together. Please reach out to our IR team or register online if you'd like to attend in person or online with us. Our full-year outlook is 3% to 4% total revenue growth, and we remain in that range. We do expect to be closer to 3% in reported currency and closer to 4% in constant currency, manifestly due to the significant changes in foreign exchange. As we look beyond fiscal 22, there's no change to our targets and aspirations. For our usual cadence, we'll provide our next fiscal year targets and then the updates to our longer-term aspirations on our Q4 call. But I can share the themes already. New innovations and continued acceleration into the cloud. Total revenue growth, both organic and acquired, increased investments to accelerate our cloud business and cloud bookings. We expect our cloud revenue to grow fastest, helping our amazing customers and partners win and thrive in this new world, and continued operational excellence and expanding free cash flows. Let me also speak to capital and M&A. We continue with our 33% capital allocation strategy via dividends and buybacks. And our Board of Directors approved on May 3rd a dividend of 22.09 cents per share for shareholders of record of June 3rd, payable on June 24th. Acquisition valuations are coming more in line with our playbook of growth at a reasonable price. Our M&A pipeline is stronger than it's been in previous quarters. We have $2.4 billion In cash and committed liquidity, we have the management bandwidth and the financial strength to execute our M&A strategy. You know, OpenTech is a unique company. We make long-term decisions. We are purposeful in balancing profits and growth. We believe in creating value through a combination of total growth, capital efficiency, and profits. When we see the opportunity, we invest. And we see the opportunity right now as we accelerate into the cloud with new investments, security investments, compliance investments, data zones, new features, our public cloud acceleration, APIs, and more. We are persistent and highly predictable with ARR percentages in the 80s. Let me end with where I started. We're accelerating into the cloud, and you can clearly see it in our revenues, bookings, investments, and customer wins. We had a strong quarter supported by amazing execution in challenging times. These challenging times also create new opportunity in established industries for us, such as manufacturing, defense, energy, oil and gas, financial services. I'm deeply optimistic about our future with the strength of our pipeline and the ability to help our customers thrive and become fully digital as we accelerate investments. It's become clear that information management is strategic, an essential capability to help organizations transform into digital companies, help organizations combat inflation, counter labor shortages and costs, power hybrid work, new supply chains, and security and information protection needs. Our teammates continue to do an amazing job, and we're confident in our ability to continue to deliver these amazing results. May the one that brings peace bring peace for all. With that, let me turn the call over to our amazing CFO, Madhu Raghunathan. Madhu.