Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the OpenTex Corporation fourth 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 will be an opportunity to ask questions. To join the question queue, simply press spar and 1 on your touchtone phone. Should anyone need assistance during the conference call, Thank you, operator.

Good afternoon, everyone, and welcome to Open Tech's fourth quarter and fiscal 22 earnings call. With me on the call today are Open Tech's Chief Executive Officer and Chief Technology Officer, Mark J. Baranchay, and our Executive Vice President and Chief Financial Officer, Manu Raghunathan. 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 shareholder letter along with our press release and investor presentation. These materials will supplement our prepared remarks and can be accessed on the Open Text Investor Relations website investors.opentex.com. I'm pleased to inform you that Open Text Management will be participating at the following upcoming conferences. Oppenheimer's Virtual Technology Internet and Communications Conference on August 10th, Deutsche Bank's Technology Conference on August 31st in Las Vegas, and Citi Global Technology Conference on September 9th 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. 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-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 pleased to hand the call over to Mark. Thank you, Harry.

and welcome everyone. We appreciate you joining us today, and I'm very pleased to be doing the call from Waterloo, Ontario. My remarks are a little longer than usual, given we just closed a great year, and we have a tremendously exciting forward agenda. So let me jump right in. OpenTX Q4 constant currency results once again beat expectations on the top and bottom line. With $935 million in total revenues, and 17% cloud revenue growth. Our renewal rates are best in class at 94% and our adjusted EBITDA margin was 35% and our free cash flows were 214 million in the quarter and 889 million for the year, up 9%. You'll hear the details on the quarter from Madhu. I have never felt better about the future of OpenText, the resiliency of our technology and expertise. the intrepidness of our people and roadmap, the transformative nature of our mission to elevate every person and organizations of all sizes to gain the information advantage, and the value we are creating for the open tech business system of total growth, cash flow expansion, and capital efficiency. Like other premier technology companies, we're managing through many macro issues. The pandemic continues, high inflation, the strength of the U.S. dollar, interest rates, Russia's war on Ukraine, the energy crisis in Europe, and recessionary indicators. Understanding the macro today is more difficult than usual, as there's not a one-size-fits-all plan, nor can you have a single point of planning. You need a multifaceted plan, unique to your business, and you need to act preemptively and boldly. Let's unpack the macro for open text. In everything I speak about today, is already factored into our F23 outlook and our F25 aspirations. The pandemic continues. OpenTex has performed superbly the last two and a half years and will continue to do so. We are a culturally stronger company. Our roadmap with Project Titanium was forged over the last year and is customer prioritized. Our renewals business is ironclad and our corporate and talent brands are stronger than ever. The pandemic tempered us and sharpened us. On to high inflation. We have put in place a program that we call WIN, Project WIN, with inflation now, WIN. We are systematically attacking inflation on all fronts, revenue, expenses, efficiency, and investing for growth. We raised prices by 5% starting July 1. We are not pulling back on hiring. We have a 2% headcount expansion plan for the year. We're also accelerating some key automation projects for efficiency and cost out. Then parallel, we're doing some good old-fashioned belt tightening. As well, we'll help our customers win with inflation now by accelerating their digitalization projects, removing variable costs, and enabling them to do more with less. Let's be frank, digitalization is the only answer here. The strength of the US dollar. Where possible, we minimize our FX exposure through natural hedging, where we match revenues and costs in our major theaters of operations, and we'll continue to optimize this balance. Our high ARR provides for consistency and predictability. And we will provide our F23 outlook and our F23 aspirations now in constant currency to reinforce that consistency and predictability. Interest rates. We've already moved approximately 75% of our debt to fixed rates. And interest rate increases have a minimal effect on our business. Russia's war on Ukraine. On the human aspect, we're helping our employees in Europe with stipends for those employees hosting refugees. We've announced a series of funding of schools in Poland for refugees, and we are a technology and funding partner with the United Nations Refugee Agency. On business aspects, we shut down our Russia offices and removed all employees two years ago and exited Russia at minimal financial cost. More than offsetting this, we see an upward pipeline in Europe and the Middle East given our strength in heavy industries, construction, and the energy sectors. Recessionary indicators. Companies are going to fall into a variety of categories here. Those poised to thrive, those who will be constrained, those who will just survive, and those who get lost. Our clear and preemptive actions on the macro issues with our WIN program are placing Open Tech squarely in the thrive category. We plan to out-compete our rivals by investing in our people, our products, and in our customers' success. We see a real opportunity to help organizations of all sizes to use digital technology to overcome today's challenges, emerge stronger, and out-compete their rivals. OpenTex is fantastically positioned to help organizations deliver on the digital imperatives, to innovate, to grow, to connect people and organizations and systems. to be well run and to do more with less. We are investing to win and we are putting our investments behind that. In fiscal 23, approximately 40% of our total expense is direct investment in R&D and cloud operations. And our investments this year are going to increase 75 million. Six years ago, our annual investment was just half that and 10 years ago, our cloud revenues were zero. and today they're 1.54 billion. We are fully committed to being the global leader in information management in the cloud at scale. In costing currency, just to recall, in fiscal 21, our cloud organic growth rate was 1.8%. In fiscal 22 last year, our cloud organic growth rate was 3.6%. This year, our cloud bookings rate, and we're gonna, we do, we'll talk about, we're gonna introduce bookings this year, Our cloud bookings rate is expected to grow 15% plus. And these proof points and increased investments give us the confidence that you'll see here in our F25 aspirations of up to 8% cloud organic growth. We are accelerating all things cloud. And OpenText is an all-weather company with foundation built on bedrock. In this dynamic environment, we saw strong demand, took share, and fortified our cloud with increased customer commitment. It's a time to standardize on companies built for the long term like OpenText. So for the full year fiscal 22 in constant currency, we delivered record total revenues of 3.53 billion and grew 4.3 year over year or 1.7% organically. The Open Text Cloud delivered a record $1.54 billion in revenues and grew 9.8%. Make no mistake, the Open Text Cloud is the flywheel of our business today. $1.35 billion in maintenance and update services, growing in a gross margin of 91%. I'm really proud to highlight we've created an SMB&C business from zero to approaching $700 million in just two years. growing and with gross margins in the high 80s. We have a unique distribution strategy with RMMs, MSPs, and our great partnership with Microsoft, and we're just getting started. ARR was 2.89 billion, up 5.5%, and 82% of our revenues. Customers fortified their long-term commitment to the OpenText Cloud with $466 million of new value in enterprise bookings, and we expect this to grow 15% plus in fiscal 23. In Q4 alone, we had 34 new cloud wins, over $1 million in bookings value, with an average commitment of over four years. World-class brands joined the OpenTex cloud in Q4. Carl Zeiss, Citgo, Close Brothers, Hydro-Quebec, Evermark, MUFG Bank, and the Salt River Project. We had adjusted dividend dollars of $1.3 billion for upper quartile margin of 36.5%. Our free cash flow for the year was $889 million, up 9.4% year over year. And during fiscal 22, we returned $415 million to shareholders, $238 million via our dividend program. We also purchased 3.8 million shares for cancellation during the year, reducing our share count by 1.4%. to 269.5 million shares. We did what we said we were going to do. Total growth, 3.53 billion of 4.3% or 1.7% organic growth. Cloud growth, 1.54 billion of 9.8% or 3.6% organic growth. Free cash flow expansion, 889 million of 9.4% And for our capital efficiency, we returned $415 million to shareholders. As we begin our new fiscal year 23, we remain committed to balancing our operational discipline, which is a hallmark of OpenTax, with continued investments and key strategic areas to drive future revenue growth, free cash flow expansion, and a continued capital efficiency. We're hiring smartly. We're investing in Project Titanium. We're going to help our customers of all sizes with their transition to the open-text cloud and win. Pressure is a privilege, and pressure creates diamonds. At the core of our fiscal 23 operating plan are the open-text four Cs. Customers, cloud, cash flow, and capital efficiency. And we intend to produce diamonds this year. On customers and cloud, again, let's be frank. Digital technology is the only answer, and our demand drivers are very clear. Converting our off-cloud install base to the open-text cloud. The continued value realization of digitizing all manual transactions and repeatable work. The overhaul of supply chain for regionalization, insight, and mitigating ongoing disruptions. The explosive growth in security, data trust, data zone, and compliance needs and regulations. The need for information and process insights to help customers manage staff turnover. to create cultures of knowing, to remove costs and do more with less. The transition to a green agenda and new ESG audits, new trading partners, new manufacturing decarbonization and 2030 pledges to be climate innovators. Open Tech has a key role to play here to help our customers be climate innovators. And even deeper relationships with top tier tech partners like Microsoft to capture new RMMs and MSPs driven by the Microsoft ecosystem and disruptions that companies like Datto and what security and data protection needs. We're also gonna look for deeper relationships with GCP and AWS for new enterprise workloads, all together helping our customers win with inflation now and get more done with less. On the cash flow and capital side, our outlook for the new fiscal year is continued growth and expansion. Let me start with the assumptions that we're using for the next 12 months. I think it's important to get an insight into the assumptions that we're using. One is continued high inflation, continued strength of the U.S. dollar, global GDP at 2% to 3% growth, high energy and wage costs. For some of the open text operating assumptions, we're expecting every business line to show revenue growth. Please recall, we have a half year of fixed benefits. You'll see in our target models that we're anticipating growth margin to be constant, R&D and cloud operations investments up $75 million, a constant adjusted tax rate at 14%, and we're anticipating CapEx down 5% to 10% as we leverage greater benefit from our partners with our cloud partners at Microsoft, Google, and Amazon. We have a strong constant currency outlook for fiscal 23. Enterprise cloud bookings growth of 15% plus. Cloud revenue growth between 6% to 8%. That's total cloud revenue growth between 6% and 8%. ARR growth between 3% to 4%. Total revenue growth between 3% to 4%. Positive organic growth. Constant adjusted EBITDA as we invest significantly. Continued free cash flow growth. And continued capital returns. Our board of directors approved a 10% dividend increase to 24.3 cents per share for shareholders of record on September 2nd, payable on September 23. On M&A, there's no change to our previous statements. Our pipeline remains active. We continue to seek those opportunities that meet our criteria on valuation, future growth contribution, cash returns, and return on invested capital. Our ability to execute is another key point of confidence. This is a proven team. I'm very excited about Project Titanium, or Cloud Editions 23.2. We chose the name Titanium because it reflects our cloud fundamentals. Strong, lightweight, industrial strength, corrosion resistant. Titanium is both new product and new routes to market. Let's get into it a little bit. The acceleration... of our large off-cloud customer base to the open text cloud. Look, our licensed customers benefit by consuming by license, and our off-cloud customers remain a massive cloud conversion opportunity. We believe this acceleration will happen because our customers can drop plans for large-scale customizations and can increasingly move to a consumption and expansion model. So we think titanium is going to help us accelerate our large off-cloud install base. Titanium is also going to further scale our private cloud business with significantly expanded geographic capabilities, data zones, and compliance capabilities. We see the opportunity to be the most trusted, secure, and compliant private cloud around the world. Our public cloud products will be at equal functionality to our off-cloud and private cloud products. And we're going to be adding all these, and this will open up a whole new set of opportunities with our public cloud at equal capabilities to our private cloud. We're going to look to win the next generation platform and future workloads from customers, partners, and embedded IP partners to our developer cloud. We see where ecosystems can be built around our API-based developer cloud. The Open Tech Cloud platform, the fundamentals underneath all our business clouds and developer clouds, will allow customers to leverage all of our cloud suites with less friction and less professional services and seamlessly go from one module to all modules because the technology, the data, the workflows, the setup, the user administration is all common across those business clouds. We also see the new opportunity for a new digital engagement center that we call the Open Tech Zone. where customers can try, purchase, renew, and get all the support they need, all automated, all self-service, without human intervention. With all of this together with titanium, we have an opportunity to reimagine the enablement of customers at scale in the cloud. This is really important. The old model that almost all of the large tech partners, the tech ecosystem work under today, it's the old model of layer. Land, adopt, expand, renew. There have been books written about it. Well, let me be clear. It's an artifact of the past, and it's not built for clouds at scale. We've created a new model with Titanium, a new customer success model centered on four principles, and we've actually already trademarked it. It's land, operate, value, expand. Win the customer, land. Operate their business at scale. See the customer and deliver the value. And when we've delivered the value together, then they expand. Land, operate, value, expand. We're going to organize it. We're going to evangelize it. We're creating programs behind it. Land, operate, value, expand. L-O-V-E. That's right. It spells love. The new open text love model for customer success with titanium. Land, operate, value, expand. we are investing in accelerating all things cloud and this puts us on a vigorous and guided growth trajectory that informs our medium-term fiscal 2025 aspirations we are raising the bar on our medium-term aspirations and in constant currency our aspirations include continued enterprise cloud bookings of 15 plus total revenue organic growth between two percent and four percent increased bookings to drive increased cloud organic revenue growth of 6% to 8%. This is really important, I want to repeat this. Our three-year aspirations, our fiscal 25 medium-term aspirations includes cloud organic growth revenues of 6% to 8%. ARR, up to 85% of total revenue, adjusted EBITDA margin between 37% to 39% given our increased R&D investments to drive more cloud growth. And annual cash flows of approximately $1.1 billion. And the slight change is due to the US dollar strength and our updated non-GAAP tax rates in the low 20s. Continued capital allocation of 33% of free cash flows to dividends and buybacks. Let me wrap up my prepared remarks before I hand the call to Madhu and then your questions. We're prepared for this dynamic environment. And we've prepared uniquely in the OpenText way for the opportunity that we see for OpenText. We're investing to outcompete our rivals, and our R&D and cloud investment for F23 is up $75 million to a total of $1 billion in annual investment, driving titanium, the open text zone, increased distribution, and the open text love model. We're also preparing for a better company and a better tomorrow. Today, we published our third corporate citizenship report. Please read it. It reflects our culture, our commitments to our employees, our commitments to our customers, to our partners, and our commitment to you and to the world around us and the communities in which we live and work. We welcome and value your feedback. I'm an optimist. I deeply believe the future is brighter than today because the future is made of the best parts of today. OpenText is committed to ensuring that growth, that our growth, is based on inclusivity and sustainability. I'm recently back from just a fantastic customer employee tour in Europe. Let me quote a customer. Time and people are the greatest assets of our company, and it's time for radical prioritization. At our strategic technology table is Microsoft, Oracle, SAP, Salesforce, Google, and OpenText. OpenText has demonstrated amazing flexibility, time to value, an unwavering commitment to us during the pandemic, and you earned your seat, end quote. It's time to standardize on companies built for the long term like OpenText. I'd like to thank our employees, our customers, our partners, and our shareholders for your continued trust and confidence in OpenText. It was just a fantastic fiscal year. We're off to a great start in fiscal 23. We're humbled and proud to help advance your mission and goals and work and to make open text in the world better for everyone. 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, over to you.