Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation first quarter fiscal 2023 financial results 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 one on your touchstone 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, sir.

Good afternoon, everyone, and welcome to OpenText's first quarter fiscal 2023 earnings call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Baranchay, and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Today's call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website. Earlier today, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, investors.opentext.com. I'm pleased to inform you that Open Text Management will be participating in the following upcoming conferences. RBC Capital Markets Global Technology Conference on November 15th in New York. Needham's Virtual Big Data Infrastructure and Cloud Communications Conference on November 16th. TD Securities Technology Conference on November 21st in Toronto. Credit Suisse Technology Conference on November 29th in Scottsdale. Bank of America's Leverage Finance Conference on November 30th in Boca Raton, Raymond James Technology Investor Conference on December 5th in New York, NASDAQ's Investor Conference on December 6th in London, UK, NBF Technology Conference on December 7th in Toronto, and Barclays Global Technology Media and Telecom Conference on December 8th in San Francisco. And now on to our Safe Harvest 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'll hand the call over to Mark.

Thank you, Harry, and welcome to today's call. OpenText fiscal 23 is shaping up to be a transformative year. My comments today focus on three key points. First, OpenText is executing very well as demonstrated by record cloud revenues, record cloud bookings, record annual recurring revenues, and solid renewal rates. We are acquiring micro focus from a position of strength. Second, the second consecutive quarters of organic cloud growth and constant currency reflects the innovation investments we have made over the last several years, inclusive of titanium, a key pillar of our future growth. Third, the acquisition of Micro Focus, when closed, enhances our leadership position in information management and broadens our capabilities to deliver business 2030 to our customers. Let me start with our strong Q1 year-over-year results. Record Q1 revenues of 852 million, up 2.4% on a reported basis. In constant currency, revenues were 892 million, up 7.1%. Record Q1 cloud revenues of 405 million, up 13.5%. In constant currency, 417 million, up 16.9%. Cloud was 47% of total revenue. the highest in our history, and the seventh consecutive quarter of cloud organic growth in constant currency. Enterprise cloud bookings were strong in the quarter, $112 million, up 37%, and on a trailing 12-month basis, enterprise cloud bookings were $496 million, up 36%. ARR of $722 million, up 4.4%, and up 8.9% in constant currency. ARR reached 85% of total revenues, the highest in our history, in the seventh consecutive quarter of ARR organic growth and constant currency. Our enterprise renewal rates were rock solid, with cloud at 94% and off cloud at 95%. Adjusted EBITDA margins remain upper quartile at 35.7%. Free cash flows were $96 million, notably and meaningfully impacted by foreign exchange tax and our accelerated investments in Q1 as we approach titanium. We expect full year fiscal 23 free cash flows of between $725 million to $750 million. Today's financial results in customer trust are further validation of our momentum. Within the quarter, we were proud to partner with the Fifth Third Bank with over $200 billion of AUM, leveraging our cloud business network for payments. University of Winchester for forensics, Penn Mutual for our experience cloud and client communications, Close Brothers in our content cloud for capture and information archiving, one of the key Dutch water boards using our content cloud for complete information management and Microsoft integration, and large technology partnerships that got deeper within the quarter and our stronger go-to-market relationship with Microsoft for mid-market new support for Google Workspace, new integrations to Salesforce, and full product support for SAP applications in the cloud. Let me turn to our fiscal 23 target, and please recall, we view our business on an annual basis, not a quarterly basis. This is important today, and will be even more important with Micro Focus. We are an annual business, we plan on an annual basis, and we think in annual cycles. Further, the following does not include micro focus contributions, and we do not intend to speak to a combined target model until we close. Cloud continues to accelerate, and we're updating our F23 outlook to reflect this. We expect this year in constant currency, cloud bookings growth of greater than 15%, cloud revenue growth of 8% to 10%, support revenues to be constant, ARR to be up 82% to 84%, of our business, and with cloud being up, we expect license to be down 8 to 10%. We are reaffirming our total revenue growth outlook of 3% to 4% growth with even stronger cloud performance. Our R&D projected spending range is at our historic highs of up to 14% of revenues as we strategically invest in titanium and in private, public, and our API cloud. The Open Text Information Management Cloud is global. That's four nines of guaranteed availability. We write this into contracts. It is secure, trusted, and open. These investments include critical capabilities to be the most trusted cloud, such as regional data zones, high security, and modern compliance processes, such as SOC 1, SOC 2, FedRAMP, StateRAMP, Protected B, BOFIN, GSP, and a dozen more compliance standards. These are very difficult and differentiated. With these investments, we set the table for continued organic growth, and we expect adjusted EBITDA between 36% to 35% on the full fiscal year. As we noted, F23 free cash flows to be between $725 million to $750 million. Let me turn to business 2030. At Open Text World, I share that titanium and micro-focus are strategic pillars for us, and that business 2030 is foundational. Information sources and information volumes are expanding exponentially. Business 2030 will see all industries radically transformed and digitized, a new human-centric workplace dominated by Gen Y and Z, looking for more purpose and more total experiences. There are new priorities in business 2030, such as sustainability, automation, incorporating more machines, AI-driven growth based on platforms of information, and software. Information is the new fuel and business 2030 is happening. In light of this, customers need to own their digital fabrics and complete their digital transformations and look beyond to new rules and new requirements for business 2030. To be prepared, all companies are becoming information companies and all need to be software companies. OpenText enables customers to connect and automate core workloads in the cloud. Today, we are the secure information fabric for business apps in the global 10,000 across supply chains and millions of edge devices. You know, the fourth industrial revolution created the beginnings of digitalization. Then the pandemic accelerated digitalization. Current supply chain challenges, inflation and sustainability are only providing more stimulus for digitalization. We see no slowing of digitalization as companies strive for business 2030. And as companies wrangle silos of information across multiple cloud environments to deliver these new digital business models, they need new ways of working to be intelligent, connected, and responsible. Let me be frank. Digitalization is the only answer. And companies want to work with brands like OpenText who are experts, who are investing, who have staying power, and who are leaders in their markets. We envisage a future where all business information flows through the OpenText cloud, where information management elevates every person, every organization to their fullest potential. It's an exciting time for OpenText. The type of data and information that we manage is ever-growing. Structured, unstructured, fast, slow, core, edge, humans, machine-generated, robot-generated, and soon within IT infrastructures and across the application lifecycle. Automation of business, the automation of IT and of their value streams, each information-led, is essential to scaling digital business. OpenText Cloud Editions is the platform of platforms for information management at scale and in the cloud. We are the intelligent information core for business. And we just demonstrated this at OpenText World, Cloud Editions 22.4. showcasing how customers can create that intelligent, connected, and responsible business with integrated data and advanced information management. At OpenText, we deliver significant innovations every 90 days in Tor Cloud to help customers be ready for the known and the unexpected, for ever-growing compliance and data sovereignty regulations, and greater insight in business agility. We are 31 years young as a cloud company. And we have a comprehensive strategy for information management that puts content, experience, business networks, and cyber resiliency markets with the full consumption choices of off-cloud, private cloud, public cloud, and as a developer cloud. We provide our 75,000 off-cloud customers choice on how they can consume. We are proud to call 97 of the top 100 companies and 40 of the 50 largest supply chains customers. We have over 3,000 private cloud customers. We added another 100 last quarter. We have over 780,000 businesses relying on OpenText SMB every day to protect, block, backup, and restore their information. As Hurricane Ian approached, we worked with dozens and dozens of businesses to ensure their digital lives were secure. Our strategy is unique and continues to be validated by our customers. In June, we announced Project Titanium, our innovation roadmap to extend all OpenText software to the public cloud and APIs. We are already winning new public workloads for core content, business network foundations, and over our two dozen APIs. Project Titanium enables us to address the fastest-growing development choices for our customers. The demand for the OpenText cloud remains strong, and we expect it to be our leading growth driver. The global shortage of IT labor and growing regulations by industry, including healthcare, financial services, and government are fueling our cloud growth in content services, business networks, and digital experience. Moreover, cyber resilience is top of mind for all businesses of all sizes, and we are pushing forward leading solutions in threat intelligence, endpoint, network protection, and backup and recovery. Let me turn to Micro Focus. It's the right asset. at the right time. Micro Focus customers want the same deployment choices Open Text customers enjoy. Off cloud, private cloud, public cloud, and API. We see the opportunity to bring cloud capabilities to Microsoft customers and at an accelerated rate. Following closing the acquisition, Micro Focus will bring significant expanded product capabilities and growth opportunities. Let me summarize what we see as the top growth drivers and value unlockers. Cyber resilience. We are very excited to bring customers a full-stack security offering from the edge to the cloud, to trusted identities, to writing secure software and forensics. Content management. The enhanced capability of AI, video, and audio content, voice content that we can bring to our mutual install base and to attract new workloads. The transformation of IT operations management, or ITOM, in the public and private cloud. The elevation of the developer with application delivery management and application lifecycle management and our APIs and our developer strategy. Application modernization and connectivity from all the important mission-critical technologies from EDI to COBOL to amplifying current modernization tools and distributed workloads and adding aspects like AppWorks, APIs, and more. And advanced AI and machine learning with Magellan, Vertica, and IDLE. Across all of these, we see an opportunity for Micro Focus customers to benefit from the Open Text Private Cloud, for Micro Focus customers to benefit from the Open Text Renewals approach, jointly deeper strategic relationships into the global 10,000 and new buying centers, and deeper strategic relationships to the world's largest technology companies and more access to markets. We have been transitioning the open text install base to the cloud over several years. And you see the successes right in front of us in the numbers. We intend to do the same for Micro Focus customers, but even faster. Let me provide an update on the Micro Focus transaction. On August 25th, we announced our firm intent to acquire Micro Focus. And on October 18th, Micro Focus shareholders approved the all-cash offer. This is an important milestone. Earlier today, Micro Focus issued a transaction-related update containing financial information for their three months ended July 31st. While we are not commenting on their business or financials, today's update is consistent with their public statements of expecting to exit their fiscal 23 being flat or better. We remain on track to close this acquisition next quarter. Please recall, concurrent with our August 25th announcement, We entered into a $4.6 billion term in bridge loan commitment, which remained undrawn to satisfy certain requirements under the UK takeover code. Subject to market conditions, we intend to further syndicate the term loan and reduce commitments under the bridge loan by accessing the debt capital market. While we're making strong progress in our pre-integration planning, we have confidence in our proven OpenTech's business system, given the proven integration successes it has delivered over time. This is our power alley. Let me reaffirm the commitments we made on August 25th. Returning micro-focus to organic growth. Accelerating micro-focus cloud growth and improving the renewals business. 400 million of cost optimizations. Upper-quantile adjusted EBITDA and free cash flow. Continuance of our dividend program. a rapid deleveraging program bringing our leverage down to less than 3x within eight full quarters or closing. Our cash priorities are twofold, investing in the business for growth and paying down debt to less than 3x leverage. We will reconsider a share purchase program upon delivering, and we're going to provide enhanced visibility into our high-value business areas to demonstrate our progress in value unlockers, inclusive of our Q1 visibility into our cloud bookings. Let me conclude my prepared remarks. There are concurrent and compounding challenges in the world, inclusive currency, wage and goods inflation, fuel prices, Russia's war on Ukraine, supply chain constraints, skill shortages, and more. Open text has its playbook. We are ready, and I can't say this enough. The only answer is digitalization and to prepare for the new rules and paradigms of business 2030. We are all information companies. We are all software companies. We ended the first quarter with a multiple momentum behind our growth engine. The best talent is the talent you have, and we are investing in our talent. We are hiring. We are investing in innovation. We're creating new channels in our go-to-market strategy, such as SMB, API, and partners. We are going for shared gains and growth at this point in time. With our reaffirmation of our annual targets, cloud acceleration, strong first quarter performance, It reflects the strength, durability, and resiliency of the OpenText business model amidst these global macro dynamics. Upon the acquisition of Micro Focus, OpenText would be one of the world's largest software and cloud companies with an even larger and more diverse global customer base at greater scale pursuing a $170 billion addressable market. Micro Focus is the right company and the right opportunity with amazing products, strong talent, marquee customers, and valued intellectual property and is a company that can gain value from the OpenTax business system. I am so proud of the team for their incredible focus and execution and committed to company success. May the one that brings peace bring peace for all. With that, let me turn the call over to Mardu, my business partner and OpenTax CFO.

Thank you, Mark, and thank you all for joining us today. All references are in millions of USD and compared to the same period in the prior fiscal year, and are on a reported basis understated otherwise. So let me start with an overarching comment. OpenText's Q1 results, they reflect continued strong execution in a dynamic macro environment. Our results are consistent with expectations we shared with you on our last earnings call in August. We are well positioned to continue to execute on our strategic priorities and well prepared for the upcoming closing and integration of Micro Focus. Q1 revenue. We are very pleased with our Q1 revenue performance. I will add a few comments here in addition to the highlights shared by Mark. First on foreign exchange. The US dollar once again strengthened in the quarter. FX in Q1 was a revenue headwind of 40 million. Approximately half the impact was on customer support and another 30% on cloud. We grew total revenue 7.1% in constant currency and 2.4% on a reported basis, the best Q1 in our history. Cloud renewal rate was 94%, steady sequentially and year-over-year, while off-cloud renewals reached 95%, the highest rate in the last three years. Enterprise cloud bookings. Our trailing 12-month enterprise cloud bookings were a very strong 496 million and 112 million in-quarter, the highest in our history. The booking strength was broad-based across most products and geographies. We continue to see the number of large cloud deals and average minimum cloud contract value increase. And many of these large cloud contracts have a duration well in excess of three years. Healthcare as a vertical stood out as an area of strength across our cloud. In content, we call out tourism, food services, and utilities. In experience, life sciences and insurance. And in business network, banking and professional services. Now, moving to other financial metrics on a year-over-year basis. Gross margins improved in all items. And let me expand on the cloud and customer support gross margin on a non-GAAP basis. Cloud gross margin was 67.9%, up 120 basis points compared to Q1 fiscal 22. Customer support gross margin was 91.6%. 20 basis points higher than Q1 fiscal 22 and reflecting the continued stellar management of our marquee install base by the Open Tax Worldwide Renewals Organization. Our expenses were up 41 million on a non-GAAP basis related to revenue growth and investments in R&D and sales and marketing. The growth investments we have made over the last several years have paid off in the form of continued year-over-year organic growth in cloud and ARR as Mark shared over seven consecutive quarters. Adjusted EBITDA for Q1 was $304 million, or 35.7% of revenue, versus $323, or 38.9%. On a constant currency basis, adjusted EBITDA was $320 million, or constant year-over-year. Gap-based net income was a loss of $117 million during the quarter, compared to income of $132 million in Q1 fiscal 22, due primarily to non-cash expenses for micro-focus-related derivatives. Now, let me expand on the derivatives. First, these charges were non-cash in nature. In connection with the proposed micro focus acquisition, as noted in our August 25th announcement during Q1, we entered into derivative transactions. 1.825 billion of GBP forward contracts to satisfy UK cash confirmation requirements relating to the GBP denominated purchase price, and 1.38 billion of cross swaps relating to Micro Focus existing euro denominated debt to fix its cost. As the acquisition is not complete, these instruments did not qualify for hedge accounting and were measured at fair value at the end of Q1 compared to August 25th, the transaction date. The fair value changes were primarily driven by large FX fluctuations in TVP to USD, which resulted in a 181 million of unrealized losses for Q1, And these were recorded to other income expense line with the offsetting net liabilities recorded within current accounts payable and accrued liabilities. You will note that our gap effective tax rate in Q1 was a negative 40.4% driven by this non-cash book loss of 181 million from the derivative instruments. I have to say these losses have partially recovered since September 30th and will continue to be marked to market through the P&L until the close of the acquisition. All detailed disclosures are available in our Form 10Q file today. Turning to operating and free cash flows. We generated $132 million in operating cash flows. Free cash flows in the quarter was $96 million, or 11% of revenue. Q1 is a seasonally lower cash flow quarter. During Q1 fiscal 23, let me share a few of the factors. We continue to invest in talent, innovation, and go-to-market initiatives. The foreign exchange impact was a headwind of $35 million to our collection. $26 million of higher cash taxes was this prior year, and primarily due to Section 174 of the U.S. tax provisions requiring companies to capitalize R&D at a higher rate than before. This was effective July 1, 2022 for us, and also higher related installment payments. Given our continued and significant momentum into the cloud, we decided to front-end load the year, are CapEx investments. CapEx disbursements in Q1 was $36 million, or approximately 40% to 45% of our full-year budget, and compared to $27 million in the prior year. The open-text working capital engine has never been stronger. DSOs were 40 days in Q1, flat with the prior year, and improved from 43 days in Q4 fiscal 22. Cash conversion cycles remained a high positive of 25 days. And we remain ready for scale with the pending micro focus acquisition. Our business is annual and the quarters will vary. So today we're providing you our expectations for full year fiscal 23 free cash flows to be approximately $725 to $750 million or upper quartile low 20s as a percentage of total revenue. Turning to balance sheet and liquidity, we ended the quarter with $1.7 billion of cash Another $750 million on our undrawn revolver, a very strong net leverage ratio of 2.1 times. And as of September 30th, approximately 75% of our outstanding debt is fixed. On outlook, let me turn to our targets and aspirations. The U.S. dollar remains strong. We plan our business in constant currency, and we present our business in a constant currency basis for our quarterly factors, total growth strategy, and medium-term aspirations. For the second quarter of fiscal 2020, you will see quarterly factors outlined on page 9 of our investor presentation. For Q2, on a year-over-year basis in constant currency, we expect cloud revenue up 12% to 14%, ARR up 6% to 7%, total revenues up 4% to 5%. We expect FX to be a revenue headwind of $50 million to $55 million. We expect constant currency adjusted EBITDA dollars to be flat year-over-year as we continue to make investments in cloud, security, and edge. We expect FX to be an adjusted EBITDA headwind of approximately 30 million. Again, all of this is available in our investor materials. Turning to fiscal 23, total growth strategy is provided on page 10 of our investor deck, and let me refer you back to Mark's commentaries earlier with added clarity relating to foreign exchanges. Please note that we continue to share our materials in constant currency. At current rates, we expect a full year fiscal 23 FX headwind of approximately 160 to 170 million, up from our prior estimate of 100 million, turning to free cash flow and capital allocation. On page 14 of the investor presentation, we have added a new metric for fiscal 23 free cash flows. As mentioned earlier, excluding micro focus, We expect fiscal 23 FCF to be in the range of $725 to $750 million, our upper quartile, low 20s range as a percentage of total revenue. We are leaving our fiscal 25 FCF aspirations unchanged at $1.1 billion. And let me comment further on our capital allocation priorities. First, as already highlighted during the micro focus announcement, our priority after closing will be to bring our net leverage ratio to less than three times within eight quarters, eight full quarters. And second, continuance of our dividend program. 20% of trailing 12-month free cash flows in dividend payouts. Third, as Mark noted, we will reconsider our share buyback program upon deleveraging. On medium-term aspirations, on page 12 of the investor presentation, you will see our details for fiscal 25, which again excludes micro-focus. There are no changes to our outlook except for the change in capital allocation that I just mentioned. Turning to dividend, as part of our quarterly cash dividend program, our board declared on November 2nd, 2022, a cash dividend of 0.24299 cents per common share. The record date for this dividend is December 2nd, 2022, and the payment date is December 22nd, 2022. And let me summarize. Strong execution was the theme as we kicked off our first fiscal quarter in a dynamic macro environment. We're executing very well on OpenText's strategic priorities, and we're approaching the acquisition of Micro Focus from a position of strength and leveraging a proven OpenText business system and the integration playbook. On behalf of OpenText, I want to thank our shareholders, loyal customers, and partners, and a special thank you to my OpenText colleagues around the globe You are a remarkable team. I will now turn the call over to the operator for your questions.

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 touchstone 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 Steve Enders of Citi.

Please go ahead.

Hi, thank you. This is George for Steve. Just to start with kind of the obligatory macro question, could you guys give us an update on anything you've seen in terms of customer budgetary changes in behavior, any changes in the deal cycles, just anything you can highlight there. Thank you.

Yeah, thank you for the question. It's steady as you go right now. So in our part of the spending centers, as I talked about, the demand for digitalization continues strong. And the continued migration of our install base, new SaaS workloads that have come into our revenue streams, large business network customers consolidating, global security, trust, and compliance requirements. So I'd say it's steady as you go. And I wouldn't shout out any Any changes on the dynamic over the last couple of quarters?

Great, thank you. And then as a follow-up, between the different areas of the portfolio, any areas you point out as being stronger than expected or maybe a little bit softer than expected relative to your expectations? Thank you.

Yeah, thank you again. Continued strength in migration to the private cloud for content and experience. We have new SaaS workloads coming in, both in our bookings and our revenue stream. You know, as we talked about, titanium is a point in time, like 23.2, but every quarter we're releasing more and more public SaaS capabilities. both in core content, core capture, core workflow, core e-signature, and we're winning business. And it's turning from bookings to revenue and our APIs. I'm quite excited about that. Titanium is starting to happen, and you can see it in our P&L and in our investments. Business network. Strengthening. As the requirements in supply chain have gotten more difficult, where more watchtower requirements are required, where there's more regionalization. We're in a position of strength to help deliver against that. And we have some unique dynamics in our SMB business that are positive to us in our SMB business. We have strong renewals execution. We have the opportunity to upsell customers from E3 to E5 type of SKUs. We have a couple of competitors that are distracted in the marketplace, so we're looking to take some share gain. We're adding our own IP into SMB from everywhere from backup threat intelligence and now encrypted email. And we've got the ability to cross out ZIX into Carbon WebRoot and WebRoot and Carbonite into ZIX. So those are some of the favorable mix shifts that we're seeing. We still have some countries that are a bit more affected in the dynamic, but the net of it all is quite a positive. I'll note that we exited Russia very early and a while ago. We didn't really have exposure in Belarus or Ukraine, so those things are not affecting us at this point.

Great. Any questions?

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

Hi, good evening. Curious about the mix shift in your target model. So cloud growth is up about 200 basis points at the midpoint and license is down significantly. Just curious what you're seeing from clients that's driving the revised target.

Yeah, thank you, Stephanie. And, yeah, I mean, we had stellar cloud bookings in the quarter up – Thirty thirty seven percent. And on a trailing 12 month basis, cloud bookings of relatively the same. Thirty six percent. I just want one percentage point different. I mean, that's just stellar growth. And look, we're winning. We win work and we win workloads. Question is, how does the customer consume them? Do they consume them in private cloud? Do they consume them in our public cloud? Or do they consume them and want to own a license up front? So with cloud up 37% in bookings and license down about 10% or a little less in cost and currency, that's very favorable to us. So the net of it is share gains. in that ratio. The net of that is clearly share gains of 37% up and 7, 8% down in constant currency. What's driving it? Talent shortages. All the things we've talked about, the need to go faster, globalization, compliance, trust, We added 100 new customers in the private cloud in the quarter. New public SaaS revenues flowing through the income statement now. So that's a little more insight, Stephanie.

Thank you. And then Micro Focus released Q3 results this afternoon. I know you don't want to speak specifically about the results, but obviously constant currency revenue declined at 5% with an improvement over the first half level. Just curious how you're thinking more generally about the opportunities and the biggest opportunities you look to stabilize revenue in the business.

Yeah, thank you for that. And as I said, you know, their update today, and they also had in their release, they'll have an update on November 4th, their typical flash for the full fiscal year. That, you know, their update today is consistent with their public statements of expecting to exit fiscal 23 flat or zero decline or better. You know, I'll go back to what I said, top of the list cyber resilience. You know, the opportunity to truly have a full stack security offering from edge to cloud, trusted identities, writing secure software, forensic, top of the stack. You know, if that's number one, code number one, content management. You know, the ability to look at AI video, audio content, bring that into our install base, bringing to their install base documentum and content suite. They call it information management and governance. We call it content management. That's the top there. And then, of course, the opportunity across everything they have from ITOM, ADM, AMC to bring to the private cloud, bringing to their customers our approach to a renewals business. which is just not a maintenance business. It's a full service that we offer. We're not just renewing. We're providing a renewal service. So that's up there as well. And then AI and Magellan, AI and machine learning, the opportunity to bring together Vertica, IDLE, and Magellan as very pertinent and relevant technology as our ML and AI base for the coming years.

Great, thank you.

The next question comes from Paul Treiber of RBC Capital Markets.

Please go ahead.

Thanks very much. Good afternoon. Just a follow-up question on Micro Focus. You had your user conference in October. What's been the feedback from your customers in regards to Micro Focus? And do you see your existing customer base as already large Micro Focus customers?

Yeah, Paul, thanks for the question. I'm not ready to get into that level of detail, right, and kind of percents of install base or percent penetration. There is a bright line opportunity in the open text install base, bright line opportunity, and we'll talk more about that cross-selling opportunity when we post-close. The conference, our Open Text World, I guess the time flies, last month, we called it the Great Reunion. Oh, it was so wonderful to be in person, 1,200 people, another 10,000 online. Big themes that came out of that is we demonstrated a single information. We demonstrated the promise, finally, the promise of information management. We're across SAP, Salesforce, Microsoft, Google, ourselves, others, the same data shared across all these business applications seamlessly. Also, a very strong and positive response to sustainability and just how important this is in their world from recycling lubricants to full cycle battery care and to ITs and sensors and agriculture. So those were some of the feedback from the event.

Looking at your cloud business, can you help explain the off-cloud renewal rates remain quite high despite uptake of the cloud? The cloud bookings, is that coming more from new workloads and new customers as opposed to a sort of mass migration of your existing install base?

Yes. Do you want to say it again? Yes.

You didn't give me a multiple choice. So you gave me yes or no. Yes, it is. And I'll give you an and. You're hearing this kind of the narrative the first time for me is that our public SaaS workloads are adding to our P&O, to our revenue. And so we've talked about our 90-day release cycles. We've talked about titanium coming in these chunks. Titanium is an end date, right? It's not a start date. And we're winning business. We're winning workloads. It's moving from bookings to revenue. And these are new. Customers gain great value off cloud. And as you noted, a 95% renewal rate. By the way, micro-focused customers will benefit from that accelerated renewal rate. And then we add services on top of that. We could add public workloads on top of that. We could add APIs on top of that. We could add the managed services on top of that as well. So we expect continued strength in our renewal business.

And then just lastly, how do we think about, since you are giving cloud bookings, like the seasonality of bookings, the licensed business historically has been quite seasonal. Should we expect cloud bookings to be that seasonal?

You know, we're going to have to, let me, Madhu and I will think through that. You know, we're an annual business, and, you know, we're an annual business, and quarters will vary. But let us think through kind of the seasonality of those bookings. But leave that with Madhu and I, and we'll think a little bit about that.

Okay, thank you. I'll press on. Once again, if you have a question, please press star then one.

The next question comes from Richard T. of National Bank Financial. Please go ahead.

Yes, thank you. Just wondering if you could maybe update us on the major milestones here to clear prior to closing the transaction in Q1, calendar Q1.

What's primarily remaining are sort of the customary regulatory filings and approvals.

Okay, so the major one was recently the shareholder vote, I guess.

That's right. Yeah, that's correct. So we shareholder vote, which was obviously positive into the affirmative. We have a series of regulatory filings, and Richard, we expect to be closed next quarter.

Okay, and then... Thank you for sharing that information in this deck you publish on your quarters. It's helpful. I was looking at the organic growth section. You've obviously had a continued pace of organic growth in recent quarters here. Given everything you highlighted about what the collective micro-focus OpenText brings, Do you think that there's kind of a reasonable chance here that that organic growth rate could accelerate beyond sort of the run rate that you've had given the size of the two companies?

Yeah, I'm not going to comment. I appreciate the question, Richard. It's a great question. We clearly feel very positive on our core business and especially amidst the global macro conditions. But I'm going to reserve the answer to post-closing to update our growth projections. But as I've said in our commitments, we have our core open text business. We've had seven consecutive quarters of cloud growth and constant currency. We don't see a change in the dynamic in the coming quarters. from the macro side and the core of our business. We're committing to returning Micro Focus to organic growth. What the enlarged group rate of organic growth is, I'll reserve that until we close. But this is not just our ability to get upper-quartile adjusted EBITDA and upper-quartile adjusted free cash flows. We believe that the enlarged group will grow. The rate of which we'll talk about upon closing. Okay.

And just the last one for me, you know, obviously, you know, the stock price hasn't kind of reflected, uh, I think the degree of, uh, potential accretion with this transaction and, you know, we're certainly kind of have the history that we've seen, you know, many acquisitions integrated. Um, so looking back sort of in context, like, um, can you maybe talk about in your history with a company? what was the most challenging historic acquisition OpenText made prior to Micro Focus? And how do you think Micro Focus would compare to that from a complexity of integration standpoint? Is it easier, is it about the same, harder? Just to kind of give people some context. Because I think, you know, by and large, those are the questions I'm getting, that that's really where the concern is, sort of the integration and the complexity of that. Thank you.

Yeah, there's a lot in there, and I appreciate it. I appreciate the question. We're focused on building one of the world's largest cloud and software businesses, and we're a quarter away from our close. I don't know how to truly comment on a stock price other to say that that when you look at a situation where markets can value risk, markets can't value uncertainty. And we're closing. We're confident we're going to close. We're confident in our models. And we have a different perspective of perhaps the uncertainty. It's okay. We're building our business. We're building the world's largest cloud and software businesses. The performance of both companies are very clear. Our business is growing. You've heard our commitments, and investors will make their choice. We've made our choices, and we're owners, not renters in our business, and we're focused on building for the long term. I'll tell you some of our experiences that will shape the integration plan. We look at Documentum, and we turned a – low-margin, low-efficient renewals business into a powerhouse. That informs us very well on the renewals business. We acquired two HP businesses prior to this. So good insight into culture and value and systems. Our playbook of we're going to make the hard decisions early, not late. We take a philosophy of adopt and go. If there's two of something, we don't need a third. We got two of something, we're going to pick one, adopt and go. We'll pick our leadership team early. We'll integrate fast. We'll consolidate to the best working system. We'll pick the best of the people. And speed and unity is top of the mark. So let me just pause there and see if there's anything you want to go into.

No, that's good. I think it's just important for people to have that context because I'm not sure that everyone has that history in terms of seeing the acquisitions you've made and sort of the success that you've had. So anyways, that's great. Thank you very much.

Yeah, and if we put just ratios in perspective, right, when we acquired GXS, we added a third to our business. upon closing next quarter, this will add 43% to our business, right? So we're stepping up from 33% to 43%, and we're a much larger company today, much more efficient company than when we brought GXS on board.

Great. Thanks, Mark. Appreciate it.

Thank you. The next question comes from Thanos Misopolis of BMO Capital Markets.

Please go ahead.

Hi, good afternoon. Mark, I don't know if you can comment, but I'll take a stab at it, which is the macro backdrop, you know, obviously seems a bit different now than it was when you announced the Micro Focus transaction. How might we think about just the potential macro impact and how that might play out on Micro Focus? Could you point to, for example, maybe some of the areas you're focused on, like application modernization and security, perhaps macro resilience, or just any comment in terms of how to think about that given the changing backdrop?

Sure thing. Well, I think the first is I just start actually at an industry level, an industry exposure. The ability of governments You know, there's sort of good cholesterol and bad cholesterol, right? I mean, good cholesterol, you know, around having strong exposure to governments, heavy manufacturing, healthcare, local government, not just federal, but local as well. A lot of great work happening in financial services as well. And these are industries where we have sort of common weight, if you will, across the two businesses. These are good places to be regardless of inflation. We at OpenTex continue to put our annual price increases in place, currency adjustments. The market's changed a bit where it's accepting from tech companies price increases, and you're grabbing them more judiciously. practice, we'll make sure that we apply. So, I mean, Thanos, I don't want to get into too much detail on their portfolio of what sort of more inflation maybe or for macro adjusted cyber, the full stack, cyber security trust and compliance. The needs are skyrocketing. We have commercial customers who will no longer just accept SOC 1, SOC 2, and sort of industry security and compliance. They want FedRAMP or Protected B or the equivalents in other countries of military-style security and compliance in the private cloud, not just their commercial. That will apply very directly over to Micro Focus as well. So I'll reserve that until we close, but maybe the industry comment, the security and privacy comments, are helpful.

Great.

And then just a quick one for Madhu, which is your cloud gross margin is obviously up a fair bit year over year in the quarter. But you're guiding for cloud margins to be constant on a four-year basis in 23 versus 22. So just remind us why that's the case. I mean, despite the fact that you're obviously seeing the cloud growth, you've integrated tech, so we're expecting to see some leverage on the cloud gross margin line. What are some of the offsets in that regard?

Yeah, absolutely. So in the quarter, our cloud gross margin was 120 basis points higher year over year. But your surmise is reasonable in terms of how we look at it for the remainder of the year. We're going to continue to prioritize investments in cloud for all the reasons Mark has been sharing in the remainder of the year. Should we do better and require less over time, we'll definitely see the cloud gross margins improve Zix, Carbonite, SMBNC, where it's purely SaaS cloud, they are holding the gross margins, obviously. So, the investments and improvements you will see coming out of the enterprise side. So, yes, we are holding it somewhat flat, and as we evaluate investments and gain efficiencies earlier, you might certainly see them pick up towards the end of the year.

Okay, great. That's fine. Thanks. The next question comes from Daniel Chan at TV Securities.

Please go ahead.

Hi, good afternoon. Mark, it looks like this deal is going to go through. Any things you guys ramping up now or any investments that you need to make ahead of the deal closing? For example, you guys were talking about the crossover opportunity with the cloud. Do you have to scale up your cloud infrastructure when that deal closes?

Dan, thanks for the question. It's normal cost investments right now. You know, our private cloud, we've always had a very great, very modern process that when we win a private cloud, we're able to onboard the infrastructure rapidly. And with more hyperscale of partnerships, our ability to provision and turn on is a matter of days right now, getting to kind of the physical environments. Look, if our public SaaS workloads go faster, that would be a delight. And then we'd have to talk about the more capital investments we need to make there. We just made some, as you do note it, as we're seeing our own titanium scale ramping. But I wouldn't say anything out of the normal course right now. And our private cloud is a great model where we can Upon winning big contracts and big business, we can get infrastructures up in days now, not months.

Thanks. That's helpful. How about on the micro-focus side with revenue stabilizing? It looks like much of the heavy lifting has worked. But any other investments in micro-focuses, products after you close the deal to integrate with yours? Thank you.

Yeah, Dan, as we noted earlier together, the issue is not investments on the combined R&D line. We have plenty of investments. We're going to have exciting prioritization opportunities of how we prioritize the full security stack, how we prioritize private cloud. So it's not about... the need for a higher investment rate. We're up to 14%. If you can remind me, I think they're up to 15%-ish on their R&D investments. That's a good, healthy investment spend. So when we close, we'll talk about the joint prioritization.

Thank you.

Thank you.

I will now hand the call back over to Mr. Berenshade for closing remarks.

All right, very good. Thank you, Madhu. Thank you, Harry. Thank you, everyone, for joining us today. Harry, Greg, Madhu, myself, we are very prescriptively taking the approach to have high engagement this quarter. As you heard in Harry's comments, we have close to a dozen conferences we'll be attending, including myself. We look forward to the high engagement, and thank you for your interest in OpenText.

That ends today's call.

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