Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation third 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'll 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, they may signal an operator by pressing star and zero on their telephone. I would now like to turn the call over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to OpenTech's third quarter fiscal 2023 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. 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 press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the Open Text Investor Relations website at investors.opentext.com. I'm pleased to inform you that Open Text Management will be participating at the following upcoming conferences. Virtual Investor Meeting hosted by Bank of America on May 10th. Needham Technology and Media Conference on May 17th in New York. Barclays Leverage Finance Conference on May 23rd in Austin. CIBC Technology and Innovation Conference on May 24th in Toronto. B of A's Global Technology Conference, June 7th in San Francisco. and Barclay's virtual bus tour on June 15th. And now up to our safe harbor. 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 the 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 will hand the call over to Mark.

Thank you, Harry. And let me welcome everyone to today's call. This is our first quarter of results since we acquired Micro Focus, and the results and our progress are superb. In constant currency, we delivered 45% total growth, positive organic growth, 1 billion plus in ARR, record adjusted EBITDA dollars, and 25% free cash flow as a percent of revenue. As I've always said, our results will speak for themselves. To use a sports analogy, We are playing to win by fielding both a strong offense and a strong defense. On our offense, we have significantly expanded our mission in TAM with the acquisition of Micro Focus to now include enterprise security, digital operations management, application automation, the developer, and AI. All in, we are addressing a $200 billion information management market. On our offense, Project Titanium is complete and affords new growth opportunities in SaaS and APIs. We announced Project Titanium X, and we are well positioned to help organizations complete their digital transformations and leverage the next generation of value through AI. And our go-to-market is focused on marquee customer segments that include the global 10,000 key governments and tech-savvy SMBs. On our defense, we achieved ARR of 81% and growing organically. upper quartile adjusted EBITDA dollars of $365 million in the quarter, upper quartile free cash flow at 25% of revenue, or $306 million in the quarter, a capital strategy via our dividend targeting 20% of trailing 12-month free cash flow. As free cash flow grows, so does our capital allocation, and cost-efficient operations via automation. The world is multi-cloud. In fact, it is an internet of clouds. And information management is the interconnect for the internet of clouds. OpenText is in a unique position as the leader in information management. Our products go to market and employees have us well positioned for continued growth and profitability. And we have momentum, and I like our on-ramps for additional growth. Continued transition from off-cloud to cloud. New public cloud SaaS products. Introduction of large language models in AI, which I'll speak to in a moment. Climate innovation remains a top priority. Security and trust. Every company is a software company and have the requirements of developer and platform accelerators. And, of course, the need to continue to consolidate around strategic providers and reduce costs. Our Q3 financial results are a reflection of customer and partner trust. a reflection on how information management is transforming business, and a reflection on the dedication and expertise of our 25,000 employees. I am extremely proud of every OpenTextr. I can't emphasize this enough. We view our business annually because it allows us to make the right short-term trade-offs and investments to enhance long-term performance. With that said, let me provide a few quarterly highlights. Total revenues of $1.28 billion, up 45%, with positive organic growth in constant currency. Over $1 billion in quarterly ARR in our ninth consecutive quarter of organic growth in constant currency. Cloud revenues were $444 million, up 10%, with positive organic growth in constant currency. Trailing 12-month cloud bookings are up 9% and remain on track for fiscal 23 cloud bookings growth of 15% plus. Though I'll note that within Q3, our cloud bookings were constant at $108 million. We generated $365 million of adjusted EBITDA dollars, or 29.3% adjusted EBITDA margin. Free cash flow was $306 million, or 25% of revenue. Adjusted EPS of $0.73. And Micro Focus contributed strong revenues of $374 million since closing, reflecting customer excitement and confidence about being part of OpenText, as a show of support for our accelerated cloud roadmap. In summary, we delivered record Q3 revenue, record ARR, record cloud revenue, and record adjusted EBITDA dollars. We had fantastic customer wins at Carrefour, California EDD, Australia Post, PacLife, the Mann Energy Group, Air Liquide, and Hydro One, ranging from our content cloud to our security cloud. Transformation themes include the need to innovate faster, secure the infrastructure, improve service experience, and solve for resource constraints. We had notable micro-focus wins in enterprise security, mainframe migrations, and IT operations management. Government, transportation, and high-tech firms were top of the demand curve. Trust is earned, not given, and I'd like to thank our customers for their continued support. Today, we have revised upwards our F23 revenue and cash flow targets. And constant currency, we expect to complete fiscal 23 in the following ranges. Total revenue of $4.54 billion to $4.61 billion, worth 30% to 32% total growth, with 1% to 2% total company organic growth. Cloud bookings growth of 15% plus. Adjusted EBITDA margin of 32.5% to 33.5%. And free cash flow of $580 million to $620 million. Our views on Fiscal 24 and Fiscal 26 remain strong and unchanged, and you can expect updates on our Q4 call when we kick off Fiscal 24. Let me speak about our markets and products. Project Titanium is our second-generation private cloud and second-generation API cloud. We announced at Open Text World EMEA we have successfully delivered Titanium for Cloud Editions 23.2, And we are already seeing strong customer adoption from companies such as Onji, Close Brothers, Stericycle, and Solaris Bank. Delivering on titanium is a major milestone for us. It now includes full public cloud SaaS for enterprise content management, including SaaS content, workflow, collaboration, e-signature, case management, capture, archive, and records management. We have further expanded our public cloud staff capability that now includes not just the ECM core I just talked about, but Value Edge, SMACS, Fortify, and Debricked. With Titanium delivered, we have fortified our support for customer choice. Off-cloud, private cloud, public cloud, and API cloud. This is another strong step to continue our annual aspirations of 15% plus cloud bookings growth. Further, we announced TitaniumX, Our cloud edition is 25. Over the next two years, we will strategically invest approximately 2.5 billion USD to deliver TitaniumX. We are a growth company, and it is the right time to invest and gain share. Here are the top five aspects of TitaniumX. We intend to be the most trusted and secure information management cloud with NetIQ and voltage integrated and built in. It's a full cloudification of Micro Focus. There will be tens of thousands of new features and facets delivered every 90 days. We'll introduce new clouds that include XDR as a service, IoT as a service, and a massively expanded developer cloud, and AI, which means integrating IDLE across all of our major clouds and adoption of private large language models, or LLMs. So I'm going to use the acronym LLMs instead of always saying large language models. Last week at Open Text World EMEA, we previewed Titanium's X integration into two LLMs, T5 and ChatGBT. At the heart of LLM has to be trusted information management. LLMs help enterprises upskill and reduce cost through text generation, information classification, knowledge answering, and dialogue generation. LLMs also help companies find new paths for growth. AI is an additional path of value for OpenText, including the other things we've talked about, cloud, climate, trust, and security. We are committed to delivering large language models to OpenText customers in the OpenText cloud, trusted, secured, based on their reliable information. OpenText is in a unique position to help customers unlock the value of their information via LLMs and gain the information advantage. We are already working with strategic customers on specific LLM deployments. We're working with a large legal organization to reduce contract risk. We're working with a financial services firm to assess audit risk, an auto company to assess mean time to failure in service strategies, and a biotech company accessing the acceleration of their clinical trial processes, quality, and regulatory submissions. You'll see us deliver dozens of LLM use cases in our private cloud over the coming quarters as a standard product offering. There's operational data, there's experience data, and I believe there will be learning data. LLMs will be the third pillar of enterprise information management. Information is not the new oil. This is absolutely the wrong analogy. Information is the new water and our information management platform is a reservoir feeding operational data, experience data, and learning data. We are making this a strategic priority and we will help our customers build their third pillar and their applications on top of it. We'll keep you updated along the way. Let me provide an update on the integration of Micro Focus. We promised a rapid and results-oriented approach. The integration is ahead of schedule let me provide a few key highlights. First on the timeline, let me walk you through our major milestones and achievements. On people and organization, we are done. On a public product roadmap, we are done. On an F24 integrated company plan, go to market and customer engagement approach, we're done and ready to go. We will complete our systems integrations over the next four to six quarters. And it's just fantastic to transition our time and energy to growing the business. So on growth, we're committed to returning Micro Focus to growth. In 93 days into owning and operating the business, and based on Q3 results, we remain confident with onboarding the business this fiscal year, 2.3 billion in revenues in fiscal 24, and returning to organic growth in fiscal 25. On people, our people are the greatest resource of the company. We're organized for growth, innovation, customer impact, and speed. With empathy and great care, we have completed the vast majority of our 8% workforce reduction. And now it's our responsibility and privilege to carry the company forward on a new path to growth. On innovation, at Open Tech's World of Media two weeks ago, we announced the accelerated roadmap of micro-focused products, including a full cloud roadmap. For DevOps, public and private cloud options available today. For cybersecurity, Fortify and DeepRect available today. Full security cloud available by 24.2. Just a few more I wanted to call off. ITOM. Public Cloud, SMAC, FinOps, and UCMDB available today. All the other private cloud options available between 23.3, 23.4, and 24.2. AMC, private cloud available today. And for AI and advanced technology, the Vertica private cloud will be available by 24.1. So we've announced our full product roadmap for Micro Focus products. Unlove. Recall, when we closed the acquisition, we created a new customer success organization led by Paul Duggan. We were brought together into one organization, support, professional services, renewals, and cloud onboarding. We provided the organization an enhanced mission that we call Open Text Love. Land, operate, value, expand. In Q3, the Open Text Enterprise delivered 95% renewal rates for both on and off cloud. our expertise and know-how will uplift micro-focused customers and renewal rates into the 90s. In the first 93 days, the dialogue with customers has radically changed to innovation, cloud, and value, and we expect to end fiscal 24 having uplifted micro-focused renewal rates from the low 80s to the mid-90s and making continuous improvement into the 90s in the coming quarters. Madhu will provide more detail, but let me add we're on track to our $400 million cost reductions and our capital structure plan of allocating 20% of trillion 12-month free cash flows via dividends and returning to a net leverage ratio under 3x. We promised a rapid and results-oriented approach. Let me provide my final comments. There's a lot of news this earnings season on the demand environment. I reviewed our key internal metrics from pipeline growth, closing cancel rates, and deal sizes. Our Q4 dashboard reads just as strong as our Q3 dashboard, so we are steady as it goes. Q3 highlights our potential, and we raised our annual F23 targets in revenue and free cash flow. We are ahead of schedule on the integration, and we're moving with speed and purpose. F24 is extremely promising as a unified company pursuing a $200 billion TAM, with a cloud-first approach, with our preliminary target near $6 billion in revenues, 36% to 38% adjusted EBITDA, free cash flows up to $900 million, while returning micro-focus to constant at $2.3 billion in revenues. We're a unique position. The world is multi-cloud. In fact, it is an internet of clouds. And information management is the interconnect for the internet of clouds. Our products and go-to-market approach have us well positioned for continued growth and profitability, and we now have an additional growth driver with AI, idle, and large language models. My deepest gratitude to our 25,000 OpenTech colleagues who did an outstanding job in Q3, delivering amazing results while managing many strategic priorities and who remain focused on creating the next generation of value for all our stakeholders. May the one that brings peace bring peace for all. And let me turn the call over to Madhu Raghunathan, OpenText CFO. Over to Madhu.