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.

Thank you, Mark. And thank you all for joining us today. As Mark highlighted, we delivered outstanding Q3 results above expectations across the board. This was driven by disciplined execution at OpenText, agile integration, and earlier than expected contributions from Micro Focus. In fact, we are just 93 days from our January 31st closing of Micro Focus. We are well advanced and ahead of schedule on our planned operational integration. We are expecting a strong Q4 finish to the fiscal year, and today we are reaffirming our long-term targets and aspirations. I would like to remind all of you that we continue to view our business on an annual basis. This is reflected in the strength and growth of our annual recurring revenues and cloud bookings, which are generally longer tenure than one year, as our customers make long-term decisions with OpenText. We will continue to drive strong quarterly performance each quarter on all fronts, and yet they all weave into the annual nature of our business and our long-term aspirations. Speaking to Q3 results, please refer to page 12 of the investor presentation. All references I'm making here are in millions of USD and compared to the same period in the prior fiscal year and are on a reported basis unless I state otherwise. On a year-over-year basis, total revenue was $1.24 billion, up 41% and 45% in constant currency, with micro focus contributing $374 million in the quarter. ARR revenue of 1.01 billion, up 38%, and 41% in constant currency, 81% of total revenue. Cloud revenue of 435 million, up 8%, and 10% in constant currency. Strong renewals, 95% enterprise cloud and off-cloud, also 95%. Enterprise cloud bookings of 108 million, constant year-over-year. Foreign exchange in Q3 was a revenue headwind of 34 million. Approximately half of this impacted customer support and the remainder having a significant impact on cloud revenue. This was our ninth consecutive quarter of organic growth and constant currency for both cloud and ARR. And moving to other financial metrics, gap net income was $58 million, down from $75 million primarily due to higher operating and interest expenses related to the acquisition of Micro Focus offset by tax benefits. Gap gross margin of 70% versus 69% was led by license and an improved mix of revenue. Adjusted EBITDA of $365 million, or 29.3% of revenue, versus $284 million, or 32.2%, up 28.3% and up 49.1% in constant currency. And breaking this down further, open tax adjusted EBITDA margin was 32% with micro focus, which had an adjusted EBITDA margin of 23.1%. Our cost of sales and operating expenses were up $430 million on a gap basis, related to higher revenue and expense from the acquisition of Micro Focus and growth-related investments in R&D, sales, and marketing. We generated $337 million in operating cash flows in the quarter. Three cash flows in the quarter of $306 million, constant year-over-year, and 25% of revenue. Working capital performance remains strong. Year-over-year, our cash position was impacted by $5.7 billion purchase of Micro Focus net of cash, $3.9 billion proceeds from debt and revolver. Our DSOs were 45 days compared to 44 days in the prior year. Our Q3 DSO reflects the continued excellent execution of OpenText paired with an agile integration of Micro Focus. We expected to make progress in Micro Focus working capital performance and, in fact, made significant strides two months from close as reflected in our FCF performance. And needless to say, Micro Focus contributed well. Turning to enterprise cloud bookings, our in-quarter cloud bookings were 108 million constant year-over-year, and our trailing 12-month cloud bookings were 511 million, up 9% year-over-year. We remain on plan to deliver 15% plus enterprise cloud bookings for fiscal 23. Turning to the balance sheet, please see page 14 of the investor presentation. We finished March quarter with approximately $1.4 billion in cash and $9.3 billion in debt. The increase in debt was related to the closing of the Micro Focus Acquisition. Our net leverage ratio was 3.3 times the Q3 and reflects higher EBITDA, stronger cash flows, and lower net debt driven by higher cash balances. As for our debt and delever plan, after we closed the quarter in March, during April, we further reduce the debt by $175 million as part of our minimum debt repayment commitment. And looking ahead, you may see net leverage ratios slightly fluctuate quarter to quarter based on investments and the impact of special charges on cash flows. We expect to exit fiscal 24 at 3.3 times or lower and are on track to be less than three times net leverage within eight full quarters. With respect to the banking situation today, I would like to share the following. At OpenTax, we were unaffected by Credit Suisse, First Republic, Signature, or Silicon Valley Bank. Our banking footprint is centered on the DSIB. It's a globally systemically important bank with strong capital ratios and solid balance sheets. Our investments are in money market funds that hold short-term government debt and AAA-rated. We have minimal exposure to U.S. regional banks. So now let me speak about the continuance of our dividend program. We intend to grow our dividend as our FCF grows. The Open Tax Board approved a cash dividend of 24.299 cents per share with a record date of June 2nd and a payment date of June 23rd. Turning to outlook, targets, and aspirations, we plan our business in constant currency and present our business in constant currency for our quarterly factors, total growth strategy, and medium-term aspirations. Starting with Q4 fiscal 2023 quarterly factors and constant currency, on page 17 of our investor presentation, we expect revenue of $1.46 to $1.51 billion, with open text being constant or better. ARR of $1.12 billion to $1.16 billion, with open text constant or better. At exchange rates being forecasted currently, foreign exchange will be a headwind of $10 to $20 million. Adjusted EBITDA on a year-over-year basis, the margin percentage down 350 to 450 basis points, again, continuing to reflect the micro focus integration costs. And we expect FX to be an adjusted EBITDA headwind of less than 10 million. As mentioned earlier, we view our business on an annual basis. Our solid Q3 and year-to-date performance, along with our visibility and confidence into Q4, we're looking for a strong finish to the fiscal year setting an excellent platform for fiscal 24 and our long-term aspirations. A fiscal 23 total growth strategy in constant currency is provided on page 18 of the investor presentation. You will see we're increasing all revenue targets and a price cloud bookings target unchanged at 15% plus. Total revenue growth up 30% to 32%. ARR up 27% to 29%. Cloud revenues up 12% to 14%. Customer support revenue up 46% to 48%. At current exchange rates, FX would be a headwind of approximately $130 million to $140 million for the full year. Our fiscal 2023 target model, as noted on page 19 of the investor presentation, it remains largely unchanged except for a $20 million decrease in interest expense to a range of $330 million to $350 million. Our preliminary F24 financial targets and F26 medium-term aspirations also remain unchanged. These are included in our investor materials notably on pages 4, 16, 20, and 21. And today we're providing additional details on our financial integration framework. I would point you to a new slide on page 21 of our investor presentation. This slide illustrates the timing and financial impact of cost savings, special charges, and integration expense or adjusted EBITDA and free cash flow targets. So let me update you on our $400 million in annual cost savings. Approximately $240 million of the savings comes from a workforce reduction that Mark previously commented on. The savings should begin to be realized in fiscal 24. $140 million in annualized savings from vendor consolidation and strategic improvements will span across fiscal 24 and into 25. The balance of the savings will come from elimination of redundant facilities, which would be substantially complete by the middle of fiscal 24. We have previously highlighted 80 million of anticipated integration spend to support systems alignment, as well as other integration expenses. We expect integration expense to span into the early portion of fiscal 25. We have highlighted 380 to 420 million in special charges that will continue to impact our near-term FCF. Of this amount, approximately $200 million will be related to severance, restructuring, advisory, and other charges spanning through the end of fiscal 24, and approximately $200 million will be for global entity simplification, tax structure initiatives, and technology footprint optimization, primarily spanning most of fiscal 24 and 25. All of these charges, investments, expenses, and savings estimates are fully reflected in our targets and aspirations. Turning to fiscal 23 free cash flow, we are raising our fiscal 23 FCS range to 580 to 620 million from our prior range of 500 to 600 million. This upward revision reflects continued strong performance and agile integration of Micro Focus. In summary, we are very pleased with our outstanding Q3 performance. Having completed our initial integration of Micro Focus operations ahead of schedule, We remain on track to meeting our near-term and long-term operating goals. We fully expect the momentum of OpenText to continue into Q4 for a strong finish to our fiscal year. On behalf of OpenText, I would like to thank our shareholders, loyal customers, partners, and team members as we embark on the exciting journey ahead. I will now request the operator to open the call for your questions. Operator?

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone to join the question queue. You will hear a tone acknowledging your request. If you are 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 then 2. Anyone who has a question may press star then 1 at this time. Our first question comes from Ramo Lencho of Barclays. Please go ahead.

Thank you, and congrats for a first quarter of the combined entity. It seems like you delivered really well here. That was also my first question, Mark. Obviously, Micro Focus had a long journey of restructuring, integrating businesses, etc., Like how has been the, what has been the experience so far in terms of what you're seeing there in terms of what your diligence showed you and what you're seeing in real life now that you kind of own the asset and are working with the asset? Any first comments, any comments there? And then I had one follow up.

Sure thing. Remo, thanks for the question and thanks for joining us today. You know, as I noted previously, we've always been very impressed with the products that the people, and the customers. And you can do all the research and the diligence and observations you want, but then once you own and operate, you then get the next level of insights. And it's just as we had planned in the diligence. We are extremely impressed with the people, the products, and the customers. And we're leading with innovation. across the board. So enterprise security, never more relevant. IDLE, just a fantastic product, highly relevant today with AI, especially combined with large language models. The movement of digital IT, ITOM into digital IT, into the cloud. So, Ramo, I would just start with it's as we had theorized and great to see in practice. just the strength of the people, the products, and the customers, and how receptive they are to a broader platform of innovation and speed of innovation.

And then the follow-up is actually, and you started mentioning it already, with IDLE and large language models. If you think about now that you own IDLE, and here you have the perfect combination because you have the content management sites, And then you have the search side with IDLE. Can you speak a little bit towards the cross-sell opportunity back into the open tech space? And then also as part of that, a little bit like how does that change with the large language models coming in? It looks like it's broadening it even further. Thank you.

Yeah, absolutely. And you hit on a lot of very important topics there. We're the market leader in content management, and we've helped 10,000 organizations over a decade, two decades, to be able to organize their enterprise information management. And we've added lots of capabilities through time. We've helped customers take that information and expose it on the web. We've helped customers add search. We've helped customers do archive and records management. We've helped... Customers do legal tech on top of that. Now we're going to help them go from not just their operational data and their experience data, but a third pillar, which is learning data. We are in such a great position to help customers with large language models. And I know chat, GBT has a lot of attention, right? And GBT standing for generative pre-trained transformers. But there are many other LLMs out there like T5. So our strategy is going to be to set up next door transactional operational platform, an LLM platform for each of our private cloud customers. And then have a connector between the two. And what IDLE does is help take some data and just video, voice, imaging, and turn it into metadata. So it's another way to get data to be useful. And then the private cloud LLM will sit next to every single private cloud customer. As I noted, we're already working deeply with a handful of customers, one in legal tech who has millions of contracts looking for risk, financial services firm who's going to augment their internal audit plans, an auto company, looking to create the next generation of service agreements. And a very interesting one, a biotech company who actually thinks they're going to transform their clinical trials through a large language model. So this is an additive. It could be top of stack growth driver for us, not just off cloud to cloud, not just moving to SaaS or climate or trust. I'm spending a lot of time on it because it could be our top growth driver in the coming quarters.

Yes, completely exciting. Thank you.

Thank you, Damon. Our next question comes from Daniel Chan of TD Cowan. Please go ahead.

Thanks. Congrats on the first quarter, Mark. Just noticing that there's a big uptick in your customer support and license revenue growth expectations. Just wondering if you could shed some color on that, whether it's from some of the early changes you've made to Micro Focus's renewals business.

Yeah. Madhu, do you want to take the question?

Yeah, sure. I can take it and pass it on to you, Mark. Dan, yes, it certainly reflects the growth coming from Micro Focus. And when you take some of the measures we've taken, yes, two months into it, as Mark mentioned, Paul Duggan's organization has done an amazing job bringing their customer support as we talked about in the last few months. And certainly continued, you know, measures from Open Tech side on the customer support, whether it's APA annual price adjustment, and you saw our renewal rate is 95% on both sides, enterprise cloud and off cloud. So, yes, you're definitely seeing all those measures, you know, come into play.

Yeah, thank you, Madhu. So it's partly given the integration with Micro Focus, open text, core open text, performing extremely well off and on cloud at 95% renewal rate. And, Dan, we're going to make steady progress on Micro Focus renewals from, you know, we started in the low 80s. We'll finish this fiscal year or this quarter, mid 80s. And we'll just look to make continuous improvement until we get into the low 90s. We can already see the confidence building with a stronger roadmap, new innovation, private cloud options. The confidence is raising. We had a fantastic week in Europe and just very deep engagement. And the stories over and over again, in-person meetings with customers saying, you've earned the right for us to stay with you and give you a really strong chance. So that's what you're seeing.

You also talked earlier about you getting some micro focus wins in the quarter. Just wondering whether these deals were in the pipeline when you acquired micro focus or whether these are new deals that entered the pipeline over the last 90 days and any update on the cross out pipeline would be great as well. Thank you.

Yeah, so the deals we closed were primarily in the pipeline, of course. We only owned the company for roughly 60 days. But the combined entity gave them a lot of confidence, as you can see in the results. We've built new pipeline, for sure. And, you know, the places that added strength inside of Q3, certainly our content services business, our business network volumes were up. But the enterprise security business is going to be a rising star for us. And also moving workloads off the mainframe to our cloud services. We're in a better position to do that than Micro Focus on their own. And the growing needs for developers and the continued transition to multi-cloud. So we'll spend more time on this in the coming quarters. But those are the areas we're certainly expecting to see very strong demand and drive the business back to constant and then to growth.

Our next question comes from Steve Enders of Citi. Please go ahead.

Hi, this is George on for Steve. Just going to echo my congratulations on a really strong start to this new journey. First question on titanium X, I think you threw out a 2.5 billion investment number, obviously a big number, but a big opportunity as well. Just could you help us understand how much, if any of that is kind of incremental spend, is there any kind of repurposing of existing resources towards this and just how we should think about that?

Yeah, for sure. Um, uh, so if we look at fiscal 24 and 25, um, We're looking at approximately $2.5 billion USD across engineering and cloud operations. We own and operate our own private cloud, our own business network, so that's an all-in investment. And looking at the combined company, as I said earlier, it wasn't so much a spend issue but a prioritization. So we have significantly reprioritized what we're doing in our first 93 days, as you can see from Enterprise World and the roadmaps that we've published. So it's mainly a reprioritization, but it's also an increase in people. So as part of our workforce restructuring, we're also increasing our people, our headcount in Canada, India, Philippines. So the combined spend we're keeping high, we've reprioritized. We're also adding more people because we're being more leveraged in how we spend those dollars.

Got it. Really helpful, Culler. And then just one follow-up. Most metrics came in, I think, well ahead of where we were at, but just wanted to dig in on was the The cloud bookings in the quarter, obviously a metric that's going to have quite a bit of fluctuation from quarter to quarter. But just if you could help us understand what you're seeing there and how we should think about that going forward.

Absolutely. So, again, as noted, we're up 9% on a trailing 12-month basis. And we're holding to our forecast of 15% plus growth for the year. But we're a constant in Q3. And that's what I'm going to do when I emphasize we're an annual business. And look, I can't say it any clearer than the following. We're going to make the best long-term decisions for the business. And it's better for OpenText, you know, not to work under the pressure of, you know, a last week or two of a quarter. So it's part of the reasons why we view our business annually. So we're going to get the best terms. work with the customers the way they need to, and use an annual boundary, not a quarterly boundary. So we're on target for a 15% plus cloud bookings growth, even though we are constant within the quarter. And we got great confidence in Q4 to deliver to that 15% plus.

Great. Thanks again, and congratulations. Thanks, George.

Our next question comes from Thanos Mostopoulos. of BMO Capital Markets. Please go ahead.

Hi, good afternoon. Mark, Micro Focus obviously performed a fair bit better than you had got it for last quarter. Just to clarify, was that primarily conservatism under prior guidance, or is there anything more specific that you would point to?

I'd point to a handful of things, Thanos. One is confidence. As I said in my notes, it's a new day. You know, customers renew and make purchasing decisions, not just for the features you have today, but where you are bringing them in the coming years. And it's why we accelerated, we did all our pre-planning and accelerated getting our roadmaps and intentionally designed to get onto the road in Europe and elsewhere to present in person that roadmap. So I'd say number one, confidence and excitement from our 25,000 employees. Look, we're also modeling, right? It's only, it's just two months, right? And we move them from two six-month cycles to our four 90-day cycles. So it's not conservativism. I would start with confidence, and we're also getting aligned to our 90-day periods, which we've now done.

Great.

And then, Danos, I'd add maybe a third, which is execute it really well. Yeah. I'm sorry, go ahead, Danos. Great.

Yeah, and then on titanium, now that you've launched it and you have public cloud for your broader suite, can you talk about how public cloud adoption is trending as you look at the pipeline? And remind us, is there any cannibalization dynamic where if a customer is going for public instead of private, you get less revenue because you're losing the infrastructure hosting piece? Or should we think of it more as being additive revenue that you may not have captured otherwise? given that you're not supporting public cloud?

Yeah, for sure. So, um, um, yeah, titanium delivered or cloud additions, 23.2 is a really important milestone for the company. ECM now has a full public SAS option. Um, so we can deliver content management off cloud public staff, cloud, private cloud, API cloud. And it's very clear that our features will outpace in public SaaS than anywhere else. But we also have now a very strong portfolio of public SaaS. I mean, SMB, completely public cloud. Business Network, completely public cloud. ECM, now completely public cloud. We did a big update to service management in the public cloud called SMACS from Micro Focus. We did a big update at the end of April for Value Edge or for developer technologies in April. Fortify on demand, available as a public SaaS option. And it's a small company, but I think a larger contributor over time called Debricked. That's part of the portfolio. So public SaaS is going to become more and more part of our narrative. It is a growth driver for sure. It's going to contribute to our 15% plus cloud bookings growth. I do not see a cannibalizing revenue. I see us going after new workloads. I see customers, when transitioning to that new workload, paying the same and or expanding capacity and increasing their consumption with us. We've never been interested in revenue substitution, right? We've always been interested in adding revenues, whether it be API or private. I think the same dynamic is going to hold for public SaaS as well.

Thanks, Mark. Congratulations, Pastor Warren. Thank you, Dennis.

Our next question comes from Paul Treber of RBC Capital Markets. Please go ahead.

Oh, thanks very much, and good afternoon. Just a follow-up question on the strength that you saw in Micro Focus. There's a five-month period between the announcement of the acquisition and the close. Was there, to a degree, a catch-up of deals, licensed deals that may have been sitting in the pipeline after the acquisition was announced and were just waiting to close and they needed that confidence of the acquisition closed to... to complete those deals? And if so, do you see that catch-up continuing into future quarters, or is it more just a one-quarter phenomenon?

Yeah, Paul, thanks for the question. I wouldn't use the terminology catch-up. There's no doubt it was confidence. It was execution. A little bit of modeling. We only had the business for 60 days. And we're aligning to our quarters. April used to be a boundary for Micro Focus, no longer is. It was end of March. July used to be a boundary, now it's end of June. And even those boundaries are becoming distant memories for the combined workforce. I'm sure there was a little bit of hesitation in there, but nothing significant that I would call out. Confidence, execution, stronger roadmap, and a very energized workforce.

That's helpful. From a forward-looking point of view in terms of your pipeline and what you're seeing upstream, How would you say, you mentioned your dashboard for Q4 is very strong. Overall, when you look maybe more broadly in terms of your pipeline, how do you see it building here, particularly in light of the macro environment, the uncertainty in macro? Is that having an impact? If so, how is it impacting that?

Yeah, I mean, every company, is my phraseology here, is observing the macro, right? Every company is doing that. When we look at our dashboard, and we run well operationally, we have a single global instance of Salesforce that we use, and lots of history, which by the way, we now pump into Vertica and other tools that we have for correlation analysis. But when we look at our dashboard of new pipe we generate, kind of our field metrics and customer dynamics, it reads the same here in early Q4 as it did in early Q3. So it's steady as it goes. Now, you know, one of the dynamics for us is going to be adding more SaaS. Our SaaS portfolio just stood up significantly with Cloud Edition 23.2 and some acceleration within ITOM, acceleration within application automation and developer automation. So I think a dynamic for us is becoming experts at building a SAS pipeline. And that's a nice new motion for us and our customers. And large language models are real. If I can maybe get that in here and talk a little more about it. This is a very real thing. Generative pre-trained transformer engines have been out there for a while. And T5 is a great open source version. There's a few other versions. Of course, ChatGPT has captured everybody's imagination. I truly feel that this is a very large item that we're going to lean all in and stand up a private platform next to every private cloud customer. Or even if you're using our public SaaS, we'll set up a private instance for you for large language models, and this too will be a driver for growth for us. And I think that will be a dynamic for us as well in our pipeline.

Great to hear. I'll pass on. Thank you, Paul.

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

Hi. Good evening. Congrats on the quarter. I just want to zoom in on the fiscal 24 target model here. It's unchanged despite the strong Q3. Just curious if you could talk a little bit about where you might have taken some conservatism in fiscal 24 and what kind of the puts and takes are as you look at the fiscal 24 target.

Yes, Stephanie Madhu here. I'll take it on and hand it over to Mark. Thanks for the questions. And look, we are leaving it unchanged for all the factors and even the prior questions that were asked. Our focus remains very strong on Q4. And Mark and I have shared with you the sentiment relating to Q4. And we'll be observing the macro. We look forward to delivering a strong Q4. And certainly, if things merit at that point of time, we'll make ads to fiscal 24 and 26, et cetera. But good news is we are keeping the fiscal 24 and 26 where it is today. And that would be my response.

The only thing I'd add, thank you, Madhu, is we have our usual cadence that when we complete the year and announce Q4 and kick off the next Q year, we'll give an update on fiscal 24. So as Madhu noted, we're holding to and reconfirming our preliminary targets of near $6 billion in revenues, 36% to 38% adjusted EBITDA, and free cash flows up to $900 million. And Steph will give a We'll give an update on next quarter's call.

Yeah, and just a couple things to add, and thank you, Mark, is to just say to the earlier questions as well. Look, our premise was to apply the strong open-text operational methodology to Micro Focus, but the returns on that premise have certainly been strong, as you can see, and that gives us a step-up confidence in how we approach Micro Focus, but a big portion of that is sort of one and done with this quarter's performance And you're only going to see continued momentum. And we are sharing from a free cash flow perspective, I will say. We have upped the target for fiscal 23. And at this point, we're sharing more color on the slide 21 I mentioned as to how the components of free cash flow plays. And as we close the year, we'll certainly come out with updates as needed.

Great. Thank you very much.

Thank you.

Once again, if you have a question, please press star, then 1. Our next question comes from Adhir Kadave of 8 Capital. Please go ahead.

Hi, guys. Let me add my congratulations to the strong quarter here. Mark, last quarter you mentioned the six markets that you're going to go after, trying to get the full stack in each of those markets. You know, I know it's only 60 days kind of into the micro-focus acquisition here, but where are you really seeing most of the, you know, most promising go-to-market motions out of those markets? I know you kind of talked about some of them, but just maybe digging deeper into where you're seeing and what's really exciting you after that.

Yeah, it's like having six beautiful children and loving every single one of them here. So let me highlight a few. No doubt that content services is cool again. And it's all about what we can now offer it any way a customer wants, including public SaaS. And the value proposition of investing in this platform. Now, there are seminal moments along the way. And, you know, the large language models is a seminal moment as to why you want to consolidate, why you want to standardize on a modern cloud content platform. So content services, absolutely top of the stack for us. Next to it continues to be enterprise, excuse me, cybersecurity. And for all the obvious reasons and all, you know, I talk a lot about in tech and sort of our tech forums about vectors of attack, whether it be the network, email, endpoints, applications, identity. And we just have a lot of optionality on cybersecurity, given we cover each of those vectors of attack and have just lots of optionality in the business. Developer, every company is a software company, and the application automation platform is very robust. And it's really going to thrive inside of our 9,000 developers in a developer mindset and bringing that to market. So I'll just highlight those three. Of course, with supply chain changes in our business network, moving workloads off the mainframe, which is just one of the worst climate platforms you could be on, we're going to benefit from moving those workloads as well. But I put content, cybersecurity, and the developer, aka application automation, top of the stack for us right now.

Excellent. Just one more and then I'll pass the line. Just maybe you've talked a lot about the large language models. Can you just give us a sense of what sort of investments it'll take for OpenText to really kind of get there and allow you to stand up this private platform for all your customers?

We've already stood it up. And the fact that we have maybe off by 100 people or so, 800, 900 people in our private cloud operation, our cloud operations, has allowed us to take T5, open source T5, and stand it up. And through our professional services organization, our cloud operations, we are open for business today to stand up that T5, any open source LLM. for customers and connect it to their private cloud. And this is a benefit of scale. It's why the private cloud was so strategic for us. It's yet another reason why we own our own professional services organization and 2,000 people inside that organization. And so, you know, within our R&D budget, we will build our connectors and our feeders, et cetera. But we already have our first platforms up and operational out here.

Excellent, guys. Congratulations again. I'll pass the line.

Thank you. Our next question comes from Richard C. of National Bank Financial. Please go ahead.

Hey, thank you. I just have one question, Mark. You talked a lot on this call about confidence here, and I'm just trying to understand, you know, maybe get more specific, like where is that confidence? It's sort of like confidence in your balance sheet and the tech and the support, like, What were Micro Focus's customers not confident on before?

Well, they weren't sure where the company was going to go. Into hands of private equity and reduced 20% expense? Were divisions going to be sold off? So customers make a decade-long decision in the enterprise. And if it's uncertain... where that platform is going to be just in 90 days or even a year, people will hesitate. So we purchased the entire company. We're operating the entire company. We publish a roadmap for each of the groups. And we have a fantastic reputation as being a steady innovator for our customers. And we share a lot of customers. So that's where the we still have a lot to do. We got to earn trust every day. But that gives us, Richard, the confidence, giving customers the confidence.

Right. And I know that was the last question, but I guess related to it. So the fact that you're kind of just let's call it not even a quarter in and be reasonable to think that that sort of confidence would actually scale. Is it kind of reasonable to think that the numbers that you're putting out there, even though you're taking the numbers up, conservative still?

Madhu has taught me never to use the word conservative, so I won't. No, look, we call it like we see it, as we always have. And our Q4 dashboard... is just as strong and consistent with our Q3 dashboard. So we're calling it like we see it right now. And thus, we've raised our F23 numbers, as you've seen. And it's not the right time to talk about F24 or three-year aspirations. We'll do that when we get into our Q4 call. So I'm delighted with bringing our revenue guidance targets up to $4.54 billion to $4.61 billion, total growth up to 32%, or 1% to 2% organic growth, cloud bookings growth of 15% plus, adjusted dividend margins up to 33.5%, and free cash flow up to $620 million. And we'll let those results speak for themselves when we deliver them.

Yeah. And Richard, I would just add, and thank you, Mark, to all the comments you heard about the aspects of integration Mark called out as done and what I called out as well. We're delighted to be where we are as a company with Micro Focus and the performance that we were able to generate, which was our premise, that we could apply an operational excellence methodology, but as we've done better than we anticipated, gives us the momentum to keep continuing it.

Okay. All right. Thank you. Operator, I think that's the last question.

Okay. Well, Harry and Madhu, thank you very, very much. And thank you, everyone, for joining today's call, and we look forward to seeing you at Needham, B of A, Barclay, CIBC. And our remarks were written by two human beings and not chat GBG. So have a great day.

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