Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the OpenSex Corporation third quarter fiscal 2024 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 analyst Q&A session. To join the question queue, simply press star then 1 on your touchtone phone. Should anyone need assistance during the conference call, naming signal and operator by pressing star, then zero on your telephone. I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to Open Tech's third quarter fiscal 2024 earnings call. With me on the call today are Open Tech's Chief Executive Officer and Chief Technology Officer, Mark J. Baranchay, and Open Tech's President, Chief Financial Officer in Corporate Development, 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, investors.opentex.com. I'm pleased to inform you that Open Text Management will be participating at the following upcoming conferences. Needham Technology Media and Consumer Conference on May 14th in New York, Barclays Leverage Finance Conference on May 21st in Austin, CIBC Technology and Innovation Conference on May 22nd in Toronto, Jefferies Software Conference on May 30th in Newport Coast, and Bank of America Global Tech Conference on June 6th in San Francisco. And now on to our Safe Harbor Statement. During this call, we will make forward-looking statements relating to the future performance of OpenText. These statements are based on current expectations, assumptions, and other material factors that are subject to risks and uncertainties, and actual results could differ materially from the forward-looking statements made today. Additional information about the material factors that could cause actual results to differ materially from such forward-looking statements, as well as risk factors that may impact future performance results of OpenText, are contained in OpenText recent forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most direct comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, I'm pleased to hand the call over to Mark.

Thank you, Harry, and welcome to today's call. Let me kick off the call with a statement. The strategic value of OpenText to our customers has never been higher. We continue to build cloud momentum with our business clouds, business AI, and business technology. And we see proof points of this as evidenced by our continued strength with large, multi-year cloud contracts and our upward revisions in future cloud bookings expectations. And with the AMC divestiture now complete, we have increased our capital flexibility to accelerate growth in the $200 billion information management addressable market. Long-term, we expect our business to deliver mid-single-digit total revenue growth through a balanced approach of cloud-led organic growth plus M&A comprised of 20% plus enterprise cloud bookings growth, 7% to 9% organic cloud growth, 2% to 4% total organic growth, and 1% to 2% M&A growth. Powerful cash flows at 20% plus of revenues and a new return of capital framework comprised of 50% of trailing 12-month free cash flows returned to shareholders in the form of dividends and share buybacks and 50% for Cloud M&A. And to jumpstart this new return of capital program, we are announcing today a $250 million share buyback over the next 12 months and our intention to return $450 to $500 million of capital to shareholders in fiscal 25. Let's get started. You'll see in our investor deck today our four-point strategy to building shareholder value. Point one of the strategy is to continue to live the OpenText business system with a relentless focus on execution. Simply said, an open texter always puts customers first, innovates, cares about people, and strives for exceptional performance. Our culture sets us apart. Point two, accelerate cloud growth. Our strategy to accelerate cloud growth is working. We've increased our R&D investment to an annualized 900 million, or 16% of fiscal 24 revenue, This helped drive enterprise cloud bookings growth of 63% in Q2 and 53% in Q3. We've increased our F24 enterprise cloud bookings targets to 33% to 38%, and we're confidently projecting 20% plus cloud bookings growth in both F25 and beyond, up from prior targets of 15%. We expect our cloud revenue organic growth to reach between 7% and 9% by fiscal 27%. And the best part is we're just getting started in our AI and security journey. The OpenText cloud opportunity continues to expand across our business clouds, business AI, and business technology. We are well aligned to Gartner and customer spending priorities in cyber, information security, data, cloud platforms, and AI. We're focused on winning more workloads for knowledge workers, business networks, customer experience, and digital operations. We're helping customers build and own their own capabilities in the private and public cloud, and to do so securely. We're unlocking new developer opportunities in large-scale software companies. And let's understand it, we're all software companies today, and we're rapidly adding IoT and AI capabilities. We see two huge opportunities in AI. First, to help our large install base of customers prepare their operations and data through systems consolidations to our cloud editions, and second, to grow our aviator and thrust offerings. We officially introduced TitaniumX at OpenText World Europe a couple weeks ago, our next-generation autonomous cloud. We demonstrated our latest aviator technology with cloud editions 24.2. We made business AI as easy as pressing a button. And we made clear the step function and productivity a knowledge worker can gain with learning models applied to information management. Customer and analyst feedback is extremely positive, and while many customers are still researching and piloting, Aviator is helping us win now. We have unique capabilities to move enterprises into actionable business AI use cases to securely exploit both unstructured and structured data and accelerate customer value through partnerships like SAP, Google, and Microsoft. Consider Pick and Pay, leveraging DevOps Aviator for scaling testing and quality. A leading global apparel company accelerating invoice intelligence with Content Aviator. Zurich Airport, leveraging our SaaS service management and universal discovery in the cloud. Please watch on OpenText.com the recap of our OpenText World Europe. where I demonstrated OpenText Content Cloud 24.2 with Content and Search Aviator, running the United States National Transportation Security Board data archive. It shows the power of automation plus AI, providing clear and bankable productivity gains for any knowledge worker. You can also hear directly from our customers of Nationwide, Carl Zeiss, Uniper, Fratome, and Critio at the event. Point three of our four-point strategy, powerful free cash flow generation. We are targeting an F24 free cash flow of $725 million to $800 million, and our medium-term aspiration by fiscal 27 of $1.2 billion to $1.3 billion, or 20% plus of free cash flow as a percent of revenue. We expect to achieve these higher free cash flow aspirations through a series of actions, adjusted EBITDA margin expansion, From a technology-enabled business through leveraging our data, automation, and AI, we are just getting started in deploying AI internally. Completing or micro-focused integration expense, lower special charges over time, lower interest charges, and potentially lower rates over time. It is a combination of margin expansion, more technology enablement, elimination of integration expense, and a reduction in interest burden that is the path to our free cash flow aspirations. Point four, disciplined capital allocation. We expect to pay down our debt on May 6th by $2 billion, and with our net leverage ratio now below 3x, we are increasing our return of capital to shareholders by introducing a $250 million buyback and reentering the M&A market with a new framework that is future-oriented while leveraging the best parts of our operational disciplines. You will see in our investor presentation today our capital allocation strategy comprised of two elements, primary and additional allocation. For the primary, we intend to allocate 50% of our trailing 12-month free cash flow to dividends and buybacks. We have a strong dividend track record, as you know, returning $1.9 billion over the last decade. I'm now pleased to add a buyback program to that return strategy. As noted, our target is 50% of trailing 12-month free cash flow allocation, and we're going to start higher with a $250 million buyback, and we intend to return again between $450 to $500 million to shareholders in fiscal 25. For the additional part, we intend to allocate the other 50% of trailing 12-month free cash flows to cloud-based M&A. Further, we are excited about the M&A opportunity for information management in the cloud. for higher recurring revenues. We intend to cast a wide net across information management for established technologies with proven customer value propositions. We're looking for small to medium-sized cloud companies that will benefit from our business system, general operations, benefit from our distribution, and benefit from our multi-billion dollar cloud foundation and cloud operations. We'll always seek value in organic growth. You can expect us to complete multiple M&A transactions in the coming year while growing organically. Let me turn to our financials and our medium-term aspirations. For Q3, our results reflect strong execution and strong customer trust. On cloud bookings, $165 million, up 53% year-over-year. We more than doubled our $1 million-plus wins year-over-year from 13 to 28%. Average cloud deal size is up 30%. Contract terms are longer. Customers are increasing their commitments for long-term durations with ramps to full value. Our investment is also up to fuel that growth, to get customers ramped, and to introduce new capabilities like AI and IoT. We have total revenues of $1.4 billion, up 16% year-over-year. We ended cash of $1.1 billion and free cash flow of $348 million, up 14%, and just had fantastic wins at Akamai, Nestle, Shell, Tyson Foods, BAE Systems, and Mon. Recall, we're an annual business, and for a full fiscal of 24, our targets include cloud bookings growth between 33% to 38%, 6% to 8% cloud growth, total revenues between $5.75 5.745 billion to 5.795 billion, and free cash flows between 725 million to 800 million, up from 655 million last year. Today, we're also presenting preliminary F25 targets and subject to change. These preliminary targets are without the AMC business. We're expecting enterprise bookings of 20% plus, cloud revenues of up to 1.9 billion, Total revenues between $5.3 and $5.4 billion. Free cash flows between $575 million to $650 million, which includes, really important, which includes a one-time $250 million tax payment for the AMC divestiture. Excluding our tax payment from divestiture, our free cash flow would be growing again year over year. And we do want to talk more about this. And again, a return of capital between $450 to $500 million. We're excited about our cloud business, cloud additions, TitaniumX, our next-generation autonomous cloud, security, SaaS, and aviators. Our cloud bookings are strong and growing faster than the market, and it's a leading indicator of our cloud momentum. We're also maintaining our medium-term aspirations, but moving them from 26 to 27. Why? Customers are trending more and more to sign larger contracts with longer-term commitments of four plus years that also include ramps. This is driven by industry trends and our strong multi-year roadmap of capabilities. This is positive news. Customers are increasing their commitments to OpenText for longer durations. You also see this positive trend from other cloud providers such as SAP, Google, Microsoft, and AWS, our most important partners. Our F27 aspirations include enterprise cloud bookings of 20% plus, total revenues of 5.7 to 5.9 billion, cloud organic growth of 7 to 9%, total organic growth 2 to 4%, adjusted EBITDA of 36 to 38%, and free cash flow between 1.2 and 1.3 billion, reflecting strong continuous growth. And M&A will contribute to these aspirations. Well, let me wrap up and thank you for joining today. And let me conclude my remarks where I started. The strategic value of OpenText to our customers have never been higher. We're increasingly confident about our business, our ability to grow in the cloud and produce higher profits from these higher revenues. And that's reflected in our increased visibility today that we are providing. To recap, OpenText has a highly attractive financial model, with a predictable, resilient, and growing revenue stream, upper-quantile adjusted EBITDA margins, and growing free cash flows and a very strong balance sheet. Our four-point strategy is designed to build shareholder value and to create a long-term recurring revenue and highly profitable business model, and we're excited to reduce our debt by $2 billion, execute to a $250 million buyback and a new return of capital strategy, return to M&A, and deliver a stellar F24 of 6% to 8% cloud growth. I want to express my deepest appreciation to the entire OpenText executive team and my colleagues for always putting customers first, innovating, caring about people, and for their exceptional performance. I'm delighted to welcome Todd Sione, President of Worldwide Sales, responsible for all new sales. Let me congratulate Paul Duggan, President and Chief Customer Officer, responsible for all renewals, professional services, and support, and to Madhu Raghunathan, president and CFO, responsible for finance, operations, and corporate development. Please visit OpenTex.com to read about our exceptional leadership team, ready for the next growth chapter in our business clouds, business AI, and business technology. May the one that brings peace bring peace for all. Let me turn the call over to Madhu, but before I do, I want to wish Madhu a very happy birthday today. Madhu?