Open Text Corporation

Welcome to the Open Text Corporation fourth 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 one on your touch-tone phone. Should anyone need assistance during the conference call, they may signal an operator by pressing star then zero on their telephone. I would now 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 fourth 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 and Corporate Development, Madhu Ranganathan. Also joining us are Todd Sione, President, Worldwide Sales, and Paul Duggan, President and Chief Customer Officer, 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 presentations 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 conferences. the Virtual Oppenheimer Technology Internet and Communications Conference on August 12th, Virtual Morgan Stanley NASDAQ Investor Asia Conference on August 20th and 21st, Deutsche Bank's Technology Conference on August 29th, and Citi's Global Technology Conference on September 5th in New York. 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's recent forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, I'm pleased to hand the call over to Mark. Thank you, Harry.

Thank you all for joining today. We kick off Fiscal 25 with the launch of OpenText 3.0 information reimagined. Simply put, our vision is to be the best information management company in the world, and our strong belief is that information elevates every individual and organization to be their best. We're very excited about our market today and the significant opportunities directly in front of us. I'll speak to our Q4 results and outlook in a moment, but I want to start today's call by clearly outlining our top priorities. First, build an even stronger competitive advantage with information management, business clouds, business AI, and business technology. Competitive advantage is everything. And information management is the center of business transformations today, led by data-driven decisions, next-gen cloud automation, foundational information security, and promising AI. Titanium X, or Cloud Editions 25.2, is on target for delivery in fiscal 25. This is our next generation autonomous cloud, strengthening our competitive advantage and the platform for information-based transformations. Second, accelerate cloud revenue growth. We delivered 7% cloud revenue growth in fiscal 24. We're targeting up to 5% organic cloud growth in fiscal 25. And with a laser focus on key growth programs, strategic partnerships, and TitaniumX, we are building to 7% to 9% organic cloud revenue growth in fiscal 27. I'll get to our growth programs in a minute. Third, drive upper quartile margins and capture the large margin opportunity we have over the next four to eight quarters. In fiscal 24, we delivered $2 billion in adjusted EBITDA dollars, or 34%, which included 10 months of ultra-high AMC adjusted EBITDA And our F25 targets are up to 34% with no AMC adjusted EBITDA. We're not pausing at 34%. We expect fiscal 26 to be in the range of 35% to 36% while investing in innovation, go-to-market, and with a higher cloud revenue mix. Our F27 targeted adjusted EBITDA range is unchanged at 36% to 38%. Our adjusted EBITDA expansion will be driven by higher revenues, including more SaaS, lower cloud costs, more cloud automation, leveraging AI internally, and locating our great talent in the right places. We have a clear path for accomplishing our margin goals. Fourth, strong and predictable capital allocation. Our capital allocation strategy is expressed as primary allocation and additional allocation. Our primary allocation is to return capital 50% of trailing 12-month free cash flows for dividends and buybacks. Our additional allocation of free cash flow, which is continuously assessed, is to allocate our additional capital to the highest return areas across dividends, buybacks, debt reduction, or M&A. We delivered free cash flows of $808 million in fiscal 24, 23% year-over-year growth, In fiscal 25, our free cash flow is expected to grow mid to high single digit, excluding our one-time tax payment from the AMC divestiture gain. Our fiscal 27 free cash flow aspirations remain unchanged at $1.2 to $1.3 billion. As our free cash flows expand, so does our capital flexibility in return. In fiscal 24, we returned $417 million to shareholders, or 52% of our free cash flow. In fiscal 25, we plan to return $570 million-plus. This is over 90% of F-25 free cash flows allocated to dividends and share repurchases because we believe this is of the highest return. In support of this plan, we announced today a new and increased NCIB program in the amount of $300 million in share repurchases, and we're also raising our annualized dividend from $1 per share to $1.05 per share or a 5% rate increase. By the end of fiscal 25, we will have returned approximately $3 billion over the last decade, including expected $1 billion return in F24 and F25 combined. We see four outcomes from these priorities. Stronger competitive advantage and cloud growth, value creation for our shareholders, an elevated bar with higher goals, and for the next three years, we expect to grow annually adjusted EBITDA, adjusted EPS, free cash flow, and our return of capital. The leadership team and company are focused on the fiscal year ahead, fiscal 25, delivering to our exciting future and implementing programs that lead to higher performance. Let me go a little deeper and speak about our talent, key growth drivers, and cloud momentum. Highest performance begins and ends with our talent of living the OpenTex business system with a relentless focus on execution. An open-texter always puts customers first, innovates, cares about people, helps teams succeed, and strives for exceptional performance. We start here because great people make great software companies, and we're attracting or attaining the next generation of great talent. We're a global and diverse organization. The majority of the company's talent is now Gen Y and Z, and 90% of our employees are outside of Canada, and our employee retention rates are at a record high of 92% plus. Today we published our annual corporate citizenship report. We believe in being a responsible and responsive company to the environment, to the communities we work and live in, and that diversity and inclusion of people and ideas are essential to innovation. Our annual corporate citizen report reflects our commitment with a practical and impactful mindset to all our stakeholders. Our leadership team is the strongest it's ever been. We have Todd Sione joining us today, President of Worldwide Sales. We have Paul Duggan joining us today, President, Chief Customer Officer. We have Madhu Raghunath, and, of course, our President, CFO, and Head of Corporate Development joining us today. Mui Mazub, our Chief Product Officer. Sandy Ono, Chief Marketing Officer. Shannon Bell recently joined us as CDO and CIO, and the rest of our highly skilled and expert team. We have the talent and next-generation mindset to be the best information management company in the world and to create a powerful future. In fiscal 24, we delivered $5.77 billion in revenues for 29% year-over-year growth, including positive organic growth. Our cloud revenues were $1.8 billion, with 7% year-over-year growth. For fiscal 25, our cloud revenue outlook is up to 5% organic growth, and total revenues between $5.3 billion to $5.4 billion are constant to 1% organic growth, XAMC. What supports our cloud revenue growth are new bookings built on the foundation of strong renewal rates and consumption expansion. Paul will speak a bit about this. In fiscal 24, we signed the largest cloud contracts in our history. Our cloud renewal rate was in the low 90s, and we delivered 701 million of new cloud bookings, or 33% year-over-year growth. Our cloud momentum continues as we expect to grow bookings 25%, in fiscal 25 higher than our previous target. On accelerating cloud revenue growth, here are the key drivers for us in fiscal 25. First is just driving expansion of our business clouds, led by content, business network, and ITOM. Customers are deeply focused on reimagining knowledge workers, consolidating their digital cores and operations, deeper value and resiliency from their supply chains, attaching new SaaS services to existing workloads, We're continuing to invest and trust global security, compliance, and industry certifications across many industries, financial services, pharma, biotech, healthcare, government, and more. Customers are beginning to seek alternatives after the recent global security events. Our partner ecosystem expansion with Microsoft, Google, SAP, Salesforce, and stronger, enricher aviator and AI use cases. Also lower cost in AI, spending in time to value with ease. For example, we're working with Robert Bosch North America to help them use aviators to connect with their data sets in whole new ways. Cloud growth, stronger execution with unified sales and field organization, higher renewal rates driven by digital renewals and expanded services. And you'll hear from Todd and Paul, as I said, just in a moment. Let me provide a few remarks on Q4 results and Q1 outlook. I'm extremely proud of what our team delivered in fiscal 24 for the long-term success of our business. On Q4, let me summarize our financial results, and Madhu will provide further detail. Total revenues was $1.36 billion. XAMC total revenue was down 4%, centered on license. Cloud grew 3%. Strong free cash flows of $145 million are up 59%. We repurchased $150 million of our shares for cancellation at an average price of $29.57. We delivered $445 million of adjusted EBITDA dollars with strong operations. And we had significant customer wins in content, in AI, Nestle, in BN in AI, Johnson & Johnson, in ITOM, Six Sensor Intelligence, in ADM, California EDD, in experience, Sutter Health. Let me highlight two important dynamics in Q4. First, our license to cloud transition continues, and you see this in our Q4 financial results, with cloud and free cash flow that are up and license down. We had great cost optimization in the quarter. Second, we had two strategic corporate programs within the quarter that required significant corporate attention, the divestiture of the AMC business and the business optimization planning, These strategic programs will have positive impact in fiscal 25 and beyond, but impacted Q4. To recap the two strategic programs that we have now concluded, closing the AMC divestiture, transitioning 750 employees, operationalizing a transition service agreement, separating out our systems and data, and discussing the transaction with thousands of customers. This was a large divestiture and the company's first, and the team executed incredibly well. Second strategic corporate program was completing the business optimization, which required precise strategic talent planning and affected about 5% of our workforce. All the planning took place in Q4, and the team executed extremely well. On Q1 outlook, we're excited about the start of the new fiscal year. Open text 3.0 launch, our healthy pipeline, our strategic corporate programs complete behind us, titanium X, and our new leadership team ready to go. And to reiterate, we manage our business annually, and quarters will vary. Our Q1 outlook has a path to growth and margin expansion. We're expecting revenues between $1.25 billion to $1.3 billion. At the higher end of our range, we are growing year-over-year XAMC. Our adjusted EBITDA range between 32% to 33%. Our adjusted EBITDA dollars are expected to grow year-over-year XAMC. Let me wrap up with a few final thoughts. We're proud of what we accomplished in fiscal 24, 29% total growth, 7% cloud growth, organic growth, $2 billion in adjusted IVA dollars, and $417 million of capital returned to shareholders. Information management competitive advantage is everything, and with TitaniumX, aviators, security, our competitive advantage grows stronger. We are excited about fiscal 25, focused on delivering to our annual targets, focused on building shareholder value through cloud growth, margin expansion, and the strongest capital return in our corporate history. We'll keep you updated on our primary and supporting metrics throughout the year. The operational improvements we deliver in fiscal 25 will put us in a position to raise the bar in fiscal 26. And again, I want to emphasize, for the next three years, year over year, we expect to grow annually, adjusted EBITDA, adjusted EPS, free cash flow, and our capital return. We thank our shareholders for their feedback and continued input. We've listened, and we believe this is a strong plan to deliver value to you and to all our stakeholders. A huge thank you to my colleagues and fellow OpenTexters for the amazing talents and contributions and to our customers for placing your trust in OpenText. And may the one that brings peace bring peace for all. Let me hand the call over To Todd Tsion, OpenText President of Worldwide Sales. Todd, welcome.