Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation second quarter fiscal 2025 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, they may signal an operator by pressing star, then zero. I would now like to turn the conference over to Greg Secord, Head of Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to Open Tech's second quarter fiscal 2025 earnings call. With me on the call today are Open Tech's Chief Executive Officer and Chief Technology Officer, Mark J. Baranchay. Open Text President, Chief Financial Officer, and Leader of Corporate Development, Madhu Ranganathan. And joining us for today's Q&A session are Open Text President, Worldwide Sales, Todd Sione, and Open Text President and Chief Customer Officer, Paul Duggan. Duggan, excuse me. Today's call is being webcast live and recorded with a replay available shortly thereafter on the Open Text Investor Relations website, which is investors.opentex.com. Earlier today, we posted a press release on our website, including our investor presentation, a supplemental RPO disclosure, and all of those are available on the Open Text Investor Relations website. Open Text will be participating in the following upcoming investor conferences, Susquehanna Financial Group on February 28th, which is a virtual conference, Morgan Stanley Technology Conference on March 3rd in San Francisco, where I'll be joined by Madhu, and the Scotiabank Telecom Media and Technology Conference on Wednesday, March 5th in Toronto. I'll also be joined by Madhu. And now, on to the reading of our Safe Harbour Statement. During this call, we will be making forward-looking statements relating to the future performance of OpenText. These statements are based on the 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 today and may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. 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, again, are available on our website. And with that, I'll hand the call over to Mark.

Thank you, Greg, and welcome to our Q2 earnings call. Since the Micro Focus acquisition in the AMC divestiture, I've been focused on getting our business model right and building a solid operating foundation to support our full growth potential. Post-AMC divestiture, our number one priority was margin. And with our first half performance and strong Q2 operating results, we've delivered. Now we're ready to make growth our new number one priority. Today I'm going to provide insight into our large growth opportunity, outline some of our challenges that are in focused areas, provide insight into our revised F25 outlook as well, provide expanded and new insights into RPO and cloud CRPO, and overall, you will notice a new style and approach to communications today. We look forward to your continued feedback as we build the market-leading information management company. In Q2, we delivered $501 million of adjusted EBITDA dollars, or 37.6% adjusted EBITDA margin, $307 million of free cash flow, $1.11 of adjusted EPS. Each of these metrics up significantly, excluding AMC. We grow a quarter-over-quarter cash to $1.12 billion. And within the quarter, we purchased and retired 2.2 million shares at an average price of $29.82. And over the last three quarters, we deployed approximately $300 million in cash and purchased and retired 10 million shares at an average price of $30.30 USD. Expect us to continue to implement our current buyback program and reduce our shares outstanding. On revenue, we delivered $1.33 billion, down 4.9%, excluding AMC. Cloud revenues grew 2.7%, and we closed $250 million of new cloud contract value. This is a record quarter of customer demand for cloud and new bookings, with 6.1% year-over-year growth. Further, in January, We completed the significant transition services agreement with Rocket Software related to our $2.28 billion acquisition of AMC, which has closed last year in May of 2024. I'm proud of the team for their amazing work over the last eight months as they performed with excellence and professionalism. The divestiture was complex and time-consuming. It is now complete, and we have a new corporate muscle. These are all important contributors to our long-term success, but let me be clear. We are steadfastly focused on our growth performance as our new number one priority. Q2 reaffirms that the world's most trusted companies trust open text. As demonstrated by new wins at Bosch for legal tech, STMicro for the developer, BASF using our business network for global supply chain, Novo Nordisk for observability and service management, and GWC Qatar for content. We went for three core reasons. We are the experts in information management, provide exceptional transformative value to our customers. We always deliver and a compelling roadmap across our market areas, inclusive of cloud security and AI. Let me turn to our growth opportunity. We're surrounded with opportunity. And we're focused on intelligently growing our business and driving higher profits from these higher revenues. Returning to organic growth will happen in three steps. First, total company growth. Second, cloud grows faster. And three, maintenance grows. Let me walk through our top growth opportunities in key areas we are looking to outperform in. The first is in our install base. We have a marquee install base with 120,000 enterprise customers. We will complete next quarter the delivery of TitaniumX or Cloud Editions 25.2. We view each customer as an opportunity to upgrade to TitaniumX. We expect to upgrade customers in place, upgrade them to the cloud, and expand capabilities wherever they run their workflows. If they choose not to upgrade, their support fees will gradually rise over time. This is a multi-year opportunity for us in our install base. Next, we have a hot hand with content and AI, that creates intelligent content management, secure collaboration, and automated workflows. SaaS and AI are core drivers to continue our growth in this key category where we look to outperform. We had large SaaS wins last quarter at SAP, BASF, Aldi, and Munich REIT. The third is investing in our security business to be a top category for OpenText. Mui Mazoub has taken on a new role to solely focus on security. Our new security cloud spans identity, applications, networks, forensics, and soon XDR. This is our ability to ingest, detect, and respond on a massively scaled Vertica database, combined with our new partnership with Microsoft Security Copilot and all hosted on Azure, puts us in a key position to win in XDR. We had amazing SaaS wins in the quarter. Nestle and Fortify, code level security, CrossBank and Voltage, transaction encryption, and Capgemini for identity management. We have turned around the micro-focused security business. Our growth strategy also means embedding AI everywhere to empower knowledge workers to significantly raise their productivity. With TitaniumX, we will have in market 15 aviators and over 100 agents. Beyond TitaniumX, we are working on a GenTech AI across all our product lines to create a new type of corporate worker called a digital worker. Aviators work with TitaniumX, so the next wave for AI is upgrading customers to TitaniumX. We are also still very much in the license business. This is a meaningful mechanism for customers to own, not subscribe, to our information management capabilities. I'll speak in a moment to the grants of certain IP rights from last year. Excluding these grants from last year, our licensed business will grow this fiscal year. We introduced in January a new mechanism for customers to own our technology via a license. We call it the OpenPath Pella, a perpetual end-user license agreement. The OpenText Pella is an uplift on existing license and maintenance, allowing the customer to remove limits on their usage while in active support. In addition, these customers gain cloud credits for future consumption thus providing an additional incentive to purchase the open pass. License and maintenance growth are intrinsically related. It's important to note that while a core maintenance business continues to return impressive results, the ITOM and ADM areas are not growing this year due to the license performance. With this, our total maintenance revenue growth rate will be negative this year. Our return to total maintenance growth is centered on three programs, continued execution on APA and premium services, two, sell more licenses, including ITOM and ADM and OpenPass, and three, new advanced customer services or ACS. We are focused on growth. We will return to growth, and we will update you on our year-end call. Paul Duggan is on the call today to answer any questions you may have about our growth plans and the next steps in the business. Our next top growth opportunity is getting our ADM and ITOM businesses performing better, get them to their best, including their cloud growth. These areas have been holding back our growth and impacting our license and maintenance revenues, as noted above. Our new Chief Product Officer, 78Berry, who rejoins OpenText from Ericsson and Vonage, will be laser-focused here. Let me walk you through our actions and confidence in returning these two groups to overall growth. On ITOM, with TitaniumX, we are differentiated in observability, which includes discovery, assets, vulnerabilities, and IT service management, where we're expanding corporate service management. We plan to relaunch and reengage our 5,000 customers with our new observability cloud and our new service management cloud, conjunctive with ramping sales, go-to-market, and professional services. The next leg of ITOM growth will be driven by expanding outside of traditional IT workflows into employee workflows, customer and industry workflows, and the merging of IT and operational workflows. On the ADM side, we have reoriented our go-to-market strategy as a top-of-market focus. ADM is differentiated not for a single developer, but for large-scale organizations who are writing software. This is a really good place to be, as we are all software companies today. Our top industry focus includes software and cloud companies, financial services, auto, telecommunications, biotech, and more. With this new strategy and with TitaniumX, we have two key SaaS wins already in Q2 at Pfizer and Lilly. I am confident we'll return to growth with TitaniumX, SaaS, AI, and our top of market focus. We're also live internally across 10,000 engineers. for requirements management, productivity insight, lease management, and quality. We took all our requirements and put them in the product, and now that's part of TitaniumX. I find when you can run the software yourself and gain value, you build strong momentum from there. Next growth opportunity continues to be with our hyperscale of partners who play an expanded role in our cloud growth. Real simple, Microsoft. We've decided to bring our XDR to market on Azure, and integrate it with Microsoft Security Co-Pilot. Our new SaaS platform and our new sovereign capabilities run on GCP. Our private cloud runs across all the hyperscalers for customer choice with AWS, GCP, and Azure. Our SAP products run in the SAP cloud and across all hyperscalers. And as I said at Open Techs World, we make multi-cloud work, and these partnerships will contribute markedly. And finally, in addition to all these organic programs, we will continue to evaluate strategic opportunities to create value and or increase our growth rate through divestitures or combinations. Let me turn to RPO. With growth as our new number one priority, I want to present our new RPO disclosures and new cloud CRPO metric that will provide insight into our cloud growth over time. There are two strategic points I'd like to make, and then Madhu will go into detail. First, we are now providing further insight into RPO, both for cloud and maintenance, both current and non-current. As you can see from ending Q2, cloud RPO was $2.3 billion and larger than our maintenance RPO at $1.8 billion. Please note this is now for the entirety of our cloud business and fully includes Enterprise and SMB. There's no more asterisks on our disclosure, including this, not including this. This is our full cloud business. Second, we're also introducing a new metric, Cloud CRPO, and what flows in and what flows out, and a common sense formula to calculate the change in Cloud CRPO from a beginning period to an ending period. We also include an example contract waterfall We designed our disclosure after viewing market-leading cloud companies, including SAP and Salesforce. And of course, we welcome your continued feedback to improve even more. Now, we're also including periods ending June 30th, 24, September 30th, 24, December 31st, 24. And we'll provide these new disclosures every quarter going forward. And when we complete this fiscal year, you can then begin to gain further insight by tracking year-over-year cloud CRPO compares and growth. So we thought it was a good time to provide a deeper insight into RPO. Let me move on to our financial targets and turn to our updated F25 targets. We're revising our revenue downward by $130 million to a range of $5.17 billion to $5.27 billion. The $130 million is broken out approximately 25% FX, 25% DXC impacting license and maintenance, and 50% from ITOM and ADM performance impacting license and maintenance. And we added a slide nine to our investor presentation to provide detailed insight into the $130 million. Now, conjunctive with this, our cloud revenue range is unchanged. Our adjusted EBITDA percent target is unchanged. Our new cloud bookings growth range is 20% to 25%, representing a very strong second half and momentum into 26. We're raising our free cash flow range to 600 to 650 million. We're on track to delivering 570 million plus of record capital return to shareholders this year through dividends and buybacks. And our F26 and longer-term aspirations remain unchanged. And our next update on our longer-term view will be on our year-end calls. Like all businesses, we're monitoring the impacts of tariffs, currency, and the transactional nature of U.S. policy. All of these items are creating some business uncertainty. Let me turn to DXE for a moment. It's well chronicled that HP, DXE, and Micro Focus had a strategic relationship where DXE was a major reseller and consumer of HPE and Micro Focus software. During Q2, the long-life Micro Focus Alliance agreement with DXC has now run its course. And that reflects the end of an unlimited deployment model with DXC in Q2. And we did not come to a mutually beneficial new agreement. This ending is the best outcome and the long one for OpenText, as we're able to establish now full value for our software, engage customers directly. However, in the near term, it creates some headwinds for renewals and maintenance revenue in the second half of the year. second half of fiscal 25. More importantly, it positions us for success in 26, which is growth. DXC remains a partner, and we hope to build a forward-looking partnership from here. As we discussed during our last earnings call, Q2 and F25 are difficult year-over-year comparisons. Please recall in fiscal 24, we disclosed license revenue primarily from inclusion of micro-focus and grants of certain IP rights, This was particularly called out within Q2 and Q3 of last year. I want to give a really important perspective here, really important. When you're looking at the core health of our business and the foundation we are building on for growth as our new number one priority, excluding AMC, excluding licensed revenue from grants of certain IP rights, excluding the FX impacts, our F25 year-over-year revenue growth would be constant, not declining. And excluding the second half DXE impact would be growing. And further, and very important, we expect the company to return to bright line organic growth in Q4. Hope you find this insight helpful. Let me wrap up with some qualitative comments as we look over the remainder of fiscal 25. Post-AMC divestiture, margin was clearly our number one priority. With our first half results and our Q2 delivery, we have delivered. Now that we've delivered, we're setting a new number one priority, which is growth. We have our business model right and our operating foundation strong, and with a Q2 adjusted EBITDA of 37.6%, 307 million free cash flow, and raising our free cash flow outlook for the year. Our growth challenges are in focused areas, and we have a clear plan to resolve them in the short term with a more focused leadership team. We expect Q4 to have bright-line total revenue growth, and this sets us up for a successful F26. We're excited about the opportunity of growth in TitaniumX, content, security, AI, SaaS, getting ITOM and ADM to its best, improved sales execution, open pass for license, advanced customer services for maintenance, all expanding our competitive advantage. I'd also like to note that near 60% of our business is in the U.S. And the new administration is focused on pro-growth initiatives and investments like SMB and expanding manufacturing. We're excited about these pro-growth opportunities ahead of us in the United States. Growth plus competitive advantage plus margin and free cash flow expansion plus capital return is the open text formula for creating exceptional shareholder value. You asked for more transparency into the exceptional items in our cloud, so I hope you find the deeper insights helpful today. you have my full commitment to continue this style of communication. So let me end with, we're making progress, the leadership team is focused, and we will not rest nor will we be satisfied until we deliver total growth, cloud growing faster, and back to maintenance growth. So with that, let me turn the call over to Madhu.