Open Text Corporation

Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation third 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, Gaylene, and good morning, everyone. Welcome to Open Tech's third quarter fiscal 2025 earnings call. With me on the call today are Open Tech's Chief Executive Officer and Chief Technology Officer, Mark Berente, and Open Tech's Executive Vice President and Chief Financial Officer, Chadwick Wesley. Today's call is being webcast live and recorded with replay available shortly thereafter. All of this is available on Open Text Investor Relations' website, which, as a reminder, is investors.opentext.com. On today's webcast, we're trying something new, and we'll have our prepared remarks coordinated with the slides from our Q3 financial results presentation. This presentation is available on the IR website to download, and please note that if you're logged in for the live webcast, you're already set up for the slideshow. I'll also point out that there are two presentations posted on our IR website, the Q3 fiscal 25 IR financial results slideshow that will be used during the call and our broader Q3 fiscal 25 investor presentation, which is posted for reference throughout the quarter and used during our investor meetings. Now turning to upcoming investor events, OpenTax will be participating in the following investor conferences. On May 8th, the Needham Technology Media and Consumer Virtual Conference, On May 20th, the Barclays Leveraged Finance Conference in Austin, Texas. On May 22nd, the CIBC Technology Conference in Toronto. May 29th, Jeffrey's Public Technology Conference in Newport Coast, California. And the BMO Bank of Montreal Virtual Software Conference on June 9th. Finally, back in Toronto on June 12th for the RBC Technology Internet Media and Telecommunications Symposium. It will be a busy quarter. We look forward to meeting with you. And now for the reading of our Safe Harbor Statement. During this call, we'll be making 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 open text recent forms 10K and 10Q, as well as in our press release that was distributed last night. Each of these can be found on our IR 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, and 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 also available on our website. And with that, I'll hand the call over to Mark.

Thank you, Greg, and good morning, and welcome, everyone, to our Q3 earnings call. There are three key areas I plan to cover this morning. First, I want to refresh our listeners on why OpenText is so distinct. Designed to perform across business cycles, it is critically significant to organizations across industries and geographies. There may be external factors we cannot control that makes revenue harder to forecast, but we intend to perform in the areas we do control, like EBITDA, earnings, free cash flow, and capital return. Secondly, I'll take you through some important product, customer, and financial updates for the quarter, as well as my perspective on market volatility and how OpenText is positioned to help our customers create value through this deep uncertainty. This includes discussing the transformative expansion of our business optimization plan, which is led by AI First. Third, I'll confirm progress on our three strategic priorities, including competitive advantage, total revenue growth, and operational excellence. Our differentiation is getting stronger through AI first, and this will help lead us to upper quartile returns. Before I start, I'd like to thank Madhu for the seven years of service to OpenText and for the transition over the last few months. All the best in her continued journey. Let me formally welcome our new CFO and business partner, Chadwick Westlake. Chadwick joined us from publicly traded EQ Bank in Canada. And as you know, he is an outstanding executive and was just recognized as one of this year's best executives in Canada by the Globe and Mail. The leadership team and I look forward to working with him as we bring OpenText to its next level of performance and value potential. Chadwick will speak to the highlights of the quarter here shortly. Let me jump right in. OpenText will celebrate its 35th anniversary this summer. and our potential remains limitless. By choice and origin, we are proudly Canadian, helping the world's largest organizations deliver products and services that benefit the lives of hundreds of millions of people every day across the world from Canada. At our core, OpenText is an information management company. We've empowered the knowledge worker over the last three decades, and now we are creating the digital knowledge worker of the future. We operate a portfolio of cloud products centered on enterprise content and process automation, securing and integrating that content across business applications and business networks, delivering exceptional services to the users of that content, and doing this at scale. We are now redefining the value of that information through our new AI platform, Aviator. Our ability is unmatched to solve global and strategic problems for our customers, by universally linking information, agnostic to platform or infrastructure or language model or information format. We have always centered on building lifetime value for our customers through a raison d'etre of we always deliver. No one else can do what we do. This is the key to our resilience. Our capabilities are far-reaching. Open text is likely part of your daily life, and you may not even realize it. For example, where did you get your milk or breakfast? Where did you get your milk this morning to put in your coffee or your breakfast? Did you read the morning newspaper using cellular data? How did you process family payments? Did you stop for gas? Did you see a doctor or take medicine? Or as simple as turning on your lights, turning on your TV, or watching a streaming movie while the National Hockey League. OpenText is the platform behind the scenes for the brands that you trust every day, making all of this work. It is important for our investors to understand that we allocate capital to deliver the best value. We are both an offensive and defensive investment opportunity in Canadian technology, with significant reasons to hold, buy, and buy more of our stock. The team is excited about winning in F26. With a new product cycle relevant to strategic needs of cloud security and AI, We are an AI-led organization with a transformative business optimization plan. The external distractions of XAMC, DXC, XRoyalty are now behind us this quarter and a clear return to capital flexibility, as you can see from our cash flow engine and our cash flow results in Q3. You can expect us to resume our traditional programmatic approach to growth through tuck-in acquisitions when they align with our strategic priorities. We'll also carry out programmatic divestitures when that is the best opportunity to monetize long-term returns for mature products. Our primary use of capital is approximately 50% of free cash flow to dividends and buybacks, and as free cash flow grows, so should our capital return. But also please recall, when we introduced this, we also said we will remain flexible and allocate our capital to the highest return scenario that is in front of us. Expect us to continue to allocate capital in a flexible manner, but always to the highest return. Bottom line, our total shareholder return proposition keeps getting stronger. Before I get into the quarter highlights, I want to speak about the market volatility. You may have heard other companies talk about two demand scenarios and thus two outlooks, and some companies are even pulling guidance. You are all very aware of what is happening, and let me add our color to recent events. There was clearly a demand shock in the second half of fiscal Q3, driven by the sudden announcements of tariffs, which then became rolling tariffs. There was so much tariff information for our customers to understand, and some of that information quite candidly was reliable and some of it was not. We are seeing our customers move beyond these disappointments and disbelief to now taking control. They are continuing with their strategic priorities, even if in some cases reduced significantly. near-term spend, even in some cases, reducing near-term spend. I'd like to highlight an important positive trend that we are seeing where customers are looking to deploy in local clouds while reducing the dependencies on U.S. technology. This introduces new opportunities for open text given our Canadian roots and local presence in key regions around the world. Further, customers are continuing the consolidation to the cloud, creating programs to gain more efficiency, and doing this through information management, AI, and new digital workers. Our digital worker approach is resonating. Let AI and machines do the work. This is a low-cost and limited workforce that will benefit all organizations in all industries. As we demonstrated at Open Tech Summits in Europe a few weeks ago, with our new cloud additions, AI Aviators and My Aviator, we can take human tasks that require dozens of screens and work and days of work and reduce that down to a dialog box in minutes. In summary, no one can predict how long the volatility will last, but we are well positioned to help organizations reposition globally, deploy locally in our private and sovereign clouds, and gain extreme efficiency through deploying a new digital workforce using our AI. Shifting to our Q3. In a normal world, we were fully expecting to deliver to our business plan and revenue range of $1.26 billion to $1.3 billion But given the large volatility, we did not meet our expectations on revenue and new bookings, and we ended up 50 basis points below our target range. Once tariffs were announced, including 25% auto tariffs, as well as U.S. government spending cutbacks, customers paused to assess the impact on their businesses, and our book of business was disrupted in the range of $40 to $50 million. During COVID, we saw impact on travel, transportation, retail, and it all came back. And this disruption, we are seeing impact in auto, materials, energy, government, and some retail, and it too will come back. With that said, we executed extremely well in our operations across adjusted EBITDA, adjusted EPS, free cash flow, and our share of purchase program. In Q3, XAMC, and in constant currency, we delivered $1.27 billion of total revenues, down 2.9%, down 1% when factoring in IP rights and DXC. New cloud bookings were $151 million, down 8% due to the demand disruption. We expect to show Q4 growth in enterprise cloud bookings and for the fiscal year. Bookings growth in Q4 is unlikely to be enough to get us to our 20% to 25% annual target. Rather, we expect the fiscal year to be in the mid-teens for growth. I will continue to encourage investors to focus on RPO and CRPO as the most effective go-forward metrics. as these will have more clear benefit with year-over-year metrics as of Q4. As I noted up front, while we may not be able to predict the headlines in the coming weeks and months, we will control well that which we can't control, including EBITDA, earnings-free cash flow, and capital return. Looking at Q3, positively within the quarter, cloud revenues grew 3% year-over-year in constant currency, our 17th consecutive quarter of organic growth. Adjusted EBITDA was strong at 395 million, or 31.5% margin, up year-over-year, excluding AMC. Adjusted EPS was 83 cents in constant currency, up year-over-year, excluding AMC. We had record-free cash flow of 374 million, up 7% year-over-year. We scaled our repurchase program by 50% in the quarter. We repurchased and retired 4.4 million shares for 115 million, for total outstanding shares for approximately 260 million, the lowest since September of 2016, and cash ended up at nearly $1.23 billion. Q3 was a strong product and customer quarter. Customer wins included ABN Amro for application security, Forneri International for digital commerce, Japan Topaco for application automation, the U.S. Air Force for secure identity, and Pacific Life for digital information management. These wins were led by our next-generation cloud platform, TitaniumX, where we are winning with AI first, our business cloud suites, our new security technology for identity protection and threat detection and response. TitaniumX with AI is now delivered, launched last month from our European Customer Summit, and this is a game changer for us. Combined with our business cloud suites, we can help customers make faster and more accurate decisions, deliver a step change in productivity, and simplify multi-cloud complexity. We have a very ambitious multi-quarter roadmap leading with AI First, and every customer is an opportunity to upgrade and expand with TitaniumX. Let me turn to our expanded business optimization plan, which we announced today as outlined on slide 13, where AI First is now the central part of our corporate DNA and culture. New hires must have AI skills. AI will be part of our performance and talent reviews. AI is now turned on in various forms for all our employees to use. and we will only hire new talent where the work cannot be done by AI. We are using AI in engineering, support, professional services, and sales, and for the general knowledge worker. We have progressed so rapidly with AI, we can now see the path to a significant reset in our cost structure through our expanded plan and other related initiatives. We expect the new annualized savings to be up to $400 million, including an incremental net reduction of 1,600 employees And when combined with what we have previously announced and actioned, this is a total annualized savings of $490 million to $550 million and a net reduction of 2,000 employees when fully implemented. Approximately 50% of the new savings are to be realized in fiscal 26, with the remaining benefit to be realized in fiscal 27. This is transformative and strategically aligned to our AI-first culture and initiatives. We'll provide more clarity on this in Q4, conjunctive with our F26 targets, including what to expect in margin improvement, reflective of the initiatives and our scaling investments, and innovation and growth. Let me turn to Outlook. Let me speak to our F25 targets. Look, the easiest thing we could do is say there's so much volatility, we are pulling our guidance. But we have a job to do, and our job is to respond to whatever is thrown at us. We are not changing our adjusted EBITDA, free cash flow, and capital return targets. In fact, we're going to work harder to get to the high end of our free cash flow ranges. In a normal world, we would be holding to our previous revenue targets. However, with the volatility, it is not possible to fully predict total revenue, and we could be below the current low end of our range. So we think it's prudent to communicate an F25 revenue target of $5.1 to $5.17 billion versus the previous range of $5.17 billion to $5.27 billion. If we do better, that is upside to the range. This approach reflects our ability to manage earnings across business cycles like we did in COVID. Let me wrap up my prepared remarks by going a little deeper in our three strategic priorities and why these remain as constant priorities. First, increasing our competitive advantage through our new product cycle and leading with AI first business cloud suites, and new security. We can see the momentum from industry analysts, customer engagement, pipeline expansion, customer and partner wins, coupled with the market timing for consolidation, efficiency gains, local deployments, enabling a new digital workforce. This is how organizations win. Second, our priority on total revenue growth. Our narrative is AI first, no longer XAMC. We're entering an exciting new product cycle, as noted, entering new market areas such as security, and we have completed seller excellence training across our sales force. And for the first time, and with TitaniumX, partners are now allowed and enabled to sell our cloud offerings, and we have new clear capital flexibility. Our strategic partners across SAP and Hyperskills keep getting stronger. Customers are getting control in a time of disruption. We are seeing high renewal rates in our cloud and off-cloud, and cloud rates were up 100 pips quarter over quarter. Third on our strategic focus is operational excellence, which means upper quartile margins, free cash flow, earnings, and capital return. With the transformative expansion of our business optimization, we're confident that we can generate more profits from higher revenues by lowering our cost curve and setting a new milestone level of free cash flow generation over the next couple of years.