Open Text - Q4 2023

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Fourth 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 will be an opportunity to ask questions. To join the question queue, simply press star, then one on your touchtone phone. Should anyone need assistance during the conference call, please siG&Al an operator by pressing star and zero on your telephone. I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead.

Harry Blount (Senior VP of Investor Relations)

Good afternoon, everyone, and welcome to OpenText Fourth Quarter Fiscal 2023 Earnings Call. With me on the call today are OpenText Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea, 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 OpenText Investor Relations website. Earlier today, we posted our earnings press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, investors.opentext.com. I'm pleased to inform you that OpenText management will be participating at the following upcoming conferences: The Virtual Oppenheimer Technology, Internet, and Communications Conference on August 9th, Deutsche Bank's Technology Conference on August 30th in Dana Point, California, and Citi's Global Technology Conference on September 7th in New York. Now on to our safe harbor statement.

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 statement. 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 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. With that, I am pleased to hand the call over to Mark.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Thank you, Harry, good afternoon, everyone, from Richmond Hill. As you can see, Q4 was another fantastic quarter and great end of the year, highlighted by record financial results, the successful integration of the Micro Focus acquisition, delivery of Cloud Editions 23.2, Project Titanium, announcement of Cloud Editions 25, Project Titanium X, and today's announcement of OpenText.ai. We are a global leader in information management. Information management is essential for the next gen of AI and the next gen of business transformation. Just as the internet changed everything, with AI, everything must change. Before I get to the numbers, I'd like to go over the journey that got us here.

Three years ago, we were delivering around $3 billion in revenues, and I said we would transform information management by significantly expanding our mission, become a cloud-centric company, grow organically, double the business over the next 5 years, and that we would return capital in a value accretive manner via dividends at a rate of approximately 20% trailing 12 months free cash flow per year. Well, as you can see, this has played out. I'm so proud of the team on delivering to our aspirations. In constant currency, Q4 revenues were $1.5 billion, and F23 revenues were $4.6 billion, or 32% total growth, led by cloud organic growth of 3.9%, ARR organic growth of 2.3%, and total organic revenues of 1.2%.

Looking ahead and in constant currency, fiscal 2024 target revenue ranges are between $5.85 billion-$5.95 billion, or 30%+ total revenue growth. For F24, we are targeting positive organic growth, including a positive organic contribution from Micro Focus a year earlier than expected. Today, we announced a $1.00 per share annualized dividend program, or $0.25 a quarter, subject to approvals, up from $0.31 annualized when we started our dividend program. We remain committed to our F2026 aspirations, which include total organic growth of 2%-4%, cloud organic growth of 7%-9%, adjusted EBITDA margin expansion up to 40%, and the doubling of our free cash flows to $1.5 billion+.

The confidence in our targets reflect the agility and operational rigor of the OpenText Business System. Within 5 months of closing Micro Focus, we have completed the business, the product, customer, and organization integration. As we kick off fiscal 2024, we are one company focused on customer success and innovation that creates intelligent growth.... Our momentum is driven by 3 fundamental advantages over our competitors. Our ability to deliver comprehensive and differentiated information management technology. Second, giving customers complete choice in how they deploy and consume our software. Third, delivering best-in-class customer experience through our unique love model. This has been our journey, and let me speak to our competitive advantages and the relative sizes of our businesses.

On Content and Business Network are popular among customers as we are the information management standard to integrate business systems from SAP, Salesforce, Oracle, NetSuite, ServiceNow, Epic, Microsoft, and hundreds more, while also integrating the business transactions between them. Content and BN represents approximately 60% of our business. Our cybersecurity solutions are actively protecting governments, defense organizations, and enterprises of all sizes, from identity through physical and soft assets. It's a fantastic platform, has significant opportunity for growth, and is approximately 20% of our business. Our ITOM solutions are all about architecting and changing the flow of information across customer critical hybrid assets and service experience. This is approximately 5% of our business.

Our Application Automation is centered on helping highly trained professionals to use their precious time more efficiently by enhancing the developer experience and seamlessly modernizing off cloud workloads by moving, running, and operating them in the cloud. This is approximately 10% of our business today. This differentiation has placed us in a fantastic position to further innovate with AI and help our customers transform yet again by combining a set of very important factors, such as leveraging large data sets from our content platform, transactions from our Business Network, test scripts from our Application Automation, and IT and service information from ITOM. From helping customers consolidate competitive platforms into our business cloud and implementing key AI technologies from OpenText and others, and now implementing new models. To be successful in AI, you need automation, large data sets, and new models.

The better the automation, the better the data. The better the data, the better the AI. No data, no AI. We have implemented AI machine learning and vector databases for many years prior to the current AI breakthroughs, and our AI platform technology, such as Magellan, capture machine learning, and new capabilities we added with Micro Focus acquisition, including Vertica and Idol. We have deep and proven experience with many customers running these technologies. Presently, AI and analytics are approximately 5% of our business. Today, we announced OpenText.ai, OpenText Aviator, and OpenText Aviator Private Cloud, and an elevation of our AI platform technologies. OpenText.ai is our expanded AI strategy and roadmap. Please visit OpenText.ai to learn more as we continue this journey with our customers.

OpenText Aviators are Gen AI capabilities built into each of our business clouds that will allow customers to use large language models and to train their private data from OpenText Information Management, and to do so with trust and security. OpenText Aviator Private Cloud offers customers the ability to leverage Aviator with highly specialized learning models in a secure private cloud environment. OpenText Aviator will initially support Google's Vertex and PaLM 2 and open source language models such as Open Assist. We intend to support many specialized learning models, applying the right model for the right job. Here are the 6 initial aviators. OpenText Content Aviator, supporting conversational search and large-scale document analysis. OpenText Experience Aviator, transforming customer communications. OpenText Business Network Aviator, generating business-to-business integrations. OpenText Cybersecurity Aviator, enhancing threat management through behavioral analysis.

OpenText DevOps Aviator, generating test platforms and generating trusted software, and OpenText ITOM Aviator, redefining level one support experiences. Our AI platform technologies, which I mentioned earlier, are available today. Aviator and Aviator Private Cloud capabilities will begin to be available with Cloud Editions 23.4 and be part of our 90-day release cycles. At OpenText, AI will be built in, and we'll and we will progress with each release. Our initial AI, R&D, and capital investments are factored into our F24 R&D investment range of 14%-16%. At present, we have not factored any Aviator revenues into our F24 plan, and once we see clear revenue siG&Als, we'll update you. We believe the AI opportunity over the long term is significant. OpenText has a large role to play in AI, and we intend to play it.

Now, I'll turn to Q4 and fiscal 2023 results. Madhu will provide deeper insights, but let me touch on a few key highlights in constant currency. For Q4, $1.5 billion in total revenues, up 66.5%. $455 million in cloud revenues, up 10.6%. Strong adjusted EBITDA margins of 31%. Our enterprise and cloud renewal rates in the mid-90s, with Micro Focus renewal rates showing clear improvements into the mid-80s. I want to thank FEMA, DHL, BNP Paribas, CNA, Renesas, Walktop, Vertex, and Daikin for selecting OpenText technology during the quarter. For FEMA and DHL, we're providing cybersecurity. For CNA and Renesas, our content platform is essential to their business. BNP, a new DevSecOps platform with ValueEdge, a Micro Focus cloud win, and Warta AI information platform for content tailoring.

For the year fiscal 2023 in constant currency, $4.6 billion in total revenues, up 32.2%, $1.7 billion in cloud revenues, up 13.3%, $1.5 billion in adjusted EBITDA or 32.4%, and free cash flows of $655 million. These results reflect the strength of our solutions in addressing the specific needs of customers across content, supply chains, developers, cloud migrations, IT operations, and growing climate and sustainability needs. Before I finish, let me provide some initial thoughts for fiscal 2024. On page 18 of our investor presentation, you'll see that we have delivered three consecutive years of accelerating organic cloud growth in constant currency. You'll note from our F24 targets and F26 aspirations, we expect to continue this trend.

We are targeting enterprise cloud bookings of 15%+ in 2024, up from 9.5% we delivered in 2023. Let me note that we grew enterprise cloud bookings by $57 million sequentially from Q3 to Q4, or $108 million to $164 million. Q4 bookings growth was strong at 12% year-over-year. We have solid momentum to the 15%+. The expected acceleration is based on our pipeline, growing demand for the cloudification of Micro Focus products, and our previous investments in Titanium. F24 is going to be an unprecedented year as customers consume more information management capabilities, consolidate away from competitive platforms, move more workloads into the OpenText cloud, adopt security, digital operations and Application Automation, and as customers begin to look to next gen AI capabilities.

Further, the Micro Focus products have expanded our information management vision and provided foundational AI tools. Customer confidence is back, renewal rates expanding, and we expect to return Micro Focus to organic growth this fiscal year. That is to exceed the $2.3 billion in revenues. I plan to show you our Micro Focus progress every quarter this fiscal year. On to our F24 outlook, highlights, and constant currency. Total revenues between $5.85 billion-$5.95 billion or 30%+ growth. Total organic growth of 1%-2% or up $90 million of new organic revenues in the year. To note, in fiscal 2023, we added $41 million of new organic revenues, this year we expect that up to $90 million of new organic revenues. Total cloud growth of 6%-8%.

Enterprise cloud bookings of 15%+. Adjusted EBITDA margin of 36%-38%. Growth of our free cash flow to a range of $800 million-$900 million. There remains much news this earning season on macro issues and demand environment. OpenText is well positioned to help our customers capture the next gen of transformation with our information management business clouds, our cloud additions, and OpenText.ai. Our internal dashboards remain consistent with previous quarters, and we are playing offense right now to advance our unique opportunity. Once again, our F24 targets do not yet have any Aviator revenues built in. I want to thank our customers for making fiscal 2023 such an enormous success and for your partnership and the trust you place in us.

I want to thank our employees for advancing our customer's mission through innovation, for their incredible and transformational work on the Micro Focus acquisition, and providing an exemplary customer experience. We accomplished so much in fiscal 2023. To our customers, to our partners, to our new employees, to employees who have been with us for many years, I think you can all see we're in an amazing place, and the best days remain ahead of OpenText and opentext.ai. You are the source of our inspiration. I'd like to thank, I'd like to thank you again, and I'd like to highlight that today we published our fourth annual Corporate Citizenship Report. I'd encourage you to read it.

The report reflects our core values and our culture, as well as our commitments as we strive for a more sustainable and inclusive world, as we strive to create an even better company. We see corporate citizenship as both an imperative and a tremendous opportunity. May the one that brings peace, brings peace for all. With that, I'd like to turn the call over to Madhu.

Madhu Ranganathan (President and CFO)

Great. Thank you, Mark, thank you all for joining us today. Our fiscal year 2023 saw a strong finish with outstanding Q4 results, driven by solid execution from the entire OpenText team. For Micro Focus, we are ahead of plan, as you see in our financial results, since the close of the acquisition on January 31st. We are one company. It is our fiscal year-end, consistent with earlier communication, we are providing you with additional disclosures. Let me outline the complete list of materials in conjunction with our, with our release today, in addition to the AI-related materials Mark talked about. Our earnings release, Form 10-K, our investor presentation, let me draw your attention to a few key items. On page 17, we are providing a view into the size of our high-value businesses.

On page 18 is our annual organic growth disclosure, highlighted by three consecutive years of accelerating cloud organic growth in constant currency. On page 20, our target model. It highlights our expectation of returning Micro Focus to organic growth in fiscal 2024, one year ahead of plan. On page 22, we have updated our financial integration framework to provide deeper insight and a clear path to doubling free cash flow by fiscal 2026. Moving to our Q4 results, please refer to page 13 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, understated otherwise. On a year-over-year basis, we had record enterprise cloud bookings of $154 million, up 12% year-over-year.

We had record cloud revenue of $452 million, up 9.7% and 10.6% in constant currency. We had record ARR revenue of $1.2 billion, up 56.4% and 57.7% in constant currency. It represents 78% of total revenue. This was our 10th consecutive quarter of organic growth in constant currency for both cloud and ARR. A record total revenue of $1.5 billion, up 65.2% and 66.5% in constant currency, with Micro Focus contributing $IT Ops million in the quarter. Strong renewals at 94% in enterprise cloud and 95% off cloud.

Moving to other financial metrics, GAAP net income was a loss of $49 million, down from income of $102 million, with higher operating expenses, amortization, special charges, and interest expenses related to the acquisition of Micro Focus. GAAP gross margin of 71.4% versus 70.2%, reflecting increased revenue contributions from license and customer support. Non-GAAP gross margin of 76.9% led by higher gross margin for the Micro Focus business and continued strong out OpenText customer support performance. Adjusted EBITDA of $463 million, or 31% of revenue, versus $314 million or 34.8% of revenue, an increase of 47.6% year-over-year and 44.3% in constant currency.

Breaking this down further, OpenText adjusted EBITDA margin was 32.9%, and Micro Focus had an adjusted EBITDA margin of 28.4% in Q4, a significant improvement from 23.1% in Q3. We continue to make excellent progress bringing Micro Focus into our adjusted EBITDA model. We generated $115 million in operating cash flows and $91 million free cash flows in the quarter. Working capital performance remains strong. Our DSOs were 41 days, compared to 43 days in the prior year. For full year fiscal 2023, on a year-over-year basis, enterprise cloud bookings of $528 million, up 9.5% year-over-year. Cloud revenue of $1.7 billion, up 10.8% and 13.3% in constant currency.

ARR revenue of $3.6 billion, up 26.2% and 29.7% in constant currency and representing 81% of total revenue. Total revenue of $4.5 billion, up 28.4% and 32.2% in constant currency, with Micro Focus contributing $977 million for the five months ended June 30th. Foreign exchange in fiscal 2023 was a revenue headwind of $132 million, approximately half of this in customer support and 30% in cloud. Moving to other financial metrics for the full year, GAAP net income of $150 million, down from $397 million, with higher operating expenses, amortization, special charges, and interest expenses related to the acquisition of Micro Focus.

GAAP gross margin of 70.6% versus 69.6%, again, reflecting increasing revenue contribution from license and customer support. Non-GAAP gross margin for the year was 76.1%, supported by higher gross margin for the Micro Focus business, as well as continued OpenText customer support performance. Adjusted EBITDA of $1.5 billion or 32.8% of revenue versus $1.3 billion or 36.2% of revenue, up 16.4% year-over-year and up 18.2% in constant currency. Breaking this down further, OpenText adjusted EBITDA margin was 34.7%, and Micro Focus had an adjusted EBITDA margin of 26.3%. We generated $779 million in operating cash flows in fiscal 2023, compared to $982 million in the prior year.

The decline primarily related to integration of the Micro Focus acquisition. Free cash flows in fiscal 2023 of $655 million, compared to $889 million in the prior year. This performance was better than our target range of $580 million-$620 million and reflects strong collections and working capital performance, as well as the rapid operational integration of Micro Focus. Micro Focus contributed positive free cash flow for the year, driven by their strong working capital performance. Free cash flow performance in fiscal 2023 provides a solid platform for our fiscal 2024 target range of $800 billion-$900 billion and our aspirations for fiscal 2026 of $1.5 billion+. Turning to the balance sheet, please see page 23 of the investor presentation.

We finished Q4 with $1.2 billion in cash and $9.1 billion of total long-term debt. Our net leverage ratio was 3.5 times for Q4. Last quarter, we mentioned our net leverage ratio would fluctuate slightly over the next few quarters, reflecting timing of investments and the impact of integration expenses on adjusted EBITDA. After we closed the quarter, we further reduced our debt by $175 million as part of our de-leveraging program. We are committed to delivering a net leverage ratio of less than 3 times by the end of fiscal 2025 or sooner. Turning to our dividend program, today, our board of directors approved a quarterly cash dividend of $0.25 per common share. The record date for the next quarterly dividend is 09/01/2023, and the payment date is 09/22/2023.

The annualized dividend increases to $1 per share, subject to quarterly board approvals. Turning to our targets and aspirations, we present our business on a constant currency basis for our quarterly factors, targets, and aspirations. Our Q1 fiscal 2024 quarterly factors on page 21 of the investor presentation. On a year-over-year basis, we expect revenue of $1.36 billion-$1.41 billion, reflecting Q1 seasonality. ARR of $1.09 billion-$1.13 billion. Adjusted EBITDA year-over-year margin percentage down, 250-350 basis points, again, reflecting Micro Focus integration costs. As mentioned earlier, we view and plan our business on an annual basis, and quarters will vary. Specifically on free cash flows, we are confident in our annual target of $800 million-$900 million.

Q1 is expected to be neutral to slightly negative as a result of interest, special charges, and integration costs, as well as seasonally lower working capital at the start of a fiscal year. Starting from Q2, we expect free cash flow growth on a year-over-year basis in each subsequent quarter. Our fiscal 2024 targets and constant currency are provided in page 20 of our investor presentation. We look for enterprise cloud bookings growth to grow, you know, 15%+ year-over-year. Cloud revenues, up 6%-8%. Customer support revenues, up 40%-42%. ARR, up 24%-26%. Total revenues of $5.85 billion-$5.95 billion, representing growth of 30%+. Non-GAAP gross margin range, 77%-79%. Adjusted EBITDA range, 36%-38%.

At current exchange rates, FX would be a revenue tailwind of approximately $40 million-$60 million. Our fiscal 2026 aspirations remain unchanged, and these are included in page 24 of our investor presentation. Let me turn to the financial integration framework update on page 22 of the investor presentation. We have actioned $260 million of our $400 million cost savings, with the balance expected to be completed in fiscal 2024. We have incurred $6 million of the $70 million integration expense, with the balance expected to be completed in fiscal 2024. Finally, we have incurred $146 million of the special charges. We expect $180 million-$200 million of the remaining Micro Focus charges and expenses to be incurred in fiscal 2024, and the remaining $150 million-$190 million in fiscal 2025.

All of these are outlined on page 22 of the investor presentation. The related initiatives driving these spend include global entity simplification, tax structures, and technology footprint optimization. These are fully reflected in our targets and aspirations. Turning to our free cash flow, we are reaffirming our fiscal 2024 free cash flow target range of $800 million-$900 million, and our fiscal 2026 aspirations of $1.5 billion+. Our fiscal 2026 FCF aspirations are more than double our fiscal 2023 free cash flow for the year. In summary, we are very pleased with our outstanding Q4 and full year performance. Our enhanced global size and scale enables us to deliver stellar metrics for gross margin, adjusted EBITDA, and free cash flows, driven by innovation and growth. On behalf of OpenText, I would like to thank our shareholders, loyal customers, and partners.

To the OpenText team members, you have proudly delivered great milestones for fiscal 2023 and put us in a position for an outstanding fiscal 2024. I'm looking forward to that exciting journey ahead. I will now request the operator to open the call for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone to join the question queue. You will hear a tone acknowledging your request. If you're 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 and two. Anyone who has a question may press star and one at this time. The first question comes from Richard Tse of National Bank Financial. Please go ahead.

Richard Tse (Managing Director and Technology Analyst)

Oh, yes. Thanks for taking my question here. Madhu, on slide 22, when you talk about sort of the special charges, if I kind of look at the prior deck from the prior quarter, it looks like it's sort of gone up here a little bit, and just wondering if you maybe unpack that for us a little bit just to explain sort of why that increased here?

Madhu Ranganathan (President and CFO)

Yeah. Yeah, absolutely. In fact, if you look at a couple line items, we have actually gone down on the integration expense by about $10 million. We've expanded the range to about $40 million of the special charges. Again, these are the current estimates for the global entity simplification, tax structures, et cetera. Yes, through fiscal 2025, it's a net increase of about $30 million.

Richard Tse (Managing Director and Technology Analyst)

Okay. Thank you. you know, it's probably a little bit too early for this, but obviously it seems like you're doing quite a good job in terms of this integration with Micro Focus. As I look at your aspirational guidance going forward to, let's say, fiscal 2026, I, I'm assuming here it does not include any acquisitions. Just kind of wondering if you could maybe, you know, help us understand your thoughts and process around, you know, annual capital deployment targets when it comes to acquisitions. Do you look at it that way, or, how should we think about that?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah, Richard, Mark here. Thank you for the question. You know, at present, we're very focused on returning Micro Focus to organic growth this year, a year ahead of schedule, and that's certainly where our energy is. Second, as I noted, we have a large role to play in AI, and we intend to play it. Our focus, and we had a, in parallel, a large set of announcements today about opentext.ai, our strategy and roadmap for AI, our announced a new product line called Aviators, and discussion of our initial six Aviators that we expect to be available for sale next quarter. Within that framework, our R&D investments are between 14%-16% of revenues this year.

We're very focused on delivering to our F24 aspirations, F2026, and as you note, those are all organic. Certainly as we, you know, bring, you know, approach our under, under 3x leverage, we'll, we'll certainly consider if we wanna do acquisitions. Right now, we're, well, we're focused on capturing the organic opportunity for us. I'd also note on capital return, we brought a dividend up as well, to a $1.00 annualized per share.

Richard Tse (Managing Director and Technology Analyst)

Okay, great. Just my last question: Do you use Aviator within OpenText current operations? I'm just really trying to understand, and maybe the use cases there, and I guess related, do you kinda see that having an impact in terms of the operating model, if that's the case, you're using Aviator within the company?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Oh, how much time do we have, Richard? Our announcements today are around our initial product offering and our, our strategy and direction. There's a lot in there. How we're going to use IDOL as a way to translate information into useful vectors and metadata. How we're going to use Vertica as the vector database, not other people's technology, our technology. How we're gonna bring embedding technologies in from open source, and we're gonna be polymodel. We're gonna support highly specialized language models for highly specialized jobs. We're talking about enterprise AI here, not consumer AI. Language models will be highly specialized. Our focus is getting that initial product to market, doing that in a private, trusted way as well in our private cloud, and elevating IDOL and Vertica and Magellan.

If you just allow me for a moment, if we think of the role automation has played in the enterprise over the last 20 years, you know, before ERP suites got integrated, G&A expense was up to 20% of P&Ls, right? Automation knocked G&A, right, into the mid single digits. AI is different than automation, but AI is the next transformative aspects for enterprises. We will use Aviator to transform our own business over time. Initial areas that we're will consider support. Just as I talked about our ITOM Aviator, our ability to transform level 1 support. We have opportunities in our professional services of how we will generate code. We have opportunities how our, our engineers can transform how they test. So we'll have a whole.

You know, Richard, we'll speak more and more about how we'll apply Aviators to our business, and how we'll transform our cost structure, and how we'll transform the revenue side, RFPs, and sales. We have, you know, 20 years of RFP history, 200,000 RFPs. We'll put them in our vector database, we'll apply a language model, and generate the, the best information out of it. That will come in time, but right now, we're announcing our strategy, our vision, our direction, our initial products, our initial R&D investment, and then we will apply it to ourselves as well, through time.

Richard Tse (Managing Director and Technology Analyst)

Okay. Thanks for taking my questions.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Thank you.

Operator (participant)

Thanks, Richard. The next question comes from Steve Enders of Citi. Please go ahead.

George Kurosawa (Equity Research Analyst)

Hi, this is George Kurosawa on for Steve. Thanks for taking the question, and congrats on a great quarter. Did wanna double-click on the enterprise cloud bookings, and, you know, just get some help on getting confident in the acceleration into next year. Was there any, you know, element of deal pushouts from this year into next year that you expect to close? Or I guess just any more color on, you know, how you guys are thinking about that?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

George, happy to, thanks for being on, on the call today. Just to recap the numbers, our cloud bookings in F23 were 9.5%, which we've already talked about, you know, Q1, Q2, Q3. In Q3, our bookings were constant at $108 million. In Q4, we had a strong bookings quarter, $164 million, up 12% year-over-year. Q4 bookings was $164 million, and we got solid, solid momentum to get to the 15%+. That's based on pipeline, pace, based on deals. I mean, the difference between 12% and 15%, I wouldn't point to push deals at all. Our momentum is up. We delivered $164 million in Q4, up 12%, and we got solid momentum to get to the 15%+.

George Kurosawa (Equity Research Analyst)

Got it. Super helpful. Then just on the Aviator announcement, a really exciting set of products. Maybe just any color on the kind of go-to-market and monetization strategy here. Is there anything kind of unique or, or I guess, you know, what would you kind of highlight there?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah, I would say two things. There's two pricing models, sort of emerging in the market. You, you certainly have Microsoft, I think, O365, you have Copilot, ChatGPT, GitHub, GitLab, you know, they're ranging from $10-$30 per user per month. That sort of makes sense to me. You have kind of the other spectrum, where, you see Google pricing and others in the enterprise, sort of based on process tokens. You know, when we turn GA in next quarter, we'll introduce the pricing then. Some aviators will be more oriented towards user pricing per month, and the market sort of setting the rate right now, right, between $10-$30.

There'll be other parts of what we do, based more on sort of consumption. Our Business Network, by the way, is priced on what we call kilo characters, which is the same thing as tokens. So, when we deliver in 23.4, we'll announce the pricing, and we'll probably have two models built for each aviator. One, user-based, and again, the market is between $10-$30 per user per month, and we'll have some aviators more oriented towards consumption, either based on kind of tokens or kilocharacter. We've thought through it, and we'll get the right pricing for the right aviator.

George Kurosawa (Equity Research Analyst)

Great. Thanks for taking the questions.

Operator (participant)

The next question comes from Kevin Krishnaratne of Scotia Bank. Please go ahead.

Kevin Krishnaratne (Director and Equity Research Analyst)

Hey there. Sorry, good evening. Just maybe one for me. Just on the Micro Focus returning to organic growth a little bit faster, how do we think about that in conjunction with the F24 guidance? Which, you know, correct me if I'm wrong, but I think it on the top end, it came down a little bit from the preliminary guide that you gave in the last quarter. Can you just talk about maybe perhaps what you're seeing in OpenText's core to lead to that result? Thanks.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah. Thanks, Kevin. Thanks for the question, and thanks for being on the call today. Just to recap the numbers, right? In fiscal 2023, our total company organic growth was 1.2%, or $40 million of new organic revenues we added in the year. You know, percents on top of percents can be tricky, right? Just real simple, we, organically, we grew 1.2%. We're committed to showing you that annually, and or said differently, we added $40 million of new revenues. Our target for 2024 is 1%-2%, but on a much larger base. That's $45 million-$90 million of new organic revenues in fiscal 2024, 'cause it's on 'cause it's on a much higher base, if you will.

That's up to $90 million, almost $100 million, of new revenues here in fiscal 2024. As I said in my script, we have no aviator revenues built in our model yet, and until we have the revenue siG&Als, we're not gonna add it. Look, we expect all our product lines to grow, and we expect, you know, I don't like speaking this way, but I'll say it this way: We're clearly expecting Micro Focus to return to organic growth and base OpenText to have organic growth as well, both having organic growth. And again, the 1%-2% for fiscal 2024 is up to $90 million of new revenues, and we added $40 million of new revenues last year.

Madhu Ranganathan (President and CFO)

Yeah, and Kevin, if I could just share, just one last point in addition to what Mark said. The last print versus this print, to your point, please make note of the FX tailwind we have-

Kevin Krishnaratne (Director and Equity Research Analyst)

Got it.

Madhu Ranganathan (President and CFO)

Slide number 20, the midpoint there is about $50 million.

Kevin Krishnaratne (Director and Equity Research Analyst)

Got it. Okay, look, thanks a lot. I'll, I'll pass the line. Thank you.

Madhu Ranganathan (President and CFO)

Yeah, thank you.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah, thank you.

Operator (participant)

The next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Paul Treiber (Director and Senior Equity Research Analyst)

Thanks for taking the question. Just, you know, given the your comments in the prepared remarks, you know, Micro Focus is doing much better than you expected. You know, fundamentally, you know, why is that? You know, what has changed with the business? Then I might have missed in the prepared remarks, but did you comment on renewal rates for Micro Focus this quarter and how that's been trending?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Paul, happily, and, and, thanks for being with us today. Two things. We're executing. Y- you know, we, I'll, I'll wind the tape back. You know, we're, we're experienced acquirers, experienced integrators. We had a vision around how to integrate the company and return it to organic growth, and we're executing to it. It, it's fundamentals, right? We've released a product roadmap, that's giving customers confidence, the cu- confidence is back. We've integrated the renewals teams to the OpenText practices, the renewals practices. We've done our work with the field, where the field says, sells new. They don't sell renew. We've gotten our systems aligned.

So we ended fiscal 2023 with Micro Focus renewals in the mid-eighties, up from the low eighties, and we're on a trajectory to get the renewals to the high eighties this year. We've also announced our roadmap for the cloudification of Micro Focus. We've delivered our first products, and actually, we announced our first winner, right, of BNP for Value Edge, in the cloud. You can see in the investor deck, 23.3, 23.4, 24.1, just a continued pace of more cloudification, right? We, we transformed Documentum into the cloud, right? We will transform Micro Focus into the cloud. It's those fundamentals that are giving us, us the confidence, plus the pipeline, plus our execution, that will return Micro Focus to organic growth this year. I'm gonna show you every quarter along the way, and showing you the numbers.

Paul Treiber (Director and Senior Equity Research Analyst)

In, in regards to Aviator, I mean, you sound very excited about the opportunity there and the, the product. How do we think about sizing it? And I know you're not giving it an outlook, but, you know, how do we compare it to some of the, the products you've had in the past? You've had Magellan in the past, you've had other large product launches in the past. You know, how do we think about the magnitude in terms of the opportunity for Aviator?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah, I'm not, I'm not ready to put a TAM on it. All right? It's a fair question, but we're not ready to put a TAM on it. As I said in my, my remarks, I believe it to be a significant long-term opportunity. We're gonna go after it the OpenText way. Fundamental innovation, we're gonna deliver, we're gonna show you the signals along the way for sort of predicting those. We don't have any Aviator revenues built into our any revenue built into our F24 model yet. I think it's gonna be relevant for every customer. It's gonna be a independent set of products.

It's clear that what automation did for the enterprise, I'm gonna make the distinction AI can do for the enterprise. You know, with you, you need automation, and the better the automation, the better the data. The better the data, the better the AI. We're extremely well-positioned, where we've been managing large data sets for thousands of customers and content. We are well positioned, where we've been managing billions of business network transactions. We're well positioned, where we have the software and testing scripts in ADM. We're well positioned in ITOM with IT assets. We're in the places where you can create value in the enterprise. There's a real.

I mean, the McKinsey report, I think, is great because it kinda, their AI report, they have a nice grid of the places of the enterprise are gonna be impacted. You look up and to the right, it's the developer, it's content, it's contracting, it's the things I've just mentioned. I'm not ready to put a TAM on it. Our, our products, our initial Aviators, will be available next quarter, be a showcase, obviously, in Vegas. We'll announce our pricing and spend more time talking about the TAM when the product comes to market next quarter.

Paul Treiber (Director and Senior Equity Research Analyst)

Jim, just one last question for me. Just, Madhu, the, in regards to tax, can you speak to this, the slope in the tax rate to 26? You know, obviously, it's a big jump to, to mid-20% from 14%. Then does that reflect... You know, what's, what's driving that increase? Does it reflect the, the global minimum tax?

Madhu Ranganathan (President and CFO)

Yeah. A few things. You know, first of all, as we end up using up the Canadian attributes, and we've talked about this before, towards the end of fiscal 2024, that plays a role in the creep up of the rates. Now, you slap in Micro Focus in here. Again, we're not talking about strategic tax initiatives. There's no immediate, sort of relief from the statutory tax rate. We're absolutely using the U.K. attributes of Micro Focus, but Micro Focus is a taxpayer on the U.S. front, and so, so is OpenText. Really the slope you're seeing is sort of the utilization expiry of the Canadian attributes for OpenText and adding on the U.S. tax attributes for Micro Focus.Again, as I said, we will spend the next 12-18 months strategizing the next wave of tax optimization, but that is not factored in the slope you're referring to.

Paul Treiber (Director and Senior Equity Research Analyst)

Okay. Thank you.

Madhu Ranganathan (President and CFO)

Yeah, thank you.

Operator (participant)

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

Stephanie Price (Executive Director and Senior Equity Analyst)

Hi, good afternoon. Thanks for the-

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Hi, Stephanie. Welcome, welcome to the call.

Stephanie Price (Executive Director and Senior Equity Analyst)

Thank you. Thanks for the additional details on the revenue from each of the divisions and, and the breakout between the different content management, security, et cetera. Just wanted to dig a little bit deeper into that. As you think about the mix of the different high-value businesses, as you look at into fiscal 2026 and beyond, which of the businesses do you see as growing above the company's typical growth rate? Where do you really see the most opportunity here out of the high-value businesses you've, you've pointed out?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Thanks, Stephanie. Thanks for, thanks for the question. You know, they each have their, their dynamics. Let me just start with, you know, we, we promise to provide more, more visibility, right, into each of the, into each of the high-value businesses. On slide 17 of the, of the investor presentation, you can see Content at 45%, Cybersecurity at 20%, Application Automation, 10%, Business Network, 15%, IT Ops, 5%, AI and analytics, 5%. I'm not get down into growth rates for each one of them, so I, I, I'm not gonna do that today. We have, you know, clear opportunity in AI and analytics, as we've talked about today, just clear opportunity. IT operations management, I'm, I'm very pleased with private cloud and SaaS products that we're bringing to market.

I think we have a significant opportunity there. Everyone needs cybersecurity. You know, we're, we've been talking about kind of winning each of these value stacks, right? Having select programs across all the value businesses. Cybersecurity kind of, is an effort underway across all the value businesses. As they say, I love all my children. They're each unique. You know, AI and analytics are obviously a significant opportunity. Very optimistic on IT Ops, cybersecurity, a deep opportunity. An interesting thing about AI, you know, again, you have automation, different than AI. For customers to take advantage of AI, they need to be on some cloud platform, private or public. They need to consolidate their automation and then take advantage of that enriched data through AI. Therefore, I believe that information management has opportunity to continue to grow because there's, there's more automation and more consolidation into that.

Stephanie Price (Executive Director and Senior Equity Analyst)

Great. Thank you very much.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yep, thank you.

Operator (participant)

The next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.

Thanos Moschopoulos (Director and Senior Equity Research Analyst)

Hi, good afternoon. Mark, can you update us on where you stand as far as sales integration? Have you started to see any early cross-selling, or it's still early days on that front?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah, we're complete, Thanos. Thanos, thank you for joining us today. I'd like to have you on the call. We're kicked off July one, Salesforce fully integrated. Single global accounts team. We go to market by buyer. We've completed all our account assignments, singular account plan. We're integrated, and all that work was completed and implemented July one. We have a single Salesforce compensation system as well, as an example. The areas... So, we're complete. The second piece is the select cross-selling. Again, security, top of the list, ITOM, top of the list as well. As part of our kickoff, which was just a couple of weeks ago, we laid out training for everybody. It is early days on the cross-selling, but we're really focused on 2 areas. It's security, and it's metadata and AI tools.

Thanos Moschopoulos (Director and Senior Equity Research Analyst)

Great. As far as leveraging your OpenText channel partnerships, with respect to the Micro products, how, how's that progressing?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Well, we're very, we're very focused on sort of the top of the pyramid, which we, you know, we announced earlier this year, the next generation of our partner program. We now call it the OpenText Partner Network, or OPN. Top of that pyramid are our top 10: Microsoft, Google, Amazon, SAP, Salesforce, DXC, Accenture, TCS, and a few others. That, that work is beginning to kind of speak holistically to Google, just holistically to DXC, holistically to Accenture. Still early days, but we've done the work to say these are the top 10, and we're gonna kind of, you know, pick key opportunities in each of them. Let me take an example, right?

We had a great partnership with Google at OpenText. We're gonna work together on mainframe modernization and moving more workloads into the Google Cloud. We had a great relationship with AWS, hosting a lot of our SaaS products, you know, again, bringing Application Automation into the AWS relationship. There's high synergies. We're focused on the top ten, and the work's begun.

Thanos Moschopoulos (Director and Senior Equity Research Analyst)

Great. That's the line.

Operator (participant)

The next question comes from [guess] of Gate Capital. Please go ahead.

Speaker 12

Hey, good evening, guys. Thanks for taking my question. I wanted to ask on the Aviator product as well. Can you just give us a sense of your conversations with customers, Mark? Are they excited for what this product could do for their business? I mean, we of course, we hear that these products are just going to increase productivity, but are customers ready to deploy these, these products? Just based on those conversations, how do you see adoption going for these customers as we move past the initial deployment in October?

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Yeah, look, our early conversations informed us deeply. Just 90 days ago, right? We're talking about early conversations. 90 days later, we, we've announced Aviator, and we've announced Aviator Private Cloud. 90 days from now, we'll have our, our, our, our first Aviators in production, if you will, and, and, and with, with good deployments to a few customers as well. It's the, the, these are our initial strategies, if you will. We're also gonna build a practice area. When I, when I speak about Aviator Private Cloud, you know, we've done, you know, we have a couple of very unique things that we can bring to market here. We obviously have our tools, IDOL, Vertica, Magellan, unique.

We don't have to go out and kinda rent those tools, if you for others, we own them. The second unique thing is our managed services, our private cloud, right? Customers want to be able to use their data privately, securely. Aviator Private Cloud is a strong avenue for our customers already in our private cloud, or want to move to our private cloud, to use their data privately and train their data privately and not, you know, bring it into some, some public domain. We're gonna build a practice area around this. Just like we have practice areas in Business Network, practice areas in Content, we're gonna have practice areas in AI and in language models. It's early days. We've announced the, you know, initial vision and direction, next set of products coming next quarter, and we'll keep you updated along the way.

Speaker 12

Thanks, Mark. Just for my second question, to piggyback on Thanos's question. Some of those early Micro Focus customers that you onboarded early in the post the acquisition, you know, now that they've had a chance to really experience the combined company, the combined offerings that we've spoken about over the past two quarters, what's their initial feedback? Do you find that those initial synergies that you had envisioned are kind of playing out? Of course, I understand early days for that, but just some initial thoughts on that would be great. Thank you.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

We're turning them to organic growth this year. you know, we maybe just to reiterate, confidence is back. roadmap published, all the key aspects of the integration complete, cloudification's begun, renewal rates up to mid-eighties, pathway to high eighties, initial wins in the cloud, and the pace of innovation. you can see some of the aviators being square in the middle of Micro Focus product lines and accelerating a Micro Focus to organic growth this year. those are the indicators, right? don't know much more to add to that, but those are the indicators.

Speaker 12

Thanks, guys. I'll pass along.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Thank you.

Madhu Ranganathan (President and CFO)

Thank you.

Operator (participant)

The next question comes from Raimo Lenschow of Barclays. Please go ahead.

Speaker 11

Great, thank you. This is Jeremy on for Raimo. Was just wondering if you could share, anything on how the, the Micro Focus free cash flow conversion is trending. I know that, that was a point of opportunity, when the acquisition closed, and was just curious if you can maybe talk about any improvement there. Thank you.

Madhu Ranganathan (President and CFO)

Yeah, absolutely. It's Madhu here. Thanks for the question. A couple of things. One, as we've shared, I'll start with the adjusted EBITDA. The adjusted EBITDA in Q4 was 28%, up 5% points from... Although Q3 was only 3 months, I mean, 2 months. Fundamentally, the question was asked in terms of integration and even what, you know, what are the reasons therefore? I will take all that Mark said in terms of product market customers to the working capital and the operational side, right? They have a strong customer base, and as we applied our own operational rigor, the team were very receptive, and you saw that. I would say, starting with adjusted EBITDA, we improved the working capital, and that is really where you see from a free cash flow perspective, they positively contributed.

Again, I'll answer the question, the second part as well. As you look into fiscal 2024, what we saw, the adjusted EBITDA in Q4 will continue. I see continued improvement in the working capital performance, all of that adds to our confidence in the $800 million-$900 million for 2024.

Speaker 11

Perfect. Thank you.

Operator (participant)

The next question comes from Steven Lee of Raymond James. Please go ahead.

Steven Lee (Financial Advisor and Branch Manager)

Thank you. Hey, Mark, Madhu. I got a quick one on the organic growth in Q4. If I take the 602 from Micro Focus out of Q4, I get a slight negative organic growth for Q4 for OpenText at constant currency. Given this is Q4, which, seasonally probably a stronger quarter for you guys, should we not have seen a stronger organic performance? And maybe any, any soft areas you wanna call out, Mark?

Madhu Ranganathan (President and CFO)

Yeah. Steven, I, I mean, I'll take that. When you looked at Q4 and you take out, you know, you know, Micro Focus, we are not seeing the negative organic growth. We are seeing positive organic growth in the share, and happy to walk through the numbers if, I mean, if it'll be helpful, but the numbers are all there. I'll just say for Q4, when you factor in Micro Focus, we are positively growing, organic growth, cloud, as well as ARR in constant currency. Again, I want to emphasize that.

Steven Lee (Financial Advisor and Branch Manager)

Okay, yeah, I mean, I, I'm just taking the reported numbers and minus six or two, and it's lower than last year.

Madhu Ranganathan (President and CFO)

Yeah. When you take out like, the 602, again, as you see, license from a constant currency perspective, is down from a year-over-year in the quarter, cloud is positive organic growth, customer support is positive organic growth, ARR is positive organic growth as well.

Steven Lee (Financial Advisor and Branch Manager)

Okay. Oh, okay. Then just maybe a housekeeping, I do, I couldn't try it in the MD&A, but did, did you actually disclose Micro Focus different revenue lines like license, maintenance, and PS? I, I think you did that last quarter. Thanks.

Madhu Ranganathan (President and CFO)

Yes, we did. I can share with you offline the page numbers of the 10-K. We did call out the cloud services. I mean, I'm sorry, we called out the license. We also called out the customer support in a number for Micro Focus as well.

Steven Lee (Financial Advisor and Branch Manager)

Okay, I'll get it offline from you. Thanks.

Madhu Ranganathan (President and CFO)

Okay. Absolutely. Thank you.

Operator (participant)

The next question comes from Daniel Chan of TD Cowen. Please go ahead.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Hello, Dan?

Operator (participant)

Daniel, your line is open. Please go ahead. Daniel Chan, your line is open. Please go ahead.

Mark Barrenechea (CEO, CTO and Board Vice Chair)

Okay, operator, there must be something not working there, so I think we can go to let me go to wrap up. I'd like to thank everyone for joining today's call, and we look forward to seeing you at the Virtual Oppenheimer Technology, Internet & Communications Conference on August ninth, Deutsche Bank, August 30th, Citibank, Global Technology, September seventh, and we'll be reaching out, and hope you can join us in Vegas at OpenText World in early October. Thanks for joining today's call.

Operator (participant)

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.