Open Text : Transcript

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EDITED TRANSCRIPT

Q1 2023 Open Text Corp Earnings Call

EVENT DATE/TIME: NOVEMBER 03, 2022 / 9:00PM GMT

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NOVEMBER 03, 2022 / 9:00PM GMT, Q1 2023 Open Text Corp Earnings Call

CORPORATE PARTICIPANTS

Harry Edward Blount Open Text Corporation - Senior VP & Global Head of IR

Madhu Ranganathan Open Text Corporation - Executive VP & CFO

Mark J. Barrenechea Open Text Corporation - Vice Chairman, CEO & CTO

CONFERENCE CALL PARTICIPANTS

Daniel Chan TD Securities Equity Research - Research Analyst

Paul Michael Treiber RBC Capital Markets, Research Division - Director of Canadian Technology & Analyst Richard Tse National Bank Financial, Inc., Research Division - MD & Technology Analyst

Stephanie Doris Price CIBC Capital Markets, Research Division - Director of Institutional Equity Research and Software & Business Services Research Analyst

Thanos Moschopoulos BMO Capital Markets Equity Research - VP & Technology Analyst

PRESENTATION

Operator

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2023 Financial Results Conference Call. As a reminder, all participants are listen-only, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead, sir.

Harry Edward Blount Open Text Corporation - Senior VP & Global Head of IR

Good afternoon everyone, and welcome to OpenText's first quarter fiscal 2023 earnings call. With me on the call today are OpenText's 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 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 in the following upcoming conferences: RBC Capital Markets Global Technology Conference on November 15 in New York. Needham's Virtual Big Data Infrastructure and Cloud Communications Conference on November 16.

TD Securities Technology Conference on November 21 in Toronto, Credit Suisse Technology Conference on November 29 in Scottsdale, Bank of America's Leveraged Finance Conference on November 30 in Boca Raton, Raymond James Technology Investor Conference on December 5 in New York. NASDAQ's Investor Conference on December 6 in London, U.K., NBF Technology Conference on December 7 in Toronto and Barclays Global Technology Media and Telecom Conference on December 8 in San Francisco.

And 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

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NOVEMBER 03, 2022 / 9:00PM GMT, Q1 2023 Open Text Corp Earnings Call

directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website.

And with that, I'll hand the call over to Mark.

Mark J. Barrenechea Open Text Corporation - Vice Chairman, CEO & CTO

Thank you, Harry, and welcome to today's call. OpenText fiscal '23 is shaping up to be a transformative year. My comments today focus on 3 key points. First, OpenText is executing very well as demonstrated by record cloud revenues, record cloud bookings, record annual recurring revenues and solid renewal rates. We are acquiring Micro Focus from a position of strength.

Second, the [seventh] (corrected by company after the call) consecutive quarters of organic cloud growth in constant currency reflects the innovation investments we have made over the last several years, inclusive of Titanium, a key pillar of our future growth. Third, the acquisition of Micro Focus when closed enhances our leadership position in information management and broadens our capabilities to deliver business 2030 to our customers.

Let me start with our strong Q1 year-over-year results, record Q1 revenues of $852 million, up 2.4% on a reported basis. In constant currency, revenues were $892 million, up 7.1%, record Q1 cloud revenues of $405 million, up 13.5% in constant currency, $417 million, up 16.9%. Cloud was 47% of total revenue, the highest in our history and the seventh consecutive quarter of cloud organic growth in constant currency.

Enterprise cloud bookings were strong in the quarter, $112 million, up 37%. And on a trailing 12-month basis, enterprise cloud bookings were $496 million, up 36%, ARR of $722 million, up 4.4% and up 8.9% in constant currency. ARR reached 85% of total revenue, the highest in our history in the seventh consecutive quarter of ARR organic growth and constant currency. Our enterprise renewal rates were rock solid with cloud at 94% and off-cloud at 95%.

Adjusted EBITDA margins remain upper quartile at 35.7%. Free cash flows were $96 million, notably and meaningfully impacted by foreign exchange, tax and our accelerated investments in Q1 as we approach Titanium. We expect full year fiscal '23 free cash flows of between $725 million to $750 million. Today's financial results and customer trust are further validation of our momentum.

Within the quarter, we were proud to partner with the Fifth Third Bank with over $200 billion of AUM, leveraging our cloud business network for payments, University of Winchester for Forensics and Mutual for our experience cloud and client communications, Close Brothers and our content cloud for capture and information archiving, one of the key Dutch water boards using our content cloud for complete information management and Microsoft integration and large technology partnerships that got deeper within the quarter.

Our stronger go-to-market relationship with Microsoft for mid-market, new support for Google Workspace, new integrations to Salesforce and full product support for SAP applications in the cloud.

Let me turn to our fiscal '23 targets. And please recall, we view our business on an annual basis, not a quarterly basis. This is important today and will be even more important with Micro Focus. We are an annual business. We plan on an annual basis, and we think in annual cycles. Further, the following does not include Micro Focus contributions, and we do not intend to speak to a combined target model until we close.

Cloud continues to accelerate, and we're updating our F '23 outlook to reflect this. We expect this year in constant currency cloud bookings growth of greater than 15%. Cloud revenue growth of 8% to 10% support revenues to be constant, ARR to be up 82% to 84% of our business and with cloud being up, we expect license to be down 8% to 10%. We are reaffirming our total revenue growth outlook of 3% to 4% growth with even stronger cloud performance.

Our R&D projected spending range is at our historic highs of up to 14% of revenues as we strategically invest in Titanium and in private, public and our API cloud. The OpenText Information Management Cloud is global, has four 9's of guaranteed availability, we write this into contracts. It is secure, trusted and open.

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NOVEMBER 03, 2022 / 9:00PM GMT, Q1 2023 Open Text Corp Earnings Call

These investments include critical capabilities to be the most trusted cloud such as regional data zones, high security and modern compliance processes such as SOC 1, SOC 2 FedRAMP, StateRAMP, Protected B, Ban-Fin, GXP and a dozen more compliance standards. These are very difficult and differentiated capabilities. With these investments, we set the table for continued organic growth, and we expect adjusted EBITDA between 36% to [36.5%] (corrected by company after the call) on the full fiscal year. As we noted, F'23 free cash flow to be between $725 million to $750 million.

Let me turn to Business 2030. At OpenText World, I shared that Titanium and Micro Focus are strategic pillars for us and that Business 2030 is foundational. Information sources and information volumes are expanding exponentially. Business 2030 will see all industries radically transformed and digitized a new human-centric work place dominated by Gen Y and Z looking for more purpose and more total experiences.

And there are new priorities in Business 2030, such as sustainability, automation, incorporating more machines, AI-driven growth based on platforms of information and software. Information is the new fuel and Business 2030 is happening. In light of this, customers need to own their digital fabrics and complete their digital transformations and look beyond to new rules and new requirements for Business 2030.

To be prepared, all companies are becoming information companies and all need to be software companies. OpenText enables customers to connect and automate core workloads in the cloud. Today, we are the secure information fabric for business apps in the Global 10,000 across supply chains and millions of edge devices. The fourth industrial revolution created the beginnings of digitalization, then the pandemic accelerated digitalization.

Current supply chain challenges, inflation and sustainability are only providing more stimulus for digitalization. We see no slowing of digitalization as companies strive for Business 2030. And as companies wrangle the silos of information across multiple cloud environments to deliver these new digital business models, they need new ways of working to be intelligent, connected and responsible.

Let me be frank, digitalization is the only answer. And companies want to work with brands like OpenText who are experts, who are investing, who have staying power and who are leaders in their market. We envisage a future where all business information flows through the OpenText Cloud, where information management elevates every person and every organization to their fullest potential. It's an exciting time for OpenText.

The type of data information that we manage is ever growing, structured, unstructured, fast flow, core, edge, humans, machine-generated robot generation, generator and soon within IT infrastructures and across the application life cycle. The automation of business, the automation of IT and of their value streams each information led is essential to scaling digital business. OpenText's Cloud Editions is the platform of platforms for information management at scale and in the cloud.

We are the Intelligent Information Core for business. And we just demonstrated this at OpenText World, Cloud Editions 22.4, showcasing how customers can create that intelligent connected and responsible business with integrated data and advanced information management. At OpenText, we delivered significant innovation every 90 days in to our cloud to help customers be ready for the known and the unexpected for ever-growing compliance and data sovereignty regulations and greater insight in business agility.

We are 31 years young as a cloud company, and we have a comprehensive strategy for information management that puts content, experience, business networks and cyber resiliency markets with the full consumption choices of off-cloud, private cloud, public cloud and as a developer cloud. We provide our 75,000 off-cloud customers choice on how they can consume. We are proud to call 97 of the top 100 companies and 40 of the 50 largest supply chains customers.

We have over 3,000 private cloud customers. We added another 100 last quarter. We have over 780,000 businesses relying on OpenText SMB every day to protect, block, backup and restore their information. As Hurricane Ian approached, we worked with dozens and dozens of businesses to ensure their digital lives were secured. Our strategy is unique and continues to be validated by our customers.

In June, we announced Project Titanium, our innovation roadmap to extend all OpenText software to the public cloud and APIs. We are

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NOVEMBER 03, 2022 / 9:00PM GMT, Q1 2023 Open Text Corp Earnings Call

already winning new public workloads through core content business network foundations and over our 2 dozen APIs. Project Titanium enables us to address the fastest-growing development choices for our customers. The demand for the OpenText Cloud remains strong, and we expect it to be our leading growth driver.

The global shortage of IT labor and growing regulations by industry, including healthcare, financial services and government are fueling our cloud growth in content services, business networks and digital experience. Moreover, Cyber Resilience is top of mind for all businesses of all sizes, and we are we're pushing forward leading solutions in threat intelligence, endpoint, network protection and backup and recovery.

Let me turn to Micro Focus. It's the right asset at the right time. Micro Focus customers want the same deployment choices OpenText customers enjoy off-cloud, private cloud, public cloud and APIs. We see the opportunity to bring cloud capabilities to [Micro Focus] (corrected by company after the call) customers and at an accelerated rate. Following closing of the acquisition, Micro Focus will bring significant expanded product capabilities and growth opportunities.

Let me summarize what we see as the top growth drivers and value unlockers. Cyber resilience, we are very excited to bring customers a full stack security offering from the edge to the cloud to trusted identities to writing secure software and forensics. Content management, the enhanced capabilities of AI, video and audio content, voice content that can bring to -- that we can bring to our mutual install base and to attract new workloads.

The transformation of IT operations management or ITOM in the public and private cloud, the elevation of the developer with application delivery management and application life cycle management and our APIs and our developer strategy, application modernization connectivity from all the important mission-critical technologies from EDI to Cobalt to amplifying current modernization tools and distributed workloads and adding aspects like AppWorks APIs and more and advanced AI and machine learning with Magellan, Vertica and Idle.

Across all of these, we see an opportunity for Micro Focus customers to benefit from the OpenText private cloud. For Micro Focus customers to benefit from the OpenText renewals approach, jointly deeper strategic relationships into the Global 10,000 and new buying centers and deeper strategic relationships to the world's largest technology companies and more access to markets.

We have been transitioning the OpenText install base to the cloud over several years, and you see the success is right in front of us in the numbers. We intend to do the same for Micro Focus customers, but even faster. Let me provide an update on the Micro Focus transaction. On August 25, we announced our firm intent to acquire Micro Focus. October -- and on October 18, Micro Focus shareholders approved the all-cash offer.

This is an important milestone. Earlier today, Micro Focus issued a transaction-related update containing financial information for their 3 months ended July 31. While we are not commenting on their business or financials, today's update is consistent with their public statements of expecting to exit their fiscal '23 being flat or better. We remain on track to close this acquisition next quarter.

Please recall, concurrent with our August 25 announcement, we entered into a $4.6 billion term and bridge loan commitment, which remain undrawn to satisfy certain requirements under the U.K. takeover code. Subject to market conditions, we intend to further syndicate the term loan and reduce commitments under the bridge loan by accessing the debt capital markets.

While we are making strong progress in our pre-integration planning, we have confidence in our proven OpenText business system, given the proven integration successes, that it has delivered over time. This is our power alley. Let me reaffirm the commitments we made on August 25. We're returning Micro Focus to organic growth, accelerating Micro Focus cloud growth and improving the renewals business.

$400 million of cost optimizations, upper quartile adjusted EBITDA and free cash flow, continuance of our dividend program, a rapid deleveraging program, bringing our leverage down to less than 3x within 8 full quarters of closing. Our cash priorities are twofold: investing in the business for growth and paying down debt to less than 3x leverage.

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