Q1 2021 Open Text Corp Earnings Call

And there's just one and then Connor.

Yes.

Thanks, I'll join you know now to spend more time with customers on cross sell and upsell.

What Google Microsoft AWS sales force a T N T S a P and others.

Selling carbonite products into our installed base of enterprise customers and selected Opentext products through Carbonites SMBC channel.

Already incorporating increased R&D and sales investment new efficiencies and a high conversion ratio from EBITDA to cash flow the.

The healthy balance sheet at 1.6 times leverage.

On M&A accelerated time to returns with Carbonite on the open text model sooner than expected most companies take two to three years to get these type of benefits we've accelerated it down to 10 months and the company is ready for the next set of opportunities. We have a return based capital allocation approach with increasing our dividend by.

15% and initiating a share repurchase program up to 350 million over the next 12 months.

Hello. This is avenues for the corner what eight O four.

15.4% or up 14.5% in a constant currency basis, including a strong contributions from carbonite.

There was a favorable affects impacted revenue of 6 million.

The geographical spit of revenue of total revenues in the corner with America, 63%.

<unk> 28 per cent in Asia Pacific ninth effect.

Annual decoding revenues for the quarter was 670.4 up 22% or up 21.4% on a constant currency basis as a percent of total revenues. They are always 83% for the quarter up from 79% of the first quarter of fiscal 20 sure I would like to note that they are all.

I was positive organic growth during the quarter on a reported basis clouds.

Clouds revenue is a particularly strong at 341 up $43 seven per cent are up 43.4% on a constant currency basis disclose but I was driven by a strong contribution from carbonite and exiting fourthquarter.

Return to pre code the transaction volumes not business network cloud.

Cloud enterprise charge, a new word way to the quote of the main midnight.

Customer support revenue the 329, four up 5.5% are at 4.8% in a constant currency basis of customer support your new address so Q1 was 94% reflecting continued strong effort the 14th to drive the noodles and support Orange installed base.

Ah license avenues of 68.5 down 12% are down 13.8% in a constant currency basis of professional services Avenue, that's 65.1 down 6.2% or down 8.5% in a constant currency basis GAAP net income was one O 3.4.

30, 849%, primarily driven by higher revenue achievement and the savings of the preemptive measures introduced to the third quarter of fiscal 20th.

Justin net income with 241.9, 39.4% are up 36.2% on a constant currency basis gap.

<unk> earnings per share diluted with 38 cents up to I'm twenty-seven set a non-GAAP earnings push it diluted was 89 cents up 25 cents from 64 cents and up 23 times in a constant cut in two days.

And now 20 to margins Gasless margin for the quarter with 69% up 180 basis points. Adjusted gross margin was 76.5% up 340 basis point also unadjusted basis cloud margin was 67.2% up to I'm, 57.1%.

Driven by continued improvement that a cloud service delivery and a strong contributions from Carbonite a customer support margin was 91.3% up from 97% affecting continued strong vanilla performance.

License margin was 96.4% down from 97 per cent, primarily due to know what license revenue.

A professional services margin was 29.2% up to them, 22.1% and the flex the benefits received from lower travel, but effectively delivering that solutions on a digital and remote basis I'd.

Adjusted EBITDA with 342.3 million this quarter up 34.7% or up 32.1% on a constant currency basis.

That person does that could 42.6% margin up from 36.5% of the same for the last year and higher than our fiscal 21 target models range at 37% to 48%.

Now turning to Castro's it was excellent the problems with operating cash both of 233.9 for the corner up 70.2% and three cashflows of 218.6 up 84%.

D S, though with 44 days compared to 54 days in queue wants to 20, but you don't forget adoption of 10 days cause that's the old Testament do a digital business services organization formed about to go to go that includes receivables connections and other key financial operations as well as strong contribution of the quota from the integration of.

Carbonite.

From a balance sheet perspective, we ended the quarter with approximately 1.8 billion in cash given a strong cashflow performance a consolidated net leverage ratio is 1.82 times and improvement from 2.0 full time slots court.

And subsequently in October really paid the 600 million just that was previously drawn under vulgar and we now have plenty available $750 million with all the lineup credit as Mark noted a strong balance sheet provides us affects the ability to navigate changing macro scenarios and provides ample opportunity.

To generate substantial longterm value for the shareholders.

Through growth dividend and now as good as what Mark noted potentially share buyback from time to time to announce repurchase plan as a complement to a capital allocation strategy.

Mm Carbonite hard when I delivered another strong quarter the results with strong a R. R cloud margins adjusted EBITDA and working capital Carbonized operations that already tracking to the open text operating model as of September 30th 2020.

<unk> the financial integration sooner than planned what we have looking ahead delay to systems and applications integration why we will continue to talk about the business. This will be my final integration update on the acquisition itself, a big shout out to the Carbonite to the innovation too.

So, let's turn to told him floats target model and quarterly factors all available on our Investor website.

First and foremost <unk> businesses, Daniel and quarters will vary.

Long term value is created from sustained annual performance and 95 those are too short to measure.

We are in a volatile macro environment due to help financial and social crisis related to the resurgence of global Covid cases, Andy with elections, we've continued to see differing impact industry by industry and jogger keep a geography why.

<unk> remained watch one of the macro environment, we continue to perform well on a business model growth and cloud girlfriend products and innovation and a strong cashbook enable us to continue to infection go to market products and digital projects.

So not so now let me turn to a schoolyard <unk> 21 total growth strategy compared recorded ago outlet for fiscal 21 has improved we now expect mid double digit grow some clouds revenue compared to a previous target of low double digits.

No single digits grows on customer support revenue compared to constant how.

Hi single digit growth, an annual the cutting revenue compared to mid single digit.

No change in a license introgression, seven seven new targets, which we see declining and consistent with a doctor industry trend and also as cloud adoption excellent. So would that total revenue moves some constant to constant to low seem to visit both in fiscal 21.

New M&A opportunities, you mean additive to a model.

[noise] assumptions do not include in effects and packed in the second half of fiscal 21.

Oh, that's just cause 21 target module, we are pleased to share the following revenue target changes from a court.

And you'll be putting revenue James moves up from 80% to 82% of total 70 to 81% to 82% a license moved down from 10% to 13% of revenues to 9% to 12% of revenue.

Uhm gross margins clouded maintained at 62% to 65% and customer support at 80 19, 91% a license at 90, 698% and Professor service more than is expected to move up to 20% to 22% from 18% to 20% as we continue to see benefits of remote delivery.

That's traveled.

As we continue to vigorously defend our position.

So in summary, a special thank you to the entire Opentext community quite incredible efforts. Your contributions demonstrated continued resilient leading the way in digital working high productivity and a laser focus on results and thank you to our shareholders with trust and confidence we greatly value and wishing you all continued safety.

And good health I would now like to open the call to your questions operator.

Thank you.

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And you want to ask a question May press star and one at this time.

The first question comes from Raimo Lenschow from Barclays. Please go ahead.

Hey, guys. This is Frank on for Raimo, Congrats on another great quarter and thanks for taking my question. So cloud was clearly very strong again or would you be able to dig a little bit more deeper or provide a little bit more color on how some of those recent partnerships with some of the big cloud players like Google.

Furniture feeding into the other.

The cloud side of the business and how we should expect those relationships going forward.

Yeah, Mark here, Thanks up for the for the question.

The strength of our cloud quarter, certainly driven by.

By some of the return a bar business volume.

And the accelerated needs of our customers of time accelerated time to value.

And the greatest time to value is to deploy our capabilities and our cloud or or a partner is cloud.

And yeah, as we look over the coming quarters <unk> and next few years.

We expect the partnership to to really contribute to that Oh look up the cloud momentum.

Yeah, we've taken the approach with cloud additions that our solutions will operate across the Hyperscalers, Google AAMC as well as for sure.

And though we continue to stay committed to customer choice, well, where customers would like to place the workload.

We saw some wins for short together with our cloud partners.

And but the the strength of the cloud was primarily driven.

Percent are relentless focus on on fast rapid integration, taking the costs out where we think we we should integration of the cloud teams integration of of of engineering teams Ah carbide contributed as well to such.

Yellow adjusted EBITDA and in fact, so greatly were already on the financial financial mom.

Right.

And then I'm kept on vacation you've mentioned in U N T. I D. Here, just wondering how you kind of think about capital allocation share repurchases, maybe for some of the capital here.

Yeah, very very good well I'll just start with.

The <unk> the large narrative on you know we you know companies talk about they're gonna exit the pandemic stronger than they came into it.

Why do a new operating efficiency within the business and and it's reflected.

In the efficiency, our processes that new digital automation, we're running internally and it's translated into a a higher level of adjusted EBITDA and our conversion ratio from it but to free castle is enormously Oh, hi, given our effective tax structure.

Yours and low Capex deployment. So we have we have great confidence in the efficiency of the business and future cash flows.

With that in mind that led us to getting back to our our evaluation of our dividend program. I know, we 90 days ago, we didn't raise the dividend sort of on our annual cadence. So at this point with that confidence we paid back or revolver, we increased our dividend right back to back to where we.

<unk>, if you will and then looking at that strengthens casuals, we thought we'd add an additional program, which was which is M. C. I b as you know so we see it as an additional tool for us going for it.

Great. Thank you for asking the corner.

Thank you Sir.

The next question comes from Paul steep from Scotia Capital. Please go ahead.

Hey evening, Mark maybe talk a little bit just with the shift to the cloud happenings really hard in this quarter as we think about emanating a future for open text.

How is your willingness to maybe take on legacy assets previously would have migrated does that appetite maybe changed or is there may be greater confidence and then I've got one quick clarification.

Yeah sure thing our M&A strategy remains unchanged.

We it it is the the great one of the greatest lovers, we have to adding value in the business conjunctive with organic growth.

But our philosophy of M&A remains the same in within M&A. It's really recurring revenue is that we focus on.

So we'll look for businesses that have high recurring revenue.

And and recurring revenues are both cloud and support businesses are they like they call them update businesses.

So it's it's not exclusively cloud it's much wider than that it's really were occurring recurring revenue that that's our focus.

Well you have a clarification question.

Yeah. That's great. So then just the other question I think you've alluded to it.

Should we be thinking and I I don't know if you've set I don't remember a policy, but around net leverage ratio should we be thinking that you're going to force back deployment of all the cashflow. Obviously it was through the dividend did you just.

Numerate it but more importantly, a boat the return of capital treat the share repurchase should people think that that level the floors, maybe one and a half or or no. There isn't the floor and you.

You're gonna leave yourself flexible.

<unk>.

Ah well, let me, let me jump in and then I'll hand, the Mike Madhu as well, we're gonna remain flexible I'll talk about the ceiling first [laughter].

The floor on the on the ceiling side Ah Nothing's changed our view that we like to operate around three three times leopard Sweet I as I've said many times in a chronicle through the years I think it was very simply if the market turns really bad for liquidity, which it has.

And I'd like to be able to pay back or that in three years. Therefore, the three X ratio, we're not bashful about going over it in a short term as we have done twice given our commitment and disciplined operations to bring it well well under.

Uhm again, the buyback is an additive tool doesn't change your M&A strategy in fact, our our our pipeline and due diligence activities are we see it as an additive tool given the the strength of our of our cash flows. We've always targeted 20 per cent of trailing for used to be Oh.

Yeah, but now M C F, but we target torne trailing 12 months, 20% of free Cashflows Ah to return a dividend gives us all the strategic opportunities we need.

We now have the extra tool Ah and stand up program on buyback and M&A remains the top relic generator for us and deploying capital and we expect to get deals done. This year. This a fiscal year, but do anything you'd like to add to that.

I guess shipping my thanks support then you'd think about apples to apples right. Then you asked about the store doing a physical 20 you'd be mad at about 1.48 neck leverage when it's been you know all the way it's like he about to with Carbonite and keeping the strength of the Castro, we've been able to bring it back down to you know to you know 122.

I would really think about it that way going above and it's eating marches described and again to cast spells. It's gonna allow us to have the band in the mid one just slightly about two if need be.

Perfect. Thanks.

The next question comes from Richard T from National Bank Financial. Please go ahead.

Yes. Thank you Mark I think you said you had a thousand customers today Unclouded edition would you say the average number of products taken up by those customers to be more than those that are not uncommon mission.

Yeah, Richard interesting question I think it's slightly above the off cloud average.

And part of our opportunity.

Is really getting to a next generation cross selling upsell and really focusing that in the cloud.

Because with more integration.

And our efficiencies and as we marched towards 21 dot for where customers will never have to update again, we can turn on more solutions for customers at very I mean minimal expense runny and the cloud and thus expose customers to to more features and more modules industrial it used for.

Action.

So I'll tell you were slightly off on kind of the average module usage in cloudburst off cloud and this is a strength, we're gonna sell right into an elaborate for cross selling in the coming years of sort of pre installing pre turning on additional modules for a customer access.

Yeah, especially was C. E 21 for it seems like there is probably a big opportunity fruit accelerator Yanker section is reduced here.

Is it fair to say that you know about something that we should think about here in terms of Marlin going forward in terms of.

Smoking and organic growth and what that can mean to it.

I I I don't mean to do this by the hand up my modeling questions to me do [laughter] [laughter] yeah.

Yeah. So that's it thanks for the question as Marx did accidentally absolutely for my Mommy prospect too we have shed all up effective so I would I would go to use the boundaries in front of me cause you've shared some of them for me if somebody to monitor perspective, but suddenly opportunities in the future it's an exciting.

Okay, and then maybe a certain misheard, but I think the way you talk about your sales cycle, even though that's health backdrop that things, it's sort of kind of have gone back to normal with the exception of some of those radicals require.

That seems different from some of the things that we've heard from others for enterprise Cubbies that recover.

But I just wanted to make sure that you know actually.

Of characterize what you said correctly.

Yeah, Richard So just David recap and it's.

In our investor presentation, as well and you just see if I can quickly get to the page number which is page 750 or 21 open texts total growth strategy, where we.

Have our revenue lines and and what the expected growth rates are for the year. We have certainly seen our business network volumes returned to pre covid levels, except for some of the well highlighted industries that I still haven't recovered hotel's hospitality airline.

And and a and a few others.

So we're not back to full revenues a war back to pre covid levels, except for those industries.

We we are.

Increasing our our outlook for the you're on cloud as me do highlight it from low double digit to mid double digit customer support from constant to low single digit a are from mid single digit to high single digit, but we're also still looking at cloud and P. S. At the same levels, we talked about last quarter.

Which is we're not changing the outlook on license and P. S.

We expect a decline this year so the transactional side of the business Ah hasn't returned to pre covid levels, but the the vast majority of our business network has and and that's translated into a an update it and.

Increased outlook for the year among.

Among other things.

Okay, great that helpful.

Yep. Thank you.

Thanks to Jim.

The next question comes from San OS Ms Complice from BMO capital markets. Please go ahead.

Good afternoon, I wanted to go deeper into the cloud guidance. So if I take your cue wasn't cloud revenues and just plotline them for the rest of the year that would give me high teams crowds gross I'm gonna pull your basis.

But you're calling from mid teens crowd gross so that would imply some erosion and I. Appreciate it must be constructed with your guidance, but can you comment on whether it cause some dynamic summers cause should be aware of that could cause that erosion. I mean is it maybe just the transaction businesses in the vertical you called me out where there could be a risk of some further weakness or you know how shall we.

Think about that.

Yeah, let me speak a little bit to the to the business end and I'm, having to do maybe speak a little bit to the.

To the to the model.

You know the Ah I'm very pleased with how the volumes have returned.

From pre Covid levels.

And.

Some industries are still a very heavily affected and we don't know the timing all the consolidation that may happen in those markets as well. So that's it so that's a bit of an unknown that's informing us to talk about cloud at mid double digit.

And there's also remains volatility in the world as we all all well know and with the next wave in Europe, and you know how far behind is North America, you know what I'm, certainly, saying is that it's a very different business reaction in in this way versus the first way.

Rafe, where there's a very.

Focused view on on keeping business running health in a healthy way in Safeway through the second way, but it's a long way to say it still remains a bit of a volatile market. What we do now and is that we're gonna, we're increasing our outlook from the ear from low dull.

About that yet to mid double digit.

And you said it well that Ah, there's still some affected industries in our business network and we're still gonna be a little cautious just giving given the volatility in the world I think it's a fine place to be somebody do anything you'd like to like that.

Mm no Mark you covered all all of the pieces and 10 knows I would I would I would point out of Marx Commons, which we in fact it into are cute too quarterly taxes is gonna be on your doctor.

Okay, Great and you take down the revolver should we took that as a negative indicators are with respect to the size of your your term I mean, the pipeline or is it less about that and more doctor confidence regarding the stability of financial markets relative to what the world with like some you initially through that down.

Yeah, I'm pretty straightforward for us it was uncertain if there would be a liquidity crisis early in the markets early during the pandemic that didn't turn out to be so.

But where no wiser than the next person. So we took a preemptive action I'd do it the same way all over again I hope I don't have to of course.

We also have reached a new level of efficiency.

So we decided to pay back.

Okay. So I'll get nothing in particular reason to as far as what that means but I'm fine how many pipeline.

No not not not not at all the the the revolver remains they are active.

It's off of fully fully available facility of 750 million. It was the volatility and uncertainty around like the liquidity in the market and many companies pre drew the revolvers, we weren't alone in doing that and now that Ah it's a much clearer on.

The the liquidity in the market, we decided to just reduce our expenses and pay back the revolver.

Where it makes sense alright, thanks, a lot for one.

Thank you [laughter].

The next question comes from Paul Cramer from our be he capital markets. Please go ahead.

Oh, thanks, very much and good afternoon I just wanted to ask a highly I level question and it ties into your your comment at enterprise World, but we're seeing you know massive change in the industry with work from home and in collaboration App's moving to the cloud another option is a cloud in new digital transformation.

And it seems like the you know the importance of enterprise. The information management would also go with that and become more important and you know are you seeing that from your customer base or in your pipeline the increasing importance put around it enterprise information management.

Yeah, Ah Paul absolutely I I very Proscriptive Lee use the the phrase and my script that I believe that information management, it's time has come.

And look we were going into the fourth industrial Revolution before the pandemic.

And and for for many that would feel kind of academic but the pandemic. It's turned the accurate academic into the into the acute.

And companies he'd operated right and they need to operate and share information they need to go through financial closes regulatory submissions they need to manage I hate to say look how the Canadian government is being challenged with not having network access in in full utilization of tools.

So it it's gone from academic to quite a cute and the ability to simply run on an information platform shared collaboration project management workflow formed E signatures, and it's a brilliant basics and being able to do that globally on that scale.

That is benefiting us.

And I mean, it seems like most companies are are taking a or have taken a piecemeal approach the cloud or eh, particularly information management in the past you mentioned, there's a thousand customers enterprise customers to deploy C. E. I think you have a total number of 75000 enterprise customers.

Do you anticipate or is it reasonable to anticipate then eventually all or the majority of those customers would need a crowd he I am strategy.

Short answer is yes.

Short answer is yes, you don't maybe it's 5%, 10% that that that doesn't and some very unique security requirements, but we do offer a private cloud in those cases, but to get that accelerated time to value the fastest.

Path is to deploy and one of our domain clouds unequivocally and we have a long way to go it's the greatest opportunity. We have is to continue the upgrade.

Transform new deployments into the into the open techs cause it's one of the reasons, we announced that open text world seven days to the cloud.

And you know we've we we have more standard product, where pre installing instances the ability for enterprise customers to stand up new new workloads used to take months and months and months, we can get it done down to a week now for standard deployment.

And last question for me and and maybe the hardest one but in terms of timeframe of.

You know is this like five years cycle isn't a 20 year cycle and then how do you think how quickly when companies prioritize this transition.

Well, we're we're unique I will highlight are the journey that we've been on and and using chess terms you can always hit the early game mid game or or late in the game.

You know for US we've gone to wear license is 8% of our business in the corner.

So where where where on that lap. We've we've started complete it the last mile here and I'm going to point. The Cloud addition to 21 dot for as I said it'd open text world and again here today, we are very focused on.

These 90 day cycles, and it's not only that it's faster, we're actually bringing more features to to mark yet.

In the shorter cycles and bye bye cloud additions 21 dot for which is just actually a little less than a year from now 11 months.

We will be at a point of where customers never have to upgrade again. All features all capabilities off assets will be automatically available and customers will have a clear a path to never upgrading again running in our class.

Thank you.

Thank you I will now I had to call back over to Mister Banshee for closing remarks.

Very good well I like to thank everyone for joining us today I, we we wish everyone much happiness.

Health and wellbeing and these very volatile and seminal times and we look forward to seeing you I hope you can enjoy join us at and fuse over the coming weeks and we look forward to our discussions engagement Ah one on ones as well as our upcoming conferences. Thank you for joining us today.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant evening.

Yeah.

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Ah.