Q1 2021 Open Text Corp Earnings Call
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I would like I like to turn the conference over to Mr. Heri Blount Senior Vice President Investor Relations. Please go ahead Sir.
Thank you operator, and good afternoon, everyone on the call today is Opentext, Chief Executive Officer, and Chief Technology Officer, Mark J. bear in shape, and our executive Vice President and Chief Financial Officer Madu regulate the.
Statements relating to our 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.
We'll be many structural and long lasting changes due to the change in human behavior, including work from anywhere direct to consumer commerce.
Contactless experiences and payment fixed.
Extreme customer experience expectations and new supply chains.
Before the pandemic industry for auto with job getting started and now it's in full acceleration.
That has been our vision at open text to build organically and through M&A. The most comprehensive information management cloud platform for the future and.
With the introduction of our new architecture cloud additions running in the Opentext cloud and other clouds, we have never been better positioned to deliver for our customers and the new equilibrium.
We are delivering massive new capabilities every 90 days.
We already have over 1000 customers on cloud additions and by cloud additions 21 Dot for just one year away our customers will never have to upgrade again I.
I know I've said this in the past, but let me repeat it as it is so important.
10 years ago license with 26% of our business and.
In Q1, it was 9% we have de risked the business overtime.
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The direct to consumer explosion, and all the associated technologies that enable omni channel and social commerce.
Customer support of $329 million up 5%.
Our of $670 million up 22% and that 30 and in at 83% of total revenue the highest in dollars and percent in our history, demonstrating the predictability of our business.
Adjusted EBITDA of $342 million or 42.6% adjusted EBITDA margin also the highest in our history. The company has never been.
For our business leaders, great execution and accelerated digital automation.
You can see in our improved operations and results the predictability that <unk> brings to our business model the strength of our margins and cash flow and afford confidence and continuous improvements.
Given our new operating efficiency and confidence in the road ahead, we're announcing a variety of key action today.
We were paid the $600 million drawn on a revolver and there are no outstanding balances, we are storing all salaries and benefits we.
Enterprise cloud renewal rates remained strong in the mid Ninetys.
Dirty offering an carbonated carbonized migrate and high availability products.
Hey, our our increased our cloud gross margins and improved our cash conversion cycle.
He wanted 81% to 83%.
Growth in strategic areas, such as cloud and customer support and they are our.
Upper quartile margins of 42.6% adjusted EBITDA.
Already incorporating increased R&D and sales investment.
New efficiencies in a high conversion ratio from EBITDA to cash flow the.
The healthy balance sheet, a 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.
Cause I need the coding definitely grilling nearby cloud and customer support.
All differences will be in millions of UFC and compared to the same period in the prior to school yet.
So let me talk with revenue.
Total revenue for the quarter, what eight O four up 15.4% or up 14.5% in a constant currency basis, including a strong contribution from carbonite.
There was a favorable effects impact of revenue of $6 million to geographical special revenue of total revenues in the quarters with America, 63%.
28% in Asia Pacific 9%.
Annual recurring revenue for the quarter was 674 up 22% or up 21, 4% on a constant currency basis.
As a percent of total revenue.
83% for the quarter.
From 79% of the first quarter of fiscal 20 sure I would like to note that they are almost positive organic growth during the quarter on a reported base.
Cloud revenues are particularly strong at 341 up $43, 7% are up 43.4% on a constant currency basis.
Driven by a strong contribution from Carbonite, and and giving up fourthquarter, David turned to pre Covid transaction volume It Ampex is network.
And the most basis.
Adjusted EBITDA was 342.3 million this quarter up 34.7% or 32.1% on a constant currency basis.
This is a record 42.6% margin up from 36.5% for the same quarter last year and higher than our fiscal 21 target model range at 37% to 38%.
Now turning to cash flows as of excellent performance with operating cash flows of 233.9 for the quarter up 70.2% and free cash flow of 218.6 up 84%.
Dsos were 44 days compared to 54 days in Q1 fiscal 20, the year over year reduction of 10 days is a real Testament to our digital business services organization formed about a year ago that includes receivables collections and other key financial operations as well as strong contribution in the quarter from the integration of.
Carbonite.
From a balance sheet perspective, we ended the quarter with approximately 1.8 billion in cash given our strong cash flow performance. Our consolidated net leverage ratio is 1.82 times an improvement from 2.04 times last quarter.
And subsequently in October we repaid the $600 million that was previously drawn on the revolver and we now have fully available $750 million revolver line of credit.
As Mark noted our strong balance sheet provides us the flexibility to navigate changing macro scenario and provide ample opportunity to generate substantial long term value for our shareholders too.
To grow dividends and now as well as what Mark noted potentially share buybacks from time to time to announce repurchase plan as a complement to our capital allocation strategy.
On Carbonite Carbonite delivered another strong quarter of results with strong they are our cloud margins adjusted EBITDA and working capital.
Carbonite operations that already tracking to the Opentext operating model as of September Thirtyth 2020, we achieved our financial integration sooner than planned.
What we have looking ahead debate to systems and applications integration, while we will continue to talk about the business. This will be my final integration update of the acquisition itself, a big shout out to the Carbonite efficiency.
So, let's turn to total growth target model and quarterly taxes, all available on our Investor website.
First and foremost we view our business with Daniel and quarters Bill Barrett.
Long term value is created from sustained annual performance and 95 those are too short to measure we.
We are in a volatile macro environment due to help financial and social crisis donated to the resurgence of global cold cases ambiguous election, we continue to see differing impacts industry by industry and John Duffey by geography.
While we remain watchful of the macro environment, we continue to perform well on office with modest growth in cloud growth and product innovation and our strong cash flow enable us to continue to invest in go to market products and digital projects.
The main but 70, 476% and our full year adjusted EBITDA expectations remain at 37% to 48% as we continue to invest in the business.
Fiscal 21 target model fully reflects the savings from previously announced restructuring the compensation restorations box referred to in his commentary and fiscal 21 hiding trends.
So coming to our immediate quarter to two I would like to highlight the following quarterly practice.
We expect Q2 total revenue to be constant versus Q1, with a favorable FX impact up to 3 million.
FX is based on current exchange rates, but note that currency volatility appears higher than normal.
Annual recurring revenue is expected to remain constant in Q2 compared to Q1.
Our adjusted EBITDA dollars are expected to decline low single digits in Q2 compared to Q1 actually.
I shared previously would have made an annuity focus business, while our quarters will Derek.
Our long term aspirations, our long term aspirations remain unchanged targeting adjusted EBITDA activations of 38% to 40% and free cash flow of 900 million to $1 billion for fiscal 2003 with a plan to reinvest any margin gains above 40% into additional growth initiatives.
For a tax update the IRS market, assuming the appeal in states that are resolved remains strong and we continue to vigorously defend our position.
So in summary, a special thank you to the entire Opentext community equator incredible efforts. The contribution demonstrated continued resilience 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 dish in Europe continued safety.
And could help I would now like to open the call to your questions operator.
Thank you.
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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.
Collaboratives clearly very strong again or would you be able to dig a little bit more deeper.
On a little bit more color on how some of those recent partnerships with some of the big cloud players like Google furniture.
Furniture feeding into.
Cost side of the business and how we should expect those relationships going forward.
Yes, Mark thanks for the.
For the question.
The strength of our cloud quarter.
Certainly driven by some of the return of our business volumes.
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 partners cloud.
And as we look over the coming quarters and next few years.
We expect the partnership to to really contribute to that.
Cloud momentum.
We've taken the approach with cloud additions that our solutions will operate.
Across the Hyperscalers Google.
AAMC.
As well as a sure.
And though we continue to stay committed to customer choice, 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.
Both by Carbonite return a business volumes.
And the accelerated time to value from our enterprise customers.
Great. Thanks, Mark Congrats again.
Yes. Thank you.
The next question comes from Stephanie price from CBC. Please go ahead.
Afternoon.
Hi, definitely hi.
Hi, Tom.
On the cloud I'm wondering if you can share a little bit more about carbonite and maybe what the Carbonite contribution was in the quarter.
I would do or we are speaking to the precise carbonite contribution in the quarter.
No they are not mark.
Yes so.
Definitely there is no doubt that carbonite had a significant and important contribution.
The business is operating very well.
Both in the <unk>.
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The loss of the large narrative on.
We companies talk about they're going to exit the pandemic stronger than they came into it.
Why didn't you operating efficiency within the business.
And it's reflected.
In.
The efficiency our processes, the new digital automation, we're running internally and it translated into a.
Higher level of adjusted EBITDA, and our conversion ratio from EBITDA to free cash flow is enormously high given our effective tax structures 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.
90 days ago, we didnt raise the dividend sort of on our annual cadence.
So at this point with that confidence we paid back our revolver, we increased our dividend rate back to back to where we were if you will and in looking at that strength and cash flows we thought would add an additional program.
Which was which is the anti d. as you know so we see it as an additional tool for us.
Going forward.
Great. Thank you congrats on the quarter.
Thank you Stephanie.
The next question comes from Paul steep from Scotia Capital. Please go ahead.
Evening, Mark maybe talk a little bit just with the shift to the cloud hopped in fairly hard this quarter as we think about M&A in the future open text.
How has your willingness to maybe keep on legacy assets previously would have migrated that appetite maybe changed or is there maybe greater confidence and then I've got one quick clarification.
Yeah sure. Thanks.
Our M&A strategy remains unchanged.
We it is the.
The great one of the greatest levers we have to.
Adding value in the business conjunctive with organic growth.
But our philosophy of M&A remains the same and within M&A Israeli 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 ours I'd like to call them update businesses.
So it's it's not exclusively cloud it's much wider than that it's really were occurring.
Our recurring revenue that's our focus.
Before you have a clarification question.
Yes, Thats great. So then just the other question I think you've alluded to it should we be thinking and I don't know if you've set I don't remember a policy that around net leverage ratio should we be thinking that youre going to have four stacked deployment of all the cash flow obviously it looks at the dividend as you just.
Numerated, but more importantly about the return of capital through the share repurchase should people think that that level. The floors, maybe one and a half or no. There isn't the floor you to leave yourself flexible.
Yes.
Well, let me, let me jump in I'll hand, the Mike Madu as well, we're going to remain flexible I'll talk about the ceiling first.
And then maybe the floor.
On the ceiling side nothing has changed our view that we like to operate around three three times laboratory.
As I've said.
Many times and chronicled through the years I think is very simply.
If the market turns really bad for liquidity, which it hasn't.
I'd like to be able to pay back our debt in three years. Therefore, the three X ratio, we're not bashful about going over it in the short term.
As we have done twice given our commitment.
The plant operations to bring it well lunder.
And again the buyback is an additive tool doesnt change our M&A strategy in fact, our our pipeline into diligence activities are up we see it as an additive tool.
Given the strength of our of our cash flows.
We've always targeted 20% of trailing used to be LCR, but now FCF.
But we target 20 to trailing 12 months, 20% free cash flows to return our dividend gives us all the strategic opportunities we need.
We now have the extra tool.
Instead of program on on buyback and M&A remains the top ROIC generator for us in deploying capital and we expect to get deals done.
This year this fiscal year, we do anything you'd like to add to that.
I guess shipping month thing.
Paul when you think about apples to apples right and you asked about the store during our fiscal 20 billion about 1.48 net leverage when they need to also reflect the Apache with Carbonite and given that the cash flows related to bring it back down to two.
Two one point 18, so I would really think about it that way going about the TV market is tight and again the cash flows is going to allow us to have the band in the mid one was just talking about too maybe.
Perfect. Thanks.
The next question comes from Richard Tse from National Bank Financial. Please go ahead.
Yes. Thank you Marc I think you said you had a thousand customers today on cloud ambition.
Would you say the average number of products taken up by those customers to be more than those that are not uncommon mission.
Yes, 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 sell and up sell and really focusing that in the cloud.
Because with more integration.
And our efficiencies and as we March towards 21 dot for where customers will never have to update again, we can turn on more solutions for customers at very low I mean minimal expense running in the cloud and thus expose customers to us to more features and more modules industrial.
Do friction.
So I'd say were slightly up on kind of the average module usage in cloud worse off cloud.
And this is a strength, we're going to sell right into and leverage for cross selling in the coming years of sort of pre installing pre turning on additional modules for customer access.
Yes, again specialists.
21 for it seems like there is a really big opportunity for you to accelerate organic growth friction as reduced year end.
Sure I'd say that that's something that we should think about here in terms of modeling going forward in terms of.
Looking at organic growth than what backing into it.
I don't mean to do it by the end of my modeling questions than they do.
Covered hotel's hospitality airlines and and a few others.
So we're not back to full revenues a war back to pre covid levels, except for those industries.
We are.
Increasing our our outlook for the year on cloud as me do highlight it from low double digit to mid double digit customer support from constant to low single digit.
From mid single digit to high single digit, but we're also still looking at cloud NPS at the same levels, we talked about last quarter.
Which is we're not changing the outlook on license and P. S.
Which we expect to decline this year, so the transactional side of the business.
Has it returned to pre covid levels, but 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.
Yes. Thank you.
Thanks to Jim.
The next question comes from San Hose from accomplice from BMO capital markets. Please go ahead.
Good afternoon, I wanted to go deeper into the cloud guidance. So if I take your cue one cloud revenues and just platband them for the rest of the year that would give me high teens class gross I'm gonna pull your basis.
But you're driving for Nixon's crowd growth that would imply some erosion and I appreciate might be conservative with your guidance between your comments on some dynamic some risk it should be aware of that could cause that erosion. I mean is it maybe just being transaction.
Businesses in the vertical he calls me out where there could be a risk of some further weakness or.
If you think about that.
Let me speak a little bit to the to the business and and having to do maybe speak a little bit to the.
To the to the model.
You know the 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 well know and.
With the.
The next wave in Europe, and how far behind is North America.
What I'm, certainly, saying is that it's a very different business reaction.
In this way versus the first wave, where there's a very.
Focused view on on keeping business running helpful. In a healthy way in Safeway through.
Through the second way, but it's a long way to say it still remains a bit of a volatile market.
We do now and.
Is that we're going to.
Increasing our outlook from year from low double digit to mid double digit.
And you said it well that there are still some affected industries.
And our business network and we're still gonna remain a little cautious just giving given the volatility in the world I think it's a fine place to be so let me do anything you'd like to like that.
Mm no mark you've covered all all of the pieces and Tenors I would I would I would point out of common between effective in two <unk>.
<unk> two quarterly factor, there's gonna Daniel outlook.
Okay, great and.
You've taken the revolver should we took that as a negative indicate here with respect to the size of your your term pipeline or is it less about that and more abductor confidence regarding the ability of financial markets.
Relative to what the world looks like when you initially through that down.
Yeah pretty straightforward for us.
It was uncertain if there would be a liquidity crisis early in the market.
Early during the pandemic that didn't turn out to be so.
But.
No wiser than the next person so we took a preemptive action.
I 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 payback.
Okay. So we get nothing in particular to reach you as far as what that means for nightline, how many pipeline.
No not not not not at all the the revolver remains they are active.
Of.
Fully fully available facility of 750 million.
It was the volatility and uncertainty around with liquidity in the market.
And many companies pre drew the revolvers, we weren't alone in doing that.
Now that.
It's a much clearer on the.
The liquidity in the market, we decided to just reduce our expenses payback the revolver.
Great.
Thankful that line.
Thank you.
Next question comes from Paul Treiber from RBC capital markets. Please go ahead.
Oh, Thank you very much and good afternoon.
Hi, I live in question.
<unk> tightened to your comment.
At enterprise World, but we're seeing massive change in the industry would.
I work from home and in collaboration apps moving to the cloud and other options a cloud of new digital transformation and it seems like the importance of enterprise information management would also go with that and become more important and are you seeing that from your customer base or in your pipeline.
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Increasing importance put around the enterprise's mission management.
Yeah.
Paul Absolutely I I very prescriptive Lee used the phrase and my script that I believe.
That information management, it's time has come.
And look we are going into the fourth industrial revolution before the pandemic.
And for many of that would feel kind of academic but.
But the pandemic, it's turned the accurate academic into the into the acute.
And company to operate probably they need to operate and share information they need to go through financial closes regulatory submission.
They need to manage.
I hate to say it look how the Canadian government is being challenged with not having network access and.
In full utilization of tools.
So 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 and at scale.
That is benefiting us.
And and then it seems like most companies are taking a or have taken a piecemeal approach the cloud or particularly information management in the past you mentioned, there's a thousand customers enterprise customers are deployed T E.
A total number of 75000 enterprise customers do you anticipate or is it reasonable to anticipate that eventually all or the majority of those customers would need a cloud.
Strategy.
Short answer is yes.
Short answer is yes.
Maybe it's 5%, 10% 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 deck cause one of the reasons, we announced that open text world seven days to the cloud.
And we've we have more standard product where pre installing instances.
The ability for enterprise customers to stand up new new workloads, you could take months and months and months, we can get it done down to a week now for on standard deployment.
And last question for me and and maybe the hardest one but in terms of timeframe.
Is this like five year cycle isn't a 20 year cycle and then how do you think I'll quickly when companies prioritizes transition.
While we're.
Where are unique I will highlight are the journey that we've been on and and using chess terms.
Hit the early game mid game or a late in the game.
For us we've gone to wear license is 8% of our business in the corner.
So we're on that lap.
We've got a complete it the last mile here and I'm going to point. The Cloud addition to 21 dot four.
As I said it open text world and again here today, we are very focused on.
90 days cycles, it's not only that it's faster, we're actually bringing more features to market.
In the shorter cycles, and bye bye cloud additions $21 for which is actually a little less than a year from now 11 months.
We will be at a point.
Where customers never have to upgrade again, all features all capabilities off assets will be automatically available.
And customers will have a clear path to never upgrading again running in our class.
Thank you.
Thank you.
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.
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.
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.
Okay.
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