Q2 2021 Open Text Corp Earnings Call

Thank you for standing by this is the conference operator welcome to the open text Corporation second quarter fiscal 2021, the earnings conference call.

As a reminder, all participants are in listen only mode and the conference is being recorded.

After the presentation there'll be an opportunity to ask questions.

To join the question queue simply press Star then one the on your Touchtone phone.

Should anyone need assistance during the conference call. They may signal, an operator by pressing star and zero on their telephone I would like to turn the conference over to Harry Blount Senior Vice President Investor Relations. Please go ahead.

Thank you operator, and good afternoon, everyone on the call today is open text, Chief Executive Officer, and Chief Technology Officer, Mark J bear in shape, and our executive Vice President and Chief Financial Officer of do Reaganite, but.

We have some prepared remarks, which will be followed by a question and answer session.

This call will last approximately 60 minutes with the replay available shortly thereafter.

I would like to take a moment and direct investors to the Investor Relations section of our website investors Dot open text dot com.

Where we have posted our consolidated investor presentation that will supplement our prepared remarks today.

The presentation includes information and financials specific to our quarterly results, notably our updated quarterly factors on page seven as well as the strategic overview.

And now an update on Investor day, I am pleased to announce that open text the executive team will be hosting a virtual investor day on Thursday March 11.

For the registered please visit our Investor relations website or contact our IR team directly.

I would also like to announce that open text management will be participating at the Morgan Stanley Conference on March 1st and fourth.

We look forward to engaging with you in the coming weeks.

I will now proceed with the reading of our Safe Harbor statement. Please note that during the course of this conference call. We may make statements relating to the future performance of open text the 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 materials 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 the risk factors, including in relation to the current global pandemic that May project future performance results of open text, Arkansas.

And open text 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 obligations to the 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.

And with that I am pleased to hand, the call over to Mark.

Thank you Harry and good afternoon to everyone and thank you for joining today's call I.

I want to open the call with the note of optimism.

Over the last year, the World has experienced health financial social political and environmental crises.

While many of these crises continue on the.

That's a long lasting and have forever changed the way, we work live and love Green shoots are emerging all around us.

With an accelerating vaccine rollout the prospects of of global economic recovery appear to be brightening.

Today in the U S. More people have received their first dose of the COVID-19 vaccine then cases reported.

Economists are increasingly predicting of strong economic recovery in calendar 'twenty 'twenty, one due to a combination of rebounding demand rising prices and low inventory levels.

We're also so much better informed today than we were a year ago.

The transformative nature of digital and extreme automation is clear.

And we remain in the early stages of the fastest deepest and most consequential technology disruption and the history of the world.

Businesses are accelerating their digital capabilities and are placing greater emphasis on trusted global partners.

On to value Mark.

Modern work sustainable supply chains stellar customer experiences and cloud plus of edge computing.

What has become clear is that the cloud plus network plus edge are inextricably linked.

Our new architecture on platform of cloud editions Places open text information management demonstrably in the middle of important demand conversations for companies of all sizes large medium and small.

The previous four quarters. The open text are reflective of the amazing strength and durability of our employees our customers our company our business model and the transformative aspects of our products.

Over the last year, we have generated a record $3 3 billion and trailing 12 month revenues.

A record $1 1 billion of trailing 12 month free cash flows and invested 400 million trailing 12 months on our products. Each approximately we settled with the IRS, we increased our dividend by 15% we announced the share repurchase program, we donated 4 million meals to help with food and security at the edge.

End of last year.

We've achieved our highest employee engagement scores.

We were named a Forbes top 150 employer.

We delivered record fiscal 'twenty, one Q2 revenues, which I'll get to in a moment.

Produced our new platform cloud editions.

And we're on target to deliver adjusted EBITDA of 37% to 38% this fiscal year.

And we are on target to deliver annual recurring revenues on a R. R of 81% to 83% highlighting two key aspects of our business first the predictability of our business and second we are a cloud company.

We made the statement it was not just words that we would exit the pandemic stronger than we entered.

The above GAAP results speak to our actions our progress amazing employees and our culture humbly. These results provide open text with momentum and confidence as we enter calendar year 2021.

And we are excited about the significant opportunities we can pursue with our cloud editions.

Let me transition to our exceptional Q2.

This quarter was highlighted by revenue growth renewal rates margin cash flow and positive organic growth in reported currency the.

<unk> delivered an exceptional quarter many of our quarterly metrics are at historic highs, let me walk through the results on a year over year basis.

Total revenue of $856 million up 11% the highest total revenue in our history.

Revenue of $350 million up 41% the highest cloud revenue in our history and the largest revenue contributor.

Customer support revenue of $334 million up 6% the highest C. S revenue our history.

A R R of $685 million up 21% the.

The highest the AAR are in our history and at 80% of total revenue.

Adjusted EBITDA of $361 million or 42% adjusted EBITDA margin and the highest adjusted EBITDA dollars in our history and.

And free cash flows of $275 million up 46% best Q2, the FCS in our history.

Let me provide a few additional comments the 41% growth of our cloud business was driven by our Carbonite acquisition cloud edition, a rebound in our business network volumes and continued momentum in F N B C and enterprise content services.

The 6% growth in our support and update business was driven by our customer centric 90 day release cycles and AI informed engagement.

We have over 2 billion in cash and committed liquidity at our disposal and our consolidated net leverage ratio has declined to one six times this quarter.

Reflective of the disciplined operations post acquisition of Carbonite.

We continued to generate growth cash and returns in the right places.

We had many notable customer expansion and wins in Q2 and.

And we have of full listed on our Investor deck. Please give the presentation of Reed, but let me highlight a few <unk>.

<unk> group, a Berkshire Hathaway company, it's a national leader in customized insurance claims and patient safety and risk solutions met Pro group is expanding its open text of extreme youth as extent used the modernized enterprise wide digital delivery processes.

The department of work and pensions in the U K of governmental body responsible for welfare pension and child. The maintenance chose open text enterprise contact solutions as an integral part of their end to end processing for shared a critical and sensitive content.

For Norway, one of the World largest global ice cream companies headquartered in the UK headquartered in the U K expanded their commitment to open text be the managed services and engage with the open text to build the service offering that allows them to dynamically flex their supply chain.

We've all health Minneapolis based provider of health care solutions for physician practices and ambulatory surgery centers.

It's investment in open text cloud using OTT services to securely handle confidential communications.

Before I turn to our approach of total growth in December.

We announced that we closed all past present and future items related to dispute with the IRS.

As part of the resolution open text will pay $299 million first the disputed amount of approximately $830 million.

While we maintain that our long standing position in this matter was in the right.

We believe the settlement to be in the best interest of all stakeholders.

Let me turn to growth.

And walked through our total growth strategy.

Which has three fundamental elements.

Pertain.

ROE and acquire on routine.

We delivered another exceptional quarter with customer support renewal rates at 94% of non-GAAP gross margins of 91 three per cent.

Our cloud renewal rate, excluding carbonite with 96% non <unk>.

Non-GAAP gross margin for total cloud of 66, 7%.

And its margin was up 830 basis points year over year.

We're seeing the direct benefits of leveraging more automation and automation based on open text Magellan.

And the direct benefits of scaled operations.

On growth we can.

Continue to ramp up our investments in products and sales.

To grow our sales coverage of the global 10000 customers and we are expanding our relationships with global partners all of them EMS and MSP.

We are on track on increasing our R&D investment in fiscal 'twenty, one to support advancing the most exciting product road map in our history with cloud editions.

For the balance of fiscal 'twenty, one our adjusted EBITDA margin will begin to reflect those increased investments the per.

The balls behind our cloud editions include customer choice run anywhere number one too.

Cloud first three simplification.

Five clouds makes it easier to go to market and easier to sell the fourth principle is consumption.

Deeper integration of capabilities enable ease of consumption.

Our fifth principle is innovation rapid and continuous innovation every 90 days to provide accelerated time to value and increase value for our subscription maintenance and our update services in the six principal is to create new channels, such as our new API services to embed open.

Text on the next generation of cash.

Good businesses.

During our capabilities. The Apis will enable developers to include open text and speed their time to market.

In October at open text World, We announced cloud editions 20 Dot for which featured our five clouds content cloud business network cloud experience cloud security and protection cloud and our developer of cloud based on our OTT platform.

On the weeks ahead, we'll be turning on cloud edition of 'twenty, one that one.

Which will provide thousands of new facets features and enhancements.

Our software development has always been deeply informed by customer feedback and here of some highlights of upcoming cloud editions and the content cloud.

We now fully support all major Hyperscale is TCP Azure AWS integration to SAP, and Salesforce embedded analytics and by 'twenty, one dot for the content cloud will be 100% recreate it as a multi tenant SaaS public shared environment running on OTT.

With cloud edition of 'twenty, one 'twenty, one dot for customers will never have to upgrade again.

And the business network cloud, we've added support for ethical supply chain sustainability and support for the circular economy.

As well as country specific support for invoicing tax and receiving we now support invoicing tax on receiving in over 60 countries, enabling global supply chains that are sustainable and support the circular economy.

And the experience cloud, we're providing superior omni channel experiences through seamless integration of the result, and enabling full social commerce commerce and personalization enabled by technology features and a long list of those features from notifications messaging.

Occupant percent meant and.

C pass open text Magellan is now integrated for machine learning into the experience cloud.

And security and our security and protection cloud.

Within bright cloud service intelligence, we have now added cloud access security broker functionality. It's also known as cozby to help enforce data centric security policies and to prevent unwanted interactions.

Our threat intelligence products are centered on behavioral analysis not signatures and.

In 'twenty, one that too we are excited about our unified management console for RMS and Msp's to enable complete integration of Webroot and Carbonite.

And the developer cloud, we now have over 25 live services content service capture signature document presentment of intelligent view of the workflow messaging. The list goes on identity and threat intelligence our developer cloud go check it out developer got open text Dot com is the.

Expect it to continue to organic growth in fiscal 'twenty two.

This new strategic long term initiative for US is to embed our services in the next generation of cloud companies and it will add a new channel to go to market.

Levering our capabilities of S. Api's will enable developers to include open text and speed their time to market.

Our third total growth strategy on acquire.

We remain patient disciplined value based buyers with returns based metrics and cash flow as creek key criteria.

It's a great example of of growth asset that met our disciplined value based criteria.

While offering significant opportunities to create revenue growth and synergies for our cloud based multi channel global platform, our liquidity cash flow on balance sheet remains strong. The pipeline is also strong and we will deploy capital when the right opportunity arises at.

Our total growth strategy of retain grow and acquire it's unique.

<unk> scalable and delivering returns.

Overall, we are of a company that remains on offense with the intent of taking share regardless of the economic environment.

Let me move onto the financial outlook.

We enter calendar 2021 with earned confidence.

An improving economy, coupled with the best part product portfolio in our history.

Position us to gain share by capitalizing on the present trends of digitalization Mark.

Modern work sustainable supply chain security and cloud.

When we do we'll cover the details of our financial outlook for Q3 and fiscal 'twenty 'twenty, one, but let me highlight the core aspects.

Increasing the investment in our product sales on our people, we have an improved demand outlook.

And we are raising our revenue growth outlook today for the remainder of the fiscal year.

Good revenue growth now to be in the high teens.

They are our growth now to be in the high single to low double digit.

And total revenue growth now to be in the mid single digit up from constant.

<unk> believes strongly returning value to shareholders today I'm pleased to announce that the board of directors has approved our quarterly dividend of 20.08 cents per share for holders of record of March 5th 2021, the payment date of March 'twenty six 'twenty 'twenty one.

Let me conclude my remarks, where I began on a note of optimism.

Today, we are playing offense with an improved outlook for fiscal 2021.

We had an exceptional quarter with record revenue and adjusted EBITDA of dollars with a growth of 21% cloud growth of 41% of support growth of 6%.

We have a strong balance sheet with the net leverage ratio of one six times and we generated approximately $1 1 billion of trailing 12 month free cash flows.

We settled with the IRS and put the matter behind us.

Last year's preemptive actions are replaced with energy and growth actions.

Secular trends are strong long lasting and open taxes at the center of transformative discussions.

We're in the early innings of an important product cycle with cloud editions.

And our pace of innovation has never been faster with 90 day release cycles, and an aggressive product roadmap on.

Behalf of open text I would like to thank our shareholders, our loyal customers our partners and our 14000 dedicated employees for all contributing to the success and I am so proud of the resilience and durability that continues to be demonstrated.

We're looking forward to seeing you at our virtual Investor Day on March 11th you can register on open text of Investor Relations website or contact our investor relations team directly and.

The Investor day, as a special opportunity for investors and analysts to gain of direct update from open text leadership team on our strategic progress and future direction. The team is very excited to be with you as.

It's my pleasure now to turn the call over the Madhu Robin often open text Chief financial Officer Madhu over to you.

Thank you Mark and thank you all for joining us today.

The strong second quarter and a solid first half of the fiscal year 2021.

PMT the sponsors at the onset of the global pandemic strength in Dos as we continue to lead the way in modern work on this.

And financial management has allowed us to support key growth initiatives maintained at the Symbion's. The type of business model and this is reflected in that expanded margins and solid cash generation.

I won't speak to Q2 Q3 in our quarterly factors.

Fiscal 'twenty, one total growth strategy.

The 21 annual target model changes and our long term aspiration all outlined in our Q2 investor presentation that is posted on the IR website today.

All references will be in the millions of USD and noted otherwise in compared to the same period in the price of school yet.

Let me talk with revenue Q2, total revenues for the quarter, but $855 six up 10, 9% or up eight 8% on a constant currency basis, including the strong.

Abuse of is from Carbonite as the completed the one year Mark of December 2020, It was the favorable FX impact to revenue of 16 point to the GP.

Capital spent a total revenues in the quarter.

Any kind of 60% EMEA, 32% and Asia Pacific 8% yet.

The year to date till those avenues of 165, 9 billion up 13% or up 11, 5% of the constant currency basis.

Q2 annual recurring revenues of $684 nine of 21 five per cent or up 19, 5% on a constant currency basis, I think the sense of total revenue.

Our our annual the cutting revenue was 80 per cent for the quarter up from 72% in the second quarter of fiscal 'twenty here on I would like to highlight that we achieved positive organic yeah outgrow the dirt.

During the quarter on a reported basis.

Year to date and names of cutting down the use of one to five 5 billion up 21, 7% or up 24% on a constant currency basis.

The percentage of total revenues year to date on was 82% up from 76% of the first six months of fiscal 'twenty.

Q2, cloud Jeb and use of particularly strong at $3 55 up 41, 1% or up 39, 6% on a constant currency basis.

The cloud the new ones rate excluding carbonite.

Oximetry, 96%.

Year to date cloud revenues of $6 91 for up $42 four per cent or up 41, 5% on a constant currency basis.

Q2 customer support companies, but to some of them 34.5 up 6% for up to 6% on a constant currency basis of customer support the new ones rate for Q2 was 94% across the business on the newest performance remained strong.

Yet to date customer support revenues of 663 nine.

The pipeline, 7% Mark.

For <unk>, 2% on a constant currency basis Q.

Q2 license revenues of 107 point G down, 22.2% or down 24, 6% on a constant currency basis year to date license revenues of $175 nine down 18, 6% on down 27% on a constant currency basis.

You tube professional services revenues of 63 point for down 9% on down 11, 4% on a constant currency basis year to date for placement services revenues of 128.5 down seven 6% or down 10% on a constant currency basis.

Text update before we speak the net income and other related metrics I want to again call out the other step as we announced on December 22020 the.

The IATA settlement provides financing with long standing matter, putting it behind us as we move forward and we believe it to be the best interest of all the stakeholders. The supplement the salt of in a charge of approximately 299 for the provision for income taxes, we expect to make payments to the eye on it of approximately 200 and <unk>.

87 during the third quarter of fiscal 'twenty, one and the associated steep tax and interest payments of approximately $12 million throughout calendar 'twenty 'twenty. One all details on included in our form 10-Q filed today.

Q2, GAAP net loss was 65 five compared to net income of 107.5 of the prior year, primarily driven by the tax provision the leading to the eye on a settlement.

To date GAAP net income was 37.9 compared to net income of 181 nine in the prior year Q.

Q2 of adjusted net income was $2 65 up 14, 8% or 11 point of 1% in the constant currency basis.

Year to date adjusted net income was 502.3.

Up $25 four per cent or up 22% on a constant currency basis.

Q2, GAAP loss per share diluted was <unk> 24 of them down to the earnings per share diluted of 40, yes.

Year to date GAAP earnings per share of denuded the 14th.

Down from 67%.

Q2, non-GAAP earnings per share diluted was <unk> 95 cents of 11 cents of 80% and up eight tenths of the constant currency basis year to date non-GAAP earnings per share diluted was $1.84 up 36 cents from $1 48, and up 31 on a constant currency basis.

Turning to margins GAAP.

GAAP gross margin for the quarter was 70.5% up 60 basis points year to date GAAP gross margin was 69, 8% up 120 basis points non-GAAP gross margin for the quarter was 77.1% up 160 basis points year to date non-GAAP gross margins of 76 point of.

On the pent up 240 basis points from <unk>.

GAAP gross margins by revenue type. Please refer to our Q2 fiscal 'twenty. One 10-Q report as I mentioned filed today.

Also on a non-GAAP basis for the quarter cloud margin was 66, 7% up from 58, 4% driven by continued improvements in the cloud service delivery and a strong contribution from Carbonite.

Year to date, the cloud margin was 66, 9% up from 57 eight per cent for now.

The quarter and year to date customer support margin was 91, 2% up from 97 per cent and reflected continued strong performance.

For the quarter license margin was 96% down from 97.8%, primarily due to higher third party technology costs.

Similar trends on a year to date basis as well.

For the quarter professional services margin was 27.5% up from 23, 5%, reflecting benefits, we see some lower travel while effectively delivering on solutions on a digital and remote basis.

Year to date professional services margin was $28 four per cent up from $22 eight per cent.

Please note that out of total operating expenses for Q2 into the destination of compensation and benefits effective December the first 2020 for all employees.

Adjusted EBITDA was still kind of in 68 this quarter up 30.

14, 8% or up 10, 7% on a constant currency basis.

This represents 42, 2% margin up from 41, 1% of the same quarter last year.

Year to date adjusted EBITDA was 703.1 up 23, 1% on up 22% on a constant currency basis.

This represents 42.4% margin up from 38, 9% during the first six months of fiscal 'twenty.

Turning to cash flow, just consistent and solid performance.

Operating cash flows of 282.5 for the quarter up 36, 2% and free cash flow of $272 eight up 46, 5% on.

On a year to date basis operating cash flows of the 516 for up 49, 8% and free cash flows of 493 point for up 61% DSO was 47 days compared to 57 days in Q2 fiscal 'twenty.

On the introduction of 10 day effects continue as mentioned to drive operational efficiencies you know working capital the same but particularly the code of conduct classes as well as positive contributions from the integration of Carbonite from.

The balance sheet perspective, we ended the quarter with approximately $1 5 billion in cash given our strong cash flow performance with the six hundreds of millions of the ball where the payment in October 2020, we now have 750 million undrawn and fully available, bringing our total liquidity to 2.25 billion.

Our consolidated net net liquidation is one six times and improvement from 182 times last quarter.

Strong place to be solid execution of the quarter and the balance sheet the positions us well to execute enough total growth strategy.

Now turning to quarterly factors total growth strategy and annual target model all available on our Investor website. So.

The first and foremost let me the debate that we do see our business is annual and quarters embedded long term values created from the 15th annual performance in 90 day cycles, the way too short to measure on.

Quality factors for the third quarter fiscal 'twenty, one and compared to the same period in the prior year, we expect the following inclusive of FX.

First of all the FX tailwind on revenues of $10 million to $15 million.

Total revenue constant.

The cutting down the new add on constant to slightly up on.

Adjusted EBITDA margin percentage of 100 to 200 basis points.

For a full year of fiscal 'twenty, one total growth strategy.

The first half of the Thats going to performance has been strong, particularly in the context of the global pandemic and I'm very pleased to increase of outlook for the remainder of the fiscal year. We now expect the following put on a full fiscal year 'twenty 'twenty, one compared to fiscal year 2020.

High teens clip on cloud revenue compared to our previous target of mid double digits.

No single digit growth of customer support revenue is consistent with our probably our target.

High single to low double digit growth in annual the cutting revenue compared to our previous target of high since the beginning.

No changes in license and P. S revenue targets, which we see declining and this is consistent with the industry trend and its cloud adoption ex committee.

Total revenue move from constant to low single digit to mid single digit growth in fiscal 'twenty one.

New M&A opportunities was the main additive to our model.

I'll just go to 'twenty, one annual target model, which includes the operating ranges. It means unchanged. However, I will highlight a few important points.

And the ones, you're putting revenue out of date.

The age for fiscal 'twenty, one expected the 81 to 83 per cent compared to 78, 2% in fiscal 'twenty.

Non-GAAP gross margin change in fiscal 'twenty, one expected at 74 to 76 per cent compared to $74 five per cent in fiscal 'twenty.

Adjusted EBITDA margin range for fiscal 'twenty, one expected at 37 to 38 per cent compared to 36, 9% of fiscal 'twenty.

On long term aspirations on.

Long term aspirations remain unchanged targeting adjusted EBITDA margin of 38 to 40 per cent and free cash flow of 900 million to $1 billion for fiscal 'twenty three with a plan to reinvest any margin gains of about 40% of additional growth initiatives.

In summary, well done to the open text team for delivering the solid Q2, and leading the way in digital working.

In January of 'twenty 'twenty, one drilled in the open texting docks forward tremendous nothing but just Indians as we look ahead for the second half of our fiscal year a day.

I, especially thank you for you the amazing efforts I. Thank each of our shareholders of trust and confidence we greatly value. We look forward to engaging with all of you as part of an investor outreach and conferences and of course and I'm much 11th of Investor Day, I wish you all continued safety and wellness.

I would now like to open the call for questions operator.

Thank you we will now begin the question and answer session anyone who wishes to ask a question May press star and one on their touchtone telephone to join the question queue, you'll hear a tone of acknowledging your request. If you were using a speaker phone. Please ensure you lift the handset before pressing any Ts if you wish to remove yourself from the quest.

Q you May press Star then to anyone who has the question May Press Star and one at this time.

Our first question comes from Raimo <unk> of Barclays. Please go ahead.

Hey, Congrats from me on a great quarter.

Mark you talked a little bit about the.

The recovery or the green shoots of recovery, you see everywhere and.

And it's great to see the guidance for Chris now. It's you know it's fully organic what we see for next quarter. If you think about the the next few quarters looking out in to the guidance you've given there is there.

Is that kind of the new normal of Gen element of recovery in there. So that's better than normal like how do we have to think about it of what you're seeing there and then I had one follow up.

Yeah. Thank you for the question.

Look the if.

The wind back for a year ago.

Our LNG was very much on our preemptive.

Sort of decisions that.

Ultimately strength industrial for the year, but if I look at the year ahead.

And certainly for the remainder of the fiscal year, which is through end of June.

We see those green shoots I mean, there there are for things that come to mind. The first is <unk>.

The modern work is really accelerating.

The contact management workflow esignature projects and collaboration.

Second is we see this rebound of our business network volumes.

And industries that are seeing an increase health.

Health care automotive retail a lot of green shoots there for us on the business network.

Security has come front of mind post us all of the wins and our ability to really provide data protection and the next generation of threat intelligence based on behaviors for of signatures and the range.

You have all of the I think the secular things around movement to cloud.

And the need to have that.

Trusted partner on on a global basis. So do you feel like very sustained trends coming into the calendar year.

And we've had for quarters of experience through through the pandemic and each each quarter has been getting sequentially stronger.

So that's a part of the reason for a bit more visibility into the fiscal year as we come into the second happened and.

Welcome to your second question.

Okay, perfect and then on the cloud. So we know we were talking to the 21 of two and 21 of the for sounds actually really exciting down when it comes out what are you seeing in terms of customer interest in terms of how they are kind of migrating over to the cloud is that do you see like new workloads go on into the into the cloud.

On the existing stuff is to kind of staying on premise do you see the migration starting what's the momentum that you're seeing there. Thank you.

Yes. Thank.

Thank you for that look at at Investor Day, I plan to go much deeper on the kind of the status of of cloud edition, but let me just give you a few examples.

I look at our content cloud and support for for modern work.

We have.

The new workloads and expense and expand it work going on at the NIH and the U S and and.

On the European Central Bank on the experience cloud.

We have a new customer like P. G N E and expand it workloads for social commerce at L'oreal.

On the business network side, we're very excited about I know, we're all very focused on the pandemic and rightfully so.

But the the greater challenge is really the environment and the circular economy.

So I'll work on and supporting very demonstrable features to support that circular economy.

The customers like Nestle or protection cloud I'm doing work with.

Hi of Thomson Reuters on our security and protection cloud.

And I'm really excited about how the developer of cloud.

Everything is of public API is going to contribute to organic growth in fiscal 'twenty. Two so it's all about the cloud edition I think of it. It's a mixture of taking off cloud current workload two of private managed service, it's about adding new workloads and our SaaS offerings.

It's attracting new customers and also of new market of our of our of our API services.

And I'm Gonna I plan to go on a lot more detail at our Investor day.

Okay I'm looking forward to the okay. Thank you.

Our next question comes from Stephanie price of CIBC. Please go ahead.

Good afternoon.

Hi, Stephanie.

Hi, the Tau.

Talk a little bit about which pieces of the cloud kind of drove that outperformance versus versus prior expectations. You know did you see kind of outsized growth on carbonite or C. E of our business networks of how to kind of think about that from.

One of the cloud this quarter.

Yeah I would.

I'd point to three pieces.

On the content side of the cash and the content cloud.

Again for the for for the reasons.

The reasons I, just previously talked about support for modern work.

Second is the business network.

And the increase in volumes and and nice new green shoots and in a variety of industries.

And Carbonite overall, just had a strong quarter.

From the data protection Carbonite side of Webroot and threat intelligence.

As well as a bright cloud.

So those of the three standouts, Stephanie I'd point to are the content cloud business that work and the Carbonite in general.

Okay, that's helpful and with some of the Carbonite I'm kind of thinking about the the upside opportunities here on the cross selling into the enterprise and the extension of the partner network.

I'm just curious you know where we are on those initiatives or you know the you know.

Performance in Carbonite was really more of a function of just the existing perfume or a consumer market on kind of driving that channel sales.

Yeah. There are there there are three drivers the first is.

Just better running the existing business and it is a unique go to market.

And.

And this is where we are we are we sell to we enable we deploy to our Mems and Msp's. We don't really we don't we of course sell to some.

Smbs directly but the vast majority of our business is true rmm's, an MSP and at the very unique channel I know others are claiming they invented it they did and.

That's okay.

But our business is sort of this very unique channel. So on growth is just a better managing that to.

Two is increased innovation I'm very excited about.

The one dot two and an integrated console.

That delivers on the promise of integrating Carbonite webroot to move through that channel of our arm M.

And M S P.

The third is uplifting.

Oh kind of Upselling upscaling the product.

To the enterprise and we started to see some green shoots there I've mentioned a.

A few names of TD Securities a highest Thomson Reuters Prudential, who are using a mixture of carbonite data protection or or bright cloud.

Those of the three approach of Stephanie that we're looking to grow it it's just better managing all of the platform.

To RMM as an M. S piece, it's to accelerating innovation things like Casspi things like an integrated consult a next generation of threat intelligence.

Continuing to focus on behaviors for signatures and that's why I called upscaling the product into the enterprise and we've begun to see some green shoots on the enterprise customers I just mentioned.

Great. Thank you very much.

Our next question comes from Paul steep Scotia capital. Please go ahead.

Great. Thanks, Mark maybe you could talk just following up on the content cloud driving growth can you give us a sense of.

What the multiyear migration cycle might look like I know that might be taking some of the excitement from the March day, but just even in the context of where we are and then the one quick follow on.

Yeah.

But my my teams strongly encouraged me.

Save the gun powder for Investor Day, if you will but let me let me say it this way Paul.

We are in literally the earliest of an ex truly are.

More of less than 10 per cent migrate it of our install base.

Into our into our five clouds.

So it is still the earliest of innings to had.

Our install base on.

Fully on the cloud edition architecture, and and and platform.

And it's not just a lift and shift of the platform. We can manage it better we can manage it at a lower price, but we want to bring them to of modern environment and we want to manage the application stack, we want to be able to expand workload, who want to be able to bring them to all of the information management. So on.

I would I would just summarize that we're in the literally earliest of earnings well less than 10 per cent migrate it on cloud and look how the addition of it's only been on the market just a little over a year.

So it remains the largest of the single largest opportunity we have to drive growth is to migrate our installed base.

Great and then.

Risk of wearing of my welcome here, how should we think of the lever Unger term as we as.

As we sort of move over from cloud how should we think of it that license line or maybe how are you managing that transition.

Make customers more of less you know agnostic about the purchase decision thanks folks.

Yeah. Thank you Paul.

I think you'll notice I didn't use the word of license at all on my script.

And the emphasis is all on cloud.

Let me point to a few things the first is our annual recurring revenue they are on.

With 80%.

It's all about our business, but when you benchmark us to Oracle.

Microsoft IBM S P.

We are ahead of every one of those in terms of art or our transition to a R. We're on.

<unk> 80 per cent Oh, we have a.

For.

Our target model is 81 to 83 per cent for the year, but you look at established companies like IBM, Microsoft Oracle has a P. Warhead of every single one of them and where we are they are the percent of our business.

Second I'd point to our our support business, which has the support and update business the ability to get security updates the the ability to get rapid new features that are relevant and easy to consume that business grew 6%.

As we noted.

So our strategy is lack of customers decide is customer choice of how they want to consume I said this many years ago I am agnostic as to how they want to consume.

We are opinionated on growing our margin.

As you can see through the year, so we're not agnostic there.

And we've we're just kind of grow of cloud faster than everything else.

As you're as you're seeing so customers still have the choice is clearly cloud first.

<unk> is leading and dominating we're ahead of our peers and we're simply going to grow faster.

And cloud and a R. R of Earth that transactional side of the business.

Thank you.

John Paul if I can maybe before we get to the last question.

I, just we don't philosophically believe that we should force it.

Because it's still customer choice and some companies are forcing it but they're all sort of lot lower a R. R than we are.

And so.

It's really the AAR our piece of that.

Is it really of stand out at 80 per cent not just at open text book when measured to our peers.

That helps thank you.

Yeah.

Our next question comes from Thanos, the troubles of BMO capital markets. Please go ahead.

Hi, good afternoon.

Hey, Mark how would you characterize the cut.

Customer buying behavior.

Terms of the sales cycles. The shifting processes are deal sizes is it starting to look a lot more similar to pre pandemic or are we still kind of a weird environment net regard.

I would say it's returning.

It's not fully back to pre pandemic.

But it's it's a lot less on certain <unk> and <unk>.

Bureaucratic than it was day being the first half of last year.

There is no doubt of greater emphasis.

And I think this is new so it is not pre pandemic or during the pandemic I just think this is new.

It is an emphasis on time to value.

That theres, an immediacy, there's a time to value.

And it's also a looked of global trusted partners versus so less risk adverse.

So I'm. It's a good question on deal sizes. I think are are slightly up I think decision cycles are slightly down or slightly shrunk.

It's I wouldn't say, it's fully back to pre pandemic, but it's more they are the knot and time to value is certainly emphasized in the majority of our transactions today.

Great and then a question for Madhu as they look at.

Your guidance and your target model for the year that would seem to imply a fair bit of gross margin compression.

In the second half in professional services and cloud and so maybe just to clarify exactly of function of comp being restored at part of levels on expectation of travel expense is going up or maybe just conservatism on your part.

Hum.

For that so definitely as Mark also alluded we.

We are investing in the second half and we are investing not just putting medicine come back but also in terms of hires.

And building up the floor for the net net.

For the next year and from a gross margin perspective, the ultimate investment income services and customer support as well.

[noise], presumably maybe two to improve but capacity right, but if you are running at high utilization of for any type of on capacity, but it would be fair.

Yes, that'd be fine as well Yep yep okay.

Okay. Thanks for that one.

Yeah. Thank you.

Our next question comes from Richard Tse of National Bank Financial. Please go ahead.

Yes, Thank you with respect to the shifts here of the cloud.

I'm just kind of curious is there.

On the opportunity to kind of create a step function up in terms of organic growth with that transition here.

Richard Thanks for the thanks for the question.

As we.

Noted in our script, we had in the quarter on.

Organic AOR growth on reported the currency.

And.

I expect to have organic growth in the cloud.

In the second half of the year.

In terms of a step up wall.

Maybe talk more about what that means, but I'm expecting cloud to grow organically.

Just to stay at the directly.

Just on the factors we talked about.

Okay, Yeah, I'm, just asking because of the sort of looking at slide 21 of 24, where you highlight your customers and the number of the products that they're signed up for and it seems like they're signing up for more.

And I guess the the line of questions around your guidance as these platforms become more uniform the ability of sell into the base I would think should be easier now which is why I'm asking the question, but in any of that yeah.

Yeah, and look at and if I cannot point to the principles I talked a little bit about.

And they're important principles behind cloud editions, I think that's partly of what you're noting that once migrated into the open text cloud.

We have the ability to deploy the features for our customers.

And they.

They don't have that.

The friction in the system right the more integrated we get.

Again, the loss of friction to more of our modules.

And as we get to more standardized product.

The ease of of of both consumption and new modules. So it's no doubt that.

The cloud edition and running of the cloud is going to give us the opportunity because of the integration to deploy more capabilities into the end to have customers be able to.

Consume more.

Okay that makes sense.

Yeah with respect to the acquisitions I know.

You talked to the us or is the one on one part of the your growth strategy, what does that on environment looks like today, and I guess related to that for you.

Looking at the sort of fortify the markets you're currently in or would you kind of look at it expanding in the marks sort of sort of like what you did with carbonite.

On the security.

Yeah.

Well, let me, let me take that as an opportunity I'll answer the question directly but I'm going to take it as an opportunity to highlight how we believe we create value.

A number one number one these are coast. These are co number one the number a number one the number one number one.

Organic growth.

And that's top of the list.

And as we look into the remainder of the sector of the second half of the fiscal year in the calendar year.

Clearly emphasizing organic growth today.

And also the step up in our on our outlook.

The second away with the circuit number two of the number one.

Is marching.

March it.

And we've just been on a stellar track.

To continue to become more efficient more productive as a company and the third way are the the.

Third number one.

Is capital.

The capital deployment and capital efficiency.

We're very focused on the capital we've deployed on <unk>.

Getting full value for Carbonite getting full value for the liaison document on wasn't that long ago.

And the document on puts us right in the middle of a modern work for a lot of companies.

And then there is new capital deployment.

And on the new capital deployment, which was I think part of the basis of your question.

We're going to remain of value buyer.

We have the management and leadership bandwidth.

We have.

Net debt ratio of 1.6 approaching sort.

Sort of a recent lows if you will.

And I'm very happy with the markets. We're in today, so I'm not looking to create a new market Richard but rather.

The kind of gaining share.

And what we have.

Okay, and just one last one related acquisitions.

What is your comfort level on leverage ratio I think of us in the mid threes of I don't like the article, but I'm not sure. What it is today is it still around there.

Our net leverage ratio was 1.6 today.

And as we are you know we've noted we've chronicled historically the.

Oh wait wait wait.

I'd be comfortable.

Ideally we're at three but will go above three of we need to and then rapidly a.

Decrease that.

And I'll point against the Carbonite as well as document them, where we rapidly de levered.

Look we are three years, where just the I think of it simply that.

If the world goes really bad like their pay off my debt in three years [laughter]. That's why the that's what I thought of of three ex ratio. So relatively conservative ratio our covenants allow us to go higher than that but we like operating around three were well below it and if we need to go above three we won't be bashful for the right asset.

But it will come with a rapid deleverage plan.

And as we've demonstrated we can do it and have done it with the Carbonite and documented.

Okay, that's great. Thanks Mark.

Our next question comes from Paul Treiber of RBC capital markets. Please go ahead.

Oh, thanks, very much and good afternoon, just wanted the horizontal one product.

Product area in particular, which is E signature it seems like that is probably one of the the products there'll be some strong adoption in the environment now how do you see within the large enterprise deals like is it the bundled in there or can you sell it as an incremental product offering and the reason I bring it out for some of your competitors are doing quite.

Well, it's selling.

Signatures of the digital signatures.

So should we expect similar growth or are you seeing some of our girls.

With your own part of that.

Yeah, Paul Thank you for the question, we're excited about it and we sell it independently.

We.

We bought the source code to our company.

About a year ago.

And we created a product.

About a year and a half ago created a product and the service.

And it's now.

For fully integrated the content services and is now a standalone product.

So.

Or.

We expect that it is contributing.

And we're fully able to sell it as a as an independent the module.

And it is an important part of modern work part of workflow a.

Part of collaboration project management, and ultimately signatures I'll highlight one customer fully life work doing tens of thousands of signatures of months.

The government of Ontario.

And who are fully live on our E signature product.

And.

This relates to the the E signatures for it.

With the market.

The signature of weak it seems like a lot of the growth is coming from SMB.

It seems like there's other product categories.

File sharing the whatnot, where the growth is being driven by Smbs with the the launch of your 21 dot for product in the multi tenant SaaS on public cloud does that potentially open you up open up the tax up to going direct in terms of addressing the F&B market.

Yeah.

We still have you know what all of our progress we still have.

Much to learn.

We bring esignature to the enterprise.

Where we we havent brought esignature to F N b.

So our esignature of success is through our enterprise sales force.

And this is one of the reasons, we really loved carbonite, because we see a lot of these solutions.

That are built both to scale up into the enterprise and scale of laterally into F N b.

And this is part of our great long term growth prospect is to be able to get that multichannel way to market really humming.

Hum.

We now have our product like E signature for the enterprise.

But we havent brought it into the into the SMB world yet.

So I mean I appreciate your kind of your comment but it just highlights.

Why we brought on Carbonite and the opportunity for many of our our key solutions and it's it's one of the things that all of its part of our strategic direction is the ever bring product simultaneously to the enterprise and SMB.

And we have a lot of learning to do there.

And lots of opportunity.

Okay. Thanks for taking my question.

This concludes the question and answer session I will now hand, the call back over to Mr. Burns for closing remarks.

Alright, well. Thank you very much. We're obviously very excited about Q2, and playing offense and our improved outlook for fiscal 'twenty one.

I hope you're well, we hope to see everyone out of our virtual Investor Day on March 11th. Please register on our website or contact Investor Relations and the team is very excited to spend time with you.

Talk to provide updates on our strategic progress and our future direction. 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 day.

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