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 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 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, <unk>, and our executive Vice President and Chief Financial Officer, Madhu resonate but.
We have some prepared remarks, which will be followed by a question and answer session.
This call will last approximately 60 minutes with a 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 executive team will be hosting a virtual investor day on Thursday March 11.
For 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 that contain forward looking information.
While these forward looking statements represent our current judgment actual results could differ materially from a conclusion forecast or projection in the forward looking statements made today.
Certain 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.
Paint 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 update these forward looking statements unless required to do so by law. In addition, our conference.
Call May include discussions of certain non-GAAP financial measures reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website.
With that I am pleased to hand, the call over to Mark.
Thank you Harry and good afternoon to everyone and thank you for joining today's call.
I want to open the call with a note of optimism.
Over the last year, the World has experienced health financial social political and environmental crises.
While many of these crises continue.
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 a global economic recovery appear to be brightening.
Today in the U S. More people have received their first dose other COVID-19 vaccine then cases reported.
Economists are increasingly predicting a strong economic recovery in calendar 'twenty to '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.
To value Mark.
Modern work sustainable supply chains, stellar customer experiences and cloud plus edge computing.
What has become clear is that the cloud plus network plus edge are inextricably linked.
Our new architecture and platform of cloud editions Places open text information management demonstrably in the middle of an important demand conversations for companies of all sizes large medium and small.
The previous for quarters that 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 in trailing 12 month free cash flows and invested $400 million trailing 12 months and our products. Each approximately we settled with the IRS, we increased our dividend by 15%, we announced a 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 we'll get to in a moment.
Introduced our new platform cloud editions.
And we're on target to deliver adjusted EBITDA of 37%, 38% this fiscal year.
And we are on target to deliver annual recurring revenue saw 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 a statement it was not just words that we would exit the pandemic stronger than we entered.
The above 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.
<unk> delivered an exceptional quarter many of our quarterly metrics are at historic highs.
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 yes revenue our history.
A R R of $685 million up 21%.
The highest day, our R&R 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 per cent best Q2, Mcf 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 or.
Reflective of the disciplined operations post acquisition of Carbonite.
We continue to generate growth cash and returns in the right places.
We had many notable customer expansion and wins in Q2.
We have a full list in our investor deck. Please give the presentation of Reed, but let me highlight a few med.
Met Pro 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 extreme youth as extent used a modernized enterprise wide digital delivery processes.
For the department of work and pensions in the U K, a governmental body responsible for welfare pension and child 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 worlds largest global ice cream companies headquartered in the UK headquartered in the U K expanded their commitment to open text <unk> managed services and engage with open text to build a 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.
Janet its 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 the dispute with the IRS as.
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 walk through our total growth strategy.
Which has three fundamental elements.
Pertain.
L and acquire and retain.
We delivered another exceptional quarter with customer support renewal rates at 94 per cent and non-GAAP gross margin 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.
Non grout.
Continue to ramp up our investments in products and sales continue to grow our sales coverage of the global 10000 customers and we are expanding our relationships with global partners, our Mems and MSP.
We're 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.
For the balance of fiscal 'twenty, one our adjusted EBITDA margin will begin to reflect those increased investments the.
For the principles behind our cloud editions include customer choice run anywhere number one to cloud.
Cloud first three simplification.
Five cloud 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 first 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 cloud businesses, delivering our capabilities 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 cloud content cloud business network cloud experience cloud security and protection cloud and our develop our cloud based on our OTT platform.
In the weeks ahead, we'll be turning on cloud edition for 'twenty, one dot, one which will provide thousands of new facets features and enhancements.
Our software development has always been deeply informed by customer feedback and here are some highlights 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 share it environment running on OTT.
With cloud edition for '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 and receiving in over 60 countries.
Tabling global supply chains that are sustainable and support the circular economy.
In the experience cloud, we're providing superior omni channel experiences through seamless integration, the result, and enabling full social comment commerce and personalization enabled by technology features and a long list of those features from notifications messaging document per sentiment and.
C pass.
Open text Magellan is now integrated for machine learning into the experience cloud.
And security and our security and protection cloud with.
Within bright cloud services 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 cigna.
Sure.
And '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 intelligent viewer workflow messaging. The list goes on identity and threat intelligence, our develop our cloud go check it out developer that open text dot com.
We 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 net.
We'll add a new channel to go to market.
Our capabilities have as API will enable developers to include open text and speed their time to market.
Our third total growth strategy an 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 a growth asset that met our disciplined value based criteria.
While offering significant opportunities to create revenue growth and synergies for our cloud based <unk>.
<unk> channel, our global platform, our liquidity cash flow and balance sheet remains strong. The pipeline is also strong and we will deploy capital when the right opportunity arises at.
Our total growth strategy and retain grow and acquire it's unique.
<unk> scalable and delivering returns.
Overall, we are 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.
And we do will cover the details of our financial outlook for Q3 and fiscal 2021, but let me highlight the core aspects.
Increasing the investment in our product sales and 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> strongly returning value to shareholders today I am pleased to announce that the board of directors has approved our quarterly dividend up 20.08 cents per share for holders of record of March 5th 2021, and a 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 dollars with a growth of 21% cloud growth of 41% and support growth of 6%.
We have a strong balance sheet with a net leverage ratio of one six times and we generated approximately $1 1 billion in 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 are 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.
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 this 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 Investor Relations website or contact our investor relations team directly.
Investor day, as a special opportunity for investors and analysts to gain a direct update from open text leadership team on our strategic progress and future direction. The team is very excited to be with you.
It's my pleasure now to turn the call over to Madhu Raga, often open text Chief financial Officer Madhu over to you.
Thank you Mark and thank you all for joining us today.
Had a strong second quarter and a solid first half of its fiscal year 2021.
PMT responses at the onset of the global pandemic strength in Dos as we continue to lead the way in modern work.
And financial management has allowed us to support key growth initiatives maintain the Indians, if our business model and this is reflected in that expanded margins and solid cash generation.
I won't speak to Q2, Q3, and our quarterly factors.
Fiscal 'twenty, one total growth strategy after fiscal 'twenty, one annual target model changes and our long term aspiration all outlined in our Q2 investor presentation that is posted on our IR website today.
All references will be in the millions of USD and as noted otherwise in compared to the same period in the prior fiscal year.
Let me talk with revenue Q2, total revenues for the quarter, but $8 $55 six up 10, 9% or up eight 8% on a constant currency basis, including strong contributions.
From Carbonite as we completed the one year Mark in December 2020, it was a favorable FX impact to revenue of $16 two.
The geographical split just told US avenues for the quarter was Americas 60 per cent, EMEA, 32% and Asia Pacific 8%.
Year to date till those avenues, 165, 9 billion up 13% or 11, 5% on a constant currency basis.
Q2 annually for cutting that been used at 684.9 up 21, five per cent or up 19, 5% on a constant currency basis.
As a percentage of total revenue.
Our our annual the cutting revenue was 80 per cent for the quarter up from 72% in the second quarter fiscal 'twenty here I would like to highlight that we achieved positive organic yeah I do.
During the quarter on a reported basis.
Year to date and names of cutting debt 135, 5 billion up 21, 7% or up 24% on a constant currency basis.
As a percentage of total revenues year to date was 82% up from 76% for six months of fiscal 'twenty.
Q2 cloud revenue as a particularly strong at $3 55 up 41, 1% or up 39, 6% on a constant currency basis.
Cloud the newer line excluding carbonite.
So between 96% yet.
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 Japanese, but 334.5 <unk>.
6% for up to 6% on a constant currency basis.
Our customer support the new ones rate for Q2 was 94% across the business are the newest performance remained strong.
Yet to date customer support revenues were 663.9.
$5 seven per cent or up for 2% on a constant currency basis.
Q2 license revenue, though why don't seven 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% or down 27% on a constant currency basis.
Q2 professional services revenues of 63 point for down 9% or down 11, 4% on a constant currency basis year to date professional services revenues of $128 five down seven 6% or down 10% on a constant currency basis.
Tax update before we speak to net income and other related metrics I want to again call out the other settlement, we announced in December 22nd 2020 debt.
I would just supplement provides finality to this long standing matto, putting it behind us as we move forward and we believe it to be the best interest of all stakeholders. The supplemental felt it in a charge of approximately 299 for the police.
Vision for income taxes.
Expect to make payments to the IR day.
Approximately 287 during the third quarter of fiscal 'twenty, one and associated state tax and interest payments of approximately $12 million throughout calendar year 2021. All details are included in our form 10-Q filed today.
Q2, GAAP net loss was 65 five compared to net income of 107 five in the prior year, primarily driven by the tax provision relating to the IATA settlement.
To date GAAP net income was $37 nine compared to net income of 181 nine in the prior yet Q.
Q2, adjusted net income was $2 65 up 14, 8% or 11, 1% on a constant currency basis.
Yet to date adjusted net income was $5 2.3.
Up $25 four per cent or up 22% on a constant currency basis.
Q2, GAAP loss per share diluted was <unk> 20 for spin down to earnings per share didn't you did 40.
Year to date GAAP earnings per share denuded the 14th.
Down from 67%.
Q2, non-GAAP earnings per share diluted was <unk> 95 up 11% from 80% and up eight tens on a constant currency basis year to date non-GAAP earnings per share diluted was <unk>.
$1 84 up 36% from $1 48, and up 31 on a constant currency basis.
Turning to margins.
GAAP gross margin for the quarter was 75 per cent 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 margin was 76, 8% up 240 basis points for.
GAAP gross margin 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 our cloud services delivery and a strong contribution from Carbonite.
Year to date cloud margin was 66, 9% up from 57 eight per cent for.
Quarter and year to date customer support margin was 91, 3% 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.
For the professional services margin was 27.5% up from 23, 5%, reflecting benefits, we see some lower travel while effectively delivering a solution 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 our total operating expenses for Q2 into a destination of compensation and benefits effective December 2020 for all employees.
Adjusted EBITDA was 268 this quarter.
13, 8% or up 10, 7% on a constant currency basis. This represents 42, 2% margin up from 41, 1% in the same quarter last year.
Year to date, adjusted EBITDA was 703.1 up $23, one per cent or 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 40 615 per cent.
On a year to date basis operating cash flows of $516 for up 49, 8% and free cash flow is a 493 point for up 61% DSO was 47 days compared to 57 days in Q2 fiscal 'twenty.
Together, we had a reduction of 10 day effects continue as mentioned to drive operational efficiencies you know what.
Capital sales, but particularly the court to collect classes as well as positive contributions from the integration of Carbonite.
From a balance sheet perspective, we ended the quarter with approximately one 5 billion in cash given strong cash flow performance with a 600 millions of Baldwin repayment in October 2020, we now have 750 million undrawn and fully available, bringing our total liquidity to 2.25 billion.
Our consolidated net leverage ratio is one six times and improvement from 182 times last quarter.
A strong place to be solid execution in the quarter and a balance sheet that positions us well to execute and I've told him build strategy.
Now turning to quarterly factors total growth strategy and annual target model all available on our Investor website.
Question for most let me be debate that we do see our business is annual and quarters embedded long term values created from 15th annual performance in 90 day cycles are 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 such.
Such for FX tailwind on revenues of $10 million to $15 million.
Children's revenue constant.
Any other cutting revenue and constant to slightly up.
Adjusted EBITDA margin percentage up 100 to 200 basis points.
For our full year fiscal 'twenty, one total growth strategy.
Almost half of the fiscal into performance has been strong, particularly in the context for the global pandemic and I'm very pleased to increase that outlook for the remainder of the fiscal year. We now expect the following put our full fiscal year 'twenty 'twenty, one compared to fiscal year 2020.
High teens cloud and cloud revenue compared to our previous target of mid double digits.
No single digit growth from customer support revenue consistent with our prior target.
High single to low double digit growth in annual recurring revenue compared to our previous target of high single digits.
No changes in license and P. S revenue targets, which we see declining and this is consistent for darden.
Industrial trend and its cloud adoption extra money.
Total revenue move from constant to low single digit to mid single digit growth in fiscal 'twenty one.
New M&A opportunities what does it mean additive to our margin.
I'll just go for 'twenty, one annual target model, which includes other operating ranges. It means unchanged. However, I will highlight a few important points.
And even just putting revenue.
Good day for fiscal 'twenty, one expected at <unk> 81 to 83 per cent compared to 78, 2% in fiscal 'twenty.
Non-GAAP gross margin James Anstead from 'twenty, one expected at 74 to 76 per cent compared to $74 five per cent in fiscal 'twenty.
Adjusted EBITDA margin change for fiscal 'twenty, one expected at 37 to 38 per cent compared to 36, 9% from fiscal 'twenty.
From a longtime explanation our 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 above 40% into additional growth initiatives.
In summary, well done to the open text team for delivering a solid Q2 and leading the way in digital working.
January 'twenty 'twenty, one drilled in the open text team docs forward tremendous nothing but just Indians as we look ahead for the second half of our fiscal year a day, especially thank you for your amazing efforts.
Thank you to our shareholders, whose 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 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 are using a speaker phone. Please ensure you lift the handset before pressing any Ts if you wish to remove yourself from the question.
Q you May press Star then to anyone who has a 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 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 next few quarters looking out in to the guidance you've given there.
Sure.
Is that kind of a new normal or is that an element of recovery in there. So that's better than normal like how do we have to think about it what you're seeing there and then I had one follow up.
Yeah. Thank you for the question.
Look the if I.
Wind back to a year ago.
Our LNG was very much on our preemptive.
Sort of decisions.
Ultimately strength industrial 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 a modern work is really accelerating contact management workflow E signature.
Projects in collaboration.
Second is we see this rebound of our business network volumes.
And industries that are seeing an increase.
Health care automotive.
Retail a lot of green shoots there for us from a business network.
Security has come front of mind post us all the wins and our ability to really provide data protection.
And the next generation of threat intelligence based on behaviors for signatures.
And while you have all the I think the secular things around.
Moving 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 and we've had four quarters of experience through through the pandemic and each each quarter has been getting sequentially.
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 half in <unk>.
And.
Welcome to your second question.
Okay, perfect and then on the cloud so we know.
Are you talking 'twenty 'twenty, one or two in 'twenty, one dot 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 going into the into the cloud and the existing stuff is to kind of staying on premise do you see that migration.
<unk>, what's the momentum that you're seeing there. Thank you.
Yeah. 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.
New workloads and expense and expand it work going on at the NIH and the U S and and.
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 greater challenge is really the environment and the circular economy.
So I'll work and supporting very demonstrable features to support that circular economy.
Customers like Nestle or protection cloud.
We work with.
Hyatt Thomson Reuters on our security and protection cloud.
And I'm really excited about how the developer cloud.
Everything is a public API is going to contribute to organic growth in fiscal 'twenty. Two so it's all about the cloud editions I think it is it's a mixture of taking off cloud current workload to a private managed service, it's about adding new workloads and our SaaS offerings.
It's attracting new customers and also a new market of our of our of our API services.
And I'm Gonna I plan to go into lot more detail at our Investor day.
Okay I'm looking forward to that okay. Thank you.
Our next question comes from Stephanie price of CIBC. Please go ahead.
Good afternoon.
Hi, Stephanie.
Hi.
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 in carbonite or T E business networks or how to kind of think about that from.
And for cloud this quarter.
Yeah I would.
I would point to three pieces.
On the content side and the cash in 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 in.
Nice new green shoots and in a variety of industries.
And.
Carbonite overall, just had a strong quarter.
From the data protection Carbonite side Webroot.
And threat intelligence.
As well as bright cloud. So those are the three standouts, Stephanie I'd point to other content cloud business that work and Carbonite in general.
Okay. That's helpful.
And within the Carbonite I'm kind of thinking about 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 in those initiatives.
The.
Our performance in carbon that was really more a function of just.
The existing protium or a consumer market kind of driving that channel. So it's Joe.
Yeah. There are 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 RMS 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 through Rmm's, an MSP and it's a very unique channel I know others are claiming they invented it they did and.
That's okay.
But our business is suited for a unique channel. So one growth is just a better managing that too is increased innovation I'm very excited about.
'twenty, one dot two and an integrated console.
That delivers on the promise of integrating Carbonite webroot to move through that channel of our RMM.
And M S P.
The third is uplifting.
Uplifting.
Uh huh.
Upselling upscaling the product into.
Into the enterprise and we started to see some green shoots there I've mentioned a.
A few names TD securities a highest Thomson Reuters Prudential, who are using a mixture of carbonite data protection or or bright cloud. So those are the three approaches Stephanie that we're looking to grow it it's just better managing other platform.
To rmm's in Msp's, it's to accelerating innovation things like Casspi things like an integrated consult a next generation of threat intelligence.
Moving 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 even in a context of where we are and then one quick follow up.
Yeah.
Yeah.
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.
We are in literally the earliest of innings truly are.
We're less than 10 per cent migrate out of our installed base.
Into our into our five cloud. So it is still the earliest of innings to.
Had our install base.
Fully on the cloud edition architecture, and and and platform.
And it's not just a lift and shift to other platform. We can manage it better we can manage it at a lower price, but we want to bring them to a modern environment and we want to manage the application stack, we want to be able to expand workloads, you want to be able to bring them to all other information management.
I would I would just summarize that where in the literally earliest of earnings well less than 10 per cent migrate it on cloud and cloud edition, it's only been in the market just a little over a year.
So it remains the largest are the single largest opportunity we have to drive growth is to migrate our installed base.
Great and then for.
Risk of wearing out my welcome here, how should we think open it ever longer term as we.
As we sort of move over from cloud how should we think about that license line or maybe how are you managing that transition.
To make customers more or less.
Gnostic about the purchase decision thanks folks.
Yeah. Thank you Paul.
I think you'll notice I didn't use the word 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.
Our with 80%.
It's all about our business, but when you benchmark us to Oracle <unk>.
Microsoft IBM S P.
We are ahead of every one of those in terms of arch are our transition to a R. R.
We're at 80% Oh, we have a.
You know, we're our target model is 81% to 83% for the year, but you look at established companies like IBM, Microsoft Oracle SAP P. Warhead every single one of them and where we are as <unk> as a percent of our business.
Second I'd point to our our support business, which is a support and update business the ability to get security updates 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 well that 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 gonna grow cloud faster than everything else.
As you're as you're seeing so customers still have the choice is clearly cloud first a R. R is leading in dominating we're ahead of our peers and we're simply going to grow faster.
And cloud and a R. R. A burst that transactional side of the business.
Thank you.
Yeah, Paul if I can maybe before we get to the last question.
I, just we don't philosophically believes that we should force it.
Because it's still customer choice and some companies are forcing it but they're also at a lot lower a R. R than we are.
And so.
It's really the AAR our piece of that.
Is it really a standout at 80 per cent not just at open text, but when measured to our peers.
That helps thank you.
Yeah.
Our next question comes from Thanos, those Troublous of BMO capital markets. Please go ahead.
Hi, good afternoon.
Hey, Mark how would you characterize for.
For a customer buying behavior in terms of sales cycles decision processes deal sizes is it starting to look a lot more similar to pre pandemic or are we still kind of a weird environment in that regard.
Yeah.
I would say it's returning.
It's not fully back to pre pandemic.
But it's it's a lot less uncertain and bureaucratic than it was maybe in the first half of last year.
There is no doubt a greater emphasis.
And I think this is new so its not pre pandemic or during pandemic I. Just think this is new but it is.
An emphasis on time to value.
That theres, an immediacy, there's a time to value.
And it's also a look to global trusted partners versus so less risk averse.
So I'm. It's a good question deal sizes. I think are are slightly up I think decision cycles are slightly down.
Likely shrunk.
It's I wouldn't say, it's fully back to pre pandemic, but it's more there than not and time to value is certainly emphasized in the majority of our transactions today.
Great and then a question for Madhu as I 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.
Maybe just to clarify what that would be a function of comps being restored at prior levels and expectation of travel expense is going up or maybe just conservatism on your part.
So thank you for that so definitely as Mark also alluded we.
We are investing in the second half and we're investing not just putting medicine come back but also in terms of hires.
And building up for up for the net net for the next year and from a gross margin perspective that ultimate interest investment income services and customer support as well.
[noise], presumably maybe two to improve capacity right, but if you are running at high utilization, that's when you've got more capacity would that be fair.
Yes, yes that would be fine as well yep yep, okay. Thanks for that line.
Yeah. Thank you.
Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Yes, Thank you with respect to the shift to the cloud.
I'm just kind of curious is there.
The opportunity to kind of create a step function up in terms of organic growth with that transition here.
Yeah.
Richard Thanks for the thanks for the question.
As we.
Noted in our script, we had in the quarter.
Organic AOR growth in reported currency.
And.
I expect to have organic growth in the cloud.
The second half for the year.
In terms of a step up.
<unk> talk more about what that means but I'm expecting cloud to grow organically just to say it directly based on the factors we talked about.
Okay, Yeah, I'm, just asking because I was sort of looking at slide 21 in 'twenty for where you highlight your customers.
The number of products.
Products that they're signed up for and it seems like they're signing up for more and I guess the line of questions around you guys. As these platforms become more you know for them the ability to sell into that base I would think it should be easier now which is why I'm asking the question, but I know that yeah yeah.
Yeah, and look at and if I can I point to the principles I talked a little bit about <unk>.
And they're important principles behind cloud editions, I think that's partly what you're noting that once migrated into the open text cloud.
We.
We have the ability to deploy the features for our customers and.
They don't have that.
Friction in the system right now.
Integrated we get.
Again, the less friction.
For more and more modules.
And as we get to more standardized product the ease of of both consumption and new modules. So it's no doubt that.
Cloud editions and running the cloud is going to give us the opportunity because of the integration.
To deploy more capabilities and to have customers be able to.
Consume more.
Okay that makes sense.
With respect to acquisitions.
You talked with us or as one on one part of your growth strategy, what does that environment look like today and I guess related to that are you looking at sort of fortify the markets that you're currently in or would you kind of look at expanding into new marks sort of sort of like what you did with carbonite.
Security.
Yeah.
Well, let me, let me take it as an opportune I'll answer the question directly but I'm gonna 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 number of number one number one number one organic growth.
And that's top of the list.
And as we look into the remainder of the sector or the second half for the fiscal year in the calendar year.
We're clearly emphasizing organic growth today and also the step up in our in our outlook second.
Second away with circuit number two of number one.
Is mark.
<unk>.
And we've just been on a stellar track.
To continue to become more efficient more productive as a company and a third way other the third number one.
Is capital capital deployment and capital efficiency, we're very focused on the capital we've deployed.
I'm getting full value for carbonite getting full value for liaison.
Documentum wasn't that long ago.
And the document and 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 a value buyer.
We have the management and leadership bandwidth.
We have.
Net debt ratio of 1.6 approaching.
For the 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.
It 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 it was in the mid threes, if they don't like their call, but I'm not sure. What it is today is it still around there.
Our net leverage ratio is one six today.
And as we've noted we've chronicled historically.
Hum.
We would be comfortable.
Ideally we're at three but will go above three if we need to and then rapidly a.
Decrease that.
And.
I'll point again to Carbonite as well as document them.
Where are we rapidly de levered.
Look we are three years, where adjusted 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 that that's what I thought of a three X 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 Carbonite and documented.
Okay sounds 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 to own a simple one.
Product area in particular, which is E signature it seems like that is probably one of the products there'll be some strong adoption in this environment now how do you see within the large enterprise deals like is it is it 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.
Well, it's selling.
Signatures digital signatures.
So should we expect similar growth or are you seeing some of our growth.
With your own product there.
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 a service.
And it's now.
For fully integrated content services and is now a standalone product.
So.
We are.
We expect that it is contributing.
And we're fully able to sell it as a as an independent module.
And it is an important part of modern work part of workflow.
Part of collaboration project management, and ultimately signatures I'll highlight one customer fully life.
We're doing.
Tens of thousands of signatures a month.
The government of Ontario.
And who are fully live on our E signature product.
And.
This relates to the E signatures, but.
With the market esignature with it seems like a lot of the growth is coming from SMB.
It seems like there's other product categories.
File sharing or whatnot, where the growth is being driven by smbs with the launch of your <unk>.
'twenty, one dot for product in the multi tenant side from public cloud does that potentially open you up open up and text out to going direct in terms of addressing the SMB market.
Yeah.
We still have it on all our progress we still have.
Much to learn.
We bring esignature to the enterprise.
Where we haven't brought esignature to SMB.
So our esignature 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 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.
So.
Now have a 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 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 other part of our strategic direction is there to bring product simultaneously to the enterprise and SMB.
And we have a lot of learning to do there.
And lots of opportunity.
Great. Thanks for taking my question.
This concludes the question and answer session I will now hand, the call back over to Mr. Barron Qi for closing remarks.
Alright, well, thank you very much where honestly.
We're excited about Q2, and playing offense and our improved outlook for fiscal 'twenty one.
I hope you're well, we hope to see everyone at 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.
To 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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