Q1 2022 Open Text Corp Earnings Call
Cereals, which are available on our website and with that I'll hand, the call over to Mark.
Thank you Harry.
Good afternoon to everyone and thank you for joining today's call.
Fiscal 'twenty two is off to a great start as we delivered record Q1 revenues powered by organic growth.
And we are on track for a fiscal 'twenty two annual targets of organic growth and longer term fiscal 'twenty four aspirations.
The open text approach to creating long term shareholder value is a balance.
Between total growth profitability and capital returns.
We are executing to our value creation approach in.
In Q1, we delivered three 5% organic revenue growth.
38, 9% adjusted EBITDA.
We estimate free cash flow as a percent of revenues will be in the high twenty's for fiscal 'twenty, two and we expect free cash flow dollars to increase significantly fiscal 'twenty two over fiscal 'twenty one.
Consistent with what you have are consistent with what we have shared before.
Our bold ambitions remain.
To be the leader in information management.
To double our revenues over the next five to seven years to 7 billion in annual revenues.
At least 85% of our revenues recurring.
To deliver our inorganic growth trial profile between 2% to 4% by fiscal 'twenty four.
To maintain upper quartile adjusted EBITDA.
While investing any adjusted EBITDA above 40% back into growth.
To generate 6 billion in cumulative free cash flows over the next five years and returned 33% of our trailing 12 month free cash flows via dividend and buybacks.
As our free cash flow grows so does our dividend and our buyback. This is a winning formula our solid execution reinforces our ambitions.
And over the last few quarters, we have returned to organic growth.
We established our fiscal 'twenty four aspiration illustrate an acceleration in organic growth.
We have increased our R&D investment targets up to 14% of revenues.
We are making additional fiscal 'twenty two investments in people go to market and digital initiatives to drive more future growth.
And our trailing 12 month cloud Bush bookings have now grown at double digit rates.
We've accomplished a lot since we spoke to you.
Specifically, we continue to successfully execute our cog led total growth strategy.
We continue to see adoption of cloud editions. Let me note. We added 89, new private cloud customers in Q1, such as CNA, Bernardo's and the U K and Mitsui.
We've expanded our relationship with Google and other Hyperscale.
We've renewed our normal course issuer bid for up to.
$350 million of common shares.
Investments and talent innovation in sales coverage to fuel future organic growth.
Let me speak to some amazing customer wins in the quarter and the open text content cloud notable customer wins included BDO one of the world's largest global accounting firm selected open texts extended E. C M with integration to Microsoft down 365 to improve information governance by.
Centralizing all the content management systems into a single platform. The open text platform, but then tog in Essen, Germany based global distributor of chemicals and chemical ingredients selected open texts extended E. C. M for S. A P and 365 to collaborate approve and process.
And Ah via digital workflows and C. N N financial I'm very very pleased with the Ah welcoming CNA to open tax one of the largest U S commercial property and casualty insurance companies, a former filenet customer selected open tax to prove leading.
Edge content service capabilities.
And the open Texas business network cloud notable customer wins included J C V. A Tokyo based global payment company, who selected our business network managed services to streamline processing and payment Mastercard expanded our relationship of Globe technology payments company with operations in more than 210 countries in.
Territory's selected the open texts trading grade managed services to help connect with more partners and more banks and Pepsico, the global beverage and snack company selected open text to be their platform for information underneath S. A P.
Use success factors.
And the open text experienced cloud a notable customer went included a I a the largest independent publicly listed Pan Asian Life Insurance group selected open text core experienced products to orchestrate the customer communication events for marketing campaigns across the entire customer lifecycle.
And the open Tech security and protection cloud notable customer wins included the U S Army Criminal investigation Division.
And permanently changing second every business transaction is going digital third customers and consumers are looking for a tailored seven star experience for.
For any business to thrive security and privacy must be job number one and the fifth force.
And as we and as we all.
As we all define what the future of growth will look like we know we know it needs to be inclusive and sustainable and more on that in a moment.
The response to these forces needs to be simplicity.
Which leads me to the theme of open text world be digital.
Let me touch on a few open text cloud highlights the open text content cloud empowers customers to master modern work.
We were once again recognized as a leader in the content services by Gartner for the 17th consecutive year at open text World, we'll be introducing the most comprehensive update.
The open text content cloud in our history with cloud editions $21 four designed to empower distributed workforce organizations, which need to provide their employees with content and context.
And the open text content cloud integrates with leading business applications from Salesforce to S. P to oracle to dozens more making it easy to collaborate and access information from anywhere in the organization, including zoom teams.
Chime and hook up some.
Some of the key highlights in this release is going to include an expansion of core content expansion with sales force expansion to S. Aps for Han expansion, what Microsoft 365.
As a SaaS offering strengthened esignature archiving and an enhanced E discovery and information extraction capabilities and will be providing a return to workplace playbook to manage all operational restart plans and procedures for companies.
We'll be announcing new capabilities to the open text business network cloud to help our customers digitize and modernize their supply chains. We were recently named again by IDC as a leader in the multi enterprise supply chain commerce.
Our grid at open text world, we'll be announcing new capabilities to our market leading business cloud new self service capabilities that will make many of the enterprise class a products and features already being used by 24, the 30 largest supply chain available to a broader class of small and medium sized customers.
And increasingly serviceability components.
Service of all components of our overall Tam effectively we're gonna be taking our enterprise capabilities, making himself service, thus consumable by smaller sized businesses and this is right in the Sps commerce competitive area.
We'll also be adding new capability to support ethical supply chain and sustainability.
The open text experience cloud helps our customers power modern work experiences.
Protection cloud.
Let me highlight.
The open tech developer cloud, which is gonna be front and center at open text World. It's the first information management as a service offering ready made for enterprise workloads via a P. I's.
Our developer cloud enables developers to build the aching API economy faster and smarter and with our recent release $21 for we are now offering more services more consumption based pricing packages and more privacy and security features.
We have 20 available a P I from content workflow Redaction archive content analysis communications threaten analysis and more.
We'll be unveiling at open texts world.
[noise] more capabilities in the cloud.
Then off clouds, it's an important milestone for us more capabilities in the open texts cloud then off cloud given this amazing milestone I expect even more adoption of the open text cloud in the future.
Over the next few quarters will be deeply integrating webroot and play cards security services into our public and private clouds as well I Wanna spend a moment on our API cloud, which I'm really excited about because it's starting to gain critical mass.
With our 20th fully features services available in October alone, we processed $98 billion 98 billion request and we just introduced even a new service called Ah Magellan risk guard as the new API surface Magellan risk Guard works, just like bright cloud send us a.
Stream or file and will return a realtime risk score on that content does your content contained G. D. P. R. Data does your content contained credit card information does your contact contain critical of and confidential information just stream it to our a P. I and will return you back a risk score.
One Lois 10 high risk five medium risk, but I want to emphasize in October alone. We processed 98 billion requests to our 20 a P is Ah we will be an API company in the future customers, who run their business in the open text API cloud now.
[noise] include companies such as C. B S.
Automate and the open texts cloud all challenges or opportunities right. So they must be viewed through the lens of automation labor pressures automate.
Supply chain challenges automating gained visibility inflation costs remove cost and automate manufacturing and transportation to tightening visibility.
Automate.
The open tech answer it to the increasing complexity.
And the World is B, digital, which which means automate automate automate and the open text club, let me spend a moment on M&A, we continue to be very busy proactive and ready to act for a target that meets our criteria. We have the management bandwidth in financial capacity to bring a to bring on new deals we remain focused and disciplined.
Operational initiatives underway.
Able us to grow faster and scale our business. Please refer to our press release, our investor presentation, and 10-Q posted on our IR website for more detailed financial data I'll just concerns will be in the millions of USD and compared to the same period in the prior fiscal year. So let me start with revenues as a note the growth rates that will shape our all.
Organic loan.
Total revenues for the quarter, but $832 three up 3.5% or up 2% on a constant currency basis. There was a favorable FX impact to revenue of $12 six annual recurring revenues for the quarter was 691 point to eight up three 2% or up one 7% on a constant currency basis.
Total revenues are our was 83% for the quarter. The same as Q1, 'twenty, but cloud revenues of 356.6 up four 6% or up three 6% on a constant currency basis, our cloud renewal rate, excluding carbonite was approximately 92% customer support revenues of 335.
0.2 up one 8% or down 2% on a constant currency basis, our customer support renewal rate was 94%.
You said down 6% from 89 cents and down 6% at a constant currency basis, let's turn to margins GAAP gross margin for the quarter was 69% constant non.
Non-GAAP gross margin for the quarter was 75, 7% down 80 basis points due to specific royalty payments in the quarter as well as slightly higher investments in our platform.
Adjusted EBITDA was 323 for the quarter down five 5% or down six 2% on a constant currency basis. This represents 38, 9% margin down from 42, 6% in the same quarter last year.
Recall that Q1 fiscal 'twenty, one had COVID-19 relate to specific savings like Q1 fiscal 'twenty two our current quarter includes higher investments specifically in Q1 on an adjusted basis year over year, R&D expenses are higher by 6% and sales and marketing up by 10%.
We are investing.
Operating and free cash flows after the cash flows of $189 seven for the quarter free cash flow the 163 for the quarter.
During the quarter free cash flows, but impacted by four important items first cash outlays in Q1, the performance bonuses commissions incentives relating to our very successful fiscal 'twenty, one second observation of prior year's Covid related compensation.
But Q1 kicks off a planned and intentional investments in fiscal 'twenty, two and I outlined earlier.
Increased capex and investments with stronger operations.
Little initiatives, which I will expand upon a bit later.
We estimate free cash flow as a percentage of revenue to be higher in the high Twenty's for fiscal 'twenty, two and expect F. C. S dollars would increase significantly over fiscal 'twenty one.
Year over year total revenue, an eight hour our annual recurring revenue to be slightly up.
<unk> to be slightly favorable.
Quarter over quarter basis, we expect in Q2 adjusted EBITDA dollars.
And margin percentage constant.
For fiscal 'twenty, two totally growth strategy target model and long term aspirations, we remain confident in our target model and aspiration all fiscal 'twenty two growth strategy, our fiscal 'twenty target model aspiration also are included in our investor deck. They all domain unchanged our planned investments during fiscal 'twenty two database.
Critical during this journey toward aspiration.
Approach to profitability the main thumb any profitability above 40% adjusted EBITDA margin will be invested towards future organic growth.
On the dividend program as part of our quarterly dividend programs at both the paid in November 2021, a cash dividend of 22.09 cents per common share.
Record date for this dividend is December 3rd 2021, and the payment date is December 22nd 2021.
I'm going to close my remarks, with some comments on operational excellence at our Investor Day in March we indicated that we were planning to make significant investments to reduce friction and increase scale and efficiency.
These initiatives fall into two broad categories.
<unk> digital zone, which drive topline growth and into its higher self service hired online interactive education and support program and DNA to Dot O digital and automation to data has a set of approximately 20 major projects internally focused on organic growth related program from customer support to the new rules.
Standardization to many levels of a professional service deployment by strengthening finance and support organizations.
Maybe specifically with regard to the security and protection cloud, if you've noticed slight any sort of expansion with some of the SNB customers, who came along as part of the Carbonite acquisition. Thank you.
Yeah. Thank you. Thank you for the question.
Well, let me just start a bit structurally on cross selling.
We have essentially recreated the business in our in our in our cloud additions.
Content cloud security protection cloud business network cloud.
Developer cloud.
And our cloud offerings are inherently integrated.
Where in the past they were knocked out a bit more you did it more pis to get the integrated value.
Through engineering, and our new destination of proud additions.
It's easier to turn on module 234, and five [laughter] that it than it is in the in the off cloud world. So.
So I'm very excited about that kind of structural advantage will have going going forward.
We're focused right now and bringing customers up from a module to to the full suite and their respective cloud.
Using archive.
Get to the full content cloud, if you're using e-signature, which is a great add on cross selling opportunity we want to get you to the full content cloud if you're using our trading partners go to the full business network cloud that also allows you to use active community active and voice.
Saying, our sustainability module et cetera.
Integrated services back into the cloud.
It's a private cloud.
It's public cloud and.
And it's a R R API cloud.
And as I noticed in the script, we had a very strong quarter on our private cloud about 89, new wins, who are moving from off cloud into the private cloud and want to maintain the uniqueness of the sort of tailored environments and they're they're deep into.
Gration [noise].
We're seeing a real night, a nice competitive uptake against I B M.
And you know what the carve out of control.
At <unk>, we look for open space is we look for our ability to.
Expand customers or partners.
Across that landscape.
As for the Canadian shelf prospectus.
It was time to it was expiring or time to renew and commensurate with our market cap, we felt that upsizing it commensurate to our market cap.
It's been our practice through time so.
With our market cap, where it is.
Commensurate to raising the shelf to 2 billion.
Great. Thanks for the color.
The next question comes from Congress Kaplowitz from BMO capital markets. Please go ahead.
Hi, good afternoon.
Gross margins for license were a bit lower this quarter I think it hurts Madhu referred to a royalty payments.
Maybe just if you could extend on that and just confirm that that was a nonrecurring item.
Okay.
Yeah.
Yeah got it.
We're doing extremely well and in hiring.
And you know our return.
You know prospects employees are.
And appropriately so and I love it.
Our mission and purpose led.
And that's why I've Oh, we've got a lot of feedback and I'm very excited to announce our <unk> zero initiatives I'd open open text world.
Of zero waste zero barriers zero I T.
Zero.
Net greenhouse gases.
We're going to live on our company and our products can support all of this.
So were beaten the market right now on an attrition.
We are.
I'll return to workplace strategy is flexible first.
So engineering and cloud cloud operations are are are coming back into the physical workspace, but.
But its flexible first two to three days in the office, but we believe we're better together.
But in a flexible way, we're also introducing Nicole proximity employees, whereas long is your 100 to 150 clicks from an office.
Two or three to some customers so.
So it's a balance but I'd say, it's probably leaning a little more ah to new when Ah, but certainly add on modules for sure.
Okay.
And then just a question I think the first gentleman asked a question was related to carbonate, but if I can sort of asked the question a different way with respect to the pushing a cloud D C that sort of creating an incremental opportunity broadly for the entire suite into mid market enterprise, where you're traditionally probably haven't been a straw.
<unk>.
Tortured as a question do we see the mid market as an opportunity yeah. Yeah with you know with the you know cloud in the integrations and perhaps you're selling process.
Absolutely and it it you know or Oracle purchase that's the way we purchased Garvin I and you don't you don't reach your full potential without being able to bring your your products and services.
Into a new channel, let's call it mid market in the cloud I think the cloud to redefine what mid market it.
Cause it's easier to connect easier to on board. So you can take your enterprise capabilities and you don't need the enterprise.
Oh Big too you know you know.
[noise] tool chest like to bring a customer on board.
So ah so M S P or mid market process.
Wider definition than others, let's take some examples M D or the M. D. Our service is gonna be both.
Enterprise and mid market for us.
Well, we'll see more customers come on board with Carbonite and the enterprise cause it's all in the cloud.
So I like very much we made the right strategic decision to expand into mid market.
We did it with the right company.
And it's gonna allow us to bring our enterprise product there.
And some of their products up into the enterprise.
Okay, that's great and just one last one I saw lobster you increase the shelf in terms of the leverage ratio that you're still comfortable with there's probably question for my do cause it's still kind of in the mid threes here.
Oh.
They may do we can't you might be on you.
Yes, no sorry, I was saying that yeah, that's right and Camden available liquidity as of now went up to 2.5 billion between cash and to Nepal, and Commendation perspective in and out in and out see psyche about three is maybe you've had it and be able to get a plan to take it back to the lower levels that you've seen in the past.
Okay. That's great. Thank you.
Thank you English.
The next question comes from Paul Treiber from our D. C capital markets. Please go ahead.
Oh, thanks, very much and good afternoon.
Mark you your acquaintances yardstick on an open Texas current product portfolio, and and sort of vision and the roadmap now when you look at your customers from bombs of perspective, you know what fundamentally do you see as the gating factor in terms of their ability to to adopt you know all of your products are a sweetie.
Products or move to more modules. You you you you know what do you see sort of holding them back at this point.
Yeah. Thank you Paul I, I am enthusiastic and brightest actually coming through in my tone the.
Cloud addition is $21 for as I said in the past and it's gonna be a major release for us.
And you know where where like a week and a half away from open decks world. So I try to if there's a different audience than that but I'm speaking about Iran. Unveiling here a little bit of 21 top four but it's more capabilities now that are off caught offering as a major milestone and it's a pre integrated.
Right cause it's not like you know, there's not like seven module cloud [laughter] one integrated platform. So the integration has always been a challenge Ah off cloud, but in the cloud it near as nearly goes away. The it now turns to configuration not not in.
Integration, so Paul we we've eliminated that friction.
Second is the opportunity remains to migrate thousands of customers thousands of customers two or cloud additions and.
An open up new ways to consume well, we always had difficulty in the past attracting developers.
But we we we've now provided these incredible service Ah incredible features as a service and we're learning from Tradecraft or or learning from Twilio. We're learning from other companies of how how to deliver these very rich services via a P. I C. A.
And it it's a phenomenal number of almost 100 billion service calls in the month of October just via those a P. I so integration removes a barrier.
The Ah a P I remove a barrier.
I believe we have the sales force to make the connections Christina New organization of customer success is well set up to enable that migration and success as well.
And you know that's that's very helpful. The I mean delving into customers further like the digital transformation initiatives you don't seem to be going on you know everywhere you know.
Do you anticipate that you'll be seeing like big migrations of existing workflows to newer at your newer products or do you think it's some new workflows, you know new deployments that you'll you'll be predominantly saying.
Oh I think it's I think it's both now we're we're going to continue to support fully kind of our off cloud deployment.
But you know realistic released 16 has has begun to go end of life.
[laughter] I remember when we built and delivered really 16, but it's over five years now it it coming toward and it Ah really 16 D. P wanted that'll come to end of life E. P. Two when you soon be end of life those customers need to move forward and we are very skilled at moving our customers from off cloud to private.
[noise] cloud or off cloud to public cloud now that public cloud has a greater capabilities thought of capability discussion to move product capability discussion to move.
So I I think that's where I wanted to go with that.
And then just Wanna switch gears to M&A you know, it's been almost two years since since carbonated seen in quite a while they eat how do we think about you know the the the the targets in your you know pipeline or or what you're looking at in terms of.
Like the the the.
The assets versus evaluations of those assets for sale I mean are you how do you think about flexing on one or the other here.
[noise].
You know I.
I mean as I said in my prepared remarks.
That we remain very busy.
Active getting to know getting to know companies.
And we're not.
When you look in the past you know, we've we've stood up to a higher valuations at a time like a liaison or slightly higher on carbonite to meet a growth profile.
At other times, we see a value based as a more of a value based asset to create a stronger return.
And we'll put a certain valuation target on it.
We're getting more confidence.
Around organic growth profile of prospects.
And we look at what we've delivered our our confidence in the year.
And you know I think there's an asset class of of some higher growth.
That would lead to a certain multiple or an act that are uncertain cashflows that would lead to to a certain multiple so I don't see us, giving on a metric, but rather having conviction can we get the cash floor conviction, we can get the growth.
And you know valuations remain irrational then we're just gonna remain patient.
But he's got a fit in your profile right.
Yeah. Thank you I'm in Albany.
Thank you.
Oh, no I had to call back over to Mr. Dancing for closing remarks.
All right well, thank you very much for joining us today.
And we'll we'll hope you'll join us whenever upcoming conferences as you got you heard from Harry It's a time to be very visible to our employees and have I touch with our employees customers and partners and work he stakeholders such as you and we hope you'll join us to open Dec Squirrelled as well.
So thanks for joining today's call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[noise].