Q1 2022 Open Text Corp Earnings Call

It's leveraged finance conference on December 2nd.

Barclays Global T M T Conference on December 7th and Raymond James Technology, Investor confidence on December 8th.

Please reach out to any member of our Investor Relations team. If you are interested in joining our schedule. An addition, I'm also please to invite investors to open text annual user conference open text World taking place on November 16th to the 18th investors are invited to explore our latest product innovations in information manager.

<unk> during this three day virtual Tech event to register for open text World. Please reach out to the I R team add investors at open text Dot com.

Forward to our upcoming engagements with you.

And now for our Safe Harbor State Ma'am.

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 material factors and assumptions were applied and drawing any such statement additional information about the material factors that could cause actual results to differ materially from a conclusion forecast or production in the forward looking information as well as risk factors, including in relation to the current global pandemic that may <unk>.

Jack future performance results of old Kentucky are contained in 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 obligation to update these forward looking statements unless required to be 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 what's that that'll hand to call over mark.

Thank you Harry.

Good afternoon to everyone and thank you for joining today's call.

Physical 22 is off to a great start as we delivered record Q1 revenues powered by organic growth and.

And we are on track for a critical twenty-two annual targets of organic growth and longer term physical 24 aspirations.

The open text approach to creating a long term shareholder value as a balance.

[noise] between total growth profitability and capital returns.

Additional physical 22 investments and people go to market and digital initiatives to dry more future growth.

And are trailing 12 month cloud bullshit bookings have now grown to double digit rates.

We've accomplished a lot since we spoke to you.

Specifically we.

We continue to successfully execute archived bled total growth strategy.

We continue to see adoption of cloud additions. Let me note. We added 89, new private cloud customers and Q1, such as C. N a barnardos in the U K and Mitsui.

We've expanded our relationship with Google and other Hyperscalers, we renewed our normal course issuer bid for up to a 350 million of common shares.

We are renewing and updating our shelf offering for up to 2 billion of debt and equity securities and.

And I will discuss in a few minutes will introduce the best and most comprehensive cloud products in the history at open Tech twirled in a few weeks.

Let me transition tour results for a first quarter such results were powered as I said earlier by organic growth.

We delivered record Q1 revenue of 832.3 million up 3.5% year over year.

Or two per cent in constant currency record Q1 annual recurring revenue a R. R of 691.8 million up 3.2% year over year or 1.7 per cent in constant currency and 83% of our total revenue.

Record Q1 revenue of 356.6 million up 4.6% year over year or 3.6% in current constant currency.

Oh, just a bit of dollars of 303rd 323.4 million.

At 838.9% margin free cash flow of 163 million or 20% of revenue, reflecting our increased investments and talent innovation in sales coverage to fuel future organic growth let.

Let me speak to some amazing customer wins in the quarter and the open text content cloud notable customer wins included BDO.

Notable customer wins included the U S Army criminal investigation Division.

The primary federal law enforcement agency in the United States Army is now using open text encase forensic defined decrypt collect and preserve forensic data for digital investigation and TD one of Canada's largest banks is now utilizing our Ebola products.

To migrate data out of their internal data centers to a secure cloud environment. The open text cloud and P. G. Any California's largest utilities utility is now using our availability products to enable fail over of call centers between data centers and the times of us utmost urgencies such as forest fires in California.

Before you.

The open text world.

You'll hear more from our customers partners and industry experts at our annual conference and I like to personally invite you to attend the event of.

The week of November 15th as Hari noted, please contact and reach out to hurry or Greg and we'll get you registered to attend the event.

We have a great speaker lineup, including keynotes from Doctor, Neil Degrasse, Tyson, a host of Cosmos and actual physicist at the Hayden planet.

I sound, a little time with Neil last weekend.

Nobody's now my personal Astro physicists E. Just as an amazing talk for US at open text World and Arianna Huffington is also going to join US the founder and CEO of the thrive global and the Huffington Post, Oregon has a very unique view of what the future of growth and the world looks like post pandemic.

You'll hear from some of our most important customers, including shell del L'oreal and the Academy of motion Pictures in my keynote I'm going to describe the five forces affecting every business first work is distributed and traditional models of authority and collaboration are rapidly.

<unk> 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 are and that's 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.

And we'll 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 increasing the serviceability components serviceable 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 a competitive area.

We'll also be adding new capabilities support ethical supply chain and sustainability.

The open text experience cloud helps our customers power modern work experiences.

So the API economy faster and smarter.

And with our.

Recent released $21 four we're now offering more services more consumption based pricing packages and more privacy and security features we have 20 available API from content workflow Redaction archive content analysis communications threat analysis and more.

We'll be unveiling at open text world.

More capabilities in the cloud.

Then off cloud and it is an important milestone for us more capabilities in the open text 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 Brightcove security services into our public and private clouds as well I want to spend a moment on our API cloud, which I'm really excited about because it's starting to gain critical mass.

With our 20 fully feature services available in October alone, we processed 98 billion 98 billion requests and we just introduced even a new service called Magellan risk guard as a new API surface Magellan risk Guard works, just like bright cloud center of.

Stream or file and will return a real time risk score on that content does your content contained G. D. P. R data does your content contained a credit card information does your content contained critical and confidential information just stream it to our API and will return you back a risk score.

One low risk 10 high risk five medium risk, but I want to emphasize in October alone. We processed 98 billion requests to our 'twenty API or we will be an API company and the future customers who run their business in the old protects API cloud now.

I'll include companies such as Cvs.

Tycho Trinity Health.

The government of Ontario, impossible Burger at five and Aruba.

I'd say look at our future roadmap of cloud editions 22 Dot one through 22 dot four or basically next calendar year, we'll be doubling down on security migrations to the open text cloud at low friction scaling up our new M. D. M D. Our services scaling up our API cloud services more competitive.

Replacement and continuing to help our customers consume the way they want to off cloud private cloud public cloud and API cloud.

And chip shortages labor shortages and costs and inflation a lot of complexity. The open text the answer to our customers is b digital automate automate 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.

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 let.

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 impatient and parallel we continue to strengthen our balance sheet and continue to invest in products and systems to drive our organic growth and access.

All right the integration of profitability of future acquisition, let.

Let me conclude my prepared remarks, we're building on that foundation to deliver to a long term aspirations on doubling the company.

Until this 30 years to achieve approximately 3.5 billion in revenues and we hope to double again over the next five to seven years.

So let me start with revenues as a note the growth rates that will shape, our all organic growth.

Total revenues for the quarter, but a 32.3 up 3.5% or up 2% on a constant currency basis. There was a favorable FX impacted revenue of $12 six annual recurring revenues for the quarter with 691 point to eight up three 2% or up one 7% on a constant currency basis.

Center of total revenues a R. R was 83% for the quarter the same as Q1 'twenty one.

Cloud revenues of 356.6 up four 6% or up three 6% on a constant currency basis.

The new ones rate, excluding carbonite was approximately 92% custom.

Customer support revenues were 335.2 up one 8% or down 2% on a constant currency basis, our customer support renewal rate was 94%.

Our license revenues of 73.5 up seven 2% or <unk>, 8% on a constant currency basis. The professional services revenues were 67 up two 8% or up 8% on a constant currency basis.

The payments in the quota as when a slightly higher investments and applause.

And just to EBITDA with 322 point for the corner down, 5.5% or down 6.2% on a constant currency basis.

<unk>, 38.9% margin down from 42.6% of the same quarter last year.

I recall that queue wants to spell 21 had called the delay to specific savings like chew on fiscal 22, I'll cut a quarter includes hired investment specifically in Q1 on and adjusted basis Yoda with your R&D expenses are higher by 6% and sales and marketing up by 10 per cent we are investing.

Auditing entry cashless opted in cash goes or 189.7 for the quota three cashflows 163 for the corner during the quota of free cash those but impacted by four important items first cash outlays in Q1 for performance bonuses commissions incentives relating to our very.

Be successful fiscal 21 second Addis duration of prior use Cobra Tomatoes compensation.

Q1 kicks off a planned is intentionally investments of fiscal 22 as I outlined Oh Dear.

Fourth increased capex and investments as strongly obligations to digital initiatives, which I would expand upon a bit later.

We estimate free cash was a percentage of revenue to be high in the high twenties for fiscal twenty-two unexpected F. C. A dollars would increase significantly over fiscal 21.

I'm looking Katherine is an essential element about cashless Ah working capital efficiencies remains high with continuous improvement Dsos, but 40 days for Q1 22, compared to 44 days and coupon fiscal 21, and every other metrics such as customer payment connection efficiency index and cash can.

Version cycles, all child, or the UW and sequential basis.

Such a strong looking capital engine gives us the confidence in R. F. C. F S station and the ability to integrate a potential acquisitions into our cash flow framework, but also introducing this quarter see slide 34 of our investor presentation specific free cash flow metrics, including R. F C at the turn on.

So the growth strategy target model and locked them expeditions, we remain confident target model and aspirations of fiscal 22 grilled strategy of fiscal 22 target model aspiration also what I can to to in our in our investor deck. They ultimate unchanged a planned and that's been during fiscal 20 Tuesday to make critical during this.

Journey toward aspiration.

Approach to profitability the main stem any profitability above 40% I'd, just EBITDA margin will be invested towards the future organic growth.

The dividend program as part of a quarterly dividend program the bold to pay it in November 3rd 2021, a cash dividend of 22.09 cents per common share. The record date for this dividend is December 3rd 2021, and the payment date is December 22nd 2025.

I'm Gonna close my remarks, with some comments and operational excellence.

Yesterday March we indicated that we were planning to make significant investments to the deuce fiction and increase scared and efficiency.

These initiatives fall into two broad categories. The open text digital zone, which drive top line growth and as to its highest in service hired online interactive education and support programs and D. N. A two dot O digital and automation two daughter has a set of approximately 20 major projects internally focused on organic growth related.

Programs from customer support to the new rules standardization too many levels of a professional service deployment by strengthening finance and support organization.

Where in the past they were not a bit more you did more P S to get the integrated value.

Through engineering, and our new destination of cloud editions.

It's easier to turn on module 234, and five that it was than it is in the in the off cloud World.

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.

You'll get to the full content cloud if you're using E signature, which is a great add on a cross selling opportunity. We wanted to get you to the full content cloud if you're using our trading partners or go to the full business network cloud that also allows you to use active.

The active invoicing or sustainability module et cetera.

So we're very focused on now.

Now that we have this destination of cloud editions, bringing.

Bringing customers from a from a feature or module to up to the full respective suite and then look I think the destination ultimately across the entire portfolio's not not any different than ERP can we get 10% of our installed base using the entire cloud if you will but we're focused on going from like module, one or two into the fall.

<unk> cloud.

Sweet.

In terms of F N b.

The teams just made really great great progress. We know we majority have sold through Rmm's historically.

Through the Carbonite business, but we've been building up our direct MSP program.

And Oh, roughly we ended the quarter with about 16000 active M. S. P.

Off cloud into the private cloud and want to maintain the uniqueness of the sort of tailored environments and they're they're deep integrations.

We're seeing a real night, a nice competitive uptake against I B M.

And you know what the carve out of control.

To renew and commensurate with our market cap.

We felt that upsizing it commensurate to our market cap.

Our practice through time, so you know with our market cap, where it is a commensurate to raising the shelf to 2 billion.

Great. Thanks for the color.

The next question comes from Congress must kaplowitz from BMO capital markets. Please go ahead.

Hi, good afternoon.

Gross margins for license were a bit lower this quarter I think I heard what you referred to a royalty payments maybe just if you could expand on that and just confirm that that was a nonrecurring item.

Okay.

Gift panels as Matthew here and I spoke about from a gross margin perspective, we did have slightly higher royalty payments on a couple of the license transactions. We did most specific to products related as you can see overall gross margin, which stood at $75 seven but just want to call back.

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 kind of announce our opening zero initiatives. I'd open are open texts world of a zero waste zero barriers zero I T.

Zero.

Net greenhouse gasses as both how 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 we are all.

I'll return to workplace strategy is flexible first.

So engineering and cloud and cloud operations are are are coming back into the physical workspace.

But its flexible first two to three days in the office, but we believe we're better together.

But you know in a flexible way. We're also introducing the call proximity employees, whereas long is your 100 to 150 clicks from an office will come back together for the moments that matter for two to three days a week. So we think it need to be there be together be together flexibly lead with what would purpose.

And I'm proud to say, we're beating the market right now on on hiring attracting and retaining.

Okay, Great I'll pass along thanks Mark.

Thank you.

If I can sort of asked the question a different way with respect to the pushing the cloud do you see that sort of creating an incremental opportunity broadly for the entire suite into mid market enterprise, where you traditionally probably haven't been as strong.

So Richard is the question do we see the mid market as an opportunity yeah, Yeah with you know with the cloud and the integrations and probably your selling process.

Absolutely and it's it's you know.

Ill or Oracle purchased naturally we purchased Carbonite and you don't you don't reach our full potential without being able to bring your products and services.

And to a new channel, let's call it mid market and the cloud I think the cloud to redefine what mid market is.

Because it's easier to connect easier to on board. So you can take your enterprise capabilities and you don't need the enterprise.

All big too.

Uh huh.

Cool chest like to bring a customer on board.

So so MSP or mid market for us as well.

Wider definition than others, let's take some examples M. D. R. D M D. Our service is gonna be both.

Enterprise and mid market for us.

What we will see more customers come on board with Carbonite in the enterprise because it's all in the cloud.

So I like very much.

We made the right strategic decision to expand into mid market.

Well, we did it with the right company.

And it's going to allow us to bring our enterprise product there.

And some of their products up into the enterprise.

Okay.

Great and just one last one I saw that you increased the shelf in terms of the leverage ratio that you're still comfortable with that's probably a question for them I do is it still kind of in the mid threes here.

Hello.

Yeah, I mean, do we can't you might be on mute.

Yes, sorry, I was saying that they get that's right in terms of available liquidity as of now went up to $2 5 billion between cash and the Nepal and termination perspective in it and in.

In the downstream slightly above three as maybe you had it and they'll keep it up.

Do they get back to the levels that you've seen in the past.

Okay. That's great. Thank you.

Thank you David.

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

Oh, thanks, very much and good afternoon.

Mark you're quite enthusiastic on open, Texas current product portfolio and end sort of vision in the roadmap. When you look at your customers from a bottoms up perspective, you know what fundamentally do you see as the gating factor in terms of their ability to to adopt all of your products are a suite of.

Products are moved to more modules.

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.

You know cloud editions 21 dot for as I said in the past it was going to be a major release for us.

And you know, where we're like a week and a half away from open tax world stuff like try to Oh. This is a this is a different audience in that but I'm speaking about Iran. Unveiling here, a little bit of $21 four but it's more capabilities now than our off cloud offering that's a major milestone and it's a pretty integrated.

Right, because it's not like they're not like seven module cloud [laughter] one integrated platform. So the integration has always been a challenge off cloud, but in the cloud it near as nearly goes away into the and now turns to configuration not not.

Gration, so Paul we've eliminated that friction.

Second is the opportunity remains to migrate thousands of customers thousands of customers.

Two our cloud editions.

And 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.

Accretable features as a service and we're learning.

Trade craft, where or learning from a twilio, where we're learning from other companies of how to.

How to deliver these very rich services via API and and it's a phenomenal number of almost 100 billion service calls in the month of October just via those API, so integration removes a barrier.

Hum the AR AP is 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 delving into customers further like digital transformation initiatives seem to be going on everywhere.

Do you anticipate that you'll be seeing like big migrations of existing workflows to newer to your newer products or do you think its new workflows, you know new deployments that you'll you'll be predominantly saying.

Oh I think it's I think it's both and where we're going to continue to support fully kind of our off cloud deployments.

But no realistic release 16 has has begun to go end of life.

I mean, I remember when we built and delivered really 16, but it's over five years now it's coming towards the end it.

Really 16 D. P wanted they'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 cloud or off cloud to public cloud and other public cloud has greater capabilities sort of capability discussion.

Our product capability discussion to move.

So I think that's a more.

I wanted to go with them.

And then just want to switch gears to M&A you know it's been almost two years since since Carbonite has been quite a while they eat how do we think about you know the the the targets in your pipeline or what you're looking at in terms of.

Like the D C.

Assets versus the valuations of those assets for sale I mean are you how do you think about flexing on one or the other here.

You know I.

And as I said in my prepared.

Remarks.

That we remain very busy.

Active getting to know our getting to know our companies.

And or.

If we look in the past, we've we've stood up to a higher valuations at a time like.

Liaison or slightly higher on carbonite are to meet our growth profile.

At other times, we see a value based as out of more of a value based asset to create to a stronger return.

And would 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 yeah, I think there is an asset class of of some higher growth that would lead to a certain multiple or an actor on certain cash flows that would lead to to a certain multiple so I don't see us, giving on a metric, but rather having conviction of can we get the.

Cash flow our conviction, we can get the growth and you know valuations remain irrational, then where chicken remain patient.

But it's got to fit our profile right.

Yep. Thank you.

Bonnie.

Thank you.

I'll now hand, the call back over to Mr. Dan Shaw for closing remarks.

Alright, well, thank you very much for joining us today.

And we love, we hope you'll join us at one of our upcoming conferences as you go as you heard from Harry It's a time to be very visible.

To our employees and have high touch with our employees customers and partners and where our key stakeholders such as U and we hope you'll join us to open texts world 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.

Okay.

Yeah.

[music].

Hum.

Yeah.

[music].