Q1 2023 Open Text Corp Earnings Call
We thereafter on the open text Investor Relations website.
Earlier today, we posted our press release and Investor presentation online. These materials will supplement our prepared remarks and can be accessed on the open text Investor Relations website investors don't open text Dot com I am pleased to inform you that open text management will be participating in that.
Following upcoming conferences RBC capital markets Global Technology Conference on November 15th in New York Needham's Virtual Big data infrastructure and Cloud Communications Conference on November 16.
TD Securities Technology Conference on November 21 in Toronto Credit Suisse Technology Conference on November 29th in Scottsdale.
Bank of America as leveraged Finance conference on November 30, and Boca Raton rave.
Raymond James Technology Investor Conference on December 5th the New York Nasdaq's Investor Conference on December six in London, UK NPS Technology Conference on December 7th in Toronto, and Barclays Global Technology Media and Telecom conference on December 8th in San Francisco.
And now onto our Safe Harbor statement.
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 fall.
Looking statements made today.
Certain material factors and assumptions were applied in drawing any such statement additional information.
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 risk factors that May project future performance results of open text are contained in <unk> recent forms 10-K, and 10-Q as well as in our press.
Lease 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 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.
<unk>, which are available on our website and with that I'll hand, the call over to Mark.
You Harry and welcome to today's call.
<unk> fiscal 'twenty three is shaping up to be a transformative year.
My comments today focus on three key points.
First open text and executing very well as demonstrated by record cloud revenues record cloud bookings record annual recurring revenues and solid renewal rates, we are acquiring micro focus from a position of strength.
Second the second consecutive quarters of organic cloud growth in constant currency.
Next the innovation investments, we have made over the last several years inclusive of titanium a key pillar of our future growth.
Third the acquisition of micro focus when closed enhances our leadership position in information management and broadens our capabilities to deliver business 2030 to our customers.
Let me start with our strong Q1 year over year results.
Record Q1 revenues of $852 million up two 4% on a reported basis and constant currency revenues were $892 million up seven 1%.
Q1 cloud revenues of $405 million of 13, 5% in constant currency 417 million up 16, 9%.
<unk> was 47% of total revenue the highest in our history and the seventh consecutive quarter of cloud organic growth in constant currency.
Enterprise cloud bookings were strong in the quarter of $112 million up 37% and on trailing 12 month basis enterprise cloud bookings were $496 million up 36%.
$722 million up four 4% and up eight 9% in constant currency.
ROE reached 85% of total revenues the highest in our history and our seventh consecutive quarter of organic growth in constant currency.
Enterprise renewal rates were rock solid with cloud at 94% and off cloud at 95% adjusted EBITDA margins remain up a quartile at 35, 7% free cash flows were 96 million, notably in meaningfully impacted by foreign exchange tax and our accelerated investments in Q1 as we approach.
Titanium.
We expect full year fiscal 'twenty three free cash flows of between 725 million to $750 million.
Today's financial results and customer trust are further validation of our momentum.
Within the quarter, we were proud to partner with the fifth third bank with over 200 billion of AUM, leveraging our cloud business network for payments.
University of Winchester for forensics and mutual for our experience cloud and client communications close brothers and our content cloud for capturing information archiving one of the key that's waterboard using our content cloud for a complete information management and Microsoft integration.
And large technology partnership that got deeper within the quarter.
So our go to market relationship with Microsoft where mid market, new support for Google Workspace, New integrations to Salesforce and full product support for S&P applications in the cloud.
Let me turn to our fiscal 'twenty three targets and please recall.
We view our business on an annual basis, not a quarterly basis. This is important today and will be even more important with micro focus we are an annual business. We plan on an annual basis, and we think in annual cycles.
Further in the following does not include Microfocus contributions and we do not intend to speak to a combined target model until we close.
Cloud continues to accelerate and we are updating our F. 'twenty three outlook to reflect this week.
We expect this year in constant currency cloud bookings growth of greater than 15% cloud revenue growth.
8% to 10%.
<unk> revenues to be constant there are to be up 82% to 84% of our business and with cloud being up we expect license to be down 8% to 10%. We are reaffirming our total revenue growth outlook of 3% to 4% growth with even stronger cloud performance.
Our R&D projected spending range is at historic highs of up to 14% of revenues as we strategically invest in titanium and in private public and our API cloud.
The open text information management cloud is global that's four 9% of guaranteed availability, we write this into contracts.
Secure trusted and open.
These investments include critical capabilities to be the most trusted cloud such as regional data zone high security and modern compliance processes, such as stock one stock to fed ramp state land protected B, Boston GSP and doesn't more compliance standards. These are very difficult and differentiate it.
Capabilities.
With these investments we set the table for continued organic growth and we expect adjusted EBITDA between 36% to 35% on the full fiscal year as.
As we noted F 'twenty three free cash flow to be between 725 million to.
$750 million let.
Let me turn to business 2030.
I don't think <unk> world I shared that titanium and micro focused our strategic pillar for us and that business 2030 is foundational inferred.
Information sources and information volumes are expanding exponentially.
2030, we'll see all industries radically transformed and digitize, our new human centric workplace dominated by Gen Y and Z looking for more purpose and more total experience and there are new priorities and business 2030, such as sustainability automation, incorporating more machines AI driven growth based on platform.
Of information and software information is the new fuel and business 2030 is happening.
In light of this customer's needs to own their digital fabrics and complete their digital transformations and look beyond to new rules and new requirements for business 2030 to be prepared all companies are becoming information companies and all need to be software companies.
Open text enables customers to connect and automate core workloads in the cloud.
We are thus occur information fabric for business apps in the global 10000 across supply chain and millions of edge devices.
The fourth industrial Revolution created the beginnings of Digitalization, then the pandemic accelerated digitalization current supply chain challenges inflation and sustainability are only providing more stimulus for digitalization, we see no slowing of digitalization as companies strive for business 2030.
And as a company to wrangle silos of information across multiple cloud environments to deliver these new digital business models, they need they need new ways of working to be intelligent connected and responsible let me be Frank digitalization is the only answer and companies want to work with brands like open text for expert.
We're investing with staying power.
Our leaders in their market.
We envisage a future where all business information flows through the open text cloud where information management elevates every person in every organization to their fullest.
Potential.
It's an exciting time for open text.
The type of data and information that we manage as ever growing structured unstructured SaaS flow core edge humans machine generated robot generation generated and soon within it infrastructures and across the application lifecycle.
Automation of business, the automation of it and of their value streams. Each information led is essential to scaling digital business.
<unk> cloud edition is the platform of platforms for information management at scale and in the cloud.
We are the intelligent information core for business and we just demonstrated this that open text cloud editions $22 four showcasing how customers can create that intelligent connected and responsible business with integrated data and advance information management.
At open text, we deliver significant innovation every 90 days into our cloud to help customers be ready for the known and the unexpected for ever growing compliance and data sovereignty regulations, and greater insight and business agility we.
We have 31 years young as a cloud company and we have a comprehensive strategy for information management that puts content experience business networks and cyber resiliency markets.
With the full consumption choices of all cloud private cloud public cloud and as a developer cloud we provide our 75000 off cloud customers choice on how they can consume we are proud to call 97 of the top 100 companies and 40 of the 50 largest supply chain custom.
Customers.
We have over 3000 private cloud customers, we added another 100 last quarter.
We have over 780000 businesses rely on open text SMB every day to protect block backup and restore their information.
As hurricane Ian approach, we work with dozens and dozens of businesses to ensure their digital lives where secure our strategy is unique and continues to be validated by our customers.
In June we announced project titanium our innovation roadmap.
To extend all open tech software to the public cloud and API.
We are already we are already winning new public workloads, where core content business network foundations and over our two dozen.
Apis.
Project titanium enables us to address the fastest growing development choices for our customers.
The demand for the open text cloud remains strong and we expect it to be our leading growth driver.
The global shortage of labor and growing regulations by industry, including healthcare financial services and government are fueling our cloud growth in content services business networks and digital experience.
Moreover, cyber resilience is top of mind for all businesses of all sizes and we are pushing forward leader, we're pushing forward, leading solutions and threat intelligence endpoint network protection and backup and recovery.
Let me turn to micro focus it's the right asset at the right time.
Micro focus customers want the same deployment choices open text customers enjoying off cloud private cloud public cloud and API.
We see the opportunity to bring cloud capabilities to Microsoft customers and at an accelerated rate.
Following closing of the acquisition micro focus will bring significant expanded product capabilities and growth opportunities. Let me summarize what we see at the top growth drivers and value unlocked.
Cyber resilience, we are very excited to bring customers a full stack security offering.
On the edge to the cloud to trusted identities to writing secure software and forensics.
Content management and enhanced capabilities with AI video and audio content voice content that can bring to that we can bring to our mutual installed base and to attract new workloads.
The transformation of it operations management or item in the public and private cloud the elevation of the developer with application delivery management and application lifecycle management, and our API and our developer strategy application modernization connectivity from all of the important mission critical technologies from Adi.
To COBOL to amplifying current modernization tools, and distribute workloads and adding aspects like App works to Api's and more in.
In advanced AI and machine learning with Magellan.
Predictor and idle.
Across all of these we see an opportunity for micro focused customers to benefit from the opened <unk> private cloud.
For micro focused customers to benefit from the open text renewals approach.
Jointly deeper strategic relationships into the global 10000, and new buying centers and deeper strategic relationships with the largest technology companies and more access to markets.
We have been transitioning the open text installed base to the cloud over several years and you see the successes right in front of us in the numbers.
We intend to do the same for micro focused customers.
Even faster.
We provide an update on the micro focus transaction on August 25th we announced our firm intent to acquire micro focus on October eight and on October 18th Microfocus shareholders approved the all cash offer this as an important milestone.
Earlier today micro focus issued a transaction related update containing financial information for the three months ended July 31.
While we are not commenting on their business of our financials. Today's update is consistent with their public statements of expecting to exit the fiscal 'twenty, three being flat or better.
We remain on track to close this acquisition next quarter.
Please recall concurrent with our August 25th announcement, we entered into a $4 $6 billion term and bridge loan commitment.
Which remained undrawn to satisfy certain requirements under the UK takeover code.
Subject to market conditions, we intend to further syndicate, the term loan and reduced commitments under the bridge loan by accessing the debt capital markets.
While we are making strong progress in our pre integration planning we have confidence in our proven open text business system given the proven integration successes that has delivered over time.
This is our power alley.
Let me reaffirm the commitments we made on August 25.
Returning micro focus to organic growth.
Accelerating microfocus cloud growth and improving the renewals business.
$400 million of cost optimizations, upper quartile, adjusted EBITDA and free cash flow continuance of our dividend program.
Our rapid deleveraging program, bringing our leverage down to less than three acts within eight full quarters or closing.
Our cash priorities are twofold investing in the business for growth and paying down debt to less than three <unk> leverage we will we consider a share purchase program upon delevering and we're going to provide enhanced visibility into our high value business areas to demonstrate our progress and value of lockers.
Inclusive of our Q1 visibility into our cloud bookings.
Let me conclude my prepared remarks.
There are concurrently compounding challenges in the world inclusive currency wage includes inflation fuel prices, Russia is worn Ukraine supply chain constraints skill shortages and more.
Open text has its playbook, we are ready and I can't say this enough. The only answer is digitalization and to prepare for the new rules and paradigms.
2030, we are all information companies, we're all software companies.
Okay.
All references.
Millions of USD and compared to the same period in the prior fiscal year and are on a reported basis unless stated otherwise.
So let me start with an overarching comments open text US Q1 results reflect continued strong execution in a dynamic macro environment. Our results are consistent with expectations. We shared with you on our last earnings call. In August we are well positioned to continue to execute on our strategic priorities and well prepared for the upcoming close.
And integration of micro focus.
Q1 revenue, we are very pleased with our Q1 revenue performance I will attitude common shares.
In addition to the highlights share by Mark first and foreign exchange the U S. Dollar once again strengthened in the quarter.
FX in Q1 was a revenue headwind of $40 million.
Approximately half the impact was on customer support and another 30% on cloud we.
We grew total revenues seven 1% in constant currency and two 4% on a reported basis the best Q1 in our history.
Good renewal rate was 94% steady sequentially and year over year, while off Clogging awards reached 95% the highest rate in the last three years.
Enterprise cloud bookings at trailing 12 months enterprise cloud bookings, we had a very strong $496 million and $112 million in quarter. The highest in our history. The booking strength was broad based across most products and geographies. We continue to see the number of large cloud deals an average minimum cloud contract value.
<unk> increased and many of these large cloud contracts have a duration well in excess of three years.
Healthcare is a vertical stood out as an area of strength across our cloud and content, we call out tourism food services and utilities experienced life Sciences, and insurance and interest is network banking and professional services.
Now moving to other financial metrics on a year over year basis.
Gross margins improved in all items.
And let me expanded cloud and customer support gross margin on a non-GAAP basis cloud gross margin was 67, 9% up 120 basis points compared to Q1 fiscal 'twenty two customer support gross margin was 91, 6% 20 basis points higher than Q1 fiscal 'twenty, two and reflecting the <unk>.
<unk> stellar management of our marquee installed base by the open tax worldwide. Your newest organization, our expenses were up $41 million on a non-GAAP basis.
Weighted to revenue growth and investments in R&D and sales and marketing the growth investments. We have made over the last several years have paid off in the form of continued year over year organic growth in cloud in IRR as mark shared over seven consecutive quarters.
Adjusted EBITDA for Q1 was 304 million or 35, 7% of revenue versus 323 or 38, 9% on a car.
Constant currency basis, adjusted EBITDA was $320 million or constant year over year.
GAAP based net income was a loss of 117 million during the quarter compared to income of $132 million in Q1 fiscal 'twenty two due primarily to noncash expenses with micro focus related derivatives now let me expand on the derivatives first these charges were noncash in nature.
In connection with the proposed Microfocus acquisition as noted in our August 20, <unk> announcement during Q1, we entered into derivative transaction.
$182 5 billion of GBP forward contracts to satisfy UK cash confirmations requirements relating to the GBP denominated purchase price and 138 billion of swaps relating to micro focus existing euro denominated debt to fix its cost.
At the acquisition is not complete these instruments did not qualify for hedge accounting and when measured at fair value at the end of Q1 compared to August 25th the transaction date.
Fair value changes were primarily driven by large FX fluctuations and GBP to USD, which resulted in the $181 million of unrealized losses for Q1, and this was recorded to other income expense line with the offsetting net liabilities.
Loaded within current accounts payable and accrued liabilities.
You will note that our GAAP effective tax rate in Q1 was a negative 44% driven by the noncash book loss of $181 million from the delegates of instruments.
I have to say these losses are partially recovered since September 30th and will continue to be mark to market through the P&L onto the tools of the acquisition.
All detailed disclosures that are available in our Form 10-Q filed today.
Turning to operating and free cash flows we generated $132 million in operating cash flows.
Cash flows in the quarter was $96 million or 11% of revenue.
Q1 is a seasonally lower cash flow quarter.
During Q1 fiscal 'twenty three that we shared a few of the factors we continue to invest in talent innovation and go to market initiatives.
The foreign exchange impact was a headwind of 35 million to our collections.
$6 million of higher cash taxes versus prior year, and primarily due to section 174 of the U S tax provisions acquiring companies to capitalize R&D at a higher pace than before this was effective July one 2022 for us and also higher related installment payments.
Given our continued and significant momentum into the cloud, we decided to front end load the year, our capex investments cap.
Capex disbursements in Q1 was $36 million.
Approximately 40% to 45% of our full year budget and compared to 27 million in the prior year.
The open text booking capital engine has never been stronger Dsos were 40 days in Q1 flat with the prior year and improved from 43 days in Q4 fiscal 'twenty two cash conversion cycle remains a high positive of 25 days.
And we remain ready for scale with the pending Microfocus acquisition.
Our business is annual and accordingly Berry. So today, we are providing you our expectations for full year fiscal 'twenty free cash flows to be approximately $2 $25 million to $750 million or upper quartile low twenty's as a percentage of total revenues.
Turning to balance sheet and liquidity, we ended the quarter with $1 7 billion of cash another $750 million on our Undrawn revolver, a very strong net leverage ratio of two one times and as of September 30th approximately 75% of our outstanding debt is fixed.
On outlook, let me turn to our targets and aspirations that you have started remained strong we plan our business at constant currency and will present, our business on a constant currency basis, but our quarterly factors total book strategy and medium to that patients for.
For the second quarter of fiscal 2003, you will see a quarterly factors outlined on page nine of our investor presentation.
For Q2 on a year over year basis in constant currency, we expect cloud revenue up 12% to 18% 12% to 14%.
We are up 6% to 7% total revenues up 4% to 5% we.
We expect FX to be a revenue headwind of $50 million to $55 million.
We expect constant currency adjusted EBITDA dollars to be flat year over year as we continued to make investments in cloud security and edge, we expect FX to be an adjusted EBITDA headwind of approximately $30 million again all of this is available in our investor materials.
Turning to fiscal 2000, <unk> total growth strategy is provided on page 10 of our investor deck and leg and let me refer you back to Mark's commentaries earlier with added clarity relating to foreign exchange.
Please note that we continue to share our materials in constant currency.
At current rates, we expect our full year fiscal 'twenty, three FX headwind of approximately $160 million to $170 million up from our prior estimate of $100 million.
Turning to free cash flow and capital allocation on.
On page 14 of the Investor presentation, we have added a new metric for fiscal 'twenty three free cash flows as mentioned earlier, excluding micro focus we expect fiscal 'twenty three mcf to be in the range of $725 million to $750 million or upper quartile low $20 range as a percentage of total revenue.
We are leaving our fiscal 'twenty five Mcf aspiration unchanged at $1 1 billion and.
Let me comment further on our capital allocation priorities.
First as already highlighted during the Microfocus announcement, a priority after closing will be to bring our net leverage ratio to less than three times within eight quarters eight full quarters and second continuance of our dividend program, 20% of trailing 12 months free cash flows and dividend payouts.
As Mark noted, we will consider a share buyback program upon deleveraging.
On medium term aspirations on page 12 of the Investor presentation.
You will see our details for fiscal 'twenty, five, which again excludes micro focus there are no changes to our outlook except for the change in capital allocation that I just mentioned.
Turning to dividend as part of our quarterly cash dividend program. Our board declared in November 2022, a cash dividend of $2 four to 99 cents per common share. The record date for this dividend is December <unk> 2022, and the payment date is December 22022.
And let me summarize strong execution with the team as we kicked off our first fiscal quarter in a dynamic macro environment, we're executing very well on open text of strategic priorities and we are approaching the acquisition of micro focus.
A position of strength and leveraging our proven open text business system and the integration playbook on behalf of open text I want to thank our shareholders loyal customers and partners and a special. Thank you to my open text colleagues around the globe you are a remarkable team.
I'll now turn the call over.
To the operator for your questions.
Thank you.
We will now begin the question and answer session anyone who wishes to ask a question may push star one on your Touchtone telephone to join the question queue.
You will hear Tony acknowledging your request if youre using a speakerphone. Please ensure you lift the handset before pressing any key if you wish to remove yourself from the question queue. You May press star two.
And you wanted to ask a question with the Spa and one at this time.
The first question comes from Steve Enders from Citi. Please go ahead.
Yeah.
Alright, thank you.
Stuart.
Hmm.
Regardless of the obligatory macro question Margaret on anything.
<unk>.
Customer.
<unk> change in behavior.
Bill cycles.
Thank you.
Yes. Thank you for the question, it's steady as you go right now so.
And our.
And our part of the.
Yeah.
Spending centers as I talked about the demand for digitalization.
<unk>.
Continued strong.
And the continued migration of our installed base.
New new SaaS workloads that have come into our revenue streams large.
Business network customers consolidating.
Global security trusting compliance requirements. So I would say it's steady as you go.
And I wouldn't shut out any.
Any changes on the dynamic over the last couple of quarters.
Alright, thank you.
One of the follow up.
Between the different areas of the portfolio Inheritors viewpoint.
Stronger than expected, maybe a little bit faster than expected.
Relative to your expectation.
Yes, Thank you again.
Continued strength and migration to the private cloud for content and experience.
We have new SaaS workloads coming in both in our bookings and our revenue stream.
As we talked about titanium.
As a point in time, our 'twenty two 'twenty three dot too, but every quarter, we're releasing more and more public SaaS capabilities.
Bolton core content core capture core workflow.
Core esignature, and we're winning business and is turning from bookings to revenue.
And our and our API I am quite excited about that titanium is.
It's starting to happen and you can see it in our in our P&L and in our investments.
Business network stress.
Strengthening.
As the requirements and supply chain have gotten more difficult where more watchtower requirements are required where theres more regionalization, we're in a position of strength to help deliver against that.
And we have some unique dynamics in our SMB business that are that are positive to us in our SMB business.
We have strong renewals execution.
We have the opportunity to upsell customers from <unk> to <unk> five type.
Type of Skus.
We have a couple of competitors that are distracted in the marketplace. So we're looking to take some share gain.
We are adding our own IP into into SMB from everywhere from backup threat intelligence and now an encrypted E mail.
The ability to cross sell <unk> into carbon web rutin, Webroot and Carbonite.
<unk>.
Those are some of the favorable mix shifts that we're seeing.
We still have some countries that.
Our.
A bit more affected in the dynamic.
But the net of it all is quite a positive.
Note that we exited Russia very early.
On a while ago, we didn't really have exposure in Belarus, Ukraine. So those things are not affecting us at this point.
Great.
Awesome.
The next question comes from Stephanie price of CIBC. Please go ahead.
Hi, good evening.
Curious about the mix shifts within your target model. So cadre of about 200 basis points at the midpoint and licenses down significantly just curious what you're seeing from clients that's driving the revised targets.
Yes, Thank you Stephanie and yes, I mean, we had.
Our cloud bookings in the quarter.
Up.
<unk> 30, 37%.
And on a trailing 12 month basis cloud bookings.
<unk> the same 36%.
One one percentage point difference.
I mean, thats just stellar growth.
And look we're winning we win work and we win workloads question is how does the customer consume them do they consume them private cloud today consume them.
In our public cloud or do they consume them and want to own a license upfront.
So with cloud up 37% and bookings and license down about 10% or a little less in constant currency, that's very favorable to us. So that net net of it is is share gains.
In that in that ratio the net of that is clearly share gains.
<unk>.
37% up.
And.
Seven 8% in constant currency, what's driving it talent shortages the needs are all the things we've talked about the need to go faster globalization compliance trust.
We added 100, new customers in the private cloud in the quarter, new public SaaS flow SaaS revenues flowing through the income statement now.
Tell us a little more insight Stephanie.
Thank you and then Microfocus release Q2 results. This afternoon I know you don't want to speak specifically about the results, but obviously constant currency revenue decline of 5% was an improvement over the first half levels. Just curious how youre thinking more generally about the opportunities and the biggest opportunity to look to stabilize revenue in the business.
Yes.
Yes, thank you for that and as I said.
The update today.
And they also had in the release you will have an update on November 4th our typical flash for the first full fiscal year.
That.
The update today is consistent with their public statements of expecting to exit fiscal.
<unk> 23 flat.
Or zero decline or better.
And.
I'll go back to what I've set top of the list cyber resilience.
<unk>.
Truly have a full stack security offering.
From edge to cloud trusted identities fighting secure software forensics.
Top of the.
Top of the stack that's number one co number one content management.
The ability to look at AI video audio content, bringing that into our installed base, bringing it to their install base document Tom and content suite.
Call It information management and governance, we call it content management.
That's that's the top there and then of course the opportunity across everything they have from items ADM AMC to bring to the private cloud.
Bringing to their customers our approach to our renewals business.
Which is.
It's just not a <unk>.
Maintenance.
It's a full service that we offer where not just renewing we're providing.
Our renewal service.
So that's up there.
As well and then AI and Magellan.
AI machine learning the opportunity to bring together vertical idle and Magellan.
Current and relevant technology, as our ml and AI base for the coming years.
Great. Thank you.
Yes.
The next question comes from Paul Treiber, RBC capital markets. Please go ahead.
Thanks very much good afternoon, just a follow up question on micro focus you had your user conference in October what's been the feedback from your customers in.
In regards to micro focus in using your existing customer base as are we.
Already large micro focused customers.
Yes, Paul Thanks.
Paul Thanks for the question.
I'm not ready to get into that level of detail right and.
Kind of percent of installed base or percent.
Penetration.
There is.
Bright line opportunity and the open text installed base brightline opportunity and we will talk more about that cross selling opportunity when.
When we.
Post post close.
The conference are open tax world.
At the time.
Last month, we call this the great or Union, Iowa, So wonderful to be in <unk> and 200 people. Another 10 10000 online big themes that came out of that as we demonstrated a single information we demonstrated the promise finally, the promise of information management where across SAP.
Sales force Mike.
Microsoft.
<unk> goal ourselves others. The same data shared across all of these business applications.
Seamlessly also a very strong and positive response to sustainability and just how important this is in in their world from recycling lubricants too.
Full cycle battery.
Care.
And to <unk> and sensors and agriculture. So those were some of the.
Our feedback from the event.
Looking looking at your cloud business can you help explain the off cloud renewal rates remain quite high despite uptake of the cloud.
The cloud bookings is that coming more from new workloads and new customers as opposed to a sort of a mass migration of your existing installed base.
Yes.
Okay.
Okay.
Yes, yes.
Can you just give me a multiple choice. So you gave me yesterday.
Yes.
Yes, it is and I'll give you an end.
Youre hitting kind of the narrative. The first time for me is that our public SaaS workloads or adding to.
<unk>.
To our P&L to our revenue.
And so we've always talked that we've talked about a 90 day release cycles, we've talking about titanium coming in these John say tightened titanium is an engaged right. It's not a start date.
And were stock were winning business, we're winning workloads, it's moving from bookings to revenue and these are new customers gained great value off cloud and as you noted 95% renewal rate by the way, Mike Micro focus customers will benefit from that accelerated renewal rate and then we add services on top of that.
We could add public workloads on top of that we can add API on top of that we could add the managed services on top of that as well. So we expect continued strength in our renewals business.
And then just lastly, how do we think about since you're arguing power bookings like the seasonality of our bookings.
The license business historically has been quite seasonal should we expect cloud bookings to be that seasonal.
We're going to have to let me know.
And I will think through that.
We're an annual business.
We're an annual business.
And quarters will vary.
But let us think through kind of the seasonality of those of those bookings.
I believe that what we do and I will think a little bit a little bit about that.
Okay. Thank you I'll pass along.
Once again, if you have a question. Please press Star then one.
The next question comes from Richard Tse of National Bank Financial. Please go ahead.
Yes. Thank you just wondering if you maybe update us on the major milestones here too clear prior to closing the transaction in Q1 calendar Q1.
Primarily remaining are sort of the customary regulatory filings and approvals.
Okay. So the major one was recently the shareholder vote I guess.
Yes, that's correct so we.
Shareholder vote, which was.
Obviously positive into the affirmative.
We have a series of.
Regulatory filings and Richard we expect to be.
<unk> next quarter.
Okay and then.
Thank you for sharing that information in the stack you you publish on your quarters Thats helpful and I was thinking about the organic growth section.
And you've obviously had a.
The continued pace of organic growth in recent quarters here.
Given everything you highlighted about what the collective Microfocus open text.
Do you think that there is.
Kind of a reasonable chance here that that organic growth rate could accelerate beyond sort of the run rate that you've had given the size of the two companies.
I am not going to comment I. Appreciate the question Richard It's a great question, we clearly feel very.
Positive on our on our core business.
And especially amidst the global macro conditions.
Yes.
But I'm going to reserve the answer.
To post post closing to update.
Our our growth projections.
But as I said and as I've said in our commitments.
And when we have our core open tax business that we had seven consecutive quarters of of cloud growth in constant currency.
We we don't see a change in the dynamic in the coming quarters.
On the macro side in India, and the core of our business.
We see we're committed to returning micro focus to organic growth.
With the large group rate of organic growth is a reserve that until until we close but this is not just our ability to get upper quartile adjusted EBITDA in upper quartile adjusted free cash flows.
We believe that <unk> and large group.
While growth.
Okay the rate of which we will talk about upon closing, okay and just last one for me obviously your stock price hasn't kind of reflected.
I think that degree of potential accretion from this transaction.
Certainly kind of the history that we've seen many acquisitions in our grid.
So looking back sort of in context like can you maybe talk about in your history with the company.
It was the most challenging historic acquisition open text made prior to micro focus and how do you think micro focus would compare to that from a complexity of integration standpoint is it easier or about the same harder just to kind of get people from context, because I think.
By and large those are the questions I'm getting that.
That's really where the concern is sort of the integration and the complexity of that thank you.
Yes.
There's a lot in there and I appreciate it.
I appreciate the.
The question we're focused on.
Building one of the world's largest.
Cloud and software businesses, and we're a quarter away from.
From our from our from our clothes and look I'm not going to.
I don't know how to truly comment on us on a stock stock price other to say that.
Sure.
When you look at a situation where.
Markets can value risk.
Risk markets can't value uncertainty.
And <unk>.
More closing.
We're confident we're going to close we are confident in our models and we have a different perspective of the.
Perhaps the uncertainty.
And it's okay.
<unk> will build on our business and build one of the world's largest.
Cloud and software businesses the pro forma for both companies are very clear.
Our business is growing you've heard our commitment and investors will make their choice.
We've made our choices and where owners not renters in our business and we're focused on building for the long term I'll tell you some of our experiences that will shape the integration plan.
We look at document them and we turned a.
Low margin low efficient renewals business into a powerhouse.
That informs us very well on the renewals business, we acquired two HP businesses.
Prior to this.
So.
Good insight into culture and value and systems.
Our playbook of Morgan.
We're going to make the hard decisions early not late.
We take a philosophy of adopting go if theres two two or something we don't need a third.
We got to is something we're going to pick one adopting though we will take our leadership team early.
We will integrate fast.
World consolidate to the best working system will pick the best of the people.
And our speed.
Unity is top of the market.
Okay.
So let me just let me just pause there and see if there's anything you want to go into it.
No. That's that's good now I think it's just important for bureau have that context, because I'm not sure that everyone sort of has that history in terms of seeing the acquisitions you've made.
Made in sort of the success that you've had so Paris. That's great. Thank you very much yeah, and if we put just ratios in perspective right when we.
When we acquired <unk>.
We added a third to our business.
Upon closing next quarter.
Slide 43% to our business.
So more stepping up from 33% to 43% now a much larger company today much more efficient company.
And then when we brought <unk> on board.
Great. Thanks, Mark I appreciate it.
Thank you.
The next question comes from Thanos <unk> Kaplowitz of BMO capital markets. Please go ahead.
Hi, good afternoon.
Mark I don't know if you can comment that I'll take a stab at it which is the.
The macro backdrop, obviously since we put different now than it was when you announced the micro focus transaction.
How might we think about just the potential macro impacts and how that might play out Microsoft sitting.
Could you point to for example, maybe some of the areas of focus behind like application modernization and security to be perhaps macro resilience.
And comment just how to think about that given the changing backdrop.
Sure sure sure thing.
I think the first is I just start actually at an industry level and industry exposure.
The ability of governments.
There are there is sort of good cholesterol bad cholesterol right I mean, good cholesterol around having strong exposure to.
Governments.
Heavy manufacturing.
Health care.
Local.
<unk>.
The government not just federal but local as well a lot of great work happening in financial services as well and these are industries, where we have sort of common weight. If you will across the two businesses. These are good places to be.
For foreign or garden list of of inflation.
At open text continue to.
Put our annual price increases in place currency adjustments.
Market's changed a bit where its accepting from tech companies.
This increases and you're grabbing them more judiciously our practice, we'll make sure that we have that we apply.
So.
Fair enough I don't want to get into too much detail on their portfolio of what's what's sort of more inflation, maybe or for macro adjusted.
Cyber the full stack cyber security Trust and compliance the needs are skyrocketing, we have commercial customers, who are no longer just accept stock one stock to until the industry security and compliance day, one fed ramp or protected b or the or the equivalent.
In other countries of military style security and compliance in the private cloud not just their commercial that will apply very directly over to micro micro focus as well.
So I'll reserve that until we close but maybe the industry comment the security and privacy comments.
Are helpful.
Great and then just a quick one for <unk>, which is.
Gross margin was obviously up a fair bit year over year in the quarter.
With regarding to cause margins to be constant on a full year basis in 'twenty three versus 22.
Just remind us why that's the case I mean, despite the fact that Youre, obviously seeing that.
Crossroads Youre integrating you've integrated <unk> and we are expecting to see some leverage on the cloud gross margin line what are some of the offsets in that regard.
Yeah, absolutely so in the quarter, our cloud gross margin was 140 basis points higher year over year.
But semis is reasonable in terms of how we looked at it for their for the remainder of the year.
We will continue to prioritize investments in cloud for all the reasons market than sharing in the domain.
Should we do.
Peter and and require less over time, we will definitely see the cloud gross margins into VIX Carbonite SMB E&C words, it's purely SaaS cloud they are holding gross margins at these three so the investments and improvements you will see coming out of the enterprise side. So.
So yes, we are holding it towards flat and as we evaluate investments and gain efficiency earlier.
You might start to see some pickup towards the end of the year.
Okay, great. Thanks.
The next question comes from Daniel Chan of TD Securities. Please go ahead.
Hi, good afternoon.
Given that it looks like this deal is going to go through any things you guys ramping up now or any investments that you need to make ahead of the deal closing for example, you guys were talking about the cross sell opportunity with the cloud do you have to scale up your cloud infrastructure.
When that deal closes.
Yeah, Dan. Thanks, Thanks for the question, it's normal course investments right now.
Our our private cloud we've always we've always had a very great.
Very good.
Modern process that when we win a private cloud we are able to onboard the infrastructure are rapidly and with more hyperscale or partnerships, our ability to provision and turn on as a matter of days right now theyre getting to kind of the physical environments.
Look if our if our.
Our public SaaS workloads go faster.
That would be a delight.
And then we'd have to talk about the more capital investments we need to make there. We just made some as you would note as we do note it.
As we're seeing our own titanium.
Scale ramping, but I wouldn't say anything out of the normal course, right now and our private cloud is a great model, where we can upon winning big contracts and big business. We can get our infrastructure is up in days.
Now not not not months.
Thanks, that's helpful.
How about on the micro focus side.
Revenue stabilizing it looks like much of the heavy lifting has worked.
But any other.
Investments in micro focuses products. After after you close the deal to integrate with yours. Thank you.
Yes.
Dan as we as we noted earlier together.
The issue is not investments on the combined R&D line, we have plenty of investments.
We're going to have exciting.
Organization opportunity.
Of how we prioritize a full security stack, how we prioritize private cloud.
So it's it's not about.
The need for a higher investment rate were up to 14%. If you can remind me I think theyre up to 15% ish on their on their R&D investments that's a good healthy investment spend.
So when we close we'll talk about the joint prioritization.
Thank you.
Yeah.
Yeah.
Thank you.
I'll now hand, the call back over to Mr. Bernstein for closing remarks.
Alright, very good. Thank you Madhu. Thank you Harry Thank you everyone.
For for joining us today.
Harry Gregg do myself.
We are very prescriptive Lee taking the approach that high engagement. This quarter as you heard in Harry's comments, we have close to a dozen conferences, we'll be attending including myself, we look forward to the high engagement and.
Thank you for your interest in open text.
That ends today's call.
Yeah.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yeah.
Yes.
Okay.