Open Text Corporation Q3 2023 Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the open text Corporation third quarter fiscal 2023 financial results Conference call. As a reminder, all participants are in listen only mode and the conference is being recorded after the presentation there'll be an opportunity to ask questions to join the question queue simply press star and.
One on your Touchtone phone should anyone need assistance during the conference call. They may signal, an operator by pressing star Encierro on their telephone I would now like to turn the call over to Harry Blount Senior Vice President Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to open text third quarter fiscal 2023 earnings call with me on the call. Today are open text, Chief Executive Officer, and Chief Technology Officer, Mark J, <unk>, and our executive Vice President and Chief Financial Officer, Madhu Ranga Nathan.
Today's call is being webcast live and recorded with the replay available. Shortly 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 at investors not open text Dot com I'm pleased to inform you that open text management will be participating at the following upcoming conferences virtual Investor meeting hosted by Bank of America on May 10th Needham Technology and media conference on May 17th in new year.
Sure.
Barclays Leveraged finance conference on May 20, <unk> in Austin, CWC technology, and innovation conference on May 24th in Toronto.
<unk> Global Technology Conference on June 7th in San Francisco.
And Barclays Virtual bus tour on June 15th.
And now to our Safe Harbor. 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.
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 in drawing any such statements additional information about the material factors that could cause actual results to differ materially from a conclusion forecast or projection in the forward looking information as well as the risk factors that May project future performance results of open text are contained in open.
<unk> 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 do so by law. In addition, our conference call May include discussions of certain non-GAAP financial measures.
Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website and with that I will hand, the call over to Mark.
Thank you Harry and let me welcome everyone to today's call. This our first quarter results since we acquired micro focus and the results in our park guests are superb.
In constant currency, we delivered 45% of total growth positive organic growth 1 billion plus in a R. Our record adjusted EBITDA dollars and 25% free cash flow as a percent of revenue.
As I've always said our results will speak for themselves juices sports analogy, we are playing to win by fielding both a strong offense and a strong defense or offense, we have significantly expanded our mission and Tam, but the acquisition of micro focus to now include enterprise security operation Spanish meant.
Location of automation, the developer and AI.
And we are addressing a 200 billion information management market.
On our offense project titanium is complete and our forged new growth opportunities in fast and Api's, We announced project titanium X and we are well positioned to help organizations complete their digital transformations and leveraged the next generation of value through AI and our go to market is focused on.
Mark key customer segments that include the global 10000 key government and tech savvy Smbs on our defense, we achieved a R R of 81% and growing organically.
Quantile adjusted EBITDA dollars up $365 million in the quarter Upper quartile free cash flow of 25% of revenue was $306 million in the quarter, our capital strategy via our dividend targeting 20% of trailing 12 month free cash flow as free cash flow grows so does our capital allocation and cost efficient.
Operations via automation.
The World is multi cloud in fact, it is an internet of clouds and information management is the interconnect for the Internet of clouds open text is in a unique position as the leader in information management, our products go to market and employees have us well positioned for continued growth and profitability.
And we have momentum and I like our on ramps for additional growth continued transition from off cloud to cloud new public cloud SaaS products introduction of large languish models in AI, which I'll speak to in a moment.
Innovation remains a top priority security and Trust every company is a software company and have their requirements of developer and platform accelerators.
Our Q3 financial results are a reflection of customer and partner Trust a reflection on how information management is transforming business and a reflection of the dedication and expertise of our 25000 employees I am extremely proud of every open texter.
Can't emphasize this enough we view our business annually because it allows us to make the right short term trade offs in investments to enhance long term performance with that said, let me provide a few quarterly highlights total revenues of 1.28 billion up 45% with positive organic growth.
In constant currency over 1 billion in quarterly a R. R and our ninth consecutive quarter of organic growth in constant currency card revenues were $444 million up 10% with positive up again it growth in constant currency trailing 12 month cloud bookings are up 9% and remain on track for fiscal 'twenty three cloud bookings growth.
A 15% plus so I'll note that within Q3, our cloud bookings were constant at $108 million, we generate 365 million of adjusted EBITDA dollars or 29, 3% adjusted EBITDA margin free cash flow was $306 million or 25% of revenue adjusted EPS of 73 cents and Microfocus contributed.
<unk> revenues of 374 million since closing, reflecting customer excitement and confidence about being part of open text.
<unk> support for accelerated cloud roadmap.
In summary, we delivered record Q3 revenue record our record revenue and record adjusted EBITDA dollars.
We had a fantastic we had fantastic customer wins at Karr for California, Edd, Australia Post Pac life. The man Energy group are liquid and hydro one ranging from our content cloud to our security cloud transformation themes include the need to innovate faster secure the infrastructure improve service experience.
And software resource constraints, we had notable microfocus wins in enterprise security mainframe migration in it operations management government transportation and high Tech firms were top of the demand curve.
Trust is earned.
Given now.
Now I'd like to thank our customers for their continued support.
Today, we have revised upwards, our F 'twenty three revenue and cash flow targets and constant currency, we expect to complete fiscal 'twenty three in the following ranges.
Revenue of 4.54 billion to $4, six 1 billion or 30% to 32% total growth with 1% to 2% total company organic growth cloud bookings growth of 15% plus adjusted EBITDA margin of 32.5 to 33, 5% and free cash flow.
$580 million to $620 million, our views on fiscal 'twenty four in fiscal 'twenty six remains strong and unchanged and you can expect updates on our Q4 call when we kick off fiscal 'twenty four.
Let me speak about our markets and products our products project titanium is our second generation private cloud and second generation API Cloud, we announced had open text world EMEA, we have successfully delivered titanium or cloud editions 23 that too and we are already seeing strong customer adoption from companies such as <unk> close brother.
Stericycle and Soliris bank deliver.
Delivering on titanium is a major milestone for US and now includes full public cloud SaaS for enterprise content management, including SaaS content workflow collaboration Esignature case management capture archive and records management, we have further expanded our public cloud SaaS capability that now.
Now includes not just the ECM core I, just talked about but value edge smacks fortify and deep bricked.
Well titanium delivered we have fortified our support for customer choice of cloud private cloud public cloud and API cloud. This is another strong step.
To continue our annual aspiration of 15% plus cloud bookings growth.
Further we announced titanium acts or cloud edition is 25 over.
Over the next two years, we will strategically invest approximately $2 5 billion USD to deliver titanium X. We are a growth company and it is the right time to invest and gain share here are the top five aspects of titanium X.
We intend to be the most trusted and secure information management cloud with net IQ and voltage integrated and built in it.
It's a full clarification of micro focus there'll be tens of thousands of new features and facets delivered every 90 days, we'll introduce new clouds that include ex Dr. As a service Iot as a service and a massively expanded developer cloud.
And AI.
Which means integrating idle across all of our major clouds and adoption of private large language models or L. L. M. So when we use the acronym L. O M. Just I've always saying large language models last week at open text World EMEA, we previewed titanium ex integration into two L. O N T five.
And chat GBT at the heart of L. L. M has to be trusted information management.
Oh, EMS help enterprises, upskill and reduce cost through tax generation information classification knowledge answering and dialogue generation.
<unk> also help companies find new paths for growth.
Why isn't additional path of value for open text, including the other things we've talked about cloud climate Trust and security.
We are committed to delivering large language models to open text customers in the open text cloud trusted secured based on their reliable information open taxes in a unique position to help customers unlock the value of their information via L. L M and gain the information advantage and we are already.
Eddie working with strategic customers answer specific L. L. M deployments, we're working with a large legal organization to reduce contract risk, we're working with a financial services firm to assess audit risk and auto company to assess meantime to failure and service strategies and a biotech company <unk>.
Testing the acceleration of their clinical trial processes quality and regulatory submissions, you'll see us deliver dozens of use cases in our private cloud over the coming quarters as a standard product offering.
There's operational data there was experienced data and I believe there will be learning data.
Hello, Ms will be the third pillar of enterprise information management.
Information is not a new oil this is absolutely the wrong analogy information is the new water and our information management platform as a reservoir feeding operational data experience data and learning data, we are making this a strategic priority and we will help our customers build their third pillar and the and their applications on top.
Top of it we will keep you updated along the way.
Now, let me provide an update on the integration.
Micro focus we promised a rapid and results oriented approach.
Gration is ahead of schedule, let me provide a few key highlights first on the timeline, let me walk you through our major milestones and achievements on people and organization we are done.
Public product roadmap, we are done.
On an F. 'twenty four integrated company plan go to market and customer gains Patriot approach, we're done and ready to go.
We will complete our systems integration over the next four to six quarters and it's just fantastic to generic to transition our time and energy to growing the business. So on growth. We're committed to returning micro focus to grow and 90 to 93 days into owning and operating the business and based on Q3 results we.
We remain confident with Onboarding the business this fiscal year $2 3 billion in revenues in fiscal 'twenty, four and returning to organic growth in fiscal 'twenty five.
On people our people are the greatest resource of the company, we're organized for growth innovation customer impact and speed with empathy and great care. We have completed the vast majority of our 8% workforce reduction.
And now it's our responsibility and privilege to carry the company forward on a new path to growth.
On innovation that open text World EMEA, two weeks ago, we announced the accelerated roadmap of micro focus products, including a full quote cloud roadmap for Dev ops public and private cloud options available today for cyber security fortifying deep bricked available today full security cloud available by 'twenty four dot too.
A few more I wanted to call out items public cloud snacks fin ops and UC MTB available today, all the other private cloud options available between $23 $323, four and 24 dot to AMC private cloud available today and for AI and advanced technology, the vertical private cloud will.
Love recall, when we closed the acquisition, we created a new customer success organization led by Paul Duggan, who are brought together into one organization support professional services renewals and cloud Onboarding.
We provided the organization and enhanced mission that we call open texts love land operate value expand in Q3. The open text enterprise delivered 95% renewal rates for both on and off cloud our expertise and Knowhow will uplift microfocus customers never all newer.
Rates into the nineties and the first 93 days the dialogue with customers has radically changed the innovation cloud and value and we expect to end fiscal 'twenty four having uplifted microfocus renewal rates from the low eighty's to the mid nineties, and making continuous improvement too.
Into the Ninety's in the coming quarters.
We will provide more detail, but let me add we're on track to our 400 million cost reductions in our capital structure plan of allocating 20% of trailing 12 months free cash flows via dividend and returning to a net leverage ratio under three X. We promised a rapid and results oriented approach let.
Let me provide my final comments, there's a lot of news this earning season on the demand environment I reviewed our key internal metrics from pipeline growth closing cancel rates and deal sizes are Q4 dashboard Reed just as strong as our Q3 dashboard. So we are steady as it goes.
Q3 highlights our potential and we raised our annual F. 'twenty three targets and revenue and free cash flow. We're ahead of schedule on the integration and we're moving with speed and purpose F.
F. 'twenty four is extremely promising as a unified company pursuing a $200 billion Tam with a cloud first approach with our preliminary target near <unk> 6 billion in revenues, 36% to 38% adjusted EBITDA free cash flow was up to $900 million, while returning microphone focus to constant at two.
3 billion in revenues.
We're in a unique position the world is multi cloud in fact, it is an internet of clouds and information management is the interconnect for the Internet of clouds, our product and go to market approach have us well positioned for continued growth and profitability and we now have an additional growth driver with AI idle and large.
Language models, my deepest gratitude to our 25000 open text colleagues, who did an outstanding job in Q3, delivering amazing results, while managing many strategic priorities and we remain focused on creating the next generation of value for all our stakeholders.
I mean, the one that brings peace bring piece we're all.
And let me turn the call over to Madhu rugged Nathan open Tech CFO older Madhu.
Thank you Mark and thank you all for joining us today as Mark highlighted we delivered outstanding Q3 results above expectations across the board. This is driven by disciplined execution at open text agile integration and earlier than expected contribution from micro focus in fact, we're just 93 days to <unk>.
Annuity 31st closing of microscope is well advanced and ahead of schedule on our planned operational integration.
We are expecting a strong Q4 finished the fiscal year and today, we are reaffirming our long term targets and aspirations I would like to remind all of you that we continue to view our business on an annual basis. This is reflected in the strength and growth of our annual recurring revenues and cloud bookings, which are generally longer tenure than one year as a customer.
<unk> make long term decisions with open text, we will continue to drive strong quarterly performance each quarter on all fronts and yet they all weaved into the annual nature of our business and our long term aspirations.
Speaking to Q3 results. Please refer to page 12 of the Investor presentation. All references I am making here are in millions of USD and compared to the same period in the prior fiscal year and on a reported basis unless I state otherwise on a year over year basis total revenue was $1, two 4 billion up 41% and 45.
Sent in constant currency with micro focus contributing $374 million in the quarter.
Our revenue of $1 1 billion up 38% and 41% in constant currency, 81% of total revenue.
Revenue of $435 million up 8% and 10% in constant currency.
Renewals, 95% enterprise cloud and <unk> cloud also 95%.
Enterprise cloud bookings of $108 million constant year over year.
Foreign exchange in Q3 with a revenue headwind of 34 million approximately half of this impacted customer support and the remainder are having a significant impact on cloud revenue.
This was our ninth consecutive quarter of organic growth in constant currency for both cloud and Iraq.
And moving to other financial metrics GAAP net income was $58 million down from $75 million, primarily due to higher operating and interest expenses related to the acquisition of Microfocus offset by tax benefits.
GAAP gross margin of 70% to 69% was led by license and an improved mix of Kevin.
Adjusted EBITDA of $365 million or 29, 3% of revenue versus 284 million or 32, 2% up 28, 3% and up 29, 1% in constant currency and breaking this down for that open text adjusted EBITDA margin was 32% with micro focus which had an adjusted EBITDA margin of $23.
1% Okay.
Cost of sales and operating expenses were up $430 million on a GAAP basis related to higher revenue and expense from the acquisition of micro focus and growth related investments in R&D sales and marketing.
We generated 337 million in operating cash flows in the quarter free.
Free cash flow in the quarter of $306 million constant year over year, and 25% of revenue working capital performance remained strong.
So that'll be our cash position was impacted by $5 7 billion purchase of micro focus net of cash.
9 billion proceeds from debt in Nevada.
Our Dsos were 45 days compared to 44 days in the prior year. Our Q3 DSO. It reflects the continued excellent execution of open text paired with an agile integration of micro focus we expect it to make progress in micro focus working capital performance and in fact made significant strides two months from close as reflected.
In our FCS performance and Needless to say Microfocus contributed well.
Turning to enterprise cloud bookings are in quarter cloud bookings of 108 million constant year over year, and our trailing 12 month cloud bookings were $511 million up 9% year over year, we remain on plan to deliver 15% plus enterprise cloud bookings for fiscal 'twenty three.
Turning to the balance sheet. Please see page 14 of the Investor presentation.
Finished march quarter with approximately $1 4 billion in cash and $9 3 billion in debt. The increase in debt was related to the closing of the micro focus acquisition. Our net leverage ratio was three three times for Q3, and just have higher EBITDA stronger cash flows and lower net debt driven by higher cash balances.
As for our debt and Delever plan after the close of the quarter in March during April we further reduce the debt by $175 million as part of our minimum debt repayment commitment and looking ahead, you may see net leverage ratio slightly fluctuate quarter to quarter based on the investments and the impact of special charge.
Just on cash flows we expect to exit fiscal 'twenty four at three two times or lower and are on track to be less than three times net leverage within eight full quarters.
But let's stick to the banking situation today I would like to share. The following at open text me, but unaffected by credit Suisse first Republic signature at Silicon Valley Bank.
Our banking footprint is centered on the <unk> is a globally systemically important banks with strong capital ratios and solid balance sheet.
Our investments are in money market funds that hold short term government debt and to play. They did we have minimal exposure to U S regional banks.
So now let me speak about the continuance of our dividend program, we intend to grow our dividend as our FCS gross.
<unk> Board approved a cash dividend of 24 to 99 cents per share with a record date of June 2nd and a payment date of June 20 ton.
Turning to outlook targets and aspirations, we plan our business in constant currency and present, our business in constant currency for a quality factors total growth strategy and medium term aspiration.
Starting with Q4 fiscal 'twenty three quarterly factors in constant currency on page 17 of our investor presentation.
We expect revenue of $1 46 to $1 five 1 billion with open text being constant a better E. R. R of 1.12 billion to $1 $1 6 billion with open text constant are better at.
At exchange rates being forecasted currently part of mix change will be a headwind of $10 million to $20 million adjusted EBITDA on a year over year basis, the margin percentage down 250 to 450 basis points again, continuing to reflect the microfocus integration costs.
And we expect FX to be an adjusted EBITDA headwind of less than $10 million as mentioned earlier, we view our business on an annual basis, a solid Q3 and year to date performance along with our visibility and confidence into Q4, we're looking for a strong finish to the fiscal year setting an excellent platform for fiscal 'twenty, four and our long term ASP.
The nations.
Fiscal 'twenty total good strategy in constant currencies provided on page 18 of the Investor presentation, you will see that increasing all revenue targets enterprise cloud bookings target unchanged at 15% plus.
Total revenue growth up 30% to 32%.
Our are up 27% to 29% cloud revenues up 12% to 14% customer support revenue up 46% to 48% at current exchange rates FX would be a headwind of approximately 130 to 140 million for the full year.
Our fiscal 'twenty target model as noted on page 19 of the Investor presentation. It remains largely unchanged except for $20 million decrease in interest expense to a range of $330 million to $350 million.
Our preliminary F 'twenty four financial targets in F. 'twenty six medium term aspirations also remain unchanged. These are included in our investor materials, notably on pages 416, 2020 one.
And today with providing additional details on our financial integration framework I would point you to a new slide on page 21 of our Investor presentation. This slide illustrates the timing and financial impact of cost savings special charges and integration expense.
<unk> EBITDA and free cash flow targets.
Okay.
Let me update you on our 400 million in annual cost savings of approximately $240 million of the savings come from and workforce reductions that Mark previously commented on the savings should begin to be realized in fiscal 'twenty four.
$140 million in annualized savings from vendor consolidation and strategic improvements will span across fiscal 'twenty four and into 'twenty five.
And so the savings will come from elimination of redundant facilities, which would be substantially complete by the middle of fiscal 'twenty four.
We have previously highlighted $80 million of anticipated integration spend to support systems alignment as well as other integration expenses, we expect integration expenses expense to span into the early portion of fiscal 'twenty five.
You have highlighted $380 million to $420 million of special charges that will continue to impact our near term FCS off this amount approximately $200 million will be related to severance restructuring advisory and other charges spanning through the end of fiscal 'twenty, four and approximately 200 million will be a global entity.
Simplification tax structure initiatives and technology footprint optimization, primarily spanning most of fiscal 'twenty four and 'twenty five.
All of these charges investments expenses and savings estimates are fully reflected in our targets and aspirations.
Turning to fiscal 'twenty, two free cash flow, we are raising our fiscal 'twenty, the Fcs range to $580 million to $620 million from our prior range of 500 to 600 million. This upward revision reflects continued strong performance and agile integration of micro focus.
In summary, we are very pleased with that outstanding.
Outstanding Q3 performance, having completed our initial integration if I could focus operations ahead of schedule. We remain on track to meeting our near term and long term operating goals. We fully expect the momentum of my of open text to continue into Q4 for a strong finish to our fiscal year.
On behalf of open text I would like to thank our shareholders loyal customers partners and team members as they embark on an exciting journey ahead.
Now request the operator to open the call for your questions operator.
We will now begin the question and answer session anyone who wishes to ask a question May press star and one on their touchtone telephone to join the question queue. You will hear a tone acknowledging your request. If you are using a speaker phone. Please ensure you lift the handset before pressing any Ts if you wish to remove yourself.
From the question queue. You May Press Star then to anyone who has a question May Press Star then one at this time.
Our first question comes from Raimo <unk> of Barclays. Please go ahead.
Thank you.
Congrats for a first kind of a quarter of the combined entity.
It seems like you'd lipid P D well here.
That was all from my first question Mark like So obviously micro full course had along our.
Journey of a restructuring integrating businesses et cetera, like how it's been the our what has been the experience so far in terms of what you're seeing there.
So you know what your diligence showed you in what you're seeing in real life now that you're kind of on the asset and are working with you I said any any first.
Any comment there and then I had one follow up.
Sure thing Raimo, Thanks for the question and thanks for joining us today.
As I noted previously.
Previously, we've always been very impressed with the products the people and the customers.
And you.
You can do all the research and due diligence and observations you want.
But then once you own and operate.
You then get the next level of insights and it's it's just as we had planned in the diligence we are extremely impressed with.
With the people the products and the customers.
And we're leading with innovation.
Across the board so our enterprise security never more relevant.
Idle just a fantastic product are highly relevant today, what AI, especially combined with large language models the movement of <unk>.
Digital T I.
Hi, Tom Interdigital it into the cloud.
So raimo I would just start with it is as we had.
Theorized and great to see in practice I'm, just the strength of the people the products and the AR and the customers and how receptive they are.
To a broader platform of innovation and speed of innovation.
And then the follow up is it actually and you started mentioning it already with Idaho and lock language models. If you think about.
Now that you're on the island here you were half the perfect combination because you have the content management side and then you have the search side with Idaho can you speak a little bit to walk the cross sell opportunity back into the open text space and then like also a part of it like a little bit like how how does that.
It kind of change with the last name, it's one of those coming in at least it looks like it's broadening it even further thank you.
Yeah, absolutely and you hit on a lot of very important topics there.
We're the market leader in content management, and we've helped 10000 organizations over a decade, two decades to be able to organize their enterprise information management and we kept that we've added lots of capabilities through time, we've we've helped customers take the information exposed on the web.
We've helped customers add search we've helped customers to archive and records management and we've helped our.
Customers do legal tech on top of that.
Now we're gonna help them a go from not just their operational data and their experience data by the third pillar.
Which is learning data we are in such a great position to.
To help customers with large language models and I know chat GBT has a lot of attention right in GBT Sidney for generative pre trained transformers.
But there are many other llm's out there like T. Five so our strategy is going to be to set up next door transactional operational platform.
A L L M platform for each of our private cloud customers.
And then have a connector between the two and what Idol dogs has helped take some data in just an internal video voice imaging.
And turn it into metadata. So it's another way to get data to be useful.
And then the private cloud L. M will sit next to every single private cloud customer as I noted, we're already working deeply with a handful are of.
Customers are one in legal tech, who has millions of contracts looking for risk financial services firm is going to augment their internal audit plants, an auto company.
Looking to create the next generation of service agreements and a very interesting one a biotech company, who actually thinks they're going to transform their clinical trials through our large language model. So this is a this is an additive and it could be top of stack growth driver for us not just off cloud to cloud not just moving to SaaS or climate.
Our trust.
I'm spending a lot of time on it.
And because it could be our top growth driver in the coming quarters.
Yes, I'm pretty excited thank you.
Yeah. Thank you Dana.
Our next question comes from Daniel Chan of TD Cowen. Please go ahead.
Okay.
Thanks, Congrats on the first quarter Mark.
Just noticing that there's a big uptick in your customer support and license revenue growth expectations. Just wondering if you could shed some color on that whether it's from some of the early changes you've made to micro focus is renewals business.
Yeah.
Yeah.
Ah Madhu do you want to take the question, yes, sure I can take it and in fact on Kumar Dan Yes. It simply reflects the growth coming from micro focus.
And then and when you say some of the measures we've taken yes, two months into it as Mark mentioned.
Insurance policy I think the organization has done an amazing job, bringing their customer support as we talked about and they've been in the last few months and certainly continued measure so open tech side on the customer support whether it's a P annual price adjustment and you saw on renewal rate is 95% on both sides and price.
Cloud and off cloud, so, yes, youre definitely seeing all those measures come into play yeah. Thanks. Thank you Madhu.
So it's partly given the integration with micro focus open text core open text performing extremely well off and on cloud at 95% renewal rate and then we're going to make steady progress on Microsoft Microphyte yourself Microfocus renewals, yes from we started low eight.
<unk> will finish this fiscal year or this quarter mid eighties, and we'll just look to make continuous improvement.
Until we get into the into the low Ninety's, we can already see the confidence building with a stronger roadmap.
New innovation private cloud options the confidence is raising we we had a fantastic week in Europe .
Very deep engagement and the stories over and over again in person meetings with customers, saying.
You've earned the right for us to stay with you and give you a really strong chance so thats what youre seeing.
Yeah.
You also talked earlier about you're getting some micro focus wins in the quarter. Just wondering whether these deals were in the pipeline. When you acquired micro focus or whether these are new deals that entered the pipeline over the last 90 days and any update on the cross sell pipeline would be great as well. Thank you.
Yeah. So.
The deals we closed more primarily in the in the pipeline of course, we bought we only owned the company for roughly 60 days.
But the combined entity gave.
Gave them a lot of confidence as you can see in the results we've built new pipeline for sure.
And you know the places that at its strength inside of Q3, certainly our content services business.
Our our business network volumes were up but.
But the enterprise security business.
Is gonna be a rising star for us.
And also moving workloads off the mainframe to a cloud services, where we are in a better position.
To do that than micro focus on their own and the growing needs for developers and the continued transition to a.
Multi cloud.
So it will spend more time on this.
In the coming quarters.
But those are the areas, where we're certainly expecting to see very strong demand and.
And drive the business back to constant and then to growth.
Okay.
Our next question comes from Steve Enders of Citi. Please go ahead.
Hi, This is George on for Steve just going to Echo my congratulations on a really strong start to this new journey.
First question on titanium X I think you threw out a $2 5 billion investment number obviously, a big number but a big opportunity as well just could you help us understand how much if any of that as kind of incremental spend is there any kind of repurposing of existing resources towards this end and just how we should think about that.
Yeah for sure. So if we look at fiscal 'twenty, four and 'twenty five.
We're looking at approximately $2 5 billion USD across engineering.
And and cloud operations right, we we own and operate our own private cloud our own business network.
So those are that's an OLED investment and looking at the combined company as I said earlier it.
It wasn't so much a spend issue, but a prioritization.
So we have significantly re prioritize what we're doing in our first.
Ah 93 days as as you can see from a enterprise world in and are the roadmap that we've published so it's mainly a re prioritization, but it's also an increase in people. So that's part of our workforce restructuring. We're also increasing our our people.
Our head count in Canada, India, Philippines.
The the re priority.
The combined spend we're keeping high we've re prioritized, we're also adding more people because youre being more.
More leveraged and how we spend those spend those dollars.
Got it really helpful color and then just one follow up you know most metrics came in came in I think well ahead of where we were at but just wanted to dig in on was the the cloud bookings in the quarter, obviously, a metric the chair have quite a bit of fluctuation from quarter to quarter, but just if you could help us understand what you're seeing there and how we should think about that going forward.
Absolutely. So again as noted were up 9% on a trailing 12 month basis, and we're holding to our forecast of 15% plus growth for the year, though we are a constant in Q3.
And that's why when we do and I.
Emphasize we're an annual business.
And look I can't say it any clearer than the following we're going to make the best long term decisions for the business.
And it's better for open text, you know not to work under the pressure of a last week or two of a quarter. So as part of the as part of the reasons why we view our business annually.
So hum, we're going to get the best terms work with the customers the way they need to and use an annual boundary not a quarterly boundary. So we're on target for a 15% plus cloud bookings growth, even though were constant with Oh.
Within within the.
Quarter, and we've got great confidence in Q4 to deliver to that 15% plus.
Great. Thanks, again and congratulations.
Yeah. Thanks George.
Our next question comes from Dan utmost helpless of BMO capital markets. Please go ahead.
Hi, good afternoon.
Mark Micro focus obviously performed sure.
If it's better than your target for last quarter.
To clarify was that primarily conservatism on your part with prior guidance or is there anything more specific that you would point to.
I'd point to a handful of things Thanos.
One is our confidence.
As I said.
Note, it's a new day.
Our customers renew and make purchasing decisions not just for the features you have today, but where are you about where you are bringing them in the coming years.
And.
It's why we accelerate it but we did all our preplanning and accelerated getting a roadmap and intentionally designed to get onto the road in Europe and elsewhere to present in person that roadmap. So I'd say number one.
Confidence.
And excitement from our 25.
A thousand employees look we're also modeling right. Its only its just two months [laughter] right and we move them from two to six months cycles to our $4 90 day cycles.
And it's not conservativism I will start with confidence.
And we're also.
Getting aligned to our 90 day periods, which we've now done.
Great.
And then Dan.
And I guess I'll start.
I'd add Jamie what a third which is execute it really well.
Yep Yep.
I'm, sorry, I got down great, Yeah, and then on <unk>.
Now that you've launched it and do you have a public cloud for.
Broader your broader suites.
Can you talk about how public.
Public cloud adoption is trending as you look at the pipeline and remind US is there any cannibalization dynamic where if a customer is looking for public instead of privates.
You get less revenue, because you're losing the infrastructure hosting piece or should we think of it we're seeing additive revenue captured otherwise.
In our sport in public cloud.
Yeah for sure so.
Yeah, titanium delivered or Todd editions, 23 that too is a really important milestone for the company ECM now has a full public SaaS option.
So we can deliver content management off cloud.
All the SaaS cloud private cloud API cloud.
And it's very clear that our features will outpace public SaaS that anywhere else.
But we also have now a very strong portfolio of public SaaS.
SMB completely public cloud business network completely public cloud ECM now completely public cloud.
Well, we did a big update to service management in the public cloud called Smacks from micro focus we did a big update at the end of April for value edge or for a developer technologies in an April fortify on demand available as a public SaaS option and us.
<unk> company.
A larger contributor over time called D bricked.
That's part of the portfolio. So public SaaS is going to become more and more part of our narrative it as a growth driver for sure.
It's going to contribute to our 15% plus cloud our cloud bookings growth I do not see it cannibalizing revenue.
I see us going after new workloads.
Ah I see customers when transitioning to that new workloads.
The same <unk> expanding capacity.
And increasing their consumption with us.
We've never been interested in revenue substitution right. We've always been interested in adding revenues, whether it be API or private and I think the same dynamic is going to hold for public SaaS as well.
Thanks, Mark Congrats hop offline.
Thank you.
Our next question comes from Paul Treiber of RBC capital markets. Please go ahead.
Oh, thanks, very much and good afternoon.
A follow up question on the strength that you saw in micro focus.
There was a five month period between the announcement of the acquisition and the close was there to a degree of a catch up of deals that license deals that may have been sitting in the pipeline. After the acquisition was announced and.
We're just waiting waiting to close and they needed that our confidence.
Because you can close to.
Complete those those deals and if so do you see that that catch up continuing into into future quarters or is it more of just a one quarter phenomenon.
Yeah.
Yes, Paul Thanks for the question.
No I wouldn't use the terminology.
Catch up.
There's no doubt.
It was confidence.
It was execution.
So a bit of modeling when we only had the business for for 60 days and we're aligning to our tour tour quarters.
Yes.
April it used to be a boundary for Microfocus no longer is it was end of March July used to be a boundary now it's end of June .
And even those memories are those boundaries are becoming distant memories for the for the combined workforce. So.
I'm sure there was a little a little bit of hesitation in there, but nothing significant.
That I would I would call out its confidence in execution stronger roadmap.
And in a very energized workforce.
That's helpful and pharma.
Forward looking point of view in terms of your pipeline and.
What you're seeing upstream how would you say you had mentioned your dashboard for Q4 is very strong and overall when you look maybe more broadly in terms of your pipeline. How do you see it building here, particularly in light of the macro environment and uncertainty in the macro you know is that having an impact.
If so how is it how is it impacting us.
Yeah, I mean, we're up.
Every company is my phraseology here is observing the macro.
Every company is doing that when we look at our dashboard and we will run well operationally we have a single global instance of sales force that we use.
So and lots of history.
Which by the way, we know pump into a vertical and other tools that we have for correlation analysis, but when we look at our dashboard of of new pipe we generate.
Kind of art deal metrics and customer dynamics. It reads the same here in early Q4.
As it did in early Q3.
So it's steady as it goes.
Now.
One of the Diamond dynamics for us is going to be adding more SaaS, our SaaS portfolio.
Stood up significantly what competition is $23 two.
And some acceleration within I, Tom acceleration within <unk>.
Application automation and develop our automation.
I think a dynamic for us is becoming experts at building a SaaS pipeline.
And that's a nice new motion for us and our.
And our customers and larger language models are real if I can maybe get that in here and talk a little more about it.
This is a very real thing.
Generative pre trained trans transformer engines have been out there for a while and T. Five is a great open source version. There is a few other versions of course chat GPT has captured everybody's imagination I truly feel that this is the.
A very large item that we're on and we're going to lean all in and stand up a private platform next to every private cloud customer or even if you're using our public SaaS will set up a private instance for you for a large language models and this too will be a driver for growth for us and I think.
That'll be a dynamic for us as well in our pipeline.
Okay, great to hear I'll pass on.
Thank you Paul.
Our next question comes from Stephanie price of CIBC. Please go ahead.
Hi, good evening and congrats on the quarter.
You mean on the fiscal 'twenty four target model here, it's unchanged. Despite the strong Q3.
If you could talk a little bit about where you might have taken swift and clarification in fiscal 'twenty, four and what kind of the puts and takes are you look at the fiscal 'twenty four targets.
Yeah.
Yes techniques Madhu I'll take it on hand and hand, it over to Mark Thanks for the questions.
And look we are leaving it unchanged for all the factors and even the prior question that would asking our focus remains very strong on Q4 and be a partner in the market and I have shared with you the sentiment relating to Q4 and we'll be observing the macro we look forward to delivering a strong Q4, and so suddenly if things merit at.
That point of time will make ads to fiscal 'twenty, four and 'twenty six et cetera, but good news is we are keeping the fiscal 202006.
It is today and that would be my response.
I mean, the only thing I'd add is thank you Madhu is we have our usual cadence that when we complete the year and announced Q4 and kick off the next two year.
We'll give an update on fiscal 'twenty four.
So we're as Purdue noted, we're holding to our and Reconfirming, our preliminary targets of near 6 billion in revenues, 36% to 38% adjusted EBITDA and free cash flows up too.
$900 million and Steph will give us will give an update on our <unk>.
Next quarter's call.
Yeah, and just a couple of things to add and thank you Mark.
Just said to the earlier questions as well.
Off premise was to apply the strong open text operational methodology to micro focus, but the returns on that premise that suddenly been strong as you can see and that gives us a step up confidence in how we approach mid approached microphone cause about a big portion of that is sort of one and done with this quarter's performance and you're only going to seek liquidity.
Momentum and we are sharing from a free cash flow perspective, I will say, we have upped the targets for fiscal 'twenty three and at this point, we're shedding more color in the slide 21, I mentioned as to how the components of free cash flow place and as we close the yard will suddenly come out with updates as needed.
Great. Thank you very much.
Yeah.
Okay. Thank you.
Once again, if you have a question. Please press Star then one.
Our next question comes from adhere <unk> of eight capital. Please go ahead.
Okay.
Hi, guys. Let me, let me add my congratulations to the strong quarter here Mark last quarter. You you mentioned, the six markets that youre going to Youre going to go after trying to get that full stack in each one of those markets.
You know I know, it's only 60 days kind of into the core into the into the micro focus acquisition here, but where are you really seeing most of the most promising go to market motions out of those.
So you kind of talked about some of them, but just maybe digging deeper into where you see and what's really exciting to go after that.
Yeah.
Like having six beautiful children and loving every single one of them is here.
So.
Let me highlight a few no doubt that a con.
Content services.
Is cool again.
And it's all about what we can now offer it any way a customer wants including public SaaS.
And the value proposition of investing in this platform now there are seminal moments along the way.
And.
The large language models is a seminal moment as to why you want to consolidate why you want to standardize on a on a modern cloud <unk>.
Content platform, so content services absolutely.
Top of the stack for US next to it continues to be enterprise.
Excuse me cyber security.
And for all the all the obvious reasons.
And all.
Talk a lot about intact.
<unk> and <unk>.
Our tech forums about vectors of attack.
Whether it be the network.
E mail endpoints applications identity.
And we just have a lot of optionality on cyber security given we cover each of those vectors of attack.
Have.
Oh, just lots of Optionality in it.
And the business.
Developer every company is a software company and the application automation platform is very robust.
And it's really going to thrive inside of our 9000 developers.
And a developer mindset and bringing that to market. So I'll just highlight a highlight those three are of course with supply chain changes in our business network.
Moving workloads off the mainframe, which is just one of the worst climate platforms, you could be on a more going to benefit from moving those workloads as well, but I put content.
Cyber security and the developer.
Application automation are top of the stack for us right now.
Excellent just one.
More and then I'll pass the line just maybe you've talked a lot about the large language models can you just give us a sense of what sort of investments. It will take for them for open text to really kind of get there and allow you to stand up this private platform for all of your customers.
We've already stood it up.
And.
That we have.
I'm kind of may be off by 100 people or so eight 900 people in our private cloud operation our cloud operations.
Has allowed us to take T. Five open source to five instead it up.
And our Oh through our professional services organization, our cloud operations.
We are open for business today to stand up that <unk> father.
Any open source L M for customers and connect it to their to their private cloud and this is the benefit of scale. It's why the private cloud was so strategic for US is yet another reason why we own our own professional services organization in 2000 people.
Inside that organization.
And so within our R&D budget, we will build our connectors and our feeders et cetera, but we already have our first platforms up and operational it here.
Excellent guys, Congratulations again I'll pass along.
Thank you.
Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Thank you.
Just have one question Mark you talked a lot on this call about confidence here and I'm just trying to understand.
Maybe get more specific but where is that confidence in sort of like confidence in your balance sheet and the tax and the support like what or micro focus as customers not coughing on before.
Well, they werent sure if where the company was going to go.
And to the hands of private equity and reduced 20% expense or division is going to be sold off or so.
Customers make decade, a decade long decision in the enterprise.
And if it is uncertain where that platform is going to be just the 90 days or even a year people hesitate.
So we.
We purchase the entire company.
We're operating the entire company with.
We publish a roadmap for each of the groups.
And we have a.
Fantastic reputation as being a steady innovator.
For our customers and we share a lot of customers.
So that's where the Oh look we still have a lot to do we got where we got to earn trust every day, but that gives us Richard the confidence giving customers the confidence.
Right and so I know what that was last question, but I guess related to it so that the.
The fact that you're kind of just let's call it not even a quarter end and it would be reasonable to think that that sort of confidence would actually scale is it kind of reasonable to think that you know the numbers that you're putting out there even though we're taking our numbers up.
Service, though.
Madhu has taught me never to use the word conservative so I won't.
Chad.
[laughter] no look we.
We call it like we see it as we always have.
And our Q4 dashboard.
It is just as strong as our and consistent with our Q3 dashboard.
So we're calling it like we see it right now.
And that's why we've raised as far F. 'twenty three numbers as you've seen.
And it's just it's not the right time to talk about F. 'twenty four or three year aspirations, we will do that when we get into our into our Q4 call. So.
I'm delighted with bringing our revenue guidance targets up to $4 54 billion to $4 six 1 billion.
Our total growth up to 32% or 1% to 2% organic growth cloud bookings growth of 15% plus adjusted EBITDA margins up to 33, and a half and free cash flow up to $620 million and Hum.
Those results speak for themselves when we deliver them.
Yeah understood I would just add and thank you Mark all the comments you've heard about the aspects of integration Mark called out is done and what I called out as well we are delighted to be where we are as a company with micro focus and the performance that we were able to generate which was a premise that we could apply in operational excellent methodology, but as we are.
Done better than we had than we anticipated gives us the momentum to keep it to two.
And I keep continuing.
Yeah.
Okay alright, thank you.
Operator, I think that's the last question.
Okay, well, Harry and Madhu, Thank you very very much.
And thank you everyone for joining today's call and we look forward to.
I'm seeing you at Needham Bofa Barclays CIBC and.
Our remarks were written by two human beings and notch at GBT.
Have a great day.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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