Q4 2023 Open Text Corporation Earnings Call
Thank you for standing by this is the conference operator welcome to the open text Corporation fourth quarter fiscal 2023 financial results conference call.
All participants are in a listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
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I would like to turn the conference over to Harry Blount Senior Vice President Investor Relations. Please go ahead.
Good afternoon, everyone and welcome to open text fourth 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 Reagan Nathan <unk>.
Today's call is being webcast live and recorded with a replay available shortly thereafter on the open text Investor Relations website.
Earlier today, we posted our earnings 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'm pleased to inform you that open text management will be participating at the.
Following upcoming conferences, the virtual Oppenheimer technology, Internet and Communications Conference on August 9th Deutsche Bank's Technology Conference on August 30th in Dana Point, California, and cities Global Technology Conference on September 7th in New York.
And now onto our Safe Harbor statement. Please note that during the course of this conference call. We may make statements relating to the future performance of open text that contain forward looking information. While these forward looking statements represent our current judgment actual results could differ materially from a conclusion forecast or projection.
The forward looking statements made today certain material factors and assumptions were applied in drawing any such statement.
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 text recent forms 10-K, and 10-Q as well as in our press release that was distributed.
Earlier, this afternoon, which may be found on our website. We undertake no obligation to update these forward looking statements unless required to 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 am pleased to hand, the call over to Mark.
Thank you Harry and good afternoon, everyone from Richmond Hill.
As you can see Q4 was another fantastic quarter and great end of the year highlighted by record financial results. The successful integration of the micro focus acquisition delivery of cloud editions twenty-three Dot two project titanium announcement of cloud editions twenty-five project titanium X and today's in.
Now spent of open tax dot AI.
We are a global leader in information management information management is essential for the Nexgen of AI and the Nextgen a business transformation and.
And just as the Internet changed everything with AI everything must change.
But before I get to the numbers I'd like to go over the journey that got US here three years ago, we were delivering around 3 billion in revenues and I said, we would transform information management by significantly expanding our mission become a cloud centric company grow organically.
Double the business over the next five years and that we would return capital in a value accretive manner via dividends at a rate of approximately 20% trailing 12 months free cash flow per year.
Well as you can see this has played out.
So proud of the team on delivering to our aspirations and constant currency Q4 revenues were $1 5 billion in F. 'twenty three revenues were $4 6 billion or 32% total growth led by cloud organic growth up three.
Three 9%.
Our our organic growth of two 3% and total organic revenues of one 2%.
Looking ahead and in constant currency fiscal 'twenty four target revenue ranges are between 585 billion to $5 95 billion or 30% plus total revenue growth.
For F. 'twenty four we are targeting positive organic growth, including a positive organic contribution from micro focus a year earlier than expected.
Today, we announced a $1 per share annualized dividend program or 25 cents a quarter subject to approvals up from 31 cents annualized when we started our dividend program.
We remain committed to our F 'twenty.
Twenty-six aspirations, which include total organic growth of 2% to 4% cloud organic growth of 7% to 9% adjusted EBITDA margin expansion up to 40% and the doubling of our free cash flows to 1.5 billion plus.
Our confidence and our targets reflect the agility and operational rigor of the open text business system within five months of closing Microfocus, we have completed the business the product customer and organization integration.
As we kick off fiscal 'twenty four we are one company focused on customer success and innovation that creates intelligent growth.
Our momentum is driven by three fundamental advantages over our competitors, our ability to deliver comprehensive and differentiated information management technology.
Second, giving customers complete choice in how they deploy and consume our software and third delivering best in class customer experience through our unique love model. This has been our journey and let me speak to our competitive advantages in the relative sizes of our businesses on content and business network are popular among customers.
As we are the information management standard to integrate business systems from SAP Salesforce.
Salesforce Oracle net suite service now epic, Microsoft and hundreds more while also integrating the business transactions between them.
Content and beyond represents approximately 60% of our business.
Our cyber security solutions are attractively protecting actively protecting governments defense organizations and enterprises of all sizes from identity through physical and swapped assets, it's a fantastic platform.
Has significant opportunity for growth and is approximately 20% of our business are items solutions, all about architects and changing the flow of information across the customer critical hybrid assets and service experience, there's approximately 5% of our business. Our application automation is centered on helping highly trained.
Professionals to use their precious time more efficiently by enhancing the developer experience and seamlessly modernizing off cloud workloads by moving running and operating them in the cloud. This is approximately 10% of our business today.
This differentiation has placed us in a fantastic position to further innovate with AI and help our customers transform yet again by combining a shirt a very important factors such as leveraging large datasets from our content platform transactions from a business that work test scripts run more applications automation.
And I T and service information from my time from Consol are helping customers consolidate competitive platforms into our business cloud implementing key AI technologies from open text and others and now implementing new models.
To be successful in AI, you need automation large datasets and new models the better the automation the better the data the better the data the better the AI no data.
Hi.
We have implemented AI machine learning and vector databases for many years prior to the current AI breakthroughs and our AI platform technology shows Magellan capture machine learning and new capabilities, we added with micro focus acquisition, including vertical and idle, we have deep and proven experience with many customers running these technologies.
Presently AI and analytics are approximately 5% of our business today.
Today, we announced open text that AI open text aviator and open text aviator private cloud and an elevation of our AI platform technologies.
Open text that AI is our expanded AI strategy and roadmap. Please visit open txdot AI to learn more as we can to continue this journey with our customers.
Open text aviators or Gen AI capabilities built into each of our business clouds that will allow customers to use large language models and to train their private data from open text information management and to do so with trust and security open text aviator private cloud offers customers the ability.
Leverage aviator with highly specialized learning models and a secure private cloud environment opens.
Open text aviator will initially support google's vertex and palm too.
And open source language models, such as open assessed.
We intend to support many specialized learning models applying the right model for the right job here are the six initial aviators open text content aviator supporting conversational search and large scale document analysis open text experience aviator transforming customer communications open.
<unk> business network aviator generating business to business integrations open tech cyber security aviator enhancing threat management through behavioral analysis open texts Dev ops aviator generating test platforms and generating trusted software and open text I, Tom aviator redefining level.
One support experiences.
Our AI platform technologies, which I mentioned earlier are available today.
<unk> and aviator private cloud capabilities will begin to be available with cloud editions $23 four and be part of our 90 day release cycles at open text AI will be built in and what progress we will progress with each release.
Our initial AI R&D and capital investments are factored into our F. 'twenty four R&D investment range of 14% to 16% at.
At present, we have not factored any aviator revenues into our F. 'twenty four plan and once we see clear revenue signals will update you.
We believe the AI opportunity over the long term a significant open text has a large role to play in AI and.
And we intend to play it.
Now I'll turn to Q4 in fiscal 'twenty three results Madhu will provide deeper insights let me touch on a few key highlights in constant currency for Q4 of one 5 billion of total revenues up 66, 5% 455 million in cloud revenues up 10, 6% strong adjusted EBITDA margins of 31%.
Our enterprise and cloud renewal rates in the mid nineties with micro focus for renewal rates, showing clear improvement and to the mid eighties.
I want to thank FEMA D. H L. B N P pet of us CNA Rene sauce, a water vertex and taken for selecting open textile technology during the quarter for FEMA and DHL, we're providing cyber security for CNA and Renee sauce, our content platform is essential to their business.
BNP, a new Dev ops platform with value add a micro focus cloud wind and water AI information platform for content tailoring.
For the year fiscal 'twenty, three and constant currency $4 6 billion of total revenues up 32, 2% $1 7 billion in cloud revenue was up 13, 3% $1 5 billion and adjusted EBITDA dollars or 32, 4% and free cash flows of $655 million.
These results reflect the strength of our solutions in addressing the specific needs of customers across content supply change developers cloud migrations, I T operations and growing climate and sustainability needs now.
Now before I finish let me provide some initial thoughts for fiscal 'twenty four.
Page 18 of our Investor presentation, you'll see that we have delivered three consecutive years of accelerating organic cloud growth in constant currency, you'll note from our F. 'twenty four targets in F. 'twenty six aspirations. We continue we expect to continue this trend.
We are targeting enterprise cloud bookings are 15% plus and 24 up from nine 5% we delivered in 'twenty three.
Note that we grew enterprise cloud bookings by 57 million sequentially from Q3 to Q4 were 108 million $264 million Q4 bookings growth was strong at 12% year over year, and we have solid momentum to the 15% plus.
They expect the acceleration is based on our pipeline growing demand for the clarification on micro focused products and our previous investments in titanium.
F. 'twenty four is going to be an unprecedented year as customers consume more information management capabilities consolidated away from competitive platforms move more workloads into the open text cloud adopt security operations and application automation and as customers begin to look to next gen AI capabilities.
Further the micro focused products have expanded our information management vision and provided foundational AI tools customer confidence is back renewal rates, expanding and we expect to return micro focus to organic growth. This fiscal year that is to exceed the $2 3 billion in revenues I plan to show you or Mike.
So focus progress our progress every quarter this fiscal year.
Now onto our F 'twenty four outlook highlights in constant currency.
Total revenues between 585 billion to $5 95 billion or 30% plus growth total organic growth of 1% to 2% or up $90 million of new organic revenues in the year to know in fiscal 'twenty. Three we added $41 million of new organic revenues and this year, we expect that up to $90 million of new organic revenue.
Total grabbed a cloud growth of 6% to 8% enterprise cloud bookings are 15% plus adjusted EBITDA margin of 36% to 38% and and growth of our free cash flow to a range of $800 million to $900 million.
There remains much news this earning season on macro issues in the demand environment open text is well positioned to help our customers capture the nextgen up transformation with our with our information management business cloud our cloud editions.
And open text out AI or.
Our internal dashboards remain consistent with previous quarters, and we are playing offense right now to advance our unique opportunity once again, our F. 'twenty four targets do not yet have any aviator revenues built in.
I want to thank our customers for making fiscal are making fiscal 'twenty three such an enormous success and for your partnership and the trust you place in us I want to thank our employees for advancing our customers' mission through innovation for their incredible and transformational work, although microfocus acquisition and providing an exemplar.
Every customer experience, we accomplished so much in fiscal 'twenty three to our customers to our partners to our new employees to employees have been with us for many years I think you can all see we're in an amazing place.
And the best days remain ahead of open text and open text out AI.
You are the source of our inspiration I'd like to thank I'd like to thank you again and like to highlight that today, we published our fourth annual corporate citizenship report I'd encourage you to read it. The report reflects our core values and our culture as well as our commitments as we strive for a more sustainable and inclusive world. It is.
We strive to create an even better company, we see corporate citizenship is both an imperative and a tremendous opportunity.
The one that brings peace brings piece for all and with that I'd like to turn the call over to Murdo.
Great. Thank you Mark and thank you all for joining us today.
Our fiscal year 2023 saw a strong finish with outstanding Q4 results driven by solid execution from the entire open texting for micro focus. We are ahead of plan as you see in our financial results since the close of the acquisition on January 31st we are one company.
It is our fiscal year end and consistent with earlier communication, we are providing you with additional disclosures and let me outline the complete list of materials in conjunction with that.
Our release today. In addition to the AI related materials, Mark talked about our earnings release Form 10-K, our investor presentation, and let me draw your attention to a few key items.
On page 17, we're providing a view into the size of our high value businesses on page 18 is that annual organic growth disclosure highlighted by three consecutive years of accelerating cloud organic growth in constant currency.
On page 20, our target model it highlights our expectation of returning micro focus to organic growth in fiscal 'twenty. Four one year ahead of plan on page 22, we have updated our financial integration framework to provide deeper insight and a clear path to doubling free cash flow by fiscal 'twenty six.
So moving to our Q4 results. Please refer to page 13 of the Investor presentation. All references are making here are in millions of USD and compared the same period in the prior fiscal year and on a reported basis unless stated otherwise.
On a year over year basis, we had record enterprise cloud bookings of $164 million up 12% year over year, we had record cloud revenue of 452 million up nine 7% and 10, 6% in constant currency, we had record revenue of $1 2 billion up 56.4% and 50.
Seven 7% in constant currency. It represents 78% of total revenue. This was our 10th consecutive quarter of organic growth in constant currency for both cloud and E. R. R.
A record total revenue of $1 5 billion up 65, 2% and 66 points by 5% in constant currency with micro focus contributing $602 million in the quarter.
Renewals at 94% in enterprise cloud and 95% of cloud.
And moving to other financial metrics GAAP net income was a loss of $49 million down from income of $102 million with higher operating expenses amortization, especially charges and interest expenses related to the acquisition of microphone.
GAAP gross margin of 71, 4% with a 72% reflecting increased revenue contribution from licensing customer support non-GAAP gross margin of $76, 9% led by higher gross margin for the micro focus business and continued strong all open text customer support for pharma and Jeff.
<unk> EBITDA of 463 million or 31% of revenue versus 314 million or 34, 8% of revenue an increase of 47, 6% year over year and 44, 3% in constant currency.
They can just down further open text adjusted EBITDA margin was 32, 9% and micro focus had an adjusted EBITDA margin of 28.4% in Q4, a significant improvement from 23.1% in Q3, we continue to make excellent progress, bringing micro focus into our adjusted EBITDA model.
We generated 115 million in operating cash flows and 91 million free cash flows in the quarter working capital performance remained strong.
So it was a 41 days compared to 43 days in the prior year.
For full year fiscal 'twenty three on a year over year basis enterprise cloud bookings of 528 million up nine 5% year over year cloud revenue of $1 7 billion up 10, 8% and 13.3% in constant currency E. R are revenue of $3 6 billion up $26 two.
The scent and 29, 7% in constant currency and representing 81% of total revenue.
Total revenue of $4 5 billion up 28, 4% and 32, 2% in constant currency with micro focus contributing 977 million for the five months ended June 30th.
Foreign exchange in fiscal 'twenty, three with a revenue headwind of $132 million approximately half of this and customer support and 30% in club.
Moving to other financial metrics for the full year GAAP net income of $150 million down from 397 million.
With higher operating expenses amortization and special charges and interest expenses related to the acquisition of Microfocus GAAP gross margin of 76% versus 69, 6% again, reflecting increasing revenue contribution from licensed and customer support non-GAAP gross margin for the year was $76.
1% supported by higher gross margin for the micro focus business as well as continued open text customer support performance.
Adjusted EBITDA of $1 5 billion or 32, 8% of revenue versus $1 3 billion. A 36, 2% of revenue up 16, 4% year over year and up 18, 2% in constant currency and breaking this down further open it open text adjusted EBITDA margin was 34, 7%.
In micro focus had an adjusted EBITDA margin of 26, 3%.
We generated 779 million in operating cash flows in fiscal 'twenty, three compared to 982 million in the prior year the decline primarily related to integration of the microphone because acquisition free cash flows in fiscal 'twenty three of 655 million compared to 889 million in the prior year.
This performance was better than our target range of 580, 620 million and reflects strong collections and working capital performance as well as a rapid operational integration of micro focus and micro focus contributed positive free cash flow for the year driven by the strong working capital performance.
Free cash flow performance in fiscal 'twenty, three provides a solid platform, but our fiscal 'twenty four targets range of 800 to 900 billion aspiration for fiscal 'twenty six of 1.5 billion plus.
Turning to the balance sheet. Please see page 23 of the Investor presentation. We finished Q4 with $1 2 billion in cash and $9 1 billion of total long term debt.
Our net leverage ratio was three five times for Q4 last quarter, we mentioned, our net leverage ratio would fluctuate slightly over the next few quarters, reflecting timing of investments and the impact of integration expenses and adjusted EBITDA. After we closed the quarter, we further reduced our debt by $175 million.
That's part of our deleveraging program, we are committed to delivering a net leverage ratio of less than three times by the end of fiscal 'twenty five or sooner.
Turning to our dividend program today, our board of directors approved a quarterly cash dividend of <unk> 25 cents per common share. The record date for the next quarterly dividend in September 1st 2023, and the payment date is September 22nd 2023, the annualized dividend increases to one dollar per share subject to quarterly board approval.
<unk>.
Turning to our targets and aspirations, we present, our business on a constant currency basis for our quarterly factors targets and aspirations. Our Q1 fiscal 'twenty four quarterly factors on page 21 of the Investor presentation on a year over year basis, We expect revenue of 1.36 billion to 1.41 billion reflecting.
Q1 seasonality.
R. R. A 1.09 billion to 1.13 billion adjusted EBITDA year over year margin percentage down 250 to 350 basis points again, reflecting micro focus integration costs.
As mentioned earlier, the view and plan our business on an annual basis and quarters will vary specifically on free cash flows. We are confident in our annual target of 800 to 900 million Q1 is expected to be neutral to slightly negative as a result of interest special charges and integration costs as well as <unk>.
Lower working capital at the start of the fiscal year.
<unk> from Q2, we expect free cash flow growth on a year over year basis in each subsequent quarter.
Our fiscal 'twenty four targets in constant currency are provided in page 20 of our investor presentation.
We look put enterprise cloud bookings growth to grow 15% plus year over year.
Revenues up 6% to 8% customer support revenues up 40% to 42% in our are up 24% to 26%.
Total revenues of $5 85 billion to $5 95 billion, representing growth of 30% plus non-GAAP gross margin range, 77% to 79%.
Adjusted EBITDA range of 36% to 38% at current exchange rates FX would be a revenue tailwind of approximately $40 million to $60 million. After suppose twenty-six aspirations remain unchanged and these are included in page 24 of our investor presentation.
Let me turn to the financial integration framework update on page 22 of the Investor presentation.
We have action $260 million of our 400 million cost savings with the balance expected to be completed in fiscal 'twenty. Four we have incurred $6 million. After 70 million integration expense with the balance expected to be completed in fiscal 'twenty. Four finally, we have incurred 146 million of the special charges, we expect 182.
Hundreds of millions of remaining microfocus charges and expenses to be incurred in fiscal 'twenty four and the remaining 150 to 190 million in fiscal 'twenty. Five all of these are outlined on page 22 of the investor presentation. The related initiatives driving the spend include global entities simplification tax structures and technology.
Foot print optimization.
These are fully reflected in our targets and aspirations.
Turning to our free cash flow, we are reaffirming our fiscal 'twenty four free cash flow target range of 800 to 900 million at our fiscal 'twenty six aspirations of $1 5 billion plus.
Our fiscal 'twenty six F C S aspiration to more than double our fiscal 'twenty free cash flow for the year.
In summary, we are very pleased with it outstanding Q4 and full year performance.
Enhanced global size and scale enables us to deliver telemetric for gross margin adjusted EBITDA and free cash flows driven by innovation and growth.
On behalf of open text I would like to thank our shareholders loyal customers and partners to.
To the open text team members you have proudly deliver great milestones for fiscal 'twenty, three and put us in a position for outstanding fiscal 'twenty four I am looking forward to that exciting journey ahead, I will now request the operator to open the call for questions.
Thank you we will.
I'll now begin the question and answer session anyone who wishes to ask a question you May press star and one under Touchtone telephone to trying to question Q you will hear a chunk acknowledging your request if youre using a speakerphone. Please ensure you lift the handset before pressing any Keith if you wish to remove yourself from the question queue you May press star.
And too Andy.
Anyone who has a question you May press star and one at this time.
The first question comes from Richard Tse National Bank financial.
Please go ahead.
Oh, yes. Thanks for taking my question here My view on Slide 22, when you talk about sort of these special charges, if I kind of look at the prior deck from the prior quarter. It looks like it's sort of gone up here a little bit and just wondering if you maybe unpack that for us a little bit just to explain sort of why that increased here.
Yeah, Yeah, absolutely in fact, if you look at a couple of line items.
Actually it's gone down on the integration expense by about 10 minutes and we've expanded the range to about $40 million of the special charges and again. These are the current estimates for the global entities simplification tax structures et cetera. So yes, two fiscal 'twenty five it's a net increase of about.
Of about $30 million.
Okay. Thank you.
It's probably the hope it too early for this but obviously it seems like Youre doing a quite a good job in terms of the Sag ratio with micro focus so as I look at your aspirational guidance going forward to let's say fiscal 'twenty six I'm assuming here. It does not include any acquisition. So just kind of wondering if you could maybe help us understand your thoughts and process around you.
Our annual capital deployment targets when it comes to acquisitions do you look at it that way or how should we think about that.
Yeah, Richard Mark Kurt and thank you for the question.
At present were very focused on.
Returning micro focus to organic growth. This year, a year ahead of schedule and that's certainly where our energy is second as I noted.
We have a large role to play in AI and we intend to play it.
So our our focus and we had a in parallel a large set of announcements today.
Oh about open text out AI, our our strategy and roadmap for AI or announced a new product line called aviators.
And and discussion of our initial six aviators that we expect to be available for sale.
Next quarter.
In that framework, our R&D investments are between 14% to 16%.
Of revenues. This year. So we're very focused on delivering to our F. 'twenty four aspiration is F. 'twenty six and as you know those were all organic.
And certainly as we.
Bring approach are under under three <unk> leverage.
We'll certainly consider if we want to do acquisitions, but right now we're well we're focused on capturing the organic opportunity for us.
And I'd also note on capital return, we brought a dividend up as well to a $1 annualized <unk> per share.
Okay great.
And just my last question do you use aviator within the open text current operations I'm, just really trying to understand and maybe they use cases are there and I guess related do you kind of see that having an impact in terms of the operating model. If that's the case.
Using either within the company.
Oh, how much time do we have Richard so.
Yeah.
Our announcements today.
Our around our initial product offering.
And our our strategy and direction and Theres a lot in there.
How we're going to use idle.
As a way to translate information into useful vectors and meta data how renews vertical as the vector database not other People's technology, our technology, how we're gonna bring embedding technologies and from open source and we're gonna be poly model, we're going to support highly specialized language models.
For highly specialized jobs we're.
We're talking about enterprise AI here, not consumer AI and a language models will be highly specialized.
So.
Our focus is getting that initial product to market are doing that in a private trusted way as well and our private cloud.
And elevating idle and vertical and Magellan.
If you just allow me for a moment if we think of the role automation has played in the enterprise over the last 20 years before ERP suites got integrated G&A expense was up to 20% of P&l's by automation knocked G&A right into the into the in the mid single digits.
<unk> is different than automation, but it's the AI the next transformative aspects for.
For enterprises, we will use aviator to transform our own business over time.
Initial areas that were would consider support just as I talked about our item aviator our ability to.
Transform level, one support we have opportunities in our professional services of how we will generate coke.
We have opportunities how are our engineers can transform how they test.
So we'll have a whole Richard will speak more and more about how we will apply aviators to our business and how we will transform our cost structure and how we will transform the revenue side rfps themselves we.
We have you know.
20 years of RFP history, 200000, rfps or put them in our vector database will apply a language model and generate the best information out of it so that will come in time.
But right now or announcing our strategy our vision our direction. Our initial products. Our initial R&D investment and then we will apply it to ourselves as well through time.
Okay. Thanks for taking my question.
Thank you.
Okay.
The next question comes from Steve Enders of Citi. Please go ahead.
Hi, This is George Chris on for Steve. Thanks for taking the question and congrats on a great quarter did want to double click on the enterprise cloud bookings.
And just get some help on getting confidence in the acceleration into next year was there any.
Element of of deal push outs from this year into next year that you expect to close or I guess, just any more color on how you're thinking about that.
George happy to and thanks for being on the call today, So just to recap the numbers.
Our cloud bookings that F 'twenty, three or nine 5%.
And which we've already talked about Q1, Q2, Q3 and Q3, our bookings were cost at $108 million in Q4, we.
We had a strong bookings quarter $164 million up 12% year over year.
And.
So Q4 bookings was $164 million and we've got saw a solid momentum to get to the 15% plus.
And so that's based on pipeline pace based on deals. So I mean, the difference between 12% and 15% I wouldn't point to push deal at all our momentum is up so we delivered $164 million in Q4 up 12% and we got solid momentum to get to the 15% plus.
Got it Super helpful. And then just on the aviator announcements are really exciting set of products, maybe just any color on the kind of go to market and monetization strategy. Here is there anything kind of unique or I guess, you know what would you kind of highlight there.
Yeah, I would say two things theres, two pricing models sort of emerging in the market.
You certainly have.
Microsoft.
I think Oh, $2 65, you have Copa copilot chat.
Chad GBT get hub.
Get lab.
They're the ranging from $10 to $30 per user per month.
And that's what it makes sense to me you have kind of the other spectrum.
Where you see Google pricing and others in the enterprise sort of based on process tokens.
So.
When we.
<unk> G E and next quarter, we'll introduce the pricing then.
But some aviators will be more oriented towards user pricing per month.
And the market sort of setting the rate right now right between 10% to $30 and there'll be other parts of what we do are based more on sort of consumption.
Our business network by the way is priced on what we call kilo characters.
Which is the same thing as tokens.
So when.
When we.
When we deliver and $23 four we'll announce the pricing and we'll probably have two models are built for the built for each aviator one user based but again the market is between 10 to $30 per user per month, and we will have some aviators more oriented towards consumption either based on kind of tokens or kilo character.
But we've thought through it and we will get the right pricing for the REIT aviator.
Yes.
Great. Thanks for taking the questions.
Okay.
The next question comes from Kevin Krishna Rodney of Scotiabank. Please go ahead.
Hey, there good.
Good evening and just maybe one for me I'm just on the Microfocus a return to organic growth a little bit faster how do we think about that in conjunction with the a F. 'twenty four guidance, which you know correct me if I'm wrong, but I think at the on the on the top end it came down a little bit from the preliminary guide that you gave in the last quarters can you just talk about maybe.
Perhaps what you're seeing in O Tex our core.
To lead to that result.
Yeah. Thanks, Kevin Thanks for the question and thanks for being on the call today.
Just to recap the numbers right in fiscal 'twenty three our total company organic growth was one 2%.
Or 40 or $40 million of new organic revenues, we added in the year. So you know percent fan type of percent can be tricky right, but just real simple we organically. We grew one 2% we're committed to showing you that annually and or said differently, we added $40 million of new revenues.
Our target for 'twenty, four is 1% to 2%, but a much larger base. So that's 45 million to $90 million of new organic revenues and fiscal 'twenty four it because it's hard.
Because it's on a much higher base. If you will so that's up to $90 million almost $100 million of new revenues here in fiscal 'twenty, four and as I said in my <unk>.
Script.
We have no aviator revenues built into our model yet and until we have the revenue signals, we're not gonna add it look we expect.
All our product lines to grow and we expect.
<unk>.
I don't like speaking this way, but I'll say it this way, we're clearly expecting micro focus to return to organic growth and and base open text to have organic growth as well, both having organic growth.
Again, the 1% to 2% for fiscal 'twenty four.
<unk> is up to $90 million of new revenues, and we added $40 million of new revenues last year.
And Kevin if I could just share with just one last point in addition to what Mark said the last print with his disciplined to your point.
Please make note of the FX tailwind, we had on slide number 20, and the midpoint there is about $50 million.
Got it okay. Thanks, a lot I'll pass the line. Thank you yeah. Thank you. Thank you.
The next question comes from Paul Treiber of RBC capital markets. Please go ahead.
And thanks for taking the question just given the comments in the prepared remarks, a micro focus is doing much better than you expected.
Fundamentally why is that you know what has changed with the business and then I might have missed it in the prepared remarks, but did you comment on renewal rates for micro focus this quarter on how that's been trending.
Paul happily and thanks for being with US today, So two things we're executing.
We executed.
In all we are all all wind the tape back.
We're experienced acquirers experienced integrators.
We had a vision around how to integrate the company and return it to organic growth and we're executing to it.
And its fundamentals right, we've released a product roadmap.
That's giving customers confidence in it.
Confidence is back.
We've integrated the renewals teams to the open text practices.
Our renewals practices.
We've done our work with the field, where the field says sells new they don't sell renew.
We've gotten our systems aligned.
And so we ended the year.
We ended fiscal 'twenty three with micro focus renewals in the mid Eighty's up from the low eighty's and water trajectory to get the renewals to the high <unk> This year.
And we've also announced our roadmap for the classification of micro focus we've delivered our first products and actually we announced the first linear right of being BNP for value edge in.
In the cloud and you can see in the investor deck of 2023 to $3 23 to 424 that one it's just a continued pace of more clarification.
We transformed document them into the cloud we will transform micro focus into the cloud. So it's those fundamentals that are giving us the confidence plus the pipeline plus or execution.
That will return micro focus to organic growth this year and I'm going to show you every quarter, along the way and showing you the numbers.
And in regards to aviator I mean, you sound very excited about the opportunity there and the product how do we think about sizing yet and I know you're not giving it a an outlook, but you know how do we compare it to some of the the products you've had in the past that Magellan in the past, but other.
Large part of launches in the past you know how do we think about the magnitude.
In terms of the opportunity for either.
Yeah, I'm not I'm not ready to put a Tam honor alright, so its a fair question, but we're not ready to put a tam on it.
Hum, but as I said in my remarks, I believe it to be.
A significant long term opportunity and we can go after at the open text way.
Fundamental innovation when deliver all we're going to we're going to show you. This show.
Show you the signals are along the way for sort of predicting those you know we don't have any aviator revenues built into our.
Any revenue built into our F 'twenty four model yet.
So.
I think it's going to be relevant for every customer is going to be a independent set of products.
It's clear that what automation did for the enterprise I'm going to make the distinction AI can do for the enterprise.
And you.
You need automation.
And the better the automation the better the data the better the data the better the AI, we're extremely well positioned where we've been managing large datasets.
Thousands of customers and content, we are well positioned where we've been managing many billions of of our business network transactions, we're well positioned where we have the.
Software and testing scripts and ADM, we're well positioned and I, Tom with with Iot asset. So we're in the places where you can create value in the enterprise and there's a real even the Mckinsey report I think is great because it kind of or are their AI or whatever nice grid of the places of the enterprise are going.
Impacted you look up into the right. It's the developer is contents contracting.
It's the things I've just mentioned, so I'm not ready to put a time on it.
Our products our initial aviators will all.
Be available next quarter be a showcase obviously in Vegas.
And we will announce our pricing and spend more time talking about the Tam when the product comes to market next quarter.
Just one last question for me.
When I do the packs.
<unk>.
Can you speak to the slope and the tax rate to 26.
Obviously, it's a big jump to mid 20% from 14%.
And then does that reflect you know, what's what's driving that increase and is reflected the global minimum tax.
Yeah. So.
A few things.
First of all as we ended up using up the Canadian attributes and we've talked about this before.
Towards the end of fiscal 2024 that plays a role in the creep up of the rates now you slap in micro focus and here again, we're not talking about strategic tax initiatives and there is no immediate.
Instead of leave from the statutory tax rate with absolutely using the UK attributes of micro focus, but micro focus ease of taxpayer on the U S front and so it's so as open text. So really the slope you're seeing is sort of the utilization expiry of the Canadian attributes that open text and adding on.
The U S tax attributes for micro focus.
Again as I said, we will spend the next 12 to 18 months strategizing. The next wave of tax optimization, better but that is not factored in the slope you're referring to.
Okay. Thank you.
Okay. Thank you.
The next question comes from Stephanie price of CIBC. Please.
Go ahead.
Hi, good afternoon.
Thanks, Hi, Stephanie welcome welcome to the call.
Thank you thanks for that.
No details on the revenue from each of the divisions and the breakout between the different content management carried et cetera, just wanted to dig a little bit deeper into that if you think about the mix of the different high value businesses. If you look out into fiscal 'twenty, six and beyond which of the businesses do you see us growing above the company growth rate and where do you really see that much tougher.
Oh did the high volume businesses.
Yep.
Thanks, Stephanie Thanks for thanks for the question.
They each have their dynamics, let me just start with we promised to provide more and more visibility by into each of the into each of the high value businesses on slide 17.
Of the Investor presentation, you can see content to 45% cyber security at 20% application automation, 10% business that were 15%.
<unk>, 5% AI and analytics, 5%.
I am not get down into growth rates for each one of them.
I'm not going to do that today.
But we have.
Clear opportunity in AI and analytics as we've talked about today just clear opportunity.
It operations management.
I'm very pleased the private cloud and SaaS products that we're bringing to market I think we have.
Significant.
Opportunity there and everyone.
Need cyber security so.
We've been talking about kind of winning each of these value stack right and having select programs across all the value businesses cyber securities is an effort underway across all all the value a value businesses.
So as they say I love all my children.
They're each unique.
But you know AI and analytics, obviously significant opportunity I'm very optimistic on on ops.
Cyber security deep opportunity and an interesting thing about AI.
You have automation.
Different than AI.
And for customers to take advantage of AI.
They need to be on.
On some cloud platform private or public.
They need to consolidate their automation.
And then take advantage of that enrich data through AI.
And therefore, I believe that content management.
Has a.
Has opportunity to continue to grow.
Because there's more and more automation and more consolidation into that.
Great. Thank you very much yeah. Thank you.
The next question comes from Santos from Scott Lewis of BMO capital markets. Please go ahead.
Hi, good afternoon.
Mark can you update us on where you stand as far as our sales integration and have you started to see any early cross selling or its still early days on that front.
Yeah. We're all we're complete Santos. It then I will thank you for joining us today I'd like to have you on the call were or kicked off July one salesforce.
Salesforce fully integrated.
Single global accounts team.
We go to market by our buyer.
Buyer we've.
We've completed all of our account assignments singular comp plan, where integrated and that all that work.
Was completed and implemented.
On July one we have a single sale.
Salesforce com.
Compensation system as well as a as an example.
The areas so a more complete the second piece.
Is.
The select.
Cross selling.
And again security top of the list.
It'll top of the list as well and so as part of our kick off which was just a couple of weeks ago, we laid out training for everybody.
So it is early days on the cross selling but were really focused on two areas is security.
And it's a meta data and.
AI tools.
Great and then as far as leveraging your open text channel partnerships.
With respect to the micro products.
How's that progressing.
Yeah.
While we're very we're very focused on sort of the top of the pyramid.
Which we we announced.
Earlier this year.
The next generation of our partner program, we now call. The open text partner network our Opn.
And on top of that pyramid are our top 10.
Microsoft.
Google.
Amazon.
S P.
Our sales force.
<unk>.
Accenture, Tcs and and a few others so.
That work is beginning to kind of speak Holistically to Google.
I'll, just holistically to DXP holistically too.
To Accenture, so still early days.
We've done the work to say these are the top 10.
And we're going to kind of pick up key opportunities in and each of them I'll. Let me take an example, right we had a great partnership with Google.
I'd open tax we're gonna brain we're.
We're going to work together on mainframe.
<unk>.
And moving more workloads into into the into the Google Cloud, we had a great relationship with AWS hosting a lot of our SaaS products.
Again, bringing application automation.
Into the AWS relationship. So there's this high synergies we're focused on the top 10.
And the work has begun.
Right Epsilon transplant.
The next question comes from adhere Cosby of eight capital. Please go ahead.
Yeah.
Hey, good evening guys. Thanks for taking my question I wanted to ask on the aviator product as well.
Can you just give us a sense of your conversations with customers Mark are they are excited for what this product can do for their business. I mean, we of course, we hear that these products are you just going to increase productivity, but are customers ready to deploy. These these these product and just based on those conversations how do you see adoption going for these customers as we move.
Perhaps the initial deployment in October .
Yeah. So I'll look our early conversations informed us deeply and just 90 days ago right. We're talking about early conversations 90 days later, we've announced aviator.
And we've announced aviator private cloud.
90 days from now we will have our our our first.
<unk>.
Aviators in production, if you will and end with.
Well good deployments are a few customers as well.
So it's the these are our initial strategies.
If you will we're also going to build a practice area. So when I when I speak about aviator private cloud.
No we've done.
We have a couple of very unique things that we can bring to market here.
We obviously have our tools are idle vertical Magellan unique we don't have to go out and.
Kind of rent those tools.
For others.
We own them the second unique thing.
<unk> is our managed services, our private cloud our customers wanted to able to use their data privately securely.
So aviator private cloud is a is a strong avenue for our for our customers already in a private cloud or want to move to a private cloud to use their data privately and train their data privately and not bring it into some some some public domain. So we're going to build a practice area around this.
Just like we have practice areas in business that work practice areas in content, we're going to practice areas in AI and in language models.
So it's early days.
Hum, we've announced the initial vision and direction.
Next set of products coming next quarter.
And we'll keep you updated along the way.
Thanks, Marc just for my second question to piggyback on <unk> question. Some of the early some of the early microfocus customers that you onboard it early.
Post the acquisition.
Now that they've had a chance to really experience the combined company. The combined offerings that we've spoken about over the past two quarters whats. The initial feedback and do you find that those initial synergies that you would envision that are kind of playing out of course I understand early days for that but just some initial thoughts on that would be great. Thank you.
We're turning them door organic growth this year.
So.
We.
Maybe just to reiterate.
Our confidence is back.
Roadmap published all the key aspects of the integration complete.
Classifications begun renewal rates up to mid Eighty's.
Pathway to high Eighty's.
Initial wins in the cloud.
And <unk>.
And the pace of innovation.
You can see some of the aviators being a square in the middle of micro focused product lines and accelerating our micro focus to organic growth this year.
So those are the indicators right.
And Oh, no not much more to add to that but those are the indicators.
Yeah.
Thanks, Chris I'll pass along.
Thank you.
The next question comes from Raimo <unk> of Barclays. Please go ahead.
Great. Thank you this is Jeremy on for Raimo.
I was just wondering if you can share anything on how the micro focus free cash flow conversion is trending I know that that was the point of opportunity. When the acquisition closed and was just curious if you can maybe talk about any improvement there. Thank you.
Yeah, absolutely it's Matt here. Thanks for the question. So a couple of things one is we've shed I'll start with adjusted EBITDA and adjusted EBITDA in Q4 was 28% up five percentage points from although Q3 was only three months two months and also fundamentally the question was asked in terms of integration and even.
I'd now like what are the reasons. Therefore, I will take all of that Mark set in terms of product market customized to their working capital and the operational side right that they have a strong customer base and as we applied our own operational rigor the team, they're very receptive and you saw that so.
So I would say starting with adjusted EBITDA improved working capital and that is really where you see from a free cash flow perspective. They positively contributed so again I'll answer the question the second part as well as they look into fiscal 'twenty four what we saw the adjusted EBITDA in Q4 will continue.
And I see continued improvement in the working capital performance and all of that adds to our confidence in the 800 to 900 million for 'twenty four.
Perfect. Thank you.
The next question comes from Steven Li of Raymond James. Please go ahead.
Thank you Hey, Mark Madhu.
I've got a quick one on organic growth in Q4, so if I take the $6 two from micro focus out of Q4, I get the slight negative organic growth for Q4 for open text at constant currency.
Given this is Q4, which are seasonally probably a stronger quarter for you guys should we have seen a stronger organic performance and maybe any south areas you want to call out smoke.
Yeah, So Stephen I mean, I'll take that so when you look at Q4 and you take out the microphone because we are not seeing negative organic growth. We are seeing positive organic growth as I shared and happy to walk through the numbers I mean, if it would be helpful. But the numbers are all there so I'll just say.
For Q4.
When you factor in micro focus we are positively growing.
Organic growth cloud as well as they are in constant currency again, I want to emphasize that.
Okay.
Yes, I mean, I'm, just taking the reported numbers and minus six or two and it's lower than last year.
Yeah. So when you take out the 600 to again as you see license from a constant currency perspective is down from a from a from a year over year in the quarter and cloud is positive organic growth customer support is positive organic growth in our Rs positive organic growth as well.
Okay, Oh, Okay, and then just maybe a housekeeping I do I couldnt trying it in the MD&A, but did you actually disclosed micro focus.
Different revenue lines like license maintenance and I think it did that last quarter. Yes, we did I can I can share with you offline the patient out of the 10-K, we did call out the cloud services are mid I'm, sorry, we call that the license. We also called out the customer support in a number for micro focus as well.
Okay, I will get it upside from here. Thanks.
Thirdly, one Keith.
The next question comes from Daniel Chan of TD Cowen. Please go ahead.
Yeah.
Yeah.
Hello, Dan.
Yes.
And your line is open. Please go ahead.
Okay.
Daniel Chen Your line is open. Please go ahead.
Yeah.
Okay, operator, there must be something.
Not working there so I think we can go to.
Let me go to <unk>, let me go to wrap up so I'd like to thank everyone for joining today's call and we look forward to seeing you at the virtual Oppenheimer technology Internet and Communications Conference on August 9th Deutsche Bank August 30th Citibank, a global technology September 7th and will be reaching.
And hope you can join us in Vegas at open text World in early October .
Thanks for joining today's call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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