Q1 2024 Open Text Corp Earnings Call
Welcome to the open text Corporation first quarter fiscal 'twenty three for financial results Conference call.
Thank you operator, good afternoon, everyone and welcome to open text first quarter fiscal 2024 earnings call with me on the call. Today are open text, Chief Executive Officer, and Chief Technology Officer, Mark J Bear and shape, our executive Vice President and Chief Financial Officer, Madhu recognition and also joining us.
As Paul Duggan Executive Vice President and Chief customer Officer, 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 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 <unk> com I'm pleased to inform you that open text management will be participating at the following upcoming conferences rpt's capped.
Markets Global Technology, Internet Media and Telecom conference on November 14th in New York Needham's Virtual SaaS Conference on November 16th TD Securities Technology Conference on November 21st in Toronto Banc of America Securities Leveraged Finance conference on November 28th in Boca Raton.
Wells Fargo Technology media and Telecom summit on November 29th in Russia, Rancho Palos Verdes UBS Global Technology Conference on November 30th in Scottsdale, Scotiabank Global Tech Conference on December 5th in San Francisco Nasdaq's Investor Conference on December 5th in London, and Barclays Global Technology Media and Telecom conference.
Traction 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 proof.
Four months 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 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 it's my pleasure to hand, the call over to Mark.
Alright. Thank you. Thank you for joining us today, it's an exciting start to our new fiscal year 2024.
We had record Q1 revenues of 1.43 billion double digit cloud revenue growth.
Adjusted EBITDA of 34, 7% it was another quarter of cloud organic growth, our organic growth and strong renewal rates in the mid nineties.
Customer showed tremendous trust and confidence and open tax during the quarter Bombardier chose open tax for their legal Tech AI platform C. N P dopant cats for large contract AI analysis.
Great information management, it's a prerequisite for great AI, and we intend to compete in and when well information management automation.
The open text business is best analyzed the measured on annual performance, we manage the business to longer cycles. The 90 days past our Cortez do vary.
First on our strong Q1, our strong product cycle afford visibility.
We have confidence our F. 'twenty for constant currency targets 585 billion to $5 95 billion in revenues, 36% to 38% adjusted EBITDA.
$800 million to $900 million in free cash flows, including total revenue organic growth, 15% plus enterprise cloud bookings growth and returning microfocus so organic growth.
We are shifting from growth, primarily driven by M&A to growth driven by product innovation and go to market execution.
You can see our new total growth model with our F. 'twenty six aspirations on slide 21 of our Investor Relations deck.
It was 15% plus enterprise cloud bookings, plus 7%, 9% cloud revenue growth to the 4% a or our growth plus any future M&A and margin expansion plus dividends and buybacks and when all combined yields return to shareholders. We are focused on the fundamentals.
That drive shareholder value.
Slide 13 of our Investor deck highlights, our new shareholder value approach and how we intend to create value through six fundamentals.
First <unk>.
And our competitive differentiation and information management.
Expand customer consumption.
Unlock new value areas, such as SaaS and AI expand our go to market.
Realize higher profits and cash flows from those higher revenues and continued to return capital to shareholders via our dividend programs and future share buybacks.
Competitive advantage it everything we offer the most comprehensive information management platform in the market of 40 customers many paths to value and paving the way for new value as the world embraces AI and to accelerate these outcomes, we expect to invest up to 16% of revenues in R&D.
We expect these investments to support our F 'twenty six growth aspiration of 7% to 9% organic cloud golf.
Second expanding our customer consumption is a threefold strategy first by being the market leader in each of our business clubs and driving more consumption within each content experience business networks applications automation I T operation and security second by embedding security and content across.
All of our business clouds.
Third by providing customers choice and continuing to provide them choice all cloud private cloud public cloud API cloud, we provide the flexibility to prepare to pair the right workload with the right consumption approach. So our customers can focus on the right model for their business third value driver.
We have new value areas to unlock.
A very focused attack that AI, why we're executing well overall and we have many programs to enhance value. We are very focused on unlocking new value from SaaS and AI tighter.
Titanium or faster than titanium acts as both AI and Microfocus clouded expect us defend disproportional time in these areas and for Q2, we expect to see 20% year over year growth in enterprise cloud bookings another positive sign of unlocking new value.
We will expand our go to market with one of the largest enterprise sales forces in software.
F 'twenty four with clear market lanes and resources across strategic accounts.
Price accounts, corporate and business accounts as well as the home.
We're making it easier for customers to connect with our products to consume more over 500 partners attended open text World as we re launched our partner network focused on cloud and AI you can already see our progress within strategic accounts, just says Microsoft Microsoft and F. N B S. P.
And enterprise business applications, Google with cloud infrastructure and AI.
And AWS with mainframe modernization, a remarkable level of interest in our long term strategy.
We also intend to realize higher profits and higher free cash flows from higher revenues with our expanded mission and information management and greater operational scale, that's provides us greater opportunity to automate and to use AI to drive even greater operational synergies.
Higher revenue and higher EBITDA translates to increased cash flows which is different which is reflected in our F. 'twenty six aspirations of adjusted EBITDA of 38% to 40% at 1.5 billion plus in free cash flows and we anticipate the operating leverage in future years to only get strong.
As well and finally capital allocation as a strategic value driver.
Our capital allocation principle is to return approximately 20% of trailing 12 month free cash flows via dividends.
Its fiscal 13, we have returned $2 2 billion via dividends and share buybacks and we expect that as our free cash flow grows so do our dividends and that's our that's our net leverage decreases below three X. We would expect to return to our share buyback program.
This is our new growth model and a new value creation approach as we shift from growth, primarily driven by M&A to growth driven by product innovation and go to market execution.
Let me close on a few points alphatec.
Alvin Texas in a great position to help our customers build the next generation of work. The next generation of experience. The next generation of service management business, right fabrics and supply chains and to do this with the highest levels of trust and security.
I'm excited about our growth agenda, helping customers modernize their businesses and their information platforms, helping them consolidate customer data into our information class, providing cyber tools create trusted security consuming more SaaS applications, helping developers be more productive and at the highest levels of quality.
Building AI platforms for humans.
Promise of AI starts with great information management or aviator AI software is built into our business clouds aviator platform embedded into our automation with plausible language models aviator thrust building smarter applications aviator search interacting with your information and whole new.
A's aviator Iot embracing the next generation of device generated information and our individual aviator business class. We are already working with customers to create exciting new AI personas via aviator such as the next generation Tech support assistant a mortgage advice.
Or a claims adjuster and HR business partner as well, we're working with customers to simply get more efficient yeah, yeah yeah.
You can start to see us unlocking AI value with our expected Q2, 20% year over year growth in enterprise cloud bookings.
Our shift to a new total growth model driven by innovation with emphasis on high quality growth.
Enable it will enable us to deliver strong metrics for profitability and cash flows at scale are six fundamentals, a new shareholder value will uniquely position us as a choice investment in the technology sector.
My deepest appreciation to our 24000 colleagues at open text, who live our mission every day to make our customers wildly successful our hearts pray for the hostages innocent everywhere and we joined the global community and the hope of a peaceful and prosperous future for the Middle East region.
Maybe the one that brings peace Greenpeace for all.
Let me turn the call over to Paul <unk>, our Chief customer officer, who will speak to our renewal business, which grew organically in Q1, and Paul will hand, the call over to redo, our CFO, who will speak to our financial outlook over the ball right. Thank you Mark.
It's a privilege to be with all of you today to talk about our renewables business and it worked for doing to unlock value for our customers and shareholders before I do let me tell you about my team the customer success organization, we're responsible for renewals of cloud and off cloud subscription professional services and cloud delivery.
In technical support we brought these functions together following the Microfocus acquisition and took on an enhanced mission called open text love land together operate value expand open text love means focusing on customer outcomes. It's all about turning promises made.
It's a promises delivered when it comes to renewals. We believe if you deliver on those promises customers succeed and when they succeed they stay with you and those relationships will grow overtime today I'll speak to three areas the strength of our renewals and update on micro focus and a few of the goals.
For our team.
First open text has a strong record of maintaining exceptional and predictable renewal performance, Despite historic and disruptive world events economic uncertainties and unprecedented strategies at the last decade, our renewal rates are unwavering Q1 was no exception, finishing at 94% for <unk>.
Cloud and off cloud, excluding micro focus of course renewal rates directly correlate to the value our products and services to our customers, but it's also a measure of operational excellence from our renewal systems processes and controls the pricing of programs to the automation simplifying.
The transactional element collectively these also create a lifting force on renewal rates and help us protect and grow our our overtime. It's not just renewal rates either all of our primary indicators are trending positively on time renewals past due contracts cancellations pricing at the point of sale and our.
Annual price adjustment at renewal. These trends are the hallmarks of customer confidence in a tightly run world class renal function.
Second as we've shared before raising the renewal rate on micro focus is a critical value in locker. We started on day one of the acquisition immediately bringing the business onto our internal standards. We also implemented a risk identification and mitigation playbook growth programs like an extended support offering and deep engagement with our.
Sales and engineering leadership to shape overall consumption and expansion strategies.
The end of Q2, we'll have touch roughly 75% of the microphone because cloud and off cloud subscriptions, we expect to touch 90% by fab one as a result will increasingly see the positive impacts of running the business and all the ways I described and I'll give you two proof points on that impact.
One back in February we took on a business operating in the low eighties on renewal rate.
Q1 ended in the mid eighties and it gives us now two consecutive quarters of improvement we remain confident we will end and the high Eighty's This year and expect to operate in the Ninety's and physical twenty-five too we did it for document them, taking renewables from the low eighty's to the mid Ninety's, where we are today.
And now we're doing it for micro focus.
And finally looking to the future. It's all about growth, we already have a successful powder and oil expansion motion in business that works in SMB, we're adding new offerings like our premium support upsell on a open text installed base, taking a very successful offering within the micro focus business understanding the profile of customers.
That consume it and extending that to similar open text customers. We also announced a new customer renewal portal last month more than 90% of our cloud business is auto renewed and with this new portal will bring an automated and self service option to our off cloud customers as well as we do that we plan to shift more renewal professionals.
Customer management versus renewal management and drive expansion across the entire customer base. Our overarching goal is to position renewals and the entire customer success organization to play a more prominent role in consumption AI adoption and public cloud expansion, let me close by saying Thank you.
To our customers.
SaaS is a team sport and the fantastic results. We saw in Q1 ultimately represent your trust in open tax that trust is earned not given and we're committed to delivering on the promises we make to you every day and with that I'll hand, the call over to Mikael.
Thank you Mark and thank you Paul we appreciate all of you joining us today.
Let me summarize the key points for today.
Regarding micro focus we expect at the time that I can focus to organic growth. This fiscal year driven by successful innovation and in particular today all of this even excellent overview under new ways and Paul. In addition, we are delighted to share that.
Micro focus to be on a target operating model of 36 to 38 within adjusted EBIT down, it's just going to be on ethanol.
In Q1 open text executed extremely well in a volatile world with record Q1 revenues and year over year pest.
Turning to our outlook our outlook reflects the performance, we expect bringing together two businesses that gets in seasonality trend and through cycles with.
But Q1, actuals and Q2 quarterly factors, we remain on target for our internal plan and we expect a stronger second half and a seasonally strong Q4 at the end of fiscal year, including a return to organic local micro focus.
Important factors that I quoted the nation and we encourage the analysts to better balance quality models, we remain fully on track to meet our fiscal 'twenty four targets and fiscal 'twenty. Six applications. You are hearing today that we're shifting some just primarily driven by M&A growth driven by product innovation and go to market and execute.
This is our new total growth model.
Fiscal 'twenty six escalation net backs out in Iraq lifestyle or somebody point B remains highly committed to check into that.
And today, we are sharing the key a new check with the valuable chose to six fundamentals as mark outlined earlier, the moving truck Q1 does that feed the person to the investor presentation. That's posted on our IR website, starting on page 24 of the presentation for the flight titled Q1 fiscal 'twenty, four and trailing 12 month financial highlight.
All of these actions as I will be making millions of USD and compared to the same period of time and are on a reported basis unless stated otherwise and.
And again I'm, a young faces enterprise class bookings of $121 million up 8%, yet I forget exactly Q1 total revenue of 451 billion up 11, 5% and 10, 9% in constant currency Q1 revenue of 1.15 billion up 59, 1% and 57.
<unk>, 5% in constant currency and this epicentral for 81% up to what was happening. This is our 11th consecutive quarter of organic growth in constant currency for both cloud and E. R.
Interactive Q1 tunes Avenue, a $1 14 billion up 67.2% and 65, 4% in constant currency with micro focus contributing $562 million in the quarter.
And moving to other financial metric GAAP net income was $80 9 million and this reflects increased operating expenses amortization special charges and interest expenses related to the acquisition of micro focus driving GAAP EPS of <unk> 30 cents gap.
GAAP gross margin of 71, 4% up from 59, 7% and this effect in Queens that it didn't have any contribution from customer support and license non-GAAP gross margin of 77.2% up from 75.2% also detecting and clean that up and revenue contribution from license and cost.
Support and Justice EBITDA of 495 million, an increase of 62, 8% year over year and 58, 2% in constant currency.
Adjusted EBITDA margin was 34.7%, we expect micro focus onto that adjusted EBITDA model by the end of the Cisco yet.
Adjusted EPS of $1, one sense continues to reflect a fabulous.
So I think the DSL dsos of 43 days down slightly by two days compared to Q4, given Q1 season in fact.
Micro focus continues to perform well and an overall working capital performance I mean strong asps.
As stated in our last call, we expected Q1 free cash flow to be neutral to slightly negative as a result of interest in special charges and integration costs and seasonally lower working capital at the start of the systems that we generated 47 million in operating cash flows and 10 million positive free cash flow in the quarter.
Starting from Q2, we expect free cash flow to grow on a year over year basis in each subsequent quarter will remain on track to realize our first.
24 F C S targets of $800 million to $900 million and achieve our fiscal 'twenty six aspiration.
Now turning to the balance sheet piece to flip to page 26 of the Investor presentation. We finished Q1 with 920 million in cash and $8 9 billion of children's long term debt.
Net leverage ratio was two six times for the quarter in Q3 and in our last call. We mentioned our net leverage ratio what's up to slightly over the next few quarters, while we remain on the path to a net leverage ratio of less than three times by the end of fiscal 2025.
If completed approximately 560 million of deputy payments since the close of micro focus transaction of the ball, but it's not fully paid and we have begun to make discretionary principal payments on the term loan.
Turning to our dividend program on November 1st our board of Directors approved a quarterly cash dividend of 25 cents per common share was that good date for the next quarterly dividend in December 2023, and the payment date December 20th 2000 tons.
And let's turn to our targets and expectations and what's kind of I guess the Q2, we expect enterprise cloud bookings to grow 20% year over yes, and let me comment on the S&P market. The SMB market has been the most impacted by the current macro environment. This trend has an impact on our cloud revenues not on on it.
Cloud bookings.
During Q2, we expect to have a $10 million to $15 million that you had been from F&B.
Enterprise cloud business remain strong and expect it to grow revenues organically in Q2 ended up to the system yet.
The F&B market Gainesville, just trying to get well position to capture share and an accelerated cloud revenue growth.
Starting with our Q2 fiscal 'twenty four quarterly factors as our investor presentation on a year over year basis, We expect 71.45 to one side to get a building.
Or a $1 1 billion to $1 1 billion FX seven your Camden.
But the $10 million to $15 million.
Adjusted EBITDA again as of yet.
Between 36, and 37% and affects Microfilter integration costs.
The adjusted EBITDA tailwind of approximately $5 million to $10 million.
Our fiscal 'twenty four targets at constant currency I provided on page 30 of the Investor Relations presentation, Mark spoke on fiscal 'twenty four targets in his comments and let me provide some summary.
Revenues of 545 billion to $5 95 billion and its lifestyle looking below the 15% plus cloud revenues up 6% to 8% customer supports avenues of 40% to 42% E. R. R F 24% to 26%.
What does that really drove the 30% plus organic growth in the range of 1% to 2%.
non-GAAP gross margin in the range of 77% to 79%.
Total operating expenses of 42% to 44% of revenue and adjusted EBITDA margin of 36% to 38% to changes to our fiscal 'twenty four targets at current exchange rates, we expect FX to be neutral.
And do you think on net interest expense for the year to be 550 to $5 17 million and this affects the 75 basis point reduction in the interest on that acquisition Campbell.
Our free cash flows are on track to achieve 800 to 900 million.
It just that fiscal 'twenty full time to change.
It's been 20 successive actions remain unchanged. These are included in page 32 of our Investor presentation materials. We are reaffirming that's got 26 F. T S aspiration of $1 5 billion plus.
We expect to realize high and adjusted EBITDA margins in feed catchments and high revenues and definitely put these numbers for you and tentative to fiscal 'twenty, three and fiscal 'twenty six aspiration shows that there needs to be 40% by adjusted EBITDA to be 57% and free cash flow to be 129% higher.
Our fiscal 'twenty six aspiration, so highly predictable and growing at scale that backs out any of our acquisitions doesn't mean attitudes about future growth and to Delever and capital flexibility to tenants not fleet PS deferred to a financial integration team looks like on page 31, we have updated to reflect timing.
On system integration and global entities simplification.
In summary, I can focus integration is ahead of plan and we expect to achieve important milestones in fiscal 'twenty four.
Turning to organic growth and then it would be to the high 80 and microphone business to be in.
On the open text operating model with adjusted EBITDA of 36% to 78% also as Mark mentioned I shift to a new total thrift model driven by innovation with emphasis on high quality growth.
Enabled us to deliver strong metrics of profitability and cash flow at scale, I think fundamentally and you've seen it with the value approach. What do you need me conviction that that's a choice investment into technology detected at open text team members have proudly deliver a solid Q1 kicking off of fiscal 'twenty 'twenty four on behalf of open text I would like to thank them.
With the largest customers and stuff.
I would now request the operator to open the call for your questions.
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Technical difficulties please standby.
Yeah.
[noise] [noise] my apologies, we will now begin the question answer session.
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The first question comes from Richard Tse with National Bank financial.
Oh, yes. Thank you can I ask a follow up question there.
Richard go right ahead, okay.
Paul So from your vantage point, you know, you'll always have been the wrong and successful what like what do you think has been the biggest so.
The most meaningful driver to increasing micro focuses that renewal rate here.
Oh, Hi, Richard Great. Thanks. Thank you for the question look I think it's at a it comes down to three things.
First we moved fast to get micro focus on our open tax practices hurdles.
As I discussed in my prepared remarks second that also meant moving quickly to integrate the teams doing the work or getting renewals doing renewals and sales doing sales and we believe that when those lines or are not clear renewal rates tend to under perform and I say you know third eye as I speak to customers I think that they also see our product.
Roadmap and and the other thing is we've unveiled in terms of our AI path and they recognize that information management is becoming really a gating factor to fully embracing those step function. So I think all of those played a significant role in the decision to renew and we can already empirically see that in the rental rates are.
They prevent we've made since February.
Great. Thanks.
Mark you know you're a recent poll conducts world was a great event, and certainly a ton of excitement around a bit or what's sort of been the fall through since.
The events of last month, and maybe kind of give us a sense of the momentum from a product perspective.
Thank you Richard and as I said in my notes the.
Continues.
The product cycle.
Customer engagement clarity of our ability to provide a practical value.
All of that into.
Our comments today on the call of increasing our bookings outlook for the quarter up 20%.
Year over year growth. So we're definitely getting to the next phase of engagement.
Specific use cases.
Hottest delivery in October it's just November because I know that for a second or third so it's separate.
We're in early summer.
We have the next wave of product delivery in January.
We've engaged with customers are fantastic.
Back from open text for all including 500 partners, who were who are with us in Vegas and work any weren't engagements now and we're going to win our postpaid.
And are you going to see it reflected first in bookings and that's all about 20% year over year growth expectations for the quarter.
Okay, and then just a last one for me.
Certainly appreciate the shift here to an organic growth focus but.
I imagine you still have a fairly robust M&A team evaluating transactions and so I'm just kind of curious you know given the backdrop today.
What's your sense of the the acquisition landscape, perhaps from a valuation standpoint, if it came across like a great opportunity would you be in a position to move on something within the next 12 to 18 months.
Yeah. Thanks Richard.
I have the organization focused.
On a singular powerful concept.
Information management.
So 200 billion dollar market.
Oh, we are.
Transitioning.
M&A driven growth for organic growth and that starts with a rich product pipeline unlocking value in the cloud new value areas of SAS in AI.
And that is a new mode with that that is an enhanced motion for us.
With our expectations of 20% year over year growth in our enterprise bookings.
So that's what we're focused on a singular powerful concept and whatever.
Main focus on a singular powerful concept.
For sure if we find an opportunity like we did recently what came out of <unk>.
That can enhance a specific aspect of our product in the context of our strategy, we won't be bashful at all but we're focused on a singular powerful concept and our expanded mission and information management.
And being driven primarily.
By organic growth.
Okay. Thanks for taking my questions.
I appreciate it.
The next question comes from Thanos amongst equals the BMO capital markets.
Go ahead.
Hi, Good afternoon also a question for Paul.
Just to be clear what remains on maximizing the micro focus is it primarily a question of going through a lot.
The annual renewal cycle with all the customers or are there still some key steps that you've done internally to really drive that organization just potential.
Yeah, Great question I, it's a number of things so you.
You've nailed the first one right we got it we actually got to get to each of the renewals are in and like I said in my in my remarks, you know it.
It will be mostly thereby February.
And look you know I think the the the step functions for us for there are really I'm kind of going to be value driven product roadmap. The conversations we're having around that I think those are the things that really go into decision points on and all the things that we see today are really in a large part decisions at.
We're made a you know 12 months ago. So you've gotta go for wind the clock back and looked at the product roadmap at that time and look at what was out in front of the customers that at that point, so theres going to be some run out here I think of you're going to get these initial improvements and benefits from all of the systems and all the processes and those sorts of things.
And then the longer end of that is gonna be all about.
The intrinsic value of our offering and you start with document them like I'd mentioned, we we started a very similar place low Eighty's I you know it's the the document business is running ahead of our average renewal rate. So we're in the mid nineties and we've been there for some time, so it's yours, there's confidence in our in our playbook, we we've done it before.
For you know, there's a scale with us, but it's still it comes down to these fundamentals.
Great.
And Mark.
In terms of integrated go to market it sounds like you've done the heavy lifting for integrating your your internal teams, but as far as integrating the micro focus on open text channels.
Where does that stand and how much opportunity remains on that probably two months do you expect first half was from somewhere else.
Yeah. Thanks, Thanks for the thanks for the question Yeah, certainly our direct sales forces are all fully integrated and fully aligned as we kicked off the fiscal year.
We have and investor deck slide 18.
Well, we talked about that segmentation really important.
Really matured as we as we scaled up to.
Our current level of 11, a letter levels are looking well beyond although the near full coverage out into the global 10000, we now have very formal segmentation.
And it's the segment, it's very well aligned to how Oracle things for the world of AP AR Microsoft.
We're now in that category of strategic accounts enterprise accounts corporate accounts business accounts and home accounts very well defined stratification very defined go to market. We all one sales organization.
Pursuing that are those market areas, where we have more work to do is.
Is on the on the partner network that we launched in July.
We are you know partner networks by definition their network. So they've got a lot of tentacles that go out over many many years, we announced what we're our landing zone for all of our partners, including micro focused partners of deal registration, we announced where they can engage on selling.
Cloud, we began the AI discussion with them.
And where we want to be kicking off July one next year take systems takes contracts takes execution, while we announced where we want to land come July one so there's a little work to do there between here in November and a June July or June of next year, but on the.
On the direct enterprise side work for Ya, along what we're United will want organization, we have one organization on the new partner network and we defined our landing zone of where we want to be July one bounced. It the partners. We're working on all the details behind it. So that's the remaining work for us.
Right.
Hi.
The next question comes from Paul Treiber, with RBC capital markets.
Go ahead.
Oh, thanks, very much and good afternoon.
Did the your your outlook to achieve 20% cloud bookings growth. This quarter is great and it seems like an inflection from Q1, which is the only E E.
8% is that the right way to characterize it is that you know new AI products or are likely to drive an inflection in growth for open text or is that reading too much into it and it was mainly just quarterly dynamics between Q1 and Q2.
Paul Thanks for the question I think to your first question to me so I appreciate that.
I'm just kidding so.
No R R, 20% bookings growth, we're going to see our first AI bookings.
And that number.
So so AI is going to contribute as we talked about two quarters ago.
We announced our direction, we have a strong history over a decade of innovation and AI.
We presented.
Four customers had to get practical value.
We announced our roadmap now we've delivered a wastewater delivering wave two and it's being very well understood where we can start to unlock value across our AR platform being built in.
Our trust services search Iot and each of the aviator business clouds, and its interesting kind of a new language or hearing from customers and we're helping them get there is that through our our business clubs were helping them build AI personas.
They have contract administrators today, and how they're going to probably AI persona of the contract administrator.
Or mortgage adviser or technical support assistant so now about 20% expected bookings growth year over year.
Hum.
Has AI contribution to it and look at Q1 is always seasonally light.
And that's just it's all Q1 I noticed the world's Q3, but it's all in Q1 and so our customers are trained that way Oh that that number reflects our oh, that's a set of wins and out and I can't wait to present a pool.
And you find product releases and product cycles in the past you bound and acquaintances, Yeah think about AI could you give us some context around how customer interest and the sales pipeline for your new AI products compare versus previous product releases.
Oh, well sure I think business I'll say two things. The first is I don't have to spend a dollar of marketing on a us [laughter] Oh, we need a whole we're thoughtful about it. So that's that's sort of an interesting news a new dynamic right. So our customers are proactively engaging.
The World is very focused on generative AI. We of course think that the landing zone is general AI, because there's a lot more towards just the generative aspect. So support dynamic number one that's different is.
The World is talking about it and it's got a big a big awareness aspect felt in second is we have very relevant product sitting.
Sitting on top of very large datasets that we help to build for our customers over the last year.
And we believe this is the inflection point the singular powerful concept that unlocks information management to its next level in the enterprise.
Those inflection points for ERP and C O N a integrated E business suite. This is an inflection point for information management.
To unlock the value of those datasets. So you got natural demand being driven by market and Ah breakthroughs in technology the baby's speak.
And number two we are very relevant and very timely.
Technology on top of our platform and as I said are at open text World. It is okay to speak this way we were late in SAS.
We are not late than AI.
And we're going to capture the opportunity here for the company.
Thanks for taking the questions.
Thank you.
The next question comes from Kevin Freshener Anthony.
Thank you.
That will help.
Hey, there are good evening I just a couple of clarifications, you said microfocus contributed $563 million in the quarter is that correct and if so is that sort of within your expectations or is it is it going better and do we have a margin for micro focus in the quarter.
Yeah, Kevin it's much okay. Thank you so yes, Simon and 62 million in revenue and as we mentioned the integration is going very well. We are ahead of our internal plan and from a margin perspective, I would point you to the fact that.
Being ahead of the plan, we are able to the projected market focus will be on that.
<unk> 30, 50 48.
This system, which is really the first thing that's going to be a sensitive.
Mexico.
Okay, and then a second clarification here just on the F. N B dynamic I think you had mentioned that $10 million to $15 million year over year revenue headwind is that correct and just curious I mean, if he can dig into that a bit more and then remind us if you can on how big a S M b as in your base.
Yeah, I mean, I mean, I'll comment and I'm sure by the time and as well the 10 to 15 minute revenue headwind as what we see in Q2, we pay attention to couple of cycles.
You see the PC cycle and of course, all the things associated with with Microsoft as it intersects with our F&B business No having said that I think Paul as I mentioned in his notes that we do have some products and innovation and new items to bring to market and the fact that they went into a kind of for the second half of the fiscal year and <unk>.
All of you remain on target for our fiscal 'twenty, four avenues, including the kind of Kevin.
Yeah, I haven't got anything to add yeah sure thing. Thank you would do this is not an open text challenge. This is a market challenge.
And we all read the same headlines about the challenges are.
And in SMB.
And F N b it is.
Less than 10% of our business.
It's an important it's a new area for us we've only been in this area two to three years, we'll never going to realize our full potential information management, if we can't get to that mid market and we're much more interested in the mid market than the than the ASP of small part of the market.
So as a micro focus obviously, Microsoft has recently said, it's the most important factor for them and as.
They do well, we will do we will do well as PC shipments rebound, we will do better. We're also bringing new product into this area like our service management a midmarket.
Business network capabilities.
It's really not our trial challenge, it's the markets challenged right now and we're still well positioned that as the market picks up where I guess, where are we going to be a beneficiary of it but we wanted to call. It out I'm just to be clear on our on our our cloud momentum.
And help you model the business.
You can stop me I appreciate the color I'll pass the line. Thanks.
Our next question comes from Stephanie price with CIBC.
Callahan.
Hi, good evening.
I just wanted to circle back on you.
Focus on achieving organic growth that microphone. That's called 24, just curious if you can share what organic rocket microphone wise this quarter and how you expect to trend over the over the fiscal year as you work towards organic growth at my car, obviously maintenance is going to be the key driver, but also curious if there's anything else, we should be thinking about that right.
We think about organic growth in the business by the end of fiscal 'twenty four.
Did decide to shed some contracts had not kept even food way and to keep it in a JV at baseline and at 563 million and we've done well. It is our first quarters of this fiscal year and we do expect to grow organically.
And everything you heard so far on the Microsoft integration the customers. The partners all of that is going to pay it all for us it actually exceed the two point and $2 billion number.
Instead, let me, let me jump in as well, we're doing exactly what we said we would do.
And we're going to show you Microfocus every quarter this fiscal year, but we don't have to through disclosure, but we're going to.
You take $2 3 billion divided by four or $5 75.
Our first quarter seasonally small a light quarter for us in Q1, we delivered $5 63.
And you'll see that momentum build.
And it's really that simple, we we are very confident well attorney micro focus to organic growth we're off to a great start.
And.
As you know Paul talked about the renewals are strong product cycle with private cloud and SaaS offerings and snacks fortify on demand that I too you see M. D. B as as a first set of AI on top of micro focus, which they would never been able to get to.
If not part of open text.
Were doing exactly what we said we'd do we're going to show you every quarter, along the way and we're off to a great start with 563.
Perfect well. Thank you so much for the color.
Thank you.
Hello, My question comes from Raimo <unk> with Barclays.
Go ahead.
Great. Thank you. This is Jeremy on for Raimo, just wanted to a follow up on that.
It shouldn't be headwind that you called out so is it having like maybe an outsized impact on any other business lines like with security, having six carbonite, which is more SMB focused it's just sort of showing up more there or really anything you can call out there would be helpful. Thank you.
Only thing I would call it a headwind maybe a light breeze.
And Ah we provided the additional color.
To help you model.
All right so there's no product.
To point to across the portfolio again, it it's it's not us it's the segment.
P. C shipments are clearly down so there's less left to sell into.
Microsoft.
Had delayed certain programs they've now recently declared this is the most important segment, although it's going to build momentum.
So no nothing specific to point to I would not call. It a headwind maybe a light greens and it's the segment, it's not up it's not something specific.
And we're excited about being a beneficiary as PC shipments go up.
Microsoft builds their amazing machine him.
Got it thank you.
Our next question comes from ice coffee with eight capital.
Callahan.
Hey, good evening guys. Thanks for taking my questions.
Outside of the AI showing up in bookings and driving that 20% growth is there any other particular areas across the six markets that you have to find mark that are really driving that confidence in the 20%.
Task.
So a SaaS and AI.
Titanium.
It was focused on many things, but our top of the stack was SaaS applications.
Being.
A core content core signature capture archive.
I'm starting to get into the machine.
Our SaaS based service management, which we call snacks.
SaaS based security through that IQ SaaS based asset management.
With the Universal configuration management database or U C N D D.
So getting additional products in there as well mid market SaaS and business network. So I'm here I'd say, it's two things, it's a titanium delivered product stuck out in the market fill demand when business.
And it's the second value on law firm of AI.
<unk> to get its first one.
Thanks, a lot and then just on the a I know you guys introduced a fairly robust product roadmap as well as products that are in market right now mark any of those that are really kind of driving excitement are really driving undo excitement from your clients that you can speak to.
Oh I have to pick a child, which one I liked.
No the were going to fall I think it's going to follow where the data sets are and and the value that we can we can unlock.
And building these aviator personas.
Next to the human persona for claim the claims manager the claims adjuster contract.
Offer Oh, so content certainly.
Is up there.
I'd also say and I saw them, we have a very large installed base around service management and the ability to create that AI aviator persona.
Around Oh, the technical support system. So.
Content.
I, Tom I would probably shot out who's going to lead the way to really know what that said all the general applicability of search very interesting for us and a lot of workloads out there for machine generated and device generated content via our Iot, but I would I've looked at our content and IP.
Tom here.
Here in the early days.
Yeah.
Excellent. Thank you guys how personally.
Once again, if you have a question. Please press Star then one.
Our next question comes from with ending let's see.
Hmm telehealth.
Thanks for taking the questions. This is George on for Steve I wanted to talk about the you know the AI.
Except the aviator set of products you guys are fairly quick out to market with them, which I think is a testament to that 90 day release cycle.
But maybe you could just talk about the decision to monetize these when maybe some of your comparison.
Customers are in an experimental phase and I guess that you know how are we thinking about the kind of timeline to two revenue contributions. Thank you.
George Thank you for the question.
As I said last quarter, you know until we have.
Revenue signals are we're not going to.
Kind of change are all outlooks, if you will.
Until today.
And you know I looked at Q2.
And we're seeing.
We've gone through the whole cycle.
Well the baby's speaks to Genesys, AR, AI and the consumer world the rise of algorithms.
The ability to do that in the consumer World, We've worked with our partners at Google and others to ensure that it could be private environments.
We have our own technology that we've advanced to do sort of aspects of the AI prefatory work for customers are embedding vector as Asian, we've worked through a lot of the technology hurdles that plausible language models, because they don't get very specific and we've now with $23 four.
Have wave one of our very profitable cable bill a practical capabilities twenty-four dot one brings the rest of the business clouds Devry practical capabilities.
And what demonstrating how within contact management business that work and the items space in the developer space, where you can apply these aviator personas to sit next to the human to add significant value. So this is the next step and ER.
We're seeing the first demand signals and thus calling it out that we expect to see 20% bookings growth.
The year over year.
Yeah.
Got it yeah, that's really encouraging number and maybe just to double click on that 20% you know kind of loud and clear that AI and SaaS are the top two drivers is there any contribution from microphone microfocus adoption of private cloud in there or is that maybe a little.
Something.
There'll be some there'll be some I'm not sure.
Got it thanks for taking the questions and congrats on the quarter.
Thanks, guys.
The next question comes from Daniel Chan with TD tell them to go ahead.
Hey, Mark earlier, you're mentioning that your customers are trained on your fiscal year end micro focus since fiscal year end is in October I know you've been trying to move some of those customers onto your timeline, but should we still expect a large number of their customers to go beyond the micro focus fiscal yearend.
Looked at I think it's going to take a year or two to kind of get the full quarter realization.
From them Microfocus install base.
And thus you know madhu comments on paying.
Paying attention to the quarter as Asian, and we spent a lot of time doing team spent a lot of time on the poorly fastest for Q2.
And just a clear shot up.
Our balanced models in the second half of the year. So look we're making progress, but we're gonna always default to the customer what the customer wants to do.
But when we get to the open text cycle you only took a you took a look at that.
Sounds good thanks for that.
And then I appreciate the color on the SMB impacts from the macro just wondering if there's any update on the enterprise side of things last quarter. You said things are still looking good just wonder if there's any updates on the enterprise customers. Thank you.
Yeah from the enterprise customer Dan. Thank you again for the question.
And I assume you're just setting for cloud side things are looking for them and and certainly that wasn't called out that's called that F&B pulling back and I said.
In addition to the AI at the core solution continued to build upon and innovate that continues to be strong demand for doing all of this is kind of included right. So on the enterprise side cloud non SMB continues to be strong.
Great. Thank you.
Thank you thank you Dan.
I'll now hand, the call back over to Mr. Dan shape for closing remarks.
Very good Madhu, Paul Thank you and thank you everyone for joining today look where we're very excited to engage with you and tell you more of our story and on our our new model for growth.
And we're gonna be participating at many upcoming conferences as Hari noted the RBC Conference November 14th in New York City that he can SaaS conference virtually on November 16th.
December 5th in San Francisco that we do is going to host the NASDAQ Investor Conference in London on December 5th and we'll be at the Barclays Global Tech Conference December 7th in San Francisco, We look forward to connecting with you telling your story and maybe one of the things piece being peaceful all that ends the call today offering.
This concludes today's conference call.
Disconnect your lines. Thank.
Thank you for participating and have a pleasant thing.
Okay.
Okay.
Okay.
Mhm.
Okay.
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Yeah.
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