Q1 2024 Open Text Corp Earnings Call
Welcome to the open text Corporation first quarter fiscal 'twenty 'twenty four financial results conference call.
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I would like to turn the conference over to Harry Blount, Senior Vice President Investor Relations.
Please go ahead.
Thank you operator, good afternoon, everyone and welcome to open text first quarter fiscal 2024 earnings call with me on the call today are <unk>, Chief Executive Officer, and Chief Technology Officer, Mark J Baron shape, our executive Vice President and Chief Financial Officer, Madhu Ragen, Nathan and also joining us.
Paul <unk> 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 that open tax dot com I'm pleased to inform you that open text management, who will be participating at the following upcoming conferences rbc'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 Rancho Palos Verdes, UBS Global Technology Conference on November 13th 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 on December 17th.
San Francisco and now on to our Safe Harbor. Please note that during the course of this conference call. We may make statements relating to the future performance of open text that contain forward looking information. While these forward looking statements represent our current judgment actual results could differ materially from a conclusion forecast or projection in the forward looking.
Statements made today certain material factors and assumptions were applied in drawing any such statements additional information about this material factors that could cause actual results to differ materially from a conclusion forecast or projection in the forward looking information as well as risk factors that May project future performance results of open text are.
Contained in 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 reckon.
Filiation 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.
Terry Thank you and 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.
Customers showed tremendous trust and confidence and open tax during the quarter Bombardier chose open tax for their legal Tech AI platform CMP chose open tax for large contract AI analysis, and Infosys chose open text for developer testing automation and generation.
Information management is a prerequisite for great AI and we intend to compete in and win both information management automation.
The open text business is best analyzed in measured on annual performance, we manage the business to longer cycles than 90 days, thus our quarters do very base.
Based on our strong Q1, our strong product cycle and forward visibility, we have confidence in 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 micro focus to 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 includes 15% plus enterprise cloud bookings growth, 7% to 9% cloud revenue growth, 2% to 4% AAR, 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 expand 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.
Let me walk you through each one of the value drivers.
Competitive advantage is everything we offer the most comprehensive information management platform in the market are forwarding customers, many path 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.
And we expect these investments to support our F. 'twenty six growth aspiration of 7% to 9% organic cloud go.
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, it operations 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 off 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.
Very focused in SaaS and 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 titanium was to ask driven titanium acts as both AI and micro focus cloud driven.
Spect us to spend 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, we have one of the largest enterprise sales forces and software and we enter F. 'twenty four with clear market lanes and resources across strategic accounts enterprise accounts, corporate and business accounts as well as the home we are making it easier for customers to connect with our products to.
Consume more.
Over 500 partners attendant open text world as we re launched our partner network focused on cloud and AI and you can already see our progress within strategic accounts, It says, Microsoft Microsoft and SMB.
And enterprise business applications, Google with cloud infrastructure and AI and.
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. This provides us greater opportunity to automate and to use AI to drive even greater operational synergies.
Revenues 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 stronger.
As well and finally capital allocation as a strategic value driver.
Our capital allocation principle is to return approximately 20% of trailing 12 months free cash flows via dividends.
Fiscal 2014, we have returned $2 2 billion via dividends and share buybacks and we expect that as our free cash flows grows so do our dividends and as our next and as 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.
Alvin Texas in a great position to help our customers build the next generation of work. The next generation of experience to the next generation of service management business fabrics and supply chain 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.
Holiday customer data into our information class, providing cyber tools create trust and security consuming more SaaS applications, helping developers be more productive and at the highest levels of quality and 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 the information and whole new.
Ways aviator Iot embracing the next generation of device generated information and our individual aviator business clubs, we are already working with customers to create exciting new AI personas via aviators such as the next generation Tech support assistant a mortgage.
Or a claims adjuster and HR business partner as well, we're working with customers to simply get more efficient via AI 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 with enable that will enable us to deliver strong metrics for profitability and cash flows at scale are six fundamentals of 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 whoever mission everyday to make our customers wildly successful.
Pray for the hostages innocent everywhere and we joined the global community in the hope of a peaceful and prosperous future for the Middle East region.
Maybe the one that brings peace bring piece 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 financials and outlook over to Paul great. Thank you Mark.
It's a privilege to be with all of you today to talk about our renewals business and the work we're 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 subscriptions professional services and cloud delivery.
And 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 tax law means focusing on customer outcomes. It's all about turning promises made.
Into 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 over the last decade, our renewal rates are unwavering Q1 was no exception, finishing at 94% for.
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 to pricing and programs to the automation simplified.
The transactional elements collectively these also create a lifting force on renewal rates and help us protect and grow.
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 adjustments at renewal. These trends are the hallmarks of customer confidence and a tightly run world class.
<unk> 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.
Our sales and engineering leadership to shape overall consumption and expansion strategies by the end of Q2, we'll have touch roughly 75% of the micro focus 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 <unk>.
Business in 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 the low Eighty's oneall right.
Q1 ended in the mid eighties and it gives us now two consecutive quarters of improvement we remain confident will end in the high <unk>. This year and expect to operate in the Ninety's in fiscal 'twenty five to we did it for document them, taking renewals 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 cloud renewal expansion motion and business networks and SMB, we're adding new offerings like our premium support upsell on open text installed base, taking a very successful offering within the micro focus business understanding the profile of customers that consume.
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 to customer management versus renewal management and draw.
Ive 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.
To our customers' success 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 Madhu.
Thank you Mark and thank you Paul we appreciate all of you joining us today. So let me summarize the key points for today.
Adding micro focus we expected a ton micro focus to organic.
Again, driven by successful innovation and in particular today all receive an excellent overview under numerous and Paul in addition, delighted to share and we expect micro focus to be on our target operating model of 36% to 38% adjusted EBITDA This fiscal year as well.
In Q1 open text executed extremely well in a volatile world with record Q1 revenues and yet as of yet.
Turning to our outlook.
<unk> fully reflects the performance, we expect bringing together two businesses with different seasonality trends and through cycles.
With 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, and the end of fiscal year, including a return to organic growth what Microsoft is doing.
Important factors for the quarter the nation and we encourage the analysts to better balance your quarterly models, we remain fully on track to meet our fiscal 'twenty four targets and fiscal 'twenty. Six explanations you are hearing today that by shifting some growth primarily driven by M&A to growth driven by product innovation and go to market execution.
This is our new total growth model did not fiscal 'twenty six activations led by cloud and AI.
My final summary point Bill remains highly committed to shareholder value and today, we are sharing with you our new shareholder value will chose to six fundamentals that mark outlined earlier, so moving to our Q1 results. Please refer to the Investor presentation. That's posted on our IR website, starting on page 24 of the presentation for the slide <unk>.
<unk> Q1 fiscal 'twenty, four and trailing 12 month financial highlights all his absence I will be making on in millions of USD and compared to the same period in the prior fiscal year and are on a reported basis unless stated otherwise on a year over year basis enterprise class bookings of $121 million up 8%, yet again, we objected.
Q1, total revenue of $451 million up 11, 5% and 10, 9% in constant currency Q1 are the Avenue, a 1.15 billion up 59, 1% and 57, 5% in constant currency and this episodes of 81% of total is happening. This is the 11th.
Consecutive quarter of organic growth in constant currency for both cloud and.
It's a record Q1 total revenue of $1 40 billion up 67, 3% and 65, 4% in constant currency with micro focus contributing $563 million in the quarter.
And moving to other financial metrics 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 at 30 <unk>.
GAAP gross margin of 71, 4% up from 69, 7% and this reflects increased relative revenue contribution from customer support and license.
non-GAAP gross margin of 77, 2% up from 75, 2% also reflecting increased revenue contribution from license and customer support and adjusted 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 adjusted EBITDA model by the end of this fiscal year.
Adjusted EPS of $1 <unk> continues to reflect this progress.
DSO on Dsos of 43 days down slightly by two days compared to Q4, given Q1 seasonal factors.
Micro focus continues to perform well and an overall working capital performance remains strong.
As stated in our last call, we expected Q1 free cash flow to be neutral to slightly negative as a result of interest special charges and integration costs as well as seasonally lower working capital at the start of the fiscal year, we generated 47 million in operating cash flows and 10 million positive free cash flows 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 Eni a fiscal 'twenty for FCS targets of $800 million to $900 million and achieve our fiscal 'twenty six explanation.
Now turning to the balance sheet. Please refer to page 26 of the Investor presentation. We finished Q1 with $920 million in cash and $8 9 billion of total long term debt. Our 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 a slightly over the <unk>.
Few quarters, while we remain on the path to our net leverage ratio of less than three times by the end of fiscal 2025 or sooner.
Pleated approximately $560 million of deputy payments since the close of micro focus transaction.
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 does that could date for the next quarterly dividend in December 2023, and the payment date December 20th 2020.
Let's turn to our targets and explanations as Mark highlighted so Q2, we expect enterprise cloud bookings to grow 20% year over yes, and let me comment on the SMB market.
<unk> market has been the most impacted by the current macro environment. This trend has an impact on our cloud revenues not.
On an enterprise cloud bookings.
During Q2, we expect to have a $10 million to $15 million revenue headwind from S&P.
Enterprise Cloud defense remains strong and expect it to grow revenues organically in Q2, and the rest of the fiscal year.
The SMB market gains more strength, we are well positioned to capture share and an excellent $8 72.
Starting with our Q2 fiscal 'twenty four quarterly factors of our investor presentation on a year over year basis, we expect <unk> of $1 45 to $1 5 billion.
<unk> of $1 1 billion to $1 1 billion FX revenue tailwind of approximately $10 million to $15 million.
Adjusted EBITDA year over year, the margin between 36, and 37% and effects, Microsoft with integration costs.
Adjusted EBITDA tailwind of approximately $5 million to $10 million.
Our fiscal 'twenty four targets in constant currency are provided on page 30 of the Investor Relations presentation, Mark spoke on fiscal 2004 target in his comments and let me provide some summary.
Total revenues of $5 85 billion to $5 95 billion enterprise bookings growth of 15% plus.
Revenues up 6% to 8% customer support revenues up 40% to 42%.
<unk> up 24%, 26%.
Total revenue growth of 30% plus with organic growth in the range of 1% to 2%.
non-GAAP gross margin in the range of <unk>, 77% to 79%.
Total operating expenses of 42% to 44% of revenue and adjusted EBITDA margin of 36% to 38%.
Two changes to our fiscal 'twenty four targets.
Current exchange rates, we expect FX to be neutral, but also reducing our net interest expense for the year to be $5 $50 million to $570 million and this reflects a 75 basis point reduction in the insistent on acquisition 10 of them.
Our free cash flows are on track to achieve 800 to 900 million.
Fiscal 'twenty four targets range.
26 aspirations remain unchanged. These are included in page 32 of our Investor presentation materials, we are reaffirming fiscal 'twenty six FCS excitation of one 5 billion class.
We expect to realize high and adjusted EBITDA margins and free cash flows from higher revenues and then we put these numbers for you and relative to fiscal 'twenty three our fiscal 'twenty six aspiration shows revenues to be 40% higher adjusted EBITDA to be 67% higher and free cash flow to be 129% higher.
Our fiscal 'twenty six explanation, so a highly predictable and growing business at scale that by cloud and AI are acquisitions will remain attitude to our future growth and to Delever and capital flexibility at a time.
Lastly, please refer to our financial innovation framework slide on page 31, we have updated to reflect timing on system integration and global entity simplification.
So in summary, I micro focus integration is ahead of plan and we expect to achieve important milestones in fiscal 'twenty four it at a time to organic growth and innovate to the high 80, and micro focus business to be in.
On the open text operating model of adjusted EBITDA of 36% to 38% also as Mark mentioned, our shift to a new total growth model driven by innovation with emphasis on high quality growth will enable us to deliver strong metrics of profitability and cash flows at scale I think fundamentals the new shareholder value.
Approach will uniquely position us as a choice investment in the technology sector.
Open text team members have proudly deliver a solid Q1 kicking off of fiscal 2024 on behalf of open text I would like to thank our shareholders, our loyal customers and partners.
I'd now request the operator to open the call for your questions.
Operator.
Pardon me.
Nickel difficulty please standby.
Okay.
Yes.
My apology, we will now begin the question answer session.
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<unk> and one at this time.
The first question comes from Richard Tse with National Bank financial.
Oh, yes. Thank you can I ask Paul a question there.
Richard go right ahead, okay.
Paul So from your vantage point.
Awesome, and then enroll them into successful or like where do you think that's been the biggest.
I guess, most meaningful driver to increasing micro focuses our 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.
I discussed in my prepared remarks second that.
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 are not clear renewal rates tend to under perform and I'd say 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 play a significant role in the decision to renew and we can already empirically see that in their rental rates and the improvement we've made since February.
Okay, great. Thanks so.
Mark you're a recent <unk> world was greater than certainly a ton of excitement around a bit or what's sort of been the fall through since.
The event last month, and maybe kind of give us a sense of the momentum from a product perspective.
Thank you Richard as I said in my notes the.
Continue.
The product cycle.
Customer engagement clarity of our ability to provide a practical value.
Hum.
All fed into our.
Our comments today on the call of increasing our bookings outlook for the quarter.
Of 20%.
Year over year growth.
So we're definitely getting to the next phase of engagement.
Specific use cases.
Product delivery in October it's just November.
But for a second or third.
We're in early November.
We have the next wave of product delivery in January.
We've engaged where customers are fantastic.
Feedback from open text for liquidity 500 partners, who were who are with us in Vegas, and where any warrant engagements now and we're going to win our first business.
And you're going to see it.
Reflected first in bookings and thus are 20% year over year growth expectations for the quarter.
Okay and then just the 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 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 you think to move on something within the next 12 to 18 months.
Yes, Thanks Richard.
I have the organization focused.
On a singular.
Powerful concept.
Information management.
So $200 billion market.
We are.
Transitioning.
M&A driven growth to organic growth and that starts with a rich product pipeline.
Unlocking value in the cloud new value areas of SaaS and AI.
And that is a new mode that is an enhanced motion for us.
With expectations of 20% year over year growth in our enterprise bookings.
So that's what we're focused on a singular powerful concept and we'll remain focused on a singular powerful concept.
For sure if we find an opportunity like we did recently with <unk>.
That can enhance a specific aspect of our product and the <unk>.
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 <unk> with BMO capital markets. Please go ahead.
Hi, good afternoon.
Also a question for Paul.
Yes.
Just to be clear what remains on maximizing the renewals that micro focus is it primarily a question of going through.
The annual renewal cycle with all the customers or.
Are there still some key steps that need to be done internally to really drive that organization to potential.
Yes, great question.
Are things so.
You nailed the first one right we got it we actually got to get to each of the renewals.
And like I said in my in my remarks.
Will be mostly thereby February and look I think.
The step functions for us so there are really.
Kind of going to be value driven product roadmap. The conversations we're having around that Ah I think those are the things that really go into decision points on renewal. There are things that we see today are really in a large part of decisions that were made.
12 months ago. So you Gotta go providing the clock back and look 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 in benefits from all the systems and all the processes and those sorts of things and then the longer end of this is going to be all about.
The intrinsic value of our offering and you start with Documentum.
Like I'd mentioned, we we started a very similar place low eighty's.
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.
There is confidence in our in our playbook, we we've done it before.
This is a scale of this but it's still it comes down to these fundamentals.
Great.
Mark.
Integrating the go to market it sounds like you've done the heavy lifting for integrating your internal teams, but as far as integrating the micro focus on open tax channels.
Where does that stand how much opportunity remains on that front and when do you expect to start capitalizing some of that.
Yes. Thank you. Thanks for the thanks for the question, Yes, certainly our direct sales forces are fully integrated and fully aligned as we kicked off the fiscal year.
<unk> and <unk>.
<unk> I think it's slide 18.
Where we talked about that segmentation really important we really matured as we as we've scaled up too.
Our current level of revenue letter levels are looking well beyond.
Full coverage out into the global 10000, we know very formal segmentation.
And it's the segment, it's very well aligned to how Oracle things for the world at AAP.
Microsoft or 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 are one sales organization.
Pursuing that.
Are those market areas, where we have more work to do.
<unk> is on the partner network.
That we launched in July.
<unk> partner networks by definition their network. So they've got a lot of tentacles that go out over many many years we announced.
Where our landing zone for all of our partners, including micro focus 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 lot of work to do there.
We here in November and.
June July or June of next year, but on the.
On the direct enterprise side, we're fully aligned where United will one organization.
One organization on the new partner network, and we defined our landing zone of where we want to be July one announced that the partners. We're working on all the details behind it. So that's the remaining work for us analysts.
Great. Thanks, Michael.
The next question comes from Paul Treiber, with RBC capital markets.
Go ahead.
Thanks, very much and good afternoon.
The your outlook to achieve 20% cloud bookings growth this quarter is great.
And it seems like an inflection from Q1, which was only 8% is that the right way to characterize it is that new AI products are likely to drive an inflection in growth for open text or.
Reading.
Too much into it and then maybe just quarterly dynamics between Q1 and Q2.
But Paul Thanks for the question and Thanks for your first question to me So I appreciate it.
Just kidding so.
Yes.
No our 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 wave one we're delivering wave two.
And it's.
Being very well understood, where we can start to unlock value across our platform being built in our.
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 business clouds, we're helping them build in AI personas.
They have contract administrators today, but now they're going to build the AI persona of the contract administrator.
Or mortgage adviser or technical support assistant so now that 20% expected bookings growth year over year.
Has AI contribution to us and look our Q1 is always seasonally light.
And that's just it's our Q1 I know, it's the world's Q3, but it's all in Q1 and so our customers are trained that way.
That number reflects our.
Our next set of wins in AI and I can't wait to present them to you.
And you have product releases and product cycles in the past you've found quite enthusiastic 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.
Well sure.
I think this is I'll say two things. The first is I don't have to spend a dollar of marketing.
The whole world talking about it so that's that's.
That's sort of an interesting new dynamic right. So customers are proactively engaging.
The World is very focused on generative AI, we of course think the landing zone.
<unk> is.
General AI, because theres a lot more to it than just the generative aspect. So so Paul dynamic number one much different.
Is the.
The World is talking about it and it's got a big.
A big awareness aspect Dalton.
<unk> is we have very relevant product sitting.
Sitting on top of very large datasets that we've helped 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 towards next level in the enterprise.
Those inflection points for ERP and CRM of 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.
Our breakthroughs in technology, the baby speak.
And number two we are very relevant and very timely.
Technology on top of our platform and as I said at open text World. It is okay to speak this way we were late in SaaS.
We are not late and AI.
And we're going to capture the opportunity here for the company.
Thanks for taking the questions.
Yes. Thank you.
The next question comes from Kevin Krishna Rhatany Shebang.
Please go ahead.
Hey, there good evening, 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.
Yes, Kevin it's Murdo here. Thank you. So yes 563 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.
Being ahead of the plan, we are able to the projected micro focus will be on a 36% to 38%. This fiscal year, which is really the first full fiscal year since the transaction closed.
Okay.
And then a second clarification here just on the SMB 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 we can dig into that a bit more and then remind us if you can on how big SMB is in your base.
Yes.
I'll comment and I am sure Moffett, chairman as well the $10 million to $15 million revenue headwind as what we see in Q2.
We pay attention to a couple of cycles, obviously, the PC cycles and of course, all the things associated with Microsoft as it intersects with our F&B business now having said that I think Paul mentioned in his notes that we do have some products and innovation and new items to bring to market and we factored those into account.
For the second half of the fiscal year and overall, we remain on target for our fiscal 'twenty for Devon use including the cloud revenue.
Yes, Mike anything to add yes sure.
Thank you Madhu. This is not an open text challenge this is a market challenge.
And we all read the same headlines about the challenges.
In SMB.
And SMB is.
Less than 10% of our business.
It's an important it's a new area for us.
<unk> only been in this area two to three years, we're 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.
Micro focus city, Microsoft has recently said, it's the most important sector 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 mid market business.
Business network capabilities. So it's really not our trial challenge. It's the market's challenged right now and we're still well positioned that as the market picks up we're going to be a beneficiary of it but we wanted to call it out.
Just to be clear on our on our cloud momentum.
And help you model the business.
Okay I appreciate the color I'll pass the line. Thanks.
Yeah.
The next question comes from Stephanie price with CIBC.
Please go ahead.
Hi, Good evening I, just wanted to circle back on your.
Focus on achieving organic growth at micro focus in fiscal 'twenty. Four just curious if you can share what organic growth at microphone right. This quarter and how you expect to trend over the over the fiscal year as you work towards organic rocket maker, obviously maintenance is going to be the key driver of it but also curious if there's anything else, we should be thinking of that tariff.
As we think about organic growth in business by the end of fiscal 'twenty four.
Yes, Stephanie Madhu here I'll take the first shot.
How to think about microfocus organic growth in the quarter, it's going to be hard year over year compare as we said in the last couple of calls our starting point is $2 3 billion of revenue you take ifr as to gap you would take the digital safe divestiture, and we did decide to shed some contracts and not carrying them forward.
And $2 3 billion Adobe at baseline and at $563 million, we've done well. It is our first quarter of this fiscal year and we do expect to grow organically in the high <unk> and everything you've heard so far on the Microsoft integration the customers. The partners all of that is going to pay it all for now for us to exceed.
The $2 $3 billion number.
Yes, and Stephen Let me, let me jump in as well.
Doing exactly what we said we would do.
And we're going to show you micro focus 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 light quarter for us in Q1, we delivered $5 63.
And youll see that momentum build.
And it's really that simple we are very confident where we're turning micro focus to organic growth we're off to a great start.
And.
As Paul talked about the renewals are strong product cycle with private cloud, new SaaS offerings and smacks fortify on demand net Iq.
You see MTB SaaS.
First set of AI on top of micro focus, which they would never been able to get to if not part of open text. So.
We're doing exactly what we said we'd do we're going to show you every quarter along the way.
We're off to a great start at $5 63.
Perfect. Thank you so much for the color.
Thank you.
Hello, Matt.
<unk> comes from Raimo <unk> with Barclays.
Please go ahead.
Yeah.
Great. Thank you. This is Jeremy on for Raimo just wanted to.
Follow up on the SMB headwind that you called out so is it hasn't like maybe an outsized impact on any of the business lines like with security, having six carbonite, which is more SMB focus is this sort of showing up more there or really anything you'd call out there would be helpful. Thank you.
Yes, Jeremy I wouldn't call it a headwind maybe a light breeze.
And we.
We provided the additional.
Color.
To help you model.
It's simple right so.
There's no product.
0.2 across the portfolio again, it's it's not us it's the segment.
PC shipments are clearly down so theres less.
Less to sell into a micro Microsoft.
Had delayed certain programs. They have now recently declared this is the most important segment, so 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 its not us its not something specific and we're excited about.
Being a beneficiary as PC shipments go up.
As Microsoft builds there are amazing machine him.
Got it thank you.
Our next question comes from adhere coffee with eight capital.
Please go ahead.
Thanks, Good evening guys. Thanks for taking my questions.
Outside of the AI is showing up in bookings and driving that 20% growth is there any other particular areas across our six markets that you've defined mark that are really driving that confidence in the 20%.
Task.
So SaaS and AI.
Titanium.
Was focused on many things, but top of the stack was SaaS applications.
Bing.
Content cost signature capture archive.
Starting to get into the machine.
Our SaaS based service management, which we call snacks.
Aas based security through net IQ SaaS based asset management.
With the Universal configuration management database or <unk>.
So getting additional products in there as well mid market SaaS and business network.
So.
I'd say, it's two things, it's a titanium delivered product started out in the market fill demand when business and it's the second value on laufer of AI.
Starting to.
Get us first one.
Thanks, Mark and then just on AI you guys.
<unk> 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 could speak to.
Oh, I had to pick a child, which one I like.
No.
We're going to fall I think it's going to follow where the data set far and and the value that we can we can unlock.
I'll start right in kind of our heritage and content management.
And building these.
<unk> personas next to the human persona.
For cleaning the claims manager the claims adjusting the contract.
Or so.
So content certainly.
<unk> is up there I'd also say an iPhone.
We have a very large installed base around service management and the ability to create that AI aviator persona.
Round the technical support assistant.
So.
Content.
Hi, Tom I would probably shot out we're going to lead the way early now with that said the general applicability of search.
Interesting for us and a lot of workloads out there for machine generated and devices generated content via Iot.
But I would.
Look for content and item.
Here in the early days.
Excellent. Thank you guys I'll personally.
Once again. Thank you have a question. Please press Star then one.
The next question comes from Andrew Let's see.
Telehealth.
Thanks for taking the questions. This is George on for Steve.
Wanted to talk about the you know the AI.
Products that the aviator.
Set of products you guys were fairly quick to market with them, which I think is a testament to that 90 day release cycle.
But maybe if you could just talk about the decision to monetize these when maybe some of your competitors.
Customers are in an experimental phase in I guess.
Thinking about the kind of timeline to two revenue contributions. Thank you.
George Thank you.
For the question.
I said last quarter until we have.
Revenue signals, we're not going to.
Kind of change or our outlook if you will.
Until today.
And I look at Q2.
And we're seeing.
Gone through this whole cycle.
Love the baby speaks through generative AI in the consumer world the rise of algorithms.
The ability to do.
Do that in the consumer World, we've worked with our partners, Google and others to ensure they can be private environments.
We have our own technology that we've advanced to do sort of aspects of the AI preparatory work for customers embedding sector 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 the very practical capability practical capabilities 24 Dot one brings the rest of the business clouds Devry practical capabilities.
And we're demonstrating how within content management business network and the <unk> space in the developer space, where you can apply these.
Ah aviator personas to sit next to the human to add significant value.
So this is the next step and we're seeing the first demand signals and thus calling it out that we expect to see 20% bookings growth.
Year over year.
Got it yeah, that's really encouraging number maybe just double click on that 20%.
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.
Top line.
There'll be some there'll be some in there sure.
Got it thanks for taking the questions and congrats on the quarter.
Thanks George.
The next question comes from Daniel Chan with TD Cowen <unk>.
Please go ahead.
Hey, Mark earlier, you're mentioning that your customers are trained on your fiscal year end micro focus as 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 still be on 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 as nation.
From the micro focus install base.
And thus reduce comments.
On <unk>.
Paying attention to the quarter as Asian, and we spent a lot of time doing team spent a lot of time on the quarterly factors for Q2.
And just a clear shot out.
Our balanced models in the second half of the year. So look we're making progress, but we're going to always default to the customer what the customer wants to do.
But we're going to get to the open text cycle, we all took a year or two but we'll get there.
Sounds good thanks for that.
And then I appreciate the color on the SMB impacts from the macro just wondering if theres any update on the enterprise side of things last quarter. You said things are still looking good just wondering if 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 deciding to cloud side.
<unk> are looking strong.
Certainly that's going to be called out on the F&B pulling back to end of March said in addition to the AI. The contributions that we continued to build upon and innovate.
It continues to be strong demand for those all business cloud 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 Ban Shane for closing remarks.
Very good Madhu, Paul Thank you and thank you everyone for joining today look 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, The Needham SaaS conference virtually on November 16.
<unk> Security Conference November 21st in Toronto, which I'll definitely be at the Wells Fargo Technology summit, the 29th in Rancho Palos Verdes UBS Global Tech Conference November 30th Scottsdale Scotia.
December 5th in San Francisco, the net reduce going to host the NASDAQ Investor Conference in London on December 5th and we will be at the Barclays Global Tech Conference on December 7th in San Francisco, We look forward to connecting with you telling our story and maybe one that brings peace, bringing peace for all that ends the call to the operator.
This concludes today's conference call.
Disconnect your line thank.
Thank you for participating and have a pleasant thing.
Okay.
This concludes today's conference call.
He disconnected.