Q2 2024 Open Text Corp Earnings Call
Thank you for standing by this is the conference operator welcome to the open text Corporation second quarter fiscal 2020 financial results Conference call.
Operator: Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation second quarter fiscal 2024 financial results conference call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, simply press star then 1 on your touchtone phone.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question queue simply press Star then one on your Touchtone phone.
Should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
Operator: Should you need assistance during the conference call, you may signal an operator by pressing star then zero. I would now like to turn the conference over to Harry Blount, Senior Vice President, Industrial Relations. Please go ahead.
I would now like to turn the conference over to Harry Blount Senior Vice President of Investor Relations. Please go ahead.
Harry Edward Blount: Good afternoon, everyone and welcome to open text second quarter fiscal 2024 earnings call with me on the call. Today are open text, Chief Executive Officer, and Chief Technology Officer, Mark J bear in shape, and our executive Vice President and Chief Financial Officer, Madhu Ragen, Nathan today's calls.
Harry Edward Blount: Good afternoon, everyone, and welcome to Open Text's second quarter fiscal 2024 earnings call. With me on the call today are Open Text's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea, and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Today's call is being webcast live and recorded, with a replay, available shortly thereafter on the Open Text Investor Relations website.
Harry Edward Blount: 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.
Harry Edward Blount: 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.opentext.com. I'm pleased to inform you that Open Text Management will be participating at the following upcoming conferences.
Materials will supplement our prepared remarks and can be accessed on the open text Investor Relations website investors thought open tax dot com I'm pleased to inform you that open text management will be participating at the following upcoming conferences Bernstein's Tech media and telecom one on one forum on February 28 in New York.
Harry Edward Blount: Bernstein's Tech Media and Telecom One-on-One Forum on February 28th in New York, Morgan Stanley's Technology, Media, and Telecom Conference on March 4th in San Francisco, and JMT Security Technology Conference on March 5th in San Francisco. And now on to our Safe Harbor Statement. Please note that during the course of this conference call, we may make statements relating to the future performance of Open Text that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast, or projection in the forward-looking statements made today. Certain material factors and assumptions are applied in drawing any such conclusion.
Morgan Stanley's technology media and Telecom conference on March 4th in San Francisco, and JMP Securities Technology Conference on March 5th in San Francisco.
And now onto our Safe Harbor statement. Please note that during the course of this conference call. We may make statements relating to the future performance of open text that contain forward looking information. While these forward looking statements represent our current judgment actual results could differ materially from a conclusion forecast or projection in the forward looking <unk>.
What's made today certain material factors and assumptions are applied in drawing any such statements additional information about the material factors that could cause actual results to differ materially from a conclusion forecast or projection in the forward looking information as well as the risk factors that May project future performance results of open text arc.
Harry Edward Blount: 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 risk factors that may project future performance results of Open Text, is contained in Open Text's recent forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found in our public filings and other materials, which are available on our website.
Turning to the open text recent forms 10-K, and 10-Q as well as in our press release that was distributed earlier. This afternoon, which may be found on our website. We undertake no obligation to update these forward looking statements unless required to do so by law. In addition, our conference call May include discussions of certain non-GAAP financial measure.
Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website and with that I'm very pleased to hand, the call to mark.
Mark J. Barrenechea: And with that, I'm very pleased to hand the call to Mark. Thank you, Harry, and thank you to everyone joining today's call. Welcome to calendar 2024 and the second half of our fiscal year. Open Text is more relevant than ever as we enter the new era of business AI. We have significant momentum as we transform into a cloud growth company, as we expand our mission in information management, and as we accelerate private and public cloud consumption. AI General Intelligence is a once-in-a-generational opportunity, and Open Text is in a very strong position to lead the way in information management.
Thank you Harry.
And thank you to everyone joining today's call welcome to calendar 2020 for the second half of our fiscal year.
Open text is more relevant than ever as we enter the new air business AI.
We have significant momentum as we transform to a cloud gross company as.
How do we expand our mission and information management, and actually accelerate private and public cloud consumption.
Artificial general intelligence.
And a generational opportunity.
Oh fantastic isn't a very strong position to lead the way in information management.
We continue to accelerate our investments in products services and go to market and we are seeing the results Q2 was a spectacular quarter and showcases our strategy and performance progress with the following.
Mark J. Barrenechea: We continue to accelerate our investments in products, services, and go-to-market, and we are seeing the results. Q2 was a spectacular quarter and showcased strategy and performance progress with the following. Record revenues of $123 billion, or 71% year-over-year growth.
Record revenues of $1 3 billion or 71% year over year over year growth strong organic growth, our 12 consecutive quarter of a or our growth in constant currency.
Mark J. Barrenechea: Strong organic growth, our 12th consecutive quarter of ARR growth in cash and currency. Record enterprise cloud bookings of $236 million, or 63% year-over-year growth. And we're just getting started.
<unk> enterprise cloud bookings of 236 million or 63% year over year growth and we're just getting started where.
Harry Edward Blount: We are winning with cloud ambitions our business clients, we are winning with data security and trust requirements SaaS and micro focus just coming online as well as business AI with open text aviators, we had record adjusted EBITDA of $566 million or 37%.
Mark J. Barrenechea: We are winning with cloud editions, our business clouds. We are winning with data security and trust requirements, and Microsoft and ships coming online, as well as Business AI with Open Text Aviation. We had record adjusted EBITDA of $566 million, or 37%, and 66% year-over-year growth, and strong free cash flows of $305 million, or 87% year-over-year growth.
Harry Edward Blount: 86% year over year growth and strength and strong it's.
Strong free cash flows of 305 million or 87% year over year grout.
I'm, so proud of our colleagues and partners.
Mark J. Barrenechea: I'm so proud of our colleagues and partners, and it's great to start, has enabled and powered our innovation investment in Strong Customer Momentum and Operational Excellence. Let me highlight a few amazing customer partners. Carl Zeiss is leveraging the Open Text Content Cloud for global information management platforms and a single source of truth across the entire company, integrating business applications from SAP, Salesforce, and Microsoft into the Open Text Cloud. Philips Healthcare is leveraging our Open Text Aviator Platform, Vertica, for mission-critical medical imaging systems for high availability and proactive field maintenance to ensure patients receive optimal clinical performance. DMW has selected the Open Text Private Security Class Fusion for what is called Roots of Trust for Information Management and Data Governance.
And its great success.
As in April and powered by our innovation investment strong customer momentum and operational excellence, let me highlight a few amazing customer partnerships.
I'll cite is leveraging the open text document cloud for a global information management platform and a single source of truth across the entire company integrating business applications from S&P, Salesforce and micro focus that Microsoft and to the open text cloud.
Hello Health care, it's leveraging our open text aviator platform verdict that what's mission critical medical imaging system for high availability of practice field maintenance to ensure patients receive optimal clinical performance.
Harry Edward Blount: <unk> W have selected the open text cybersecurity cloud fusion for what is called the root of trust information management and data governance Fedex Express the world's largest cargo airlines has been a strategic partner with silicon attached for over a decade and that partnership expansion now by leveraging the open text I T operations cloud.
Mark J. Barrenechea: OTEX Express, the world's largest cargo airline, has been a strategic partner with Open Text for over a decade, and that partnership is now expanding to leverage the Open Text IT operations cloud for off-bridge monitoring and autonomically responding to a very dynamic topology, ensuring the highest possible flexibility and resiliency in support of their mission. We have 48 cloud rents over $1 million in new contract value in Q2, with many impressive customer stories just like these. Today marks our first full year of owning MicroSpoken. And our focus is on how to grow Aon, customer success, and being number one in information management. Micro Focus contributed revenues of $601 million in Q2. And we should end the fiscal year with a lower wage than the high age.
<unk> bridge monitoring autonomously responding to a very dynamic topology.
During the highest possible flexibility and resiliency in support of their mission.
We had 48 cloud wins over $1 million in new contract value in Q2 with many impressive customer story just like these.
Today marks our first full year of owning micro focus and our focus is on cloud growth AI customer success and being number one and information management.
Micro focus contributed revenues of $6 1 million in Q2.
And and we should end the fiscal year with renewal rates in the high eighties.
The amazing work from our colleagues and partners, who have the trust of our customers, we reshaped a shrinking business into a winning and growing innovator.
Mark J. Barrenechea: The amazing work of our colleagues and partners and the trust of our customers. We shape a shrinking business into a winning and growing innovator. We're doing exactly what we said we would do.
Doing exactly what we said we would do.
We're on track to complete the empty divestiture by the end of the fiscal year subject to standard regulatory approval and customary closing conditions, which will allow us to go even faster and AI and the cloud.
Mark J. Barrenechea: Furthermore, we're on track to complete the AMC divestiture by the end of the fiscal year, subject to standard regulatory approval and customary closing conditions, which will allow us to go even faster in AI in the cloud. We intend to use the post to reduce net leverage to less than 3x and ahead of schedule, providing us with the flexibility to resume share buybacks and to pursue strategic M&A and to drive future cloud and AR organic growth. We have all the ingredients we need for a fantastic 2024 and to achieve our F26 aspiration of 7% to 9% cloud organic revenue growth. And with our strong cloud bookings growth of 63% this quarter, your visibility into our cloud growth increases. And as a reminder, and as we like to say, we're an annual business.
We intend to use the proceeds to reduce net leverage to less than three acts and ahead of schedule, providing us the flexibility to resume share buybacks and to pursue strategic M&A and to drive future cloud and they are organic.
We have all the ingredients, we need for a fantastic 2024 and to achieve our F. 'twenty six aspiration of 7% to 9% crowd organic revenue growth with our <unk>.
Strong cloud bookings growth of 63% this quarter your visibility into our cloud growth increases.
And as a reminder, and as we like to say, we're an annual business. So let me turn to our fiscal 'twenty four outlook, we're maintaining our total cloud revenue outlook of 5.85 billion to $5 95 billion.
Mark J. Barrenechea: So let me turn to our fiscal 24 outlook. We're maintaining our total cloud revenue outlook of $5.85 billion to $5.95 billion. We are reaching our cross-voting growth targets at 25-30% growth, up from 58% plus, and this will thin our adjusted emitter range by tightening the range to 36-37% given our investments in cloud and security in Eon. Therefore, we need them for long-term opportunities to increase margins. But right now, our focus is on bookings and cloud revenue growth. We're also raising the lower end of our pre-cash flow range and now expect stronger full-year results of between $825 million and $900 million.
Using our cloud bookings growth target of 25% to 30% up from 15% plus.
And our adjusted EBITDA range by tightening the range to 36, 36% to 37% given our investments in cloud and security and AI.
We have both medium and long term opportunities to increase market, but right now our focus is driving bookings and cloud revenue grew up well.
We're also raising the lower end of our free cash flow range and now expect stronger full year results of between 825 million to 900 million of free cash flow.
Harry Edward Blount: Our workforce optimization are complete and the majority of the micro focus restructuring complete our attention and energy are focused now on customer transformation innovation and growth.
Mark J. Barrenechea: And with our workforce optimization complete, and the majority of the micro-focus restructuring complete, our attention and energy are now focused on customer transformation, innovation, and growth. Information Coordination plus AI will be an essential part of our competitive advantage. Open Text will completely impair AI and all our products.
Information automation, plus AI will be an essential part of our competitive advantage open text will completely embed AI in all our products.
I have received very positive customer feedback on our information management business cloud AI.
Mark J. Barrenechea: I've received very positive customer feedback on our Information Management Business Cloud, aka Cloud Edition, and our Business AI, aka Aviator. We are working with a major apparel company to apply AI to invoices, a major bank to detect fraud, a major manufacturer for complex compliance, and a major food company to consolidate billions of supply chain transactions and documents to create the next generation of sustainable food. We are making strong and steady AI progress, we are differentiated in the market, and we are winning business. Our differentiator advantages include managing assets and large data sets. We believe in integrating automation and AI together, are protecting data privacy, security, and trust, focusing on AI assists and personas, and being caught reasonable. We are clearly projecting from discussion to delivery, from vision to that. Aviators 23.4 and 24.1 are delivered, and soon, 24.2.
K, a cloud edition and our business AI Haa aviators.
We are working with a major apparel company to apply AI to invoices, a major bank to detect fraud, a major manufacturer for complex compliance at a major food company to consolidate billions of supply chain transactions and documents to create the next generation of sustainable food.
We are making strong and steady AI progress we are differentiated in the market and we are winning business.
French hated advantages include managing active and large datasets, we believe in integrating automation and AI together.
Testing data privacy security and trust.
Harry Edward Blount: Focusing on AI.
And personas and being cost reasonable.
We are clearly progressing from discussion to delivery from vision to that.
Aviator was $23 424 about one are delivered and soon 'twenty for that too.
800 engineers working on AI, and we're delivering new capabilities now every 90 days.
We have numerous customers in our earn your wings program and our bookings growth is benefiting from customers consolidating and preparing for a.
We built a powerhouse services organization, and we're ready to engage with customers for our talent to help them do AI transformation.
And further we are focused on enabling our engineers to go even faster with business.
I'm announcing today that we've begun a significant internal AI transformation and how our engineers create open text software, we're creating a new platform called platform Athena that will be our trusted platform to generate software to assist our engineers and creating our products.
Mark J. Barrenechea: We have 800 engineers working on AI, and we're delivering new capabilities now every 90 days. We have numerous customers in our Earn Your Wings program, and our booking scope is benefiting from customers consolidating and preparing for AI. We built a powerhouse services organization, and we're ready to engage with customers for our talents to help them with their AI transformation. And furthermore, we are focused on enabling our engineers to go even faster with business AI. I'm announcing today that we've begun a significant internal AI transformation in how our engineers create Open Text software. We're creating a new platform called Platform Athena that will be our trusted platform to generate software and to assist our engineers in creating our products. Athena will significantly accelerate our innovation, accelerate time to market, attract the next generation of talent, and raise our productivity and efficiency. Our first Athena-generated products are expected to be in the market with cloud editions 25.2, and we'll keep you updated along the way. Our two curators will tell our story.
Bettina will significantly accelerate our innovation accelerate time to market attract the next generation of talent and raised our productivity and efficiency.
Our first Athena generated products are expected to be in the market with cloud editions 25 Dot too and we'll keep you updated along the way.
Our future results to tell our story.
Now, let me conclude with saying how excited I am about the second half of the fiscal year and our momentum in information management cloud AI and information security and truck. There's so much runway ahead of open text for growth.
Harry Edward Blount: Our investments are the fuel for that momentum our operational experience will help us realize higher profits and cash flows from those higher revenues and arc salary passed down to three X library will create stronger capital allocation and capital return opportunities.
The open text cloud isn't information cloud and great information management is a key ingredient to business. They are trusting us in a central element in automation and AI and we're earning our customers' Trust every day. This is why we were the first Canadian company to join candidate voluntary code of conduct.
On the responsible development and management of advanced generative AI systems.
Mark J. Barrenechea: And let me conclude by saying how excited I am about the second half of the fiscal year's momentum in information management, cloud, AI, and information security and trust. There's still much runway ahead of Open Text for growth. Our investments are the fuel for that momentum. Operational Strength will help us realize higher profits and cash flows from those higher revenues, and our salary passed under 3S leverage will create stronger capital allocation and capital return opportunities. The Open Text Cloud is an information cloud, and great information management is a key ingredient in business AI. Trust is an essential element in automation and AI, and we're earning our customers' trust every day.
And as I said last year and you heard it here first our customers' data, it's not our product.
A big Thank you to my open type of colleagues customers and partners for this momentum I also want to thank our shareholders for their support of the micro focus acquisition.
Is your capital we manage that responsibility with the utmost care and we are doing exactly what we said we would do provide growth cash flows and returns are.
Our top core value of open text has been disturbing the trust and we look forward to your feedback and continued support they are the one that brings peace bring piece for all let me turn the call over to Nick.
Thank you Mark.
And thank you all for joining us today.
So let me start with a few key points in Q2 open text executed extremely well with record Q2 revenues and cloud bookings at an all time high we have built an operations practice, but strategically support the foundation.
Mark J. Barrenechea: This is why we were the first Canadian company to join Canada's Voluntary Code of Conduct on the Responsible Development and Management of Advanced Generative AI Systems. And as I said last year, and you heard it here first, our customers' data is not our product. A big thank you to my Open Text colleagues, customers, and partners for this moment. I also want to thank our shareholders for their support of the Micro Focus application. It is your capital, and we manage that responsibility with the utmost care, and we are doing exactly what we said we would do, providing growth, cash flows, and return. Our top core value at Open Text is being deserving of trust, and we look forward to your feedback and continued support. May the one that brings peace bring peace for all.
Solid growing enterprise cloud business.
During Q2, we also completed a successful one year commitment and delivery on micro focus to drive accretive integration one year anniversary with Microsoft because it's today.
I'll get fully reflects the opportunity in front of you trying to have open text and the rapid progress we have made in growing micro focus revenue profitability and free cash flows.
Mark spoke to our Q2 results and let me shed additional comments study.
Starting on page 23 of the Investor presentation posted on our IR website. So the slides titled Q2 fiscal 'twenty four and trailing 12 months financial highlights all references are in millions of USD and compared to the same period in the prior fiscal year and on a reported basis unless stated otherwise on a year over year basis with Q.
Madhu Ranganathan: Let me turn the phone over to you. Thank you, Mark, and thank you all for joining us today. So, let me start with a few key points. In Q2, Open Text performed extremely well.
Two cloud revenue of 450 million up 10, 1% and nine 2% in constant currency Q2, eight out of our annual recurring revenue of 1.15 billion up 58% and 55, 6% in constant currency that kept us into approximately 75% of total revenue.
Madhu Ranganathan: With record Q2 revenues and cloud bookings at an all-time high, we have built an operations practice that strategically supports the foundation of a solid, growing enterprise cloud business. During Q2, we also completed successfully our one-year commitment and delivery on Microsocus to drive access integration. The one-year anniversary of Microsocus is today.
Yeah.
This was our 11th consecutive quarter of enterprise cloud organic growth in constant currency and our 12th consecutive quarter of constant currency organic growth in AI are our license and PS, 168% year over year as reported and 163% in constant currency and this reflects incremental contribution to a microphone.
Madhu Ranganathan: I also fully reflect the opportunity in front of Open Text and the rapid progress we have made in growing micro-focused revenue, profitability, and pre-capture. Mark spoke about our Q2 results and let me share additional comments. Starting on page 23 of the investor presentations posted on our IR website for the slides titled Q2 Fiscal 24 and trailing 12-month financial highlights, all references are in millions of USD and compared to the same period in the prior fiscal year and are, on a reported basis, unlisted otherwise.
Cause an increase in the number of large deals and the granting of certain IP rights.
And let me comment to the large deals.
Cloud, we closed 48 deals greater than 1 million in the quarter was 23 in the earlier period.
The license, we closed 35 contracts greater than 1 million in the quarter versus 15, India earlier.
These factors reflect the strategic importance of open text and cloud booking strength as our customers prepare for Alex.
And moving to other financial metrics GAAP net income was 38 million, primarily reflecting the increasing interest expense amortization and special charges related to the acquisition of micro focus driving GAAP EPS up 14 sets gap.
Madhu Ranganathan: On a year-over-year basis, with Q2 cloud revenue of $450 million, up 10.1% and 9.2% in constant quarter. Q2 ARR, annual recurring revenue, of 1.15 billion, up 58% and 55.6% in constant currency. That represents approximately 75% of total revenue. This was our 11th consecutive quarter of Enterprise Cloud Organic Growth in Constant Currency and our 12th consecutive quarter of Constant Currency Organic Growth in ARR. Our license revenue increased 168% year-over-year as reported and 163% in Constant Currency, and this reflects the incremental contribution from Micro Focus and an increase in the number of large deals and the granting of certain IP rights. Now, let me comment on the large deals. For cloud, we closed 48 deals greater than $1 million in the quarter versus 23 in the earlier period. For license, we closed 35 contracts greater than $1 million in the quarter versus 15 in the year earlier.
Harry Edward Blount: GAAP gross margin of 73, 6% up from 78%, reflecting increased revenue contribution from our license business.
non-GAAP gross margin of 78, 6% up from 76% also reflecting increase in claims relative to revenue contribution from license.
Adjusted EBITDA of 566 million, an increase of 66, 1% year over year at 61, 2% in constant currency.
Adjusted EBITDA margin was 36, 9% as I mentioned earlier, we expect micro focus to be on an adjusted EBITDA model by the end of this fiscal year.
Adjusted EPS of $1.24 continues to affect us targets.
Our Dsos were 47 days flat from Q2 of the prior year and affecting higher seasonal billings and consistent with our expectations on overall working capital performance remained strong and micro focus continues to systematically perform Hyatt all working capital metrics.
Harry Edward Blount: We generated a stellar $350 7 million in operating cash flows and $305 4 million and free cash flows during the quarter.
Turning to the balance sheet. Please see page 25 of the Investor presentation. We finished Q2 with $1 billion in cash our net leverage ratio was as expected at three seven times for Q2. After the quarter close we made an additional January repayment of 175 million of that acquisition.
Madhu Ranganathan: These prices reflect the strategic importance of Open Text and cloud booking strength as our customers prepare for AI. And moving to other financial metrics, GAAP Net Income of $38 million, primarily reflecting the increasing interest expense, amortization, and special charges related to the acquisition of micro-profits driving GAAP ETFs of $0.14. Gap to us margin of 73.6%, up from 70.8%, reflecting increased relative revenue contribution from our right to vote.
Sure Tim long after this payment our principal outstanding debt is $8 5 billion.
On Microsoft teams integration. Please refer to page 34 of our Investor presentation, where we're delighted to share that open texture on or ahead of plan on every commitment relating to micro focus integration I'm highlighting a few accelerated microfocus cloud, which includes product and sales investment as we saw strong.
Madhu Ranganathan: Non-gap gross margin of 78.6%, up from 76%, also reflecting increased relative revenue contributions and life expectancy. And let's begin with a $566 million increase of 66.1% year-over-year and 61.2% in constant currency. Our Adjusted EBITDA margin was 36.9%.
Cloud results in Q2.
And to try and Microsoft to show organic growth another strong quarter with 601 million of revenues, but able to accelerate the turn to organic growth in fiscal 'twenty four.
Improving Microsoft teams or new ones is a key milestone for organic growth, but on track for high Eighty's to new ones rate in fiscal 'twenty four.
Madhu Ranganathan: As I mentioned earlier, we expect Micro Focus to be on our Adjusted EBITDA model by the end of the fiscal year. Adjusted EPS of $1.24 continues to reflect this progress. Our DSOs are 47 days, flat from Q2 of the prior year, and reflecting higher seasonal billing, consistent with our expectations.
And lastly, micro focus will be on our operating model, both adjusted EBITDA and free cash flows during fiscal 'twenty four making significant contributions.
On page 35 of our Investor presentation, we are providing a final one year anniversary update to the financial integration framework, we have no action $370 million about 400 million targeted savings initiatives were increasing our restructuring advisory and facility expense special charges by $20 million, but did you.
Madhu Ranganathan: Our overall working capital performance remains strong, and Micro Focus continues to systematically perform higher on all working capital networks, generating a stellar $350.7 million in operating tax flows and $305.4 million in free tax flows during the quarter. Turning to the balance sheet, please see page 25 of the investor presentation, we finished Q2 with $1 billion in cash. Our net leverage ratio was, as expected, at 3.7 times for Q2. After the quarter closed, we made an additional January repayment of $175 million on our acquisition term loan.
Think expected technology tax and legal entity simplification costs by 100 million for a net reduction of $80 million.
Combined with expected reduction in interest expense following the AMC divest that has increased visibility on the improvement in free cash flow, we expect to see between now and our fiscal 'twenty six aspirations.
Madhu Ranganathan: After this payment, our principal outstanding debt is $8.5 billion. On micro-focus integration, please refer to page 34 of our investor presentation, where we're delighted to share that Open Text is on or ahead of schedule on every commitment relating to micro-focus integration. I'm highlighting a few. Accelerate micro-focus cloud growth, which includes product and sales investment as we saw strong cloud results in Q2, and Return Microscope to Organic Growth, another strong quarter with 601 million in revenues. We were able to accelerate return to organic growth in fiscal 24. Improving Microscopic Renewals is a key milestone for organic growth with an on-track top-side 80s renewal rate in fiscal 24. And lastly, Micro Focus will be on an operating model, both adjusted EBITDA and free cash flow during fiscal 24, making significant contributions. On page 35 of our investor presentation, we are providing a final one-year anniversary update on the financial integration framework. We have now actioned $370 million of our $400 million targeted savings initiatives.
Harry Edward Blount: AMC updates, let me spend a moment on application modernization connectivity AMC.
Business continues to perform well and we're on track for a successful close in Q4 to divest AMC to docket software.
Net proceeds will reduce debt to a consolidated net leverage ratio of less than three times within 90 days of closing.
Our dividend program.
I believe first our board of directors approved a quarterly cash dividend of <unk> 25 cents per common share.
Good day for the next quarterly dividend in March 2024, and the payment date is March 20th 'twenty 'twenty four.
So let me turn to our targets and expectations, starting with our Q3 fiscal 'twenty four quarterly factors on page 32 of our investor presentation on a year over year basis, we expect revenue of $1 4 billion to $1 45 billion.
Our annual recurring revenue of 1.13 billion to $1 6 billion, we expect FX to be constant.
The EBITDA year over year margin between 32, and 32% that reflects microfocus integration cost and FX adjusted EBITDA to also be constant.
Madhu Ranganathan: We're increasing our restructuring advisory and facility expense special charges by $20 million, but reducing expected technology, tax, and legal entity simplification costs by $100 million for a net reduction of $80 million. When combined with the expected reduction in interest expense following the AMC divest, there is increased visibility on the improvement in free cash flow we expect to see between now and our fiscal 26 aspirations. AMC update: let me spend a moment on Application Modernization Connectivity, AMC. The business continues to perform well, and we're on track for a successful close in Q4 to divest AMC to Rocket Software. The net proceeds will reduce debt for a consolidated net leverage ratio of less than three times within 90 days of closing. A Dividend Program. On February 1st, our Board of Directors approved a quarterly cash dividend of 25 cents per common share. The record date for the next quarterly dividend is March 1st, 2024, and the payment date is March 20th, 2024.
Our fiscal 'twenty four targets in constant currency are provided on page 33 of our Investor Relations presentation.
Is that built in marks comments I will also provide updates to the target model ranges to fully reflect our successful one year integration of Microfocus.
Harry Edward Blount: Our cloud revenue is expected to be up 6% to 8%.
Customer support revenues up 43% to 45% year over year compared to our prior range of up 40% to 42% are up 25% to 27% compared to our prior range of up 24% to 26%.
License revenue up 68% to 70% compared to our prior range of 71% to 73% and professional services revenue up 26% to 28% compared to our prior range of about 20.
<unk>, 29% to 31%.
Total revenue growth of 30% plus organic growth in the range of 1% to 2%.
Total operating expenses of 42% to 44% of revenues.
non-GAAP gross margin range of 77% to 79% we are tightening our adjusted EBITDA margin range to 36% to 37% and that reflects higher investments in AI and cloud sales and marketing expenses related to the AMC divestiture and micro focus integration expense.
Madhu Ranganathan: So let me turn to our targets and aspirations, starting with our Q3-624 quarterly factors on page 32 of our investor presentation. On a year-over-year basis, we expect revenue of $1.4 billion to $1.45 billion. ARR, annual recurring revenue, of $1.13 billion to $1.16 billion. We expect FX to be constant.
At current exchange rates, we expect FX to be 20 to 40 million tailwind.
Net interest expense for the year to be $550 million to $570 million and non-GAAP effective tax rate of 14%.
As noted earlier, our enterprise cloud business is doing extremely well with solid revenue growth and 63% year over year bookings growth in the quarter, increasing our visibility we are a key Microsoft partner and as noted in their recent calls the SMB market is facing short term challenges this impacts our SMB business.
Madhu Ranganathan: Adjusted EBITDA year-over-year; margin between 32 and 33 percent. That reflects Microsoft's integration cost and expects adjusted EBITDA to also be constant. Our fiscal 24 targets in funds and currency are provided on page 33 of our investor relations presentation. As I build on Mark's comments, I will also provide updates to the target model ranges to fully reflect our successful one-year integration of Microsoft. Our total revenues are expected to be up 68%. Customer support revenues up 43-45% year-over-year compared to our prior range of up 40-422% ARR up 25-27% compared to our prior range of up 24-26% Our license revenue up 68-70% compared to our prior range of up 71-73% And professional services revenue up 26-28% compared to our prior range of up 29-31% Total revenue growth of 30% plus with organic growth in the range of 1-2%.
We remain in a great position to continue to add products, where F&B business and benefit the environment to choose.
Turning to free cash flow, we expect free cash flow to grow year over year in both third quarter and fourth quarter, we're raising the lower end of what a F. C. S range and now expect stronger full year results between 825 million to 900 million.
Fiscal 'twenty six explorations are included on page 36 of the Investor presentation, and you may not change so not material as we shared with you on November 28, when we announced the AMC divestiture of fiscal 'twenty six aspiration shows the highly predictable and growing business at scale led by cloud and add our.
So in summary, I open text team members are proudly delivered a solid Q2 and a strong first half of the fiscal year and we remain on track to meet our fiscal 'twenty four targets and fiscal 'twenty six aspirations.
If I can focus integration is ahead of us and.
And we expect micro focus to receive important milestones in fiscal 'twenty for a return to organic growth and renewals rates in the high eighties and micro focus business to be an open text operating model, but adjusted EBITDA and free cash flows the AMC divestiture reinforces and sharpens, our focus sharpened our capital allocation at all.
Madhu Ranganathan: Total Operating Expenses of 42 to 44% of revenue; Non-Gap Margin Range is 77% to 79%. We are tightening our adjusted EBITDA margin range to 36-37%, and that reflects higher debt in AI and cloud, sales and marketing, and expenses related to the AMC divestiture and microservices integration expenses. At current exchange rates, we expect FX to be $20 to $40 million a trade win.
Time will allow for more resources to be allocated to drive more growth on behalf of open texts I would like to thank our shareholders as long as customers and partners I would now request the operator to open the call to your questions.
Speaker Change: Thank you.
Well now begin the question and answer session.
The one who wishes to ask a question you May Press Star then one on their touchtone phone to join the question queue.
You'll hear a tone acknowledging your request.
Speaker Change: Using a speaker phone. Please ensure you lift the handset before pressing any key if you wish to withdraw your question.
Madhu Ranganathan: Net Interest Expense for the year to be 550 to 570 million and the Non-Gap Effective Tax Rate approaching. As noted earlier, our enterprise-client business is doing extremely well, with solid revenue growth and 63% year-over-year bookings growth in the quarter, increasing our visibility. We are a key Microsoft partner, and as noted in their recent call, the SMB market is facing shocks and challenges. This impacts our SMB business. We remain in a great position to continue to add products for the SMB market and benefit as the environment improves. Telling to see cash flow, we expect free cash flow to grow year over year in both the third quarter and fourth quarter. We're raising the lower end of our FTF range and now expect stronger full year results between 825 million and 900 million.
Press Star then two.
And then he went to Hudson you May Press Star then one at this time.
Speaker Change: My first question is from Richard Tse with National Bank Financial. Please go ahead.
Richard Tse: Yes. Thank you Oh do I think you did talk about the SMB market I'm not sure. It is for mark or Madhu, but wondering if you could sort of expand that and talk more broadly about the enterprise spending environment. It seems there's been some mixed messages out there as to whether it's kind of gone back to a normal pace or not.
Madhu Ranganathan: Hey, Richard Thanks for the question, let me take a part of that Oh.
Looking at the SMB part F&B is a massive.
Part of the U S economy.
370 billion in spend for companies with 1000 employees or less.
Madhu Ranganathan: Our fiscal 26th aspirations are included on page 36 of the investor presentation and remain unchanged from the materials we shared with you on November 28th when we announced the ANC divestiture. Our fiscal 26th aspirations show the highly predictable and growing business f-scare led by cloud and ARR. So, in summary, our Open Text team members have proudly delivered a solid Q2, and a strong first half of the fiscal year, and we remain on track to meet our Fiscal 24 targets and Fiscal 22 expectations. The MicroFocus integration is ahead of our commitment, and we expect MicroFocus to achieve important milestones in Fiscal 24, a return to organic growth and renewal rates in the high 80s, and MicroFocus' business to be on Open Text's operating model for adjusted EBITDA and fee cash flows.
We believe information management deeply relevant part of the market.
And as we know Microsoft Microsoft is a key partner in this space.
And Microsoft recently, just got hub with our short term challenges and SMP.
Madhu Ranganathan: Well, they've also confirmed our long term strategic drivers for growth.
Well, so I think we're in a great position to benefit from SMB.
Medium and long term and it will be a strong contributor to our 79% organic comp growth.
Aspirations, that's it really.
Right.
A little more on the macro side.
Combining the comments I'll hand over to Madhu, I'll combine a bit of macro and competitors.
We are benefiting from customer demand as customers look to consolidate away from competitors that are stock off cloud. They don't have a data security our trust platform and have weak a weak AI vision and low capabilities to deliver.
We're in the right place today about 60% of our business in the North America public sector Energy financial services manufacturing I was quoting CPG apparel retail.
Madhu Ranganathan: The AMC divestiture reinforces and sharpens our focus, sharpens our capital allocation, and over time will allow for more resources to be allocated to drive more growth. On behalf of Open Text, I would like to thank our shareholders, our loyal customers, and partners. I will now request the operator to open the call for the press conference. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and then 1 on their touch tone phone to join the question queue. Use your tone to acknowledge your request. If you're using a speakerphone, please ensure you lift the handset before pressing any keys.
We got some we got some fantastic ecosystem partners, Microsoft and Google.
And our sales force so.
Oh, what went wrong in the right places right now and it's about.
Delivering value for our customers.
And so more right.
We see a reasonable economy out there to go execute.
Yeah. Thank you Mark and I just wanted to highlight a specific to fiscal 'twenty for again, you saw the enterprise cloud bookings closer to 62%. We're also increasing the outlook for the year for cloud revenues in fiscal 'twenty for content revenue out of it takes seven new experienced revenue and business like look all doing very well, but we did want to call out.
Richard Tse: If you wish to withdraw your question, And when you have a question, you press star then 1 at the... Our first question is from Richard Tse with National Bank Financial. Please go ahead. Yes. I'm wondering if you could sort of expand that, talk more broadly about the enterprise environment. Mixed messages out there about whether it's kind of gone back to normal.
The S&P have you looked at the Q3 end of fiscal 'twenty four targets for cloud revenue per se.
Okay, Great and then just separate question on maybe there are no doubt that's probably one of your more more exciting products right now.
I don't know if it's too early still but do you ever any sort of sense at this point in time you know what.
What a reasonable attach rate would be within your existing customer base and you know about sort of potential incremental revenue opportunity and I guess on the same note.
Mark J. Barrenechea: Open Text Corp. Yeah, Richard, thanks for the question. Let me take a part of that. Look at the SMB part. SMB is the maximum part of the U.S. economy. $270 billion are spent on companies with 1,000 employees or less.
You had some sort of I forgot what it was called as a trial of your your annual user conference.
Mark J. Barrenechea: We believe information management is deeply relevant for this market, and as you know, Microsoft is a key partner in this space. Microsoft has recently discussed some of their short-term challenges in SMB, but they've also confirmed they're a long-term strategic driver for growth in SMBs as well. So, I think we're in a great position to benefit from SMB, both in the medium and long term, and it will be a strong contributor to our 7 to 9 cent Arcana Cosmos aspiration.
One of them you can sort of assurance thoughts in terms of the uptake on that that trial.
Yes sure thing. Thank you again for a true up.
We're making strong and steady progress and.
So I'll just start with what a differentiator in the market and we have one business now.
And that will differentiate us as I noted in my prepared remarks on the datasets that are automation crazy, we manage we believe that our business cloud automation and AI are integrated.
Mark J. Barrenechea: You know, if you relate to, maybe a little more on the macro side, but then I'm going to combine any of the comments that I had in order to do so. I'll combine a little bit of macro and competitors. We are benefiting from customer demand, that customers look to consolidate away from competitors that are stuck on the cloud, they don't have a data security or trust platform, and they have weak AI vision and low capabilities to deliver. You know, we're in the right place today.
And I also said on my prepared remarks, we are embedding AI.
Everywhere.
It will be a capability, we live right next to automation and the long term.
You'll have your automation screen, but you'll have your AI to step right that's still it.
And we work on my bet My best way to describe it as we're moving from vision to show them the value and discussion to deliver.
We have numerous customers today and our firm your wings program.
Mark J. Barrenechea: We've got 60% of our business in North America, public sector, energy financial services, manufacturing, we're supporting CPG, apparel, and retail. We've got some fantastic ecosystem partners, Microsoft, SAP, Google, and Salesforce. So, we're in the right places right now, and it's about delivering value for customers. And so we see a reasonable economy out there to go execute.
I discussed a few in my remarks in food.
And and apparel.
Manufacturing.
And if you look at our bookings growth of 63%, 63% year over year growth, we had wins in that and also noted we raised our outlook on our bookings growth off of 15% to 25 to 30.
So you know we're doing you know we're doing this the open text way at it it is a strong vision.
Madhu Ranganathan: Yeah, thank you, Mark. And this slide is going to highlight some things specific to Fiscal 24. Again, we saw an enterprise cloud bookings growth rate of 53%, and we're also increasing the output for the year. For cloud revenues in Fiscal 24, content revenue, analytics revenue, experience revenue, and business revenue are all doing very well. But we did want to call out S&B as you look at the Q3 and the Fiscal 24 targets for cloud revenue, per se. And I just have a question on Aviator. No doubt that's probably one of your most exciting products right now. I don't know if it's too early still, but do you have any search times at this point in time? What a reasonable attachment!
<unk> are backed up by product, we're delivering every 90 days, we're moving from that vision to showing value, we're moving from discussion to delivery.
We have now progressed to just a fantastic bookings quarter.
And raising our outlook for the year on booking site I'm up and work we move to the next step which is creating a a really a breakthrough idea on platform Bettina on how we're going to transform how we write our own software or using our own platform.
So I'm pleased with our progress we're going to keep making progress every 90 days and.
I strongly believe that your visibility into our 7% to 9% cloud organic revenue growth significantly increases with the with the strong bookings outlook.
Okay. Thank you I'll pass the line.
Thank you.
The next question is from Daniel Chan with TD Colin. Please go ahead.
Mark J. Barrenechea: Open Text Corp. Open Text Corp. I guess on the same note. I think you had some sort of, I forget what it was called, but it was a trial.
Alright. Thanks.
Cash flow conversion took a really took a step up in the quarter Q2 seems to be seasonally stronger for conversion anyway, but considering the ongoing integration does seem pretty good.
Mark J. Barrenechea: I'm wondering if you can sort of share any stats in terms of the uptake on that trial. Yes, sure thing. Thank you again, Richard.
Is there anything to call out on that performance and should we expect that to continue.
Yes. Thank you Dan So what I would say is that as I've shared before the open text a cash conversion has remained very steady and strong.
Mark J. Barrenechea: We're making strong and steady progress, and now the charts are differentiated in the market, and we have won this. No differentiators, as I noted in my prepared remarks on the data test that our automation creates and we manage. We believe that our business cloud automation and AI are integrated, And I also got it on hyperparameters.
Speaker Change: If you think about the elevation that we made with open text, we set out to do that with Microsoft to me, but I would say is that in Q2, we saw micro focus also respond.
Positively and the cash conversion, but you're seeing scrubber administered a item that keep in mind, they have different year ends and different quarters, and we're actually very delighted how we were able to convert their operating performance to eight.
Our quarters et cetera do.
Do we expect it to continue I guess, we absolutely expect it to continue.
Mark J. Barrenechea: We are embedding AI everywhere. It will be a capability; AI will live right next to automation in the long term. You'll have your automation screen, but you'll have your AI assist right next to it.
Okay.
Thanks Madhu.
Then on the EBITDA margin guidance for the full year tightened it up next quarter I think it looks like it's going to take a step down to the 32% to 33% I'm just wondering what's driving that.
Mark J. Barrenechea: Open Text Corp. My best way to describe it is we're moving from great things to show me the value and set me up to deliver it. We have numerous customers today in our Earn Your Wings program, and I discussed a few in my remarks about Peru, in apparel manufacturing.
Yeah. So if you recall Q3 for US is usually a seasonally lower EBITDA quarter. They got a big factors in play for the remainder of the year as Mark and I. Both called dog that includes investment in AI and cloud just given the strong book strong bookings, we see and did you have some AMC divestiture experienced midnight.
Mark J. Barrenechea: And if you look at our bookings growth of 63%, 62% year over year growth, we have AI wins in that. And also know that we raised our outlook on our bookings growth from 15% to 25% to 30%. So, you know, we're doing this the Open Text way.
And also some Microsoft integration expense, but Q3, if I could just highlight some employee perspective as Jay. It's it's it's a January 1st a New York, we have higher benefits expense, we have higher sort of the sort of the vacation expense et cetera. So that is more seasonal to Q2 and that also weighed down a bit the EBITDA margin.
Daniel Chan: It is a strong vision; we are the back-up partners. We're delivering every 90 days, we're moving from that vision to showing value, we're moving from discussion to delivery, and we have now progressed to just a fantastic booking quarter and raising our outlook for the year on bookings. And we've moved to the next step, which is creating really a breakthrough idea on Platform Athena about how we're going to transform how we write our own software using our own platform. So I'm pleased with our progress; we're going to keep making progress every 90 days, and I strongly believe that your visibility into our 7-9% cloud organic revenue growth significantly increases with this strong booking guideline. Thank you. The next question is from Daniel Chan with TD Cullen. Please go ahead.
And but for the year. The 36 to 37 Q4 will remain a seasonally strong quarter.
And Dan I think it's fair to say it doesn't do noticed that Q3 is up.
Speaker Change: She is a seasonally low quarter in Q4 is a seasonally stronger quarter.
I appreciate that the investments that you're making into into cloud.
Where are the areas of focus for decided our investment. Thank you.
Speaker Change: Yeah.
Madhu Ranganathan: Hi, thanks. Cash flow conversion really took a step up in the quarter. Q2 seems to be seemingly stronger for conversion anyway, but considering the ongoing integration, this seems pretty good. Is there anything to call out about that performance, and should we expect that to continue?
Speaker Change: Thank you Dan.
Speaker Change: Well you noticed some of them. The we continue to build out our private cloud infrastructure, particularly around.
Industry.
Speaker Change: Clients are data security trust pregnancy.
Speaker Change: It's an investment in our SAS offerings.
Madhu Ranganathan: Yes, thank you, Dan. So, what I would say is that, as I've shared before, the Open Text fast conversion has remained very steady and strong. If you think about the progress that we made with Open Text, we set out to do that with Micro Focus.
We are all about how to unlock future value.
We have established our private cloud platform as a standard globally.
The next step is more public cloud SaaS consumption.
Madhu Ranganathan: What I would say is that in Q2, we saw Micro Focus also respond very positively, and the fast conversion that you're seeing. Keep in mind that different year ends and different quarters, and we're actually very delighted how we were able to converge their operating performance to our quarters, etc. Do we expect it to continue? Yes, we actually expect it to continue. Thanks, Miki. And then on the margin guidance for this later, I tidied it up, but next quarter, I think it's okay, it's going to take us down to 32 to 33 percent. Just wondering what's driving that. Yeah, so, if you recall, Q3 for us is usually a seasonally lower EBITDA quarter. There are big changes, I'll say, for the remainder of the year.
Speaker Change: Cross sell products and of course off avian are.
Our AI so those are the areas where.
We're applying that investment and doing that within the range, we talked at the beginning of the year, even though we tightened up a little bit we're still within the range. We've got a we've presented.
That's good thank you.
Thank you.
The next question comes from Steve Enders with Citi. Please go ahead.
Okay.
Thanks for taking the questions here, maybe just on the comp.
I'm looking at your screens in a corner I mean pretty pretty impressive results there.
What in particular.
It was a surprise or was it.
Customers converting over.
How big of a contributor with a.
And then I guess.
Secondarily as you think about that.
Madhu Ranganathan: As Mark and I both called out, that includes investment in AI and the cloud, just given the strong bookings we see, and if you have some ANC, domestic experience, mid-expenses, and also some microprofit integration expenses. But Q3, if I could just highlight, from an employee perspective, it's January 1st, a new year, we have higher benefit expenses, we have higher vacation expenses, etc. So, that is more seasonal to Q2, and that also weighs down the EBITDA margin. But for the years of 36 to 37, Q4 will remain a seasonally strong quarter. And Dan, I think it's fair to say that since Madhu knows that 2.3 is a seasonally low quarter, and 2.4 is a seasonally stronger quarter.
And the growth.
Now looking forward bookings for the year.
AI contribution that you're kind of embedding in that.
Speaker Change: Okay. Thanks for the thanks for the question.
I said in my prepared remarks on the cloud side.
Clearly, a very strong quarter, 63% year over year growth are and what our forward visibility we see continued strength.
And we raised our outlook for 15% cloud bookings growth of 25% to 30% cloud bookings growth for the year.
What's driving that.
First is we see a lot of customers continuing to move to our cloud.
And consolidating away from.
Mark J. Barrenechea: I appreciate that. The investment that you're making into cloud AI, where are the areas of focus for this added investment? Yes, thank you, Dan. Well, you've noticed some of that.
Competitors.
Who can't get to the cloud can provide the data security and trust I don't have a credible.
AI vision, let alone first products in the market.
So just continued strength of our private cloud customers consolidating.
Mark J. Barrenechea: We continue to build out our private cloud infrastructure, particularly around industry, compliance, data security, trust, and privacy. It's an investment in our staff offering, as we've talked about how to unlock our future value. We have established our private cloud platform as a standard globally.
Compliance data security Trust privacy remain top of the list for.
For the global 10000, that's a driver for us.
And they are Oh, we've what we've want AI business.
And it's showing up in our bookings, we're not breaking out at all.
Mark J. Barrenechea: The next step is more public cloud staff consumption across our products, and, of course, our aviators, our AI. So those are areas where... We're making that investment and doing that within the range we talked about at the beginning of the year. Even though we tightened it a little bit, we're still within the range we presented.
Or or security and trust or content or BN.
Bookings at this point, we don't get down to that level.
But it was a it was a clear contributor and that 63.
Percent cloud bookings growth and the other factor in us raising our outlook our growth outlook for the year.
Steve Enders: Thank you. The next question is from Steve Enders with Citi. Please go ahead.
Mark J. Barrenechea: Sir, thanks for taking the questions there. Um, maybe just to start off on the crowdbooking screen from the crowd. I mean, pretty impressive results there. Uh, I guess what... What in particular kind of drove the upside there?
Okay.
Or maybe some of the puts and takes in the underground that was no.
Speaker Change: It's good to see customer support.
Maybe there wasn't one.
Color.
So the license fees are.
Cutting down a little bit in print services stepping down a little bit on the expectations from last quarter.
Mark J. Barrenechea: Was it customers converting over, new use cases, how they used to trigger with AI? And I guess secondarily, as you think about the step-up in e-book, the growth outlook on cloud bookings for the year, what's the AI contribution that you're kind of embodying in that? Okay, thanks for the question. As I said in my prepared remarks on the Proud's side, currently a very strong quarter, 63% year-over-year growth. And with our hoarders' abilities, we see continued strength.
Yeah, So Steve I'll take that license in the quarter actually.
Was significantly higher from a year over year basis, and the fact that the contribution there really is bringing micro focus and today I meant to say as you are I mean, I think they call. It macro focused cloud momentum is strong but they are still smaller from a cloud perspective in terms of bookings and revenue relative to of course open text and PS revenues also grew.
In the quarter, you know competitively I want to make sure I heard your question right both license and P. S did grow in the quarter.
Mark J. Barrenechea: And we raised our outlook from 15% crowdbooking growth to 25% to 30% crowdbooking growth for the year. First, we feel our customers are continuing to move to our cloud and consolidating the Wave from our competitors, who can't get to the cloud, can't provide the data security and trust, and don't have a credible AI vision, let alone first products in the market. So just the continuous strength of our private cloud, customers consolidating, compliance, data security, trust, and privacy remain top of the list for the global 10,000. That's the driver for us, and AI. We've won AI this year, and we're just showing up on our bookings.
Yeah Yeah.
Can you clarify on the outlets.
We've done that.
We're down from prior expectations.
Corners.
Yeah.
Margins came down a little bit.
Sure Yeah, I missed that part in your Uh Huh.
In your comments so the adjustment of the ranges are really reflects the strength of again micro focus from a customer support perspective, right and we've ended up just look back at the games and keeping the overall fiscal 'twenty four targets. The same from a license perspective, just consider that you have about Q3.
Seasonality in license and that applies to micro focus as well, but it's but it's really the contributor there I would say is the better than new world for micro focused customer support. So we wanted to increase the range of customer support and obviously account for some inherent volatility in the license business.
Yeah.
Speaker Change: Thanks for taking the questions here.
Madhu Ranganathan: We're not raising out, you know, AI or security and trust or content or BN of bookings. That's just why we don't get down to that level. But AI was a clear contributor to that 63% cross bookings growth and a factor in us raising our outlook, our growth outlook for the year. Okay, that's all for me. You know, taking some of those little pushes and pings of the dropout look
Yeah. Thank you yeah. Thank you.
Okay.
The next question is from Kevin Krishna That's me.
Kevin Krishna: Scotiabank. Please go ahead.
Hey, there just a couple of clarifications for me. So just on the cloud growth of 6% to 8% that was maintained so I just wanted to read is it just the fact that you've had the strong enterprise bookings, but there's no offset from SMB and that sort of the reason why.
Madhu Ranganathan: You know, there's activity, customer support, setbacks, and... Can you just go a little more, I guess, on the license, lower the price a little bit on pro services, lower the price a little bit from the expectations from last quarter? Yeah, so Steve, I'll take that. License revenue in the quarter actually was significantly higher from a year-over-year basis, and the contribution there really is bringing micro-focus into the play. As you recall, micro-focus' cloud momentum is strong, but they're still smaller from a cloud perspective in terms of bookings and revenue. Relative to, of course, Open Text and PX revenues also grew in the quarter compared. I want to make sure I heard your questions right. Both licenses and PX did grow in the quarter. Yeah, I just want to, yeah, I'm sorry if I didn't sound funny out loud because, as you said, social workers were down from the prior occupations from last quarter. Just trying to get in for the annual outlaws rises to came down a little bit.
That range was maintained.
Yeah, I'll take it first and turn it over to Mark Thanks for the question.
So think about the cloud bookings as Marc mentioned, Chile, increasing the visibility to the future, which would be fiscal 'twenty five in fiscal 'twenty six our cloud contracts on long and we've talked about that before and the time to deployment and to Jack and you are also long, but we're very delighted at the performance in the quarter.
Just giving us that future forward visibility, so take India for fiscal 'twenty, four but keeping it at 6% to 8% and within that enterprise cloud revenue analytics experience Deanne, all doing well and as we are and as we called out SMB, it's weighing down a bit. So we wanted to kind of balance that and keeps.
Revenues at at 6% to 8% and that you have and is really benefiting from our cloud bookings from our prior quarters, right and the cloud renewal rates et cetera.
So I just want to separate the strength of the cloud bookings here, which is really going to be positively impacting 'twenty five 'twenty six and just the factors outlining sniffles from 24.
Madhu Ranganathan: Sure, sure, I'll take that part in your earlier comment. So the adjustment of the ranges really reflects the strength of, again, Micro Focus from a customer support perspective, right, and we've adjusted that in the range. And keeping the overall 6124 target the same, from a license perspective, just consider that we have a Q3 seasonality in licenses, and that applies to Micro Focus as well. But it's really the contributor there, I would say, is the best in the world for Micro Focus customer support, so we wanted to increase the range of the customer support and obviously account for some inherent volatility in the license. Yes, perfect.
Yeah.
Speaker Change: Got it thanks for that just to find another question here just on the bookings I know, sometimes you know you've announced the bookings and there can be a little bit of a delay I guess in the translation to revenue is the IRA.
I related bookings do those look any different deals or do you think that those are going to be you know translated from from bookings to revenue at a faster pace just given the sort of strong demand that your customers are you now.
<unk> for the AI products.
Yeah, Kevin Thanks for the question.
No.
The bookings related to AI.
All following the same characteristics as an enterprise bookings.
And so in the.
Kevin Krishnarathne: Thank you for taking the questions here. Thank you. The next question is from Kevin Krishnarathne with Scotiabank. Please go ahead.
F&B space, we tend to see one years, one year contracts in the enterprise space, we tend to see two to four year contract and so AI is following that.
Madhu Ranganathan: Hey there, just a couple of clarifications for me. So just on the cloud growth, 6% to 8%, that was maintained. So I just want to read it's just the fact that, you know, you have the strong enterprise bookings, but they're still offset from SMBs. That's sort of the reason why that range was maintained.
That enterprise pattern, if you will and as we do noticed that bookings number what kind of impact a positive impact and and 25 and 26, but right now it looks like or AI wins.
I will follow this up.
Traditional enterprise pattern.
Got it great. Thanks, a lot I'll pass the line.
Madhu Ranganathan: Yeah, I'll take it first and turn it over to Mark. Thanks for the question. So, thinking about the cloud bookings, as Mark mentioned, it's really increasing our visibility to the future, which would be Fiscal 25 and Fiscal 26. Our cloud contracts are long, and we talked about that before, and the time to deployment and to revenue is also long, but we're very delighted at the performance in the quarter, just giving us that future forward visibility. So, looking in here for Fiscal 24, we're keeping it at 68%, and within that, enterprise cloud revenue, analytics, experience, BN, all doing well. And as we called out SMB, it's weighing down a bit, so we want to kind of balance that and keep the revenue at 68%, and that revenue is really benefiting from our cloud bookings from the prior quarters, right, and the cloud renewal rates, et ce So, I just want to separate this change to the cloud bookings here, which is really going to be positively impacting 25 and 26, and this is actually outlining Fiscal 24. Got it. Thanks for that. Just one final question here on the bookings.
Thank you.
The next question is from adhere cabinet with eight capital. Please go ahead.
Hi, Good afternoon, guys. Thanks for taking my questions I wanted to talk a little bit about you know last quarter. You saw some initial bookings in this quarter you called out some strength there as well I just want to ask how have customers really progressed in AI, Mark you've kind of mentioned that.
A lot of customers customers are still dipping their people to get your wings program, but are some of those early customers are they progressing faster to maybe more larger scale deployments or are they kind of still in the in the get your wings program get their feet wet type go deploy.
Deployment phase.
Yeah. Thanks for thanks for the question it's progressing.
And a couple wide statements here, we're going to embed AI and all our products.
It's clear that there's a path where you have your audit automation.
And you have the learning from the data and our approach is to provide AI assist. These if we automated health care professionals that should be in a AR and AI persona right next to that we automate a tech support specialist there should be an AI assist nextera, we automate it.
Mark J. Barrenechea: I know sometimes, you know, you've announced the bookings, and there can be a little bit of a delay, I guess, in the translation to revenue. Are the AI-related bookings, do those look any different? Do you think that those are going to be translated from bookings to revenue at a faster pace, just given the sort of strong demand that your customers are, you know, seeing for the AI products? Yes, thank you for the question. No, the book is related to A.I.
Contract specialist or a loan specialist there should be an AI assist right next to it.
So we're going to embed AI everywhere.
It's a discussion.
RFP.
And every RFP and some customers are in early stages of exploring Ah.
Some are our medium.
A handful or more advanced.
But it's in every single discussion. So it is certainly hum sort of separating out in the market those competitors, who have not necessarily even moved to the cloud a lot a lot of the resources to deliver a robust AI platform. So we're seeing benefit from our view.
Mark J. Barrenechea: Collab, all following the same characteristics as an enterprise book. Uh, and so in the... In the FSMB space, we tend to see one-year contracts. In the enterprise space, we tend to see, you know, two- to four-year contracts. And so AI is following that enterprise pattern, if you will. And as you do notice, that booking number will have a clear impact, a positive impact, in 2025 and in 2026. But right now, it looks like our AI wins. We'll follow our traditional enterprise pattern. Great, thanks a lot.
<unk> strong a first wave of products and our vision.
Skills now to be able to deploy.
A data management platform and to be able to back the rise and install all language model so to be able to get customers and you earn your wings to actually be able to experiment either on a small scale very differentiated in the market like I called out parse our our services organization.
We've been investing at par for a decade in building that service organization. So we're making steady progress you know work we've gone from a vision.
Adhir Kabir: Thank you. This question is from Adhir Kabir with Cape Capital. Please go ahead.
Mark J. Barrenechea: Thanks for asking, guys. Thanks. I want to talk a little bit about, you know, last quarter you saw some initial bookings in AI, and this quarter you called out some strengths there as well. I just want to ask, how have customers really progressed with AI? Mark, you kind of mentioned that a lot of customers are still dipping their feet in the Get Your Wings program, but are some of those early customers, are they progressing faster to maybe larger-scale deployments? Or are they kind of still in the Get Your Wings program, getting their feet wet, type of deployment phase?
To a first a first out of.
Beta products to our first version.
Through our first delivery first customers using and getting value.
Bringing our are our services organization to hire a capability to a very strong bookings growth raising our booking outlook at dancing now how do we can apply it internally on what we think is a breakthrough platform called platform Athena. So I really like the progress that we're making.
Mark J. Barrenechea: Yeah, yeah, thanks for taking the time. It's progressive. And a couple wise statements here. We're going to embed AI in all of us. It's clear that this is a path where you have your automation and you have the learning from the data. And our approach is to provide an AI assist. If we automate a healthcare professional, there should be an AI persona right next to that.
Okay excellent and then I just wanted to touch on one comment you made that the customers are getting value. What are some early learnings from that value that customers are getting how is it helping their organization using these AI products.
Speaker Change: Yeah.
Few shout outs in the in the script.
One is particularly using.
Mark J. Barrenechea: If we automate a tech support specialist, there should be an AI assist next to it. If we automate a contract specialist or a loan specialist, there should be an AI assist right next to it. So we're gonna embed AI everywhere. It's a discussion in every RFP, every RFP. And some customers are in the early stages of exploring AI. Some are medium, a handful or more advanced. But it's just every single
Our business network invoicing transactions.
To under and.
Some of the wider.
Network meta data.
To understand the next generation of food and sustainability.
Going deep into into contracts and understanding revenue opportunities and liabilities, but some of the early learnings are one you have to prepare.
And Ah you may need to consolidate systems, you may need to prepare your data a little bit so preparation is important.
Mark J. Barrenechea: So it is certainly sort of separating out in the market those competitors who have not necessarily moved to the cloud, let alone the resources to deliver a robust AI platform. So, working benefits from our very strong first wave of products in our vision are skills now to be able to deploy a data management platform and to be able to vectorize and install a language model. So, to be able to get customers in your earning lane to actually be able to experiment either in the small or at scale, very differentiated in the market. So, I called out our services organization, and we've been investing in for a decade in building that service organization. So we're making steady progress.
So what they want to do is there there's a lot of agonists out there all of our customers a lot to do but they've got to prepare.
Speaker Change: Second is.
Do not separate your automation and you're out.
You take data out of your automation it immediately rock like a cabbage cause it yet David.
So I think that's another big learning and customers want to do it economically.
And with more open source language models more skills.
Speaker Change: We're still staying on.
Traditional processors, if you will to manage cost that customers want to do it reasonably and this is just going to keep building on itself. All four open tax. So those are some of our learnings.
Speaker Change: Okay.
Excellent Thanks, a lot.
The next question is from Thanos Nasca policy with BMO capital markets. Please go ahead.
Hi, good afternoon.
Regarding the EMC business are you seeing any kind of impact in that business spending from the fact that you've publicly announced your plans to dispose it or.
Mark J. Barrenechea: You know, we've gone from a vision to a first beta product, to our first version, to our first delivery, to our first customer using and getting value, bringing our services organization to higher capability, to a very strong bookings growth, raising our booking outlook, and seeing now how we can apply it internally on what we think is a breakthrough platform, co-platform, FEMA. So I really like the progress that we're making. Okay, excellent.
During the call out in that regard.
Yeah. Thanks, Thanks for the question no steady as you go.
These are products and customers who have.
There have been a better benefitting from decades of investment.
And I understand the long term nature of the platform.
And it's a steady as we go.
Great and then just going back to the question regarding the slightly more conservative license outlook.
Mark J. Barrenechea: And then I just wanted to touch on one comment you made that customers are getting value. What are some early learnings from that value that customers are getting? How is it helping their organization using these AI products? Yeah, I did a few shout-outs in the script.
Obviously licenses more volatile stream harder to forecast, but.
Is there anything else you would point to is it a function media clients deferring.
Cloud deployment model to a greater extent than you were initially expecting or anything else you would call out in that regard.
Mark J. Barrenechea: One is particularly using our business network invoicing transaction, uh...under uh...uh...uh...A-I-N-E-R-O-N-E-R-O-N-E-R-O-N-E-R-O-N-E-R-O-N-E some of the wider network metadata to understand the next generation of food and sustainability, going deep into contracts and understanding revenue opportunities and liabilities. But some of the early learnings are, one, you have to prepare, and you may need to consolidate systems, you may need to prepare your data a little bit, so preparation is important. Customers know what they want to do. There's a lot of vagueness out there on what customers want to do, but we've got to prepare. The second is... Do not separate your automation and your AI. You take data out of your automation, it immediately rots like a cabbage. Because you're getting faded.
And then I think the first partners.
In terms of the customer trends will turn it over to Mark again on the license to keep in mind Q3 has also been seasonally.
Speaker Change: From a license standpoint, and that pattern also applies to micro focus in our license business, while I'm on the micro focus is doing very well as I said, we are they're turning them to organic growth. This year. So that's really the Q3 seasonality, but we are that's what actually calling out and also we're seeing a micro focus do you get involved with it.
Renewal rates et cetera, So really we wanted to expand the customer support line those ranges there and keeping our annual revenue within the range and and accounting for more than license productivity is really what you've seen is <unk> seen the ranges I also shared that in my commentary, we shared the number of Uber.
Mark J. Barrenechea: So I think that's another big learning. And customers want to do it economically. And with more open source language models, more skills, more skills staying on traditional processors, if you will, to manage cost, customers want to do it reasonably. And this is just going to keep building on itself for Open Text.
Dollar deals both on the cloud side as well as on the license side and both remain very strong. So it's more of a Q3 seasonality that you're seeing into the annual dangerous because many of the comments Marc Let me say yeah sure license has a role.
Mark J. Barrenechea: So those are some of our learnings. Excellent. Thanks a lot, Carl. The next question is from Thanos Moschopoulos with BMO Capital Markets. Please go ahead. Hi, good afternoon.
And we work and very secure environments, we work and deeply regulate it.
Thanos Moschopoulos: Regarding the AMC business, are you seeing any kind of impact on that? Thank you.
Speaker Change: Environment and environment is to have very very.
A very high bar on compliance.
Speaker Change:
Mark J. Barrenechea: Thanks. Thanks for the question. No, steady as you go.
What a fantastic nuclear platform.
That requires license in a private cloud, we are where we want to Uh huh.
Thanos Moschopoulos: These are products and customers who have been benefiting from decades of investment and understand the long-term nature of the platform and its study as we go. Great. Next, going back to the question regarding the slightly more conservative likeness outlook, obviously, you know, likeness is a more volatile stream, harder to forecast, but is there anything else you would point to? Is it a function maybe of clients preferring a cloud deployment model to something we were initially expecting or anything else you would call out in that regard?
Our customer security.
T O D and other community platforms.
That require licenses as well, but was caught up with time is that license has a wall and it's gonna have a role in certain types of of regulatory and deeply compliant environments environments that requires the utmost trust.
And in security has a role in the private cloud as well and we've sort of found our natural level like in our license business.
So it's a dentist that has a role.
And it's also a place where we can integrate to our hybrid cloud strategy.
Hybrid cloud strategy also mean SAS and private cloud.
Speaker Change: So where the license business, it's got a role but the roll is clearer today than it was five years ago.
Mark J. Barrenechea: And, you know, I think the first part, then, is in terms of the customer experience. We'll turn it over to Mark. Again, on the licenses, keep in mind, Q3 has also been seasonally, you know, lower from a license standpoint, and that pattern also applies to Micro Focus in the license business, while, you know, when Micro Focus is doing very well, as I said, we are returning them to organic growth this year, so And also, we're seeing, you know, Micro Focus do very well with the renewal rates, etc., so really, we wanted to expand the customer support line, those ranges there, and keep our annual revenue, you know, within the range, and account for more of the license volatility is really what you see in the ranges. I'd also like to share that, in my commentary, we discussed the number of over-million-dollar deals, both on the cloud side, as well as on the license side, and both remain very strong, right? It's more the Q3 seasonality that you're seeing in the annual ranges.
Alright. Thanks.
Okay.
Speaker Change: The next question is from Raimo <unk> with Barclays. Please go ahead.
Great. Thank you. This is Jeremy on for Raimo. So just on micro focus maybe focusing on the product side can you speak a bit to which areas of the business are seem most interested at the moment, whether it be a you know Idaho verdict or maybe some of the security products. Thank you.
Definitely happy to thank you Jeremy So our block it's been a great year, one and we're onto a year or two today marks the first year anniversary and if you'll just allow me we reshaped a shrinking business informed it into an innovative growing.
One.
And it was at first it was fantastic first Gen. I want thank everyone for their support in terms of innovation and growth. Let me provide a few shout outs IHOP, our itr IC operations management.
Speaker Change: It's all about the next generation of products around observe ability.
And extending service management outside of the IP environment to corporate wide service management desktop priority in terms of security, it's about bringing yes into SaaS.
Speaker Change: Identity management.
Thanos Moschopoulos: Do you have any other comments, Mark, you want to share? Yeah, sure. License overall, and we work in very secure environments. We work in deeply regulated environments and environments that have a very high bar on compliance. We want a fantastic nuclear platform that requires licenses in a private cloud. We want many customer security, DoD, and other community platforms that require licenses as well.
And to edge computing.
It's about ADM and having that end to end lifecycle.
Speaker Change: Platform Athena has many components to from ADM so getting.
Bringing AI.
This AI and aviators and too often to the developer experience.
Speaker Change: We introduced a new Iot platform based on core broke up.
And someone called G by the.
Mark J. Barrenechea: But what's clear now is that the license has a role. And it's going to have a role in certain types of regulatory and deeply compliant environments, environments that require the utmost trust in security. It has a role in the private cloud as well. And we've sort of found our natural level, right, in our license business. So, Thanos, it has a role.
G past muscles.
You can find it on our website and we're very excited to bring in a higher scale machine transaction data into our information cloud across all and then of course, all things cloud.
Speaker Change: The cloud SAS.
And AI embedded across ipod security.
M I O T. I'll also note.
Mark J. Barrenechea: And it's also a place where we can integrate our hybrid cloud strategy. In a hybrid cloud strategy, you also need DAS and private cloud. So, we're in the license business. It's got a role. But the role is clearer today than it was, you know, five years ago. I really have a flying face.
In my comments of our 63% cloud bookings growth on our raised outlook for the year to 25%, 30% cloud bookings growth Microsoft Ikea.
I keep calling them Microsoft So we didnt buy Microsoft we bought micro focus.
I I I noted that micro focus cloud bookings all contributed to that 63% growth as well and will begin to contribute more over time.
Okay.
Got it thank you.
Thank you I did not enough our acquisition of Microsoft search, it's pretty quick [laughter].
Mark J. Barrenechea: Thank you. The next question is from Raimo Lenschow with Berkeley. Please go ahead. Great, thank you. This is Jeremy on behalf of Raimo.
Yes, Thank you Jeremy.
The next question is from Stephanie price with CIBC. Please go ahead.
Stephanie Price: Good afternoon, Mark you mentioned M&A, so simply cannot go down I'm not make resource, but you did mentioned strategic M&A in your prepared remarks, but how should we think about the balancing M&A and organic investments and shareholder capital return here.
Raimo Lenschow: So, just on a micro-focus, maybe focusing on the product side, can you speak a bit about which areas of the business are seeing the most interest at the moment, whether it be, you know, EYAL Vertica or maybe some of the security products? Thank you. I'd be happy to.
Yancey divestiture.
Mark J. Barrenechea: Thank you, Jeremy. So, Mark, it's been a great year one, and we're on to year two. Today marks the first year anniversary. And if you'll just allow me, we took a shrinking business, formed it into an innovative, growing one. And it was, of course, a fantastic first year.
Yes, okay. Thanks, Stephanie.
Well look we're we're we're excited to.
A complete the divestiture and as I noted were.
We're on track such.
Stephanie Price: Subject to closing conditions and regulatory approvals.
And we expect to close by the end of our fiscal year.
And when we do so our intent is to de.
De lever.
Mark J. Barrenechea: I want to thank everyone for their support. In terms of innovation and growth, let me provide a few shout-outs. ICONS, our IT Operations Management. It's all about the next generation of products around observability and Extending Service Management Outside of the IT Environment to Corporate-Wide Service Management. That's our priority. In terms of security, it's about bringing it into staff, Identity Management, and Edge Computing.
And bring our leverage under three acts.
Stephanie Price: And to return to full stack capital Allocator.
And the Investor materials, we're looking to return.
30% of our approximately 30% of our free cash flow via dividend and buyback.
And that allows 70% of our available capital available for other other purposes, including M&A and you should expect us to return to M&A and that M&A will be strategic it'll be focused on a R. R.
And and cloud assets that drive future organic growth.
Okay. Thanks.
And then I also want to circle back on investments in AI cloud and security.
Mark J. Barrenechea: It's about ADM and having that end-to-end life cycle. Then our platform Athena has many components from ADM, so bringing AI, business AI, and aviators into the developer experience. We introduced a new IoT platform based on Port Vertica and some of those GBAS modules. You can find it on our website.
I think it shouldn't these investments continue to post fiscal 'twenty four and how should we think about R&D as a percentage of revenue going forward from here.
Yeah, absolutely I think that's definitely so.
Mark J. Barrenechea: And we're very excited to bring in higher-scale machine transaction data into our information cloud. And then, of course, all things cloud, private cloud, staff, and AI embedded across ICOM, Security, ADM, and IOT. I'll also note in my comments our 63% crowdbooking scope and our latest outlook for the year, the 25 to 30% crowdbooking scope, Microsoft. I keep calling them Microsoft, so if you didn't buy Microsoft, we bought Microfocus. I noticed that Microfocus, I was looking..., has contributed to that 63% growth as well and will begin to contribute more over time. Got it, thank you. I did not announce our acquisition of Microsoft, so that's a good question. Thank you very much. The next question is from Stephanie Price with CIDC. Please go ahead.
Hum.
Today, we're actually looking at we actually called out R&D as a percentage of revenue at 14% to 16%. So that's the largest scale expect that to continue.
In terms of AI investments, both in R&D, and sales and marketing and for fiscal 'twenty four it is 18% to 20%.
Stephanie Price: So I would say expect us to keep at that range. Obviously at the scale of the dollars would be higher as well and also the deployment of R&D as Mark mentioned.
800 engineers deployed towards AI and related activities to the teams are spending a lot of time not just on the investment but with that with investments are going.
Yes.
Speaker Change: Great. Thank you very much.
Yes. Thank you. Thanks, Thank you Stephanie and just to amplify a point from.
Madhu.
Speaker Change: Platform Athena, so, let's go to significantly raise our productivity and output.
And then let's see I look through two decades, three decades of leading engineering organizations and how they've evolved over time.
And how organizations like open text has looked to balance our incredible talent globally and through automation through systems.
Through it all the open source wave through better tools, Oh, there's another wave coming we just called out.
Stephanie Price: Good afternoon, Mark. You mentioned M&A, so some people will go there, not Microsoft, but you did mention Stages Week M&A, and you have a pair of remarks. So how should we think about the balance between M&A and organic investments and shareholder capital return here post the AMC divestiture? Yes, it sounds great, Thanos. Thank you, Stephanie. Well, look, we're excited to complete the task. We're on task, you know, subject to closing conditions and regulatory approval, and we expect to close by the end of our fiscal year, and when we do so, our intent is to de-level, and bring our leverage under 3S, and return to a full-stack capital allocator. If you see any of that sort of material, we're looking to return 30% of our... approximately 30% of our pre-tax load through dividends and buybacks.
And some companies will use it well some may stumble along the way for US we have a very clear vision.
And we're gonna be building, our proprietary platform internally.
Speaker Change: To manage roughly a billion lines of software.
And how to auto generate cases, how to auto generate interfaces to api's, how to accelerate learning I think the talent, we hire in the future and engineering is going to be radically different and radically elevate it Athena will be able to take descriptions and generate co.
So that next wave of efficiency and we'll talk more about that when we get to a 0.5 play out.
Mark J. Barrenechea: And that allows 70% of our available capital to be available for other purposes, including M&A. And you should expect us to return to M&A. That M&A will be strategic; it will be focused on ARR and cloud assets that drive future organic growth. Thank you.
The R&D expense per Seth the nature of this in large scale tech companies are going to change. The cause is that there's a very interesting wave of AI is coming and how we're going to be building software.
Yeah, and it's definitely if I could just add one more R&D is a very broad category, just given our a spectacular south bookings growth and we talked about visibility into 25 and 26. We are also investing in what we call information security inside the CECO organization. We're also investing in cloud operations and cloud infrastructure.
Stephanie Price: And then I just want to circle back on the investments in AI and security. We think as soon as these investments continue post-Fiscal 24, and how should we think about R&D as a percentage of revenue going forward? Yeah, absolutely. I think that's definitely true.
And so the hyper scale up costs I did want to mention in terms of investments, it's going instead of above the line and below the line as well.
Madhu Ranganathan: Today, we're actually looking at, and we actually called out R&D as a percentage of revenue at 14 to 16 percent. So at the larger scale, expect that to continue. In terms of AI investments, it's both, it's R&D and sales and marketing. And for Fiscal 24, it is 18 to 20 percent. So I would say expect that to stay the same.
Great. Thank you for the color.
Thank you.
The next question is from Paul Treiber with RBC capital markets. Please go ahead.
Oh, thanks, very much and good afternoon Jim.
Madhu Ranganathan: Obviously, at scale, the dollars will be higher as well. And also, the deployment of R&D, as Mark mentioned, 800 engineers deployed for AI and related activities. So the teams are spending a lot of time not just on the investments but where the investments are going. Great, thank you very much.
Your recent comments on as you know were very helpful to understand what it is.
<unk> and <unk>.
<unk> AI to improve the productivity of your your R&D.
R&D teams.
Jim: When do you expect or do you see improving productivity across the entire organization through AI over the next several years is that something that we could expect going forward.
Mark J. Barrenechea: Yes, and thank you, Stephanie, just to amplify a point from Madhu. Talk to us on a theme that doesn't start a significant array for productivity and output. And I looked through three decades of leading engineering organizations and how they've evolved over time and how organizations like Open Text have looked to balance our incredible talent globally and through automation and through systems. Through open source ways, through better tools, there's another way of coming, which is called AI.
Jim: Yeah.
Voice and thanks for being on the call absolutely.
And.
No we have room to improve our margin right now we're focused on bookings and revenue growth and I only and I already decided on the call today go into one area very large area for us.
Mark J. Barrenechea: And some companies will use it well; some may stumble along the way. For us, we have a very clear vision, and we're going to be building our proprietary platform internally to manage roughly a billion lines of software and how to auto-generate cases, how to auto-generate interfaces to APIs, how to accelerate learning. I think the talent we hire in the future in engineering is going to be radically different and radically elevated. Athena will be able to take descriptions and generate code.
Formative area for us.
<unk>, which is the core of the company, we're an engineering from rice and wheat create IP and products, but when we look across the entire company. We have other projects that we're working on and that will come to fruition in the coming years and increased productivity in our support organization.
And the pre sales organization and the renewals organization.
Jim: So we can talk more about where we look to deploy them, but I wanted to be very grounded.
Mark J. Barrenechea: So that next wave of efficiency, and we'll talk more about that when we get to our F25 plan, that the R&D expense percent, the nature of this in large-scale tech companies is going to change. Because there's a very interesting wave of AI coming, and how we're going to be building software. Yeah, and Stephanie, if I could just add one more.
Jim: And kind of the first transformative area that we have our concrete plants are and it is sort of a multiplier as a force multiplier to be able to get our engineering team more productive next generation of talent accelerating product to market.
We think that's the area that will have the.
Nearest term and highest impact.
Madhu Ranganathan: R&D is a very broad category. Just given our spectacular cloud bookings growth, and we talked about visibility to 25 and 26, we are also investing in what we call information security, right, as a CISO organization. We're also investing in cloud operations and cloud infrastructure and sort of hyperscale across. So I did want to mention, in terms of investment, it's going sort of above the line and below the line as well. Great, thank you for the questions.
Speaker Change: Thanks, and then just a.
Second question, just more specifically on the outlook for 'twenty four and when you look at Q4, if you can back into what it implies for Q4 EBITDA margins in the mid <unk>.
When I was at about 41.
0.5% EBITDA margins.
Which is which is quite high and it's close to an all time high for the company.
Speaker Change: What is driving that seasonality the upside and then you talked a lot about Q3, but how do we think about Q4 the drivers there.
Paul Treiber: Thank you. The next question is from Paul Treiber with RBC Capital Markets. Please go ahead.
Mark J. Barrenechea: Thanks very much and good afternoon. Your recent comments on Athena were very helpful in understanding what it is and using AI to improve the productivity of your R&D team. Can, do you expect, or do you see improving productivity across the entire organization through AI over the next several years? Is that something that we could expect going forward? Absolutely.
No problem. Thank you, it's Matthew here because they are important questions. A couple of things one I spoke about the acute cases and attitude, which is actually very typical so again at the EBA level, we are making investments, but Q3 has its own seasonality in terms of people spend payroll spend benefits et cetera. So Q4 is a seasonally strong quarter from a familiar for me now.
Revenue perspective, and a and you will see that benefit a benefit to the EBITDA margin as well and some of the integration expenses, we have for Microsoft <unk> for this fiscal year.
Paul Treiber: And as I noted, we have room to improve our margin right now. We're focused on bookings and revenue growth. And I only decided on the call today to go into one area, a very large area for us, a transformative area for us, which is the core of the company. We're an engineering firm, right? And we create IP and products.
Some of the spend is focused in Q3, we look to optimize some of those in Q4. So I would say the big contributor to Q4 EBITDA margin, it's gonna be a seasonally stronger revenue quarter and a tapering off of some of the expenses and you got to go get absolutely right for the second half of the year.
Mark J. Barrenechea: But when we look across the entire company, we have other projects that we're working on that will come to fruition in the coming years and increase productivity in the support organization, the Pre-Sales Organization, and the Renewals Organization. So, we can talk more about where we look to deploy them, but I wanted to be very grounded in kind of the first transformative area that we have our concrete plans for, and it's sort of a multiplier, it's a force multiplier to be able to get our engineering team more productive, the next generation of talent, accelerate product to market. We think that's the area that will have the nearest term at high speed.
Q4, EBITDA margin will be much stronger than Q3 to get to our annual guidance.
Speaker Change: Hi, Thanks for taking the questions.
Thank you Paul Thank you.
I'll now hand, the call back over to Mr. Barents Sea for closing remarks.
Very good. Thank you everyone. Thanks for joining our call today, we're just delighted with our progress and our momentum.
Barents Sea: You heard us we're investing for growth, we're extending our competitive advantage and strong financial update and we're focused on capital return in the room today as well as go Greg Secord, and we'd like to wish him a happy birthday.
Thanks, everyone for joining and to do myself, Aaron Greg we look forward to engaging on the come.
Days and weeks that ends today's call.
Madhu Ranganathan: Thanks, and then just a second question, just more specifically on the Outlook for 24, when you look at Q4, if you can back into what your Q4 EBITDA margins are, I think the mid-point is at about 41.5% EBITDA margins, which is quite high, and it's close to an all-time high for the company. What is driving that seasonality to the upside? We talked a lot about Q3, but how do you think about Q4, the drivers there? You know, Paul, thank you. It's my pleasure. It's a very important question.
Yeah.
Speaker Change: This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[noise].
Yeah.
Yeah.
Madhu Ranganathan: So, a couple of things. One, I spoke about the Q3 seasonality, which is actually very typical. So, again, at the Uber level, we are making investments, but Q3 has its own seasonality in terms of people spend, payroll spend, benefits, etc. So, Q4 is our seasonally strong quarter from a revenue perspective, and you will see that benefits improve the EBITDA margin as well. And some of the integration expenses we have for micro-focus for this fiscal year, some of the spend is focused in Q3. We look to optimize some of those in Q4. So, I would say the big contributor to Q4's EBITDA margin is going to be our seasonally strong revenue quarter and the tapering off of some of the expenses.
Yes.
Yeah.
Okay.
[music].
Yeah.
Speaker Change: Okay.
Yeah.
Okay.
Yeah.
Yeah.
Yeah.
Hum.
Yeah.
Speaker Change: Yeah.
Okay.
Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Okay.
Hum.
Yeah.
Yeah.
Mhm.
[noise].
Madhu Ranganathan: And you're actually right about the second half of the year; the Q4 EBITDA margin will be much stronger than Q3 to get to our annual gains. Thanks for taking the question. Thank you. I'll now hand the call back over to Mr. Barrenechea for closing remarks. Very good.
Yeah.
Yeah.
Yeah.
Speaker Change: Sure.
Mark J. Barrenechea: Thank you, everyone. Thanks for joining our call today. We're just delighted with our progress and our momentum. You heard us. We're investing for growth. We're expanding our competitive advantage, and strong financial updates, and we're focused on capital return. And the room today is owned by Greg Seaport, and we'd like to wish him a happy birthday. Yeah. Thanks, everyone, for joining us. And Madhu, myself, Harry, and Greg, we look forward to engaging in the coming days and weeks. That concludes today's call. You may disconnect your lines. Thank you for participating and have a pleasant day. Open Text Corp. Open Text Corp. Open Text Corp. Open Text Corp. Open Text Corp.
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Yeah.
Yeah.
Yes.
Yeah.
Yeah.
Yeah.
[laughter].
Yeah.
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Yeah.
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