Q1 2025 Open Text Corp Earnings Call
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I would now like to turn the conference over to Greg Secord, Vice President Investor Relations. Please go ahead.
Good morning, everyone and welcome to open tax first quarter fiscal 2025 earnings call.
With me on the call today are <unk>, Chief Executive Officer, and Chief Technology Officer, Mark J <unk> and.
And open texts, President and Chief Financial Officer, Madhu ringing often.
Today's call will be webcast live and recorded with replay available. Shortly thereafter on the open text Investor Relations website at investors don't open text Dot com.
For today's call, we posted press release.
And Investor presentations online these materials will supplement our prepared remarks and can also be accessed on the open text Investor Relations website.
I'd like to take the opportunity to invite institutional investors and financial analysts to join our open text World 2024, Investor track. It's on Tuesday November 19th in Las Vegas. The open Textural conference is a great opportunity for investors and financial analysts to learn about the latest product innovations with full conference access, allowing open dialogue with leadership.
Customers and partners on site, the Investor track, we'll be available to investors attending in person and virtually by webcast or live streaming and replay you can contact myself or the investor relations team for more details and to register.
In addition, I'm pleased to inform you that open text will be participating in the following upcoming investor conferences, including the TV Technology Conference on Monday November 25th in Toronto, with Mark Wells, Fargo's Technology media and Telecommunications summit.
December 4th in Rancho Palos severe dis and Barclays Global Technology Conference on Thursday December 12 in San Francisco with Madhu.
And now onto the reading of our Safe Harbor statement.
During this call, we'll be making forward looking statements relating to the future performance of open text. These statements are based on current expectations assumptions and other material factors that are subject to risks and uncertainties and actual results may differ materially from the forward looking statements made today.
Additional information about the material factors that could cause actual results to differ materially from such forward looking statements as well as risk factors that may impact future performance results of open text are contained in <unk> recent forms 10-K, and 10-Q as well as in our press release that was distributed earlier this morning, 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 reconciliation 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'll hand, the call over to Mark. Thank you.
Speaker Change: Greg and.
And welcome everyone to today's call.
Let me start with in Q1, we delivered to our revenue quarterly factors as well as exceeded expectations and adjusted EBITDA and adjusted EPS.
Speaker Change: We grew our adjusted EBITDA percent year over year to 35%.
And this growth comes from sustained efficiency gains even after the divestiture of the ultra high margin AMC business.
Over the last two quarters, we purchased and canceled 772 million shares at an average price of $30 43.
Expect us to continue purchasing our shares in.
In Q2 on deeply excited about our momentum.
We are strengthening our competitive advantage with titanium ex our next generation autonomous information management platform powered by AI and security coupled with strong investments, we're making in our enterprise and SMB go to market strategic partners and customer success organizations, all of which leads us to a straw.
Speaker Change: <unk> second half of the fiscal year.
Speaker Change: Further we are reaffirming our fiscal 'twenty five targets in our outer year aspiration onto Q1. Our Q1 results include delivering $1 $2 7 billion in revenues well within our quarterly factor range of $1 25 billion to $1 3 billion.
Q1 is a seasonally lower quarter yet it was the largest Q1 of enterprise cloud bookings in our history up 10% year over year and up 53% over three years.
Speaker Change: As it relates to our cloud business Q1 marked our 15th consecutive quarter of organic growth.
$457 million or revenues up one 2%, one 3% and we expect this to ramp throughout the year.
We also had strong customer wins at Raytheon Fedex Virgin Mobile Alaska Airlines Nippon gas, the European Medicines agency, and Dick's sporting goods across content business network digital operations and security.
Financial services technology public sector health care, and biotech and consumer packaged goods, where top industries for our book of business revenue by Geo Americas, 57% with the majority in the United States EMEA, 33% in APAC and Japan, 10%.
Speaker Change: We had 38 deals over $1 million and the majority being cloud based deals we had 20 wins related to our jet AI aviator offering we keep building strength and progress every 90 days or aviators more agents easier to use and less expensive to operate.
Speaker Change: AI is a long term opportunity and a key priority for the company.
Speaker Change: The net cloud renewal rate of 94% and of course, adjusted EBITDA of 35%, which is year over year percent growth inclusive of the AMC business. This is incredible progress and reflects our deep focus on capturing the large margin opportunity ahead of us and.
And adjusted EPS of <unk>, 93, well above expectations.
Looking ahead into Q2.
We expect total revenues of $1 $2 9 billion to 134 billion supported by a strong pipeline and customer engagement continued adjusted EBITDA strength of 34%, 35% continued enterprise bookings strength ramping towards our annual target of 25% growth and we do we will expand our outlook here in a few of them.
Q2 is a tougher year over year compare given the large AMC contribution and the license revenue from grants of certain IP rights in Q2 of last year.
The business is executing well and as I kicked off the call, saying, we're reaffirming today, our fiscal 'twenty five targets of total revenues of $5 3 billion to $5 4 billion, that's 100 $100 million spread ex AMC. This is constant to 1% growth.
Adjusted excuse me annual adjusted EBITDA of 33% to 34% free cash flow of $575 million to $625 million and we're on track to return approximately $570 million of capital via our dividend and share buyback programs. It will be a record year of capital return for open text.
As you can see from our comments today, we're expecting a stronger second half to our fiscal year driven by four factors.
Expect demand for titanium ex our next generation Autonomous information management platform led by our business cloud business AI and security.
Factor, realizing our new go to market investments led by Todd and the sales organization third factor expanding partner contribution led by Sandy Ono and our fourth factor realizing our new customer service investments led by Paul and the renewals professional services and customer success teams. Let me expand on these drivers more and how they point to.
A stronger second half first our competitive advantage clearly gets stronger with titanium X or cloud editions twenty-five dot too and we are on track for the final delivery in the second half of this fiscal year information is the heartbeat of every organization. It flows through every process every workflow every innovation.
Speaker Change: Every experience.
Touches all roles it enables the modern organization.
Speaker Change: So <unk> X will elevate our customers capabilities and significant ways.
Speaker Change: <unk> 2020 for November will bring this all to life and we hope to see you there.
As a preview customers and partners will see key differentiation and compelling reasons to adopt.
Speaker Change: Our new titanium ask first a modern SaaS platform for our core information solutions, because I'd like to say everything downstream of SaaS is goodness, it's faster time to revenue is easier to expand capabilities and is higher margin.
Second key piece, a private cloud that is global secure trusted and autonomous. So we've obviously made significant progress here over the last few years and once in our private cloud we keep customers current on the latest versions latest security and the latest AI. So customers are free to run their business and elevate.
And evaluate our new innovations we provide every 90 days.
Third is our compelling new capabilities in each of our business clients. For example in the content World and content cloud is all about SaaS, AI and integrated security and deep integration into business applications.
Speaker Change: And our business network, it's about being global global supply chain is global E. Invoicing, a global supply chain control tower that can see the.
See it across all your suppliers and new traceability applications from being determined cobalt fields in Africa to finished electric vehicles in Germany as an example.
Security, we are delivering a full stack of protection from users applications E Mail network and cloud we call it xdr as a service.
Titanium acts as a major step forward for enterprise and SMB security are composed of all approach in the cloud to identity to identify detect and respond.
Active threats, we will demonstrate our next generation <unk> as a service that open tax world.
Security trusted compliance is a major investment area for open text other compelling areas item discovery and observe ability at our new corporate helpdesk expanding to include HR, It and all internal <unk> organizations into one unified corporate Helpdesk, all all focused on elevating the employee.
ADM, we're introducing Dev ops for large scale software organizations and then SMB. We are already live on our next generation secure cloud platform for the partner community to easily transact with you may have seen some of our social media last week and going live and secure cloud and then lastly wave II Gen AI aviators.
Speaker Change: Bill for heavy industry and embedded everywhere and open text software titanium X, we'll have 15 aviators and over 100 agents as we like to say never bring a human to do the work over machine, we will be announcing support for Microsoft Co pilot. In addition to a Google vertex and BYOB bring your <unk>.
<unk> language models into our private cloud so youll see all of this that open text World 2024, it's a packed agenda of innovation and the value of that that comes at the right time for our customers and open text for open text to bring this all together for them in a powerful way I hope to see you there at open text world.
Next let me expand on our new go to market investments led by Todd and the sales organization as mentioned in our last earnings call, we're making investments in our go to market across three priority areas people customers and innovation.
On people, we continue to find much success, attracting new sales talent, we're right on our AE and FC capacity targets. In addition, our new unified Global sales organization structure has allowed us to launch unified programs to the entire organization on a global basis.
Speaker Change: All within this dynamic marketplace of cloud AI and security and the first program we've launched.
It's cross selling security across all of our AI is particularly important with our new <unk> as a service coming out.
Open text always puts customers first and we're finding very strong momentum in engagement are cloud AI pipeline is the largest it's ever been and up 20% year over year.
On sales innovation, we have deployed internally open text AI. We're now live we call. It Ali Dot AI to act as a sales aviator for the sales force I'll be demo Ing life, our new Ali Dot AI tool at open text World and how we are using aviators internally to generate.
Proposals accelerate sales velocity and win more.
We are seeing very favorable impact in our sellers' ability to build effective account plans, our ticket articulate value propositions and build compelling business cases now live on open text AI.
Speaker Change: Third.
Speaker Change: In support of a strong second half.
Longer second half is moving.
Speaker Change: Moving onto expanding partner contribution the demand signals for information management are strong our customers see the growing availability of business AI for many many many places including the importance of effective information management solutions.
You need strong data management to have strong AI.
I've talked about how we help companies operate in the world of the Internet of disconnected clouds, you'll hear at open text or next big steps in this area on how open text makes multi cloud work.
You see all enterprise customers have many cloud providers. This is a new normal I can't meet a customer I can't find a customer that already has one cloud provider our customers have many cloud providers and no customer standardizes just on one cloud provider. So further customers will have multiple AI suppliers as well it is a multi cloud world.
Speaker Change: We see a growing role for open tax where we make multi cloud work for one source of truth for data user authentication across all these systems workflow across all the cloud search across all the clouds governance across all these clouds.
We make multi cloud work in achieving this our strategic partnerships are more important than ever and at all layers of the enterprise staff from the app layer to infrastructure to security and to the supply chain for.
Speaker Change: For example on SAP.
We continue work closely to remain day, one current across all their amazing cloud solutions on Google We've expanded our support to include their full AI stack and services.
Speaker Change: On Microsoft we have expanded our partnership to now include Copilot for security, we continue to work with Salesforce that our business clouds work in tandem with their business class titanium <unk> integrations across content security Niton for Salesforce. We've recently added content cloud for Guidewire to expand our presence in the insurance industry and for Amazon Our business now.
We're better integrates and leverages their commerce platform.
Speaker Change: We will continue to foster our strategic partnerships to ensure open tech solutions are at the center of the multi cloud world, we make multi cloud work.
Speaker Change: And then finally, the support of a stronger second half.
We will increasingly see returns on our customer success investments on our last call. We told you. We informed that we would be building a new digital renewal center and going live July one and we went live July one we will continue to take humans out of the renewal process and in doing so our business scales with lower friction.
Lower cost and our best people can help our customers expand consumption.
Speaker Change: This team has an incredible first quarter and exceeded our expectations. So a lot more to follow in this particular area.
Speaker Change: I'd like to conclude.
Speaker Change: With two items first join us that open tax world and see the momentum we see in <unk>.
Speaker Change: Engage with our customers partners leadership and product teams directly.
Tuesday keynote will center on demonstrating titanium X with AI embedded everywhere as well as our new security and multi cloud capabilities. We have over 150 sessions and speakers describing how they are using our business clouds business, AI and business technologies, including security.
See how customers are redefining their relationship with their data staying secure in the age of increasing cyber attacks and what's needed to leverage the next generational cloud Nei. We also have a special investor analyst track that Greg to sign you up for so just feel free to reach out to Greg or the IR team.
Speaker Change: Second comment and conclusion is we have a strong belief in our four point strategy to create shareholder value strengthening our competitive advantage accelerating cloud growth.
Capturing the large margin opportunity in front of us and strong capital returns via cash flow expansion dividends and share buybacks.
Of course <unk> three factor. These four factors assume stable externalities and positive economic drivers. We continue to monitor the economies in Europe, North America, APAC, and Japan, and we're prepared to adjust our approach if we need to the.
The team is focused on delivering to our F. 'twenty five targets building, a strong longer term business and creating value for all our stakeholders. Our fundamentals remained strong demand is there and we have the innovation our customers need. This is a winning strategy and we see our path very clearly today with that I would like to thank.
Speaker Change: You for joining us today, and maybe the one that brings peace spring piece for all I'd like to turn the call over to Jim.
Thank you Mark and thank you all for joining US today, please refer to the IR materials posted on our website during.
Jim: During Q1, we executed very well on our operational efficiencies and exceeded our plan to bring operating leverage to the P&L, we had committed to delivering on operational efficiencies and in Q1, we led with higher adjusted EBITDA performance and delivering 35% adjusted EBITDA in Q1, excluding the impact of <unk>.
High margin AMC business is a significant achievement.
Now turning to the numbers I will share with relevant year over year comparison, excluding the impact of AMC divestiture.
Our Q1 results reflect typical seasonality we experienced in the September quarter Q1, total revenue of one point to 69 billion was down 11% or down one 8% when adjusted for the AMC divestiture Q1 cloud revenue was 457 million up one 3% our cloud business continues to exhibit strong performance with <unk>.
Bookings of $133 5 million up 10, 3%.
Our our $1 billion 52, 5 million was down eight 4% and down one 1% when adjusted for the AMC divestiture.
Our percentage of total revenues was approximately 82, 9%.
Customer support was down 3% when adjusted for the AMC divestiture.
And moving to other financial metrics GAAP net income was $84 4 million or 32 cents diluted EPS up six 7% year over year GAAP gross margin of 71, 7% was up from 71, 4% year over year non-GAAP gross margin of 75, 8% compared to <unk>.
77, 3% it reflects the AMC divestiture and continued investment in AI Global security and in our global cloud infrastructure and adjusted EBITDA of $443 8 million or 35% as mentioned earlier, it's reflected extreme operational focus during the quarter non-GAAP diluted EPS.
<unk> was nicely down seven 9% also due to the impact of AMC divestitures.
Our overall working capital performance remained strong with Dsos at 42 days a decrease of one day from 43 days in the last quarter we.
Jim: We reported negative $77 8 million in operating cash flows and negative $117 1 million free cash flows in the quarter and this reflects the one time tax payment and the gains relating to the AMC divestiture included in our Form 10-Q is a total cash payments during the quarter at 200.
Jim: $40 million.
Our GAAP tax rate in the quarter was 2% and that reflects the expiry of certain I've sat in uncertain tax positions due to statute limitations.
One time acquisition charges and accruals such factors are unique to Q1, we.
We expect our annual GAAP tax rate to be in the mid teens for fiscal 2025.
Jim: As we communicated during our last earnings call today, you will see in our filings that we defined and standardized on net renewal rate or an hour, which is a better reflection of our cloud of our business as it now includes the expansion and impact driven by customers, who they knew and migrate to the cloud.
Now moving to outlook first let me draw your attention to our Q2 quarterly factors included in slide nine of our financial results and targets presentations and I would add to marks comments.
We expect 129 billion to $1 34 billion of total revenue and a one point theater, two 5 billion to 1.055 billion.
Speaker Change: And.
Speaker Change: And that museum for size that this Q2 has a difficulty it'll be a compared as to probably had both AMC revenue and higher license revenue from the grants of certain IP tightened fiscal 'twenty four neither is expected to occur in Q2 fiscal 'twenty five.
Maintain an incredible focus on costs to continue capturing a large margin opportunity with targeting adjusted EBITDA margin of 34% to 35% during Q2.
In today's call are second half of the year commentaries are very important for all of you to note, we expect stronger momentum in revenues and cloud bookings during the second half of this fiscal year and a seasonally strong Q4 for all the reasons outlined by Mark earlier and with respect to expenses, we will continue to invest in our people as we experience.
Retention and low attrition rate.
As you all have seen in the past our second half had expenses will be higher than the first half starting in Q3, specifically in January we expect higher cost due to annual employee merit increases typical calendar year benefits cost Atlas and vacation accruals I would recall Mark's earlier comments, we are making investments.
Speaker Change: In our go to market across three priority areas people customers and innovation, we have much success in attracting new sales talent and we expect to maintain our capacity targets in sales account executives and solution consultants. So with all of that we have factored strong second half business momentum in revenues and cloud bookings.
As well as the additional spend and investment into our fiscal 'twenty five targets, which I will summarize shortly and also included insights 10, and 11 of our Investor presentation.
It's a cloud revenue of $1 85 to $1 9 billion and.
Annual recurring revenue of four to five to $4 3 billion total revenues between five three and $5 4 billion, which is constant to 1% growth excluding AMC.
Speaker Change: Adjusted EBITDA margin range at 33% to 34% as a reminder, in August we raised our adjusted EBITDA outlook for fiscal 'twenty, five up 100 basis points to the 33% to 34% range, we are well positioned to meet our adjusted EBITDA targets.
Speaker Change: As a reminder, our 2025 adjusted tax rate is expected to be in the mid 20.
Free cash flows of $575 million to $625 million.
And let me now summarize our path to grow adjusted EBITDA and free cash flow during fiscal 'twenty five on an annual basis.
Speaker Change: We are experts in driving meticulous expense management on a global scale and that is what we're focused on.
And regarding cloud revenue growth future margin expansion will be driven by higher revenues, including more SaaS, we will deliver in the cloud with lower cloud cost and more cloud automation for the full year fiscal 'twenty five we expect non-GAAP cloud gross margins in the low Sixty's, we are beginning to leverage AI internally.
Optimization plan, we announced earlier to locate great talent in the right places is going well higher EBITDA will directly support free cash flow given the strides we've made on working capital and efficient capital expenditures driving what we expect to be the highest return of capital to shareholders in open Texas history.
Speaker Change: During fiscal 'twenty five.
As we have communicated at four point strategy to create shareholder value, capturing the large margin opportunity and cash flow expansion they remain front and center.
Speaker Change: Strong efforts during the last two fiscal years is paying off our efforts continued in Q1, posting 35% adjusted EBITDA in Q1, which is better than the last year, even after the divestiture of high margin AMC business. The decisions, we make today alongside programs and projects to deploy will set us up well beyond fiscal 'twenty five inches.
<unk> 26, and 27, we remain on target for fiscal 'twenty five have momentum towards meeting our long term aspiration and we intend to update you annually on fiscal 'twenty six 'twenty seven.
Behalf of open text I would like to thank our shareholders, our loyal customers and partners for their continued support and always fixed thanks to team up in Texas. We look forward to seeing you in person at open text, whether in November I will now request the operator to open the call for your questions.
Thank you well now begin the analyst question and answer session analysts who wish to ask a question May Press Star then one on their touchtone telephone to join the question queue.
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I would now like to I.
Our first caller, it's from Kevin <unk> with Citi. Please go ahead.
Kevin: Okay, great. Thanks for taking my questions here.
I guess I just wanted to start a little bit on kind of maybe the demand environment and the macro and what youre seeing out there.
I guess was there maybe any shifts in deals are you seeing anything kind of get pushed all of that maybe gets a little bit more confidence in that in a second half that maybe is impacting things in the first half would be great to get a little bit more details on what it is thats may be going on out there in the general environment.
Yeah, very good and good morning, Stephen Thanks for.
Joining the call we're here in California, as well so our early start today, thanks for joining.
The demand environment is stable.
Even though I called out were going to continue to monitor.
The volatility in the World, we see demand is stable the drivers for us are all point towards a stronger second half.
Kevin: We have the largest release of our all of our software and cloud in the history of the company coming up.
Kevin: <unk>.
Or cod additions twenty-five dot to we've been out kind of world Chronicle laying in well demo ing.
Kevin: The.
Kevin: Steady capabilities.
We've been we've been adding so.
Directly to your question, we see the demand environment is stable. So we're monitoring it as everyone else's, we have a very large.
<unk> push that's going to drive demand for us in the second half. We've just gone live on our new SMB platform that I highlighted we used to which project El Dorado, which is now live our secure cloud, which went live last week.
Kevin: And we got we got a big product upgrade.
In security ex Dr. As a service.
Kevin: We have significant step ups in <unk>.
For a more micro focused acquisition and we have a very large SaaS push coming with titanium acts and everything downstream of SaaS is just goodness is faster time to revenue higher margin and easier to to expand for us, but as we noted we have a tougher compare in Q2.
High quarter for for AMC, and we have our one time.
Kevin: Our royalty from certain Oh from certain IP grants from a year ago. So demand is stable, we're executing well and we're looking for a stronger second half.
Okay. That's that's.
That's helpful context, there I guess, just a quick clarification just.
Speaker Change: Can you remind us what the IP rate impact is for <unk> that would be embedded in that comp and then I guess secondarily, just thinking about the second half and the execution that needs to go into that I guess as.
There are certain things that you are seeing on the deal environment or and go to market investments you are making and that gives you that confidence and the liner side tenants of our pipeline.
Speaker Change: To kind of close on that for the second half.
Speaker Change: Yeah, I mean I'll take the second part first.
Kevin: Which is the two things the things that give us confidence or as we highlighted in the script.
Kevin: We're on track for delivery of titanium.
On our people side on the sales force we're at capacity.
As I noted in the script, it's just us incredible thing or we're doing credibly well on talent attraction and retention were at record rates of retention in the company.
I also noted that our pipeline is up 20% for the second half year over year.
Kevin: Which is very tangible rack capacity our pipeline is up we have a product release.
And we're also now live on AI internally, we're going to demo it at open text World. So Ali that AI, where we're enabling our new hires and are are experts in the sales force to what could take a couple of weeks to build proposals. We can now generate out of content management.
So we think thats going to increase our response velocity in our win rates. So those are some very tangible thing Steve.
In relation to the grant of certain IP rights.
It's as we've chronicled last year.
Didn't talk about the quantum because were always in the business of IP and secondly, the nature of this particular item there were a confidentially asked about the confidentiality aspects. So we have no new disclosure from last year.
And we did disclose the quantum last year.
Kevin: Yeah.
Alright, well I appreciate the I appreciate the context, there and.
Thanks again for taking the questions. This morning.
Speaker Change: Yes. Thank you. Thank you.
Speaker Change: Okay.
The next question is from Samad Samana with Jefferies. Please go ahead.
Hey, everyone. This billing fitzsimmons for spot.
First for you Mark you may have talked about in the prepared remarks I may have missed it but it's been a couple of quarters asset project Athena was about.
Speaker Change: Would be curious if you had any updates on progress thus far and maybe going a step further is there any anecdotes around early efficiency gains or early internal feedback from employees because you'd be implemented these changes.
Very good thanks, Bill and thanks for your question, Yeah, we had kicked off a handful of initiatives.
Kevin: One one.
What I just talked about right, which is all <unk> dot AI I can't wait to show you an open desks for all those going to be main stage, we have our sales force on stage showing how we are using 10 years of data.
To enable our sales force to auto generate proposals for you imagine an AE, who is doing a fed ramp proposal who's new to the company and we're all my fed ramp solutions, what's the best presentation series III questions produce me a stellar generated responds to give to my client.
We're live on that now and it's just going to keep getting better and better as we tune. It. So the early feedback is very positive on that.
Kevin: Project, Athena, which is for developers so Ali that AI is for our sales force and support and Athena is for our developers. So we expect with $25 two to generate our first applications.
And those apps will be generated on top of all of our API services. So we call our API layer. So our strategy is to build apps and to deliver Aps.
On the API, so we're going to generate software on top of those API.
And Thats, what <unk> is going to do and we will have our first production apps by 'twenty five dot two or April of next year, we're just four or five months away.
The early feedback is fantastic.
API, how do I use them what are kind of the templates.
To generate simple things like how to upload a file.
How do I build a screen how do I do.
Kevin: Security So Athena.
First generation of software is focused on basic apps is focused on language translation.
We deliver our product now put into the 40 localize it across 40 countries and generate the documentation. So we'll start to see the impacts with titanium at $25. Two early feedback great and its working right in the areas, where we thought we could which is apt generation.
Localization and documentation and that's the wave one for us.
Kevin: For developer experience productivity.
And then that's Super helpful. Barak, and then if I could sneak in another I know a couple of quarters back I think glad correct duration.
Jeff: This is Jeff.
Kevin: But.
Sure sure.
I'm sorry, three years to four years is that continuing to roughly track it for years that one quarter into 2025, and then just help us think about kind of the pace of on Prem to cloud conversions Youre seeing in your business in 2025 rare.
Kevin: Relative to what you saw in late fiscal 'twenty four.
And believe me I didn't hear the very first part of your question Didnt come through if you if you don't mind repeating it.
Speaker Change: The first part was just.
I know a couple of quarters ago cloud contract durations stretched.
Years to four years is that continuing to track at Russell for years.
Speaker Change: Yes fair enough said I got it. Thanks, Bill It look I'd note on Sap's earnings call. They talked about their average contract length going out to about four and a half years.
And we're we toe right along with us on our SAP business.
Which is important part of our business.
Kevin: So they've talked about.
Standing out to four and a half years workout for years right now where I think we have a little better control over that ramping we are we did notice as you noted we noted a couple of quarters ago that we began to see this increasing ramp and agreements. So it has stabilized.
And we're getting a little and we're also getting better control and so are our partners right.
I'm, saying, Okay. This is sort of a high watermark. So it's not continuing to ramp I would say that it's hit a high watermark, but we're starting to move the dial it back a little bit.
But we're seeing just around four years at AAP was very.
Kevin: Had their disclosure around four and a half years.
And then on the on Prem to cloud.
Kevin: I think it was other part of your question.
Kevin: It's all about the second half drivers for us when I look at titanium apps and one of the design principles of titanium X. The first principle was to have.
<unk> X is designed and built for SaaS.
And that's why we're calling it out so in SaaS, where our major pieces core content.
Our service management.
Kevin: Our digital operations.
Kevin: Developer experience.
And <unk> as a service is only a SaaS offering.
Kevin: And so.
I think we'll continue to see in a very controlled way customers continuing to move from on premise.
We've done great into the private cloud and titanium X will give us now the next growth swim Lane.
Kevin: Which is to move on Prem into SaaS and continue to do this in a very controlled way.
The next question is from Raimo <unk> with Barclays. Please go ahead.
Perfect. Thank you.
Brian: Mike It's Brian.
Speaker Change: Listen you AI World.
Speaker Change: How do you think about adoption patterns could you mean like cure every ATM offerings et cetera.
Kind of the more kind of initial steps with the Microsoft Copilot et cetera, like how do you think that will play out in terms of what do you when you're talking to customers in terms of like adoption cycles adoption patterns is that like at first you kind of do just on the kind of Microsoft a copilot stuff. Then you come to you is it going straight to you but Christopher.
So can you speak to that of what you're seeing there in the marketplace.
Yeah, I mean I'll speak first thanks, Raimo I'll speak first to US, which is we are seeing steady progress.
Kevin: We've been sort.
Kevin: Our third fourth quarter of having Eva aviators in the market.
Kevin: By titanium X, we're going to 15 aviators in 100, plus agents and it is commonplace so like having a search button on a screen right. We havent aviator button on screens now in over 100 agents permeated through all of titanium X.
Kevin: And so it's easier to use easier to deploy and it's getting less is getting less expensive still expensive.
Speaker Change: When you look at the platform providers do you just sort of buy by the drink right.
Or you make multiyear commitments.
Interestingly for us, we see customers working on big problems.
Kevin: And.
Kevin: So there is so.
And we're like Croft, we're very close like breakthrough moments on very big problem sets.
Kevin: So it's steady as we go it's in every conversation.
Or so delighted with titanium acts in the World will see it live here in a couple of weeks.
Where it's almost like the search button on every screen, we had 20 wins directly related to our Gen II aviators in the quarter.
And we're just going to keep making steady progress and it's all going to support all of our.
Our bookings aspirations of up to 25% bookings growth is going to support our cloud growth revenue growth of 2% to 5%, but I think its just steady steady steady and then theres a step up at some outer point.
But we're making really good progress on making it easy to use deeply embedded radically focused on driving down the cost and making it a button and agent button on all our major processes.
Okay perfect. Thank you and one for Madhu like if I look at the margin performance. This quarter was very strong guidance is really healthy there.
Is there anything that we should be aware of in terms of timing that.
Some of the cost got pushed out in the second half or is this just kind of you're doing your job in controlling what you can control. Thank you.
Speaker Change: Yeah. Thanks Raimo.
We are doing that job and beyond that job.
I'll explain that in the last couple of years since the close of micro focus transaction, we have taken a lot of cost out and we've been reporting that to you systematically right.
Kevin: We also announced that distance optimization plan in early July the implementation of it was also very early to provide us the benefit throughout the year, what's really happening in the second half is very consistent with open text. Our annual merit increases our January 1st and as I said, we are seeing that could employee retention has been a sales capacity we met.
And so that's really what you're seeing in the second half of the year, but having a great start on adjusted EBITDA. In Q1 is what's really supporting us and the confidence to maintain that 33% to 34% for the year.
Speaker Change: Okay perfect. Thank you.
Thank you.
Kevin: Yeah.
The next question is from Paul <unk> with RBC capital markets. Please go ahead.
That's a cheaper your line is open.
Kevin: Yeah.
Speaker Change: Sure, we Shouldnt, Iran.
The next question is from Aaron Kyle Yes.
Please go ahead.
Kevin: Yeah.
Hi, good morning, its Aaron Kyle Oscar it's definitely price.
I wanted to ask a question just on the revenue growth, excluding <unk>, which was negative one 8% this quarter.
Kevin: This is all organic now how do you think about organic growth at Microsemi I.
The Baxter and what are the key lines of business that you expect.
Kevin: That'll drive you toward achieving organic ground.
Speaker Change: Yes, it sounds great Aaron Thanks for thanks for being on the call. This morning.
Let me start with that were maintaining our outlook for the year, which is constant to a 1% growth.
And we.
We look at our business by market area today.
So in particular for what we acquired from Microfocus deconstruct that into security.
Speaker Change: Into digital operations.
Speaker Change: And into the developer if you will.
Speaker Change: We are deeply excited on the security side.
Kevin: And as noted our xdr as a service is taking.
What we acquired from Microfocus plus components from.
Kevin: From other parts of the business like forensics like for Carter on the network side.
Plus our E mail security from Zacks.
And we're bringing it all together in a unified composedly offering called Xdr as a service.
Kevin:
And we're quite excited about it so we see security being a growth driver for US second piece is.
What was historically called <unk>, where we now call <unk>.
Kevin: <unk> operations.
I'm, just really excited about the product offering around discovery.
Kevin: Which feeds into security by the way what do you use occurring yet to discover the assets of durability and to the infrastructure observer ability across multi cloud.
Financial or ops management sustainability and Green computing.
Which has been our priority. So the product has just made incredible strides if you will and we got a little more work to do on the developer side, it's more of a complex area. So.
Kevin: We stabilized.
Kevin: Historical micro focus last year as we talked about.
We are now on a platform, where we're looking to grow micro focus, particularly in security in digital operations, We got a little more work to do on ADM and we factor that all into our constant to 1% organic growth this year.
Okay. Thank you that's helpful.
Kevin: Color there.
And maybe if I could just ask one more question just on capital allocation.
He then $85 million in buybacks this quarter and I know there's targets unchanged for the year I just wanted to clarify that strategy.
It's primarily on organic growth and return capital to shareholders and whether M&A fits into the picture at all.
So a couple of things there.
Speaker Change: We're excited about delivering.
Delivering a record amount of capital this year to shareholders. So we are we've.
We've announced plans around approximately $570 million of return of capital will be the highest in the company's history.
And delivering that that amount by the end of this year, we will have delivered $3 billion over a decade.
And we are on target to have the highest capital return in the history of the company this year.
Speaker Change: We're also looking at M&A and so.
With the with the stabilization of micro focus to divestiture behind us.
Titanium acts.
Speaker Change: Coming into the market yet.
Yes, you can expect us to continue to look at M&A, a small to medium sized cloud companies profitable generating <unk> for us that fit into our current strategic thesis.
Speaker Change: Okay. Thank you very much.
Speaker Change: Thank you. Thank you.
The next question is from Richard Tse with National Bank Financial. Please go ahead.
Speaker Change: Hi, Good morning. This is Mike Stevens on for Rich just more broadly you touched on M&A, there, but are there any further opportunities to streamline the company.
For growth.
The AMC divestiture.
Yes, I mean, our whole script and a whole narrative is on.
Driving organic growth right. So.
Speaker Change: And having some some M&A M&A is what was the question.
Speaker Change: So yeah I mean, it's all about the second half and what we've talked about.
It's bringing titanium acts to market, which is across all of our business cloud.
It's driving growth in our new AI offering business AI and business technology in particular security and as we noted we're at a high watermark for sales capacity, our pipeline is up 20% year over year for cloud and AI and the main thrust of the company is all focused on.
Speaker Change: On an organic growth.
Okay. That's that's helpful. Additionally, with the aviator you mentioned on the number of wins in the quarter.
Much approximately what that representative of bookings and where do you see that kind of going forward.
Yes, no we didn't we didn't break out of the.
10% bookings growth how much of that.
Speaker Change:
Was related to aviators, if you will but clearly it was in the large deals and in the bookings growth that we had within in Q1. So it's a main part of how we sell today right. So we go to market today and our strategy again, we start with our business clouds from con.
<unk> all the way through the developer we go to market around.
Supported right underneath there are multi cloud offering and then coupled with security and AI. So it is now will coordinate a part of how we go to market.
And I expect steady steady steady progress every single quarter.
Speaker Change: Q1, 'twenty direct wins related to AI will have direct wins in.
In Q2, it will add to our targets going.
Going from 10% up to our our mid twenties, 25% cloud bookings growth for the year. So it is contributing to the bookings growth for sure.
Speaker Change: Yeah.
Speaker Change: Okay. Appreciate the insights and I'll pass the line. Thank you.
Speaker Change: Yes.
Mike Stevens: Thank you Mike.
And next question some tenants must coupled with BMO capital markets. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: Cloud revenue growth was subdued this quarter and I understand youre looking for that to accelerate for all the reasons you cited.
Just in terms of the quarter in particular.
Is that a function of gill.
<unk> that you called out.
Same here.
Speaker Change: Some contributing factors.
And get tenants as Mandy said I'll pick up the question and Mark can chime in of course.
So think of cloud revenue as it.
It is occurring but certainly in our third and fourth quarters, we do see a lot more of the volume and sort of the variable side of the cloud revenue picking up so we had over 3% growth in Q4 of last year and that's typical of all of our sort of <unk> and.
In the fiscal year strength and I know Q1, the growth is right, where we expect it to be on revenue.
As Mark outlined earlier, no further sort of expansion of where the cloud contract SOG, it's still around the four year Mark for what we do and slightly longer when we look at S&P. So nothing has changed there.
Speaker Change: And I would look at Q1 cloud revenue is more of Q1 light seasonality.
Speaker Change: Great.
And then Mark can you.
Speaker Change: Comment on SMB side of the business headlines there for quite a few months.
Speaker Change: How's that been bucking.
You alluded to a new platform to watch the press release, you can expand on that.
Yes, yes.
Speaker Change: And yes, I mean as Madhu noted.
We had our quarterly factors for Q1, and we delivered right to what we said we were going to do on revenue.
And that's inclusive of cloud seasonally lower quarter for us.
Speaker Change: And.
Inclusive of SMB right and all those numbers were excited it's a different year for us in SMB than it was last year.
And we now have our our partner platform live and in the market.
What we call secure cloud so we've gone from project El Dorado to the actual service offering called secure cloud realized.
Speaker Change: And the platform allows us allows partners to be able to buy from us that allows partners and now we can easily add new products like our filler acquisition or which is on a secure cloud and allows partners to then go sell to their customers and then to be able to monitor their installed base and.
Speaker Change: Usage, so it's sort of a.
<unk> as a partner relationship management platform that allows us to sell partners to sell and partners to manage and it's been it's now all built by open tact flexible.
Customizable and we're just delighted with it.
So that's an enabler for a second is we've gotten closer with our biggest partner in this area, Mike Chris soft.
Microsoft is one of the biggest investment areas for the year.
And then thirdly of.
The demand is starting to pick back up so we think those three factors we have gone from a headwind. If you will to just steady as you go and I think we'll pick up some tailwind.
Throughout the year, so we're quite excited about it.
Great I'll pass along thanks. Thank.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question is from adhere cut that with eight capital. Please go ahead.
Good morning, all this is a chance we'd run on for Dear.
Speaker Change: First just wanted to touch on the cloud.
Growth trends again between 2% to 5%.
Speaker Change: This quarter, what factors you would call out that contribute to the bottom and the top end of that range.
Speaker Change:
Speaker Change: Yeah.
I would say three factors first is SaaS.
Speaker Change: Hum.
Speaker Change: Customers are adopting our SaaS capabilities and titanium X.
Speaker Change: Two.
Seeing aviator and our AI contribute revenue.
And and there's some product specific pieces in.
Speaker Change: In particular I'd call out currently xdr as a service.
Speaker Change: Those are three things that are going to drive us to the top end of the range.
Thanks, Marc and then on I'd like to zoom in on the investment in the sales and go to market rather sharply into hiring cycle of disease and maybe you could also comment on the experience level and the pits that which this cohort would contribute just given the refresh your go to market strategy.
I'll leave it there.
Speaker Change: Yes, thanks for the thanks for the question, Yes noted, we're having great success.
Speaker Change: And going to market attracting.
And in hiring a very.
Speaker Change: Qualified account executives and solution consultants.
Speaker Change: And.
We are at sort of the capacity of our capacity if you will and that's driven by a few things. So first of all the scale.
We attract skilled professionals.
We don't we don't tend to look for kind of the fresh grads to come into enterprise selling when we do hire those straight out of college maybe into inside sales.
And then to grow in the organization or our account development executives as a great place to enter open tax and then to grow but what I was talking about with the qualified sales executives that have been in the market.
Speaker Change: Seven to 15 years, joining open tax.
So we're just having great success in doing that we're at capacity.
Speaker Change: We're also are our employee engagement is incredibly strong with our highest retention rates for employees.
Our employee value proposition is very strong are strong for the new hire kind of entering open tax as inside sales or or account development and then to grow grow your career get your first job out of school and grow with US and then the skilled professional seven to 15 years out of enterprise.
Speaker Change: Software companies that has brought us to the top of our capacity and I'm gonna help them, both with AI, both cohorts with AI and Ali that AI.
And if I could just add here then Mark mentioned, we are at capacity in Q1 early part of the year I mean that was a very important conscious step we undertook in order to have a strong second half given all the product innovation that are coming through and then when I spoke about the second half an expensive and are continuing to invest keep in.
<unk>, that's also needed for our fiscal 26 and beyond so there are really two parts to the sales investment.
Thanks for the color guys.
Speaker Change: Thank you.
I will now hand, the call back over to Mr. Barish Yang for closing remarks.
Barish Yang: Okay very good. Thank you everyone for joining us today and we'll welcome your feedback if you like the early morning call. So the afternoon call. So.
Speaker Change: But we would welcome your feedback on that on that we hope you'll join us.
We hope you'll join US at open text World November 19.
Speaker Change: And I will be.
Live and in person at the TD Conference November 25th.
And as well as all the other conferences that Greg Madhu highlighted so thanks for joining us today, and we look forward to seeing you in person soon.
Speaker Change: That ends today's call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.