Q3 2025 Open Text Corp Earnings Call
Yes.
Speaker Change: Thank you for standing by this is the conference operator welcome to the open text Corporation third quarter fiscal 2025 financial results Conference call.
Speaker Change: As a reminder, all participants are in listen only mode and the conference is being recorded.
Speaker Change: After the presentation, there will be an analyst Q&A session to join the question queue simply press Star then one on your Touchtone phone.
Speaker Change: Should anyone need assistance during the conference call, but they may signal, an operator by pressing Star then zero.
Speaker Change: I would now like to turn the conference over to Greg Secord head of Investor Relations. Please go ahead.
Speaker Change: Thank you Kevin and good morning, everyone. Welcome to open tax third quarter fiscal 2025 earnings call with me on the call. Today are open texts, Chief Executive Officer, and Chief Technology Officer, Mark Baron Jay and open tax Executive Vice President and Chief Financial Officer Chadwick Westlake.
Speaker Change: Today's call is being webcast live and recorded with the replay available. Shortly thereafter all of this is available on open text Investor Relations website, which as a reminder, as investors don't open text dot com on today's webcast, we're trying something new and we will have our prepared remarks coordinated with the slides from our Q3 financial results presentation. This presentation.
Speaker Change: Available on the IR website to download and please note that if you are logged in for the live webcast are already set up for the slideshow.
Speaker Change: I'll also point out that there are two presentations posted on our IR website. The Q3 fiscal twenty-five IR financial result side show that will be used during the call and our broader Q3 fiscal 'twenty five investor presentation, which is posted for referenced throughout the quarter and used during our investor meetings.
Speaker Change: Now turning to upcoming Investor events open text will be participating in the following investor conferences on May 8th the Needham Technology media and consumer Virtual conference on May 20th Barclays Leveraged Finance conference in Austin, Texas on May 22nd the CIBC Technology Conference in Toronto May 29th Jefferies Public Technology Conference.
Speaker Change: In Newport Coast, California, and the BMO Bank of Montreal Virtual software conference on June 9th finally back in Toronto on June 12th for the RBC technology, Internet media and Telecommunications symposium.
Speaker Change: It will be a busy quarter, we look forward to meeting with you and now for the reading of our Safe Harbor statement.
Speaker Change: During this call we will be making forward looking statements relating to the future performance of Overtaxed. These statements are based on current expectations assumptions and other material factors that are subject to risks and uncertainties and actual results could differ materially from the forward looking statements made today.
Speaker Change: 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 open text recent forms 10-K, and 10-Q as well as in our press release that was distributed.
Speaker Change: Last night on.
Speaker Change: Each of these can be found on our IR 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 and 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 all.
Speaker Change: So available on our website and with that I'll hand, the call over to Mark. Thank you, Greg and good morning, and welcome everyone to our Q3 earnings call.
Mark: There are three key areas I plan to cover this morning.
Mark: First I want to refresh our listeners on wide open text is so distinct designed to perform across business cycles and is critically significant organizations across industries and geographies geographies. There may be external factors, we cannot control that makes revenue harder to forecast, but we intend to perform in the areas we do control.
Mark: Like EBITDA earnings free cash flow and capital return.
Mark: Secondly, I'll take you through some important product customer and financial updates for the quarter as well as my perspective on market volatility and how open text is positioned to help our customers create value through this deep uncertainty.
Mark: This includes discussing the transformative expansion of our business optimization plan, which is led by AI first.
Mark: Third I'll confirm progress on our three strategic priorities, including competitive advantage total revenue growth and operational excellence, our differentiation is getting stronger through AI first and this will help us. This will help lead us to upper quartile returns before I start I'd like to thank Madhu for the seven years of service.
Mark: To open text for their transition.
Speaker Change: Excuse me over the last few months all the best in her continued journey, let me formally welcome our new CFO and business partner Chadwick Westlake chatter with joined Us.
Speaker Change: From publicly traded EQ Bank in Canada, and as you know he is an outstanding executive and it was just recognized as one as this year's best executives in Canada by the Globe and mail the leadership team and I look forward to working with him as we bring open text to its next level of performance and value potential Shattuck, who will speak to the highlights of the quarter here shortly.
Speaker Change: Let me jump right in open text will celebrate its 35th anniversary this summer and our potential remains limitless like choice and origin. We are proudly Canadian helping the world's largest organizations deliver products and services that benefit the lives of hundreds of millions of people every day across the world from <unk>.
Speaker Change: Canada.
Speaker Change: At our core open text is an information management company, we empower them, we've empowered the knowledge worker over the last three decades and now we're creating the digital knowledge worker of the future.
Speaker Change: We operate a portfolio of cloud products centered on enterprise content and process automation, securing and integrating that content across business applications and business networks delivering exceptional services to the users of that content and doing this at scale. We are now redefining the value of that information through our new AI platform.
Speaker Change: Aviator.
Speaker Change: Our ability is unmatched just all global and the strategic problems for our customers by universally linking information agnostic to platform or infrastructure or language model or information format. We have always centered on building lifetime value for our customers through our raison d'etre of we always deliver.
Speaker Change: No one else can do what we do this is the key to our resilience.
Speaker Change: Our capabilities are far reaching open text is likely part of your daily life and you may not even realize it for example, where did you get your milk or breakfast, where did you get your milk. This morning to putting your coffee or your breakfast did you read the morning newspaper using cellular data how did you process family payments did you stop for gas.
Speaker Change: Gas did you see a doctor or take medicine or simple as turning on your lights, turning on your T V or watching a streaming movie well are the National Hockey League open.
Speaker Change: Open text is the platform behind the scenes.
Speaker Change: So the brands that you Trust every day.
Speaker Change: All of this work.
Speaker Change: It is important for investors to understand that we allocate capital to deliver the best value.
Speaker Change: We are both an offensive and defensive investment opportunity in Canadian technology with significant reasons to hold buy and buy more of our stock. The team is excited about winning in F. 'twenty six with a new product cycle relevant to strategic needs of cloud security and AI, we aren't AI led organization with a transfer.
Speaker Change: The business optimization plan.
Speaker Change: External distractions the ex AMC DXP ex royalty are now behind us this quarter and a clear returned to clock capital flexibility as you can see from our cash flow engine in.
Speaker Change: And our cash flow results in Q3, you can expect us to resume our traditional programmatic approach to growth through tuck in acquisitions, while our when they align with our strategic priorities will also carry out programmatic divestitures when that is in the best when that is the best opportunity to monetize long term returns for mature products.
Speaker Change: Our primary use of capital is approximately 50% of free cash flow to dividends and buybacks and that's free cash flow growth social social our capital return, but also please recall when we introduce this we also said we will remain flexible and allocate our capital to the highest return scenario that is in front of us expect us.
Speaker Change: To continue to allocate capital in a flexible manner, but always to the highest return.
Speaker Change: Bottom line, our total shareholder return proposition keeps getting stronger.
Speaker Change: Before I get into the quarter highlights I want to speak about the market volatility you.
Speaker Change: You may have heard other companies talk about to demand scenarios, and thus two outlooks and some companies or even pulling guidance.
Speaker Change: All very aware of what is happening and let me add r-color two recent events.
Speaker Change: There was clearly a demand shock in the second half of fiscal Q3, driven by the sudden announcements of tariffs, which then it became rolling tariffs. There was so much tariff information for our customers to understand and some of that information quite candidly was reliable and some of it was not we are seeing our customers move beyond these disappointments in disbelief.
Speaker Change: Now taking control.
Speaker Change: They are continuing with their strategic priorities, even if in some cases reduced near term event.
Speaker Change: Even in some cases, reducing near term spend I'd like to highlight an important positive trend that we are seeing where customers are looking to deploy and local clouds, while reducing the dependencies on U S. Technology. This introduces new opportunities for open text, given our Canadian roots and local presence in key regions around the world.
Speaker Change: Further customers are continuing their consolidation to the cloud creating programs to gain more efficiency and doing this through information management AI and new digital workers are digital worker approaches rest any like AI and machines do the work. This is a low cost unlimited workforce that will benefit all organizations in all industries.
Speaker Change: As we demonstrated open tech summits in Europe, a few weeks ago with our new cloud editions AI aviators and my aviator, we can take human tasks that required dozens of screens and work and days of work and reduced that down to a dialogue box in minutes instead.
Speaker Change: In summary, no one can predict how long the volatility will last but we are well positioned to help organizations repositioned globally deploy locally in our private and sovereign clouds and gain extreme efficiency through deploying a new digital workforce using our AI shifting.
Speaker Change: Shifting to our Q3.
Speaker Change: In a normal world, we were fully expecting to deliver it to our business plan and revenue range of $1 6 billion to $1 3 billion, but given the large volatility we did not meet our expectations on revenue and new bookings, we ended up 50 basis points below our target range.
Speaker Change: Once the tariffs were announced including 25% auto tariffs as well as U S government spending cutbacks customers paused to assess the impact on their businesses and our book of business was disrupted in the range of $40 million to $50 million.
Speaker Change: During Covid, we saw impact on travel transportation retail and it all came back and this disruption we are seeing impact in auto materials energy government and some retail and it too will come back with that said, we executed extremely well in our operations across adjusted EBITDA adjusted EPS free cash flow and our share.
Speaker Change: Repurchase program.
Speaker Change: In Q3 ex AMC and in constant currency, we delivered 127 billion of total revenues down two 9% down 1% when factoring in IP rights in D C.
Speaker Change: New cloud bookings were $151 million down 8% due to the demand disruption, we expect to show Q4 growth in enterprise cloud bookings and for the fiscal year bookings growth in Q4 is unlikely.
Speaker Change: To be enough to get us to our $20 to 25% annual target rather we expect the fiscal year to be in the mid teens for growth.
Speaker Change: I will continue to encourage investors to focus on <unk> and C. R. P O as the most effective go forward metrics as these will have more clear benefit with year over year metrics.
Speaker Change: As of Q4 as.
Speaker Change: As I noted upfront, while we may not be able to predict the headlines in the coming weeks and months, we will control well that which we can't control, including EBITDA earnings free cash flow and capital return looking at Q3 positively within the quarter cloud revenues grew 3% year over year in constant currency, our 17th consecutive quarter of organic.
Speaker Change: Growth adjusted EBITDA was strong at $395 million or 31, 5% margin up year over year, excluding AMC Jess.
Speaker Change: EPS was <unk> 83 cents in constant currency up year over year, excluding AMC, we had record free cash flow of $374 million up 7% year over year, we scaled our repurchase program by 50% in the quarter, we repurchased and retired $4 4 million shares for $115 million for total outstanding standing shares of approximate.
Speaker Change: $260 million the lowest since September of 2016, and cash ended up at nearly 1.23 billion.
Speaker Change: Q3 was a strong product and customer quarter customer wins included ABN Amro for application security for international for digital Commerce, Japan tobacco for application automation. The U S Air Force for secure identity and Pacific Life for digital information management. These wins were led by.
Speaker Change: Our next generation cloud platform titanium X, we are where we are winning with AI first our business cloud suites, our new security technology for identity protection and threat detection and response to.
Speaker Change: Titanium X with AI has now delivered launched last month from our European customer summit and this is a game changer for us combined with our business cloud suites, we can help customers make faster and more accurate decisions deliver a step change in productivity and simplify multi cloud complexity, we have a very ambitious multi quarter road.
Speaker Change: Matt bleeding with AI first and every customer has an opportunity to upgrade and expand with titanium X.
Speaker Change: Let me turn to our expanded business optimization plan, which we announced today as outlined on slide 13 with AI first is now the central part of our corporate DNA and culture.
Speaker Change: New hires must have AI skills.
Speaker Change: It will be part of our performance and talent reviews. AI has now turned on in various forms for all our employees to use and we will only hire new talent, where the work cannot be done by AI.
Speaker Change: We're using AI in engineering support professional services and sales and for the general knowledge worker.
Speaker Change: We have progressed so rapidly with AI, we can now see the path to a significant reset in our cost structure through our expanded plant and other related initiatives. We expect the new annualized savings to be up to 400 million, including an incremental net reduction of 16 Hunter employees and when combined with what we have previously announced an action.
Speaker Change: This is a total annualized savings of 490 million to $550 million and a net reduction of 2000 employees and when fully implemented.
Speaker Change: Only 50% of the new savings are to be realized in fiscal 'twenty six with the remaining benefit to be realized in fiscal 'twenty seven.
Speaker Change: This is transformative and strategically aligned to our AI first culture and initiatives will provide more clarity on this in our Q.
Speaker Change: On this in Q4 conjunctive with our F 'twenty six targets <unk>.
Speaker Change: What to expect in margin improvement reflective of the initiatives and are scaling investments in innovation and growth. Let me turn to outlook, let me speak to our F. 'twenty five targets.
Speaker Change: Look the easiest thing we could do is say, there's so much volatility we're pulling our guidance, but we have a job to do and our job is to respond to whatever is thrown at us we are not changing our adjusted EBITDA free cash flow and capital return targets. In fact, we're going to work harder to get to the high end of our free cash flow range.
Speaker Change: In a normal world, we'd be holding to our previous revenue targets. However, with the volatility it is not possible to fully predict total revenue and we could be below the current low end of our range. So we think it's prudent to communicate and F. Twenty-five revenue target of 5.1 to $5, one 7 billion versus the previous rate.
Speaker Change: A 5.17 billion to $5 two 7 billion, if we do better that as upside to the range.
Speaker Change: This approach reflects our ability to manage earnings across business cycles like we did in Colby let.
Speaker Change: Let me wrap up my prepared remarks by going a little deeper in our three strategic priorities and why these remain as constant priorities.
Speaker Change: First.
Speaker Change: Increasing our competitive advantage through our new product cycle, and leading with AI first business cloud suites and new security.
Speaker Change: We can see the momentum from industry analysts customer engagement pipeline expansion customer and partner wins, coupled with the market timing for consolidation efficiency gains local deployments, enabling a new digital workforce. This is how organizations when second our priority on total revenue growth our narrative is.
Speaker Change: <unk> no longer ex AMC.
Speaker Change: We are entering an exciting new product cycle as noted entering new market areas, such as security and we have complete itself excellence training across our sales force and for the first time and with titanium ex partners are now allowed and enabled to sell our cloud offerings.
Speaker Change: And we have new clear capital flexibility, our strategic partners across S&P and Hyperscale is keep getting stronger customers gaining control in a time of disruption we are seeing high renewal rates in our cloud and off cloud and cloud rates were up 100 bps quarter over quarter.
Speaker Change: Third on our strategic focus is operational excellence, which remains well, which means upper quartile margins free cash flow earnings and capital return with their transformative expansion of our business optimization. We're confident that we can generate more profits from higher revenues by lowering our cost curve and setting a new milestone level of.
Speaker Change: Free cash flow generation over the next couple of years with that let me turn the call over to Chad.
Chad: Thanks, Mark and good morning, as a very proud Canadian I'm pleased to now be serving as a proud Canadian company.
Chad: Since joining the team in March listening has been job one.
Chad: I spent my first couple of weeks meeting with our shareholders capital markets analyst and partners I understand the opportunities and I'm enthusiastic about the growth journey ahead.
Chad: As Mark referenced in Q4, we will introduce fiscal 2026 targets and Reframed medium term aspirations.
Chad: There should be no surprises.
Chad: We will continue to see targets on what you know, what's best for including adjusted EBITDA margin free cash flow and adjusted EPS growth capital returns and our expectations for annual total revenue growth.
Chad: We will simplify more performance metrics and look to add increasing transparency. This includes for how more of our businesses are performing particularly ones that are outperforming and revenue growth.
Chad: For today I'll focus on Q3 results with brief added context on enterprise cloud bookings revenue adjusted EBITDA margin free cash flow and overall earnings.
Chad: As you reviewed in our material total enterprise bookings were $151 million down eight 4% year over year.
Chad: While below expectations I would contextualize the outcome in a few ways we.
Chad: We had good results in a few key segments importantly in content management bookings from the financial services and technology sectors, we want more competitive business intangible pipeline momentum.
Chad: As Mark indicated our bookings difference to target was primarily attributed to the macro disruption in the quarter, which resulted in some pauses to later quarters.
Chad: And on the cloud net renewal rate a metric we introduced in Q1, we expanded again 100 bps sequentially to 96%.
Chad: You May recall, we introduced total RPM and CRP last quarter. Once we have that year over year comparable in Q4, you'll have a trend and we'll add more context.
Chad: Shifting to revenue for the quarter, where we had solid annual recurring revenue of 82% higher year over year, excluding AMC.
Chad: Cloud revenues were $463 million up nearly 2% year over year and represented about 37% of total Q3 revenue.
Chad: That marks 17 quarters of cloud organic growth driven by AI readiness and strong demand for our content cloud non-GAAP cloud margin increased approximately 300 basis points to 62, 7% year over year.
Chad: Customer support or maintenance revenue was $567 million coming in slightly below our expectation, we are making progress here and non-GAAP gross margin remained strong at 89, 3%.
Chad: Overall non-GAAP gross margin for Q3 was 75, 7%, which excluding AMC remained consistent year over year.
Chad: As you see on slide 19 important to note we are working to expand our revenue disclosures.
Chad: This is intended to add more clarity and context for our businesses, where revenue is outperforming such as content as you see on the left that as compared to our businesses, where we expect to perform and continuously improve on the right side. We look forward to publishing this data for you in Q4 and regularly.
Chad: Now the adjusted EBITDA margin, which was ahead of her charter range at 31, 5%.
Chad: While revenue was lower expense actions and improving our operations translated well.
Chad: This was a good outcome for Q3 and it takes our year to date adjusted EBITDA margin to 34, 7% compared to our annual target of 33% to 34%.
Chad: As a reminder, our fiscal Q3 is a calendar Q1.
Chad: And our adjusted EBITDA margin would always be lower sequentially.
Chad: So the difference you see into Q2 is entirely seasonal both in revenue bookings and expense increases, including annual reset categories, such as annual merit increases vacation and benefits that take effect January one.
Chad: Total head count declined slightly from Q2, but you will see that come down further in Q4 as part of the announcement today.
Chad: Expenses for Q3 were down year over year importantly attributed to the completion of the first phase of the business optimization plan announced last summer.
Chad: Open text is exceptional at consistently generating strong and recurring free cash flows as.
Chad: As mentioned earlier, our free cash flows increased 7% year over year to $374 million on a reported basis, a new high water mark in a quarter with a 30% free cash flow margin.
Chad: Q3, each year is typically the highest due to the timing of maintenance annual renewals, but two items of note.
Chad: In Q3 last year, we had the benefit of free cash flows from AMC, which is now gone.
Chad: And in Q3. This year, we had a total onetime benefit of $48 million as disclosed in our 10-Q related to the collection of a U K state aid receivables.
Chad: Mark touched on our capital allocation strategy, and I will reinforce and expand on this a little more we expect our businesses will continue to generate strong and growing free cash flows and in turn we allocate that to the highest capital return scenarios, thus reserving flexibility and our strategy.
Chad: On a primary basis, we look to deploy it by investing back into our businesses and customer innovation as well as always rewarding our investors with a steady dividend.
Chad: Secondary to that flexible to the environment and opportunity, we will deploy it to acquire tuck in companies that align to our current strategy and we will repurchase shares, particularly at these valuation levels for example, based on that opportunity.
Chad: You saw us increase our current repurchase program by 50% up to $450 million in March this year it.
Chad: It is very important we will remain strategic and flexible in this capital allocation sequence.
Chad: Moving to adjusted EPS, which was strong again in Q3 at ADT diluted.
Chad: Reported that is down 13% year over year, but excluding the AMC divestiture it was up year over year.
Chad: Contributing to this outcome was the benefit of repurchasing and cancelling 14 3 million shares over the trailing 12 months.
Chad: With purchases completed at the end of March we had approximately $184 million capacity remaining in our $450 million program, we intend to continue our program.
Chad: In closing we are focused on executing in Q4.
Chad: Building long term value for our customers and shareholders as.
Chad: As an investor you might want to hold <unk> stock is the best defensive name and Canadian technology with our World class install base loyal customers moats around our key businesses and a strong earnings profile and return of capital strategy.
Chad: You should want to biotech stock because of the opportunity to participate in our growth and it's more than $200 billion of total addressable market.
Chad: We are a significant cash generator with scale and efficiency to reinvest in our growth products across business cycles and.
Chad: And you should want to buy more of the stock because of the significant discount and our valuation to key metrics as compared to our history and comparable firms.
Chad: It's an exceptional time to participate in the earnings growth engine, we're building.
Chad: With that scaling can you. Please open the line to our equity analysts for Q&A.
Speaker Change: Certainly we will now begin the analyst question and answer session and the analysts 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: You're using a speaker phone. Please ensure you lift your handset before pressing any case, if you wish to remove yourself from the question queue. You May Press Star then two.
Speaker Change: And the analysts who wishes to trying to kill May Press Star then one at this time.
Raimo: Question is from Raimo <unk> with Barclays. Please go ahead.
Speaker Change: Perfect. Thank you.
Speaker Change: Mark two questions one for Mark one for Chadwick at Mark first one if you look at the performance this quarter.
Speaker Change: Pointed out some of the uncertainty.
Speaker Change: But we also have seen very good.
Speaker Change: Guys in this space report numbers.
Speaker Change: And kind of it's kind of in relative terms slightly.
Speaker Change: Better than you guys can you talk a little bit about maybe there were some geographic or vertical kind of.
Speaker Change: Split that is different for you than for other guys to try to understand that a little bit better.
Speaker Change: And that one and then Chadwick now with you having joined could you talk a little bit about your priorities and now that you're in the seat thinking about capital the structured portfolio all the different products et cetera. Thank you very much.
Speaker Change: Yes, thanks very much I appreciate the question well as we know we ended up 50 bps below our range and actually in the low end of the range in constant currency, but for us demand was or was disrupted and I think the tipping point for US was the auto tariffs and the rumor.
Speaker Change: Of them in the actualization of them.
Speaker Change: Around March 12.
Speaker Change: And so we.
Speaker Change: We have exposure and auto materials U S government and energy.
Speaker Change: And that Q4 impact as I said on the call was $40 million to $50 million.
Speaker Change: Roughly I would say two thirds of that was bookings one third was revenue.
Speaker Change: And in a normal world, we were on target to be right within our within that range.
Speaker Change: But we we we acquired Culberson, we've always had a very important business in auto auto parts auto ecosystem.
Speaker Change: Materials U S government and energy on the government side.
Speaker Change: No you just read the headlines National Institute of Health.
Speaker Change: Our U S a.
Speaker Change: The department of Education.
Speaker Change: And we have some business in there so as we've said in the $40 million to $50 million roughly two thirds bookings are one third revenue.
Speaker Change: With some of the relief and auto tariffs announced this week are a rumored.
Speaker Change: Still data being worked out of some of our auto customers are we engaging deeply that now that they can manage and predict and if you can kind of predict your spend you don't know how to invest so like we said if we can't control the top line and the volatile times, we will control well that which we can't control.
Speaker Change: And we did an extraordinary job.
Speaker Change: The company did on its expenses margin earnings record free cash flow with our operations, Yes, we had a one time item in there, but we still performed extremely well and the business will come back.
Speaker Change: It will all come back just like it did during COVID-19.
Speaker Change: Rick over to you for the second part yes sure. Thank you Mark Thanks for the question.
Speaker Change: <unk>.
Speaker Change: Three things I would say briefly and again I'm not at the two month, Mark, but I would say three things very simply number one capital allocation maximization of working together with Merck and our great leadership team to making sure we're picking the top choices for where our free cash flow and capital is going and that's why we you heard us speak about that even.
Speaker Change: More today and more to the tradition of open tax where our strengths are but number one capital allocation number two importantly on the reframe guidance and how we're simplifying and providing more clarity and more transparency going forward to help our investors and analysts understand the business understood understand where were outperform.
Speaker Change: As we said and understand where we're going to continuously improve and within all that executing that guidance.
Speaker Change: <unk> period.
Speaker Change: And then three I'd say listening and simplifying so I'll continue to listen.
Speaker Change: Continue to work with our businesses understand that business, but I will be listening engaging as a top priority with our investors shareholders and teammates. So those three would be top early priorities.
Speaker Change: Perfect. Thank you very clear thank you. Thank.
Rob: Thanks, Rob.
Rob: The next question is from Stephanie price with CIBC. Please go ahead.
Rob: Yes.
Speaker Change: Hi, good morning.
Speaker Change: Maybe start off one with you Chad I guess on the restructuring.
Speaker Change: And its scope.
Speaker Change: Press release noted annualized savings of about 400 million starting in fiscal 'twenty six.
Speaker Change: What I understand is it do you expect it to be additive to current market and just should we think about a portion of the savings being reinvested back into the business and then maybe just a little bit more in terms of where the restructuring will be done it sounds like there's some technology work being done on the AI side.
Speaker Change: Yeah, maybe I'll go first and then Mark I think should answer the second part of that question. What I would just say simply what we will provide more clarity in Q4 in terms of how that business optimization benefit will show up you will see some of the costs that we noted incurred in Q4.
Speaker Change: All within our existing outlook and then you'll see more of that clarity come again in Q4, but for now it's still a good campus on the kind of equally split between 26, and <unk> 27 for that benefit realization rate across the board, though right. This is this is in that head count is a net number. So there is a gross impact and then theres a net reinvestment aspect, especially.
Speaker Change: And the top products and countries a focus for centers of excellence, but I think mark should take some of the AI first component, which is future yeah. Stephanie. Thanks for the question. Thanks, Chadwick, Yeah, I mean, the business optimization and our AI first strategy go hand in hand, Stephanie our business optimization as transformative.
Speaker Change: And it's and it's reflective of what we're building an AI operating model. So if you'll allow me just talk a little bit about our AI first strategy leadership as a choice and we've decided to lead in AI.
Stephanie: Building, a great AI products and company, we're helping our customers transform what AI and we're going to operate like an AI centric company.
Speaker Change: And with.
Speaker Change: With me.
Stephanie: <unk>.
Stephanie: Yeah.
Stephanie: And centering on this business optimization program. So we've been moving very rapidly we created the knowledge work over the last three decades with titanium X. We've introduced 100 digital workers.
Stephanie: With Abi aviator studio coming out in the summer, we will introduce a tool where customers can now create their own digital workers and thus now have tools built on our platform to create limitless digital workers not just within our software but across other software companies.
Stephanie: We've begun to partner with Microsoft and Copilot and building on their incredible success with our security offering and we've now created an AI first corporate operating plan with AI turned on for our employees and.
Stephanie: As I said on the call.
Stephanie: Along with the higher roles that can be done with AI AI is part of a hiring skills learning and performance and through that lens right. We looked at expanding our business optimization plan.
Stephanie: Which is AI led taking out up to $400 million of new expense over the next two years.
Stephanie: We're focused on roles like the general knowledge worker support.
Stephanie: <unk> generation QA entry level program administrative work help desks everything that can be accomplished through AI.
Stephanie: And we had many wins in Q3 so.
Stephanie: The AI first land and building an operating model around AI first is really central to us and the expanded view of the business optimization.
Stephanie: Thanks for that and then maybe one more for me just on the customer support side of the business we calculated.
Stephanie: The six 4% organic decline in that business in the quarter and I know the DXP contract then maybe impacted that a little bit could you just talk to what's going on in that customer support line apps.
Slowly so let me just start with it is an amazing business remains a pillar of strength and I'm confident that we're going to return maintenance to growth in the future.
Stephanie: As you were noting a bit in the maintenance business here is primarily under pressure due to item and ADM license performance Dx see some FX and some goodness of.
Stephanie: Customers transitioning to the cloud.
Stephanie: But without <unk>, our renewal rate for off cloud would actually be moving up quarter over quarter not down if you take out <unk> and thats going to be behind us as we enter fiscal 'twenty six the core operating metrics Stephanie in the business are very positive a P. A up past due down.
Stephanie: Cancel rate down in quarter renewal rates up year over year decline in constant currency is cut in half again without <unk> cut in half in constant currency without dfc.
Stephanie: And that's 26, we're definitely going to improve the business and the rate of decline is slowing.
Stephanie: And when we get to our F. 'twenty six outlook in August we will.
Stephanie: Provide provide those specifics.
Stephanie: Thank you very much.
Stephanie: Stephanie.
Speaker Change: The next question is from Mcdonalds, most coppola with BMO capital markets. Please go ahead.
Speaker Change: Hi, good morning.
Speaker Change: Mark could you, perhaps expand on what youre doing with a nighttime and ATM to work towards further stabilizing those working with us.
Mark: Yeah, absolutely. So thanks, Dennis let me throw a security in their first were on an incredible trajectory what security.
Speaker Change: And we showed.
Speaker Change: Live last month from Europe.
Speaker Change: Our new threat detection and response platform.
Speaker Change: Deeply integrated into Microsoft technology, including co pilot.
Speaker Change: And we're going deeper in our integration so as Microsoft obviously continues to gain success in AI.
Just as we partner in.
Speaker Change: And their success will go to partner of Microsoft and their success and bringing threat detection and response.
Speaker Change: Into their AI and into their install base. So we are we got security right on track, where we want it to be.
Speaker Change: In relation to item, we're making really good progress.
Speaker Change: We are.
Speaker Change: I always like to think that if you can run the platform at scale yourself than everyone else should be.
Speaker Change: Should be able to and we've just completed going live across discovery observer ability and service management.
Speaker Change: I believe you have a time on a very good trajectory of the product is there.
Speaker Change: Salesforce expanded and trained titanium acts in the market. The cloud offerings are there new wins on SaaS. We've also studied our biggest competitor extremely well service now and where we feel that we can differentiate and win on the service management side is in regulated industries.
Speaker Change: And that's I don't know 10 billion part of the tab and so we're very happy to go. After these very regulated industries that need contact management that needs security need process automation and really go into our core strengths. So I feel we have item on a good trajectory and its going to contribute.
Speaker Change: To our improved performance in fiscal 'twenty six.
Speaker Change: And in ADM is going to take a couple more quarters.
Speaker Change: We have focused ADM on the top end of the market to really go after the top thousand software companies in the World. So every company is a software company today, but auto.
Speaker Change: Financial services insurance biotech, our next generation Av Av software companies as well so we've been that's going to take us another couple of quarters or so to get the ADM mentioned really performing at its best but I love, where we are in security. We just we're we're in the right.
Speaker Change: When lane our swimmers are now in the pool with Ita I Tom.
Speaker Change: Given our deployment in titanium apps and the swimmers are approaching the pool on <unk> use.
Speaker Change: To use a swimming lane analogy.
Speaker Change: So that's a quick insight into item in ADM.
Speaker Change: I appreciate the color and then just secondly, you haven't meaningful government business. Just curious what are you seeing any impact from the dose cuts.
Speaker Change: Yeah.
Speaker Change: Theres no doubt theres some impact from the U S government expense reductions.
Speaker Change: And but it's not as significant as the tariffs. So there is.
Speaker Change: In the normal world, we'd just be absorbing this but we are calling out a little bit, but it's it's really secondary to our message on on tariffs.
Speaker Change: And look at the end of the day the U S. Government governments are a great partner of ours, we provide critical services and defense intelligence and running critical citizen applications.
Speaker Change: The effects have been de Minimis, and and we're still very optimistic on that business.
Speaker Change: Great I'll pass the line. Thank you.
Ed: The next question will come from Ed.
Speaker Change: Atlanta with Jefferies. Please go ahead.
Speaker Change: Hey, good morning, Thanks for taking my question.
Mark: On the new role, maybe Mark I'll kick off with you if we think about.
Speaker Change: Last year.
Speaker Change: Youre getting longer maybe.
Speaker Change: Four years in terms of duration.
Speaker Change: Now you probably have some exceptions.
Speaker Change: How would you characterize it.
Speaker Change: It had not been for tariff would you say that the demand environment was better this year than last.
Speaker Change: Maybe how we're constantly chatting before and then to get a sense of what it could look like if all goes away or if we had a problem.
Speaker Change: One follow up.
Speaker Change: Yes, it sounds great. Thanks, Thanks, Tom.
Tom: But the the deal cycle.
Speaker Change: The deal terms.
Speaker Change: And ramping has stabilized so we're not seeing kind of a change of deals getting longer or more effects to ramping if you will.
That was sort of.
Speaker Change: Kind of a little bit of a.
Speaker Change: It's stabilized so there's no there's no there's no real changes there well customers are still spending.
Speaker Change: Clearly I mean this is a it was it was a shock when you put out 25% auto tariffs.
Speaker Change: And there were so and then and then this list of countries.
And companies past.
Speaker Change: To assess the information some of the information was accurate so far it was marketing.
Speaker Change: It was the wrong right. So I know I paused on spending right until I could just understand the landscape.
Speaker Change: I also think there's a dynamic as I highlighted in the script.
Speaker Change: We are a Canadian company.
Speaker Change: And we are we love all of our markets.
And in the non U S markets. If you will customers are.
Speaker Change: Our over their disappointment I guess be candidly other over their disappointment there over their disbelief.
Speaker Change: And they are in full action mode to take control because they've got businesses to run.
And I am personally and dozens and dozens of conversations of how we can support our customers in France.
Speaker Change: In France.
Speaker Change: And not rely on U S technology, because they just don't know, what's coming next and whether rational or irrational based on prudent economic theory or not they're going to take control because they got their priorities. So we're gonna help our our business in France, our customers in France run and deploy France.
Speaker Change: We're going to help our customers in Germany, one employee in Germany same in U K.
Speaker Change: Same in Canada same in Japan, and Australia famous South Korea is the.
Speaker Change: Same in Singapore, and India, all across the World all of our U S customers want to deploy in the U S as well.
Speaker Change: So and I also think coupled with we got momentum in AI.
So this is a very different scenario, if you want to make comparisons like Covid right. This is a very different scenario for us customers are spending they're.
Speaker Change: They're going to spend differently locally.
Speaker Change: I think this I hope the tariff thing rationalize as a normalized if it does it came back on fully.
Speaker Change: And we're in a nice place being it help customers deploy locally and create efficiencies through the digital worker. So it feels.
Speaker Change: Different and positive different actually for us.
Speaker Change: Great I appreciate that color and then maybe just.
Speaker Change: I appreciate it.
Speaker Change: Okay.
Speaker Change: Then.
Speaker Change: Still.
Speaker Change: Early in executing the game plan, but if you think about the different components of capital management, what would you say are the.
Speaker Change: Hierarchy.
Speaker Change: What are your thoughts on being more aggressive.
Speaker Change: Is it on some of the divestitures that you mentioned maybe tactically.
Speaker Change: Yeah.
Speaker Change: We're early focus will be.
Speaker Change: Thanks, a lot I think.
Speaker Change: Excuse me, we outlined it well were flexibility is number one.
Speaker Change: And it's going to depend on the environment at the time and the opportunities at the time. So that's why it was so key in the last quarter you saw some of the greatest opportunity for us to continue to buyback and buyback more heavily discounted share price.
Speaker Change: So we were doing that as well.
Speaker Change: Smart aligned opportunities come up on the M&A front, certainly we are going to look at those those tuck ins when they come up.
Speaker Change: And same thing with <unk>.
Mark: As Mark indicated very clearly.
Mark: More mature products or portfolios, if theres better opportunities to monetize those we'll take those as they come up but it's going to be that sequence. So we are we're going to continue to invest in the business as we are.
Mark: We're going to reinvest in the business, we're going to focus on our innovation and we're going to pay that dividend, but then it's flexibly month by month quarter by quarter as the opportunities are rolling for the other two are mark if there's anything you want to add.
Mark: Extremely well said I mean the R. R.
Mark: Our execution of our performance.
Mark: And the addition of our transformative business optimization plan returns us back to.
Mark: Capital flexibility yes.
Mark: And these.
Mark: These are the levers we've traditionally had when we've traded our highest multiples and so we're excited to bring these are these levers back as we come in at 26.
Richard Tse: The next question is from Richard Tse with National Bank Financial. Please go ahead.
Richard Tse: Yes. Thank you so obviously a big push here on AI.
Richard Tse: Just wondering if you maybe able to provide some metrics just to really to help us understand how thats being adopted by your base like I don't know if you have.
Richard Tse: Numbers on aviator that you could sort of share just kind of any growth metrics. So we can kind of get a sense of.
Richard Tse: That trajectory.
Richard Tse: Yeah, Thanks, Rick Richard and thanks for.
Richard Tse: Thanks for being with us and thanks for being on the call as I noted.
Richard Tse: <unk>.
Richard Tse: Leadership is a choice and we've decided to lead in AI.
Richard Tse: And it's and it's starting with building our AI products.
Richard Tse: It is having a.
Richard Tse: 3000 person professional service organization that everyone is trained on AI and helping transform our customers with AI.
Richard Tse: It's creating an operating model inside of open text that AI centric.
Richard Tse: And a.
Richard Tse: And a new model for us that the business optimization is kicking off.
Richard Tse: And.
Richard Tse: So I look at metrics around first adoption is the adoption on the rise.
Richard Tse: Adoption is on the rise everywhere across what we're doing.
Richard Tse: As our frequency of use up right or frequency of use is skyrocketing internally, we only hire people all of.
Richard Tse: That have AI skills now as part of our interviewing.
Richard Tse: If you don't know AI skills, if youre not using them. If you don't know how to prompt if you.
Richard Tse: Yeah.
Then we just disqualify you.
Richard Tse: We are training we've turned tools on for all our employees so frequency of uses up.
Another measurement is reduction of expenses and I think we couldn't be clearer what our expanded business optimization plan that we're going to lead first and then we're going to lead a 100000 customers.
Richard Tse: That is a reduction of expense when rates are increasing for us of where we engage because of AI. If we look at the wins in the quarter that we have in our deck.
Richard Tse: <unk> ABN GTI, we're all AI led and winning those.
Richard Tse: Our partnerships are up with Microsoft.
Richard Tse: Just as we've had an amazing partnership with SAP, we have incredible joint value proposition of product to their into their install base. We're about to do the same.
Richard Tse: Layering and on their incredible success in AI.
Richard Tse: With our security and then hopefully an inset of Gen.
Richard Tse: <unk> said will be Gen revenue.
Richard Tse: As we as we lead into.
Richard Tse: Ah <unk>.
Richard Tse: No.
Richard Tse: Yeah.
Richard Tse: Adoption frequency reduction of expense win rates.
Richard Tse: New partnerships that that's how we're measuring right now.
Richard Tse: And as we get into 'twenty six we can think about Oh, we'll keep talking about.
Richard Tse: Customer wins booking rates et cetera, Richard but I think those are some of the metrics I've been looking at.
Richard Tse: As this race goes on.
Richard Tse: Okay, Great. So my second question.
Richard Tse: I don't know if this is for chadwick or yourself.
Richard Tse: But as you make that shift are you considering shifting the revenue model to more sort of usage or value based pricing similar to some of your competitors.
Richard Tse: Should we expect if you do that the relative impact would be on to the current model.
Richard Tse: Yeah.
Richard Tse: We're not looking at a disruptive pricing model excuse me, a disruptive change and how we commercially engage with our customers.
Richard Tse: We have.
Richard Tse: A couple additional pieces to bring to market.
Richard Tse: Next quarter, we're bringing my aviator to market.
Richard Tse: Which is if you think on every screen you used today you have a search button that our class you have what I call. The hamburger those three lines of menu waiting I call. It the Hamburger we're going to have my aviator Budd.
Richard Tse: Personal digital assistant that every user of <unk> software.
Richard Tse: Regardless of screen, regardless of Bu, regardless of product just like you have the hamburger the search button.
Richard Tse: Search glass Youll have a my aviator and will bring up a personal digital worker for you to be able to.
Richard Tse: Do rack style capabilities.
Speaker Change: Cross one document across 100 documents complex cases things you're working on how do you collaborate.
Richard Tse: We also have.
Richard Tse: A very important new capability, what aviator studio, where we're going now allow our customers to create their limited digital workforce that is a step function for us where they can create their own digital workers and we're also going to be introducing conjunctive with that what we call and always.
Richard Tse: Always on AI platform today, you have to go through some work to turn AI on.
Richard Tse: We will have it always on inside our SaaS and inside our private cloud. So we're going to we're going to think through how to keep monetizing that.
Richard Tse: But I think it's too early to say, but I don't think but I don't think were going to do something radical in a move from you have to commit.
Richard Tse: Two just a consumptive model.
Richard Tse: More to follow on that it is going to really follow this very.
Richard Tse: <unk> and impactful roadmap.
Richard Tse: My aviator aviators studio and always on aviator.
Richard Tse: The next question is from Paul Treiber with RBC capital markets. Please go ahead.
Paul Treiber: Well, thanks, very much and good morning question on AI.
Paul Treiber: And then and then also the magnitude of the reductions that you're doing so it does sound like Youre seeing good usage and traction of AI internally, but how did you arrive at the magnitude of these head count reductions.
Paul Treiber: And did you contemplate a slower move in and sort of.
Paul Treiber: Dip your toe in the water as you make the transition more towards AI internally.
Paul Treiber: Yeah, Paul Thanks. Thanks for the question. We appreciate it we've been at this for over a year.
Paul Treiber: So and we're moving at just an incredible pace. So when we look across how.
Paul Treiber: Aviator has advanced some of our partners AI tools have advanced like Microsoft.
Paul Treiber: SAP.
Paul Treiber: And in.
Paul Treiber: And looking at the <unk> of our usage.
Paul Treiber: We've looked we can already see productivity gains and sales pre sales.
Paul Treiber: Professional services education, Onboarding general productivity, and very specifically enrolls of customer support document data documentation Q.
Paul Treiber: QA.
Paul Treiber: General administrative work and the general knowledge worker.
Paul Treiber: And so we've been doing a very deep analysis of what rolls we can.
Paul Treiber: The work still needs to be done, it's just going to be done with a machine.
Paul Treiber: AI and <unk>.
Speaker Change: This shows the totality right look I remember I remember with ERP came into the market many years ago.
Paul Treiber: Yes.
Speaker Change: As a leader in Oracle applications really bringing ERP to market, we took G&A expense in the ERP.
Paul Treiber: ERP world from upper teens.
Speaker Change: To low singles to mid to high single digit that was it.
Speaker Change: Step function. This is a step function AI as a step function and be able to reduce expense and companies over time and.
Speaker Change: Yes.
Speaker Change: You can you can count it what percent of Opex. This is going to reduce for open tax or other companies, but ERP was a step function of high teens.
Speaker Change: To high single digit.
Speaker Change: AI is a step function.
Speaker Change: Of of expense efficiency, so we're leading the way.
Speaker Change: And doing it.
Our business optimization and look I think this if you'll allow me Paul I think this goes into how we're going to think about F. 'twenty six a little bit.
Speaker Change: We're gonna provided 26 guidance in August.
Speaker Change: And maybe just a little but I won't go into that.
Speaker Change: That 26, West I'm happy to answer it.
Speaker Change: Some of this will flow to the bottom line for sure. Some of this will be reinvested in.
Speaker Change: In the business it will be reinvested back into AI be reinvested into sales. So let me just pause there Paul but.
Speaker Change: I'm going to I'm going to keep talking about this analogy of ERP as a step function.
Speaker Change: And G&A expense AI is the same.
Speaker Change: Thanks for that explanation. The second question just for a child with one of the metrics that youre, considering giving guidance on us going forward as in EPS.
Speaker Change: Which is a metric that the company hasn't guided for in the past can you just elaborate on the philosophy around Etfs as a metric that you guide for.
Sure well I think we are a strong very strong and distinctly strong are growing profitably and at the end of the day, how does that translate to your earnings per share, which is very consistent no matter what company no matter what sector and that shows also the benefits of when we're deploying our capital strategically. They also repurchase shares right. How are we deploying every dollar.
Speaker Change: <unk> period, EPS as a bottom line strength period, So I think it is valuable.
Speaker Change: To show that and have some expectations and frankly at the level. We're growing I don't think were getting credit for it compared to many businesses in many sectors. So it's just a good consistent guidepost from my perspective.
Speaker Change: Yeah.
Kevin Krish: The next question is from Kevin Krish <unk> with Scotiabank. Please go ahead.
Kevin Krish: Hey, there good morning, I do you have a question on guidance I know, we're going to get more detail.
Kevin Krish: In August one on one of your slides and I think you've talked about in the script that unexpected.
Kevin Krish: Turn to organic growth in 2006 can you just.
Kevin Krish: What gave you that sort of the call.
Kevin Krish: It's there I know you've got the RPE Oh, maybe some of the drivers to get there and then the second thing I'd point out is striving for.
Kevin Krish: Also another 1 billion in free cash flow.
Kevin Krish: Is the expectation that you'll you'll do a 1 billion plus in 26 I'm just trying to think about some of the puts and takes there with restructurings and as the shift in the business. Thanks.
Kevin Krish: Thanks, Kevin Thanks for the thanks for the question.
Kevin Krish: As you start it we will provide our F 'twenty six guidance in August.
Kevin Krish: But with that said F. 'twenty six is a very different year than F. 'twenty five.
Kevin Krish: I couldnt be happier that the phrase ex AMC is done.
Kevin Krish: And with F. 'twenty six it's about AI first.
Kevin Krish: And we have some very positive levers coming into F. 'twenty six.
Kevin Krish:
Kevin Krish: Product cycle.
Kevin Krish: Transformative business optimization plan, which is going to allow flexibility.
Kevin Krish: Continued flexibility and strength and our capital model for new AI investments.
Kevin Krish: The business optimization look some will drop to the bottom line some will be reinvested in the business, but it's going to return us to this.
Kevin Krish: Capital flexibility, but expect some positives right.
Kevin Krish: When we when we talk about F. 'twenty six in August we will have improved growth rates year over year.
Kevin Krish: We will have improved maintenance year over year.
Kevin Krish: We expect to have higher free cash flows and we'll talk about all the dials that get us there when we get into 'twenty six.
Kevin Krish: As Chad mentioned, we will continue to have strong capital return in our buyback.
Kevin Krish: And our dividend program.
Kevin Krish: This flexibility is can allow us to return to programmatic M&A.
Kevin Krish: And and we are as we've noted going to.
Kevin Krish: Consider divestitures of more mature offerings that will create a greater return.
<unk> increase our growth rate or both.
Kevin Krish: And these are the levers we've traditionally had when we traded at our highest multiples.
Kevin Krish: And we expect to have these levers back in 'twenty six.
Kevin Krish: So it's a very different year.
Kevin Krish: AI first and.
Kevin Krish: We want to finish out the year and we as we traditionally do when we get our August call, we'll outline what F 'twenty.
26 look like but expect it to be very different.
Speaker Change: Got it I appreciate that one final. One then you know we talked about the enterprise.
Booking softness, but the 10% of your everyday basis SMB.
Speaker Change: So I'm wondering what the trends are looking like there.
Speaker Change: That's a sensitive part of.
Speaker Change: The business win win when there is uncertainty so just curious.
Speaker Change: Okay.
Speaker Change: Absolutely as I said on the call we had given this sudden.
Speaker Change: Shock to the system of tariffs of 25% auto tariffs and then rolling tariffs.
Speaker Change: We did have a bookings impact in Q3 as we noted.
Speaker Change: And.
Speaker Change: We're unlikely to get to our aspiration of 20 of our targets of 20% plus but.
Speaker Change: But we are looking to be in mid teens growth for.
Speaker Change: For the for the year, which means a strong Q4, so we actually have strong visibility into the bookings.
Todd: Todd and Paul in the field are executing.
Todd: The deals in front of Us I think the.
Todd: The news on the week.
Todd: Of it would be lightening some auto tariffs is helpful.
Todd: But it still remains a little unpredictable.
Todd: And so we're still at.
Todd: It's still volatile, but we think we're going to execute well and the volatility.
Speaker Change: I'll now hand, the call back over to Mr. Bernstein for closing remarks alright.
Mr. Bernstein: Alright, well, thank you everyone chatter Rick welcome and.
Speaker Change: And thank you everyone for joining joining us today, we have.
Mr. Bernstein: Three things I'll add and with.
Mr. Bernstein: It's a whole new narrative for us with AI first.
Mr. Bernstein: And everything from product initiatives.
Mr. Bernstein: Through building an operating model centered on AI, we're very excited about F 'twenty six and all the positive.
Mr. Bernstein: Or is that are in front of us and we look forward to very strong.
Mr. Bernstein: Directing candidate engagement.
Speaker Change: In the quarter as Greg noted will chatter with the team and myself will be out in the field spending time with you and we look forward to hearing your voice. Thanks.
Speaker Change: Thanks for joining today's call.
Speaker Change: This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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