Open Text Corporation (OTEX) Earnings Call Transcript & Summary

All right. Welcome to our next session. I know as a speaker we have like Madhu, and Madhu will join us any minute, but Greg is -- because she's stuck on traffic. So Greg is going to start with me. So we can ask all the questions you always wanted to ask. No. But Greg, thanks for joining us for a start.

First thing I wanted to go, and it's also good to have you here. Like you just had your big customer conference there kind of kind of well attended Analyst Day. Can you talk a little bit about what was the highlights? What was the message you wanted to convey? And what were the highlights from there?

So I think the -- it was a product conference, and we did have some investors there, but it really was about the upgrade to Titanium X, which is a product cycle that we have. It's a 2-year product cycle. very focused on the SaaS functionality coming into some of the traditional OpenText cloud products and overall cloud functionality coming into the Micro Focus products that we acquired. So it's that April is -- comes to the kind of that high water point as far as delivering on the Titanium X. So we were outlining what some of those enhanced functionalities would be in the cloud. We were highlighting kind of some more of the AI-oriented integration pieces and what we were coming to market with and just a broader discussion there with customers. So we're quite excited by the feedback and customers kind of got engaged as far as what their structure and their needs were.

Yes. And we see -- I see Madhu is just here, so we get a kind of mic up and she can join us. So Madhu, Greg already talked a little bit about how the quarter is going. No. Okay. No, we just started kicking off like talking a little bit at a conference and Titanium X. So that was a good initial summary. Like talk a little bit about that journey. And then maybe, Madhu, you can join in as well. Talk a little bit about that journey. So obviously, the world has been moving towards SaaS cloud models for quite a while. Like describe a little bit like we're now having more SaaS from you guys. Obviously, Micro Focus, you only got later. So that took a while. But talk a little bit about more on the OpenText side. like that journey towards like SaaS and cloud, yes?

Sure. Well, our journey has been one of hybrid, right? So obviously, we've been around 30-plus years, but we became a cloud company a couple of years ago. The idea that we have and the model is really built around customer choice. So the idea of coming out with a SaaS-oriented and a multi-tenant structure that customers could enjoy, but not forcing them to go to the cloud or go to where they want. And most of our customers are hybrid. So when you think about multinationals, there is years of structure that they have around their own infrastructure, and we manage that with the customers. So the focus is really about providing the customers with a set of products that will support the new business workloads that they're getting, support the initiatives they're doing in the cloud. It could be a Salesforce or an SAP or an Oracle. And to do so in a way that's consistent with what we've done with them from a security standpoint, but also goes back and connects to the other investments they've made over years. So we're not displacing what they've done. We're just allowing them to grow into the SaaS applications that they're already investing in and carry OpenText along as that kind of trusted partner.

Yes. And then Madhu, like if you think about the customer conversations you had at the conference, like how excited were the customers? Like what was the perception?

Yes. And sorry to be late. Thank you for having OpenText and thanks for the cover as well. And look, the OpenText World at Las Vegas, I'm sure Greg covered, we had 2,000 in-person attendees and that includes partners and customers and so on. So think about Titanium X as just kind of the major frontier for as we've been in the cloud journey, like Greg mentioned, from 0 to literally close to $2 billion of revenue. And we've had many sort of stops like along the way. But Titanium X, why is it important is as we've been investing in cloud, in R&D, over 80%, Titanium X over the course of many releases in 2025 will take a majority of our solutions to SaaS. And Greg talked about hybrid. We also introduced the concept of multi-cloud, which I'm sure you hear from many of your enterprise customers. So Titanium X is really going to take many, many of our solutions into SaaS and the ability to operate in the multi-cloud. So the excitement was actually very high. And to get more into sort of the technology side, I would say, thinking about content from a platform perspective. And from a security standpoint, we introduced XDR as a service, right? And when you think about DevSecOps for the enterprise customers, that was also a major release. So again, it's OpenText, it's all of the solutions we got from Micro Focus. We said we're not only going to upgrade the solutions, we're going to cloudify them. So look for many more releases in 2025. So the excitement was quite high.

That's nice to hear. Yes. Okay. And then if you think about the other big subject or the other big subjects that we had here at the conference is obviously GenAI. And if you look at Gen AI, and we had like Databricks, I interviewed them earlier as well. The one big important aspect that people need to understand is like data, good Gen AI needs good data. And we need to think about not just horizontal data, but also kind of company-specific data. In theory, like you're a content management provider. So you're having a treasure trove of data that you're kind of managing for your clients. Talk a little bit about that Gen AI opportunity from your perspective.

Yes. I would introduce a minute thought into your terms of the treasure trove, right? We've been the trusted partner for enterprise customers for a very long time, plus decade. So with the AI wave coming in, we have Aviators, it's about 15 of them across all of our solutions and version 1 as we introduced last version 2. So yes, so we do sit on all of the data, and we go with the trust, we go with the security. And we're doing use cases. We're learning a lot, and we always lead in with. This is also where we find many of the solutions are not quite making it beyond the POC into the different because we -- I mean, BFSI is a big vertical for us. It's over 20% of our revenues, and you need to have trusted data there right there, right?

Sorry, what's BFSI?

I'm sorry, the banking, financial and services industry. So the financial services is a big market for us. Now we lead in with autonomous workflows, right? And each of our Aviator solutions sitting on top of content or business networks. I would say we're not just sitting on large sets of data in the content pillar, we're sitting on large sets of data across the pillars. So again, deploying Aviator right there. And we also meet where the customers are in terms of the process. We're not asking the customers to come over to where we are in terms of the process. And last not least is the data in the models is really secure from a customer perspective. We are not taking over the data. The data is sitting where the customers want the data to sit, and we're meeting the customers where the processes are. So we talked in our last earnings call, and we continue to have conversations. Every cloud deal is preceded or blended with an AI conversation. It's a data conversation. And we have a very large supply chain. We continue to work with a retailer, health insurance, like other types of insurance and even public sector companies, we're having a lot of conversations. And I will say the monetization of AI is a whole different topic where we are focused on is that you talked about the Gen AI and the data, the organization of the data and many of our customers are still not organized, which is fine. And that's really where our bookings growth comes into play that it starts off with an AI conversation, in many cases, an Aviator POC, et cetera, but it moves into a cloud booking sale where we go and enter into the next 6 months, 12 months of organizing the data. So this is going to be a long pretty exciting runway.

And just to clarify one little thing, like obviously, we live in the world of AI, and we started kind of starting to learn about, oh, there's a copilot and Microsoft kind of educated really well. Then we had Salesforce with the agent and now we're talking all about Agentic AI. How do you see Aviator? How do you fit that into like the current AI story? And like how do you see that evolving as well?

Yes. So Aviator is going to sit on top of the solutions the customers have with us. whether it's IT operations management, content or cybersecurity. One of the key factors for OpenText in our decades of being in information management is not just we have access to the data, we have deep integration of the data, the customer solutions into their own back-end systems and their own front-end systems. So we're applying the same concept to Aviator as well. The customers are also looking to the same [indiscernible] you do a particular data set and analysis and analytics, they want to they get integrated back into the system, whether you're talking BMW from an automotive perspective or other supply chains. So I would say, Raimo, that as Aviator sits on all of the solutions, we're applying the deep integration back into the customers' world. We do sit with 3,000 professionals of deep practice areas, whether it's SAP or Salesforce or NetSuite, et cetera, or even supply chain systems. So we have this capability. And again, back to the AI, just as a refresher, we did have the Micro Focus idle product. We had the Vertica. We had -- we got an analytics. So we could come to the market with an aviator solution of our own proprietary products much faster and building on top of it for us now is not too difficult. And we have the practice strength to do that.

Yes. And remind me, Aviator, can I use that like everywhere? Is that -- does it need to be in the cloud? Or how do you...

So Aviator is a cloud solution, right?

It's a cloud Solution, yes.

And where the customers are already in the cloud, that's really where we are focused on. And in a lot of cases, on-prem customers, they want to get on to the cloud before they get on to Aviator, right? But the most important thing is Aviator is a solution that is now operative in production across all pillars.

Yes, yes. But that could -- so that could be, in theory, like a good motivator to kind of entice people to go to the cloud faster because if you want to use the latest and greatest like GenAI.

Absolutely. I think Titanium X think about it as an opportunity for our customers to upgrade into the latest and the greatest platform. And when you do that or if we don't do that, Aviator does exist across the solutions.

Yes. Okay. And then Madhu, I wanted to kind of -- like one of the things I'm getting as pushback from investors when I kind of broke the story is that organic growth hasn't been like as strong as kind of would have hoped probably. And there's a lot of like things moving in the right direction and a positive way around product innovation. What were the obstacles for you like if you think about that? And what are you doing about it?

I've tried this Raimo, before. I'm going to try again. I mean we're going to speak to our growth in the following order. We have been investing in the cloud for a number of years. So the starting point really is make a note of our cloud bookings growth. We delivered $700 million of cloud bookings in the last fiscal year, and that's a 33% growth. At a much higher scale, we are targeting to deliver 25% growth, and we can do the math over the $700 million. So the starting point of the growth rate when you think about the organic growth, I want to start at the cloud bookings growth rate. We do have a longer lag than other pure SaaS multi-tenant companies as to how fast the cloud bookings gets into cloud revenue, right? And we do all the investors a correlation model that you can model better as well. So we do have long-term cloud contracts that sort of walks more like an elephant than a C order going into cloud revenue. So again, think about 2% to 4% cloud revenue growth rate this year, but the North star for us is fiscal '27, where we're targeting 7% to 9% growth rate. Now you get to the customer support line, which is a very large installed base, about $2.4 billion, and that's going to be 90% gross margin, about flat to slightly above or slightly below, and we are integrating Micro Focus that. And the rest is what Greg alluded to earlier. We are the customer deployment choice, and that's license and professional services. So when you do the math, yes, it is constant to 1% growth for this year. We're targeting 2% to 4% in fiscal '27. But I do want to put in front, it all starts from -- we are more than 80% R&D investment in the cloud. So the first growth rate we do want to look at the cloud bookings growth rate, which is all organic and the cloud revenue growth rate is all organic, right? So the math stacks up, as we said, it is what it is, but I do think we want to start with the cloud in the growth rate.

Yes, yes. So -- but in a way, then we should kind of track cloud growth and then from there, just kind of -- it's not a simple waterfall, but it's kind of mechanic in a way it goes...

That's what the business is. That's what the business is going to be in the future, right? Cloud is ultimate destination. Now what are the levers for organic growth? We talked about Titanium X. Titanium X, we are, as a company, a bit late to SaaS, right? We've been very strong on enterprise cloud, integrated cloud, private cloud. So the drivers to organic growth is absolutely going to be the cloud bookings growth rate, and watch for the cloud revenue growth rate. And SaaS is going to be a big driver to that. We also introduced -- there's a lot of questions we get about [indiscernible] cloud. We also introduced with XDR as a Service that across our pillars, while the different account executive sales reps are going to be focused on the pillars, we made an exceptional security. Every pillar can sell security. And every AE stands for account executive. These are a security AE. We do think that will also be additive to organic growth. And given the size and the scale of the company, Todd Cione, our President of Worldwide Sales, is a new organization we put together in April, and there's a lot of consolidation synergies that's going to come up from a worldwide perspective that's also going to make growth faster. Last not least, AI is being applied internally to the sales organization, where we get to RFPs faster in weeks, right, weeks faster and get to our customers faster. So plenty of levers in there to continue to drive starting with the cloud revenue growth rate.

Yes. Okay. And then the -- obviously, we had SaaS, like SaaS has been around in your industry as well. Is part of the kind of you being like you're dealing with the largest customers, more complex customers. So it's you need a more powerful SaaS than just doing something simple. Is that part of the [indiscernible] as well?

Yes. No, that's absolutely fair. But I think it also goes back to where we came from and where we started, right? When we really started, we're probably the largest private cloud practice in information management and software, right? So we started off with the private cloud, which is very long deals, chunky deals, highly integrated deals. So not easily so to speak, but that's where we made a lot of progress. Titanium and Titanium Max is now taking our cloud private solutions into a more consumable SaaS model. XDR-as-a-Service is a SaaS solution. So we're introducing several SaaS solutions. And I think that's a natural evolution of a company in the last few years when you think about where we came from.

And then -- so one side of growth is obviously is product, and we just addressed it. The other side is like on the organization in terms of go-to-market, partner, can you speak a little bit like what are you doing there?

Absolutely. We have a very large, robust partner network. You hear the name SAP a lot. SAP's growth in the cloud, we follow the growth in the cloud. SAP remains a very strong and the largest partner for us. Where we are with Google today is night and day from where we started about 3 years ago. Google is a partner for development for us. Google is a partner for enterprise pipeline and co-selling model. So we've made a lot of progress with Google. And with Amazon and Microsoft, we are sort of in various stages. And while Microsoft may not be reselling, they are certainly a co-seller with us like when it comes to security products. And below that, there are several, what we call the system integrators, the SIs, that we work with. And what we're giving the partner community today, Raimo, with our expanded product portfolio is they all have a lot more to sell, right? And obviously, the SMB space is primarily partners. and we've introduced new solutions there as well. So our partner network is very strong, and our selling model is we have a direct AE hand-in-hand with the partner network. So we have created a model where there is no conflict and channel conflict, et cetera, right? So it's a win-win for both. And we do expect to do more with the hyperscaler cohort and with expanded solutions more with the system integrators as well.

Can you -- and the SAP, you mentioned quite a bit more like nowadays. Like can you remind us like what's going on there? Like I do cover SAP. So they're obviously having that S/4HANA migration where the clients have a end of life, so they have to move to S/4HANA, and as part of that, they're going to the cloud. Like is that kind of where you fit in? And how do you fit in there? Like that's not 100% there.

Yes. So starting with content where we partnered with SAP as our content products and solutions move to the cloud, our partnership with SAP just got stronger. We were just winning more deals with SAP in content. Think about Extended ECM, right and think about e-invoicing and kind of the WIM product. So each time SAP is moving towards the cloud, we've already had solutions and products ready to move, need to move along in the cloud. The upgrade to HANA is an interesting one. And I do want to point to that when you talk about the cloud bookings and the delay to revenue, sometimes that horse leaves the bond first and then come the OpenText solutions, right? So that's a bit of a downside on the SAP partnership, where it's purely a delay in the time to revenue.

Yes, yes. Okay. Perfect. And then the -- so you talked about the partner -- network and the partner opportunity. Like if you think about like how is the -- your internal sales organization kind of set up? Now looks like SaaS selling is kind of slightly different selling than kind of the traditional way. Like where are we on that journey?

Yes. So I would say think about the sales organization, we are hiring, maintaining, growing enterprise software professionals. So these are folks who sell enterprise software all day long, 5, 10, 15, 25 years of experience. I don't know if you covered this. So you start from content, cybersecurity, business network, IT operations management. We talked about ADM, the developer tools and then, of course, AI and analytics. We have enterprise software sales team with software experience and domain experience in each of those pillars. So that's how the organization is set up. And of course, like every other company, we have the North America theaters and the geographies, and we have international and sort of the rest of the world. But we talk about really by business unit selling. Content is about 40% of our business. The goal is really to grow every pillar there into kind of the $1 billion business range over time. So it's important for us that we win each business. As I said, the cross-selling is not a concept that sort of easily applies to OpenText because we do want to win each pillar, and we don't want to distract them. But security is the only exception that we've made. On the partner side, as I mentioned, it's complete hand in hand. There's a very important aspect to our large account selling. We our installed base is 75,000 to 100,000 large enterprise customers. So we've taken the top 200 of them, and we call that global account management. So these are your top companies in the world where you have a sales team that cuts across all the pillars, whether the company, say, in the Bank of Montreal, if it's a customer on the content side or cybersecurity side, we have a dedicated team that cuts through all those pillars, right? That works well for us.

Okay. And then the -- if you think about it, like shifting gear a little bit, like you kind of talked about breaking out the different pillars a little bit better with content, ITOM, et cetera? First of all, like well done, I kind of like that idea. So like what was the idea for you to kind of do it now? And yes, let's start with that one actually.

Yes. So look, I think there are a couple of things. One, it is -- we have built information management with a wide breadth and depth of products and portfolios, right? And we believe that OpenText is significantly undervalued at this point. But part of that is there are many, many growth pockets within the breadth of information management. And there are areas where we need to arrest the decline, which are primarily the Micro Focus products, right? But what we believe, again, to your earlier question in terms of the organic growth, we want to bring sort of front and center the strength in the portfolio, right? What is also there in the portfolio is a built-in resilience, unlike other companies where just the lack of growth in one sort of pillar can create the entire business model, that doesn't apply to us. And we do have built-in resilience, but there are a lot of growth rates that is much above the corporate growth rate within the portfolio that today, we do recognize that unless you have information about that, how do we get valued. I'm not quite going to some of the parts here, but that's the primary driver, right? The content is growing very well and so is cybersecurity. So we want to start providing disclosures that are feasible and sustainable for us, at the same time, give you all enough information to value the business for its strength, right, that are disproportionately higher than the corporate rate.

And then as part of that, we probably will see some of the Micro Focus pockets as well. Like so how is that going? Like well, some of that, as you mentioned, ideal fits really nicely into your content strategy, but you have -- you kind of inherited or you've got some other assets as well. How do you think about where Micro Focus is on that kind of journey? Well, Cloud started now but we had like the journey of getting the maintenance up as well before. So like where are we on that overall Micro Focus story.

And, we'll think about the February earnings call. It's a great question. Thank you. We're going to be at our 2-year mark in January, right? We've done exceedingly well in bringing the assets on and integrating it. Again, think Micro Focus ex AMC. We don't think of Micro Focus as Micro Focus anymore within the company. We think of it as the market right? When I talked about content, that's organic OpenText. And when we think about business network, that's historical OpenText. Think IT operations management, think application developer and modernization, that's Micro Focus. So think of it in the product category, right? Again, we have the cybersecurity where we were great on SMB, but with Micro Focus, we got the enterprise. So like today, we are a full stack enterprise SMB cybersecurity. So Raimo, we think about the product groups or the market groups and the ones that we want to attribute to Micro Focus is going to be ITOM, it's ADM and the enterprise side of cybersecurity. So there were 3 challenges of the charter for us. Now first of all, where there was decline in the product, we wanted to arrest the decline, arrest the decline, bring them to flat and bring them to green, right? And part two, the investment thesis on the installed base still holds, and we are in the upper 80s in terms of renewal rates. The North Star in a couple of years, 2, 3 years is going to be in the 90s, which is sort of the OpenText rate. And the third part is the cloudification of the Micro Focus products that they had no cloud strategy. And bit by bit, we're doing it. I will share with you ITOM, which is a service management solutions. Early indicators is a very feasible Sax cloud solution for the corporate help desk, and there's more to come on that in terms of the cloud journey. So again, adapting to the decline and getting it to flat to growth, the customer support installed base getting into high 80s and into the 90s. And last not least, is just apply our cloud journey to the Micro Focus product.

Yes. Okay. it looks like -- and then the last couple of minutes, I want to say like -- so where are we on Micro Focus synergy capture, like overall margin performance that we can expect out of you guys here?

Yes. So we brought Micro Focus to our margin model, right? We have, and this is ex AMC as well. I think the way to think about the OpenText margin model is going to be how do we get to the efficiency pre-Micro Focus at this company. And that is going to be the mid- to high 30s in EBITDA margin. That's fiscal '27 for us, that's 36% to 38%. But we've made tremendous headway. And this year, we are maintaining 33% to 34%, but still we achieved mid-30s already in Q1, and we continue to be on that path. So positive uplifts, I call them incremental benefits from the revenues, right? But the synergies from a cost perspective, we are 80% of the way there and getting them to our working capital model, getting them to our EBITDA model, we are more than 80% of the way there.

Yes. Okay. And then next question for me is like if you think about M&A, so you've been very active there in the past, you have a very good track record. But there's also like a lot of stuff that is going on organically in terms of product development, cloud migration, et cetera. How do you think about how M&A fits into the equation at the moment?

So if I could separate our -- the muscle power we carry, we carry a lot of that. That's never going to go away. But fiscal '25 and going to '26 and M&A is not a focus for us. Our focus is everything we talked about so far. It is all those product groups, all those market groups and getting Aviator in there, increasing our cloud bookings and getting them to sizable product groups, not just content, but every one of them. Would we do a tuck-in here and there? Absolutely. But I do want to address the M&A question with the capital allocation we've done, right? Our stock is the best buy right now, and we have been -- we have put out our share repurchase program. It's going to be the largest capital return in the history of OpenText. $570 million for this year is a target, and we're tracking slightly ahead of it. Yes, so that's really the near-term plan. And when we get to the other side of higher currency with the stock, right, and getting all of the growth programs in play, we'll know would we be back in M&A? Of course, but the near-term focus is on M&A.

And can you remind me what the debt situation, debt ratios that you kind of feel comfortable that you want to kind of think about?

It's slightly above 3% at this point. We did delever $2 billion with AMC divestiture. We've actually delevered 30% at the peak of the debt we did in 2022. So somewhere in the 3% is where we feel comfortable. Again, when you think about capital allocation, dividend, share repurchases, debt reduction when it's appropriate, we're all watching the interest rates so to speak. And of course, you asked about M&A, but somewhere in the 3%, slightly below 3% is fair for us.

Okay. Perfect. That's -- I see our time is up as well. So...

Thank you, Raimo. Thanks, everyone.

Thanks, Madhu and Greg, for joining us. Thank you.