Open Text Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
February 6, 2025

There are 11 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Second Quarter Fiscal twenty twenty five Financial Results Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an analyst Q and A session.

Operator

I would now like to turn the conference over to Greg Secord, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to OpenText's second quarter fiscal twenty twenty five earnings call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barinche OpenText's President, Chief Financial Officer and Leader of Corporate Development, Madhu Ranganathan. And joining us for today's Q and A session are OpenText's President, Worldwide Sales, Todd Sione and OpenText President and Chief Customer Officer, Paul Dugan.

Speaker 1

Today's call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website, which is investors.opentext.com. Earlier today, we posted a press release on our website, including our investor presentation, a supplemental RPO disclosure, and all of those are available on the OpenText Investor Relations website. OpenText will be participating in the following upcoming investor conferences Susquehanna Financial Group on February 28, which is a virtual conference Morgan Stanley Technology Conference on March 3 in San Francisco, where I'll be joined by Madhu and the Scotiabank Telecom Media and Technology Conference on Wednesday, March 5 in Toronto. I'll also be joined by Madhu. And now on to the reading of our Safe Harbor statement.

Speaker 1

During this call, we will be making forward looking statements relating to the future performance of OpenText. These statements are based on the 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. 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 OpenText are contained in OpenText's recent Forms 10 K and 10 Q, as well as in our press releases that our press release that was distributed earlier today and 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.

Speaker 1

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 again are available on our website. And with that, I'll hand the call over to Mark.

Speaker 2

Thank you, Greg, and welcome to our Q2 earnings call. Since the Micro Focus acquisition and the AMC divestiture, I've been focused on getting our business model right and building a solid operating foundation to support our full growth potential. Post AMC divestiture, our number one priority was margin. And with our first half performance and strong Q2 operating results, we've delivered. Now we're ready to make growth our new number one priority.

Speaker 2

Today, I'm going to provide insight into our large growth opportunity, outline some of our challenges that are in focused areas, provide insight into our revised F25 outlook as well, provide expanded and new insights into RPO and cloud CRPO, and overall you will notice a new style and approach to communications today. We look forward to your continued feedback as we build the market leading information management company. In Q2, we delivered $5.00 $1,000,000 of adjusted EBITDA dollars or 37.6% adjusted EBITDA margin, $3.00 $7,000,000 of free cash flow, $1.11 of adjusted EPS, each of these metrics up significantly excluding AMC. We grow a quarter over quarter cash to $1,120,000,000 and within the quarter we purchased and retired 2,200,000.0 shares at an average price of $29.82 And over the last three quarters we deployed approximately $300,000,000 in cash and purchased and retired 10,000,000 shares at an average price of $30.3 USD. Expect us to continue to implement our current buyback program and reduce our shares outstanding.

Speaker 2

On revenue, we delivered $1,330,000,000 down 4.9% excluding AMC. Cloud revenues grew 2.7% and we closed $250,000,000 of new cloud contract value. This is a record quarter of customer demand for cloud and new bookings with 6.1% year over year growth. Further in January, we completed the significant transition services agreement with Rocket Software related to our $2,280,000,000 acquisition of AMC, which is closed last year in May of twenty twenty four. I'm proud of the team for their amazing work over the last eight months as they performed with excellence and professionalism.

Speaker 2

The divestiture was complex and time consuming. It is now complete and we have a new corporate muscle. These are all important contributors to our long term success, but let me be clear. We are steadfastly focused on our growth performance as our new number one priority. Q2 reaffirms that the world's most trusted companies trust OpenText, as demonstrated by new wins at Bosch for Legal Tech, STMicro for the developer BASF using our business network for global supply chain, Novo Nordisk for observability and service management, and GWC Qatar for content.

Speaker 2

We win for three core reasons. We are the experts in information management, provide exceptional transformative value to our customers, we always deliver, and a compelling roadmap across our market areas inclusive of cloud, security and AI. Let me turn to our growth opportunity. We're surrounded with opportunity and we're focused on intelligently growing our business and driving higher profits from these higher revenues. Returning to organic growth will happen in three steps.

Speaker 2

First, total company growth second, cloud grows faster and three, maintenance growth. Let me walk through our top growth opportunities in key areas we are looking to outperform in. The first is in our installed base. We have a marquee installed base with 120,000 enterprise customers. We will complete next quarter the delivery of Titanium X or Cloud Editions 25.2.

Speaker 2

We view each customer as an opportunity to upgrade to Titanium X. We expect to upgrade customers in place, upgrade them to the cloud, and expand capabilities wherever they run their workflows. If they choose not to upgrade, their support fees will gradually rise over time. This is a multi year opportunity for us in our installed base. Next, we have a hot hand with content and AI that creates intelligent content management, secure collaboration and automated workflows.

Speaker 2

SaaS and AI are core drivers to continue our growth in this key category where we look to outperform. We had large SaaS wins last quarter at SAP, BASF, ALDI and Munich REIT. The third is investing in our security business to be a top category for OpenText. Mui Mezub has taken on a new role to solely focus on security. Our new security cloud spans identity, applications, networks, forensics and soon XDR.

Speaker 2

This is our ability to ingest, detect and respond on a massively scaled Vertica database combined with our new partnership with Microsoft Security CoPilot and all hosted on Azure puts us in a key position to win in XDR. We had amazing SaaS wins in the quarter, Nestle and Fortify, code level security, Frost Bank and Voltage transaction encryption and Capgemini for identity management. We have turned around the micro focused security business. Our growth strategy also means embedding AI everywhere to empower knowledge workers to significantly raise their productivity. With Titanium X, we have we'll have in market 15 aviators and over 100 agents.

Speaker 2

Beyond Titanium X, we are working on AgenTek AI across all our product lines to create a new type of corporate worker called the digital worker. Aviators work with TitaniumX, so the next wave for AI is upgrading customers to TitaniumX. We are also still very much in the license business. This is a meaningful mechanism for customers to own, not subscribe to our information management capabilities. I'll speak in a moment to the grants of certain IP rights from last year.

Speaker 2

Excluding these grants from last year, our license business will grow this fiscal year. We introduced in January a new mechanism for customers to own our technology via a license. We call it the OpenPath Pella, a perpetual end user license agreement. The OpenText Pela is an uplift on existing license and maintenance, allowing the customer to remove limits on their usage while in active support. In addition, these customers gain cloud credits for future consumption, thus providing an an additional incentive to purchase the Open Pass.

Speaker 2

License and maintenance growth are intrinsically related. It's important to note that while our core maintenance business continues to return impressive results, the ITOM and ADM areas are not growing this year due to the license performance. With this, our total maintenance revenue growth rate will be negative this year. Our return to total maintenance growth is centered on three programs: continued execution on APA and premium services two, sell more licenses, including ITOM and ADM and Open Pass and three, new advanced customer services or ACS. We are focused on growth.

Speaker 2

We will return to growth and we will update you on our year end call. Paul Duggan is on the call today to answer any questions you may have about our growth plans and the next steps in the business. Our next top growth opportunity is getting our ADM and ITOM businesses performing better, get them to their best, including their cloud growth. These areas have been holding back our growth and impacting our license and maintenance revenues as noted above. Our new Chief Product Officer, seventy eight Barry, who rejoins OpenText from Ericsson and Vonage, will be laser focused here.

Speaker 2

Let me walk you through our actions and confidence in returning these two groups to overall growth. On ITOM, with TitaniumX, we are differentiated in observability, which includes discovery assets vulnerabilities and IT service management where we're expanding corporate service management. We plan to re launch and re engage our 5,000 customers with our new service management cloud, conjunctive with ramping sales go to market and professional services. The next leg of ITOM growth will be driven by expanding outside of traditional IT workflows into employee workflows, customer and industry workflows and the merging of IT and operational workflows. On the ADM side, we have reoriented our go to market strategy as a top of market focus.

Speaker 2

ADM is differentiated not for a single developer, but for large scale organizations who are writing software. This is a really good place to be as we are all software companies today. Our top industry focus includes software and cloud companies, financial services, auto, telecommunications, biotech and more. With this new strategy and with TitaniumX, we have two key SaaS wins already in Q2 at Pfizer and Lilly. I am confident we'll return to growth with TitaniumX SaaS AI and our top of market focus.

Speaker 2

We're also live internally across 10,000 engineers for requirements management, productivity insight, lease management and quality. We took all our requirements and put them in the product and now that's part of Titanium X. I find when you can run the software yourself and gain value, you build strong momentum from there. Next growth opportunity continues to be with our hyperscale partners who play an expanded role in our cloud growth. Real simple, Microsoft, we've decided to bring our XDR to market on Azure and integrate it with Microsoft Security Copilot.

Speaker 2

Our new SaaS platform and our new sovereign capabilities run on GCP. Our private cloud runs across all the hyperscalers for customer choice with AWS, GCP and Azure. Our SAP products run-in the SAP cloud and across all hyperscalers. And as I said at OpenText World, we make multi cloud work and these partnerships will contribute markedly. And finally, in addition to all these organic programs, we will continue to evaluate strategic opportunities to create value and or increase our growth rate through divestitures or combinations.

Speaker 2

Let me turn to RPO. With growth as our new number one priority, I want to present our new RPO disclosures and new cloud CRPO metric that will provide insight into our cloud growth over time. There are two strategic points I'd like to make and then Madhu will go into detail. First, we are now providing further insight into RPO, both for cloud and maintenance, both current and non current. As you can see from ending Q2, cloud RPO was $2,300,000,000 and larger than our maintenance RPO at $1,800,000,000 Please note this is now for the entirety of our cloud business and fully includes enterprise and SMB.

Speaker 2

There's no more asterisk on our disclosure including this, not including this. This is our full cloud business. Second, we're also introducing a new metric cloud CRPO and what flows in and what flows out and a common sense formula to calculate the change in cloud CRPO from a beginning period to an ending period. We also include an example contract waterfall. We designed our disclosure after viewing market leading cloud companies including SAP and Salesforce.

Speaker 2

And of course, we welcome your continued feedback to improve even more. Now, we're also including periods ending June 30, 'twenty four, September 30, 'twenty four, December 31, 'twenty '4, and we'll provide these new disclosures every quarter going forward. And when we complete this fiscal year, you can then begin to gain further insight by tracking year over year cloud CRPL compares and growth. So we thought it was a good time to provide a deeper insight into RPO. Let me move on to our financial targets and turn to our updated F25 targets.

Speaker 2

We're revising our revenue downward by $130,000,000 to a range of $5,170,000,000 to $5,270,000,000 The $130,000,000 is broken out approximately 25% FX, 25% DXC impacting license and maintenance, and 50% from ITOM and ADM performance impacting license and maintenance. And we added a Slide nine to our investor presentation to provide detailed insight into the $130,000,000 Now, conjunctive with this, our cloud revenue range is unchanged. Our adjusted EBITDA percent target is unchanged. Our new cloud bookings growth range is 20% to 25% representing a very strong second half and momentum into '26. We're raising our free cash flow range to $600,000,000 to $650,000,000 We're on track to delivering $570,000,000 plus of record capital return to shareholders this year through dividends and buybacks.

Speaker 2

And our F-twenty '6 and longer term aspirations remain unchanged, and our next update on our longer term view will be on our year end call. Like all businesses, we're monitoring the impacts of tariffs, currency, and the transactional nature of U. S. Policy. All of these items are creating some business uncertainty.

Speaker 2

Let me turn to DXC for a moment. It's well chronicled that HP, DXC and Micro Focus had a strategic relationship where DXC was a major reseller and consumer of HPE and Micro Focus software. During Q2, the long life Micro Focus Alliance agreement with DXC has now run its course. That reflects the end of an unlimited deployment model with DXC in Q2. And we did not come to a mutually beneficial new agreement.

Speaker 2

This ending is the best outcome in the long run for OpenText as we're able to establish now full value for our software, engage customers directly. However, in the near term, it creates some headwinds for renewals and maintenance revenue in the second half of the year second half of fiscal 'twenty five. More importantly, it positions us for success in 'twenty six, which is growth. DXC remains partner and we hope to build a forward looking partnership from here. As we discussed during our last earnings call, Q2 and F 'twenty five are difficult year over year comparisons.

Speaker 2

Please recall in fiscal twenty twenty four, we disclosed license revenue primarily from inclusion of Micro Focus and grants of certain IP rights. This was particularly called out within Q2 and Q3 of last year. I want to give a really important perspective here, really important. When you're looking at the core health of our business and the foundation we are building on for growth as our new number one priority, excluding AMC, excluding license revenue from grants of certain IP rights, excluding the FX impacts, our F25 year over year revenue growth would be constant, not declining. And excluding the same half DXC impact, would be growing.

Speaker 2

And further and very important, we expect the company to return to bright line organic growth in Q4. Hope you find this insight helpful. Let me wrap up with some qualitative comments as we look over the remainder of fiscal 'twenty five. Post AMC divestiture, margin was clearly our number one priority. With our first half results and our Q2 delivery, we have delivered.

Speaker 2

Now that we've delivered, we're setting a new number one priority, which is growth. We have our business model right and our operating foundation strong and with a Q2 adjusted EBITDA of 37.6%, three zero seven million dollars free cash flow and raising our free cash flow outlook for the year. Our growth challenges are in focused areas and we have a clear plan to resolve them in the short term with a more focused leadership team. We expect Q4 to have bright line total revenue growth and this sets us up for a successful F26. We're excited about the opportunity of growth in Titanium X, content, security, AI, SaaS, getting ITOM and ADM to its best, improved sales execution, open pass for license, advanced customer services for maintenance, all expanding our competitive advantage.

Speaker 2

I'd also like to note that near 60% of our business is in The U. S. And the new administration is focused on pro growth initiatives and investments like SMB and expanding manufacturing. We're excited about these pro growth opportunities ahead of us in The United States. Growth plus competitive advantage plus margin and free cash flow expansion plus capital return is the OpenText formula for creating exceptional shareholder value.

Speaker 2

You asked for more transparency into the exceptional items in our cloud, so I hope you find the deeper insights helpful today. You have my full commitment to continue this style of communication. So let me end with, we're making progress, leadership team is focused and we will not rest nor will be satisfied until we deliver total growth, cloud going faster and back to maintenance growth. So with that, let me turn the call over to Madhu.

Speaker 3

Thank you, Mark, and thank you all for joining us today. Please refer to the IR materials posted on our website. In Q2, we demonstrated the strength of our operating model, delivering 37.6% adjusted EBITDA, a significant achievement, and that reflects our operational efficiency as a larger company. Today, I will also present expanded disclosures and new metrics relating to RPO and CRPO. In specific instances, I will provide year over year comparison excluding the impact of AMC divestiture.

Speaker 3

And moving to financial metrics, GAAP net income was $229,900,000 or $0.87 diluted EPS. Non GAAP diluted EPS was $1.11 down 10.5% due to the impact of AMC divestiture. GAAP gross margin of 73.3% was down from 73.6% year over year. Non GAAP gross margin of 77.2 compared to 78.6% due to higher margin license revenue in the prior year from AMC and IP rights. Non GAAP cloud gross margin was strong at 63.3%.

Speaker 3

Adjusted EBITDA of $501,500,000 or 37.6 percent and continues to reflect our extreme operational focus to capture our large margin opportunity. Operating cash flows of $348,000,000 and free cash flows of $306,700,000 DSOs at forty three days, one day higher than forty two days from last quarter and down four days from Q2 last year at forty seven days, and that reflects the strength of our working capital in what is seasonally the highest billing quarter for us. Now moving to outlook. First, let me draw your attention to our Q3 quarterly factors included in Slide 12 of our investor presentation. We expect $1,260,000,000 to $1,300,000,000 of total revenue and ARR of $1,025,000,000 to $1,045,000,000 We're targeting Q3 adjusted EBITDA margin of 29% to 30%.

Speaker 3

And let me recall that while our fiscal year end is June 30, January of each year starts the clock for employee salary uplifts, the higher benefits and vacation accruals. To note, our total spend in Q3 will be approximately 8% higher on a quarter over quarter basis due to the factors I just noted, yet 3% lower on a year over year as we continue to optimize our expense models. Marcus provided you with an insight into our updated fiscal twenty twenty five outlook and that there is a clear path ahead to address our near term challenges. We remain on target for our fiscal twenty twenty five adjusted EBITDA target of 33% to 34% and have increased the free cash flow range to $600,000,000 to $650,000,000 for the year. Now let me offer more details on our expanded disclosures relating to RPL.

Speaker 3

Please refer to supplemental materials on our IR website, which include the expanded disclosures to be read alongside our Form 10 Q, Page 13 of the filing today. You will see total RPO of $4,100,000,000 including cloud RPO of $2,300,000,000 and customer support, AKA maintenance and other RPO of $1,800,000,000 For cloud, current CRPL is a new metric. The percentage to be recognized for the next twelve months is approximately 50%. The remainder is the balance beyond twelve months. We want to provide additional insights and sharing two numbers relating to cloud revenue in any given twelve months.

Speaker 3

Approximately 60% of the cloud revenue arises from CRPO, current RPO balance and remainder of the 40% is contributed in year by revenue from in year new business, revenue from in year renewals and do refer to our strong cloud renewal rates, revenue from in year uncommitted business, which include business not in committed contracts and contracts more aligned to consumption models like our business network. Page four of our supplemental materials for details on cloud CRPO model and a cloud contract example on pages five and eight. Our enterprise cloud bookings, $250,000,000 for Q2, flow completely into the cloud RPO balances and only the current portion of those bookings flow into CRPL. For customer support, the percentage to be recognized for the next twelve months is 79%, given the predominantly annual nature of support contracts and ratable revenue recognition. RPL balances can fluctuate from quarter to quarter.

Speaker 3

We are a global company operating in multiple industries and verticals and seasonality is inherent in our business. Calendar year end and our fiscal fourth quarter June will generally see stronger bookings. In summary, I would like to close with our previously communicated four point strategy to create shareholder value. As we continue to accelerate cloud growth, capturing the large margin opportunity and cash flow expansion remain front and center. Alongside disciplined capital allocation, all enabled by the OpenText business system.

Speaker 3

Our strong operational improvements during the last two fiscal years are paying off. These efforts continued in Q2, posting 37.6% adjusted EBITDA margin in Q2. Our free cash flow and working capital performance in Q2 was driven by strong cost controls and leveraging timely and advanced billings supported by steadfast collections. Turning to the dividend program, the Board of Directors declared a quarterly cash dividend of 0.262 dividend is 03/07/2025, and the payment date is 03/21/2025. We continue to be on track to deliver approximately $570,000,000 of capital via our dividend and share buyback programs this fiscal year.

Speaker 3

I will close with a few areas relating to operational initiatives with a deep lens again into margin and cash flow expansion. Expanding cloud profitability by addressing a fixed data center space, optimizing cloud infrastructure, our vendor contracts and customer level cost structures and hyperscaler cost containment, all will continue to benefit our cloud gross margins. Our next wave of high value use of AI internally are in full motion in sales and R and D. Todd Sion, who is with us today and can certainly take your questions, Todd has rolled out programs towards consistency and elevating sales excellence. This will improve sales productivity while giving us operating leverage.

Speaker 3

We continue to expand our Centers of Excellence given the incredible talent and capabilities. Our geographical shift to the Centers of Excellence has a strategic focus to ensure roles and regions are optimized. In terms of investments, our plan includes investments in marketing for demand generation, sales university for enablement and training, new sales leadership in content, cyber and legal tech, all to drive our go to market initiatives. We remain well positioned for return to growth in Q4 fiscal twenty twenty five to expand margins and cash flows to deliver a strong fiscal twenty twenty five and setting us up for even greater success in future years. On behalf of OpenText, I would like to thank our shareholders, our loyal customers and partners for your continued support.

Speaker 3

A big thank you to the fellow team members at OpenText for your unwavering commitment to drive greater results. I will now request the operator to open the call for your questions.

Operator

Thank you. We'll now begin the analyst question and answer session. Our first question is from Raimo Lenschow with Barclays. Please go ahead.

Speaker 4

Perfect. Thank you. Congrats on the extra disclosure. I'm really looking forward to kind of digging into that. One area that is obviously like helping you or not helping you is currently economy.

Speaker 4

Mark, can you kind of talk a little bit about what you saw in the quarter, what you saw in the different regions? That would be a great start for us. Thank you.

Speaker 2

Yes. Thanks, Raimo, and thanks for the comments. We're excited to provide that increased visibility and you have, Mike, a commitment to continue that style of communications. Look, I think around the globe, the only area I'd shout out is Europe. And growth is hard in Europe right now.

Speaker 2

But we are in very good industries. We're in strategic manufacturing. We're in communications. We're deep with governments. And that's really the only macro area that I would shout out.

Speaker 2

We're quite excited about the pro growth American investment initiatives happening in SMB and U. S. Based manufacturing. And there's no doubt that currency, the new U. S.

Speaker 2

Administration is focused on The U. S. Currency, which is creating FX challenges for everyone who is a global business. We are not subject to tariffs as a digital company. We'll see where that progresses over time, but it's really on physical goods, not digital services.

Speaker 2

And that just creates some uncertainty for others. Actually, we're here to help customers to think about moving manufacturing or supply chains to kind of right balance their portfolios. So we're not subject to the tariffs. We're helping customers. We're excited about the pro growth investments in The U.

Speaker 2

S. But I'd say growth in Europe is elusive right now, but I like the industries we're in.

Speaker 4

Perfect. Thank you. And one follow-up. You talked a lot about yes, I had one follow-up, like you talked a lot about like ITOM and you mentioned observability, ITSM, etcetera. The one question I get a lot from U.

Speaker 4

S. Investors is around like how should we think about you in the market because obviously there is like ServiceNow on the ITSM item side, there is like the Observability guys out there, like where do you think you kind of play and where do you win? Thank you. Congrats from me.

Speaker 2

Yes. Thank you. Well, I like very much the that's why I highlighted we want to outperform in key categories. And the three key categories are content, security, and what we call ITOM today. So if you think of our ability to discover a company through observability and monitor it, be able to manage all its unstructured content, intelligent content, collaboration and workflows, that on top of that have our own package staff not just for IT service management, but for HR help desk, for supply chain help desk and corporate employee experiences.

Speaker 2

I think we're very well positioned in that core stack to out compete and outperform. So expect us to focus on observability and service management being real focused in those two areas, but combined with security and combined with our strength in content.

Speaker 4

Okay. Thank you.

Operator

The next question is from Samad Samana with Jefferies. Please go again.

Speaker 5

I appreciate the question. This is Billy Fitzsimmons on for Samad from Jefferies. Mark, you highlighted multiple growth opportunities in the prepared remarks. Maybe expanding on the previous answer, one of those growth opportunities you talked about was security. Maybe to double click there, can you talk about where you do particularly well in security today and additional areas of investment you're making right now to grow in that market?

Speaker 2

Yes, very happily and thank you. Just a little echo on the phone there. So where we're focusing where we are today is core identity, applications, network and forensics. That's where we excel today. And I highlighted some of our new SaaS wins in that area.

Speaker 2

Nestle, for example, a code level security, FrostBank and Voltage for transaction encryption, and Capgemini and identity management. Our next deliverable or the next market segment for us is XDR, right, the ability to ingest, detect and respond. And we think we're very uniquely positioned with some of the core assets from Micro Focus, as well as the vertical database, some of our own technology, and we partner with Microsoft. We've built this integrated to Azure. We've built this integrated with security co pilot.

Speaker 2

We're going to go to market with Microsoft and we believe we're going to be a composable solution. Now, we don't think we have to go in and displace anyone actually. We want to be we want to incorporate them all into what we do. We think we can provide value on top of them all to be able to literally ingest billions of events a day and process them down to multiple a needle in multiple haystacks. Next area is we want to bring all that to our installed base.

Speaker 2

So when we launch Titanium X next quarter, the XDR capabilities will be pre integrated to our content platform and pre integrated to our business network platform. So we can go into our installed base and not just try to win XDR standalone, XDR on top of other vendors, but pre integrate it into our own software. So that's why I highlighted it as my second point of growth and in a category we're going to out compete in and we put into to lead the engineering side of the business, we repositioned Mui Mezuz to do nothing but security. So that's why we feel pretty confident here.

Speaker 5

Thanks, Mark. And then if I could sneak in a second one maybe. A big focus during the presentations at OpenText World was on some of the go to market changes across the business. Can you just remind us of some of those announcements? And obviously, it's only been a few months and things take time, but maybe updates on progress thus far and maybe where there's still more work to be done?

Speaker 2

Yes, we have Todd Seon with us. So Todd, do you want to jump in?

Speaker 6

Yes, absolutely. Thanks for the question. Look, we've been heavily investing in our sales force capability across a comprehensive and global sales excellence program that commenced a couple of quarters ago. And we're beginning to see outcomes from that investment now. In Q2, we actually saw improvement of AE productivity, both tenured and new AE.

Speaker 6

And in the second half, the sales excellence program investments continuing. Myself, Sandiono, our marketing leader are going to be on the road in Asia, ANZ, Europe and U. S. Markets driving this with our sales force. So we're excited about the productivity gains that it's driving.

Speaker 6

And then in addition, look, we're in the people business. So there's been a lot of improvement and boosting of leadership within our sales organization as well.

Speaker 5

Perfect. Thank you very much, Todd and Mark.

Operator

The next question is from Thanos Moskopoulos with BMO Capital Markets. Please go ahead.

Speaker 7

Hi, good afternoon. Mark, can you expand a bit in terms of the challenges in ADM and ITOM? Was that more on the go to market side or a bit of both? Despite that maybe just those products that having been classified and now you're addressing that with Tanium X, just any color would be helpful?

Speaker 2

Yes, very good. Thanks for the question. Yes, we as I committed to, we're going to have a new style of communication. And so when we have exceptional items or things to communicate, we're going to provide the detail. And that's what we're doing today inclusive of materials in our IR deck.

Speaker 2

So within the 130,000,000 20 five percent is FX, 25% is DXC. And really focuses on focuses down to just ADM and ITOM about $65,000,000 to $70,000,000 where is the core challenge. And it's related to license and maintenance, not the cloud side. So we got the security business back on track. So in ITOM, it's about TitaniumX.

Speaker 2

It's the our new observability cloud, it's our service management cloud. We believe we're ready now, including some of the investments Todd was talking about, and we're simply going to re launch with TitaniumX and reengage our 5,000 customers. On ADM, we have now refocused the portfolio to be top of market. And this idea of to be everything to all things, which was the previous strategy, just ain't the new strategy going forward. We're not here for a single developer.

Speaker 2

We're here for a large scale developer organizations. We're now live on the product. I got 10,000 engineers in the product every single day. We've taken all those advancements, put them back in the product and they're released with TitaniumX. Thus wins like at Pfizer and Eli Lilly that we talked about.

Speaker 2

So we're confident that here in the short term, we're going to return those two pieces back to growth. I'd also like to take the EXE would be growing. So, we're very focused on that area of ITOM and ADM license maintenance $65,000,000 to $70,000,000 and I believe we've got the right plan here in the short term to return them to growth.

Speaker 7

Great. And then you touched on the new licensing model in your prepared remarks, which should be a bit of a tailwind. Just any further color on that and when specifically was that launched?

Speaker 2

Yes, we launched it in January. This is the OpenText Pella. And look, we have a large license install base and we're in the license business. And there are a couple of models in the industry that when you get pretty mature in this space, Customers want to keep for those customers who want to keep running on premise or off cloud, we want to help support them. And they've grown, they've acquired, they may want to expand to new divisions, add more users, so we're going to make it easy for them.

Speaker 2

We're going to allow them to go enterprise wide, not have to count anymore, and that will require a license uplift and a maintenance uplift, and we'll give them some cloud credits along the way. So when they're ready to move to the cloud, they're even more invested in the OpenText solution. So again, less the IP licensing license is growing this year and we want to kind of continue that momentum with this new Open Pass mechanism.

Speaker 7

But the premise is that the clients pay more, but in exchange get unlimited licenses at Seth Corbett?

Speaker 2

That's correct. They will pay more in license, they'll pay a little more in maintenance, but in exchange for that, they'll be able to go unlimited and they'll no longer have to count.

Speaker 7

Great. Thanks, Mark. I'll pass the line.

Speaker 2

Thank you. Thank you. Operator, next question.

Operator

Apologies. The next question is from Stephanie Price with CIBC. Please go ahead.

Speaker 8

Good afternoon. Just in light of some of the recent news around large language models such as DeepSeq, Just curious how you're thinking about planned investments in AI and whether you think you can benefit from some of the cost reductions in the LLM space?

Speaker 2

Yes. We're, I said earlier, Stephanie, welcome to the call, a criteria question. I said very early on, there'll be 1,000 language models and let 1,000 models bloom. To quote a poem, there was tulips, not language models, but let 1,000 tulips bloom. So let 1,000 models bloom.

Speaker 2

We like the spirit of DeepSeek to lower the cost of language models. And we're already embedding some open source models into parts of our solution to for ease of deployment, predictability of expense and lower expense. So we applaud the spirit behind DeepSeek and we think this trend will continue. Now for technical point, we have DeepSeek in a quarantined area fully installed. We've tried the R1 model and it doesn't really work.

Speaker 2

So it's actually more expensive than running Lama. So I don't want to get into the technical aspects of the version in China of how it may be running the technical back end, But we've done just a pure test in a quarantine Faraday cage and it simply doesn't outperform Lama and is not more cost effective. But we applaud this idea of innovation, open source models and lowering the cost and we will benefit from that.

Speaker 8

Thanks for the color. And then in your prepared remarks, you mentioned evaluating strategic alternatives to increase value either through divestitures or combinations. Just hoping you can expand on how you're thinking about capital allocation at this point?

Speaker 2

Yes. Well, great question. And look, I think it goes like this. Margin was our number one priority post AMC divestiture and I couldn't be more proud of the team and how they delivered in the first half including Q2, I mean $500,000,000 of adjusted EBITDA dollars. So we have a new number one priority.

Speaker 2

We have multiple priorities, but this is the number one overriding priority at the company, which is now growth and is across all BUs and maintenance. We're going to return to BrightLine growth in Q4. And yes, we all want more growth and we expect more growth and we'll return to growth in Q4. That's our current focus. Now in parallel, we're going to continue to evaluate opportunities.

Speaker 2

And what does that mean? In some cases, I think it will mean for BU an acquisition. I think in some other cases, it could mean a combination of divestiture. But my macro point is this, and my intention for purposely saying it on the call in my script is I want to deliver more paths and more reasons to buy our stock. And I think those answers are total growth, higher cloud growth, higher margins and higher free cash flows, upper quartile capital return, and unlocking the value of each of our business units beyond organic growth through this strategic thinking.

Speaker 2

So clearly we're focused right now on record capital return in 2025. You'll completing the divestiture and getting the margin operation engine, boy, it's just a whole different level of oxygen with the growth as our number one priority. And as we focus on each BU to do that, I wanted to kind of walk through just how I was thinking in parallel to just focusing on organic growth. Hope that's helpful.

Speaker 8

That is. Thank you very much.

Operator

The next question is from Paul Treiber with RBC Capital Markets. Please go ahead.

Speaker 9

Thanks very much and good afternoon.

Speaker 3

Just wanted to ask

Speaker 9

a question on bookings and your expectations for bookings going forward. I think the outlook calls for a pickup in growth in the second half of the year. What do you see as the primary driver of that? Do you expect Titanium X to drive a surge? Or do you just see less seasonality than the past in $200,000,000 or so on bookings per quarter as sort of

Speaker 2

the new normal going forward? Yes. Paul, let me just jump in the hand, I'll hand to Todd. Look, on a percent basis, it was a little over 6% in Q2, but it was a record high watermark of $250,000,000 of guaranteed new bookings that flowed right into RPO. So that is a high watermark.

Speaker 2

And clearly, we're expecting a very strong second half. And Todd, I'll let you talk to the strong second half.

Speaker 6

Yes. Thanks, Mark, and thanks for the question. So, I mean, just as Mark mentioned, we're super proud and excited about that record quarter of customer demand for cloud and new bookings. And we see this continuing into the second half because we've got a solid pipeline in Q3 and in Q4 we have our largest cloud pipeline ever. That means we've got really strong coverage.

Speaker 6

In addition to that, we've launched already a focused list of programs and incentives to convert that pipeline. And we also fully expect that Titanium X being completed next quarter, it's going to provide a tailwind for that pipeline conversion as well. So we're super bullish.

Speaker 4

That's great to hear. Thanks for

Speaker 9

the explanation. The shifting gears and speaking on AI, could you walk through you touched in the past like there's internal initiatives around AI. Do you have any metrics that you can share in terms of either productivity gains that you've seen or ways that you can be more efficient with your spending internally? So perhaps you can shift that those dollars to focus on growth initiatives?

Speaker 2

Yes, great question. Thank you, Paul. We're not ready to put a quantum on it. But we have two large initiatives and there'll be a third and a fourth that's right on the event horizon for us. The first is our platform, Athena, where you can imagine

Speaker 4

the

Speaker 2

breadth of software we build in development environments, it's we're close to 10,000,000,000 lines of code across multiple environments and IDEs and all of that. We've built a proprietary AI platform internally for our developers to use Athena. We don't use Copilot to use Athena for things such as the following. Explain a piece of code to me. I'm a new developer and I got to learn a piece of code.

Speaker 2

Explain it to me. I need to fix the bug. Help me. I need to write interface to an API. Generate the code.

Speaker 2

I need to localize it in Hatagana or in left to right languages, so generate the screens and GUIs for me. So that's going to uplift productivity. Is that 5%, ten %? We'll see. It could be mid single digit, it could be low double digit.

Speaker 2

And if we can do that, I just added 1,000 developers with no extra cost. On the sales side, we are live on a platform we call internally ollie.ai. Ollie was the original name for our pre demo environment back in the Live Link days, and we've advanced it to ollie.ai, where we're helping and we demoed it at OpenText World to generate RFPs. Can that uplift sales productivity 5% to 10%, fifteen % increase our win rate? Todd, any comments you want to provide on ollie.ai?

Speaker 6

Yes. So if you're a presales leader at OpenText, that is your first stop when you have an RFP right now. It's live and it's active. And we are at the precipice in Q3 of expanding that into capabilities for the entire sales force. Account executives will have new information at their fingertips via mobile as well.

Speaker 6

So we're really excited about AI boosting our efficiency in worldwide sales. Yes.

Speaker 2

So the next stop is tech support. And one of the next stops post that is help increase our win rate and competing in more opportunity. So look, from what we've seen from theory to test beds to version one, even version two internally, I'm absolutely convinced we'll raise productivity.

Speaker 4

And engineering, sales, support and helping us compete more and win more.

Speaker 2

But not

Operator

The next question is from Seth Gilbert with UBS. Please go ahead.

Speaker 10

Thanks for the questions. Maybe

Speaker 4

two, if

Speaker 10

I may. To start, you made a comment in the beginning of your prepared remarks about the upgrade to Titanium X, reengaging the 5,000 customers and upgrade fees kind of rising over time. I was wondering if you could talk about the upgrade journey to Titanium X, how is it going? Is there maybe a plan to migrate a certain percent of customers in FY 2025?

Speaker 2

Yes, fair enough. So, Titaniumx is fully delivered next quarter, right, so we're almost there. And we have 5,000 customers who are just on ITOM, not the overall install base of 120,000. But the opportunity is large for us. We want to get the entire install I mean, I'm just going to start a big general.

Speaker 2

I want the entire install base to be engaged and move to Titanium X over time. We got to bring our install base with us and it's compelling. Gen AI and aviators, fifteen aviators, one hundred agents. SaaS at scale, I've already started to highlight some of the wins, SAP, BAS, ALDI, Frost Cap, Gemini. Content plus in the content world intelligent content plus AI workflow plus SaaS, ITOM, the one you highlighted, Observability Service Cloud, ADM, the features that run OpenText can now run you BN, Control Tower and AI and Security XDR.

Speaker 2

So, TitaniumX is compelling. We're going to start with those on older versions, right? We're going to kind of look at three major buckets. One of those buckets is the customers on three releases and back. We have a world class PS organization, they'll engage, they'll have upgrade programs, and that's the first place that we're going to go to with TitaniumX.

Speaker 2

And we respect customers who don't want to move and we'll perfectly understand that, but we'll begin to raise your prices. And because our cost will go up of supporting you off cloud. So that's a bit of the opportunity, and that's a bit of where we're going to start and we begin next quarter.

Speaker 10

Got it. Very helpful. Maybe just as a follow-up, unless I missed it, I didn't see any of the disclosure around the business unit revenue split. I guess we were hopeful that we would see maybe a little bit of it this quarter. So even if and correct me if I maybe missed it in the filings, but even if not quantitative, I was wondering if you could provide maybe some qualitative color on some of the faster growing BUs, business units and maybe some that are not growing as quickly.

Speaker 10

Thank you.

Speaker 2

Yes. No, you didn't miss it. And what we did this quarter is focus on cloud. And so the new RPO disclosure is very important and very strategic and ties to our number one priority. So we put our energy there, because this is the long life disclosure for us to give you the insight into the strength of our cloud growth over time.

Speaker 2

So that's where we put our energy to get RPO, both maintenance and cloud RPO and cloud RPO, cloud CRPO. So that's fully available. We also focused our attention in the communication around and I just want to say it again that again less the IP licensing license is growing this year, new insight for you. Less IP and FX, the business is constant, new insight for you. Unless DXC, we'd be growing.

Speaker 2

So we focused on those insights, versus breaking down each BU. We will at the end of the year provide our usual BU update if you will. Content, our hot hand with AI. Security growing. SMB, it was a negative year last year.

Speaker 2

We're performing constant this year with path to the second half growth. For example, we just delivered the new secured cloud, secured VPN or PC optimizer. We have EDR on secured cloud. We have a whole new online presence at cybersecurityopentext.com. So SMB went from negative to constant path to growth in the second half should be a positive contributor in the year out.

Speaker 2

We also provided some insight into ADM and ITOM on the call, specifically around maintenance and license. So we thought that was a better usage of our time to give you that insight. And so that's a little bit of the BU insight. But we'll have a full BU update at the end of the year.

Speaker 10

Got it. Super helpful. Thank you, Mark.

Speaker 3

And Seth, welcome to our call and thank you for your questions.

Operator

The next question is from Kevin Krishnaratne with Scotiabank. Please go ahead.

Speaker 10

Hey, there. Good afternoon. Question on the cloud business that had a nice uptick in growth this quarter, but you've maintained the guide 2% to 5% for the year. You sound really bullish on that business. You talked about a lot of different initiatives, big SaaS wins.

Speaker 10

And I'm just curious, what would is there anything to think about that would make the revenue growth in cloud be closer to the 2% range rather than the 5% range? Just wondering about the guidance and your thoughts there.

Speaker 2

Well, I highlight a couple of things and maybe Todd or Madhu jump in. One is record new commitments in Q4, '2 '50 million dollars flows right into the top of the RPO and you can now see the RPO and you'll see it next quarter. Second is I highlighted large strategic SaaS wins before the full delivery of Titanium X. By the way, when we deliver Titanium X, customers don't have to upgrade those SaaS pieces. We upgrade them for them.

Speaker 2

On the content side, a large win at SAP, BASF, ALDI, Immunic Read, on the security side, Frost, Capgemini, Nestle on ADM, Lilly, Pfizer, they're all SaaS wins, faster time to revenue. And then the momentum around the delivery of TitaniumX. So, yes, we're focused on a $65,000,000 70 million dollars in ADM and ITOM, but no, we're not moving our cloud view of fiscal 'twenty five. Tahira, if there's anything you want to add or me too?

Speaker 3

Yes, I'll take the path and then Todd, please chime in. So Kevin, to a specific question on why we left the ranges unchanged, right? I think the good news is that we did leave the ranges unchanged, notwithstanding kind of the downward trend in the other buckets, license and maintenance, right? Now two things, I will remind us, our enterprise cloud bookings, the strong cloud booking still have a ramp to revenue, right? There's about six to nine months ramp to the first dollar of revenue.

Speaker 3

So think of this as providing us more visibility into beyond '25. And then the second part, as Mark outlined, SMB and C are very strong components of cloud revenue for this year for '25. We are planning them at more neutral to constant. So those are the reasons why we've left the range unchanged. And SaaS is picking up as you heard from Mark and over time beyond 25% certainly we think the SaaS mix in the overall cloud revenue will provide higher velocity from bookings to revenue.

Speaker 3

Yes.

Speaker 6

Now adding on to my comments I made about the direct sales force in the pipeline activation and conversion activity we have underway, partnerships are playing an increasingly important role in our cloud business and that's going to only reinforce our industry leading SAP partnership is driving accelerated cloud growth. Our relationships with the cloud service providers Microsoft and Google are contributing and then in our emerging markets in specific industries, resellers are playing an increasingly important role for us as well and we're excited about that.

Speaker 10

I really appreciate that extra color. I just want to slip one last one in here. Can you remind us how big your government opportunity is? How much government exposure you have in The U. S?

Speaker 10

And maybe any thoughts on Doge potential benefits or things to consider there? Thanks.

Speaker 2

Yes. No, we don't break out just our U. S. Government business. But I'd say globally, the public sector is roughly 15% of our revenues on a global basis.

Speaker 2

Look, we're on the business front, we are excited about the opportunities in The U. S. The mid market and manufacturing investments, it's 60% of our business in The U. S. And we're going to be very present to help our customers take advantage of that and do that digitally enabled.

Speaker 2

Part of The U. S. Government efficiency programs, DOGE, is about becoming more digital. And so we got a great presence in D. C.

Speaker 2

We're fully represented both on the government intelligence side as well as standard agencies and NGOs as well as the large states in The U. S. So I think we're well positioned that as opportunities come along, we'll be right there.

Operator

The next question is from Richard Tse with National Bank Financial. Please go ahead.

Speaker 7

Oh, yes. Thanks for fitting me here through the hour. Just quickly, can you provide some metrics on how Aviator is performing?

Speaker 2

Look, I think the we're not disclosing specific bookings or revenue numbers. There is no doubt that our work fully delivered in TitaniumX is helping us win. The SaaS wins all have a part of AI. Again, I can't emphasize the SaaS wins. OpenText imagine these two words in the same sentence, OpenText and SaaS.

Speaker 2

And what TitaniumX we set out on TitaniumX to have as part of it a SaaS platform. The wins in Q2 SAP, BASF, ALDI, Munich Re, Frost, Capgemini, Nestle, Lilly, Pfizer, I just couldn't be more proud of those wins. Most of them have Aviator as part of it. So we're not here yet to kind of break out this much of revenue or this much of booking, but unequivocally a part of our platform, part of our win strategy and part of the actual wins at this point. So stay tuned.

Speaker 2

There will be more to follow here. As we upgrade to Titanium X, there will be more to talk about on the AI platform.

Speaker 4

Okay. And just a last quick one

Speaker 7

here for me. Appreciate you sharing those RPO metrics. I think in the past you've talked about sort of expanding your disclosure. And so as you go forward, are you going to be looking at disclosing things like net expansion rate? And I only ask that because a big part of your strategy here is selling into the base.

Speaker 7

And I think having that metric in terms of understanding how that base is growing would be very helpful. So is that something on the radar here?

Speaker 2

Thank you for the feedback. There is we're going to assess the feedback. Clearly, it's not about renewal, it's about expansion over time, right? Yes. So, thank you for the feedback.

Speaker 2

We'll take it offline and process all the feedback. It's a big disclosure for us, as you know. It's both cloud and maintenance. It's current and long term with a big emphasis on cloud CRPO and that increased visibility. And so what are the commitments flowing in?

Speaker 2

What are the uncommitted portions in there? All the things we do talked about, we disclosed a very simple formula. We looked at SAP and Salesforce of how they disclose. We have a net renewal rate as well. So a good comment on we start to talk expansion.

Speaker 2

We'll take it as a feedback and we'll collect all the feedback and then understand what the next set is. So thank you for the question.

Speaker 5

Thank you.

Operator

I'll now hand the call back over to Mr. Baron Shea for closing remarks.

Speaker 2

Yes, very good. Thank you for being part of our Q2 call. Margin was our number one priority post AMC divestiture. And with our Q2 and first half performance we delivered and our new number one priority is growth. Second, we're very excited about the opportunity that Titaniumx and upgrades will bring us.

Speaker 2

And three, we look forward to your continued feedback on our new style of communications and the insights into our business and did you find them helpful and how we can continue to do that. Thank you very much and we look forward to seeing you at Morgan Stanley and elsewhere. Thank you very much.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Powered by Quartr
Earnings Conference Call
Open Text Q2 2025
00:00 / 00:00