Open Text Corporation (OTEX) on Q3 2021 Results - Earnings Call Transcript

Operator: Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Third Quarter Fiscal 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would like to turn the conference over to Harry Blount, Senior Vice President of Investor Relations. Please go ahead, sir. Harry Blount: Thank you, operator, and good afternoon everyone. On the call today is OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, which will be followed by a question-and-answer session. This call will last approximately 60 minutes with a replay available shortly thereafter. Mark Barrenechea: Thank you, Harry. Good afternoon to everyone, and thank you for joining today's call. What a difference a year makes. Today, we are announcing the strongest 12-month period in the history of the company. The global economic outlook has significantly improved. US GDP projections are strong and we are in a new product cycle with OpenText Cloud Edition and we just passed $1 billion COVID vaccination globally. We have endeavored over the last year to help our customers own and deploy digital capabilities, we have purposely leveraged the last year to accelerate innovation, increase our spending and innovation, transition to modern work, get more efficient and dramatically strengthened our go-to-market. Madhu Ranganathan: Thank you, Mark, and thank you all for joining us today. OpenText delivered another strong quarter of results-driven by our investments in organic growth on a strengthening base of operational excellence. We expect this momentum to continue in fiscal '22. I will speak to Q3, Q4, our quarterly factors, our fiscal '21 total growth strategy, our fiscal '21 annual target model ranges, our '22 outlook, and our long-term aspirations all as outlined in our Q3 investor presentation that is posted on our IR website today. All references will be in millions of USD and compared to the same period in the prior fiscal year unless otherwise stated. And let me start with revenues. Total revenues for the quarter were $832.9 million, up 2.2%, down 0.8% on a constant currency basis, there was a favorable FX impact revenue of $25 million. The geographical split of revenues in the quarter was Americas 61%, EMEA 31% and Asia-Pacific 8%. Year-to-date, total revenues were $2.49 billion , up 9.2% or 7.1% on a constant currency basis. Q3 annual recurring revenues at $691.8 million, up 4.4% or up 1.7% on a constant currency basis. As a percent of total revenues, ARR, annual recurring revenue, was 83% for the quarter, up from 81% in the third quarter of fiscal '20. Year-to-date annual recurring revenues were $2.047 billion up 15.3%, or up 13.5% on a constant currency basis. As a percent of total revenues year-to-date ARR was 82% up from 78% in the first nine months of fiscal '20. Q3 cloud revenues were 355.8 up 4.8% or up 3.1% on a constant currency basis. Our cloud renewal rate excluding Carbonite was approximately 92%. Year-to-date cloud revenue was $1.047 billion up, 26.9% or up $25.5 million or 0.7% on a constant currency basis. Q3 customer support revenues of $345.9 million, up 4% or up 0.3% on a constant currency basis. Our customer support renewal rate for Q3 was 94%. Across the business, our renewals performance remained strong. Year-to-date, customer support revenues were $999.8 million up 5.2% or up 2.9% on a constant currency basis. Q3 license revenue was 76.2, down 5.9% or down 10.9% on a constant currency basis. Year to date, license revenues were $252.2 million down 15.1% or down 18% on a constant currency basis. Q3 professional services revenues were 64.9, down 9% or down 13.2% in a constant currency basis. Year-to-date, professional services revenues were 193.3, down 8.1% or down 11.1% on a constant currency basis. Q3 GAAP net income was 91.5%, up compared to net income of $26 million in the prior year and primarily driven by higher revenues, lower operating expenses, as well as debt extinguishment cost incurred in Q3 of fiscal '20. Year to date, GAAP net income of $129.4 million compared to net income of $207.8 million in the prior year, primarily driven by the tax expense relating to the IRS settlement, partly offset by higher revenue. Q3 non-GAAP net income was $204.5 million, up 22% or up 16.9% on a constant currency basis. Year-to-date, non-GAAP net income was $706.9 million, up 24.7% or up 20.5% on a constant currency basis. Q3 GAAP earnings per share diluted was $0.33, up from earnings per share diluted of $0.10. Year-to-date GAAP earnings per share diluted was $0.47, down from $0.77, also driven by the tax expense relating to the IRS Settlement. Q3 non-GAAP earnings per share diluted was $0.75, up $0.14 from $0.51 and up $0.10 on a constant currency basis. Year-to-date, non-GAAP earnings per share diluted was $2.59, up $0.50 from $2.09, and up to $0.41 on a constant currency basis. Turning to margins; GAAP gross margin for the quarter was 68.6%, up 320 basis points. Year-to-date GAAP gross margins of 69.4%, up 190 basis points. Non-GAAP gross margin for the quarter was 75.2%, up 190 basis points. Year-to-date non-GAAP gross margin was 76.3%, up 230 basis points. For GAAP gross margins by revenue stream please refer to our Q2 fiscal 21 10-Q report. Also on an adjusted basis for the quarter, cloud margin was 65.4% up from 62.5% driven by continued improvement with our cloud service delivery and strong contribution from Carbonite. Year-to-date cloud margin was 66.4% up from 59.7%. For the quarter, customer support margins was 90.9%, up from 90.1% and reflecting continued strong renewal performance. Year-to-date customer support margin was 91.2% up from 90.5%. For the quarter, license margin was 96.3% down from 96.9% primarily due to higher third-party technology costs, similar trends on a year-to-date basis as well. For the quarter, professional services margin was 23.5% up from 21.2% and reflecting the ongoing benefits from remote and cloud-based deployment. Year-to-date professional services margin was 26.7%, up from 22.2%. Adjusted EBITDA was $297.1 million this quarter, up 14.5% or up 9.9% on a constant currency basis. This represents 35.7% margin, up from 31.8% in the same quarter last year. Year-to-date adjusted EBITDA was $1.0 billion, up 20.4% or up 17% on a constant currency basis. This represents 40.1% margin, up from 36.4% during the first nine months of fiscal '20. Turning to operating and free cash flow. Operating cash flows was at $63.6 million and free cash flows were $50.3 million, which include an IRS settlement payment of $290 million. Operating cash flows are very strong in Q3. Our DSO was 44 days for Q3 fiscal '21, compared to 51 days in Q3 fiscal '20. The year-over-year reduction of 7 days is significant and it reflects a consistent acquisition through collection efficiency and other aspect of our working capital via the cash conversion cycle. Our next milestone in fiscal '22 will be automation, within the working capital framework to maintain these well optimized levels of performance. The higher efficiencies of capital spend free cash flow generation also remain strong in the quarter. From a balance sheet perspective, we ended the quarter with approximately $1.5 billion in cash and supported by our strong cash flow performance. We have a $750 million of Revolver undrawn and fully available gaining our total liquidity to $2.2 billion. Our consolidated net leverage ratio is 1.57 times of slight improvement from 1.6 times last quarter. This is a strong place to be. A balance sheet that positions us well to execute on our total growth strategy. Now turning to quality factors, total growth strategy and annual target model all available in the Q3 fiscal '21 Investor Presentation on our website. As a reminder, we view our business as annual and quarters will vary. Our long-term value created from sustained annual performance and 90-day cycles are too short to measure. The quality factors for the fourth quarter fiscal '21 when compared to the same period in the prior year, we expect the following. Expect Q4 FX tailwind similar to Q3. Total revenue growth up to 2%. Annual recurring revenue, ARR, up low single digits. Adjusted EBITDA margin percentage down 300 basis points to 400 basis points. For our full year fiscal 2021 total growth strategy, our fiscal year-to-date performance has been strong and our leading indicators appointing upwards. We are pleased to increase the clouds revenue outlook for the current fiscal year to grow 18% to 20% year-over-year versus our previous range of high teens. All other ranges remain unchanged. For our full year fiscal '21 target model were reducing our capital expenditure spend target range to $55 million to $65 million from our prior range of $85 million to $95 million, a lower CapEx range is driven by broader partnership to the hyperscale as the many parts of our business while we continue to invest in our cloud infrastructure. All other aspects of fiscal '21 target models remain unchanged. We do expect to increase our investments in a variety of internal initiatives such as the digital down, non-linear scaling of our properties and higher self-service all towards the frictionless environment with tools and automation. I am truly excited that many of these initiatives are under my direct responsibility including our CIO organization. Our fiscal '22 outlook and fiscal '24 aspirations remain unchanged from our Investor Day presentation in March of this year as we continue to strongly execute against the cloud roadmap. Our fiscal '22 outlook provides for 1% to 2% total organic growth and 3% to 4% cloud organic growth. So fiscal '24, we are targeting 2% to 4% total organic revenue growth, 85% ARR, adjusted EBITDA margin of 38% to 40% with a plan to reinvest any margin gains above 40% into additional growth initiatives and free cash flow of $1.1 billion to $1.2 billion. All M&A remains additive to our outlook and aspirations. Tax update; we note the recent developments related to the Made in America tax plan proposed the President, Biden, and the ongoing considerations by the OECD. We do not anticipate any changes to our fiscal '21 tax rate nor any significant changes to our fiscal '22 tax rates and we will continue to monitor these developments. During April, the Canada Revenue Agency or CRA issued a proposal letter to OpenText in connection with its audit of our 2017 tax year. The CRA is asserting aggressive technical valuation arguments with seek to reduce the fair market value of certain tax assets. I want to be clear that this is not, similar to the prior IRS matter we have previously discussed. This CRA proposal has no industrial cash impact but rather could affect the tax rate in future years. That said, with the support of leading tax advisors, we strongly disagree with the CRA and we intend to vigorously defend our position. All details are included in our Form 10-Q filed today. So in summary, very well done to the OpenText team for delivering a solid Q3 and leading the way. We are excited about our future and the momentum that continues to build into fiscal '22. I wish you all continued safety environments. I would now like to open the call for questions. Operator? Operator: Thank you. We will now begin the question-and-answer session. The first question comes from Stephanie Price from CIBC. Please go ahead. Stephanie Price: Hi, good evening. Just want you to give us more color on the uptake of CE? Where you're seeing the most demand and how is the pipeline building there? Mark Barrenechea: Stephanie, thank you for the question. As I said in the prepared materials, we have about 20% of our installed base now on cloud additions and that's very positive. I think ultimately the ideal landing zone for us is about 50% of the installed base that will migrate to cloud. We have all new customers come on the cloud additions. I think the ultimate landing zone is about half of our installed base by 20% today. So still significant opportunity in front of us. We are also announcing our GROW with OpenText program that for those who decided to stay on Release-16 that we introduced a new extended support program at additional fees and we're going to take our private cloud to on-premise. So, we'll be able to do managed services on-premise for customers who want to maintain themselves on Release-16 longer, which is another revenue opportunity. So, we progressed to about 20%. I think the ultimate landing zone is about half the installed base and we introduced new programs to the support those who are either going to take a little longer to get there or we'll just run the life of their investment on Release-16. Stephanie Price: That's good color. Thanks. Then on the supply chain transformation, you mentioned that of the growth driver several times. Just wondering if you could talk a bit about the demand, you're seeing in the business network and maybe some of it is approach in offerings? Mark Barrenechea: Sure thing. I'll start at the headline, which is all our services are back to pre-COVID levels except some portions of auto and that's driven mainly by chip shortages and wherever there is a temporary pause of some production. But I'm really excited to see our levels back to pre-COVID levels. Things driving demand, the return to GDP growth, new activity for us in CPG retail, healthcare, more micro payments volume over our network. As we stated, we think the one of the strongest drivers include sustainability and we have new eco-friendly sustainability features of being able to look up suppliers and get scores and look at many layers. We're also seeing regionalization. Canada has moved certain pharmaceutical supply chains back to Canada. We're participating in the regionalization of auto supply chains in Germany. We're seeing certain manufacturing supply chains come back to the US, which we're going to put be participating in some of those as well. So, I think it's a return to volume. Certain industries that have just gained more TAM, it is regionalization and our long-term sustainability features that is driving the growth. Stephanie Price: Great, thanks so much. Operator: The next question comes from Raimo Lenschow from Barclays. Please go ahead. Unidentified Analyst: Hey, this is Frank for Raimo. I wanted to dig a bit deeper into rate guidance for cloud. So, specifically, where you seeing the most strength and confidence in the cloud business, both from a product and customer vertical perspective? Mark Barrenechea: Yes. Thank you, Frank. So, it's sort of broad-based confidence right now. On our private cloud, as I said, we added approximately 75 new customers into our private cloud and these are global 10,000 customers. So, there is a continue need to provide these specialized environments, these private clouds that have very unique value proposition for them and that includes content services, experience, and some other things. Second, our new cloud API services. I highlight some of the wins previously. Then, both network volumes coming back. We're back to pre-COVID levels in certain industries as I noted, CPG, retail, healthcare, pharmaceutical leading the way for us. Putting that all together has led us to our confidence in raising our total growth strategy for fiscal 21, where we now expect to see the cloud at 18% to 20% year-over-year percent growth. Unidentified Analyst: Great, that's really good color. Then just on the GROW with OpenText program. I was wondering if you provide some more detail into the customer conversations and feedback there so far? Mark Barrenechea: Early engagement is quite positive. We announced it. We kind of gave in early preview in March at Investor Day. We had intended to launch it with OpenText World Europe and then OpenText World Asia and then continue that sort of rolling thunder approach into July with our sales kickoff and started a new fiscal year, but we kind of accelerated it and a preview did at Investor Day. So, early conversations are really positive. The first is that engagement with off-cloud customers and ensuring that they can get the full value for their investment in Released-16. So the two new services, extended support program, which is a 20% fee that we're going to charge. Then we have bringing on-prem managed services to off-cloud customers. So, those are the two brand new revenue opportunities for off-cloud. For private cloud, we believed in private cloud. Some companies were in and out and back and again. This is just a great opportunity. The customers gain unique value in their unique processes and don't want to move to kind of a more generic public cloud. We have 75 new private cloud customers and from that point, you can integrate into our public cloud or go to the public cloud directly. Our security and business network products are 100% public cloud today. Cloud Editions 21.4 or content cloud will be a 100% public cloud. You'll never have to upgrade again and that 21.4, which will be available by the end of this year. Then Experience Cloud will be 100% public cloud and Cloud Editions 22.2. So, we got great momentum there. Then, we got this brand new market which is we've turned our Information Management into APIs and whether it'd be Twilio or other companies, Stripe, and alike, who are just pure API companies, now will be our product and platform company plus an API service company as well. This is our Developer Cloud, but that's part of the GROW with OpenText Program. So, Frank, you probably hear in my voice the excitement around these strategic programs, but the initial take from April and May were just two months in have been pretty positive. Unidentified Analyst: Great to hear. Thank you. Operator: The next question comes from Paul Treiber from RBC Capital Markets. Please go ahead. Paul Treiber: Thanks very much and good afternoon. Only the transition or migration to CE. Could you speak about the unit economics? Typically when you see a customer migrate, are you seeing expanded deployments and effectively higher AR run rate per account as a result? Mark Barrenechea: Paul, good to hear your voice. Thanks for the question. We certainly expect over the long term a multiplier effect as you just noted. The reason for that is you will be on more standard product, you'll have less friction, and you'll be able to turn on more services, whether it'd be Capture, E-Signature, Project Management, the Supply Chain, or maybe you go to some API connectivity services as well. We haven't talked about certain percentages of what that multiplier effect is, but we certainly expect a greater share of wallet and higher ARR from each customer that come on cloud editions. Because of that less friction and multiplier effect as you noted. Paul Treiber: Thanks. That's helpful. Shifting to M&A, we haven't made an acquisition in over a year or so. Looking back, that's probably the biggest gap since probably HummingBird back in 2006. I imagine you're at the market and valuations of obviously run up over the last year. You mentioned, you're still looking to do acquisitions. How you think about the environment right now in terms of valuations, in terms of your pipeline, what are the opportunities that you're seeing out there? Mark Barrenechea: Yes, fair enough. It's a good question. Obviously, we're quite excited about organic growth. Let me just state at a high level we're going to continue to acquire. So, nothing has changed in that. M&A allows us to bring companies into green spaces for us. That also adds to future growth and revenue growth and future cash flows. We take a long-term view. Nothing has changed in our philosophy of disciplined and value based. Valuations are clearly higher today and we're not going to participate in valuations where we can get the return on invested capital or cash flow returns. So, we'll continue to build our capital position or cash position. As I said in the script, over the next five years, I'd expect to have a pretty good capital build of $5 million in free cash flows on our current run rate. I also noted that when you look at us historically per fiscal year, we tend to on-board on average $200 million plus of revenues per fiscal year. That will happen this fiscal year, in fiscal 21, and that's happened on average for the last 10 years. Our pipeline is healthy or varying degrees of the diligence and again, we're going to have to go over $200 million of M&A revenues in fiscal 2021 and I would expect to have meaningful acquired revenues in fiscal 2022 as well, which are not part of any of our projections right now in our F22 targets. Paul Treiber: Great, thank you. Operator: The next question comes from Thanos Moschopoulos from BMO Capital Markets. Please go ahead. Thanos Moschopoulos: Hi, good afternoon. your share prices and your valuation relative to peers. Have you thought about being more aggressive on the share buyback or for M&A? Mark Barrenechea: As you can see in our queue from today, we did not purchase any shares last quarter. We have our repurchase program available to us and Thanos, we'll keep monitoring it. We'll see how the share prices are tomorrow . But I like the capital build that we're all going under right now. It's probably my third time I'm going to say it, but you look at our free cash flows and of course, within the quarter, we had a one-time IRS payment. We're going to have a period of very strong cash flows based on all the efficiencies we gained over the last year as well as our incredible improvements in cloud margin and overall margin improvement for the company. I like the cash, the capital build. It is going to provide us a lot of flexibility in our thinking around how we return value. So, we'll keep watching this space especially as we increase our cash flow. Thanos Moschopoulos: Right. And then, in terms of the CRA tax dispute, just any color in terms of the timing? Would it be similar to the IRS in terms of probably a year or two or more before it gets resolved, how should we think about that? Mark Barrenechea: Madhu will take the CRA question. Madhu Ranganathan: Thank you, Mark and thanks, Thanos. As mentioned, we just see the proposal. CRA does of tend to talk within timing. I would say, to us, time is less of the factor. We will take the required time to defend ourselves because we strongly believe in our position and we do plan to defend ourselves vigorously for a successful outcome to OpenText. Thanos Moschopoulos: All right. Thanks. Operator: Thank you. I will now hand the call back over to Mr. Barrenechea for closing remarks. Mark Barrenechea: Very good. Thank you for joining us today. We're excited about our GROW with OpenText Program. In that spirit, we've increased our outreach for the quarter and here in the short-term and we look forward to seeing you at CIBC, Barclays, Bernstein, BofA, and NASDAQ Virtual. Thanks for attending today and look forward to our ongoing discussion. Have a nice day. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant evening.
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OpenText Corporation (NASDAQ:OTEX) Financial and Leadership Update

OpenText Corporation (NASDAQ:OTEX) is a prominent player in the enterprise information management sector, providing software solutions that help organizations manage and secure their data. The company is known for its cloud-based services and innovative platforms, such as the AI-driven Titanium X. OpenText competes with other tech giants in the software industry, striving to maintain its market position through strategic initiatives and leadership changes.

On August 12, 2025, Kevin Krishnaratne from Scotiabank set a price target of $35 for OTEX, suggesting a potential price increase of approximately 19.78% from its current price of $29.22. This optimistic outlook comes amid significant leadership changes at OpenText, with James McGourlay stepping in as the Interim CEO. McGourlay, a seasoned executive with 25 years at OpenText, previously served as the Executive Vice President of International Sales.

The leadership transition follows the departure of Mark J. Barrenechea from his roles as CEO, CTO, and Vice Chairman of the Board. The Board of Directors has formed an Executive Committee and is actively searching for a permanent CEO. Despite these changes, OpenText remains focused on exploring portfolio-shaping opportunities to enhance its strategic direction, as highlighted in their recent Q4 2025 earnings call.

OpenText's financial performance in the fourth quarter of 2025 reflects both challenges and strengths. The company reported a 10.4% year-over-year decline in total revenues, yet its cloud business showed resilience with a 32% growth in cloud bookings. This growth is largely attributed to the demand for the Titanium X platform. Additionally, OpenText achieved $1.86 billion in cloud revenues, marking a 2% year-over-year increase.

In efforts to return value to shareholders, OpenText announced a 5% increase in its quarterly dividend, now set at $0.275 per common share. The company also initiated a $300 million share repurchase program. Despite a 3.5% decrease in earnings per share and a 14.2% drop in adjusted EBITDA, OpenText remains committed to enhancing shareholder value through strategic financial initiatives and innovative product offerings.

OpenText Corporation (NASDAQ:OTEX) Faces Leadership Changes and Market Fluctuations

OpenText Corporation's Leadership Transition and Market Performance

OpenText Corporation (NASDAQ:OTEX) is a prominent player in the enterprise information management sector. The company provides software solutions that help organizations manage and secure their data. OpenText competes with other tech giants like IBM and Microsoft in the information management space. Recently, Jefferies downgraded OTEX from a Buy to a Hold, with the stock trading at $30.22 at the time of the rating change.

The downgrade by Jefferies comes amid a significant leadership transition at OpenText. James McGourlay has been appointed as the Interim CEO, following the departure of Mark J. Barrenechea from his roles as CEO, Chief Technology Officer, and Vice Chairman of the Board. McGourlay, a 25-year veteran of the company, previously served as the Executive Vice President of International Sales. The Board of Directors has also established an Executive Committee and is searching for a permanent CEO.

OpenText's stock, currently priced at $30.22, has seen a decrease of 2.23% or $0.69. During the trading day, the stock reached a low of $30.11 and a high of $32.87. Over the past year, OTEX has fluctuated between a low of $22.79 and a high of $34.20. The company's market capitalization stands at approximately $7.69 billion, indicating its significant presence in the market.

The trading volume for OTEX today is 3,049,689 shares, reflecting active investor interest. Despite the leadership changes, OpenText plans to continue exploring portfolio-shaping opportunities to enhance its focus. This strategic direction may influence the company's future performance and investor sentiment.