Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2022 Earnings Conference Call. [Operator Instructions]. I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and welcome to OpenText's First Quarter 2022 Earnings Call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark 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. I would like to take a moment and direct investors to the Investor Relations section of our website, investors.opentext.com, where we have posted our investor presentation that will supplement our prepared remarks today. The presentation includes information and financials specific to our quarterly results, notably our updated quarterly factors on Page 6 as well as a strategic overview. Before I proceed with the reading of our safe harbor statement, I would like to inform you that we will be participating in several conferences in the coming weeks, including TD's Virtual Technology Conference on November 15, RBC's Global TIMT Virtual Conference on November 16, Needham's Virtual Tech Week on November 17, NASDAQ's Investor Conference on November 30, Credit Suisse Annual Technology Conference on December 1, BofA's Leverage Finance Conference on December 2, Barclays Global TMT Conference on December 7 and Raymond James Technology Investor Conference on December 8. Please reach out to any member of our Investor Relations team, if you are interested in joining our schedule. In addition, I'm also pleased to invite investors to OpenText's annual user conference, OpenText World, taking place on November 16 to the 18th. Investors are invited to explore our latest product innovations and information management during this 3-day virtual tech event. To register for OpenText World, please reach out to the IR team at investors@opentext.com. We look forward to our upcoming engagements with you. And…

Thank you, Harry. Good afternoon to everyone, and thank you for joining today's call. Fiscal '22 is off to a great start as we delivered record Q1 revenues powered by organic growth, and we are on track for our fiscal '22 annual targets of organic growth and longer-term fiscal '24 aspirations. The OpenText approach to creating long-term shareholder value is a balance between total growth, profitability and capital returns. We are executing to our value creation approach. In Q1, we delivered 3.5% organic revenue growth, 38.9% adjusted EBITDA, and we estimate free cash flow as a percent of revenues will be in the high 20s for fiscal '22, and we expect free cash flow dollars to increase significantly fiscal '22 over fiscal '21. Consistent with what you have -- consistent with what we have shared before, our bold ambitions remains: to be the leader in information management, to double our revenues over the next 5 to 7 years to $7 billion in annual revenues, to have at least 85% of our revenues recurring, to deliver an organic growth profile between 2% to 4% by fiscal '24, to maintain upper quartile adjusted EBITDA while investing any adjusted EBITDA above 40% back into growth, to generate $6 billion in cumulative free cash flow over the next 5 years and return 33% of our trailing 12 months free cash flows via dividends and buybacks. As our free cash flow grows, so does our dividend and our buyback. This is a winning formula. Our solid execution reinforces our ambitions. And over the last few quarters, we have returned to organic growth. We established our fiscal '24 aspiration that illustrate an acceleration in organic growth. We have increased our R&D investment targets up to 14% of revenues. We are making additional fiscal '22 investments in…

Thank you, Mark, and thank you all for joining us today. We had a strong Q1. We delivered another quarter of organic growth, kicked off our fiscal 2022 plan and intentional investments in the business including talent, innovation, sales coverage and capital expansion. Also in Q1, we internally mobilized a robust digital road map to support with technology, many of our organic growth initiatives. Our Q1 results, a strong road map, including rapid quarterly releases of innovative cloud edition products to support the momentum in our cloud growth has given us a strong start to the fiscal year all consistent with what we shared with you last quarter, we have had a strong Q1 execution behind us to drive our fiscal '22 targets and fiscal '22 aspirations. Starting this quarter, my commentary will focus on selected financial highlights as well as certain operational initiatives underway that will enable us to grow faster and scale our business. Please refer to our press release, our investor presentation and 10-Q posted on our IR website for more detailed financial data. All references will be in millions of USD and compared to the same period in the prior fiscal year. So let me start with revenues. As a note, the growth rate I will share here are all organic growth. Total revenues for the quarter were $32.3 million, up 3.5% or up 2% on a constant currency basis. There was a favorable FX impact to revenue of $12.6 million. Annual recurring revenues for the quarter was $691.8 million, up 3.2% or up 1.7% on a constant currency basis. As a percent of total revenues, ARR was 83% for the quarter, the same as Q1 '21. Cloud revenues were $36.6 million, up 4.6% or up 3.6% on a constant currency basis. Our cloud renewal rate,…

[Operator Instructions]. The first question comes from Raimo Lenschow from Barclays.

This is Jeremy on for Raimo. I was wondering if you could talk a bit about what kind of cross-selling opportunities you're seeing across the 5 cloud products and maybe specifically with regard to the Security and Protection Cloud, if you've noticed like any sort of expansion with some of the SMB customers who came along as part of the Carbonite acquisition.

Yes. Thank you for the question. Let me just start a bit structurally on cross-selling. We've essentially recreated the business in our cloud additions, Content Cloud, Security Protection cloud, business network cloud, developer cloud. And our cloud offerings are inherently integrated, where in the past, they were not a bit more -- you need more PS to get the integrated value. Through engineering and our new destination of cloud additions, it's easier to turn on module 2, 3, 4 and 5 than it is in the off-cloud world. So I'm very excited about that kind of structural advantage we'll have going forward. We're focused right now in bringing customers up from a module to the full suite in their respective cloud using archive get to the full content cloud. If you're using e-signature, which is a great add-on cross-selling opportunity, we want to get you to the full content cloud. If you're using our trading partners, go to the full business network cloud that also allows you to use active community active invoicing or sustainability module, et cetera. So we're very focused on now that we have this destination of cloud additions, bringing customers from a feature or module to up to the full respective suite. And then look, I think the destination ultimately across the entire portfolio, not any different than ERP, can we get 10% of our installed base using the entire cloud, if you will. But we'll focus on going from like module 1 or 2 into the full cloud suite. In terms of SMB, the teams just made really great progress. We majorly have sold through RMMs historically through the Carbonite business. but we've been building up our direct MSP program. And roughly, we ended the quarter with about 16,000 active MSPs. And with our new MDR service, we're able to bring those now directly to MSPs and to RMMs but also more so directly to SMBs. So the new thing that we're doing is we're focused on MSPs, and we've built up more capacity, and we have a new MDR service that we're bringing to MSPs.

The next question comes from Stephanie Price of CIBC.

Just following up on that question around the cloud, you mentioned double-digit growth in cloud bookings. Just curious if you could talk a bit about what was driving that growth in bookings, whether it was specific services and also if there were any major wins that kind of drove that growth to?

Yes. Thanks, Stephanie. I'd point to a few things here. The first is our strategy is differentiated that for us, cloud is both off-cloud but with integrated services back into the cloud. It's private cloud. It's public cloud and it's our ABI cloud. And as I want to maintain the uniqueness of their sort of tailored environments and their deep integrations, we're seeing a nice competitive uptake against IBM. And with the carve-out of Kendra. Every FileNet customer and Sterling Commerce customer has to now negotiate a new contract with Kendra. So if you were having a managed service with IBM for file net store in commerce, you don't want to have that with IBM. You don't have to do that with control. So we're seeing this as an opportunity to win business at some accelerated rates against IBM. So Stephanie, we're going to have a lot of activity here. CNA, great example. -- big final net customer, didn't want to continue what Kendra, has come over to the OpenText Cloud. We're in the upper right for Gartner. IBM is in the lower left. We have a public cloud offering, they don't. We provide one SLA. You have to go to 2 companies now for IBM. So private cloud was a driver of growth. G&A is a great example of that. Our API cloud is picking up a little faster than I expected. And we almost did 100 billion service request in October alone. So we had some nice wins, as I highlighted on the API side and also some more return to work. also drove opportunity. So those are some places we saw some outsized growth, define. -- and relate to those advanced bookings.

And then I just want to switch gears on M&A. So the deck talks a bit about focus areas with high adjacencies to information management. Just curious if you could expand on this a bit and how you kind of think about breaking out that market when you look at M&A? And maybe one additional one is just if we should read anything into the increase in the shelf from kind of $1.5 billion previously to $2 billion.

Yes, very good. Look, we like the market we're in. Content services, business network, experience, maybe a digital experience platform, security and protection and SMB. So both in the enterprise and in SMB. So I wouldn't -- I never like to highlight a particular kind of functional area or enterprise versus SMB, just except to say we like the market we're in. We like those adjacencies. We look for open spaces. We look for ability to expand customers or partners across that landscape. . As for the Canadian shelf prospectus, it was time to -- it was expiring in time to renew and commensurate with our market cap we felt that upsizing it commensurate to our market cap, it's just been our practice through time. So with our market cap where it is, to commensurate to raising the shelf to $2 billion.

The next question comes from Thanos Moschopoulos from BMO Capital Markets.

Gross margins for license were a bit lower this quarter. I think I heard Madhu referred to royalty payments, maybe just if you could expand on that and just confirm that, that was a nonrecurring item.

Yes, Thanos, this is Madhu here. As I spoke about from a gross margin perspective, we did have slightly higher royalty payments on a couple of the license transactions we did, no specific to product related. As you can see, overall, the gross margin was still at 75.7, but I just want to call that out.

Okay. And just to clarify, when you talk about double-digit cloud book ages, is the metric or TCD, is that what you're referring to?

This is Mark. Yes. We call it MCV, but it means the new booking value. So if we had a customer, we've got $1 million and we signed a contract for $1.5 million, it would be $500,000 of new bookings. So it is the new booking value, not the total contract value, but the new booking value. And that new booking value grew double digit. It was very, very healthy. First time we've hit double digit on sort of a sustained way, and this will turn into future revenues, right? So as we get customers live and operational.

Okay. Great. And then just if you could speak to the higher rate environment. I mean obviously, you're looking to make some more investments this year. Any potential constraints as far as being able to make those investments ramp up sales accordingly? Or is that not an issue for now?

Thanos, I'm sorry, I had a little difficulty hearing that question. I apologize.

I'm sorry, yes, I was referring to the higher environment, just given the labor environment as you're looking to make more investments this year, whether that could be a financial constraint or whether you're able to bring on the resources needed relative to the growth you're looking for?

Yes. Got it. Look, we're doing extremely well in hiring. And our return -- prospects employees are -- and appropriately so, and I love it -- are mission and purpose led. And that's why I've -- we've gotten a lot of feedback, and I'm very excited to kind of announce our OpenText Zero initiatives at OpenText World of zero barriers, IT zero net greenhouse gases is both how we're going to live, run our company, and our products can support all of this. So we're beating the market right now on attrition. We are -- our return to workplace strategy is flexible first. So engineering and cloud operations are coming back into the physical workspace, but it's flexible first 2 to 3 days in the office, but we believe we're better together but in a flexible way. We're also introducing the call proximity employees, where as long as you're 100 to 150 clicks from an office, we'll come back together for the moments that matter. for 2 to 3 days a week. So we think you need to be there, be together, be together flexibly lead with purpose, and I'm proud to say we're beating the market right now on hiring, attracting and retaining.

The next question comes from Richard Tse from National Bank Financial.

So congratulations on that organic growth, it's certainly kind of nice to see. Just wondering if you can maybe elaborate a little bit in terms of the split of the organic growth. Could you maybe sort of share or give us some context in terms of the proportion that's coming from upselling into the existing base versus net new customer wins?

Richard, it's Mark. Thanks for the question and the comments. Really appreciate it. It's a combination. I'd tell you what is front and center in my mind share is competitive wins against IBM, SPS Commerce, FileNet Sterling Commerce, SPS Commerce, and that's probably driving a bit more of the growth than selling module 2 or module 3. There's certainly some of that. Ontario standardizing in our e-signature acts an add-on capability to a foundation we have in the province of Ontario. CNA wholesale win, just a wholesale win. I look at Magellan Risk Guard, It's going to be a nice add-on feature module 2 or 3 to some customers. So it's a balance. But I'd say it's probably leaning a little more to new wins. But certainly, add-on modules for sure. .

Okay. And then just sort of a question, I think the first gentleman that asked the question was related to Carbonite, but if I can sort of ask the question in a different way. With respect to the pushing to the cloud. Do you see that sort of creating an incremental opportunity broadly for the entire suite into mid-market enterprise, where you traditionally probably haven't been as strong?

Richard, is the question, do we see the mid-market as an opportunity?

Yes. Yes, with the cloud and the integrations and problem you're selling process.

Absolutely. And it's -- Oracle purchased NetSuite. We purchased Carbonite. And you don't reach your full potential without being able to bring your products and services into a new channel, let's call it mid-market. And the cloud, I think the cloud redefines what mid-market is because it's easier to connect. It's easier to onboard -- So you can take your enterprise capabilities and you don't need the enterprise or big tool chest, right, to bring a customer onboard. . So MSP or mid-market for us is a wider definition than others. Let's take some examples. MDR, the MDR service is going to be both enterprise and mid-market for us. We'll see more customers come on board with Carbonite in the enterprise because it's all in the cloud. So I like very much we made the right strategic decision to expand into mid-market. We did it with the right company, and it's going to allow us to bring our enterprise product there. and some of their products up into the enterprise.

Okay. That's great. And just one last one. I saw that obviously, you increased the shelf. In terms of the leverage ratio that you're still comfortable with -- that's probably a question for Madhu. Is it still kind of in the mid-3s here?

We can't -- you might be on mute.

Yes, sorry. I was saying that that's right in terms of available liquidity as of now, we are up to $2.5 billion between cash and the revolver. And from a ratio perspective, in and around 3, slightly above 3 is where we've headed and we obviously have a plan to bring it back to the lower levels as you've seen in the past.

The next question comes from Paul Treiber from RBC Capital Markets.

So Mark, you're quite enthusiastic on OpenText's current product portfolio and sort of vision in the road map. When you look at your customers, from a bottoms up perspective, what fundamentally do you see as the gating factor in terms of their ability to adopt all of your products or the suite of products to move to more modules? What do you see sort of holding them back at this point?

Yes. Thank you, Paul. I am enthusiastic and that is actually coming through in my tone. The Cloud Editions 21.4, as I said in the past, is going to be a major release for us. And we're like 1.5 weeks away from OpenText World, stuff I try to -- This is a different audience than that. But I'm speaking about unveiling here a little bit of 21.4. But it's more capabilities now than our off-cloud offering. That's a major milestone. And it's pre-integrated, right? Because it's not like -- there's not like 7 module clouds. It's one integrated platform. So the integration has always been a challenge off cloud. But in the cloud, it nearly goes away. It now turns to configuration, not integration. So Paul, we've eliminated that friction. Second is the opportunity remains to migrate thousands of customers, thousands of customers to our Cloud Editions and open up new ways to consume. We always had difficulty in the past attracting developers. But we've now provided these incredible service -- incredible features as a service. And we're learning from tradecraft. We're learning from Twilio. We're learning from other companies to how to deliver these very rich services via APIs. And it's a phenomenal number of almost 100 billion service calls in the month of October just via those APIs. So integration removes a barrier. The APIs remove a barrier. I believe we have the sales force to make the connections. Christina's new organization of customer success is well set up to enable that migration and success as well. .

That's very helpful. Mean delving into customers further, like the digital transformation initiatives seem to be going on everywhere. Do you anticipate that you'll be seeing like big migrations of existing workflows to newer -- to your newer products? Or do you think it's new workflows, new deployments that you'll be predominantly saying?

I think it's both. We're going to continue to support fully kind of our off-cloud deployments. But Release 16 has begun to go end of life. I mean I remember when we built and delivered early Release 16, but it's over 5 years now. It's coming towards -- and release 16.1 EP1 has now come to end-of-life. EP2 wouldn't soon be end of life. Those customers need to move forward. And we are very skilled at moving our customers from off-cloud to private cloud or off cloud to public cloud. Now that public cloud has greater capabilities -- It's not a capability discussion to a product capability discussion to move. So I think that's where I wanted to go with that.

And then just I want to switch gears to M&A. It's been almost 2 years since Carbonite. it's been quite a while. How do we think about the targets in your pipeline or what you're looking at in terms of like the assets versus the valuations of those assets for sale? I mean, are you -- how do you think about flexing on one or the other here?

As I said in my prepared remarks that we remain very busy active getting to no companies. And we're not -- when we look in the past, we've stood up to higher valuations at a time like liaison or slightly higher on Carbonite to meet a growth profile. At other times, we see a value-based asset -- more of a value-based asset. It creates a stronger return and would put a certain valuation target on it. We're getting more confident around our organic growth prospects. And we look at what we've delivered, our confidence in the year. And I think there's an asset class of some higher growth that would lead to a certain multiple or an asset on certain cash flows that would lead to a certain multiple. So I don't see us giving on a metric, but rather having conviction can we get the cash flow or conviction we can get to growth. And valuations remain irrational, then which is going to [indiscernible]

Thank you. I will now hand the call back over to Mr. Barrenechea for closing remarks.

All right. Well, thank you very much for joining us today, and we hope you'll join us at one of our upcoming conferences as you heard from Harry. It's a time to be very visible to our employees and have high touch with our employees, customers and partners and where our key stakeholders such as you. And we hope you'll join us at OpenText World as well. So thanks for joining today's call.

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