Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2023 Financial Results Conference Call. As a reminder, all participants are listen-only and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would like to turn the conference over to Harry Blount, Senior Vice President, Investor Relations. Please go ahead, sir.

Good afternoon, everyone and welcome to OpenText’s first quarter fiscal 2023 earnings call. With me on the call today are OpenText’s Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Today’s call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website. Earlier today, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, investors.opentext.com. I’m pleased to inform you that OpenText management will be participating in the following upcoming conferences: RBC Capital Markets Global Technology Conference on November 15 in New York; Needham’s Virtual Big Data Infrastructure and Cloud Communications Conference on November 16. TD Securities Technology Conference on November 21 in Toronto, Credit Suisse Technology Conference on November 29 in Scottsdale, Bank of America’s Leveraged Finance Conference on November 30 in Boca Raton, Raymond James Technology Investor Conference on December 5 in New York. NASDAQ’s Investor Conference on December 6 in London, U.K., NBF Technology Conference on December 7 in Toronto and Barclays Global Technology Media and Telecom Conference on December 8 in San Francisco. And now on to our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the future performance of OpenText that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such statement. Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information as well as risk factors that may project future performance results of OpenText are contained in OpenText’s recent Forms 10-K and 10-Q as well as in our press release that was distributed earlier this afternoon, which 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. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I’ll hand the call over to Mark.

Thank you, Harry, and welcome to today’s call. OpenText fiscal ‘23 is shaping up to be a transformative year. My comments today focus on 3 key points. First, OpenText is executing very well as demonstrated by record cloud revenue, record cloud bookings, record annual recurring revenues and solid renewal rates. We are acquiring Micro Focus from a position of strength. Second, the second consecutive quarters of organic cloud growth in constant currency reflects the innovation investments we have made over the last several years, inclusive of Titanium, a key pillar of our future growth. Third, the acquisition of Micro Focus when closed enhances our leadership position in information management and broadens our capabilities to deliver business 2030 to our customers. Let me start with our strong Q1 year-over-year results. Record Q1 revenues of $852 million, up 2.4% on a reported basis; in constant currency, revenues were $892 million, up 7.1%. Record Q1 cloud revenues of $405 million, up 13.5%; in constant currency, $417 million, up 16.9%. Cloud was 47% of total revenue, the highest in our history and the seventh consecutive quarter of cloud organic growth in constant currency. Enterprise cloud bookings were strong in the quarter, $112 million, up 37%. And on a trailing 12-month basis, enterprise cloud bookings were $496 million, up 36%, ARR of $722 million, up 4.4% and up 8.9% in constant currency. ARR reached 85% of total revenue, the highest in our history and the seventh consecutive quarter of ARR organic growth in constant currency. Enterprise renewal rates were rock solid with cloud at 94% and off-cloud at 95%. Adjusted EBITDA margins remain upper quartile at 35.7%. Free cash flows were $96 million, notably and meaningfully impacted by foreign exchange, tax and our accelerated investments in Q1 as we approach Titanium. We expect full year…

Yes, thank you, Mark, and thank you all for joining us today. All references are in millions of USD and compared to the same period in the prior fiscal year and are on a reported basis unless stated otherwise. So let me start with an overarching comment. OpenText’s Q1 results, they reflect continued strong execution in a dynamic macro environment. Our results are consistent with expectations we shared with you on our last earnings call in August. We are well positioned to continue to execute on our strategic priorities and well prepared for the upcoming closing and integration of Micro Focus. Q1 revenue, we are very pleased with our Q1 revenue performance. I will add a few comments here – in addition to the highlights shared by Mark. First, on foreign exchange, the U.S. dollar once again strengthened in the quarter. FX in Q1 was a revenue headwind of $40 million. Approximately half the impact was on customer support and another 30% on cloud. We grew total revenue 7.1% in constant currency and 2.4% on a reported basis, the best Q1 in our history. Cloud renewal rate was 94%, steady sequentially and year-over-year, while off-cloud renewals reached 95%, the highest rate in the last 3 years. Enterprise cloud bookings, our trailing 12-month enterprise cloud bookings were a very strong $496 million and $112 million in quarter, the highest in our history. The booking strength was broad-based across most products and geographies. We continue to see the number of large cloud deals and average minimum cloud contract value increase. And many of these large cloud contracts have a duration well in excess of 3 years. Healthcare as a vertical stood out as an area of strength across our cloud. In content, we call our tourism food services and utilities in experienced…

Thank you. [Operator Instructions] The first question comes from Steve Enders of Citi. Please go ahead.

Hi, thank you. This is George Kurosawa on for Steve. Just to start with some of the regulatory macro question. Can you guys give us an update on anything you see in terms of customer budgetary changes and behavior in reaching deal cycles, just anything you have right there? Thank you.

Yes. Thank you for the question. It’s steady as you go right now. So in our part of the – of spending centers, as I talked about, the demand for digitalization continues strong and the continued migration of our installed base, new SaaS workloads that have come into our revenue streams, large business network customers consolidating global security, trust and compliance requirements. So I’d say it’s steady as you go. And I wouldn’t shout out any changes on the dynamic over the last couple of quarters.

Great, thank you. And then as a follow-up, between the different areas of the portfolio, any areas you’d point out being stronger than expected or maybe a little bit softer than expected relative to your expectations? Thank you.

Yes, thank you again. Continued strength in migration to the private cloud for content and experience, we have new SaaS workloads coming in, both in our bookings and our revenue stream. As we talked about Titanium is a point in time, like 23.2%. But every quarter, we’re releasing more and more public SaaS capabilities both in core content, core capture, core workflow, core e-signature and we’re winning business and it’s turning from bookings to revenue and our APIs. I’m quite excited about that. Titanium is starting to happen, and you can see it in our P&L and in our investments. Business network, strengthening as the requirements in supply chain have gotten more difficult, where more watch tower requirements are required, where there is more regionalization. We’re in a position of strength to help deliver against that. And we have some unique dynamics in our SMB business that are positive to us in our SMB business. We have strong renewals execution. We have the opportunity as upsell customers from E3 to E5 type of SKUs. We have a couple of competitors that are distracted in the marketplace. So we’re looking to take some share gains. We’re adding our own IP into SMB from everywhere from backup threat intelligence and now encrypted e-mail. And we’ve got the ability to cross-sell Zix into carbon Webroot and Webroot – and Carbonite into Zix. So those are some of the favorable mix shifts that we’re seeing. We certainly have some countries that are a bit more affected in the dynamic. But the net of it all is quite a positive. I’ll note that we exited Russia very early on a while ago. We didn’t really have exposure in Belarus or Ukraine. So those things are not affecting us at this point.

Great, and thanks for taking the questions.

The next question comes from Stephanie Price of CIBC. Please go ahead.

Hi, good evening. Curious about the mix shift in your target model so cloud growth is up about 200 basis points at the midpoint and licenses down significantly, just curious what you’re seeing from clients that’s driving the revised target?

Yes, thank you, Stephanie. And yes, I mean, we had stellar cloud bookings in the quarter, up 37%. And on a trailing 12-month basis, cloud bookings up relatively the same 36% or just 1 percentage point difference. I mean that’s just stellar growth. And look, we’re winning – we win work and we win workloads. The question is how does the customer consume them? Do they consume them private cloud? Do they consume them in our public cloud or do they consume them and want to own a license upfront. So with cloud up 37% in bookings and license down about 10% or a little less in constant currency, that’s very favorable to us. So the net of it is share gains in that ratio. The net of that is clearly share, gains up 37% up and 7%, 8% down in constant currency. What’s driving talent shortages, the need – all the things we’ve talked about, the need to go faster, globalization, compliance, trust. We added 100 new customers in the private cloud in the quarter, new public SaaS revenues flowing through the income statement now. So tell us a little more insight, Stephanie.

Thank you. And then Micro Focus released Q2 results this afternoon. I know you don’t want to speak specifically about the results, but obviously, constant currency revenue decline of 5% was an improvement over the first half levels. Just curious how you’re thinking more generally about the opportunities and the biggest opportunity as you look to stabilize revenue in the business?

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Thank you.

The next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Thanks so much. Good afternoon. Just a follow-up question on Micro Focus, you had your user conference in October. What’s been the feedback from your customers in regards to Micro Focus? And do you see your existing customer base as already large Micro Focus customers?

Yes. Paul, thanks for the question. I am not ready to get into that level of detail, right. And kind of percents of installed base or percent penetration, there is a bright line opportunity in the OpenText installed base, bright line opportunity. And we will talk more about that cross-selling opportunity when we post post-close. The conference, our OpenText World, I guess last time flies last month, we call this the Greater Union. It was so wonderful to be in person, 1,200 people another 10,000 online, big themes that came out of that as we demonstrated a single information. We have demonstrated the promise, finally, the promise of information management were across SAP, Salesforce, Microsoft, Google, ourselves, others, the same data shared across all these business applications seamlessly. Also a very strong and positive response to sustainability and just how important this is in their world from recycling lubricants to full cycle battery care and to ICs and sensors and agriculture. So, those were some of the feedback from the event.

Looking at your cloud business, can you help explain the off-cloud renewal rates remain quite high despite uptake of the cloud. Is that the cloud bookings, is that coming more from new workloads and new customers as opposed to a sort of a mass migration of your existing installed base?

Yes.

Do you want to?

I could say it, yes, yes. You did give me a multiple choice. You gave me yes, I don’t know. Yes it is and I will give you and you are hearing this kind of the narrative. The first time for me is that our public SaaS workloads are added to our P&L, to our revenue. And so we have always talked – we have talked about our 90-day release cycles. We have talked about Titanium coming in these chunks yes. Titanium is an end date, right, it’s not a start date. And we are winning business. We are winning workloads, it’s moving on bookings to revenue, and these are new. Customers gain great value off-cloud and as you noted a 95% renewal rate. By the way, Micro Focus customers will benefit from that accelerated renewal rate. And then we add services on top of that. We could add public workloads on top of that. We could add APIs on top of that. We could add the managed services on top of that as well. So, we expect continued strength in our renewals business.

And just lastly, how do you think about – since you are giving cloud bookings, like the seasonality of bookings, the license business historically has been quite seasonal. Should we expect cloud bookings to be that seasonal?

We are going to have to let me – Madhu and I will think through that. We are an annual business and we are an annual business and quarters will vary. But let us think through kind of the seasonality of those bookings. But I will leave that with Madhu and I and we will think a little bit about that.

Thank you. I will pass it on.

[Operator Instructions] The next question comes from Richard Tse of National Bank Financial. Please go ahead.

Yes. Thank you. Just wondering if you can maybe update us on the major milestones here to clear prior to closing the transaction in Q1 – calendar Q1?

What’s primarily remaining or sort of customary regulatory filings and approvals.

Okay. So, the major one was recently the shareholder vote, I guess.

That’s right. Yes, that’s correct. So we – shareholder vote, which was obviously positive into the affirmative. We have a series of regulatory filings. And Richard, we expect to be closed next quarter.

Okay. And then – thank you for sharing that information in this deck you published on your quarter, that’s helpful and I was looking at the organic growth section. And you have obviously had a continued pace of organic growth in recent quarters here. Given everything you highlighted about what the collective Micro Focus-OpenText brings, do you think that there is kind of a reasonable chance here that, that organic growth rate could accelerate beyond sort of the run rate that you have had given the size of the two companies?

Yes. I am not going to comment, but I appreciate the question, Richard. It’s a great question. We clearly feel very positive on our core business and especially amidst the global macro conditions. But I am going to reserve the answer to post closing to update our growth projections. But as I have said in our commitments, we have our core OpenText business. We had seven consecutive quarters of cloud growth in constant currency. We don’t see a change in the dynamic in the coming quarters on the macro side and the core of our business. We see – we are committing to returning Micro Focus to organic growth. What the enlarged group rate of organic growth is, I will reserve that until we close. But this is not just our ability to get upper quartile adjusted EBITDA, not for quartile adjusted free cash flows, we believe that the enlarged group will grow.

Okay.

The rate of which, we will talk about it on closing.

Okay. And just the last one from me, obviously, the stock price hasn’t kind of reflected, I think the degree of potential accretion of this transaction. And we are certainly kind of ahead of the history that we have seen many acquisitions integrated. So, looking back sort of in context, like can you maybe talk about, in your history with the company, what was the most challenging historic acquisition OpenText made prior to Micro Focus? And how do you think Micro Focus would compare that from a complexity of integration standpoint? Is it easier about the same, harder just to kind of give people some context, because I think by and large, those are the questions I am getting that, that’s really where the concern is that’s sort of the integration and the complexity of that? Thank you.

Yes. There is a lot in there, and I appreciate it. And I appreciate the question. We are focused on building one of the world’s largest cloud and software businesses. And we are a quarter away from our close. And like I am not going to – I don’t know how to truly comment on a stock price other to say that when you look at a situation where markets can value risk, markets can’t value uncertainty. And we are closing. We are confident we are going to close. We are confident in our models. And we have a different perspective of the – perhaps the uncertainty. And it’s okay. We are building our business, we are building the world’s largest – cloud and software businesses, the performance of both companies are very clear. Our business is growing. You have heard our commitments and investors will make their choice. We have made our choices, and we are owners, not renters in our business. And we are focused on building for the long-term. I will tell you some of our experiences that will shape the integration plan. We look at Documentum, and we turned a low margin, low efficient renewal business into a powerhouse. That informs us very well on the renewals business. We acquired two HP businesses prior to this. So, we have good insight into culture and value and systems. Our playbook of – we are going to make the hard decisions early, not late. We take a philosophy of adopting go. There is two of something, we don’t need a third. We got two of something, we are going to pick one, adopt and go. We will pick our leadership team early. We will integrate fast. We will consolidate to the best working system. We will pick the best of the people, and speed, and unity is top of the mark. So, let me just pause there and see if there is anything you want to go into.

No, that’s good. No, I think it’s just too important for people to have that context because I am not sure that everyone to have that history in terms of seeing the acquisitions you have made and sort of the success that you have had, so anyways that’s great. Thank you very much.

Yes and if we put just ratios in perspective, right, when we acquired GXS, it was – we added a third to our business. Upon closing next quarter, this will add 43% to our business, right. So, we are stepping up from 33% to 43%. And we are a much larger company today, much more efficient company than when we brought GXS onboard.

Okay. Thanks Mark. Appreciate it.

Thank you.

The next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.

Hi. Good afternoon. Mark, I don’t know if you can comment, but also you can stab at it, which is the macro backdrop. Obviously, you see a bit different now than it was when you announced a Micro Focus transaction, how might we think about just the potential macro impacts and how that might play out Micro Focus? I mean could you point to, for example, maybe some of the areas you are focused on like application modernization and perhaps macro resilient, or just any comment just how to think about that given the changing backdrop?

Sure thing, well, I think the first is, I just start actually at an industry level, an industry exposure. The ability of governments there is sort of good cholesterol and bad cholesterol, right. I mean good cholesterol, around having strong exposure to governments, heavy manufacturing, healthcare, local government, not just Federal, but local as well. A lot of great work happening in financial services as well. And these are industries where we have sort of common weight, if you will, across the two businesses. These are good places to be for – regardless of inflation. We at OpenText, continue to put our annual price increases in place, currency adjustments. The market has changed a bit where it’s accepting from tech companies price increases and you are grabbing them more judiciously. A practice we will make sure that we apply. So, I mean Thanos, I don’t want to get into too much detail on their portfolio, what’s sort of more inflation maybe or for macro adjusted cyber, the full stack cyber security trust and compliance. The needs are skyrocketing. We have commercial customers who will no longer just accept SOC 1, SOC 2 and sort of industry security and compliance. They want FedRAMP or Protected B or the equivalents in other countries of military style security and compliance in the private cloud, not just their commercial. That will apply very directly over to Micro Focus as well. So, I will reserve that until we close, but maybe the industry comment, the security and privacy comments are helpful.

Great. And then just a quick one for Madhu, which is your cloud gross margin is obviously up a fair bit year-over-year in the quarter. That you are guiding for cloud margins to be constant on a full year basis in ‘23 versus ‘22? So, just remind us why that’s the case, I mean despite the fact that you are obviously seeing the cloud growth and you integrated GXS, it looks like, I can see some leverage on the cloud gross margin line versus some of the offsets in that regard?

Yes. Absolutely, so in the quarter, our cloud gross margin was 130 basis points higher year-over-year. But you surmise is reasonable in terms of how we look at it for the remainder of the year. We are going to continue to prioritize investments in cloud for all the reasons Mark has been sharing in the remainder of the year. Should we do better and acquire less over time, we will definitely see the cloud gross margins improve. Zix, Carbonite, our SMB&C, where it’s purely SaaS cloud, they are holding the gross margins, obviously. So, the investments and improvement, you will see coming out of the enterprise side. So, yes, we are holding it somewhat flat. And as we evaluate investments and gain efficiencies earlier, you might certainly see some pickup towards the end of the year.

Yes. Clear. Thanks.

The next question comes from Daniel Chan of TD Securities. Please go ahead.

Hi. Good afternoon. Mark, given that it looks like this deal is going to go through. Any things you guys ramping up now or any investments that you need to make ahead of the deal closing. For example, you guys were talking about big cross-sell opportunity with the cloud. Do you have to scale up your cloud infrastructure when that deal closes?

Yes. Dan, thanks for the question. It’s normal course investments right now. Our private cloud, we have always had a very great – very modern process that when we win a private cloud, we are able to onboard the infrastructure rapidly and with more hyperscaler partnerships, our ability to provision and turn on as a matter of days right now, getting to kind of the physical environment. Look, if our public SaaS workloads go faster, that would be a delight. And then we would have to talk about the more capital investments we need to make there. We just made some, as you have noted – as Madhu noted, as we are seeing our own Titanium scale ramping. But I wouldn’t say anything out of the normal course right now. And our private cloud is a great model where we can – upon winning big contracts and big business, we can get infrastructures up in days now, not months.

Thanks. That’s helpful. How about on the Micro Focus side with the revenue stabilizing, it looks like much of the heavy lifting has worked. But any other investments in Micro Focus’ products after you close the deal to integrate with yours? Thank you.

Yes. Dan, as we noted earlier, together, the issue is not investments on the combined R&D line. We have plenty of investments. We are going to have exciting prioritization opportunity of how we prioritize the full security stack, how we prioritize private cloud. So, it’s not about the need for a higher investment rate. We are up to 14%. If you can remind me, I think they are up to 15%-ish on their R&D investments. That’s a good healthy investment spend. So, when we close, we will talk about the joint prioritization.

Thank you.

Thank you. I will now hand the call back over to Mr. Barrenechea for closing remarks. End of Q&A:

Alright. Very good. Thank you, Madhu. Thank you, Harry. Thank you everyone for joining us today. Harry, Greg, Madhu and myself, we are very prescriptively taking the approach to have high engagement this quarter. As you heard in Harry’s comments, we have close to a dozen conferences we will be attending, including myself. We look forward to the high engagement and thank you for your interest in OpenText. That ends today’s call.

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