Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Second Quarter Fiscal 2024 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 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.

Good afternoon, everyone, and welcome to OpenText's second quarter fiscal 2024 earnings call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; 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 at the following upcoming conferences: Bernstein's Tech Media and Telecom One-on-One Forum on February 28 in New York; Morgan Stanley's Technology Media and Telecom Conference on March 4 in San Francisco; and JMP Security's Technology Conference on March 5 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’m very pleased to hand the call over to Mark.

Thank you, Harry. And thank you to everyone joining today's call. Welcome to calendar 2024 and the second-half of our fiscal year. Open Text is more relevant than ever as we enter the new era of business AI. We have significant momentum as we transform into a cloud growth company, as we expand our mission in information management, and as we accelerate private and public cloud consumption. Artificial general intelligence is a once in a generational opportunity. And OpenText is in a very strong position to lead the way in information management. We continue to accelerate our investments in product, services, and go-to-market, and we are seeing the results. Q2 was a spectacular quarter and showcases our strategy and performance progress with the following. Record revenues of $1.3 billion or 71% year-over-year growth, strong organic growth, our 12 consecutive quarter of ARR growth in constant currency. Record enterprise cloud bookings of $236 million or 63% year-over-year growth, and we're just getting started. We are winning with cloud additions, our business clouds. We are winning with data security and trust requirements, SaaS and Micro Focus just coming online, as well as Business AI with OpenText Aviators. We had record adjusted EBITDA of $566 million, or 37%, and 66% year-over-year growth, and strong free cash flows of $305 million or 87% year-over-year growth. I'm so proud of our colleagues and partners. And this great success is enabled and powered by our innovation investments, strong customer momentum, and operational excellence. Let me highlight a few amazing customer partnerships. Carl Zeiss is leveraging the OpenText content cloud for a global information management platform and a single source of truth across the entire company, integrating business applications from SAP; Salesforce; and Microsoft into the OpenText cloud. Philips Healthcare is leveraging our OpenText Aviator platform; Vertica,…

Thank you, Mark, and thank you all for joining us today. So let me start with a few key points. In Q2, OpenText executed extremely well, with record Q2 revenues and cloud bookings at an all-time high, we have built an operations practice that strategically supports the foundation of a solid growing enterprise cloud business. During Q2, we also completed successfully our one-year commitments and delivery on Micro Focus to drive a creative integration. One-year anniversary of Micro Focus is today. Our outlook fully reflects the opportunity in front of OpenText and the rapid progress we have made in growing Micro Focus revenue profitability and free cash flows. Mark spoke to our Q2 results and let me share additional comments. Starting on page 23 of the investor presentation posted on our IR website for the slides titled Q2 fiscal ‘24 and trailing-12 months financial highlights, 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. On a year-over-year basis, with Q2 cloud revenue of $450 million, up 10.1% and 9.2% in constant currency. Q2 ARR, annual recurring revenue of $1.15 billion, up 58% and 55.6% in constant currency, that represents approximately 75% of total revenue. This was our 11th consecutive quarter of enterprise cloud organic growth in constant currency and our 12th consecutive quarter of constant currency organic growth in ARR. Our license increased 168% year-over-year as reported and 163% in constant currency and this reflects the incremental contribution from Micro Focus and increase in the number of large deals and the granting of certain IP rights. And let me comment to the large deals. For cloud, we closed 48 deals greater than $1 million in the quarter versus ‘23 in the earlier…

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] Our first question is from Richard Tse With National Bank Financial. Please go ahead.

Yes, thank you. Madhu, I think you did talk about the SMB market. I'm not sure this is for Mark or Madhu, but wondering if you could sort of expand that and talk more broadly about the enterprise spending environment? It seems there's been some mixed messages out there as to whether it's kind of gone back to a normal pace or not?

Yes, Richard, thanks for the question. Let me take a part of that. Look on the SMB part -- SMB is a massive part of the U.S. economy $370 billion in spend for companies with 1,000 employees or less. We believe information management is deeply relevant for this market. And as we know, Microsoft is a key partner in this space. Microsoft's recently discussed some of their short-term challenges in SMB, but they've also confirmed they're a long-term strategic driver for growth in SMB as well. So I think we're in a great position to benefit from SMB both in the medium and long-term and it will be a strong contributor to our 7% to 9% organic cloud growth aspirations. Now as it relates to maybe a little more on the macro side. Look, I'm going to combine any of the comments I had over to Madhu. I'll combine a little bit of macro and competitors. We are benefiting from customer demand as customers look to consolidate away from competitors that are stuck off cloud, they don't have a data security or trust platform, and have a weak AI vision and low capabilities to deliver. You know, we're in the right place today. You know, 60% of our business is in North America, public sector, energy, financial services, manufacturing, we're supporting CPG, apparel, retail. We got some fantastic ecosystem partners, Microsoft, SAP, Google, and Salesforce. So we're in the right places right now and it's about delivering value for customers. And so we see a reasonable economy out there to go execute.

Yes, thank you, Mark. And Richard, I just wanted to highlight, specific to fiscal ‘24, again, you saw the enterprise cloud bookings growth rate of 63%. And we're also increasing the outlook for the year. For cloud revenues in fiscal ‘24, content revenue, analytics revenue, experience revenue, and business network, all doing very well. But we did want to call out the SMB as you look at the Q3 and the fiscal ‘24 targets for cloud revenue, per se.

Okay, great. And I just have a question on Aviator, no doubt that's probably one of your more exciting products right now. I don't know if it's too early still, but do you have any sort of sense at this point in time what a reasonable attach rate would be within your existing customer base and that sort of potential incremental revenue opportunity? And I guess on the same note, I think you had some sort of, I forgot what it was called, a trial at your annual user conference. Like, I’m wondering if you could sort of share any stats in terms of the uptake on that trial?

Yes, sure, thanks. Thank you again, Richard. We're making strong and steady progress. And I'll just start with what differentiated in the market. And we have one business. Now, we're differentiated, as I noted in my prepared remarks, on the data sets that our automation create and we manage. We believe that our business cloud automation and AI are integrated. And I also said on my prepared remarks, we are embedding AI everywhere. It will be a capability, AI will live right next to automation in the long-term. You'll have your automation screen, but you'll have your AI assist right next to it. My best way to describe it is we're moving from vision to showing the value and discussion to delivery. We have numerous customers today in our Earn Your Wings program. I discussed a few in my remarks in food, in apparel, manufacturing. And if you look at our bookings growth of 63% year-over-year growth, we have AI wins in that. And also note that we raised our outlook on our bookings growth from 15% to 25% to 30%. So, you know, we're doing this the OpenText way. It is a strong vision backed up by product. We're delivering every 90-days. We're moving from that vision to showing value. We're moving from discussion to delivery. We have now progressed to just a fantastic bookings quarter and raising our outlook for the year on bookings. And we've moved to the next step, which is creating really a breakthrough idea on platform Athena on how we're going to transform how we write our own software using our own platform. So I'm pleased with our progress. We're going to keep making progress every 90-days. And I strongly believe that your visibility into our 7% to 9% cloud organic revenue growth significantly increases with this strong bookings outlook.

Okay, thank you, I'll pass the line.

Thank you.

The next question is from Daniel Chan with TB Cowen. Please go ahead.

Hi, thanks. Casual conversion really took a step up in the quarter. Q2 seems to be seemingly stronger for conversion anyway, but considering the ongoing integration, this seemed pretty good. Is there anything to call out on that performance and should we expect that to continue?

Yes. Thank you, Dan. So what I would say is that, as I've shared before, the OpenText cash conversion has remained very steady and strong. If you think about the elevation that we made with OpenText, we set out to do that with Micro Focus. What I would say is that in Q2, we saw Micro Focus also respond very positively, and the cash conversion that you're seeing is sort of right in there. Keep in mind they had different year ends and different quarters, and we're actually very delighted how we were able to converge their operating performance to our quarters, et cetera. Do we expect it to continue? Yes, we absolutely expect it to continue.

Thanks, Madhu. And then on the EBITDA margin guidance for the full-year, tightened it up. But next quarter, I think it looks like it's going to take us down to 32% to 33%. Just wondering what's driving that?

Yes, so if you recall, Q3 for us is usually a seasonally lower EBITDA quarter. There are big factors, I'd say, for the remainder of the year, as Mark and I both called out, that includes investment in AI and cloud, just given the strong bookings we see, and we do have some AMC divestiture experience, I mean, expenses, and also some micro-profit integration expense. But Q3, if I could just highlight, from an employee perspective, it's in January 1, a new year, we have higher benefits expense, we have higher sort of vacation expense, et cetera. So that is more seasonal to Q2, and that also weighs down a bit, the EBITDA margin. But for the year that 36% to 37% Q4 will remain a seasonally strong quarter.

And Dan, I think it's fair to say, as Madhu noted, that Q3 is a seasonally low quarter and Q4 is a seasonally stronger quarter.

Okay, I appreciate that. The investments that you're making into cloud AI, where are the areas of focus for this added investment? Thank you.

Yes, thank you, Dan. Well, you noted some of them. The -- we continue to build out our private cloud infrastructure, particularly around industry of compliance, data security, trust, privacy. It's an investment in our SaaS offerings. As we talk about how to unlock our future value, we have established our private cloud platform as a standard globally. The next step is more public cloud staff consumption across our products. And of course, aviator, our AI. So those areas where we're applying that investment. And doing that within the range we talked at the beginning of the year, even though we tightened it a little bit, we're still within the range we presented.

Sounds good, thank you.

Thank you.

The next question is from Steve Enders with Citi. Please go ahead.

Sure. Thanks for taking the question here. Maybe to start on the cloud booking experience in the core, I mean, pretty impressive results there. I guess what in particular kind of drove the upside there? Was it customers converting over, new use cases, how big of a contributor was this AI? And then I guess secondarily, do you think about the growth outlook and cloud bookings for the year, what kind of AI contribution that you're kind of embedding in that?

Steve, thanks for that question. As I said in my prepared remarks on the cloud side, clearly a very strong quarter, 63% year-over-year growth. And with our forward visibility, we see continued strength. And we raised our outlook from 15% cloud bookings growth to 25% to 30% cloud bookings growth for the year. What's driving that? First is we see a lot of customers continuing to move to our cloud and consolidating away from competitors, who can't get to the cloud, can't provide the data security and trust, don't have a credible AI vision, let alone first products in the market. So just continuous strength of our private cloud, customers consolidating, compliance, data security, trust, privacy remain top of the list for the global 10,000, that's the driver for us. And AI, we've won AI business. And it's showing up in our bookings. We're not breaking out AI or security and trust or content or BN of bookings at this point. We don't get down to that level. But AI was a clear contributor in that 63% cloud bookings growth and a factor in us raising our growth outlook for the year.

Okay, that's helpful. Maybe taking some of the puts and takes of the growth outlook, you know, like it’s good to see customer support step up and maybe just a little more I guess color on the license stepping down a little bit in the per services stepping down a little bit from the expectations from last quarter?

Yes, so Steve, I'll take that. License in the quarter actually was significantly higher from a year-over-year basis. And the contribution there really is bringing Micro Focus into the play. As you recall, Micro Focus cloud momentum is strong, but they're still smaller from a cloud perspective in terms of bookings and revenue relative to, of course, OpenText. And PS revenues also grew in the quarter comparatively. I want to make sure I heard your question right. Both license and PS did grow in the quarter.

Yes, I guess I want to, yes, just clarify just on the outlook, because I think you said that both of those were down from the prior expectations from last quarter. So, just trying to understand for the annual outlook, why those two lows came down a little bit?

Sure, sure, I missed that part in your earlier comment. So the adjustment of the ranges really reflects the strength of, again, Micro Focus from a customer support perspective, right, and we've adjusted that to the range. And keeping the overall fiscal ‘24 target the same from a license perspective, just consider that we have our Q3 seasonality and license, and that applies to Micro Focus as well. But it's really the contributor there, I would say, is the better renewals for Micro Focus customer support. So we wanted to increase the range of the customer support and obviously account for some inherent volatility in the license business.

Okay, perfect. Thanks for taking the questions there.

Sure. Thank you.

Yes. Thanks, Steve.

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

Hey there just a couple of clarifications for me. So just on the cloud growth 6% to 8%, that was maintained. So I just want to read, is it just the fact that you've had the strong enterprise bookings, but they're still offset from SMB. Is that sort of the reason why that range was maintained?

Yes, I'll take it first and turn it over to Mark. Thanks for the question. So think about the cloud bookings, as Mark mentioned, really increasing our visibility to the future, which would be fiscal ‘25 and fiscal ‘26. Our cloud contracts are long and we talked about that before and the time to deployment and to revenue are also long. But we're very delighted at the performance in the quarter just giving us that future forward visibility. So take India for fiscal ‘24, we're keeping it at 6% to 8% and within that, enterprise cloud revenue, analytics, experience, DN, all doing well. And as we called out SMB, it's weighing down a bit. So we want to kind of balance that and keep the revenues at 6% to 8%. And that revenue is really benefiting from our cloud bookings from our prior quarters, right? And the cloud renewal rates, et cetera. So I just want to separate the strength of the cloud bookings here, which is really going to be positively impacting ‘25 and ‘26, and just the factors outlining significant ‘24.

Got it, thanks for that. Just final other question here, just on the bookings. I know sometimes you've announced the bookings and there can be a little bit of a delay, I guess, in the translation to revenue. Is the AI-related bookings, do those look any different? Do you think that those are going to be translated from bookings to revenue at a faster pace, just given the sort of strong demand that your customers are seeing for the AI products?

Yes, Kevin, thanks for that question. No, the bookings related to AI are following the same characteristics as an enterprise booking. And so in the SMB space, we tend to see one-year contracts. In the enterprise space, we tend to see two to four year contracts. And so AI is following that enterprise pattern, if you will. And as we do notice, that bookings number will have a clear impact, a positive impact, in ‘25 and ‘26. But right now it looks like our AI wins will follow our traditional enterprise pattern.

Got it. Great, thanks a lot, I'll pass the line.

Thank you.

Thank you.

The next question is from Adhir Kadve with Eight Capital. Please go ahead.

Hi, good afternoon guys. Thanks for taking my questions. I wanted to talk a little bit about, you know, last quarter you saw some initial bookings in AI, this quarter you called out some strengths there as well? I just want to ask how have customers really progressed in AI? Mark, you kind of mentioned that a lot of customers are still dipping their feet with the Get Your Wings program, but are some of those early customers, are they progressing faster to maybe more larger scale deployments or are they kind of still in the Get Your Wings program, get their feet wet type of deployment phase?

Yes, Adhir. Thanks for the question. It's progressing and a couple why statements here. We're going to embed AI in all our products. It's clear that there's a path where you have your automation and you have the learning from data. And our approach is to provide AI assist. If we automate a healthcare professional, there should be an AI persona right next to that. We automate a tech support specialist, there should be an AI assist next to it. We automate a contract specialist or a loan specialist, there should be an AI assist next to it. So we're going to embed AI everywhere. It's a discussion in every RFP. In every RFP and some customers are in early stages of exploring. Some are medium, a handful are more advanced. But it's in every single discussion. So it is certainly sort of separating out in the market those competitors, who have not necessarily even moved to the cloud or let alone have the resources to deliver a robust AI platform. So we're seeing benefit from our very strong first waiver products and our vision, our skills now to be able to deploy a data management platform and to be able to vectorize and install a language model to be able to get customers in Earn Your Wings to actually be able to experiment either in the small or at scale, very differentiated in the markets, right? I called out our services organization that we've been investing in for a decade in building that service organization. So we're making steady progress. We've gone from a vision to a first set of beta products, to our first version, through our first delivery, first customers using and getting value, bringing our services organization to higher capability, to a very strong bookings growth, raising our booking outlook, and seeing now how we can apply it internally on what we think is a breakthrough platform called platform Athena. So I really like the progress that we're making.

Okay, excellent. And then I just wanted to touch on one comment you made that the customers are getting value. What are some early learnings from that value that customers are getting? How is it helping their organization using these AI products?

Yes, I've given a few shout-outs in the script. One is particularly using our business network invoicing transactions and some of the wider network metadata to understand next generation of food and sustainability, going deep into contracts and understanding revenue opportunities and liabilities. But some of the early learnings are, one, you have to prepare, and you may need to consolidate systems. You may need to prepare your data a little bit. So preparation is important. Customers know what they want to do. There's not a lot of vagueness out there on what customers want to do, but they've got to prepare. Second is do not separate your automation and your AI. You take data out of your automation, it immediately rocks like a cabbage, because it gets dated. So I think that's another big learning. And customers want to do it economically. And with more open source language models, more skills, we're still staying on traditional processors, if you will, to manage cost, the customers want to do it reasonably. And this is just going to keep building on itself for Open Tech. So those are some of our learnings.

Excellent, thanks a lot [Indiscernible]. Pass the line.

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

Hi, good afternoon. Regarding the AMC business, are you seeing any kind of impact in that business, stemming from the fact that you've publicly announced your plans to dispose of it, or? I think you're going to call out in that regard?

Yes, Thanos, thanks for the question. No, steady as you go. These are products and customers who have been benefiting from decades of investment and understand the long-term nature of the platform and it's steady as we go.

Great and then just going back to the question regarding the slightly more conservative license outlook. Obviously, license is more volatile, it's hard to forecast, but is there anything else you would point to? Is it a function maybe of clients preferring a cloud deployment model to a greater extent than you were initially expecting, or anything else you would call out in that regard?

And, I mean, I'll take the first part, Thanos, in terms of the customer trends. We'll turn it over to Mark. Again, on the license, keep in mind Q3 has also been seasonally lower from a licensed standpoint, and that pattern also applies to Micro Focus in a licensed business, while the Micro Focus is doing very well, as I said, we are returning them to organic growth this year. So that's really the Q3 seasonality that we are actually calling out. And also we're seeing, you know, Micro Focus do very well with the renewal rates, et cetera. So really we wanted to expand the customer support line, those ranges there, and keeping our annual revenue, you know, within the range and accounting for more the license volatility is really what you see in the ranges. I'll also share that in my commentaries, we shared the number of over a million dollar deals both in the cloud side, as well as on the license side and both remain very strong, right? It's more the Q3 seasonality that you're seeing into the annual ranges. Does any of the comments Mark want to share?

Yes, sure. License has a role. And we work in very secure environments. We work in deeply regulated environments and environments that have very high bar on compliance. We want a fantastic nuclear platform that requires license in a private cloud. We want many customer security, DoD, and other community platforms that require licenses as well. But what's clear through time is that license has a role and it's going to have a role in certain types of regulatory and deeply compliant environments, environments that require the utmost trust and security has a role in the private cloud as well. We've sort of found our natural level in our licensed business. So, Thanos, it has a role. And it's also a place where we can integrate to our hybrid cloud strategy. And a hybrid cloud strategy also means SaaS and private cloud. So we're in the licensed business. It's got a role. But the role is clearer today than it was five years ago.

[Indiscernible] thanks.

Yes. Thank you, Thanos.

The next question is from Raimo Lenschow with Barclays. Please go ahead.

Great, thank you. This is Jeremy on Raimo. So just on Micro Focus, maybe focusing on the product side, can you speak a bit to which areas of the business are seeing most interest at the moment, whether it be idle, Vertica, or maybe some of the security products? Thank you.

Yes, we happy too. Thank you, Jeremy. So, look, it's been a great year one, and we're on to year two. Today marks the first year anniversary. And if you'll just allow me, we were shaped a shrinking business and formed it into an innovative, growing one. And it was a first, it was a fantastic first year. I want to thank everyone for their support. In terms of innovation and growth, let me provide a few shout outs. ITOM, our IT operations management, it's all about the next generation of products around observability and extending service management outside of the IT environment to corporate-wide service management. That's our priority. In terms of security, it's about bringing it into SaaS, identity management, and to edge computing. It's about ADM and having that end-to-end life cycle. And our platform, Athena, has many components from ADM. So getting -- bringing AI -- business AI and Aviators into the developer experience. We introduced a new IoT platform based on core Vertica and something called the GPAC modules. You can find it on our website. And we're very excited to bring in higher scale machine transaction data into our information cloud. And then of course all things cloud. Private cloud, SaaS, and AI embedded across ITOM, security, ADM, IoT. I'll also note in my comments of our 63% cloud bookings growth, and I raised outlook for the year to 25% to 30% cloud bookings growth. Microsoft, I keep calling them Microsoft, so we didn't buy Microsoft, we bought Micro Focus. I noted that Micro Focus cloud bookings contributed to that 63% growth as well and will begin to contribute more over time.

Got it. Thank you.

Thank you, I did not announce our acquisition of Microsoft today, so just to be clear. Yes, thank you, Jeremy.

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

Good afternoon, Mark. You mentioned M&A, so some people will go there. Not Microsoft, but you did mention strategic M&A in your prepared remarks. So how should we think about the balance between M&A and organic investments and insurer-holder capital return here post the AMC divestiture?

Yes, sounds great. Thank you, Stephanie. Well, look, we're excited to complete the divestiture. And as I noted, we're on track, you know, subject to closing additions and regulatory approvals. And we expect to close by the end of our fiscal year. And when we do so, our intent is to de-lever and bring our leverage under 3 times and to return to a full-stack capital allocator. As you'll see in the investor materials, we're looking to return 30% of our, approximately 30% of our free cash flow via dividends and buyback. And that allows 70% of our available capital available for other purposes including M&A. And you should expect us to return to M&A. So that M&A will be strategic. It will be focused on ARR and cloud assets that drive future organic growth.

Okay, thank you. And then I also want to circle back on the investments in AI cloud and security. Should we think, assume these investments continue post fiscal ‘24, and how should we think about R&D as a percentage of revenue going forward from here?

Yes, absolutely, I'll take that Stephanie. So today we're actually looking at, we actually called out R&D as a percentage of revenue at 14% to 16%. So at the larger scale, expect that to continue. In terms of AI investments, it's both, it's R&D and sales and marketing. And for fiscal ‘24, it is 18% to 20%. So I would say expect us to keep in that range, obviously, at the scale the dollars will be higher as well. And also the deployment of R&D, as Mark mentioned, 800 engineers deployed towards AI and related activities. So the teams are spending a lot of time not just on the investments, but where the investments are going.

Great. Thank you very much.

Yes. And thank you, Stephanie, and just to amplify a point from Madhu, platform Athena, so it's going to significantly raise our productivity and output. And this is, I look through two decades, three decades of leading engineering organizations and how they've evolved over time and how organizations like OpenText have looked to balance our incredible talent globally and through automation and through systems, through open source wave, through better tools. There's another wave coming, which is called AI. And some companies will use it, while some may stumble along the way. For us, we have a very clear vision and we're going to be building our proprietary platform internally to manage roughly a billion lines of software and how to auto-generate cases, how to auto-generate interfaces to APIs, how to accelerate learning. I think the talent we hire in the future in engineering is going to be radically different and radically elevated. Athena will be able to take descriptions and generate code. So that next wave of efficiency, and we'll talk more about that when we get to our F ‘25 plan, that in the R&D expense percent, the nature of this in large scale tech companies are going to change, because there's a very interesting wave of AI coming and how we're going to be building software.

Yes, and Stephanie, if I could just add one more, R&D is a very broad category, just given our spectacular cloud bookings growth, and we talked about visibility into ‘25 and ‘26. We are also investing in what we call information security, the CECL organization. We are also investing in cloud operations and cloud infrastructure and sort of hyperscale a cost. So I did want to mention in terms of investments, it's going sort of above the line and below the line as well.

Great, thank you for the color.

Thank you.

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

Thanks very much and good afternoon. Your recent comments on Athena were very helpful to understanding what it is, and using AI to improve the productivity of your R&D teams, do you expect or do you see improving productivity across the entire organization through AI over the next several years. Is that something that we could expect going forward?

Yes, Paul, good to hear your voice and thanks for being on the call, absolutely. And as I noted, we have room to improve our margin right now. We're focused on bookings and revenue growth. And I only decided on the call today to go into one area, very large area for us, a transformative area for us, which is the core of the company. We're an engineering firm, right? And we create IP and products. But when we look across the entire company, we have other projects that we're working on and that will come to fruition in the coming years in increased productivity in the support organization, in the pre-sales organization, in the renewals organization. So we can talk more about where we look to deploy them, but I wanted to be very grounded in kind of the first transformative area that we have our concrete plans are. And it's sort of a multiply, it's a force multiplier to be able to get our engineering team more productive, next generation of talent, accelerating product to market. We think that's the area that will have the nearest term and highest impact.

Thanks. And then just a second question, just more specifically on the outlook for ‘24. And when you look at Q4, you can back into what it implies for Q4 EBITDA margins. I think the midpoint is at about 41.5% EBITDA margins, which is quite high and it's close to an all-time high for the company. What is driving that seasonality to the upside? We talked a lot about Q3, but how do we think about Q4, the drivers there?

No, Paul. Thank you, it's Madhu here. It's a very important question. So a couple of things, one I spoke about the Q3 seasonality, which is actually very typical. So again, at the Uber level, we are making investments, but Q3 has its own seasonality in terms of people spend, payroll spend, benefit, et cetera. So Q4 is our seasonally strong quarter from a revenue perspective, and you will see that benefit the EBITDA margin as well. And some of the integration expenses we have for Micro Focus for this fiscal year, some of the spend is focused in Q3, we look to optimize some of those in Q4. So I would say the big contributor to Q4 EBITDA margin is going to be our seasonally strong revenue quarter and tapering off of some of the expenses. And you're absolutely right for the second-half of the year, Q4 EBITDA margin will be much stronger than Q3 to get to our annual range.

All right, thanks for taking the questions.

Yes, thanks Paul.

Thank you.

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

Very good. Thank you, everyone. Thanks for joining our call today. We're just delighted with our progress and our momentum. You heard us, we're investing for growth. We're expanding our competitive advantage, strong financial update, and we're focused on capital return. In the room today as well is Greg Secord, and we'd like to wish him a happy birthday, yes. Thanks, everyone, for joining. And Madhu, myself, Harry, and Greg, we look forward to engaging in the coming days and weeks. 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.