Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation Third 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 analyst Q&A session. [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 third quarter fiscal 2024 earnings call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea, and OpenText's President, Chief Financial Officer and Corporate Development, 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. Needham Technology, Media & Consumer Conference on May 14th in New York. Barclays Leveraged Finance Conference on May 21st in Austin, CIBC Technology & Innovation Conference on May 22nd in Toronto. Jefferies Software Conference on May 30th in Newport Coast, and Bank of America Global Tech Conference on June 6 in San Francisco. And now on to our safe harbor statement. During this call, we will make forward-looking statements relating to the future performance of OpenText. These statements are based on current expectations, assumptions, and other material factors that are subject to risks and uncertainties and actual results could differ materially from the forward-looking statements made today. Additional information about the material factors that could cause actual results to differ materially from such forward-looking statements as well as risk factors that may impact future performance results of OpenText are contained in OpenText’s recent Forms 10-K and 10-Q as well as in our press 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 direct, comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, I'm pleased to hand the call over to Mark.

Thank you, Harry, and welcome to today's call. Let me kick off the call with a statement. The strategic value of OpenText to our customers has never been higher. We continue to build cloud momentum with our business clouds, business AI, and business technology. And we see proof points of this as evidenced by our continued strength with large multi-year cloud contracts and our upward revisions in future cloud bookings expectations. And with the AMC divestiture now complete, we have increased our capital flexibility to accelerate growth in the $200 billion information management addressable market. Long term, we expect our business to deliver mid-single-digit total revenue growth through a balanced approach of cloud-led organic growth plus M&A comprised of 20% plus enterprise cloud bookings growth, 7% to 9% organic cloud growth, 2% to 4% total organic growth, and 1% to 2% M&A growth, powerful cash flows at 20% plus of revenues, and a new return of capital framework comprised of 50% of trailing 12-month free cash flows returned to shareholders in the form of dividends and share buybacks and 50% for Cloud M&A. And to jumpstart this new return of capital program, we are announcing today a $250 million share buyback over the next 12 months, and our intention to return $450 million to $500 million of capital to shareholders in fiscal ‘25. Let's get started. You'll see in our investor deck today our four point strategy to building shareholder value. Point one of the strategy is to continue to lead the OpenText business system with a relentless focus on execution. Simply said, an OpenTexter always puts customers first, innovates, cares about people, and strives for exceptional performance. Our culture sets us apart. Point two, accelerate cloud growth. Our strategy to accelerate cloud growth is working. We've increased our R&D…

Great, Thank you, Mark. And we appreciate all of you joining us today. So let me start with a few key points. In Q3, we successfully achieved our operating goals while focusing on initiatives for growing our cloud business. This was our 13th quarter of organic cloud growth. We announced yesterday, May 1st, that we have successfully completed divesting the AMC assets. This transaction returns us to capital flexibility. Last quarter, I mentioned that Micro Focus will be on our operating model, both adjusted EBITDA and free cash flows, as well as returning to organic growth by the end of fiscal 2024, we are on track to achieving that. Our outlook, targets, and aspirations fully reflect the opportunity in front of OpenText with enterprise cloud bookings leading the way as our customers prepare for AI. Mark spoke to our Q3 results and let me share some additional comments. During the call, I will refer to the investor presentation posted on our IR website. 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, Q3 cloud revenue was $455 million, up 4.4% as well as 4.4% in constant currency. Our enterprise cloud business is doing extremely well with 53% year-over-year bookings growth in the quarter, increasing our visibility towards cloud revenue growth. Q3ARR, annual recurring revenue, of $1.146 billion up 13.3% and 13.1% in constant currency, that represents approximately 79.2% of total revenue. And now moving to other financial metrics. GAAP net income was $98.3 million, reflecting increased interest expense amortization and special charges that relate to the broader acquisition of Micro Focus driving GAAP EPS of $0.36. GAAP gross margin of 73%, up from 70.3%, also reflecting a healthy…

We will now begin the analyst question-and-answer session. [Operator Instructions] The first question comes from Daniel Chan of TD Cowen. Please go ahead.

Hi, guys. Just want to get some clarification on the pushout of the midterm aspirations from fiscal ‘26 to fiscal ‘27. Sounds like there's a lot of demand, a lot of strength, a lot of traction here. Just trying to understand why that pushes the aspirations out of year rather than pulling it forward.

Yeah, Dan, Mark here, thanks for the question. I'll just start obviously with the headline, which is we're divesting $528 million of revenue via the divestiture. And as I noted in my remarks, we're signing larger, longer-term cloud contracts that have ramps in them, ramps to full value, supported by strong multi-year roadmaps. We're also seeing and hearing from others in the industry, like SAP, Microsoft, Google, who are seeing various trends. Now, we have various accelerants that are not factored into those aspirations yet. Like faster cloud adoption, aka, can we grow faster than 20%, and can we get faster ramps. We haven't factored in yet AI taking off, we haven't factored in M&A, we haven't factored in the euro rebounding and helping customers spend more in Europe, if you will. So those are the reasons for maintaining the aspirations, but seeing them as part of F ‘27, not part of F ‘26.

Okay, thanks for that, Mark. And then on the margin guide for next year, if I back out AMC from fiscal ‘24, it looks like EBITDA margin this year is expected to be about 32.5% as well based on your fiscal ‘24 targets. So you called out additional AI investments, AMC divestment, having an impact on some of those margins. Can you help break down what is driving, how much is coming from each of those? How much more are you accelerating R&D for AI investments that's causing that flattish EBITDA margin trajectory versus how much of it is going to come from additional expenses from AMC divestment? Thank you.

Yeah, thank you again. The AMC divestiture expenses are predominantly in Q4. And if your question is about fiscal ’25, the categories would be, as I mentioned earlier, it is certainly investing towards the cloud bookings growth and you'll see those investments predominantly in cost of sales and some below the line as well. When it comes to below the line, yes, we are absolutely investing in R&D line as well as sales and marketing. But also keep in mind, fiscal ‘25 adjusted EBITDA is growing from a year-over-year perspective.

Thank you.

Yeah, thank you.

The next question comes from Steve Enders of Citi. Please Go ahead.

Thanks for taking the question. This is George on for Steve, and congrats on a great quarter. A lot going on, not least of which, happy birthday, Madhu.

Thank you.

Maybe just to start, the cloud bookings number, second really impressive growth number, obviously impacted by duration and maybe bumped up your long-term target to 20%. Maybe if you can just help us kind of tease apart, bumping that up, how much of that is kind of the underlying strength versus what you're seeing on the duration side?

Yeah, George, thank you for the question. No, it's definitely the strength of the portfolio, long-term roadmap. I encourage everyone to watch our demonstration of the United States National Transportation Security Board data archive and just the power of having Aviator or Business AI integrated into information management and it's helping us win now. So it's the strength of the underlying business. These are large numbers, 63% growth in Q2, 53% in Q3. We continue to see a strong pipeline on the cloud bookings. And like I noted, I mean, the duration is longer. Average deal size was up in Q3, 30%, contract terms are longer. We more than doubled our $1 million wins year-over-year from 13 to 28. So it's reflective of the strength of the product. That's the underlying reason.

Got it. That makes sense. And I wanted to ask about what you're seeing from customers on AI budgeting. I think you kind of framed it in the past as kind of early spend really being about preparing data estates, so they can ultimately make the best use out of their data assets. Maybe if you could just talk about where customers are at on their journey of making those preparations and if you think about kind of the leading edge versus more the median customer?

Yeah, it’s -- as I said in my remarks, it's in every discussion. It's in every discussion, and it's real. We are, in some customers, they are exploring vision. We have other customers piloting. Some of the strength of the larger, longer, with ramped cloud contracts is about we get it. And so we're going to buy into the cloud bookings, but there's going to be a ramp to it over time. No doubt we're seeing customers consolidate and preparing for AI as well. Because you don't want to go through all this spend on fragmented systems and fragmented data. So there's some pre-work. We have some pre-work we need to do internally in some of our systems as well before we apply the higher productivity value of a language model. So it's in every conversation. We are -- Aviator is helping us win now. You're seeing it reflected in the bookings. Pick n Pay is live on DevOps Aviator. So it's starting to move now into production.

Great. Thanks for taking the questions.

Yeah, thank you, George.

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

Thanks so much and good afternoon. First question, just on the M&A strategy, you mentioned to be more cloud oriented, but then also you remain a value buyer. Can you just elaborate on what you mean and how you bridge those two? I mean, how should we think about valuations that you would consider deploying capital at versus what you typically in the past deployed it at?

Yeah, we think the two are synergetic right where you -- we're going to continue, Paul, to seek value and organic growth. It's all about the future, right? I mean, we have learnings of the past for sure. But the framework that the company's announcing, that Madhu is heavily influenced in having Corp Dev as part of Madhu's team, it's all future oriented. And so we're seeking cloud revenues, high recurring revenues. We're not seeking licensed businesses. And these are businesses, if you think of our learnings from the past, which are interesting, but not about -- it's all about playing it forward. We're able to leverage our maintenance and our license scale of the 80 license acquisitions we did. We now have close to a $2 billion cloud platform. And that's the leverage going forward. Yes, we'll get the general operating synergies of acquiring companies. But we're really excited about bringing cloud companies who can leverage our operational scale in the cloud and get those synergies of growth. And we're going to remain value oriented. I'm not here to put multiples out, right, on a call. But we're going to seek small to medium sized companies, value oriented, that can leverage our operating discipline, our general distribution, and the very large cloud operational scale. Madhu, anything you'd like to add to that?

Thank you, Mark. I'm completely aligned. And as I said, looking forward to putting these assets in motion.

And expect us to close multiple transactions over the next 12 months.

Thanks for that. The second question is on longer-term free cash flow conversion. You mentioned a couple of drivers that will help improve it. But what do you see? How do you rank them in terms of the most material ones that you see executing on in the near term to drive it up?

Yeah, I'll pick that up Paul. And, Mark, certainly chime in. Look, I think first of all, all the -- when you get to fiscal ‘27, the growth in the cloud revenue at scale is going to contribute to adjusted EBITDA margin expansion. But built in there, we also think the investments we're making in the cloud, we are making predominantly in ‘24, also ‘25 will pay higher returns when we get to ‘27. So expect cloud gross margin without giving quantitative ranges to also improve between now and then, and that's going to help adjust the EBITDA margin. And certainly from a free cash flow perspective, the interest savings we are getting from de-levering is going to sustain itself then. As said, we're not making any interest rate improvements yet. The special charges will be slightly down and the AMC tax is on the other side as well. But built into all of this, I will say we make a note of at our greater scale in ‘27, we are going to get efficiencies through automation AI within OpenText. And Project Athena is just one example, and we are in the very early stages, we are at the end of fiscal ‘24 in creating this plan across the company with respect to automation AI. Mark, anything to add?

Yeah, sure. And thank you, Madhu. Look, Paul, I'm really excited about our three President structure, with Todd leading up our entire sales force, Paul leading up aftersales for renewals, PS and support, and Madhu taking on more operations. That is freeing my time up to focus on building a more efficient and scaled company through many things. One of which is this aspect of a technology led business. Shannon Bell has joined us recently, our new CDO and CIO. I just want to double click on the -- it's like being a new company again with AI tools and what is that next level of efficiency? We see opportunities in support, that we're going to go architect. We see opportunities in pre-sales. We see opportunities in generated code, as we do highlight it with Athena. We're going to have a new approach to full digital renewals. So it's a new day of leveraging AI internally. So I just want to double click on the other aspect to get us to our $1.2 billion to $1.3 billion F ‘27 aspirations are really leading with this technology led business with automation data and AI.

Thanks for taking the questions.

Thank you.

The next question comes from Samad Samana of Jefferies. Please go ahead.

Hey everyone. This is Billy Fitzsimmons on for Samad from Jefferies. Last quarter you both talked about strengths in large enterprise, but maybe some potential weakness in SMB, which informed the guide. It sounds like the enterprise strength continued, but any change there quarter-over-quarter in terms of the SMB market? And then what did the 4Q guide assume in terms of macro? And obviously it's still very early, but what did you assume around macro when putting together that initial fiscal 2025 guide?

Yeah, let me take the first part. Thanks for the question on SMB. Look, we're expecting an SMB uptick in fiscal ‘25. We have Microsoft, who's obviously our largest ecosystem partner here, pushing very hard in the market with Azure, Dynamics, and Copilot. We're also upgrading our own partner platform, really important. We've codenamed it El Dorado. And we'll be upgraded to this new platform that we've built later this year that's going to allow us to bring more product to market, more quickly, and go across more countries now, because we're primarily a US based SMB platform. We're also seeing higher partner engagement right now, especially with Cloud Editions 24.2 and what's coming in El Dorado. We're also seeing some churn in SMB resellers. I don't want to necessarily call them out, but some of the larger ones, we're seeing some churn. So we're actually excited about SMB. I know we've shouted out the last few quarters. We've had some modest headwinds. But we see it now back on an uptick starting in Q1 with the things I just outlined. And Madhu, anything you want to shout out on Q4 macro?

Yep, so on the macro side from an externality perspective, we've certainly considered the geopolitical aspects and as you know, we have a very global business. And look, the lower GDP growth is everywhere and how that affects some of the customer decisions we've really factored that in. And inflation is high and we expect that to continue, right? And two other pieces if you consider the interest rate environment and the FX impact as I outlined in my commentaries, we're not assuming any benefit from the interest rate environment at this point and also we have a strong European business and an Asia business. So with respect to the euro and the yen, which are the key drivers for some of that revenue, we're also not assuming improvement in those currencies. And of course, if there's improvement there, our customers in those regions would also feel better about buying, but we're not assuming those benefits in our model.

Super helpful. And then if I can sneak in a second question here, Mark, maybe building on some of the prior questions and answers around your Aviators investments and opportunity, given that you highlighted that Aviators helping OpenText win now and given what you've seen with the Get Your Wings program, maybe you could share some anecdotes or just general feedback from early customers who have adopted or tried these solutions.

Yeah, I'm very happy to. And I, look, seeing is believing. And I encourage everyone, we've posted some short clips on opentext.com of applying our content cloud, plus Content Aviator, and Search Aviator to the US National Transportation Security Board data archive. And that was the centerpiece of our demonstrations in Europe two weeks ago. I encourage everyone to watch it, because seeing is believing. And we had thousands of people across London, Munich, Paris. It was literally standing room only to watch that demonstration of applying a language model to a very rich data archive. And you can just obviously see as a knowledge worker your life on just automation and your life with automation and AI. And what would take three weeks of a knowledge worker, we got down to three hours. And so I think seeing is believing, go check out the video. And the demonstration was live. It's our shipping product. It's the published NTSB data. It was literally us pressing a button. So look, everyone saw that. And you can see our every 90 day progress. So, Pick n Pay, using a different aviator for testing in QA. A large apparel company inspecting invoices. A large manufacturer doing contract compliance. But we think that the heart of what we're going to do and win is that knowledge worker. And just like we went from no automation to content management, to digital folders, to search, to metadata, now this is the next progression in the evolution of knowledge management to bring in a language model. So obviously you can hear the excitement in my voice, but seeing is believing. Go watch the demo and draw your own conclusions.

Super helpful. Thank you both very much.

Thank you.

Thank you.

The next question comes from Adhir Kadve of Eight Capital. Please go ahead.

Great, Thanks for taking my questions, guys. Mark, you mentioned that a lot of your customers continue to test different use cases. Obviously, you've given some anecdotes on what customers are using right now. But in your conversation with those customers, you also mentioned that a lot of them are doing the pre-work to kind of really kind of full-scale deploy AI. How long do you see that pre-work taking and kind of browsing that journey and what and how long do you see until those full-scale deployments kind of take place?

Yeah, a great question. One of the strengths of having a market-leading professional services organization, I mean we have close to 2,000 billable consultants at OpenText covering every major theater in the global 10,000 is putting in place our Earn Your Wings program across that breadth. And since our first Aviator, I think we've collected over 100 use cases, right, across all our customer interactions. So there's probably three categories. There are those who are going to just continue to lightly experiment and understand. There are those that are going to take a very long view. Let me consolidate, get down to one, purify my data. And then there's probably the third case, which is they're going to go now, because they can see the productivity gains in very specific use cases. So we're seeing success reflected in bookings. There's a ramp time, as we've noted. And look, I'm going to keep you updated every quarter on that progress. But I certainly would hope to see that next step up in revenue contribution in fiscal ‘25, even though in our preliminary numbers, we're not factoring that in yet.

Okay, great. And of course, all the talk about cloud is great to hear. My second question will be around Micro Focus and how that plays and that product feed plays into all of your cloud growth aspirations.

Yeah, for sure. So three large areas. The first is ITOM or digital operations plus their service management. And we're just very excited about a whole new set of big data, right? We've always followed big data at OpenText, whether it be contracts, whether it be employees, whether it be invoices. And ITOM or Digital Ops opens up a couple big data sets for us, IT data and service data. So we really like having that hybrid digital operations and service management as part of the portfolio. Next piece of data is the developer. And I don't think we reach our full potential. I know we don't reach our full potential unless we can open up the developer. If you look how Oracle became Oracle, Microsoft became Microsoft, SAP became SAP, they built robust developer communities. And so not only do we have an ADM product line, but we're also going to open up the developer. That’s our strategy around our thrust services, our strategy around Athena, our strategy around complete developer management. Now, we're winning business at scale at very large software companies. And that's -- we're focusing the ADM organization on large scale software developers in auto, financial services, banking, biotech, healthcare. So we're quite -- I'll just shout out those two as places we're very excited about.

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

The next question comes from Thanos Moschopoulos of BMO capital markets. Please go ahead.

Hi, good afternoon. A couple for Madhu and happy birthday by the way.

Thank you.

Madhu, can you remind us what your thoughts are on target leverage? So after you pay down the $2 billion, how high or not might you take leverage up again for future M&A?

Yeah, absolutely. Perhaps I'll answer the question with respect to what we said on where we're targeting for M&A, right? Clouds ARR small to medium sizes, right, so being under three pretty imminently, I do think we will come back to around the three-ish. Our M&A, the capital allocation program, as you saw, [if primary] (ph), we refer to dividend and buybacks, but the second bucket is really the remainder of the 50% is M&A. So at the moment, I think with the $6.5 billion of debt, our own cash flows, the strategy around the acquisitions being small to mid, I think we expect to remain around the 3 times. And the last thing I'd say is the strategy around the small to mid cloud M&A is about those assets contributing to growth in the future, right? That also is going to again contribute to our free cash flow target, the $1.2 billion to $1.3 billion for fiscal ‘27. So again, that's how we're seeing it at this point in terms of M&A and annual leverage.

Great. And just a point of clarification, the transition services agreement related to AMC, is that neutral to margins?

Yes, that is neutral to margins at this point.

Okay. Great. And then finally, maybe one for Mark. Just in terms of Micro Focus, outside of the AMC business, it seems like it's stabilizing based on the 10-Q disclosure, but just commentary there in terms of how close you are to that returning to organic growth? How much work may need to be done in that regard?

Yeah, sound great. Thanks, Thanos. Thanks for the question. Yeah, we expect Micro Focus to return to organic growth this year. And we're also doing extremely well on the renewal side, right? Micro Focus was in the high 80s in Q3, our best rate since the acquisition, and we'll be in the high 80s again this quarter, which is great news. And there are -- with the divestiture of the mainframe, we're now focused on the three big businesses, right, ITOM, which is digital operations and service management. We're focused on the developer and of course, security, right, which are the three big businesses there.

Great, I'll pass the line, thanks.

Thank you.

Thank you.

The next question comes from Kevin Krishnaratne of Scotiabank. Please go ahead.

Hey, good evening. Just a couple of small ones for me. I noticed in the deck that the cloud renewal rates inched down 92% from 93%. Just wondering what happened there and does that ramp back up in Q4?

Yeah, Kevin, thanks for the question. I'm actually going to take that one. I just want to note that the cloud renewal rate we publish is a gross measure of cancellation only. It does not include the net impact of upsells or downturn. Now our peers in the industry, when you look across the larger cloud companies, those are multibillion-dollar scale. They report a more like off-cloud which includes the effect of upsells and downsells. So if we report it this way in our cloud, and we don't report that way, we would be in the high 90s in Q3. So you can expect us kicking off F '25 that we want to kind of align to the industry. This is it's just -- don't make it just a gross cancellation rate, which it is today. You need the effects, plus or minus, of upsells and downsells. So the industry reports that way. We report that way on off cloud, like the industry does. But if we report it that way, we'd be 90s. So we're going to align to those new metrics starting in '25. And we'll continue to share insights along the way.

Okay. Good stuff. That's super helpful. And the other one that I have is just on the updated guidance for '24. When you look at the license growth and the customer support growth, they come down, I know that some of that is related to the AMC divestiture. Maybe a couple of questions. One, can you just remind us of what the mix is for AMC in terms of license versus customer support? And then second, just looking at your -- the business excluding AMC, is there any changes there on your views on your ability to land the higher number of bookings for license revenue that typically falls in Q4. I'm just wondering if everything is sort of the status quo of what you're looking at when you were looking at Q2 versus the business today in terms of just the health of the business, excluding AMC.

Yes. So I'll take the first one on the AMC components of revenue. We've shared this before, cloud is still very small or zero from an AMC perspective, and PS is small. It's predominantly license and customer support.

Got it. Is it -- what's the mix, though, between the license and customer support?

License and customer support. I'm not sure we've shared that. I'm just -- so it is in our 305 filing, I believe. So you can certainly take a look at that.

We can follow up offline.

Yeah, and we can actually follow up offline. So it's predominantly license and customer support given zero cloud and very small PS.

I presume that supports larger than license.

The support would be larger than the license, yeah. And I think on your second piece in terms of Q4, what are we assuming as far as the license business goes. Is that your second question?

Correct. Yeah, that's it. Yeah.

So Mark, you?

No, I’m sorry.

Yeah. So the Q4 from a license perspective, look, both Micro Focus and OpenText are behaving quite similarly, right? If you actually look at about 18 months ago, when they had a completely different year-end, quarter-end, et cetera, as part of integration, we've sort of synergized the compensation plan, the regional focus, all of that. So I believe we are there. So expect the general business strength and focus for our OpenText -- and of course, the Micro Focus now ex AMC to be quite consistent.

Yeah. I mean the ITOM security and developer business units, are on the mother ship cadence at OpenText, right? So they're well aligned to the end of our fiscal year and will be well aligned to our kick off July 1.

Great. Thanks a lot. I’ll pass the line. Thank you.

Yeah. Thank you, Kevin.

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

Hi, good evening and happy birthday, Madhu.

Thank you, Stephanie.

I was hoping you could talk a little bit about the Micro Focus cost savings realization. Have there been any surprises in the process. And how should we think about the quantify the micro integration on the fiscal '25 adjusted EBITDA margin outlook?

Yeah. So it's actually gone very well. And it's -- I would say, from a supply perspective, it's gone as we expected when we did the diligence and when we formulated the plan. Now Micro Focus, as I mentioned, is very much on track, being of the OpenText operating model from an adjusted EBITDA perspective. Again, the EBITDA is impacted, obviously, by us reducing the churn and returning Micro Focus to organic growth. But from an expense standpoint, we'll continue to optimize to Mark's earlier comments about applying AI internally, whether it's Micro Focus on OpenText, it’s environment. But beyond that, I would say our design plan, whether we hit their facilities or the vendors or other just the pure operating excellence, we've pretty much been very much on target.

Okay. Thanks. And then maybe another one for you, Madhu. Just on the cost of cloud services line. It seems to be ticking up here. Wondering how we should think about the puts and takes?

Yes, absolutely. Again, I'll speak to the cost side and see if Mark can chime in more from an environment and perspective. Look, it's really driven by the -- I mean, as we said, our second strong data point is the 53% cloud bookings growth in the third quarter. And second quarter was over 60%. If you take the prior four to six quarters, there was healthy growth, but this is a very strong second data point, and we are realizing that to continue to keep up with that momentum, and we've upped our ranges in the future as well. We do need to invest. And the investments are primarily internal cloud infrastructure investments, investments with our partners and hyperscalers. And there is a ramp but there is a fair amount of cost. And in the past, Mark has outlined in the calls about just the growing list of compliance and certification including security that we have to do for our cloud business and happy to do so, but that does require a certain amount of earlier investments. Maybe I'll add one other comment. There was an earlier question about margins in fiscal 2017. These investments at scale will optimize themselves so that we have higher benefit when we look at '27, right? So these are not linear investments, they are certainly a step function investment.

Great. Thank you.

Thank you.

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

Very good. Well, let me thank everyone for joining us today. As you can see, we're extremely excited about our cloud and AI path in front of us. And Madhu, happy birthday, and thank you all for joining us today. 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.