Open Textual content Company (OTEX) Presents at Nasdaq forty ninth Investor Convention (Transcript)

Open Textual content Company (NASDAQ:OTEX) Nasdaq forty ninth Investor Convention December 5, 2023 8:00 AM ET

Firm Members

Madhu Ranganathan – Chief Monetary Officer

Unidentified Firm Consultant

All proper, effectively, good afternoon. Hope everybody loved lunch and the panel presentation. We’re kicking issues again on once more with OpenText, and we’re happy to have Chief Monetary Officer, Madhu Ranganathan.

Madhu, thanks for becoming a member of us once more on the NASDAQ convention.

Madhu Ranganathan

Sure, thanks for having us. It is nice to be at NASDAQ in London.

Query-and-Reply Session

Q – Unidentified Analyst

Superior. So simply to present you a way, OpenText is now virtually a $6 billion enterprise, serving 120,000 enterprises on and 150 million customers. And so Madhu, given the size of the enterprise for buyers, new to the OpenText story, what’s the ache level that OpenText is fixing in your clients and the way would you describe the core alternative that firm’s pursuing?

Madhu Ranganathan

Sure, sounds nice. And it is an important place to start out. Consider OpenText as we’re targeted on the singular highly effective idea of knowledge administration at scale within the cloud and AI. With the Micro Focus acquisition, we actually have probably the most complete info administration platform within the trade. And to handle Sanjit’s level and the ache factors, I am going to speak about what will we do? We construct software program and we construct software program to energy and defend info and starting from content material administration to enterprise networks, we name it that, gears in direction of industrial, industrial, automotive, provide chain, cybersecurity, proper? And IT operations administration, software automation, and naturally, AI and analytics, form of the complete form of the complete spectrum.

Now what we do is all kinds of knowledge, content material, paperwork, e-mail, video, archives, all of that. And the thrilling alternative forward is intersecting Gen AI via all of that. Now with respect to ache factors, consider clients have very, very advanced work streams and the info and the knowledge sprawl has by no means been extra advanced. So the place we actually intersect with our software program is, there’s loads of speak about AI and knowledge warehousing, however we come a lot earlier than that when it comes to organizing knowledge, storing knowledge, defending knowledge, analyzing knowledge so as to in truth apply the info warehousing in AI and that is actually the place we are available.

So I’d say the ache factors are actually the info sprawl, the knowledge sprawl. It is nonetheless unfathomable how a lot of unstructured knowledge is on the market for a corporation like OpenText to use its software program. And the place the evolution occurs, it is actually stepping into the Gen AI capabilities as effectively.

Unidentified Analyst

Nice. Sure, you may’t have an AI technique and not using a knowledge technique clearly. Seethe Firm made some information on its earnings name and which was a really strong quarter. However I believe what caught my eyes round this strategic shift from a much less reliance on M&A, which has been a spotlight to renewed dedication to driving natural development. Are you able to discuss to us slightly bit concerning the motivation behind the shift in technique, and what does that imply for M&A going ahead? Like, will you not do any M&A or is it simply going to be a distinct dimension and sort of M&A?

Madhu Ranganathan

Sure, completely. I’ll say we’re a 32-year younger firm and to only kick it off, I am going to say, as a know-how firm at scale, we’re all the time going to do acquisitions, proper? In order that’s form of the main assertion there. So for the final 32 years, the framework of knowledge administration has clearly been constructed via in acquisitions. We have additionally had a pair distinctive approaches to M&A. We now have been — as you may name it, a value-based acquirer. You don’t see us pay very, very excessive multiples on companies. And we additionally consider in getting the companies in buying, integrating, and getting them to the degrees of profitability that OpenText has that kind of has been form of the complete M&A mannequin.

Now, with Micro Focus acquisition, we’re close to 6 billion in income, however we additionally should — we will additionally function in a $200 billion TAM. Now, earlier to Micro Focus, we have been about 9,000 billion. So, we have now a $200 billion TAM, and at close to 6 billion, it is rather clear that we don’t want extra TAM, we may develop into this TAM. And there are many areas for us to unlock. And this isn’t an in a single day technique Sanjit. And that is one thing I do wish to make clear. That is in a multi-year added, and naturally the scale and scale of the TAM permits us to make this pivot.

However there are two crucial elements that lead into this. One is clearly R&D and innovation. We’re at 14% to 16% of revenues in R&D that can also be reflective of 40% of our workforce, of 25,000 workers concerned in R&D and innovation, and our go-to market engine, we consider on the dimension and scale of OpenText is like none different, which is — we in all probability have the strongest direct Salesforce group, and we have now a really sturdy accomplice community from the SAPs of the world to Google and AWS and to many, many different accomplice channel.

Now, the investments we have made in M&A, our subsequent kind of worth unlocker goes to be natural development. So, so once more, we’re going to lead in with natural development. We will discuss concerning the divestiture. The divestiture goes to permit us to ship sooner than we anticipated. Which means we return to capital flexibility. The muscle reminiscence of M&A doesn’t go away, however we are going to lead in with natural development and M&A will certainly be within the image. However the subsequent 30 years, so to talk, of OpenText is constructed upon the framework of M&A that we did, and loads of worth areas on unlock for natural development.

Unidentified Analyst

Nice. Let’s speak about that divestiture. So within the final couple weeks you’ve got introduced the divestiture of the applying modernization and connectivity enterprise to rocket software program. Are you guys are going to get 2.27 billion in money? Are you able to describe what this enterprise was? How massive was it when it comes to income and EBITDA? And why did the group make the choice to divest?

Madhu Ranganathan

I might wish to begin with the why first after which we will work our method again to your different very, very legitimate factors. Look, once we acquired Micro Focus, we didn’t have an intention to divest. We acquired the whole enterprise and the intent was to maintain the whole enterprise. That is AMC, proper, software modernization and connectivity. It is the COBOL and the mainframe enterprise. And we did get an inbound name and as we diligence the inbound name, just a few issues got here to gentle. One is you will hear us discuss so much about our cloud journey. AMC was all non-cloud or off-cloud, which truly additionally meant that in our product roadmap, which could be very aggressive product roadmap, AMC was the farthest in our cloud roadmap to have the ability to cloudify and simply by DNA, AMC can also be a really self-contained unit.

So once more, when you concentrate on divestitures and carve outs, we wish to be certain it’s carve-outable in a really profitable method. And by nature of the whole lot I described about AMC, rocket software program is a superb dwelling for AMC. They usually have invested into cloud and hybrid since that’s the bread and butter of their enterprise and AMC would do very effectively there. For us, if we have been to cloudify AMC sooner than we had deliberate, it will imply we’d not be capable to make clear different merchandise and options. And there is a crucial facet right here. AMC’s 500 million in income, 275 million in EBITDA, nevertheless it was additionally a flattish enterprise, proper? So, we had chosen to place our roadmap into extra of the growthy areas of our merchandise and options. And it completely made sense to do that divestiture.

We count on to shut it by June, and also you’re proper, it is about 2.275 billion. And final however not least, it is going to permit us to delever, which is about three quarters earlier, to get to under 3 times in our internet leverage ratio than we had deliberate. And most significantly, the main focus and the chance for us to launch the assets, the mindshare ranging from our CEO and CTO to the architects to cloud and AI alternatives simply appear too massive to not think about, and we’re delighted to have the ability to do that.

Unidentified Analyst

Sure, it seems like a transaction makes loads of sense. And simply to comply with up, and I believe you addressed it in your reply, it seems like with the proceeds, you will be utilizing it for debt pay down.

Madhu Ranganathan

Sure. I imply, one hundred percent goes to be targeted on debt pay down if I may simply increase the reply that OpenText has taken a reasonably holistic view on capital allocation. That means, like traditionally, we have now a 20% trailing 12 month money flows, free money flows on dividend. Now we’re, once we return to capital flexibility, in a position so as to add buybacks into the combo. And as you rightly requested earlier, M&As will all the time be within the combine. And this can be a sturdy free money circulate enterprise. Sure, some money flows goes out of the enterprise with AMC, however we nonetheless are going to be on the low twenties when it comes to free money circulate to income solely to develop. So, the complete stack capital allocation is one thing I believe would be the, I believe we’ll be able to implement.

Unidentified Analyst

Glorious. Let’s discuss slightly bit about, Micro Focus. In August, 2022, the Firm bought Micro Focus for about $6 billion. Are you able to give us some progress updates since making the acquisition, what has been accomplished with respect to the combination and what stays forward? We’ll discuss concerning the high line development when it comes to Micro Focus in a bit, however simply when it comes to the blocking tackling of integration, what’s been completed and what’s left to do?

Madhu Ranganathan

Sure. Properly, initially the Micro Focus acquisition brings me personally, operationally to the UK extra usually than I used to. And we have now a powerful workforce in Studying, and I will be there tomorrow. So, we went after Micro Focus integration like none different as a result of it was a transformative deal. And likewise, we needed to bridge the hole between the market’s response to it versus the place we believed, the worth might be kind of gathered from the asset. And what do I imply by that? We went off at what has been accomplished, company integration, product integration, gross sales integration, product roadmap, and clients all completed.

We spoke about renewals in our final earnings name, which is about 65% of the enterprise we acquired from Micro Focus. They usually have been at low 80s when it comes to the of their renewal charge and getting them to the excessive 80s, which is the aim for this fiscal yr, June, and getting them into the mid-90s, which is basically the OpenText normal, is basically the journey that we’re very effectively on. And we spoke about it at our earnings name as effectively. And I’ll say micro focus is predominantly off cloud, very nascent within the cloud and getting a few of their key merchandise like voltage and fortify into our aggressive cloud roadmap, and we have been in a position to try this as effectively.

And the very last thing we will get to AI, if you’re prepared, two of the micro focus crown jewel merchandise are going to be a part of our AI answer and we could not be extra delighted to take action, 2.3 billion is their baseline of income we count on to organically develop from that base in fiscal ‘24. And the final, however not least, I am going to inform you that, we will get them to 36% to 38% adjusted EBITDA in fiscal ‘24, which can also be about six months sooner than we had deliberate. So all in all, we’re very happy with the place we’re.

Unidentified Analyst

So let’s flip the dialog into what we talked to on the high of the decision when it comes to driving natural development. And the way will we obtain that? In order an organization, you’ve got laid out some multi-year targets. In 2026, I believe you guys are focusing on AR development to go from 1.2%, which is roughly the place it’s at this time — to sorry, 2% to 4% by that point. So perhaps simply beginning on the excessive degree, we’ll go into the person companies in a second, however what are the fundamental pillars to get you to that acceleration?

Madhu Ranganathan

Sure, so we have now the supplies in our investor deck, however actually the primary place to start out is cloud, and the cloud bookings development we have spoken about at 15% annual cloud bookings development. And for these of you who’re newer to the OpenText story, I am going to share that our cloud revenues was zero about eight years in the past, proper. So, I imply, it has been an incredible journey within the cloud. So the fiscal ‘26 aspirations embrace 7% to 9% natural cloud income development, which is the most important and the main development driver for the general 2% to 4%.

Now, cloud natural development charge has been trending steadily up in our most up-to-date fiscal yr we did about 4%. After which when you concentrate on the following two to 3 years, attending to the 7% to 9% goes to be the main driver. Our buyer assist set up base is a really strong market set up base, and that runs about flat to low single digits in development. We optimize for gross margins about 91%. So that is what will get you to the two% to 4% ARR natural development.

We name out licenses flat. We have chosen to be within the license enterprise extra as a buyer deployment selection, proper. So if you do the maths there as effectively, we get to the two% to 4% development, however beginning on the high of the stack for us, the last word vacation spot is cloud, 80% of R&D goes into the cloud. So I say the start line is 15% cloud bookings development, and we work our method from there into cloud income development and to the general 2% to 4%.

Unidentified Analyst

And so if we take a look at core OpenText ex-Micro Focus, are you able to body up the chance to speed up development by driving extra conversion to SaaS and larger adoption of the cloud portfolio? As you reply that, is there any kind of uplift that the Firm sees when a buyer goes from off cloud to your cloud merchandise and cloud portfolio? What does that uplift appear to be?

Madhu Ranganathan

Sure, so I am going to say, one of many essential distinctions of OpenText’s journey to the cloud is we didn’t take the strategy of the upkeep being the bottom that we have now to cannibalize out of or substitute out of, proper? So the greenfield new alternatives for us for cloud has been very sturdy and continues to be very sturdy. So once we communicate concerning the 15% cloud bookings Sanjit, like, none of that’s anticipated to come back out of upkeep like cannibalization, proper? Once more throughout our pillars, we see the pipeline and the alternatives to take action.

Now, the OpenText Cloud, we’re the most important non-public cloud supplier, so we proceed to see development in that. Notably as you intersect AI for a big enterprises, they’d reasonably stand it up within the non-public cloud than they’d in a, than they’d in a public cloud. We now have loads of alternatives within the SaaS, proper? We went after advanced cloud companies that can proceed, however a lot of our merchandise and options are transferring from the on-prem to the SaaS model. And we see loads of development in there now.

Now, content material goes to be a number one cloud development driver, and proper subsequent to it’s going to be cybersecurity like merchandise as effectively. And once we discuss concerning the Micro Focus intersection, worth edge smacks is the service administration device that Micro Focus didn’t have an opportunity to cloudify fortify, all of that’s going to be a part of the cloud journey. And bear in mind we name it Titanium, that is our R&D venture of how a lot we drive into the cloud. 80% of R&D investments are directed to the cloud.

Titanium was pushed for OpenText clarification. Now, Titanium X is pushed for Micro Focus clarification. And once we speak about cloud is getting up merchandise to public cloud parity, as a result of a lot of our clients have already made the choice about their cloud dwelling, whether or not it is Google or AWS or Microsoft. And our job is to offer the merchandise and options agnostic of the cloud parity, proper? These are the areas the place the cloud options come into play.

Unidentified Analyst

Sure. As a part of that development technique, clearly AI goes to be play a task in that, in that higher development story over time. Are you able to give buyers the explanation why OpenText shall be an AI winner? What knowledge belongings does the Firm possess that’ll help you successfully monetize your AI ambitions?

Madhu Ranganathan

Sure, completely. So the 32 yr historical past we have now, it has been all about working with and dealing on buyer’s knowledge. So to start out off with the client’s knowledge is just not our product, however we have now visibility, entry to the client knowledge, and as we will all recognize, and there isn’t any AI — excuse me, and there isn’t any AI with out knowledge, proper? So let’s begin proper there. We sit on 75,000 enterprise clients who’ve been with us for a really very long time, and we get entry to the info to supply our merchandise and options. And the quantity two issues, Sanjit is, it is form of missed to this AI hype in our view, which is we at this time have the product portfolio prepared.

It is our product, our know-how to go do that AI, I imply like AI journey and that is what we name the Aviator. It comes along with a Micro Focus idle product, the Vertica product, which is the vectorization of the database, in addition to our personal analytics device referred to as the Magellan. So at first of this AI hype, we all know went about it very systematically and we have been capable of pull this collectively as Aviator. Now should you recall me mentioning the totally different pillars we have been, we form of splashed this Aviator throughout our pillars.

So we’re providing the AI, the AI answer to sit down throughout each, each single pillar is sitting on trillions of information, whether or not that is content material or transactions. In order that’s actually the strategy we’re taking at OpenText’s world, we rolled out our common availability product, so this Aviator goes to be launched in December and we rolled out pricing, we name buy your wings, which is the preliminary pilot section of what the shoppers wish to take into consideration as use circumstances, which once more, what we’re seeing is sits throughout each sector we function, organising an Aviator persona together with the form of the actual life, whether or not it is claims or whether or not it is HR or whether or not it is tech assist, proper That is actually the strategy we’re taking.

Unidentified Analyst

Superior. And also you kind of addressed it in your reply, however simply to place a pin in it, which merchandise do you see as probably the most important contributors near-term, and what do you see as the most important long-term AI alternative for the Firm to monetize?

Madhu Ranganathan

Sure. So the close to time period AI alternatives goes to come up out of search, it is going to come up out of IoT. And when you concentrate on the long run, I might encourage us to consider in two elements, there’s this hype asking, what’s your AI income, proper? There’s going to be loads of pull in impact for OpenText the place our clients who’ve — who’re prepared to maneuver into AI additionally understand that they should work via this unstructured content material and so they should get the content material organized or prepare for AI. And that is the place the core OpenText cloud options come into play.

We referred to as out within the context of the 15% bookings development, we referred to as out 20% near-term in our second quarter, which is December quarter. It will have some AI contribution in it, however I do assume the long run goes to be a pull-in alternative for our cloud options, in addition to AI, and the AI curve might be slower to form of start, and we’ll name it out as we see it. We — within the numbers you requested, and I shared on fiscal ‘26, it doesn’t embrace AI in the meanwhile, and we’ll simply name out as we see it.

Unidentified Analyst

Is there with throughout the product actually — is it just like the content material administration facet that is in all probability most blatant close to time period versus different components of the world?

Madhu Ranganathan

Sure. The content material administration and the search facet is ripe for that, however that does embrace much more of the pull-in impact as effectively with respect to the place there’s extra unstructured knowledge. Prospects wish to prepare very quick, which might imply buying our core content material administration options. And we do see, as I stated, IoT as a key alternative as effectively.

Unidentified Analyst

On the final earnings name, you talked about that Micro Focus would return to natural development by the top of fiscal yr ‘24. Trying long term in direction of your 2026 targets, what are the particular issues that corporations doing to speed up natural develop that Micro Focus?

Madhu Ranganathan

Sure, so one of many challenges of Micro Focus that was effectively, kind of seen from the market perspective that we have been effectively conscious too is their continued buyer churn. So, we are going to return Micro Focus natural development. And recall my remark about 65% of the enterprise we purchased was assist and upkeep. So we immediately needed to deal with the upkeep within the renewals piece, a pair kind of strategic elements and extra operational elements.

From a strategic facet, as many people who’ve been in software program for a very long time, the shoppers are searching for the long run path of the product roadmap. And proper or unsuitable, the Micro Focus clients didn’t get loads of love and visibility on the long run roadmap. And Mark, a CEO of the group, means like addressed that first as quickly as couple months into the shut. We went in entrance of all of the Micro Focus clients spoke concerning the present product roadmap, what we may do sooner or later.

As we all know in software program renewals, that renewal does not occur for that product. It occurs for the imaginative and prescient of the long run product. In order that needed to be addressed kind of immediately. Now, the blocking and tackling is a few philosophies round in a renewals administration and our philosophy needs to be centralized. We do not outsource renewals. Micro Focus had it decentralized additionally had it outsourced. So, we pulled the whole lot in inside two months.

Now their low 80s renewal charges, we see a path to excessive 80s in fiscal ‘24, and we see a path to the OpenText requirements of mid 90s within the subsequent one to 2 years. In order that’s going to be a serious driver for returning to natural development. Now our philosophy is each one of many Micro Focus merchandise has to develop. Now I spoke about AMC that was kind of flattish and we have now a chance there, however except for that, all different merchandise have a chance to develop.

Now, cloud was non-existent or nascent for Micro Focus. Their clients are searching for a personal cloud roadmap for a common cloud roadmap we offered that. So step-by-step, we shall be cloudifying the Micro Focus merchandise, that can also be accretive to development, proper. So these are kind of the large drivers. However I’ll say the foundational facet of what must be completed it has been set, proper.

Unidentified Analyst

Glorious. That is my first CFO particular query.

Madhu Ranganathan

Alright.

Unidentified Analyst

However let’s kind of lay out the full return framework you propose to ship to shareholders throughout, if we consider the important thing inputs right here, income development, margin growth, share of purchases and dividends. And what does that kind of sum as much as that buyers can count on over the following three or 4 years?

Madhu Ranganathan

Sure, so perhaps circuitously answering and I’ll do this. Look, we’re very clear that at this time we’re not getting full worth for what we have now completed and for what we have now on the market. And particularly, I imply, our fiscal ‘26 aspirations, and there is a little little bit of a historical past or a journey there, which is all good, placing the unfavorable items and Micro Focus within the rear view mirror via the power of our integration, the power of us posting the numbers, that is been precedence one. And I consider we have completed very effectively on that.

And over time, we are going to put that within the rear view mirror. The leverage was high of thoughts from an investor perspective, proper. And we do have a strong path there along with our regular reimbursement to get to accelerated delever. So I’ll say with that the capital allocation framework, if you concentrate on it on a three-legged stool, with M&A has been an enormous facet of the capital allocation and dividends, we have been a ten yr plus dividend issuer. We count on to proceed to keep up it, share buybacks we have completed some not so programmatically.

And with the June anticipated shut of AMC and the large bang delever, we do count on buyback to be again on the desk from a return to shareholder perspective. Sure, so these are form of the three massive like levers we have now. However coming again to the mannequin of OpenText for software program corporations, we have chosen to be very worthwhile, sturdy money flows. And now, I consider our natural development charge will catch as much as the expectations of the place this addressable market and the product innovation can come collectively. In order that’s actually the place we consider that the convergence of what we have completed and what we will do, to the place the share costs buying and selling and the valuation is, we do, we count on that to converge.

Unidentified Analyst

Superior. And simply to comply with up on that going again to the full from the income development standpoint. We’re trying I believe kind of turning two to 4%. EBITDA margins from at this time to 2026, the place does that — the place is, the place are you ranging from and the place, the place does that go to? After which when it comes to the dividend piece, what is the coverage when it comes to free money circulate allocation?

Madhu Ranganathan

Sure, certain factor. So from a development perspective, I am going to in all probability reiterate, that the start line is a cloud bookings development. That is the 15%. And the cloud income natural development is seven to 9%. And once more, if you take a look at buyer assist at flat to low single digit development, that is the place the maths of the two% to 4% is available in. I did wish to make clear that. So from a dividend and buyback perspective, we’re 30%. So we have been at 20% trailing 12 month free money flows for dividend. We’re placing one other 10% buyback. That is actually not the cap.

If we consider our inventory is a greater purchase than doing an M&A. I imply, our decisions are going to be very clear, with the AMC form of the potential divestiture, our EBITDA vary is 36% to 38%. It was beforehand 38% to 40%. We’re bringing it down simply the pure math of AMC. And I am going to remind us that we nonetheless have not baked in AI revenues and the productiveness popping out of it. And as we get to the closing of the divestiture, we’ll actually come out with kind of the higher math on that.

Unidentified Analyst

Sure. And it is also a key level that you simply’re not essentially baking in any kind of AI curiosity screens and monetization into the forecast. I suppose, my final query is simply on this as a CFO on this larger charge setting, how has the change — how has that modified your perspective on the way you allocate capital to the enterprise with these larger charges between the curiosity that you simply’re getting on money versus debt pay down versus the funding wants of the enterprise?

Madhu Ranganathan

Sure, so two issues. Once more, again to the AMC divestiture, about $150 million yearly goes to come back off of the curiosity burden and the money circulate burden from the divestiture. Pre that very cognizant of elevating rates of interest at a median of 6%, we had dedicated to $175 million reimbursement. So positively that is kind of in high of thoughts. However your query about allocating investments throughout the working mannequin is an important one.

And I’ll say OpenText could be very distinctive within the sense we may do 36% to 38% adjusted EBITDA margin after allocating 14% to 16% to R&D. And the 14% to 16%, we have now to think about that as 40% of our workforce. That is 10,000 out of 25,000 folks across the globe doing R&D and innovation. And we’re additionally doing 16% to 18% for gross sales and advertising and marketing. So, I consider CFO perspective, it is a very effectively allotted, very effectively invested mannequin. And we get loads of mileage out of this when it comes to the expansion charges we talked about.

Unidentified Analyst

Superior. Properly, Madhu, thanks a lot for coming to NASDAQ and strolling us via all of the issues which can be occurring within the OpenText. I actually recognize it.

Madhu Ranganathan

Thanks to NASDAQ and thanks as effectively. Thanks all.