Open Text Corp (OTEX) Q1 2021 Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2021 Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Mr. Harry Blount, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. On the call today is OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, which will be followed by a question-and-answer session. This call will last approximately 60 minutes with a replay available shortly thereafter. I'd like to take a moment and direct investors to the Investor Relations section of our website, where we have posted our consolidated investor presentation that will supplement our prepared remarks today. The presentation includes information and financial specifics to our quarterly results, notably our updated quarterly factors on Page 9, as well as a strategic overview. Please also note the following update on our Investor Day. We are moving our previously announced Investor Day from next week to early next year. We just provided a tremendous amount of new information at OpenText World, and we have our earnings call today, and Enfuse is just around the corner. We will also be attending several investor conferences in the coming weeks. I'm pleased to announce that OpenText management will be participating at several upcoming virtual conferences. TD’s Canadian Technology Conference on November 16, RBC’s Global Technology, Internet, Media and Telecom conference on November 17, Needham's Data Analytics and Infrastructure Software Conference on November 18, NASDAQ's Investor Conference on December 1, Credit Suisse's Technology Conference on December 3, Raymond James Technology Conference on December 8, and Barclays Global Technology, Media and Telecom Conference on December 10. We look forward to virtually meeting with investors in the coming days and weeks. And now I will proceed with the reading of our safe harbor statement. Please note that during the course of this conference call, we may make statements relating to our 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 statements. 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 including the current global pandemic that may affect 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. Good afternoon, everyone, and thank you for joining today's call. I want to continue the conversation we started at OpenText World, where we gathered over 7,500 information management professionals, focused on the future of our business and work. COVID-19 has changed everything from the way we work to the way we live to the way we conduct business. There will be many structural and long-lasting changes due to the change in human behaviors, including work from anywhere, direct-to-consumer commerce, contactless experiences and payments, extreme customer experience expectations, and new supply chains. Before the pandemic, Industry 4.0 was just getting started, and now it's in full acceleration. I call this the new equilibrium, which is driving the fastest, deepest, and most consequential technology disruption in the history of the world, creating tremendous opportunity. Businesses are accelerating their digital capabilities and are placing greater emphasis on time to value, all things cloud, customer experience, and edge computing. They are all looking to proven, trusted global partners, such as OpenText, to help them navigate these times. This new equilibrium has also changed OpenText, as I chronicled at OpenText World. You can clearly see how we've become even more digital and extended our lead in the cloud. Since the beginning of the pandemic and the calendar year, we've conducted over 10 million team meetings and chats, processed over 320 million emails through support, and as a company, we are managing 250 million secure endpoints for an estimated 100 million end users, 11 million cloud subscribers, 75,000 enterprise customers, and over 2,000 private cloud customers. That’s been our vision at OpenText: to build organically and through M&A the most comprehensive information management cloud platform for the future. With the introduction of our new architecture, Cloud Editions, running in the OpenText cloud and other clouds, we have never been better positioned to deliver for our customers in this new equilibrium. We're delivering massive new capabilities every 90 days. We already have over 1,000 customers on Cloud Editions. And by Cloud Editions 21.4, which is just one year away, our customers will never have to upgrade again. I know I've said this in the past, but let me repeat it as it is so important. Ten years ago, licenses accounted for 26% of our business. In Q1, it was 9%. We have de-risked the business over time. Ten years ago, we had zero cloud revenues. Now it's our largest revenue line, at $341 million in Q1 or 42% of our revenue, and it is now the first revenue line on our income statement. Our customer support business continues to expand, and customer renewal rates reflect the value customers derive from our new security features both in the cloud and off the cloud. We had a 94% renewal rate in Q1 for our customer support business. Our annual recurring revenues were 83% in the quarter, and we became a cloud company while expanding adjusted EBITDA to an upper quartile 42.6% margin within the quarter. I said many years ago, we were not born cloud, but we are reborn cloud. Soon again with Cloud Editions 21.4, customers will never have to upgrade again. Our Cloud Editions are well aligned to the digital needs of our customers. The OpenText Content Cloud is benefiting from businesses that need cloud-based information platforms to seamlessly and securely support content management, process management, collaboration, applications, and new capabilities like e-signatures. The OpenText Experience Cloud business is benefiting from the trend towards contactless solutions, the direct-to-consumer explosion and all the associated technologies that enable omnichannel and social commerce. The OpenText Security & Protection Cloud, our Cyber Resilience business is benefiting from the work-from-anywhere trend and the integration of corporate and home networks. The need to protect devices everywhere and anywhere is growing in importance and will only become more profound as 5G bandwidth becomes ubiquitous, and the connections to human and machine-based devices explode. The OpenText Business Network Cloud, our Business Network is benefiting from the acceleration to digital as companies become more mobile and regionalized. If a country can't get raw materials to build a product, they're going to move their supply chains. Our new OpenText Developer Cloud, API-driven, is driving the API economy. Embedding OpenText information management into the next generation of customer and SaaS applications is a key long-term strategy for us. OpenText is already seeing the benefits of the new equilibrium as businesses accelerate their digital capabilities. Information management's time has come, and we are not just ready, we are leading in the cloud. Our domain leadership positions have never been stronger, and our Q1 results reflect that. It was the best Q1 and a strongest start to the fiscal year in the history of our company, and another record high for our key businesses of cloud and customer support, and a record high for annual recurring revenues. For the quarter, and on a year-over-year basis, total revenue was $804 million, up 15%; cloud revenue was $341 million, up 44%; customer support was $329 million, up 5%; ARR was $670 million, up 22%, which is 83% of total revenue, the highest in both dollars and percent in our history, demonstrating the predictability of our business. Our adjusted EBITDA of $342 million or a 42.6% adjusted EBITDA margin is also the highest in our history. The company has never been this productive and efficient, and we have gained efficiencies over the last few quarters, with free cash flows of $219 million, up 84% and accounting for 24% of revenue, marking the best Q1 in our history. By the end of the quarter, our business network volumes had returned to pre-COVID-19 levels, except for those industries still affected like hotels, hospitality, airlines, and a few others. We had many notable customer wins in Q1, including Sephora, Wm Morrison, Pacific Gas and Electric, Southern California Edison, Hydro-Québec, ON Semiconductor, FreshDirect, Heritage LAB Express, the California Department of Managed Health Care, the UK Department for Work and Pensions, and Texas A&M, a public research university in College Station, Texas. I'm so proud of my colleagues for their focus and commitment to our customers. At the beginning of COVID-19, we took several preemptive actions given the historic volatility the world was about to face. Six months later, our business is operating stronger and more efficiently than before the start of the pandemic due to our business leaders’ great execution and accelerated digital automation. You can see in our improved operations and results, the predictability that ARR brings to our business model, the strength of our margins and cash flow, and our forward confidence and continuous improvements. Given our new operational efficiency and confidence in the road ahead, we are announcing a variety of key actions today. We repaid $600 million withdrawn from our revolver, and there are no outstanding balances. We are restoring our salaries and benefits. We have opened over 400 new positions in innovation and sales. We are investing in product and sales, and we look to strategically hire the best global talent. Two years ago, our R&D investment was approximately $300 million per year. This fiscal year, R&D investment will exceed $400 million. We are also announcing that we're increasing our quarterly dividend by 15% to $20.80 per share from $17.46 per share for holders of record on December 4, 2020, with a payment date of December 22, 2020, as approved by our Board of Directors. We continue to target 20% of trailing 12 months free cash flow for our dividend program. We have increased our dividend rate by 15% every year since its inception as our cash flows have increased. With this quarterly dividend, we will have returned over $1 billion in cash to our shareholders since 2013. We're also returning to our standard cadence of reviewing our dividend rate at the end of each fiscal year. Today, we announced a new share repurchase plan of up to $350 million over the next 12 months. The announced repurchase plan is additive to our return-based capital allocation strategy, and is intended to complement our ongoing M&A activity and dividend program from time to time. I want to spend some time today on our unique total growth strategy of retain, grow, and acquire. On retain, we had another great quarter with our customer support renewal rates at 94% and margins of 91%. Our enterprise cloud renewal rates remain strong in the mid-90s. With our digital zone and new cloud platforms, we see the opportunity to improve the quality of our customer experience even more by automating portions of the renewal process, enabling our customer-facing personnel to spend more time with customers on cross-sell and up-sell. Again, with Cloud Editions 21.4, all new updates, features, and facets will be automatically available to all customers. On grow, over the last few quarters, we've made significant investments in our go-to-market. Let me highlight some key aspects of this. Having five domain clouds versus many point products simplifies our customer messaging and our go-to-market friction. We can accelerate customer time to value through our managed services. We are accelerating our ongoing shift towards vertically focused applications and solution-oriented selling, such as public security, legal, cyber, and the healthcare industry. We remain on track to double our enterprise sales coverage of the Global 10,000 within three years. We continue to make great progress on cross-sell and up-sell initiatives, specifically in our SMB channel, which has begun to successfully sell Carbonite, Webroot, and Hightail products. On the enterprise side, we're seeing success in cross-selling Carbonite and Webroot security offerings and Carbonite Migrate in high availability products. Finally, we are excited about the growing opportunities with partners. On the enterprise side, we have expanded relationships with Google, Microsoft, AWS, Salesforce, AT&T, SAP and others. On the SMB side of our business, we expect to grow our partners through increased sales focus, additional product offerings, and the completion of the integration of the Carbonite and Webroot channels. With our adjusted EBITDA above 40%, we are accelerating our investments in products and sales, as we said we would, by expanding R&D investment dollars and accelerating our sales coverage and capacity, both for the Global 10K and SMBs, on acquire. As it relates to M&A, we remain patient, disciplined, and value-based buyers with ROIC and cash flow as key criteria. We continue to build a strong and actionable pipeline. I'm pleased to say that our Carbonite integration is ahead of schedule and we achieved our financial integration goals in 10 months. We acquired Carbonite just last December, and we increased our cloud revenue, increased our ARR, increased our cloud gross margins, and improved our cash conversion cycle. Carbonite continues to grow in its core market and starting this fiscal year, we expect to begin seeing meaningful revenue synergies from cross-selling Carbonite products into our install base of enterprise customers and selected OpenText products through Carbonite's SMB channel. Carbonite is a great example of our M&A strategy, a growth asset that gave us a strong entry and presence in cyber resilience and the SMB channel and met our disciplined value-based criteria while offering significant opportunity to create revenue synergies. Our balance sheet is strong at 1.8 times leverage, cash and cash flows are strong. We have capital to deploy and we will deploy capital as and when the right opportunity arises in our disciplined manner. Our total growth strategy of retain, grow, and acquire is unique, massively scalable, and delivers returns. On our financial outlook, Madhu will cover the details of our financial outlook for Q2 in fiscal 2021 and our three-year aspirations. But let me highlight what you will hear. An improved demand outlook and confidence in our operating model and future cash flows. Let me summarize: OpenText is firing on all cylinders. Our ARR target model for fiscal 2021 is 81% to 83%. Growth in strategic areas, such as cloud, customer support, and ARR, with upper quartile margins of 42.6%. Adjusted EBITDA already incorporating increased R&D and sales investments, new efficiencies, and a high conversion ratio from EBITDA to cash flow, along with a healthy balance sheet at 1.x times leverage. On M&A, we expect accelerated time to return for Carbonite on the OpenText model sooner than expected. Most companies take two to three years to achieve these types of benefits, and we’ve accelerated it down to 10 months. The company is ready for the next set of opportunities. We have a return-based capital allocation approach that includes increasing our dividend by 15% and initiating a share repurchase program of up to $350 million over the next 12 months, and lastly, a new product platform, Cloud Edition, that is aligned to the needs of our customers. We are not waiting to return to normal. I learned during my personal cancer journey that this is the new normal, and we are going on the offensive. We are stronger today than we were a year ago. On behalf of OpenText, I would like to thank our shareholders, loyal customers, partners, and over 14,000 dedicated employees for their contributions to our success. I am so proud of the resilience and durability that continues to be demonstrated. Finally, a big thank you to all the nurses, doctors, frontline responders, healthcare workers, those in the food industry, those in the delivery industry, and those working in data centers and the power grid and distribution. Thank you for all that you do to keep the world running. It's my pleasure to turn the call over to Madhu Ranganathan, OpenText's Chief Financial Officer. Madhu?

Thank you, Mark. And thank you all for joining us today. We had a strong first quarter of fiscal 2021. Our performance amidst the global pandemic reflects the underlying resilience and agility of our operating framework. I will speak to Q1, Q2, our quarterly factors, our fiscal 2021 target model, and our long-term aspirations as outlined in our Q1 investor presentation that is posted on our IR website today. I would also like to highlight that we have changed the order of revenue line: cloud is now first, customer support is second, and license is third, followed by professional services. We see this as a permanent shift in our revenue disclosures, reflecting the strength of annual recurring revenue growth led by cloud and customer support. All references will be in millions of USD and compared to the same period in the prior fiscal year. So let me start with revenues and earnings. Total revenues for the quarter were $804 million, up 15.4% or up 14.5% on a constant currency basis, including a strong contribution from Carbonite. There was a favorable FX impact to revenue of $6 million. The geographical split of revenues in the quarter was 63% Americas, 28% EMEA, and 9% Asia Pacific. Annual recurring revenues for the quarter was $670.4 million, up 22% or up 21.4% on a constant currency basis. As a percent of total revenue, ARR was 83% for the quarter, up from 79% in the first quarter of fiscal 2020. Here, I would like to note that ARR occurred positive organic growth during the quarter on a reported basis. Cloud revenues were particularly strong at $341 million, up 43.7% or up 43.4% on a constant currency basis. This growth was driven by a strong contribution from Carbonite and exiting our fourth quarter with a return to pre-COVID transaction volumes in our business network. Our enterprise cloud renewal rate in the quarter remained in the mid-90s. Customer support revenues were $329.4 million, up 5.5% or up 4.8% on a constant currency basis. Our customer support renewal rate for Q1 was 94%, reflecting the continued strong efforts of our teams to drive the roles and support our average install base. Our license revenues were $68.5 million, down 12% or down 13.8% on a constant currency basis. Our professional services revenue is at $65.1 million, down 6.2% or down 8.5% on a constant currency basis. GAAP net income was $103.4 million, up 38.9%, primarily driven by higher revenue achievement and the savings of the preemptive measures introduced in the third quarter of fiscal 2020. Our adjusted net income was $241.9 million, up 39.4% or up 36.2% on a constant currency basis. GAAP earnings per share diluted was $0.38, up from $0.27. Our non-GAAP earnings per share diluted was $0.89, up $0.25 from $0.64 and up $0.23 on a constant currency basis. Now turning to margins, GAAP gross margin for the quarter was 69%, up 180 basis points. Adjusted gross margin was 76.5%, up 340 basis points, also on an adjusted basis. Cloud margin was 67.2%, up from 57.1%, driven by continued improvements in our cloud service delivery and a strong contribution from Carbonite. Our customer support margin was 91.3%, up from 90.7%, reflecting continued strong renewal performance. The license margin was 96.4%, down from 97% primarily due to lower license revenue. Our professional services margin was 29.2%, up from 22.1% and reflects the benefits received from lower travel while effectively delivering our solution on a digital and remote basis. Adjusted EBITDA was $342.3 million this quarter, up 34.7% or up 32.1% on a constant currency basis. This represents a record 42.6% margin, up from 36.5% in the same quarter last year, and higher than our fiscal 2021 target margin range of 37% to 38%. Now turning to cash flows, it was excellent performance, with operating cash flows at $233.9 million for the quarter, up 70.2%, and free cash flows of $218.6 million, up 84%. DSO was 44 days compared to 54 days in Q1 fiscal 2020. The year-over-year reduction of 10 days is a real testament to our digital business services organization formed about a year ago, which includes receivables, collections, and other key financial operations, as well as strong contributions in the quarter from the integration of Carbonite. From a balance sheet perspective, we ended the quarter with approximately $1.8 billion in cash, given our strong cash flow performance. Our consolidated net leverage ratio is 1.82 times, an improvement from 2.04 times last quarter. Subsequently, in October, we repaid the $600 million that was previously drawn on the revolver. We now have a fully available line of credit of $750 million. As Mark noted, our strong balance sheet provides us the flexibility to navigate changing macro scenarios and an opportunity to generate substantial long-term value for our shareholders through growth, dividends, and potential share buybacks from time to time through our announced repurchase plan as a complement to our capital allocation strategy. On Carbonite, it delivered another strong quarter of results with strong ARR, cloud margins, adjusted EBITDA, and working capital. Carbonite operations are already tracking to the OpenText operating model as of September 30, 2020. We achieved the financial integration sooner than planned. What we are looking ahead relates to systems and applications integration. While we will continue to talk about the business, this will be the final integration update of the acquisition itself, so a big shout-out to the Carbonite integration team. So let's turn to our total growth, target model, and quarterly factors, all available on our investor website. First and foremost, we view our businesses in annual terms, and quarters will vary. Long-term value is created from sustained annual performance, and 90-day cycles are too short to measure. We are in a volatile macro environment due to health, financial, and social crises related to the resurgence of global COVID cases and the U.S. election. We continue to see deferring impacts industry by industry, and geography by geography. While we remain watchful in the macro environment, we continue to perform well based on our growth in cloud, growth in products and innovation, and our strong cash flow enables us to continue investing in go-to market products and digital projects. So now let me turn to our full-year fiscal 2021 total growth strategy. Compared to a quarter ago, our outlook for fiscal 2021 has improved. We now expect mid-double-digit growth on cloud revenue compared to a previous target of low-double-digit. We anticipate low-single-digit growth on customer support revenue as consistent with our previous expectations. High-single-digit growth of annual recurring revenue compared to mid-single-digit previously expected. There’s no change in our license and professional services revenue targets, which we see declining and consistent with the broader industry trends as cloud adoption accelerates. Therefore, our total revenue outlook also shifts from constant to low-single-digit growth in fiscal 2021. New M&A opportunities remain additive to our model. Our assumptions do not include an FX impact in the second half of fiscal 2021. On our fiscal 2021 target model, we are pleased to share the following revenue target changes from a quarter ago, annual recurring revenue gains moved up from 80% to 82% of total revenue to 81% to 83%. Our license moved down from 10% to 13% of revenues to 9% to 12% of revenues. On gross margins, Cloud is maintained at 63% to 65% and customer support at 89% to 91%, our license at 96% to 98% and professional services margin is expected to move up to 20% to 22% from 18% to 20%, as we continue to see the benefits of remote deliveries and less travel. Gross margins overall remain at 74% to 76%, and our full-year adjusted EBITDA expectations remain at 37% to 38% as we continue to invest in the business. Our fiscal 2021 target model fully reflects the savings from previous restructuring announcements, the compensation restoration that Mark referred to in his commentary, and our fiscal 2021 hiring plans. So coming to our immediate quarter Q2, I would like to highlight the following quarterly factors: We expect Q2 total revenue to be consistent versus Q1, with a favorable FX impact of up to $3 million. Our FX is based on current exchange rates, but note that currency volatility appears higher than normal. Annual recurring revenue is expected to remain constant in Q2 compared to Q1. Our adjusted EBITDA dollars are expected to decline in low-single digits in Q2 compared to Q1. I shared previously that we remain focused on annual performance while our quarters will vary. Our long-term aspirations remain unchanged, with adjusted EBITDA aspirations at 38% to 40% and free cash flow of $900 million to $1 billion for fiscal 2023 with a plan to reinvest in margin gains above 40% into additional growth initiatives. Regarding the tax update, the IRS matter is still in the appeal stage and our results remain strong, and we continue to vigorously defend opposition. So, in summary, a special thank you to the entire OpenText community for their incredible efforts. Their contributions demonstrate resilience, leading the way in digital working, high productivity, and a laser focus on results. Thank you to our shareholders, whose trust and confidence we greatly value, and wishing you all continued safety and good health. I would now like to open the call for your questions.

Thank you. We will now begin the question-and-answer session. The first question comes from Raimo Lenschow from Barclays. Please go ahead.

Hey, guys. This is Frank on for Raimo. Congrats on another great quarter, and thanks for taking my question. So cloud is clearly very strong again. Would you be able to dig a little deeper and provide a little more color on how some of those recent partnerships with some of the big cloud players like Google from this year are feeding into the cloud side of the business? And how we could expect those relationships to evolve going forward?

Yes, Mark here. Thanks for the question. The strength of our cloud quarter was certainly driven by the return of our business volumes and the accelerated needs of our customers for rapid time to value. The fastest time to value is deploying our capabilities in our cloud or our partner’s cloud. Looking over the coming quarters and the next few years, we expect these partnerships to significantly contribute to our cloud momentum. We’ve taken the approach with Cloud Editions that our solutions will operate across hyperscalers, including Google, AWS, and Azure. We continue to stay committed to customer choice regarding where they would like to place their workloads. We saw some wins for Azure together with our cloud partners, but the strength of the cloud was primarily driven by Carbonite's return to business volumes and an accelerated time to value from our enterprise customers.

Great. Thanks, Mark. Congrats again.

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

Good afternoon.

Hi, Stephanie.

Hi. Just on the cloud, I'm wondering if you can share a little bit more about Carbonite and maybe what the Carbonite contribution was in the quarter?

Madhu, are we speaking to the precise Carbonite contribution in the quarter?

No, we’re not, Mark.

Yes. So, Stephanie, there is no doubt that Carbonite had a significant and important contribution. The business is operating very well, both in our first go-to market with RMMs who then sell to SMBs and through a bit of our business directly to SMBs, and we have our prosumer and consumer business that really returned after the early part of the pandemic. We are also well underway in integrating the Carbonite and Webroot channels, which were not integrated when we acquired the business. And the work-from-home trend has now permanently changed our operational model, right, the hybrid work model. It certainly contributed to the revenue side this quarter. Our adjusted EBITDA, at 42.6%, reflects our relentless focus on rapid integration, removing costs where appropriate, integrating the cloud teams, and merging engineering teams. Carbonite also contributed to such stellar adjusted EBITDA, allowing us to stay on our financial model.

Right. And then on capital allocation, you’ve mentioned a new NCIB here. Just wondering how you think about capital allocation, share repurchases, and any insights into how you are seeing the capital here.

Yes, very good. Well, I'll just start with the large narrative on this. Companies talk about exiting the pandemic stronger than they entered, widening our operational efficiency within the business. This is reflected in the efficiency of our processes and the new digital automation we're running internally, which translates into a higher level of adjusted EBITDA. Our conversion ratio from EBITDA to free cash flow is significantly high, given our effective tax structures and low CapEx deployment. We have great confidence in the efficiency of the business and future cash flows. This led us to reevaluate our dividend program. I know we didn't raise the dividend about 90 days ago on our annual cadence. Given our confidence, we have repaid our revolver, and we increased our dividend rate to where it was previously with that strength in our cash flows, and we thought it was the right time to initiate an additional program, which is the NCIB. So we see it as a tool for us moving forward.

Great. Thank you, and congrats on the quarter.

Thank you, Stephanie.

Thank you, Stephanie.

The next question comes from Paul Steep from Scotia Capital. Please go ahead.

Hey, good evening. Mark, maybe talk a little bit about the shift to the cloud happening fairly rapidly this quarter. As we think about M&A in the future for OpenText, has your willingness to consider legacy assets, which you would have previously been hesitant about, changed? Do you have greater confidence in your strategy? Or is there still hesitation?

Yes, sure thing. Our M&A strategy remains unchanged. It is one of the greatest levers we have to add value to the business, alongside organic growth, but our philosophy around M&A has remained the same. Within M&A, we focus on high recurring revenues. So our focus will be on businesses that have high recurring revenues, and recurring revenues can come from both cloud and support businesses or, as I like to call them, update businesses. So it's not exclusively cloud, it's much wider than that. It's really recurring revenues, that's our focus. Paul, you have a clarification question?

Yes, that's great. So just the other question, I think you’ve alluded to it. Should we be thinking, and I don't remember a policy around net leverage ratio, should we be thinking that you're going to force back deployment of all the cash flow? Obviously, you’ve listed the dividend that you just discussed, but more importantly about the return of capital through share repurchase; should people think that level of the floor is maybe 1.5? Or, no, there isn’t a floor, and you're going to leave yourself flexible?

Let me jump in, and I'll hand the mic to Madhu as well. We are going to remain flexible. I'll talk about the ceiling first, and then maybe the floor. On the ceiling side, nothing has changed our view that we like to operate around 3 times leverage. As I've said many times, I think it’s very simple: if the market turns really bad for liquidity, as it has happened, I'd like to be able to pay back our debt in three years, hence the 3x ratio. We're not bashful about going over it in the short term as we have done twice, given our commitment to disciplined operations to bring it well under control again. The buyback is an additive tool; it doesn't change our M&A strategy. In fact, our pipeline and due diligence activities are increasing. We see that as a complementary option given the strength of our cash flows. We have always targeted 20% of trailing cash flows for our dividend, and we have the strategic opportunities we need. We now have the new buyback program in place, as well as our M&A efforts for the coming fiscal year. Madhu, anything you'd like to add?

Thanks, Mark. When you think about it apples to apples – right, when you ask about the floor, during our fiscal 2020, we had about 1.48 net leverage when the brand was all the way up slightly above 2 with Carbonite. Given the strength of the cash flow, we were able to bring it back down to 2, 1.82. So I would suggest you think about it that way when going above with a ceiling as Mark just described, and again, the cash flows are going to allow us to have the band in the mid-1s to slightly over 2.

Perfect. Thanks.

The next question comes from Richard Tse from National Bank Financial. Please go ahead.

Yes, thank you. Mark, you mentioned you had 1,000 customers today on Cloud Editions. Would you say the average number of products taken by those customers is greater than those that are not on Cloud Editions?

Yes, Richard, that's an interesting question. I think it's slightly above the off-cloud average. Part of our opportunity is genuinely getting to a next-generation cross-sell and up-sell, and really focusing that in the cloud. Because with more integration in our efficiencies, and as we approach 21.4, where customers will never have to update again, we can turn on additional solutions for customers at very minimal expense running in the cloud, thus exposing customers to more features and more modules, reducing friction. So I'd say we're slightly ahead on kind of the average module usage in-cloud versus off-cloud, and this is a strength we're going to see integrated into and leverage with cross-selling in the coming years.

Especially with CE 21.4, it seems like there's likely a big opportunity for you to accelerate organic growth as the friction is reduced here. Is it fair to say that that's something we should factor in as we model moving forward in terms of looking at organic growth?

I don’t mean to dodge this; I'll hand the modeling questions to Madhu.

Yes, Richard, thanks for the question. As Mark said, directionally, absolutely; I would incorporate those parameters you've shared from a modeling perspective, but there are certainly opportunities for growth moving forward that are truly exciting.

And I might have misheard earlier. When you talked about your sales cycle, it seems to have returned to something like normal with the exception of a few verticals. This feels different from what we've heard from others with respect to those larger enterprise companies that we cover. I just wanted to ensure that I am characterizing what you said accurately?

Yes, Richard. Just let me recap. It’s in our investor presentation as well, and I can quickly reference it. We have seen that some of our business network clients have returned to pre-COVID levels, except for some notable industries that still haven’t recovered fully, such as hotels, hospitality, airlines, and a few others. While we're not back to full revenues, the majority of our business network has translated into an updated and increased outlook for the year, particularly with our cloud and service offerings.

Okay, great.

Is that helpful?

Yes. Thank you.

Thanks, Richard.

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

Hi, good afternoon. I want to drill deeper into the cloud guidance. If I take your Q1 cloud revenues and extrapolate those for the rest of the year, that seems to suggest high-teens cloud growth on a full-year basis, but you're guiding for mid-teens cloud growth. Can you comment on what dynamics or risks we should be aware of that would imply that erosion? Is it simply the transaction businesses and the verticals you mentioned where there could be risks of further weakness, or how should we think about that?

Yes, Thanos. Let me talk a bit about the business, and then I'll have Madhu elaborate further on the model. I'm very pleased with how the volumes have returned from pre-COVID levels, but some industries are still affected, and we don't know the timing of potential consolidation in those markets. This also reflects our cautious outlook regarding cloud growth at mid-double digits. There is still volatility in the world, as we're all well aware. Although the reactions of businesses in this wave differed from the first wave, there's still a need for companies to maintain healthy and safe operational environments. But overall, we are increasing our outlook for the year from low-double-digit to mid-double-digit growth for cloud, reflecting growth momentum in important areas such as cloud renewal rates.

Mark covered the dynamics well, Thanos, and I would just emphasize their impact on our Q2 quarterly factors that will be part of our outlook.

Okay, great. And about the revolver. Should we interpret that as a potential negative indicator regarding the size of your near-term pipeline? Or is it less about that and more reflective of your confidence in the stability of financial markets relative to the initial turmoil we foresaw?

It's pretty simple for us. At the onset of the pandemic, there was uncertainty about the likelihood of a liquidity crisis in the markets. We weren't alone in pre-drawing revolvers. The volatility and uncertainty in the liquidity markets got us to take preemptive action. I would do it again in the same fashion, but I am pleased to say that things are much clearer now. We have reached a new level of efficiency, which allowed us to repay the revolver.

Great. That makes sense. Thanks for addressing that.

Thank you.

Next question comes from Paul Treiber from RBC Capital Markets. Please go ahead.

Thanks very much. Good afternoon. I wanted to ask a high-level question that connects to your comments at OpenText World, but we’re seeing massive change in the industry with the shift to work from home, cloud collaboration apps moving forward, and digital transformations. Would you agree that enterprise information management is becoming more important through this transition, and are you seeing that reflected in your customer base or pipeline?

Absolutely, Paul. I specifically emphasized the phrase in my script; information management’s time has come. We were entering the fourth industrial revolution before the pandemic, but for many, that concept was abstract. The global situation has turned what was academic into urgent reality. Companies need to operate and share information effectively. They must navigate financial closes, regulatory submissions, and manage various operational challenges, even amid difficulties encountered by governments, as witness to the Canadian government faced challenges due to limited network access. This illustrates the acute need to leverage an information platform that supports global workflow, project management, and remote solutions like e-signatures, thus benefiting OpenText significantly.

It seems like many companies have adopted a piecemeal approach to cloud and information management thus far. You mentioned 1,000 enterprise customers currently using Cloud Editions. Of the total 75,000 enterprise customers, do you anticipate that eventually most of them would require a cloud EIM strategy?

Yes, indeed. The short answer is yes, with perhaps a 5% to 10% exception on unique security requirements where we offer private cloud options. However, for the fastest path to value, the quickest solution is to deploy within our domain clouds without exception. We have significant opportunities to continue upgrading existing deployments to the OpenText Cloud. One of the reasons we announced at OpenText World our concept of 'seven days to the cloud' is that we can now standardize deployments to be set up much faster than before, with new workloads being deployed in as little as a week.

Thanks, Mark. That's helpful context.

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

Very good. I’d like to thank everyone for joining us today. We wish everyone much happiness, health, and well-being during these volatile and critical times. We look forward to seeing you, and hope you can join us at Enfuse in the coming weeks. We also look forward to our discussions, engagement, one-on-ones, as well as our upcoming conferences. Thank you for joining us today.

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