Open Text Corp Q1 FY2025 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2025 Financial Results Conference Call. Please note that all participants are in listen-only mode and the conference is being recorded. Following the presentation, analysts will have the chance to ask questions. I would now like to pass the call to Greg Secord, Vice President of Investor Relations. Please proceed.

Good morning, everyone. And welcome to OpenText’s first quarter fiscal 2025 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 and Chief Financial Officer, Madhu Ranganathan. Today’s call will be webcast live and recorded with replay available shortly thereafter on the OpenText Investor Relations website, that’s investors.opentext.com. Before today’s call, we posted press releases and investor presentations online. These materials will supplement our prepared remarks and can also be accessed on the OpenText Investor Relations website. I’d like to take the opportunity to invite institutional investors and financial analysts to join our OpenText World 2024 Investor Track. It’s on Tuesday, November 19th in Las Vegas. The OpenText World Conference is a great opportunity for investors and financial analysts to learn about the latest product innovations with full conference access, allowing open dialogue with leadership, customers, and partners on site. The Investor Track will be available to investors attending in person and virtually by webcast or live streaming and replay. You can contact myself or the Investor Relations team for more details and to register. In addition, I’m pleased to inform you that OpenText will be participating in the following upcoming investor conferences, including the TD Technology Conference on Monday, November 25th in Toronto with Mark, Wells Fargo Technology, Media & Telecommunications Summit on December 4th in Rancho Palos Verdes, and Barclays Global Technology Conference on Thursday, December 12th in San Francisco with Madhu. And now on to the reading of our Safe Harbor Statement. During this call, we’ll be making 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 may 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 morning, 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. Reconciliation of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and the other materials which are available on our website. And with that, I’ll hand the call over to Mark.

Thank you, Greg, and welcome everyone to today’s call. Let me start with, in Q1, we delivered to our revenue quarterly factors, as well as exceeded expectations in adjusted EBITDA and adjusted EPS. We grew our adjusted EBITDA percent year-over-year to 35% and this growth comes from sustained efficiency gains even after the divestiture of the ultra-high-margin AMC business. Over the last two quarters, we purchased and canceled 7.72 million shares at an average price of $30.43. Expect us to continue purchasing our shares. And in Q2, I’m deeply excited about our momentum. We are strengthening our competitive advantage with Titanium X, our next-generation autonomous information management platform powered by AI and security, coupled with strong investments we are making in our enterprise and SMB go-to-market, strategic partners and customer success organizations, all of which leads us to a stronger second half of the fiscal year. Further, we are reaffirming our fiscal 2025 targets and our outer-year aspirations. On to Q1. Our Q1 results include delivering $1.27 billion in revenues, well within our quarterly factor range of $1.25 billion to $1.3 billion. Q1 is a seasonally lower quarter, yet it was the largest Q1 of enterprise cloud bookings in our history, up 10% year-over-year and up 53% over three years. As it relates to our cloud business, Q1 marked our 15th consecutive quarter of organic growth of $457 million or revenues of 1.2% - 1.3% and we expect this to ramp throughout the year. We also had strong customer wins at Raytheon, FedEx, Virgin Mobile, Alaska Airlines, Nippon Gas, The European Medicines Agency and DICK’S Sporting Goods across content, business network, digital operations and security. Financial services, technology, public sector, healthcare and biotech, and consumer packaged goods were top industries for our book of business. Revenue by geo, America is 57% with a majority in the United States. EMEA, 33% and APAC and Japan, 10%. We had 38 deals over 1 million, the majority being cloud-based deals. We had 20 wins related to our Jet AI Aviator offering. We keep building strength and progress every 90 days. More aviators, more agents, easier-to-use, and less expense to operate. We see AI as a long-term opportunity and a key priority for the company. Net cloud renewal rate of 94%, and of course, adjusted EBITDA of 35%, which is year-over-year percent growth inclusive of the AMC business. This is incredible progress and reflects our deep focus on capturing the large margin opportunity ahead of us. And adjusted EPS of $0.93, well above expectations. Looking ahead into Q2, we expect total revenues of $1.29 billion to $1.34 billion supported by a strong pipeline and customer engagement, continued adjusted EBITDA strength of 34% to 35%, continued enterprise booking strength ramping towards our annual target of 25% growth, and we do we’ll expand on our outlook here in a few moments. Q2 is a tougher year-over-year compare, given the large AMC contribution and the licensed revenue from grants of certain IP rights in Q2 of last year. The business is executing well. And as I kicked off the call saying, we are reaffirming today our fiscal 2025 targets of total revenues of $5.3 billion to $5.4 billion, that’s a $100 million spread, ex-AMC. This is constant to 1% growth. Adjusted, excuse me, annual adjusted EBITDA of 33% to 34%, free cash flow of $575 million to $625 million and we’re on track to return approximately $570 million of capital via our dividend and share buyback programs. It’ll be a record year of capital return for OpenText. Further, as you can see from our comments today, we’re expecting a stronger second half to our fiscal year driven by four factors. Expect demand for Titanium X, our next-generation autonomous information management platform led by a Business Cloud, Business AI and security. Second factor, realizing our new go-to-market investments led by Todd and the sales organization. Third factor, expanding partner contribution led by Sandy Ono. And our fourth factor, realizing our new customer service investments led by Paul and the renewals professional services and customer success teams. Let me expand on these drivers more and how they point to a stronger second half. Our competitive advantage is strengthened with Titanium X or Cloud Edition 25.2, and we are on track for final delivery in the latter half of this fiscal year. Information is essential for every organization, influencing all processes, workflows, innovations, and experiences across various roles. It is vital for the modern organization. Titanium X will significantly enhance our customers' capabilities. OpenText World 2024 in November will showcase these advancements, and we look forward to seeing everyone there. Customers and partners will discover key differentiators and strong incentives to adopt the new Titanium X. Firstly, it offers a modern SaaS platform for core information solutions, allowing for quicker revenue generation, easier capability expansion, and higher margins. Secondly, it features a global, secure, trusted, and autonomous private cloud, where we have made substantial progress in recent years. Once customers are in our private cloud, we ensure they have access to the most recent versions, security updates, and AI advancements, allowing them to manage their operations while evaluating our innovations delivered every 90 days. Thirdly, we present compelling new capabilities across our Business Clouds. In the content cloud, the focus is on SaaS, AI, integrated security, and deep interconnections with business applications. In our business network, we concentrate on global supply chains, invoicing, and a comprehensive supply chain control tower that monitors all suppliers, along with new traceability tools to track materials from their origins to finished products. In terms of security, we offer comprehensive protection spanning users, applications, email, networks, and clouds, referred to as XDR-as-a-Service. Titanium X marks a significant advancement in both enterprise and SMB security by providing a cloud-based approach to identifying, detecting, and responding to active threats. We will showcase our next generation of XDR-as-a-Service at OpenText World. Security, trust, and compliance represent major investment areas for OpenText. Additionally, we are enhancing our ITOM, discovery, and observability functionalities, and our corporate help desk now integrates HR, IT, and all internal TXO divisions into a single platform aimed at improving employee experiences. In application development, we are launching DevSecOps for large-scale software organizations. For SMBs, our next-generation secure cloud platform is already operational, facilitating easier transactions for our partner community. You might have noticed our recent social media announcements regarding this. Lastly, our Wave 2 GenAI Aviators, designed for every industry and embedded throughout OpenText software, will consist of 15 aviators and over 100 agents. Our mantra is to never assign a human task to a machine. We are also announcing support for Microsoft Copilot, Google Vertex, and the capability to Bring Your Own Language Models into our private cloud. All of this will be unveiled at OpenText World 2024, where we have a comprehensive agenda of innovations and timely value for our customers. We are excited to bring these developments together powerfully for them. I hope to see you at OpenText World. Next, let me expand on our new go-to-market investments led by Todd Cione and the sales organization. As mentioned in our last earnings call, we’re making investments in our go-to-market across three priority areas, people, customers and innovation. On people, we continue to find much success attracting new sales talent. We are right on our AE and SE capacity targets. In addition, our new unified global sales organization structure has allowed us to launch unified programs to the entire organization on a global basis, all within this dynamic marketplace of cloud AI and security. And the first program we’ve launched is cross-selling security across all of our AIs, particularly important with our new XDR-as-a-Service coming out. OpenText always puts customers first and we are finding very strong momentum and engagement. Our cloud AI pipeline is the largest it’s ever been at up 20% year-over-year. On sales innovation, we have deployed internally OpenText AI. We’re now live. We call it olli.ai to act as a sales aviator for the Salesforce. I’ll be demoing live our new olli.ai tool at OpenText World and how we are using aviators internally to generate proposals, accelerate sales velocity and win more. We are seeing very favorable impact in our sellers’ ability to build effective account plans, articulate value propositions and build compelling business cases now live on OpenText AI. Third, in support of a strong second half, a stronger second half, is moving on to expanding partner contribution. The demand signals for information management are strong. Our customers see the growing availability of Business AI from many places, including the importance of effective information management solutions. You need strong data management to have strong AI. I’ve talked about how we help companies operate in the world of the internet of disconnected clouds. You’ll hear at OpenText our next big steps in this area on how OpenText makes multi-cloud work. You see, all enterprise customers have many cloud providers. This is the new normal. I can’t meet a customer. I can’t find a customer that only has one cloud provider. Our customers have many cloud providers. And no customer standardizes just on one cloud provider. So further, customers will have multiple AI suppliers as well. It is a multi-cloud world. We see a growing role for OpenText where we make multi-cloud work for one source of truth for data, user authentication across all these systems, workflow across all the clouds, search across all the clouds, governance across all these clouds. We make multi-cloud work. In achieving this, our strategic partnerships are more important than ever. They’re at all layers of the enterprise stack, from the app layer, to infrastructure, to security and to the supply chain. For example, on SAP, we continue to work closely to remain day one current across all their amazing cloud solutions. On Google, we’ve expanded our support to include their full AI stack and services. On Microsoft, we’ve expanded our partnership to now include co-pilot for security. We continue to work with Salesforce that our Business Clouds work in tandem with their Business Cloud. Titanium X has integrations across content security and ITOM for Salesforce. We recently added content cloud for Guidewire to expand our presence in the insurance industry. And for Amazon, our business network better integrates and leverages their commerce platform. We’ll continue to foster our strategic partnerships to ensure OpenText solutions are at the center of the multi-cloud world. We make multi-cloud work. And then finally, in support of a stronger second half, we will increasingly see returns on our customer success investment. On our last call, we told you, we informed that we would be building a new digital renewal center and going live July 1. And we went live July 1. We’ll continue to take humans out of the renewal process. And in doing so, our business scales with lower friction, lower cost and our best people can help our customers expand consumption. This team had an incredible first quarter and exceeded our expectations. So a lot more to follow in this particular area. I’d like to conclude with two items. First, join us at OpenText World and see the momentum we see and engage with our customers, partners, leadership, and product teams directly. My Tuesday keynote will center on demonstrating Titanium X with AI embedded everywhere, as well as our new security and multi-cloud capabilities. We have over 150 sessions and speakers describing how they are using our Business Cloud, Business AI and Business Technologies, including security. See how customers are redefining their relationship with their data, staying secure in the age of increasing cyberattacks, and what’s needed to leverage the next generation of cloud and AI. We also have a special investor analyst track that Greg can sign you up for, so just feel free to reach out to Greg or the IR team. Second comment in conclusion is we have a strong belief in our Four Point Strategy to create shareholder value, strengthening our competitive advantage, accelerating cloud growth, capturing the large margin opportunity in front of us and strong capital returns via cash flow expansion, dividends and share buybacks. Of course, these four factors assume stable externalities and positive economic drivers. We continue to monitor the economies in Europe, North America, APAC and Japan, and we’re prepared to adjust our approach if we need to. The team is focused on delivering to our F 2025 targets, building a strong longer-term business and creating value for all our stakeholders. Our fundamentals remain strong, demand is there and we have the innovation our customers need. This is a winning strategy and we see our path very clearly today. With that, I’d like to thank you for joining us today and may the one that brings peace bring peace for all. I’d like to turn the call over to Madhu.

Thank you, Mark, and thank you all for joining us today. Please refer to the IR materials posted on our website. During the first quarter, we executed well on operational efficiencies and exceeded our plan to bring operating leverage to the P&L. We had committed to delivering on operational efficiencies, and in Q1, we achieved a higher adjusted EBITDA performance, delivering 35% adjusted EBITDA in the first quarter, excluding the impact of ultra-high margin AMC business, which is a significant accomplishment. Now, turning to the numbers, I'll provide relevant year-over-year comparisons, excluding the impact of AMC divestiture. Our Q1 results reflect typical seasonality experienced in the September quarter. Q1 total revenue was $1.269 billion, a decrease of 11% or 1.8% when adjusted for AMC divestiture. Q1 cloud revenue reached $457 million, up 1.3%. Our cloud business continues to perform strongly, with bookings of $133.5 million, an increase of 10.3%. ARR was $1,052.5 million, down 8.4% and down 1.1% when adjusted for the AMC divestiture, with ARR as a percentage of total revenues at approximately 82.9%. Customer support was down 3% when adjusted for the AMC divestiture. Regarding other financial metrics, GAAP net income was $84.4 million, or $0.32 diluted EPS, up 6.7% year-over-year. GAAP gross margin was 71.7%, up from 71.4% year-over-year. Non-GAAP gross margin of 75.8%, compared to 77.3%, reflects the AMC divestiture and ongoing investments in AI, global security, and our global cloud infrastructure. Adjusted EBITDA of $443.8 million, or 35%, reflects our strong operational focus during the quarter. Non-GAAP diluted EPS was $0.93, down 7.9%, also due to the impact of AMC divestiture. Our overall working capital performance remained strong, with DSOs at 42 days, a decrease from 43 days in the previous quarter. We reported negative $77.8 million in operating cash flows and negative $117.1 million in free cash flows for the quarter, which reflect a one-time tax payment and gains related to the AMC divestiture. Our Form 10-Q includes total cash payments during the quarter of $240 million. Our GAAP tax rate for the quarter was 2%, reflecting the expiry of certain uncertain tax positions due to statute limitations, some one-time acquisition charges, and accruals, which are unique to Q1. We expect our annual GAAP tax rate to be in the mid-teens for fiscal 2025. As we communicated during our last earnings call, today you will see in our filings that we defined and standardized our net renewal rate, or NRR, which better reflects our business as it now includes expansion and impact driven by customers who renew and migrate to the cloud. Now moving to the outlook. First, I’d like to draw your attention to our Q2 quarterly factors included in Slide 9 of our financial results and target presentations, and I’ll add to Mark's comments. We expect total revenue between $1.29 billion and $1.34 billion and ARR between $1.025 billion and $1.055 billion. I want to reiterate that this Q2 will be challenging year-over-year, as the prior year included both AMC revenue and higher licensed revenue from the grants of certain IP rights in fiscal 2024, neither of which is expected to occur in Q2 of fiscal 2025. We are maintaining a strong focus on costs to continue capitalizing on our large margin opportunities, targeting an adjusted EBITDA margin of 34% to 35% in Q2. Our comments on the second half of the year are important for all of you to note. We expect stronger momentum in revenues and cloud bookings in the second half of this fiscal year and a seasonally strong Q4 for the reasons Mark previously mentioned. Regarding expenses, we will continue to invest in our team as we experience record retention and low turnover rates. As you have seen in the past, our expenses in the second half will be higher than in the first half. Beginning in Q3, specifically in January, we anticipate increased costs due to annual employee merit increases, typical calendar year benefit cost uplifts, and vacation accruals. To echo Mark’s earlier comments, we are investing in our go-to-market strategy focused on three priority areas: people, customers, and innovation. We have had success in attracting new sales talent and expect to meet our capacity targets in sales, account executives, and solution consultants. Considering all of this, we have accounted for strong second-half momentum in revenues and cloud bookings, as well as the increased spending and investments into our fiscal 2025 targets, which I will summarize shortly and will also include in Slides 10 and 11 of our investor presentation. Our cloud revenue target is $1.85 billion to $1.9 billion. Annual recurring revenue is projected to be between $4.25 billion and $4.30 billion. Total revenues are expected to be between $5.3 billion and $5.4 billion, which represents constant 1% growth, excluding AMC. We are targeting an adjusted EBITDA margin range of 33% to 34%. As a reminder, in August, we raised our adjusted EBITDA target for fiscal 2025 by 100 basis points to the 33% to 34% range. We are well-positioned to meet our adjusted EBITDA goals. Additionally, our adjusted tax rate for 2025 is expected to be in the mid-20s. We project free cash flows between $575 million and $625 million. I will now summarize our strategy for growing adjusted EBITDA and free cash flow during fiscal 2025 on an annual basis. We are skilled in managing expenses meticulously on a global scale, which remains our focus. For cloud revenue growth, future margin expansion will be supported by increased revenues, including more SaaS. We will achieve success in the cloud through reduced cloud costs and enhanced cloud automation. For the full fiscal year 2025, we expect non-GAAP cloud gross margins in the low 60s. We are starting to leverage AI internally. Our business optimization plan, announced earlier, to place talent effectively is progressing well. Higher EBITDA will directly support free cash flow growth, given our advancements in working capital and efficient capital expenditures, driving what we believe will be the highest return of capital to shareholders in OpenText's history during fiscal 2025. Our Four Point Strategy to create shareholder value, capturing significant margin opportunities and cash flow expansion, remains a priority. Our strong efforts over the last two fiscal years are yielding positive results. We continued strong performance in Q1, achieving 35% adjusted EBITDA, which surpasses last year's performance, even after the high-margin AMC business divestiture. The decisions we make today, along with the programs and projects we deploy, will set us up well beyond fiscal 2025 into fiscal 2026 and 2027. We are on track for fiscal 2025, gaining momentum toward our long-term goals, and we plan to provide annual updates on fiscal 2026 and 2027. On behalf of OpenText, I want to thank our shareholders, our loyal customers, and partners for their continued support, and a big thank you to team OpenText. We look forward to seeing you in person at OpenText World in November. I will now ask the operator to open the call for questions.

Thank you. I would now like to introduce the first caller, Steven Enders from Citi. Please go ahead.

Okay. Great. Thanks for taking the questions here. I guess I just want to start a little bit on kind of maybe the demand environment and the macro and what you’re seeing out there. I guess was there maybe any shift in deals? Are you seeing anything kind of get pushed out that maybe gives a little bit more confidence in that second half that maybe is impacting things in the first half? It would be great to get a little bit more details on what it is that’s maybe going on out there in the general environment?

Good morning, Steven. Thank you for being part of the call. We’re also in California, so it's an early start for us. The demand environment remains stable. While we are aware of the global volatility, we believe demand will remain consistent. Indicators suggest a stronger second half for us. We have our largest software and cloud release ever, Titanium X or Cloud Editions 25.2, approaching. We’ve been actively demonstrating our ongoing enhancements. To address your question, we do see stability in demand and are monitoring it like everyone else. Our significant innovation initiatives are poised to boost demand in the latter half of the year. We've launched our new SMB platform, previously known as Project El Dorado, on a secure cloud just last week. Additionally, we’ve introduced a major product upgrade in security, XDR-as-a-Service. We are making substantial advancements in ITOM aimed at more focused acquisitions and have a major SaaS initiative with Titanium X on the horizon. This SaaS development leads to quicker revenue generation, improved margins, and easier expansion for us. As mentioned, we do have a challenging comparison in Q2, as it's typically strong for AMC, and we’re also facing a one-time royalty from certain IP grants made last year. Therefore, demand is stable, we are performing well, and we anticipate a stronger second half.

Thank you for the context. I just need a quick clarification. Can you remind us what the impact of the IP rights is for the second quarter that will be reflected in that comparison? Additionally, looking ahead to the second half, what execution strategies are you implementing? Are there specific trends in the deal environment or the go-to-market investments that give you confidence in the visibility of the pipeline and your ability to close deals in the second half?

I’ll address the second part first, which involves two key factors that boost our confidence. As mentioned in the script, we are on track for the delivery of Titanium X. On the personnel front, our sales team is operating at full capacity. I noted in the script that our success in attracting and retaining talent has been remarkable, with record retention rates within the company. Additionally, our pipeline has increased by 20% for the second half compared to last year, which is very promising. We are fully utilized, our pipeline is growing, we have a product release lined up, and we have also launched AI internally. We'll be showcasing it at OpenText World, through olli.ai, which will streamline the proposal-building process for our new hires and sales experts, shifting what used to take weeks into a more efficient content management system. We believe this will enhance our response speed and win rate. These are significant indicators of progress. Regarding the grant of certain IP rights, as we outlined last year, we did not disclose the specific quantum then because we operate within the realm of IP. Additionally, this matter has confidentiality concerns, so there are no new updates from last year, and the quantum was already revealed previously.

All right. Well, appreciate the context there and thanks again for taking the questions this morning.

Yeah. Thank you.

Thank you.

The next question is from Samad Samana with Jefferies. Please go ahead.

Hey, everyone. This is Billy Fitzsimmons for Samad. Maybe first for you, Mark, you may have talked about it in the prepared remarks. I may have missed it. But it’s been a couple quarters now since Project Athena was announced. Would be curious if you have any updates on progress thus far and maybe going a step further, is there any anecdotes around early efficiency gains or early internal feedback from employees as you’ve implemented these changes?

Yeah. Very good. Thanks, Billy, and thanks for your question. Yeah. We had kicked off a handful of initiatives. One I just talked about, right, which is olli.ai. I can’t wait to show you at OpenText World. It’s going to be main stage. We’re going to have our sales force on stage showing how we are using 10 years of data to enable our sales force to auto-generate proposals. Imagine an AE who’s doing a FedRAMP proposal, who’s new to the company. And what are all my FedRAMP solutions? What’s the best presentation? Here’s three questions. Produce me a stellar generated response to give to my client. We’re live on that now. And it’s just going to keep getting better and better as we tune it. So, the early feedback is very positive on that. Project Athena, which is for developers. So, olli.ai is for our sales force and support. And Athena is for our developers. So, we expect with 25.2 to generate our first application. And those apps will be generated on top of all our API services. So, we call our API layer. Now, our strategy is to build apps and to deliver APIs. On the APIs, we’re going to generate software on top of those APIs and that’s what Athena is going to do. And we’ll have our first production apps by 25.2 or April of next year. We’re just four or five months away. And the early feedback is fantastic. What APIs? How do I use them? What are kind of the templates to generate? Simple things. Like, how do I upload a file? How do I build a screen? How do I do security? So, Athena, in its first generation of software, is focused on basic apps. It’s focused on language translation. We deliver a product. Now, put it to the 40, localize it across 40 countries and generate the documentation. So, we’ll start to see the impacts with Titanium X 25.2. Early feedback, great. And it’s working right in the areas where we thought we could, which is app generation, localization and documentation. And that’s wave one for us, for developer experience productivity.

That's very helpful, Mark. If I could also ask another question, I remember a couple of quarters ago…

Please go ahead, Billy. That’s great.

...those from two to, sorry, three years to four years. Is that continuing to roughly track at four years, now one quarter into 2025? And then, just help us think about kind of the pace of on-prem to cloud conversions you’re seeing in your business in 2025, relative to what you saw in late fiscal 2024.

And Billy, it’s Madhu here. The very first part of your question didn’t come through, if you don’t mind repeating it.

Yeah. The first part was just, I know a couple quarters ago, cloud contract duration stretched from about three years to four years.

Yeah.

Does that continue to track at roughly four years?

Thanks, Billy. On SAP’s earnings call, they mentioned their average contract length has extended to about four and a half years. We align closely with SAP in our SAP business, which is a key portion of our operations. While SAP indicated a shift to four and a half years, we're currently around four years. We have better control over this ramping process and noted a few quarters ago an increase in the number of agreements. This trend has stabilized, and we're able to manage it better alongside our partners, establishing a high water mark. It has reached a peak, and we're starting to adjust it down slightly. In relation to on-premise to cloud transitions, our focus is on second-half drivers. Titanium X was designed specifically for software as a service, which is why we're emphasizing it. Our main offerings, including core content, service management, digital operations, developer experience, and XDR-as-a-Service, are all SaaS solutions. We expect to see a controlled transition of customers from on-premise to private cloud, and Titanium X will provide further opportunities to shift on-premise solutions to SaaS in a managed manner.

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

Perfect. Thank you. Mark, since we’re in this new AI world, like, how do you think about adoption patterns between like your Aviator offerings, et cetera, and kind of the more kind of initial steps with the Microsoft Copilot, et cetera? Like, how do you think that will play out in what you, when you’re talking to customers in terms of like, adoption cycles, adoption patterns? Is that like, at first you kind of do the standard kind of Microsoft type Copilot stuff, then you come to you, is it going straight to you because the value-add is so high? Can you speak to that, what you’re seeing there in the marketplace?

I’ll go first. We’re seeing steady progress. This is our third quarter of having Aviators in the market by Titanium X. We’re going to have 15 Aviators and over a hundred agents, which is becoming commonplace. It’s comparable to having a search button on a screen; we now have an Aviator button on screens throughout Titanium X. It’s easier to use, easier to deploy, and getting less expensive, though still a bit costly. When considering platform providers, you either pay per use or commit for multiple years. We notice customers tackling significant challenges, and we feel we are on the brink of breakthrough moments with these challenges. It’s a steady process, present in every conversation. We are thrilled with Titanium X, which will be showcased live in a couple of weeks, similar to a search button on every screen. We achieved 20 wins in the quarter directly linked to our GenAI Aviators. We expect to continue making steady progress, supporting our goal of 25% bookings growth and a revenue increase of 2% to 5%. Overall, it’s a consistent effort, with the potential for a significant leap at a future point. We are effectively making it user-friendly, integrated, and significantly focused on reducing costs, transforming it into a button, or an agent button, in all our key processes.

Okay. Perfect. Thank you. And then one thing I do like, if I look at the margin performance this quarter was very strong, guidance is really healthy there. Is there anything that we should be aware of in terms of timing that, some of the costs got pushed out in the second half or is this just all kind of, you’re doing your job and controlling what you can control? Thank you.

Yeah. Thanks, Raimo. We are doing our job and beyond our job and I’ll explain that in the last couple years, since the close of Micro Focus transaction, we have taken a lot of cost out and we’ve been reporting that to you systematically, right? We also announced the business optimization plan in early July. The implementation of it was also very early to provide us the benefit throughout the year. What’s really happening in the second half is very consistent for OpenText. Our annual merit increases are January 1st. And as I said, we are seeing, that could employee retention, as well as sales capacity we mentioned. So that’s really what you’re seeing in the second half of the year. But having a great start on adjusted EBITDA in Q1 is what’s really supporting us and the confidence to maintain the 33% to 34% for the year.

Okay. Perfect. Thank you.

Thank you.

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

Hi. Good morning. It’s Erin Kyle on for Stephanie Price. I wanted to ask a question just on the revenue growth, excluding AMC, which was negative 1.8% this quarter. So seeing as this is all organic now, how do you think about organic growth at Micro Focus post the AMC divestiture and what are the key lines of business that you expect that will drive you towards achieving organic growth?

Yeah. It sounds great, Erin. Thanks for being on the call this morning. Let me start with that we’re maintaining our outlook for the year, which is constant to a 1% growth. And we look at our business by market area today. So in particular, for what we acquired from Micro Focus, deconstruct that into security, into digital operations and into the developer, if you will. We are deeply excited on the security side. And as noted, our XDR-as-a-Service is taking what we acquired from Micro Focus, plus components from other parts of the business, like Forensics, like Verkada on the network side, plus our email security from Zix. And we’re bringing it all together in a unified, composable offering called XDR-as-a-Service and we’re quite excited about it. So we see security being a growth driver for us. Second piece is what was historically called ITOM, what we now call digital operations. And I’m just really excited about the product offering around discovery, which feeds into security, by the way. What do you secure? You’ve got to discover the assets. Observability into the infrastructure. Observability across multi-cloud. Financial ops management. Sustainability in green computing, which has been our priority. So the product has just made incredible strides, if you will. We’ve got a little more work to do on the developer side. It’s more of a complex area. So we stabilized historical Micro Focus last year, as we talked about. We are now on a platform where we’re looking to grow Micro Focus, particularly in security and digital operations. We’ve got a little more work to do on ADM and we factor that all into our constant to 1% organic growth this year.

Okay. Thank you. That’s helpful color there. And maybe if I could just ask one more question just on capital allocation. So you did $85 million in buybacks this quarter and I noticed targets are unchanged for the year. So I just wanted to clarify if the strategy is still to focus primarily on that organic growth and return of capital to shareholders and whether M&A fits into the picture at all?

We are excited to announce that we will be delivering a record amount of capital to our shareholders this year. We have planned approximately $570 million in capital returns, which will be the highest in the company’s history. By the end of this year, we will have returned $3 billion over the last decade, hitting our highest capital return this year. Additionally, we are actively looking at mergers and acquisitions. With Micro Focus stabilized and the divestiture behind us, along with the introduction of Titanium X to the market, we plan to continue exploring small to medium-sized, profitable cloud companies that generate annual recurring revenue and align with our strategic goals.

Okay. Thank you very much.

Thank you.

Thank you.

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

Hi. Good morning. This is Mike Stevens on for Rich. Just more broadly, you touched on M&A there, but are there any further opportunities to streamline the company for growth, a la the AMC divestiture?

Our primary focus is on driving organic growth. Regarding M&A, our emphasis remains on the second half of the year and what we've previously discussed. We're bringing Titanium X to market across all our Business Clouds and working to enhance our new AI offerings, specifically Business AI and Business Technology, with a strong emphasis on security. Additionally, we're currently experiencing the highest level of sales capacity, and our pipeline for cloud and AI has increased by 20% year-over-year. Overall, the main objective of the company is centered on organic growth.

Okay. That’s helpful. Additionally, with the Aviator, you mentioned the number of wins on the quarter. How much approximately would that represent of bookings and where do you see that kind of going forward?

We didn't break out how much of the 10% bookings growth was related to Aviators, but it was clearly reflected in the large deals and the bookings growth during Q1. This is a significant aspect of our sales approach today. Our strategy begins with our Business Clouds, covering everything from content to development. We support it with a multi-cloud offering along with security and AI. This has become a coordinated part of our market approach, and I anticipate steady progress each quarter. In Q1, we had 20 direct wins related to AI, and I expect more direct wins in Q2, contributing to our goal of increasing cloud bookings growth from 10% to the mid-20s, aiming for 25% for the year. This is definitely adding to our bookings growth.

Okay. Appreciate the insights and I’ll pass the line. Thank you.

Yeah. Thank you, Mike.

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

Hi. Good morning. The cloud revenue growth was due this quarter and I understand you’re looking for that to accelerate for all the reasons you cited. But just in terms of the quarter in particular, is that a function of the deployed deal ramp dynamic that you called out? Is it anything to do with SMB or what are some contributing factors?

Yeah. Thanos, it’s Madhu here. I’ll pick up the question and Mark can chime in, of course. So think of cloud revenue as it is recurring, but certainly in our third and fourth quarters, we do see a lot more of the volume and sort of the variable side of the cloud revenue picking up. So we had over 3% growth in Q4 of last year and that’s typical of our sort of end of fiscal year strength. And Q1, the growth is right where we expect it to be on revenue. As Mark outlined earlier, no further sort of expansion of where the cloud contracts are. They’re still around the four-year mark for what we do and slightly longer when we look at SAP. So nothing has changed there and I would look at Q1 cloud revenue as more of Q1 light seasonality.

Great. And then, Mark, can you comment on SMB? So I know there have been some timelines there to go back a few months. How has that been looking and you alluded to a new platform you’re launching for SMB. If you can expand on that. Thanks.

Yeah. Yeah. Thanks, Thanos. And yeah, I mean, as Madhu noted, we had our quarterly factors for Q1 and we delivered right to what we said we’re going to do on revenue. And that’s inclusive of cloud, seasonally lower quarter for us, and inclusive of SMB, right, in all those numbers. So we’re excited. It’s a different year for us in SMB than it was last year. And we now have our partner platform live and in the market, what we call Secure Cloud. So we’ve gone from Project El Dorado to the actual service offering called Secure Cloud. We’re live. And the platform allows us, allows partners to be able to buy from us, allows partners and now we can easily add new products, like our Pillr acquisition, which is on Secure Cloud, and allows partners to then go sell to their customers and then to be able to monitor their install base and usage. So it’s sort of a PRM. It’s a partner relationship management platform that allows us to sell, partners to sell and partners to manage. And it’s now all built by OpenText, flexible, customizable and we’re just delighted with it. So that’s an enabler for us. Second is we’ve gotten closer with our biggest partner in this area, Microsoft. And Microsoft is one of their biggest investment areas for the year. And then thirdly, the demand is starting to pick back up. So we think those three factors, we have gone from a headwind, if you will, to just steady as you go, and I think, we’ll pick up some tailwinds throughout the year. So we’re quite excited about it.

Great. I’ll pass it along. Thanks.

Thank you.

Thank you.

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

Good morning, all. This is Kiran Sritharan for Adhir. My first, I just want to touch on the cloud growth range again, between 2% to 5%.

Yeah.

Following this quarter, what are factors you’d call out that contribute to the bottom and the top end of that range?

I would say three factors. First is SaaS. Customers adopting our SaaS capabilities and Titanium X. Two, seeing Aviator and our AI contribute revenue. And then some product-specific pieces. In particular, I’d call out security, XDR-as-a-Service. Those are three things that are going to drive us to the top end of the range.

Thanks, Mark. And then I’d like to zoom in on the investment in the sales and go-to-market. Where are you in the hiring cycle of these AEs? And maybe you can also comment on the experience levels and the pace at which this cohort would contribute, just given the refreshing go-to-market strategy? Thanks and I’ll leave it there.

Yeah. Thanks for the question. Yeah. As noted, we’re having great success in going to market, attracting and hiring very qualified account executives and solution consultants. And we’re at sort of our capacity, if you will. And that’s driven by a few things. So, first of all, we attract skilled professionals. We don’t tend to look for kind of the fresh grad to come into enterprise selling. I mean, we do hire those straight out of college, maybe into inside sales and then to grow in the organization or account development executives. So, it’s a great place to enter OpenText and then to grow. But what I was talking about was the qualified sales executives that have been in the market seven years to 15 years joining OpenText. So, we’re just having great success in doing that. We’re at capacity. We’re also, our employee engagement is incredibly strong. We’re at our highest retention rates for employees. So, our employee value proposition is very strong. Strong for the new hire, kind of entering OpenText as inside sales or account development and then to grow your career. Get your first job out of school and grow with us. And then the skilled professional seven years to 15 years out of enterprise software companies that has brought us to the top of our capacity. And I’m going to help them both with AI. Both cohorts with AI and olli.ai.

And if I could just add here, when Mark mentioned we’re at capacity in Q1 early part of the year, I mean, that was a very important conscious step we undertook in order to have a strong second half given all the product innovations that are coming through. And then when I spoke about the second half year expense of, continuing to invest, keep in mind that that’s also needed for our fiscal 2026 and beyond. So, there are really two parts to the sales investment.

Thanks for the call, guys.

Thank you.

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

Okay. Very good. Thank you everyone for joining us today. And we’ll welcome your feedback if you like the early morning call or the afternoon call. So, we’ll welcome your feedback on that. We hope you’ll join us. We hope you’ll join us at OpenText World November 19th and I’ll be live and in person at the TD conference November 25th, and as well as all the other conferences that Greg and Madhu highlighted. So, thanks for joining us today and we’ll look forward to seeing you in person soon. 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.