Earnings Call Transcript - OTEX Q1 2026

Greg Secord, Head of Investor Relations

Thank you, and good morning, everyone. Welcome to Open Text's Fourth Quarter Fiscal 2026 Earnings Call. With me on the call today are Open Text's Executive Chair and Chief Strategy Officer, Tom Jenkins, together with James McGourlay, Interim Chief Executive Officer; Steve Rai, Executive Vice President and Chief Financial Officer; and Cosmin Balota, our Senior Vice President and Chief Accounting Officer. Today's call is being webcast live and recorded with a replay available shortly thereafter on the Open Text Investor Relations website at investors.opentext.com. Earlier yesterday, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can also be accessed on the Open Text Investor Relations website. Now turning to the upcoming investor events. I'd like to take the opportunity to invite institutional investors and financial analysts to join us at Open Text World 2025 Investor Track on Tuesday, November 18 in Nashville. The Open Text World Conference is a unique opportunity for investors and financial analysts to learn about our latest product innovations and with full conference access, allow open dialogue with our customers and partners on site. The conference keynotes and investor track will also be available by webcast virtually. Open Text will also be participating in the following investor conferences. On November 21, we'll attend the Needham Tech Conference virtually. And on November 24, we'll be at the TD Technology, Media & Telecom Conference in Toronto. On December 2, we'll be at the Bank of America Leveraged Finance Credit Conference in Boca Raton and on the same day, we'll also be at the UBS Global Technology and AI Conference in Scottsdale, Arizona. On December 8, we'll be at the Raymond James TMT and Consumer Conference in New York. And then finally, on December 10, we'll be heading to the Barclays Global Technology Conference in San Francisco. We look forward to meeting with you at one of those events. And now on with the reading of our safe harbor statement. During this call, we'll be making forward-looking statements relating to the future performance of Open Text. These statements are based on current expectations, assumptions and other material factors that are subject to risks and uncertainties, and actual results could differ materially from the forward-looking statements made today. Additional information about the material factors that could cause actual results to differ materially from such forward-looking statements as well as risk factors that may impact the future performance results of Open Text are contained in Open Text recent Forms 10-K and 10-Q as well as in our press release that was distributed earlier yesterday, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most directly comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I'll hand the call over to James.

James McGourlay, Interim CEO

Thanks very much, Greg. I would like to welcome everyone on the call today. Joining us today is Tom Jenkins, Executive Chair and Chief Strategy Officer. I also want to give a warm welcome to Steve Rai, who joined Open Text as Executive VP and CFO in October. Steve brings a wealth of experience from technology and software. He is based in our Waterloo, Ontario headquarters. Also joining on the call is Cosmin Balota. I want to thank Cosmin for his leadership as Interim Chief Financial Officer, and Cosmin has now resumed his role as Chief Accounting Officer. The entire Open Text team is committed to delivering secure information management products that let our customers curate and enable agentic AI with their content. We have a tremendously strong and deep customer relationships. It is because of this that we have such incredible and loyal installed base. Now let's get into our Q1 fiscal '26 results. Q1 total revenues, ARR, adjusted EBITDA margin, adjusted EPS are all above Street expectations. As you saw with the Q1 performance, we are continuing our momentum from last quarter, especially in our core content business. We remain focused on sales execution, having just completed a major product cycle. We believe we are in the market with the right products at the right time. Turning to our cloud performance this quarter. Q1 cloud revenue was $485 million, up 6% year-over-year, which is well on track towards our F '26 outlook range of 3% to 4% growth. Cloud bookings continue to remain strong as we saw Cloud cRPO up 6% year-over-year. More importantly, our long-term cloud RPO is up 16% year-over-year, and total cloud RPO is up 11% year-on-year. Our other measure of cloud performance is enterprise cloud bookings, which were up 20% year-on-year in Q1. This puts us in a good position towards achieving our F '26 outlook range of 12% to 16%. We closed 33 deals greater than $1 million in Q1, which is up 43% year-on-year. We had key wins in the quarter with ALTEN, Australia Department of Health, Core42, Optiv Security, and mh Services. In September, we provided additional disclosure on our main businesses, which we break into product categories. This disclosure is in our IR presentation on the website and allows you to better track the performance. Tom will speak more about the tremendous opportunities in our core information management for AI business. For Q1, you can see that Content being our largest business continues to lead our growth in Cloud. Content Cloud grew 21% year-on-year in Q1. This was driven mostly by bookings won in financial services, energy and utilities as well as telecom verticals. We saw strength in retail, automotive and manufacturing verticals which also contributed to our business network positive growth in Q1. We are pleased with our Enterprise cybersecurity business growth this quarter and mainly driven by a few sizable wins. Our product offerings continue to be recognized by industry experts such as Gartner, and we are establishing key partnerships that are important for content management and agentic AI. We're excited about our upcoming Open Text World event being held in Nashville from November 17 to 20. Thousands of our customers and partners and other stakeholders will join in person to see our latest product offerings and innovations, especially our Aviator and agentic AI solutions in action. We will also showcase our sovereign cloud, keeping our customers' data local and secure. We are very excited to see how our customers unlock the power of their own data using Open Text products to foster innovation and spur growth. As we look ahead to the rest of fiscal year, we are not changing our fiscal '26 annual outlook. Please remember that we are an annual business and that results can fluctuate quarter-over-quarter. With that said, we expect Q2 total revenue to be between $1.275 billion and $1.295 billion and the adjusted EBITDA margin to be between 35.5% and 36%. We continue to see strength in our Content business going forward. For the second half of fiscal '26, we expect revenue to skew higher towards a strong Q4. There is typical seasonality that we see in Q3, but the momentum from our new product cycle is expected to come mostly in the latter part of fiscal '26 and beyond. We continue to expect ARR to return to growth in fiscal '26 with Cloud growth outpacing maintenance declines, while customer support revenue is on track to meet our fiscal '26 annual outlook. We are seeing some of our customers making faster decisions to shift their workloads from on-premise into the cloud. We have always given our customers the choice of where they want to deploy and note that the on-premise deployment is still being sought after in heavily regulated industries and governments. To conclude my remarks, I want to take a moment to thank our Open Text team across the company for their professionalism, dedication and hard work during this period of change as well as our partners, customers and shareholders. Finally, I would like to thank Tom Jenkins and all of the members of the Open Text Board of Directors. Their support to both myself and all of our employees has been tremendous. This is an exciting time for Open Text. We're in a great position financially and operationally. We are in the right markets of secure content and data that drive agentic AI. When I stepped in as Interim CEO, my main priority was to take care of our customers and carry forward our initiatives and deliver our fiscal '26 annual outlook. We had a great start to Q1, which sets us up nicely for the rest of the year and beyond. With that, I will hand the call over to Steve Rai, our EVP and CFO.

Steve Rai, EVP and CFO

Thank you for the kind introduction, James. It's great to be here. Good morning, everyone, and thanks for joining the call. I'm one month in at Open Text and very excited to contribute to the tremendous opportunity ahead. Over the past few weeks, I've spent a lot of time with James and Tom and the extended team, and I'm in full support of the company's vision and direction. I look forward to working together with them to deliver on this. Cosmin Balota, our Chief Accounting Officer, who was the Interim CFO before I joined, is on the call today, and he will discuss the highlights of our Q1 financial results. I would like to thank Cosmin personally for his unwavering support, insights and maintaining a steady ship through the transition. For those of you who may not know me, my last role was as CFO at BlackBerry, where I was deeply involved in the company's corporate technology and organizational changes. I'm truly energized to join Open Text at this stage in its journey and will be based in our global headquarters in Waterloo, Canada. Since joining, I've been very impressed with the professionalism and passion from everyone that I've met across the organization. I see a company with solid financial fundamentals with expanding margin and free cash flow and excellent foundational technology. Open Text supports an impressive global enterprise customer base and is poised to capture a broad-based step change in the market for training and adoption of agentic AI. I look forward to putting my deep experience in technology and transformation to work with such a dedicated team. With that, I'll hand the call to Cosmin to discuss our Q1 highlights.

Cosmin Balota, Senior VP and Chief Accounting Officer

Thank you, Steve, and good morning, everyone. Let me start by saying that in Q1, we continued our momentum from last quarter, particularly from growth in cloud revenues, led by our Content product category and through overall margin expansion. Total revenues for the quarter were $1.3 billion, which was an increase of 1.5% year-over-year. This growth exceeded our expectations for Q1 and was mainly driven by Cloud and License revenues. In the quarter, our Cloud revenues of $485 million were up 6% year-over-year. This growth was mainly attributed to strong demand in our Content product category, which makes up approximately 40% of our overall business and grew 21% year-over-year in Cloud and 3% in total revenues, as outlined on Slide 6 of our investor presentation. Customer support revenues of $587 million were down 1.5% year-over-year, while our ARR or annual recurring revenue was $1.1 billion, which was an increase of 1.8% year-over-year. ARR was 83.2% of total revenues, which was a slight increase compared to the 82.9% in the same quarter last year. Moving to profitability. Q1 GAAP-based gross margins was 72.8% or 76.5% on a non-GAAP basis, which were up 100 basis points and 60 basis points year-over-year, respectively. These increases were mainly due to Cloud gross margins growing 280 basis points year-over-year and 270 basis points on a non-GAAP basis. Adjusted EBITDA for the quarter was $467 million, which is a 36.3% margin and was up 130 basis points year-over-year. This improvement was mainly driven by higher revenues, which, as I mentioned, was primarily from continued growth in Cloud and our Content category with additional benefits realized from the expanded business optimization plan and improved gross margins. The costs and benefits associated with the business optimization plans and other savings initiatives, as outlined on Slide 19 of our investor presentation, and they have not changed since the prior quarter. The strong margin performance in Q1 resulted in an adjusted EPS of $1.05, which was up 12.9% year-over-year. Q1 free cash flow was $101 million, which was a significant increase of $218 million year-over-year. As you may recall, in Q1 of last year, we made a one-time tax payment, driven by the gain on sale from the AMC divestiture. This concludes my summary of the Q1 fiscal '26 financial highlights. And with that, I'd like to hand the call back to Steve.

Steve Rai, EVP and CFO

Thank you, Cosmin. The results in Q1 demonstrate the resilience of Open Text's business supported by the strong financial position of the company. Along with our portfolio-shaping initiatives and announcing the recent sale of our eDOCS business. This solid foundation supports our capital allocation strategy of consistently paying a growing dividend, buying back shares, reducing debt and reinvesting in growth. I'm a month in and looking forward to continuing my engagement with the Open Text team and meeting our investors and analysts. I'm excited to work with James and Tom and the rest of the executive team and Board to carry out our strategic objectives.

Tom Jenkins, Executive Chair and Chief Strategy Officer

Thank you, Steve. Good morning, everyone. Before I begin, I want to express my gratitude to Mark Barrenechea for his 13 years of dedicated service to our company. His leadership has been instrumental in establishing our company as a leader in enterprise information management. I also want to extend a warm welcome to Steve, who has only been with us for a month, and I'm glad to have you here on the call today. Since our announcement on August 11, we've engaged with hundreds of shareholders, analysts, and investors, and it's been wonderful for me to reconnect with many of you. I appreciate those of you who remarked that I haven't aged a day since we last met, though I wish that were true. This period has offered us a chance to communicate a clearer strategy for unlocking the value at Open Text. Our focus will be on our core business units within enterprise information management, particularly those that support training in the emerging field of enterprise artificial intelligence, which we refer to as agentic AI. It makes sense for us to concentrate on this area because Open Text is one of the largest corporate data and metadata vendors globally, boasting hundreds of connectors to both legacy and current data sets. This is a valuable asset for AI development, and we intend to leverage it. Initially, we will divest our noncore business units and use the proceeds to enhance shareholder value, which is our ultimate objective. In essence, we are returning to our roots as a content management company, but now with additional products in business networks and machine management, all encompassed within an enterprise-class security framework. This will be our foundational business. We already possess a global scale, an effective sales force, a diverse product line in these areas, and our Content Management business remains the largest business unit, contributing about 40% of our total revenue. It is also our fastest-growing segment, with cloud growth averaging over 20% in recent years. Therefore, the decision made by the Board to pursue these actions was clear. The entire company, from the Board to the executive management team and our workforce of over 20,000, is aligned with our objectives for FY '26 and beyond. We are committed to our plan, and early indications suggest that our transition to cloud services may accelerate as the year progresses. As we divest the noncore units, our Cloud Content business is positioned to become the dominant source of our revenue. We will continue to provide updates on our business unit performances as we progress toward this goal. Regarding our August 11 release and the short-term priorities we aimed to tackle, I'm pleased to report that we've addressed nearly all of them. The past 90 days have been very busy, and the next 90 days promise to be just as active. As I mentioned, we increased transparency by providing performance metrics for our business units in early September, allowing you to follow our progress. This showcased the strength of our Cloud growth. Last year, Content Cloud grew by 17%, and this quarter, it saw a year-over-year growth of 21%, reflecting the acceleration I mentioned. Our Content Management customers are clearly transitioning to the cloud more rapidly, which will start to shift our revenue mix slightly, indicating that we are advancing toward becoming a fully cloud-centric company. Of course, we appointed Steve Rai as our permanent CFO. He has a strong background in financial and operational reporting, along with experience in portfolio shaping from his time at BlackBerry. We welcome his expertise to our management team. This was followed by our first announcement regarding the sale of a noncore business unit within the analytics sector, which is an on-premise software. This move will further support our transition to cloud services as we shed noncore units. Additionally, we spoke about refreshing the Board, and we've recently added a new member, George Schindler, the former CEO of CGI. He is a fantastic addition and brings valuable insights. Other new members announced over the past year include senior leaders from Accenture, Hewlett Packard, and Cisco. We're rapidly retooling at Open Text. Yesterday, we released our Q1 fiscal '26 results, demonstrating the resilience of our business and continued demand for Content Cloud and AI. We are focused on the right market at the right time. We have one major priority left, which is to find a permanent CEO. The search is ongoing, with both internal and external candidates, and I’m pleased to say we've had many world-class candidates express interest. Our goal is to find a leader focused on solutions who can elevate Open Text to the next phase of its journey. In the meantime, I want to thank James for stepping in as Interim CEO; he's provided steady leadership for the company's operations, and thanks to Cosmin for leading our finance group. Their leadership has shown through the results during this transition. Open Text is positioned on a strong financial and operational foundation, with a commitment to increasing long-term margins and free cash flow. We are focused on unlocking shareholder value through our capital allocation strategy, which includes debt reduction, dividend payments, share buybacks, and small acquisitions. Throughout this process, we are committed to providing investors with clear and transparent metrics to help you understand our business and performance. Now, let's discuss our strategy and how Open Text plays a critical role for our customers in agentic AI. We provided additional slides, and we will also present at our user conference and Analyst Day next week, where you'll receive more detailed information. To give you a preview, a recent MIT study on agentic AI highlights the need for AI to be trained on specific content that is typically located within organizational firewalls. Notably, many leading generative AI products, such as ChatGPT, have primarily been trained on publicly available data, which accounts for only about 10% of the world's information. The remaining 90% is behind corporate firewalls. Years ago, Open Text published a book titled "Behind the Firewall," which outlined where this information resides and how to access it. Much of our early work was focused on records management and archiving for regulated industries, where Open Text has been a leader, giving us substantial access to valuable data. We work with hundreds of thousands of organizations worldwide, developing systems over the past 35 years, which opens up significant opportunities for customers looking to build productivity-enhancing agentic AI. In terms of how this applies to Open Text, our enterprise information management solutions store data across three major business units that we detailed today: Content, ITOM, and our business networks. Users can harness their own data to train agentic AIs that are far more powerful than anything publicly available, which is why we refer to it as enterprise artificial intelligence, similar to how we previously described enterprise information management and enterprise content management. We are returning to our roots, and we believe there is substantial demand for this model moving forward. We're also observing a shift regarding proprietary cloud solutions, especially in the context of governments, referred to as sovereign clouds. Users want to maintain control over their data. There’s a distinction between merely storing data and the intricacies of AI, and our users are becoming cautious about how they construct AI-enabled cloud solutions, prioritizing security and data governance within their firewalls. As noted, domestic telecom companies globally are playing an increased role in the supply chain for these proprietary clouds. As these channel opportunities arise, Open Text anticipates greater involvement with telecommunications partners. Interestingly, we’ve found that major corporations that migrated to cloud services often lack internal IT capacity. This has led them to seek alternatives for maintaining proprietary AI through managed services offered by us, other vendors, and telecom providers. These trends will be key topics at our upcoming user conference and Analyst Day later this month in Nashville. We will also introduce a new book on enterprise artificial intelligence, elaborating on these concepts for both investors and users. In closing, Open Text is on the cusp of potentially the greatest opportunity in its history. We invite you to join us on this journey as we concentrate on our core businesses and leverage our content to train agentic AI. Our Board committee continues to work on divesting noncore businesses, while also identifying and onboarding our new CEO. Now, could the operator please open the line for questions?

Operator, Operator

The first question comes from Richard Tse with National Bank Financial.

Richard Tse, Analyst

So Tom, you're embarking on a pretty ambitious strategy here. I just kind of want to get your thoughts in terms of what you think Open Text's competitive edge is and content as you make this pivot to leveraging your data for AI because there are a number of companies in the marketplace.

Tom Jenkins, Executive Chair and Chief Strategy Officer

Yes, the competitive edge, you don't create competitive edges overnight, as you know. That competitive edge was built over 35 years. We're the only company that has the hundreds and hundreds of data connectors. You had to be around back in 1995 to be able to have a connector into WordPerfect and into Lotus Notes and then Lotus 1, 2, 3 and all that stuff. And the reality is that legacy data is critical to training agentic AI. And we have all of those connectors, whether it's in business networks, whether it's in IT operations management or in human content. And that stuff gets built up over decades. You had to have been there at the time. And so all that source code, all of that plumbing is buried inside our products, whether it's SAP archives that are written directly in ABAP, that kind of stuff, you just can't make up later. You had to have been there at the time. So that's the part that really gives us a huge competitive advantage. I think the other part that we're going to find play out in the market is that we offer a hybrid mix. We offer on-prem through license as well as in the cloud and managed services. So there's a mix that users can pick because as you go to build these AI systems, that information is located throughout corporations in many, many different attics, so to speak, throughout. And we're equipped to be able to do that.

Richard Tse, Analyst

And my second question has to do with the Content business. Thank you for that segmented disclosure. It obviously is growing at a pretty rapid rate, certainly on the cloud side. Can you maybe give us a bit of color in terms of the mix of where that growth is coming from? Is it sort of AI readiness? Or is it something else because for mature markets, granted, it's sort of off a small base on the cloud piece, but still curious to see how that's playing out.

James McGourlay, Interim CEO

Yes, I'll defer this to James. But I will say one thing when a CIO approaches this problem, the first thing that they have to do is they have to curate their content in general. That's why I think you're seeing a lag in some of the adoption of AI because even though we had COVID and even though we created a lot of digital pieces inside our organization, the reality is we were doing that in a hurry during COVID. Getting this in an organized fashion, that takes a lot of content management. It takes a lot of archival, and a lot of records management. So a lot of organizations were simply getting digitally ready. They had never been asked to do this before. They were keeping all that data for regulatory reasons. Now they're starting to present that data in real time and ready so that they can do training. So I'll leave it to James to talk about the very specific parts. I think you covered it pretty well, Tom. We're seeing our customers looking at moving into the cloud for a number of reasons, including the managed capability that we offer, curating their data for AI readiness and just overall simplification of the management of the system for them. So customers are moving quickly. We're seeing new customers coming in, coming on board, jumping directly into our cloud offering, as you would expect in this day and age. But it's across the board, we're seeing a shift to cloud in the customer base.

Kevin Krishnaratne, Analyst

Tom, regarding data readiness, I understand the extensive history of content you manage for your customers. Can you discuss whether there's an optimal timeframe for the data customers should consider? You've mentioned the vast amount of data available for training agentic. I'm curious about the relevance of data from 30 years ago compared to more recent data, such as from the last 5 years. Is there a particular timeframe that seems most useful for customers bringing in data for their agentic AI training?

Tom Jenkins, Executive Chair and Chief Strategy Officer

Yes, that's a great question. And even to go further, we could say that there were early attempts to create synthetic data where you would take 5 years of data and just simply replicate it to try and fake out some form of agentic AI training. The reality is, I think the person who did this analysis the best was Larry Summers, who is, of course, now on the Board at OpenAI and former Harvard President when he was doing the analysis of how the Fed had made such an error during COVID. And when he went to look at the Fed models, he discovered that they had gone back 20 years. And you can go on YouTube and watch this. It's a fascinating presentation and analysis by Larry Summers. And basically, he looked at them and he said, you didn't go far enough back. You had to go to where the black swan was, which was in the '70s. And that's why you missed it. And it's an interesting point because what you're doing when you're training GenAI, you're going back looking for patterns. And so if you have the data, you go back as far as you can because you're looking to get the pattern of the black swan. That's what a corporation wants to be able to see. Where are those anomalies? And so quite frankly, you can't go far enough back. If you've got the ability to go back 35, 40 years, you're absolutely going to do that because your AI will be more accurate and quite frankly, wise. And that's the race. There is no such thing as data that is not useful. The more you have, the better off you are.

Kevin Krishnaratne, Analyst

That's super fascinating. Maybe switching over to Steve, welcome to the team. If you think about the Q2 guide on revenue, it's a range. It does imply a scenario that could see quarter-over-quarter decline. So I'm just wondering if you can maybe talk about the drivers that would get you on the one hand down to the bottom of the range and on the other hand, the top end of the range. Can you just talk about expectations for the coming quarter?

Steve Rai, EVP and CFO

I believe the most important aspect for this quarter and the future is the theme that Tom has been discussing and James mentioned. Although I'm new to this, what stands out to me is the focus on content and the essential elements that support it, along with the current remaining performance obligation, which is crucial for our business. It represents the largest part of our operations. We haven't altered our annual outlook regarding the second quarter compared to the second half of the year. While we expect some shift in other business elements, the overall trajectory is the key trend to monitor.

Tom Jenkins, Executive Chair and Chief Strategy Officer

Yes. And don't forget that the thing that we don't know is what's the mix of revenue caused by how fast people are going to the cloud. As you know, the revenue reporting for cloud gets distributed when we make a contract 3, 4, even 5 years as opposed to license, which gets recognized right away in that quarter. So that's part of the issue that we don't know what the mix of that revenue will be. We sure do have the customers, though, it's just that what buckets of revenue will that go into quarter-by-quarter. That's the thing that we think we're seeing an even faster move to the cloud.

Operator, Operator

The next question comes from Stephanie Price with CIBC.

Stephanie Price, Analyst

Maybe just a follow up on Kevin's question around the Q2 guide, and I appreciate the color on the go-forward strategy. In terms of EBITDA growth in the second half, the reiterated guide implies a pretty significant step-up in H2. Just curious about what's driving that growth? Is it primarily transformation initiatives? Or any color on that, Steve, and welcome would be great.

Steve Rai, EVP and CFO

Certainly, there has been substantial reshaping of the portfolio and significant business optimization initiatives that have been ongoing for some time and will continue. We are seeing a half billion dollar improvement in run rate since the program was announced. Approximately one-third of that was realized last fiscal year, another one-third is incorporated into the current year's plan, and we are also working on future improvements. All of these factors contribute to that growth.

Stephanie Price, Analyst

Great. And then, Tom, maybe just an update on the divestitures initiatives. Congratulations on eDOCS. How should we kind of think about the cadence of divestitures over the next several quarters here as you look to divest 15% to 20% of the overall revenue?

Tom Jenkins, Executive Chair and Chief Strategy Officer

Yes, that's an important question. We've been discussing the best approach with Steve. There are several noncore business units involved. Our plan is to aim for one divestiture per quarter, as each one requires significant effort. As Steve mentioned, when we divest a unit, there are parts that won't be included in the sale that will need restructuring, making it a complex process. We intend to proceed carefully, and our goal is to complete this by next year. There will be a consistent rhythm to these actions; we won't implement them all at once, as that wouldn't be prudent. We aim to be disciplined regarding our EBITDA, ensuring that these changes are managed carefully to avoid substantial impacts. We appreciate everyone’s patience as we work through this, aiming for a steady progression throughout the year without causing disruption.

Operator, Operator

The next question comes from Steve Enders with Citi.

George Michael Kurosawa, Analyst

This is George Kurosawa on for Steve. Maybe one follow-up on the divestiture point. Steve, I think one of the things that jumped out to us on your resume, your time at BlackBerry was your involvement in divestitures with that organization. Maybe any thoughts on your approach or playbook? What do you feel like is similar or different coming into the situation?

Steve Rai, EVP and CFO

The main distinction here is that the core of our business is the largest and fastest-growing segment, which puts us in an advantageous position. Additionally, as Tom highlighted, it's clear that we are on the verge of a significant transformation in AI, especially with agentic AI. Our company possesses its own AI technology, and we also have access to the necessary information for training it. This access creates an exceptional opportunity for us, especially considering this has been 35 years in the making, putting us in a strong position to take advantage of the market landscape.

George Michael Kurosawa, Analyst

Got it. Okay. Great. I appreciate that color. And then I also appreciate the additional disclosure on the business unit side. I think the Content Cloud side really jumps off the page, it's been well discussed. I think the other thing that caught our attention maybe on the flip side was the cybersecurity enterprise piece, particularly that cloud component declining. I know it's small, but I think we were kind of interested in the cross-sell opportunity there. So surprised to see that moving in the wrong direction. Just any color or commentary on what's happening in that business and your outlook there going forward.

James McGourlay, Interim CEO

I think it's fair to say that we're working extensively on that business. We've made several investments in product development since acquiring the product lines, and we are seeing great success as we move forward. We will start to see an increase in cloud numbers with investments in specific regions. I'm looking at various deals we've done with large strategic banks where we've sold content, cloud, and security together. Our cross-selling efforts are succeeding, and we are expanding those efforts. You'll see us continue to do so throughout this year and beyond.

Operator, Operator

The next question comes from Samad Samana with Jefferies.

William Fitzsimmons, Analyst

This is actually Billy Fitzsimmons on for Samad. I want to double-click on Content Cloud because it's important. And when we think about the 21% Content Cloud growth in the quarter, how would you break down that growth between, call it, net new customer wins, seat expansions, ARPU expansion for selling additional modules in the base? And then cloud conversions in your existing base. And what I'm kind of getting at here is when we think about cloud versus non-cloud, Open Text has always made a point to support customers where they are. And so just so we're all clear, were there any, call it, shorter-term tailwinds to the Content Cloud growth rate from you guys using either carrot or sticks to incentivize your existing on-prem customers to move to the cloud? Or would you more categorize this as customer-driven and that they're choosing to transition because of their AI readiness?

James McGourlay, Interim CEO

I would describe this situation as a collaborative effort between Open Text and our customers. We sell to our customers based on their preferences, allowing them to make the decision about whether to move to the cloud. We do not have any incentive programs encouraging customers to transition to the cloud, nor are we pressuring them to do so. This is truly a joint initiative as we move forward. The growth we are experiencing this quarter is primarily a result of our sales team's dedicated efforts, with no exceptional factors contributing to it.

Tom Jenkins, Executive Chair and Chief Strategy Officer

There's an important point in that question. Our company is focused on maximizing shareholder value. We aim to make the most profit, and our installed base generates significant annual recurring revenue, which we consider maintenance. This is very beneficial for us, and we are not eager to lose it. Our customers also prefer things as they are; they believe in not fixing what isn’t broken. We are not in a rush to change. While other vendors focus on moving everything to the cloud, we don't think that's the best approach for us or our customers. They are willing to pay us more under the traditional model, and we are happy to accommodate that. As James mentioned, this is a collaborative relationship with our users. We aren't rigid in our approach; we are simply motivated by maximizing our profits, which is best achieved by doing what our customers want.

William Fitzsimmons, Analyst

Makes perfect sense and crystal clear on that. And maybe if I can ask one to you, Steve. I'll leave this pretty open ended, but it's only been a month or so since you joined, and this is your first earnings call. Can you just talk through kind of what are your initial priorities as CFO?

Steve Rai, EVP and CFO

Well, obviously, understanding the priorities on the part of our customers, understanding the products. Obviously, there's been some very significant strategic initiatives recently announced, and the Board obviously has been very involved in that. But the big things are the primary trend that we've been talking about with content leading the growth and wrapped with all the business optimization initiatives, and that's really the top line, but bottom line, I mean, those are the most significant and most impactful items. So that's where I'm focusing and just obviously getting to know the team and how we do things.

Tom Jenkins, Executive Chair and Chief Strategy Officer

Steve is certainly not bored. There's a lot of balls in the air, and he's just in a perfect position. We had a meeting early in and I said, Steve, what do you think? He said, go faster. And I think that characterizes Steve for us. He's a veteran, been around, he sees what we're doing, just go faster.

Operator, Operator

The next question comes from Stephen Machielsen with BMO Capital Markets.

Stephen Machielsen, Analyst

So with respect to the ITOM business, you clearly had some strong cloud growth, albeit off of a small base. What would your expectations be for stabilizing total ITOM revenue? Like is this something you hope to accomplish as you exit this year? Or is it still TBD?

James McGourlay, Interim CEO

I think we’re still uncertain about the timeline for stabilizing. We are making progress as we work on it, and you can see the growth in the cloud. There are some exciting product features and benefits coming in our upcoming releases, and we’re experiencing stronger demand from our customers. While I can't provide a specific date at this moment, we are advancing well toward stabilization. We are also securing significant deals despite facing strong competition, which gives us optimism for ITOM as a vital part of our portfolio.

Tom Jenkins, Executive Chair and Chief Strategy Officer

I think what you'll see at Analyst Day and also at the user conference, although we break out these units as ITOM and enterprise security and content, you're quickly seeing us evolve into a go-to-market strategy where we're training all content for agentic AI. You'll see us go to market where the ITOM, which is really machine-generated content for agentic AI, you'll see business networks, which is really transactional content for agentic AI and then the original content server business, which is human-generated content. All of those components are going to come together in an offering from us because our users, when they go to train agentic AI, they don't think of it as ITOM or the way we as vendors would break it up in the historical way of creating content. They just think of it as content, a big data pool. And so you'll see us go to market where we would in the past call that cross-selling. We're coming to the market now to give our users what they need, which is really all of the data, not select data that previous vendors had but rather all of the data. I think this is a very important thing you'll see us go-to-market with starting with next week with Analyst Day.

Stephen Machielsen, Analyst

All right. We'll look forward to it. My second question is the Q2 revenue guide seems to imply a double-digit decline in license. Can you provide some color on that dynamic? Is it reflective of clients transitioning from license to cloud? Or is there some other dynamic or factor to point to?

Tom Jenkins, Executive Chair and Chief Strategy Officer

So this is what I was referencing before. We're really driven by the selection that our customers are making. As James has said, we don't have a definitive target. We simply show up and say, here's the menu. Would you like this on-prem? Would you like this as a managed service. So in many ways, that mix is really a reflection of how quickly customers are going to the cloud. And quite frankly, last quarter, they chose cloud more than they did license. That could change next quarter because there is that other dynamic going on where the need for a proprietary cloud or a sovereign cloud that will have an element of on-prem, and it will have an element of wanting license revenue. So it's not something that we can predict with absolute precision. We think overall, though, that the trend line will continue just like what you saw this quarter into the following quarters. But that variability quarter-to-quarter is really hard to really nail down. James, what's your...

James McGourlay, Interim CEO

I think you covered it great, Tom.

Operator, Operator

I will now hand the call back over to management for closing remarks. Please go ahead.

Tom Jenkins, Executive Chair and Chief Strategy Officer

Thanks, everyone, for joining us today. We're excited about our fiscal '26 and all the opportunities in front of us. We hope you'll join us at Open Text World in Nashville on November 18 for our Analyst Day. We'll go into more detail on some of the things that we talked about. As Greg noted, we'll be out in the field quite a bit at many investor conferences through the fall spending time with you and looking forward to you hearing your feedback. Thanks again for joining us today.

Operator, Operator

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