Earnings Call Transcript - OTEX Q2 2022

Operator, Operator

Welcome to the OpenText Corporation's Second Quarter Fiscal 2022 Earnings Conference Call. I would now like to turn the conference over to Harry Blount, Senior Vice President of Investor Relations. Please proceed.

Harry Blount, Senior Vice President, Investor Relations

Thank you, Operator. Good afternoon everyone, and welcome to OpenText’s second quarter fiscal 2022 earnings call. With me on the call today are OpenText’s Chief Executive Officer and Chief Technology Officer, Mark Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Please note that we have shortened our prepared remarks this quarter to allow more time for the question-and-answer session. Today’s call is being webcast live and recorded with replay available shortly thereafter on OpenText’s Investor Relations website. Earlier today, we posted our inaugural quarterly shareholder letter along with our press release and investor presentation. These materials will supplement our prepared remarks and can be accessed on OpenText’s Investor Relations website. Before I proceed with the reading of our Safe Harbor statement, I would like to inform investors that OpenText 2022 Investor Day will take place virtually on March 1. Registration for the event will be available in the coming days on our investor relations website. In addition, OpenText management will be participating in the Scotiabank TMT conference on March 8 and the Morgan Stanley TMT conference on March 9. And now for our Safe Harbor statement. Please note that during the course of this conference call, we may make statements relating to the 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 statement. 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 in relation to the current global pandemic that may project future performance. Results of OpenText’s are contained in OpenText 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 directly comparable GAAP measures may be found within our public filings and other materials which are available on our website. And with that, it’s a great pleasure to hand the call over to Mark.

Mark Barrenechea, CEO and Chief Technology Officer

Thank you, Harry. Well, good afternoon to everyone and thank you for joining today’s call. Today we are introducing our new call format. Earlier today, we published our inaugural quarterly shareholder letter in addition to our press release and investor presentation, all available on investors.opentext.com. The three documents are intended to provide more insight into our strategy, aspirations, growth programs and results over short, medium and long-term horizons. Going forward, you can expect a quarterly shareholder letter and shorter prepared remarks from me, leaving more time for Q&A. Today we’ll spend a bit more time in our remarks to ensure a smooth transition to our new format. We welcome your continued feedback on how to improve our communication. Onto Q2 accomplishments, we had an amazing quarter financially and strategically. We provided the ongoing progress towards our longer-term fiscal ‘24 aspirations of up to 4% organic growth, 38% to 40% adjusted EBITDA margin, and free cash flow of $1.2 billion plus. Today we increased our fiscal ‘22 targets to include total growth of up to 4% and cloud revenue growth of up to 10%. This reinforces our aspiration to generate over $6 billion in cumulative cash flows over the next five years. Please recall our plan to return 33% of free cash flow to investors in the form of dividends and buybacks while investing the majority of our cash in organic growth and in corporate purposes, primarily M&A. Our capital return strategy has two fundamental pillars: one, returning 20% to trailing 12-month free cash flow via dividends; and two, keeping our share count constant via our buyback program. We believe our cash generation prospects and capital allocation strategy puts us in a stellar position to create sustained long-term value. I listed our quarterly accomplishments in the shareholder letter, but let me call out just a few. We had our strongest Q2 revenue quarter in the history of the company at $876.8 million, up 2.5% year-over-year, cloud up 4.1% year-over-year with bright line organic growth. We had a very strong cloud bookings quarter with double-digit year-over-year growth and adjusted EBITDA of 39.2%. We expect strong year-over-year annual growth in our free cash flows. We view our business as annual; we make many decisions based on that while driving upper quartile adjusted EBITDA and free cash flow on an annual basis. I’m very proud of the recent talent recognitions our teammates received including Canada’s most admired cultures, Canada’s top employer for young people, and being named one of Forbes best employers. The pandemic strengthened our culture and results. We announced the OpenText zero initiative with bold ESG objectives, we plan to lead here. To our core, we believe the future of growth at OpenText is both inclusive and sustainable. By 2030, we are setting out to achieve zero barriers, zero waste and zero net emissions. These are our three pillars of the OpenText zero initiative. Specifically on zero barriers, we are actively striving to become a majority diverse company and to expand our leadership to a total of 40% female leadership as defined as manager and up. I’ll comment on mid-market in Zix and enterprise growth programs and partners in a moment, simply said Zix significantly improves our mix. It was an exceptional quarter across the board. We entered Q3 with increased visibility both near-term and over the longer horizon and OpenText's best days are ahead. Let me tell you why. Businesses of all sizes are transforming and they are transforming into the cloud and by digitizing processes. But more importantly, they are transforming through information or as I like to call it information-led transformations. This includes the way their employees work, and in how we’re all mastering modern work. This includes the way they manage their supply chains and digitizing supply chains. It includes the way we sell and go-to-market and how we power modern experiences and the way we secure our digital infrastructures and strengthen cyber resilience. We are the information management market leader, and our cloud edition offerings are optimized to help our customers regardless of their size or where they are in their transformation journey. We are going to take market share through organic growth and acquisitions on our path to doubling the company over the next five to seven years. We had amazing wins in the quarter, which you can read about in the detail in our investor presentation. Some of those wins include Volkswagen, Kimberly-Clark, the U.S. Army Corps of Engineers, Raytheon Space & Intelligence and Amazon’s new PillPack, among many others. Let me turn to Zix, our enterprise growth programs and partners, each strategic points of emphasis within my prepared remarks on Zix. We see an amazing opportunity to expand our information management leadership in the enterprise in the SMB market. Nearly 50% of U.S. GDP is generated by small and medium-sized businesses, and most need a secure and scalable digital presence. We just started our third year as a scale provider of information management in SMB. And with the acquisition of Zix, we have market-leading platforms for data protection, data and email security, as well as being a top Microsoft Cloud Solution provider for mid-market solutions. By bringing together Carbonite, Webroot, Zix and Cloud services plus our strategic relationship with the most important endpoint company on the planet, Microsoft, we’re able to offer the industry’s most complete total protection and security platform to RMMs and to 23,000 MSPs direct from OpenText. We intend to lead, grow and win information management by addressing the high compliance and cyber resilience needs for small and medium businesses. And you can expect us to continue to acquire in the SMB market. Onto the enterprise, in the enterprise and for larger businesses, we have a fantastic direct sales force and high-impact strategies to drive profitable growth. First, one of our most important recent investments is to cover our top 100 customers directly with global account managers; this program is now in place. Second, we have covered directly the top 20 supply chain companies, this program is also now in place. As large enterprises become larger and more global, we have a clear opportunity to grow the top of the market. And we are investing to do just that via our top 100 customer GAM program and our top 50 supply chain program. Third, I want to speak about partners here, as we are building a remarkable business model with enterprise partners. We are fully committed to this model, and partners are a force multiplier over the long-term. Google, we announced today a greatly enhanced partnership to bring our joint content and experience solution to enterprise customers. Microsoft: we have massively expanded our SMB and security relationships; Amazon and AWS is the core data platform for our protection cloud. SAP: we are a leading cloud partner with SAP with nearly three million cloud users already and strong product and selling momentum heading into the new calendar year. ServiceNow is a new opportunity for us to bring extended ECM to their large expanding installed base. Here’s the even greater macro point. Via our API cloud, our developer cloud, we have the opportunity to win the next generation set of cloud app vendors for their information management needs through content services, metadata, workflow capture, supply chain threat intelligence and more via our developer and API cloud. Underlying our Q2 results and our strategic progress with Cloud editions, SMB and Zix and our enterprise growth programs and partners. We believe our outlook heading into calendar ‘22 is vastly more positive than the previous two years. OpenText is on the offensive as it relates to inflation. The best answer to inflation is to remove labor where you can, reduce your friction costs and create new just-in-time supply chain through the digitalization of global processes. Let me conclude by saying I’m humbled by the resilience, courage and unstoppable nature of my colleagues through this pandemic. We used the last two years to transform into a cloud company with 80% annual recurring revenue. And today we are raising our cloud growth target to up to 10%. The leadership team is excited to present at our March 1 Investor Day, and they plan to detail our next generation of cloud capabilities and our business journey to achieve increased market share, customer success, and financial aspirations. Let me leave you with two things: targeting up to 10% cloud growth and Zix improves our mix. Now let me turn the call to Madhu to provide the financial commentary on the quarter, Zix’s contribution, and our outlook.

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Thank you, Mark. And thank you all for joining us today. This is a new call format, and we’ll focus on selected financial highlights rather than a line-by-line review. On the investor relations section of our website at opentext.com, please find the latest quarterly results for Q2. You will see the PDF of our earnings, the PDF of our shareholder letter, as well as the quarterly investor presentation. All references are in millions of USD and compared to the same period in the prior fiscal year on a reported basis. Q2 fiscal 2022 results: we are very pleased with our record Q2 revenue, our record annual recurring revenue and record cloud revenue. Growth: annual recurring revenue (ARR) and cloud bookings, we grew total revenues low single-digit organically. We posted another quarter of double-digit enterprise cloud bookings; cloud revenues saw their four consecutive quarters of low single-digit organic growth with positive organic growth in all of our cloud market domains. Strong renewal rates in cloud and off-cloud. And Q2 annual recurring revenue at 80% of our total revenues; on a first-half year basis, ARR was 81% of total revenues. On the bookings front, enterprise cloud bookings were strong across many products and geographies, and a large deal trend was up. GAAP-based net income was $88.3 million during the quarter, higher than Q2 of fiscal ‘21, which had a loss of $65.5 million primarily due to the tax settlement recorded in the prior year. Adjusted EBITDA for Q2 was $343.5 million or 39.2%, down slightly from Q2 fiscal 2021 of $360.8 million primarily due to investments and talent across the board including restoration of compensation, sales coverage and growth initiatives. Turning to operating and free cash flows, we generated $216.6 million in operating cash flows in the quarter, down 23.2%, and $756.1 million in the trailing 12-months, down 32%. We generated $206 million in free cash flows in the quarter, down 25%, and $688 million in the trailing 12-months, down 35.6%. During the quarter and compared to the prior year, there are three items I want to share with you with respect to OCF and FCF. First, integration costs related to the big acquisitions in the current quarter. Second, timing of tax refunds in the prior year, including CARES Act benefits that are not occurring in this quarter, and two months of salary forbearance in the prior year now restored, augmented with competitive salary increases as well. Let me spend a few minutes on our working capital framework. Our working capital metrics are strong; the working capital ratio increased from 1.4 times to 1.6 times on a year-over-year basis. Day sales improved from 47 days to 44 days, while our cash conversion cycle improved by three days. Our operating cash flows and free cash flow on a trailing 12-month basis, the reasons are similar in terms of CARES Act benefits last year, salary forbearance plus the one-time IRS settlement in the current year. Our next quarter, Q3, is expected to remain the strongest free cash flow quarter. Also, free cash flow comparisons will continue to improve on a year-over-year basis as we anniversary the IRS settlement payment last year and COVID-related comparisons also become easier. Turning to balance sheet and liquidity, we ended the quarter with $2.3 billion of cash and available liquidity and a very strong net leverage ratio of two times. Before I speak to our outlook and aspirations, I will share details regarding our Zix acquisition which we closed on December 23, 2021. Relative to Zix’s reporting prior to our acquisition, please note the following: OpenText will record revenues on a net revenue basis, it will be 100% part of cloud with gross margins in the low 80s. During integration, we are factoring year-one customer partner disruption into overall revenue models. We expect to share with you at the end of the fiscal year as we complete the June quarter a combined growth prospects for our SMB powerhouse offering that Mark referenced in his commentary. Now let me turn to our updated targets and aspirations. For the third quarter of fiscal ‘22, we look for total revenue to grow mid-to-high single-digit, ARR to grow mid-single-digits year-over-year, with an FX headwind of $20 million to $25 million. We expect adjusted EBITDA margin percentage to be down 450 to 500 basis points due to higher investments in talent and continued support of our growth ambitions, Zix’s acquisitions, and typical calendar year reset of higher benefits expense. For the full year fiscal 2022, we’re increasing our cloud revenue growth outlook from 1% to 2% to a range of 3% to 4% and our cloud revenue growth from 3% to 4% to a range of 8% to 10%. A higher revenue outlook is predicated on our cloud bookings, contributions from Zix, and confidence from strong Q2 and first-half results. And let me expand on the cloud revenue line. Our fiscal 2022 cloud growth at 8% to 10% includes the Zix acquisition; we expect to grow cloud organically in both reported and constant currency in fiscal ‘22 despite the Q3 FX headwind and where we sit today, we expect FX headwinds in Q4 as well. Setting FX aside, as I said earlier, we saw the strongest booking growth in our enterprise cloud bookings during the first half, and along with our expanding hyperscale of relationships, Carbonite and Zix acquisition, we expect cloud to continue to drive our future organic growth aspirations. Moving to adjusted EBITDA margin, we now expect our fiscal ‘22 adjusted EBITDA margin to be in the range of 35.5% to 36.5%, reflecting the integration of Zix and internal investments to support growth initiatives. We have made demonstrable progress towards a solid fiscal ‘22 finish and continued momentum into fiscal ‘23. Our fiscal ‘24 aspirations remain unchanged: up to 4% organic growth, 85% annual recurring revenue, 38% to 40% adjusted EBITDA margin, and $1.2 billion plus of free cash growth. We plan to continue to invest anything higher than 40% back into sales, marketing and product initiatives driving organic growth. We’re seeing growth in all the right places. Our investment in talent, sales, coverage and innovation are paying off in organic growth. Our strong bookings also give us long-term visibility, while the predictability of our business remains high. All of this has been made possible by the amazing OpenText team and your contributions are invaluable. On behalf of OpenText, I would like to thank our shareholders, loyal customers, partners and employees across the globe. I would now like to turn the call over to your questions. And over to you, Operator.

Operator, Operator

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

Raimo Lenschow, Analyst

Congrats on the solid numbers. Mark, the more bigger picture question. The one thing that gets discussed a lot with software investors here at the moment is the demand situation in terms of spending with customers. Digital transformation was a big theme in the last couple of years; the pandemic really sharpened people’s minds here. And there’s kind of the notion that we kind of overspent a little bit over the last year, and now we’re coming back to more normal levels. What are you seeing in terms of how this is playing out for you? And I had one follow-up for Madhu please.

Mark Barrenechea, CEO and Chief Technology Officer

Yes, thanks Raimo, and good to hear from you. Like I said in my prepared remarks, coming into calendar ‘22 is a vastly more positive year for us. If you look at our customer wins, Novartis with new machine learning and capture, Volkswagen building a new platform for electric cars, representing roughly 10 million cars and 10 billion documents a year across purchasing, delivery, assembly, service, warranty, and more. The U.S. Army Corps of Engineers has significant new projects going on in the U.S.; 600 dams to 2,000 levees are all on Cloud edition. So we see increased demand, not shortening demand, as we come into calendar ‘22. We’re also very focused on upgrading and migrating our installed base into our cloud edition. So OpenText’s position is more positivity coming into ‘22 than we had over the last two years.

Raimo Lenschow, Analyst

That’s good to hear. And for Madhu, if I think about your EBITDA guidance, if I do the math, it came down a little bit. Can you talk a little bit about the drivers in terms of, if I look at the absolute level, if I look at the drivers here in terms of between FX, investment to the business, higher employee costs, etc. Just could you break down a little bit? Thank you and congrats.

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, thank you, Raimo, for the comments. So I’ll pick FX first, and certainly on the top line on revenue, FX does play a big role. We’re calling it out in our quarterly factors. The two lines that FX impacts the most are the cloud services line as well as customer support. We’re definitely seeing that in Q3, and where we sit today, I would expect a similar FX impact in Q4. However, the underlying business as I said, is absolutely growing from an organic basis. Regarding the adjusted EBITDA growth, I would put Zix’s acquisition as number one, which is not uncommon for us. If you go back to the Carbonite acquisition, we did see a downward tick in adjusted EBITDA in the quarter immediately following, but we did come back up. So the number one reason is going to be Zix, and we’re targeting to align Zix to our operating model in our usual timeframe of a year plus. Number two, as you outlined, yes, we did have some salary forbearance in the past, but more importantly, we are passing through competitive salary increases, and we’re investing in talent overall, including in our sales, coverage, marketing, and innovation products.

Operator, Operator

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

Paul Steep, Analyst

Two quick ones, Mark, maybe you could just update us on the roadmap for 22.2 and maybe other key releases that should be on our radar screen. And then Madhu, can you go back? Because it doesn’t look like the transcript caught your third comment after gross margins, low 80s in terms of maybe the impact on customer that we broke up on my side as well. And then just one last one on gross versus net at Zix? Thanks.

Mark Barrenechea, CEO and Chief Technology Officer

Yes, Paul, thank you for the question and good to hear from you. We’re going to have a large and important product update at Investor Day, so I am going to save some of the details for March 1. However, looking ahead to our releases, for 22.2 and 22.3, we remain on our 90-day cadence, which is our battle cry. In terms of what to look forward to in the next 90 days: for our content cloud, we will support partners and embed extended ECM, which is really enabling salesforce, ServiceNow, SAP, Google, Microsoft. We have a supply chain summit coming up in a couple of weeks, where we will unveil a new global invoicing capability that will support approximately 60 countries, allowing what we call just-in-case supply chains, not just in time, but just in case. We are also bringing to the market our new mid-market offering directly targeted at SPS commerce in the mid-market with a product line called freeway. For the experienced cloud, we have a new SeaPass platform in the marketplace and enhanced offerings over the next 90 days. We’ll be integrating Zix very rapidly for email protection and encryption within the security and protection cloud and more advanced APIs. We’re excited about these developments, as they will add significant value across our five clouds in 22.2. Please expect a very important and significant product roadmap update at Investor Day in March.

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Thank you, Mark. And Paul, let me address the Zix piece. As I mentioned, we closed the acquisition on December 23. We will record revenues on a net revenue basis. Our diligence suggested this approach was appropriate. Also, our sales channels are designed to capture growth prospects and leverage partnerships. This does not discount the totality of efforts that goes into the business to emphasize the financial reporting. We will be recording revenues on a net revenue basis, and all Zix’s revenues will be recorded as part of cloud with gross margins in the low 80s. During integration, we generally take into account year-one customer partner disruptions in our overall revenue models, and we strive to meet the higher end of it. It is prudent, in our view, to factor some discount to the normal run rate given year-one customer partner disruptions. We will share our combined growth prospects at the end of this fiscal year, focusing on the SMB powerhouse that Mark discussed in his commentary.

Paul Steep, Analyst

Your last line was what we’ve missed. So on the integration, should we think to the traditional, I believe we used to be in the 18% to 20% sort of step-down. Is that what sort of embedded into the thought process at this point?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, I would agree. Yes, thank you.

Paul Steep, Analyst

And last clarification, I’ll leave it I promise. Can you give us a sense of what that sort of translation is obviously from gross to net on their revenues, since some folks are going to be looking at the Zix numbers and trying to read across. You stated already, the deal that you were going to recast it in your IFRS standard?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

The overall growth is linked to the overall financial calculations. I would estimate that, considering their two business types, the resale business will transition to a net revenue system. Without going into specific details, we expect the resale revenue to fall between 30% and 35% of each dollar of resale revenue.

Operator, Operator

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

Thanos Moschopoulos, Analyst

Hi, good afternoon. Maybe just to follow up on Zix and accounting. When we look at your deferred revenue balance, would that have included some resale revenue in there that needs to be marked down to a net basis or were the elements in deferred as a public company that are already recognized?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, that’s a great question. Zix had adopted gross revenue accounting for their entire business, so that applies to the deferred revenue as well.

Thanos Moschopoulos, Analyst

So, even the resale revenue has some different elements in it that would be part of the deferred revenue balance?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, yes.

Thanos Moschopoulos, Analyst

Also, given that it’s going to have a higher gross margin profile, does that mean that once integrated, it might actually be above your target operating model?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, the convergence to a target operating model is absolutely our goal as we integrate and we mention the gross margin, which is important too because we expect that from a SAP Cloud-based business it will fall in the low 80s. We aim to make this clear just like we did with Carbonite.

Mark Barrenechea, CEO and Chief Technology Officer

Well, the short answer, of course, is yes; we’d look at it. It has to derive value, but of course we’d look at it. I'm very happy with our competitive position, but of course we look at it, and we’ll keep competing, and we’ve got a great campaign in the market.

Operator, Operator

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

Paul Treiber, Analyst

Thanks very much and good afternoon. In the prepared remarks, you noted double-digit cloud bookings growth, and I was wondering how important was content cloud 21.4 release this quarter to the growth of bookings? More generally speaking, how do we think about product cycles in the future? Do you expect to see ebbs and flows in cloud bookings around significant product releases or is that less of a factor?

Mark Barrenechea, CEO and Chief Technology Officer

Yes, Paul, thank you for the question and good to hear from you. There’s no doubt that our content cloud is a key driver right now. If we look at our customer wins, Novartis being a great example, they’re leveraging our content cloud by incorporating machine learning capabilities into many of their information-rich processes, from regulated documents to clinical trials. Volkswagen is another example, where they are generating 10 million documents a year across purchasing to warranty, all on our Cloud edition. The U.S. Army Corps of Engineers has been another significant win, and I’m proud to partner with one of the most prestigious engineering firms in the world. Everything is being managed through a single information platform supporting their projects, and we very much appreciate working together. Our 90-day cycles are essential; both 22.1 and 22.2 have contributed to some very impressive cloud edition wins. Innovation matters.

Paul Treiber, Analyst

My second question is, on the SMB opportunity. The products you mentioned have been acquired to build out your SMB portfolio. Should we expect more of the traditional enterprise-grade software from OpenText to be repositioned for SMB, or do you think that this market requires distinct products?

Mark Barrenechea, CEO and Chief Technology Officer

It’s a bit of both; it is a distinct product. Going back to our vision and our strategy for information management, it’s both in the cloud and at the edge, and we think both are really important. Data protection, information security, email security, EDR, MDR, and forensics are essential at the edge. We're focused on helping customers shift information from the edge to more cloud-based solutions. We innovate at the edge, and there are unique technologies for the edge. The edge encompasses both SMB and enterprise. Utilizing Zix’s technology, we think the email encryption integrates well into our experience cloud for security information in healthcare. The secure edge email security is going to be incredibly beneficial for our business network. Overall, it’s all multi-layered; it’s edge and cloud, both SMB and enterprise. While there are unique technologies for both, we also see a significant intersection where we can bring technologies together.

Paul Treiber, Analyst

Last one from me. I checked your developer website today and reviewed all the APIs available, which is quite a number. I was wondering, what’s the marketing strategy for the developer cloud? It seems like a different channel than enterprise sales. How do you plan to raise awareness of OpenText APIs for developers?

Mark Barrenechea, CEO and Chief Technology Officer

I’m delighted to hear you’re on the developer platform at opentext.com. Look, I think it’s one of the gems we have inside the company, and we haven’t cracked the scale code yet. It’s roughly a $100 million business today. Part of the strategy to unlock it has involved bringing Sandy Ono onboard as our new Chief Marketing Officer, and we are establishing a new internal group focused on go-to-market strategies. We believe we can attach API sales to platform sales effectively. For instance, when we secured Dickinson, we included some APIs in that sale on our business network. We've won over a dozen SAP customers for machine learning in capture. We think that’s a powerful strategy, and we aim to leverage our technology, know-how, and marketing expertise to create a comprehensive approach to raise awareness for our developer cloud. We are also going to provide a service platform to facilitate application building on top of it, ensuring ample opportunities for growth in that area.

Operator, Operator

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

Stephanie Price, Analyst

Can you talk a bit about the potential from the vehicle partnerships that you announced this afternoon? How are you thinking about that partnership evolving?

Mark Barrenechea, CEO and Chief Technology Officer

Yes, very good. Thanks for joining us, Stephanie, and good to hear from you. I focused my prepared remarks on our enterprise partners, and we’ve made significant progress in developing out our technology and strategy with partners. In relation to Google, we announced today a new MoU and greatly enhanced partnership in the enterprise context. We plan to jointly innovate, and we at OpenText will consume more of their platform for our customers and our use. Our content and experience platforms will be offered to their customers through their workspace platform. We’ll also build out a joint selling team, similar to what we’ve established at SAP and other collaborations, to engage with enterprise customers. This is a highly evolved and complete strategy aimed at moving to the next level of engagement around joint innovation, mutual consumption, and fostering the success of our enterprise clients.

Stephanie Price, Analyst

Great, thank you. Then switching to the SMB market, I’m curious about the ability to cross-sell other SMB solutions through the Zix partner channel, and what the timeline looks like for starting that?

Mark Barrenechea, CEO and Chief Technology Officer

Sure, I would highlight a couple of things regarding that. The first opportunity is to bring Zix products to Carbonite and Webroot customers. The second opportunity is to leverage Zix email security, which is a cloud service that processes 100 million emails daily. We plan to integrate that service into our SeaPass platform to enhance offerings in healthcare, automotive, and other significant EDI traffic. We also see a notable opportunity on the Microsoft reseller side; we have identified close to 5,000 MSPs in the Carbonite and Webroot world that currently do not have a relationship with Microsoft, and we are actively reaching out to them to introduce the cloud service platform from Microsoft. So, these are immediate, active, and tangible programs we are implementing to cross-sell and bond our offerings.

Stephanie Price, Analyst

That’s helpful. And finally, regarding customer support, it came down as a percentage of total overall revenue in the target model. Can you discuss the factors influencing this?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, Stephanie, I would say two things. One, it’s more of an adjustment as the cloud revenue increases, leading to a slight decline in the percentage of total revenues. That’s the main driver. Additionally, customer support continues to demonstrate very strong renewal rates, as expressed in our commentary. A factor also is the FX impact, which most notably influences customer support as well as cloud lines.

Operator, Operator

Our next question comes from Howard Leung of Veritas Investment Research. Please go ahead.

Howard Leung, Analyst

Thanks. And thank you for taking my questions. It doesn’t sound like, I guess for the Zix acquisition, a lot of the focus on the call. The marks are about the cross-sell, which makes sense. And it sounds like, I guess for the resale part of their business. Even with the larger side that OpenText and Zix combined, it doesn’t look like you’ll try to renegotiate those margins or trying to get a little bit of a list there.

Mark Barrenechea, CEO and Chief Technology Officer

Howard, welcome, and thanks for your question. There’s multiple vectors of opportunity. First, there are the Zix secure cloud products, which are positioned to enhance our integrations across data protection, information security, and email security. Our goal is to develop an integrated endpoint edge platform, and this acquisition will be a strong component in achieving that across data protection, information security, and email security. Second, there is our ability to cross-sell across our businesses, as noted, bringing Zix’s offerings to Webroot and Carbonite customers and vice versa. The resale opportunity is substantial; relationships define success and will be a force multiplier for us. We’re committed to leveraging our relationships with Microsoft and other partners to expand our reach beyond the existing 23,000 MSPs. Our strategy involves nurturing our existing ecosystem and bringing additional third-party resellers into our integrated platform.

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Howard, it’s Madhu here. Yes, I’d just like to add some thoughts as well.

Operator, Operator

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

Thanos Moschopoulos, Analyst

Hi, good afternoon. I just wanted to ask about the deferred revenue balance. Would that have some resale revenue that needs to be marked down to a net basis or does the deferred balance include amounts already recognized?

Madhu Ranganathan, Executive Vice President and Chief Financial Officer

Yes, Zix operated under a gross revenue accounting basis, so that applies to the deferred revenue balance as well.

Howard Leung, Analyst

Thanks for explaining the process. About the renewal rates; I know on the cloud side, they slipped a bit from 96% to 93%. Is there anything you want to call out there? Should we expect it to go back up or is the growth trajectory more about new deals than mid-90s retention?

Mark Barrenechea, CEO and Chief Technology Officer

Any given quarter will vary in the cloud renewal rate, but the trajectory is definitely into the mid-to-high nineties.

Operator, Operator

This concludes the question and answer session. I will now hand the call back over to Mr. Barrenechea for any closing remarks.

Mark Barrenechea, CEO and Chief Technology Officer

All right. Very, very, very good. Thank you for joining today. We welcome your feedback on our new format, where our quarterly shareholder letter provides key information. Madhu and I will be very disciplined to focus on the main points, shortening our prepared remarks to allow more time for Q&A, which we believe is the most important point of this call. We hope you’ll join us on March 1 for our Investor Day; the executive team will be present here in Silicon Valley live, and you are most welcome to join us either in person or virtually for our Investor Day on March 1. We look forward to seeing you then. Thank you.

Operator, Operator

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