Earnings Call
Open Text Corp (OTEX)
Earnings Call Transcript - OTEX Q3 2023
Harry Blount, Senior Vice President, Investor Relations
Good afternoon, everyone, and welcome to OpenText’s third quarter fiscal 2023 earnings call. With me on the call today are OpenText’s Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. Today’s call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website. Earlier today, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can be accessed on the OpenText Investor Relations website, at investors.opentext.com. I’m pleased to inform you that OpenText management will be participating at the following upcoming conferences: Virtual Investor Meeting hosted by Bank of America on May 10; Needham Technology and Media Conference on May 17, in New York; Barclays Leveraged Finance Conference on May 23 in Austin; CIBC Technology & Innovation Conference on May 24 in Toronto; BofA’s Global Technology Conference, June 7 in San Francisco; and Barclays Virtual Bus Tour on June 15. And now on to our Safe Harbor. 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 the risk factors that may project future performance results of OpenText are contained in OpenText’s recent Forms 10-K and 10-Q, as well as in our press release that was distributed earlier this afternoon, which may be found on our website. We undertake no obligation to update these forward-looking statements unless required to do so by law. In addition, our conference call may include discussions of certain non-GAAP financial measures. Reconciliations of any non-GAAP financial measures to their most current – 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 Mark.
Mark J. Barrenechea, CEO and Chief Technology Officer
Thank you, Harry, and let me welcome everyone to today’s call. This is our first quarter results since we acquired Micro Focus and the results and our progress are superb. In constant currency, we delivered 45% total growth, positive organic growth, over $1 billion in ARR, record adjusted EBITDA dollars, and 25% free cash flow as a percent of revenue. As I’ve always said, our results will speak for themselves. Use as a post-analogy, we are playing to win by fielding both a strong offense and a strong defense. On our offense, we have significantly expanded our mission in TAM for the acquisition of Micro Focus to now include enterprise security, digital operations management, applications automation, and AI. All in, we are addressing a 200 billion information management market. On our offense, Project Titanium is complete and affords new growth opportunities and fast APIs. We announced Project Titanium X and we are well positioned to help organizations complete their digital transformations and leverage the next generation of value through AI. Our go-to-market is focused on marquee customer segments that include the global 10,000, key governments, and tech-savvy SMBs. On our defense, we achieved ARR of 81% in growing organically upper quartile adjusted EBITDA dollars of $365 million in the quarter. We had upper quartile free cash flow at 25% of revenue or $306 million in the quarter. A capital strategy via our dividend targeting 20% of trailing 12 months free cash flow as free cash flow growth. So does our capital allocation and cost-efficient operations via automation. The world is multi-cloud. In fact, it is an internet of clouds, and information management is the interconnect for the internet of clouds. OpenText is in a unique position as the leader in information management. Our products, go-to-market, and employees are well positioned for continued growth and profitability, and we have momentum, and I like our on-ramps for additional growth. Continued transition from off-cloud to cloud, new public cloud SaaS products, introduction of large language models in AI, which I’ll speak to you in a moment. Climate innovation remains a top priority. Security and trust. Every company is a software company and has their requirements for developer and platform accelerators and of course the need to continue to consolidate around strategic providers and reduce costs. Our Q3 financial results are a reflection of customer and partner trust, a reflection of how information management is transforming business and a reflection of the dedication and expertise of our 25,000 employees. I am extremely proud of every OpenTexter. I cannot emphasize this enough. We view our business annually because it allows us to make the right short-term trade-offs and investments to enhance long-term performance. With that said, let me provide a few quarterly highlights. Total revenues of $1.28 billion, up 45% with positive organic growth and in constant currency over $1 billion in quarterly ARR and our ninth consecutive quarter of organic growth in constant currency. Cloud revenues were $444 million, up 10% with positive organic growth in constant currency. Trailing 12-month cloud bookings were up 9% and remain on track for fiscal 2023 cloud bookings growth of 15% plus. I’ll note that within Q3 our cloud bookings were constant at $108 million. We generated $265 million of adjusted EBITDA dollars or 29.3% adjusted EBITDA margin. Free cash flow was $306 million or 25% of revenue. Adjusted EPS of $0.73 and Micro Focus contributed strong revenues of $374 million since closing, reflecting customer excitement and confidence about being part of OpenText, and the show of support for our accelerated cloud roadmap. In summary, we delivered record Q3 revenue, record ARR, record cloud revenue, and record adjusted EBITDA dollars. We had fantastic customer wins at Carrefour, California EDD, Australia Post, PacLife, the MAN Energy Group, Air Liquide, and Hydro One, ranging from our content cloud to our security cloud. Transformation themes include the need to innovate faster, secure the infrastructure, improve service experience, and address software resource constraints. We had notable Micro Focus wins in enterprise security, mainframe migrations, and IT operations management. Government transportation and high-tech firms were at the top of the demand curve. Trust is earned, not given, and I’d like to thank our customers for their continued support. Today, we have revised upwards our fiscal 2023 revenue and cash flow targets. In constant currency, we expect to complete fiscal 2023 in the following ranges: total revenue of $4.54 billion to $4.61 billion, or 30% to 32% total growth with 1% to 2% total company organic growth. Cloud bookings growth of 15% plus. Adjusted EBITDA margin of 32.5% to 33.5%, and free cash flow of $580 million to $620 million. Our views on fiscal 2024 and fiscal 2026 remain strong and unchanged, and you can expect updates on our Q4 call when we kick off fiscal 2024. Let me speak about our markets and products. Project Titanium is our second-generation private cloud and second-generation API cloud. We announced at OpenText World EMEA that we have successfully delivered Titanium for Cloud Editions 23.2 and we are already seeing strong customer adoption from companies such as ANXe, Close Brothers, Stericycle, and solarisBank. Delivering on Titanium is a major milestone for us. It now includes full public cloud SaaS for enterprise content management, including SaaS content workflow collaboration, e-signature, case management, capture, archive, and records management. We have further expanded our public cloud SaaS capability that now includes not just the ECM core I just talked about, but ValueEdge, SMAX, Fortify, and Debricked. With Titanium delivered, we have fortified our support for customer choice off-cloud, private cloud, public cloud, and API cloud. This is another strong step to continuing our annual aspirations of 15% plus cloud bookings growth. Further, we announced Titanium X for Cloud Editions 25. Over the next two years, we will strategically invest approximately $2.5 billion to deliver Titanium X. We are a growth company, and it is the right time to invest and gain share. Here are the top five aspects of Titanium X. We intend to be the most trusted and secure information management cloud with NetIQ and Voltage integrated and built-in. It leads to a full cloudification of Micro Focus. There will be tens of thousands of new features and facets delivered every 90 days. We’ll introduce new clouds that include XDR-as-a-Service, IoT as-a-service, and a massively expanded developer cloud and AI, which means integrating idle across all of our major clouds, and adoption of private large language models or LLMs. So I’m going to use the acronym LLMs instead of always saying large language models. Last week at OpenText World EMEA, we previewed Titanium X integration into two LLMs, T5 and ChatGPT. At the heart of LLM is trusted information management. LLMs help enterprises upskill and reduce costs through text generation, information classification, knowledge answering, and dialogue generation. LLMs also help companies find new paths for growth. AI is an additional path of value for OpenText, including the other things we’ve talked about: cloud, climate, trust, and security. We are committed to delivering large language models to OpenText customers in the OpenText cloud, trusted, secured based on their reliable information. OpenText is in a unique position to help customers unlock the value of their information via LLMs and gain the information advantage. We are already working with strategic customers on specific LLM deployments. We’re working with a large legal organization to reduce contract risk. We’re working with a financial services firm to assess audit risk and an auto company to assess meantime to failure and service strategies. A biotech company is assessing the acceleration of their clinical trial processes, quality and regulatory submissions. We’ll deliver dozens of LLM use cases in our private cloud over the coming quarters as a standard product offering. There’s operational data, there’s experience data, and I believe there will be learning data. LLMs will be the third pillar of enterprise information management. Information is not the new oil. This is absolutely the wrong analogy. Information is the new water and our information management platform is the reservoir, feeding operational data, experience data, and learning data. We are making this a strategic priority and we will help our customers build their third pillar and their applications on top of it. We’ll keep you updated along the way. Let me provide an update on the integration of Micro Focus. We promised to wrap it in a results-oriented approach. The integration is ahead of schedule. Let me provide a few key highlights. First on the timeline, let me walk you through our major milestones and achievements. On people and organization, we are done. On our public product roadmap, we are done. On an F2024 integrated company plan go-to-market and customer engagement major approach, we’re done and ready to go. We will complete our systems integrations over the next four to six quarters, and it’s just fantastic to transition our time and energy to growing the business. So on growth, we’re committed to returning Micro Focus to growth in 93 days of owning and operating the business and based on Q3 results, we remain confident with onboarding the business this fiscal year, $2.3 billion in revenues in fiscal 2024 and returning to organic growth in fiscal 2025. On people, our people are the greatest resource of the company. We’re organized for growth, innovation, customer impact, and speed, with empathy and great care; we have completed the vast majority of our 8% workforce reduction. Now it’s our responsibility and privilege to carry the company forward on a new path to growth. On innovation, at OpenText World EMEA two weeks ago we announced the accelerated roadmap of Micro Focus products, including a full cloud roadmap. For DevOps, public and private cloud options available today for cybersecurity Fortify and Debricked available today. Full security cloud available by 24.2. A few more I wanted to call out: ITOM public cloud SMAX FinOps and UCMDB available today. All the other private cloud options are available between 23.3, 23.4, and 24.2. AMC private cloud available today and for AI and advanced technology, the vertical of private cloud will be available by 24.1. We’ve announced our full product roadmap for Micro Focus products. On L.O.V.E. recall when we closed the acquisition, we created a new customer success organization led by Paul Duggan, who we brought together into one organization support professional services, renewals, and cloud onboarding. We provided the organization with an enhanced mission that we call OpenText L.O.V.E, land, operate, value, expand. In Q3, the OpenText enterprise delivered 95% renewal rates for both on and off cloud. Our expertise and know-how will uplift Micro Focus customers and renewal rates into the 90s, and in the first 93 days the dialogue with customers has radically changed: innovation, cloud, and value. We expect by end of fiscal 2024 to uplift Micro Focus renewal rates from the low 80s to the mid-90s, and we will continuously improve this into the 90s in the coming quarters. Madhu will provide more detail, but let me add, we’re on track to our $400 million cost reductions and our capital structure plan of allocating 20% of trailing 12 months free cash flows via dividend and returning to a net leverage ratio under 3x. We promised a wrap it and results-oriented approach. Let me provide my final comments. There’s a lot of news this earning season on the demand environment. I’ve reviewed our key internal metrics from pipeline growth, closing cancel rates, and deal sizes. Our Q4 dashboard reads just as strong as our Q3 dashboard, so we are steady as it goes. Q3 highlights are potential, and we raise our annual fiscal 2023 targets for revenue and free cash flow. We are ahead of schedule on the integration, and we’re moving with speed and purpose. Fiscal 2024 is extremely promising as a unified company pursuing a $200 billion TAM with a cloud-first approach, with our preliminary target of near $6 billion in revenues, 36% to 38% adjusted EBITDA, and free cash flows up to $900 million while returning Micro Focus to constant at $2.3 billion in revenues. We’re in a unique position. The world is multi-cloud. In fact, it is an internet of clouds, and information management is the interconnect for the internet of clouds. Our products and go-to-market approach have us well-positioned for continued growth and profitability, and we now have an additional growth driver with AI, idle and large language models. My deepest gratitude to our 25,000 OpenText colleagues who did an outstanding job in Q3 delivering amazing results while managing many strategic priorities and who remained focused on creating the next generation of value for all our stakeholders. May the one that brings peace, bring peace for all. And let me turn the call over to Madhu Ranganathan, OpenText, CFO. Over to Madhu.
Madhu Ranganathan, CFO
Thank you, Mark. And thank you all for joining us today. As Mark highlighted, we delivered outstanding Q3 results above expectations across the board. This was driven by disciplined execution at OpenText, agile integration, and earlier than expected contributions from Micro Focus. In fact, we are just 93 days from a January 31 closing of Micro Focus. We are well advanced and ahead of schedule on our planned operational integration. We are expecting a strong Q4 finish to the fiscal year and today we are reaffirming our long-term targets and aspirations. I would like to remind all of you that we continue to view our business on an annual basis. This is reflected in the strength and growth of our annual recurring revenues and cloud bookings, which are generally longer-tenured than one year. As our customers make long-term decisions with OpenText, we will continue to drive strong quarterly performance each quarter on all fronts, and yet they all weave into the annual nature of our business in our long-term aspirations. Speaking to Q3 results, please refer to Page 12 of the investor presentation. All references I’m making here are in millions of USD and compared to the same period in the prior fiscal year and are on a reported basis on the slide state otherwise. On a year-over-year basis, total revenue was $1.24 billion, up 41% and 45% in constant currency, with Micro Focus contributing $374 million in the quarter. ARR revenue of $1.01 billion, up 38% and 41% in constant currency, 81% of total revenue. Cloud revenue of $435 million, up 8% and 10% in constant currency. Strong renewals, 95% for enterprise cloud and off-cloud as well at 95%. Enterprise cloud bookings were $108 million, constant year-over-year. Foreign exchange in Q3 was a revenue headwind of $34 million. Approximately half of this impacted customer support and the remainder had a significant impact on cloud revenue. This was our ninth consecutive quarter of organic growth and constant currency for both cloud and ARR. Moving to other financial metrics, GAAP net income was $58 million, down from $75 million primarily due to higher operating and interest expenses related to the acquisition of Micro Focus offset by tax benefits. GAAP gross margin of 70% versus 69% was led by license and an improved mix of revenue. Adjusted EBITDA of $365 million or 29.3% of revenue versus $284 million or 32.2%, up 28.3% and up 29.1% in constant currency. Breaking this down further, OpenText adjusted EBITDA margin was 32% with Micro Focus having an adjusted EBITDA margin of 23.1%. Our cost of sales and operating expenses were up $430 million on a GAAP basis, related to higher revenue and expense from the acquisition of Micro Focus and growth-related investments in R&D sales and marketing. We generated $337 million in operating cash flows in the quarter. Free cash flows in the quarter were $306 million, constant year-over-year and 25% of revenue. Working capital performance remains strong. Year-over-year, our cash position was impacted by the $5.7 billion purchase of Micro Focus net of cash, and $3.9 billion proceeds from debt and revolver. Our days sales outstanding (DSOs) were 45 days compared to 44 days in the prior year. Our Q3 DSO reflects the continued execution of OpenText paired with an agile integration of Micro Focus. We expected to make progress in Micro Focus working capital performance and in fact made significant strides two months from close, as reflected in our free cash flow performance. Needless to say, Micro Focus contributed well. Turning to enterprise cloud bookings, our in-quarter cloud bookings were $108 million constant year-over-year, and our trailing 12-month cloud bookings were $511 million, up 9% year-over-year. We remain on plan to deliver 15% plus enterprise cloud bookings for fiscal 2023. Turning to the balance sheet, please see Page 14 of the investor presentation. We finished the March quarter with approximately $1.4 billion in cash and $9.3 billion in debt. The increase in debt was related to the closing of the Micro Focus acquisition. Our net leverage ratio was 3.3 times for Q3 and reflects higher EBITDA, stronger cash flows, and lower net debt driven by higher cash balances. As for our debt and deleveraging plan, after we closed the quarter in March, during April, we further reduced the debt by $175 million as part of our minimum debt repayment commitment. Looking ahead, you may see net leverage ratios slightly fluctuate quarter-to-quarter based on our investments and the impact of special charges on cash flows. We expect to exit fiscal 2024 at 3.3 times or lower and are on track to be less than three times net leverage within eight full quarters. With respect to the banking situation today, I would like to share the following. At OpenText, we were unaffected by Credit Suisse, First Republic, Signature, or Silicon Valley Bank. Our banking footprint is centered on globally systemically important banks with strong capital ratios and solid balance sheets. Our investments are in money market funds that hold short-term government debt and AAA rated; we have minimal exposure to U.S. regional banks. Now let me speak about the continuance of our dividend program. We intend to grow our dividend as our free cash flow grows. The OpenText Board approved a cash dividend of $24.299 per share with a record date of June 2 and a payment date of June 23. Turning to outlook, targets, and aspirations, we plan our business in constant currency and present our business in constant currency for our quarterly factors. Total growth strategy and medium-term aspirations. Starting with Q4, fiscal 2023 quarterly factors in constant currency on Page 17 of our investor presentation. We expect revenue of $1.46 billion to $1.51 billion with OpenText being constant or better. ARR of $1.12 billion to $1.16 billion with OpenText constant. At exchange rates currently forecasted, foreign exchange will be a headwind of $10 million to $20 million. Adjusted EBITDA on a year-over-year basis, the margin percentage is down 350 basis points to 450 basis points. Continuing to reflect the Micro Focus integration costs, we expect FX to be an adjusted EBITDA headwind of less than $10 million. As mentioned earlier, we view our business on an annual basis; solid Q3 and year-to-date performance, along with our visibility and confidence in Q4, we are looking for a strong finish to the fiscal year, setting an excellent platform for fiscal 2024 and our long-term aspirations. Our fiscal 2023 total growth strategy and constant currency is provided on Page 18 of the investor presentation. You will see we’re increasing all revenue targets with price cloud bookings unchanged at 15% plus. Total revenue growth up 30% to 32%. ARR up 27% to 29%. Cloud revenues up 12% to 14%. Customer support revenue up 46% to 48%. At current exchange rates, FX would be a headwind of approximately $130 million to $140 million for the full year. Our fiscal 2023 target model, as noted on Page 19 of the investor presentation, remains largely unchanged except for a $20 million decrease in interest expense to arrange $330 million to $350 million. Our preliminary fiscal 2024 financial targets and fiscal 2026 medium-term aspirations also remain unchanged. These are included in our investor materials, notably on pages 4, 16, 20, and 21. Today we’re providing additional details on our financial integration framework. I would point you to a new slide on Page 21 of our investor presentation. This slide illustrates the timing and financial impact of cost savings, special charges, and integration expenses on adjusted EBITDA and free cash flow targets. Let me update you on $400 million in annual cost savings. Approximately $240 million of the savings comes from a workforce reduction that Mark previously commented on. The savings should begin to be realized in fiscal 2024. $140 million in annualized savings from vendor consolidations and strategic improvements will span across fiscal 2024 and into 2025. The balance of the savings will come from the elimination of redundant facilities, which will be substantially complete by the middle of fiscal 2024. We have previously highlighted $80 million of anticipated integration span to support systems alignment as well as other integration expenses. We expect integration expenses to span into the early portion of fiscal 2025. We have highlighted $380 million to $420 million in special charges that will continue to impact our near-term free cash flow, of this amount approximately $200 million will be related to severance, restructuring, advisory, and other charges spanning through the end of fiscal 2024. Approximately $200 million will be for global entity simplification, tax structure initiatives, and technology footprint optimization, primarily spanning most of fiscal 2024 and 2025. All of these charges, investments, expenses, and savings estimates are fully reflected in our targets and aspirations. Turning to fiscal 2023 free cash flow, we are raising our fiscal 2023 free cash flow range to $580 million to $620 million from our prior range of $500 million to $600 million. This upward revision reflects continued strong performance and agile integration of Micro Focus. In summary, we are very pleased with an outstanding Q3 performance. Having completed our initial integration of Micro Focus operations ahead of schedule, we remain on track to meet our near-term and long-term operating goals. We fully expect the momentum of OpenText to continue into Q4 for a strong finished fiscal year. On behalf of OpenText, I would like to thank our shareholders, loyal customers, partners, and team members as we embark on the exciting journey ahead. I will now request the operator to open the call for your questions.
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
Thank you and congrats on the first quarter of the combined entity. It seems like you delivered really well here and that was also my first question, Mark. Obviously, Micro Focus had a long journey of restructuring, integrating businesses, etc. What has been the experience so far in terms of what you’re seeing there regarding what your due diligence showed you and what you’re seeing in real life now that you’ve owned the asset and are working with the asset? Any comments here?
Mark J. Barrenechea, CEO and Chief Technology Officer
Sure. Thank you. Raimo, thanks for the question and thanks for joining us today. As I noted previously, we’ve always been very impressed with the products, the people, and the customers. You can do all the research and due diligence and observations you want, but then once you own and operate, you then get the next level of insights. And it’s just as we had planned in due diligence, we are extremely impressed with the people, the products, and the customers. We’re leading with innovation across the board. So enterprise security is never more relevant. Idle is just a fantastic product highly relevant today with AI, especially combined with large language models. The movement of digital IT, ITOM into digital IT into the cloud. So Raimo, I would just start with it’s as we had theorized and great to see in practice just the strength of the people, the products, and the customers, and how receptive they are to a broader platform of innovation and speed of innovation.
Raimo Lenschow, Analyst
And then the follow-up: is it actually, and you started mentioning it already with Idle and large language models. If you think about now that you’re on Idle and fear, you have the perfect combination because you have the content management side, and then you have the search side with Idle. Can you speak a little bit towards the cross-sell opportunity back into the OpenText space, and then, as part of that, how does that kind of change with the large language models coming in? It looks like it’s broadening it even further. Thank you.
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, absolutely. And you hit on a lot of very important topics there. We were the market leader in content management, and we’ve helped 10,000 organizations over a decade and two decades to organize our enterprise information management. We’ve added a lot of capabilities over time. We’ve helped customers take that information and expose it on the web. We’ve helped customers add search. We’ve helped customers do archive and records management. We’ve helped customers do legal tech on top of that. Now we’re going to help them go from not just their operational data and their experience data, but a third pillar which is learning data. We are in such a great position to help customers with large language models. I know ChatGPT has a lot of attention and GPT sitting for generative pre-trained transformers. But there are many other LLMs out there like T5. Our strategy will be to set up a transactional operational platform and an LLM platform for each of our private cloud customers and then have a connector between the two. What Idle does is help take data and turn video, voice, and imaging into metadata, making data useful. The private cloud LLM will sit next to every single private cloud customer. As I noted, we’re already working deeply with a handful of customers. One in legal tech who has millions of contracts is looking for risk, a financial services firm is going to augment their internal audit plans, an auto company is looking to create the next generation of service agreements, and a very interesting one, a biotech company that thinks they’re going to transform their clinical trials through a large language model. This could be a significant additive growth driver for us, not just off-cloud to cloud but also the move to SaaS or climate or trust. I’m spending a lot of time on it because it could be our top growth driver in the coming quarters.
Raimo Lenschow, Analyst
Yes, sounds pretty exciting. Thank you.
Madhu Ranganathan, CFO
Thank you, Raimo.
Operator, Operator
Our next question comes from Daniel Chan of TD Cowen. Please go ahead.
Daniel Chan, Analyst
Thanks. Congrats on the first quarter, Mark. I’ve noticed that there’s a big uptick in your customer support and license revenue growth expectations. I’m just wondering if you could shed some light on that, whether it’s from some of the early changes you’ve made to Micro Focus as a renewals business.
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes. Madhu, do you want to take the question?
Madhu Ranganathan, CFO
Yes, sure. I can take it and pass it on to you, Mark. Dan, yes, it certainly reflects the growth coming from Micro Focus. When you say some of the measures we’ve taken, yes, two months into it. As Mark mentioned, Paul Duggan’s organization has done an amazing job bringing their customer support, as we talked about in the last few months, and certainly continued measures from OpenText side on the customer support, whether it’s APA annual price adjustment, and you saw a renewal rate of 95% on both sides, enterprise cloud and off-cloud. So yes, you’re definitely seeing all those measures come into play.
Mark J. Barrenechea, CEO and Chief Technology Officer
Thank you, Madhu. So it’s partly given the integration with Micro Focus, OpenText performing extremely well off and on cloud at a 95% renewal rate. Dan, we’re going to make steady progress right on Micro Focus renewals from, we started in the low 80s, and this quarter we’ll finish in the mid 80s. We’ll just look to make continuous improvement until we get into the low 90s. We can already see the confidence building with a stronger roadmap and new innovation, private cloud options, and the confidence is rising. We had a fantastic week in Europe and just deep engagement. Customers are repeatedly expressing that you’ve earned the right for us to stay with you and give you a really strong chance. So that’s what you’re seeing.
Daniel Chan, Analyst
You also talked earlier about getting some Micro Focus wins in the quarter, just wondering whether these deals were in the pipeline when you acquired Micro Focus, or whether these are new deals that entered the pipeline over the last 90 days, and any update on the cross-sell pipeline would be great as well. Thank you.
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, so the deals we close are primarily in the pipeline. Of course, we’ve only owned the company for roughly 60 days. But the confidence of the combined entity gave them a lot of strength. As you can see in the results, we’ve built new pipeline for sure. The areas that have shown strength inside of Q3 certainly include our content services business and our business network volumes that were up. The enterprise security business is a rising star for us and also moving workloads off the mainframe to our cloud services gives us a better position than Micro Focus had on their own.
Operator, Operator
Our next question comes from Steve Enders of Citi. Please go ahead.
Unidentified Analyst, Analyst
Hi, this is George on for Steve. Just going to echo my congratulations on a really strong start to this new journey. First question on Titanium X, you threw out a $2.5 billion investment number. Obviously a big number, but a big opportunity as well. Just could you help us understand how much, if any of that is kind of incremental spend? Is there any kind of repurposing of existing resources towards this and just how we should think about that?
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, for sure. If we look at fiscal 2024 and 2025, we’re looking at approximately $2.5 billion across engineering and cloud operations. We own and operate our own private cloud and our own business network, so that’s all investment. Looking at the combined company, as I said earlier, it wasn’t so much a spend issue, but a prioritization. We have significantly reprioritized what we’re doing in our first 93 days, as you can see from enterprise world and the roadmaps that we’ve published. It’s mainly a reprioritization, but it’s also an increase in people. So as part of our workforce restructuring, we’re also increasing our headcount in Canada, India, and the Philippines. The combined spend, we’re keeping high. We’ve reprioritized and are also adding more people because we’re being more leveraged in how we spend those dollars.
Unidentified Analyst, Analyst
Got it. Really helpful color. As a follow-up, most metrics came in well ahead of where we were at, but just wanted to dig in on the cloud bookings in the quarter. Obviously a metric that’s going to have quite a bit of fluctuation from quarter to quarter, but just if you could help us understand what you’re seeing there and how we should think about that going forward.
Mark J. Barrenechea, CEO and Chief Technology Officer
Absolutely. Again, as noted we’re up 9% on a trailing 12-month basis. We’re holding to our forecast of 15% plus growth for the year. We stayed constant in Q3. Madhu and I emphasize we’re an annual business. I can’t say it any clearer than the following: we’re going to make the best long-term decisions for the business, and it’s better for OpenText not to work under the pressure of the last week or two of a quarter. So it’s part of the reasons why we view our business annually. We’re going to get the best terms, work with the customers as needed, and use an annual boundary, not a quarterly boundary. So we’re still on target for our 15% plus cloud bookings growth, even though we are constant within the quarter. We have great confidence in Q4 to deliver that 15% plus.
Unidentified Analyst, Analyst
Great. Thanks again and congratulations.
Mark J. Barrenechea, CEO and Chief Technology Officer
Yep. Thank you, George.
Operator, Operator
Our next question comes from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.
Thanos Moschopoulos, Analyst
Hi, good afternoon. Mark, Micro Focus obviously performed a bit better than you had anticipated last quarter. Just to clarify, was that primarily conservatism on your part with prior guidance, or is there anything more specific that you would point to?
Mark J. Barrenechea, CEO and Chief Technology Officer
I’d point to a handful of things, Thanos. One is confidence. As I said in my notes, it’s a new day. Customers renew and make purchasing decisions not just for the features you have today, but for where you are bringing them in the coming years. That’s why we accelerated; we did all our pre-planning and accelerated getting our roadmaps intentionally designed to get onto the road in Europe and elsewhere to present in person that roadmap. So number one is confidence and excitement from our 25,000 employees. We’re also modeling; it’s just two months since acquisition. We moved them from two, six-month cycles to our 490-day cycles. It’s not conservatism; it’s about confidence, execution, and a stronger roadmap and an energized workforce.
Thanos Moschopoulos, Analyst
Great. And then...
Mark J. Barrenechea, CEO and Chief Technology Officer
And I guess Thanos, I’d add maybe one more point, which is we executed really well.
Thanos Moschopoulos, Analyst
Great. And then on Titanium now that you’ve launched it and have public cloud for a broader suite, can you talk about how public cloud adoption is trending as you look at the pipeline? And remind us; is there any cannibalization dynamic where if a customer chooses public instead of private, do you get less revenue because you’re losing the infrastructure hosting piece? Or should we think of it more as added revenue that you may not captured otherwise given that you’re not supporting public cloud?
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, for sure. The Titanium delivered or cloud edition 23.2 is a really important milestone for the company. ECM now has a full public SaaS option. We can deliver content management off-cloud, public SaaS cloud, private cloud, and API cloud. It’s clear that our features will outpace public SaaS anywhere else. We now have a very strong portfolio of public SaaS. Our entire SMB is completely public cloud. Our business network is entirely public cloud, and ECM is now completely public cloud. We made a massive update to service management in the public cloud called SMAX from Micro Focus. We did a significant update at the end of April for ValueEdge or our developer technologies. Fortify on demand is available as a public SaaS option. We expect public stack to become a more significant part of our narrative. I do not see a cannibalizing revenue; I see us going after new workloads. Customers transitioning to new workloads will pay the same or expand their capacity and increase their consumption with us. We’ve never been interested in revenue substitution; we’ve always been interested in adding revenues, whether it be API or private. I believe the same dynamic will hold for public SaaS as well.
Thanos Moschopoulos, Analyst
Thanks, Mark. Congrats and I’ll pass the line.
Mark J. Barrenechea, CEO and Chief Technology Officer
Thank you, Thanos.
Operator, Operator
Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.
Paul Treiber, Analyst
All right, thanks very much and good afternoon. Just a follow-up question on the strength that you saw in Micro Focus. There’s a five-month period between the announcement of the acquisition and the close. Was there to a degree a catch-up of license deals that may have been sitting in the pipeline after the acquisition was announced? Were any just waiting to close, and they needed that confidence of the acquisition closed to complete those deals? If so, do you see that catch-up continuing into future quarters or is it more just a one-quarter phenomenon?
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, Paul, thanks for the question. I wouldn’t use the terminology catch-up. There’s no doubt it was confidence and execution. It’s a little bit of modeling. We only had the business for 60 days, and we’ve aligned to our quarters. April used to be a boundary for Micro Focus; it no longer is. Now it’s end of March, July used to be a boundary; now it’s end of June. Those memories of boundaries are becoming distant memories for the combined workforce. Sure, there was a little hesitation but nothing significant that I would call out. It’s about confidence, execution, a stronger roadmap, and an energized workforce.
Paul Treiber, Analyst
That’s helpful. From a forward-looking point of view in terms of your pipeline, how do you see it building here? Particularly in light of the macro environment, is there any impact? If so, how is it impacting that?
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, every company is observing the macro. When we look at our dashboard, we run well operationally; we have a single global instance of Salesforce that we use with several tools that we have for correlation analysis. Looking at our dashboard of new pipe, we generate, deal metrics, and customer dynamics, it reads the same in early Q4 as it did in early Q3. Steady as it goes. One dynamic for us is adding more SaaS. Our SaaS portfolio stood up significantly, following Cloud Editions 23.2 and some acceleration within ITOM, application automation, and developer automation. A significant dynamic for us will be becoming experts at building a SaaS pipeline as that’s a new motion for us and our customers. Large language models are real. Generative pre-trained transformers have been out there for a while, and T5 is a great open-source version. There are a few other versions, and ChatGPT has captured everybody’s imagination. This is a major component that we’re going to lean in on, standing up a private platform next to every private cloud customer or even if you’re using our public SaaS, we’ll set up a private instance for you for large language models. This, too, will be a growth driver for us in the pipeline.
Paul Treiber, Analyst
Okay, great to hear. I’ll pass the line.
Mark J. Barrenechea, CEO and Chief Technology Officer
Thank you, Paul.
Operator, Operator
Our next question comes from Stephanie Price of CIBC. Please go ahead.
Stephanie Price, Analyst
Hi, good evening. Congrats on the quarter. I just wanted to zoom in on the fiscal 2024 target model here. It’s unchanged despite the strong Q3. Just curious if you could talk a little bit about where you might have baked some conservatism into fiscal 2024 and what the puts and takes are as you look at the fiscal 2024 target?
Madhu Ranganathan, CFO
Yes, Stephanie, it’s Madhu here. I’ll take it on and hand it over to Mark. Thanks for the question. We are leaving it unchanged for all the factors and even the prior questions that were asked, and our focus remains very strong on Q4. Mark and I have shared with you the sentiment relating to Q4, and we’ll be observing the macro. We look forward to delivering a strong Q4. Certainly, if things merit at that point of time, we’ll make adjustments to fiscal 2024 and 2026. But the good news is we are keeping fiscal 2024 and 2026 the same as it is today. That would be my response.
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, I mean, the only thing I’d add, thank you, Madhu, is we have our usual cadence that when we complete the year and announce Q4 and kick off the next two years, we’ll give an update on fiscal 2024. So as Madhu noted, we’re holding to and reconfirming our preliminary targets of near $6 billion in revenues, 36% to 38% adjusted EBITDA, and free cash flows up to $900 million. We’ll give an update on next quarter's call.
Madhu Ranganathan, CFO
Yes, just a couple things to add; thank you, Mark, is to say to the earlier questions as well: Our premise was to apply the strong OpenText operational methodology to Micro Focus. The returns on that premise have certainly been strong, as you can see. It gives us a step-up confidence in how we approach main Micro Focus. A big portion of that is one-and-done with this quarter’s performance, and you’re only going to see continued momentum. We are sharing color on Slide 21 I just highlighted about how the components of free cash flows will place. As we close the year, we’ll come out with updates as needed.
Operator, Operator
Once again, if you have a question, please press star then one. Our next question comes from Adhir Kadve of Eight Capital. Please go ahead.
Adhir Kadve, Analyst
Hi guys, let me add my congratulations to the strong quarter here. Mark, last quarter, you mentioned six markets that you’re going to go after trying to get the full stack in each of those markets. I know it’s only 60 days into the Micro Focus acquisition here, but where are you really seeing the most promising go-to-market motions out of those? I know you kind of talked about some of them, but just maybe digging deeper into what’s really exciting you after that?
Mark J. Barrenechea, CEO and Chief Technology Officer
Yes, it’s like having six beautiful children and loving every single one of them, Adhir. Let me highlight a few. No doubt that content services is cool again, and it’s all about offering it any way a customer wants, including public SaaS and the value proposition of investing in this platform. There are seminal moments along the way, and the large language models are a seminal moment as to why you want to consolidate and standardize on a modern cloud content platform. So content service is absolutely at the top of the stack for us. Next to it continues to be cybersecurity, and for all the obvious reasons I talk about in tech: our tech forms about vectors of attack, whether it be network, email, endpoints, applications, identity. We just have a lot of optionality on cybersecurity given we cover each of those vectors of attack. Developer: every company is a software company. The application automation platform is very robust and is going to thrive inside of our 9,000 developers in a developer mindset in bringing that to market. I’ll just highlight those three. Of course, with supply chain changes in our business network, moving workloads off the mainframe, which is just one of the worst climate platforms you could be on, we’re going to benefit from moving those workloads as well. But I’ll put content cybersecurity and the developer/application automation at the top of the stack for us right now.
Adhir Kadve, Analyst
Excellent. Just one more and then I’ll pass the line. You’ve talked a lot about large language models. Can you give us a sense of what sort of investments it’ll take for OpenText to really get there and allow you to stand up this private platform for all your customers?
Mark J. Barrenechea, CEO and Chief Technology Officer
We’ve already stood it up. The fact that we have 800 to 900 people in our private cloud operations has allowed us to take T5 open-source and stand it up. And through our professional services organization and our cloud operations, we are open for business today to stand up any open-source LLM for customers and connect it to their private cloud. This is the benefit of scale; it’s why the private cloud was so strategic for us. You see yet another reason why we own our own professional services organization with 2,000 people. Within our R&D budget, we’ll build our connectors and our feeders, et cetera, but we already have our first platforms up and operational.
Adhir Kadve, Analyst
Excellent, guys, congratulations again. I’ll pass the line.
Madhu Ranganathan, CFO
Thank you.
Operator, Operator
Our next question comes from Richard Tse of National Bank Financial. Please go ahead.
Richard Tse, Analyst
Hey, thank you. I just have one question. Mark, you talked a lot on this call about confidence here, and I’m just trying to understand, maybe get more specific, like where is that confidence coming from? Is it confidence in your balance sheet and the tech and the support? What were Micro Focus’ customers not confident about before?
Mark J. Barrenechea, CEO and Chief Technology Officer
They weren’t sure where the company was going to go, whether it would fall into the hands of private equity and be reduced by a 20% expense—where divisions would be sold off. Customers make decade-long decisions in the enterprise. If it’s uncertain where that platform’s going to be in 90 days or even a year, people hesitate. We purchased the entire company. We’re operating the company fully. We published a roadmap for each group, and we have a fantastic reputation as a steady innovator for our customers, many of whom we share. That’s where we’ve gained confidence.
Richard Tse, Analyst
Right. And I know why that was the last question, but I guess related to it: the fact that you’re kind of just not even a quarter in, it’s reasonable to think that that confidence would actually scale. Is it reasonable to think that the numbers you’re putting out there, even though you’re taking the numbers up, are still conservative?
Mark J. Barrenechea, CEO and Chief Technology Officer
Madhu has taught me never to use the word conservative, so I won’t. Look, we call it as we see it as we always have. Our Q4 dashboard is as strong as our Q3 dashboard. We’re calling it how we see it right now. We’ve raised our fiscal 2023 revenue guidance targets to $4.54 billion to $4.61 billion, with total growth up to 32%, well, 1% to 2% organic growth, with cloud bookings growth of 15% plus, adjusted EBITDA margins up to 33.5%, and free cash flow up to $620 million. We let results speak for themselves when we deliver them.
Madhu Ranganathan, CFO
Yes. Richard, I would just add, and thank you, Mark, to all the comments you heard about the aspects of integration; Mark called out as done and what I highlighted. We are delighted to be where we are as a company with Micro Focus and the performance that we were able to generate, which was our premise that we could apply an operationally excellent methodology. But as we’ve done better than we had anticipated gives us momentum to keep improving.
Harry Blount, Senior Vice President, Investor Relations
Operator, I think that’s the last question.
Mark J. Barrenechea, CEO and Chief Technology Officer
Okay. Well, Harry, Madhu, thank you very much. Thank you everyone for joining today’s call. We look forward to seeing you at Needham, BofA, Barclays, CIBC, and our remarks were written by two human beings and not ChatGPT. So have a great day.
Operator, Operator
This concludes today’s conference call. You may disconnect your lines. Thank you for participating. Have a pleasant day.