Earnings Call Transcript - OTEX Q2 2025

Operator, Operator

Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation Second Quarter Fiscal 2025 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, star then zero. I would now like to turn the conference over to Greg Secord, Head of Investor Relations. Please go ahead.

Greg Secord, Head of Investor Relations

Thank you, and good afternoon, everyone.

Mark Barrenechea, CEO

Welcome to OpenText's second quarter fiscal 2025 earnings call. With me on the call today are OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea, OpenText President, Chief Financial Officer, and Leader of Corporate Development Madhu Ranganathan. And joining us for today's Q&A session are OpenText President Worldwide Sales, Todd Cione, and OpenText President and Chief Customer Officer, Paul Duggan.

Greg Secord, Head of Investor Relations

Okay. Excuse me. Today's call is being webcast live and recorded with a replay available shortly thereafter on the OpenText Investor Relations website, which is investors.opentext.com. Earlier today, we posted a press release on our website, including our investor presentation, a supplemental RPO disclosure, and all of those are available on the OpenText Investor Relations website. OpenText will be participating in the following upcoming investor conferences: Susquehanna Financial Group on February 28th, which is a virtual conference, Morgan Stanley Technology Conference on March 3rd in San Francisco where I'll be joined by Madhu, and the Scotiabank Telecom Media and Technology Conference on Wednesday, March 5th in Toronto I'll also be joined by Madhu. Now, on to the reading of our Safe Harbor statement. During this call, we will be making forward-looking statements relating to the future performance of OpenText. These statements are based on the 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 future performance results of OpenText, are contained in OpenText's recent forms 10-Ks and 10-Q, as well as in our press releases that were distributed earlier today and 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 again are available on our website. And with that, I'll hand the call over to Mark.

Mark Barrenechea, CEO

Thank you, Greg, and welcome to our Q2 earnings call. Since the Micro Focus acquisition and the AMC divestiture, I've been focused on getting our business model right and building a solid operating foundation to support our full growth potential. Our number one priority was margin, and with our first half performance and strong Q2 operating results, we've delivered. Now we're ready to make growth our new number one priority. Today, I'm going to provide insight into our large growth opportunity, outline some of our challenges that are in focused areas, provide insight into our revised FY25 outlook as well as provide expanded and new insights into RPO and cloud CRPO. Overall, you will notice a new style and approach to communications today. We look forward to your continued feedback as we build a market-leading information management company. In Q2, we delivered $501 million of adjusted EBITDA dollars or 37.6% adjusted EBITDA margin. $307 million of free cash flow, $1.11 of adjusted EPS, each of these metrics up significantly excluding AMC. We grew our quarter-over-quarter cash to $1.12 billion and within the quarter, we purchased and retired 2.2 million shares at an average price of $29.82. And over the last three quarters, we deployed approximately $300 million in cash and purchased and retired 10 million shares at an average price of $30.30 USD. Expect us to continue to implement our current buyback program and reduce our shares outstanding. On revenue, we delivered $1.33 billion, down 4.9% excluding AMC. Cloud revenues grew 2.7% and we closed $250 million of new cloud contract value. This is a record quarter of customer demand for cloud and new bookings with 6.1% year-over-year growth. Further, in January, we completed the significant transition services agreement with Rocket Software related to our $2.28 billion acquisition of AMC, which closed last year in May of 2024. I'm proud of the team for their amazing work over the last eight months as they performed with excellence and professionalism. The divestiture was complex and time-consuming. It is now complete and we have a new corporate muscle. These are all important contributors to our long-term success but let me be clear. We are steadfastly focused on our growth performance as our new number one priority. Q2 reaffirms that the world's most trusted companies trust OpenText. As demonstrated by new wins at Bosch for Legal Tech, STMicro for the developer, BASF using our business network for global supply chain, Novo Nordisk for observability and service management, and GWC Qatar for content. We win for three core reasons. We are the experts in information management, provide exceptional transformative value to our customers, and we always deliver a compelling roadmap across our market areas inclusive of cloud, security, and AI. Let me turn to our growth opportunity. We're surrounded with opportunity, and we're focused on intelligently growing our business and driving higher profits. Returning to organic growth will happen in three steps. First, total company growth, second, cloud grows faster, and third, maintenance grows. Let me walk through our top growth opportunities in key areas we are looking to outperform in. The first is in our installed base. We have a marquee installed base with 120,000 enterprise customers. We will complete next quarter the delivery of TitaniumX or cloud editions 25.2. We view each customer as an opportunity to upgrade to TitaniumX. We expect to upgrade customers in place, upgrade them to the cloud, and expand capabilities wherever they run their workflows. If they choose not to upgrade, support fees will gradually rise over time. This is a multi-year opportunity for us in our installed base. Next, we have a hot hand with content and AI, that creates intelligent content management, secure collaboration, and automated workflows. SaaS and AI are core drivers to continue our growth in this key category where we look to outperform. We had large SaaS wins last quarter at SAP, BASF, Aldi, and Munich REIT. The third is investing in our security business to be a top category for OpenText. Mui Mizuh has taken on a new role to solely focus on security. Our new security cloud spans identity, applications, networks, forensics, and soon XDR. This is our ability to ingest, detect, and respond on a massively scaled vertical database combined with our new partnership with Microsoft Security Copilot, and all hosted on Azure, puts us in a key position to win in XDR. We had amazing SaaS wins in the quarter, Nextly, in Fortify, code-level security, frost bank and voltage transaction encryption, and Capgemini for identity management. We have turned around the micro-focused security business. Growth strategy also means embedding AI everywhere to empower knowledge workers to significantly raise their productivity. With Titanium X, we will have at market fifteen aviators and over a hundred agents. Beyond TitaniumX, we are working on Agentech AI across all our product lines, creating a new type of corporate worker, called a digital worker. Aviators work with TitaniumX, so the next wave for AI is upgrading customers to TitaniumX. We are also still very much in the license business. This is a meaningful mechanism for customers to own, not subscribe to our information management capabilities. I'll speak in a moment to the grants of certain IP rights from last year. Excluding these grants from last year, our license business will grow in the fiscal year. We introduced in January a new mechanism for customers to own our technology via a license. We call it the OpenPath Hello. A perpetual end-user license agreement. The OpenText Pella is an uplift on existing licenses and maintenance allowing the customer to remove limits on their usage while in active support. In addition, these customers gain cloud credits for future consumption, thus providing an additional incentive to purchase the Open Pass. License and maintenance growth are intrinsically related. It's important to note that while our core maintenance business continues to return impressive results, the ITOM and ADM areas are not growing this year due to the license performance. With this, our total maintenance revenue growth rate will be negative this year. Our return to total maintenance growth is centered on three programs. Continued execution on APA and premium services, two, selling more licenses including ITOM and ADM and OpenPASS, and three, new advanced customer services or ACS. We are focused on growth, we will return to growth and we'll update you on our year-end call. Paul Duggan is on the call today to answer any questions you may have about our growth plans and the next steps in the business. Our next top growth opportunity is getting our ADM and ITOM businesses performing better, getting them to their best, including their cloud growth. These areas have been holding back our growth and impacting our license and maintenance revenues as noted above. Our new Chief Product Officer, seventy-eight Barry, who rejoins OpenText from Ericsson and Vonage, will be laser-focused here. Let me walk you through our actions and confidence in returning these two groups to overall growth. On ITOM with Titanium X, we are differentiated in observability which includes discovery assets, vulnerabilities, and IT and IT service management, where we're expanding to corporate service management. We plan to relaunch and reengage our five thousand customers with our new observability cloud and our new service management cloud conjunctive with ramping sales go to market and professional services. The next leg of ITOM growth will be driven by expanding outside of traditional IT workflows into employee workflows, customer and industry workflows, and the merging of IT and operational workflows. On the ADM side, we have reoriented our go-to-market strategy as a top-of-market focus. ADM is differentiated not for a single developer but for large-scale organizations who are writing software. This is a really good place to be as we are all software companies today. Our top industry focus includes software and cloud companies, financial services, auto, telecommunications, biotech, and more. With this new strategy and with TitaniumX, we have two key SaaS wins already in Q2, at Pfizer and Lilly. I am confident we'll return to growth with TitaniumMax SaaS AI and our top-of-market focus. We're also live internally across ten thousand engineers for requirements management, productivity insight, lease management, and quality. We took all our requirements and put them in the product, and now that's part of Titanium X. I find when you can run the software yourself and gain value, you build strong momentum from there. Next growth opportunity continues to be with our hyperscale of partners. Who play an expanded role in our cloud growth. Real simple, Microsoft. We've decided to bring our XDR to market on Azure, integrated with Microsoft Security Copilot. Our new SaaS platform and our new sovereign capabilities run on GCP. Our private cloud runs across all the hyperscalers for customer choice, but AWS, GCP, and Azure. Our SAP products run in the SAP cloud and across all hyperscalers, and as I said at OpenText World, we make multi-cloud work. And these partnerships will contribute markedly. And finally, in addition to all these organic programs, we will continue to evaluate strategic opportunities to create value and or increase our growth rate through divestitures, or combinations. With growth as our new number one priority, I want to present our new RPO disclosures and new cloud CRPO metric that will provide insight into our cloud growth over time. There are two strategic points I'd like to make, and then Madhu will go into detail. First, we are now providing further insight into RPO. Both for cloud and maintenance, both current and non-current. As you can see from ending Q2, Cloud RPO was $2.3 billion and larger than our maintenance RPO at $1.8 billion. Please note, this is now for the entirety of our cloud business and fully includes enterprise and SMB. There's no more asterisk on our disclosure. Including this, not including this. This is our full cloud business. Second, we're also introducing a new metric cloud CRPO. And what flows in and what flows out and a common-sense formula to calculate the change in cloud CRPO from a beginning period to an ending period. We also include an example contract waterfall. We designed our disclosure after viewing market-leading cloud companies, including SAP and Salesforce. And, of course, we welcome your continued feedback to improve even more. Now we're also including periods ending June 30th, 2024, September 30th, 2024, December 31st, 2024, and we'll provide these new disclosures every quarter going forward. When we complete this fiscal year, you can then begin to gain further insight by tracking year-over-year cloud CRPO compares and growth. With always a good time to provide a deeper insight into RPO. Let me move on to our financial targets. And turn to our updated FY25 targets. We're revising our revenue downward by $130 million to a range of $5.175 billion to $5.27 billion. The $130 million is broken out approximately 25% FX, 25% DXC impacting license and maintenance, and 50% from ITOM and ADM performance impacting license and maintenance. We added a slide nine to our investor presentation to provide detailed insight into the $130 million. Now conjunctive with this, our cloud revenue range is unchanged. Our adjusted EBITDA percent target is unchanged. Our new cloud bookings growth range is 20% to 25%, representing a very strong second half and momentum into 2026. We're raising our free cash flow range to $600 to $650 million. We're on track to delivering $570 million plus of record capital return to shareholders this year through dividends and buybacks. Our FY26 and longer-term aspirations remain unchanged. And our next update on our longer-term view will be on our year-end call. Like all businesses, we're monitoring the impacts of tariffs, currency, and the transactional nature of US policy; all of these items are creating some business uncertainty. Let me turn to DXC for a moment. It's well-crunched that HP DXC and Micro Focus had a strategic relationship where DXC was a major reseller and consumer of HPE and Micro Focus software. During Q2, the long-life Micro Focus alliance agreement with DXC has now run its course. And that reflects the end of an unlimited deployment model with DXC. We did not come to a mutually beneficial new agreement. This ending is the best outcome in the long run for OpenText, as we're able to establish now full value for our software and engage customers directly. However, in the near term, it creates some headwinds for renewals and maintenance revenue in the half of the year. Second half of fiscal 2025. More importantly, it positions us for success in 2026, which is growth. DXC remains a partner, and we hope to build a forward-looking partnership from here. As we discussed during our last earnings call, Q2 and FY25 are difficult year-over-year comparisons. Please recall in fiscal '24, we disclosed license revenue up primarily from the inclusion of Micro Focus and grants of certain IP rights. This was particularly called out within Q2 and Q3 of last year. I want to give a really important perspective here; when you're looking at the core health of our business and the foundation we are building on, for growth as our new number one priority, excluding AMC, excluding license revenue from grants of certain IP rights, and excluding the FX impacts, our FY25 year-over-year revenue growth would be constant, not declining. And excluding the same half DXC impact would be growing. And further and very importantly, we expect the company to return to bright line organic growth in Q4. Hope you find this insight helpful.

Greg Secord, Head of Investor Relations

Let me wrap up.

Mark Barrenechea, CEO

Some qualitative comments as we look over the remainder of fiscal '25. Post AMC divestiture, margin was clearly our number one priority. With our first half results and our Q2 delivery, we have delivered. Now that we've delivered, we're setting a new number one priority, which is growth. We have our business model right, and our operating foundation strong and with a Q2 adjusted EBITDA of 37.6%, $307 million of free cash flow, and raising our free cash flow outlook for the year. Our growth challenges are in focused areas, and we have a clear plan to resolve them in the short term with a more focused leadership team. We expect Q4 to have bright line total revenue growth, and this sets us up for a successful FY26. We're excited about the opportunity of growth in Titanium X, content, security, AI, SaaS, getting ITOM and ADM to its best, improved sales execution, open pass for license, advanced customer services for maintenance, all expanding our competitive advantage. I'd also like to note that near 60% of our business is in the US, and the new administration is focused on pro-growth initiatives and investments like SMB and expanding manufacturing. We're excited about these pro-growth opportunities ahead of us in the United States. Growth plus competitive advantage plus margin and free cash flow expansion plus capital return is the OpenText formula for creating exceptional shareholder value. You asked for more transparency into the exceptional items and our cloud, so I hope you find the deeper insights helpful today. You have my full commitment to continue this style of communication. But let me end with, we're making progress, the leadership team is focused, and we will not rest nor be satisfied until we deliver photo growth, cloud growing faster, and back to maintenance growth. With that, let me turn the call over to Madhu.

Madhu Ranganathan, CFO

Thank you, Mark, and thank you all for joining us today. Please refer to the IR materials posted on our website. In Q2, we demonstrated the strength of our operating model delivering 37.6% adjusted EBITDA, a significant achievement and that reflects our operational efficiency as a larger company. Today, I will also present expanded disclosures and new metrics relating to RPO and CRPO. In specific instances, I will provide year-over-year comparison excluding the impact of AMC divestiture. And moving to financial metrics, GAAP net income was $229.9 million or $0.87 diluted EPS. Non-GAAP diluted EPS was $1.11, down 10.5% due to the impact of AMC divestiture. GAAP gross margin of 73.3% was down from 73.6% year over year. Non-GAAP gross margin of 77.2% compared to 78.6% due to higher margin license revenue in the prior year from AMC and IP rights. Non-GAAP cloud gross margin was strong at 63.3%. Adjusted EBITDA of $501.5 million or 37.6% continues to reflect our extreme operational focus to capture our large margin opportunity. Operating cash flows of $348 million and free cash flows of $306.7 million DSOs at 43 days one day higher than 42 days from last quarter and down four days from Q2 last year at 47 days and that reflects the strength of our working capital in what is seasonally the highest billing quarter for us. Moving to Outlook. First, let me draw your attention to our Q3 quarterly fact included in slide twelve of our investor presentation. We expect $1.26 billion to $1.3 billion of total revenue and ARR of $1.025 billion to $1.045 billion. We're targeting Q3 adjusted EBITDA margin of 29% to 30%. And let me recall that while our fiscal year-end is June 30th, January of each year stops the clock for employee salary uplifts, higher benefits and vacation accruals. To note, our total spend in Q3 would be approximately 8% higher on a quarter-over-quarter basis due to the factors I just noted. Yet 3% lower on a year-over-year as we continue to optimize our expense models. Mark has provided you with an insight into our updated fiscal 2025 outlook and that there is a clear path ahead to address near-term challenges. We remain on target for our fiscal 2025 adjusted EBITDA target of 33% to 34% and have increased the free cash flow range to $600 million to $650 million for the year. Now let me offer more details on our expanded disclosures relating to RPO. Please refer to supplemental materials on our IR website which include expanded disclosures to be read alongside our Form 10-Q, page thirteen of the filing today. You will see total RPO of $4.1 billion including cloud RPO $2.3 billion and customer support aka maintenance and other RPO $1.8 billion. For cloud, Current CRPO is a new metric. The percentage to be recognized for the next twelve months is approximately 50%. The remainder is the balance beyond twelve months. We want to provide additional insights and sharing two numbers relating to cloud revenue in any given twelve months. Approximately 60% of the cloud revenue arises from CRPO current RPO balance and the remainder of the 40% is contributed in year by revenue from in-year new business and revenue from in-year renewals. Do refer to our strong cloud renewal rates, revenue from in-year uncommitted business, which includes business not uncommitted contracts and contracts more aligned to consumption models like our business network. Page four of our supplemental materials for details on the cloud CRPO model and a cloud contract example on pages five and eight. Our enterprise cloud bookings of $250 million for Q2 flow completely into the cloud RPO balances and only the current portion of those bookings flows into CRPO. For customer support, the percentage to be recognized for the next twelve months is 79%. Given the predominantly annual nature of support contracts and ratable revenue recognition, RPO balances can fluctuate from quarter to quarter. We are a global company operating in multiple industries and verticals, and seasonality is inherent in our business. Calendar year-end and our fiscal fourth quarter in June would generally see stronger bookings. In summary, I would like to close with our previously communicated four-point strategy to create shareholder value. As we continue to accelerate cloud growth, capturing the large margin opportunity and cash flow expansion remain front and center. Alongside disciplined capital allocation, all enabled by the OpenText business system. Our strong operational improvements during the last two fiscal years are paying off. These efforts continued in Q2, posting 37.6% adjusted EBITDA margin in Q2. Free cash flow and working capital performance in Q2 was driven by strong cost controls and leveraging timely and advanced billings supported by steadfast collections. Turning to the dividend program, the Board of Directors declared a quarterly cash dividend of $26.25 per common share. The record date for this dividend is March 7th, 2025, and the payment date is March 21st, 2025. We continue to be on track to deliver approximately $570 million of capital via our dividend and share buyback program this fiscal year. I will close with a few areas relating to operational initiatives with a deep lens again into margin and cash flow expansion. Expanding cloud profitability, by addressing fixed data center space, optimizing cloud infrastructure, our vendor contracts, and customer-level cost structures and hyperscaler cost containment will all continue to benefit our cloud gross margins. Our next wave of high-value use of AI internally is in full motion, in sales and R&D. Todd Sion, who is with us today and can certainly take your questions, Todd has rolled out programs towards consistency and elevating sales excellence. This will improve sales productivity while giving us operating leverage. We continue to expand our centers of excellence given the incredible talent and capability. Our geographical shift to the centers of excellence has a strategic focus to ensure roles and regions are optimized. In terms of investments, our plan includes investments in marketing for demand generation, sales university for enablement and training, and new sales leadership in content, cyber, and legal tech, all to drive our go-to-market initiatives. We remain well-positioned for a return to growth in Q4 fiscal 2025 to expand margins and cash flows, to deliver a strong fiscal 2025, and setting us up for even greater success in future years. On behalf of OpenText, I would like to thank our shareholders, our loyal customers, and partners for your continued support. A big thank you to the fellow team members at OpenText for your unwavering commitment to drive greater results.

Greg Secord, Head of Investor Relations

I would now request the operator to open the call for your questions. Thank you. We'll now begin the analyst question and answer session.

Operator, Operator

Tone telephone will hear a tone acknowledging your request. If you're using a speakerphone, please ensure that you listen to the handset before pressing any key. If you wish to remove yourself from the question queue, you may press star then one. Anyone who has a question may press star then one at this time. Our first question is from Raimo Lenschow with Barclays. Please go ahead.

Raimo Lenschow, Analyst

Perfect. Thank you. Congrats on the extra disclosure. I'm really looking forward to kind of digging into that. One area that is obviously, like, helping you or not helping you is currently the economy. Mark, can you kind of talk a little bit about what you saw in the quarter what you saw in the different regions that would be a great start for us. Thank you.

Mark Barrenechea, CEO

Yep. Thanks, Raimo, and thanks for the comments. We're excited to provide that increased visibility, and you have my commitment to continue that style of communications. Look, I think around the globe, the only area I'd shout out is Europe. And growth is hard in Europe right now. But we are in very good industries. We're in strategic manufacturing. We're in communications. We're deep with governments. And that's really the only macro area that I would shout out. We're quite excited about the pro-growth American investment initiatives happening in SMB, and US-based manufacturing. And there's no doubt that currency, the new US administration is focused on the US currency, which is creating FX challenges for everyone who is a global business. We are not subject to tariffs as a digital company. We'll see where that progresses over time, but it's really on physical goods, not digital services, and that just creates some uncertainty for others. Actually, we're here to help customers to think about moving manufacturing or supply chains to kind of know, right balance their portfolios. So we're not subject to the tariffs. We're helping customers. We're excited about the pro-growth investments in the US. But I'd say growth in Europe is elusive right now but I like the industries we're in.

Raimo Lenschow, Analyst

Perfect. Thank you. And one follow-up. Go ahead. You talked a lot about a Yeah. Had one follow-up. Like, you talked a lot about, like, ITOM. And you may have mentioned observability, ITSM, etcetera. The one question I get a lot from you as investors is around, like, how should we think about you in the market? Because, obviously, there is, like, you know, there's ServiceNow on the ITSM ITOM side. There's, like, the observability guys out there, like, how where do you think you kind of play in where do you win? Thank you. Congrats for me.

Mark Barrenechea, CEO

Yeah. Thank you. Well, I like very much that's why I highlighted we want to outperform in key categories. And the three key categories are content, security, and, what we call ITOM today. So if you think of our ability to discover a company through observability and monitor it, be able to manage all its unstructured content, intelligent content collaboration and workflows, but on top of that, have our own package staff, not just for IT, service management, but for HR help desk, for supply chain help desk, and corporate employee experiences, I think we're very well positioned in that core stack to outcompete and outperform. So expect us to focus on observability, and service management being real focused in those two areas but combined with security and combined with our strength in

Raimo Lenschow, Analyst

Okay. Thank you.

Operator, Operator

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

Billy Fitzsimmons, Analyst

I appreciate the question. This is Billy Fitzsimmons on for Samad from Jefferies. Mark, you highlighted multiple growth opportunities in the prepared remarks. Maybe expanding on the previous answer, one of those growth opportunities you talked about was security. Maybe it's a double click there. Can you talk about where you do particularly well in security today? And additional areas of investment. You're making right now to grow that market?

Mark Barrenechea, CEO

Yep. Very great. Very happily, and thank you. Just a little echo on the phone there. So where we're focusing where we are today is core identity applications, network, and forensics. That's where we excel today. And I highlighted some of our new SaaS wins. In that area. Nestle, for example, a Ford a code level security, cross bank and voltage for transaction encryption, and Capgemini in identity management. Our next deliverable or the next market segment for us is XDR. Right? The ability to ingest, detect, and respond as Micro Focus, as well as the vertical database of our own technology, and we partner with Microsoft. We built this integrated to Azure. We've built this integrated with Security Copilot. We're gonna go to market with Microsoft and we believe we're gonna be a composable solution. Now we don't think we have to go in and displace anyone, actually. We want to incorporate them all into what we do. We think we can provide value on top of them all. To be able to literally ingest billions of events to a day and process them down to multiple you know, a needle in multiple haystacks. Next area is we want to bring all that to our installed base. So when we launched TitaniumX next quarter, the SDR capabilities will be pre-integrated to our content platform and pre-integrated to our business network platform. So we can go into our install base, and not just try to win SDR standalone, XDR on top of other vendors, but pre-integrated into our own software. So that's why I highlighted it as my second point of growth and in a category, we're gonna outcompete and we put into lead the engineering side of the business, we repositioned Mui Mazou to do nothing but security. So that's why we feel pretty confident here.

Billy Fitzsimmons, Analyst

Thanks, Mark. And then if I could sneak in a second one maybe. A big focus during the presentations at OpenText World was on some of the go-to-market changes across the business. Can you just remind us of some of those announcements and obviously, it's only been a few months and things take time, but maybe updates on progress thus far and maybe where there's still more work to be done.

Mark Barrenechea, CEO

Yeah. We have Todd Cione with us. So, Todd, you want to jump in?

Todd Cione, President Worldwide Sales

Yeah. Absolutely. Thanks for the question. Look, we've been heavily investing in our Salesforce capability across a comprehensive and global sales excellence program. That commenced a couple of quarters ago, and we're beginning to see outcomes from that investment now. In Q2, we actually saw improvement in AE productivity, both tenured and new AEs. And in the second half, the sales excellence program investments continuing. Myself, San Deono, our marketing leader are gonna be on the road in Asia, ANZ, Europe, and US markets driving this with our sales force. So we're excited about the productivity gains that it's driving. And then in addition, look, we're in the people business. So there's been a lot of improvement in boosting of leadership within our sales organization as well.

Operator, Operator

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

Thanos Moschopoulos, Analyst

Hi. Good afternoon. Mark, can you expand a bit in terms of the challenges in ADM and ITOM? Was that more on the product side or on the go-to-market side or a bit of both, responded maybe just those products that have been classified and how you're dressing up with HaneyMax. Just any color would be helpful.

Mark Barrenechea, CEO

Yeah. Very good. Thanks for the question. Yeah. As I committed to gonna have a new style of communication. And so when we have exceptional items or things to communicate, we're gonna provide the detail. And that's what we're doing today, inclusive of materials in our IR deck. So, you know, within the $130 million, 25% is FX and 25% is DXC. That really focuses us down to just ADM and ITOM of $65 million to $70 million where is the core challenge. And it's related to license and maintenance, not the cloud side. So we got the security business back on track. So in ITOM, it's about Titanium X. It's our new observability cloud. It's our service management cloud. We believe we're ready now including some of the investments Todd was talking about, and we're simply gonna relaunch with Titanium Max and reengage our 5,000 customers. On ADM, we have now refocused the portfolio to be top of market. And this idea of being everything to all things, which was the previous strategy, just ain't the new strategy going forward. We're not here for a single developer. We're here for large-scale developer organizations. We're now live on the product. I got 10,000 engineers in the product every single day. We've taken all those advancements and put them back in the product, and they're released with Titanium X. Thus wins like at Pfizer and Eli Lilly that we talked about. So we're confident that here in the short term, we're gonna return those two pieces back to growth. I'd also like to take the opportunity, if I can, again, less the IP licensing, license will grow this year. Less the IP and FX, our business is constant this year. Unless DXC we'd be growing. So we're very focused on that area of ITOM and ADM. License maintenance, $65 million to $70 million, and I believe we got the right plan here in the short term to return them to growth.

Thanos Moschopoulos, Analyst

Great. And then you touched on the new licensing model in your prepared remarks, which should be a bit of a tailwind. Just any further color on that and when specifically was that launched?

Mark Barrenechea, CEO

Yeah. We launched it in January. This is the OpenText Pella. And look, we have a large license installed base, and we're in the license business. And there are a couple of models in the industry that when you get pretty mature in this space, customers want to keep for those customers who want to keep running on-premise or off-cloud. We want to help support them. And, you know, they've grown. They've acquired. They may want to expand to new divisions, add more users, so we're gonna make it easy for them. We're gonna allow them to go enterprise-wide, not have to count anymore. And that will require a license uplift, a maintenance uplift, and we'll give them some cloud credits along the way. So when they're ready to move to the cloud, they're even more invested in the OpenText solution. So you know, again, less the IP licensing, licenses are growing this year, and we want to continue that momentum with this new open path mechanism.

Thanos Moschopoulos, Analyst

But the premise is that the clients pay more but in exchange get unlimited licenses, is that the core of it?

Mark Barrenechea, CEO

That's correct. They will pay more in license, they'll pay a little more in maintenance, but in exchange for that, they'll be able to go unlimited and they'll no longer have to count.

Thanos Moschopoulos, Analyst

Great. Thanks, Mark.

Operator, Operator

Thank you.

Mark Barrenechea, CEO

Operator, next question.

Operator, Operator

Apologies. The next question is from Stephanie Price with CIBC. Please go ahead.

Stephanie Price, Analyst

Good afternoon. Just in light of some of the recent news around large language models such as DeepSeq, just curious how you're thinking about planned investments in AI and whether you think you can benefit from some of the cost reduction LMS space?

Mark Barrenechea, CEO

Yeah. We're, you know, I said earlier, Stephanie, welcome to the call, a criteria question. I said very early on, there'll be a thousand language models and let a thousand models bloom. To quote a poem, there was tulips, not language models, the little thousand tulips bloom. So let a thousand models bloom. We like the spirit of DeepSeq, to lower the cost of language models. And we're already embedding some open-source models into parts of our solution for easy deployment, predictability of expense, and lower expense. So we applaud the spirit behind DeepSeq, and we think this trend will continue. Now for a technical point, we have DeepSeq in a quarantined area, fully installed. We've tried the R1 model. And it doesn't really work. So it's actually more expensive than running Llama. So I don't want to get into the technical aspects of what the version in China of how it may be running the technical back end, but we've done just a pure test in a quarantine Faraday cage and it simply doesn't outperform Llama and is not more cost-effective. But we applaud this idea of innovation, open-source models, and lowering the cost, and we will benefit from them.

Stephanie Price, Analyst

Thanks for the color. And then in your prepared remarks, you mentioned evaluating strategic alternatives to increase value either through divestitures or combinations. Just hoping you can expand on how you think that capital allocation at this point.

Mark Barrenechea, CEO

Yeah. Well, great question. And look I think it goes like this. With margin was our number one priority. Post the AMC divestiture, and I couldn't be more proud of the team and how they delivered in the first half including Q2. I mean, half a billion of adjusted EBITDA dollars. So we have a new number one priority. We have multiple priorities. This is the number one overriding priority at the company, which is now growth, and is across all BUs and maintenance. We're gonna return to BrightLine growth in Q4. And yes, we all want more growth. And we expect more growth. And we'll return to growth in Q4. That's our current focus. Now in parallel, we're gonna continue to evaluate strategic opportunities. And what does that mean? In some cases, I think it will mean for BU, an acquisition. I think some other cases, it could mean a combination of divestiture. But my macro point is this and my intention for purposely saying it on the call and my script, is I want to deliver more path and more reasons to buy our stock. And I think those answers are total growth, higher cloud growth, higher margins to higher free cash flows, upper quartile capital return, and unlocking the value of each of our business units beyond organic growth through this strategic thinking. So clearly, we're focused right now on record capital return in 2025. You'll complete the divestiture and getting the margin operation engine boy, it's just a whole different level of oxygen with the growth as our number one priority. And as we focus on each BU to do that, I wanted to kind of walk through just how I was thinking you know, in parallel to just focusing on organic growth. Hope that's helpful.

Stephanie Price, Analyst

That is. Thank you very much.

Operator, Operator

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

Paul Treiber, Analyst

Thanks very much and good afternoon. Just want to ask a question on bookings. And your expectations for bookings going forward. I think the outlook calls for a pickup in growth in the second half of the year. What do you see as the primary driver of that? Do you expect Titanium X to drive a surge, or do you just see less seasonality than the past in, you know, two hundred million or so on bookings per quarter as sort of the new normal going forward?

Mark Barrenechea, CEO

Yeah. Yeah. Paul, let me just jump in the hand. I'll hand to Todd. Look, a percent basis, it was, you know, a little over six percent in Q2, but it was a record high watermark of $250 million of guaranteed new bookings that flowed right into RPO. So that is a high watermark. And clearly, we're expecting a very strong second half. And, Todd, I'll let you talk to the strong second half.

Todd Cione, President Worldwide Sales

Yes. Thanks, Mark, and thanks for the question. I mean, just as Mark mentioned, we're super proud and excited about that record quarter of customer demand for cloud and new bookings. And we see this continuing into the because we've got a solid pipeline in Q3 and in Q4, we have our largest cloud pipeline ever. That means we've got really strong coverage. In addition to that, we've launched already a focused list of programs and incentives to convert that pipeline. And we also fully expect that TitaniumMax being completed next quarter is going to provide a tailwind for that pipeline conversion as well. So we're super bullish.

Paul Treiber, Analyst

That's great to hear. Thanks for the explanation. Fee, shifting gears and speaking on AI, could you walk through you know, you touched in the past, like there's internal initiatives around AI. Do you have any metrics that you can share in terms of, you know, either productivity gains, that you've seen or ways that you can be more efficient with your spending internally so perhaps you can shift those dollars to focus on growth initiatives?

Mark Barrenechea, CEO

Yeah. Great question. Thank you, Paul. We're not ready to put a quantum on it. But we have two large initiatives. And there'll be a third and a fourth that's right on the event horizon for us. The first is our platform Athena, where you can imagine the breadth of software we build in development environments. You know, we're close to ten billion lines of code across multiple environments and IDEs and all of that. We've built a proprietary AI platform internally for our developers, to use Athena, we don't use Copilot. To use Athena for things such as the following. Explain a piece of code to me. I'm a new developer, and I gotta learn a piece of code. Explain it to me. I need to fix a bug. Help me. I need to write an interface to an API. Generate the code. I need to localize it in Hautagana or in left-to-right languages. So generate the screens and GUIs for me. So that's gonna uplift productivity. Is that five, ten percent? We'll see. You know, it could be mid-single digit, could be low double-digit. And if we can do that, I just added a thousand developers with no extra cost. On the sales side, we are live on a platform we call internally ollie.ai. Ollie was the original name for our pre-demo environment back in the LiveLink days. And we've advanced it to ollie.ai. Where we're helping we demoed it at OpenText World to generate RFPs. You know, can that uplift sales productivity five to ten percent, fifteen percent? Increase our win rate? Todd, any comments you want to provide on ollie.ai?

Todd Cione, President Worldwide Sales

Yeah. So if you're a presales leader at OpenText, that is your first stop. When you have an RFP right now. It's live and it's active, and we are at the precipice in Q3 of expanding that into capabilities for the entire sales force account executives, will have new information at their fingertips via mobile as well. So we're really excited about AI boosting our efficiency in worldwide sales.

Mark Barrenechea, CEO

Yeah. So next stop is tech support. And one of the next stops post that is helping increase our win rate and competing in more opportunities. So look, from what we've seen from theory to test beds to version one, even version twos internally, I'm absolutely convinced we'll raise productivity in engineering, sales, support, and helping us compete more and win more. But not really to put a hard dollar number on it yet, Paul. But we'll keep you updated.

Operator, Operator

The next question is from Seth Gilbert with UBS. Please go ahead.

Seth Gilbert, Analyst

Thanks for the questions. Maybe two, if I may. You know, to start, you made a comment in the beginning of your prepared remarks about the upgrade to Titanium X and reengaging the 5,000 customers and you know, upgrade fees kind of rising over time. I was wondering if you could talk about the upgrade journey to TitaniumX. How's it going? Is there maybe a plan to migrate a certain percent of customers in FY25?

Mark Barrenechea, CEO

Yeah. Fair enough. So, Titanium X is fully delivered next quarter. Right? So we're almost there. And the 5,000 customers were just on ITOM, not the overall install base of 120,000. The opportunity is large for us. We want to get the entire install, I mean, I'm just gonna start with a big general. I want the entire install base to be engaged and move to TitaniumX over time. We got to bring our installed base with us. And it's compelling. Gen AI and Aviators. Fifteen Aviators, a hundred agents. SaaS scale. I've already started to highlight some of the wins, SAP, BASF, Aldi. Frostcap, Gemini. Content plus in the content world, intelligent content plus AI workflow plus SaaS. ITOM, the one you highlighted, observability service cloud, ADM, the features that run OpenText can now run your BN control tower and AI on security XDR. So TitaniumMax is compelling. We're gonna start with those on older versions. Right? We're gonna kind of look at three major buckets. One of those buckets is the customers on, you know, three releases and back. Our goal, we have a world-class PS organization. They'll engage. They'll have upgrade programs. And that's the first place that we're gonna go to with Titanium X. And we respect customers who don't want to move, and we'll perfectly understand that. But we'll begin to raise your prices because our cost will go up of supporting you off cloud. So that's been on the opportunity. That's a bit of where we're gonna start, and we begin next quarter.

Seth Gilbert, Analyst

Got it. Very helpful. Maybe just as a follow-up, unless I missed it, I didn't see any of the disclosure around the business unit revenue split? I guess we were hopeful that we would see maybe a little bit of it this quarter. So even if and correct me if I maybe missed it in the filings. But even if not quantitative, I was wondering if you could provide maybe some qualitative color on some of the faster-growing BUs, business units, and maybe some that are not growing as quickly. Thank you.

Mark Barrenechea, CEO

Yeah. Yeah. No. You didn't miss it. And what we did this quarter is focus on Cloud. And so the new RPO disclosure is very important and very strategic and ties to our number one priority. So we put our energy there because this is the long-life disclosure for us to give you the insight into the strength of our cloud growth over time. So that's where we put our energy to get, RPA both maintenance and cloud RPO. And cloud RPO, cloud CRPO. So that's fully available. We also focused our attention in the communication around and I just want to say it again. That again less the IP licensing licenses growing this year. New insight for you. Less IP and FX, the business is constant, new insight for you. Unless DXC, we'd be growing. So we focused on those insights versus breaking down each BU. We will, at the end of the year, provide our usual BU update, if you will. Content, our hot hand with AI. Security growing. SMB was a negative year last year. We're performing constant this year with past to the second half growth. For example, we just delivered the new secure cloud Secure VPN or PC Optimizer. We have EDR on secure cloud. We have a whole new online presence at cybersecurity at opentext.com. So, SMB went from negative to constant, passive growth in the second half. Should be a positive contributor in the year out. We also provided some insight into ADM and ITOM on the call, specifically around maintenance and license. So we thought that was a better usage of our time to give you that insight that's a little bit of the BU insight. But we'll have a full BU update at the end of the year.

Seth Gilbert, Analyst

Got it. Super helpful. Thank you, Mark.

Operator, Operator

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

Mark Barrenechea, CEO

Yes, very good. Thank you for being part of our Q2 call. Margin was our number one priority both AMS, and with our Q2 and first-half performance, we delivered, and our new number one priority is growth. Second, we're very excited about the opportunity that Titanium X and upgrades will bring us. And three, we look forward to your continued feedback on our new style of communications and the insights into our business. Did you find them helpful? And how we can continue to do that? Thank you very much, and we look forward to seeing you at Morgan Stanley and elsewhere. Very much.

Operator, Operator

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