Thank you for standing by. This is the conference operator. Welcome to the OpenText Corporation First Quarter Fiscal 2021 Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] I would now like to turn the conference over to Mr. Harry Blount, Senior Vice President, Investor Relations. Please go ahead, sir..

Thank you, operator, and good afternoon, everyone. On the call today is OpenText's Chief Executive Officer and Chief Technology Officer, Mark J. Barrenechea; and our Executive Vice President and Chief Financial Officer, Madhu Ranganathan. We have some prepared remarks, which will be followed by a question-and-answer session.

This call will last approximately 60 minutes with a replay available shortly thereafter. I'd like to take a moment and direct investors to the Investor Relations section of our website, investors.opentext.com, where we have posted our consolidated investor presentation that will supplement our prepared remarks today.

The presentation includes information and financial specific to our quarterly results, notably our updated quarterly factors on Page 9, as well as strategic overview. Please also note the following update on our Investor Day. We are moving our previously announced Investor Day from next week to early next year.

We just provided a tremendous amount of new information at OpenText World, and we have our earnings call today and Enfuse is just around the corner. We will also be attending several investor conferences in the coming weeks. I'm pleased to announce that OpenText management will be participating at the following upcoming virtual conferences.

TD’s Canadian Technology Conference on November 16, RBC’s Global Technology, Internet, Media and Telecom conference on November 17, Needham's Data Analytics and Infrastructure Software Conference on November 18, NASDAQ's Investor Conference on December 1, Credit Suisse's Technology Conference on December 3, Raymond James Technology Conference on December 8, and Barclays Global Technology, Media and Telecom Conference on December 10.

We look forward to virtually meeting with investors in the coming days and weeks. And now I will proceed with the reading of our safe harbor statement. Please note that during the course of this conference call, we may make statements relating to our future performance of OpenText that contain forward-looking information.

While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions were applied in drawing any such statement.

Additional information about the material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information as well as risk factors including in relation to the current global pandemic that may project future performance results of OpenText 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 direct comparable GAAP measures may be found within our public filings and other materials, which are available on our website. And with that, I'm pleased to hand the call over to Mark..

Thank you, Harry. Good afternoon to, everyone, and thank you for joining today's call. I want to continue the conversation we started at OpenText World, where we gathered over 7,500 information management professionals, focused on the future of our business and work.

COVID-19 has changed everything from the way we work to the way we live to the way we conduct business.

There'll be many structural and long lasting changes due to the change in human behaviors, including work from anywhere, direct to consumer commerce, contactless experiences and payments, extreme customer experience expectations, and new supply chains. Before the pandemic, Industry 4.0 was just getting started and now it's in full acceleration.

I call this the new equilibrium and it's driving the fastest, deepest, most consequential technology disruption in the history of the world, and thus creating tremendous opportunity. Businesses are accelerating their digital capabilities and are placing greater emphasis on time to value, all things cloud, customer experience and edge computing.

And they're all looking to proven, trusted global partners, such as OpenText, to help them navigate the Seminole times. This new equilibrium has also changed OpenText as I chronicled at OpenText World. You can clearly see how we've become even more digital and extended our lead in the cloud.

Since the beginning of the pandemic and the calendar year, we've conducted over 10 million team meetings and chats, processed over 320 million emails through support and as a company, we are managing 250 million secure endpoints and estimated 100 million end users, 11 million cloud subscribers, 75,000 enterprise customers, and over 2,000 private cloud customers.

That’s been our vision at OpenText to build organically and through M&A the most comprehensive information management cloud platform for the future.

And with the introduction of our new architecture, Cloud Editions, running in the OpenText cloud and other clouds, we have never been better positioned to deliver for our customers in the new equilibrium. We're delivering massive new capabilities every 90 days. We already have over 1,000 customers on Cloud Editions.

And by Cloud Editions 21.4 for just one year away, our customers will never have to upgrade again. I know I've said this in the past, but let me repeat it as it is so important. 10 years ago, license was 26% of our business. In Q1, it was 9%. We have de-risked the business over time. 10 years ago, we had zero cloud revenues.

Now it's our largest revenue line, $341 million in Q1 or 42% of our revenue, and it is now the first revenue line on our income statement. We do will speak more about this in a couple of moments. Our customer support business continues to expand, and customers’ literature updates new security features both in the cloud and off cloud.

We had a 94% renewal rate in Q1 for our customer support business. Our annual recurring revenues were 83% in the quarter, and we became a cloud company while expanding adjusted EBITDA to an upper quartile 42.6% within the quarter. I said many years ago, we were not born cloud, but we are reborn cloud.

And we would create the new OpenText at higher margins and sustained efficiencies, and we did. And soon again with Cloud Editions 21.4, customers will never have to upgrade again. Our Cloud Editions are well aligned to the digital needs of our customers.

The OpenText content cloud is benefiting from businesses that need cloud-based information platforms to seamlessly and securely support content management, process management, collaboration, applications and new capabilities like e-signature.

The OpenText experience cloud business is benefiting from the trends to all things contactless, the direct-to-consumer explosion and all the associated technologies that enable omnichannel and social commerce.

The OpenText Security & Protection Cloud, our Cyber Resilience business is benefiting from the work from anywhere and the integration of corporate and home networks.

The need to protect devices everywhere and anywhere is growing in importance, and will only become more profound as 5G bandwidth becomes ubiquitous, and the connections to human and machine-based devices explode.

The OpenText Business Network Cloud, our Business Network is benefiting from the acceleration to digital as companies become more mobile and regionalized. If a country can't get raw material to build a product, they're going to move their supply chains. And our new OpenText Developer Cloud, API-driven, driving the API economy.

Embedding OpenText information management into the next generation of customer and SaaS applications is a key long-term strategy for us. OpenText is already seeing the benefit of the new equilibrium as businesses accelerate, owning their digital capabilities.

Information management time has come, and we are just not ready, rather, we are leading in the cloud. And our domain leadership positions us – our domain leadership positions have never been stronger and our Q1 results reflect that.

It was the best Q1 and a strongest start to the fiscal year in the history of our company, and another record high for our key businesses of cloud and customer support and a record high for annual recurring revenues.

For the quarter and on a year-over-year basis, total revenue of $804 million, up 15%; cloud revenue of $341 million, up 44%; customer support of $329 million, up 5%; ARR of $670 million, up 22%, and a 83% of total revenue, the highest in dollars and percent in our history demonstrating the predictability of our business.

Adjusted EBITDA of $342 million or 42.6% adjusted EBITDA margin also the highest in our history. The company has never been this productive and efficient, and we've gained efficiencies over the last few quarters, and free cash flows of $219 million, up 84% and 24% of revenue, best Q1 in our history.

By the end of the quarter, our business network volumes had returned to pre-COVID-19 levels, except for those industries still affected like hotels, hospitality, airlines and a few others.

But many notable customer wins in Q1 that included; Sephora, the global retail provider of personal care and beauty products; Wm Morrison, one of the largest supermarket chains in the UK; Pacific Gas and Electric, one of the largest electric utilities in the United States; Southern California Edison, one of the largest electric utilities in the United States; Hydro-Québec, one of the largest electric utilities in Canada; ON Semiconductor; FreshDirect; Heritage LAB Express; the California Department of Managed Health Care; the UK Department for Work and Pensions; and Texas A&M, a public research university in College Station, Texas.

I'm so proud of my colleagues for their focus and commitment to our customers. At the beginning of COVID-19, we took several preemptive actions, given the historic nature of volatility the world was about to face.

Six months later, our business is operating stronger and more efficient than before the start of the pandemic due to our business leaders, great execution and accelerated digital automation.

You can see in our improved operations and results, the predictability that ARR brings to our business model, the strength of our margins and cash flow, and our forward competence and continuous improvements. Given our new operating efficiency and competence in the road ahead, we are announcing a variety of key action today.

We were paid $600 million drawn on our revolver, and there are no outstanding balances. We are restoring our salaries and benefits. We have opened over 400 new positions in innovation and sales. We are investing in product and sales, and we look to strategically hire the best global talent.

Two years ago, our R&D investment was approximately $300 million per year. This fiscal year R&D investment will exceed $400 million a year.

We're also announcing today that we're increasing our quarterly dividend by 15% to $20.80 per share from $17.46 per share for holders of record December 4, 2020 with a payment date of December 22, 2020 as approved by our Board of Directors. We continue to target 20% of trailing out of 12 months free cash flow for a dividend program.

And we have increased our dividend rate 15% every year since its inception as we have increased cash flows. With this quarterly dividend, we will have returned over $1 billion in cash to our shareholders since 2013. We're also returning to our standard cadence or revealing our dividend rate at the end of each fiscal year.

And today we announced a new share repurchase plan of up to $350 million over the next 12 months. The announced repurchase plan is additive to our return space capital allocation strategy, and tended to compliment from time-to-time our ongoing M&A activity and dividend program.

I want to spend some time today on our unique total growth strategy of retain, grow and acquire. On retain, we had another great quarter with our customer support renewal rates at 94% and margins of 91%. Our enterprise cloud renewal rates remain strong in the mid-90s.

With our digital zone and new cloud platforms, we see opportunity to improve the quality of our customer experience even more by automating portions of the renewal process, enabling our CF personnel to spend more time with customers on cross-sell and up-sell.

Again, with CE 21.4, all new updates, features and facets will be automatically immediately available to all customers. On grow, over the last few quarters, we've made significant investments in our go-to-market. Let me highlight some key aspects of this.

Having five domain clouds versus many point products, simplifies our customer messaging and our go-to-market friction. We can accelerate customer time to value through our managed services.

We are accelerating our ongoing shift towards vertically focused applications and solution-oriented selling, such as public security, legal, cyber, and the healthcare industry. We remain on track to double our enterprise sales coverage of the Global 10K, within three years.

We continue to make great progress on cross-sell and up-sell initiatives specifically on our SMBC channel, has begun to successfully sell Carbonite, Webroot and Hightail products. On the Enterprise side, we're seeing success in cross-selling Carbonite &Webroot security offerings and Carbonite Migrate in high availability products.

Finally, we are excited about the growing opportunities with partners. On the Enterprise side, we have expanded relationships with Google, Microsoft, AWS, Salesforce, AT&T, SAP and others.

On the SMB side of our business, we expect to grow our partners through increased sales focus, additional product offerings and the completion of the integration of the Carbonite &Webroot channels.

With our adjusted EBITDA above 40%, we are accelerating our investments in products and sales, as we said we would, by expanding R&D investment dollars, and accelerating our sales coverage and capacity, both for the Global 10K and SMBs, on acquire.

As it relates to the M&A, we remain patient, disciplined, value-based buyers with ROIC and cash flow as key criteria. And we continue to build strong and actionable pipeline. I'm pleased to say that our Carbonite integration is ahead of schedule and we achieved our financial integration goals in 10 months.

We acquired Carbonite just last December and we increased our cloud revenue, increased our ARR, increased our cloud gross margins and improved our cash conversion cycle.

Carbonite continues to grow in its core market and starting this fiscal year we expect to begin seeing meaningful revenue synergies from cross-selling Carbonite products into our install base of enterprise customers and selected OpenText products through Carbonite's SMBC channel.

Carbonite is a great example of our M&A strategy, growth asset that gave us strong entry and presence in cyber resilience and the SMB channel. And met our disciplined value based criteria while offering significant opportunity to create revenue synergies. Our balance sheet is strong at 1.8 times leverage, cash and cash flows are strong.

We have capital to deploy and we will deploy capital as and when the right opportunity rises in our disciplined manner. Our total growth strategy of retain, grow and acquire is unique, massively, scalable in delivering returns.

On our financial outlook, Madhu will cover the details of our financial outlook for Q2 in fiscal 2021 and our three-year aspirations. But let me highlight what you will hear. An improved demand, outlook and confidence in our operating model and future cash flows. Let me summarize, OpenText is firing on all cylinders.

Our ARR target model for fiscal 2021 is 81% to 83%. Growth in strategic areas, such as cloud and customer support and ARR, upper quartile margins of 42.6%. Adjusted EBITDA already incorporating increased R&D and sales investments, new efficiencies and a high conversion ratio from EBITDA to cash flow, the healthy balance sheet of 1.x times leverage.

On M&A accelerated time to return for Carbonite on the OpenText model sooner than expected. Most companies take two to three years to get these types of benefits. We've accelerated it down to 10 months. And the company is ready for the next set of opportunities.

We have a return based capital allocation approach with increasing our dividend by 15% and initiating a share repurchase program up to $350 million over the next 12 months and lastly, a new product platform, Cloud Edition that is aligned to the needs of our customers. We are not waiting to return to normal.

I learned that in my personal cancer journey, this is the new normal and we are going on the offence. We are stronger today than we were a year ago. On behalf half of OpenText, I'd like to thank our shareholders, loyal customers, partners, and 14,000 plus dedicated employees for all contributing to our success.

And I am so proud of the resilience and durability that continues be demonstrated. Finally, a big thank you to all the nurses, doctors, frontline responders, healthcare workers, those in the food industry, those in the delivery industry, those working in data centers and the power grid and distribution.

Thank you for all that you do and keeping the world running. It's my pleasure to turn the call over to Madhu Ranganathan, OpenText's Chief Financial Officer.

Madhu?.

Thank you, Mark. And thank you all for joining us today. We had a strong first quarter of fiscal 2021. Our performance during the global pandemics reflects the underlying resilience and agility of our operating framework.

I will speak to Q1, Q2, our quarterly factors, our fiscal 2021 target model and our long-term aspirations as outlined in our Q1 investor presentation that is posted on our IR website today.

I would also like to highlight that we have changed the order of revenue line, cloud is now first, customer support is second and license, third, followed by professional services. We see this as a permanent shift in our revenue disclosures, deflecting the strength of annual recurring revenue growth led by cloud and customer support.

All references will be in millions of USD and compared to the same period in the prior fiscal year. So let me start with revenues and earnings. Total revenues for the quarter were $804 million, up 15.4% or up 14.5% on a constant currency basis, including a strong contribution from Carbonite. There was a favorable FX impact to revenue of $6 million.

The geographical split of revenues of total revenues in the quarter, with Americas 63%, EMEA 28% and Asia Pacific 9%. Annual recurring revenues for the quarter was $670.4 million, up 22% or up 21.4% on a constant currency basis. As a percent of total revenue, ARR was 83% for the quarter, up from 79% in the first quarter of fiscal 2020.

Here, I would like to note that ARR was positive organic growth during the quarter on a reported basis. Cloud revenues are particularly strong at $341 million up 43.7% or up 43.4% on a constant currency basis.

This growth was driven by a strong contribution from Carbonite and exiting our fourth quarter a return to pre-COVID transaction volumes in our business network. Our enterprise cloud renewal rate in the quarter remained in the mid-90. Customer support revenues were $329.4 million up 5.5% or up 4.8% on a constant currency basis.

Our customer support renewal rate for Q1 was 94% reflecting continued strong efforts of our teams to drive the new roles and support our average install base. Our license revenues were $68.5 million, down 12% or down 13.8% on a constant currency basis.

Our professional services revenue is at $65.1million, down 6.2% or down 8.5% on a constant currency basis. GAAP net income was $103.4 million, up 38.9% primarily driven by higher revenue achievement and the savings of the preemptive measures introduced in the third quarter of fiscal 2020.

Our adjusted net income was $241.9 million, up 39.4% or up 36.2% on a constant currency basis. GAAP earnings per share diluted was $0.38 up from $0.27. Our non-GAAP earnings per share diluted was $0.89, up $0.25 from $0.64 and up $0.23 on a constant currency basis.

And now turning to margins, GAAP gross margin for the quarter was 69%, up 180 basis points. Adjusted gross margin was 76.5% up 340 basis points, also on an adjusted basis. Cloud margin was 67.2% up from 57.1% driven by continued improvements at our cloud service delivery and a strong contribution from Carbonite.

Our customer support margin was 91.3% up from 90.7% reflecting continued strong renewal performance. The license margin was 96.4% down to 97% primarily due to lower license revenue.

Our professional services margin was 29.2% up from 22.1% and reflects the benefits received from lower travel, while effectively delivering our solution on a digital and remote basis. Adjusted EBITDA was $342.3 million this quarter up 34.7% or up 32.1% on a constant currency basis.

This represents a record 42.6% margin, up from 36.5% in the same quarter last year and higher than our fiscal 2021 target margin range of 37% to 38%. Now turning to cash flows, it was excellent performance. With operating cash flows at $233.9 million for the quarter, up 70.2% and free cash flows of $218.6 million, up 84%.

DSO was 44 days compared to 54 days in Q1 fiscal 2020. The year-over-year reduction of 10 days is a real testament to our digital business services organization formed about a year ago, that includes receivables, collections and other key financial operations, as well as strong contribution in the quarter from the integration of Carbonite.

From a balance sheet perspective, we ended the quarter with approximately $1.8 billion in cash, given our strong cash flow performance. Our consolidated net leverage ratio is 1.82 times, an improvement from 2.04 times last quarter. And subsequently in October, we repaid the $600 million that was previously drawn on the revolver.

And we now have fully available $750 million revolver line of credit.

As Mark noted our strong balance sheet provides us the flexibility to navigate changing macro scenarios and provide ample opportunity to generate substantial long-term value for our shareholders to growth, dividends and [indiscernible] as well as what Mark noted potentially share buyback in time-to-time through our announced repurchase plan as a compliment to our capital allocation strategy.

On Carbonite, Carbonite delivered another strong quarter of results with strong ARR, cloud margins, adjusted EBITDA and working capital. Carbonite operations are already tracking to the OpenText operating model as of September 30, 2020. We achieved the financial integration sooner than planned.

What we are looking ahead relates to systems and applications integration. While we will continue to talk about the business, this will be the final integration update of the acquisition itself, a big shout out to the Carbonite integration team. So let's turn to total growth, target model and quarterly factors, all available on our investor website.

First and foremost, we view our businesses in annual and quarters will vary. Long-term value is created from sustained annual performance and 90-day cycles are too short to measure. We are in a volatile macro environment due to health, financial and social crisis related to the resurgence of global COVID cases and the U.S. election.

We continue to see deferring impacts industry-by-industry, and geography-by-geography. While we remain watchful in the macro environment, we continue to perform well on our business model growth in cloud, growth in products and innovation and our strong cash flow enable us to continue to invest in go-to market products and digital projects.

So now let me turn to our full year fiscal 2021 total growth strategy. Compared to quarter ago, our outlook for fiscal 2021 has improved. We now expect mid-double digit growth on cloud revenue compared to a previous target of low-double digit. Low-single digit growth on customer support revenue compared to constant.

High single digit growth of annual recurring revenue compared to mid-single digits. No change in our license and professional services revenue targets which we see the [indiscernible] and consistent with the broader industry trends and also as cloud adoption accelerates.

So with that total revenue move from constant to low-single digit growth in fiscal 2021. New M&A opportunities remain additive to our model. Our assumptions do not include an FX impact in the second half of fiscal 2021. On our fiscal 2021 target model, we are pleased to share the following revenue target changes from a quarter ago.

Annual recurring revenue gains moved up from 80% to 82% of total revenues to 81% to 83%. Our license moved down from 10% to 13% of revenues to 9% to 12% of revenue.

On gross margins, Cloud is maintained at 63% to 65% and customer support at 89% to 91%, our license at 96% to 98% and professional service margin is expected to move up to 20% to 22% from 18% to 20% as we continue to see benefits of remote deliveries and less travel.

Gross margins overall remains at 74% to 76% and our full-year adjusted EBITDA expectations remain at 37% to 38% as we continue to invest in the business.

Our fiscal 2021 target model fully reflects the savings from previously announced restructuring, the compensation restoration that Mark referred to in his commentary and our fiscal 2021 hiring plans. So coming to our immediate quarter Q2, I would like to highlight the following quarterly factors.

We expect Q2 total revenue to be constant versus Q1 with a favorable FX impact up to 3 million. Our FX is based on current exchange rates, but note that currency volatility appears higher than normal. Annual recurring revenue is expected to remain constant in Q2 compared to Q1.

Our adjusted EBITDA dollars are expected to decline low-single digits in Q2 compared to Q1. I shared previously we remain on an annually focused business while our quarters will vary. Our long-term aspirations remain unchanged.

Following adjusted EBITDA aspirations at 38% to 40% and free cash flow of $900 million to $1 billion for fiscal 2023 with a plan to reinvest in margin gains above 40% into additional growth initiatives. For tax update, the IRS matter is still in the appeal state and our results remain strong, and we continue to vigorously defend opposition.

So, in summary, a special thank you to the entire OpenText community for their incredible efforts. Their contributions demonstrated continued resilience, leading the way in digital working, high productivity and a laser focus on results.

And thank you to our shareholders, whose trust and confidence we greatly value, and wishing you all continued safety and good health. I would now like to open the call for your questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Raimo Lenschow from Barclays. Please go ahead..

Hey, guys. This is Frank on for Raimo. Congrats on another great quarter, and thanks for taking my question. So cloud is clearly very strong again.

Would you be able to dig a little bit more deeper, provide a little bit more color on how some of those recent partnerships with some of the big cloud players like Google from this year your are feeding into the cloud side of the business? And how we could expect those relationships going forward?.

Yes, Mark here. Thanks for the question. The strength of our cloud quarter certainly driven by some of the return of our business volumes, and the accelerated needs of our customers of time – accelerated time to value, and the greatest time to value is to deploy our capabilities and our cloud or our partner's cloud.

And as we look over the coming quarters and next few years, we expect the partnership to really contribute to that cloud momentum. We've taken the approach with cloud additions that our solutions will operate across the hyperscalers, Google, AWS, as well as Azure.

And we continue to stay committed to customer choice, where customers would like to place the workload. We saw some wins for Azure together with our cloud partners, and –but the strength of the cloud was primarily driven by Carbonite returned to business volumes and an accelerated time to value from our enterprise customers..

Great. Thanks, Mark. Congrats again..

Yes. Thank you..

The next question comes from Stephanie Price from CIBC. Please go ahead..

Good afternoon..

Hi, Stephanie..

Hi.

Just on the clouds, I'm wondering if you can share a little bit more about Carbonite and maybe what the Carbonite contribution was in the quarter?.

Madhu, are we speaking to the precise Carbonite contribution in the quarter?.

No, we’re not, Mark..

Yes. So, Stephanie, there is no doubt that Carbonite had a significant and important contribution. The business is operating very well, both in the – we first go to RMMs who then sell to SMBs.

We have a bit of our business direct to SMBs, and we have our prosumer and consumer business that really came back from the early part of the – start of the pandemic. We are also well underway of integrating the Carbonite and Webroot channels, which were not integrated when we acquired the business.

And we've brought into the Carbonite channel, do OpenText solutions to sell as well. And work from home is, it's permanently changed, right, the hybrid work model. So it certainly contributed on the revenue side of the quarter.

And you look at our adjusted EBITDA, 42.6% are relentless focus on fast – rapid integration, taking the cost out where we think we should, integration of the cloud teams, integration of engineering teams, Carbonite contributed as well to such a stellar adjusted EBITDA. And in fact, so greatly, we're already on the financial model..

Right. And then on capital allocation, you've mentioned a new NCIB here. Just wondering how you kind of think about capital allocation share repurchases maybe versus how you are seeing the capital here..

Yes, very good. Well, I'll just start with the large narrative on – we – companies talk about they're going to exit the pandemic stronger than they came into it, widening new operating efficiency within the business.

And it's reflected in the efficiency, our processes, the new digital automation we're running, internally and it's translated into a higher level of adjusted EBITDA. And our conversion ratio from EBITDA to free cash flow is enormously high given our effective tax structures and low CapEx deployment.

So we have great confidence in the efficiency of the business and future cash flows. With that in mind, that led us to getting back to our evaluation of our dividend program. I know – 90 days ago we didn't raise the dividend sort of on our annual cadence.

So at this point with that confidence we paid back our revolver, we increased our dividend rate back where we were, if you will. And looking at that strength of the cash flows, we thought would add an additional program, which was – which is the NCIB as you know. So we see it as a tool for us going forward..

Great. Thank you, and congrats on the quarter..

Thank you, Stephanie..

Thank you, Stephanie..

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

Hey, good evening.

Mark, maybe talk a little bit just with the shift to the cloud happening fairly hard in this quarter, as we think about M&A in the future for OpenText, how has your willingness to maybe take on legacy assets that you previously would have migrated? Has that appetite maybe changed? Or is there may be greater confidence? And then I've got one quick clarification..

Yes, sure thing. Our M&A strategy remains unchanged. We – it is the great – one of the greatest levers we have to adding value in the business conjunctive with organic growth, but our philosophy of M&A remains the same. And within M&A, it's really recurring revenues that we focus on.

So we'll look for businesses that have high recurring revenues, and recurring revenues are both cloud and support businesses, or as I like to call them update businesses. So it's not exclusively cloud, it's much wider than that. It's really recurring revenues, that's our focus.

Paul, you have a clarification question?.

Yes, that's great. So then just the other question, I think you've alluded to it.

Should we be thinking, and I don't know if you've set – I don't remember a policy that around net leverage ratio, should we be thinking that you're going to force back deployment of all the cash flow? Obviously, you’ve listed the dividend that you just numerated, but more importantly about the return of capital through the share repurchase, should people think that that level of the floor is maybe 1.5? Or, no, there isn't a floor, and you're going to leave yourself flexible? Thanks..

Well, let me jump in and I'll hand the mic to Madhu as well. We're going to remain flexible. I'll talk about the ceiling first, and then maybe the floor. On the ceiling side, nothing's changed our view that we like to operate around 3 times leverage.

As I've said, many times and I've chronicled through the years, I think it’s very simply, if the market turns really bad for liquidity, which had happened, I'd like to be able to payback our debt in three years, therefore the 3x ratio.

We're not bashful about going over it in the short-term as we have done twice, given our commitment, disciplined operations to bring it well under. Again, the buyback is an additive tool, doesn't change our M&A strategy. In fact, our pipeline and due diligence activities are up. We see that as an additive tool given the strength of our cash flows.

We've always targeted 20% of trailing – used to be OCF, but now FCF. But we target trailing 12 months 20% of free cash flows to return our dividend gives us all the strategic opportunities we need. We now have the extra tool and stand up program on buyback. And M&A remains the top relic generator for us in deploying capital.

And we expect to get deals done this year, this fiscal year.

Madhu, anything you'd like to add to that?.

I guess I think, Mark. Thanks. Suppose when you think about apples to apples, right, when you ask about the floor, during our fiscal 2020 we've had about 1.48 net leverage when the brand made all the way slightly above 2 with Carbonite. And given the strength of the cash flow, we were able to bring it back down to 2, 1.82.

So I would really think about it that way going above with a feeling not just described, and again, the cash flows is going to allow us to have the band in the mid-1s to slightly above 2, maybe..

Perfect. Thanks..

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

Yes, thank you. Mark, I think you said you had 1,000 customers today on Cloud Editions.

Would you say the average number of products taken up by those customers to be more than those that are not on Cloud Editions?.

Yes, Richard, interesting question. I think it's slightly above the off-cloud average. And part of our opportunity is really getting to a next generation cross-sell and up-sell, and really focusing that in the cloud.

Because with more integration in our efficiencies, and as we march towards 21.4, where customers will never have to update again, we can turn on more solutions for customers at very, I mean, minimal expense running in the cloud, and thus expose customers to more features and more modules, and thus reduce friction.

So I'd say we're slightly up on kind of the average module usage in-cloud verse off-cloud. And this is a strength we're going to see right into and leverage with cross-selling in the coming years, sort of pre-installing, pre-turning on additional modules for customer access..

Yes, I guess, especially with CE 21.4, it seems like there is probably a big opportunity for you to accelerate organic growth as the friction is reduced here.

Is it fair to say that that's something that we should think about here in terms of modeling going forward, in terms of looking at organic growth and what that can mean to it?.

I don't mean to do this. I’ll the hand the modeling questions to Madhu..

Yes. So, Richard, thanks for the question. As Mark said, directionally, absolutely; from a modeling perspective, we have shared all our perspectives. So I would already use the boundaries and parameters you've shared from a modeling perspective, but certainly opportunities in the future is really exciting..

Okay. And then maybe I sort of miss heard, I think the way you talked about your sales cycle, even though that’s health backdrop that they have is sort of kind of gone back to the normal with the exception of some of those vertical supply there.

That seems different from some of the things that we've heard from others with enterprise companies that we cover.

But I just wanted to make sure that sort of characterize what you said correctly?.

Yes. Richard, so just may be recap and it's in our investor presentation as well. And let me just see if I can quickly get to the page number, which is Page 7, fiscal year 2021 OpenText total growth strategy, where we have our revenue lines and what the expected growth rates are for the year.

We have certainly seen our business network clients returned to pre-COVID levels, except for some of the well-highlighted industries that still haven't recovered, hotels, hospitality, airlines, and in a few others. So we're not back to full revenues. We're back to pre-COVID levels except for those industries.

We are increasing our outlook for the year on cloud, as we do highlight it from low-double digit to mid-double digit, customer support from constant to low single digit, AR from mid-single digit to high-single digit. But we're also still looking at cloud and PS at the same levels we talked about last quarter.

Which is, we're not changing the outlook on license and PS, which we expect to decline this year. So the transactional side of the business has been returned to pre-COVID levels, but the vast majority of our business network has and that's translated into an updated and increased outlook for the year, among other things..

Okay, great..

Is that helpful?.

Yes. Thank you..

Thanks, Richard..

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

Hi, good afternoon. I want to drill deeper into the cloud guidance. So if I take your Q1 cloud revenues and just clap on them for the rest of the year that gives me high-teens cloud growth on the full year basis, but you're guiding from mid-teen cloud growth.

So that would imply some erosion and they appreciate it like to be conservative with your guidance, but can you comment on what the dynamic or some risks should be aware of? That could cause that erosion and is it maybe just the transaction, businesses and the verticals you call they out, where there could be a risk of some further weakness or how to think about that?.

Yes. Thanos, let me speak a little bit to the business and have Madhu, maybe speak a little bit to the model. I'm very pleased with how the volumes have returned from pre-COVID levels and some industries are still very heavily affected, and we don't know the timing, all the consolidation that may happen in those markets as well.

So that's a bit of an unknown, that's informing us to talk about cloud at mid-double digit. And this also remains volatility in the world as we all well know. And with the next wave in Europe and how far behind is North America.

What I'm certainly seeing is that it's a very different business reaction in this wave versus the first wave, where there's a very focused view on keeping business running in a healthy way and safe way through the second wave.

But it's a long way to say it's still remains a bit of a volatile market, What we do know, and is that we're going to – we're increasing our outlook from the year from low-double digit to mid-double digit. And you said it well that there's still some effected industries in our business network.

And we're still going to remain a little cautious, just giving – given the volatility in the world. I mean, it's a fine place to be. So Madhu anything you'd like to add..

No Mark, you covered all of the pieces. And Thanos, I would point all of Mark’s comments that we had factored into our Q2 quarterly factors that’s going to be in the outlook..

Okay. Great. And you did on the revolver.

Should we take that as a negative indicator with respect to the size of your near-term? I mean, the pipeline, or is it less about that and more factor competence regarding the stability of financial markets relative to what the world looked like when you initially put that down?.

Yes. Pretty straight forward for us. It was uncertain if there would be a liquidity crisis early in the markets or early during the pandemic that didn't turn out to be so. But, we're no wiser than the next person. So we took a preemptive action. I do it the same way all over again, I hope I don't have to of course.

We also have reached a new level of efficiency, so we decided to pay it back,.

So, nothing in particular to [indiscernible] to as far as what that means for pipeline.

How many pipeline?.

No, not at all the revolver remains, they are active, it's fully available facility of 750 million. It was the volatility and uncertainty around the liquidity in the markets. And many companies pre-drew the revolvers. We weren't alone in doing that.

And now that – it's much clearer on the liquidity in the markets, we decided to just reduce our expense and pay back the revolver..

Great. Makes sense. All right. Thanks for answering..

Thank you..

Next question comes from Paul Treiber from RBC Capital Markets. Please go ahead..

Thanks very much. And good afternoon. I just wanted to ask a high-level question and it ties into your, your comments at enterprise world, but we're seeing massive change in the industry with work from home and collaboration apps moving to the cloud and other options in cloud and new digital transformation.

And it seems like the importance of enterprise information management would also go with it and become more important.

And are you seeing that from your customer base or in your pipeline, the increasing importance put around enterprise information management?.

Paul, absolutely. I very prescriptively used that the phrase in my script, that I believe that information management it's time has come. And look, we were going into the fourth industrial revolution before the pandemic and for many that was still kind of academic. But the pandemic has turned the accurate academic into the acute.

And company they’d, operate, they need to operate and share information. They need to go through financial closes, regulatory submission, they need to manage, I hate to say, look how the Canadian government is being challenged. With not having network access and full utilization of tools.

So it's gone from academic to quite acute in the ability to simply run on an information platform, shared collaboration, project management, workflow, form e-signatures and it's a brilliant basics on being able to do that globally and at scale that is benefiting us..

And I mean, it seems like most companies are taking or have taken a piecemeal approach to the cloud or particularly information management in the past. You mentioned there's 1,000 customers, enterprise customers has deployed CE. I think you have a total number of 75,000 enterprise customers.

Do you anticipate as a reasonable to anticipate that eventually all or the majority of those customers would need a cloud EIM strategy?.

Short answer is yes. Short answer is yes. Maybe it's 5%, 10% that doesn't and some very unique security requirements, but we do offer a private cloud in those cases. But to get that accelerated time to value, the fastest path is to deploy in one of our domain clouds unequivocally. And we have a long way to go.

It's the greatest opportunity we have as to continue to upgrade, transform new deployments into the OpenText Cloud.

One of the reasons we announced that OpenText World seven days to the cloud, and we have more standard product, we're pre-installing instances, the ability for enterprise customers to stand up new, new workloads used to take months and months and months, we can get it done down to a week now for standard deployment..

And last question for me, and maybe the hardest one, but in terms of timeframe of – is this like five-years cycle? Is it a 20-year cycle? And how do you think, how could the company prioritizes its transition?.

Well, we're unique. I will highlight the journey that we've been on. In using chess terms, is it the early game, mid game, or late in the game, for us, we've gone to where license is 8% of our business in the quarter. So we're in that last – we thought to complete the last mile here.

And I'm going to point the Cloud Edition 21.4, as I said, at OpenText World and again, here today, we are very focused on these 90-day cycles. It's not only that it's faster, we're actually bringing more features to market, in these shorter cycles.

And by Cloud Edition 21.4, which is actually a little less than a year from now, 11 months, we'll be at a point of where customers never have to upgrade again. All features, all capabilities, all facets will be automatically available and customers will have a Kohler path to never upgrading again, running in our cloud..

Thank you..

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

Very good. Well, I'd like to thank everyone for joining us today. We wish everyone much happiness, health and wellbeing in these very volatile and seminole times. And we look forward to seeing you, hope you can join us at Enfuse over the coming weeks. And we look forward to our discussions engagement, one-on-ones as well as our upcoming conferences.

Thank you for joining us today..

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