Open Text Corporation (OTEX) Q1 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary indicates positive financial performance with growth in cloud revenue, new bookings, and free cash flow, alongside a dividend increase and share buyback program. The Q&A section reveals optimism in strategic initiatives like AI and cybersecurity, despite some uncertainties in revenue mix and divestitures. Overall, the company's strategic moves and financial health suggest a positive outlook, leading to a prediction of a stock price increase between 2% to 8% over the next two weeks.

Key Financial Performance

Q1 Cloud Revenue $485 million, up 6% year-over-year. Growth attributed to strong demand in Content product category.

Cloud cRPO Up 6% year-over-year. Indicates strong cloud bookings.

Long-term Cloud RPO Up 16% year-over-year. Reflects strong long-term cloud commitments.

Total Cloud RPO Up 11% year-over-year. Indicates overall growth in cloud-related revenue commitments.

Enterprise Cloud Bookings Up 20% year-over-year. Demonstrates strong enterprise adoption of cloud solutions.

Deals Greater Than $1 Million 33 deals closed in Q1, up 43% year-over-year. Indicates success in securing large contracts.

Content Cloud Growth 21% year-over-year in Q1. Driven by bookings in financial services, energy, utilities, and telecom verticals.

Total Revenues $1.3 billion, up 1.5% year-over-year. Growth driven by Cloud and License revenues.

Customer Support Revenues $587 million, down 1.5% year-over-year. Reflects slight decline in support revenue.

Annual Recurring Revenue (ARR) $1.1 billion, up 1.8% year-over-year. Represents 83.2% of total revenues, slightly up from 82.9% last year.

GAAP-based Gross Margins 72.8%, up 100 basis points year-over-year. Indicates improved profitability.

Non-GAAP Gross Margins 76.5%, up 60 basis points year-over-year. Reflects enhanced operational efficiency.

Cloud Gross Margins Up 280 basis points year-over-year (GAAP) and 270 basis points (non-GAAP). Indicates improved cloud profitability.

Adjusted EBITDA $467 million, 36.3% margin, up 130 basis points year-over-year. Driven by higher revenues and improved gross margins.

Adjusted EPS $1.05, up 12.9% year-over-year. Reflects strong earnings growth.

Free Cash Flow $101 million, significant increase of $218 million year-over-year. Boosted by absence of prior year's one-time tax payment.

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Operating Highlights

Content Cloud: Grew 21% year-on-year in Q1, driven by bookings in financial services, energy, utilities, and telecom verticals. Retail, automotive, and manufacturing also contributed to growth.

Agentic AI Solutions: Showcased at Open Text World event, emphasizing secure and localized data management for innovation and growth.

Sovereign Cloud: Introduced to keep customer data local and secure, aligning with trends in proprietary cloud solutions.

Cloud Revenue: Achieved $485 million in Q1, up 6% year-over-year, with long-term cloud RPO up 16% year-over-year.

Enterprise Cloud Bookings: Increased by 20% year-on-year in Q1, supporting fiscal '26 outlook of 12%-16% growth.

Large Deals: Closed 33 deals greater than $1 million in Q1, up 43% year-on-year.

Financial Performance: Q1 total revenues reached $1.3 billion, up 1.5% year-over-year. Adjusted EBITDA margin improved to 36.3%, and adjusted EPS grew by 12.9% year-over-year.

Cloud Gross Margins: Improved by 280 basis points year-over-year, contributing to overall margin expansion.

Free Cash Flow: Increased significantly to $101 million in Q1, a $218 million year-over-year improvement.

Portfolio Shaping: Announced sale of non-core eDOCS business to focus on core enterprise information management and AI training.

Board Refreshment: Appointed George Schindler, former CEO of CGI, to the Board, enhancing expertise in IT and consulting.

CEO Search: Ongoing search for a permanent CEO, with strong internal and external candidates under consideration.

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Risk or Challenges

Market Conditions: Potential risks associated with customers making faster decisions to shift workloads from on-premise to the cloud, which could impact revenue mix and operational adjustments.

Regulatory Hurdles: On-premise deployment is still sought after in heavily regulated industries and governments, which may slow down cloud adoption in these sectors.

Strategic Execution Risks: The company is undergoing significant portfolio reshaping, including divestitures of non-core business units, which could pose challenges in maintaining focus and operational efficiency.

Economic Uncertainties: No explicit mention of economic uncertainties impacting the company, but general market conditions and customer decision-making speed could indirectly reflect economic pressures.

Supply Chain Disruptions: No explicit mention of supply chain disruptions in the transcript.

Competitive Pressures: The company is focusing on agentic AI and cloud solutions, which are competitive markets, requiring continuous innovation and differentiation to maintain market position.

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Guidance & Outlook

Cloud Revenue Growth: Q1 cloud revenue was $485 million, up 6% year-over-year, on track towards the fiscal 2026 outlook range of 3% to 4% growth. Long-term cloud RPO is up 16% year-over-year, and total cloud RPO is up 11% year-on-year. Enterprise cloud bookings were up 20% year-on-year in Q1, aligning with the fiscal 2026 outlook range of 12% to 16%.

Content Cloud Growth: Content Cloud grew 21% year-on-year in Q1, driven by bookings in financial services, energy, utilities, and telecom verticals. This growth is expected to continue, contributing to the company's cloud-centric strategy.

Fiscal 2026 Annual Outlook: The company is maintaining its fiscal 2026 annual outlook. Q2 total revenue is expected to be between $1.275 billion and $1.295 billion, with an adjusted EBITDA margin between 35.5% and 36%. Revenue is expected to skew higher in Q4 due to seasonality and momentum from the new product cycle.

ARR Growth: Annual Recurring Revenue (ARR) is expected to return to growth in fiscal 2026, with cloud growth outpacing maintenance declines. Customer support revenue is on track to meet the fiscal 2026 annual outlook.

Shift to Cloud: Customers are making faster decisions to shift workloads from on-premise to the cloud. Heavily regulated industries and governments still seek on-premise deployments, but the overall trend is towards cloud adoption.

Strategic Focus on Core Business: The company is focusing on its core business units, including Content, ITOM, and Business Networks, to drive growth. The strategy includes divesting non-core business units and accelerating the transition to a cloud-centric model.

Agentic AI and Proprietary Clouds: Open Text is positioning itself as a leader in enterprise artificial intelligence (agentic AI) by leveraging its extensive data and metadata assets. The company is also exploring opportunities in proprietary and sovereign clouds, particularly in collaboration with telecom providers.

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Shareholder Return Plan

Dividend Payment: The company is committed to consistently paying a growing dividend as part of its capital allocation strategy.

Share Buyback Program: The company plans to buy back shares as part of its capital allocation strategy.

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Key Q&A

Q:What is Open Text's competitive edge in leveraging data for AI?

A:Open Text's competitive edge lies in its 35 years of experience, having hundreds of data connectors built over decades. These connectors are critical for training agentic AI and include legacy systems like WordPerfect, Lotus Notes, and SAP archives. Additionally, Open Text offers a hybrid mix of on-premise, cloud, and managed services, enabling flexibility for users.

Q:What is driving the growth in the Content business, particularly on the cloud side?

A:The growth is driven by customers curating their data for AI readiness, moving to the cloud for managed capabilities, and simplifying system management. Many organizations are transitioning to the cloud to better organize and present their data for AI training.

Q:How relevant is older data (e.g., 30 years ago) for agentic AI training?

A:Older data is highly relevant for agentic AI training as it helps identify patterns and anomalies, such as black swan events. The more data available, the better the AI's accuracy and wisdom. Open Text emphasizes the importance of going back as far as possible to improve AI training.

Q:What are the expectations for Q2 revenue and its drivers?

A:Q2 revenue guidance includes a range that could see a quarter-over-quarter decline. The key drivers include the mix of revenue from cloud versus license, with cloud revenue being distributed over longer contracts. The company has not changed its annual outlook and expects variability in revenue mix due to customer choices.

Q:What is driving EBITDA growth in the second half of the fiscal year?

A:EBITDA growth is driven by portfolio reshaping, business optimization initiatives, and a $0.5 billion run rate improvement. Approximately one-third of this improvement was realized last fiscal year, another third is planned for the current year, and the remainder will continue beyond.

Q:What is the cadence of divestitures over the next several quarters?

A:Open Text plans to divest 15% to 20% of overall revenue methodically, aiming to complete one divestiture per quarter. The process is complex and involves restructuring parts of the business that do not go with the unit sale. The goal is to complete the divestitures within the next year.

Q:What is the approach to divestitures, and how does it compare to past experiences?

A:The approach focuses on divesting non-core business units while maintaining the core, which represents the largest and fastest-growing part of the business. The strategy is methodical and disciplined, ensuring minimal impact on EBITDA. This approach is informed by past experiences, such as those at BlackBerry.

Q:What is happening with the cybersecurity enterprise business, particularly the cloud component?

A:The cybersecurity enterprise business is undergoing investments in product development and regional expansion. While the cloud component has declined, cross-selling efforts are showing success, and the company expects cloud numbers to improve as these investments take effect.

Q:What is driving the growth in Content Cloud, and are there any incentives for customers to move to the cloud?

A:Content Cloud growth is driven by a joint effort between Open Text and customers, with no specific incentives or programs pushing customers to the cloud. The growth is customer-driven, focusing on AI readiness and the concerted effort of the sales team.

Q:What are the CFO's initial priorities?

A:The CFO's initial priorities include understanding customer priorities, products, and strategic initiatives, focusing on content growth, and overseeing business optimization initiatives. The goal is to align with the company's strategic direction and drive impactful results.

Q:What are the expectations for stabilizing ITOM revenue?

A:Stabilizing ITOM revenue is a work in progress, with no specific timeline provided. The company is making product investments and winning deals against strong competition, aiming for positive progress toward stabilization.

Q:Why does the Q2 revenue guide imply a decline in license revenue?

A:The decline in license revenue is due to customers transitioning to the cloud, where revenue is recognized over longer contracts. The variability in revenue mix reflects customer choices and the pace of cloud adoption.

Q:How does the changing revenue mix impact margins?

A:The changing revenue mix does not impact margins, as Open Text is committed to maintaining its disciplined approach to profitability. The company adjusts its operations to ensure consistent margins regardless of revenue mix.

Q:What is the company's strategy for ITOM and agentic AI?

A:The strategy involves integrating ITOM, business networks, and content into a unified offering for agentic AI. This approach aligns with customer needs for comprehensive data pools for AI training, moving beyond traditional product silos.

Q:Review of Unclear Management Responses

A:Management avoided providing specific timelines or precise details on certain topics, such as the exact timing for stabilizing ITOM revenue and the specific mix of Q2 revenue. Additionally, responses about the cadence of divestitures and the impact of changing revenue mix on margins were somewhat vague, relying on general statements about methodical approaches and disciplined operations.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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