Hi, everybody. Thank you for joining us. We appreciate you. With me for this session, I have Chadwick Westlake, the CFO of OpenText. It's just going to turn itself on. We appreciate you joining us. I know that you recently joined OpenText, but you've been there a long time. Why don't we start with maybe, for investors that are less familiar with the story, you've spent a lot of time getting up to speed on it. How would you kind of explain at a high level what OpenText does for those that may not know it as well as you do?
Yeah, sure. Thanks, Simon. Thanks to Jefferies for hosting us. We really appreciate the opportunity to be here. I'm not sure if this is webcast or audio, but I think it's audio. Thanks to the hundreds of people that are here. It's great. It's a huge turnout. Just so everybody knows, this is a big event. We're going to try to get to hopefully some Q&A too. I'm excited. It's been less than a quarter at OpenText and learned a lot for sure. It's an extraordinary company. The simplest way to think about it, and there's really never a better time to be in it, but we are a world leader and, you know, in a lot of ways a world beater in enterprise information management.
We do it by operating a portfolio of products, particularly in enterprise content, security, and multi-cloud integration. Really important aspects. We have been doing this for now over 35 years. We actually just celebrated our 35-year anniversary in Waterloo, where we originated at the University of Waterloo, where I was also a graduate. We are one of about 20 software companies in the world that generate over $5 billion in revenue too. We have quite a bit of scale and there is a lot we can talk about around the company, but we are definitely in that core content, that core cloud. You will see us in that top right of the Gartner Magic Quadrant as well. We are a leader in that space.
As you mentioned, you give us some of the high notes about the company and you've been here for a few months. As you think about your decision to join, what attracted you to OpenText? What did you see as this being the right time to jump here?
Yeah, never a better time. I enjoy the systemic nature of OpenText. It's one of those companies where it's everywhere and you might not realize it. We're serving the largest companies in the world, governments. We're literally, if you do the math, benefiting the lives of hundreds of millions of people regularly across 180 countries. That has a lot of purpose to it. The companies that we serve have a lot of purpose to it. I was drawn to that. You know, anyone here, especially at a conference like this, is thinking, you know, AI first and how do you get to the AI first? It's by being the best in enterprise content as well and what we enable through that content and cloud.
I saw that opportunity and for me, I, in my career, I've been in banking for over two decades and I became more of a transformation kind of turnaround person and also somebody that finds undervalued businesses and opportunities. I did a lot of that at Scotiabank globally, where I was also the CFO of the Canadian Bank, drove a lot of productivity and transformation. I just joined from a company that I joined about four and a half years ago, a digital, tech-first, Canadian bank, that I saw a real threat, a real opportunity to create significantly more value. People did not really know it was there or, you know, the story was not clear. That worked out really well. We tripled the market cap.
While I was there, I saw this opportunity come up with OpenText in a very similar way where, hey, you know, this company has been around for a long period of time. I think the narrative maybe hasn't been as clear lately. Maybe there's an opportunity to simplify it and be more precise. I think it's the opportunity to significantly enhance the value and be more clear and consistent with that value. Never a better time to be in this space and sector. All the stars aligned. As a very proud Canadian, a very patriotic Canadian, and somebody that went to Waterloo, everybody knows OpenText, right? If, you know, I saw an opportunity to come in and be helpful with a world-class team and products.
I'm excited to be on that journey to really unlock the value for the next chapter of OpenText. It was one of those ones you just don't say no to.
I think that that's very helpful. You mentioned undervalued a couple of times in there. What do you think?
Say that one more time.
Hey, listen, I'm not charging by the word, so you can say it again. What are your early observations of what investors might not appreciate about OpenText, right? I think you've given us a good sense of the size and scale, but what do you think the investment community maybe isn't understanding and what are you hoping to communicate?
Yeah, that's a fair question because on the outside in, I had my hypothesis, right? When I started looking at OpenText again, and then any of you do the same, right? You look at the past charts, look at where it is now, and then think of the scale and the significance of a company that's world leading in so many products. What I've learned now that I've been in there and lifted up the hood is I think it's very evident of why you would want to hold the stock, why you'd want to buy the stock, and why you'd want to buy more of the stock. I've seen different threads that in my fresh eyes just made sense.
What I do not know if everyone appreciates of why you hold a stock like this is, you know, you can go to sleep at night and know tomorrow morning it is going to be a free cash flow generating machine. That is systemic. It is the wiring and plumbing of businesses and governments globally. It has a foundational systemic need, right? We are really, really good at it, right? We have thousands of patents. We are all over the place for a reason, but that is a reason to hold because, you know, we are going to pay a good steady dividend. We are going to have steady growth, and that free cash flow is going to enable us to drive more growth consistently. That consistency is there. Why do you buy it?
We are at the epicenter of growth, especially where we can outperform in content and enterprise security. There is a lot of reason to believe this can keep going up to the right with the products that we are really good at, especially as we return to more programmatic buying of companies, plus building with our 10,000 engineers. You have to believe to be true, okay, I can hold this stock, but I might want to buy more because we are in the right space and we are doing the right things with the right customers. What you might not appreciate, and you will pretty quick, especially this room, if you look at the charts, you might want to buy more when you realize how significantly discounted the share price is that I saw coming in.
It's important because we were at, late 2021, about 13 x EV/EBITDA, which was still pretty reasonably priced, and we're just about half that right now. You know, we went through a lot of transition through the Micro Focus acquisition a couple of years ago, and now we've come through that. It was a very complicated and important acquisition, and we have complete conviction that we will return the top line to the trajectory that we believe in, and that unlock in value is going to come back. You know, depending on how you chart it, depending on how you value companies, I firmly believe people should realize there's a reason to buy more because of that unlock.
There are not a lot of opportunities like that globally in our space where, you know, to be true, there is the core engine, the core products, and the core cash flow generation to achieve that valuation potential. It is kind of those three stacks of hold, buy, buy more that I think are compelling that I have learned a lot about and have even higher conviction. Now that I really see how the products work, I really see the profitability of the products, I really understand the team and the potential of the business.
Now that you've spent some time at the company, I know it's still early in your journey there, but what are your top priorities? I know you mentioned them on the earnings call, but for those that maybe didn't have an opportunity to hear that, what's the agenda that you're setting and what priorities do you have as the CFO?
Yeah, sure. It's a few things really simply, right? One, every day of the week is capital allocation. Really bringing fresh perspective, with my great business partner, and frankly genius CEO, Mark. Working really closely with Mark and the board on capital allocation and really being robust and taking a fresh perspective of the capital allocation. When I say that, it's interesting because OpenText was known historically as a very strong portfolio operator, regularly buying companies and rolling them in. We also had a bit of a pivot to organic growth. I think now when you step back and think of capital allocation, how do we just remain very consistent in our filter and don't waver, right?
First up, we're going to invest in the business and the R&D and the product innovation through our engineers. We're going to pay our steady dividend, and then, for capital allocation, how do we make really astute regular decisions on more tuck-in acquisitions or buying back stock or paying down debt and running through that filter very consistently so there's no surprises and nobody is ever wondering, why did you do that? Why did you do that? It's a really consistent capital allocation framework is priority number one and then making sure it's very, very solid and nobody's surprised because I think there has been some friction in feeling or, you know, do we really know how you're going to spend every dollar? So that's number one. And then number two, just consistency.
I think we have not always been consistent, I guess, to the point on capital allocation in terms of saying what our top strategic priorities are. Those are really anchored in competitive advantage, revenue growth, and optimization of the business. Being really consistent in what we say we're going to do and doing it regularly and under-promising and over-delivering and being world-beating in, especially in enterprise content and security and multi-cloud integration. Making sure that consistency is there and nobody's ever surprised. Simplification is a big priority for me in terms of what we talk about, how we do it, kind of the one, two, threes of the business and making sure our product portfolio, what we report and share with investors, how we communicate internally and externally is very simple, clear, and concise. Kind of capital allocation, consistency, and simplification would be a few of the priorities.
Helpful. I want to maybe zoom in a little bit on more of some of the short-term trends. You guys reported a few weeks ago. We're also now getting into late May. I think macro is a really big focus. Every day it feels like we have new policies and I can't tell you what it's going to be tomorrow. What I'd love to know is maybe what are you guys seeing? What are, especially in your conversations with your end customers, how are macro dynamics, how are deal close rates, how is the top of the funnel looking? Anything you can do to help illuminate given how much surface area that OpenText has, I think it would be really helpful for the audience.
Yeah, it's an interesting question to answer. We provided as much clarity as we could last quarter, which is, you know, as much clarity as we could provide, right? Everyone's in this uncertain state. I usually think, well, what would Bruce Rothney think? That's what I would do as well. We're pretty consistent with where we were, what our messages were last quarter, right? We had conviction that we have a strong pipeline, but there's a lot of uncertainty and a lot of uncertainty across certain sectors that we work with. You know, some on the auto side, for example, some in the public sector, there was some pause, feeling of pause. I think we're all wondering the same thing last night through this morning, right?
You see some of the overturn on the tariffs and the U.S. government actions. It's really hard to say exactly what the compass is, but what we have clarity on is sort of the base pipeline of the business, the core business, the core content business. We expect to continue to achieve our range of growth that we provided last quarter. I would say we haven't necessarily seen any significant upside or downside changes. We're pretty consistent with what we shared a few weeks ago. I wouldn't say the unease has shifted significantly yet. Part of the benefit of why we maintain a lot of regular dialogue and we like our current pipeline is the agnostic nature of our business where we can work with whatever cloud customers want. We can go on-prem, private, you can go sovereign in whatever country you want.
If you want to work with a hyperscaler, you don't, we can do that. Whatever LLM, we're very flexible and robust in how we can work with customers. That helps, but we needed to work through more of that with a lot of our customers. Continued unease, I think drops of optimism, but we're being very cautious in our position to under-promise and over-deliver. I'd say our perspective hasn't shifted in a material way from a few weeks ago, at the quarter end. It is, you know, some positives and the negatives there.
I think that's helpful. One of the things that I think investors appreciated on the earnings call was talking about streamlining the organization more to drive better cost savings, which ultimately I think will help with capital management. Can you just help us think through what was the catalyst for that now and what's allowing the company to achieve that type of efficiency and to think about headcount through that lens?
Yeah, I think it's important for every company to continuously innovate and improve, right? We're on a path back to Rule of 40, with the anchor of EBITDA margin. I think we should be progressively expanding our EBITDA margin every year. We were higher pre-Micro Focus acquisition, and we expect to continue to do that. One of the catalysts was we're AI first, and we're using our own technology to be AI first. There's a lot of changes we're making internally and have been making over the past year, post-Micro Focus, post-AMC divestiture, and with AI first mindset to reduce the countries that we operate in more from a corporate function, SG&A type perspective.
That enables us to save some costs and then do some rehiring in our centers of expertise and really ensuring every single job in the company that we hire for has an AI component to it. That enables us to do more with less and do more efficiently. I think that time is now and will continue to be regular. I think part of the catalyst and the spark is just where we're at now and kind of the complete completion of that Micro Focus post-AMC where we were pretty dispersed. We're just, you know, again, reducing the scale, not reducing R&D and innovation spend.
That's going to continue, but becoming more efficient and effective because I'm somebody that thinks about, together with our executive leadership team, I'm big on every dollar matters, every dollar counts in terms of how you optimize every dollar. Ensuring we're being very disciplined in where we spend and how we spend and reinvesting that currency in the growth of the business. We found areas we could reduce. That included in that reduction, a net reduction of another 1,600 employees. That has replaced over time through much more significant process automation and AI enablement, including our Aviator on every single employee's desk. It's just that the time is now, right, to act and grow and scale and become more efficient because it's one of our competitive advantages, I think as well, right?
As we generate growing free cash flow margin, I think we can generate expanding EBITDA margin. I think we can be a competitive standout, again in the next couple of years.
I'm going to put you on the spot. I've asked a couple of other CFOs this both on stage and then in one-on-ones over the course of the last couple of days. As a public company CFO, is there an AI tool that you have used that you, you don't have to name the vendor, you don't have, but that you are using as a CFO that you like that is making your job or the financial functions team easier?
Yes.
Can you tell us, without naming the vendor, what is the actual, what's the function you're using it for? Because I think what everybody wants to know is how are executives deploying AI, and you're a real-time channel check for me?
100%. My completely sincere answer, it's not a pitch, is OpenText technology is the best I've seen. MyAviator, now that it's deployed internally, this is newer technology for us. It rapidly increases our ability to synthesize and analyze information. That's important for me too, right? If you get a big data dump of information or, say, investor reports, there are a lot of things you can dump into our content manager, and then we can use our Aviator to synthesize, which I would do as well. What are the three most important facts here? Or, you know, you can get to the essence of reading a thousand pages in seconds. We are using that now. If you used it yourself, and we could happily set that up, you can see what I mean with MyAviator.
It's different than ChatGPT. It's different than other options that for sure we'll use all the time. MyAviator is internal. It's customized. The data is protected for us and with our own sources. Greg from our investor relations team is here today too. That entire team is doing the exact same thing because that helps us with script and comment preps of give me the five most important insights on this document now. That does it in the most sophisticated way that I've seen across files. Yes, actively doing it. I would expect not just as a public company CFO, but you'll see 22,000 OpenText doing that more regularly pretty soon as well.
Great. I want to pull on the AI thread now from the opportunity for OpenText itself. I know you mentioned Aviator. I want to both understand the commercial opportunity, but also the important role that OpenText is going to play in AI for a company to be AI ready, right? The role that you guys play on the data and information side, because I think it's quite critical. Could you maybe illuminate on that a little bit?
Yeah, it starts with your content management, right? We are, when I say the wiring and plumbing, we are kind of the plumbing to bring it all together and have that one single source of truth for data for a company so we can bring it all together again in whatever cloud they want. We consolidate really legacy infrastructure with this new platform. When you upgrade to Titanium X or really the 25 to, you have the choice to upgrade as well and enable the MyAviator. What we are doing is, again, it always depends on the company, whether you are providing managed service provider support or you are just, you know, actually storing the data, securing it.
We can bring it all together, we can secure it, and then that's what the companies can use to tap into the AI, right? You need to access something. So it's kind of the, I think, again, when you think of the wiring, the plumbing and how we consolidate all that data and secure it in a compliant way, and how we capture it, we're doing all that for the companies and whatever they want or the governments and whatever the way they want. That's where it all starts, right? That's why I think it's so important. Again, no better time to have the content management because you, what do you really have with AI without the data, and without secure data, trusted data, compliant data, governed data, and secure data again, wherever you want it. Again, it doesn't matter on-prem cloud.
We're seeing more of the migration to cloud for sure. I think that's really the grassroots of it, to be honest, that secure data, secure content, secure documentation, part of it is key.
Great. In that, you mentioned Titanium X. I know that was a really big project for the company. Can you maybe help us understand how you think that that ultimately impacts cloud adoption versus on-premise and what the impact of that has been for customers as well?
Yeah, it's a bit early still. Very encouraging start. It was just in April that we launched that. There's more to come still this quarter in terms of MyAviator, but we have our agents, we have our aviators that are going out. Those are increasing by the day. I'd say it's an encouraging sign for the amount of our customers, enterprise customers that want to upgrade now. We have pretty high ambition for that. It's a little early for me to say precisely how it's trending to expectation, but I'd say encouraging signs so far. I hope by the end of this quarter, we could give more clarity. I would say a predominant amount would be cloud-based, versus the on-prem. I think that was your question as well.
Early days, very encouraging because it is just people just getting the chance to actually see it in action, right? I think what they are seeing is that this is different than anything they have seen before. Again, because of the agnostic nature of it, right? Any document type, any LLM type, whatever you want to do, we can do that in a robust way. The team's very proud of it. The team worked hard on it for a long time. I think there is a lot more to come in terms of our kind of one quarter, one year, and three-year roadmap to take that, again, to the next level.
I think one of the things that might be helpful, and you mentioned this on the earnings call, is that the disclosures might evolve, right? Giving investors a better sense of what the growth engines inside of the company are. Can you maybe help us think through what are the clouds as you think about the six different cloud components and what's the driving force behind growth right now? How should we think about the disclosures going forward?
Yeah, it's an important new level of transparency, right? When we think of the changes and the opportunities I've seen since joining is, people don't always see the full breadth and scope and growth of the business based on how we disclose some of the business units today. The way we simply thought about it, a few of us were sitting around is, you know, how do we show our investors where are we outperforming and where are we performing? Because some of where we're performing is actually, you know, I'd use the term, as aggressive as it's, it's a bit of a drag on some of the overall top line. That's just been some of the migration and the conversion since the Micro Focus acquisition.
What we want to do is show starting in Q4 precisely where we are performing because that's where you would expect us to outperform, especially in enterprise content and security, on that cloud side. All right. It's that side of the business, clouds. Then we'll have clarity to where we're performing and where you might see maybe it is more constant to, in some cases, declining revenue for some of the more mature businesses. They are generating a lot of free cash flow, very high margin. We want to show where are we performing, where are we outperforming, and then how can you expect us to grow, especially in those outperforming businesses versus the market and what is the market growing at? I think that should be more encouraging because people can't really see that today.
I think that should provide clarity because then you can anticipate and understand the margins and the growth of those businesses and where we're going to allocate our capital, especially if it's to the perform versus the outperform side of the six business clouds. When we spoke as well at the last call about, not only investment in the business, but where you might see programmatic, token acquisitions or maybe some businesses that we monetize and find different owners for, and then we reinvest that currency back into the outperforming businesses, it'll be much more clear, I think. That will start in Q4. That will be important, right? As much transparency as possible. We have a lot of products for sure.
We have a lot of products, a lot of SKUs, a lot happening in our very big company, but this should simplify it in a really important way starting this quarter. That will be brand new and that will start just at the revenue side of it.
Great. Maybe, we're coming upon time, but I wanted to dig into the capital management side a little bit more. I think you've been clear on how you're thinking about it, but you've mentioned M&A, but I think at least divestitures have come up as well. How are you thinking about where you guys currently are and what needs to happen both between the potential acquisition strategy and the divestiture strategy going forward?
Yeah, we're being very clear-minded about it. We're not interested in any fire sales. We're very proud of all the businesses and products that we have, but we're also at a point where we are very interested in ensuring our top line is always growing. That's why I think the separation of perform and outperform is clear. We wanted to really synthesize that and then taking the time to really step back and think, okay, for the businesses that are not performing today, what can we truly expect three to five years from now? If they're not to our expectation, we have some internal thresholds, some internal hurdle rates.
We've been looking at those and then deciding, okay, from a lot of the interest that we have in our products and businesses, can we trade those instead for pretty meaningful multiples from different owners that might be in that swim lane or more focused just on that product or that business unit? We can, you know, sell to them and then again reinvest that, whether it's into buybacks or more token acquisitions. I'd say we're deep into the assessment phase. We have a lot of ideas. We have lots of interest. We're not rushing to anything per se, but we have a lot of great ideas on what could be with different owners and what could be what we could continue to acquire.
It's, that's just a natural part of the business at our scale, but we're very ready for more positive, thoughtful change. This is not something that should be surprising though, right? Again, this is the grassroots muscle OpenText. We've done over 80, completed successfully over 80 acquisitions, right? We slowed it down because Micro Focus was of significant scale, but we are very, very good at buying. Now we've proven to be very good at selling with the AMC divestment as well. It's not that you're going to necessarily see some big massive ones, but we use the tuck in and kind of almost tuck out or untuck type language to indicate some scale. We're prepared to move, make some smart decisions.
Otherwise, in the absence of that with our flexible capital, we'll keep buying back the stock every day of the week as well because of the low value right now.
Great. You mentioned Greg from the IR team. I have to say this fun fact for you. The very first IR professional that I ever got to go on the road with, with my senior analyst. That was 18 years ago and I am going to turn 40 this year. I have known him forever and I am glad to see you out in the audience, Greg. Thank you for that. Thank you for coming with us, Chadwick, today and look forward to learning more.
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