OPEN TEXT CORP Q1 2026 earnings call

Thank you and good morning, everyone. Welcome to OpenText's fourth quarter fiscal 2026 earnings call. With me on the call today are OpenText's Executive Chair and Chief Strategy Officer, Tom Jenkins, together with James McGourlay, Interim Chief Executive Officer, Steve Rai, Executive Vice President and Chief Financial Officer, and Cosmin Balota, our Senior Vice President and Chief Accounting Officer. Today's call is being webcast live and recorded, with replay available shortly thereafter on the OpenText Investor Relations website at investors.opentext.com. Earlier yesterday, we posted our press release and investor presentation online. These materials will supplement our prepared remarks and can also be accessed on the OpenText Investor Relations website. Now turning to the upcoming investor events, I'd like to take the opportunity to invite institutional investors and financial analysts to join us at OpenText World 2025 Investor Track on Tuesday, November 18th, in Nashville.

The OpenText World Conference is a unique opportunity for investors and financial analysts to learn about our latest product innovations and, with full conference access, allow open dialogue with our customers and partners on site. The conference keynotes and investor track will also be available by webcast virtually. OpenText will also be participating in the following investor conferences. On November 21, we'll attend the Needham Tech Conference virtually, and on November 24, we'll be at the TD Technology Media and Telecom Conference in Toronto. On December 2, we'll be at the Bank of America Leveraged Finance Credit Conference in Boca Raton, and on the same day, we'll also be at the UBS Global Technology and AI Conference in Scottsdale, Arizona.

On December 8th, we'll be at the Raymond James TMT and Consumer Conference in New York, and then finally, on December 10th, we'll be heading to the Barclays Global Technology Conference in San Francisco. We look forward to meeting with you at one of those events. Now, on with the reading of our safe rarbor statements. During this call, we'll be making forward-looking statements relating to the future performance of OpenText. These statements are based on 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 the 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 yesterday, 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 directly comparable GAAP measures may be found within our public filings and other materials which are available on our website. With that, I'll hand the call over to James.

Thanks very much, Greg. I would like to welcome everyone on the call today.

Joining us today is Tom Jenkins, Executive Chair and Chief Strategy Officer. I also want to give a warm welcome to Steve Rai, who joined OpenText as Executive VP and CFO in October. Steve brings a wealth of experience from technology and software. He is based in our Waterloo, Ontario headquarters. Also joining on the call is Cosmin Balota. I want to thank Cosmin for his leadership as Interim Chief Financial Officer, and Cosmin has now resumed his role as Chief Accounting Officer. The entire OpenText team is committed to delivering secure information management products that let our customers curate and enable agentic AI with their content. We have tremendously strong and deep customer relationships. It is because of this that we have such incredible and loyal install base. Now, let's get into our Q1 Fiscal 2026 results.

Q1 total revenues, ARR, adjusted EBITDA, margin, adjusted EPS are all above street expectations. As you saw with Q1 performance, we are continuing our momentum from last quarter, especially in our core content business. We remain focused on sales execution, having just completed a major product cycle. We believe we are in the market with the right products at the right time. Turning to our cloud performance this quarter. Q1 cloud revenue was $485 million, up 6% year over year, which is well on track towards our F2026 outlook range of 3%-4% growth. Cloud bookings continue to remain strong as we saw cloud CRPO up 6% year over year. More importantly, our long-term cloud RPO is up 16% year over year, and total cloud RPO is up 11% year on year.

Our other measure of cloud performance is enterprise cloud bookings, which were up 20% year on year in Q1. This puts us in a good position towards achieving our F2026 outlook range of 12%-16%. We closed 33 deals greater than $1 million in Q1, which is up 43% year on year. We had key wins in the quarter with Alton, Australia Department of Health, Core42, OptiSecurity, and MH Services. In September, we provided additional disclosure on our main businesses, which we break into product categories. This disclosure is in our IR presentation on the website and allows you to better track the performance. Tom will speak more about the tremendous opportunities in our core information management for AI business. For Q1, you can see that content being our largest business continues to lead our growth in cloud. Content Cloud grew 21% year on year in Q1.

This was driven mostly by bookings won in financial services, energy and utilities, as well as telecom verticals. We saw strength in retail, automotive, and manufacturing verticals, which also contributed to our business network positive growth in Q1. We are pleased with our enterprise cybersecurity business growth this quarter and mainly driven by a few sizable wins. Our product offerings continue to be recognized by industry experts such as Gartner, and we are establishing key partnerships that are important for content management and agentic AI. We're excited about our upcoming OpenText World event being held in Nashville from November 17th to 20th. Thousands of our customers and partners and other stakeholders will join in person to see our latest product offerings and innovations, especially our Aviator and agentic AI solutions in action. We will also showcase our Sovereign Cloud, keeping our customers' data local and secure.

We are very excited to see how our customers unlock the power of their own data using OpenText's products to foster innovation and spur growth. As we look ahead to the rest of the fiscal year, we are not changing our fiscal 2026 annual outlook. Please remember that we are an annual business and that results can fluctuate quarter over quarter. With that said, we expect Q2 total revenue to be between $1.275 billion and $1.295 billion and the adjusted EBITDA margin to be between 35.5% and 36%. We continue to see strength in our content business going forward. For the second half of fiscal 2026, we expect revenue to skew higher towards a strong Q4. There is typical seasonality that we see in Q3, but the momentum from our new product cycle is expected to come mostly in the latter part of fiscal 2026 and beyond.

We continue to expect ARR to return to growth in fiscal 2026, with cloud growth outpacing maintenance declines, while customer support revenue is on track to meet our fiscal 2026 annual outlook. We are seeing some of our customers making faster decisions to shift their workloads from on-premise into the cloud. We have always given our customers the choice of where they want to deploy and note that the on-premise deployment is still being sought after in heavily regulated industries and governments. To conclude my remarks, I want to take a moment to thank our OpenText team across the company for their professionalism, dedication, and hard work during this period of change, as well as our partners, customers, and shareholders. Finally, I would like to thank Tom Jenkins and all of the members of the OpenText Board of Directors.

Their support to both myself and all of our employees has been tremendous. This is an exciting time for OpenText. We're in a great position financially and operationally. We are in the right markets of secure content and data that trains agentic AI. When I stepped in as Interim CEO, my main priority was to take care of our customers and carry forward our initiatives and deliver our fiscal 2026 annual outlook. We had a great start to Q1, which sets us up nicely for the rest of the year and beyond. With that, I will hand the call over to Steve Rai, our EVP and CFO.

Thank you for the kind introduction, James. It's great to be here. Good morning, everyone, and thanks for joining the call. I'm one month in at OpenText and very excited to contribute to the tremendous opportunity ahead. Over the past few weeks, I've spent a lot of time with James and Tom and the extended team, and I'm in full support of the company's vision and direction. I look forward to working together with them to deliver on this. Cosmin Balota, our Chief Accounting Officer, who was the Interim CFO before I joined, is on the call today, and he will discuss the highlights of our Q1 financial results. I would like to thank Cosmin personally for his unwavering support, insights, and maintaining a steady ship through the transition.

For those of you who may not know me, my last role was as CFO at BlackBerry, where I was deeply involved in the company's corporate technology and organizational changes. I'm truly energized to join OpenText at this stage in its journey and will be based in our global headquarters in Waterloo, Canada. Since joining, I've been very impressed with the professionalism and passion from everyone that I've met across the organization. I see a company with solid financial fundamentals, with expanding margin and free cash flow, and excellent foundational technology. OpenText supports an impressive global enterprise customer base and is poised to capture a broad-based step change in the market for training and adoption of agentic AI. I look forward to putting my deep experience in technology and transformation to work with such a dedicated team.

With that, I'll hand the call to Cosmin to discuss our Q1 highlights.

Thank you, Steve, and good morning, everyone. Let me start by saying that in Q1, we continued our momentum from last quarter, particularly from growth in cloud revenues led by our content product category and through overall margin expansion. Total revenues for the quarter were $1.3 billion, which was an increase of 1.5% year over year. This growth exceeded our expectation for Q1 and was mainly driven by cloud and license revenues. In the quarter, our cloud revenues of $485 million were up 6% year over year. This growth is mainly attributed to strong demand in our content product category, which makes up approximately 40% of our overall business. It grew 21% year over year in cloud and 3% in total revenues, as outlined on slide six of our investor presentation.

Customer support revenues of $587 million were down 1.5% year over year, while our ARR, or annual recurring revenue, was $1.1 billion, which was an increase of 1.8% year over year. ARR was 83.2% of total revenues, which was a slight increase compared to the 82.9% in the same quarter last year. Moving to profitability, Q1 GAAP-based gross margins was 72.8% or 76.5% on a non-GAAP basis, which were up 100 basis points and 60 basis points year over year, respectively. These increases were mainly due to cloud gross margins growing 280 basis points year over year and 270 basis points on a non-GAAP basis. Adjusted EBITDA for the quarter was $467 million, which is a 36.3% margin and was up 130 basis points year over year.

This improvement was mainly driven by higher revenues, which, as I mentioned, was primarily from continued growth in cloud and our content category, with additional benefits realized from the expanded business optimization plan and improved gross margins. The costs and benefits associated with the business optimization plan and other savings initiatives, as outlined on slide 19 of our investor presentation, have not changed since the prior quarter. The strong margin performance in Q1 resulted in an adjusted EPS of $1.05, which was up 12.9% year over year. Q1 free cash flows was $101 million, which was a significant increase of $218 million year over year. As you may recall, in Q1 of last year, we made a one-time tax payment driven by the gain on sale from the AMC divestiture. This concludes my summary of the Q1 Fiscal 2026 financial highlights.

With that, I'd like to hand the call back to Steve.

Thank you, Cosmin. The results in Q1 demonstrate the resilience of OpenText's business supported by the strong financial position of the company. Along with our portfolio shaping initiatives and announcing the recent sale of our eDocs business, this solid foundation supports our capital allocation strategy of consistently paying a growing dividend, buying back shares, reducing debt, and reinvesting in growth. I'm a month in and looking forward to continuing my engagement with the OpenText team and meeting our investors and analysts. I'm excited to work with James and Tom and the rest of the executive team and board to carry out our strategic objectives. With that, I'll hand it over to Tom.

Thanks, Steve. Good morning, everyone. Before I get started, I'd like to thank Mark Barrenechea for his 13 years of dedicated service to our company. His leadership scaled and developed our company as a leader in enterprise information management. Steve, a very warm welcome to you and welcome to OpenText. You've only been here for a month, but I appreciate having you here on the call today. Since we made our announcement on August 11, we've met with hundreds of shareholders and analysts and investors, and it's been great for me to renew old acquaintances. I thank all of you who said that I haven't aged a day since the last time you saw me. I wish that was true. This has allowed us an opportunity to communicate to you a simpler strategy for the company to unlock the value that OpenText has.

We're going to concentrate on our core business units in enterprise information management and specifically those that provide the training for the new area around enterprise artificial intelligence. You'll hear us use the term agentic AI as well, and more on that in a minute. After all, it makes sense for us because OpenText is one of the biggest—we think it's the biggest, but it's certainly one of the biggest corporate data and metadata vendors in the world, with hundreds of connectors to legacy and current data sets. That's a powerful asset inside OpenText for AI, and we plan to unlock it. We'll do this first, though, by selling off all our non-core business units and using those proceeds to further create shareholder value. That's really our end goal. In a way, what is old is new again.

We're going back to our historical roots of being a content management company, except this time we have additional products in business networks and machine management wrapped in an enterprise-class security layer. That will be our core business. We already have the global scale, the go-to-market salesforce, the product line in these businesses, and the core of our core, which is the content management business, is also our largest business unit at about 40% of our total revenue. It also happens to be the fastest growing, with, on average, more than 20% cloud growth over the past few years. It was a pretty obvious strategic decision by the board to take these actions. We now have the entire company from the board, the executive management team, to our 20,000-plus strong global workforce aligned and locked into achieving our FY26 objectives and beyond.

We're going to stick to our plan. There are early signs that we may be even going faster towards the cloud as the year goes on. As we shed the non-core units, our cloud content business will be soon the dominant share of all of our revenue sources. That's our goal. We'll keep reporting our business unit breakout as we go through this journey so that you can track right along with us our progress towards that goal. Speaking of progress, if you take our August 11th release and some of the short-term priorities that we said we would address, I'm pleased to report we've addressed almost all of them. We've had a very busy 90 days, and the next 90 days will be just as busy. As I mentioned, we started by providing additional transparency with all of the revenue breakout performance for our business units.

We did this in early September so that you could track along with us on our progress. That is where you saw the strength of the cloud growth. In fact, last year, Content Cloud grew 17%, and this quarter it grew 21% year over year. That is the acceleration I was referring to. Clearly, our content management customers are moving even faster to the cloud. This will start to change our revenue mix slightly in our plan, but it is an indication that we are moving faster to becoming a fully cloud-centric company. Of course, we appointed Steve Rai as our permanent CFO, and he, of course, has a solid background in financial and operational reporting. Even more so, with his background at BlackBerry, he has a lot of experience in portfolio shaping. We welcome that wisdom to the management team.

This was followed by our first announcement of a non-core business unit sale within the analytics business, as has already been mentioned. It's an on-premise piece of software, so that will help the pivot towards cloud even further as we shed the non-core units. We also talked about the refreshment of the board. Recently, we appointed a new board member, George Schindler. He's the former CEO of global IT consulting giant CGI. He's a fantastic addition to the board, brings valuable perspective, and now includes other members that we've announced in the past year, such as the senior partner in technology and telecom from Accenture, the Chief Human Resources Officer of Hewlett-Packard, the CIO of Cisco, among just the new members that we've announced in the past year. We're quickly retooling everything at OpenText.

Yesterday, we published our Q1 Fiscal 2026 results that demonstrate the resilience of the business and the continued demand for Content Cloud and AI. We're focused on the right market at the right time. It leaves us with one major priority remaining, which is to find a permanent CEO. The search is ongoing, both internal and external candidates. I'm pleased to note that we have had many world-class candidates step up and put their hat in the ring for consideration by our search committee. Our goal is to find a leader whose solutions are focused and to help us elevate to the next phase of OpenText's journey. In the meantime, I'd like to thank James for stepping in as Interim CEO. He's been a steady hand leading the operations of the company and to Cosmin for leading the financial group.

As you can see from the results, they've both done a great job stepping up on short notice. OpenText is on a solid financial and operational foundation of growing long-term margin and free cash flow. We are committed to unlocking shareholder value through our capital allocation strategy, which will include reducing debt, paying a dividend, share buybacks, and tucking M&A. With all of this, we are committed to providing investors with clear, simple, transparent metrics so you can better understand our business and performance and follow along with us on this journey. Let's turn to our strategy now and how OpenText plays an important role for our customers in agentic AI. We provided some slides, and obviously, we are also going to speak at our user conference and analyst day next week, as James had mentioned.

A lot more detail to come, but we thought we'd give you an overview of what you'll be seeing next week. It really falls around a recent MIT study on agentic AI, which indicated that the importance to productivity is that AI must be trained by specific content that can only be found inside the firewall of organizations. Keep in mind that many of the world's first, most amazing Gen AI products like ChatGPT and Perplexity and Claude were all primarily trained on public information. Now, public information only represents about 10% of the world's information. About 90% of that information is behind the firewall. In fact, many years ago, OpenText wrote a book called Behind the Firewall that described where all this information is and how you find it and how you use it.

Now, of course, most of that was built as records management and archive for regulated industries. OpenText was the leader in all of that. That positions us with an enormous access to all the data. As you know, we have hundreds of thousands of organizations all throughout the world that we've built these systems for over the past 35 years. That's really the gold mine for customers that are seeking to build productivity-related agentic AI. We'll provide a lot more information on that. Where does that apply to OpenText? OpenText in enterprise information management, it's got data stored in three major business units that we've broken out for you today: in content, our ITOM, and our business networks. These products, our users are able to use their own data to train agentic AI.

That's way more powerful for anything that's available in the public domain. That is why we call this enterprise artificial intelligence, in the same way that we used to call it enterprise information management and before that, enterprise content management. What is old is new again, and we're returning to our roots. We think that there's an enormous demand for this as we go forward. Now, we're also seeing an interesting change around proprietary clouds. In the case of governments, they call it a sovereign cloud. Users do not want to lose the keys to their castle. AI is very different than just storing data. Our users are starting to find that they want to be very careful how they construct clouds that use AI. They want to make sure that they're inside the firewall.

We're noticing that the domestic telecoms throughout the world are starting to take a more substantial role in the supply chain for these proprietary clouds. I think you'll see in the future OpenText get more involved with those telecoms throughout the world as those channel opportunities present themselves. It's interesting because we're finding that major corporations that went to the cloud actually don't have an IT capacity internal to their companies anymore. That's why they're seeking alternatives where they can maintain a proprietary AI but do it on a managed service basis through ourselves, other vendors, and the telecoms, as I had mentioned. Now, these trends, they're going to be a major topic of our upcoming user conference. James has mentioned that we'll be having later this month in Nashville, as well as the analyst day.