OPEN TEXT CORP Q2 2026 earnings call

Thank you, operator, and good afternoon, everyone. Welcome to OpenText second quarter fiscal 2026 earnings call. With me on the call today are OpenText Executive Chair and Chief Strategy Officer Tom Jenkins, together with James McGourlay, our Interim Chief Executive Officer, and Steve Rai, our Executive Vice President and Chief Financial Officer. Today's call is being webcast live and recorded with a replay available shortly thereafter. Just look on the OpenText investor relations website at investors.opentext.com. Earlier today, 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 some upcoming investor events. OpenText will be participating in the Scotiabank Technology Media Telecommunications Conference in Toronto. It's on March 4th. We look forward to meeting with you there.

Now onto reading of our safe harbor statement. During this call, we will be making forward-looking statements relating to the future performance of OpenText. These statements are based on 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 the risk factors that may impact future performance results of OpenText, are contained in OpenText's recent Forms 10-K and 10-Q, as well as in the press release that was distributed earlier today, all of which can 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 the other materials that are available on our website. With that, I'll hand the call over to James.

Thank you, Greg, and welcome everyone to our Q2 fiscal 2026 earnings call. Last week, we announced Ayman Antoun as our new CEO. Tom will talk more about Ayman later in this call, but I wanted to take an opportunity to welcome Ayman to OpenText, and I look forward to working with him when I return to an executive role on the leadership team. In this past week, we announced that we had entered into an agreement to divest Vertica to Rocket Software for $150,000,000. I would like to recognize the dedication of our teams and thank our customers and partners for their continued trust during this process. The transaction places the Vertica solution with a strong, committed steward, and I look forward to working with Rocket to support customers and to ensure a smooth and thoughtful transition.

We ended off the quarter with a solid performance beating our own expectations on total revenues, Adjusted EBITDA margin, and adjusted EPS. Our results for this quarter in the first half of 2026 demonstrate our commitment to deliver on our objectives and maintain a steady ship as we continue to implement our strategy of reshaping our business to focus our faster-growing core businesses. Since August, our goal has been to ensure that our clients receive strategic support from OpenText as they progress through their cloud journey while rapidly advancing their AI readiness. Our clients are using our AI Aviator tools to gain additional value and insights from their contents. The secure information management capabilities that we have provided to our clients for the last 30 years deliver the same data that AI requires. Therefore, we are well-positioned whether our customers use AI or applications to meet their business needs.

Steve Rai will go through our quarterly results in more detail. However, I would like to highlight that in Q2, we generated total revenues of approximately $1,330,000,000 led by overall cloud growth of 3.4% year-over-year. We continue to see strong enterprise cloud bookings of $295,000,000 or growth of 18% year-over-year. Total cloud RPO is up 13.7% year-over-year, and we closed 53 cloud deals larger than $1,000,000. We introduced disclosure on the revenue performance of our product categories in September of last year, and you can see that our total content business, which consists of 43% of our total revenues, grew 4.5% year-over-year in Q2. And if you look specifically at cloud revenue for content, it grew 18% year-over-year.

I would like to call out that our revenues for our core business continue to grow at approximately twice the pace of total revenues. Content, which is our largest and fastest-growing business, continues to demonstrate strength, and it also leads to our cloud growth. There is no change to our F26 revenue target of 1%-2% growth year-over-year. I would like to turn to some of our customer wins in the quarter that highlight the growth trajectory of our core business. We secured a win from U.S. Bank where it completed a full migration of its on-premise license to hosted architecture and cybersecurity. Solenis faced complex document management needs across their global operations, and they opted to integrate OpenText's Extended ECM with SAP for more streamlined and unified processes. We had another cybersecurity win with BNP Paribas.

They needed a single integrated application security stack to help avoid production vulnerabilities and reduce remediation costs. They chose OpenText since it delivered the best results after testing all major vendors. At OpenText World Conference last November, we received very positive feedback from our clients and partners on our new product cycle release. We had customers such as IBM and Honda join us on the main stage to speak about using OpenText AI solutions. IBM spoke about using our content management and Content Aviator to support their 280,000-plus employees worldwide. United Airlines discussed why they chose our ITOM platform and ITOM Aviator to reduce critical incident resolution time, and Honda chose our Business Network Trading Grid and Business Network Aviator for autonomous supply chain issue resolution.

At the conference, we also introduced the OpenText AI Data Platform, which will be shipping next quarter, as well as a host of new tools for orchestration of data, integration, and agentic AI. Our AI Data Platform can facilitate any major LLM model and provide over 1,500 connectors to various ERP, CRM, ITOM systems such as Oracle, Salesforce, SAP, etc. Turning to our FY26 outlook, as I mentioned, we are reaffirming our total revenue growth of 1%-2% year-on-year. Our expectation for FY26 year-on-year customer support and ARR growth, as well as enterprise cloud bookings, also remain unchanged. As we look forward to the next quarter, we expect Q3 total revenues to be between $1,260,000,000 and $1,280,000,000. To summarize, we are really excited about our cloud growth in our core product groups, especially in Content, our largest and fastest-growing business.

Overall, we see opportunity for our core products to continue growing in the cloud as our clients make fundamental decisions on their cloud and AI needs. With that, I would like to hand the call over to Steve.

Thanks, James. Good afternoon, and thank you all for joining the call today. I will also take this opportunity to congratulate Ayman on his CEO appointment and look forward to working together in a couple of months on this exciting journey. After my first full quarter with OpenText, I've gained excellent insight into the business. OpenText maintains a strong financial position, and I am very optimistic about the strategy we're executing to pivot the company to higher growth with a solid margin and free cash flow profile. We remain operationally focused and are making good progress on the major strategic initiatives that we've outlined in the last couple of quarters, including on our portfolio reshaping and business optimization plan. In Q2, our content cloud business continued to lead our growth, and we also performed well on margins and cash flow.

As James mentioned, we generated total revenues of $1,330,000,000. Cloud revenue was $478,000,000, up 3.4%, mainly driven by content cloud. As a reminder, please see our investor relations presentation for further details of our core and non-core revenues by product category. Q2 represents the 20th consecutive quarter of organic cloud growth, and our cloud net renewal rate remained consistent at 95%. Customer support revenue in the quarter was $582,000,000, down 1.5%, and on track with our fiscal 2026 outlook. Our customer support net renewal rate also remained consistent at 92%. Annual recurring revenue, or ARR, was $1,060,000,000, up 0.7% year-over-year. An ARR as a percentage of total revenues was 80%, which increased by one percentage point. Regarding profitability, GAAP gross margin was 74.0%, and non-GAAP gross margin was 77.6%, both up 70 basis points and 40 basis points, respectively.

This was mainly driven by the increase in cloud and customer support gross margins, partially offset by the decline in gross margins for license and professional services. Adjusted EBITDA was $491,000,000, or 37.0% margin. This was down 2.1% and 60 basis points, respectively. The decline was driven primarily by investment in the sales team, including commissions, partially offset by savings from our business optimization plan, which remains on track. Regarding that, we still expect to realize this year approximately one-third of the total estimated savings of between $490,000,000-$550,000,000. Please see slide 34 in our investor relations presentation for more details. GAAP net income was $168,000,000, down 26.9% year over year. The decline was largely due to FX on acquisition-related derivatives. Non-GAAP net income was $286,000,000, down 2.4%.

Q2 GAAP diluted EPS was $0.66, down 24.1%, and non-GAAP diluted EPS was $1.13, up 1.8%, and free cash flow was $279,000,000, down 8.9%. On a year-to-date basis, total revenue was up 0.4%, and cloud revenue grew 4.7%. License was also up 1.3%, partially offset by a decline of 1.5% in customer support and 10.2% in professional services. First half fiscal 2026 adjusted EBITDA margin was 36.7%, up 40 basis points. Non-GAAP diluted EPS of $2.18 was up 7.4%, and our free cash flow was $381,000,000, up from $190,000,000 for the same period last year. We announced the divestiture of Vertica for $150,000,000, in cash before taxes, fees, and other adjustments. Vertica is part of OpenText's on-prem analytics product group, and it contributed approximately $80,000,000 annual revenue in fiscal 2025. OpenText intends to use the proceeds from the sale to reduce outstanding debt.

Under the terms of the agreement, the software, customer contracts, and associated services and employees will be transferred to Rocket Software. The transaction is expected to close during fiscal 2026, subject to customary approvals and closing conditions. Turning to our full-year fiscal 2026 outlook that James touched on earlier, our expectations remain unchanged at 1%-2% for total revenue growth. While not impactful to the overall percentage range, we are reminding investors and analysts to reduce their revenue models for the remainder of the fiscal year by approximately $15,000,000 to reflect our divestiture of eDOCS, which was completed in January. All other previously announced outlook remains unchanged. We continue to watch global currencies and are being slightly more specific that in fiscal 2026, we expect our core business total revenue to grow in constant currency terms.

Turning to Q3, we expect total revenue between $1,260,000,000 and $1,280,000,000. This number reflects a $7,000,000 reduction for the eDOCS divestiture. Q3 adjusted EBITDA margin is expected to be between 33.0% and 33.5%, which, as in prior years, is a seasonally lower margin quarter. We continue to expect total revenue in the second half of fiscal 2026 to skew higher from Q3 to Q4. Last November, at our OpenText World investor briefing, I provided an illustrative example of how we anticipate our total revenue mix could change and grow in the coming years as our customers move faster to the cloud. For reference, we included this on slide 8 in our investor relations presentation. In the longer term, OpenText will benefit as we expect to see cloud revenue, ARR, and RPO increase significantly.

This is a classic strategy utilizing the same modeling as for all other software companies experienced as they experienced through their cloud transitions. We closed the divestiture of eDOCS in January and used the proceeds to pay down our debt. We continue to execute on our previously announced $300,000,000 share buyback program, and we have repurchased for cancellation half of this on a year-to-date basis so far in fiscal 2026. Subject to customary regulatory approvals, we intend to further increase the amount of our existing buyback program, particularly given recent valuation levels. We are also looking to do small tuck-in M&A as opportunities arise. Our robust cash flow engine provides us with the scale and flexibility to continue investing for growth within our core enterprise information management for AI market. With that, I will hand it over to Tom.

Thanks, Steve, and good afternoon, everyone. It's been a busy six months, but I'm happy to see solid results for the second quarter and first half of the year. Thanks to the leadership of James and Steve and the rest of the executive leadership team. The company has been operating smoothly while we continue to move forward with our strategy to pivot OpenText to higher growth while maintaining a solid margin and free cash flow profile. Last August, we made some promises, and I'm happy to say we met all of them. We've completed our hiring and performance targets. We're moving forward with some solid milestones in our portfolio shaping activities. Let's review what we've done so far. As Steve and James have highlighted, we've had strong Q2, had a strong Q1 before. First half of the year is going well.

We're on track to meet all of our F26 outlook targets as we promised. We appointed Steve Rai, who's now fully immersed and focused deeply on strategy, operations, and financial reporting. On the portfolio shaping, we've announced the sale of Vertica as well as the closing of the eDOCS divestiture, but we're not done. We've set a cadence of one divestiture per quarter, and we're working towards streamlining our portfolio to get to our core business. We've elected two new board members at our AGM in December, and that brings to a total of five new board members in the past year alone. We provided additional transparency with quarterly reporting of our product category revenues so everyone can track our progress every 90 days as we move to our core business. Lastly, we appointed our new CEO, Ayman Antoun, a software industry veteran.

I'd like to echo James and Steve's warmest welcome to Ayman. He won't be on this call since we just announced his appointment last week, but Ayman will be ready to participate in next quarter's earnings call. The board is very pleased to welcome Ayman to OpenText, and as we look ahead to the company's future, the board believes that he's the best leader to drive shareholder value by growing organic revenue in our core enterprise information management business to train agentic AI. Ayman brings more than three decades of global technology, operating discipline, transformation leadership to OpenText. Built over a seasoned career in the information technology industry, most recently as president of IBM Americas, he led the company's largest and most complex business unit across U.S., Canada, and Latin America, about $30,000,000,000 in revenues all told.

During his tenure at IBM, he drove major advancements in cloud, infrastructure, cybersecurity, cognitive solutions, digital modernization, as well as divestitures such as Kyndryl. We're also welcoming Ayman back home as he went to high school and university a few blocks from our headquarters office in Waterloo. James continues to serve as Interim CEO until Ayman officially joins us in a couple of months. Upon that transition, James will move into a role within the executive leadership team. I'd like to thank James for his steadfast leadership as Interim CEO and for the strong results we're realizing by his continued commitment to our clients. Part of our portfolio shaping strategy, we recently agreed to divest Vertica to Rocket Software for approximately $150,000,000, and this comes shortly after we announced closing of the eDOCS divestiture for $163,000,000.

We're executing to our strategic plan, focusing on our core product offerings, our expertise, and secure data for enterprise AI that provides strategic choice where you can choose LLMs and flexibility for our customers. We're moving quickly but methodically to ensure that we obtain the best market value for our assets and do it in a way that will not disrupt our sales and operations. By rationalizing these non-core assets, we're strengthening the portfolio, reinforcing our capital allocation framework, and positioning OpenText to invest more deeply in our cloud businesses. That will drive sustainable long-term growth and shareholder value. The rise of AI has confirmed our thesis that providing data to train AI is the best choice for our core business. I'd like to turn our attention to some changes we made at the board level.

We held our AGM last December, and we welcome two new board members, John Hastings and Margaret Stuart, and of course, Ayman will be joining the board as well in April. As I mentioned before, that brings a total of five new members joining the board just in the past year. We announced back in August that the company will be focusing on our core markets anchored by our largest and fastest growing content cloud business. This requires us to reshape the current product portfolio, and with the announcements that we've made so far of Vertica and eDOCS, we're pushing forward at a methodical pace to sell one business unit or product category per quarter. This timing is approximate and can vary depending on the size of the transaction that we're working on.

As OpenText moves towards a leaner content cloud and AI-focused software company, it's important to be reminded of why we are doing this. OpenText is positioned as a leader in the information management space, particularly for training agentic AI. Our product strategy remains focused on the need of our customers to organize and curate their data to use with agentic AI. Our core businesses, and especially content, couldn't be better positioned in this market. We're managing, organizing, and securing data are critical steps in training and deploying agentic AI tools. As you all know, OpenText for 30 years has been making this information management for applications that our customer used in regulatory industries because they needed permissions to access sensitive information.

It just so happened that when AI was invented, it needed the same kind of information management to train the enterprise AI, also known as agentic AI. So we're very fortunate that we were ahead of the curve and that all of our technology that we developed over the last 30 years is immediately usable to an AI through our Aviator Connector. The focus of our development has been on making Aviator Connector to as many popular large language models as possible that are being used to train as agents within organizations using sensitive data. So we're doing what we said we would do. There are more milestones to come, and we're operationally ready to support further portfolio reshaping. And I'm confident in our leadership team and the existing operating model.

The core of OpenText is growing while management remains disciplined on margin and focused on growing Adjusted EBITDA dollars. We appreciate the patience given to us by our shareholders while we evolve into a higher growth content cloud and AI-focused software company, and we're excited by what lies ahead. With that, this concludes our prepared remarks, and could the operator please open the line for questions?