The News: OpenText announced second quarter (Q2) fiscal year (FY) 2024 earnings on February 1, powered by strong growth in cloud services and subscription revenue and large increases in annual recurring revenue (ARR) and quarterly enterprise cloud bookings. The company reported total revenue of $1.535 billion for the quarter, and non-generally accepted accounting principles (non-GAAP) diluted earnings per share (EPS) of $1.24 for its Q2 FY 2024 period ending December 31, 2023, up 39.3% on a year-over-year (YoY) basis. The company’s earnings were impacted due to operating expenses nearly doubling for the quarter, reaching $875.3 million, compared with $451.1 million a year ago, along with significantly higher interest and other related expenses. For the full earnings press release, see the OpenText investor relations site.
By the numbers:
- Q2 2024 Earnings: $1.24 per share versus $0.35 per share, up 39.3% YoY, non-GAAP diluted
- Q2 2024 Revenue: $1.535 billion, up 71.0% YoY or up 68.2% YoY in constant currency (CC)
- Q2 2024 Operating Expenses: $875.3 million, up 94% YoY
The company also reported the following results:
- Cloud Services and Subscription Revenue: $450.1 million for Q2 FY 2024 versus $408.7 million for Q2 FY 2023, a YoY increase of 10.1%, or 9.2% in CC
- Customer Support Revenue: $316.5 million for Q2 FY 2022 versus $695.8 million for Q2 FY 2023, a YoY increase of 115.6% in CC
- Total ARR: $725.2 million for Q2 FY 2023 versus $1.146 billion for Q2 FY 2024, a YoY increase of 58%, or 55.6% in CC
- Q2 2024 Quarterly Enterprise Cloud Bookings: $236 million, up 62.8% YoY
- Non-GAAP-Based Operating Income: $532.9 million, up 67.5% YoY
OpenText Q2 Revenue Growth Driven by Cloud Services, Customer Support
Analyst Take: OpenText, a global leader in information management solutions, has strategically positioned itself in the competitive market by focusing on core areas of growth and innovation, particularly in cloud services and digital transformation technologies. The recent divestiture of the Micro Focus Application Modernization and Connectivity (AMC) assets to Rocket Software represents a deliberate move to streamline its portfolio, allowing OpenText to concentrate on its strengths and enhance its market position in enterprise information management. This strategic realignment underscores OpenText’s commitment to optimizing its offerings and resources, ensuring it remains at the forefront of addressing the evolving needs of businesses in the digital era.
OpenText reported record Q2 FY 2024 earnings of $1.535 billion, up an impressive 71% YoY, powered by strong growth within its cloud services and subscription segment, ARR performance, and professional services segment. For the Q2, OpenText reported adjusted earnings per share of $1.24, up from $0.89 in Q2 2023 of the previous year.
Customer Wins and Strength in Cloud Services and ARR Driving Revenue Growth
The company’s strong performance in Q2 FY 2024 was driven in part by a number of customer wins, including Beyond One (Virgin Mobile), BMW, Carl Zeiss, Coop Danmark, Edward Don & Company, F5 Networks, FedEx Express, Google, Harris County, Metropolitan Utilities District, Turkcell, and Zoho, as well as the introduction of a new unified OpenText Partner Network.
Another key contributor to the company’s strong revenue performance was OpenText’s customer support division, which posted a YoY revenue reaching $695.8 million, an increase of 115.6% in CC. Licensing revenue grew even more, 162.7% YoY to $283.6 million in CC.
OpenText also announced in the quarter the release of Cloud Editions 24.1 and its latest OpenText Aviator innovations, which supports natural language queries, conversational chat, and personalized, automatically generated content. In addition, the company also announced a suite of tools to aid IT administrators in creating and managing data lakes, analyzing structured and unstructured data, and creating visualizations.
Strong YoY Growth in Enterprise Cloud Bookings and ARR
The quarter was also marked by strong growth in cloud revenue. OpenText reported enterprise cloud revenue of $450.1 million, up 10.1% on a YoY basis, or up 9.2% in CC., driven by 48 cloud wins with more than $1 million in contract value.
ARR reached $1.146 billion, up 58% YoY, and up 55.6% in CC. According to the company, Q2 2024 marked the company’s 11th consecutive quarter of enterprise cloud organic growth in constant currency and 12 consecutive quarters of constant quality organic growth in ARR.
Micro Focus Acquisition Complete, Company to Focus on Innovation and Growth
According to the company, the Micro Focus acquisition, which closed exactly a year ago, has resulted in a $601 million revenue contribution in Q2 2024, with renewal rates of high 80%, according to comments made by CEO Mark J. Barrenechea, OpenText CEO & CTO on the company’s earnings call with analysts. Barrenechea added that the majority of the Micro Focus restructuring is complete, so the company’s attention and focus is now being placed on customer transformation, innovation, and growth, leaning on information automation and AI. Like other major enterprise SaaS workflow vendors, OpenText will completely embed AI in all of its products.
OpenText is clearly focused on embedding AI across its entire platform, and the company used the conference call as an opportunity to discuss Platform Athena, which is its proprietary process platform that will be used internally to help OpenText’s engineers generate software, thereby accelerating the company’s innovation potential, improve time to market, and improve productivity and efficiency. Barrenechea said that the company’s first Athena-generated products are expected to be in the market with Cloud Edition 25.2.
OpenText is also in the process of completing the divestiture of AMC to Rocket Software, which the company expects to be completed by Q4 2024. The company expects to use the proceeds of the $2.275 billion sale to reduce its net leverage to less than 3 times and ahead of schedule, providing OpenText with more flexibility to resume share buybacks, pursue strategic M&A, and drive future cloud and organic growth.
Looking Ahead
The company’s core focus in the near term is driving bookings and cloud revenue growth. OpenText is raising its cloud bookings growth target to 25% to 30% growth, up from 15% plus. For fiscal full year 2024, in constant currency, the company expects to reach $5.85 billion to $5.95 billion in revenue, 36% to 37% in adjusted EBITDA, $825 million to $900 million in free cash flow, and total revenue organic growth of 1% to 2%, and expects Micro Focus to return to organic growth in FY 2024.
All told, OpenText has positioned itself well to take advantage of the growing demand for AI across a wide variety of workflows and processes, thanks to the infusion of the technology across its entire platform. Further, the company’s commitment to consistently roll out platform feature enhancements and improvements every 90 days ensures that customers are able to continually reap the benefits of new technological developments quickly. The company’s relative weakness in the small and midsize business (SMB) market is clearly being offset by strength in the enterprise segment, particularly in its cloud and service business, and the company’s focus on improved internal efficiency and productivity through Platform Athena should set up OpenText for continued growth and momentum through 2025 and beyond.
Disclosure: The Futurum Group is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of The Futurum Group as a whole.
Other insights from The Futurum Group:
Rocket Buying OpenText’s Application Modernization Unit for $2 Billion
OpenText Reports Strong Q1 FY 2024 Earnings
Evaluating OpenText Aviator: The Emergence of Enterprise AI Platforms
Author Information
Steven engages with the world’s largest technology brands to explore new operating models and how they drive innovation and competitive edge.
Keith Kirkpatrick is VP & Research Director, Enterprise Software & Digital Workflows for The Futurum Group. Keith has over 25 years of experience in research, marketing, and consulting-based fields.
He has authored in-depth reports and market forecast studies covering artificial intelligence, biometrics, data analytics, robotics, high performance computing, and quantum computing, with a specific focus on the use of these technologies within large enterprise organizations and SMBs. He has also established strong working relationships with the international technology vendor community and is a frequent speaker at industry conferences and events.
In his career as a financial and technology journalist he has written for national and trade publications, including BusinessWeek, CNBC.com, Investment Dealers’ Digest, The Red Herring, The Communications of the ACM, and Mobile Computing & Communications, among others.
He is a member of the Association of Independent Information Professionals (AIIP).
Keith holds dual Bachelor of Arts degrees in Magazine Journalism and Sociology from Syracuse University.
