The News: OpenText Corp. announced third quarter (Q3) fiscal year (FY) 2024 earnings on May 2, with total revenue reaching $1.45 billion, up 16.3% year-over-year (YoY), reflecting continuing demand for cloud services, larger deal sizes, and notable customer wins with large enterprise customers, and beating the analyst consensus estimate of $1.43 billion. OpenText’s non-generally accepted accounting principles (non-GAAP) earnings per share (EPS) figure of $0.94 met the consensus EPS forecast of $0.94, with earnings driven in part by strong enterprise cloud bookings, which increased in Q3 2024 by 53%, reaching $165 million. For the full earnings press release, see the OpenText investor relations site.
By the numbers:
- Total Revenue: Increased to $1.447 billion, up 16.3% YoY, and up 16% in constant currency (CC)
- Annual Recurring Revenue (ARR): Grew to $1.146 billion, up 13.3% YoY , and up 13.1% in CC
- Cloud Revenue: Rose to $454.5 million, up 4.4% YoY, and up 4.4% in CC
- Non-GAAP Net Income: Increased to $257.0 million, up 29.9% YoY
- Non-GAAP EPS: Non-GAAP diluted EPS was $0.94
- Gross Margins: Non-GAAP gross margin rose to 76.7%\Adjusted EBITDA: Reached $463.7 million, up 27.0% YoY, with adjusted EBITDA margin of 32.0%
- Operational Cash Flows and Free Cash Flows: Demonstrated strong cash generation with operational cash flows of $384.7 million and free cash flows of $348.2 million.
- Strategic Sale: Completed the sale of its AMC business for $2.275 billion in cash, enhancing financial flexibility
OpenText Q3 Driven by Strength in Cloud and Annual Recurring Revenue
Analyst Take: OpenText’s Q3 FY2024 financial results are indicative of another quarter of robust growth and strategic achievements, underpinned by significant increases in revenue, net income, and operational efficiencies. The company’s focus on cloud services, subscriptions, and strategic divestitures has positioned it strongly within the information management sector.
The company’s total revenue rose to $1.45 billion, marking a 16.3% YoY growth or 16.0% in CC. This growth is reflective of OpenText’s expanding product portfolio and its ability to meet the evolving needs of its global customer base, which includes both large enterprises, mid-market, and mature SMBs. ARR, a critical indicator of the company’s stable future cash flows, grew by 13.3% YoY to $1.1 billion or 13.1% in CC, demonstrating the strength and reliability of the company’s current operations, which are focused on generating longer-term and larger contracts.
Cloud services and subscription revenue increased by 4.4% YoY to $454.5 million, indicating a steady demand for OpenText’s cloud offerings. This segment’s growth is crucial as it aligns with the company’s strategic focus on cloud-based solutions, which are increasingly becoming a central part of digital transformation strategies for all types of businesses.
From a profitability perspective, OpenText reported non-GAAP-based net income of $257.0 million, up 29.9% YoY. Non-GAAP-based diluted EPS increased to $0.94, reflecting the company’s revenue growth and focus on operational efficiency.
OpenText posted a non-GAAP gross margin at 76.7%, indicating better profitability and cost efficiency in delivering services. Adjusted EBITDA was $463.7 million, a 27.0% YoY increase, with adjusted EBITDA margin of 32.0%.
Operational cash flows were $384.7 million, up 14.2% YoY, and free cash flows were $348.2 million, up 13.9% YoY. Additionally, the completion of the sale of its AMC business to Rocket Software for $2.275 billion in cash is a strategic move that not only simplifies OpenText’s business structure but also enhances its financial flexibility.
OpenText Banking on Greater AI Adoption in the Future
These quarterly results reflect OpenText’s strong financial health and its strategic focus on growth, profitability, and the company’s emphasis on cloud, security, and the use of AI capabilities to enable better internal and external experiences. According to Mark J. Barrenechea, CEO of OpenText, the company sees two large opportunities with AI, which he explained on the conference call with analysts.
“We see two huge opportunities in AI; first to help our large installed base of customers prepare their operations and data through systems consolidations to our Cloud Editions,” Barrenechea said. “And second, to grow our Aviator and Thrust offerings. We officially introduced Titanium X at OpenText World Europe a couple weeks ago, our next-generation autonomous cloud. We demonstrated our latest Aviator technology with Cloud Editions 24.2. We made business AI as easy as pressing a button.”
Divestiture of AMC and Share Buyback Announcements
OpenText said that as of May 1, the company had completed the divestiture of AMC assets, which resulted in a one-time $250 million tax charge. However, as the divestiture is now complete, the proceeds from the sale of AMC will be used to pay down debt, increasing the company’s capital flexibility.
OpenText expects that for FY 2025, the company will realize free cash flows between $575 million to $650 million, which includes the one-time tax charge, setting the company up for potential future acquisitions. In addition, OpenText also announced a $250 million share buyback over the next 12 months, and the company’s intention to return $450 million to $500 million of capital to shareholders in FY 2025, underscoring the commitment to delivering value to its shareholders.
Key Customer Wins and Product Launches Set Up OpenText for Longer-Term Success
OpenText highlighted a number of large customer wins during the quarter, including Akamai Technologies, BAE Systems, Commercial Vehicle Group, Insecurity Inc., Kuveyt Turk, Lotte Non-Life Insurance Co, MAN Energy Solutions, Merck, Metso, Nestle Operational Services Worldwide, Redcentric Plc, Serica Energy, Shell International Petroleum, The Standard, and Tyson Foods. The addition of these enterprise customers provides significant revenue stability for the company, while illustrating that the market is buying into the company’s messaging around the value of a cloud-based, AI-driven approach to enterprise software.
Similarly, OpenText has executed on its plan to bring new editions of its AI-powered software to market, announcing Cloud Editions (CE) 24.2 at OpenText World Europe, and the second generation of its advanced cybersecurity auditing technology, Fortify Audit Assistant, which debuted at the inaugural OpenText Security Summit 2024.
Looking Ahead
Like other vendors, OpenText is banking on organizations that are testing or piloting AI use cases now to eventually roll out full-scale AI use cases in the future, which will drive greater utilization of Aviator and DevOps Aviator, which is designed to help organizations build out their own AI applications and workflows within the company’s cloud environment.
As such, the company issued revised guidance for FY 2025, with enterprise bookings growth of more than 20%, cloud revenue of up to $1.9 billion, and total revenue between $5.3 billion and $5.4 billion. The company also says that its customers are increasing contract lengths of more than 4 years, which will help OpenText maintain revenue stream momentum for the midterm and long term, as companies sign up for cloud services and products.
Most importantly, OpenText has made data privacy, governance, and ethical AI use the key pillars of its platform, which is in line with the steady shift toward responsible adoption and use of AI. The integration of Micro Focus’s technologies into OpenText’s offerings continues, which should help to entice enterprise customers that are seeking out advanced AI solutions that are securely integrated into comprehensive enterprise management systems.
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
Market Context: OpenText in the AI Space
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OpenText Reports Strong Q1 FY 2024 Earnings
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
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.
