Prepared remarks
Thank you for standing by. This is the conference operator. Welcome to the Open Text Corporation Third Quarter Fiscal 2025 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an analyst Q&A session. I would now like to turn the conference over to Greg Secord, Head of Investor Relations. Please go ahead.
Thank you, Gayvaine, and good morning, everyone. Welcome to Open Text's third quarter fiscal 2025 earnings call. With me on the call today are Open Text's Chief Executive Officer and Chief Technology Officer, Mark Barrenechea, and OpenText's Executive Vice President and Chief Financial Officer, Chadwick Westlake. Today's call is being webcast live and recorded with a replay available shortly thereafter. All of this is available on Open Text's Investor Relations website, which as a reminder is investors.opentext.com. On today's webcast we're trying something new and we'll have our prepared remarks coordinated with the slides from our Q3 financial results presentation. This presentation is available on the IR website to download and please note that if you're logged in for the live webcast, you're already set up for the slideshow. I'll also point out that there are two presentations posted on our IR website, the Q3 Fiscal ‘25 IR Financial Results Slideshow that will be used during the call and our broader Q3 Fiscal ‘25 Investor presentation, which is posted for reference throughout the quarter and used during our investor meetings.
Now turning to upcoming investor events, Open Text will be participating in the following investor conferences on May 8, the Needham Technology Media and Consumer Virtual Conference. On May 20, the Barclays Leveraged Finance Conference in Austin, Texas. On May 22, the CIBC Technology Conference in Toronto. May 29, Jefferies Public Technology Conference in Newport Coast, California. And the BMO Bank of Montreal Virtual Software Conference on June 9. Finally, back in Toronto on June 12 for the RBC Technology, Internet, Media and Telecommunications Symposium. It will be a busy quarter. We look forward to meeting with you. And now for the reading of our Safe Harbor Statement. During this call, we'll be making forward-looking statements relating to the future performance of Open Text. 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 future performance results of Open Text are contained in Open Text's recent forms 10-K and 10-Q, as well as in our press release that was distributed last night. Each of these can be found on our IR 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 and 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 also available on our website. And with that, I'll hand the call over to Mark.
Thank you, Greg. And good morning and welcome everyone to our Q3 earnings call. There are three key areas I plan to cover this morning. First, I want to refresh our listeners on why Open Text is so distinct. Designed to perform across business cycles and is critically significant to organizations across industries and geographies. There may be external factors we cannot control that make revenue harder to forecast, but we intend to perform in the areas we do control like EBITDA, earnings, free cash flow, and capital return. Secondly, I'll take you through some important product, customer, and financial updates for the quarter, as well as my perspective on market volatility and how Open Text is positioned to help our customers create value through this deep uncertainty. This includes discussing the transformative expansion of our business optimization plan, which is led by AI First. Third, I'll confirm progress on our three strategic priorities, including competitive advantage, total revenue growth, and operational excellence.
Our differentiation is getting stronger through AI first. And this will help lead us to upper quartile returns. Before I start, I'd like to thank Madhu for the seven years of service to Open Text and for the transition over the last few months. All the best in her continued journey. Let me formally welcome our new CFO and business partner, Chadwick Westlake. Chadwick joined us from publicly traded EQ Bank in Canada. And as you know, he's an outstanding executive and was just recognized as one of this year's best executives in Canada by the Globe and Mail. The leadership team and I look forward to working with him as we bring Open Text to its next level of performance and value potential. Chadwick will speak to the highlights of the quarter here shortly. Let me jump right in. Open Text will celebrate its 35th anniversary this summer, and our potential remains limitless. By choice and origin, we are proudly Canadian, helping the world's largest organizations deliver products and services that benefit the lives of hundreds of millions of people every day across the world from Canada.
At our core, Open Text is an information management company. We've empowered the knowledge worker over the last three decades and now we are creating the digital knowledge worker of the future. We operate a portfolio of cloud products centered on enterprise content and process automation, securing and integrating that content across business applications and business networks, delivering exceptional services to the users of that content, and doing this at scale. We are now redefining the value of that information through our new AI platform, Aviator. Our ability is unmatched to solve global and strategic problems for our customers, by universally linking information, agnostic to platform or infrastructure or language model or information format. We have always centered on building lifetime value for our customers through a commitment to always deliver. No one else can do what we do. This is the key to our resilience.
Our capabilities are far-reaching. Open Text is likely part of your daily life, and you may not even realize it. For example, where did you get your milk or breakfast this morning to put in your coffee or your breakfast? Did you read the morning newspaper using cellular data? How did you process family payments? Did you stop for gas? Did you see a doctor or take medicine? Or as simple as turning on your lights, turning on your TV, or watching a streaming movie, while the National Hockey League. Open Text is the platform behind the scenes for the brands that you trust every day making all of this work. It is important for investors to understand that we allocate capital to deliver the best value. We are both an offensive and defensive investment opportunity in Canadian technology with significant reasons to hold, buy, and buy more of our stock. The team is excited about winning in F ‘26, with a new product cycle relevant to strategic needs of cloud security and AI.
We are an AI-led organization with a transformative business optimization plan. The external distractions of former AMC, DXC, and X-Royalty are now behind us this quarter, and a clear return to capital flexibility, as you can see from our cash flow engine and our cash flow results in Q3. You can expect us to resume our traditional programmatic approach to growth through tuck-in acquisitions when they align with our strategic priorities. We'll also carry out programmatic divestitures when that is the best opportunity to monetize long-term returns for mature products. Our primary use of capital is approximately 50% of free cash flow to dividends and buybacks, and as free cash flow grows, so should our capital return. But also please recall, when we introduced this, we also said we will remain flexible and allocate our capital to the highest return scenario that is in front of us. Expect us to continue to allocate capital in a flexible manner, but always to the highest return.
Bottom line, our total shareholder return proposition keeps getting stronger. Before I get into the quarter highlights, I want to speak about the market volatility. You may have heard other companies talk about two demand scenarios and thus two outlooks. And some companies are even pulling guidance. You're all very aware of what is happening. And let me add our color to recent events. There was clearly a demand shock in the second half of fiscal Q3, given by the sudden announcements of tariffs, which then became rolling tariffs. There was so much tariff information for our customers to understand, and some of that information, quite candidly, was reliable and some of it was not. We are seeing our customers move beyond these disappointments and disbelief to now take control. They are continuing with their strategic priorities, even if in some cases reduced near-term spending. I'd like to highlight an important positive trend that we are seeing, where customers are looking to deploy in local clouds, while reducing the dependencies on U.S. technology.
This introduces new opportunities for Open Text, given our Canadian roots and local presence in key regions around the world. Further, customers are continuing the consolidation to the cloud, creating programs that gain more efficiency, and doing this through information management, AI, and new digital workers. Our digital worker approach is resonating, allowing AI and machines to do the work. This is a low-cost and limited workforce that will benefit all organizations and all industries. As we demonstrated at Open Text Summits in Europe a few weeks ago, with our new cloud additions, AI Aviators and My Aviator, we can take human tasks that require dozens of screens and days of work and reduce that down to a dialog box in minutes. In summary, no one can predict how long the volatility will last, but we are well positioned to help organizations reposition globally, deploy locally in our private and sovereign clouds, and gain extreme efficiency through deploying a new digital workforce using our AI.
Shifting to our Q3. In a normal world, we were fully expecting to deliver to our business plan and revenue range of $1.26 billion to $1.3 billion, but given the large volatility, we did not meet our expectations on revenue and new bookings, and we ended up 50 basis points below our target range. Once tariffs were announced, including 25% auto tariffs, as well as U.S. government spending cutbacks, customers paused to assess the impact on their businesses. And our book of business was disrupted in the range of $40 million to $50 million. During COVID, we saw impact on travel, transportation, retail, and it all came back. And this disruption, we are seeing impact in auto, materials, energy, government, and some retail, and it too will come back. With that said, we executed extremely well in our operations across adjusted EBITDA, adjusted EPS, free cash flow, and our share purchase program. In Q3, excluding AMC, and in constant currency, we delivered $1.27 billion of total revenue, down 2.9%, down 1% when factoring in IP rights and DXC.
New cloud bookings were $151 million, down 8% due to the demand disruption. We expect to show Q4 growth in enterprise cloud bookings and for the fiscal year. Bookings growth in Q4 is unlikely to be enough to get us to our 20% to 25% annual target. Rather, we expect the fiscal year to be in the mid-teens for growth. I would continue to encourage investors to focus on RPO and CRPO as the most effective go-forward metrics. As these will have more clear benefits with year-over-year metrics as of Q4. As I noted up front, while we may not be able to predict the headlines in the coming weeks and months, we will control well what we can control, including EBITDA, earnings, free cash flow, and capital return. Looking at Q3, positively within the quarter, cloud revenues grew 3% year-over-year in constant currency, our 17th consecutive quarter of organic growth. Adjusted EBITDA was strong at $395 million or 31.5% margin, up year-over-year excluding AMC.
Adjusted EPS was $0.83 in constant currency, up year-over-year excluding AMC. We had record free cash flow of $374 million, up 7% year-over-year. We scaled our repurchase program by 50% in the quarter. We repurchased and retired 4.4 million shares for $115 million, for total outstanding shares of approximately 260 million, the lowest since September of 2016. And cash ended up at nearly $1.23 billion. Q3 was a strong product and customer quarter. Customer wins included ABN AMRO for application security; Froneri International for digital commerce; Japan Tobacco for application automation; the U.S. Air Force for secure identity, and Pacific Life for digital information management. These wins were led by our next generation cloud platform, Titanium X, where we are winning with AI first, our business cloud suites, our new security technology for identity protection and threat detection and response.
Titanium X with AI is now delivered, having been launched last month from our European Customer Summit. And this is a game changer for us. Combined with our business cloud suites, we can help customers make faster and more accurate decisions, deliver a step change in productivity, and simplify multi-cloud complexity. We have a very ambitious multi-quarter roadmap leading with AI First. And every customer is an opportunity to upgrade and expand with Titanium X. Let me turn to our expanded business optimization plan, which we announced today as outlined on slide 13, where AI First is now the central part of our corporate DNA and culture. New hires must have AI skills. AI will be part of our performance and talent reviews. AI is now turned on in various forms for all our employees to use, and we will only hire new talent where the work cannot be done by AI. We are using AI in engineering, support, professional services, and sales, and for the general knowledge worker.
We have progressed so rapidly with AI, we can now see the path to a significant reset in our cost structure through our expanded plan and other related initiatives. We expect the new annualized savings to be up to $400 million, including an incremental net reduction of 1,600 employees. And when combined with what we have previously announced and actioned, this is a total annualized savings of $490 million to $550 million and a net reduction of 2,000 employees when fully implemented. Approximately 50% of the new savings are to be realized in fiscal ‘26, with the remaining benefit to be realized in fiscal ’27. This is transformative and strategically aligned to our AI first culture and initiatives. We'll provide more clarity on this in Q4, alongside our F ‘26 targets, including what to expect in margin improvement, reflective of the initiatives and our scaling investments in innovation and growth.
Let me turn now. Let me speak to our F ‘25 targets. Look, the easiest thing we could do is say there is so much volatility, we are pulling our guidance. But we have a job to do, and our job is to respond to whatever is thrown at us. We are not changing our adjusted EBITDA, free cash flow, and capital return targets. In fact, we're going to work harder to get to the high end of our free cash flow ranges. In a normal world, we would be holding to our previous revenue targets. However, with the volatility, it is not possible to fully predict total revenue. And we could be below the current low end of our range. So we think it's prudent to communicate an F ‘25 revenue target of $5.1 billion to $5.17 billion versus the previous range of $5.17 billion to $5.27 billion. If we do better, that is upside to the range. This approach reflects our ability to manage earnings across business cycles like we did in COVID.
Let me wrap up my prepared remarks by going a little deeper into our three strategic priorities and why these remain as constant priorities. First, increasing our competitive advantage through our new product cycle and leading with AI first, business cloud suites, and new security. We can see the momentum from industry analysts, customer engagement, pipeline expansion, customer, and partner wins. Coupled with the market timing for consolidation, efficiency gains, local deployments, enabling a new digital workforce. This is how organizations win. Second, our priority on total revenue growth. Our narrative is AI first, no longer ex-AMC. We're entering an exciting new product cycle as noted, entering new market areas such as security. And we have completed seller excellence training across our sales force. And for the first time, with Titanium X, partners are now allowed and enabled to sell our cloud offerings.
And we have new clear capital flexibility. Our strategic partners across SAP and hyperscalers keep getting stronger. Customers are getting control in the time of disruption. We are seeing higher renewal rates in our cloud and off-cloud, and cloud rates were up 100 basis points quarter-over-quarter. The third on our strategic focus is operational excellence, which means upper-quartile margins, free cash flow, earnings, and capital return. With the transformative expansion of our business optimization, we're confident that we can generate more profits from higher revenues by lowering our cost curve and setting a new milestone level of free cash flow generation over the next couple of years. With that, let me turn the call over to Chadwick.
Thanks, Mark, and good morning. As a very proud Canadian, I'm pleased to now be serving this proud Canadian company. Since joining the team in March, listening has been job one. I spent my first couple of weeks meeting with our shareholders, capital markets analysts, and partners. I understand the opportunities and I’m enthusiastic about the growth journey ahead. As Mark referenced, in Q4 we will introduce fiscal 2026 targets and reframed medium-term aspirations. There should be no surprises. You will continue to see targets on what you know us best for, including adjusted EBITDA margin, free cash flow and adjusted EPS growth, capital returns, and our expectations for annual total revenue growth. We will simplify more performance metrics and look to add increasing transparency. This includes for how more of our businesses are performing, particularly ones that are outperforming and revenue growth.
For today, I'll focus on Q3 results with brief added context on enterprise cloud bookings, revenue, adjusted EBITDA margin, free cash flow, and overall earnings. As you reviewed in our material, total enterprise bookings were $151 million, down 8.4% year-over-year. While below expectations, I would contextualize the outcome in a few ways. We had good results in a few key segments. Importantly, in content management bookings, from the financial services and technology sectors, we won more competitive business and tangible pipeline momentum. As Mark indicated, our bookings difference to target was primarily attributed to the macro disruption in the quarter, which resulted in some pauses to later quarters. And on the cloud net renewal rate, a metric we introduced in Q1, we expanded again 100 basis points sequentially to 96%. You may recall we introduced total RPO and CRPO last quarter. Once we have that year-over-year comparable in Q4, you'll have a trend, and we'll add more context.
Shifting to revenue for the quarter, where we had solid annual recurring revenue of 82%, higher year-over-year excluding AMC. Cloud revenues were $463 million, up nearly 2% year-over-year, and represented about 37% of total Q3 revenue. That marks 17 quarters of cloud organic growth driven by AI readiness and strong demand for our content cloud. Non-GAAP cloud margin increased approximately 300 basis points to 62.7% year-over-year. Customer support or maintenance revenue was $567 million, coming in slightly below our expectation. We are making progress here, and non-GAAP gross margin remains strong at 89.3%. Overall, non-GAAP gross margin for Q3 was 75.7%, which excluding AMC, remained consistent year-over-year. As you see on slide 19, important to note, we are working to expand our revenue disclosures. This is intended to add more clarity and context for our businesses where revenue is outperforming, such as content, as you see on the left.
That is compared to our businesses where we expect to perform and continuously improve on the right side. We look forward to publishing this data for you in Q4 and regularly. Now to adjusted EBITDA margin, which was ahead of our target range at 31.5%. While revenue was lower, expense actions in improving our operations translated well. This was a good outcome for Q3, and it takes our year-to-date adjusted EBITDA margin to 34.7%, compared to our annual target of 33% to 34%. As a reminder, our fiscal Q3 is a calendar Q1 and our adjusted EBITDA margin would always be lower sequentially. So the difference you see to Q2 is entirely seasonal, both in revenue bookings and expense increases, including annual reset categories such as annual merit increases, vacation, and benefits that take effect on January 1. Total headcount declined slightly from Q2, but you will see that come down further in Q4 as part of the announcement today.
Expenses for Q3 were down year-over-year, importantly attributed to the completion of the first phase of the business optimization plan announced last summer. Open Text is exceptional at consistently generating strong and recurring free cash flows. As mentioned earlier, our free cash flows increased 7% year-over-year to $374 million on a reported basis, a new high water mark in a quarter with a 30% free cash flow margin. Q3 each year is typically the highest due to the timing of maintenance annual renewals. But two items of note, in Q3 last year, we had the benefit of free cash flows from AMC, which is now gone. And in Q3 this year, we had a total one-time benefit of $48 million as disclosed in our 10-Q related to the collection of a U.K. state aid receivable. Mark touched on our capital allocation strategy, and I will reinforce and expand on this a little more. We expect our businesses will continue to generate strong and growing free cash flows and in turn we allocate that to the highest capital return scenarios, thus reserving flexibility in our strategy.
On a primary basis, we look to deploy it by investing back into our businesses and customer innovation, as well as always rewarding our investors with a steady dividend. Secondary to that, flexible to the environment and opportunity, we will deploy it to acquire tuck-in companies that align with our current strategy and we will repurchase shares particularly at these valuation levels. For example, based on that opportunity, you saw us increase our current repurchase program by 50% up to $450 million in March this year. It is very important we will remain strategic and flexible in this capital allocation sequence. Moving to adjusted EPS, which was strong again in Q3 at $0.82 diluted. Reported that as down 13% year-over-year, but excluding the AMC divestiture, it was up year-over-year. Contributing to this outcome was the benefit of repurchasing and canceling 14.3 million shares over the trailing 12 months.
With purchases completed to the end of March, we had approximately $184 million capacity remaining in our $450 million program. We intend to continue our program. In closing, we are focused on executing in Q4, building long-term value for our customers and shareholders. As an investor, you might want to hold OTEX stock as the best defensive name in Canadian technology, with our world-class installed base, loyal customers, moats around our key businesses, and a strong earnings profile and return of capital strategy. You should want to buy OTEX stock because of the opportunity to participate in our growth in this more than $200 billion total addressable market. We are a significant cash generator with scale and efficiency to reinvest in our growth products across business cycles. And you should want to buy more of the stock because of the significant discount in our evaluation to key metrics, as compared to our history and comparable firms. It's an exceptional time to participate in the earnings growth engine we're building. With that, Gaylene, can you please open the line to our equity analysts for Q&A?
Questions and answers
Certainly. We'll now begin the analyst question-and-answer session. Our first question is from Raimo Lenschow with Barclays. Please go ahead.
Perfect, thank you. Mark, I have two questions, one for Mark, one for Chadwick. Mark, first one, if you look at the performance this quarter, obviously you pointed out some of the uncertainty, but we also have seen other guys in the space report numbers and kind of in relative terms likely better than you guys. Can you talk a little bit about, you know, maybe there were some geographic or vertical kind of split that is different for you than for other guys to try to understand that a little bit better? Thank you on that one. And then Chadwick, now with you having joined, can you talk a little bit about your priorities now that you're in the seat and thinking about capital structure, you know, portfolio of the different products, et cetera. Thank you very much.
Yes, thanks Raimo. Appreciate the question. Well, as we know, we ended up 50 basis points below our range and actually in the low-end of the range in constant currency. But for us, demand was disrupted. And I think the tipping point for us was the auto tariffs and the rumor of them and the actualization of them around March 12. And so, you know, we have exposure in auto, materials, U.S. government, and energy. And that Q4 impact, as I said on the call, was $40 million to $50 million. Roughly, I'd say two-thirds of that was bookings, one-third was revenue. And in a normal world, we were on target to be right within that range. But we acquired Covisint. We've always had a very important business in auto, auto parts, auto ecosystem, materials, U.S. government and energy. On the government side, you just read the headlines, Nations to Health, U.S. AID, Department of Education, and we have some business in that space.
So as we've said, on the $40 million to $50 million, roughly two-thirds bookings to one-third revenue. With some of the relief in auto tariffs announced this week are rumored still data being worked out. Some of our auto customers are reengaging deeply now that they can manage and predict. And if you can't kind of predict your spend, you don't know how to invest. So like we said, if we can't control the top line in volatile times, we will control well what we can control. And we did an extraordinary job the company did on its expenses, margin, earnings record free cash flow with our operations. Yes, we had a one-time item in there, but we still performed extremely well. And the business will come back; I'm confident it will all come back, just like it did during COVID. Maybe Chadwick, over to you for the second part.
Yes, sure. Thank you, Mark. Thanks for the question. Three things I would say briefly, and again, I'm not at the two-month mark. But I'd say three things very simply. Number one, capital allocation maximization and working together with Mark and our great leadership team to make sure we're picking the top choices for where our free cash flow and capital is going. And that's why you heard us speak about that even more today and more to the tradition of Open Text where our strengths are. But number one, capital allocation, number two, importantly, on the reframe guidance, and how we're simplifying and providing more clarity and more transparency going forward to help our investors and analysts understand the business, understand where we're outperforming as we said, and understand we're going to continuously improve. And within all that, executing that guidance consistently period. And then three, I'd say, listening and simplifying. So I'll continue to listen, continue to work with our businesses, understand the business, but I will be listening and engaging as a top priority with our investor shareholders and teammates. So those three would be top early priorities.
Perfect. Thank you. And very clear. Thank you.
Hi. Good morning. Maybe start off one with you, Chadwick. Just on the restructuring and the expanded scope. The press release noted annualized savings of about $400 million starting in fiscal '26. Just trying to understand if you expect these to be additive to current margins? Or should we think about a portion of the savings being reinvested back into the business? And maybe just a little bit more in terms of where the restructuring will be done. It sounds like there's some technology work being done on the AI side.
Yes, I can start with the first part, and then Mark can address the second part of the question. I want to emphasize that we will clarify the benefits of our business optimization in Q4. You will notice some costs incurred during Q4, which align with our current outlook, and we will provide more details in Q4. For now, it's a good indication that the benefits will be evenly distributed between fiscal '26 and fiscal '27. This is a net figure regarding headcount, meaning there is both a gross impact and a net reinvestment element, particularly focused on our leading products and key regions. Mark should also cover the significant AI aspects.
Yes. Stephanie, thanks for the question. Thanks, Chadwick. Yes, I mean the business optimization and our AI first strategy go hand-in-hand, Stephanie. Our business optimization is transformative. And it's reflective of we're building an AI operating model. So if you'll allow me, just talk a little bit about our AI-first strategy. Look, leadership is a choice, and we've decided to lead in AI. We're building great AI products in our company. We're helping our customers transform and we're going to operate like an AI-centric company. And with our centering on this business optimization program. So we've been moving very rapidly. We created the knowledge work over the last three decades with Titanium X. We've introduced 100 digital workers, with Aviator Studio coming out in the summer, we'll introduce a tool where customers can now create their own digital workers and thus have tools built on our platform to create limitless digital workers, not just within our software, but across other software companies.
We've begun to partner with Microsoft in CoPilot, and building on their incredible success with our security offering. And we've now created an AI-first corporate operating plan with AI turned on for our employees. And as I said on the call, we will no longer hire roles that could be done with AI as part of our hiring skills learning and performance. And through that lens, we looked at expanding our business optimization plan, which is AI led, taking out up to $400 million of new expense over the next two years. We're focused on roles like the general knowledge worker, support, document generation, QA, entry-level program, administrative work, help desks, everything that can be accomplished through AI. And we had many wins in Q3. So the AI first lens and building an operating model around AI first is really central to us and the expanded view of the business optimization.
Thanks for that. And maybe one more for me, just on the customer support side of the business. We calculated, I think, a 6.4% organic decline in that business in the quarter. And I know the DXC contract may have impacted that a little bit. Could you just dig in to what's going on in that customer support line? Thanks.
Absolutely. Let me start by saying that it is an amazing business and a key source of strength, and I am confident that we will return maintenance to growth in the future. As you mentioned, the maintenance business is primarily under pressure due to ITOM and ADM license performance, DXC, some foreign exchange impacts, and challenges with customers moving to the cloud. However, if we exclude DXC, our renewal rate for off-cloud would be increasing quarter-over-quarter instead of declining. We expect this issue to be behind us as we approach fiscal '26. The core operating metrics in the business are very positive: APA is up, past due amounts are down, cancel rates are down, and quarter renewal rates are up. The year-over-year decline in constant currency has been cut in half again when we take DXC out of the equation. We are definitely going to improve the business in fiscal '26, and the rate of decline is slowing. When we provide our fiscal '26 outlook in August, we will share those specific details.
Hi, good morning. Mark, could you perhaps expand on what you're doing within ITOM and ADM to work towards further stabilizing those businesses?
Yes, absolutely. Thanks, Dan. First, let’s focus on security. We're on an impressive path with our security initiatives. Last month, we demonstrated our new threat detection and response platform live from Europe, which is well integrated with Microsoft technology, including CoPilot, and we're enhancing that integration further. We're making significant progress with ITOM as well. I like to believe that if we can run the platform effectively at scale, then others should be able to do the same. We've just gone live across discovery, observability, and service management. I feel confident that ITOM is on a promising path. The product is solid, our sales force is well-trained on Titanium in the market, we have cloud offerings available, and we've secured new wins in the SaaS segment. We've also analyzed our main competitor, ServiceNow, and we see opportunities to differentiate ourselves in regulated industries, which represent a $10 billion segment of the total addressable market.
We're eager to target these regulated markets that require content management, security, and process automation, which align with our core strengths. Overall, I believe ITOM is on the right track and will enhance our performance in fiscal '26. For ADM, we anticipate it will take a couple more quarters to achieve its full potential. We're focusing ADM on the upper echelon of the market, specifically the top 1,000 software companies worldwide. Today, every company operates like a software company, including those in automotive, financial services, insurance, and biotech, as well as the next generation of software firms. It will take us a little longer to optimize the ADM engine, but I'm very pleased with our progress in security. We're aligned with our goals. Our initiatives are now solidly integrated with ITOM, thanks to our efforts with Titanium, and we're beginning to engage consumers in ADM. This gives you a brief overview of where we stand with ITOM and ADM.
I appreciate the color. And then just secondly, you have a meaningful government business. I'm just curious whether you're seeing any impact from the dose cuts?
Yes, there is definitely some impact from the U.S. government expense reductions, but it is not as significant as the impact from tariffs. In a typical situation, we would simply absorb these changes, but we felt it was important to mention them. However, the key focus remains on tariffs. Ultimately, the U.S. government is an important partner for us, as we provide essential services in defense, intelligence, and critical citizen applications. The effects have been minimal, and we remain very optimistic about that business.
Hi, good morning. Thanks for taking my questions, and Chadwick congrats on the new role. Maybe Mark, I'll kick off with you. If we think about last year, we've seen deals getting longer going to two to four years in terms of duration. And now you're calling out some destruction what happened there. I would characterize, if not for the tariff, would you say that the demand environment was better this year than last? And maybe how are customers chatting before then to get a sense of what it could look like if this all goes away or if we had a pause on tariffs? I have one follow-up together.
Yes, that sounds great. Thanks, Samad. The deal terms and ramping have stabilized, meaning we are not experiencing longer deals or extended ramping periods. Customers are continuing to spend despite the surprising introduction of 25% auto tariffs. There were several instances where countries and companies paused their spending to evaluate the situation, with varying levels of accuracy in the information they received. I also took a moment to understand the changing landscape before proceeding with spending. As a Canadian company, we cater to various markets, and outside of the U.S., customers seem to have moved past their initial disappointment and disbelief. They are now taking decisive action to regain control of their operations. I am engaged in numerous discussions about how we can assist our customers in France and other countries in utilizing local resources rather than relying on U.S. technology, as there is uncertainty about future developments.
Customers in various regions, including Germany, the U.K., Canada, Japan, Australia, South Korea, Singapore, and India, are actively seeking support. Additionally, we are experiencing positive momentum in AI, creating a different landscape compared to previous situations like COVID. Customers are spending, and while their spending patterns may change to reflect local needs, I remain hopeful that the tariff situation will normalize. If that occurs, we will be in a strong position to help customers operate locally and improve efficiency through digital solutions. This overall situation feels notably different and positively promising for us.
Great. I appreciate that color. And then Chadwick, maybe just appreciate all of the insights, and you're still early in executing the game plan. But if you think about the different components of capital management, what would you say are the higher priorities of capital allocation? Is it on being more aggressive with the buyback? Is it on some of the divestitures that you mentioned maybe tactically? How are you prioritizing where your early focus will be?
Thanks, Samad. I think we outlined that our flexibility is number one. And it's going to depend on the environment and the opportunities at the time. So that's why it was so key in the last quarter, you saw some of the greatest opportunities for us was to continue to buy back and buy back a heavily discounted share price. So we were doing that as smart aligned opportunities come up on the M&A front. Certainly, we're going to look at those tuck-ins going to come up. And same thing as Mark indicated very clearly, more mature products or portfolios if there's better opportunities to monetize those. We'll take those as they come up. But it's going to be that sequence. So we're going to continue to invest in the business, as we’re, we’re going to reinvest in the business. We're going to focus on our innovation. We're going to pay that dividend, but then it's flexibly month-by-month, quarter-by-quarter as the opportunities are rolling for the other two. I don't know, Mark, if there's anything you want to add?
No, extremely well said. Our execution and performance, along with the introduction of our transformative business authorization plan, allows us to regain capital flexibility. These are the strategies we have traditionally utilized when we've reached our highest valuation multiples. We are excited to reintroduce these strategies as we approach fiscal '26.
Yes, thank you. So obviously, a big push here on AI. Just wondering if you may be able to provide some metrics just really to help us understand how that's being adopted by your base, like I don't know if you sort of have numbers on Aviator that you could share just kind of any growth metrics so we can kind of get a sense of that trajectory?
Thank you, Richard, for joining us on the call. As I mentioned, our leadership is intentional, and we've chosen to take the lead in AI, starting with the development of our AI products. We have a professional services team of 3,000 people, all trained in AI and assisting in transforming our customers' AI capabilities. We're establishing an AI-centric operating model within Open Text, which is a new approach for us that is beginning to optimize our business. When I look at our metrics regarding initial adoption, I see that adoption is increasing across our initiatives, and our internal usage is soaring. We now only hire individuals with AI skills as part of our selection process; if candidates lack AI familiarity or the ability to utilize prompts, they are disqualified. We have activated tools for all employees, which has contributed to increased frequency of use. Another significant indicator is cost reduction.
Our expanded business optimization plan clearly states that we will take the lead first, followed by supporting our 100,000 customers in reducing their expenses. We are experiencing higher win rates wherever we apply AI. In our recent quarter, wins with Criteo, ABN, and JTI were all driven by AI efforts. Our partnerships are strengthening, particularly with Microsoft, and just as we have successfully collaborated with SAP, we are poised to replicate that success by integrating their achievements in AI with our security offerings. Looking ahead, we hope to transition from focusing on Gen Z to emphasizing Gen revenue as we continue to prioritize AI. In summary, we are measuring success through adoption rates, usage frequency, expense reductions, win rates, and new partnerships. As we move into fiscal ‘26, we will continue to discuss customer wins, booking rates, and additional metrics.
Okay. Great. So my second question, I don't know if this is for Chadwick or yourself. But as you make that shift, are you considering shifting the revenue model to more sort of usage or value-based pricing, similar to some of your competitors? And how should we expect if you do that, the relative impact would be to the current model?
Yes. We are not considering a disruptive pricing model or a significant change in how we engage commercially with our customers. We have a few additional offerings to introduce to the market. Next quarter, we will launch My Aviator, which will serve as a personal digital assistant accessible from every screen you use, similar to the search button or menu options. Every user of Open Text software will have a My Aviator button to facilitate tasks across various documents and improve collaboration on complex cases. Additionally, we will introduce Aviator Studio, allowing our customers to create their own digital workforce, which represents a significant advancement for us. We are also launching an always-on AI platform, eliminating the need for users to manually enable AI within our SaaS and private cloud environments. While we are exploring ways to maintain revenue from these offerings, it's too early to determine if we will adopt a more consumption-based model. However, we are committed to following a clear and ambitious roadmap with My Aviator, Aviator Studio, and the always-on AI functionality.
Thanks very much and good morning. Question on AI and then also the magnitude of the reductions that you're doing. So it sounds like you're seeing good usage and traction of AI internally, but how do you arrive at the magnitude of these headcount reductions? And did you contemplate a slower move and sort of dip your toe in the water as you make the transition more towards AI internally?
Yes, Paul, thank you for your question. We have been working on this for over a year and are progressing at an incredible pace. In terms of the advancements with Aviator and our partners’ AI tools like Microsoft and SAP, we are already observing productivity gains across various areas such as sales, presales, professional services, education, onboarding, and overall productivity, particularly in customer support, documentation, QA, administrative tasks, and general knowledge work. We are conducting a thorough analysis of the roles where work still needs to be done, which will now be handled by AI. This reflects the overall picture. I remember when ERP was introduced to the market, and as a leader in Oracle applications, we significantly reduced general and administrative expenses in that space. This current situation with AI is analogous to that, representing a new phase in expense management for companies over time.
While we cannot quantify the exact reduction in operational expenses for Open Text or other companies just yet, we know that AI will lead to greater efficiency. We are at the forefront of this transformation in our business operations. Regarding our outlook for fiscal year 2026, we will provide guidance in August. Some of the savings will definitely contribute to our bottom line, while other portions will be reinvested into AI and sales initiatives. I’ll pause here, but I will continue to emphasize the comparison between ERP as a significant shift in G&A expenses and AI’s similar potential.
Sure. Well, I think we're strong, very strong and distinctly strong and growing profitably. At the end of the day, how does that translate to your earnings per share, which is very consistent no matter what company, no matter what sector. And that shows also the benefits of when we're deploying our capital strategically, they also repurchase shares. So how are we deploying every dollar capital period? EPS is a bottom line strength period. I think it is valuable to show that and have some expectations. And frankly, at the level we're growing, I don't think we're getting credit for it compared to many businesses in many sectors. So it's just a good, consistent guidepost from my perspective.
Good morning. I have a question regarding guidance. I understand we're expecting to receive more details in August. On one of your slides and in your script, you mentioned the expectation of returning to organic growth in fiscal '26. What gives you confidence in that outlook? You mentioned RPO and some drivers to achieve it. Additionally, you highlighted an aim for $1 billion in free cash flow. Should we anticipate that you'll exceed $1 billion in '26? I'm trying to consider the factors involved, including restructurings and shifts in the business.
Thank you, Kevin, for the question. We will provide our fiscal '26 guidance in August, but fiscal '26 will be quite different from fiscal '25. I'm pleased to say that the phrase AMC is behind us. Fiscal '26 will focus on AI first, and we have some promising factors coming into play. We have a product cycle and a transformative business optimization plan that will enhance our capital model for new AI investments. This optimization will either contribute directly to our profits or be reinvested in the business, restoring our capital flexibility. In August, when we discuss fiscal '26, we expect to see improved year-over-year growth rates and maintenance, as well as higher free cash flows. We'll detail the various factors that will contribute to this improvement. As Chadwick mentioned, we will continue our strong capital returns through our buyback and dividend programs. This flexibility will enable us to return to systematic mergers and acquisitions and to consider selling off more mature offerings that could enhance our returns or growth rate, or both.
These are the strategies we have historically used when we achieved our highest valuations, and we anticipate having these options available again in fiscal '26. So, it is going to be a very different year, centered on AI, and we're eager to conclude this year positively. In our August call, we will outline what fiscal '26 looks like, but anticipate significant changes ahead.
Got it. Appreciate that. One final one then. We talked about the enterprise booking softness, but about 10% of revenue basis excluding AMC. So I'm wondering what the trends are looking like there? That's a sensitive part of the business when there's uncertainty. So just curious on what’s happened there? Thanks.
Absolutely. As I mentioned during the call, we faced an unexpected impact from tariffs, specifically the 25% auto tariffs and the ongoing tariffs. This affected our bookings in the third quarter, as we highlighted. While it's unlikely we'll reach our goal of over 20% growth, we aim for mid-teens growth for the year, which would indicate a strong fourth quarter. We have good visibility on the bookings that Todd and Paul are working on with the current deals. The news this week about reducing some auto tariffs is a positive development, but the situation remains somewhat unpredictable. It's still volatile, though we believe we will manage effectively amid this volatility.
I'll now hand the call back over to Mr. Barrenechea for closing remarks.
All right. Well, thank you, everyone. Chadwick, welcome, and thank you, everyone, for joining us today. We have just three things I'd end with. It's a whole new narrative for us with AI first and everything from product initiatives through building an operating model centered on AI. We're very excited about fiscal '26 and all the positive levers that are in front of us. And we look forward to very strong direct candidate engagement in the quarter. As Greg noted, Chadwick and the team and myself will be out in the field, spending time with you, and we look forward to hearing your voice. Thanks for joining today's call.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.