TD COMPANY UPDATE
Q3/F24 PREVIEW: CLOUD BOOKINGS, ORGANIC GROWTH, AND MARGINS IN FOCUS
THE TD COWEN INSIGHT
As Q3 will be the last quarter of inorganic contribution from Micro Focus, we believe the focus will be on cloud bookings, organic growth, and the implied step-up in Q4 EBITDA margins from the F2024 guide. We continue to believe OpenText remains undervalued, with a significantly improved financial profile post-AMC divestiture.
Event:
Q3/F24 Results: Thursday, May 2, 2024, after markets close. Conference Call: 5:00 p.m. ET.
Impact: NEUTRAL
Strong execution expected to continue. With the Micro Focus integration largely complete and AMC to be divested by the end of F2024, we expect the company to remain focused on organic growth, supported by its cloud & AI roadmap. We will be looking for sustained momentum in cloud bookings, which came in at a very strong 63% y/y in Q2/F24. We note that cloud bookings in Q3/F23 was relatively flat y/y at $108mm, setting up for an easier y/y comp. We expect continued benefits from the Micro Focus integration, with Micro Focus returning to organic growth and expected to be on OpenText's EBITDA model by
the end of F2024. We believe investor focus will also be on Q4 EBITDA margin guidance, which is expected to step-up materially following a sequential decline in Q3, driven by seasonality for certain opex items such as vacation and benefit costs, in addition to one-off costs associated with the AMC divestiture.
We estimate Q3/F24 total revenue of $1,439mm, up 15.7% y/y in cc largely due to
the Micro Focus acquisition. This quarter marks a full calendar year with Micro. On a consolidated basis, we forecast annual recurring revenue (ARR) of $1,139mm, up 12.7% y/ y in cc. We also expect License revenue of $200mm, up 43.6% y/y in cc, due to Micro's high mix of license revenue, and Professional Services revenue of $100mm, up 6.5% y/y in cc. We forecast $467mm of EBITDA or a 32.5% EBITDA margin, and EPS of $0.94.
Lower leverage and potentially higher organic growth post-AMC. In our recent AMC note, we highlight how the implied valuation of Micro Focus ex-AMC seems fair, considering how effective OpenText has been at stabilizing and integrating the assets. More importantly, we believe the divestment significantly improves OpenText's financial profile, with lower leverage and optionality to invest in its cloud & AI roadmap, with minimal impact to cash flow.