Specialist
Former executive at Open Text Corp
Agenda
- Open Text (NASDAQ: OTEX) (TSE: OTEX) and its evolving and expanding set of offerings, noting the importance of M&A and pending purchase of Micro Focus (LON: MCRO)
- Macroeconomic impacts on Open Text and its offerings, noting significant diversification
- Industry dynamics across multiple areas and products, plus partnerships with companies such as SAP (ETR: SAP), Google (NASDAQ: GOOGL) and Microsoft (NASDAQ: MSFT)
- 1-3-year outlook, highlighting corporate governance considerations
Questions
1.
Can you describe Open Text and its evolution over the years? Historically, the company was predominantly, maybe entirely, focused on the enterprise content management space and opportunity. It’s clearly grown a lot over the last few years, with a lot of that due to M&A and being acquisitive. How would you describe Open Text and its offerings now?
2.
How has the current macroeconomic backdrop been impacting Open Text and how will it impact the company? I’m thinking about the potential for longer sales cycles, pricing pressures and contract reductions or cancellations.
3.
You mentioned the notion of becoming more aggressive given the current economic climate, and Open Text announced its agreed acquisition of Micro Focus in August 2022. The company talks about four primary segments – Content Services, Business Network, Digital Experience and Security and Protection. One of its larger acquisitions over the last few years was Carbonite, which was more of a Security and Protection business and probably forms the base of that segment to some extent. It’s also increasingly talking about the Developer segment. Could you walk through these segments and what’s important to know about them?
4.
How has the pandemic impacted Open Text, and how does the company think about prioritising and investing accordingly? You mentioned its 2017 acquisition of EnCase, which is the product made by a company formerly known as Guidance Software. Open Text also bought Zix in December 2021, further bolstering its Security and Protection capabilities. You highlighted Content Services as the company’s number one priority, which makes a lot of sense, but then you highlighted Digital Experience as the next most significant or important, particularly strategically. You said this reflects changes in demand due to the pandemic.
5.
What percentage of revenues do Open Text’s four primary segments contribute, appreciating it’s a moving target for many reasons?
6.
Could you size Open Text’s Content Services segment? Are we talking about two-thirds or half of overall company revenue?
7.
It seems there’s a significant opportunity with Digital Experience and Open Text has been prioritising this. You think the segment has already started to gain some traction. Could it go from the fourth- to the second-biggest segment in the next three years?
8.
The TAMs Open Text has indicated for each of the four segments are pretty comparable, from USD 20bn-21bn for Security and Protection to USD 25bn for Digital Experience. You’re suggesting, however, that the company’s partnerships with the cloud providers perhaps enable it to more aggressively or successfully pursue and capture the market opportunity represented by some of the TAM work it has done. Is that the way to think about it?
9.
How far along is Open Text in its cloud journey? To what extent are the company’s platforms and offerings in the cloud? In terms of transitioning its customers from more traditional licensed revenue to cloud subscriptions, how far along do you think they are as a percentage of revenue? Open Text seems to spend a fair amount of time talking about cloud platforms and transitions as a business imperative and one it’s well-positioned to help clients with. I see a lot of its branding as Business Clouds and the OpenText Content Cloud offering, Business Network, Experience offering and so on.
10.
There’s obviously a lot of work to do with the cloud transition and it sounds as though Open Text is partnering with many public cloud businesses to make that happen and perhaps provide incentives for them as well. For a long time, the company’s key partnerships were critical in some respects. Historically, people thought about the company as a primary partner of SAP, and now it talks about the partnerships with Google and Microsoft on the Digital Experience and Security and Protection sides respectively. How is this slightly different for Open Text than other software companies, and what are the benefits and risks of this business model?
11.
How important was Open Text’s relationship with SAP historically in terms of revenue, and where is it now? I suppose as other segments and products have been built up, it’s not quite as significant or as critical as it used to be.
12.
A specialist in a previous Forum Interview [see Open Text – Canadian Software Leader & M&A-oriented Strategy – 4 March 2020] posited that SAP could have accounted for one-third of Open Text’s revenues. Is that a reasonable estimate at this point? Do you think it’s notably lower, maybe 20%?
13.
How should we consider the competitive landscape and Open Text’s positioning? I find it interesting that not only it is very commonplace for there to be many partnerships with public cloud companies across a variety of software vendor types, there’s also a lot of competition with those companies and many others that companies partner with. Open Text partners with players such as Oracle and Microsoft, but it also competes with those companies. IBM seems to be the most significant competitor to Open Text across categories.
14.
You said we were in the bottom of the second inning in terms of customers and revenues in the cloud. When you build a company such as Open Text where you do a lot of acquisitions, I’m guessing that with many solutions not necessarily in the cloud, it’s harder to have true integrations across the business segments, platforms and products, which perhaps makes it easier for customers to pick and choose who to work with across the different areas. Do you see that as a challenge for Open Text as it moves into this new phase of prioritising cloud?
15.
It seems that one way to address the issues you mentioned is partnering with public cloud companies. Do you expect Open Text to pursue other means to address these issues, such as committing more R&D resources, or do you think the company will continue with what’s been working for it?
16.
What are your thoughts on Open Text’s proposed purchase of Micro Focus and what it indicates? The company continuing with increasingly large acquisitions might make people think it’s not as serious about reducing some of the technical debt. In many ways, the acquisition makes sense for Open Text as there’s some overlap with what it’s doing. Micro Focus provides solutions for application modernisation and delivery, IT transformation and security and data analysis among other areas, which points to your comments on the value it brings, particularly in some areas people may not know Open Text as much for. It’s also noteworthy that the company talked about a TAM of USD 92bn earlier in 2022, which is obviously very sizeable, and then, in conjunction with this announced deal, it announced it’s creating a large software and cloud business – the sub-heading indicated it would expand the market opportunity to USD 170bn.
17.
People are talking about a potential global recession, and meanwhile, Open Text announces a USD 6bn acquisition, by far the company’s largest to date. Is an acquisition of this size the right approach, given there are so many business segments, platforms and products already?
18.
To what extent might Micro Focus fulfil other primary M&A criteria Open Text has historically had? You highlighted the notion of value, which I imagine is pretty primary for many would-be acquirers, but in terms of Open Text’s M&A playbook, how did it see Micro Focus and the related opportunity?
19.
You mentioned the potential for restructuring-type efforts. Open Text recently had around 15,000 employees and Micro Focus has around 11,000, so pretty big numbers. When announcing the deal, Open Text said it wants to get Micro Focus on the company’s operating model within six quarters, so, to your point, to me that means cutting costs and expenses and transitioning it to the Open Text way of doing business. What do you think this means more specifically, based on other acquisitions you saw? For a company with 11,000 employees, does it mean one-quarter to one-half of them could be vulnerable, given the transition to the Open Text way of doing business?
20.
What is your 1-3-year outlook for Open Text, and what do you see as the biggest opportunity and risk for the company?
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