Madhu Ranganathan: Yeah, absolutely. Perhaps I’ll answer the question with respect to what we said on where we’re targeting for M&A, right? Clouds ARR small to medium sizes, right, so being under three pretty imminently, I do think we will come back to around the three-ish. Our M&A, the capital allocation program, as you saw, [if primary] (ph), we refer to dividend and buybacks, but the second bucket is really the remainder of the 50% is M&A. So at the moment, I think with the $6.5 billion of debt, our own cash flows, the strategy around the acquisitions being small to mid, I think we expect to remain around the 3 times. And the last thing I’d say is the strategy around the small to mid cloud M&A is about those assets contributing to growth in the future, right? That also is going to again contribute to our free cash flow target, the $1.2 billion to $1.3 billion for fiscal ‘27. So again, that’s how we’re seeing it at this point in terms of M&A and annual leverage.
Thanos Moschopoulos: Great. And just a point of clarification, the transition services agreement related to AMC, is that neutral to margins?
Madhu Ranganathan: Yes, that is neutral to margins at this point.
Thanos Moschopoulos: Okay. Great. And then finally, maybe one for Mark. Just in terms of Micro Focus, outside of the AMC business, it seems like it’s stabilizing based on the 10-Q disclosure, but just commentary there in terms of how close you are to that returning to organic growth? How much work may need to be done in that regard?
Mark J. Barrenechea: Yeah, sound great. Thanks, Thanos. Thanks for the question. Yeah, we expect Micro Focus to return to organic growth this year. And we’re also doing extremely well on the renewal side, right? Micro Focus was in the high 80s in Q3, our best rate since the acquisition, and we’ll be in the high 80s again this quarter, which is great news. And there are — with the divestiture of the mainframe, we’re now focused on the three big businesses, right, ITOM, which is digital operations and service management. We’re focused on the developer and of course, security, right, which are the three big businesses there.
Thanos Moschopoulos: Great, I’ll pass the line, thanks.
Mark J. Barrenechea: Thank you.
Madhu Ranganathan: Thank you.
Operator: The next question comes from Kevin Krishnaratne of Scotiabank. Please go ahead.
Kevin Krishnaratne: Hey, good evening. Just a couple of small ones for me. I noticed in the deck that the cloud renewal rates inched down 92% from 93%. Just wondering what happened there and does that ramp back up in Q4?
Mark J. Barrenechea: Yeah, Kevin, thanks for the question. I’m actually going to take that one. I just want to note that the cloud renewal rate we publish is a gross measure of cancellation only. It does not include the net impact of upsells or downturn. Now our peers in the industry, when you look across the larger cloud companies, those are multibillion-dollar scale. They report a more like off-cloud which includes the effect of upsells and downsells. So if we report it this way in our cloud, and we don’t report that way, we would be in the high 90s in Q3. So you can expect us kicking off F ’25 that we want to kind of align to the industry. This is it’s just — don’t make it just a gross cancellation rate, which it is today.
You need the effects, plus or minus, of upsells and downsells. So the industry reports that way. We report that way on off cloud, like the industry does. But if we report it that way, we’d be 90s. So we’re going to align to those new metrics starting in ’25. And we’ll continue to share insights along the way.
Kevin Krishnaratne: Okay. Good stuff. That’s super helpful. And the other one that I have is just on the updated guidance for ’24. When you look at the license growth and the customer support growth, they come down, I know that some of that is related to the AMC divestiture. Maybe a couple of questions. One, can you just remind us of what the mix is for AMC in terms of license versus customer support? And then second, just looking at your — the business excluding AMC, is there any changes there on your views on your ability to land the higher number of bookings for license revenue that typically falls in Q4. I’m just wondering if everything is sort of the status quo of what you’re looking at when you were looking at Q2 versus the business today in terms of just the health of the business, excluding AMC.
Madhu Ranganathan: Yes. So I’ll take the first one on the AMC components of revenue. We’ve shared this before, cloud is still very small or zero from an AMC perspective, and PS is small. It’s predominantly license and customer support.
Kevin Krishnaratne: Got it. Is it — what’s the mix, though, between the license and customer support?
Madhu Ranganathan: License and customer support. I’m not sure we’ve shared that. I’m just — so it is in our 305 filing, I believe. So you can certainly take a look at that.
Mark J. Barrenechea: We can follow up offline.
Madhu Ranganathan: Yeah, and we can actually follow up offline. So it’s predominantly license and customer support given zero cloud and very small PS.
Mark J. Barrenechea: I presume that supports larger than license.
Madhu Ranganathan: The support would be larger than the license, yeah. And I think on your second piece in terms of Q4, what are we assuming as far as the license business goes. Is that your second question?
Kevin Krishnaratne: Correct. Yeah, that’s it. Yeah.
Madhu Ranganathan: So Mark, you?
Mark J. Barrenechea: No, I’m sorry.
Madhu Ranganathan: Yeah. So the Q4 from a license perspective, look, both Micro Focus and OpenText are behaving quite similarly, right? If you actually look at about 18 months ago, when they had a completely different year-end, quarter-end, et cetera, as part of integration, we’ve sort of synergized the compensation plan, the regional focus, all of that. So I believe we are there. So expect the general business strength and focus for our OpenText — and of course, the Micro Focus now ex AMC to be quite consistent.
Mark J. Barrenechea: Yeah. I mean the ITOM security and developer business units, are on the mother ship cadence at OpenText, right? So they’re well aligned to the end of our fiscal year and will be well aligned to our kick off July 1.
Kevin Krishnaratne: Great. Thanks a lot. I’ll pass the line. Thank you.
Madhu Ranganathan: Yeah. Thank you, Kevin.
Operator: The next question comes from Stephanie Price of CIBC. Please go ahead.
Stephanie Price: Hi, good evening and happy birthday, Madhu.
Madhu Ranganathan: Thank you, Stephanie.
Stephanie Price: I was hoping you could talk a little bit about the Micro Focus cost savings realization. Have there been any surprises in the process. And how should we think about the quantify the micro integration on the fiscal ’25 adjusted EBITDA margin outlook?
Madhu Ranganathan: Yeah. So it’s actually gone very well. And it’s — I would say, from a supply perspective, it’s gone as we expected when we did the diligence and when we formulated the plan. Now Micro Focus, as I mentioned, is very much on track, being of the OpenText operating model from an adjusted EBITDA perspective. Again, the EBITDA is impacted, obviously, by us reducing the churn and returning Micro Focus to organic growth. But from an expense standpoint, we’ll continue to optimize to Mark’s earlier comments about applying AI internally, whether it’s Micro Focus on OpenText, it’s environment. But beyond that, I would say our design plan, whether we hit their facilities or the vendors or other just the pure operating excellence, we’ve pretty much been very much on target.
Stephanie Price: Okay. Thanks. And then maybe another one for you, Madhu. Just on the cost of cloud services line. It seems to be ticking up here. Wondering how we should think about the puts and takes?
Madhu Ranganathan: Yes, absolutely. Again, I’ll speak to the cost side and see if Mark can chime in more from an environment and perspective. Look, it’s really driven by the — I mean, as we said, our second strong data point is the 53% cloud bookings growth in the third quarter. And second quarter was over 60%. If you take the prior four to six quarters, there was healthy growth, but this is a very strong second data point, and we are realizing that to continue to keep up with that momentum, and we’ve upped our ranges in the future as well. We do need to invest. And the investments are primarily internal cloud infrastructure investments, investments with our partners and hyperscalers. And there is a ramp but there is a fair amount of cost.
And in the past, Mark has outlined in the calls about just the growing list of compliance and certification including security that we have to do for our cloud business and happy to do so, but that does require a certain amount of earlier investments. Maybe I’ll add one other comment. There was an earlier question about margins in fiscal 2017. These investments at scale will optimize themselves so that we have higher benefit when we look at ’27, right? So these are not linear investments, they are certainly a step function investment.
Stephanie Price: Great. Thank you.
Madhu Ranganathan: Thank you.
Operator: I will now hand the call back over to Mr. Barrenechea for closing remarks.
Mark J. Barrenechea: Very good. Well, let me thank everyone for joining us today. As you can see, we’re extremely excited about our cloud and AI path in front of us. And Madhu, happy birthday, and thank you all for joining us today. That ends today’s call.
Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
