Open Text Earnings Call Highlights Cloud-Led Momentum

Open Text Corporation ((TSE:OTEX)) has held its Q3 earnings call. Read on for the main highlights of the call.

Open Text Corporation’s latest earnings call struck an upbeat tone as management highlighted record cloud revenue, robust content performance, and expanding margins, all of which supported higher outlooks for cloud growth, bookings, and free cash flow. Executives also acknowledged pockets of weakness in professional services, certain segments, and U.S. public-sector demand, while stressing disciplined execution and prudent capital allocation.

Total Revenue and Record Cloud Quarter

Open Text reported about $1.28 billion in total revenue for the third quarter of fiscal 2026, underscoring steady top-line performance despite divestitures and FX headwinds. Cloud revenue climbed 6.6% year over year to $493 million, marking the highest quarterly cloud revenue in the company’s history and extending its streak to 21 consecutive quarters of organic cloud growth.

Content Business Strength

The content business, which now represents 44% of total revenue, grew 6% year over year in the quarter, highlighting the importance of this franchise to Open Text’s overall profile. Within that, content cloud revenue surged 22% year over year, emerging as a primary driver of the company’s broader cloud momentum and reinforcing demand for modern information management.

Core Cloud and Bookings Momentum

Core cloud revenue rose 12% year over year, reflecting healthy demand for Open Text’s enterprise cloud offerings across its installed base and new customers. Year to date, enterprise cloud bookings reached $651 million, the highest Q3 year-to-date level in company history, supported by 41 cloud deals over $1 million, up 28% from a year earlier.

Profitability and Margin Expansion

Profitability continued to improve, with adjusted EBITDA rising to $438 million and margins expanding 260 basis points to 34.1%, helped by mix shift toward higher-margin cloud and content offerings. GAAP gross margin improved to 73.1%, while non-GAAP gross margin reached 76.7%, indicating operational efficiencies and cost discipline even as the company invests in growth areas.

Earnings and Net Income Improvement

Non-GAAP diluted EPS climbed 23.2% year over year to $1.01, the highest third-quarter non-GAAP EPS in the company’s history, showing strong earnings leverage on modest revenue growth. GAAP diluted EPS doubled to $0.70 as GAAP net income rose 86% to $173 million and non-GAAP net income increased nearly 16% to $250 million, although management noted some GAAP benefits from one-time items.

ARR and Recurring Revenue Mix

Annualized recurring revenue reached $1.06 billion, up 2.7% from a year ago, and now accounts for 82% of total revenue, underscoring the stability of Open Text’s subscription-heavy model. This high recurring mix provides visibility into future cash flows and helps buffer short-term volatility in license or services demand, a key consideration for investors.

Improved Guidance and Upside to Cloud Targets

Although the company left its full-year fiscal 2026 revenue growth target at 1% to 2% after accounting for about $30 million of divestiture-related revenue loss, it raised several key cloud metrics, signaling confidence in underlying demand. Management now expects cloud revenue to grow 4% to 5%, up from 3% to 4%, with enterprise cloud bookings projected to increase 16% to 20% and free cash flow growth guided to 22% to 25%.

Cash Flow and Capital Returns

Year-to-date free cash flow reached $686 million, up from $563 million a year earlier and the highest Q3 year-to-date level in company history, highlighting strong cash generation from the business. The company expanded its share repurchase program from $300 million to $500 million, repurchasing and cancelling 9.7 million shares in the quarter and lowering the share count 6.7% year over year to about 242.2 million shares.

Product and Market Positioning for AI

Open Text is rolling out a data and AI platform this quarter featuring more than 1,500 connectors and support for major large language models, aiming to help customers unlock value from sprawling enterprise data. The company also noted that selected solutions are now available on AWS’s sovereign cloud in the European Union, positioning it to capture regulated AI and cloud demand where data residency is critical.

Q3 Free Cash Flow Decline

Despite strong performance year to date, free cash flow in the third quarter declined 18.4% year over year to $305 million, suggesting some quarter-specific working capital or timing impacts. Management framed this as a short-term fluctuation within an otherwise positive cash trend, pointing to the record Q3 year-to-date free cash flow as a more representative indicator.

Customer Support and Professional Services Pressure

Customer support revenue slipped slightly in the quarter to $565 million, down 0.4%, and has declined 1.1% year to date, hinting at mild pressure in this mature segment of the portfolio. Professional services revenue fell 9.3% year to date, a drop that not only weighs on services growth but also creates margin drag in that line even as cloud and license margins improve.

Cloud Net Renewal Rate Slight Decline

The cloud net renewal rate came in at 95%, down one percentage point year over year, which management suggested is consistent with its overall model but still represents a modest decline. Investors will watch whether this slight erosion stabilizes as Open Text ramps AI-enabled offerings and deeper integrations, which could strengthen customer stickiness over time.

Segment Weakness and Regional Softness

Some product segments, including cybersecurity and IT operations management, were down in the quarter, underscoring uneven demand across the portfolio as customers prioritize spend. Regionally, the Americas remained soft, partly due to lingering effects from U.S. government contract delays, while EMEA delivered strong performance, helping balance overall results.

One-Time GAAP Drivers

Management highlighted that part of the strong GAAP net income growth stemmed from one-time factors such as the sale of the eDOCS business and unrealized gains on derivatives. These items boosted reported results but are not expected to recur, so investors may focus more on non-GAAP metrics and recurring earnings power when assessing underlying performance.

Divestiture-Related Revenue Reduction and Market Uncertainty

The company’s guidance assumes about $30 million of revenue lost from completed and planned divestitures of non-core assets such as eDOCS and Vertica, consistent with its portfolio simplification strategy. However, management noted that geopolitical and macro uncertainty are constraining buyers and financing, which has slowed the pace of divestitures and could delay the timing of future proceeds.

FX and Constant Currency Considerations

Executives cautioned that on a constant currency basis, core revenue growth may appear muted, implying that foreign-exchange movements can mask some of the underlying trends. For investors, this means headline growth numbers may not fully reflect operational progress, particularly as Open Text’s global footprint exposes it to currency volatility.

Professional Services Gross Margin Drag

While cloud, support, and license gross margins improved, the professional services line experienced margin compression, reflecting weaker revenue and potentially higher delivery costs. This drag partially offset gains elsewhere, highlighting an area where management may seek further optimization to protect overall profitability.

Guidance and Forward-Looking Outlook

Looking ahead, management reiterated its fiscal 2026 revenue growth target of 1% to 2% even after factoring in divestiture-related revenue losses, signaling confidence in the core business. They forecast cloud revenue growth of 4% to 5%, enterprise cloud bookings growth of 16% to 20%, and free cash flow growth of 22% to 25%, and expect to realize roughly one-third more of the planned business-optimization savings this year while maintaining a disciplined stance on buybacks, dividends, and opportunistic divestitures.

Open Text’s earnings call painted a picture of a company leaning into cloud and AI while leveraging a strong recurring base to fund shareholder returns and portfolio reshaping. Investors will likely focus on whether the firm can sustain cloud growth, stabilize professional services and support, and navigate FX, divestiture timing, and segment softness as it works toward its upgraded cash flow and bookings targets.