In this episode of Making Markets, I sit down with Mark Barrenechea, CEO and CTO of OpenText, to talk about the company’s recent acquisition of Micro Focus and what it means for their customers, their strategy on information management and systems integrations, and his outlook on the current macroeconomic environment.
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Transcript:
Daniel Newman: Mark Barrenechea, CEO and CTO, OpenText, welcome to Making Markets.
Mark Barrenechea: Dan, pleasure to be with you.
Daniel Newman: Yeah, it’s great to have you here. I’ve been following the company for a long time. I’ve been really excited to have you on Making Markets. Company’s doing a lot of interesting things and we’re going to dive into that throughout this conversation. I do want to start with something that I don’t always start when I’m talking to my guests, but when a company is growing as large as yours, doubled in size, I believe, in the last quarter through some really strategic inorganic, usually everybody’s like, “Yeah, I know what it is. You’re a PC company or you’re a chip maker.” OpenText is an information management company, or that’s kind of how you self prescribe. How do you explain when you’re at the Thanksgiving dinner table and someone’s like, “Hey, okay, OpenText big company, what do you do?”
Mark Barrenechea: Yeah, we do a lot of things and we deliver a wide range of outcomes. So look, we started as a search company and then went into managing the content behind search. And then over time, we expanded the content that we manage from experience data, operational data. We’ve gotten into supply chain data and now we’re getting into IT automation and IT data as well. So we call ourselves the information company. We manage, secure, provide insights to big unstructured data for enterprises and small, medium-sized businesses. So that’s what we do. We’ll work with your unstructured data, provide you insights back.
Daniel Newman: And by the way, that’s a massive undertaking for most companies because while we often focus on systems of record that have very well-defined and structured data, I don’t want to downplay those that do that, but that is an easier problem to solve. It’s easier to create consistent schema and then it’s easier to utilize that to drive insights. But with things like the rise of IoT and Edge and all the data that’s coming from sensors and environments, companies have a big challenge to say, how do we utilize that data in our decision making? And despite the fact that I know all this generative AI hype, you can’t just ask Bing, you’re going to need better systems than that.
So, let’s talk about the quarter. So you just recently came off a really strong earnings coming into, this is a tough macro, Mark. I mean it’s not an easy environment. I’m watching big companies that people depend upon missing and I think you guys showed some really solid resolve. Talk a little bit about the earnings and the highlights.
Mark Barrenechea: Yeah, look, it’s a very unusual market out there, Dan, and I’ve tried to find a word to describe it and my best word is it’s uneven. And it’s not where all boats are rising or all boats are retracting based on the tide, it’s that certain companies that have invested over the last couple years into continued digitalization, supply chains, security and trust are seeming to do better than others. So it’s a very uneven market right now given the inflation, given the war on talent, and Russia’s war on Ukraine.
For us, we’ve been tripling down on our cloud technologies and our cloud grew revenue 16% last quarter. The total company grew 8% revenue. We had fantastic efficiency and margin at 38% adjusted EBITDA. We busted the rule of 40 with 38% adjusted EBITDA and 8% growth. So, we’re in a very good lane helping customers digitize, collaborate. We have one company who literally sells bicycles in the hallways, automating contracts and grants and we’ve moved that to fully digital now. So yeah, we had a strong quarter and a continued strong outlook here on the first half of calendar ’23.
Daniel Newman: And I’m glad you talked to kind of the unevenness, Mark, because I wrote an op-ed in Market Watch recently, or actually a couple of them and I’ve taken this exact comment, I think the last time I did Squawk Box, I went on and talked about what’s old is new was kind of the whole thing. And I didn’t mean it in a cynical way, I meant it in a really positive way is a lot of what are kind of legacy technology companies that have been either building hybrid or on-prem architectures are seeing a bit of a renaissance right now as companies are trying to figure out, how do we maximize our current IT investments?
Going to public cloud has a component that’s definitely well understood of value and scale. And at the same time though, I think people understand there is a lot of cost to lifting and shifting into the public cloud. Not all workloads are going to benefit. And I think that’s why I’ve kind of gone on record saying, hybrid architecture is the winner. Hybrid architectures will win because it’s financially, economically, operationally the most sensible. You call it cloud and operating model, well the operating model has to be financially sensible. So, speaking of sensible and financial-
Mark Barrenechea: And Dan, if I could, some unwritten laws in the universe and one of them is 42, like the Hitchhiker’s Guide to the Universe, 42. It is 42 months where I’ve seen this for years, we’ve done the math inside and out. If you’re consuming enterprise software, it is more economic to buy a license if you’re going to use it for more than 42 months. Beyond the 42 months, clouds become more expensive. Now, you may not have the skills you need to go to cloud and subscription, but economically, a license is more beneficial at 42 months or greater.
Daniel Newman: Well, is this now, have we just defined the rule of 42-
Mark Barrenechea: Yeah, there you go.
Daniel Newman: …on the show. So we’ve got the rule of 42. Mark Barrenechea, the rule of 42. It could be the cover, I see a cover of a book maybe someday after you retire. I think you can write the book of 42.
Mark Barrenechea: A new Hitchhiker’s Guide.
Daniel Newman: Well, I’ve definitely seen companies like 37 Signals and Base Camp and JP Morgan have kind of come out talking about why they’re repatriating. And again, that’s not the focus of what you’re doing because you’re kind of trying to manage the information across the chasm. So whether people are in public, whether they’re on prem, whether they’re hybrid, you’re trying to give them the tools and technologies to just manage and secure and utilize all the data. And you made a big bet this last quarter. I mean wasn’t this last quarter you made the bet, it was a few quarters back, but you announced and officially closed the acquisition of Micro Focus. This, to me, seems like really a watershed moment for the future of OpenText. That was a big bet, I think effectively doubling the company. Talk about what this means for OpenText and for your customers.
Mark Barrenechea: Yeah, sounds great. And thanks for the opportunity to talk about it. I mean as you noted, the world is hybrid and those who say it’s going to be all cloud or all, I don’t call it on prem, I call it off cloud, still with a cloud mindset. It’s not going to be in either of those extremes. It’s going to be hybrid. Hybrid is that destination. But as companies bring on more and more workloads in the cloud, or off cloud, the operations get a lot more complex. How do you integrate all these systems? How do you keep identities consistent? How do you secure them? How do you bring the information together in a supply chain when you’re talking to 50 systems?
So that’s where we come in. And the strategic rationale behind Micro Focus is, we’ve had the information components because all companies are information companies, Micro Focus had the components to help companies become software companies. And we believe everyone’s going to be an information company and a software company. So by expanding our mission again in information management to digital operations management, doubling down on enterprise security, application automation, we can deliver a much bigger mission to our customers and continue to expand the definition of information management.
And as you noted, it near doubled the company. We put our projections out there for the next few years approaching over 6 billion in revenues, very efficient in high EBITDA and high cash flow, 25,000 experts strong, and seventh largest pure play software company on the planet now. But we’ve expanded our mission of information management and where companies may have the process advantage from ERP, now they need the information advantage that we think we can provide.
Daniel Newman: And of course, you’re really kind of jumping and riding the wave of systems migration with Micro Focus. I’ve been on the record countless time saying the mainframe is not dead, but you will see significant workloads moving off because of public cloud. So I think you’re trying to meet that perfect spot of being, “Hey, we want to be the company that helps you get to that right workload, right place really holistically. It’s not just about which cloud, it’s about everything from mainframe to prem, private cloud to hybrid to public and having that whole spectrum of being able to help companies deal with it. And I like that-
Mark Barrenechea: I was with the CEO of a major bank last week and he’s a former COBOL programmer. And we were talking about, he made it very clear the bank is not moving off mainframe or COBOL, it is the most reliable system for transaction processing. When it comes to money, various calculations, it is a foundational technology in the enterprise. And so is the EDI and we’re the market leader in EDI of how commerce works over the internet. We’re delighted to be a leader now in mainframe technologies, COBOL, EDI, those are the backbone of enterprises and we’ll surround them with more current internet technologies.
Daniel Newman: Well, there’s a customer angle to this, Mark, what you’re basically saying is, I know, I think it was Andy Jassy that always talked about this at AWS before he became CEO of Amazon, at just AWS he always just kind said, “We want to meet the customer where they are.” And when you have that whole continuum though, that’s really what you’re doing. You’re living that sort of word of saying, “Yes, we understand enterprise is really where your data lives, really where your systems live. It’s all over the place.” And frankly it’s a bit of a mess. I mean it’s really not an easy thing to unwind.
So as you’re trying to unwind all that, I’m a big M&A guy, I’m a believer in M&A, I’m actually in the process, I’ve made four acquisitions in the last seven months of research and data companies. So I’m a believer, not everybody is, some people believe that when you can’t find organic growth, you grow inorganic, it’s because you don’t have enough… I don’t buy any of that by the way. But integrating companies is hard. OpenText has grown by doing that. Give me the quick snapshot. In your role, how are you making these integrations work? It’s one thing to acquire companies, it’s another thing to integrate them into your culture and make them successful.
Mark Barrenechea: Yeah. Well, we’ve done over 80 acquisitions as a company in our 33 year history. And it’s part of our business model. My shareholders expect the return on their capital. They expect me to drive tax efficient structures and to get a high return on invested capital and strong cash flows. So, we believe that we’re going to put our capital to work. I think you said it very well, we’re going to meet the customer as to their needs. We’re very customer-centric in our innovation.
So we look for open spaces, either technology or customer sets in the context of our strategy. We look for a financial return. We take a very unique view that it’s through a cash lens. If I’m going to spend a dollar, I want that dollar back in five years, and if I can’t get that return, we’re not going to be interested. If it doesn’t fit our technology, we’re not interested. If we can’t make the culture work. But the key word for us always is integrate, integrate, integrate, integrate, integrate the technology, integrate the sales force, integrate the operations, and it’s through that integration that we ultimately yield the customer value on the innovation and the shareholder value on the return.
Daniel Newman: That’s, by the way, not easy to do. I’ve built through acquisition and in many cases, I end up doing more of a, you almost set things up in structured divisions because it is so hard. So you should really feel pretty accomplished, and I’m obviously getting these companies, the size, scope, scale, and culture, by the way, Mark, is always one of the hardest things and you need to kind of smash two cultures together. And that really takes having a vision that people can all get behind.
I mean it’s never like, “Hey, we acquired you and we integrated you and overnight it’s all one thing.” You’ll always see a little bit of team red, team blue for a while, but when you really, everybody can really say, “Hey, that vision, I can get behind that.” That’s when you see culture start to mesh really quickly. And by the way, through acquisition, through growth, through product, through software, you’ve been able to acquire quite a prophetic customer base. You’ve got 80% of the Fortune 500 and you’re a very hands on CEO from what I’ve gathered. What are you hearing from these big global customers right now? How are they thinking about the market? You, of course, are doing great, but I don’t know that that’s everybody right now. There seems to be a lot of stress about what’s coming.
Mark Barrenechea: Yeah, maybe just one word on the culture piece, then what we’re hearing in the market. I mean you nailed it. It’s about purpose and I don’t address employees, I address my colleagues. And so we talk about our shared purpose, 25,000 experts, colleagues strong, and we talk about how we help customers. We talk about our purpose, how do we advance our skills? So it’s a shared purpose and that’s one of the most important things of creating a high performance culture.
There’s a lot going on in the world today and you go back, I call it BC, before COVID, and now AC, after COVID, as we entered COVID, it was the fourth industrial revolution and that was just heating up. COVID was an accelerant to it and created new work paradigms and here we are. Coming out, the disease will be with us for a long time, but socially it’s over. Inflation, top of mind. How do you control cost? It’s got to be to automate. Supply chains are completely revamping around the world. And with respect, people are bringing supply chains back home. They don’t want to be beholden to a government. They want more regional control. So there’s just massive supply chain work.
One of the biggest pieces of work, Dan, that we’re doing right now is security and trust. With Russia’s war on Ukraine, commercial companies are asking for DOD level security. We have commercial customers in the US looking to be like a bank or like the DOD and have FedRAMP level security. And we’re seeing that all over the world. Data zones, trust, compliance, just up like a rocket ship. So inflation, new exploration of energy, supply chains, and security and trust are driving demand for us.
Daniel Newman: So I like that you kind of pointed out what’s driving demand. I like that you pointed out some of the inhibitors. I agree. I think there’s a CPI rating actually today, I didn’t hear what it was yet. Did you happen to catch it this morning?
Mark Barrenechea: I only saw a quick headline that prices increased more slowly, but they’re still high, but they increased a little more slowly.
Daniel Newman: Okay. So I’ll have to watch when market opens in a handful of minutes. Obviously, you’re probably not watching this show in real time with us, but we are, we’re doing some real time exchange here.
Mark Barrenechea: I’m focused on you.
Daniel Newman: Yeah, no thank you and I appreciate that. Me too. I typically have CNBC running on my monitor over there, but I turn it off because I’m like a squirrel. If I have too many things going on, I’m going to flash away from you, but I’m really engaged here. I’ll tell you what, the supply chain thing, we do a lot of work in semiconductors. So, I was countlessly speaking to the media about this and repatriation of parts of our supply chain is going to be imperative. The chip supply chain is incredibly complex and the parts, components that will never make it, we can never fully repatriate, meaning we still build stuff here and then have to ship it back to Vietnam for some. I mean it’s a bit misleading that we’re going to take everything back here, but the fact is we have off-shored way too much and created just a disproportionate dependence on places that we have no control over.
And it was pretty scary. I don’t think people realized how close things are at times because we don’t watch the news, we watch TikTok and so hopefully we’re upleveling all of our desires to read and pay attention to the world, but it’s good that people like you are. Now-
Mark Barrenechea: To this point, this is a very real issue and it’s going to be with us for a while. You look at the supply chain of a chip from just silicon to the machinery that creates the glass and the subsurface to the rare earth minerals. I mean before you even get to manufacturing, there’s a big supply chain before you’re pushing a button in Rio Rancho, New Mexico that a lot of this stuff is coming back home.
Daniel Newman: I’m so glad you said that. I was on, I can’t remember if it was Bloomberg or CNBC, they were asking me just recently about ASML because the Netherlands joined the chip control. It’s like-
Mark Barrenechea: There you go.
Daniel Newman: …you realize that’s the only company on the planet that can do this advanced lithography. And so, if you can’t get those machines, you literally can’t build these five and three nanometer processes, which means you can’t build the most advanced semiconductors for AI, for mobile devices. And people don’t realize that one company in the world, in the Netherlands builds this machine and if they don’t build a machine, it doesn’t matter what AMD does or Intel does or any of these companies, they’re 100% beholden. It is crazy that we let that happen, but hopefully we’re going to find solutions for that in the coming year.
As we sort of wind down at the end here, one of the things that came to my attention through reading your earnings was that cloud growth for companies like yours that are supporting cloud from a very holistic standpoint, it’s not slowing down. So while some of the public cloud numbers have seemingly decelerated a bit, that’s not your case. What do you attribute that to?
Mark Barrenechea: Yeah, I mean you have companies like Salesforce and Micro, they’ve had galactic growth and they’ve… Look, they invested in very large growth and now they’re just down to interplanetary growth. Even though their growth has slowed, it’s still interplanetary growth. And we’ve gone from planetary growth to interplanetary growth. So we’ve been raising our growth, and even though other companies have come down, they’re still big growth numbers. So as you noted, we grew 16% in our revenues last quarter in cloud, driven by supply chain, driven by security and trust. And our forecast for the year is still 15% plus cloud bookings growth here in fiscal ’23. And so we’re excited about going from low single digit to mid single digit cloud growth and we expect that to continue.
Daniel Newman: Yeah. I would say overall there’s very little indication that cloud slows, but I think the architecture of cloud and what it means in the enterprise continues to evolve. Like I said, there was a pendulum, everything’s going public. That’s not the case. And so, the definition of clouds evolving.
Mark Barrenechea: Oh yeah, we do public SaaS stuff, right? Real important. Or we have a big private cloud business. We have customers who don’t want to be in shared instances, they want their private and they want all the benefits of what look like SaaS, but they want to do it in their own private environments, given their integrations and their data. Dan, we’ve also built an API business, so all our major pieces of functionality are also consumable via an API, so we’ve gotten into the embedded app space as well. So our cloud is public cloud, private cloud, and an API cloud.
Daniel Newman: So as we wind down here, Mark, you guys refer to something as information advantage. I feel like, without getting an answer, I could possibly describe it, but I’d love to just hear from you. What do you mean when you say information advantage?
Mark Barrenechea: Yeah, real simple. And you noted it at the beginning of our conversation today. ERP providers are fantastic at managing transactions. Wind the clock back 20 years, there were a thousand ERP providers, Bond, JD Edwards, the JBOPS, if we remember the JBOPS from way back when and G&A used to be like 20% of a company’s expense. And through automation, the process advantage, through ERP companies automate their G&A today. Well now they have all those transactions and all that unstructured data, let’s get the information advantage out of it.
So, build a great HR process and give me your hundred million CVs so I can find the best patterns of talent. Hand me your billion invoices and we’ll work through your best suppliers and build supply chain towers for you. So you’ll get the process advantage from ERP, but we want to get into that data and get insights into all that transactional and operational data and experience data and provide you insights. And that’s what we call the information advantage, not just the process advantage.
Daniel Newman: Yeah, absolutely. So, Mark, I want to thank you so much for tuning in. My favorite last thing to ask every CEO that joins Making Markets is always, what is the street, the investor, the market, in your opinion, not understanding or missing when it comes to how they valuate OpenText? If there was one or two things, what comes to mind that you would really like to see the market better appreciate that the company is doing?
Mark Barrenechea: Well we’ve moved quickly here over the last year and we just doubled the size of our company over the last three weeks. And so, appreciating the scale of our expanded mission at OpenText, understanding our cloud growth. We weren’t born cloud, we are reborn cloud, and understanding the cloud. And understanding the capital engine of the company. I’ve spoken on our earnings about when we complete the integration, we’ll be upper quartile free cash flow. And at the end of the day, we believe for shareholders, the value is the cash flow we can generate and we’ll be generating in the 20s of percent of free cash flow yield. And our three-year projection is over 1.5 billion in free cash flow generation from the company. So, size and the scale and the importance, cloud growth, free cash flow, and I think as investors understand better the power of that capital engine, everyone will be rewarded for that hard work.
Daniel Newman: And it allows you to keep that cycle going, finding and identifying targets, making acquisitions, integration, scaling those respective businesses, accelerating growth and so-
Mark Barrenechea: Yeah, but that engine is a virtuous cycle of reinvesting back into the business. Or returning-
Daniel Newman: Absolutely.
Mark Barrenechea: Or having a higher capital return strategy.
Daniel Newman: And that free cash flow is the ultimate creator of that opportunity is that you can put off the cash to be able to give you so much flexibility, non-dilutively in many cases to be able to do things to keep your investors happy, keep growth coming. And of course, as I always say, organic growth plus inorganic growth, and you’re already showing over 40, which is a really great result for a mature company, you’re getting close to the rule of 50. When I bring you back-
Mark Barrenechea: Let’s keep smashing the rule of 40.
Daniel Newman: Okay. Yeah. No pressure here on Making Markets, Mark, but rule of 40, you’re at 46 I think this quarter, so nothing wrong with pushing the envelope. You got the rule of 42 now, you got the rule of 46, let’s keep pushing. But Mark Barrenechea, thanks so much for joining me here on Making Markets. I look forward to having you back in the near future to hear how things are going.
Mark Barrenechea: Dan, thank you very much.
Author Information
Daniel is the CEO of The Futurum Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise.
From the leading edge of AI to global technology policy, Daniel makes the connections between business, people and tech that are required for companies to benefit most from their technology investments. Daniel is a top 5 globally ranked industry analyst and his ideas are regularly cited or shared in television appearances by CNBC, Bloomberg, Wall Street Journal and hundreds of other sites around the world.
A 7x Best-Selling Author including his most recent book “Human/Machine.” Daniel is also a Forbes and MarketWatch (Dow Jones) contributor.
An MBA and Former Graduate Adjunct Faculty, Daniel is an Austin Texas transplant after 40 years in Chicago. His speaking takes him around the world each year as he shares his vision of the role technology will play in our future.
