OpenText Corporation: Q1 Fiscal 2022 Summary
Business context and reporting period
OpenText provides information-management software and services, including cloud services and subscriptions, customer support, licenses, and professional services. This unaudited Form 10-Q covers the three months ended September 30, 2021, the first quarter of Fiscal 2022, with comparison to the three months ended September 30, 2020. Results are presented in U.S. dollars under U.S. GAAP.
- Approximately 14,500 employees in 34 countries as of September 30, 2021.
- Revenue mix was 42.8% cloud services and subscriptions, 40.3% customer support, 8.8% license, and 8.1% professional services and other.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $832.3 million | $804.0 million | +3.5% |
| Recurring revenue | $691.8 million | $670.4 million | +3.2% |
| Cloud services and subscriptions | $356.6 million | $341.0 million | +4.6% |
| Gross profit | $574.2 million | $555.1 million | +3.4% |
| GAAP gross margin | 69.0% | 69.0% | Flat |
| Income from operations | $182.7 million | $182.4 million | +0.2% |
| Net income attributable to OpenText | $131.9 million | $103.4 million | +27.6% |
| Diluted GAAP EPS | $0.48 | $0.38 | +$0.10 |
| Operating cash flow | $189.7 million | $233.9 million | -18.9% |
| Adjusted EBITDA | $323.4 million | $342.3 million | -5.5% |
| Non-GAAP diluted EPS | $0.83 | $0.89 | -6.7% |
Approximate GAAP operating margin was 22.0%, and net income attributable to OpenText represented approximately 15.8% of revenue. Non-GAAP gross margin declined to 75.7% from 76.5%.
- Other income increased to $29.8 million from $2.9 million, primarily because the Company’s share of income from equity-method investment funds rose to $29.3 million from $6.2 million.
- The effective tax rate declined to 24.8% from 29.2%.
- Cash and cash equivalents were $1.735 billion at September 30, 2021, up from $1.607 billion at June 30, 2021. Including restricted cash, total cash was $1.738 billion.
- Capital expenditures were $26.7 million. Dividends paid were $59.9 million, or $0.2209 per share.
- Total debt was $3.588 billion, including $965.0 million under Term Loan B and no borrowings under the $750 million revolving facility. Debt less cash was approximately $1.852 billion.
- The consolidated net leverage ratio was 1.4:1 versus a maximum covenant of 4.0:1.
- Management stated that cash, cash equivalents, and available credit facilities are expected to fund working capital, contractual commitments, capital expenditures, dividends, and operating needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was led by cloud services and subscriptions, which increased 4.6%; growth was 3.6% excluding favorable foreign-exchange effects.
- Recurring revenue growth was 3.2%, or 1.7% excluding favorable foreign-exchange effects.
- Customer support revenue increased 1.8% reported but declined 0.3% after excluding foreign-exchange effects. Renewal rates were approximately 94%, unchanged year over year.
- Cloud renewal rates, excluding Carbonite, declined to approximately 93% from 95%.
- Professional services gross margin declined to 22.7% from 28.5%, primarily due to higher labor costs. Cloud gross margin declined to 66.4% from 67.0%, and license gross margin declined to 94.6% from 96.4%.
- Sales and marketing expense increased 10.5%, and general and administrative expense increased 27.2%, reflecting higher personnel, commissions, professional fees, and restored compensation levels.
- Special charges declined sharply to $0.3 million from $13.2 million. The Company recorded net recoveries under both the COVID-19 and Fiscal 2020 restructuring plans and does not expect further significant charges under those plans.
- Operating cash flow declined primarily because of less favorable working-capital movements, particularly accounts payable and accrued liabilities. Days sales outstanding improved to 40 days from 44 days.
Guidance, outlook, commentary, and risks
Management did not provide a specific quarterly or full-year numerical revenue or earnings outlook in the filing. Its Fiscal 2022 and Fiscal 2023 priorities are growth in earnings and cash flow, increased recurring revenue, margin expansion, continued cloud adoption, product innovation, and disciplined acquisitions under its “Total Growth” strategy. R&D spending was $100.2 million, or 12.0% of revenue, within the stated Fiscal 2022 target of 12% to 14% of revenue.
- Approximately $1.4 billion of remaining performance obligations existed at September 30, 2021; approximately 46% was expected to be recognized over the next 12 months.
- COVID-19 continues to create uncertainty around customer purchasing decisions, operations, financial performance, restructuring estimates, credit losses, and remote-work controls.
- The CRA is disputing OpenText’s transfer-pricing methodology for Fiscal 2012 through Fiscal 2016. Management estimates potential liability for penalties, interest, and provincial taxes at approximately $72 million, assuming available tax attributes. Approximately $28 million had been paid provisionally.
- A proposed CRA adjustment for Fiscal 2017 could reduce deferred tax assets by up to approximately $470 million if the Company is unsuccessful; no accrual has been recorded.
- Carbonite-related securities litigation remains on appeal after dismissal with prejudice. A separate patent case involving Realtime Data remains unresolved; no loss has been accrued, and the possible loss cannot be reasonably estimated.
- Interest-rate risk remains concentrated in the floating-rate Term Loan B; a one-percentage-point increase would increase annual interest expense by approximately $9.7 million based on the reported balance.
- Foreign-exchange exposure includes $573.2 million of cash denominated in foreign currencies. A uniform 10% weakening against the U.S. dollar would reduce the reported U.S.-dollar value of that cash by approximately $57.3 million, before derivatives.
- Subsequent to quarter-end, the Board declared a $0.2209 per-share dividend and authorized a new share-repurchase plan of up to $350 million, commencing November 12, 2021.
Most important facts for investors to verify
- Whether recurring-revenue and cloud growth accelerates after adjusting for foreign exchange and whether cloud renewal rates recover.
- Whether lower non-GAAP margins, adjusted EBITDA, and operating cash flow reflect temporary cost and working-capital effects or a sustained trend.
- The outcome and potential cash and non-cash effects of the CRA reassessments, particularly the proposed Fiscal 2017 deferred-tax-asset reduction.
- Debt repayment capacity, refinancing requirements through the 2026, 2028, 2030, and 2025 Term Loan B maturities, and exposure to floating interest rates and LIBOR transition.
- The economic impact and execution of the new $350 million share-repurchase authorization alongside dividends and acquisition spending.
- The ultimate outcome of the Carbonite-related litigation and Realtime Data patent matter.