OpenText Corporation — Fiscal 2019 Form 10-K Summary
Reporting period: The supplied filing is an annual report for the fiscal year ended June 30, 2019, not a 2018 fourth-quarter filing. Amounts are presented in U.S. dollars unless otherwise noted. OpenText provides Enterprise Information Management software and services through on-premises, cloud, subscription and hybrid delivery models.
Business Context
- Products span content services, business networks, cloud services, analytics and artificial intelligence, security, digital process automation, customer experience management and discovery.
- The company operates as one reportable segment and serves customers globally. Fiscal 2019 revenue was 58.7% Americas, 32.1% EMEA and 9.2% Asia Pacific.
- OpenText employed approximately 13,100 people as of June 30, 2019.
- Fiscal 2019 acquisitions included Liaison Technologies for approximately $310.6 million and Catalyst Repository Systems for approximately $70.8 million, both paid in cash.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue | $2,868.8 million | $2,815.2 million | Up 1.9%; up 3.8% excluding foreign exchange |
| Annual recurring revenue | $2,155.7 million | Not clearly provided in the filing excerpt | Up 4.6%; up 6.2% excluding foreign exchange |
| Cloud services and subscriptions | $907.8 million | $829.0 million | Up 9.5%; up 10.8% excluding foreign exchange |
| License revenue | $428.1 million | $437.5 million | Down 2.2%; up 0.4% excluding foreign exchange |
| Customer support revenue | $1,247.9 million | $1,232.5 million | Up 1.3% |
| Professional services and other | $284.9 million | $316.3 million | Down 9.9% |
| GAAP gross profit | $1,938.1 million | $1,864.2 million | Up $73.8 million |
| GAAP gross margin | 67.6% | 66.2% | Up 1.4 percentage points |
| Income from operations | $567.0 million | $506.7 million | Up $60.3 million |
| Net income attributable to OpenText | $285.5 million | $242.2 million | Up 17.9% |
| Diluted GAAP EPS | $1.06 | $0.91 | Up $0.15 |
| Adjusted EBITDA | $1,100.3 million | $1,020.4 million | Up 7.8% |
| Operating cash flow | $876.3 million | $708.1 million | Up 23.8% |
| Cash and cash equivalents | $941.0 million | $682.9 million | Up $258.1 million |
Non-GAAP measures: Non-GAAP diluted EPS was $2.76 versus $2.56, non-GAAP gross margin was 74.1% versus 73.0%, and non-GAAP net income was $744.7 million versus $683.6 million. These measures exclude items including acquired-intangible amortization, share-based compensation, special charges, other income or expense and related tax effects.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow of $876.3 million exceeded capital expenditures of $63.8 million and supported acquisitions, dividends and debt service.
- Cash used in investing activities was $464.5 million, including approximately $381.4 million for the Liaison and Catalyst acquisitions.
- Cash used in financing activities was $148.4 million, including $168.9 million of dividends and $10.0 million of scheduled debt repayment. The company also spent $26.5 million to repurchase shares for potential use in employee plans.
- Total principal debt at June 30, 2019 was $2,637.5 million, consisting of $850.0 million of 5.875% senior notes due 2026, $800.0 million of 5.625% senior notes due 2023 and $987.5 million under Term Loan B due 2025. Reported debt after premium and issuance costs was $2,614.9 million.
- The $450 million revolving credit facility had no outstanding balance. Term Loan B carried an interest rate of approximately 4.19% at year-end and was subject to a maximum consolidated net leverage covenant of 4.0:1. The reported consolidated net leverage ratio was 1.5:1.
- Management stated that cash and available credit facilities were expected to fund working capital, capital expenditures, contractual commitments, dividends and operating needs for the next twelve months.
- Unfunded pension obligations totaled $77.5 million, including $2.3 million payable within twelve months.
- Contractual obligations totaled $3.74 billion, including $3.41 billion of long-term debt obligations inclusive of interest and $318.9 million of operating lease obligations.
Material Changes Versus Fiscal 2018
- Growth shifted toward recurring and cloud revenue: cloud services and subscriptions grew 9.5%, while license revenue declined 2.2% and professional services declined 9.9%.
- Gross margin improved from 66.2% to 67.6%, driven partly by higher cloud and customer-support margins and more selective professional-services engagements.
- Operating cash flow increased substantially, helped by improved accounts receivable collections, higher accounts payable and accrued liabilities, and higher income taxes payable.
- The company adopted ASC Topic 606 using the cumulative-effect method, increasing opening retained earnings by approximately $29.8 million, or approximately $30 million as described in the MD&A. The standard accelerated recognition of certain license revenue and changed contract-asset, deferred-revenue and commission accounting.
- OpenText adopted ASU 2016-16 for intra-entity asset transfers, reducing opening retained earnings by approximately $26.8 million. It also adopted revised restricted-cash and pension-cost presentation guidance.
- Special charges increased to $35.7 million from $29.2 million, primarily due to the Fiscal 2019 restructuring plan and acquisition-related costs.
- Interest and other related expense declined modestly to $136.6 million from $138.5 million despite higher Term Loan B interest, partly because the revolver was undrawn.
- The effective tax rate declined to 35.2% from 37.2%. Fiscal 2017 results remain unusually high because of an $876.1 million one-time tax benefit and are not directly comparable.
Guidance, Outlook and Management Commentary
- For Fiscal 2020, management emphasized “Total Growth,” combining organic growth, innovation, acquisitions, recurring-revenue expansion, margin improvement and cash-flow generation.
- Strategic priorities include expanding penetration of Global 10,000 customers, investing in OpenText Cloud and OT2, deepening the installed-customer footprint, strengthening partnerships, expanding internationally and selectively pursuing acquisitions.
- Management expects continued investment in research and development at approximately 11% to 13% of revenue; Fiscal 2019 R&D spending was $321.8 million, or approximately 11.2% of revenue.
- No specific Fiscal 2020 revenue, earnings or cash-flow guidance figures are provided in the supplied filing text.
- Customer support renewal was approximately 91% in the quarter ended June 30, 2019, unchanged from the comparable prior-year quarter.
Risks, Contingencies and Unusual Items
- IRS examinations: The IRS issued final Notices of Proposed Adjustment related to Fiscal 2010 and Fiscal 2012. The company estimated potential aggregate liability, including taxes, penalties and interest, at approximately $770 million, including $455 million of taxes, $130 million of penalties and $185 million of interest. OpenText disputes the positions, is pursuing appeals and court remedies, and recorded no material accrual.
- CRA transfer-pricing matter: Canadian reassessments for Fiscal 2012 through Fiscal 2014 could result primarily in approximately $25 million of penalties and interest, assuming available tax attributes. OpenText disputes the reassessments and has not recorded an accrual.
- Debt and interest-rate risk: Term Loan B and potential revolver borrowings carry floating rates, creating exposure to LIBOR and other benchmark-rate changes. A one-percentage-point rate increase on the Term Loan B balance outstanding at year-end would have increased annual interest expense by approximately $9.9 million.
- Acquisition and integration risk: The strategy depends on continued acquisitions and successful integration. Acquired goodwill was $3.77 billion, and no goodwill impairment was recorded in Fiscal 2019.
- Restructuring: Fiscal 2019 restructuring charges were $28.3 million; total expected costs under the plan were approximately $30.0 million, with no further significant charges expected.
- Other principal risks include intense competition, cloud migration and technology changes, cybersecurity and data breaches, data privacy regulation including GDPR, foreign exchange, international operations, long sales cycles, customer renewals, intellectual-property claims, government spending and economic weakness.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Liaison was excluded from management’s internal-control assessment; it represented approximately 1.9% of Fiscal 2019 revenue and 4.7% of year-end assets.
Investor Verification Checklist
- Reconcile Fiscal 2019 revenue and license growth under ASC Topic 606 with the filing’s pro forma ASC Topic 605 figures, particularly the $37.7 million license-revenue timing difference.
- Review recurring-revenue growth, cloud gross-margin trends and customer-support renewal rates to assess the quality and durability of revenue.
- Verify total debt maturities, Term Loan B covenants, floating-rate exposure and refinancing requirements, especially the $800 million senior notes due in 2023.
- Assess the potential cash and earnings impact of the IRS proposed adjustments and the CRA transfer-pricing reassessments, including accruing interest and penalties.
- Evaluate acquisition integration, restructuring progress and the carrying value of goodwill and acquired intangible assets.
- Distinguish GAAP results from management’s non-GAAP measures and review the full reconciliations before using adjusted EPS or EBITDA for valuation.
- Confirm the effect of the planned Fiscal 2020 adoption of lease accounting, for which management expected right-of-use assets of approximately $218 million to $228 million and lease liabilities of approximately $255 million to $265 million.