Open Text Corporation — Q1 Fiscal 2016 Form 10-Q Summary
Business context and reporting period
OpenText provides enterprise information management software and related cloud, subscription, support, and professional services. The filing covers the three months ended September 30, 2015, the first quarter of fiscal 2016. Results are presented in U.S. dollars under U.S. GAAP. The company employed approximately 8,100 people worldwide.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $434.5 million | $453.8 million | Down 4.2% |
| Recurring revenue | $383.2 million | Not clearly provided in the filing text | Down 3.1% |
| Gross profit | $294.5 million | $306.8 million | Down $12.4 million |
| GAAP gross margin | 67.8% | 67.6% | Up 0.2 percentage points |
| Income from operations | $76.5 million | $103.0 million | Down 25.8% |
| GAAP operating margin | 17.6% | 22.7% | Down 5.1 percentage points |
| Net income attributable to OpenText | $41.3 million | $64.6 million | Down 36.1% |
| Diluted GAAP EPS | $0.34 | $0.53 | Down $0.19 |
| Non-GAAP diluted EPS | $0.84 | $0.97 | Down $0.13 |
| Cash flow from operations | $92.7 million | $138.5 million | Down 33.1% |
Revenue mix included license revenue of $51.3 million, cloud services and subscriptions of $147.8 million, customer support of $185.7 million, and professional services and other revenue of $49.7 million. Customer support was the only major revenue category to increase year over year.
Non-GAAP gross margin was 72.6%, non-GAAP operating margin was 34.1%, and non-GAAP net income attributable to OpenText was $103.2 million. These measures exclude, among other items, acquired-intangible amortization, share-based compensation, special charges, and certain other income or expense.
Liquidity, capital resources, and debt
- Cash and cash equivalents were $690.8 million at September 30, 2015, compared with $700.0 million at June 30, 2015.
- Short-term investments were $18.0 million, bringing cash and short-term investments to approximately $708.8 million.
- Total debt was $1.586 billion, consisting of $800.0 million of 5.625% senior notes due 2023 and $786.0 million outstanding under Term Loan B. Net debt after cash and short-term investments was approximately $877 million.
- The company had a $300 million revolving credit facility with no borrowings outstanding.
- Term Loan B had a floating interest rate of 3.25% at September 30, 2015. Management reported a consolidated net leverage ratio of 1.5:1, below the 4:1 covenant maximum.
- Financing cash outflows were $70.3 million, including $50.0 million of share repurchases, $23.3 million of dividends, and $2.0 million of debt repayment.
- Contractual obligations totaled $2.291 billion, including $2.057 billion of debt obligations, $220.8 million of operating leases, and $13.1 million of purchase obligations.
Material changes versus the prior comparable period
- Total revenue declined $19.3 million, driven primarily by lower license, cloud, and professional services revenue. Foreign exchange was a significant factor in the declines.
- License revenue fell 11.8% to $51.3 million; cloud services and subscriptions declined 4.1% to $147.8 million; and professional services and other revenue declined 13.7% to $49.7 million.
- Customer support revenue increased 1.0% to $185.7 million, and its gross margin improved to approximately 89.0% from 87.5%.
- Operating expenses increased $14.2 million, primarily because special charges rose to $17.3 million from $4.2 million and acquired-intangible amortization increased.
- The company recorded $15.5 million of charges under its Fiscal 2015 restructuring plan. Total expected costs under that plan were estimated at $32 million to $35 million, with $23.7 million recorded through September 30, 2015.
- Interest and other related expense increased to $19.0 million from $11.1 million, primarily due to the senior notes issued in January 2015.
- Operating cash flow decreased $45.8 million, reflecting lower net income and less favorable working-capital changes.
- The company repurchased approximately 1.1 million shares for $50.0 million under a newly authorized $200 million repurchase plan; approximately $150 million remained available at quarter-end.
Guidance, outlook, risks, contingencies, and unusual items
Management stated that fiscal 2016 priorities include growth in earnings and cash flow, expansion of cloud-based enterprise information management through acquisitions and innovation, and continued support for on-premises, cloud, subscription, managed-service, and hybrid delivery models. Customer support renewal rates were approximately 90%, consistent with the prior-year quarter.
The filing does not provide specific quantitative revenue or earnings guidance for fiscal 2016. Management expects available cash, operating cash flow, and credit facilities to fund working capital, capital expenditures, dividends, normal-course acquisitions, and operating needs for at least the next 12 months, although additional material acquisitions may require further financing.
- IRS tax examination: A draft Notice of Proposed Adjustment proposed approximately $280 million of additional U.S. federal taxes related to a fiscal 2010 reorganization, plus 20% penalties and interest. The company expects a further proposed adjustment of approximately $80 million related to fiscal 2012 and Global 360 integration. No material accrual was recorded, and an adverse outcome could materially affect financial position and results.
- Other tax matters: The company reported a $1.9 million Brazilian tax claim supported by a $2.9 million bank guarantee, approximately $4.6 million accrued for a Brazilian indirect-tax matter, and $1.5 million accrued for an Indian transfer-pricing matter.
- Restructuring and ERP costs: Special charges included restructuring costs and approximately $1.9 million related to a one-time ERP implementation project.
- Foreign exchange and interest-rate exposure: A 1% increase in the Term Loan B interest rate would increase annual interest expense by approximately $7.9 million. A uniform 10% weakening of foreign currencies against the U.S. dollar would reduce reported cash by approximately $28.1 million.
- Subsequent acquisition: On October 8, 2015, OpenText announced an agreement to acquire Daegis Inc. for approximately $13.5 million in cash, expected to close in the second quarter of fiscal 2016.
- Accounting developments: The company was evaluating the impact of the new revenue-recognition standard, which was expected to become effective in fiscal 2019. Adoption of other recently issued standards was not expected to have a material impact.
Most important facts for investors to verify
- Whether revenue and recurring-revenue trends stabilize after the reported foreign-exchange impact and weaker license activity.
- The final outcome and potential total exposure from the IRS examinations, including penalties, interest, and possible state-tax effects.
- Whether restructuring costs remain within the estimated $32 million to $35 million range and whether expected efficiencies improve operating margins.
- The effect of the $1.586 billion debt balance, floating-rate Term Loan B, and future acquisition activity on leverage and cash flow.
- Progress integrating Actuate and other acquisitions, including the pending Daegis transaction.
- The sustainability of dividends and share repurchases given lower operating cash flow and significant contractual obligations.
- The impact of currency movements on revenue, cash balances, operating results, and hedging instruments.