Business Context and Reporting Period
Open Text Corporation filed a Form 10-K for the fiscal year ended June 30, 2015. The requested period metadata states “2014 Q4,” but the filing is an annual report covering Fiscal 2015, with comparative Fiscal 2014 and Fiscal 2013 results. OpenText provides Enterprise Information Management software and services across on-premises, cloud, subscription and hybrid delivery models. The company reported one operating segment.
Fiscal 2015 included the acquisitions of Actuate Corporation for approximately $332.0 million and Informative Graphics Corporation for approximately $40.0 million. The company continued its strategy of consolidating cloud-based EIM, B2B integration and analytics capabilities.
Financial Performance and Liquidity
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $1,851.9 million | $1,624.7 million | +14.0% |
| Net income attributable to OpenText | $234.3 million | $218.1 million | +7.4% |
| Diluted GAAP EPS | $1.91 | $1.81 | +5.5% |
| Gross profit | $1,250.1 million | $1,113.0 million | +12.3% |
| GAAP gross margin | 67.5% | 68.5% | Down 1.0 point |
| Income from operations | $348.7 million | $300.5 million | +16.0% |
| GAAP operating margin | 18.8% | 18.5% | Up 0.3 point |
| Operating cash flow | $523.0 million | $417.1 million | +25.4% |
| Cash and cash equivalents | $700.0 million | $427.9 million | +$272.1 million |
Revenue mix shifted toward recurring offerings. Cloud services and subscriptions revenue increased 62.1% to $605.3 million, customer support revenue increased 3.5% to $731.8 million, license revenue declined 3.8% to $294.3 million, and professional services and other revenue declined 7.5% to $220.5 million. Recurring revenue, defined by management as cloud services and subscriptions, customer support, and professional services and other, totaled $1,557.7 million, or 84% of revenue, up 18.1% from Fiscal 2014.
Non-GAAP diluted EPS was $3.46 versus $3.37, and non-GAAP operating margin was 30.9%, unchanged year over year. These measures exclude items including acquired-intangible amortization, share-based compensation, special charges and certain other income or expense; investors should not substitute them for GAAP results.
Net cash used in investing activities was $398.4 million, including $326.98 million of cash consideration for Actuate and IGC, plus $77.0 million of property and equipment additions. Financing activities provided $170.6 million, primarily reflecting the issuance of $800.0 million of senior notes, partially offset by debt repayments, dividends and treasury-stock purchases.
Debt, Liquidity and Capital Allocation
- Outstanding debt at June 30, 2015 was $1,588.0 million, consisting of $800.0 million of 5.625% senior notes due 2023 and $788.0 million outstanding under Term Loan B.
- The $300.0 million revolving credit facility was undrawn at year-end and matures in December 2019.
- Term Loan B had a floating interest rate of 3.25% at June 30, 2015. A one-percentage-point increase in rates would increase annual interest expense by approximately $7.9 million, assuming the balance remained outstanding.
- Reported consolidated net leverage was 1.5:1, compared with a maximum covenant ratio of 4:1.
- The company paid $87.6 million of dividends, or $0.7175 per share, during Fiscal 2015. On July 28, 2015, the board authorized repurchases of up to $200 million of common shares and declared a subsequent $0.20 per-share dividend.
- Total contractual obligations were $2.305 billion, including $2.088 billion of long-term debt obligations and $201.0 million of operating lease obligations.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the full-year contribution from the GXS acquisition and strong cloud services and subscriptions growth. GXS was acquired in January 2014 for approximately $1.2 billion.
- Cloud services and subscriptions increased from 23.0% to 32.7% of total revenue, while license revenue declined from 18.8% to 15.9%.
- Gross margin declined because cloud services and subscriptions, which carry lower margins than licenses and customer support, represented a larger share of revenue. Cloud gross margin decreased to 60.4% from 61.8%.
- Operating margin improved modestly despite higher depreciation, acquired-intangible amortization and operating expenses. Special charges declined to $12.8 million from $31.3 million.
- Net interest expense increased to $54.6 million from $27.9 million following the addition of Term Loan B and the 2023 senior notes, partially offset by repayment of Term Loan A.
- The effective GAAP tax rate decreased to 11.9% from 21.1%, primarily due to lower expenses related to unrecognized tax benefits and nondeductible items.
- Foreign exchange was a significant headwind. Transactional foreign exchange losses were approximately $31.0 million in Fiscal 2015, compared with a $4.0 million gain in Fiscal 2014.
- The company initiated a Fiscal 2015 restructuring plan involving workforce reductions and facility consolidation. Total expected costs were estimated at $32.0 million to $35.0 million, of which approximately $8.0 million had been recorded by year-end; substantial completion was expected by the end of Fiscal 2016.
Guidance, Outlook, Commentary and Risks
Management did not provide specific Fiscal 2016 revenue or earnings guidance in the filing. Its stated priorities were to grow earnings and cash flow, expand cloud-based EIM, offer subscription and managed-service purchasing models, deepen customer relationships, invest in technology, broaden partnerships and global presence, and selectively pursue acquisitions.
Management reported a 90% customer-support renewal rate for the quarter ended June 30, 2015, unchanged from the comparable prior-year quarter. It expects the transition from perpetual licenses to subscriptions and managed services to support long-term recurring revenue growth, but warned that reported revenue and operating cash flow may be lower or more variable in the short term because payments are received over time.
The most material disclosed contingency was an IRS examination of Fiscal 2010–2012 tax returns. A draft Notice of Proposed Adjustment received July 17, 2015 proposed approximately $280 million of additional U.S. federal taxes related to the 2010 reorganization, plus 20% penalties and interest. The company also expected a further proposed adjustment of approximately $80 million related to the integration of Global 360, plus penalties and interest. OpenText disagreed with the IRS position, intended to contest it, and had not recorded a material accrual for these matters.
- Acquisition integration, restructuring execution, goodwill and intangible-asset valuation.
- Transition to cloud and subscription models, including potential short-term revenue and cash-flow pressure.
- Competition, pricing pressure, rapid technological change and dependence on strategic partners.
- Cybersecurity, data privacy, service interruptions and potential customer indemnification claims.
- Foreign exchange exposure, floating-rate debt and international tax complexity.
- Unfunded pension obligations of approximately $58.3 million, including $1.6 million payable within 12 months.
- Tax audits, litigation and other contingencies, particularly the IRS proposed adjustments and inherited GXS tax matters in Brazil and India.
Management and KPMG reported effective disclosure controls and internal control over financial reporting as of June 30, 2015. Actuate was excluded from management’s internal-control assessment; it represented approximately 2% of consolidated revenue and 9% of consolidated assets at the relevant dates.
Important Facts for Investors to Verify
- Reconcile the strong reported revenue and cash-flow growth for Fiscal 2015 against the effects of GXS, Actuate and IGC acquisitions and foreign-exchange movements.
- Monitor cloud and subscription growth, customer-support renewal rates, recurring-revenue composition and the effect of mix shift on gross margins.
- Review the maturity, interest-rate exposure, covenants and refinancing requirements of Term Loan B and the 2023 senior notes.
- Assess the potential cash, tax and earnings impact of the IRS proposals, including penalties, interest, additional state taxes and the expected Global 360 adjustment.
- Track remaining Fiscal 2015 restructuring costs, facility obligations and integration expenses.
- Review non-GAAP reconciliations carefully: Fiscal 2015 non-GAAP diluted EPS of $3.46 compares with GAAP diluted EPS of $1.91.
- Confirm the effect of the July 2015 $200 million repurchase authorization and subsequent dividend on liquidity and capital allocation.