Open Text Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2012, filed May 2, 2012. The request metadata identifies “2011 Q3,” but the filing itself is for fiscal 2012 third quarter. Amounts are in U.S. dollars unless otherwise stated and are unaudited.
Business context
Open Text provides enterprise content management software and related services. The company employed approximately 4,600 people worldwide and generated approximately half of revenue outside North America. Results include Global 360 from July 13, 2011, Operitel from September 1, 2011, and MessageManager from October 31, 2011.
Financial performance and key metrics
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Total revenue | $292.3 million | $263.0 million | $901.8 million | $747.9 million |
| Gross profit | $186.0 million | $175.0 million | $588.4 million | $501.9 million |
| Gross margin | 63.6% | 66.5% | 65.2% | 67.1% |
| Income from operations | $27.3 million | $28.7 million | $109.7 million | $113.5 million |
| Operating margin | 9.3% | 10.9% | 12.2% | 15.2% |
| Net income | $34.8 million | $35.8 million | $117.2 million | $94.6 million |
| Diluted EPS | $0.59 | $0.61 | $2.00 | $1.63 |
| Cash flow from operations | Not separately provided | Not separately provided | $186.6 million | $171.3 million |
- Quarterly revenue increased 11.1%; customer support rose 16.0% and services and other revenue rose 25.6%, while license revenue declined 10.1%.
- Nine-month revenue increased 20.6%, led by customer support growth of $83.9 million and services and other growth of $44.1 million. License revenue increased $26.0 million.
- Quarterly net income declined 2.9% despite higher revenue, reflecting increased amortization, special charges, operating expenses, and interest expense.
- The nine-month tax provision changed from $11.9 million of expense to an $8.5 million recovery, primarily due to one-time tax benefits from reorganizing recently acquired international subsidiaries and a Canadian functional-currency election.
- Cash and cash equivalents were $508.9 million at March 31, 2012, compared with $284.1 million at June 30, 2011.
- Total debt was $604.4 million, including $592.5 million under the term loan and $11.9 million of mortgage debt. Net cash after total debt was approximately negative $95.4 million.
- Deferred revenue totaled $303.5 million, including current and long-term balances.
Material changes versus the prior comparable period
- Revenue mix shifted toward recurring customer support and services. Customer support represented 56.8% of quarterly revenue versus 54.4% previously; license revenue fell to 20.9% from 25.8%.
- Gross margin decreased to 63.6% from 66.5% for the quarter and to 65.2% from 67.1% for the nine-month period, primarily reflecting higher service costs and acquisition-related amortization.
- Income from operations decreased 5.0% for the quarter and 3.4% for the nine-month period. Operating expenses increased $12.4 million quarterly and $90.3 million year to date.
- Interest expense increased to $4.8 million from $2.0 million quarterly and to $11.2 million from $6.4 million year to date after the November 2011 refinancing.
- The company borrowed $600 million under a new five-year term loan, repaid $332.9 million of prior facility debt, and retained an undrawn $100 million revolving facility.
- Goodwill increased to $1.04 billion from $832.5 million, primarily from the Global 360 acquisition. Acquired intangible assets were $347.3 million.
- Special charges increased to $6.5 million quarterly and $18.8 million year to date. The Fiscal 2012 restructuring plan had recorded $12.9 million of an estimated total cost of approximately $16.0 million as of March 31, 2012.
Guidance, outlook, risks and unusual items
- Management described the ECM market as generally stable and expected recurring customer support revenue to remain a key source of income. Fiscal 2012 revenue mix guidance was 25%–30% license, 52%–57% customer support, and 18%–23% services and other.
- Fiscal 2012 expense expectations included research and development at 14%–16% of revenue, sales and marketing at 21%–23%, and general and administrative expense at 8%–10%.
- Management expected cash, available credit, and committed loan facilities to fund working capital, contractual commitments, capital expenditures, and operating needs for the next 12 months. Material acquisitions could require additional financing.
- The term loan carries a floating rate of LIBOR plus 2.50%. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $5.9 million, assuming the March 31 balance remained outstanding.
- The company was in compliance with its 3.0x maximum leverage and 3.0x minimum interest-coverage covenants at March 31, 2012.
- Contractual obligations totaled $846.3 million, including $691.6 million of debt obligations and $153.5 million of operating lease obligations.
- Unfunded pension and employee benefit obligations totaled $21.6 million, with $0.6 million payable within 12 months.
- Tax examinations were open in Canada, the United States, France, and Spain. Management believed the reasonably foreseeable outcomes were adequately provided for and not material, but estimated that approximately $4.6 million of unrecognized tax benefits could reduce tax expense within 12 months.
- The company is exposed to foreign currency and floating-rate risk. Approximately 31% of cash was held in currencies other than the U.S. dollar, and foreign exchange forward contracts had a $99.6 million notional amount.
- On May 1, 2012, after quarter end, Open Text announced an agreement to acquire EasyLink Services International Corporation for approximately $310 million in cash, inclusive of debt, subject to shareholder, regulatory, and customary closing conditions.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. Litigation and indemnification matters were not considered material based on the filing.
Most important facts for investors to verify
- Reconcile the strong revenue growth with declining quarterly operating income and lower gross and operating margins.
- Assess the sustainability of the unusually favorable tax recoveries and their effect on reported net income and EPS.
- Evaluate leverage, floating-rate exposure, scheduled debt repayments, and covenant compliance following the refinancing.
- Review acquisition integration, Global 360’s reported losses, goodwill and intangible-asset balances, and ongoing amortization expense.
- Confirm the remaining cost and timing of the Fiscal 2012 restructuring plan and other special charges.
- Assess the financing and strategic impact of the announced approximately $310 million EasyLink acquisition.
- Monitor tax audits, unrecognized tax benefits, pension obligations, foreign exchange exposure, and contractual commitments.