OpenText Corporation — Q1 Fiscal 2021 10-Q Summary
Business context and reporting period
OpenText provides information-management software and services, including cloud, subscriptions, customer support, licensing, professional services, cybersecurity and data-protection solutions. The filing covers the three months ended September 30, 2020, the first quarter of Fiscal 2021. Results are presented in U.S. dollars under U.S. GAAP. The company employed approximately 14,300 people worldwide.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $804.0 million | $696.9 million | 15.4% increase |
| Recurring revenue | $670.4 million | $549.6 million | 22.0% increase |
| Cloud services and subscriptions revenue | $341.0 million | $237.3 million | 43.7% increase |
| Gross profit | $555.1 million | $468.4 million | 18.5% increase |
| GAAP gross margin | 69.0% | 67.2% | 180 basis-point increase |
| Income from operations | $182.4 million | $132.5 million | 37.6% increase |
| GAAP net income attributable to OpenText | $103.4 million | $74.4 million | 39.0% increase |
| Diluted GAAP EPS | $0.38 | $0.27 | Increase |
| Adjusted EBITDA | $342.3 million | $254.2 million | 34.7% increase |
| Operating cash flow | $233.9 million | $137.4 million | 70.2% increase |
GAAP operating margin was approximately 22.7%, compared with 19.0% in the prior-year quarter. GAAP net margin was approximately 12.9%, compared with 10.7%. Non-GAAP diluted EPS was $0.89 versus $0.64, non-GAAP gross margin was 76.5% versus 73.1%, and non-GAAP net income attributable to OpenText was $241.9 million versus $173.5 million.
Revenue mix and material changes
- Cloud services and subscriptions increased 43.7%, driven across all regions and supported by recent acquisitions; cloud gross margin improved to 67.0% from 56.9%.
- Customer support revenue increased 5.5% to $329.4 million. The support renewal rate improved to approximately 94% from 92%.
- License revenue declined 12.0% to $68.5 million, with fewer qualifying license deals than in the prior-year quarter.
- Professional services and other revenue declined 6.2% to $65.1 million, partly reflecting COVID-19-related travel and operating restrictions; lower delivery costs increased the related gross margin to 28.5% from 21.7%.
- Americas revenue increased 21.2% to $508.7 million and represented 63.3% of total revenue. EMEA increased 7.5% and Asia Pacific increased 3.6%.
- Revenue and earnings benefited from the inclusion of Carbonite, acquired in December 2019, and XMedius, acquired in March 2020. Acquisition-related amortization increased materially.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $1.846 billion at September 30, 2020, up from $1.693 billion at June 30, 2020. Cash, cash equivalents and restricted cash totaled $1.849 billion.
- Operating cash flow was $233.9 million. Investing cash outflow was $17.5 million, including $15.3 million of property and equipment additions. Financing cash outflow was $75.8 million, including $47.3 million of dividends and $41.9 million of treasury-share purchases.
- Total debt outstanding was $4.193 billion, including $900 million of 2030 notes, $900 million of 2028 notes, $850 million of 2026 notes, a $975 million Term Loan B and a $600 million Revolver draw. The company reported a consolidated net leverage ratio of 1.8:1 versus a 4:1 covenant limit.
- The Revolver had $150 million of remaining availability at quarter-end. In October 2020, OpenText repaid the $600 million draw using cash on hand, reducing reported debt and available cash after the reporting date.
- Management stated that cash and available credit facilities should be sufficient for expected working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months.
- Following quarter-end, the company declared a quarterly dividend of $0.2008 per share and authorized a share-repurchase plan of up to $350 million, subject to a five-percent share limit.
Outlook, management commentary and unusual items
- Management’s Fiscal 2021 focus is “Total Growth,” emphasizing recurring revenue, cloud expansion, margin improvement, cash-flow generation, innovation and disciplined acquisitions. The filing does not provide specific revenue or EPS guidance.
- Research and development spending was $93.9 million, or 11.7% of revenue. Management expects R&D spending to remain approximately 11% to 13% of revenue for Fiscal 2021.
- COVID-19 continued to affect customer purchasing decisions, travel, sales and marketing events, work locations and operating costs. Management restored previously reduced compensation and appropriate hiring by the end of December 2020, while continuing to monitor discretionary spending.
- COVID-19 restructuring charges were $3.6 million in the quarter. Estimated total costs under the COVID-19 Restructuring Plan are approximately $62 million to $75 million, of which $57.2 million had been recorded through September 30, 2020.
- Fiscal 2020 restructuring charges were $8.7 million in the quarter. Estimated total costs under that plan are approximately $36 million to $44 million, of which $35.4 million had been recorded.
- The effective tax rate increased to 29.2% from 23.7%, primarily due to higher income, changes in unrecognized tax benefits and U.S. BEAT expense.
- OpenText adopted the expected-credit-loss standard on July 1, 2020, reducing opening retained earnings by $2.5 million. The adoption did not affect current-quarter income or cash flow.
- The IRS matter remains a significant contingency. Proposed adjustments, penalties and interest were estimated at approximately $770 million, with no material accrual recorded; an adverse outcome could materially affect financial position and results.
- The company estimated potential CRA penalties and interest of approximately $45 million related to Canadian transfer-pricing reassessments, with no accrual recorded.
- The Carbonite securities class action was dismissed with prejudice on October 22, 2020, subject to possible further court action. A separate Carbonite patent case remains stayed and its potential loss cannot be estimated.
Most important facts for investors to verify
- Whether cloud and recurring-revenue growth remains strong after acquisition-related contributions and as COVID-19 effects evolve.
- The cash, debt and liquidity impact of the October 2020 Revolver repayment, the new dividend and the authorized share-repurchase plan.
- Actual future costs and cash requirements under both restructuring plans, including potential changes to the estimated ranges.
- Progress and ultimate exposure from the IRS and CRA tax matters, including accruing interest, penalties and any effect on cash taxes.
- Integration results and final purchase-price allocations for Carbonite, XMedius and other acquisitions, including related amortization and goodwill risks.
- Exposure to floating-rate debt, LIBOR transition, foreign-exchange movements, cybersecurity and data breaches, customer demand, and COVID-19-related operating disruptions.
- The comparability of GAAP and non-GAAP results, particularly because non-GAAP measures exclude amortization, share-based compensation, special charges, other income or expense and certain tax effects.