OpenText Corporation — Fiscal 2021 Form 10-K Summary
Period covered: Fiscal year ended June 30, 2021. The request metadata references “2020 Q4,” but the supplied filing is the Fiscal 2021 annual Form 10-K; the filing does not provide a clear standalone fourth-quarter income statement.
Business Context and Reporting Period
OpenText is a Canadian information-management software company providing cloud, SaaS, subscription, on-premises, support, license, professional-services, cybersecurity, data-protection, content-management and business-network solutions. The company reports one operating segment and presents financial statements in U.S. dollars under U.S. GAAP.
- Approximately 14,300 employees in 34 countries as of June 30, 2021.
- Major revenue streams are cloud services and subscriptions, customer support, licenses, and professional services and other.
- The Carbonite acquisition continued to expand cloud backup, endpoint security, SMB and consumer offerings.
Financial Performance and Key Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Total revenue | $3.386 billion | $3.110 billion | Up 8.9% |
| Recurring revenue | $2.742 billion | $2.433 billion | Up 12.7% |
| Cloud services and subscriptions | $1.407 billion | $1.158 billion | Up 21.6% |
| Customer support | $1.334 billion | $1.276 billion | Up 4.6% |
| License revenue | $384.7 million | $402.9 million | Down 4.5% |
| Professional services and other | $259.9 million | $273.6 million | Down 5.0% |
| GAAP gross profit | $2.352 billion | $2.106 billion | Up 11.7% |
| GAAP gross margin | 69.4% | 67.7% | Up 170 basis points |
| GAAP income from operations | $740.9 million | $503.5 million | Up 47.1% |
| Net income attributable to OpenText | $310.7 million | $234.2 million | Up 32.7% |
| Diluted GAAP EPS | $1.14 | $0.86 | Up 32.6% |
| Adjusted EBITDA | $1.315 billion | $1.148 billion | Up 14.5% |
| Operating cash flow | $876.1 million | $954.5 million | Down 8.2% |
Calculated margins were approximately 21.9% for GAAP operating income, 9.2% for GAAP net income and 25.9% for operating cash flow. Management reported non-GAAP gross margin of 76.1%, non-GAAP net income of $927.2 million, non-GAAP diluted EPS of $3.39 and non-GAAP operating margin of approximately 36.3%.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $1.607 billion at June 30, 2021, compared with $1.693 billion a year earlier. Total cash, including restricted cash, was $1.610 billion.
- Debt principal totaled approximately $3.618 billion: $900 million of 2030 notes, $900 million of 2028 notes, $850 million of 2026 notes and $967.5 million under Term Loan B.
- The $750 million revolving credit facility had no outstanding balance at year-end. Approximate gross debt less cash was $2.010 billion before other adjustments.
- Reported consolidated net leverage was 1.5:1, compared with a maximum covenant of 4:1.
- Interest and other related expense was $151.6 million. A 1% adverse rate change on Term Loan B would increase annual interest expense by approximately $9.7 million.
- Operating cash flow exceeded capital expenditures of $63.7 million, but cash was reduced by debt repayment, dividends, share repurchases and tax payments.
- The company paid $210.7 million of dividends, or $0.7770 per share, and repurchased and cancelled 2.5 million shares for $119.1 million.
- Management expects cash and available credit facilities to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Growth was led by cloud services and subscriptions, which increased 21.6% and rose to 41.6% of revenue from 37.2%.
- Recurring revenue increased 12.7%, while license and professional-services revenue declined, indicating continued mix shift toward recurring and cloud offerings.
- GAAP gross margin improved to 69.4% from 67.7%, primarily reflecting greater cloud scale and business mix.
- Operating income increased substantially as special charges declined to $1.7 million from $100.4 million. Fiscal 2021 included net restructuring recoveries, including recoveries on abandoned facilities.
- Net income benefited from higher operating income and $61.4 million of other income, including $62.9 million of income from equity-method investments. Fiscal 2020 included a $17.9 million loss on debt extinguishment.
- The effective tax rate increased to 52.2% from 32.1%, primarily because of a $300.5 million IRS settlement charge and the nonrecurrence of a Fiscal 2020 CARES Act benefit.
- Operating cash flow declined despite higher earnings, principally because of working-capital effects, including approximately $105.7 million related to income taxes payable net of receivables.
- The company repaid the $600 million previously drawn on its revolver using cash on hand.
Guidance, Outlook, Commentary and Risks
Management’s Fiscal 2022 strategy emphasizes “Total Growth”: organic growth, recurring revenue expansion, cloud investment, margin expansion, cross-selling to the installed customer base, strategic partnerships and selective acquisitions. The filing does not provide a specific quantitative Fiscal 2022 revenue or earnings guidance range.
- OpenText intends to continue investing approximately 12% to 14% of revenue in research and development and to prioritize cloud-native applications, managed services and hybrid deployments.
- Management expects substantial work-from-home and modified sales and marketing practices to continue through calendar 2021. Compensation reductions imposed during the pandemic were restored effective December 1, 2020; an approximately $18 million employee performance bonus was accrued at June 30, 2021.
- COVID-19 remains a significant uncertainty, including potential effects on customer purchasing, sales cycles, employee productivity, cybersecurity, third-party service providers and restructuring costs.
- Material risks include competition and technology shifts, cloud adoption and product acceptance, customer renewals, acquisition integration, cybersecurity and data privacy, foreign exchange, LIBOR replacement, international operations and economic weakness.
- The CRA has reassessed Fiscal 2012 through Fiscal 2016. Management estimates potential exposure of approximately $74 million for penalties, interest and provincial taxes, and has paid approximately $28 million to preserve its objection rights. No accrual has been recorded.
- The CRA’s Fiscal 2017 proposal could reduce deferred tax assets by up to approximately $470 million if the company is unsuccessful, with potential cash-tax effects primarily over future years. Fiscal 2018 and Fiscal 2019 audits are also in preliminary stages.
- The Carbonite securities class-action dismissal was appealed, with oral arguments held July 29, 2021. A separate patent lawsuit involving Realtime Data remains pending; the potential loss is considered reasonably possible but not probable and cannot be reasonably estimated.
- Unfunded pension obligations totaled $77.3 million, including $2.8 million payable within twelve months.
Most Important Facts an Investor Should Verify
- Reconcile the strong reported earnings growth with the $300.5 million IRS settlement charge and the unusually high 52.2% effective tax rate.
- Assess whether cloud and recurring-revenue growth is organic or acquisition-driven, particularly following Carbonite and other acquisitions.
- Monitor operating cash conversion, as operating cash flow declined 8.2% while net income increased 32.7%.
- Review gross debt maturities, Term Loan B’s floating-rate exposure, covenant compliance and the effect of LIBOR replacement.
- Evaluate the potential financial impact and timing of the outstanding CRA reassessments and Fiscal 2017 proposal.
- Review acquisition-related amortization, share-based compensation and other non-GAAP adjustments when comparing GAAP and non-GAAP profitability.
- Track customer support and cloud renewal rates, reported at approximately 94% and 93% excluding Carbonite, respectively.
- Confirm the status and possible exposure from the Carbonite securities appeal and Realtime Data patent litigation.