OpenText Corporation 10-K Summary
Business context and reporting period
OpenText develops enterprise information management software and services, including content services, cloud and subscription offerings, business networks, analytics, discovery, security and digital process automation. The filing is an annual report for the fiscal year ended June 30, 2018, presented in U.S. dollars under U.S. GAAP. Although the request references 2017 Q4, the supplied filing is for Fiscal 2018 and does not provide a standalone Q4 financial summary.
OpenText reported approximately 12,200 employees and operated globally. Fiscal 2018 revenue was generated approximately 57.5% in the Americas, 32.6% in EMEA and 9.9% in Asia Pacific.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Total revenue | $2.815 billion | $2.291 billion | +22.9% |
| Annual recurring revenue | $2.062 billion | Not clearly provided in source text | +22.2% |
| Cloud services and subscriptions revenue | $829.0 million | $705.5 million | +17.5% |
| License revenue | $437.5 million | $369.1 million | +18.5% |
| Customer support revenue | $1.233 billion | $981.1 million | +25.6% |
| GAAP gross margin | 66.2% | 66.7% | Down 0.5 percentage points |
| GAAP operating income | $505.4 million | $352.9 million | +43.2% |
| GAAP operating margin | 18.0% | 15.4% | Up 2.6 percentage points |
| Net income attributable to OpenText | $242.2 million | $1.026 billion | Down materially |
| Diluted GAAP EPS | $0.91 | $4.01 | Down materially |
| Non-GAAP diluted EPS | $2.56 | $2.02 | +26.7% |
| Adjusted EBITDA | $1.019 billion | $792.5 million | +28.6% |
| Operating cash flow | $709.9 million | $439.3 million | +61.6% |
| Cash and cash equivalents | $682.9 million | $443.4 million | +$239.6 million |
GAAP net income and EPS were depressed relative to Fiscal 2017 because Fiscal 2017 included a one-time $876.1 million tax benefit related to an internal reorganization. Fiscal 2018 included a provisional $19.0 million tax expense related primarily to U.S. tax reform.
Non-GAAP results excluded amortization of acquired intangible assets, share-based compensation, special charges, other income and expense, and certain tax effects. Investors should not treat these measures as substitutes for GAAP results.
Material changes versus the prior comparable period
- Revenue increased $524.2 million, with growth across all revenue streams and geographies.
- Recurring revenue growth remained central to the business: cloud and subscription revenue increased 17.5%, while customer support revenue increased 25.6%.
- GAAP operating margin expanded to 18.0%, despite higher amortization and acquisition-related costs.
- Cloud gross margin declined to 56.1% from 57.4%, primarily reflecting higher labor-related and network costs.
- Operating cash flow increased substantially, aided by higher earnings before non-cash items and improved receivables metrics; fourth-quarter DSO improved to 58 days from 60 days.
- OpenText acquired Covisint for approximately $102.8 million, Guidance Software for approximately $240.5 million and Hightail for approximately $20.5 million, for aggregate Fiscal 2018 consideration of approximately $363.8 million.
- Research and development expense increased to $323.5 million from $281.7 million, or approximately 11.5% of revenue.
- Special charges declined to $29.2 million from $63.6 million, although Fiscal 2018 included restructuring and acquisition-related costs.
- The company refinanced its prior term loan in May 2018 with a new $1.0 billion Term Loan B and ended the year with no Revolver balance.
Debt, liquidity and capital allocation
- Total debt principal was $2.648 billion at June 30, 2018, consisting of $850 million of 5.875% senior notes due 2026, $800 million of 5.625% senior notes due 2023 and $997.5 million outstanding under Term Loan B.
- The company had a $450 million committed revolving facility, with no outstanding balance at year-end.
- Term Loan B carried an approximately 3.73% interest rate at year-end and was subject to a maximum consolidated net leverage ratio of 4.0:1. The reported ratio was 1.9:1.
- Net cash provided by financing activities was negative $23.7 million, reflecting debt repayments and $145.6 million of dividends, partly offset by debt proceeds and employee equity issuances.
- Management stated that cash and available credit facilities were expected to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months.
- Fiscal 2018 dividends totaled $0.5478 per share, or $145.6 million. Future dividends remain subject to Board approval, cash needs and debt-covenant restrictions.
Guidance, outlook, risks and unusual items
Management did not provide a specific quantitative Fiscal 2019 revenue or earnings forecast in the supplied text. Its Fiscal 2019 priorities were to broaden its EIM, cloud, analytics, discovery and business-network offerings; deepen customer penetration; invest in technology and partnerships; expand globally; and selectively pursue acquisitions.
- Acquisition and integration risk: Growth depends materially on acquisitions, while integration may create restructuring costs, operational disruption, goodwill impairment risk and additional leverage.
- Tax contingencies: The IRS proposed adjustments relating to prior reorganizations and intellectual-property valuations. OpenText estimated potential aggregate exposure of approximately $725 million, including taxes, penalties and interest, but recorded no material accrual and intends to contest the matter.
- Canadian tax matter: CRA reassessments could result in approximately $23 million of penalties and interest, although the company expects available tax attributes to offset additional cash taxes.
- Tax reform: The $19.0 million U.S. tax-reform charge was provisional and subject to further evaluation under SAB 118.
- Cloud transition: A shift from perpetual licenses to subscriptions and managed services may reduce near-term reported revenue and operating cash flow because payments are received over time.
- Cybersecurity and privacy: The company faces risks from data breaches, service interruptions, evolving privacy laws and GDPR compliance, including potentially significant penalties and reputational damage.
- Competition and technology: Competition includes IBM, Oracle, Microsoft and specialized software providers. Rapid changes in cloud, artificial intelligence, mobility and SaaS could pressure pricing, market share and margins.
- Interest-rate and currency risk: A one-percentage-point increase in interest rates would have increased annual Term Loan B interest expense by approximately $10.0 million based on the year-end balance.
- Subsequent restructuring: On August 1, 2018, the Board approved a plan expected to cost approximately $29 million, consisting of approximately $15 million of workforce reductions and $14 million of facility consolidation costs, primarily in Fiscal 2019.
- Accounting changes: The company adopted ASC Topic 606 in the first quarter of Fiscal 2019 using the cumulative-effect method and expected an approximately $35 million after-tax increase to opening retained earnings. The standard changes the timing and classification of certain revenue and contract costs but does not change expected cash economics.
Most important facts an investor should verify
- Confirm that the relevant filing is the Fiscal 2018 10-K rather than a Fiscal 2017 fourth-quarter filing.
- Reconcile the reported GAAP and non-GAAP results, especially the effect of the Fiscal 2017 $876.1 million one-time tax benefit.
- Review the full debt agreements, maturity schedule, interest-rate exposure and covenant calculations, including the 1.9:1 reported net leverage ratio.
- Assess the probability and potential cash impact of the IRS matter, estimated at approximately $725 million, and the status of the CRA reassessments.
- Evaluate acquisition contribution, integration progress, goodwill and acquired-intangible balances, which totaled $3.580 billion and $1.297 billion, respectively, at year-end.
- Monitor cloud and subscription growth against declining cloud gross margin and the potential timing effects of ASC Topic 606.
- Review the Fiscal 2019 restructuring plan and its effect on operating expenses, cash flow and facility utilization.
- Consider cybersecurity, privacy, foreign exchange, interest-rate, customer-renewal and competitive risks when assessing forward-looking performance.