Open Text Corporation — Fiscal 2016 Form 10-K Summary
Business context and reporting period
OpenText is a Canadian enterprise information management software and services provider, offering on-premises, cloud, subscription and hybrid solutions across content management, business process management, customer experience management, business networking, analytics and discovery. The filing covers the fiscal year ended June 30, 2016, not 2015 Q4. Financial statements are presented in U.S. dollars under U.S. GAAP.
OpenText operated as one reportable segment and employed approximately 8,900 people at June 30, 2016. Geographic revenue mix was approximately 57.5% Americas, 33.5% EMEA and 9.0% Asia Pacific.
Key financial metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenue | $1.824 billion | $1.852 billion | Down 1.5%; up 3.0% excluding foreign exchange |
| Recurring revenue | $1.541 billion | Not clearly stated in the filing excerpt | Down 1.1%; 84% of total revenue |
| Cloud services and subscriptions | $601.0 million | $605.3 million | Down 0.7%; up 2.5% excluding foreign exchange |
| License revenue | $283.7 million | $294.3 million | Down 3.6%; up 1.5% excluding foreign exchange |
| Customer support revenue | $746.4 million | $731.8 million | Up 2.0% |
| Net income attributable to OpenText | $284.5 million | $234.3 million | Up 21% |
| Diluted GAAP EPS | $2.33 | $1.91 | Up $0.42 |
| GAAP gross margin | 68.5% | 67.7% | Up 0.8 percentage points |
| GAAP operating margin | 20.2% | 18.8% | Up 1.4 percentage points |
| Non-GAAP diluted EPS | $3.54 | $3.46 | Up 2% |
| Non-GAAP operating margin | 33.8% | 30.9% | Up 2.9 percentage points |
| Operating cash flow | $525.7 million | $523.0 million | Up 1% |
| Cash and cash equivalents | $1.284 billion | $700.0 million | Up $583.8 million |
Income from operations was $368.6 million, compared with $348.7 million in Fiscal 2015. The effective tax rate declined to 2.2% from 11.9%, primarily reflecting changes in deferred-tax valuation allowances and other tax items. Interest expense increased to $76.4 million from $54.6 million.
Liquidity, debt and capital allocation
- Total principal debt at June 30, 2016 was $2.180 billion, consisting of $800 million of 5.625% senior notes due 2023, $600 million of 5.875% senior notes due 2026 and $780 million outstanding under Term Loan B.
- After $34.0 million of debt issuance costs, reported debt was $2.146 billion, including $8.0 million current debt.
- The company had a $300 million revolving credit facility, none of which was drawn at year-end, and reported a consolidated net leverage ratio of 1.3:1 against a 4.0:1 covenant limit.
- Fiscal 2016 financing cash flow was $430.2 million, including $600 million of new debt issuance, $99.3 million of dividends and $65.5 million for repurchase and cancellation of approximately 1.5 million common shares.
- Quarterly dividends increased to $0.23 per share in the fourth quarter; total Fiscal 2016 dividends were $0.83 per share.
- Unfunded pension obligations totaled $64.9 million, including $2.9 million payable within 12 months. Total contractual obligations were $3.154 billion, including $2.962 billion of debt-related obligations.
Material changes versus the prior comparable period
- Revenue declined modestly on a reported basis because of foreign-exchange pressure and lower professional services and license revenue. Customer support revenue increased and remained the largest revenue stream.
- Operating profitability improved despite lower revenue, supported by lower sales and marketing and general and administrative costs, reduced foreign-exchange losses and lower amortization of certain acquired technology.
- Cloud-services gross margin declined to approximately 59.4% from 60.8%, primarily because of higher labor-related costs and sales-tax liabilities.
- Special charges increased to $34.8 million from $12.8 million, including restructuring, acquisition-related costs, an ERP implementation project and post-acquisition integration costs.
- Cash increased substantially following the $600 million debt issuance, while operating cash flow remained broadly stable.
- Fiscal 2016 acquisitions included Daegis for approximately $23.3 million, certain HP customer-experience assets for approximately $160.0 million and ANXe Business Corporation for approximately $104.6 million. These acquisitions added approximately $164.0 million of goodwill in aggregate.
- Research and development spending was $194.1 million, down from $196.5 million, and represented approximately 10.6% of revenue.
Guidance, outlook, risks and unusual items
Management did not provide a formal numerical Fiscal 2017 revenue or earnings forecast in the filing. Its stated priorities were growth in earnings and cash flow, continued expansion of cloud, analytics, discovery and business-network offerings, deeper customer penetration, investment in OpenText Release 16, strategic partnerships, global expansion and selective acquisitions.
- Management expects to continue pursuing acquisitions. Subsequent to year-end, OpenText completed the approximately $170 million acquisition of Recommind and announced a new $200 million share-repurchase authorization.
- In July 2016, the company reorganized its subsidiaries and intellectual-property ownership. Management expected a material tax benefit of several hundred million dollars in Fiscal 2017 from recognition of a net deferred tax asset; the amount and timing remain subject to execution and accounting assessments.
- The IRS tax examinations concerning Fiscal 2010–Fiscal 2012 reorganizations could result in an estimated aggregate liability of approximately $550 million, including taxes, penalties and interest. OpenText strongly disagrees with the IRS position, intends to contest it and recorded no material accrual for the proposed adjustments.
- Key operating risks include acquisition integration, intense competition, technology and cloud-transition risk, cybersecurity and data-privacy incidents, foreign-currency volatility, long sales cycles, reliance on strategic partners, international operations, pension funding and potential restructuring costs.
- Brexit was identified as a potential source of European economic, regulatory, currency and customer-spending uncertainty.
- The company reported effective disclosure controls and effective internal control over financial reporting, with ANX excluded from the control assessment because it was acquired shortly before year-end.
Most important facts for investors to verify
- Reconcile the reported 21% net-income increase with the unusually low 2.2% effective tax rate and the subsequent tax benefit expected from the Fiscal 2017 intellectual-property reorganization.
- Assess the potential cash, earnings and covenant impact of the IRS examinations and the estimated $550 million contingent exposure.
- Monitor whether recurring and cloud revenue resumes organic growth after foreign-exchange effects and whether cloud gross margins recover.
- Evaluate leverage, interest expense and refinancing requirements, particularly the floating-rate Term Loan B and the 2023 and 2026 senior notes.
- Review acquisition integration performance, goodwill of $2.326 billion and the risk of future impairment or additional restructuring charges.
- Confirm the cash-flow effect and authorization status of dividends, the new $200 million repurchase plan and the Recommind acquisition.
- Compare GAAP results with non-GAAP measures, which exclude amortization, share-based compensation, special charges, other income or expense and related tax effects.