Open Text Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015, representing the third quarter and first nine months of fiscal 2015. The filing is dated April 28, 2015. The request metadata references “2014 Q3,” but the filing compares fiscal 2015 with fiscal 2014.
Business context
OpenText provides enterprise information management software and services, including enterprise content management, business process management, customer experience management, information exchange, discovery, cloud services and managed services. The company employed approximately 8,700 people worldwide as of March 31, 2015. Results include Actuate from January 16, 2015 and Informative Graphics Corporation from January 2, 2015.
Financial highlights
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Nine months ended March 31, 2015 | Nine months ended March 31, 2014 |
|---|---|---|---|---|
| Total revenue | $447.6 million | $442.8 million | $1.369 billion | $1.131 billion |
| Gross profit | $294.0 million | $298.2 million | $918.6 million | $771.8 million |
| GAAP gross margin | 65.7% | 67.3% | 67.1% | 68.3% |
| Income from operations | $52.6 million | $66.8 million | $266.2 million | $192.8 million |
| GAAP operating margin | 11.8% | 15.1% | 19.4% | 17.1% |
| Net income attributable to OpenText | $26.6 million | $45.9 million | $165.5 million | $130.0 million |
| Diluted GAAP EPS | $0.22 | $0.38 | $1.35 | $1.08 |
| Operating cash flow | Not separately provided in the statements | Not separately provided in the statements | $391.2 million | $282.2 million |
Management reported third-quarter non-GAAP diluted EPS of $0.66 versus $0.84, non-GAAP operating margin of 25.7% versus 29.1%, and non-GAAP gross margin of 70.8% versus 71.3%.
Revenue mix and material changes
- License revenue: $64.0 million, down 12.5% year over year for the quarter; nine-month revenue was $198.4 million, down $11.2 million. Management attributed approximately $6.3 million of the quarterly decline and $9.1 million of the nine-month decline to foreign exchange.
- Cloud services: $143.8 million, up $15.4 million for the quarter; nine-month revenue was $445.1 million, up $232.9 million, primarily reflecting the GXS acquisition. Cloud gross margin declined to 58.3% from 61.5% for the quarter.
- Customer support: $184.3 million, up $4.0 million for the quarter and $547.7 million for the nine months. The reported customer support renewal rate was 90%.
- Professional services and other: $55.5 million, down $5.5 million for the quarter and $7.8 million for the nine months, partly due to foreign exchange and lower services activity.
- Quarterly revenue growth was concentrated in the Americas, which increased $18.4 million; EMEA declined $10.0 million and Asia Pacific declined $3.6 million.
- Operating expenses increased $10.1 million for the quarter and $73.5 million for the nine months, driven by acquisitions, higher research and development, sales and marketing, general and administrative costs, depreciation and amortization.
Profitability, cash flow, liquidity and debt
- Quarterly GAAP net income attributable to OpenText declined approximately 42% year over year, despite revenue growth, primarily reflecting lower gross profit, higher operating expenses, increased interest expense and unfavorable other income/expense.
- The quarterly effective tax rate was a 1.2% recovery compared with a 22.1% tax expense rate in the prior-year quarter. The nine-month effective tax rate was 17.6% versus 27.2%.
- Cash and cash equivalents were $613.2 million at March 31, 2015, compared with $427.9 million at June 30, 2014. Marketable securities totaled $30.2 million.
- Operating cash flow for the nine months increased $109.0 million year over year to $391.2 million. Investing cash use was $390.2 million, including $291.8 million for Actuate and $35.2 million for IGC, while capital expenditures were $60.6 million.
- Total debt was $1.598 billion, consisting primarily of $800.0 million of 5.625% senior notes due 2023 and $790.0 million of Term Loan B. Term Loan A was repaid in full on January 15, 2015 using proceeds from the senior notes.
- The company had not drawn on its $300 million revolving credit facility. Its reported consolidated net leverage ratio was 1.6:1, below the 4:1 covenant.
- Contractual obligations totaled $2.335 billion, including $2.105 billion of long-term debt obligations, $212.3 million of operating lease obligations and $18.4 million of purchase obligations.
Guidance, outlook and unusual items
- Management’s fiscal 2015 priorities include growth in earnings and cash flow, expansion of enterprise information management capabilities, continued development of cloud and subscription offerings, and strategic acquisitions.
- Management expects cloud services and other recurring revenue streams to continue growing. The company also expects to continue selectively acquiring companies, products, services and technologies.
- Actuate was acquired for approximately $332.0 million and contributed $14.5 million of revenue and a $7.6 million net loss from January 16 through March 31, 2015. IGC was acquired for approximately $40.4 million and had no significant period impact.
- Special charges were $5.6 million for the quarter and $4.0 million for the nine months. The new OpenText/Actuate restructuring plan is expected to cost approximately $7 million to $10 million in total, with $2.1 million recorded through March 31, 2015, and substantial completion expected by June 30, 2016.
- Quarterly results included a $3.1 million gain from remeasuring OpenText’s pre-acquisition Actuate investment, a $2.9 million write-off of debt issuance costs following repayment of Term Loan A and acquisition-related and post-combination compensation costs.
- Management states that existing cash, operating cash flow and available credit facilities should fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next 12 months. Additional acquisitions could require further financing.
Risks and contingencies
- Key risks include acquisition integration and restructuring, foreign exchange volatility, competition, delayed customer purchasing decisions, demand for products and services, system failures or security breaches, intellectual-property claims, privacy compliance, international operating risks and retention of key personnel.
- The IRS is examining fiscal 2010 through fiscal 2012 tax returns and the company’s international reorganization. No adjustments had been proposed, but potential adjustments could be material.
- OpenText has accrued approximately $6.2 million for a Brazil indirect-tax matter and $1.4 million for potential Indian transfer-pricing assessments. A Brazil tax claim of approximately $2.2 million is supported by a $3.0 million bank guarantee.
- Aggregated litigation losses were reported as immaterial, and management did not believe a material additional loss was reasonably possible as of the filing date.
- Term Loan B is floating-rate debt; a one-percentage-point increase in rates would increase annual interest expense by approximately $7.9 million based on the March 31 balance.
- Unfunded pension obligations totaled $65.4 million, including $1.4 million payable within 12 months.
Investor verification priorities
- Verify the sustainability of revenue growth as license revenue declines and the mix shifts toward cloud services and recurring support revenue.
- Assess cloud-services gross-margin pressure and the profitability contribution of the GXS, Actuate and IGC acquisitions.
- Review debt maturity, floating-rate exposure, covenant compliance and the company’s ability to fund future acquisitions while maintaining dividends.
- Evaluate the effect of amortization, restructuring, acquisition costs, foreign exchange and unusual tax items on GAAP versus non-GAAP earnings.
- Monitor the IRS examination, Brazil and India tax matters, other tax audits and the potential for additional tax liabilities.
- Confirm progress and total costs of the OpenText/Actuate restructuring plan and the realization of expected acquisition synergies.