OpenText Corporation — Q2 Fiscal 2015 Form 10-Q Summary
Business context and reporting period
OpenText provides Enterprise Information Management software and services, including enterprise content management, business process management, customer experience management, information exchange and discovery solutions. The filing covers the three and six months ended December 31, 2014, representing the second quarter and first six months of Fiscal 2015. Results include the impact of the January 2014 acquisition of GXS. The company employed approximately 8,000 people worldwide.
Key financial metrics
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Total revenue | $467.8 million | $363.5 million | $921.6 million | $688.0 million |
| GAAP gross profit | $318.7 million | $255.6 million | $624.6 million | $473.6 million |
| GAAP gross margin | 68.1% | 70.3% | 67.8% | 68.8% |
| Income from operations | $110.6 million | $73.9 million | $213.6 million | $126.0 million |
| GAAP operating margin | 23.6% | 20.3% | 23.2% | 18.3% |
| Net income attributable to OpenText | $74.3 million | $53.5 million | $138.9 million | $84.1 million |
| Diluted GAAP EPS | $0.60 | $0.45 | $1.13 | $0.71 |
| Operating cash flow | Not separately stated in the financial statements | Not separately stated | $248.1 million | $140.8 million |
Quarterly revenue increased 28.7%, while six-month revenue increased 34.0%. Q2 non-GAAP diluted EPS was $0.97 versus $0.79, and non-GAAP operating margin was 32.8% versus 30.9%. Non-GAAP measures exclude, among other items, acquired-intangible amortization, share-based compensation, special charges and certain other income or expense.
- License revenue declined 6.6% in Q2 to $75.8 million and declined 1.5% for the six-month period to $134.4 million.
- Cloud services revenue increased 259.0% in Q2 to $151.3 million and increased 259.1% for the six-month period to $301.3 million, primarily due to GXS.
- Customer support revenue increased 2.9% in Q2 to $179.5 million and 6.0% for the six-month period to $363.4 million.
- Professional services and other revenue decreased 6.8% in Q2 to $61.3 million and 1.8% for the six-month period to $122.5 million.
Liquidity, balance sheet and debt
| Balance-sheet item | December 31, 2014 | June 30, 2014 |
|---|---|---|
| Cash and cash equivalents | $542.8 million | $427.9 million |
| Total assets | $3.896 billion | $3.919 billion |
| Total debt | $1.292 billion | $1.319 billion |
| Total shareholders’ equity | $1.759 billion | $1.642 billion |
Six-month operating cash flow of $248.1 million was partly offset by $57.4 million of investing outflows and $59.6 million of financing outflows. Investing outflows included $48.3 million of capital expenditures. Financing outflows included $26.8 million of debt repayments and $42.1 million of dividends.
At December 31, 2014, debt consisted primarily of $491.3 million under Term Loan A, $792.0 million under Term Loan B and an $8.5 million mortgage. The company had not drawn on its $300 million revolving facility. Management stated that cash and available credit were expected to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the GXS acquisition and the resulting increase in cloud services revenue.
- GAAP operating margin expanded despite lower gross margin, reflecting operating leverage and lower special charges relative to the prior year.
- Gross margin declined because cloud services represented a substantially larger share of revenue and carried a lower margin than license and customer support revenue.
- Interest expense increased by $5.4 million in Q2 and $12.1 million for the six-month period, primarily because of Term Loan B issued to finance the GXS acquisition.
- Depreciation and acquired-customer-intangible amortization increased due primarily to GXS and higher capital expenditures.
- Special charges changed from a $6.3 million expense in the prior-year quarter to a $5.8 million recovery in Q2 FY2015. The recovery primarily reflected a $9.8 million reversal of certain pre-acquisition tax liabilities and related interest.
- The company declared and paid quarterly dividends of $0.1725 per share, compared with $0.1500 per share in the prior-year quarter.
Outlook, unusual items and risks
Management’s Fiscal 2015 focus was growth in earnings and cash flow, expansion of Enterprise Information Management capabilities and increased emphasis on recurring revenue from cloud services, customer support and professional services. Management expected cloud services revenue to remain a recurring and growing stream and was pursuing subscription-based delivery models combining cloud functionality with on-premises control.
Subsequent to quarter-end, OpenText issued $800.0 million of 5.625% senior notes due 2023 and used part of the proceeds to repay Term Loan A in full. The remaining proceeds were added to cash for general corporate purposes, including potential acquisitions. The credit agreement was amended to replace prior leverage and interest-coverage covenants with a consolidated net leverage covenant of no more than 4:1.
OpenText acquired Informative Graphics Corporation for approximately $39.1 million on January 2, 2015, and Actuate Corporation for approximately $311.5 million on January 16, 2015. Both acquisitions were expected to be consolidated beginning in Q3 Fiscal 2015. The company also held approximately $9.5 million of Actuate shares at December 31, 2014.
- The OpenText/GXS restructuring plan was expected to cost approximately $30.0 million in total, with $23.5 million recorded through December 31, 2014 and substantial completion expected by the end of Fiscal 2015.
- Unfunded pension obligations totaled $66.9 million, including $1.6 million payable within 12 months.
- Tax contingencies included a $6.3 million accrual related to New York State assessments, a $2.5 million Brazilian tax claim supported by a $3.4 million bank guarantee, approximately $7.5 million accrued for Brazilian indirect taxes, and a $1.4 million accrual for an Indian transfer-pricing matter.
- The IRS was examining Fiscal 2010–Fiscal 2012 tax returns and the company’s international reorganization; no adjustments had been proposed and no material accrual had been recorded for potential adjustments.
- Key disclosed risks include acquisition integration and restructuring, competition, product execution, customer demand and retention, foreign exchange, interest rates, cybersecurity and network reliability, intellectual-property claims, tax audits, litigation, privacy regulation and access to capital.
Important facts for investors to verify
- Whether the sharp increase in cloud and recurring revenue, particularly from GXS, is sustained and produces acceptable margins.
- The post-quarter-end effect of the Actuate and Informative Graphics acquisitions on revenue, profitability, goodwill, intangible amortization and leverage.
- The effect of replacing Term Loan A with 5.625% senior notes, including changes in interest expense, maturity profile and covenant flexibility.
- The company’s reconciliation of non-GAAP results, particularly the material exclusions for acquired-intangible amortization, share-based compensation, special charges and other income or expense.
- Resolution and potential changes in the disclosed tax audits, tax contingencies, litigation and restructuring obligations.
- Foreign-exchange and interest-rate sensitivity, including the disclosed potential annual interest impact of approximately $7.9 million for a one-percentage-point increase on Term Loan B as of December 31, 2014.