OpenText Corporation 10-Q Summary
Reporting period: Quarterly and nine-month periods ended March 31, 2014, representing the third quarter and first nine months of fiscal 2014. The request metadata identifies “2013 Q3,” but the filing itself is for March 31, 2014 and compares against March 31, 2013. Results are presented in U.S. dollars under U.S. GAAP.
Business context
OpenText provides enterprise information management software and services, including license, cloud, customer support, and professional services. The company had approximately 8,100 employees worldwide. The January 2014 acquisition of GXS significantly expanded its cloud-based business-to-business integration and managed-services offerings.
Financial performance
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 | Change |
|---|---|---|---|
| Total revenue | $442.8 million | $337.7 million | 31.1% increase |
| Gross profit | $298.2 million | $215.6 million | 38.3% increase |
| Gross margin | 67.3% | 63.9% | Up 3.4 points |
| Income from operations | $66.8 million | $40.9 million | 63.6% increase |
| Operating margin | 15.1% | 12.1% | Up 3.0 points |
| Net income attributable to OpenText | $45.9 million | $25.8 million | 77.8% increase |
| Diluted EPS | $0.38 | $0.22 | 72.7% increase |
| Operating cash flow | $141.4 million | Not separately provided in the filing excerpt | 21.0% increase per management |
| Revenue category | Three months ended March 31, 2014 | Change versus prior year |
|---|---|---|
| License | $73.1 million | 5.9% increase |
| Cloud services | $128.4 million | $85.2 million increase |
| Customer support | $180.3 million | $13.7 million increase |
| Professional service and other | $61.0 million | $2.1 million increase |
For the nine months ended March 31, 2014, revenue was $1.131 billion versus $1.016 billion, gross profit was $771.8 million versus $648.2 million, operating income was $192.8 million versus $148.2 million, and net income attributable to OpenText was $130.0 million versus $106.3 million. Diluted EPS was $1.08 versus $0.90.
Management also reported non-GAAP diluted EPS of $0.84 for the quarter versus $0.63 in the prior-year quarter, and non-GAAP operating margin of 29.1% versus 26.8%. These measures exclude, among other items, acquired-intangible amortization, share-based compensation, special charges, and related tax effects.
Cash flow, liquidity, and capital structure
- Cash and cash equivalents were $336.1 million at March 31, 2014, down from $470.4 million at June 30, 2013.
- Nine-month operating cash flow was $282.2 million, compared with $253.3 million in the prior-year period.
- Nine-month investing cash outflow was $1.140 billion, primarily reflecting $1.078 billion for GXS and $30.6 million for Cordys, plus capital expenditures of $28.4 million.
- Nine-month financing cash inflow was $717.8 million, including $800.0 million of new borrowings, partly offset by debt repayments, issuance costs, dividends, and treasury-stock purchases.
- Total debt was $1.332 billion at March 31, 2014, including $525.0 million under Term Loan A, $798.0 million under Term Loan B, and a $9.4 million mortgage. The current portion was $62.4 million.
- Term Loan B was entered into and fully drawn in connection with the GXS acquisition. It has a seven-year term, floating-rate interest, and quarterly principal repayments of 0.25% of original principal, with the balance due at maturity.
- The company had a $100 million revolving facility with no amounts drawn at March 31, 2014.
- Management stated that cash and available credit facilities should be sufficient for anticipated working capital, commitments, capital expenditures, dividends, and operating needs over the next 12 months, although additional acquisitions could require further financing.
Material changes versus the prior comparable period
- GXS was acquired on January 16, 2014 for preliminary consideration of $1.219 billion, including $1.102 billion in cash and $116.8 million in OpenText shares. GXS contributed $95.1 million of revenue and $1.8 million of net income from acquisition through March 31, 2014.
- GXS contributed approximately $88.2 million of cloud-services revenue and $5.8 million of customer-support revenue during the nine-month period; its contribution materially increased reported cloud revenue.
- Goodwill increased from $1.247 billion to $2.106 billion, and acquired intangible assets increased from $363.6 million to $770.2 million, primarily due to the GXS acquisition.
- Debt increased substantially from $565.5 million at June 30, 2013 to $1.332 billion at March 31, 2014 to finance the acquisition.
- Special charges increased to $15.9 million for the quarter and $25.9 million year to date, compared with $5.4 million and $17.3 million, respectively, in the prior-year periods.
- The company began the OpenText/GXS restructuring plan and expects total costs of approximately $28.0 million, of which $11.5 million had been recorded by March 31, 2014. Substantial completion is expected by the end of the next fiscal year.
- A two-for-one stock split was implemented on February 18, 2014. Historical share and per-share data have been adjusted accordingly.
- The company declared and paid quarterly dividends of $0.15 per post-split share during the quarter and $0.45 per share for the nine-month period.
Outlook, risks, contingencies, and unusual items
Management’s stated strategy is to expand its position in enterprise information management, cloud services, business process management, customer experience management, information exchange, and discovery. Customer support and cloud services are expected to provide recurring revenue streams and remain important growth drivers. No specific full-year revenue or earnings guidance is provided in the filing excerpt.
- Integration of GXS may be complex, costly, and time-consuming and may result in additional restructuring, acquisition, or integration costs.
- Higher leverage increases debt-service obligations and exposes the company to floating interest rates. A one-percentage-point rate increase would increase estimated annual interest expense by approximately $5.3 million on Term Loan A and $8.0 million on Term Loan B, based on March 31 balances.
- The company reported a consolidated leverage ratio of 2.9:1 under Term Loan A, against a maximum of 3:1, and a consolidated net leverage ratio of 2.16:1 under Term Loan B, against a maximum of 4:1. Interest coverage was 19.6:1 against a minimum of 3:1.
- The IRS is examining certain fiscal 2010 through fiscal 2012 tax returns and the company’s international restructuring. No adjustments had been proposed, but potential adjustments could be material.
- Potential tax matters include an approximately $10.5 million New York assessment related to pre-acquisition EasyLink revenue, a $2.6 million Brazilian tax claim inherited with GXS supported by a $3.5 million bank guarantee, and Indian transfer-pricing assessments for which $1.4 million had been accrued.
- The company had $1.785 billion of contractual obligations, including $1.534 billion of debt obligations, $222.0 million of operating lease obligations, and $28.8 million of purchase obligations.
- Unfunded pension obligations totaled $57.6 million, including $1.7 million payable within 12 months.
- A universal shelf registration statement was filed to facilitate potential primary or secondary offerings. Management stated it had no current commitment or plan for a primary securities offering, but GXS selling shareholders may resell shares issued in the acquisition.
Important facts for investors to verify
- Whether GXS integration delivers expected revenue synergies, cost savings, and recurring cloud-service growth.
- The pace of debt reduction and compliance with leverage and interest-coverage covenants.
- The effect of floating interest rates on future interest expense and cash flow.
- The final purchase-price allocation for GXS, including goodwill, acquired intangibles, tax balances, and potential unrecorded liabilities.
- The ultimate resolution of IRS, New York, Brazilian, Indian, and other tax examinations or assessments.
- The remaining approximately $16.5 million of estimated OpenText/GXS restructuring costs and the timing of related cash payments.
- The effect of potential secondary sales of GXS-related shares on the company’s share price and share count.
- The sustainability of reported margins after excluding acquisition-related amortization, share-based compensation, and special charges.