Open Text Corporation — Q2 Fiscal 2012 Form 10-Q Summary
Business context and reporting period
Open Text provides enterprise content management software and related implementation, training, integration, maintenance and support services. The filing covers the three and six months ended December 31, 2011, compared with the corresponding periods ended December 31, 2010. Amounts are in thousands of U.S. dollars unless otherwise noted.
Approximately 4,600 employees supported a globally diversified business. Management stated that the ECM market remained generally stable, with more than half of revenue generated from recurring customer support and approximately half generated outside North America.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Total revenue | $321.5 million | $267.5 million | $609.5 million | $484.9 million |
| Gross profit | $215.8 million | $182.9 million | $402.4 million | $326.9 million |
| Gross margin | 67.1% | 68.4% | 66.0% | 67.4% |
| Income from operations | $55.2 million | $52.6 million | $82.4 million | $84.8 million |
| Operating margin | 17.2% | 19.7% | 13.5% | 17.5% |
| Net income | $47.4 million | $37.1 million | $82.4 million | $58.8 million |
| Net margin | 14.8% | 13.9% | 13.5% | 12.1% |
| Diluted EPS | $0.81 | $0.64 | $1.41 | $1.01 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $90.0 million | $88.9 million |
- Second-quarter revenue increased 20.2%; license revenue rose 13.3%, customer support revenue 20.9%, and service and other revenue 28.7%.
- Six-month revenue increased 25.7%, while net income increased 40.2%. Six-month operating income decreased 2.8%, reflecting higher operating expenses, amortization and special charges.
- Quarterly gross margin declined primarily because acquired technology amortization and service delivery costs increased faster than revenue. Service and other gross margin improved to 23.8% from 20.2%.
- Cash and cash equivalents were $413.9 million at December 31, 2011, up from $284.1 million at June 30, 2011. Total current assets were $658.0 million versus current liabilities of $428.4 million.
- Six-month investing cash outflow was $270.9 million, including $245.7 million for Global 360 and additional spending for Operitel, MessageManager, patents and capital assets.
- Six-month financing cash inflow was $317.1 million, driven by new debt financing, partially offset by repayment of prior debt.
Revenue mix and material changes
| Revenue category | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| License | $89.7 million | $79.2 million | $154.7 million | $121.9 million |
| Customer support | $165.4 million | $136.7 million | $327.4 million | $266.5 million |
| Services and other | $66.4 million | $51.6 million | $127.4 million | $96.6 million |
- Customer support represented 51.4% of second-quarter revenue and 53.7% of six-month revenue, supporting recurring revenue visibility.
- Americas revenue increased 21.3% in the quarter, EMEA revenue 13.1%, and Asia Pacific revenue 63.3%. Asia Pacific increased to 7.6% of total revenue from 5.6%.
- Operating expenses increased 23.2% in the quarter and 32.2% for six months. Research and development, sales and marketing, and general and administrative expenses all increased, largely due to personnel and related costs.
- Amortization of acquired technology and customer-based intangible assets increased as a result of prior-year and current-year acquisitions.
- Other income was $2.6 million in the quarter versus other expense of $6.3 million in the prior-year quarter, primarily reflecting foreign-exchange effects. Six-month other income was $11.9 million versus expense of $3.7 million.
- The six-month income-tax provision fell to $5.5 million from $17.9 million, primarily due to one-time tax benefits related to international subsidiary reorganizations and a Canadian functional-currency election. The tax benefit is not necessarily indicative of the ongoing tax rate.
Debt, acquisitions, outlook and risks
- On November 9, 2011, Open Text entered into a $700 million credit agreement consisting of a $600 million five-year term loan and a $100 million revolving facility. The term loan bears interest at LIBOR plus 2.50%; the revolver was undrawn at December 31, 2011.
- Total debt was $611.7 million at December 31, 2011, including $600.0 million of term debt and an $11.7 million mortgage. A 100-basis-point increase in LIBOR would increase annual term-loan interest expense by approximately $6.0 million, assuming the balance remained outstanding.
- The company was in compliance with its 3.0-to-1 maximum consolidated leverage covenant and 3.0-to-1 minimum interest-coverage covenant at December 31, 2011.
- Global 360 was acquired for approximately $256.6 million in cash and contributed $19.9 million of quarterly revenue and a $1.2 million net loss during the period from October 1 through December 31, 2011. Operitel and MessageManager were also acquired during fiscal 2012.
- Management expected fiscal 2012 revenue mix of 25%–30% license, 52%–57% customer support, and 18%–23% services and other. Expected expense ranges were 14%–16% of revenue for research and development, 21%–23% for sales and marketing, and 8%–10% for general and administrative.
- The fiscal 2012 restructuring plan was expected to cost approximately $16.0 million in total; $8.1 million had been recorded by December 31, 2011, with $3.2 million accrued at period-end. Further charges were expected.
- Total contractual obligations were $852.8 million, including $705.2 million of debt obligations and $145.9 million of operating lease obligations. The company stated that available cash and credit facilities should fund expected needs for the next 12 months, although material acquisitions could require additional financing.
- Key risks include acquisition integration and execution, substantial goodwill and acquired intangible assets, floating-rate debt, foreign-exchange exposure, restructuring estimates, tax examinations, intellectual-property indemnification claims, litigation, and macroeconomic conditions. Aggregated litigation losses were considered immaterial at filing.
- John Shackleton retired as CEO effective January 2, 2012, and Mark Barrenechea became CEO. The filing also reported a change in presentation of tax-related interest and penalties; prior periods were reclassified without changing operating income, net income or EPS.
Important facts for investors to verify
- Assess whether revenue growth, particularly from Global 360 and other acquisitions, is translating into sustainable organic growth and operating-margin improvement.
- Reconcile the increased $600 million floating-rate term loan with cash generation, scheduled amortization and the company’s leverage and interest-coverage covenants.
- Separate recurring customer support performance from license timing, acquisition-related revenue and services growth.
- Evaluate the impact of approximately $381.9 million of acquired intangible assets and $1.04 billion of goodwill, including future amortization and impairment risk.
- Verify the expected remaining fiscal 2012 restructuring costs and acquisition-integration expenses.
- Review the sustainability of the unusually low six-month tax provision and the status of open tax examinations and unrecognized tax benefits.
- Monitor foreign-exchange exposure, including $99.6 million of currency-forward notional contracts and the effect of changes in LIBOR on interest expense.