Open Text Corporation Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2010; filed April 30, 2010. The request identifies “2009 Q3,” but the filing reports Fiscal 2010 Q3 and compares against the periods ended March 31, 2009. Financial statements are unaudited and presented in U.S. dollars.
Business Context
Open Text provides enterprise content management software, including licensing, customer support, consulting, implementation, training and integration services. The company had approximately 3,700 employees worldwide. Vignette Corporation was consolidated beginning July 22, 2009.
Key Financial Metrics
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Revenue | $212.8 million | $192.0 million | $672.0 million | $582.3 million |
| Gross profit | $141.9 million | $128.3 million | $451.9 million | $395.3 million |
| Gross margin | 66.7% | 66.8% | 67.2% | 67.9% |
| Operating income | $26.4 million | $21.0 million | $67.1 million | $63.2 million |
| Operating margin | 12.4% | 10.9% | 10.0% | 10.8% |
| Net income | $13.1 million | $22.0 million | $36.0 million | $37.5 million |
| Diluted EPS | $0.23 | $0.41 | $0.63 | $0.71 |
| Cash flow from operations | $78.0 million | Not separately shown in statements | $115.0 million | $137.5 million |
Customer support was the largest revenue source, increasing 22.1% year over year to $124.4 million in the quarter and representing 58.5% of revenue. License revenue declined 4.6% to $49.5 million, while service and other revenue increased 1.7% to $38.8 million.
At March 31, 2010, cash and cash equivalents were $321.3 million, compared with $275.8 million at June 30, 2009. Total debt was $301.6 million, including a $288.8 million term loan and a $12.8 million mortgage; the company had no revolver borrowings. Total assets were $1.72 billion and shareholders’ equity was $862.5 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 10.8%, driven primarily by customer support revenue and the Vignette acquisition.
- Nine-month revenue increased 15.4%; customer support revenue increased $77.6 million, while license revenue increased only $2.7 million.
- Quarterly operating income increased 26.1%, despite higher operating expenses, reflecting revenue growth and operating efficiencies.
- Quarterly net income declined 40.5%, primarily because other income of $11.7 million in the prior-year quarter became net other expense of $5.6 million, largely due to foreign exchange effects.
- Nine-month net income declined 3.8%, while the effective tax rate increased to approximately 34% from 28%, partly because competent-authority tax relief expired and valuation allowances increased.
- Operating cash flow declined $22.6 million for the nine-month period, mainly because of less favorable working-capital changes and higher income-tax payments.
- Investing cash use declined to $72.3 million from $148.5 million, although the company spent $90.6 million, net of acquired cash, on Vignette and $15.3 million on capital assets.
- Goodwill increased to $699.8 million from $576.1 million, primarily from $132.5 million of Vignette goodwill.
Guidance, Outlook, Risks and Unusual Items
- Management described the ECM market as stable and expects recurring customer support revenue, which exceeds 50% of total revenue, to remain an important stabilizing factor. Approximately half of revenue comes from outside North America.
- For Fiscal 2010, management expected research and development expenses at 14%–16% of revenue, sales and marketing expenses at 24%–26%, and general and administrative expenses at 9%–10%. The filing does not provide revenue or earnings guidance.
- Special charges were $6.1 million in the quarter and $35.1 million for the nine months, primarily relating to restructuring, acquisition costs and impairment charges. Total Fiscal 2010 restructuring costs are expected to be approximately $32 million–$40 million, with $28.8 million recorded through March 31, 2010.
- The company expects cash and available credit facilities to fund working capital, contractual commitments and capital expenditures for the foreseeable future. It was in compliance with its debt covenants at March 31, 2010.
- The term loan bears interest at LIBOR plus 2.25%; a 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.9 million, assuming the balance remained outstanding.
- Approximately 55% of cash was held in currencies other than the U.S. dollar. Management states that foreign-exchange movements could materially affect reported results.
- Income-tax examinations were open in Canada, Germany, the United States, France and Spain. Management believes adequate provisions have been recorded, but future settlements cannot be predicted with certainty.
- On April 1, 2010, Open Text acquired Nstein Technologies for $32.8 million. On April 26, 2010, it announced a proposed approximately CAD $11 million acquisition of Burntsand, subject to shareholder approval.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Assess the sustainability of growth given the strong increase in recurring support revenue but weak quarterly license revenue.
- Separate operating performance from foreign-exchange gains and losses, acquisition accounting, amortization and restructuring charges.
- Monitor completion and integration of Vignette, Nstein and the proposed Burntsand transaction, including the impact on goodwill and acquired intangible assets.
- Review the timing and funding of the $12.6 million final mortgage principal payment due January 2011 and the term loan maturity in October 2013.
- Verify the remaining Fiscal 2010 restructuring obligations and expected cash payments, as well as the company’s ability to maintain debt covenant compliance.
- Evaluate tax-examination exposures, Vignette tax attributes and the provisional valuation of acquired intangible assets and goodwill.