Open Text Corporation — Fiscal 2009 Form 10-K
Reporting period: Fiscal year ended June 30, 2009. The request metadata references “2008 Q4,” but the supplied filing is an annual Form 10-K for Fiscal 2009, with Fiscal 2008 as the principal comparable period. Amounts are in U.S. dollars unless otherwise stated and prepared under U.S. GAAP.
Business context
Open Text provides enterprise content management software and related consulting, support, training, integration, hosting and other services. It operates as one industry segment and serves customers globally, with slightly more than 50% of revenue generated outside North America. No customer represented 10% or more of revenue.
Key financial metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Total revenue | $785.7 million | $725.5 million | Up 8.3% |
| License revenue | $229.8 million | $219.1 million | Up 4.9% |
| Customer support revenue | $405.3 million | $363.6 million | Up 11.5% |
| Services and other revenue | $150.5 million | $142.8 million | Up 5.4% |
| Gross profit | $533.8 million | $492.8 million | Up 8.3% |
| Gross margin | 67.9% | 67.9% | Stable |
| Income from operations | $97.6 million | $100.4 million | Down 2.8% |
| Operating margin | 12.4% | 13.8% | Down 1.4 points |
| Net income | $56.9 million | $53.0 million | Up 7.4% |
| Diluted earnings per share | $1.07 | $1.01 | Up 5.9% |
| Cash flow from operations | $176.2 million | $166.0 million | Up 6.1% |
Customer support represented 51.6% of revenue, license revenue 29.3%, and services and other revenue 19.1%. Product-level gross margins were 92.9% for licenses, 83.0% for customer support, and 21.0% for services and other.
- Cash and liquidity: Cash and cash equivalents were $275.8 million, up from $254.9 million. Current assets were $434.9 million versus current liabilities of $318.7 million, implying a current ratio of approximately 1.4x.
- Debt: Total debt was $302.7 million, consisting primarily of a $291.0 million term loan and an $11.7 million mortgage. Net debt was approximately $26.9 million before considering marketable securities. The $75.0 million revolver was undrawn.
- Debt terms: The term loan bears interest at LIBOR plus 2.25%, matures in October 2013, and had $90.0 million of cumulative prepayments. The company was in compliance with its debt covenants.
- Assets and equity: Total assets were $1.51 billion, including $576.1 million of goodwill and $315.0 million of acquired intangible assets. Shareholders’ equity was $686.5 million.
- Research and development: R&D expense was $116.2 million, or 14.8% of revenue, compared with $107.2 million in Fiscal 2008.
- Taxes and unusual items: Income before taxes was $80.8 million and tax expense was $23.8 million, an effective tax rate of approximately 29.4%. Special charges were $14.4 million, compared with a $0.4 million recovery in Fiscal 2008.
Material changes versus Fiscal 2008
- Revenue growth was driven primarily by customer support, particularly in North America, while European revenue was broadly stable.
- North American revenue rose to $391.9 million from $338.5 million; European revenue increased slightly to $351.4 million from $350.1 million.
- Operating income declined despite revenue growth because operating expenses increased $43.8 million, including higher sales and marketing, R&D, amortization and restructuring costs.
- Net interest expense decreased to $13.6 million from $22.9 million, mainly because of lower interest expense on the term loan.
- Investing cash outflows increased substantially to $160.8 million from $28.4 million, primarily because of approximately $117.0 million spent on acquisitions and $12.2 million of capital expenditures.
- Fiscal 2009 acquisitions included Captaris for approximately $101.0 million net of cash acquired, eMotion for $3.6 million, Spicer assets for $11.4 million and Vizible for $0.9 million.
- Cash flow from financing was positive $24.8 million, compared with negative $50.6 million in Fiscal 2008, because the company made no large discretionary term-loan prepayment during Fiscal 2009.
Guidance, outlook, risks and unusual items
Management described the ECM market as robust and emphasized recurring maintenance revenue, compliance-focused products and geographic diversification. For Fiscal 2010, management expected revenue mix of 25%–30% license, 50%–55% customer support, and 20%–25% services and other. Expected expense ranges were 14%–16% of revenue for R&D, 24%–26% for sales and marketing, and 9%–10% for general and administrative expense. The filing does not provide clear total revenue or earnings guidance.
- Vignette acquisition: On July 21, 2009, after year-end, Open Text acquired Vignette for approximately $321 million, including cash and Open Text shares. Vignette results were expected to be consolidated beginning July 22, 2009. The transaction added significant Web Content Management, Portal, Collaboration and Records Management operations.
- Post-year-end restructuring: Also on July 21, 2009, management committed to a restructuring and exit plan expected to generate approximately $32 million–$40 million of charges, including $26 million–$31 million for staff reductions, $3 million–$5 million for facility closures and $3 million–$4 million of other exit costs.
- Acquisition integration: Captaris contributed new technology, inventory, an unfunded pension obligation of $16.4 million and integration-related restructuring liabilities. The company identified risks from integrating Captaris and Vignette, retaining employees and realizing anticipated synergies.
- Interest-rate exposure: A 300-basis-point adverse change in LIBOR would have increased annual term-loan interest expense by approximately $8.7 million absent the interest-rate collar. The collar covered $100.0 million of debt and expired in December 2009.
- Foreign exchange: Approximately 52% of cash and cash equivalents were held in currencies other than the U.S. dollar. A 10% adverse currency movement would have reduced reported cash by approximately 5%.
- Tax contingencies: Gross unrecognized tax benefits were $91.4 million, of which $8.8 million would affect the effective tax rate if realized. Tax examinations were open in Canada, Germany, the United States and France.
- Other contingencies: The company disclosed intellectual-property indemnifications and ordinary-course litigation but stated that no current matter was reasonably expected to have a material adverse effect. It had no material off-balance-sheet financing other than operating leases.
- Controls and audit: Management and KPMG concluded that internal control over financial reporting and disclosure controls were effective as of June 30, 2009. KPMG issued unqualified audit opinions.
Investor verification points
- Verify the final purchase accounting, financing and integration results for the Vignette acquisition, including the shares issued and resulting dilution.
- Assess whether the announced $32 million–$40 million restructuring plan was completed as expected and whether additional charges or cash costs arose.
- Reconcile recurring customer support growth and renewal rates with subsequent license revenue and overall revenue mix.
- Monitor term-loan refinancing or repayment requirements, the October 2013 maturity, LIBOR exposure and the status of the expiring interest-rate collar.
- Review goodwill and acquired intangible balances for impairment risk following the Captaris and Vignette acquisitions.
- Evaluate the realizability of deferred tax assets and the resolution of the $91.4 million of gross unrecognized tax benefits.
- Review the effect of foreign exchange movements, especially given the company’s international revenue base and foreign-currency cash holdings.
- Confirm subsequent-period operating margin performance, because Fiscal 2009 revenue growth did not translate into higher operating income.