OpenText Corporation — Fiscal Q3 2022 Form 10-Q
Reporting period: Three and nine months ended March 31, 2022; U.S. GAAP, unaudited, in U.S. dollars. The filing describes the period as the third quarter of Fiscal 2022, although the request metadata refers to “2021 Q3.” OpenText provides information-management software and services, including cloud, content, business network, experience, security and developer solutions.
Financial performance and liquidity
| Metric | Three months ended March 31, 2022 | Prior comparable period | Nine months ended March 31, 2022 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $882.3 million | $832.9 million | $2.591 billion | $2.493 billion |
| Gross profit | $608.0 million | $571.7 million | $1.798 billion | $1.730 billion |
| GAAP gross margin | 68.9% | 68.6% | 69.4% | 69.4% |
| Income from operations | $131.6 million | $152.4 million | $507.2 million | $569.2 million |
| Net income attributable to OpenText | $74.7 million | $91.5 million | $294.9 million | $129.4 million |
| Diluted EPS | $0.28 | $0.33 | $1.08 | $0.47 |
| Operating cash flow | Not separately provided | Not separately provided | $729.9 million | $579.9 million |
- Recurring revenue, defined as cloud services and subscriptions plus customer support, was $734.5 million in the quarter, up 6.2% reported and 8.1% excluding foreign-exchange effects.
- Cloud services and subscriptions revenue increased 13.0% to $401.9 million in the quarter and 7.3% to $1.123 billion for the nine-month period. Customer support revenue declined 1.0% in the quarter but increased 0.3% year to date.
- Quarterly GAAP operating margin was approximately 14.9%, versus 18.3% in the prior period. Nine-month operating margin was approximately 19.6%, versus 22.8%.
- Quarterly GAAP net margin was approximately 8.5%, versus 11.0%; nine-month net margin was approximately 11.4%, versus 5.2%. The prior-year nine-month result was depressed by significant IRS settlement-related tax expense.
- Management reported quarterly non-GAAP net income of $190.8 million, diluted non-GAAP EPS of $0.70 and adjusted EBITDA of $284.5 million, compared with $204.5 million, $0.75 and $297.1 million, respectively.
- Cash and cash equivalents were $1.634 billion at March 31, 2022, compared with $1.607 billion at June 30, 2021. Cash, cash equivalents and restricted cash totaled $1.636 billion.
- Gross debt principal was $4.260 billion, consisting primarily of senior notes and a $960.0 million Term Loan B. Revolver availability was $750 million, with no outstanding balance. Management reported a consolidated net leverage ratio of 1.9:1 against a 4:1 covenant limit.
- Total contractual obligations included approximately $5.359 billion of debt obligations, including interest, $285.2 million of operating lease payments and $70.9 million of other purchase obligations.
Material changes versus the prior comparable period
- Revenue growth was driven principally by cloud services and subscriptions and the contribution from acquisitions. Foreign exchange reduced reported growth; management stated total revenue growth was 8.0% on a constant-currency basis for the quarter versus 5.9% reported.
- Operating income declined despite higher revenue because operating expenses increased $57.2 million in the quarter and $130.1 million year to date. Sales and marketing and general and administrative costs increased materially, partly reflecting acquisitions, restored compensation levels and higher labor costs.
- Professional services gross margin fell to 15.6% from 22.4% in the quarter and to 19.9% from 25.8% year to date, primarily due to higher labor-related costs.
- Special charges increased to $11.0 million in the quarter from $2.8 million and totaled $20.6 million year to date, compared with a $1.4 million recovery in the prior-year period. The increase included acquisition-related costs, pre-acquisition equity incentive settlements and the new Fiscal 2022 Restructuring Plan.
- Other income increased to $24.4 million in the quarter, primarily from a $27.7 million share of income from equity-method investments. Year-to-date other income included a $27.4 million loss on the redemption of the Senior Notes 2026.
- On December 23, 2021, OpenText acquired Zix Corporation for total consideration of $894.5 million, including $856.2 million of cash paid net of cash acquired. On November 24, 2021, it acquired Bricata for $17.8 million. These transactions increased goodwill by approximately $595.7 million and are not fully comparable with the prior period.
- The company issued $650 million of 4.125% Senior Notes due 2031 and $850 million of 3.875% Senior Notes due 2029, using part of the proceeds to redeem $850 million of 5.875% Senior Notes due 2026.
- OpenText repurchased and cancelled 2.81 million common shares for $136.1 million year to date and repurchased an additional 1.7 million shares for $75.7 million for potential use in employee plans. Dividends paid increased to $178.6 million from $156.3 million.
Guidance, outlook, commentary and risks
- Management did not provide specific numerical revenue or earnings guidance in the supplied filing text. Its stated priorities are “Total Growth,” increasing recurring revenue, expanding margins, generating cash flow, continued cloud modernization and disciplined acquisitions.
- Research and development spending was $321.5 million, or 12.4% of nine-month revenue, within management’s stated full-year target of 12% to 14% of revenue.
- The Fiscal 2022 Restructuring Plan, associated with return-to-office planning and a reduced real-estate footprint, was expected to cost approximately $30 million to $35 million in total; $0.5 million had been recorded through March 31, 2022.
- Management expected cash and available credit facilities to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for at least the next 12 months, although additional acquisitions could require further financing.
- The Canada Revenue Agency’s transfer-pricing reassessments for Fiscal 2012 through Fiscal 2016 could result in approximately $75 million of penalties, interest and provincial taxes, assuming available tax attributes. OpenText had provisionally paid approximately $34 million and had not accrued the potential liability.
- The CRA’s Fiscal 2017 reassessment could reduce deferred tax assets and produce income tax expense of up to approximately $470 million if OpenText is unsuccessful; no accrual had been recorded. The filing states that any related cash-tax impact would primarily occur over future years.
- Other risks include integration and realization of expected benefits from Zix, customer and SMB demand, cybersecurity and data breaches, intellectual-property claims, COVID-19 effects, inflation and labor costs, foreign-exchange movements, rising interest rates, LIBOR transition, geopolitical conditions and the Russia-Ukraine conflict. OpenText ceased direct business in Russia and Belarus and with known Russian-owned companies.
- Interest-rate sensitivity was approximately $9.6 million of additional annual interest expense for a one-percentage-point increase on the Term Loan B balance outstanding at March 31, 2022.
Investor verification points
- Verify the durability of reported growth excluding Zix and Bricata, particularly cloud renewal rates, recurring-revenue growth and constant-currency performance.
- Reconcile GAAP and non-GAAP results, including the effects of amortization, share-based compensation, special charges and volatile equity-method investment income.
- Assess leverage, debt maturities, floating-rate exposure and the effect of acquisition financing on future free cash flow.
- Monitor Zix integration, purchase-price allocation finalization, expected synergies and the projected $30 million to $35 million restructuring program.
- Follow the CRA Fiscal 2012–2017 tax disputes, including the potential $470 million deferred-tax-asset reduction and the approximately $75 million exposure for earlier years.
- Evaluate whether weaker professional-services margins and higher sales, marketing and administrative costs are temporary or structural.
- Confirm the company’s future dividend and repurchase capacity against debt obligations, acquisition plans and contractual commitments.