OpenText Corporation Form 10-Q Summary
Business context and reporting period
OpenText Corporation is a global Information Management software and services company offering on-premise, cloud, hybrid and managed-service solutions. The filing covers the quarter and six months ended December 31, 2020, the second quarter of Fiscal 2021. Results are presented in U.S. dollars under U.S. GAAP. The company employed approximately 14,300 people worldwide.
Key financial metrics
| Metric | Three months ended Dec. 31, 2020 | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2020 | Six months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Total revenue | $855.6 million | $771.6 million | $1.660 billion | $1.468 billion |
| Gross profit | $603.1 million | $539.2 million | $1.158 billion | $1.008 billion |
| GAAP gross margin | 70.5% | 69.9% | 69.8% | 68.6% |
| Income from operations | $234.5 million | $184.7 million | $416.8 million | $317.3 million |
| Net income attributable to OpenText | $(65.5) million | $107.5 million | $37.9 million | $181.9 million |
| Diluted EPS | $(0.24) | $0.40 | $0.14 | $0.67 |
| Adjusted EBITDA | $360.8 million | $317.0 million | $703.1 million | $571.2 million |
| Operating cash flow | Not separately reported | Not separately reported | $516.4 million | $344.7 million |
Quarterly revenue increased 10.9%, or 8.8% excluding a $16.2 million foreign-exchange benefit. Recurring revenue, defined as cloud services and subscriptions plus customer support, increased 21.5% to $684.9 million, or 19.5% excluding foreign exchange. Cloud services and subscriptions revenue rose 41.1% to $350.5 million, while customer support increased 6.0% to $334.5 million. License revenue declined 22.3% to $107.3 million, and professional services and other revenue declined 9.0% to $63.4 million.
Quarterly GAAP operating margin was approximately 27.4%, compared with approximately 23.9% in the prior-year quarter. Non-GAAP gross margin was 77.1%, compared with 75.5%, and non-GAAP diluted EPS was $0.95, compared with $0.84. Adjusted EBITDA margin was approximately 42.2%, compared with approximately 41.1%.
Financial position, cash flow and liquidity
- Cash and cash equivalents were $1.501 billion at December 31, 2020, compared with $1.693 billion at June 30, 2020. Total cash, cash equivalents and restricted cash were $1.504 billion.
- Six-month operating cash flow was $516.4 million, up 49.8% year over year. The increase primarily reflected working-capital benefits, including higher income taxes payable and improved collections.
- Investing cash outflow was $24.3 million, compared with $1.265 billion in the prior-year period, which included approximately $1.2 billion for the Carbonite acquisition.
- Financing cash outflow was $719.5 million, primarily reflecting repayment of the $600 million Revolver balance, share repurchases for employee-plan purposes and $101.8 million of dividends.
- Total debt outstanding was approximately $3.592 billion, including $900 million of 2030 Notes, $900 million of 2028 Notes, $850 million of 2026 Notes and $972.5 million under Term Loan B. The Revolver had no outstanding balance at December 31, 2020 and had $750 million of total commitments.
- The Term Loan B consolidated net leverage ratio was 1.6:1, below the 4:1 covenant limit. Term Loan B carried an interest rate of 1.90% at quarter-end and matures in May 2025.
- Management stated that cash and available credit facilities are expected to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven principally by acquisitions and expansion of cloud services and subscriptions. Recurring revenue increased materially, while license revenue and professional services declined.
- GAAP net income fell to a loss because of a $299.3 million income-tax charge related to the IRS settlement. Excluding specified items, non-GAAP net income increased to $260.5 million from $227.0 million.
- Interest and other related expense increased to $37.6 million from $32.4 million for the quarter, largely reflecting debt associated with recent financing and acquisitions.
- Research and development expense increased 24.9% for the quarter, primarily due to recent acquisitions; management continues to target R&D spending of approximately 12% to 14% of fiscal-year revenue.
- Special charges changed from a $10.1 million expense in the prior-year quarter to a $17.5 million recovery, primarily because of reversals of lease liabilities and other facility costs under restructuring plans.
- Cash used in investing activities declined sharply because the prior-year period included the Carbonite acquisition. OpenText acquired XMedius in March 2020 for approximately $72.9 million; no material acquisition cash payment was recorded in the current six-month period.
Guidance, outlook, commentary and unusual items
Management’s Fiscal 2021 strategy emphasizes “Total Growth,” including organic growth, recurring-revenue expansion, margin improvement, cash-flow generation and disciplined acquisitions. The company remains focused on cloud investment, innovation, cross-selling and strategic acquisitions. No specific full-year revenue or EPS guidance is provided in the filing.
The IRS settlement finalized proposed adjustments for Fiscal 2010 and Fiscal 2012. OpenText recorded a $299.3 million tax charge and expects to pay approximately $287.2 million to the IRS in the third quarter of Fiscal 2021, plus approximately $12.1 million of associated state tax and interest payments during calendar 2021. The settlement eliminates approximately $90 million of expected future withholding taxes over 10 years.
COVID-19 continues to affect customer purchasing decisions, travel, sales and marketing events, work locations and operating assumptions. The company restored previously reduced employee and director compensation and resumed appropriate hiring during the quarter. The COVID-19 Restructuring Plan is estimated to cost approximately $47 million to $53 million in total, of which $45.9 million had been recorded by December 31, 2020. The Fiscal 2020 Restructuring Plan is estimated to cost approximately $30 million to $35 million, of which $27.9 million had been recorded.
The Canada Revenue Agency has disputed transfer-pricing positions for Fiscal 2012 through Fiscal 2016. Management estimates potential exposure of approximately $64 million for penalties, interest and provincial taxes, but has not accrued a liability and is contesting the reassessments. A Carbonite-related patent litigation matter remains unresolved; management considers an unfavorable outcome reasonably possible but not probable and cannot estimate a loss range.
Management identified COVID-19 effects, acquisition integration, customer demand, competition, foreign exchange, interest rates and LIBOR transition, cybersecurity and data breaches, intellectual-property claims, tax audits, litigation, privacy regulation and employee retention as material risks. Disclosure controls and procedures were considered effective as of December 31, 2020.
Important facts for investors to verify
- Reconcile GAAP results with non-GAAP EPS and EBITDA, particularly the effects of the $299.3 million IRS settlement, acquired-intangible amortization, share-based compensation and restructuring recoveries.
- Assess the sustainability of cloud and recurring-revenue growth, including the contribution from acquisitions and the reported cloud renewal rate of approximately 96%, excluding Carbonite.
- Evaluate liquidity after the expected approximately $299.3 million of IRS and related state payments, remaining $53 million of COVID-19-related tax deferrals and continuing dividends.
- Monitor leverage, Term Loan B covenant compliance, floating-rate exposure and the maturities of the 2026, 2028 and 2030 Notes.
- Review the potential cost and timing of COVID-19 and Fiscal 2020 restructuring plans, including whether estimated recoveries and future charges change.
- Track the CRA reassessments, other tax audits and unresolved Carbonite litigation for changes in estimated exposure or cash requirements.
- Consider the comparability impact of the Carbonite and XMedius acquisitions, acquisition-related amortization and integration costs.