Open Text Corporation — Fiscal 2014 First-Quarter 10-Q Summary
Reporting period: Three months ended September 30, 2013, compared primarily with the three months ended September 30, 2012. The filing is presented in U.S. dollars under U.S. GAAP. OpenText provides enterprise information management software and related cloud, support, and professional services and employed approximately 5,300 people worldwide.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $324.5 million | $326.2 million | Down 0.5% |
| License revenue | $55.3 million | $55.7 million | Down 0.6% |
| Cloud services revenue | $41.6 million | $43.9 million | Down 5.1% |
| Customer support revenue | $168.4 million | $162.1 million | Up 3.9% |
| Professional services and other revenue | $59.1 million | $64.6 million | Down 8.5% |
| Gross profit | $218.0 million | $204.4 million | Up $13.6 million |
| GAAP gross margin | 67.2% | 62.7% | Up 450 basis points |
| Income from operations | $52.0 million | $40.1 million | Up $12.0 million |
| GAAP operating margin | 16.0% | 12.3% | Up 370 basis points |
| Net income | $30.6 million | $19.4 million | Up 57.7% |
| Diluted EPS | $0.52 | $0.33 | Up $0.19 |
| Operating cash flow | $79.9 million | $61.8 million | Up 29.4% |
Non-GAAP diluted EPS was $1.37 versus $1.31, non-GAAP gross margin was 73.9% versus 70.0%, and non-GAAP operating margin was 30.6% versus 28.7%. These measures exclude or adjust for items including acquired-intangible amortization, share-based compensation, special charges, certain other income or expense, and related tax effects.
- Cash and cash equivalents were $491.1 million at September 30, 2013, compared with $470.4 million at June 30, 2013.
- Investing cash outflows were $40.6 million, including $30.6 million net cash consideration for the Cordys acquisition and $8.3 million of capital expenditures.
- Financing cash outflows were $23.5 million, including $17.7 million of dividends and $7.7 million of debt repayment.
- Total debt carrying value was $558.0 million, consisting principally of a $547.5 million term loan and a $10.5 million mortgage. The $100 million revolver was undrawn.
- The company reported a consolidated leverage ratio of 1.33:1 against a maximum covenant of 3:1 and interest coverage of 22.9:1 against a minimum covenant of 3:1.
- Current and long-term deferred revenue totaled approximately $281.8 million, and shareholders’ equity was $1.36 billion.
- The effective GAAP tax rate was 38.2%, compared with 45.5% in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue was broadly stable, but the mix shifted toward recurring customer support revenue, which increased $6.3 million and represented 51.9% of total revenue.
- Cloud services revenue declined $2.2 million, primarily because of lower Asia Pacific and EMEA revenue. Professional services and other revenue declined $5.5 million, mainly in the Americas and Asia Pacific.
- Gross margin improved primarily because of lower delivery costs, reduced amortization of acquired technology intangibles, lower third-party product costs, and certain one-time sales-tax adjustments.
- Operating expenses increased $1.7 million. Sales and marketing expenses rose $4.9 million, reflecting increased sales-force capacity and Cordys-related costs; research and development increased $0.3 million; general and administrative expenses increased $1.9 million.
- Special charges declined to $3.7 million from $9.6 million. The current quarter included $4.8 million for the Fiscal 2014 restructuring plan, $1.3 million of acquisition-related costs, and a $2.4 million net recovery from other charges.
- On August 15, 2013, OpenText acquired Cordys Holding B.V. for $33.2 million in cash, or $30.6 million net of cash acquired. Cordys provides business process management and case-management solutions. The acquisition had no significant effect on reported revenue or earnings for the quarter.
- OpenText paid its first reported quarterly dividend of $0.30 per common share, totaling $17.7 million.
Guidance, outlook, risks and unusual items
- Management did not provide numerical revenue or earnings guidance in the filing. It expects customer support to remain approximately 50% of revenue and views cloud services as an important future growth driver.
- Management intends to strengthen its Enterprise Information Management position across enterprise content management, business process management, customer experience management, information exchange, and discovery. It expects to continue pursuing strategic acquisitions.
- The Fiscal 2014 restructuring plan is expected to generate approximately $10.0 million of total costs; $4.8 million had been recorded by September 30, 2013, and additional charges were expected.
- Liquidity is expected to be sufficient for working capital, contractual commitments, capital expenditures, dividends, and operating needs for the next 12 months. Additional financing may be required for material acquisitions.
- Contractual obligations totaled $759.9 million, including $593.8 million of debt obligations, $158.1 million of operating leases, and $8.0 million of purchase obligations.
- EasyLink, acquired in a prior period, faces a New York telecommunications excise and franchise tax assessment of approximately $10.5 million, as well as a New York sales-tax audit. Management intends to contest the matters and states that sufficient reserves have been established where appropriate.
- Income-tax examinations remain open in several jurisdictions. Management stated that gross unrecognized tax benefits could decrease tax expense by approximately $3.9 million over the next 12 months.
- Key market risks include floating-rate debt and foreign exchange exposure. A 100-basis-point increase in LIBOR would increase annual term-loan interest expense by approximately $5.5 million based on the September 30 balance.
- The company uses foreign-exchange forward contracts to hedge Canadian-dollar payroll exposure. The September 30 notional amount was $74.7 million, with a net derivative liability of $0.3 million.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify whether customer-support growth and the approximately 50% recurring-revenue mix offset weakness in cloud and professional services.
- Assess the sustainability of the quarter’s margin expansion, particularly the effects of lower amortization, restructuring recoveries, and one-time sales-tax adjustments.
- Monitor Cordys integration, future acquisition spending, goodwill of $1.27 billion, and the related increase in acquisition-related amortization and restructuring costs.
- Review debt repayment requirements, floating-rate exposure, covenant headroom, and the potential financing needs of future acquisitions.
- Track the EasyLink tax assessment, open tax examinations, and the company’s $3.9 million estimate of potentially favorable tax changes.
- Reconcile non-GAAP results to GAAP results and consider the material exclusions, particularly $38.8 million of acquired-intangible amortization, $4.6 million of share-based compensation, and $3.7 million of special charges.
- Confirm the board’s subsequent declaration of a $0.30 per-share dividend payable December 20, 2013; future dividends remain discretionary.