OpenText Corporation — Q1 Fiscal 2024 Summary
Business context and reporting period
OpenText provides information-management software and services, including cloud, cybersecurity, content, business-network, IT operations, application automation, analytics and AI solutions. This Form 10-Q covers the three months ended September 30, 2023, the first quarter of Fiscal 2024. Results include Micro Focus from February 1, 2023, making year-over-year comparisons substantially affected by the acquisition. The company had approximately 24,050 employees in 45 countries at quarter-end.
Key financial metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change/comment |
|---|---|---|---|
| Total revenue | $1.425 billion | $852.0 million | Up 67.3%; Micro Focus contributed $562.9 million |
| Recurring revenue | $1.149 billion | $722.0 million | Up 59.1%; includes cloud and customer support |
| Cloud services and subscriptions | $451.0 million | $404.7 million | Up 11.5% |
| Gross profit | $1.018 billion | $593.7 million | GAAP gross margin of 71.4% versus 69.7% |
| Income from operations | $212.9 million | $146.4 million | GAAP operating margin approximately 14.9% |
| Net income attributable to OpenText | $80.9 million | $(116.9) million | Returned to GAAP profitability |
| Diluted EPS | $0.30 | $(0.43) | Improved year over year |
| Adjusted EBITDA | $494.8 million | $304.0 million | Non-GAAP measure; margin approximately 34.7% |
| Non-GAAP diluted EPS | $1.01 | $0.77 | Non-GAAP net income was $274.3 million |
| Operating cash flow | $47.1 million | $132.0 million | Down 64.3%; approximately 3.3% of revenue |
Revenue mix was $697.7 million of customer support, $173.0 million of license revenue and $103.7 million of professional services and other revenue. Americas revenue was $845.2 million, EMEA revenue was $445.4 million and Asia Pacific revenue was $134.8 million.
Cash and cash equivalents were $919.9 million at September 30, 2023, down from $1.232 billion at June 30, 2023. Including restricted cash, total cash was $922.2 million. Cash declined primarily because of $297.0 million used in financing activities, including $186.5 million of debt repayments, $53.1 million of treasury-stock purchases and $67.0 million of dividends.
Total debt principal was $8.903 billion, with $8.700 billion reported after unamortized discounts and issuance costs. The debt included $3.558 billion of Acquisition Term Loan principal, $945.0 million of Term Loan B, $100.0 million drawn on the Revolver and $1.0 billion of 6.90% Senior Secured Notes due 2027. The reported consolidated net leverage ratio was 3.64:1.00, versus a maximum covenant of 4.00:1.00 under Term Loan B and 4.50:1.00 under the Acquisition Term Loan. Approximately $2.8 billion of debt principal is scheduled to mature or amortize through June 2028, excluding interest; contractual debt obligations including interest total $12.0 billion.
Material changes versus the prior comparable period
- Micro Focus added $562.9 million of revenue, including $369.9 million of customer support revenue and $115.5 million of license revenue. It also added $158.2 million of cost of revenue and $350.9 million of operating expenses.
- GAAP earnings improved from a $116.9 million attributable loss to $80.9 million of attributable income. The prior-year period included a $181.5 million loss from mark-to-market valuation of non-designated derivatives; the current period recorded a $17.9 million gain.
- Interest and related expense increased to $141.8 million from $40.4 million, reflecting acquisition-related debt and higher rates. Cash interest paid was $131.9 million versus $46.4 million.
- GAAP gross margin increased to 71.4%, while non-GAAP gross margin increased to 77.3% from 75.2%. Cloud gross margin declined to 62.0% from 67.4%, and customer-support gross margin declined to 89.2% from 91.4%.
- Operating cash flow declined despite higher earnings, primarily because of unfavorable working-capital changes, including a $150.5 million reduction in deferred revenue and a $124.2 million decrease in accounts payable and accrued liabilities.
- The company purchased 1.4 million shares for $53.1 million to support employee award settlements and declared a quarterly dividend of $0.25 per share. It did not repurchase and cancel shares under its share repurchase plan.
Guidance, outlook, commentary and unusual items
Management did not provide specific numerical revenue, earnings or cash-flow guidance in the filing. Its stated Fiscal 2024 priorities are growth in earnings and cash flow, increasing recurring revenue, expanding profitability, continuing cloud modernization and pursuing organic and acquired growth under its “Total Growth” strategy. Enterprise cloud bookings were $121.0 million, compared with $111.8 million in the prior-year quarter. Cloud renewal rates excluding Carbonite, Zix and Micro Focus remained at 94%; customer-support renewal rates declined to 94% from 95%.
The Micro Focus integration and restructuring plan is expected to reduce the combined workforce by approximately 8%, or 2,000 employees, and is expected to be completed by the end of Fiscal 2024. Estimated total restructuring costs are $135 million to $150 million, of which $79.1 million had been recorded through September 30, 2023. Q1 special charges were $13.8 million.
Subsequent to quarter-end, OpenText repaid the $100 million Revolver balance on October 10, 2023 and $75 million of the Acquisition Term Loan on October 20, 2023. As of October 31, 2023, the Revolver had no balance and the Acquisition Term Loan had approximately $3.5 billion outstanding. The company stated that cash and available credit facilities are expected to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months.
Material risks include high leverage and floating-rate exposure, integration and synergy execution for Micro Focus, restructuring costs, foreign-exchange volatility, cybersecurity and data-breach risks, macroeconomic and geopolitical uncertainty, customer demand and renewal rates, and potential tax liabilities. A 100-basis-point increase in rates would increase annual interest expense by approximately $9.5 million on Term Loan B, $1.0 million on the Revolver and $35.6 million on the Acquisition Term Loan, based on quarter-end balances.
The CRA is challenging transfer-pricing positions for Fiscal 2012 through Fiscal 2016. Management estimates potential penalties, interest and provincial taxes of approximately $76 million, has provisionally paid approximately $33 million, and has not accrued additional amounts. Separate CRA reassessments for Fiscal 2017 through Fiscal 2019 could reduce deferred tax assets and generate income-tax expense of up to approximately $470 million if the company is unsuccessful. The Carbonite securities class action remains pending after class certification; motions for decertification and summary judgment are pending. The Realtime Data patent matter was fully resolved in OpenText’s favor in August 2023.
Facts investors should verify
- How much of the revenue and profitability improvement is organic versus attributable to Micro Focus, and whether recurring-revenue growth and renewal rates are sustained.
- Progress toward the $400 million of announced Micro Focus cost synergies and completion of the $135 million to $150 million restructuring plan.
- Debt paydown, refinancing needs and compliance with leverage covenants, particularly as Term Loan B matures in May 2025 and the Revolver matures in October 2024.
- Cash conversion and working-capital trends, including the sharp decline in operating cash flow and the effect of deferred-revenue movements.
- Exposure to higher SOFR rates, foreign-exchange movements and derivative valuation volatility.
- Developments in the CRA reassessments, including the potential $470 million deferred-tax-asset impact and the approximately $76 million estimated penalties, interest and provincial taxes.
- Micro Focus purchase-price allocation, intangible-asset amortization, goodwill and impairment assumptions; the allocation remained preliminary at September 30, 2023.
- The outcome of the Carbonite securities class action and the company’s ability to maintain dividends while reducing leverage.