OpenText Corporation — Fiscal 2020 Form 10-K Summary
Business context and reporting period
OpenText provides Information Management software and services across on-premise, hybrid, cloud and managed-service deployments, including Business Network, Content Services, Cyber Resilience and Digital Experience solutions. This filing covers the fiscal year ended June 30, 2020, compared primarily with fiscal 2019; it is not a 2019 fourth-quarter filing. Results include Carbonite from December 24, 2019, XMedius from March 9, 2020, and The Fax Guys from December 2, 2019.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Revenue | $3.110 billion | $2.869 billion | +8.4% |
| Recurring revenue | $2.433 billion | $2.156 billion | +12.9% |
| Cloud services and subscriptions | $1.158 billion | $908 million | +27.5% |
| License revenue | $403 million | $428 million | -5.9% |
| GAAP gross margin | 67.7% | 67.6% | +0.1 percentage points |
| Income from operations | $504 million | $567 million | -11.2% |
| Net income attributable to OpenText | $234 million | $286 million | -18.0% |
| Diluted GAAP EPS | $0.86 | $1.06 | -18.9% |
| Adjusted EBITDA | $1.148 billion | $1.100 billion | +4.3% |
| Operating cash flow | $955 million | $876 million | +8.9% |
Non-GAAP diluted EPS increased to $2.89 from $2.76, and non-GAAP gross margin increased to 74.5% from 74.1%. GAAP operating expenses rose to $1.602 billion from $1.371 billion, including $100.4 million of special charges versus $35.7 million in fiscal 2019. Income was also affected by $17.9 million of debt-extinguishment losses and higher amortization of acquired intangible assets.
Cash and cash equivalents were $1.693 billion at June 30, 2020, up from $941 million. Total cash, including restricted cash, was $1.697 billion. Cash flow used in investing activities was $1.469 billion, principally reflecting acquisitions. The company paid $188.7 million in dividends, or $0.6984 per share, and declared a subsequent quarterly dividend of $0.1746 per share on August 5, 2020.
Principal debt outstanding was $4.228 billion, comprising $2.650 billion of senior notes, $977.5 million of Term Loan B and $600 million drawn on the revolving facility. The company reported a consolidated net leverage ratio of 2.0:1 against a 4.0:1 covenant limit, with $150 million remaining available under the revolver. Long-term debt, net of issuance costs and premiums, was $3.584 billion, and current debt was $610 million.
Material changes versus fiscal 2019
- Cloud and subscription revenue was the primary growth driver, while license revenue declined and professional services revenue decreased 4.0%.
- Recurring revenue increased to 78.2% of total revenue from approximately 75.1%, reflecting continued movement toward subscription and support-based offerings.
- Carbonite was acquired for approximately $1.4 billion and contributed $235.4 million of post-acquisition revenue and a $49.3 million net loss, including acquisition-related charges and amortization.
- OpenText also acquired XMedius for $73.3 million and The Fax Guys for $5.1 million.
- The company issued $900 million of 3.875% senior notes due 2028 and $900 million of 4.125% senior notes due 2030. Proceeds supported the redemption of $800 million of 2023 notes and repayment of a prior $750 million revolver draw.
- GAAP profitability declined despite higher revenue and adjusted EBITDA, primarily because of increased operating expenses, acquisition-related amortization and special charges.
- Operating lease right-of-use assets of $207.9 million and operating lease liabilities of $281.2 million were recognized following adoption of ASC 842.
Guidance, outlook, commentary and risks
Management did not provide specific fiscal 2021 revenue or earnings guidance in the filing. Its stated priorities are to expand recurring revenue and cloud adoption, deepen existing customer relationships, invest in research and development, broaden partnerships and global reach, and pursue selective acquisitions.
COVID-19 materially increased uncertainty around customer purchasing, sales cycles, collections, employee productivity, cybersecurity and future operating performance. The company reduced hiring and discretionary spending, moved toward a significant work-from-home model and planned to reduce its global office footprint by more than 50%, affecting approximately 15% of employees. The COVID-19 restructuring plan was expected to cost approximately $62 million to $75 million, of which $53.6 million had been recorded by June 30, 2020. A separate fiscal 2020 restructuring plan was expected to cost approximately $36 million to $44 million, of which $26.7 million had been recorded.
Other principal risks include acquisition integration, competition and technology transitions, customer renewals, foreign currency and floating-rate debt exposure, cybersecurity and data privacy compliance, LIBOR replacement, unfunded pension obligations, and tax disputes. The IRS proposed aggregate additional taxes, penalties and interest of approximately $770 million relating to fiscal 2010 and fiscal 2012 matters; OpenText disputes the proposed adjustments and has recorded no material accrual. CRA reassessments could result primarily in approximately $44 million of penalties and interest, assuming available tax attributes, and are also being contested.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management excluded Carbonite from its ICFR assessment; Carbonite represented 7.6% of fiscal 2020 revenue and 17.2% of total assets at year-end.
Important facts for investors to verify
- Reconcile reported revenue growth and adjusted EBITDA growth with the decline in GAAP operating income, net income and EPS.
- Assess the sustainability and organic contribution of cloud, subscription and recurring-revenue growth following the Carbonite acquisition.
- Review total debt maturities, floating-rate exposure, revolver repayment plans and compliance with leverage covenants.
- Evaluate the expected remaining costs and cash requirements of the COVID-19 and fiscal 2020 restructuring plans.
- Monitor Carbonite integration, customer retention, profitability and the finalization of its purchase-price allocation.
- Assess potential exposure from the IRS matter, CRA reassessments, Carbonite securities litigation and patent litigation.
- Review the reconciliation between GAAP and non-GAAP results, particularly amortization, special charges, share-based compensation and tax adjustments.
- Consider the limitations of the ICFR assessment because Carbonite was excluded from management’s and the auditor’s control evaluation.