Open Text Corporation — Fiscal 2017 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2017, with comparative fiscal years 2016 and 2015. The request metadata references “2016 Q4,” but the supplied filing is an annual report for Fiscal 2017, not a quarterly filing. Amounts are in U.S. dollars unless otherwise noted.
Business context
OpenText develops enterprise information management software and services for digital transformation, including content services, business process management, customer experience management, discovery, business networks, analytics, cloud services and subscriptions. The company operates as one reportable industry segment and serves customers globally through on-premise, cloud and hybrid delivery models.
- Fiscal 2017 revenue mix: customer support 42.8%, cloud services and subscriptions 30.8%, license 16.1%, and professional services and other 10.3%.
- Geographic revenue mix: Americas 59.2%, EMEA 31.5%, and Asia Pacific 9.3%.
- Approximately 10,900 employees as of June 30, 2017; no customer represented 10% or more of revenue.
Key financial metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Revenue | $2,291.1 million | $1,824.2 million | +25.6% |
| Annual recurring revenue | $1,686.6 million | Not clearly provided in the filing excerpt | +25.2% |
| License revenue | $369.1 million | $283.7 million | +30.1% |
| Cloud services and subscriptions | $705.5 million | $601.0 million | +17.4% |
| Customer support | $981.1 million | $746.4 million | +31.4% |
| Gross profit | $1,528.7 million | $1,250.2 million | +22.3% |
| GAAP gross margin | 66.7% | 68.5% | Down 1.8 points |
| Income from operations | $352.9 million | $368.6 million | Down $15.6 million |
| GAAP operating margin | 15.4% | 20.2% | Down 4.8 points |
| Net income attributable to OpenText | $1,025.7 million | $284.5 million | +260.6% |
| Diluted GAAP EPS | $4.01 | $1.17 | +242.7% |
| Non-GAAP diluted EPS | $2.02 | $1.77 | +14.1% |
| Adjusted EBITDA | $792.5 million | $671.7 million | +18.0% |
| Cash flow from operations | $439.3 million | $525.7 million | Down 16.4% |
Liquidity, debt and capital resources
- Cash and cash equivalents declined to $443.4 million from $1,283.8 million at June 30, 2016. Short-term investments were zero at year-end.
- Operating cash flow was $439.3 million. Investing cash outflow was $2,191.0 million, primarily reflecting acquisitions. Financing cash inflow was $909.5 million.
- Total debt principal was $2,597.1 million, comprising $850.0 million of 5.875% senior notes due 2026, $800.0 million of 5.625% senior notes due 2023, $772.1 million of Term Loan B, and $175.0 million drawn on the revolver.
- Debt reported on the balance sheet was $2,569.8 million after premiums and issuance costs. The consolidated net leverage ratio was 2.4:1 versus a maximum covenant of 4:1.
- The committed revolver was increased to $450 million and extended to May 2022. Management expected to repay the $175 million outstanding balance by the end of Fiscal 2018.
- Fiscal 2017 dividends totaled $120.6 million, or $0.4770 per share, compared with $99.3 million, or $0.4150 per share, in Fiscal 2016.
- Unfunded pension obligations totaled $60.4 million, including $1.7 million payable within twelve months.
Material changes versus the prior comparable period
- Revenue growth was driven substantially by acquisitions, particularly the Dell-EMC enterprise content division, HP customer communication management assets and Recommind.
- OpenText acquired the Dell-EMC enterprise content division on January 23, 2017 for approximately $1.62 billion. The acquisition contributed $193.2 million of revenue and a reported net loss of $23.6 million from acquisition through year-end, including substantial amortization and special charges.
- OpenText acquired the HP CCM Business for approximately $315.0 million and Recommind for approximately $170.1 million.
- Goodwill increased to $3.42 billion from $2.33 billion, and acquired intangible assets increased to $1.47 billion from $646.2 million, primarily due to acquisitions.
- Research and development expense increased to $281.7 million from $194.1 million, while special charges increased to $63.6 million from $34.8 million.
- Cloud gross margin declined to 57.4% from 59.4%, and professional services gross margin declined to 17.0% from 19.4%, reflecting acquisition-related labor, network and other costs.
- Operating cash flow declined despite higher earnings, principally because accounts receivable increased and working capital absorbed cash. Fourth-quarter days sales outstanding increased to 60 days from 53 days.
- Shares were split two-for-one effective January 24, 2017. Historical per-share data in the filing is presented on a post-split basis. The company also raised approximately $584.6 million net through a public equity offering.
Guidance, outlook, risks and unusual items
- Management expected Fiscal 2018 growth in earnings and cash flow, continued investment in cloud, analytics, discovery and broader enterprise information management capabilities, and continued selective acquisitions. The filing does not provide a specific Fiscal 2018 revenue or earnings forecast.
- Research and development spending was expected to represent approximately 11% to 13% of Fiscal 2018 revenue. OpenText planned to release its artificial-intelligence platform, OpenText Magellan, during Fiscal 2018.
- On July 26, 2017, after year-end, OpenText completed the approximately $103.0 million acquisition of Covisint and announced an agreement to acquire Guidance Software for approximately $240.0 million, subject to customary closing conditions.
- Fiscal 2017 GAAP net income and EPS were heavily affected by an $876.1 million non-recurring tax benefit from an internal intellectual-property reorganization. The reported effective tax rate was a 311.1% recovery, compared with a 2.2% provision in Fiscal 2016. This benefit is not expected to recur.
- The IRS tax examinations include a draft proposed adjustment of approximately $280 million for Fiscal 2010 and an anticipated additional adjustment of approximately $80 million for Fiscal 2012, plus penalties and interest. The company estimated potential aggregate liability at approximately $585 million as of June 30, 2017, had recorded no material accrual, and intends to contest the matter.
- The CRA issued a Fiscal 2012 reassessment that would increase taxable income by approximately $90 million; the company stated that available deductions could offset the increase and that no additional cash tax would be payable for that year even if unsuccessful.
- Other risks include acquisition integration, goodwill and intangible-asset impairment, migration from perpetual licenses to cloud and subscription models, cybersecurity and service disruptions, foreign-currency exposure, competition, customer renewal rates, interest-rate risk, Brexit-related uncertainty and reliance on strategic partners.
- Special charges included $33.8 million under the Fiscal 2017 restructuring plan, $15.9 million of acquisition-related costs and approximately $11.0 million for ERP implementation. Expected total Fiscal 2017 restructuring-plan costs were approximately $45.0 million.
- Management and KPMG reported effective disclosure controls and internal control over financial reporting. However, management excluded the acquired ECD Business from its internal-control assessment; ECD represented approximately 8.4% of revenue and 23% of total assets at year-end.
Most important facts for investors to verify
- Separate recurring operating performance from the $876.1 million one-time tax benefit and reconcile GAAP EPS of $4.01 with non-GAAP EPS of $2.02.
- Assess whether post-acquisition revenue growth, recurring revenue and margins can offset higher amortization, restructuring costs and acquisition-integration expenses.
- Review cash conversion, the increase in days sales outstanding, and the company’s ability to reduce the $175 million revolver balance while funding dividends and further acquisitions.
- Evaluate the potential financial and timing impact of the IRS and CRA tax matters, particularly the estimated IRS exposure of approximately $585 million.
- Monitor leverage covenant compliance, floating-rate debt exposure and scheduled debt maturities, including the 2023 and 2026 senior notes.
- Confirm the final purchase-price allocation for the Dell-EMC acquisition and subsequent effects on goodwill, acquired intangibles, amortization and impairment risk.
- Track the implementation of the new ERP system and the company’s integration of ECD, Covisint and any Guidance Software acquisition.