Business Context and Reporting Period
Open Text Corporation is a Canadian enterprise software company providing Enterprise Information Management solutions, including enterprise content management, business process management, customer experience management, information exchange, discovery, professional services and cloud services. This Form 10-K covers the fiscal year ended June 30, 2014, with comparisons to fiscal 2013 and fiscal 2012. The request metadata references “2013 Q4,” but the filing is an annual report for Fiscal 2014.
Results include Cordys from August 15, 2013 and GXS Group, Inc. from January 16, 2014. Historical share and per-share data reflect the February 2014 two-for-one stock split.
Financial Performance and Key Metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $1,624.7 million | $1,363.3 million | +19.2% |
| Net income attributable to OpenText | $218.1 million | $148.5 million | +46.9% |
| Diluted EPS | $1.81 | $1.26 | +43.7% |
| Gross profit | $1,113.0 million | $877.4 million | +26.8% |
| GAAP gross margin | 68.5% | 64.4% | +4.1 points |
| Income from operations | $300.5 million | $197.7 million | +52.0% |
| GAAP operating margin | 18.5% | 14.5% | +4.0 points |
| Operating cash flow | $417.1 million | $318.5 million | +31.0% |
| Cash and cash equivalents | $427.9 million | $470.4 million | -$42.6 million |
Revenue mix was $707.0 million of customer support, $361.1 million of cloud services, $309.2 million of licenses and $247.4 million of professional services and other. Cloud services increased 107.8%, primarily because of GXS; license revenue increased 10.6%; customer support increased 7.4%; and professional services and other declined 1.7%.
Non-GAAP diluted EPS was $3.37 versus $2.79, and non-GAAP operating margin was 30.9% versus 29.3%. These measures exclude items including acquired-intangible amortization, share-based compensation, special charges, certain other income or expense and related tax effects.
Liquidity, Debt and Capital Resources
- Operating cash flow was $417.1 million; investing cash outflow was $1,153.4 million, primarily reflecting $1,076.9 million of cash consideration for GXS and $30.6 million for Cordys.
- Financing cash inflow was $687.9 million, including $800.0 million of Term Loan B borrowings, partially offset by debt repayments, debt issuance costs and $74.7 million of dividends.
- Total debt was $1,319.3 million at June 30, 2014, consisting principally of $513.8 million outstanding under Term Loan A, $796.0 million under Term Loan B and a $9.6 million mortgage.
- The $100 million revolving facility was undrawn. Term Loan A and Term Loan B carry floating interest rates and are secured by substantially all assets on a pari passu basis.
- Reported covenant ratios were within required limits: consolidated leverage was 2.22:1 versus a maximum of 3:1; consolidated interest coverage was 13.81:1 versus a minimum of 3:1; and consolidated net leverage was 1.49:1 versus a maximum of 4:1.
- Management expects cash, operating cash flow and available facilities to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next 12 months, although additional acquisitions may require further financing.
Material Changes Versus the Prior Comparable Period
- The $1.2 billion GXS acquisition materially increased revenue, cloud services exposure, goodwill, acquired intangible assets and debt. GXS contributed $211.3 million of revenue and $8.7 million of net income from January 16 through June 30, 2014.
- Goodwill increased to $2.0 billion from $1.2 billion, and acquired intangible assets increased to $725.3 million from $363.6 million.
- Total assets increased to $3.9 billion from $2.7 billion, while long-term liabilities increased to $1.6 billion from $789.7 million.
- GAAP gross margin improved primarily because of product mix, lower third-party technology costs and improved cloud and customer-support economics.
- Operating expenses increased 19.5% to $812.5 million. Sales and marketing increased to $345.6 million, general and administrative expense increased to $142.5 million, and research and development increased to $176.8 million.
- Special charges increased to $31.3 million from $24.0 million, including $19.3 million for the OpenText/GXS restructuring plan and $10.1 million of acquisition-related costs.
- Net interest expense increased to $27.9 million from $17.0 million because of Term Loan B. The effective tax rate increased to 21.1% from 16.6%, largely due to higher unrecognized tax benefits, interest and penalties.
- Cash dividends increased to $0.6225 per share, or $74.7 million, from $0.15 per share, or $17.7 million. A further quarterly dividend of $0.1725 per share was declared on July 30, 2014.
Outlook, Risks, Contingencies and Unusual Items
Management stated that its Fiscal 2015 objectives are to strengthen OpenText’s EIM leadership, expand cloud services and build on its ECM, BPM, CEM, information exchange and discovery offerings. Management expects cloud services to remain a recurring and growing revenue stream and views customer support, which historically represented approximately half of revenue, as a recurring source of income. The filing does not provide specific Fiscal 2015 revenue or earnings guidance.
- GXS integration is complex and may involve additional restructuring, customer disruption, employee turnover, control deficiencies, unanticipated liabilities and failure to realize expected synergies.
- Debt service, floating interest rates and restrictive covenants may reduce financial flexibility and constrain acquisitions, dividends, investments and other corporate actions.
- Key operating risks include fluctuating license sales cycles, economic weakness, intense competition, rapid technological change, reliance on strategic partners, product defects, cybersecurity incidents, cloud-service outages, data privacy regulation, foreign exchange movements and international tax exposure.
- Unfunded pension obligations totaled approximately $62.0 million, including $1.7 million payable within 12 months.
- OpenText has accrued approximately $10.5 million for a New York telecommunications-tax assessment related to pre-acquisition EasyLink revenue; it also accrued $10.3 million for GXS Brazil indirect-tax exposure and $1.4 million for GXS India transfer-pricing assessments.
- An inherited Brazilian tax dispute had a claimed amount of approximately $2.8 million and was supported by a $4.0 million bank guarantee. The company believes it has a defensible position, but the ultimate outcome remains uncertain.
- The IRS is examining Fiscal 2010 through Fiscal 2012 tax returns, including the company’s international reorganization and intellectual-property structure. No adjustments had been proposed, and no material accrual had been recorded for potential adjustments.
- Management reported no material litigation loss exposure beyond recognized amounts and no goodwill or long-lived-asset impairment for Fiscal 2014.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management excluded GXS from its internal-control assessment; GXS represented 13% of fiscal 2014 revenue and 36% of total assets at June 30, 2014.
Most Important Facts for Investors to Verify
- Whether GXS integration delivers the expected recurring cloud revenue, cost synergies and customer retention without materially increasing restructuring costs.
- The sustainability of revenue growth and margin expansion after adjusting for GXS’s partial-year contribution and acquisition-related accounting effects.
- Debt repayment capacity, floating-rate exposure, covenant headroom and the maturity profile of approximately $1.5 billion of contractual debt obligations, including interest and principal.
- The magnitude and timing of potential tax payments or settlements involving the IRS, New York, Brazil, India and other jurisdictions.
- The future level of acquisition spending, goodwill and intangible-asset amortization, and the potential for impairment or additional special charges.
- Cash conversion, working-capital trends and the capacity to fund dividends, capital expenditures and future acquisitions without materially increasing leverage.
- The effect of the pending revenue-recognition standard, ASU 2014-09, which the company expected to adopt in Fiscal 2018 and was still evaluating.