Open Text Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2011, filed April 28, 2011. The request identifies “2010 Q3,” but the filing is for fiscal 2011 third quarter, with comparison to the three and nine months ended March 31, 2010.
Business context
Open Text provides enterprise content management software and related services. The company had approximately 4,400 employees worldwide and generated more than half of its revenue from recurring customer support. The quarter included the acquisitions of StreamServe, Metastorm and weComm.
Key financial metrics
| Metric | Three months ended March 31, 2011 | Three months ended March 31, 2010 | Nine months ended March 31, 2011 | Nine months ended March 31, 2010 |
|---|---|---|---|---|
| Total revenue | $263.0 million | $212.8 million | $747.9 million | $672.0 million |
| License revenue | $67.8 million | $49.5 million | $189.6 million | $169.5 million |
| Customer support revenue | $143.1 million | $124.4 million | $409.6 million | $378.4 million |
| Service and other revenue | $52.0 million | $38.8 million | $148.6 million | $124.1 million |
| Gross profit | $175.0 million | $141.9 million | $501.9 million | $451.9 million |
| Income from operations | $28.7 million | $26.4 million | $113.5 million | $67.1 million |
| Net income | $35.8 million | $13.1 million | $94.6 million | $36.0 million |
| Diluted earnings per share | $0.61 | $0.23 | $1.63 | $0.63 |
- Quarterly revenue increased 23.6%; license revenue increased 37.0%, customer support revenue 15.0%, and service and other revenue 34.0%.
- Nine-month revenue increased 11.3%, while nine-month net income increased 162.5%.
- Approximate gross margin was 66.5% for the quarter and 67.1% for the nine-month period, compared with 66.7% and 67.2%, respectively, in the prior-year periods.
- Approximate operating margin was 10.9% for the quarter and 15.2% for the nine-month period, compared with 12.4% and 10.0%, respectively, in the prior-year periods.
- Approximate net margin was 13.6% for the quarter and 12.6% for the nine-month period, compared with 6.2% and 5.4%, respectively.
- Quarterly operating cash flow was approximately $82.3 million, up 5.5% year over year. Nine-month operating cash flow was $171.3 million versus $115.0 million.
- Cash and cash equivalents were $237.7 million at March 31, 2011, versus $326.2 million at June 30, 2010. Current assets were $467.0 million and current liabilities were $435.7 million.
- Total debt was $298.6 million, consisting primarily of a $285.8 million term loan and a $12.8 million mortgage. No amounts were drawn under the $75.0 million revolver.
Material changes versus the prior comparable period
- Revenue growth was broad-based across North America, Europe and other regions. North America represented 51.4% of quarterly revenue and Europe 39.8%.
- Operating income increased despite higher research and development, sales and marketing, depreciation and acquisition-related amortization expenses.
- Special charges declined to $4.4 million for the quarter and $11.1 million year to date, compared with $6.1 million and $35.1 million, respectively, in the prior-year periods.
- The quarter benefited from a $7.2 million income tax recovery, compared with a $5.1 million tax provision in the prior-year quarter. The filing attributes the change primarily to tax benefits from internal reorganizations.
- Cash declined by $88.4 million during the nine months, primarily because $277.5 million was used in investing activities, including $246.1 million for the acquisitions of StreamServe, Metastorm and weComm.
- Goodwill increased to $832.6 million from $666.1 million at June 30, 2010, and acquired intangible assets increased to $374.3 million from $328.2 million, reflecting acquisitions.
Guidance, outlook, risks and unusual items
- Management described the ECM market as generally stable and expected recurring customer support revenue to remain an important component of results.
- For fiscal 2011, management expected research and development expense to be 14%–16% of revenue, sales and marketing expense to be 21%–23%, and general and administrative expense to be 8%–10%.
- Management stated that cash, available credit facilities and committed loan facilities should fund anticipated working capital, contractual commitments and capital expenditures for the foreseeable future. Material acquisitions could require additional financing.
- The term loan matures in October 2013 and bears interest at LIBOR plus 2.25%. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.9 million, based on the reported balance.
- The mortgage on the Waterloo headquarters was extended to July 1, 2011 and included a final lump-sum principal payment of approximately Canadian $12.3 million at maturity.
- The company was in compliance with its debt covenants at March 31, 2011. Contractual obligations totaled $468.1 million, including $316.6 million of debt obligations and $148.2 million of operating lease obligations.
- Fiscal 2011 restructuring charges were still being incurred; the remaining restructuring liability was $2.5 million at March 31, 2011. Management expected additional charges as plans were finalized.
- Metastorm and weComm acquisition accounting remained provisional for certain liabilities and goodwill allocations. The filing states that these assessments were expected to be completed by June 30, 2011.
- Income tax examinations were open in Canada, the United States, France and Spain. Management believed that reasonably foreseeable outcomes were adequately provided for, but noted that exact settlements could not be predicted.
- The company had $42 million of foreign currency forward contracts and reported that approximately 64% of cash was held in currencies other than the U.S. dollar, creating foreign exchange exposure.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Most important facts for investors to verify
- Confirm the period distinction: this is the fiscal 2011 third-quarter filing, not a quarter ended in calendar 2010.
- Assess the sustainability of earnings growth excluding the $7.2 million quarterly tax recovery and acquisition-related effects.
- Review the integration, profitability and final purchase-price accounting for StreamServe, Metastorm and weComm.
- Monitor cash usage, acquisition spending, the July 2011 mortgage maturity and the October 2013 term-loan maturity.
- Evaluate the effect of acquired-intangible amortization, restructuring charges and share-based compensation on operating margins and cash generation.
- Review foreign exchange exposure, floating-rate debt sensitivity, tax examinations and remaining restructuring and contractual obligations.