Open Text Corporation: Fiscal 2010 Form 10-K Summary
Reporting period: The supplied filing is the annual report for the fiscal year ended June 30, 2010, not a 2009 Q4 filing. Financial statements are presented in U.S. dollars under U.S. GAAP.
Business context
Open Text provides enterprise content management software and related consulting, support, training, integration, hosting and hardware services. It operates as one industry segment, with primary markets in North America and Europe. Approximately 48% of Fiscal 2010 revenue was generated outside North America, and no customer represented 10% or more of revenue.
Financial performance
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $912.0 million | $785.7 million | 16.1% increase |
| License revenue | $238.1 million | $229.8 million | 3.6% increase |
| Customer support revenue | $507.5 million | $405.3 million | 25.2% increase |
| Services and other revenue | $166.5 million | $150.5 million | 10.6% increase |
| Gross profit | $615.5 million | $533.8 million | 15.3% increase |
| Income from operations | $107.6 million | $97.6 million | 10.2% increase |
| Net income | $87.6 million | $56.9 million | 53.8% increase |
| Diluted earnings per share | $1.53 | $1.07 | 43.0% increase |
| Cash flow from operations | $180.2 million | $176.2 million | 2.3% increase |
Margins: Gross margin was approximately 67.5%, compared with 68.0% in Fiscal 2009. Operating margin was approximately 11.8%, compared with 12.4%, while net margin improved to approximately 9.6% from 7.2%. The filing does not provide a single consolidated adjusted EBITDA figure.
Cash flow, liquidity and capital structure
- Cash and cash equivalents were $326.2 million at June 30, 2010, up $50.4 million year over year.
- Operating cash flow was $180.2 million. Investing activities used $109.8 million, including acquisition spending and capital expenditures. Financing activities used $7.4 million.
- Total debt was approximately $300.5 million, consisting of a $288.0 million term loan and a $12.5 million mortgage. The $75.0 million revolver was undrawn.
- The term loan bears interest at LIBOR plus 2.25%, matures in October 2013 and was subject to leverage and interest-coverage covenants. The company reported compliance with all covenants.
- Management stated that cash and available credit facilities should fund working capital, contractual commitments and capital expenditures for the foreseeable future, although material acquisitions could require additional financing.
- Total contractual obligations were $451.7 million, including $325.1 million of debt obligations, $120.4 million of operating leases and $6.3 million of purchase obligations.
- The company had $16.4 million of unfunded pension and related benefit obligations, including $0.5 million payable within 12 months.
Material changes versus Fiscal 2009
- Revenue growth was driven primarily by customer support revenue and the inclusion of Vignette results following its July 2009 acquisition. License revenue grew modestly, while support revenue increased substantially.
- Fiscal 2010 included the acquisitions of Vignette for approximately $321.4 million, Nstein for $33.9 million, Burntsand for $10.8 million and New Generation Consulting assets for approximately $4.0 million.
- Goodwill increased to $671.6 million from $576.1 million, and acquired intangible assets increased to $328.2 million from $315.0 million.
- Special charges increased to $43.7 million from $14.4 million, primarily due to restructuring, facility consolidation, acquisition-related costs and impairment-related items.
- Research and development spending increased to $129.4 million from $116.2 million, while sales and marketing expense increased to $198.2 million from $186.5 million.
- Net interest expense declined to $10.4 million from $13.6 million because of lower interest rates, partially offset by higher foreign-exchange losses and other expense.
- Income tax expense fell to $1.3 million from $23.8 million, primarily due to a $21.2 million tax recovery associated with an internal international reorganization. This materially benefited net income and is not necessarily recurring.
- The company repurchased 307,579 shares for $14.0 million for anticipated use under its long-term incentive plan.
Guidance, outlook and management commentary
- Management characterized the ECM market as generally stable and cited geographic diversification, compliance-focused products and recurring support revenue as sources of resilience.
- For Fiscal 2011, management expected revenue mix of 25% to 30% license, 50% to 55% customer support and 20% to 25% services and other.
- Expected Fiscal 2011 operating expense ranges were 14% to 16% of revenue for research and development, 21% to 23% for sales and marketing, and 8% to 10% for general and administrative expense.
- Management expected to continue investing in research and development and pursuing strategic acquisitions.
- Goodwill testing as of April 1, 2010 indicated no impairment, but the company noted that impairment conclusions depend on forecasts, discount rates and other significant judgments.
Risks, contingencies and unusual items
- Key risks include economic weakness, delayed technology spending, long and unpredictable sales cycles, intensified competition from IBM, EMC, Microsoft, Oracle and others, and dependence on strategic partners and distributors.
- International operations expose the company to foreign-exchange, political, regulatory, tax and collection risks. Approximately 52% of cash was held in currencies other than the U.S. dollar; management estimated that a 10% adverse currency movement would reduce reported cash by approximately 5%.
- A 100-basis-point increase in LIBOR would increase annual interest expense on the term loan by approximately $2.9 million, assuming the June 30, 2010 balance remained outstanding.
- The company had $107.5 million of gross unrecognized tax benefits, including $65.4 million excluding amounts offset by valuation allowances. Tax examinations were open in Canada, the United States, France and Spain.
- Legal claims arise in the ordinary course of business. Management did not believe current matters would have a material adverse effect, but litigation outcomes are inherently uncertain.
- The company vacated 415,906 square feet of leased space because of restructuring and merger integration initiatives; some space was subleased or marketed for sublease or disposition.
- Fiscal 2010 results benefited from the $21.2 million tax recovery and were burdened by $43.7 million of special charges, $15.4 million of transactional foreign-exchange losses and significant acquisition-related amortization.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control over financial reporting.
Most important facts for an investor to verify
- Confirm that the intended period is Fiscal 2010 rather than 2009 Q4, because the supplied filing covers the year ended June 30, 2010.
- Assess the sustainability of earnings growth after excluding the $21.2 million tax recovery and considering the $43.7 million of special charges.
- Evaluate the integration, revenue contribution and profitability of Vignette, Nstein, Burntsand and New Generation Consulting.
- Review the $288.0 million floating-rate term loan, the October 2013 maturity and the mortgage maturity in January 2011.
- Monitor customer support renewal rates and the shift toward recurring support revenue, which represented 55.6% of Fiscal 2010 revenue.
- Review goodwill and acquired-intangible balances, including approximately $96.3 million of estimated Fiscal 2011 amortization.
- Assess exposure to foreign exchange, tax examinations, unrecognized tax benefits, restructuring obligations and unfunded pension liabilities.