OpenText Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021, representing the third quarter and year-to-date period of Fiscal 2021. The request metadata identifies “2020 Q3,” but the filing itself is for March 31, 2021. Amounts are in U.S. dollars unless otherwise stated; financial statements are unaudited and prepared under U.S. GAAP.
Business context
OpenText provides information-management software and services across cloud, hybrid, on-premise and managed-service deployments. The company had approximately 14,300 employees at March 31, 2021. Its strategy emphasizes recurring revenue, cloud expansion, margin improvement, innovation and acquisitions.
Key financial metrics
| Metric | Q3 FY2021 | Q3 FY2020 | Change |
|---|---|---|---|
| Total revenue | $832.9 million | $814.7 million | Up 2.2%; up 0.8% in reported comparison after stated foreign-exchange adjustment |
| Recurring revenue | $691.8 million | $662.3 million | Up 4.4% |
| Cloud services and subscriptions | $355.8 million | $339.5 million | Up 4.8% |
| GAAP gross profit | $571.7 million | $532.5 million | Up 7.4% |
| GAAP gross margin | 68.6% | 65.4% | Up 3.2 percentage points |
| Income from operations | $152.4 million | $95.1 million | Up $57.3 million |
| Net income attributable to OpenText | $91.5 million | $26.0 million | Up $65.5 million |
| Diluted GAAP EPS | $0.33 | $0.10 | Up $0.23 |
| Adjusted EBITDA | $297.1 million | $259.5 million | Up 14.5% |
Revenue mix: License revenue declined 5.9% to $76.3 million and professional services and other revenue declined 9.0% to $64.9 million. Customer support revenue increased 4.0% to $335.9 million. Recurring revenue represented approximately 83% of quarterly revenue.
Nine-month results: Revenue was $2.493 billion versus $2.283 billion. GAAP operating income was $569.2 million versus $412.3 million. Net income attributable to OpenText was $129.4 million versus $207.8 million, and diluted EPS was $0.47 versus $0.77. The year-to-date decline in GAAP earnings primarily reflected the $300.6 million IRS settlement tax charge.
Cash flow, liquidity and capital structure
- Cash flow from operations for the nine months was $579.9 million, down from $674.3 million, largely due to tax payments and working-capital changes.
- Cash and cash equivalents were $1.476 billion at March 31, 2021, down from $1.693 billion at June 30, 2020. Cash, cash equivalents and restricted cash totaled $1.479 billion.
- Cash used in investing activities was $38.2 million, compared with $1.449 billion in the prior-year period, when Carbonite and XMedius acquisitions were funded.
- Cash used in financing activities was $782.9 million, including repayment of the $600 million Revolver balance, $156.3 million of dividends and $64.8 million of treasury-stock purchases.
- Total debt principal was $3.620 billion, consisting primarily of $900 million Senior Notes due 2030, $900 million Senior Notes due 2028, $850 million Senior Notes due 2026 and a $970 million Term Loan B. Revolver borrowings were zero at March 31, 2021, with $750 million of committed capacity.
- The consolidated net leverage ratio was 1.6:1, below the 4:1 covenant limit. Term Loan B had a floating interest rate of 1.86% at quarter-end.
- Management expects cash, cash equivalents and available credit facilities to fund working capital, contractual commitments, capital expenditures, dividends and operating needs for the next 12 months.
Material changes versus the prior comparable period
- Cloud and subscription growth, improved customer-support revenue and lower cost of revenue drove the quarterly gross-margin expansion.
- License and professional-services revenue continued to decline, reflecting lower license deal activity and COVID-19-related limitations on travel and services activity.
- Quarterly GAAP earnings benefited from lower amortization, lower special charges, improved other income and the absence of the prior-year $17.9 million debt-extinguishment loss.
- Year-to-date GAAP earnings were materially reduced by the $300.6 million IRS settlement tax charge. The company paid $290.0 million related to the settlement during the quarter and had approximately $10.6 million of remaining associated state tax and interest payments recorded as payable.
- OpenText repurchased 489,934 shares for $23.0 million during the quarter for potential use in employee award settlements; no purchases were made under the separately authorized $350 million share-repurchase plan.
- The company adopted the expected-credit-loss standard effective July 1, 2020, reducing opening retained earnings by $2.5 million.
Guidance, outlook and management commentary
- Management remains focused on “Total Growth,” combining organic growth, innovation, acquisitions, recurring-revenue expansion, margin improvement and cash-flow generation.
- Research and development spending was $304.2 million year to date, or 12.2% of revenue. Management targets approximately 12% to 14% of revenue for R&D in Fiscal 2021.
- Management expects continued investment in the OpenText Cloud and continued strategic acquisitions, but the filing does not provide formal revenue, earnings or cash-flow guidance for Fiscal 2021.
- COVID-19 operating modifications, including remote work, reduced travel and changes to sales and marketing events, were expected to remain in place through Fiscal 2021. Compensation and hiring restrictions implemented earlier in the pandemic had been restored or moderated.
- The COVID-19 Restructuring Plan was estimated to cost approximately $47 million in total, with $46.0 million recorded through March 31, 2021. The Fiscal 2020 Restructuring Plan was estimated at approximately $30 million, with $27.2 million recorded.
Risks, contingencies and unusual items
- The CRA is disputing transfer-pricing positions for Fiscal 2012 through Fiscal 2016. Management estimates potential penalties, interest and provincial taxes of approximately $64 million, assuming available tax attributes; approximately $28 million has been provisionally paid. No accrual has been recorded for the reassessments.
- The CRA’s Fiscal 2017 proposal could reduce deferred tax assets by up to approximately $470 million if the company is unsuccessful. The filing states that no accrual has been recorded.
- A Carbonite securities class-action appeal remains pending after the district court dismissed the case with prejudice. A separate patent action brought by Realtime Data remains unresolved; no loss has been accrued because the potential loss cannot be reasonably estimated and is not considered probable.
- COVID-19 may affect customer purchasing decisions, operations, liquidity, restructuring costs, asset valuations and credit-loss estimates. Management notes that actual results may differ materially from current estimates.
- The company has approximately $4.93 billion of contractual obligations, including debt obligations of $4.55 billion, operating lease obligations of $298.6 million and other purchase obligations of $82.1 million.
- Interest-rate exposure is concentrated in the $970 million floating-rate Term Loan B; a one-percentage-point increase would increase annual interest expense by approximately $9.7 million, assuming the balance remains outstanding.
- Foreign currency exposure remains significant: $590.2 million of cash was denominated in foreign currencies at March 31, 2021. A uniform 10% weakening against the U.S. dollar would reduce reported cash by approximately $59.0 million, before considering derivatives.
Important facts for investors to verify
- Reconcile recurring-revenue growth and cloud growth with the continued declines in license and professional-services revenue.
- Assess normalized earnings and cash generation excluding the IRS settlement, amortization, restructuring recoveries and other non-GAAP adjustments.
- Monitor the CRA Fiscal 2017 proposal and the potential deferred-tax-asset impact of up to approximately $470 million.
- Evaluate leverage, refinancing and interest-rate risk as the 2026 Senior Notes and Term Loan B mature before the 2028 and 2030 notes.
- Verify management’s cash-sufficiency assessment after the remaining IRS-related payments, deferred COVID-19 tax payments and contractual obligations.
- Review acquisition integration, recurring-revenue renewal rates, cloud margins and the sustainability of cost savings from the COVID-19 restructuring program.