Open Text Corporation — Q1 Fiscal 2010 Summary
Reporting period: Form 10-Q for the three months ended September 30, 2009, compared with the three months ended September 30, 2008. The unaudited statements are prepared under U.S. GAAP and include Vignette Corporation from July 22, 2009.
Business Context
Open Text provides enterprise content management software and related services. The company had approximately 3,900 employees worldwide and generated approximately 50% of revenue outside North America. Customer support represented 58.5% of quarterly revenue, providing a recurring revenue base.
On July 21, 2009, Open Text acquired Vignette for total consideration of $321.4 million, including the fair value of Vignette shares previously held by Open Text. The acquisition expanded the company’s web content management and enterprise content management capabilities.
Key Financial Metrics
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Total revenue | $211.4 million | $182.6 million | 15.8% increase |
| License revenue | $47.3 million | $50.1 million | 5.5% decrease |
| Customer support revenue | $123.6 million | $98.4 million | 25.6% increase |
| Services and other revenue | $40.4 million | $34.1 million | 18.5% increase |
| Gross profit | $139.9 million | $125.7 million | 11.3% increase |
| Gross margin | 66.2% | 68.8% | Down 2.6 percentage points |
| Income from operations | $4.8 million | $23.0 million | 79.1% decrease |
| Operating margin | 2.3% | 12.6% | Down 10.3 percentage points |
| Net income | $1.7 million | $14.7 million | 88.2% decrease |
| Diluted earnings per share | $0.03 | $0.28 | Decrease |
| Cash flow from operations | $4.5 million | $24.8 million | Decrease of $20.3 million |
Operating expenses increased to $135.1 million from $102.7 million, including $18.6 million of special charges. Excluding the special charges, operating expenses were approximately $116.5 million, but the filing does not provide a corresponding adjusted operating income or margin.
License gross margin was 93.4%, customer support gross margin was 83.1%, and services and other gross margin was 17.7%, each modestly below the prior-year period.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $212.2 million at September 30, 2009, compared with $275.8 million at June 30, 2009. Short-term investments were $19.8 million, acquired with Vignette.
- Cash used in investing activities was $75.9 million, primarily reflecting $90.6 million of cash consideration for Vignette, partly offset by $27.2 million from maturities of short-term investments.
- Cash provided by financing activities was $3.3 million, including $4.5 million from common-share issuance and $0.9 million of debt repayment.
- Total debt was $302.7 million, consisting primarily of a $290.3 million term loan and a $12.4 million mortgage. The term loan matures in October 2013 and bears interest at LIBOR plus 2.25%. No amounts were drawn under the $75.0 million revolver.
- The term loan’s quarterly scheduled principal payment was approximately $0.7 million. The company had made $90.0 million of nonscheduled term-loan prepayments since inception.
- Contractual obligations totaled $478.9 million, including $341.2 million of debt obligations and $132.8 million of operating lease obligations.
- Accounts receivable were $135.6 million and deferred revenue was $217.0 million, including current and long-term amounts.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by customer support revenue and the inclusion of Vignette, while license revenue declined because of economic conditions and customer delays related to the planned Vignette/RedDot web content management roadmap.
- Profitability declined materially because of $18.6 million of special charges, higher personnel and operating costs, and increased amortization of acquired intangible assets.
- The company initiated a Fiscal 2010 restructuring plan. Expected total costs are approximately $32 million to $40 million, of which $14.7 million had been recorded by September 30, 2009.
- Goodwill increased from $576.1 million to $718.6 million and acquired intangible assets increased from $315.0 million to $384.2 million, primarily because of the Vignette acquisition.
- Common shares outstanding increased to 56.4 million at September 30, 2009 from 52.7 million at June 30, 2009, primarily reflecting 3.4 million shares issued as acquisition consideration.
- Comprehensive income was $15.9 million, compared with a comprehensive loss of $26.9 million in the prior-year quarter, principally because of favorable foreign currency translation in 2009.
Guidance, Outlook, Risks and Unusual Items
Management stated that the enterprise content management market remained robust and that recurring customer support revenue, geographic diversification, and compliance-focused products could provide resilience in a difficult macroeconomic environment. The filing does not provide specific revenue, earnings, or margin guidance.
- Vignette integration may disrupt operations, require significant management attention, result in employee or customer attrition, or fail to deliver expected strategic benefits.
- License revenue is subject to long sales cycles, economic conditions, customer budget constraints, competition, and the timing of large transactions.
- The company has substantial goodwill and acquired intangible assets, creating exposure to impairment risk and future amortization expense. The Vignette purchase price allocation remained provisional.
- Interest-rate risk remained significant: a 300-basis-point adverse LIBOR change would have increased annual term-loan interest expense by approximately $8.7 million before the effect of the interest-rate collar. The collar covering $100 million of notional debt expires in December 2009.
- Approximately 51% of cash and cash equivalents were held in currencies other than the U.S. dollar. A 10% adverse foreign-exchange movement would have reduced reported cash and cash equivalents by approximately 5%.
- Tax examinations were open in Canada, Germany, the United States, France, and Spain. Management believed the company had adequately provided for reasonably foreseeable outcomes, but the filing states that future settlements cannot be predicted with certainty.
- The company had intellectual-property indemnification obligations and lease-related guarantees for which the maximum potential future payments were not determinable. Management did not believe current litigation would have a material adverse effect.
Important Facts for Investors to Verify
- Whether Vignette integration produces the expected revenue synergies and whether the acquisition’s provisional goodwill and intangible valuations change materially.
- The final cost and timing of the Fiscal 2010 restructuring plan and its effect on cash flow and operating margins.
- Recurring customer support renewal rates and the recovery of license revenue after customer deferrals.
- Debt covenant compliance, refinancing or repayment plans for the October 2013 term-loan maturity, and the December 2009 expiration of the interest-rate collar.
- Potential impairment of the enlarged goodwill and intangible-asset balances.
- Future tax examination outcomes and the utilization of Vignette’s deferred tax assets and net operating losses.