OpenText Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2016. The request metadata identifies “2015 Q3,” but the filing is for Fiscal 2016 Q3. Financial statements are unaudited, prepared under U.S. GAAP, and presented in U.S. dollars.
Business context
OpenText provides enterprise information management software and services, including on-premises, cloud, managed-hosting, subscription, customer-support, professional-services and business-to-business information exchange solutions. The company employed approximately 8,300 people worldwide at March 31, 2016.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | 9M FY2016 | 9M FY2015 |
|---|---|---|---|---|
| Total revenue | $440.5 million | $447.6 million | $1.340 billion | $1.369 billion |
| Gross profit | $299.1 million | $295.2 million | $919.2 million | $921.5 million |
| GAAP gross margin | 67.9% | 66.0% | 68.6% | 67.3% |
| Income from operations | $88.6 million | $52.6 million | $275.1 million | $266.2 million |
| GAAP operating margin | 20.1% | 11.8% | 20.5% | 19.4% |
| Net income attributable to OpenText | $69.1 million | $26.6 million | $198.1 million | $165.5 million |
| Diluted GAAP EPS | $0.57 | $0.22 | $1.62 | $1.35 |
| Operating cash flow | Not separately provided in the statements | Not separately provided in the statements | $406.6 million | $391.2 million |
- Q3 recurring revenue was $376.1 million, down 2.0% year over year, or up 1.0% excluding $11.6 million of foreign-exchange impact. Recurring revenue represented 85.4% of total revenue.
- Q3 cloud services and subscriptions revenue was $147.5 million, essentially flat year over year and up 2.5% excluding foreign exchange.
- Q3 license revenue increased 1.3% to $64.4 million, or 6.0% excluding foreign exchange.
- Q3 professional services and other revenue declined 13.9% to $45.0 million. Nine-month revenue declined 13.8% to $145.0 million.
- Non-GAAP diluted EPS was $0.80 in Q3 and $2.65 for the nine months, compared with $0.66 and $2.59, respectively, in the prior-year periods. These measures exclude specified amortization, share-based compensation, special charges or recoveries, other income or expense and related tax effects.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $877.4 million at March 31, 2016, compared with $700.0 million at June 30, 2015. Short-term investments were $13.0 million.
- Net cash provided by operating activities was $406.6 million for the first nine months, up $15.4 million year over year.
- Investing cash outflow was $81.6 million, including $22.1 million for the acquisition of Daegis and $48.9 million of capital expenditures.
- Financing cash outflow was $141.7 million, including $71.6 million of dividends, $65.5 million for share repurchases and $6.0 million of debt repayment.
- Total debt was $1.582 billion, consisting of $800.0 million of 5.625% Senior Notes due 2023 and $782.0 million outstanding under Term Loan B. The $300 million revolving credit facility was undrawn.
- Term Loan B carried an interest rate of 3.25% at March 31, 2016. A one-percentage-point increase in the rate would increase annual interest expense by approximately $7.8 million, assuming the balance remained outstanding.
- The company reported a consolidated net leverage ratio of 1.1:1 versus a covenant limit of 4:1.
- The board’s $200 million share-repurchase authorization had approximately $134.5 million remaining at March 31, 2016.
Material changes versus the prior comparable period
- Revenue declined 1.6% in Q3 and 2.1% for the nine months, with foreign exchange a significant adverse factor. Excluding foreign exchange, management reported Q3 total revenue growth of 1.7%.
- Gross margin improved by 190 basis points in Q3 and 130 basis points for the nine months, primarily reflecting lower cost of revenues and lower technology-intangible amortization.
- Operating margin increased substantially in Q3, reflecting lower research and development, sales and marketing, and general and administrative expenses, together with a $1.7 million special-charge recovery versus $5.6 million of charges in the prior-year quarter.
- Nine-month special charges increased to $24.8 million from $4.0 million, primarily due to the Fiscal 2015 Restructuring Plan and ERP implementation costs. The restructuring plan is expected to cost approximately $32 million to $35 million in total and be substantially completed by the end of Fiscal 2016.
- Interest expense increased for the nine months because of the Senior Notes issued in January 2015, partially offset by repayment of the prior Term Loan A.
- OpenText acquired Daegis for $23.3 million, including $22.1 million net of cash acquired, in November 2015. The filing states that the acquisition had no significant impact on reported revenue or earnings for the period.
Outlook, commentary, risks and unusual items
- Management remains focused on growth in earnings and cash flow, expansion of cloud-based enterprise information management, recurring revenue, acquisitions and customer flexibility across on-premises, cloud and hybrid delivery models.
- OpenText introduced “Release 16” in April 2016 and stated that virtually all products are available through the OpenText Cloud.
- On April 18, 2016, the company agreed to acquire certain HP customer-experience software and services assets for approximately $170 million. On April 19, 2016, it agreed to acquire ANXeBusiness Corp. for approximately $104 million. Both transactions were expected to close in the fourth quarter of Fiscal 2016, subject to customary conditions.
- The IRS is examining Fiscal 2010 through Fiscal 2012 tax matters involving the company’s internal reorganization and acquisition integration. A draft Notice of Proposed Adjustment indicated approximately $280 million of additional U.S. federal taxes, with an anticipated additional adjustment of approximately $80 million. Including potential state taxes, penalties and interest, the company estimated aggregate exposure of approximately $550 million as of March 31, 2016. No material accrual was recorded, and the company intends to contest the proposed adjustments.
- Other tax matters include a $2.2 million Brazilian claim supported by a $3.4 million bank guarantee, approximately $4.5 million accrued for Brazilian indirect-tax exposure, and $1.5 million accrued for an Indian transfer-pricing matter.
- Total contractual obligations were $2.216 billion, including $2.018 billion of debt obligations, $188.8 million of operating lease obligations and $9.9 million of purchase obligations.
- Key ongoing risks include foreign-exchange exposure, floating-rate debt, acquisition integration and restructuring, tax audits, competition, customer demand and renewals, cybersecurity and network reliability, intellectual-property claims, privacy regulation and the execution of cloud and product initiatives.
- Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Confirm the status, scope and potential resolution or settlement of the IRS examinations and the approximately $550 million estimated exposure.
- Assess whether recurring-revenue and cloud growth excluding foreign exchange is translating into sustainable reported growth, particularly as professional-services revenue declines.
- Review the financing impact, purchase accounting and integration risks associated with the planned HP asset and ANXeBusiness acquisitions.
- Evaluate the company’s ability to maintain cash generation while funding dividends, repurchases, acquisitions, restructuring and ERP implementation costs.
- Reconcile GAAP results with management’s non-GAAP measures, including the material amortization, share-based compensation and special-charge adjustments.
- Monitor Term Loan B interest-rate sensitivity, debt maturities, covenant compliance and the company’s stated leverage ratio.