Open Text Corporation 10-Q Summary
Business Context and Reporting Period
Open Text Corporation provides enterprise content management software and related services. The filing covers the three and six months ended December 31, 2010, the second quarter and first six months of fiscal 2011. Results are presented in U.S. dollars under U.S. GAAP and are unaudited. The company employed approximately 4,100 people worldwide.
StreamServe Inc. was acquired on October 27, 2010, for $70.5 million in cash and was consolidated from the acquisition date.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2010 | Three Months Ended Dec. 31, 2009 | Six Months Ended Dec. 31, 2010 | Six Months Ended Dec. 31, 2009 |
|---|---|---|---|---|
| Total revenue | $267.5 million | $247.8 million | $484.9 million | $459.2 million |
| Gross profit | $182.9 million | $170.1 million | $326.9 million | $310.0 million |
| Income from operations | $52.6 million | $35.9 million | $84.8 million | $40.7 million |
| Net income | $37.1 million | $21.2 million | $58.8 million | $22.9 million |
| Diluted earnings per share | $0.64 | $0.37 | $1.01 | $0.40 |
| Operating cash flow | Approximately $40.0 million | Approximately $32.5 million | $88.9 million | $37.0 million |
- Quarterly revenue increased 7.9%; six-month revenue increased 5.6%.
- Quarterly gross margin was approximately 68.4%, compared with 68.6% in the prior-year quarter. Six-month gross margin was approximately 67.4%, compared with 67.5%.
- Quarterly operating margin was approximately 19.7%, compared with 14.5%; six-month operating margin was approximately 17.5%, compared with 8.9%.
- Quarterly net margin was approximately 13.9%, compared with 8.6%; six-month net margin was approximately 12.1%, compared with 5.0%.
- Customer support remained the largest revenue category at $136.7 million for the quarter and $266.5 million for the six-month period. It represented 51.1% and 55.0% of revenue, respectively.
- At December 31, 2010, cash and cash equivalents were $340.8 million, up from $326.2 million at June 30, 2010. Total assets were $1.79 billion and shareholders’ equity was $954.8 million.
- Total debt was approximately $299.0 million, consisting primarily of a $286.5 million term loan and a $12.5 million mortgage. No amounts were drawn under the $75.0 million revolver.
- The company was in compliance with its debt covenants. The term loan matures October 2, 2013 and bears interest at LIBOR plus 2.25%.
Material Changes Versus the Prior Comparable Period
- Quarterly license revenue increased $6.5 million, customer support revenue increased $6.4 million, and service and other revenue increased $6.8 million. For the six-month period, the increases were $1.8 million, $12.5 million, and $11.3 million, respectively.
- North American revenue increased $10.3 million for the quarter and $20.7 million for the six-month period. Six-month European revenue declined $4.1 million, primarily reflecting lower license sales.
- Operating expenses declined $3.8 million for the quarter and $27.1 million for the six-month period. The primary driver was lower special charges, which fell to $3.5 million from $10.4 million quarterly and to $6.7 million from $29.0 million year to date.
- Income from operations increased 46.4% quarterly and more than doubled for the six-month period. Net income increased 75.0% quarterly and 156.4% for the six-month period.
- Operating cash flow increased $52.0 million for the six-month period, benefiting from higher net income, stronger accounts receivable collections, and income-tax-related working-capital changes.
- Investing cash use was $75.3 million, including $57.2 million for the StreamServe acquisition and $14.6 million for capital assets. Financing cash use was $9.2 million, including $12.5 million of treasury-stock purchases for the fiscal 2011 long-term incentive plan.
- Goodwill increased to $705.2 million from $666.1 million, primarily reflecting the StreamServe acquisition. Acquired intangible assets were $321.3 million after $49.9 million of amortization during the first six months.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management characterized the enterprise content management market as generally stable and expects recurring customer support revenue to remain an important contributor. More than half of revenue was from customer support for the six-month period.
- 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 expected cash, available credit facilities, and committed loan facilities to fund anticipated working capital, contractual commitments, and capital expenditures. Material acquisitions could require additional financing.
- A new fiscal 2011 restructuring plan began in the second quarter, generating $1.7 million of charges and an ending liability of $1.1 million at December 31, 2010. The company expected additional charges as plans were finalized.
- The fiscal 2010 restructuring plan had incurred $40.9 million of charges in total, with $5.7 million remaining accrued at December 31, 2010. Management did not expect further significant charges under that plan.
- On January 1, 2011, the Waterloo mortgage was extended to July 1, 2011. It carries variable interest at Canadian prime plus 0.50% and requires a final principal payment of approximately Canadian $12.3 million at maturity.
- On February 2, 2011, after the reporting date, Open Text announced an agreement to acquire Metastorm Inc. for approximately $182 million in cash, subject to customary conditions and approvals. Closing was expected during the third quarter of fiscal 2011.
- Outstanding contractual obligations totaled $459.9 million, including $319.1 million of long-term debt obligations, $137.8 million of operating leases, and $3.0 million of purchase obligations.
- Income-tax examinations were open in Canada, the United States, Germany, France, and Spain. Management believed foreseeable outcomes were adequately provided for, but estimated outcomes cannot be predicted with certainty.
- Principal market risks were floating-rate debt and foreign currency exposure. A 100-basis-point increase in LIBOR would increase annual term-loan interest expense by approximately $2.9 million. Approximately 72% of cash was held in currencies other than the U.S. dollar.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Intellectual-property indemnification obligations exist, but potential future payments were not determinable and no material payments had been made.
- Disclosure controls and procedures were determined to be effective, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether StreamServe contributes expected revenue and operating synergies and whether acquisition-related amortization and restructuring costs affect future margins.
- The timing and total cost of the fiscal 2011 restructuring plan.
- Refinancing or repayment plans for the Waterloo mortgage maturity and the October 2013 term-loan maturity.
- The funding impact of the planned approximately $182 million Metastorm acquisition and any subsequent acquisition activity.
- Progress and potential cash consequences of open income-tax examinations and unrecognized tax benefits.
- Exposure to foreign currency movements, LIBOR changes, and the company’s effectiveness in using its $67.2 million foreign-exchange hedging program.
- Whether recurring customer support growth continues to offset variability in license revenue, particularly in Europe.