Open Text Corporation Form 10-Q Summary
Business context and reporting period
Open Text provides enterprise content management software and related services. This unaudited Form 10-Q covers the three and six months ended December 31, 2009, the second quarter and first six months of fiscal 2010. Results include Vignette Corporation from July 22, 2009. The company reported approximately 3,700 employees and generated about half of revenue outside North America.
Financial performance and position
| Metric | Three months ended Dec. 31, 2009 | Three months ended Dec. 31, 2008 | Six months ended Dec. 31, 2009 | Six months ended Dec. 31, 2008 |
|---|---|---|---|---|
| Revenue | $247.8 million | $207.7 million | $459.2 million | $390.3 million |
| Gross profit | $170.1 million | $141.3 million | $310.0 million | $267.0 million |
| Gross margin | 68.6% | 68.1% | 67.5% | 68.4% |
| Operating income | $35.9 million | $19.3 million | $40.7 million | $42.2 million |
| Operating margin | 14.5% | 9.3% | 8.9% | 10.8% |
| Net income | $21.2 million | $0.8 million | $22.9 million | $15.4 million |
| Diluted EPS | $0.37 | $0.01 | $0.40 | $0.29 |
- Quarterly revenue increased 19.3%, led by customer support revenue of $130.3 million, up 29.7%. License revenue rose 12.1% to $72.7 million, and service and other revenue rose to $44.8 million.
- Six-month revenue increased 17.7%. Customer support represented 55.3% of six-month revenue, compared with 51.0% in the prior-year period.
- Quarterly operating income increased substantially despite higher operating expenses, while six-month operating income declined because of higher special charges and acquisition-related costs.
- Six-month operating cash flow was $37.0 million, down from $64.7 million. Management attributed the decline principally to restructuring payments and less favorable working-capital movements.
- Investing cash outflow was $72.6 million, including $90.6 million for the Vignette acquisition and $11.8 million for capital assets, partly offset by $38.5 million of short-term investment maturities.
- Cash and cash equivalents were $247.6 million at December 31, 2009, compared with $275.8 million at June 30, 2009. Short-term investments were $8.4 million.
- Total debt was approximately $302.1 million, consisting primarily of a $289.5 million term loan and a $12.6 million mortgage. The $75.0 million revolver remained undrawn. The company reported compliance with all loan covenants.
- Deferred revenue was $203.9 million, including current and long-term balances. Accounts receivable increased to $143.4 million from $115.8 million at June 30, 2009.
Material changes versus the prior comparable period
- Revenue growth was broad-based geographically, with quarterly increases of $20.0 million in North America, $13.3 million in Europe and $6.8 million in other regions.
- Customer support growth materially increased the recurring-revenue mix. Partner-generated license revenue represented approximately 43% of license revenue, compared with approximately 30% in the prior-year quarter.
- Service and other gross margin declined to 18.7% for the quarter and 18.2% for the six months, primarily because of delayed implementations and lower margins on Vignette service contracts.
- Research and development, sales and marketing, and general and administrative expenses increased in absolute dollars, although research and development and sales and marketing declined as percentages of revenue.
- Special charges were $10.4 million for the quarter and $29.0 million for the six months, compared with $11.4 million for the prior-year quarter and six-month period. Six-month charges included $23.8 million related to the fiscal 2010 restructuring plan.
- Other expense improved materially because of foreign-exchange and financial-instrument gains and a $4.4 million gain from remeasuring Open Text’s pre-acquisition Vignette investment.
- Vignette added $56.8 million of revenue but a $2.0 million net loss from July 22 through December 31, 2009. Acquisition consideration totaled $321.4 million, including cash, Open Text shares and the fair value of shares previously owned.
Guidance, outlook, commentary, risks and unusual items
Management stated that the enterprise content management market remained stable and that diversified geography, compliance-oriented products and recurring customer support revenue should provide resilience. The filing does not provide quantified fiscal 2010 revenue, earnings or cash-flow guidance.
- The fiscal 2010 restructuring plan is expected to cost approximately $32 million to $40 million in total; $23.8 million had been recorded through December 31, 2009. The remaining workforce-reduction provision was expected to be paid by December 2010.
- Vignette integration creates risks involving customer, technology, personnel and operational integration, retention of key employees and management distraction.
- The term loan bears interest at LIBOR plus 2.25%. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $2.9 million, absent other effects. The interest-rate collar covering $100 million of debt expired at December 31, 2009.
- Approximately 50% of cash was held in currencies other than the U.S. dollar. Management estimated that a 10% adverse foreign-exchange movement would reduce reported cash and cash equivalents by approximately 5%.
- Tax examinations were open in Canada, Germany, the United States, France and Spain. Management believed existing provisions were adequate, but stated that outcomes could not be predicted with certainty.
- Vignette purchase accounting remained provisional for certain deferred tax assets and acquired intangible assets, and final valuation could materially change goodwill and intangible asset balances.
- The company reported no litigation expected to have a material adverse effect and no material impairment indicators during the period.
- Management concluded that disclosure controls were effective and that no material changes had occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether Vignette integration produces the expected revenue synergies and improves service-contract margins.
- The remaining cash requirements and final cost of the fiscal 2010 restructuring plan.
- Debt maturity, refinancing and interest-rate exposure, particularly the $289.5 million floating-rate term loan and the mortgage maturing in January 2011.
- The sustainability of customer support growth, renewal rates and partner-driven license revenue.
- Final purchase accounting for Vignette, including goodwill, intangible assets and tax attributes.
- Working-capital trends, especially accounts receivable, deferred revenue and operating cash conversion.
- Outcomes of open tax examinations and potential changes in unrecognized tax benefits.