Open Text Corporation Form 10-Q Summary
Reporting period: Three and nine months ended March 31, 2009, filed May 7, 2009. The request metadata identifies “2008 Q3,” but the filing is for fiscal 2009 third quarter. Financial statements are unaudited, presented in U.S. dollars, and prepared under U.S. GAAP.
Business context
Open Text provides enterprise content management software and related services. The company employed approximately 3,400 people worldwide and generated approximately half of its revenue outside North America. Customer support represented approximately 53% of quarterly revenue and historically had an approximately 90% renewal rate.
Fiscal 2009 results included Captaris beginning November 1, 2008, as well as the July 2008 acquisitions of eMotion and a division of Spicer Corporation.
Financial performance and liquidity
| Metric | Q3 2009 | Q3 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Total revenue | $192.0 million | $178.8 million | $582.3 million | $525.3 million |
| Gross profit | $128.3 million | $122.1 million | $395.3 million | $355.4 million |
| Income from operations | $21.0 million | $23.5 million | $63.2 million | $71.1 million |
| Net income | $22.0 million | $7.3 million | $37.5 million | $25.8 million |
| Diluted EPS | $0.41 | $0.14 | $0.71 | $0.49 |
| Operating cash flow | $72.9 million | $49.8 million | $137.5 million | $121.4 million |
Calculated margins were approximately 66.8% gross, 10.9% operating, and 11.5% net in Q3 2009, compared with approximately 68.3%, 13.2%, and 4.1%, respectively, in Q3 2008. For the nine-month period, gross margin was approximately 67.9%, operating margin 10.8%, and net margin 6.4%.
- Quarterly revenue increased 7.4%; license revenue increased 0.7%, customer support revenue increased 11.3%, and service and other revenue increased 7.1%.
- Nine-month revenue increased 10.9%; license revenue increased 10.5%, customer support revenue increased 12.0%, and service and other revenue increased 8.4%.
- Quarterly partner-influenced sales represented 42.0% of license revenue, versus 20.1% in the prior-year quarter.
- Cash and cash equivalents were $237.0 million at March 31, 2009, down from $254.9 million at June 30, 2008. The company stated that its cash consisted of readily accessible cash and short-term bank deposits and that it had no exposure to illiquid or distressed investments.
- Total debt was $302.6 million, consisting primarily of a $291.8 million term loan and a $10.8 million mortgage. The revolving facility had no outstanding borrowings.
- Total assets were $1.47 billion and shareholders’ equity was $618.2 million at March 31, 2009.
Material changes versus the prior comparable period
- Net income increased substantially in Q3, primarily reflecting an $18.5 million improvement in other income, driven mainly by foreign exchange gains, and lower net interest expense. The filing does not provide a comparable quarter-specific operating improvement; operating income declined.
- Operating income declined 11.0% in Q3 and 11.1% for the nine-month period, despite revenue growth. Higher amortization of acquired intangibles, operating expenses, and restructuring charges offset revenue gains.
- Q3 gross margin decreased to approximately 66.8% from 68.3%, principally because of higher third-party royalty costs and increased amortization. Customer support gross margin declined to 83.0% from 84.4%.
- Operating expenses increased $8.8 million in Q3 and $47.8 million year to date. Nine-month sales and marketing expense increased $17.1 million, research and development increased $9.2 million, and acquired customer-intangible amortization increased $6.5 million.
- Cash flow from operations increased 13.3% year to date, aided by collections of accounts receivable. Investing cash outflows rose to $148.5 million, primarily because of the $101.0 million Captaris acquisition and other acquisitions and investments.
- Foreign currency translation losses reduced accumulated other comprehensive income by $81.6 million year to date, contributing to a comprehensive loss of $47.5 million despite reported net income of $37.5 million.
Guidance, outlook, risks, and unusual items
- Management expected fiscal 2009 research and development expense at 14% to 16% of revenue, sales and marketing expense at 24% to 26%, and general and administrative expense at 9% to 10%.
- The fiscal 2009 restructuring plan was expected to cost approximately $20 million in total; $13.0 million had been recorded through March 31, 2009, with approximately $7.0 million of additional charges expected. Management projected approximately $40 million of annual cost savings and operational efficiencies.
- Captaris integration, retention of key employees, workforce reductions, and excess-facility obligations were significant execution issues. Captaris-related acquisition accruals included employee termination and facility costs, with some facility obligations extending through February 2015.
- The company had $361.9 million of contractual long-term debt payments, $82.5 million of operating lease obligations, and $4.4 million of purchase obligations, totaling $448.8 million.
- The term loan carried a floating rate of LIBOR plus 2.25%. A 300-basis-point adverse LIBOR change would increase annual interest expense by approximately $8.8 million before the effect of hedging. A $100 million interest-rate collar limited exposure on part of the loan and expired in December 2009.
- Approximately 75% 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 by approximately 8%.
- The company assumed $16.2 million of unfunded Captaris pension and long-term employee benefit obligations, including a $14.6 million unfunded pension obligation.
- Tax examinations were open in Canada, the United States, Germany, and France. Management believed existing provisions were adequate and did not expect a material adverse outcome, but stated that settlements could not be predicted with certainty.
- Subsequent events included the April 8, 2009 acquisition of Vizible for approximately $0.9 million and the May 6, 2009 agreement to acquire Vignette for approximately $310 million in cash and shares, subject to shareholder, antitrust, and other closing conditions.
Most important facts for investors to verify
- Whether revenue growth and the reported Q3 net-income increase were sustainable without foreign-exchange gains and other non-operating benefits.
- The effect of Captaris integration, restructuring execution, employee retention, and the expected remaining $7 million restructuring charge.
- Debt repayment capacity, refinancing requirements, LIBOR exposure, and liquidity after the proposed Vignette transaction.
- Progress toward the projected $40 million of annual restructuring savings and the impact on operating margins.
- Foreign-exchange exposure, including the effect of currency translation losses on equity and reported results.
- Final purchase-price allocations and potential contingencies related to Captaris, eMotion, Spicer, Vizible, and the proposed Vignette merger.
- The status and ultimate cost of unfunded pension, tax, restructuring, lease, litigation, and acquisition-related obligations.