OpenText Reports First Quarter Fiscal Year 2015 Financial Results

Q1 FY15

Q4 FY14

Q1 FY14

% Change

(Q/Q)

% Change

(Y/Y)

Revenue (million)

$453.8

$494.0

$324.5

(8.1)%

39.9%

GAAP-based gross margin

67.4%

69.1%

67.2

(170)

bps

20

bps

GAAP-based operating margin

22.7%

21.8%

16.0

90

bps

670

bps

GAAP-based EPS, diluted

$0.53

$0.72

$0.26

(26.4)%

103.8%

Non-GAAP-based gross margin ₍₂₎

71.6%

72.9%

73.9

(130)

bps

(230)

bps

Non-GAAP-based operating margin ₍₂₎

34.3%

32.8%

30.6

150

bps

370

bps

$0.97

$1.05

$0.69

40.6%

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars, except share data)

September 30, 2014

June 30, 2014

(unaudited)

ASSETS

Cash and cash equivalents

$

492,486

$

427,890

Accounts receivable trade, net of allowance for doubtful accounts of $4,535 as of September 30, 2014 and $4,499 as of June 30, 2014

239,762

292,929

Income taxes recoverable

12,372

24,648

Prepaid expenses and other current assets

47,498

42,053

Deferred tax assets

30,336

28,215

Total current assets

822,454

815,735

Property and equipment

151,573

142,261

Goodwill

1,940,082

1,963,557

Acquired intangible assets

681,229

725,318

Deferred tax assets

159,424

156,712

Other assets

54,819

52,041

Deferred charges

48,598

52,376

Long-term income taxes recoverable

10,701

10,638

Total assets

$

3,868,880

$

3,918,638

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued liabilities

$

193,720

$

231,954

Current portion of long-term debt

62,105

62,582

Deferred revenues

301,341

332,664

Income taxes payable

15,341

31,630

Deferred tax liabilities

944

1,053

Total current liabilities

573,451

659,883

Long-term liabilities:

Accrued liabilities

39,126

41,999

Deferred credits

16,382

17,529

Pension liability

61,682

60,300

Long-term debt

1,243,500

1,256,750

Deferred revenues

18,646

17,248

Long-term income taxes payable

163,749

162,131

Deferred tax liabilities

57,371

60,631

Total long-term liabilities

1,600,456

1,616,588

Shareholders' equity:

Share capital

122,034,461 and 121,758,432 Common Shares issued and outstanding at September 30, 2014 and June 30, 2014, respectively; Authorized Common Shares: unlimited

800,422

792,834

Additional paid-in capital

117,242

112,398

Accumulated other comprehensive income

36,216

39,449

Retained earnings

759,898

716,317

Treasury stock, at cost (763,278 shares at September 30, 2014 and  June 30, 2014, respectively)

(19,132)

(19,132)

Total OpenText shareholders' equity

1,694,646

1,641,866

Non-controlling interests

327

301

Total shareholders' equity

1,694,973

1,642,167

Total liabilities and shareholders' equity

$

3,868,880

$

3,918,638

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands of U.S. dollars, except share and per share data)

(unaudited)

Three Months Ended
September 30,

2014

2013

Revenues:

License

$

58,615

$

55,306

Cloud services

150,006

41,647

Customer support

183,906

168,440

Professional service and other

61,260

59,067

Total revenues

453,787

324,460

Cost of revenues:

License

3,088

3,036

Cloud services

57,996

14,265

Customer support

23,218

22,170

Professional service and other

45,361

45,435

Amortization of acquired technology-based intangible assets

18,206

21,530

Total cost of revenues

147,869

106,436

Gross profit

305,918

218,024

Operating expenses:

Research and development

44,742

40,216

Sales and marketing

80,099

69,413

General and administrative

35,756

28,886

Depreciation

12,242

6,458

Amortization of acquired customer-based intangible assets

25,884

17,277

Special charges

4,169

3,731

Total operating expenses

202,892

165,981

Income from operations

103,026

52,043

Other income (expense), net

(9,873)

1,926

Interest and other related expense, net

(11,099)

(4,385)

Income before income taxes

82,054

49,584

Provision for income taxes

17,402

18,954

Net income for the period

$

64,652

$

30,630

Net (income) loss attributable to non-controlling interests

(26)

—

Net income attributable to OpenText

$

64,626

$

30,630

Earnings per share—basic attributable to OpenText

$

0.53

$

0.26

Earnings per share—diluted attributable to OpenText

$

0.53

$

0.26

Weighted average number of Common Shares outstanding—basic

121,918

118,126

Weighted average number of Common Shares outstanding—diluted

122,861

118,756

Dividends declared per Common Share

$

0.1725

$

0.15

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands of U.S. dollars)

(unaudited)

Three Months Ended
September 30,

2014

2013

Net income for the period

$

64,652

$

30,630

Other comprehensive income—net of tax:

Net foreign currency translation adjustments

3,105

241

Unrealized gain (loss) on cash flow hedges:

Unrealized gain (loss)

(2,900)

1,520

Loss reclassified into net income

53

584

Actuarial gain (loss) relating to defined benefit pension plans:

Actuarial gain (loss)

(3,118)

83

Amortization of actuarial loss into net income

121

73

Unrealized loss on marketable securities

(494)

—

Total other comprehensive income (loss), net, for the period

(3,233)

2,501

Total comprehensive income

61,419

33,131

Comprehensive income attributable to non-controlling interests

(26)

—

Total comprehensive income attributable to OpenText

$

61,393

$

33,131

OPEN TEXT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

(unaudited)

Three Months Ended
September 30,

2014

Cash flows from operating activities:

Net income for the period

$

64,652

$

30,630

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization of intangible assets

56,332

45,265

Share-based compensation expense

4,449

4,612

Excess tax benefits on share-based compensation expense

(395)

(73)

Pension expense

1,220

353

Amortization of debt issuance costs

1,143

525

Amortization of deferred charges and credits

2,631

2,967

Loss on sale and write down of property and equipment

—

21

Deferred taxes

(1,545)

(1,869)

Changes in operating assets and liabilities:

Accounts receivable

55,543

28,778

Prepaid expenses and other current assets

(149)

(3,432)

Income taxes

17,806

7,502

Deferred charges and credits

—

2,700

Accounts payable and accrued liabilities

(34,139)

(18,093)

Deferred revenue

(26,755)

(18,560)

Other assets

(2,262)

(1,402)

Net cash provided by operating activities

138,531

79,924

Cash flows from investing activities:

Additions of property and equipment

(30,235)

(8,315)

Purchase of Cordys Holding B.V., net of cash acquired

—

(30,588)

Purchase consideration for prior period acquisitions

(222)

(222)

Other investing activities

(7,374)

(1,500)

Net cash used in investing activities

(37,831)

(40,625)

Cash flows from financing activities:

Excess tax benefits on share-based compensation expense

395

73

Proceeds from issuance of Common Shares

7,099

1,823

Repayment of long-term debt

(13,417)

(7,668)

Debt issuance costs

(183)

—

Payments of dividends to shareholders

(21,045)

(17,721)

Net cash used in financing activities

(27,151)

(23,493)

Foreign exchange gain (loss) on cash held in foreign currencies

(8,953)

4,896

Increase in cash and cash equivalents during the period

64,596

20,702

Cash and cash equivalents at beginning of the period

427,890

470,445

Cash and cash equivalents at end of the period

$

492,486

$

491,147

(1)

All dollar amounts in this press release are in U.S. Dollars unless otherwise indicated.

(2)

Use of Non-GAAP Financial Measures: In addition to reporting financial results in accordance with U.S. GAAP, the Company provides certain financial measures that are not in accordance with U.S. GAAP (non-GAAP).These non-GAAP financial measures have certain limitations in that they do not have a standardized meaning and thus the Company's definition may be different from similar non-GAAP financial measures used by other companies and/or analysts and may differ from period to period. Thus it may be more difficult to compare the Company's financial performance to that of other companies. However, the Company's management compensates for these limitations by providing the relevant disclosure of the items excluded in the calculation of these non-GAAP financial measures both in its reconciliation to the U.S. GAAP financial measures and its consolidated financial statements, all of which should be considered when evaluating the Company's results.

The Company uses these non-GAAP financial measures to supplement the information provided in its consolidated financial statements, which are presented in accordance with U.S. GAAP. The presentation of non-GAAP financial measures are not meant to be a substitute for financial measures presented in accordance with U.S. GAAP, but rather should be evaluated in conjunction with and as a supplement to such U.S. GAAP measures. OpenText strongly encourages investors to review its financial information in its entirety and not to rely on a single financial measure. The Company therefore believes that despite these limitations, it is appropriate to supplement the disclosure of the U.S. GAAP measures with certain non-GAAP measures defined below.

Non-GAAP-based net income and non-GAAP-based EPS are calculated as net income or net income per share on a diluted basis, excluding, the amortization of acquired intangible assets, other income (expense), share-based compensation, and special charges, all net of tax. Non-GAAP-based gross profit is the arithmetical sum of GAAP-based gross profit and the amortization of acquired technology-based intangible assets. Non-GAAP-based gross margin is calculated as non-GAAP-based gross profit expressed as a percentage of revenue. Non-GAAP-based income from operations is calculated as income from operations, excluding, the amortization of acquired intangible assets, special charges, and share-based compensation. Non-GAAP-based operating margin is calculated as non-GAAP-based income from operations expressed as a percentage of revenue.

The Company's management believes that the presentation, of the above defined non-GAAP financial measures, provides useful information to investors because they portray the financial results of the Company before the impact of certain non-operational charges. The use of the term "non-operational charge" is defined for this purpose as an expense that does not impact the ongoing operating decisions taken by the Company's management and is based upon the way the Company's management evaluates the performance of the Company's business for use in the Company's internal reports. In the course of such evaluation and for the purpose of making operating decisions, the Company's management excludes certain items from its analysis, including amortization of acquired intangible assets, special charges, share-based compensation, other income (expense), and the taxation impact of these items. These items are excluded based upon the manner in which management evaluates the business of the Company and are not excluded in the sense that they may be used under U.S. GAAP.

The Company believes the provision of supplemental non-GAAP measures allow investors to evaluate the operational and financial performance of the Company's core business using the same evaluation measures that management uses, and is therefore a useful indication of OpenText's performance or expected performance of future operations and facilitates period-to-period comparison of operating performance (although prior performance is not necessarily indicative of future performance). As a result, the Company considers it appropriate and reasonable to provide, in addition to U.S. GAAP measures, supplementary non-GAAP financial measures that exclude certain items from the presentation of its financial results in this press release.

The following charts provide (unaudited) reconciliations of U.S. GAAP-based financial measures to non-U.S. GAAP-based financial measures for the following periods presented:

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the three months ended September 30, 2014.

(In thousands except for per share amounts)

Three Months Ended

September 30, 2014

GAAP-based

Measures

GAAP-based

Measures

% of Revenue

Adjustments

Note

Non-GAAP-based

Measures

Non-GAAP-

based Measures

% of Revenue

Cost of revenues

Cloud services

$

57,996

$

(213)

(1)

$

57,783

Customer support

23,218

(174)

(1)

23,044

Professional service and other

45,361

(263)

(1)

45,098

Amortization of acquired technology-based intangible assets

18,206

(18,206)

(2)

—

GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%)

305,918

67.4%

18,856

(3)

324,774

71.6%

Operating expenses

Research and development

44,742

(563)

(1)

44,179

Sales and marketing

80,099

(2,074)

(1)

78,025

General and administrative

35,756

(1,162)

(1)

34,594

Amortization of acquired customer-based intangible assets

25,884

(25,884)

(2)

—

Special charges

4,169

(4,169)

(4)

—

GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%)

103,026

22.7%

52,708

(5)

155,734

34.3%

Other income (expense), net

(9,873)

9,873

(6)

—

Provision for (recovery of) income taxes

17,402

8,606

(7)

26,008

GAAP-based net income / Non-GAAP-based net income, attributable to OpenText

64,626

53,975

(8)

118,601

GAAP-based earnings per share / Non GAAP-based earnings per share-diluted, attributable to OpenText

$

0.53

$

0.44

(8)

$

0.97

(1)

Adjustment relates to the exclusion of share based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.

(2)

Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.

(3)

GAAP-based and Non-GAAP-based gross profit stated in dollars, and gross margin stated as a percentage of revenue.

(4)

Adjustment relates to the exclusion of Special charges from our Non-GAAP-based operating expenses as Special charges are generally incurred in the periods following the relevant acquisitions and are not indicative or related to continuing operations and are therefore excluded from our internal analysis of operating results.

(5)

GAAP-based and Non-GAAP-based income from operations stated in dollars, and operating margin stated as a percentage of revenue.

(6)

Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results.

(7)

Adjustment relates to differences between the GAAP-based tax provision of approximately 21% and a Non-GAAP-based tax rate of 18%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income.

(8)

Reconciliation of Non-GAAP-based adjusted net income to GAAP-based net income:  

Three Months Ended
September 30, 2014

Per share diluted

Non-GAAP-based net income, attributable to OpenText

$

118,601

$

0.97

Less:

Amortization

44,090

0.36

Share-based compensation

4,449

0.04

Special charges

4,169

0.03

Other (income) expense, net

9,873

0.08

GAAP-based provision for (recovery of) income taxes

17,402

0.14

Non-GAAP-based provision for income taxes

(26,008)

(0.21)

GAAP-based net income, attributable to OpenText

$

64,626

$

0.53

Reconciliation of selected GAAP-based measures to Non-GAAP-based measures for the three months ended June 30, 2014.

(In thousands except for per share amounts)

Three Months Ended
June 30, 2014

GAAP-based

Measures

GAAP-based

Measures

% of Revenue

Adjustments

Note

Non-GAAP-based

Measures

Non-GAAP-

based Measures

% of Revenue

Cost of revenues

Cloud services

$

55,780

$

(197)

(1)

$

55,583

Customer support

24,195

(207)

(1)

23,988

Professional service and other

51,041

(112)

(1)

50,929

Amortization of acquired technology-based intangible assets

18,205

(18,205)

(2)

—

GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%)

341,262

69.1%

18,721

(3)

359,983

72.9%

Operating expenses

Research and development

47,502

(450)

(1)

47,052

Sales and marketing

101,240

(1,112)

(1)

100,128

General and administrative

41,413

(2,121)

(1)

39,292

Amortization of acquired customer-based intangible assets

26,635

(26,635)

(2)

—

Special charges

5,413

(5,413)

(4)

—

GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%)

107,705

21.8%

54,452

(5)

162,157

32.8%

Other income (expense), net

1,103

(1,103)

(6)

—

Provision for (recovery of) income taxes

9,885

12,785

(7)

22,670

GAAP-based net income / Non-GAAP-based net income, attributable to OpenText

88,111

40,564

(8)

128,675

GAAP-based earnings per share / Non GAAP-based earnings per share-diluted, attributable to OpenText

$

0.72

$

0.33

(8)

$

1.05

(1)

Adjustment relates to the exclusion of share based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.

(2)

Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.

(3)

GAAP-based and Non-GAAP-based gross profit stated in dollars, and gross margin stated as a percentage of revenue.

(4)

Adjustment relates to the exclusion of Special charges from our Non-GAAP-based operating expenses as Special charges are generally incurred in the periods following the relevant acquisitions and are not indicative or related to continuing operations and are therefore excluded from our internal analysis of operating results.

(5)

GAAP-based and Non-GAAP-based income from operations stated in dollars, and operating margin stated as a percentage of revenue.

(6)

Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results.

(7)

Adjustment relates to differences between the GAAP-based tax provision of approximately 10% and a Non-GAAP-based tax rate of 15%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income.

(8)

Reconciliation of Non-GAAP-based adjusted net income to GAAP-based net income:  

Three Months Ended
June 30, 2014

Per share diluted

Non-GAAP-based net income, attributable to OpenText

$

128,675

$

1.05

Less:

Amortization

44,840

0.37

Share-based compensation

4,199

0.03

Special charges

5,413

0.04

Other (income) expense, net

(1,103)

(0.01)

GAAP-based provision for (recovery of) income taxes

9,885

0.08

Non-GAAP-based provision for income taxes

(22,670)

(0.18)

GAAP-based net income, attributable to OpenText

$

88,111

$

0.72

Reconciliation of selected GAAP-based measures to Non GAAP-based measures for the three months ended September 30, 2013.

(In thousands except for per share amounts)

Three Months Ended
September 30, 2013

GAAP-based

Measures

GAAP-based

Measures

% of Revenue

Adjustments

Note

Non-GAAP-based

Measures

Non-GAAP-

based Measures

% of Revenue

Cost of revenues:

Cloud services

$

14,265

$

(38)

(1)

$

14,227

Customer support

22,170

(97)

(1)

22,073

Professional service and other

45,435

(170)

(1)

45,265

Amortization of acquired technology-based intangible assets

21,530

(21,530)

(2)

—

GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%)

218,024

67.2%

21,835

(3)

239,859

73.9%

Operating expenses

Research and development

40,216

(728)

(1)

39,488

Sales and marketing

69,413

(2,353)

(1)

67,060

General and administrative

28,886

(1,226)

(1)

27,660

Amortization of acquired customer-based intangible assets

17,277

(17,277)

(2)

—

Special charges

3,731

(3,731)

(4)

—

GAAP-based income from operations and operating margin (%) / Non-GAAP-based income from operations and operating margin (%)

52,043

16.0%

47,150

(5)

99,193

30.6%

Other income (expense), net

1,926

(1,926)

(6)

—

Provision for (recovery of) income taxes

18,954

(5,681)

(7)

13,273

GAAP-based net income / Non-GAAP-based net income, attributable to OpenText

30,630

50,905

(8)

81,535

GAAP-based earnings per share / Non GAAP-based earnings per share-diluted, attributable to OpenText

$

0.26

$

0.43

(8)

$

0.69

(1)

Adjustment relates to the exclusion of share based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results.

(2)

Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results.

(3)

GAAP-based and Non-GAAP-based gross profit stated in dollars, and gross margin stated as a percentage of revenue.

(4)

Adjustment relates to the exclusion of Special charges from our Non-GAAP-based operating expenses as Special charges are generally incurred in the periods following the relevant acquisitions and are not indicative or related to continuing operations and are therefore excluded from our internal analysis of operating results.

(5)

GAAP-based and Non-GAAP-based income from operations stated in dollars, and operating margin stated as a percentage of revenue.

(6)

Adjustment relates to the exclusion of Other income (expense) from our Non-GAAP-based operating expenses as Other income (expense) relates primarily to the transactional impact of foreign exchange and is generally not indicative or related to continuing operations and is therefore excluded from our internal analysis of operating results.

(7)

Adjustment relates to differences between the GAAP-based tax provision of approximately 38% and a Non-GAAP-based tax rate of 14%; these rate differences are due to the income tax effects of expenses that are excluded for the purpose of calculating Non-GAAP-based adjusted net income.

(8)

Reconciliation of Non-GAAP-based adjusted net income to GAAP-based net income:  

Three Months Ended
September 30, 2013

Per share diluted

Non-GAAP-based net income, attributable to OpenText

$

81,535

$

0.69

Less:

Amortization

38,807

0.33

Share-based compensation

4,612

0.04

Special charges

3,731

0.03

Other (income) expense, net

(1,926)

(0.02)

GAAP-based provision for (recovery of) income taxes

18,954

0.16

Non-GAAP-based provision for income taxes

(13,273)

(0.11)

GAAP-based net income, attributable to OpenText

$

30,630

$

0.26

(3)

The following tables provide a composition of our major currencies for revenue and expenses, expressed as a percentage, for the three months ended September 30, 2014 and 2013:

Three Months Ended
September 30, 2014

Three Months Ended
September 30, 2013

Currencies

% of Revenue

% of Expenses*

% of Revenue

% of Expenses*

EURO

25%

15%

27%

17%

GBP

9%

9%

8%

9%

CAD

5%

13%

5%

17%

USD

49%

45%

49%

42%

Other

12%

18%

11%

15%

Total

100%

100%

100%

100%

Expenses include all cost of revenues and operating expenses included within the Condensed Consolidated Statements of Income, except for amortization of intangible assets, share-based compensation and special charges.