OpenText(US:OTEX)2022-11-03 21:13Part I Financial Information This section provides a comprehensive overview of the company's financial performance, condition, and related disclosures for the period Financial Statements This section presents the unaudited condensed consolidated financial statements for the three months ended September 30, 2022, including balance sheets, income statements, and cash flow statements, along with detailed notes Condensed Consolidated Balance Sheets As of September 30, 2022, total assets were $10.08 billion, total liabilities $6.23 billion, and total shareholders' equity $3.85 billion Condensed Consolidated Balance Sheets (in thousands) | | September 30, 2022 (in thousands) | June 30, 2022 (in thousands) | | :--- | :--- | :--- | | Total current assets | $2,244,054 | $2,285,367 | | Total assets | $10,077,088 | $10,178,973 | | Total current liabilities | $1,577,524 | $1,468,258 | | Total liabilities | $6,226,947 | $6,146,713 | | Total shareholders' equity | $3,850,141 | $4,032,260 | | Total liabilities and shareholders' equity | $10,077,088 | $10,178,973 | Condensed Consolidated Statements of Income Total revenues increased to $852.0 million, but the company reported a net loss of $116.9 million due to significant 'Other income (expense), net' for the quarter Condensed Consolidated Statements of Income (in thousands) | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | | Total revenues | $852,036 | $832,308 | | Gross profit | $593,688 | $574,185 | | Income from operations | $146,353 | $182,689 | | Net income (loss) attributable to OpenText | $(116,929) | $131,915 | | Earnings (loss) per share—diluted | $(0.43) | $0.48 | - The significant swing from net income to net loss was primarily caused by the "Other income (expense), net" line item, which was an expense of $189.2 million in Q1 2023 versus an income of $29.8 million in Q1 202213 Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $132.0 million, with cash and cash equivalents increasing by $10.4 million for the period Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $131,959 | $189,669 | | Net cash used in investing activities | $(36,324) | $(26,416) | | Net cash used in financing activities | $(57,161) | $(26,054) | | Increase in cash, cash equivalents and restricted cash | $10,372 | $127,922 | Notes to Condensed Consolidated Financial Statements Key disclosures include the proposed $6.0 billion Micro Focus acquisition, a $181.5 million unrealized derivative loss, and a potential $470 million tax dispute with the CRA - On August 25, 2022, the company announced an agreement for an all-cash offer to acquire Micro Focus International PLC for approximately $6.0 billion, with the deal expected to close in the first quarter of calendar 202328163 - The company entered into derivative transactions to mitigate foreign currency risks associated with the Micro Focus acquisition, resulting in an unrealized loss of $181.5 million for the quarter, which was recognized in "Other income (expense), net"150152178 - The company is contesting reassessments from the Canada Revenue Agency (CRA) regarding transfer pricing and asset valuation. An unsuccessful defense could lead to an income tax expense reducing deferred tax assets by up to approximately $470 million125129130 Revenue by Geography (in thousands) | Revenue by Geography | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | | Americas | $557,788 | $519,692 | | EMEA | $228,353 | $244,597 | | Asia Pacific | $65,895 | $68,019 | | Total revenues | $852,036 | $832,308 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 FY23 performance, highlighting revenue growth, the GAAP net loss due to derivative losses, the 'Total Growth' strategy, liquidity, and debt facilities for the Micro Focus acquisition Executive Overview Total revenue grew 2.4% to $852.0 million, with annual recurring revenues up 4.4% to $722.0 million, but a GAAP net loss of $116.9 million was reported Key Financial Metrics (in millions) | Metric | Q1 FY2023 (in millions) | YoY Change | | :--- | :--- | :--- | | Total Revenue | $852.0M | +2.4% | | Annual Recurring Revenue | $722.0M | +4.4% | | Cloud Services & Subscriptions Revenue | $404.7M | +13.5% | | GAAP Net Income (Loss) | $(116.9)M | N/A (vs. $131.9M income) | | Adjusted EBITDA | $304.0M | -6.0% | | Operating Cash Flow | $132.0M | -30.4% | - The company's "Total Growth" strategy focuses on organic initiatives, innovation, and acquisitions to increase recurring revenues, expand margins, and drive overall cash flow generation207 Results of Operations Total revenue growth was driven by a 13.5% increase in Cloud services and subscriptions, offset by decreases in Customer support and License revenue, leading to a GAAP net loss - Cloud services and subscriptions revenues increased by 13.5% (16.9% in constant currency), primarily driven by incremental revenues from acquisitions222 - Customer support revenues decreased by 5.3% but increased by 0.5% after factoring in a $19.5 million unfavorable impact from foreign exchange rate changes228 - Sales and marketing expenses increased by $20.9 million, and Research and development expenses increased by $10.0 million compared to the prior-year period, partly due to recent acquisitions242246 Reconciliation of GAAP to Non-GAAP EPS (per share) | Reconciliation of GAAP to Non-GAAP EPS | Three Months Ended Sep 30, 2022 (per share) | | :--- | :--- | | GAAP-based earnings (loss) per share - diluted | $(0.43) | | Adjustments (Amortization, SBC, etc.) | $1.20 | | Non-GAAP-based earnings per share - diluted | $0.77 | Liquidity and Capital Resources The company maintained $1.70 billion in cash, with operating cash flow at $132.0 million, and secured $4.585 billion in new debt for the Micro Focus acquisition - Operating cash flow decreased by $57.7 million to $132.0 million compared to the same period last year291295 - To finance the Micro Focus acquisition, the company secured a $2.585 billion Acquisition Term Loan and a $2.0 billion Bridge Loan339345 - The company declared and paid cash dividends of $0.24299 per share, totaling $64.7 million for the quarter300 Contractual Obligations (in thousands) | Contractual Obligations | Total (in thousands) | Next 9 Months (in thousands) | 1-3 Years (in thousands) | 3-5 Years (in thousands) | Beyond 5 Years (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $5,336,028 | $134,121 | $1,289,157 | $263,500 | $3,649,250 | | Operating lease obligations | $281,067 | $50,268 | $103,186 | $62,269 | $65,344 | | Purchase obligations | $93,168 | $36,137 | $44,352 | $12,679 | $0 | Quantitative and Qualitative Disclosures About Market Risk The company faces significant interest rate risk on its $955.0 million Term Loan B and foreign currency risk from derivatives, with $515.5 million cash held in foreign currencies - The company has significant exposure to interest rate risk on its $955.0 million Term Loan B, where a 1% rate increase would raise annual interest payments by approximately $9.6 million378 - Derivative transactions for the Micro Focus acquisition create substantial foreign currency risk. A one-cent change in the British Pound to U.S. dollar forward exchange rate would cause a $22.7 million change in the mark-to-market valuation of outstanding forward contracts386 - The company holds a significant portion of its cash in foreign currencies, with a total of $515.5 million in U.S. dollar equivalent as of September 30, 2022, exposing it to translation risk390 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2022391 - No material changes to internal control over financial reporting were identified during the fiscal quarter ended September 30, 2022392 Part II Other Information This section details additional information, primarily focusing on the significant risks associated with the proposed Micro Focus acquisition Risk Factors Key risks for the Micro Focus acquisition include potential failure to complete, inability to realize synergies, integration challenges, substantial new debt, and significant transaction costs - There is a risk that the Micro Focus acquisition may not be consummated or that the company may fail to realize the anticipated benefits and synergies due to complex integration challenges396398 - The incurrence of substantial indebtedness to finance the acquisition could adversely impact liquidity, limit flexibility in responding to business opportunities, and increase vulnerability to adverse economic conditions402405 - The company has incurred and will continue to incur significant transaction costs, including fees for financing and mark-to-market losses on derivatives, which could adversely affect results of operations408