OpenText(OTEX) - 2024 Q2 - Quarterly Report

Part I Financial Statements This section presents Open Text Corporation's unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, with accompanying notes for detailed explanations Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets to $16.44 billion and total liabilities to $12.41 billion as of December 31, 2023, primarily due to asset reclassification and debt reduction Condensed Consolidated Balance Sheet Highlights (in thousands of U.S. dollars) | Account | December 31, 2023 (unaudited) | June 30, 2023 | | :--- | :--- | :--- | | Total current assets | $4,083,990 | $2,275,231 | | Assets held for sale | $2,051,116 | $— | | Goodwill | $7,604,409 | $8,662,603 | | Acquired intangible assets | $2,773,220 | $4,080,879 | | Total assets | $16,443,264 | $17,089,200 | | Total current liabilities | $2,959,175 | $3,219,614 | | Long-term debt | $8,474,599 | $8,562,096 | | Total liabilities | $12,412,917 | $13,067,096 | | Total shareholders' equity | $4,030,347 | $4,022,104 | - As of December 31, 2023, the company has classified $2.05 billion in assets and $222.8 million in liabilities as held for sale, related to the proposed divestiture of its Application Modernization and Connectivity (AMC) business[11][32] Condensed Consolidated Statements of Income Total revenues surged 71.0% to $1.53 billion for the three months ended December 31, 2023, primarily due to the Micro Focus acquisition, though net income significantly decreased to $37.7 million Income Statement Summary (in thousands of U.S. dollars, except per share data) | Metric | Three Months Ended Dec 31, 2023 | Three Months Ended Dec 31, 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,534,868 | $897,440 | +71.0% | | Gross profit | $1,129,120 | $635,747 | +77.6% | | Income from operations | $253,867 | $184,663 | +37.5% | | Net income attributable to OpenText | $37,675 | $258,486 | -85.4% | | Diluted EPS attributable to OpenText | $0.14 | $0.96 | -85.4% | - For the six months ended December 31, 2023, total revenues were $2.96 billion, a 69.2% increase from $1.75 billion in the prior year period. Net income was $118.6 million, down from $141.6 million[13] Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $397.8 million for the six months ended December 31, 2023, while financing activities used $532.9 million, resulting in a net cash decrease of $228.5 million Cash Flow Summary for Six Months Ended Dec 31 (in thousands of U.S. dollars) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $397,774 | $327,129 | | Net cash used in investing activities | ($96,868) | ($69,412) | | Net cash provided by (used in) financing activities | ($532,925) | $869,561 | | Increase (decrease) in cash | ($228,480) | $1,127,007 | - The significant swing in financing cash flow from a large inflow in 2022 to an outflow in 2023 is due to the $1.0 billion in proceeds from long-term debt in the prior year period for the Micro Focus acquisition, which did not recur, combined with debt repayments in the current period[22] Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures supporting the financial statements, covering accounting policies, revenue recognition, acquisitions, divestitures, long-term debt, and significant contingencies like the CRA tax dispute - Revenue Disaggregation: For the six months ended Dec 31, 2023, the Americas represented 58.4% of total revenue, EMEA 32.1%, and Asia Pacific 9.5%. Recurring revenues (Cloud services and Customer support) constituted 77.5% of total revenues[38][39] - Micro Focus Acquisition: On January 31, 2023, the company acquired Micro Focus for a total purchase price of $6.2 billion. The preliminary purchase price allocation includes $3.4 billion in goodwill[30][187][190] - Proposed AMC Divestiture: On November 28, 2023, the company agreed to sell its Application Modernization and Connectivity (AMC) business for $2.275 billion in cash. The transaction is expected to close in Q4 Fiscal 2024. Assets and liabilities of the AMC business have been classified as held for sale[31][195] - Long-Term Debt: As of December 31, 2023, total principal debt outstanding was $8.72 billion, including various Senior Notes, a Term Loan B, and an Acquisition Term Loan[70] - CRA Tax Contingency: The company is in a dispute with the Canada Revenue Agency (CRA) over transfer pricing for fiscal years 2012-2016, with a potential liability of approximately $79 million in penalties and interest. A separate dispute for fiscal years 2017-2019 could result in a non-cash income tax expense of up to $470 million[132][136] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's Q2 Fiscal 2024 financial performance, highlighting the Micro Focus acquisition's impact on revenue and expenses, alongside liquidity, capital resources, and the AMC business divestiture Executive Overview This overview summarizes OpenText's strong Q2 Fiscal 2024 performance, with total revenue growing 71.0% to $1.53 billion due to the Micro Focus acquisition, alongside debt repayments and the AMC business divestiture agreement Q2 FY2024 Financial Highlights (YoY) | Metric | Q2 FY2024 | YoY Change | | :--- | :--- | :--- | | Total Revenue | $1,534.9M | +71.0% | | Annual Recurring Revenue | $1,145.9M | +58.0% | | GAAP Net Income | $37.7M | -85.4% | | Non-GAAP Net Income | $338.5M | +40.9% | | GAAP Diluted EPS | $0.14 | -85.4% | | Non-GAAP Diluted EPS | $1.24 | +39.3% | | Adjusted EBITDA | $566.3M | +66.1% | - The company entered into a definitive agreement to sell its Application Modernization and Connectivity (AMC) business to Rocket Software for $2.275 billion in cash, with the transaction expected to close in Q4 Fiscal 2024[232] Results of Operations This section details financial performance, attributing substantial year-over-year increases in revenue and operating expenses to the Micro Focus acquisition, which significantly impacted Q2 FY2024 results - The Micro Focus acquisition was the primary driver of financial changes. For the three months ended Dec 31, 2023, it contributed $601.4 million to revenue and $513.0 million to costs and operating expenses[245][246][247] Revenue by Product Type - Q2 FY2024 vs Q2 FY2023 (in thousands) | Revenue Stream | Q2 FY2024 | Q2 FY2023 | YoY Change | | :--- | :--- | :--- | :--- | | Cloud services and subscriptions | $450,091 | $408,674 | +10.1% | | Customer support | $695,762 | $316,508 | +119.8% | | License | $289,238 | $107,960 | +167.9% | | Professional service and other | $99,777 | $64,298 | +55.2% | Operating Expenses - Q2 FY2024 vs Q2 FY2023 (in thousands) | Expense Category | Q2 FY2024 | Q2 FY2023 | YoY Change | | :--- | :--- | :--- | :--- | | Research and development | $220,220 | $109,700 | +100.7% | | Sales and marketing | $280,263 | $177,171 | +58.2% | | General and administrative | $173,264 | $77,603 | +123.3% | Use of Non-GAAP Financial Measures The company reconciles GAAP to Non-GAAP financial measures, including Non-GAAP net income of $338.5 million for Q2 FY2024, to provide a clearer view of core operational performance by excluding specific items Reconciliation of GAAP to Non-GAAP Net Income - Q2 FY2024 (in thousands) | Description | Amount | | :--- | :--- | | GAAP-based net income, attributable to OpenText | $37,675 | | Amortization | $184,709 | | Share-based compensation | $40,175 | | Special charges (recoveries) | $54,166 | | Other (income) expense, net | $68,784 | | Tax adjustments | ($47,054) | | Non-GAAP-based net income, attributable to OpenText | $338,455 | Reconciliation to Adjusted EBITDA - Q2 FY2024 (in thousands) | Description | Amount | | :--- | :--- | | GAAP-based net income, attributable to OpenText | $37,675 | | Add back: Taxes, Interest, D&A, etc. | $528,595 | | Adjusted EBITDA | $566,270 | Liquidity and Capital Resources As of December 31, 2023, the company held $1.0 billion in cash and $8.5 billion in long-term debt, with operating cash flow of $397.8 million for the first six months of Fiscal 2024, indicating sufficient liquidity for the next twelve months - Cash and cash equivalents stood at $1.003 billion as of December 31, 2023, a decrease of $228.5 million from June 30, 2023[364] - For the six months ended Dec 31, 2023, the company generated $397.8 million in cash from operations, used $96.9 million in investing, and used $532.9 million in financing activities, primarily for debt repayment and dividends[365] Contractual Obligations Summary (as of Dec 31, 2023, in thousands) | Obligation | Total | Next 6 Months | 2024-2026 | 2026-2028 | Beyond 2028 | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $11,584,399 | $303,321 | $2,042,458 | $2,896,912 | $6,341,708 | | Operating leases | $364,641 | $52,754 | $151,528 | $94,124 | $66,235 | | Purchase obligations | $427,043 | $106,237 | $301,550 | $19,256 | $— | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations, with a 100 basis point increase potentially raising annual interest payments by $9.4 million and $34.7 million on specific term loans, and foreign currency exposure on $390.1 million in cash - Interest Rate Risk: A 100 basis point adverse change in interest rates would increase annual interest payments by approximately $9.4 million on the Term Loan B and $34.7 million on the Acquisition Term Loan[458][459] - Foreign Currency Risk: As of December 31, 2023, the company held $390.1 million in cash and cash equivalents denominated in foreign currencies. A uniform 10% weakening of these currencies against the U.S. dollar would result in a reported decrease of $39.0 million in cash[467] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of December 31, 2023, the company's disclosure controls and procedures were effective[468] - No material changes to the internal control over financial reporting were identified during the fiscal quarter ended December 31, 2023[469] Part II Risk Factors This section introduces new risk factors related to the proposed AMC business divestiture, including transaction completion uncertainty, potential business disruptions, and the risk of not achieving anticipated strategic and financial benefits - The proposed divestiture of the AMC business is subject to closing conditions and regulatory approvals, and there is a risk it may not be consummated on the current timeline or at all[474] - The divestiture process could disrupt the company's remaining business, divert management attention, and negatively impact relationships with customers and employees[477] - The company may not realize the anticipated benefits of the divestiture, such as enhanced focus on Cloud and AI or the full value from repaying debt with the proceeds[478] Other Information This section confirms that no officers or directors adopted or terminated any Rule 10b5-1 trading plans or non-10b5-1 trading arrangements during the three months ended December 31, 2023 - During the quarter, no officers or directors adopted or terminated any Rule 10b5-1 trading plans[480] Exhibits This section lists exhibits filed with the Form 10-Q report, including the AMC business divestiture purchase agreement, a credit agreement amendment, and CEO/CFO certifications - Exhibits filed with the report include the Purchase Agreement for the AMC business divestiture and certifications from the CEO and CFO[482]