OpenText(OTEX) - 2024 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements This section presents Open Text Corporation's unaudited condensed consolidated financial statements, including balance sheets, statements of income, comprehensive income, shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, accounting policies, revenue disaggregation, and specific financial line items Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and shareholders' equity at specific reporting dates | ASSETS (in thousands of U.S. dollars) | March 31, 2024 | June 30, 2023 | | :------------------------------------ | :------------- | :------------ | | Cash and cash equivalents | $1,125,323 | $1,231,625 | | Total current assets | $4,192,328 | $2,275,231 | | Goodwill | $7,528,147 | $8,662,603 | | Acquired intangible assets | $2,624,117 | $4,080,879 | | Total assets | $16,392,676 | $17,089,200 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Total current liabilities | $2,988,155 | $3,219,614 | | Long-term debt | $8,305,670 | $8,562,096 | | Total long-term liabilities | $9,273,876 | $9,847,482 | | Total shareholders' equity | $4,130,645 | $4,022,104 | | Total liabilities and shareholders' equity | $16,392,676 | $17,089,200 | - Total assets decreased by $696.5 million from $17,089.2 million at June 30, 2023, to $16,392.7 million at March 31, 2024, primarily due to a reclassification of $2,120.3 million in assets held for sale related to the AMC Divestiture, which was partially offset by other changes[11][33][214] - Goodwill decreased by $1,134.5 million, from $8,662.6 million at June 30, 2023, to $7,528.1 million at March 31, 2024, largely due to the reclassification of $1,102.4 million to Assets held for sale related to the AMC Divestiture[11][58][214] Condensed Consolidated Statements of Income This section outlines the company's financial performance over specific periods, including revenues, expenses, and net income | (In thousands of U.S. dollars) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Total revenues | $1,447,131 | $1,244,674 | $4,407,428 | $2,994,150 | | Gross profit | $1,055,774 | $874,944 | $3,203,312 | $2,104,379 | | Income from operations | $227,068 | $63,989 | $693,827 | $395,005 | | Net income for the period | $98,327 | $57,613 | $217,010 | $199,251 | | Net income attributable to OpenText | $98,285 | $57,556 | $216,861 | $199,113 | | Basic EPS attributable to OpenText | $0.36 | $0.21 | $0.80 | $0.74 | | Diluted EPS attributable to OpenText | $0.36 | $0.21 | $0.80 | $0.74 | - Total revenues for the three months ended March 31, 2024, increased by 16.3% to $1,447.1 million, compared to $1,244.7 million in the prior fiscal year, primarily driven by the Micro Focus Acquisition[13][248][266] - Net income attributable to OpenText for the three months ended March 31, 2024, rose to $98.3 million from $57.6 million in the prior fiscal year, while diluted EPS increased to $0.36 from $0.21[13][248] Condensed Consolidated Statements of Comprehensive Income This section presents the company's total comprehensive income, encompassing net income and other comprehensive income items not recognized in profit or loss | (In thousands of U.S. dollars) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income for the period | $98,327 | $57,613 | $217,010 | $199,251 | | Total other comprehensive income (loss), net for the period | $10,454 | $(32,086) | $(19,486) | $(25,455) | | Total comprehensive income | $108,781 | $25,527 | $197,524 | $173,796 | | Total comprehensive income attributable to OpenText | $108,739 | $25,470 | $197,375 | $173,658 | - Total comprehensive income attributable to OpenText significantly increased to $108.7 million for the three months ended March 31, 2024, from $25.5 million in the prior year, driven by higher net income and a positive shift in foreign currency translation adjustments[14] Condensed Consolidated Statements of Shareholders' Equity This section details changes in the company's shareholders' equity, including common shares, treasury stock, retained earnings, and accumulated other comprehensive income | (In thousands of U.S. dollars and shares) | Balance as of Dec 31, 2023 | Balance as of Mar 31, 2024 | | :---------------------------------------- | :------------------------- | :------------------------- | | Common Shares (in thousands) | 271,855 | 272,562 | | Common Shares Amount | $2,261,856 | $2,276,758 | | Treasury Stock Shares (in thousands) | (4,400) | (3,377) | | Treasury Stock Amount | $(179,089) | $(133,606) | | Retained Earnings | $2,029,643 | $2,059,060 | | Accumulated Other Comprehensive Income | $(83,499) | $(73,045) | | Total | $4,030,347 | $4,130,645 | - Total shareholders' equity increased by $11.9 million from $4,022.1 million at June 30, 2023, to $4,130.6 million at March 31, 2024, primarily due to net income for the period and issuance of common shares under employee plans, partially offset by dividends declared and other comprehensive losses[11][18][20] Condensed Consolidated Statements of Cash Flows This section reports the company's cash inflows and outflows from operating, investing, and financing activities over specific periods | (In thousands of U.S. dollars) | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by operating activities | $782,471 | $663,904 | | Net cash used in investing activities | $(124,600) | $(5,625,003) | | Net cash provided by (used in) financing activities | $(760,358) | $4,662,276 | | Decrease in cash, cash equivalents and restricted cash during the period | $(106,469) | $(296,191) | | Cash, cash equivalents and restricted cash at end of the period | $1,127,483 | $1,399,720 | - Net cash provided by operating activities increased by $118.6 million to $782.5 million for the nine months ended March 31, 2024, compared to $663.9 million in the prior year, driven by higher net income and changes in working capital[23][393] - Net cash used in investing activities significantly decreased by $5.5 billion to $124.6 million for the nine months ended March 31, 2024, primarily due to the absence of the $5.7 billion cash consideration paid for the Micro Focus Acquisition in the prior fiscal year[23][396] - Net cash used in financing activities was $760.4 million for the nine months ended March 31, 2024, a decrease of $5.4 billion compared to the prior year's $4.7 billion provided, mainly due to debt repayments and reduced proceeds from debt issuance[23][398] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements NOTE 1—BASIS OF PRESENTATION This note outlines the basis for preparing the Condensed Consolidated Financial Statements, including the consolidation of Open Text Corporation and its subsidiaries, the use of U.S. GAAP, and the inclusion of Micro Focus International Limited's results from February 1, 2023. It also details the recent divestiture of the AMC business, classified as held for sale, and the significant estimates and judgments involved in financial reporting - The financial statements are prepared in accordance with U.S. GAAP and include the consolidated results of Micro Focus International Limited from February 1, 2023[29][31] - The Application Modernization and Connectivity (AMC) business was sold on May 1, 2024, for $2.275 billion in cash. As of March 31, 2024, its assets and liabilities were reclassified as 'held for sale' on the balance sheet[32][33][211] - Key estimates and judgments in financial statements include revenue recognition, income taxes, goodwill impairment, valuation of acquired intangible assets, and contingencies[30] NOTE 2—ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS This note details the Company's accounting policies, specifically the criteria for 'held for sale' classification, and discusses recent accounting pronouncements. It highlights the adoption of ASU 2022-04 on supplier finance programs and the ongoing evaluation of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes) for potential future impacts - Assets and liabilities are classified as 'held for sale' when they are available for immediate sale and a sale is probable within one year, measured at the lower of carrying amount or fair value less costs to sell[34] - The Company adopted ASU 2022-04 (Supplier Finance Program Obligations) as of July 1, 2023, with no material impact on financial statements[35] - The Company is evaluating the potential impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes), which are effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively[36][37][38] NOTE 3—REVENUES This note disaggregates revenue into four streams: cloud services and subscriptions, customer support, license, and professional service and other, by significant geographic area and type of performance obligation. It also provides details on contract balances, including contract assets and deferred revenues, and incremental costs of obtaining contracts Total Revenues by Type of Performance Obligation (in thousands of U.S. dollars) | Type of Performance Obligation | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Cloud services and subscriptions | $454,528 | $435,449 | $1,355,633 | $1,248,774 | | Customer support | $691,441 | $575,884 | $2,084,916 | $1,209,743 | | Total recurring revenues | $1,145,969 | $1,011,333 | $3,440,549 | $2,458,517 | | License revenue | $200,363 | $139,722 | $662,627 | $310,230 | | Professional service and other | $100,799 | $93,619 | $304,252 | $225,403 | | Total revenues | $1,447,131 | $1,244,674 | $4,407,428 | $2,994,150 | Contract Balances (in thousands of U.S. dollars) | Contract Balance | As of March 31, 2024 | As of June 30, 2023 | | :--------------- | :------------------- | :------------------ | | Short-term contract assets | $66,124 | $71,196 | | Long-term contract assets | $42,659 | $64,553 | | Short-term deferred revenues | $1,583,638 | $1,721,781 | | Long-term deferred revenues | $170,544 | $217,771 | - Approximately $2.6 billion of revenue is expected to be recognized from remaining performance obligations on existing contracts as of March 31, 2024, with 45% expected within the next 12 months[46] NOTE 4—ALLOWANCE FOR CREDIT LOSSES This note details the activity in the allowance for credit losses on accounts receivable and contract assets. The allowance for credit losses on accounts receivable decreased from $13.8 million at June 30, 2023, to $11.4 million at March 31, 2024, partly due to reclassification to assets held for sale Allowance for Credit Losses on Accounts Receivable (in thousands of U.S. dollars) | Activity | Amount | | :-------------------------------- | :----- | | Balance as of June 30, 2023 | $13,828 | | Credit loss expense (recovery) | $7,149 | | Write-off / adjustments | $(8,527) | | Reclassification to Assets held for sale | $(1,060) | | Balance as of March 31, 2024 | $11,390 | - Unbilled receivables were $68.5 million as of March 31, 2024, up from $66.5 million at June 30, 2023[48] - Allowance for credit losses for contract assets increased from $0.3 million at June 30, 2023, to $1.3 million at March 31, 2024[48] NOTE 5—PROPERTY AND EQUIPMENT This note provides a breakdown of property and equipment, net of accumulated depreciation, and reports the sale of a company-owned facility. The net book value of property and equipment decreased from $356.9 million at June 30, 2023, to $346.1 million at March 31, 2024, partly due to reclassification to assets held for sale and the sale of a facility Property and Equipment, Net (in thousands of U.S. dollars) | Category | As of March 31, 2024 (Net) | As of June 30, 2023 (Net) | | :------------------------ | :------------------------- | :------------------------ | | Computer hardware | $131,401 | $132,269 | | Computer software | $35,695 | $43,776 | | Capitalized software development costs | $96,165 | $94,032 | | Leasehold improvements | $30,429 | $28,886 | | Land and buildings | $39,507 | $44,021 | | Furniture, equipment and other | $12,876 | $13,920 | | Total | $346,073 | $356,904 | - During the three months ended March 31, 2024, the Company sold a facility with a carrying value of $4.5 million, recognizing a gain of $1.0 million[51] NOTE 6—LEASES This note provides details on the Company's operating and finance leases, including balance sheet information, weighted-average terms and discount rates, lease costs, and supplemental cash flow information. Operating lease right-of-use assets and liabilities decreased, partly due to reclassification to assets held for sale related to the AMC Divestiture Operating Lease Information (in thousands of U.S. dollars) | Category | As of March 31, 2024 | As of June 30, 2023 | | :------- | :------------------- | :------------------ | | Operating lease right of use assets | $229,327 | $285,723 | | Operating lease liabilities (current) | $80,960 | $91,425 | | Operating lease liabilities (non-current) | $224,984 | $271,579 | | Total operating lease liabilities | $305,944 | $363,004 | Weighted-Average Lease Terms and Discount Rates | Category | As of March 31, 2024 | As of June 30, 2023 | | :------- | :------------------- | :------------------ | | Weighted-average remaining lease term (Operating leases) | 5.23 years | 5.62 years | | Weighted-average discount rate (Operating leases) | 4.86 % | 4.66 % | - Total lease cost for the nine months ended March 31, 2024, was $65.1 million, up from $45.0 million in the prior year[55] NOTE 7—GOODWILL This note summarizes the changes in goodwill, which decreased from $8,662.6 million at June 30, 2023, to $7,528.1 million at March 31, 2024. The primary driver for this decrease was the reclassification of $1,102.4 million to Assets held for sale related to the AMC Divestiture Changes in Goodwill (in thousands of U.S. dollars) | Activity | Amount | | :-------------------------------- | :----- | | Balance as of June 30, 2023 | $8,662,603 | | Acquisition of Micro Focus (adjustments) | $(32,063) | | Impact of foreign exchange rate changes | $(1,276) | | Other acquisition | $1,250 | | Reclassification to Assets held for sale | $(1,102,367) | | Balance as of March 31, 2024 | $7,528,147 | - The decrease in goodwill is primarily due to the reclassification of $1,102.4 million to Assets held for sale related to the AMC Divestiture[59] NOTE 8—ACQUIRED INTANGIBLE ASSETS This note provides a breakdown of acquired intangible assets, net of accumulated amortization, and their estimated future amortization expense. Total net acquired intangible assets decreased from $4,080.9 million at June 30, 2023, to $2,624.1 million at March 31, 2024, largely due to reclassification to assets held for sale and amortization Acquired Intangible Assets, Net (in thousands of U.S. dollars) | Category | As of March 31, 2024 (Net) | As of June 30, 2023 (Net) | | :------- | :------------------------- | :------------------------ | | Technology assets | $851,212 | $1,429,392 | | Customer assets | $1,772,905 | $2,651,487 | | Total | $2,624,117 | $4,080,879 | - The decrease in acquired intangible assets is primarily due to reclassification to Assets held for sale related to the AMC Divestiture ($930.7 million) and fully amortized intangible assets[60][61][214] Estimated Future Amortization Expense (in thousands of U.S. dollars) | Fiscal years ending June 30, | Amount | | :--------------------------- | :----- | | 2024 (three months ended) | $145,582 | | 2025 | $509,456 | | 2026 | $466,019 | | 2027 | $395,665 | | 2028 | $378,007 | | 2029 and Thereafter | $729,388 | | Total | $2,624,117 | NOTE 9—PREPAID EXPENSES AND OTHER ASSETS This note details the components of prepaid expenses and other assets, both current and long-term. It highlights the reclassification of certain assets to 'held for sale' due to the AMC Divestiture and provides information on capitalized costs to obtain contracts, investments, and available-for-sale financial assets Prepaid Expenses and Other Current Assets (in thousands of U.S. dollars) | Category | As of March 31, 2024 | As of June 30, 2023 | | :------- | :------------------- | :------------------ | | Deposits and restricted cash | $3,809 | $2,621 | | Capitalized costs to obtain a contract | $42,279 | $39,685 | | Short-term prepaid expenses and other current assets | $165,358 | $175,879 | | Derivative asset | $815 | $3,547 | | Total | $212,261 | $221,732 | Other Assets (Long-Term) (in thousands of U.S. dollars) | Category | As of March 31, 2024 | As of June 30, 2023 | | :------- | :------------------- | :------------------ | | Deposits and restricted cash | $19,031 | $20,418 | | Capitalized costs to obtain a contract | $68,020 | $57,522 | | Investments | $124,123 | $147,974 | | Available-for-sale financial assets | $40,615 | $39,858 | | Long-term prepaid expenses and other long-term assets | $62,791 | $76,546 | | Total | $314,580 | $342,318 | - The Company's share of net loss from equity method investments was $(0.8) million for the three months and $(19.0) million for the nine months ended March 31, 2024[67] NOTE 10—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES This note details the components of current and long-term accounts payable and accrued liabilities. Total current accounts payable and accrued liabilities decreased from $996.3 million at June 30, 2023, to $898.6 million at March 31, 2024, partly due to reclassification to liabilities held for sale Accounts Payable and Accrued Liabilities (Current) (in thousands of U.S. dollars) | Category | As of March 31, 2024 | As of June 30, 2023 | | :------- | :------------------- | :------------------ | | Accounts payable—trade | $169,451 | $162,720 | | Accrued salaries, incentives and commissions | $264,623 | $333,543 | | Accrued liabilities | $193,427 | $239,817 | | Derivative liability | $176,169 | $161,191 | | Total | $898,611 | $996,261 | Long-Term Accrued Liabilities (in thousands of U.S. dollars) | Category | As of March 31, 2024 | As of June 30, 2023 | | :------- | :------------------- | :------------------ | | Amounts payable in respect of restructuring and other special charges | $9,141 | $8,875 | | Other accrued liabilities | $15,596 | $17,749 | | Asset retirement obligations | $23,294 | $25,337 | | Total | $48,031 | $51,961 | - The present value of asset retirement obligations was $29.2 million as of March 31, 2024, inclusive of $0.7 million reclassified to Liabilities held for sale[73] NOTE 11—LONG-TERM DEBT This note provides a detailed breakdown of the Company's long-term debt, including Senior Unsecured Fixed Rate Notes, Senior Secured Fixed Rate Notes, Term Loan B, Revolver, and Acquisition Term Loan. It highlights changes in outstanding balances, interest rates, and debt extinguishment losses, and notes subsequent debt prepayments using proceeds from the AMC Divestiture Total Debt (in thousands of U.S. dollars) | Debt Instrument | As of March 31, 2024 | As of June 30, 2023 | | :-------------- | :------------------- | :------------------ | | Senior Notes 2031 | $650,000 | $650,000 | | Senior Notes 2030 | $900,000 | $900,000 | | Senior Notes 2029 | $850,000 | $850,000 | | Senior Notes 2028 | $900,000 | $900,000 | | Senior Secured Notes 2027 | $1,000,000 | $1,000,000 | | Term Loan B | $940,000 | $947,500 | | Acquisition Term Loan | $3,290,188 | $3,567,075 | | Revolver | $— | $275,000 | | Total principal payments due | $8,530,188 | $9,089,575 | | Non-current portion of long-term debt | $8,305,670 | $8,562,096 | - The Company recognized a loss on debt extinguishment of $10.8 million for the three and nine months ended March 31, 2024, due to optional repayments of the Acquisition Term Loan[77][106] - Subsequent to the quarter, on May 1, 2024, the Company announced plans to prepay $2.0 billion of aggregate outstanding debt, including $940 million of Term Loan B and $1.06 billion of the Acquisition Term Loan, using proceeds from the AMC Divestiture[93][103][230] NOTE 12—PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS This note details the Company's defined benefit and other post-retirement plans, primarily located outside Canada and the United States, with a significant portion in Germany. It outlines the components of net pension expense, which increased for both the three and nine months ended March 31, 2024, compared to the prior year - The Company has 52 pension and other post-retirement plans, with approximately 61% of total net benefit pension obligations in Germany[107] Net Pension Expense (in thousands of U.S. dollars) | Component | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :-------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Service cost | $2,789 | $2,084 | $8,342 | $4,191 | | Interest cost | $3,092 | $2,208 | $9,303 | $4,210 | | Expected return of plan assets | $(2,864) | $(1,946) | $(8,575) | $(2,780) | | Amortization of actuarial (gains) losses | $179 | $60 | $509 | $185 | | Net pension expense | $3,196 | $2,406 | $9,579 | $5,806 | NOTE 13—SHARE CAPITAL, OPTION PLANS AND SHARE-BASED PAYMENTS This note details the Company's share capital, cash dividends, treasury stock activities, and various share-based payment plans, including stock options, Performance Share Units (PSUs), Restricted Share Units (RSUs), Deferred Share Units (DSUs), and the Employee Stock Purchase Plan (ESPP). It also announces a new $250 million share repurchase plan for Fiscal 2024 - Cash dividends of $0.25 per Common Share ($67.3 million total) were declared and paid for the three months ended March 31, 2024, and $0.75 per Common Share ($200.7 million total) for the nine months[111] - A new Fiscal 2024 Repurchase Plan was authorized on April 30, 2024, allowing for the repurchase of up to $250 million of Common Shares over a 12-month period[117][231] Total Share-Based Compensation Expense (in thousands of U.S. dollars) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Stock Options | $3,580 | $3,908 | $13,840 | $13,217 | | Performance Share Units | $6,999 | $4,763 | $19,816 | $14,023 | | Restricted Share Units (LTIP) | $2,489 | $2,480 | $8,404 | $7,299 | | Restricted Share Units (other) | $21,002 | $23,316 | $64,673 | $46,673 | | Deferred Share Units (directors) | $776 | $889 | $2,378 | $3,138 | | Employee Stock Purchase Plan | $1,196 | $1,012 | $4,201 | $4,048 | | Total share-based compensation expense | $36,042 | $36,368 | $113,312 | $88,398 | NOTE 14—GUARANTEES AND CONTINGENCIES This note outlines the Company's contractual obligations, guarantees, indemnifications, and ongoing legal proceedings and contingencies. It details the CRA tax dispute, Carbonite class action complaint, and Carbonite vs. Realtime Data patent litigation, providing updates on their status and potential financial impacts Contractual Obligations (in thousands of U.S. dollars) | Category | Total | April 1, 2024 - June 30, 2024 | July 1, 2024 - June 30, 2026 | July 1, 2026 - June 30, 2028 | July 1, 2028 and beyond | | :------- | :----------- | :---------------------------- | :--------------------------- | :--------------------------- | :---------------------- | | Long-term debt obligations | $11,186,995 | $162,868 | $2,012,561 | $2,867,179 | $6,144,387 | | Purchase obligations for contracts not accounted for as lease obligations | $384,173 | $76,161 | $288,756 | $19,256 | $— | | Total | $11,571,168 | $239,029 | $2,301,317 | $2,886,435 | $6,144,387 | - The Company is contesting CRA reassessments for Fiscal 2012-2016, with a potential aggregate liability limited to $79 million for penalties, interest, and provincial taxes. $33 million has been provisionally paid[142] - A class action complaint against Carbonite (acquired by OpenText) reached a preliminary settlement approval on February 1, 2024, expected to be substantially covered by insurance[149] - The patent infringement lawsuit 'Carbonite vs Realtime Data' was fully resolved as Realtime Data dismissed its appeal after the U.S. Court of Appeals for the Federal Circuit affirmed patent invalidity on August 2, 2023[150] NOTE 15—INCOME TAXES This note discusses the Company's effective tax rates, which varied significantly between periods due to factors like valuation allowances, foreign tax credits, R&D credits, U.S. BEAT, and uncertain tax positions. It also provides details on unrecognized tax benefits, ongoing tax audits in major jurisdictions, and the State Aid Matter in the UK - The effective tax rate for the three months ended March 31, 2024, was a provision of 5.8%, compared to a provision of (27.5)% in the prior year, influenced by tax benefits and U.S. BEAT[151][152] - The gross amount of unrecognized tax benefits accrued was $187.3 million as of March 31, 2024, with a potential decrease of $34.5 million in the next 12 months[156] - The Company is subject to income tax audits in Canada (earliest fiscal year 2012), United States (2020), United Kingdom (2015), and Germany (2016)[157] - The State Aid Matter in the UK, related to 'Financing Company Partial Exemption' legislation, is under appeal, with a long-term income tax recoverable of $44.3 million recognized[158][159][160] NOTE 16—FAIR VALUE MEASUREMENT This note defines fair value and establishes a three-level hierarchy for valuation inputs. It summarizes the fair value of financial instruments, including available-for-sale financial assets and derivative instruments, and provides a reconciliation of changes in Level 3 fair value measurements - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs reflecting management's estimates)[162][167] Fair Value of Financial Instruments (in thousands of U.S. dollars) | Instrument | Fair Value Hierarchy | March 31, 2024 | June 30, 2023 | | :--------- | :------------------- | :------------- | :------------ | | Available-for-sale financial assets | Level 2 | $15,803 | $15,231 | | Available-for-sale financial assets | Level 3 | $24,812 | $24,627 | | Derivative asset | Level 2 | $815 | $3,547 | | Derivative liability | Level 2 | $(176,169) | $(161,191) | | Senior Notes | Level 2 | $(4,004,164) | $(3,827,888) | - Level 3 available-for-sale financial assets, primarily insurance contracts, increased from $24.6 million at June 30, 2023, to $24.8 million at March 31, 2024[164][166] NOTE 17—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES This note describes the Company's derivative instruments and hedging activities, including non-designated hedges (cross currency swaps), net investment hedges (EUR/USD cross currency swaps), and cash flow hedges (foreign currency forward contracts for Canadian dollar payroll). It provides the fair values of outstanding derivatives and their effects on financial performance - The Company uses non-designated cross currency swaps and designated net investment hedges (7-year EUR/USD cross currency swaps) to mitigate foreign currency risks related to the Micro Focus Acquisition[171][172][173][174] - Cash flow hedges are used to limit foreign exchange fluctuations on Canadian dollar payroll expenses, with notional amounts of $96.2 million as of March 31, 2024[177][178][180] Fair Value of Derivative Instruments (in thousands of U.S. dollars) | Instrument | As of March 31, 2024 (Asset) | As of March 31, 2024 (Liability) | As of June 30, 2023 (Asset) | As of June 30, 2023 (Liability) | | :--------- | :--------------------------- | :------------------------------- | :-------------------------- | :------------------------------ | | Total derivatives designated as hedges | $243 | $(99,283) | $2,126 | $(87,855) | | Total derivatives not designated as hedges | $572 | $(76,886) | $1,421 | $(73,336) | | Total derivatives | $815 | $(176,169) | $3,547 | $(161,191) | NOTE 18—SPECIAL CHARGES (RECOVERIES) This note details special charges and recoveries, which include costs related to restructuring initiatives (Micro Focus Acquisition Restructuring Plan, Fiscal 2022 Restructuring Plan), divestiture-related costs, and acquisition-related costs. Total special charges decreased for the three and nine months ended March 31, 2024, compared to the prior year Special Charges (Recoveries) (in thousands of U.S. dollars) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Micro Focus Acquisition Restructuring Plan | $9,597 | $11,173 | $61,221 | $11,173 | | Divestiture-related costs | $7,331 | $— | $14,313 | $— | | Acquisition-related costs | $676 | $34,795 | $1,796 | $45,383 | | Other charges (recoveries) | $2,109 | $29,705 | $10,726 | $36,693 | | Total | $19,561 | $74,350 | $87,521 | $98,937 | - The Micro Focus Acquisition Restructuring Plan is expected to cost $155.0 million to $170.0 million, with $133.5 million incurred to date, and is anticipated to be completed by the end of Fiscal 2024[189][259] - Divestiture-related costs for the AMC Divestiture were $7.3 million for the three months and $14.3 million for the nine months ended March 31, 2024[197] NOTE 19—ACQUISITIONS AND DIVESTITURES This note details the Company's acquisition and divestiture activities. It covers the Fiscal 2024 acquisition of KineMatik Ltd., the Fiscal 2023 acquisition of Micro Focus International Limited (including its purchase price allocation), and the Fiscal 2024 divestiture of the AMC business, including the reclassification of its assets and liabilities as held for sale - In Fiscal 2024, OpenText acquired KineMatik Ltd., a provider of automated business process and project management solutions, on August 23, 2023[201] - The Micro Focus Acquisition, completed on January 31, 2023, for $6.2 billion, significantly expanded OpenText's operations, with its results consolidated from February 1, 2023[202][204][252] Micro Focus Purchase Price Allocation (in thousands of U.S. dollars) | Category | Amount | | :------- | :----- | | Cash and cash equivalents | $541,584 | | Goodwill | $3,385,572 | | Intangible customer assets | $2,162,400 | | Intangible technology assets | $1,392,300 | | Net assets acquired | $6,246,437 | - The AMC business was sold on May 1, 2024, for $2.275 billion. As of March 31, 2024, its assets ($2,120.3 million) and liabilities ($228.1 million) were classified as held for sale[211][212][214][253] NOTE 20—ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) This note provides a reconciliation of changes in accumulated other comprehensive income (loss) for the three and nine months ended March 31, 2024 and 2023. The balance improved from $(83.5) million at December 31, 2023, to $(73.0) million at March 31, 2024, primarily due to positive foreign currency translation adjustments Accumulated Other Comprehensive Income (Loss) (in thousands of U.S. dollars) | Component | Balance as of Dec 31, 2023 | Total OCI (loss) for Q3 FY24 | Balance as of Mar 31, 2024 | | :-------- | :------------------------- | :--------------------------- | :------------------------- | | Foreign Currency Translation Adjustments | $(74,493) | $11,765 | $(62,728) | | Cash Flow Hedges | $1,142 | $(1,516) | $(374) | | Available-for-Sale Financial Assets | $(373) | $90 | $(283) | | Defined Benefit Pension Plans | $(9,775) | $115 | $(9,660) | | Total Accumulated Other Comprehensive Income (Loss) | $(83,499) | $10,454 | $(73,045) | - Net foreign currency translation adjustments contributed a gain of $11.8 million for the three months ended March 31, 2024, compared to a loss of $(28.6) million in the prior year[14][215] NOTE 21—SUPPLEMENTAL CASH FLOW DISCLOSURES This note provides supplemental cash flow disclosures, detailing cash paid for interest and income taxes, and cash received for interest for the nine months ended March 31, 2024 and 2023 Supplemental Cash Flow Disclosures (in thousands of U.S. dollars) | Category | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------- | :------------------------------- | :------------------------------- | | Cash paid during the period for interest | $409,452 | $196,238 | | Cash received during the period for interest | $31,587 | $41,013 | | Cash paid during the period for income taxes | $198,271 | $122,991 | - Cash paid for interest more than doubled to $409.5 million for the nine months ended March 31, 2024, from $196.2 million in the prior year[217] NOTE 22—OTHER INCOME (EXPENSE), NET This note details the components of other income (expense), net, which shifted from a net income of $85.7 million for the three months ended March 31, 2023, to $9.95 million for the same period in 2024. For the nine months, it changed from $59.8 million income to $(38.7) million expense, primarily due to changes in foreign exchange gains/losses and derivative valuations Other Income (Expense), Net (in thousands of U.S. dollars) | Component | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :-------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Foreign exchange gains (losses) | $3,806 | $55,558 | $(4,384) | $54,257 | | Unrealized gains (losses) on derivatives not designated as hedges | $16,671 | $(102,713) | $(3,551) | $(112,567) | | Realized gains on derivatives not designated as hedges | $— | $137,471 | $— | $137,471 | | OpenText share in net loss of equity investees | $(835) | $(4,724) | $(19,013) | $(11,547) | | Loss on debt extinguishment | $(10,803) | $(21) | $(10,803) | $(8,152) | | Total other income (expense), net | $9,950 | $85,706 | $(38,664) | $59,824 | - Foreign exchange gains decreased significantly from $55.6 million in Q3 FY23 to $3.8 million in Q3 FY24, and shifted to a loss of $(4.4) million for the nine months ended March 31, 2024[218] - Unrealized gains on derivatives not designated as hedges improved from a loss of $(102.7) million in Q3 FY23 to a gain of $16.7 million in Q3 FY24[218] NOTE 23—EARNINGS (LOSS) PER SHARE This note provides the calculation of basic and diluted earnings per share (EPS) attributable to OpenText. Basic and diluted EPS increased for both the three and nine months ended March 31, 2024, compared to the prior year, reflecting higher net income Earnings Per Share (in thousands, except per share data) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income attributable to OpenText | $98,285 | $57,556 | $216,861 | $199,113 | | Basic earnings per share attributable to OpenText | $0.36 | $0.21 | $0.80 | $0.74 | | Diluted earnings per share attributable to OpenText | $0.36 | $0.21 | $0.80 | $0.74 | | Weighted-average number of shares outstanding—basic | 272,272 | 270,441 | 271,671 | 270,143 | | Weighted-average number of shares outstanding—diluted | 273,033 | 270,650 | 272,349 | 270,173 | - Dilutive securities (stock options) had an effect of 761 thousand shares for the three months and 678 thousand shares for the nine months ended March 31, 2024[224] NOTE 24—RELATED PARTY TRANSACTIONS This note outlines the Company's procedure for approving related party transactions, requiring review and approval by independent members of the Audit Committee. It discloses that Mr. Stephen Sadler, a Board member, earned $5 thousand in consulting fees for acquisition-related business activities during the nine months ended March 31, 2024 - Related party transactions are reviewed and approved by a majority of the independent members of the Audit Committee[226] - Mr. Stephen Sadler, a Board member, received $5 thousand in consulting fees for acquisition-related business activities during the nine months ended March 31, 2024[227] NOTE 25—SUBSEQUENT EVENTS This note details significant events occurring after March 31, 2024, including the declaration of a quarterly cash dividend, the completion of the AMC business divestiture, the prepayment of $2.0 billion in debt using divestiture proceeds, and the authorization of a new $250 million share repurchase plan (Fiscal 2024 Repurchase Plan) with an associated Normal Course Issuer Bid (NCIB) - A quarterly dividend of $0.25 per Common Share was declared on April 30, 2024, payable on June 18, 2024[228] - The sale of the AMC business to Rocket Software was completed on May 1, 2024, for $2.275 billion in cash, with OpenText providing transition services for up to 24 months[229] - On May 1, 2024, the Company provided notice to prepay $2.0 billion of its outstanding debt, including $1.06 billion of the Acquisition Term Loan and $940 million of Term Loan B, using net proceeds from the AMC Divestiture[230] - A new Fiscal 2024 Repurchase Plan was authorized on April 30, 2024, allowing for the repurchase of up to $250 million of Common Shares until May 6, 2025, including through a Normal Course Issuer Bid (NCIB) on the TSX[231][232][233] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on OpenText's financial condition and results of operations, including an executive overview of business strategy, quarterly performance, and the impact of acquisitions and divestitures. It details revenue and cost trends by product type and geography, analyzes operating expenses, and reconciles GAAP to Non-GAAP financial measures. The section also covers liquidity, capital resources, debt, and ongoing legal and tax contingencies Executive Overview OpenText, an Information Management company, provides software and services to digital businesses, focusing on growth in earnings and cash flows through organic initiatives, innovations, and acquisitions. The executive overview highlights the company's comprehensive platform, Q3 Fiscal 2024 performance, recent acquisitions (Micro Focus) and divestitures (AMC Business), geopolitical impacts, and future outlook with an emphasis on cloud innovation and R&D investments - OpenText is an Information Management company providing software and services to empower digital businesses, with a focus on growth in earnings and cash flows[243][256] Q3 Fiscal 2024 Key Financial Highlights (YoY Change) | Metric | Q3 FY24 Value | YoY Change | | :----------------------------- | :------------ | :--------- | | Total revenue | $1,447.1 M | +16.3% | | Total annual recurring revenue | $1,146.0 M | +13.3% | | Cloud services and subscriptions revenue | $454.5 M | +4.4% | | GAAP-based gross margin | 73.0% | +2.7 pp | | Non-GAAP-based gross margin | 76.7% | +0.9 pp | | GAAP-based net income attributable to OpenText | $98.3 M | +70.6% | | Non-GAAP-based net income attributable to OpenText | $257.0 M | +29.9% | | GAAP-based EPS, diluted | $0.36 | +71.4% | | Non-GAAP-based EPS, diluted | $0.94 | +28.8% | - Operating cash flow for the nine months ended March 31, 2024, was $782.5 million, up 17.9% YoY[250] - The Micro Focus Acquisition (Jan 31, 2023) significantly expanded OpenText's scope, contributing to revenue growth but also integration costs and a restructuring plan targeting 8% workforce reduction ($155 million-$170 million cost)[252][259] - The AMC business divestiture (May 1, 2024) for $2.275 billion will fund $2.0 billion in debt prepayments, with no material impact expected on FY24 operating results[253][254][260] Critical Accounting Policies and Estimates This section identifies the critical accounting policies and estimates that require significant judgment and assumptions, including revenue recognition, goodwill, acquired intangibles, and income taxes. These policies are crucial for understanding the Company's reported financial results, as actual outcomes may differ from estimates - Key critical accounting policies and estimates include revenue recognition, goodwill, acquired intangibles, and income taxes, which involve complex judgments and estimates[262] Results of Operations This section provides a detailed analysis of OpenText's financial performance, highlighting the significant impact of the Micro Focus Acquisition on period-over-period comparability. It breaks down revenues, costs, and gross margins by product type and geography, and analyzes changes in operating expenses, other income/expense, interest, and income taxes for the three and nine months ended March 31, 2024, compared to the prior year - Total revenues increased by $202.5 million (16.3%) for the three months and $1,413.3 million (47.2%) for the nine months ended March 31, 2024, primarily due to the Micro Focus Acquisition[266][271][275] - GAAP-based gross margin improved to 73.0% for the three months and 72.7% for the nine months ended March 31, 2024, from 70.3% in the prior year periods[275] - Income from operations increased significantly to $227.1 million for the three months and $693.8 million for the nine months ended March 31, 2024, compared to $64.0 million and $395.0 million, respectively, in the prior year[275] Revenues, Cost of Revenues and Gross Margin by Product Type This section analyzes the company's revenue, cost of revenues, and gross margin performance across different product types, highlighting the impact of acquisitions and operational changes Cloud Services and Subscriptions Cloud services and subscriptions revenues increased by 4.4% to $454.5 million for the three months and 8.6% to $1,355.6 million for the nine months ended March 31, 2024, driven by the Micro Focus Acquisition. However, the GAAP-based gross margin decreased to 59.0% (Q3 FY24) and 60.3% (9M FY24) from 63.8% and 66.1% respectively, due to increased third-party network usage fees and labor costs Cloud Services and Subscriptions Performance (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $454,528 | $435,449 | $1,355,633 | $1,248,774 | | Cost of Revenues | $186,400 | $157,658 | $537,960 | $423,771 | | GAAP-based Gross Margin % | 59.0% | 63.8% | 60.3% | 66.1% | - Cloud services contracts greater than $1.0 million increased to 28 in Q3 FY24 from 13 in Q3 FY23, and to 97 in 9M FY24 from 54 in 9M FY23[281][284] - The cloud renewal rate (excluding Carbonite, Zix, Micro Focus) decreased to 92% in Q3 FY24 from 95% in Q3 FY23[277] Customer Support Customer support revenues increased by 20.1% to $691.4 million for the three months and 72.3% to $2,084.9 million for the nine months ended March 31, 2024, primarily due to the Micro Focus Acquisition. The GAAP-based gross margin percentage remained stable at 89.2% (Q3 FY24) and 89.3% (9M FY24), despite increased labor-related costs Customer Support Performance (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $691,441 | $575,884 | $2,084,916 | $1,209,743 | | Cost of Revenues | $74,639 | $67,067 | $223,027 | $123,010 | | GAAP-based Gross Margin % | 89.2% | 88.4% | 89.3% | 89.8% | - The Customer support renewal rate remained stable at 95% in Q3 FY24 compared to Q3 FY23 (excluding Carbonite, Zix, Micro Focus)[286] License License revenues significantly increased by 43.4% to $200.4 million for the three months and 113.6% to $662.6 million for the nine months ended March 31, 2024, primarily due to the Micro Focus Acquisition and the grant of certain IP rights. The GAAP-based gross margin remained stable at 96.6% (Q3 FY24) and 97.5% (9M FY24) License Performance (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $200,363 | $139,722 | $662,627 | $310,230 | | Cost of Revenues | $6,769 | $3,840 | $16,591 | $10,461 | | GAAP-based Gross Margin % | 96.6% | 97.3% | 97.5% | 96.6% | - The number of license contracts greater than $0.5 million increased to 55 in Q3 FY24 (from 42 in Q3 FY23) and to 189 in 9M FY24 (from 102 in 9M FY23)[297][300] Professional Service and Other Professional service and other revenues increased by 7.7% to $100.8 million for the three months and 35.0% to $304.3 million for the nine months ended March 31, 2024, primarily due to the Micro Focus Acquisition. The GAAP-based gross margin percentage significantly improved to 25.1% (Q3 FY24) and 24.1% (9M FY24) from 16.1% and 17.3% respectively, due to decreased labor-related costs in Q3 and increased revenues Professional Service and Other Performance (in thousands of U.S. dollars) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Nine Months Ended March 31, 2024 | Nine Months Ended March 31, 2023 | | :----- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Revenues | $100,799 | $93,619 | $304,252 | $225,403 | | Cost of Revenues | $75,455 | $78,526 | $230,836 | $186,390 | | GAAP-based Gross Margin % | 25.1% | 16.1% | 24.1% | 17.3% | Amortization of Acquired Technology-based Intangible Assets Amortization of acquired technology-based intangible assets decreased by $14.5 million for the three months ended March 31, 2024, but increased by $49.6 million for the nine months, compared to the prior year. This was due to a mix of fully amortized assets, reduced amortization from the AMC Divestiture's held-for-sale classification, and new amortization from the Micro Focus Acquisition Amortization of Acquired Technology-based Intangible Assets (in thousands of U.S. dollars) | Period | 2024 | 2023 | Change (increase/decrease) | | :----- | :--- | :--- | :----------------------- | | Three Months Ended March 31, | $48,094 | $62,639 | $(14,545) | | Nine Months Ended March 31, | $195,702 | $146,139 | $49,563 | - The decrease in Q3 FY24 amortization was primarily due to intangible assets from previous acquisitions becoming fully amortized and reduced amortization related to the AMC Divestiture's held for sale classification[309] - The increase in 9M FY24 amortization was primarily due to newly acquired technology-based intangible assets from the Micro Focus Acquisition[310] Operating Expenses This section analyzes the company's operating expenses, including research and development, sales and marketing, general and administrative, depreciation, and amortization of acquired customer-based intangible asset