This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of theU.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of theU.S. Securities Act of 1933, as amended (the Securities Act), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. When used in this report, the words "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", "may", "could", "would", "might", "will" and other similar language, as they relate toOpen Text Corporation ("OpenText" or the "Company"), are intended to identify forward-looking statements under applicable securities laws. Specific forward-looking statements in this report include, but are not limited to: (i) statements about our focus in the fiscal year beginningJuly 1, 2019 and endingJune 30, 2020 (Fiscal 2020) on growth in earnings and cash flows; (ii) creating value through investments in broader Information Management (IM) capabilities; (iii) our future business plans and business planning process; (iv) statements relating to business trends; (v) statements relating to distribution; (vi) the Company's presence in the cloud and in growth markets; (vii) product and solution developments, enhancements and releases and the timing thereof; (viii) the Company's financial conditions, results of operations and earnings; (ix) the basis for any future growth and for our financial performance; (x) declaration of quarterly dividends; (xi) future tax rates; (xii) the changing regulatory environment; (xiii) annual recurring revenues; (xiv) research and development and related expenditures; (xv) our building, development and consolidation of our network infrastructure; (xvi) competition and changes in the competitive landscape; (xvii) our management and protection of intellectual property and other proprietary rights; (xviii) existing and foreign sales and exchange rate fluctuations; (xix) cyclical or seasonal aspects of our business; (xx) capital expenditures; (xxi) potential legal and/or regulatory proceedings; (xxii) statements about acquisitions and their expected impact; and (xxiii) other matters. In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking, and based on our current expectations, forecasts and projections about the operating environment, economies and markets in which we operate. Forward-looking statements reflect our current estimates, beliefs and assumptions, which are based on management's perception of historic trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. The forward-looking statements contained in this report are based on certain assumptions including the following: (i) countries continuing to implement and enforce existing and additional customs and security regulations relating to the provision of electronic information for imports and exports; (ii) our continued operation of a secure and reliable business network; (iii) the stability of general economic and market conditions, currency exchange rates, and interest rates; (iv) equity and debt markets continuing to provide us with access to capital; (v) our continued ability to identify, source and finance attractive and executable business combination opportunities; and (vi) our continued compliance with third party intellectual property rights. Management's estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change. We can give no assurance that such estimates, beliefs and assumptions will prove to be correct. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed or implied by such forward-looking statements. The risks and uncertainties that may affect forward-looking statements include, but are not limited to: (i) integration of acquisitions and related restructuring efforts, including the quantum of restructuring charges and the timing thereof; (ii) the potential for the incurrence of or assumption of debt in connection with acquisitions and the impact on the ratings or outlooks of rating agencies on our outstanding debt securities; (iii) the possibility that the Company may be unable to meet its future reporting requirements under the Exchange Act, and the rules promulgated thereunder, or applicable Canadian securities regulation; (iv) the risks associated with bringing new products and services to market; (v) fluctuations in currency exchange rates (including as a result of the impact of Brexit and any policy changes resulting from trade and tariff disputes); (vi) delays in the purchasing decisions of the Company's customers; (vii) the competition the Company faces in its industry and/or marketplace; (viii) the final determination of litigation, tax audits (including tax examinations inthe United States , Canada or elsewhere) and other legal proceedings; (ix) potential exposure to greater than anticipated tax liabilities or expenses, including with respect to changes in Canadian,U.S. or international tax regimes; (x) the possibility of technical, logistical or planning issues in connection with the deployment of the Company's products or services; (xi) the continuous commitment of the Company's customers; (xii) demand for the Company's products and services; (xiii) increase in exposure to international business risks (including as a result of the impact of Brexit and any policy changes resulting from the transition from the North American Free Trade Agreement tothe United States -Mexico-Canada Agreement) as we continue to increase our international operations; (xiv) inability to raise capital at all or on not unfavorable terms in the future; (xv) downward pressure on our share price and dilutive effect of future sales or issuances of equity securities (including in connection with future acquisitions); and (xvi) potential changes in ratings or outlooks of rating agencies on our outstanding debt securities. Other factors that may affect forward-looking statements include, but are not limited to: (i) the future performance, financial and otherwise, of the Company; (ii) the ability of the Company to bring new products and services to market and to increase sales; (iii) the strength of the Company's product 42 -------------------------------------------------------------------------------- development pipeline; (iv) failure to secure and protect patents, trademarks and other proprietary rights; (v) infringement of third-party proprietary rights triggering indemnification obligations and resulting in significant expenses or restrictions on our ability to provide our products or services; (vi) failure to comply with privacy laws and regulations that are extensive, open to various interpretations and complex to implement including General Data Protection Regulation (GDPR) and Country by Country Reporting; (vii) the Company's growth and other profitability prospects; (viii) the estimated size and growth prospects of the IM market; (ix) the Company's competitive position in the IM market and its ability to take advantage of future opportunities in this market; (x) the benefits of the Company's products and services to be realized by customers; (xi) the demand for the Company's products and services and the extent of deployment of the Company's products and services in the IM marketplace; (xii) the Company's financial condition and capital requirements; (xiii) system or network failures or information security breaches in connection with the Company's offerings and information technology systems generally; and (xiv) failure to attract and retain key personnel to develop and effectively manage the Company's business. For additional information with respect to risks and other factors which could occur, see Part II, Item 1A "Risk Factors" herein and the Company's Annual Report on Form 10-K, including Part I, Item 1A "Risk Factors" therein; Quarterly Reports on Form 10-Q, including Item 1A herein and other documents we file from time to time with theSecurities and Exchange Commission (SEC) and other securities regulators. Readers are cautioned not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following MD&A is intended to help readers understand our results of operations and financial condition, and is provided as a supplement to, and should be read in conjunction with, our Condensed Consolidated Financial Statements and the accompanying Notes to our Condensed Consolidated Financial Statements under Part I, Item 1 of this Quarterly Report on Form 10-Q. All dollar and percentage comparisons made herein refer to the three and six months endedDecember 31, 2019 compared with the three and six months endedDecember 31, 2018 , unless otherwise noted. Where we say "we", "us", "our", "OpenText" or "the Company", we meanOpen Text Corporation orOpen Text Corporation and its subsidiaries, as applicable. EXECUTIVE OVERVIEW OpenText is an information management company, historically focused primarily on enabling the intelligent and connect enterprise. With our recent acquisition ofCarbonite Inc. (Carbonite), we believe we have entered into the next phase of our Total Growth strategy where we have an opportunity to take advantage of Carbonite's world-class channel organization and partners, to bring our information management (IM) solutions to all size customers, including small and medium businesses (SMB) and consumers. The comprehensive OpenText IM platform and suite of software products and services provide secure and scalable solutions for global companies, SMBs, governments and consumers around the world. With our software, organizations manage a valuable asset - information: information that is made more valuable by connecting it to digital business processes, information that is enriched with analytics, information that is protected and secure throughout its entire lifecycle, information that captivates customers, and information that connects and fuels some of the world's largest digital supply chains in manufacturing, retail, and financial services. Our IM solutions are designed to enable organizations and professional consumers to secure their information so that they can collaborate with confidence, validate endpoints with all machines and the Internet of Things (IoT), stay ahead of the regulatory technology curve, identify threats that cross their networks, leverage discovery with information forensics, and gain insight and action through analytics, artificial intelligence (AI) and automation. We offer software through traditional on-premises solutions, cloud solutions or a combination of both. We believe our customers will operate in hybrid on-premises and cloud environments, and we are ready to support the delivery method the customer prefers. In providing choice and flexibility, we strive to maximize the lifetime value of the relationship with our customers. Our initial public offering was on the NASDAQ in 1996 and we were subsequently listed on theToronto Stock Exchange (TSX) in 1998. We are a multinational company and as ofDecember 31, 2019 , employed approximately 14,600 people worldwide. Our ticker symbol on both the NASDAQ and the TSX is "OTEX". Quarterly Summary: During the second quarter of Fiscal 2020 we saw the following activity: 43 --------------------------------------------------------------------------------
• Total revenue was
the prior fiscal year; up 6.3% after factoring the impact of $10.2
million of foreign exchange rate changes.
• Total annual recurring revenue, which we define as the sum of cloud
services and subscriptions revenue and customer support revenue, was
year; up 7.8% after factoring the impact of $6.9 million of foreign
exchange rate changes.
• Cloud services and subscriptions revenue was
compared to the same period in the prior fiscal year; up 14.1% after
factoring the impact of $1.8 million of foreign exchange rate changes.
• License revenue was $138.1 million , up 4.0% compared to the same period
in the prior fiscal year; up 5.6% after factoring the impact of $2.1
million of foreign exchange rate changes.
• GAAP-based EPS, diluted, was
in the prior fiscal year.
• Non-GAAP-based EPS, diluted, was $0.84 compared to $0.80 in the same
period in the prior fiscal year.
• GAAP-based gross margin was 69.9% compared to 69.0% in the same period in
the prior fiscal year.
• Non-GAAP-based gross margin was 75.5% compared to 75.7% in the same
period in the prior fiscal year.
• GAAP-based net income attributable to OpenText was
compared to $104.4 million in the same period in the prior fiscal year.
• Non-GAAP-based net income attributable to OpenText was $227.0 million
compared to $215.7 million in the same period in the prior fiscal year.
• Adjusted EBITDA was $317.0 million compared to $308.3 million in the sameperiod in the prior fiscal year.
• Operating cash flow was
31, 2019, down 4.4% from the same period in the prior fiscal year.
• Cash and cash equivalents was $675.4 million as of December 31, 2019 ,
compared to $941.0 million as of June 30, 2019 .
See "Use of Non-GAAP Financial Measures" below for definitions and
reconciliations of GAAP-based measures to Non-GAAP-based measures.
See "Acquisitions" below for the impact of acquisitions on the period-to-period
comparability of results.
Acquisitions
Our competitive position in the marketplace requires us to maintain an evolving
array of technologies, products, services and capabilities. In light of the
continually evolving marketplace in which we operate, on an ongoing basis we
regularly evaluate acquisition opportunities within our market and at any time
may be in various stages of discussions with respect to such opportunities.
Acquisition of Carbonite, Inc.
On December 24, 2019 , we acquired all of the equity interest in Carbonite, Inc.
(Carbonite), a leading provider of cloud-based subscription backup, disaster
recovery and endpoint security to SMB, consumers, and a wide variety of
partners. Total consideration for Carbonite was approximately $1.4 billion ,
comprised of $1.3 billion paid in cash (inclusive of cash acquired) and
approximately $0.1 billion currently held back and unpaid in accordance with the
purchase agreement. We believe the acquisition will increase our position in the
data protection and endpoint security space, further strengthen our cloud
capabilities and open a new route to connect with customers through Carbonite's
marquee SMB and consumer channels and products. The results of operations of
Carbonite have been consolidated with those of OpenText beginning December 24,
2019 .
Acquisition of Dynamic Solutions Group Inc. (The Fax Guys)
On December 2, 2019 , we acquired certain assets and certain liabilities of The
Fax Guys, for approximately $5.3 million , of which $1.2 million is currently
held back and unpaid in accordance with the terms of the purchase agreement. The
results of operations of The Fax Guys have been consolidated with those of
OpenText beginning December 2, 2019 .
We believe our acquisitions support our long-term strategic direction,
strengthen our competitive position, expand our customer base, provide greater
scale to accelerate innovation, grow our earnings and provide superior
shareholder value. We expect to continue to strategically acquire companies,
products, services and technologies to augment our existing business. Our
acquisitions, particularly significant ones, can affect the period-to-period
comparability of our results. See note 19 "Acquisitions" to our Condensed
Consolidated Financial Statements for more details.
Outlook for remainder of Fiscal 2020
As an organization, our management believes in delivering "Total Growth",
meaning we strive towards delivering value through organic initiatives,
innovations and acquisitions, as well as financial performance. This growth is
further enhanced
44
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through our direct and indirect sales distribution channels. With an emphasis on
improving productivity, increasing recurring revenues and expanding our margins,
we believe our "Total Growth" strategy will ultimately drive overall cash flow
generation, thus helping to fuel our disciplined capital allocation approach and
further drive our ability to deepen our account coverage and identify and
execute strategic acquisitions. With strategic acquisitions, we are better
positioned to expand our product portfolio and improve our ability to innovate
and grow organically, which then further helps us to meet our long-term growth
targets. We believe this "Total Growth" strategy is a durable model that will
create shareholder value over both the near and long-term.
We are committed to continuous innovation. Our investments in research and
development (R&D) drive product innovation, increasing the value of our
offerings to our installed customer base, which includes Global 10,000
companies, SMBs and consumers. More valuable products, coupled with our
established global partner program, lead to greater distribution and
cross-selling opportunities which further help us to achieve organic growth. On
a fiscal year to date basis, we have invested approximately $161 million or
approximately 11% of revenue in R&D, in line with our target to spend
approximately 11% to 13% of revenues for R&D this fiscal year.
The cloud is quickly becoming a business imperative. What used to be discussed
as a potential option for managing budgets, is now a strategic direction that
drives competitive positioning, product innovation, business agility, and cost
management. We are committed to continue our investment in The OpenText Cloud,
which is a purpose-built cloud environment for solutions spanning Information
Management, Compliance, and B2B Integration. Supported by a global, scalable,
and secure infrastructure, OpenText Cloud includes a foundational platform of
technology services, and packaged business applications for industry and
business processes. The OpenText Cloud enables organizations to protect and
manage information in public, private or hybrid deployments.
We remain a value oriented and disciplined strategic acquirer, having
efficiently deployed approximately $7.5 billion on acquisitions over the last 10
years. Mergers and acquisitions are one of our leading growth drivers. We
believe in creating value by focusing on acquiring strategic businesses,
integrating them into our business model and using our acquired assets to
innovate. We have developed a philosophy, which we refer to as "The OpenText
Business System", that is designed to create value by leveraging a clear set of
operational mandates for integrating newly acquired companies and assets. We see
our ability to successfully integrate acquired companies and assets into our
business as a strength and pursuing strategic acquisitions is an important
aspect to our Total Growth strategy.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires us
to make estimates, judgments and assumptions that affect the amounts reported in
the Consolidated Financial Statements. These estimates, judgments and
assumptions are evaluated on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable at that time. Actual results may differ materially from those
estimates. The policies listed below are areas that may contain key components
of our results of operations and are based on complex rules requiring us to make
judgments and estimates and consequently, we consider these to be our critical
accounting policies. Some of these accounting policies involve complex
situations and require a higher degree of judgment, either in the application
and interpretation of existing accounting literature or in the development of
estimates that affect our financial statements. The critical accounting policies
which we believe are the most important to aid in fully understanding and
evaluating our reported financial results include the following:
(i) Revenue recognition,
(ii) Goodwill ,
(iii) Acquired intangibles, and
(iv) Income taxes.
For a full discussion of all our accounting policies, please see Note 2 "Accounting Policies and Recent Accounting Pronouncements" to our Consolidated Financial Statements included in our Annual Report on Form 10-K for our fiscal year endedJune 30, 2019 . RESULTS OF OPERATIONS The following tables provide a detailed analysis of our results of operations and financial condition. For each of the periods indicated below, we present our revenues by product type, revenues by major geography, cost of revenues by product type, total gross margin, total operating margin, gross margin by product type, and their corresponding percentage of total revenue. In addition, we provide Non-GAAP measures for the periods discussed in order to provide additional information to investors that we believe will be useful as this presentation is in line with how our management assesses our Company's 45 --------------------------------------------------------------------------------
performance. See "Use of Non-GAAP Financial Measures" below for a reconciliation of GAAP-based measures to Non-GAAP-based measures. Summary of Results of Operations
Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Total Revenues by
Product Type:
License $ 138,095 $ 5,339 $ 132,756 $ 215,993 $ 6,350 $ 209,643
Cloud services and
subscriptions 248,340 29,107 219,233 485,605 58,289 427,316
Customer support 315,508 5,154 310,354 627,806 5,901 621,905
Professional service and
other 69,614 (3,274 ) 72,888 139,041 (4,483 ) 143,524
Total revenues 771,557 36,326 735,231 1,468,445 66,057 1,402,388
Total Cost of Revenues 232,385 4,363 228,022 460,893 6,558 454,335
Total GAAP-based Gross
Profit 539,172 31,963 507,209 1,007,552 59,499 948,053
Total GAAP-based Gross
Margin % 69.9 % 69.0 % 68.6 % 67.6 %
Total GAAP-based
Operating Expenses 354,432 21,155 333,277 690,299 15,405 674,894
Total GAAP-based Income
from Operations $ 184,740 $ 10,808 $ 173,932 $ 317,253 $ 44,094 $ 273,159
% Revenues by Product
Type:
License 17.9 % 18.1 % 14.7 % 15.0 %
Cloud services and
subscriptions 32.2 % 29.8 % 33.1 % 30.5 %
Customer support 40.9 % 42.2 % 42.8 % 44.3 %
Professional service and
other 9.0 % 9.9 % 9.4 % 10.2 %
Total Cost of Revenues
by Product Type:
License $ 3,050 $ (605 ) $ 3,655 $ 5,373 $ (2,154 ) $ 7,527
Cloud services and
subscriptions 103,644 14,946 88,698 205,806 29,405 176,401
Customer support 29,788 (1,485 ) 31,273 59,175 (2,563 ) 61,738
Professional service and
other 53,604 (2,426 ) 56,030 107,942 (4,884 ) 112,826
Amortization of acquired
technology-based
intangible assets 42,299 (6,067 ) 48,366 82,597 (13,246 ) 95,843
Total cost of revenues $ 232,385 $ 4,363 $ 228,022 $ 460,893 $ 6,558 $ 454,335
% GAAP-based Gross
Margin by Product Type:
License 97.8 % 97.2 % 97.5 % 96.4 %
Cloud services and
subscriptions 58.3 % 59.5 % 57.6 % 58.7 %
Customer support 90.6 % 89.9 % 90.6 % 90.1 %
Professional service and
other 23.0 % 23.1 % 22.4 % 21.4 %
Total Revenues by
Geography:(1)
Americas (2) $ 450,691 $ 29,995 $ 420,696 $ 870,401 $ 60,365 $ 810,036
EMEA (3) 252,268 8,331 243,937 462,435 4,023 458,412
Asia Pacific (4) 68,598 (2,000 ) 70,598 135,609 1,669 133,940
Total revenues $ 771,557 $ 36,326 $ 735,231 $ 1,468,445 $ 66,057 $ 1,402,388
% Revenues by Geography:
Americas (2) 58.4 % 57.2 % 59.3 % 57.8 %
EMEA (3) 32.7 % 33.2 % 31.5 % 32.7 %
Asia Pacific (4) 8.9 % 9.6 % 9.2 % 9.5 %
46
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Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Other Metrics:
GAAP-based gross
margin 69.9 % 69.0 % 68.6 % 67.6 %
GAAP-based EPS,
diluted $ 0.40 $ 0.39 $ 0.67 $ 0.52
Net income,
attributable to
OpenText $ 107,467 $ 104,432 $ 181,868 $ 140,756
Non-GAAP-based gross
margin (5) 75.5 % 75.7 % 74.4 % 74.6 %
Non-GAAP-based EPS,
diluted (5) $ 0.84 $ 0.80 $ 1.48 $ 1.40
Adjusted EBITDA (5) $ 317,015 $ 308,287 $ 571,227 $ 554,543 (1) Total revenues by geography are determined based on the location of our end
customer.
(2)
definitions and reconciliations of GAAP-based measures to Non-GAAP-based
measures.
Revenues, Cost of Revenues and Gross Margin by Product Type
1) License:
Our license revenue can be broadly categorized as perpetual licenses, term
licenses and subscription licenses, all of which are deployed on the customer's
premises (on-premise). Our license revenues are impacted by the strength of
general economic and industry conditions, the competitive strength of our
software products, and our acquisitions. Cost of license revenues consists
primarily of royalties payable to third parties.
Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
License Revenues:
Americas $ 66,261 $ 137 $ 66,124 $ 105,497 $ 100 $ 105,397
EMEA 58,101 9,236 48,865 84,793 7,584 77,209
Asia Pacific 13,733 (4,034 ) 17,767 25,703 (1,334 ) 27,037
Total License Revenues 138,095 5,339 132,756 215,993 6,350 209,643
Cost of License Revenues 3,050 (605 ) 3,655 5,373 (2,154 ) 7,527
GAAP-based License Gross
Profit $ 135,045 $ 5,944 $ 129,101 $ 210,620 $ 8,504 $ 202,116
GAAP-based License Gross
Margin % 97.8 % 97.2 % 97.5 % 96.4 %
% License Revenues by
Geography:
Americas 48.0 % 49.8 % 48.8 % 50.3 %
EMEA 42.1 % 36.8 % 39.3 % 36.8 %
Asia Pacific 9.9 % 13.4 % 11.9 % 12.9 %
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31,
2018
License revenues increased by $5.3 million or 4.0% during the three months ended
December 31, 2019 as compared to the same period in the prior fiscal year; up
5.6% after factoring the impact of $2.1 million of foreign exchange rate
changes. Geographically, the overall change was attributable to an increase in
EMEA of $9.2 million and an increase in Americas of $0.1 million , partially
offset by a decrease in Asia Pacific of $4.0 million .
During the second quarter of Fiscal 2020, we closed 37 license deals greater
than $0.5 million , of which 19 deals were greater than $1.0 million ,
contributing approximately $54.1 million of license revenues. This was compared
to 45 deals greater
47
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than $0.5 million closed during the second quarter of Fiscal 2019, of which 19
deals were greater than $1.0 million , contributing $51.7 million of license
revenues.
Cost of license revenues decreased by $0.6 million during the three months ended
December 31, 2019 as compared to the same period in the prior fiscal year,
primarily as a result of lower third party technology costs. Overall, the gross
margin percentage on license revenues increased to approximately 98% from
approximately 97%.
Six Months Ended December 31, 2019 Compared to Six Months Ended December 31,
2018
License revenues increased by $6.4 million or 3.0% during the six months ended
December 31, 2019 as compared to the same period in the prior fiscal year; up
4.6% after factoring the impact of $3.4 million of foreign exchange rate
changes. Geographically, the overall change was attributable to an increase in
EMEA of $7.6 million and an increase in Americas of $0.1 million , partially
offset by a decrease in Asia Pacific of $1.3 million .
During the first six months of Fiscal 2020, we closed 62 license deals greater
than $0.5 million , of which 24 deals were greater than $1.0 million ,
contributing approximately $73.6 million of license revenues. This was compared
to 71 deals greater than $0.5 million closed during the first six months of
Fiscal 2019, of which 24 deals were greater than $1.0 million , contributing
$72.5 million of license revenues.
Cost of license revenues decreased by $2.2 million during the six months ended
December 31, 2019 as compared to the same period in the prior fiscal year,
primarily as a result of lower third party technology costs. Overall, the gross
margin percentage on license revenues increased to approximately 98% from
approximately 96%.
2) Cloud Services and Subscriptions:
Cloud services and subscriptions revenues are from hosting arrangements where in
connection with the licensing of software, the end user doesn't take possession
of the software, as well as from end-to-end fully outsourced
business-to-business (B2B) integration solutions to our customers (collectively
referred to as cloud arrangements). The software application resides on our
hardware or that of a third party, and the customer accesses and uses the
software on an as-needed basis via an identified line. Our cloud arrangements
can be broadly categorized as "platform as a service" (PaaS), "software as a
service" (SaaS), cloud subscriptions and managed services.
Cost of Cloud services and subscriptions revenues is comprised primarily of
third party network usage fees, maintenance of in-house data hardware centers,
technical support personnel-related costs, and some third party royalty costs.
Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Cloud Services and
Subscriptions:
Americas $ 170,519 $ 25,302 $ 145,217 $ 337,075 $ 53,242 $ 283,833
EMEA 56,054 2,092 53,962 104,497 1,816 102,681
Asia Pacific 21,767 1,713 20,054 44,033 3,231 40,802
Total Cloud Services and
Subscriptions Revenues 248,340 29,107 219,233 485,605 58,289 427,316
Cost of Cloud Services and
Subscriptions Revenues 103,644 14,946 88,698 205,806 29,405 176,401
GAAP-based Cloud Services
and Subscriptions Gross
Profit $ 144,696 $ 14,161 $ 130,535 $ 279,799 $ 28,884 $ 250,915
GAAP-based Cloud Services
and Subscriptions Gross
Margin % 58.3 % 59.5 % 57.6 % 58.7 %
% Cloud Services and
Subscriptions Revenues by
Geography:
Americas 68.7 % 66.2 % 69.4 % 66.4 %
EMEA 22.5 % 24.6 % 21.5 % 24.0 %
Asia Pacific 8.8 % 9.2 % 9.1 % 9.6 %
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31,
2018
Cloud services and subscriptions revenues increased by $29.1 million or 13.3%
during the three months ended December 31, 2019 as compared to the same period
in the prior fiscal year; up 14.1% after factoring the impact of $1.8 million
48
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of foreign exchange rate changes. Geographically, the overall change was
attributable to an increase in Americas of $25.3 million , an increase in EMEA of
$2.1 million and an increase in Asia Pacific of $1.7 million .
The number of Cloud services deals greater than $1.0 million that closed during
the second quarter of Fiscal 2020 was 16 deals, consistent with the number of
deals greater than $1.0 million that closed during the second quarter of Fiscal
2019.
Cost of Cloud services and subscriptions revenues increased by $14.9 million
during the three months ended December 31, 2019 as compared to the same period
in the prior fiscal year. This was primarily due to an increase in
labour-related costs of $12.7 million , an increase in third party network usage
fees of $2.1 million and an increase in other miscellaneous costs of $0.1
million . The increase in labour-related costs was primarily due to increased
headcount from recent acquisitions.
Overall, the gross margin percentage on Cloud services and subscriptions
revenues decreased to approximately 58% from approximately 60%.
Six Months Ended December 31, 2019 Compared to Six Months Ended December 31,
2018
Cloud services and subscriptions revenues increased by $58.3 million or 13.6%
during the six months ended December 31, 2019 as compared to the same period in
the prior fiscal year; up 14.5% after factoring the impact of $3.9 million of
foreign exchange rate changes. Geographically, the overall change was
attributable to an increase in Americas of $53.2 million , an increase in Asia
Pacific of $3.2 million and an increase in EMEA of $1.8 million .
The number of Cloud services deals greater than $1.0 million that closed during
the first six months of Fiscal 2020 was 23 deals, compared to 25 deals during
the first six months of Fiscal 2019.
Cost of Cloud services and subscriptions revenues increased by $29.4 million
during the six months ended December 31, 2019 as compared to the same period in
the prior fiscal year. This was primarily due to an increase in labour-related
costs of $22.9 million , an increase in third party network usage fees of $6.3
million and an increase in other miscellaneous costs of $0.2 million . The
increase in labour-related costs was primarily due to increased headcount from
recent acquisitions.
Overall, the gross margin percentage on Cloud services and subscriptions
revenues decreased to approximately 58% from approximately 59%.
3) Customer Support:
Customer support revenues consist of revenues from our customer support and
maintenance agreements. These agreements allow our customers to receive
technical support, enhancements and upgrades to new versions of our software
products when and if available. Customer support revenues are generated from
support and maintenance relating to current year sales of software products and
from the renewal of existing maintenance agreements for software licenses sold
in prior periods. Therefore, changes in Customer support revenues do not always
correlate directly to the changes in license revenues from period to period. The
terms of support and maintenance agreements are typically twelve months, and are
renewable, generally on an annual basis, at the option of the customer. Our
management reviews our Customer support renewal rates on a quarterly basis and
we use these rates as a method of monitoring our customer service performance.
For the quarter ended December 31, 2019 , our Customer support renewal rate was
approximately 93%, up slightly compared with the Customer support renewal rate
of 91% during the quarter ended December 31, 2018 .
Cost of Customer support revenues is comprised primarily of technical support
personnel and related costs, as well as third party royalty costs.
49
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Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Customer Support Revenues:
Americas $ 181,563 $ 3,559 $ 178,004 $ 361,006 $ 4,615 $ 356,391
EMEA 108,128 1,075 107,053 215,075 214 214,861
Asia Pacific 25,817 520 25,297 51,725 1,072 50,653
Total Customer Support
Revenues 315,508 5,154 310,354 627,806 5,901 621,905
Cost of Customer Support
Revenues 29,788 (1,485 ) 31,273 59,175 (2,563 ) 61,738
GAAP-based Customer
Support Gross Profit $ 285,720 $ 6,639 $ 279,081 $ 568,631 $ 8,464 $ 560,167
GAAP-based Customer
Support Gross Margin % 90.6 % 89.9 % 90.6 % 90.1 %
% Customer Support
Revenues by Geography:
Americas 57.5 % 57.4 % 57.5 % 57.3 %
EMEA 34.3 % 34.5 % 34.3 % 34.5 %
Asia Pacific 8.2 % 8.1 % 8.2 % 8.2 %
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31,
2018
Customer support revenues increased by $5.2 million or 1.7% during the three
months ended December 31, 2019 as compared to the same period in the prior
fiscal year; up 3.3% after factoring the impact of $5.1 million of foreign
exchange rate changes. Geographically, the overall change was attributable to an
increase in Americas of $3.6 million , an increase in EMEA of $1.1 million and an
increase in Asia Pacific of $0.5 million .
Cost of Customer support revenues decreased by $1.5 million during the three
months ended December 31, 2019 as compared to the same period in the prior
fiscal year. This was primarily due to a decrease in labour-related costs of
$1.2 million and a decrease in other miscellaneous costs of $0.3 million .
Overall, the gross margin percentage on Customer support revenues increased to
approximately 91% from approximately 90%.
Six Months Ended December 31, 2019 Compared to Six Months Ended December 31,
2018
Customer support revenues increased by $5.9 million or 0.9% during the six
months ended December 31, 2019 as compared to the same period in the prior
fiscal year; up 2.6% after factoring the impact of $10.1 million of foreign
exchange rate changes. Geographically, the overall change was attributable to an
increase in Americas of $4.6 million , an increase in Asia Pacific of $1.1
million and an increase in EMEA of $0.2 million .
Cost of Customer support revenues decreased by $2.6 million during the six
months ended December 31, 2019 as compared to the same period in the prior
fiscal year, due to a decrease in labour-related costs of approximately $2.1
million and a decrease in other miscellaneous costs of $0.5 million . Overall,
the gross margin percentage on Customer support revenues increased to
approximately 91% from approximately 90%.
4) Professional Service and Other:
Professional service and other revenues consist of revenues from consulting
contracts and contracts to provide implementation, training and integration
services (professional services). Other revenues consist of hardware revenues,
which are grouped within the "Professional service and other" category because
they are relatively immaterial to our service revenues. Professional services
are typically performed after the purchase of new software
licenses. Professional service and other revenues can vary from period to period
based on the type of engagements as well as those implementations that are
assumed by our partner network.
Cost of professional service and other revenues consists primarily of the costs
of providing integration, configuration and training with respect to our various
software products. The most significant components of these costs are
personnel-related expenses, travel costs and third party subcontracting.
50
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Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Professional Service and Other
Revenues:
Americas $ 32,348 $ 997 $ 31,351 $ 66,823 $ 2,408 $ 64,415
EMEA 29,985 (4,072 ) 34,057 58,070 (5,591 ) 63,661
Asia Pacific 7,281 (199 ) 7,480 14,148 (1,300 ) 15,448
Total Professional Service and
Other Revenues 69,614 (3,274 ) 72,888 139,041 (4,483 ) 143,524
Cost of Professional Service and
Other Revenues 53,604 (2,426 ) 56,030 107,942 (4,884 ) 112,826
GAAP-based Professional Service
and Other Gross Profit $ 16,010 $ (848 ) $
16,858
23.0 % 23.1 % 22.4 % 21.4 %
% Professional Service and Other
Revenues by Geography:
Americas 46.5 % 43.0 % 48.1 % 44.9 %
EMEA 43.1 % 46.7 % 41.8 % 44.4 %
Asia Pacific 10.4 % 10.3 % 10.1 % 10.7 %
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31,
2018
Professional service and other revenues decreased by $3.3 million or 4.5% during
the three months ended December 31, 2019 as compared to the same period in the
prior fiscal year; down 2.9% after factoring the impact of $1.1 million of
foreign exchange rate changes. Geographically, the overall change was
attributable to an increase in Americas of $1.0 million , offset by a decrease in
EMEA of $4.1 million and a decrease in Asia Pacific of $0.2 million .
Cost of Professional service and other revenues decreased by $2.4 million during
the three months ended December 31, 2019 as compared to the same period in the
prior fiscal year. This was due to a decrease in labour-related costs of
approximately $2.5 million resulting primarily from a reduction in the use of
external labour resources, partially offset by an increase in other
miscellaneous costs of $0.1 million .
Overall, the gross margin percentage on Professional service and other revenues
remained at approximately 23%. We continue to be selective about the
professional service engagements we accept to strategically optimize margins.
Six Months Ended December 31, 2019 Compared to Six Months Ended December 31,
2018
Professional service and other revenues decreased by $4.5 million or 3.1% during
the six months ended December 31, 2019 as compared to the same period in the
prior fiscal year; down 1.4% after factoring the impact of $2.5 million of
foreign exchange rate changes. Geographically, the overall change was
attributable to an increase in Americas of $2.4 million , offset by a decrease in
EMEA of $5.6 million and a decrease in Asia Pacific of $1.3 million .
Cost of Professional service and other revenues decreased by $4.9 million during
the six months ended December 31, 2019 as compared to the same period in the
prior fiscal year. This was due to a decrease in labour-related costs of
approximately $5.3 million resulting primarily from a reduction in the use of
external labour resources, partially offset by an increase in other
miscellaneous costs of $0.4 million .
Overall, the gross margin percentage on Professional service and other revenues
increased to approximately 22% from approximately 21%.
Amortization of Acquired Technology-based Intangible Assets
Three Months Ended December 31,
Six Months Ended
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Amortization of
acquired
technology-based
intangible assets $ 42,299 $ (6,067 ) $ 48,366 $ 82,597 $ (13,246 ) $ 95,843
Amortization of acquired technology-based intangible assets decreased during the
three and six months ended December 31, 2019 by $6.1 million and $13.2 million ,
respectively, as compared to the same periods in the prior fiscal year. This was
due to a reduction of $13.8 million and $27.5 million , respectively, relating to
intangible assets from certain previous acquisitions becoming fully amortized,
partially offset by an increase in amortization of $7.7 million and $14.3
million ,
51
--------------------------------------------------------------------------------respectively, primarily relating to newly acquired technology-based intangible assets from our recent acquisitions of Catalyst, Liaison and Carbonite. Operating Expenses
Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Research and
development $ 80,283 $ 4,530 $ 75,753 $ 161,461 $ 8,238 $ 153,223
Sales and marketing 137,310 11,117 126,193 265,928 19,553 246,375
General and
administrative 54,595 2,397 52,198 106,130 3,008 103,122
Depreciation 20,712 (3,122 ) 23,834 40,989 (6,699 ) 47,688
Amortization of
acquired
customer-based
intangible assets 51,460 5,541 45,919 100,618 8,823 91,795
Special charges
(recoveries) 10,072 692 9,380 15,173 (17,518 ) 32,691
Total operating
expenses $ 354,432 $ 21,155 $ 333,277 $ 690,299 $ 15,405 $ 674,894
% of Total Revenues:
Research and
development 10.4 % 10.3 % 11.0 % 10.9 %
Sales and marketing 17.8 % 17.2 % 18.1 % 17.6 %
General and
administrative 7.1 % 7.1 % 7.2 % 7.4 %
Depreciation 2.7 % 3.2 % 2.8 % 3.4 %
Amortization of
acquired
customer-based
intangible assets 6.7 % 6.2 % 6.9 % 6.5 %
Special charges
(recoveries) 1.3 % 1.3 % 1.0 % 2.3 %
Research and development expenses consist primarily of payroll and
payroll-related benefits expenses, contracted research and development expenses,
and facility costs. Research and development assists with organic growth and
improves product stability and functionality, and accordingly, we dedicate
extensive efforts to update and upgrade our product offerings. The primary
driver is typically budgeted software upgrades and software development.
Change between Three Change between Six
Months Ended December Months Ended December 31,
31, 2019 and 2018 2019 and 2018
(In thousands) increase (decrease) increase (decrease)
Payroll and payroll-related benefits $ 3,319 $ 8,122
Contract labour and consulting 82 540
Share-based compensation (21 ) (159 )
Travel and communication 29 (35 )
Facilities 798 (555 )
Other miscellaneous 323 325
Total change in research and development expenses $ 4,530 $ 8,238
Research and development expenses increased by $4.5 million during the three
months ended December 31, 2019 as compared to the same period in the prior
fiscal year. This was primarily due to (i) an increase in payroll and
payroll-related benefits of $3.3 million , driven primarily by increased
headcount from recent acquisitions and (ii) an increase of $0.8 million in
facility related expenses. Overall, our research and development expenses, as a
percentage of total revenues, remained stable compared to the same period in the
prior fiscal year at approximately 10%.
Research and development expenses increased by $8.2 million during the six
months ended December 31, 2019 as compared to the same period in the prior
fiscal year. This was primarily due to (i) an increase in payroll and
payroll-related benefits of $8.1 million , driven primarily by increased
headcount from recent acquisitions and (ii) an increase of $0.5 million relating
to the use of external labour resources. These were partially offset by a
decrease in facility related expenses of $0.6 million . Overall, our research and
development expenses, as a percentage of total revenues, remained stable
compared to the same period in the prior fiscal year at approximately 11%.
Our research and development labour resources increased by 504 employees, from
3,542 employees at December 31, 2018 to 4,046 employees at December 31, 2019 .
52
--------------------------------------------------------------------------------Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising, marketing events and trade shows.
Change between Three
Months Ended Change between Six
December 31, 2019 Months Ended December 31,
and 2018 2019 and 2018
(In thousands) increase (decrease) increase (decrease)
Payroll and payroll-related benefits $ 7,210 $ 12,065
Commissions 4,297 7,300
Contract labour and consulting (871 ) (799 )
Share-based compensation 169 484
Travel and communication 106 1,487
Marketing expenses 1,719 2,622
Facilities 912 1,548
Bad debt expense (2,865 ) (4,586 )
Other miscellaneous 440 (568 )
Total change in sales and marketing expenses $ 11,117 $ 19,553
Sales and marketing expenses increased by $11.1 million during the three months
ended December 31, 2019 as compared to the same period in the prior fiscal year.
This was primarily due to (i) an increase in payroll and payroll-related
benefits of $7.2 million , (ii) an increase in commissions expense of $4.3
million , and (iii) an increase in marketing expenses of $1.7 million . These were
partially offset by a decrease in bad debt expense of $2.9 million . Overall, our
sales and marketing expenses, as a percentage of total revenues, increased to
approximately 18% from approximately 17% in the same period in the prior fiscal
year.
Sales and marketing expenses increased by $19.6 million during the six months
ended December 31, 2019 as compared to the same period in the prior fiscal year.
This was primarily due to (i) an increase in payroll and payroll-related
benefits of $12.1 million , (ii) an increase in commissions expense of $7.3
million and (iii) an increase in marketing expenses of $2.6 million . These were
partially offset by a decrease in bad debt expense of $4.6 million . Overall, our
sales and marketing expenses, as a percentage of total revenues, as compared to
the same period in the prior fiscal year, remained stable at approximately 18%.
Our sales and marketing labour resources increased by 491 employees, from 2,027
employees at December 31, 2018 to 2,518 employees at December 31, 2019 .
General and administrative expenses consist primarily of payroll and payroll
related benefits expenses, related overhead, audit fees, other professional
fees, contract labour and consulting expenses and public company costs.
Change between Three Change between Six
Months Ended December Months Ended December 31,
31, 2019 and 2018 2019 and 2018
(In thousands) increase (decrease) increase (decrease)
Payroll and payroll-related benefits $ 3,912 $ 6,762
Contract labour and consulting (531 ) (1,149 )
Share-based compensation 715 1,073
Travel and communication 391 20
Facilities (704 ) (380 )
Other miscellaneous (1,386 ) (3,318 )
Total change in general and administrative
expenses $ 2,397 $ 3,008
General and administrative expenses increased by $2.4 million during the three
months ended December 31, 2019 as compared to the prior fiscal year. This was
primarily due to an increase in payroll and payroll-related benefits of $3.9
million , partially offset by a decrease in other miscellaneous expenses of $1.4
million , which includes professional fees such as legal, audit and tax related
expenses. The remainder of the change was attributable to other activities
associated with normal growth in our business operations. Overall, general and
administrative expenses, as a percentage of total revenues, remained stable
compared to the same period in the prior fiscal year at approximately 7%.
General and administrative expenses increased by $3.0 million during the six
months ended December 31, 2019 as compared to the prior fiscal year. This was
primarily due to an increase in payroll and payroll-related benefits of $6.8
million , partially offset by a decrease in other miscellaneous expenses of $3.3
million , which includes professional fees such as legal, audit and tax related
expenses. The remainder of the change was attributable to other activities
associated with normal growth
53
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in our business operations. Overall, general and administrative expenses, as a
percentage of total revenues, remained stable compared to the same period in the
prior fiscal year at approximately 7% .
Our general and administrative labour resources increased by 426 employees, from
1,574 employees at December 31, 2018 to 2,000 employees at December 31, 2019 .
Depreciation expenses:
Three Months Ended December 31, Six Months Ended December 31,
Change Change
increase increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Depreciation $ 20,712 $ (3,122 ) $ 23,834 $
40,989
Depreciation expenses decreased during the three and six months endedDecember 31, 2019 by$3.1 million and$6.7 million , respectively, as compared to the same periods in the prior fiscal year. Depreciation expense, as a percentage of total revenue, remained at approximately 3% for each such period. Amortization of acquired customer-based intangible assets: Three Months Ended December 31, Six Months Ended December 31, Change Change increase increase (In thousands) 2019 (decrease) 2018 2019 (decrease) 2018 Amortization of acquired customer-based intangible assets$ 51,460 $ 5,541 $ 45,919 $ 100,618 $ 8,823 $ 91,795 Amortization of acquired customer-based intangible assets increased during the three and six months endedDecember 31, 2019 by$5.5 million and$8.8 million , respectively, as compared to the same periods in the prior fiscal year. This was due to an increase in amortization of$5.7 million and$9.4 million respectively, relating to newly acquired customer-based intangible assets from our recent acquisitions of Catalyst, Liaison and Carbonite. The increase in amortization was partially offset by a reduction of$0.2 million and$0.6 million , respectively, relating to intangible assets from certain previous acquisitions becoming fully amortized. Special charges (recoveries): Special charges typically relate to amounts that we expect to pay in connection with restructuring plans, acquisition-related costs and other similar charges and recoveries. Generally, we implement such plans in the context of integrating acquired entities with existing OpenText operations. Actions related to such restructuring plans are typically completed within a period of one year. In certain limited situations, if the planned activity does not need to be implemented, or an expense lower than anticipated is paid out, we record a recovery of the originally recorded expense to Special charges. Three Months Ended December 31,
Six Months Ended
Change increase Change increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Special charges
(recoveries) $ 10,072 $ 692 $ 9,380 $ 15,173 $ (17,518 ) $ 32,691
Special charges increased by $0.7 million during the three months ended
December 31, 2019 as compared to the same period in the prior fiscal year. This
was primarily due to (i) an increase of $4.6 million in acquisition related
costs and (ii) an increase in other miscellaneous charges of $2.4 million . These
were partially offset by a decrease in restructuring activities of $6.3 million .
Special charges decreased by $17.5 million during the six months ended
December 31, 2019 as compared to the same period in the prior fiscal year. This
was primarily due to a decrease in restructuring activities of $25.7 million ,
partially offset by an increase in acquisition related costs of $6.7 million .
The remainder of the change is due to other miscellaneous items.
For more details on Special charges (recoveries), see note 18 "Special Charges
(Recoveries)" to our Condensed Consolidated Financial Statements.
54
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Other Income (Expense), Net
Other income (expense), net relates to certain non-operational charges primarily
consisting of income or losses in our share of marketable equity securities
accounted for under the equity method and of transactional foreign exchange
gains (losses). The income (expense) from foreign exchange is dependent upon the
change in foreign currency exchange rates vis-à-vis the functional currency of
the legal entity.
Three Months Ended December 31,
Six Months Ended
Change increase Change increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Foreign exchange gains
(losses) $ 352 $ 5,568 $ (5,216 ) $ (3,307 ) $ 2,850 $ (6,157 )
OpenText share in net
income (loss) of
equity investees (note
9) 1,266 (4,225 ) 5,491 1,948 (5,915 ) 7,863
Other miscellaneous
income (expense) 354 251 103 546 352 194
Total other income
(expense), net $ 1,972 $ 1,594 $ 378 $ (813 ) $ (2,713 ) $ 1,900
Interest and Other Related Expense, Net
Interest and other related expense, net is primarily comprised of interest paid
and accrued on our debt facilities, offset by interest income earned on our cash
and cash equivalents.
Three Months Ended December 31,
Six Months Ended
Change increase Change increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Interest expense
related to total
outstanding debt (1) $ 33,778 $ (601 ) $ 34,379 $ 67,944 $ (278 ) $ 68,222
Interest income (3,474 ) (850 ) (2,624 ) (7,423 ) (4,064 ) (3,359 )
Other miscellaneous
expense 2,072 214 1,858 4,065 784 3,281
Total interest and
other related expense,
net $ 32,376 $ (1,237 ) $ 33,613 (1) For more details see note 11 "Long-Term Debt" to our Condensed Consolidated Financial Statements. Provision for (Recovery of) Income Taxes We operate in several tax jurisdictions and are exposed to various foreign tax rates. We also note that we are subject to tax rate discrepancies between our domestic tax rate and foreign tax rates that are significant and these discrepancies are primarily related to earnings inthe United States . Please also see Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2019. Three Months EndedDecember 31 ,
Six Months Ended
Change increase Change increase
(In thousands) 2019 (decrease) 2018 2019 (decrease) 2018
Provision for
(recovery of) income
taxes $ 46,818 $ 10,582 $ 36,236 $ 69,909 $ 3,823 $ 66,086
The effective tax rate increased to a provision of 30.3% for the three months
ended December 31, 2019 , compared to 25.8% for the three months ended December
31, 2018 . The increase in tax expense of $10.6 million was primarily due to (i)
an increase of $16.8 million relating to a one-time reversal of accruals for
repatriations from subsidiaries in the United States that did not recur in
Fiscal 2020, (ii) an increase in tax filings in excess of estimates of $6.0
million and (iii) an increase in net income taxed at foreign rates of $3.3
million . These were partially offset by (i) a decrease of $11.6 million in
reserves for unrecognized tax benefits resulting from clarifications provided by
tax regulations and taxation years becoming statute barred and (ii) a decrease
of $4.5 million related to tax costs of internal reorganizations that did not
recur in Fiscal 2020. The remainder of the difference was due to normal course
movements and non-material items.
The effective tax rate decreased to a provision of 27.8% for the six months
ended December 31, 2019 , compared to 31.9% for the six months ended December 31,
2018 . The increase in tax expense of $3.8 million was primarily due to (i) the
increase in net income taxed at foreign rates of $11.8 million , (ii) an increase
of $14.9 million relating to a one-time reversal of accruals for repatriations
from subsidiaries in the United States in fiscal 2019 that did not recur in
Fiscal 2020 and (iii) an increase in tax failing in excess of estimates of $7.3
million . These were partially offset by (i) a decrease of $22.4 million in
reserves for unrecognized tax benefit resulting from clarifications provided by
tax regulations and taxation years becoming statute barred
55
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and (ii) a decrease of $7.9 million relating to the tax impact of internal
reorganizations of subsidiaries that did not reoccur Fiscal 2020. The remainder
of the difference was due to normal course movements and non-material items.
For information with regards to certain potential tax contingencies, see note 14
"Guarantees and Contingencies" to our Condensed Consolidated Financial
Statements.
56
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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 Condensed 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 Condensed 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, attributable to OpenText, is
consistently calculated as GAAP-based net income or earnings per share,
attributable to OpenText, on a diluted basis, excluding the effects of the
amortization of acquired intangible assets, other income (expense), share-based
compensation, and Special charges (recoveries), all net of tax and any tax
benefits/expense items unrelated to current period income, as further described
in the tables below. Non-GAAP-based gross profit is the arithmetical sum of
GAAP-based gross profit and the amortization of acquired technology-based
intangible assets and share-based compensation within cost of sales.
Non-GAAP-based gross margin is calculated as Non-GAAP-based gross profit
expressed as a percentage of total revenue. Non-GAAP-based income from
operations is calculated as GAAP-based income from operations, excluding the
amortization of acquired intangible assets, Special charges (recoveries), and
share-based compensation expense.
Adjusted earnings (loss) before interest, taxes, depreciation and amortization
(Adjusted EBITDA) is consistently calculated as GAAP-based net income,
attributable to OpenText excluding interest income (expense), provision for
income taxes, depreciation and amortization of acquired intangible assets, other
income (expense), share-based compensation and Special charges (recoveries).
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. These items are excluded based upon
the way the Company's management evaluates the performance of the Company's
business for use in the Company's internal reports and are not excluded in the
sense that they may be used under U.S. GAAP.
The Company does not acquire businesses on a predictable cycle, and therefore
believes that the presentation of non-GAAP measures, which in certain cases
adjust for the impact of amortization of intangible assets and the related tax
effects that are primarily related to acquisitions, will provide readers of
financial statements with a more consistent basis for comparison across
accounting periods and be more useful in helping readers understand the
Company's operating results and underlying operational trends. Additionally, the
Company has engaged in various restructuring activities over the past several
years, primarily due to acquisitions, that have resulted in costs associated
with reductions in headcount, consolidation of leased facilities and related
costs, all which are recorded under the Company's "Special Charges (recoveries)"
caption on the Condensed Consolidated Statements of Income. Each restructuring
activity is a discrete event based on a unique set of business objectives or
circumstances, and each differs in terms of its operational implementation,
business impact and scope, and the size of each restructuring plan can vary
significantly from period to period. Therefore, the Company believes that the
exclusion of these special charges (recoveries) will also better aid readers of
financial statements in the understanding and comparability of the Company's
operating results and underlying operational trends.
In summary, 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.
The following charts provide unaudited reconciliations of U.S. GAAP-based
financial measures to Non-GAAP-based financial measures for the following
periods presented.
57
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Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended
Three
Months Ended
GAAP-based
Measures Non-GAAP-based
GAAP-based % of Total Non-GAAP-based Measures % of
Measures Revenue
Adjustments Note Measures Total Revenue
Cost of revenues
Cloud services and subscriptions
$ (371 ) (1) $ 103,273 Customer support 29,788 (297 ) (1) 29,491 Professional service and other 53,604 (346 ) (1) 53,258 Amortization of acquired technology-based intangible assets 42,299 (42,299 ) (2) - GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) 539,172 69.9% 43,313 (3) 582,485 75.5% Operating expenses Research and development 80,283 (1,255 ) (1) 79,028 Sales and marketing 137,310 (2,383 ) (1) 134,927 General and administrative 54,595 (3,131 ) (1) 51,464 Amortization of acquired customer-based intangible assets 51,460 (51,460 ) (2) - Special charges (recoveries) 10,072 (10,072 ) (4) - GAAP-based income from operations / Non-GAAP-based income from operations 184,740 111,614 (5) 296,354 Other income (expense), net 1,972 (1,972 ) (6) - Provision for (recovery of) income taxes 46,818 (9,861 ) (7) 36,957 GAAP-based net income / Non-GAAP-based net income, attributable to OpenText 107,467 119,503 (8) 226,970 GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText$ 0.40 $ 0.44 (8) $ 0.84
(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 ofamortization 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 total revenue. (4) Adjustment relates to the exclusion of Special charges (recoveries) from our
Non-GAAP-based operating expenses as Special charges (recoveries) are
generally incurred in the periods relevant to an acquisition and include
certain charges or recoveries that are not indicative or related to
continuing operations, and are therefore excluded from our internal analysis
of operating results. See note 18 "Special Charges (Recoveries)" to our
Condensed Consolidated Financial Statements for more details. (5) GAAP-based and Non-GAAP-based income from operations stated in dollars. (6) Adjustment relates to the exclusion of Other income (expense) from our
Non-GAAP-based operating expenses as Other income (expense) generally
relates 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. Other income (expense) also
includes our share of income (losses) from our holdings in non-marketable
securities investments as a limited partner. We do not actively trade equity
securities in these privately held companies nor do we plan our ongoing
operations based around any anticipated fundings or distributions from these
investments. We exclude gains and losses on these investments as we do not
believe they are reflective of our ongoing business and operating results. (7) Adjustment relates to differences between the GAAP-based tax provision rate
of approximately 30% and a Non-GAAP-based tax rate of approximately 14%;
these rate differences are due to the income tax effects of items that are
excluded for the purpose of calculating Non-GAAP-based adjusted net income.
Such excluded items include amortization, share-based compensation, Special
charges (recoveries) and other income (expense), net. Also excluded are tax
benefits/expense items unrelated to current period income such as changes in
reserves for tax uncertainties and valuation allowance reserves, and "book
to return" adjustments for tax return filings and tax assessments. Included
is the amount of net tax benefits arising from the internal reorganization
that occurred in Fiscal 2017 assumed to be allocable to the current period
based on the forecasted utilization period. In arriving at our
Non-GAAP-based tax rate of approximately 14%, we analyzed the individual
adjusted expenses and took into consideration the impact of statutory tax
rates from local jurisdictions incurring the expense.
58--------------------------------------------------------------------------------
(8) Reconciliation of GAAP-based net income to Non-GAAP-based net income:
Three Months Ended December 31, 2019
Per share diluted
GAAP-based net income, attributable to OpenText $ 107,467 $ 0.40
Add:
Amortization 93,759 0.35
Share-based compensation 7,783 0.03
Special charges (recoveries) 10,072 0.04
Other (income) expense, net (1,972 ) (0.01 )
GAAP-based provision for (recovery of) income taxes 46,818 0.17
Non-GAAP-based provision for income taxes (36,957 ) (0.14 )
Non-GAAP-based net income, attributable to OpenText
0.84
Reconciliation of Adjusted EBITDA
Three Months
Ended
2019
GAAP-based net income, attributable to OpenText $
107,467
Add:
Provision for (recovery of) income taxes
46,818
Interest and other related expense, net
32,376
Amortization of acquired technology-based intangible assets
42,299
Amortization of acquired customer-based intangible assets 51,460
Depreciation 20,712
Share-based compensation 7,783
Special charges (recoveries) 10,072
Other (income) expense, net (1,972 )
Adjusted EBITDA $ 317,015
59--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended
Three
Months Ended
GAAP-based
Measures Non-GAAP-based
GAAP-based % of Total Non-GAAP-based Measures % of
Measures Revenue
Adjustments Note Measures Total Revenue
Cost of revenues
Cloud services and subscriptions
$ (265 ) (1) $ 88,433 Customer support 31,273 (271 ) (1) 31,002 Professional service and other 56,030 (358 ) (1) 55,672 Amortization of acquired technology-based intangible assets 48,366 (48,366 ) (2) - GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) 507,209 69.0% 49,260 (3) 556,469 75.7% Operating expenses Research and development 75,753 (994 ) (1) 74,759 Sales and marketing 126,193 (1,615 ) (1) 124,578 General and administrative 52,198 (3,382 ) (1) 48,816 Amortization of acquired customer-based intangible assets 45,919 (45,919 ) (2) - Special charges (recoveries) 9,380 (9,380 ) (4) - GAAP-based income from operations / Non-GAAP-based income from operations 173,932 110,550 (5) 284,482 Other income (expense), net 378 (378 ) (6) - Provision for (recovery of) income taxes 36,236 (1,114 ) (7) 35,122 GAAP-based net income / Non-GAAP-based net income, attributable to OpenText 104,432 111,286 (8) 215,718 GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText$ 0.39 $ 0.41 (8) $ 0.80
(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 ofamortization 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 total revenue. (4) Adjustment relates to the exclusion of Special charges (recoveries) from our
Non-GAAP-based operating expenses as Special charges (recoveries) are
generally incurred in the periods relevant to an acquisition and include
certain charges or recoveries that are not indicative or related to
continuing operations, and are therefore excluded from our internal analysis
of operating results. See note 18 "Special Charges (Recoveries)" to our
Condensed Consolidated Financial Statements for more details. (5) GAAP-based and Non-GAAP-based income from operations stated in dollars. (6) Adjustment relates to the exclusion of Other income (expense) from our
Non-GAAP-based operating expenses as Other income (expense) generally
relates 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. Other income (expense) also
includes our share of income (losses) from our holdings in non-marketable
securities investments as a limited partner. We do not actively trade equity
securities in these privately held companies nor do we plan our ongoing
operations based around any anticipated fundings or distributions from these
investments. We exclude gains and losses on these investments as we do not
believe they are reflective of our ongoing business and operating results. (7) Adjustment relates to differences between the GAAP-based tax provision rate
of approximately 26% and a Non-GAAP-based tax rate of approximately 14%;
these rate differences are due to the income tax effects of items that are
excluded for the purpose of calculating Non-GAAP-based adjusted net income.
Such excluded items include amortization, share-based compensation, Special
charges (recoveries) and other income (expense), net. Also excluded are tax
benefits/expense items unrelated to current period income such as changes in
reserves for tax uncertainties and valuation allowance reserves, and "book
to return" adjustments for tax return filings and tax assessments. Included
is the amount of net tax benefits arising from the internal reorganization
that occurred in Fiscal 2017 assumed to be allocable to the current period
based on the forecasted utilization period. In arriving at our
Non-GAAP-based tax rate of approximately 14%, we analyzed the individual
adjusted expenses and took into consideration the impact of statutory tax
rates from local jurisdictions incurring the expense.
60--------------------------------------------------------------------------------
(8) Reconciliation of GAAP-based net income to Non-GAAP-based net income:
Three Months Ended December 31, 2018
Per share diluted
GAAP-based net income, attributable to OpenText $ 104,432 $ 0.39
Add:
Amortization 94,285 0.35
Share-based compensation 6,885 0.03
Special charges (recoveries) 9,380 0.03
Other (income) expense, net (378 ) -
GAAP-based provision for (recovery of) income taxes 36,236 0.13
Non-GAAP-based provision for income taxes (35,122 ) (0.13 )
Non-GAAP-based net income, attributable to OpenText
0.80
Reconciliation of Adjusted EBITDA
Three Months
Ended
2018
GAAP-based net income, attributable to OpenText $
104,432
Add:
Provision for (recovery of) income taxes
36,236
Interest and other related expense, net
33,613
Amortization of acquired technology-based intangible assets
48,366
Amortization of acquired customer-based intangible assets 45,919
Depreciation 23,834
Share-based compensation 6,885
Special charges (recoveries) 9,380
Other (income) expense, net (378 )
Adjusted EBITDA $ 308,287
61--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the six months ended
Six Months Ended December 31, 2019
GAAP-based
Measures Non-GAAP-based
GAAP-based % of Total Non-GAAP-based Measures % of
Measures Revenue
Adjustments Note Measures Total Revenue
Cost of revenues
Cloud services and subscriptions
$ (754 ) (1) $ 205,052 Customer support 59,175 (613 ) (1) 58,562 Professional service and other 107,942 (589 ) (1) 107,353 Amortization of acquired technology-based intangible assets 82,597 (82,597 ) (2) - GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) 1,007,552 68.6% 84,553 (3) 1,092,105 74.4% Operating expenses Research and development 161,461 (2,476 ) (1) 158,985 Sales and marketing 265,928 (4,499 ) (1) 261,429 General and administrative 106,130 (5,743 ) (1) 100,387 Amortization of acquired customer-based intangible assets 100,618 (100,618 ) (2) - Special charges (recoveries) 15,173 (15,173 ) (4) - GAAP-based income from operations / Non-GAAP-based income from operations 317,253 213,062 (5) 530,315 Other income (expense), net (813 ) 813 (6) - Provision for (recovery of) income taxes 69,909 (4,707 ) (7) 65,202 GAAP-based net income / Non-GAAP-based net income, attributable to OpenText 181,868 218,582 (8) 400,450 GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText$ 0.67 $ 0.81 (8) $ 1.48
(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 ofamortization 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 total revenue. (4) Adjustment relates to the exclusion of Special charges (recoveries) from our
Non-GAAP-based operating expenses as Special charges (recoveries) are
generally incurred in the periods relevant to an acquisition and include
certain charges or recoveries that are not indicative or related to
continuing operations, and are therefore excluded from our internal analysis
of operating results. See note 18 "Special Charges (Recoveries)" to our
Condensed Consolidated Financial Statements for more details. (5) GAAP-based and Non-GAAP-based income from operations stated in dollars. (6) Adjustment relates to the exclusion of Other income (expense) from our
Non-GAAP-based operating expenses as Other income (expense) generally
relates 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. Other income (expense) also
includes our share of income (losses) from our holdings in non-marketable
securities investments as a limited partner. We do not actively trade equity
securities in these privately held companies nor do we plan our ongoing
operations based around any anticipated fundings or distributions from these
investments. We exclude gains and losses on these investments as we do not
believe they are reflective of our ongoing business and operating results. (7) Adjustment relates to differences between the GAAP-based tax provision rate
of approximately 28% and a Non-GAAP-based tax rate of approximately 14%;
these rate differences are due to the income tax effects of items that are
excluded for the purpose of calculating Non-GAAP-based adjusted net income.
Such excluded items include amortization, share-based compensation, Special
charges (recoveries) and other income (expense), net. Also excluded are tax
benefits/expense items unrelated to current period income such as changes in
reserves for tax uncertainties and valuation allowance reserves, and "book
to return" adjustments for tax return filings and tax assessments. Included
is the amount of net tax benefits arising from the internal reorganization
that occurred in Fiscal 2017 assumed to be allocable to the current period
based on the forecasted utilization period. In arriving at our
Non-GAAP-based tax rate of approximately 14%, we analyzed the individual
adjusted expenses and took into consideration the impact of statutory tax
rates from local jurisdictions incurring the expense.
62--------------------------------------------------------------------------------
(8) Reconciliation of GAAP-based net income to Non-GAAP-based net income:
Six Months Ended December 31, 2019
Per share diluted
GAAP-based net income, attributable to OpenText $ 181,868 $ 0.67
Add:
Amortization 183,215 0.68
Share-based compensation 14,674 0.05
Special charges (recoveries) 15,173 0.06
Other (income) expense, net 813 -
GAAP-based provision for (recovery of) income taxes 69,909 0.26
Non-GAAP-based provision for income taxes (65,202 ) (0.24 )
Non-GAAP-based net income, attributable to OpenText
1.48
Reconciliation of Adjusted EBITDA
Six Months
Ended
2019
GAAP-based net income, attributable to OpenText $
181,868
Add:
Provision for (recovery of) income taxes
69,909
Interest and other related expense, net
64,586
Amortization of acquired technology-based intangible assets
82,597
Amortization of acquired customer-based intangible assets 100,618
Depreciation 40,989
Share-based compensation 14,674
Special charges (recoveries) 15,173
Other (income) expense, net 813
Adjusted EBITDA $ 571,227
63--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the six months ended
Six Months Ended December 31, 2018
GAAP-based
Measures Non-GAAP-based
GAAP-based % of Total Non-GAAP-based Measures % of
Measures Revenue
Adjustments Note Measures Total Revenue
Cost of revenues
Cloud services and subscriptions
$ (582 ) (1) $ 175,819 Customer support 61,738 (571 ) (1) 61,167 Professional service and other 112,826 (882 ) (1) 111,944 Amortization of acquired technology-based intangible assets 95,843 (95,843 ) (2) - GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) 948,053 67.6% 97,878 (3) 1,045,931 74.6% Operating expenses Research and development 153,223 (2,353 ) (1) 150,870 Sales and marketing 246,375 (3,416 ) (1) 242,959 General and administrative 103,122 (5,636 ) (1) 97,486 Amortization of acquired customer-based intangible assets 91,795 (91,795 ) (2) - Special charges (recoveries) 32,691 (32,691 ) (4) - GAAP-based income from operations / Non-GAAP-based income from operations 273,159 233,769 (5) 506,928 Other income (expense), net 1,900 (1,900 ) (6) - Provision for (recovery of) income taxes 66,086 (4,656 ) (7) 61,430 GAAP-based net income / Non-GAAP-based net income, attributable to OpenText 140,756 236,525 (8) 377,281 GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText$ 0.52 $ 0.88 (8) $ 1.40
(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 ofamortization 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 total revenue. (4) Adjustment relates to the exclusion of Special charges (recoveries) from our
Non-GAAP-based operating expenses as Special charges (recoveries) are
generally incurred in the periods relevant to an acquisition and include
certain charges or recoveries that are not indicative or related to
continuing operations, and are therefore excluded from our internal analysis
of operating results. See note 18 "Special Charges (Recoveries)" to our
Condensed Consolidated Financial Statements for more details. (5) GAAP-based and Non-GAAP-based income from operations stated in dollars. (6) Adjustment relates to the exclusion of Other income (expense) from our
Non-GAAP-based operating expenses as Other income (expense) generally
relates 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. Other income (expense) also
includes our share of income (losses) from our holdings in non-marketable
securities investments as a limited partner. We do not actively trade equity
securities in these privately held companies nor do we plan our ongoing
operations based around any anticipated fundings or distributions from these
investments. We exclude gains and losses on these investments as we do not
believe they are reflective of our ongoing business and operating results. (7) Adjustment relates to differences between the GAAP-based tax provision rate
of approximately 32% and a Non-GAAP-based tax rate of approximately 14%;
these rate differences are due to the income tax effects of items that are
excluded for the purpose of calculating Non-GAAP-based adjusted net income.
Such excluded items include amortization, share-based compensation, Special
charges (recoveries) and other income (expense), net. Also excluded are tax
benefits/expense items unrelated to current period income such as changes in
reserves for tax uncertainties and valuation allowance reserves, and "book
to return" adjustments for tax return filings and tax assessments. Included
is the amount of net tax benefits arising from the internal reorganization
that occurred in Fiscal 2017 assumed to be allocable to the current period
based on the forecasted utilization period. In arriving at our
Non-GAAP-based tax rate of approximately 14%, we analyzed the individual
adjusted expenses and took into consideration the impact of statutory tax
rates from local jurisdictions incurring the expense.
64--------------------------------------------------------------------------------
(8) Reconciliation of GAAP-based net income to Non-GAAP-based net income:
Six Months Ended December 31, 2018
Per share diluted
GAAP-based net income, attributable to OpenText $ 140,756 $ 0.52
Add:
Amortization 187,638 0.70
Share-based compensation 13,440 0.05
Special charges (recoveries) 32,691 0.12
Other (income) expense, net (1,900 ) (0.01 )
GAAP-based provision for (recovery of) income taxes 66,086 0.25
Non-GAAP-based provision for income taxes (61,430 ) (0.23 )
Non-GAAP-based net income, attributable to OpenText
1.40
Reconciliation of Adjusted EBITDA
Six Months
Ended
2018
GAAP-based net income, attributable to OpenText $
140,756
Add:
Provision for (recovery of) income taxes
66,086
Interest and other related expense, net
68,144
Amortization of acquired technology-based intangible assets
95,843
Amortization of acquired customer-based intangible assets 91,795
Depreciation 47,688
Share-based compensation 13,440
Special charges (recoveries) 32,691
Other (income) expense, net (1,900 )
Adjusted EBITDA $ 554,543
65
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following tables set forth changes in cash flows from operating, investing
and financing activities for the periods indicated:
As of December 31, Change
(In thousands) 2019 increase (decrease) As of June 30, 2019
Cash and cash equivalents $ 675,403 $ (265,606 ) $ 941,009
Restricted cash included in other
assets 4,829 2,295 2,534
Total cash, cash equivalents and
restricted cash $ 680,232 $ (263,311 ) $ 943,543
Six Months Ended December 31,
(In thousands) 2019 Change 2018
Cash provided by operating activities $ 344,685 $ (15,819 ) $ 360,504
Cash used in investing activities $ (1,264,541 ) $ (911,140 ) $ (353,401 )
Cash used in financing activities $ 660,616 $ 747,935 $ (87,319 )
Cash and cash equivalents
Cash and cash equivalents primarily consist of balances with banks as well as
deposits with original maturities of 90 days or less.
We continue to anticipate that our cash and cash equivalents, as well as
available credit facilities, will be sufficient to fund our anticipated cash
requirements for working capital, contractual commitments, capital expenditures,
dividends and operating needs for the next twelve months. Any further material
or acquisition-related activities may require additional sources of financing
and would be subject to the financial covenants established under our credit
facilities. For more details, see "Long-term Debt and Credit Facilities" below.
As of December 31, 2019 , we recognized a provision of $19.3 million (June 30 ,
2019-$17.4 million) in respect of both additional foreign taxes or deferred
income tax liabilities for temporary differences related to the undistributed
earnings of certain non-United States subsidiaries, and planned periodic
repatriations from certain United States and German subsidiaries, that will be
subject to withholding taxes upon distribution.
Cash flows provided by operating activities
Cash flows from operating activities decreased by $15.8 million due to a
decrease in changes from working capital of $69.5 million , partially offset by
an increase in net income before the impact of non-cash items of $53.7 million .
The change in operating cash flow from changes in working capital was primarily
due to the net impact of the following decreases: (i) $30.9 million relating to
higher accounts receivable balances, (ii) $18.2 million relating to changes in
income taxes payable, (iii) $13.0 million relating to an increase in prepaid
expenses and other current assets, (iv) $4.3 million relating to higher contract
assets, (v) $3.5 million relating to a decrease in accounts payable and accrued
liabilities, (vi) $2.6 million relating to an increase in other assets and (vii)
$2.1 million net operating lease assets and liabilities. These decreases in
operating cash flows were partially offset by an increase of $5.1 million
relating to deferred revenues.
During the second quarter of Fiscal 2020 our days sales outstanding (DSO) was 57
days, compared to a DSO of 59 days during the second quarter of Fiscal 2019. The
per day impact of our DSO in the second quarter of Fiscal 2020 on our cash flows
was $8.5 million before the impact of acquired accounts receivable from
Carbonite. The per day impact of our DSO in the second quarter of Fiscal 2019
was $8.2 million . In arriving at DSO, we exclude contract assets as these assets
do not provide an unconditional right to the related consideration from the
customer.
Cash flows used in investing activities
Our cash flows used in investing activities is primarily on account of
acquisitions and additions of property and equipment.
Cash flows used in investing activities increased by $911.1 million , primarily
due to an increase in consideration paid for acquisitions during the first half
of Fiscal 2020, which included cash paid for the acquisition of Carbonite of
approximately $1.2 billion .
66
--------------------------------------------------------------------------------
Cash flows used in financing activities
Our cash flows from financing activities generally consist of long-term debt
financing and amounts received from stock options exercised by our employees.
These inflows are typically offset by scheduled and non-scheduled repayments of
our long-term debt financing and, when applicable, the payment of dividends
and/or the repurchases of our Common Shares.
Cash flows provided by financing activities increased by $747.9 million . This
was primarily due to proceeds from drawings on the Revolver of $750 million
during the second quarter of Fiscal 2020, which were used, in part, to fund the
acquisition of Carbonite.
Cash Dividends
During the three and six months ended December 31, 2019 , we declared and paid
cash dividends of $0.1746 and $0.3492 per Common Share, respectively, in the
aggregated amount of $47.1 million and $94.1 million , respectively. Future
declarations of dividends and the establishment of future record and payment
dates are subject to the final determination and discretion of the Board. See
Item 5 "Dividend Policy" in our Annual Report on Form 10-K for Fiscal 2019 for
more information.
Long-term Debt and Credit Facilities
Senior Unsecured Fixed Rate Notes
Senior Notes 2026
On May 31, 2016 we issued $600 million in aggregate principal amount of 5.875%
Senior Notes due 2026 (Senior Notes 2026) in an unregistered offering to
qualified institutional buyers pursuant to Rule 144A under the Securities Act,
and to certain persons in offshore transactions pursuant to Regulation S under
the Securities Act. Senior Notes 2026 bear interest at a rate of 5.875% per
annum, payable semi-annually in arrears on June 1 and December 1 , commencing on
December 1, 2016 . Senior Notes 2026 will mature on June 1, 2026 , unless earlier
redeemed, in accordance with their terms, or repurchased.
On December 20, 2016 , we issued an additional $250 million in aggregate
principal amount by reopening our Senior Notes 2026 at an issue price of
102.75%. The additional notes have identical terms, are fungible with and are a
part of a single series with the previously issued $600 million aggregate
principal amount of Senior Notes 2026. The outstanding aggregate principal
amount of Senior Notes 2026, after taking into consideration the additional
issuance, is $850 million .
We may redeem all or a portion of the Senior Notes 2026 at any time prior to
June 1, 2021 at a redemption price equal to 100% of the principal amount of
Senior Notes 2026 plus an applicable premium, plus accrued and unpaid interest,
if any, to the redemption date. We may also, on one or more occasions, redeem
Senior Notes 2026, in whole or in part, at any time on and after June 1, 2021 at
the applicable redemption prices set forth in the indenture governing the Senior
Notes 2026, dated as of May 31, 2016 , among the Company, the subsidiary
guarantors party thereto, The Bank of New York Mellon , as U.S. trustee, and BNY
Trust Company of Canada , as Canadian trustee (the 2026 Indenture), plus accrued
and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of changes of control triggering events
specified in the 2026 Indenture, we will be required to make an offer to
repurchase Senior Notes 2026 at a price equal to 101% of the principal amount of
Senior Notes 2026, plus accrued and unpaid interest, if any, to the date of
purchase.
The 2026 Indenture contains covenants that limit our and certain of our
subsidiaries' ability to, among other things: (i) create certain liens and enter
into sale and lease-back transactions; (ii) create, assume, incur or guarantee
additional indebtedness of the Company or the guarantors without such subsidiary
becoming a subsidiary guarantor of the notes; and (iii) consolidate, amalgamate
or merge with, or convey, transfer, lease or otherwise dispose of its property
and assets substantially as an entirety to, another person. These covenants are
subject to a number of important limitations and exceptions as set forth in the
2026 Indenture. The 2026 Indenture also provides for events of default, which,
if any of them occurs, may permit or, in certain circumstances, require the
principal, premium, if any, interest and any other monetary obligations on all
the then-outstanding notes to be due and payable immediately.
Senior Notes 2026 are guaranteed on a senior unsecured basis by our existing and
future wholly-owned subsidiaries that borrow or guarantee the obligations under
our existing senior credit facilities. Senior Notes 2026 and the guarantees rank
equally in right of payment with all of our and our guarantors' existing and
future senior unsubordinated debt and will rank senior in right of payment to
all of the our and our guarantors' future subordinated debt. Senior Notes 2026
and the guarantees will be effectively subordinated to all of our and our
guarantors' existing and future secured debt, including the obligations under
the senior credit facilities, to the extent of the value of the assets securing
such secured debt.
67
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The foregoing description of the 2026 Indenture does not purport to be complete
and is qualified in its entirety by reference to the full text of the 2026
Indenture, which is filed as an exhibit to the Company's Current Report on Form
8-K filed with the SEC on May 31, 2016 .
Senior Notes 2023
On January 15, 2015 , we issued $800 million in aggregate principal amount of our
5.625% Senior Notes due 2023 (Senior Notes 2023) in an unregistered offering to
qualified institutional buyers pursuant to Rule 144A under the Securities Act
and to certain persons in offshore transactions pursuant to Regulation S under
the Securities Act. Senior Notes 2023 bear interest at a rate of 5.625% per
annum, payable semi-annually in arrears on January 15 and July 15 , commencing on
July 15, 2015 . Senior Notes 2023 will mature on January 15, 2023 , unless earlier
redeemed in accordance with their terms, or repurchased.
We may, on one or more occasion, redeem Senior Notes 2023, in whole or in part,
at any time at the applicable redemption prices set forth in the indenture
governing the Senior Notes 2023, dated as of January 15, 2015 , among the
Company, the subsidiary guarantors party thereto, The Bank of New York Mellon
(as successor to Citibank N.A .), as U.S. trustee, and BNY Trust Company of
Canada (as successor to Citi Trust Company Canada ), as Canadian trustee (the
2023 Indenture), plus accrued and unpaid interest, if any, to the redemption
date.
If we experience one of the kinds of changes of control triggering events
specified in the 2023 Indenture, we will be required to make an offer to
repurchase Senior Notes 2023 at a price equal to 101% of the principal amount of
Senior Notes 2023, plus accrued and unpaid interest, if any, to the date of
purchase.
The 2023 Indenture contains covenants that limit our and certain of our
subsidiaries' ability to, among other things: (i) create certain liens and enter
into sale and lease-back transactions; (ii) create, assume, incur or guarantee
additional indebtedness of the Company or the subsidiary guarantors without such
subsidiary becoming a subsidiary guarantor of Senior Notes 2023; and (iii)
consolidate, amalgamate or merge with, or convey, transfer, lease or otherwise
dispose of its property and assets substantially as an entirety to, another
person. These covenants are subject to a number of important limitations and
exceptions as set forth in the 2023 Indenture. The 2023 Indenture also provides
for events of default, which, if any of them occurs, may permit or, in certain
circumstances, require the principal, premium, if any, interest and any other
monetary obligations on all the then-outstanding notes to be due and payable
immediately.
Senior Notes 2023 are guaranteed on a senior unsecured basis by our existing and
future wholly-owned subsidiaries that borrow or guarantee the obligations under
our existing senior credit facilities. Senior Notes 2023 and the guarantees rank
equally in right of payment with all of our and our subsidiary guarantors'
existing and future senior unsubordinated debt and will rank senior in right of
payment to all of our and our subsidiary guarantors' future subordinated debt.
Senior Notes 2023 and the guarantees will be effectively subordinated to all of
ours and our guarantors' existing and future secured debt, including the
obligations under the Revolver and Term Loan B (as defined herein), to the
extent of the value of the assets securing such secured debt.
The foregoing description of the 2023 Indenture does not purport to be complete
and is qualified in its entirety by reference to the full text of the 2023
Indenture, which is filed as an exhibit to the Company's Current Report on Form
8-K filed with the SEC on January 15, 2015 .
Notes due 2022
As part of our acquisition of Carbonite, our consolidated debt reflects $143.8
million of principal debt convertible notes (Notes due 2022). Notes due 2022
were originally issued by Carbonite, on April 4, 2017 , in an unregistered
offering to qualified institutional buyers pursuant to Rule 144A under the
Securities Act. The Notes due 2022 were issued under an Indenture (the 2022
Notes Indenture) between Carbonite and U.S. Bank National Association , as
trustee (the 2022 Notes Trustee). The Notes due 2022 accrue interest at 2.5% per
year, payable semiannually in arrears on April 1 and October 1 of each year. The
Notes due 2022 will mature on April 1, 2022 , unless earlier repurchased,
redeemed or converted. Carbonite, now a subsidiary of OpenText, remains the sole
obligor on the Notes due 2022.
In connection with our acquisition of Carbonite, and as required by the 2022
Notes Indenture, Carbonite and the 2022 Notes Trustee entered into a first
supplemental indenture, dated as of December 24, 2019 (the 2022 Notes
Supplemental Indenture). The 2022 Notes Supplemental Indenture provides that, at
and after the effective time of our acquisition of Carbonite, the right to
convert each $1,000 principal amount of the Notes due 2022 was changed into the
right to convert such principal amount of the Notes due 2022 solely into cash in
an amount equal to the Conversion Rate (as defined in the 2022 Notes Indenture)
in effect on the Conversion Date (as defined in the 2022 Notes Indenture)
multiplied by $23.00 , which was the price per share we paid in connection with
our acquisition of Carbonite.
As a result of our acquisition of Carbonite, the Conversion Rate for the Notes
due 2022 was temporarily increased by 7.7633 per $1,000 principal amount of
Notes due 2022 to yield a Conversion Rate of 46.4667 per $1,000 principal amount
of Notes due 2022. The increased Conversion Rate will remain in effect until
the close of business (5:00 P.M. New York City
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time) on February 27, 2020 . During the period between our acquisition of
Carbonite and that date, each $1,000 principal amount of Notes due 2022
surrendered for conversion will be converted into $1,068.7341 in cash.
Term Loan B
On May 30, 2018 , we entered into a credit facility, which provides for a $1
billion term loan facility with certain lenders named therein, Barclays Bank PLC
(Barclays), as sole administrative agent and collateral agent, and as lead
arranger and joint bookrunner (Term Loan B) and borrowed the full amount on May
30, 2018 to, among other things, repay in full the loans under our prior $800
million term loan credit facility originally entered into on January 16, 2014 .
Repayments made under Term Loan B are equal to 0.25% of the principal amount in
equal quarterly installments for the life of Term Loan B, with the remainder due
at maturity.
Borrowings under Term Loan B are secured by a first charge over substantially
all of our assets on a pari passu basis with the Revolver. Term Loan B has a
seven year term, maturing in May 2025 .
Borrowings under Term Loan B bear interest at a rate per annum equal to an
applicable margin plus, at the borrower's option, either (1) the eurodollar rate
for the interest period relevant to such borrowing or (2) an ABR rate. The
applicable margin for borrowings under Term Loan B is 1.75%, with respect to
LIBOR advances and 0.75%, with respect to ABR advances. The interest on the
current outstanding balance for Term Loan B is equal to 1.75% plus LIBOR
(subject to a 0.00% floor). As of December 31, 2019 , the outstanding balance on
the Term Loan B bears an interest rate of approximately 3.45%.
Term Loan B has incremental facility capacity of (i) $250 million plus (ii)
additional amounts, subject to meeting a "consolidated senior secured net
leverage" ratio not exceeding 2.75:1.00, in each case subject to certain
conditions. Consolidated senior secured net leverage ratio is defined for this
purpose as the proportion of our total debt reduced by unrestricted cash,
including guarantees and letters of credit, that is secured by our or any of our
subsidiaries' assets, over our trailing twelve months net income before
interest, taxes, depreciation, amortization, restructuring, share-based
compensation and other miscellaneous charges.
Under Term Loan B, we must maintain a "consolidated net leverage" ratio of no
more than 4:1 at the end of each financial quarter. Consolidated net leverage
ratio is defined for this purpose as the proportion of our total debt reduced by
unrestricted cash, including guarantees and letters of credit, over our trailing
twelve months net income before interest, taxes, depreciation, amortization,
restructuring, share-based compensation and other miscellaneous charges. As of
December 31, 2019 , our consolidated net leverage ratio was 2.3:1.
Revolver
On October 31, 2019 , we amended our committed revolving credit facility (the
Revolver) to increase the total commitments under the Revolver from $450 million
to $750 million as well as to extend the maturity from May 5, 2022 to October
31, 2024 . Borrowings under the Revolver are secured by a first charge over
substantially all of our assets, on a pari passu basis with Term Loan B. The
Revolver has no fixed repayment date prior to the end of the term. Borrowings
under the Revolver bear interest per annum at a floating rate of LIBOR plus a
fixed margin dependent on our consolidated net leverage ratio ranging from 1.25%
to 1.75%. As of December 31, 2019 , the outstanding balance on the Revolver bears
an interest rate of approximately 3.29%.
During the three months ended December 31, 2019 we drew down $750 million from
the Revolver to partially fund the acquisition of Carbonite. As of December 31,
2019 , the full amount drawn remains outstanding (June 30 , 2019-nil). During the
three and six months ended December 31, 2019 , we recorded interest expense
relating to amounts drawn of approximately $0.6 million , respectively.
As of December 31, 2018 , we had no outstanding balance on the Revolver. There
was no activity during three and six months ended December 31, 2018 and we
recorded no interest expense.
For further details relating to our debt, please see note 11 "Long-Term Debt" to
our Condensed Consolidated Financial Statements.
Shelf Registration Statement
On November 29, 2019 , we filed a universal shelf registration statement on Form
S-3 with the SEC , which became effective automatically (the Shelf Registration
Statement). The Shelf Registration Statement allows for primary and secondary
offerings from time to time of equity, debt and other securities, including
Common Shares, Preference Shares, debt securities, depositary shares, warrants,
purchase contracts, units and subscription receipts. A base shelf short-form
prospectus qualifying the distribution of such securities was concurrently filed
with Canadian securities regulators on November 29, 2019 . The type
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of securities and the specific terms thereof will be determined at the time of
any offering and will be described in the applicable prospectus supplement to be
filed separately with the SEC and Canadian securities regulators.
Pensions
As of December 31, 2019 , our total unfunded pension plan obligations were $75.9
million , of which $2.3 million is payable within the next twelve months. We
expect to be able to make the long-term and short-term payments related to these
obligations in the normal course of operations.
Our anticipated payments under our most significant plans for the fiscal years
indicated below are as follows:
Fiscal years ending June 30,
CDT GXS GER GXS PHP
2020 (six months ended June 30) $ 331 $ 493 $ 31
2021 739 985 268
2022 810 1,017 266
2023 909 1,017 222
2024 1,014 1,023 278
2025 to 2029 5,851 5,171 2,890
Total $ 9,654 $ 9,706 $ 3,955
For a detailed discussion on pensions, see note 12 "Pension Plans and Other Post
Retirement Benefits" to our Condensed Consolidated Financial Statements.
Commitments and Contractual Obligations
As of December 31, 2019 , we have entered into the following contractual
obligations with minimum payments for the indicated fiscal periods as follows:
Payments due between
January 1, 2020- July 1, 2020- July 1, 2022- July 1, 2024
Total June 30, 2020 June 30, 2022 June 30, 2024 and beyond
Long-term debt
obligations (1) $ 3,449,651 $ 223,222 $ 277,680 $ 1,031,371 $ 1,917,378
Purchase obligations
for contracts not
accounted for as
lease obligations
(2) 60,978 23,135 32,843 5,000 -
$ 3,510,629 $ 246,357 $ 310,523 $ 1,036,371 $ 1,917,378
(1) Includes interest up to maturity and principal payments. Please see note 11
"Long-Term Debt" for more details.
(2) For contractual obligations relating to leases and purchase obligations
accounted for under Topic 842, please see note 6 "Leases".
Guarantees and Indemnifications
We have entered into customer agreements which may include provisions to
indemnify our customers against third party claims that our software products or
services infringe certain third party intellectual property rights and for
liabilities related to a breach of our confidentiality obligations. We have not
made any material payments in relation to such indemnification provisions and
have not accrued any liabilities related to these indemnification provisions in
our Condensed Consolidated Financial Statements.
Occasionally, we enter into financial guarantees with third parties in the
ordinary course of our business, including, among others, guarantees relating to
taxes and letters of credit on behalf of parties with whom we conduct business.
Such agreements have not had a material effect on our results of operations,
financial position or cash flows.
Litigation
We are currently involved in various claims and legal proceedings.
Quarterly, we review the status of each significant legal matter and evaluate
such matters to determine how they should be treated for accounting and
disclosure purposes in accordance with the requirements of ASC Topic 450-20
"Loss Contingencies" (Topic 450-20). Specifically, this evaluation process
includes the centralized tracking and itemization of the
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status of all our disputes and litigation items, discussing the nature of any
litigation and claim, including any dispute or claim that is reasonably likely
to result in litigation, with relevant internal and external counsel, and
assessing the progress of each matter in light of its merits and our experience
with similar proceedings under similar circumstances.
If the potential loss from any claim or legal proceeding is considered probable
and the amount can be reasonably estimated, we accrue a liability for the
estimated loss in accordance with Topic 450-20. As of the date of this Quarterly
Report on Form 10-Q, the aggregate of such accrued liabilities was not material
to our consolidated financial position or results of operations and we do not
believe as of the date of this filing that it is reasonably possible that a loss
exceeding the amounts already recognized will be incurred that would be material
to our consolidated financial position or results of operations. As more fully
described below, we are unable at this time to estimate a possible loss or range
of losses in respect of certain disclosed matters.
Contingencies
IRS Matter
As we have previously disclosed, the United States Internal Revenue Service
(IRS) is examining certain of our tax returns for our fiscal year ended June 30,
2010 (Fiscal 2010) through our fiscal year ended June 30, 2012 (Fiscal 2012),
and in connection with those examinations is reviewing our internal
reorganization in Fiscal 2010 to consolidate certain intellectual property
ownership in Luxembourg and Canada and our integration of certain acquisitions
into the resulting structure. We also previously disclosed that the examinations
may lead to proposed adjustments to our taxes that may be material, individually
or in the aggregate, and that we have not recorded any material accruals for any
such potential adjustments in our Condensed Consolidated Financial Statements.
We previously disclosed that, as part of these examinations, on July 17, 2015 we
received from the IRS an initial Notice of Proposed Adjustment (NOPA) in draft
form, that, as revised by the IRS on July 11, 2018 proposes a one-time
approximately $335 million increase to our U.S. federal taxes arising from the
reorganization in Fiscal 2010 (the 2010 NOPA), plus penalties equal to 20% of
the additional proposed taxes for Fiscal 2010, and interest at the applicable
statutory rate published by the IRS .
On July 11, 2018 , we also received, consistent with previously disclosed
expectations, a draft NOPA proposing a one time approximately $80 million
increase to our U.S. federal taxes for Fiscal 2012 (the 2012 NOPA) arising from
the integration of Global 360 Holding Corp. into the structure that resulted
from the internal reorganization in Fiscal 2010, plus penalties equal to 40% of
the additional proposed taxes for Fiscal 2012, and interest.
On January 7, 2019 , we received from the IRS official notification of proposed
adjustments to our taxable income for Fiscal 2010 and Fiscal 2012, together with
the 2010 NOPA and 2012 NOPA in final form. In each case, such documentation was
as expected and on substantially the same terms as provided for in the
previously disclosed respective draft NOPAs, with the exception of an additional
proposed penalty as part of the 2012 NOPA.
A NOPA is an IRS position and does not impose an obligation to pay tax. We
continue to strongly disagree with the IRS' positions within the NOPAs and we
are vigorously contesting the proposed adjustments to our taxable income, along
with any proposed penalties and interest.
As of our receipt of the final 2010 NOPA and 2012 NOPA, our estimated potential
aggregate liability, as proposed by the IRS , including additional state income
taxes plus penalties and interest that may be due, was approximately $770
million , comprised of approximately $455 million in U.S. federal and state
taxes, approximately $130 million of penalties, and approximately $185 million
of interest. Interest will continue to accrue at the applicable statutory rates
until the matter is resolved and may be substantial.
As previously disclosed and noted above, we strongly disagree with the IRS'
positions and we are vigorously contesting the proposed adjustments to our
taxable income, along with the proposed penalties and interest. We are examining
various alternatives available to taxpayers to contest the proposed adjustments,
including through IRS Appeals and U.S. Federal court. Any such alternatives
could involve a lengthy process and result in the incurrence of significant
expenses. As of the date of this Quarterly Report on Form 10-Q, we have not
recorded any material accruals in respect of these examinations in our Condensed
Consolidated Financial Statements. An adverse outcome of these tax examinations
could have a material adverse effect on our financial position and results of
operations.
For additional information regarding the history of this IRS matter, please see
Note 13 "Guarantees and Contingencies" in our Annual Report on Form 10-K for
Fiscal 2018.
CRA Matter
As part of its ongoing audit of our Canadian tax returns, the Canada Revenue
Agency (CRA) has disputed our transfer pricing methodology used for certain
intercompany transactions with our international subsidiaries and has issued
notices of
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reassessment for Fiscal 2012, Fiscal 2013 and Fiscal 2014. Assuming the
utilization of available tax attributes (further described below), we estimate
our potential aggregate liability, as of December 31, 2019 , in connection with
the CRA's reassessments for Fiscal 2012, Fiscal 2013 and Fiscal 2014 to be
limited to penalties and interest that may be due of approximately $25 million .
The notices of reassessment for Fiscal 2012, Fiscal 2013 and Fiscal 2014 would,
as drafted, increase our taxable income by approximately $90 million to $100
million for each of those years, as well as impose a 10% penalty on the proposed
adjustment to income.
We strongly disagree with the CRA's positions and believe the reassessments of
Fiscal 2012, Fiscal 2013 and Fiscal 2014 (including any penalties) are without
merit. We have filed notices of objection for Fiscal 2012, Fiscal 2013 and
Fiscal 2014, and we are currently seeking competent authority consideration
under applicable international treaties in respect of these reassessments.
Even if we are unsuccessful in challenging the CRA's reassessments to increase
our taxable income for Fiscal 2012, Fiscal 2013 and Fiscal 2014, or potential
reassessments that may be proposed for subsequent years currently under audit,
we have elective deductions available for those years (including carry-backs
from later years) that would offset such increased amounts so that no additional
cash tax would be payable, exclusive of any assessed penalties and interest, as
described above.
We will continue to vigorously contest the proposed adjustments to our taxable
income and any penalty and interest assessments. As of the date of this
Quarterly Report on Form 10-Q, we have not recorded any accruals in respect of
these reassessments in our Condensed Consolidated Financial Statements. Audits
by the CRA of our tax returns for fiscal years prior to Fiscal 2012 have been
completed with no reassessment of our income tax liability in respect of our
international transactions, including the transfer pricing methodology applied
to them. The CRA is currently auditing Fiscal 2015, Fiscal 2016 and Fiscal 2017
and have proposed to reassess Fiscal 2015 in a manner consistent with Fiscal
2012, Fiscal 2013 and Fiscal 2014. We are engaged in ongoing discussions with
the CRA and continue to vigorously contest the CRA's audit positions.
GXS India Matter
Our Indian subsidiary, GXS India Technology Centre Private Limited (GXS India),
is subject to potential assessments by Indian tax authorities in the city of
Bangalore . GXS India has received assessment orders from the Indian tax
authorities alleging that the transfer price applied to intercompany
transactions was not appropriate. Based on advice from our tax advisors, we
believe that the facts that the Indian tax authorities are using to support
their assessment are incorrect. We have filed appeals and anticipate an eventual
settlement with the Indian tax authorities. We have accrued $1.3 million to
cover our anticipated financial exposure in this matter.
Carbonite Class Action Complaint
On August 1, 2019 , prior to our acquisition of Carbonite, a purported
stockholder of Carbonite filed a putative class action complaint against
Carbonite, its former Chief Executive Officer, Mohamad S. Ali , and its former
Chief Financial Officer, Anthony Folger , in the United States District Court for
the District of Massachusetts captioned Ruben A. Luna , Individually and on
Behalf of All Others Similarly Situated v. Carbonite, Inc. , Mohamad S. Ali , and
Anthony Folger (No. 1:19-cv-11662-LTS). The complaint alleges violations of the
federal securities laws under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The
complaint generally alleges that the defendants made materially false and
misleading statements in connection with Carbonite's Server Backup VM Edition,
and seeks, among other things, the designation of the action as a class action,
an award of unspecified compensatory damages, costs and expenses, including
counsel fees and expert fees, and other relief as the court deems appropriate.
On August 23, 2019 , a nearly identical complaint was filed in the same court
captioned William Feng , Individually and on Behalf of All Others Similarly
Situated v. Carbonite, Inc. , Mohamad S. Ali , and Anthony Folger (No. 1:19-
cv-11808-LTS) (together with the Luna Complaint, the "Securities Actions"). On
November 21, 2019 , the court consolidated the Securities Actions, appointed a
lead plaintiff, and designated a lead counsel. On January 15, 2020 , the lead
plaintiff filed a consolidated amended complaint generally making the same
allegations and seeking the same relief as the complaint filed on August 1,
2019 . The defendants' answer or responsive pleading is due by March 10, 2020 . In
light of, among other things, the early stage of the litigation, we are unable
to predict the outcome of this action and are unable to reasonably estimate the
amount or range of loss, if any, that could result from this proceeding.
Carbonite vs Realtime Data
On February 27, 2017 , prior to our acquisition of Carbonite, a non-practicing
entity named Realtime Data LLC ("Realtime Data") filed a lawsuit against
Carbonite in the U.S. District Court for the Eastern District of Texas "Realtime
Data LLC v. Carbonite, Inc. et al (No 6:17-cv-00121-RWS-JDL)", alleging that
certain of Carbonite's cloud storage services infringe upon certain patents held
by Realtime Data. Realtime Data's complaint against Carbonite sought damages in
an unspecified
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amount and injunctive relief. On December 19, 2017 , the U.S. District Court for
the Eastern District of Texas transferred the case to the U.S District Court for
the District of Massachusetts (No. 1:17-cv-12499). Realtime Data has also filed
numerous other patent suits on the asserted patents against other companies
around the country. In one of those suits, filed in the U.S. District Court for
the District of Delaware , the Delaware Court on July 29, 2019 dismissed the
lawsuit after declaring invalid three of the four patents asserted by Realtime
Data against Carbonite. By way of Order dated August 19, 2019 , the U.S. District
Court for the District of Massachusetts stayed the action against Carbonite
pending appeal of the dismissal in the Delaware lawsuit. As to the fourth
patent, the U.S. Patent & Trademark Office Patent Trial and Appeal Board on
September 24, 2019 invalidated certain claims of that patent. No trial date has
been set in the action against Carbonite. The Company is defending Carbonite
vigorously. We have not accrued a loss contingency related to this matter
because litigation related to a non-practicing entity is inherently
unpredictable. Although a loss is reasonably possible, an unfavorable outcome is
not considered by management to be probable at this time and we remain unable to
reasonably estimate a possible loss or range of loss associated with this
litigation.
Please also see Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K
for Fiscal 2019.
Off-Balance Sheet Arrangements
We do not enter into off-balance sheet financing as a matter of practice, except
for guarantees relating to taxes and letters of credit on behalf of parties with
whom we conduct business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to market risks associated with fluctuations in
interest rates on our term loans, revolving loans and foreign currency exchange
rates.
Interest rate risk
Our exposure to interest rate fluctuations relate primarily to our Term Loan B
and the Revolver.
As of December 31, 2019 , we had an outstanding balance of $982.5 million on Term
Loan B. Term Loan B bears a floating interest rate of 1.75% plus LIBOR. As of
December 31, 2019 , an adverse change of one percent on the interest rate would
have the effect of increasing our annual interest payment on Term Loan B by
approximately $9.8 million , assuming that the loan balance as of December 31,
2019 is outstanding for the entire period (June 30 , 2019-$9.9 million).
As of December 31, 2019 , we had an outstanding balance of $750.0 million on the
Revolver. Borrowings under the Revolver bear interest per annum at a floating
rate of LIBOR plus a fixed rate that is dependent on our consolidated net
leverage ratio ranging from 1.25% to 1.75%. As at December 31, 2019 , an adverse
change of one percent on the interest rate would have the effect of increasing
our annual interest payment on the Revolver by approximately $7.5 million ,
assuming that the full balance as of December 31, 2019 is outstanding for the
entire period (June 30 , 2019-nil).
Foreign currency risk
Foreign currency transaction risk
We transact business in various foreign currencies. Our foreign currency
exposures typically arise from intercompany fees, intercompany loans and other
intercompany transactions that are expected to be cash settled in the near term.
We expect that we will continue to realize gains or losses with respect to our
foreign currency exposures. Our ultimate realized gain or loss with respect to
foreign currency exposures will generally depend on the size and type of
cross-currency transactions that we enter into, the currency exchange rates
associated with these exposures and changes in those rates. Additionally, we
have hedged certain of our Canadian dollar foreign currency exposures relating
to our payroll expenses in Canada .
Based on the foreign exchange forward contracts outstanding as of December 31,
2019 , a one cent change in the Canadian dollar to U.S. dollar exchange rate
would have caused a change of approximately $0.6 million in the mark to market
on our existing foreign exchange forward contracts (June 30 , 2019-$0.6 million).
Foreign currency translation risk
Our reporting currency is the U.S. dollar. Fluctuations in foreign currencies
impact the amount of total assets and liabilities that we report for our foreign
subsidiaries upon the translation of these amounts into U.S. dollars. In
particular, the amount of cash and cash equivalents that we report in U.S.
dollars for a significant portion of the cash held by these subsidiaries is
subject to translation variance caused by changes in foreign currency exchange
rates as of the end of each
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respective reporting period (the offset to which is recorded to accumulated
other comprehensive income on our Condensed Consolidated Balance Sheets).
The following table shows our cash and cash equivalents denominated in certain
major foreign currencies as of December 31, 2019 (equivalent in U.S. dollar):
U.S. Dollar U.S. Dollar
Equivalent at Equivalent at
(In thousands) December 31, 2019 June 30, 2019
Euro $ 58,020 $ 120,417
British Pound 30,603 33,703
Canadian Dollar 15,678 12,635
Swiss Franc 34,163 56,776
Other foreign currencies 97,856 105,273
Total cash and cash equivalents denominated in 236,320 328,804
foreign currencies
U.S. dollar 439,083 612,205
Total cash and cash equivalents $ 675,403 If overall foreign currency exchange rates in comparison to theU.S. dollar uniformly weakened by 10%, the amount of cash and cash equivalents we would report in equivalentU.S. dollars would decrease by approximately$23.6 million (June 30 , 2019-$32.9 million), assuming we have not entered into any derivatives discussed above under "Foreign Currency Transaction Risk".
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