NaN cash was used by us to settle equity instruments granted under share-based compensation arrangements in any of the periods presented.
We have 0t capitalized any share-based compensation costs as part of the cost of an asset in any of the periods presented.
We incentivize certain eligible employees, in part, with long-term compensation pursuant to our LTIP. The LTIP is a rolling three year program that grants eligible employees a certain number of target Performance Share Units (PSUs) and/or Restricted Share Units (RSUs). Target PSUs become vested upon the achievement of certain financial and/or operational performance criteria (the Performance Conditions) that are determined at the time of the grant. Target RSUs become vested when an eligible employee remains employed throughout the vesting period.
PSUs and RSUs granted under the LTIPs have been measured at fair value as of the effective date, consistent with Topic 718, and will be charged to share-based compensation expense over the remaining life of the plan. Stock options granted under the LTIPs have been measured using the Black-Scholes option-pricing model, consistent with Topic 718. We estimate the fair value of PSUs using the Monte Carlo pricing model and RSUs have been valued based upon their grant date fair value. Stock options granted under the LTIPs have been measured using the Black-Scholes option-pricing model, consistent with Topic 718.
LTIP grants that have recently vested, or have yet to vest, are described below. LTIP grants are referred to in this Quarterly Report on Form 10-Q based upon the year in which the grants are expected to vest.
DSUs granted vest at our next annual general meeting following the granting of the DSUs. No DSUs are payable by us until the director ceases to be a member of the Board.
Our ESPP offers employees a purchase price discount of 15%.
We have entered into the following contractual obligations with minimum payments for the indicated fiscal periods as follows:
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.
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 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 described more fully below, we are unable at this time to estimate a possible loss or range of losses in respect of certain disclosed matters.
As we have previously disclosed, the United States Internal Revenue Service (IRS) ishas been 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 ishas been reviewing our internal reorganization in Fiscal 2010 and Fiscal 2012 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 havehad 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 infor 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 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.
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 reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2014.2016. Assuming the utilization of available tax attributes (further described below), we estimate our potential aggregate liability, as of March 31, 2020,2021, in connection with the CRA's reassessments for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 20142016 to be limited to penalties, interest and interestprovincial taxes that may be due of approximately $25$64 million. As of March 31, 2021, we have provisionally paid approximately $28 million in order to fully preserve our rights to object to the CRA's audit positions, being the minimum payment required under Canadian legislation while the matter is in dispute. This amount is recorded within "Long-term income taxes recoverable" on the Condensed Consolidated Balance Sheets as of March 31, 2021.
We strongly disagree with the CRA's positions and believe the reassessments of Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 20142016 (including any penalties) are without merit. We have filed notices of objection for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2014, and we2016. 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, Fiscal 2014, Fiscal 2015 and Fiscal 2014, or potential reassessments that may be proposed for subsequent years currently under audit,2016, 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. Asassessments, as well as any proposed reduction to the basis of our depreciable property. We are confident that our original tax filing positions were appropriate. Accordingly, as of the date of this Quarterly Report on Form 10-Q, we have not recorded any accruals in respect of these reassessments or proposed reassessment 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.
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 moved to dismiss the Securities Actions on March 10, 2020. The motion was fully briefed in June 2020 and a hearing on the motion to dismiss the Securities Actions was held on October 15, 2020. Following the hearing, on October 22, 2020, the court granted with prejudice the defendants’ motion to dismiss the Securities Actions. On November 20, 2020, the lead counsel'splaintiff filed a notice of appeal to the Court of Appeals for the First Circuit. The lead plaintiff's brief in support of its appeal was filed on March 2, 2021. The defendants' opposition is currentlybrief was filed on March 31, 2021. The lead plaintiff's reply brief will be due on May 4, 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.7, 2021.
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 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.Carbonite; that decision was appealed to the U.S. Court of Appeals for the Federal Circuit. By way of Order dated August 19, 2019, the U.S. District Court for the District of Massachusetts stayed the action against Carbonite pending the aforementioned appeal of the dismissal in the Delaware lawsuit. On October 23, 2020, the Appeals Court vacated and remanded the Delaware Court’s decision. Following the Appeals Court's decision, the Massachusetts District Court lifted the stay on the action against Carbonite. On January 21, 2021, the Court held a hearing to construe the claims of the asserted patents. As to the fourth patent asserted against Carbonite, the U.S. Patent & Trademark Office Patent Trial and Appeal Board on September 24, 2019 invalidated certain claims of that patent.patent, including certain claims that had been asserted against Carbonite, and the parties jointly stipulated to dismiss the patent from the action. No trial date has been set in the action against Carbonite. The Company isWe are vigorously defending Carbonite vigorously.the matter. 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.
Our effective tax rate represents the net effect of the mix of income earned in various tax jurisdictions that are subject to a wide range of income tax rates.
We recognize interest expense and penalties related to income tax matters in income tax expense. For the three and nine months ended March 31, 2021 and 2020, and 2019,respectively, we recognized the following amounts as income tax-related interest expense and penalties:
The following amounts have been accrued on account of income tax-related interest expense and penalties:
* These balances are primarily included within "Long-term income taxes payable" within the Condensed Consolidated Balance Sheets.
We believe that it is reasonably possible that the gross unrecognized tax benefits, as of March 31, 2020,2021, could decrease tax expense in the next 12 months by $9.3$1.7 million, relating primarily to the expiration of competent authority relief and tax years becoming statute barred for purposes of future tax examinations by local taxing jurisdictions.
Our four most significant tax jurisdictions are Canada, the United States, Luxembourg and Germany. Our tax filings remain subject to audits by applicable tax authorities for a certain length of time following the tax year to which those filings relate. The earliest fiscal years open for examination are 2012 for Germany, 2010 for the United States, 20122015 for Luxembourg, and 2012 for Canada.
We are subject to tax audits in all major taxing jurisdictions in which we operate and currently have tax audits open in Canada, the United States, Germany, India, Austria, Italy, France, and the United Kingdom, Italy and Japan.Philippines. On a quarterly basis we assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Statements regarding the United States and Canada audits are included in note 14 "Guarantees and Contingencies".
The timing of the resolution of income tax audits is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next 12 months we will receive additional assessments by various tax authorities or possibly reach resolution of income tax audits in one or more jurisdictions. These assessments or settlements may or may not result in changes to our contingencies related to positions on tax filings. The actual amount of any change could vary significantly depending on the ultimate timing and nature of any settlements. We cannot currently provide an estimate of the range of possible outcomes. For more information relating to certain tax audits, please refer to note 14 "Guarantees and Contingencies".
certain non-United States subsidiaries and planned periodic repatriations from certain German subsidiaries, that will be subject to withholding taxes upon distribution. We have not provided for additional foreign withholding taxes or deferred income tax liabilities related to undistributed earnings of all other non-Canadian subsidiaries, since such earnings are considered permanently invested in those subsidiaries or are not subject to withholding taxes. It is not practicable to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future.
ASC Topic 820 “Fair Value Measurement” (Topic 820) defines fair value, establishes a framework for measuring fair value, and addresses disclosure requirements for fair value measurements. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value, in this context, should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including our own credit risk.
Our valuation techniques used to measure the fair values of the derivative instruments, the counterparty to which has high credit ratings, were derived from pricing models including discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data, as no quoted market prices exist for these instruments. Our discounted cash flow techniques use observable market inputs, such as, where applicable, foreign currency spot and forward rates.
Our cash and cash equivalents, along with our accounts receivable and accounts payable and accrued liabilities balances, are measured and recognized in our Condensed Consolidated Financial Statements at an amount that approximates their fair value (a Level 2 measurement) due to their short maturities.
If applicable, we will recognize transfers between levels within the fair value hierarchy at the end of the reporting period in which the actual event or change in circumstance occurs. During the three and nine months ended March 31, 20202021 and 2019,2020, we did not have any transfers between Level 1, Level 2 or Level 3.
We measure certain assets and liabilities at fair value on a nonrecurring basis. These assets and liabilities are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the three and nine months ended March 31, 20202021 and 2019,2020, no indications of impairmentimpairments were identified and therefore no fair value measurements were required.
Fair Value of Derivative Instruments and Effect of Derivative Instruments on Financial Performance
The effect of these derivative instruments on our Condensed Consolidated Financial Statements for the periods indicated below were as follows (amounts presented do not include any income tax effects).
For the three months ended March 31, 2020, "Other charges" includes $1.0 million relating to other miscellaneous charges.
For the nine months ended March 31, 2020, "Other charges" includes $0.7 million relating to accelerated amortization associated with the write-offabandonment of ROU assets and approximately $3.6 million relating to other miscellaneous charges.
The results of operations of this acquisition have been consolidated with those of OpenText beginning March 9, 2020.
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their preliminary fair values as of March 9, 2020, are set forth below:
Included in total identifiable net assets is acquired deferred revenue with a fair value of $18.5 million, which represents our estimate of the fair value of the contractual obligations assumed based on a valuation. In arriving at this fair value, we reduced the acquired company’s original carrying value by approximately $2.7 million.
The fair value of current assets acquired includes accounts receivable with a fair value of $6.5$6.3 million. The gross amount receivable was $6.7$6.6 million, of which $0.2$0.3 million is expected to be uncollectible.
On December 24, 2019, we acquired all of the equity interest in Carbonite, a leading provider of cloud-based subscription backup, disaster recovery and endpoint security to small and medium-sized businesses (SMB), consumers, and a wide variety of partners. Total consideration for Carbonite was approximately $1.4 billion paid in cash (inclusive of cash acquired) and inclusive of approximately $0.1 billion, relating to the cash settlement of pre-acquisition stock compensation that was previously accrued but since paid as of March 31, 2020.. In accordance with ASC Topic 805, this acquisition was accounted for as a business combination. We believe the acquisition will increaseincreases our position in the data protection and endpoint security space, further strengthenstrengthens our cloud capabilities and openopens 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.
| | | | | |
Current assets (inclusive of cash acquired of $62.9 million) | $ | 127,532 | |
Non-current tangible assets (inclusive of restricted cash acquired of $2.4 million) | 105,742 | |
Intangible customer assets | 549,500 | |
Intangible technology assets | 290,000 | |
Liabilities assumed | (554,320) | |
Total identifiable net assets | 518,454 | |
Goodwill | 851,970 | |
Net assets acquired | $ | 1,370,424 | |
The goodwill of approximately $868.4$852.0 million is primarily attributable to the synergies expected to arise after the acquisition. Of this goodwill, approximately $6.9 million is expected to be deductible for tax purposes.
Included in total identifiable net assets is acquired deferred revenue with a fair value of approximately $171.0 million, which represents our estimate of the fair value of the contractual obligations assumed. In arriving at this fair value, we reduced the acquired company’s original carrying value by approximately $74.7 million.
The fair value of current assets acquired includes accounts receivable with a fair value of $45.7 million. The gross amount receivable was $47.1 million of which $1.4 million of this receivable was expected to be uncollectible.
Acquisition-related costs for Carbonite included in "Special charges (recoveries)" in the Condensed Consolidated Financial Statements for the three and nine months ended March 31, 2020 were $1.1 million and $8.5 million, respectively.
The finalization of the above purchase price allocation is pendingcompleted during the finalizationsecond quarter of the valuation of fair value for the assets acquired and liabilities assumed, including intangible assets and taxation-related balances as well as for potential unrecorded liabilities. We expect to finalize this determination on or before our quarter ending December 31, 2020.
The amount of Carbonite's revenues and net loss includedFiscal 2021 did not result in our Condensed Consolidated Statements of Income for the three and nine months ended March 31, 2020 is set forth below: |
| | | | | | |
| January 1, 2020 - March 31, 2020 |
December 24, 2019 - March 31, 2020 |
Revenues | $ | 110,351 |
| $ | 119,862 |
|
Net Loss * | (27,877 | ) | (31,531 | ) |
* Net loss for the three and nine months ended includes one-time fees of approximately $2.8 million and $5.4 million, respectively, on account of special charges and $48.0 million and $52.2 million, respectively, of amortization charges relating to intangible assets, all net of tax.
The unaudited pro forma revenues and net income of the combined entity for the three and nine months ended March 31, 2020 and 2019, respectively, had the acquisition been consummated on July 1, 2018, are set forth below:
|
| | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
Supplemental Unaudited Pro Forma Information(1) | 2019 | | 2020 | | 2019 |
Total Revenues | $ | 800,361 |
| | $ | 2,524,726 |
| | $ | 2,357,397 |
|
Net Income (2) (3) | 44,984 |
| | 134,778 |
| | 35,236 |
|
(1)Carbonite acquired Webroot Inc. in March 2019. The supplemental pro forma revenues and net income shown above do not include the results of operations of Webroot Inc. for periods priorany significant changes to the Webroot acquisition date.
(2) Included in pro forma net income for the nine months ended March 31, 2019 are approximately $127 million of one-time expenses incurred by Carbonite on account of the acquisition and the related tax effect of approximately $33 million. These one-time expenses included i) approximately $74 million related to the accelerated vesting of historical Carbonite equity awards, ii) approximately $29 million of one time fees, primarily related to transaction costs triggered by the closing of the acquisition, iii) $21 million related to the extinguishment of certain of Carbonite's historical debt and interest rate swaps and iv) approximately $3 million in employee severance costs.
(3) Included in pro forma net income for the nine months ended March 31, 2020 and three and nine months ended March 31, 2019 are estimated amortization charges relating to the allocated value of intangible assets.
There was no pro forma impact during the three months ended March 31, 2020. The unaudited pro forma financial information in the table above is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the periods presented or the results that may be realized in the future.preliminary amounts previously disclosed.
Acquisition of Dynamic Solutions Group Inc. (The Fax Guys)
On December 2, 2019, we acquired certain assets and assumed certain liabilities of The Fax Guys, for approximately $5.1 million, of which $1.0$0.6 million is currently held back and unpaid in accordance with the terms of the purchase agreement. During the second quarter of Fiscal 2021, we paid consideration of $0.4 million which was previously accrued. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition complements our Enterprise Information Management (EIM) portfolio.
The results of operations of The Fax Guys have been consolidated with those of OpenText beginning December 2, 2019.
Since the date of acquisition, the acquisition had no significant impact on revenues and net earnings
NOTE 20—ACCUMULATED OTHER COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 |
| | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income |
Balance as of December 31, 2020 | | $ | 81,678 | | | $ | 2,007 | | | $ | (17,209) | | | $ | 66,476 | |
Other comprehensive income (loss) before reclassifications, net of tax | | (12,568) | | | 681 | | | 344 | | | (11,543) | |
Amounts reclassified into net income, net of tax | | 0 | | | (1,108) | | | 249 | | | (859) | |
Total other comprehensive income (loss) net, for the period | | (12,568) | | | (427) | | | 593 | | | (12,402) | |
Balance as of March 31, 2021 | | $ | 69,110 | | | $ | 1,580 | | | $ | (16,616) | | | $ | 54,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2021 |
| | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income |
Balance as of June 30, 2020 | | $ | 32,968 | | | $ | (136) | | | $ | (15,007) | | | $ | 17,825 | |
Other comprehensive income (loss) before reclassifications, net of tax | | 36,142 | | | 3,608 | | | (2,342) | | | 37,408 | |
Amounts reclassified into net income, net of tax | | 0 | | | (1,892) | | | 733 | | | (1,159) | |
Total other comprehensive income (loss) net, for the period | | 36,142 | | | 1,716 | | | (1,609) | | | 36,249 | |
Balance as of March 31, 2021 | | $ | 69,110 | | | $ | 1,580 | | | $ | (16,616) | | | $ | 54,074 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income |
Balance as of December 31, 2019 | | $ | 40,016 | | | $ | 738 | | | $ | (16,064) | | | $ | 24,690 | |
Other comprehensive income (loss) before reclassifications, net of tax | | (15,484) | | | (3,539) | | | 3,309 | | | (15,714) | |
Amounts reclassified into net income, net of tax | | 0 | | | 337 | | | 153 | | | 490 | |
Total other comprehensive income (loss) net, for the period | | (15,484) | | | (3,202) | | | 3,462 | | | (15,224) | |
Balance as of March 31, 2020 | | $ | 24,532 | | | $ | (2,464) | | | $ | (12,602) | | | $ | 9,466 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended March 31, 2020 |
| | Foreign Currency Translation Adjustments | | Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive Income |
Balance as of June 30, 2019 | | $ | 40,752 | | | $ | 541 | | | $ | (17,169) | | | $ | 24,124 | |
Other comprehensive income (loss) before reclassifications, net of tax | | (16,220) | | | (3,278) | | | 3,923 | | | (15,575) | |
Amounts reclassified into net income, net of tax | | 0 | | | 273 | | | 644 | | | 917 | |
Total other comprehensive income (loss) net, for the period | | (16,220) | | | (3,005) | | | 4,567 | | | (14,658) | |
Balance as of March 31, 2020 | | $ | 24,532 | | | $ | (2,464) | | | $ | (12,602) | | | $ | 9,466 | |
NOTE 21—SUPPLEMENTAL CASH FLOW DISCLOSURES
| | | | | | | | | | | |
| Nine Months Ended March 31, |
| 2021 | | 2020 |
Cash paid during the period for interest | $ | 117,359 | | | $ | 111,786 | |
Cash received during the period for interest | $ | 3,116 | | | $ | 10,166 | |
Cash paid during the period for income taxes (1) | $ | 369,246 | | | $ | 75,881 | |
(1) Included for the three and nine months ended March 31, 2020. Pro forma results2021 is cash paid of operations for this acquisition have not been presented because they are not material to our consolidated results of operations.
Fiscal 2019 Acquisitions
Acquisition of Catalyst Repository Systems Inc.
On January 31, 2019, we acquired all of the equity interest in Catalyst, a leading provider of eDiscovery that designs, develops and supports market-leading cloud eDiscovery software. Total consideration for Catalyst was approximately $71.4$290.0 million of which $70.8 million was paid in cash and approximately $0.6 million is currently held back and unpaid in accordance with the purchase agreement. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition complements and extends our EIM portfolio.
The results of operations of this acquisition have been consolidated with those of OpenText beginning January 31, 2019.
Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of January 31, 2019, are set forth below:
|
| | | |
Current assets | $ | 9,699 |
|
Non-current tangible assets | 5,754 |
|
Intangible customer assets | 30,607 |
|
Intangible technology assets | 11,658 |
|
Liabilities assumed | (17,891 | ) |
Total identifiable net assets | 39,827 |
|
Goodwill | 31,607 |
|
Net assets acquired | $ | 71,434 |
|
The goodwill of approximately $31.6 million is primarily attributablerelating to the synergies expected to arise after the acquisition. Of this goodwill, approximately $3.1 million is expected to be deductibleIRS Settlement. Please see note 15 "Income Taxes" for tax purposes.
Included in total identifiable net assets is acquired deferred revenue with a fair value of $0.8 million, which represents our estimate of the fair value of the contractual obligations assumed based on a valuation. In arriving at this fair value, we reduced the acquired company’s original carrying value by an insignificant amount.
The fair value of current assets acquired includes accounts receivable with a fair value of $10.8 million. The gross amount receivable was $11.8 million, of which $1.0 million is expected to be uncollectible.
The finalization of the purchase price allocation during the three months ended March 31, 2020 resulted in an adjustment to amounts previously disclosed of approximately $0.6 million.
Acquisition of Liaison Technologies, Inc.
On December 17, 2018, we acquired all of the equity interest in Liaison, a leading provider of cloud-based business to business integration, for approximately $310.6 million in an all cash transaction. In accordance with Topic 805, this acquisition was accounted for as a business combination. We believe this acquisition complements and extends our EIM portfolio.
The results of operations of this acquisition have been consolidated with those of OpenText beginning December 17, 2018.
Purchase Price Allocation
The recognized amounts of identifiable assets acquired and liabilities assumed, based upon their fair values as of December 17, 2018, are set forth below:
|
| | | |
Current assets | $ | 23,006 |
|
Non-current tangible assets | 5,168 |
|
Intangible customer assets | 68,300 |
|
Intangible technology assets | 107,000 |
|
Liabilities assumed | (57,265 | ) |
Total identifiable net assets | 146,209 |
|
Goodwill | 164,434 |
|
Net assets acquired | $ | 310,643 |
|
additional details.The goodwill of approximately $164.4 million is primarily attributable to the synergies expected to arise after the acquisition. Of this goodwill, approximately $2.2 million is expected to be deductible for tax purposes.
Included in total identifiable net assets is acquired deferred revenue with a fair value of $7.6 million, which represents our estimate of the fair value of the contractual obligations assumed. In arriving at this fair value, we reduced the acquired company’s original carrying value by an insignificant amount.
The fair value of current assets acquired includes accounts receivable with a fair value of $20.5 million. The gross amount receivable was $22.2 million, of which $1.7 million is expected to be uncollectible.
The finalization of the purchase price allocation during the three months ended December 31, 2019 did not result in any significant changes to the preliminary amounts previously disclosed.
NOTE 20—SUPPLEMENTAL CASH FLOW DISCLOSURES
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Cash paid during the period for interest | $ | 43,657 |
| | $ | 33,585 |
| | $ | 111,786 |
| | $ | 102,348 |
|
Cash received during the period for interest | $ | 2,743 |
| | $ | 987 |
| | $ | 10,166 |
| | $ | 4,346 |
|
Cash paid during the period for income taxes | $ | 42,509 |
| | $ | 26,190 |
| | $ | 75,881 |
| | $ | 66,002 |
|
NOTE 21—22—OTHER INCOME (EXPENSE), NET
Other income (expense), net relates to certain non-operational charges primarily consisting of debt extinguishment costs, income or losses in our share of investments 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-
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Foreign exchange gains (losses) | $ | (3,248) | | | $ | (5,766) | | | $ | (3,258) | | | $ | (9,073) | |
OpenText share in net income of equity investees (note 9) | 11,765 | | | 4,527 | | | 20,020 | | | 6,475 | |
Loss on debt extinguishment (1) | 0 | | | (17,854) | | | 0 | | | (17,854) | |
Other miscellaneous income (expense) | (234) | | | 170 | | | (345) | | | 716 | |
Total other income (expense), net | $ | 8,283 | | | $ | (18,923) | | | $ | 16,417 | | | $ | (19,736) | |
vis the functional currency of the legal entity. |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Foreign exchange gains (losses) | $ | (5,766 | ) | | $ | 2,033 |
| | $ | (9,073 | ) | | $ | (4,124 | ) |
OpenText share in net income of equity investees (note 9) | 4,527 |
| | 2,789 |
| | 6,475 |
| | 10,652 |
|
Loss on debt extinguishment (1) | (17,854 | ) | | — |
| | (17,854 | ) | | — |
|
Other miscellaneous income (expense) | 170 |
| | 243 |
| | 716 |
| | 437 |
|
Total other income (expense), net | $ | (18,923 | ) | | $ | 5,065 |
| | $ | (19,736 | ) | | $ | 6,965 |
|
(1)On March 5, 2020, we redeemed in full $800 million aggregate principal amount of our 5.625% Senior Notes due 2023 in full,(Senior Notes 2023), which resulted in a loss on debt extinguishment of debt of approximately $17.9 million. Of this, approximately $6.7 million relatesrelated to unamortized debt issuance costs and the remaining $11.2 million relatesrelated to the early termination call premium. See note 11 "Long-Term Debt".
NOTE 22—23—EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income, attributable to OpenText, by the weighted average number of Common Shares outstanding during the period. Diluted earnings per share are computed by dividing net income, attributable to OpenText, by the shares used in the calculation of basic earnings per share plus the dilutive effect of Common Share equivalents, such as stock options, using the treasury stock method. Common Share equivalents are excluded from the computation of diluted earnings per share if their effect is anti-dilutive.
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Basic earnings per share | | | | | | | |
Net income attributable to OpenText | $ | 25,965 |
| | $ | 72,762 |
| | $ | 207,833 |
| | $ | 213,518 |
|
Basic earnings per share attributable to OpenText | $ | 0.10 |
| | $ | 0.27 |
| | $ | 0.77 |
| | $ | 0.80 |
|
Diluted earnings per share | | | | | | | |
Net income attributable to OpenText | $ | 25,965 |
| | $ | 72,762 |
| | $ | 207,833 |
| | $ | 213,518 |
|
Diluted earnings per share attributable to OpenText | $ | 0.10 |
| | $ | 0.27 |
| | $ | 0.77 |
| | $ | 0.79 |
|
Weighted-average number of shares outstanding (in 000's) | | | | | | | |
Basic | 271,221 |
| | 268,991 |
| | 270,559 |
| | 268,511 |
|
Effect of dilutive securities | 981 |
| | 1,039 |
| | 1,084 |
| | 1,095 |
|
Diluted | 272,202 |
| | 270,030 |
| | 271,643 |
| | 269,606 |
|
Excluded as anti-dilutive(1) | 3,361 |
| | 2,928 |
| | 2,681 |
| | 2,643 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Basic earnings per share | | | | | | | |
Net income attributable to OpenText | $ | 91,490 | | | $ | 25,965 | | | $ | 129,389 | | | $ | 207,833 | |
Basic earnings per share attributable to OpenText | $ | 0.34 | | | $ | 0.10 | | | $ | 0.47 | | | $ | 0.77 | |
Diluted earnings per share | | | | | | | |
Net income attributable to OpenText | $ | 91,490 | | | $ | 25,965 | | | $ | 129,389 | | | $ | 207,833 | |
Diluted earnings per share attributable to OpenText | $ | 0.33 | | | $ | 0.10 | | | $ | 0.47 | | | $ | 0.77 | |
Weighted-average number of shares outstanding (in '000's) | | | | | | | |
Basic | 272,832 | | | 271,221 | | | 272,414 | | | 270,559 | |
Effect of dilutive securities | 1,092 | | | 981 | | | 898 | | | 1,084 | |
Diluted | 273,924 | | | 272,202 | | | 273,312 | | | 271,643 | |
Excluded as anti-dilutive(1) | 3,691 | | | 3,361 | | | 4,222 | | | 2,681 | |
(1) Represents options to purchase Common Shares excluded from the calculation of diluted earnings per share because the exercise price of the stock options was greater than or equal to the average price of the Common Shares during the period.
NOTE 23—24—RELATED PARTY TRANSACTIONS
Our procedure regarding the approval of any related party transaction requires that the material facts of such transaction be reviewed by the independent members of the Audit Committee and the transaction be approved by a majority of the independent members of the Audit Committee. The Audit Committee reviews all transactions in which we are, or will be, a participant and any related party has or will have a direct or indirect interest in the transaction. In determining whether to approve a related party transaction, the Audit Committee generally takes into account, among other facts it deems appropriate, whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances; the extent and nature of the related person’s interest in the transaction; the benefits to the Company of the proposed transaction; if applicable, the effects on a director’s independence; and if applicable, the availability of other sources of comparable services or products.
During the nine months ended March 31, 2020,2021, Mr. Stephen Sadler, a member of the Board of Directors, earned approximately $0.7 million32 thousand (nine months ended March 31, 2019—2020—$0.60.7 million) in consulting fees from OpenText for assistance with acquisition-related business activities. Mr. Sadler abstained from voting on all transactions from which he would potentially derive consulting fees.
NOTE 24—25—SUBSEQUENT EVENTSEVENT
Cash Dividends
As part of our quarterly, non-cumulative cash dividend program, we declared, on April 29, 2020,May 5, 2021, a dividend of $0.1746$0.2008 per Common Share. The record date for this dividend is May 29, 2020June 4, 2021 and the payment date is June 19, 2020.25, 2021. Future declarations of dividends and the establishment of future record and payment dates are subject to the final determination and discretion of our Board.
COVID-19 Restructuring Plan
On March 3, 2020, COVID-19 was characterized as a pandemic by the World Health Organization. The spread of COVID-19 has significantly impacted the global economy and is expected to adversely impact our operational and financial performance. The extent of the adverse impact of the pandemic on the global economy and markets will depend, in part, on the length and severity of the measures taken to limit the spread of the virus and, in part, on the size and effectiveness of the compensating measures taken by governments. We are closely monitoring the potential effects and impact on our operations, businesses and financial performance, including liquidity and capital usage, though the extent of the impact is difficult to fully predict at this time due to the rapid evolution of this uncertain situation.
On April 29, 2020, our Board approved a restructuring plan that will impact our global workforce and execute a significant reduction in our real estate footprint around the world. The estimated total cost of the plan is expected to be in the range of $80 million to $100 million and the plan is expected to be implemented over the next six to twelve months.
The Company has made a strategic decision to move towards a significant work from home (WFH) model. As a result of COVID-19, more than 95% of our employees are currently WFH, and we are now making plans for the future return to office strategy for our nearly 15,000 employees. We currently have approximately 120 offices around the world, and our intent, over time, is to make a significant reduction in the number of offices, anticipated to be over 50% of our global offices impacting approximately 15% of our employees. Based upon our plan, we estimate that this transition can be executed over the next six to twelve months. Management has estimated cost of this restructuring to be in the range of $65 million to $80 million, including the write-off of ROU assets relating to leases, the write-off of leases and fixed assets and other related costs.
We have also approved and begun executing an employee rationalization program across various departments in order to further reduce our cost base in light of the anticipated adverse effects and impact of COVID-19. We estimate severance costs to be in the range of $15 million to $20 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of the U.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 to Open Text Corporation (“OpenText”(OpenText or the “Company”)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:to, statements regarding: (i) statements about our focus in the fiscal year beginning July 1, 20192020 and ending June 30, 20202021 (Fiscal 2020)2021) 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; (xxiii) tax audits, including expected payments in connection with the IRS Settlement (as defined below); and (xxiii)(xxiv) 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 withability to avoid infringing 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) actual and potential risks and uncertainties relating to the ultimate geographic spread of COVID-19, the severity of the disease and the duration of the COVID-19 pandemic and issues relating to its resurgence, including potential material adverse effects on our business, operations and financial performance; (ii) actions that may be taken by governmental authorities to contain the COVID-19 pandemic or to treat its impact on our business (or failure to implement additional stimulus programs) and the availability, effectiveness and use of treatments and vaccines; (iii) the actual and potential negative impacts of COVID-19 on the global economy and financial markets; and (iv) the actual and potential risk and uncertainties relating to the implementation of our COVID-19 Restructuring Plan (as defined herein), including the possibility that the actual cash or non-cash cost of restructuring might exceed the estimated amounts; (v) integration of acquisitions and related restructuring efforts, including the quantum of restructuring charges and the timing thereof; (ii)(vi) 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)(vii) 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)(viii) the risks associated with bringing new products and services to market; (v)(ix) 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)(x) delays in the purchasing decisions of the Company’s customers; (vii) the(xi) competition the Company faces in its industry and/or marketplace; (viii)(xii) the final determination of litigation, tax audits (including tax examinations in the United States, Canada or elsewhere) and
other legal proceedings; (ix)(xii) potential exposure to greater than anticipated tax liabilities or expenses, including with respect to changes in Canadian, U.S. or international tax regimes; (x)(xiv) the possibility of technical, logistical or planning issues in connection with the deployment of the Company’s products or services; (xi)(xv) the continuous commitment of the Company’s customers; (xii)(xvi) demand for the Company’s products and services; (xiii)(xvii) 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 to the United States-Mexico-Canada Agreement) as we continue to increase our international operations; (xiv)(xviii) inability to raise capital at all or on not unfavorable terms in the future; (xv)(xix) 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)(xx) 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
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), California Consumer Privacy Act (CCPA), and Country by Country Reporting;Reporting (including with respect to transferring personal data outside of the EEA, as a result of the recent ruling of the Court of Justice of the European Union that the EU-US Privacy Shield is an invalid data transfer mechanism and that Standard Contractual Clauses are a valid transfer mechanism unless the country to which personal data is exported restricts the ability to comply with such Clauses); (vii) the Company’s growth and other profitability prospects; (viii) the estimated size and growth prospects of the IMInformation Management market; (ix) the Company’s competitive position in the IMInformation Management 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 IMInformation Management marketplace; (xii) the Company’s financial condition and capital requirements; (xiii) system or network failures or information security, cybersecurity or other data breaches in connection with the Company's offerings andor the information technology systems generally;used by the Company generally, the risk of which may be increased during times of natural disaster or pandemic (including COVID-19) due to remote working arrangements; and (xiv) failure to attract and retain key personnel to develop and effectively manage the Company's business; (xv) potential risks and uncertainties relating to the ultimate geographic spread of COVID-19, the severity of the disease and the duration of the COVID-19 outbreak, including potential material adverse effect on our business, operations and financial performance; (xvi) actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact on our business; (xvii) the potential negative impacts of COVID-19 on the global economy and financial markets; and (xviii) the potential risk and uncertainties relating to the implementation of our COVID-19 restructuring plan, including the possibility that the actual cash or non-cash cost of restructuring might exceed the estimated amounts.business.
For additional information with respect to risks and other factors which could occur, seeReaders should carefully review 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;therein, Quarterly Reports on Form 10-Q, including Item 1A herein and other documents we file from time to time with the Securities and Exchange Commission (SEC) and other securities regulators. A number of factors may materially affect our business, financial condition, operating results and prospects. These factors include but are not limited to those set forth in Part II, Item 1A "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K. Any one of these factors, and other factors that we are unaware of, or currently deem immaterial, may cause our actual results to differ materially from recent results or from our anticipated future results. 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 nine months ended March 31, 20202021 compared with the three and nine months ended March 31, 2019,2020, unless otherwise noted.
Where we say “we”, “us”, “our”, “OpenText” or “the Company”, we mean Open Text Corporation or Open Text Corporation and its subsidiaries, as applicable.
EXECUTIVE OVERVIEW
OpenText is an Information Management company that provides software and services to maximize the strategic benefits of data and content for increased productivity, growth and competitive advantage. With a focus on Information Management technologies and services, we continue to innovate and provide customers with the capabilities they need to build resilient businesses and become tomorrow's disruptors.
We provide our customers with choice and flexibility in their path to digital transformation with solutions that can be run on-premise, cloud, hybrid, or as a managed service. We also accelerate and simplify our customers’ path to information management company, historically focused primarily on enabling themodernization with intelligent tools and connect enterprise. With our recent acquisition of Carbonite Inc. (Carbonite)services for moving off paper, automating classification, and building clean data lakes for artificial intelligence (AI), we believe we have enteredanalytics and automation.
We are fundamentally integrated into the next phaseparts of our Total Growth strategycustomers' businesses that matter so they can securely manage the complexity of information flow end to end. Furthermore, with automation and AI, we connect, synthesize and deliver information where we have an opportunityit is needed to take advantage of Carbonite's world-class channel organizationdrive new efficiencies, experiences and partners, to bring ourinsights. We make 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 enrichedenriching it with capture and analytics, information that is protectedprotecting and securesecuring it throughout its entire lifecycle, information that captivates customers, and information that connects and fuels some of the world's largestleveraging it to captivate customers. Our solutions also connect large 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 crosson any endpoint or across their networks, leverage discovery with informationeDiscovery and digital forensics to defensibly investigate and gain insightcollect evidence, and action through analytics, artificial intelligence (AI) and automation.
We offer software through traditional on-premises solutions, cloud solutions orensure business continuity in the event of 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.security incident.
Our initial public offering was on the NASDAQ in 1996 and we were subsequently listed on the Toronto Stock Exchange (TSX) in 1998. We are a multinational company and as of March 31, 2020,2021, employed approximately 15,00014,300 people worldwide.
Our ticker symbol on both the NASDAQ and the TSX is "OTEX".
Quarterly Summary:
During the third quarter of Fiscal 20202021 we saw the following activity:
•Total revenue was $814.7$832.9 million, up 13.3%2.2% compared to the same period in the prior fiscal year; up 14.1%down 0.8% after factoring in the impact of $5.7$25.0 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 $662.3$691.8 million, up 20.6%4.4% compared to the same period in the prior fiscal year; up 21.3%1.7% after factoring in the impact of $4.0$17.9 million of foreign exchange rate changes.
•Cloud services and subscriptions revenue was $339.5$355.8 million, up 42.3%4.8% compared to the same period in the prior fiscal year; up 42.8%3.1% after factoring in the impact of $1.2$5.8 million of foreign exchange rate changes.
License revenue•GAAP-based gross margin was $81.1 million, down 17.9%68.6% compared to the same period in the prior fiscal year; down 17.0% after factoring in the impact of $0.9 million of foreign exchange rate changes.
GAAP-based EPS, diluted, was $0.10 compared to $0.2765.4% in the same period in the prior fiscal year.
•Non-GAAP-based EPS, diluted,gross margin was $0.6175.2% compared to $0.6473.3% in the same period in the prior fiscal year.
GAAP-based gross margin was 65.4% compared to 66.7% in the same period in the prior fiscal year.
Non-GAAP-based gross margin was 73.3% compared to 73.0% in the same period in the prior fiscal year.
•GAAP-based net income attributable to OpenText was $26.0$91.5 million compared to $72.8$26.0 million in the same period in the prior fiscal year.
•Non-GAAP-based net income attributable to OpenText was $166.3$204.5 million compared to $173.0$166.3 million in the same period in the prior fiscal year.
•GAAP-based earnings per share (EPS), diluted, was $0.33 compared to $0.10 in the same period in the prior fiscal year.
•Non-GAAP-based EPS, diluted, was $0.75 compared to $0.61 in the same period in the prior fiscal year.
•Adjusted EBITDA was $259.5$297.1 million compared to $261.8$259.5 million in the same period in the prior fiscal year.
•Operating cash flow was $674.3$579.9 million for the nine months ended March 31, 2020, up 4.3% from2021, compared to $674.3 million in the same period in the prior fiscal year. During the three months ended March 31, 2021, we made payments of $290.0 million relating to the IRS Settlement (as defined herein).
•Cash and cash equivalents was $1,452.6were $1,475.6 million as of March 31, 2020,2021, compared to $941.0$1,692.9 million as of June 30, 2019. As of2020. During the nine months ended March 31, 2020, our cash2021, we made payments of $290.0 million relating to the IRS Settlement (as defined herein) and cash equivalents andrepaid the current portion of our long-term debt include a $600 million draw down onpreviously drawn under the Revolver in order to increase our(as defined herein) using cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.
Issued $900 million in aggregate principal amount of 3.875% Senior Notes due 2028 and $900 million in aggregate principal amount of 4.125% Senior Notes due 2030.on hand.
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 lightAs a result 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 XMedius
On March 9, 2020, we acquired all of the equity interest in XMedius for approximately $73.3 million in an all cash transaction. XMedius is a provider of secure information exchange and unified communication solutions. We believe the acquisition will complement our Customer Experience Management (CEM) and Business Network (BN) platforms. The results of operations of this acquisition have been consolidated with those of OpenText beginning March 9, 2020.
Acquisition of Carbonite
On December 24, 2019, we acquired all of the equity interest in 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, paid in cash (inclusive of cash acquired) and inclusive of approximately $0.1 billion relating to the cash settlement of pre-acquisition stock compensation that was previously accrued but since paid as of March 31, 2020. 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 $5.1 million, of which $1.0 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 remainderRemainder of Fiscal 20202021
As an organization, our management believes in delivering “Total Growth”we are committed to "Total Growth", meaning we strive towards delivering value through organic initiatives, innovations and acquisitions, as well as financial performance. This growth is further enhanced 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”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) drivepush product innovation, increasing the value of our offerings to our installed customer base, which includes Global 10,000 companies SMBs(G10K), small and medium-sized businesses (SMB) and consumers. The G10K are the world's largest companies, typically those with greater than two billion in revenues, as well as the world's largest governments and organizations. 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 $270$304.2 million or approximately 12%12.2% of revenue in R&D, in line with our target to spend approximately 11%12% to 13%14% of revenues for R&D this fiscal year.
The cloud has becomeis 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, Cyber Resilience and B2Bbusiness-to-business (B2B) Integration. Supported by a global, scalable, and secure
infrastructure, the 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 $7.4 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.
OnIn March 3, 2020, COVID-19 was characterized as a pandemic by the World Health Organization. The spread of COVID-19 has significantly impacted the global economy and has adversely impacted and is expected to further adversely impact our operational and financial performance. The extent of the adverse impact of the pandemic on the global economy and markets will continue to depend, in part, on the length and severity of the measures taken to limit the spread of the virus, the availability, effectiveness and use of treatments and vaccines and, in part, on the size and effectiveness of the compensating measures taken by governments.governments and on actual and potential resurgences. We are closely monitoring the potential effects and impact on our operations, businesses and financial performance, including liquidity and capital usage, though the extent is difficult to fully predict at this time due to the rapid evolution of this uncertain situation.
We are conductingcontinue to conduct business with substantial modifications to employee travel employeeand work locations and also virtualization or cancellations of all sales and marketing events, which we expect to remain in place throughout Fiscal 2021, along with substantially modified interactions with customers and suppliers, among other modifications. In March 2020, we also drew down $600 million from the Revolver as a preemptive measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. We will continue to actively monitor the impact of the COVID-19 pandemic on all aspects of our business and geographies, including customer purchasing decisions, and may take further actions that alter our business operations as may be required by governments, or that we determine are in the best interest of our employees, customers, partners, suppliers, and shareholders. It is uncertain and difficult to predict what the potential effects any such alterations or modifications may have on our business including the effects on our customers and prospects, or our financial results and our ability to successfully execute our business strategies and initiatives.
As previously disclosed, in order to further mitigate the operational impacts of COVID-19, our Compensation Committee and Board approved certain compensation adjustments, effective for the period May 15, 2020 through June 30, 2021, subject to review and modification as the situation warrants. As a precaution, we havealso temporarily and significantly reduced all hiring and reduced discretionary spending, while taking note of some savings to be achieved through travel restrictions and the cancellation of certain events.
In addition, in order to further mitigate the operational impacts of COVID-19, our Compensation Committee and Board have approved the following measures effective for the period May 15, 2020 through June 30, 2021, subject to review and modification as the situation warrants:
15% base salary reduction and forbearance of any annual variable cash compensation effective May 15, 2020 for Fiscal 2020 and for all of Fiscal 2021, totaling an approximate 60% reduction in targeted cash compensation, for our CEO & CTO;
15% base salary reduction and 15% reduction in target annual variable cash compensation for our other Named Executive Officers and members of the executive leadership team (ELT);
10% base salary reduction and 10% reduction in target annual variable cash compensation, as applicable, for Vice-President- director-, and manager-level employees;
5% base salary reduction for all other employees subject to exception for certain of our employees, such as our employees in Asia who are earning less than the equivalent of $20,000 per year;
15% reduction in cash retainer compensation fees payable to the Board of Directors; and
Suspend employer paid contributions to retirement benefits in the United States and Canada for the remainder of Fiscal 2020 and Fiscal 2021.
These cost reduction measures are in addition to other previously disclosed facilities and workforce related
actions as part of our COVID-19 restructuring plan.Restructuring Plan. Please see Note 24 "Subsequent Events"note 18 "Special Charges (Recoveries)" to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for more information.
After careful consideration and review, the Compensation Committee and Board approved the restoration of all previously announced compensation adjustments for all employees and directors, including the CEO, which became effective during the second quarter of Fiscal 2021. While we continue to closely monitor discretionary spending, we have also restored appropriate hiring across our organization.
The ongoing and ultimate impact of the COVID-19 outbreakpandemic on our operations and financial performance depends on many factors that are not within our control. For more information, please see note 24 "Subsequent Events" to our Condensed Consolidated Financial Statements and Part II, Item 1A "Risk Factors" included elsewhere within this Quarterly Report on Form 10-Q.
10-Q and Part I, Item 1A "Risk Factors" within our Annual Report on Form 10-K for Fiscal 2020.
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 Condensed 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:
| |
(iii) | Acquired intangibles, and |
(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 ended June 30, 2019 and note 6 "Leases" to our Condensed Consolidated Financial Statements elsewhere in this Quarterly Report on Form 10-Q.Fiscal 2020.
We will continue to monitor the potential impact of COVID-19 on our financial statements and related disclosures, including the need for additional estimates going forward, which could include costs related to items such as special charges, restructurings, asset impairments and other non-recurring costs. For more information, please see note 24 "Subsequent Events" to our Condensed Consolidated Financial Statements. As of March 31, 2020,2021, we have not recorded any estimated amounts with respect to COVID-19certain estimates in our Condensed Consolidated Financial Statements.Statements resulting from the pandemic, particularly with respect to the COVID-19 Restructuring Plan and allowance for credit losses, based on management's estimates and assumptions utilizing the most currently available information. Such estimates may be subject to change particularly given the unprecedented nature of the COVID-19 pandemic. Please also see "Risk Factors" included within Part II, Item 1A, of"Risk Factors" included in this Quarterly Report on Form 10-Q.10-Q and Part I, Item 1A "Risk Factors" within our Annual Report on Form 10-K for Fiscal 2020.
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 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 March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 |
Total Revenues by Product Type: | | | | | | | | | | | |
License | $ | 81,055 |
| | $ | (17,666 | ) | | $ | 98,721 |
| | $ | 297,048 |
| | $ | (11,316 | ) | | $ | 308,364 |
|
Cloud services and subscriptions | 339,463 |
| | 100,856 |
| | 238,607 |
| | 825,068 |
| | 159,145 |
| | 665,923 |
|
Customer support | 322,865 |
| | 12,103 |
| | 310,762 |
| | 950,671 |
| | 18,004 |
| | 932,667 |
|
Professional service and other | 71,296 |
| | 240 |
| | 71,056 |
| | 210,337 |
| | (4,243 | ) | | 214,580 |
|
Total revenues | 814,679 |
| | 95,533 |
| | 719,146 |
| | 2,283,124 |
| | 161,590 |
| | 2,121,534 |
|
Total Cost of Revenues | 282,187 |
| | 42,556 |
| | 239,631 |
| | 743,080 |
| | 49,114 |
| | 693,966 |
|
Total GAAP-based Gross Profit | 532,492 |
| | 52,977 |
| | 479,515 |
| | 1,540,044 |
| | 112,476 |
| | 1,427,568 |
|
Total GAAP-based Gross Margin % | 65.4 | % | | | | 66.7 | % | | 67.5 | % | | | | 67.3 | % |
Total GAAP-based Operating Expenses | 437,415 |
| | 93,777 |
| | 343,638 |
| | 1,127,714 |
| | 109,182 |
| | 1,018,532 |
|
Total GAAP-based Income from Operations | $ | 95,077 |
| | $ | (40,800 | ) | | $ | 135,877 |
| | $ | 412,330 |
| | $ | 3,294 |
| | $ | 409,036 |
|
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Total Revenues by Product Type: | | | | | | | | | | | |
Cloud services and subscriptions | $ | 355,845 | | | $ | 16,382 | | | $ | 339,463 | | | $ | 1,047,285 | | | $ | 222,217 | | | $ | 825,068 | |
Customer support | 335,915 | | | 13,050 | | | 322,865 | | | 999,806 | | | 49,135 | | | 950,671 | |
License | 76,299 | | | (4,756) | | | 81,055 | | | 252,170 | | | (44,878) | | | 297,048 | |
Professional service and other | 64,872 | | | (6,424) | | | 71,296 | | | 193,327 | | | (17,010) | | | 210,337 | |
Total revenues | 832,931 | | | 18,252 | | | 814,679 | | | 2,492,588 | | | 209,464 | | | 2,283,124 | |
Total Cost of Revenues | 261,266 | | | (20,921) | | | 282,187 | | | 762,753 | | | 19,673 | | | 743,080 | |
Total GAAP-based Gross Profit | 571,665 | | | 39,173 | | | 532,492 | | | 1,729,835 | | | 189,791 | | | 1,540,044 | |
Total GAAP-based Gross Margin % | 68.6 | % | | | | 65.4 | % | | 69.4 | % | | | | 67.5 | % |
Total GAAP-based Operating Expenses | 419,269 | | | (18,146) | | | 437,415 | | | 1,160,613 | | | 32,899 | | | 1,127,714 | |
Total GAAP-based Income from Operations | $ | 152,396 | | | $ | 57,319 | | | $ | 95,077 | | | $ | 569,222 | | | $ | 156,892 | | | $ | 412,330 | |
| | | | | | | | | | | |
% Revenues by Product Type: | | | | | | | | | | | |
Cloud services and subscriptions | 42.7 | % | | | | 41.7 | % | | 42.0 | % | | | | 36.1 | % |
Customer support | 40.3 | % | | | | 39.6 | % | | 40.1 | % | | | | 41.7 | % |
License | 9.2 | % | | | | 9.9 | % | | 10.1 | % | | | | 13.0 | % |
Professional service and other | 7.8 | % | | | | 8.8 | % | | 7.8 | % | | | | 9.2 | % |
| | | | | | | | | | | |
Total Cost of Revenues by Product Type: | | | | | | | | | | | |
Cloud services and subscriptions | $ | 123,729 | | | $ | (3,836) | | | $ | 127,565 | | | $ | 354,235 | | | $ | 20,864 | | | $ | 333,371 | |
Customer support | 30,953 | | | (1,198) | | | 32,151 | | | 89,815 | | | (1,511) | | | 91,326 | |
License | 2,810 | | | 266 | | | 2,544 | | | 9,601 | | | 1,684 | | | 7,917 | |
Professional service and other | 50,321 | | | (6,205) | | | 56,526 | | | 143,521 | | | (20,947) | | | 164,468 | |
Amortization of acquired technology-based intangible assets | 53,453 | | | (9,948) | | | 63,401 | | | 165,581 | | | 19,583 | | | 145,998 | |
Total cost of revenues | $ | 261,266 | | | $ | (20,921) | | | $ | 282,187 | | | $ | 762,753 | | | $ | 19,673 | | | $ | 743,080 | |
| | | | | | | | | | | |
% GAAP-based Gross Margin by Product Type: | | | | | | | | | | | |
Cloud services and subscriptions | 65.2 | % | | | | 62.4 | % | | 66.2 | % | | | | 59.6 | % |
Customer support | 90.8 | % | | | | 90.0 | % | | 91.0 | % | | | | 90.4 | % |
License | 96.3 | % | | | | 96.9 | % | | 96.2 | % | | | | 97.3 | % |
Professional service and other | 22.4 | % | | | | 20.7 | % | | 25.8 | % | | | | 21.8 | % |
| | | | | | | | | | | |
Total Revenues by Geography:(1) | | | | | | | | | | | |
Americas (2) | $ | 507,892 | | | $ | (1,886) | | | $ | 509,778 | | | $ | 1,533,400 | | | $ | 153,221 | | | $ | 1,380,179 | |
EMEA (3) | 258,010 | | | 17,481 | | | 240,529 | | | 754,966 | | | 52,002 | | | 702,964 | |
Asia Pacific (4) | 67,029 | | | 2,657 | | | 64,372 | | | 204,222 | | | 4,241 | | | 199,981 | |
Total revenues | $ | 832,931 | | | $ | 18,252 | | | $ | 814,679 | | | $ | 2,492,588 | | | $ | 209,464 | | | $ | 2,283,124 | |
% Revenues by Geography: | | | | | | | | | | | |
Americas (2) | 61.0 | % | | | | 62.6 | % | | 61.5 | % | | | | 60.5 | % |
EMEA (3) | 31.0 | % | | | | 29.5 | % | | 30.3 | % | | | | 30.8 | % |
Asia Pacific (4) | 8.0 | % | | | | 7.9 | % | | 8.2 | % | | | | 8.7 | % |
| | | | | | | | | | | |
Other Metrics: | | | | | | | | | | | |
GAAP-based gross margin | 68.6 | % | | | | 65.4 | % | | 69.4 | % | | | | 67.5 | % |
GAAP-based EPS, diluted | $ | 0.33 | | | | | $ | 0.10 | | | $ | 0.47 | | | | | $ | 0.77 | |
Net income, attributable to OpenText | $ | 91,490 | | | | | $ | 25,965 | | | $ | 129,389 | | | | | $ | 207,833 | |
Non-GAAP-based gross margin (5) | 75.2 | % | | | | 73.3 | % | | 76.3 | % | | | | 74.0 | % |
Non-GAAP-based EPS, diluted (5) | $ | 0.75 | | | | | $ | 0.61 | | | $ | 2.59 | | | | | $ | 2.09 | |
Adjusted EBITDA (5) | $ | 297,131 | | | | | $ | 259,468 | | | $ | 1,000,225 | | | | | $ | 830,695 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 |
% Revenues by Product Type: | | | | | | | | | | | |
License | 9.9 | % | | | | 13.7 | % | | 13.0 | % | | | | 14.5 | % |
Cloud services and subscriptions | 41.7 | % | | | | 33.2 | % | | 36.1 | % | | | | 31.4 | % |
Customer support | 39.6 | % | | | | 43.2 | % | | 41.7 | % | | | | 44.0 | % |
Professional service and other | 8.8 | % | | | | 9.9 | % | | 9.2 | % | | | | 10.1 | % |
| | | | | | | | | | | |
Total Cost of Revenues by Product Type: | | | | | | | | | | | |
License | $ | 2,544 |
| | $ | (148 | ) | | $ | 2,692 |
| | $ | 7,917 |
| | $ | (2,302 | ) | | $ | 10,219 |
|
Cloud services and subscriptions | 127,565 |
| | 23,692 |
| | 103,873 |
| | 333,371 |
| | 53,097 |
| | 280,274 |
|
Customer support | 32,151 |
| | 307 |
| | 31,844 |
| | 91,326 |
| | (2,256 | ) | | 93,582 |
|
Professional service and other | 56,526 |
| | (100 | ) | | 56,626 |
| | 164,468 |
| | (4,984 | ) | | 169,452 |
|
Amortization of acquired technology-based intangible assets | 63,401 |
| | 18,805 |
| | 44,596 |
| | 145,998 |
| | 5,559 |
| | 140,439 |
|
Total cost of revenues | $ | 282,187 |
| | $ | 42,556 |
| | $ | 239,631 |
| | $ | 743,080 |
| | $ | 49,114 |
| | $ | 693,966 |
|
| | | | | | | | | | | |
% GAAP-based Gross Margin by Product Type: | | | | | | | | | | | |
License | 96.9 | % | | | | 97.3 | % | | 97.3 | % | | | | 96.7 | % |
Cloud services and subscriptions | 62.4 | % | | | | 56.5 | % | | 59.6 | % | | | | 57.9 | % |
Customer support | 90.0 | % | | | | 89.8 | % | | 90.4 | % | | | | 90.0 | % |
Professional service and other | 20.7 | % | | | | 20.3 | % | | 21.8 | % | | | | 21.0 | % |
| | | | | | | | | | | |
Total Revenues by Geography:(1) | | | | | | | | | | | |
Americas (2) | $ | 509,778 |
| | $ | 72,905 |
| | $ | 436,873 |
| | $ | 1,380,179 |
| | $ | 133,270 |
| | $ | 1,246,909 |
|
EMEA (3) | 240,529 |
| | 24,242 |
| | 216,287 |
| | 702,964 |
| | 28,265 |
| | 674,699 |
|
Asia Pacific (4) | 64,372 |
| | (1,614 | ) | | 65,986 |
| | 199,981 |
| | 55 |
| | 199,926 |
|
Total revenues | $ | 814,679 |
| | $ | 95,533 |
| | $ | 719,146 |
| | $ | 2,283,124 |
| | $ | 161,590 |
| | $ | 2,121,534 |
|
| | | | | | | | | | | |
% Revenues by Geography: | | | | | | | | | | | |
Americas (2) | 62.6 | % | | | | 60.7 | % | | 60.5 | % | | | | 58.8 | % |
EMEA (3) | 29.5 | % | | | | 30.1 | % | | 30.8 | % | | | | 31.8 | % |
Asia Pacific (4) | 7.9 | % | | | | 9.2 | % | | 8.7 | % | | | | 9.4 | % |
| | | | | | | | | | | |
Other Metrics: | | | | | | | | | | | |
GAAP-based gross margin | 65.4 | % | | | | 66.7 | % | | 67.5 | % | | | | 67.3 | % |
GAAP-based EPS, diluted | $ | 0.10 |
| | | | $ | 0.27 |
| | $ | 0.77 |
| | | | $ | 0.79 |
|
Net income, attributable to OpenText | $ | 25,965 |
| | | | $ | 72,762 |
| | $ | 207,833 |
| | | | $ | 213,518 |
|
Non-GAAP-based gross margin (5) | 73.3 | % | | | | 73.0 | % | | 74.0 | % | | | | 74.1 | % |
Non-GAAP-based EPS, diluted (5) | $ | 0.61 |
| | | | $ | 0.64 |
| | $ | 2.09 |
| | | | $ | 2.04 |
|
Adjusted EBITDA (5) | $ | 259,468 |
| | | | $ | 261,810 |
| | $ | 830,695 |
| | | | $ | 816,353 |
|
|
| | | | |
(1) | Total revenues by geography are determined based on the location of our end customer. |
(2) | Americas consists of countries in North, Central and South America. |
(3) | EMEA primarily consists of countries in Europe, the Middle East and Africa. |
(4) | Asia Pacific primarily consists of the countries Japan, Australia, China, Korea, Philippines, Singapore and New Zealand. |
(5) | See "Use of Non-GAAP Financial Measures" (discussed later in this MD&A) for 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 March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 |
License Revenues: | | | | | | | | | | | |
Americas | $ | 38,360 |
| | $ | (18,555 | ) | | $ | 56,915 |
| | $ | 143,857 |
| | $ | (18,455 | ) | | $ | 162,312 |
|
EMEA | 32,216 |
| | 2,179 |
| | 30,037 |
| | 117,009 |
| | 9,763 |
| | 107,246 |
|
Asia Pacific | 10,479 |
| | (1,290 | ) | | 11,769 |
| | 36,182 |
| | (2,624 | ) | | 38,806 |
|
Total License Revenues | 81,055 |
| | (17,666 | ) | | 98,721 |
| | 297,048 |
| | (11,316 | ) | | 308,364 |
|
Cost of License Revenues | 2,544 |
| | (148 | ) | | 2,692 |
| | 7,917 |
| | (2,302 | ) | | 10,219 |
|
GAAP-based License Gross Profit | $ | 78,511 |
| | $ | (17,518 | ) | | $ | 96,029 |
| | $ | 289,131 |
| | $ | (9,014 | ) | | $ | 298,145 |
|
GAAP-based License Gross Margin % | 96.9 | % | | | | 97.3 | % | | 97.3 | % | | | | 96.7 | % |
| | | | | | | | | | | |
% License Revenues by Geography: | | | | | | | | | | | |
Americas | 47.3 | % | | | | 57.7 | % | | 48.4 | % | | | | 52.6 | % |
EMEA | 39.8 | % | | | | 30.4 | % | | 39.4 | % | | | | 34.8 | % |
Asia Pacific | 12.9 | % | | | | 11.9 | % | | 12.2 | % | | | | 12.6 | % |
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
License revenues decreased by $17.7 million or 17.9% during the three months ended March 31, 2020 as compared to the same period in the prior fiscal year; down 17.0% after factoring in the impact of $0.9 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in Americas of $18.6 million and a decrease in Asia Pacific of $1.3 million, partially offset by an increase in EMEA of $2.2 million.
During the third quarter of Fiscal 2020, we closed 23 license deals greater than $0.5 million, of which 8 deals were greater than $1.0 million, contributing approximately $25.0 million of license revenues. This was compared to 29 deals greater than $0.5 million closed during the third quarter of Fiscal 2019, of which 12 deals were greater than $1.0 million, contributing $43.3 million of license revenues.
Cost of license revenues decreased by $0.1 million during the three months ended March 31, 2020 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 remained stable at approximately 97%.
Nine Months Ended March 31, 2020 Compared to Nine Months Ended March 31, 2019
License revenues decreased by $11.3 million or 3.7% during the nine months ended March 31, 2020 as compared to the same period in the prior fiscal year; down 2.3% after factoring in the impact of $4.3 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in Americas of $18.5 million and a decrease in Asia Pacific of $2.6 million, partially offset by an increase in EMEA of $9.8 million.
During the first nine months of Fiscal 2020, we closed 85 license deals greater than $0.5 million, of which 32 deals were greater than $1.0 million, contributing approximately $98.6 million of license revenues. This was compared to 100 deals greater than $0.5 million that closed during the first nine months of Fiscal 2019, of which 36 deals were greater than $1.0 million, contributing $115.8 million of license revenues.
Cost of license revenues decreased by $2.3 million during the nine months ended March 31, 2020 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 remained stable at approximately 97%.
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 does not take possession of the software, as well as from end-to-end fully outsourced business-to-business (B2B)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),PaaS, SaaS, cloud subscriptions and managed services. For the quarter ended March 31, 2021 our cloud renewal rate, excluding the impact of Carbonite, was approximately 93%, compared to approximately 96% for the quarter ended March 31, 2020.
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 March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Cloud Services and Subscriptions: | | | | | | | | | | | | Cloud Services and Subscriptions: | | | | | | | | | | | |
Americas | $ | 253,315 |
| | $ | 86,783 |
| | $ | 166,532 |
| | $ | 590,390 |
| | $ | 140,025 |
| | $ | 450,365 |
| Americas | $ | 264,277 | | | $ | 10,962 | | | $ | 253,315 | | | $ | 779,979 | | | $ | 189,589 | | | $ | 590,390 | |
EMEA | 65,130 |
| | 14,331 |
| | 50,799 |
| | 169,627 |
| | 16,147 |
| | 153,480 |
| EMEA | 65,403 | | | 273 | | | 65,130 | | | 190,981 | | | 21,354 | | | 169,627 | |
Asia Pacific | 21,018 |
| | (258 | ) | | 21,276 |
| | 65,051 |
| | 2,973 |
| | 62,078 |
| Asia Pacific | 26,165 | | | 5,147 | | | 21,018 | | | 76,325 | | | 11,274 | | | 65,051 | |
Total Cloud Services and Subscriptions Revenues | 339,463 |
| | 100,856 |
| | 238,607 |
| | 825,068 |
| | 159,145 |
| | 665,923 |
| Total Cloud Services and Subscriptions Revenues | 355,845 | | | 16,382 | | | 339,463 | | | 1,047,285 | | | 222,217 | | | 825,068 | |
Cost of Cloud Services and Subscriptions Revenues | 127,565 |
| | 23,692 |
| | 103,873 |
| | 333,371 |
| | 53,097 |
| | 280,274 |
| Cost of Cloud Services and Subscriptions Revenues | 123,729 | | | (3,836) | | | 127,565 | | | 354,235 | | | 20,864 | | | 333,371 | |
GAAP-based Cloud Services and Subscriptions Gross Profit | $ | 211,898 |
| | $ | 77,164 |
| | $ | 134,734 |
| | $ | 491,697 |
| | $ | 106,048 |
| | $ | 385,649 |
| GAAP-based Cloud Services and Subscriptions Gross Profit | $ | 232,116 | | | $ | 20,218 | | | $ | 211,898 | | | $ | 693,050 | | | $ | 201,353 | | | $ | 491,697 | |
GAAP-based Cloud Services and Subscriptions Gross Margin % | 62.4 | % | | | | 56.5 | % | | 59.6 | % | | | | 57.9 | % | GAAP-based Cloud Services and Subscriptions Gross Margin % | 65.2 | % | | 62.4 | % | | 66.2 | % | | 59.6 | % |
| | | | | | | | | | | | |
% Cloud Services and Subscriptions Revenues by Geography: | | | | | | | | | | | | % Cloud Services and Subscriptions Revenues by Geography: | |
Americas | 74.6 | % | | | | 69.8 | % | | 71.6 | % | | | | 67.6 | % | Americas | 74.3 | % | | 74.6 | % | | 74.5 | % | | 71.6 | % |
EMEA | 19.2 | % | | | | 21.3 | % | | 20.6 | % | | | | 23.0 | % | EMEA | 18.4 | % | | 19.2 | % | | 18.2 | % | | 20.6 | % |
Asia Pacific | 6.2 | % | | | | 8.9 | % | | 7.8 | % | | | | 9.4 | % | Asia Pacific | 7.3 | % | | 6.2 | % | | 7.3 | % | | 7.8 | % |
Three Months Ended March 31, 20202021 Compared to Three Months Ended March 31, 20192020
Cloud services and subscriptions revenues increased by $100.9$16.4 million or 42.3%4.8% during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year; up 3.1% after factoring in the impact of $5.8 million of foreign exchange rates. Geographically, the overall change was attributable to an increase in Americas of $11.0 million, an increase in Asia Pacific of $5.1 million and an increase in EMEA of $0.3 million.
There were 16 cloud services deals greater than $1.0 million that closed during the third quarter of Fiscal 2021, compared to 5 deals during the third quarter of Fiscal 2020.
Cost of Cloud services and subscriptions revenues decreased by $3.8 million during the three months ended March 31, 2021 as compared to the same period in the prior fiscal year. This was primarily driven by the impact of recent acquisitions. After factoring in the impact of $1.2 million of foreign exchange rate changes, cloud services and subscriptions revenues were up 42.8%. Geographically, the overall change was attributable to an increase in Americas of $86.8 million, an increase in EMEA of $14.3 million and a decrease in Asia Pacific of $0.3 million.
The number of Cloud services deals greater than $1.0 million that closed during the third quarter of Fiscal 2020 was 5 deals, compared to 8 deals greater than $1.0 million that closed during the third quarter of Fiscal 2019.
Cost of Cloud services and subscriptions revenues increased by $23.7 million during the three months ended March 31, 2020 as compared to the same period in the prior fiscal year. This was due to an increasea decrease in labour-related costs of $19.8$6.3 million, primarily due to increased headcount from recent acquisitions,partially offset by an increase of $1.5 million in third party network usage fees of $2.9 million and an increase in other miscellaneous costs of $1.0 million.
Overall, the gross margin percentage on Cloud services and subscriptions revenues increased to approximately65% from 62% from approximately 56%.
Nine Months Ended March 31, 20202021 Compared to Nine Months Ended March 31, 20192020
Cloud services and subscriptions revenues increased by $159.1$222.2 million or 23.9%26.9% during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year; up 24.7%25.7% after factoring in the impact of $5.1$10.3 million of foreign exchange rate changes.rates. The increase was primarily driven by incremental Cloud services and subscriptions revenues from acquisitions over the comparative period. Geographically, the overall change was attributable to an increase in Americas of $140.0$189.6 million, an increase in EMEA of $21.4 million and an increase in Asia Pacific of $3.0 million and an increase in EMEA of $16.1$11.3 million.
The number of CloudThere were 37 cloud services deals greater than $1.0 million that closed during the first nine months of Fiscal 2020 was 28 deals,2021, compared to 3328 deals during the first nine months of Fiscal 2019.
2020.
Cost of Cloud services and subscriptions revenues increased by $53.1$20.9 million during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was primarily due to an increase in labour-related costs of $42.7$14.9 million primarily due toresulting from increased headcount from recent acquisitions, an increase of $4.5 million in third party network usage fees of $9.2 million and an increase in other miscellaneous costs of $1.2$1.5 million.
Overall, the gross margin percentage on Cloud services and subscriptions revenues increased to approximately66% from 60% from approximately 58%.
3)2) 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 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 March 31, 2020,2021, our Customer support renewal rate was approximately 94%, compared with the Customer support renewal rate of 91% duringapproximately 94% for the quarter ended March 31, 2019.2020.
Cost of Customer support revenues is comprised primarily of technical support personnel and related costs, as well as third party royalty costs.
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Customer Support Revenues: | | | | | | | | | | | | Customer Support Revenues: | | | | | | | | | | | |
Americas | $ | 184,621 |
| | $ | 4,962 |
| | $ | 179,659 |
| | $ | 545,627 |
| | $ | 9,577 |
| | $ | 536,050 |
| Americas | $ | 185,985 | | | $ | 1,364 | | | $ | 184,621 | | | $ | 560,010 | | | $ | 14,383 | | | $ | 545,627 | |
EMEA | 112,456 |
| | 7,045 |
| | 105,411 |
| | 327,531 |
| | 7,259 |
| | 320,272 |
| EMEA | 122,464 | | | 10,008 | | | 112,456 | | | 358,479 | | | 30,948 | | | 327,531 | |
Asia Pacific | 25,788 |
| | 96 |
| | 25,692 |
| | 77,513 |
| | 1,168 |
| | 76,345 |
| Asia Pacific | 27,466 | | | 1,678 | | | 25,788 | | | 81,317 | | | 3,804 | | | 77,513 | |
Total Customer Support Revenues | 322,865 |
| | 12,103 |
| | 310,762 |
| | 950,671 |
| | 18,004 |
| | 932,667 |
| Total Customer Support Revenues | 335,915 | | | 13,050 | | | 322,865 | | | 999,806 | | | 49,135 | | | 950,671 | |
Cost of Customer Support Revenues | 32,151 |
| | 307 |
| | 31,844 |
| | 91,326 |
| | (2,256 | ) | | 93,582 |
| Cost of Customer Support Revenues | 30,953 | | | (1,198) | | | 32,151 | | | 89,815 | | | (1,511) | | | 91,326 | |
GAAP-based Customer Support Gross Profit | $ | 290,714 |
| | $ | 11,796 |
| | $ | 278,918 |
| | $ | 859,345 |
| | $ | 20,260 |
| | $ | 839,085 |
| GAAP-based Customer Support Gross Profit | $ | 304,962 | | | $ | 14,248 | | | $ | 290,714 | | | $ | 909,991 | | | $ | 50,646 | | | $ | 859,345 | |
GAAP-based Customer Support Gross Margin % | 90.0 | % | | | | 89.8 | % | | 90.4 | % | | | | 90.0 | % | GAAP-based Customer Support Gross Margin % | 90.8 | % | | 90.0 | % | | 91.0 | % | | 90.4 | % |
| | | | | | | | | | | | |
% Customer Support Revenues by Geography: | | | | | | | | | | | | % Customer Support Revenues by Geography: | |
Americas | 57.2 | % | | | | 57.8 | % | | 57.4 | % | | | | 57.5 | % | Americas | 55.4 | % | | 57.2 | % | | 56.0 | % | | 57.4 | % |
EMEA | 34.8 | % | | | | 33.9 | % | | 34.5 | % | | | | 34.3 | % | EMEA | 36.5 | % | | 34.8 | % | | 35.9 | % | | 34.5 | % |
Asia Pacific | 8.0 | % | | | | 8.3 | % | | 8.1 | % | | | | 8.2 | % | Asia Pacific | 8.1 | % | | 8.0 | % | | 8.1 | % | | 8.1 | % |
Three Months Ended March 31, 20202021 Compared to Three Months Ended March 31, 20192020
Customer support revenues increased by $12.1$13.1 million or 3.9%4.0% during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year; up 4.8%0.3% after factoring in the impact of $2.8$12.1 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase in EMEA of $7.0$10.0 million, an increase in Americas of $5.0 million, and an increase in Asia Pacific of $0.1$1.7 million and an increase in Americas of $1.4 million.
Cost of Customer support revenues increaseddecreased by $0.3$1.2 million during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was primarily due to a decrease in labour-related costs of $1.4 million, partially
offset by an increase in third party costs of $0.4 million and a decrease in other miscellaneous costsexpense of $0.1$0.2 million. Overall, the gross margin percentage on Customer support revenues remained stable at approximatelyincreased to 91% from 90%.
Nine Months Ended March 31, 20202021 Compared to Nine Months Ended March 31, 20192020
Customer support revenues increased by $18.0$49.1 million or 1.9%5.2% during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year; up 3.3%2.9% after factoring in the impact of $12.9$21.9 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase in AmericasEMEA of $9.6$30.9 million, an increase in EMEAAmericas of $7.3$14.4 million and an increase in Asia Pacific of $1.2$3.8 million.
Cost of Customer support revenues decreased by $2.3$1.5 million during the nine months ended March 31, 2021 as compared to the same period in the prior fiscal year. This was primarily due to a decrease in labour-related costs of $1.7 million and a decrease in third party costs of $0.3 million, partially offset by an increase in other miscellaneous costs of $0.5 million. Overall, the gross margin percentage on Customer support revenues increased to 91% from 90%.
3) License:
Our License revenue can be broadly categorized as perpetual licenses, term licenses and subscription licenses. 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 March 31, | | Nine Months Ended March 31, |
(In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
License Revenues: | | | | | | | | | | | |
Americas | $ | 29,422 | | | $ | (8,938) | | | $ | 38,360 | | | $ | 105,488 | | | $ | (38,369) | | | $ | 143,857 | |
EMEA | 39,820 | | | 7,604 | | | 32,216 | | | 119,963 | | | 2,954 | | | 117,009 | |
Asia Pacific | 7,057 | | | (3,422) | | | 10,479 | | | 26,719 | | | (9,463) | | | 36,182 | |
Total License Revenues | 76,299 | | | (4,756) | | | 81,055 | | | 252,170 | | | (44,878) | | | 297,048 | |
Cost of License Revenues | 2,810 | | | 266 | | | 2,544 | | | 9,601 | | | 1,684 | | | 7,917 | |
GAAP-based License Gross Profit | $ | 73,489 | | | $ | (5,022) | | | $ | 78,511 | | | $ | 242,569 | | | $ | (46,562) | | | $ | 289,131 | |
GAAP-based License Gross Margin % | 96.3 | % | | | | 96.9 | % | | 96.2 | % | | | | 97.3 | % |
| | | | | | | | | | | |
% License Revenues by Geography: | | | | | | | | | | | |
Americas | 38.6 | % | | | | 47.3 | % | | 41.8 | % | | | | 48.4 | % |
EMEA | 52.2 | % | | | | 39.8 | % | | 47.6 | % | | | | 39.4 | % |
Asia Pacific | 9.2 | % | | | | 12.9 | % | | 10.6 | % | | | | 12.2 | % |
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
License revenues decreased by $4.8 million or 5.9% during the three months ended March 31, 2021 as compared to the same period in the prior fiscal year; down 10.9% after factoring in the impact of $4.1 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in Americas of $8.9 million and a decrease in Asia Pacific of $3.4 million, partially offset by an increase in EMEA of $7.6 million.
During the third quarter of Fiscal 2021, we closed 21 license deals greater than $0.5 million, of which 8 deals were greater than $1.0 million, contributing $19.4 million of License revenues. This was compared to 23 license deals greater than $0.5 million closed during the third quarter of Fiscal 2020, of which 8 deals were greater than $1.0 million, contributing $25.0 million of License revenues.
Cost of License revenues increased by $0.3 million during the three months ended March 31, 2021 as compared to the same period in the prior fiscal year due toas a decrease in labour-related costsresult of approximately $2.2 million and a decrease in other miscellaneous costs of $0.1 million.higher third party technology costs. Overall, the gross margin percentage on Customer supportLicense revenues remained stable at approximately 90%decreased to 96% from 97%.
Nine Months Ended March 31, 2021 Compared to Nine Months Ended March 31, 2020
License revenues decreased by $44.9 million or 15.1% during the nine months ended March 31, 2021 as compared to the same period in the prior fiscal year; down 18.0% after factoring in the impact of $8.7 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in Americas of $38.4 million and a decrease in Asia Pacific of $9.5 million, partially offset by an increase in EMEA of $3.0 million.
During the first nine months of Fiscal 2021, we closed 72 license deals greater than $0.5 million, of which 23 deals were greater than $1.0 million, contributing $66.9 million of License revenues. This was compared to 85 license deals greater than $0.5 million closed during the first nine months of Fiscal 2020, of which 32 deals were greater than $1.0 million, contributing $98.6 million of License revenues.
Cost of License revenues increased by $1.7 million during the nine months ended March 31, 2021 as compared to the same period in the prior fiscal year as a result of higher third party technology costs. Overall, the gross margin percentage on License revenues decreased to 96% from 97%.
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 professionalProfessional 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.
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Professional Service and Other Revenues: | | | | | | | | | | | | Professional Service and Other Revenues: | | | | | | | |
Americas | $ | 33,482 |
| | $ | (285 | ) | | $ | 33,767 |
| | $ | 100,305 |
| | $ | 2,123 |
| | $ | 98,182 |
| Americas | $ | 28,208 | | | $ | (5,274) | | | $ | 33,482 | | | $ | 87,923 | | | $ | (12,382) | | | $ | 100,305 | |
EMEA | 30,727 |
| | 687 |
| | 30,040 |
| | 88,797 |
| | (4,904 | ) | | 93,701 |
| EMEA | 30,323 | | | (404) | | | 30,727 | | | 85,543 | | | (3,254) | | | 88,797 | |
Asia Pacific | 7,087 |
| | (162 | ) | | 7,249 |
| | 21,235 |
| | (1,462 | ) | | 22,697 |
| Asia Pacific | 6,341 | | | (746) | | | 7,087 | | | 19,861 | | | (1,374) | | | 21,235 | |
Total Professional Service and Other Revenues | 71,296 |
| | 240 |
| | 71,056 |
| | 210,337 |
| | (4,243 | ) | | 214,580 |
| Total Professional Service and Other Revenues | 64,872 | | | (6,424) | | | 71,296 | | | 193,327 | | | (17,010) | | | 210,337 | |
Cost of Professional Service and Other Revenues | 56,526 |
| | (100 | ) | | 56,626 |
| | 164,468 |
| | (4,984 | ) | | 169,452 |
| Cost of Professional Service and Other Revenues | 50,321 | | | (6,205) | | | 56,526 | | | 143,521 | | | (20,947) | | | 164,468 | |
GAAP-based Professional Service and Other Gross Profit | $ | 14,770 |
| | $ | 340 |
| | $ | 14,430 |
| | $ | 45,869 |
| | $ | 741 |
| | $ | 45,128 |
| GAAP-based Professional Service and Other Gross Profit | $ | 14,551 | | | $ | (219) | | | $ | 14,770 | | | $ | 49,806 | | | $ | 3,937 | | | $ | 45,869 | |
GAAP-based Professional Service and Other Gross Margin % | 20.7 | % | | | | 20.3 | % | | 21.8 | % | | | | 21.0 | % | GAAP-based Professional Service and Other Gross Margin % | 22.4 | % | | 20.7 | % | | 25.8 | % | | 21.8 | % |
| | | | | | | | | | | | |
% Professional Service and Other Revenues by Geography: | | | | | | | | | | | | % Professional Service and Other Revenues by Geography: | |
Americas | 47.0 | % | | | | 47.5 | % | | 47.7 | % | | | | 45.8 | % | Americas | 43.5 | % | | 47.0 | % | | 45.5 | % | | 47.7 | % |
EMEA | 43.1 | % | | | | 42.3 | % | | 42.2 | % | | | | 43.7 | % | EMEA | 46.7 | % | | 43.1 | % | | 44.2 | % | | 42.2 | % |
Asia Pacific | 9.9 | % | | | | 10.2 | % | | 10.1 | % | | | | 10.5 | % | Asia Pacific | 9.8 | % | | 9.9 | % | | 10.3 | % | | 10.1 | % |
Three Months Ended March 31, 20202021 Compared to Three Months Ended March 31, 20192020
Professional service and other revenues increaseddecreased by $0.2$6.4 million or 0.3%9.0% during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year; up 1.5%down 13.3% after factoring in the impact of $0.8$3.0 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase in EMEA of $0.7 million, partially offset by a decrease in the Americas of $0.3$5.3 million, and a decrease in Asia Pacific of $0.2$0.7 million and a decrease in EMEA of $0.4 million.
Cost of Professional service and other revenues decreased by $0.1$6.2 million during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was due to a decrease in labour-related costslabour and travel-related expenses of approximately $0.4$5.9 million partially offsetresulting from the travel limitations triggered by an increasethe COVID-19 pandemic and a decrease of $0.3 million in other miscellaneous costs of $0.3 million.costs.
Overall, the gross margin percentage on Professional service and other revenues increased to approximately22% from 21% from approximately 20%. We continue to be selective about the professional service engagements we accept to strategically optimize margins.
Nine Months Ended March 31, 20202021 Compared to Nine Months Ended March 31, 20192020
Professional service and other revenues decreased by $4.2$17.0 million or 2.0%8.1% during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year; down 0.4%11.1% after factoring in the impact of $3.4$6.3 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in the Americas of $12.4 million, a decrease in EMEA of $4.9$3.3 million and a decrease in Asia Pacific of $1.5 million, partially offset by an increase in Americas of $2.1$1.4 million.
Cost of Professional service and other revenues decreased by $5.0$20.9 million during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was due to a decrease in labour-related costslabour and travel-related expenses of approximately $5.7$21.5 million resulting primarily from a reduction in the use of external labour resources,travel limitations triggered by the COVID-19 pandemic, partially offset by an increase of $0.6 million in other miscellaneous costs of $0.7 million.
costs.
Overall, the gross margin percentage on Professional service and other revenues increased to approximately26% from 22% from approximately 21%.
Amortization of Acquired Technology-based Intangible Assets | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Amortization of acquired technology-based intangible assets | $ | 63,401 |
| | $ | 18,805 |
| | $ | 44,596 |
| | $ | 145,998 |
| | $ | 5,559 |
| | $ | 140,439 |
| Amortization of acquired technology-based intangible assets | $ | 53,453 | | | $ | (9,948) | | | $ | 63,401 | | | $ | 165,581 | | | $ | 19,583 | | | $ | 145,998 | |
Amortization of acquired technology-based intangible assets increaseddecreased by $9.9 million during the three months ended March 31, 2020 by $18.8 million2021 as compared to the same period in the prior fiscal yearyear. This was primarily due to a reduction of $9.9 million relating to intangible assets from certain previous acquisitions becoming fully amortized.
Amortization of acquired technology-based intangible assets increased by $19.6 million during the nine months ended March 31, 2021 as compared to the same period in the prior fiscal year. This was primarily due to an increase of $23.5$44.1 million relating to amortization of newly acquired technology-based intangible assets from recent acquisitions, partially offset by a reduction of $4.7$24.5 million relating to intangible assets from certain previous acquisitions becoming fully amortized.
Amortization of acquired technology-based intangible assets increased during the nine months ended March 31, 2020 by $5.6 million as compared to the same period in the prior fiscal year due to an increase of $37.8 million relating to amortization of newly acquired technology-based intangible assets from recent acquisitions, partially offset by a reduction of $32.2 million relating to intangible assets from certain previous acquisitions becoming fully amortized.
Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Research and development | $ | 110,071 | | | $ | 1,887 | | | $ | 108,184 | | | $ | 304,212 | | | $ | 34,567 | | | $ | 269,645 | |
Sales and marketing | 158,687 | | | (7,547) | | | 166,234 | | | 438,984 | | | 6,822 | | | 432,162 | |
General and administrative | 71,548 | | | 2,720 | | | 68,828 | | | 190,502 | | | 15,544 | | | 174,958 | |
Depreciation | 21,961 | | | (2,859) | | | 24,820 | | | 64,244 | | | (1,565) | | | 65,809 | |
Amortization of acquired customer-based intangible assets | 54,156 | | | (5,787) | | | 59,943 | | | 164,075 | | | 3,514 | | | 160,561 | |
Special charges (recoveries) | 2,846 | | | (6,560) | | | 9,406 | | | (1,404) | | | (25,983) | | | 24,579 | |
Total operating expenses | $ | 419,269 | | | $ | (18,146) | | | $ | 437,415 | | | $ | 1,160,613 | | | $ | 32,899 | | | $ | 1,127,714 | |
| | | | | | | | | | | |
% of Total Revenues: | | | | | | | | | | | |
Research and development | 13.2 | % | | | | 13.3 | % | | 12.2 | % | | | | 11.8 | % |
Sales and marketing | 19.1 | % | | | | 20.4 | % | | 17.6 | % | | | | 18.9 | % |
General and administrative | 8.6 | % | | | | 8.4 | % | | 7.6 | % | | | | 7.7 | % |
Depreciation | 2.6 | % | | | | 3.0 | % | | 2.6 | % | | | | 2.9 | % |
Amortization of acquired customer-based intangible assets | 6.5 | % | | | | 7.4 | % | | 6.6 | % | | | | 7.0 | % |
Special charges (recoveries) | 0.3 | % | | | | 1.2 | % | | (0.1) | % | | | | 1.1 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 |
Research and development | $ | 108,184 |
| | $ | 23,279 |
| | $ | 84,905 |
| | $ | 269,645 |
| | $ | 31,517 |
| | $ | 238,128 |
|
Sales and marketing | 166,234 |
| | 33,990 |
| | 132,244 |
| | 432,162 |
| | 53,543 |
| | 378,619 |
|
General and administrative | 68,828 |
| | 16,995 |
| | 51,833 |
| | 174,958 |
| | 20,003 |
| | 154,955 |
|
Depreciation | 24,820 |
| | (208 | ) | | 25,028 |
| | 65,809 |
| | (6,907 | ) | | 72,716 |
|
Amortization of acquired customer-based intangible assets | 59,943 |
| | 11,111 |
| | 48,832 |
| | 160,561 |
| | 19,934 |
| | 140,627 |
|
Special charges (recoveries) | 9,406 |
| | 8,610 |
| | 796 |
| | 24,579 |
| | (8,908 | ) | | 33,487 |
|
Total operating expenses | $ | 437,415 |
| | $ | 93,777 |
| | $ | 343,638 |
| | $ | 1,127,714 |
| | $ | 109,182 |
| | $ | 1,018,532 |
|
| | | | | | | | | | | |
% of Total Revenues: | | | | | | | | | | | |
Research and development | 13.3 | % | | | | 11.8 | % | | 11.8 | % | | | | 11.2 | % |
Sales and marketing | 20.4 | % | | | | 18.4 | % | | 18.9 | % | | | | 17.8 | % |
General and administrative | 8.4 | % | | | | 7.2 | % | | 7.7 | % | | | | 7.3 | % |
Depreciation | 3.0 | % | | | | 3.5 | % | | 2.9 | % | | | | 3.4 | % |
Amortization of acquired customer-based intangible assets | 7.4 | % | | | | 6.8 | % | | 7.0 | % | | | | 6.6 | % |
Special charges (recoveries) | 1.2 | % | | | | 0.1 | % | | 1.1 | % | | | | 1.6 | % |
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 isdrivers are typically budgeted software upgrades and software development.
| | | Change between Three Months Ended March 31, 2020 and 2019 | | Change between Nine Months Ended March 31, 2020 and 2019 | | Change between Three Months Ended March 31, 2021 and 2020 | | Change between Nine Months Ended March 31, 2021 and 2020 |
(In thousands) | increase (decrease) | | increase (decrease) | (In thousands) | increase (decrease) | | increase (decrease) |
Payroll and payroll-related benefits | $ | 15,284 |
| | $ | 23,406 |
| Payroll and payroll-related benefits | $ | 5,457 | | | $ | 27,837 | |
Contract labour and consulting | 1,534 |
| | 2,074 |
| Contract labour and consulting | (2,134) | | | (2,018) | |
Share-based compensation | (72 | ) | | (231 | ) | Share-based compensation | 903 | | | 3,476 | |
Travel and communication | 426 |
| | 391 |
| Travel and communication | (724) | | | (1,339) | |
Facilities | 6,133 |
| | 5,578 |
| Facilities | (2,627) | | | 4,623 | |
Other miscellaneous | (26 | ) | | 299 |
| Other miscellaneous | 1,012 | | | 1,988 | |
Total change in research and development expenses | $ | 23,279 |
| | $ | 31,517 |
| Total change in research and development expenses | $ | 1,887 | | | $ | 34,567 | |
Research and development expenses increased by $23.3$1.9 million during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year, primarily as a result of recent acquisitions.year. Payroll and payroll-related benefits increased by $15.3$5.5 million and other miscellaneous costs increased by $1.0 million. These increases were partially offset by reductions in facility related expenses increased by $6.1of $2.6 million due to the COVID-19 spending reduction discussed under "Outlook for Fiscal 2021" above and contract labour and consulting expense increased by $1.5 million. Overall, our research and development expenses as a percentage of total revenues, increased to approximately 13% from approximately 12% in the same period in the prior fiscal year.
Research and development expenses increased by $31.5 million during the nine months ended March 31, 2020 as compared to the same period in the prior fiscal year, partially as a result of recent acquisitions. Payroll and payroll-related benefits increased $23.4 million, facility related expenses increased by $5.6 million and contract labour and consulting expense increased by $2.1 million. Overall, our research and development expenses, as a percentage of total revenues, increasedremained stable compared to approximately 12% from approximately 11% in the same period in the prior fiscal year.year at 13%.
Research and development expenses increased by $34.6 million during the nine months ended March 31, 2021 as compared to the same period in the prior fiscal year as a result of recent acquisitions, partially offset by the impact of the COVID-19 spending reduction discussed under "Outlook for Fiscal 2021" above. Payroll and payroll-related benefits increased by $27.8 million and facility related expenses increased by $4.6 million. Additionally, share-based compensation expense increased by $3.5 million and other miscellaneous costs increased by $2.0 million. These increases were partially offset by reductions in contract labour and consulting expenses of $2.0 million and travel and communication expenses of $1.3 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 12%.
Our research and development labour resources increaseddecreased by 55318 employees, from 3,643 employees at March 31, 2019 to 4,196 employees at March 31, 2020.2020 to 4,178 employees at March 31, 2021.
Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising, marketing events and trade shows.
| | | Change between Three Months Ended March 31, 2020 and 2019 | | Change between Nine Months Ended March 31, 2020 and 2019 | | Change between Three Months Ended March 31, 2021 and 2020 | | Change between Nine Months Ended March 31, 2021 and 2020 |
(In thousands) | increase (decrease) | | increase (decrease) | (In thousands) | increase (decrease) | | increase (decrease) |
Payroll and payroll-related benefits | $ | 16,009 |
| | $ | 28,074 |
| Payroll and payroll-related benefits | $ | 3,646 | | | $ | 15,476 | |
Commissions | (278 | ) | | 7,022 |
| Commissions | 1,593 | | | (541) | |
Contract labour and consulting | 776 |
| | (23 | ) | Contract labour and consulting | (492) | | | (315) | |
Share-based compensation | (197 | ) | | 287 |
| Share-based compensation | 2,319 | | | 6,834 | |
Travel and communication | 991 |
| | 2,478 |
| Travel and communication | (5,442) | | | (14,402) | |
Marketing expenses | 8,325 |
| | 10,947 |
| Marketing expenses | (2,609) | | | 3,030 | |
Facilities | 6,164 |
| | 7,712 |
| Facilities | (4,813) | | | (2,548) | |
Bad debt expense | (66 | ) | | (4,652 | ) | |
Credit loss expense | | Credit loss expense | (666) | | | (1,188) | |
Other miscellaneous | 2,266 |
| | 1,698 |
| Other miscellaneous | (1,083) | | | 476 | |
Total change in sales and marketing expenses | $ | 33,990 |
| | $ | 53,543 |
| Total change in sales and marketing expenses | $ | (7,547) | | | $ | 6,822 | |
Sales and marketing expenses increaseddecreased by $34.0$7.5 million during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year, primarily as a resultyear. Travel and communication expenses decreased by $5.4 million, resulting from travel limitations triggered by the COVID-19 pandemic, facility related expenses decreased by $4.8 million and marketing expenses decreased by $2.6 million, resulting from the impact of recent acquisitions. Payrollthe COVID-19 spending reduction discussed under "Outlook for Fiscal 2021" above. These reductions were partially offset by increases in payroll and payroll-related benefits increased by $16.0of $3.6 million, marketing expenses increased by $8.3share-based compensation expense of $2.3 million and facilities related expenses increased by $6.2commissions of $1.6 million. The remainder of the difference was due to non-material items. Overall, our sales and marketing expenses, as a percentage of total revenues, increaseddecreased to approximately19% from 20% from approximately 18% in the same period in the prior fiscal year.
Sales and marketing expenses increased by $53.5$6.8 million during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year partially as a result of recent acquisitions.acquisitions, partially offset by the impact of the COVID-19 spending reduction discussed under "Outlook for Fiscal 2021" above. Payroll and payroll-related benefits increased by $28.1$15.5 million, share-based compensation expense increased by $6.8 million and marketing expenses increased by $10.9 million, and facility related expenses increased by $7.7$3.0 million. Additionally, commission expense increased by $7.0 million. These increases were partially offset by a decreasereductions in bad debt expensetravel and communications of $4.7$14.4 million resulting from travel limitations triggered by the COVID-19 pandemic and reductions in facility related expenses of $2.5 million. The remainder of the difference was due to non-material items. Overall, our sales and marketing expenses, as a percentage of total revenues, increaseddecreased to approximately18% from 19% from approximately 18% in the same period in the prior fiscal year.
Our sales and marketing labour resources increaseddecreased by 508117 employees, from 2,057 employees at March 31, 2019 to 2,565 employees at March 31, 2020.
2020 to 2,448 employees at March 31, 2021.
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 Months Ended March 31, 2020 and 2019 | | Change between Nine Months Ended March 31, 2020 and 2019 | | Change between Three Months Ended March 31, 2021 and 2020 | | Change between Nine Months Ended March 31, 2021 and 2020 |
(In thousands) | increase (decrease) | | increase (decrease) | (In thousands) | increase (decrease) | | increase (decrease) |
Payroll and payroll-related benefits | $ | 7,373 |
| | $ | 12,796 |
| Payroll and payroll-related benefits | $ | 2,385 | | | $ | 8,567 | |
Contract labour and consulting | 1,014 |
| | (23 | ) | Contract labour and consulting | (1,247) | | | (1,228) | |
Share-based compensation | 452 |
| | 1,525 |
| Share-based compensation | 1,636 | | | 3,989 | |
Travel and communication | 370 |
| | 431 |
| Travel and communication | (1,276) | | | (3,722) | |
Facilities | 393 |
| | (1,354 | ) | Facilities | (678) | | | (2,315) | |
Other miscellaneous | 7,393 |
| | 6,628 |
| Other miscellaneous | 1,900 | | | 10,253 | |
Total change in general and administrative expenses | $ | 16,995 |
| | $ | 20,003 |
| Total change in general and administrative expenses | $ | 2,720 | | | $ | 15,544 | |
General and administrative expenses increased by $17.0$2.7 million during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year. Payroll and payroll-related benefits increased by $7.4$2.4 million primarily as a resultand share-based compensation expense increased by $1.6 million. These increases were partially offset by reductions in travel and communication of increased headcount from recent acquisitions.$1.3 million and facility related expenses of $0.7 million, due to the impact of the COVID-19 spending reduction discussed under "Outlook for Fiscal 2021" above. Additionally, other miscellaneous expenses increased by $7.4 million, primarily due to highercosts, which include professional fees such as legal, audit and tax related expenses from our recent acquisitions.increased by $1.9 million. The remainder of the changedifference was attributabledue to other activities associated with normal growth in our business operations.non-material items. Overall, general and administrative expenses, as a percentage of total revenues, increased to approximately9% from 8% from approximately 7% in the same period in the prior fiscal year.
General and administrative expenses increased by $20.0$15.5 million during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was primarily due to an increase in payrollyear as a result of recent acquisitions. Payroll and payroll-related benefits of $12.8 million. Additionally,increased by $8.6 million, other miscellaneous expenses,costs, which includesinclude professional fees such as legal, audit and tax related expenses, increased by $6.6$10.3 million primarily as a result of recent acquisitions.and share-based compensation expense increased by $4.0 million. These increases were partially offset by a decreasereductions in travel and communication of $3.7 million and facility related expenses of $1.4 million.$2.3 million, due to the impact of the COVID-19 spending reduction discussed under "Outlook for Fiscal 2021" above. The remainder of the changedifference was attributabledue to other activities associated with normal growth in our business operations.non-material items. Overall, general and administrative expenses, as a percentage of total revenues, increasedremained stable compared to approximately 8% from approximately 7% in the same period in the prior fiscal year.year at 8%.
Our general and administrative labour resources increaseddecreased by 408146 employees, from 1,589 employees at March 31, 2019 to 1,997 employees at March 31, 2020.2020 to 1,851 employees at March 31, 2021.
Depreciation expenses:
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Depreciation | $ | 24,820 |
| | $ | (208 | ) | | $ | 25,028 |
| | $ | 65,809 |
| | $ | (6,907 | ) | | $ | 72,716 |
| Depreciation | $ | 21,961 | | | $ | (2,859) | | | $ | 24,820 | | | $ | 64,244 | | | $ | (1,565) | | | $ | 65,809 | |
Depreciation expenses decreased during the three and nine months ended March 31, 20202021 by $0.2$2.9 million and $6.9$1.6 million, respectively, as compared to the same periods in the prior fiscal year. Depreciation expenses, as a percentage of total revenue, remained stable at approximately 3% for each such period.the three and nine months ended March 31, 2021, respectively, compared to the same periods in the prior fiscal year.
Amortization of acquired customer-based intangible assets:
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Amortization of acquired customer-based intangible assets | $ | 59,943 |
| | $ | 11,111 |
| | $ | 48,832 |
| | $ | 160,561 |
| | $ | 19,934 |
| | $ | 140,627 |
| Amortization of acquired customer-based intangible assets | $ | 54,156 | | | $ | (5,787) | | | $ | 59,943 | | | $ | 164,075 | | | $ | 3,514 | | | $ | 160,561 | |
Amortization of acquired customer-based intangible assets increaseddecreased by $5.8 million during the three months ended March 31, 2020 by $11.1 million2021 as compared to the same period in the prior fiscal yearyear. This was due to a reduction of $8.0 million relating to intangible assets from certain previous acquisitions becoming fully amortized, partially offset by an increase of $2.2 million relating to amortization of newly acquired customer-based intangible assets from recent acquisitions.
Amortization of acquired customer-based intangible assets increased by $3.5 million during the nine months ended March 31, 2021 as compared to the same period in the prior fiscal year. This was due to an increase of $26.4$56.0 million relating to amortization of newly acquired customer-based intangible assets from recent acquisitions, partially offset by a reduction of $15.3 million relating to intangible assets from certain previous acquisitions becoming fully amortized.
Amortization of acquired customer-based intangible assets increased during the nine months ended March 31, 2020 by $19.9 million as compared to the same period in the prior fiscal year due to an increase of $35.8 million relating to amortization
of newly acquired customer-based intangible assets from recent acquisitions, partially offset by a reduction of $15.9$52.5 million relating to intangible assets from certain previous acquisitions becoming fully amortized.
Special charges (recoveries):
Special charges (recoveries) 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.charges (recoveries).
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Special charges (recoveries) | $ | 9,406 |
| | $ | 8,610 |
| | $ | 796 |
| | $ | 24,579 |
| | $ | (8,908 | ) | | $ | 33,487 |
| Special charges (recoveries) | $ | 2,846 | | | $ | (6,560) | | | $ | 9,406 | | | $ | (1,404) | | | $ | (25,983) | | | $ | 24,579 | |
Special charges increased(recoveries) decreased by $8.6$6.6 million during the three months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was due to (i) an increasea decrease of $5.3$6.5 million in restructuring activities, (ii) an increase of $1.5 million relatingprimarily related to the impactCOVID-19 and Fiscal 2020 restructuring plans which were initiated during the second half of certain pre-acquisition salesFiscal 2020. The recoveries were largely associated with the reversal of lease liabilities from previously abandoned facilities which have since been assigned or early terminated as well as the release of other facility charges accrued for under the plans. Additionally, other miscellaneous charges decreased by $0.8 million and use tax liabilities becoming statute barred during Fiscal 2019, (iii) an increase of $1.0 million in acquisition related costs and (iv) an increase of $0.8 million relating to other miscellaneous charges.increased by $0.7 million.
Special charges (recoveries) decreased by $8.9$26.0 million during the nine months ended March 31, 20202021 as compared to the same period in the prior fiscal year. This was due to (i) a decrease in restructuring activities of $20.4 million and (ii) a decrease of $1.1$14.5 million relatingprimarily related to one-time system implementation costs, partially offset by (i) an increase inthe COVID-19 and Fiscal 2020 restructuring plans which were initiated during the second half of Fiscal 2020. The recoveries were largely associated with the reversal of lease liabilities from previously abandoned facilities which have since been assigned or early terminated as well as the release of other facility charges accrued for under the plans. Additionally, acquisition related costs of $7.8decreased by $8.3 million (ii) an increase of $1.5 million relating to the impact of certain pre-acquisition sales and use tax liabilities becoming statute barred during Fiscal 2019, and (iii) an increase in other miscellaneous charges of $3.3decreased by $3.2 million.
For more details on Special charges (recoveries), see note 18 "Special Charges (Recoveries)" to our Condensed Consolidated Financial Statements.
Other Income (Expense), Net
OtherThe components of other income (expense), net relates to certain non-operational charges primarily consisting of debt extinguishment costs, income or losses in our share of investments 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.were as follows: | | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Foreign exchange gains (losses) | $ | (5,766 | ) | | $ | (7,799 | ) | | $ | 2,033 |
| | $ | (9,073 | ) | | $ | (4,949 | ) | | $ | (4,124 | ) | Foreign exchange gains (losses) | $ | (3,248) | | | $ | 2,518 | | | $ | (5,766) | | | $ | (3,258) | | | $ | 5,815 | | | $ | (9,073) | |
OpenText share in net income (loss) of equity investees (note 9) | 4,527 |
| | 1,738 |
| | 2,789 |
| | 6,475 |
| | (4,177 | ) | | 10,652 |
| OpenText share in net income (loss) of equity investees (note 9) | 11,765 | | | 7,238 | | | 4,527 | | | 20,020 | | | 13,545 | | | 6,475 | |
Loss debt extinguishment (1) | (17,854 | ) | | (17,854 | ) | | — |
| | (17,854 | ) | | (17,854 | ) | | — |
| Loss debt extinguishment (1) | — | | | 17,854 | | | (17,854) | | | — | | | 17,854 | | | (17,854) | |
Other miscellaneous income (expense) | 170 |
| | (73 | ) | | 243 |
| | 716 |
| | 279 |
| | 437 |
| Other miscellaneous income (expense) | (234) | | | (404) | | | 170 | | | (345) | | | (1,061) | | | 716 | |
Total other income (expense), net | $ | (18,923 | ) | | $ | (23,988 | ) | | $ | 5,065 |
| | $ | (19,736 | ) | | $ | (26,701 | ) | | $ | 6,965 |
| Total other income (expense), net | $ | 8,283 | | | $ | 27,206 | | | $ | (18,923) | | | $ | 16,417 | | | $ | 36,153 | | | $ | (19,736) | |
|
(1)On March 5, 2020, we redeemed in full $800 million aggregate principal amount of our 5.625% Senior Notes due 2023 in full,(Senior Notes 2023), which resulted in a loss on debt extinguishment of debt of approximately $17.9 million. Of this, approximately $6.7 million relatesrelated to unamortized debt issuance costs and the remaining $11.2 million relatesrelated to the early termination call premium. Seepremium.For more details see note 11 "Long-Term Debt"22 "Other Income (Expense), Net" to our Condensed Consolidated Financial Statements.
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 March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Interest expense related to total outstanding debt (1) | $ | 41,668 |
| | $ | 7,043 |
| | $ | 34,625 |
| | $ | 109,612 |
| | $ | 6,765 |
| | $ | 102,847 |
| Interest expense related to total outstanding debt (1) | $ | 35,602 | | | $ | (6,066) | | | $ | 41,668 | | | $ | 110,054 | | | $ | 442 | | | $ | 109,612 | |
Interest income | (2,743 | ) | | (1,756 | ) | | (987 | ) | | (10,166 | ) | | (5,820 | ) | | (4,346 | ) | Interest income | (780) | | | 1,963 | | | (2,743) | | | (3,116) | | | 7,050 | | | (10,166) | |
Other miscellaneous expense | 2,338 |
| | 369 |
| | 1,969 |
| | 6,403 |
| | 1,153 |
| | 5,250 |
| Other miscellaneous expense | 2,511 | | | 173 | | | 2,338 | | | 7,079 | | | 676 | | | 6,403 | |
Total interest and other related expense, net | $ | 41,263 |
| | $ | 5,656 |
| | $ | 35,607 |
| | $ | 105,849 |
| | $ | 2,098 |
| | $ | 103,751 |
| Total interest and other related expense, net | $ | 37,333 | | | $ | (3,930) | | | $ | 41,263 | | | $ | 114,017 | | | $ | 8,168 | | | $ | 105,849 | |
|
(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 in the United States.
Please also see Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2019.
| | | Three Months Ended March 31, | | Nine Months Ended March 31, | | Three Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change increase (decrease) | | 2019 | | 2020 | | Change increase (decrease) | | 2019 | (In thousands) | 2021 | | Change increase (decrease) | | 2020 | | 2021 | | Change increase (decrease) | | 2020 |
Provision for (recovery of) income taxes | $ | 8,891 |
| | $ | (23,651 | ) | | $ | 32,542 |
| | $ | 78,800 |
| | $ | (19,828 | ) | | $ | 98,628 |
| Provision for (recovery of) income taxes | $ | 31,818 | | | $ | 22,927 | | | $ | 8,891 | | | $ | 342,121 | | | $ | 263,321 | | | $ | 78,800 | |
The effective tax rate decreasedincreased to a provision of 25.8% for the three months ended March 31, 2021, compared to a provision of 25.5% for the three months ended March 31, 2020, compared to a provision of 30.9% for2020. Tax expense increased by $22.9 million from $8.9 million during the three months ended March 31, 2019. The decrease in tax expense of $23.72020 to $31.8 million during the three months ended March 31, 2021. This was primarily due to (i) a decreasean increase of $20.0$23.5 million relating to the decrease inhigher net income including the impact of foreign rates, (ii) a decreasean increase of $9.0 million from tax rate differential in tax years applicable to United States loss carryforwards that became eligible for carryback under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act enacted in the third quarter of Fiscal 2020, and (iii) a decrease of $7.9$9.1 million related to tax costs of internal reorganizationsthe one-time benefit from the US CARES Act in Fiscal 2020 that did not recur in Fiscal 2020.2021, and (iii) an increase of $3.4 million related to differences in tax filings being higher than estimates. These were partially offset by (i) an increasea decrease of $4.8$8.9 million related to the US Base Erosion Anti-avoidanceAnti-Abuse Tax (US BEAT), (ii) an increasea decrease of $3.2 million for net changes in unrecognized tax filings in excess of estimates of $3.0 million,benefits, (iii) a decrease inof $2.8 million related to permanent differences, and (iv) a decrease of $1.0 million related to tax credits for research and developmentbenefits of $2.9 million resulting from filings in excess of estimatesinternal reorganizations that occurred in Fiscal 2019 that did not recur in Fiscal 2020 and (iv) an increase in accruals for repatriations from foreign subsidiaries of $1.7 million.2021. The remainder of the difference was due to normal course movements and non-material items.
The effective tax rate decreasedincreased to a provision of 72.5% for the nine months ended March 31, 2021, compared to a provision of 27.5% for the nine months ended March 31, 2020, compared to a provision of 31.6% for2020. Tax expense increased by $263.3 million from $78.8 million during the nine months ended March 31, 2019. Tax expense decreased by $19.82020 to $342.1 million during the nine months ended March 31, 2021. This was primarily due to (i) a decreasean increase of $21.5 million in reserves for unrecognized tax benefits resulting from clarifications provided by tax regulations and taxation years becoming statute barred, (ii) a decrease of $15.8$300.6 million relating to the taxIRS Settlement, (ii) an increase of $47.4 million relating to higher net income including the impact of internal reorganizationsforeign rates, and (iii) an increase of subsidiaries$9.1 million related to the one-time benefit from the US CARES Act in Fiscal 2020 that did not recur in Fiscal 2020, (iii) a decrease of $9.0 million from tax rate differential in tax years applicable to United States loss carryforwards that became eligible for carryback under the CARES Act enacted in the third quarter of Fiscal 2020, (iv) the decrease in net income taxed at foreign rates of $8.3 million, and (v) an increase in tax credits for research and development of $2.9 million.2021. These were partially offset by (i) an increasea decrease of $16.6
$70.5 million relatingfor net changes in unrecognized tax benefits, primarily from the conclusion of relevant tax audits, (ii) a decrease of $12.4 million related to tax benefits of internal reorganizations that occurred in Fiscal 2021, (iii) a one-time reversaldecrease of $6.4 million related to US BEAT, and (iv) a decrease of $4.1 million related to accruals for repatriations from subsidiaries in the United States in Fiscal 2019 that did not recur in Fiscal 2020, (ii) an increase in tax filings in excess of estimates of $10.4 million, and (iii) the impact of US BEAT of $9.9 million.unrepatriated foreign earnings. The remainder of the difference was due to normal course movements and non-material items.
For information with regards to the IRS Settlement and certain other potential tax contingencies, see note 14 "Guarantees and Contingencies" and note 15 "Income Taxes" to our Condensed Consolidated Financial Statements. Please also see Part I, Item 1A "Risk Factors" within our Annual Report on Form 10-K for Fiscal 2020.
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 areis 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, isare 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 Specialspecial 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, Specialspecial 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 Specialspecial 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-GAAPNon-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 Chargescharges (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.
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended March 31, 20202021
(inIn thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 123,729 | | | $ | (505) | | (1) | $ | 123,224 | | |
Customer support | 30,953 | | | (464) | | (1) | 30,489 | | |
Professional service and other | 50,321 | | | (684) | | (1) | 49,637 | | |
Amortization of acquired technology-based intangible assets | 53,453 | | | (53,453) | | (2) | — | | |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 571,665 | | 68.6% | 55,106 | | (3) | 626,771 | | 75.2% |
Operating expenses | | | | | | |
Research and development | 110,071 | | | (2,146) | | (1) | 107,925 | | |
Sales and marketing | 158,687 | | | (4,580) | | (1) | 154,107 | | |
General and administrative | 71,548 | | | (3,978) | | (1) | 67,570 | | |
Amortization of acquired customer-based intangible assets | 54,156 | | | (54,156) | | (2) | — | | |
Special charges (recoveries) | 2,846 | | | (2,846) | | (4) | — | | |
GAAP-based income from operations / Non-GAAP-based income from operations | 152,396 | | | 122,812 | | (5) | 275,208 | | |
Other income (expense), net | 8,283 | | | (8,283) | | (6) | — | | |
Provision for (recovery of) income taxes | 31,818 | | | 1,485 | | (7) | 33,303 | | |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 91,490 | | | 113,044 | | (8) | 204,534 | | |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.33 | | | $ | 0.42 | | (8) | $ | 0.75 | | |
|
| | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 127,565 |
| | $ | (398 | ) | (1) | $ | 127,167 |
| |
Customer support | 32,151 |
| | (284 | ) | (1) | 31,867 |
| |
Professional service and other | 56,526 |
| | (328 | ) | (1) | 56,198 |
| |
Amortization of acquired technology-based intangible assets | 63,401 |
| | (63,401 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 532,492 |
| 65.4% | 64,411 |
| (3) | 596,903 |
| 73.3% |
Operating expenses | | | | | | |
Research and development | 108,184 |
| | (1,243 | ) | (1) | 106,941 |
| |
Sales and marketing | 166,234 |
| | (2,261 | ) | (1) | 163,973 |
| |
General and administrative | 68,828 |
| | (2,342 | ) | (1) | 66,486 |
| |
Amortization of acquired customer-based intangible assets | 59,943 |
| | (59,943 | ) | (2) | — |
| |
Special charges (recoveries) | 9,406 |
| | (9,406 | ) | (4) | — |
| |
GAAP-based income from operations / Non-GAAP-based income from operations | 95,077 |
| | 139,606 |
| (5) | 234,683 |
| |
Other income (expense), net | (18,923 | ) | | 18,923 |
| (6) | — |
| |
Provision for (recovery of) income taxes | 8,891 |
| | 18,188 |
| (7) | 27,079 |
| |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 25,965 |
| | 140,341 |
| (8) | 166,306 |
| |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.10 |
| | $ | 0.51 |
| (8) | $ | 0.61 |
| |
|
| | | | |
(1) | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue. |
(4) | Adjustment relates to the exclusion of Specialspecial charges (recoveries) from our Non-GAAP-based operating expenses as Specialspecial 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)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 Otherother income (expense) from our Non-GAAP-based operating expenses as Otherother 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 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. |
| | | | | |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
| | | | | | | | |
| Three Months Ended March 31, 2021 |
| | Per share diluted |
GAAP-based net income, attributable to OpenText | $ | 91,490 | | $ | 0.33 | |
Add: | | |
Amortization | 107,609 | | 0.39 | |
Share-based compensation | 12,357 | | 0.05 | |
Special charges (recoveries) | 2,846 | | 0.01 | |
Other (income) expense, net | (8,283) | | (0.03) | |
GAAP-based provision for (recovery of) income taxes | 31,818 | | 0.12 | |
Non-GAAP-based provision for income taxes | (33,303) | | (0.12) | |
Non-GAAP-based net income, attributable to OpenText | $ | 204,534 | | $ | 0.75 | |
|
Reconciliation of Adjusted EBITDA
| | | | | |
| Three Months Ended March 31, 2021 |
GAAP-based net income, attributable to OpenText | $ | 91,490 | |
Add: | |
Provision for (recovery of) income taxes | 31,818 | |
Interest and other related expense, net | 37,333 | |
Amortization of acquired technology-based intangible assets | 53,453 | |
Amortization of acquired customer-based intangible assets | 54,156 | |
Depreciation | 21,961 | |
Share-based compensation | 12,357 | |
Special charges (recoveries) | 2,846 | |
Other (income) expense, net | (8,283) | |
Adjusted EBITDA | $ | 297,131 | |
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended March 31, 2020
(In thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 127,565 | | | $ | (398) | | (1) | $ | 127,167 | | |
Customer support | 32,151 | | | (284) | | (1) | 31,867 | | |
Professional service and other | 56,526 | | | (328) | | (1) | 56,198 | | |
Amortization of acquired technology-based intangible assets | 63,401 | | | (63,401) | | (2) | — | | |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 532,492 | | 65.4% | 64,411 | | (3) | 596,903 | | 73.3% |
Operating expenses | | | | | | |
Research and development | 108,184 | | | (1,243) | | (1) | 106,941 | | |
Sales and marketing | 166,234 | | | (2,261) | | (1) | 163,973 | | |
General and administrative | 68,828 | | | (2,342) | | (1) | 66,486 | | |
Amortization of acquired customer-based intangible assets | 59,943 | | | (59,943) | | (2) | — | | |
Special charges (recoveries) | 9,406 | | | (9,406) | | (4) | — | | |
GAAP-based income from operations / Non-GAAP-based income from operations | 95,077 | | | 139,606 | | (5) | 234,683 | | |
Other income (expense), net | (18,923) | | | 18,923 | | (6) | — | | |
Provision for (recovery of) income taxes | 8,891 | | | 18,188 | | (7) | 27,079 | | |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 25,965 | | | 140,341 | | (8) | 166,306 | | |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.10 | | | $ | 0.51 | | (8) | $ | 0.61 | | |
| | | | | |
(1) | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of 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 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 25% 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, Specialspecial 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. |
|
| | | | |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
| | | Three Months Ended March 31, 2020 | | | Three Months Ended March 31, 2020 |
| | Per share diluted |
| | | Per share diluted |
GAAP-based net income, attributable to OpenText | $ | 25,965 |
| $ | 0.10 |
| GAAP-based net income, attributable to OpenText | $ | 25,965 | | $ | 0.10 | |
Add: | | Add: | |
Amortization | 123,344 |
| 0.45 |
| Amortization | 123,344 | | 0.45 | |
Share-based compensation | 6,856 |
| 0.03 |
| Share-based compensation | 6,856 | | 0.03 | |
Special charges (recoveries) | 9,406 |
| 0.03 |
| Special charges (recoveries) | 9,406 | | 0.03 | |
Other (income) expense, net | 18,923 |
| 0.07 |
| Other (income) expense, net | 18,923 | | 0.07 | |
GAAP-based provision for (recovery of) income taxes | 8,891 |
| 0.03 |
| GAAP-based provision for (recovery of) income taxes | 8,891 | | 0.03 | |
Non-GAAP-based provision for income taxes | (27,079 | ) | (0.10 | ) | Non-GAAP-based provision for income taxes | (27,079) | | (0.10) | |
Non-GAAP-based net income, attributable to OpenText | $ | 166,306 |
| $ | 0.61 |
| Non-GAAP-based net income, attributable to OpenText | $ | 166,306 | | $ | 0.61 | |
Reconciliation of Adjusted EBITDA
| | | | | |
| Three Months Ended March 31, 2020 |
GAAP-based net income, attributable to OpenText | $ | 25,965 | |
Add: | |
Provision for (recovery of) income taxes | 8,891 | |
Interest and other related expense, net | 41,263 | |
Amortization of acquired technology-based intangible assets | 63,401 | |
Amortization of acquired customer-based intangible assets | 59,943 | |
Depreciation | 24,820 | |
Share-based compensation | 6,856 | |
Special charges (recoveries) | 9,406 | |
Other (income) expense, net | 18,923 | |
Adjusted EBITDA | $ | 259,468 | |
|
| | | |
| Three Months Ended March 31, 2020 |
GAAP-based net income, attributable to OpenText | $ | 25,965 |
|
Add: | |
Provision for (recovery of) income taxes | 8,891 |
|
Interest and other related expense, net | 41,263 |
|
Amortization of acquired technology-based intangible assets | 63,401 |
|
Amortization of acquired customer-based intangible assets | 59,943 |
|
Depreciation | 24,820 |
|
Share-based compensation | 6,856 |
|
Special charges (recoveries) | 9,406 |
|
Other (income) expense, net | 18,923 |
|
Adjusted EBITDA | $ | 259,468 |
|
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the threenine months ended March 31, 20192021
(inIn thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended March 31, 2021 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 354,235 | | | $ | (2,484) | | (1) | $ | 351,751 | | |
Customer support | 89,815 | | | (1,405) | | (1) | 88,410 | | |
Professional service and other | 143,521 | | | (1,867) | | (1) | 141,654 | | |
Amortization of acquired technology-based intangible assets | 165,581 | | | (165,581) | | (2) | — | | |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 1,729,835 | | 69.4% | 171,337 | | (3) | 1,901,172 | | 76.3% |
Operating expenses | | | | | | |
Research and development | 304,212 | | | (7,195) | | (1) | 297,017 | | |
Sales and marketing | 438,984 | | | (13,594) | | (1) | 425,390 | | |
General and administrative | 190,502 | | | (12,074) | | (1) | 178,428 | | |
Amortization of acquired customer-based intangible assets | 164,075 | | | (164,075) | | (2) | — | | |
Special charges (recoveries) | (1,404) | | | 1,404 | | (4) | — | | |
GAAP-based income from operations / Non-GAAP-based income from operations | 569,222 | | | 366,871 | | (5) | 936,093 | | |
Other income (expense), net | 16,417 | | | (16,417) | | (6) | — | | |
Provision for (recovery of) income taxes | 342,121 | | | (227,030) | | (7) | 115,091 | | |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 129,389 | | | 577,484 | | (8) | 706,873 | | |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.47 | | | $ | 2.12 | | (8) | $ | 2.59 | | |
|
| | | | | | | | | | | | |
| Three Months Ended March 31, 2019 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 103,873 |
| | $ | (291 | ) | (1) | $ | 103,582 |
| |
Customer support | 31,844 |
| | (310 | ) | (1) | 31,534 |
| |
Professional service and other | 56,626 |
| | (448 | ) | (1) | 56,178 |
| |
Amortization of acquired technology-based intangible assets | 44,596 |
| | (44,596 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 479,515 |
| 66.7% | 45,645 |
| (3) | 525,160 |
| 73.0% |
Operating expenses | | | | | | |
Research and development | 84,905 |
| | (1,315 | ) | (1) | 83,590 |
| |
Sales and marketing | 132,244 |
| | (2,458 | ) | (1) | 129,786 |
| |
General and administrative | 51,833 |
| | (1,890 | ) | (1) | 49,943 |
| |
Amortization of acquired customer-based intangible assets | 48,832 |
| | (48,832 | ) | (2) | — |
| |
Special charges (recoveries) | 796 |
| | (796 | ) | (4) | — |
| |
GAAP-based income from operations / Non-GAAP-based income from operations | 135,877 |
| | 100,936 |
| (5) | 236,813 |
| |
Other income (expense), net | 5,065 |
| | (5,065 | ) | (6) | — |
| |
Provision for (recovery of) income taxes | 32,542 |
| | (4,373 | ) | (7) | 28,169 |
| |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 72,762 |
| | 100,244 |
| (8) | 173,006 |
| |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.27 |
| | $ | 0.37 |
| (8) | $ | 0.64 |
| |
|
| | | | |
(1) | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of total revenue. |
(4) | Adjustment relates to the exclusion of Specialspecial charges (recoveries) from our Non-GAAP-based operating expenses as Specialspecial 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)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 Otherother income (expense) from our Non-GAAP-based operating expenses as Otherother 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 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 31%73% 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. The GAAP-based tax provision rate for the nine months ended March 31, 2021 includes the income tax provision charge from the IRS Settlement partially offset by a tax benefit from the release of unrecognized tax benefits due to the conclusion of relevant tax audits that was recognized during the three months ended December 31, 2020. |
| | | | | |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
| | | | | | | | |
| Nine Months Ended March 31, 2021 |
| | Per share diluted |
GAAP-based net income, attributable to OpenText | $ | 129,389 | | $ | 0.47 | |
Add: | | |
Amortization | 329,656 | | 1.21 | |
Share-based compensation | 38,619 | | 0.14 | |
Special charges (recoveries) | (1,404) | | (0.01) | |
Other (income) expense, net | (16,417) | | (0.06) | |
GAAP-based provision for (recovery of) income taxes | 342,121 | | 1.26 | |
Non-GAAP-based provision for income taxes | (115,091) | | (0.42) | |
Non-GAAP-based net income, attributable to OpenText | $ | 706,873 | | $ | 2.59 | |
Reconciliation of Adjusted EBITDA
| | | | | |
| Nine Months Ended March 31, 2021 |
GAAP-based net income, attributable to OpenText | $ | 129,389 | |
Add: | |
Provision for (recovery of) income taxes | 342,121 | |
Interest and other related expense, net | 114,017 | |
Amortization of acquired technology-based intangible assets | 165,581 | |
Amortization of acquired customer-based intangible assets | 164,075 | |
Depreciation | 64,244 | |
Share-based compensation | 38,619 | |
Special charges (recoveries) | (1,404) | |
Other (income) expense, net | (16,417) | |
Adjusted EBITDA | $ | 1,000,225 | |
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the nine months ended March 31, 2020
(In thousands, except for per share data)
| | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended March 31, 2020 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 333,371 | | | $ | (1,152) | | (1) | $ | 332,219 | | |
Customer support | 91,326 | | | (897) | | (1) | 90,429 | | |
Professional service and other | 164,468 | | | (917) | | (1) | 163,551 | | |
Amortization of acquired technology-based intangible assets | 145,998 | | | (145,998) | | (2) | — | | |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 1,540,044 | | 67.5% | 148,964 | | (3) | 1,689,008 | | 74.0% |
Operating expenses | | | | | | |
Research and development | 269,645 | | | (3,719) | | (1) | 265,926 | | |
Sales and marketing | 432,162 | | | (6,760) | | (1) | 425,402 | | |
General and administrative | 174,958 | | | (8,085) | | (1) | 166,873 | | |
Amortization of acquired customer-based intangible assets | 160,561 | | | (160,561) | | (2) | — | | |
Special charges (recoveries) | 24,579 | | | (24,579) | | (4) | — | | |
GAAP-based income from operations / Non-GAAP-based income from operations | 412,330 | | | 352,668 | | (5) | 764,998 | | |
Other income (expense), net | (19,736) | | | 19,736 | | (6) | — | | |
Provision for (recovery of) income taxes | 78,800 | | | 13,481 | | (7) | 92,281 | | |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 207,833 | | | 358,923 | | (8) | 566,756 | | |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.77 | | | $ | 1.32 | | (8) | $ | 2.09 | | |
| | | | | |
(1) | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of 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 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 27% 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. |
|
| | | | |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
| | | | | | | | |
| Nine Months Ended March 31, 2020 |
| | Per share diluted |
GAAP-based net income, attributable to OpenText | $ | 207,833 | | $ | 0.77 | |
Add: | | |
Amortization | 306,559 | | 1.13 | |
Share-based compensation | 21,530 | | 0.08 | |
Special charges (recoveries) | 24,579 | | 0.09 | |
Other (income) expense, net | 19,736 | | 0.07 | |
GAAP-based provision for (recovery of) income taxes | 78,800 | | 0.29 | |
Non-GAAP-based provision for income taxes | (92,281) | | (0.34) | |
Non-GAAP-based net income, attributable to OpenText | $ | 566,756 | | $ | 2.09 | |
|
| | | | | | |
| Three Months Ended March 31, 2019 |
| | Per share diluted |
GAAP-based net income, attributable to OpenText | $ | 72,762 |
| $ | 0.27 |
|
Add: | | |
Amortization | 93,428 |
| 0.35 |
|
Share-based compensation | 6,712 |
| 0.02 |
|
Special charges (recoveries) | 796 |
| — |
|
Other (income) expense, net | (5,065 | ) | (0.02 | ) |
GAAP-based provision for (recovery of) income taxes | 32,542 |
| 0.12 |
|
Non-GAAP-based provision for income taxes | (28,169 | ) | (0.10 | ) |
Non-GAAP-based net income, attributable to OpenText | $ | 173,006 |
| $ | 0.64 |
|
Reconciliation of Adjusted EBITDA
|
| | | |
| Three Months Ended March 31, 2019 |
GAAP-based net income, attributable to OpenText | $ | 72,762 |
|
Add: | |
Provision for (recovery of) income taxes | 32,542 |
|
Interest and other related expense, net | 35,607 |
|
Amortization of acquired technology-based intangible assets | 44,596 |
|
Amortization of acquired customer-based intangible assets | 48,832 |
|
Depreciation | 25,028 |
|
Share-based compensation | 6,712 |
|
Special charges (recoveries) | 796 |
|
Other (income) expense, net | (5,065 | ) |
Adjusted EBITDA | $ | 261,810 |
|
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the nine months ended March 31, 2020
(in thousands except for per share data)
|
| | | | | | | | | | | | |
| Nine Months Ended March 31, 2020 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 333,371 |
| | $ | (1,152 | ) | (1) | $ | 332,219 |
| |
Customer support | 91,326 |
| | (897 | ) | (1) | 90,429 |
| |
Professional service and other | 164,468 |
| | (917 | ) | (1) | 163,551 |
| |
Amortization of acquired technology-based intangible assets | 145,998 |
| | (145,998 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 1,540,044 |
| 67.5% | 148,964 |
| (3) | 1,689,008 |
| 74.0% |
Operating expenses | | | | | | |
Research and development | 269,645 |
| | (3,719 | ) | (1) | 265,926 |
| |
Sales and marketing | 432,162 |
| | (6,760 | ) | (1) | 425,402 |
| |
General and administrative | 174,958 |
| | (8,085 | ) | (1) | 166,873 |
| |
Amortization of acquired customer-based intangible assets | 160,561 |
| | (160,561 | ) | (2) | — |
| |
Special charges (recoveries) | 24,579 |
| | (24,579 | ) | (4) | — |
| |
GAAP-based income from operations / Non-GAAP-based income from operations | 412,330 |
| | 352,668 |
| (5) | 764,998 |
| |
Other income (expense), net | (19,736 | ) | | 19,736 |
| (6) | — |
| |
Provision for (recovery of) income taxes | 78,800 |
| | 13,481 |
| (7) | 92,281 |
| |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 207,833 |
| | 358,923 |
| (8) | 566,756 |
| |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.77 |
| | $ | 1.32 |
| (8) | $ | 2.09 |
| |
| | | | | |
| Nine Months Ended March 31, 2020 |
(1)GAAP-based net income, attributable to OpenText | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2)$ | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of 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 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 27% 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. |
|
207,833 | |
(8) | Reconciliation of GAAP-based net income to Non-GAAP-based net income: |
|
| | | | | | |
| Nine Months Ended March 31, 2020 |
| | Per share diluted |
|
GAAP-based net income, attributable to OpenText | $ | 207,833 |
| $ | 0.77 |
|
Add: | | |
Amortization | 306,559 |
| 1.13 |
|
Share-based compensation | 21,530 |
| 0.08 |
|
Special charges (recoveries) | 24,579 |
| 0.09 |
|
Other (income) expense, net | 19,736 |
| 0.07 |
|
GAAP-based provision for (recovery of) income taxes | 78,800 |
| 0.29 |
|
Non-GAAP-based provision for income taxes | (92,281 | ) | (0.34 | ) |
Non-GAAP-based net income, attributable to OpenText | $ | 566,756 |
| $ | 2.09 |
|
Reconciliation of Adjusted EBITDA
|
| | | |
| Nine Months Ended March 31, 2020 |
GAAP-based net income, attributable to OpenText | $ | 207,833 |
|
Add: | |
Provision for (recovery of) income taxes | 78,800 |
|
Interest and other related expense, net | 105,849 |
|
Amortization of acquired technology-based intangible assets | 145,998 |
|
Amortization of acquired customer-based intangible assets | 160,561 |
|
Depreciation | 65,809 |
|
Share-based compensation | 21,530 |
|
Special charges (recoveries) | 24,579 |
|
Other (income) expense, net | 19,736 |
|
Adjusted EBITDA | $ | 830,695 |
|
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the nine months ended March 31, 2019Add:
(in thousands except for per share data)
|
| | | | | | | | | | | | |
| Nine Months Ended March 31, 2019 |
| GAAP-based Measures | GAAP-based Measures % of Total Revenue | Adjustments | Note | Non-GAAP-based Measures | Non-GAAP-based Measures % of Total Revenue |
Cost of revenues | | | | | | |
Cloud services and subscriptions | $ | 280,274 |
| | $ | (873 | ) | (1) | $ | 279,401 |
| |
Customer support | 93,582 |
| | (881 | ) | (1) | 92,701 |
| |
Professional service and other | 169,452 |
| | (1,330 | ) | (1) | 168,122 |
| |
Amortization of acquired technology-based intangible assets | 140,439 |
| | (140,439 | ) | (2) | — |
| |
GAAP-based gross profit and gross margin (%) / Non-GAAP-based gross profit and gross margin (%) | 1,427,568 |
| 67.3% | 143,523 |
| (3) | 1,571,091 |
| 74.1% |
Operating expenses | | | | | | |
Research and development | 238,128 |
| | (3,668 | ) | (1) | 234,460 |
| |
Sales and marketing | 378,619 |
| | (5,874 | ) | (1) | 372,745 |
| |
General and administrative | 154,955 |
| | (7,526 | ) | (1) | 147,429 |
| |
Amortization of acquired customer-based intangible assets | 140,627 |
| | (140,627 | ) | (2) | — |
| |
Special charges (recoveries) | 33,487 |
| | (33,487 | ) | (4) | — |
| |
GAAP-based income from operations / Non-GAAP-based income from operations | 409,036 |
| | 334,705 |
| (5) | 743,741 |
| |
Other income (expense), net | 6,965 |
| | (6,965 | ) | (6) | — |
| |
Provision for (recovery of) income taxes | 98,628 |
| | (9,029 | ) | (7) | 89,599 |
| |
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText | 213,518 |
| | 336,769 |
| (8) | 550,287 |
| |
GAAP-based earnings per share / Non-GAAP-based earnings per share-diluted, attributable to OpenText | $ | 0.79 |
| | $ | 1.25 |
| (8) | $ | 2.04 |
| |
|
| |
(1)Provision for (recovery of) income taxes | Adjustment relates to the exclusion of share-based compensation expense from our Non-GAAP-based operating expenses as this expense is excluded from our internal analysis of operating results. |
(2) | Adjustment relates to the exclusion of amortization expense from our Non-GAAP-based operating expenses as the timing and frequency of amortization expense is dependent on our acquisitions and is hence excluded from our internal analysis of operating results. |
(3) | GAAP-based and Non-GAAP-based gross profit stated in dollars and gross margin stated as a percentage of 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 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. |
|
78,800 | |
(8)Interest and other related expense, net | Reconciliation105,849 | |
Amortization of GAAP-basedacquired technology-based intangible assets | 145,998 | |
Amortization of acquired customer-based intangible assets | 160,561 | |
Depreciation | 65,809 | |
Share-based compensation | 21,530 | |
Special charges (recoveries) | 24,579 | |
Other (income) expense, net income to Non-GAAP-based net income: | 19,736 | |
Adjusted EBITDA | $ | 830,695 | |
|
| | | | | | |
| Nine Months Ended March 31, 2019 |
| | Per share diluted |
GAAP-based net income, attributable to OpenText | $ | 213,518 |
| $ | 0.79 |
|
Add: | | |
Amortization | 281,066 |
| 1.04 |
|
Share-based compensation | 20,152 |
| 0.07 |
|
Special charges (recoveries) | 33,487 |
| 0.12 |
|
Other (income) expense, net | (6,965 | ) | (0.03 | ) |
GAAP-based provision for (recovery of) income taxes | 98,628 |
| 0.37 |
|
Non-GAAP-based provision for income taxes | (89,599 | ) | (0.32 | ) |
Non-GAAP-based net income, attributable to OpenText | $ | 550,287 |
| $ | 2.04 |
|
Reconciliation of Adjusted EBITDA
|
| | | |
| Nine Months Ended March 31, 2019 |
GAAP-based net income, attributable to OpenText | $ | 213,518 |
|
Add: | |
Provision for (recovery of) income taxes | 98,628 |
|
Interest and other related expense, net | 103,751 |
|
Amortization of acquired technology-based intangible assets | 140,439 |
|
Amortization of acquired customer-based intangible assets | 140,627 |
|
Depreciation | 72,716 |
|
Share-based compensation | 20,152 |
|
Special charges (recoveries) | 33,487 |
|
Other (income) expense, net | (6,965 | ) |
Adjusted EBITDA | $ | 816,353 |
|
LIQUIDITY AND CAPITAL RESOURCES
The following tables set forth changes in cash flows from operating, investing and financing activities for the periods indicated:
| | | | | | | | | | | | | | | | | |
(In thousands) | As of March 31, 2021 | | Change increase (decrease) | | As of June 30, 2020 |
Cash and cash equivalents | $ | 1,475,626 | | | $ | (217,224) | | | $ | 1,692,850 | |
Restricted cash (1) | 3,054 | | | (1,359) | | | 4,413 | |
Total cash, cash equivalents and restricted cash | $ | 1,478,680 | | | $ | (218,583) | | | $ | 1,697,263 | |
| | | | | |
(1) Restricted cash is classified under the Prepaid expenses and other current assets and Other assets line items on the Condensed Consolidated Balance Sheets. |
|
| | | | | | | | | | | |
(In thousands) | As of March 31, 2020 | | Change increase (decrease) | | As of June 30, 2019 |
Cash and cash equivalents | $ | 1,452,570 |
| | $ | 511,561 |
| | $ | 941,009 |
|
Restricted cash included in other assets | 5,026 |
| | 2,492 |
| | 2,534 |
|
Total cash, cash equivalents and restricted cash | $ | 1,457,596 |
| | $ | 514,053 |
| | $ | 943,543 |
|
| | | Nine Months Ended March 31, | | Nine Months Ended March 31, |
(In thousands) | 2020 | | Change | | 2019 | (In thousands) | 2021 | | Change | | 2020 |
Cash provided by operating activities | $ | 674,286 |
| | $ | 27,785 |
| | $ | 646,501 |
| Cash provided by operating activities | $ | 579,931 | | | $ | (94,355) | | | $ | 674,286 | |
Cash used in investing activities | $ | (1,448,930 | ) | | $ | (1,006,571 | ) | | $ | (442,359 | ) | Cash used in investing activities | $ | (38,212) | | | $ | 1,410,718 | | | $ | (1,448,930) | |
Cash (used in) provided by financing activities | $ | 1,308,757 |
| | $ | 1,423,465 |
| | $ | (114,708 | ) | |
Cash provided by (used in) financing activities | | Cash provided by (used in) financing activities | $ | (782,855) | | | $ | (2,091,612) | | | $ | 1,308,757 | |
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. Proceeds from our $600
During the three months ended March 31, 2021, we made payments for U.S. federal taxes and interest of $288.6 million draw down onand state taxes and interest of $1.4 million as a result of the Revolver (defined below), (for which noticeIRS Settlement. We expect to the lenders was provided on March 5, 2020) have resulted in total cashmake remaining certain associated state tax and cash equivalentsinterest payments of approximately $1.5 billion as$10.6 million primarily throughout the remainder of March 31, 2020.Fiscal 2021.
As of March 31, 2020,2021, we have recognized a provision of $21.7$25.1 million (June 30, 2019—2020—$17.424.8 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.
We have deferred a total of approximately $99 million of tax payments under the CARES Act and other COVID-19 related tax relief programs in EMEA. During the nine months ended March 31, 2021, we made repayments of approximately $53 million related to amounts previously deferred. As of March 31, 2021, we have remaining deferrals of $46 million which will become payable throughout the remainder of Fiscal 2021 with a portion becoming payable in Fiscal 2022.
Cash flows provided by operating activities
Cash flows from operating activities increaseddecreased by $27.8$94.4 million, as compared to the same period in the prior fiscal year, due to an increasea decrease in changes from working capital of $69.5 million and a decrease in net income before the impact of non-cash items of $53.5 million, partially offset by a decrease in changes from working capital of $25.7$24.9 million. The changedecrease in operating cash flow from changes in working capital was primarily due to the net impact of the following decreases:
(i) $55.6$83.0 million relating to changes in income taxes payable, net of receivables, receivables;
(ii) $11.6$22.4 million relating to a decrease in accounts payable and accrued liabilities, (iii) $6.8 million relating to an increase in prepaid expenses and other current assets, and (iv) $4.5 million relating to changes in net operating lease assets and liabilities. liabilities;
(iii)$6.7 million relating to other assets; and
(iv) $2.4 million relating to contract assets.
These decreases in operating cash flows were partially offset by the following increases:
(i) $33.4 million relating to a lower accounts receivable balance, (ii) $14.1$24.3 million relating to deferred revenues, (iii) $3.1revenues;
(ii)$14.9 million relating to changes in other assetsaccounts payable and (iv) $2.2accrued liabilities;
(iii)$4.8 million relating to higher contract assets.prepaid expenses and other current assets; and
(iv)$1.0 million relating to accounts receivable.
During the third quarter of Fiscal 20202021 our days sales outstanding (DSO) was 5144 days, compared to a DSO of 6051 days during the third quarter of Fiscal 2019.2020, largely as a result of strong improvement in collections efficiency. The per day impact of our DSO in the third quarter of Fiscal 20202021 and Fiscal 20192020 on our cash flows was $9.1$9.3 million and $8.0$9.1 million, respectively. 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 increaseddecreased by approximately $1.0$1.4 billion, primarily due to an increase in consideration paid for acquisitions during the first nine months of Fiscal 2020, as compared towhich included the same period in Fiscal 2019. During Fiscal 2020 we acquiredacquisitions of Carbonite for approximately $1.4$1.3 billion net of cash acquired, and XMedius for approximately $73.3 million.
Cash flows provided by (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 byused in financing activities increased by approximately $1.4 billion. This was$2.1 billion, primarily due to the net impact of the following long-term debt financing activities that occurred in Fiscal 2020 and did not recur in Fiscal 2021:
(i)$1.8 billion relating to proceeds from the issuance of Senior Notes 2028 and SeniorsSenior Notes 2030 (both defined below), of approximately $1.8 billion. Awhich a portion of thesethe proceeds were used to redeem $800 million of our Senior Notes 20232023;
(ii)$750 million in proceeds for amounts drawn and subsequently repaid under the Revolver (defined below);
(iii)$153.6 million repayment of convertible notes, inherited through our acquisition of Carbonite, which were surrendered and repay $750converted for an aggregate repayment; and
(iv)$600 million that wasin proceeds for amounts drawn on the Revolver in the third quarter of Fiscal 2020, subsequently repaid during the second quarter of Fiscal 2020. 2021.
Additionally, in February 2020, all Notes due 2022, inherited throughcash used to repurchase Common Shares on the open market for potential reissuance under our acquisition of Carbonite, were surrenderedstock compensation plans increased by $52.4 million and converted at a rate of $1,068.7341 in cash for each $1,000 principal amount, and in March 2020, we drew $600 million from the Revolver as a preemptive measure in light of current uncertainty in the global markets.dividends paid to shareholders increased by $14.9 million.
Cash Dividends
During the three and nine months ended March 31, 2020,2021, we declared and paid cash dividends of $0.1746$0.2008 and $0.5762 per Common Share, respectively, in the aggregate amount of $54.5 million and $156.3 million, respectively (three and nine months ended March 31, 2020—$0.1746 and $0.5238 per Common Share, respectively, in the aggregatedaggregate amount of $47.3 million and $141.4 million, respectively. 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 20192020 for more information.
Long-term Debt and Credit Facilities
Senior Unsecured Fixed Rate Notes
Senior Notes 2030
On February 18, 2020 Open Text Holdings, Inc. (OTHI), a wholly-owned indirect subsidiary of the Company, issued $900 million in aggregate principal amount of 4.125% Senior Notes due 2030 guaranteed by usthe Company (Senior Notes 2030) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (Securities Act), and to certain persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2030 bear interest at a rate of 4.125% per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2030 will mature on February 15, 2030, unless earlier redeemed, in accordance with their terms, or repurchased.
We may redeem all or a portion of the Senior Notes 2030 at any time prior to February 15, 2025 at a redemption price equal to 100% of the principal amount of the Senior Notes 2030 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2030, on one or more occasions, prior to February 15, 2025, using the net proceeds from certain qualified equity offerings at a redemption price of 104.125% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, subject to compliance with certain conditions. We may, on one or more occasions, redeem the Senior Notes 2030, in whole or in part, at any time on and after February 15, 2025 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2030, dated as of February 18, 2020, among OTHI, 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 2030 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of change of control triggering events specified in the 2030 Indenture, we will be required to make an offer to repurchase the Senior Notes 2030 at a price equal to 101% of the principal amount of the Senior Notes 2030, plus accrued and unpaid interest, if any, to the date of purchase.
The 2030 Indenture contains covenants that limit the Company, OTHI and certain of the Company's 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, OTHI or certain of the Company's subsidiaries without such subsidiary becoming a subsidiary guarantor of Senior Notes 2030; 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 2030 Indenture. The 2030 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 Senior Notes 2030 to be due and payable immediately.
Senior Notes 2030 are guaranteed on a senior unsecured basis by the Company and the Company's existing and future wholly-owned subsidiaries (other than OTHI) that borrow or guarantee the obligations under our existing senior credit facilities. Senior Notes 2030 and the guarantees rank equally in right of payment with all of the Company, OTHI and the
guarantors’ existing and future senior unsubordinated debt and will rank senior in right of payment to all of the Company, OTHI and the guarantors’ future subordinated debt. Senior Notes 2030 and the guarantees will be effectively subordinated to all of the Company, OTHI and the 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.
The foregoing description of the 2030 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2030 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2020.
Senior Notes 2028
On February 18, 2020 we issued $900 million in aggregate principal amount of 3.875% Senior Notes due 2028 (Senior Notes 2028) 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 2028 bear interest at a rate of 3.875% per annum, payable semi-annually in arrears on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2028 will mature on February 15, 2028, unless earlier redeemed, in accordance with their terms, or repurchased.
We may redeem all or a portion of the Senior Notes 2028 at any time prior to February 15, 2023 at a redemption price equal to 100% of the principal amount of the Senior Notes 2028 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. We may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2028, on one or more occasions, prior to February 15, 2023, using the net proceeds from certain qualified equity offerings at a redemption price of 103.875% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, subject to compliance with certain conditions. We may, on one or more occasions, redeem the Senior Notes 2028, in whole or in part, at any time on and after February 15, 2023 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2028, dated as of February 18, 2020, 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 2028 Indenture), plus accrued and unpaid interest, if any, to the redemption date.
If we experience one of the kinds of change of control triggering events specified in the 2028 Indenture, we will be required to make an offer to repurchase the Senior Notes 2028 at a price equal to 101% of the principal amount of the Senior Notes 2028, plus accrued and unpaid interest, if any, to the date of purchase.
The 2028 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 Senior Notes 2028; 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 2028 Indenture. The 2028 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 Senior Notes 2028 to be due and payable immediately.
Senior Notes 2028 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 2028 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 2028 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.
The foregoing description of the 2028 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2028 Indenture, which is filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 18, 2020.
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.
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.
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 bore 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 were to mature on January 15, 2023, unless earlier redeemed in accordance with their terms, or repurchased.On March 5, 2020, we redeemed Senior Notes 2023 in full at a price equal to 101.406% of the principal amount plus accrued and unpaid interest up to but excluding the redemption date. A portion of the net proceeds from the offerings of Senior Notes 2028 and Senior Notes 2030 was used to redeem Senior Notes 2023. Upon redemption, Senior Notes 2023 were cancelled and any obligation thereunder was extinguished. The resulting loss of $17.9 million has been recorded as a component of other income (expense), net in our Condensed Consolidated Statements of Income. See note 21 "Other income (Expense), net" to our Condensed Consolidated Financial Statements.
Notes due 2022
Following our acquisition of Carbonite, our consolidated debt reflected $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 accrued interest at 2.5% per year, which was 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, was 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 was in effect until the close of business (5:00 P.M. New York City time) on February 27, 2020. As of February 27, 2020, all Notes due 2022 had been surrendered and converted at a rate of $1,068.7341 in cash for each $1,000 principal amount. As of March 31, 2020, all Notes due 2022 have been fully settled in cash and there are no remaining Notes due 2022 outstanding.
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 eurodollarEurodollar 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 March 31, 2020,2021, the outstanding balance on the Term Loan B bears an interest rate of approximately 3.35%1.86%. For more information regarding the impact of LIBOR, see "Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against" included within "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2020.
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 March 31, 2020,2021, our consolidated net leverage ratio was 2.3:1.6:1.
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%. For more information regarding the impact of LIBOR, see "Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against" included within "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2020.
Under the Revolver, 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.
During the second quarter of Fiscal 2021, we repaid $600 million previously drawn on the Revolver using cash on hand. As of March 31, 2020, the2021, we had no outstanding balance onunder the Revolver bears an(June 30, 2020—$600 million). During the three and nine months ended March 31, 2021, we recorded interest rateexpense of approximately 2.50%.nil and $3.6 million, respectively, relating to amounts previously drawn.
During the second quarter of Fiscal 2020, we drew down $750 million from the Revolver to partially fund the acquisition of Carbonite. In February 2020, we repaid $750 million drawn under the Revolver with a portion of the proceeds from the Senior Notes 2030 and Senior Notes 2028. In March 2020, we drew down $600 million from the Revolver as a preemptive measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The proceeds from the $600 million draw down are presented within cash and cash equivalents and within the current portion of long-term debt in our Condensed Consolidated Balance Sheet as of March 31, 2020.
Under the Revolver, 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 March 31, 2020, our consolidated net leverage ratio was 2.3:1.
As of March 31, 2020, we have $600 million outstanding balance onremained outstanding. During the Revolver (June 30, 2019—nil) and $150 million remains available to be drawn under the Revolver.
As of March 31, 2019, we had no outstanding balance on the Revolver. There was no activity during three and nine months ended March 31, 2019.2020, we recorded interest expense of $3.7 million and $4.3 million, respectively, relating to amounts previously drawn.
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 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.
Share Repurchase Plan
On November 5, 2020, the Board authorized a share repurchase plan, pursuant to which we may purchase in open market transactions, from time to time over the 12 month period commencing November 12, 2020, up to an aggregate of $350 million of our Common Shares on the NASDAQ Global Select Market, the Toronto Stock Exchange and/or other exchanges and alternative trading systems in Canada and/or the United States, if eligible, subject to applicable law and stock exchange rules (the “Repurchase Plan”). The price that we will pay for Common Shares in open market transactions will be the market price at the time of purchase or such other price as may be permitted by applicable law or stock exchange rules.
The Repurchase Plan will be effected in accordance with Rule 10b-18 under the U.S. Securities Exchange Act of 1934. Purchases made under the Repurchase Plan will be subject to a limit of 13,618,774 shares (representing 5% of the Company’s issued and outstanding Common Shares as of November 4, 2020). All Common Shares purchased by us pursuant to the Repurchase Plan will be cancelled.
During the three and nine months ended March 31, 2021, we did not repurchase any of our Common Shares under the Repurchase Plan.
Pensions
As of March 31, 2020,2021, our total unfunded pension plan obligations were $69.9$83.4 million, of which $2.5$2.8 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, Open Text Document Technologies GmbH (CDT), GXS GmbH (GXS GER), GXS Philippines, Inc. (GXS PHP), for the fiscal years indicated below are as follows:
| | | | | | | | | | | | | | Fiscal years ending June 30, |
| Fiscal years ending June 30, | | CDT | | GXS GER | | GXS PHP |
| CDT | | GXS GER | | GXS PHP | |
2020 (three months ended June 30) | $ | 161 |
| | $ | 240 |
| | $ | 10 |
| |
2021 | 719 |
| | 959 |
| | 264 |
| |
2021 (three months ended) | | 2021 (three months ended) | $ | 203 | | | $ | 246 | | | $ | 28 | |
2022 | 789 |
| | 990 |
| | 341 |
| 2022 | 877 | | | 1,014 | | | 254 | |
2023 | 885 |
| | 990 |
| | 244 |
| 2023 | 975 | | | 1,014 | | | 100 | |
2024 | 987 |
| | 995 |
| | 304 |
| 2024 | 1,083 | | | 1,022 | | | 140 | |
2025 to 2029 | 5,695 |
| | 5,034 |
| | 3,068 |
| |
2025 | | 2025 | 1,130 | | | 1,051 | | | 190 | |
2026 to 2030 | | 2026 to 2030 | 6,486 | | | 5,154 | | | 2,456 | |
Total | $ | 9,236 |
| | $ | 9,208 |
| | $ | 4,231 |
| Total | $ | 10,754 | | | $ | 9,501 | | | $ | 3,168 | |
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 March 31, 2020,2021, we have entered into the following contractual obligations with minimum payments for the indicated fiscal periods as follows:
| | | Payments due between | | Payments due between |
| Total | | April 1, 2020— June 30, 2020 | | July 1, 2020— June 30, 2022 | | July 1, 2022— June 30, 2024 | | July 1, 2024 and beyond | | Total | | April 1, 2021 - June 30, 2021 | | July 1, 2021 - June 30, 2023 | | July 1, 2023 - June 30, 2025 | | July 1, 2025 and beyond |
Long-term debt obligations (1) | $ | 4,772,778 |
| | $ | 35,776 |
| | $ | 329,750 |
| | $ | 328,478 |
| | $ | 4,078,774 |
| Long-term debt obligations (1) | $ | 4,547,824 | | | $ | 32,040 | | | $ | 300,124 | | | $ | 1,225,472 | | | $ | 2,990,188 | |
Operating lease obligations (2) | | Operating lease obligations (2) | 298,632 | | | 15,796 | | | 114,835 | | | 73,991 | | | 94,010 | |
Purchase obligations for contracts not accounted for as lease obligations (2) | 52,938 |
| | 14,975 |
| | 32,963 |
| | 5,000 |
| | — |
| 82,060 | | | 20,738 | | | 61,322 | | | — | | | — | |
| $ | 4,825,716 |
| | $ | 50,751 |
| | $ | 362,713 |
| | $ | 333,478 |
| | $ | 4,078,774 |
| | $ | 4,928,516 | | | $ | 68,574 | | | $ | 476,281 | | | $ | 1,299,463 | | | $ | 3,084,198 | |
(1) Includes interest up to maturity and principal payments. Excludes $600 million currently drawn on the Revolver, which we expect to repay within one year. Please see note 11 "Long-Term Debt" to our Condensed Consolidated Financial Statements for more details.
(2) For contractual obligations relatingRepresents the undiscounted future minimum lease payments under our operating leases liabilities and excludes sublease income expected to leases and purchase obligations accounted forbe received under Topic 842, pleaseour various sublease agreements with third parties. Please see note 6 "Leases" to our Condensed Consolidated Financial Statements.Statements for more details.
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.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 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 and Fiscal 2012 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 infor 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.
Onon 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,December 31, 2020, our estimated potential aggregate liability, as originally proposed by the IRS under the 2010 NOPA and the 2012 NOPA, including additional state income taxes plus penalties and continually accruing interest that may be due, waswould have been approximately $770$830 million, comprised of approximately $455$430 million in U.S. federal and state taxes, approximately $130 million of penalties, and
approximately $185$270 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 arehave been 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
On December 21, 2020, we entered into a closing agreement with the IRS resolving all of the proposed adjustments including throughto our taxable income for Fiscal 2010 and Fiscal 2012 (the IRS AppealsSettlement).
The IRS Settlement resulted in charges of $1.3 million and $300.6 million, respectively, during the three and nine months ended March 31, 2021 to "Provision for (recovery of) income taxes". In connection with the IRS Settlement, during the three months ended March 31, 2021, we made aggregate payments to the IRS of $288.6 million in U.S. Federal court. Any such alternatives could involve a lengthy processfederal taxes and result in the incurrenceinterest and $1.4 million of significant expenses. Ascertain associated state tax and interest payments. The remaining payments of the datecertain associated state tax and interest of this Quarterly Report on Form 10-Q, we have notapproximately $10.6 million, which as of March 31, 2021 is recorded any material accruals in respect of these examinationswithin "Income taxes payable" in our Condensed Consolidated Financial Statements. An adverse outcomeBalance Sheets, are expected to occur primarily throughout the remainder of these tax examinations could have a material adverse effect on our financial positionFiscal 2021. The IRS Settlement also eliminates approximately $90 million in future withholding taxes that we had expected to incur over the next 10 years. Interest at the applicable statutory rates will continue to accrue until the time of payment.
We believe the IRS Settlement to be in the best interest of all stakeholders, as it closes all past, present and results of operations.future items related to this matter. The IRS Settlement provides finality to this longstanding matter.
For additional information regarding the history of this IRS matter, please see Note 13note 14 "Guarantees and Contingencies" in our Annual Report on Form 10-K for Fiscal 2018.2020.
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 reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2014.2016. Assuming the utilization of available tax attributes (further described below), we estimate our potential aggregate liability, as of March 31, 2020,2021, in connection with the CRA's reassessments for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 20142016 to be limited to penalties, interest and interestprovincial taxes that may be due of approximately $25$64 million. As of March 31, 2021, we have provisionally paid approximately $28 million in order to fully preserve our rights to object to the CRA's audit positions, being the minimum payment required under Canadian legislation while the matter is in dispute. This amount is recorded within "Long-term income taxes recoverable" on the Condensed Consolidated Balance Sheets as of March 31, 2021.
The notices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 20142016 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. 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.
We strongly disagree with the CRA's positions and believe the reassessments of Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 20142016 (including any penalties) are without merit. We have filed notices of objection for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2014, and we2016. 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, Fiscal 2014, Fiscal 2015 and Fiscal 2014, or potential reassessments that may be proposed for subsequent years currently under audit,2016, 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.
The CRA is also currently auditing Fiscal 2017 on a basis that we strongly disagree with and will vigorously contest. The focus of the CRA audit has been the valuation of certain intellectual property and goodwill when one of our subsidiaries continued into Canada from Luxembourg in July 2016. In accordance with applicable rules, these assets were recognized for tax purposes at fair market value as of that time, which value was supported by an expert valuation prepared by an independent leading accounting and advisory firm. In conjunction with the Fiscal 2017 audit, the CRA issued a proposal letter dated April 7,
2021 (Proposal Letter) indicating to us that it proposes to reassess our Fiscal 2017 tax year to reduce the depreciable basis of these assets. The CRA has invited us to make submissions responding to the Proposal Letter, which will be our first opportunity to respond to the CRA’s position. CRA’s position for Fiscal 2017 relies in significant part on the application of its positions regarding our transfer pricing methodology that are the basis for its reassessment of our fiscal years 2012 to 2016 described above, and that we believe are without merit. Other aspects of CRA’s position for Fiscal 2017 conflict with the expert valuation prepared by the independent leading accounting and advisory firm that was used to support our original filing position. If the CRA determines to issue a notice of reassessment in respect of Fiscal 2017 on the basis of its position set forth in the Proposal Letter and we are ultimately unsuccessful in defending our position, the estimated impact of the proposed adjustment could result in us recording an income tax expense, with no immediate cash payment, to reduce the stated value of our deferred tax assets of up to approximately $470 million. Any such income tax expense could also have a corresponding cash tax impact that would primarily occur over a period of several future years based upon annual income realization in Canada. We strongly disagree with the CRA’s position for Fiscal 2017 and intend to vigorously defend our original filing position.
We will continue to vigorously contest the proposed adjustments to our taxable income and any penalty and interest assessments. Asassessments, as well as any proposed reduction to the basis of our depreciable property. We are confident that our original tax filing positions were appropriate. Accordingly, as of the date of this Quarterly Report on Form 10-Q, we have not recorded any accruals in respect of these reassessments or proposed reassessment 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 $1.2 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 moved to dismiss the Securities Actions on March 10, 2020. The motion was fully briefed in June 2020 and a hearing on the motion to dismiss the Securities Actions was held on October 15, 2020. Following the hearing, on October 22, 2020, the court granted with prejudice the defendants’ motion to dismiss the Securities Actions. On November 20, 2020, the lead counsel'splaintiff filed a notice of appeal to the Court of Appeals for the First Circuit. The lead plaintiff's brief in support of its appeal was filed on March 2, 2021. The defendants' opposition is currentlybrief was filed on March 31, 2021. The lead plaintiff's reply brief will be due on May 4, 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.7, 2021.
Carbonite vs Realtime Data
On February 27, 2017, prior to our acquisition of Carbonite, a non-practicing entity named Realtime Data LLC (“Realtime Data”)(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 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.Carbonite; that decision was appealed to the U.S. Court of Appeals for the Federal Circuit. By way of Order dated August 19, 2019, the U.S. District Court for the District of Massachusetts stayed the action against Carbonite pending the aforementioned appeal of the dismissal in the Delaware lawsuit. On October 23, 2020, the Appeals Court vacated and remanded the Delaware Court’s decision. Following the Appeals Court's decision, the Massachusetts District Court lifted the stay on the action against Carbonite. On January 21, 2021, the Court held a hearing to construe the claims of the asserted patents. As to the fourth patent asserted against Carbonite, the U.S. Patent & Trademark Office Patent Trial and Appeal Board on September 24, 2019 invalidated certain claims of that patent.patent, including certain claims that had been asserted against Carbonite, and the parties jointly stipulated to dismiss the patent from the action. No trial date has been set in the action against Carbonite. The Company isWe are vigorously defending Carbonite vigorously.the matter. 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 2019.2020.
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 March 31, 2020,2021, we had an outstanding balance of $980.0$970.0 million on Term Loan B. Term Loan B bears a floating interest rate of 1.75% plus LIBOR. As of March 31, 2020,2021, 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$9.7 million, assuming that the loan balance as of March 31, 20202021 is outstanding for the entire period (June 30, 2019—2020—$9.99.8 million).
As of March 31, 2020,2021, we had anno outstanding balance of $600.0 million onunder 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 of March 31, 2020,2021, with no outstanding balance on the Revolver, an adverse change of one percent on the interest rate would have theno effect of increasingon our annual interest payment on the Revolver by approximately $6.0 million, assuming that the full balance as of March 31, 2020 is outstanding for the entire period (June 30, 2019—nil)2020—$6.0 million).
For more information regarding the impact of LIBOR, see "Stress in the global financial system may adversely affect our finances and operations in ways that may be hard to predict or to defend against" included within Part I, Item 1A of our Annual Report on Form 10-K for Fiscal 2020.
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.term and are transacted in non-functional currency. 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 March 31, 2020,2021, a one cent change in the Canadian dollar to U.S. dollar exchange rate would have caused a change of approximately $0.6$0.7 million in the mark to market on our existing foreign exchange forward contracts (June 30, 2019—2020—$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 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 March 31, 20202021 (equivalent in U.S. dollar):
| | (In thousands) | | U.S. Dollar Equivalent at March 31, 2020 | | U.S. Dollar Equivalent at June 30, 2019 | (In thousands) | | U.S. Dollar Equivalent at March 31, 2021 | | U.S. Dollar Equivalent at June 30, 2020 |
Euro | | $ | 217,645 |
| | $ | 120,417 |
| Euro | | $ | 323,746 | | | $ | 229,579 | |
British Pound | | 17,708 |
| | 33,703 |
| British Pound | | 83,926 | | | 64,865 | |
Canadian Dollar | | 16,663 |
| | 12,635 |
| Canadian Dollar | | 22,769 | | | 20,311 | |
Swiss Franc | | 34,559 |
| | 56,776 |
| Swiss Franc | | 39,162 | | | 43,365 | |
Other foreign currencies | | 101,577 |
| | 105,273 |
| Other foreign currencies | | 120,579 | | | 93,292 | |
Total cash and cash equivalents denominated in foreign currencies | | 388,152 |
| | 328,804 |
| Total cash and cash equivalents denominated in foreign currencies | | 590,182 | | | 451,412 | |
U.S. dollar | | 1,064,418 |
| | 612,205 |
| |
U.S. Dollar | | U.S. Dollar | | 885,444 | | | 1,241,438 | |
Total cash and cash equivalents | | $ | 1,452,570 |
| | $ | 941,009 |
| Total cash and cash equivalents | | $ | 1,475,626 | | | $ | 1,692,850 | |
If overall foreign currency exchange rates in comparison to the U.S. dollar uniformly weakened by 10%, the amount of cash and cash equivalents we would report in equivalent U.S. dollars would decrease by approximately $38.8$59.0 million (June 30, 2019—2020—$32.945.1 million), assuming we have not entered into any derivatives discussed above under "Foreign Currency Transaction Risk".
Item 4. Controls and Procedures
(A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2020,2021, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act were recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that information required to be disclosed by us in the reports we file under the Exchange Act (according to Rule 13(a)-15(e)) is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(B) Changes in Internal Control over Financial Reporting (ICFR)
Based on the evaluation completed by our management, in which our Chief Executive Officer and Chief Financial Officer participated, our management has concluded that there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2020,2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
As a result of COVID-19, we continue to operate under a work from home model. Although our pre-existing controls were not specifically designed to operate in this current environment, we continue to believe that our established internal control over financial reporting addresses all identified risk areas. We continue to monitor for any effects that the COVID-19 pandemic may have on the design or operating effectiveness of our internal control over financial reporting.
Part II - Other Information
Item 1A. Risk Factors
You should carefully consider the risk factors discussed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for our fiscal year ended June 30, 2019 in addition to the risk factors set forth below.2020. These are not the only risks and uncertainties facing us. Additional risks not currently known to us or that we currently believe are immaterial may also impair our operating results, financial condition and liquidity. Our business is also subject to general risks and uncertainties that affect many other companies.
The outbreak
Item 2. Unregistered Sales of COVID-19 is expected to negatively affectEquity Securities and Use of Proceeds
PURCHASE OF EQUITY SECURITIES OF THE COMPANY
FOR THE THREE MONTHS ENDED MARCH 31, 2021
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
01/01/21 to 01/31/21 | | — | | | $ | — | | | — | | | — | |
02/01/21 to 02/28/21 | | — | | | $ | — | | | — | | | — | |
03/01/21 to 03/31/21 | (1) | 489,934 | | | $ | 46.90 | | | — | | | — | |
Total | | 489,934 | | | $ | 46.90 | | | — | | | — | |
(1) Represents Common Shares repurchased in the open market. 23,640 Common Shares were subsequently reissued as settlement of DSU awards and the remainder are held in trust for the purpose of potential reissuance under our business, operations and financial performance
On March 3, 2020, COVID-19 was characterized as a pandemic by the World Health Organization. Since December 2019, COVID-19 has spread rapidly, with at least 180 countries and territories worldwide with confirmed cases of COVID-19, and a high concentration of cases in certain countries in which we sell our products and services and conduct our business operations, including the United States, Canada, Europe and Asia.
The spread of COVID-19 and resulting tight government controls and travel bans implemented around the world , such as declarations of states of emergency, business closures, manufacturing restrictions and a prolonged period of travel, commercial and/LTIP or other similar restrictions and limitations, have caused disruption to global supply chains and economic activity, and the market has entered a period of significantly increased volatility. The spread of COVID-19 is currently having an adverse impact on the global economy, the severity and duration of which is difficult to predict, and is expected to adversely affect our financial performance, as well as our ability to successfully execute our business strategies and initiatives, including by negatively impacting the demand for our products and services, restricting our sales operations and marketing efforts, disrupting the supply chain of hardware needed to operate our SaaS offerings or run our business and disrupting our ability to conduct product development and other important business activities. While the restrictions and limitations noted above may be relaxed or rolled back if and when COVID-19 abates, the actions may be reinstated as the pandemic continues to evolve. The scope and timing of any such reinstatements is difficult to predict and may materially affect our operations in the future. We are continuing to focus on the safety and protection of our workforce and our customers by conducting business with substantial modifications to employee travel, employee work locations and virtualization or cancellations of all sales and marketing events, among other modifications. In March 2020, we also drew down $600 million from the Revolver as a preemptive measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. To mitigate anticipated negative financial and operational impacts of COVID-19, we have approved cost cutting measures effective through June 30, 2021, subject to review and modification as the situation warrants, and approved our COVID-19 restructuring plan which includes a move towards a significant work from home (WFH) model.plans. For more information,details, please see "Treasury Stock" under note 24 "Subsequent Events"13 "Share Capital, Option Plans and Share-based Payments" to our Condensed Consolidated Financial Statements and "Outlook for remainder of Fiscal 2020" in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q.Statements.
We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by governments, or that we determine are in the best interest of our employees, customers, partners, suppliers and shareholders. The extent of the adverse impact of the pandemic on the global economy and markets will depend, in part, on the length and severity of the measures taken to limit the spread of the virus and, in part, on the size and effectiveness of the compensating measures taken by governments. To the extent the COVID-19 pandemic continues to adversely affect the global economy, and/or adversely affects our business, operations or financial performance, it may also have the effect of increasing the likelihood and/or magnitude of other risks described in “Risk Factors” included within Part 1, Item 1A of our Annual Report on Form 10-K for Fiscal 2019, including those risks related to market, credit, geopolitical and business operations, or risks described in our other filings with the SEC. In addition, the COVID-19 pandemic may also affect our business, operations or financial performance in a manner that is not presently known to us. We are closely monitoring the potential adverse effects and impact on our operations, businesses and financial performance, including liquidity and capital usage, though the extent of the impact is difficult to fully predict at this time due to the rapid evolution of this uncertain situation.
We may fail to realize all of the anticipated benefits of the acquisition of Carbonite or those benefits may take longer to realize than expected.
We may be required to devote significant management attention and resources to integrating the business practices and operations of OpenText and Carbonite. As we continue to integrate, we may experience disruptions to our business and, if implemented ineffectively, it could restrict the realization of the full expected benefits. The failure to meet the challenges
involved in the integration process and to realize the anticipated benefits of the acquisition of Carbonite could cause an interruption of, or loss of momentum in, our operations and could adversely affect our business, financial condition and results of operations.
Furthermore, as we continue the integration of Carbonite, it may result in material unanticipated problems, expenses, charges, liabilities, competitive responses, loss of customers and other business relationships, and diversion of management’s attention. Additional integration challenges may include:
Difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition;
Difficulties in the integration of operations and systems, including pricing and marketing strategies, which may hurt the sale of hybrid backup solutions which are sensitive to price; and
Difficulties in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures.
Many of these factors will be outside of our control and any one of them could result in increased costs, including restructuring charges, decreases in the amount of expected revenues and diversion of management’s time and energy, which could adversely affect our business, financial condition and results of operations.
We may be unable to maintain or expand our base of SMB and professional consumer customers, which could adversely affect our anticipated future growth and operating results.
With the acquisition of Carbonite, we have expanded our presence in the SMB market as well as the consumer market. To expand in this market may require substantial resources and increased marketing efforts, different to what we are accustomed to. If we are unable to market and sell our solutions to the SMB market and consumers with competitive pricing and in a cost-effective manner, it may harm our ability to grow our revenues and adversely affect our results of operation. In addition, SMBs frequently have limited budgets and are more likely to be significantly affected by economic downturns than larger, more established companies. As such, SMBs may choose to spend funds on items other than our solutions, particularly during difficult economic times, which may hurt our projected revenues, business financial condition and results of operations.
Item 5. Other Matters
COVID-19 Restructuring Plan
On March 3, 2020, COVID-19 was characterized as a pandemic by the World Health Organization. The spread of COVID-19 has significantly impacted the global economy and is expected to adversely impact our operational and financial performance. The extent of the adverse impact of the pandemic on the global economy and markets will depend, in part, on the length and severity of the measures taken to limit the spread of the virus and, in part, on the size and effectiveness of the compensating measures taken by governments. We are closely monitoring the potential effects and impact on our operations, businesses and financial performance, including liquidity and capital usage, though the extent of the impact is difficult to fully predict at this time due to the rapid evolution of this uncertain situation.
On April 29, 2020, our Board approved a restructuring plan that will impact our global workforce and execute a significant reduction in our real estate footprint around the world. We expect to incur total charges in the range of $80 million to $100 million to be recorded in our quarter ending June 30, 2020, substantially all of which will ultimately result in cash expenditures, with the plan expected to be implemented over the next six to twelve months.
The Company has made a strategic decision to move towards a significant work from home (WFH) model. As a result of COVID-19, more than 95% of our employees are currently WFH, and we are now making plans for the future return to office strategy for our nearly 15,000 employees. We currently have approximately 120 offices around the world, and our intent, over time, is to make a significant reduction in the number of offices, anticipated to be over 50% of our global offices impacting approximately 15% of our employees. Based upon our plan, we estimate that this transition can be executed over the next six to twelve months. Management has estimated cost of this restructuring to be in the range of $65 million to $80 million, including the write-off of ROU asset relating to leases, the write-off of leases and fixed assets and other related costs.
We have also approved and begun executing an employee rationalization program across various departments in order to further reduce our cost base in light of the anticipated adverse effects and impact of COVID-19. We estimate severance costs to be in the range of $15 million to $20 million.
Item 6. Exhibits
The following documents are filed as a part of this report:
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Exhibit Number
| | Description of Exhibit |
2.14.1 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.510.1* | | |
10.131.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS | | XBRL instance document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | Inline XBRL taxonomy extension schema. |
101.CAL | | Inline XBRL taxonomy extension calculation linkbase. |
101.DEF | | Inline XBRL taxonomy extension definition linkbase. |
101.LAB | | Inline XBRL taxonomy extension label linkbase. |
101.PRE | | Inline XBRL taxonomy extension presentation. |
* Indicates management contract relating to compensatory plans or arrangements
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(1) | Filed as an Exhibit to the Company's Current Report on Form 8-K, as filed with the SEC on November 12, 2019 and incorporated herein by reference. |
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(2) | Filed as an Exhibit to the Company's Current Report on Form 8-K,(1) Filed as an Exhibit to the Company's Registration Statement on Form S-8, as filed with the SEC on September 4, 2019 and incorporated herein by reference. |
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(3) | Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, as filed with the SEC on January 30, 2020 and incorporated herein by reference.(2) Filed as an Exhibit to the Company's Current Report on Form 8-K, as filed with the SEC on August 14, 2020 and incorporated herein by reference. |
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(4) | Filed as an Exhibit to the Company's Current Report on Form 8-K, as filed with the SEC on February 18, 2020 and incorporated herein by reference. |
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(5) | Filed as an Exhibit to Company's Current Report on Form 8-K, as filed with the SEC on November 5, 2019 and incorporated herein by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OPEN TEXT CORPORATION
Date: April 30, 2020
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By: | /s/ MARK J. BARRENECHEA |
| Mark J. Barrenechea Vice Chair, Chief Executive Officer and Chief Technology Officer
(Principal Executive Officer)
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| /s/ MADHU RANGANATHAN |
| Madhu Ranganathan Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
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| /s/ HOWARD ROSEN |
| Howard Rosen Senior Vice President and Chief Accounting Officer (Principal Accounting Officer)
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