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OTEX > SEC Filings for OTEX > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for OPEN TEXT CORP

Form 10-Q for OPEN TEXT CORP


31-Oct-2013

Quarterly Report


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 regarding future events and our future results that are subject to the safe harbors within the meaning of the Private Securities Litigation Reform Act of 1995, and created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts are statements that could be deemed forward-looking statements.
Certain statements in this report may contain words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "could," "would" and other similar language and are considered forward-looking statements or information under applicable securities laws. In addition, any information or statements 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, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. Such forward-looking information or statements are subject to important assumptions, risks and uncertainties that are difficult to predict, and the actual outcome may be materially different. Our assumptions, although considered reasonable by us at the date of this report, may prove to be inaccurate and consequently our actual results could differ materially from the expectations set out herein. You should not rely too heavily on the forward-looking statements contained in this Quarterly Report on Form 10-Q because these forward-looking statements are relevant only as of the date they were made. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking information or statements. You should carefully review Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q and other documents we file from time to time with the Securities and Exchange Commission and other applicable 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" of this Quarterly Report on Form 10-Q and elsewhere in this report and in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K and elsewhere in such Annual Report. 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. 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 generally refer to the three months ended September 30, 2013 compared with the three months ended September 30, 2012, 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
We are an independent company providing a comprehensive suite of software products that assist organizations in finding, utilizing, and sharing business information from any device in ways which are intuitive, efficient and productive. Our technologies and business solutions address one of the biggest problems encountered by enterprises today, which is the explosive growth of information in terms of volume and formats. Our software allows organizations to manage the information that flows into, out of, and throughout the enterprise as part of daily operations. Our product offerings provide solutions which help to increase customer satisfaction, improve collaboration with partners, address the legal and business requirements associated with information governance, and ensure the security and privacy of information demanded in today's highly regulated climate. In addition, our products provide the benefit of organizing and managing business content, while leveraging it to operate more efficiently and effectively. OpenText products incorporate social and mobile technologies and are delivered for on-premises deployment as well as through cloud and managed hosted services models to provide the flexibility and cost efficiencies demanded by the market.
Our initial public offering was on the NASDAQ in 1996 and we were subsequently listed on the Toronto Stock Exchange in 1998. We are a multinational company and currently employ approximately 5,300 people worldwide. Quarterly Summary:
During the quarter we saw the following activity:
Total revenue was $324.5 million, down 0.5% over the same period in the prior fiscal year.

License revenue was $55.3 million, down 0.6% over the same period in the prior fiscal year.


GAAP-based EPS, diluted, was $0.52 compared to $0.33 in the same period of the prior fiscal year.

Non-GAAP-based EPS, diluted, was $1.37 compared to $1.31 in the same period of the prior fiscal year.

GAAP-based operating margin was 16.0% compared to 12.3% in the same period of the prior fiscal year.

Non-GAAP-based operating margin was 30.6% compared to 28.7% in the same period of the prior fiscal year.

Operating cash flow was $79.9 million, up 29.4% over the same period in the prior fiscal year.

Cash and cash equivalents was $491.1 million as of September 30, 2013, compared to $470.4 million as of June 30, 2013.

See "Use of Non-GAAP Financial Measures" below for a reconciliation of non-GAAP-based measures to GAAP-based measures. Acquisitions
Our competitive position in the marketplace requires us to maintain a complex and evolving array of technologies, products, services and capabilities. In light of the continually evolving marketplace in which we operate, we regularly evaluate various acquisition opportunities within the Enterprise Information Management (EIM) market. We made one acquisition during the first quarter of our fiscal year ending June 30, 2014 (Fiscal 2014).
On August 15, 2013, we acquired Cordys Holding B.V. (Cordys), based in Putten, the Netherlands, for $33.2 million. Cordys is a leading provider of Business Process Management (BPM) and case management solutions, offered on one platform with cloud, mobile, and social capabilities.

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 increase shareholder value. We expect to continue to strategically acquire companies, products, services and technologies to augment our existing business. See note 18 "Acquisitions" to our Condensed Consolidated Financial Statements for more details.
Outlook for Remainder of Fiscal 2014
We believe we have a strong position in the EIM market. Our goal is to strengthen our position in EIM by building on our leadership in Enterprise Content Management (ECM), BPM, Customer Experience Management (CEM), and Information Exchange (iX) and expanding our position in Discovery. We continue to have approximately 50% of our revenues from customer support revenues, which are generally a recurring source of income, and we expect this trend will continue. Beginning in Fiscal 2013 we recognized cloud services revenue and we expect this service to be an important growth driver in the future. We also believe that our diversified geographic profile helps strengthen our position and helps to reduce the impact of a downturn in the economy that may occur in any one specific region.
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, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
(i) Revenue recognition,

(ii) Goodwill,

(iii) Acquired intangibles,

(iv) Restructuring charges,

(v) Business combinations,

(vi) Foreign currency, and

(vii) Income taxes.

During the first quarter of Fiscal 2014, there were no significant changes to our critical accounting policies and estimates. For a detailed discussion of our critical accounting policies and estimates, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended June 30, 2013.


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, revenues by major geography, cost of revenues by product, total gross margin, total operating margin, gross margin by product, 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 Non-GAAP-based measures to GAAP-based measures.


Summary of Results of Operations
                                                               Three Months Ended
                                                                 September 30,
                                                                Change increase
(In thousands)                                      2013           (decrease)          2012
Total Revenues by Product Type:
License                                         $    55,306     $       (350 )     $    55,656
Cloud services                                       41,647           (2,226 )          43,873
Customer support                                    168,440            6,344           162,096
Professional service and other                       59,067           (5,502 )          64,569
Total revenues                                      324,460           (1,734 )         326,194
Total Cost of Revenues                              106,436          (15,371 )         121,807
Total GAAP-based Gross Profit                       218,024           13,637           204,387
Total GAAP-based Gross Margin %                        67.2 %                             62.7 %
Total GAAP-based Operating Expenses                 165,981            1,681           164,300
Total GAAP-based Income from Operations         $    52,043     $     11,956       $    40,087

% Revenues by Product Type:
License                                                17.1 %                             17.1 %
Cloud services                                         12.8 %                             13.4 %
Customer support                                       51.9 %                             49.7 %
Professional service and other                         18.2 %                             19.8 %

Total Cost of Revenues by Product Type:
License                                         $     3,036     $     (1,132 )     $     4,168
Cloud services                                       14,265           (3,717 )          17,982
Customer support                                     22,170           (3,653 )          25,823
Professional service and other                       45,435           (4,617 )          50,052
Amortization of acquired technology-based
intangible assets                                    21,530           (2,252 )          23,782
Total cost of revenues                          $   106,436     $    (15,371 )     $   121,807

% GAAP-based Gross Margin by Product Type:
License                                                94.5 %                             92.5 %
Cloud services                                         65.7 %                             59.0 %
Customer support                                       86.8 %                             84.1 %
Professional service and other                         23.1 %                             22.5 %

Total Revenues by Geography:
Americas (1)                                    $   175,377     $     (3,550 )     $   178,927
EMEA (2)                                            119,611            5,139           114,472
Asia Pacific (3)                                     29,472           (3,323 )          32,795
Total revenues                                  $   324,460     $     (1,734 )     $   326,194

% Revenues by Geography:
Americas (1)                                           54.0 %                             54.9 %
EMEA (2)                                               36.9 %                             35.1 %
Asia Pacific (3)                                        9.1 %                             10.0 %


                                          Three Months Ended
                                            September 30,
(In thousands)                           2013             2012
GAAP-based gross margin                   67.2 %          62.7 %
GAAP-based operating margin               16.0 %          12.3 %
GAAP-based EPS, diluted               $   0.52          $ 0.33
Non-GAAP-based gross margin (4)           73.9 %          70.0 %
Non-GAAP-based operating margin (4)       30.6 %          28.7 %
Non-GAAP-based EPS, diluted (4)       $   1.37          $ 1.31

(1) Americas primarily consists of countries in North, Central and South America.
(2) EMEA primarily consists of countries in Europe, Africa and the United Arab Emirates.
(3) Asia Pacific primarily consists of the countries Japan, Australia, Hong Kong, Singapore and New Zealand.
(4) See "Use of Non-GAAP Financial Measures" (discussed later in the MD&A) for a reconciliation of Non-GAAP-based measures to GAAP-based measures.

Revenues, Cost of Revenues and Gross Margin by Product Type
1) License Revenues:
License revenues consist of fees earned from the licensing of software products to customers. 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
                                                                    September 30,
                                                                    Change increase
(In thousands)                                      2013              (decrease)              2012
License Revenues:
Americas                                        $    28,915     $            688          $   28,227
EMEA                                                 22,007                 (604 )            22,611
Asia Pacific                                          4,384                 (434 )             4,818
Total License Revenues                               55,306                 (350 )            55,656
Cost of License Revenues                              3,036               (1,132 )             4,168
GAAP-based License Gross Profit                 $    52,270     $            782          $   51,488
GAAP-based License Gross Margin %                      94.5 %                                   92.5 %

% License Revenues by Geography:
Americas                                               52.3 %                                   50.7 %
EMEA                                                   39.8 %                                   40.6 %
Asia Pacific                                            7.9 %                                    8.7 %

License revenues decreased by $0.4 million, which was geographically attributable to a decrease in EMEA of $0.6 million, and a decrease in Asia Pacific of $0.4 million, partially offset by an increase in Americas of $0.7 million.
Cost of license revenues decreased by $1.1 million, primarily due to lower third party technology costs. As a result, the gross margin percentage on license revenues increased to 94.5%.
2) Cloud Services:
Cloud services revenues consist of services arrangements primarily attributable to our acquisition of EasyLink Services International Corporation (EasyLink). These arrangements allow our customers to make use of legacy EasyLink and OpenText software, services and content over Internet enabled networks supported by OpenText data centers. These web applications allow customers to transmit a variety of content between various mediums and to securely manage enterprise information without the commitment of investing in related hardware infrastructure. Revenues are generated on several transactional usage-


based models, are typically billed monthly in arrears, and can therefore fluctuate from period to period. Certain service fees are occasionally charged to customize hosted software for some customers and are either amortized over the expected economic life of the contract, in the case of setup fees, or recognized in the period they are provided. Cost of cloud services 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
                                                                  September 30,
                                                                 Change increase
(In thousands)                                      2013           (decrease)            2012
Cloud Services:
Americas                                        $   27,829     $         (173 )      $   28,002
EMEA                                                 6,120               (532 )           6,652
Asia Pacific                                         7,698             (1,521 )           9,219
Total Cloud Services Revenues                       41,647             (2,226 )          43,873
Cost of Cloud Services Revenues                     14,265             (3,717 )          17,982
GAAP-based Cloud Services Gross Profit          $   27,382     $        1,491        $   25,891
GAAP-based Cloud Services Gross Margin %              65.7 %                               59.0 %

% Cloud Services Revenues by Geography:
Americas                                              66.8 %                               63.8 %
EMEA                                                  14.7 %                               15.2 %
Asia Pacific                                          18.5 %                               21.0 %

Cloud services revenues decreased by $2.2 million, which was geographically attributable to a decrease in Asia Pacific of $1.5 million, a decrease in EMEA of $0.5 million, and a decrease in Americas of $0.2 million.
Cost of cloud services revenues decreased by $3.7 million, primarily due to lower revenues and certain one-time adjustments related to sales tax liabilities. As a result, the gross margin percentage on cloud services revenues increased to approximately 66%.
3) Customer Support Revenues:
Customer support revenues consist of revenues from our customer support and maintenance agreements. These agreements allow our customers to receive technical support, enhancements and upgrades to new versions of our software products when and if available. Customer support revenues are generated from support and maintenance relating to current year sales of software products and from the renewal of existing maintenance agreements for software licenses sold in prior periods. Therefore, changes in customer support revenues do not always correlate directly to the changes in license revenues from period to period. The terms of support and maintenance agreements are typically twelve months, with customer renewal options. 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
                                                                  September 30,
                                                                 Change increase
(In thousands)                                      2013           (decrease)            2012
Customer Support Revenues:
Americas                                        $   89,558     $        1,568        $   87,990
EMEA                                                66,396              4,962            61,434
Asia Pacific                                        12,486               (186 )          12,672
Total Customer Support Revenues                    168,440              6,344           162,096
Cost of Customer Support Revenues                   22,170             (3,653 )          25,823
GAAP-based Customer Support Gross Profit        $  146,270     $        9,997        $  136,273
GAAP-based Customer Support Gross Margin %            86.8 %                               84.1 %

% Customer Support Revenues by Geography:
Americas                                              53.2 %                               54.3 %
EMEA                                                  39.4 %                               37.9 %
Asia Pacific                                           7.4 %                                7.8 %

Customer support revenues increased by $6.3 million, which was geographically attributable to an increase in Americas of $1.6 million, and an increase in EMEA of $5.0 million, partially offset by a decrease in Asia Pacific of $0.2 million. Cost of customer support revenues decreased by $3.7 million, primarily due to a reduction in the installed base of third party products. As a result, the gross margin percentage on customer support revenues increased to approximately 87%.
4) Professional Service and Other Revenues:
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. These revenues 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. Cost of professional service and other revenues consists primarily of the costs of providing integration, configuration and training with respect to our various software products. The most significant components of these costs are personnel-related expenses, travel costs and third party subcontracting.

                                                               Three Months Ended
                                                                  September 30,
                                                                 Change increase
(In thousands)                                      2013           (decrease)            2012
Professional Service and Other Revenues:
Americas                                        $   29,075     $       (5,633 )      $   34,708
EMEA                                                25,088              1,313            23,775
Asia Pacific                                         4,904             (1,182 )           6,086
Total Professional Service and Other Revenues       59,067             (5,502 )          64,569
Cost of Professional Service and Other
Revenues                                            45,435             (4,617 )          50,052
GAAP-based Professional Service and Other
Gross Profit                                    $   13,632     $         (885 )      $   14,517
GAAP-based Professional Service and Other
Gross Margin %                                        23.1 %                               22.5 %

% Professional Service and Other Revenues by Geography:
Americas                                              49.2 %                               53.8 %
EMEA                                                  42.5 %                               36.8 %
Asia Pacific                                           8.3 %                                9.4 %


Professional service and other revenues decreased by $5.5 million, which was geographically attributable to a decrease in Americas of $5.6 million, a decrease in Asia Pacific of $1.2 million, partially offset by an increase in EMEA of $1.3 million.
Cost of professional service and other revenues decreased by $4.6 million. This is primarily due to lower professional service and other revenues as well as the reduction in the use of subcontractors. Overall, the gross margin percentage on professional service and other revenues remained relatively stable. Amortization of Acquired Technology-based Intangible Assets

                                                               Three Months Ended
                                                                  September 30,
                                                                 Change increase
(In thousands)                                     2013            (decrease)            2012
Amortization of acquired technology-based
intangible assets                              $    21,530     $       (2,252 )      $    23,782

Amortization of acquired technology-based intangible assets decreased by $2.3 million due to the intangible assets pertaining to our acquisition of Vignette Corporation becoming fully amortized during the first quarter of Fiscal 2014.

Operating Expenses
                                                               Three Months Ended
                                                                  September 30,
                                                                 Change increase
(In thousands)                                     2013            (decrease)            2012
. . .
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