OPEN TEXT CORPORATION This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 21E of theU.S. Securities Exchange Act of 1934, as amended (the Exchange Act), and Section 27A of theU.S. Securities Act of 1933, as amended (the Securities Act), and is subject to the safe harbors created by those sections. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. When used in this report, the words "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", "may", "could", "would", "might", "will" and other similar language, as they relate toOpen Text Corporation (OpenText or the Company), are intended to identify forward-looking statements under applicable securities laws. Specific forward-looking statements in this report include, but are not limited to, statements regarding: (i) our focus in the fiscal year beginningJuly 1, 2021 and endingJune 30, 2022 (Fiscal 2022) andJuly 1, 2022 and endingJune 30, 2023 (Fiscal 2023) on growth in earnings and cash flows; (ii) creating value through investments in broader Information Management capabilities; (iii) our future business plans and business planning process; (iv) business trends; (v) 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 condition, 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) acquisitions and their expected impact, including our ability to successfully integrate the assets we acquire or utilize such assets to their full capacity, including those acquired in connection with the acquisition of Zix Corporation (see note 19 "Acquisitions" to our Condensed Consolidated Financial Statements for more details); (xxiii) tax audits; (xxiv) the expected impact of our decision to cease all direct business inRussia andBelarus and with known Russian-owned companies;(xxv) expected costs of the restructuring plans; and (xxvi) 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 political, economic and market conditions; (iv) our ability to manage inflation, including rising interest rates and increased labour costs associated with attracting and retaining employees; (v) our continued ability to manage certain foreign currency risk through hedging; (vi) equity and debt markets continuing to provide us with access to capital; (vii) our continued ability to identify, source and finance attractive and executable business combination opportunities; (viii) our continued ability to avoid infringing third party intellectual property rights; and (ix) our ability to successfully implement our restructuring plans. 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 the resurgence of COVID-19 and/or new strains of COVID-19, including potential material adverse effects on our business, operations and financial performance; (ii) actions that have been and 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 (including the effectiveness of boosters); (iii) the actual and potential negative impacts of COVID-19 on the global economy and financial markets; (iv) integration of acquisitions and related restructuring efforts, including the quantum of restructuring charges and the timing thereof; (v) the possibility that we may be unable to successfully integrate the assets we acquire or fail to utilize such assets to their full capacity and not realize the benefits we expect from our acquired portfolios and businesses, including the acquisition of Zix Corporation, (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; (vii) the possibility that the Company may be unable to meet its future reporting requirements 39 -------------------------------------------------------------------------------- under the Exchange Act, and the rules promulgated thereunder, or applicable Canadian securities regulation; (viii) the risks associated with bringing new products and services to market; (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); (x) delays in the purchasing decisions of the Company's customers; (xi) competition the Company faces in its industry and/or marketplace; (xii) the final determination of litigation, tax audits (including tax examinations inCanada ,the United States or elsewhere) and other legal proceedings; (xiii) potential exposure to greater than anticipated tax liabilities or expenses, including with respect to changes in Canadian,United States or international tax regimes; (xiv) the possibility of technical, logistical or planning issues in connection with the deployment of the Company's products or services; (xv) the continuous commitment of the Company's customers; (xvi) demand for the Company's products and services; (xvii) increase in exposure to international business risks (including the impact of geopolitical instability, political unrest, war and other global conflicts, the impact of Brexit and any policy changes resulting from the transition from the North American Free Trade Agreement tothe United States -Mexico-Canada Agreement) as we continue to increase our international operations; (xviii) adverse macroeconomic conditions, including inflation, disruptions in global supply chains and increased labour costs; (xix) inability to raise capital at all or on not unfavorable terms in the future; (xx) downward pressure on our share price and dilutive effect of future sales or issuances of equity securities (including in connection with future acquisitions); and (xxi) 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, California Privacy Rights Act, Virginia Consumer Data Protection Act, Colorado Privacy Act, and Country by Country Reporting (including with respect to transferring personal data outside of the EEA, as a result of the recent ruling of theCourt of Justice of theEuropean Union (CJEU) that the EU-US Privacy Shield is an invalid data transfer mechanism and that Standard Contractual Clauses (SCCs) are a valid transfer mechanism unless the country to which personal data is exported restricts the ability to comply with such Clauses and the new SCCs published by theEuropean Commission to meet the requirements of GDPR and such CJEU decision known as Schrems II); (vii) the Company's growth and other profitability prospects; (viii) the estimated size and growth prospects of the Information Management market; (ix) the Company's competitive position in the Information 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 Information 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 or the information technology systems 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; (xiv) failure to achieve our environmental goals on energy consumption, waste diversion and greenhouse gas emissions; and (xv) failure to attract and retain key personnel to develop and effectively manage the Company's business. Readers 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, Quarterly Reports on Form 10-Q, including Item 1A therein and other documents we file from time to time with theSecurities 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 endedMarch 31, 2022 compared with the three and nine months endedMarch 31, 2021 , unless otherwise noted.
Where we say "we", "us", "our", "OpenText" or "the Company", we mean
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--------------------------------------------------------------------------------EXECUTIVE OVERVIEW
At OpenText, we believe information and knowledge make business and people better. We are an Information Management company that provides software and services that empower digital businesses of all sizes to become more intelligent, secure and connected. Our innovations maximize the strategic benefits of data and content for our customers, strengthening their productivity, growth and competitive advantage.
Our comprehensive Information Management platform and services provide secure and scalable solutions for global companies, small and medium-sized businesses (SMBs), governments and consumers around the world. We have a complete and integrated portfolio of Information Management solutions delivered at scale in the OpenText Cloud, helping organizations master modern work, power modern experiences and optimize their digital supply chains. To do this, we bring together our Content Cloud, Business Network Cloud, Experience Cloud, Security and Protection Cloud and Developer Cloud. We also accelerate information modernization with intelligent tools and services for moving off paper, automating classification and building clean data lakes for Artificial Intelligence (AI), analytics and automation. We are fundamentally integrated into the parts of our customers' businesses that matter, so they can securely manage the complexity of information flow end to end. Through automation and AI, we connect, synthesize and deliver information where it is needed to drive new efficiencies, experiences and insights. We make information more valuable by connecting it to digital business processes, enriching it with capture and analytics, protecting and securing it throughout its entire lifecycle, and leveraging it to create engaging digital experiences. Our solutions also connect large digital supply chains in manufacturing, retail and financial services. Our solutions also enable organizations and consumers to secure their information so that they can collaborate with confidence, stay ahead of the regulatory technology curve, identify threats on any endpoint or across their networks, enable privacy, leverage eDiscovery and digital forensics to defensibly investigate and collect evidence, and ensure business continuity in the event of a security incident. Our initial public offering was on the NASDAQ in 1996 and we were subsequently listed on theToronto Stock Exchange (TSX) in 1998. Our ticker symbol on both the NASDAQ and the TSX is "OTEX". As ofMarch 31, 2022 , we employed a total of approximately 15,000 individuals, of which 7,300 or 49% are in theAmericas , 2,700 or 18% are in EMEA and 5,000 or 33% are inAsia Pacific . Currently, we have employees in 35 countries enabling strong access to multiple talent pools while ensuring reach and proximity to our customers. Please see "Results of Operations" below for our definitions of geographic regions.
Quarterly Summary:
During the third quarter of Fiscal 2022 we saw the following activity:
•Total revenue was$882.3 million , up 5.9% compared to the same period in the prior fiscal year; up 8.0% after factoring in the unfavorable impact of$17.2 million of foreign exchange rate changes. •Total annual recurring revenue, which we define as the sum of cloud services and subscriptions revenue and customer support revenue, was$734.5 million , up 6.2% compared to the same period in the prior fiscal year; up 8.1% after factoring in the unfavorable impact of$13.2 million of foreign exchange rate changes. •Cloud services and subscriptions revenue was$401.9 million , up 13.0% compared to the same period in the prior fiscal year; up 14.3% after factoring in the unfavorable impact of$4.6 million of foreign exchange rate changes.
•GAAP-based gross margin was 68.9% compared to 68.6% in the same period in the prior fiscal year.
•Non-GAAP-based gross margin was 74.5% compared to 75.2% in the same period in the prior fiscal year.
•GAAP-based net income attributable to OpenText was
•Non-GAAP-based net income attributable to OpenText was
•GAAP-based earnings per share (EPS), diluted, was
•Non-GAAP-based EPS, diluted, was
•Adjusted EBITDA was
•Operating cash flow was
41
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•Cash and cash equivalents were
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
As a result of the continually changing marketplace in which we operate, 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 Zix Corporation
OnDecember 23, 2021 , we acquired all of the equity interest in Zix Corporation (Zix), a leader in software as a service (SaaS) based email encryption, threat protection and compliance cloud solutions for SMBs. Total consideration for Zix was$894.5 million paid in cash, inclusive of$38.3 million of cash acquired and$18.6 million relating to the cash settlement of pre-acquisition vested share-based compensation that was previously accrued but since paid as ofMarch 31, 2022 . We believe the acquisition increases our position in the data protection, threat management, email security and compliance solutions spaces. The results of operations of Zix have been consolidated with those of OpenText beginningDecember 23, 2021 . Acquisition ofBricata Inc. OnNovember 24, 2021 , we acquired all of the equity interest inBricata Inc. (Bricata) for$17.8 million . We believe the acquisition strengthens our OpenText Security and Protection Cloud with Network Detection and Response technologies. The results of operations of Bricata have been consolidated with those of OpenText beginningNovember 24, 2021 . 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.
Impacts of COVID-19
InMarch 2020 , COVID-19 was characterized as a pandemic by theWorld Health Organization . The spread of COVID-19 continues to impact the global economy and has adversely impacted and may continue to 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 (including any current and/or new variants), the availability, effectiveness and use of treatments and vaccines (including the effectiveness of boosters) and, in part, on the size and effectiveness of the compensating measures taken by 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 continue to conduct business with substantial modifications to employee travel and work locations and also virtualization of sales and marketing events, which we expect to remain in place throughout Fiscal 2022, along with substantially modified interactions with customers and suppliers, among other modifications. 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, during the fourth quarter of Fiscal 2020, our
Compensation Committee and Board approved certain compensation adjustments in
order to preemptively mitigate the operational impacts of COVID-19. These
adjustments remained in effect until
The ongoing and ultimate impact of the COVID-19 pandemic on our operations and
financial performance depends on many factors that are not within our control.
For more information, please see Part II, Item 1A "Risk Factors" included
elsewhere within this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk
Factors" in our Annual Report on Form 10-K for Fiscal 2021.
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--------------------------------------------------------------------------------Outlook for Remainder of Fiscal 2022
As an organization, we are committed to "Total Growth," meaning we strive towards delivering value through organic growth initiatives, innovations and acquisitions, as well as financial performance. With an emphasis on increasing recurring revenues and expanding our margins, we believe our Total Growth strategy will ultimately drive cash flow generation, thus helping to fuel our disciplined capital allocation approach and further our ability to deepen our account coverage and identify and execute strategic acquisitions. With strategic acquisitions, we are better positioned to expand our sales coverage and product portfolio and improve our ability to innovate and grow organically, which 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) push product innovation, increasing the value of our offerings to our installed customer base, which includes Global 10,000 companies (G10K), SMB and consumers. The G10K are the world's largest companies, typically those with greater thantwo billion dollars in revenues, as well as the world's largest governments and organizations. More valuable products, coupled with theOpenText Digital Zone and 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$321.5 million or 12.4% of revenue in R&D, in line with our target to spend 12% to 14% of revenues for R&D this fiscal year. Looking ahead, the destination for innovation is indisputably the cloud. OpenText Anywhere is our commitment to enable organizations of all sizes to deploy our products in any combination of public and private clouds, managed services and off-cloud solutions. As a result, we are committed to continue to modernize our technology infrastructure and leverage our existing investments in the OpenText Cloud. The combination of OpenText cloud-native applications and managed services, together with the scalability and performance of our partner public cloud providers, offer more secure, reliable and compliant solutions to customers wanting to deploy cloud-based Information Management applications. The OpenText Cloud is designed to build additional flexibility and scalability for our customers: becoming cloud-native, connecting anything, and extending capabilities quickly with multi-tenant SaaS applications and services. We will continue to closely monitor the potential impacts of COVID-19, inflation with respect to wages, services and goods and theRussia -Ukraine conflict on our business. We do not expect our decision to cease all direct business inRussia andBelarus and with known Russian-owned companies to have a material adverse effect on our overall business, results of operations or financial condition. See Part II, Item 1A, "Risk Factors" included within this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity withU.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:
(i)Revenue recognition,
(ii)
(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 the Consolidated Financial Statements included in our Annual Report on Form 10-K for Fiscal 2021.
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. As ofMarch 31, 2022 , we have recorded certain estimates in our Condensed Consolidated Financial 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 this Quarterly Report on Form 10-Q and Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2021. 43 --------------------------------------------------------------------------------
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.
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--------------------------------------------------------------------------------Summary of Results of Operations
Three Months Ended March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Total Revenues by Product Type:
Cloud services and subscriptions $ 401,947 $ 46,102 $ 355,845 $ 1,123,422 $ 76,137 $ 1,047,285
Customer support 332,514 (3,401) 335,915 1,002,626 2,820 999,806
License 80,641 4,342 76,299 263,663 11,493 252,170
Professional service and other 67,181 2,309 64,872 201,679 8,352 193,327
Total revenues 882,283 49,352 832,931 2,591,390 98,802 2,492,588
Total Cost of Revenues 274,236 12,970 261,266 793,540 30,787 762,753
Total GAAP-based Gross Profit 608,047 36,382 571,665 1,797,850 68,015 1,729,835
Total GAAP-based Gross Margin % 68.9 % 68.6 % 69.4 % 69.4 %
Total GAAP-based Operating Expenses 476,438 57,169 419,269 1,290,668 130,055 1,160,613
Total GAAP-based Income from
Operations $ 131,609 $ (20,787) % Revenues by Product Type: Cloud services and subscriptions 45.6 % 42.7 % 43.4 % 42.0 % Customer support 37.7 % 40.3 % 38.7 % 40.1 % License 9.1 % 9.2 % 10.2 % 10.1 % Professional service and other 7.6 % 7.8 % 7.7 % 7.8 % Total Cost of Revenues by Product Type: Cloud services and subscriptions$ 136,020 $ 12,291 $ 123,729 $ 377,928 $ 23,693 $ 354,235 Customer support 31,763 810 30,953 90,914 1,099 89,815 License 3,196 386 2,810 10,906 1,305 9,601 Professional service and other 56,693 6,372 50,321 161,459 17,938 143,521 Amortization of acquired technology-based intangible assets 46,564 (6,889) 53,453 152,333 (13,248) 165,581 Total cost of revenues$ 274,236 $ 12,970
% GAAP-based Gross Margin by Product Type: Cloud services and subscriptions 66.2 % 65.2 % 66.4 % 66.2 % Customer support 90.4 % 90.8 % 90.9 % 91.0 % License 96.0 % 96.3 % 95.9 % 96.2 % Professional service and other 15.6 % 22.4 % 19.9 % 25.8 % Total Revenues by Geography: (1) Americas (2)$ 560,969 $ 53,077 $ 507,892 $ 1,615,967 $ 82,567 $ 1,533,400 EMEA (3) 252,888 (5,122) 258,010 764,707 9,741 754,966 Asia Pacific (4) 68,426 1,397 67,029 210,716 6,494 204,222 Total revenues$ 882,283 $ 49,352 $ 832,931 $ 2,591,390 $ 98,802 $ 2,492,588 % Revenues by Geography: Americas (2) 63.6 % 61.0 % 62.4 % 61.5 % EMEA (3) 28.7 % 31.0 % 29.5 % 30.3 % Asia Pacific (4) 7.7 % 8.0 % 8.1 % 8.2 % Other Metrics: GAAP-based gross margin 68.9 % 68.6 % 69.4 % 69.4 % Non-GAAP-based gross margin (5) 74.5 % 75.2 % 75.5 % 76.3 % Net income, attributable to OpenText$ 74,681 $ 91,490 $ 294,894 $ 129,389 GAAP-based EPS, diluted$ 0.28 $ 0.33 $ 1.08 $ 0.47 Non-GAAP-based EPS, diluted (5)$ 0.70 $ 0.75 $ 2.43 $ 2.59 Adjusted EBITDA (5)$ 284,496 $ 297,131 $ 951,367 $ 1,000,225 (1) Total revenues by geography are determined based on the location of our direct end customer. (2)Americas consists of countries in North, Central andSouth America . (3) EMEA primarily consists of countries inEurope , theMiddle East andAfrica . (4)Asia Pacific primarily consists ofJapan ,Australia ,China ,Korea ,Philippines ,Singapore ,India andNew 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. 45 --------------------------------------------------------------------------------
Revenues, Cost of Revenues and Gross Margin by Product Type
1) 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 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), SaaS, cloud subscriptions and managed services. For the quarter endedMarch 31, 2022 , our cloud renewal rate, excluding the impact ofCarbonite Inc. (Carbonite) and Zix, was approximately 93%, consistent with the quarter endedMarch 31, 2021 . 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, Change Change increase increase (In thousands) 2022 (decrease) 2021 2022 (decrease) 2021 Cloud Services and Subscriptions: Americas$ 303,183 $ 38,906 $ 264,277 $ 844,761 $ 64,782 $ 779,979 EMEA 72,773 7,370 65,403 199,886 8,905 190,981 Asia Pacific 25,991 (174) 26,165 78,775 2,450 76,325 Total Cloud Services and Subscriptions Revenues 401,947 46,102 355,845 1,123,422 76,137 1,047,285 Cost of Cloud Services and Subscriptions Revenues 136,020 12,291 123,729 377,928 23,693 354,235 GAAP-based Cloud Services and Subscriptions Gross Profit$ 265,927 $ 33,811 $ 232,116 $ 745,494 $ 52,444 $ 693,050 GAAP-based Cloud Services and Subscriptions Gross Margin % 66.2 % 65.2 % 66.4 % 66.2 % % Cloud Services and Subscriptions Revenues by Geography: Americas 75.4 % 74.3 % 75.2 % 74.5 % EMEA 18.1 % 18.4 % 17.8 % 18.2 % Asia Pacific 6.5 % 7.3 % 7.0 % 7.3 %
Three Months Ended
Cloud services and subscriptions revenues increased by$46.1 million or 13.0% during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 14.3% after factoring in the unfavorable impact of$4.6 million of foreign exchange rate changes. 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 inAmericas of$38.9 million and an increase in EMEA of$7.4 million , partially offset by a decrease inAsia Pacific of$0.2 million . There were 21 cloud services contracts greater than$1.0 million that closed during the third quarter of Fiscal 2022, compared to 16 contracts during the third quarter of Fiscal 2021. Cost of Cloud services and subscriptions revenues increased by$12.3 million during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in third party network usage fees of$7.0 million and increase in labour-related costs of$4.7 million . Overall, the gross margin percentage on Cloud services and subscriptions revenues increased to 66% from 65%.
Nine Months Ended
Cloud services and subscriptions revenues increased by$76.1 million or 7.3% during the nine months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 7.4% after factoring in the unfavorable impact of$1.4 million of foreign exchange rate changes. 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 inAmericas of$64.8 million , an increase in EMEA of$8.9 million and an increase inAsia Pacific of$2.5 million . There were 64 cloud services contracts greater than$1.0 million that closed during the first nine months of Fiscal 2022, compared to 37 contracts during the first nine months of Fiscal 2021. 46 -------------------------------------------------------------------------------- Cost of Cloud services and subscriptions revenues increased by$23.7 million during the nine months endedMarch 31, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in third party network usage fees of$13.5 million , an increase in labour-related costs of$8.5 million and an increase in other miscellaneous costs of$1.7 million . Overall, the gross margin percentage on Cloud services and subscriptions revenues remained stable at 66%.
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 endedMarch 31, 2022 , our Customer support renewal rate was approximately 94%, consistent with the quarter endedMarch 31, 2021 .
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,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Customer Support Revenues:
Americas $ 185,660 $ (325) $ 185,985 $ 555,758 $ (4,252) $ 560,010
EMEA 119,556 (2,908) 122,464 362,468 3,989 358,479
Asia Pacific 27,298 (168) 27,466 84,400 3,083 81,317
Total Customer Support Revenues 332,514 (3,401) 335,915 1,002,626 2,820 999,806
Cost of Customer Support
Revenues 31,763 810 30,953 90,914 1,099 89,815
GAAP-based Customer Support
Gross Profit $ 300,751 $ (4,211) $
304,962
90.4 % 90.8 % 90.9 % 91.0 %
% Customer Support Revenues by
Geography:
Americas 55.8 % 55.4 % 55.4 % 56.0 %
EMEA 36.0 % 36.5 % 36.2 % 35.9 %
Asia Pacific 8.2 % 8.1 % 8.4 % 8.1 %
Three Months Ended
Customer support revenues decreased by$3.4 million or 1.0% during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 1.5% after factoring in the unfavorable impact of$8.6 million of foreign exchange rate changes. Geographically, the overall change was attributable to a decrease in EMEA of$2.9 million , a decrease inAmericas of$0.3 million and a decrease inAsia Pacific of$0.2 million . Cost of Customer support revenues increased by$0.8 million during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in labour-related costs of$0.9 million . Overall, the gross margin percentage on Customer support revenues decreased to 90% from 91%.
Nine Months Ended
Customer support revenues increased by
Cost of Customer support revenues increased by$1.1 million during the nine months endedMarch 31, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in other miscellaneous costs of$1.0 million . Overall, the gross margin percentage on Customer support revenues remained stable at 91%. 47 --------------------------------------------------------------------------------
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,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
License Revenues:
Americas $ 40,678 $ 11,256 $ 29,422 $ 124,257 $ 18,769 $ 105,488
EMEA 32,358 (7,462) 39,820 114,831 (5,132) 119,963
Asia Pacific 7,605 548 7,057 24,575 (2,144) 26,719
Total License Revenues 80,641 4,342 76,299 263,663 11,493 252,170
Cost of License Revenues 3,196 386 2,810 10,906 1,305 9,601
GAAP-based License Gross
Profit $ 77,445 $ 3,956 $ 73,489 $ 252,757 $ 10,188 $ 242,569
GAAP-based License Gross
Margin % 96.0 % 96.3 % 95.9 % 96.2 %
% License Revenues by
Geography:
Americas 50.4 % 38.6 % 47.1 % 41.8 %
EMEA 40.1 % 52.2 % 43.6 % 47.6 %
Asia Pacific 9.5 % 9.2 % 9.3 % 10.6 %
Three Months Ended
License revenues increased by$4.3 million or 5.7% during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 8.4% after factoring in the unfavorable impact of$2.1 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase inAmericas of$11.3 million and an increase inAsia Pacific of$0.5 million , partially offset by a decrease in EMEA of$7.5 million . During the third quarter of Fiscal 2022, we closed 32 license contracts greater than$0.5 million , of which 11 contracts were greater than$1.0 million , contributing$32.6 million of License revenues. This was compared to 21 license contracts greater than$0.5 million during the third quarter of Fiscal 2021, of which 8 contracts were greater than$1.0 million , contributing$19.4 million of License revenues.
Cost of License revenues increased by
Nine Months Ended
License revenues increased by$11.5 million or 4.6% during the nine months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 5.4% after factoring in the unfavorable impact of$2.1 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase inAmericas of$18.8 million , partially offset by a decrease in EMEA of$5.1 million and a decrease inAsia Pacific of$2.1 million . During the first nine months of Fiscal 2022, we closed 81 license contracts greater than$0.5 million , of which 35 contracts were greater than$1.0 million , contributing$94.9 million of License revenues. This was compared to 72 license contracts greater than$0.5 million during the first nine months of Fiscal 2021, of which 23 contracts were greater than$1.0 million , contributing$66.9 million of License revenues.
Cost of License revenues increased by
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 included 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.
48
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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 March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Professional Service and Other
Revenues:
Americas $ 31,448 $ 3,240 $ 28,208 $ 91,191 $ 3,268 $ 87,923
EMEA 28,201 (2,122) 30,323 87,522 1,979 85,543
Asia Pacific 7,532 1,191 6,341 22,966 3,105 19,861
Total Professional Service and
Other Revenues 67,181 2,309 64,872 201,679 8,352 193,327
Cost of Professional Service
and Other Revenues 56,693 6,372 50,321 161,459 17,938 143,521
GAAP-based Professional
Service and Other Gross Profit $ 10,488 $ (4,063) $ 14,551 $ 40,220 $ (9,586) $ 49,806
GAAP-based Professional
Service and Other Gross Margin
% 15.6 % 22.4 % 19.9 % 25.8 %
% Professional Service and
Other Revenues by Geography:
Americas 46.8 % 43.5 % 45.2 % 45.5 %
EMEA 42.0 % 46.7 % 43.4 % 44.2 %
Asia Pacific 11.2 % 9.8 % 11.4 % 10.3 %
Three Months Ended
Professional service and other revenues increased by$2.3 million or 3.6% during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 6.4% after factoring in the unfavorable impact of$1.9 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase inAmericas of$3.2 million and increase inAsia Pacific of$1.2 million , partially offset by a decrease in EMEA of$2.1 million . Cost of Professional service and other revenues increased by$6.4 million during the three months endedMarch 31, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in labour-related costs of$5.7 million and an increase in other miscellaneous costs of$0.7 million . Overall, the gross margin percentage on Professional service and other revenues decreased to 16% from 22%.
Nine Months Ended
Professional service and other revenues increased by$8.4 million or 4.3% during the nine months endedMarch 31, 2022 as compared to the same period in the prior fiscal year; up 4.7% after factoring in the unfavorable impact of$0.8 million of foreign exchange rate changes. Geographically, the overall change was attributable to an increase inAmericas of$3.3 million , an increase inAsia Pacific of$3.1 million and an increase in EMEA of$2.0 million . Cost of Professional service and other revenues increased by$17.9 million during the nine months endedMarch 31, 2022 as compared to the same period in the prior fiscal year. This was primarily due to an increase in labour-related costs of$17.6 million and an increase in other miscellaneous costs of$0.3 million . Overall, the gross margin percentage on Professional service and other revenues decreased to 20% from 26%.
Amortization of Acquired Technology-based Intangible Assets
Three Months Ended March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Amortization of acquired
technology-based intangible
assets $ 46,564 $ (6,889) Amortization of acquired technology-based intangible assets decreased during the three months endedMarch 31, 2022 by$6.9 million as compared to the same period in the prior fiscal year. This was due to a reduction of$10.7 million relating to intangible assets from previous acquisitions becoming fully amortized, partially offset by an increase of$3.8 million relating to amortization of newly acquired customer-based intangible assets from recent acquisitions. 49 -------------------------------------------------------------------------------- Amortization of acquired technology-based intangible assets decreased during the nine months endedMarch 31, 2022 by$13.2 million as compared to the same period in the prior fiscal year. This was due to a reduction of$17.3 million relating to intangible assets from previous acquisitions becoming fully amortized, partially offset by an increase of$4.1 million relating to amortization of newly acquired customer-based intangible assets from recent acquisitions. Operating Expenses Three Months Ended March 31, Nine Months Ended March 31, Change Change increase increase (In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Research and development
180,955 22,268 158,687 491,133 52,149 438,984
General and administrative 88,137 16,589 71,548 231,127 40,625 190,502
Depreciation 22,370 409 21,961 65,535 1,291 64,244
Amortization of acquired
customer-based intangible
assets 56,215 2,059 54,156 160,764 (3,311) 164,075
Special charges (recoveries) 11,031 8,185 2,846 20,592 21,996 (1,404)
Total operating expenses
% of Total Revenues:
Research and development 13.3 % 13.2 % 12.4 % 12.2 %
Sales and marketing 20.5 % 19.1 % 19.0 % 17.6 %
General and administrative 10.0 % 8.6 % 8.9 % 7.6 %
Depreciation 2.5 % 2.6 % 2.5 % 2.6 %
Amortization of acquired
customer-based intangible
assets 6.4 % 6.5 % 6.2 % 6.6 %
Special charges (recoveries) 1.3 % 0.3 % 0.8 % (0.1) %
Research and development expenses consist primarily of payroll and
payroll-related benefits expenses, contracted research and development expenses,
and facility costs. Research and development enables organic growth and improves
product stability and functionality, and accordingly, we dedicate extensive
efforts to update and upgrade our product offerings. The primary drivers are
typically software upgrades and development.
Change between Three Change between Nine
Months Ended Months Ended
March 31, 2022 and 2021 March 31, 2022 and 2021
(In thousands) increase (decrease) increase (decrease)
Payroll and payroll-related benefits $ 5,639 $ 20,156
Contract labour and consulting 1,364 1,319
Share-based compensation 2,204 2,741
Travel and communication 19 72
Facilities (1,805) (7,644)
Other miscellaneous 238 661
Total change in research and development expenses $ 7,659 $ 17,305
Research and development expenses increased by $7.7 million during the three
months ended March 31, 2022 as compared to the same period in the prior fiscal
year, primarily as a result of recent acquisitions. Payroll and payroll-related
benefits, which is comprised of salaries, benefits and variable short-term
incentives, increased by $5.6 million . Additionally, share-based compensation
expense increased by $2.2 million and contract labour and consulting increased
by $1.4 million . These increases were partially offset by reductions in
facility-related expenses of $1.8 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 13%.
Research and development expenses increased by $17.3 million during the nine
months ended March 31, 2022 as compared to the same period in the prior fiscal
year, partially as a result of recent acquisitions. Payroll and payroll-related
benefits, which is comprised of salaries, benefits and variable short-term
incentives, increased by $20.2 million , including the impact of the compensation
restoration discussed under "Impacts of COVID-19" above. Additionally,
share-based compensation expense increased by $2.7 million , contract labour and
consulting increased by $1.3 million and other miscellaneous costs increased by
$0.7 million . These increases were partially offset by reductions in
facility-related expenses of $7.6 million . Overall, our research and development
expenses, as a percentage of total revenues, remained stable compared to the
same period in the prior fiscal year at 12%.
50
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Our research and development labour resources increased by 213 employees, from
4,178 employees at
Sales and marketing expenses consist primarily of personnel expenses and costs associated with advertising, marketing events and trade shows.
Change between Three Change between Nine
Months Ended Months Ended
March 31, 2022 and 2021 March 31, 2022 and 2021
(In thousands) increase (decrease) increase (decrease)
Payroll and payroll-related benefits $ 13,813 $ 37,928
Commissions 3,755 10,585
Contract labour and consulting (175) 139
Share-based compensation 1,181 1,783
Travel and communication 1,051 1,941
Marketing expenses 4,079 8,385
Facilities (711) (3,681)
Credit loss expense (recovery) (2,426) (7,551)
Other miscellaneous 1,701 2,620
Total change in sales and marketing expenses $ 22,268 $ 52,149
Sales and marketing expenses increased by $22.3 million during the three months
ended March 31, 2022 as compared to the same period in the prior fiscal year,
partially as a result of recent acquisitions. Payroll and payroll-related
benefits, which is comprised of salaries, benefits and variable short-term
incentives, increased by $13.8 million . Additionally, marketing expenses
increased by $4.1 million , commissions increased by $3.8 million , other
miscellaneous costs increased by $1.7 million , share-based compensation expense
increased by $1.2 million and travel and communication expenses increased by
$1.1 million . These increases were partially offset by reductions in credit loss
expense of $2.4 million and reductions in facility-related expenses of $0.7
million . Overall, our sales and marketing expenses, as a percentage of total
revenues, increased to 21% from 19% in the same period in the prior fiscal year.
Sales and marketing expenses increased by $52.1 million during the nine months
ended March 31, 2022 as compared to the same period in the prior fiscal year,
partially as a result of recent acquisitions. Payroll and payroll-related
benefits, which is comprised of salaries, benefits and variable short-term
incentives, increased by $37.9 million , including the impact of the compensation
restoration discussed under "Impacts of COVID-19" above. Additionally,
commissions increased by $10.6 million , marketing expenses increased by $8.4
million , other miscellaneous costs increased by $2.6 million , travel and
communication expenses increased by $1.9 million and share-based compensation
expense increased by $1.8 million . These increases were partially offset by
reductions in credit loss expense of $7.6 million and reductions in
facility-related expenses of $3.7 million . Overall, our sales and marketing
expenses, as a percentage of total revenues, increased to 19% from 18% in the
same period in the prior fiscal year.
Our sales and marketing labour resources increased by 322 employees, from 2,448
employees at
General and administrative expenses consist primarily of payroll and payroll related benefits expenses, related overhead, audit fees, other professional fees, contract labour and consulting expenses and public company costs.
Change between Three Change between Nine
Months Ended Months Ended
March 31, 2022 and 2021 March 31, 2022 and 2021
(In thousands) increase (decrease) increase (decrease)
Payroll and payroll-related benefits $ 14,382 $ 35,992
Contract labour and consulting 1,954 5,061
Share-based compensation (17) 726
Travel and communication 1,444 3,606
Facilities (70) (70)
Other miscellaneous (1,104) (4,690)
Total change in general and administrative
expenses $ 16,589 $ 40,625
General and administrative expenses increased by $16.6 million during the three
months ended March 31, 2022 as compared to the same period in the prior fiscal
year, partially as a result of recent acquisitions. Payroll and payroll-related
benefits, which is comprised of salaries, benefits and variable short-term
incentives, increased by $14.4 million . Additionally,
51
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contract labour and consulting increased by $2.0 million and travel and
communication expenses increased by $1.4 million . These increases were partially
offset by reductions in other miscellaneous costs, which include professional
fees such as legal, audit and tax related expenses, of $1.1 million . Overall,
general and administrative expenses, as a percentage of total revenues,
increased to 10% from 9% in the same period in the prior fiscal year.
General and administrative expenses increased by $40.6 million during the nine
months ended March 31, 2022 as compared to the same period in the prior fiscal
year, partially as a result of recent acquisitions. Payroll and payroll-related
benefits, which is comprised of salaries, benefits and variable short-term
incentives, increased by $36.0 million , including the impact of the compensation
restoration discussed under "Impacts of COVID-19" above. Additionally, contract
labour and consulting increased by $5.1 million , travel and communication
expenses increased by $3.6 million and share-based compensation expense
increased by $0.7 million . These increases were partially offset by reductions
in other miscellaneous costs, which include professional fees such as legal,
audit and tax related expenses of $4.7 million . Overall, general and
administrative expenses, as a percentage of total revenues, increased to 9% from
8% in the same period in the prior fiscal year.
Our general and administrative labour resources increased by 129 employees, from
1,851 employees at
Depreciation expenses:
Three Months Ended March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Depreciation $ 22,370 $ 409 $ 21,961 $ 65,535 $ 1,291 $ 64,244 Depreciation expenses increased during the three and nine months ended
Depreciation expenses, as a percentage of total revenue remained stable for the three and nine months endedMarch 31, 2022 at 3%, 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,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Amortization of acquired
customer-based intangible
assets $ 56,215 $ 2,059 Amortization of acquired customer-based intangible assets increased during the three months endedMarch 31, 2022 by$2.1 million as compared to the same period in the prior fiscal year. This was due to an increase of$4.3 million relating to amortization of newly acquired customer-based intangible assets from recent acquisitions, partially offset by a reduction of$2.2 million relating to intangible assets from previous acquisitions becoming fully amortized. Amortization of acquired customer-based intangible assets decreased during the nine months endedMarch 31, 2022 by$3.3 million as compared to the same period in the prior fiscal year. This was due to a reduction of$8.3 million relating to intangible assets from previous acquisitions becoming fully amortized, partially offset by an increase of$5.0 million relating to amortization of newly acquired customer-based intangible assets from recent acquisitions.
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 and
most recently in response to our return to office planning. 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 (recoveries).
52
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Three Months Ended March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Special charges (recoveries) $ 11,031 $ 8,185 $ 2,846 $ 20,592 $ 21,996 $ (1,404)
Special charges (recoveries) increased by $8.2 million during the three months
ended March 31, 2022 over the comparative period. Restructuring activities
increased by $0.5 million during the three months ended March 31, 2022 primarily
related to the Fiscal 2022 Restructuring Plan.
Additionally, other miscellaneous charges increased by $9.5 million , primarily
driven by pre-acquisition equity incentives, which upon acquisition were
replaced by equivalent value cash settlements (see note 19 "Acquisitions" to our
Condensed Consolidated Financial Statements) compared to the same period in the
prior fiscal year. These increases were partially offset by a reduction in
acquisition related costs of $1.8 million .
Special charges (recoveries) increased by $22.0 million during the nine months
ended March 31, 2022 as compared to the same period in the prior fiscal year.
This was primarily due to the net recoveries recognized in the comparative
period, resulting in an increase in restructuring activities of $6.0 million ,
primarily related to the Fiscal 2022 Restructuring Plan, COVID-19 Restructuring
Plan and Fiscal 2020 Restructuring Plan.
Additionally, acquisition related costs increased by
For more details on Special charges (recoveries), see note 18 "Special Charges (Recoveries)" to our Condensed Consolidated Financial Statements.
Other Income (Expense), Net
The components of other income (expense), net were as follows:
Three Months Ended March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Foreign exchange gains (losses) $ (3,443) $ (195) $ (3,248) $ (2,900) $ 358 $ (3,258)
OpenText share in net income
(loss) of equity investees (1) 27,746 15,981 11,765 59,103 39,083 20,020
Loss on debt extinguishment (2) - - - (27,413) (27,413) -
Other miscellaneous income
(expense) 89 323 (234) 347 692 (345)
Total other income (expense),
net $ 24,392 $ 16,109 $ 8,283 $ 29,137 $ 12,720 $ 16,417
(1) Represents our share in net income of equity investees, which approximates
fair value and subject to volatility based on market trends and business
conditions, based on our interest in certain investment funds in which we are a
limited partner. Our interests in each of these investees range from 4% to below
20% and these investments are accounted for using the equity method (see note 9
"Prepaid Expenses and Other Assets" to our Condensed Consolidated Financial
Statements for more details).
(2) On December 9, 2021 , we redeemed Senior Notes 2026 in full, which resulted
in a loss on debt extinguishment of $27.4 million . Of this, $25.0 million
related to the early termination call premium, $6.2 million related to
unamortized debt issuance costs and ($3.8) million related to unamortized
premium (see note 11 "Long-Term Debt" to our Condensed Consolidated Financial
Statements for more details).
53
--------------------------------------------------------------------------------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,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Interest expense related to
total outstanding debt (1) $ 37,993 $ 2,391
(851) (71) (780) (2,382) 734 (3,116)
Other miscellaneous expense 3,096 585 2,511 7,949 870 7,079
Total interest and other
related expense, net $ 40,238 $ 2,905 (1) For more details see note 11 "Long-Term Debt" to our Condensed Consolidated Financial Statements.
Provision for Income Taxes
We operate in several tax jurisdictions and are exposed to various foreign tax
rates.
Three Months Ended March 31, Nine Months Ended March 31,
Change Change
increase increase
(In thousands) 2022 (decrease) 2021 2022 (decrease) 2021
Provision for income taxes $ 41,041 $ 9,223 $ 31,818 $ 123,757 $ (218,364) $ 342,121
The effective tax rate increased to a provision of 35.5% for the three months
ended March 31, 2022 , compared to a provision of 25.8% for the three months
ended March 31, 2021 . Tax expense increased from $31.8 million during the three
months ended March 31, 2021 to $41.0 million during the three months ended March
31, 2022 . This was primarily due to (i) an increase of $10.6 million related to
the US Base Erosion and Anti-Abuse Tax (US BEAT) and (ii) an increase of
$4.4 million relating to tax impacts of legal entity rationalization. These were
partially offset by (i) a net decrease of $2.9 million related to Foreign
Accrual Property Income and (ii) a net increase of $2.1 million benefit related
to the 50% exclusion on gains in certain investment funds in which we are a
limited partner. The remainder of the difference was due to normal course
movements and non-material items.
The effective tax rate decreased to a provision of 29.6% for the nine months
ended March 31, 2022 , compared to a provision of 72.5% for the nine months ended
March 31, 2021 . Tax expense decreased from $342.1 million during the nine months
ended March 31, 2021 to $123.8 million during the nine months ended March 31,
2022 . This was primarily due to (i) a decrease of $300.6 million related to
Internal Revenue Service (IRS) settlements in Fiscal 2021, (ii) a decrease of
$11.3 million related to differences in tax filings, (iii) a net decrease of
$5.9 million for related Subpart F and (iv) an increase of $5.2 million benefit
related to the 50% exclusion on gains in certain investment funds in which we
are a limited partner. These were partially offset by (i) an increase of
$90.6 million for changes in unrecognized tax benefits, (ii) a net increase of
$17.0 million related to internal reorganizations and (iii) a decrease of
$4.4 million in share-based compensation benefits. The remainder of the
difference was due to normal course movements and non-material items.
For information on certain potential tax contingencies, including the CRA
matter, 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" in our Annual Report on Form 10-K for Fiscal 2021.
54
--------------------------------------------------------------------------------Use of Non-GAAP Financial Measures
In addition to reporting financial results in accordance withU.S. GAAP, the Company provides certain financial measures that are not in accordance withU.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 theU.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 withU.S. GAAP. The presentation of Non-GAAP financial measures is not meant to be a substitute for financial measures presented in accordance withU.S. GAAP, but rather should be evaluated in conjunction with and as a supplement to suchU.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 theU.S. GAAP measures with certain Non-GAAP measures defined below. Non-GAAP-based net income and Non-GAAP-based EPS, attributable to OpenText, are consistently calculated as GAAP-based net income or earnings per share, attributable to OpenText, on a diluted basis, excluding the effects of the amortization of acquired intangible assets, other income (expense), share-based compensation, and special charges (recoveries), all net of tax and any tax benefits/expense items unrelated to current period income, as further described in the tables below. Non-GAAP-based gross profit is the arithmetical sum of GAAP-based gross profit and the amortization of acquired technology-based intangible assets and share-based compensation within cost of sales. Non-GAAP-based gross margin is calculated as Non-GAAP-based gross profit expressed as a percentage of total revenue. Non-GAAP-based income from operations is calculated as GAAP-based income from operations, excluding the amortization of acquired intangible assets, special charges (recoveries), and share-based compensation expense. Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA) is consistently calculated as GAAP-based net income, attributable to OpenText, excluding interest income (expense), provision for income taxes, depreciation and amortization of acquired intangible assets, other income (expense), share-based compensation and special charges (recoveries). The Company's management believes that the presentation of the above defined Non-GAAP financial measures provides useful information to investors because they portray the financial results of the Company before the impact of certain non-operational charges. The use of the term "non-operational charge" is defined for this purpose as an expense that does not impact the ongoing operating decisions taken by the Company's management. These items are excluded based upon the way the Company's management evaluates the performance of the Company's business for use in the Company's internal reports and are not excluded in the sense that they may be used underU.S. GAAP. The Company does not acquire businesses on a predictable cycle, and therefore believes that the presentation of Non-GAAP measures, which in certain cases adjust for the impact of amortization of intangible assets and the related tax effects that are primarily related to acquisitions, will provide readers of financial statements with a more consistent basis for comparison across accounting periods and be more useful in helping readers understand the Company's operating results and underlying operational trends. Additionally, the Company has engaged in various restructuring activities over the past several years, primarily due to acquisitions and most recently in response to our return to office planning, that have resulted in costs associated with reductions in headcount, consolidation of leased facilities and related costs, all which are recorded under the Company's "Special charges (recoveries)" caption on the Condensed Consolidated Statements of Income. Each restructuring activity is a discrete event based on a unique set of business objectives or circumstances, and each differs in terms of its operational implementation, business impact and scope, and the size of each restructuring plan can vary significantly from period to period. Therefore, the Company believes that the exclusion of these special charges (recoveries) will also better aid readers of financial statements in the understanding and comparability of the Company's operating results and underlying operational trends. In summary, the Company believes the provision of supplemental Non-GAAP measures allow investors to evaluate the operational and financial performance of the Company's core business using the same evaluation measures that management uses, and is therefore a useful indication of OpenText's performance or expected performance of future operations and facilitates period-to-period comparison of operating performance (although prior performance is not necessarily indicative of future performance). As a result, the Company considers it appropriate and reasonable to provide, in addition toU.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
55
--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended
Three Months Ended March 31, 2022
GAAP-based GAAP-based Measures Non-GAAP-based Non-GAAP-based Measures
Measures % of Total Revenue Adjustments Note Measures % of Total Revenue
Cost of revenues
Cloud services and subscriptions $ 136,020 $ (1,268) (1) $ 134,752
Customer support 31,763 (501) (1) 31,262
Professional service and other 56,693 (907) (1) 55,786
Amortization of acquired technology-based intangible assets
46,564 (46,564) (2) -
GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%) 608,047 68.9% 49,240 (3) 657,287 74.5%
Operating expenses Research and development 117,730 (4,350) (1) 113,380 Sales and marketing 180,955 (5,761) (1) 175,194 General and administrative 88,137 (3,961) (1) 84,176
Amortization of acquired customer-based intangible assets
56,215 (56,215) (2) -
Special charges (recoveries) 11,031 (11,031) (4) -GAAP-based income from operations / Non-GAAP-based income from operations
131,609 130,558 (5) 262,167
Other income (expense), net 24,392 (24,392) (6) -
Provision for income taxes 41,041 (9,971) (7) 31,070
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText
74,681 116,137 (8) 190,818
GAAP-based earnings per share / Non-GAAP-based
earnings per share-diluted, attributable to OpenText $ 0.28 $ 0.42 (8) $ 0.70
(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 35% 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.
56--------------------------------------------------------------------------------
(8) Reconciliation of GAAP-based net income to Non-GAAP-based net income:
Three Months Ended March 31, 2022
Per share diluted
GAAP-based net income, attributable to OpenText $ 74,681 $ 0.28
Add:
Amortization 102,779 0.38 Share-based compensation 16,748 0.06 Special charges (recoveries) 11,031 0.04 Other (income) expense, net (24,392) (0.09) GAAP-based provision for income taxes 41,041 0.15 Non-GAAP-based provision for income taxes (31,070) (0.12) Non-GAAP-based net income, attributable to OpenText $ 190,818 $ 0.70
Reconciliation of Adjusted EBITDA
Three
Months Ended
2022
GAAP-based net income, attributable to OpenText $ 74,681
Add:
Provision for income taxes 41,041
Interest and other related expense, net 40,238
Amortization of acquired technology-based intangible assets 46,564
Amortization of acquired customer-based intangible assets 56,215
Depreciation 22,370
Share-based compensation 16,748
Special charges (recoveries) 11,031
Other (income) expense, net (24,392)
Adjusted EBITDA $ 284,496
57--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the three months ended
Three Months Ended March 31, 2021
GAAP-based GAAP-based Measures Non-GAAP-based Non-GAAP-based Measures
Measures % of Total Revenue Adjustments Note 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 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
(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 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.
58
--------------------------------------------------------------------------------
(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 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
2021
GAAP-based net income, attributable to OpenText $ 91,490
Add:
Provision for 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
59--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the nine months ended
Nine Months Ended March 31, 2022
GAAP-based Measures Non-GAAP-based Non-GAAP-based Measures
GAAP-based Measures % of Total Revenue Adjustments Note Measures % of Total Revenue
Cost of revenues
Cloud services and subscriptions $ 377,928 $ (3,072) (1) $ 374,856
Customer support 90,914 (1,631) (1) 89,283
Professional service and other 161,459 (2,275) (1) 159,184
Amortization of acquired technology-based intangible assets
152,333 (152,333) (2) -
GAAP-based gross profit and gross margin (%) /
Non-GAAP-based gross profit and gross margin (%) 1,797,850 69.4% 159,311 (3) 1,957,161 75.5%
Operating expenses
Research and development 321,517 (9,936) (1) 311,581
Sales and marketing 491,133 (15,377) (1) 475,756
General and administrative 231,127 (12,800) (1) 218,327
Amortization of acquired customer-based intangible assets
160,764 (160,764) (2) -
Special charges (recoveries) 20,592 (20,592) (4) -
GAAP-based income from operations / Non-GAAP-based income from operations
507,182 378,780 (5) 885,962
Other income (expense), net 29,137 (29,137) (6) -
Provision for income taxes 123,757 (16,178) (7) 107,579
GAAP-based net income / Non-GAAP-based net income, attributable to OpenText
294,894 365,821 (8) 660,715
GAAP-based earnings per share / Non-GAAP-based
earnings per share-diluted, attributable to OpenText $ 1.08 $ 1.35 (8) $ 2.43
(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 30% and a Non-GAAP-based tax rate of approximately 14%; these rate
differences are due to the income tax effects of items that are excluded for the
purpose of calculating Non-GAAP-based adjusted net income. Such excluded items include
amortization, share-based compensation, special charges (recoveries) and other income
(expense), net. Also excluded are tax benefits/expense items unrelated to current
period income such as changes in reserves for tax uncertainties and valuation
allowance reserves, and "book to return" adjustments for tax return filings and tax
assessments. Included is the amount of net tax benefits arising from the internal
reorganization that occurred in Fiscal 2017 assumed to be allocable to the current
period based on the forecasted utilization period. In arriving at our Non-GAAP-based
tax rate of approximately 14%, we analyzed the individual adjusted expenses and took
into consideration the impact of statutory tax rates from local jurisdictions
incurring the expense.
60
--------------------------------------------------------------------------------
(8) Reconciliation of GAAP-based net income to Non-GAAP-based net income:
Nine Months Ended March 31, 2022
Per share diluted
GAAP-based net income, attributable to OpenText $ 294,894 $ 1.08
Add:
Amortization 313,097 1.15 Share-based compensation 45,091 0.17 Special charges (recoveries) 20,592 0.08 Other (income) expense, net (29,137) (0.11) GAAP-based provision for income taxes 123,757 0.45 Non-GAAP-based provision for income taxes (107,579) (0.39) Non-GAAP-based net income, attributable to OpenText $ 660,715 $ 2.43
Reconciliation of Adjusted EBITDA
Nine
Months Ended
2022
GAAP-based net income, attributable to OpenText $
294,894
Add:
Provision for income taxes
123,757
Interest and other related expense, net
117,538
Amortization of acquired technology-based intangible assets
152,333
Amortization of acquired customer-based intangible assets 160,764
Depreciation 65,535
Share-based compensation 45,091
Special charges (recoveries) 20,592
Other (income) expense, net (29,137)
Adjusted EBITDA $ 951,367
61--------------------------------------------------------------------------------
Reconciliation of selected GAAP-based measures to Non-GAAP-based measures
for the nine months ended
Nine Months Ended March 31, 2021
GAAP-based Measures Non-GAAP-based Non-GAAP-based Measures
GAAP-based Measures % of Total Revenue Adjustments Note 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 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
(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 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
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 .
62--------------------------------------------------------------------------------
(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 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
2021
GAAP-based net income, attributable to OpenText $
129,389
Add:
Provision for 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
63--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
The following tables set forth changes in cash flows from operating, investing and financing activities for the periods indicated:
Change As of June 30,
(In thousands) As of March 31, 2022 increase (decrease) 2021
Cash and cash equivalents $ 1,633,702 $ 26,396 $ 1,607,306
Restricted cash (1) 2,149 (345) 2,494
Total cash, cash equivalents and
restricted cash $ 1,635,851 $
26,051
(1) Restricted cash is classified under the Prepaid expenses and other current assets and Other assets line items on
the Condensed Consolidated Balance Sheets (see note 9 "Prepaid Expenses and Other Assets" to our Condensed
Consolidated Financial Statements for more details).
Nine Months Ended March 31,
(In thousands) 2022 Change 2021
Cash provided by operating activities $ 729,870 $ 149,939 $ 579,931
Cash used in investing activities $ (932,961) $
(894,749)
Cash and cash equivalents
Cash and cash equivalents primarily consist of balances with banks as well as deposits with original maturities of 90 days or less.
We continue to anticipate that our cash and cash equivalents, as well as available credit facilities, will be sufficient to fund our anticipated cash requirements for working capital, contractual commitments, capital expenditures, dividends and operating needs for the next twelve months. Any further material or acquisition-related activities may require additional sources of financing and would be subject to the financial covenants established under our credit facilities. For more details, see "Long-term Debt and Credit Facilities" below. As ofMarch 31, 2022 , we have recognized a provision of$29.2 million (June 30 , 2021-$27.5 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 German subsidiaries, that will be subject to withholding taxes upon distribution. We have deferred a total of approximately$99.0 million of tax payments under the CARES Act and other COVID-19 related tax relief programs in EMEA since our fourth quarter of Fiscal 2020. During the nine months endedMarch 31, 2022 , we made repayments of approximately$9.0 million related to amounts previously deferred. As ofMarch 31, 2022 , we have remaining deferrals of$30.0 million which will become payable throughout Fiscal 2022 and Fiscal 2023.
Cash flows provided by operating activities
Cash flows from operating activities increased by
The increase in operating cash flow from changes in working capital was primarily due to the net impact of the following increases:
(i)
(ii)
(iii)
(iv)
These increases in operating cash flows were partially offset by the following decreases:
(i)
(ii)
(iii)
(iv)
During the third quarter of Fiscal 2022 our days sales outstanding (DSO) of 44 days remained stable compared to our DSO during the third quarter of Fiscal 2021. The per day impact of our DSO in the third quarter of Fiscal 2022 and Fiscal 2021
64
--------------------------------------------------------------------------------
on our cash flows was
Cash flows used in investing activities
Our cash flows used in investing activities is primarily on account of acquisitions and additions of property and equipment.
Cash flows used in investing activities increased by$894.7 million , primarily due to an increase in consideration paid for acquisitions during the first nine months of Fiscal 2022, which includes cash paid for the acquisitions of Zix of$856.2 million and Bricata of$17.9 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 repurchases of our Common Shares.
Cash flows provided by financing activities increased by
(i)$1.5 billion relating to proceeds from the issuance of Senior Notes 2031 and Senior Notes 2029 (both defined below), of which a portion of the net proceeds was used to redeem$850.0 million of our Senior Notes 2026 (as defined below); and
(ii)
The increases in cash flows provided by financing activities were partially offset by the following decreases:
(i)$250.0 million relating to higher repayments of our long-term debt and Revolver (as defined below), which is inclusive of$850.0 million redemption of Senior Notes 2026 (as defined below) during our second quarter of Fiscal 2022, partially offset by$600.0 million repaid on amounts previously drawn on our Revolver in the second quarter of Fiscal 2021;
(ii)
(iii)
(iv)
(v)$10.8 million relating to more cash used in the repurchase of Common Shares on the open market for potential reissuance under our Long-Term Incentive Plans (LTIP) or other stock compensation plans; and
(vi)
Cash Dividends During the three and nine months endedMarch 31, 2022 , we declared and paid cash dividends of$0.2209 and$0.6627 per Common Share, respectively, in the aggregate amount of$59.1 million and$178.6 million , respectively (three and nine months endedMarch 31 , 2021-$0.2008 and$0.5762 per Common Share, respectively, in the aggregate amount of$54.5 million and$156.3 million , respectively). Future declarations of dividends and the establishment of future record and payment dates are subject to final determination and discretion of the Board. See Item 5 "Dividend Policy" included within our Annual Report on Form 10-K for Fiscal 2021 for more information.
Long-term Debt and Credit Facilities
Senior Unsecured Fixed Rate Notes
Senior Notes 2031
OnNovember 24, 2021 ,OpenText Holdings, Inc. (OTHI), a wholly-owned indirect subsidiary of the Company, issued$650 million in aggregate principal amount of 4.125% Senior Notes due 2031 guaranteed by the Company (Senior Notes 2031) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended 65 -------------------------------------------------------------------------------- (Securities Act), and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2031 bear interest at a rate of 4.125% per annum, payable semi-annually in arrears onJune 1 andDecember 1 , commencing onJune 1, 2022 . Senior Notes 2031 will mature onDecember 1, 2031 , unless earlier redeemed, in accordance with their terms, or repurchased. OTHI may redeem all or a portion of the Senior Notes 2031 at any time prior toDecember 1, 2026 at a redemption price equal to 100% of the principal amount of the Senior Notes 2031 plus an applicable premium, plus accrued and unpaid interest, if any, to the redemption date. OTHI may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2031, on one or more occasions, prior toDecember 1, 2024 , 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. OTHI may, on one or more occasions, redeem the Senior Notes 2031, in whole or in part, at any time on and afterDecember 1, 2026 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2031, dated as ofNovember 24, 2021 , among OTHI, the Company, the subsidiary guarantors party thereto,The Bank of New York Mellon , asU.S. trustee, andBNY Trust Company of Canada , as Canadian trustee (the 2031 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 2031 Indenture, OTHI will be required to make an offer to repurchase the Senior Notes 2031 at a price equal to 101% of the principal amount of the Senior Notes 2031, plus accrued and unpaid interest, if any, to the date of purchase.
The 2031 Indenture contains covenants that limit OTHI, the Company 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) in the case of our non-guarantor subsidiaries, create, assume, incur or guarantee additional indebtedness of OTHI, the Company or the guarantors without such subsidiary becoming a subsidiary guarantor of Senior Notes 2031; 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 2031 Indenture. The 2031 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 2031 to be due and payable immediately. Senior Notes 2031 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 2031 and the guarantees rank equally in right of payment with all of the Company's, OTHI's and the guarantors' existing and future senior unsubordinated debt and will rank senior in right of payment to all of the Company's, OTHI's and the guarantors' future subordinated debt. Senior Notes 2031 and the guarantees will be effectively subordinated to all of the Company's, OTHI's 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 2031 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2031 Indenture, which is filed as an exhibit to the Company's Current Report on Form 8-K filed with theSEC onNovember 24, 2021 .
Senior Notes 2030
OnFebruary 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 the 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 non-U.S. 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 onFebruary 15 andAugust 15 , commencing onAugust 15, 2020 . Senior Notes 2030 will mature onFebruary 15, 2030 , unless earlier redeemed, in accordance with their terms, or repurchased. OTHI may redeem all or a portion of the Senior Notes 2030 at any time prior toFebruary 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. OTHI may also redeem up to 40% of the aggregate principal amount of the Senior Notes 2030, on one or more occasions, prior toFebruary 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. OTHI may, on one or more occasions, redeem the Senior Notes 2030, in whole or in part, at any time on and afterFebruary 15, 2025 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2030, dated as ofFebruary 18, 2020 , among OTHI, the Company, the subsidiary guarantors party thereto,The Bank of New York Mellon , asU.S. trustee, andBNY Trust Company of Canada , as Canadian trustee (the 2030 Indenture), plus accrued and unpaid interest, if any, to the redemption date. 66 --------------------------------------------------------------------------------
If we experience one of the kinds of change of control triggering events specified in the 2030 Indenture, OTHI 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) in the case of our non-guarantor subsidiaries, create, assume, incur or guarantee additional indebtedness of the Company, OTHI or the guarantors 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 theSEC onFebruary 18, 2020 .
Senior Notes 2029
OnNovember 24, 2021 , we issued$850 million in aggregate principal amount of 3.875% Senior Notes due 2029 (Senior Notes 2029) in an unregistered offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons in offshore transactions pursuant to Regulation S under the Securities Act. Senior Notes 2029 bear interest at a rate of 3.875% per annum, payable semi-annually in arrears onJune 1 andDecember 1 , commencing onJune 1, 2022 . Senior Notes 2029 will mature onDecember 1, 2029 , unless earlier redeemed, in accordance with their terms, or repurchased. We may redeem all or a portion of the Senior Notes 2029 at any time prior toDecember 1, 2024 at a redemption price equal to 100% of the principal amount of the Senior Notes 2029 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 2029, on one or more occasions, prior toDecember 1, 2024 , 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 2029, in whole or in part, at any time on and afterDecember 1, 2024 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2029, dated as ofNovember 24, 2021 , among the Company, the subsidiary guarantors party thereto,The Bank of New York Mellon , asU.S. trustee, andBNY Trust Company of Canada , as Canadian trustee (the 2029 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 2029 Indenture, we will be required to make an offer to repurchase the Senior Notes 2029 at a price equal to 101% of the principal amount of the Senior Notes 2029, plus accrued and unpaid interest, if any, to the date of purchase.
The 2029 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) in the case of our non-guarantor
subsidiaries, create, assume, incur or guarantee additional indebtedness of the
Company or the guarantors without such subsidiary becoming a subsidiary
guarantor of Senior Notes 2029; 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 2029
Indenture. The 2029 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 2029 to be due and payable immediately.
Senior Notes 2029 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 2029 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 our and our guarantors' future subordinated debt. Senior Notes 2029 and
the guarantees will
67
--------------------------------------------------------------------------------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 2029 Indenture does not purport to be complete and is qualified in its entirety by reference to the full text of the 2029 Indenture, which is filed as an exhibit to the Company's Current Report on Form 8-K filed with theSEC onNovember 24, 2021 .
Senior Notes 2028
OnFebruary 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 non-U.S. 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 onFebruary 15 andAugust 15 , commencing onAugust 15, 2020 . Senior Notes 2028 will mature onFebruary 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 toFebruary 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 toFebruary 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 afterFebruary 15, 2023 at the applicable redemption prices set forth in the indenture governing the Senior Notes 2028, dated as ofFebruary 18, 2020 , among the Company, the subsidiary guarantors party thereto,The Bank of New York Mellon , asU.S. trustee, andBNY 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) in the case of our non-guarantor subsidiaries, 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 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 theSEC onFebruary 18, 2020 .
Senior Notes 2026
OnMay 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 onJune 1 andDecember 1 , commencing onDecember 1, 2016 . Senior Notes 2026 would have matured onJune 1, 2026 , unless earlier redeemed, in accordance with their terms, or repurchased.
On
68
--------------------------------------------------------------------------------
On December 9, 2021 , we redeemed Senior Notes 2026 in full at a price equal to
102.9375% of the principal amount plus accrued and unpaid interest to, but
excluding, the redemption date. A portion of the net proceeds from the offerings
of Senior Notes 2029 and Senior Notes 2031 was used to redeem Senior Notes 2026.
Upon redemption, Senior Notes 2026 were cancelled and any obligation thereunder
was extinguished. The resulting loss of $27.4 million , consisting of $25.0
million relating to the early termination call premium, $6.2 million relating to
unamortized debt issuance costs and ($3.8) million relating to unamortized
premium, has been recorded as a component of Other income (expense), net in our
Condensed Consolidated Statements of Income. See note 22 "Other Income
(Expense), Net" to our Condensed Consolidated Financial Statements.
Term Loan B
OnMay 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 onMay 30, 2018 to, among other things, repay in full the loans under our prior$800 million term loan credit facility originally entered into onJanuary 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 inMay 2025 . Borrowings under Term Loan B bear interest at a rate per annum equal to an applicable margin plus, at the borrower's option, either (1) the Eurodollar rate for the interest period relevant to such borrowing or (2) an ABR rate. The applicable margin for borrowings under Term Loan B is 1.75%, with respect to LIBOR advances and 0.75%, with respect to ABR advances. The interest on the current outstanding balance for Term Loan B is equal to 1.75% plus LIBOR (subject to a 0.00% floor). As ofMarch 31, 2022 , the outstanding balance on the Term Loan B bears an interest rate of 1.96%. 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, "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2021. 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 ofMarch 31, 2022 , our consolidated net leverage ratio was 1.9:1.
Revolver
OnOctober 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 fromMay 5, 2022 toOctober 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 Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for Fiscal 2021. 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
For further details relating to our debt, please see note 11 "Long-Term Debt" to our Condensed Consolidated Financial Statements.
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--------------------------------------------------------------------------------Shelf Registration Statement
OnDecember 6, 2021 , we filed a universal shelf registration statement on Form S-3 with theSEC , 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 short-form base shelf prospectus qualifying the distribution of such securities was concurrently filed with Canadian securities regulators onDecember 6, 2021 . 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 theSEC and Canadian securities regulators.
Share Repurchase Plan / Normal Course Issuer Bid
OnNovember 5, 2020 , the Board authorized a share repurchase plan, pursuant to which we were authorized to purchase in open market transactions, from time to time over the 12 month period commencingNovember 12, 2020 , up to an aggregate of$350 million of our Common Shares on the NASDAQ Global Select Market, the TSX and/or other exchanges and alternative trading systems inCanada and/orthe United States , if eligible, subject to applicable law and stock exchange rules (the "Repurchase Plan"). The price that we were authorized to pay for Common Shares in open market transactions was the market price at the time of purchase or such other price as was permitted by applicable law or stock exchange rules.
The Repurchase Plan was effected in accordance with Rule 10b-18 under the
Exchange Act (Rule 10b-18). Purchases made under the Repurchase Plan were
subject to a limit of 13,618,774 shares (representing 5% of the Company's issued
and outstanding Common Shares as of
OnNovember 4, 2021 , 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 commencingNovember 12, 2021 , up to an aggregate of$350 million of our Common Shares on the NASDAQ Global Select Market, theToronto Stock Exchange (as part of a NCIB as defined below) and/or other exchanges and alternative trading systems inCanada and/orthe United States , if eligible, subject to applicable law and stock exchange rules (the "Renewed Repurchase Plan"). The price that we have paid and will pay for Common Shares in open market transactions has been and 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 Renewed Repurchase Plan has been and will be effected in accordance with Rule 10b-18. Purchases made under the Renewed Repurchase Plan are subject to a limit of 13,638,008 shares (representing 5% of the Company's issued and outstanding Common Shares as ofOctober 31, 2021 ). All Common Shares purchased by us pursuant to the Renewed Repurchase Plan have been and will be cancelled. During the three and nine months endedMarch 31, 2022 , we repurchased and cancelled 1,000,000 and 2,809,559 Common Shares, respectively, for$45.1 million and$136.1 million , respectively (three and nine months endedMarch 31 , 2021-nil, respectively). Share repurchases during the three and nine months endedMarch 31, 2022 were completed under our share repurchase plans authorized on bothNovember 5, 2020 andNovember 4, 2021 .
Normal Course Issuer Bid
The Company established a Normal Course Issuer Bid (the NCIB) in order to provide it with a means to execute purchases over the TSX as part of the overall Repurchase Plan.
The TSX approved the Company's notice of intention to commence the NCIB pursuant to which the Company was authorized to purchase Common Shares over the TSX for the period commencingNovember 12, 2020 untilNovember 11, 2021 in accordance with the TSX's normal course issuer bid rules, including that such purchases were to be made at prevailing market prices or as otherwise permitted. Under the rules of the TSX, the maximum number of Common Shares that could be purchased in this period was 13,618,774 (representing 5% of the Company's issued and outstanding Common Shares as ofNovember 4, 2020 ), and the maximum number of Common Shares that could be purchased on a single day was 143,424 Common Shares, which was 25% of 573,699 (the average daily trading volume for the Common Shares on the TSX for the six months endedOctober 31, 2020 ), subject to certain exceptions for block purchases, subject in any case to the volume and other limitations under Rule 10b-18. The Company renewed its Normal Course Issuer Bid (the Renewed NCIB) in order to provide it with a means to execute purchases over the TSX as part of the overall Renewed Repurchase Plan. The TSX approved the Company's notice of intention to commence the Renewed NCIB pursuant to which the Company may purchase Common Shares over the TSX for the period commencingNovember 12, 2021 untilNovember 11, 2022 in accordance with the TSX's normal course issuer bid rules, including that such purchases are to be made at prevailing market prices or as otherwise permitted. Under the rules of the TSX, the maximum number of Common Shares that may be purchased 70 -------------------------------------------------------------------------------- in this period is 13,638,008 (representing 5% of the Company's issued and outstanding Common Shares as ofOctober 31, 2021 ), and the maximum number of Common Shares that may be purchased on a single day is 112,590 Common Shares, which is 25% of 450,361 (the average daily trading volume for the Common Shares on the TSX for the six months endedOctober 31, 2021 ), subject to certain exceptions for block purchases, subject in any case to the volume and other limitations under Rule 10b-18.
Pensions
As ofMarch 31, 2022 , our total unfunded pension plan obligations were$78.9 million , of which$2.5 million is payable within the next twelve months. We expect to be able to make the long-term and short-term payments related to these obligations in the normal course of operations. Our anticipated payments under our most significant plans,Open Text Document Technologies GmbH (CDT),GXS GmbH (GXS GER),GXS Philippines, Inc. (GXS PHP), for the fiscal years indicated below are as follows: Fiscal years ending June 30, CDT GXS GER GXS PHP 2022 (three months ended)$ 203 $ 244 $ - 2023 886 965 116 2024 959 966 130 2025 1,002 989 175 2026 1,036 977 287 2027 to 2031 5,997 4,743 2,894 Total$ 10,083 $ 8,884 $ 3,602
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
Payments due between
April 1, 2022 - July 1, 2022 - July 1, 2024 - July 1, 2026
Total June 30, 2022 June 30, 2024 June 30, 2026 and beyond
Long-term debt obligations (1)
$ 321,232 $ 1,218,025 $ 3,781,000 Operating lease obligations (2) 285,187 17,431 114,196 68,231 85,329 Purchase obligations for contracts not accounted for as lease obligations 70,931 28,555 42,376 - -$ 5,714,665 $ 84,276$ 477,804 $ 1,286,256 $ 3,866,329 (1) Includes interest up to maturity and principal payments. Please see note 11 "Long-Term Debt" to our Condensed Consolidated Financial Statements for more details.
(2) Represents the undiscounted future minimum lease payments under our operating leases liabilities and excludes sublease income expected to be received under our various sublease agreements with third parties. Please see note 6 "Leases" to our Condensed Consolidated Financial 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.
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.
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--------------------------------------------------------------------------------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
CRA Matter
As part of its ongoing audit of our Canadian tax returns, theCanada 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 2016. Assuming the utilization of available tax attributes (further described below), we estimate our potential aggregate liability, as ofMarch 31, 2022 , in connection with the CRA's reassessments for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016, to be limited to penalties, interest and provincial taxes that may be due of approximately$75 million . As ofMarch 31, 2022 , we have provisionally paid approximately$34 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 ofMarch 31, 2022 . The notices of reassessment for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016 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 2016 (including any penalties) are without merit. We have filed notices of objection for Fiscal 2012, Fiscal 2013, Fiscal 2014, Fiscal 2015 and Fiscal 2016. 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 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 has also been 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 intoCanada from Luxembourg inJuly 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 datedApril 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. We have made extensive submissions in support of our 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. OnJanuary 27, 2022 , the CRA issued a notice of reassessment in respect of Fiscal 2017 on the basis of its position set forth in the Proposal Letter. OnApril 19, 2022 , we filed our notice of objection regarding the reassessment in respect of Fiscal 2017. If 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 72 --------------------------------------------------------------------------------
income realization in
We will continue to vigorously contest the proposed adjustments to our taxable income and any penalty and interest assessments, 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. The CRA is currently in preliminary stages of auditing Fiscal 2018 and Fiscal 2019.
Carbonite Class Action Complaint
OnAugust 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 theUnited States District Court for the District of Massachusetts captionedRuben A. Luna , Individually and on Behalf of All Others Similarly Situated v.Carbonite, Inc. ,Mohamad S. Ali , andAnthony 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. OnAugust 23, 2019 , a nearly identical complaint was filed in the same court captionedWilliam Feng , Individually and on Behalf of All Others Similarly Situated v.Carbonite, Inc. ,Mohamad S. Ali , andAnthony Folger (No. 1:19- cv-11808-LTS) (together with the Luna Complaint, the "Securities Actions"). OnNovember 21, 2019 , the court consolidated the Securities Actions, appointed a lead plaintiff, and designated a lead counsel. OnJanuary 15, 2020 , the lead plaintiff filed a consolidated amended complaint generally making the same allegations and seeking the same relief as the complaint filed onAugust 1, 2019 . The defendants moved to dismiss the Securities Actions onMarch 10, 2020 . The motion was fully briefed inJune 2020 and a hearing on the motion to dismiss the Securities Actions was held onOctober 15, 2020 . Following the hearing, onOctober 22, 2020 , the court granted with prejudice the defendants' motion to dismiss the Securities Actions. OnNovember 20, 2020 , the lead plaintiff filed a notice of appeal to theCourt of Appeals for the First Circuit . OnDecember 21, 2021 , the First Circuit issued a decision reversing and remanding the Securities Actions to the district court for further proceedings. The defendants remain confident in their position, believe the Securities Actions are without merit, and will continue to vigorously defend the matter.
Carbonite vs Realtime Data
OnFebruary 27, 2017 , before our acquisition of Carbonite, a non-practicing entity namedRealtime Data LLC (Realtime Data) filed a lawsuit against Carbonite in theU.S. District Court for the Eastern District of Texas "Realtime Data LLC v.Carbonite, Inc. et al (No 6:17-cv-00121-RWS-JDL)." Therein, it alleged 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. OnDecember 19, 2017 , theU.S. District Court for the Eastern District of Texas transferred the case to theU.S. District Court for the District of Massachusetts (No. 1:17-cv-12499). Realtime Data has also filed numerous other patent suits on the same asserted patents against other companies. After a stay pending appeal in one of those suits, onJanuary 21, 2021 , the Court held a hearing to construe the claims of the asserted patents. As to the fourth patent asserted against Carbonite, onSeptember 24, 2019 , theU.S. Patent & Trademark Office Patent Trial and Appeal Board invalidated certain claims of that patent, including certain claims that had been asserted against Carbonite. The parties then jointly stipulated to dismiss that patent from this action. OnAugust 23, 2021 , in one of the suits against other companies, the District ofDelaware (No. 1:17-cv-800), held all of the patents asserted against Carbonite to be invalid. Realtime Data has appealed that decision to theU.S. Court of Appeals for the Federal Circuit . We continue to vigorously defend the matter, and theU.S. District Court for the District of Massachusetts has issued a claim construction order. We anticipate motion practice based upon the result of that order. 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 2021.
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.
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