OPEN TEXT CORP Q2 FY2023 earnings

OpenText reported FY2023 Q2 revenue of $897.44 million, up 2.4% from the prior-year quarter. The top line rose 7.8% in constant currency after the company absorbed a $47.5 million unfavorable foreign exchange impact. Cloud services and subscriptions revenue grew 12.0% year over year, or 16.0% in constant currency. Annual recurring revenue was $725 million, up 3.6%, or 8.7% in constant currency, and represented 81% of total revenue. Enterprise cloud bookings were $144.7 million, up 12% year over year. The company marked its eighth consecutive quarter of cloud organic and ARR organic growth in constant currency.

Profitability was mixed. Gross profit rose to $635.75 million, up 3.3%, and gross margin improved to 70.8%. Operating income fell to $184.66 million, down 4.3%, while operating margin declined to 20.6%. GAAP net income jumped to $258.49 million, up 192.7%, mostly because of $172 million of pretax unrealized gains on mark-to-market derivative valuations tied to the Micro Focus acquisition. Diluted EPS was $0.96, up 200.0%.

Cash generation weakened. Operating cash flow was $195.17 million, down 9.9%, and capital expenditures were $32.22 million, up 202.9%. Free cash flow was $163 million. On a year-to-date basis, operating cash flow was $327.13 million, down 19.5%. YTD revenue was $1.75 billion, up 2.4%. YTD operating income was $331.02 million, down 11.9%. YTD net income was $141.56 million, down 35.7%, and YTD diluted EPS was $0.52, down 35.8%. Deferred revenue was $879.23 million, up 3.6%. Remaining performance obligations were $1.60 billion, up 6.7%.

Non-GAAP metrics showed a steadier operating picture. Non-GAAP gross margin was 76.0%, Non-GAAP EPS was $0.89, flat year over year, and Adjusted EBITDA was $340.9 million, with a 38.0% margin. Cloud renewal rate rose to 94% from 93%, and customer support renewal rate rose to 95% from 94%. The company closed 23 cloud services contracts greater than $1.0 million, down from 27 a year earlier. It also closed 38 license contracts greater than $0.5 million, including 15 greater than $1.0 million.

Micro Focus dominated the strategic agenda. OpenText completed the acquisition on January 31, 2023, for a total purchase price of approximately $5.8 billion. It issued $1 billion in Senior Secured Notes due 2027 and increased the Acquisition Term Loan to $3.585 billion. It drew $450.0 million under the Revolver to help fund the deal. Management expects to have Micro Focus on the OpenText operating model within six full quarters or sooner. It targets $400 million in cost savings and a consolidated net leverage ratio below 3x within eight full quarters or sooner. A restructuring plan announced January 31, 2023 is expected to reduce the combined workforce by about 8%, or 2,000 employees, with estimated costs of $70 million to $80 million, and is targeted for completion by the end of Fiscal 2023. Management also targets R&D expense at 13% to 15% of revenues for the remainder of fiscal 2023.

Risks remain substantial. Integration of Micro Focus could take longer or cost more than planned, and the company may not realize the expected $400 million in savings. The deal adds debt and leverage, and the company drew the full Acquisition Term Loan and $450.0 million from the Revolver. Foreign exchange, inflation, rising interest rates, and a potential recession could pressure results. The Canada Revenue Agency has reassessed transfer pricing for Fiscal 2012 through Fiscal 2016, with a potential aggregate liability of approximately $72 million and approximately $32 million already provisionally paid. A Fiscal 2017 reassessment could reduce deferred tax assets by up to approximately $470 million. Other legal matters include the Carbonite securities class action and Realtime Data patent litigation.