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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
______________________
FORM 10-Q
______________________
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-27544
______________________________________
OPEN TEXT CORPORATION
(Exact name of Registrant as specified in its charter)
______________________
| | | | | |
Canada | 98-0154400 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
| | | | | | | | | | | | | | | | | | | | | | | |
| 275 Frank Tompa Drive, | | | N2L 0A1 | |
| Waterloo, | Ontario | Canada | | | |
| (Address of principal executive offices) | | | (Zip code) | |
Registrant's telephone number, including area code: (519) 888-7111
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock without par value | OTEX | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At October 27, 2023, there were 271,514,728 outstanding Common Shares of the registrant.
OPEN TEXT CORPORATION
TABLE OF CONTENTS
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| | Page No |
|
Item 1. | | |
| | |
| | |
| | |
| Condensed Consolidated Statements of Shareholders' Equity | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
|
Item 1A. | | |
Item 5. | | |
Item 6. | | |
| |
Part I - Financial Information
Item 1. Financial Statements
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share data)
| | | | | | | | | | | |
| September 30, 2023 | | June 30, 2023 |
ASSETS | (unaudited) | | |
Cash and cash equivalents | $ | 919,850 | | | $ | 1,231,625 | |
Accounts receivable trade, net of allowance for credit losses of $11,501 as of September 30, 2023 and $13,828 as of June 30, 2023 (Note 4) | 676,594 | | | 682,517 | |
Contract assets (Note 3) | 78,562 | | | 71,196 | |
Income taxes recoverable (Note 15) | 70,179 | | | 68,161 | |
Prepaid expenses and other current assets (Note 9) | 199,917 | | | 221,732 | |
Total current assets | 1,945,102 | | | 2,275,231 | |
Property and equipment (Note 5) | 361,612 | | | 356,904 | |
Operating lease right of use assets (Note 6) | 266,053 | | | 285,723 | |
Long-term contract assets (Note 3) | 54,448 | | | 64,553 | |
Goodwill (Note 7) | 8,618,765 | | | 8,662,603 | |
Acquired intangible assets (Note 8) | 3,888,217 | | | 4,080,879 | |
Deferred tax assets (Note 15) | 996,514 | | | 926,719 | |
Other assets (Note 9) | 328,972 | | | 342,318 | |
Long-term income taxes recoverable (Note 15) | 94,193 | | | 94,270 | |
Total assets | $ | 16,553,876 | | | $ | 17,089,200 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable and accrued liabilities (Note 10) | $ | 836,042 | | | $ | 996,261 | |
Current portion of long-term debt (Note 11) | 145,850 | | | 320,850 | |
Operating lease liabilities (Note 6) | 90,418 | | | 91,425 | |
Deferred revenues (Note 3) | 1,596,321 | | | 1,721,781 | |
Income taxes payable (Note 15) | 153,396 | | | 89,297 | |
Total current liabilities | 2,822,027 | | | 3,219,614 | |
Long-term liabilities: | | | |
Accrued liabilities (Note 10) | 49,333 | | | 51,961 | |
Pension liability (Note 12) | 125,616 | | | 126,312 | |
Long-term debt (Note 11) | 8,554,569 | | | 8,562,096 | |
Long-term operating lease liabilities (Note 6) | 252,629 | | | 271,579 | |
Long-term deferred revenues (Note 3) | 197,112 | | | 217,771 | |
Long-term income taxes payable (Note 15) | 148,822 | | | 193,808 | |
Deferred tax liabilities (Note 15) | 389,510 | | | 423,955 | |
Total long-term liabilities | 9,717,591 | | | 9,847,482 | |
Shareholders’ equity: | | | |
Share capital and additional paid-in capital (Note 13) | | | |
271,227,929 and 270,902,571 Common Shares issued and outstanding at September 30, 2023 and June 30, 2023, respectively; authorized Common Shares: unlimited | 2,216,921 | | | 2,176,947 | |
Accumulated other comprehensive income (loss) (Note 20) | (70,025) | | | (53,559) | |
Retained earnings | 2,062,107 | | | 2,048,984 | |
Treasury stock, at cost (4,753,281 and 3,536,375 shares at September 30, 2023 and June 30, 2023, respectively) | (196,119) | | | (151,597) | |
Total OpenText shareholders' equity | 4,012,884 | | | 4,020,775 | |
Non-controlling interests | 1,374 | | | 1,329 | |
Total shareholders’ equity | 4,014,258 | | | 4,022,104 | |
Total liabilities and shareholders’ equity | $ | 16,553,876 | | | $ | 17,089,200 | |
Guarantees and contingencies (Note 14)
Related party transactions (Note 24)
Subsequent events (Note 25)
See accompanying Notes to Condensed Consolidated Financial Statements
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands of U.S. dollars, except share and per share data)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Revenues (Note 3): | | | |
Cloud services and subscriptions | $ | 451,014 | | | $ | 404,651 | |
Customer support | 697,713 | | | 317,351 | |
License | 173,026 | | | 62,548 | |
Professional service and other | 103,676 | | | 67,486 | |
Total revenues | 1,425,429 | | | 852,036 | |
Cost of revenues: | | | |
Cloud services and subscriptions | 171,412 | | | 131,799 | |
Customer support | 75,014 | | | 27,354 | |
License | 3,839 | | | 2,758 | |
Professional service and other | 79,922 | | | 53,800 | |
Amortization of acquired technology-based intangible assets (Note 8) | 76,824 | | | 42,637 | |
Total cost of revenues | 407,011 | | | 258,348 | |
Gross profit | 1,018,418 | | | 593,688 | |
Operating expenses: | | | |
Research and development | 234,437 | | | 110,198 | |
Sales and marketing | 271,801 | | | 167,170 | |
General and administrative | 131,211 | | | 78,074 | |
Depreciation | 34,091 | | | 23,174 | |
Amortization of acquired customer-based intangible assets (Note 8) | 120,192 | | | 54,438 | |
Special charges (recoveries) (Note 18) | 13,794 | | | 14,281 | |
Total operating expenses | 805,526 | | | 447,335 | |
Income from operations | 212,892 | | | 146,353 | |
Other income (expense), net (Note 22) | 20,170 | | | (189,231) | |
Interest and other related expense, net | (141,764) | | | (40,382) | |
Income (loss) before income taxes | 91,298 | | | (83,260) | |
Provision for income taxes (Note 15) | 10,352 | | | 33,625 | |
Net income (loss) for the period | $ | 80,946 | | | $ | (116,885) | |
Net (income) attributable to non-controlling interests | (45) | | | (44) | |
Net income (loss) attributable to OpenText | $ | 80,901 | | | $ | (116,929) | |
Earnings (loss) per share—basic attributable to OpenText (Note 23) | $ | 0.30 | | | $ | (0.43) | |
Earnings (loss) per share—diluted attributable to OpenText (Note 23) | $ | 0.30 | | | $ | (0.43) | |
Weighted average number of Common Shares outstanding—basic (in '000's) | 271,178 | | | 269,804 | |
Weighted average number of Common Shares outstanding—diluted (in '000's) | 271,902 | | | 269,804 | |
See accompanying Notes to Condensed Consolidated Financial Statements
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of U.S. dollars)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Net income (loss) for the period | $ | 80,946 | | | $ | (116,885) | |
Other comprehensive income (loss)—net of tax: | | | |
Net foreign currency translation adjustments | (14,583) | | | (36,366) | |
Unrealized gain (loss) on cash flow hedges: | | | |
Unrealized gain (loss) - net of tax (1) | (1,841) | | | (3,340) | |
(Gain) loss reclassified into net income - net of tax (2) | 9 | | | 588 | |
Unrealized gain (loss) on available-for-sale financial assets: | | | |
Unrealized gain (loss) - net of tax (3) | (221) | | | — | |
Actuarial gain (loss) relating to defined benefit pension plans: | | | |
Actuarial gain (loss) - net of tax (4) | (19) | | | 4,164 | |
Amortization of actuarial (gain) loss into net income - net of tax (5) | 189 | | | 37 | |
Total other comprehensive loss net, for the period | (16,466) | | | (34,917) | |
Total comprehensive income (loss) | 64,480 | | | (151,802) | |
Comprehensive income attributable to non-controlling interests | (45) | | | (44) | |
Total comprehensive income (loss) attributable to OpenText | $ | 64,435 | | | $ | (151,846) | |
______________________________
(1)Net of tax expense (recovery) of ($664) and $(1,206) for the three months ended September 30, 2023 and 2022, respectively.
(2)Net of tax expense (recovery) of $3 and $212 for the three months ended September 30, 2023 and 2022, respectively.
(3)Net of tax expense (recovery) of $59 and $— for the three months ended September 30, 2023 and 2022, respectively.
(4)Net of tax expense (recovery) of $19 and $1,104 for the three months ended September 30, 2023 and 2022, respectively.
(5)Net of tax expense (recovery) of $75 and $26 for the three months ended September 30, 2023 and 2022, respectively.
See accompanying Notes to Condensed Consolidated Financial Statements
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of U.S. dollars and shares)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2023 |
| Common Shares and Additional Paid in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-Controlling Interests | | Total |
| Shares | | Amount | | Shares | | Amount | |
Balance as of June 30, 2023 | 270,903 | | | $ | 2,176,947 | | | (3,536) | | | $ | (151,597) | | | $ | 2,048,984 | | | $ | (53,559) | | | $ | 1,329 | | | $ | 4,022,104 | |
Issuance of Common Shares | | | | | | | | | | | | | | | |
Under employee stock option plans | 85 | | | 2,892 | | | — | | | — | | | — | | | — | | | — | | | 2,892 | |
Under employee stock purchase plans | 240 | | | 8,641 | | | — | | | — | | | — | | | — | | | — | | | 8,641 | |
Share-based compensation | — | | | 37,004 | | | — | | | — | | | — | | | — | | | — | | | 37,004 | |
Purchase of treasury stock | — | | | — | | | (1,400) | | | (53,085) | | | — | | | — | | | — | | | (53,085) | |
Issuance of treasury stock | — | | | (8,563) | | | 183 | | | 8,563 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Dividends declared ($0.25 per Common Share) | — | | | — | | | — | | | — | | | (67,778) | | | — | | | — | | | (67,778) | |
Other comprehensive income (loss) - net | — | | | — | | | — | | | — | | | — | | | (16,466) | | | — | | | (16,466) | |
Net income (loss) for the period | — | | | — | | | — | | | — | | | 80,901 | | | — | | | 45 | | | 80,946 | |
Balance as of September 30, 2023 | 271,228 | | | $ | 2,216,921 | | | (4,753) | | | $ | (196,119) | | | $ | 2,062,107 | | | $ | (70,025) | | | $ | 1,374 | | | $ | 4,014,258 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Common Shares and Additional Paid in Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-Controlling Interests | | Total |
| Shares | | Amount | | Shares | | Amount | |
Balance as of June 30, 2022 | 269,523 | | | $ | 2,038,674 | | | (3,706) | | | $ | (159,966) | | | $ | 2,160,069 | | | $ | (7,659) | | | $ | 1,142 | | | $ | 4,032,260 | |
Issuance of Common Shares | | | | | | | | | | | | | | | |
Under employee stock option plans | 72 | | | 1,994 | | | — | | | — | | | — | | | — | | | — | | | 1,994 | |
Under employee stock purchase plans | 286 | | | 9,179 | | | — | | | — | | | — | | | — | | | — | | | 9,179 | |
Share-based compensation | — | | | 23,208 | | | — | | | — | | | — | | | — | | | — | | | 23,208 | |
| | | | | | | | | | | | | | | |
Issuance of treasury stock | — | | | (5,174) | | | 120 | | | 5,174 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | |
Dividends declared ($0.24299 per Common Share) | — | | | — | | | — | | | — | | | (64,698) | | | — | | | — | | | (64,698) | |
Other comprehensive income (loss) - net | — | | | — | | | — | | | — | | | — | | | (34,917) | | | — | | | (34,917) | |
| | | | | | | | | | | | | | | |
Net income (loss) for the period | — | | | — | | | — | | | — | | | (116,929) | | | — | | | 44 | | | (116,885) | |
Balance as of September 30, 2022 | 269,881 | | | $ | 2,067,881 | | | (3,586) | | | $ | (154,792) | | | $ | 1,978,442 | | | $ | (42,576) | | | $ | 1,186 | | | $ | 3,850,141 | |
See accompanying Notes to Condensed Consolidated Financial Statements
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Cash flows from operating activities: | | | |
Net income (loss) for the period | $ | 80,946 | | | $ | (116,885) | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of intangible assets | 231,107 | | | 120,249 | |
Share-based compensation expense | 37,095 | | | 23,208 | |
Pension expense | 3,171 | | | 1,387 | |
Amortization of debt discount and issuance costs | 5,496 | | | 1,480 | |
Write-off of right of use assets | 4,715 | | | 2,827 | |
| | | |
Loss on sale and write down of property and equipment | 458 | | | — | |
Deferred taxes | (88,630) | | | (20,667) | |
Share in net loss of equity investees | 9,696 | | | 6,534 | |
Changes in financial instruments | (17,895) | | | 181,461 | |
Changes in operating assets and liabilities: | | | |
Accounts receivable | 31,304 | | | 59,494 | |
Contract assets | (22,566) | | | (9,054) | |
Prepaid expenses and other current assets | 19,326 | | | (2,934) | |
Income taxes | 29,597 | | | 15,834 | |
Accounts payable and accrued liabilities | (124,214) | | | (27,179) | |
Deferred revenue | (150,476) | | | (53,779) | |
Other assets | 4,104 | | | (47,749) | |
Operating lease assets and liabilities, net | (6,113) | | | (2,268) | |
Net cash provided by operating activities | 47,121 | | | 131,959 | |
Cash flows from investing activities: | | | |
Additions of property and equipment | (37,539) | | | (36,324) | |
Micro Focus acquisition | (9,272) | | | — | |
| | | |
Proceeds from net investment hedge derivative contracts | 1,966 | | | — | |
Other investing activities | (5,554) | | | — | |
Net cash used in investing activities | (50,399) | | | (36,324) | |
Cash flows from financing activities: | | | |
Proceeds from issuance of Common Shares from exercise of stock options and ESPP | 11,453 | | | 10,037 | |
| | | |
Repayment of long-term debt and Revolver | (186,463) | | | (2,500) | |
| | | |
Debt issuance costs | (1,961) | | | — | |
| | | |
Purchase of treasury stock | (53,085) | | | — | |
| | | |
Payments of dividends to shareholders | (66,965) | | | (64,698) | |
| | | |
Net cash used in financing activities | (297,021) | | | (57,161) | |
Foreign exchange loss on cash held in foreign currencies | (11,503) | | | (28,102) | |
Increase (decrease) in cash, cash equivalents and restricted cash during the period | (311,802) | | | 10,372 | |
Cash, cash equivalents and restricted cash at beginning of the period | 1,233,952 | | | 1,695,911 | |
Cash, cash equivalents and restricted cash at end of the period | $ | 922,150 | | | $ | 1,706,283 | |
OPEN TEXT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
(unaudited)
| | | | | | | | | | | |
Reconciliation of cash, cash equivalents and restricted cash: | September 30, 2023 | | September 30, 2022 |
Cash and cash equivalents | $ | 919,850 | | | $ | 1,704,385 | |
Restricted cash (1) | 2,300 | | | 1,898 | |
Total cash, cash equivalents and restricted cash | $ | 922,150 | | | $ | 1,706,283 | |
_________________________________
(1)Restricted cash is classified under the Prepaid expenses and other current assets and Other assets line items on the Condensed Consolidated Balance Sheets (Note 9).
Supplemental cash flow disclosures (Note 6 and Note 21)
See accompanying Notes to Condensed Consolidated Financial Statements
OPEN TEXT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended September 30, 2023
(Tabular amounts in thousands of U.S. dollars, except share and per share data)
(unaudited)
NOTE 1—BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements include the accounts of Open Text Corporation and our subsidiaries, collectively referred to as “OpenText” or the “Company.” We wholly own all of our subsidiaries with the exception of Open Text South Africa Proprietary Ltd. (OT South Africa), which as of September 30, 2023, was 70% owned by OpenText. All intercompany balances and transactions have been eliminated.
The following Fiscal Year terms are used throughout this Quarterly Report on Form 10-Q:
| | | | | | | | | | | | | | |
Fiscal Year | | Beginning Date | | Ending Date |
Fiscal 2025 | | July 1, 2024 | | June 30, 2025 |
Fiscal 2024 | | July 1, 2023 | | June 30, 2024 |
Fiscal 2023 | | July 1, 2022 | | June 30, 2023 |
Fiscal 2022 | | July 1, 2021 | | June 30, 2022 |
Fiscal 2021 | | July 1, 2020 | | June 30, 2021 |
Fiscal 2020 | | July 1, 2019 | | June 30, 2020 |
Fiscal 2019 | | July 1, 2018 | | June 30, 2019 |
Fiscal 2018 | | July 1, 2017 | | June 30, 2018 |
Fiscal 2017 | | July 1, 2016 | | June 30, 2017 |
Fiscal 2016 | | July 1, 2015 | | June 30, 2016 |
Fiscal 2015 | | July 1, 2014 | | June 30, 2015 |
Fiscal 2014 | | July 1, 2013 | | June 30, 2014 |
Fiscal 2013 | | July 1, 2012 | | June 30, 2013 |
Fiscal 2012 | | July 1, 2011 | | June 30, 2012 |
These Condensed Consolidated Financial Statements are expressed in U.S. dollars and are prepared in accordance with United States generally accepted accounting principles (U.S. GAAP). The information furnished reflects all adjustments necessary for a fair presentation of the results for the periods presented and includes the consolidated financial results of Micro Focus International Limited, formerly Micro Focus International plc, and its subsidiaries (Micro Focus), with effect from February 1, 2023 (see below and Note 19 “Acquisitions”).
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements. These estimates, judgments and assumptions are evaluated on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates. In particular, key estimates, judgments and assumptions include those related to: (i) revenue recognition, (ii) accounting for income taxes, (iii) testing of goodwill for impairment, (iv) the valuation of acquired intangible assets, (v) the valuation of long-lived assets, (vi) the recognition of contingencies, (vii) restructuring accruals, (viii) acquisition accruals and pre-acquisition contingencies, (ix) the valuation of stock options granted and obligations related to share-based payments, including the valuation of our long-term incentive plans, (x) the valuation of pension obligations and pension assets, (xi) the valuation of available-for-sale investments and (xii) the valuation of derivative instruments.
Acquisition of Micro Focus
On January 31, 2023, we acquired all of the issued and to be issued share capital of Micro Focus (the Micro Focus Acquisition) for a total purchase price of $6.2 billion, inclusive of Micro Focus’ cash and repayment of Micro Focus’ outstanding indebtedness, subject to final adjustments. The results of operations of Micro Focus have been consolidated with those of OpenText with effect from February 1, 2023. See Note 19 “Acquisitions” to our Condensed Consolidated Financial Statements for more details.
NOTE 2—RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Pronouncements Adopted in Fiscal 2024
During the three months ended September 30, 2023, we have adopted the following Accounting Standards Updates (ASU):
Supplier Financing Program Obligations
In September 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-04 “Liabilities-Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations.” This standard requires companies that participate in supplier finance programs in connection with the procurement of goods or services to disclose quantitative and qualitative information about the programs. We adopted this ASU as of July 1, 2023 which did not have a material impact on our Condensed Consolidated Financial Statements and related disclosures, as we had no material supplier finance program obligations as of September 30, 2023.
NOTE 3—REVENUES
Disaggregation of Revenue
We have four revenue streams: cloud services and subscriptions, customer support, license, and professional service and other. The following tables disaggregate our revenue by significant geographic area, based on the location of our direct end customer, by type of performance obligation and timing of revenue recognition for the periods indicated:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Total Revenues by Geography: | | | |
Americas (1) | $ | 845,227 | | | $ | 557,788 | |
EMEA (2) | 445,440 | | | 228,353 | |
Asia Pacific (3) | 134,762 | | | 65,895 | |
Total revenues | $ | 1,425,429 | | | $ | 852,036 | |
| | | |
Total Revenues by Type of Performance Obligation: | | | |
Recurring revenues (4) | | | |
Cloud services and subscriptions revenue | $ | 451,014 | | | $ | 404,651 | |
Customer support revenue | 697,713 | | | 317,351 | |
Total recurring revenues | $ | 1,148,727 | | | $ | 722,002 | |
License revenue (perpetual, term and subscriptions) | 173,026 | | | 62,548 | |
Professional service and other revenue | 103,676 | | | 67,486 | |
Total revenues | $ | 1,425,429 | | | $ | 852,036 | |
| | | |
Total Revenues by Timing of Revenue Recognition: | | | |
Point in time | $ | 173,026 | | | $ | 62,548 | |
Over time (including professional service and other revenue) | 1,252,403 | | | 789,488 | |
Total revenues | $ | 1,425,429 | | | $ | 852,036 | |
___________________________
(1)Americas consists of countries in North, Central and South America.
(2)EMEA consists of countries in Europe, the Middle East and Africa.
(3)Asia Pacific primarily consists of Japan, Australia, China, Korea, Philippines, Singapore, India and New Zealand.
(4)Recurring revenue is defined as the sum of Cloud services and subscriptions revenue and Customer support revenue.
Contract Balances
A contract asset, net of allowance for credit losses, will be recorded if we have recognized revenue but do not have an unconditional right to the related consideration from the customer. For example, this will be the case if implementation services offered in a cloud arrangement are identified as a separate performance obligation and are provided to a customer prior to us being able to bill the customer. In addition, a contract asset may arise in relation to subscription licenses if the license revenue that is recognized upfront exceeds the amount that we are able to invoice the customer at that time. Contract assets are reclassified to accounts receivable when the rights become unconditional.
The balance for our contract assets and contract liabilities (i.e. deferred revenues) for the periods indicated below were as follows:
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Short-term contract assets | $ | 78,562 | | | $ | 71,196 | |
Long-term contract assets | $ | 54,448 | | | $ | 64,553 | |
Short-term deferred revenues | $ | 1,596,321 | | | $ | 1,721,781 | |
Long-term deferred revenues | $ | 197,112 | | | $ | 217,771 | |
The difference in the opening and closing balances of our contract assets and deferred revenues primarily results from the timing difference between our performance and the customer’s payments. We fulfill our obligations under a contract with a
customer by transferring products and services in exchange for consideration from the customer. During the three months ended September 30, 2023, we reclassified $25.1 million (three months ended September 30, 2022—$8.9 million) of contract assets to receivables as a result of the right to the transaction consideration becoming unconditional. During the three months ended September 30, 2023 and 2022, respectively, there was no significant impairment loss recognized related to contract assets.
We recognize deferred revenue when we have received consideration or an amount of consideration is due from the customer for future obligations to transfer products or services. Our deferred revenues primarily relate to cloud services and customer support agreements which have been paid for by customers prior to the performance of those services. The amount of revenue that was recognized during the three months ended September 30, 2023 that was included in the deferred revenue balances at June 30, 2023 was $739 million (three months ended September 30, 2022—$373 million).
Incremental Costs of Obtaining a Contract with a Customer
Incremental costs of obtaining a contract include only those costs that we incur to obtain a contract that we would not have incurred if the contract had not been obtained, such as sales commissions. The following table summarizes the changes in total capitalized costs to obtain a contract, since June 30, 2023:
| | | | | |
Capitalized costs to obtain a contract as of June 30, 2023 | $ | 97,207 | |
New capitalized costs incurred | 11,719 | |
Amortization of capitalized costs | (9,955) | |
Impact of foreign exchange rate changes | (742) | |
Capitalized costs to obtain a contract as of September 30, 2023 | $ | 98,229 | |
During the three months ended September 30, 2023 and 2022, respectively, there was no significant impairment loss recognized related to capitalized costs to obtain a contract. Refer to Note 9 “Prepaid Expenses and Other Assets” for additional information on incremental costs of obtaining a contract.
Transaction Price Allocated to the Remaining Performance Obligations
As of September 30, 2023, approximately $2.5 billion of revenue is expected to be recognized from remaining performance obligations on existing contracts. We expect to recognize approximately 47% of this amount over the next 12 months and the remaining balance substantially over the next three years thereafter. We apply the practical expedient and do not disclose performance obligations that have original expected durations of one year or less.
NOTE 4—ALLOWANCE FOR CREDIT LOSSES
The following illustrates the activity in our allowance for credit losses on accounts receivable, since June 30, 2023:
| | | | | |
Balance as of June 30, 2023 | $ | 13,828 | |
Credit loss expense (recovery) | 1,782 | |
Write-off / adjustments | (4,109) | |
Balance as of September 30, 2023 | $ | 11,501 | |
Included in accounts receivable are unbilled receivables in the amount of $63.9 million as of September 30, 2023 (June 30, 2023—$66.5 million).
As of September 30, 2023, we have an allowance for credit losses of $0.2 million for contract assets (June 30, 2023—$0.3 million). For additional information on contract assets please see Note 3 “Revenues.”
NOTE 5—PROPERTY AND EQUIPMENT
| | | | | | | | | | | | | | | | | |
| As of September 30, 2023 |
| Cost | | Accumulated Depreciation | | Net |
Computer hardware | $ | 398,358 | | | $ | (260,277) | | | $ | 138,081 | |
Computer software | 188,038 | | | (142,234) | | | 45,804 | |
Capitalized software development costs | 224,334 | | | (129,896) | | | 94,438 | |
Leasehold improvements | 118,370 | | | (92,065) | | | 26,305 | |
Land and buildings | 61,877 | | | (18,403) | | | 43,474 | |
Furniture, equipment and other | 54,738 | | | (41,228) | | | 13,510 | |
Total | $ | 1,045,715 | | | $ | (684,103) | | | $ | 361,612 | |
| | | | | | | | | | | | | | | | | |
| As of June 30, 2023 |
| Cost | | Accumulated Depreciation | | Net |
Computer hardware | $ | 386,400 | | | $ | (254,131) | | | $ | 132,269 | |
Computer software | 178,899 | | | (135,123) | | | 43,776 | |
Capitalized software development costs | 216,762 | | | (122,730) | | | 94,032 | |
Leasehold improvements | 123,607 | | | (94,721) | | | 28,886 | |
Land and buildings | 62,041 | | | (18,020) | | | 44,021 | |
Furniture, equipment and other | 55,741 | | | $ | (41,821) | | | 13,920 | |
Total | $ | 1,023,450 | | | $ | (666,546) | | | $ | 356,904 | |
NOTE 6—LEASES
We enter into operating leases, both domestically and internationally, for certain facilities, automobiles, data centers and equipment for use in the ordinary course of business. The duration of the majority of these leases generally ranges from 1 to 10 years, some of which include options to extend for an additional 3 to 5 years after the initial term. Additionally, the land upon which our headquarters in Waterloo, Ontario, Canada is located is leased from the University of Waterloo for a period of 49 years beginning in December 2005, with an option to renew for an additional term of 49 years. We also have finance lease liabilities comprised of equipment lease arrangements with an average duration of 4 to 5 years all of which are currently being sublet. Leases with an initial term of 12 months or less are not recorded on our Condensed Consolidated Balance Sheets.
The following illustrates the Condensed Consolidated Balance Sheets information related to leases:
| | | | | | | | | | | | | | |
| | As of September 30, 2023 | | As of June 30, 2023 |
Operating Leases | Balance Sheet Location | | | |
Operating lease right of use assets | Operating lease right of use assets | $ | 266,053 | | | $ | 285,723 | |
| | | | |
Operating lease liabilities (current) | Operating lease liabilities | $ | 90,418 | | | $ | 91,425 | |
Operating lease liabilities (noncurrent) | Long-term operating lease liabilities | 252,629 | | | 271,579 | |
Total operating lease liabilities | | $ | 343,047 | | | $ | 363,004 | |
| | | | |
Finance Leases | | | | |
Finance lease receivables (current) | Prepaid expenses and other current assets | $ | 5,492 | | | $ | 6,362 | |
Finance lease receivables (noncurrent) | Other assets | 4,443 | | | 5,515 | |
Total finance lease receivables | | $ | 9,935 | | | $ | 11,877 | |
| | | | |
Finance lease liabilities (current) | Accounts payable and accrued liabilities | $ | 4,992 | | | $ | 5,281 | |
Finance lease liabilities (noncurrent) | Accrued liabilities | 4,437 | | | 5,500 | |
Total finance lease liabilities | | $ | 9,429 | | | $ | 10,781 | |
The weighted average remaining lease term and discount rate for the periods indicated below were as follows:
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Weighted-average remaining lease term | | | |
Operating leases | 5.49 years | | 5.62 years |
Finance leases | 2.22 years | | 2.40 years |
Weighted-average discount rate | | | |
Operating leases | 4.7 | % | | 4.66 | % |
Finance leases | 5.58 | % | | 5.60 | % |
Lease Costs and Other Information
The following illustrates the various components of lease costs for the period indicated:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Operating lease cost | $ | 23,740 | | | $ | 14,311 | |
Short-term lease cost | 1,155 | | | 387 | |
Variable lease cost | 1,135 | | | 579 | |
Sublease income | (3,338) | | | (2,912) | |
Total lease cost | $ | 22,692 | | | $ | 12,365 | |
Supplemental Cash Flow Information
The following table presents supplemental information relating to cash flows arising from lease transactions. Cash payments made for variable lease costs and short-term leases are not included in the measurement of lease liabilities, and, as such, are excluded from the amounts below:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating leases | $ | 27,699 | | | $ | 17,740 | |
Finance leases | $ | 1,486 | | | $ | — | |
Right of use assets obtained in exchange for new lease liabilities: | | | |
Operating leases | $ | 7,045 | | | $ | 22,467 | |
Maturity of Lease Liabilities
The following table presents the future minimum lease payments under our leases liabilities as of September 30, 2023:
| | | | | | | | | | | |
Fiscal years ending June 30, | Operating Leases | | Finance Leases |
2024 (nine months ended) | $ | 79,726 | | | $ | 4,232 | |
2025 | 84,518 | | | 3,363 | |
2026 | 62,278 | | | 1,937 | |
2027 | 50,684 | | | 459 | |
2028 | 39,505 | | | — | |
Thereafter | 70,926 | | | — | |
Total lease payments | $ | 387,637 | | | $ | 9,991 | |
Less: Imputed interest | (44,590) | | | (562) | |
Total | $ | 343,047 | | | $ | 9,429 | |
Operating lease maturity amounts included in the table above do not include sublease income expected to be received under our various sublease agreements with third parties. Under the agreements initiated with third parties, we expect to receive sublease income of $9.4 million over the remainder of Fiscal 2024 and $34.0 million thereafter.
NOTE 7—GOODWILL
Goodwill is recorded when the consideration paid for an acquisition of a business exceeds the fair value of identifiable net tangible and intangible assets. The following table summarizes the changes in goodwill since June 30, 2023:
| | | | | |
Balance as of June 30, 2023 | $ | 8,662,603 | |
Other acquisition (Note 19) | 1,250 | |
Acquisition of Micro Focus (Note 19) (1) | (33,889) | |
Impact of foreign exchange rate changes | (11,199) | |
Balance as of September 30, 2023 | $ | 8,618,765 | |
______________________
(1)Adjustments relating to open measurement period.
NOTE 8—ACQUIRED INTANGIBLE ASSETS
| | | | | | | | | | | | | | | | | |
| As of September 30, 2023 |
| Cost | | Accumulated Amortization | | Net |
Technology assets | $ | 1,815,285 | | | $ | (461,716) | | | $ | 1,353,569 | |
Customer assets | 3,694,061 | | | (1,159,413) | | | 2,534,648 | |
Total | $ | 5,509,346 | | | $ | (1,621,129) | | | $ | 3,888,217 | |
| | | | | |
| As of June 30, 2023 |
| Cost | | Accumulated Amortization | | Net |
Technology assets | $ | 1,815,260 | | | $ | (385,868) | | | $ | 1,429,392 | |
Customer assets | 3,691,252 | | | (1,039,765) | | | 2,651,487 | |
Total | $ | 5,506,512 | | | $ | (1,425,633) | | | $ | 4,080,879 | |
The weighted average amortization periods for acquired technology and customer intangible assets are approximately six years and eight years, respectively.
The following table shows the estimated future amortization expense for the fiscal years indicated. This calculation assumes no future adjustments to acquired intangible assets:
| | | | | |
Fiscal years ending June 30, | |
2024 (nine months ended) | $ | 557,173 | |
2025 | 643,188 | |
2026 | 599,851 | |
2027 | 529,474 | |
2028 | 505,749 | |
2029 and Thereafter | 1,052,782 | |
Total | $ | 3,888,217 | |
NOTE 9—PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other current assets:
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Deposits and restricted cash | $ | 4,400 | | | $ | 2,621 | |
Capitalized costs to obtain a contract | 36,020 | | | 39,685 | |
Short-term prepaid expenses and other current assets | 158,566 | | | 175,879 | |
Derivative asset (1) | 931 | | | 3,547 | |
Total | $ | 199,917 | | | $ | 221,732 | |
______________________________
(1)Represents the asset related to our derivative instrument activity (see Note 17 “Derivative Instruments and Hedging Activities”).
Other assets:
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Deposits and restricted cash | $ | 18,364 | | | $ | 20,418 | |
Capitalized costs to obtain a contract | 62,209 | | | 57,522 | |
| | | |
Investments | 137,229 | | | 147,974 | |
Available-for-sale financial assets | 39,048 | | | 39,858 | |
Long-term prepaid expenses and other long-term assets | 72,122 | | | 76,546 | |
Total | $ | 328,972 | | | $ | 342,318 | |
Deposits and restricted cash primarily relate to security deposits provided to landlords in accordance with facility lease agreements and cash restricted per the terms of certain contractual-based agreements.
Capitalized costs to obtain a contract relate to incremental costs of obtaining a contract, such as sales commissions, which are eligible for capitalization on contracts to the extent that such costs are expected to be recovered (see Note 3 “Revenues”).
Investments relate to certain investment funds in which we are a limited partner. Our interests in each of these investees range from 4% to below 20%. These investments are accounted for using the equity method. Our share of net income or losses based on our interest in these investments, which approximates fair value and is subject to volatility based on market trends and business conditions, is recorded as a component of Other income (expense), net in our Condensed Consolidated Statements of Income (see Note 22 “Other Income (Expense), Net”). During the three months ended September 30, 2023, our share of income (loss) from these investments was $(9.7) million (three months ended September 30, 2022—$(6.5) million).
Available-for-sale financial assets relate to contractual arrangements under insurance policies held by the Company with guaranteed interest rates that are utilized to meet certain pension and post-retirement obligations but do not meet the definition of a plan asset. The remaining portion of available-for-sale financial assets are primarily comprised of various debt and equity funds, which are valued utilizing market quotes provided by our third-party custodian. These arrangements are treated as available-for-sale financial assets measured at fair value quarterly (see Note 16 “Fair Value Measurement”) with unrealized gains and losses recorded within “Other Comprehensive Income (Loss) Net” (see Note 20 “Accumulated Other Comprehensive Income (Loss)”).
Prepaid expenses and other assets, both short-term and long-term, include advance payments on licenses that are being amortized over the applicable terms of the licenses and other miscellaneous assets.
NOTE 10—ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities:
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Accounts payable—trade | $ | 138,460 | | | $ | 162,720 | |
Accrued salaries, incentives and commissions | 252,975 | | | 333,543 | |
Accrued liabilities | 222,748 | | | 239,817 | |
Accrued sales and other tax liabilities | 14,194 | | | 25,439 | |
Derivative liability (1) | 127,152 | | | 161,191 | |
Accrued interest on long-term debt | 52,766 | | | 37,563 | |
Amounts payable in respect of restructuring and other special charges | 21,818 | | | 30,073 | |
Asset retirement obligations | 5,929 | | | 5,915 | |
Total | $ | 836,042 | | | $ | 996,261 | |
______________________
(1)Represents the liability related to our derivative instrument activity (see Note 17 “Derivative Instruments and Hedging Activities”).
Long-term accrued liabilities:
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Amounts payable in respect of restructuring and other special charges | $ | 8,534 | | | $ | 8,875 | |
Other accrued liabilities | 16,829 | | | 17,749 | |
Asset retirement obligations | 23,970 | | | 25,337 | |
Total | $ | 49,333 | | | $ | 51,961 | |
Asset retirement obligations
We are required to return certain of our leased facilities to their original state at the conclusion of our lease. As of September 30, 2023, the present value of this obligation was $29.9 million (June 30, 2023—$31.3 million), with an undiscounted value of $33.5 million (June 30, 2023—$35.0 million).
NOTE 11—LONG-TERM DEBT
| | | | | | | | | | | |
| As of September 30, 2023 | | As of June 30, 2023 |
Total debt | | | |
Senior Notes 2031 | $ | 650,000 | | | $ | 650,000 | |
Senior Notes 2030 | 900,000 | | | 900,000 | |
Senior Notes 2029 | 850,000 | | | 850,000 | |
Senior Notes 2028 | 900,000 | | | 900,000 | |
Senior Secured Notes 2027 | 1,000,000 | | | 1,000,000 | |
| | | |
Term Loan B | 945,000 | | | 947,500 | |
Acquisition Term Loan | 3,558,113 | | | 3,567,075 | |
Revolver | 100,000 | | | 275,000 | |
Total principal payments due | 8,903,113 | | | 9,089,575 | |
| | | |
| | | |
Unamortized debt discount and issuance costs (1) | (202,694) | | | (206,629) | |
Total amount outstanding | 8,700,419 | | | 8,882,946 | |
Less: | | | |
Current portion of long-term debt | | | |
Term Loan B | 10,000 | | | 10,000 | |
Acquisition Term Loan | 35,850 | | | 35,850 | |
Revolver | 100,000 | | | 275,000 | |
Total current portion of long-term debt | 145,850 | | | 320,850 | |
| | | |
Non-current portion of long-term debt | $ | 8,554,569 | | | $ | 8,562,096 | |
______________________
(1)During the three months ended September 30, 2023, we recorded $1.6 million of debt issuance costs related to the modification of the Acquisition Term Loan (as defined below).
Senior Unsecured Fixed Rate Notes
Senior Notes 2031
On November 24, 2021, OpenText Holdings, Inc. 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 (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 on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2031 will mature on December 1, 2031, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2023, we recorded interest expense of $6.7 million relating to Senior Notes 2031 (three months ended September 30, 2022— $6.7 million).
Senior Notes 2030
On February 18, 2020, OpenText Holdings, Inc. 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 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 on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2030 will mature on February 15, 2030, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2023, we recorded interest expense of $9.3 million relating to Senior Notes 2030 (three months ended September 30, 2022—$9.3 million).
Senior Notes 2029
On November 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 on June 1 and December 1, commencing on June 1, 2022. Senior Notes 2029 will mature on December 1, 2029, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2023, we recorded interest expense of $8.2 million relating to Senior Notes 2029 (three months ended September 30, 2022—$8.2 million).
Senior Notes 2028
On February 18, 2020, we issued $900 million in aggregate principal amount of 3.875% Senior Notes due 2028 (Senior Notes 2028, and together with the Senior Notes 2031, Senior Notes 2030, Senior Notes 2029 and Senior Notes 2027, the Senior Notes) 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 on February 15 and August 15, commencing on August 15, 2020. Senior Notes 2028 will mature on February 15, 2028, unless earlier redeemed, in accordance with their terms, or repurchased.
For the three months ended September 30, 2023, we recorded interest expense of $8.7 million relating to Senior Notes 2028 (three months ended September 30, 2022—$8.7 million).
Senior Secured Fixed Rate Notes
Senior Secured Notes 2027
On December 1, 2022, we issued $1 billion in aggregate principal amount of Senior Secured Notes 2027 in connection with the financing of the Micro Focus Acquisition 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 Secured Notes 2027 bear interest at a rate of 6.90% per annum, payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2023. Senior Secured Notes 2027 will mature on December 1, 2027, unless earlier redeemed, in accordance with their terms, or repurchased.
The Senior Secured Notes 2027 are guaranteed on a senior secured basis by certain of the Company’s subsidiaries, and are secured with the same priority as the Company’s senior credit facilities. The Senior Secured Notes 2027 and the related guarantees are effectively senior to all of the Company’s and the guarantors’ senior unsecured debt to the extent of the value of the collateral (as defined in the indenture to the Senior Secured Notes 2027) and are structurally subordinated to all existing and future liabilities of each of the Company’s existing and future subsidiaries that do not guarantee the Senior Secured Notes 2027. As of September 30, 2023, the Senior Secured Notes 2027 bear an effective interest rate of 7.39%. The effective interest rate includes interest expense of $17.3 million and amortization of debt discount and issuance costs of $0.6 million.
For the three months ended September 30, 2023, we recorded interest expense of $17.3 million relating to Senior Secured Notes 2027 (three months ended September 30, 2022—nil).
Term Loan B
On May 30, 2018, we refinanced our existing term loan facility, by entering into a new $1 billion term loan facility (Term Loan B), whereby we borrowed $1 billion on that day and repaid in full the loans under our prior $800 million term loan facility originally entered into on January 16, 2014. 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 (as defined below), Acquisition Term Loan and Senior Secured Notes 2027. On June 6, 2023, we amended the Term Loan B to replace the LIBOR benchmark rate applicable to borrowings under Term Loan B with a Secured Overnight Financing Rate (SOFR) benchmark rate.
Term Loan B has a seven-year term, maturing in May 2025, and 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 currently bear a floating rate of interest equal to Adjusted Term SOFR (as defined in the Term Loan B) and applicable margin of 1.75%. As of September 30, 2023, the outstanding balance on the Term Loan B bears an interest rate of 7.18%. As of September 30, 2023, the Term Loan B bears an effective interest rate of 7.48%. The effective interest rate includes interest expense of $17.2 million and amortization of debt discount and issuance costs of $0.4 million.
Under Term Loan B, we must maintain a “consolidated net leverage” ratio of no more than 4.00:1.00 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 September 30, 2023, our consolidated net leverage ratio, as calculated in accordance with the applicable agreement, was 3.64:1.00.
For the three months ended September 30, 2023, we recorded interest expense of $17.2 million relating to Term Loan B (three months ended September 30, 2022—$9.7 million).
Revolver
On October 31, 2019, we amended our committed revolving credit facility (the Revolver) to increase the total commitments under the Revolver from $450 million to $750 million as well as to extend the maturity from May 5, 2022 to October 31, 2024. Borrowings under the Revolver are secured by a first charge over substantially all of our assets, on a pari passu basis with Term Loan B, the Acquisition Term Loan and Senior Secured Notes 2027. On June 6, 2023, we entered into an amendment to replace the LIBOR benchmark rate applicable to borrowings under the Revolver with a SOFR benchmark rate.
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 interest equal to Adjusted Term SOFR (as defined in the Revolver) and a fixed margin dependent on our consolidated net leverage ratio ranging from 1.25% to 1.75%. As of September 30, 2023, the outstanding balance on the Revolver bears an interest rate of 7.18%.
As of September 30, 2023, we had a $100 million outstanding balance under the Revolver (June 30, 2023—$275 million). For the three months ended September 30, 2023, we recorded interest expense of $2.0 million relating to the Revolver (three months ended September 30, 2022—nil). In October 2023, the Company repaid the $100 million outstanding balance drawn under the Revolver.
Acquisition Term Loan
On December 1, 2022, we amended our first lien term loan facility (the Acquisition Term Loan), dated as of August 25, 2022, to increase the aggregate commitments under the senior secured delayed-draw term loan facility from an aggregate principal amount of $2.585 billion to an aggregate principal amount of $3.585 billion. During the third quarter of Fiscal 2023, the Company drew down $3.585 billion from the Acquisition Term Loan, net of original issuance discount of 3% and other fees (see Note 19 “Acquisitions” for more details). On August 14, 2023, we amended the Acquisition Term Loan, to reduce the applicable interest rate margin by 0.75% over the remaining term of the Acquisition Term Loan. The reduction in interest rate margin on the Acquisition Term Loan resulting from the amendment was accounted for by the Company as a debt modification.
The Acquisition Term Loan has a seven-year term from the date of funding, and repayments under the Acquisition Term Loan are equal to 0.25% of the principal amount in equal quarterly installments for the life of the Acquisition Term Loan, with the remainder due at maturity. Borrowings under the Acquisition Term Loan currently bear a floating rate of interest equal to 2.75% plus Adjusted Term SOFR (as defined in the Acquisition Term Loan). As of September 30, 2023, the outstanding balance on the Acquisition Term Loan bears an interest rate of 8.18%. As of September 30, 2023, the Acquisition Term Loan bears an effective interest rate of 9.27%. The effective interest rate includes interest expense of $77.2 million and amortization of debt discount and issuance costs of $3.3 million.
The Acquisition Term Loan 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 the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, that is secured by the Company’s or any of the Company’s subsidiaries’ assets, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges. Under the Acquisition Term Loan, we must maintain a “consolidated net leverage” ratio of no more than 4.50:1.00 at the end of each financial quarter. Consolidated net leverage ratio is defined for this purpose as the proportion of the Company’s total debt reduced by unrestricted cash, including guarantees and letters of credit, over the Company’s trailing four financial quarter net income before interest, taxes, depreciation, amortization, restructuring, share-based compensation and other miscellaneous charges as defined in the Acquisition Term Loan. As of September 30, 2023, our consolidated net leverage ratio, as calculated in accordance with the applicable agreement, was 3.64:1:00.
The Acquisition Term Loan is unconditionally guaranteed by certain subsidiary guarantors, as defined in the Acquisition Term Loan, and is secured by a first charge on substantially all of the assets of the Company and the subsidiary guarantors on a pari passu basis with the Revolver, Term Loan B and the Senior Secured Notes 2027.
For the three months ended September 30, 2023, we recorded interest expense of $77.2 million relating to the Acquisition Term Loan (three months ended September 30, 2022—nil). In October 2023, the Company repaid $75 million drawn under the Acquisition Term Loan.
Bridge Loan
On August 25, 2022, we entered into a bridge loan agreement (Bridge Loan) which provided for commitments of up to $2.0 billion to finance a portion of the repayment of Micro Focus’ existing debt. On December 1, 2022, we entered into an amendment to the Bridge Loan that reallocated commitments under the Bridge Loan to the Acquisition Term Loan. In connection with the amendment to the Bridge Loan and the receipt of proceeds from the issuance of the Senior Secured Notes 2027, all remaining commitments under the Bridge Loan were reduced to zero and the Bridge Loan was terminated, which resulted in a loss on debt extinguishment of $8.2 million relating to unamortized debt issuance costs in the second quarter of Fiscal 2023.
For the three months ended September 30, 2023, we did not have any borrowings or record any interest expense relating to the Bridge Loan (three months ended September 30, 2022—nil).
Debt Issuance Costs
Debt issuance costs relate primarily to costs incurred for the purpose of obtaining or amending our credit facilities and issuing our Senior Notes and are being amortized through interest expense over the respective terms of the Senior Notes, Senior Secured Notes, Term Loan B, and Acquisition Term Loan using the effective interest method and straight-line method for the Revolver.
NOTE 12—PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
Defined Benefit and Other Post-Retirement Benefit Plans
The Company has 52 pension and other post-retirement plans in multiple countries. All of our pension and other post-retirement plans are located outside of Canada and the United States. The plans are primarily located in Germany, which as of September 30, 2023, make up approximately 63% of the total net benefit pension obligations.
Our defined benefit pension plans include a mix of final salary type plans which provide for retirement, old age, disability and survivor’s benefits. Final salary pension plans provide benefits to members either in the form of a lump sum payment or a guaranteed level of pension payable for life in the case of retirement, disability and death. Benefits under our final salary type plans are generally based on the participant’s age, compensation and years of service as well as the social security ceiling and other factors. Many of these plans are closed to new members. The net periodic costs of these plans are determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate and estimated service costs.
Other post-retirement plans include statutory plans that offer termination, indemnity or other end of service benefits. Many of these plans were assumed through our acquisitions or are required by local regulatory and statutory requirements. All of our defined benefit and other post-retirement plans are included in the aggregate projected benefit obligation within “Pension liability” on our Condensed Consolidated Balance Sheets.
The following are details of net pension expense relating to the defined benefit pension plans:
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | |
| 2023 | | 2022 | | | | |
Pension expense: | | | | | | | |
Service cost | $ | 2,725 | | | $ | 1,059 | | | | | |
Interest cost | 3,089 | | | 970 | | | | | |
Expected return of plan assets | (2,808) | | | (403) | | | | | |
Amortization of actuarial (gains) losses | 165 | | | 63 | | | | | |
Net pension expense | $ | 3,171 | | | $ | 1,689 | | | | | |
Service-related net periodic pension costs are recorded within operating expense and all other non-service related net periodic pension costs are classified under “Interest and other related expense, net” on our Condensed Consolidated Statements of Income.
NOTE 13—SHARE CAPITAL, OPTION PLANS AND SHARE-BASED PAYMENTS
Cash Dividends
For the three months ended September 30, 2023, pursuant to the Company’s dividend policy, we declared total non-cumulative dividends of $0.25 per Common Share in the aggregate amount of $67.0 million which we paid during the same period (three months ended September 30, 2022—$0.24299 per Common Share in the aggregate amount of $64.7 million).
Share Capital
Our authorized share capital includes an unlimited number of Common Shares and an unlimited number of Preference Shares. No Preference Shares have been issued.
Treasury Stock
From time to time we may provide funds to an independent agent to facilitate repurchases of our Common Shares in connection with the settlement of awards under the Long-Term Incentive Plans (LTIP) or other plans.
During the three months ended September 30, 2023, 1,400,000 Common Shares were purchased on the open market at a cost of $53.1 million and held under trust for potential settlement of awards under our LTIP or other plans as described below (three months ended September 30, 2022—no Common Shares were purchased).
During the three months ended September 30, 2023, we delivered to eligible participants 183,313 Common Shares that were purchased in the open market in connection with the settlement of awards and other plans (three months ended September 30, 2022—120,406 Common Shares).
Share Repurchase Plan
On November 4, 2021, the Board authorized a share repurchase plan (Fiscal 2022 Repurchase Plan), pursuant to which we may purchase in open market transactions, from time to time over the 12-month period commencing November 12, 2021, up to an aggregate of $350 million of our Common Shares. During the three months ended September 30, 2023 and 2022, we did not repurchase and cancel any Common Shares.
Share-Based Payments
Share-based compensation expense for the periods indicated below is detailed as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Stock Options (issued under Stock Option Plans) | $ | 4,544 | | | $ | 3,585 | |
Performance Share Units (issued under LTIP) | 5,889 | | | 4,235 | |
Restricted Share Units (issued under LTIP) | 2,881 | | | 2,175 | |
Restricted Share Units (other) | 21,372 | | | 10,637 | |
Deferred Share Units (directors) | 914 | | | 961 | |
Employee Stock Purchase Plan | 1,495 | | | 1,615 | |
Total share-based compensation expense | $ | 37,095 | | | $ | 23,208 | |
A summary of unrecognized compensation cost for unvested shared-based payment awards is as follows:
| | | | | | | | | | | |
| As of September 30, 2023 |
| Unrecognized Compensation Cost | | Weighted Average Recognition Period (years) |
Stock Options (issued under Stock Option Plans) | $ | 48,754 | | | 2.6 |
Performance Share Units (issued under LTIP) | 56,484 | | | 2.5 |
Restricted Share Units (issued under LTIP) | 27,139 | | | 2.4 |
Restricted Share Units (other) | 83,793 | | | 1.3 |
Total unrecognized share-based compensation cost | $ | 216,170 | | | |
Stock Option Plans
Stock Options
A summary of activity under our stock option plans for the three months ended September 30, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value
|
Outstanding at June 30, 2023 | 12,219,439 | | | $ | 38.44 | | | 4.68 | | $ | 62,473 | |
Granted | 840,610 | | | 36.79 | | | | | |
Exercised | (84,885) | | | 34.08 | | | | | |
Forfeited or expired | (221,571) | | | 42.39 | | | | | |
Outstanding at September 30, 2023 | 12,753,593 | | | $ | 38.29 | | | 4.60 | | $ | 23,473 | |
Exercisable at September 30, 2023 | 4,940,080 | | | $ | 40.16 | | | 3.10 | | $ | 2,691 | |
As of September 30, 2023, 5,331,793 options to purchase Common Shares were available for issuance under our stock option plans.
We estimate the fair value of stock options using the Black-Scholes option-pricing model or, where appropriate, the Monte Carlo pricing model, consistent with the provisions of ASC Topic 718, “Compensation—Stock Compensation” (Topic 718) and SEC Staff Accounting Bulletin No. 107. The option-pricing models require input of subjective assumptions, including the estimated life of the option and the expected volatility of the underlying stock over the estimated life of the option. We use historical volatility as a basis for projecting the expected volatility of the underlying stock and estimate the expected life of our stock options based upon historical data.
We believe that the valuation techniques and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair value of our stock option grants. Estimates of fair value are not intended, however, to predict actual future events or the value ultimately realized by employees who receive equity awards.
For the periods indicated, the weighted-average fair value of options and weighted-average assumptions estimated under the Black-Scholes option-pricing model were as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Weighted–average fair value of options granted | $ | 9.16 | | | $ | 8.16 | |
Weighted-average assumptions used: | | | |
Expected volatility | 30.93 | % | | 27.46 | % |
Risk–free interest rate | 4.44 | % | | 2.86 | % |
Expected dividend yield | 2.66 | % | | 2.32 | % |
Expected life (in years) | 4.24 | | 4.18 |
Forfeiture rate (based on historical rates) | 7 | % | | 7 | % |
Average exercise share price | $ | 36.79 | | | $ | 39.09 | |
Performance Options
During the three months ended September 30, 2023, we did not grant performance options (during the three months ended September 30, 2022—1,000,000).
For the period in which performance options were granted, the weighted-average fair value of performance options and weighted-average assumptions estimated under the Monte Carlo pricing model were as follows:
| | | | | |
| Three Months Ended September 30, |
| 2022 |
Weighted–average fair value of options granted | $ | 8.09 | |
Derived service period (in years) | 1.70 |
Weighted-average assumptions used: | |
Expected volatility | 26.00 | % |
Risk–free interest rate | 3.21 | % |
Expected dividend yield | 2.00 | % |
Average exercise share price | $ | 31.89 | |
Long-Term Incentive Plans
We incentivize certain eligible employees, in part, with long-term compensation pursuant to our LTIP. The LTIP is a rolling three-year program that grants eligible employees a certain number of target Performance Share Units (PSUs) and/or Restricted Share Units (RSUs). Target PSUs become vested upon the achievement of certain financial and/or operational performance criteria (the Performance Conditions) that are determined at the time of the grant. The Performance Conditions for vesting of the PSUs are based solely upon market conditions. The RSUs are employee service-based awards and vest subject to an eligible employee’s continued employment throughout the applicable vesting period.
PSUs and RSUs granted under the LTIP have been measured at fair value as of the effective date, consistent with ASC Topic 718, and will be charged to share-based compensation expense over the remaining life of the plan. We estimate the fair value of PSUs using the Monte Carlo pricing model and RSUs have been valued based upon their grant date fair value. Beginning in Fiscal 2023, certain PSU and RSU grants were eligible to receive dividend equivalent units that vest under the same conditions as the underlying grants.
Performance Share Units (Issued Under LTIP)
A summary of activity under our performance share units issued under the LTIP for the three months ended September 30, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average Grant Date Fair Value | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value ($’000's) |
Outstanding at June 30, 2023 | 1,013,385 | | | $ | 61.64 | | | 1.75 | | $ | 42,106 | |
Granted (1) | 612,432 | | | 59.22 | | | | | |
Vested | — | | | — | | | | | |
Forfeited or expired | (24,049) | | | 61.69 | | | | | |
Outstanding at September 30, 2023 | 1,601,768 | | | $ | 60.76 | | | 2.16 | | $ | 56,222 | |
__________________________
(1)PSUs are earned based on market conditions and the actual number of PSUs earned, if any, is dependent upon performance and may range from 0 to 200 percent.
For the periods indicated, the weighted-average fair value of PSUs issued under LTIP, and weighted-average assumptions estimated under the Monte Carlo pricing model were as follows:
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2023 | | 2022 |
Weighted–average fair value of performance share units granted | $ | 59.48 | | | $ | 55.06 | |
Weighted-average assumptions used: | | | |
Expected volatility | 28.05 | % | | 29.00 | % |
Risk–free interest rate | 4.38 | % | | 3.13 | % |
Expected dividend yield | — | % | | — | % |
Expected life (in years) | 3.11 | | 3.11 |
| | | |
Restricted Share Units (Issued Under LTIP)
A summary of activity under our RSUs issued under the LTIP for the three months ended September 30, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average Grant Date Fair Value | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value ($’000's) |
Outstanding at June 30, 2023 | 774,360 | | | $ | 42.83 | | | 1.68 | | $ | 32,175 | |
Granted | 466,454 | | | 36.80 | | | | | |
Vested | — | | | — | | | | | |
Forfeited or expired | (24,049) | | | 41.83 | | | | | |
Outstanding at September 30, 2023 | 1,216,765 | | | $ | 40.55 | | | 2.11 | | $ | 42,708 | |
Restricted Share Units (Other)
In addition to the grants made in connection with the LTIP discussed above, from time to time, we may grant RSUs to certain employees in accordance with employment and other non-LTIP related agreements. RSUs (other) vest over a specified contract date, typically two or three years from the respective date of grants.
A summary of activity under our RSUs (other) issued for the three months ended September 30, 2023 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Units | | Weighted-Average Grant Date Fair Value | | Weighted- Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value ($’000's) |
Outstanding at June 30, 2023 | 5,310,595 | | | $ | |