OpenText losses US$65.5 million in Q2 as it settles IRS case, revenues rise

A month after OpenText Corp. settled an 11-year U.S. tax saga in the middle of the COVID-19 pandemic, its chief executive is relieved to be rid of the matter and able to pour his attention into booming parts of the business.

“A year ago we were focused on pre-emptive actions and no one knew how the year was going to work out, so I’m just delighted to be able to focus now on growth, on cloud additions and migration, and to have the IRS settled and behind us,” Mark Barrenechea said.

That IRS matter he was referring to resulted in the company incurring a US$65.5 million net loss in its latest quarter, which it reported Thursday. 

The IRS matter hung over the Waterloo, Ont-based company since 2010, when it decided to move ownership of its intellectual property to Luxembourg from the U.S. 

It’s customary for companies to pay taxes when IP is moved, but OpenText disagreed with the at least US$280 million tax the U.S. Internal Revenue Service wanted to apply to the situation.

The two sides only settled the US$830-million claim last year, when OpenText agreed on a settlement that resulted in it taking a $299-million charge in its latest quarter.

“I have always maintained and I will continue to maintain we are in the right,” Barrenechea said Thursday.

“But at the end of the day, I felt that settling… was in the best interest of all stakeholders.”

The IP that was at the heart of the conflict has since been shifted back to Canada. As part of the deal, OpenText will eliminate about US$90 million in future withholding taxes that the company had expected to pay over the next 10 years.

The resolution came at the right time because the company is “humble and hungry” right now, Barrenechea said.

“There is a lot to be optimistic about,” he said.

Economists are projecting a recovery in GDP and companies and governments are warming up to technology and remote offerings — both which OpenText specialize in.

“This acceleration of digital, collaboration, teams, Zoom, electronic signature workflow is right in the wheelhouse of what OpenText is and yeah, we’re benefiting from the acceleration,” Barrenechea said.

On Thursday, he released BrightCloud, a service that can be used to enforce data-centric security policies and prevent unwanted interactions with cloud services.

The interest in other OpenText cloud products helped the company land clients like McCain Foods, Nestle, SaskPower and the City of San Diego in the second quarter, which ended Dec. 31.

Reporting in U.S. dollars, Open Text’s revenue for the period reached $855.6 million, up from $771.6 million in the year prior.

That revenue was largely attributable to OpenText’s cloud services and subscriptions revenues growing to $350.5 million, up 41 per cent year-over-year.

The company lost 24 cents per share, down from a profit of 40 cents per share or $107.5 million a year ago.

Excluding the one-time settlement, its adjusted profit was 95 cents per share, up 13.1 per cent from 84 cents per share a year earlier.

Analysts on average had expected OpenText to report adjusted earnings per share of 85 cents per share and $814.5 million in revenue, according to financial data firm Refinitiv.

This report by The Canadian Press was first published Feb. 4, 2021.

Companies in this story: (TSX:OTEX)

Tara Deschamps, The Canadian Press

Note to readers: This is a corrected story. An earlier version failed to say earnings were in U.S. dollars and omitted adjusted profits.