Open Text’s surprise rise in revenue overshadowed by IRS ‘proposed adjustment’

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Open Text Corp. dished out a serving of surprisingly good news with a side order of worse-than-expected news as it announced its fourth-quarter results on Wednesday.

The business software company, based in Waterloo, Ont., said it earned $482.7-million in revenue in the period ended June 30, after warning just two months ago that it would only bring in between $440-million and $455-million. The company said it earned 87 cents per share on a non-GAAP basis, compared with the range of 64 cents to 72 cents it had projected on May 20, the day chief executive officer Mark Barrenechea resumed full-time duties after receiving treatment for leukemia.

The results "are really odd," BMO analyst Thanos Moschopoulos said in an interview. "The numbers are way above what [the company] guided for."

The company's reported revenues were in line with market expectations prior to the earnings warning, which sent the stock tumbling in late May. Net earnings were 56 cents per share, down from 72 cents a year earlier.

However, the positive surprise was countered by a negative: Open Text revealed that the U.S. Internal Revenue Service has issued the company with a draft "notice of proposed adjustment" that would increase its U.S. federal taxes by $280-million (U.S.) on a one-time basis stemming from its reorganization five years ago.

"The [proposed adjustment] is an IRS position and does not impose an obligation to pay tax," the company said in a release, adding that it could be changed before the final adjustment is issued. The company said it expected a roughly $80-million increase to its federal taxes for its 2012 fiscal tax year. "We strongly disagree with the IRS position and intend to vigorously contest the proposed adjustments to our taxable income," the company said.

While the company has kept shareholders abreast of developments with the IRS for several quarters, Mr. Moschopoulos called the update "a new and negative development. The question is what the tax rate will look like going forward," which could weigh on future results.

The company said in a statement: "The IRS is not proposing any changes to our global operating structure. The IRS' proposed adjustments are a one-time response to the IP transfers in 2010 and 2012 and do not affect subsequent tax years.  Our effective tax rate outlook for Fiscal 2016 is approximately 20% on a non-U.S. GAAP basis."

Open Text's overall quarterly revenue rose by 7 per cent year over year. Mr. Barrenechea reiterated the company's intent to plow $3-billion into acquisitions in the coming years and said Open Text would buy back up to $200-million worth of stock.