Cormark ups target on Open Text to (U.S.) $62.00

Cormark analyst Richard Tse says he is encouraged by Open Text’s (TSX:OTC, NASDAQ:OTEX) ability to create cost synergies from its M&A activity. He says this efficiency has the company is trending a full three quarters ahead of his expectations.

Open Text yesterday reported its Q3, 2014 results. The company earned (U.S.) $25.79-million on revenue of $442.8-million. CEO Mark Barrenechea characterized the quarter.

“In the third quarter, we delivered strong year-over-year results with revenue growth of 31 per cent, adjusted operating income growth of 43 per cent and operating cash flow growth of 21 per cent,” he said. “With our intelligent growth strategy, we are focused on delivering value through acquisitions, innovation and now an increased dividend program. The GXS integration is off to a fast start and has established Open Text as a key cloud services provider. Our newly upgraded EIM product suite is driving customer demand and reinforces our market position as a leader in EIM.”

While Tse says Open Text’s Q3 topline was slightly below his expectation of $448-million and street consensus of $447-million, the company’s adjusted EPS number of $0.84 was far above his expectation of $0.73 and consensus of $0.79. The Cormark analyst credits this to “aggressive cost savings”.

Tse says that over the past seven years Open Text has largely been driven by a growth-through-acquisition strategy, a playbook the company strayed from last year in a bid to generate more organic growth. He says the company has now set its sights back on acquisitions. “That doesn’t mean organic is off the table, it’s just become an inexpensive option for investors,” he says.

In a research update to clients this morning, Tse maintained his “Buy” rating on Open Text, but raised his one-year target by two dollars to (U.S.) $62.00.

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