Cormark downgrades OpenText after Q3 reveals new challenges

Cormark analyst Richard Tse says OpenText’s (OpenText Stock Quote, Chart, News: TSX:OTC, Nasdaq:OTEX) third quarter results revealed foreign exchange headwinds and other problems he didn’t anticipate.

Yesterday, OpenText reported its Q3, 2015 results. The company earned (U.S.) $26.49-million on revenue of $447.6-million.

“As for our quarterly financial results, we did not meet our full financial objectives,” said CEO Mark Barrenechea. “As for revenue, we were affected by foreign exchange and customers transitioning to our cloud; as for profit, we were affected by foreign exchange and unique items in the quarter, such as acquisitions, litigation costs and others, the benefits of which should be seen in future quarters. With that said, I am pleased that our recurring revenues grew by 4 per cent, up 10 per cent in constant currency, and we had record operating cash flows of $143.1-million in the quarter.”

Tse notes that OpenText missed his topline target of $471-million and the street consensus $477-million. While he says he anticipated foreign exchange to present issues, he says the quarter presented a host of other potential problems.

“These new challenges included: a slower than expected start with the company’s Actuate acquisition; a headwind from customers transitioning to OpenText’s cloud offerings; macro headwinds in EMEA; and, comments pointing to increasing valuations when it comes to acquisitions,” said Tse.

In a research update to clients today, Tse downgraded OpenText to a “Market Perform”, from “Buy” and lowered his one year target price on the stock to (U.S.) $60.00 from his previous target of $70.00.