OpenText’s Q3 was better than the numbers suggest, says Cormark

Cormark analyst Richard Tse says a return to license growth in Q3 suggests OpenText’s (OpenText Stock Quote, Chart, News: TSX:OTC) organic growth strategy is working.

OpenText’s third quarter, which it reported yesterday, fell short of both his and the street’s expectations. Revenue came in at $337.7-million, and earnings at $1.26. The street expected $346-million and $1.31, and Cormark $352 and $1.32, respectively.

Tse says at first glance, these results don’t suggest that the company is executing on its growth plan. But dig a little deeper, he says, and the numbers reveal a different picture. License revenue, he says, is the “lifeblood” of enterprise software companies, and OpenText’s performance in this area was outstanding; up 13% year-over-year to $69-million. Tse says this growth is encouraging particularly given the scaling productivity in the company’s sales force, which he thinks will continue to accelerate.

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The culprit in the Waterloo software company’s Q3 was in its professional services segment, which was down 12% to $58-million. Tse says this drop is less worrisome than it would be in license or maintenance because this type of revenue is relatively low margin and non-recurring in nature.

Tse says OpenText remains one of the firm’s favourite Canadian large-cap tech stocks from a potential return standpoint. In a research update to clients this morning, he reiterated his BUY recommendation and $85 target price. He says that at a 9.9x price to earnings on his fiscal 2013 estimates, Opentext is attractively valued because a growing portion of its revenue is recurring.

The biggest surprise in OpenText’s Q3, says Tse, was the declaration of the company’s first ever dividend. The company will begin a non-cumulative quarterly dividend payment of $0.30, June 21, 2013, payable to to shareholders of record on May 31, 2013. He says this could be helpful in attracting new investors to the story.