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.

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.