Open Text gets price target raise at Cormark

Solid profitability and cash flow in what is traditionally a soft quarter for Open Text (TSX:OTC, Nasdaq: OTEX) shows just how skilled the company is at M&A, says Cormark analyst Richard Tse.

Yesterday, Open Text reported its Q1, 2015 results. The company earned (US) $64.65-million on revenue of $453.8-million, a topline that was up 40% over last year’s Q1.

“We delivered the strongest first quarter results in the history of Open Text, with total revenues of $453.8-million, up 40 per cent year over year and non-GAAP-based operating income of $155.7-million, up 57 per cent year over year, despite a toughening economy,” said CEO Mark J. Barrenechea. “Our focus on enabling a digital-first world is resonating with customers as they deploy projects to reduce costs, grow revenues or scale with greater efficiency.

Tse says the company’s earnings beat his expectations handily and its topline was in line with his prediction. The one downside, he says, was license revenue, which fell short of his expectations, he says, “due to extended sales cycle care of a soft economic backdrop”.

Overall, Tse says he remains bullish on Open Text because he thinks the company has a “long runway” of acquisition opportunities that will drive earnings growth of more than 20%. “But that doesn’t mean organic (growth) is off the table, it’s just become an inexpensive option for investors,” he explains.

In a research update to clients this morning, Tse maintained his “Buy” rating on Open Text, but raised his one-year target on the stock from (US)$67 to $70.