2016 will be a transformational year for OpenText, says Cormark

Cormark analyst Richard Tse says 2016 will be a “transformational” year for OpenText (OpenText Stock Quote, Chart, News: TSX:OTC, Nasdaq:OTEX).

On Wednesday after market, OpenText will report its Q1, 2016 results. Tse says he expects the company will operating EPS of (U.S.) $0.77 on revenue of $469-million, a topline estimate that is a little ahead of the street consensus of $454-million. He thinks license revenue will come in at $68.4-million.

While the analyst thinks that the company may see some volatility in license deals in the first quarter and there is the risk that, following a strong fourth quarter, some larger deals were pulled from Q1, he nonetheless believes OpenText shareholders could be set for something special in fiscal 2016.

“All in, we believe 2016 will be a transformational year for OpenText when it comes to its rapid shift toward the cloud and the potential (upward) rerating that comes with that. At 12.6x F2016 EPS, we believe OTEX/OTC looks very compelling,” said Tse. “Even more, we believe F2016 may also see a year of transformational acquisition(s) which we all know has been the main driver of value for this stock. We believe the company is actively evaluating targets today.”

Tse says that while OpenText’s transition to a cloud-based business hasn’t been an easy one, it should settle into a less volatile model as time passes. He notes that the company’s efforts in the area have already resulted in an increase in its recurring revenue to 84% (from 76%).

In a research update to clients today, Tse maintained his “Buy” rating and (U.S.) $55.00 one-year target price on OpenText.