OpenText Q3 preview from Industrial Alliance

Industrial Alliance Securities analyst Blair Abernethy today reviewed OpenText’s (OpenText Stock Quote, Chart, News: TSX:OTC, Nasdaq:OTEX) most recent acquisition and previewed the company’s upcoming Q3, 2016 results.

Yesterday, OpenText announced it had entered into a definitive agreement to acquire assets from HP, including HP TeamSite, a web content management platform, HP MediaBin, a digital asset management solution, HP Qfiniti, an intelligent work force optimization solution, and HP Explore, HP Aurasma and HP Optimost, for approximately (U.S.) $170-million.

The Industrial Alliance analyst broke down the acquisition.

“We believe the TeamSite revenue base is predominately maintenance contracts from on-premise software with some ancillary license and professional services,” says Abernethy. “When Interwoven was sold to Autonomy in 2008 (later Autonomy was acquired by HP in 2011), it had total revenue of $260M, including a $110M maintenance base. If we assume a $90M annual revenue contribution to OpenText from the TeamSite assets, we would expect this business to soon (one or two quarters out) be on the OpenText margin model of ~33% EBITDA margins. Thus, our F2016 EBITDA estimate of $626M for OpenText would increase (on a stabilized run rate basis) by ~$30M or ~4.8% from this pending acquisition. We expect to update our OpenText forecasts once the acquisition closes and potentially more insight around organic growth is provided by management.”

On April 27, OpenText will report is Q3, 2016 results. Abernethy expects the company will post Adjusted EBITDA of $0.87 on revenue of $448-million, compared to the street consensus of Adjusted EBITDA of $0.84 on revenue of $450.9-million. The analyst says he is expecting license sales of $62.5-million, down from last year’s third quarter number of $63.9-million.

Abernethy says in light of the HP acquisition and a big picture that is seemingly softening, he is taking a cautious approach to OpenText.

“Given the recent run-up in the stock yet weaker macro IT data points, we are somewhat cautious coming into OpenText’s results release,” says the analyst. “We await the Q3 results and the HP TeamSite closing before updating our estimates and valuation.”

Abernethy today maintained his “Buy” rating and one-year price target of (U.S.) $55.00 on OpenText, implying a return of 2.2 per cent at the time of publication.