A selloff in shares of Open Text (Open Text Stock Quote, Chart, News: TSX:OTEX) following the company’s third quarter results makes for an attractive entry point for investors, National Bank Financial analyst Richard Tse says.
On Wednesday, Open Text reported its Q3, 2018 results. The company earned (U.S.) $58.8-million on revenue of $685.0-million, a topline that was up per cent over the $593.1-million the company reported in the same period last year.
“We are pleased with our Q3 results, especially our annual recurring revenues (ARR) of $521-million, up 18 per cent year over year and our operating cash flows (OCF) of $271-million, up 73 per cent y/y,” said Open Text vice-chair, chief executive officer and chief technology officer, Mark J. Barrenechea. “We are making key investments in the Open Text Cloud that will drive growth and customer adoption, and these investments will help create even more predictability in our business model.”
Tse says the downtick that followed these results was unwarranted.
“We had the opportunity to meet investors with Open Text Management, Mark J. Barrenechea (CEO and CTO) and Madhu Ranganathan (CFO) today,” he notes. “Having covered this names for 18 years, there’s nothing we heard or saw that would give us pause when it comes to our investment thesis. The reality is that we weren’t surprised with the post quarter volatility – we can’t tell you how many times we’ve seen that during our years covering this name and as always, we’re always assessing whether there’s a structural change to warrant a change in view. That assessment following the most recent fiscal Q3 results and our day with management suggest the recent pullback has been another overreaction and we view this pullback as another opportunity in this name where pullbacks have provided outsized returns. We think that’s the case again. The quick takes from the day were: (1) there’s no shortage of capacity or pipeline of acquisition targets; (2) there continues to be meaningful optionality from organic growth, particularly as it relates to Cloud (Managed Services); and (3) OTEX is on course with its operating targets this year – based on our estimates, we expect a strong sequential pickup in fiscal Q4.
In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $50.00 on Open Text, implying a return of 46 per cent at the time of publication.
Tse thinks Open Text will generate EBITDA of $997-million on revenue of $2.81-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $1.1-billion on a topline of $3.07-billion the following year.