OpenText gets price target raise at Beacon Securities

Following the company’s fourth quarter results, Beacon Securities analyst Gabriel Leung has raised its target price on OpenText (OpenText Stock Quote, News, Chart Nasdaq:OTEX).

On Thursday, OTEX reported its fourth quarter and fiscal 2019 results. In the fourth quarter, the company posted Adjusted EBITDA of (USD) $283.9-million on revenue of $747.2-million, a topline that was down 0.9 per cent from the same period last year.

“Fiscal 2019 was a momentous year for Open Text as we delivered in constant currency $2.92-billion in total revenues, a record $918.6-million in cloud revenues, up 10.8 per cent year-over-year growth and $2.19-billion in annual recurring revenues, up 6.2 per cent year-over-year growth, representing 75 per cent of total revenues,” CEO Mark J. Barrenechea said. “We enter fiscal 2020 with the strongest EIM offering in the industry, empowering customers to unlock their information advantage and win in industry 4.0. Our expanded partnerships with Google and SAP, and recently announced next-generation product line, Open Text Cloud Edition, will help revolutionize the way businesses capture, govern, exchange and use information in the cloud.”

Leung says that while OTEX missed his revenue projection slightly, he doesn’t think it means much.

“In our opinion, the revenue shortfall relative to consensus driven primarily on the license line, which came in at $120M versus our $128M and was down 14% y/y or down 12% in constant currency,” the analyst explains. “We believe the license shortfall was driven by tough q/q comparables (recall the company beat fiscal Q3 license expectations by a meaningful mark), forex headwinds, along with delayed purchase decisions due to macro challenges.

The analyst adds that he is impressed by OpenText’s ability to achieve EBITDA margins of 38 per cent, which he thinks is attributable to cost management and by the company’s large recurring revenue base.

OpenText stock still has double-digit upside, analyst says

In a research update to clients today, Leung maintained his “Buy” rating, but raised his one-year price target on OTEX from (USD) $46.00 to $50.00, implying a return of 18 per cent at the time of publication.

Leung thinks the company will post EBITDA of $1.1-billion on revenue of $2.87-billion in fiscal 2019. He expects those numbers will improve to EBITDA of $1.16-billion on a topline of $2.99-billion the following year.

“While we believe the market could be disappointed by the headline revenue miss, we believe it was partially timing-related (i.e. fiscal Q3 stealing from Q4) and we also continue to remind investors that the value of the company will ultimately be driven by its cloud revenue growth, which continues unabated, and the corresponding operating leverage,” the analyst adds.