OpenText is still a buy, Beacon Securities says

Beacon Securities analyst Gabriel Leung is taking a more conservative approach to Canadian tech company OpenText (OpenText Stock Quote, Chart, News TSX, NASDAQ:OTEX), which will be reporting its quarterly results later this month.

In a client update Friday, Leung maintained his “Buy” rating but trimmed his target price from $50.00 to $49.00 on the basis of the company’s seasonally light fiscal Q1.

OpenText keeps buy rating but has target trimmed by analyst Gabriel Leung

Waterloo, Ontario-based Enterprise Information Management company OpenText will be reporting its fiscal first quarter on October 31 after market close, a seasonally slower quarter for the company, which Leung thinks will translate into a sharp quarter-over-quarter decline in license revenues, which over the past five years have declined anywhere in the range of 30 to 47 per cent quarter-over-quarter, the analyst points out.

Leung is now calling for a 40 per cent q/q decline in license revenues to $72 million, with his total revenue and EBITDA for the Q1 now standing at $706 million and $252 million, respectively.

“Given ongoing macro economic uncertainties (which we think, as a data point, may have impacted certain parts of IBM’s results earlier this week), we feel it is prudent to take a more conservative stance on license revenues growth for Q1,” said Leung.

Certainly a lucrative stock to own over the past decade, OTEX started off 2019 very well, climbing 32 per cent between January 1 and July 26. The company was buoyed by news this summer of a number of key contract wins, including Google’s choosing of OpenText as its preferred partner for enterprise information management.

But the stock started dropping after OTEX’s fourth-quarter earnings report on August 1, which saw revenues decline one per cent to $747.2 million, lower than the consensus estimate. Adjusted earnings came in flat, as well, at $0.72 per share while adjusted EBITDA of $283.9 million was up just 0.8 per cent versus a year earlier.

“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,” said Mark J. Barrenechea, OpenText CEO and CTO in a press release. “Our expanded partnerships with Google and SAP and recently announced next generation product line, OpenText Cloud Edition, will help revolutionize the way businesses capture, govern, exchange and use information in the cloud.”

Leung said OTEX is still looking good going into 2020, however.

“Despite the downward revision to our fiscal Q1 estimates, we remain positive on the OpenText story given its strong FCF generation and lower leverage ratios (i.e., 1.5x net debt/EBITDA), which provides it with ample room to take on additional debt of potential acquisitions, and its ongoing strategy of accelerate its cloud revenue growth, which could ultimately help to drive a multiple expansion down the road,” says Leung.

The analyst is calling for fiscal 2020 revenue and EBITDA of $2.956 billion and $1.133 billion, respectively. OpenText’s dividend yield currently sits at 1.7 per cent.

Leung’s $49.00 target price represented a projected 12-month return of 20 per cent at the time of publication. (All figures in US dollars.)