Now that they’ve got a major acquisition wrapped up, it’s full steam ahead for OpenText (TSX:OTEX), says Beacon Securities analyst Gabriel Leung, who reviewed the company’s recent second quarter results in an update to clients on January 31.
The analyst maintained his “Buy” rating and raised his price target from $53.00 to $54.00 per share.
Waterloo, Ontario, EIM name OpenText reported its fiscal second quarter 2020 on January 30, showing record Cloud and annual recurring revenue in a quarter which featured only a few days of results from recent purchase Carbonite, a Boston-based software security company bought for $1.42 billion. (All figures in US dollars.)
On the acquisition, OpenText CFO Madhu Ranganathan said the deal was financed by the company’s internal cash and existing revolver, while the target for full integration will be the end of fiscal 2021.
On the quarter, Ranganathan said, “OpenText demonstrated solid operational performance during the second quarter delivering to our Total Growth Strategy. We put our capital to work while maintaining a strong balance sheet with a net leverage ratio of 2.3x and generated solid operating cash flows of $207.2 million, supported by equally strong A-EBITDA results.”
For the Q2, OTEX generated revenue, adjusted EBITDA and adjusted EPS of $772 million, $317 million (41.1 per cent margins) and $0.84 per share, respectively. Those numbers came in ahead of Leung’s estimates, which called for $745 million, $303 million (40.8 per cent margins) and $0.79 per share, respectively, although the analyst pointed out that he did not factor in any Carbonite contribution to his forecasts.
Leung noted that total revenues rose by 4.9 per cent year-over-year, with Cloud segment revenues growing by 13.3 per cent year-over-year to $248 million. Free cash flow was $187 million compared to $180 million a year ago and the company ended the quarter with $675 million in cash and total debt of $3.5 billion for a net debt to EBITDA (fiscal 2020) of 2.5x.
With the quarterly results, OTEX management also announced a restructuring plan which will cost between $26 and $34 million, one that will impact its global workforce and consolidate some real estate facilities for streamlining operations while integrating Carbonite. The plan is anticipated to be completed by the end of fiscal 2021 and bring about cost savings between $37 and $41 million.
On his target increase, Leung wrote, “We have adjusted our estimates to reflect the inclusion of Carbonite. The net impact is our target price increases slightly to $54.00, which is based on 13x FY21e EV/EBITDA (was previously 14x FY20e EV/EBITDA).”
“While the integration of Carbonite could have a slightly dilutive impact to margins over the near-term (although positive impact to adjusted EPS), ultimately, we believe the transaction will be a good one as it bulks up the company’s recurring revenue base and partnership ecosystem and adds another growth lever,” Leung wrote.
For the full fiscal 2020, the analyst thinks OTEX will generate revenue of $3,168 million, EBITDA of $1,155 million and adjusted EPS of $2.91 per share.
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