Enterprise Information Management company OpenText (OpenText Stock Quote, Chart, News NASDAQ:OTEX) is the type of resilient name you ought to own during and after the COVID-19 crisis, says National Bank Financial analyst Richard Tse, who reviewed OTEX’s latest quarterly results in an update to clients last Thursday.
Tse said it all comes down to having the software businesses consider an essential part of their operations, and OpenText has it.
“If you’ve been following our research, you’ll know we’ve been pretty consistent in the names we think investors should own since this health crisis began – in general, those have been names with strong balance sheets (cash), recurring revenue (cash flow) and growth (where possible) despite what may be premium valuations,” Tse wrote in his report.
“With that in mind, one of the names we’ve pointed to and most recently in our CQ1 preview has been OpenText given its resilient recurring enterprise software revenue,” Tse said.
OpenText, the largest enterprise software company in Canada, with 12,000 employees and 100,000 global customers, released its third quarter ended March 31 fiscal 2020 results last Thursday. The company posted adjusted EBITDA of $259.5 million, down 0.9 per cent from a year earlier, on a top line of $814.7 million, up 13.3 per cent year-over-year. (All figures in US dollars.)
In his quarterly comments, CEO and CTO Mark J. Barrenechea said OpenText’s leadership position in Information Management has never been stronger.
As for the current health crisis, Barrenechea reported over 95 per cent of its workforce is now working from home.
“We have taken pre-emptive measures to manage expenses and introduced a COVID-19 restructuring plan that continues our operational rigour, while supporting key initiatives that drive our Total Growth strategy,” Barrenechea said.
Relatedly, OTEX announced a hybrid return-to-workplace strategy going forward that will entail a 50-per-cent reduction in its office space and five-per-cent cut in workforce.
Management estimates the restructuring will cost between $80 and $100 million, with eventual yearly savings (starting in 2021) of between $65 and $75 million.
On the quarterly numbers, OpenText beat Tse’s and the consensus estimates for top and bottom lines. OTEX’s $815 million in revenue was better than Tse’s $767 million and the consensus $788 million and its adjusted EPS of $0.61 per share was better than Tse’s $0.56 per share and the Street’s $0.57 per share.
Tse pointed to the company’s strengths in Cloud Services and Subscriptions, a segment which saw a year-over-year increase of 42.3 per cent to $339.5 million, while Licensing was down 17.9 per cent to $81.1 million. OpenText’s recent acquisition of Carbonite played a big role in the Cloud Services lift, contributing about $110 million.
Tse said while growth will be challenging in OTEX’s fiscal fourth quarter, the company’s got the right attributes to weather the storm.
“We continue to see relative value with some compelling defensive attributes. We see a growing base of recurring revenue through acquisitions, expanding operating leverage and optionality from organic growth,” Tse wrote.
With the update, Tse has retained his “Outperform” rating and $45.00 target, which at press time represented a projected return of 20 per cent.
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