OpenText will weather the storm, says Beacon Securities

OpenText (OpenText Stock Quote, Chart, News NASDAQ:OTEX) has received a price cut from Beacon Securities analyst Gabriel Leung, who reported on the company’s latest quarterly results in and update to clients on Friday.

Waterloo, Ontario’s OpenText, an Enterprise Information Management (EIM) solutions company, released its third quarter ended March 31 fiscal 2020 financials on Thursday, featuring revenue of $814.7 million, up from $719.1 million a year earlier, and adjusted EBITDA of $259.5 million, down 0.9 per cent year-over-year. (All figures in US dollars.)

CEO Mark J. Barrenechea said the solid results are a reflection of the company’s resilient business model and the “mission-critical” nature of its product portfolio in the face of the current economic downturn.

“In constant currency, total revenues in the quarter grew 14.1 per cent year-over-year to $820.4 million, Cloud Services and Subscriptions revenues, now our largest business revenue stream, grew a record 42.8 per cent year-over-year to $340.6 million and our Annual Recurring Revenues which represent a record 81 per cent of total revenues, grew 21.3 per cent year-over-year to $666.3 million,” Barrenechea wrote in the quarterly press release.

The company reported a $600-million draw-down from its Revolving Credit Facility in order to increase its cash position and give it financial flexibility during the likely trying times ahead. At the same time, the company raised $1.8 billion in February to refinance existing debt.

Also announced was a restructuring plan which will see OpenText adopt a hybrid return-to-workplace strategy, resulting in a 50-per-cent reduction in office real estate and a five per cent workforce reduction. Altogether, the company expects costs to come in at between $80 and $100 million and by fiscal 2021 result in annual savings of between $65 and $75 million.

For his part, Leung noted the quarter’s numbers were better than the consensus, with new acquisition Carbonite’s contribution being better than expected. OTEX’s revenue, adjusted EBITDA and adjusted EPS of $815 million, $260 million (31.8 per cent margins) and $0.61 per share, respectively, were beats of the Street’s $797 million, $257 million (32.2 per cent margins) and $0.59 per share, respectively. Data protection and endpoint security pickup Carbonite contributed $110 million in revenue, which at a half-year run-rate of $220 million was higher than OTEX management’s H2 fiscal 2020 revenue guidance for Carbonite of between $195 and $200 million.

“Ultimately, we believe better-than-expected Carbonite results along with consensus estimates dropping over the past few days (i.e., to factor the COVID-19 impact) helped the company to overachieve in the quarter relative to consensus,” Leung wrote in his quarterly report.

“While the company is clearly taking a cautious near-term outlook as evidenced by its fiscal Q4 guidance, we do take comfort in the company’s large recurring revenue base, which now represents ~80 per cent of revenues and proactive cost cutting measures, which should help to preserve margins during this difficult period,” he said.

Calling for fiscal 2020 revenue and EBITDA of $3,099 million and $1,092 million, respectively, Leung has lowered his price target from $54.00 to $45.00 while keeping his “Buy” rating. At press time, the new target represented a projected 12-month return of 19 per cent.