We’re waiting for OpenText’s next big splurge, this portfolio manager said

Investors looking for that rare breed of stock that combines growth with defensive-minded attributes should be thinking about Canadian tech stock OpenText (OpenText Stock Quote, Chart, News, Analysts, Financials TSX:OTEX). So says portfolio manager Darren Sissons who thinks this growth-by-acquisition story can also be a great “get it and forget it” name to own.

Sissons, vice president and partner at Campbell Lee & Ross, says there’s potential upside to the name once OpenText puts its M&A game into full swing.

“We do have some OpenText for our system,” said Sissons, who spoke to BNN Bloomberg on Monday.

“What I would say is that relative to some of the other Canadian names it probably has been the laggard. But it has an attractive dividend, and I think what we’re really waiting for is the next acquisition,” Sissons said.

Waterloo-based OpenText, an enterprise software company in the information management space, recently made it back to even with its pre-pandemic highs. The stock was at $63 in February 2020 before plunging to a low of $45 by late March but has more recently climbed above the $64 mark. 

And with a small but stable dividend currently sporting a 1.5 per cent yield, the stock has attributes that would please investors of a more defensive stripe.

“I think it’s a fine company and it’s probably good for people who are in the slow ‘Get Rich’ camp where they don’t want to trade a lot. They just want to buy a good quality name and just hold for longer periods of time, and it will gradually increase in value,” Sissons said. “That’s the kind of stock we have with OpenText.”

“So, at these levels I would be more than fine to buy this. I think this is a fine name and I have no problem owning it here,” he said.

Ahead of the company’s fourth quarter fiscal 2021 results due in August, OTEX showed year-over-year revenue growth of 2.2 per cent for its fiscal Q3 at $832.9 million and adjusted EBITDA up 14.5 per cent to $297.1 million.

“OpenText delivered a robust quarter with organic revenue growth in Annual Recurring Revenues (ARR) and Cloud services and subscriptions, driving Total Growth and profitability across the organization,” said Mark J. Barrenechea, OpenText CEO and CTO, in a May 6 press release. 

“Annual Recurring Revenues grew to a record $691.8 million, up 4.4 per cent year-over-year, representing 83 per cent of total revenues. We are well positioned to grow and extend our leadership in Information Management as we focus on expanding our global sales initiatives and capturing market share,” Barrenechea said.

By segment, OTEX’s Cloud Services and Subscriptions revenue for the fiscal Q3 was up 4.8 per cent to $355.8 million while Customer Support was up 4.0 per cent to $335.9 million. Licensing came in at $76.3 million, down 5.9 per cent, and Professional Service and Other revenue was $64.9 million, down 9.0 per cent.

Over the quarter, OpenText scored key customer wins with names like AccessDx, Achievers, AIA Philam Life, Central 1, Impulse Dynamics, Johnson & Johnson, Maersk, New Balance Athletic Shoe, Inc., Royal Bank of Canada, State of Qatar Ministry of Interior, Uniper and Vitesco Technologies.

It’s in the acquisitions department that OTEX typically shines, but the company was sitting on $1.5 billion in cash at the end of its most recent quarter, and a full $2.2 billion in cash and committed liquidity. While OpenText has made smaller acquisitions in more recent years, its most recent big purchase was data protection, recovery and end-to-end security business Carbonite in 2019. 

“Our balance sheet and liquidity position remain strong with approximately $1.5 billion of cash after the IRS settlement payment and a 1.6x net leverage ratio, giving us the financial strength and flexibility to invest in future growth and deploy capital for the right acquisitions,” said OpenText EVP, CFO, Madhu Ranganathan in the fiscal third quarter press release.

Earlier this year, OpenText laid out a road map for the next few years, with management calling for long-term organic revenue growth of two to four per cent, annual recurring revenue of 85 per cent, adjusted EBITDA between 38 and 40 per cent and free cash flow of between $1.1 and $1.2 billion, with upside to those figures expected if and when a major acquisition comes along.

“We are committed to our M&A playbook, patient, disciplined, value-based buyers with return-based metrics and cash flows as key criteria,” said Barrenechea in the fiscal third quarter conference call on May 6. “We always take the long view, and I encourage you to look at our annual rate of revenues we have on-boarded via M&A over the last decade.”

“Our liquidity, cash flow and balance sheet remains strong, our M&A pipeline is healthy and we’ll deploy capital when the right opportunity arises. Our continued cash flow and cash flow generation only enhances our financial position. We are very confident in our unique total growth strategy of retain, grow and acquire. Let me turn to our financial outlook,” he said.

Last week, OTEX announced the release of OpenText Cloud Editions CE 21.3, which contains a new customer data platform, a new AI-powered compliance and risk mediating solution. OpenText said Cloud Editions is helping businesses navigate their digital transformation and growth strategies.