Tribe Technologies
Trending >

Keep buying OpenText, says Brian Madden

It’s far from a sexy growth stock but that may be to its advantage in the current climate, says portfolio manager Brian Madden about OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials TSX:OTEX). 

Canada’s largest enterprise software company, OpenText has seen its share price tumble over the past half year, bringing the stock to pretty much where it was as far back as mid-2019. The pullback may seem odd, seeing as business has been trucking along fine for OTEX, with management even raising its guidance recently after posting record revenues in its latest quarter. 

But the general market distaste for tech companies over the past half year has been a factor, says Madden, chief investment officer at First Avenue Investment Counsel, who gave a vote of confidence to OpenText on BNN Bloomberg on Monday.

“We added to our position in OpenText a week or ten days ago,” Madden said. “It has pulled back [but] the NASDAQ which is a very tech-heavy US index is down about ten per cent year to date and it had been down closer to 20 per cent.”

“A lot of the software companies got dragged down along with that melee in the tech universe, although not all tech companies are created equal,” he said.

Headquartered in Waterloo, Ontario, and founded in 1991, OpenText deals in Enterprise Information Management (EIM), with applications for tasks like sharing and storing data and documents. Worldwide, OTEX has some of the biggest companies as clients and over 100,000 global customers and a workforce of about 12,000.

“Not to disparage the company — we like it and that’s why we own it — but I would characterize this as being let’s call it boring tech,” said Madden. “But boring is beautiful in markets like these.”

“It creates and globally licenses mission critical enterprise content management and collaboration software and sells to large and medium-sized businesses around the world,” he said. 

For a look under the hood, OpenText had fiscal 2021 (ended June 30, 2021) revenues of $3.386 billion, up 8.9 per cent from the previous year. By segment, the topline broke down to $1.407 billion from Cloud Services and Subscriptions, up 21.6 per cent year-over-year and $1.334 billion from Customer Support, up 4.6 per cent year-over-year. Lesser contributions were from Licensing revenue at $384.7 million, down 18.1 per cent from 2020’s numbers, and Professional Service and Other revenue at $259.9 million, down 13.7 per cent. (All figures in US dollars except where noted otherwise.)

More recently, OpenText’s second quarter fiscal 2022, delivered in early February, showed Cloud and Subscriptions up 4.1 per cent year-over-year to $364.9 million, Customer support essentially flat at $334.9 million, Licensing up 2.0 per cent to $109.5 million and Professional Services up 6.6 per cent to $67.5 million. The Q2 also featured net income of $88.3 million or EPS of $0.32 per share, and both top and bottom lines were in-line with Street estimates. 

“We delivered another robust quarter of organic growth driven by demand for OpenText Cloud Editions, closed the Zix acquisition and we are raising our Fiscal 2022 target model to include cloud growth of up to ten per cent and total revenue growth of up to four per cent. The first half of Fiscal 2022 provides demonstrable progress towards our Fiscal 2024 Aspirations to include up to four per cent organic growth,” said Mark J. Barrenechea, OpenText CEO & CTO, in a press release.

For Madden, the pullback on OTEX may also be a result of tough comps where businesses worldwide have had to up their game on the information management side over the pandemic.

“It’s a low to mid single-digit organic growth model and it’s not really subject to technological obsolescence. It’s right now facing some difficult comparisons as the lap the work-from-home bonanza that landed in their laps last year and the year before,” Madden said. “And so that’s maybe why the enthusiasm has waned for the shares.”

“But we see this [company] as being a compounder who’s bolstering that organic growth rate with serial acquisitions. They’ve done I think 80 of them over the last decade or so, large, medium and small, and putting about $6 billion of capital at work,” he said.

“It all rolls up to about a 13 per cent compound growth rate in earnings with the stock trading at about 12x or 13x earnings. We think that’s a good combination of growth and value, which is why we added to our position quite recently,” Madden said.

Its largest recent acquisition, OpenText in December bought Zix, a SaaS-based email encryption, threat protection and compliance cloud platform for the SMB sector for a total purchase price of $860 million which was funded with OpenText’s existing cash on hand. 

We Hate Paywalls Too!

At Cantech Letter we prize independent journalism like you do. And we don't care for paywalls and popups and all that noise That's why we need your support. If you value getting your daily information from the experts, won't you help us? No donation is too small.

Make a one-time or recurring donation

About The Author /

insta twitter facebook


Leave a Reply