OpenText wins target raise from Eight Capital

Eight Capital analyst Adhir Kadve likes the look of Canadian enterprise information management software company OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials NASDAQ:OTEX), reiterating a “Buy” rating in a Friday note to clients while raising his 12-month target from $45 to $50 per share. Kadve said the early results look good on OTEX’s integration efforts with last year’s big acquisition MicroFocus, while the company’s latest quarterly numbers were a beat of estimates.

OpenText released its fiscal third quarter 2023 financials on Thursday, coming in with revenue up 41 per cent year-over-year to $1.24 billion, beating the consensus estimate at $1.18 billion as well as Kadve’s call at $1.17 billion. Annual recurring revenue at $1.01 billion made up 81 per cent of the Q3 topline. (All figures in US dollars.)

On adjusted EBITDA, OTEX hit $365 million for a 29 per cent margin, also coming in ahead of the Street’s estimate at $306 million and Kadve’s forecast at $300 million.

OpenText’s share price dropped sharply last year after the company announced the major acquisition of MicroFocus, with critics seemingly unhappy, among others, with the latter’s recent lack of revenue momentum. 

But so far so good, according to Kadve, who noted MicroFocus’ contribution to OTEX’s Q3 was $374 million in revenue, which was ahead of management’s previous expectations of $310-$325 million. Management also said it was well ahead of schedule on its planned operational integration.

“We continue to believe that, OpenText’s track record of successful acquisitions should not be ignored, which gives us confidence in the company’s ability to successfully integrate Micro Focus, and this quarter only serves as an early validation of that thesis. As the company continues to execute, we see shares returning to historical levels (11x adj. EBITDA),” Kadve said.

The analyst adjusted his estimates on OpenText and is now calling for full 2023 revenue and EBITDA of $4,499 million and $1,489 million, respectively, and full 2024 revenue and EBITDA of $6,125 million and $2,330 million, respectively.

“A large part of the increase in outlook stems from the strength coming from Micro Focus and key measures taken by management to improve renewal rates at the asset,” he said.

“To that end, management noted that they will continue to make steady progress towards improving renewal rates at Micro Focus from the low 80 per cent at acquisition to mid-80 per cent by the end of F23 and reiterated their goal to reach OpenText level renewals at Micro Focus (i.e.mid-90 per cent). The pipeline of new deals from MF was strong with Business Network and Content Services called out as areas seeing particular strength,” Kadve said.

At the time of publication, Kadve’s new $50 target represented a projected one-year return of 37 per cent.