OpenText price target cut at National Bank

Following third quarter results he describes as “in-line”, National Bank Financial analyst Richard Tse has cut his price target on OpenText (OpenText Stock Quote, Chart, News, Analysts, Financials NASDAQ:OTEX).

On May 2, OTEX reported its Q3, 2024 results. The company posted Adjusted EBITDA of $464-million on revenue of $1.44-billion a topline that was up 16.3% over the same period a year prior.

“OpenText delivered strong financial performance in Q3 with revenues of $1.45 billion, or 16% year-over-year growth, reflecting customer demand for information management and new AI capabilities,” said CEO Mark J. Barrenechea. “OpenText sits at the center of connected ecosystems, the internet of clouds, and we play a trusted role as our customers adopt cloud, security and AI. OpenText is focused on growth, profitability and the future of Information Management. The divestiture of our AMC/Mainframe business is now complete, and we are using the net proceeds to repay $2 billion of debt. With our increased capital flexibility, we are pleased to announce a new capital allocation program, continuance of our dividend program, and a new $250 million share buyback.”

Tse says the quarter was about what he expected but warns that the the company’s updated outlook could be troublesome.

“With respect to some notable FQ3 KPIs, Adj. EBITDA margin came in at 32.0% (+271 bps Y/Y) with Cloud bookings of $165 mln (+52.6% Y/Y) – with Management implying a meaningful contribution from Aviator, the Company’s scaling AI product line. Importantly, FQ3 also marked the 13th consecutive quarter of positive organic Cloud and ARR growth (in CC). With respect to the divestiture of AMC, OpenText announced on May 1, 2024 the transaction had closed, ahead of what had widely been expected to be a June close,” he wrote. “Management noted it expects $2 bln of the proceeds to reduce debt, bringing OpenText’s leverage ratio (Net Debt / TTM EBITDA) below 3.0x from 3.8x. We expect that delevering will offer financial flexibility to resume acquisitions, a potential increase in the dividend and share buybacks where the Company announced plans to repurchase $250 mln of common shares in a Share Repurchase Plan/NCIB. But while the above are positive – we think the updated outlook, which reflects the AMC divestiture, also suggests the Company’s former outlook after adjusting for the divestiture is lower by approximately $50 – $80 mln in A-EBITDA based on our analysis. That would suggest that either the former outlook was overly robust, or something has eroded in the core business. In our view, this shortfall will likely cause a negative short-term pullback in the name.”

In a research update to clients May 2, Tse maintained his “Outperform” rating but lowered his price target on OTEX from (US) $60.00 to $50.00, implying a return of 43.8% at the time of publication.

Tse thinks OTEX will post Adjusted EBITDA of $1.990-billion on revenue of $5.82-billion in fiscal 2024. He expects those numbers will decline to Adjusted EBITDA of $1.76-billion on a topline of $5.39-billion in fiscal 2025.

“Bottom line, we see a short-term pullback as offering an attractive entry point,” the analyst concluded. “At 7.4x EV / EBITDA (F24E – multiple includes cash proceeds from divestiture) with building option value from organic growth and the resumption of M&A going into FY25 (Jun), we think a pullback will provide a compelling valuation risk-to-reward profile in OTEX.”