OTEX Stock

Analyst Richard Tse of National Bank Financial raised his target price on OpenText (OpenText Stock Quote, Chart, News, Analysts, Financials NASDAQ:OTEX) after the tech company’s latest quarter. In an update to clients on February 4, Tse said OpenText is showing continued success with its M&A, especially with newly integrated Carbonite, which drove OTEX’s Cloud Services revenue to new heights. Founded in 1991, OpenText is Canada’s largest enterprise software company with about 12,000 employees worldwide and about 100,000 global customers. The company competes in the Enterprise Information Management space, which provides applications to help a business’ employees, teams and projects collaborate, share, store and retrieve information. The stock has been a strong performer for years but it finished 2020 up just three per cent, which compares with a return of 52 per cent from the S&P/TSX Capped Information Technology Index for 2020. But OTEX popped this past Friday with the release on Thursday after the bell of its fiscal second quarter 2021 results (for the period ended December 31, 2020). There, OpenText reported Q2 revenues of $855.6 million, up 10.9 per cent year-over-year, and adjusted EBITDA of $360.8 million, up 13.8 per cent. (All figures in US dollars.) In his comments, CEO and CTO Mark J. Barrenechea said OpenText is seeing increasing demand for its cloud offerings as its customers work through this period of digital transformation. “OpenText delivered another quarter of strong growth, reflecting the power of our business model and exceptional performance in all of our key metrics,” said Barrenechea in a press release. “Total revenues grew to $855.6 million, up 10.9 per cent year-over-year, and Cloud Services and Subscriptions revenues grew to $350.5 million, up 41.1 per cent year-over-year. Annual Recurring Revenues (ARR) grew to a record $684.9 million, up 21.5 per cent year-over-year, now representing 80 per cent of total revenues,” he said. OpenText hit $274.8 million in free cash flow compared to $187.6 million a year earlier and had non-GAAP-based diluted EPS of $0.95 per share compared to $0.84 per share for the previous year period. Overall, Tse rated the quarterly numbers as strong, with top and bottom lines coming in ahead of his and the Street’s estimates. On revenue, OTEX’s $856 million was above Tse’s $814 million and the consensus $815 million while adjusted EPS of $0.95 per share was ahead of the analyst’s $0.90 per share estimate and the Street’s $0.85 per share. “With respect to the results, they reinforced what we believe is an undervalued acquisition growth story that continues to have the Company posting record results from a growing base of recurring revenue (80 per cent of revenue),” Tse said. “More importantly, that recurring revenue base continues to tap expanding operating leverage to drive profitability and cash flow. For FQ2, that resulted in $360.8 million in EBITDA for a margin of 42.2 per cent and $274.8 million in FCF (+46.5 per cent year-over-year),” he said. Tse said while the company’s Cloud Services segment saw revenue climb in large part due to another strong quarter from security business Carbonite, acquired in late 2019 for $1.45 billion, OTEX’s License segment had a very strong quarter at $107.3 million in revenue compared to the analyst’s forecast at $76.0 million. In terms of organic growth, Tse estimated the overall number to be negative four per cent year-over-year but growth of one per cent from Cloud Services, which together with Customer Support makes up 80 per cent of the company’s total revenue, up from 73 per cent a year earlier. OpenText ended the quarter with $1.5 billion in cash and a 1.6x net leverage ratio, which the company said puts it in a good position to pursue its growth strategy. Among its customer wins over the Q2, OTEX pointed to Auto Club Group, Autoriteit Persoonsgegevens, the City of San Diego, the UK Department for Work and Pensions, Evonik Industries AG, Froneri, Heraeus, McCain Foods, MedPro Group, Nestlé, Norwegian Labour and Welfare Administration, Region Skane, Revo Health and SaskPower. Going forward, Tse thinks the company will hit fiscal 2021 revenue of $3,291.4 million compared to $3,109.7 million for fiscal 2020 and 2021 adjusted EBITDA of $1,266.3 million compared to $1,148.2 million for fiscal 2020. With the update, Tse maintained his “Outperform” rating for OTEX with the new target of $60.00 (previously $55.00), which at the time of publication represented a projected one-year return of 27.8 per cent. “While we don’t view OTEX as a name that’s in the cross-hairs of growth investors over the past year, it nonetheless continues to be a Company that’s driving meaningful value through a proven acquisition growth model. And while organic growth remains elusive, we continue to believe the continued push into the Cloud adds potential option value,” Tse wrote. “Bottom line, our investment thesis is unchanged - we continue to like OTEX based on a continued growth outlook and option on organic growth that’s not fully priced into the stock,” he said.

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