Open Text Corporation (TSX: OTEX) enables organizations to gain insight through market-leading information management solutions powered by OpenText Cloud Editions.

Key Updates:

• Revised FY22 Guidance: For FY22, the company revised its revenue guidance from 1% to 2% growth over FY21 to 3% to 4% y-o-y growth. The group expects its cloud segment to grow by 8% to 10% from FY21, up from earlier guidance of 3% to 4% growth. Adjusted EBITDA margin is expected in between 35.5% to 36.5%. The company has a long-term target of delivering free cash flows of USD 1.24 billion in FY24, from present USD 688 million in H1FY22.

              Source: Company Presentation

• Strong Profitability Margins: The group commands higher margins than the industry median, which indicates higher operational efficiencies. Notably, in Q2FY22, OTEX reported its EBITDA margin of 37.5%, versus an industry median of 7 %. Moreover, the company posted operating margin and net margin of 18.9% and 10.1%, respectively, as compared to the negative industry median of 1.4% and of 4.6%, respectively.

• New Customer Acquisition: The company has an impressive Customer Base and reported solid business wins during the second quarter of FY22. Notably, during the quarter, the company has added several Marquee clients from major industries, which illustrates company’s innovative product offerings along higher customer satisfaction. Moreover, the company has shown constant revenue growth during the last seven years, which is encouraging. Below is the snapshot of the recent customer wins.

Source: Company Presentation 

     Q2FY22 Financial Highlights: (USD in thousands)

Q2FY22 Income Statement Highlights (Source: Company Report)

• OTEX announced its quarterly results, wherein the group reported total revenues of USD 876.7 million in Q2FY22, improved from USD 855.6 million in pcp. The growth was aided by improved income from all its operating segments.

• Gross profit stood higher at USD 615.6 million, compared to USD 603.0 million in pcp, thanks to the higher income, partially offset by an increase in the cost of revenues (USD 261.1 million v/s USD 252.5 million in pcp).

• The quarter was marked by a higher Research & development cost along with an increase in the sales and marketing expense. Income from operations came lower at USD 192.8 million, v/s USD 234.4 million in pcp, due to higher input costs as mentioned above.
• The company reported a net income of USD 88.3 million, as compared to a net loss of USD 65.4 million in pcp. This was due to a considerably lower recovery of income taxes amounting USD 39.2 million v/s USD 267.5 million in pcp.

Risks associated with the Business:

The company’s product requires constant upgradation in order to stay afloat within the industry. Moreover, the arrival of new players would likely lead to price competition and loss of clients. Increase in R&D and other input costs would likely to put pressure on the company’s margins, which remains a key concern for the group.

 Valuation Methodology (Illustrative): EV to Sales based

Analysis By Kaline Group

Stock Recommendation:

The corporation is a leader in its own segment, while its total addressable market in which it operates is roughly USD 84 billion and is expected to grow by 8% annually in coming years. This offers ample scope for expansion, while the company is highly poised to take advantage of it. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Pegasystems Inc, Box Inc. Considering the above-mentioned facts, we give a ‘Buy’ rating on the stock at the last closing price of CAD 53.99 on April 04, 2022.

One-Year Technical Price Chart (as on April 04, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

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