Open Text Corporation

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

Key Updates:

• Healthy Balance sheet: In recent quarters, the group reported a constant decline in its total debt, which signifies prudent capital management. In Q4FY21, the company reported total debt of USD 3,589 million, which is the lowest in the last five quarters. Moreover, the debt to equity ratio improved to 0.88 in Q4FY21, from 1.05 in Q4FY20.

• Launch of a new product: Recently, the company announced two new MDR offerings, which are targeted for small and medium-sized businesses (SMBs) and managed service providers (MSPs) and are designed to meet their unique business requirements. Notably, the company reported the addition of Webroot MDR powered by Blackpoint Cyber and OpenText MDR Service to the OpenText Security & Protection Cloud to its offerings. The above application is a threat intelligence platform, which would enhance the cyber security of its networks, devices, and data of the end-users. Growing traction for internet security services is likely benefit the company’s prospects in the coming days.

• Balance revenue mix: The company has a diversified revenue mix and derived its revenue from Cloud Services, Customer Support, License Professional Service & Other etc. Notably, the performance of the company is less dependent on a particular segment, and hence, provides a balanced risk profile.

Source: Company Presentation

• Result declaration: The group would disclose its Q1FY22 result on November 4, 2021.
• Decent growth in cash flows: The company reported a growth in its cash flows, which is a key positive as it enhances liquidity. Notably, cash from operations grew to USD 296.189 million in FY21, as compared to USD 280.250 million in FY20.

FY21 Financial Highlights:

• OTEX announced its quarterly result, wherein the company posted total revenues of USD 3,386.115 million, higher than USD 3,109.736 million in FY20. The increase was driven by 12.7% y-o-y growth in average recurring revenues (ARR).
• Gross profit increased to USD 2,351.649 million v/s USD 2,105.961  million in FY20, thanks to the higher income, partially offset by slightly higher cost of revenues (USD 1,034.466  million v/s USD 1,003.775  million in pcp).
• The corporation reported a net income of USD 310.864 million, as compared to a net income of USD 234.368 million in pcp.

FY21 Income Statement Highlights (Source: Company Report)

Risks: 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.

Valuation Methodology (Illustrative): Price to CF-based 

Stock Recommendation:

The company has ample liquidity of USD 2.4 Billion, which includes USD 1.6 billion of cash, and is sufficient to meet its capital requirements. Moreover, the company does not have any debt maturity before FY25, which is a key positive.

We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like j2 Global Inc, Box Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of OTEX at the last traded price of CAD 62.54 on October 25, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary:

One-Year Technical Price Chart (as on October 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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