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:

• Robust profitability margins: The company commands higher margins than the industry median, which indicates improved operational efficiencies. Notably, during Q1FY22, the group reported its EBITDA margin of 37.2%, versus an industry median of 7.7%. Additionally, the company reported an operating margin and net margin of 21.9% and 15.9%, respectively, as compared to the negative industry median of 0.6% and 6.2%, respectively.

• Constant reduction in total debt: The company has successfully reduced its total debt, which is a key positive and indicates higher financial flexibility. Notably, during the last six quarters, the company reported the lowest total debt of USD 3,588 million.                     

• Recurring revenue provides income stability: In Q1FY21, the group reported that 83% of the total revenues are repetitive in nature. Notably, during the trailing twelve months (TTM), its Average Recurring Revenue (ARR) stood higher at ~81%. The above indicates improved customer satisfaction and also establish the strength of the OTEX business model, delivering strong operational performance. Moreover, the company’s has innovative offerings like OpenText Cloud, which has gained traction in the recent past due to its customized features like modern power experiences, digitizing supply chains, strengthening cyber resilience etc. We expect the above to continue in the coming days, which would further result in value-addition for the company.   

Q1FY22 Financial Highlights:

• In the first quarter, the group reported total revenues of USD 832.308 million, up 3.5% on y-o-y basis. The increase was driven by higher income from Cloud services & subscriptions and Customer support segments.

• Gross profit surged to USD 574.185 million from USD 555.088 million in pcp, thanks to the higher income, partially offset by an increase in the cost of revenues (USD 258.123 million v/s USD 248.925 million in pcp).

• The quarter was marked by higher Research & development costs (USD 100.165 million v/s USD 93.903 million in pcp) coupled with a surge in sales and marketing expense (USD 146.240 million v/s USD 132.400 million in pcp). Income from operations grew marginally to USD 182.689 million, from USD 182.356 million in pcp.
• OTEX posted a net income of USD 131.966 million, climbed from USD 103.406 million in pcp.

Q1FY22 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 Cash Flow

Stock Recommendation:

At the end of Q1FY22, the company reported its available liquidity of USD 2.5 billion, which includes cash and cash equivalent of USD 1.735 billion. The above is sufficient to meet its working capital and capital expenditures. Moreover, the company do not have any major debt maturity before 2025, which is a key positive. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Oracle Corp, etc. Considering the above-mentioned facts, we give a ‘Buy’ rating on the stock at the last closing price of CAD 60.26 on December 21, 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 December 21, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.