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:

• New Acquisition update: Recently, the company complete the acquisition of Zix Corporation, which is a leader in SaaS-based email encryption, threat protection and compliance cloud solutions for Small and Medium-sized Businesses (SBMs). This is expected to enhance the company’s presence across the SBMs segment and would lead to organic growth in the coming quarters.
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• Strong profitability margins: The group commands higher margins than the industry median, which indicates higher operational efficiencies. Notably, in Q1FY22, OTEX reported its EBITDA margin of 37.2%, versus an industry median of 7.9%. Moreover, the company posted operating margin and net margin of 21.9% and 15.9%, respectively, as compared to the negative industry median of 0.8% and 6.4%, respectively.

• Recurring revenue provides income stability: During Q1FY22, the company reported its total annual recurring revenues of USD 691.8 million, which is 3.2% higher than pcp. This represents ~83% of the total revenue, which is in-line with the company’s FY22 target. A higher repetitive business denotes strong client satisfaction and provides income stability, which is a key positive.

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. 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.

Q1FY22 Financial Highlights:

• OTEX announced its quarterly results, wherein the group reported total revenues of USD 832.308 million, improved from USD 804.013 million in pcp. The growth was aided by improved income from all its operating segments.

• Gross profit stood higher at 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) along with higher sales and marketing expense (USD 146.240 million v/s USD 132.400 million in pcp). Income from operations came slightly higher at USD 182.689 million, v/s USD 182.356 million in pcp.
• The company reported a net income of USD 131.966 million, climbed from USD 103.406 million in pcp.

Q1FY22 Income Statement Highlights (Source: Company Report)

   Valuation Methodology (Illustrative): Price to Cash Flow

   Analysis By Kaline Group

Stock Recommendation:

For FY22, the company expects its cloud revenue would likely to grow by 3% to 4% over FY21, while Average Recurring Revenue is likely to grow by low-single digit on y-o-y basis. The company’s adjusted EBITDA margin is expected to be within the range of 37% to 38%, which is in-line with the FY21. 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 Box Inc, Oracle Corp, etc. Considering the above-mentioned facts, we give a ‘Buy’ rating on the stock at the last closing price of CAD 59.00 on January 13, 2022.

*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 January 13, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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