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

Key Updates:

• Growth From Cloud Services and Subscriptions segment: The company derives ~41% of the revenue from Cloud services and subscriptions segment, and due to the growing traction for the cloud-based products, revenue grew to USD 1,123.4 million in 9MFY22, increased from USD 1,047.2 million in pcp. Moreover, the company offers strong client services and has resulted in retention of clients, which is a key positive. Considering the current trend of mass digitization, we expect the above momentum to continue in the coming years.

• Investment in Product Innovations: In order to stay afloat within the changing dynamics, the company offers innovative products to its clients. The group has constantly nurtured its products in order to provide best experience to its customers. OTEX has gained a leading market share within logistics and content management categories. Notably, OTEX invested ~USD 426 million in innovations in 9MFY22, which is significantly higher than USD 274 million in FY17. This is expected to lead to better propositions from its clients.

Source: Company Report

• Ample liquidity: In 9MFY22, the company reported a higher cash flow from operations of USD 729.8 million, which is significantly higher than USD 579.9 million in pcp. This is expected to support the company’s overall liquidity. Moreover, the company do not have any major debt maturity before CY2025, which indicates prudent capital management also.

Source: Company Reports

Q3FY22 Financial Highlights: (in thousands of U.S. dollars)

  Q3FY22 Income Statement Highlights (Source: Company Report)

• OTEX announced Q3FY22 result, wherein the group reported total revenues of USD 882.2 million, surged from USD 832.9 million in pcp. The growth was aided by strong traction from Cloud services and subscriptions segment.
• Gross profit stood higher at USD 608.0 million, compared to USD 571.6 million in Q3FY21, thanks to the higher income, partially offset by an increase in the cost of revenues
• The quarter was marked by a higher Research & development cost along with an increase in the sales and marketing expense. Total expenses came higher at USD 476.4 million, as compared to USD 419.2 million in pcp. Income from operations came lower at USD 131.6 million, v/s USD 152.3 million in pcp, due to higher input costs as mentioned above.

• The company reported a net income of USD 74.7 million in Q3 FY22, lower than the net income of USD 91.5 million in pcp. This was due to a considerably lower income before income taxes along with a higher provision for income taxes.

Risks associated with the Investment:

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:

More than 80% of the company’s revenue is recurring in nature, which is a key positive as it leads to higher revenue stability. The company’s annual recurring revenue grew from USD 1,337 million in FY17 to USD 2,742 million in FY21, which is encouraging. 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 CGI Inc, Box Inc etc. Considering the above-mentioned facts, we give a ‘Buy’ rating on the stock of OTEX at the current market price of CAD 50.98 at 9:47 AM Toronto Time on May 05, 2022.

One-Year Technical Price Chart (as on May 05, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Technical Analysis Summary

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.