OTEX Details

Acquisition of Carbonite to Drive Improve Performance: Open Text Corporation (TO: OTEX) enables organizations to gain insight through market leading information management solutions, on-premises or in the cloud. On 24^th December 2019, the company confirmed its acquisition of Carbonite Inc, for $23.00 per share, paid in cash. Carbonite operates in cloud-based business and has more than 300,000 small and medium business (SMB) customers, 16,000 MSPs, 7 million customers and more than 1,500 staffs.

Q2FY20 Operational Highlights: OTEX came up with its quarterly results, wherein the company posted total revenues of US$771.6 million, up 4.9% on y-o-y basis, aided by higher demand for OpenText products. Annual Recurring Revenues (ARR) stood at US$570.8 million, up 7.8% on y-o-y, contributing 73% of the total revenues. The growth was primarily due to 14% y-o-y growth in the cloud services and subscriptions revenues. The business reported decent operating cash flows of US$207.2 million driven by equally strong Adjusted EBITDA. During the quarter, the company successfully made the addition of key customers like PFU Limited, the Ministry of Justice Rhineland-Palatinate, thyssenkrupp AG, the Netherlands Ministry of Economic Affairs and Climate Policy, Lewis Rice etc. The group also marked its presence across the Japanese market wherein the company will provide cloud infrastructure support to several enterprise solutions. The business derived 41% and 32% of the revenues from Customer Support & Other and Cloud Services & Subscriptions segments, respectively. Adjusted EBITDA stood at US$317 million, up 2.8% on a y-o-y basis.

Q2FY20 Financial Highlights (Source: Company Reports)

Guidance: Going forward, the group expects ARR to remain robust and fall in the range of 75%-77%. The management expects that the revenue contribution from Carbonite for the second half of FY20to be in the range of $195 million to $200 million.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Based Relative Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: The stock of OTEX closed at CAD 46.78 with a market capitalization of CAD 12.7 billion. The stock made a 52-week low and high of CAD 45.00 and CAD 63.43 and is currently trading close to the lower band of its 52-week’s trading range. The quarterly results reflect higher demand of OpenText products followed by an increment in its ARR. With the recent acquisition of Carbonite and addition of esteemed clientele, the business is expected to deliver improved business prospects in the coming years. Considering the above facts, current trading levels, business prospects, etc., we have valued the stock using Price to Earnings based relative valuation method. For this, we have considered peers like j2 Global Inc (TO: JCOM), Box Inc (TO: BOX), International Business Machines Corp (TO: GPN), etc., and arrived at a target price which is offering a double-digit upside (in % terms).  Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $46.78, down 9.60% as on 12^th March 2020.

OTEX Daily Technical Chart (Source: Thomson Reuters)

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