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 Highlights:

• Higher Annual Recurring Revenues (ARR) derived operational resiliency: Over the years, the company adopted the strategy of product innovation and utilized the changing industry trend towards cloud migration. Moreover, the company focused on better client servicing, which resulted in higher customer retention. Notably, renewal rate stood at 96% for the cloud segment and 94% for the off-cloud segment in Q2FY21. Moreover, the company derived ~80% of its Q2FY21 revenue from ARR, which indicates business stability.

Source: Company Presentation

• Stable Risk Profile supported by Diverse Revenue base: The company caters to all the industries, while derived ~41% and ~39% revenues from Cloud Services & Subscriptions and Customer Support segments, respectively. On a Geographic basis, the company derives ~60% of its income from the America and ~32% from the EMEA region. Hence, the company’s revenue is not dependent on any particular segment, which is a key positive.

Source: Company Presentation

• Launch of New Product: The company released its new offering OpenText™ Cloud Editions, which is built as per the modern needs and allows the customers to operate from both private and public platform.
• Event update: The group would disclose its Q3FY21 result on May 06, 2021. 

Q2FY21 Financial Highlights:

• OTEX announced its quarterly result, wherein the company posted total revenues of USD 855.644 million, grew 10.9% on y-o-y basis. The increase was driven by a solid 41.4% y-o-y growth from cloud revenues, while Annual Recurring Revenues registered a growth of 21.5% on y-o-y basis.

Source: Company Report

• Gross profit increased to USD 603.082 million v/s USD 539.172 million in Q2FY20, thanks to the higher income, partially offset by higher cost of revenues (USD 252.562 million v/s USD 232.385 million in pcp).
• The quarter was marked by higher Research and development costs (USD 100.238 million v/s USD 80.283 million in pcp) and an increase in sales and marketing expense (USD 147.897 million v/s USD 137.310 million in pcp). Income from operations surged to USD 234.470 million, as compared to USD 184.740 million in pcp.
• The corporation reported a net loss of USD 65.433 million, as compared to a net income of USD 107.518 million in pcp. The loss was primarily attributable to significantly higher income taxes of USD 267.559 million, v/s USD 46.818 million in pcp.
• The company reported cash and cash equivalents of USD 1,500.561 million, while total assets were recorded at USD 9,769.098 million.

Q2FY21 Financial 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 lead to price competition and loss of clients.

Valuation Methodology (Illustrative): Price to CF-based

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

Stock Recommendation:

For FY21, the company is expecting its Cloud segment to witness robust growth, while the customer support segment and ARR is expected to grow modestly. On a long-term basis, the company targets its FY23 adjusted EBITDA margin to remain in the range of 38% to 40%, while free cash flow is targeted in between USD 0.9 billion to USD 1 billion.

Source: Company Presentation

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 closing price of CAD 59.51 on April 27, 2021.

One-Year Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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