Open Text Corporation

Open Text Corporation (TSX: OTEX) is an Ontario based company which enables organizations to gain insight through market-leading information management solutions, on-premises or in the cloud. The software of the Company allows clients to archive, aggregate, retrieve, and search unstructured information such as documents, e-mail, presentations.

Recent Highlights:

Recently, the company introduced the OpenText™ Developer Cloud, a new cloud platform for application development based on OpenText information management services. This platform would allow developers to create custom solutions to manage information, building a community of innovators that can create better enterprise applications.

Key Highlights:

Stable Financial Performance: The company has a resilient business model and has shown a stable revenue growth over the years, which is impressive. The company derived ~83% of the revenue through Annual Recurring Revenue (in Q1FY21) and has shown stable growth over the years. The corporations have maintained its adjusted EBITDA margin in higher thirties, while EBITDA grew from USD 538 million to USD 1,148 million in FY20. Free cash flow, on the other hand, registered growth of ~135% to USD 882 million during the same time frame.                              

Financial Snapshot from FY11 to FY20 (Source: Company Presentation)

Financial Snapshot from FY14 to FY20 (Source: Company Presentation)

Improved Traction across Cloud Segment: In the recent past, more number of businesses are opting for cloud based services. Most of the businesses are migrating to cloud segment in order to procure hassle-free data computation and less pen and paper works. The company witnessed strong revenue growth within the segment and expects the momentum to continue in the foreseeable future.                

Recent Trend in Cloud Segment (Source: Company Reports)

Q1FY21 Financial Highlights:

• OTEX announced its first-quarter FY21 results, wherein the company posted a higher revenue of USD 804.013 million, as compared to USD 696.888 million in Q1FY20. The growth was driven by significantly higher revenue from Cloud services and subscriptions segments and an improved performance from Customer support segment. Annual Recurring Revenue grew 22% on y-o-y basis.

Snapshot of Revenue Constituents (Source: Company Reports)

• Income from operations grew to USD 182.356 million, from USD 132.513 million in pcp. Free Cash Flows stood at USD 218.6 million, up 84% on y-o-y basis.
• Net income for the period soared to USD 103.406 million, against USD 74.427 million in Q1FY20

Risks: The cloud computing business has registered strong growth during the recent past. The particular segment offers lucrative margins, and hence most of the information technology players are entering the segment, which might lead to intense competition and subsequently lead to price war, which might affect the group’s performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The company is a prominent player within the cloud segment and has a premium client base.  The company has reported additions of new clients, new orders from the existing clients in the recent past, which augers well for financial stability. Further, growing adaptability of the cloud-based services augers well for future expansion and improved cash flows. Recently, the company has enhanced its footprints by collaborating with Google, Amazon and Microsoft and also expanded its Information Management platform into the small and medium business market. We valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered peers like Box Inc Oracle Corp, International Business Machines Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 54.03 on November 6, 2020.

OTEX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Lightspeed POS Inc.

Lightspeed POS Inc. (TSX: LSPD) provides omni-channel commerce-enabling SaaS platform. Its software platform provides customers with the functionality it needs to engage with consumers, manage their operations, accept payments, and grow their business.

Recent Updates:

Recently, the company announced that it had entered into a definitive agreement to acquire ShopKeep Inc., a prominent cloud commerce platform provider based in New York City. The acquisition is likely to strengthen the company’s product offerings in the foreseeable future and would provide higher customer-satisfaction, as most of the retailers and restaurateurs are seeking to modernize their operations.

Key Highlights:

Strong Operating Metrics: The company reported strong top-line growth during FY18 to FY20 driven by robust momentum across the Software+ Payment Revenue growth. Furthermore, the company’s performance was supported by an increase in the total customer’s location and a higher Gross Transaction Volume.

Financial Metrics (Source: Company Reports)

Meanwhile, the company reported strong momentum within the gross profit and Adjusted EBITDA during FY18 to FY20, which is also a key positive.

LSPD’s Historical Profitabilty (Source: Company Presentations)

Innovative Offerings:  The company has remarkably succeeded in its products innovations and offered products according to the client’s needs, which has resulted in higher customer traction. Offerings like eCommerce for Restaurants, Payments platform, Hospitality POS, etc., has registered tremendous response in the recent past and is likely to retain its growth momentum in the anticipated future.                          

New Product Offerings (Source: Company Presentations)

Q2FY21 Financial Highlights:

• LSPD declared its second quarter FY21 results, wherein the company posted total revenue of USD 45.5 million, reflecting an increase of 62% on y-o-y basis. The growth was attributable to strong momentum from Software and payments segment, and positive impact from acquisitions.
• Operating loss widened to USD 20.646 million from USD 11.229 million in the previous corresponding period, due to a higher sales and marketing expense, increase in the amortization of intangibles and higher research and development expenses.
• Net loss stood at USD 19.466 million, as compared to USD 10.075 million in the previous corresponding period.                  

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: As the company would be providing financing to the merchants via Lightspeed capital, the company is exposed to default risk.

Stock Recommendation: The stock of LSPD soared ~98% and ~65% in the last six months and one-year, respectively. At the last closing price, the stock was trading above the crucial short terma s well as long term support levels of 20-days, 50-days, 100-days and 200-days simple moving average (SMA), indicating a bullish trend. The company estimates its third quarter FY21 revenue within USD 44 million to USD 47 million, while Adjusted EBITDA loss is expected within USD 8 million to USD 10 million. The stock has appreciated ~16% in the last one month and we expect the momentum to continue, underpinned by the higher adoption of the digital platform across businesses. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 51.53 on November 06, 2020.

LSPD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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.