Open Text Corporation

Open Text is one of the Waterloo, Ontario companies that most people haven’t heard of with a market cap of over C$13 billion. It’s difficult to describe what they do but they are a provider of Enterprise Information Management solutions to large organizations, essentially helping them manage their data. Open Text has mainly grown through strategic acquisitions but they have also grown organically. Management has demonstrated a prudent approach to their acquisition strategy in buying strategic assets and not overpaying; they have also demonstrated effective integration of acquired assets. The company’s valuation seems attractive given their growth opportunity. The company reports their results in U.S. dollars and their dividend is also paid in U.S. dollars.

Ests: 4Q24 1Q25 FY24 FY25

Revs 1.4b 1.29 5.8b 5.4b

EPS 1.01 0.76 4.20 3.51

P=C$42.22 U.S.$30.49, div=$US 1.05, yield=2.8%, TTM EPS=4.10, P/E 8.7X, D/C=55% not incl Def Revs =$1.68bn,

4Q24 0.98 vs 0.91, est 1.01 down from 1.42 (prior to AMC divestiture), FY24 EPS 4.17 (3.37 ex AMC?) vs 3.29

Aug 1, 2024, P=C$42.22 U.S.$30.49, TTM EPS=4.17, P/E=7X, FY25 P/E=8.6X
Raised dividend 5%
Revs -8.6% to 1.362 (-4% ex AMC, est 1.4bn), GM 76.4% vs 76.9%, OM 30.4% vs 28.9% (OpInc -4.2%), EBITDA 32.7% vs 31.0%
ARR -5.5% to 1.1bn due to customer support -10.9% to 628.4m (some AMC impact), Cloud +2.9% to 464.9m, Enterprise Cloud bookings +10.3% to 180m, License -25% to 171.5m, OCF +60% to 185.2m
1Q25 Outlook: Revs 1.25-1.3bn (vs 1.29bn ex AMC, est 1.29), EBITDA 32-33% (est 31.9%)
FY25 Outlook: Revs 5.3-5.4bn (flat to +1% ex AMC), EBITDA 33-34% (previously 32-33%), Cloud +2-5%, FY25 EPS could be closer to 4.00 than 3.51 est.
FY26 EBITDA target 35-36% and and 36-38% in FY27

3Q24 .94 vs .73 +28.8%, est .94 down from 1.18

May 2, 2024, P= P=C$48.54 U.S.$35.47, TTM EPS=4.10, P/E 8.7X
Revs +16.3% to 1.45bn (est 1.43), ARR +13.3% to 1.15bn, Organic +1.4%, Micro Focus 564.7m vs 374m, GM 76.7% vs 75.8%, OM 29.8% vs 26.9%, EBITDA 463.7 vs 365.1
Cloud +4.4% to 455m, Enterprise cloud bookings +53% to 165m
OCF +14.2% to 384.7m, FCF +13.9% to 348m
Divested AMC in early May, 4Q Outlook includes only 1 month of AMC
4Q24 Outlook: Revs 1.385-1.435bn (vs 1.39bn ex 100m AMC), EBITDA 32.5-33.5% vs 31% (est 41%, too high), implies EBITDA 473.5m vs 462.8m, est 630m included 3months of AMC, possibly $60m, (LY also included AMC).
FY25 Preliminary Outlook: Revs 5.3-5.4bn (vs approx. 5.4 bn ex 440m AMC), EBITDA 32-33%, FCF 575-650m after 250m tax payment for AMC divestiture (825-900m normalized)
New framework to return 50% of TTM FCF in dividends/buybacks and 50% for cloud M&A, expect 450-500m in FY25
Previous FY26 Aspirational targets now FY27 targets, Mgmt pointed to signing larger and longer cloud deals with longer ramps and removing AMC but those prior FY26 targets were already ex AMC.
Implies FY25 EBITDA 1.78bn vs approx. 2bn and 2.1bn est which is due to the AMC carve-out, not weakness, debt repayment also lowers interest expense, stock decline from 3 months ago and valuation more than reflect carve-out. Trading down like when they announced the MF acquisition, after which was announced, FY24 est was 3.48 and FY25 est was 3.31, prior to acquisition FY21 was 3.39 and FY22 was 3.22, now they have higher revenue and earnings, more margin improvement to go, better organic growth profile (modest growth vs flat to modest decline), they sold 20% of the MF revenue stream for 38% of what they paid for MF. probably puts FY25 adj EPS ~3.49 (maybe >3.60 depending on lower share count from buyback) vs maybe 3.37 in FY24 ex AMC, at $35, would still be approx 10X earnings power.

2Q24 1.24 vs 0.89, est 1.19 up from 1.22

Feb 1, 2024, P=C$59.04 U.S.$44.09, TTM EPS=3.89, P/E=11X, FY24 P/E=9X
Revs 1.535bn, est 1.5bn, ARR 1.15bn, Organic +4%?, Microfocus 601m, GM 78.6% vs 77.3%, OM 34.7% vs 35.4%, EBITDA 566m vs 341m
Cloud +10% to 450m (+9% ex fx), Record enterprise cloud bookings +63% to 236m,
OCF 351m vs 195m, FCF 305m vs 163m
3Q Outlook: Revs 1.4-1.45bn (est 1.44), adj EBITDA margin 32-33% vs 29.3% LY, est 37.9% (seasonality)
FY24 Outlook: Raised Enterprise Cloud bookings to +25-30%, FCF tightened to 825-900m (TTM FCF 711.8m), expect MicroFocus return to organic growth in FY24
FY26 Aspirations updated to remove AMC, same as previous update, EBITDA 36%-38%

1Q24 1.01 vs .77, est .90 down from .95

Nov 2, 2023, P=C$47.37 U.S.$34.46, TTM EPS=3.53, P/E=10X, FY25 P/E=7X
Revs 1.425bn (est 1.4b), Microfocus 563m, Organic +1.2%, organic Cloud 451m, ARR 1.15bn, adj EBITDA 495m vs 304m
GM 77.3% vs 75.2%, 76.9% in 4Q, OM 32.3% vs 33%, 29% in 4Q, adj EBITDA 34.7% vs 35.7%
OCF 47m vs 132m, FCF 9.6m vs 95.6m (not “slightly down”), Enterprise cloud bookings +8.2%
2Q24 Outlook: Revs 1.45-1.5bn (est 1.5), Enterprise cloud bookings +20%, EBITDA 36-37%
FY24 Targets: Enterprise cloud bookings >15%, organic growth +1-2%, Revs 5.85-5.95bn (est 5.9bn), adj EBITDA 36-38%, FCF0.8-0.98bn (vs TTM FCF 569m)
FY26 Aspirations, Enterprise cloud bookings >15%, Organic growth +2-4%, Revs 6.2-6.4bn, EBITDA 38-40%, FCF >1.5bn

Mid-quarter update – Nov 28, 2023, Selling Application and Connectivity Modernization (AMC) business for 2.275bn

Sale price 4.6X FY23 Revs 500m, 8.3X EBITDA of 275m, revs off-cloud and “relatively constant”
Expect closing by June 30, 2024, OTEX was approached rather than sought divestment.
No change to FY26 Cloud Aspirations, removing the AMC business results in projected Revs 5.7-5.9bn, FCF 1.2-1.3bn (looks like they were expecting no growth in AMC).

4Q23 .91 vs .80, est .86, +14%, FY23 EPS 3.29 vs 3.22

Aug 3, 2023, P=C$54.08 U.S.$40.48, TTM EPS=3.29, P/E=12X
Revs 1.49bn, organic +1.2%, Cloud 452m, ARR 1.2bn, adj EBITDA 462.8m vs 313.6m
OCF -54% to 115.3m, FCF -57.3% to 91.2m vs non-GAAP Income of 294.6m
FY24 Outlook: Revs +30% to 5.5-5.95bn mostly due to Micro Focus but expect positive organic growth (FY23 organic +40m, FY24 expect up to 90m), FCF 800-900m vs 655m in FY23
Expect 1Q FCF flat or slightly down due to interest and restructuring chargesadn seasonality, expect y/y growth in 2Q and “each subsequent quarter”
FY26 Aspirations: Organic Growth +2-4%, Cloud organic +7%, adj EBIT margin up to 40%, double FCF to 1.5bn or more.
Net debt to EBITDA 3.5X, target below 3X by end of FY25 “or sooner”
Stock sold off >8% (taking back pop from 3Q) as Cloud bookings were +12% and +9.5% for FY23, below mgmt 15% target they reiterated just last month when TTM was at +9%, so 4Q picked up just not as much as they expected, they still expect +15% for FY24. At 12X TTM EPS which should grow solidly in FY24 and beyond, stock doesn’t look priced for growth although leverage is a factor, on an EV/E basis at 20X

3Q23 .73 vs .70 est .46

May 4, 2023, P=C$49.43 U.S.$36.56, TTM EPS=3.20, P/E=11.4X
Revs +41% to 1.24bn (incl Micro Focus), GM 75.8% vs 74.5%, adj EBITDA 365m, OpInc 334.6m vs 262.2m
4Q Outlook: Revs 1.46-1.51, adj EBITDA margin 350-450bps (from 34.8%) implies EBITDA ~457m vs 314m

1Q20 .64 v .60 +6.7%, est .63

Oct 31, 2019, P= P=C$53.22 U.S.$40.26, TTM EPS=2.80, P/E=14X, FY20 P/E=13X
Revs +4.5% to 696.9m, +5.9% ex fx, GM 73.1% vs 73.4%, OM 33.6% vs 33.3%, OpInc +5.2% to 234m
ARR +5.8% to 549.6m, +7.1% ex fx, organic growth was positive.
Cloud +14% to 237.3m, Customer support +0.2% to 312.3m, License +1.3% to 77.9m, Professional Services -1.7% to 69.4m
Decent results, stock continues to be very cheap. While TTM EPS is up 7% y/y as acquisitions have been smaller, it’s up 31% vs 2 years ago.
Mgmt said their outlook for 2Q is favourable and they have not seen material impacts to their business from macro factors but they have taken prudent steps regarding to consumer spending environments in the UK due to Brexit uncertainty and Europe due to slowdown in manufacturing and China due to trade tensions, US business looks sold and >50% of their business is in the US.

4Q19 .72 vs .72, flat, est .71, FY19 EPS +7.8% to 2.76

Aug 1, 2019, P= C$56.23 U.S.$42.40, TTM EPS=2.76, P/E 15X, FY20 P/E=14X
Revs -0.9% to 747.2m, +2% ex fx, GM 74.2% vs 74%, OM 34.7% vs 34.3%, OpInc flat at 259m,
Cloud Services and subs +11% to 241.9m, Customer Support -0.5% to 315.2m, License -14.4% to 119.7m, Professional Services -11.7% to 70.4m,
Annual Recurring Revs +4.2% to 557.1m, +7% ex fx, CFO +12.6% to 229.8m
26 transactions >1m, 13 cloud, 13 on premise
FY20 Outlook: Expect revs up low single digits, cloud growth in high single digits, EBITDA margin 38-39% vs previous target 36-38% and 38.4% in FY19
Mgmt thinks the tone of businesses is more cautious but don’t see a slowdown in their pipeline,
Stock selling off 10% after hours, stock has been reasonably strong to new highs. Decent results, cloud and ARR demonstrate continued transformation to a more stable business, still looks attractively valued, growth opportunity remains.

3Q19 .64 vs .54 +18.5%, est .60

May 1, 2019, P= C$51.67, U.S.$38.44, TTM EPS=2.76, P/E=14X, FY20 P/E=13X
Revs +5% to 719m, +8% ex fx, GM 73% vs 71.6%, OM 33% vs 29.8%, OpInc +15.8%
20 transactions >1m, 8 Cloud, 12 on premise.
Annual Recurring Revs +5% to 549m
Raised dividend 15% to 0.70, 1.8% yield
Very solid results, valuation continues to be very compelling notwithstanding mgmt. cautioning on 4Q, Macro and currency issues still at play, given strong 3Q, mgmt expects 4Q revs to grow q/q below historical seasonality (est 771m) and their statement was ambiguous and could be interpreted as a q/q decline, also expect ~100bps impact to EBITDA from Liason acquisition (3Q EBITDA margin 36.4%, YTD is 38.5% vs FY19 target 36-38%), reiterates strength of the business.

2Q19 .80 vs .76, +5.3%, est .72 down from .75

Jan 31, 2019, P= C$46.71, U.S.$35.64, TTM EPS=2.66, P/E 13X, FY20 P/E=12X

Revs +0.1% to 735.2m (+1.5% ex fx, est 728.5m), GM 75.7% vs 73.9%, OM 38.7% vs 36.5%, OpInc +6%, EBITDA margin 41.9% vs 39.5%, positive organic growth
Annual Recurring Revs +3% to 530m
35 transactions >1m, 16 Cloud, 19 on premise
Announced $75m acquisition of Catalyst (closed today), an eDiscovery solution for legal departments and law firms, to be on operating model in 1styear.
Over next 5 years, expect to invest $2bn in R&D and “much more” in acquisitions.
Expect Liason (closed Dec 17) to contribute -100bps to EBITDA in 2H, to be on operating model within 1styear.
3Q is seasonally weaker, recent acquisitions will drag profitability so could be tough EPS comp but should also benefit from recently completed restructuring to cut costs, still confident on FY19 targets.

Some recent thoughts on Open Text.

The U.S. ticker is essentially flat since September 2016, since then they have done $2.4bn in acquisitions, FY18 Revs were 55% or $991m higher than FY16, OpInc was 51% or $315m higher, NI was 58% or $251m higher and EPS was up 45%, P/E contracted from ~19X to 13X

1Q19 .60 vs .54, +11%, est .59

October 31, 2018 P= $C44.44, U.S. $33.80, TTM EPS=2.62, P/E=13X, FY19 P/E=12X
Revs +4% to 667m, GM 73.4% vs 72.2%, OM 33.3% vs 31.5%, OpInc +10.3%, CFO +155% to 171m, EBITDA margin 36.9%,
Annual Recurring Revenue +6% to 520m, 78% of total revenues, recurring revenues higher than total revenues just 2 years ago.
14 transactions >1m, 9 cloud, 5 on premise
Acquiring Liason Technologies for $310m, a provider of cloud-based business to business integration.
Had positive organic growth, expect tougher comp in 2Q, on track to FY19 targets including low single digit organic growth
Expect solid seasonally strong 2Q with q/q revs +mid-high single digits (below estimates)
Solid results, stock is weak after hours presumably on revenues being 3% below analyst estimates, durability of recurring revenues and profitability and earnings growth, coupled with low valuation, continue to make this very attractive, revenue miss is not indicative of weakness.

4Q18 .72 vs .60, +20%, est .68, FY118=2.56 vs 2.02, +26.7%

August 2, 2018, P=C$49.18, U.S.$37.76, TTM EPS=2.56, P/E=1X, FY 19 P/E=13X
Revs +13.7% to 754.3m, +10% ex fx, GM74% vs 73.6%, OM 34.3% vs 33.1%, OpInc +17.8%, CFO +100% to 205m, ROIC=17.5%
38 transactions >1m, 15 cloud, 23 on premise,
FY18 Organic growth +2.5% ex fx, Annual recurring revenues +19% ex fx
FY19 expect low single digit organic growth, continued M&A, some fx headwinds, adjusted EBITDA 36-38% vs 36% in FY18, FY21 target adj EBITDA 38-40%, CFO$1bn
Implementing small restructuring ~$29m, should drive 20m in savings in FY19 but $50m in FY20 and beyond
Mgmt continues to focus on stregic wins against IBM
Solid results, stock has been performing better, P/E at 15X trailing earnings continues to be very attractive, given valuation, quality, and growth opportunity, I view OTEX as a strong core holding.

3Q18 .54 vs .45, est .62

Raised dividend 15%
Revs +15.6% to 686m, organic growth, GM 71.6% vs 71.2%, OM 29.8% vs 29.1%, OpInc +18%, CFO +73% to 270.7m
22 transactions >1m, 10 cloud, 12 on premise, Def Revs +21% q/q and +20% y/y to 761m
Based on strength and trajectory of recurring revenues and cash flows, see generating CFO of $1bn as they exit FY21 vs 439m in FY17
Stock weak after hours but this is a low seasonal quarter so lower operating leverage, ignoring estimates, Revs +16%, OpInc +18%, EPS +20%, and TTM P/E of 15X, I’d view weakness as a buying opportunity. The company is a proven grower/acquirer, business has great cash flow and that have been a solid dividend grower. Stock has been flattish in $U.S. for roughly 1.5 years while EPS is up over 30%. They are comping their sizable acquisitions a year ago so top line growth is understandably slowing. The stock is roughly flat over 1.5 years while earnings are up over 30%, this is not a stock that’s about a single quarter.

2Q18 .76 vs .54, est .63

Revs +35% to 734m, solid organic growth, GM 73.9% vs 73.8%, OM 36.5% vs 34%, OpInc +45%
Revs stronger than expected due to strong performance from acquisitions and sales force execution on organic growth.
30 transactions >1m, 14 cloud, 16 on-premise, new MCV bookings +31% to 65m
ECD now on operating model, focus on cross-selling, expanding partner footprint, and new offerings, seeing increasing demand in EIM suite including AI and Security.
Introducing 2021 adjusted OM target 36-40% up from 2020 target 34-38%
As per historical seasonality, expect 3Q to be lowest revenue quarter and strongest cash flow quarter.

1Q18 .54 vs .43, est .54

Revs +30% to 641m, GM 72.2% vs 71.5%, OM 31.4% vs 30.8%
14 transactions >1m, 7 in cloud and 7 on premise. New MCV bookings +30% to 67m
Covisint and Guidance acquisitions closed in the quarter, did not materially contribute to top line, to be on OTEX operating model within 12 months. ECD on plan, adjusted margin improved 600bps to 25%, to be on OTEX model by January 2018.
For 2Q expect mid-high single digit q/q rev growth (est 6.8% q/q), 2020 aspirational OM 34-38%
Continued solid progress with more to come.

4Q17 .60 vs .45, est 58 FY EPS 2.02 vs 1.77

Revs +37% to 664m, GM 73.6% vs 72.4%, OM 33.1% vs 32.7%, OpInc +39%
37 transactions >$1m, 18 OpenText Cloud, 19 on premise, strongest demand in cloud and license seen in Financial, Services, Consumer Goods, and Technology.
ECD 113m in revs, New MCV bookings 78m vs 67m, announced 2 acquisitions for approx $300m
Solid recovery from the previous quarter’s disruptions due to timing of acquisitions etc., OTEX presents very interesting valuation at a significant discount to the market despite a solid growth profile. Certainly acquisitions are part of their growth strategy but they are also focused on organic growth; other growth by acquisition plays have significantly higher valuations. Mgmt is focused oncompetitive replacements against IBM.

3Q17 .45 vs .40

Revs +34.6% to 593m, GM 71.2% vs 72.0%, OM 29.1% vs 31.4%, OpInc +25%, EBT +15% due to higher interest expense from acquisitions, 19 transactions >$1m
Closed ECD acquisition on Jan 23rd, Revs $80m, OM in low teens, expect to be on OTEX operating model in 12m.
Increased div 15% to $US 0.53, renegotiated revolving credit facility resulting in annual interest savings ~$4m/year.
Noisy quarter with results coming below analyst expectations, stock selling off ~10% in the after-market. That said, closing their largest acquisition to date will cause some noise and it will take them a bit of time to reduce cost, the stock has had a solid run and strong pullbacks on results like this have tended to be good buying opportunities. My position is pretty full so I would want a stronger pullback before I add more.
Noise includes f/x headwinds, acquisition accounting and revenue recognition, and timing of closing and higher level of expenses vs recognized revenue.