Open
Text Corp. (OTEX, $48.99): “O’TEXT me maybe?”
By: Daniel
Fernandez Guerra, AIM student at Marquette University
Disclosure:
The AIM International Equity Fund currently holds this
position. This article was written by myself, and it expresses my own opinions.
I am not receiving compensation for it and I have no business relationship with
any company whose stock is mentioned in this article.
Summary
• Open Text Corp. (NASDAQ:OTEX) provides software products and
services that assist organizations in finding, utilizing, and sharing business
information from any device in the Unites States, Canada, Europe, and Japan.
• OTEX experienced a robust increase
on product revenues derived by important contracts and strong license revenue
growth.
• Mark Barrenechea became the
new CEO of Open Text at the beginning of the year. He previously served as
president of the company from 2012-2016 until his announcement.
• Management has indicated and
forecasted gains in the market share as competitors have experienced a damaged
and disorganized administration space.
• OTEX expects to reach new
52-week highs as the company has shifted its focus to a recurring revenue model.
Key points: Open
Text Corp has a positive outlook. Open Text reported a significant upside to
earnings for its fiscal Q2 extending its string of upside performance. OTEX
made a significant jumped in value after beating estimates, as software license
revenue rose 8.6% from previous year.
Management
has shifted its corporate strategy of FY 2016 into a digital transformation
business. The landscape within the industry has been continuously changing
recently and companies have no choice but to adopt digitalization to survive.
Therefore, OTEX will focus on adopting strategic mergers and acquisitions to continue
their growth and on acquiring value-based assets in order to maximizing returns
to shareholders.
Within
this shift, Open Text will center on five functional pillars to drive growth
and expansion in FY16. 1) Expand their Enterprise Information Management (EIM)
market leadership by attracting/winning new customers, and competitive
replacements. 2) Develop cloud services
since it has been the fastest growing segment, achieving new customers and new
revenues offering a long-term growth opportunity for FY16 and beyond. 3)
Introduction of Analytics. With the acquisition of Actuate, OTEX will be able
to provide customers with a new analytics as a service application. 4) Consolidation
of their inside and outside resources (Go-to-Market), with the purpose of capturing
the total life-time value of their customers and providing them the best and
integrated EIM cloud service. 5) Strengthening the financial performance.
Enabled by their new Open Text Intelligent Growth System (OTIGS).
This is
expected to make an impact for FY16 and beyond. As a percent of total revenues,
recurring revenues and cloud revenues are expected to increase, while slowly
lowering license and professional services revenues. For non-GAAP operating
margin, the forecast target for FY16 is between 30 to 34%, while providing a
longer-term aspirational goal of 34% to 38%.
What
has the stock done lately?
After
OTEX released their fiscal Q2 results on February 9, 2016, the company jumped
from $42.85 to $50.54 in a week. An impressive ~18% increased caused by an
increase in total revenue, recurring revenue, license revenue, cloud services
and subscriptions, and an remarkable jump on operating margin of almost 400
basis points. This positive performance along with their restructuring plan
expects to outperform the software market in 2016.
Past Year Performance: OTEX
has decreased 9.38% in value over the last 52 weeks; however, it has provided an
impressive 84.24% since it has added to the fund on December 8, 2008. Most
international technology companies have struggled over the past year, and the
software sector has not been an exception. Open Text fell 35% in the first six
months of 2015, but it has recovered 30% since the end of July 2015. Investors,
along with the strong performance that the company is showing lately, expect
that the company will continue with the positive trend.
Source: FactSet
My
Takeaway
Open Text has proven to be a very profitable
company since it was added to the portfolio and has continuously shifted its
focus in order to keep growing. The company is present in the most important
regions of the world which help them to achieve important markets while
reducing risk. With the strategic shift by management, along with the important
projects and partnership that OTEX has ensured for future years, I believe
OTEX’s stock price will be reach new all-time highs throughout 2016 as it gains
market share.
