OTEX Thrives With Opportunities and Recurring Revenue

OpenText Corp is a leading Enterprise Information Management (EIM) company. It provides software and solutions to companies enabling them to better manage, leverage, and secure their enterprise information.

The company’s revenues comprise customer support (41% of FY20 revenues), cloud services and subscriptions (37%), licenses (13%), and professional services (~9%).

OpenText has a large presence in North America (60% of FY 20 revenues), followed by EMEA (18%), the UK (~6%), Germany (~6%), and other countries (~10%). The US accounted for 55% of the total revenues.

The company caters to a large number of industries like Life Sciences, Manufacturing, Auto, Healthcare, and Government sectors.

OpenText processes trillions of commerce transactions every year and connects over 1 million businesses globally. More than 100 million end users trust OpenText to digitize and manage their critical information.

The company helps clients’ businesses by reducing their security risks and lowering their operational costs either on-premises or through the cloud.

Investment Data

Revenue Growth & Market Exposure

OpenText has extensive experience in delivering mission-critical solutions across industries globally over the last three decades. Out of the $3.11 billion in revenues last year, $2.43 billion was recurring in nature.

Revenues have grown at 125% since 2014 and the company has been consistently reporting improving metrics (ARR, EBITDA, cash flows) over the years. Recurring revenues add predictability, stability, and visibility to cash flows and OpenText’s recurring revenues now account for 78% up from 73% two years ago. T

he company is targeting to further increase this to 80%-82% by FY 2021.

Source: Investor Presentation

OpenText has a strategy to grow both organically and through acquisitions. The company has a history of successful acquisitions, completing more than 15 acquisitions and deploying $6.8 billion over the last decade.

It acquired Carbonite, and XMedius, in the last year. The integration of Carbonite remains on track and should be completed by the end of FY2021. Carbonite has delivered $235 million since the date of acquisition and continues to be accretive to adjusted earnings and cash flows.

OpenText should also benefit from its strategic partnerships with tech giants like Google, Amazon, and Microsoft. It will also gain from its launch of OpenText Cloud Editions and expansion of the Information Management platform into the small and medium business market.

The OpenText Cloud which operates from 37 data centers in nine countries, is poised to become a $1 billion run rate business.

As the EIM market leader for enterprise software and cloud solutions, OpenText has successfully bagged 120,000 customers and 100 million end-users. The company has sticky customer relations formed as a result of its attractive product portfolio which includes security, AI, and IoT.

Nestle, GM, AT&T, Daimler, etc. are some of the prominent names in its customer list. In fact, 89 of the world’s largest 100 companies are OpenText customers and it sports a renewal rate of mid-90%. OpenText also stands a good chance to benefit from cross-selling its products and services to its existing clients.

OpenText posted strong quarterly results, marking its sixth consecutive year of annual revenue growth. Key customer wins in the quarter included AIA Thailand, Amway, Arch Resources, Asahi Intecc, Becton Dickinson and Company, Doosan Babcock, etc.

The company is optimistic that it will emerge stronger out of the pandemic. In its last quarterly release, the CEO said: “Businesses that build digital capabilities will recover faster and emerge stronger from this pandemic.”

Dividend

OpenText is a Dividend Aristocrat. Since its inception, OpenText has maintained a consistent quarterly dividend program paying dividends for 24 consecutive quarters. It has a solid track record of operating cash flows and high-teens ROIC. The company has returned over $900 million in dividends since FY’13, maintaining a dividend growth of over ~15% CAGR over the last three years. The company’s earnings have also grown by more than 14% CAGR over the last decade.

OpenText last raised its dividend by 15%, has a current yield of 1.7% and a payout ratio of 81%. It currently pays $0.1746 per common share as a dividend and intends to maintain its dividend program.

OpenText has a $100 billion opportunity at hand, to grow as an information company. It is targeting an EBITDA of 37%-38% by FY21 and 38%-40% by FY23, by leveraging AI and automation, optimizing the OpenText business system. The company is well-positioned to benefit from the growing trends of organizations digitizing and transforming to recover faster from the ongoing crisis. Customers trust on OpenText products and expertise to help them go digital.

OpenText is generating solid cash flows on the back of growing cloud and recurring revenues. The company should be in a comfortable position to raise dividends using its increasing cash flows. OpenText is in a good position to leverage its leading position and benefit from the emerging trends of data and digital growth.

Today, companies need to connect businesses and applications with speed, security, and reliability and OpenText promises its clients reduced costs and more security with the launch of OpenText Cloud. Trends like 5G, digital acceleration, global supply chain restructuring, work from anywhere, cloud, and edge act as strong tailwinds for OpenText.

Competition

OpenText has an edge over the competition, given a consistent track record of delivering growth, through disciplined capital allocation.

Given rapid technological change and shifting customer needs, OpenText products face severe competitive pressures. It primarily competes with IBM. Oracle and Microsoft also pose competition in certain markets.

Other software vendors competing in the EIM sector are Veeva Systems, j2 Global, Pegasystems, Hyland Software, SPS Commerce, and Adobe Systems. As a result of software industry consolidation, new entrants or alliances could spring up and capture additional market share.

On the Canadian front, these are the companies in the software industry.

Bottom line

A world-class set of products, an innovation culture, industry vertical focus, and marquee customers make OpenText a winner. The company is targeting growth in the core markets of content services, business networks, and cloud while growing security, AI, and IoT.

OpenText is recognized as a leader in Customer Communications Management. It is well-positioned to drive growth both organically and through M&A. Its recurring revenues remains a key indicator of its organic growth and should aid future dividend growth.

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