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%).
The company has a large presence in the Americas (61% of FY’20 revenues), followed by EMEA (30%), and Asia Pacific (~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 trusts 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.
- Opportunity Score: 46
- Ticker: TSE:OTEX
- Sector: Technology
- Industry: Software - Application
- Market Cap: 16.98B
- P/E: 86.78
- Dividend Yield: 1.62%
- Payout Ratio (TTM): 129.75%
- Canadian Dividend Aristocrat: YES
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 5/10
- Dividend Income Fit: 3/10
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Revenue Growth & Market Exposure
OpenText has extensive experience in delivering mission-critical solutions across industries globally over the last three decades. Revenues have grown at 13%+ in the last decade 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 80% up from 73% three years ago. The company is targeting to further increase this to 85% by FY 2024.
The company has a strategy to grow both organically and through acquisitions. The company has a history of successful acquisitions and has deployed $5.8 billion since 2014. 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, OTEX has successfully bagged more than 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 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.
The company posted strong quarterly results, witnessing growth in both cloud services and subscriptions revenues.
OpenText is a Canadian Dividend Aristocrat. Since its inception, OpenText has maintained a consistent quarterly dividend program and has paid more than $1 billion in dividends since FY2014. It has a solid track record of operating cash flows and high ROIC. It sports 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 modest yield of 1.6%, but a high payout ratio. It 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. It also has a strong M&A pipeline that should be additive to total growth.
OpenText is targeting organic growth of 2%-4% and annual recurring revenue of 85% by FY24. Its total addressable market is projected to grow by more than 8% over the next three years. The company is well-positioned to benefit from the growing trends of digitization, AI, and automation, optimizing the OpenText business system. Customers trust OpenText products and expertise to help them go digital.
It has a number of subscription-based programs that help clients to transform their businesses. Trends like 5G, digital acceleration, global supply chain restructuring, work from anywhere, cloud, and edge act as strong tailwinds for OpenText. The company has an outlook of 1%-2% total and 3%-4% cloud organic growth for FY22 and has projected over $2.2 billion investment in R&D over the next five years.
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 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 International Business Machines Corporation (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.
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A world-class set of products, an innovation culture, industry vertical focus, marquee customers, and predictable recurring revenue 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 well-positioned to drive growth both organically and through M&A. Its recurring revenues remain a key indicator of its organic growth and should aid future dividend growth.