TSX Commentary

Open Text Corp. (OTC) – $39.98 – Expecting In-Line Q2, Reaffirmed Outlook; Outperform
Outperform, Above Average Risk, Price Target: $47.00
In its seasonally strong quarter, RBC CM expects OTC to produce Q2 revenue of $229M (10% Y/Y,) in line with the Street ($228M), with $58M license. EPS is expected at $0.69, in line with Street on healthy margins. Despite a slow IT spending recovery, RBC CM believes OTC saw resiliency in Government, Healthcare, Financial verticals Q2, with license estimated at $58M (23% Q/Q, -10% Y/Y). OTC saw stable margins due to VIGN synergies and cost controls. RBC CM expects that OTC’s restructuring is on track (est. $40-50M ann. benefit) and recovering Web Content Management (Red Dot) momentum following sales alignment, announced integration roadmap and VIGN 8 launch. Excluding revised FX assumptions, OTEX is expected to reiterate F10 rev outlook in line with concensus (Street $912M, RBC $918M). On VIGN synergies, RBC CM expects reaffirmed EPS outlook in line with concensus (Street $2.83, RBC $2.86) with 22-27% proforma F10 EBIT margins. RBC CM reiterates its Outperform rating on: 1) positioning as last independent ECM vendor; 2) stable recurring revenues; 3) margin outperformance; and 4) resilient compliance demand. RBC CM considers OTC an attractive takeout candidate. With its high ROI and compliance solutions, OTC appears well positioned for growth recovery as IT spending recovers.