TSX Commentary

Open Text Corp. (OTC) – $45.44 – Meetings with OTEX Management Affirm OP Thesis
Outperform, Above Average Risk, Price Target: $50.00
Following Open Text’s (OTEX) strong Q2 last week, RBC CM hosted meetings with OTEX management. OTEX sees attaining $2B+ in revenues in 3-5 years, through acquisitions and organic growth. Acquisition strategy to target vertical opportunities: (Healthcare, Utilities, Military, Government, etc.). Acquisition pipeline remains ‘attractive’, some large targets remain. OTC Intends to use cash+stock+debt (has $256M cash, $200M annual cashflow, $300M debt capacity). OTEX estimates ECM market at $10B (OTEX 10% share), with CAGR of 15-25%. Management sees continued market expansion, driven by compliance, productivity, competitiveness, cost savings. Europe and Asia remain underpenetrated; US market remains near-term risk. OTEX believes it now has the broadest ECM suite vs. other vendors. Core advantages remain: high ROI, rapid implementation, scalability. The vendor landscape remains fractured; management sees consolidation favoring OTEX. SAP is largest partner, but sees upside expanding Oracle, Microsoft relationships; others like HP may offer new channel opportunities. SAP challenges benefit OTEX as being promoted to capture sales given affordability and high ROI. OTEX, in RBC CM’s view, remains an attractive takeout candidate. RBC CM’s $50 target is DCF-based (11.5% WACC, 3% terminal growth, FTM net cash $3.68/sh) and equates to 15x FTM EPS, below peers (18x), in RBC CM’s view warranted by 27% EBIT margins, 25% EPS growth.