TSX Commentary » Open Text Corp.

Open Text Corp. OTC Meetings with OTEX Management Affirm OP Thesis

admin — Mon, 08 Feb 2010 20:35:02 +0000

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.

Open Text OTC Q2 Strong Rebounds; Outlook remains Conservative

admin — Thu, 04 Feb 2010 15:17:27 +0000

Open Text (OTC) – $40.55 – Q2 Strong Rebounds; Outlook remains Conservative
Outperform, Above Average Risk, Price Target: $50.00
OTEX surprised sharply to the upside, with revenue at $248M (17% Q/Q, 19% Y/Y), well above Street ($228M) on closed delayed Q1 deals, partner momentum. Adj. EPS of $0.87 beat $0.69 Street/RBC on higher license mix. FX rev tailwind was $8-12M, in-line; GAAP EPS was $0.37 (RBC $0.18). VIGN rev contribution was $30M, in-line. License at $72M (up 12% Y/Y, 29% total) beat RBC/Street ($58M/~$60M) on: a) catch-up from slipped Q1 transactions; b) recovery in sluggish WCM (Web Content Management) momentum (VIGN/Red Dot); and c) Partner strength (43% revenues, above 35-40% avg). OTEX closed 6 deals >$1M (2 over $2M) with ASP <$300K. Strong Margins, Cashflow. Higher license mix drove 28.8% Adj EBIT margins (RBC 23.9%). Cashflow at $32M was strong, with cash $256M or $4.46/sh, net debt $46M ($0.80/share). VIGN integration remains on track, with restructuring still providing $40-50M annual benefit. US Visibility Remains Limited. Pipelines strengthening, Europe/Asian visibility improving and VIGN revenue resilient. However, management indicated 2H/F10 visibility to US recovery (50% revs) remains limited, as does visibility to forward partner (SAP) contribution. Cautiously optimistic, management reiterated their 2H/F10 outlook, which RBC CM views as conservative. Q2 results in RBC CM’s view illustrates ECM demand remains resilient, against which OTEX remains well positioned, with its high-ROI, affordable, and quickly implementable solutions. Reiterating Outperform on: 1) last independent ECM vendor; 2) stable recurring revenues; 3) margin outperformance; and 4) resilient demand. On higher EPS outlook, RBC CM’s revised $50 target ($47 prior) is DCF-based (11.5% WACC, 3% terminal growth rate, FTM net cash $3.68/sh) and equates to 15x FTM EPS (unchanged), below peers (17x).

Open Text Corp. OTC Expecting In-Line Q2, Reaffirmed Outlook; Outperform

admin — Wed, 03 Feb 2010 17:25:05 +0000

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.