Open Text proves its resilience

COVID-19 caused analysts to reduce their expectations for Open Text’s Q3 results. But this technology stock beat those expectations and the long-term outlook is positive.

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With its 2019 acquisition of a provider of cloud-based subscription data protection, backup, disaster recovery and endpoint security, Open Text believes it has entered the next phase of its growth.

Open Text (TSX—OTEX; NASDAQ—OTEX) has shown resilience in the face of COVID-19. The company’s third-quarter results were generally in line with pre-virus estimates and exceeded more recent forecasts. Revenues, for example, rose 14.1 per cent year over year to $820.4 million (all figures in US dollars unless otherwise noted) in constant currency. The pre-COVID-19 consensus estimate for revenues was $819 million, while the more recent estimate was $789 million.

Notably, cloud services and subscription revenues rose 42.8 per cent to $340.6 million and is now Open Text’s largest business revenue stream.

Open Text Corp. calls itself “The Information Company”. It helps organizations gain insight through information management solutions, on-premises or in the cloud. The company has historically focused mostly on “enabling the intelligent and connected enterprise”. But with the 2019 acquisition of Carbonite Inc., a provider of cloud-based subscription data protection, backup, disaster recovery and endpoint security, it believes it has entered the next phase of its growth. Carbonite gives it the opportunity to bring its information management solutions to all size customers, including small and medium businesses and consumers.

Earnings down slightly; dividend maintained

For the third quarter ended March 31, 2020, Open Text made $166.3 million (adjusted), or $0.61 a share, compared with $173.0 million, or $0.64 a share, in the same period of 2019. The pre-COVID-19 estimate had called for the company to earn $0.63 a share, while the more recent forecast was $0.56.

Open Text has declared its regular quarterly dividend of $0.1746 a share. The company says it intends to maintain its dividend program and we believe the safety of the dividend is high. The rate remains the same based on a target of distributing about 20 per cent of the company’s trailing 12 months operating cash flow, which is currently $904.1 million. What’s more, the estimated dividend payout ratio (dividend/earnings) for fiscal 2020 is just 26 per cent. So, earnings should be more than adequate to cover the dividend.

Pandemic may be a plus for Open Text

Unlike many companies these days, Open Text hasn’t withdrawn its fiscal 2020 (ends June 30) outlook. Management has, however, lowered its expectations to reflect the COVID-19 pandemic. It expects fourth-quarter revenues to be flat to slightly down from the third quarter, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to be flat to slightly up.

But COVID-19’s impact on Open Text will likely be temporary. In fact, the virus’ long-term impact for the company may be a plus in one way. The rapid expansion of work from home caused by the virus could be part of a long-term structural shift that the company, through its cloud offerings, can profit from.

Open Text’s earnings per share are expected to decline 2.5 per cent to C$3.89 in fiscal 2020. The company’s shares trade at just 14.1 times that estimate. The annual dividend of C$0.98 a share yields 1.8 per cent.

Open Text is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the May 15, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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