By: Taylor Smith, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Open Text Corporation (OTEX, $63.81) is a software company that
provides products and services that assist organizations locating, utilizing,
and sharing business information from different devices. Its solutions include
digital asset management, enterprise content management, cloud, business
process management, content management and legal.
• OpenText announced 4
acquisitions expected to generate $300 million in annualized revenues in 2017
• The company will Acquire
Dell’s Enterprise Content Division for $1.62B, expecting to improve its
Vertical Offerings, Managed services, and more.
• Management has also agreed to
acquire CCM from HP for $315 million, expecting to enhance its selection of
software solutions and multi-channel customer engagement
• OTEX has appreciated 130% in
share price since being added to the AIM portfolio in 2008
Key
points:
Adequate would be the most
appropriate word in describing Q4 2016 financials for OpenText. Revenue totaled
$484 million, up 0.2% Y/Y with demand concentrated in license and cloud segments.
Highlights included an increase in Cloud revenue by 5% Y/Y, non-GAAP Operating
Margin of 33%, and Operating Cash flow reaching $119 million. However, the
quarter overall still marked pivotal for the company, primarily through the
announcements of agreed acquisitions.
Over the past ten years, OpenText has put
intense focus on strategically acquiring companies to grow its cash flows.
Since 2006, Operating Cash Flow has increased from $61 million to $526 million,
yielding a 24% CAGR. This past quarter, the company displayed its interest in
continuing the strategy by announcing four acquisitions that are expected to
add approximately $300M in annualized revenues for 2017.
On September 12, OpenText announced
a definitive agreement to acquire Dell’s EMC Enterprise Content Division to
improve its vertical offerings, managed services, customer base, and
geographical coverage. The acquisition was priced at $1.62B, which is 2.7 times
ECD FY15 revenue of $599M. ECD accretion to earnings is expected to take place
immediately and is targeted to add to the operating model within the first 12
months. Management is confident with the play and released a statement
describing their expectations: “This acquisition further strengthens OpenText
as a leader in Enterprise Information Management, enabling customers to capture
their Digital future and transform into information-based businesses.”
The company also agreed to
another acquisition in June, this time regarding the the CCM (Customer
Communications Management) division from HP, which will include HP Exstream, HP
Output Management, HP TeleForm, and HP LiquidOffice for customer communications
management, process automation and document delivery solutions. The price is
set at roughly $315 million with accretion to earnings expected by the end of
Q1 2017. The acquired solutions are expected to bring in between $110 and $125
million in annualized revenues.
What
has the stock done lately?
Since Quarter 4 results came in
during July, the stock has appreciated 7% - a very solid increase in roughly a
three month span. The growth is assumed to be from optimism based off of the
announced acquisitions in the Q4 results. Investor confidence did however temporarily
drop after the Citi 2016 Global Technology Conference in September,
demonstrating a decrease in 5.8% overnight but recovering almost immediately.
Past
Year Performance:
OpenText has experienced an
annual increase of 37% in value, a remarkable comeback after the stock had
dropped 39 percent the year prior. Multiple sources have the stock marked as a
discount. The company has also announced a buy-back of up to $200,000,000 of
its common shares, displaying confidence for continued growth in share price.
Source:
FactSet
My
Takeaway
OpenText has maintained an
extremely strong foothold in the information technology industry. Since added
to the International AIM Fund, the stock has appreciated 130%, showing
inarguable excellence thus far. Based off of the firm’s success with growing
cash flows from acquisitions over the past ten years, and its strategy to
continue acquiring companies, I believe this company is on pace to only
continue its growth and success.
