Tuesday, October 25, 2016

An existing AIM Fund holding: Open Text (OTEX) by Taylor Smith: “Acquiring Optimism in OpenText”

Open Text Corporation (OTEX, $63.81): “Acquistitons Instill Optimism about OpenText's Future”
By: Taylor Smith, AIM Student at Marquette University

Image result for open text logo

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.


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.