Pat McKeough recently replied to an Inner Circlemember looking for an opinion on data software provider OpenText. The company continues to grow by acquisition, says Pat. That has both pros and cons.
Q: Pat: What is your opinion of OpenText? Thanks.
A:OPENTEXT CORP. (symbol OTC on Toronto; www.opentext.com) makes software that helps businesses store, organize and manage large amounts of data over a wide variety of computer systems and devices. The company’s more than 80,000 clients then analyze their data to make better business decisions. OpenText’s products also help them comply with increasingly complex regulations related to privacy, money laundering and other issues. Clients can either install OpenText’s products on their own networks or access them over the Internet through a subscription.
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The company began operating in 1991 at the University of Waterloo as part of a project to index the Oxford English Dictionary for online users. It later shifted its focus to data-collaboration software.
OpenText first sold shares to the public on January 23, 1996, at $3.75 U.S. a share (all per-share amounts are adjusted for splits, including a 2-for-1 split on January 24, 2017).
The company tends to fuel its growth with acquisitions of other software firms. Due to these new operations, its revenue rose 53.5%, from $1.2 billion in 2012 to $1.85 billion in 2015 (fiscal years end June 30; all amounts except share price and market cap in U.S. dollars). Due to the negative impact of foreign currency rates, revenue in 2016 slipped 1.5% to $1.82 billion. Disregarding changes in currency rates, revenue improved 3%.
Earnings jumped 126.3%, from $125.2 million in 2012 to $283.3 million in 2016. Due to more shares outstanding, per-share earnings rose 117.8%, from $0.54 to $1.17.
In the three months ended September 30, 2016, OpenText paid HP Inc. $315.0 million for software focused on customer communications management. In the same quarter, it paid $171.1 million for Recommind, an analytics software firm.
Thanks to these purchases, the company’s revenue in the quarter rose 13.1%, to $491.7 million from $434.5 million a year earlier. Excluding costs to integrate those new businesses and other unusual items, earnings rose 2.3%, to $105.5 million, or $0.43 a share, from $103.2 million, or $0.42.
As of September 30, 2016, OpenText held cash of $837.7 million, or $3.45 a share. Its long-term debt was $2.1 billion, or a low 18% of its market cap.
In January 2017, the company completed its purchase of the enterprise content division of Dell-EMC for $1.6 billion. This business’s products include the popular Documentum program. That platform is used by businesses to manage all their information content.
The purchase will strengthen OpenText’s current products, and immediately add to its earnings.
To help pay for this acquisition, the company sold 18.5 million common shares at $30.50 a share for total proceeds of $546.3 million. It also sold $250.0 million of its notes. That corporate debt comes due 2026.
OpenText’s shares have gained 31% in the past year. They now trade at 17.3 times the $1.97 U.S. a share that the company will probably earn in fiscal 2017. The $0.46 U.S. annual dividend yields 1.3%.
The company’s reliance on acquisitions to fuel its growth is a significant risk factor. In fact, it plans to spend an additional $3 billion to buy other software companies between 2019 and 2021. However, OpenText has successfully integrated its past acquisitions, and it’s able to cross-sell its products to each newly added customer base. It’s also a leader in its field, and continues to spend a high 12% of revenue on research.
Inner Circle recommendation: OpenText is okay to hold for aggressive investors.
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