By the end of the January, OpenText Corporation (TSX: OTEX)(NASDAQ: OTEX) will declare its second quarter results. Analysts and investors will, no doubt, be closely watching to see if the company can ignite a fresh growth spurt to address the recent slowdown.
Cloud computing service provider OpenText is a formidable force in the Enterprise content management (ECM) space, where it has more market share than IBM. ECM software essentially allows companies to manage all their cross-platform documents on the cloud, so an old Word file from Tim in account is readable by Jenny in management regardless of their devices and operating systems.
OpenText also offers other services for online education programs and consulting services, but those are much less interesting.
Addressing its niche has helped OpenText double its annual sales over the past six years. However, growth seemed to be slowing to low single digits in the first half of 2018. Now investors want to know if the company can keep growing at the same relentless pace as before.
Last quarter’s results were lackluster. Revenue was up 4% year-on-year, while net income was nearly flat. Unsurprisingly, the stock price is also flat over the past year.
To the management’s credit, they realize something is amiss and have outlined a new strategic vision to get the company growing again. According to CEO Mark J. Barrenechea, the company has a solid base of recurring income derived from a diversified group of clients from around the world.
Growth over the past six years has been fueled in part by acquisitions. The company has deployed a total of $4.8 billion over this period to buy new companies. Revenue from the cloud division is up eightfold as a result. CEO Barrenechea says investors should expect more big-ticket acquisitions in the near term.
Acquisitions could pave the way for OpenText to enter trendier, faster-growing sectors like artificial intelligence, internet-of-things (IoT), cyber security, and software-as-a-service (SaaS). This wider market is expected to be worth over $100 billion according to the company’s own estimates.
The recent acquisition of Liaison Technologies, a provider of cloud-based application integration and data management solutions with 100% cloud-based recurring revenues and strong renewal rates, for $310 million in December 2018, is a great example of where the company is heading over the next few years.
Management claims these acquisitions, coupled with internal cost-saving tweaks to the business, could help them achieve $1 billion in cash flow from operations and a gross margin of 40% by 2021.
Investors should keep a close eye on the stock to see how this strategy pans out over the course of 2019. The stock currently trades at a much lower forward price-to-earnings (PE) ratio than many of its peers (expect IBM) and offers a 1.7% dividend yield. The company’s market capitalization is a little over $9 billion.
If you’re optimistic about the company’s prospects and agree with the strategic vision, this might be a great time to enter the stock. By most traditional measures, it is undervalued.
