Open Text (TSX: OTEX) earnings are right around the corner, with the tech stock due to announce results on August 3, 2023. It’s a big one, as the company will be detailing fourth quarter along with full-year results.
So what should investors be doing on the eve of earnings? Let’s take a look at the company’s recent moves and see.
First off, why Open Text?
When it comes to tech stocks, it can be difficult to sort through the wave of new additions over the last decade. Yet sift out those that have been around for the last few decades and the list becomes a lot shorter. On that list is Open Text stock.
The company came on the scene to bring the Oxford Dictionary online, but has become so much more. The software-as-a-service (SaaS) company is an information management software company, creating partnerships around the world with some of the biggest names out there. These include companies like Microsoft and Alphabet, just to name a few.
But this last year or so has been interesting. After the last few years of creating partnerships with recognizable names, the company is shifting to acquisition mode. It needs new software to back up its growth, and has been expanding through organic and acquisition growth. And this has led to plenty of growth in the company’s bottom line.
Last quarter’s earnings
Investors can see this from looking at Open Text’s last quarterly earnings report. Total revenue increased 41.1% year over year to $1.2 billion, with annual recurring revenue at $1.01 billion, up 37.7%. Operating cash flow increased to $337 million, with free cash flow hitting $306 million.
Its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) hit $365 million at a margin of 29.3%, with diluted earnings per share at $0.21. Earnings came in higher than estimates, and the stock now trades near 52-week highs after these solid results.
“At OpenText, the heart of our culture is the unwavering commitment to customer success. The acquisition of Micro Focus expands the OpenText mission once again, and places OpenText as the trusted company to power and protect customer information. Our Q3 results demonstrate the potential for our expanded business.”
Mark J. Barrenechea, OpenText CEO & CTO
More growth to come?
Acquisitions such as Micro Focus and the introduction of Titanium X will likely be in focus during the next quarter and full-year report. During the last quarter, management seemed confident they would reach their growth targets, as well as acquisition commitments. This would include a $400 million cost savings plan, to help them meet their free cash flow plan.
Another point of focus will be whether the company manages to reduce its debt, as debt has increased year over year. Even so, analysts remain confident in the stock’s long-term trajectory, with a buy recommendation by many as earnings edge closer.
The key here is the company remains a top contender among those providing information management software to enterprise companies. It leverages a significant amount of data and information, making life easier for businesses. This includes the Titanium X integration, showcased through Alphabet’s T5 model, and OpenAI’s GPT, say analysts.
Bottom line
So sure, shares are trading near 52-week highs. However, there looks like there could be more growth on the way. And as the average price-to-earnings ratio sits at 44 over the last five years, you’re looking at a deal trading at 38 times earnings as of writing. Add on a 2.3% dividend yield, and Open Text stock looks like a hidden gem ahead of earnings.
