There are few tech stocks out there that offer the longevity and stability of OpenText (TSX:OTEX). The enterprise cloud company has been on the scene since 1991, becoming Canada’s fourth-largest software company as of 2022. And it doesn’t look like OpenText stock is going to slow down anytime soon.
However, shares dropped last week after earnings showed that there was a drop in earnings before interest, taxes, depreciation, and amortization (EBITDA). Coupled with no increase in guidance, analysts weren’t as excited about the stock.
Yet in an interview with Madhu Ranganathan, chief financial officer (CFO) of OpenText stock, the CFO said that drop was for a good reason, and there are many benefits to consider today.
Records set, but earnings drop
The drop in OpenText stock might suggest that the company had a bad quarter overall. Yet OpenText stock reported record total revenue at $1.535 billion, which was an increase of 71% year over year. Annual recurring revenue also shot up 58% to $1.146 billion, achieving record quarterly enterprise cloud bookings as well at $236 million.
Adjusted EBITDA came in at $566 million, providing a margin of 36.9% for OpenText stock. This was a particularly high margin, said Ranganathan, given the integration costs of Micro Focus over the last year — an integration that’s recently been sold off in part.
The company recently sold its application modernization and connectivity unit for US$2.275 billion in cash to Rocket Software, which aligns better, in the view of Ranganathan — both for Rocket Software and for the future of OpenText stock.
“We did intend to keep Micro Focus as a whole when we bought it,” she said in an interview with Motley Fool. “But when we got the inbound call, it made sense to divest that given that it’s far away from where we’re going with AI [artificial intelligence].”
Flexibility in focus
The price was right, and OpenText stock took it, allowing it more financial flexibility. This comes as the company used the US$2 billion to help improve its debt faster than anticipated. And that flexibility could add up to one key item for investors: buybacks.
Ranganathan stated that the recent debt repayment and improved finances will allow the company to “squarely put a buyback program in place, which we intend to do.” This should happen once they fully digest Micro Focus.
Furthermore, the increased cash would allow the stock to make even more selective acquisitions in the future — something OpenText stock has become quite well known for in the past. And these are likely to align with their focus on AI.
Not your ChatGPT AI
The focus on AI comes as the company looks to integrate its seven vectors of AI over the next year or so, which was announced during its OpenText World event last year. One such vector, Athena, has already been put into place to help its engineers with productivity and optimization. And Ranganathan said OpenText believes this alone will help yield greater results.
“AI contributed to the strength in bookings,” Ranganathan said. “Internal productivity will generate from our workforce, supported by AI.”
The company has since expanded its engineers working with Athena from 150 last year to now 800 on hand. Yet, as it continues to work on the other AI vectors, that’s going to mean an investment in research and development — hence, the narrowing of its EBITDA guidance to a margin between 36% and 38%.
Still undervalued
Ranganathan believes that investors interested in OpenText stock should eye the next three years. This would include the return to growth for Micro Focus. It should also include more AI vectors up and running that will improve productivity and optimization. And that will all cause a return to improved EBITDA.
Bottom line: the company wants to do as it says. So, guidance will be raised, but likely when the Micro Focus divestiture takes place. Meanwhile, the overall improvement and attractiveness of AI should also help the company expand in the United States, where OpenText stock is putting more focus.
“We’ve just started to scratch the surface in the U.S.,” Ranganathan said. “So we’re expanding our U.S. investor relations … the stock continuing to be undervalued makes it a very unique opportunity for all investors to hold.”
