Enterprise information management solutions provider OpenText Corporation (NASDAQ: OTEX)
shares are trying to regain its February highs before the pandemic
struck the benchmark S&P 500 index (NYSEARCA: SPY)
. The market has not given this one the multiples for a pandemic benefactor
as its suite of content, engagement and security products entail improving business volumes, instead categorizing it as a recovery play with the emergence of a COVID-19 vaccine approval
. OpenText’s integrated platform optimizes customer engagement and experience with data-driven analytics and information management tools that transform data archives into data lakes. The AI platform transforms that raw data into insights that clients can use to make better decisions. The subscription model has proven resilient during downturns and entering the expansive stage. As the economic recovery accelerates, shares should also reflect the resurgence. Prudent investors can use opportunistic pullbacks to gain exposure.
Q1 FY 2021 Earnings Release
On Nov. 5, 2020, OpenText reported its fiscal first-quarter 2021 results for the quarter ending September 2020. The Company reported an adjusted earnings-per-share (EPS) profit of $0.89 versus consensus analyst estimates for EPS profit of $0.67, a $0.22 beat. Revenues grew by 15.4% year-over-year (YOY) to $804 million versus analyst estimates of $758.42 million. Business network volumes returned to pre-Covid-19 levels by the end of the quarter, with the exception of travel and leisure industries. The Company announced a new $350 million 12-month share repurchase program and a 15% increase to the quarterly dividend. OpenText is targeting 20% of trailing 12-month free cash flow to return in dividends moving forward. The Company ended the quarter with $1.8 billion in cash and net leverage ratio of 1.82X with a fully available $750 million revolver, after paying down the $600 million revolver in October.
Conference Call Takeaways
OpenText CEO and CTO, Mark Barrenechea, exposed on the growth of the Company’s footprint evidenced by the OpenText World, attended by over 7.500 information management professionals. Barrenechea stated, “Industry 4.0 was just getting started and now it’s in full acceleration… the new equilibrium. Businesses are accelerating their digital capabilities and are placing greater emphasis on time to value, all things cloud, customer experience, and edge computing.” The Company is currently “managing over 250 million secure endpoints for an estimated 100 million end-users, 11 million cloud subscribers, 75,000 enterprise customers and over 2,000 private cloud customers.” He noted how a decade ago, the license was 26% of revenues with zero cloud revenues. Now, its 9% and cloud is 42% of revenues and the “first line on our income statement.” This is the new equilibrium which is further enhanced with the new Cloud Editions architecture. The Company is, “delivering massive new capabilities every 90 days.” The stay-at-home and work-from-anywhere trend is bolstering the OpenText Security & Protection Cloud, Cloud Resilience segment performance. Business Cloud is benefiting from the acceleration of digital migration trends with businesses as they race to become more mobile. Cloud revenues grew 44% YoY in the quarter.
Subscription Growth Driver
OpenText offers competitive services in many facets of the business ecosystem. The notable growth drivers are the cloud service and subscription revenues, which continue to grow double digits YoY. The Company has pursued a growth by acquisition model to broaden its suite of services. The enterprise information management umbrella enables OpenText integration into clients’ infrastructure with its suite of products that complement and operate with other essential enterprise software. The subscription model (SaaS) is adored by investors due to its non-cyclical predictive nature of cash flow and the tendency for extending the lifecycle of client billings. The expensive of switching once entrenched often outweighs the benefits of remaining with OpenText. The more you use, the more you’re inclined to stay as evidenced by the 94% renewal rate in customer support business with 91.3% margins, 95% renewal rate in enterprise cloud and overall ARR revenues at 83% for Q1. As the economy recovers, more subscriptions and higher priced add-ons can be expected making this a direct play on economic recovery. Prudent investors can still find opportunistic pullbacks on this relatively cheap play trading under 15X forward P/E.
OTEX Opportunistic Pullback Levels
Using the rifle charts on the monthly and weekly time frames provides a broader complete perspective of the landscape for OTEX stock. The monthly rifle chart has a make or break formation with a potential moving average (MA) pup breakout or a stochastic mini inverse pup. The monthly upper Bollinger Bands sit near the $49.33 Fibonacci (fib) level. The monthly lower BBs reside near the $34.51 fib. The weekly rifle chart formed a market structure low (MSL) buy trigger above $35.46 and recently formed a higher MSL trigger above $43.16. The weekly upper BBs sit around the $47.85 fib. The weekly stochastic are in a mini pup rising through the 50-band. This may set up for a move towards the $47.85 fib double top resistance either before a pullback or preceding a pullback. Prudent investors can monitor either way for opportunistic pullback levels at the $41.36 fib, $39.36 fib, $37.36 fib and the $35.46 weekly MSL trigger. The upside trajectories range from the $47.85 fib double-top towards the $60.49 fib.
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