Open Text Corp.
(OTEX-Q, OTEX-T) US$38.04 | C$50.64
Q1/F21 Preview: Expecting Mixed Impact from the Pandemic
Event
Q1/F21 Results: Thursday, November 5, 2020 after markets close. Conference Call: 5:00 p.m. ET; 1-800-319-4610 or 1-604-638-5340.Impact: NEUTRAL
We estimate total revenue of $756.4mm, up 9% y/y. We forecast EBITDA of $266.8mm, or 35.3% EBITDA margin, and EPS of $0.65. We attribute this quarter's top-line growth to ~$122.7mm of revenue contribution from recent acquisitions. We expect EBITDA margin to contract ~120bps y/y.
Expecting to see continued negative impact on non-recurring revenue from the pandemic, but potential improvement in cloud revenue. We expect OpenText's non-recurring revenue base, from licenses and professional services revenue, to remain challenged this quarter. We believe that customers' focus towards capital preservation and work from home directives will weigh on these segments. OpenText's recurring revenue base, specifically cloud services revenue, should drive the company's top-line growth this quarter, largely from Carbonite's revenue contribution. We believe that demand for endpoint security, data protection, data backup services, and overall cloud services should continue to remain strong. While business network activity is likely still depressed relative to last year, the sharp recovery in U.S. GDP in Q3/C20 suggests that there could have been a material sequential improvement in transactional cloud revenue.
OpenText has a healthy balance sheet to weather through the economic uncertainty. We estimate the company will have ~$1.8bln of gross cash at the end of Q1/F21. Additionally, we expect OpenText to generate ~$888mm of FCF in F2021.
TD Investment Conclusion
We maintain our BUY rating and US$52.00 target price. We remain confident that OpenText will weather through the economic uncertainty due to its strong recurring revenue base and healthy balance sheet. We also remain positive on management's proven track record of executing and integrating acquisitions.