Enterprise software provider Open Text Corp. reported first-quarter earnings late Thursday that far exceeded analysts' expectations. The stock was up 5 per cent in early trading Friday on the Nasdaq and Toronto Stock Exchanges.
The Waterloo, Ont.-based company reported after markets closed Thursday that revenue in the quarter ended Sept. 30 of US$804-million, up 15.4 per cent from a year earlier and close to $50-million above average analyst expectations.
Open Text, which sells data-management software to large enterprises such as General Motors Co., Citigroup Inc. and the Canadian government, earned $103.4-million (38 cents per share), up 39 per cent from its first quarter last year. Analysts focus on Open Text’s adjusted earnings before interest, tax, depreciation and amortization (EBITDA), which came in at $342.3-million – far surpassing their expectations in the $277-million range.
Chief executive officer Mark Barrenechea said in a release that Open Text had “record performance across all our key metrics,” including an adjusted EBITDA margin of 42.6 per cent of revenues. The company also appeared to overcome concerns raised last month after SAP, a key integration partner, warned investors of softness in its business.
But National Bank Financial analyst Richard Tse questioned whether the solid performance – “probably some the best results I’ve ever seen from this company” – was enough to revive the lacklustre performance of the company’s stock.
Open Text, which relies primarily on acquisitions for growth, has seen its share price sink by more than 9 per cent this year prior to Friday, while many fast-growing internet-based companies have soared in value.
It’s a strategy the CEO has defended in the past. Mr. Barrenechea said last year: “We’re sticking to our value play” of pursuing ever-higher margins and growth through acquisitions rather than through fast-rising sales of existing products, adding “I like the balance we have.”
“That [stock price] performance is not reflective of these results at all,” Mr. Tse said, noting this was the second consecutive strong quarter for Open Text. “Many legacy names [such as Open Text] are being ignored” by investors. In a research note Friday Mr. Tse said there was a “valuation disconnect” as investors favor technology stocks that grow revenues by selling more of their existing products over those bulking up with acquisitions, but added "Going forward, we see a growing base of recurring revenue through acquisitions, expanding operating leverage and optionality from organic growth that’s not fully priced into [Open Text] stock.
Open Text said Thursday it would repurchase up to $350-million worth of shares in the next year and increased its quarterly dividend by 15 per cent to 20.1 cents per common share, which should improve the stock’s profile. The company generated US$218.6-million of free cash flow in the quarter, up 84 per cent year over year.
“We continue to grow, generate cash and remain committed to our proven total growth strategy,” Mr. Barrenechea said in a release.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.