OpenText Corporation

Open Text Corporation provides intranet, extranet and corporate portal solutions to organizations located throughout the world. The Company’s flagship product, Livelink is an off the shelf, enterprise scalable, collaborative application for companies that want to leverage their information and resources through intranets

Income Statement AnalysisOpentext’s income statement is very encouraging for investors as it boasts constant revenue growth (except for 2016) and an increasing net income year after year. The decline in 2016 revenue was due to creating a more efficient business plan and increasing adjusted operating margins by 240 basis points. It appears to be handling expenses well as its operating margin has increased steadily for the past five years. Estimates for coming years are expected to be even higher due to the acquisition of Dell’s EMS segment.

While Opentext’s margins do not appear as strong as some competitors such as Oracle Corp, it stands out because of its consistent double digit growth which is not seen by any of its peers. With this upcoming acquisition Opentext should be able to continue this growth and continue to push revenues and net income higher.

Balance Sheet AnalysisOpentext has been using more debt in recent years, and currently has a debt-to-equity ratio of 1.735 which is not very alarming given its constant growth lately. Its current and quick ratios have increased year after year, and are at 2.49 and 2.36, respectively. These are so close because of the nature of Opentext’s products; there is little tangible inventory to keep on hand.

Opentext seems to be making heavy investments, its property, plant and equipment has more than doubled in the past three years. Its total assets ($5.1B) are also approximately double than 2013’s value ($2.6B).

Statement of Cash Flow AnalysisPerhaps the most important statement, the statement of cash flows gives insight into Opentext’s financial health. Its cash flow from operations as well as free cash flow are both positive and have been increasing at a moderate rate in recent years. Double digit growth in

both have been common apart from 2016 partially due to the deferment of income taxes and the repayment of long term debt.

Other notable items include the increasingly negative cash flow from investing activities as well as the huge spike of - $1.153B in 2014. This was its acquisition of GXS Group Inc, and the further decreases are due to other smaller acquisitions. Negative cash flow for the acquisition of subs consistently makes up well over three quarters of its total cash flow from investing activities.

Peer AnalysisOpentext Inc. has few direct competitors in their specific industry. Oracle Corp. is a major one however, and has a much larger market cap ($158.4B) than Opentext. Oracle has similar ratios when it comes to its margins and in some cases, are higher, but the main statistic that Opentext stands out on is its strong growth and its constant acquisitions of smaller companies. When it comes to growth, Oracle Corp’s revenue, net income, and free cash flow all see far less improvements year after year than Opentext. Because of these constant improvements, we feel that Opentext is in a strong spot to consistently outperform over at least the next few years.

Macro-economic factorsAlthough the company is headquartered in Canada which geographically is at risk of recession, the bulk of their business is conducted abroad. The United States represents about 44.9% of total revenue while Germany accounts for 10.6%. The rest of continental Europe generates 16.4% while Canada itself only produces 7.6% of OpenText Corps revenue. However, OpenText does conduct business in the United Kingdom comprising 9.7% of revenues, currently it is unclear what impact if any the British Exit from the European Union will cause for the company. Globally growth rates seem stagnate and as companies further attempt to cut costs to generate profits, OpenText business platforms will surely become an attractive method for doing so.

Other FactorsOpenText as over the past 5 year implemented an aggressive M&A strategy acquiring over 30 companies in that period. On September 12th of this year Dell Announced the sale of its Enterprise content division to OpenText for 1.62 Billion with an expected completion date of December 31st. Although the company has ample cash on hand they have chosen to finance 1 billion of the acquisition thru Barclays Bank. This Acquisition being outstanding it remains unclear whether this will change their capital structure furthermore following the announcement of the acquisition Moody's placed all of Open Text Corporation's credit ratings on review for downgrade.

ValuationUsing the DCF model with a few reasonable assumptions gives OTEX an estimated value per share of $99.59 with the perpetuity growth method and a value of $89.29 per share using the

EBITDA multiple method. These assumptions are that its current estimated WACC increases from 8.1% to 8.5%, that its perpetuity growth rate is 3.0%, and that it can increase operating margins from 22% to at least 34% following the acquisition of Dell’s EMS. These assumptions give the stock an estimated upside of 54% for the perpetuity growth method and 38% for the EBITDA multiple method.

Using sensitivity analysis and a worst-case scenario with a WACC of 9.5% and growth of only 2%, the upside is still 14% with an estimated price of $73.53.