OpenText CEO Mark Barrenechea speaks at the Open Government Partnership Global Summit, in Ottawa, on May 29, 2019.Justin Tang/The Canadian Press
Open Text Corp. OTEX-T stock sank Thursday over concerns about the enterprise software vendor’s declining revenue.
Open Text reported revenue of US$1.27-billion in its fiscal first quarter ended Sept. 30, down 11 per cent from US$1.43-billion in the same period a year earlier. Excluding the impact of a rare divestiture, revenue sagged by 1.8 per cent, chief financial officer Madhu Ranganathan said on a conference call.
The outlook for the second quarter ending in late December is also feeble. BMO Capital Markets' Thanos Moschopoulos estimated that, based on limited disclosure by the Waterloo, Ont.-based company, organic revenue, or the change in revenue from existing businesses, would decline by 5 per cent to 8 per cent in the second quarter. Part of the drop is owing to the fact Open Text booked an undisclosed amount of revenue from a patent settlement in last year’s second quarter.
The prospect of two straight quarters of declining revenue did not sit well with investors after chief executive Mark Barrenechea previously promised Open Text would deliver 1-per-cent organic growth this fiscal year. The stock sank by 11.1 per cent to $41.77 a share on the Toronto Stock Exchange.
Mr. Barrenechea maintained he was sticking to the 1-per-cent organic growth target for the entire fiscal year ending next June and that the company would make it up during the last two quarters. “Our whole script and our whole narrative is on driving organic growth,” he said, adding: “It’s all about the second half.”
National Bank of Canada Financial Markets analyst Richard Tse said in an interview that “investors are a bit concerned the organic growth expectations may not play out.” The second half “is a little far out right now for people to buy into it when the numbers don’t point to it just yet.”
Mr. Moschopoulos said meeting the organic growth target “implies a significant acceleration” in the second half. He noted Open Text said it could get there thanks to new product releases, a pipeline of expected revenue in its cloud software business and additions to its sales force. But the two negative quarters are “causing some misapprehension, and that’s a key issue.”
The organic growth target is part of a set of promises Mr. Barrenechea has made to keep investors interested in a historically mergers-and-acquisitions-driven stock that is pausing on deals while it digests a US$5.8-billion takeover of Britain’s Micro Focus International PLC last year.
In addition to the promised organic growth, Open Text plans to return US$570-million to shareholders – 90 per cent of free cash flow – through share buybacks and by increasing its dividend in this fiscal year. That is the highest level in the company history.
For most software companies 1 per cent would amount to a feeble increase. But that’s better than the company’s typical revenue growth, which has come in at zero or negative in recent years.
Open Text is also highly profitable, generating US$444-million in adjusted operating earnings (a measure that is not in accordance with generally accepted accounting principles, or GAAP) in its first quarter, or 35 per cent of revenues. GAAP-based net income was US$84-million, or 32 cents a share, up 6.7 per cent per share year-over-year. Its earnings beat analyst estimates.
The sale of Micro Focus’s mainframe computer unit to Rocket Software Inc. – Open Text’s first such divestiture in memory – in May for US$2.3-billion before taxes and fees, helped it cut its borrowings in last year’s fourth quarter. But its net debt of US$6.4-billion and heightened debt-to-operating earnings ratio of 3.1 times still limits its deal-making abilities until Open Text can reduce those levels.