OTEX - Open Text

[no_free_lunch]

Open Text is a software company specializing in digital document management.  I honestly don't know too much about them, I have followed them for about a year but have only recently started to look at them in depth.  Both Donville Kent and Turtle Creek have mentioned them and I believe Donville Kent still owns them.  These are both 20%+ firms.  I will try to find their write-ups if I have a chance.

 

The basic thesis is that they can grow organically at 5-10% and make bolt-on acquisitions via cash and a little debt.  They have done this with great aptitude over the companies past history.  I really think that the numbers speak for themselves.  These are just crude numbers I put together off of edgar, sorry about the formatting.

 

Year      Free Cash Flow Shares Revenue   Long-Term Debt Current Assets   Comments

2014 375                 120.5   1624                 1256                 815

2013 295                 118           1363             513                 717

2012 241                 117.5   1207               555                 790               Share Split

2011 186                 58           1033               282                 515

2010 160                 57           912                 285                 544

2009 164                 53           786

2008 160                 52.6           725                 305                 430

2007 105                 51           595                 365                 350

2006 40                 50             410                 13                 230

2005 40                 52             415                 0                 191

2004 31                 47             291                   0                 272

2003 36                 41.4           177                   0                 191                   Share Split, I adjusted

2002 26.5                 42.4         154.3                 0                   146

2001 6                 43             149.7                  0                   124

2000 19                 48.8               113                   0           143

1999 -2                    47                  90                      0                      230

1998 -11                    36                  45                      0                        66

1997 -15                    34                  23

 

From 2000's 19m fcf to the 375m in 2014, even taking into account that there is 25% additional shares we have a 24x increase in fcf per share.  That is about a 23% cagr.  Obviously they can't be counted on to grow that fast in the future, although they just might, but based on most recent numbers it looks like they will hit aroung $450m fcf this year, which at current prices is 14-15x fcf.  It seems like a reasonable valuation, given the past growth rate, reasonable debt levels and given where the S&P is at today.  Their GAAP earnings per share is much weaker than their free cash flow due to their large d&a expenses from the various acquisitions.  To me this is just fluff, it is about the free cash flow. 

 

I particularly like that unlike other high-growth acquisitions machines they have held the line, more or less, on both share count and debt.  Debt has jacked up recently but if you back out current assets it is like 1.5x free cash flow.  Very reasonable.

 

The market didn't like their earnings in the most recent quarter but backing out foreign exchange they actually increased revenues by I believe 10%.  They were also impacted by an increase in their tax rate from 14% to 18%.  It sucks, but something beyond their control and still a very reasonable rate.  They are a software company, increasingly cloud focused, so perhaps they could relocate if taxes get out of hand.

[no_free_lunch]

From Turtle Creek case study, june 2013

 

Before  we  turn  to  the  chart, let’s  discuss  Open  Text  in  regards  to  our  first  edge,  Security  Selection.    We endeavour  to  identify  superior  companies  –  highly  intelligent  organizations  that  earn  superior  returns  for their investors.  Open Text is a software company that has become a global leader in the large and growing Enterprise  Information  Management  market.    When  we first  invested  in  the  company,  revenue  was  $50 million.    Today,  revenue  is  over  $1.4  billion  and  margins  have  strengthened,  resulting  in  profitability increasing  at  an  even  faster  rate  than  revenue.    This  profitable  growth  has  been  accomplished  both organically and through acquisitions.  Open Text has created substantial shareholder value – since 1999, the share price has increased from $20 to $70, an annualized return of 9.3%.

 

As of today and aaccording to yahoo finance it has gone from $5.5 in january 1999 to $50 today.  This represents a cagr in the share price of 15%.

[no_free_lunch]

As of February 5, OTEX was Donville Kent's 4th largest holding at 8.5% of the fund.

 

 

FUND PROFILE

 

Donville Kent Capital Ideas Fund

 

Performance as of December 31, 2014

 

1 Month: Fund 1.21%, Index* -.44%

 

1 Year: Fund 22.68%, Index* 10.55%

 

3 Year: Fund 26.65%, Index* 10.22%

 

* Index: S&P/TSX Total Return

 

* The fund’s returns are based on reinvested dividends & are net of fees. ***

 

Top 5 holdings and weightings:

 

Concordia Healthcare – 12.30%

 

Constellation Software – 11.80%

 

CGI Group – 11.50%

 

Open Text – 8.50%

 

Enghouse – 6.30%

 

 

http://www.bnn.ca/News/2015/2/5/Top-Picks-from-Jason-Donville-Valeant-Pharma-CGI-Group-and-Constellation-Software.aspx

 

 

A brief writeup on his newsletter, the newsletter has some charts on the financials over the past 7 years.

 

The  basic  seven-year  historical  track  record  of  each  company  is  presented below. In the first table we see that Open Text has experienced steady growth in  both  sales  and  cash  earn

ings  over  the  past  seven  years.  It  is  also  worth noting that Open Text’s profit margins (based on cash earnings) have been high and gradually improving. At the bottom line, Open Text looks great with its  ROAE  consistently  at  or  above  the  20%  level  in each  of  the  last  seven years. Thus, from even this limited statistical vantage point, we see that Open Text is a very attractive Company to consideras a potential investment. 

 

http://www.donvillekent.com/pdf/DKAM-Newsletter_October_2014_Final.pdf

[petec]

What does it actually do?  ("Digital document management" doesn't mean much to me!)  And why does it do it better than the next guy?  Who is the next guy?

[no_free_lunch]

They basically make software so that you can upload/download/search/build security/build processes around and on your documents. 

 

I don't know much about the competition, it definitely exists but I recall reading somewhere that they were one of the industry leaders.

[KCLarkin]

I am accumulating.

[ccap]

Is this a business at risk from Evernote? 

[KCLarkin]

Competition

The market for our products and services is highly competitive, subject to rapid technological change and shifting customer needs and

economic pressures. We compete with multiple companies, some that have single or narrow solutions and some that have a range of information

management solutions, like ourselves. Our competitors are International Business Machines Corporation (IBM), EMC Corporation (EMC),

Hewlett-Packard Company (HP) and Adobe. In certain markets, OpenText competes with Oracle and Microsoft, who are also our partners. In

addition there are numerous, other niche software vendors in the information management space, such as j2, Axway, Seeburger Inc., and

Pegasystems Inc., that compete with OpenText in certain segments of the EIM market. We also face competition from systems integrators that

configure hardware and software into customized systems. Additionally, new competitors or alliances among existing competitors may emerge

and could rapidly acquire additional market share. We also expect that competition will increase as a result of ongoing software industry

consolidation.

 

We believe that the principal competitive factors affecting the market for our software products and services include: (i) vendor and

product reputation; (ii) product quality, performance and price; (iii) the availability of software products on multiple platforms; (iv) product

scalability; (v) product integration with other enterprise applications; (vi) software functionality and features; (vii) software ease of use; (viii) the

quality of professional services, customer support services and training; and (ix) the ability to address specific customer business problems. We

believe the relative importance of each of these factors depends upon the concerns and needs of each specific customer.

 

Box, Evernote, and Dropbox are indirect substitutes for some use cases but don't appear to pose a significant risk.

[no_free_lunch]

They actually just won a lawsuit against box for patent infringement so there is definitely some overlap there.  I honestly don't know evernote but just doing a 3 minute scan through their site I think they fall into the "narrow solutions" in KCLarkin's quote.

 

I read somewhere that they are currently integrating over 300 different products (although some products are going to be more akin to features) into 7 different suites.  So they really do have a large breadth of products.

 

Competition is definitely the weak link on this thesis, I don't want to ignore that.  I am relying on management's past track record, margin levels and the fact that from my experience large software packages tend to be quite sticky. 

 

They are also at a size where they can buy smaller companies and through a two-fold combintation they can use D&A to reduce the cost of the purchase and plug the product into their existing sales channels to increase revenue.  Their is also likely some cost savings available as they reduce admin costs.

[wachtwoord]

Thanks for bringing this company to my attention. I have initiated a position.

[KCLarkin]

The key to this thesis is to understand why established enterprise software companies tend to have wide moats. See Chapter 4 in Dorsey's Little Book that Builds Wealth.

 

Canadian software companies also have an advantage over U.S. companies for M&A. Taxes are a bit lower but more importantly overseas cash doesn't get stranded. This makes it easier for Canadian companies to reinvest profits.

[no_free_lunch]

According to this site, turtle creek asset management had 21% of their fund in OTEX as of Jan 31, 2014.  The site is admittedly a bit sketchy, does anyone know what the official source of these type of filings is?

 

http://www.j3sg.com/Reports/Stock-Insider/Generate-Institution-Portfolio.php?institutionid=13161&DV=yes

[FiveSigma]

Turtle Creek has ~$750M in AUM.

 

This data is from a 13-F, which includes only US securities.

 

So the actual weight is ~4.5%. Hardly a high-conviction weight.

[KCLarkin]

iIrc, They usually hold 20 stocks and aggressively scale up and down positions based on relative value. So 5% would be a typical position. Of course, that 13f data is old so things have likely changed.

[no_free_lunch]

Thanks FiveSigma.  I didn't realize it was only US funds.  Still though, if you think about it the Canadian holdings aren't disclosed, correct?  OTEX is dual listed so it could also be held in their canadian funds.

 

At any rate,  don't mean to come off as a mindless bull but I still think that 20% of US funds is a good data point.

[no_free_lunch]

Just a comment that I updated the long-term numbers back to 97.

[no_free_lunch]

Slightly dated, from 2013, but worth reading.

 

"

OpenText: A leader across all content segments, OpenText remains the biggest pure-play ECM platform vendor. Its ongoing acquisition strategy continues to extend its capabilities. Its strategy is focused on unifying all the content aspects of Enterprise Information Management rather than the EIM ideal of harmonizing all content and data in the organization.

"

 

http://www.cmswire.com/cms/information-management/forrester-wave-ecm-market-segments-as-emchp-ibm-opentext-lead-022621.php?pageNum=2

[no_free_lunch]

On Friday, OpenText announced it had entered into a definitive agreement to acquire Actuate for $6.60 a share in cash in a transaction valued at approximately $330-million.

..

“OpenText is paying 2.5x sales but on forward consensus estimates, it looks closer to 3.1x.,” says Tse. “While it may not appear to be a bargain, we believe the potential synergies from this deal are value creating for OpenText even with Actuate’s recent challenges.”

 

Tse says he doesn’t think the market is fully pricing in this acquisition, nor the company’s organic growth initiatives into the stock.

 

And while Acutate has struggled with a business model that has transitioned from perpetual to subscription licenses and from general challenges in the market, the analyst says the fact that OpenText hasn’t always gone after market leaders simply hasn’t hurt its ability to derive value from them.

 

In a research update to clients this morning, Tse maintained his “Buy” rating and one-year target of $70.00 on OpenText.

 

http://www.cantechletter.com/2014/12/opentexts-acquisition-actuate-gets-thumbs-cormark/

 

 

It is only a 6% position for me, a lot of unknowns in the tech landscape but in general I like what the company has been doing.

 

One concern is that the CEO has cancer so they might need to transition management.  I know they have done that before, this is at least their 3rd CEO, but it is a risk.

[KCLarkin]

Donville mentioned them briefly on BNN Market Call Tonight. Still likes and owns OTC but prefers CGI which is at only 12x.

[Guest 50centdollars]

The Company is providing today its outlook for Fourth Quarter Fiscal 2015. Ranges with approximate U.S. dollar amounts are:

 

Revenue of $440 million to $455 million;

 

Non-GAAP EPS of $0.64 to $0.72 per share, diluted, based on 123,054,000 shares outstanding as at March 31, 2015.�

[Guest 50centdollars]

Open Text announced that its CEO, Mark Barrenechea, has resumed full

involvement in the day-to-day operations of the company following his

treatment for leukemia. Concurrently management provided disappointing

guidance for the current quarter and announced a restructuring. Q4/15 revenues

are expected to be $440-$455 million (by our math, down 4% y/y on an organic

c/c basis) versus the consensus of $488 million while adj. EPS is expected to be

$0.64 to $0.72 versus the consensus of $0.89. Based on this, we estimate that

license revenues may have experienced a >20% y/y organic decline, albeit off of

a tough comp. Management attributed the miss to FX, its transition from a

license-focused to a cloud-focused model (which it believes might have a $5-10

million impact on license revenue for the quarter), and, to a lesser extent, a

challenging macro environment. Open Text’s restructuring includes a

reshuffling of the executive team (including the departure of the EVP Sales) and

a 5% reduction to its workforce, which will come in large part from streamlining

its sales organization. It expects to incur a $25 million restructuring charge that

will result in $50 million in annualized opex savings.

[no_free_lunch]

I didn't think that the latest numbers were too bad.  Just a continuation of last quarter's performance.  I still see them as pulling $400m FCF this year, or $450m with their restructuring goal implemented.  So maybe $450m vs a market cap of $5.26b, or about a 12 multiple.  The market is pricing in a slowly deflating business.

 

I will wait and see what happens.

 

BTW good albeit slightly dated video here with the CEO:

 

http://www.bnn.ca/News/2014/7/31/OpenText-CEO-defends-acquisition-strategy.aspx

[ratiman]

From Glassdoor:

 

Lets detail the facts so you can formulate your own opinion to join

 

1. The company is a value company so the bottom line is everything! Growth, investment, innovation, employee value, all expendable to protect the bottom line

 

2. They buy broken and shrinking assets so by the nature of it you are selling, building, deploying solutions that exist and often decaying, are not priorities for customers or are commoditizing

 

3.,with commodizing solutions it's hard to sell more. So the renewal becomes everything. Power internally shifts to those teams and the field gets screwed along with customers. It's a viscous downward spiral seen by many a tech company death

 

3. A company like this can't attract or retain innovative and great leadership across all roles. Hence good people leave. Bad people stay.. Over the years it has resulted in a upper level leadership team that are incapable of action. Few good execs joined and now all left.. Leaving yes men

 

4. When you have leadership that is so mediocre then you get a command and control type structure in which the CEO dictates, monitors and tinkers with everything. This results in a paralyzed structure. It's on a scale unseen

 

5. The only way to keep the scheme going is to keep topping up through acquisitions faster than leaking out of the bottom. Works fine until even bad companies are expensive and then the bang moment .. It collapses

[KCLarkin]

From Glassdoor:

 

Are glassdoor reviews a useful investment tool? Ignoring the risk of fake reviews, I sometimes think there is an inverse correlation with good capital allocators. A company that buys unwanted companies, cuts employees, and manages expenses will likely have disgruntled employees. A company with private jets, excessive stock options, ping pong tables might get very good reviews.

 

 

 

[Jurgis]

From Glassdoor:

 

Are glassdoor reviews a useful investment tool? Ignoring the risk of fake reviews, I sometimes think there is an inverse correlation with good capital allocators. A company that buys unwanted companies, cuts employees, and manages expenses will likely have disgruntled employees. A company with private jets, excessive stock options, ping pong tables might get very good reviews.

 

OT?

 

Glassdoor reviews are probably not useful investment tool. But you are being too simplistic too. Employee satisfaction may be a large part of company's success. Penny pinching, crappy salaries, crappy benefits, no future can be both signs of downward spiral and push the company into it even more. This is especially true for tech companies where the labor market is highly competitive. If the word on the street is that company is walking dead with crappy environment, they will not get any A tech people. They'll get B & Cs at best - if they have offices in less competitive markets. And if they get mediocre people working on their products, it's likely competitors will eat their lunch really soon.

 

I sometimes wonder how Constellation does it. I guess their stock performance has been a large attraction so far. Maybe the environment is not bad (I don't know). And I guess they are in some niches where you can live without much new development, so perhaps they don't need that many great people. Plus if their niches are in old tech, they may get older people who are familiar with that and prefer stability of being in that area and company.

 

Disclaimer: No opinion about OTEX.