OpenText Corporation (NASDAQ: OTEX), (TSX:OTEX) a Canada based enterprise information management software company, has faced significant challenges in recent years following a large acqusition. The stock has experienced a substantial decline, with a 41% drop over the past three years and a 33% decrease in the last year alone, currently trading at $26.09 per share. Despite this, it offers an attractive forward dividend yield of 4.05%, supported by an annual dividend payout ratio of $0.26. OpenText’s valuation is notably low, with a forward price-to-earnings (P/E) ratio of 6.38, suggesting potential undervaluation compared to industry peers. The company’s financials show revenue decline due to divestments, but strong adjusted EBITDA margins remain. OpenText is focusing on growth areas like cloud computing and artificial intelligence (AI), with initiatives such as the Titanium X platform launch expected to drive AI-related revenue. However, high debt levels and slow organic growth posed challenges. The company has now addressed the debt issue through a divestiture and has made good progress in reducing debt.
OpenText is a global leader in information management, operating in a $200 billion total addressable market. The company is active in six key markets: content management, IT operations management, application development and modernization, business network, cybersecurity, and AI analytics. OpenText is approaching $6 billion in revenue for fiscal 2026, with cloud bookings growth exceeding 15% annually and an adjusted EBITDA of 30%.
Analysts anticipate earnings growth and increased free cash flow, but concerns about underperformance and investor confidence remain. Overall, OpenText presents a mixed picture for investors, balancing potential undervaluation and growth prospects against significant business challenges.
OpenText offers a comprehensive suite of enterprise software products that span various aspects of information management and digital business processes. At the core of their offerings is the Enterprise Content Management (ECM) suite, which includes the Content Suite Platform, Extended ECM, and Documentum. For business-to-business integration, OpenText provides the Trading Grid as part of its Business Network solutions. The company also offers Customer Experience Management tools and Digital Process Automation solutions like AppWorks. In the realm of legal technology, OpenText’s Discovery suite, featuring Axcelerate, supports eDiscovery and investigations. The company has significantly bolstered its security offerings with products such as EnCase Forensic Security Suite, Carbonite, Webroot, NetIQ, ArcSight, Voltage, and Fortify. For organizations looking to leverage artificial intelligence and analytics, OpenText provides the Magellan Product Suite. Additional key products include information management tools like Archive Center and RightFax, as well as web content management solutions. This diverse product portfolio positions OpenText as a one-stop shop for enterprises seeking comprehensive information management and digital transformation solutions.
Over its history OpenText has been an highly acquisitive company to build out its software stack. Here’s a table listing OpenText’s key acquisitions and divestment, sorted by date:
| Date | Type | Company/Business | Value | Description |
| 2003 | Acquisition | IXOS Software AG | - | Added content and email archiving capabilities |
| 2004 | Acquisition | Artesia | - | Added digital asset management capabilities |
| 2006 | Acquisition | Hummingbird Ltd. | $489 million | Expanded ECM offerings |
| 2008 | Acquisition | Captaris Inc. | $131 million | Added document capture and fax solutions |
| 2009 | Acquisition | Vignette Corporation | $321 million | Enhanced web content management and social media capabilities |
| 2012 | Acquisition | EasyLink | $232 million | Expanded cloud-based offerings |
| 2014 | Acquisition | GXS Inc. | $1.06 billion | Added B2B integration and cloud-based fax services |
| 2014 | Acquisition | Actuate | - | Expanded analytics capabilities |
| 2015 | Acquisition | Daegis | $13.5 million | Enhanced eDiscovery solutions |
| 2016 | Acquisition | Dell EMC (NYSE:EMC_old)’s Enterprise Content Division (including Documentum) | $1.62 billion | Strengthened position in Content Services |
| 2017 | Acquisition | Covisint | $103 million | Integrated into OpenText Business Network |
| 2017 | Acquisition | Guidance Software | $240 million | Enhanced digital investigation capabilities |
| 2018 | Acquisition | Liaison Technologies | $310 million | Integrated into OpenText ALLOY Platform |
| 2019 | Acquisition | Carbonite Inc. (including Webroot and Mozy) | $1.45 billion | Enhanced cyber resilience offerings |
| 2020 | Acquisition | Xmedius | $75 million | Expanded secure information exchange capabilities |
| 2021 | Acquisition | Zix Corp | $860 million | Strengthened cloud security offerings |
| 2021 | Acquisition | Bricata | - | Added Network Detection & Response technology |
| 2023 | Acquisition | Micro Focus | $5.8 billion | Added AI & Analytics, Application Delivery & Management, and IT Operations Management capabilities |
| 2024 | Divestment | Application Modernization and Connectivity (AMC) business | $2.275 billion | Sold to Rocket Software to focus on Cloud and AI opportunities in Information Management |
OpenText’s $5.8 billion acquisition of UK based MicroFocus in 2023 was driven by a multifaceted strategy aimed at significantly expanding its market presence and enhancing its product portfolio. This move expanded OpenText’s total addressable market (TAM) to $170 billion and added approximately $2.7 billion in annual revenue, making it one of the world’s largest software and cloud businesses. The acquisition brought valuable software solutions in areas such as identity access, security, IT operations management, and networking, complementing OpenText’s existing offerings and accelerating its digital transformation capabilities through enhanced cloud and AI technologies. OpenText also /gained access to MicroFocus’s prestigious customer base, strengthening its global reach and cybersecurity offerings. The company projected annual cost savings of $400 million through operational synergies and expected the acquisition to immediately boost its adjusted EBITDA and free cash flow. Ultimately, this strategic move positioned OpenText as a more comprehensive and competitive player in the information management and enterprise software space, while achieving significant operational and financial synergies.
Company Strategy The company’s future business strategy focuses more on organic growth, primarily driven by cloud services. Cloud revenue is projected to comprise 40% of total revenue, with customer support at 40% and license/professional services at 20%. OpenText continues to offer on-premises options for customers while investing heavily in cloud development. This dual approach allows the company to cater to a wide range of customer needs.
In early 2023, OpenText acquired Micro Focus for approximately $6 billion. As part of its strategic realignment, the company has divested the Mainframe, Application Modernization and Connectivity (AMC) business for $2.275 billion. Following this divestiture, OpenText will retain IT operations management, application development and modernization, cybersecurity, and AI analytics from Micro Focus. This strategic move is designed to optimize OpenText’s portfolio and focus on high-growth areas.
Artificial intelligence (AI) is seen as a significant growth opportunity for OpenText, driving cloud bookings growth. The company has launched an AI product called Aviator, which is available across all business pillars. OpenText is leveraging its large installed base and existing customer relationships to drive AI adoption, positioning itself for further expansion in this area.
Financially, OpenText plans to use the proceeds from the AMC divestiture to reduce debt, aiming to bring its net leverage ratio below 3x. Once leverage covenants allow, the company intends to implement a share buyback program. OpenText has increased its annual cloud bookings growth guidance to 25-30% and expects 7-9% revenue growth in fiscal 2026. This strategic financial management is designed to enhance shareholder value while supporting ongoing business growth.
The near term Revenue and Operating Income trend appears to be encouraging, with double digit % growth over the last 3 years, and it appears that the company is coming out of a funk following a period of major acquisitions and divestment.
(TSX:OTEX) Data by GuruFocus
Guru Holding’s of OpenTextThe following Guru’s hold OpenText stock in their portfolio. Brandes, Grantham, Greenblatt and Royce are value investors whie Ray Dalio (Trades, Portfolio) is more of a "macro" investor.
| Brandes Investment Partners, LP (Trades, Portfolio) | 2024-12-31 | 4,504,139 | 1.710 | 1.43% | Add 29.17% | |
| Jeremy Grantham (Trades, Portfolio) | 2024-12-31 | 1,297,772 | 0.490 | 0.12% | Add 84.26% | |
| Ray Dalio (Trades, Portfolio) | 2024-12-31 | 174,047 | 0.070 | 0.02% | Add 361.34% | |
| Joel Greenblatt (Trades, Portfolio) | 2024-12-31 | 48,059 | 0.020 | 0.01% | Reduce -5.28% | |
| Chuck Royce (Trades, Portfolio) | 2024-12-31 | 32,519 | 0.010 | 0.01% | Reduce -69.24% |
Conclusion OpenText is still in a period of transition after its transformative acquisition of Microfocus and divestment of AMC. It’s basically now transitioning from being an acquirer towards an emphasis on organic growth focused on cloud and Software as a Service (Saas). OpenText’s has a large TAM to aim for and a long runway for growth. It also has a very large and sticky legacy business which brings in reliable cash flows from lucrative and renewing customer support services. The company’s FCF yield is nearly 10%.
Given the deleveraging following the AMC divestment the company’s balance sheet is now in better shape (with debt/equity of 1.58) and the company is poised to return cash to the company via stock buybacks. I expect the stock should offer steady growth in the years ahead. OpenText is a rare undervalued stock and an established dividend payer, a rarity in the software industry.
This content was originally published on Gurufocus.com
