Open Text (OTEX) reported strong quarterly results, with fiscal 2024 Q3 revenue increasing by 16.3% year-over-year to $1.45 billion. This exceeded consensus estimates and was driven by the acquisition of Micro Focus and continued strong performance in existing operations. Adjusted earnings per share climbed by 28.8% to 94 cents, meeting analysts’ expectations. Despite these positive results, OTEX’s shares dropped by 14% due to a revised forecast for the year, which lowered the revenue outlook to $5.75 billion to $5.80 billion. The stock’s decline is largely attributed to the completion of the divestiture of its Application Modernization and Connectivity business to Rocket Software.
Although the revised targets indicate strong top-line growth of at least 28% from fiscal 2023, the stock’s slide is viewed as excessive. The reduction in revenue outlook is primarily due to the early completion of the divestiture, which was expected to contribute $100 million to the top line through June 30. OTEX also lowered its adjusted Ebitda margin guidance but still expects meaningful expansion from fiscal 2023. The company’s free cash flow forecast, despite being reduced, still reflects solid growth of about 16% from the previous year’s numbers. OTEX plans to use the net proceeds from the divestiture to pay down debt, which will improve its financial flexibility and allow for investment in growth areas such as cloud and artificial intelligence capabilities.
Open Text (OTEX) is recommended as a market-beating investment opportunity in the Forbes Investor newsletter. The company’s strong performance and positive outlook make it an undervalued gem with significant upside potential. By paying down debt with the net proceeds from the divestiture, OTEX will enter fiscal 2025 with improved financial flexibility and a decreased leverage ratio. This will position the company to accelerate its move into growth areas and increase free cash flow over the next three years. The projected free cash flow expansion to $1.2 billion to $1.3 billion without the Application Modernization and Connectivity business could lead to a stock rebound over that time period.
Julius Juenemann, CFA, equity analyst and associate editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters, highlights Open Text (OTEX) as a current recommendation in Forbes Investor. With the potential for significant free cash flow expansion and improved financial flexibility, OTEX is well-positioned for growth in fiscal 2025. The company’s focus on cloud and artificial intelligence capabilities, coupled with the expected interest cost savings from debt reduction, will further drive its financial performance. OTEX’s strong outlook and growth potential make it an attractive investment opportunity for investors looking for value and upside in the market.
