Open Text (OTEX) recently reported strong quarterly results for fiscal Q3 of 2024, with revenue rising by 16.3% year-over-year to a record $1.45 billion. This increase was primarily driven by the acquisition of rival Micro Focus in January 2023, which added $190 million more to the top line compared to the prior year. Despite the lower-margin operations of Micro Focus and higher interest expenses from debt associated with the deal, OTEX saw a significant climb in adjusted earnings to 94 cents per share, meeting analysts’ expectations. Additionally, the company experienced its 13th consecutive quarter of growth in currency-adjusted cloud services and subscriptions revenue.
However, OTEX’s shares plummeted by 14% following the company’s downward revision of its revenue forecast for the full fiscal year of 2024. The new outlook now ranges from $5.75 billion to $5.80 billion, which is $130 million lower than the previous guidance. This decrease is mainly due to the earlier-than-expected completion of the divestiture of the Application Modernization and Connectivity business to Rocket Software on May 1. As a result, OTEX is missing out on $100 million in revenue contribution and $100 million in expected free cash flow. This, coupled with $40 million in related costs, led to the significant reduction in outlook.
Despite the revised targets, OTEX still anticipates strong top-line growth of at least 28% from fiscal 2023, largely attributed to the acquisition of Micro Focus. The company also expects growth in enterprise cloud bookings to accelerate to 33%-38%, up from the previous forecast of 25%-30% and a substantial increase from last year’s 9.5%. Although adjusted EBITDA margin guidance was reduced by 2.5%, it still represents a meaningful expansion from the previous year. The lowered free cash flow forecast of $725 million to $800 million also indicates solid growth compared to the previous year.
With the net proceeds from the divestiture of the Application Modernization and Connectivity division, OTEX was able to pay down debt, leading to a more manageable net debt balance and leverage ratio. This improved financial flexibility will allow the company to focus on growth areas such as cloud and artificial intelligence capabilities. OTEX is eyeing free cash flow expansion to $1.2 billion to $1.3 billion over the next three years, doubling from the targeted $575 million to $650 million in fiscal 2025. Analysts believe that this financial progress and strategic focus could lead to a significant rebound in the stock price in the coming years. Julius Juenemann, CFA, an equity analyst and associate editor of Forbes Special Situation Survey and Forbes Investor, recommends OTEX as a stock to watch for potential upside.
