01 November 2018

Enterprise Information Management, a global leader with an attractive valuation (NASDAQ: OTEX)

Open Text (NASDAQ: OTEX) has evolved from a small content management company based in Waterloo, Canada to a global leader in Enterprise Information Management (EIM). EIM can best be defined as a set of technologies, processes, disciplines and practices used to manage an organisation’s data and content as an enterprise asset.  Put simply, it addresses all issues that an organisation faces when managing and exploiting the data and content within its business.  It’s not a new concept but its importance to organisations has grown as enormous amounts of data are readily available.

Open Text has built one of the premier platforms in EIM with enough scale to provide benefits to businesses of any size. The company accomplished this by creating a robust technology platform through innovation and acquisition over the past 15 years. Unlike many of the company’s competitors, who have only focused on one area within EIM, Open Text offers a comprehensive solution for its customers.  The company’s platform enables their clients’ businesses to grow faster, with lower operational costs, and reduced information governance and security risks.

We identified Open Text as being a high-quality company with an attractive valuation, and allocated capital for the following reasons:

1. Valuation – Open Text was trading at one of the most attractive valuations in the software sector.

  • The Enterprise Value/revenue ratio was 3.4Xs.  A significant portion of the revenue is recurring with a high gross margin and at a large discount to industry average;
  • Enterprise Value/EBITDA ratio was 12.5Xs.  The Capital Expenditure is for the core business; Open Text  has the ability to acquire other companies at lower multiples.
  • The price to equity free cash flow was 14Xs.

2. Competitive advantage – Open Text’s product reach, partner ecosystem and industry vertical expertise will help the company take market share from its largest competitors such as IBM and Hewlett Packard.  As a leading expert in the rapidly evolving field of EIM, Open Text has developed a competitive advantage due to its scale of product offerings and technical expertise.  Due to the complexity of EIM and high switching costs, Open Text has also developed sticky customer relationships.

3. Growth – Strong organic growth has come from cross-selling new products to its existing customer base as well as annual increases in maintenance fees.  Additionally, Open Text has also seen substantial growth in new customers. Going forward, the company will continue to focus on cross selling its full product suite into its existing and acquired customer bases.

4. Management – Open Text has a strong senior leadership structure and continues to attract top industry talent.  Mr. Mark Barrenechea has been the President and CEO of the firm since joining the Company in 2012.  Mr. Tom Jenkins, Chairman of the Board, has served various roles within the organization such as President, CEO, and Chief Strategy Officer.  Mr. Jenkins is the largest shareholder of the Company.  Mr. Steve Sadler is one of the key directors on the Open Text Board, having served since 1997.  Mr. Sadler has had significant influence in Open Text’s capital allocation strategy.  He, along with Mr. Jenkins, are among a handful of the early pioneers that helped build the Canadian software industry.

This stock is currently held by our Pengana Global Small Companies Fund

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