New AI Initiatives With SAP And BASF Will Boost Future SaaS Offerings

Key Takeaways

• Focus on AI, SaaS growth, and strategic partnerships is expected to boost high-margin revenue and improve efficiencies.
  
• Investments in security and cloud expansions aim to bolster revenue and positively impact net margins.
  
• Economic uncertainties and currency fluctuation challenges, along with integration risks and alliance transitions, threaten Open Text's revenue and profitability margins.

Catalysts

Engages in the provision of information management products and services.

• The completion of the Titanium X or Cloud Editions 25.2 next quarter is anticipated to upgrade existing customers to the cloud and expand capabilities, potentially enhancing both revenue and earnings through cloud growth.
  
• The company's focus on AI and SaaS-driven growth, with significant SaaS wins at SAP, BASF, and others, is expected to contribute to higher-margin revenue growth opportunities and improved net margins through increased efficiencies.
  
• Investments in the security business, particularly in expanding the new security cloud and integrating with Microsoft Security Copilot, aim to bolster revenue growth in a top category for OpenText, potentially positively impacting net margins.
  
• The new licensing model, OpenPass, introduced in January allows for license uplift and maintenance uplift with additional cloud credits, expected to drive license revenue growth, ultimately impacting overall earnings positively.
  
• Strategic partnerships with hyperscalers like Microsoft and Google are expected to enhance cloud growth, providing operating leverage and potentially increasing revenue and net margins as the company benefits from economies of scale.

Open Text Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Open Text's revenue will decrease by 0.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $695.3 million (and earnings per share of $2.8) by about March 2028, up from $660.7 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $871.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 10.4x today. This future PE is lower than the current PE for the CA Software industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 3.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.65%, as per the Simply Wall St company report.

Open Text Future Earnings Per Share Growth

Risks

• The recent downward revision of revenue by $130 million for fiscal '25, partly due to ITOM and ADM performance and FX, could negatively impact future revenue projections.
  
• The transitional phase following the end of the alliance agreement with DXC presents near-term headwinds impacting license and maintenance revenue, which could affect net margins.
  
• Economic uncertainties in Europe and FX challenges, particularly due to U.S. currency fluctuations, can create broader financial impacts, potentially affecting revenue and earnings.
  
• The expectation of lower total maintenance revenue growth due to declines in ITOM and ADM revenues could challenge the company's profitability margins.
  
• Successfully integrating and growing acquisitions, such as Micro Focus, entails execution risks that could impact EBITDA and operating cash flows if not well-managed.

Valuation

• The analysts have a consensus price target of $35.091 for Open Text based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $48.0, and the most bearish reporting a price target of just $31.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $695.3 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $26.33, the analyst price target of $35.09 is 25.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.