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St Andrews Investment Society 03. April 2017

OpenText Corporation

OTEX OpenText’s diverse business solutions within a single ecosystem and an aggressive M&A strategy, in a high growth sector, offers a unique Price (31/03/2017) investment opportunity at a fair price. Market Cap (bn) EV (bn)

Company Overview

$34.01 $9.0 $5.2

Cloud Computing

OpenText Corporation is a cloud computing company from Ontario, Canada, which was founded in 1991 and is dual listed on the Toronto & New York Stock exchanges. It has a market capitalisation of $9.0bn and has revenues of $1.8bn in 2016, which came from over 100k international customers. OpenText currently supports these customers with a staff of 12,000 based in three global regions; Americas, EMEA, APJ.

Price Target Investment Horizon

$80 36m

24m performance:

OpenText provides a platform of software products and services that assist organizations in finding, utilizing, and sharing business information from any device. The business information can then be used to find efficiencies across companies. The Company’s primary focus is in the development of, and sales of Enterprise Information Management (EIM) software and solutions. EIM

Enterprise Content Management

Cloud

Analytics

Customer Experience Management

Business Process Management

Compliance, Risk Management and Governance

Its software and services allow organizations to manage the information that flows into, out of, and throughout the enterprise as part of daily operations. In addition, the Company provides solutions that enable the exchange of information and transactions that occur between the constituent parts of a supply chain.

Investment Rationale

Market Data: 52- Week Range Shares Out. (m) EV/EBITDA EV/OpFCF P/E Div./Yield

35.07-25.84 263.14 9.3x 59.5x 7.5x $0.46/1.4%

Financial Data: Revenue (m) Revenue growth EBITDA (m) EBITDA growth EBITDA margin

$1,824 -1.5% $611 3.7% 33.5%

Leverage: Net Debt (m) Net Debt/EBITDA EBITDA/Interest

$862 1.4x 9.3x

OpenText has established itself in a high potential growth market which has recently benefited from increasing revenues and decreasing costs giving them a net income margin at 15.6% from 11% 4 years ago. The expectation of future sector growth and the continuation of reduced costs in both cloud computing and data analysis with their launch of Magellan should continue this growth. OTEX is also looking towards further acquisitions with Mark Barrenechea recently stating that the $3bn of acquisitions laid out in 2014 was ‘an old number, and needed updating’. OpenText has a large number of contracts with various industry leaders such as ING, Honda, FedEx and ArcelorMittal and will be able to continually integrate new software into these companies and cross sell within them Page 1 of 4

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to get a larger share of control over these businesses enterprise software. OTEX has a more diversified EIM software business than its competitors and with the high sunk cost of changing software at a large business, this diversification is likely to pay off in the long run as companies look for a single entity to provide their software as opposed to multiple platforms.

Market Position With the growth in unstructured data, cloud computing and big data analysis software, EIM has become an increasingly significant market within all industries. Berkshire Hathaway recently stated a forecast that CAGR of the industry would be in the region of 20% for the next 5 years. Whilst the market is largely filled by tech giants IBM, Microsoft and Oracle (OpenText has a technology alliance with the latter two), there has been an increasing trend for more tailor made integrated software like OpenText over the past decade, with OpenText consistently being ranked strong in both their current offerings and strategy by both Forrester and Gartner across their platform. OpenText’s M&A model has given them a larger, moreintegrated platform than its smaller rivals, lowering costs and allowing them to insert their platform into specific sections of companies; allowing them to grow their hold on businesses’ enterprise software from within. This combined with its latest offering of Magellan, to be released in Q3/4 2017, will give its customers access to machine learning software only offered by themselves. Unlike IBM’s Watson and Palantir’s machine learning software, OpenText promise to be more open with clients about how their data is processed, alongside being cheaper, which gives them a competitive advantage in its future platforms in the more company specific business software. The growth of the market in recent years has been largely down to consolidation, OpenText’s ability to make and finalise multiple deals year on year plus Canada’s favourable tax credit system, in regards to moving IP rights to its headquarters in Waterloo, gives them the ability to proceed to grow their business both organically and through acquisitions.

Financial Position As can be seen from the CAGR, OpenText’s income growth is strong, CAGR 29% last ten years, yet not consistent. This is due to their current strategy of many acquisitions and low underlying, more consistent, organic growth. By their estimates this is in the low single digits but this is set to increase with full integration. In comparison, they are expecting $300 million in revenue from acquisitions annually, at their current expansion rate, as financial benefits of recent purchases have yet to be fully realised. They are predicting double digit growth in revenue this year. Most of the acquisitions made are asset transactions, by targeting specific strategic areas to purchase. This is more difficult for them to incorporate but force the new additions to be fully integrated as they cannot be an independently fraction of the company. This will support future organic growth. Quarterly growth in revenue over the last year comes to about 5% (CQGR). You may note that the revenue dropped in 2016 as opposed to 2015. This has been addressed with some restructuring in N. America. They are prioritising improving, and steadying, their operating cash flow, already with a CAGR of 24%, and reorganising the company to promote organic growth and for full integration. They are currently in a strong liquidity position, (which can’t be seen in summary below) at $835 m at the end of Q12017, as they approach the closing of the Dell EMC (‘s Documentum) agreement, expected soon. This is mainly due to the substantial tax benefit they received for moving their IP to Canada, the lower tax rates will continue to benefit the business and simplify legal proceedings.

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OpenText - Financial Summary ($k, FYE June 2016) Revenue Growth EBITDA Margin EBIT Margin Net income Margin

FY2014A

FY2015A

FY2016A

LTM

$1,624,699

$1,851,917

$1,824,228

$1,958,719

19.2%

14.0%

-1.5%

7.02%

$486,705

$588,858

$610,931

$631,156

30.0%

31.8%

33.5%

32.2%

$300,528

$348,711

$368,563

$363,267

18.74%

17.32%

19.54%

18.55%

$218,074

$234,406

$284,495

$1,113,386

13.4%

12.7%

15.6%

56.84%

14A-16A CAGR

3.9% 7.9% 7.0% 9.3%

Growth Prospects & Risks Growth Strong and consistent growth in FY 2016 looks set to continue once again into FY 2017, with a focus on acquisitions and organic growth. The recent purchase of Dell EMC’s enterprise content division for $1.62 billion has now been completed, adding the documentum software to an increasingly diverse range of services that the company has on offer. This joins the following acquisitions from FY 2016: Daegis Inc., ANXe Business, HP Inc.’s CEM assets, Recommind and HP Inc.’s CCM assets. The ECM market is well suited to growth via acquisitions due to the logistics of large scale data storage and the infrastructure that is required to operate such facilities. These have helped establish the company as the ECM market leader, with the company estimating that cloud related services will constitute over 50% of revenue by 2020. OpenText will seek to continue to grow its customer base. In the fourth quarter of FY 2016 the company saw Banco Original, The City of Calgary, FMC Technologies, Joy Global, Del Monte Foods Inc., Tata Motors Limited, Superior Tribunal de Justica, AbbVie and Eisenmann AG, join their echosystem. In FY 2017 they have continued to grow with new customers including Red Hat Inc., Nevada State Controller's Office, Schwan Cosmetics, Kamehameha Schools, eMeter Corporation, APA Group, State of Iowa, KUKA, Miller Insurance Services LLP, Kno2, Delta RM, Sanofi, Mount Sinai Health System, Inland Revenue Department, HKSAR and Constellation Brands. This shows the vast array of companies that require the range of services that Opentext provides. In terms of organic growth, the Magellan cognitive system has produced a direct challenge to market leader IBM. If OpenText release 16 is successful, it will produce the first significant organic growth for the company within the recent past and compliment the consistent growth that has been produced through acquisitions. The company is also investing in machine operating software (OpenText Virtual Desktop), which provides an exciting and varied range of opportunities in a growing market. As of March 24, 2017, the consensus forecast amongst 15 polled investment analysts covering Open Text advises that the company will outperform the market. Risks Opentext is vulnerable to the success and decisions made by their strategic partners, distributers, and third party service providers. Opentext is not able to control the success of these groups, nor are they able to predict future growth. A decline in any of these groups has the ability to affect the Opentext revenues.

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The enterprise information management market (EIM) is constantly changing as new products are developed and additional companies enter the market. As a result, it is extremely competitive and it can be difficult to maintain market position. While OTEX believes it is taking all the steps necessary to remain competitive, they are unable to ensure that they will not be affected. While Opentext has had great success so far with their mergers and acquisitions, these large financial investments face the risk of not producing revenues Opentext had expected. Other revenue reducing risks with acquisitions include: i) failure to successfully integrate the new products with OTEX products, resulting in market confusion ii) strain on pre-existing systems, controls procedures, and resources. Lastly, much of OTEX success has come from their mergers and acquisitions. There is the risk that OTEX does not have strong enough organic growth to continue this success if they do not continue to acquire new companies.

Management Structure & Integrity OpenText has a very technologically experienced leadership team, with current members sourced from high-profile successful tech companies with both the CEO and President having worked for Oracle prior to moving to OpenText. The leadership team is made up of the CEO, President, 3 Executive Vice Presidents (Chief Financial Officer, Chief Legal Officer, and head of Engineering, 7 Senior Vice Presidents (responsible for Professional Services, Enterprise Sales, Global Technical Services, Corporate Development, Human Resources, Business Network Sales, and Cloud Services), a Chief Marketing Officer, and a Chief Information Officer.

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