AI is revolutionizing enterprise software by enhancing products, streamlining operations, and offering real-time analytics, creating new growth opportunities. 

Open Text (OTEX), a leader in enterprise information management and supports over 120,000 global customers, including major companies like Microsoft, Amazon, and Google. 

The company’s expansion into AI and cloud services, highlighted by innovations like the AI engine Open Text Aviator, has broadened its market potential to around $200 billion. 

Despite facing challenges from acquisitions like Micro Focus, including increased debt, Open Text continues to perform strongly, driven by its cloud segment and strategic innovations. 

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AI is transforming how businesses operate, offering a clear edge by turning data into actionable insights. 

For enterprise software companies, integrating AI isn’t just an upgrade, it’s a game changer. 

It enhances product offerings, streamlines operations, and delivers real-time analytics, helping clients make smarter decisions faster. 

This shift opens new growth avenues, allowing these companies to upsell advanced solutions and improve customer retention. 

Open Text (OTEX) is a leading provider of enterprise information management software, serving a vast range of industries with solutions that manage, store, and distribute data across corporate networks.

The company’s diverse product portfolio includes offerings like content cloud, cybersecurity cloud, application automation cloud, and business network cloud.

These offerings enable Open Text to support over 120,000 enterprise customers globally, including 98 of the world’s 100 largest companies such as Microsoft (MSFT), Amazon (AMZN), and Google (GOOGL).

The company’s recent focus on expanding its AI and cloud services has significantly broadened its market potential, pushing its total addressable market (TAM) to approximately $200 billion. 

Open Text’s approach centers on embedding AI functionalities within its existing products, enhancing data processing, analytics, and automation capabilities for its customers.

The introduction of Open Text Aviator, an AI and analytics engine, exemplifies the company’s commitment to driving innovation in enterprise software. 

Aviator enables clients to integrate large language models (LLMs) and advanced analytics into their operations. 

By offering AI tools that can be directly applied to real-world business challenges, the company helps organizations streamline operations and gain actionable insights from their data.

Open Text’s AI capabilities are designed to work seamlessly within its cloud-based services, further solidifying its competitive edge. 

The company’s growth strategy has been focused on strategic acquisitions, which have enabled it to expand its product offerings and deepen its market reach. 

The $6 billion acquisition of Micro Focus last year was a transformative move, adding significant scale to Open Text’s operations. 

This acquisition has allowed the company to enhance its cloud and AI capabilities, but it also brought challenges, particularly a higher debt burden.

To address its elevated debt levels, Open Text has initiated a series of financial maneuvers, including divestitures and targeted debt repayments. 

For instance, the company sold its mainframe computer unit to Rocket Software for $2.3 billion, which helped pay down $2 billion of debt this year.

Despite the financial pressures from its acquisition strategy, Open Text’s cloud segment continues to perform strongly, contributing significantly to the company’s overall revenue. 

In fiscal 2024, cloud revenues grew by 7%, and the company aims to achieve mid-single-digit organic growth in this segment in the near term. 

Investments in cloud infrastructure and AI capabilities are expected to drive further growth, enhancing the value proposition for Open Text’s clients.

Additionally, the company grew total revenue by 29% from the prior year, largely driven by the integration of Micro Focus.

All these developments enabled Open Text to achieve a 61% Uniform ROA and 20% asset growth last year.

Despite the strong performance, the market is concerned about growth in a mature software sector and debt, as reflected by the company’s low 9x Uniform P/E.

While the company faces challenges from its recent acquisitions and trying to penetrate a mature market, its robust product portfolio and ongoing innovation efforts provide a solid foundation for future growth. 

For investors, Open Text offers a compelling blend of steady cash flow, attractive valuation, and significant growth potential in AI-driven enterprise solutions.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research