Publicly-traded tech companies have laid off hundreds of workers in recent months and warned of diminishing prospects due to high inflation and recession fears. But amid the sector-wide gloom, the outlook at Waterloo, Ont.-headquartered OpenText is relatively sunny. “We can see the headwinds out there, but we’re leaning in right now,” said CEO Mark Barrenechea.

Spun out of the University of Waterloo in June 1991, OpenText sells software that some of the world’s largest companies use to manage their corporate and customer information. Over the past three decades, it’s become a mainstay of Canada’s tech sector, even as local peers like Blackberry have risen and fallen and fellow business-to-business software makers like Shopify and Lightspeed have attracted more attention in the public markets. 

OpenText made US$3.49 billion in revenue in its 2022 fiscal year ended June 30, up 3.2 per cent, and expects to grow up to four per cent this year. Its cloud business brought in US$1.54 billion, and is projected to increase another eight per cent. 

High inflation is the toughest in a raft of macroeconomic challenges businesses face at the moment, said Barrenechea in an interview last week: “It’s like a cavity—it doesn’t do anything, it just erodes” corporate profits. In response, OpenText raised prices five per cent in July. It’s also doing “some good old fashioned belt-tightening,” deferring projects and facilities expansions not directly tied to immediate revenues, said Barrenechea, although he declined to identify them.   

Other headwinds he cited include the continuing effects of COVID-19; the risk of recession in key advanced economies; rising interest rates; Russia’s invasion of Ukraine; and a strong U.S. dollar, which eats into the earnings of businesses like OpenText with recurring revenues and significant international sales. 

Barrenechea has worked through several tech crashes. When the financial crisis began in December 2007, he was CEO of Palo Alto, Calif.-based Rackable Systems, a data-centre hardware firm. One lesson businesses learned was to “be able to respond promptly,” he recalled, noting that firms that moved quickly fared better. But that recession was “a mono-crisis—a liquidity challenge,” said Barrenechea. “This one is different… It would be a poly-crisis that we have today.”      

Some companies are moving “a little too fast” in anticipation of another downturn, according to Barrenechea: while Germany and the U.K. are at risk of recession, the United States is not guaranteed to face one. “We’re being temperate in our response, because we see the opportunity that’s being created by the poly-crisis.” The U.S. is by far OpenText’s largest market, accounting for 56.3 per cent of its revenue last fiscal year, while Germany and the U.K. made up 6.9 per cent and 5.7 per cent, respectively.

The firm continues to see resilient demand, Barrenechea says, and is pitching its technology as an answer to clients’ rising costs. “The best answer to inflation is digitalization,” he said, noting that automating repetitious work removes costs that rise during inflationary periods. (Wages have yet to follow prices upward during the current economic spell). . 

OpenText is also selling to companies overhauling their supply chains to meet climate commitments, or bringing production closer to their home markets following COVID-19 and political disruptions. Toyota, for one, is using the Canadian firm’s technology to manage plans to significantly electrify its lineup by 2030. 

OpenText has built a new clientele of small- and medium-sized businesses since it acquired Boston-based Carbonite, a data backup platform, for US$1.45 billion in December 2019. Those customers accounted for $700 million in revenue last fiscal year.

The company plans to grow its workforce of about 14,800 by two per cent over the next year, hiring primarily in Canada, India, and the Philippines; about a third of current staff are already based in the Asia-Pacific region. “There have been a lot of tech companies announcing layoffs,” said Barrenechea. “We are not doing that.” But he does anticipate some employee exits as a result of the firm’s annual performance reviews. “We’ve hired 4,000 people over two years, and we did that [remotely],” he said. “I’m confident we got the majority of our decisions right, but not all of them.” 

In April 2020, OpenText announced plans to permanently close half its offices around the world. The company now expects to be about a third virtual, up from a tenth before the pandemic. “It’s not ‘hire anywhere,’ it’s really ‘hire with proximity,’” said Barrenechea. “You can be virtual, but I want you near us, so we can come together.” 

Before the recent rounds of layoffs, tech firms had reported significant competition for workers, including from large U.S. firms increasingly willing to hire remotely. “There’s been an uptick in Canadian tech salaries because the border got a lot thinner over the last two years,” Barrenechea said, reiterating concerns he’s previously expressed that the country risks becoming a venue for “outsourced low-cost work” instead of building its own ecosystem. 

OpenText has historically been very acquisitive. It’s done fewer deals in recent years, but the acquisitions it has made have mostly been large, including the November 2021 takeover of Zix, a Dallas-based email security firm, for US$860 million. “OpenText has created the vast majority of shareholder value through acquisitions,” RBC Capital Markets analyst Paul Treiber wrote in a late-July investor note.  

The company ended June with US$1.69 billion in cash on its balance sheet and generated free cash flow of US$889 million last fiscal year, with room to borrow if necessary. OpenText expects to complete the integration of Zix this calendar year. “So we have the capital and we have the bandwidth in the company” for further acquisitions, Barrenechea said. Meanwhile, valuations for targets, which have put him off deals in recent years, are now down to levels that the firm finds attractive. “I expect to get transactions done this year,” he said.

Barrenechea also intends to increase R&D spending on OpenText’s cloud offerings this year to almost US$1 billion, a US$75 million boost. The company is targeting organic cloud revenue growth of up as much as eight per cent by its 2025 fiscal year. “It is a Darwinian moment to be more aggressive to outcompete rivals,” he said on an earnings call earlier this month. 

Speaking with The Logic, Barrenechea cited the firm’s ability to meet government-level security standards and country-specific, evolving data sovereignty requirements. “We’re just going to out-engineer [competitors] with our investment,” he said. “Every 90 days, we’re releasing products.” 

As it looks to grow, OpenText won’t be making a major return to the venture market. Between January and November 2014, the company became a limited partner in three of the four funds-of-funds the then-Consevative government seeded via its $340 million Venture Capital Action Plan (VCAP). Ottawa established the program on the recommendation of a panel led by OpenText chair Tom Jenkins. The company has also directly backed startups like Toronto-based Sensibill and Q4. 

OpenText is still open to direct investments, but is not planning to back any more funds-of-funds. “We were showing support to the community [and] the government [by being] an anchor tenant in the VCAP program,” said Barrenechea, noting that the company has “done quite well” from its investments. “We’ve paused there to seek our return.”