While Open Text Corp. (OTEX) is expected to report in-line
second-quarter financial results Wednesday, the deteriorating
economy is likely to weigh on revenue growth for the rest of fiscal
2009 - something the Street may not appreciate, an analyst
said.
Open Text makes software that helps companies archive electronic
data, such as email. Such enterprise-content-management software
has assumed a growing importance in recent years as companies use
ECM software to adhere to tough new compliance laws, like the
Sarbanes-Oxley Act.
However, as the global recession intensifies, companies are
cutting expenditures across the board, said Versant Partners' Tom
Liston. Software won't be immune, and he said there is mounting
evidence that the cutting has already started.
For instance, EMC Corp.'s (EMC) content management and archiving
division reported a 31% decline in fourth-quarter software-license
revenue Tuesday. The company's Chief Financial Officer David
Goulden said that was "an area of our business that's been affected
by the weakness in the enterprise software market this year,"
according to a transcript of EMC's fourth-quarter conference
call.
EMC also indicated it sees global spending on information
technology falling in 2009 by the mid-to-high single digits on a
percentage basis.
Liston noted that technology-research firms, such as Gartner and
Forrester, have also ratcheted down their global-IT spending
forecasts. For example, on Jan. 12, Forrester cut its 2009 forecast
to -3% from +4%, according to Liston.
Meanwhile, bellwether software companies are slashing jobs,
Liston added. On Monday, Market Watch reported that International
Business Machines Corp. (IBM) has cut 2,800 jobs in its software
and sales department. Last week, Microsoft Corp. (MSFT) announced
plans to cut 5,000 jobs.
Room For More Cost Cutting
In November, Open Text said it would cut 10% of its workforce, a
move that coincided with the completion of its acquisition of
Captaris. The company also announced a $20 million restructuring
charge, which it later raised to $36 million.
Open Text has never been reluctant to cut costs, and it could
cut further if its revenue falls, Liston said. Still, while
cost-cutting could help Open Text meet fiscal 2009 earnings
expectations, the potential revenue hit from reduced software
spending isn't fully reflected in analysts' estimates, he said. The
mean analyst revenue estimate for 2009 is $822 million, with
estimates ranging from as high as $852 million to as low as $781
million.
Liston is forecasting 2009 revenue of $802 million, but said he
believes his estimate could prove too high. He has a neutral rating
on the stock and a $30 target.
Open Text is trading above Liston's target, though the stock is
off slightly Tuesday. On Nasdaq, Open Text is down 1.6%, or 53
cents, to $31.88 on about 267,000 shares.
At Monday's close, Open Text's stock had climbed about 47% since
hitting an intraday low of $22.01 on Oct. 24. The Nasdaq is
essentially flat over the same period. A strong first quarter,
highlighted by license-revenue growth of 13%, was one reason for
the big upward move. Speculation that Open Text could be a takeover
target has also pushed the stock higher.
The ECM sector has been consolidating in recent years, with the
latest takeover coming last week. On Jan. 22, Autonomy Corp. PLC
(AU.LN), a U.K. ECM vendor, announced plans to acquire U.S. rival
Interwoven Inc. (IWOV) for $16.20 a share. The offer, valued at
$775 million, represented a 37% premium to Interwoven's Jan. 21
close of $11.84.
Still, takeover speculation notwithstanding, Liston said he
believes the Street is pricing in too much optimism around Open
Text's revenue-growth prospects. "We believe spending on software
licenses will fall by 5-10% this year, and consensus on Open Text's
license-revenue appears to be calling for mid single-digit
percentage growth," he said.
Not everyone agrees. In a note Tuesday, Research Capital's David
Shore said he believes Open Text's valuation is compelling. He said
Open Text trades below its peers and is now at "historically low
levels." He also noted that Autonomy and Interwoven both reported
strong quarterly results.
"Being the largest ECM vendor in the market, we expect Open Text
to benefit from the increased regulatory drive and post steady
results in these tough economic times," he said.
Shore is forecasting fiscal 2009 revenue of $829.5 million. He
rates Open Text a buy with a $42 target.
Company Web Site: http://www.opentext.com
-Stuart Weinberg, Dow Jones Newswires; 416-306-2026;
stuart.weinberg@dowjones.com
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