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The Open Text building in Waterloo, Ont. (Kevin Van Paassen/The Globe and Mail)
The Open Text building in Waterloo, Ont. (Kevin Van Paassen/The Globe and Mail)

TECHNOLOGY

Open Text shares roar back Add to ...

Shares of Open Text Corp. surged 15 per cent a day after Canada’s largest software company delivered quarterly results that topped expectations on the Street.

The rise on Thursday erased most of the losses that the stock had suffered since last November, a three-month period that has included worries about Open Text’s operations in Europe and a switch in the company’s leadership.

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Investors appeared to take comfort in the comments of the newly appointed chief executive officer, who discussed his outlook for the company during the earnings conference call late on Wednesday.

Mark Barrenechea said Open Text is well positioned to take business from IBM Corp. and EMC Corp. in its core specialty of enterprise content management (ECM) software, which helps organizations sort and access the vast amount of information in their computers.

Mr. Barrenechea took over as president and CEO from the retiring John Shackleton on Jan. 2. The 46-year-old had previously served in the senior ranks of Oracle Corp. and most recently headed Silicon Graphics Inc., a California-based company that makes servers and data storage equipment.

The new CEO said the company would seek growth by going after U.S. federal contracts, more customers in the manufacturing sector and more overseas business, in Japan, Brazil, Russia, India and China.

He also expressed his desire to forge closer ties with Oracle. Open Text already has alliances with Oracle’s rivals SAP AG and Microsoft Corp. , in which Open Text optimizes its software to run with their technology in return for greater sales.

“Our relationship with Oracle is an untapped opportunity,” Mr. Barrenechea told analysts. “I've spoken to the leadership team at Oracle already, and the door is open for us,” he said. “Oracle is certainly very interested in working with us.”

Oracle has also frequently been cited as a potential suitor for Open Text, as the number of firms selling ECM software continues to shrink through consolidation. SAP and Microsoft are also part of the rumour mill as acquirers, which kicked into high gear last September, after Hewlett-Packard Co. offered a 64-per-cent premium to buy one of Open Text’s rivals, Britain’s Autonomy Corp.

In terms of Europe, Mr. Barrenechea said it remains a region of great concern, but he singled out Germany and France as strong markets for the company. Revenue from Europe remained steady from the previous quarter, amounting to about 40 per cent of overall sales.

Open Text posted record revenue of $321.5-million (U.S.) for the three months ended Dec. 31, up 20 per cent from a year earlier. Of that figure, $89.7-million came from licensing software, slightly above analysts’ expectations. New licences feed future customer support revenue, which in the last quarter hit $165.4-million. Service revenue was $66.4-million.

The software company's profit rose to $47.4-million from $37.1-million a year earlier.

“Open Text seems to be firing on all cylinders,” said Kris Thompson, of National Bank Financial Inc. He has an “outperform” rating on the stock, with a price target of $78. The shares closed Thursday on the Nasdaq at $60.35, up $7.73.

By Mr. Thompson’s calculation, the value of the company’s support business alone is worth $50 a share. In a takeover scenario, he values the shares at four-times future sales, or about $88 a share.

Canaccord Genuity’s Eyai Ofir is also bullish on the stock, giving it a $70 price target. The shares trade at just 11 times estimated earnings, compared with an average multiple of 17 for comparable software companies. On the basis of enterprise value divided by sales, however, Open Text trades very close to the industry average multiple of 2.8, he says.

But Thanos Moschopoulos, of BMO Nesbitt Burns Inc., warns that the devil may lie in the details. Despite the better-than-expected performance, he calculates that stripping out the benefits of currency changes and acquisitions, Open Text’s “organic” revenue growth amounted to only 3 per cent and licence revenue actually declined 4 per cent.

Among his criticisms, he notes that: “Open Text has fallen behind in specific product segments, such as social media and the cloud, as there has perhaps been a disproportionate focus placed on buying rather than building in recent years.”

Mr. Moschopoulos is among the small minority of analysts who aren’t recommending the stock as a buy. But he does see positive developments in the latest results, including European results and encouraging remarks from the new CEO.

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