The Open Text building in Waterloo, Ont. The company’s stock price has rocketed by 56 per cent in the past year.Kevin Van Paassen/The Globe and Mail
Two years ago, investors were starting to get fired up about the strong earnings growth and momentum of software and data management company Open Text Corp.
Since then the acquisitive Waterloo, Ont.-based firm has continued to expand. It has bought several technology companies and its stock price has soared by 56 per cent in the past year.
Today, Open Text is at a critical point. The company is "nearing the end of its transition from a software consolidator to a competitor," said Paul Treiber, analyst at RBC Dominion Securities, in a recent note to clients.
The company is on the verge of updating its product lineup, has new executives in place and has reorganized and stabilized its sales team, Mr. Treiber said. He noted that these factors are changing the way investors see the stock, which is currently trading at a multiple well below its peers. Mr. Treiber noted that its enterprise value-to-EBITDA multiple is 11 times, while competitors such as data integration company Informatica Corp. and cloud computing software company Tibco Software Inc. trade at an average of 13 times.
While the company could easily manage another acquisition, the big focus now will be on expanding the business it has.
Management is optimistic about that growth because customers are gaining a better understanding of what's known as "enterprise information management" (EIM) – the business of helping companies best use their data. Open Text has identified this as a major market for software and other services (with a total addressable market of about $20-billion [U.S.] by 2016), and Mark Barrenechea, the company's CEO, said recently that he wants to be a leader in the space.
"EIM is the next generation of enterprise software, and we are confident that our momentum around new wins and new partners will continue to build in fiscal 2014," Mr. Barrenechea said in an analyst call in July. He noted that Hasbro Inc. and Ralph Lauren were customers.
The framework is in place, and now Open Text must build on it. "In particular, we would like to see more consistent sales execution, better product integration, product gaps filled, and improved relations with systems integrator partners," Mr. Treiber said.
The company reports first-quarter 2014 earnings on Oct. 30.