Open Text Q3 F10 License Revenue Drops Despite Acquisitions

Open Text (news, site) recently released its unaudited fiscal third quarter 2010 results that show negative effects of "greater seasonality" compared to previous years, resulting in a 5% drop in license revenue.

Even though OTEX says fiscal 2010 is "tracking to plan," several financial analysts are downgrading their recommendations from “neutral” to “sell” in regards to Open Text shares.

Acquisitions Don't Seem to Be Delivering for Open Text

Even though in Q2 OTEX recognized positive Vignette contributions to YoY numbers, this quarter license revenue was quite disappointing, ifyou compare what financial analysts and the Street were expecting from Open Text.

Despite the recent Vignette acquisition and the revenue it should havecontributed (estimated at about US$ 5M in license revenue), OTEX stillfell short in delivering expected numbers, which were Street-estimatedat around US$ 234M. Instead, Open Text’s revenue in the quarter was US$212.8M.

Food for thought: the economy has slightly improved, andOpen Text’s Enterprise CMS rivals are showing solid YoY growth.

FinancialHighlights for Q3 2010

Some are falling short of Street and analyst expectations:

Learning Opportunities

  • Revenueof US$ 212.8M (compared to same period last year US$ 192M)
  • License revenue of US$ 49.5M (compared to same period last year US$ 51.9M)
  • Adjusted EPS of US$ 0.70
  • GAAP EPS of US$ 0.23
  • GAAP Net Income US$ 13.1M (comparedto US$ 22M previous year)
  • Operating expenses -- especially, looking atR&D -- are running low at US$ 31.6M compared to US$ 97.5M nine months endedMarch 31, 2010, which may indicate lower investments in productdevelopment and innovation by the Waterloo ECM powerhouse.

More Balance Is Needed in Acquisition Strategy

As analyst TomListon of investment banking firm Versant Partners notes:"The strategyof aggressively managing costs against organic revenue declines becomes adifficult task unless it is offset by larger and larger acquisitions oran investment in license growth."

WhileOpen Text continues its “quilting exercise,” we again think that more balanced precision in direction is needed in its acquisitionstrategy. 2009-2010 acquisitions by Open Text include (as illustrated by Jon on Tech's "superspliced logo" below):



Offsetting the lack of organic growth by adding acquisitionsto the extensive portfolio and aggressively cutting costs is not likely to do anygood to this Enterprise CMS vendor in the long term.

At publish time, sharesof Open Text were down at C$ 43.77 (change of -0.41% or C$ -0.18) on theToronto Stock Exchange.