PI’s Sangha raises target on Open Text, but says license revenue a concern

Open Text CEO Mark Barrenechea. PI analyst Pardeep Sangha regards Open Text’s Q3 as only “slightly positive”. Although the company beat consensus estimates, he says, its decline in licensing revenue is troubling. Yesterday, Open Text (TSX:OTC) reported its Q2 2013 numbers. The Waterloo company earned (U.S.) $61.1-million on revenue of $352.2-million, which was up 10% over the same period a year earlier.

Open Text CEO Mark Barrenechea commented on the quarter, which was a record.

“We performed well in the quarter, delivering the highest quarterly revenue, non-GAAP operating margin and non-GAAP EPS in the company’s history,” he said. “We continue to invest in expanding our sales force and building new products, balanced with strong earnings. I am confident these investments will yield results. We are committed to leading the market with the broadest range of EIM software and services, both on premise and in the cloud.”

PI analyst Pardeep Sangha regards the quarter as only “slightly positive”. Although the company beat consensus estimates, he says, its decline in licensing revenue is troubling.

But Sangha says management is expecting license revenue to be higher in the second half of fiscal 2013 than the second half of fiscal 2012, and Sangha is forecasting overall revenue growth of 16% in fiscal 2013. In a research update to clients today, Sangha maintained his NEUTRAL recommendation on Open Text, but raised his target to $65 from his previous $60.

Open Text, which last year joined Waterloo peer Research in Motion in surpassing a billion dollars in revenue, sells software that enables companies to manage their content. The company’s various product offerings exist under a parade of acronyms that relate to the way companies use their content to collaborate and engage clients and meet regulatory requirements. These include Enterprise Content Management (ECM), Enterprise Information Management (EIM), Customer Experience Management (CEM) and Business Process Management (BPM). The company now has more than 5000 employees in 31 countries.

Sangha says OpenText’s growth will be driven primarily by the an expansion of its sales efforts, increased market share in its core ECM market, and the launch of new products and services. He says part of its decline in license revenue (he points out that this was the fourth consecutive quarter that the company has recorded lower year-over-year license revenue) was attributable to the fiscal cliff concerns in the United States and continued sluggishness in Europe. The reasoning behind his bump in target price, he says, is that he believes license revenue will improve going forward.

Shares of Open Text on the TSX closed today down .3% to $59.68.

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