OpenText headed into tough macro winds, says Cantor Fitzgerald

Cantor Fitzgerald analyst Tom Liston says the upcoming Q3 might be tough sledding for OpenText (OpenText Stock Quote, Chart, News: TSX:OTC).

On Wednesday, after market close, the Waterloo-based software concern will report its Q3 fiscal 2013 results. The company is coming off a Q2 in which it reported net income of $61.1 million or $1.04 per share, which was up from $47.4 million or $0.81 a share in the same period a year prior. The company grew its topline by 10%, to $352.2 million.

Liston says OpenText peers such as Oracle, IBM and Microsoft have posted license revenue growth that was, in the March quarter, up just 2% year-over-year, which was down significantly from the 7% they collectively earned in the December quarter. Liston says this makes him extremely cautious going into the quarter, as he expects OpenText’s license revenue will tell the same story as its larger competitors. In a research update to clients this morning, Liston maintained his HOLD rating and one-year target of (U.S.) $60.

Liston notes that on last quarter’s conference call, management said it expected license revenue growth for the second half of fiscal 2013 would be up year-over-year. But the Cantor Fitzgerald analyst says the company’s twelve-month license revenue was $284.3-million in Q2, which was down 10.4% year-over-year. This, says Liston, is OpenText’s lowest growth rate in over three years.

Further eating away at OpenText’s license growth rate, says Liston, will be the aggressive cost cutting the company has implemented. He points out that both research and development and sales and marketing budgets were cut in Q2. The company’s research and development expenses as a percentage of revenue has fallen to just 11%, the lowest level in recent history.

Shares of OpenText on Nasdaq closed today up 1.25% to $55.26.