Open Text is undergoing a culture shift, says Cormark

Cormark analyst Richard Tse says he will be watching Open Text’s (Open Text Stock Quote, Chart, News: TSX:OTC) organic growth carefully when the company reports its numbers this week.

On Wednesday, July 31st, after market, Open Text will report its Q4, 2013 fiscal results. The report will follow on a Q3 that missed both Tse’s and the street’s expectations, with revenue that came in at $337.7-million, and earnings at $1.26. The street expected $346-million and $1.31, and Cormark $352-million and $1.32, respectively.

But Tse said those numbers were somewhat misleading as the company saw declines in its low margin professional services segment, and gains in its license revenue, which he describes as the “lifeblood” of enterprise software companies.

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Tse notes that, on the back of an aggressive acquisition strategy, Open Text has posted a better than 25% earnings growth rate over the past five years. But now, he says an “aggressive pivot” to organic sales is now the real driver, and a shift to a culture that emphasizes organic sales is in full swing and delivering increased sales capacity.

In a research update to clients this morning, Tse reiterated his BUY rating and one-year target price of $85 on Open Text.

Tse, however, warns that the recent results of major enterprise software vendors, such as SAP, reveals a “soft backdrop” in current enterprise tech spending, and says he does not believe that Open Text is immune to these larger economic drivers.