Open Text hurt by poor Q3 2009 earnings and revenue results

Open Text shares were down 9.1% Friday after the company reported lower-than-expected third-quarter earnings and revenue late Thursday.

The company, which makes enterprise-content-management software, attributed the shortfall to pronounced seasonality, but the miss raises questions about Open Text’s acquisition strategy. For years, Open Text has propped up revenue and generated healthy cash flows by acquiring companies and aggressively cutting costs. However, few sizable, growing enterprise-content-management companies remain, making it tougher for Open Text to increase revenue through its acquire-and-slash strategy.

“We believe Open Text’s acquisition strategy should be much more balanced,” said Versant Partners’ Tom Liston in a note. “We see the need to add technologies with growing demand to the mix.”

Liston cut his rating to sell from neutral and lowered his target to $44 from $48.

According to a transcript of its earnings call held late Thursday, Open Text said it wasn’t hurt in the quarter by increased competition. Indeed, the company said the competitive environment in the ECM sector hasn’t changed for about two years.

Instead, the company said seasonality was more pronounced, particularly in Europe and Asia. The company generated 39% of revenue in the quarter from Europe and 8% from Asia-Pacific.

Open Text said it expects earnings and revenue to be within the current range of expectations for fiscal 2010. That range is fairly wide. For instance, the revenue range is from $918 million to $958 million. The Thomson Reuters mean analyst revenue estimate for fiscal 2010 is for revenue of $941 million.

During the call, Open Text Chief Executive John Shackleton said seasonality swings are greater than in the past due in part to the company’s recent acquisitions, delayed budgeting decisions by governments and the economic situation in Europe. For instance, in the past, license revenue slipped 5-10% in the third quarter compared to the second quarter, he said. Now, expect a 20-30% decline, he said. On the flip side, expect a 40-50% increase in fourth-quarter license revenue, he said.

While a number of analysts cut their targets on Open Text, many remained supportive and advised buying the stock on weakness. Scotia Capital’s Paul Steep maintained his outperform rating on the stock, while cutting his target to $62 from $63. “We believe investors should be more focused on the firm’s impressive margin expansion results and the long-term outlook for the ECM market as indicative of the potential growth ahead of the firm,” he said in a note.

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