Calling all software equity research analysts

According to CIBC’s economics research department, Canada is heading for parity on the dollar in the coming months. Predictions aside, the dollar has already moved from US$0.86 to US$0.94 awfully quickly.

While it’ll make a U.S. summer holiday even more affordable (Europe as well BTW), what it won’t help with is the profitability of Canadian-based software firms. While much media focus has been on the manufacturing sector, are folks in the investment bank research departments spending enough time worrying about the recent 10% swing in the cost of local software employees?

Think it through: Certicom, (CIC:TSX), Cognos (CSN:TSX), Constellation (CSU:TSX), Corel (CREL:NASDAQ), Descartes (DSG:TSX), MKS (MKX:TSX), Open Text (OTC:TSX) and Systems Excellence (SXC:TSX), for example, all report their financials in U.S. dollars. A large number of their employees are based in Canada. At 65 US cents per CAN $, this was a great competitive advantage over basing a programmer in Boston. But at 94 cents?

While the currency swing won’t affect the look of the financials per se, it will certainly have an impact. If your firm’s R&D budget for Canadian-based staff was US$10 million at 86 cents per Canadian buck, hasn’t the cost of that same team gone up almost 10% when the dollar is at 94 cents? How many firms’ earnings aren’t hit by a million dollar change to EBIT?

Open Text, for example, spent over US$21 million on R&D in their recent quarter. If that’s an accurate run rate under the new OTC/HUM structure, US$85 million is a big research and development budget. And a bunch of those employees are based in Ontario, earning Canadian dollar salaries.

Open Text’s EBT (earnings before tax) was about US$5.9 million for the last quarter. Operating expenses were US$88 million. Hundreds of their employees are based in Waterloo. A sustained move in the CDN$ costs will put real pressure on that figure in quarters to come, won’t it?

Certicom is smaller, with only US$5.5MM in quarterly opex (for the January quarter), but any move in the currency has a bigger impact on them, you’d think, with most of their employees based in Mississauga and a net loss of US$1.2MM in the most recent q.

Hopefully our software research analyst friends at the various Investment Banks might chip in on this with some new material, before the July quarter (1st quarter 2008) warning season begins on or about August 6th, 2007.

MRM
(disclosure – I own MKS)