Calling all software equity research analysts part 2

The recent post about the impact of the Canadian dollar on local software firms generated a bit of traction with at least one Canadian software and services analyst. He thinks the Euros’ performance will mitigate part of the issue that continues to come from the rising US$.

Here are the recent US/CDN$ exchange rate figures:

Average for 2004: 1.302
Average for 2005: 1.216
Average for 2006: 1.134
As at May 31, 2007: 1.069

If Canadian-based software firm X reports in US$ but has a majority of their employees in this country, labour just became alot more expensive.

If your CDN-based R&D (or SG&A) budget was a static C$10MM, that means in US$ it appeared on your financial statements as:

2004: US$7.68 million
2005: US$8.22 million
2006: US$8.82 million
2007: US$9.35 million

If we assumed that the May 31st exchange rate was the average for the year, the 2004 era C$10MM R&D budget now appears to be 21.8% more expensive when reported in US dollars, even though it actually shrank in real dollars (think of inflation, increasing benefit costs, etc.).

Imagine what this means for Waterloo-based Open Text and their US$88 million quarterly opex budget (R&D was US$21MM) if profit in the most recent quarter was only US$5.9 million, for example.

If anyone can remember why Canadian-based software firms were told it was a good idea for them to report in US$, consider the consequences today, particularly if a majority of the firm’s revenue doesn’t come from the USA. What’s makes this all so muddy is the impact of the Euro’s swings. If your quarterly revenue grew by 7% in US dollars, but only 3% in Canadian dollars, should shareholders be happy or sad?

Is the US$ the global benchmark any longer, and does it serve local investors well when the impact of currency swings is more immediately material to revenue growth and/or profitability than the affect of a new product launch?

I’m not looking forward to the fall earnings cycle.

MRM