Scotia Capital update on Open Text

Speaking of well known Canadian software stories, here is a note on Open Text (OTC:TSX) from Scotia Capital’s research department:

Product Plans, Acquisitions, and More

Event

? Over the past week, a number of noteworthy acquisitions have occurred in the ECM market as vendors continue to strengthen their product portfolio.

Implications

? Our view is that the ECM market continues to mature as the leading vendors look to expand their product suite through tuck-under acquisitions. The latest transactions involve EMC and Kofax
strengthening their offerings in terms of compliance and process
management.

? We believe that Open Text’s updated product roadmap for Vignette is inline with our expectations of continued support for customers using a variety of its products. Our expectation is that more details regarding the operational and product integration of Vignette will surface at Content World on October 25-30.

Recommendation

? We are becoming more constructive on Open Text’s shares as the firm begins the integration process with Vignette. However, challenging comps in the next two quarters and the prospect of weak license revenues near-term result in our recommendation remaining a 2-Sector Perform.

Vignette Intergration – First Glance At A Product Roadmap

? Our expectation is that consistent with prior acquisitions Open Text will continue to support its customers using a variety of its web content management products while developing a go forward product plan centered around Vignette’s solutions. Open Text announced its plans to leverage its acquisition of Vignette to deliver its next generation Web content management product set.

The firm highlighted the increasing activity within social networking, digital media and mobile applications as key focus areas that its Web business strategy will target using Vignette’s content management solutions as a foundation. Key milestones announced by the firm include the release of Vignette Content Management version 8.0 and Vignette Portal version 8.0 in 2H/09 and Web Solutions 10.1 in 1H/10. Over the next two years, the firm expects to combine Open Text Web Solutions with the Vignette Content Management platform. Further announcements are expected when the firm introduces its new product roadmap at its Content World 2009 Conference in October 25-30 in Orlando, Florida.

ECM Acquisitions Reflect Market Trends

? Over the past week, two mid-sized acquisitions have occurred in the ECM market with Kofax purchasing 170 Systems Inc. and EMC acquiring Kazeon Systems Inc.

In our view, the relatively small size of these acquisitions reflects the significantly reduced market for ECM assets available following considerable consolidation over the past several years, suggesting that the next stage will likely be acquisitions in vertical markets related to ECM such as eDiscovery tools, compliance management solutions, and business process management (BPM) products.

? On September 7, Kofax acquired privately held 170 Systems Inc. in an all cash transaction for $33 million. The transaction valued 170 Systems at ~1.2x Price/Revenue on F2008 results with the deal being neutral to Kofax’s earnings. The purchase of 170 Systems enables Kofax to strengthen its offering in the area of invoice processing and accounts payable.

This transaction mirrors the efforts that Open Text made in developing a solution for accounts payable targeted at customer, using SAP’s ERP solutions.

? On September 1, EMC announced its intentions to acquire privately held Kazeon Systems and while financial details were not disclosed, estimates suggests that the deal is worth $50-$100 million. The acquisition bolsters EMC’s eDiscovery service offering along with improved concept-based search and collaborative review tools. Our view is that EMC’s move reflects the increased focus by providers of content management technology to offer more robust compliance solutions (e.g., Open Text fields a number of products in this area through technology acquired from the purchase of IXOS).

SAP & Growing Indirect Partners Support Execution

? In our view, Open Text’s partner strategy continues to represent a successful tactic deployed by the firm to enhance its sales force coverage while reducing its direct sales force head count following its acquisition of Hummingbird. The “extended” sales force represents a significant driver for the firm delivering approximately 38% of Q2/09 license revenues from key partnerships with SAP, Microsoft, and Deloitte & Touche.

Reduced Concerns Relating to Sales Force Reorganization

? Our view is that concerns regarding the degree of sales force reorganization announced on the Q2 conference call appears to be lower than we originally anticipated. The company announced plans to restructure its sales and field operations globally following the purchase of Vignette. The new sales structure will see three general managers in each geographic region responsible for sales, field service, and professional services reporting to CEO John Shackleton. Early feedback indicates that the primary changes to the sales force appear to be contained to the senior sales management with the retirement of John Wilkerson.

Beyond this change there appears to be the usual level of sales coverage reallocation associated with
Open Text’s post-merger integration plans.

MRM