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Financial Post: Open Text: Safe harbour amid a global economic storm?

Insulated from much of the tumult besieging public markets worldwide, Canada's largest software company has positioned itself as a safe harbour for investors looking for a port to weather the gathering economic storm.

Waterloo, Ont.-based Open Text Corp. managed to meet lofty Wall Street expectations when it announced quarterly earnings after markets closed on Wednesday. Reporting revenue of US$285.5-million and adjusted earnings per share of US$1.05, the results were in line with consensus estimates of US$285-million in revenue and just shy of US$1.12 in EPS expectations.

For its entire 2011 fiscal year, Open Text made US$1.03-billion in revenue and US$4.02 EPS, representing growth of 13.3% and 31.7% respectively.

"I am pleased with our performance this quarter and for the fiscal year," John Shackleton, Open Text chief executive, said during a conference call Wednesday evening.

"All regions showed strength and even with the continued tough economy, our pipeline continues to grow."

As a result, many market watchers now consider the world leading provider of enterprise content management (ECM) technology to be an ideal defensive stock in an otherwise moribund marketplace.

"They are the last, largest, independent content management player in the world," said Mike Abramsky, managing director of global technology equity research for RBC Capital Markets.

"Content management tends to do well where there needs to be high productivity, cost savings and of course where there needs to be [regulatory] compliance."

Simply put, cash-strapped companies will continue buying Open Text software even as they cut back spending on other technologies.

The mission critical nature of ECM software has also helped other providers such as International Business Machines (IBM) Corp. - the only company on Earth to command a larger ECM market share than Open Text - maintain strong earnings as other leading technology stocks have tanked in recent months. However, Mr. Abramsky argues Open Text has an advantage that makes it even more attractive than other enterprise software players.

"Most of the larger players like IBM and [EMC Corp.] have tied their offerings through their particular core business," he said.

"So IBM's offering is tied to its services business and EMC is tied to its hardware business."

"Open Text remains agnostic to that and that probably makes them attractive to many companies that don't want solutions tied to other things," Mr. Abramsky said.

Spawned two decades ago from a University of Waterloo project to digitize the Oxford English Dictionary, Open Text has been on a buying spree in recent months to expand its ECM dominance into the business process management (BPM) sector. To understand the difference, think of an ECM program as being an all-encompassing interface and BPM software being more specifically tailored to managing project workflows; typically those requiring active files to be passed back and forth between employees and managers.

Spending US$182-million to buy Maryland-based Metastorm Inc. in February, followed by a US$260-million acquisition of Texas-based Global 360 Holding Corp., Open Text has rapidly amassed about 8% of the global BPM market. That is up from nearly zero just one year ago, according to data from National Bank Financial.

Both Metastorm and Global 360 are leading workflow management providers for the Microsoft Corp.'s Windows platform, data from market analysis firm Gartner Inc. suggests.

"Open Text has always had strong cash flow and they've been very savvy at doing acquisitions," said Mr. Abramsky. "They've honed that business model."

Successful execution of its growth-by-acquisition strategy has long been admired by others in the analyst community, with National Bank Financial analyst Kris Thompson raising his target on Open Text's share price from US$63 to US$70 in late February after the Metastorm acquisition closed earlier than expected.

He increased his price target again to US$78 following the Global 360 acquisition and on Monday, TD Newcrest upgraded Open Text from Hold to Buy with an even more bullish US$80 target. Justification for the upgrade came in the form of an August 8 note to clients, in which the investment bank said the company's growth momentum "should stand above other [Canadian] tech names."

With most market watchers forecasting even stronger revenue growth for the first quarter of Open Text's 2012 fiscal year, Mr. Thompson believes those figure may already be too conservative.

"Most brokers have not increased their estimates to reflect [the Global 360] acquisition," he said. "But that is going to add another 6% to 8% revenue growth."

Even if the global economy takes an unexpected turn for the better, Mr. Abramsky believes Open Text can easily adapt by providing more discretionary products to companies with newly found room in their budgets for less-critical software.

"When [market] growth becomes more prevalent, they shift gears to focus on more growthy offerings," said Mr. Abramsky.

"That is part of their defensiveness as an investment."

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