January 28, 2009 - Open Text Corp. (OTEX-NASDAQ) develops, markets, sells, licenses, and supports Enterprise Content Management (ECM) solutions primarily in North America and Europe. The company's ECM solutions help customers manage their critical business content, including version revisions and compliance with regulatory requirements. Its principal product, Livelink, enables corporations to manage traditional forms of content, such as images, office documents, graphics, and drawings, as well as to manage electronic content, including Web pages, email, and video.

The story starts with earnings. The've been erratic at OTEX but now seem to be on the right track, moving upward. They went from 3 cents a share in 2000 to 46 cents, then 51 cents, followed by 68 cents in 2003, peaking at 85 cents in 2004. Then they headed lower, to 75 cents in 2005, followed by 50 cents, then 43 cents by 2007. But in 2008, they bounced significantly, up to $1.00 per share (fiscal year ends June 30). For 2009, analysts predict $2.33, then $2.72 for 2010. Over the last 5 years, earnings grew by 32% a year, on average. Going forward, analyst predict average annual increases at 17%. Earnings will be announced for the second quarter on January 28. Analysts expect 58 cents.

A large part of the increase in earnings comes from reduction of interest expense but not all. Sales have grown, 13% in license revenues and 14% in customer support in the first quarter. One more favorable item: currency exchange rates were positive. Sales composition is 30% from licenses, 50% from customer support, and 20% from services.

Growth in the future will come from market expansion, organically and through acquisitions. Recently the company bought a Canadian software firm Captaris which works in the enterprise content management sector for $131 million in cash. Also contributing to better sales and profits will be the ever growing market for ECM globally. But there's no escaping the softness in the U.S. economy. If that continues to falter, growth can't be as robust as currently forecast.

Even with the pay down of some debt, there remains $307 million on the books. Expect the company to continue to pay that off, lowering the interest expense even more.

A reason for caution: IBM and Oracle are expanding in the ECM sector. To counter that, Open Text has to strengthen its alliances with Microsoft, Oracle and SAP. Another perspective on increased competition: Open Text may become a take over candidate to boost one of the larger player's presence immediately.

More numbers: Market Cap is $1.7 billion. Forward P/E is 12. Price to Book is 2.64. Operating margin for the last 12 months was 13.78% with a Profit margin of 8.05%. There's $250 million in cash that makes for $4.82 a share. Current ratio is 1.59. Book Value is $12.01. Beta is a rather high 1.42. 52 week high was $39.09 set on September 19, 2008. The 52 week low was $22.01 reached on October 24, 2008. There are 51.87 million shares outstanding. Insiders own 29% of them.

Open Text is doing everything right. The bottom line is moving up extraordinarily well. There's plenty of cash in the bank. Even in this terrible economy, domestic and global, the company has delivered solid earnings growth. And that's why IBM and Oracle are turning their guns on the ECM sector. They can see what investors in OTEX have seen: there's money to be made in this market.

- Company Web site: www.opentext.com

- Ted Allrich