OTEX - Open Text

[ratiman]

Who knows if Glassdoor reviews are informative, but it is interesting to get an inside view instead of management's "everything is great" point of view. 

 

Maybe some of the finance experts here can help me out. If OTEX acquires a company at 2.5x revenues that generates 20% net margins after cost cutting, that's an 8% ROIC, right? How is that great capital allocation?

[KCLarkin]

Maybe some of the finance experts here can help me out. If OTEX acquires a company at 2.5x revenues that generates 20% net margins after cost cutting, that's an 8% ROIC, right? How is that great capital allocation?

 

Remember 8% is just the initial yield. You also need to include growth. OTEX gets astronomical ROE for organic growth, so even modest growth is very valuable.

 

--

Why does OTEX get astronomical ROE for organic growth?

- growth investments are expensed rather than capitalized (R&D, sales & marketing)

- low capital intensity (mostly intangibles)

- negative working capital (customers pre-pay)

 

[ratiman]

So  what happens when users stop using faxes?

 

http://www.opentext.com/what-we-do/products/business-network/fax-solutions

 

Going by acquisitions Easylink and Captaris, there is at least $200M of fax software revenue. Sure, you can squeeze customers for a few years and raise prices, but at some point they just stop using faxes. That seems like a big impediment to growth. I wouldn't want to be in the fax business at 4x revenues.

[KCLarkin]

So  what happens when users stop using faxes?

 

They didn't pay 2.5x for Captaris or Easylink.

 

IF fax-related software is $200M, that is 10% of revenue. Hard to imagine a decline quick enough for this to be a material drag on growth.

[ratiman]

 

It's not just fax software. The ECM or EIM or ECD or whatever it's called, is the core business. That business is facing a sea change in the marketplace as users move to services like Box and Sharepoint and some other new competitors. Documentum, which is rumored as Opentext's next acquisition, has been losing revenues to competitors for a couple of years. The entire segment is undergoing big changes because of the switch to the cloud. It's not clear that grinding out 1-3% growth is the most likely outcome when the technology is changing so rapidly. It might happen, but it's also likely that management is boosting short term cash flow at the expense of long term growth. That's exactly what the Glassdoor reviews indicate.

[KCLarkin]

That business is facing a sea change in the marketplace as users move to services like Box and Sharepoint and some other new competitors. Documentum, which is rumored as Opentext's next acquisition, has been losing revenues to competitors for a couple of years. The entire segment is undergoing big changes because of the switch to the cloud.

 

Do you have any evidence of this? Steve Jobs once called DropBox "a feature, not a product". Box seems like a feature, not a business.

[Liberty]

That business is facing a sea change in the marketplace as users move to services like Box and Sharepoint and some other new competitors. Documentum, which is rumored as Opentext's next acquisition, has been losing revenues to competitors for a couple of years. The entire segment is undergoing big changes because of the switch to the cloud.

 

Do you have any evidence of this? Steve Jobs once called DropBox "a feature, not a product". Box seems like a feature, not a business.

 

I think that back when Jobs said this - after trying to buy Dropbox, IIRC - he probably was right. But since then businesses like Box, and the enterprise world, has changed. There's now more compliance and collaboration stuff that is integrated into Box.

 

I still don't know how good a business that makes them, but I just wanted to add a reminder to keep what Jobs said in the context of the time when he made the remark.

[KCLarkin]

I just wanted to add a reminder to keep what Jobs said in the context of the time when he made the remark.

 

When Jobs said this, everyone in Silicon Valley thought he was nuts. Now, it looks like he was right.

 

How can Dropbox survive, as a standalone company, against Google Drive, Apple, Amazon, Microsoft, Box...

 

Box lost $200M on $300M in revenue. Are they winning share because they have the best product or because they are irrationally chasing growth? Is this a sustainable business?

 

--

 

But this doesn't answer the core question. Are enterprises ripping out their OTEX implementations and replacing them with Box? Or is Box attacking a different niche?

[Liberty]

I just wanted to add a reminder to keep what Jobs said in the context of the time when he made the remark.

 

When Jobs said this, everyone in Silicon Valley thought he was nuts. Now, it looks like he was right.

 

How can Dropbox survive, as a standalone company, against Google Drive, Apple, Amazon, Microsoft, Box...

 

Box lost $200M on $300M in revenue. Are they winning share because they have the best product or because they are irrationally chasing growth? Is this a sustainable business?

 

--

 

But this doesn't answer the core question. Are enterprises ripping out their OTEX implementations and replacing them with Box? Or is Box attacking a different niche?

 

I think there's two things to untangle. Is it a business or a feature, and if it's a business, is it a good one?

 

If it was just a feature, it would've gotten killed as soon as the OS owners added the feature to their platforms, giving people a more convenient default options. But Dropbox and Box are still popular despite iCloud Drive and Microsoft Sky Drive (or whatever it's called) and Google Drive. Part of it is first mover's advantage/name recognition, part of it is being more full-featured (esp. Box with its focus on the enterprise), or known as being more reliable or user-friendly, etc.

 

But all this competition and the lack of what seems to be a durable competitive advantage means that it's probably not a good business... A lot of things are more than features yet won't ever be very profitable businesses.

 

I think the best hope of companies like Dropbox and Box is to keep growing like crazy for a while and then being acquired by a giant with a platform that could plug them in and use their cloud expertise on other things. In that sense, it might be rational for them to sacrifice profitability to chase market share. Whatsapp did pretty well by becoming big enough quickly enough that a giant felt it had to buy them out (I'm not saying that these companies will be valued as highly as Whatsapp).

 

No opinion on Open Text, but it's a business that I've been slowly learning about because Turtle Creek likes them and I tend to trust their judgement.

[ratiman]

Box and Dropbox already have hundreds of users within a company, so it's what they call a land-and-expand strategy. Go after the users first and then say to the IT dept: The users are already on Box, buy some licenses to make it safe. The usage is apparently very sticky and is a natural entry point into what Documentum and Opentext do. I don't have a list of customers that have switched from OTEX to Box, but is Opentext even taking the threat seriously?

 

 

This is from the last conference call: 

 

We're not really seeing a shift of SaaS or, you know cloud – subscription versus on-prem kind of shift. We still see the world as hybrid, the best way to describe it is a ultimate 50-50 split.

 

You know, in fact, we had two customers last quarter, who went from our cloud services to back on-prem. And one went back on-prem, because they've done the economic model.

 

They have been in our cloud for a couple years, and having a great service from us, and they wanted – they were looking at a multi-year model and just felt that for them and their usage that economically it was better to be on-prem.

 

There you go, not a threat at all. Nothing to worry about.

[KCLarkin]

Box and Dropbox already have hundreds of users within a company, so it's what they call a land-and-expand strategy. Go after the users first and then say to the IT dept: The users are already on Box, buy some licenses to make it safe.

 

Box spent $240M in Sales & Marketing versus $300M in revenue. Compare that with a real land-and-expand strategy, like Atlasssian.

 

(If you spread that S&M over the increase in revenue, it looks like Box is buying negative-margin revenue at over 2x sales. OTEX can buy cash generating legacy revenue cheaper than Box can grow organic revenue).

[KCLarkin]

No opinion on Open Text, but it's a business that I've been slowly learning about because Turtle Creek likes them and I tend to trust their judgement.

 

I don't have high conviction on OTEX. I bought a big position (currently 4%) last year when they sold off on an earnings warning. But I plan to exit in the next few months.

 

I prefer CSU at current prices.

[Liberty]

I prefer CSU at current prices.

 

Same.

[ratiman]

Box and Dropbox already have hundreds of users within a company, so it's what they call a land-and-expand strategy. Go after the users first and then say to the IT dept: The users are already on Box, buy some licenses to make it safe.

 

Box spent $240M in Sales & Marketing versus $300M in revenue. Compare that with a real land-and-expand strategy, like Atlasssian.

 

(If you spread that S&M over the increase in revenue, it looks like Box is buying negative-margin revenue at over 2x sales. OTEX can buy cash generating legacy revenue cheaper than Box can grow organic revenue).

 

Not to sidetrack this into a Box debate, but how can it be better to buy  revenue at 2.5x sales vs. 2x sales? If that marketing and sales expense were categorized as a purchase, it wouldn't be negative margin revenue, it would be high margin revenue, just like OTEX acquisitions. The only difference is that one is an expense and the other is a non-cash charge.

 

By your argument, OTEX spent $330M in 2016 fiscal year on marketing and sales. If we spread that over projected sales growth of say 3%, that's like buying $1 of sales for $5.50. That's much more inefficient than 2x. I'm not trying to be difficult, I just don't see why growth companies are held to a different standard.

 

[KCLarkin]

If that marketing and sales expense were categorized as a purchase, it wouldn't be negative margin revenue, it would be high margin revenue, just like OTEX acquisitions.

 

That's a fair argument. I was double counting the sales & marketing spend.

 

I'm not trying to be difficult, I just don't see why growth companies are held to a different standard.

 

There is some weakness in Box's value proposition that forces them to pay so much to acquire revenue. So when you say that Box is disrupting ECM, are they really disrupting ECM? Or are they just picking up the crumbs?

 

I don't know the answer. As I said, I have low conviction on OTEX.

[Liberty]

Speaking of OTC, stock down 6% on earnings:

 

http://files.shareholder.com/downloads/AMDA-267TY1/2370027920x0x901721/EBEE3204-9C98-47E4-A077-F343ED45D6BC/OTEX_News_2016_7_27_Financial_Releases.pdf

 

Fiscal 2016

- Total revenue of $1.8 billion, down 1%; up 3% Y/Y in CC*

- Recurring revenue of $1.5 billion, down 1%; up 3% Y/Y in CC

- Cloud services and subscription revenue of $601 million, down 1%; up 2% Y/Y in CC - License revenue of $284 million, down 4%; up 2% Y/Y in CC

- GAAP EPS, diluted was $2.33, up 22% Y/Y

- Non-GAAP-based EPS of $3.54, up 2% Y/Y

Q4 Fiscal 2016

- Total revenue of $484 million, up 0.2%; up 0.2% Y/Y in CC

- Recurring revenue of $398 million, up 3%; up 3% Y/Y in CC

- Cloud services and subscription revenue of $157 million, up 5%; up 5% Y/Y in CC

- License revenue of $86 million, down 11%; down 12% Y/Y in CC

- GAAP EPS, diluted was $0.71, up 27% Y/Y

- Non-GAAP-based EPS of $0.89, up 2% Y/Y

[KCLarkin]

Speaking of OTC, stock down 6% on earnings

 

I'm out.

 

[ratiman]

 

There is some weakness in Box's value proposition that forces them to pay so much to acquire revenue. So when you say that Box is disrupting ECM, are they really disrupting ECM? Or are they just picking up the crumbs?

 

 

It's hard to say what's going on in enterprise software. I used to work in enterprise sales (for SAP) and I can say this, nobody really understands the technology or what it does, at least not the sales people, and certainly not very many people on WS. We do know that Box spends 10% of revenues offering free storage, and that's listed as a marketing and sales expense, but if it's recharacterized as COGS, then the S&M looks much more efficient, or at least less inefficient. And over time that expense will go down as the cost of storage goes down and competition declines (Microsoft recently reduced free storage from unlimited to 1TB to 5G).  I might write up Box in a few days but it can be bought for about 2.5x sales, which is a good margin of safety.

[Liberty]

"Open Text Corp said Monday that it will buy Dell EMC's enterprise content division for $1.62 billion."

[fareastwarriors]

"Open Text Corp said Monday that it will buy Dell EMC's enterprise content division for $1.62 billion."

 

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&cad=rja&uact=8&ved=0ahUKEwjSi5mXn4rPAhWnyoMKHc4UApgQFggkMAM&url=http%3A%2F%2Fwww.wsj.com%2Farticles%2Fopen-text-to-buy-dell-emc-enterprise-content-division-for-1-6-billion-1473687288&usg=AFQjCNG9O8VuBzj6k9VNlZvYbvwy_oyINw