Big acquisitions can be nerve-racking for a software company. Open Text's (Nasdaq: OTEX) $412.5 million purchase of Hummingbird last October is no exception. But despite the deal's complexities and the debt load involved, the purchase seems to be paying off. Following last week's fiscal Q4 earnings report, happy investors drove Open Text's shares 23.6% higher, to $24.87.
Open Text develops software to help companies manage their web content, records, and documents. Its programs provide seamless integration with critical software systems from firms such as Microsoft (Nasdaq: MSFT), SAP (NYSE: SAP), and Oracle (Nasdaq: ORCL).
Revenue for Open Text's Q4 spiked 66% to $175.2 million, while license revenues rose 85% to $59.2 million. In addition to a nice boost from the Hummingbird transaction, Open Text has been adding new products and leveraging its key alliances. In the fourth quarter, the company snared 11 contracts in excess of $500,000, and three contracts valued at more than $1 million. Open Text indicated that joint-selling efforts with SAP and Microsoft contributed heavily to the new business.
Since October, Open Text has also been restructuring operations and paring back its workforce, improving the company's bottom line. In fiscal Q4, profits were $26.6 million, or $0.52 per share, up from $15.4 million or $0.31 per share year over year. (The figures exclude non-cash charges such as stock option expenses.) Cash flow from operations was $28.5 million, up from $15.4 million in last year's Q4.
The Hummingbird deal helps Open Text provide a broad product offering to a global customer base. Those are critical advantages amid intense competition from rivals such as IBM (NYSE: IBM) and EMC (NYSE: EMC).
Based on trailing-12-month revenue, Open Text trades at roughly two times enterprise value. That's a discount relative to a variety of other major business software players, including Business Objects and Cognos (Nasdaq: COGN), which trade at roughly three times EV or better.
Foolish investors looking for a software opportunity may find Open Text attractive. But the stock has spiked over the past couple days, and in light of the volatility of such stocks, it's probably best to wait for heavy trading to subside before considering this company.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 4,172 out of more than 60,000 total participants in CAPS.
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