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While Open Text Corp. (OTEX) is expected to report in-line second-quarter financial results Wednesday, the deteriorating economy is likely to weigh on revenue growth for the rest of fiscal 2009 - something the Street may not appreciate, an analyst said.

Open Text makes software that helps companies archive electronic data, such as email. Such enterprise-content-management software has assumed a growing importance in recent years as companies use ECM software to adhere to tough new compliance laws, like the Sarbanes-Oxley Act.

However, as the global recession intensifies, companies are cutting expenditures across the board, said Versant Partners' Tom Liston. Software won't be immune, and he said there is mounting evidence that the cutting has already started.

For instance, EMC Corp.'s (EMC) content management and archiving division reported a 31% decline in fourth-quarter software-license revenue Tuesday. The company's Chief Financial Officer David Goulden said that was "an area of our business that's been affected by the weakness in the enterprise software market this year," according to a transcript of EMC's fourth-quarter conference call.

EMC also indicated it sees global spending on information technology falling in 2009 by the mid-to-high single digits on a percentage basis.

Liston noted that technology-research firms, such as Gartner and Forrester, have also ratcheted down their global-IT spending forecasts. For example, on Jan. 12, Forrester cut its 2009 forecast to -3% from +4%, according to Liston.

Meanwhile, bellwether software companies are slashing jobs, Liston added. On Monday, Market Watch reported that International Business Machines Corp. (IBM) has cut 2,800 jobs in its software and sales department. Last week, Microsoft Corp. (MSFT) announced plans to cut 5,000 jobs.

 
   Room For More Cost Cutting 
 

In November, Open Text said it would cut 10% of its workforce, a move that coincided with the completion of its acquisition of Captaris. The company also announced a $20 million restructuring charge, which it later raised to $36 million.

Open Text has never been reluctant to cut costs, and it could cut further if its revenue falls, Liston said. Still, while cost-cutting could help Open Text meet fiscal 2009 earnings expectations, the potential revenue hit from reduced software spending isn't fully reflected in analysts' estimates, he said. The mean analyst revenue estimate for 2009 is $822 million, with estimates ranging from as high as $852 million to as low as $781 million.

Liston is forecasting 2009 revenue of $802 million, but said he believes his estimate could prove too high. He has a neutral rating on the stock and a $30 target.

Open Text is trading above Liston's target, though the stock is off slightly Tuesday. On Nasdaq, Open Text is down 1.6%, or 53 cents, to $31.88 on about 267,000 shares.

At Monday's close, Open Text's stock had climbed about 47% since hitting an intraday low of $22.01 on Oct. 24. The Nasdaq is essentially flat over the same period. A strong first quarter, highlighted by license-revenue growth of 13%, was one reason for the big upward move. Speculation that Open Text could be a takeover target has also pushed the stock higher.

The ECM sector has been consolidating in recent years, with the latest takeover coming last week. On Jan. 22, Autonomy Corp. PLC (AU.LN), a U.K. ECM vendor, announced plans to acquire U.S. rival Interwoven Inc. (IWOV) for $16.20 a share. The offer, valued at $775 million, represented a 37% premium to Interwoven's Jan. 21 close of $11.84.

Still, takeover speculation notwithstanding, Liston said he believes the Street is pricing in too much optimism around Open Text's revenue-growth prospects. "We believe spending on software licenses will fall by 5-10% this year, and consensus on Open Text's license-revenue appears to be calling for mid single-digit percentage growth," he said.

Not everyone agrees. In a note Tuesday, Research Capital's David Shore said he believes Open Text's valuation is compelling. He said Open Text trades below its peers and is now at "historically low levels." He also noted that Autonomy and Interwoven both reported strong quarterly results.

"Being the largest ECM vendor in the market, we expect Open Text to benefit from the increased regulatory drive and post steady results in these tough economic times," he said.

Shore is forecasting fiscal 2009 revenue of $829.5 million. He rates Open Text a buy with a $42 target.

   Company Web Site: http://www.opentext.com 
 
   -Stuart Weinberg, Dow Jones Newswires; 416-306-2026; 
   stuart.weinberg@dowjones.com 
 

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