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Waterloo, Ont., isn't just a flourishing petri dish of startups it's also home to two of Canada's biggest publicly traded tech companies: ailing BlackBerry Ltd. and Open Text Corp., the latter recently surpassing the smartphone maker in stock market valuation. Their prominence compared with other domestic tech companies is a sobering reminder of how little the sector factors into an economy dominated by resources, banking and telecommunications.
With a market capitalization of about $6-billion, Open Text is one of Canada's most valuable software firms. Yet it's worth less than 1 per cent of the stock market value of Apple Inc. and less than 2 per cent of Google Inc. Rivals International Business Machines Corp. (IBM) and EMC Corp. are significantly larger.
Open Text – which started as a University of Waterloo spinoff in the early 1990s, building a searchable digital version of the Oxford English Dictionary – is hardly a brand name at home. But millions of people at more than 50,000 companies use its software daily to handle records and business processes. Its customers include the Canadian government, Marriott International Inc. and Ralph Lauren Corp.
"We're not a consumer company, so we have products that probably touch more than 90 per cent of Canadians every day, but they'll never see us because we're deep into enterprises and enabling them to deliver their products or services," said chief executive officer Mark Barrenechea in a recent interview.
Open Text typically expands revenues by 10 per cent to 20 per cent per year in a sector where high growth or market dominance capture investor imagination. Much of its business is in mature or highly competitive areas, and about half of Open Text's revenue growth comes from acquisitions. To keep investors interested, it needs to keep acquiring, said BMO analyst Thanos Moschopoulos: "I do think they can keep executing on mergers and acquisitions, and that might be good enough for the stock to work."
With $3-billion earmarked for expansion, that's in the plans, though Mr. Barrenechea, who recently returned to full-time duties after battling leukemia, said Open Text is "not a growth-at-all-costs company. Any CEO can grow at rapid rates and lose money. That's not who we are."
What it has been lately is a disappointment. The company's stock is down one-third off its 2015 high after it reported third-quarter results that fell short of expectations. It then offered equally underwhelming guidance for fourth-quarter revenue, between $440-million and $455-million, and net profit of 64 and 72 cents per share.
Some observers worry about Open Text's success in moving customers from paying licence fees for in-house software to shelling out recurring payments for cloud-based offerings. But Mr. Barrenechea points out his company has steadily increased cloud revenues and margins and will benefit from the corporate world's continued digitization. "You have to pick a secular trend and go ride it, and I think digital is it," he said.
Easier said than done. Open Text chief marketing officer Adam Howatson said one of the biggest "head-bangers" is convincing large customers to undertake sweeping digitization efforts rather than follow a piecemeal approach. "You'll come into these large organizations, they have big budgets, big capacity, good vision, but we sometimes fall back to the simplest mode of execution, which is: 'Department 8462J has a problem – we'll solve that in isolation. Okay, what's next?'"
But Mr. Howatson is optimistic that the arrival of millions of Internet-savvy millennials to the work force will push companies to ramp up slow-going digitization efforts. "Decision-makers are now digital natives going, 'What do you mean our entire customer experience isn't digital?'" he said. "'Well, you'd better call a company like Open Text, and we need to solve this right now or we'll be left in the dust.'"