Open Text Lowers R&D Spending, Fails To Explain Why

Open Text (OTEX) reported what some people will call slightly better results and made much of its continuing integration of Hummingbird. Management claims to be happy. So why was there no comment from management about its absolute and relative drop in R&D spending? The drop was not insignificant: from $15.7 million during 1Q05 down to $14.2 million during 3Q06 and from 17% of revenues last year to 14% this quarter.

In the latest conference call, management and big shot sell side analysts spent all their time talking about the integration. The Hummingbird acquisition is expected to be accretive in 2008, not earlier. Some analysts came close to talking about market share growth and what it will take for the company to grow faster than the market. R&D was not covered.

Open Text is now the largest independent enterprise content management [ECM] vendor and is positioning itself as the Switzerland of that world. They appear to be bulking up with market share to make themselves look acquisition attractive, leaving the costly innovation to whoever will be buying them. The stock is trading near its 52 week high. If a takeover does not come soon, the company will have a successful integration with obsolete products.

OTEX 1-yr chart: