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Open Text Corporation 13 July 2007

Initiation Report

Stringent corporate compliance norms to fuel growth for Open Text

NASDAQ BUY Fundamental research indicates an 11% upside in the price of the NASDAQ common stock for the
coming 6-24 months. The company reports in US dollars, which is its major trading currency. As a
Common result, the impact of currency movements on the NASDAQ common stock is assumed to be neutral.
We have calculated the target price based on fundamental factors using the weighted average of
Stock target prices obtained by using DCF and comparative valuation methodologies. The technical condition
Ticker: OTEX of the NASDAQ common stock suggests a HOLD.
Target price: US$24.69 We rate the NASDAQ common stock a BUY based on fundamental factors, with a 6-24 month target
Current price: US$22.17 price of US$24.69.

Canadian HOLD The Canadian stock is expected to remain flat over the next 6-24 months as the 11% fundamental
upside is offset by approximately 11 percentage points downside attributable purely to the anticipated
Stock appreciation of the Canadian dollar against the US dollar over the same period.

Ticker: OTC.TO
Target price: C$23.21
Current price: C$23.32 We rate the Canadian stock a HOLD, with a 6–24 month target price of C$23.21.

Supervisor: Arindam Pal Investment horizon

Analyst: Aishwarya Narayanan
Editor: Heloise Capon This report addresses the needs of strategic investors with a long term investment horizon of 6-24 months.
Global Research Director: We will soon provide, from time to time, a short term view for this stock, generally 7-60 days, for readers who
have a short trading horizon.
Satish Betadpur, CFA

Next news due:

FY 2007 results, 30 August
Report summary
Open Text Corporation (Open Text) is an application software company concentrated primarily in the
Enterprise Content Management (ECM) domain, in which it holds a strong market position, providing
ECM solutions to large corporations. Headquartered in Canada, Open Text has operations spread
across Australia, North America, Europe, Asia and Latin America, managed through 52 offices. It
currently employs a workforce of over 2000 personnel. The company’s flagship product, LiveLink, is a
web-based content management solution and offers integrated Business Process Management (BPM)
capabilities. Over the past 4 years, Open Text has grown inorganically through several acquisitions, the
largest of these being the acquisition of Hummingbird Ltd. (Hummingbird) in October 2006 for
US$412.5 mn. Open Text has successfully partnered with leading players in the application software
industry such as SAP AG (SAP), Oracle Corporation (Oracle) and Microsoft Corporation (Microsoft), by
integrating LiveLink with their products, enabling users to continue working on their preferred
applications. Despite concerns that Open Text could face problems in integrating its various
acquisitions, the company has created the broadest ECM suite available in the market and, amongst
its peers, comes closest to the description of a fully integrated ECM services provider. Based on the
growing demand for ECM products, primarily as a result of heightened concerns over compliance
requirements, which can be effectively managed using ECM suites, we expect Open Text to maintain
its dominant position in the ECM market. Based on these factors our outlook for the stock is positive.

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Open Text Corporation 13 July 2007

Currency impact for US investors

The company reports in US dollars, which is its major trading currency. Earnings forecasts are
therefore also expressed in US dollars. Although the company has costs as well as revenues in other
currencies, we assume that the net risk is minimized through implementation of effective hedging
strategies. As a result, the impact of currency movements on the price of the NASDAQ common stock
is assumed to be neutral. Where specific currency risks are identified these risks will be highlighted in
the report.

Currency impact on the Canadian stock

The impact by itself of the anticipated currency movements on the Canadian stock (now C$23.32),
without considering changes in the share price, is broadly negative and is expected to be:

Over 6 months: C$22.61

Over 12 months: C$23.94

Over 24 months: C$20.84

Investment Thesis
Company overview
Open Text, founded in June 1991 and headquartered in Canada, is currently the world’s largest
independent provider of ECM software and solutions. The company introduced its flagship product
Open Text is the LiveLink (initially known as Latitude Web Server), a web-based document management product which
world’s largest was the first of its type, in 1995. The product was well received as it effectively capitalized on the
independent provider Web’s potential for content management. In 1995 the company also achieved several major contract
of ECM software and wins, integrating its technology with that of leading players in the application software domain, such as
solutions Oracle and Microsoft. The company went public in 1996 and continued to expand its customer base.
Since 2003 Open Text has pursued a strategy of rapid inorganic growth, acquiring a number of
independent software firms, including Gauss Interprise AG (Gauss), Eloquent Inc. (Eloquent),
Corechange Inc. (Corechange) and DOMEA e-Government (which comprises SER eGovernment
Deutschland GmbH and SER Solutions Software GmbH ), all of which were acquired in 2003. However,
the largest acquisition in 2003 was that of Munich-based IXOS Software AG (IXOS), a software vendor,
which had provided archiving software to enable users to manage data compatible with SAP solutions,
for 15 years. In 2003, the company also developed strategic alliances with Adobe Systems Inc. and
Open Text’s largest Ricoh Co. Ltd. and entered into a joint venture with BearingPoint Inc., a leading business consulting
firm, to provide a world wide training portal for the US Army. The company made two acquisitions in
acquisition to date
2004, Artesia Technologies Inc. (Artesia) and Vista Plus Suite from Quest Software Inc. (Quest) and
has been that of acquired Optura Inc. in 2005. The acquisition program continued in 2006, when Open Text acquired
Hummingbird for Hummingbird, and later Momentum Inc. in early 2007. At a cost of US$412.5 mn, Hummingbird is by
US$412.5 mn in far the largest of the acquisitions made by Open Text and it has strengthened its product portfolio
October 2006 considerably. As a result of this well-planned growth strategy, Open Text is now able to provide
solutions for multiple industry verticals such as energy, media, manufacturing, financial services,
telecommunications, insurance, legal, pharmaceutical and life sciences as well as governmental
organizations. Open Text’s solutions encompass business applications such as Compliance and
Governance, Email Management, Corporate Services, Information Systems and Technology,
Manufacturing and Operations and Procurement.

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Open Text Corporation 13 July 2007

Open Text Acquisitions: 2003 to July 2007

Date Company acquired Terms Business description

Feb-03 Corechange Inc. US$3.6 mn Provider of portal infrastructure software
Mar-03 Eloquent Inc. US$6.7 mn Provider of "sales-readiness" solutions
Oct-03 Gauss Interprise AG US$9.8 mn Web Content Management vendor
Integrated document management and archiving
Oct-03 IXOS Software AG US$237 mn
solutions provider
Oct-03 DOMEA e-Government US$11.4 mn Vendor of e-Government solutions
Provider of Digital Asset Management for the media and
Aug-04 Artesia Technologies Inc. US$5.8 mn
entertainment industry
Vista Plus Suite acquired from Quest Software Inc.
Sep-04 Vista Plus Suite US$23.7 mn Captures and stores business criticial information from
ERP systems
Feb-05 Optura Inc. US$3.7 mn Vendor of Business Process optimisation software
Oct-06 Hummingbird Ltd. US$412.5 mn Provider of ECM solutions

Mar-07 Momentum, Inc. US$4.7 mn Provider of IT solutions for US Government agencies

Source: Company data

Business overview
Open Text classifies its top-line into three principal revenue streams (segments) – License and
License revenues Networking, Customer Support and Services. License and Networking revenues consist of fees earned
accounted for from software licenses sold to customers, which are one-off charges. This segment contributed 30% of
the company’s total revenues in FY 2006. Customer Support revenues consist of charges for
approximately 30% maintenance and customer support agreements which allow customers to receive technical support,
of Open Text’s total enhancements and upgrades for the company’s products as and when they are available. In FY 2006,
revenue in FY 2006 the Customer Support segment contributed 46% of total revenues. Service revenues derive from
consulting contracts and contracts to provide training and integration services, whereby Open Text’s
ECM product can be integrated with a customer’s existing applications. The Services segment
contributed 24% to total revenues in FY 2006.

The company has a presence across five continents and classifies its geographical segments under
In FY 2006, North North America, Europe and Other, where the last segment primarily consists of Australia and Asia.
America and Europe North America and Europe accounted for the highest shares (48.3% and 46.2%, respectively) of the
company’s total revenues in FY 2006. The remaining 5.5% was accounted for by Australia, Japan, and
accounted for the Middle East (Asia).
48.3% and 46.2%
of total revenues Through its various acquisitions, Open Text has achieved the expertise to deliver solutions which are
respectively customized for each of the many industry verticals to which it caters. Furthermore, Open Text has
successfully partnered with prominent enterprise software players such as Oracle, Microsoft and SAP,
through its global partner program, to ensure Open Text products are compatible with the customers’
existing systems. According to the terms of this program, the company’s partners develop, validate and
deliver Open Text-based solutions, giving a distinct advantage to Open Text over its competitors as the
partnerships are with the majority of the leading players in the Operating System (OS) domain. The
most recent example of the company’s product compatibility is Open Text’s Hummingbird Connectivity
2007 suite, which is certified as compatible with Microsoft’s latest operating system, Windows Vista.
This program has enabled Open Text to significantly widen its customer base as it allows users to
easily integrate ECM with current applications.

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FY 2006: Revenues by business segment (%) FY 2006: Global revenue mix (%)

23.8% 5.5%




Licence and Networking Customer Support Services North America Europe Other

Source: Company data

Products and suites

LiveLink ECM – Open Text’s flagship product:

LiveLink is a leading content management and collaboration software suite for global organizations. It
LiveLink ECM is Open enables users to maintain auditable trails of records and encourages efficiency by streamlining
Text’s flagship processes. LiveLink serves multiple industry verticals and objectives within a company by bringing
product suite which together content, collaboration and process technologies. Business solutions are customized for each
client and can be scaled and extended to integrate with other solutions across the enterprise, thus
offers a variety of
protecting existing investments in technology. Some of LiveLink’s principal product features are:
Archiving and Imaging: These products enable organizations to manage the physical storage of all
content, without impacting the way users work with content. These products can also be integrated
with third party applications.

Business Process Management: These products enable organizations to create, modify and manage
business processes of any complexity and allow business process managers to manage workflows
without heavy dependence on IT resources.

Document Management and Collaboration: These ECM products enable teams of users to share their
knowledge on projects and collaborate in a virtual enviroment. Document management services
LiveLink based captures information and make it securely available to other users as and when they require.
solutions can be
customized and offer Digital Asset Management: Allows effective management of digital assets and serves as the single
scalability and easy access point for all digital media files and underlying information.
integration with a
client’s existing E-mail Management: Open Text’s e-mail products enable compliancy compatible archiving and records
management, allowing organizations to store and retrieve e-mail content whilst ensuring regulatory
compliance. It eliminates the requirement to delete content in order to meet storage requirements.

Web Content Management (WCM): Global organizations require the management of corporate
information over a long period of time and for the benefit of multiple audiences through websites,
intranets and portals. Open Text’s RedDot WCM product enables delivery of content to audiences from
any source using the Web and eliminates bottlenecks in Web publishing.

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Open Text Corporation 13 July 2007

FY 2003- FY 2006: Revenues by segment (in US$ mn) FY 2003- FY 2006: Revenues by segment (%)

500 ` 100%
21% 21% 24% 24%
400 80%
99 98
300 60% 36% 37%
43% 46%
179 189 40%
39 109
20% 43% 42%
100 63 33% 30%
122 137 123
76 0%
FY 2003 FY 2004 FY 2005 FY 2006
FY 2003 FY 2004 FY 2005 FY 2006

Licence and Networking Customer Support Service Licence and Networking Customer Support Service

Source: Company data

Hummingbird Connectivity Suite:

The connectivity suite is a single, consolidated solution that allows organizations to securely integrate
different legacy IT-infrastructure with desktop products, thus enabling them to meet corporate
Hummingbird’s governance and business continuity requirements. This product suite also offers solutions for remote
connectivity software, document access, allowing remote users to access critical and confidential applications with maximum
Exceed, held 71.5% security. According to global market research and analysis firm, IDC Inc. (IDC). Hummingbird’s flagship
market share, from connectivity software, Exceed, held 71.5% market share in the server connectivity software market
1999-2004 between 1999-2004. Open Text now views the connectivity business as a mature cash generating
business and believes that it has potential to enhance its profitability.

Industry overview
According to the IDC, the market for ECM software grew almost 13% y-o-y in 2006. The year 2006 was
also marked by vendor consolidations and several high profile acquisitions such as IBM’s acquisition
of FileNet Corporation (FileNet) and Oracle’s acquisition of Stellent, Inc. (Stellent). The IDC forecasts
this market to continue to grow at a CAGR of 13% per annum between 2006-2011, generating annual
revenues of approximately US$3.9 bn. With information volumes growing and companies facing
greater competitive pressures to be more responsive and efficient, there is now increasing demand for
ECM, as a technology required to address compliance and process efficiency needs. Furthermore, the
potential for the ECM market to expand into currently under-served geographies and market verticals,
adds to the overall positive growth outlook for the industry. This leads us to believe that IDC’s
forecasted growth figure is achievable.

Competition and consolidation in the ECM industry:

The ECM market, which has historically been characterized by fragmentation, has experienced several
The ECM industry has vendor consolidations and acquisitions over the recent past. Since the 1980s, IBM has been the
acknowledged market leader in ECM. However, EMC Corporation’s (EMC) acquisition of content
been marked by management heavyweight, Documentum Inc. in 2003, followed by that of Captiva Software
vendor consolidation Corporation, led to EMC assuming the market leader position in the ECM industry. However, IBM’s
and several acquisition of FileNet in 2006 has re-established the company as the leading player in this market,
acquisitions over the with Open Text, as a result of the Hummingbird acquisition, taking the second position. In the EMEA
last few years (Europe, Middle East and Africa) region, the combined Open Text -- Hummingbird entity now has 28%
market share, positioning the company as the market leader in the region, according to a recent study
conducted by Gartner Dataquest, Inc. Other independent vendors of note in the industry are
Interwoven Inc. (Interwoven) and Vignette Corporation (Vignette), which are likely to be prime takeover
targets for larger multiple-product vendors in the future.

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Open Text Corporation 13 July 2007

ECM Market Share (3Q 07)

IBM FileNet (IBM Corporation)
Open Text Corporation
EMC Corporation 4.50%
Interwoven, Inc
Vignette Corporation
Stellent, Inc 3.50%
Mobius Management Systems, Inc 2.60%
Hyland Software, Inc 1.60%
Microsoft Corporation

Source: Company data, Investor Presentation, 3Q 07

Open Text’s peer group and close competitors:

IBM FileNet (IBM): IBM is an information technology (IT) company that provides business, technology
Open Text enjoys the and consulting services. Its recent acquisition of FileNet has established the combined entity as the
second largest largest ECM provider in the space. FileNet enjoys a strong presence in the financial services and
market share globally banking verticals.
in the ECM market
EMC: EMC is a leading developer and provider of information infrastructure technology and solutions
which cater to the information repository needs of organizations of all sizes around the world. The
company’s main segments are information storage, content management and archiving, information
security and virtual infrastructure.

Microsoft: Microsoft is the largest player in the software industry. Microsoft’s Windows OS is the most
widely used in the world and the company is endeavoring to add value to its core Windows product
through offerings in areas such as ECM. Microsoft recently launched the Microsoft Office SharePoint
IBM is the current Server 2007 product which offers ECM solutions such as document management, records
market leader in the management and WCM. Microsoft’s principal advantage in this space is its ability to capitalize on its
ECM industry with core products’ large market share, by bundling ECM solutions with these core products.
24.9% of market
Interwoven: Interwoven is an independent ECM vendor which specializes in legal and compliance
share globally related content management software. The company’s target client group consists of law firms and
corporate legal departments.

Vignette: Vignette is an independent ECM provider which offers Web content management, documents
and records management and document imaging functionalities.

Hyland Software, Inc. (Hyland): Hyland engages in developing and marketing ECM software in North
America, Latin America, Europe and Japan. The company offers a product suite named OnBase, which
is ECM software offering document imaging and BPM functionalities.

Mobius Management Systems, Inc. (Mobius): This company provides solutions for records and content
management. It offers a suite of products named ViewDirect TCM that meets various enterprise
requirements for managing content. It is currently a subsidiary of Allen Systems Group, Inc.

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Industry outlook

The global ECM market is expected to continue to expand as small and mid-sized companies also
Potential product enter the market for enterprise-wide ECM implementations, following the adoption of stricter
differentiation and compliance norms, globally, and the ever-increasing volume of information which requires
classification. In terms of geographical distribution of demand, the Asia Pacific excluding Japan (APEJ)
consolidation will region is currently under-served in terms of ECM implementations and offers significant potential for
determine market growth. With a CAGR of 13% predicted for the next five years, the outlook for the industry is positive.
leadership in the ECM Further consolidations, combined with the ability to offer differentiated products, will determine the
space acquisition of market share by current players.

Peer comparison
Following the recent wave of consolidation in the industry and subsequent divergence in product
Microsoft is a offerings, Open Text is not directly comparable with its peers. For the larger players in the industry
potential threat to such as IBM and Microsoft, ECM software comprises minimal share of their product portfolios. As far
Open Text following as the smaller players are concerned, only Open Text enjoys a significant market share in the ECM
adoption of strategy market. However, in our peer group we have considered both the larger players and the smaller pure-
play independent ECM vendors. IBM is currently the market leader in the ECM industry, followed by
to bundle ECM with Open Text. Although Microsoft commands a minuscule market share currently, it poses a significant
OS products threat to Open Text following the adoption of a strategy to bundle ECM products with its market leading
legacy OS applications. In terms of top-line performance in FY 2006, Open Text registered a decline of
1.3% y-o-y, well below its peer group average of 6.7% y-o-y growth. The decline was led by a drop in
license revenues. However, the company reported a strong y-o-y growth of 54.6% in revenues in 3Q 07,
following the acquisition of Hummingbird in the second quarter. Open Text’s operating margin in FY
2006, adjusted1 for non-recurring items was reported at 9.51%, as opposed to a peer group average
of 17.02%. However, the peer average for independent vendors only (namely, ECM, Interwoven and
Vignette) was 7.3%. Open Text registered a strong 77.2% y-o-y growth in adjusted EPS, compared to
the peer group average growth of 16.3% y-o-y. We have not considered Interwoven’s growth in
adjusted1 operating margin and EPS in the peer group average, as the company incurred losses in FY
2005 from which it turned around in FY 2006. Going forward, we believe Open Text’s top-line will
benefit from the Hummingbird acquisition (as is already evident from the performances of the two
completed consolidated quarters after acquisition), enabling the company to grow at a CAGR of just
over 13% between the years FY 2006-FY 2011, in line with the growth rate predicted for the ECM
industry over the same period.

Peer Comparison Table - FY 2006

Open Text EMC IBM Microsoft Interwoven Vignette Industry

Corporation Corporation Corporation Corporation Inc Corporation Average

Market capitalization (in US$ bn) 1.07 37.63 156.55 285.76 0.62 0.54 N/A
Employees 1,894 31,100 366,486 71,000 744 670 N/A
Revenue (in US$ mn) 410 11,155 91,423 44,282 194 198 N/A
y-o-y growth (%) (1.27%) 15.43% 0.31% 11.29% 10.86% 3.62% 6.71%
Operating profit (in US$ mn)* 39 1,804 13,963 18,010 4 7 N/A
y-o-y growth (%) 41.87% 14.06% 6.27% 6.37% 612.50% 2200.00% 453.71%
Operating margin* (%) 9.51% 16.18% 15.27% 40.67% (0.01%) 3.48% 17.02%
EPS* (US$) 0.53 0.54 6.06 1.20 0.07 0.41 N/A
y-o-y growth (%) 77.22% 14.26% 23.42% 6.40% 393.33% (39.77%) 16.31%
*Excluding non-recurring items
Note: Fiscal year end for Open Text and Microsoft is 30 June 2006, and 31 December 2006 for the remaining companies
Source: Company data

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Open Text Corporation 13 July 2007

3Q 07 results update
Top-line registers robust growth post-acquisition

The company’s revenues registered a 54.6% y-o-y growth to US$156.1 mn in 3Q 07 driven largely by a
Hummingbird 72.0% y-o-y increase in Customer Support revenues, which stood at US$79 mn, contributing 50.7% to
acquisition provided a the company’s total revenues. License and Networking revenues grew 51.4% y-o-y to US$43 mn and
much needed boost to accounted for 27.6% of total revenues. Service revenues stood at US$34 mn, registering a growth of
Open Text’s top-line in 28.0% y-o-y and contributed 21.8% to the total revenues. This healthy growth can be attributed to the
wider customer base that Open Text has obtained following the Hummingbird acquisition. Customer
3Q 07
support revenues came from existing customers as well as from new license sales. Operating profit
was reported at US$13.5 mn, registering a y-o-y increase of 24.5%. Operating profit adjusted1 for non-
recurring restructuring charges stood at US$14.4 mn, registering a y-o-y growth of 39.7%, which was
led by growth in revenues as well as a reduction in operating expenses y-o-y. Operating profit margin
was reported at 8.7%, registering a decline of 210 bps y-o-y. Adjusted1 operating profit margin stood at
9.2%, registering a decline of 100 bps y-o-y. The decline in operating margin is attributable to a y-o-y
increase in amortization expenses, resulting from amortization of intangibles relating to acquisitions
made in the previous fiscal year as well as that of the Hummingbird acquisition in the current year.
Adjusted EBITDA was US$35.9 mn, reporting a y-o-y growth of 79.0%, while adjusted EBITDA margin
increased by 313 bps y-o-y, driven by increased revenues. Net profit was reported at US$3.9 mn,
registering a decline of 47.4%, due to interest charges of US$7.6 mn on the Hummingbird acquisition
term loan. Net income, adjusted for non-recurring foreign exchange gains/losses, declined 11.1% y-o-y
to US$4.6 mn, while adjusted net margin declined 219 bps y-o-y to 3%. Adjusted EPS declined to
US$0.09 per share in 3Q 07 from US$0.10 per share in 3Q 06.

Operating cash flow was strong

Cash flow from operations in 3Q 07 stood at US$41.3 mn, compared to US$28.7 mn in the
Cash flow from corresponding quarter last year, registering a 44.1% y-o-y growth. Net cash and cash equivalents stood
operations in 3Q 07 at US$159.7 mn at the end of 3Q 07, compared to US$107.4 mn at the end of 3Q 06, an increase of
registered a 44.1% y- 32.8% y-o-y. In 2Q 07, the company raised debt through a term loan amounting to US$390 mn in order
o-y growth to partially fund the Hummingbird acquisition. As a result, the company’s debt-to-capital ratio on its
balance sheet stood at 44.5% at the end of 3Q 07.

FY 2006 performance was not impressive

FY 2006 results disappointed due to slowdown in Licence revenues

Open Text reported revenues of US$409.6 mn in FY 2006, registering a 1.3% y-o-y decline, primarily
Open Text’s top-line due to a 10.3% y-o-y decline in License and Networking revenues to US$122.5 mn. Service revenues
declined 1.3% y-o-y in also declined 1.5% y-o-y to US$97.63 mn, while revenues from Customer Support stood at
FY 2006 as operating US$189.42, registering growth of 5.7% y-o-y. The company cites structural re-alignment in global sales
force as the reason for this drop in License and Networking revenues as the company focused on
performance streamlining operations for future profitability.
improved due to cost
efficiencies Adjusted operating profit registered 41.9% y-o-y growth in FY 2006

Open Text’s operating profit was reported at US$13.0 mn in FY 2006, registering a decline of 55.8% y-
o-y. The decline was led by significant restructuring charges which were reported at US$26.2 mn,
compared to a recovery of US$1.7 mn in FY 2005. Operating profit adjusted1 for non-recurring
restructuring charges increased by 41.9% to US$39.1 mn, reflecting improving cost efficiencies as
R&D and SG&A costs declined as a percentage of revenues in FY 2006. Reported net income stood at
US$5.0 mn in FY 2006, registering a decline of 75.6% y-o-y due to a higher tax rate of 42.4%,
compared to 25.2% in FY 2005. Adjusted net income increased by 69.9% y-o-y to US$26.4 mn on the
back of higher adjusted operating profit. Adjusted net margin increased by 270 bps to 6.4%. Reported
EPS declined 74.5% to US$0.10 per share, while adjusted EPS increased 77.2% to US$0.53 per share
in FY 2006.

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Open Text Corporation 13 July 2007

Stringent compliance requirements to be the primary growth driver

Information Lifecycle Management (ILM) is designed to manage the flow of information and data from
Compliance and creation and initial storage to obsolescence and deletion. ILM has gained importance following the
litigation are seen as implementation of compliance laws such as the Sarbanes-Oxley Act of 2002 in the US, which mandate
the main growth strict records compliance. We believe that ECM players will continue to benefit from the Sarbanes-
Oxley compliance drive as well as from compliance requirements mandated by laws globally.
drivers for the ECM Compliance demands affect an entire company, necessitating enterprise-wide policies and an
industry integrated information management system to enable it. ILM enables a user to create content and
store it until the end of its lifecycle. Most regulations are information intensive and impose strict
mandates as to how information should be managed. Companies with operations in Europe are
subject to the provisions of the European Commission’s Directive on Data Protection. According to this
directive, organizations have to meet minimum adequacy standards relating to privacy. Similarly the
Sarbanes-Oxley legislation imposes tougher standards for accounting practices for companies with
operations in the US. As a result of this stringent regulatory environment, demand for ECM for
compliance purposes is gaining ground as it enables organizations to provide compliance and
corporate governance in an efficient and cost effective manner. Open Text’s solutions allow
corporations to manage operations in a more transparent manner by ensuring that all content is safe,
searchable and readily accessible. Open Text’s partnerships with leading OS providers such as
Microsoft, ensures that content can be managed irrespective of which application it is produced on.
We believe the company is well positioned to capitalize on this requirement.

Growing incidence of corporate litigation to be a key driver

An ever growing global corporate marketplace is increasing the scope of regulations as well as the
degree of corporate risk. Not only are regulations demanding but any infringement invites strict
penalties, resulting in prolonged legal battles in many cases. As is the prerequisite with any litigation,
corporate litigation also necessitates conclusive data backed evidence. As a result, organizations now
require efficient and effective technology for managing content more than ever before. The starting
point is to identify records and content which are business records, after which these records have to
be classified, stored and managed accordingly. An organization can be litigation-ready only when it can
successfully combine automated and intelligent record classification to extract meaningful and
important information from records. ECM is seen as the most cost-effective solution to the problem as
it helps manage content lifecycle in accordance with regulatory requirements. Open Text’s content
management solutions provide clients with an integrated product offering developed to support
activities through the information lifecycle.

Requirement for products that differentiate

In terms of product offering and functionality, there is very little to choose between ECM vendors in the
Hummingbird’s market today. Most vendors have concentrated on combining unstructured and structured data to
connectivity suite facilitate tasks such as claims or forms processing in combination with Enterprise Resource Planning
offers an opportunity (ERP). Only a product that is appreciably different and adds certain value-added functionalities can
offer a vendor an edge over the others. Interwoven recently took a step in this direction by offering a
for diversification to
product aimed at Segmentation and Analytics, which allows companies to track the behavior of
Open Text’s existing different customers who visit their website and accordingly categorize them and target each segment
portfolio with customized offers. This functionality also helps to identify if a particular site is poorly designed so
that appropriate action can be taken. We believe that following the acquisition of Hummingbird, Open
Text has the potential to diversify effectively, using Hummingbird’s connectivity products.

Hummingbird acquisition results in larger market share, but significant product overlap
The ECM industry has been left with only three pure-play independent vendors of note – Open Text,
Product overlap may Interwoven and Vignette. Of these, the chances that the latter two will be acquired by a larger multi-
cannibalize market product vendor are high. Following its Hummingbird acquisition Open Text may have been successful
share and reduce in pulling itself out of the list of potential acquisition targets. However, the acquisition also poses some
synergies from the new challenges for Open Text going forward, which the company will have to manage effectively in
Hummingbird order to survive in the highly competitive ECM industry. While Open Text’s acquisition of Hummingbird
has established the company as the largest independent vendor of ECM software, it has also brought
with it a slew of overlapping products. Open Text and Hummingbird previously offered competing ECM
technologies, which now require significant product integration work. Open Text supports three

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products for Web Content Management (WCM) – Open Text, Gauss and Obtree. Hummingbird has now
added a fourth – Red Dot. Product overlaps also exist in the Records Management and Document
Management products. Therefore, the actual gain in market share for Open Text from this acquisition
could be less than it appears. Another consequent risk is that of Hummingbird customer migration to
third party vendors due to concern over lack of support for their platform. Disturbingly, Management
has also suspended guidance for the quarters following the acquisition citing lack of clarity. However,
we expect the synergies from this acquisition to only be marginally negatively impacted by product
overlaps and its effect on market share.

The Hummingbird acquisition may adversely affect profitability in the short term
Open Text acquired all of Hummingbird’s outstanding shares in October 2006, in an all cash deal
Hummingbird worth US$412.5 mn, which was funded in part by a term-loan of US$390 mn. The resultant interest
acquisition could arising from this term loan will materially impact the company’s bottom-line. The size of the acquisition
adversely impact and challenges from integration could pose a challenge for Open Text Management and affect the
earnings in the short company’s operations. Nevertheless, the Hummingbird acquisition represents an excellent opportunity
term to expand Open Text’s existing product portfolio and will help contribute significantly to the company’s
top-line as well as profitability if it can be integrated with the company’s existing operations effectively.

Financial Projections
Revenue and earnings growth
Growth in revenues: We expect Open Text’s revenues to grow by 42.5% y-o-y to US$583.6 mn in FY
2007. This expectation is largely driven by the strong inorganic growth registered by the company in
FY 2007 revenues the second and third quarters of this year, following the Hummingbird acquisition, and we expect this
estimated to grow growth to continue into the last quarter as well. We expect revenues from Licence and Networking to
42.5% y-o-y, driven by contribute US$172.2 mn or 29.5% to total revenues, growing at 40.6% y-o-y. Revenues from Customer
Hummingbird Support are estimated to be US$280.7 mn or 48.1% of total revenues, growing at 48.2 y-o-y, while
acquisition those from the Service segment are expected to be US$130.7 mn or 22.4% of total revenues, growing
at 33.8% y-o-y. In FY 2008, we expect the company to grow a healthy 13.5% y-o-y aided by one
quarter’s inorganic growth from the Hummingbird acquisition. Going forward, we expect Open Text’s
revenues to grow at an organic growth rate of approximately 5% up to FY 2011. Accordingly, our
estimates suggest a CAGR of 13.4% in total revenues through the period FY 2006-FY 2011, which is in
line with the ECM industry’s projected CAGR of 13% over the same period. Over our projection horizon
of FY 2007-FY 2016, we have estimated a CAGR of 8.7% for Open Text.

Margins: We expect expansion in reported operating margin for Open Text in FY 2007, as non-recurring
restructuring charges have been lower in the three reported quarters of FY 2007. We forecast an
improvement over FY 2006 operating margin of 468 bps, resulting in an operating margin of 7.9% in
Adjusted operating FY 2007. Adjusted1 operating margin (excluding restructuring expenses) for FY 2007 is expected at
profit margin 8.8%, a decrease of 81 bps over 9.6% in FY 2006. The estimated decline is due to an increase in
amortization expenses of acquired intangibles relating to the Hummingbird acquisition in FY 2007.
expected to expand
Amortization is estimated at 4.2% of revenues in FY 2007 as opposed to 2.3% of revenues in FY 2006.
from 9.6% to 20.5% Adjusted operating margin for FY 2008 has been estimated at 9.1% considering a margin expansion
over the period assumption of 124 bps. FY 2007 estimates are based on the robust results in the first three reported
FY2006- FY2016 quarters and on an expected strong performance in 4Q 07. Cost savings are expected in General and
Administrative expenses as the company experiences further synergies from the Hummingbird
acquisition in FY 2008. Accordingly, we have reflected this as a declining percentage of total revenues.
We have estimated a margin improvement from 9.6% in FY 2006 to 20.5% in FY 2016.

Earnings: Net income in FY 2007 is estimated at US$15.9 mn, more than three times that in FY 2006,
Reported net income which was US$5.0 mn, registering a growth of 219.1% y-o-y. The increase is mainly due to an outflow
estimated at more of US$4.8 mn in FY 2006 in the form of Other Losses as opposed to a projected inflow of US$0.6 mn
in FY 2007. Net income in FY 2008 is estimated at US$18.7 mn. Adjusted1 net income for FY 2007 is
than three times that
estimated at US$21.7 mn, a decline of 17.6% y-o-y over US$26.4 mn in FY 2006, resulting from the
in FY 2006 increased amortization expenses. Adjusted net income margin is estimated at 3.7% for FY 2007, down
271 bps from FY 2006. Over our projected horizon we expect adjusted net margin to improve from
6.4% in FY 2006 to 12.8% in FY 2016, despite interest outflows on the term loan undertaken to fund

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the Hummingbird acquisition. These outflows are expected to continue until FY 2013. The company
has provided guidance for complete amortization of acquired intangibles until FY 2011, which we have
modeled into our estimates. The reason for margin expansion, despite these two heavy outflows, is the
significant savings in costs expected due to acquisition synergies. Adjusted diluted EPS is expected to
register a CAGR of 12.7% through the period 2006-2011. It is estimated at US$0.43 in FY 2007 and
US$0.38 in FY 2008 compared to US$0.53 in FY 2006. Over our projected horizon of FY 2006-FY
2016, we expect adjusted diluted EPS to exhibit a CAGR of 16.7%. Reported diluted EPS stood at
US$0.10 in FY 2006 and is estimated at US$0.31 in FY 2007. Non-GAAP2 net income and EPS are
projected to increase from US$76.6 mn and US$1.52 in FY 2007 to US$95.3 mn and US$1.96 in FY

Adjusted operating (%) and net margin (%) (FY 2006A-FY 2011E)





FY 2006 A FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 E

Adjusted operating margin Adjusted net margin

Source: IIIR estimates, Company data

Open Text has announced a share repurchase program: Open Text has adopted a proposed
repurchase program to potentially repurchase up to an aggregate of 2,494,053 common shares over
the next twelve months, which represents 5% of the issued and outstanding shares. As of April 2007,
Open Text had 49,881,068 issued and outstanding common shares. This repurchase program
commenced in May 2007 and will continue for the next twelve months. We have accordingly modeled
this into our estimates.

Stock price movement

Open Text’s NASDAQ common stock broadly outperformed the NASDAQ composite index over the past
Open Text’s NASDAQ year. However, it has shown a slight decline since May 2007. The company’s stock has appreciated by
common stock has 65.0%, compared to the 31.5% appreciation in the NASDAQ composite index in the corresponding
appreciated 65% period. The Canadian stock appreciated by 53.7% compared to a 28.4% appreciation registered by the
over the past year index in the corresponding period.

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Stock price movement

75% 75%

60% 60%

45% 45%

30% 30%

15% 15%

0% 0%

-15% -15%
07-06 09-06 11-06 01-07 03-07 05-07 07-07 07-06 09-06 11-06 01-07 03-07 05-07 07-07


Source: Bloomberg

To value Open Text in this report we have used the Discounted Cash Flow (DCF) valuation and
comparative valuation based on Price-to-sales (P/S) and Price-Earnings-Growth (PEG) multiple
methods considering FY 2009 sales and earnings estimates. The DCF method values the stream of
future cash flows discounted to the present day using the company’s Weighted Average Cost of Capital
(WACC), and as such is a good measure of the company’s value in absolute terms. Comparative
valuation using P/S and PEG helps us to compare the company’s operating performance with its
peers. The P/S method helps us compare the sales growth of peer companies, while the PEG multiple
method is particularly helpful in valuing companies based on their future growth potential, providing a
useful tool to assess the value investors are likely to assign to the stock over the investment horizon.

Comparative valuation
If we consider the P/S multiples, Open Text is currently trading at a multiple of 2.14x, which represents
Based on a P/S a discount of 25% to the current peer group average of 2.84x. Historically, the stock has traded in a
multiple of 1.80x, the TTM range of 1.54x to 2.48x, at an average of 2.08x. We expect Open Text to report strong growth in
NASDAQ common margins as it realizes synergies from the Hummingbird acquisition and top-line growth that is in line
stock is valued at with the projected industry CAGR from FY 2006 to FY 2011. In order to reflect this, we have assigned a
target P/S multiple of 1.80x, to value the NASDAQ common stock, which is lower than the current
multiple as we expect sales to increase significantly but higher than its forward multiple of 1.49x.
Employing this target multiple on the FY 2009 sales estimate of US$695.2 mn, we arrive at a target
price of US$25.73 per share.

Considering P/E multiples, Open Text is currently trading at a P/E multiple of 19.59x trailing 12-month
EPS, which is at a 25% discount to its current peer group average multiple of 26.12x. Historically, the
Based on a PEG
stock has traded at a TTM average P/E of 17.75x, which represents a discount of 29% to the peer
multiple of 0.70x, the group TTM average multiple of 25.16x. We expect Open Text’s long term earnings growth rate (next 5-
NASDAQ common year CAGR) to be at 13.37%, giving us a current PEG multiple of 0.99x, compared to an average of
stock is valued at 1.33x for its peer group. To value the NASDAQ common stock in this report, we have assigned a PEG
US$27.01 multiple of 0.70x, which is lower than the current multiple but higher than the forward multiple.
Applying this multiple to our estimated FY 2009 non-GAAP EPS of US$1.96, we arrive at a target price
of US$27.01 per share.

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Comparative valuation : P/S approach

Company 3 yr trading range TTM trading TTM P/S Current P/S Forward
range average FY 2009 P/S
Open Text Corporation 1.39 - 4.44 1.54 - 2.48 2.08 2.14 1.49
EMC Corporation 2.22 - 4.55 2.22 - 3.48 2.76 3.17 2.50
Interwoven Inc 1.65 - 3.26 1.94 - 3.26 2.57 3.16 N/A
Vignette Corporation 1.67 - 3.15 1.84 - 3.15 2.51 2.90 N/A
Peer group average 2.48 2.84 2.01
Source: Bloomberg, IIIR estimates

Comparative valuation : PEG approach

Company 3 yr trading TTM trading TTM P/E Current Forward LTGR Current PEG
range range average P/E FY 2009 P/E (%)
Open Text Corporation 13.53 - 34.72 13.53 - 21.35 17.75 19.59 30.77 13.37 1.47
EMC Corporation 16.93 - 46.31 16.93 - 29.44 22.14 26.81 18.39 15.00 1.79
Interwoven Inc 24.53 - 281.25 24.53 - 45.12 34.30 33.07 N/A 27.50 1.20
Vignette Corporation 14.06 - 30.94 23.33 - 30.60 26.44 25.00 N/A 25.00 1.00
Peer group average 25.16 26.12 14.76 21.80 1.25
Source: Bloomberg, IIIR estimates

DCF valuation
Using the DCF valuation method, we arrive at a 6-24 month target price of US$23.58 per share for the
Based on our DCF Open Text NASDAQ common stock, which represents a potential upside of 6.3% from current levels.
We have based our valuation on the following assumptions:
model, the NASDAQ
common stock is
Weighted Average Cost of Capital (WACC) of 9.14%: We have assumed a risk-free rate of 4.89%, in line
valued at US$23.58
with the three month average of the yield on the 10-year US Treasury bond. We have arrived at the
per share WACC by multiplying the cost of equity (which stands at 10.53%) and the tax-adjusted cost of debt
(which stands at 5.20%) by their respective estimated weights of 73.89% and 26.11%.

Terminal growth rate: We have developed Free Cash Flow (FCF) estimates for FY 2007 to FY 2016.
Thereafter, we have assumed a perpetual growth rate of 3.0% (implied terminal year exit sales and
EBITDA multiples of 2.29x and 9.90x respectively).

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DCF Valuation : Key Metrics

All figures in US$ '000 FY 2006 A FY 2007 E FY 2008 E FY 2009 E FY 2010 E FY 2011 E FY 2012 E FY 2013 E FY 2014 E FY 2015 E FY 2016 E
Revenues 409,562 583,582 699,910 695,239 730,001 766,501 800,993 835,035 870,524 905,345 941,559

Operating profit* 39,133 51,042 60,157 75,227 94,529 104,944 160,920 168,260 175,846 184,238 192,549

Operating profit margin* (%) 9.55% 8.75% 9.09% 10.82% 12.95% 13.69% 20.09% 20.15% 20.20% 20.35% 20.45%

Net income* 26,372 21,718 18,693 28,097 40,141 46,640 81,569 86,149 109,728 114,964 120,150

Net margin* (%) 6.44% 3.73% 2.82% 4.04% 5.50% 6.08% 10.18% 10.32% 12.60% 12.70% 12.76%

Cash and cash equivalents 107,354 70,011 130,945 220,773 306,995 396,980 461,540 545,113 643,349 751,154 862,838

Total assets 671,093 1,137,554 1,151,587 1,205,827 1,279,050 1,347,425 1,504,514 1,605,280 1,771,641 1,902,690 2,039,788

Debt 13,368 400,639 400,748 391,934 383,118 374,495 366,067 357,828 349,774 341,902 334,207

Shareholders' equity 442,842 447,100 436,294 475,106 533,391 603,331 713,176 838,487 999,178 1,176,752 1,370,599

Total liabilities and equity 671,093 1,137,554 1,151,587 1,205,827 1,279,050 1,347,425 1,504,514 1,605,280 1,771,641 1,902,690 2,039,788

Free Cash Flow (FCF) Analysis

NOPLAT 7,458 31,022 39,102 48,898 61,444 68,214 104,598 109,369 114,300 119,755 125,157

Depreciation and amortisation 39,202 76,693 89,223 83,496 71,911 70,355 22,027 22,963 23,939 24,897 25,893

Change in working capital 14,110 15,753 11,487 3,721 3,923 4,478 4,335 3,323 3,504 3,034 3,344

Capex (19,278) (303,937) (18,209) (19,119) (24,090) (25,295) (22,027) (22,963) (28,727) (29,876) (31,071)

Free Cash Flow (FCF) 41,492 (180,470) 121,603 116,996 113,188 117,752 108,933 112,692 113,016 117,809 123,322

PV of FCF (180,383) 111,342 98,155 87,010 82,940 70,287 66,625 61,223 58,476 56,074

Terminal Cash Flow 941,068

Perpetual growth rate 3.00%

WACC 9.14%
* IIIR adjusted to exclude non-recurring items
Source: Company data, IIIR estimates

Risk free rate 4.89%
Equity risk premium 5.08%
Beta 1.11

Cost of equity 10.53%

Marginal cost of debt 8.00%
Marginal tax rate 35.00%
Tax adjusted cost of debt 5.20%
Debt/ capital ratio 26.11%
WACC 9.14%

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DCF sensitivity analysis

Terminal growth rate
1.50% 2.00% 2.50% 3.00% 3.50% 4.00%
7.64% 26.58 28.51 30.82 33.63 37.11 41.56
8.14% 23.96 25.54 27.40 29.63 32.33 35.69
WACC 8.64% 21.70 23.02 24.54 26.33 28.48 31.08
9.14% 19.75 20.84 22.11 23.58 25.31 27.37
9.64% 18.03 18.96 20.02 21.23 22.65 24.32
10.14% 16.51 17.30 18.20 19.22 20.39 21.76
Source: IIIR estimates

Weighted average valuation

We assigned a 60% weight to the target price derived from our DCF valuation and 20% weights each to
The weighted the target prices derived from relative valuations based on P/S and PEG multiple methods. The
average target price weighted average valuation reflects our estimate of intrinsic value and market expectations and
for the NASDAQ sentiments. Applying these weights on our target prices we arrived at a weighted average target price
common stock is of US$24.69 for the Open Text NASDAQ common stock, representing an 11.4% upside from current
US$24.69 per share levels. Therefore, we initiate the Open Text’s NASDAQ common stock with a BUY on fundamental
grounds. The technical condition of the NASDAQ common stock suggests a HOLD (see page 19). The
Canadian stock is rated a HOLD due to anticipated negative currency impact (see page 1).

NASDAQ common stock (OTEX): Target price (US$), 6-24 months

Target price average
Methodology price
Target price using DCF approach 60.0% 23.58 14.15
Target price using PEG approach 20.0% 27.01 5.40
Target price using P/S approach 20.0% 25.73 5.14
Weighted average NASDAQ common stock target price 24.69
Current NASDAQ common stock price 22.17
Upside/(Downside) from current levels 11.39%
Source: IIIR estimates

Key risks to fundamental rating

Continued relationship with strategic partners is essential to sustain growth
Failure to continue
relationship with Open Text relies on its close ties with partner organizations and their cooperation for its sales and
strategic partners development as well as optimization of opportunities which may arise in the competitive environment
may adversely in which it operates. In the event that any strategic partner decides to scale back or discontinue its
relationship with Open Text, the company’s business would be adversely affected.
impact performance
Continued ability to develop technologically advanced products
Market acceptance The market for ECM products is intensely competitive and is subject to rapid technological change and
of Open Text’s modification. The company must be sensitive to market demands as well as competitive threats in
products is order to design and distribute both new and innovative software products and enhancements to
essential for existing products on a timely basis. Open Text currently relies on its proprietary R&D resources and has
been able to maintain responsiveness to customer requests. Since the primary market for ECM
continued healthy
products is rapidly evolving, the level of acceptance of current and future releases is not certain. In
growth in revenues

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addition, revenues from licenses drive revenues from customer support and services. If Open Text’s
products are not well received by the market, it could negatively impact the top-line and our rating for
the stock.

Further consolidation will be a threat to Open Text

The recent acquisition of Documentum by EMC and that of FileNet by IBM signifies that larger players
Further are keen to capitalize on opportunities offered by the ECM market. These acquisitions have replaced
consolidation in the the main comparable competitors of Open Text with larger companies. These companies have
ECM space by large considerable resources at their disposal to compete with the products and services offered by Open
Text, at a lower cost. For example, Microsoft recently launched SharePoint, a software product that
players could be a
competes with some of those offered by Open Text at a lower cost to the customer. Microsoft offers
threat to Open this ECM product as an add-on to its hugely popular OS product, thus capitalizing on the large market
Text’s market share share it already enjoys. Going forward, further consolidation is expected in this space which could be a
threat to Open Text.

Financial statements
Forecast income statement, FY 2006- FY 2008

All figures in US$ '000 unless specified FY 2006 A 1Q 07 A 2Q 07 A 3Q 07 A 4Q 07 E FY 2007 E FY 2008 E FY 2009E

Total revenues 409,562 101,155 163,261 156,052 163,114 583,582 662,132 695,239
y-o-y growth 9.20% 47.39% 54.62% 55.00% 42.49% 13.46% 5.00%
Operating expenses 255,423 55,909 98,012 88,092 92,627 334,640 411,149 418,949
Operating income 12,951 11,007 9,764 13,539 11,479 45,789 60,157 75,227
Operating margin 3.16% 10.88% 5.98% 8.68% 7.04% 7.85% 9.09% 10.82%
Operating income* 39,133 10,539 14,607 14,417 11,479 45,789 60,157 75,227
Operating margin* 9.55% 10.42% 8.95% 9.24% 7.04% 7.85% 9.09% 10.82%
Non-GAAP** operating income 67,640 19,407 34,034 33,409 30,933 117,783 137,792 146,556
Non-GAAP operating margin 16.52% 19.19% 20.85% 21.41% 18.96% 20.18% 20.81% 21.08%
Income before tax 9,650 11,772 2,581 5,891 3,929 24,173 29,957 45,027
Minority interest 579 137 131 124 102 494 779 1,171
Net income 4,978 7,301 2,277 3,853 2,452 15,883 18,693 28,097
Net margin 1.22% 7.22% 1.39% 2.47% 1.50% 2.72% 2.82% 4.04%
Net income* 26,372 7,206 7,449 4,633 2,430 21,718 18,693 28,097
Net margin* 6.44% 7.12% 4.56% 2.97% 1.49% 3.72% 2.82% 4.04%
Non-GAAP net income 43,966 12,615 22,122 26,909 20,106 76,559 89,565 95,262
Non-GAAP net margin 10.73% 12.47% 13.55% 17.24% 12.33% 13.12% 13.53% 13.70%
Diluted EPS (US$) 0.10 0.15 0.04 0.08 0.05 0.31 0.38 0.58
Diluted EPS* (US$) 0.53 0.14 0.15 0.09 0.05 0.43 0.38 0.58

Non-GAAP EPS (US$) 0.88 0.25 0.44 0.53 0.40 1.52 1.84 1.96
Outstanding shares ('000) 49,950 50,219 50,739 51,134 50,510 50,510 48,640 48,640
*Excluding non-recurring items **We have calculated non-GAAP figures for 1Q 07 and 2Q 07 as the company did not publish non-GAAP figures for these two quarters

Source: Company data, IIIR estimates

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Forecast Balance Sheet, FY 2006 A - FY 2009 E

All figures in US$ '000 unless specified FY 2006 A FY 2007 E FY 2008 E FY 2009 E
Cash and cash equivalents 107,354 70,011 130,945 220,773
Accounts receivable (trade) 75,016 111,920 126,984 133,333
Capital Assets 41,262 41,262 41,262 41,262
Goodwill 235,523 526,636 526,636 526,636
Acquired intangibles 102,326 329,570 258,556 194,179
Other current and non-current assets 109,612 58,155 67,204 89,644
Total Assets 671,093 1,137,554 1,151,587 1,205,827

Accounts payable 62,535 85,599 97,766 103,010
Long term debt 13,368 400,639 400,748 391,934
Share capital 442,842 447,121 431,005 459,102
Minority interest 5,804 6,299 6,299 6,299
Other current and non-current liabilities 146,544 197,896 215,769 245,482
Total liabilities and shareholders' equity 671,093 1,137,554 1,151,587 1,205,827
Source: Company data, IIIR estimates

Forecast cash flow statement, FY 2006 A - FY 2009 E

All figures in US$ '000 unless specified FY 2006 A FY 2007 E FY 2008 E FY 2009 E
Net income 4,978 15,883 18,693 28,097
Net cash flow from operating activities 60,798 152,994 113,164 115,477
Net cash flow from investing activities (54,727) (573,530) (18,209) (19,119)
Net cash flow from financing activities 18,202 383,192 (34,022) (6,530)
Change in cash and cash equivalents 27,456 (37,343) 60,934 89,828
Cash and cash equivalents at the beginning of year 79,898 107,354 70,011 130,945
Cash and cash equivalents at the end of year 107,354 70,011 130,945 220,773
Source: Company data, IIIR estimates

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Industry context for our recommendation – Software products and services

Company Ticker Key issues Fundamental rating
Amdocs’ 2Q 07 revenues were in line with our expectations but earnings were better than our
expectations, on the back of lower R&D spend. The company has made major deals, including one with
Amdocs Ltd DOX BUY
AT&T, which are expected to boost its revenue stream going forward. Profitability from further expansion of
margins is expected, aided by cost control measures.
Business Objects records strong results in 1Q 07, driven by revenue growth across all segments. Operating
and net margins witnessed a rise, enabled by stringent cost controls. Going forward, the company has
Business Objects S.A. BOBJ BUY
guided for strong revenue growth inFY 2007 on account of which we anticipate robust growth to continue.
Acquisition of Cartesis will also boost both the top- and bottom-line for the company going forward.
Although 1Q 07 was a decent quarter for Check Point, it was not a very encouraging one, as there was no
real turnaround. The top-line results were broadly in line with our expectations, with marginally lower than
Check Point Software
CHKP expected contributions from the Protect Data acquisition. However, profitability failed to impress with HOLD
Technologies Ltd.
noticeable margin dilution resulting from the acquisition. Management’s muted guidance for FY 2007
affirms our cautious outlook for the stock.
Cognos reported strong results in 1Q 08, driven by market acceptance of its upgraded product suite.
Management guidance continues to be optimistic for the next quarter as well as the full year. Our outlook
Cognos Inc. COGN BUY
for the stock remains positive considering the planned upgrades to existing product suites and the
company’s strong order pipeline.
Corel posted impressive top-line growth in 2Q 07 aided by strong demand for its existing products as well
as healthy contribution from the Intervideo acquisition. The company’s profitability also witnessed
Corel Corporation CREL BUY
encouraging revival aided by cost synergies from Intervideo. We believe that Intervideo will provide a
healthy top-line contribution going forward and will improve the company's margins.

Although the company reported encouraging 1Q 07 top-line growth, broadly in-line with our expectations,
we expect the company to witness some slowdown in its volume growth going forward. Management has
Dassault Systems DAST.PA also lowered its FY 2007 top-line guidance, Furthermore, 1Q 07 operating and net margins were below our HOLD
estimates. We believe that Dassault will continue to face margin pressure going forward, on the back of
rising operating costs. Therefore we anticipate some slowdown in Dassault’s profitability.
4Q 07 results were slightly lower than our expectations mainly due to the appreciation of the Indian rupee
Infosys Technologies against the US dollar during the quarter. Volumes and pricing growth were modest during the quarter.
Ltd. Going forward, we expect a stable pricing and margin environment, growing client base, and additional
staffing, and increasing global demand for offshoring, indicating attractive future prospects.
Open Text is the world's largest independent provider of Enterprise Content Management services.
Based on the growing demand for ECM products, primarily because of heightened concerns over
Open Text
OTEX.O compliance requirements among corporations, which can be managed efficiently using ECM suites, we BUY
expect Open Text to maintain its dominant position in the ECM market. Based on these factors our
outlook for the stock is positive.
Patni Computer The solid organic growth, robust Indian IT Software& Service industry, expanding client base, and ABN deal
Systems Limited are expected to boost revenues, indicating attractive future prospects.
Decent top-line growth and strong earnings growth on the back of strong Software revenues and Support
SAP AG SAPG.DE revenues in 1Q 07. Signs of recovery visible after a weak last quarter in the Americas in FY 2006. Strong BUY
order entry and a marked improvement in new contracts suggest a decent build-up for SAP in FY 2007.

4Q 07 results were in line with our expectations and surpassed market expectations and company
Satyam Computer guidance aided by robust volume growth, higher billing rates and favorable revenue mix effects. Improving
Services Ltd. profitability from subsidiaries, increasing client base and employee count, lower attrition and increasing
global demand for IT offshoring combine to maintain the positive outlook for Satyam.
Healthy 4Q 07 results were in line with our expectations and broadly surpassed market expectations.
Performance was supported by healthy volume growth, higher price realizations, benefits from BPO
Wipro Ltd. WPRO.IN BUY
transition and improved contribution from the acquired portfolio. Robust client wins and manpower buildup
indicate visibility for strong growth going forward.
Source: IIIR

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Tel. +44 (0)20 7232 3090 Traded on
AIM, London
Fax +44 (0)20 7232 3099 Stock Exchange Regulated and

LSE: IIR authorised by

Open Text Corporation 13 July 2007

Technical Overview: OTEX.O

Data Source: Bloomberg LP. For training resources see “Analytic Techniques” at
The technical condition of the NASDAQ common stock is rated a HOLD, with a target price of US$21.69. Note, however, the NASDAQ
common stock is rated a BUY on fundamental grounds. The Canadian stock is rated a HOLD due to anticipated negative currency impact.
Resistance: US$22.94, US$23.80
Support: US$21.69
A sustained break below support at US$21.69 is required ahead of a down move to US$21.13 from here. However, note that a sustained
break above resistance at US$22.94 opens up further upside to US$23.80 and potentially to US$24.37.

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Tel. +44 (0)20 7232 3090 Traded on
AIM, London
Fax +44 (0)20 7232 3099 Stock Exchange Regulated and

LSE: IIR authorised by

Open Text Corporation 13 July 2007

1 We have adjusted the reported operating profit, net income and diluted EPS for non-recurring income/expenses by subtracting/adding

the non-recurring items from/to reported operating profit, net income and diluted EPS in order to arrive at our adjusted operating profit,
net income and diluted EPS. Note, however, that in doing so we have not recalculated the tax liability for the period to reflect the above
change and have used the provision for tax as reported in the income statement for the period.

2 Non-GAAP accounting principles do not consider non-cash charges such as stock-based compensation expenses, acquisition-related in-

process R&D expenses and acquisition-related amortization expenses as operating expenses, which are considered as operating
expenses under US GAAP accounting principles. Unless otherwise stated the results in this report are reported under US-GAAP.

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Page 20 Refer to page 20 for all footnotes

Tel. +44 (0)20 7232 3090 Traded on
AIM, London
Fax +44 (0)20 7232 3099 Stock Exchange Regulated and

LSE: IIR authorised by

Open Text Corporation 13 July 2007

Guide to IIIR’s research approach

Valuation methodologies
We apply the following methodologies to triangulate the ‘fair value’ for the stock assessed fundamentally:
DCF valuation:- The DCF method values the stream of future cash flows discounted to the present day, most often using the company’s WACC. This method
is used to estimate the attractiveness of an investment opportunity and as such provides a good measure of the company’s value in absolute terms. There
are several approaches to discounted cash flow analysis, including Free Cash Flow to Firm and Free Cash Flow to Equity. The selection of a particular
approach depends on the particular company being researched and valued.
Comparative valuation:- In Comparative valuation or Relative valuation, various comparative multiples including Price/Earnings, Price/Sales, Enterprise
Value/Sales, EV/EBITDA ratios are used to assess the relative worth and performance of companies which operate in the same industry/industries and are
thereby in the same peer group. In general at least two multiples will inform the valuation of every stock.
Other methodologies:- Other methodologies such as Dupont Analysis, EVA, Dividend Discount Method and P/NAV are applied where appropriate.
The target price derived from each methodology is then weighted, based on industry characteristics, to provide a weighted average target or ‘fair value’ for
the stock.
Stock ratings
Buy recommendations are expected to improve, based on consideration of the fundamental view and the currency impact (where applicable) by at least
Hold recommendations assume that value is fully reflected in the current share price or that the overall view on the stock is fully compensated by the
currency impact (where applicable).
Sell recommendations are expected to deteriorate, based on consideration of the fundamental view and the currency impact (where applicable) by at least
Currency impact and premium/discount
Our fundamental analysis is always conducted on the security which is traded in the company’s reporting currency. For global equities coverage, we also
factor in any currency impact on the target price of the derivative security. In most cases, the derivative security will be the ADR, but in cases where the
company reports in US dollars, we assume the company’s major trading currency is the US dollar and therefore, since the impact of US dollar fluctuations
will be minimized, the currency impact is applied to the non-US issue. We assume that fluctuations in the exchange rate linking the two securities will
always impact the derivative security which may result in higher or lower returns compared to the base security and therefore may result in a different
rating compared to the fundamentally assessed security. IIIR forecasts forward exchange rates for all major currency pairs utilizing its proprietary
methodology. The forward exchange rates are overlaid on the target price for the fundamental stock over the defined investment horizon to derive the
target price for the derivative security, helping investors to identify additional opportunities and risks associated with investing in a stock in US dollars or
local currency.
Note that under some circumstances the currency impact alone can be responsible for driving a buy or sell rating on an otherwise fundamentally neutral
In certain cases, the two issues under coverage may trade at a premium or discount which is not explained by the exchange rate impact. Typically this will
be a premium or discount of the derivative stock relative to the base security. Our approach factors in the 12-month average premium or discount to our
forecast target price. However, to forecast the price based only on currency impact for investors, we factor in the current premium/discount in order to
clearly isolate the upside/downside purely attributable to currency impact.
Technical condition
IIIR also provides a view on the technical condition for all fundamentally assessed securities in our reports (where data is available) utilizing our proprietary
Pronet product. This component of the report aims to provide investors with an alternative assessment of the technical condition of the security and is not
considered when deriving the target price and rating for the common stock and ADR.

Independent International Investment Research PLC supplies this research via Pronet Ltd. ('Pronet'). Pronet is Regulated and Authorized by
the Financial Services Authority (FSA) and registered with the Securities Exchange Commission (SEC). You are reminded that investment advice provided by
Pronet is for your general information and use and is not intended to address your particular requirements. Any advice or recommendations contained in
this report may not be suitable for you and are not intended to be relied upon by you in the making (or refraining from making) any specific investment or
other decision. Such decisions should only be made on the basis of independent advice from an appropriately qualified adviser. Pronet Ltd.
and Independent Financial Markets Research Ltd. are subsidiaries of Independent International Investment Research PLC (the 'Group'). Research analysts
working for the Group are subject to stringent confidentiality and security policies and are located in secure-access premises which may be in the proximity
of professionals conducting similar work for other firms. The Group is not nor has been nor will be engaged in investment banking and does not make
markets in any of the securities covered in this report or have any investment banking relationship with the firm whose security is covered in this report. No
employee or contractor of the Group is permitted to personally buy or sell stock in the company covered in this report, and neither the analysts responsible
for this report nor any related household members are officers, directors, or advisory board members of any covered company. No one at a covered
company is on the Board of Directors of the Group or any of its affiliates. This report is not a solicitation to buy or sell any security and past performance is
no guarantee of future results.
Copyright © 2007 Independent International Investment Research PLC. All rights reserved.

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