Why Open Text's Fundamentals Suggest the Company May Be a Closed Book

Also, more on Lernout & Hauspie, CustomTracks and CKE.
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It may not pay to talk about fundamentals of Internet-related companies (at least not yet), but: Here's

Delta Air Lines

(DAL) - Get Report

, a big, real company with a strong Web presence of its own and tight ties to

priceline.com

(PCLN)

, one of the latest if not greatest IPOs (if market value means anything). What you probably didn't know was that Delta has warrants on 18.6 million priceline shares at 93 cents per share. At yesterday's close of 81 1/2, that's equal to around $1.5 billion. Give it the usual discount of 40% or so that is often put on the value of a company's Internet holdings, and you get around $900 million. Since priceline went public, however, Delta's stock, valued at $9.7 billion, is actually down. (Too big for an Internet injection, no?)

Contrast that with

Open Text

(OTEX) - Get Report

, a Canadian software company whose stock was languishing at a market cap of around $450 million a mere month ago. It's now at $986 million, thanks largely to its 7.7% stake in

MiningCo.com

(MINE)

, a portal site that recently went public. That's currently worth around $3 per share in cash. Open Text, meanwhile, has also let it be known that it owns 16% of

DejaNews

, an online news search service that one day hopes to go public. If it does, analysts think Open Text's stake could be worth as much as $200 million, or around $6 per share in cash, assuming an initial market value of $900 million (based on today's nosebleed valuations).

But is $9 or even $10 per share in cash, or whatever these companies will be worth at the time the stock is sold, worth a doubling in Open Text's valuation near a billion bucks? Not even

red-hot

Delia's

(DLIA)

, with around $500 million in revenues, gets

that

kind of pop with the $732 million Internet value of its

iTurf

(TURF)

investment. Delia's is currently valued at $514 million.

So, what makes Open Text different? Nothing, according to short-sellers, who believe the surge in valuation is merely the latest in a series of issues that attracted them to Open Text long before anybody had ever heard of MiningCo.com or DejaNews. (Though, you probably could argue it's trying to make up for lost time. Several years ago Open Text provided the search engine technology behind

Yahoo!

(YHOO)

. Sometime in 1997, after the Yahoo! relationship ended, Open Text sold its entire Yahoo! stake for a measly $6 million when the stock traded for less than 30, adjusted for splits. It closed yesterday at 203. Ouch!)

Away from the Internet hoopla, though, there's the real business of Open Text: software that corporations use to let employees view, retrieve and otherwise interact with documents on internal intranets. It's considered a good product, and has helped Open Text's revs grow from $22 million in fiscal 1997 to what analysts estimate will be close to $100 million in the fiscal year ending this June. Not bad, but short-sellers simply don't think it's worth a market value of $1 billion, or anywhere close; they didn't even think it was worth $500 million.

While Open Text's LiveLink has carved itself a good niche, however, it isn't without competition, especially from

IBM's

(IBM) - Get Report

Lotus Domino

. And a stripped-down, comparable product is expected to be included in

Microsoft 2000

. Most analysts who track the company rave about it, but not Brandon Osten of

Sprott Securities

in Toronto, who rates it a hold. He thinks that at more than 8 times sales estimates, it's simply too expensive.

"If you look at the company's growth rate, there's a big difference between the company's organic growth rate and what they've acquired," Osten says. "The assets they acquired were growing at zero percent a year. They were acquired for their customer base, but that'll dilute their growth rate going forward. So when that happens, you're looking at a growth rate that is safe to say will be below 50% and probably below 40%, and 8 times sales seems high for a company with 40% growth."

What's more, there's dispute among analysts just what sales will be.

NationsBanc Montgomery

has pegged revs for the fiscal third quarter, which will be reported in a week or two, at $24.5 million. Along came

Punk Ziegel

, initiating coverage, with an estimate of $23.4 million. (Yep, that's a small discrepancy, but the most recent estimate on the Street is lower than the others!)

There are other issues as well: Howard Schilit of the

Center for Financial Research and Analysis

has raised red flags over the accounted-for acquisitions. And the company has been saddled with more than 120 days sales outstanding of receivables, suggesting customers are taking their time in paying, for the past three quarters; that compares with 80 days at

Documentum

(DCTM)

, a competitor that recently warned Wall Street of an earnings shortfall. Adding to the intrigue: negative operating cash flow (not usually a good sign at a software firm), and the company is on its third president and second CFO in three years. And just yesterday, to keep the Internet hype going, Open Text promoted a new portal strategy. Funny, but it promoted another portal strategy this time last year. (Ever heard of www.pinstripe.com? Didn't think so.)

What's the company's response? It apparently doesn't have one. I talked to a spokeswoman Monday and gave her a rough idea of what I was interested in. She said she was at a trade show and might not have time to get a company official back to me by what then was a Monday deadline. So, I held the column. (You noticed I didn't write yesterday -- the first busted deadline in 11 years. That's why.) I called again today, but never got a call back. If the company does respond, however, its point-by-point comments will be published, with prominence, in this space.

Short Positions

Speaking of giving companies a chance to respond:

Still haven't heard from

Lernout & Hauspie

(LHSP)

, a Belgian developer of voice-recognition software, with answers to questions raised in this column on

Friday. The company apparently is telling anybody who asks that it doesn't believe it's in its best interest to respond to shortsellers, and in turn, via this column, yours truly. It intends to let its results speak for themselves. Funny, that's just what

HMT Technology

(HMTT)

,

Iomega

(IOM)

(in the old days) and

C-Cube

(CUBE) - Get Report

used to say. Each one of these companies put a blackout on talking to this column. You might say their results spoke volumes.

Update:

CustomTracks

(CUST)

, the company run by

Blockbuster Video

founder David Cook, first

mentioned here several months ago, rose 14 1/16, or 54%, yesterday to 39 15/16 on no announcement by the company ... And how about that

CKE Restaurants

(CKR)

, the topic of quite a few items

here when the stock was in the high 20s as analysts really believed the hype that it could turn around

Hardee's

. It's now at 13. Seems Hardee's hasn't been as hot as it had hoped. And speaking of CKE, which also owns

Carl's Jr.

in California (mighty fine fast-food burgers, if I do say so), take a look at the dwindling price of

Fidelity National

(FNF) - Get Report

, a title insurance firm run by Bill Foley, who also runs CKE. Seems he may have bitten off more than he could chew. (Sorry, couldn't resist.)

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides commentary for CNBC.