Since it was announced on Monday, September 12th that OpenText was buying the ECD Division (which includes Documentum) from EMC/Dell, we have conducted multiple conversations with customers as well as current and former employees of both Documentum and OpenText. This post will present our summarized analysis and predictions on the purchase by OpenText.
OpenText Investor Relations Call
OpenText held an investor conference call first thing on September 12th. A recording of the call as well as a supporting PowerPoint deck can be found at http://investors.opentext.com/. Some thoughts from the call:
- Purchase price of $1.62 billion (2.7 times ECD FY ’15 Revenue). Many were surprised at the high price as ECD revenues have been declining over the last four years and most were expecting something more in the 2 times revenue area. Paying almost 3 times revenue for what has been a declining revenue stream indicates both that OpenText has access to cheap credit ($1 billion from Barclays) as well as expectations for a good profit to payback the high purchase price. (They mention in the post that it will be immediately accretive to earnings). Expect the transaction to close in 90 to 120 days subject to regulatory approvals.
- Strategically, OpenText sees opportunities to expand their portfolio, bring on Documentum’s deep industry solutions, as well as access their install base of marquee customers. OpenText also sees opportunities to sell the OpenText EIM products to Documentum customers as well as uplift Documentum customers to OpenText Cloud, Managed Services and SaaS Offerings.
- In the last 6 months, OpenText has announced 5 acquisitions including ECD/Documentum.
Some relevant insights after listening to the call.
- OpenText promoted the recurring revenue for ECD of 75% (of the FY ’15 $599 million). 50% was maintenance. Based on our review of FY ’15 ECD earnings, we would roughly break down $300 million per year in maintenance, $156 million in new product sales and $144 million in consulting/other.
- OpenText was very positive about InfoArchive. See our recap from EMC World 2016 but, in talking with Documentum sales as well as different customers, ECD (and EMC themselves) has been very successful selling InfoArchive as opposed to new instances of Documentum. Since OpenText doesn’t offer a competitive product, InfoArchive does representing a growing revenue stream and new offering for OpenText to sell to OpenText clients.
- OpenText was slightly neutral on LEAP. When pushed during the Q&A section regarding cloud and LEAP, OpenText focused on how ECD products could benefit from the OpenText cloud and mentioned “bringing the ECD install base forward to the OpenText cloud managed services. We need to look at LEAP but see it as part of our managed service offerings.”
- OpenText sees opportunities for cross selling possibilities. It was specifically mentioned that selling analytics and cloud based services to the ECD install base was one of the top opportunities. OpenText thought they could sell ECD products, specifically some of the ECD vertical solutions and InfoArchive, into their install base.
- OpenText did not specifically mention Captiva, Document Sciences or ApplicationXtender although they are included in the overall EIM Portfolio slide.
- OpenText did mention that the purchase includes 2,000 resources. We would imagine the asset purchase includes all components of ECD (Sales, Marketing, Engineering and Consulting).
Some of the items that will remain unknown until after the deal closes include:
- What is the new arrangement with Dell? Will Dell still be selling ECD products (we would guess InfoArchive) or will OpenText leverage some of the Dell VMWare cloud components (Documentum hosted, Cloud Foundry, LEAP and OpenText Cloud?) to help them compete against Amazon, Microsoft and Google? Given that OpenText has their own cloud infrastructure and seems, from the call, to be very proud of it, we would predict that the partnership will not include VMWare.
- OpenText specifically mentioned “expanding profitability of the ECD products over time”. We would think that expanding the profitability means getting more profit (higher price/less expense) out of the ECD products.
OpenText Documentum Purchase – Cutting out the Hype – What are the realities?
As with any major announcement, the call included a couple of items that are probably more hype than reality. Some quick thoughts:
- Loyal Documentum Customers – OpenText mentioned that the deal give OpenText access to a very loyal Documentum customer base. From our discussions with Documentum customers, while most have stayed with Documentum, it isn’t necessarily based on a feeling of warmth for the company or the brand. Documentum got very aggressive with sales starting in 2002 and it has left a bad taste for many of the long-time Documentum customers. Loyalty to the platform (and the maintenance payments) for many is more a decision based on the difficulties in moving to a different platform, integrations required, cost and risk to move than it is love and loyalty for the Documentum software and brand.
- Cross Selling – Given the 90+ day quiet period and that the products don’t really integrate together now, we see it as a stretch that Documentum or OpenText customers would have new motivation to buy new products based on a consolidated price sheet once the deal closes. InfoArchive might make sense for an OpenText client but would Documentum customers want to move to the OpenText cloud or analytics, something we would imagine they could have purchased before the deal closed? OpenText would need to invest in integration between the different products to achieve any cross selling to Documentum customers and that would take some time and effort.
- Partner Network – The Documentum partner network is not as strong as it once was during the 90’s and early 2000’s. Documentum’s push into consulting as well it’s as solutions has affected some of their stronger partnerships (example CSC).
- ECD Solutions – OpenText was very excited about ECD Vertical Solutions built on the Documentum server back end. While the solutions do differentiate Documentum from OpenText, the solutions are really built off the backs of the consulting engagements and have evolved as different clients have evolved. We would position the Life Sciences solution as the most well thought out and mature solution with other solutions much more immature and haphazard. See our post from EMC World 2012 when ECD (IIG at the time) began focusing on their Documentum solutions.
On the combination of partners and solutions, back in May ECD announced a partnership and cloud offering with Parexel that even hit our blog on the rumor that they might be the buyer. We are not sure where this partnership will land in the new OpenText environment with solutions and cloud offerings.
OpenText Purchase – Behind the numbers and “expanding profitability”
In multiple discussions and articles, most of us that have been following the Documentum/ECD sale were surprised by the $1.62 Billion sales price. Some relevant points:
- It is all Cash – Would say Dell/EMC are the winners here as it can be all used to pay down the estimated $40 billion dollar debt of taking EMC private. Dell didn’t want OpenText stock or anything else that was not cash. While many of us thought, like Syncplicity a year ago, Documentum would be sold to private equity. The $1.62 billion and cash deal probably pushed it to OpenText.
- Optimistic payback of 8 years – We have heard that ECD was running at about a 30% margin meaning roughly that of the $599 million in revenue in 2015, $200 million was profit. Keeping everything the same, it would take 8 years to payback the $1.62 Billion that was spent on ECD. Typically firms shoot for a 5 to 7 year payback period with acquisitions. To achieve or improve the payback the existing profit streams need to be maintained and strengthened even if revenues decline due to the purchase. OpenText mentioned that they are looking for a 34%-38% operating margin (rumor is Documentum is at 30%) so they need to take out additional cost as typically revenues decline in the first 18 months after acquisition.
- This is a different deal for OpenText. Without a ton of analysis it was pretty easy to determine that the 2.7 multiplier was the highest ever for a purchase by OpenText. Their previous acquisitions to date being more distressed. OpenText wanted the brand of Documentum along with their revenue streams and paid a premium for it.
- OpenText stated during the call that “their objective is to maintain a conservative capital structure, including preserving current credit ratings”.
We would think that decreasing the payback to their standard 7 years even with some overall revenue decreases is where OpenText will look to “expand the profitability of the ECD products”. Breaking down the numbers:
- Maintenance – Roughly $300 million per year in 2015. OpenText was excited about the amount of maintenance as this is the most guaranteed revenue stream. Expanding profitability could include raising maintenance costs as well as reducing expenses. This is a slippery slope as Documentum has already increased maintenance years ago and if support expenses are decreased too much, clients could leave resulting decreased maintenance revenue stream.
- New Product Sales – Roughly $156 million but has been decreasing. Reducing sales expense is fairly easy given some of the overlap of OpenText and Documentum sales and marketing. InfoArchive seems to be the hot product within ECD mostly sold to existing customers. LEAP has not affected sales yet as it was still in beta in June and many of the modules are not planned to be released until the end of the year (see our post from EMC World). We would anticipate that LEAP development efforts might be stalled given the sale and it is hard to see OpenText funding more R&D on a product that is not contributing to sales and increases expenses.
- Consulting/Other – Roughly $144 million. In regards to ECD Solutions, most are consultant-ware and do require consulting support. We are not sure how those revenues are broken down between product and services buckets. Expanding profitability could include raising rates. It is hard to see reducing costs as most costs are consultant salaries. With technical and consulting skills in demand from other companies, OpenText would want to retain consultants as they could easily leave given change in ownership (non-compete agreements are difficult to enforce particularly in a change of ownership situation).
Lastly, given that the purchase is an asset purchase, we would imagine that many of the liabilities would not move with ECD to OpenText, also increasing ECD product profitability.
Will OpenText invest in Documentum? (The issue with the numbers.)
In discussing the sale with Alan Pelz-Sharpe from Digital Clarity Group, we both agreed that, while OpenText might not like hearing it, from a technical and market/client perspective, Documentum is probably better than what OpenText has now. We have done both OpenText and Hummingbird migrations and, from what we saw of the core repository services, Documentum is better.
Will OpenText pursue any ECM consolidation efforts between the different products? We would think not based on previous OpenText purchases as well as from the experience of Oracle and IBM. We would predict that OpenText will mostly leave Documentum alone (while cross selling products) to protect the Documentum maintenance revenue and solutions just as Documentum has done with old products like Webtop when D2 became available. Forcing clients to move to new tools opens up the option of looking outside for tools from other vendors. On the opposite side, we wouldn’t predict that OpenText would look to bring current customer from OpenText or Hummingbird platforms to Documentum.
Will OpenText invest in the Documentum core to allow the product innovate again? The numbers seem strong enough to think it might be a possibility and it is the question customers and potential customers should be asking. Unfortunately, OpenText does not have a history of substantial investments and ECD hasn’t been investing in the Documentum core product for quite some time. We started noticing the non-investment back in 2014 when we noticed Documentum 8 had strangely vanished from the product roadmap. Review the post for more thoughts on improving Documentum as well as the cash cow dilemma back in 2014. As mentioned back in CMSWire in May around EMC World, ECD was publically stating it was not investing in Documentum as Rohit Ghai, President of ECD – said “No one is asking for more features or functions,” as he was promoting LEAP. (Quick side note – we do think Rohit was a serious upgrade for ECD compared to his predecessors and hope he stays – see our thoughts and comparisons from Rohit’s keynote at EMC World 2015.
In a quick meeting with some our long-term Documentum technical architects, we had a variety of innovative things that Documentum could add to the core product based on our work with clients with Documentum. Some quick thoughts might include:
- Amazon Web Services (or Microsoft Azure or Google) – Getting away from EMC means getting away from the VM Cloud. See our comparison of Amazon versus VMWare Cloud for Documentum. Amazon, Microsoft and Google are the clear market leaders in a race for cloud dominance that Dell cannot win. Documentum having an easy to deploy Amazon offering would be an accelerator for those looking to move to a private cloud. Not sure if this makes sense based on OpenText commitment to their own cloud offering.
- Better Back-end – Removal of DB for something more modern. Documentum began talking about a “bridge to the third platform” back in 2014 but it has faded since then. It used to be on the product roadmap as XML after Xhive purchase. Clients would love something cluster/fault tolerant out of the box and Hadoop for ECM is something we have been recommending.
- XPlore – get rid of xDB/Lucene for more modern Solr. While xDB might work for InfoArchive, Solr is clearly better and evolving for search.
- Java Method Server – removal of the reliance on the Java Method Server for D2 as we have seen D2 scaling issues.
- Transformation Server – great to add a cloud/highly scalable option for clients to reduce reliance on standalone servers that don’t scale and are often unreliable for clients.
- Enhanced Extensible Front End – D2 and xCP are showing their age. Lots of opportunities for better, more extensible front end to the repository based on newer technologies. Somewhat related to the investment in LEAP and other cloud based Documentum tools.
If you have any other thoughts, feel free to add other ideas in the comments of this post.
Issues with OpenText making these or any investments in Documentum include:
- Dell Partnership, OpenText Cloud and other cloud vendors – we are not sure what the Dell partnership involves but are very confident it does not involve letting EMC reps continue to sell Documentum, something they never did well. We would think the partnership probably includes continuing to sell InfoArchive, something EMC reps had some success selling. In regards to innovation on the cloud, not sure if Dell is pushing their cloud infrastructure as part of the partnership.
- Expanding Profitability – we are fairly confident that any investment will decrease rather than expand profitability. Innovative investments might attract new customers but that is considerably more risky and unlikely and not an avenue OpenText has aggressively pursued in the past.
Overall, we would say that the purchase beats the thought of Documentum just hanging around in limbo with Dell for another year in a slow decline.
In October 2015 when we first wrote our thoughts about the eventual sale of Documentum we had said that Documentum needed to get away from Dell and, for the purchase to be a good thing it would have to satisfy three objectives:
- Documentum engineering and consulting would need to survive the layoffs and the next six+ months in limbo as they await a buyer.
- The buyer would have to want to invest in Documentum’s future rather than just milk the existing revenue stream.
- The buyer would need to bring others positives (existing clients, funding, technology) to Documentum to continue to evolve the product.
With the Dell deal complete (and EMC options vested), the ability of OpenText, an old school non-Silicon Valley company without a “new-tech” brand, to hold on to Documentum consultants and engineers will be difficult. The next 90 to 120 days of quiet time awaiting regulatory approval will not help given a hot technology and consulting market, particularly in San Francisco. We would anticipate a large amount of turnover (50%) and OpenText is probably anticipating it as well.
OpenText does not have a history of investing in their acquisitions. The revenue streams seem to be there if OpenText chooses to invest in Documentum. Unfortunately, a somewhat distrusting user base needs proof and more than just an announcement. With 90 to 120 days of quiet before any announcement and then waiting to see any investment come to fruition, it might take a year or more to confirm the investment in innovation. Would clients wait that long given newer, cheaper and innovative alternatives?
OpenText doesn’t necessarily bring the brand or clients that they could introduce to Documentum for some easy sales (think Oracle, SAP or Salesforce). OpenText does bring other positives, particularly knowledge of ECM and of how to run a software company (something EMC was never able to understand). With one less competitor on the field, the combination of OpenText/Documentum does position the combined company better in the ECM market. Can they hold off upstart competitors and new technology?
To conclude, one of the great things about being an Alfresco partner has been continued access to John Newton, Alfresco founder and original Documentum co-founder. His thoughts on the merger are consistent with our analysis (although considerably less wordy) and concern about innovation and investment.
The OpenText/Documentum news is another classic case of two legacy vendors coming together, but it does nothing to advance innovation. Furthermore, it begs a lot of conjecture about what OpenText will do with yet another ECM product, where there is no precedence of them being able integrate any of their previously acquired products.
– John Newton
(Update – see John’s full thoughts here.…)
Let us know your thoughts below.
See our thoughts from last year in regards to how Documentum compares to Alfresco, one of the newer disruptors in the ECM space.