OpenText Looks Forward to a Brighter Future

By Markets Fool.com

Cloud computing has been a strong growth industry recently, and information management specialist OpenText (NASDAQ: OTEX) has looked to claim its share of the growing sector by offering products and services that help its customers take better advantage of cloud-based capabilities. Yet investors have had high hopes for companies seeking to profit from the cloud, and coming into Thursday's fiscal first-quarter financial report, OpenText shareholders wanted to see strong revenue growth along with incremental increases in its bottom line. OpenText did see its earnings and sales grow, but at a slightly pace than investors were hoping to see.Let's take a closer look at how OpenText fared during the quarter and what it expects going forward.

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Image source: OpenText.

OpenText delivers less-than-perfect performance

OpenText's fiscal first-quarter results left most investors looking for more. Revenue grew 13% to $491.7 million, and that was only slightly slower than the 14% growth rate that those following the stock had wanted the company to produce. GAAP net income soared from a huge one-time tax benefit, but adjusted net income climbed just 2% to $105.5 million. That produced adjusted earnings of $0.86 per share, which was $0.01 per share below the consensus forecast among investors and up by just $0.02 per share from year-ago levels.

Looking more closely at OpenText's numbers, some of the negative issues that the company has faced have started to wane recently. For instance, foreign currency weakness has played a role in pushing OpenText's growth rates lower in recent periods. However, during the fiscal first quarter, revenue only took about a $5 million hit from currency-related issues, and the impact on OpenText's bottom line was just $0.01 per share.

OpenText's various segments had relatively consistent performance. Licensing revenue was the biggest gainer, climbing 18% from year-ago levels. The key cloud services and subscriptions area's 15% growth rate outpaced the 13% that OpenText saw in its customer support business. Professional services had the slowest growth rate of just 3%, continuing its trend of lagging behind the other growth drivers in OpenText's business. Operating margin figures were weak, falling more than three percentage points to 30.8%.

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From an operational basis, OpenText kept bringing in new business. The company said that it had 20 customer transactions worth more than $1 million, including 13 OpenText Cloud contract signings and seven on-premises transactions. As we've seen before, the financial, services, and consumer-goods areas were among the largest contributors to OpenText's growth, as well as the technology sector. Among new customers during the quarter were German car giant BMW Group, along with several other private-sector, government, and nonprofit entities.

OpenText CEO Mark Barrenchea was quite pleased with the company's results. "OpenText delivered nearly half a billion dollars in quarterly revenues," Barrenchea said, "and double digit cloud and license performance, our fastest start to a fiscal year in the company's history." The CEO also said that customers are responding favorably to new digital transformation products, which he sees adding to growth for the rest of the fiscal year.

What's ahead for OpenText?

OpenText has high hopes for the year. As Barrenchea put it, "We expect Fiscal 2017 to be a transformative year for OpenText as we strengthen our product offerings with innovation and acquisitions." The company said that it had successfully completed its acquisition of customer communications management assets from HP, and independent reviews had good things to say about various OpenText products.

The big news for OpenText during the quarter was its September agreement to acquire the enterprise content division of Dell-EMC. OpenText has high hopes that the transaction will help it boost its recurring revenue, which has become a key component of the company's expected growth trajectory. Barrenchea said that he hopes to close the transaction by mid-January, and the new customers that OpenText brings in as a result of the purchase should help in its transformation efforts going forward.

OpenText shareholders didn't react immediately to the news, pushing the stock higher by just a fraction of a percent in after-hours trading following the announcement. However, long-term investors in OpenText should look beyond short-term results to see the potential in the strategic moves that the company is making. If they pan out, then OpenText could look a lot different down the road than it does today.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends OpenText. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.