OpenText Turns Customer Support Needs Into Faster Growth

Markets Motley Fool

Cloud computing has enabled companies to make huge advances with their technology, and one of the most important aspects of the cloud is for businesses to gather useful information and then put it to work in driving strategic decisions. OpenText (NASDAQ: OTEX) specializes in enterprise information management, which includes using elements like the internet of things and artificial intelligence to gather and analyze data. The company has done extremely well, finishing its 2017 fiscal year on a solid note three months ago.

Continue Reading Below

Coming into Thursday's fiscal first-quarter financial report, OpenText shareholders wanted to see even more big gains from the cloud specialist's business. OpenText was able to deliver on the promise that those shareholders had wanted to see, and an encouraging start to the year has some investors looking forward to even better results in the future. Let's take a closer look at how OpenText did and what's coming down the road for the tech company.

OpenText heads skyward

OpenText's fiscal first-quarter results showed that the company continues to grow at a healthy pace. Revenue was up 30% to $640.7 million, slightly outpacing the 28% growth rate that most investors were looking to see. Adjusted operating income was up a third to $201.1 million, and adjusted earnings of $0.54 per share matched the consensus forecast among those following the stock.

OpenText got balanced contributions from most of its business segments toward its impressive top-line growth. Revenue from recurring sources was up 29% year over year, with gains in the customer support business soaring 40% to lead the way higher for OpenText. Gains in cloud services and subscriptions were limited to just 14%, continuing a troubling downward track that investors have seen in recent periods. Revenue from other sources grew at a good pace, with license revenue jumping 29% and professional services revenue rising 43% higher than in last year's fiscal first quarter.

Margin figures were more mixed. The high-margin customer support business saw even more improvement, climbing by more than a percentage point to 89%. Cloud services margin fell by a greater amount, however, pulling the company's overall gross margin down to around 65%. Operating expenses matched the 30% rise in revenue almost exactly.

Continue Reading Below

Business activity levels returned to more normal readings for OpenText during the quarter, but the company was still successful. OpenText brought in 14 customer transactions of more than $1 million, down from 37 in the fiscal fourth quarter. Half came from cloud business, while the other half were on-premises transactions. Among customers that the company served were the City of Phoenix and the Qatar Public Works Authority, as well as several private companies in the financial, services, and technology industries.

CEO Mark Barrenechea was happy with the way the company did. "OpenText delivered strong first quarter results," Barrenechea said, and "we are off to a very strong start to the new fiscal year." The CEO pointed to the completed acquisitions of Covisint and Guidance Software as key drivers of growth, with organic expansion complementing OpenText's merger and acquisition activity.

Can OpenText keep making progress?

OpenText is optimistic about its prospects to become an even more important player in the technology space. In Barrenechea's words, "OpenText is well positioned to be the leading digital platform for the world's leading companies, both on-premises and in the cloud."

A lot will be riding on OpenText's release of its Magellan artificial intelligence platform. The company said that it has announced its first customer, which will be winemaker E. & J. Gallo Winery. Gallo is the largest winery in the world with more than 6,500 employees, and it manages more than 90 brands of wine for delivery to more than 90 countries worldwide. The winery hopes to use Magellan to optimize its manufacturing and purchasing decisions by better understanding its customers, and OpenText will look forward to its experience with Gallo to see its AI platform in action.

OpenText stock has been volatile in 2017, with ups and downs leaving the share price close to where it started the year. As the company makes more progress toward developing an all-inclusive cloud platform with full artificial intelligence and data gathering capabilities, OpenText has the potential to sustain its growth into 2018 and beyond.

10 stocks we like better than Open Text
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Open Text wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of October 9, 2017

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Open Text. The Motley Fool has a disclosure policy.