OpenText Boosts Dividend, Looks For Acquisition-Led Growth

By Dan

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Information-management specialist OpenText has focused its efforts on helping enterprises realize the value of the data they collect, and until recently, the potential for growth in the industry seemed limitless. Yet huge share-price declines at Tableau Software earlier this year raised concerns about the sustainability of growth in the broader industry, and coming into Wednesday's fiscal third-quarter financial report, OpenText investors were hoping that the company would be able to squeeze as much profit as possible from relatively flat revenue growth. OpenText didn't do quite as good a job of that as shareholders had hoped, but its results were strong enough to justify a dividend increase, and recently announced acquisitions could help spur further expansion in the future. Let's look more closely at the latest from OpenText and what investors can expect in the future from the company.

OpenText falls shortOpenText's fiscal third-quarter results didn't live up to expectations among investors. Revenue fell 1.6% to $440.5 million, missing the consensus forecast for $450 million. Bottom-line results were stronger, with net income climbing 160% to $69.1 million. On an adjusted basis, earnings came in at $0.80 per share, but although that was a solid increase from year-ago levels, it was nevertheless $0.04 less than investors had expected to see.

As we've seen in past quarters, the strong U.S. dollar hurt OpenText's overall results, but the impact was less than investors have previously seen. Revenue would have risen 1.7% in constant-currency terms, but adjusted earnings suffered by only a penny because of the dollar's rise. Swings of three to five percentage points were common throughout OpenText's segments.

A closer look at OpenText's divisional results confirmed trends that we've seen previously from the company. Cloud services and subscription revenue was flat in dollar terms, but customer support revenue fell slightly, and professional services once again led the company's downward revenue movement with a 14% drop. Operating margins jumped by nearly six percentage points, and operating cash flows jumped by nearly a third to $189.9 million.

Operationally, OpenText scored 18 transactions worth more than $1 million, with eight OpenText Cloud contract signings and 10 from on-premises sales. The financial, services, and consumer-goods areas saw the highest demand, and successful business during the quarter involved SAP and several other private companies along with a host of government entities.

OpenText CEO Mark Barrenchea celebrated the quarter's performance. "OpenText's strategic and financial progress is evident in our results," Barrenchea said, citing the record operating cash flow levels and cuts in operating expenses.

Can OpenText cash in?Going forward, the new availability of OpenText's Release 16 will be huge for the company, and early feedback is already positive. At the same time, OpenText announced today that it will acquire ANXeBusiness, a cloud-based information exchange company focusing on the healthcare and automotive industries. The ANX deal will cost OpenText about $100 million, but the company expects the purchase to generate $30 million in annualized revenues and be accretive to earnings immediately. In conjunction with its already planned purchase of Customer Experience Management software and services assets from HP, OpenText hopes that it can jump-start its growth prospects for the remainder of its fiscal year.

OpenText also shared its cash-flow bounty with shareholders. The company boosted its dividend by 15%, now paying $0.23 per share on a quarterly basis. Barrenchea said that the move shows "the confidence in our strategy, financial model, and future cash flows" that OpenText has.

In the long run, OpenText investors appear to be in a good position to continue taking advantage of the positive trends supporting the cloud-computing industry. As long as managing and making maximum use of the information that businesses collect remains important to its customers, OpenText should have plenty of demand for its services for the rest of the fiscal year and beyond.d

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

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