OpenText Keeps Climbing Into the Cloud, but 2015 Will Be Its Real Test

The cloud has become essential to OpenText. Image source: OpenText.

Information has always been a hot commodity, but as technology has advanced, it has also boosted the value of data. With current trends toward ever-greater collection and analysis of information, OpenText (OTEX 0.43%) is well-placed to capitalize on increased demand for its information-management software and services. In the company's fiscal second-quarter financial report Tuesday afternoon, OpenText stayed on course with solid growth in revenue and earnings. Yet now that it has completed its $330 million acquisition of Actuate, OpenText will need to show that its now-boosted exposure to the data analytics and visualization industry will translate to greater sales and profitability going forward. Let's take a closer look at OpenText's latest results and whether the company can sustain its growth pace heading into 2015.

How OpenText fared last quarter

OpenText's fiscal second-quarter results included some impressive growth figures, even though some of them won't be quite as strong as investors would have preferred to see. Total revenue climbed 29% from year-ago levels, but that actually was less than the 34% sales growth that analysts had expected. OpenText managed to match expectations on the earnings front, with adjusted earnings per share of $0.97 representing a 23% gain from last year's fiscal second quarter.

Yet a deeper look reveals more about OpenText's performance during the quarter. Revenue from the key Cloud Services segment soared more than 259% to $151.3 million and now makes up nearly a third of OpenText's entire sales base. Customer Support revenue also made more modest gains of almost 3% to $179.5 million, helping to offset declines in License and Professional Services sales. Overall, revenue from recurring sources grew 39% from year-ago levels, demonstrating the effectiveness of the strategy that OpenText has followed to ensure consistent financial performance even at the expense of the short-term gains that selling permanent licenses can bring.

Source: OpenText.

On the other hand, currency exposure played a role in holding back some of OpenText's growth. About half of the company's revenue comes in the form of U.S. dollars, but the euro makes up nearly a quarter of revenue, with the British pound and the Canadian dollar also responsible for substantial amounts of sales. Weakness in those currencies translated to less dollar-denominated revenue for OpenText, with CFO John Doolittle attributing $0.04 per share of lost earnings to currency headwinds.

Nevertheless, the tone at OpenText was upbeat. CEO Mark Barrenchea bragged about what he called OpenText's "strongest product line up ever." Even more importantly, Barrenchea specifically pointed to the Actuate acquisition as allowing OpenText "to significantly enter the world of business analytics, allowing customers to analyze and visualize a broad range of structured, semi-structured, and unstructured data."

What OpenText needs to prove in 2015

OpenText had no shortage of successes during the quarter. Among high-profile clients, OpenText brought on Nestle and Schneider Electric as cloud-services customers, and other companies such as Monster Beverage, Airbus, and Fox Entertainment joined OpenText's ranks as license customers. OpenText also acquired Informative Graphics, whose offerings in the commercial document management and publishing software realm OpenText will integrate into its existing suites of products.

Source: OpenText.

Yet the biggest question on investors' minds is how much the Actuate acquisition will help broaden OpenText's reach. Barrenechea noted that "analytics is an imperative to enabling a Digital-First World," and he believes that the customers that Actuate already has should complement OpenText's existing offerings well while also opening up OpenText's customer base to better visualization and big-data processing tools.

Clearly, OpenText's recent acquisitions have given it more tools to use in building a lucrative portfolio of product offerings for customers. The big question, though, is whether customers will appreciate OpenText's efforts enough to stick with the information-management company against competition from other industry players. With the data analytics movement picking up steam, though, momentum should remain on OpenText's side this year and well into the future.