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OpenText Starts 2017 Strong

By Dan Caplinger – Feb 2, 2017 at 6:26PM

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The company showed positive signs from better growth than most investors had expected.

Managing information is more important than ever, and OpenText (OTEX -0.96%) has taken advantage of the push across the global economy toward greater use of cloud-computing resources to drive its business forward. With platforms designed to help customers utilize the information technology resources more effectively, OpenText has seen dramatic growth recently, and coming into Thursday's fiscal second-quarter financial report, OpenText shareholders expected to see continued progress on that front.

OpenText's numbers were solid, and the company is confident about its future. Let's look more closely at OpenText and what it said about its momentum heading into 2017.

OpenText Enterprise World conference.

Image source: OpenText.

OpenText moves forward

OpenText's fiscal second-quarter results were impressive by most standards. Revenue of $543 million was up 17% from the year-ago quarter, and it also represented a new record for OpenText's top line. Adjusted net income climbed 9%, to $133.3 million, and that produced adjusted earnings of $0.54 per share. That was $0.02 per share higher than the consensus forecast among investors.

Taking a closer look at how OpenText did, the company's divisions had relatively consistent performance. Revenue from cloud services and subscriptions rose 17%, matching the company's overall growth, and making up almost a third of the company's overall sales. Licensing revenue grew at a 19% year-over-year rate, and customer support-related sales also brought in 19% more money than it did in the year-ago quarter.

Only the professional services segment lagged, falling just short of the break-even mark. Total revenue from recurring sources was up by a seventh measured year over year.

Still, OpenText kept having some challenges in keeping costs down. Operating margin fell three full percentage points from year-ago levels, to 34%, as operating expenses grew by nearly a quarter. Big gains in spending on research and development, sales and marketing, and general overhead expenses all contributed to the small decline in operating income compared to the fiscal second quarter of 2016.

One area in which OpenText was successful was in attracting customers. The company featured 25 customer transactions over $1 million, including eight OpenText Cloud contract signings. New customers included restaurant chain Subway and the U.S. Defense Logistics Agency, along with a host of other companies. OpenText said that the financial service, consumer goods, technology, and public sector industry groups had the most demand for cloud and license services.

CEO Mark Barrenechea celebrated the news. "We made significant progress in advancing our vision, products, and market reach over the last 12 months," Barrenechea said, "and it is reflected in our financial results." The CEO also discussed the ongoing transformation supporting the shift toward greater use of data analytics and enterprise information, and how OpenText will keep contributing toward it.

What's ahead for OpenText?

In particular, OpenText thinks that the late-January closing of its acquisition of Dell-EMC's Enterprise Content Division will be a key driver of growth in 2017 and beyond. The move brings the Documentum electronic document management system into OpenText's hands, and the company believes that it will play a key role in its overall strategy toward helping customers manage their enterprise information more effectively.

The $1.62 billion purchase gave OpenText 5,000 customers, as well as 2,000 employees and 300 partners to help the company move forward more aggressively. Barrenechea put it succinctly in explaining that the deal makes it "the market leader in content services."

Somewhat interestingly, OpenText also made a lot of references to its recent stock split. The cloud specialist split its shares 2-for-1 on Jan. 24, and so it was careful to emphasize that new financial results were adjusted for the split. Given how few companies have done stock splits recently, OpenText's move seemed unnecessary, but innocuous.

OpenText shareholders didn't have a huge reaction to the report, sending the stock upward by just a fraction of a percent in after-hours trading following the announcement. What matters far more in the long run is whether the new Enterprise Content Division and Documentum are able to generate the long-term growth that OpenText wants to achieve. If it does, then there could be a lot more opportunities ahead for the business looking forward.

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

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