Enterprises across the world are looking to take advantage of the benefits of cloud computing, but they need help to implement information technology strategies that will work best for their respective businesses. OpenText (OTEX +0.48%) has held itself out as a specialist in providing tools that customers can use to manage their data and make the best use of it for strategic purposes. That business model has produced strong growth for OpenText even amid competition from much larger players in the tech industry.
Coming into Thursday's fiscal fourth-quarter financial report, OpenText shareholders were hoping that the company would be able to sustain high growth rates with accelerating gains in some key areas. OpenText's results were good, and the company thinks it has a long runway ahead of it for future growth. Let's look more closely at OpenText and what its latest report says about its prospects ahead.
Image source: OpenText.
OpenText keeps growing
OpenText's fiscal fourth-quarter results continued the trends that we've seen in previous quarters. Revenue climbed 37% to $663.6 million, accelerating from its pace of growth in the fiscal third quarter of 2017. Adjusted operating income climbed 39% to $219.9 million, and adjusted earnings of $0.60 per share topped the consensus forecast for $0.58 per share during the period.
Looking more closely at the report, OpenText saw mixed performance from its business divisions. Recurring revenue jumped 35% to $471.4 million, powered by an increase of nearly half in customer support revenue. One source of concern to some will be the deceleration of growth in cloud services and subscriptions, which climbed just 17%, continuing to slow from recent quarters. One-time sales were strong, with licensing revenue and professional services sales both picking up 43% year over year.
Margin figures also varied across segments. Gross margin from cloud services fell by nearly two percentage points to drop below 57%, but margin improved by nearly a percentage point in customer support. Overall, increases in operating expenses outpaced revenue growth, leading to pressure on operating margin figures as well.
However, OpenText got a big pickup in business activity. The company boasted 37 customer transactions of more than $1 million, nearly double what it brought in during the fiscal third quarter. New customers included Germany's central bank and NASA's Langley Research Center along with a host of private-sector companies. OpenText pointed to the financial, services, consumer goods, and technology sectors as the best sources of clients.
CEO Mark Barrenechea celebrated the news. "Fiscal 2017 was a transformational year for OpenText," Barrenechea said, "as we strengthened our product offerings with OpenText Release 16 and acquisitions." The CEO pointed to solid full-year growth and the company's rebranding efforts as instrumental in preparing the company for continued success in fiscal 2018.
What's next for OpenText?
OpenText sees plenty of potential for future growth. The new Magellan artificial intelligence platform has promise to help the company participate in the growing AI industry, and Barrenechea noted that the right balance of strategic acquisitions and organic sales growth has been essential in driving greater performance from the company.
In particular, Magellan drew questions from analysts following the release. Barrenechea identified three fundamental things about the product and its role at OpenText. First, the company has worked with data for 20 years, putting it in a strong position to develop a useful AI tool. Second, unlike IBM's (IBM +2.42%) Watson, OpenText is using an open approach with Magellan rather than IBM's closed approach. And finally, OpenText is excited about the ease of use and the affordability of Magellan compared to what IBM and other providers are offering. It's still early, and OpenText hesitated to build further success into its financial modeling, but the company is clearly excited about Magellan and its ability to hasten the pace of growth in the future.
OpenText shareholders seemed pleased with the results, and the stock climbed more than 3% just after the market opened following the announcement. With so much potential going forward, OpenText has to find the best ways to execute in order to take full advantage of the opportunities in front of it.
