Technology companies across the industry have scurried to tap into the investment potential of cloud computing, and OpenText (OTEX +2.50%) has worked hard to offer enterprise customers a better solution for managing and taking full advantage of the information that they accumulate in the course of their day-to-day operations. That's been a high-growth business, especially given the rising demand for cloud-based solutions that can take the place of expensive and complicated in-house tech alternatives.
Coming into Wednesday's fiscal second-quarter financial report, OpenText shareholders were optimistic about the company's ability to keep delivering growth. Yet even some bullish investors were pleasantly surprised at the results that the company achieved. Let's look more closely at OpenText and what its latest results mean for the cloud company going forward.
Image source: OpenText.
Things look sunny for OpenText
OpenText's fiscal second-quarter results added to the success the company has already achieved. Total revenue soared 35% to $734.7 million, easily outpacing the 27% growth rate that most investors expected to see and even outrunning the growth rate that OpenText hit in the fiscal first quarter. Adjusted operating income was up an even healthier 45% to $267.9 million, and that produced adjusted earnings of $0.76 per share, up more than 40% from year-earlier figures and crushing the consensus forecast for $0.63 per share.
Fundamentally, OpenText kept seeing all the right trends continue. Revenue from recurring sources rose at a 31% clip, as customer support revenue growth again was primarily responsible for the top-line rise. Yet cloud services and subscriptions grew 19%, picking up the pace from a more sluggish fiscal first quarter. A big jump in professional services revenue contributed to the company's overall gains, as did solid rises in license revenue.
OpenText also kept its eye on containing costs, and its efforts showed up in improving margin figures. Gross margin rose just a fraction of a percentage point from the year-ago quarter, but adjusted operating margin soared by 2.5 percentage points to 36.5%. Costs like research and development, sales and marketing, and general overhead grew from year-earlier levels, but the pace of that growth was slower than OpenText's overall revenue.
Large customer transaction counts rebounded from a tough quarter three months ago. OpenText counted 30 transactions for more than $1 million, split almost evenly between cloud and on-premises projects. Most of the demand for services came from the financial, consumer goods, services, and technology sectors, as well as public sector customers.
CEO Mark Barrenechea was pleased with the performance. "OpenText's fiscal year 2018 Q2 results represent the power of the OpenText Business System," Barrenechea said, "our strategic focus on M&A, functional integration, operational excellence, and innovation." The CEO pointed to the success of recurring revenue gains in combination with organic growth initiatives.
What's ahead for OpenText?
OpenText has high hopes for the future. Barrenechea pointed to cross-selling and better use of partnerships to drive sales, and he pointed to "increasing demand in our Enterprise Information Management product suite, including security and AI products."
The company remains focused on long-term improvements. OpenText believes it can grow its adjusted operating margin to a range of between 36% and 40% by 2021. That's two percentage points better than the corresponding range that OpenText had for 2020, but that reflects the progress that the company has made in optimizing its business strategy.
OpenText investors were excited about the news, and the stock soared by more than 12% in after-market trading following the announcement. With continued demand for cloud services, OpenText should be able to keep helping its customers make the most of their information and profit accordingly.
