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For OpenText, This Long-Term Plan Could Be the Answer

By Dan Caplinger – Aug 3, 2018 at 12:43PM

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To succeed at business, you need to embrace the value of managing information. The rise of cloud computing has forced corporate behemoths to invest heavily in the technology that allows them to collect, manage, and analyze their data. OpenText (OTEX 0.76%) seeks to help its clients do exactly that, with a suite of products giving them the tools they need to keep up with their competitors.

Coming into Thursday's fiscal fourth-quarter financial report, OpenText shareholders expected a continued slowdown in growth rates, but they still wanted to see progress strategically. OpenText did better than most had expected. And even more important, its strategic vision for the next few years gives it what it needs to take full advantage of the current opportunities in cloud computing.

Conference hall with OpenText presentation given by speakers at front of hall, in front of digital screens.

Image source: OpenText.

The latest from OpenText

OpenText's fiscal fourth-quarter results were solid. Revenue rose 14% to $754.3 million, easily outpacing the 10% growth rate that most investors had expected to see from the cloud company. Net income rose by a third to $61.9 million. And even after making allowances for extraordinary items, adjusted earnings of $0.72 per share managed to outpace the consensus forecast of $0.68 among those following the stock.

For the most part, OpenText's performance was consistent with the trends the company has seen in recent periods. Recurring revenue was up just 13% from year-earlier levels, as a healthy 19% rise in cloud services and subscriptions was offset by just a 10% rise in customer support revenue. Licensing fees climbed 13% from year-earlier levels, and professional services generated a 16% rise in sales.

Business bounced back for OpenText on a fundamental level. The company brought in 38 customer transactions amounting to $1 million or more, making up for weakness in the previous quarter. On-premises projects accounted for 23 of those deals, with the remaining 15 coming from orders for the OpenText Cloud platform. The financial, services, and consumer goods industries remained the key contributors of customers for OpenText, with technology and healthcare also playing valuable supporting roles.

CEO Mark Barrenechea was happy with how the year turned out, saying, "Fiscal 2018 demonstrates the strength of our Total Growth strategy that combines both acquisition and organic growth." He pointed specifically to the acquisitions of Covisint, Guidance Software, and Hightail as valuable in supporting OpenText's growth.

What's ahead for OpenText?

But investors should be most pleased about the company's commitment to longer-term growth. As CFO Madhu Ranganathan stated, "We are taking steps to further improve our operational efficiency and expand margins, which reinforces our ability to execute our [mergers and acquisitions] strategy and advance the company toward our fiscal 2021 objectives." That includes a restructuring plan to produce rising cost savings over the next couple of years and improve profitability.

Expansion of cloud, business network, and security products will all be essential to that long-term success. Barrenechea highlighted the new OpenText OT2 public software-as-a-service platform as the latest in its efforts to woo top enterprises onto OpenText's client list. And multiple award wins confirm the strong reception the company's products are getting from the marketplace.

Investors don't seem entirely sure about OpenText's long-term prospects. With projections for revenue growth of just 4% in fiscal 2019, those following OpenText seem less than convinced that past growth rates will be sustainable even if the company's strategic plan succeeds.

Nevertheless, OpenText shareholders reacted favorably to the latest news, and the stock climbed 5% on Friday morning following the late-Thursday announcement. If it can start to accelerate its sales growth once again, then many will take a new look at OpenText and assess whether its turnaround is now complete -- and the odds of a growth rebound taking shape look better than they've been in a long while.

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

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