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OpenText's Slowing Growth Prompts a Strategic Move

By Dan Caplinger – Nov 1, 2018 at 10:16AM

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The information management specialist is still restructuring and is finding new pathways for revenue gains.

Cloud computing has revolutionized the way that enterprises handle their technology needs, and highlighted the true value of corporate information. OpenText (OTEX 3.65%) has worked hard to help its clients manage their proprietary information more effectively, assisting them in identifying key trends that can show them what they're doing right and what they need to change in order to meet the needs of their customers.

Coming into Wednesday's fiscal first-quarter financial report, OpenText shareholders were hoping to see evidence that the company had taken full advantage of the growth opportunities in the space. However, its growth rates continued to slow, cause some investors to worry that it might be falling behind. This prompted a strategic move from the company, but it's not clear exactly what impact it could have on OpenText's momentum.

Animated clouds with blue lines connecting them into a network.

Image source: Getty Images.

An ongoing deceleration

OpenText's fiscal Q1 results reflected some troubling trends. Revenue was higher by just 4% to $667.2 million, which fell short of the consensus forecast among those following the stock by more than $25 million. Net income actually fell 1% to $36.4 million, but factoring out extraordinary items, there was bottom-line growth, and adjusted earnings of $0.60 per share actually topped the $0.59 per share consensus expectation.

Slowing growth manifested itself throughout OpenText's business. Recurring revenue rose 6%, with the key cloud services and subscriptions category seeing just 7% gains, down from double-digit percentage growth as recently as last quarter. Non-recurring revenue actually fell year over year, with licensing revenue down 2%, and revenue from professional services and other sources declining 3.5%.

Fundamentally, a big slowdown in order activity was consistent with the company's lackluster financial results. OpenText had just 14 customer transactions of $1 million or more, down from 38 three months ago. Five deals were made for on-premises systems, while nine were for OpenText Cloud. Demand continued to be strong from the financial and services sectors, among others; key new customers included the city of Austin, Texas.

CEO Mark Barrenechea tried to portray the results positively. "OpenText delivered a strong Q1," he said, "and we are tracking to our Fiscal 2019 target model." He also pointed to improvements in operating margin and cash flow as signs of the enterprise information management software provider's strength.

Can OpenText grow faster?

Management is optimistic about the company's prospects. In Barrenechea's words, "These results show the deep value and superior experience our customers receive, [and] OpenText's vision and position as market leader in content services, B2B network services, and cloud services allow our customers to differentiate from their competition and win in the Digital Age."

In a key strategic move to push for faster growth, OpenText Thursday announced it would acquire Liaison Technologies. A provider of cloud-based business-to-business integration, it will add to the breadth of OpenText's cloud platform, with particular application to the life sciences and healthcare markets. Although the buyer didn't provide much financial information about Liaison in advance of closing, which is expected within the next 90 days, the $310 million purchase price implies a modest but still significant impact on growth. Once the acquisition closes, investors will be in a better position to evaluate how good a deal OpenText made.

Overall, shareholders seemed dissatisfied with the latest results; the stock fell 8% in pre-market trading on Thursday following Wednesday afternoon's report. The company's efforts to re-accelerate growth, including its restructuring and the purchase of Liaison Technologies, will likely have to show results before investor confidence is restored.

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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