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The Cloud Boom Keeps Lifting OpenText

By Dan Caplinger – May 2, 2019 at 9:18AM

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The information management specialist is tapping into the digital transformation among enterprises.

OpenText (OTEX -1.96%) has worked hard lately to take full advantage of opportunities in cloud-computing, helping clients come up with ways to manage their information more effectively and make better use of insights drawn from it. As competition has ramped up, OpenText has had to respond with efforts to stay ahead of its rivals while pursuing its own long-term strategies for success.

Coming into Wednesday's fiscal third-quarter financial report, OpenText shareholders expected to see continued growth in the business. OpenText's results were even more encouraging than many had foreseen, and the company sees even more chances to expand its reach and become an even more important player in cloud-computing this year and beyond.

Conference booth with OpenText promotional materials and about three dozen people posing for a picture

Image source: OpenText.

Another growth spurt for OpenText

OpenText's fiscal third-quarter results were reassuring in how they asserted the company's strengths. Revenue came in at $719 million, up 5% from year-ago levels and outpacing the $710 million consensus forecast among those following the stock. OpenText had bottom-line success as well, with adjusted net income of $173 million rising 19% and producing adjusted earnings of $0.64 per share. That topped expectations among investors by $0.04 per share.

After several quarters of deceleration, some key measures of growth started to move in the right direction again. Recurring revenue was up 5.4% from year-ago levels, lifted largely by a 14% jump in cloud services and subscription sales. Moreover, the strong U.S. dollar cost the company some of its upside, weighing down growth by about two to three percentage points. Customer support and professional services revenue eased lower, but licensing revenue bounced back to give a boost to OpenText's overall sales as well.

Order flows for OpenText were a bit muted. The company boasted 20 customer transactions worth $1 million or more during the quarter, down from 35 three months ago and 22 in the year-ago quarter. Of that number, 12 of the high-value deals involved on-premises work, while eight were in the OpenText cloud. The company pointed to the same key industries of financials, consumer goods, services, technology, and public sector entities as seeing high demand, with the European Parliament among key customers to sign on during the quarter.

CEO Mark Barrenechea gave the motivation for OpenText's clients generating more growth:

Customers are looking for an information advantage provided through enterprise information management (EIM). Building upon our vision of the intelligent and connected enterprise, with a continued focus on customer-driven innovation, we are strategically well positioned to compete and win in the EIM marketplace.

Can OpenText keep growing faster?

OpenText also sees plenty of room for future growth. The CEO pointed to a balance between organic growth and mergers and acquisitions to provide expansion opportunities, and CFO Madhu Ranganathan added that OpenText's balance sheet is healthy and can support strategic moves to bolster the business.

However, OpenText gave a mixed set of factors for those following the stock to consider in weighing the prospects for the company's fiscal fourth-quarter performance. Barrenechea noted that concerns about a global recession continue, due largely to trade issues, Brexit, and regulatory worries. The rising U.S. dollar could weigh on earnings once again, and the CEO also advised that after a period of strong execution in the past quarter, the usual fourth-quarter lift in revenue might not happen, and end-of-year expenses could weigh on profits.

OpenText shareholders didn't immediately respond dramatically to the news, and the stock was largely unchanged in pre-market trading Thursday morning following the Wednesday afternoon announcement. As long as favorable conditions in cloud-computing continue, OpenText has put itself in position to benefit from them and keep its growing customer base happy with its core offerings.

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

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