Cloud computing is a popular industry within the tech sector, with many companies looking to profit from it. Despite its relatively modest size, OpenText (NASDAQ:OTEX) has been a significant player in the cloud space, but coming into Wednesday afternoon's fiscal fourth-quarter financial report, OpenText shareholders were nervous about the company's ability to sustain its past growth rates and return to a more favorable trajectory going forward. OpenText's results breathed new life into investor sentiment about the stock, with much smaller declines in sales and earnings than most had anticipated and new hope that the company could indeed be getting a second wind. Let's take a closer look at OpenText and how it managed to surprise so many investors with its results.
OpenText shrinks, but a turnaround could be coming
If you weren't familiar with some of the situations that it has faced recently, OpenText's fiscal fourth-quarter results would probably leave you unimpressed. Revenue declined 2.3% to $482.7 million, and net income fell to $68.8 million, down 22% from the year-ago quarter. Even after making revisions for extraordinary items, adjusted earnings of $0.87 per share were down 17% from last year's fiscal fourth quarter.
Yet what really stood out in OpenText's results was just how much better the company fared than most had expected. The consensus view among those following the stock was that revenue would plunge by nearly 10%, cutting earnings by more than a third. In that light, OpenText's much smaller declines looked extremely strong.
Looking at its segment results, OpenText clearly suffered from foreign exchange impacts. Cloud Services saw a decline in revenue of 2%, but the strong dollar cost the company roughly six percentage points of potential revenue growth. Similarly, OpenText's customer-support unit managed to eke out a tiny revenue gain for the quarter, but those sales would have jumped by almost 10% on a constant-currency basis. Professional services fared worst of all with a 12% decline in revenue, yet while better foreign-exchange performance wouldn't have eliminated that drop, it would have limited it to just 2%. Licensing revenue also would have turned a 4% drop into a 3% gain were it not for the strong dollar.
OpenText CEO Mark Barrenchea emphasized the success of the company's sales team, noting that "our sales organization performed extremely well in Q4, closing 26 deals over $1 million." At the same time, the company has worked hard to boost the portion of its revenue it gets from the cloud, and now, OpenText collects about a third of its sales from cloud services and a whopping 84% of its revenue from recurring sources.
Why OpenText investors are happy
OpenText believes that the favorable trends that it saw throughout the 2015 fiscal year should continue in fiscal 2016. The company boosted its guidance for adjusted operating margins and expects an even greater proportion of its total sales to come from recurring revenue sources in the coming year. As new business comes in, OpenText has built up an impressive customer list, ranging from key players in the health insurance industry to major government agencies.
Moreover, OpenText is taking steps to help boost its flagging stock price. In addition to the dividend increase it implemented last quarter, OpenText announced that it would spend as much as $200 million on stock repurchases. Combined with its assertion that it will spend $3 billion toward strategic acquisitions over the next several years, OpenText is looking hard at making sure it uses its capital effectively to treat shareholders well while also fostering further growth.
OpenText investors reacted extremely favorably to the news, sending the stock up by 14% in the first three hours of after-market trading following the announcement. Even with those gains, OpenText has a long way to go before it can recover all of the declines its shares have seen in the past year. Yet with some favorable signs of future potential, OpenText has investors excited about its prospects for the first time in a while.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Open Text. The Motley Fool owns shares of Open Text. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.