Helping companies manage their information has become big business, and in the enterprise information management space, OpenText (NASDAQ:OTEX) has aimed to use the power of cloud computing to give its customers the ability to use the data they collect more effectively and profitably. Yet in doing so, OpenText has to fight against much bigger companies like Hewlett-Packard (NYSE:HPQ), and coming into Wednesday afternoon's fiscal first-quarter financial report, OpenText investors expected both net income and revenue to decline from year-ago levels as the company continues to go through a transformative process. Even though OpenText's sales fell more than expected, its bottom line didn't shrink as much as feared, and the company still thinks it can meet its long-term goals and take advantage of opportunities with new products. Let's look more closely at OpenText to see how its quarter went and whether it can keep bouncing back throughout its 2016 fiscal year.
OpenText delivers on the bottom line
OpenText's fiscal first-quarter results gave investors half of what they wanted to see. On the revenue front, sales fell 4% to $434.5 million, which fell short of the roughly break-even results that investors had expected to see. Yet adjusted net income came in at $103.2 million, and that worked out to $0.84 per share, or $0.06 per share better than the consensus forecast even though the figure was down 13% year over year.
OpenText blamed some of its poor results on the strength of the U.S. dollar. Taking out currency impacts, revenue would have grown 3%, and recurring revenues would have climbed at a 4% pace. The hit from the strong dollar also showed up in OpenText's segment results. Declines in cloud services and subscription revenue amounted to 4% in dollar terms, but sales rose 1% in constant currency terms. Similarly, a tepid 1% rise in customer support-related revenue balloons to 9% if you take out currency impacts, and even the 14% drop in professional services revenue benefits by nearly 10 percentage points on a currency-neutral basis.
Nevertheless, OpenText pointed to several favorable highlights during the quarter. The company saw 11 transactions worth more than $1 million, with six coming from the OpenText Cloud and five representing on-premises business. Demand in the financial, technology, and services industries was the highest among OpenText's customer base, and the company pointed to several successes, including both private businesses and the U.S. State Department.
OpenText CEO Mark Barrenechea kept investors focused on the future. "Fiscal 2016 will be a transformative year for OpenText," Barrenechea said. "Digitalization enables customers to create a better way to work, and project Blue Carbon is the enabling platform." The CEO further noted that it would release a beta version of Blue Carbon in early November at its annual user conference.
Can OpenText point to a brighter future?
The Blue Carbon initiative will be an important piece of OpenText's overall strategy for the future. The company hopes that its newest generation of cloud and hybrid solutions will push enterprise information management to a whole new level and define OpenText's role in helping customers take advantage of it. The package should include better tools for information capture, business-to-business integration, and compliance management, all of which are critical to its users' success.
However, OpenText competitors are skeptical of its efforts. Hewlett-Packard has responded to past quips from OpenText's CEO by noting that HP continues to be a leader in the enterprise industry, offering key analyst reports that its competitors can't match. Nevertheless, OpenText expects to keep taking on not just Hewlett-Packard but also a wide range of other massive companies in the space.
OpenText faces a tough road ahead, with Hewlett-Packard and other competitors having much greater internal resources to use in developing products to go up against the smaller cloud developer. That doesn't spell certain defeat for OpenText, but it will take continued strong effort from the company in order to produce and maintain what it hopes will be a sustainable competitive advantage in the long run.