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Open Text Defies Bottom-Line Pressure, Enterprise Worries

By Dan Caplinger - Feb 10, 2016 at 9:16AM

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The information management specialist expects its Release 16 to be a game changer.

Image source: Open Text.

Information management for enterprises has never been more important, and Open Text (OTEX -0.80%) has developed tools that it offers to clients to help them be smarter about using their data. Yet the recent plunge in shares of peer Tableau Software (DATA) sent the enterprise cloud computing and big data industry into a tailspin, and coming into Tuesday's fiscal second-quarter financial report, Open Text investors had prepared themselves for a potential drop in earnings and revenue. To their surprise, Open Text was able to grow its earnings and sees plenty of future potential for its Release 16 next-generation platform. Let's take a closer look at how Open Text fared and what's ahead for the company going forward.

Open Text posts unexpected growth
Open Text's fiscal second-quarter results came as a nice surprise for investors. Revenue was down a fraction of a percent to $465.3 million, coming in slightly ahead of the larger reduction in sales that most investors were expecting. But net income jumped 18% to $87.7 million, and adjusted earnings came in at $1.01 per share, topping the consensus forecast by more than a dime per share.

The U.S. dollar once again had a negative impact on Open Text's results. Overall, revenue gains in constant currency terms amounted to more than 6%, and the impact of the dollar cost Open Text $0.07 per share in earnings. The hit was especially large on the licensing revenue front, where even a strong 9% gain in dollar terms would have been 10 percentage points higher on a constant currency basis.

Looking more closely at Open Text's segment results, cloud services and subscription revenue fell 4%, while customer support revenue picked up just under 3%. Professional services was the real sore spot in the report, falling 14%. It was the only segment to report a drop in revenue on a currency-adjusted basis.

Open Text had plenty of good news in the quarter. The company posted 16 transactions worth more than $1 million, five more than in the previous quarter, with seven Open Text Cloud contract signings and nine from on-premises sales. The financial, services, and technology areas saw the highest demand, and successful business during the quarter involved several private entities as well as the Greater Toronto Airports Authority and the Banque de France.

Open Text CEO Mark Barrenechea was pleased with the results. The quarter's strength "shows the potential of digital transformation for our customers and the Open Text business model," Barrenechea said, and he pointed to the huge prospects from Release 16, which he termed the world's first digital platform.

What's ahead for Open Text?
An important element of Open Text's future will come from its acquisition in November of global software and services company Daegis. Open Text believes that the purchase will add to its expertise in information governance and help broaden the company's overall suite of products. By providing experience with data archiving and migration, Daegis should help Open Text customers save money and do the right thing to preserve valuable information.

Still, a lot will depend on demand for Open Text Suite 16 and Open Text Cloud 16. Tableau Software's shocking suggestion that overall enterprise spending on technology came as a blow not just to Tableau shareholders but to the entire industry, and Open Text stock has fallen 12% in the first nine days of February partially as a consequence. That's nothing compared to Tableau Software's 50% plunge, but it still indicates that Open Text sees some challenges similar to what Tableau is dealing with in the industry.

Open Text investors didn't react strongly to the report, sending shares up less than 1% in after-hours trading following the announcement. In order to rebound, Open Text will have to keep demonstrating that it has the staying power to survive in a cutthroat industry that is likely to get even more competitive as 2016 progresses.

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