Buyout And Cloud Products Aid OpenText Software Sales

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The words "cloud" and "oxygen" pop up a lot in references to OpenText, even though the firm has nothing to do with parachuting, mountain climbing or any other high-altitude endeavors where oxygen is thin and the clouds are at your fingertips.

Instead,OpenText ( OTEX ) designs and sells enterprise information management ( EIM ) software and solutions to corporate and government clients.

Its products are geared to help organizations manage, secure and leverage their unstructured business information. The company boasts more than 50,000 customers worldwide.


In OpenText's case, the "cloud" refers to its recent initiatives to expand its presence in cloud computing, in which applications are accessed over the Internet instead of sitting on a hard drive. OpenText's biggest move in this area came in January, when it closed a $1.07 billion buyout of GXS Group, a provider of cloud-based business-to-business integration services and managed services.

Meanwhile, "oxygen" refers to OpenText's Red Oxygen project, which packages many software products into a single platform.

Red Oxygen is designed to bring a higher level of integration across OpenText's EIM products. In November the company identified five Project Red Oxygen product suites.

The Content Suite's products assist in areas such as information governance, workflow, search and archiving. The Process Suite helps automate complex and simple business processes -- provisioning services to employees, for example.

OpenText's Experience Suite includes tools for collaboration, tailoring the company intranet for users and managing digital assets, among other features. The Information Exchange Suite has to do with things like mail, other messaging and notifications. And the Discovery Suite involves search and content analytics.

Cachet Of The Cloud

The suites are built to help clients manage content, automate complex processes, improve brand management and derive value from content trapped in "silos," or information management systems that can't communicate with other systems.

These initiatives are part of OpenText's desire to build the world's largest enterprise business-to-business, or B2B, network, as CEO Mark Barrenechea said during a fiscal 2014 third-quarter conference call last month.

"We intend to achieve this by adding new services, more vertical applications and growing our trading partners," Barrenechea said. "B2B integration is a critical technology for the enterprise in EIM."

An important element of OpenText's growth plan is a bigger footprint in cloud technology.

Providing EIM solutions via the cloud offers customers "the flexibility to place workloads where they need to around the globe and in the data zone they find important to them," Barrenechea said. "Continuing to scale our cloud services is a key priority."

A couple years ago OpenText had no cloud-related revenue. But during the company's fiscal third quarter, which ended in March, the Cloud Services unit delivered $128.4 million in revenue. That was up from $43.2 million a year earlier and represented about 29% of overall revenue. GXS contributed $88.2 million of Cloud Services revenue during the quarter.

By comparison, OpenText's core Software License business contributed $73.1 million in Q3 revenue.

OpenText posted overall revenue of $442.8 million for the quarter, up 31% from a year earlier but below consensus estimates for $447 million. Earnings climbed 33% to 84 cents a share, topping views for 80 cents.

Regionally, the Americas contributed 54% of revenue, Europe/Middle East/Africa contributed 36%, and Asia-Pacific contributed 10%.

Analysts polled by Thomson Reuters expect OpenText to grow full-year earnings 16% this fiscal year and 15% in fiscal 2015. Its shares trade near 48.

OpenText looks to expand both its customer base and geographic footprint in coming quarters as a way of growing new-product sales, says Ralph Garcea, analyst at Global Maxfin Capital.

"The company intends to establish a wider and deeper distribution network that includes a direct selling organization, inside sales, system integrators, agencies, OEMs (original equipment manufacturers) and (value added resellers)," he noted.

International Buildout

OpenText has made progress in its "established" European and North American businesses, Garcea says.

"But there are further opportunities in growth markets such as Latin America, China, India, Southeast Asia, Japan, South Africa and the Middle East, as well as Eastern Europe," Garcea said. "The company has identified over 3,000 key target accounts."

OpenText recently announced the opening of a new office in Sao Paulo, Brazil, to support its Latin America business operations. The office will serve as OpenText's South American hub.

OpenText also increased its workforce there and opened a new satellite office in the capital city of Brasilia to further expand its footprint in the region.

"With a diversifying technology landscape and increasing Internet penetration, Brazil is in the midst of a technology boom which creates huge opportunity for businesses," Barrenechea said in a statement. "By strengthening our presence in Latin America, we are now able to provide local organizations with solutions tailored to their specific needs."

OpenText faces competition from a variety of different companies, including tech giants such asEMC ( EMC ),IBM ( IBM ) andOracle ( ORCL ).

Of those three, however, only Oracle is part of IBD's Computer Software-Database industry group, where OpenText resides. The largest companies in it by market cap are Oracle, then OpenText andSplunk (SPLK). Companies in the group that are currently highly rated by IBD includeNetScout Systems (NTCT) and OpenText.

In a recent interview with IBD, Barrenechea said one of his company's competitive strengths is its ability to find the right employees and give them free rein to pitch ideas and share input.

"I've seen cultures where leaders tell you what to do," he said. "We have a culture built on asking the right questions. Ninety-nine percent of our workforce has a bachelor's degree. I treat it as a learned organization."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: OTEX , EIM , EMC , IBM , ORCL

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