OpenText (TSX:OTEX) stock reported record revenue of US$4.5 billion during its most recent fourth quarter and full-year 2023 earnings report, up 28% from the year before. Yet investors narrowed their focus to the company’s loss, which came in at US$49 million, compared to a profit the year before. Shares dropped by 12% at the news.
However, in an interview with OpenText stock’s Chief Financial Officer Madhu Ranganathan, the CFO was far more positive about the future, both near and long term.
A loss, for good reason?
The net loss stemmed from the US$2.1 billion acquisition of Micro Focus. The acquisition helps the company with its ongoing process to not only bring customers into the Cloud, but for a “digital transformation.”
Yet investors weren’t as excited about the acquisition, coming at a time when tech stocks were struggling as shareholders saw returns shrink. Even still, OpenText remained firm on the choice. And it has already seen a massive increase in revenue, as seen during the recent report.
Not only has the acquisition increased the company’s cloud bookings, up 9.9% year over year, OpenText has seen Micro Focus customers continue to come back for more.
“It’s exceeded all expectations in terms of margin and revenue for Micro Focus,” Ranganathan said. “We’re now returning Micro Focus to organic growth a year earlier than we anticipated.”
What does this have to do with OpenText?
It’s a fair question, and one Ranganathan stated OpenText is asked quite a lot.
“‘You’ve done great with Micro Focus, so what about mothership OpenText?’ Well, Mothership OpenText is doing great.”
After a slow down in the third quarter, OpenText saw a pick up in the fourth quarter, which Ranganathan believes sets the company up for strong momentum for fiscal 2024. The company is moving into a new wave of cloud products under TitaniumX, with Micro Focus also providing the capabilities to position the company for its next phase. That of artificial intelligence.
Opentext.ai
If you think OpenText is going to be putting out another version of ChatGPT, think again. This is where the company can position itself ahead of many of its competitors. It’s also why it has gained such high level enterprise clients such as AT&T, BMW, Alphabet and more. OpenText sits on literally decades of data. It holds the capabilities to mine that data and find solutions for its enterprise clients.
That’s where the Micro Focus acquisition comes into play. Through the acquisition, the company gained access to Vertica, IDOL and Magellan. The three bring the machine learning together, and the company is now aiming to deploy them across their customer base.
However, the end goal is to take these acquisitions, along with the others parts OpenText plays in the supply chain, and unify them under artificial intelligence. Instead of customers needing to access multiple tools, they’ll be able to access everything under one artificial intelligence program. But there is still some work to be done before this rolls out.
“How do we train the data to manage in a secure way, and make business decisions?” Ranganathan said. “We have the tools already…we’re in the evolution phase.”
The future facts
As mentioned, fiscal 2024 looks to already have some strong momentum behind it, according to Ranganathan. After the record results, the CFO stated the current outlook includes 15% growth in enterprise cloud bookings. This is still the leading source of growth and revenue. The company should also see operating margins between 36% and 38%, with cash flow of US$800 to US$900 million.
But it’s OpenText stock’s aspirational goals for fiscal 2026 that could be more interesting, Ranganathan said. Here, free cash flow could hit US$1.5 billion, with revenue reaching between US$6.2 and US$6.4 billion. By then, the company will be done with the backend systems on Micro Focus, which has been weighing down cash flows.
These numbers don’t take into consideration artificial intelligence, however; so numbers could be even higher, Ranganathan said. So should it gain traction, numbers will need to be revised. For now, the CFO remains confident that the company’s decades of data, along with strong client retention and top cybersecurity, will see revenue rise.
“We haven’t offered AI solutions yet, and now we have the ability to do it,” Ranganathan said. “We have it all.”
