Why OpenText's Dividend Boost Wasn't Enough

Cloud computing has seen amazing growth in recent years, but that's also made investors extremely demanding when it comes to the success of players in the cloud space. Like many of its peers, OpenText (NASDAQ: OTEX) promises to help enterprise customers use their information more effectively in achieving key business objectives. Those familiar with the space acknowledge OpenText's approach to the industry, but that doesn't make them any more forgiving when the company hasn't lived up to their ambitious expectations for growth.

Coming into Wednesday's fiscal third-quarter financial report, OpenText shareholders wanted once again to see solid gains in revenue and earnings from the cloud company. OpenText's results showed progress, but the pace of gains didn't live up to all of the expectations some had. Even a nice increase to its dividend wasn't enough to make everyone happy about the rate at which OpenText is expanding and its prospects going forward.

Dark auditorium with presenter and OpenText materials projected on screens.

Image source: OpenText.

How OpenText kept gaining ground

OpenText's fiscal third-quarter results showed significant growth. Total revenue rose 16% to $685.9 million, falling only a bit short of what most of those following the stock had expected to see though slowing considerably from fiscal second-quarter growth rates. Adjusted operating income gained 18% to $204.1 million, and adjusted earnings of $0.54 per share were higher by 20% from year-ago levels, although they missed the consensus forecast among investors for $0.62 per share.

OpenText's results overall were just a bit more sluggish than what we've generally seen in recent quarters. Revenue from recurring sources rose by 18%, with balanced contributions from both cloud services and customer support. Professional services revenue grew at a faster 23% pace, offsetting a small decline in licensing revenue.

Fundamentally, OpenText kept reporting business successes but, again, the achievements weren't quite as impressive as in the recent past. Large customer transactions above $1 million in value numbered 22, down from 30 three months ago. Of those, 10 were for the OpenText Cloud platform, while the remaining 12 were on-premises projects. The cloud company identified a number of different industries as important contributors to performance, including financial, consumer goods, services, technology, and public sector customers.

CEO Mark Barrenechea attributed the good results to strategic efforts. "We are making key investments in the OpenText Cloud that will drive growth and consumer adoption," Barrenechea said, "and these investments will help create even more predictability in our business model." The CEO was particularly pleased with the gains in recurring revenue and operating cash flow, the latter of which jumped nearly three-quarters from year-ago levels.

Can OpenText pick up more speed?

OpenText has made several moves that it thinks can accelerate its growth. The acquisition of Hightail last quarter adds additional capabilities for file sharing and creative collaboration in the cloud, adding to the attractiveness of the OpenText platform. A couple of planned presentations will give OpenText the ability to show off its cybersecurity and digital investigation features as well as its broader vision for what it calls the "intelligent and connected enterprise."

OpenText also gave investors a bigger piece of its success. The company boosted its dividend by 15%, paying an unusually precise figure of $0.1518 per share on a quarterly basis. Higher dividends are usually good, but it's not typical for tech stocks that are still in their high-growth phase to give up working capital by returning it to shareholders rather than reinvesting it in their own businesses. That, combined with slowing growth rates, might actually have reinforced concerns about OpenText's ability to find enough growth-enhancing strategies in the future to make a meaningful difference in top-line gains.

OpenText investors indeed seemed to have those worries, and the stock fell 7% in pre-market trading Thursday following the late-Wednesday announcement. The cloud company does have good prospects to try to stoke its growth rate higher, but it will need to focus more than ever on successful execution in order to stay ahead of the multitude of competitors in the cloud space.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Open Text. The Motley Fool has a disclosure policy.