Shares of OpenText (TSX:OTEX) stock jumped about 6% last week, as the company reported an extraordinary earnings beat. The company beat out its own estimates, as well as those of analysts, when it reported its first quarter for the full year of 2024. Yet in an interview with Chief Financial Officer (CFO) Madhu Ranganathan, it’s only the beginning.
Record reporting
Before we get into what’s to come, let’s look at what’s happened already. OpenText stock announced in its earnings report total revenue of $1.425 billion. This was an incredible 67.3% increase year over year, with annual recurring revenue (ARR) reaching $1.149 billion, an increase of 59.1%. This is important to note as the ARR takes up 81% of company revenue.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also climbed, hitting $495 million in the quarter. Cloud revenue climbed 11.5% to $451 million, and Open Text management was pleased across the board with the record results.
Yet much of this growth came down to OpenText stock’s acquisition of Micro Focus. Now integrated into the company, there has been a large rollout that’s led to these major increases. However, in an interview with the CFO, that’s why OpenText stock is now seeking to shift towards organic growth.
How it’ll get there
OpenText stock has been around for decades. In that time, it has been a merger and acquisitions (M&A) powerhouse. Yet, while the company isn’t about to turn down any opportunities, given M&A is in its DNA, organic growth will be the focus of the future.
“We have a $200 billion addressable market,” Ranganathan said in an interview with the Motley Fool. “We don’t need more market; we need to grow into the market.”
But the question is, how? For that, there are a few areas where Ranganathan stated the company is focusing. Cloud joinery isn’t done yet, which will continue to provide sustainable growth for customers. Software as a Service (SaaS) is another opportunity for the company as well. And the best part? OpenText stock has already been involved in these very complex areas for decades.
But even this area doesn’t spell out the amount of expansion the company predicts will occur in the next few years. Content should be a leading growth driver, Ranganathan said, as well as cybersecurity. This area in particular already provides a revenue run rate of $1 billion for OpenText stock. Supply chains, the automotive industry, analytics and the rollout of artificial intelligence are all opportunities for organic growth.
What investors should watch for
While this is all projected to come down the pipeline, Ranganathan was able to give some hard numbers and facts as to where OpenText stock is going next. For fiscal 2024, OpenText stock should reach between $5.85 and $5.95 billion in revenue, with an adjusted EBITDA margin of 36-38%. Cloud bookings are projected to increase by 15% or more for the year, with the second quarter likely closer to 40%.
In the long term, OpenText stock is keeping an eye on fiscal 2026. OpenText expects ARR growth of between 2% and 4%, reaching between $6.2 and $6.4 billion in revenue. Cash flow by this point should also hit $1.5 billion or more, with cloud bookings leading the path to growth.
Bottom line
OpenText stock continues to provide innovative products for its current and future clients but with a history of growing through acquisitions. Now, the company is shifting its focus again, aiming towards organic growth. Not just through where it’s had success in the past, but easy paths to success for the future.
It might sound simple, but it’s something Ranganathan says comes from a strong team.
“We were over-prepared for the [Micro Focus] transaction; we were over-prepared for integration [of artificial intelligence],” she said. “We are in control, but it came with hours and hours of work.”
