Sign up UNITED KINGDOM
Proactive Investors - Run By Investors For Investors

Micro Focus shares plunge as it warns on revenue after decline at HPE software unit

Micro Focus has appointed former ARM Holdings executive Chris Kennedy as its new chief financial officer
technology
Micro Focus was the biggest faller on the FTSE 100 in morning trading

Micro Focus International PLC (LON:MCRO) delivered a sharp rise in half-year revenue in its first set of results to include the recently acquired software business of Hewlett Packard Enterprise.

Revenue, including a two-month contribution of US$569.8mln from the HPE software unit, jumped 80.7% at constant currency to US$1.2bn in the six months to 31 October 2017, compared to the same period a year earlier.

READ: Deutsche Bank downgrades Micro Focus to ‘hold’ from ‘buy’ on valuation grounds

Excluding HPE software, however, revenue dropped 2.7% at constant currency to US$664.7mln, reflecting a weak performance in the company’s existing product portfolio.

The company, which completed the takeover of HPE software in September last year, said pre-tax profit for the period grew 33.8% to US$145.7mln and adjusted underlying earnings (EBITDA) increased 67.7% to US$530.1mln, both at constant exchange rates.

Full year revenue to decline

However, the company warned that the integration of HPE software could delay the division's return to revenue growth and impact its overall results for the year. 

It expects the HPE software revenue trend to "continue its historical decline until the transformation has been fully executed and the benefits take hold". The last set of results from the business showed a 3% drop in third quarter revenue to US$718mln.

Susequently, Micro Focus anticipates total revenue to fall 2-4% in the year to 31 October.

The acquisition of HPE also saw net debt widen to US$4.1bn at 31 October from US$1.4bn at 30 April.

Shares fell 14.7% to 2,201p in morning trading.

Micro Focus confident on outlook as it hikes dividend

Executive chairman Kevin Loosemore said the board is still confident that medium-term "low single digit" revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on its strategy.

“These returns can be further enhanced by appropriate deployment of capital in value enhancing acquisitions," he said.

Micro Focus is targeting long-term shareholder returns of 15% to 20% per year.

The interim dividend was lifted 16.4% to 34.6 cents per share, in line with the group’s policy of the full year dividend being twice covered by adjusted earnings.  

Lower US tax rate expected 

The company expects US President Donald Trump's sweeping tax reforms will result in a tax rate of 25% in the future, compared to expectations of more than 30%.

It estimates a US$600mln to US$700mln one-off credit to its income statement for the period to 30 April 2018.

Numis cut its rating on Micro Focus to 'add' from 'buy' but raised its target price to 2,980p from 2,800p, saying the company's interims missed the broker's expectations but its guidance implies a lower-than-expected US tax rate.

"Micro's six months to Oct-17 is, on a pro-forma basis, about 1-2% behind our expectations, but guidance indicates a materially lower tax rate (25% vs 30-33%) than we had forecast, which gives about 9% earnings per share and 5% free cash flow upgrades despite downgrading our operating forecasts consistent with the 1-2% 2017 shortfall".

It added: "Overall the operating underperformance is modestly disappointing but more than offset by tax, and the building blocks are clearly in place for delivery of the long term strategy."

Former ARM executive appointed as CFO

In a separate announcement, the group said chief financial officer Mike Phillips will move to the role of director of mergers and acquisitions. Chris Kennedy, the former CFO of ARM Holdings PLC (LON:ARM) and group finance director of easyJet (LON:EZY), will assume the position.

The company also announced the appointment of Ian Fraser as chief human resources officer.

“Both Chris and Ian bring recent relevant experience in functional terms and also in dealing with listed businesses of scale in the UK and US and we welcome them to the team,” said Loosemore.

View full MCRO profile View Profile

Micro Focus Timeline

Related Articles

office computers
September 05 2017
The EG board has recommended Verint’s offer of 112.5p a share
Office productivity
September 11 2017
It would have been somewhat embarrassing had an office productivity software firm not got its flagship product delivered on time, but fortunately BOS did
Medical scientist
March 08 2018
Since its trading update on January 16, the stock has risen from 143p to 227p, a gain of almost 59%

No investment advice

The Company is a publisher. You understand and agree that no content published on the Site constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable or advisable for any specific person. You further understand that none of the information providers or their affiliates will advise you personally concerning the nature, potential, advisability, value or suitability of any particular security, portfolio of securities, transaction, investment strategy, or other matter.

You understand that the Site may contain opinions from time to time with regard to securities mentioned in other products, including company related products, and that those opinions may be different from those obtained by using another product related to the Company. You understand and agree that contributors may write about securities in which they or their firms have a position, and that they may trade such securities for their own account. In cases where the position is held at the time of publication and such position is known to the Company, appropriate disclosure is made. However, you understand and agree that at the time of any transaction that you make, one or more contributors may have a position in the securities written about. You understand that price and other data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that neither such data nor such calculations are guaranteed by these sources, the Company, the information providers or any other person or entity, and may not be complete or accurate.

From time to time, reference may be made in our marketing materials to prior articles and opinions we have published. These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current. As markets change continuously, previously published information and data may not be current and should not be relied upon.

© Proactive Investors 2018

Proactive Investors Limited, trading as “Proactiveinvestors United Kingdom”, is Authorised and regulated by the Financial Conduct Authority.
Registered in England with Company Registration number 05639690. Group VAT registration number 872070825 FCA Registration number 559082. You can contact us here.

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use