Micro Focus reaches upper end of margin expectations in first half

Micro Focus said on Tuesday that it was expecting to report revenue of around $1.45bn (£1.19bn) for the first half, making for a decline of around 11% on a constant currency basis.

The FTSE 250 company said that was consistent with the guidance it gave in February, taking into account the expected disruption to new sales activity.

It said it had identified a slowdown in customer buying behaviour in April, leading to the deferral of some projects involving new licence and services revenues, as well as delays to some maintenance renewals.

The identifiable impact of that was estimated to be at least 2% on revenues in the period.

“The impact of this revenue reduction on Adjusted EBITDA has been largely mitigated due to the close management of variable and discretionary costs in addition to a reduction in certain costs as a direct result of Covid-19,” the board said in its statement.

As a result, its adjusted EBITDA margin of about 38% in the period was towards the upper end of its expectations.

Micro Focus said its cash flow performance was strong, and underpinned by effective working capital management.

The company ended the period with operating cash balances of $0.63bn, and net debt after IFRS 16 of $4.31bn.

It said its working capital management resulted in adjusted cash conversion above 100% in the first half of the financial period.

In addition, the group said it had drawn down $175m of its $500m revolving credit facility as a precautionary measure, and placed that in accessible money market facilities in order to further increase liquidity.

In total, it had $1.1bn of available liquidity as at 30 April.

“Micro Focus delivers mission-critical enterprise software to over 40,000 customers,” the board said.

“The majority of our revenues are contractual and recurring in nature and the resilience this affords can be seen in the company's ability to generate cash and manage costs to partly mitigate revenue weakness.”

It said that despite that resilience, the ultimate impact of Covid-19 on the global economy remained unknown, as did the timing and extent to which that impact would flow through into customer spending plans on enterprise software.

As a result, the board said it was not possible to provide reliable forward guidance in the current environment, with the directors withdrawing formal revenue guidance for the current financial year.

“As a minimum, we continue to believe it appropriate to be prepared for a level of disruption to our new sales activity and timing pressure on renewals.

“As a consequence, we are currently evaluating the potential impact on the carrying value of the group's intangible assets and goodwill at this point in time.”

Micro Focus said it reacted quickly to ensure a balanced approach to mitigating the immediate risks, while continuing to make progress on the actions taken as a result of its strategic and operational review.

“As such, the investments outlined as part of that review are broadly continuing as planned,” the board said.

“Outside of these investments, mitigating actions including a hiring freeze in all but exceptional circumstances, as well as reductions in all discretionary spending, are now in place.

“The group is prepared to implement further actions in reducing costs, in the event the pandemic has a prolonged impact on trading performance.”

Despite the current uncertainty, Micro Focus said its diversified and recurring revenue base and its “highly cash generative” business model represented “solid foundations” from which to execute any additional actions required.

Additionally, it said its business continuity plans had been thoroughly tested, and were proving robust.

“We have more than 90% of our people working from home and supporting our customers and partners effectively and we are proud of the commitment and determination of our teams in making this transition as seamless as possible despite the challenges.

“Our primary focus remains the health and safety of our employees and delivering for our customers and partners.”

At 0937 BST, shares in Micro Focus were up 7.37% at 453.1p.