Micro Focus bounces as it gets on top of HPE integration
Micro Focus said it was getting on top of the integration of the acquired HPE software business as it reported that the rate of revenue decline had eased off as last year went on and was expected to improve in 2019.
FTSE 100
7,895.85
16:59 19/04/24
FTSE 350
4,341.08
17:09 19/04/24
FTSE All-Share
4,296.41
17:08 19/04/24
Micro Focus International
532.00p
16:40 30/01/23
Software & Computer Services
2,337.16
17:09 19/04/24
Management said they will return the proceeds of the $2.5bn sale of its SUSE business after it completes before the end of March and will keep the share buyback scheme going.
For the pro-forma 12-month period to 31 October, including the HPE Software business acquired in September 2017, Micro Focus generated revenues of $4.1bn, down 5.3% on the previous year. Guidance had been given for a drop of 6-9%, after a profit warning almost a year ago due to troubles with the HPE integration.
Revenue from the product portfolio, excluding SUSE, slipped 7.1% on a pro-forma constant currency basis to $3.7bn, with adjusted earnings before interest, tax, depreciation and amortisation improving 8.6% to $1.4bn as margins improved to 38.4% from 33.3% the year before.
Chief executive Stephen Murdoch, who took back the reins when ex-HPE man Chris Hsu jumped ship alongside the profit warning last March, said the stabilisation of revenue performance was due to recent operational improvements, while the continued expansion in profit margins were two "encouraging signs of early progress" with the HPE business.
He said the troubles reported for the first half of the year were felt to be "largely one-off transitional effects" of the merger, "rather than underlying issues with the end market of the product portfolio". Since then, he said there has been a restructuring of the organisation to better align customer coverage and improve engagement with customers.
"There is a great deal still to do to build the operational foundations and flexibility we want as we drive to capture fully the significant opportunity ahead in both the existing business and the market more broadly."
With free cash flow of $755.4m in the 12-month period and pro forma earnings per share more than doubling to 155.8 cents, the annualised total dividend was lifted 14.5% to 100.84 cents.
Net debt stood at $4.3bn at the end of October, up from $1.4m at the end of April 2017 and 2.8 times the size of adjusted EBITDA.
Following on from the $400m share buyback that finished this week, directors have authorised a further $110m to take the total buy-back to $510m, with further authority being sought at next month's annual meeting to continue the buying.
Murdoch felt it was a "solid" financial performance and told investors to expect a further moderation of the revenue decline for 2019.
At constant currencies, revenue for the continuing business is being guided to fall 4-6% for the 12 months to 31 October 2019, with a continued target of bringing net debt to below 2.7 times adjusted EBITDA, with a regular dividend twice covered by adjusted earnings.
"The Micro Focus operating model delivers substantial cash returns to shareholders," he said, explaining the intention is to return the net proceeds from the sale of SUSE after tax, transaction costs and any required debt repayment.
"I am pleased with the financial and operational progress we have made over recent months as we continue to build a more dynamic environment where execution is faster, operations simpler and people more accountable, all of which is focused on delivering value to customers and shareholders for the long-term."
MARKET REACTION & GUIDANCE
Shares surged more than 11% to 1,689.5p on Thursday morning but are still a long way off the 2,500p-plus they were enjoying a year ago.
Broker Numis said the Micro Focus had outperformed year-end guidance both in revenue and cash terms, with net debt also ahead.
"Guidance for underlying CCY revenues of -4% to -6% in FY19, combined with outperformance in FY18, should we think lead to consensus revenue and EBITDA upgrades for FY19 of c.3%.
"While there remains significant work still to do, we view these results as another significant step in the rehabilitation of Micro Focus. We believe that the shares can continue to perform strongly, with the next significant event being the sale of SUSE by end March and subsequent capital return."
Russ Mould, investment director at AJ Bell, said complications of the HPE software integration were "inevitable" but the company is now "showing signs of putting the whole sorry episode behind it".
The results "show some signs it can regain its credibility with investors" referring to the Micro Focus management team's well-earned reputation for generating cash in the first part of this decade, having returned some 600p per share in ordinary and special dividends between 2011 and 2017.
“Although it is a technology company, what Micro Focus does is fairly simple, even prosaic, but it has also proved very lucrative over time.
“Essentially it helps refresh legacy IT systems for large organisations to make them fit for purpose in meeting the challenges posed by developments in areas such as cloud computing and e-commerce.”