ii view: bullish Micro Focus starts paying dividend again

Do better sales and further progress for its turnaround programme make this IT company a buy?

Full-year results to 31 October 2020

Chief executive Stephen Murdoch said:

"We are now 12 months into our three-year turnaround plan and whilst there remains a great deal to do, we have made solid progress in delivery of our key strategic objectives and improvements in operational effectiveness. We continue to work closely with our customers around the world enabling them to build on their existing IT investments with the latest innovations to help accelerate their digital transformation programmes."

ii round-up:

Software company Micro Focus (LSE:MCRO) today reported progress one year into its three-year recovery plan, as sales fell by a more modest 9% in the second half compared to 11% in the first half. Annual revenue was down 10% at $3 billion. Profit margin of 39% was towards the upper end of expectations. 

Confidence in the recovery plan was underlined by the reinstating of a dividend payment following its suspension this time last year, with a sole payment for the year of 15.5 US cents, or 11.3p per share declared.

Micro Focus shares rose by more than 6% in UK trading, leaving them up by more than 120% since late October, but still down by around a third over the last year. Shares for rival UK software companies Sage (LSE:SGE) and AVEVA Group (LSE:AVV) are down by 24% and 11% over the last year.

The company's software engineers offer it the ability to bridge client’s existing and emerging technologies. It supplies computer software and services to over 40,000 customers. Its specialist product areas include IT operations management, IT security and application modernisation & connectivity. 

Adjusted profit for the year fell 13.6% to $1.17 billion as it battled both operational customer challenges caused by the pandemic and prior performance difficulties. Statutory, or unadjusted earnings, saw it report a near $3 billion loss following an impairment charges of $2.8 billion in relation to its previous acquisition of Hewlett Packard’s software business.

Management continues to execute multiple programmes to deliver improved operational effectiveness and agility. This includes simplifying operations and strengthening its product portfolios Most of its revenues are contractual and recurring in nature, a point it is working hard to extend further. 

Accompanying outlook comments highlighted sequential improvement in revenue performance, with momentum continuing into the first quarter of 2021.

ii view:

As a software provider to businesses, Micro Focus employs around 12,000 staff in over 40 countries. Its products support mission critical business applications, central to some of the world's largest companies. Customers are geographically diverse and often multi-national across a range of sectors.

For investors, early progress in its previously launched turnaround programme offers ongoing hope. The reinstatement of the dividend payment is clearly favourable, helped by its recurring revenue base and cash generative business model. New strategic initiatives such as accelerating the move of certain products to subscription fees and transforming its go-to-market function to improve sales effectiveness are steps in the right direction. A recent business win to help Amazon (NASDAQ:AMZN) cloud customers is also a big positive. But a more than doubling in the share price since late October offers some room for caution.

Positives: 

• High proportion of recurring revenues
• Reinstated the dividend payment

Negatives:

• Both sales and adjusted profit continue to fall
• Ratio of net debt to adjusted profit rose to 3.5 times, from 3.2 times

The average rating of stock market analysts:

Strong hold