ii view: Micro Focus in confident mood

Software company Micro Focus International increases profit despite fall in six-month revenue.

First-half results for the six months ending 30 April 2019

• Revenue down 5.3% at constant currency to $1.66 billion
• Adjusted cash profit (EBITDA) up 1.8% to $662.3 million
• Adjusted earning per share up 8.4% to 85.53 US cents
• Adjusted net debt down 12.2% to $3.8 billion
• Interim dividend flat at 58.33 US cents

Chief executive Stephen Murdoch said:

"We have continued to make progress on our significant program of work to fully integrate the HPE Software business through the sustained application of the Micro Focus business model. As a result, we are pleased to reiterate full-year guidance."

ii round-up:

Micro Focus International (LSE:MCRO) provides legacy computer software to 40,000 customers, from airlines and healthcare to financial services and the public sector, in over 40 countries. Its software products help customers install, operate, and improve their IT infrastructure.

Its 14,000 staff are spread across five product areas including security, IT operations management and application delivery management.

Micro Focus has struggled to integrate the $8.8 billion of assets bought from Hewlett-Packard (HP) in 2017. But half-year results showed steady progress. Cost cutting linked to the integration of HP helped improve margins and adjusted profit. Although the loss of sales personnel caused an 11% decline in software licencing revenue, management says half of the 5.3% dip in constant currency group revenue was caused by deliberate action to improve Software as a Service (SaaS) and consulting revenue streams.

After completing the sale of its open–source software provider SUSE for a profit of $1.72 billion, Micro Focus returned $1.8 billion to shareholders. 

Management is now focused on building a more dynamic business where execution is faster, operations simpler and people more accountable. 

ii view:

The company’s diverse product offering and broad customer base offer clear appeal. Its business model underpins solid cash generation and returns to shareholders, returns which have been boosted by proceeds of $2.54 billion from the sale of its SUSE business. A forecast dividend yield of over 4% makes Micro Focus attractive to income seekers. Progress in addressing HP integration issues adds confidence and, despite a 40% increase in the share price already this calendar year, a forward price/earnings (PE) ratio of just over 11 times is hardly aggressive. That said, sales are tipped to fall this year, which might put off some investors.  

Positives: 

• Sale of SUSE demonstrates ability to manage its business portfolio
• Willingness to return excess capital to shareholders
• Forecast dividend yield of over 4%

Negatives:

• Licence revenue declined by 11.1%
• Full-year guidance for a 4-6% decline in revenue
• Exposed to currency swings

The average rating of stock market analysts:

Hold