ii view: Micro Focus hammered as sales estimates cut

IT company Micro Focus is suffering slower sales, so management is rushing through a strategic review.

Trading update

• Full-year constant currency revenue guidance downgraded to -6% to -8% from -4% to -6%
• Accelerating a strategic review of the company's operations

Chief executive Stephen Murdoch said:

"Following the recent disappointing trading performance, we have determined that it is appropriate to accelerate the undertaking of a strategic review of the Group's operations with a view to determining where performance can be improved and how the business can be better positioned to optimise shareholder value. We are fully committed to meeting the needs of our customers through the ongoing delivery of innovation within our exceptional product portfolio.  Whilst the review is taking place management will continue to drive previously targeted improvements in business performance and execute the operational initiatives already in place."

ii round-up:

Computer software and services company Micro Focus International (LSE:MCRO) supplies over 300 products to more than 40,000 customers, helping them run and transform their businesses. 

Listed on both the London and New York stock exchanges, its 14,000 staff are spread across five product areas including security, IT operations management and application delivery management.

For a round-up of its trading update, please click here.

ii view:

Investor trust is hard to win and easily lost. Against a backdrop of economic and Brexit uncertainty, an unscheduled and negative trading update has been severely punished - the share price fell over 30% in early UK trading. Analyst downgrades to forecasts will likely follow. 

A strategic review of the business focusing on what in addition to execution improvements is required to optimise the value of its broad product portfolio, offers longer-term hope. The $8.8 billion of assets bought from Hewlett Packard Enterprise (NYSE:HPE) (HP) in 2017, and which it has struggled to integrate, may prove a core focus.

For investors, a forward single digit price/earnings (PE) ratio certainly does not look stretched for a major technology company, and a prospective dividend yield in the region of 6% may compensate for likely required patience. However, given the company's current challenges and series of negative trading updates, more cautious investors may wish to wait for the full strategic review before taking any action.  

Positives: 

• Sizeable pipeline of potential sales confirmed by management
• Accelerating a strategic review of the company's operations
• Previous sale of SUSE demonstrates ability to manage its business portfolio

Negatives:

• Full-year revenue guidance further downgraded
• Deteriorating macro environment
• First-half licence revenue declined by 11.1%

The average rating of stock market analysts:

Weak hold