ii view: Micro Focus shares tumble on interim results day

Sales remain in retreat, but can investors dismiss a partnership with Amazon AWS? 

Half-year results to 30 April 2020

• Revenue down 2% $1.4 billion (£1 billion)
• Operating loss from continuing operations of $155 million, reduced from a loss of $906 million 
• Adjusted profit (EBITDA) fell 7.7% to $519 million (£374 million)
• Net debt down 4.5% to $4.3 billion (£3 billion)
• Interim dividend of 8.80 US cents.
• Full-year guidance unchanged

Chief executive Stephen Murdoch said:

"We are pleased with a period of further solid progress in most areas of our business. The product investments and operational changes we are making are beginning to deliver performance improvements, and our value propositions are resonating with customers and partners, as demonstrated by the signing of the significant, long term commercial agreement with AWS.

“Our recovery programme and specifically our systems transformation are progressing as planned despite the challenges of executing this within the constraints of a global lockdown. 

“Whilst there is a great deal to do, we are encouraged by our progress and remain committed to delivering revenue stabilisation and sustainable cash flow generation for our shareholders."

ii round-up:

Software company Micro Focus (LSE:MCRO) today reported a smaller operating loss as it paired down costs in its ongoing battle to both reignite growth and overcome headwinds from the global pandemic. 

A loss of $155 million for the six month to the end of April contrasted with a loss this time last year of $906 million. Management forecasts for the full year remain unchanged, with a stabilisation in revenue come the end of the financial year 2023 heading its objectives. 

Micro Focus shares fell by more than 8% in UK trading, having gained by around 50% since pandemic market lows in March 2020. Shares in IT support firms Kainos (LSE:KNOS) and Computacenter (LSE:CCC) are both up by more than 140% over that time. 

The reduced loss follows an impairment charge of $922.2 million taken this time last year. Adjusted profit, or EBITA fell by fell 7.7% to $519 million. A declared interim dividend of 8.80 US cents per share, leaving the company on track to pay a full-year dividend totalling 26.4 US cents per year according to broker UBS. 

Micro Focus products target areas such as security, IT operations management and application delivery management. Its army of software engineers enables it to help clients to bridge older software programmes and technologies with newer and emerging products.

A COBOL system developer - a programming language used for transaction processing - Micro Focus hit issues following its 2017 purchase of HPE Software for $8.8 billion. It is in the second year of a three-year turnaround programme. A strategic partnership with Amazon's (NASDAQ:AMZN) AWS is now in place. Other partnerships announced include those with Microsoft (NASDAQ:MSFT) Azure and Snowflake (NYSE:SNOW). 

ii view:

Micro Focus products support mission critical business applications, central to some of the world's largest companies. Its customers are geographically diverse and often multi-national across a range of sectors. Its 40,000-plus customers include the likes of BMW, Allianz and Accor Hotels. The US provides its biggest slug of sales at around 40%. In product terms, maintenance heads the list at over 60% of revenue, followed by licences at just over a fifth. 

New strategic initiatives following disappointing performance, include accelerating the move of certain products to subscription fees and transforming its go-to-market function to improve sales effectiveness. 

For investors, retreating revenue and adjusted profit continues to flag ongoing challenges. Net debt of $4.3 billion (£3 billion) compares to a stock market value of £1.72 billion, while competition in many of its arenas is intense. Yes, progress is being made, including new partnerships, and the dividend is being paid, with the shares now stand on a forecast dividend yield of over 4%. However, the shares do carry extra risk just now and confidence in the City is low.  Investors may wish to continue watching for firmer evidence of recovery before taking action.  

Positives: 

• Executing a recovery programme
• Dividend restarted

Negatives:

• Both sales and adjusted profit continue to fall
• Covid clouded outlook

The average rating of stock market analysts:

Strong hold