ii view: shares slump after Micro Focus plunges into the red

Shares of this billion-pound UK software company are down more than 60% in 2020. 

Half-year results to 30 April 2020

• Revenue down 12% $1.45 billion
• Impairment charge of $922.2 million
• Operating loss from continuing operations of $906 million, down from a profit of $32 million
• Net debt up 13% to $4.3 billion
• No interim dividend 

Guidance:

• Macro-economic conditions are unlikely to improve in the second half of the financial year 
• Prepared for further disruption to new sales activity & timing pressure on renewals

Chief executive Stephen Murdoch said:

"I am proud of our employees' resilience and professionalism throughout the unprecedented disruption caused by the Covid-19 pandemic.  Micro Focus' business continuity plans have been highly effective and we continue to adapt our working practices to continue supporting our customers and partners. Our performance during the period has been consistent with our guidance and the successful refinancing of our debt despite the challenging market conditions demonstrates confidence in the underlying strengths of our model. 

“Going forward, we see significant opportunities to improve our business and we will continue to progress initiatives to strengthen and simplify our business operations, and stand ready to take further actions if required in these uncertain times."

ii round-up:

Software company Micro Focus (LSE:MCRO) today reported an operating loss of over $900 million, hit by an exceptional charge taken to cover expected sales disruption and timing pressure on renewals due to the Covid-19 pandemic. 

The UK firm, now battling a headwind from coronavirus, was already in the middle of a transformation programme following previously disappointing performance. 

Micro Focus shares were down 14% at lunchtime trading, having fallen by more than 60% year-to-date. Shares for rival UK software companies Sage (LSE:SGE) and AVEVA Group (LSE:AVV) Group are down around 11% for 2020 and up over 170% each over the last 10 years.  

Micro Focus’s 12,000 staff are spread across five product areas including security, IT operations management and application delivery management. Employing over 4,000 software engineers, it focuses on enabling clients to bridge existing and emerging technologies.

Sales last year for continuing operations fell by nearly a third. In March, and given Covid-19 uncertainties, it scrapped a proposed final dividend of 58.33 US cents per share. It today proposed no interim dividend, although does intend to pay a final dividend for this year if prudent, given both its own performance and the economic backdrop. 

Progress over the coming months will be focused on simplifying and strengthening its operations, improving the way it sells to and serves its customers, and making product development as relevant and effective as possible.

Its available cash liquidity totals $1.1 billion. It supplies computer software and services to over 40,000 customers including BMW (XETRA:BMW), Allianz (XETRA:ALV) and Accor Hotels.

ii view:

Micro Focus generates approximately 70% of revenues from recurring sources. Its 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.

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, the company's recurring revenue base and cash generative business model have historically supported shareholder returns. A strategic review and transformation programme to try and improve performance offer longer-term hope. But Covid-19 uncertainty and disruption have compounded an already misfiring business, with the suspension of the dividend payment removing a key investor attraction. For now, investors may wish to wait for firm evidence of recovery before adding to existing holdings. 

Positives: 

• Around 70% of revenues from recurring sources
• No term loan maturities until June 2024

Negatives:

• Both sales and adjusted profit continue to fall
• Dividend payment suspended

The average rating of stock market analysts:

Hold