ii view: Micro Focus shares crash to 19-month low

First-half results for this FTSE 250 software company have disappointed. We assess prospects. 

First-half results to 30 April 2022

• Revenue down 11% to $1.27 billion
• Adjusted profit (EBITDA) down 12% to $449 million
• Net debt down 13% to $3.65 billion
• Interim dividend down 9% to 8 US cents

Chief executive Stephen Murdoch said:

"In H1 we improved free cash flow, reduced leverage, and made progress against the strategic objectives we outlined in November. I am encouraged by the strides taken to become increasingly customer centric, building growth in key portfolios, and increasing our quality of earnings.

"We have delivered these results against an increasingly volatile market backdrop with customer demand to date remaining robust, demonstrating the mission critical nature of our solutions."

ii round-up:

Software company Micro Focus International (LSE:MCRO) today reported a lower interim dividend payment as both sales and adjusted profits fell due to an increasingly volatile market backdrop.

An 11% drop in sales pushed adjusted earnings (EBITDA) down 12% to $449 million, with an 8 US cent interim dividend declared compared to last year’s 8.8 cents. 

Micro Focus shares fell by more than 15% in UK trading to leave them down by more than 40% over the last year. Shares for both engineering software provider AVEVA Group (LSE:AVV) and IT security company Darktrace (LSE:DARK) are each down by around a third over that time. The tech heavy US Nasdaq Composite index is down by just over a fifth. 

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Micro Focus concentrates on product arenas including security, IT operations management and application delivery management. Its army of software engineers enables it to help clients bridge older software programmes and technologies with newer and emerging products.

A suspension of its operations in Russia during the period hindered its revenue performance, although a strong focus on cashflows and costs resulted in improvements in both. Free cashflow gained by just over a third year over year to $190 million, while its cost base is now expected to reduce by around $150 million on an annualised basis. Group net debt fell 13% to $3.65 billion. 

Accompanying management comments highlighted both employee wage inflation and a more challenging recruitment environment due to changes in work practices following the pandemic. Management estimates for full-year revenues, costs and cash are unchanged. 

ii view:

Started in 1976, Micro Focus today employs over 11,000 people across more than 45 countries and describes itself as one of the world’s largest enterprise software providers. Headquartered in Berkshire in the UK, its global customer base includes Bayerische Motoren Werke AG (XETRA:BMW), China Telecom, Airbus SE (EURONEXT:AIR) and Sky. Current strategic objectives include becoming more product centric, increasing innovation, and cutting costs. 

For investors, falls in both revenues and adjusted profit emphasise ongoing challenges, while net debt of $3.65 billion (£3 billion) compares to a stock market value of around £1 billion. Meanwhile, the competition is not standing still.  

More favourably, refocused strategic goals were laid out in November, with pushes to cut costs and reduce debt ongoing. It also enjoys both diversity of product and geographic footprint. In all, Micro Focus's chequered past has not always been kind to investors and the shares are often volatile. The dividend is down, too, although there is an estimated forward yield. There is certainly potential here, but the shares are for brave investors only. 

Positives: 

• Executing a recovery programme
• Attractive dividend yield (not guaranteed)

Negatives:

• Both sales and adjusted profit continue to fall
• Clouded economic outlook

The average rating of stock market analysts:

Strong hold