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Wednesday 11 July 2018

Micro Focus: rate of revenue decline slowing, integration pace picking up

logoFirst pass takeaway from Micro Focus interim results is that the HPE Software integration programme is gaining pace after its initial challenges, with executive chairman Kevin Loosemore commenting that “since March there has been an improved momentum in the HPE Software integration process and a slowdown in the rate of revenue decline. This has led to revenues for the period being at the better end of management guidance.”

For the six months to 30 April 2018 pro forma constant currency revenue declined 8% to $1.97bn but there was a 6.4% improvement in pro forma adjusted EBITDA to $710.5m, with the pro forma adjusted EBITDA margin rising 4.2 percentage points to 36% and the expectation that it will reach 37% for the full year, the mid point of guidance.

The integration is running approximately a year behind the original plan resulting, as previously announced, in lower than expected revenues for the year. However, management believes that by the year ending 31 October 2020, revenue declines will have stabilised and the group will be delivering adjusted EBITDA margins in the mid-40% area. It remains highly cash generative - $672m generated from operations during the period, an 121.5% increase.

What comes across from the discussion around the results is open recognition of the problems, from too much complexity to not enough pace and inconsistent application of the Micro Focus operating model across the enlarged group, and work still needed in several areas. But importantly Micro Focus is acting fast and acting iteratively - for example the operating model is being applied “fully and robustly” says CEO Stephen Murdoch, while the business is being simplified, costs taken out and the sense of urgency and “tone” improved.

With its hybrid IT strategy and focus on “bridging the old and the new", the company has a strong story. The challenge is managing a set of products that range from double digit growth to those in revenue decline as each also moves though its own lifecycle - but Micro Focus has previously proved itself adept at this. There are execution improvements to be made (and the level of work is not being underestimated) and changes to the portfolio such as the proposed sale of SUSE, but despite a dip in the share price this morning there is a sense that goals are achievable within known timeframes. 

Posted by Angela Eager at '09:49' - Tagged: results   software  

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