January 8, 2018 / 12:40 PM / 12 days ago

Micro Focus International sinks after results, outlook disappoints

LONDON (Reuters) - Britain’s Micro Focus International (MCRO.L) said its revenue would fall this year after disappointing sales from the software assets it bought from Hewlett Packard Enterprise (HPE.N) (HPE), sending its shares down 17 percent.

Results for the FTSE 100 company for the six months to the end of October 2017, including a two-month contribution from HPE, fell short of some analyst expectations.

The forecast for a 2-4 percent top-line decline in the 12 months to the end of October 2018 also disappointed those looking for broadly flat guidance.

The $8.8 billion (£6.5 billion) deal to buy HPE’s software business catapulted Micro Focus into the top tier of European tech companies but has had teething troubles.

Chief Executive Chris Hsu said the firm, which licenses legacy software to major corporations, was “disappointed with sales execution primarily in our Americas region” for the HPE business.

“There are areas where we can improve on our performance,” he said in an interview on Monday.

“We think the revenue performance will continue to be bumpy through the first quarters as we integrate the two organisations and put the changes in place that we need to build the company for the long term.”

CHANGE OF ROLES

Revenue in Micro Focus’s existing business fell 2.7 percent in the six-month period as anticipated, it said. Revenue for the HPE assets for a full 12 months to the end of October came in at the low end of its $2.89-$2.96 billion guidance.

FILE PHOTO: A sign stands outside the offices of Micro Focus in Newbury, England, September 8, 2016. REUTERS/Eddie Keogh/File Photo

It also said finance director Mike Phillips would move to a new role of M&A director while it had appointed Chris Kennedy, previously finance chief at ARM and easyJet, to replace him.

Phillips will look for more acquisition opportunities in the consolidating sector, Hsu said, leaving the HPE integration to the chief operating officer and others.

Micro Focus targets profitability over revenue growth, often by boosting the margins on software that had been neglected by previous owners as they concentrated on developing new products.

    The strategy aims to deliver shareholder returns in the range of 15 percent to 20 percent a year.

    It was achieving core earnings margins of more than 46 percent before the deal, but the lower margin HPE business dragged them down to 42.9 percent for the period.

    Hsu, however, said the HPE margin had already started to shift, improving 840 basis points to 29.1 percent from the 20.7 percent margin in the 12 months to end-April 2016.

    Shares in Micro Focus, which have more than doubled in the last two years, fell to a five-month low of 2,129 pence. They were trading down 15.5 percent at 2,182 pence at 1210 GMT.

    Analysts at Numis said on a pro-forma basis the results were about 1-2 percent behind their expectations, but a materially lower tax rate than it had expected would boost earnings per share and free cash flow.

    “Overall the operating performance is modestly disappointing but more than offset by tax, and the building blocks are clearly in place for delivery of the long-term strategy,” the broker said.

    Editing by Louise Heavens and Keith Weir

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