Micro Focus COVID-19 costs: Carry the one, decimal 9 places to the right... hmm. Holy cow, it's a $1bn+ loss

Customers' decision to hit pause on spending compounds HP Software indigestion woes

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Things seem to be going from bad to worse for Micro Focus: its shares took a bath this morning on the back of a $1bn plus loss, largely due to a whopping goodwill impairment charge made to account for uncertainty caused by COVID-19.

The retirement home for legacy software brands was already facing internal challenges, a hangover from the buy of the much larger HP Software business that it swallowed for $8.8bn in 2017 and has struggled to integrate. Now the external threat facing Micro Focus is one that everyone, everywhere is confronting too.

Revenues reported for the first half of fiscal 2020 ended 30 April were down 12.2 per cent year-on-year to $1.45bn, with declines across all areas of the business.

"The group identified a slowdown in customer buying behaviour in April 2020 resulting in a deferral of projects involving new licence and service revenues as well as delays to some maintenance renewals. The impact of this is estimated to be at least 2 per cent on revenues in the period," said CEO Stephen Murdoch.

Application Modernisation & Connectivity was down 5.3 per cent to $226.1m; Application Delivery Management (ADM) fell 12.3 per cent to $315m; IT Operations Management (ITOM) plunged 20.5 per cent to $411.8m; Security was down 3.9 per cent to $306.2m; and Information Management & Governance fell 6.3 per cent to $194.5m. Some $400,000 of this revenue was deferred.

Licence revenue was down across all product groups by 21.3 per cent to $268m, and was the business area most impacted by the customers' spending pause. Maintenance dropped 7.4 per cent to $966m, mostly caused by ITOM and ADM business units. SaaS decreased 12.4 per cent to $125m, and Consulting was down 14.8 per cent to $96.1m.

“We have continued to rationalise unprofitable SaaS operation’s and practises and refocused resources and investments. This has to led to a revenue decline in all product segments and geographies as we reposition offerings and deliver product enhancements,” said the company.

Consulting, it added, was also hit by "delays in certain customers products where physical access to customer sites is required".

Micro Focus said sales were in line with earlier expectations.

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Profit before tax, excluding exceptional items, was $12.4m but taxation turned that into a loss of $11.7m. Heap on a series of exceptional items including a $922m goodwill impairment charge, and other things such as severance costs, and Micro Focus was left with a loss on its Profit and Loss accounts of $1.032bn.

Micro Focus, which over the years has wolfed down multiple buys including Borland in 2009, Attachmate in 2014, Serena Software in 2016 and HPE Software in that same year, said 70 per cent of its revenues are recurring in their nature with “broad based and longstanding relationships”.

Murdoch said the initiatives put in place to turnaround its fortunes are progressing, “albeit with the additional complexity and impact of the COVID-19 pandemic, which may require us to adapt our approach in response to the opportunities and threats arising from continued market disruption.

“Progress over the coming months will be focused on simplifying and strengthening our business operations, improving the way we sell to and serve our customers, and ensuring our product development is as relevant and effective as possible,” he said.

The plan is to stabilise revenue by 2023 but that looks to be challenged by the virus. Micro Focus expects to exit fiscal '20 with revenue 6 to 8 per cent lower than the prior year's $3.35bn, but that also now looks in doubt.

More than 90 per cent of Micro Focus' 12,000 employees are working from home during the crisis, the company revealed, and just 10 of its 101 offices remain open, mainly in Asia.

Micro Focus shares were down today by 13.15 per cent at the time of writing. ®

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