Micro Focus shares up almost 30% as revenue decline less than expected in fiscal 2020

Is this turnaround plan working or is the COVID-struck biz world improving?

Shares in London Stock Exchange-listed Micro Focus are up by almost 30 per cent this morning after sales declines seen across the organisation slowed in the second half of its fiscal '20 ended 31 October.

A collection of fragmented legacy software assets, Micro Focus was nine months into a three-year turnaround strategy – as of October – though it is too early to tell if it's the market or the firm that's on the way up.

According to today's trading update for the 12 months, group revenue was around $3bn, down 10 per cent year-on-year on a constant currency basis, which was pretty much in line with management's forecasts.

In terms of a headline break down, licensing shrank 17 per cent in H2 versus 21 per cent in first six months of Micro Focus's financial year, meaning the annual decline came in at 19 per cent. This was down to "more consistent execution", the business claimed.

Sales of licences for the IT Operations Management (IOTM), Application Delivery Management (ADM), and Information Management and Governance (IMG) divisions improved, but Security, along with Application Modernisation and Connectivity (AMC), did not.

On the Maintenance front, revenue declined 6 per cent year-on-year on the back of a 7 per cent drop in the first half of the financial year and a 5 per cent dip in the second. Security and IMG improved but ITOM and ADM came in "below management's expectations".

"We are continuing to direct resources and execute operational plans to deliver sustained improvements in overall performance in this revenue stream," said Micro Focus.

Software-as-a-Service revenues slumped 12 per cent with a marginal improvement seen in H2, lifted by Security. Consulting was 12 per cent smaller than a year ago, as a decline of 15 per cent in H1 was followed by a 10 per cent drop in H2.

Earnings before income tax, depreciation and amortisation (EBITDA) – the only figure Micro Focus provided today – was up 39 per cent, "towards the upper end of our expectations," the business said. Cashflow was £700m and net debt was $4.2bn, down $400m on a year ago.

Micro Focus had been buying up software targets like they were going out of fashion. It all came to a head in 2017 when the company paid an eye-watering $8.8bn for the far bigger HPE Software and subsequently suffered integration worries. Since then the company has tried to correct course on a couple of occasions.

The latest efforts to improve its fortunes began in February, when chairman Kevin Loosemore, who joined the company in 2005 to lead its IPO, stood down.

"We are now nine months into our three-year turnaround plans for the group and whilst there remains a great deal to do I am pleased with the progress in both overall operational efficiencies and in the delivery of our key strategic objectives," said CEO Stephen Murdoch.

New personnel have been hired, with new training programmes and tools provided and a go-to-market atrategy tweaked. Among the multiple programmes being delivered is the project to move to one set of core IT systems, which is “on track” to be in place next year, the company said.

The tone of this update was more upbeat than in previous years, and the market reacted positively. The share price was up almost 30 per cent at the time of writing. But this was still well, well down – 10 times smaller – on the peaks seen in 2017. ®