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Micro Focus prepares for private ownership, turnaround still WIP

Russia and strong dollar weigh heavy on 2022, but OpenText is ready for COBOL expert

Unaudited fiscal 2022 financial results for Micro Focus indicate that potential new owner OpenText still has some work to do to convert the app and infrastructure management software house into a growth engine.

London Stock Exchange (LSE) listed Micro Focus today revealed revenue for the 12 months ended 31 October was down 7 percent – in constant currency, the only figure detailed – to $2.5 billion.

This includes the circa 1 percent impact of the company withdrawing from Russia and an impact from the strength of the US dollar versus the British pound.

License turnover was down 9 percent, maintenance dropped 7 percent and consulting was down 3 percent. The only uplift in the business came from software-as-a-service, which grew 9 percent.

Earning before income tax, depreciation and amortization (EBITDA) slipped to $900 million from $1 billion, despite the drop in revenues, because Micro Focus jettisoned some $200 million worth of expenses in the year.

"In FY22 we continued to make significant progress against our strategic initiatives," said CEO Stephen Murdoch, who took over in 2018 following a brief stint where former HPE Software boss Chris Hsu was in charge.

He said Micro Focus has morphed into being "increasingly customer centric," was "building growth in key portfolios," and "delivering cost savings and improving cash generation."

"To date, demand has remained robust in the face of an increasingly volatile market backdrop, demonstrating the importance of our solutions to customers," the CEO added.

The wares sold by Micro Focus are designed to build, manage, test and modernize applications, and a chunk of its operation still centers on support for COBOL. It has 300 products spread across five divisions.

A three-year turnaround blueprint was written by Murdoch at the start of calendar 2020. It involves spending more on R&D, improving sales channels, hiring more staff, revamping training programs, modernizing its own internal tech infrastructure, switching more license business to SaaS and pushing more deeply into big data and security.

The numbers haven't markedly improved in that timeframe. The problems actually stem from the purchase of the much larger HPE software business in 2018, which Micro Focus has struggled to digest. The task of managing this fell to Murdoch and the bad situation was compounded by a certain pandemic that the world had to navigate.

In between trying to improve the health of the business, the CEO also sold SUSE for $2.5 billion to pay down some of Micro Focus's debts and the company has since itself become the subject of takeover interest from Open Text, which bid $6 billion for Micro Focus in August.

"The acquisition by OpenText will create one of the world's largest software and cloud businesses with marquee customer base, global scale and comprehensive go-to-market platform," said Murdoch.

Micro Focus shareholders approved the all-cash offer by OpenText last month but the purchase remains subject to regulatory clearance. It'll again be one less British tech stock traded on the LSE.

Tom Kennedy, analyst at Megabuyte, said that although the "headline" figures show declining revenue and EBITDA," the story behind the numbers is more of Micro Focus's continued transition away from licenses and support to a SaaS-based model.

"On top of this, the company is continuing to make significant progress on its cost-cutting measures," he added. Micro Focus's net debt is $3.5 billion. ®

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