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Micro Focus |
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Tel: +44 (0)1635 32646 |
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Stephen Kelly Nick Bray |
Chief Executive Officer Chief Financial Officer |
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Financial Dynamics |
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Tel: +44 (0)20 7831 3113 |
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Giles Sanderson Harriet Keen Haya Chelhot |
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MICRO FOCUS INTERNATIONAL PLC
Preliminary results for the year to 30 April 2006
New management team in place
LONDON , June 29, 2006 - Micro Focus International plc ("Micro Focus", "the Company" or "the Group", LSE: MCRO.L) announces full year results for the year to 30 April 2006.
• Turnover US$143.7m (2005: US$150.6m)
• Operating profit before exceptional items* US$36.9m (2005: US$47.9m)
• EBITDA** before exceptional items* US$38.8m (2005: US$50.0m)
• Profit before tax US$22.6m (2005: US$32.6m)
• Basic earnings per share*** before exceptional items* 14.4 cents (2005: 18.6 cents)
• Net cash balance as at 30 April 2006, US$55.9m (2005: net debt of US$78.6m)
• Final proposed dividend of 4 cents per share; total dividend for the year of 6 cents per share
• Operating profit US$22.7m (2005: US$40.9m)
• EBITDA** US$24.5m (2005: US$43.0m)
• Basic earnings per share of 8.3 cents (2005: 14.3 cents)
• New management team in place
o Stephen Kelly joined as Chief Executive Officer on 1 May 2006
o Nick Bray joined as Chief Financial Officer on 3 January 2006
• Cost reduction programme to reduce fixed costs by approximately US$10.0m announced 6 April 2006 progressing well, with some savings already delivered in 4Q06
* Exceptional items are detailed in note 7
** EBITDA is reconciled to operating profit in note 6
*** Earnings per share are detailed in note 8
Kevin Loosemore , Chairman of Micro Focus, commented:
"Whilst the full year results reflected a disappointing year for the business, the Company is financially strong and generated strong cash flow from its operating activities.
"Having previously reported on the operational issues that lay behind our performance,we have made solid progress in addressing them. We identified the potential to reduce our fixed costs and consequently began a cost reduction programme in April. The programme was designed to improve overall returns while maintaining the fabric of the business and the Company's sales capability and is progressing well.
"I am delighted that, with the appointments of Stephen Kelly and Nick Bray, we now have a strong and experienced management team in place to drive the business forward. Micro Focus is focused on growth and I remain confident that the Company will deliver good value to all its stakeholders."
Stephen Kelly, Chief Executive Officer of Micro Focus, commented:
"The primary focus of the new management team is to continue to restore the business to achieve significant, sustainable, profitable growth and to enhance shareholder confidence over time.
"Tough action has been taken in regard to costs, the benefits of which we expect to flow through to operating profits in FY2007. Returning to sustainable revenue growth is the key factor that will determine the long term success of the Company and, while I believe we have broadly arrested the decline, our revenue outlook remains cautious as we stabilise and focus the business. In a short space of time, we have made many changes to drive alignment and operational excellence as well as initiating a broader review of the market and opportunities for growth. I look forward to providing a further update on progress at the half year."
About Micro Focus
Micro Focus provides software that enables customers to significantly enhance their existing or "legacy" applications in a modern context. Through improvement of existing systems, our customers are able to avoid the high risk of, and associated costs of replacement.
Chairman's statement
The past year has been very disappointing for the business. In September 2005 and February 2006 we revised downwards our expectations for growth for the year ahead. We have since made solid progress in addressing the operational issues that lay behind our performance, restructured the Company to reduce fixed costs and put a strong new management team in place. As we reached the end of the financial year, it was encouraging that we marginally exceeded our revised fourth quarter revenue expectations.
At the beginning of the second quarter, we reported that trading for August had been weaker than usual for two principal reasons: firstly, the rate of revenue contribution from our larger, global Systems Integrator (SI) partners had been slower than anticipated and secondly, disruptions within the sales force had delayed a planned expansion of the sales team.
As announced at the interim results, significant incremental revenue from our global SI partners was not anticipated in the second half of the year to 30 April 2006, given the size and nature of these organisations. However, we continue to focus on strengthening and expanding these relationships. We have also maintained a strong focus on strengthening our sales force as a priority for the business. There is still some work to do in this regard but we are pleased with the progress made to date.
A further update on trading was announced at the beginning of the fourth quarter due to a number of changes in trading which had occurred since the half-year end. These included delays in customer decisions and failure to close larger opportunities; the knock-on impact on maintenance revenues due to lower licence sales; and a reduction in the rate of closure of smaller deals.
We are pleased to report that, since then, we have successfully completed a small number of larger deals. While this portion of our revenues remains inherently lumpy, we continue to focus on it as an important element in improving our overall sales performance.
On 6 April 2006 the Company announced a cost reduction programme to improve overall returns while maintaining the fabric of the business and the Company's sales capability. We have made solid progress in this respect.
The Board is delighted to welcome Stephen Kelly as Chief Executive Officer and Nick Bray as Chief Financial Officer. Stephen joined Micro Focus on 1 May 2006. He has over 20 years experience in the software sector and was previously CEO of NASDAQ-listed Chordiant Software Inc. Nick joined Micro Focus on 3 January 2006. He has broad experience in the IT sector, both in the US and Europe and was previously Group Finance Director of London-listed Fibernet Group plc.
The Board would like to thank all of Micro Focus' employees for their continued hard work and commitment throughout the last year.
FY2006 was a disappointing year in many respects. However, the Board took decisive action to recruit a new, experienced management team which has implemented the rapid restructuring of the business. In Q4, it was encouraging to see that we exceeded our revised fourth-quarter expectations. Micro Focus is focused on growth and I remain confident that the Company will deliver good value to all its stakeholders.
Kevin Loosemore , Chairman
Initial thoughts from the Chief Executive Officer
In the short time since joining Micro Focus, I have been impressed by the quality of our employees and our technical expertise as well as our very strong customer and partner base.
While the full year results were disappointing and below those of the previous year, the Company is financially strong and has generated strong cash flow from operating activities. The cash balance at 30 April 2006 stood at US$56.1m.
The Company has an enviable customer base with fifty percent of turnover being derived from secure and predictable maintenance revenues. A significant proportion of licence fee revenues are from our channel partners. During the year we continued to successfully conduct direct sales business with many of the worlds leading companies.
The primary focus of the new management team is to continue to restore the business to achieve significant, sustainable, profitable growth and to enhance shareholder confidence over time.
The fundamentals of the business are strong - great customers benefiting from strong returns on investment, high quality products and committed and talented people. I believe that we have broadly arrested the decline and have the foundations for a future of profitable growth. FY2007 will be a transition year and driving the initial recovery of the licence business to deliver revenue growth will be a key focus.
In a short space of time, tough action has been taken in regard to costs and we have made many changes to drive alignment and operational excellence, as well as initiating a broader review of the market and opportunities for growth.
Outlook
Our business model dictates that revenue growth will be largely dependent on achieving increased licence sales. While we anticipate that a proportion of these will be larger deals, this revenue stream is inherently lumpy.
The smallest proportion of our revenues are derived from consultancy and it is anticipated that these revenues will remain a minor proportion of total revenues for the year ahead. Given the lower licence fee sales in the year to April 2006, as compared to those achieved in the prior year, we anticipate that maintenance revenues for the current year will be about the same as those reported in the year to 30 April 2006 (assuming that the retention rate of existing customers remains constant).
Returning to sustainable revenue growth is the key factor that will determine the long term success of the Company. Thus, management's emphasis will be on licence fee sales to drive growth in the year to 30 April 2007. In this regard, whilst our foundations are solid and we have made good progress in addressing the operational issues identified in the last financial year, our revenue outlook remains cautious as we stabilise and focus the business.
Licence revenues in the second half of the year to 30 April 2006 were $32.8m and our run rate currently reflects a similar level for the first half of 2007. Our ability to return to revenue growth will depend primarily on the development and execution of larger licence deals in the pipeline as we move through the year. We will provide a further update on progress at the half year.
Expenses are expected to reduce following the restructuring, the benefits of which we expect to flow through to operating profits in FY2007. Interest income is expected to increase as a result of increasing the Company's cash reserves.
Stephen Kelly, Chief Executive
Chief Financial Officer's review
At the point of listing on the London Stock Exchange on 17 May 2005, the Company acquired the entire issued share capital of Micro Focus International Limited by way of a share-for-share exchange, pursuant to which the previous shareholders of Micro Focus International Limited were issued and allotted three ordinary shares in the capital of the Company for every one ordinary share they previously held in Micro Focus International Limited. The results presented in the financial information therefore represent those of the Micro Focus International Limited group up to 17 May 2005 and the Micro Focus International Plc group from that date onwards.
Turnover for the year ended 30 April 2006 was $143.7m (2005: $150.6m). Whilst the year on year reduction was disappointing, we achieved a solid fourth quarter to end the year marginally above our revised expectations.
Turnover for the year by geographic region was as follows:
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2006 $'000 |
2005 $'000 |
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North America |
68,847 |
73,173 |
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Europe and the Middle East |
54,038 |
57,365 |
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Rest of the World |
20,803 |
20,107 |
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Total turnover |
143,688 |
150,645 |
Although the Group experienced declines in Europe and the Middle East and in North America, our strong overall performance in Japan, despite a difficult third quarter, contributed to a positive result for the Rest of World. Of the decrease in revenues of $7.0m, $4.3m was from our North American operation.
Turnover for the year by category was as follows:
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Year ended 30 April |
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2006 |
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2005 |
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2004 |
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$'000 |
% |
$'000 |
% |
$'000 |
% |
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Licence fees |
67,985 |
47.3 |
79,860 |
53.0 |
64,211 |
50.9 |
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Maintenance fees |
71,860 |
50.0 |
66,705 |
44.3 |
57,980 |
45.9 |
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Consultancy fees |
3,843 |
2.7 |
4,080 |
2.7 |
4,077 |
3.2 |
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Total turnover |
143,688 |
100.0 |
150,645 |
100.0 |
126,268 |
100.0 |
It can be seen that the reduction in total revenues for the year related primarily to the fall in licence fees of $11.9m or 14.9% to $68.0m for the year ended 30 April 2006 (2005: $79.9m). This reduction was in part offset by a $5.2m year on year increase in maintenance fees to $71.9m for the year ended 30 April 2006 (2005: $66.7m). Consulting revenues showed a modest decline but represent only a minor proportion of total revenues.
In the year ended 30 April 2005, the Company signed a number of high value licence fee deals, principally in North America. This success was not, however, replicated in the year to 30 April 2006 and the flow of smaller deals did not increase to compensate for this. While licence fee revenues decreased year on year, they remain above the level achieved for the year ended 30 April 2004 of $64.2m and of prior years.
Maintenance revenues are recognised evenly over the life of each contract, which is typically twelve months. As such, the profit and loss recognition of maintenance revenue lags the initial licence fee sale (assuming a constant retention rate of existing customers). Thus, maintenance revenues of $71.9m for the year to 30 April 2006 (2005: $66.7m) were ahead of the prior year in part due to improved licence fee performance in the year to 30 April 2005 compared to the year to 30 April 2004.
Costs
Cost of sales for the year ended 30 April 2006 increased by 10.9% to $12.1m (2005: $10.9m). The increase principally reflected higher temporary staff costs in our consulting organisation. Costs have since been reduced and the performance of this organisation is under critical review with further improvements required.
Selling and distribution costs for the year remained relatively flat at $48.5m for the year ended 30 April 2006 (2005: $48.1m). Reduced commission payments were offset by higher marketing, travel and other employee costs.
Research and development expenses for the year reduced by 2.9% to $17.1m (2005: $17.6m), driven primarily by the fact that no significant bonus amounts were paid to non-sales staff in the current year.
Underlying administrative expenses increased to $29.1m (2005: £26.1m). In part this was driven by the costs of being a public company. However, a number of expense items had been allowed to increase above expected levels and measures have been taken to bring these costs back to an appropriate level. Total administrative expenses for the year increased by 30.6% to $43.3m (2005: $33.1m). One-off IPO related costs of $6.9m were paid during the year.
On 6 April 2006, the Company announced a cost reduction programme. A number of potential savings have been identified which are expected to reduce Group fixed costs by approximately $10.0m in the financial year to 30 April 2007, the benefits of which we expect to flow through to operating profits in FY2007. Some of those saving have already been achieved in 4Q06. The programme was designed to improve overall returns while maintaining the fabric of the business and the Company's sales capability and is progressing well. The one-off charge for this cost reduction programme is $7.4m falling in the second half of the financial year to 30 April 2006.
Operating profit
Operating profit before exceptional items was $36.9m (2005: $47.9m). Operating profit for the year ended 30 April 2006 reduced by 44.4% to $22.7m (2005: $40.9m) as a result of the lower revenues and higher costs as detailed above.
EBITDA
EBITDA before exceptional items reduced by 22.5% to $38.8m for the year ended 30 April 2006. EBITDA reduced by 42.9% to $24.5m for the year ended 30 April 2006 from $43.0m for the year ended 30 April 2005.
Net interest income
The IPO proceeds allowed the Company to repay all its outstanding loan balances. Since this time, interest has been generated on the available cash balance. As a result, interest expenses reduced to $1.1m (2005: $8.7m), of which $0.7m relates to early payment penalties which the Company deemed appropriate to avoid higher interest charges.
Tax on profit on ordinary activities
Tax on profit on ordinary activities for the year ended 30 April 2006 reduced to $6.3m (2005: $11.6m). The Company has an effective tax rate of 28.1% (2005: 35.5%). The reduction in the effective tax rate reflects changes to the Group's structure resulting from the IPO in May 2005.
Profit for the financial year
The net profit after tax for the year ended 30 April 2006 reduced by 22.9% to $16.2m (2005: $21.0m).
Cash flow
For the financial year ended 30 April 2006, the Company generated a net cash inflow from operating activities of $35.0m (2005: $44.5m). At 30 April 2006, the Company's net cash balance was US$55.9m (2005: net debt of US$78.6m).
Dividend
The Board has adopted a progressive dividend policy reflecting the long-term earnings and cash flow potential of Micro Focus whilst targeting a level of dividend cover for the financial year ended 30 April 2006 of approximately 2.5 times on a pre-exceptional earnings basis. In line with the above policy announced at the time of the IPO the directors recommend payment of a final dividend in respect of 2006 of 4 cents per share, which, taken together with the interim dividend of 2 cents per share paid in January 2006, gives a total dividend in respect of 2006 of 6 cents per share. Subject to shareholder approval, the final dividend will be paid on 2 October 2006 to shareholders on the register on 8 September 2006.
Dividends will be paid in sterling based on an exchange rate of 1.82 US$/£, equivalent to approximately 2.2 pence per share, being the rate applicable on 28 June 2006, the date of recommendation of the dividend by the Board.
Nick Bray , Chief Financial Officer
Unaudited Preliminary Results Financial Statements and Notes
Preliminary results unaudited financial statements and notes
