Micro Focus International plc—Interim results for the six months ended 31 October 2016

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L), the international software product group, announces unaudited interim results for the six months ended 31 October 2016.

13 December 2016

Please click here to view the full 51-page report (PDF).

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L), the international software product group, announces unaudited interim results for the six months ended 31 October 2016.

Revenues in the period were $684.7m, 14.2% higher than the prior year's constant currency ("CCY") figures. Underlying Adjusted EBITDA of $320.3m was 20.9% higher than that delivered in the comparable period at CCY.

Pro-forma CCY* revenues increased 1.2% to $684.7m in the six months ended 31 October 2016, slightly ahead of the guidance range for the full year. Adjusted Diluted EPS in the period increased by 20.5% to 89.20 cents.

In March 2016 the Company announced it had entered into a definitive agreement to acquire the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. and its subsidiaries (together, "Serena" or "the Serena Group"). The acquisition completed on 2 May 2016 and consequently trading results of Serena are included in the results for the six months ended 31 October 2016 set out below.

In September 2016 the Company announced it had agreed with Hewlett Packard Enterprises ("HPE") to merge with the software business assets of HPE ("HPE Software") by way of merger with a wholly owned subsidiary of HPE. The transaction is expected to complete in the third quarter of the calendar year 2017. Exceptional pre-acquisition costs have been incurred in the period and further exceptional costs will be incurred for the remainder of the FY17 and to completion in FY18.

Key highlights

  • Pro-forma CCY* revenue growth of 1.2%, driven by:
    • Strong performance by the SUSE Product Portfolio where revenues grew by 23.3% on a pro-forma CCY* basis;
    • On plan performance in Micro Focus portfolio with expected reduction in maintenance and Serena revenues.
  • On a CCY basis:
    • Total revenues of $684.7m (2015: CCY $599.6m), an increase of 14.2%.
    • Adjusted EBITDA** of $332.5m (2015: CCY $271.7m), an increase of 22.4%.
    • Underlying Adjusted EBITDA increased by 20.9% to $320.3m (2015: CCY $265.0m).
  • Completion of the Serena acquisition took place on 2 May 2016 for an Enterprise Value of $540.0m on a cash and debt free basis, partially funded by a share placing in FY16 of 10.9m shares at a price of 1455 pence raising £158.2m ($225.7m) before expenses.
  • On a pro-forma CCY* basis to provide a better comparison of like-for-like performance:
    • Total revenues of $684.7m (2015: pro-forma CCY $676.8m), an increase of 1.2%.
    • Adjusted EBITDA of $332.5m (2015: pro-forma CCY $308.3m), an increase of 7.8%.
    • Underlying Adjusted EBITDA of $320.3m (2015: pro-forma CCY $301.5m), an increase of 6.2%.
  • Continual focus on efficiencies led Underlying Adjusted EBITDA margins to improve further to 46.8% (2015: pro-forma CCY 44.5%).
  • Exceptional costs incurred in the period of $41.0m (2015: $10.7m) relate to integration costs, acquisition costs, pre-acquisition costs, property costs, severance and legal costs. Second half exceptional costs are currently estimated to be up to $80.0m.
  • Improved cash generation in the period:
    • Cash generated from operations was $201.9m (2015: $162.7m) representing 69.3% (2015: 62.6%) of Adjusted EBITDA less exceptional costs.
    • Net debt+ at 31 October 2016 was $1,612.6m (30 April 2016: $1,078.0m) down from $1,625.0m following the completion of the Serena acquisition on 2 May 2016.
    • Free cash flow**** in the period of $111.0m (2015: $40.3m)
    • Net debt to Facility EBITDA** for the 12 month period to 31 October 2016 is a multiple of 2.6 times, decreasing to 2.4 times on a pro-forma basis including the acquisition of Serena; medium term target remains 2.5 times.
  • Growth in adjusted diluted earnings per share of 20.5% to 89.20 cents (2015: 74.01 cents)***
  • Proposed interim dividend increased by 75.5% to 29.73 cents per share (2015: 16.94 cents per share) in line with dividend policy of full year dividend being twice covered by adjusted earnings.

Statutory results

  • Operating profit of $163.3m (2015: $150.4m)
  • Profit before tax of $113.2m (2015: $98.8m)
  • Basic earnings per share of 39.57 cents (2015: 40.17 cents) a decrease of 1.5%***

The table below shows the reported results for the Group at actual exchange rates for the six months ended 31 October 2016 together with CCY comparatives except where stated otherwise:

Results at a glance
Six months
ended 31 Oct 2016
Six months
ended 31 Oct 2015
Growth/
(Decline)%
Year ended
30 Apr 2016
Revenue        
Total Revenue        
Constant Currency
$684.7m
$599.6m
14.2%
$1,241.1m
- Licence
$146.9m
$134.4m
9.3%
$304.8m
- Maintenance
$364.2m
$324.4m
12.3%
$642.6m
- Subscription
$144.9m
$117.1m
23.7%
$246.8m
- Consultancy
$28.7m
$23.7m
21.1%
$46.9m
Reported
$684.7m
$604.5m
13.3%
$1,245.0m
NON GAAP MEASURES
Adjusted EBITDA**
Constant Currency
$332.5m
$271.7m
22.4%
$550.0m
Reported
$332.5m
$270.6m
22.9%
$546.8m
Underlying Adjusted EBITDA**
Constant Currency*
$320.3m
$265.0m
20.9%
$535.7m
Reported
$320.3m
$263.8m
21.4%
$532.5m
STATUTORY MEASURES
Pre-tax profit        
Constant Currency
$113.2m
$101.0m
12.1%
$201.0m
Reported
$113.2m
$98.8m
14.6%
$195.4m
Earnings per share ***        
Basic
39.57c
40.17c
(1.5)%
74.50c
Diluted
38.12c
38.58c
(1.2)%
71.61c
Adjusted
92.59c
77.06c
20.2%
152.63c
Adjusted Diluted
89.20c
74.01c
20.5%
146.70c
Dividend per share
29.73c
16.94c
75.5%
66.68c
Net debt
$1,612.6m
$1,454.3m
10.9%
$1,078.0m

* Interim results presented for the six months to 31 October 2016 include the post-acquisition period results for Serena and GWAVA. Due to the significant size of the Serena acquisition the directors believe that the interim results are better understood by looking at the comparative results on a pro-forma basis for the combination of Serena and Base Micro Focus. The directors do not consider the GWAVA acquisition to be of a significant size ($0.8m revenue in the period and a loss to Adjusted EBITDA of $0.1m in the period) and therefore have not presented GWAVA results in the pro-forma comparatives.

Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena's revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus' experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the six months to 31 October 2015 the directors have combined the unaudited internal management information for Serena for the period from 1 February 2015 to 31 July 2015 and then added in the Base Micro Focus results for the six months ended 31 October 2015. The pro-forma comparatives for the year ended 30 April 2016 combine the unaudited financials for Serena for the year ended 31 January 2016 with the audited figures for Base Micro Focus for the year ended 30 April 2016. From the date of acquisition, 2 May 2016 to 31 October 2016, Serena contributed $72.6m to revenue and a contribution to Adjusted EBITDA of $40.0m, before any allocation of management costs.

** In assessing the performance of the business, the directors use non GAAP measures "Adjusted Operating Profit", "Adjusted Operating Costs" and "Adjusted earnings per share", being the relevant statutory measures, prior to exceptional items, amortization of purchased intangibles and share based compensation. "Adjusted EBITDA" is the Adjusted Operating Profit prior to depreciation and amortization of purchased software. Underlying Adjusted EBITDA removes the impact of net capitalization/amortization of development costs and foreign currency gains and losses from Adjusted EBITDA whilst Facility EBITDA is Adjusted EBITDA before amortization and impairment of capitalized development costs. A reconciliation of these profit measures is given in note 8.

*** Earnings per share are detailed in note 11.

**** Free cash flow is cash generated from operations less net interest payments and loan costs, tax, purchase of intangible assets and purchase of property, plant and equipment.

+ Net debt is defined in note 18. The acquisition of Serena completed on 2 May 2016 for an Enterprise Value of $540m. Pro-forma for the completion of the acquisition net debt at 30 April 2016 would have been $1,625.0m.

Kevin Loosemore, Executive Chairman of Micro Focus, commented:

"The board is delighted with our progress. Our focus on delivering to our customers by making detailed product by product decisions and investments has resulted in the business achieving modest like-for-like revenue growth. Our investments have resulted in strong growth in SUSE and a reduced rate of decline in the Micro Focus portfolio. Whilst we have had a good start to the year and completed two acquisitions, we are maintaining our revenue guidance for FY17 being in the range minus 2% to zero% on FY16 on a CCY basis, pro-forma for the acquisition of Serena.

"Mergers and acquisitions continue to be a key component of our strategy. The key strategic announcement in the period was the HPE Software transaction which is on target to complete in the third quarter of calendar year 2017. This is a complex transaction that will transform the Group in a similar way to the Attachmate transaction back in 2014 and provides the opportunity for enhanced shareholder returns over the medium-term.

"The acquisition of Serena completed at the beginning of the period together with a number of small acquisitions across the business comprising GWAVA Inc., openATTIC on 1 November and the OpenStack IaaS and Cloud Foundry Paas talent and technology assets from HPE which was announced on 30 November and is currently expected to close in the first quarter of calendar year 2017.

"We are delighted to announce that our interim dividend is increasing to 29.73 cents from 16.94 cents in line with our twice covered dividend policy."

Please click here to view the full 51-page report (PDF).

Enquiries:

Micro Focus
Tel: +44 (0) 1635 32646
Kevin Loosemore, Executive Chairman
Mike Phillips, Chief Financial Officer
Tim Brill, IR Director

Powerscourt
Tel: +44 (0) 20 7250 1446
Juliet Callaghan
Simon Compton
Harriet O'Reilly

About Micro Focus

Micro Focus (LSE: MCRO.L) is a global enterprise software Company supporting the technology needs and challenges of the Global 2000. Our solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Our product portfolios are Micro Focus and SUSE. Within Micro Focus our solution portfolios are COBOL Development and Mainframe Solutions, Host Connectivity, Identity and Access Security, IT Development and Operations Management Tools, and Collaboration and Networking. For more information, visit: www.microfocus.com. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, cloud infrastructure and storage solutions that give enterprises greater control and flexibility. For more information, visit: www.suse.com.

Forward-looking statements

Certain statements in this interim report are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.