Acquisitions boost top and bottom line growth at Micro Focus

Micro Focus International reported continued top and bottom-line growth, boosted by recent acquisitions and ahead of its expected takeover of Hewlett Packard Enterprises's software arm.

However, shares in the software group continued their recent descent as its underlying growth underwhelmed the market, with a "broadly flat" outlook for revenues in first half of its new financial year, while management's bullish comments about further acquisitions may have spooked investors with such a major deal still pending.

For the full-year to 30 April, sales jumped by 10.9% to $1.38bn (consensus: $1.39bn) on a reported basis, alongside a 20.4% increase in its underlying operating profits to $640.9m.

Those results, which had been reasonably well flagged in pre-close announcements, included the post-acquisition period results from recently purchased Serena, GWAVA, OpenATTIC and OpenStack.

On a pro-forma constant currency basis on the other hand, the software and information technology outfit posted a 0.9% decline in revenues for the year to $1.38bn.

Meanwhile, earnings before interest, taxes, depreciation and amortisation rose 4.2% to $640.9m. Adjusted earnings per share were 19.7% higher to 175.65 cents (consensus: 176 cents).

The reverse takeover of HPE Software is still expected to complete on 1 September, the company said, though it did not provide any more information on the transaction, which will see a $500m return of value immediately prior to completion.

Regarding the company's projected effective tax rate following its tie-up with HPE's software division - a key variable which analysts were watching - the directors projected it would rise to roughly 33%.

That was higher than previous guidance for an ETR of between 23% to 27%, mainly due to the higher proportion of profits that would now be earned in the States.

The cash tax rate, that is to say, the proportion of taxes payable on its underlying adjusted EBITDA less exceptional items, capital expenditure and interest, for the entire group was seen at 30%.

Micro Focus hiked its interim dividend by 17.3% to 58.33 cents, bringing the full-year payout to 88.06 cents, which was 32.1% ahead of the previous year's.

A FLAT OUTLOOK AND LUMPY HPE

In terms of the outlook for the company, management said: "Having delivered 12 years of approximately 29.3% compound annual returns to investors we believe we have a strong operational and financial model that can continue to scale and provide excellent returns to our shareholders."

Revenue for its current core business for the six months until October will be “broadly flat".

Executive chairman Kevin Loosemore said HPE’s software business is where Micro Focus was seven or eight years ago.

“It’s lumpy, they have good quarters and bad quarters. Once we own the business we’ll start changing things, making it a bit more predictable. We’re absolutely confident that it’s going to be a stunning deal,” he told reporters.

Management also said they remained keen to continue to do more deals and see long term shareholder returns of 15-20%.

But by midday in London, shares of the company were down by almost 6% at 2,075p, meaning they were almost 22% off their May all-time high.

"I think the pro forma growth underwhelmed the market," said Jamie Constable at broker N+1Singer, who said the talk of more M&A to come when the HPE deal yet has not even completed yet was likely to have spooked investors too.

Analysts at Canaccord attributed the recent share price decline to “investor concerns around the flow-back of stock from US funds holding HPE, but which may be unable to hold Micro Focus”.

Following the completion of the HPE transaction, Micro Focus will report an 18 month financial period to 31 October 2018, the first six months of which will include HPE for two months.