Micro Focus confirms HPE Software's improving margins, falling sales

Ahead of its agreed merger, Micro Focus International confirmed that US-based HP Enterprise Software saw margins improve but sales continue to drop off in the second quarter.

HPE Software, which has been spun off by Hewlett Packard Enterprise into a vehicle called Seattle SpinCo as preparation for its separation, reported second quarter of $685m, down 11% year over year, or down 9% at the underlying level.

Reported operating profits of $181m for the quarter represented an improvement in the operating margin to 26.4% from 24.8% in the same period last year, "predominantly driven by the team's continued focus on disciplined cost controls".

Micro Focus noted that the year-on-year improvement was over 10 points when adjusted for one-time items last year including the disposal of Tipping Point.

This lifted reported operating profit to $335m for the first half half, representing an improved operating margin of 23.8% from 21.1%.

Growth in software as a service revenues of 3% were outweighed by declines in licence and professional services of 29% and 17% respectively, "as the team works through the transition to Micro Focus".

For the six months of the year to 30 April, total revenue from HPE Software fell 10% to $1.4bn, while the fall is only 5% if adjusted to take account of divestitures and changes in currency exchange rates.

In early May Micro Focus had seen its shares drop after reporting initial indications that earnings at HP Enterprise Software had softened ahead of the planned merger, with preliminary estimates that revenue was down around 10% in the quarter to 30 April, on a reported basis and after adjusting for the disposal of Tipping Point.

Micro Focus executive chairman Kevin Loosemore said the company was encouraged by the early progress that HPE Software's management was making on implementing operational efficiencies, as well as the speed of change in the business.

“Whilst the short term decline in licence is disappointing it is not unusual given the level of change being undertaken.”

Last week, the company's shareholders voted to approve the deal, which will constitute a reverse takeover by Micro Focus of HPE Software, and the proposed return of up to $500m to investors.