Micro Focus update on HPE Software earnings disappoints

Micro Focus International reported its own revenues were in line with expectations for the year to April but that earnings at HP Enterprise Software had softened ahead of the planned merger.

Updating the market on its trading for the year to 30 April on Tuesday, as well as trading at HPE Software, the FTSE 100 company reiterated that, for the year to 30 April, it expected to report revenue within the range of management guidance, with year-on-year change of flat to -2% on a proforma constant currency basis.

At HPE Software, the board said preliminary indications were that its revenue was down around 10% year-on-year in the quarter to 30 April, on a reported basis and after adjusting for the disposal of Tipping Point.

It put the decline largely down to performance in the licence and professional services division, with support and software-as-a-service said to be broadly flat.

HPE Software is expected to release full company results for the quarter to 30 April in the “coming weeks”, Micro Focus said.

“We are excited about the opportunities of our business combination and are pleased to have obtained all regulatory approvals and the new debt facilities,” said Micro Focus executive chairman Kevin Loosemore.

“We look forward to being able to combine the businesses and to fully implement the Micro Focus business model.”

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.”

Merger update

On the merger, the board confirmed that all required regulatory approvals had now been received, including approval from the Committee on Foreign Investment in the United States (CFIUS).

A circular convening a general meeting of Micro Focus shareholders to request approval for the transaction would now be posted shortly.

“Shareholders will also be asked to approve a $500m return of value - approximately $2.09 per fully diluted share based on the current fully diluted share count (£1.61 pence per fully diluted share at the current exchange rate of $1.30:£1) - structured as a B Share Scheme,” the Micro Focus board said in its statement.

“The sterling value of the return of value will be determined closer to completion, which is expected to be 1 September 2017, subject to satisfaction of the conditions to closing set forth in the merger agreement, and will be dependent upon the $:£ exchange rate at that time.”

Micro Focus also reported an improvement in the terms of its existing loans, saying that following the successful syndication of the new credit facilities related to the transaction, its existing term loans had been consolidated into one tranche maturing in November 2021, carrying an annual amortisation of 1% of the original value of $1.775bn. At 30 April, $1.515bn of the existing term loan was outstanding.

The Micro Focus board said it would issue its preliminary results for the year to 30 April on 12 July.

Shares in Micro Focus, having hit an all-time high earlier this month, fell more than 11% in early trade on Tuesday, but only taking them back to levels from early April.

Analyst Neil Wilson at ETX Capital said the drop in HPE Software earnings followed an 8% drop in the preceding quarter "and is sending investors running for cover who are maybe thinking the $8.8bn acquisition of Hewlett Packard Enterprise’s software business was not so clever after all".