Micro Focus share slump as H1 numbers disappoint

Shares in Micro Focus slumped in early morning trade as first half results failed to meet expectations as the stock.

The software group posted a 28.7% rise in pre-tax profts to $145.7m after the acquisition of Hewlett Packard Enterprise's software unit helped to increase revenue.

The company also warned that revenues for the year to October 31 2018 would fall by 2%-4% from 2017's $4.2bn.

Operating profits rose 34.7% to $220m, while basic earnings per share fell 9.5% to 35.83 cents. The dividend was hoisted by 16.4% to 34.60 cents a share. Revenues grew by 80% to $1.2bn.

If the HPE merger was taken out of the numbers, revenue fell 2.9% to $664.7m. Within Micro Focus's existing business, the SUSE product portfolio grew revenue by 13% to $164.4m and the product portfolio fell 7.05% to $0.5bn from $0.537bn.

The company also said its chief financial officer Mike Phillips would move to a new position as director of mergers and acquisitions with his old role filled by Chris Kennedy, a former CFO of ARM and easyJet.

Accendo Markets head of research Mike van Dulken said the healthy numbers did “nothing to offset guidance being considered below par. Which is a worry when the CFO has moved to a more M&A focused role, suggesting more purchases, acquisition risk and integration of slower growth”.

“Perhaps investors need more time to see that the latest monster acquisition is providing value before hearing more about incremental additions of the older product types the company likes to eke the most out.”

Van Dulken said the shares may be well off their worst levels but have made a significant breach of intersecting support at 2420p, “after gapping sharply lower this morning”.

“This has undone the bounce from mid-December, and more. Bulls will need to get back above December lows of 2400p (+3.7%). Bears will be eyeing September lows of 2160p (-7.5%),” he added.

Broker Numis moved to stock to 'add' from 'buy'. In a note it said the revenue guidance of a 2-4% decline “is reassuring in our view and implies attenuation vs 8% decline in the last six months”.

“We think headline EBITDA growth to Oct-18 could exceed 10% as a number of distorting factors unwind. Overall the operating underperformance is modestly disappointing but more than offset by tax, and the building blocks are clearly in place for delivery of the long term strategy.”

“We think the shares were held back by Q4 concerns; with this now behind us we expect investors to focus on the future opportunity, underpinned by reassuring guidance and tax benefits. Upgrades and the increasing proximity of our valuation window raises our target price to 2980p (vs 2800p).”

Graham Spooner, investment research analyst at The Share Centre said investors were reacting negatively to revenue warning.

"This has been a recent concern for the market as it focused on the longer-term growth picture, which in turn has seen a bumpier ride for investors and the share price over the last year. This follows on from a stellar performance over the last five years which has seen the share price rise from £6 to a November 2017 high of £27," Spooner said.

“Micro Focus reassured investors that regardless of a complex 12 months between the announcement and completion of the Hewlett Packard acquisition, it is now ‘fully engaged’ in the integration of the combined company."

"Due to the ongoing potential boost from this and other recent acquisitions, we continue to recommend Micro Focus International as a ‘buy’ for medium risk investors. The company’s healthy dividends (and) its exposure to a wide geographic spread of regions should also be seen as positives for interested investors.”

Micro Focus shares were down 17% to 2141 at 1340 GMT.