Micro Focus nosedives on HPE integration issues, CEO Hsu walks

The rate of revenue decline "has been greater than anticipated" due to several factors, management said, paring guidance to revenue in a range from -6% to -9%, down from the -2% to -4% range indicated in January. Cost cutting has been "ahead of schedule" since the acquisition and so earnings before interest, tax, depreciation and amortisation will not fall quite as much, with an adjusted EBITDA margin percentage of roughly 37%.

Based on current trading the worst decline is expected in the first half of the year, with guidance for the -9% to -12% for the half-year.

Hsu, the former HPE man who was given the top job after the $8.8bn merger, is departing immediately "to spend more time with his family and pursue another opportunity" so chief operating officer Stephen Murdoch will regain his former role of CEO of the British company with immediate effect.

Micro Focus said licence income was lower than expected as a result of a number of factors that "management believe to be largely one-off transitional effects of the combination with HPE software, rather than underlying issues with the end market or the product portfolios", including IT implementation affecting sales teams, high attrition of salespeople "due to both integration and system related issues", disruption of ex HPE global customer accounts and "continued sales execution issues" in North America.

Some of the HPE Software assets that Micro Focus bought included remnants from HP's horrendous 2011 acquisition of former FTSE 100 software group Autonomy, which led to billions of dollars in write-offs and allegations by HP of financial misconduct on the part of the UK company's management.

Executive chairman Kevin Loosemore said: "We remain confident in Micro Focus' strategy whilst recognising that operational issues have led to a disappointing short term performance and outlook. We believe that Micro Focus is well positioned to help our customers with the increasing pace of change across their hybrid IT environments and to deliver customer centred innovation."

Shares in Micro Focus tanked 52% to 901p, levels not seen for over three years.

Broker Numis cut its recommendation to 'hold' from 'buy' and said it was setting its forecasts at bottom of the guidance range as well as assuming a slightly slower rate of improvement in future years, which give a 10-14% downgrade for EBITDA, earnings per share and free cash flow. With guidance being worst in the first half, Numis said it implied that "licences could be down 20-30% in the April period".

With management characterising the issues as largely "transitional" from the HPE combination, analyst David Toms said: "whilst we concur with the logic, we note that guidance effectively calls the bottom in the current period and implies a good H2 recovery with a -3 to -6% performance".

He added: "From a valuation perspective, this performance will clearly restart the 'terminal multiple' debate and our lower TP reflects an element of this, moving our long-term target FCF multiple to 7.5% from 6.4%."

Goldman Sachs said "this is mostly the bear thesis playing out" of its December 'neutral' thesis.

"We had also highlighted the importance of management in terms of delivery of the cost synergies, and believe that CEO Chris Hsu stepping down is likely to be taken negatively by investors, as he was key to integration of the combined entity in our view."

Analysts at Investec said they remained concerned that the requirement for greater cost reductions than expected could "further destabilise the top line outlook".

Having spoken to management, Investec relayed the information that they are "confident there are no issues on the covenant with the revolver not yet drawn down".