Micro Focus International plc (LSE:MCRO), the legacy software giant, is briefing analysts today on its strategy and the portents are not good, with the shares off 6%.
The company, which has been out of favour with investors since its September 2017 acquisition of the software segment of the Hewlett Packard Enterprise Company (HPE) despite a prolonged share buyback programme, claims it is at “an inflexion point in its transformation journey”.
The company’s top brass is set to tell analysts and investors that the integration of HPE is now substantially complete and there will no further exceptional costs beyond the current fiscal year.
That will come as an immense relief to long-suffering Micro Focus shareholders; the company paid an eye-watering US$8.8bn for HPE – the price a payback of sorts to UK PLC for the Brits stiffing Hewlett-Packard on the acquisition price of Autonomy PLC – and the suspicion is that management bit off more than it could chew.
In its 2018 results, the company was already grumbling that the integration of the HPE Software business had involved additional complexities, largely because it was a carve-out of a division from a larger parent, as opposed to the acquisition of a business that had been operating independently.
2019 saw the company conduct a strategic and operational review that purportedly identified the additional actions and changes required to deliver on the “significant potential within the business”. That involved the departure of Kevin Loosemore, the executive chairman of Micro Focus and the company’s head honcho since it floated in 2005.
Exceptional costs of US$294.2mln that year were predominantly related to the integration of the HPE business, with – ironically for a legacy software business – the integration of information technology systems proving a particularly knotty problem.
The big shock, however, came early this year in its results for the year to 31 October 2020, when the company recorded an exceptional charge related to goodwill impairment of US$2.8bn in the period driven by changes in the group’s trading performance and the overall environment when compared to the original projections produced at the time of the HPE Software acquisition.
That US$2.8bn impairment was a non-cash charge but that just means that management recognised that in previous years it had spaffed billions up the wall on investments that had not worked out.
That’s all in the past though, or so we are told, and Stephen Murdoch, the chief executive officer, said the company is now free to “once again focus on our core objectives that we know deliver success”.
Patience is still the keyword for investors however with the company planning to “exit FY 23 with a flat or better year-on-year revenue trajectory”. Cutting through the management gobbledegook, that means by the end of fiscal 2023 the group might actually be growing the top line.
“We have robust, granular plans for the next two years that give us confidence to achieve our core financial objectives as we exit FY23, and a strong foundation from which to execute thereafter,” said Matt Ashley, the chief financial officer, raising a cheer from analysts who had “granular” on their Buzzword Bingo card.
The group has set a medium-term revenue growth target of 1%-2%, which does not appear to have knocked the market’s socks off.
“If we assume sales fall 3% in 2022 and 2% in 2023 and are flat in FY24, it implies revenues of US$2,756mln vs cons[ensus] at US$2,599mln today and EBITDA [underlying earnings] of US$1.16-1.26bn and 42-46% margins vs cons. at US$965mln/37% today,” UBS said.
The company is seeking to remove US$400mln-US$500mln of gross annual recurring cost to achieve a reduction of the cost base from around US$1.9bn a year currently to around US$1.5-US$1.6bn (allowing for cost inflation) by the end of fiscal 2023.
The reduction in the cost base will require an exceptional spend – that’s probably management speak for redundancy payments – of around US$200mln to deliver the savings.
The consensus forecast among brokers for costs in 2024 is an implied US$1,634mln, UBS calculates.
The group has reiterated its commitment to paying a dividend that is 20% of retained earnings. Based on current dividend forecasts among the broking community, the shares are set to yield 5.6% over the coming year, which may be the main appeal of the shares at the moment, although it is worth noting that before today's strategy update, the consensus target price was a very pokey 711p, versus a current share price of around 350p.
“Micro Focus's ambition for medium-term revenue growth of 1%-2% is the key assumption investors will want to test,” UBS declared as it stuck with its neutral stance and 400p price target.