The UK’s biggest technology company on the stock market, Micro Focus (MCRO) is getting an almighty hammering on today’s half year results.
The stock is down close on 15% on Monday, by far the biggest FTSE 100 faller, to £21.97 and investors have got the hump. The chief complaints are missing market expectations at this stage. Nevermind the headline 80% jump in revenues, thanks to the HPES acquisition, on organic measures they actually declined 2.9% and profit margins are down too.
HPES IS NOW PART OF THE FAMILY
This is largely because HPES has now been integrated and today’s results reflect two months of its operating performance. The software part of HP has much lower earnings before interest, tax, depreciation and amortisation (EBITDA) margins, so today’s 3.3 percentage point decline to 42.9% for the enlarged group is not entirely unexpected.
Improving those to something closer to Micro Focus’ typically exceptional mid-40s in percentage terms is part of the reason for the $8.8bn merger in the first place. That will take a bit of time but management have a clear path to this goal.
While SUSE operations remains semi-independent (it may one day bet hived off in some fashion), the now bigger £9.5bn business has clear operating lines. There’s Security, IT Operations Management, Application Delivery Management, Information Management & Governance, and Application Modernization & Connectivity.
NEAR-TERM OBJECTIVES
On the to do list for 2018, management wants to standardise and rationalisation systems and office locations and develop a new combined go-to-market model for the non-SUSE parts of the business. It also plans to axe underperforming parts of its business and invest in new technologies.
Together, this should help improve cash conversion to historical levels despite managed revenue declines towards something like $4.1bn this year to 31 October 2018.
FURTHER DOWN THE LINE
Longer-term, the company has exciting operational leverage potential, which underpins the investment attractions.
Management will look to stabilise the top-line, improve profitability, and rationalise legal entities.
What this means for the overall group is annual returns of around 15% to 20% for investors, with continued growth in dividends. Today’s interim payout is up 16% to $0.35, a clear statement of confidence from management.
This is not without risk for shareholders. But on a full year 2019 price to earnings multiple of 13.3, the balance of risk reward looks favourably weighted towards those investors willing to back a business that has for years been a total returns rarest of breeds.
