Micro Focus pats itself on the back over SUSE jettison as licensing revenue shrinks

Brit software house Micro Focus is bleeding licensing revenue as sales people abandoned the business for pastures new, according to half-year financials filed today with the London Stock Exchange.

In the six months ended 30 April, sales for the unit fell 11 per cent year-on-year to $343.7m; the only product categories to see any sort of growth were application modernisation and connectivity (1.4 per cent) and information management and governance (2.6 per cent).

"The product group experienced significant levels of sales force attrition during FY18," Micro Focus said. "This was compounded by corrective actions which were made to products within the portfolio over the last twelve months. The improvements we have made in these areas will take time to flow through to pipeline and revenue."

The company's vintage software maintenance business fared a lot better: revenues decreased by a single per cent to $1.054bn.

SaaS revenues dropped 8.3 per cent to $143.1m, as Micro Focus attempted to "rationalise unprofitable operations", while the consulting business reported turnover of $116m, 18.3 per cent down on a year ago period.

"The restructuring of the consultancy operations is progressing as anticipated and is expected to continue in the second half of the year with the revenue stream beginning to moderate and ultimately track underlying software revenue," the firm added.

Micro Focus has also reported the separation of German Linux vendor SUSE – which was acquired by a private equity fund for $2.5bn last year – went off without a hitch, with $1.7bn profit on disposal, and $1.8bn returned to shareholders in May 2019.

"Through effective investment and management of the SUSE asset, from being 20 per cent of total revenues of the Attachmate Group when acquired by Micro Focus in November 2014 for $2.3bn, we achieved a total cash consideration of $2.5bn for the SUSE asset alone just four years later," said Micro Focus CEO Stephen Murdoch, who was appointed in March 2018.

Micro Focus reported a 5.3 per cent fall in overall revenue, down to $1.657bn for six months ending in April – in line with its own predictions. Operating costs for the period totalled $994.8m. The company once again said it expects revenue to decline 4 to 6 per cent in 2019 – something it already said in February, and reiterated in March.

Back in 2017, Micro Focus acquired HPE's software business for $8.8bn, and it has been busy digesting it ever since. As a result of the acquisition, in the past six months alone the company had to spend $80.9m on IT infrastructure, $56m on integration, $15.7m on severance, and $10.6m on property costs.

According to Murdoch, that's actually a good thing: "We have continued to make progress on our significant program of work to fully integrate the HPE Software business through the sustained application of the Micro Focus business model. As a result, we are pleased to reiterate full-year guidance."

Meanwhile, the sale of SUSE increased profit for the six months to nearly $1.4bn, more than double from $620m a year earlier. Operating profit stood at $32.6m, up 2.5 per cent from $31.8m in the first half of 2018. "The complexities of the HPE Software business integration continue to require detailed attention and substantial programme planning and execution," said the CEO.

"Integration work to improve our operational effectiveness is closely linked to instilling the right corporate culture of sharper execution, simpler business operations and a dynamic, accountable team," he added, appearing to throw shade on a former competitor.

Micro Focus finished the six months with free cash flow of $429.9m and adjusted net debt of $3.8bn – around $530m less than a year ago.

It said several "transformation programmes" were due to complete in 2020, including a new IT stack for its business processes, which could lead to further efficiencies in finance, HR, IT and legal departments. The company will pay interim dividend of $0.5833 per share to its shareholders in September. ®