Shares in Micro Focus International (LSE: MCRO) rose as much as 9% today after the company announced encouraging results for its newly acquired software business Hewlett Packard Enterprises (HPE).
Although revenues at HPE’s software business continued to decline in the three months to July, it has reacted positively by taking measures to cut costs and reduce its exposure to less profitable lines. As such, operating margins improved 7.1 percentage points to 24.9% in the period.
Meanwhile, it’s also seeing a degree of stabilisation in revenues, down 3% year-on-year in Q3, which compares favourably to the 9% on-year fall in the second quarter.
These results should allay investors’ fears that Micro Focus overpaid and overstretched to buy Hewlett Packard’s non-core software business in an $8.8bn deal. Micro Focus has a great deal of experience of integrating and managing legacy software businesses following a series of acquisitions under executive chairman Kevin Loosemore’s leadership.
It’s a strategy that has worked very well, and shares in the company have more than tripled over the past five years. And there may be still more to come as valuations remain tempting – shares in the company trades at just 14.7 times its expected earnings this year and have a prospective dividend yield of 3.5%.
Meanwhile, shares in software security company Sophos (LSE: SOPH) dipped as much as 2% despite an upbeat update today. It showed the company is on track to exceed its previous guidance on billings growth, with robust customer demand boosting sales.
Following strong momentum in billings growth since April, the company now expects related growth of around 20% for the full year, compared to its previous guidance of mid- to high-teens growth. The trading update demonstrates Sophos’s mid-market strategy is continuing to deliver strong financial results, with recent momentum picking up.
Sector fundamentals also remain bright as awareness of cyber security risks only continue to build. Businesses and consumers increasingly recognise the need to protect themselves from cyber attacks. And Sophos is not just doing well because it’s in a growing market, it’s gaining market share and winning significant new customers. Sophos is one of the fastest growing network security vendors in the IT security market, and it has achieved this through continued innovation, together with its efforts to develop best-in-class customer support.
But although expectations for the firm’s revenue and earnings growth are certainly captivating, valuations seem stretched after shares have soared by 110% over the past 12 months. Based on this year’s expected underlying earnings per share of 4.8p, shares of Sophos trade at an extremely high forward P/E of 99.5. And even after factoring in estimates of a further 39% increase in its bottom line in 2018/9, its forward P/E would fall to a still-pricey 83.6 next year.