Today’s interim results from FTSE 100 firm Micro Focus International (LSE: MCRO) give us a chance to see how the software and information technology provider is getting on with integrating last year’s $9bn acquisition of Hewlett Packard Enterprises’ software business.
On 19 March, Micro Focus delivered a profit warning that torpedoed its stock. The enormous acquisition had been causing a bit of indigestion. Sales were down and today the share price is more than 40% lower than it was at the beginning of March before the profit warning. I last wrote about the company in April and back then City analysts expected positive earnings growth going forward, and the directors believed the integration challenges were short term with the acquisition thesis remaining intact. All eyes were looking for the turnaround, so how’s that going?
Improved momentum in the integration process
Helpfully, in today’s report, the company has given us currency adjusted pro forma figures that compare the current period’s trading to 30 April 2018 with last year’s equivalent period for Micro Focus and the HPE Software business. Adjusted revenue slipped around 6% and adjusted diluted earnings per share moved 0.5% higher. The directors held the dividend at last year’s level, which suggests to me that they are reasonably confident in the outlook.
Executive chairman Kevin Loosemore said in today’s report that since March there has been “improved momentum in the HPE Software integration process and a slowdown in the rate of revenue decline.” Revenues for the period are “at the better end of management guidance,” which I reckon suggests the firm is getting to grips with its unwieldy acquisition. Mr Loosemore explained that the initial difficulties integrating the HPE Software business have put the firm around a year behind its original plan and by the end of the current trading year he expects revenues to be “substantially lower” than anticipated at the time of the takeover.
Improving outlook
However, the outlook beyond that is more upbeat. By the year ending October 2020, the directors expect revenue to have stopped its decline and for adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) to be delivering percentage margins around the mid-40s. There will likely be a further $210m in costs needed to realise ongoing synergy benefits and to sort out errant new IT systems introduced to the HPE Software business. I reckon that’s small fry if things start working well in the enlarged business after that.
City analysts following Micro Focus International expect earnings to lift 2% for the trading year to October 2018 and 7% the year after that. The share price is down around 13% today as I write but the turnaround potential is good in my view. With the share price around 1,137p, the forward price-to-earnings ratio sits just above seven for the year to October 2019, and the forward dividend yield is a little over 6.7%. That strikes me as an undemanding valuation, although the firm has a large debt pile to consider as well. However, I think the stock is well worth your further research time.
