Embattled enterprise software seller Micro Focus (MCRO) reported lower than expected revenue and profits for the year ended 31 October 2019, as it continued to struggle with the integration of 2017 blockbuster acquisition Hewlett Packard Enterprise.
Executive chairman Kevin Loosemore appeared to pay the price, his departure announced alongside the disappointing update.
The shares tanked 15% to 835p and are now 46% lower following last August’s profit warning.
DOUBLE WHAMMY
Revenues fell 7.3% in constant currencies to $3.3bn which led to a 2.6% fall in adjusted earnings before tax, interest, depreciation and amortisation (EBITDA).
The Hewlett Packard software (HPE) acquisition proved too troublesome to integrate, leading to last summer's warnings and a strategic review.
While the macroeconomic background is beyond managements' control to a large extent, dealing with customers should be front and centre, so it is disappointing that ‘changing buying behaviour’ and ‘inconsistent execution’ are the reasons given for the poor performance.
CALL TO ACTION
The strategic review has identified the need to deploy a standalone IT hardware infrastructure as well making efficiencies as 60 overhead locations are shrunk to 5 global and regional centres.
The company expects the operational improvements to result in a slow-down in revenue attrition to the minus 6% to minus 8% range while the investment required of $70m to $80m will impact 2020 and 2021 margins.
The revenue benefits are expected to show through in the 2021 financial year which should coincide with the full benefits coming from the operational improvements, contributing to some margin expansion.
In time EBITDA margins are expected to improve to the ‘mid-forties range’ and result in significant free cash flow.
BID TARGET
Loosemore is stepping down after 15 years at the company. Greg Lock has been appointed non-executive chairman to replace him.
If all else fails, there are potentially other companies that could get more value from the assets, as Russ Mould, investment director of AJ Bell commented, ‘there is speculation after last summer’s major profit warning and the resulting strategic review that the company might be up for sale. Loosemore’s departure would seem only to make it more vulnerable to an opportunistic bid’.
