The fall in pre-tax profits doesn't really tell the whole story of Micro Focus's performance - that's because the software specialist provider has been busy spending time and money on integrating two acquisitions. In fact, adjust for $130.8m (£79.6m) of administration distribution, and research and development costs, and gross profits actually grew 39 per cent in the period, to $172.9m.
During the first half, the group bought Borland Software and the Testing/ASQ division from Compuware. Following full integration, these are expected to generate around $160m of revenues a year - some $10m ahead of initial estimates. What's more, thanks to greater cost synergies and growth expectations, the group has doubled gross margin expectations for the acquired businesses from 15 per cent to 30 per cent. Gross margins for the group in the second half are expected to reach 40 per cent. And even without the new additions, organic growth came in at a respectable 5 per cent. Much of this reflected strong growth in maintenance revenue.
Once again, the tough economic climate served the group well, with customers opting to buy updated software for existing IT systems as a cheaper alternative to buying new hardware. In fact, maintenance revenue now accounts for 51 per cent of group revenue, up from 48 per cent. Meanwhile, licence fee revenue (in constant currency terms) edged ahead slightly to $62m, before taking into account acquisitions, while income from consultancy work grew 18 per cent to $6.7m.
Micro Focus has now made seven acquisitions in the past four years; the latest two costing $174.2m, plus a further $25.5m in reorganisation costs. This turned a cash balance of $40.7m into net borrowings of $104.1m and the group also drew down $163.5m to help finance the acquisitions, since when $16m has been repaid. There are also plans to introduce additional cost management measures to the core business, which are expected to have a positive impact on profitability in the second half.
KBC Peel Hunt expects full-year adjusted pre-tax profits of $147.4m and EPS of 51.3¢ ($113.5m and 39.6¢ in 2009).
More analysis of company results
| MICRO FOCUS (MCRO) | ||||
|---|---|---|---|---|
| ORD PRICE: | 424p | MARKET VALUE: | £867m | |
| TOUCH: | 424-425p | 12-MONTH HIGH: | 454p | LOW: 240p |
| DIVIDEND YIELD: | 2.4% | PE RATIO: | 21 | |
| NET ASSET VALUE: | 89c* | NET DEBT: | 57% | |
| Half-year to 31 Oct | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (p) | Dividend per share (¢) |
|---|---|---|---|---|
| 2008 | 136 | 44.1 | 8.38 | 4.5 |
| 2009 | 198 | 38.8 | 8.69 | 5.6 |
| % change | +46 | -12 | +4 | +24 |
Ex-div: 2 Jan Payment: 29 Jan £1=$1.64 *Includes intangible assets of $437m, or 214¢ a share | ||||
