Shares in Micro Focus (MCRO) crashed by a third after the software group warned that it was unlikely to meet its constant-currency revenue guidance of minus 4 to minus 6 per cent this year. Management now expects a sales decline of between 6 and 8 per cent, and is fast-tracking a review of the group’s operations.
On top of weak sales execution, Micro Focus has endured a worsening macro environment. This has led to “conservatism” and customers taking longer to make decisions. While there is “a significant pipeline of business opportunity being pursued”, the group concedes that “a highly challenging percentage of this pipeline would need to close prior to year-end” for it to achieve its earlier outlook. Management has thus cut its guidance to minus 6 to minus 8 per cent, and is fast-tracking a review of the group’s operations.
Such news conjures a distinct sense of déjà vu. Micro Focus’s shares crashed by around a half back in March 2018, after it revised its guidance for the respective year from minus 2 per cent to minus 4 per cent to minus 6 per cent to minus 9 per cent. At the time, the group attributed its recent revenue performance to “largely one-off transitional effects” of the incorporation of Hewlett Packard Enterprise’s (HPE) software wing – whose $8.8bn (£7.2bn today) combination with Micro Focus completed in 2017.
Still, within its most recent half-year report, Micro Focus maintained its FY2019 guidance; albeit noting that “[t]he complexities of the HPE Software business integration continue to require detailed attention and substantial programme planning and execution”. Days after these results, executive chairman Kevin Loosemore offloaded £11.6m-worth of shares for personal financial reasons.
Following Micro Focus’s latest update, broker Numis noted that some investors may be concerned about timing, with two more months until the year-end and the fourth quarter usually being Micro Focus’s strongest. Analysts here – who have kept a ‘buy’ rating on the stock – have reduced their underlying sales growth expectations for FY2019, FY2020 and FY2021 to -7.5 per cent, -5.1 per cent and -4.2 per cent, from -5.2 per cent, -3.2 per cent and -3.1 per cent respectively. They say that Micro Focus “remains highly cash generative”, although they’ve lowered their free-cash-flow estimates.
