How the mighty have fallen. Shares in former IC buy tip Micro Focus (MCRO) plummeted more than 50 per cent this week, halving the market cap of what had become the UK’s largest listed tech company. This shareholder exodus followed concerns that Micro Focus had bitten off more than it could chew when it acquired Hewlett Packard (HPE’s) software arm for an enormous $8.8bn (£6.3bn) last September.
Since its first-half update in January, sales have fallen further than expected – leading management to knock down guidance for this year. Sales had been forecast to decline by 2-4 per cent year on year, but are now set to drop by a substantial 6-9 per cent. During the six months to April alone, underlying sales are likely to fall by between 9 and 12 per cent.
Moreover, Chris Hsu – the man given the top job when the HPE transaction completed – has resigned to spend time with family and pursue another opportunity. He is replaced as chief executive by chief operating officer Stephen Murdoch. Management turnover so soon after a transformative deal does not inspire huge confidence.
Micro Focus attributed poorer sales to lower-than-expected licence income, caused by “largely one-off" transitional effects of the integration with HPE software, rather than underlying issues with the end market or the group’s product portfolios. Firstly, the company has faced challenges with the implementation of its new IT system, holding back its sales teams’ efficiency. There has also been disruption among former HPE global customer accounts in the aftermath of the merger, along with ongoing sales issues in North America.
In a bid to shore up confidence, management highlighted its cost reduction programme, which has enjoyed better progress than projected. It reckons that at the midpoint of its sales guidance range, it should be able to achieve an adjusted cash profit margin of around 37 per cent by October. Analysts at Numis were less positive on such savings, suggesting immediately after the announcement that they were not sufficient to compensate for these challenges.
However, updated research from the broker 24 hours later was more sanguine. Citing the dramatic market reaction as “overdone”, Numis emphasised that Micro Focus “emphatically has no debt issue”. With net debt of $4.4bn as at October 2017, the group has loan facilities of over $5bn and no repayments due for 3.5 years, nor any covenants on these loans. However, the broker cut its EPS forecasts for this year by 12 per cent.
