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Micro Focus swings to $1bn loss on impairment charge

The software company was hit by an impairment charge of $922m
July 7, 2020

Micro Focus (MCRO) was hit by an impairment charge of $922m (£739m), pushing the software company to a hefty pre-tax loss in the first half. Management said that the charge was attributable to heightened economic uncertainty due to coronavirus, which led to an increase in the pre-tax discount rate as well as disruption to sales activity and renewals. 

IC TIP: Sell at 401p

The group is currently working on the basis that macroeconomic conditions are unlikely to improve through the remainder of the financial year, and is braced for further interruptions to new sales and renewals. 

In the first half, licence revenue declined by more than a fifth on a constant currency basis. Combined contract delays totalled around $20m, which accounted for approximately six percentage points of the total decline. Management noted that the remainder was driven in part by the structural changes made to the sales force in the current financial period.

Maintenance revenue dropped by 7 per cent, led by losses within its IT Operations Management (‘ITOM) and Application Delivery Management (‘ADM’) product groups which declined by 16.3 per cent and 9.3 per cent respectively. 

Turnover derived from software-as-a-service (‘SaaS’) products and other recurring revenue also dropped by more than a tenth. Management said that it continued to rationalise unprofitable SaaS operations, which led to a decline in all of its product segments and geographies. The group’s consulting revenue stream was also hit, down 14.8 per cent, as some customer projects were delayed where physical access to customer sites was required. 

Perhaps the only bright spot was the group’s cash performance, with adjusted cash conversion of 131.5 per cent and free cash flow of $305m. Micro Focus was also able to refinance a $1.4bn term loan in May 2020, which means it has no term loan maturities until June 2024.

FactSet provides consensus forecasts of EPS of 67.95p and pre-tax income of £591m in October 2020.

MICRO FOCUS (MCRO)   
ORD PRICE:401pMARKET VALUE:£ 1.3bn
TOUCH:390-441p12-MONTH HIGH:2,141pLOW: 291p
DIVIDEND YIELD:12.0%PE RATIO:NA
NET ASSET VALUE:1,495¢*NET DEBT:86%**
Half-year to 30 AprTurnover ($bn)Pre-tax profit ($bn)Earnings per share (¢)Dividend per share (¢)
20191.66-0.10-18.858.3
20201.45-1.04-308nil
% change-12---
Ex-div:-   
Payment:-   
*Includes intangible assets of $11bn or 3,342¢ a share **Includes lease liabilities of $264.7m. £1=$1.25