Micro Focus drops the most in almost seven years as sales disappoint

Micro Focus slumped the most in almost seven years after predicting falling sales and reporting revenue at its freshly acquired HPE Software business at the low end of its forecast

Micro Focus’s stock has fallen as much as 18% after the company posted sales at its new HPE Software business unit at the bottom of its guidance, and predicted that revenue for the 12 months ending October 31 will decline 2% to 4%.

The share drop was the largest since February 2011, a sign that investors are increasingly nervous about the prospects for the UK’s largest listed software and IT company. In September, Micro Focus wrapped up its $8.8 billion purchase of HPE software assets, such as application delivery management, big-data analytics and enterprise security.

“Our main concern is playing out earlier than we expected, with material top line declines coming through due to the size of the integration challenge and disruption this may cause to the focus on revenues,” said analysts at Investec in a research note.

Micro Focus said it drafted a pair of UK industry executives to help lead the new enlarged company. Chris Kennedy, previously Chief Financial Officer at ARM Holdings and EasyJet, is to take over from existing CFO Mike Phillips, while Ian Fraser is joining as Chief Human Resources Officer, having held the same role at RELX Group and BHP Billiton Plc. Phillips is to take the newly created role of Director of M&A.

The company, with a market value of about £10 billion ($13.6 billion), has vaulted past Sage Group Plc as the UK’s biggest tech company and now employs over 18,000 people, most joining from HPE.

“There are areas of performance we’d like to see improve,” said Micro Focus Chief Executive Officer Chris Hsu, highlighting sales execution within the Americas region.

Sales of existing Micro Focus businesses fell 2.7%, offset by a 13% growth in SUSE, the German-based subsidiary focused on Linux products.

The combined revenue of Micro Focus highlights the far greater scale of the new business. Reported revenue in the six months to October 31 hit $1.2 billion, just over 80% higher than during the prior period.

Despite the company’s new size, the appointment of Phillips to the new M&A role signals Micro Focus’s desire to hunt for a new deals. “There are lots of opportunities,” said Hsu.

One positive point for investors was the company’s guidance for medium-term adjusted effective tax rate, which was revised to 25% from the previous guidance of 33%.

“Overall the operating under-performance is modestly disappointing,” said David Toms, analyst at Numis in a research note, “but more than offset by tax, and the building blocks are clearly in place for delivery of the long term strategy”.

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