7:59 cut – MCRO

Micro Focus – Revenue warning

Micro Focus sell and support a wide variety of software products. A significant part of their business is in collecting licence fees and supporting customers still using legacy software (which broadly means “software that nobody in their right mind would start using today”) and of course this business is declining year-on-year. Another significant part is software that requires very significant sales effort to promote and naturally this is very dependant on the effectiveness of the sales people, customer confidence and getting contracts signed by the end of the period. Very little of their software seems to be essential, class leading and of the nature where the customers mostly approach them (or resellers) and buy it in ever increasing numbers (as was once the case for, say, Microsoft Office).

In March 2018 they issued a profits warning related to the old Autonomy business (which appears to fall somewhere between the first two camps), resulting in a drop of in central revenue guidance from -3% down to -7.5% (with a wider range). The share price, which had already fallen from recent (adjusted) highs of £27 fell from £20 to £9. This put them on a post-warning PE of around 5.5x for a company with relative stable revenues albeit a significant debt load.

The profits warning proved to be a one-off with the price quickly bouncing, and further good news from the sale of their SUSE unit (which fell somewhere between the last two camps described above), and the price peaked at £21.

Recently the share price has once again been weak, closing at around £15.50 with a forward PE of 8 as of yesterday. Today we have a profits warning downgrading central revenue forecasts from -5% to -8% and plans for a strategic review (probably including further asset sales). Will history repeat itself?

I suspect that any fall in excess of 30% may once again be a buying opportunity, but will be doing further research first.

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