TIDMMCRO
RNS Number : 7743R
Micro Focus International plc
14 December 2016
14 December 2016
Micro Focus International plc
Interim results for the six months ended 31 October 2016
Micro Focus International plc ("the Company" or "the Group",
LSE: MCRO.L), the international software product group, announces
unaudited interim results for the six months ended 31 October
2016.
Revenues in the period were $684.7m, 14.2% higher than the prior
year's constant currency ("CCY") figures. Underlying Adjusted
EBITDA of $320.3m was 20.9% higher than that delivered in the
comparable period at CCY.
Pro-forma CCY* revenues increased 1.2% to $684.7m in the six
months ended 31 October 2016, slightly ahead of the guidance range
for the full year. Adjusted Diluted EPS in the period increased by
20.5% to 89.20 cents.
In March 2016 the Company announced it had entered into a
definitive agreement to acquire the entire share capital of
Spartacus Acquisition Holdings Corp. the holding company of Serena
Software Inc. and its subsidiaries (together, "Serena" or "the
Serena Group"). The acquisition completed on 2 May 2016 and
consequently trading results of Serena are included in the results
for the six months ended 31 October 2016 set out below.
In September 2016 the Company announced it had agreed with
Hewlett Packard Enterprises ("HPE") to merge with the software
business assets of HPE ("HPE Software") by way of merger with a
wholly owned subsidiary of HPE. The transaction is expected to
complete in the third quarter of the calendar year 2017.
Exceptional pre-acquisition costs have been incurred in the period
and further exceptional costs will be incurred for the remainder of
the FY17 and to completion in FY18.
Key highlights
-- Pro-forma CCY* revenue growth of 1.2%, driven by:
o Strong performance by the SUSE Product Portfolio where
revenues grew by 23.3% on a pro-forma CCY* basis;
o On plan performance in Micro Focus portfolio with expected
reduction in maintenance and Serena revenues.
-- On a CCY basis:
o Total revenues of $684.7m (2015: CCY $599.6m), an increase of
14.2%.
o Adjusted EBITDA** of $332.5m (2015: CCY $271.7m), an increase
of 22.4%.
o Underlying Adjusted EBITDA increased by 20.9% to $320.3m
(2015: CCY $265.0m).
-- Completion of the Serena acquisition took place on 2 May 2016
for an Enterprise Value of $540.0m on a cash and debt free basis,
partially funded by a share placing in FY16 of 10.9m shares at a
price of 1455 pence raising GBP158.2m ($225.7m) before
expenses.
-- On a pro-forma CCY* basis to provide a better comparison of like-for-like performance:
o Total revenues of $684.7m (2015: pro-forma CCY $676.8m), an
increase of 1.2%.
o Adjusted EBITDA of $332.5m (2015: pro-forma CCY $308.3m), an
increase of 7.8%.
o Underlying Adjusted EBITDA of $320.3m (2015: pro-forma CCY
$301.5m), an increase of 6.2%.
-- Continual focus on efficiencies led Underlying Adjusted
EBITDA margins to improve further to 46.8% (2015: pro-forma CCY
44.5%)
-- Exceptional costs incurred in the period of $41.0m (2015:
$10.7m) relate to integration costs, acquisition costs,
pre-acquisition costs, property costs, severance and legal costs.
Second half exceptional costs are currently estimated to be up to
$80.0m
-- Improved cash generation in the period:
o Cash generated from operations was $201.9m (2015: $162.7m)
representing 69.3% (2015: 62.6%) of Adjusted EBITDA less
exceptional costs.
o Net debt(+) at 31 October 2016 was $1,612.6m (30 April 2016:
$1,078.0m) down from $1,625.0m following the completion of the
Serena acquisition on 2 May 2016.
o Free cash flow**** in the period of $111.0m (2015: $40.3m)
o Net debt to Facility EBITDA** for the 12 month period to 31
October 2016 is a multiple of 2.6 times, decreasing to 2.4 times on
a pro-forma basis including the acquisition of Serena; medium term
target remains 2.5 times.
-- Growth in adjusted diluted earnings per share of 20.5% to 89.20 cents (2015: 74.01 cents)***
-- Proposed interim dividend increased by 75.5% to 29.73 cents
per share (2015: 16.94 cents per share) in line with dividend
policy of full year dividend being twice covered by adjusted
earnings.
Statutory results
-- Operating profit of $163.3m (2015: $150.4m)
-- Profit before tax of $113.2m (2015: $98.8m)
-- Basic earnings per share of 39.57 cents (2015: 40.17 cents) a decrease of 1.5%***
The table below shows the reported results for the Group at
actual exchange rates for the six months ended 31 October 2016
together with CCY comparatives except where stated otherwise:
Results at a glance Six months Six months Growth Year
ended ended /(Decline) ended
31 Oct 30 Apr
2016 31 Oct 2015 % 2016
================================== ============ ============== ============ ==========
Revenue
Total Revenue
Constant Currency $684.7m $599.6m 14.2% $1,241.1m
* Licence $146.9m $134.4m 9.3% $304.8m
* Maintenance $364.2m $324.4m 12.3% $642.6m
* Subscription $144.9m $117.1m 23.7% $246.8m
* Consultancy $28.7m $23.7m 21.1% $46.9m
Reported $684.7m $604.5m 13.3% $1,245.0m
NON GAAP MEASURES
---------------------------------- ------------ -------------- ------------ ----------
Adjusted EBITDA**
Constant Currency $332.5m $271.7m 22.4% $550.0m
Reported $332.5m $270.6m 22.9% $546.8m
Underlying Adjusted
EBITDA**
Constant Currency* $320.3m $265.0m 20.9% $535.7m
Reported $320.3m $263.8m 21.4% $532.5m
STATUTORY MEASURES
---------------------------------- ------------ -------------- ------------ ----------
Pre-tax profit
Constant Currency $113.2m $101.0m 12.1% $201.0m
Reported $113.2m $98.8m 14.6% $195.4m
Earnings per share
***
Basic 39.57c 40.17c (1.5)% 74.50c
Diluted 38.12c 38.58c (1.2)% 71.61c
Adjusted 92.59c 77.06c 20.2% 152.63c
Adjusted Diluted 89.20c 74.01c 20.5% 146.70c
Dividend per share 29.73c 16.94c 75.5% 66.68c
Net debt $1,612.6m $1,454.3m 10.9% $1,078.0m
================================== ============ ============== ============ ==========
* Interim results presented for the six months to 31 October
2016 include the post-acquisition period results for Serena and
GWAVA. Due to the significant size of the Serena acquisition the
directors believe that the interim results are better understood by
looking at the comparative results on a pro-forma basis for the
combination of Serena and Base Micro Focus. The directors do not
consider the GWAVA acquisition to be of a significant size ($0.8m
revenue in the period and a loss to Adjusted EBITDA of $0.1m in the
period) and therefore have not presented GWAVA results in the
pro-forma comparatives.
Serena had a 31 January year end date prior to acquisition.
Similar to other software companies with a perpetual licence model
Serena's revenues were weighted to the end of each financial
quarter and were weighted to the final financial quarter of the
year. Micro Focus' experience is that when the financial year end
is changed following acquisition the weighting of financial
performance moves to the new financial year end. Consequently, in
order to provide a meaningful comparison in the pro-forma results
for the six months to 31 October 2015 the directors have combined
the unaudited internal management information for Serena for the
period from 1 February 2015 to 31 July 2015 and then added in the
Base Micro Focus results for the six months ended 31 October 2015.
The pro-forma comparatives for the year ended 30 April 2016 combine
the unaudited financials for Serena for the year ended 31 January
2016 with the audited figures for Base Micro Focus for the year
ended 30 April 2016. From the date of acquisition, 2 May 2016 to 31
October 2016, Serena contributed $72.6m to revenue and a
contribution to Adjusted EBITDA of $40.0m, before any allocation of
management costs.
** In assessing the performance of the business, the directors
use non GAAP measures "Adjusted Operating Profit", "Adjusted
Operating Costs" and "Adjusted earnings per share", being the
relevant statutory measures, prior to exceptional items,
amortization of purchased intangibles and share based compensation.
"Adjusted EBITDA" is the Adjusted Operating Profit prior to
depreciation and amortization of purchased software. Underlying
Adjusted EBITDA removes the impact of net
capitalization/amortization of development costs and foreign
currency gains and losses from Adjusted EBITDA whilst Facility
EBITDA is Adjusted EBITDA before amortization and impairment of
capitalized development costs. A reconciliation of these profit
measures is given in note 8.
*** Earnings per share are detailed in note 11.
**** Free cash flow is cash generated from operations less net
interest payments and loan costs, tax, purchase of intangible
assets and purchase of property, plant and equipment.
+ Net debt is defined in note 18. The acquisition of Serena
completed on 2 May 2016 for an Enterprise Value of $540m. Pro-forma
for the completion of the acquisition net debt at 30 April 2016
would have been $1,625.0m.
Kevin Loosemore, Executive Chairman of Micro Focus,
commented:
"The board is delighted with our progress. Our focus on
delivering to our customers by making detailed product by product
decisions and investments has resulted in the business achieving
modest like-for-like revenue growth. Our investments have resulted
in strong growth in SUSE and a reduced rate of decline in the Micro
Focus portfolio. Whilst we have had a good start to the year and
completed two acquisitions, we are maintaining our revenue guidance
for FY17 being in the range minus 2% to zero% on FY16 on a CCY
basis, pro-forma for the acquisition of Serena.
"Mergers and acquisitions continue to be a key component of our
strategy. The key strategic announcement in the period was the HPE
Software transaction which is on target to complete in the third
quarter of calendar year 2017. This is a complex transaction that
will transform the Group in a similar way to the Attachmate
transaction back in 2014 and provides the opportunity for enhanced
shareholder returns over the medium-term.
"The acquisition of Serena completed at the beginning of the
period together with a number of small acquisitions across the
business comprising GWAVA Inc., openATTIC on 1 November and the
OpenStack IaaS and Cloud Foundry Paas talent and technology assets
from HPE which was announced on 30 November and is currently
expected to close in the first quarter of calendar year 2017.
"We are delighted to announce that our interim dividend is
increasing to 29.73 cents from 16.94 cents in line with our twice
covered dividend policy."
Enquiries:
Micro Focus Tel: +44 (0) 1635 32646
Kevin Loosemore, Executive
Chairman
Mike Phillips, Chief
Financial Officer
Tim Brill, IR Director
Powerscourt Tel: +44 (0) 20 7250 1446
Juliet Callaghan
Simon Compton
Harriet O'Reilly
About Micro Focus
Micro Focus (LSE: MCRO.L) is a global enterprise software
Company supporting the technology needs and challenges of the
Global 2000. Our solutions help organizations leverage existing IT
investments, enterprise applications and emerging technologies to
address complex, rapidly evolving business requirements while
protecting corporate information at all times. Our product
portfolios are Micro Focus and SUSE. Within Micro Focus our
solution portfolios are COBOL Development and Mainframe Solutions,
Host Connectivity, Identity and Access Security, IT Development and
Operations Management Tools, and Collaboration and Networking. For
more information, visit: www.microfocus.com. SUSE, a pioneer in
Open Source software, provides reliable, interoperable Linux, cloud
infrastructure and storage solutions that give enterprises greater
control and flexibility. For more information, visit:
www.suse.com.
Forward-looking statements
Certain statements in this interim report are forward-looking.
Although the Group believes that the expectations reflected in
these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to be correct. Because
these statements involve risks and uncertainties, actual results
may differ materially from those expressed or implied by these
forward-looking statements. The Group undertakes no obligation to
update any forward-looking statements whether as a result of new
information, future events or otherwise.
Executive Chairman's Statement
Financial performance
The period under review has been one of considerable economic
and political uncertainty. Against this backdrop, Micro Focus'
strategy has remained constant. Together with our ongoing merger
and acquisition activity, the board is delighted with the financial
performance of the business with growth in revenue and growth in
Underlying Adjusted EBITDA. We would like to thank our employees
for their continued dedication, commitment and hard work in
delivering the first half results.
At the beginning of FY2017 our revenue guidance was for constant
currency revenues of minus 2% to zero% on a pro-forma basis.
Following completion of the acquisition of Serena, the Group had
pro-forma reported revenues for the year to 30 April 2016 of
$1,407.4m and Underlying Adjusted EBITDA of $613.4m. Adjusting for
the exchange rates experienced in the six months to 31 October
2016, these pro-forma numbers become $1,401.6m and $615.4m on a CCY
basis.
Micro Focus Group delivered revenues and Underlying Adjusted
EBITDA in the six months to 31 October 2016 of $684.7m and $320.3m
respectively, an increase in pro-forma CCY revenues of 1.2%. Our
net debt at 31 October 2016 was $1,612.6m which is a small
reduction from the $1,625.0m at 30 April 2016 on a pro-forma basis
for the acquisition of Serena. Net debt to pro-forma Facility
EBITDA for the 12 months period to 31 October 2016 is 2.4 times
which is slightly below our medium term target of 2.5 times.
Further details on the operational performance of our portfolios,
Micro Focus and SUSE, are contained in the CEO reports from Stephen
Murdoch and Nils Brauckmann.
Corporate developments: proposed merger with HPE Software
Micro Focus has a firm belief that there are significant
segments of the infrastructure software market that have matured.
The likely response to this is consolidation. To be successful in
this stage of a market both operational effectiveness and scale are
critical. We believe that Micro Focus is now well positioned to
lead in this space.
On 7 September 2016 we announced that we had entered into a
definitive agreement with Hewlett Packard Enterprise ("HPE") on the
terms of a transaction (the "Transaction") in which we agreed to
acquire HPE's software business segment ("HPE Software") by way of
a merger (the "Merger") with a wholly owned subsidiary of HPE
incorporated to hold the business of HPE Software for the purposes
of the Transaction. At the time of announcement the Transaction
valued HPE Software at $8.8bn consisting of $6.3bn of Micro Focus
equity and a $2.5bn dividend to HPE funded by debt.
The Transaction presented a rare opportunity to increase
significantly Micro Focus' scale and breadth through the
combination with a business operating in adjacent and complementary
product areas with similar characteristics and benefitting from a
high proportion of recurring revenues and strong cash conversion.
On a pro-forma basis in the 12 months to 30 April 2016, HPE
Software and Micro Focus would have combined annual revenues of
US$4.5bn and EBITDA of US$1.35bn, creating one of the world's
largest pure-play infrastructure software companies.
The Transaction is complex and is expected to complete in the
third quarter of calendar year 2017. HPE is in the process of
carving out HPE Software from its existing business. Micro Focus
will be seeking approval for the Transaction and a Return of Value
of circa $400m to Micro Focus shareholders in a Circular to
shareholders is expected to be issued in May 2017. The Circular
will include historic financial information on HPE Software for the
three years ended 31 October 2016 under IFRS. Following shareholder
approval of the Transaction the Return of Value will be made to
Micro Focus shareholders immediately prior to completion of the
Transaction.
The Transaction provides considerable scope to improve product
innovation and customer responsiveness through the application of
Micro Focus' disciplined operating model. This can be achieved
whilst simultaneously improving profitability. HPE Software's
Underlying Adjusted EBITDA margin of c.21% compares with Micro
Focus equivalent margin for its mature software assets of c.46%
(excluding SUSE) in the year ended 30 April 2016. Micro Focus
believes it will be possible to improve the margin delivered by HPE
Software's mature software assets (c.80% of revenue) to Micro
Focus' level by the end of the third full financial year following
completion (i.e. year ending 30 April 2021).
The board expects the Merger to enhance adjusted earnings per
share by the first full financial year ending after completion,
with scope for further benefits as operational improvements are
realized across the Enlarged Group.
To fund the Transaction, the Company has entered into
commitments with JP Morgan Chase ("JPMC"), HSBC, Barclays and The
Royal Bank of Scotland (together "the Banks") to provide $5bn of
term loans and with the Banks and Bank of America Merrill Lynch to
provide a $0.5bn revolving facility. These facilities will be
marketed to lenders in the New Year.
In preparation for the Merger and integration of the business,
Micro Focus has established an Integration Management Office
("IMO") which interfaces to the Divestiture Management Office
("DMO") of HPE. The DMO is responsible for carving out the HPE
Software business into a stand-alone business with which Micro
Focus will merge. The DMO is managing multiple work-streams related
to all facets of the business. Our IMO co-ordinates the
interactions to ensure that appropriate representation is provided
on each work-stream. The IMO is led by our Business Operations and
Integration Director supported by internal staff and external
consultants led by the same Deloitte team that worked on the
Attachmate transaction and integration. The IMO will continue in
operation beyond completion and throughout FY2018. HPE Software is
also implementing a new business software stack as part of the
carve-out. It is our intention that Micro Focus will move onto the
new systems after completion. Consequently, integration costs will
be incurred and treated as exceptional throughout this integration
period.
On 7 September we also announced that SUSE was to become HPE's
preferred Linux partner and explore additional collaboration,
leveraging SUSE's OpenStack expertise for joint innovation around
HPE's Helion, Openstack Infrastructure as a Service (IaaS) and
Stackato Platform as a Service (PaaS) solutions. HPE and SUSE have
now reached a commercial arrangement over the transfer of assets
and staff related to OpenStack IaaS and Cloud Foundry PaaS that,
subject to regulatory clearance, is expected to complete in the
first quarter of calendar year 2017.
Delivering value to customers
In the period it has been particularly pleasing to note the
number of customer successes from product innovations that have
been made following the acquisition of the Attachmate Group ("TAG")
in November 2014. In a number of cases technologies from one
portfolio have been used to enhance products in the other,
particularly where there were product overlaps. Customers were also
protected as product life expectancies have increased with Micro
Focus ownership. We anticipate that similar benefits will accrue
with the HPE transaction.
Delivering value to shareholders
The board has adopted a very clear plan of value creation.
Our priority is to improve the performance of the business in
order to maximize the opportunity to generate modest revenue growth
in the medium-term. At the same time we have created flexibility to
allow value creation to shareholders through cash distributions or
acquisitions as appropriate. We will do nothing that will constrain
our ability to achieve organic growth and we are currently
investing significant amounts on activities designed to enhance
growth.
The board is targeting a net debt to Facility EBITDA multiple of
approximately 2.5 times. This is a modest level of gearing for a
company with the cash generating qualities of Micro Focus. We are
confident that this level of debt would not reduce our ability to
deliver growth, invest in products and/or make appropriate
acquisitions. At Completion of the HPE Software Transaction it is
anticipated that Net Debt to Facility EBITDA will increase to
approximately 3.3 times on a pro-forma basis and that the target of
2.5 times will be achieved two years after Completion.
In July the board announced that in future the dividend payout
would be twice covered by adjusted earnings of the Group. This
policy took effect for the final dividend for FY16. Applying this
policy to the interim dividend results in an increase in interim
dividend of 75.5% to 29.73 cents (2015: 16.94 cents)
The dividend will be paid in Sterling equivalent to 23.60 pence
per share, based on an exchange rate of GBP1 = $1.26, the rate
applicable on 13 December 2016, the date on which the board
resolved to pay the interim dividend. The dividend will be paid on
27 January 2017 to shareholders on the register at 6 January
2017.
Outlook
In accordance with our four phase plan established at the time
of the acquisition of TAG in 2014 our intention was to stabilize
revenues around a solid core in FY17 from which we aim to grow in
FY18. We have had a good start to the year and are maintaining our
revenue guidance for FY17 being in the range minus 2% to zero% on
FY16 on a CCY basis, pro-forma for the acquisition of Serena.
Having delivered eleven and a half years of approximately 28.9%
compound returns to investors we believe we have a strong
operational and financial model that can continue to scale and
provide excellent returns to our shareholders.
Kevin Loosemore
Executive Chairman
14 December 2016
Financial Review
Interim results presented for the six months to 31 October 2016
include the post-acquisition period results for Serena and GWAVA.
Due to the significant size of the Serena acquisition the directors
believe that the interim results are better understood by looking
at the comparative results on a pro-forma basis for the combination
of Serena and Base Micro Focus. The directors do not consider the
GWAVA acquisition to be of a significant size ($0.8m revenue in the
period and a loss to Adjusted EBITDA of $0.1m in the period) and
therefore have not presented GWAVA results in the pro-forma
comparatives.
Serena had a 31 January year end date prior to acquisition.
Similar to other software companies with a perpetual licence model
Serena's revenues were weighted to the end of each financial
quarter and were weighted to the final financial quarter of the
year. Micro Focus' experience is that when the financial year end
is changed following acquisition the weighting of financial
performance moves to the new financial year end. Consequently, in
order to provide a meaningful comparison in the pro-forma results
for the six months to 31 October 2015 the directors have combined
the unaudited internal management information for Serena for the
period from 1 February 2015 to 31 July 2015 and then added in the
Base Micro Focus results for the six months ended 31 October 2015.
The pro-forma comparatives for the year ended 30 April 2016 combine
the unaudited financials for Serena for the year ended 31 January
2016 with the audited figures for Base Micro Focus for the year
ended 30 April 2016. From the date of acquisition, 2 May 2016 to 31
October 2016, Serena contributed $72.6m to revenue and a
contribution to Adjusted EBITDA of $40.0m, before any allocation of
management costs.
A reconciliation between the GAAP and Non-GAAP performance
measures is given on page 8 (Revenue), page 10 (Adjusted Operating
Profit, Adjusted EBITDA and Underlying Adjusted EBITDA) and note 8.
The Group operates two product portfolios (i) Micro Focus and (ii)
SUSE. These are the reporting segments and the cash generating
units for the Group.
The Micro Focus Product Portfolio contains our mature
infrastructure software products that are managed on a portfolio
basis akin to a "fund of funds" investment portfolio. This
portfolio is being managed with a single product development group
that makes and maintains the software, whilst the software is sold
and supported through a geographic Go-to-Market ("GTM")
organization. Products are organised into five sub-portfolios based
on industrial logic. During the period Serena's product set was
added to the Development & IT Operations Management Tools
sub-portfolio and towards the end of the period GWAVA was added to
Collaboration & Networking.
SUSE's characteristics are different due to the Open Source
nature and the growth profile of its offerings. After the period
end SUSE made its first acquisition of openATTIC, a storage
management software solution, and entered into an agreement to take
over assets and staff from HPE related to OpenStack IaaS and Cloud
Foundry PaaS technology.
Our revenue guidance at the beginning of the year was for Group
revenues for the full year to decline by between minus 2% and zero%
when compared to the pro-forma CCY revenues of the comparable
period with growth in SUSE expected to partially offset the
anticipated decline in the Micro Focus Product Portfolio based on
the revenue trends in the sub-portfolios. The performance in the
period was revenue growth of 1.2% when compared to pro-forma CCY
revenues, which was slightly ahead of our revenue guidance for the
full year.
The portfolios have directly controlled costs and then an
allocation of costs of the functions that are managed within the
Micro Focus portfolio and provide services to both portfolios
together with centrally managed support function costs. Set out in
the table below are the profitability metrics for our two product
portfolios including the breakdown of Adjusted Operating Profit for
the period and the reconciliation between Adjusted Operating
Profit, Adjusted EBITDA and Underlying Adjusted EBITDA (note
8):
Six months ended Six months Six months
31 October 2016 ended ended
As reported 31 October 31 October
Actual 2015 2015
Pro-forma As reported
CCY Actual
--------------------------- --------------------------- ---------------------------
Micro Micro SUSE Group Micro SUSE Group
Focus SUSE Group Focus Focus
$m $m $m $m $m $m $m $m $m
-------------------------- -------- ------- -------- -------- ------- -------- -------- ------- --------
Segment revenue 537.3 147.4 684.7 557.3 119.5 676.8 483.3 121.2 604.5
Directly managed
costs (277.3) (81.2) (358.5) (311.0) (64.3) (375.3) (278.7) (62.0) (340.7)
Allocation of
centrally managed
costs 12.7 (12.7) - 13.0 (13.0) - 16.3 (16.3) -
Total Adjusted
Operating costs (264.6) (93.9) (358.5) (298.0) (77.3) (375.3) (262.4) (78.3) (340.7)
Adjusted Operating
Profit 272.7 53.5 326.2 259.3 42.2 301.5 220.9 42.9 263.8
Margin 50.8% 36.3% 47.6% 46.5% 35.3% 44.5% 45.7% 35.4% 43.6%
Adjusted Operating
Profit 272.7 53.5 326.2 259.3 42.2 301.5 220.9 42.9 263.8
Depreciation
of property,
plant and equipment 4.7 1.0 5.7 5.1 0.8 5.9 4.7 1.1 5.8
Amortization
of software intangibles 0.5 0.1 0.6 0.9 - 0.9 0.7 0.2 0.9
-------------------------- -------- ------- -------- -------- ------- -------- -------- ------- --------
Adjusted EBITDA 277.9 54.6 332.5 265.3 43.0 308.3 226.3 44.2 270.5
Foreign exchange
credit (8.0) (1.3) (9.3) 0.1 (0.5) (0.4) (0.4) - (0.4)
Net capitalization
of development
costs (2.9) - (2.9) (6.4) - (6.4) (6.4) - (6.4)
-------------------------- -------- ------- -------- -------- ------- -------- -------- ------- --------
Underlying adjusted
EBITDA 267.0 53.3 320.3 259.0 42.5 301.5 219.5 44.2 263.7
-------------------------- -------- ------- -------- -------- ------- -------- -------- ------- --------
Margin 49.7% 36.2% 46.8% 46.5% 35.6% 44.5% 45.4% 36.5% 43.6%
-------------------------- -------- ------- -------- -------- ------- -------- -------- ------- --------
The table below shows the revenue breakdown by type within the
two product portfolios for the six months to 31 October 2016, the
pro-forma CCY and reported revenue for the six months to 31 October
2015 and the year ended 30 April 2016.
Six months Six months Six months Year Year
ended ended ended ended ended
31 October 31 October 31 October 30 April 30 April
2016 2015 2015 2016 2016
As reported Pro-forma (Decline)/ As reported Pro-forma As reported
Actual CCY Growth Actual CCY Actual
$m $m % $m $m $m
Micro Focus Product
Portfolio
Licence 146.9 146.6 0.2% 134.5 335.0 304.8
Maintenance 364.2 382.6 (4.8%) 327.4 759.6 644.5
Consultancy 26.2 28.1 (6.8%) 21.4 55.3 41.9
------------------------ ------------- ------------ ------------ ------------- ----------- -------------
537.3 557.3 (3.6%) 483.3 1,149.9 991.2
------------------------ ------------- ------------ ------------ ------------- ----------- -------------
SUSE Product Portfolio
Licence - - - - - -
Maintenance - - - - - -
Subscription 144.9 117.1 23.7% 118.7 246.8 248.9
Consultancy 2.5 2.4 4.2% 2.5 4.9 4.9
------------------------ ------------- ------------ ------------ ------------- ----------- -------------
147.4 119.5 23.3% 121.2 251.7 253.8
------------------------ ------------- ------------ ------------ ------------- ----------- -------------
Total Revenue
Licence 146.9 146.6 0.2% 134.5 335.0 304.8
Maintenance 364.2 382.6 (4.8%) 327.4 759.6 644.5
Subscription 144.9 117.1 23.7% 118.7 246.8 248.9
Consultancy 28.7 30.5 (5.9%) 23.9 60.2 46.8
------------------------ ------------- ------------ ------------ ------------- ----------- -------------
Revenue 684.7 676.8 1.2% 604.5 1,401.6 1,245.0
======================== ============= ============ ============ ============= =========== =============
GWAVA Inc. was acquired on 30 September 2016 and contributed
$0.8m to revenue in the period and is not included in the pro-forma
CCY comparatives. Excluding GWAVA revenues grew by 1.0% compared to
pro-forma CCY revenues.
We are not providing renewal rate information for SUSE or Micro
Focus within this set of results. Our methodology is still being
refined in order to accommodate data from our multiple systems. We
believe that until renewal information is provided following the
trends on the maintenance revenue for the Micro Focus
sub-portfolios and subscription revenues for SUSE provides the best
guidance on performance.
The table below shows regional revenue for the six months to 31
October 2016, the pro-forma CCY and reported regional revenue for
the six months to 31 October 2015 and the year ended 30 April
2016:
Six months Six months Six months Year Year
ended ended ended ended ended
31 October 31 October 31 October 30 April 30 April
2016 2015 2015 2016 2016
As reported Pro-forma (Decline)/ As reported Pro-forma As reported
Actual CCY Growth Actual CCY Actual
$m $m $m $m $m
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Micro Focus
North America 299.8 309.7 (3.2%) 260.8 627.6 525.2
International 187.7 197.7 (5.1%) 180.1 420.4 377.0
Asia Pacific &
Japan 49.8 49.9 (0.2%) 42.4 101.9 89.0
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Total 537.3 557.3 (3.6%) 483.3 1,149.9 991.2
---------------- ------------- ------------ ------------- ------------- ----------- -------------
SUSE
North America 59.9 50.8 17.9% 50.9 108.6 108.6
International 70.0 54.2 29.2% 56.2 112.7 115.6
Asia Pacific &
Japan 17.5 14.5 20.7% 14.1 30.4 29.6
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Total 147.4 119.5 23.3% 121.2 251.7 253.8
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Total Revenue
North America 359.7 360.5 (0.2%) 311.7 736.2 633.8
International 257.7 251.9 2.3% 236.3 533.1 492.6
Asia Pacific &
Japan 67.3 64.4 4.5% 56.5 132.3 118.6
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Total Revenue 684.7 676.8 1.2% 604.5 1,401.6 1,245.0
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Detailed analysis of the revenue performance of each of the
product portfolios is provided in the CEO reports.
Reconciliation of pro-forma CCY revenues to reported revenues
for the six months to 31 October 2015 and the year ended 30 April
2016
6 months Year
ended ended
31 October 30 April
2015 2016
$m $m
--------------------- ------------ ----------
Micro Focus
As reported 483.3 991.2
Serena 77.8 162.4
Currency impact (3.8) (3.7)
--------------------- ------------ ----------
Pro-forma CCY 557.3 1,149.9
--------------------- ------------ ----------
SUSE
As reported 121.2 253.8
Currency impact (1.7) (2.1)
--------------------- ------------ ----------
CCY 119.5 251.7
--------------------- ------------ ----------
Total Revenue
As reported 604.5 1,245.0
Serena 77.8 162.4
Currency impact (5.5) (5.8)
--------------------- ------------ ----------
Total Pro-forma CCY 676.8 1,401.6
--------------------- ------------ ----------
Operating costs
The operating costs (including exceptional costs of $41.0m) for
the six months ended 31 October 2016 compared with the pro-forma
CCY and as reported six months to 31 October 2015 and the year
ended 30 April 2016 are shown below:
Six months Six Six months Year Year
ended months ended ended ended
31 October ended 31 October 30 April 30 April
2016 31 October 2015 2016 2016
As reported 2015 (Decline)/ As reported Pro-forma As reported
Actual Pro-forma Growth Actual CCY Actual
CCY
$m $m % $m $m $m
-------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Costs of goods sold 74.3 77.1 (3.6%) 66.5 157.2 135.4
Selling and distribution 218.5 210.6 3.8% 198.8 442.8 416.3
Research and development 135.5 130.9 3.5% 122.7 277.2 259.4
Administrative expenses 93.1 71.4 30.4% 66.1 148.1 139.0
-------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Total operating
costs 521.4 490.0 6.4% 454.1 1,025.3 950.1
-------------------------- ------------- ------------ ------------- ------------- ----------- -------------
On a pro-forma CCY basis, cost of goods sold for the period
decreased by $2.8m to $74.3m (2015: pro-forma CCY $77.1m) of which
the exceptional costs were $1.3m (2015: pro-forma CCY $0.9m). The
reduction is partly as a result of lower consulting revenues and
continuing cost efficiencies.
Selling and distribution costs, excluding the amortization of
purchased trade names and customer relationship intangible assets
of $69.4m (2015: pro-forma CCY $53.3m), were $149.1m (2015:
pro-forma CCY $157.3m). Within these costs were exceptional costs
of $2.0m (2015: pro-forma CCY $3.9m), thus the underlying costs
were $147.1m (2015: pro-forma CCY $153.4m), a decrease of 4.1% on
the prior period on a pro-forma CCY basis. The reduction was mostly
due to cost saving actions taken at the end of FY16.
Research and development expenses, excluding the amortization of
purchased technology intangible assets of $37.0m (2015: pro-forma
CCY $37.6m), were $98.5m (2015: pro-forma CCY $93.2m), and after
excluding exceptional costs of $2.2m (2015: pro-forma CCY $0.7m),
the resulting costs were $96.3m (2015: pro-forma CCY $92.6m) an
increase of 4.0% on the prior period on a pro-forma CCY basis. This
figure is equivalent to approximately 14.1% of revenue (2015:
pro-forma CCY 13.7%).
The impact of net capitalization of internal development costs
was $2.9m (2015: pro-forma CCY $6.4m). Research and development
costs prior to amortization of purchased intangibles, exceptional
items and the capitalization and amortization of internal
development costs were $99.3m (2015: pro-forma CCY $99.0m) an
increase of 0.3%.
At 31 October 2016 the net book value of capitalized development
costs on the consolidated statement of financial position was
$46.5m (2015: $37.7m).
Administrative expenses were $93.1m (2015: pro-forma CCY
$71.4m). Excluding share based compensation of $15.5m (2015:
pro-forma CCY $12.8m), exceptional costs of $35.6m (2015: pro-forma
CCY $4.5m) and an exchange gain of $9.3m (2015: pro-forma CCY gain
of $0.4m), administrative expenses decreased by 6.1% to $51.2m
(2015: pro-forma CCY $54.5m). The decrease has arisen mostly from
continuing efficiencies. Share based compensation was $15.5m (2015:
pro-forma CCY $12.8m), being ASG cost of $8.1m, LTIP cost of $6.9m
and Sharesave Scheme costs of $0.5m.
Amortization of purchased intangibles included in the above cost
categories for the six months totalled $106.4m (2015: pro-forma CCY
$91.9m).
Adjusted Operating Costs (excluding amortization of purchased
intangibles, exceptional costs and share-based compensation) were
$358.5m (2015: pro-forma CCY $375.3m) a fall of $16.8m. The
reduction in Adjusted Operating Costs has resulted from integration
efficiencies achieved through the acquisition of Serena including
the benefits of restructuring, rationalizing mainframe
infrastructure, and closing the head office property in San Mateo.
Savings have also been achieved from restructuring initiatives
taken at the end of the last financial year in the Micro Focus
Product Portfolio and ongoing focus on tightly controlling
discretionary costs. Cost savings have been partially offset by
ongoing investments in the SUSE Product Portfolio to support growth
and a reduction in the net capitalisation of development costs as
the adoption of the Micro Focus policy into TAG begins to
normalise. Adjusted Operating Costs and Adjusted EBITDA benefited
from an increase in the foreign exchange gain in the period.
As a result of the HPE Software Merger we have put our systems
project ("TITAN") on hold as the plan is to migrate to HPE
Software's new system stack following completion. This will mean
that some of the further efficiencies planned with the integration
of TAG and Serena have been delayed.
The exceptional costs in the period were $41.0m (2015: $10.7m)
including:
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
As reported As reported As reported
Actual Actual Actual
$m $m $m
--------------------------------- ------------- ------------- -------------
Integration costs 13.4 8.4 23.6
Acquisition and pre-acquisition
costs 21.1 0.5 6.1
Severance costs 4.0 0.7 (4.8)
Property costs 2.5 1.1 6.0
Royalty provision releases - - (3.0)
--------------------------------- ------------- ------------- -------------
41.0 10.7 27.9
--------------------------------- ------------- ------------- -------------
The HPE Software Transaction is anticipated to complete in the
third quarter of calendar year 2017. In the period up to close it
is anticipated that there will be further exceptional costs
incurred related to pre-acquisition costs, integration costs,
property and severance costs in relation to the HPE Software
Transaction and the other acquisitions made during the current
year. It is currently estimated that up to $80m of exceptional
costs will be incurred before 30 April 2017 and a further $60m in
the period up to the completion of the HPE Software Transaction.
Post completion exceptional costs have not yet been quantified.
Currency impact
During the six months to 31 October 2016, 62.9% of our revenues
were contracted in US dollars, 20.8% in Euros, 4.7% in Sterling,
3.5% in Yen and 8.1% in other currencies. In comparison, 50.4% of
our costs are US dollar denominated, 13.0% in Sterling, 19.2% in
Euros, 1.8% in Yen and 15.6% in other currencies.
This weighting of revenue and costs means that if the US$: Euro
or US$: Yen exchange rates move during the period, the revenue
impact is greater than the cost impact, whilst if US$: Sterling
rate moves during the period the cost impact exceeds the revenue
impact. Consequently, actual US$ EBITDA can be impacted by
significant movements in US$ to Euro, Yen and Sterling exchange
rates.
The currency movement for the US dollar against Sterling, Euro
and Yen was a strengthening of 13.3% and a weakening of 0.1% and
17.0% respectively when looking at the average exchange rates in
the six months to 31 October 2016 compared to those in the six
months to 31 October 2015.
In order to provide CCY comparatives, we have restated the
pro-forma results of the Group for the six months ended 31 October
2015 at the same average exchange rates as those used in reported
results for the six months ended 31 October 2016. Consequently,
pro-forma CCY revenues reduce from $682.3m to $676.8m, a reduction
of 0.8%, and pro-forma CCY Underlying Adjusted EBITDA increases
from $300.5m to $301.5m, an increase of 0.3%.
Intercompany loan arrangements within the Group are typically
denominated in the local currency of the overseas affiliate.
Consequently, any movement in the respective local currency and US$
will have an impact on the converted US$ value of the loans. This
foreign exchange movement is taken to the consolidated statement of
comprehensive income. The Group's UK Corporation Tax liability is
denominated in Sterling and any movement of the US$: Sterling rate
will give rise to a foreign exchange gain or loss which is also
taken to the consolidated statement of comprehensive income. The
foreign exchange gain for the period is approximately $9.3m (2015:
pro-forma CCY gain of $0.4m).
Adjusted EBITDA and Underlying Adjusted EBITDA
Adjusted EBITDA in the period increased by $24.2m to $332.5m
(2015: pro-forma CCY $308.3m). The increase in Adjusted EBITDA is
as a result of the increase in pro-forma CCY revenue of 1.2% in the
period and a reduction in adjusted operating costs of 4.5%,
including an increase in the foreign exchange credit in the
period.
Underlying Adjusted EBITDA in the year increased by $18.8m to
$320.3m (2015: pro-forma CCY $301.5m) at a margin of 46.8% (2015:
pro-forma CCY 44.5%). The increase in Underlying Adjusted EBITDA is
smaller as it does not benefit from the increase in the foreign
exchange credit or suffer from the reduction in net capitalization
of development costs.
Six months Six Six months Year Year
ended months ended ended ended
31 October ended 31 October 30 April 30 April
2016 31 October (Decline)/ 2015 2016 2016
As reported 2015 Growth As reported Pro-forma As reported
Actual Pro-forma Actual CCY Actual
CCY
$m $m % $m $m $m
------------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Revenue 684.7 676.8 1.2% 604.5 1,401.6 1,245.0
------------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Adjusted EBITDA 332.5 308.3 7.8% 270.6 629.9 546.8
Foreign exchange
gain (9.3) (0.4) (0.4) (3.1) (2.9)
Net
(capitalization)/amortization
of development costs (2.9) (6.4) (6.4) (11.4) (11.4)
------------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Underlying Adjusted
EBITDA 320.3 301.5 6.2% 263.8 615.4 532.5
------------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Underlying Adjusted
EBITDA Margin 46.8% 44.5% 5.2% 43.6% 43.9% 42.8%
------------------------------- ------------- ------------ ------------- ------------- ----------- -------------
Both revenue and EBITDA in the current period have been reduced
by the fair value deferred revenue haircut of $6.4m that was
applied as part of the acquisition of TAG ($3.8m), Serena ($2.5m)
and GWAVA ($0.1m). The impact of this was $0.9m less than in the
comparative period (2015: pro-forma CCY $7.3m).
Reconciliation of pro-forma CCY Adjusted EBITDA and Underlying
Adjusted EBITDA to reported Adjusted EBITDA and Underlying Adjusted
EBITDA for the six months to 31 October 2015 and the year ended 30
April 2016
Six months ended Year ended 30 April
31 October 2015 2016
------------------------------------- -------------------------------------
Adjusted Underlying Adjusted Underlying
Operating Adjusted Adjusted Operating Adjusted Adjusted
Profit EBITDA EBITDA Profit EBITDA EBITDA
$m $m $m $m $m $m
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Micro Focus
As reported 220.9 226.4 219.5 453.3 465.1 451.1
Serena 36.3 36.8 36.7 80.4 81.2 80.9
Currency impact 2.1 2.1 2.8 3.3 3.6 3.7
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Pro-forma CCY 259.3 265.3 259.0 537.0 549.9 535.7
----------------- ----------- ----------- ----------- ----------- ----------- -----------
SUSE
As reported 42.9 44.2 44.3 79.8 81.7 81.4
Currency impact (0.7) (1.2) (1.8) (0.6) (1.7) (1.7)
----------------- ----------- ----------- ----------- ----------- ----------- -----------
CCY 42.2 43.0 42.5 79.2 80.0 79.7
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Total
As reported 263.8 270.6 263.8 533.1 546.8 532.5
Serena 36.3 36.8 36.7 80.4 81.2 80.9
Currency impact 1.4 0.9 1.0 2.7 1.9 2.0
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Total Pro-forma
CCY 301.5 308.3 301.5 616.2 629.9 615.4
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Operating profit
Operating profit was $163.3m (2015: $150.4m). Within the
operating profit is $41.0m (2015: $10.7m) of exceptional costs.
Adjusted operating profit (excluding amortization of purchased
intangibles, exceptional costs and share-based compensation) was
$326.2m (2015: $263.9m).
Net finance costs
Net finance costs were $49.0m (2015: $50.4m) including the
amortization of $7.3m (2015: $8.1m) of prepaid facility
arrangement, original issue discounts and facility fees incurred on
the Group's loan facilities, loan interest and commitment fees of
$41.9m (2015: $42.1m), interest on pension liability $0.3m (2015:
$0.2m) and other interest costs of $nil (2015: $0.4m) offset by
$0.5m (2015: $0.4m) of interest received. Net finance costs have
decreased by $1.4m, mostly due to reduced loan interest and
commitment fees ($0.2m), a decrease in the amortization of prepaid
facility arrangements, original issue discounts and facility fees
($0.8m) and a decrease in other interest costs of $0.4m.
Profit before tax and adjusted profit before tax
Profit before tax was $113.2m (2015: reported $98.8m). Adjusted
profit before tax was $276.2m (2015: reported $212.3m):
Six months ended Six months Year ended
31 October 2016 ended 30 April
As reported 31 October 2016
(unaudited) 2015 As reported
As reported (audited)
(unaudited)
$'000 $'000 $'000
--------------------------- ----------------- ------------- -------------
Profit before tax 113,206 98,835 195,396
Share based compensation 15,521 11,856 28,793
Amortization of purchased
intangibles 106,394 90,958 181,934
Exceptional costs 41,048 10,651 27,853
Adjusted profit before
tax 276,169 212,300 433,976
--------------------------- ----------------- ------------- -------------
The tax charge for the period was $22.6m (2015: $11.3m) with the
Group's effective tax rate ("ETR") being 20.0% (2015: 11.4%). The
tax charge on adjusted profit before tax for the period was $64.1m
(2015: $44.6m), which represents an ETR on adjusted profit before
tax of 23.2% (2015: 21.0%) as set out below:
Six months ended Six months ended Year ended
31 October 2016 31 October 2015 30 April 2016
(actual) (actual) (actual)
(unaudited) (unaudited) (audited)
------------------------------------- ------------------------------------- ----------------------------------
Adjusted Adjusted Adjusted
Actual Adjusts measures Actual Adjusts measures Actual Adjusts measures
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ------------
Profit
before
tax 113,206 162,963 276,169 98,835 113,465 212,300 195,396 238,580 433,976
Taxation (22,589) (41,513) (64,102) (11,297) (33,262) (44,559) (32,424) (67,766) (100,190)
----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ------------
Profit
after
tax 90,617 121,450 212,067 87,538 80,203 167,741 162,972 170,814 333,786
Effective
tax rate 20.0% 23.2% 11.4% 21.0% 16.6% 23.1%
----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ------------
In computing adjusted profit before tax, $163.0m of adjustments
have been made for the items shown in the adjusted profit before
tax section above, of which the associated tax is $41.5m.
The Group's ETR for the six months ended 31 October 2016 (20.0%)
is higher than the previous year (11.4%) mainly due to the high
proportion of disallowable exceptional costs in the current year
relating to the HPE Software Transaction.
The Adjusted ETR for the six months ended 31 October 2016
(23.2%) is higher than the previous year (2015: 21.0%). This is due
to intra-group transfer pricing changes to manage risk arising from
the OECD's Base Erosion and Profit Shifting ("BEPS")
initiative.
The Group continues to benefit from the UK's Patent Box regime.
Benefits during the six months to 31 October 2016 were $4.3m (2015:
$3.8m).The Group realized benefits in relation to intra-Group
financing in the six months to 31 October 2016 of $8.4m (2015:
$7.2m).
Ignoring the impact of the Merger with HPE Software the Group's
medium-term Adjusted ETR is expected to be between 23% and 27% of
the Group's adjusted profit before tax, in line with guidance
issued at year end. The enacted reduction in the UK's corporation
tax rate from 18% to 17% from 1 April 2020 is not expected to give
rise to a material reduction in the Adjusted ETR.
The Group's cash taxes paid in the period were $18.2m, compared
to $47.7m in the six months to 31 October 2015. The prior year
figure included $27.2m in respect of US Federal income tax
liabilities for the year ended 30 April 2016 and previous years.
Following a recalculation of the respective liabilities, a
substantial part of that payment was subsequently carried forward
at 30 April 2016 as a debtor, reducing payments required in the
current year.
There have been no significant developments in relation to the
UK tax claim impacting the Group's tax returns for the years ended
30 April 2009 through to 2015, which is under review by HMRC. The
Group maintains a provision for the full potential liability of
$4.7m at 31 October 2016. The provision has reduced by $0.9m since
30 April 2016 due to foreign exchange movements.
Profit after tax
Profit after tax increased by 3.5% to $90.6m (2015: reported
$87.5m).
Goodwill
The largest item on the consolidated statement of financial
position is goodwill at $2,827.8m (2015: $2,436.2m) arising from
acquisitions made by the Group. In the period goodwill has
increased due to the acquisition of Serena ($378.6m) and GWAVA
($13.1m) (note 13).
Capital structure of the Group
As at 31 October 2016 the market capitalization of the Group was
GBP4,896.6m, equivalent to $5,973.9m at an exchange rate of $1.22
to GBP1. Net debt was $1,612.6m resulting in an Enterprise Value of
$7,586.4m.The board believes that this capital structure is
appropriate for the Group's requirements.
The debt facilities of the Group were put in place at the time
of the acquisition of TAG on 20 November 2014 and totaled $2,000.0m
under a credit agreement comprising a $1,275.0m seven year Term
Loan B, a $500.0m five year Term Loan C and a $225.0m Revolving
Facility (together "the New Facilities"). As part of the Serena
acquisition additional Revolving Facility commitments of $150.0m in
total were obtained on 2 May 2016 from Barclays, HSBC and The Royal
Bank of Scotland.
During the six months to 31 October 2016, mandatory repayments
of $6.4m of the Term Loan B and $25.0m of the Term Loan C were made
together with a draw-down of $115.0m and repayment of $95.0m of the
Revolving Facility.
At 31 October 2016, $245.0m of the Revolving Facility was drawn,
together with $1,105.9m of Term Loan B and $425.0m of Term Loan C
giving gross debt of $1,775.9m drawn.
The only financial covenant attaching to these new facilities
relates to the Revolving Facility, which is subject to an aggregate
net leverage covenant only in circumstances where more than 35% of
the Revolving Facility is outstanding at a fiscal quarter end. At
31 October 2016 65.3% of the Revolving Facility was drawn. The
covenant calculation indicates that the Group had in excess of 70%
headroom against the covenant test.
The terms of Micro Focus' existing debt facilities are as
follows:
(a) In relation to the senior secured term loan B of $1,275.0m:
an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of
0.75%), amortizing at 1.00% per annum, with an original issue
discount of 1.00% and a seven year term;
(b) In relation to the senior secured term loan C of $500.0m: an
interest rate of 3.75% above LIBOR (subject to a LIBOR floor of
0.75%), amortizing at 10.00% per annum, with an original issue
discount of 1.50% and a five year term; and
(c) In relation to the senior secured revolving credit facility
of $375.0m: an initial interest rate of 3.50% above LIBOR, and an
original issue discount of 0.50%.
On 1 August 2016 the Company allocated a re-pricing of its
senior secured term loan B which reduced its ongoing interest
payments. The interest rate was reduced from 4.25% to 3.75% and the
LIBOR floor was reduced from 1.00% to 0.75%, amortizing at 1.00%
per annum, up from 0.75%. All other terms of the Group's Credit
Facilities remain the same.
As announced on 7 September 2016, the Company has entered into
Commitments for $5.5bn of new facilities to finance the Merger with
HPE Software. These commitments have now been syndicated to the
Banks in respect of the $5bn of term loans and to the Banks and
Bank of America Merrill Lynch in respect of the revolving facility
of $0.5bn. At the appropriate time when information is available
and market conditions are suitable the commitments will be placed
with lenders. These new term loan facilities will be drawn down at
or around completion to fund the proposed return of value of circa
$0.4bn, the dividend to HPE of $2.5bn, refinance the existing
facilities and for general corporate purposes. The costs associated
with raising these new facilities, including underwriting fees,
original issue discount, ticking fees and professional costs will
be capitalized and written off over the term of the facilities. The
costs are currently estimated at between 4.5% and 6% of funds
raised.
Total equity
The total equity of the Group is $1,581.8m with a merger reserve
of $988.1m.
Cash flow and net debt
The Group's cash generated from operations was $201.9m (2015:
$162.7m). This represented a cash conversion ratio when compared to
Adjusted EBITDA less exceptional items of 69.3% (2015: 62.6%). The
first half of our financial year typically has a lower cash
conversion than our second half ratio as a result of the timing of
the maintenance and subscription renewals which are weighted to the
second half of the year.
As at 31 October 2016 the net debt of the Group was $1,612.6m
(2015: $1,454.3m) comprising gross debt of $1,775.9m (2015:
$1,593.6m), cash balances of $123.0m (2015: $91.6m) and pre-paid
loan arrangement fees of $40.3m (2015: $47.8m). This compares with
the pro-forma net debt following completion of the Serena
acquisition of $1,625.0m as at 30 April 2016.
The most significant cash outflows during the period were the
payment of the 2016 final dividend of $111.0m, $277.6m in respect
of the acquisition of Serena, $16.2m in respect of the acquisition
of GWAVA, bank loan repayments of $126.4m, corporate taxes of
$18.2m, payment for tangible and intangible assets of $24.0m and
interest and loan costs of $54.2m.
Dividend
In the preliminary announcement for FY16 the board reverted to a
dividend policy that is 2 times covered by the adjusted earnings of
the Group which applied from the final dividend for FY16. Typically
the interim dividend will be approximately half of the final
dividend for the year.
The proposed interim dividend is 29.73 cents (2015: 16.94 cents
per share), which represents a 75.5% increase on last year's
interim dividend.
The dividend will be paid in Sterling equivalent to 23.60 pence
per share, based on an exchange rate of GBP1 = $1.26 being the rate
applicable on 13 December 2016, the date on which the board
resolved to pay the dividend. The dividend will be paid on 27
January 2017 to shareholders on the register at 6 January 2017.
Group risk factors
As with all businesses, the Group is affected by certain risks,
not wholly within our control, which could have a material impact
on the Group's long-term performance and cause actual results to
differ materially from forecast and historic results.
The principal risks and uncertainties facing the Group,
including the impact of Brexit, have not changed from those set out
in the Annual Report and Accounts 2016. The principal risks and
uncertainties were:
-- Products;
-- Go to Market models;
-- Competition;
-- Employees;
-- Change management;
-- IT systems and information;
-- Legal and regulatory compliance;
-- Intellectual property;
-- Treasury;
-- Tax.
As well as the foregoing, the primary risk and uncertainty to
the Group's performance for the remainder of the year is the
challenging macro-economic environment, which could have a material
impact on the Group's performance over the remaining six months of
the financial year and could cause results to differ materially
from expected and historic results.
Mike Phillips
Chief Financial Officer
14 December 2016
CEO Review - Micro Focus Product Portfolio
Introduction
The Micro Focus Product Portfolio represents 78.5% of total
Group revenue in the six months to October 2016 (2015: pro-forma
CCY 82.3%).
From within the Micro Focus Product Portfolio we also manage,
for the Group overall, the corporate support functions of HR, IT,
Facilities, Finance, Legal and both the Project Management Office
("PMO") for acquisitions and the Integration Management Office
("IMO") focused on the HPE transaction. This enables the Group to
operate effectively and SUSE to directly control what they need to
execute with speed and flexibility whilst leveraging the larger
Group where appropriate.
The focus of the Micro Focus Portfolio is to deliver innovation
that matters to customers. This means helping them solve real
problems today within the context of the opportunities and
challenges they face in their business and the realities of their
existing IT environment. In essence enabling them to deliver more
value from prior investments in existing infrastructure whilst also
exploiting the opportunities presented by cloud, mobile and
emerging opportunities such as DevOps and the Internet of Things
("I.O.T".). We describe this as "bridging the old and the new".
There were significant product innovations across the portfolio
to underpin this strategy that are best illustrated through
customer use cases. For example, a major public sector organization
in EMEA chose to standardize on our Collaboration and Networking
products to replace a competitive solution, a decision driven by
significant total cost of ownership benefits and clarity of product
roadmap. In the USA, we saw a new customer win of a major federal
institution that implemented our industry leading security
capabilities in Host Connectivity ensuring compliance with critical
legislative changes without the unnecessary costs and risk of
rewriting applications. In Australia a major financial institution
standardized on our IAS solutions to underpin their infrastructure
as they grow through acquisition and another leveraged our
Mainframe Solutions capabilities, hosted in the cloud to deliver
their DevOps vision.
In addition to our focus on delivering product innovation
organically we also completed two acquisitions in the portfolio
during the period.
On 2 May 2016 we completed the acquisition of Serena. Serena is
a leading provider of Application Lifecycle Management products.
Serena's product offerings have been integrated into the existing
Micro Focus Development and IT Operations Management Tools
("Development & ITOM") portfolio, further enhancing both our
expertise in mainframe computing and distributed software change
management. Consistent with our strategy of adding value through
targeted, customer driven innovation we have continued developing
the full portfolio of Serena's products and we will aim to identify
how additional customer value and capability can be realized for
Serena customers, leveraging related Micro Focus software
development and software quality solutions.
On 30 September 2016 we completed the acquisition of GWAVA Inc.
("GWAVA"), a leading company in email security and enterprise
information archiving (EIA) based in the US, Canada and Germany.
GWAVA has a full suite of products, including their award winning
EIA product Retain, that enable customers to protect, optimize,
secure and ensure compliance for email, mobile and social data
across multiple platforms including Micro Focus GroupWise,
Microsoft Office and Google.
During the period, the Micro Focus Product Portfolio delivered
performance in line with management expectations.
Progress in North America was encouraging with overall execution
levels and more importantly consistency of execution continuing to
improve. International regions (EMEA and LATAM) saw strength in the
U.K and France being offset by weakness in Brazil and a mixed
performance across the rest of Europe. Asia Pacific & Japan
delivered a good performance with notable strength in Australia and
stability in Japan.
Operationally, there was notable strength in COBOL Development
& Mainframe Solutions ("CDMS") offset by expected declines in
Collaboration & Networking ("C&N"), Development & ITOM
and Host Connectivity ("HC"). Revenues declined marginally in
Identity, Access & Security ("IAS") but significant progress
was made in the product portfolio to deliver much stronger
foundations for sustainable growth over the longer term in this
highly competitive and growing market.
This in period performance was very different by product and
geography from the prior year highlighting the nature of portfolio
movements in more mature markets and the strength of our portfolio
approach.
Regional revenue performance
Six months Six months Six months Year Year
ended ended ended ended ended
31 October 31 October 31 October 30 April 30 April
2016 2015 2015 2016 2016
As reported Pro-forma (Decline)/ As reported Pro-forma As reported
Actual CCY Growth Actual CCY Actual
$m $m % $m $m $m
---------------- ------------- ------------ ------------- ------------- ----------- -------------
North America
Licence 80.0 80.2 (0.2%) 74.8 171.6 157.3
Maintenance 205.8 216.7 (5.0%) 176.9 429.9 349.6
Consultancy 14.0 12.8 9.4% 9.1 26.1 18.3
---------------- ------------- ------------ ------------- ------------- ----------- -------------
299.8 309.7 (3.2%) 260.8 627.6 525.2
---------------- ------------- ------------ ------------- ------------- ----------- -------------
International
Licence 47.3 49.4 (4.3%) 45.8 126.2 115.1
Maintenance 129.5 135.8 (4.6%) 123.5 269.8 241.4
Consultancy 10.9 12.5 (12.8%) 10.8 24.4 20.5
---------------- ------------- ------------ ------------- ------------- ----------- -------------
187.7 197.7 (5.1%) 180.1 420.4 377.0
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Asia Pacific &
Japan
Licence 19.6 17.0 15.3% 14.0 37.2 32.3
Maintenance 28.9 30.1 (4.0%) 27.0 59.9 53.5
Consultancy 1.3 2.8 (53.6%) 1.4 4.8 3.2
---------------- ------------- ------------ ------------- ------------- ----------- -------------
49.8 49.9 (0.2%) 42.4 101.9 89.0
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Total
Licence 146.9 146.6 0.2% 134.6 335.0 304.7
Maintenance 364.2 382.6 (4.8%) 327.4 759.6 644.5
Consultancy 26.2 28.1 (6.8%) 21.3 55.3 42.0
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Total 537.3 557.3 (3.6%) 483.3 1,149.9 991.2
---------------- ------------- ------------ ------------- ------------- ----------- -------------
Revenue performance by product portfolio
Revenue for the period by product portfolio at actual exchange
rates and CCY pro-forma and reported comparatives are shown in the
table below:
Six months Six months Six months Year Year
ended ended ended ended ended
31 October 31 October 31 October 30 April 30 April
2016 2015 2015 2016 2016
As reported Pro-forma (Decline)/ As reported Pro-forma As reported
Actual CCY Growth Actual CCY Actual
$m $m % $m $m $m
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Micro Focus Product
Portfolio
CDMS
Licence 52.4 40.2 30.3% 40.0 105.6 104.7
Maintenance 75.3 72.4 4.0% 71.9 146.7 145.2
Consultancy 5.5 4.1 34.1% 4.0 9.0 8.9
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
133.2 116.7 14.1% 115.9 261.3 258.8
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Host Connectivity
Licence 38.9 48.1 (19.1%) 48.5 89.3 89.9
Maintenance 52.6 54.1 (2.8%) 54.2 105.7 105.4
Consultancy 0.9 1.2 (25.0%) 1.2 2.8 2.9
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
92.4 103.4 (10.6%) 103.9 197.8 198.2
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Identity, Access
& Security
Licence 19.8 20.1 (1.5%) 20.4 52.0 52.4
Maintenance 70.3 69.6 1.0% 70.5 141.3 142.2
Consultancy 10.2 11.7 (12.8%) 11.7 22.2 22.1
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
100.3 101.4 (1.1%) 102.6 215.5 216.7
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Development &
IT Operations
Management Tools
Licence 24.6 25.9 (5.0%) 13.4 64.0 33.9
Maintenance 109.4 120.1 (8.9%) 62.8 237.5 121.3
Consultancy 7.3 8.2 (11.0%) 1.5 15.5 2.2
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
141.3 154.2 (8.4%) 77.7 317.0 157.4
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Collaboration
& Networking
Licence 11.2 12.3 (8.9%) 12.2 24.1 23.9
Maintenance 56.6 66.4 (14.8%) 68.0 128.4 130.4
Consultancy 2.3 2.9 (20.7%) 3.0 5.8 5.8
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
70.1 81.6 (14.1%) 83.2 158.3 160.1
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Micro Focus Product
Portfolio
Licence 146.9 146.6 0.2% 134.5 335.0 304.8
Maintenance 364.2 382.6 (4.8%) 327.4 759.6 644.5
Consultancy 26.2 28.1 (6.8%) 21.4 55.3 41.9
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Total 537.3 557.3 (3.6%) 483.3 1,149.9 991.2
--------------------- ------------- ------------ ----------- ------------- ----------- -------------
Licence revenue in the period was marginally up on a pro-forma
CCY basis compared with the six months to 31 October 2015. There
was a strong Licence revenue performance in CDMS offset by declines
in all the other portfolios. Maintenance revenues declined by 4.8%
on a pro-forma CCY basis. This was primarily in Development &
ITOM Tools and Collaboration & Networking which is in line with
prior year trends. The fair value deferred revenue haircut reduced
maintenance by $4.5m (2015: $7.3m). Excluding this, underlying
Maintenance revenues fell by 5.4%.
Consultancy revenues declined by 6.8% on a pro-forma CCY basis
representing approximately 4.9% of total revenues compared with
5.0% in the prior period.
COBOL Development & Mainframe Solutions revenues were
$133.2m; a growth of 14.1% on a pro-forma CCY basis compared with
the six months to 31 October 2015. The growth in Licence revenues
was 30.3% ($12.2m), growth in Maintenance revenues was 4.0% ($2.9m)
and Consulting revenue growth was 34.1% ($1.4m). Visual COBOL
revenues continued to grow strongly.
Host Connectivity revenues declined by 10.6% in the year on a
pro-forma CCY basis to $92.4m. Licence revenues declined by 19.1%
($9.2m). Maintenance revenues declined by 2.8% ($1.5m) and there
was a decline in Consulting revenues of 25% ($0.3m).
Identity, Access & Security revenues declined by 1.1%
($1.1m) on a pro-forma CCY basis to $100.3m. We believe that the
IAS portfolio has the potential for growth within the context of a
growing market but delivering this consistently will take time as
we re-position the portfolio. Licence revenue declined by 1.5%
($0.3m) on a pro-forma CCY basis, Maintenance grew by 1.0% ($0.7m)
and Consulting revenues declined by 12.8% ($1.5m).
Development & IT Operations Management Tools revenues were
$141.3m; a decline of 8.4% ($12.9m) on pro-forma CCY basis. $10.7m
of the decline was in Maintenance revenues which declined by 8.9%
in line with management expectations. Licence revenues declined in
the period by $1.3m.
Collaboration & Networking revenues were $70.1m; a 14.1%
($11.5m) decline on pro-forma CCY basis. Maintenance declined by
14.8% ($9.8m) in the period in line with management
expectations.
Adjusted operating profit and Underlying Adjusted EBITDA
The table below shows the Adjusted Operating Profit for the
portfolio together with a comparison to the pro-forma CCY figures
for 2015:
Six months Six months Six months
ended ended ended
31 October 31 October 31 October
2016 2015 2015
As reported Pro-forma As reported
Actual CCY Actual
$m $m $m
--------------------------- ------------- ------------ -------------
Segment revenue 537.3 557.3 483.3
Directly managed costs (277.3) (311.0) (278.7)
Allocation of centrally
managed costs to SUSE 12.7 13.0 16.3
--------------------------- ------------- ------------ -------------
Total Adjusted Operating
Costs (264.6) (298.0) (262.4)
--------------------------- ------------- ------------ -------------
Adjusted Operating Profit 272.7 259.3 220.9
--------------------------- ------------- ------------ -------------
Margin 50.8% 46.5% 45.7%
--------------------------- ------------- ------------ -------------
The directly managed costs are those costs specifically managed
by the CEOs of the Micro Focus Product Portfolio and SUSE Product
Portfolio. All the Group central support costs are managed by the
Micro Focus Product Portfolio and the allocation of these costs to
SUSE is based on an appropriate methodology.
The adjusted operating profit was $272.7m, delivering a margin
of 50.8% which compares with the margin in the pro-forma CCY
numbers for the six months to 31 October 2015 of 46.5%. The
increase in margin arises because of the reduction in costs that
have been achieved in the period through the progress on the
integration of Serena and ongoing cost management initiatives in
the core business.
The table below shows the reconciliation between Adjusted
Operating Profit and Underlying Adjusted EBITDA with a comparative
of the pro-forma CCY and reported figures for the six months ended
31 October 2015:
Six months Six months Six months
ended ended ended
31 October 31 October 31 October
2016 2015 2015
As reported Pro-forma As reported
Actual CCY Actual
$m $m $m
----------------------------------- ------------- ------------ -------------
Adjusted Operating Profit 272.7 259.3 220.9
Depreciation of property,
plant and equipment 4.7 5.1 4.7
Amortization of software
intangibles 0.5 0.9 0.7
----------------------------------- ------------- ------------ -------------
Adjusted EBITDA 277.9 265.3 226.3
Foreign exchange credit (8.0) 0.1 (0.4)
Net capitalization of development
costs (2.9) (6.4) (6.4)
----------------------------------- ------------- ------------ -------------
Underlying Adjusted EBITDA 267.0 259.0 219.5
----------------------------------- ------------- ------------ -------------
The Underlying Adjusted EBITDA improved by $8.0m in the year on
a pro-forma CCY basis primarily due to cost saving actions taken at
the end of FY16.
Outlook
We have continued to improve the foundations of the business
through clarity of execution against the strategy of customer
driven innovation, underpinned by a relentless focus on improving
the way in which we operate to maximise the efficiency of the
organisation.
This clarity of focus will continue as we execute against our
strategy and begin to prepare for operation as an enlarged group
after completion of the HPE Transaction. To this end our priorities
remain unchanged:
-- Delivery of our financial plan;
-- The work to standardise systems and simplify the underlying operations of the business;
-- Accelerating progress on improving the effectiveness of our go to market teams; and
-- Continuing to operationalize the FOUR-BOX MODEL (New Models,
Growth Drivers, Optimize and Core) to better align resources to
optimize the performance of each sub-portfolio.
Stephen Murdoch
Chief Executive Officer
Micro Focus
14 December 2016
CEO Review - SUSE Product Portfolio
Introduction
The SUSE Product Portfolio represented 21.5% of the total Group
revenue in the six months to 31 October 2016 (2015: CCY revenue
17.6%). Following the acquisition of TAG by Micro Focus the SUSE
Product Portfolio was given a mandate to deliver "accelerated,
sustainable and profitable revenue growth" and was provided with
the support and initial investments to support this vision. The six
months to 31 October 2016 was a successful period for SUSE with
growth in revenue, Annual Contract Value ("ACV"), Total Contract
Value ("TCV") and Adjusted Operating Profit.
To create additional capacity to grow we expanded the SUSE
headcount across different business functions and geographies and
aligned the critical supporting organizations of customer care,
renewals and sales operations much more tightly with the SUSE
business. This will continue throughout FY17 as SUSE assumes the
execution responsibility for sales and marketing in APAC and for
the SUSE channel. We continued to broaden and deepen our Alliance,
OEM, Business Partner and cloud service provider relationships and
see ongoing strong contribution from these routes to market to our
overall success.
We also extended SUSE's presence and contribution in key Open
Source projects and relevant industry groups both in support of
strengthening our contribution to Open Source innovation and
development efforts as well as in support of our partner and
enterprise customer relationships.
Key Strategic Developments
openATTIC acquisition
On 1 November 2016 SUSE announced the completion of the
acquisition of the openATTIC storage management technology and
engineering talent from the company it-novum. The openATTIC
technology aligns perfectly with our strategy to provide open
source, software defined infrastructure solutions for the
enterprise and will strengthen SUSE Enterprise Storage solution by
adding enterprise grade storage management capabilities to the
portfolio.
Acquisition of OpenStack IaaS and Cloud Foundry PaaS Talent and
Technology Assets from HPE
On 30 November 2016 SUSE announced it had reached a definitive
agreement with HPE on the terms of a transaction pursuant to which
the company has agreed to acquire technology and talent that will
expand SUSE's OpenStack Infrastructure-as-a-Service (IaaS) solution
and accelerate SUSE's entry into the growing Cloud Foundry
Platform-as-a-Service (PaaS) market. The acquired OpenStack assets
will be integrated into SUSE OpenStack Cloud and the acquired Cloud
Foundry and PaaS assets will enable SUSE to bring to market a
certified, enterprise-ready SUSE Cloud Foundry PaaS solution for
all customers and partners in the SUSE ecosystem. Additionally,
SUSE has increased engagement with the Cloud Foundry Foundation,
becoming a platinum member and taking a seat on the Cloud Foundry
Foundation board.
As part of the transaction HPE has named SUSE as its preferred
open source partner for Linux, OpenStack IaaS and Cloud Foundry
PaaS. HPE's choice of SUSE as their preferred open source partner
further cements SUSE's reputation for delivering high-quality,
enterprise-grade open source solutions and services.
SUSECON
SUSE held its annual global end-user conference from 7 to 11
November 2016 in Washington, D.C. The conference showcased the
latest developments in building software-defined data centers on
SUSE's leading Linux, OpenStack and Ceph-based solutions as well as
in-depth sessions on other key technology topics such as
Platform-as-a-Service, Docker and containers, NFV, and
software-defined networking.
Key announcements at SUSECON included:
- SUSE has acquired software-defined storage management assets
from German IT firm it-novum, including openATTIC, the open source
Ceph and storage management framework. The acquisition allows SUSE
to accelerate its use of openATTIC as the management framework for
SUSE Enterprise Storage and will help the company deliver simpler,
more cost-effective enterprise storage management solutions.
- For enterprises in data-intensive or highly regulated
industries and those needing highly scalable and resilient storage
solutions, SUSE announced the upcoming availability of SUSE
Enterprise Storage 4, powered by Ceph technology. SUSE Enterprise
Storage 4 marks the first production release of CephFS and is the
ideal solution for bulk, archive and "large data" storage
management.
- SUSE unveiled SUSE Linux Enterprise 12 Service Pack 2 to power
physical, virtual and cloud-based mission-critical workloads. The
newest version of the world-class SUSE Linux Enterprise Server open
source operating system, SUSE Linux Enterprise 12 SP2 will help
customers accelerate innovation, improve system reliability, meet
tough security requirements and adapt to new technologies.
- SUSE is extending its "SUSE Ready" application-certification
program to include SUSE OpenStack Cloud and SUSE Enterprise
Storage. SUSE Ready, which has been a benefit to SUSE Linux
Enterprise partners and customers for many years, verifies for
customers that partner solutions are mutually tested and supported
on SUSE software, so they can confidently build out their
software-defined infrastructures using compatible and supported
third-party solutions that best meet their business requirements,
without being locked into a single vendor.
- SUSE honored its 2016 Customers of the Year. The award
recipients represent the four regions of the globe and are
recognized for "defining their future" using SUSE open source
solutions for IT transformation and increased business agility and
continuity.
SUSE - key financial metrics
SUSE provides technical support together with rights to updates,
patches and security fixes for its Open Source solutions on a
subscription basis with revenues being recognized rateably over the
period of the contract. As with the Annual Results we are providing
additional Key Performance Indicators ("KPIs") for the SUSE Product
Portfolio in this set of results. Total Contract Value ("TCV") is
the amount invoiced to customers (excluding sales tax) in respect
of new contracts and renewals completed in the year. The weighted
average contract length expressed in months, reflecting the
duration of the TCV is also being provided as growth in TCV alone
without this information is potentially misleading. Finally we are
providing Annual Contract Value ("ACV") which aims to normalize
contract length by including in the calculation of ACV only the
first 12 months of each new contract or renewal included within
TCV. Where the contract length is less than 12 months all of the
TCV is included in ACV.
Revenue
The table below provides a breakdown of the revenue for the six
months to 31 October 2016 and a CCY and reported comparison to six
months to 31 October 2015 and the year ended 30 April 2016.
SUSE Product Portfolio
Six months Six months Year Year
ended Six months ended Ended ended
31 October ended 31 October 30 April 30 April
2016 31 October 2015 2016 2016
As reported 2015 As reported CCY As reported
Actual CCY Growth Actual Actual
$m $m % $m $m
-------------- ------------- ------------ ------- ------------- ---------- -------------
Subscription 144.9 117.1 23.7% 118.7 246.8 248.9
Consultancy 2.5 2.4 4.2% 2.5 4.9 4.9
-------------- ------------- ------------ ------- ------------- ---------- -------------
147.4 119.5 23.3% 121.2 251.7 253.8
-------------- ------------- ------------ ------- ------------- ---------- -------------
The SUSE Product Portfolio revenue increased by 23.3% to $147.4m
compared with the CCY revenues for the six months to 31 October
2015 of $119.5m, with the Subscription revenue increasing by 23.7%
to $144.9m (2015: CCY $117.1m). The Subscription revenue is net of
the fair value deferred revenue haircut of $1.9m (2015: $3.9m).
Prior to this adjustment Subscription revenue grew by 21.3%.
Regional Revenue Performance
Six months Six months Six months Year Year
ended ended ended ended ended
31 October 31 October 31 October 30 April 30 April
2016 2015 2015 2016 2016
As reported CCY As reported CCY As reported
Actual Growth Actual Actual
$m $m % $m $m $m
---------------- ------------- ------------ --------- ------------- ---------- -------------
North America 59.9 50.8 17.9% 50.9 108.6 108.6
International 70.0 54.2 29.2% 56.2 112.7 115.6
Asia Pacific &
Japan 17.5 14.5 20.7% 14.1 30.4 29.6
---------------- ------------- ------------ --------- ------------- ---------- -------------
Total 147.4 119.5 23.3% 121.2 251.7 253.8
---------------- ------------- ------------ --------- ------------- ---------- -------------
All regions showed good revenue growth in the period compared
with the CCY revenues for the same period in FY15. North America
grew subscription revenue at 17.9%, International at 29.2% and Asia
Pacific & Japan grew revenue at 20.7%
TCV and ACV
TCV represents the gross billings for the six months to 31
October 2016 of $154.0m, an increase of 20.3% (2015: CCY $128.0m).
The weighted average contract duration increased from 28 months to
31 months due to the impact of two large end customer transactions
with long contract duration. The 'in period yield' from TCV to
revenue increased from 23% in the six months to 31 October 2015 to
24% in the six months to 31 October 2016. 'In period yield'
represents the proportion of TCV generated in the period that can
be recognized as subscription revenue in the same period. Net new
subscription TCV increased by 30.0% year-on-year and renewal
subscriptions TCV grew by 12% year-on-year. Net new subscription
contracts are derived from the sale of subscriptions to new logo
customers and existing customers expanding footprint of existing
product portfolio or subscribing to new product solutions.
ACV grew to $88.8m for the six months to 31 October 2016, an
increase of 16.4% (2015: CCY $76.3m). ACV removes the impact of
multi-year contracts and is a cleaner KPI on the performance of the
business. Where subscription term is less than 12 months, all of
the subscription TCV billing is included in the ACV measure.
Regional TCV performance
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
As reported CCY As reported
Actual Growth Actual
$m $m % $m
---------------------- ------------- ------------ --------- -------------
North America 57.1 56.6 0.9% 137.3
International 75.1 53.8 39.6% 128.9
Asia Pacific & Japan 21.8 17.6 23.9% 35.1
---------------------- ------------- ------------ --------- -------------
154.0 128.0 20.3% 301.3
---------------------- ------------- ------------ --------- -------------
Regional ACV performance
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
As reported CCY As reported
Actual Growth Actual
$m $m % $m
---------------------- ------------- ------------ --------- -------------
North America 36.2 34.3 5.5% 81.7
International 36.3 29.8 21.8% 67.8
Asia Pacific & Japan 16.3 12.2 33.6% 25.3
---------------------- ------------- ------------ --------- -------------
88.8 76.3 16.4% 174.8
---------------------- ------------- ------------ --------- -------------
North America grew its TCV and ACV for the six months to 31
October 2016, by 0.9% and 5.5% respectively. Delayed renewal
transactions with substantial new contract elements did not close
as anticipated in the six months to 31 October 2016 and prevented
the region from delivering more substantial TCV and ACV growth.
These transactions are now forecasted to close in the third quarter
of FY17.
International had a very strong performance in TCV and ACV,
growing by 39.6% and 21.8% respectively. In addition to a solid
overall performance across New and Renewal bookings, International
results benefited from large transaction momentum with an
enterprise customers in the period, who renewed and also expanded
its SUSE product footprint.
Asia Pacific & Japan had very strong performance in TCV and
ACV, growing by 23.9% and 33.6% respectively. We continue to have
strong performance in China and Japan, and are also winning new
accounts in some of the other key markets in the region. The region
is also starting to get good traction by leveraging the global
agreements we have in place with key independent hardware vendors
and cloud service providers. Go-to-market via a SUSE dedicated and
SUSE specialized sales force also contributes to the success of the
region.
ACV contribution by route to market
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
As reported CCY Growth/ As reported
Actual (Decline) Actual
$m $m % $m
------------------------- ------------- ------------ ------------ -------------
Direct 5.6 7.6 (26.3%) 37.2
Indirect 43.5 39.0 11.5% 61.8
Global Service Partners 36.8 27.7 32.9% 63.8
OEM (Embedded Systems) 2.9 2.0 45.0% 12.0
------------------------- ------------- ------------ ------------ -------------
Total 88.8 76.3 16.4% 174.8
------------------------- ------------- ------------ ------------ -------------
Direct represents customers that have a master licence agreement
with SUSE and subscribe directly with SUSE or via authorized
fulfillment partners.
Indirect represents customers that subscribe via the SUSE Value
Added Reseller network and predominantly through a two tier
distribution model.
Global Service Partners represents primarily Independent
Hardware Vendors who sell SUSE subscriptions alongside the sale of
their respective hardware and subscriptions generated from cloud
service providers.
OEM (Embedded Systems) represents entities that embed SUSE
subscriptions within the sale of their respective specialized
appliance offerings.
We continue to see significant growth in Indirect, Global
Service Partners and OEM routes to market, growing by 11.5%, 32.9%
and 45.0% respectively.
We also see a trend of customers who initially purchased
subscriptions direct, subsequently subscribing through Global
Service Partners. This partially contributes to ACV from Global
Service Partners growing more significantly relative to Direct and
Indirect. We continue to see strength in the Value Added Reseller
network, where we have seen significant growth in ACV during the
fiscal year. OEM (Embedded Systems) transactions tend to be large,
custom, specialized and binary in nature, and thus year on year
fluctuations in ACV generated are to be expected.
The table below shows the percentage share of ACV by the
different routes to market in HY17 compared to HY16:
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
------------------ ------------ ------------ ----------
Direct 6% 10% 21%
Indirect (Value
Added Reseller) 49% 51% 35%
Global Service
Partners 41% 36% 37%
OEM 4% 3% 7%
100% 100% 100%
------------------ ------------ ------------ ----------
In aggregate the ACV mix by route to market in HY17 compared to
HY16 saw a small shift of contribution to SUSE's growth from direct
routes to market to indirect routes to market. This is a result of
the roll out of an improved partner program, additional partner
sales coverage and increased collaboration between direct sales
teams and the channel.
SUSE Adjusted Operating Profit and Adjusted EBITDA
The table below shows the Adjusted Operating Profit for the SUSE
Product Portfolio and compares it against the CCY and as reported
numbers for the six months to 31 October 2015:
Six months Six months Six months
ended ended ended
31 October 31 October 31 October
2016 2015 2015
As reported CCY As reported
Actual Actual
$m $m $m
--------------------------- ------------- ------------ -------------
Revenue 147.4 119.5 121.2
Directly managed costs (81.2) (64.3) (62.0)
Allocation of centrally
managed costs from Micro
Focus (12.7) (13.0) (16.3)
--------------------------- ------------- ------------ -------------
Total Adjusted Operating
Costs (93.9) (77.3) (78.3)
--------------------------- ------------- ------------ -------------
Adjusted Operating Profit 53.5 42.2 42.9
--------------------------- ------------- ------------ -------------
Margin 36.3% 35.3% 35.4%
--------------------------- ------------- ------------ -------------
SUSE Adjusted Operating Profit for the period was $53.5m at a
margin of 36.3%. Compared to the CCY six months to 31 October 2015,
this is an increase of $11.3m (26.8%) and a profit margin
improvement of 1.0%. We have seen a significant increase in
directly managed costs in SUSE that is consistent with the
investment being made to deliver the SUSE growth charter. We are
also seeing the benefit of a reduced allocation of centrally
managed costs which is being delivered from the efficiencies in the
Micro Focus Product Portfolio.
The table below shows the reconciliation between Adjusted
Operating Profit and Underlying Adjusted EBITDA for SUSE:
Six months Six months Six months
ended ended ended
31 October 31 October 31 October
2016 2015 2015
As reported CCY As reported
Actual Actual
$m $m $m
----------------------------------- ------------- ------------ -------------
Adjusted Operating Profit 53.5 42.2 42.9
Depreciation of property,
plant and equipment 1.0 0.8 1.0
Amortization of software
intangibles 0.1 - 0.2
----------------------------------- ------------- ------------ -------------
Adjusted EBITDA 54.6 43.0 44.1
Foreign exchange credit (1.3) (0.5) -
Net capitalization of development - - -
costs
----------------------------------- ------------- ------------ -------------
Underlying Adjusted EBITDA 53.3 42.5 44.1
----------------------------------- ------------- ------------ -------------
Deferred revenue
We continue to have year on year steady growth in the deferred
revenue balance. At 31 October 2016 SUSE's total deferred revenue
balance was $335.2m (2015: $275.1m), an increase of $60.1m (21.8%).
56% of the deferred revenue balance is recognizable revenue in the
next 12 months and 82% recognizable in 24 months.
Headcount
At the end of April 2016, direct headcount in SUSE was 641
increasing to 776 by 31 October 2016, a net increase of 135 in the
six months. The increased investment in direct headcount was in
Sales, Engineering and Alliance & Marketing to address the
opportunity we see in the market for SUSE's existing offerings
together with new opportunities in OpenStack IaaS, Software Defined
Distributed Storage based on Ceph technology and with public cloud
service providers. The increase in Sales headcount includes heads
from APJ Sales moving to directly managed dedicated SUSE headcount,
which was part of a shared sales function at the end of April 2016.
If we exclude this movement, net increase in total direct headcount
is 91.
In addition to the direct headcount, the SUSE portfolio received
in HY17 support from SUSE dedicated employees, who are
organizationally aligned in the shared service functions of the
Group. Most prominently in Renewal Sales, Consulting, Customer
Care, Sales Operations and other corporate operations
functions.
Outlook "Sustainable, Profitable Revenue Growth"
For FY17 SUSE will continue to focus on the successful execution
of SUSE's mandate for sustainable, profitable revenue growth. The
objective remains to grow revenue ahead of growth rates for
relevant markets.
Nils Brauckmann
Chief Executive Officer
SUSE
14 December 2016
Going concern
The directors, having made enquiries, consider that the Group
has adequate resources to continue in operational existence for the
foreseeable future and therefore it is appropriate to maintain the
going concern basis in preparing the condensed consolidated interim
financial statements.
Related party transactions
The Group has taken advantage of the exemption available under
IAS 24, "Related Party Disclosures", not to disclose details of
transactions with its subsidiary undertakings.
Directors' responsibilities
The directors confirm that, to the best of their knowledge,
these condensed consolidated interim financial statements;
-- have been prepared in accordance with IAS 34 as adopted by
the European Union. The interim management report gives a true and
fair review of the assets, liabilities, financial position and
profit of the Group as a whole as required by DTR 4.2.4R and;
-- includes a fair review of important events that have occurred
during the first six months of the financial year and their impact
on the condensed set of financial statements and a description of
the principal risks and uncertainties for the remaining six months
of the financial year as required by DTR 4.2.7R and;
-- includes a fair review of material related-party transactions
in the first six months and any material changes in the
related-party transactions described in the last annual report as
required by DTR 4.2.8R.
The current directors of the Company are Kevin Loosemore, Mike
Phillips, Stephen Murdoch, Nils Brauckmann, Karen Slatford, Richard
Atkins, Tom Virden, Steve Schuckenbrock and Amanda Brown.
Biographies for each director are included on page 47 of the Annual
Report and on the Company's website: www.microfocus.com.
By order of the board
Kevin Loosemore Mike Phillips
Executive Chairman Chief Financial
Officer
14 December 2016
Micro Focus International plc
Consolidated statement of comprehensive income (unaudited)
Six months ended Six months ended Year ended
31 October 2015 30 April
31 October 2016 2016
(unaudited) (unaudited) (audited)
----------------- ---- ----------------------------------------- -------------------------------------- ----------
Before Before
exceptional Exceptional exceptional Exceptional
Note items items Total items items Total Total
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
$'000 $'000 $'000 $'000 $'000 $'000 $'000
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Revenue 5,6 684,743 - 684,743 604,523 - 604,523 1,245,049
Cost of sales (73,031) (1,265) (74,296) (65,578) (932) (66,510) (135,432)
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Gross profit 611,712 (1,265) 610,447 538,945 (932) 538,013 1,109,617
Selling and
distribution
costs (216,526) (2,002) (218,528) (194,600) (4,202) (198,802) (416,333)
Research and
development
expenses (133,359) (2,175) (135,534) (121,977) (682) (122,659) (259,388)
Administrative
expenses (57,493) (35,606) (93,099) (61,314) (4,835) (66,149) (138,962)
Operating profit 204,334 (41,048) 163,286 161,054 (10,651) 150,403 294,934
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Analyzed as:
Adjusted
Operating
Profit 326,249 - 326,249 263,868 - 263,868 533,514
Share based
compensation (15,521) - (15,521) (11,856) - (11,856) (28,793)
Amortization of
purchased
intangibles 14 (106,394) - (106,394) (90,958) - (90,958) (181,934)
Exceptional items 7 - (41,048) (41,048) - (10,651) (10,651) (27,853)
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Operating profit 5 204,334 (41,048) 163,286 161,054 (10,651) 150,403 294,934
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Share of results
of associates (1,127) - (1,127) (1,129) - (1,129) (2,190)
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Finance costs (49,455) - (49,455) (50,887) - (50,887) (98,357)
Finance income 502 - 502 448 - 448 1,009
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Net finance costs (48,953) - (48,953) (50,439) - (50,439) (97,348)
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Profit before tax 154,254 (41,048) 113,206 109,486 (10,651) 98,835 195,396
Taxation 12 (28,140) 5,551 (22,589) (14,593) 3,296 (11,297) (32,424)
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Profit for the
period 126,114 (35,497) 90,617 94,893 (7,355) 87,538 162,972
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Attributable to:
Equity
shareholders
of the parent 126,135 (35,497) 90,638 94,676 (7,355) 87,321 162,894
Non-controlling
interests (21) - (21) 217 - 217 78
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Profit for the
period 126,114 (35,497) 90,617 94,893 (7,355) 87,538 162,972
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Other
comprehensive
income:
Items that will
not
be reclassified
to
profit or loss
Actuarial
(loss)/gain
on pension
liabilities
schemes 21 (3,521) - (3,521) 6,260 - 6,260 2,697
Actuarial gain on
non-plan pension
assets 21 2,482 - 2,482 1,205 - 1,205 3,104
Deferred tax
movement
on pensions 326 - 326 (2,344) - (2,344) (1,745)
Items that may be
subsequently
reclassified
to profit or loss
Currency
translation
differences (5,708) - (5,708) (1,774) - (1,774) (3,458)
Other
comprehensive
(expense)/income
for the period (6,421) - (6,421) 3,347 - 3,347 598
Total
comprehensive
income for the
period 119,693 (35,497) 84,196 98,240 (7,355) 90,885 163,570
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Attributable to:
Equity
shareholders
of the parent 119,714 (35,497) 84,217 98,023 (7,355) 90,668 163,492
Non-controlling
interests (21) - (21) 217 - 217 78
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Total
comprehensive
income for the
period 119,693 (35,497) 84,196 98,240 (7,355) 90,885 163,570
----------------- ---- ----------------- ----------- --------- ------------ ------------- --------- ----------
Earnings per
share cents cents cents
expressed in
cents
per share
- basic 11 39.57 40.17 74.50
- diluted 11 38.12 38.58 71.61
Earnings per pence pence pence
share
expressed in
pence
per share
- basic 11 29.49 25.96 49.59
- diluted 11 28.41 24.94 47.66
The accompanying notes are an integral part of this financial
information.
Micro Focus International plc
Consolidated statement of financial position (unaudited)
31 October 2016 31 October 30 April
2015 2016
(unaudited) (unaudited) (audited)
Note $'000 $'000 $'000
------------------------------- ---- ---------------- ------------- -----------
Non-current assets
Goodwill 13 2,827,825 2,436,168 2,436,168
Other intangible assets 14 1,186,184 1,050,581 966,555
Property, plant and equipment 15 40,537 42,525 40,867
Investments in associates 11,584 13,772 12,711
Long term pension assets 21 24,120 19,114 22,272
Other non-current assets 3,230 3,515 4,002
Deferred tax assets 208,230 219,343 198,757
4,301,710 3,785,018 3,681,332
Current assets
Inventories 63 78 93
Trade and other receivables 16 277,958 215,224 268,186
Current tax receivables 3,432 - 18,016
Cash and cash equivalents 122,970 91,566 667,178
Assets classified as held
for sale 888 888 888
------------------------------- ---- ---------------- ------------- -----------
405,311 307,756 954,361
------------------------------- ---- ---------------- ------------- -----------
Total assets 4,707,021 4,092,774 4,635,693
------------------------------- ---- ---------------- ------------- -----------
Current liabilities
Trade and other payables 17 151,163 137,020 188,090
Borrowings 18 294,192 50,600 275,256
Provisions 19 15,420 27,784 10,545
Current tax liabilities 29,583 27,515 22,426
Deferred income 20 582,412 537,280 565,480
1,072,770 780,199 1,061,797
Non-current liabilities
Deferred income 204,342 171,407 196,483
Borrowings 18 1,441,337 1,495,272 1,469,953
Retirement benefit obligations 21 34,599 26,695 31,669
Long-term provisions 19 11,729 16,634 14,354
Other non-current liabilities 11,021 4,039 3,671
Deferred tax liabilities 349,464 286,450 264,038
2,052,492 2,000,497 1,980,168
------------------------------- ---- ---------------- ------------- -----------
Total liabilities 3,125,262 2,780,696 3,041,965
------------------------------- ---- ---------------- ------------- -----------
Net assets 1,581,759 1,312,078 1,593,728
------------------------------- ---- ---------------- ------------- -----------
Micro Focus International plc
Consolidated statement of financial position (unaudited)
31 October 2016 31 October 30 April
2015 2016
(unaudited) (unaudited) (audited)
Note $'000 $'000 $'000
------------------------------------------- ---- --------------- ------------ ----------
Capital and reserves
Share capital 22 39,650 39,558 39,573
Share premium account 190,727 16,559 190,293
Merger reserve 23 988,104 1,168,104 988,104
Capital redemption reserve 23 163,363 163,363 163,363
Retained earnings/(deficit) 221,593 (61,380) 228,344
Foreign currency translation deficit (22,714) (15,322) (17,006)
Total equity attributable to owners of the
parent 1,580,723 1,310,882 1,592,671
------------------------------------------- ---- --------------- ------------ ----------
Non-controlling interests 1,036 1,196 1,057
------------------------------------------- ---- --------------- ------------ ----------
Total equity 1,581,759 1,312,078 1,593,728
------------------------------------------- ---- --------------- ------------ ----------
The accompanying notes are an integral part of this financial
information.
Micro Focus International plc
Consolidated statement of cash flow (unaudited)
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015* 2016*
(unaudited) (unaudited) (audited)
Note $'000 $'000 $'000
------------------------------------------------- ---- ------------ ------------ ----------
Cash flows from operating activities
Net profit for the period 90,617 87,538 162,972
Adjustments for:
Net interest 48,953 50,439 97,348
Taxation 22,589 11,297 32,424
Share of results of associates 1,127 1,129 2,190
------------------------------------------------- ---- ------------ ------------ ----------
Operating profit 163,286 150,403 294,934
Research and development tax credits (936) (936) (2,041)
Depreciation 15 5,712 5,770 11,419
Loss on disposal of property, plant and
equipment 484 7 109
Amortization of intangibles 14 119,085 100,644 203,313
Share-based compensation 9 15,521 11,856 28,793
Exchange movements (9,270) 719 (2,915)
Provisions movements 19 18,788 2,237 12,985
Changes in working capital:
Inventories 30 44 28
Trade and other receivables 21,073 4,276 (49,175)
Payables and other liabilities (50,118) (17,310) 30,923
Provision utilization 19 (18,581) (25,114) (55,639)
Deferred income (62,308) (69,879) (16,603)
Pension funding in excess of charge to operating
profit (856) (22) (18)
------------------------------------------------- ---- ------------ ------------ ----------
Cash generated from operations 201,910 162,695 456,113
Interest paid (42,879) (52,200) (91,807)
Bank loan costs (5,864) (753) (1,805)
Tax (paid)/received (18,183) (47,707) (79,282)
------------------------------------------------- ---- ------------ ------------ ----------
Net cash generated from operating activities 134,984 62,035 283,219
Cash flows from investing activities
Payments for intangible assets 14 (17,571) (15,786) (34,488)
Purchase of property, plant and equipment 15 (6,454) (5,917) (10,281)
Interest received 502 448 1,009
Payment for acquisition of subsidiaries 26 (293,797) (9,960) (9,960)
Repayment of bank borrowings on acquisitions 26 (316,650) - -
Net cash acquired with acquisitions 26 68,173 106 106
Net cash used in investing activities (565,797) (31,109) (53,614)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 467 475 968
Proceeds from share placement - - 225,720
Costs associated with share placement - - (2,979)
Repayment of bank borrowings 18 (126,375) (126,375) (157,750)
Net proceeds from bank borrowings 18 115,000 20,000 245,000
Dividends paid to owners 10 (111,023) (70,015) (105,159)
------------------------------------------------- ---- ------------ ------------ ----------
Net cash (used in)/generated from financing
activities (121,931) (175,915) 205,800
Effects of exchange rate changes 8,536 (4,769) (9,551)
------------------------------------------------- ---- ------------ ------------ ----------
Net (decrease) / increase in cash and cash
equivalents (544,208) (149,758) 425,854
Cash and cash equivalents at beginning of
period 667,178 241,324 241,324
------------------------------------------------- ---- ------------ ------------ ----------
Cash and cash equivalents at end of period 122,970 91,566 667,178
------------------------------------------------- ---- ------------ ------------ ----------
* Provision utilization for the six months to 31 October 2015
and the year ended 30 April 2016 has been reclassified from
provision movements to working capital movements to ensure
consistency with the six months to 31 October 2016 presentation.
The presentation of bank loan costs for the six months to 31
October 2015 and year ended 30 April 2016 have also been
reclassified from net cash from financing activities to net cash
generated from operating activities to ensure consistency with the
six months to 31 October 2016 presentation.
The accompanying notes form an integral part of this financial
information.
Micro Focus International plc
Consolidated statement of changes in equity (unaudited)
Foreign Equity
currency / (deficit) Total
Share Retained translation Capital attributable equity
Share premium earnings/ reserve redemption Merger to the Non-controlling /
capital account (deficit) (deficit) reserves reserve parent interests (deficit)
Notes $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
-------------- ----- -------- -------- ---------- ----------- ----------- --------- ------------ --------------- ---------
Balance as
at 1 May 2015 39,555 16,087 (96,479) (13,548) 163,363 1,168,104 1,277,082 979 1,278,061
Currency
translation
differences - - - (1,774) - - (1,774) - (1,774)
Profit for
the period - - 87,321 - - - 87,321 217 87,538
Remeasurement
on defined
benefit
pension
schemes 21 - - 6,260 - - - 6,260 - 6,260
Remeasurement
on long-term
pension
assets 21 - - 1,205 - - - 1,205 - 1,205
Deferred tax
movement
pensions - - (2,344) - - - (2,344) - (2,344)
-------------- ----- -------- -------- ---------- ----------- ----------- --------- ------------ --------------- ---------
Total
comprehensive
income - - 92,442 (1,774) - - 90,668 217 90,885
Transactions
with owners:
Dividends 10 - - (70,015) - - - (70,015) - (70,015)
Issue of share
capital 3 472 (1,935) - - - (1,460) - (1,460)
Movement in
relation to
share options - - 12,287 - - - 12,287 - 12,287
Deferred tax
on share
options - - 2,320 - - - 2,320 - 2,320
-------------- ----- -------- -------- ---------- ----------- ----------- --------- ------------ --------------- ---------
Balance as
at 31 October
2015 39,558 16,559 (61,380) (15,322) 163,363 1,168,104 1,310,882 1,196 1,312,078
-------------- ----- -------- -------- ---------- ----------- ----------- --------- ------------ --------------- ---------
Balance at
1 May 2016 39,573 190,293 228,344 (17,006) 163,363 988,104 1,592,671 1,057 1,593,728
Currency
translation
differences - - - (5,708) - - (5,708) - (5,708)
Profit for
the period - - 90,638 - - - 90,638 (21) 90,617
Remeasurement
on defined
benefit
pension
schemes 21 - - (3,521) - - - (3,521) - (3,521)
Remeasurement
on long-term
pension
assets 21 - - 2,482 - - - 2,482 - 2,482
Deferred tax
movement
pensions - - 326 - - - 326 - 326
-------------- ----- -------- -------- ---------- ----------- ----------- --------- ------------ --------------- ---------
Total
comprehensive
income - - 89,925 (5,708) - - 84,217 (21) 84,196
Transactions
with owners:
Dividends 10 - - (111,023) - - - (111,023) - (111,023)
Movement in
relation to
share options 77 434 11,266 - - - 11,777 - 11,777
Deferred tax
on share
options - - 3,081 - - - 3,081 - 3,081
Balance as
at 31 October
2016 39,650 190,727 221,593 (22,714) 163,363 988,104 1,580,723 1,036 1,581,759
-------------- ----- -------- -------- ---------- ----------- ----------- --------- ------------ --------------- ---------
The accompanying notes are an integral part of this financial
information.
Micro Focus International plc
Notes to the consolidated interim financial statements
(unaudited)
1. General
Micro Focus International plc ("the Company") is a public
limited Company incorporated and domiciled in the UK. The address
of its registered office is, The Lawn, 22-30 Old Bath Road,
Newbury, RG14 1QN, UK.
Micro Focus International plc and its subsidiaries (together
"the Group") provide innovative software to clients around the
world enabling them to dramatically improve the business value of
their enterprise applications. The Group has a presence in 40
countries worldwide and employs approximately 4,490 people.
The Company is listed on the London Stock Exchange.
These condensed consolidated interim financial statements were
approved by the board on 13 December 2016 for issue on 14 December
2016.
These condensed consolidated interim financial statements do not
comprise statutory accounts within the meaning of section 434 of
the Companies Act 2006. Statutory accounts for the year ended 30
April 2016 were approved by the Board of directors on 13 July 2016
and delivered to the Registrar of Companies. The report of the
auditors on those accounts was unqualified, did not contain an
emphasis of matter paragraph and did not contain any statement
under Section 498 of the Companies Act 2006.
These condensed interim consolidated financial statements have
been reviewed, not audited.
2. Basis of preparation
These condensed consolidated interim financial statements for
the six months ended 31 October 2016 have been prepared in
accordance with the Disclosure and Transparency Rules of the
Financial Conduct Authority and with IAS 34, "Interim Financial
Reporting" as adopted by the European Union. The condensed
consolidated interim financial statements should be read in
conjunction with the Annual Report and Accounts for the year ended
30 April 2016, which have been prepared in accordance with IFRSs as
adopted by the European Union.
3. Accounting policies
Other than as described below, the accounting policies adopted
are consistent with those of the Annual Report and Accounts for the
year ended 30 April 2016, as described in those financial
statements.
(a) The following standards, interpretations and amendments to
existing standards are now effective and have been adopted by the
Group:
-- Amendment to IAS 16, 'Property, plant and equipment' and IAS
38, 'Intangible assets', on depreciation and amortization applies
for periods beginning on or after 1 January 2016. In this amendment
the IASB has clarified that the use of revenue based methods to
calculate the depreciation of an asset is not appropriate because
revenue generated by an activity that includes the use of an asset
generally reflects factors other than the consumption of the
economic benefits embodied in the asset.
-- Annual Improvements 2014 includes amendments to IFRS 5,
'Non-current Assets Held For Sale and Discontinued Operations',
IFRS 7, 'Financial Instruments: Disclosures', IAS 19, 'Employee
Benefits' and IAS 34, 'Interim Financial Reporting' applies for
periods beginning on or after 1 January 2016.
-- Amendment to IAS 1, 'Presentation of financial statements' as
part of the IASB initiative to improve presentation and disclosure
in financial reports, effective for annual periods beginning on or
after 1 January 2016.
The amendments above do not have a material impact to the
consolidated financial statements.
(b) The following standards, interpretations and amendments to
existing standards are not yet effective and have not been adopted
early by the Group:
-- IFRS 15 'Revenue from Contracts with Customers' establishes
the principles that an entity shall apply to report useful
information to users of financial statements about the nature,
amount, timing, and uncertainty of revenue and cash flows arising
from a contract with a customer. Application of the standard is
mandatory for annual reporting periods starting from 1 January 2018
onwards and has been approved by EU, apart from those
clarifications the IASB published in April 2016. Earlier
application is permitted. The standard replaces IAS 18 'Revenue'
and IAS 11 'Construction contracts' and related
interpretations.
-- IFRS 9 'Financial instruments'. This standard replaces the
guidance in IAS 39 and applies to periods beginning on or after 1
January 2018. It includes requirements on the classification and
measurement of financial assets and liabilities; it also includes
an expected credit losses model that replaces the current incurred
loss impairment model.
The Group is currently assessing the impact of IFRS 15 and IFRS
9. It is too early to determine how significant the effect of these
standards will be on reported results and financial position.
(c) The following standards, interpretations and amendments to
existing standards are not yet effective and have not yet been
endorsed by the EU:
-- Amendments to IAS 7, 'Statement of cash flows' on disclosure
initiative are effective on periods beginning on or after 1 January
2017, subject to EU endorsement. This amendment introduces an
additional disclosure that will enable users of financial
statements to evaluate changes in liabilities arising from
financing activities and is part of the IASB's Disclosure
Initiative, which continues to explore how financial statement
disclosure can be improved.
-- Amendments to IAS 12, 'Income taxes' on recognition of
deferred tax assets for unrealized losses are effective on periods
beginning on or after 1 January 2017, subject to EU endorsement.
These amendments clarify how to account for deferred tax assets
originated from unrealized loss in debt instruments measured at
fair value.
-- Amendments to IFRS 2, 'Share based payments' on clarifying
how to account for certain types of share based payment
transactions are effective on periods beginning on or after 1
January 2018, subject to EU endorsement. These amendments clarify
the measurement basis for cash-settled share-based payments and the
accounting for modifications that change an award from cash-settled
to equity-settled. It also introduces an exception to the
principles in IFRS 2 that will require an award to be treated as if
it was wholly equity-settled, where an employer is obliged to
withhold an amount for the employee's tax obligation associated
with a share based payment and pay that amount to the tax
authority.
-- IFRS 16, 'Leases' addresses the definition of a lease,
recognition and measurement of leases and establishes principles
for reporting useful information to users of financial statements
about the leasing activities of both lessees and lessors. A key
change arising from IFRS 16 is that most operating leases will be
accounted for on balance sheet for lessees. The standard replaces
IAS 17 'Leases', and related interpretations. The standard is
effective for annual periods beginning on or after 1 January 2019
and earlier application is permitted subject to EU endorsement and
the entity adopting IFRS 15 'Revenue from contracts with customers'
at the same time. The Group is currently assessing the impact of
IFRS 16.
Apart from IFRS 16, where it is too early to determine how
significant the effect on reported results and financial position
will be, the directors anticipate that the future introduction of
those amendments listed above will not have a material impact on
the consolidated financial statements.
4. Functional currency
The presentation currency of the Group is US dollars. Items
included in the financial statements of each of the Group's
entities are measured in the functional currency of each entity.
The Group uses the local currency as the functional currency,
except for two entities based in Ireland (Novell Ireland Software
Limited and Novell Ireland Real Estate Limited) and the parent
company, where the functional currency is the US dollar.
5. Segmental reporting
In accordance with IFRS 8, "Operating Segments", the Group has
derived the information for its operating segments using the
information used by the Chief Operating Decision Maker ("the
Executive Committee"). The Group's operating segments are: Micro
Focus and SUSE as set out in the Executive Chairman's Statement.
Operating segments are consistent with those used in internal
management reporting and the profit measure used by the Executive
Committee is the Adjusted Operating Profit for the Group as a whole
as set out in note 8.
Operating segments for the six months ended 31 October 2016:
Micro
Note Focus SUSE Total
--------------------------- ------- ---------- --------- ----------
$'000 $'000 $'000
--------------------------- ------- ---------- --------- ----------
Segment revenue 537,311 147,432 684,743
Directly managed costs (277,297) (81,197) (358,494)
Allocation of centrally
managed costs 12,651 (12,651) -
Total segment costs (264,646) (93,848) (358,494)
--------------------------- ------- ---------- --------- ----------
Adjusted Operating Profit 8 272,665 53,584 326,249
---------- ---------
Exceptional items 7 (41,048)
Share based compensation
charge (15,521)
Amortization of purchased
intangibles (106,394)
--------------------------- ------- ---------- --------- ----------
Operating profit 163,286
Share of results of
associates (1,127)
Net finance costs (48,953)
--------------------------- ------- ---------- --------- ----------
Profit before tax 113,206
--------------------------- ------- ---------- --------- ----------
Total assets 4,707,021
--------------------------- ------- ---------- --------- ----------
Total liabilities 3,125,262
=========================== ======= ========== ========= ==========
Operating segments for the six months ended 31 October 2015:
Micro
Note Focus SUSE Total
--------------------------- ------- ---------- --------- ----------
$'000 $'000 $'000
--------------------------- ------- ---------- --------- ----------
Segment revenue 483,291 121,232 604,523
Directly managed costs (278,637) (62,018) (340,655)
Allocation of centrally
managed costs 16,268 (16,268) -
Total segment costs (262,369) (78,286) (340,655)
--------------------------- ------- ---------- --------- ----------
Adjusted Operating Profit 8 220,922 42,946 263,868
---------- ---------
Exceptional items 7 (10,651)
Share based compensation
charge (11,856)
Amortization of purchased
intangibles (90,958)
--------------------------- ------- ---------- --------- ----------
Operating profit 150,403
Share of results of
associates (1,129)
Net finance costs (50,439)
--------------------------- ------- ---------- --------- ----------
Profit before tax 98,835
--------------------------- ------- ---------- --------- ----------
Total assets 4,092,774
--------------------------- ------- ---------- --------- ----------
Total liabilities 2,780,696
=========================== ======= ========== ========= ==========
The operating segment split of depreciation on property, plant
and equipment and the amortization of purchased software
intangibles is reported in note 8. The segmental costs for the six
months ended 31 October 2015 have been reclassified to the
methodology utilized in the six months ended 31 October 2016.
6. Analysis of revenue by product
Set out below is an analysis of revenue recognized between the
principal product portfolios for the six months ended 31 October
2016:
Micro Focus
Development
& IT Total
Identity, Operations Micro
Host Access Management Collaboration Focus SUSE Total
CDMS Connectivity & Security Tools & Networking
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
-------------- -------- -------------- ------------ ------------ -------------- -------- -------- --------
Licence 52,447 38,898 19,845 24,509 11,174 146,873 - 146,873
Maintenance 75,320 52,613 70,298 109,388 56,612 364,231 - 364,231
Subscription - - - - - - 144,925 144,925
Consulting 5,433 935 10,211 7,336 2,292 26,207 2,507 28,714
Total 133,200 92,446 100,354 141,233 70,078 537,311 147,432 684,743
-------------- -------- -------------- ------------ ------------ -------------- -------- -------- --------
Set out below is an analysis of revenue recognized between the
principal product portfolios for the six months ended 31 October
2015:
Micro Focus
Development
& IT Total
Identity, Operations Micro
Host Access Management Collaboration Focus SUSE Total
CDMS Connectivity & Security Tools & Networking
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
-------------- -------- -------------- ------------ ------------ -------------- -------- -------- --------
Licence 39,984 48,450 20,412 13,467 12,210 134,523 - 134,523
Maintenance 71,910 54,205 70,489 62,798 68,015 327,417 - 327,417
Subscription - - - - - - 118,732 118,732
Consulting 4,025 1,210 11,723 1,411 2,982 21,351 2,500 23,851
Total 115,919 103,865 102,624 77,676 83,207 483,291 121,232 604,523
-------------- -------- -------------- ------------ ------------ -------------- -------- -------- --------
The table below provides the proportion of revenue by each of
the portfolios delivered during the six months to 31 October 2016,
the comparison to the revenue for the six months to 31 October 2015
and the year ended 30 April 2016, with Micro Focus broken out into
its sub-portfolios:
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
------------------------------- ------------ ------------ ----------
COBOL Development & Mainframe
Solutions 19.4% 19.2% 20.8%
Host Connectivity 13.6% 17.2% 15.9%
Identity, Access & Security 14.6% 17.0% 17.4%
Development & IT Operations
Management Tools 20.6% 12.8% 12.6%
Collaboration & Networking 10.3% 13.8% 12.9%
------------------------------- ------------ ------------ ----------
Micro Focus Portfolio 78.5% 80.0% 79.6%
SUSE Portfolio 21.5% 20.0% 20.4%
Micro Focus Group 100.0% 100.0% 100.0%
------------------------------- ------------ ------------ ----------
7. Exceptional items
The exceptional costs of $41.0m (2015: $10.7m) shown in the
consolidated statement of comprehensive income relate to costs
incurred on the acquisition of Serena and GWAVA, pre-acquisition
costs relating the HPE Software and integration costs for acquired
businesses. The total cash outflow of exceptional items during the
year was $21.2m (2015: $8.0m).
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
Reported within Operating $'000 $'000 $'000
profit:
--------------------------- ------------- ------------- -----------
Integration costs 13,432 8,394 23,634
Acquisition costs 1,468 531 531
Pre-acquisition costs 19,669 - 5,569
Property costs 2,521 1,073 5,964
Severance and legal costs 3,958 653 (4,845)
Royalty provision release - - (3,000)
--------------------------- ------------- ------------- -----------
41,048 10,651 27,853
--------------------------- ------------- ------------- -----------
Integration costs of $13.4m (2015: $8.4m) arose from the work
being done in bringing together the Base Micro Focus, TAG, Serena
and GWAVA organizations into one organization. Other activities
include; development of a new Group intranet and website and system
integration costs.
The acquisition costs of $1.5m are external costs in evaluating
and completing the acquisitions of Serena in May 2016 and GWAVA in
September 2016 (2015: acquisition of Authasas BV $0.5m). The costs
mostly relate to due diligence work, legal work on the acquisition
agreements and professional advisors on the transaction.
The property costs of $2.5m (2015: $1.1m) relate to the cost of
exiting entire buildings or floors of buildings which the Group are
leasing following the integration of the TAG and Serena business.
The majority of the costs relate to TAG and Serena properties in
North America.
Severance and legal costs of $4.0m (2015: $0.7m) relate mostly
to termination costs for senior Serena executives after
acquisition.
The pre-acquisition costs of $19.7m (2015: $nil) relate to the
evaluation of the acquisition of HPE Software (note 27), which was
announced in September 2016 and is expected to complete in the
third quarter of calendar year 2017. The costs relate to due
diligence work, legal work on the acquisition agreements and
professional advisors on the transaction
The estimated total tax effect of exceptional items is a credit
to the income statement of $5.6m (2015: $3.3m).
8. Reconciliation of operating profit to EBITDA
Six months Six months Year
ended ended ended
31 October 31 October 30 April
2016 2015 2016
Note (unaudited) (unaudited) (audited)
$'000 $'000 $'000
----------------------------------- ------ -------------- -------------- ------------
Operating profit 5 163,286 150,403 294,934
Exceptional items 7 41,048 10,651 27,853
Share-based compensation
charge 15,521 11,856 28,793
Amortization of purchased
intangibles 14 106,394 90,958 181,934
----------------------------------- ------ -------------- -------------- ------------
Adjusted Operating Profit 326,249 263,868 533,514
Depreciation of property,
plant and equipment 15 5,712 5,770 11,419
Amortization of purchased
software intangibles 14 574 918 1,864
----------------------------------- ------ -------------- -------------- ------------
Adjusted EBITDA 332,535 270,556 546,797
Amortization and impairment
of development costs 14 12,117 8,768 19,515
----------------------------------- ------ -------------- -------------- ------------
Facility EBITDA 344,652 279,324 566,312
----------------------------------- ------ -------------- -------------- ------------
Operating profit 5 163,286 150,403 294,934
Amortization of intangible
assets 14 119,085 100,644 203,313
Depreciation of property,
plant and equipment 15 5,712 5,770 11,419
----------------------------------- ------ -------------- -------------- ------------
EBITDA 288,083 256,817 509,666
Amortization and impairment
of development costs 14 (12,117) (8,768) (19,515)
Share-based compensation
charge 15,521 11,856 28,793
Exceptional items 7 41,048 10,651 27,853
----------------------------------- ------ -------------- -------------- ------------
Adjusted EBITDA 332,535 270,556 546,797
Foreign exchange credit (9,270) (355) (2,915)
Net (capitalization)/amortization
of internal development
costs 14 (2,931) (6,360) (11,362)
----------------------------------- ------ -------------- -------------- ------------
Underlying Adjusted EBITDA 320,334 263,841 532,520
----------------------------------- ------ -------------- -------------- ------------
Net capitalization of internal development costs of $2.9m (2015:
$6.4m) is calculated as additions to intangible development costs
of $15.3m (2015: $15.1m), excluding external consultants
development costs of $0.3m (2015: $nil) less amortization and
impairment of the development costs intangibles in the period of
$12.1m (2015: $8.8m).
The table below provides the operating segments split for the
six months ended 31 October 2016 and the six months ended 31
October 2015:
Six months to 31 Six months ended
October 2016 31 October 2015
Micro SUSE Total Micro SUSE Total
Focus Focus
$'000 $'000 $'000 $'000 $'000 $'000
--------------------------- -------- -------- -------- -------- ------- --------
Adjusted Operating
Profit 272,665 53,584 326,249 220,922 42,946 263,868
Depreciation of property,
plant and equipment 4,759 953 5,712 4,691 1,079 5,770
Amortization of purchased
software intangibles 529 45 574 746 172 918
--------------------------- -------- -------- -------- -------- ------- --------
Adjusted EBITDA 277,953 54,582 332,535 226,359 44,197 270,556
Foreign exchange credit (7,981) (1,289) (9,270) (355) - (355)
Net capitalization
of development costs (2,931) - (2,931) (6,360) - (6,360)
--------------------------- -------- -------- -------- -------- ------- --------
Underlying Adjusted
EBITDA 267,041 53,293 320,334 219,644 44,197 263,841
--------------------------- -------- -------- -------- -------- ------- --------
The directors use EBITDA, EBITDA before exceptional items and
share based compensation charge but after amortization and
impairment of development costs ("Adjusted EBITDA") and Adjusted
EBITDA before foreign exchange gains and losses and net
amortization/capitalization of internal development costs
("Underlying Adjusted EBITDA") as key performance measures of the
business.
The use of these alternative performance measures are consistent
with those used by sell-side equity analysts who write research on
the Group and how institutional investors consider the performance
of the Group.
Facility EBITDA was the measure used under the Group's $420m
Revolving Credit Facility to determine the Net Debt to Facility
EBITDA covenant calculation. Whilst the $420m facility was repaid
and cancelled as part of the refinancing on the acquisition of TAG,
for consistency the directors will continue to use the metric Net
Debt to Facility EBITDA. These measures are not defined in IFRS and
thus may not be comparable to similarly titled measures by other
companies.
9. Share-based payments
The share-based compensation charge for the six months ended 31
October 2016 was $15.5m (2015: $11.9m) including $4.3m (2015:
$1.6m) relating to employer taxes. The increase in the period is as
a result of the additional employer taxes that would be payable as
a result of the increase in the share price. $7.6m of the employer
taxes is included in trade and other payables and $5.2m is included
in other non-current liabilities.
10. Dividends
A dividend of $111.0m was paid during the period to 31 October
2016 of 49.74 cents per share (2015: $70.0m or 33.0 cents per
share).
The directors announce an interim dividend of 29.73 cents per
share (2015: 16.94 cents per share) payable on 27 January 2017 to
shareholders who are registered at 6 January 2017. This interim
dividend, amounting to $68.2m (2015: $35.1m) has not been
recognized as a liability in this half year report.
11. Earnings per share
The calculation of the basic earnings per share has been based
on the earnings attributable to owners of the parent and the
weighted average number of shares for each period.
Six months ended 31 Six months ended 31
October 2016 October 2015
(unaudited) (unaudited)
Total Weighted Per Per Total Weighted Per Per
earnings average share share earnings average share share
number amount amount number amount amount
of of
shares shares
$'000 '000 Cents Pence $'000 '000 Cents Pence
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Basic EPS
Earnings attributable
to ordinary
shareholders
(1) 90,638 229,067 39.57 29.49 87,321 217,402 40.17 25.96
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Effect of
dilutive securities
Options 8,689 8,938
Diluted EPS
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Earnings attributable
to ordinary
shareholders 90,638 237,756 38.12 28.41 87,321 226,340 38.58 24.94
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Supplementary
EPS
Basic EPS 90,638 229,067 39.57 29.49 87,321 217,402 40.17 25.96
Adjusted items(2) 162,963 113,465
Tax relating
to above items (41,513) (33,262)
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Basic EPS
- adjusted 212,088 229,067 92.59 69.00 167,524 217,402 77.06 49.81
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Diluted EPS 90,638 237,756 38.12 28.41 87,321 226,340 38.58 24.94
Tax adjustments -
Adjusted items(2) 162,963 113,465
Tax relating
to above items (41,513) (33,262)
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
Diluted EPS
- adjusted 212,088 237,756 89.20 66.48 167,524 226,340 74.01 47.84
----------------------- ---------- --------- -------- -------- ---------- --------- -------- --------
(1) Earnings attributable to ordinary shareholders is the profit
for the period of $90,617,000 (2015: $87,538,000), excluding the
$21,000 loss (2015: $217,000 profit) attributable to
non-controlling interests.
(2) Adjusted items comprise amortization of purchased
intangibles $106,394,000 (2015: $90,958,000), share-based
compensation $15,521,000 (2015: $11,856,000) and exceptional items
$41,048,000 (2015: $10,651,000).
The weighted average number of shares excludes treasury shares
that do not have dividend rights. Earnings per share, expressed in
pence, has used the average exchange rate for the year of $1.34 to
GBP1 (2015: $1.55 to GBP1).
12. Taxation
Profit before tax and adjusted profit before tax
Profit before tax was $113.2m (2015: $98.8m). Adjusted profit
before tax was $276.2m (2015: $212.3m):
Six months ended Six months Year ended
ended
31 October 2016 31 October 30 April
2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
--------------------------- ----------------- ------------- -----------
Profit before tax 113,206 98,835 195,396
Share based compensation 15,521 11,856 28,793
Amortization of purchased
intangibles 106,394 90,958 181,934
Exceptional costs 41,048 10,651 27,853
Adjusted profit before
tax 276,169 212,300 433,976
--------------------------- ----------------- ------------- -----------
The tax charge for the period was $22.6m (2015: $11.3m) with the
Group's effective tax rate ("ETR") being 20.0% (2015: 11.4%). The
tax charge on adjusted profit before tax for the period was $64.1m
(2015: $44.6m), which represents an ETR on adjusted profit of 23.2%
(2015: 21.0%) as set out below:
Six months ended Six months ended Year ended
31 October 2016 31 October 2015 30 April 2016
(actual) (actual) (actual)
(unaudited) (unaudited) (audited)
------------------------------------- ------------------------------------- ----------------------------------
Adjusted Adjusted Adjusted
Actual Adjusts measures Actual Adjusts measures Actual Adjusts measures
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ------------
Profit
before
tax 113,206 162,963 276,169 98,835 113,465 212,300 195,396 238,580 433,976
Taxation (22,589) (41,513) (64,102) (11,297) (33,262) (44,559) (32,424) (67,766) (100,190)
----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ------------
Profit
after tax 90,617 121,450 212,067 87,538 80,203 167,741 162,972 170,814 333,786
Effective
tax rate 20.0% 23.2% 11.4% 21.0% 16.6% 23.1%
----------- ----------- ----------- ----------- ----------- ----------- --------- --------- ------------
In computing adjusted profit before tax, $163.0m of adjustments
have been made for the items shown in the adjusted profit before
tax section above, of which the associated tax is $41.5m.
The Group's ETR for the six months ended 31 October 2016 (20.0%)
is higher than the previous year (11.4%) mainly due to the high
proportion of disallowable exceptional costs in the current year
relating to the HPE Software acquisition.
The Adjusted ETR for the six months ended 31 October 2016
(23.2%) is higher than the previous year (2015: 21.0%). This is due
to intra-group transfer pricing changes to manage risk arising from
the OECD's Base Erosion and Profit Shifting ("BEPS")
initiative.
The Group continues to benefit from the UK's Patent Box regime.
Benefits during the six months to 31 October 2016 were $4.3m (2015:
$3.8m).The Group realized benefits in relation to intra-Group
financing in the six months to 31 October 2016 of $8.4m (2015:
$7.2m).
Ignoring the impact of the Merger with HPE Software the Group's
medium-term Adjusted ETR is expected to be between 23% and 27% of
the Group's adjusted profit before tax, in line with guidance
issued at year end. The enacted reduction in the UK's corporation
tax rate from 18% to 17% from 1 April 2020 is not expected to give
rise to a material reduction in the Adjusted ETR.
The Group's cash taxes paid in the period were $18.2m, compared
to $47.7m in the six months to 31 October 2015. The prior year
figure included $27.2m in respect of US Federal income tax
liabilities for the year ended 30 April 2016 and previous years.
Following a recalculation of the respective liabilities, a
substantial part of that payment was subsequently carried forward
at 30 April 2016 as a debtor, reducing payments required in the
current year.
There have been no significant developments in relation to the
UK tax claim impacting the Group's tax returns for the years ended
30 April 2009 through to 2015, which is under review by HMRC. The
Group maintains a provision for the full potential liability of
$4.7m at 31 October 2016. The provision has reduced by $0.9m since
30 April 2016 due to foreign exchange movements.
13. Goodwill
31 October 2016 31 October 2015 30 April 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
Cost and net book amount
------------------------------ --------------- --------------- -------------
At 1 May 2,436,168 2,421,745 2,421,745
Hindsight adjustments - 5,583 5,583
Acquisitions (note 26) 391,657 8,840 8,840
At 31 October / 30 April 2,827,825 2,436,168 2,436,168
------------------------------ --------------- --------------- -------------
A segment-level summary
of the goodwill allocation
is presented below:
Micro Focus 1,968,259 1,576,602 1,576,602
SUSE 859,566 859,566 859,566
At 31 October / 30 April 2,827,825 2,436,168 2,436,168
------------------------------ --------------- --------------- -------------
The Group has two operating segments: Micro Focus Product
Portfolio and SUSE Product Portfolio.
The additions to goodwill in the year relate to the acquisition
of Serena ($378.6m) and GWAVA ($13.1m) (note 26). Of the additions
to goodwill, there is no amount that is expected to be deductible
for tax purposes.
14. Other intangible assets
Purchased intangibles
Purchased Development Trade names Customer
software costs Technology relationships Total
$'000 $'000 $'000 $'000 $'000 $'000
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
Net book value
At 1 May 2015 935 31,369 222,466 209,696 667,755 1,132,221
Acquisition -
Authasas - - 2,545 - 811 3,356
Additions 658 15,128 - - - 15,786
Charge for the
period (918) (8,768) (37,599) (7,520) (45,839) (100,644)
Exchange
adjustments (138) - - - - (138)
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
At 31 October
2015 537 37,729 187,412 202,176 622,727 1,050,581
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
Net book value
At 1 May 2015 935 31,369 222,466 209,696 667,755 1,132,221
Acquisition -
Authasas - - 2,545 - 811 3,356
Additions 3,093 31,395 - - - 34,488
Charge for the
year (1,864) (19,515) (75,227) (15,040) (91,667) (203,313)
Exchange
adjustments (197) - - - - (197)
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
At 30 April 2016 1,967 43,249 149,784 194,656 576,899 966,555
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
Net book value
At 1 May 2016 1,967 43,249 149,784 194,656 576,899 966,555
Acquisition -
Serena (note 26) 79 - 86,100 21,400 210,200 317,779
Acquisition -
GWAVA (note 26) - - 4,075 711 544 5,330
Additions 2,226 15,345 - - - 17,571
Charge for the
period (574) (12,117) (37,027) (5,501) (63,866) (119,085)
Exchange
adjustments (1,966) - - - - (1,966)
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
At 31 October
2016 1,732 46,477 202,932 211,266 723,777 1,186,184
------------------ ----------------- ----------------- ------------- -------------- ----------------- ----------
Expenditure totaling $17.6m (2015: $15.8m) was made in the year,
including $15.3m in respect of development costs and $2.2m of
purchased software. The acquisition of Serena gave rise to an
addition of $317.7m to purchased intangibles and $0.1m to purchased
software, the acquisition of GWAVA gave rise to an addition of
$5.3m to purchased intangibles (note 26).
Of the $15.3m of additions to development costs, $15.0m (2015:
$15.1m) relates to internal development costs and $0.3m (2015:
$nil) to external consultants development costs.
At 31 October 2016, the unamortized lives of technology assets
were in the range of two to ten years, customer relationships in
the range of one to ten years and trade names in the range of ten
to twenty years.
Amortization of $69.4m (2015: $53.4m) is included in selling and
distribution costs, $49.1m (2015: $46.4m) is included in research
and development expense and $0.6m (2015: $0.9m) is included in
administrative expenses in the consolidated statement of
comprehensive income.
15. Property, plant and equipment
Capital expenditure of $6.5m (2015: $5.9m) was made in the six
months to 31 October 2016.
Freehold land Leasehold Computer Fixtures
and buildings improvements equipment and fittings Total
$'000 $'000 $'000 $'000 $'000
-------------------------------- -------------- ------------- ---------- ------------- ---------
Net book value
At 1 May 2015 14,653 14,645 9,505 4,093 42,896
Acquisition - Authasas - - 14 - 14
Additions - 2,649 2,578 690 5,917
Disposals - (1) (5) (1) (7)
Charge for the period (211) (1,741) (3,156) (662) (5,770)
Exchange adjustments 50 (154) (368) (53) (525)
-------------------------------- -------------- ------------- ---------- ------------- ---------
At 31 October 2015 14,492 15,398 8,568 4,067 42,525
-------------------------------- -------------- ------------- ---------- ------------- ---------
Net book value
At 1 May 2015 14,653 14,645 9,505 4,093 42,896
Acquisition - Authasas - - 14 - 14
Additions - 3,636 5,386 1,259 10,281
Disposals - - (53) (56) (109)
Charge for the year (403) (3,541) (6,127) (1,348) (11,419)
Exchange adjustments (638) (136) (11) (11) (796)
-------------------------------- -------------- ------------- ---------- ------------- ---------
At 30 April 2016 13,612 14,604 8,714 3,937 40,867
-------------------------------- -------------- ------------- ---------- ------------- ---------
Net book value
At 1 May 2016 13,612 14,604 8,714 3,937 40,867
Acquisition - Serena (note 26) - 1,057 659 211 1,927
Acquisition - GWAVA (note 26) - - 111 84 195
Additions 18 2,329 3,926 181 6,454
Disposals - (286) (79) (119) (484)
Charge for the period (182) (2,060) (2,919) (551) (5,712)
Exchange adjustments (2,057) (209) (366) (78) (2,710)
-------------------------------- -------------- ------------- ---------- ------------- ---------
At 31 October 2016 11,391 15,435 10,046 3,665 40,537
-------------------------------- -------------- ------------- ---------- ------------- ---------
16. Trade and other receivables
31 October 2016 31 October 2015 30 April 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
----------------------------------------------------- ---------------- ---------------- --------------
Trade receivables 257,486 201,568 248,759
Less: provision for impairment of trade receivables (3,768) (2,998) (4,486)
----------------------------------------------------- ---------------- ---------------- --------------
Trade receivables net 253,718 198,570 244,273
Prepayments 21,353 14,690 21,694
Other receivables 2,436 1,647 1,651
Accrued income 451 317 568
----------------------------------------------------- ---------------- ---------------- --------------
Total 277,958 215,224 268,186
----------------------------------------------------- ---------------- ---------------- --------------
At 31 October 2016, 31 October 2015 and 30 April 2016, the
carrying amount approximates to the fair value.
17. Trade and other payables - current
31 October 2016 31 October 2015 30 April 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
Trade payables 14,301 13,158 20,793
Tax and social security 9,250 5,588 10,425
Accruals 127,612 118,274 156,872
Total 151,163 137,020 188,090
------------------------- ---------------- ---------------- --------------
At 31 October 2016, 31 October 2015 and 30 April 2016, the
carrying amount approximates to the fair value. Accruals include
employee taxes on share-based payments, acquisition fees, vacation
and payroll accruals including bonuses and commissions.
18. Borrowings
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
-------------------------------- ------------- ------------- -----------
Bank loans secured 1,775,875 1,593,625 1,787,250
Unamortized prepaid facility
arrangement fees and original
issue discounts (40,346) (47,753) (42,041)
-------------------------------- ------------- ------------- -----------
Net Borrowings 1,735,529 1,545,872 1,745,209
-------------------------------- ------------- ------------- -----------
Reported within:
Current liabilities 294,192 50,600 275,256
Non-current liabilities 1,441,337 1,495,272 1,469,953
-------------------------------- ------------- ------------- -----------
Net Borrowings 1,735,529 1,545,872 1,745,209
Less: Cash at bank and in
hand (122,970) (91,566) (667,178)
-------------------------------- ------------- ------------- -----------
Net debt 1,612,559 1,454,306 1,078,031
-------------------------------- ------------- ------------- -----------
The terms of the Micro Focus existing debt facilities are as
follows:
-- Syndicated senior secured tranche B term loan facility of
$1,275.0m ("Term Loan B"), with an interest rate of 3.75% above
LIBOR (subject to a LIBOR floor of 0.75%), amortizing at 1.00% per
annum, with an original issue discount of 1.00% and a seven year
term;
-- A syndicated senior secured tranche C term loan facility of
$500.0m ("Term Loan C"), with an interest rate of 3.75% above LIBOR
(subject to a LIBOR floor of 0.75%), amortizing at 10.00% per
annum, with an original issue discount of 1.5% and a five year
term; and
-- A senior secured revolving credit facility of $375.0m,
("Revolving Facility"), with an interest rate of 3.50% above LIBOR
on amounts drawn (and 0.50% on amounts undrawn) thereunder and an
original issue discount of 0.50%.
The Revolving Facility was increased to $375.0m on 2 May 2016 as
part of the funding for the Serena acquisition (note 26).
On 1 August 2016 the Company allocated a re-pricing of its
senior secured term loan B which will reduce its ongoing interest
payments. The interest rate was reduced from 4.25% to 3.75% and the
LIBOR floor was reduced from 1.00% to 0.75%, amortizing at 1.00%
per annum, up from 0.75%. All other terms of the Group's Credit
Facilities remain the same.
The only financial covenant attaching to these new facilities
relates to the Revolving Facility, which is subject to an aggregate
net leverage covenant only in circumstances where more than 35% of
the Revolving Facility is outstanding at a fiscal quarter end. At
31 October 2016 $245.0m of the Revolving Facility available of
$375.0m was drawn representing 65.3%. The covenant calculation
indicates that the Group had in excess of 70% headroom against the
covenant test.
Borrowings are stated after deducting unamortized prepaid
facility fees and original issue discounts. Facility arrangement
costs and original issue discounts are amortized between four and
six years. The fair value of borrowings equals their carrying
amount.
19. Provisions
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
---------------------------------- ------------- ------------- -----------
Onerous leases and dilapidations 16,687 21,422 18,176
Restructuring and integration 7,340 9,095 3,523
Legal 3,022 3,264 1,920
Other 100 10,637 1,280
---------------------------------- ------------- ------------- -----------
Total 27,149 44,418 24,899
---------------------------------- ------------- ------------- -----------
Current 15,420 27,784 10,545
Non-current 11,729 16,634 14,354
---------------------------------- ------------- ------------- -----------
Total 27,149 44,418 24,899
---------------------------------- ------------- ------------- -----------
Onerous Restructuring
leases and integration
and dilapidations Legal Other Total
$'000 $'000 $'000 $'000 $'000
----------------------------- ------------------ ---------------- ------- ------- --------
At 1 May 2016 18,176 3,523 1,920 1,280 24,899
Acquisitions - Serena (note
26) - 1,201 1,344 - 2,545
Additional provision in
the period 2,128 20,358 - - 22,486
Released (344) (2,077) (97) (1,180) (3,698)
Utilization of provision (3,151) (15,311) (119) - (18,581)
Exchange adjustments (122) (354) (26) - (502)
At 31 October 2016 16,687 7,340 3,022 100 27,149
----------------------------- ------------------ ---------------- ------- ------- --------
Current 5,120 7,278 3,022 - 15,420
Non-current 11,567 62 - 100 11,729
----------------------------- ------------------ ---------------- ------- ------- --------
Total 16,687 7,340 3,022 100 27,149
----------------------------- ------------------ ---------------- ------- ------- --------
Onerous Restructuring
leases and
and dilapidations integration Legal Other Total
$'000 $'000 $'000 $'000 $'000
--------------------------- ------------------ ------------- ------- ------- --------
At 1 May 2015 22,630 30,921 3,065 10,637 67,253
Hindsight adjustment - - 677 - 677
Additional provision in
the period 2,575 5,201 - - 7,776
Provision releases in the
period (991) (4,548) - - (5,539)
Utilization of provision (2,598) (22,328) (188) - (25,114)
Unwinding of discount 6 - - - 6
Exchange adjustments (200) (151) (290) - (641)
At 31 October 2015 21,422 9,095 3,264 10,637 44,418
--------------------------- ------------------ ------------- ------- ------- --------
Current 9,464 8,856 3,264 6,200 27,784
Non-current 11,958 239 - 4,437 16,634
--------------------------- ------------------ ------------- ------- ------- --------
Total 21,422 9,095 3,264 10,637 44,418
--------------------------- ------------------ ------------- ------- ------- --------
The onerous lease and dilapidations provision relates to leased
Group properties and this position is expected to be fully utilized
within nine years. The provision was increased by $2.1m in the
period to 31 October 2016, mostly due to the lengthening in the
estimated time to sublease a North American property.
Restructuring and integration provisions relate mostly to
severance and integration work undertaken during the six months
ended 31 October 2016. Integration provisions arose from the work
done in bringing together the Base Micro Focus, TAG, Serena and
GWAVA organizations into one organization. This includes, amongst
other activities; development of a new Group intranet and website
and system integration costs. Severance releases relate to the
change in estimates made for integrating the TAG business in the
year ended 30 April 2016, including the redeployment of staff
previously notified of redundancy. The provisions are expected to
be fully utilized within 12 months.
Legal provisions include management's best estimate of the
likely outflow of economic benefits associated with ongoing legal
matters.
Of the net additions and releases to provisions in the period,
$19.9m (2015: $7.3m) was included in exceptional items.
20. Deferred income - current
31 October 2016 31 October 2015 30 April 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
----------------- ---------------- ---------------- --------------
Deferred income 582,412 537,280 565,480
----------------- ---------------- ---------------- --------------
Revenue not recognized in the consolidated statement of
comprehensive income under the Group's accounting policy for
revenue recognition is classified as deferred income in the
consolidated statement of financial position to be recognized in
future periods.
21. Retirement benefit obligations
31 October 31 October 30 April 2016
2016 2015
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
-------------------------------- ------------ ------------ -------------
Within Non-current assets
:
Long term pension assets 24,120 19,114 22,272
-------------------------------- ------------ ------------ -------------
Within Non-current liabilities:
Retirement benefit obligations (34,599) (26,695) (31,669)
-------------------------------- ------------ ------------ -------------
There are three defined benefit plans in Germany under broadly
similar regulatory frameworks. All of the plans are final salary
pension plans, which provide benefits to members in the form of a
guaranteed level of pension payable for life in the case of
retirement, disability and death. The level of benefits provided
depends not only on the final salary but also on member's length of
service, social security ceiling and other factors. Final pension
entitlements are calculated by our Actuary in Swiss Life. They also
complete calculations for cases of death in service and disability.
There is no requirement for the appointment of Trustees in Germany.
The schemes are administered locally with the assistance of German
pension experts. All three plans were closed for new
membership.
Long-term pension assets
Certain long-term pension assets do not meet the definition of
plan assets as they have not been pledged to the plan and are
subject to the creditors of the Group. Such assets as follows are
recorded separately in the consolidated statement of financial
position as long-term pension assets.
The movement on the long-term pension asset is as follows:
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
------------------------------- ------------- ------------- -----------
As at 1 May 22,272 14,076 14,076
Hindsight adjustment - 3,917 3,917
Return on non-plan assets 187 168 333
Benefits paid (44) (40) (8)
Contributions - - 475
Actuarial gain on non-plan
assets included within other
comprehensive income 2,482 1,205 3,104
Foreign currency exchange
changes (777) (212) 375
------------------------------- ------------- ------------- -----------
As at 31 October / 30 April 24,120 19,114 22,272
------------------------------- ------------- ------------- -----------
The long-term pension asset was acquired as part of the
acquisition of TAG. The non-plan assets were not subject to an
actuarial revaluation until after 30 April 2015 and therefore a
hindsight adjustment was made in respect of this and reflected in
the consolidated statement of comprehensive income.
Retirement benefit obligations
The net liability included in the consolidated statement of
financial position arising from obligations in respect of defined
benefit schemes is as follows:
31 October 31 October 30 April
2016 2015 (unaudited) 2016
(unaudited) (audited)
$'000 $'000 $'000
---------------------------------- ------------- ------------------ -----------
Present value of defined benefit
obligation 40,120 32,148 37,524
Fair value of plan assets (5,521) (5,453) (5,855)
34,599 26,695 31,669
---------------------------------- ------------- ------------------ -----------
The present value of the defined benefit obligation has moved as
follows:
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
----------------------------------- ------------- ------------- -----------
At 1 May 37,524 38,224 38,224
Current service cost 424 383 760
Benefits paid (145) (88) (100)
Interest cost 311 276 546
Remeasurements - actuarial
losses:
- - -
* Demographic
* Financial 3,521 (6,340) (2,024)
* Experience (117) 98 (565)
Foreign currency exchange changes (1,398) (405) 683
----------------------------------- ------------- ------------- -----------
At 31 October / 30 April 40,120 32,148 37,524
----------------------------------- ------------- ------------- -----------
The fair value of plan assets has moved as follows:
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
------------------------------------ ------------- ------------- -----------
At 1 May 5,855 5,482 5,482
Interest income 49 40 79
Remeasurements - actuarial
return on assets excluding
amounts included in interest
income (117) 18 108
Contributions by plan participants 13 13 126
Benefits paid (43) (42) (84)
Foreign currency exchange changes (236) (58) 144
At 31 October / 30 April 5,521 5,453 5,855
------------------------------------ ------------- ------------- -----------
$0.7m (2015: $0.6m) is included in the consolidated statement of
comprehensive income in respect of the German defined benefit
pension arrangements being a current service charge of $0.4m (2015:
$0.4m) and a net finance charge of $0.3m (2015: $0.2m).
The contributions for the six months ended 30 April 2017 are
expected to be broadly in line with the six months ended 31 October
2016.
The amounts recognized as movements in equity included $0.1m
(2015: $0.1m) of actuarial return on assets excluding amounts
included in interest and $3.4m (2015: $6.2m gains) of actuarial
losses arising on scheme liabilities.
The key assumptions used for the German scheme were:
31 October 31 October 30 April
2016 2015 2016
(unaudited) (unaudited) (audited)
$'000 $'000 $'000
--------------------------------------- ------------- ------------- -----------
Rate of increase in final pensionable
salary 2.60% 2.60% 2.60%
Rate of increase in pension
payments 2.00% 2.00% 2.00%
Discount rate 1.30% 2.20% 1.70%
Inflation 2.00% 2.00% 2.00%
--------------------------------------- ------------- ------------- -----------
The mortality assumptions for the German scheme are set based on
actuarial advice in accordance with published statistics and
experience in the territory, specifically German pension table
'Richttafeln 2005 G' by Prof. Dr. Klaus Heubeck. This is unchanged
from that reported as at 30 April 2016.
Sensitivities
The table below provides information on the sensitivity of the
defined benefit obligation to changes to the most significant
actuarial assumptions. The table shows the impact of changes to
each assumption in isolation, although, in practice, changes to
assumptions may occur at the same time and can either offset or
compound the overall impact on the defined benefit obligation.
These sensitivities have been calculated using the same
methodology as used for the main calculations. The weighted average
duration of the defined benefit obligation is 25 years.
Change in assumption Change in defined benefit obligation
Discount rate for scheme liabilities 0.50% 13.0%
Price inflation 0.25% 3.7%
Salary growth rate 0.50% 1.7%
-------------------------------------- ---------------------- -------------------------------------
An increase of one year in the assumed life expectancy for both
males and females would increase the defined benefit obligation by
2.9% (2015: 2.9%). The methods and types of assumptions used in
preparing the sensitivity analysis did not change compared to
previous years.
22. Share capital
Ordinary shares at 10 pence each (2015: 10 pence each)
31 October 2016 31 October 2015 30 April 2016
---------------------- --------------------- ---------------------
Shares $'000 Shares $'000 Shares $'000
---------------------------------------- ------------ -------- ------------ ------- ------------ -------
Issued and fully paid
At 1 May 228,706,210 39,573 228,587,397 39,555 228,587,397 39,555
Shares issued to satisfy option awards 584,289 77 22,242 3 118,313 18
Share placement issues - - - - 500 -
At 31 October / April 229,290,499 39,650 228,609,639 39,558 228,706,210 39,573
---------------------------------------- ------------ -------- ------------ ------- ------------ -------
Share issuances during the six months to 31 October 2016
During the six months to 31 October 2016, 584,289 ordinary
shares of 10 pence each (2015: 22,242 ordinary shares of 10 pence)
were issued by the Company to settle exercised share options. The
gross consideration received was $0.5m (2015: $0.5m).
At 31 October 2016 there were no treasury shares held (2015:
11,029,506) and as such that the voting rights and number of listed
shares at 31 October were 229,290,499 (2015: 217,580,133).
Potential issues of shares
Certain employees hold options to subscribe for shares in the
Company at prices ranging from nil pence to 1,875.58 pence under
the following share option schemes approved by shareholders in 2005
and 2006: the Long-Term Incentive Plan 2005, the Additional Share
Grants, the Sharesave Plan 2006 and the Employee Stock Purchase
Plan 2006.
The number of shares subject to options at 31 October 2016 was
9,271,150 (2015: 9,312,749).
23. Other reserves
Capital
redemption Merger
reserve reserve Total
$'000 $'000 $'000
Share capital issue (1) - (27,085) (27,085)
Redemption of B shares
(2) 56,359 - 56,359
Expenses and foreign exchange
relating to return of value
(2) 545 - 545
Redemption of B shares
(2) 47,079 - 47,079
Acquisition of TAG (3) - 1,372,666 1,372,666
Reallocation of merger
reserve (5) - (130,000) (130,000)
Return of Value - Share
consideration (4) 11,903 - 11,903
Return of Value - New share
issues (4) 47,477 (47,477) -
As at 1 May 2015 and 31
October 2015 163,363 1,168,104 1,331,467
As at 1 May 2015 163,363 1,168,104 1,331,467
Reallocation of merger
reserve (5) - (180,000) (180,000)
As at 30 April 2016 163,363 988,104 1,151,467
-------------------------------- ------------ ---------- ----------
As at 1 May 2016 and 31
October 2016 163,363 988,104 1,151,467
-------------------------------- ------------ ---------- ----------
(1) On 17 May 2005, the Company acquired the entire issued share
capital of Micro Focus International Limited by way of a share for
share exchange, pursuant to which the previous shareholders of
Micro Focus International Limited were issued and allotted three
ordinary shares in the capital of the Company for every one
ordinary share they previously held in Micro Focus International
Limited. This increase in share capital created a merger reserve
deficit of $27.1m.
(2) In January 2012 a Return of Value was made to all
shareholders amounting to $129.0m in cash after including a foreign
exchange contract gain of $0.6m. As a result of this a capital
redemption reserve was created following the redemption of the B
shares ($56.9m). In November 2012 a further Return of Value was
made to all shareholders amounting to $128.2m in cash after
including a foreign exchange contract gain of $2.4m. In the year
ended 30 April 2014 a further $47.1m was added to the capital
redemption reserve following the redemption of the B shares.
(3) On 20 November 2014 the TAG acquisition was completed. As a
result of this a merger reserve was created of $1.372.7m. The
acquisition of TAG was structured by way of a share for share
exchange; this transaction fell within the provisions of section
612 of the Companies Act 2006 (merger relief) such that no share
premium was recorded in respect of the shares issued. The Company
chose to record its investment in TAG at fair value and therefore
recorded a merger reserve equal to the value of the share premium
which would have been recorded had section 612 of the Companies Act
2006 not been applicable (i.e. equal to the difference between the
fair value of TAG and the aggregate nominal value of the shares
issued). This merger reserve was initially considered unrealized on
the basis it was represented by the investment in TAG, which is not
considered to represent qualifying consideration (in accordance
with Tech 02/10 (Guidance on the determination of realized profits
and losses in the context of distributions under the Companies Act
2006)). Immediately following the acquisition of TAG, the Company's
investment in TAG was transferred to another Group company in
exchange for an intercompany loan. To the extent this loan is
settled in qualifying consideration, the related proportion of the
merger reserve is considered realized.
(4) In December 2014 a Return of Value was made to all
shareholders amounting to $131.6m in cash. The Return of Value was
accompanied by a 0.9285 share consolidation and resulted in a net
$11.9m reduction in share capital and an $11.9m increase in the
capital redemption reserve. In addition $47.5m was transferred from
the merger reserve to the capital redemption reserve.
(5) The merger reserve is an unrealized profit until it can be
realized by the settlement of the intercompany loan by qualifying
consideration. $180.0m of the intercompany loan is expected to be
settled in qualifying consideration during the year to 30 April
2017 (2015: $130.0m) and as such an equivalent proportion of the
merger reserve is considered realized and therefore has been
transferred to the profit and loss account.
24. Related party transactions
The Group's related parties are its subsidiary undertakings and
Executive Committee members. The Group has taken advantage of the
exemption available under IAS 24, "Related Party Disclosures", not
to disclose details of transactions with its subsidiary
undertakings.
6 months 6 months Year ended
ended ended
31 October 31 October 30 April
2016 2015 2016
$'000 $'000 $'000
------------------------------ ------------ ------------ -----------
Key management compensation
Short-term employee benefits 4,749 4,710 9,297
Share-based payments 6,326 6,247 10,146
------------------------------ ------------ ------------ -----------
11,075 10,957 19,443
------------------------------ ------------ ------------ -----------
The key management figures above include the executive
management team and directors. There are no post-employment
benefits.
At the beginning of the period Wizard Parent LLC held 13.8% of
the issued share capital of the Company and by the 13 July 2016
they reduced their holding to only 2.6%. Wizard Parent LLC is no
longer considered to be a related party.
25. Return of Value to shareholders
There has not been a Return of Value to shareholders in the six
months to 31 October 2016.
From the 25 March 2011 to 31 October 2016, the Company has
returned a total of GBP710.8m to shareholders through share
buy-backs, Returns of Value and ordinary dividends which
represented 111.9% of the Market Capitalization at that time.
As part of the corporate entity restructuring resulting from the
acquisition of TAG a merger reserve was created of approximately
$1.4bn, which is expected to become a distributable reserve in
future periods. This creates flexibility for future Returns of
Value once Net Debt to Facility EBITDA is below 2.5 times.
26. Business combinations
Summary of acquisitions
Consideration
-----------------------------
Carrying Fair
value value Hindsight
at acquisition adjustments adjustments Goodwill Shares Cash Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000
----------------- ---------------- ------------- -------------- --------- --------- -------- --------
Acquisitions
in the six
months ended
31 October
2015 and the
year ended
30 April 2016:
Authasas BV 1,110 10 - 8,840 - 9,960 9,960
Acquisitions
in the six
months ended
31 October
2016:
Serena Software
Inc. 148,958 (249,938) - 378,603 - 277,623 277,623
GWAVA Inc. 1,098 2,295 - 13,054 - 16,447 16,447
150,056 (247,643) - 391,657 - 294,070 294,070
----------------- ---------------- ------------- -------------- --------- --------- -------- --------
Acquisition of Serena Software Inc.
On 2 May 2016, the Group acquired the entire share capital of
Spartacus Acquisition Holdings Corp. the holding company of Serena
Software Inc. ("Serena") and its subsidiaries for $277.6m, payable
in cash at completion. In addition to this the Group then repaid
the outstanding Serena bank borrowings of $316.7m as at 2 May 2016,
making the total cash outflow for the Group of $528.5m, net of cash
acquired of $65.8m.
The acquisition is highly consistent with the Group's
established acquisition strategy and focus on the efficient
management of mature infrastructure software products.
Serena is a leading provider of enterprise software focused on
providing Application Lifecycle Management products for both
mainframe and distributed systems. Whilst Serena is headquartered
in San Mateo, California the operations are effectively managed
from offices in Hillsboro, Oregon and St. Albans in the United
Kingdom. It operates in a further ten countries. The Serena Group's
customers are typically highly regulated large enterprises, across
a variety of sectors including banking, insurance, telco,
manufacturing and retail, healthcare and government. Like Micro
Focus, Serena benefits from high levels of recurring maintenance
revenues and high EBITDA margins, with consistently strong cash
generation and no significant customer concentration. Serena's
position in the Source Code Change Management ("SCCM") segment
complements the Micro Focus Product Portfolio in COBOL Development,
Host Connectivity, and CORBA.
Serena will be integrated into the Micro Focus Product Portfolio
and the revenues reported in the Development and IT Operations
Management Tools sub-portfolio and, consequently, it will give rise
to operational efficiencies.
The transaction was funded through the Group's existing cash
resources together with additional debt and equity finance arranged
through Barclays, HSBC, the Royal Bank of Scotland and Numis
Securities. On the 2 May 2016, the Group's existing revolving
credit facility was extended from $225m to $375m and the Group
raised approximately GBP158.2m (approximately $225.7m) through a
Placing underwritten by Numis Securities incurring $3.0m of costs
associated with the Placing in March 2016.
A provisional fair value review was carried out on the assets
and liabilities of the acquired business, resulting in the
identification of intangible assets. At the time these consolidated
interim financial statements were authorized for issue, the Group
had not yet fully completed its assessments of the Serena
acquisition.
Details of the net assets acquired and goodwill are as
follows:
Carrying Fair value
value at adjustments Fair value
acquisition
$'000 $'000 $'000
------------------------------- ------------- ------------- ------------
Goodwill 462,400 (462,400) -
Intangible assets - purchased
(1) - 317,700 317,700
Intangible assets - other 79 - 79
Property, plant and equipment 1,927 - 1,927
Other non-current assets 167 - 167
Deferred tax asset 15,541 - 15,541
Trade and other receivables 27,362 - 27,362
Cash and cash equivalent 65,784 - 65,784
Borrowings - short-term (27,712) - (27,712)
Trade and other payables (11,518) - (11,518)
Provisions - short-term (2,545) - (2,545)
Current tax liabilities (3,173) - (3,173)
Deferred income - short-term
(2) (72,217) 3,761 (68,456)
Deferred income - long-term
(2) (14,853) 798 (14,055)
Borrowings - long-term (288,938) - (288,938)
Other non-current liabilities (717) - (717)
Deferred tax liabilities (3) (2,629) (109,797) (112,426)
------------------------------- ------------- ------------- ------------
Net assets 148,958 (249,938) (100,980)
Goodwill (note 13) 378,603
------------------------------- ------------- ------------- ------------
Consideration 277,623
------------------------------- ------------- ------------- ------------
Consideration satisfied by
:
Cash 277,623
------------------------------- ------------- ------------- ------------
Trade and other receivables are net of a bad debt provision of
$0.8m.
The fair value adjustments relate to:
(1) Purchased intangible assets have been valued based on a
market participant point of view and the fair value has been based
on various characteristics of the product lines and intangible
assets of Serena Software Inc.;
(2) Deferred income has been valued taking account of the
remaining performance obligations;
(3) A deferred tax liability has been established relating to the purchase of intangibles.
The purchased intangible assets acquired as part of the
acquisition can be analyzed as follows (note 14):
Fair value
$'000
------------------------ -----------
Technology 86,100
Customer relationships 210,200
Trade names 21,400
------------------------ -----------
317,700
------------------------ -----------
The value of the goodwill represents the value of the assembled
workforce at the time of the acquisition with specific knowledge
and technical skills. It also represents the prospective future
economic benefits that are expected to accrue from enhancing the
portfolio of products available to the Company's existing customer
base with those of the acquired business.
The Group has used acquisition accounting for the purchase and
the goodwill arising on consolidation of $378.6m has been
capitalized.
From the date of acquisition, 2 May 2016 to 31 October 2016, the
acquisition contributed $72.6m to revenue and $40.0m to Adjusted
EBITDA, before any allocation of management costs. There is no
difference in results between 1 May and 2 May 2016.
Acquisition of GWAVA Inc.
On 30 September 2016, the Group acquired the entire share
capital of GWAVA Inc. ("GWAVA") and its subsidiaries for $16.4m,
payable in cash at completion.
The acquisition is highly consistent with the Group's
established acquisition strategy and focus on the efficient
management of mature infrastructure software products.
GWAVA is a leading company in email security and enterprise
information archiving (EIA). GWAVA has approximately 90 employees,
based in the US, Canada and Germany. More than a million users
across 60 countries rely on its products in over 3,000 customer
organizations, supported by GWAVA's global team, with a further
1,000 GWAVA business partners collaborating closely to ensure
successful customer solutions. In addition to GWAVA's award winning
EIA product Retain, GWAVA has a full suite of products to protect,
optimize, secure and ensure compliance for customers running Micro
Focus GroupWise.
Extending our portfolio by adding the ability to archive all
electronic business communication data in one central location,
including email, social media and mobile communications data will
provide further support for our customers' mobile, social, cloud
and big data initiatives. We are also better positioned to address
their growing governance needs relating to compliance, privacy and
regulatory reporting requirements.
The acquisition supports our commitment to enabling our
customers to innovate faster with the lowest possible risk and to
maximize the business value of their existing IT assets. It also
demonstrates our clear commitment to protecting the investment of
existing GroupWise customers, as well as creating new and exciting
possibilities for them as they consider their collaboration
needs.
A provisional fair value review was carried out on the assets
and liabilities of the acquired business, resulting in the
identification of intangible assets. At the time these consolidated
interim financial statements were authorized for issue, the Group
had not yet fully completed its assessments of the GWAVA
acquisition.
Details of the net assets acquired and goodwill are as
follows:
Carrying Fair value
value at adjustments Fair value
acquisition
$'000 $'000 $'000
------------------------------- ------------- ------------- ------------
Intangible assets - purchased
(1) - 5,330 5,330
Intangible assets - other (2) 1,180 (1,180) -
Property, plant and equipment 195 - 195
Trade and other receivables
(3) 3,309 (767) 2,542
Cash and cash equivalent 2,389 - 2,389
Trade and other payables (1,064) - (1,064)
Deferred income - short-term
(4) (4,094) 324 (3,770)
Deferred income - long-term (817) - (817)
Deferred tax liabilities (5) - (1,412) (1,412)
------------------------------- ------------- ------------- ------------
Net assets 1,098 2,295 3,393
Goodwill (note 13) 13,054
------------------------------- ------------- ------------- ------------
Consideration 16,447
------------------------------- ------------- ------------- ------------
Consideration satisfied by
:
Cash 16,447
------------------------------- ------------- ------------- ------------
Of the consideration payable, $16,174,000 has been settled as at
31 October 2016 and $273,000 remains payable.
Trade and other receivables is net of a bad debt provision of
$52,000.
The fair value adjustments relate to:
(1) Purchased intangible assets have been valued based on a
market participant point of view and the fair value has been based
on various characteristics of the product lines and intangible
assets of GWAVA Inc.;
(2) Other intangible assets relating to historic IP has been
written down to nil;
(3) Other advances have been written off as irrecoverable;
(4) Deferred income has been valued taking account of the
remaining performance obligations;
(5) A deferred tax liability has been established relating to
the purchase of intangibles.
The purchased intangible assets acquired as part of the
acquisition can be analyzed as follows (note 14):
Fair value
$'000
------------------------ -----------
Technology 4,075
Customer relationships 544
Trade names 711
------------------------ -----------
5,330
------------------------ -----------
The value of the goodwill represents the value of the assembled
workforce at the time of the acquisition with specific knowledge
and technical skills. It also represents the prospective future
economic benefits that are expected to accrue from enhancing the
portfolio of products available to the Company's existing customer
base with those of the acquired business.
The Group has used acquisition accounting for the purchase and
the goodwill arising on consolidation of $13.1m has been
capitalized. From the date of acquisition, 30 September 2016 to 31
October 2016, the acquisition contributed $0.8m to revenue and a
loss of $0.1m to Adjusted EBITDA.
The estimated results of the above acquisition if it had been
made at the beginning of the accounting year, 1 May 2016, to 31
October 2016 would have been as follows:
Continuing $m
---------------------------- ----
Revenue 4.6
Profit for the period 0.1
Adjusted EBITDA 0.2
Underlying Adjusted EBITDA 0.1
---------------------------- ----
The estimated results of the Group if the acquisition had been
made at the beginning of the accounting year, 1 May 2016, to 31
October 2016 would have been as follows:
Continuing $m
---------------------------- ------
Revenue 688.5
Profit for the period 90.8
Adjusted EBITDA 332.8
Underlying Adjusted EBITDA 320.4
---------------------------- ------
The above figures are based on information provided to Micro
Focus by GWAVA and the results since acquisition.
27. Post balance sheet events
1. OpenATTIC acquisition
On 1 November 2016 SUSE announced the completion of the
acquisition of the openATTIC storage management technology and
engineering talent from the company it-novum for a cash
consideration of 4.7m Euros. The openATTIC technology aligns
perfectly with our strategy to provide open source, software
defined infrastructure solutions for the enterprise and will
strengthen SUSE Enterprise Storage solution by adding enterprise
grade storage management capabilities to the portfolio.
2. Acquisition of OpenStack IaaS and CloudFoundry PaaS Talent and Technology Assets from HPE
On 30 November 2016 SUSE announced it had reached a definitive
agreement with HPE on the terms of a transaction pursuant to which
the company has agreed to acquire technology and talent that will
expand SUSE's OpenStack Infrastructure-as-a-Service (IaaS) solution
and accelerate SUSE's entry into the growing CloudFoundry
Platform-as-a-Service (PaaS) market. In consideration for this the
Group will assume any liabilities relating to the IPR agreements
and the transferring employees and offer employment to the offered
employees.
The acquired OpenStack assets will be integrated into SUSE
OpenStack Cloud and the acquired Cloud Foundry and PaaS assets will
enable SUSE to bring to market a certified, enterprise-ready SUSE
Cloud Foundry PaaS solution for all customers and partners in the
SUSE ecosystem. Additionally, SUSE has increased engagement with
the Cloud Foundry Foundation, becoming a platinum member and taking
a seat on the Cloud Foundry Foundation Board.
As part of the transaction, HPE has named SUSE as its preferred
open source partner for Linux, OpenStack IaaS and CloudFoundry
PaaS. HPE's choice of SUSE as their preferred open source partner
further cements SUSE's reputation for delivering high-quality,
enterprise-grade open source solutions and services.
3. Micro Focus announces proposed merger with HPE Software
On 7 September 2016 we announced that we had entered into a
definitive agreement with Hewlett Packard Enterprise ("HPE") on the
terms of a transaction (the "Transaction") in which we agreed to
acquire HPE's software business segment ("HPE Software") by way of
a merger (the "Merger") with a wholly owned subsidiary of HPE
incorporated to hold the business of HPE Software for the purposes
of the Transaction. At the time of announcement HPE Software was
valued at $8.8bn.
The Transaction is complex and is expected to complete in the
third quarter of calendar year 2017. HPE are in the process of
carving out HPE Software from their existing business. Micro Focus
will be seeking approval for the Transaction in a Circular to
shareholders in May 2017 together with approval for a $400m return
of value to shareholders that is agreed as part of the Transaction.
The Circular will include historic financial information on HPE
Software for the three years ended 31 October 2016 under IFRS.
Following shareholder approval of the Transaction the return of
value will be made to Micro Focus shareholders immediately prior to
completion of the Transaction.
The board expects the Merger to enhance adjusted earnings per
share by the first full financial year ending after Completion,
with scope for further benefits as operational improvements are
realized across the Group.
To fund the Transaction, the Company has entered into
commitments with JPMC, HSBC, Barclays and The Royal Bank of
Scotland (the Banks) to provide $5bn of term loans and the Lenders
and Bank of America Merrill Lynch to provide a $0.5bn revolving
facility. These facilities will be marketed to lenders in the New
Year.
Independent review report to Micro Focus International plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Micro Focus International plc's condensed
consolidated interim financial statements (the "interim financial
statements") in the interim results for the six months ended 31
October 2016 of Micro Focus International plc for the six month
period ended 31 October 2016. Based on our review, nothing has come
to our attention that causes us to believe that the interim
financial statements are not prepared, in all material respects, in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated statement of financial position (unaudited) as at 31 October 2016;
-- the consolidated statement of comprehensive income (unaudited) for the period then ended;
-- the consolidated statement of cash flows (unaudited) for the period then ended;
-- the consolidated statement of changes in equity (unaudited) for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results
for the six months ended 31 October 2016 have been prepared in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 2 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The interim results for the six months ended 31 October 2016,
including the interim financial statements, is the responsibility
of, and has been approved by, the directors. The directors are
responsible for preparing the interim results for the six months
ended 31 October 2016 in accordance with the Disclosure Guidance
and Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the interim results for the six months
ended 31 October 2016 based on our review. This report, including
the conclusion, has been prepared for and only for the company for
the purpose of complying with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority and for no other purpose. We do not, in giving
this conclusion, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior
consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK and
Ireland) and, consequently, does not enable us to obtain assurance
that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit
opinion.
We have read the other information contained in the interim
results for the six months ended 31 October 2016 and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial
statements.
PricewaterhouseCoopers LLP
Chartered Accountants
Reading
14 December 2016
a) The maintenance and integrity of the Micro Focus
International plc website is the responsibility of the directors;
the work carried out by the auditors does not involve consideration
of these matters and, accordingly, the auditors accept no
responsibility for any changes that may have occurred to the
interim financial statements since they were initially presented on
the website.
b) Legislation in the United Kingdom governing the preparation
and dissemination of financial statements may differ from
legislation in other jurisdictions.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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December 14, 2016 02:00 ET (07:00 GMT)
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