Final Results

Released : 21/06/2012

RNS Number : 8277F
Micro Focus International plc
21 June 2012
 

21 June 2012

 

Micro Focus International plc reports

Audited preliminary results for the full year to 30 April 2012

 

Micro Focus International plc ("Micro Focus", "the Company" or "the Group", LSE: MCRO.L), announces audited preliminary results for the year to 30 April 2012.

 

 

Results at a glance

FY 2012

FY 2011

Change

Revenue

              Reported

$434.8m

$436.1m

-0.3%

              Constant Currency

-       Licence

$176.6m

$167.7m

+5.3%

-       Maintenance

$230.9m

$238.2m

-3.1%

-       Consulting

$27.3m

$36.6m

-25.4%

-       Total

$434.8m

$442.5m

-1.7%

Adjusted EBITDA*

              Reported

$179.8m

$158.7m

+13.3%

              Constant Currency

$179.8m

$161.0m

+11.7%

Pre-tax profit

              Reported

$149.3m

$114.5m

+30.4%

              Constant Currency

$149.3m

$117.4m

+27.2%

Earnings per share

              Basic

65.77c

47.04c

+39.8%

              Adjusted

73.07c

54.85c

+33.2%

              Diluted

64.11c

46.15c

+38.9%

              Adjusted diluted

71.22c

53.81c

+32.4%

Proposed final dividend per share

23.40c

16.20c

+44.4%

Proposed total dividend per share

31.60c

23.40c

+35.0%

Net debt**

$113.2m

$12.7m

+791.3%

 

 

Key highlights

·      Results in line with previous guidance

Licence fee growth offsetting anticipated decline in maintenance revenues with consultancy revenues lower as unprofitable work is reduced

Second half Adjusted EBITDA in line with first half

Adjusted EBITDA margin of 41.4% (2011:  36.4%)

Underlying*** Adjusted EBITDA margin of 39.8%; within the 37% to 42% range given at the interim results

·      Strong cash conversion in the period

o  Cash generated from operations was $197.3m (2011: $182.3m) representing 108.3% (2011: 126.4%) of Adjusted EBITDA less exceptional items

o  Net debt at 30 April 2012 increased by $100.5m to $113.2m (2011: $12.7m) following $253.1m (2011: $92.3m)  of cash outflows relating to share buyback programme of $62.5m (2011: $42m), purchase of head office $14.7m (2011: $nil), payment of dividends of $46.3m (2011: $50.3m) and Return of Value of $129.6m (2011: $nil)

Net debt to Adjusted EBITDA multiple of 0.6 (2011: 0.1)

·      Revolving Credit Facility of up to $275m on improved terms

·      Enhanced returns for shareholders

Return of 45 pence per share in cash to shareholders (equivalent to 69.8 cents per share at cash cost of approximately $129.6m) (the "Return of Value")

Change in dividend policy to 2 times cover on pre-exceptional post tax earnings

Proposed Final dividend increased by 44.4% to 23.4 cents per share (2011: 16.2 cents per share)

Proposed Total dividend increased by 35.0% to 31.6 cents per share (2011: 23.4 cents per share)

·      Share buyback programme under terms of current shareholder authority at appropriate valuation levels

 

Statutory results

 

·      Operating profit of $155.8m (2011: $120.5m)

·      Profit before tax of $149.3m (2011: $114.5m)

·      Basic earnings per share of 65.77 cents (2011: 47.04 cents) increased by 39.8%***

 

 

*  In assessing the performance of the business, the directors use non GAAP measures "Adjusted EBITDA",  "Adjusted operating profit" and "Adjusted earnings per share", being the relevant statutory measures, prior to exceptional items, amortisation of purchased intangibles and share based compensation.  Exceptional items, share based compensation and amortisation of purchased intangibles are detailed in note 5 and EBITDA and Adjusted EBITDA are reconciled to operating profit.

 

** Net debt now stated after unamortised prepaid facility arrangement fees previously disclosed within trade and other receivables.

 

*** Underlying Adjusted EBITDA removes the impact of net capitalisation of development costs and foreign currency gains and losses from Adjusted EBITDA.

 

**** Earnings per share are detailed in note 7.

 

Kevin Loosemore, Executive Chairman of Micro Focus, commented: -

 

"The year ended 30 April 2012 was a period of stabilization of Micro Focus' business after the disappointments of the previous year and the opportunistic approaches from private equity.  Our revenues are in line with both market expectations and the guidance we gave a year ago. Our Adjusted EBITDA is in line with guidance and is towards the upper end of market expectations. Strong performance in Asia Pacific and Japan together with stability in North America offset declining revenues in International where the macro economic conditions remained challenging. 

 

The board's focus remains on delivering sustainable shareholder value, with returns exceeding the cost of capital deployed. We believe this is best achieved by a combination of organic growth, maintaining high cash returns and the deployment of appropriate financial strategies.

 

During the year we have focused relentlessly on Micro Focus as a software product company. We have made changes in Product Management and Development and now look to improve our internal and external channels to market, Marketing effectiveness and Sales execution. In the year ended 30 April 2012 we invested $58.3m in research and development which is the equivalent of 33.0% of our licence fee sales. All our products now have clear and relevant roadmaps and these will be communicated through innovative marketing campaigns to our customers and prospects to drive licence fee growth. Micro Focus is a company that offers customers true choice in how they extract value from their IT investments.

 

We have leadership in the off mainframe COBOL Development market and by integrating COBOL into the Visual Studio and Eclipse IDE's have addressed concerns regarding interoperability and a perceived COBOL skills shortage. Visual COBOL offers the fastest way for organisations to deploy their core applications to JVM, .net or the Cloud.

 

In the past month we have launched the Mainframe Solution set to address the Modernization and Migrations markets. We can now offer significant productivity and time to market improvements to customers whichever is their platform of choice. The product set has been evolved to address the creation of applications and then their deployment on or off the mainframe. 

 

On the Borland side of our business we established a leadership team to drive this product set globally and re-launched the Borland brand to connect with the Developer Community.  In the year ending 30 April 2013 there will be two new releases of each major product in the Borland portfolio.

 

In addition to operational improvement we have focused on shareholder value in the way we deploy our assets and reflecting our confidence in the strong and sustainable nature of Micro Focus' cash flows.  This enabled a Return of Value of 45 pence per share paid out in January 2012. In addition, shareholders received further benefit from our progressive dividend policy and the accretive share buyback. 

 

At the AGM in September 2011 shareholders renewed the authority for the Company to make market purchases of shares.  Under the previous authority the Company purchased 10% of its shares at an average price of 319 pence per share.  The board will now continue its buyback programme under its existing authority, making market purchases at price points based on its analysis of historical trading patterns.

 

Our $275m Revolving Credit Facility provides flexibility for further returns to shareholders, share buybacks or for suitable acquisitions.  At the year ended 30 April 2012 our Net Debt was $113.2m and our Net Debt to Adjusted EBITDA multiple was 0.6 times.  The board has decided that the Company will target a multiple of 1.5 times over the next two years. This will be achieved by on market purchases as described above or by further Returns of Value. In the current phase of development, acquisitions will only be considered if they deliver cash payback within a five year period, or if they are small in nature and deliver technical functionality offsetting development costs and delivering speed to market for key product features.

 

The board has also reviewed the Company's dividend policy and increased the pre-exceptional post tax earnings payout to 50%. This 2 times dividend cover ratio reiterates the board's confidence in the future of the business and its strong cash flows.  The proposed final dividend for the year is 23.4 cents per share (2011: 16.2 cents per share) giving an increase in total dividend per share for the year of 35.0% to 31.6 cents (2011: 23.4 cents)."

 

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

Giles Sanderson

Nick Dibden 


Sophie Moate

 

About Micro Focus

Micro Focus, a member of the FTSE 250, provides innovative software that helps companies to dramatically improve the business value of their enterprise applications.  Micro Focus Enterprise ApplicationModernization, Testing and Management software enables customers' business applications to respond rapidly to market changes and embrace modern architectures with reduced cost and risk.

 

Executive Chairman's statement

 

Introduction

 

The year ended 30 April 2012 has been a year of stabilization for Micro Focus following the disappointments of the previous year.  I am pleased to report that we have seen a return to licence fee growth, an increase in Adjusted EBITDA to $179.8m, and a continued strong cash conversion ratio of 108.3% (2011: 126.4%). 

 

Overview and corporate developments

 

Micro Focus is a software product group with strong franchises and a robust and sustainable core business.  We make software products and we sell software products.  Everything within the organisation is focused on either making or selling our software products. 

 

At the beginning of the financial year we expected overall revenue on a constant currency basis to decline year on year.  Growth in licence fee revenue would offset the anticipated decline in maintenance revenues (following poor licence sales in the year ended 30 April 2011) and consulting revenue would decline due to increased focus and a reduction in loss making revenues. Growth in licence fee revenue would be against a backdrop of a 15.2% decline in the prior period. Against this revenue scenario management took the necessary steps to achieve appropriate margins and cash generation through a clear focus on sound business operations throughout the Group.  All of our actions are consistent with the objective of setting the business to return to growth whilst maintaining all options to deliver shareholder value.

 

During the year to 30 April 2012, Micro Focus delivered revenues of $434.8m (2011: $436.1m) which compared to constant currency ("CCY") revenue for the comparable period of $442.5m, a decline of 1.7%.  Licence fees increased by 5.3% to $176.6m, (2011: CCY $167.7m), maintenance fees declined by 3.1% to $230.9m (2011: CCY $238.2m) and consultancy revenues were down by 25.4% to $27.3m (2011: CCY $36.6m).

 

Our Asia Pacific region benefited from a strong performance in the year from our Japanese operations after very difficult conditions following the Tsunami and Earthquake in 2011.  Revenues increased by 8.5% to $65.1m (2011: CCY $60.0m).  North America is our largest region and despite mixed economic indicators revenues grew by 1.0% to $200.3m (2011: CCY $198.4m). Our International region includes the Eurozone and the macro-economic factors affecting that region are well known.  Overall revenues here have declined by 8.0% to $169.4m (2011: CCY $184.1m).

 

At the end of the year ended 30 April 2011 we undertook a significant restructuring exercise in order to align the cost base with our anticipated revenues.  This led to restructuring charges of $22.1m in the final quarter of the year offset by $7.6m of releases from onerous lease provisions.  In the year ended 30 April 2012 we have released $2.4m of the provisions made last year back to the consolidated statement of comprehensive income as these are no longer required.  This figure is separately identified as an exceptional item.  Of the provisions made last year, $2.4m remains in the balance sheet at 30 April 2012, the majority of which relates to onerous lease provisions. 

 

As a result of the restructuring exercise, the average employee headcount during the year ended 30 April 2012 was 1,191 (2011: 1,434). At 30 April 2012 headcount was 1,195.  We currently anticipate that our headcount will increase slightly during the year ending 30 April 2013. 

 

Consequently, operating costs before exceptional items, share based payments and amortisation of purchased intangibles ("Adjusted Operating Costs") were reduced by 8.3% to $259.7m (2011: $283.1m).  On a CCY basis, Adjusted Operating Costs fell more sharply from $286.9m to $259.7m, with the largest reduction coming from personnel costs.

 

The stabilization of the revenue and reduction in costs enabled Micro Focus to report Adjusted Operating Profit for the year ended 30 April 2012 of $175.1m (2011: $153.0m), an increase of 14.4% and Adjusted EBITDA in the period increased by 13.3% to $179.8m (2011: $158.7m) at a margin of 41.4% (2011: 36.4%). 

 

Our employees are key to the success of the organisation and we would like to thank them for their dedication, commitment and hard work in delivering the full year results.  In the year ended 30 April 2011 minimal bonuses were paid to non-commissioned and quota bearing staff due to the results being significantly below the required level of performance.  The performance in the year ended 30 April 2012 means that full year bonuses will be paid to those eligible staff as well as Executive and Senior Management.

 

During the year we reorganised Product Management and Development with the objective of delivering a product roadmap that better met our customer needs and optimised our development investment. The teams have established clear product roadmaps and release plans for each of our products and have developed compelling messaging around the deployment of those products.  In the year ended 30 April 2012 Micro Focus spent $58.3m (33.0% of licence fee sales) on research and development, a level which we believe is appropriate to our objective of achieving sustainable revenue growth.

 

Having completed the product roadmaps we are now able to turn our attention to optimizing our channel strategy (both internal and with partners), and our marketing and lead generation plans.  In preparation for this, in the year ended 30 April 2012 we have invested in a new online partner portal, a new lead management system and have upgraded our financial systems from Sun V4 to Sun V5 as well as enhancing our Pivotal CRM system.

 

Product Portfolio and Go to Market Strategy

 

We will be holding an Investor day on 10 July where we will explain our product plans in more detail.

 

We look at our business as comprising four product offerings; COBOL Development (CD); Modernization and Migration (MM), and Test and Niche which we refer to collectively as Borland.

 

We have continued to invest in and strengthen our core portfolio product of CD.  The CD portfolio delivers products that enable programmers to develop and deploy applications written in COBOL across distributed platforms including Windows, UNIX and Linux.  We have seen further developments to Visual COBOL and have received a positive response from customers and the partner community.  Visual COBOL V2, which will be shipped in October 2012, will extend coverage to 85% of existing COBOL applications and provide the fastest way for customers to move to JVM, .net or Cloud environments whilst protecting their investments and intellectual property.  At 30 April 2012 we had over 100 customers who have decided to migrate to Visual COBOL to take advantage of the opportunities provided by operating a modern language in an industry standard IDE.  With Visual COBOL the perceived COBOL skill issues will be eliminated.

 

COBOL applications continue to be at the heart of the world's business transactions and power the majority of  large organisations' key business operations. Maintaining our leadership position in CD is at the core of our value proposition.  By embedding in industry standard IDE's and addressing the perceived skill issues, COBOL will provide a stable base and strong cash flow for the Group over the coming decades.

 

MM has evolved and been renamed Mainframe Solutions (MS).  Our new Enterprise product set has been formed from existing products and enhanced to address application creation and then deployment on or off the mainframe.  This approach provides a logical series of solutions which together will transform a customer's mainframe environment.  MM had become too focused on purely application migration off the IBM mainframe whilst MS seeks to address a customer's need to get the most value out of their mainframe environment.  MS was launched at our Sales Kick Off meeting in May 2012 and is being supported by innovative marketing campaigns.  Further enhancements to the product set will be delivered during the coming year.

 

MM had seen strong growth rates in the period up to 30 April 2010 but saw a decline in overall revenues in the year ended 30 April 2011 with a significant decline in licence fee revenue.  This decline in overall revenues has continued in the year ended 30 April 2012 because we have refocused on our target customers in this segment and we have reduced the sales emphasis on large projects and prime contracting.  As a result of poor focus and consulting losses in the year ended 30 April 2011, we implemented a bid review process to ensure proper control over the services engagement around these contracts.  In addition, we have been harvesting the learning from over 500 completed migrations to improve our offer and make it more accessible to our business partners.

 

The combination of the bid process and the narrower focus on migrations has improved the profitability of the projects we have progressed whilst constraining revenue growth.  The launch of MS seeks to provide more flexibility in the coming year, while maintaining a strong focus on the profitability of these projects.  We believe that with the evolution of MS and proper targeting and execution there will be a return to growth.

 

In the second half of the year we established a global leadership team for the Borland product set incorporating Test and Niche under a General Manager for Borland.  This was driven from the need to focus on this product set and to ensure that the Sales organisation was properly enabled to sell the leading technology that Borland provides.  The Borland brand was re-launched at our Sales Kick Off meeting and the new website is now live.  This provides relevant and helpful content and is targeted at the Developers and IT decision makers in customer organisations who use Borland's tools to support and manage the process of software development from beginning to end to accelerate delivery and improve quality. The re-launch of Borland is again supported by innovative marketing campaigns this summer.

 

Borland's Test products have a large addressable market and now have clear product roadmaps and differentiated customer propositions.  Our Niche business comprises mature products that provide good margins and strong cash flow.  The challenge for both revenue streams is the significant maintenance drag they suffer due to the balance between licence and maintenance in their overall revenues.  We are fully aware of this dynamic and are seeking to reduce this drag through increasing licence sales and clear communications of product roadmaps and business benefits to increase maintenance renewal rates.

 

The operational changes made in the year ended 30 April 2012 have delivered progress but they are the first steps in an ongoing process and we have further improvement to make. 

 

Having completed our product roadmaps we are now able to start adjusting our go to market structures.  We continue to believe that we have room for improvement in sales productivity.  As we enter the year ending 30 April 2013 we are starting to shift the balance between direct and inside sales, and have appointed EBR's ("Enterprise Business Representatives") to improve our lead qualification.  In the year ended 30 April 2012 we had an average of 131 direct sales representatives and 58 inside sales representatives.  For the year ending 30 April 2013 our plan is to increase to 142 direct and 77 inside.  The number of EBR's is increasing from 7 to 22 and we anticipate increased productivity from our investment in an Eloqua lead management system. Through these investments we will be laying the foundations for further licence fee growth in 2014.

 

In the year ended 30 April 2012 we made solid progress on Inside Sales performance increasing sales by Inside Sales Representatives ("ISR's") from $21.5m at CCY in the year ended 30 April 2011 to $27.3m.  During the year we launched the first phase of our web store.  This had been identified as a channel to market we had not exploited in the past.  A small number of products have been made available and some sales have been made.  Most importantly we have started to learn what we do not know about this channel and how to develop it.  One of the outcomes of this learning was the appointment of Tom Virden as a non-executive director to help us progress in this space.  We do not expect significant revenues through this channel in the year ending 30 April 2013 but believe that this is an important capability to build for the future and has important consequences in how we interact with our customers and partners.

 

We aim to increase sales productivity and predictability further by continuing to improve Product Management and by generating closer interaction between Sales, Product Management and Product Development.  In addition we have provided the Sales organisation with increased levels of training, improved content from Product Management and coverage from Marketing.

 

In order to drive greater interaction with our partners we have created a Partner Relationship Management portal.  This provides a single repository of information about our products for the benefit of our partners. We reinstated our partner conferences with the first being in Dallas in May and a second planned for Barcelona later this month.

 

We continue to invest in Product Development and are excited by the new products that we will be releasing in the next year.  Micro Focus will maintain its leadership position in CD by continuing to innovate products as is evidenced by Visual COBOL. We will work with our independent software vendors and customers to ensure that they can reap the benefits of this new development environment.  MS revenue growth will be achieved by leveraging our partner relationships and ensuring that our direct sales force targets the right opportunities.  We are increasing the product focus on our Test and Niche business whilst integrating the channels into the three geographic regions to capitalise on opportunities for the wider portfolio of products to be sold to our customers.

 

Maintenance revenues declined in the year ended 30 April 2012 at CCY by 3.1%.  Had the mathematical trends of the year ended 30 April 2011 been followed the decline would have been 5.3%. The improvement came primarily from winning back customers who were off maintenance.  The CDMS maintenance revenues increased by 2.1%, and Borland declined by 12.6%, as a result of the maintenance attached to new licence fee sales not compensating for the attrition rates.

 

The renewal rates for CDMS have declined slightly from 89.5% to 88.9% and for Borland there has been an improvement from 78.6% to 80.9%, with the Borland improvement attributable to the changes made to the product roadmap, and product management.  For the year ending 30 April 2013 a continuation of these renewal rates would see maintenance revenues decline by 2.3% over the year ended 30 April 2012 at CCY.

 

In the year ended 30 April 2012 consultancy revenues declined at CCY by 25.4% due to our decision to refer more consulting work to our global and local partners and our decision to focus on more profitable product related services.  As we enter the year ending 30 April 2013 we still have a number of customer contracts which have revenues that do not meet our target profile.  We would anticipate eliminating these by the end of the year ending 30 April 2013.

 

Delivering value to shareholders

 

The Company was in an offer period from 26 April 2011 to 22 August 2011 following a number of opportunistic approaches from private equity firms.  During this process management explored all opportunities to deliver value to our shareholders and as a result the board has adopted a very clear plan of value creation.

 

Our priority is improving the business operations to maximise the opportunity to return to growth.  Based on our assessment of the asset base and our current markets we believe that Micro Focus is well positioned to deliver sustainable operational returns.  At the same time, we have created flexibility to increase shareholder value by buybacks, cash distribution and/or acquisitions as appropriate.  In creating this flexibility we will do nothing that will constrain our ability to achieve organic growth.

 

We have consulted with institutional shareholders on the options for achieving a more efficient capital structure for Micro Focus.  In the period from 28 March 2011 to 21 September 2011 we completed a 10% share buyback programme using market purchases under an authority granted at our 2010 Annual General Meeting, at a total cost of $104.5m.  The average share price paid was 319p.  At our AGM in September 2011 we renewed our buyback authority and we have not yet utilised that authority to make on market purchases.

 

On 2 December 2011 we announced that we had entered into a new three year Revolving Credit Facility ("RCF") of up to $275m with a group of five banks.  The existing banks, Barclays, HSBC, Lloyds and Royal Bank of Scotland, have been joined by Clydesdale Bank in the new facility.  This increased facility is on better terms than the previous facility and has greater flexibility for its use including the ability to add value through suitable acquisitions should appropriate opportunities arise. Bolt on acquisition opportunities may arise that would enhance or accelerate the operational improvements being made. We have reviewed a number of opportunities in the period but have not found anything to match our criteria to have a payback within five years.

 

In January we made a Return of Value to all shareholders amounting to $129.6m in cash (45 pence per share, equivalent to approximately 69.8 cents per share), by way of a B and C share scheme, which gave shareholders (other than certain overseas shareholders) a choice between receiving the cash in the form of income or capital. The Return of Value was accompanied by a 22 for 25 share consolidation to maintain broad comparability of the share price and return per share of the ordinary shares before and after the creation of the B and C shares.

 

Net Debt to RCF EBITDA (being our Adjusted EBITDA before Amortisation of Capitalised Development Costs) is limited to 2 times in the period to 30 April 2013 and 1.5 times thereafter.   At the end of January 2011, after completion of the Return of Value our Net Debt was $153.3m and based on the reported RCF EBITDA in the year to 30 April 2012 of $196.1m this would have represented a net debt to RCF EBITDA multiple of 0.8 times.  By 30 April 2012 bank borrowings had reduced to $113.2m and the multiple was reduced to 0.6 times RCF EBITDA.  When compared to our Adjusted EBITDA figure of $179.8m then the multiple is also 0.6 times.  

 

The board has considered the appropriate gearing level of the Group and has now concluded that it should target a Net Debt to Adjusted EBITDA multiple of approximately 1.5 times and would expect to reach that level in the course of the next 24 months.  This is a modest level of gearing for a company with the cash generating qualities of Micro Focus and will provide options to give further returns to shareholders.  We are confident that this level of debt will not reduce our ability to deliver growth, invest in products and / or make appropriate acquisitions.

 

Since IPO the Company has had a dividend policy of distributing 40% of pre-exceptional post tax earnings.  This 2.5 times dividend cover has provided shareholders with a compound increase in dividend from 2006 to 2011 of over 30% per annum.   The board has decided to increase the payout ratio to 50% so that dividend cover will be 2 times for 2012 onwards. This change in policy results in an increase of the proposed final dividend of 44.4% to 23.4 cents per share, (2011: 16.2 cents per share) and an increase in the proposed total dividend for the year of 35.0% to 31.6 cents per share (2011: 23.4 cents per share).  In a normal year there would be a third paid out at the interims and two thirds paid out at the final dividend.  The final dividend will be paid in sterling equivalent to 14.90 pence per share, based on an exchange rate of £ = $1.57, being the rate applicable on 20 June 2012, the date on which the board resolved to propose the final dividend.  If approved by shareholders at the AGM on 26 September 2012 the final dividend will be paid on 2 October 2012 to shareholders on the register at 31 August 2012.

 

Outlook

 

Following the prior year's significant licence sales decline we are pleased to see a return to licence fee growth in the year ended 30 April 2012.  The anticipated reduction in maintenance revenues provided a drag on overall revenues and this will continue in the new financial year.  Consultancy revenues are down significantly but now provide a positive contribution to the Group after being significantly loss making in the prior year.  We have seen some currency headwinds in the second half of the year and these are likely to continue in the first half of the year ending 30 April 2013.

 

In the year ending 30 April 2013 we anticipate delivering shareholders a return in excess of our cost of capital. During the year ending 30 April 2013 we will deliver many of the product enhancements and campaigns that we have been working on in the year ended 30 April 2012.  Having completed the product plan we can now reengineer our internal go to market model, our partner network and our marketing campaigns around these roadmaps.  By the end of the year ending 30 April 2013 the operations should be 'fit for purpose' and the integration of all prior acquisitions fully complete.

 

As many of our products have a six to nine month sales cycles we would expect to see some initial customer wins from these new products by the end of the year.

 

Our strategy (and pure mathematics) dictates that we will see some decline in maintenance and consultancy revenues and a decline in niche revenues in the year.  These will be offset to some extent by growth in licence revenues.  In addition we expect to see continued uncertainty in the Eurozone.  As a result we anticipate that our overall revenues will be in the range of +1% to -3% on those reported in the year ended 30 April 2012 on a CCY basis. We anticipate that the quality of revenue will improve year on year and the Group will exit the year positioned for growth in the year ending 30 April 2014.  Our strategy of driving strong cash generation and using this to reinvest in our products and to generate enhanced returns for shareholders remains unchanged.

 

 

Kevin Loosemore

Executive Chairman

21 June 2012



 

Operational and financial review

 

Micro Focus's primary reporting segments are its three geographic regions (i) North America, (ii) International (comprising Europe, Middle East, Latin America and Africa), and (iii) Asia Pacific.  Product sets are sold into these regions via a combination of direct sales, partners and independent software vendors.

 

In previous years Micro Focus did not provide profitability by its operating segments as it controlled all costs globally.  At the start of this financial year Adjusted EBITDA responsibility was delegated to the regional presidents.  They have directly controllable costs and then allocated central costs.  Their variable reward is now heavily weighted towards delivery of profitability in their region.

 

Revenue for the year by geographic region at actual reported and constant currency is shown in the table below:

 



                Year ended

30 April

2012

as reported

Year ended

30 April

2011

as reported

Year ended

30 April

2011

at constant currency



$m

$m

$m





North America


200.3

197.7

198.4

International


169.4

179.3

184.1

Asia Pacific


65.1

59.1

60.0

Total revenue


434.8

436.1

442.5

 

 

On a constant currency basis total revenues have declined by 1.7%.  North America saw an increase of 1.0%, International declined by 8.0% and Asia Pacific increased by 8.5%.  The decline in International is 6.6% after adjusting for the credit note issued in Brazil in the first half of last year. 

 

In North America, licence fee revenue grew compared with the year ended 30 April 2011 and more than offset the anticipated declines in maintenance and consultancy revenues.  The licence fee performance in the second half of the year showed an improvement over the comparable period.

 

For International reported revenues were similar in the second half of the year to the first half of the year but were down by 11.2% on the six months to 30 April 2011.  Both licence and consultancy revenues have declined with maintenance remaining at the same level.

 

In Asia Pacific the overall increase in revenues was driven by a strong growth in licence fees largely as a result of a strong performance in Japan.  Maintenance and consultancy revenues declined during the year. 

 

Revenue for the year by category at actual reported and constant currency was as follows:

 



             Year ended

30 April

2012

as reported

Year ended

30 April

2011

as reported

Year ended

30 April

2011

at constant currency



$m

$m

$m

Licence


176.6

167.7

Maintenance


230.9

233.8

238.2

Consultancy


27.3

36.5

36.6

Total revenue


434.8

436.1

442.5





 

Revenue by Product Portfolio on a constant currency basis is shown below:

 



Year ended

30 April

Year ended

30 April

Growth

v April



2012

2011

2011

CD


$m

$m

%

Licence


108.5

96.8

12.1

Maintenance


115.1

112.8

2.0

Consultancy


2.8

2.1

33.3



226.4

211.7

6.9

MS





Licence


25.0

30.1

(16.9)

Maintenance


42.2

41.2

2.4

Consultancy


10.8

16.1

(32.9)



78.0

87.4

(10.8)

CDMS





Licence


133.5

126.9

5.2

Maintenance


157.3

154.0

2.1

Consultancy


13.6

18.2

(25.3)

Sub-total


304.4

299.1

1.8






Test





Licence


26.6

22.7

17.2

Maintenance


52.5

58.7

(10.6)

Consultancy


12.0

16.5

(27.3)



91.1

97.9

(6.9)

Niche





Licence


16.5

18.1

(8.8)

Maintenance


21.1

25.5

(17.3)

Consultancy


1.7

1.9

(10.5)



39.3

45.5

(13.6)

Borland





Licence


43.1

40.8

5.6

Maintenance


73.6

84.2

(12.6)

Consultancy


13.7

18.4

(25.5)

Sub-total


130.4

143.4

(9.1)

 

Total revenue





Licence


176.6

167.7

5.3

Maintenance


230.9

238.2

(3.1)

Consultancy


27.3

36.6

(25.4)

Revenue at constant currency


434.8

442.5

(1.7)






 

Total licence fee revenues grew by 5.3% at constant currencies.  In the comparable period licence fee revenues included the impact of a credit note for $2.1m issued in Brazil.  Adjusting for the impact of this credit note, total licence fee revenue increased by 4.0%.  CDMS licence fee revenues at constant currencies increased by 5.2%, due to a strong performance in COBOL development which offset the lower licence fee sales in our migration business.  Borland licence fee revenues increased by 5.6%.

 

Maintenance revenues declined at constant currencies by 3.1%.  The CDMS maintenance revenues increased by 2.1%, and Borland declined by 12.6% as a result of the maintenance attached to new licence fee sales not compensating for the attrition rates.  The renewal rates for CDMS have declined slightly from 89.5% to 88.9% whilst for Borland there has been an improvement from 78.6% to 80.9%.

 

Consultancy revenues have declined at constant currency by 25.4% due to our decision to refer more consulting work to our global and local partners and our decision to focus on more profitable product related services. 

 

Costs

 

All comments relate to costs at actual reported $.

 

Cost of sales for the year decreased by 22.3% to $49.5m excluding exceptional credits of $0.2m (2011: $63.7m). The costs in this category predominantly relate to our consulting and helpline support operations. The majority of the cost reduction came from decreased consulting revenues and the impact of the restructuring undertaken at the end of the year ended 30 April 2011.

 

Selling and distribution costs decreased by 3.2% to $128.1m excluding exceptional credits of $0.8m (2011: $132.3m excluding exceptional items of $12.5m) as a result of the reduction in costs following the restructuring programme undertaken at the end of the year ended 30 April 2011.

 

Research and development expenses decreased slightly by 3.8% to $55.0m excluding exceptional credits of $0.2m (2011: $57.2m excluding exceptional items of $4.1m), equivalent to approximately 12.6% of revenue compared with 13.1% in the prior year.  The charge to the consolidated statement of comprehensive income in the period is after taking account of the net capitalisation of development costs in the period.  Additions to capitalised development costs in the period were $19.5m (2011: $21.7m) less amortisation of previously capitalised development costs of $16.2m (2011: $12.5m) resulting in a net credit to the consolidated statement of comprehensive income of $3.3m (2011: $9.2m).  The amount spent on research and development prior to the impact of net capitalisation of development costs and exceptional items was $58.3m (2011: $67.1m) representing 33.0% of licence fee revenue (2011: 40.5%). At 30 April 2012 the net book value of capitalised development costs on the balance sheet was $29.8m (2011: $26.6m).

 

Administrative expenses, excluding a credit of exceptional items of $1.3m (2011: credit of $2.1m), and share based compensation of $6.1m (2011: $2.2m) decreased by 5.9% to $43.0m (2011: $45.7m).  The current period includes a gain of $3.6m (2011: loss of $5.4m) in respect of mainly foreign exchange gains on intercompany balances denominated in Euros and Yen.  Excluding the impact of foreign exchange, administrative expenses increased by 15.6% from $40.3m to $46.6m as a result of $1.0m in bid defence costs, $3.2m (2011: $0.4m) in bonuses paid to staff for the year ended 30 April 2012, $0.7m in increased temporary staff costs, $0.8m in increased tax and audit fees and $0.8m in additional dilapidations for our Twyford leased property.

 

Currency impact

 

Intercompany loan arrangements within the Group are denominated in the local currency of the borrower.  Consequently, any movement in the respective local currency and US$ will have an impact on converted US$ value of the loans.  This foreign exchange movement is taken to the consolidated statement of comprehensive income.  During the period there was a significant movement on Euro:US$ and Yen:US$ exchange rates that gave rise to the majority of the foreign exchange gain of approximately $3.6m (2011: loss of $5.4m).

 

53.1% of our revenue is contracted in US dollars, 23.0% in Euros and 23.9% in other currencies.  In comparison, 31.6% of our costs are US dollar denominated, 27.2% in sterling, 19.1% in Euros and 22.1% in other currencies. 

 

This weighting of revenue and costs means that if the US$ :Euro exchange rate moves during the year, the  revenue impact is far greater than the cost impact, whilst if US$: sterling rate moves during the year the cost impact  far exceeds the revenue impact.  Consequently, reported US$ profit before tax can be impacted by significant movements in US$ to Euro and sterling exchange rates.   The impact of these movements can be seen by the changes to prior year reported numbers when they are stated at CCY.  For the year ended 30 April 2011 CCY revenues are 1.46% higher at $442.5m and profit before tax before the exchange loss above of $5.4m is 2.41% higher than the reported numbers at $122.8m.

 

The greatest volatility in exchange rates continues to be in the US$ to Euro where the average US$:Euro exchange rate in May 2012 was $1.2835:Euro which is 9.2% lower than the average for the six months to 31 October 2011 and 2.8% lower than the six months to 30 April 2012.  Consequently, if this rate was maintained for the remainder of the year ending 30 April 2013 then reported revenues will be adversely impacted which would not be offset by the cost benefit.

 

Adjusted EBITDA

 

Adjusted EBITDA in the period was $179.8m (2011: $158.7m) at a margin of 41.4% (2011: 36.4%).

 

At the Interim Results we gave guidance on our target margin for Underlying Adjusted EBITDA of 37% to 42%.  Underlying Adjusted EBITDA removes the impact of net capitalisation of research and development and foreign currency gains and losses from our Adjusted EBITDA figure.  We believe this provides a better indication of the underlying performance of the business.  For the comparative figures we also have removed the impact of items identified during last year namely a credit note provision of $2.1m and a property provision of $0.9m.

 

 

 

 

 


 

Year ended

30 April

2012

 

Year ended

April 2011

as reported



$m

$m

Reported revenue


434.8

436.1

Credit note in Brazil


-

2.1

Underlying revenue


434.8

438.2





Adjusted EBITDA


179.8

158.7

Foreign exchange (credit)/charge


(3.6)

5.4

Credit note in Brazil


-

2.1

Property provision


-

0.9

Net capitalisation of software development


(3.3)

(9.2)

Underlying Adjusted EBITDA


172.9

157.9

Underlying Adjusted EBITDA Margin


39.8%

36.0%





 

Operating profit

 

Operating profit was $155.8m (2011: $120.5m). Adjusted operating profit was $175.1m (2011: $153.0m). The improvement in the adjusted operating profit was partly driven by the $9.0m positive swing on foreign exchange and from the cost savings arising from the restructuring undertaken at the end of the year ended 30 April 2011.

 

Net finance costs

 

Net finance costs were $6.5m (2011: $6.0m), including the amortisation of $4.3m of prepaid facility arrangement fees incurred on the Group's bank loan facility (2011: $4.1m), loan interest of $2.2m (2011: $1.7m) and other interest costs of $0.3m (2011: $0.6m) offset by $0.3m of interest received (2011: $0.4m). The increased charges in the second half of the year reflect the interest on the increased bank borrowings arising from the Return of Value. Unamortised prepaid facility arrangements fees were $2.4m at 30 April 2012 (2011: $2.2m).

 

Exceptional items

 

There was an exceptional credit in the year to 30 April 2012 of $2.4m following releases of provisions related to the restructuring programme undertaken in the year ended 30 April 2011 which were no longer required (2011: $14.5m charge).  The release resulted mainly from lower settlements paid to staff made redundant by the restructuring, from our ability to avoid repaying a grant and settlement of property lease liabilities at amounts lower than expected.

 

Taxation

 

Tax for the year was $28.6m (2011: $18.1m) resulting in the Group's effective tax rate being 19.2% (2011: 15.8%).  In the year the Group recognised additional deferred tax assets of $3.0m all of which was taken to the consolidated statement of comprehensive income (2011: $12.6m of which $6.8m was taken to the consolidated statement of comprehensive income and $5.8m was taken to goodwill) in respect of US tax losses arising from acquisitions made in prior periods.  The impact of this recognition gives rise to a lower effective tax rate for the year.  Additionally, in the current year a credit of $2.6m (2011: nil) has been recognised as a result of the submission of claims for enhanced deductions for research and development expenditure in prior years.

 

Excluding the impact of these adjustments the Group's effective tax rate would be 22.9% for the year (2011: 21.7%). The Group's medium term effective tax rate is currently expected to be between 19% and 22%. 

 

The Group has benefited from a lower cash rate of tax during the last two years as a result of an ongoing claim with HMRC in the UK, based on tax legislation, impacting its tax returns for the year ended 30 April 2009 and subsequent years.  The Group is one of a number of companies that have submitted similar claims and it is now anticipated that HMRC will choose a test case to establish the correct interpretation of the legislation.  The Group has taken no benefit to the consolidated statement of comprehensive income during the periods affected and the potential tax liability is recognised on the Group's balance sheet, but has paid reduced cash tax payments in line with its claim.  The cash tax benefit in the year was $9.2m (2011: $5.5m) and the total cash tax benefit to date is $14.7m based on the difference between the Group's claimed tax liability and the tax liability in the balance sheet.  Due to the nature of the claim and the advice the Group has received, if HMRC were successful then it is unlikely that any penalties would be payable by the Group but there would be interest on any overdue tax.

 

When the tax position relating to the claim is agreed with HMRC then to the extent that the tax liability is lower than that provided in the balance sheet there would be a positive benefit to the tax charge in the consolidated statement of comprehensive income in the year of settlement.  The current maximum benefit is $17.8m which equates to 10.5 cents per share on a fully diluted basis.

 

Profit after tax 

 

Profit after tax increased by 25.1% to $120.6m (2011: $96.4m).

 

Goodwill

 

The largest item on the consolidated statement of financial position is goodwill at $274.3m (2011: $274.4m) and arose from acquisitions made by the Group in the period to 31 July 2009.  Of this balance, $162.5m was added when the Group acquired the ASQ Division of Compuware and Borland in May and July 2009.  As a result of the change made at the beginning of the year to operate through the three geographic regions this balance of goodwill has been allocated into the geographic regions.  These regions are considered by the board to be the cash generating units ("CGU's") of the Group.  The annual impairment review of goodwill is based on the value in use of the CGU's to which the goodwill is allocated and based on the assumptions used by the board there is no impairment of goodwill in the year.

 

Purchase of property

 

In June 2011 the Group exchanged and completed on the purchase of the freehold of its Newbury headquarters from CIP Property for a total consideration of $14.7m.  The reduction in rental charge together with income from an existing tenant produces an initial yield on the purchase of 9.4% compared to the current cost of debt of 2.4%.

 

Return of Value

 

The Return of Value of $129.6m announced in December 2011 was completed in January 2012.  In preparation for the Return of Value and in order to provide flexibility for future distributions to shareholders there was an internal corporate reorganization effected by the sale and purchase of a subsidiary of the Company that created a profit of $682.4m.  Approximately $352.8m of this profit is unrealized and will remain so until the Company receives repayment of the outstanding intercompany debtor.  Repayment of the debtor is expected through cash generated through operations or by additional external borrowings.  The transactions are reflected in the Company's own balance sheet but do not increase the consolidated profit and loss account reserves.

 

The impact of the Return of Value on the consolidated statement of financial position was to reduce the share premium account by $56.4m through the issue of B shares and by the issue and cancellation of the C shares, to increase the other reserves by $56.4m through the creation of a Capital Redemption Reserve on redemption of the B shares and finally to reduce the retained earnings by $129.6m.

 

Total equity attributable to the parent         

 

The total equity attributable to the parent has reduced by $111.2m during the year from $228.7m to $117.5m.  $9m of this reduction is explained by the difference between the Return of Value of $129.6m and the profit after tax for the year of $120.6m.  The remaining $102.2m of reduction comprises dividends of $46.3m and share buyback of $62.5m offset by $6.1m of movement in relation to share options and other items of $0.5m.  Details are provided in the consolidated statement of changes in equity.

 

The board recognizes that by accessing the unrealized profit of $532.8m in the Company's retained reserves by further significant distributions to shareholders whether by share buybacks, dividends or returns of value it is possible for the equity attributable to the parent in the consolidated statement of financial position to go into deficit.  If such a position were to arise in future it would not impact the Company's ability to make such distributions to shareholders but could impact the external perception of the financial position of the Group.  The board will consider the impact of such future distribution at the appropriate time.  

 

Balance sheet restatement

 

Following a review of our accruals reported in the financial statements for the years ended 30 April 2010 and 2011 we have determined that it is more appropriate to show some of these balances as provisions in accordance with IAS 37, "Provisions, Contingent Liabilities and Contingent Assets" where previously no provisions were disclosed. As a result, we have restated the prior year balance sheets with a reduction in accruals of $24.9m for the year ended 30 April 2011 and $16.1m for the year ended 30 April 2010 and a corresponding increase in provisions at each balance sheet date.  For 2011 this meant trade and other payables reduced from $88.4m to $63.6m whilst current provisions became $17.5m and non-current provisions became $7.4m.  For 2010, trade and other payables reduced from $90.7m to $74.6m with current provisions at $6.0m and non-current provisions at $10.1m.

 

The provisions as at 30 April 2012 are $10.5m with them mostly related to onerous property leases, property dilapidations and potential tax liabilities in Brazil split between current liabilities of $3.7m and non current liabilities of $6.8m.  In addition, bank borrowings are now stated after deduction of unamortised prepaid facility arrangement fees of $2.2m at 30 April 2011 and $4.5m at 30 April 2010 previously contained within trade and other receivables. There is no impact on the consolidated statement of comprehensive income in any of the years of the restatement.  In accordance with the requirements of IAS 1, "Financial Statement Presentation", where a restatement of an opening consolidated statement of financial position is made then the prior year's consolidated statement of financial position should be published.  We have therefore published restated 30 April 2010 numbers.

 

Cash flow and net debt

 

The Group's operating cash flow from continuing operations was $197.3m (2011: $182.3m).  This represented a cash conversion ratio when compared to Adjusted EBITDA before exceptional items of 108.3% (2011: 126.4%).

 

At 30 April 2012, the Group's net debt was $113.2m (2011: $12.7m) and during the year the Group increased net borrowings by $100.5m.  There were significant cash outflows totalling $253.1m comprising the share buyback programme, at a cost of $62.5m, the purchase of the freehold of the Group's Headquarters in Newbury for $14.7m, the payment of dividends of $46.3m and the Return of Value to shareholders of $129.6m.  

 

Dividend

 

The board continues to adopt a progressive dividend policy reflecting the long-term earnings and cash flow potential of Micro Focus.  As outlined in the Executive Chairman's statement, the Group is now targeting a level of dividend cover of approximately 2 times on a pre-exceptional earnings basis reducing from the previous policy of approximately 2.5 times.  Consequently, the proposed final dividend is 23.4 cents per share (2011: 16.2 cents per share) giving a total proposed dividend of 31.6 cents per share (2011: 23.4 cents per share) an increase of 35.0% and this is 2 times covered by the pre-exceptional diluted earnings per share.  The final dividend will be paid on 2 October 2012 to shareholders on the register on 31 August 2012.

 

Dividends will be paid in sterling equivalent to 14.90 pence per share, based on an exchange rate of £1 = $1.57, being the rate applicable on 20 June 2012, the date on which the board resolved to propose the dividend.

 

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 are set out in note 21.

 

 

 

 

Mike Phillips

Chief Financial Officer

21 June 2012

 

 

Micro Focus International plc

Consolidated statement of comprehensive income (audited)

For the year ended 30 April 2012

 


 

 

 

Note


 

2012

(audited)

$'000

 

2011

(audited)

$'000

Revenue

2,3


434,838

436,130

Cost of sales



(49,267)

(63,670)

Gross profit



385,571

372,460

Selling and distribution costs



(127,253)

(144,832)

Research and development expense



(54,768)

(61,302)

Administrative expenses



(47,759)

(45,794)

Operating profit

5


155,791

120,532

Analysed as:





Operating profit before exceptional items



153,349

135,072

Exceptional items

4


2,442

(14,540)

Operating profit



155,791

120,532

Finance costs



(6,836)

(6,349)

Finance income



295

358

Profit before tax



149,250

114,541

Taxation

   8


(28,630)

(18,105)

Profit for the year



120,620

96,436






Other comprehensive income





Currency translation differences

 



1,045

607

Other comprehensive income for the period



1,045

607

Total comprehensive income for the period



121,665

97,043

Profit attributable to:

Owners of the parent



 

121,665

 

97,043






Earnings per share expressed in cents per share



cents

cents

- basic

7


65.77

47.04

- diluted

7


64.11

46.15






Earnings per share expressed in pence per share



pence

pence

- basic

7


41.29

30.16

- diluted

7


40.25

29.58

 

Micro Focus International plc

Consolidated statement of financial position (audited)

As at 30 April 2012

 

 


 

 

Note

 

2012

(audited)

$'000

Restated *

2011

(audited)

$'000

Restated *

2010

(audited)

$'000

ASSETS





Non-current assets





Goodwill


274,340

274,355

274,355

Other intangible assets

9

97,811

109,843

116,827

Property, plant and equipment

10

22,302

9,048

9,775

Deferred tax assets


39,782

45,789

55,560



434,235

439,035

456,517

Current assets





Inventories

11

460

1,618

153

Trade and other receivables

12

91,856

105,860

121,825

Cash and cash equivalents


30,410

26,080

32,829



122,726

133,558

154,807

  Total assets


556,961

572,593

611,324






Liabilities





Current liabilities





Trade and other payables

13

61,164

63,556

74,643

Borrowings

14

143,613

38,788

96,537

Provisions

16

3,721

17,479

6,047

Current tax liabilities


35,438

22,393

24,921

Deferred income

15

136,135

136,269

125,652



380,071

278,485

327,800

Non-current liabilities





Deferred income


12,611

15,139

10,529

Long-term provisions

16

6,794

7,393

10,059

Deferred tax liabilities


39,939

42,878

43,530



59,344

65,410

64,118

  Total liabilities


439,415

343,895

391,918

  Net assets


117,546

228,698

219,406






EQUITY





Ordinary shares


37,787

37,713

37,583

Share premium account


61,311

115,789

112,700

Retained earnings


(6,480)

108,217

102,537

Foreign currency translation (deficit)


(4,891)

(5,936)

(6,329)

Other reserves (deficit)


29,819

(27,085)

(27,085)

  Total equity attributable to the parent


117,546

228,698

219,406

 

The accompanying notes are an integral part of this financial information

 

* Balances as at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of provisions previously contained within trade and other payables (see notes 13 and 16).  In addition, balances at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of unamortised prepaid facility arrangement fees previously contained within trade and other receivables (see notes 12 and 14).

 

Micro Focus International plc

Consolidated statement of cash flow (audited)

For the year ended 30 April 2012

 

 

 

 

 

 

 

Note

 

2012

(audited)

$'000    

Restated *

2011

(audited)

$'000

Restated *

2010

(audited)

$'000

Cash flows from operating activities





Net profit for the period


120,620

96,436

76,358

Adjustments for





Net interest payable


6,541

5,991

7,092

Taxation


28,630

18,105

21,967

Depreciation


3,810

4,675

4,202

Loss on disposal of property, plant and equipment


146

234

197

Loss on disposal of intangible asset


-

225

-

Amortisation of intangibles


32,840

29,261

23,631

Share-based compensation


6,056

2,235

3,069

Provisions


2,897

16,781

-

Exchange movements


766

2,980

(2,780)

Changes in working capital:





Inventories


1,158

(1,465)

(25)

Trade and other receivables


13,697

15,320

(27,703)

Payables and other non-current liabilities


(19,867)

(8,441)

(3,224)

Cash flows from operating activities


197,294

182,337

102,784

Interest paid


(2,545)

 (2,239)

(3,776)

Tax paid


(11,936)

(11,957)

(20,856)

Net cash generated from operating activities


182,813

168,141

78,152

Cash flows from investing activities





Payments for intangible assets

9

(20,946)

(22,502)

(18,209)

Purchase of property, plant and equipment

10

(18,273)

(4,051)

(4,950)

Interest received


295

358

634

Acquisition of subsidiaries


-

-

(185,227)

Net cash acquired with subsidiaries


-

-

139,635

Repayment of Borland loan notes


-

-

(114,984)

Net cash used in investing activities


(38,924)

(26,195)

(183,101)

Cash flows from financing  activities





Payments for repurchase of shares

18

(62,498)

(41,997)

-

Proceeds from issue of ordinary share capital


1,253

1,521

4,703

Proceeds from bank borrowings

14

308,000

-

163,500

Repayment of bank borrowings

14

(203,000)

(60,000)

(62,500)

Costs associated with the return of value

19

(1,116)

-

-

Return of value paid to shareholders

19

(129,604)

-

-

Proceeds from sale of fractional shares

19

2

-

-

Bank loan costs


(4,293)

(1,292)

(6,695)

Dividends paid to owners

6

(46,262)

(50,313)  

(33,599)

Net cash used in financing activities


(137,518)

(152,081)

65,409

Effects of exchange rate changes


(2,041)

3,386

800

Net increase / (decrease) in cash and cash

Equivalents


4,330

(6,749)

(38,740)

Cash and cash equivalents at beginning of period


26,080

32,829

71,569

Cash and cash equivalents at end of period


30,410

26,080

32,829

The accompanying notes are an integral part of this financial information

 

* Cash flows for the years ended 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of provisions previously contained within trade and other payables.

 

Micro Focus International plc

Consolidated statement of changes in equity (audited) 

For the year ended 30 April 2012

 


 

 

 

 

 

 

 

Note

 

 

 

 

 

Ordinary share capital

 

 

 

 

 

Share premium account

 

 

 
Foreign currency translation reserve (deficit)

 

 

 

 

 

Other reserves (deficit)

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

Total



$'000

$'000

$'000

$'000

$'000

$'000

 Balance as at 1 May 2010


37,583

112,700

(6,329)

(27,085)

102,537

219,406









Currency translation differences


-

214

393

-

-

607

Profit for the period


-

-

-

-

96,436

96,436

Total comprehensive income


-

214

393

-

96,436

97,043

Transactions with owners:








Dividends

6

-

-

-

-

(50,313)

(50,313)

Issue of share capital


130

2,875

-

-

(1,484)

1,521

Movement in relation to share options


-

-

-

-

2,235

2,235

Repurchase of shares

18

-

-

-

-

(41,997)

(41,997)

Deferred tax on share options


-

-

-

-

803

803

Balance as at 30 April 2011


37,713

115,789

(5,936)

(27,085)

108,217

228,698









Currency translation differences


-

-

1,045

-

-

1,045

Profit for the period


-

-

-

-

120,620

120,620

Total comprehensive income


-

-

1,045

-

120,620

121,665

Transactions with owners:








Dividends

6

-

-

-

-

(46,262)

(46,262)

Issue of share capital


74

1,879

-

-

(700)

1,253

Repurchase of shares

18

-

-

-

-

(62,498)

(62,498)

Return of value to shareholders

19

-

-

-

-

(129,604)

(129,604)

Issue of B shares

19

56,359

(56,359)

-

-

-

-

Redemption of B shares

19

(56,359)

-

-

56,359

-

-

Sale of fractional shares

19

-

2

-

-

-

2

Expenses and foreign exchange relating to return of value

19

-

-

-

545

(1,026)

(481)

Movement in relation to share options


-

-

-

-

4,931

4,931

Corporation tax on share options


-

-

-

-

(189)

(189)

Deferred tax on share options


-

-

-

-

31

31

Balance as at 30 April 2012


37,787

61,311

(4,891)

29,819

(6,480)

117,546









The accompanying notes are an integral part of this financial information

 

Micro Focus International plc

Notes to the financial statements (audited)

For the year ended 30 April 2012

 

 

Group accounting policies

 

a. General information

 

Micro Focus International plc is a limited liability company incorporated, domiciled and registered in the United Kingdom.  The registered office address is The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN.  The Company has its listing on the London Stock Exchange.

The statutory accounts of the Company for the year ended 30 April 2012 which include the Group's consolidated financial statements for that year were audited at the date of this announcement.  These financial results do not comprise statutory accounts within the meaning of Section 435 of the Companies Act 2006.  Statutory accounts for the year ended 30 April 2011 were approved by the board of directors on 22 June 2011 and delivered to the Registrar of Companies.  The report of the auditors on those accounts was unqualified and did not contain any statement under Section 498 of the Companies Act 2006.

This preliminary announcement was approved by the board of Directors on 20 June 2012.

 

 

b. Basis of preparation

This audited preliminary consolidated financial information for the year ended 30 April 2012, has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Services Authority and International Financial Reporting Standards ("IFRSs") as endorsed by the European Union and those parts of the Companies Act 2006 that remain applicable to companies reporting under IFRS. 

The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through the consolidated statement of comprehensive income.

Balances at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of provisions previously contained within trade and other payables (see notes 13 and 16).  In addition, balances at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of borrowings to show unamortised prepaid facility arrangement fees previously contained within trade and other receivables (see notes 12 and 14).  In accordance with the requirements of IAS 1, "Financial Statement Presentation", where a restatement of an opening consolidated statement of financial position is made then the prior year's consolidated statement of financial position should be published thus we have published 30 April 2010 numbers.

 

 

c. Accounting policies

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 April 2011, with the exception of the following standards, amendments to and interpretations of published standards adopted during the year:

 

(a)           The following standards, amendments to standards or interpretations effective during the year to 30 April 2012 and have been adopted by the Group:

·        IAS 24 (Revised), "Related Party Disclosures", for periods beginning on or after 1 January 2011 and supersedes IAS 24, "Related Party Disclosures" which was issued in 2003.  The amendment to this standard clarifies and simplifies the definition of a related party.

·        IAS 27 (Revised). "Consolidated and Separate Financial Statements" - The Group has adopted IFRS 3 (Revised), and so it is required to adopt IAS 27 (Revised) at the same time.  The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains or losses.  The standard also specifies the accounting when control is lost.  Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss.  IAS 27 (Revised) has had no impact in the current period.

(b)           The following standards, amendments to standards or interpretations were effective during the year ended 30 April 2012 but had no material impact on the Group:

·        IFRIC 14 (Amendment), "Prepayment of a Minimum Funding Requirement", applies for periods beginning on or after 1 January 2011.  The amendments correct an unintended consequence of IFRIC 14.  Without the amendments, entities are not permitted to recognise as an asset some voluntary prepayments for minimum funding contributions.

·        IFRIC 19, "Extinguishing Financial Liabilities With Equity Investments", applies for periods beginning on or after 1 July 2010.  It clarifies the accounting when an entity renegotiates the terms of its debt with the result that the liability is extinguished through the debtor issuing its own equity instruments to the creditor.

·        Improvements to International Financial Reporting Standards - was issued in May 2010 with effective dates varying standard by standard.

(c)           The following standards, amendments to standards or interpretations are not yet effective and have not been adopted early by the Group:

·        Amendments to IFRS 7, "Financial instruments: Disclosures on Derecognition" for periods beginning on or after 1 July 2011.  These amendments arise from the IASB's review of off-balance sheet activities and will promote transparency in the reporting of transfer transactions.

 

1.  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.

 

 

2.  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").  Operating segments are consistent with those used in internal management reporting and the measure used by the Executive Committee is the Adjusted EBITDA for the Group taken as a whole, as set out in note 5.  With effect from 1 May 2011 the Executive Committee delegated responsibility for directly managed costs to the Regional Presidents of the three geographic regions of the Group and then allocated centrally managed costs to those regions, consequently for the three operating segments the Group now measures Adjusted Operating Profit.  Prior to 1 May 2011 resources were managed on a global basis and accordingly the Group did not measure costs or operating profit by segment, and therefore the Group did not report operating profit by segment. 

 

Operating segments for the year ended 30 April 2012:



North America

 

International

 

Asia Pacific

 

Total



$'000

$'000

$'000

$'000

Segment revenue


200,291

169,379

65,168

434,838

Directly managed costs


(37,430)

(60,137)

(15,879)

(113,446)

Allocation of centrally managed costs


(70,651)

(58,679)

(16,955)

(146,285)

Total segment costs


(108,081)

(118,816)

(32,834)

(259,731)

Adjusted operating profit (note 5)


92,210

50,563

 

32,334

175,107

Exceptional items





2,442

Share based compensation charge





(6,056)

Amortisation of purchased intangibles





(15,702)

Operating profit





155,791







Total assets





556,961







Total liabilities





439,415

 

 

In the same format as 30 April 2011 for comparability:

 

 

 



North America

 

International

 

Asia Pacific

 

Total



$'000

$'000

$'000

$'000

Segment revenue


200,291

169,379

65,168

434,838







Operating profit





155,791

Exceptional items





(2,442)

Share based compensation charge





6,056

Amortisation of purchased intangibles





15,702

Adjusted operating profit (note 5)





175,107







Total assets





556,961







Total liabilities





439,415

 

 

Operating segments for the year ended 30 April 2011:


North America

International

Asia Pacific

 

 

 

AMQ

 

Total


$'000

$'000

$'000

$'000

$'000

Total segment revenue

129,045

125,751

38,771

142,563

436,130

Allocation of AMQ on a geographical basis

68,605

53,558

20,400

(142,563)

-

Comparable segment revenue

197,650

179,309

59,171

-

436,130







Operating profit





120,532

Exceptional items





14,540

Share based compensation charges





2,235

Amortisation of purchased intangibles





15,709

Adjusted operating profit (note 5)





153,016

 

Total assets





572,593

 

Total liabilities





 

343,895

 

 

3. Supplemental information

 

 

Set out below is an analysis of revenue recognised between the principal product categories for the year ended 30 April 2012:

 



CD

MS

Test

Niche

Total



$'000

$'000

$'000

$'000

$'000

Licence


108,437

26,617

16,471

176,572

Maintenance


115,149

42,173

52,525

21,056

230,903

Consulting


2,787

10,803

12,035

1,738

27,363

Total


226,373

78,023

91,177

39,265

434,838

 

Set out below is an analysis of revenue recognised between the principal product categories for the year ended 30 April 2011:

 



CD

MS

Test

Niche

Total



$'000

$'000

$'000

$'000

$'000

Licence


95,823

22,347

17,697

165,841

Maintenance


110,598

40,366

57,827

24,979

233,770

Consulting


1,905

14,902

17,642

2,070

36,519

Total


208,326

85,242

97,816

44,746

436,130

 

 

4.   Exceptional items

 






2012

2011






$'000

$'000

Restructuring costs and property rationalizaton



(2,442)

14,540

 

The credit of $2.4m for restructuring has arisen following releases of provisions related to the restructuring programme undertaken at the year ended 30 April 2011 which were no longer required.  The release resulted mainly from lower settlements paid to staff made redundant by the restructuring, from our ability to avoid repaying a grant and settlement of property lease liabilities at lower levels than originally expected.

 

Prior year restructuring costs of $14.5m relate to the Group restructuring that took place in March and April 2011.  Salaries and severance costs were $17.1m, facilities costs were $3.8m and other costs were $1.2m.  These were offset by net releases of onerous lease provisions in the year of $7.6m.

 

5. Reconciliation of operating profit to EBITDA and Adjusted EBITDA


 

 

 

2012

$'000

 

 

 

2011

$'000

 

Operating profit


155,791

120,532

Exceptional items - restructuring costs and property rationalization


(2,442)

14,540

Share-based compensation charges


6,056

2,235

Amortisation of purchased intangibles


15,702

15,709

Adjusted operating profit


175,107

153,016

Depreciation


3,810

4,675

Amortisation of software


921

1,045

Adjusted EBITDA


179,838

158,736





Operating profit


155,791

120,532

Amortisation of intangible assets


32,840

29,261

Depreciation of property, plant and equipment


3,810

4,675

EBITDA


192,441

154,468

Amortisation of development costs


(16,217)

(12,507)

Exceptional items - restructuring costs and property rationalization


(2,442)

14,540

Share-based compensation charges


6,056

2,235

Adjusted EBITDA


179,838

158,736

 

The directors use EBITDA and EBITDA before exceptional items and share based compensation charges ("Adjusted EBITDA") as key performance measures of the business.

 

Under the terms of the Group's Revolving Credit Facility ("RCF"), the Net Debt to RCF EBITDA covenant is limited to 2 times in the period to 30 April 2013 and 1.5 times thereafter.  RCF EBITDA is defined as adjusted EBITDA before Amortisation of Development Costs and for the year ended 30 April 2012 RCF EBITDA amounted to $196.1m (2011: $171.2m).

 

 

6. Dividends






2012

2011






$'000

$'000

Equity - ordinary







2011 final paid 16.2 cents (2010: 16.2 cents) per ordinary share

30,920

35,262

2012 interim paid 8.2 cents (2011: 7.2 cents) per ordinary share


15,342

15,051

Total





46,262

50,313

 

The directors are proposing a final dividend in respect of the year ended 30 April 2012 of 23.4 cents per share which will utilise approximately $38.3m of shareholders' funds.  The final dividend will be paid on 2 October 2012 to shareholders listed on the share register on 31 August 2012.  It has not been included as a liability in the financial statements.

 

 

7.  Earnings per share

 

The calculation of the basic earnings per share has been based on the earnings attributable to ordinary shareholders and the weighted average number of shares for each period.

 


Year ended 30 April 2012

Year ended 30 April 2011


 

 

 

Earnings

$'000

Weighted

average

number

of shares

'000

 

 

Per share amount

cents

 

 

Per share amount pence

 

 

 

Earnings

$'000

Weighted

average

number

of shares

'000

 

Per share amount

cents

 

Per share amount pence

Basic EPS









Earnings attributable to ordinary









shareholders

120,620

183,391

65.77

41.29

96,436

204,994

47.04

30.16










Effect of dilutive securities









Options


4,758




3,961



Diluted EPS









Earnings attributable to ordinary









shareholders

120,620

188,149

64.11

40.25

96,436

208,955

46.15

29.58










Supplementary adjusted EPS









Basic EPS

120,620

183,391

65.77

41.29

96,436

204,994

47.04

30.16

Impact of US tax losses 1

 

-




 

(6,842)




Adjusted items2

19,316




32,484




Tax relating to adjusted items

 

(5,936)




 

(9,630)













Basic EPS - adjusted

 

134,000

 

183,391

 

73.07

 

45.87

 

112,448

 

204,994

 

54.85

 

35.16










Diluted EPS

120,620

188,149

64.11

40.25

96,436

208,955

46.15

29.58

Impact of US taxes losses1

 

-




 

(6,842)




Adjusted items2

19,316




32,484




Tax relating to adjusted items

 

(5,936)




 

(9,630)




Diluted EPS - adjusted

 

134,000

 

188,149

 

71.22

 

44.71

 

112,448

 

208,955

 

53.81

 

34.50

 

1As disclosed in note 8, the tax charge for the prior year includes a credit in respect of the recognition of an additional deferred tax asset of $6.8m in respect of US tax losses.  This credit does not result from the performance of the business in the period and has therefore been excluded in calculating Adjusted EPS.

 

2Adjusted items comprise amortisation of acquired intangibles, share-based compensation charges and exceptional costs. Estimated tax relief on these items is as shown above.

 

Earnings per share expressed in pence has been calculated using the average exchange rate for the year of $1.59 to £1 (2011: $1.56 to £1).

 

 

8. Taxation

 

Tax for the year was $28.6m (2011: $18.1m). The Group's effective tax rate is 19.2% (2011: 15.8%).

 

In the year the Group recognised additional deferred tax assets of $3.0m all of which was taken to the consolidated statement of comprehensive income (2011: $12.6m of which $6.8m was taken to the consolidated statement of comprehensive income and $5.8m was taken to goodwill) in respect of US tax losses arising from acquisitions made in prior periods.  The impact of this recognition gives rise to a lower effective tax rate for the year.  Additionally, in the current year a credit of $2.6m (2011: nil) has been recognised as a result of the submission of claims for enhanced deductions for research and development expenditure in prior years.

 

Excluding the impact of these adjustments the Group's effective tax rate would be 22.9% for the year (2011: 21.7%).     

 

9. Other intangible assets

 

Expenditure totalling $20.9m (2011: $22.5m) was made in the year.  This consisted of $19.5m (2011: $21.7m) in respect of development costs and $1.4m (2011: $0.8m) in respect of purchased software.

 

 

10. Property, plant and equipment

 

An analysis of the movements in the period has not been given due to the immaterial size of the transactions in the year to 30 April 2012. Capital expenditure of $18.3m (2011: $4.1m) was made in the year.  The majority of the capital expenditure of $18.3m consists of $14.7m relating to the purchase by the Group of its Newbury headquarters. 

 

 

11. Inventories



 

2012

$'000

 

2011

$'000

Work in progress


405

1,562

Finished goods


55

56

Total


460

1,618

 

 

12. Trade and other receivables

 

 



 

2012

$'000

Restated

2011

$'000

Restated

2012

$'000

Trade receivables (net of provisions)


81,278

93,801

100,389

Prepayments


10,481

11,623

17,077

Other debtors


64

396

-

Accrued income


33

40

4,359

Total


91,856

105,860

121,825

 

Balances at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of unamortised prepaid facility arrangement fees previously contained within prepayments (see note 14).

 

 

13. Trade and other payables - current


 

2012

$'000

Restated

2011

$'000

Restated

2010

$'000

Trade payables

6,168

10,478

10,744

Other tax and social security payable

8,391

10,729

7,977

Accruals

46,605

42,349

55,922

 Total

61,164

63,556

74,643

 

Balances as at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of provisions previously contained within trade and other payables.


Balances as at 30 April 2010 have been restated to reflect adjustments made in respect of goodwill on acquisitions made in the year ended 30 April 2010 of $20,000 following a revaluation of trade and other payables (see note 20).

 

 

14. Borrowings



 

2012

$'000

Restated

2011

$'000

Restated

2010

$'000

Bank loan secured


146,000

41,000

101,000

Unamortised prepaid facility arrangement fees


(2,387)

(2,212)

(4,463)

Total


143,613

38,788

96,537

 

At 30 April 2012, the Group had an unsecured $275m revolving credit facility in place, denominated in US dollars, which expires on 1 December 2014.  Interest on the facility was payable at US Dollar Libor plus 2.1% from 2 December 2011 for a period of approximately six months.  The rate then payable is dependent upon the Group's net debt to RCF EBITDA ratio on a periodic basis.  The range payable is 1.75% to 2.35% over US Dollar LIBOR.  The facility was initially used to repay the outstanding balance on the Group's previous $215m facility and then to make interim dividend and Return of Value payments to shareholders.  It can be used on an ongoing basis for the payment of distributions to shareholders, acquisitions and general corporate purposes.

 

Borrowings are stated after deduction of unamortised prepaid facility arrangement fees.  Facility arrangement fees are being written off over the period of the facility.

 

Balances at 30 April 2011 and 30 April 2010 have been restated to reflect adjustments made in the disclosure of unamortised prepaid facility arrangement fees previously contained within prepayments (see note 12).

 

 

15. Deferred income - current



2012

$'000

2011

$'000

Deferred income


136,135

136,269

 

Revenue not recognised in the consolidated statement of comprehensive income under the Group's accounting policy for revenue recognition is classified as deferred revenue in the balance sheet to be recognised in the year ending 30 April 2013.

 

 

16. Provisions


2012

2011

2010 

 


$'000

$'000

$'000

 

Onerous leases and dilapidations

4,128

5,708

16,106

 

Restructuring

2,369

19,164

-

 

Other

4,018

-

-

 

Total

10,515

24,872

16,106

 





 

Current

 

3,721

17,479

6,047

 

Non-current

6,794

7,393

10,059

 

Total

10,515

24,872

16,106

 

 

 

 

Onerous leases and dilapidations

$'000

 

 

 

Restructuring

$'000

 

 

 

Other

$'000

 

 

 

Total

$'000

At 1 May 2011 - restated

5,708

19,164

-

24,872

Additional provision in the period

1,068

715

4,418

6,201

Utilisation of provision

(2,527)

(14,327)

(400)

(17,254)

Released

(235)

(2,442)

-

(2,677)

Unwinding of discount

151

-

-

151

Exchange adjustments

(37)

(741)

-

(778)

At 30 April 2012

4,128

2,369

4,018

10,515


 

 

Onerous leases and dilapidations

$'000

 

 

 

 

Restructuring

$'000

 

 

 

 

Other

$'000

 

 

 

Restated

Total

$'000

At 1 May 2010

16,106

-

-

16,106

Additional provision in the period

6,683

22,053

-

28,736

Utilisation of provision

(5,126)

(2,889)

-

(8,015)

Released

(12,263)

-

-

(12,263)

Unwinding of discount

308

-

-

308

At 30 April 2011

5,708

19,164

-

24,872

 

The onerous lease and dilapidations provision relates to leased Group properties and this provision is expected to be utilized within ten years.  The credit of $7.6m which was offset against the $22.1m of restructuring costs in the year ended 30 April 2011 is included in the $12.3m of releases in onerous leases and dilapidations.

 

Restructuring provisions relates to the restructuring and property rationalization that was undertaken during the year ended 30 April 2011.  Included within this is $0.3m of legal costs associated with the restructuring, $0.5m for redundancy and $1.6m for property costs incurred as part of the restructuring.  The provisions are expected to be fully utilized within twelve months.

 

Other provisions include $0.1m of costs relating to a rationalization of non-trading subsidiaries and $3.9m relating to our subsidiary in Brazil.  Of this $3.1m relates to taxes potentially due for pensions and bonus payments between July 2006 and July 2011, $0.3m for potential claims from third party contractors for unpaid benefits in prior years and $0.6m for potential claims from other third parties.  The timing of these provisions is uncertain but it is expected to be over twelve months before the provision is fully utilized.

 

In prior periods provisions totalling $24.9m for the year ended 30 April 2011 and $16.1m for the year ended 30 April 2010 had been included within accruals.  However, following a review it has been determined that it is more appropriate to show these balances as provisions in accordance with IAS 37, "Provisions, Contingent Liabilities and Contingent Assets".

 

17. 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.   There are no other external related parties.

 

18. Share buyback

 

During the year ended 30 April 2012 the Company repurchased 12,298,791 £0.10 ordinary shares (2011: 8,223,092) under an authority obtained from shareholders at the AGM held in September 2010.  Distributable reserves have been reduced by $62.5m in the year ended 30 April 2012 (2011: $42.0m) being the consideration paid for these shares.

 

The Group obtained shareholder authority at the last AGM (held on 22 September 2011) to buy back up to 14.99% of its issued share capital which remains outstanding until the conclusion of the next AGM on 26 September 2012.  Following the return of value and associated share consolidation this authority now relates to a maximum of 24,472,697 ordinary shares of 11 4/11 pence per share.  The minimum price which must be paid for such shares is the nominal value of the ordinary shares which is now 11 4/11 pence per share and the maximum price payable is the higher of (i) 105 per cent of the average of the middle market quotations for an Ordinary Share as derived from the London Stock Exchange Daily Official List for the five business days immediately preceding the day on which the Company agrees to buy the shares concerned; and (ii) the higher of the price of the last independent trade of any Ordinary Share and the highest current bid for an Ordinary Share as stipulated by Article 5(1) of Commission Regulation (EC) 22 December 2003 implementing the Market Abuse Directive as regards exemptions for buyback programmes and stabilisation of financial instruments (2273/2003).

 

No shares have been brought back under the terms of this resolution since 22 September 2011.

 

 

19. Return of Value to shareholders

 

In January 2012 a Return of Value was made to all shareholders amounting to $129.6m in cash (45 pence per share, equivalent to approximately 69.8 cents per share), by way of a B and C share scheme, which gave shareholders (other than certain overseas subsidiaries) a choice between receiving the cash in the form of income or capital.  The Return of Value was accompanied by a 22 for 25 share consolidation to maintain broad comparability of the share price and return per share of the ordinary shares before and after the creation of the B and C shares.



20. Business combinations

 

During the year to 30 April 2011 adjustments were made in respect of goodwill on prior year acquisitions of $5.2 million due to a decrease in the net assets following finalization of the fair value of assets and liabilities.

As reported in our interim results for the period ended 31 October 2010, adjustments were made of $4.0 million.  Subsequently it was discovered that this adjustment should have been $5.2 million.


21. Principal risks and uncertainties

 

The Group, in common with all businesses, could be affected by risks which could have a material effect on its short- and longer-term financial performance. These risks could cause actual results to differ materially from forecasts or historic results. Where possible, the Group seeks to mitigate these risks through its system of internal controls but this can only provide reasonable assurance and not absolute assurance against material losses. 

 

With regard to the Group's objectives, the board and executive management team have identified the key risks, and then reviewed the controls in place for management to mitigate those same risks.  Risks have been prioritised and additional actions identified for further mitigation by management.  A full risk register has been developed for ongoing evaluation and mitigation and the following are the key risks, potential impacts and mitigations that are relevant to the Group as a provider of software products and associated services.  Please also refer to the section on internal controls within the corporate governance report.

 

Principal risks have been identified in the following five categories - Products, Go To Market, Employees, Competition and Systems & Infrastructure

 

Products

 

Risks - Investment in research and innovation in product development is essential to meet customer and partner requirements in order to drive revenue growth and corporate performance.  In addition, the ability to cross sell the Micro Focus product set is an opportunity to exploit additional customer opportunities.

 

Potential impacts - Insufficient focus on key research and development projects may damage the long term growth prospects of the Group.  Poor cross selling of Micro Focus products will reduce the prospects for additional revenue streams going forward.

 

Mitigations - Product Management has been a key focus area in the year ended 30 April 2012 and will continue to be so.  The Product Management teams have been strengthened and refocused under new leadership promoted from within.  Product Management has been more closely aligned with both Sales and Development.  Product Management for the Borland product set has been given renewed focus and now reports directly to the General Manager for Borland, whilst Product Management for COBOL Development and Mainframe Solutions (CDMS) reports to the President of Sales.  The Development teams are also structured with the same reporting lines, such that there is close alignment and collaboration between Sales, Product Management and Development.   For the year ending 30 April 2013 product development plans have been approved, following detailed reviews, with additional investment frameworks under ongoing assessment in response to marketplace trends and customer feedback.  With regard to cross selling, sales teams receive training to cover selling techniques for the full portfolio of products, and sales incentives and training have been further improved to encourage enhanced collaboration across product sets. 

 

Go To Market Models

 

Risks - For the Group to succeed in meeting revenue and growth targets it requires successful go to market models across the full product portfolio, with effective strategies and plans to exploit channel opportunities and focus the sales force on all types of customer categories.  In addition, effective 'go to market' models will be more successful if accompanied by compelling Micro Focus brand awareness programmes.

 

Potential impacts - Poor execution of 'go to market' plans may limit the success of the Group by targeting the wrong customers through the wrong channels and using the wrong product offerings.

 

Mitigations - Revenue plans are supported by a range of measures to monitor and drive improvements in 'go to market' operating models.  In addition to quarterly business reviews with all geographies and monthly reviews with regional presidents, the President of Sales participates in weekly management team meetings to review sales performance and 'go to market' priorities.  Customer sales cycles are reviewed regularly and a bid review process is in place to monitor and maximise customer revenue opportunities.  In addition to sales performance reviews, marketing and product development programmes are assessed regularly to optimise levels of qualified pipeline and ensure that marketing programmes are supported by appropriate product offerings. 

 

During the year a global leadership team for the Borland product set incorporating Test and Niche was established under a General Manager for Borland reporting directly to the Executive Chairman.  This was driven from the need to focus on this product set and to ensure that the Sales organisation was properly enabled to sell the technology that Borland provides.

 

A series of measures are in place to the direct sales force focus towards a broad range of customer categories.  These measures include detailed bid management, tailored quota targets and robust presales management. 

 

The Group has introduced programmes to improve existing channels and expand into new routes to market.  The Group has established a dedicated Partners and Alliances team to increase the focus on maximising the opportunities with new and existing partners.  Strategic partners, such as systems integrators and key distributors, are served by tailored review and enablement programmes, while new online routes to market have been introduced, for example a web based sales site.

 

In addition, brand awareness programmes are in place and reviewed on an ongoing basis to draw on differentiated and consistent PR plans across key geographies, supported by targeted analyst relations to reach and raise Micro Focus brand awareness through key marketplace influencers.  Brand building is also supported by a growing customer reference programme and online programmes such as effective search engine optimisation and improved corporate websites.  In the year ending 30 April 2013 the Group will be running online advertising campaigns to increase awareness of the Micro Focus and Borland brands.

 

Employees

 

Risks - The retention and recruitment of highly skilled and motivated employees, at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it currently operates.  Employees require clear business objectives, and a well communicated vision and values, for the Group to achieve alignment and a common sense of corporate purpose among the workforce.

 

Potential impacts - Failure to retain and develop skill sets, particularly sales and R&D may hinder the Group's sales and development plans.  Weak organisational alignment and inadequate incentivisation may lead to poor performance and instability.

 

Mitigations - The Group has policies in place to help ensure that it is able to attract and retain employees with the required skills. These policies include training, career development and long-term financial incentives.  Leadership

training schemes are in place to support management development and succession plans.  At the start of the year ended 30 April 2012  a renewed vision and corporate objectives were shared throughout the organisation and are reinforced through regular employee communications plans and performance reviews.

 

Competition

 

Risks - Comprehensive information about the markets in which Micro Focus operates is required for the Group to effectively assess competitive risks and perform successfully.

 

Potential Impacts - Failure to adequately understand the competitive landscape and thereby identify where competitive threats exist may damage the successful sales of Group products.

 

Mitigations - Group product plans contain analysis of competitive threats and subscriptions to industry analyst firms are leveraged to better understand market dynamics and competitor strategies.  In addition, customer contact programmes are mined for competitive intelligence.

 

Systems & Infrastructure

 

Risks - Adequate investment is required to develop effective systems and infrastructure that will support the ambitions of the Company.  Management information must be of sufficient quality to allow effective and timely decision making.

 

Potential impacts - Ineffective Micro Focus systems and infrastructure could lead to an unstable platform for the Group's future success, and deliver inadequate management information.

 

Mitigations - Group policies are in place to review the ongoing additional investment required to enhance key IT systems and processes.  Management information draws on comprehensive product reports and functional plans to extract the key metrics needed to manage the Group at a corporate, regional and product level.

 

The Business Change function provides programme and project management support on key systems and infrastructure projects in order to ensure that the impact of planned changes to systems and infrastructure are properly assessed and the implementation of projects is effectively managed.


This information is provided by RNS
The company news service from the London Stock Exchange
 
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