Micro Focus CFO, Nick Bray on his interim results

What, for you, are the key numbers in these results?

Well, 8% revenue growth, a reduction in costs and 50% improvement in profit.
That allowed us to increase our interim dividend by 50% to three cents a share.
On top of that cash increased to $68m (£34.9m), and no debt, so we have very
strong financial foundations.

Results in the US have been a little bit disappointing, so can you
tell us what impact the weaker dollar is having

I think from a trading standpoint, it’s minimal at the profit level, because
while we do get some benefits in revenues, similarly, our costs outside the US
also increase. On a translational basis, based on our capital structure, we had
a very modest exchange loss, but again, as a group, we’re actually quite well
hedged against any exchange movements.

Where exactly are the revenues coming from across the divisions?

On a geographic basis, approximately 45% of revenues are from the US, 40% from
Europe and the Middle East and the remainder from the rest of the world, which
actually is predominantly from our Japanese operation. By account code, again
it’s a strength of the company that 50% comes from our maintenance base, our
maintenance revenues. Approximately 47% to 48% comes from licence fees and a
modest proportion from consulting. So we actually do have a very good spread of
revenues, both by geographic area and by sales type.

These results come amid a major change for Micro Focus, including a
new management team, and you are part of that change. So what’s your take on
Micro Focus, and what changes have you implemented since you joined?

From day one, I’ve thought it’s a great company; good people, good products,
great customer base. One of the strengths of the company is its maintenance
stream ­ we get 50% of revenues from maintenance. On top of that, it has a very
good financial position. Again, we mentioned earlier that $68m in cash, so the
company is very strong.

In terms of the changes you are putting in place, what are the costs

You have seen from last year’s accounts that the restructure charge was $7.4m,
and again from the costs savings we’ve already achieved, we’re well on the way
to a very quick payback period.

Sales executions have been historically poor. How have you been
investing in your sales force?

The first thing to note is that we took decisive action to fix the sales
execution issue, and having now achieved that, and stabilised the sales team,
and sales and marketing team, we’re now putting some modest investment back into
sales and marketing to support future growth.

And you’re concentrating on licence sales. Why aren’t you developing
your consultant driven business?

We do have a very clear and proven business model, which is driven by licence
fees and obviously related maintenance sales. So while every dollar of revenue
is important to us, licence fees are the higher margin business for us, along
with most other software companies out there. So the focus is on licence fees
and consulting really supports licence fee sales, rather than existing as a
revenue stream in its own right, as such.

How did the margins compare between the two?

Without divulging our margins as such, I think across the sector, people
looked to achieve perhaps somewhere between 10% to 30%. And again, you’ve only
got to look at the gross margins that we’re achieving as a company, and you can
see that the licence fee sales are higher and consistent with other companies in
the sector.

In terms of revenues from existing contracts, how much of next year’s
budgeted revenues have already been secured?

One of the strengths of the company is its maintenance base: very good customers
and very high retention rates. So while we cannot predict the future on
revenues, we wouldn’t expect those maintenance revenues to go down in the year
ahead, subject to conditions remaining the same. So again, it’s a key strength
of the company. Really, the variability relates to the licence fee sales and, of
course, it’s both a risk and an opportunity.

What about cost control? Should we expect the results of cost control
to start flowing into the bottom line by the end of the year?

I think to a certain extent we’ve already seen that. We’ve seen the costs
reduce, and we’ve seen our profitability significantly increase. Based on the
guidance for revenues ­ and we’ve talked about a modest increase in sales and
marketing costs for the second half year ­ I think we could assume that those
benefits will be seen at the full year with improved profits over the prior

Your underlying tax rate is falling. Is it for the

At the end of last year our tax rate was around 30% and that was the
assumption going forward. But I’m pleased to say that we have secured some
ongoing benefits from our IP deductions, so our underlying tax rate now,
sustainably, should be in the order of 26% to 27% going forward, which is a nice
benefit to the group. We’ve had an encouraging first year with good margins and
I’d like to think we can maintain those going forward.

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