Micro Focus - Full Year Results

Micro Focus, a member of the FTSE 250, provides innovative software that allows companies to dramatically improve the business value of their enterprise applications. Micro Focus Enterprise Application Modernization, Management and Testing software enables customers' business applications to respond rapidly to market changes and embrace modern architectures with reduced cost and risk. For additional information see www.microfocus.com, or their Investor Relations.

They have announced their final results today which they had already confirmed would be in line with expectations. The highlights were revenue growth at 6.4% in constant currencies was just above the top end of their 4 to 6% guidance and this included a return to organic growth of 2.2% in the second half. They claim to have met or exceeded expectations in the last 13 quarters, but since they probably set expectations it probably just means they are good at managing these. 

Adjusted diluted earnings were up by 14.9%, slightly ahead of forecasts. They also increased the full year dividend by 10% to 44 cents. Net debt increased slightly to 1.3x EBITDA (in the top credit rating range - see check list page) as they paid for acquisitions, dividends and a return of value via 60 pence returned to shareholders in November 2013. This will bring the cash returns to shareholders since March 2011 to £449.0m representing 71% of the market capitalization at that date.

The board believes that the Company has demonstrated its ability to support a modest level of gearing and is now increasing the target net debt to RCF EBITDA multiple to 2.5 times. This will be achieved through planned returns of value and/or acquisitions should they be more value enhancing. However, in the absence of a significant acquisition, share buy-back opportunity or unforeseen circumstances and subject to shareholder approval the Company intends to make a further Return of Value to shareholders in November 2014. So a fairly mature software business which seems to be well run and is being managed to produce cash returns if no reinvestment or enhancing acquisitions are available. They seem to be running it like a Venture Capitalist, but for the benefit of shareholders, by extracting cash and gradually building up the debt, although of course that will need watching as it builds up. Their debt target above will for example take their credit rating down a notch, but I guess they would argue it as being more "efficient". 

It appears reasonable value on around 13 to 14x with a yield of just over 3% plus the prospect of a further capital return to come so it seems OK, if a little dull, as part of a broadly diversified income portfolio. Mr. Market seems to like it this morning as he has marked them up by 4% or so. To finish up I'll leave it to Kevin Loosemore, Executive Chairman of Micro Focus International plc who said:

 "We believe that by continuing to execute our business strategy and financial model Micro Focus is positioned to continue to provide shareholders with returns in the coming years.

Our core objective is to deliver consistent shareholder returns of 15% to 20% over the long-term

The underlying premise behind Micro Focus' business strategy is that the Company should consistently and over the long-term deliver shareholder returns of at least between 15% and 20% per annum.  To deliver this objective the Company has adopted an operational and financial strategy underpinned by consistent and effective management and reward systems.  This strategy is capable of execution over the long-term and also of significant scaling should appropriate opportunities arise.

The Company was listed on the London Stock Exchange on 12 May 2005 at a price of 130 pence and in the year ended 30 April 2006 reported diluted EPS of 8.17 cents and declared total dividends for the year of 6 cents.    In the year ended 30 April 2014 diluted EPS is 82.35 cents and proposed full year dividend is 40.0 cents representing a compound annual growth rate of 33.5% and 28.3% respectively. 

Full year dividends on our shares have totalled 107.58 pence and since January 2012 we have made three Returns of Value totalling 155 pence per share.  On 30 April 2014 our share price had increased to 775 pence.  A shareholder who invested at the time of IPO and had reinvested the Returns of Value would have grown their investment by 579.9% which is a compound annual return of 23.8%.

On 28 March 2011, on the back of two profit warnings and poor performance in the year ended 30 April 2011, the Company announced a share buy-back programme.  The closing share price on 25 March 2011, the day before the announcement, was 308.6 pence and the dividends received since IPO at that time were 43.56 pence.  The annual rate of return for the shareholder from IPO to 25 March 2011 was 18.5% per annum.   The Company's market capitalization on that date was £635.0m and by 30 April 2014 this had increased to £1,081.4m.  The Company made cash returns to shareholders during this period of £424.3m, consisting of share buy-backs £65.0m, ordinary dividends of £103.6m and Returns of Value of £255.7m.  These cash returns represent 66.8% of the market capitalization of the Company on 25 March 2011 and the annual compound return for shareholders from that date to 30 April 2014 is 38.1% per annum."