Micro Focus shares plunge 30 per cent following profits warning

CEO Stephen Murdoch launches strategic review after disclosing that revenues could fall by up to eight per cent

Micro Focus, the British software vendor that absorbed HPE Software, has issued a profits warning today, resulting in a 30 per cent share-price plunge.

The company had already warned investors that it expected revenues to come in at between four and six per cent down for the financial year to the end of October.

But in guidance issued this morning, the company admitted that revenues could instead decline by between six and eight per cent - despite what it claimed was a "significant pipeline of business opportunity".

The statement went on to describe the current environment as "highly challenging", attributing this partly to its own execution shortcomings and partly to the "deteriorating macro environment". This no doubt includes uncertainty wrought by Brexit, the continuing trade war between the US and China, unrest in Hong Kong, and rising expectations of a global recession in the near future.

However, Micro Focus is also challenged by the rise of cloud computing, DevOps and Agile development methodologies, where it is under-prepared compared to, for example, Compuware, its venerable Detroit, Michigan-based rival.

Compuware has been re-tooling since its acquisition by private equity firm Thoma Bravo in 2014 to provide DevOps-style tools for the mainframe, mimicking DevOps with regular quarterly releases and updates. Micro Focus, in contrast, has been bogged down by its merger with HPE Software, and has struggled to satisfactorily integrate the many different software assets it acquired as a result.

Hence, Compuware CEO Chris O'Malley is now claiming single-digit annual growth, driven by its retooling while maintaining its focus on the mainframe. Micro Focus, in contrast, is heading for its second consecutive year of declines in both revenue and, probably, net income.

"Against this backdrop the Board has decided to accelerate a strategic review of the Group's operations. This review will focus on what in addition to execution improvements are required to optimise the value of our broad portfolio of products and it will consider a range of strategic, operational and financial alternatives available to the company," it warned in a statement.

CEO Stephen Murdoch, appointed in March 2018 to execute a turnaround following its troubled acquisition of HPE Software, described the company's performance as "disappointing" and added that the review would determine "where performance can be improved and how the business can be better positioned to optimise shareholder value".

One of the early gains of the company's ongoing review has been the sale of SUSE Linux to private equity for $2.5 billion.

In early afternoon trading, Micro Focus shares recovered somewhat, but still remained down by 24 per cent.