Moody's Downgrades Micro Focus Credit Outlook Amid Growing Challenges

22nd Mar 2018 10:31

LONDON (Alliance News) - Moody's Investors Service downgraded the credit rating outlook for software firm Micro Focus International PLC Thursday to Negative amid "greater than expected" challenges to its integration of the software business of Hewlett Packard Enterprise Co.

Micro Focus completed its USD8.80 billion reverse takeover of Hewlett Packard Enterprise's software arm in September 2017.

The credit analyst turned sour on FTSE 100-listed Micro Focus after "increased execution risks" and "heightened uncertainty" in revenue and earnings before interest, tax, depreciation and amortisation for 2018 and beyond.

Despite downgrading the outlook, Moody's affirmed Micro Focus's B1 credit rating.

The news followed Micro Focus on Monday reporting revenue declines had been "greater than anticipated" since reporting its interim results in January. As a result, it expects constant-currency revenue for the year ending October to decline more than originally forecast.

Micro Focus now expects pro forma constant-currency revenue to fall between 6% and 9%. This is compared to a 2% to 4% fall originally forecast in January.

"Achieving the revised revenue guidance already implies progress on reversing the minus 9% to minus 12% of revenue decline expected by the company for the interim period to April 2018," Moody's explained.

Micro Focus singled out the loss of sales personnel during the integration process, IT system implementation which is hampering sales team efficiency and disruption to former HPE accounts due to the demerger process as reasons for the weaker sales performance.

The company added it has identified steps to address these issues including hiring more sales staff and a focus on top global accounts.

Moody's, however, was cautious about how quickly Micro Focus could turn this issue around adding that the "attrition in the sales personnel and resulting pressure on revenue may also take some time to address."

Moody's continued that the "changed company guidance for year to October 2018, challenges on the sales side and greater uncertainty regarding the achievability of the original target of USD600 million of identified annual cost savings over the three years following closing of the acquisition in September 2017" all make it question its ability to deleverage in line with its forecasts.

The credit analysts now believed there was more risk Micro Focus would note reduce net debt below 3.5 times Ebitda. For financial 2018, Moody's now expect leverage levels to remain above 3.5 times.

Moody's added: "The company also said that the overall cost saving target until 2020 is under review and that the timing of the second phase, originally planned for November 2018 (the transition of the legacy Micro Focus business onto the new IT platform), is under review."

The free cash flow generation at Micro Focus was likely to "remain positive" in financial 2018, Moody's explained. It did, however, believe there was some risk that free cash flow - as defined by Moody's - could fall below USD300 million.

Moody's also emphasised Micro Focus had "sufficient" liquidity. Cash balances - adjusted for payments to Hewlett Packard Enterprise - stood at USD472 million. What is more, even if cash flow did reduce, it would remain "visibly free cash flow positive despite sizeable restructuring costs and dividend payments."

Shares in Micro Focus were 5.4% lower at 919.83 pence on Thursday, down 51% since it released the trading update on Monday.

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