2019 Annual Results

4 February 2020

Micro Focus International plc

Preliminary results for the 12 months ended 31 October 2019

Initial findings of Strategic & Operational Review and appointment of new Chairman

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L, NYSE: MFGP), the global enterprise software group, announces audited Preliminary results for the 12 months ended 31 October 2019.

The Company also announces the initial findings of the Strategic & Operational Review, which was launched in August 2019, and the appointment of Greg Lock as non-executive Chairman on 14 February 2020. Greg Lock succeeds Kevin Loosemore, who will be standing down as Chairman on 14 February 2020, after 15 years in the role.

1 The definition and reconciliations of Adjusted EBITDA, Adjusted Diluted EPS, Net Debt and Constant Currency ("CCY") are in the "Alternative Performance Measures" section of this Preliminary announcement.

2 Net debt/ Adjusted EBITDA ratio for 12 months ended 31 October 2018 as previously reported and therefore includes profit for discontinued operations.

Summary:

·; Revenue in line with the guidance of minus 6% to minus 8% issued on 29 August 2019, at minus 7.3% on a CCY basis for the 12 months ended 31 October 2019 compared to the 12 months ended 31 October 2018;

·; Adjusted EBITDA margin1 increased 2.0ppt to 40.7% on a CCY basis (12 months ended 31 October 2018: 38.7%);

·; Profit for the period of $1,469.1m for 12 months ended 31 October 2019 (18 months ended 31 October 2019: $784.1m);

·; Adjusted Diluted EPS from continuing operations up 4.5%;

·; Net debt of $4,338.5m at 31 October 2019 (31 October 2018: $4,253.5m), 3.2 times Adjusted EBITDA; Cash and undrawn facilities amounted to $855.7m as at 31 October 2019;

·; Final dividend per share of 58.33 cents taking total dividend for the 12 months ended 31 October 2019 to 116.66 cents compared to an annualised dividend of 100.84 cents for 12 months ended 31 October 2018;

·; The dividend policy remains twice covered Adjusted Profit after tax;

·; $2.5bn disposal of SUSE completed and $1.8bn of proceeds returned to shareholders, in addition to $540.0m of share buybacks in the period;

·; Comprehensive Strategic & Operational Review undertaken resulting in the detailed initiatives detailed further below.

·; Greg Lock will take up the role of non-executive Chairman on 14 February 2020. Greg has more than 45 years' experience in the software and computer services industry, including 11 years as Chairman of Computacenter plc, seven years as Chairman of Kofax plc and four years as Chairman of SurfControl plc. In the last five years he has also been a director of Informa plc and UBM plc. From 1998 to 2000, he was General Manager of IBM's Global Industrial sector. Greg also served as a member of IBM's Worldwide Management Council and as a governor of the IBM Academy of Technology.

Stephen Murdoch, Chief Executive Officer, said:

"This has been a challenging year for Micro Focus and our overall financial performance fell short of expectations. As a result, we conducted a Strategic & Operational Review, which has identified the additional actions and changes required to deliver on the significant potential within the business. Successful execution of these actions, will position Micro Focus to deliver against our goal of consistent and sustained value creation for customers, shareholders and employees."

"Kevin joined Micro Focus in 2005 to lead the IPO. Under his stewardship the Company has grown from a small, single portfolio company with revenues of roughly $100m to a multi-billion dollar software business supporting more than 40,000 customers globally and from 2005 to January 2020 delivered compound annual returns to shareholders of approximately 20%. On behalf of the whole Micro Focus team, the board and personally, I would like to thank Kevin for his leadership and vision in building the Micro Focus business over 15 years".

Kevin Loosemore, Executive Chairman, said:

"The Board and I have decided that now is the right time for me to leave Micro Focus and hand over to a non-executive Chairman. Greg Lock will become Non-Executive Chairman effective 14th February 2020. At that time, I will step down from the Board but will remain available to support the business over the next 6 months."

Greg Lock, non-executive Chairman designate, said:

"I am pleased to join Micro Focus as non-executive Chairman, well aware of the previous successes and the present challenges. I am looking forward to rolling my sleeves up to help management execute the plan."

This announcement contains information that was previously Inside Information, as that term is defined in the Market Abuse Regulation (Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014) and successor UK legislation.

There are no other matters in relation to Greg Lock which are required to be disclosed under LR 9.6.13 R.

Results conference call

A conference call to cover the results for the 12 months ended 31 October 2019 will be held today at 1.30pm UK time.

A live webcast and recording of the presentation will be available at https://investors.microfocus.com/ during and after the event. For dial in only, access numbers are as follows:  

United Kingdom +44 (0)330 027 1446

United States +1 334-777-6978

Confirmation Code: 9659816

Enquiries:

About Micro Focus

Micro Focus (LSE: MCRO.L, NYSE: MFGP) is an enterprise software Company supporting the technology needs and challenges of customers globally. Our solutions help organisations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Within the Micro Focus Product Portfolio are the following product groups: Application Modernisation & Connectivity, Application Delivery Management, IT Operations Management, Security, and Information Management & Governance. For more information, visit: www.microfocus.com.

Forward-looking statements

Certain statements in these preliminary results are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Chief Executive Officer's Report

Performance in the Period

This has been a challenging year for Micro Focus and our overall financial performance in the 12 months ending 31 October 2019 fell short of our expectations. For the 12 months ended 31 October 2019 the Group reported revenues of $3,348.4m (18 months ended 31 October 2018: $4,754.4m). This represents a 7.3% decline on the 12 months ended 31 October 2018 on a constant currency basis ("CCY"), in line with revised management guidance issued as part of the trading update in August 2019 of minus 6% to minus 8%. The Group generated a statutory operating profit of $221.7m for the 12 months ended 31 October 2019 (18 months ended 31 October 2019: $376.8m).

Adjusted EBITDA for the Group was $1,362.5m for the 12 months ended 31 October 2019, representing a decline of 2.6% on a constant currency basis. Whilst further progress on cost optimisation was made across the business this was not sufficient to fully offset the miss on revenue. This performance translates to a 40.7% Adjusted EBITDA margin (12 months ending 31 October 2018: 38.7%).

The divestiture of our SUSE business for $2.5bn completed in the period and the operational work required to enable the separation of this division was completed to time and budget. This, when combined with our other share buy-back activities resulted in total cash returns to shareholders of $2.3bn or equivalent to $5.36 per share (based on the share count as at the day before the announcement of the transaction).

The revenue performance in the period was impacted by a combination of volatile macro-economic conditions and changing buying behaviour leading to the delay of customer investment decisions, and inconsistent execution, which was further impacted by the greater than expected complexities arising from the integration of the Hewlett Packard Enterprise (HPE) Software business acquisition.

As a result, we issued a trading update on 29 August 2019, revising downwards the range for expected full year revenues and announcing the decision to initiate a comprehensive Strategic & Operational Review of our business.

Board changes

The Company also announces the appointment of Greg Lock as non-executive Chairman. Greg succeeds Kevin Loosemore, who is standing down after 15 years in the role. On behalf of the whole Micro Focus team, the board and personally, I would like to thank Kevin for his leadership and vision in building the Micro Focus business over 15 years.

Effective from 4 February 2020, Silke Scheiber also stepped down. I would like to thank Silke for her contributions to the Board, having joined prior to the closing of the HPE Software transaction in September 2017.

Strategic & Operational Review: Approach

We have undertaken the most comprehensive review of the business since 2011. A leading Global Investment Bank and other specialist advisors supported the work undertaken.

The review covered:

·; Evaluation of the full range of the strategic alternatives for value creation; and

·; An assessment of where we stand now in our efforts to fully integrate the HPE Software business, the overall execution capability within the company and the improvements required to accelerate progress.

In order to enable better clarity and provide the necessary context, a summary of the key issues, the progress made within this reporting period and the outcome of the review is set out below.

Assessment of key issues and progress to date

The key issues that have emerged related to overall execution, market changes and the integration of the HPE Software business acquisition. All of these issues are understood in detail, progress has been made and there is clear visibility of what remains to be done in the near term. This is set out below.

1. Operational Systems and Business Processes

The HPE Software business acquisition presented the typical challenges associated with making a large and complex acquisition and significant additional complexities relating specifically to this being a "carve-out" of a division from a much larger parent.

To enable this "carve out ", HPE designed and initiated the build of new IT systems, new business processes and identified the key functions and people required to support a standalone organisation. The adoption of these purpose built systems and business processes across the enlarged Group was one of the key benefits expected from the acquisition.

In reality, the systems were proven to be not fit for purpose, the business processes were overly complex, and the organisational design was highly fragmented. This has continued to have a material impact to core business operations, execution levels and overall productivity.

We have deployed significant resources to stabilise these systems and in parallel execute a comprehensive programme of work to address the more structural changes required. The objective of these changes is to deliver a single set of business applications and infrastructure built on simplified or completely re-designed business processes, which are anticipated to drive operational improvements and efficiencies.

Notable progress includes:

·; The design, build and deployment of a fully standalone IT hardware infrastructure was completed on time and budget. This significant and critical undertaking allowed us to migrate from the shared environment with HPE;

·; Organisational consolidation in each of the Finance and Human Resources functions has advanced and will consolidate operations from more than 60 locations into 5 global and regional Centres of Excellence to enable effective scale, lower costs and efficiency; and

·; Rationalisation of our legal entity structure and standardisation of company policies and processes. When complete we expect to significantly simplify the group structure which will bring significant improvements in efficiency and cost.

The remaining major work item is the completion of the project to build the single business application architecture. When complete this work is expected to deliver the platform for materially improved execution through more streamlined business operations and effective scale to drive operational and cost efficiencies creating a platform for future growth.

2. Go-to-Market Organisation

Through multiple acquisitions, the business has inherited a mix of regional and product orientated Go-to-Market models. These differences have led to inconsistent approaches to customer engagement and the associated deployment of resources and when combined with the systems issues outlined above impacted overall levels of execution and predictability of performance. This led to reduced productivity and elevated levels of staff attrition.

Progress has been made in stabilising staff attrition and hiring levels have increased to drive towards stable sales headcount. The process of on-boarding new people has been improved and investments made in better enablement and training to reduce the time it takes to get new sales teams fully productive. Investments have also been made in delivering tactical improvements to systems and reporting tools whilst replacement business systems are developed.

The approach to date has been to drive improvement through iterative and incremental change. This has now been replaced by a more accelerated approach in order to drive fundamental changes on a global basis to deliver the necessary improvements to the organisation. The new model and approach is summarised later in this section.

3. Product Portfolio

The operating model for product development drove "siloed" execution leading to disconnected strategies and limited cross-portfolio leverage of skill and capability. Customer engagement in the development of product strategies was insufficient and resulted in product roadmaps that did not fully exploit the advantages of significant customer installed bases and strong market positions. This combination led to reduced adoption of our latest technology which in turn limits our ability to cross and upsell.

The operating model has been re-structured to drive collaboration and the leverage of innovation across portfolios to both strengthen existing offerings and reduce time to market. Core product roadmaps have been re-shaped in every portfolio with the major remedial, corrective actions in product design now complete.

The improved collaboration enabled our product teams to deliver over 500 product releases during the period with examples of this more customer centered innovation being delivered, notably:

·; New Robotic Process Automation, Artificial Intelligence and Natural Language Processing capabilities;

·; Delivering container technology to enable flexible deployment;

·; User, Entity & Behavioural Analytics capabilities to enhance security capabilities; and

·; Enabling customers to process huge volumes of data in the cloud or within their own environment but with cloud scale economics.

The immediate execution focus is to ensure our customers fully understand our product strategy and are able to deploy our latest technology releases successfully.

4. Revenue Composition & Alignment to Strategy

Professional services revenue has needed to be realigned to support the Micro Focus product strategy rather than to generate standalone services revenue and some of the key SaaS offerings were not engineered correctly to create a profitable and sustainable source of incremental revenue.

The amount of revenue impacted and the actions and time required to correct this were greater than we initially anticipated but there is now a clear path to completion.

Professional services revenue has been broadly stable for the last 3 quarters and is on track to be stable on a year-over-year basis by the end of FY20. The remedial product roadmap work for the impacted SaaS offerings is complete and the remaining activities will be completed within the next six months. Impacted customers now have a clear path forward and delivery of the transition is driven by customer demand.

Strategic & Operational Review: Conclusions and next steps

The Strategic & Operational review is substantially complete, and in the opinion of the board, has confirmed that:

·; The fundamentals underpinning our model and approach remain valid;

·; We underestimated the challenges that have emerged in the integration of the HPE Software business;

·; The key issues in relation to execution and integration are understood in detail, progress has been made and there is clear visibility of what remains to be done and this now needs to be driven to conclusion; and

·; Whilst we have been addressing these challenges, the pace of change within the Enterprise software market has accelerated and we now need to evolve our business model to capture the opportunities for significantly improved performance that exist within a number of our portfolios.

Given the above and having completed a full evaluation of the alternative strategic options available, the board has concluded that, at this time, the greatest opportunity for value creation is through the successful execution of the following key initiatives:

Evolve - our operating model

Objective: improve product portfolio positioning and external visibility

Given the pace of change in our industry we need to both accelerate and improve the visibility of our product strategies and drive a more differentiated approach to operational management and investment levels in certain portfolios.

When we acquired SUSE as part of The Attachmate Group we recognised the need to run this portfolio differently and essentially as a separate business. The market opportunity for Security and Big Data is such that a similar, differentiated approach to investment and operational management will be adopted for these product lines.

Over the medium-term our goal is to develop broadly autonomous businesses operating within the group. This will happen in two phases and take 12-24 months to complete. During the first phase we will re-align organisational structures, build new capability within these portfolios and re-focus product and market positioning where required. In phase two our plan is to run these portfolios broadly autonomously and report performance discretely within the overall Group performance updates.

Accelerate - transition of certain portfolios to SaaS or subscription based revenue models

Objective: Improve portfolio positioning and revenue composition

The Strategic & Operational review has highlighted the need for a more definitive approach and accelerated transition to Subscription and SaaS based offerings as part of our future portfolio strategy. The transition will be managed over multiple financial periods with an initial focus on products where this model is the emerging or de-facto market standard.

Our goal is to deliver incremental improvements in revenue trajectory alongside a structured and disciplined transition to SaaS and Subscription for some of our products. During FY20 we will begin the transition of Vertica, seek to grow existing and introduce new offerings in Security and build upon existing initiatives in ADM and ITOM with accelerated progress in these portfolios during 2021.

Driving this transition more systematically and faster will lead to improved competitiveness, higher contract value and customer retention rates combined with greater revenue predictability.

Transform - our Go-to-Market function

Objective: Improve overall productivity and predictability of performance

In order to drive consistent and sustained improvements in sales effectiveness a more fundamental restructuring of our go-to-market organisation is now underway. We have now accelerated the implementation of a new global operating plan and management system, supplemented by improved infrastructure and a single, consistent sales methodology and investment in the enablement of our teams. The goal of which is to drive significantly improved and increased levels of customer engagement.

Effective execution should over time ensure our resource alignment is better optimised to the opportunities in the marketplace for our portfolio and drive productivity improvements, improve renewal rates and exploit cross-selling opportunities within our broad portfolio.

Complete - core systems and operational simplification priorities

Objective: deliver the operational systems and business processes that form the platform for operational effectiveness and efficiencies

The Strategic & Operational Review confirmed the critical priority of driving our systems work to successful conclusion to capture the significant operational improvements and associated efficiencies evident and achievable within the business.

The major piece of structural work outstanding is the project to deliver the single set of business application systems architecture required to fully integrate our business operations.

We are encouraged with progress made to date but as previously communicated this is a complex multi-period IT project, further complicated by our SOX requirements which limits the opportunity to make substantial system changes in the second half of FY20. As such a decision on whether we execute in line with our timetable or have to re-phase will be made in the second quarter and communicated as part of our interim results.

Outlook for the Future: Focus on Operational Excellence and Performance

Micro Focus has a heritage of strong brands and deep sector expertise, along with customer and partner relationships founded on delivering software and support that is essential to mission-critical business processes. Our approach and experience in helping customers run and transform their business while managing risk and ultimately driving long-term value from their investments are strong foundations from which to build.

Our model is designed to deliver sustainable and consistent returns for our shareholders, customers and employees. Our overarching principles remain unchanged:

1. Long-term and sustainable Adjusted EBITDA growth;

2. Strong free cash flow generation;

3. Efficient allocation of capital; and

4. Value accretive corporate actions through either acquisition or divestment.

The key initiatives and associated investments, combined with existing but adjusted operational improvement actions resulting from the Strategic & Operational Review are intended to drive an accelerated recovery in revenue trajectory such that the revenue decline moderates and delivers flat to low single digit growth over the medium-term. Successful delivery of this when combined with the completion of work to build an effective operational platform should also enable Adjusted EBITDA margins to be improved to the mid-forties % range over time and result in significantly improved levels of free cash flow.

Significant progress on this journey will also enable the company to once again consider appropriate portfolio actions and accretive M&A to enhance shareholder value creation in the medium-term.

FY20 Outlook

We expect revenues for the 12 months ending 31 October 2020 to be in the range of minus 6% to minus 8% at constant currency when compared to the 12 months ended 31 October 2019. Within this, we expect the first half revenues of FY20 to be broadly consistent with the trajectory achieved in the second half of FY19, with improvements in the second half of FY20 and beyond. The investments we are announcing today should amount to $70-80 million in FY20 and are expected to recur in large part in FY21. We do not expect to see a material revenue benefit from these in the current financial year but the benefits should start to come through in FY21. The increased investment will impact our Adjusted EBITDA margins in FY20 and FY21, by which time we expect to be showing a demonstrable improvement in our growth prospects and revenue quality, which in turn should flow through into higher returns thereafter. This should also coincide with the delivery of the operational platform enabling cost and operational efficiencies to further contribute to margin expansion, in line with our longer term objectives.

We expect net debt broadly to reduce through FY20 excluding the impact of IFRS16 with our strong underlying cash flows from operations continuing to comfortably fund the remaining integration related exceptional costs, as well as ongoing debt service, capital expenditure, tax and dividend payments.

Chief Financial Officer's Report

Micro Focus International - Statutory Results

Revenue FROM CONTINUING OPERATIONS

$3.3BN

Compared to $4.8bn in 18 months ended 31 October 2018.

Loss before Tax FROM CONTINUING OPERATIONS

$34.1M

Compared to a profit before tax of $34.1m in the 18 months ended 31 October 2018.

PROFIT FOR THE YEAR

$1.5BN 

Including the profit on disposal of SUSE.

In the 18 months ended 31 October 2018, the Group generated a profit of $0.8bn.

final dividend per share

58.33 cents

Compared to 58.33 cents in the 18 months ended 31 October 2018.

The financial periods presented in this report are for the 12 months ended 31 October 2019 and the previously reported 18 and 12 months ended 31 October 2018.

As reported previously, the Group acquired the HPE Software business on 1 September 2017 and completed the disposal of SUSE on 15 March 2019. SUSE has been excluded from continuing operations for all periods, with its results shown separately in "Profit from discontinued operations". The results of the HPE Software business are shown within continuing operations for all 12 months ended 31 October 2019 and 31 October 2018 and for the 14 months post acquisition in the period for the 18 months ended 31 October 2018.

The impact of these significant corporate development activities combined with the extended period of account in the comparative period has meant the financial information for the Group are better understood when comparing the 12 months ended 31 October 2019 with the 12 months ended 31 October 2018, which were unaudited.

Revenue

In the 12 months ended 31 October 2019, the Group generated revenue of $3,348.4m, which represents a decrease of 29.6% on the results for the 18 months ended 31 October 2018 and a 9.1% decrease on the results for the 12 months ended 31 October 2018. The rate of decline includes a 1.8% decrease due to the strengthening of the dollar against most major currencies.

In order to fully understand the underlying trading performance of the continuing operations, the directors feel revenue is better considered on a constant currency basis ("CCY") between the 12 months ended 31 October 2019 and the 12 months ended 31 October 2018. Excluding the impact of foreign exchange, revenue declined at constant currency by 7.3%. Revenue performance presented on a CCY basis can be found later in this report.

Operating profit

In the 12 months ended 31 October 2019, the Group generated an operating profit of $221.7m, which represents a decrease of 41.2% on the results for the 18 months ended 31 October 2018 and a 16.4% increase on the results for the 12 months ended 31 October 2018. This increase was driven by ongoing cost reductions combined with lower exceptional costs, partially offset by a decrease in revenue from $3,684.3m in the 12 months ended 31 October 2018 to $3,348.4m in the 12 months ended 31 October 2019. Exceptional costs (included within operating profit) have decreased from $439.7m in the 12 months ended 31 October 2018 to $294.2m in the 12 months ended 31 October 2019.

Exceptional items (included within operating profit)

* Exceptional costs excludes gain on disposal of SUSE, which is separately included in Profit from discontinued operations.

In the 12 months ended 31 October 2019, exceptional costs totalled to $294.2m. Exceptional costs predominantly relate to the integration of the HPE Software business and the costs incurred in the year include:

·; System and IT infrastructure costs of $126.3m principally reflect the IT migration of the Micro Focus business onto a single IT platform;

·; Integration costs of $119.6m across a wide range of projects undertaken to conform, simplify and increase efficiency across the two businesses;

·; Severance costs of $32.1m in relation to ongoing headcount reductions as we continue to remove duplication and streamline the continuing operations; and

·; Property costs of $16.3m as the Group continues the process of simplifying the real estate footprint.

As communicated previously, we anticipate total exceptional charges in relation to the HPE Software business integration of $960.0m of which $715.3m has been incurred to date. We initially expected to incur exceptional costs in relation to the HPE Software business integration of $420.0m in the 12 months ended 31 October 2019, which compares to an actual charge of $294.3m in the financial year. This variance is driven by the phasing of integration programmes.

This is a complex multi-period IT project, complicated by our SOx requirements, which limits the opportunity to make substantial system changes in the second half of FY20. As such a decision on whether we execute in line with our timetable or have to re-phase will be made in the second quarter and communicated as part of our interim results.

Net finance costs (excluding exceptional costs)

Net finance costs were $255.8m in the 12 months ended 31 October 2019 compared to $336.9m in the 18 months ended 31 October 2018 and $269.0m in the 12 months ended 31 October 2018. Finance costs predominantly relate to interest on the term loans put in place as part of the transaction to acquire the HPE Software business. In addition, included within the $255.8m is $46.7m in relation to the amortisation of facility costs and original issue discounts, which were paid on initiation of the term loans.

The decline in net finance costs between the periods of $13.2m primarily reflects an increase in bank interest from $2.6m in the 12 months ended 31 October 2018 to $16.3m in the 12 months ended 31 October 2019. The majority of interest income relates to interest earned on cash deposits held following the completion of the SUSE divestment until the Group returned $1.8bn of the proceeds to shareholders.

The Group holds interest rate swaps to hedge against the cash flow risk in the LIBOR rate charged on $2,250.0m of the debt issued by Seattle Spinco, Inc. (the investment company used to acquire the HPE Software business) from 19 October 2017 to 30 September 2022. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receives one-month USD LIBOR.

Taxation

The Group reported a tax credit for the 12 months ended 31 October 2019 of $16.0m (18 months ended 31 October 2018: credit of $673.1m).

Profit from discontinued operation 

Profit from discontinued operation reflects the profits generated from the SUSE portfolio and the profit on disposal. The SUSE disposal was completed on 15 March 2019, and as a result was included in the Group's reported trading numbers for four months during the 12 months ended 31 October 2019. In these four months, SUSE generated a profit of $28.7m compared to $55.5m in the 12 months ended 31 October 2018. After taking into account profits on disposal and disposal costs the Group generated a total of $1,487.2m from discontinued operation during the 12 months ended 31 October 2019.

Reconciliation from Statutory results to Alternative Performance Measures

This section sets out a reconciliation from the statutory results presented above to Alternative Performance Measures used by the business to assess operating performance and liquidity including Adjusted EBITDA, Adjusted Profit before tax and Adjusted EPS. For further details relating to the definition and relevance of such measures, please refer to the Alternative Performance Measures section of this Preliminary announcement. The Group believes that these and similar measures are used widely by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity.

Adjusted EBITDA

A reconciliation between Operating profit and Adjusted EBITDA is shown below:

* Adjusted EBITDA is for continuing operations only.

Adjusted Profit before tax

Adjusted Profit before tax is defined as Profit before tax excluding the effects of share-based compensation, the amortisation of purchased intangible assets, and all exceptional items.

The following tables are reconciliations from Plrofit before tax for the period to Adjusted Profit before tax:

Adjusted Effective Tax Rate

The tax charge on Adjusted Profit before tax for the 12 months ended 31 October 2019 was $235.7m, which represents an effective tax rate ("ETR") on Adjusted Profit before tax ("Adjusted ETR") of 23.9%. The Group's forecast for Adjusted ETR in the medium-term remains at 25%.

In computing Adjusted Profit before tax for the 12 months ended 31 October 2019, $1,018.7m of adjusting items have been added back (see Adjusted Profit before tax section above) and the associated tax is $251.7m.

Cash tax paid in respect of continuing operations during the year was $167.4m.

In April 2019, the European Commission published its final decision on its state aid investigation into the UK's Financing Company Partial Exemption legislation and concluded that part of the legislation is in breach of EU State Aid rules. Similar to other UK based international groups that have acted in accordance with the UK legislation in force at the time, the Group may be affected by the finding and is monitoring developments.

In addition, during the period the Group has recognised a one off credit within adjusting items above of $48.6m in relation to the recognition of deferred tax on historical UK interest restrictions.

Earnings per share and Adjusted Earnings per share

The table below sets out the Earnings per Share ("EPS") on both a reported and adjusted basis. The Group is also required to present EPS for both the continuing and discontinued operations.

1 As there is a loss from continuing operations attributable to the ordinary equity shareholders of the Company for the 12 months ended 31 October 2019 ($18.4m), the Diluted EPS is reported as equal to Basic EPS, as no account can be taken of the effect of dilutive securities under IAS 33. There was total earnings attributable to ordinary equity shareholders of the Company for the 12 months ended 31 October 2019 of $1,468.8m and therefore the effect of dilutive securities can be reflected in the total Diluted EPS above.

The Adjusted EPS is defined as Basic EPS where the earnings attributable to ordinary shareholders are adjusted by adding back exceptional items, share-based compensation charge and the amortisation of purchased intangibles and the tax attributable to these charges. These are presented as management believes they are important to understanding the impact that the underlying trading performance has on the Group's EPS.

In the 12 months ended 31 October 2019, the Group generated an Adjusted EPS from continuing operations of 198.01 cents. This compares to 192.99 cents in the 12 months ended 31 October 2018. The increase was primarily driven by a lower share count due to share buy-backs and share consolidation as described further below.

Following the completion of the SUSE transaction, the Group returned $1.8bn of proceeds to shareholders, in addition to the $540.0m of share buy backs. As a result, the total ordinary shares with voting rights has reduced from 426.9m to 333.4m during the period. These returns occurred throughout the year ending 31 October 2019, meaning that the full year Adjusted EPS will further benefit from the accretion in value in the 12 months ended 31 October 2020.

Micro Focus Alternative Performance Measures

Constant currency Revenue

(7.3)%

After the impact of the deferred revenue haircut.

Constant currency costs

(10.3)%

Continued operational efficiencies delivering cost reduction of 10.3% year on year.

CONSTANT CURRENCY Adjusted EBITDA

$1.4BN

in the 12 months ended 31 October 2019.

CONSTANT CURRENCY ADJUSTED EBITDA MARGIN

40.7%

Adjusted EBITDA margin increase of 2.0ppt from 38.7% in the 12 months ended 31 October 2018.

The table below has been prepared on a constant currency basis ("CCY") and is for continuing operations only. See the Alternative Performance Measures section for further detail.

Revenue

* The trends discussed in this section are presented before the impact of the deferred revenue haircut.

** The prior year comparatives have been restated to reflect the reorganisation of the LATAM operations from North America (previously named "Americas") to International (previously named "EMEA"). This restatement ensures consistent revenue trend reporting.

Revenue by stream performance (versus CCY comparatives)

In the 12 months ended 31 October 2019, the four revenue streams performance versus the 12 months ended 31 October 2018 was as follows:

Licence revenue declined by 7.2%. The Group's licence revenue performance in the year continues to be impacted by operational issues impacting sales execution and, as such, performance volatility.

In the third quarter of the financial year the challenging macro environment resulted in a slowdown in customer purchases. This environment improved marginally in the fourth quarter but short-term volatility remains a continued risk to new business in future trading periods.

The stabilisation of licence revenue is a key objective of the Strategic & Operational Review and the steps outlined within the CEO Report of this document are the focus areas required to improve the performance in future periods.

Maintenance revenue declined by 6.2% (5.3% post deferred revenue haircut). This was impacted by one-off events such as the disposal of Atalla and selling to the US Government through a strategic partner rather than direct, which on a combined basis contributed 1.5% to the decline. Excluding these factors Maintenance revenue declined by 4.7%.

As highlighted above, the HPE Software business transaction brought a greater than anticipated level of complexity, which has required us to address a range of specific legacy, issues which are taking time to work through. These have a distortive effect on the underlying trends within the business. For example, Winback iniatives, which we implemented to recover previous customer terminations, had to be paused for systems reasons and then restarted. These examples amongst others impact in period comparisons in multiple and distort underlying performance especially when comparing half-year on half-year performance.

As such, we do not see the decline in the financial year to be indicative of our underlying maintenance revenue trend and we anticipate an improvement in the rate of decline in future periods.

Renewal rates vary at a product level but across the portfolio we continue to see renewal rates consistent with historical rates.

SaaS and other recurring revenue declined by 11.1% (9.9% post deferred revenue haircut). During the current financial year, the Group took deliberate actions to rationalise unprofitable operations and practices and refocused resources and investments to deliver the product enhancements required for long-term success. As a result, SaaS and other recurring revenue declined in line with our expectations during the current financial year, which will allow us to deliver a more sustainable expected growth in SaaS revenue at a higher profit margin in the medium-term.

As a result of the Strategic & Operational Review, we will be accelerating the transition of certain aspects of the portfolio to subscription and SaaS revenue models. In the next financial year, we will begin the transition of Vertica to subscription and accelerate the transition of certain products within the Security portfolio to SaaS, before undertaking similar transitions in ADM and ITOM in future periods. This transition will be delivered over multiple financial periods in a controlled and disciplined manor prioritising key products and will be undertaken alongside the intention to deliver incremental improvements in revenue performance year-on-year.

Consulting revenue declined by 21.5% (21.1% post deferred revenue haircut). The managed decline can be primarily attributed to the Group's continued desire to focus only on consulting engagements that are directly related to the software portfolio.

In the 12 months ending 31 October 2020, the decline in Consulting will moderate as the actions undertaken in the current financial year conclude.

Revenue by product group (versus CCY comparatives)

The Group has more than 300 products reported under five product groups. These products are managed at a granular level using the application of the Micro Focus four-box model. The l nature of the software order cycle means that when considering underlying revenue trends, year-on-year growth rates by portfolio are not always indicative of an underlying trend and will be impacted by the timing of customer projects.

Licence revenue declined by 5.1% in the 12 months ended 31 October 2019. The AMC portfolio operates in a mature and stable environment with long-term licence performance trending broadly flat. In individual financial periods, the timing and impact of one off deals will result in a performance, which exceeds or trends below this level; however, over the longer-term this performance is expected to remain relatively stable.

Maintenance and Consulting revenues declined by 0.6% and 1.4% respectively, as the level of maintenance and consulting support to licence sales continued to track at historical rates.

Licence revenue declined by 3.9% in the 12 months ended 31 October 2019. The performance in the current financial year includes an improvement in the second half in part due to the launch of a new Robotic Process Automation offering combined with a strong close to the financial year in the core ITOM product offerings.

ITOM Maintenance revenue declined by 11.1% in part due to the impact of the change in approach to government contracts and the change in terms of two customer contracts acquired with the HPE Software business assets, which resulted in a loss in total Maintenance revenue on these contracts. We do not anticipate any more such contracts as the majority of acquired contracts have already been through one renewal cycle.

The management actions to exit non-core revenue drove the 14.6% decline in Consulting revenue.

Licence revenue declined by 13.1% in the 12 months ended 31 October 2019, albeit with an improvement in the second half of the financial year. The Licence revenue decline is due to two primary factors. Firstly, the product group experienced significant levels of sales force attrition which was then secondly compounded by corrective actions made to product roadmaps within the portfolio, which will initially be disruptive to revenue. The improvements we have made are well progressed in these areas, but will take time to flow through to pipeline and revenue.

Following the strategic review, we intend to make additional strategic investments in the Security portfolio during financial year 2020, in order to stabilise the revenue performance.

Maintenance revenue declined by 5.4% in the 12 months ended 31 October 2019 and was driven in part by the disposal of Atalla.

Consulting revenue declined by 29.0% over the same year driven by a reduction in Licence revenue combined with the deliberate managed actions discussed earlier in this report.

Information Management & Governance ("IM&G")

Licence revenue declined by 11.7% in the 12 months ended 31 October 2019.

Maintenance and Consulting revenues declined 6.8% and 29.2% respectively. In addition, SaaS revenue declined 14.1% year-on-year due to a deliberate reduction in revenue generatated from managed services offerings within the product group.

The IM&G division includes our Vertica offering, which currently relies on large one-off licence deals, which results in a revenue profile, that can be inconsistent period on period due to timing of significant deals. In the 12 months ended 31 October 2019, the product teams have improved the offering to allow Vertica to be sold on a subscription basis. This road map re-engineering is important as it will allow our customers the option of a consumption model and develop a growing recurring revenue base which is expected to supplement large licence deals.

Licence revenue declined by 4.2% in the 12 months ended 31 October 2019.

SaaS and other recurring revenues declined by 8.1% in the 12 months ended 31 October 2019. The ADM product group operates within a market, which is transitioning to SaaS at a faster rate than other parts of the portfolio.

In the current financial year, we have offered customers the choice of consumption model with products available in both traditional licence and maintenance or SaaS offerings. The work undertaken on the Strategic & Operational review has indicated this market will continue to transition this way and as such, we intend to transition the portfolio to a subscription model over the coming financial years.

Work will be undertaken to transition parts of the ADM portfolio to a subscription model in the 12 months ending 31 October 2020, however no material incremental substitution in revenue is anticipated until the 12 months ending 31 October 2021. Maintenance revenue declined by 3.3% year on year. Consulting revenue declined by 41.9% driven by our decision to refocus execution to be in support of consulting engagements that drive other revenue streams.

______________________________________________________________________________________________________________

Regional revenue performance (versus CCY comparatives)

Within the 12 months ended 31 October 2019, the revenue performance has shown a decline across all three regions, which were all impacted by the issues outlined earlier in this report.

Within North America, the decline in Maintenance was impacted by the disposal of Atalla and selling to the US Government via a strategic partner rather than directly to the customer. If you exclude the impact of these items, North America Maintenance declined by approximately 7.0%, however this region was impacted by the legacy HPE issues as outlined earlier in this section.

Adjusted EBITDA performance (versus CCY comparatives)

The Group generated an Adjusted EBITDA of $1,362.5m in the 12 months ended 31 October 2019, at an Adjusted EBITDA margin of 40.7%. This represents a 2.0ppt increase in Adjusted EBITDA margin between the periods.

The ability to drive operational efficiencies within the two businesses via integration was a key thesis for the HPE Software business deal and remains a strategic priority of management. Total costs on a CCY basis within the Micro Focus Product Portfolio in the 12 months ended 31 October 2019 were $1,985.9m. This reflects a reduction of $228.5m on the comparable period to 31 October 2018.

Alongside this cost reduction, we continue to work on multiple transformation projects to simplify and standardise our systems and processes, including a new IT system to run more streamlined business processes. We anticipate the opportunity to realise further efficiencies across our centralised Finance, HR, IT and Legal functions, allowing for further cost reductions in the future.

As mentioned above, whilst we are still targeting structural cost reductions for the future, the rate at which costs are taken out will reduce to enable focused investment in certain products and Go-To-Market.

As outlined within the Chief Executive Officer report, the Strategic & Operational review has highlighted the need for investments in our Security and Big Data products. These investments will total $70-80m and as such will have an unfavourable impact on the Adjusted EBITDA margin in the short-term before driving incremental revenue and profit in future accounting periods.

MFI Cash Generation

The table presented below focuses on those items which specifically relate to the Group's free cash flow, which is considered to be a Key Performance Indicator ("KPI") of the Group.

In the cash flow analysis presented above, the results for SUSE are included for the entire period in the 12 and 18 months ended 31 October 2018, but are only included for four months to 28 February 2019 for the 12 months ended 31 October 2019.

As a result, in the 12 months ended 31 October 2019, the Group generated $576.2m of free cash flow compared to $755.6m in the 12 months ended 31 October 2018. The year-on-year impact of the SUSE cash flows was approximately $76m. The remaining decline in free cash flow year-on-year was primarily driven by increased tax payments from $79.0m in the 12 months ended 31 October 2018 to $167.4m in the 12 months ended 31 October 2019. The increased tax payments in the 12 months ended 31 October 2019 were due to the utilisation of tax attributes, which reduced cash tax, paid in the 12 months ended 31 October 2018.

The working capital outflow increased from $39.6m in the 12 months ended 31 October 2018 to $121.2m in the 12 months ended 31 October 2019. Despite a significant improvement in the collection of overdue trade receivable balances during the year, this was offset by cash outflows due to the timing of exceptional costs, and deferred income which was partly due to the change in approach to US government revenues. See Consolidated statement of financial position later in this report.

In addition to the corporate tax payments mentioned above, the Group also paid $264.6m in tax on profits following the disposal of SUSE. This payment is included within cash generated from investing activities and therefore excluded from the analysis above.

In the 12 months ended 31 October 2019, purchases of intangible assets (relating predominantly to software licences) totalled $29.3m compared to $56.5m in the 12 months ended 31 October 2018. In addition, purchase of property, plant and equipment increased from $30.2m to $56.3m over the same period.

Free cash flow for the 12 months ended 31 October 2020 will benefit from a reduction in exceptional costs, however this will be partially offset by increased tax payments as the Group has now utilised a number of significant tax attributes acquired with HPE Software (as mentioned above). Allowing for these factors, once the business has completed its strategic initiatives, the business is capable of delivering a substainable free cash flow of in excess of $700.0m

See the Alternative Performance Measures for further detail of cash conversion.

The Group's Adjusted cash conversion ratio (defined as cash generated from operations divided by Adjusted EBITDA less exceptional items included within operating profit) for the 12 months ended 31 October 2019 was 95.3% compared to 105.7% in the 12 months ended 31 October 2018. Overall, the Group continues to anticipate annual adjusted cash conversion rates of between 95% and 100% over the medium term.

Net Debt

As at 31 October 2019, Net Debt was $4,338.5m (31 October 2018: $4,253.5m). This represents a Net Debt to Adjusted EBITDA ratio as follows:

* The Adjusted EBITDA for the 12 months ended 31 October 2019 is for continuing operations only, the comparatives include the discontinued operation.

The Group's net debt to Adjusted EBITDA ratio is 3.2 times as at 31 October 2019. The net leverage has increased in the year due to $540.0m of share buy backs, of which $200.0m were paid from the residual amount remaining from proceeds of the SUSE transaction net of the $1.8bn return of value to shareholders and the $200.0m debt repayment with the remainder being paid from cash within the business.

The medium-term leverage target for the Group remains 2.7 times Net Debt to Adjusted EBITDA. The cash generation qualities of the business means the business has successfully increased leverage above this target in order to complete in-organic investment before returning to 2.7 times after each transaction.As we have undertaken the Strategic & Operational Review, we have identified organic opportunities, which require similar investment. As a result, we now intend to repeat this leverage cycle to invest in the organic business before returning to our medium-term target in future financial periods.

The board will keep the appropriate level of debt under review and the Group will be consistent in its policy of not holding surplus cash on the balance sheet.

The movements on the Group loans in the 12 months to 31 October 2019 were as follows:

In the 12 months ended 31 October 2019, the Group repaid $212.6m of term loans of which $200.0m was repaid on the completion of the SUSE divestment. This early repayment means that the Group has no mandatory repayments payable until the first tranche of the debt matures in November 2021.

In addition to the term loans and cash reserves, the Group has access to a $500m revolving credit facility, which has remained undrawn throughout the financial year.

Consolidated statement of financial position

The Group's Consolidated statement of financial position is presented later in this report. A summarised version is presented below.

The net assets of the Group have decreased from $7,792.0m to $6,276.3m between 31 October 2018 and 31 October 2019.

In the year, the key movements were as follows:

·; Non-current assets decreased by $873.8m to $12,846.7m primarily due to the net decrease of other intangible assets of $687.0m primarily as a result of the annual amortisation charge.

·; Current assets decreased by $469.5m to $1,448.1m driven by a reduction in trade and other receivables of $239.1m and a decrease in cash and cash equivalents of $265.2m. Trade and other receivables decreased due to a reduction of aged receivables of $100.8m and a reduced current balance of $111.4m. The reduction in aged receivables has been a key focus of the finance team in the financial year and an important part of the ongoing stabilisation of the business and mitigation of potential risk on the balance sheet.

·; Current assets and liabilities classified as held for sale as at 31 October 2018 reflects the assets and liabilities of the SUSE business segment, which were disposed of in the year. Following the disposal the Group returned $1.8bn of proceeds to shareholders and completed $540.0m of share buy-backs.

·; Current liabilities decreased by $208.4m, primarily due to a $65.9m reduction in trade and other payables driven by the year-end bonus provision reducing to nil and a $88.8m decrease in contract liabilities (deferred revenue) balance due to the decline in maintenance revenue.

·; Non-current liabilities decreased by $324.0m to $6,216.5m, primarily due to the repayment of term loans in the year.

Other financial matters

IFRS 15 "Revenue from contracts with customers"

The Group adopted IFRS 15 "Revenue from Contracts" ("IFRS 15") from the transition date of 1 November 2018. Under the IFRS 15 adoption method chosen by the Group, prior-year comparatives are not restated to conform to the new policies.

Consequently, the year-over-year change of revenue and profit in the year to 31 October 2019 has been impacted by the new policies. IFRS 15 increased revenue by $16.1m in the 12 months ended 31 October 2019.

IFRS 16 "Leases"

The Group is required to adopt IFRS 16 "Leases" from the transition date of 1 November 2019. We currently estimate that IFRS 16 will increase Adjusted EBITDA by between $70.0m and $80.0m for the 12 months ended 31 October 2020 and net debt by approximately $200.0m as at 31 October 2020.

These estimates reflect the current lease positions of the Group as at the date of this report, the actual impact on the results for the year ended 31 October 2020 and statement of financial position at 31 October 2020 will depend on factors that may occur during the year. These include new leases entered into, changes or reassessments of the Group's existing lease portfolio and changes to exchange rates or discount rates.

Contractual cash obligations

The following table reflects a summary of obligations and commitments outstanding as of 31 October 2019:

Dividend

The Group proposes a final dividend of 58.33 cents, taking total dividend per share to 116.66 cents for the period. The Group's dividend policy remains unchanged at two times covered by the adjusted earnings of the company, of which one third will be paid as interim and two thirds as final.

The dividend will be paid in Sterling equivalent to 44.53 pence per share, based on an exchange rate of £1 = $1.31, the rate applicable on 03 February 2020, the date on which the board resolved to propose the dividend. Subject to approval by shareholders, the dividend will be paid on 7 May 2020 to shareholders on the register at 14 April 2020.

Alternative Performance Measures

The Group uses certain measures to assess the financial performance of its business. These measures are termed "Alternative Performance Measures" because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS.

The Group uses such measures to measure operating performance and liquidity in presentations to the board and as a basis for strategic planning and forecasting, as well as monitoring certain aspects of its operating cash flow and liquidity. The Group believes that these and similar measures are used widely by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity.

The Alternative Performance Measures may not be comparable to other similarly titled measures used by other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS.

An explanation of the relevance of each of the Alternative Performance Measures, a reconciliation of the Alternative Performance Measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below.

Unaudited reporting periods

The Group has a comparative period of the 18 months ended 31 October 2018, as a result of a change in year-end. The Group has therefore also reported unaudited comparative results for the 12 months ended 31 October 2018 as this provides a more meaningful basis on which to discuss the results of the Group.

1. Consolidated statement of comprehensive income

12 months ended 31 October 2019 (12 months ended 31 October 2018 (unaudited))

The 12 months to 31 October 2018 results were calculated by deducting the six-month results to 31 October 2017, after adjusting for the discontinued operation, from the 18 month results to 31 October 2018.

1The comparatives for the 12 months and 18 months ended 31 October 2018 have been revised as described in the Basis of Preparation of the Significant Accounting Policies section.

2. Consolidated statement of cash flows - 12 months to 31 October 2019 (12 months ended 31 October 2018 (unaudited))

3. Impact of deferred revenue haircut

The following table shows the impact of the acquisition accounting adjustment of deferred revenue haircut (i.e. the unwinding of fair value adjustment to acquired deferred revenue) on reported revenues.

4. EBITDA and Adjusted EBITDA

EBITDA is defined as net earnings before finance costs, finance income, taxation, share of results of associates, depreciation of property, plant and equipment and amortisation of intangible assets. The Group presents EBITDA because it is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortisation expense).

The Group defines Adjusted EBITDA as comprising of EBITDA (as defined above), exceptional items including the gain on disposal of discontinued operation, share-based compensation, product development intangible costs capitalised and foreign exchange (gains)/losses. Adjusted EBITDA is the primary measure used internally to measure performance and to incentivise and reward employees.

Adjusted EBITDA Margin refers to each measure defined above as a percentage of actual revenue recorded in accordance with IFRS for the period.

Adjusted EBITDA is a key profit measure used by the board to assess the underlying financial performance of the Group. Adjusted EBITDA is stated before the following items for the following reasons:

• Exceptional items, including the gain on disposal of discontinued operation as set out in note 3, are excluded by virtue of their size, nature or incidence, in order to show the underlying continuing business performance of the Group.

• Share-based compensation charges are excluded from the calculation of Adjusted EBITDA because these represent a non-cash accounting charge for transactions that could otherwise have been settled in cash or not be limited to employee compensation. These charges also represent long-term incentives designed for long-term employee retention, rather than reflecting the short-term underlying operations of the Group's business. The directors acknowledge that there is an ongoing debate on the add-back of share-based compensation charges but believe that as they are not included in the analysis of segment performance used by the Chief Operating Decision Maker and their add-back is consistent with metrics used by a number of other companies in the technology sector, that this treatment remains appropriate.

• Charges for the amortisation of purchased intangibles are excluded from the calculation of Adjusted EBITDA. This is because these charges are based on judgements about their value and economic life, are the result of the application of acquisition accounting rather than core operations, and whilst revenue recognised in the income statement does benefit from the underlying intangibles that has been acquired, the amortisation costs bear no relation to the Group's underlying ongoing operational performance. In addition, amortisation of acquired intangibles is not included in the analysis of segment performance used by the Chief Operating Decision Maker.

• We exclude foreign exchange (gains)/losses from Adjusted EBITDA in order to exclude foreign exchange volatility when evaluating the underlying performance of the business.

4. EBITDA and Adjusted EBITDA continued

• We deduct from EBITDA, actual spend on product development costs during the period as this reflects the required underlying expenditure. This is because the capitalisation and subsequent amortisation of such costs are based on judgements about whether they meet the capitalisation criteria set out in IAS38 "Intangible Assets" and on the period of their estimated economic benefit. In addition, product development costs for the period are included in the analysis of segment performance used by the Chief Operating Decision Maker.

The following table is a reconciliation from profit for the period to EBITDA and Adjusted EBITDA:

5. Adjusted Profit before tax

Adjusted Profit before tax is defined as profit before tax excluding the effects of share-based compensation, the amortisation of purchased intangible assets, and all exceptional items including gain on disposal of discontinued operation. These items are individually material items that are not considered to be representative of the performance of the Group. Adjusted Profit before tax is only presented on a consolidated basis because management believes it is important to the understanding of the Group's effective tax rate. When presented on a consolidated basis, Adjusted Profit before tax is an Alternative Performance Measure.

The following table is a reconciliation from profit before tax for the period to Adjusted Profit before tax:

6. Adjusted Effective Tax Rate

The tax charge on Adjusted Profit before tax for the 12 months ended 31 October 2019 was $235.7m (18 months ended 31 October 2018: $347.1m). This represents an Adjusted Effective Tax Rate ("Adjusted ETR"), calculated as the tax charge on Adjusted Profit from continuing operations divided by the Adjusted Profit, of 23.9% (18 months ended 31 October 2018: 23.6%).

In computing Adjusted Profit before tax for the 12 months ended 31 October 2019, $1,018.7m (18 months ended 31 October 2018: $1,438.7m) of adjusting items have been added back (see Adjusted Profit before tax section above) and the associated tax credit is $251.7m (18 months ended 31 October 2018: $327.9m credit).

Exceptional tax items of $692.3m in the 18 months ended 31 October 2018 shown above related to the impact of US tax reforms, comprised of a credit of $930.6m in respect of the re-measurement of deferred tax liabilities due to the reduction of the US federal tax rate from 35% to 21% and a transition tax charge of $238.3m payable over eight years.

7. Adjusted Earnings per Share and Diluted Adjusted Earnings per Share

The Adjusted Earnings per Share ("EPS") is defined as Basic EPS where the earnings attributable to ordinary shareholders are adjusted by adding back exceptional items including the gain on disposal of discontinued operation, share-based compensation charge and the amortisation of purchased intangibles because they are individually or collectively material items that are not considered to be representative of the trading performance of the Group. These are presented as management believe they are important to understanding the change in the Group's EPS and is consistent with adjustments as made by our peers.

1 As there is a loss from continuing operations attributable to the ordinary equity shareholders of the Company for the 12 months ended 31 October 2019 ($18.4m), the Diluted EPS is reported as equal to Basic EPS, as no account can be taken of the effect of dilutive securities under IAS 33. There was total earnings attributable to ordinary equity shareholders of the Company for the 12 months ended 31 October 2019 of $1,468.8m and therefore the effect of dilutive securities can be reflected in the total Diluted EPS above. 

7. Adjusted Earnings per Share and Diluted Adjusted Earnings per Share continued