1st Jul 2005 07:01
Micro Focus International plc01 July 2005 Embargoed for 7.01am, Friday 1 July 2005 Micro Focus International plc Preliminary results for the twelve months to 30 April 2005 Turnover growth of 19% and profit before tax up 24% Micro Focus International plc ("Micro Focus" or "the Company"; LSE MCRO.L),Unlocking the Value of LegacyTM, the software company, announces its maidenpreliminary results as a listed company for the year to 30 April 2005. MicroFocus listed on the main market of the London Stock Exchange on 17 May 2005 ("the IPO"). The Company acquired the entire issued share capital of Micro FocusInternational Limited ("the Operating Company") on 17 May 2005, immediatelyprior to the IPO. The results published herein show the consolidatedperformance of the Operating Company and its subsidiaries (together with theCompany, "the Group") for the year to 30 April 2005 and the turnover achievedfor the year is in line with the estimate published in the supplementary listingparticulars dated 6 and 12 May 2005 and issued by the Company in connection withthe IPO. The Company did not trade prior to 30 April 2005 and therefore only itsbalance sheet and cash flow statements are included below. Key highlights • Turnover increased 19.3% to US$150.6m (2003: US$126.3m) • Turnover increased 15% at constant currency • EBITDA increased 35.0% to US$41.7m (2004: US$30.9m) and adjusted EBITDA increased 45.7% to US$48.7m (2004: US$33.5m)* • Profit on ordinary activities before tax increased 23.6% to US$27.7m (2003: US$22.0m) • Basic earnings per share increased 21.8% to 11.91c (2003: 9.78c) • Successful IPO in May 2005 • John Browett appointed as a Non-executive Director with effect from 1 July 2005 Commenting on the results, Tony Hill, Chief Executive Officer of Micro Focus,said: "We are pleased to announce a strong set of full-year results, building on thesubstantial revenue and operating profit growth the Company has achieved sinceits independence in August 2001. We believe this financial performance isfurther endorsement of our technology leadership and our strong and growingnetwork of business partners. As companies around the world seek to reduce operating cost and become moreagile, so they are increasingly looking to exploit their investment in legacy ITassets. By helping our customers manage legacy more effectively and drive reusewithin contemporary contexts, Micro Focus unlocks business value. Moreover, ourevolutionary approach comes with much less risk than alternative strategiesbased on wholesale system replacement. Our business model is continuing to prove its value. In recent months we haveachieved greater penetration of our target markets and, following the IPO andthe repayment of debt, we are financially well positioned to maintain profitablegrowth and generate cash. The Company continues to make good progress and iswell positioned for continued growth in the year ahead." *Details of the reconciliation of operating profit to adjusted EBITDA isprovided in the preliminary results A briefing for sell-side analysts will be held at 9.15am for 9.30am today atUBS's offices, 7th Floor, 1 Finsbury Avenue, London, EC2M 2PP. Enquiries:Micro Focus Tel: +44 (0)1635 32646Tony Hill Chief Executive Officer Richard Lloyd Chief Financial OfficerMichael Kearney Director, Investor Relations Financial Dynamics Tel: +44 (0)20 7831 3113Giles SandersonHarriet KeenCass Helstrip Operating and Financial Review We are delighted to announce a strong set of maiden preliminary results as alisted company following our successful IPO in May 2005. The Micro Focus business traces its origins back to 1976. Micro Focus Group plcwhich was founded in 1983 and had its ordinary shares listed on the London StockExchange and American Depositary Receipts quoted on NASDAQ, purchased Intersolv,Inc. in a share-for-share exchange offer in 1998 and the combined entity wasnamed MERANT plc ("MERANT"). In August 2001 following a strategic decision byMERANT to refocus its business, MERANT sold the operations that form theOperating Company to Golden Gate Capital, a US-based private equity fund. Sincethat time, we have refocused the business on legacy development and deployment,what we describe as "unlocking the value of legacy", a strategy which has formedthe basis of our success over the past four years. Results of Operations On 17 May 2005 (immediately prior to the IPO) the Company acquired the entireissued share capital of the Operating Company by way of a share-for-shareexchange, pursuant to which the previous shareholders of the Operating Companywere issued and allotted three ordinary shares in the capital of the Company forevery one ordinary share they previously held in the Operating Company. Theresults presented herein for the twelve months to 30 April 2005 thereforerepresent trading of the Operating Company. Turnover Turnover for the year ended 30 April 2005 increased by 19.3 per cent to US$150.6million from US$126.3 million for the year ended 30 April 2004 and was in linewith the estimate published in the supplementary listing particulars dated 6 and12 May 2005 and issued by the Company in connection with the IPO. Even afterremoving the impact of currency fluctuations on turnover during the year,turnover increased by 15 per cent. Year ended 30 April 2004 2005 (US $'000) (per cent) (US $'000) (per cent) Licence Fees 64,221 50.9 79,860 53.0Maintenance Fees 57,980 45.9 66,705 44.3Consultancy Fees 4,077 3.2 4,080 2.7Total turnover 126,268 100.0 150,645 100.0 Licence fees Licence fees increased 24.4 per cent on the previous year, principally due toincreased volumes of licence sales, particularly in North America, as a resultof Micro Focus' efforts to leverage its partners' distribution networks. Withinlicence sales, the proportion of turnover generated from sales of deploymentsoftware, particularly with respect to the UNIX platform, continued to increase,partially driven by the overall industry trend towards the use of serviceoriented architectures and web services frameworks. Maintenance fees Maintenance fees increased 15.0 per cent on the previous year, driven byincreasing licence sales during the year ended 30 April 2005, as well asmaintenance renewal fees for licences sold during the prior financial year. Consultancy fees Consultancy fees during the year continued to decrease as a percentage of totalturnover, in line with the Company's overall strategy of minimising theprovision of consultancy services. Cost of sales Cost of sales for the year ended 30 April 2005 decreased by 23.6 per cent toUS$6.3 million from US$8.3 million for the year ended 30 April 2004. Thedecrease in cost of sales was principally driven by a reduction in headcount asa result of the Company's implementation of its partner centric approach towardscustomer support and a reduction in the level of consulting and trainingservices provided during the year. This has been a significant focus for theBoard and reflects Micro Focus' continued focus on being a nearly pure softwarebusiness. Operating profit Operating profit for the year ended 30 April 2005 increased by 42.3 per cent toUS$35.9 million from US$25.2 million for the year ended 30 April 2004. Thisincrease reflects the significant economies of scale in our cost structureagainst substantial growth in revenues. EBITDA and Adjusted EBITDA The Board, in common with most software companies, pay particular attention toEBITDA and adjusted EBITDA as two key measures of performance. These arecalculated as follows: Year ended Year ended April 30 2004 April 30 2005 $ '000 $ '000 Operating profit 25,239 35,924 - Depreciation 1,849 1,962 - Amortisation 3,769 3,769Earnings before interest tax depreciation and 30,857 41,655amortisation (EBITDA)Share based compensation 840 3,581Non recurring costs - Management charges 1,200 1,200 - Reorganisation costs - 2,302 - Redundancy costs 562 -Adjusted EBITDA 33,459 48,738 EBITDA increased by 35.0 per cent and adjusted EBITDA increased by 45.7 per centover the previous year. Tax on profit on ordinary activities Tax on profit on ordinary activities for the year ended 30 April 2005 increasedto US$10.1 million from US$7.8 million for the year ended 30 April 2004. Theincrease is principally attributable to increased taxes due to increasedprofitability, both in the United Kingdom and abroad, during the year, partiallyoffset by a decrease in deferred taxes. Profit after tax Profit on ordinary activities after tax for the year ended 30 April 2005increased by 23.3 per cent to US$17.5 million from US$14.2 million for the yearended 30 April 2004. Dividends The Board intends to adopt a progressive dividend policy reflecting thelong-term earnings and cashflow potential of Micro Focus whilst targeting aninitial level of dividend cover for the full financial year ended 30 April 2006of approximately 2.5 times on a pre-exceptional earnings basis. Cashflow For the financial year ended 30 April 2005, the Operating Company generated anet cash inflow from operating activities of US$46.4 million (2004: US$31.7million). The increase in net cash inflow was driven by improved operatingperformance, specifically through increased sales of software and the effectivemanagement of our working capital. Going forward, the Company anticipates that its principal source of cash fromoperating activities will continue to be generated by software licence andmaintenance fees. The strong cash flow, together with the funds generated from the IPO (US$122million), enabled us to pay off the outstanding loans. Our Business The need for companies to increase their agility while, at the same time,reducing costs and minimising risk has led many to look for ways to capitaliseon their investment in legacy technology. As much as 80% of an organisation'ssoftware budget may be used to maintain and operate legacy applications whichhave traditionally been too inflexible to integrate with one another or withnewer technologies. The lower cost of contemporary platforms combined withtechnical advances, such as security, flexibility and scalability, and theemergence of enabling technologies, such as web services and service-orientedarchitectures, has driven many organisations to look for ways to re-use theirlegacy investments. And it should be borne in mind that such legacy assetsmight be as little as five years old. Organisations seeking to modernise their IT infrastructure broadly have thefollowing alternatives: • Improve the development infrastructure for their current applicationsand platforms by increasing developer productivity and lowering developmentcosts. We refer to this as Leverage & Extend; • Extend critical legacy applications and services on current platformsto new internal and external user communities by using the internet andcontemporary architectures, also part of Leverage & Extend; • Move legacy applications from current high cost or end-of-lifeplatforms, such as the mainframe, to more contemporary, open and flexibleplatforms such as Windows, Unix and Linux. We refer to this as Lift & Shift;and • Replace legacy applications on mainframes with new packages or newcustom-built applications which run on more contemporary, open and flexibleplatforms, such as Windows, Unix and Linux, often referred to in the industry asRip and Replace. Our legacy application development and deployment software enables our customersto improve their development infrastructure, to extend legacy applications tonew users and to move them to contemporary platforms. We believe that the highcosts and risks associated with large-scale replacement projects are rarelyviable in today's climate of tight cost and risk management and are, in mostinstances, unnecessary. Customers and Partners Our expertise, developed over 30 years, with a strong record of technologyinnovation in legacy development and deployment solutions has resulted in morethan one million licensed users of our software around the world. Our customersinclude more than 70 of the Fortune Global 100 companies. They include companieswhich operate in a wide range of industry sectors, including financial services,insurance and government, of varying sizes and over a wide geographic area.Approximately 49% of our turnover is derived from North America, 38% from Europeand the Middle East, and 13% from the rest of the world. No single customerdominates. Because our products are deeply integrated into our customers' coreIT systems, we have been able to create and maintain long-term relationshipswith them. We sell our software through three channels: • Direct customers buy our software to maintain and operate core legacy business applications and pay licence and maintenance fees direct to us; • Indirect customers buy our software and pay licence and maintenance fees through packaged application providers and systems integrators; and • Resellers sell Micro Focus software in geographic areas where Micro Focus does not have a presence. We have developed a strong platform, technology, service and application partnerecosystem to expand our ability to develop, market and distribute our products,and to further support our customers' legacy modernisation initiatives. Forexample: • Micro Focus is a member of the IBM Advanced Partnerworld program. We are a Microsoft Gold Certified Partner and a premier member of Microsoft's Visual Studio Industry Partner program. In 2004, we jointly announced the formation of the Mainframe Migration Alliance with Microsoft; • We founded the Migration and Transformation Consortium, a global network of companies which specialises in modernising legacy systems with a combination of our software, specialist technology and legacy expertise; • Many systems integrators such as EDS, Accenture and CSC work with us to provide migration and deployment services which use our Lift & Shift software to minimise the risk of moving to a contemporary platform; and • Our application partners offer a range of packaged applications which feature the latest technology innovations and which can be implemented across a wide range of mainframe and contemporary platforms. Long-term customer relationships have resulted in a relatively stable stream ofrevenue from recurring maintenance fees, as well as from licence fees frompackaged application providers. Strategy Our objective is to be the leading global provider of legacy development anddeployment software. We believe we will achieve this with the strategiesoutlined below. We will endeavour to strengthen relationships with existing customers bypromoting our complementary Leverage & Extend and Lift & Shift solutions. Webelieve that opportunities also exist to help systems integrators develop anddeploy their own legacy applications. The market for mainframe migration is expanding rapidly. We have been involvedin more than 20 Lift & Shift projects since we launched the software in April2004. We aim to increase awareness of this product through marketing and byestablishing alliances with large systems integrators, and software and hardwarevendors, including members of the Mainframe Migration Alliance. The increasinglevel of interest from customers and the growth in the average size of projectsis, we believe, evidence that the market for mainframe migration continues togrow. We aim to increase indirect sales through packaged applications providers,systems integrators and resellers by strengthening existing relationships withkey industry players, such as Accenture, EDS and CSC, and by developing newrelationships with other industry leaders. We intend to continue to focus onselling software licences, and the associated maintenance, and to rely on oursystems integrator partners for professional services. We will endeavour to continue to develop innovative technology and we willfurther invest in expanding the features and functionality of our technology andproducts. We intend to maintain a leading position in our market for legacyapplication development and deployment software by co-operating with ourpartners to expand the coverage of our technologies and products. We will pursue selected technology-based acquisitions to take advantage of thegrowing mainframe migration market. This will enable us to ensure that ourtechnologies cover all the necessary legacy and contemporary architectures,platforms and applications. Any acquisition will be incremental and will beselected to supplement existing products and to expand our customer base. Our Board and people Prior to the IPO, the Board was strengthened with the appointment of KevinLoosemore as Non-executive Chairman and David Maloney as a Non-executiveDirector. Mr Loosemore has more than 20 years experience in the informationtechnology and communications industries in which he has held senior rolesincluding Chief Operating Officer of Cable & Wireless plc until 31 March 2005,President, Motorola Europe, Middle East and Africa and Chief Executive of IBMUK. Mr Maloney is a Non-executive Director of Virgin Mobile Holdings (UK) plcand was previously Chief Financial Officer of Le Meridien Hotels and Resorts andof Thomson Travel Group and Preussag Airlines, as well as Group Finance Directorof Avis Europe plc. In addition, we are pleased to announce today the appointment of John Browett,Operations Director - UK for Tesco, as a Non-executive Director with immediateeffect. Further details regarding this appointment have been announcedseparately today. We are grateful to all our employees, for their energy, commitment andcontribution during the past year, which has been a time of immense change anddemanding deadlines. Outlook We are pleased to announce a strong set of full-year results, building on thesubstantial revenue and operating margin growth the Group has achieved since itsindependence in August 2001. We believe this financial performance is furtherendorsement of our technology leadership and our strong and growing network ofbusiness partners. As companies around the world seek to reduce operating cost and become moreagile, so they are increasingly looking to exploit their investment in legacy ITassets. By helping our customers manage legacy more effectively and drive reusewithin contemporary contexts, Micro Focus unlocks business value. Moreover, ourevolutionary approach comes with much less risk than alternative strategiesbased on wholesale system replacement. Our business model is continuing to prove its value. In recent months we haveachieved greater penetration of our target markets and, following the IPO andthe repayment of loans, we are financially well positioned to maintainprofitable growth and generate cash. The Company continues to make good progressand is well positioned for continued growth in the year ahead. Certain statements in this announcement are "forward-looking statements". Theforward- looking statements can be identified by the use of forward-lookingterminology including the terms 'believes', 'plans', 'projects', 'targets','aims', 'would', 'could', 'anticipates', 'expects', 'intends', 'may' or 'will'and include statements that the Company makes concerning the intended results ofits strategy. The Company's actual results may differ materially from thosepredicted by the forward-looking statements. Subject to any obligations underthe listing rules of the UK Financial Services Authority, the Company undertakesno obligation to update publicly or revise forward-looking statements, except asrequired by law. Such statements are based on current expectations and aresubject to a number of risks and uncertainties that could cause actual resultsor events to differ materially from those expressed or implied by theforward-looking statements. Micro Focus International PlcBalance sheet as at 30 April 2005 2005 $Current assets Cash 2Debtors 95,354 Net current assets 95,356 Total assets less current liabilities 95,356 Net assets 95,356 Capital and reserves Called up share capital 95,356Equity shareholder's funds 95,356 Micro Focus International PlcCash flow statement for the period ended 30 April 2005 Period from 21 May 2004 to 30 April 2005 $Financing Issue of ordinary share capital 2Net cash inflow from financing 2 Increase in net cash 2 Cash at 30 April 2005 2 Notes 1) The Company did not trade during the period from formation to 30 April 2005 2) Post balance sheet events On 17 May 2005 (immediately prior to the IPO) the Company acquired the entireissued share capital of the Operating Company by way of a share-for-shareexchange, pursuant to which the previous shareholders of the Operating Companywere issued and allotted three ordinary shares in the capital of the Company forevery one ordinary share they previously held in the Operating Company. On 17May 2005, 51,069,602 new ordinary shares in the capital of the Company wereissued to institutional investors in the IPO and these shares, as well as theCompany's existing ordinary shares, were admitted to the Official List and tothe London Stock Exchange to be traded on its market for listed securities. The50,000 redeemable preference shares in issue immediately before the IPO wereredeemed and then sub-divided and reclassified into ordinary shares of 10p eachby the Company after the IPO. Micro Focus International Limited Consolidated profit and loss account for the year ended 30 April 2005 2005 2004 Notes $'000 $'000 Turnover 150,645 126,268Cost of sales (6,327) (8,279)Gross profit 144,318 117,989Selling and distribution costs (48,106) (39,697)Research and development (23,407) (22,350)Amortisation of goodwill (3,769) (3,769)Share-based compensation payments (3,581) (840)Reorganisation costs (2,302) -Other administrative expenses (27,229) (26,094)Total administrative expenses (36,881) (30,703)Operating profit 35,924 25,239Net interest payable (8,274) (3,233)Profit on ordinary activities before taxation 27,650 22,006Tax on profit on ordinary activities (10,101) (7,771)Profit for the financial year 17,549 14,235Dividends (78,800) (28,450)Accumulated loss for the financial year (61,251) (14,215) Earnings per ordinary share-Basic 5 11.91c 9.78c-Diluted 11.66c 9.49c Micro Focus International LimitedConsolidated balance sheet as at 30 April 2005 2005 2004 Notes $'000 $'000Fixed assetsIntangible assets 38,635 42,404Tangible assets 3,667 4,115 42,302 46,519Current assetsStock 350 312Debtors 50,245 37,925Deferred tax asset 3,722 5,998Investments 8,313 7,166Cash at bank and in hand 24,557 17,254 87,187 68,655Creditors - Amounts falling due within one year (91,174) (73,654)Net current liabilities (3,987) (4,999)Total assets less current liabilities 38,315 41,520Creditors - Amounts falling due after more than one year (110,298) (55,517)Net liabilities (71,983) (13,997) Capital and reservesCalled up share capital - 1Share premium account 3,376 2,946Profit and loss reserve (deficit) (75,190) (17,062)Other reserves (169) 118Total shareholders' deficit 3 (71,983) (13,997) Micro Focus International LimitedConsolidated cash flow statements for the year ended 30 April 2005 2005 2004 Notes $'000 $'000Net cash inflow from operating activities 2 46,380 31,726Returns on investments and servicing of financeInterest received 382 141Interest paid (5,274) (3,160)Issue costs of new bank loan (2,959) -Interest element of finance lease payments (19) -Net cash outflow from returns on investments and servicing of finance (7,870) (3,019)Taxation (2,368) (2,417)Capital expenditure and financial investmentPurchase of tangible fixed assets (1,360) (1,207)Proceeds on disposal of tangible fixed assets 23 -Net cash outflow for capital expenditure and financial investment (1,337) (1,207)Equity dividends paid to shareholders (78,800) (28,450)Net cash outflow before use of liquid resources and financing (43,995) (3,367)Management of liquid resources(Increase)/reduction in short-term deposits with banks (1,147) (6,440)Net cash (outflow)/inflow from the management of liquid resources (1,147) (6,440)FinancingIssue of ordinary share capital 505 7Capital element of finance lease payments (42) -Increase in borrowings 50,500 15,550Net cash inflow from financing 50,963 15,557Increase in net cash 5,821 5,750 Notes 1) Basis For Preparation The figures and financial information for the years ended 30 April 2005 and 2004do not constitute the statutory financial statements. Financial statements forthe year ended 30 April 2004 have been prepared and included the auditor'sreport, which was unqualified. Final statements for the year end 30 April 2005are expected to be distributed during August 2005 and will be available from theregistered office of the company. The Company anticipates releasing yearly and half-yearly results as requiredunder applicable regulations. Copies of this announcement are available for the Company Secretary at theregistered offices of the Company, which is, The Lawn, 22-30 Old Bath RoadNewbury, RG14 1QN, Berkshire. The announcement was approved by the Board on 29June 2005. 2) Cash flow from operating activities Reconciliation of operating profit to net cash inflow from operating activities: 2005 2004Continuing operations $'000 $'000Operating profit 35,924 25,239Depreciation charge (net of loss on disposals) 1,981 1,849Goodwill amortisation 3,769 3,769Compensation share-option charge 3,581 840(Increase) in stocks (38) (122)(Increase) in debtors (12,320) (4,300)Increase in creditors 13,483 4,451Total net cash inflow from operating activities 46,380 31,726 3) Deficit on Reserves The deficit on reserves has arisen from the payment of substantial dividends.Under Cayman law the unrealised profit on the revaluation of an asset may beused to find a dividend. As such the Directors obtained an independentvaluation of the intellectual property held in the Operating Company and itssubsidiaries, which confirmed the adequacy of distributable reserves underCayman law. 4) Post balance sheet events On 17 May 2005 (immediately prior to the IPO) the Company acquired the entireissued share capital of the Operating Company by way of a share-for-shareexchange, pursuant to which the previous shareholders of the Operating Companywere issued and allotted three ordinary shares in the capital of the Company forevery one ordinary share they previously held in the Operating Company. On 17 May 2005 the Company's ordinary shares were admitted to the Official Listand to the London Stock Exchange to be traded on its market for listedsecurities. On 20 May 2005 the outstanding debt of $110,625,000 owed by the Company to WellsFargo Foothill, Inc. and DB Zwirn Special Opportunities Fund was repaid in full. 5) Earnings per share The calculation of basic earnings per share has been based on the earningsattributable to ordinary shareholders of the Operating Company and the weightedaverage number of shares for each period. This is after taking account of therestructuring of the share capital of the Operating Company, which resulted inthe previous shareholders of the Operating Company receiving three ordinaryshares in the Company for every one ordinary share they previously held in theOperating Company. The diluted earnings per share has been calculated after taking account of theshare options. 6) Segmental reporting The directors consider there to be only one class of business being theprovision of legacy application development and deployment software forcontemporary platforms. Therefore, only geographical information is givenbelow. Turnover 2005 2004 $'000 $'000Geographical analysisNorth America 73,173 61,357Europe and the Middle East 57,365 47,537Rest of the World 20,107 17,374Total 150,645 126,268 There is no material difference between turnover by origin above and turnover bydestination. All turnover is derived from external customers. Profit on ordinary activities before taxation 2005 2004 $'000 $'000Geographical analysisNorth America 22,532 17,138Europe and the Middle East 3,838 4,353Rest of the World 9,554 3,748 35,924 25,239Net interest payable (8,274) (3,233)Total 27,650 22,006 Net assets/(liabilities) 2005 2004 $'000 $'000Geographical analysisNorth America (2,879) (2,955)Europe and the Middle East 1,368 5,352Rest of the World 2,143 1,336 632 3,733Goodwill 38,635 42,404 39,267 46,137Bank loans (111,250) (60,134)Net assets/(liabilities) (71,983) (13,997) This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MCRO.L