Final Results

14 July 2016

Micro Focus International plc

Audited preliminary results for the full year ended 30 April 2016

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L), the international software product group, announces audited preliminary results at the high end of management expectations for the year ended 30 April 2016, with reported operating profit doubling year-on-year and final dividend increasing by 50.7%.

In September 2014 the Company announced the transformational $2.5bn acquisition of The Attachmate Group, Inc. ("TAG") which was subsequently completed on 20 November 2014. Trading results of TAG are included for the year ended 30 April 2016 and from the date of acquisition in the figures for the year to 30 April 2015.

Key highlights

· Reported operating profit doubles on reported revenues up 49.2%.

· Revenue, Underlying Adjusted EBITDA** and basic EPS*** at the top end of management expectations, driven by:

o Strong performance by the SUSE Product Portfolio where revenues grew by 18.2% on a pro-forma* CCY basis, offset by anticipated reductions in the Micro Focus Product Portfolio.

o Integration benefits resulting in a $75.8m decrease in Adjusted Operating Costs** on a pro-forma CCY basis.

· On a CCY basis:

o Total revenues of $1,245.0m (2015: CCY $804.0m), an increase of 54.9%.

o Adjusted EBITDA** of $546.8m (2015: CCY $344.0m), an increase of 59.0%.

o Underlying Adjusted EBITDA increased by 59.1% to $532.5m (2015: CCY $334.7m), at a margin of 42.8%.

· On a pro-forma CCY basis to provide a better comparison of underlying performance:

o Total revenues of $1,245.0m (2015: pro-forma CCY $1,270.7m), a reduction of 2.0%.

o Adjusted EBITDA of $546.8m (2015: pro-forma CCY $499.3m), an increase of 9.5%.

o Underlying Adjusted EBITDA of $532.5m (2015: pro-forma CCY $486.8m), an increase of 9.4%.

· Growth in Adjusted diluted earnings per share of 13.3% to 146.70 cents (2015: 129.43 cents)***

· Acquisition of Serena Software Inc. ("Serena") announced on 22 March 2016 for $540.0m on a cash and debt free basis, together with a share placing of 10.9m shares at a price of 1,455 pence raising £158.2m ($225.7m) gross and £156.1m ($222.7m) net. Completion of the Serena acquisition took place after the year end on 2 May 2016.

· Strong cash generation in the period:

o Cash generated from operations was $455.7m (2015: $288.7m) representing 87.8% (2015: 110.6%) of Adjusted EBITDA less exceptional costs with second half cash generated from operations of $293.7m, 113.4% of Adjusted EBITDA less exceptional costs.

o Free cash flow**** of $238.1m (2015: $173.7m).

o Net debt at 30 April 2016 reduced to $1,078.0m (30 April 2015: $1,403.5m) benefiting from the net proceeds of $222.7m from the share placing announced on 22 March 2016. The Serena acquisition completed on 2 May 2016 with resulting increase in pro-forma net debt to $1,625.0m.

o Net debt to pro-forma Facility EBITDA** for the year to 30 April 2016 is a multiple of 1.90 times, increasing to 2.51 times on a pro-forma basis including the acquisition of Serena Software Inc.; target remains 2.5 times.

· Proposed final dividend increased by 50.7% to 49.74 cents per share (2015: 33.00 cents per share) resulting in full year dividend of 66.68 cents per share (2015: 48.40 cents per share).

Statutory results

· Operating profit of $294.9m (2015: $147.2m)

· Profit before tax of $195.4m (2015: $91.4m)

· Basic earnings per share of 74.50 cents (2015: 58.54 cents) an increase of 27.3%***

The table below shows the reported results for the Group at actual exchange rates with CCY FY15 comparatives except where stated otherwise:

* Due to the significant size of the TAG acquisition the directors believe that the full year results are better understood by comparing the results in the period with the pro-forma CCY results of the combination of TAG and Base Micro Focus in the comparable period. In arriving at pro-forma CCY results for year ended 30 April 2015 the directors have combined the unaudited internal management information for TAG for the period from 1 May 2014 to 20 November 2014 with the audited Group results for the year ended 30 April 2015 converted at the same exchange rates as experienced in the current period.

** In assessing the performance of the business, the directors use non GAAP measures "Adjusted Operating Profit", "Adjusted Operating Costs" and "Adjusted earnings per share", being the relevant statutory measures, prior to exceptional items, amortization of purchased intangibles and share based compensation. "Adjusted EBITDA" is the Adjusted Operating Profit prior to depreciation and amortization of purchased software. Underlying Adjusted EBITDA removes the impact of net capitalization/amortization of development costs and foreign currency gains and losses from Adjusted EBITDA whilst Facility EBITDA is Adjusted EBITDA before amortization and impairment of capitalized development costs. A reconciliation of these profit measures is given in note 8.

*** Earnings per share are detailed in note 11.

**** Free cash flow is cash generated from operations less net interest payments and loan costs, tax, intangible assets and purchase of property, plant and equipment.

Kevin Loosemore, Executive Chairman of Micro Focus, commented:

"The board is delighted with the progress that has been made with the integration of the TAG business, the acquisition of Serena and the opportunities being presented as the infrastructure software market continues to mature. Our staff continue to work diligently to realize the value opportunities from this consolidating market space.

We look forward to the coming year with optimism and excitement about the opportunities to come. We remain absolutely focused on growing shareholder returns which we see as the true measure of growth. In that context we are delighted to have announced a return to a policy of twice covered dividend."

Enquiries:

About Micro Focus

Micro Focus (LSE: MCRO.L) is a global enterprise software Company supporting the technology needs and challenges of the Global 2000. Our solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Our Product Portfolios are Micro Focus and SUSE. Within Micro Focus our solution portfolios are COBOL Development and Mainframe Solutions, Host Connectivity, Identity and Access Security, IT Development and Operations Management Tools, and Collaboration and Networking. For more information, visit: www.microfocus.com. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, cloud infrastructure and storage solutions that give enterprises greater control and flexibility. For more information, visit: www.suse.com.

Forward-looking statements

Certain statements in this audited preliminary results statement 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.

Executive Chairman's Statement

2016 was the first full year of operations for the new organization formed following the acquisition of TAG. This created a Global Infrastructure Software business with revenues of c$1.25bn and EBITDA of c$530m which has since traded in line with our expectations of revenue and ahead of expectations for EBITDA. This was achieved during a year of significant change as we began implementation of the outputs from our integration review. In addition, we announced the acquisition of Serena on 22 March 2016 which was subsequently completed on 2 May 2016. Serena was acquired for an enterprise value of $540m having delivered $162.3m of revenue and $80.9m of Underlying Adjusted EBITDA in the year ended 31 January 2016.

It is increasingly clear that there are significant segments of the infrastructure software market that have matured. The likely response to this is consolidation. To be successful in this stage of a market both operational effectiveness and scale are critical. We believe that Micro Focus is now well positioned to lead in this space.

Like the TAG acquisition, the acquisition of Serena has clear business logic to extend Micro Focus market presence in mature infrastructure software segments; to increase the operational efficiency of the combined Group; to deliver effective product management and improve sales productivity. It is 100% consistent with the Company's strategy which, as you will see in our Annual Report and Accounts, has not had any significant changes from the plan laid out four and a half years ago. Micro Focus sets out to deliver consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on that strategy. These returns can be further enhanced by the appropriate deployment of capital in value enhancing acquisitions.

The Company has a business strategy, a financial strategy, an operating plan and an incentive strategy that all support our objective to achieve 15% to 20% compound annual return for shareholders. Since IPO in 2005 until 30 April 2016 the annual compound shareholder return over 11 years has been 26.4%. Adjusted diluted earnings per share have grown from 14.23 cents in 2006 to 146.70 cents in 2016 and dividends per share have grown from 6 cents to 66.68 cents with respective compound annual growth rates of 26.3% and 27.2% respectively.

When we announced the acquisition of TAG on 15 September 2014 we set out a four phase plan for the combination of the businesses whilst continuing to deliver sustainable shareholder returns.

The only changes to this plan are that our detailed review concluded that the integration of systems supporting the new business will extend throughout the four year period and the rationalization of legal entities will extend through FY17 and beyond.

The acquisition of Serena does not change this plan but may slightly delay the return to revenue growth as we consolidate the Serena products. As with prior transactions we expect Serena's revenue trend to continue its historic decline until significant change has been implemented. This further integration will be included in the remaining two stages of the plan that will consolidate and strengthen the combined business, with the goal of delivering modest revenue growth in the medium-term. We are building a strong platform and with the addition of Serena we have annual pro-forma cash generated from operations in the year ended 30 April 2016 of approximately $524m per annum and free cash flows of approximately $274m, from which we can achieve significant returns of value to our shareholders and/or further highly accretive acquisitions.

Our performance in the year

Following our integration review in 2015 we decided that the Group should operate two product portfolios, Micro Focus and SUSE and have reported the business this way since 1 May 2015. In December 2015 we announced that effective 1 February 2016 Stephen Murdoch would become Chief Executive Officer ("CEO") of the Micro Focus portfolio and Nils Brauckmann CEO of the SUSE portfolio. Stephen and Nils discuss the operating performance of their respective portfolios in their CEO reports.

Micro Focus Group delivered revenues and Underlying Adjusted EBITDA of $1,245.0m and $532.5m respectively which is at the top end of the guidance given at the beginning of the year. Our net debt at 30 April 2016 was $1,078.0m and once we had completed the acquisition of Serena this had increased to $1,625.0m on a pro-forma basis.

We would like to thank our employees for their continued dedication, commitment and hard work in delivering the full year results.

For the year ended 30 April 2016 bonuses were paid to executive management and non-commissionable staff in Micro Focus in line with the improvement in Underlying Adjusted EBITDA of the Group on a constant currency ("CCY") basis excluding the impact of in year acquisitions. Staff bonuses were paid at 100% of their on target amount reflecting a 10.0% increase in Underlying Adjusted EBITDA of Micro Focus at their budgeted exchange rates and this applied also to executive management who are capped at 100%. Non-commissioned staff fully aligned with SUSE were targeted 50% on improvement in Underlying Adjusted EBITDA of the Group and 50% on delivery of Annual Contract Value ("ACV") growth targets in SUSE. Their bonus payment was 126% of their on target amount, reflecting stronger than targeted achievement in the ACV component. The amount charged to the consolidated statement of comprehensive income in respect of the Corporate Bonus plan in the actual results for the year ended 30 April 2016 was $45.6m. 

Delivering value to shareholders

The board has adopted a very clear plan of value creation.

Our priority is to improve the performance of the business in order to maximize the opportunity to generate modest revenue growth in the medium-term. At the same time we have created flexibility to allow value creation to shareholders through cash distributions or acquisitions as appropriate. We will do nothing that will constrain our ability to achieve organic growth and we are currently investing significant amounts on activities designed to enhance growth.

The Company's market capitalization at 30 April 2016 was £3,496.5m. The original Micro Focus shareholders prior to the announcement of the TAG transaction who now own 56.8% of the Company have seen their total investment increase from £1,178.6m to £1,986.0m over a period of 19 months and during that period have received a Return of Value of £83.9m and ordinary dividends of £55.0m.

The board is targeting a net debt to Facility EBITDA multiple of approximately 2.5 times. This is a modest level of gearing for a company with the cash generating qualities of Micro Focus. We are confident that this level of debt would not reduce our ability to deliver growth, invest in products and/or make appropriate acquisitions. As the integration of the businesses continues the board will keep the appropriate level of debt under review.

In order to complete the acquisition of Serena the Company extended its revolving credit facility from $225.0m to $375.0m on 2 May 2016 and raised money from shareholders for the first time since the IPO in May 2005 when it placed 10.9m shares with institutional investors raising $222.7m net of expenses in March 2016.

At 30 April 2016 we had net debt of $1,078.0m which was prior to the completion of the Serena acquisition. Once the transaction completed the pro-forma net debt was $1,625.0m representing a pro-forma net debt to pro-forma Facility EBITDA of 2.51 times.

On completion of the TAG acquisition the board adopted a progressive dividend policy whilst the net debt to Facility EBITDA was above 2.5 times. Absent a significant acquisition, share buy-back opportunity or unforeseen circumstances the net debt to Facility EBITDA multiple will be below 2.5 times at the end of April 2017 and so the board is proposing an increase in the dividend payout such that it is 2 times covered by the adjusted earnings of the Group. This policy will take effect from the proposed final dividend of 49.74 cents (2015: 33.00 cents per share), which represents a 50.7% increase on last year's final dividend and gives a total proposed dividend for the year of 66.68 cents per share (2015: 48.40 cents), an increase of 37.8%.

The dividend will be paid in Sterling equivalent to 37.40 pence per share, based on an exchange rate of £1 = $1.33, the rate applicable on 13 July 2016, the date on which the board resolved to propose the dividend. The dividend will be paid on 7 October 2016 to shareholders on the register at 2 September 2016.

In line with our target net debt to Facility EBITDA multiple of 2.5 times and consistent with our shareholder return policy it is the board's current intention, absent a significant acquisition, share buy-back opportunity or unforeseen circumstances, to make a further Return of Value to shareholders in calendar year 2017.

Board changes and succession planning

Since April 2011 I had held the roles of both Chairman and Chief Executive. In December we announced that effective from 1 February 2016, I would be Executive Chairman and that Stephen Murdoch and Nils Brauckmann would become CEO of Micro Focus and CEO of SUSE respectively.

During the year there were a number of other board changes.

At the AGM in September 2015, Tom Skelton stepped down from the board after serving as a non-executive director for nine years. We would like to thank Tom for his contribution to the success of Micro Focus. Karen Geary who joined the board as a non-executive in January 2015 has now become Group HR Director and a member of the senior management team. Prescott Ashe and David Golob stepped down from the board on 1 February 2016 in anticipation of Wizard's shareholding reducing below 15%.

Stephen Murdoch and Nils Brauckmann joined the board on 1 February 2016 as CEO's of Micro Focus and SUSE respectively whilst on the same day Steve Schuckenbrock joined as an independent non-executive director.

Finally, we were delighted to welcome Amanda Brown to the board on 1 July 2016 as a non-executive director.

We welcome the new members of our board and biographical details of all board members will be available in the Annual Report and Accounts.

Outlook

During FY17, in accordance with our four phase plan, we intend to stabilize revenues around a solid core from which we aim to grow in FY18. As a result we anticipate revenues in FY17 being in the range minus 2% and zero% on FY16 on a CCY basis, pro-forma for the acquisition of Serena as set out in the Financial Review section below.

Having delivered 11 years of approximately 26.4% compound returns to investors we believe we have a strong operational and financial model that can continue to scale and provide excellent returns to our shareholders.

Kevin Loosemore

Executive Chairman

13 July 2016

Financial Review

Due to the significant size of the TAG acquisition the directors believe that the full year results are better understood by comparing the actual results in the year with the pro-forma CCY results of the combination of TAG and Base Micro Focus in the comparable period. In arriving at pro-forma CCY results for the comparable period of the 12 months ended 30 April 2015 the directors have combined the unaudited internal management information for TAG for the period from 1 May 2014 to 19 November 2014 and then added in the Base Micro Focus results for the 12 months ended 30 April 2015 with the TAG audited results from 20 November 2014 to 30 April 2015 converted at the same average monthly exchange rates experienced in the year to 30 April 2016.

Following our integration review in FY15 we decided that the Group should operate two product portfolios from 1 May 2015 (i) Micro Focus and (ii) SUSE. These are the reporting segments and the cash generating units for the Group going forward.

The Micro Focus product portfolio contains our mature infrastructure software products that are managed on a portfolio basis akin to a "fund of funds" investment portfolio. This portfolio is being managed with a single product group that makes and maintains the software, whilst the software is sold and supported through a geographic GTM organization. As part of the integration review we have grouped the products together into five sub portfolios based on industrial logic. There was significant organizational change in the Micro Focus product portfolio in bringing together the prior organizations and we have been delighted with the progress during FY16.

In comparison, the SUSE product portfolio experienced much less change at the beginning of the financial year in the way that it operated. SUSE's characteristics are different due to the Open Source nature of its offerings and the growth profile of those offerings.

Our revenue guidance at the beginning of the year and after the Interim results in December 2015 was for revenues to decline by between 2% and 4% when compared to the pro-forma CCY revenues of the comparable period with growth in SUSE expected to partially offset the anticipated decline in the Micro Focus product portfolios based on the revenue trends in the sub-portfolios. The guidance took account of the fair value deferred revenue accounting haircut of $16.6m (2015: $17.0m) taken at the time of the acquisition of TAG.

The performance in the year was at the top of management's guidance with overall revenues declining by 2.0% when compared to pro-forma CCY revenues.

The breakdown in revenue within the two Product Portfolios by revenue type compared to the pro-forma CCY revenues in the year to 30 April 2016 and the year ended 30 April 2015 is shown in the table below:

1 unaudited

The table below provides the proportion of revenue delivered during FY16 by each of the portfolios and the comparison to the pro-forma FY15 CCY revenues with Micro Focus broken out into its sub-portfolios:

1 unaudited

We are providing additional Key Performance Indicators ("KPIs") for the SUSE product portfolio for the first time in this set of results. Total Contract Value ("TCV") is the amount invoiced to customers (excluding sales tax) in respect of new contracts and renewals completed in the year. The weighted average contract length expressed in months, reflecting the duration of the TCV is also being provided as growth in TCV alone without this information is potentially misleading. Finally we are providing ACV which aims to normalize contract length by only including the first 12 months of each new contract or renewal included within TCV. Where the contract length is less than 12 months all of the TCV is included in ACV.

We are not providing renewal rate information for SUSE or Micro Focus within this set of results. Our methodology is still being refined in order to accommodate data from our multiple systems. Once we have a common methodology and are content with the data we will provide clear explanations of both. In the meantime we believe that following the trends on the maintenance revenue for the Micro Focus sub-portfolios and subscription revenues for SUSE provide the best guidance on performance.

The table below shows revenues for the year by region and the pro-forma CCY revenue for the year to 30 April 2015 and the reported revenue for the year ended 30 April 2015:

1 unaudited

Detailed analysis of the revenue performance of each of the product portfolios is provided in the CEO reports. 

Operating costs

The operating costs (including exceptional costs of $27.9m) for the year compared with the prior year on a pro-forma basis at CCY and the prior year reported costs are shown below:

1 unaudited

On a pro-forma CCY basis, cost of goods sold for the year decreased by $25.9m to $135.4m (2015: pro-forma CCY $161.3m) of which the exceptional costs were $2.2m (2015: pro-forma-CCY $4.6m). The reduction is partly as a result of lower consulting revenues and cost saving actions taken at the end of the prior year. The costs in this category predominantly relate to our consulting and helpline support operations.

Selling and distribution costs, excluding the amortization of purchased trade names and customer relationships intangible assets of $106.7m (2015: pro-forma CCY $79.6m), were $309.6m (2015: pro-forma CCY $354.2m). Within these costs were exceptional costs of $4.4m (2015: pro-forma CCY $19.8m), thus the underlying costs were $305.2m (2015: pro-forma CCY $334.4m), a reduction of 8.7% on the prior year on a pro-forma CCY basis. The reduction was due mostly to cost saving actions taken at the end of FY15.

Research and development expenses, excluding the amortization of purchased technology intangible assets of $75.2m (2015: pro-forma CCY $43.8m), were $184.2m (2015: pro-forma CCY $210.4m), and after exceptional costs of $1.3m (2015: pro-forma CCY $3.1m), the resultant costs were $182.9m (2015: pro-forma CCY $207.3m) a reduction of 11.8% on the prior year on a pro-forma CCY basis.

This figure is equivalent to approximately 14.7% of revenue (2015: pro-forma CCY 16.5%). The impact of net capitalization of internal development costs was $11.4m (2015: net amortization pro-forma CCY $0.1m). Research and development costs prior to amortization of purchased intangibles, exceptional items and the capitalization and amortization of internal development costs were $194.3m (2015: pro-forma CCY $207.2m) a decline of 6.2% as a result of the cost saving actions taken in the second half of FY15. At 30 April 2016 the net book value of capitalized development costs on the consolidated statement of financial position was $43.2m (2015: $31.4m).

Administrative expenses were $139.0m (2015: pro-forma CCY $265.8m). Excluding share based compensation of $28.8m (2015: pro-forma CCY $15.5m), exceptional costs of $20.1m (2015: pro-forma CCY $161.3m) and an exchange gain of $2.9m (2015: pro-forma CCY gain of $12.6m), administrative expenses decreased by 8.5% to $93.0m (2015: pro-forma CCY $101.6m). The decrease has arisen mostly from the reduction in managers and fewer properties. Share based compensation was $28.8m (2015: pro-forma CCY $15.5m), being ASG cost of $10.4m (2015: pro-forma CCY $3.7m), LTIP cost of $17.5m (2015: pro-forma CCY $11.3m) and Sharesave Scheme costs of $0.9m (2015: pro-forma CCY $0.5m).

Amortization of purchased intangibles for the year was $181.9m (2015: pro-forma CCY $123.4m). This growth is as a result of the TAG acquisition being completed part way through the prior year.

Adjusted Operating Costs were $711.5m (2015: pro-forma CCY $787.3m) a fall of $75.8m. The reduction in Adjusted Operating Costs arose mostly from efficiencies from the restructuring exercise taken at the end of the last financial year, the rationalization of the property portfolio, capitalization of some of TAG's development costs following the introduction of a suitable time recording system and a tighter control over discretionary costs offset by the increased investment in SUSE directly controlled costs.

The exceptional costs in the year were $27.9m (2015: pro-forma CCY $188.8m) including:

1 unaudited

Currency impact

During the year to 30 April 2016, 61.6% of our revenues were contracted in US dollars, 20.9% in Euros, 5.0% in Sterling, 3.6% in Yen and 8.9% in other currencies. In comparison, 51.9% of our costs are US dollar denominated, 12.7% in Sterling, 18.9% in Euros, 1.6% in Yen and 14.9% in other currencies.

This weighting of revenue and costs means that if the US$: Euro or US$: Yen exchange rates move during the period, the revenue impact is greater than the cost impact, whilst if US$: Sterling rate moves during the period the cost impact exceeds the revenue impact. Consequently, actual US$ EBITDA can be impacted by significant movements in US$ to Euro, Yen and Sterling exchange rates.

The currency movement for the US dollar against Sterling, Euro and Yen was a strengthening of 6.4%, 12.2% and 7.5% respectively when looking at the average exchange rates in the year ended 30 April 2016 compared to those in the year ended 30 April 2015. In order to provide CCY comparatives, we have restated the pro-forma results of the Group for the 12 months ended 30 April 2015 at the same average exchange rates as those used in reported results for the year ended 30 April 2016. Consequently, revenues reduce from $1,320.7m to $1,270.7m, a reduction of 3.8%, and Underlying Adjusted EBITDA reduces from $503.0m to $486.8m, a reduction of 3.2%.

The United Kingdom's referendum vote in favour of leaving the European Union ("Brexit") on 23 June 2016 has created significant changes in the US dollar exchange rates with sterling, Euro and Yen. Compared with the average exchange rates experienced in FY16, as at 7 July 2016 Sterling has weakened from $1.50 to $1.29, the Euro has remained at $1.11 and the Yen has strengthened from $0.0085 to $0.0099. If these exchange rates were experienced for the remainder of FY17 ("FY17 Exchange Rates") then the CCY number for FY16 would be revenue of $1,247.1m and Underlying Adjusted EBITDA of $543.8m compared with reported revenue of $1,245.0m and reported Underlying Adjusted EBITDA of $532.5m. A 1% weakening in the exchange rate on these 7 July 2016 exchange rates would have the following impact on the FY16 CCY numbers:

Intercompany loan arrangements within the Group are typically denominated in the local currency of the overseas affiliate. Consequently, any movement in the respective local currency and US$ will have an impact on the converted US$ value of the loans. This foreign exchange movement is taken to the consolidated statement of comprehensive income. The Group's UK Corporation Tax liability is denominated in Sterling and any movement of the US$: Sterling rate will give rise to a foreign exchange gain or loss which is also taken to the consolidated statement of comprehensive income. The foreign exchange gain for the period is approximately $2.9m (2015: pro-forma CCY gain of $12.6m).

Adjusted EBITDA and Underlying Adjusted EBITDA

Adjusted EBITDA in the year increased by $47.5m to $546.8m (2015: pro-forma CCY $499.3m). The increase in Adjusted EBITDA is as a result of a reduction in adjusted operating costs which arose mostly from efficiencies from the restructuring exercise taken at the end of the last financial year, the rationalization of the property portfolio, capitalization of some of TAG's development costs following the introduction of a suitable time recording system and a tighter control over discretionary costs offset by a reduction in foreign exchange credit. Underlying Adjusted EBITDA in the year increased by $45.7m to $532.5m (2015: pro-forma CCY $486.8m) at a margin of 42.8% (2015: pro-forma CCY 38.3%). The increase in Underlying Adjusted EBITDA is smaller as it does not benefit from the net capitalization of development costs nor suffer from the reduction in foreign exchange credit.

1 unaudited

Both revenue and EBITDA in the current period have been reduced by the unwinding of the fair value deferred revenue haircut of $16.6m (2015: pro-forma CCY $17.0m, reported $17.0m) that was applied as part of the acquisition of TAG.

We are providing profitability metrics for our two product portfolios for the first time in this set of results. The portfolios have directly controlled costs and then an allocation of costs of the functions that are managed within the Micro Focus portfolio and provide services to both portfolios together with centrally managed support function costs. Note 8 provides the breakdown to Adjusted Operating Profit for the period and the table below summarises the reconciliation between Adjusted Operating Profit and Adjusted EBITDA and Underlying Adjusted EBITDA and is also in note 8:

1 unaudited

Operating profit

Operating profit was $294.9m (2015: pro-forma CCY $155.6m). Within the operating profit is $27.9m (2015: pro-forma CCY $188.8m) of exceptional costs. Adjusted operating profit was $533.5m (2015: pro-forma CCY $483.4m).

Net finance costs

Net finance costs were $97.3m (2015: pro-forma CCY $120.6m) including the amortization of $13.8m (2015: pro-forma CCY $9.2m) of prepaid facility arrangement, original issue discounts and facility fees incurred on the Group's loan facilities, loan interest and commitment fees of $83.5m (2015: pro-forma CCY $112.6m), interest on pension liability $0.5m (2015: pro-forma CCY $0.7m) and other interest costs of $0.5m (2015: pro-forma CCY $0.1m) offset by $1.0m (2015: pro-forma CCY $2.0m) of interest received. Net finance costs have decreased by $23.3m, mostly due to reduced loan interest and commitment fees ($29.1m) offset by an increase in the amortization of prepaid facility arrangement, original issue discounts and facility fees ($4.6m).

Profit before tax and adjusted profit before tax

Profit before tax was $195.4m (2015: pro-forma CCY $48.3m). The profit before tax has primarily increased in the year when compared to the 2015 pro-forma CCY as a result of improved Adjusted EBITDA ($47.5m), a reduction in pro-forma CCY exceptional costs of $160.9m offset by an increase in the amortization of purchased intangibles following the TAG acquisition of $58.5m, lower net finance costs of $23.3m, no repeat of other income of $14.9m received by TAG prior to the acquisition date and an increase in the share based compensation charge of $13.3m.

Adjusted profit before tax was $434.0m (2015: pro-forma CCY $386.2m) and the table below shows the reconciliation between profit before tax and adjusted profit before tax:

1 unaudited

Taxation

The tax charge for the period was $32.4m (2015: credit of $10.0m) with the Group's effective tax rate ("ETR") being 16.6% (2015: minus 11.0%). The ETR on adjusted profit before tax ("Adjusted ETR") was 23.1% (2015: 21.2%) as set out in the following table:

In computing adjusted profit before tax, $238.6m of adjustments have been made for the items shown in the adjusted profit before tax section above, of which the associated tax is $67.8m.

The Adjusted ETR for the year ended 30 April 2016 (23.1%) is higher than the previous year (2015: 21.2%). This is due to the fact that the Group's adjusted profit includes a full year of profit from TAG, which is taxed at higher rates, particularly in the US (where a proportion of earnings of non-US subsidiaries of TAG have also been taxed). This increase is partly offset by a full year's worth of benefit from the intra-group financing arrangement, which was put in place as part of the acquisition of TAG.

The Group continues to benefit from the UK's Patent Box regime. Benefits during the year are $7.6m compared to $6.0m in the previous year.

The Group's medium-term Adjusted ETR is expected to be between 23% and 27% of the Group's adjusted profit before tax. The increase compared to the forecast at 30 April 2015 of 21% to 25% is due to the impact of changes with regards to the deductibility of interest expense in the UK, which are expected to come into effect from April 2017, and wider uncertainty around the future impact of the OECD's Base Erosion and Profit Shifting ("BEPS") initiative. The acquisition of Serena is not expected to have a significant impact on the Group's medium-term ETR. The enacted reductions in the UK's corporation tax rate from 20% currently to 19% from 1 April 2017 and 18% from 1 April 2020 are not expected to give rise to a material reduction in the ETR.

The Group's cash taxes paid in the period were $79.3m (2015: net repayment of $1.8m) reflecting the following factors:

1. The Group paid $24.5m in respect of an Accelerated Payment notice issued by HMRC in relation to the historic tax issue disclosed in previous years, which impacts UK tax returns from 2009 until 2015. Further details are set out below.

2. The Group paid $27.2m in respect of forecast US Federal income tax liabilities for the current and previous year. Following a recalculation of the impact of temporary differences, including the offset of brought forward deferred tax assets, these liabilities are now expected to be significantly lower than previously anticipated. This accounts for the majority of the current tax receivables shown on the balance sheet of $18.0m.

3. In the previous year, TAG received $17.0m of cash in the post-acquisition period relating to the settlement of tax audits and historic overpayments of tax in the US.

4. As disclosed previously, the Group has benefited from a lower cash rate of tax in recent years as a result of an ongoing claim with HMRC in the UK, based on tax legislation, impacting its tax returns for the years ended 30 April 2009 through to 2015. The Group maintains a provision for the potential liability in its consolidated financial statements. A payment of $24.5m was made in accordance with an Accelerated Payment Notice issued by HMRC which covers the years up to 30 April 2014. The remaining provision at 30 April 2016 is $5.6m (including interest on overdue tax of $3.1m) compared to $31.2m at 30 April 2015.

5. The Group is one of a number of companies that have submitted similar claims. During the year, a test case chosen to establish the correct interpretation of the legislation was heard by the First-tier Tribunal, which ruled in favour of HMRC. The precise implications for the Group's claim are subject to further discussion with HMRC.

6. When the tax position is agreed with HMRC, then to the extent that the tax liability is lower than that provided in the consolidated statement of financial position, there would be a positive benefit to the tax charge in the consolidated statement of comprehensive income in the year of settlement and a refund of any amounts paid under the Accelerated Payment notice in excess of the agreed liability.

Profit after tax

Profit after tax increased by 60.6% to $163.0m (2015: $101.5m reported).

Goodwill

The largest item on the consolidated statement of financial position is goodwill at $2,436.2m (2015: $2,421.7m) arising from acquisitions made by the Group. In the year goodwill has increased due to the acquisition of Authasas BV ($8.9m) and hindsight adjustments from acquisition of TAG ($5.6m) (note 13).

Capital structure of the Group

As at the 30 April 2016 the market capitalization of the Group was £3,496.5m, equivalent to $5,104.9m at an exchange rate of $1.46 to £1. The pro-forma net debt of the Group following completion of the Serena acquisition was $1,625.0m resulting in an Enterprise Value of $6,729.8m. The board believes that this capital structure is appropriate for the Group's requirements.

The debt facilities of the Group were put in place at the time of the acquisition of TAG on 20 November 2014 and totaled $2,000.0m under a credit agreement comprising a $1,275.0m seven year Term Loan B, a $500.0m five year Term Loan C and a $225.0m Revolving Facility (together "the New Facilities"). As part of the Serena acquisition additional Revolving Facilities commitments of $150.0m in total were obtained on 2 May 2016 from Barclays, HSBC and The Royal Bank of Scotland.

During the current financial year mandatory repayments of $12.75m of the Term Loan B and $50.0m of the Term Loan C were made together with a draw-down of $245.0m and repayment of $95.0m of the Revolving Facility.

At 30 April 2016, $225.0m of the Revolving Facility was drawn, in anticipation of the completion of the Serena acquisition, together with $1,112.25m of Term Loan B and $450.0m of Term Loan C giving gross debt of $1,787.25m drawn. On 2 May 2016 the Revolving Facility was extended by $150.0m and this increased the total facilities available to the Group to $1,937.25m.

The only financial covenant attaching to these new facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end. At 30 April 2016 $225.0m of the Revolving Facility available at that time was drawn representing 100%, reducing to 60% on 2 May 2016 when the facility was extended. The covenant calculation indicates that the Group had in excess of 140% headroom against the covenant test.

The terms of Micro Focus existing Facilities are as follows:

(a) In relation to the senior secured term loan B of $1,275.0m: an interest rate of 4.25% above LIBOR (subject to a LIBOR floor of 1.00%), amortizing at 1.00% per annum, with an original issue discount of 1.00% and a 7 year term;

(b) In relation to the senior secured term loan C of $500.0m: an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), amortizing at 10.00% per annum, with an original issue discount of 1.50% and a 5 year term; and

(c) In relation to the senior secured revolving credit facility of $225.0m: an initial interest rate of 3.50% above LIBOR, and an original issue discount of 0.50%.

The Revolving Facility was increased to $375.0m on 2 May 2016 as part of the funding for the Serena acquisition (note 27).

Total equity

The total equity of the Group is $1,593.7m with a merger reserve of $988.1m.

Cash flow and net debt

The Group's cash generated from operations was $455.7m (2015: $288.7m). This represented a cash conversion ratio when compared to Adjusted EBITDA less exceptional items of 87.8% (2015: 110.6%). The decline in the ratio is mainly related to negative working capital impacts arising from having higher trade receivables at the year end and the settlements during the year of prior year restructuring provisions. Trade receivables are higher due to the change in the TAG year end in FY16 from March to April.

As at 30 April 2016 the net debt of the Group was $1,078.0m (2015: $1,403.5m) comprising gross debt of $1,787.25m (2015: $1,700.0m), cash balances of $667.2m (2015: $241.3m) and pre-paid loan arrangements fees of $42.0m (2015: $55.1m). An equity placement of 10.9m shares in March 2016 raised $222.7m (net of expenses). The most significant cash outflows during the period were the payment of the final dividend for last year of $70.0m, interim dividend of $35.1m, $10.0m in respect of the acquisition of Authasas BV, bank loan net repayments of $157.8m, corporate taxes of $79.3m, payment for tangible and intangible assets of $44.8m and interest and loan costs of $93.6m.

Dividend

On completion of the TAG acquisition the board adopted a progressive dividend policy whilst the net debt to Facility EBITDA was above 2.5 times. Absent a significant acquisition, share buy-back opportunity or unforeseen circumstances the net debt to Facility EBITDA multiple will be below 2.5 times at the end of April 2017 and so the board is proposing an increase in the dividend payout such that it is 2 times covered by the adjusted earnings of the Group. This policy will take effect from the proposed final dividend of 49.74 cents (2015: 33.00 cents per share), which represents a 50.7% increase on last year's final dividend and gives a total proposed dividend for the year of 66.68 cents per share (2015: 48.40 cents), an increase of 37.8%.

The dividend will be paid in Sterling equivalent to 37.40 pence per share, based on an exchange rate of £1 = $1.33 being the rate applicable on 13 July 2016, the date on which the board resolved to propose the dividend. The dividend will be paid on 7 October 2016 to shareholders on the register at 2 September 2016.

FY16 pro-forma figures for Serena

In their financial year ended 31 January 2016, Serena delivered unaudited revenues of $162.3m and Underlying Adjusted EBITDA of $80.9m. Applying the FY17 Exchange Rates to these numbers reduces revenue to $161.1m and increases Underlying Adjusted EBITDA to $81.0m. Adding these numbers to the FY16 CCY numbers at FY17 Exchange Rates for the Group revenues of $1,247.1m and Underlying Adjusted EBITDA of $543.8m would give pro-forma FY16 CCY numbers for the Enlarged Group at FY17 Exchange Rates of revenue of $1,408.2m and Underlying Adjusted EBITDA of $624.8m.

Group risk factors

As with all businesses, the Group is affected by certain risks, not wholly within our control, which could have a material impact on the Group's long-term performance and cause actual results to differ materially from forecast and historic results.

The principal risks and uncertainties facing the Group are set out in note 28.

Mike Phillips

Chief Financial Officer

13 July 2016

CEO Review - Micro Focus Product Portfolio

Introduction

The Micro Focus product portfolio represents 79.6% of total Group revenue in FY16 (2015: pro-forma CCY 83.1%).

From within the Micro Focus product portfolio we also manage, for the Group overall, the corporate support functions of HR, IT, Facilities, Finance, Legal and the Project Management Office ("PMO") for acquisitions and integration. In addition we manage the delivery of a shared service for other elements of infrastructure support to the SUSE portfolio. This enables the Group to operate effectively and SUSE to directly control what they need to execute with speed and flexibility whilst leveraging the larger Group where effective. Wherever practical the shared functions staffs are dedicated to product portfolios, including SUSE, in order to provide the additional benefit of specialization whilst leveraging the scale of the shared function.

Progress in FY16

During 2016 our focus has been on integrating the different businesses into a more coherent whole. This has involved significant volumes and complexity of work spanning structure, people, processes, systems and infrastructure across multiple operational entities.

Highlights include:

· Completion of the initial restructuring work to ensure stability and focus on delivery of our financial commitments;

· Delivery of significant levels of synergies;

· Simplification of the branding to Micro Focus and SUSE from Micro Focus, SUSE, Borland, Net IQ, Attachmate and Novell underpinned by two completely new web domains of microfocus.com and suse.com;

· Creation of dedicated GTM organizations for SUSE and Micro Focus focused on quarterly instead of annual performance;

· Rationalization of our property portfolio from 128 offices in November 2014 to 83 offices at 30 April 2016; and

· Creation of a comprehensive IT systems strategy for the Group.

Much of the above is ongoing, most notably in the area of systems where our stated goal of standardizing systems will take longer to deliver than originally anticipated. Progress has been made throughout the year in our systems programme, for example reducing from five customer relationship management ("CRM") systems to one. We now have a comprehensive plan built on detailed analysis work to define and map our processes and build target enterprise application and technical infrastructure environments. This will enable us to move to the execution phase from a much improved position in terms of clarity and stability but is still a very significant undertaking.

The above touches on the breadth of work underway and there remains a huge amount to do. However, progress is encouraging and the foundations required for ongoing delivery of our business model are beginning to emerge.

On 2 May 2016 we completed the acquisition of Serena. Serena is a leading provider of Application Lifecycle Management products. Its product offering will be integrated into the existing Micro Focus Development and IT Operations Management Tools ("Development & ITOM") portfolio, further enhancing both our expertise in mainframe computing and distributed software change management. We intend to continue developing the full portfolio of Serena's products, and we will aim to identify how additional customer value and capability can be realized for Serena customers, leveraging related Micro Focus software development and software quality solutions.

Revenue for the year by product portfolio at actual exchange rates and CCY pro-forma and reported comparatives are shown in the table below:

1 unaudited

As anticipated Licence revenue declined by 4.8% on a pro-forma CCY basis compared with the year to 30 April 2015. There was a strong Licence revenue performance in Identity, Access & Security offset by declines in all the other portfolios. Maintenance revenues declined by 6.1% on a pro-forma CCY basis. This was primarily in Development & ITOM Tools and Collaboration & Networking which is in line with prior year trends. The fair value deferred revenue haircut reduced maintenance by $10.2m (2015: $11.9m). Excluding this, underlying maintenance revenues fell by 6.2%.

Consultancy revenues declined by 15.2% on a pro-forma CCY basis as we implemented the established Micro Focus policy of focusing only on consulting business that supports our licence business.

As previously mentioned there were significant changes to the organization on the Micro Focus portfolio at the beginning of the year and these can be seen to impact the performance in the year. We changed the sales compensation plan of the former TAG organization away from bookings as the primary target towards revenue and introduced quarterly targets compared to the former TAG approach of annual targets.

CDMS revenues were $258.8m; a growth of 1.1% on a pro-forma CCY basis compared with the year to 30 April 2015. The reduction in Licence revenues was 1.1% ($1.2m) offset by a growth in Maintenance revenues of 2.3% ($3.3m) and Consulting revenue growth of 9.9% ($0.8m). Visual COBOL revenues continued to grow strongly.

Host Connectivity revenues declined by 3.0% in the year on a pro-forma CCY basis. Licence revenues declined by 5.0% ($4.7m). The split of Licence revenue between the first half and second half of last year in the pro-forma CCY numbers was 28.3% and 71.7% respectively whereas the performance this year was 53.9% in the first half and 46.1% in the second half and can mostly be explained by the change in compensation structure which lead to a more balanced half-on-half performance in the current year. This also reflects the generally shorter sales cycle in this portfolio. Maintenance revenues declined by 0.4% ($0.4m) and there was a decline in Consulting revenues of 27.5% ($1.1m).

Identity, Access & Security ("IAS") revenues declined by 0.5% ($1.0m). Licence revenue grew by 21.6% on CCY basis partly due to some significant changes in the approach to the product portfolio and the successful closure of some key transactions. There is also a longer sales cycle on these transactions. We acquired Authasas, a Dutch company, in the period for $10.0m. Authasas provides Multi Factor Authentication for the security market and TAG had previously embedded the Authasas offering in their products on an Original Equipment Manufacturer ("OEM") basis. Micro Focus has a preference for owning its Intellectual Property wherever possible and when we had the opportunity to acquire the Authasas technology we did so. We believe that IAS has the potential for further growth as the market it operates in continues to grow. We will continue to drive for consistent and sustainable growth in this area but expect that this will take time to be delivered. Maintenance declined by 3.3% ($4.8m) because of a few contract cancellations that were known about when TAG was acquired and Consulting revenues declined by 19.9% ($5.5m) due to proactive change in direction outlined previously.

Development & IT Operations Management Tools revenues were $157.4m; a 13.2% ($23.9m) decline on pro-forma CCY basis. $15.4m of the decline was in Maintenance revenues which declined by 11.3% is in line with management expectations. Licence revenues declined in the period by $7.9m partly due to lower sales of our App Manager products which had some large licence sales in the prior year.

Collaboration & Networking revenues were $160.1m; a 18.6% ($36.6m) decline on pro-forma CCY basis. Maintenance declined by 15.8% ($24.5m) in the period in line with management expectations and consistent with the prior period trend.

Regional revenue performance

1 unaudited

Progress in North America was encouraging with execution levels improving through the strengthening of leadership talent and associated improvements in execution and discipline. Host Connectivity delivered a strong performance throughout the year and a much more balanced performance in terms of H1 and H2 phasing. IAS was challenged overall but delivered significant new customer wins and much improved alignment and engagement with partner channels. Development & ITOM suffered from significant levels of attrition that took time to stabilize and begin to correct. Collaboration and Networking was down consistent with prior performance and trends. CDMS execution improved throughout the year to deliver an acceptable performance overall with Mainframe Solutions delivering exciting new customer wins and improving pipeline.

International region (EMEA and LATAM) had a challenging year. EMEA took a significant time to stabilize as the restructuring actions worked through local legislative and consultation requirements. This was compounded by attrition in the key market of Germany and some portfolios leading to increased levels of disruption overall. Despite this, IAS delivered a strong performance and there were notable wins in Development & ITOM and CDMS. LATAM was impacted by the economic situation in Brazil and in the rest of LATAM we moved to a distribution led model rather than direct sales resulting in an additional level of transition and disruption to be managed. Execution levels across International improved throughout the year.

Asia Pacific & Japan was mixed. Strength in Japan broadly across the board was offset by weakness in Asia. In Australia it was necessary to rebuild the business to ensure that the correct teams were in place to execute consistently the Micro Focus approach to and improve the overall capabilities locally. There were some excellent wins in Mainframe Solutions and IAS that demonstrate what can be delivered when skill and execution levels are maintained.

Adjusted operating profit and Underlying Adjusted EBITDA

The table below shows the Adjusted Operating Profit for the portfolio together with a comparison to the pro-forma CCY figures for FY15:

1 unaudited

The directly managed costs are those costs specifically managed by the CEOs of the Micro Focus Product Portfolio and SUSE Product Portfolio. All the Group central support costs are managed by the Micro Focus portfolio group and the allocation of these costs to SUSE is based on an appropriate methodology.

The adjusted operating profit was $453.7m, delivering a margin of 45.8% which compares with the margin in the pro-forma CCY numbers for FY15 of 40.2%. The increase in margin arises because of the cost savings actions that were taken at the end of FY15 when we integrated the original Micro Focus business with TAG. These savings were mostly in staff and property costs.

The table below shows the reconciliation between Adjusted Operating Profit and Underlying Adjusted EBITDA with a comparative of the Pro-forma CCY figures for FY15:

1 unaudited

The Underlying Adjusted EBITDA improved by $24.5m in the year on a pro-forma CCY basis primarily due to cost saving actions taken at the end of FY15.

Outlook

We have achieved a great deal over the last 12 months and enter the new financial year with stronger foundations than a year ago when the integration and change programme was just commencing. We continue to focus on improving the way in which we operate to maximise the efficiency of the organization.

The Group has undergone huge change in FY16 but the one constant has been clarity of strategy and the associated focus on aligning operational execution to the delivery of that strategy. Looking forward to FY17 this focus will continue with our key priorities being:

· Delivery of our financial plan;

· The work to standardise systems and simplify the underlying operations of the business;

· Accelerating progress on improving the effectiveness of our go to market teams; and

· Continuing to operationalize the FOUR-BOX MODEL (New Models, Growth Drivers, Optimize and Core) to better align resources to optimize the performance of each sub-portfolio.

Stephen Murdoch

Chief Executive Officer

Micro Focus

13 July 2016

CEO Review - SUSE Product Portfolio

Introduction

The SUSE product portfolio represented 20.4% of the total Group revenue in FY16 (2015: pro-forma CCY revenue 16.9%). Following the acquisition of TAG by Micro Focus the SUSE product portfolio was given a mandate to deliver "accelerated, sustainable and profitable revenue growth" and was provided with the support and initial investments to support this vision. FY16 was a successful year for SUSE with growth in revenue, ACV, TCV and Adjusted Operating Profit.

To create additional capacity to grow we expanded the SUSE headcount across different business functions and geographies and aligned the critical supporting organizations of customer care, renewals and sales operations much more tightly with the SUSE business. This will continue in FY17 as SUSE assumes the execution responsibility for sales and marketing in APAC and for the SUSE channel. In FY16 we broadened and deepened our Alliance, OEM, Business Partner and cloud service provider relationships and see ongoing strong contribution from these routes to market to our overall success.

We also extended SUSE's presence and contribution in key Open Source projects and relevant industry groups both in support of strengthening our contribution to Open Source innovation and development efforts as well as in support of our partner and enterprise customer relationships.

SUSE - Key Financial Metrics

SUSE provides technical support together with rights to updates, patches and security fixes for its Open Source solutions on a subscription basis with revenues being recognised rateably over the period of the contract. The key metrics are Revenue, TCV and ACV of the TCV. The ACV represents the value of the first 12 months of each contract reported as TCV.

RevenueThe table below provides a breakdown of the revenue for the year and a comparison to FY15 on a pro-forma CCY basis and as reported.

SUSE Product Portfolio

1 unaudited

The SUSE product portfolio revenue increased by 18.2% to $253.8m compared with the pro-forma CCY revenues for FY15 of $214.7m, with the Subscription revenue increasing by 18.2% to $248.9m (2015: pro-forma CCY $210.5m). The Subscription revenue is net of the fair value deferred revenue haircut of $6.4m (2015: $5.1m). Prior to this adjustment Subscription revenue grew by 18.4%.

Regional Revenue Performance

1 unaudited

North America and International have had successful years in terms of subscription revenue, growing at 24.3% and 17.5% respectively compared with the pro-forma CCY revenues for FY15.

Asia Pacific & Japan, whilst showing a small increase of 2.4% compared with the pro-forma CCY revenues for FY15, has a solid foundation to grow from in the coming years. SUSE, now with a dedicated GTM sales organization in this region, is already starting to show promise evidenced by strong TCV and ACV performance as referenced below.

TCV and ACV

TCV represents the gross billings for the year of $301.3m, an increase of 14.3% from the pro-forma CCY for FY15. The weighted average contract duration decreased from 33 months to 28 months. This has resulted in the 'in fiscal year yield' from TCV to revenue to increase from 32% in FY15 to 34% in FY16. 'In fiscal year yield' represents the proportion of TCV generated in the fiscal year that can be recognized as SFR in the same fiscal year. As the weighted average contract duration reduces, we would expect to get a higher 'in fiscal year yield'. Net new subscription TCV increased by 9.6% year-on-year and renewal subscriptions TCV grew by 22.7% year-on-year. Net new subscription contracts are derived from sale of subscriptions to new logo customers and existing customers expanding footprint of existing product portfolio or subscribing to new product solutions.

ACV measures the first 12 months duration equivalent of TCV. ACV grew to $174.8m, an increase of 17.9% from the pro-forma CCY for FY15. ACV removes the impact of multi-year TCV and is a cleaner KPI on the performance of the business. Where subscription term is less than 12 months, all of the subscription TCV billing is included in the ACV measure.

Regional TCV performance

1 unaudited

Regional ACV performance

1 unaudited

North America had very strong performance in TCV and ACV for the year, growing by 32.9% and 29.9% respectively.

International, whilst showing a 2.7% decline in TCV, has shown 6.4% growth in ACV and as referenced above has grown revenues by 19.4% compared with the pro-forma CCY FY15 revenues. International TCV and ACV performance was lower as a strong performance in the prior year gave a tough compare.

Asia Pacific & Japan had very strong performance in TCV and ACV, growing by 26.7% and 17.1% respectively. We continue to have strong performance in China and Japan, and are also winning new accounts in some of the other key markets in the region. The region is also starting to get good traction by leveraging the global agreements we have in place with key independent hardware vendors and cloud service providers.

ACV contribution by route to market

1 unaudited

Direct represents customers that have a master licence agreement with SUSE and subscribe directly with SUSE or via authorized fulfillment partners.

Indirect represents customers that subscribe via the SUSE Value Added Reseller network and predominantly through a two tier distribution model.

Global Service Partners represents primarily Independent Hardware Vendors who sell SUSE subscriptions alongside the sale of their respective hardware and subscriptions generated from cloud service providers.

OEM (Embedded Systems) represents entities that embed SUSE subscriptions within the sale of their respective specialized appliance offerings.

We continue to see significant growth in Direct, Indirect and Global Service Partners routes to market, growing by 13.4%, 31.2% and 17.7% respectively.

We also see a trend of customers, who purchased subscriptions direct, subsequently subscribing through Global Service Partners. This partially contributes to ACV from Global Service Partners growing more significantly relative to Direct and Indirect. We continue to see strength in the Value Added Reseller network, where we have seen significant growth in ACV during the fiscal year. OEM (Embedded Systems) transactions tend to be large, custom, specialized and binary in nature, and thus year on year fluctuations in ACV generated are to be expected.

The table below shows the percentage share of ACV by the different routes to market in FY16 compared to FY15.

1 unaudited

In aggregate the ACV mix by route to market remains stable in FY16 compared to FY15 as we saw homogenous contribution to SUSE's growth from the various routes to market.

SUSE Adjusted Operating Profit and Adjusted EBITDAThe table below shows the Adjusted Operating Profit for the SUSE product portfolio and compares it against the pro-forma CCY numbers for FY15:

1 unaudited

SUSE Adjusted Operating Profit for the year was $79.8m at a profit margin of 31.4%. Compared to the pro-forma CCY FY15, this is an increase of $21.1m (35.9%) and a profit margin improvement of 4.1%. We have seen a significant increase in directly managed costs in SUSE that is consistent with the investment being made to deliver the SUSE growth charter. We are also seeing the benefit of a reduced allocation of centrally managed costs which is being delivered from the efficiencies in the Micro Focus product portfolio.

The table below shows the reconciliation between Adjusted Operating Profit and Underlying Adjusted EBITDA for SUSE:

1 unaudited

Deferred revenue

We continue to have year on year steady growth in the deferred revenue balance. At 30 April 2016 SUSE's total deferred revenue balance was $326.8m (2015: $265.0m), an increase of $61.8m year-on-year. 60.8% of this increase in deferred revenue balance is recognizable revenue in the next 12 months and 88.7% recognizable in 24 months.

Headcount

At the end of April 2015, direct headcount in SUSE was 522 increasing to 641 by 30 April 2016 SUSE, a net increase of 119 in the fiscal year. The increased investment in direct headcount is primarily in Engineering, Product Management, Sales, Marketing, Product Marketing and Alliances to address the opportunity we see in the market for SUSE's existing offerings together with new opportunities in OpenStack IaaS, Software Defined Distributed Storage based on Ceph technology and with public cloud service providers.

In addition to the direct headcount, the SUSE portfolio received in FY16 support from SUSE dedicated employees, who are organizationally aligned in the shared service functions of the Group. Most prominently in APJ Sales, Renewal Sales, Consulting, Customer Care, Sales Operations and other corporate operations functions. These add up to approximately 224 full-time equivalents ("FTEs"), which brings the total SUSE dedicated headcount supporting the SUSE business and customers to approximately 865 FTEs at the end of April 2016.

Outlook "Sustainable, Profitable Revenue Growth"

For FY17 SUSE will focus on the successful execution of SUSE's mandate for sustainable, profitable revenue growth. The objective is to grow revenue ahead of growth rates for relevant markets.

Nils Brauckmann

Chief Executive Officer

SUSE

13 July 2016

Micro Focus International plc

Consolidated statement of comprehensive income (audited)

The accompanying notes form an integral part of this financial information.

Micro Focus International plc

Consolidated statement of financial position (audited)

Micro Focus International plc

Consolidated statement of financial position (audited)

The accompanying notes are an integral part of this financial information.

Micro Focus International plc

Consolidated statement of cash flow (audited)

The accompanying notes form an integral part of this financial information.

Micro Focus International plc

Consolidated statement of changes in equity (audited)