Half-year Report

14 December 2016

Micro Focus International plc

Interim results for the six months ended 31 October 2016

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L), the international software product group, announces unaudited interim results for the six months ended 31 October 2016.

Revenues in the period were $684.7m, 14.2% higher than the prior year's constant currency ("CCY") figures. Underlying Adjusted EBITDA of $320.3m was 20.9% higher than that delivered in the comparable period at CCY.

Pro-forma CCY* revenues increased 1.2% to $684.7m in the six months ended 31 October 2016, slightly ahead of the guidance range for the full year. Adjusted Diluted EPS in the period increased by 20.5% to 89.20 cents.

In March 2016 the Company announced it had entered into a definitive agreement to acquire the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. and its subsidiaries (together, "Serena" or "the Serena Group"). The acquisition completed on 2 May 2016 and consequently trading results of Serena are included in the results for the six months ended 31 October 2016 set out below.

In September 2016 the Company announced it had agreed with Hewlett Packard Enterprises ("HPE") to merge with the software business assets of HPE ("HPE Software") by way of merger with a wholly owned subsidiary of HPE. The transaction is expected to complete in the third quarter of the calendar year 2017. Exceptional pre-acquisition costs have been incurred in the period and further exceptional costs will be incurred for the remainder of the FY17 and to completion in FY18.

Key highlights

· Pro-forma CCY* revenue growth of 1.2%, driven by:

o Strong performance by the SUSE Product Portfolio where revenues grew by 23.3% on a pro-forma CCY* basis;

o On plan performance in Micro Focus portfolio with expected reduction in maintenance and Serena revenues.

· On a CCY basis:

o Total revenues of $684.7m (2015: CCY $599.6m), an increase of 14.2%.

o Adjusted EBITDA** of $332.5m (2015: CCY $271.7m), an increase of 22.4%.

o Underlying Adjusted EBITDA increased by 20.9% to $320.3m (2015: CCY $265.0m).

· Completion of the Serena acquisition took place on 2 May 2016 for an Enterprise Value of $540.0m on a cash and debt free basis, partially funded by a share placing in FY16 of 10.9m shares at a price of 1455 pence raising £158.2m ($225.7m) before expenses.

· On a pro-forma CCY* basis to provide a better comparison of like-for-like performance:

o Total revenues of $684.7m (2015: pro-forma CCY $676.8m), an increase of 1.2%.

o Adjusted EBITDA of $332.5m (2015: pro-forma CCY $308.3m), an increase of 7.8%.

o Underlying Adjusted EBITDA of $320.3m (2015: pro-forma CCY $301.5m), an increase of 6.2%.

· Continual focus on efficiencies led Underlying Adjusted EBITDA margins to improve further to 46.8% (2015: pro-forma CCY 44.5%)

· Exceptional costs incurred in the period of $41.0m (2015: $10.7m) relate to integration costs, acquisition costs, pre-acquisition costs, property costs, severance and legal costs. Second half exceptional costs are currently estimated to be up to $80.0m

· Improved cash generation in the period:

o Cash generated from operations was $201.9m (2015: $162.7m) representing 69.3% (2015: 62.6%) of Adjusted EBITDA less exceptional costs.

o Net debt+ at 31 October 2016 was $1,612.6m (30 April 2016: $1,078.0m) down from $1,625.0m following the completion of the Serena acquisition on 2 May 2016.

o Free cash flow**** in the period of $111.0m (2015: $40.3m)

o Net debt to Facility EBITDA** for the 12 month period to 31 October 2016 is a multiple of 2.6 times, decreasing to 2.4 times on a pro-forma basis including the acquisition of Serena; medium term target remains 2.5 times.

· Growth in adjusted diluted earnings per share of 20.5% to 89.20 cents (2015: 74.01 cents)***

· Proposed interim dividend increased by 75.5% to 29.73 cents per share (2015: 16.94 cents per share) in line with dividend policy of full year dividend being twice covered by adjusted earnings.

Statutory results

· Operating profit of $163.3m (2015: $150.4m)

· Profit before tax of $113.2m (2015: $98.8m)

· Basic earnings per share of 39.57 cents (2015: 40.17 cents) a decrease of 1.5%***

The table below shows the reported results for the Group at actual exchange rates for the six months ended 31 October 2016 together with CCY comparatives except where stated otherwise:

* Interim results presented for the six months to 31 October 2016 include the post-acquisition period results for Serena and GWAVA. Due to the significant size of the Serena acquisition the directors believe that the interim results are better understood by looking at the comparative results on a pro-forma basis for the combination of Serena and Base Micro Focus. The directors do not consider the GWAVA acquisition to be of a significant size ($0.8m revenue in the period and a loss to Adjusted EBITDA of $0.1m in the period) and therefore have not presented GWAVA results in the pro-forma comparatives.

Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena's revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus' experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the six months to 31 October 2015 the directors have combined the unaudited internal management information for Serena for the period from 1 February 2015 to 31 July 2015 and then added in the Base Micro Focus results for the six months ended 31 October 2015. The pro-forma comparatives for the year ended 30 April 2016 combine the unaudited financials for Serena for the year ended 31 January 2016 with the audited figures for Base Micro Focus for the year ended 30 April 2016. From the date of acquisition, 2 May 2016 to 31 October 2016, Serena contributed $72.6m to revenue and a contribution to Adjusted EBITDA of $40.0m, before any allocation of management costs.

** 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, purchase of intangible assets and purchase of property, plant and equipment.

+ Net debt is defined in note 18. The acquisition of Serena completed on 2 May 2016 for an Enterprise Value of $540m. Pro-forma for the completion of the acquisition net debt at 30 April 2016 would have been $1,625.0m. 

Kevin Loosemore, Executive Chairman of Micro Focus, commented:

"The board is delighted with our progress. Our focus on delivering to our customers by making detailed product by product decisions and investments has resulted in the business achieving modest like-for-like revenue growth. Our investments have resulted in strong growth in SUSE and a reduced rate of decline in the Micro Focus portfolio. Whilst we have had a good start to the year and completed two acquisitions, we are maintaining our revenue guidance for FY17 being in the range minus 2% to zero% on FY16 on a CCY basis, pro-forma for the acquisition of Serena.

"Mergers and acquisitions continue to be a key component of our strategy. The key strategic announcement in the period was the HPE Software transaction which is on target to complete in the third quarter of calendar year 2017. This is a complex transaction that will transform the Group in a similar way to the Attachmate transaction back in 2014 and provides the opportunity for enhanced shareholder returns over the medium-term.

"The acquisition of Serena completed at the beginning of the period together with a number of small acquisitions across the business comprising GWAVA Inc., openATTIC on 1 November and the OpenStack IaaS and Cloud Foundry Paas talent and technology assets from HPE which was announced on 30 November and is currently expected to close in the first quarter of calendar year 2017.

"We are delighted to announce that our interim dividend is increasing to 29.73 cents from 16.94 cents in line with our twice covered dividend policy."

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 interim report 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

Financial performance

The period under review has been one of considerable economic and political uncertainty. Against this backdrop, Micro Focus' strategy has remained constant. Together with our ongoing merger and acquisition activity, the board is delighted with the financial performance of the business with growth in revenue and growth in Underlying Adjusted EBITDA. We would like to thank our employees for their continued dedication, commitment and hard work in delivering the first half results.

At the beginning of FY2017 our revenue guidance was for constant currency revenues of minus 2% to zero% on a pro-forma basis. Following completion of the acquisition of Serena, the Group had pro-forma reported revenues for the year to 30 April 2016 of $1,407.4m and Underlying Adjusted EBITDA of $613.4m. Adjusting for the exchange rates experienced in the six months to 31 October 2016, these pro-forma numbers become $1,401.6m and $615.4m on a CCY basis.

Micro Focus Group delivered revenues and Underlying Adjusted EBITDA in the six months to 31 October 2016 of $684.7m and $320.3m respectively, an increase in pro-forma CCY revenues of 1.2%. Our net debt at 31 October 2016 was $1,612.6m which is a small reduction from the $1,625.0m at 30 April 2016 on a pro-forma basis for the acquisition of Serena. Net debt to pro-forma Facility EBITDA for the 12 months period to 31 October 2016 is 2.4 times which is slightly below our medium term target of 2.5 times. Further details on the operational performance of our portfolios, Micro Focus and SUSE, are contained in the CEO reports from Stephen Murdoch and Nils Brauckmann.

Corporate developments: proposed merger with HPE Software

Micro Focus has a firm belief 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.

On 7 September 2016 we announced that we had entered into a definitive agreement with Hewlett Packard Enterprise ("HPE") on the terms of a transaction (the "Transaction") in which we agreed to acquire HPE's software business segment ("HPE Software") by way of a merger (the "Merger") with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software for the purposes of the Transaction. At the time of announcement the Transaction valued HPE Software at $8.8bn consisting of $6.3bn of Micro Focus equity and a $2.5bn dividend to HPE funded by debt.

The Transaction presented a rare opportunity to increase significantly Micro Focus' scale and breadth through the combination with a business operating in adjacent and complementary product areas with similar characteristics and benefitting from a high proportion of recurring revenues and strong cash conversion. On a pro-forma basis in the 12 months to 30 April 2016, HPE Software and Micro Focus would have combined annual revenues of US$4.5bn and EBITDA of US$1.35bn, creating one of the world's largest pure-play infrastructure software companies.

The Transaction is complex and is expected to complete in the third quarter of calendar year 2017. HPE is in the process of carving out HPE Software from its existing business. Micro Focus will be seeking approval for the Transaction and a Return of Value of circa $400m to Micro Focus shareholders in a Circular to shareholders is expected to be issued in May 2017. The Circular will include historic financial information on HPE Software for the three years ended 31 October 2016 under IFRS. Following shareholder approval of the Transaction the Return of Value will be made to Micro Focus shareholders immediately prior to completion of the Transaction.

The Transaction provides considerable scope to improve product innovation and customer responsiveness through the application of Micro Focus' disciplined operating model. This can be achieved whilst simultaneously improving profitability. HPE Software's Underlying Adjusted EBITDA margin of c.21% compares with Micro Focus equivalent margin for its mature software assets of c.46% (excluding SUSE) in the year ended 30 April 2016. Micro Focus believes it will be possible to improve the margin delivered by HPE Software's mature software assets (c.80% of revenue) to Micro Focus' level by the end of the third full financial year following completion (i.e. year ending 30 April 2021).

The board expects the Merger to enhance adjusted earnings per share by the first full financial year ending after completion, with scope for further benefits as operational improvements are realized across the Enlarged Group.

To fund the Transaction, the Company has entered into commitments with JP Morgan Chase ("JPMC"), HSBC, Barclays and The Royal Bank of Scotland (together "the Banks") to provide $5bn of term loans and with the Banks and Bank of America Merrill Lynch to provide a $0.5bn revolving facility. These facilities will be marketed to lenders in the New Year.

In preparation for the Merger and integration of the business, Micro Focus has established an Integration Management Office ("IMO") which interfaces to the Divestiture Management Office ("DMO") of HPE. The DMO is responsible for carving out the HPE Software business into a stand-alone business with which Micro Focus will merge. The DMO is managing multiple work-streams related to all facets of the business. Our IMO co-ordinates the interactions to ensure that appropriate representation is provided on each work-stream. The IMO is led by our Business Operations and Integration Director supported by internal staff and external consultants led by the same Deloitte team that worked on the Attachmate transaction and integration. The IMO will continue in operation beyond completion and throughout FY2018. HPE Software is also implementing a new business software stack as part of the carve-out. It is our intention that Micro Focus will move onto the new systems after completion. Consequently, integration costs will be incurred and treated as exceptional throughout this integration period.

On 7 September we also announced that SUSE was to become HPE's preferred Linux partner and explore additional collaboration, leveraging SUSE's OpenStack expertise for joint innovation around HPE's Helion, Openstack Infrastructure as a Service (IaaS) and Stackato Platform as a Service (PaaS) solutions. HPE and SUSE have now reached a commercial arrangement over the transfer of assets and staff related to OpenStack IaaS and Cloud Foundry PaaS that, subject to regulatory clearance, is expected to complete in the first quarter of calendar year 2017.

Delivering value to customers

In the period it has been particularly pleasing to note the number of customer successes from product innovations that have been made following the acquisition of the Attachmate Group ("TAG") in November 2014. In a number of cases technologies from one portfolio have been used to enhance products in the other, particularly where there were product overlaps. Customers were also protected as product life expectancies have increased with Micro Focus ownership. We anticipate that similar benefits will accrue with the HPE transaction.

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 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. At Completion of the HPE Software Transaction it is anticipated that Net Debt to Facility EBITDA will increase to approximately 3.3 times on a pro-forma basis and that the target of 2.5 times will be achieved two years after Completion.

In July the board announced that in future the dividend payout would be twice covered by adjusted earnings of the Group. This policy took effect for the final dividend for FY16. Applying this policy to the interim dividend results in an increase in interim dividend of 75.5% to 29.73 cents (2015: 16.94 cents)

The dividend will be paid in Sterling equivalent to 23.60 pence per share, based on an exchange rate of £1 = $1.26, the rate applicable on 13 December 2016, the date on which the board resolved to pay the interim dividend. The dividend will be paid on 27 January 2017 to shareholders on the register at 6 January 2017.

Outlook

In accordance with our four phase plan established at the time of the acquisition of TAG in 2014 our intention was to stabilize revenues around a solid core in FY17 from which we aim to grow in FY18. We have had a good start to the year and are maintaining our revenue guidance for FY17 being in the range minus 2% to zero% on FY16 on a CCY basis, pro-forma for the acquisition of Serena.

Having delivered eleven and a half years of approximately 28.9% 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

14 December 2016

Financial Review

Interim results presented for the six months to 31 October 2016 include the post-acquisition period results for Serena and GWAVA. Due to the significant size of the Serena acquisition the directors believe that the interim results are better understood by looking at the comparative results on a pro-forma basis for the combination of Serena and Base Micro Focus. The directors do not consider the GWAVA acquisition to be of a significant size ($0.8m revenue in the period and a loss to Adjusted EBITDA of $0.1m in the period) and therefore have not presented GWAVA results in the pro-forma comparatives.

Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena's revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus' experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the six months to 31 October 2015 the directors have combined the unaudited internal management information for Serena for the period from 1 February 2015 to 31 July 2015 and then added in the Base Micro Focus results for the six months ended 31 October 2015. The pro-forma comparatives for the year ended 30 April 2016 combine the unaudited financials for Serena for the year ended 31 January 2016 with the audited figures for Base Micro Focus for the year ended 30 April 2016. From the date of acquisition, 2 May 2016 to 31 October 2016, Serena contributed $72.6m to revenue and a contribution to Adjusted EBITDA of $40.0m, before any allocation of management costs.

A reconciliation between the GAAP and Non-GAAP performance measures is given on page 8 (Revenue), page 10 (Adjusted Operating Profit, Adjusted EBITDA and Underlying Adjusted EBITDA) and note 8. The Group operates two product portfolios (i) Micro Focus and (ii) SUSE. These are the reporting segments and the cash generating units for the Group.

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 development group that makes and maintains the software, whilst the software is sold and supported through a geographic Go-to-Market ("GTM") organization. Products are organised into five sub-portfolios based on industrial logic. During the period Serena's product set was added to the Development & IT Operations Management Tools sub-portfolio and towards the end of the period GWAVA was added to Collaboration & Networking.

SUSE's characteristics are different due to the Open Source nature and the growth profile of its offerings. After the period end SUSE made its first acquisition of openATTIC, a storage management software solution, and entered into an agreement to take over assets and staff from HPE related to OpenStack IaaS and Cloud Foundry PaaS technology.

Our revenue guidance at the beginning of the year was for Group revenues for the full year to decline by between minus 2% and zero% 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 Portfolio based on the revenue trends in the sub-portfolios. The performance in the period was revenue growth of 1.2% when compared to pro-forma CCY revenues, which was slightly ahead of our revenue guidance for the full year.

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. Set out in the table below are the profitability metrics for our two product portfolios including the breakdown of Adjusted Operating Profit for the period and the reconciliation between Adjusted Operating Profit, Adjusted EBITDA and Underlying Adjusted EBITDA (note 8):

The table below shows the revenue breakdown by type within the two product portfolios for the six months to 31 October 2016, the pro-forma CCY and reported revenue for the six months to 31 October 2015 and the year ended 30 April 2016.

GWAVA Inc. was acquired on 30 September 2016 and contributed $0.8m to revenue in the period and is not included in the pro-forma CCY comparatives. Excluding GWAVA revenues grew by 1.0% compared to pro-forma CCY revenues.

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. We believe that until renewal information is provided following the trends on the maintenance revenue for the Micro Focus sub-portfolios and subscription revenues for SUSE provides the best guidance on performance.

The table below shows regional revenue for the six months to 31 October 2016, the pro-forma CCY and reported regional revenue for the six months to 31 October 2015 and the year ended 30 April 2016:

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

 Reconciliation of pro-forma CCY revenues to reported revenues for the six months to 31 October 2015 and the year ended 30 April 2016

Operating costs

The operating costs (including exceptional costs of $41.0m) for the six months ended 31 October 2016 compared with the pro-forma CCY and as reported six months to 31 October 2015 and the year ended 30 April 2016 are shown below:

On a pro-forma CCY basis, cost of goods sold for the period decreased by $2.8m to $74.3m (2015: pro-forma CCY $77.1m) of which the exceptional costs were $1.3m (2015: pro-forma CCY $0.9m). The reduction is partly as a result of lower consulting revenues and continuing cost efficiencies.

Selling and distribution costs, excluding the amortization of purchased trade names and customer relationship intangible assets of $69.4m (2015: pro-forma CCY $53.3m), were $149.1m (2015: pro-forma CCY $157.3m). Within these costs were exceptional costs of $2.0m (2015: pro-forma CCY $3.9m), thus the underlying costs were $147.1m (2015: pro-forma CCY $153.4m), a decrease of 4.1% on the prior period on a pro-forma CCY basis. The reduction was mostly due to cost saving actions taken at the end of FY16.

Research and development expenses, excluding the amortization of purchased technology intangible assets of $37.0m (2015: pro-forma CCY $37.6m), were $98.5m (2015: pro-forma CCY $93.2m), and after excluding exceptional costs of $2.2m (2015: pro-forma CCY $0.7m), the resulting costs were $96.3m (2015: pro-forma CCY $92.6m) an increase of 4.0% on the prior period on a pro-forma CCY basis. This figure is equivalent to approximately 14.1% of revenue (2015: pro-forma CCY 13.7%).

The impact of net capitalization of internal development costs was $2.9m (2015: pro-forma CCY $6.4m). Research and development costs prior to amortization of purchased intangibles, exceptional items and the capitalization and amortization of internal development costs were $99.3m (2015: pro-forma CCY $99.0m) an increase of 0.3%.

At 31 October 2016 the net book value of capitalized development costs on the consolidated statement of financial position was $46.5m (2015: $37.7m).

Administrative expenses were $93.1m (2015: pro-forma CCY $71.4m). Excluding share based compensation of $15.5m (2015: pro-forma CCY $12.8m), exceptional costs of $35.6m (2015: pro-forma CCY $4.5m) and an exchange gain of $9.3m (2015: pro-forma CCY gain of $0.4m), administrative expenses decreased by 6.1% to $51.2m (2015: pro-forma CCY $54.5m). The decrease has arisen mostly from continuing efficiencies. Share based compensation was $15.5m (2015: pro-forma CCY $12.8m), being ASG cost of $8.1m, LTIP cost of $6.9m and Sharesave Scheme costs of $0.5m.

Amortization of purchased intangibles included in the above cost categories for the six months totalled $106.4m (2015: pro-forma CCY $91.9m).

Adjusted Operating Costs (excluding amortization of purchased intangibles, exceptional costs and share-based compensation) were $358.5m (2015: pro-forma CCY $375.3m) a fall of $16.8m. The reduction in Adjusted Operating Costs has resulted from integration efficiencies achieved through the acquisition of Serena including the benefits of restructuring, rationalizing mainframe infrastructure, and closing the head office property in San Mateo. Savings have also been achieved from restructuring initiatives taken at the end of the last financial year in the Micro Focus Product Portfolio and ongoing focus on tightly controlling discretionary costs. Cost savings have been partially offset by ongoing investments in the SUSE Product Portfolio to support growth and a reduction in the net capitalisation of development costs as the adoption of the Micro Focus policy into TAG begins to normalise. Adjusted Operating Costs and Adjusted EBITDA benefited from an increase in the foreign exchange gain in the period.

As a result of the HPE Software Merger we have put our systems project ("TITAN") on hold as the plan is to migrate to HPE Software's new system stack following completion. This will mean that some of the further efficiencies planned with the integration of TAG and Serena have been delayed.

The exceptional costs in the period were $41.0m (2015: $10.7m) including:

The HPE Software Transaction is anticipated to complete in the third quarter of calendar year 2017. In the period up to close it is anticipated that there will be further exceptional costs incurred related to pre-acquisition costs, integration costs, property and severance costs in relation to the HPE Software Transaction and the other acquisitions made during the current year. It is currently estimated that up to $80m of exceptional costs will be incurred before 30 April 2017 and a further $60m in the period up to the completion of the HPE Software Transaction. Post completion exceptional costs have not yet been quantified.

Currency impact

During the six months to 31 October 2016, 62.9% of our revenues were contracted in US dollars, 20.8% in Euros, 4.7% in Sterling, 3.5% in Yen and 8.1% in other currencies. In comparison, 50.4% of our costs are US dollar denominated, 13.0% in Sterling, 19.2% in Euros, 1.8% in Yen and 15.6% 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 13.3% and a weakening of 0.1% and 17.0% respectively when looking at the average exchange rates in the six months to 31 October 2016 compared to those in the six months to 31 October 2015.

In order to provide CCY comparatives, we have restated the pro-forma results of the Group for the six months ended 31 October 2015 at the same average exchange rates as those used in reported results for the six months ended 31 October 2016. Consequently, pro-forma CCY revenues reduce from $682.3m to $676.8m, a reduction of 0.8%, and pro-forma CCY Underlying Adjusted EBITDA increases from $300.5m to $301.5m, an increase of 0.3%.

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 $9.3m (2015: pro-forma CCY gain of $0.4m).

Adjusted EBITDA and Underlying Adjusted EBITDA

Adjusted EBITDA in the period increased by $24.2m to $332.5m (2015: pro-forma CCY $308.3m). The increase in Adjusted EBITDA is as a result of the increase in pro-forma CCY revenue of 1.2% in the period and a reduction in adjusted operating costs of 4.5%, including an increase in the foreign exchange credit in the period.

Underlying Adjusted EBITDA in the year increased by $18.8m to $320.3m (2015: pro-forma CCY $301.5m) at a margin of 46.8% (2015: pro-forma CCY 44.5%). The increase in Underlying Adjusted EBITDA is smaller as it does not benefit from the increase in the foreign exchange credit or suffer from the reduction in net capitalization of development costs.

Both revenue and EBITDA in the current period have been reduced by the fair value deferred revenue haircut of $6.4m that was applied as part of the acquisition of TAG ($3.8m), Serena ($2.5m) and GWAVA ($0.1m). The impact of this was $0.9m less than in the comparative period (2015: pro-forma CCY $7.3m).

Reconciliation of pro-forma CCY Adjusted EBITDA and Underlying Adjusted EBITDA to reported Adjusted EBITDA and Underlying Adjusted EBITDA for the six months to 31 October 2015 and the year ended 30 April 2016

Operating profit

Operating profit was $163.3m (2015: $150.4m). Within the operating profit is $41.0m (2015: $10.7m) of exceptional costs. Adjusted operating profit (excluding amortization of purchased intangibles, exceptional costs and share-based compensation) was $326.2m (2015: $263.9m).

Net finance costs

Net finance costs were $49.0m (2015: $50.4m) including the amortization of $7.3m (2015: $8.1m) of prepaid facility arrangement, original issue discounts and facility fees incurred on the Group's loan facilities, loan interest and commitment fees of $41.9m (2015: $42.1m), interest on pension liability $0.3m (2015: $0.2m) and other interest costs of $nil (2015: $0.4m) offset by $0.5m (2015: $0.4m) of interest received. Net finance costs have decreased by $1.4m, mostly due to reduced loan interest and commitment fees ($0.2m), a decrease in the amortization of prepaid facility arrangements, original issue discounts and facility fees ($0.8m) and a decrease in other interest costs of $0.4m.

Profit before tax and adjusted profit before tax

Profit before tax was $113.2m (2015: reported $98.8m). Adjusted profit before tax was $276.2m (2015: reported $212.3m):

The tax charge for the period was $22.6m (2015: $11.3m) with the Group's effective tax rate ("ETR") being 20.0% (2015: 11.4%). The tax charge on adjusted profit before tax for the period was $64.1m (2015: $44.6m), which represents an ETR on adjusted profit before tax of 23.2% (2015: 21.0%) as set out below:

In computing adjusted profit before tax, $163.0m of adjustments have been made for the items shown in the adjusted profit before tax section above, of which the associated tax is $41.5m.

The Group's ETR for the six months ended 31 October 2016 (20.0%) is higher than the previous year (11.4%) mainly due to the high proportion of disallowable exceptional costs in the current year relating to the HPE Software Transaction.

The Adjusted ETR for the six months ended 31 October 2016 (23.2%) is higher than the previous year (2015: 21.0%). This is due to intra-group transfer pricing changes to manage risk arising from the OECD's Base Erosion and Profit Shifting ("BEPS") initiative.

The Group continues to benefit from the UK's Patent Box regime. Benefits during the six months to 31 October 2016 were $4.3m (2015: $3.8m).The Group realized benefits in relation to intra-Group financing in the six months to 31 October 2016 of $8.4m (2015: $7.2m).

Ignoring the impact of the Merger with HPE Software the Group's medium-term Adjusted ETR is expected to be between 23% and 27% of the Group's adjusted profit before tax, in line with guidance issued at year end. The enacted reduction in the UK's corporation tax rate from 18% to 17% from 1 April 2020 is not expected to give rise to a material reduction in the Adjusted ETR.

The Group's cash taxes paid in the period were $18.2m, compared to $47.7m in the six months to 31 October 2015. The prior year figure included $27.2m in respect of US Federal income tax liabilities for the year ended 30 April 2016 and previous years. Following a recalculation of the respective liabilities, a substantial part of that payment was subsequently carried forward at 30 April 2016 as a debtor, reducing payments required in the current year.

There have been no significant developments in relation to the UK tax claim impacting the Group's tax returns for the years ended 30 April 2009 through to 2015, which is under review by HMRC. The Group maintains a provision for the full potential liability of $4.7m at 31 October 2016. The provision has reduced by $0.9m since 30 April 2016 due to foreign exchange movements.

Profit after tax

Profit after tax increased by 3.5% to $90.6m (2015: reported $87.5m).

Goodwill

The largest item on the consolidated statement of financial position is goodwill at $2,827.8m (2015: $2,436.2m) arising from acquisitions made by the Group. In the period goodwill has increased due to the acquisition of Serena ($378.6m) and GWAVA ($13.1m) (note 13).

Capital structure of the Group

As at 31 October 2016 the market capitalization of the Group was £4,896.6m, equivalent to $5,973.9m at an exchange rate of $1.22 to £1. Net debt was $1,612.6m resulting in an Enterprise Value of $7,586.4m.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 Facility commitments of $150.0m in total were obtained on 2 May 2016 from Barclays, HSBC and The Royal Bank of Scotland.

During the six months to 31 October 2016, mandatory repayments of $6.4m of the Term Loan B and $25.0m of the Term Loan C were made together with a draw-down of $115.0m and repayment of $95.0m of the Revolving Facility.

At 31 October 2016, $245.0m of the Revolving Facility was drawn, together with $1,105.9m of Term Loan B and $425.0m of Term Loan C giving gross debt of $1,775.9m drawn.

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 31 October 2016 65.3% of the Revolving Facility was drawn. The covenant calculation indicates that the Group had in excess of 70% headroom against the covenant test.

The terms of Micro Focus' existing debt facilities are as follows:

(a) In relation to the senior secured term loan B of $1,275.0m: an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), amortizing at 1.00% per annum, with an original issue discount of 1.00% and a seven 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 five year term; and

(c) In relation to the senior secured revolving credit facility of $375.0m: an initial interest rate of 3.50% above LIBOR, and an original issue discount of 0.50%.

On 1 August 2016 the Company allocated a re-pricing of its senior secured term loan B which reduced its ongoing interest payments. The interest rate was reduced from 4.25% to 3.75% and the LIBOR floor was reduced from 1.00% to 0.75%, amortizing at 1.00% per annum, up from 0.75%. All other terms of the Group's Credit Facilities remain the same.

As announced on 7 September 2016, the Company has entered into Commitments for $5.5bn of new facilities to finance the Merger with HPE Software. These commitments have now been syndicated to the Banks in respect of the $5bn of term loans and to the Banks and Bank of America Merrill Lynch in respect of the revolving facility of $0.5bn. At the appropriate time when information is available and market conditions are suitable the commitments will be placed with lenders. These new term loan facilities will be drawn down at or around completion to fund the proposed return of value of circa $0.4bn, the dividend to HPE of $2.5bn, refinance the existing facilities and for general corporate purposes. The costs associated with raising these new facilities, including underwriting fees, original issue discount, ticking fees and professional costs will be capitalized and written off over the term of the facilities. The costs are currently estimated at between 4.5% and 6% of funds raised.

Total equity

The total equity of the Group is $1,581.8m with a merger reserve of $988.1m.

Cash flow and net debt

The Group's cash generated from operations was $201.9m (2015: $162.7m). This represented a cash conversion ratio when compared to Adjusted EBITDA less exceptional items of 69.3% (2015: 62.6%). The first half of our financial year typically has a lower cash conversion than our second half ratio as a result of the timing of the maintenance and subscription renewals which are weighted to the second half of the year.

As at 31 October 2016 the net debt of the Group was $1,612.6m (2015: $1,454.3m) comprising gross debt of $1,775.9m (2015: $1,593.6m), cash balances of $123.0m (2015: $91.6m) and pre-paid loan arrangement fees of $40.3m (2015: $47.8m). This compares with the pro-forma net debt following completion of the Serena acquisition of $1,625.0m as at 30 April 2016.

The most significant cash outflows during the period were the payment of the 2016 final dividend of $111.0m, $277.6m in respect of the acquisition of Serena, $16.2m in respect of the acquisition of GWAVA, bank loan repayments of $126.4m, corporate taxes of $18.2m, payment for tangible and intangible assets of $24.0m and interest and loan costs of $54.2m.

Dividend

In the preliminary announcement for FY16 the board reverted to a dividend policy that is 2 times covered by the adjusted earnings of the Group which applied from the final dividend for FY16. Typically the interim dividend will be approximately half of the final dividend for the year.

The proposed interim dividend is 29.73 cents (2015: 16.94 cents per share), which represents a 75.5% increase on last year's interim dividend.

The dividend will be paid in Sterling equivalent to 23.60 pence per share, based on an exchange rate of £1 = $1.26 being the rate applicable on 13 December 2016, the date on which the board resolved to pay the dividend. The dividend will be paid on 27 January 2017 to shareholders on the register at 6 January 2017.

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, including the impact of Brexit, have not changed from those set out in the Annual Report and Accounts 2016. The principal risks and uncertainties were:

· Products;

· Go to Market models;

· Competition;

· Employees;

· Change management;

· IT systems and information;

· Legal and regulatory compliance;

· Intellectual property;

· Treasury;

· Tax.

As well as the foregoing, the primary risk and uncertainty to the Group's performance for the remainder of the year is the challenging macro-economic environment, which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause results to differ materially from expected and historic results.

Mike Phillips

Chief Financial Officer

14 December 2016

CEO Review - Micro Focus Product Portfolio

Introduction

The Micro Focus Product Portfolio represents 78.5% of total Group revenue in the six months to October 2016 (2015: pro-forma CCY 82.3%).

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 both the Project Management Office ("PMO") for acquisitions and the Integration Management Office ("IMO") focused on the HPE transaction. 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 appropriate.

The focus of the Micro Focus Portfolio is to deliver innovation that matters to customers. This means helping them solve real problems today within the context of the opportunities and challenges they face in their business and the realities of their existing IT environment. In essence enabling them to deliver more value from prior investments in existing infrastructure whilst also exploiting the opportunities presented by cloud, mobile and emerging opportunities such as DevOps and the Internet of Things ("I.O.T".). We describe this as "bridging the old and the new".

There were significant product innovations across the portfolio to underpin this strategy that are best illustrated through customer use cases. For example, a major public sector organization in EMEA chose to standardize on our Collaboration and Networking products to replace a competitive solution, a decision driven by significant total cost of ownership benefits and clarity of product roadmap. In the USA, we saw a new customer win of a major federal institution that implemented our industry leading security capabilities in Host Connectivity ensuring compliance with critical legislative changes without the unnecessary costs and risk of rewriting applications. In Australia a major financial institution standardized on our IAS solutions to underpin their infrastructure as they grow through acquisition and another leveraged our Mainframe Solutions capabilities, hosted in the cloud to deliver their DevOps vision.

In addition to our focus on delivering product innovation organically we also completed two acquisitions in the portfolio during the period.

On 2 May 2016 we completed the acquisition of Serena. Serena is a leading provider of Application Lifecycle Management products. Serena's product offerings have been 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. Consistent with our strategy of adding value through targeted, customer driven innovation we have continued 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.

On 30 September 2016 we completed the acquisition of GWAVA Inc. ("GWAVA"), a leading company in email security and enterprise information archiving (EIA) based in the US, Canada and Germany. GWAVA has a full suite of products, including their award winning EIA product Retain, that enable customers to protect, optimize, secure and ensure compliance for email, mobile and social data across multiple platforms including Micro Focus GroupWise, Microsoft Office and Google.

During the period, the Micro Focus Product Portfolio delivered performance in line with management expectations.

Progress in North America was encouraging with overall execution levels and more importantly consistency of execution continuing to improve. International regions (EMEA and LATAM) saw strength in the U.K and France being offset by weakness in Brazil and a mixed performance across the rest of Europe. Asia Pacific & Japan delivered a good performance with notable strength in Australia and stability in Japan.

Operationally, there was notable strength in COBOL Development & Mainframe Solutions ("CDMS") offset by expected declines in Collaboration & Networking ("C&N"), Development & ITOM and Host Connectivity ("HC"). Revenues declined marginally in Identity, Access & Security ("IAS") but significant progress was made in the product portfolio to deliver much stronger foundations for sustainable growth over the longer term in this highly competitive and growing market.

This in period performance was very different by product and geography from the prior year highlighting the nature of portfolio movements in more mature markets and the strength of our portfolio approach.

Regional revenue performance

Revenue performance by product portfolio

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

Licence revenue in the period was marginally up on a pro-forma CCY basis compared with the six months to 31 October 2015. There was a strong Licence revenue performance in CDMS offset by declines in all the other portfolios. Maintenance revenues declined by 4.8% 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 $4.5m (2015: $7.3m). Excluding this, underlying Maintenance revenues fell by 5.4%.

Consultancy revenues declined by 6.8% on a pro-forma CCY basis representing approximately 4.9% of total revenues compared with 5.0% in the prior period.

COBOL Development & Mainframe Solutions revenues were $133.2m; a growth of 14.1% on a pro-forma CCY basis compared with the six months to 31 October 2015. The growth in Licence revenues was 30.3% ($12.2m), growth in Maintenance revenues was 4.0% ($2.9m) and Consulting revenue growth was 34.1% ($1.4m). Visual COBOL revenues continued to grow strongly.

Host Connectivity revenues declined by 10.6% in the year on a pro-forma CCY basis to $92.4m. Licence revenues declined by 19.1% ($9.2m). Maintenance revenues declined by 2.8% ($1.5m) and there was a decline in Consulting revenues of 25% ($0.3m).

Identity, Access & Security revenues declined by 1.1% ($1.1m) on a pro-forma CCY basis to $100.3m. We believe that the IAS portfolio has the potential for growth within the context of a growing market but delivering this consistently will take time as we re-position the portfolio. Licence revenue declined by 1.5% ($0.3m) on a pro-forma CCY basis, Maintenance grew by 1.0% ($0.7m) and Consulting revenues declined by 12.8% ($1.5m).

Development & IT Operations Management Tools revenues were $141.3m; a decline of 8.4% ($12.9m) on pro-forma CCY basis. $10.7m of the decline was in Maintenance revenues which declined by 8.9% in line with management expectations. Licence revenues declined in the period by $1.3m.

Collaboration & Networking revenues were $70.1m; a 14.1% ($11.5m) decline on pro-forma CCY basis. Maintenance declined by 14.8% ($9.8m) in the period in line with management expectations.

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 2015:

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 Product Portfolio and the allocation of these costs to SUSE is based on an appropriate methodology.

The adjusted operating profit was $272.7m, delivering a margin of 50.8% which compares with the margin in the pro-forma CCY numbers for the six months to 31 October 2015 of 46.5%. The increase in margin arises because of the reduction in costs that have been achieved in the period through the progress on the integration of Serena and ongoing cost management initiatives in the core business.

The table below shows the reconciliation between Adjusted Operating Profit and Underlying Adjusted EBITDA with a comparative of the pro-forma CCY and reported figures for the six months ended 31 October 2015:

The Underlying Adjusted EBITDA improved by $8.0m in the year on a pro-forma CCY basis primarily due to cost saving actions taken at the end of FY16.

Outlook

We have continued to improve the foundations of the business through clarity of execution against the strategy of customer driven innovation, underpinned by a relentless focus on improving the way in which we operate to maximise the efficiency of the organisation.

This clarity of focus will continue as we execute against our strategy and begin to prepare for operation as an enlarged group after completion of the HPE Transaction. To this end our priorities remain unchanged:

· 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

14 December 2016

CEO Review - SUSE Product Portfolio

Introduction

The SUSE Product Portfolio represented 21.5% of the total Group revenue in the six months to 31 October 2016 (2015: CCY revenue 17.6%). 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. The six months to 31 October 2016 was a successful period for SUSE with growth in revenue, Annual Contract Value ("ACV"), Total Contract Value ("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 throughout FY17 as SUSE assumes the execution responsibility for sales and marketing in APAC and for the SUSE channel. We continued to broaden and deepen 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.

Key Strategic Developments

openATTIC acquisition

On 1 November 2016 SUSE announced the completion of the acquisition of the openATTIC storage management technology and engineering talent from the company it-novum. The openATTIC technology aligns perfectly with our strategy to provide open source, software defined infrastructure solutions for the enterprise and will strengthen SUSE Enterprise Storage solution by adding enterprise grade storage management capabilities to the portfolio.

Acquisition of OpenStack IaaS and Cloud Foundry PaaS Talent and Technology Assets from HPE

On 30 November 2016 SUSE announced it had reached a definitive agreement with HPE on the terms of a transaction pursuant to which the company has agreed to acquire technology and talent that will expand SUSE's OpenStack Infrastructure-as-a-Service (IaaS) solution and accelerate SUSE's entry into the growing Cloud Foundry Platform-as-a-Service (PaaS) market. The acquired OpenStack assets will be integrated into SUSE OpenStack Cloud and the acquired Cloud Foundry and PaaS assets will enable SUSE to bring to market a certified, enterprise-ready SUSE Cloud Foundry PaaS solution for all customers and partners in the SUSE ecosystem. Additionally, SUSE has increased engagement with the Cloud Foundry Foundation, becoming a platinum member and taking a seat on the Cloud Foundry Foundation board.

As part of the transaction HPE has named SUSE as its preferred open source partner for Linux, OpenStack IaaS and Cloud Foundry PaaS. HPE's choice of SUSE as their preferred open source partner further cements SUSE's reputation for delivering high-quality, enterprise-grade open source solutions and services.

SUSECON

SUSE held its annual global end-user conference from 7 to 11 November 2016 in Washington, D.C. The conference showcased the latest developments in building software-defined data centers on SUSE's leading Linux, OpenStack and Ceph-based solutions as well as in-depth sessions on other key technology topics such as Platform-as-a-Service, Docker and containers, NFV, and software-defined networking.

Key announcements at SUSECON included:

- SUSE has acquired software-defined storage management assets from German IT firm it-novum, including openATTIC, the open source Ceph and storage management framework. The acquisition allows SUSE to accelerate its use of openATTIC as the management framework for SUSE Enterprise Storage and will help the company deliver simpler, more cost-effective enterprise storage management solutions.

- For enterprises in data-intensive or highly regulated industries and those needing highly scalable and resilient storage solutions, SUSE announced the upcoming availability of SUSE Enterprise Storage 4, powered by Ceph technology. SUSE Enterprise Storage 4 marks the first production release of CephFS and is the ideal solution for bulk, archive and "large data" storage management.

- SUSE unveiled SUSE Linux Enterprise 12 Service Pack 2 to power physical, virtual and cloud-based mission-critical workloads. The newest version of the world-class SUSE Linux Enterprise Server open source operating system, SUSE Linux Enterprise 12 SP2 will help customers accelerate innovation, improve system reliability, meet tough security requirements and adapt to new technologies.

- SUSE is extending its "SUSE Ready" application-certification program to include SUSE OpenStack Cloud and SUSE Enterprise Storage. SUSE Ready, which has been a benefit to SUSE Linux Enterprise partners and customers for many years, verifies for customers that partner solutions are mutually tested and supported on SUSE software, so they can confidently build out their software-defined infrastructures using compatible and supported third-party solutions that best meet their business requirements, without being locked into a single vendor.

- SUSE honored its 2016 Customers of the Year. The award recipients represent the four regions of the globe and are recognized for "defining their future" using SUSE open source solutions for IT transformation and increased business agility and continuity.  

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 recognized rateably over the period of the contract. As with the Annual Results we are providing additional Key Performance Indicators ("KPIs") for the SUSE Product Portfolio 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 Annual Contract Value ("ACV") which aims to normalize contract length by including in the calculation of ACV only 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. 

RevenueThe table below provides a breakdown of the revenue for the six months to 31 October 2016 and a CCY and reported comparison to six months to 31 October 2015 and the year ended 30 April 2016.

SUSE Product Portfolio

The SUSE Product Portfolio revenue increased by 23.3% to $147.4m compared with the CCY revenues for the six months to 31 October 2015 of $119.5m, with the Subscription revenue increasing by 23.7% to $144.9m (2015: CCY $117.1m). The Subscription revenue is net of the fair value deferred revenue haircut of $1.9m (2015: $3.9m). Prior to this adjustment Subscription revenue grew by 21.3%.

Regional Revenue Performance

All regions showed good revenue growth in the period compared with the CCY revenues for the same period in FY15. North America grew subscription revenue at 17.9%, International at 29.2% and Asia Pacific & Japan grew revenue at 20.7%

TCV and ACV

TCV represents the gross billings for the six months to 31 October 2016 of $154.0m, an increase of 20.3% (2015: CCY $128.0m). The weighted average contract duration increased from 28 months to 31 months due to the impact of two large end customer transactions with long contract duration. The 'in period yield' from TCV to revenue increased from 23% in the six months to 31 October 2015 to 24% in the six months to 31 October 2016. 'In period yield' represents the proportion of TCV generated in the period that can be recognized as subscription revenue in the same period. Net new subscription TCV increased by 30.0% year-on-year and renewal subscriptions TCV grew by 12% year-on-year. Net new subscription contracts are derived from the sale of subscriptions to new logo customers and existing customers expanding footprint of existing product portfolio or subscribing to new product solutions.

ACV grew to $88.8m for the six months to 31 October 2016, an increase of 16.4% (2015: CCY $76.3m). ACV removes the impact of multi-year contracts 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

Regional ACV performance

North America grew its TCV and ACV for the six months to 31 October 2016, by 0.9% and 5.5% respectively. Delayed renewal transactions with substantial new contract elements did not close as anticipated in the six months to 31 October 2016 and prevented the region from delivering more substantial TCV and ACV growth. These transactions are now forecasted to close in the third quarter of FY17.

International had a very strong performance in TCV and ACV, growing by 39.6% and 21.8% respectively. In addition to a solid overall performance across New and Renewal bookings, International results benefited from large transaction momentum with an enterprise customers in the period, who renewed and also expanded its SUSE product footprint.

Asia Pacific & Japan had very strong performance in TCV and ACV, growing by 23.9% and 33.6% 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. Go-to-market via a SUSE dedicated and SUSE specialized sales force also contributes to the success of the region.

ACV contribution by route to market

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 Indirect, Global Service Partners and OEM routes to market, growing by 11.5%, 32.9% and 45.0% respectively.

We also see a trend of customers who initially 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 HY17 compared to HY16:

In aggregate the ACV mix by route to market in HY17 compared to HY16 saw a small shift of contribution to SUSE's growth from direct routes to market to indirect routes to market. This is a result of the roll out of an improved partner program, additional partner sales coverage and increased collaboration between direct sales teams and the channel.

SUSE Adjusted Operating Profit and Adjusted EBITDAThe table below shows the Adjusted Operating Profit for the SUSE Product Portfolio and compares it against the CCY and as reported numbers for the six months to 31 October 2015:

SUSE Adjusted Operating Profit for the period was $53.5m at a margin of 36.3%. Compared to the CCY six months to 31 October 2015, this is an increase of $11.3m (26.8%) and a profit margin improvement of 1.0%. 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:

Deferred revenue

We continue to have year on year steady growth in the deferred revenue balance. At 31 October 2016 SUSE's total deferred revenue balance was $335.2m (2015: $275.1m), an increase of $60.1m (21.8%). 56% of the deferred revenue balance is recognizable revenue in the next 12 months and 82% recognizable in 24 months.

Headcount

At the end of April 2016, direct headcount in SUSE was 641 increasing to 776 by 31 October 2016, a net increase of 135 in the six months. The increased investment in direct headcount was in Sales, Engineering and Alliance & Marketing 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. The increase in Sales headcount includes heads from APJ Sales moving to directly managed dedicated SUSE headcount, which was part of a shared sales function at the end of April 2016. If we exclude this movement, net increase in total direct headcount is 91.

In addition to the direct headcount, the SUSE portfolio received in HY17 support from SUSE dedicated employees, who are organizationally aligned in the shared service functions of the Group. Most prominently in Renewal Sales, Consulting, Customer Care, Sales Operations and other corporate operations functions.

Outlook "Sustainable, Profitable Revenue Growth"

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

Nils Brauckmann

Chief Executive Officer

SUSE

14 December 2016

Going concern

The directors, having made enquiries, consider that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore it is appropriate to maintain the going concern basis in preparing the condensed consolidated interim financial statements.

Related party transactions

The Group has taken advantage of the exemption available under IAS 24, "Related Party Disclosures", not to disclose details of transactions with its subsidiary undertakings.

Directors' responsibilities

The directors confirm that, to the best of their knowledge, these condensed consolidated interim financial statements;

· have been prepared in accordance with IAS 34 as adopted by the European Union. The interim management report gives a true and fair review of the assets, liabilities, financial position and profit of the Group as a whole as required by DTR 4.2.4R and;

· includes a fair review of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year as required by DTR 4.2.7R and;

· includes a fair review of material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report as required by DTR 4.2.8R.

The current directors of the Company are Kevin Loosemore, Mike Phillips, Stephen Murdoch, Nils Brauckmann, Karen Slatford, Richard Atkins, Tom Virden, Steve Schuckenbrock and Amanda Brown. Biographies for each director are included on page 47 of the Annual Report and on the Company's website: www.microfocus.com.

By order of the board

14 December 2016

Micro Focus International plc

Consolidated statement of comprehensive income (unaudited)