Interim results for the six months ended 30 Apr 18

11 July 2018

Micro Focus International plc

Interim results for the six months ended 30 April 2018

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L, NYSE: MFGP), the international software product group, announces unaudited interim results for the six months ended 30 April 2018, being the second interims for the 18-month reporting period to 31 October 2018.

Key highlights:

· Pro-forma constant currency* ("CCY") revenue decline of 8.0% for six-months ended 30 April 2018.

· Further improvement in pro-forma Adjusted EBITDA margin from 31.8% to 36.0%, up 4.2 percentage points on the comparable period, expected to increase to approximately 37% for the full year at the midpoint of our revenue guidance.

· Slowing of revenue decline as we reiterate full year constant currency revenue guidance of minus 6% to minus 9% for the 12 months ended 31 October 2018 compared to the pro-forma 12 months ending 31 October 2017.

· Strong free cash flow* of $213.4m despite elevated trade receivables as a result of IT systems issues.

· Twice covered dividend policy remains unchanged and 58.33c second interim dividend of the 18-month accounting period declared.

· Cost management programs progressing well with the Group targeting further $300m of annualized cost savings by end of FY20.

· Progress on integration with IT systems stabilizing, business being simplified, sales organization re-aligned and refocused.

· Additional resources required to stabilize then remediate the FAST platform, driving increase in exceptional costs, now expected to be $960m vs $750m previously flagged.

· The Cash Tax Rate* for the 12 months ended 30 April 2018 was 15.0% in line with the Group's existing guidance for FY18 and FY19 of 15.0%.

· 70% of revenues are recurring, reflecting deep and business critical customer relationships.

The table below shows key results for the Group for the six months ended 30 April 2018 together with reported comparatives unless otherwise stated:

* The definition and reconciliations of Adjusted EBITDA, Adjusted EPS, Adjusted Diluted EPS, Net Debt, Free Cash Flow, Cash Tax Rate, Constant Currency ("CCY") and Pro-forma are in the "Non IFRS measures" section of this Interim Statement. 

Kevin Loosemore, Executive Chairman, commented:

"I am pleased to report that since March there has been an improved momentum in the HPE Software integration process and a slowdown in the rate of revenue decline. This has led to revenues for the period being at the better end of management guidance. The Micro Focus strategy and proven operating model has seen us successfully acquire and integrate a number of transactions over recent years. Management is now applying the Micro Focus operating model across the enlarged Group fully and robustly after an initial period where the application had been inconsistent.

On 2 July 2018, we announced a proposal to sell SUSE for a total cash consideration of $2.535 billion. The proposed sale, at a multiple of approximately 7.9x revenue and 26.7x Adjusted Operating Profit for the 12 months to 31 October 2017, reflects an excellent return on the investments we have made to support and grow this business since it was acquired in 2014. In EQT, we believe that SUSE will have a new owner committed to the significant further investment to enable the business to capitalize on the significant opportunities presented by changes underway in the Enterprise Linux market. The disposal should generate approximately $2.1bn in cash, the substantial majority of which will be available to deliver as returns to our shareholders. As a result of the SUSE transaction, Nils Brauckmann will step down from the Board so that he can focus 100% on SUSE until completion. I would like to thank Nils for his outstanding contribution to Micro Focus.

Following the sale of SUSE, the Micro Focus business will continue to focus on the opportunity presented by the consolidation of the mature infrastructure software market. The integration of HPE Software, following on from the Attachmate Group transaction in 2014 and Serena in 2016 means that we have a business generating in excess of $1bn a year in operating cash flow. This in turn underpins the ability of the business to achieve its target of 15-20% Total Shareholder Returns ("TSR"). In addition, by maintaining an appropriate debt profile, we will have the capability to fund either further significant Returns of Value to Shareholders or fund additional accretive acquisitions.

Due to initial challenges in the integration of the HPE Software assets, we believe that we are running approximately one year behind our original plan and as communicated in March, we expect that on exiting the current financial year revenues will be substantially lower than anticipated at the time of the transaction. By the year ending 31 October 2020, we expect the business (excluding SUSE) to have stabilized revenue declines and be delivering Adjusted EBITDA margins in the mid-40's%. Incremental cost savings required to deliver the above can be accomplished with only a $30m increase to the $600m estimated in September 2016. The new IT systems implemented in HPE Software have now been stabilized, the cost of which and the anticipated further necessary remediation will incur an additional $180m in exceptional charges on top of the $150m estimated in September 2016.

We are reiterating our full year revenue guidance for the 12 months to 31 October 2018 of minus 6% to minus 9% at CCY, with an Adjusted EBITDA margin of approximately 37% at the midpoint of that revenue range (both inclusive of SUSE).

Our changed year-end means that we are announcing a second interim dividend today and will propose a final dividend at the full year results in January. The Adjusted Diluted EPS in the year to 30 April 2018 has increased by 6.9%. To avoid undue disruption we have decided to pay the 18-month dividend as a smaller first interim followed by a larger second interim dividend and then a broadly similar final dividend. As a result, we are pleased to announce that the second interim dividend will be 58.33c, the same as last year's final dividend."

Interim results presentation

The presentation of the interim results for the six months ended 30 April 2018 will be held today at 9am BST in London. A live webcast and recording of the presentation will be available at https://investors.microfocus.com/ during and after the event.

Enquiries:

About Micro Focus

Micro Focus (LSE: MCRO.L, NYSE: MFGP) 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. We have two product portfolios: Micro Focus Product Portfolio and SUSE Product Portfolio. Within the Micro Focus Product Portfolio are the following products: Application Modernization & Connectivity, Application Delivery Management, IT Operations Management, Security, Information Management & Governance and Vertica. For more information, visit: www.microfocus.com. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, Software Defined Infrastructure and Application Delivery platforms that give customers greater control and flexibility while reducing cost. 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.  

Chief Executive Officer's Statement

Introduction

The Micro Focus strategy and proven operating model continue to position this organization as a financially strong and successful leader in the infrastructure software sector. We have believed for some time that there are significant segments of the infrastructure software market that have matured. The response to this is consolidation and to be successful in this stage of a market, a clear strategy underpinned by both operational effectiveness and scale are critical.

Key to our strategy is the delivery of what we call "customer centered innovation". In essence, we focus on innovation that delivers tangible business impact for customers. This can mean any or all of enabling new business models or use cases, protecting existing investments and extending productive use; and reducing operational cost and risks.

Over decades, our customers have built ever more sophisticated I.T. environments as they seek to balance the need to innovate with the realities of reducing operational budgets and heightened operational threats. This resulting operating model is increasingly being called Hybrid I.T. and is underpinned by new ways of working such as DevOps and a heightened focus on security and analytics. In essence, to be successful, customers are connecting mainframes with client server systems, with mobile applications and a mixture of on-premise and off-premise workloads and associated delivery models. All of which has to be done real-time, securely and in a way that enables a balance of innovation and reducing run costs.

Micro Focus is ideally positioned to solve customer needs within this Hybrid IT environment through our solutions and products which span mainframe to traditional IT to mobile and the public cloud. We describe this as "bridging the old and the new", with products that help increase returns from investments already made enabling customers to innovate faster at lower risk and cost. This is the focus of our business model and customer centered innovation strategy.

The Group now has global scale, operating in 50 countries, serving more than 40,000 customers and employing approximately 16,000 employees.

Across the Group, our portfolios have revenue profiles ranging from double-digit growth to decline. Our business model is focused on ensuring the right decisions are taken at a granular level to enable the allocation of appropriate levels of investment on a product-by-product basis, to innovate, market, sell and support the product to best deliver value to customers. Execution of our model enables revenue declines to be moderated and product portfolios repositioned to achieve growth where possible by aligning appropriate R&D and Go-To-Market investment to help deliver high levels of profitability and strong cash generation in a balanced portfolio approach.

The application of the model has been inconsistent across the enlarged Group following completion of the HPE Software transaction. The model is now being applied fully and robustly. This is an iterative process that, over time, results in the delivery of product strategies and roadmaps that are based on direct customer and market feedback and focused on delivering innovation that is impactful for customers.

Performance in the Period

The Group reported revenues of $1,974.2m (2017: $696.0m) and Operating Profit of $65.0m (2017: $130.2m). On a statutory reported basis, this is a revenue increase of 183.6% and on a pro-forma constant currency ("CCY") basis, this decline was 8.0% (2017: pro-forma CCY $2,146.0m).

The Group operates with two portfolios: the Micro Focus Product Portfolio ("MFPP") and the SUSE portfolio.

Adjusted EBITDA for the Group was $710.5m (2017: $320.5m) with the MFPP contributing $654.5m (2017: $275.0m) and SUSE delivering $56.0m (2017: $45.6m). On a pro-forma CCY basis the Group delivered a 6.4% growth in Adjusted EBITDA to $710.5m (2017: CCY $667.8m), reflecting good progress in the cost management actions related to the integration program. This performance translates to a 36.0% Adjusted EBITDA margin.

Micro Focus Product Portfolio Performance

The MFPP, which includes what was previously HPE Software as well as what was the existing MFPP prior to the transaction completion, represents 90.7% of total Group revenue in the six-month period to 30 April 2018 (2017: 77.6%). On a statutory reported basis, this portfolio reported revenues of $1,791.3m (2017: $540.0m) and Adjusted EBITDA of $654.5m (2017: $275.0m). This was a revenue increase of 231.7% and on a pro-forma CCY basis, a decline of 10.0% (2017: pro-forma CCY $1,989.4m).

SUSE Product Portfolio Performance

The SUSE Product Portfolio represented 9.3% of the total Group revenue in the six months ended 30 April 2018 (2017: 22.4%), and grew reported revenues by 17.2% to $182.9m (2017: $156.0m), 16.8% on a CCY basis (2017: CCY $156.6m) in line with the Infrastructure Linux market growth rates. Adjusted EBITDA for SUSE was $56.0m (2017: $45.6m).

Investments in the SUSE Product Portfolio have continued to support the management team's objective of "sustainable and profitable revenue growth". During the six months to 30 April 2018, the business achieved an improved revenue growth rate compared to the prior six months. Leadership changes in North America are delivering signs of stabilization and positive momentum with growth rates improving from 8.7% in the prior period to 11.8% in the current period. Growth of 19.1% was achieved in Asia Pacific & Japan, and 19.3% in EMEA, SUSE's largest region.

On 2 July 2018, we announced definitive terms for the sale of SUSE for a total cash consideration of $2.535 billion. We believe the transaction represents a highly attractive enterprise valuation for SUSE. The proposed sale, at a multiple of approximately 7.9x revenue and 26.7x Adjusted Operating Profit for the 12 months to 31 October 2017, reflects an excellent return on the investments we have made to support and grow this business since it was acquired in 2014. In addition to a great value return for shareholders, we see EQT as a strong long term investor for SUSE. The transaction allows Micro Focus to continue to focus upon its longstanding and consistent strategy of delivering value to customers and shareholders through effective management of infrastructure software assets in an increasingly consolidating sector. The net proceeds will be used in part to pay a tax charge arising from the transaction and to repay a proportion of the existing Micro Focus Group debt. The remainder of the net proceeds, which will represent the majority of the consideration, will be used for general corporate purposes and/or returned to shareholders through whatever mechanism the Board may in its discretion determine at the relevant time. Completion of the transaction is currently expected in the first quarter of the calendar year 2019.

Integration Update

Micro Focus has successfully completed and integrated 17 acquisitions in the past decade. We have delivered consistent and strong shareholder returns over the period due to our ability to learn from every transaction and integration to further refine and improve our model. We have integrated transformational acquisitions during this time, such as the November 2014 Attachmate Group transaction, which was, similar to the HPE Software transaction, the acquisition of assets equivalent to more than twice the size of the then existing Micro Focus business.

The HPE Software integration has involved additional complexities, largely because this was a carve-out transaction, as opposed to the acquisition of a business that had been operating independently. The HPE Software business was a small division that did not move HPE's overall performance and was guided by the parent company's strategy and financial goals and as a result often invested in projects to support the hardware centric HPE business at a Group level.

Clarity of purpose, alignment of objectives and the systematic application of the Micro Focus business model are key components in achieving an effective corporate culture across the organisation. Rigorous application of these goals creates a team that is accustomed to a performance based culture grounded on our ability to make, sell and support great software. There have been significant integration issues in combining cultures as our people adapt to this more dynamic environment where execution is expected to be faster, operations simpler and people more accountable. This has been compounded by the complexities of standing up a completely new set of I.T. systems, implementing a new Go-To-Market organization and changing the fiscal year end.

The systems complexities were significant and a recap of context is relevant. Micro Focus had embarked upon a programme to refresh and standardise systems as the final phase of the Attachmate Group integration. However, once it became apparent that the HPE Software transaction was executable we decided to cancel the existing Micro Focus project and utilize the platform (FAST) being built by HPE to facilitate the carve out of HPE Software as the single platform for the enlarged Group.

The system has been live from mid-November 2017 for the heritage HPE Software business but there have been material and ongoing issues, first signalled at our 8 January 2018 interim results and expanded on in our March trading update.

Progress has been made with the system now stable and able to support the business. All core business processes can now be executed end-to-end with many now at target operating levels. Accomplishing this still requires many manual workarounds and as such operational effectiveness and agility are compromised. The backlog of customer and partner invoicing and subsequent cash collection created by these issues is being worked through and the key metrics are improving month by month in these areas. However, we continue to have elevated DSOs and there is a systematic program of issue resolution and simplification being executed to continue to improve the situation.

In parallel to fixing the operational issues a strategic review of the FAST program has been commissioned to identify and determine the changes necessary to simplify the architecture and improve operational agility. The planned move to a single systems stack for the enlarged Group is therefore on hold until this work is complete. The intent remains to move to a single set of systems to help drive operational efficiencies. In the meantime, the focus remains on simplification of the existing environment and building the right business intelligence infrastructure to support effective business operations across two sets of systems.

The systems issues, compounded in sales by insufficient focus on effective enablement of the teams, created an environment where attrition is at elevated levels. To begin to correct this, organisational changes have been made to align marketing and product much more tightly and investments made to build a consistent approach to enablement globally, underpinned by simplified processes, clear accountability and dedicated resources. The hiring engine is now functioning effectively. The combination of these initiatives should result in a normalisation of attrition rates but this will take time.

Returning to a dynamic and accountable culture is key and we are resetting the tone and increasing the pace of execution. In support of this, key actions include: the collapse of unnecessary organisational structures at the worldwide level with accountability driven closer to the customer, a reduction in management with more than 135 senior management and management roles being eliminated by year-end and the implementation of simplified management systems to reduce the number of meetings and unnecessary debate. An overriding objective is to focus more on decision-making and accountability as well as a rigorous approach to ongoing simplification and continuous improvement of processes and structure.

Looking at the integration status more broadly there has been a great deal of progress and it is worth reflecting that less than a year ago we fundamentally changed the organisation top to bottom following the completion of the HPE Software transaction - creating completely new product groups, a new Go-To-Market organization and corporate functions in support of a combined carved-out HPE Software business and an established Micro Focus business.

 In addition to this organizational work, key achievements include:

· Major project to build stand-alone infrastructure and remove reliance on HPE shared infrastructure on track;

· Cost reduction (ahead of plan);

· Real estate rationalization (41 closures have already been completed); and

· 81% of transition services agreements exited with remainder on track such that residual dependence on HPE is removed.

As a United Kingdom domiciled company, Micro Focus is subject to additional controls when selling to the United States Federal Government. Following a detailed review of how best to comply with our obligations and support our important Federal customers, we have entered into a partnership with Carahsoft Technology Corp. to be the exclusive distributor to sell, fulfill, support and deliver our products for our classified and controlled U.S. Federal Government customers. The existing Micro Focus Government Solutions continues to serve all other U.S. government business, including State, Local, and Higher Education. This development is fully aligned with our commitment to optimize our operational model to best serve our customers and maximize our returns to shareholders.

Following any acquisition, and in line with our commitment to delivering long-term value to customers and shareholders, we conduct evaluations of the value of owned assets, appropriateness of revenue lines and assessments of product portfolio alignment. As part of this process the Group entered into an agreement to sell the Micro Focus Atalla product lines for an undisclosed amount that is not financially material.

The leadership team is committed to an effective application of the proven Micro Focus operating model across the enlarged Group. Since the 19 March 2018 trading update, the pace and rigour of that work has improved, and early signs of improving revenue trends are encouraging. The focus of the integration plan is on relevant business outcomes and simplification of business operations to improve speed and accountability of decision making and drive a heightened sense of urgency across all aspects of execution.

There remains a great deal to be done but the Micro Focus operating model has proven to be effective. This requires robust, consistent and sustained application. That is now the focus of the leadership team.

Delivering value to shareholders

The Board and the management team have continued confidence in the Micro Focus operating model and the Company's ability to deliver strong shareholder returns.

The infrastructure software market continues to consolidate and Micro Focus is building the scale and operational efficiency to be a leader in this consolidation. We believe our operating model and focused strategy of customer centered innovation that protects and modernizes customer investments in business critical technology position us very well to support customers for the long-term and through this deliver strong, consistent and sustainable returns to shareholders over the long-term.

The board continues to target a modest level of gearing for a company with the cash generating qualities of Micro Focus, with a target net debt to Adjusted EBITDA multiple of 2.7 times. We are confident that this level of debt will not reduce our ability to deliver our strategy, 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. Micro Focus has a strong balance sheet and our lenders are supportive of our strategy and business model.

At 30 April 2018, we had reported net debt of $4,337.4m representing a net debt to pro-forma Adjusted EBITDA ($1,443.8m) of 3.0 times.

Dividend

With the extension of the year-end to 31 October, the company is paying two interim dividends and a final dividend for the 18-month period ended 31 October 2018. To avoid undue disruption we have decided to pay the 18-month dividend as a smaller first interim followed by a larger second interim dividend and then a broadly similar final dividend. As a result, we are pleased to announce that the second interim dividend will be 58.33c, the same as last year's final dividend.

The dividend will be paid in Sterling equivalent to 43.86 pence per share, based on an exchange rate of £1 = $1.33, the rate applicable on 10 July 2018, the date on which the board resolved to pay the dividend. The dividend will be paid on 24 August 2018 to shareholders on the register as at 3 August 2018.

Group Outlook

Micro Focus has delivered strong and consistent shareholder returns for the last seven years. The breadth and longevity of our customer relationships, a highly committed and talented team, a proven operating model and our approach to capital allocation form the foundations of our confidence in continuing to do so into the future. We have strong belief in our ability to address the current issues, which we believe are transitionary operational challenges.

We reiterate our constant currency revenue guidance for the 12 months to 31 October 2018 of minus 6% to minus 9% compared to the pro-forma 12 months ending 31 October 2017 and an Adjusted EBITDA margin of approximately 37% at the midpoint of that revenue range. As previously stated in the pre-close statement on 16 May 2018, net debt is expected to improve to approximately $4.2bn by 31 October 2018, in line with market consensus.

Our focus continues to be delivering annual returns to investors in the range of 15% to 20% per annum. We believe we have a strong operational and financial model that can continue to scale and provide excellent returns to our shareholders. We have significant flexibility across the Group to consider a range of merger and acquisition alternatives relating to the large portfolio of software assets within the infrastructure software sector.

We would like to thank our employees for their continued professionalism and hard work to do their jobs within an environment that has been, at times, very challenging and changing. Their dedication and commitment to Micro Focus is a core component in our confidence to deliver against our objectives.

Stephen Murdoch

Chief Executive Officer

10 July 2018

Financial Review

The following discussion provides an analysis of our results of operations and should be read in conjunction with our unaudited consolidated interim financial statements included elsewhere in this report.

We include certain non-IFRS financial measures which assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our underlying operations. Included in the following discussion is Adjusted EBITDA which is a non-IFRS financial measure. For additional information on Adjusted EBITDA see the "Non-IFRS Measures" section of this report.

The Group operates two product portfolios (i) Micro Focus and (ii) SUSE. These are the operating 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 run to optimize Adjusted EBITDA and cash flow through targeted innovation and driving an efficient and consistent end-to-end process. From 1 November 2017, the HPE Software operations have been fully integrated into the Micro Focus Product Portfolio and the two heritage businesses are run as one single operating unit with a combined Go-to-Market ("GTM") function.

SUSE's characteristics are different due to the Open Source nature and the growth profile of its offerings.

GROUP FINANCIAL PERFORMANCE

Group financial performance in line with expectations:

· Revenue increased by 183.6% in the six months ended 30 April 2018;

· Pro forma CCY revenue decline of 8.0% in the six months ended 30 April 2018, including a $40m deal which closed earlier than expected in April 2018;

· Loss before tax of $68.5m (2017: profit $83.2m) driven by inclusion of exceptional costs and amortization of purchased intangibles relating to the HPE Software transaction;

· Strong free cash flow generation of $213.4m (2017: 298.2m) despite working capital impact of system implementation issues;

· Strong balance sheet with net debt to pro-forma Adjusted EBITDA ratio reduced to 3.0x; and

· Confidence in sustainable Adjusted EBITDA growth to support second interim dividend of 58.33 cents.

*Pro forma Adjusted EBITDA margin for the six months ended 30 April 2017 reflects the Pro Forma Revenue divided by Pro forma Adjusted EBITDA (at actual rates).

The Group acquired HPE Software on 1 September 2017 and as a result the Group's reported results for the six months ended 30 April 2018 include six months post acquisition results for HPE Software, while the Group's reported results for the six months ended 30 April 2017, do not contain any results for HPE Software. As a result, on a reported basis, the Group's revenue and cost base has increased substantially between the periods.

Revenue

On a reported basis, revenue increased from $696.0m to $1,974.2m in the six months ended 30 April 2018. The impact of the HPE Software acquisition is such that in order to understand the underlying trends within the business a pro-forma constant currency ("CCY") revenue metric is also presented above. On a pro-forma CCY basis, revenue declined by 8.0% year-on-year as a number of transitory issues directly impacted the Group's sales execution in the Micro Focus Product Portfolio.

Revenue trends by segment, stream and product group are discussed on a pro-forma CCY basis later in this section.

Operating profit and Adjusted EBITDA

The Operating profit for the six months ended 30 April 2018 was $65.0m, compared to $130.2m in the six months ended 30 April 2017 primarily reflecting the inclusion of exceptional items and amortization of purchased intangible assets relating to the HPE Software transaction. The Operating profit includes the impact of certain items that management believes do not directly reflect our underlying performance. These include exceptional items, share based compensation and amortization of purchased intangibles.

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

Adjusted EBITDA has increased from $320.5m in the six months ended 30 April 2017 to $710.5m in the six months ended 30 April 2018 as the scale of the business increased substantially following the completion of the HPE Software acquisition.

Exceptional costs

In the six months ended 30 April 2018, exceptional costs increased from $56.2m to $195.4m as the integration of HPE Software into the Micro Focus Product Portfolio continued during this period. The costs incurred in the period include:

· System and IT infrastructure costs of $44.8m principally reflect the cost of stabilizing the FAST platform ;

· Integration costs of $75.1m across a wide range of projects undertaken to conform, simplify and increase efficiency across the two businesses;

· Severance costs of $60.8m in relation to ongoing headcount reductions as we integrate HPE Software; and

· Property costs of $8.1m as the Group began the process of simplifying the real estate footprint exiting 29 offices in the six months to April 2018.

On the announcement of the deal, we anticipated total exceptional costs related to the MF/HPE Software integration of $750m. $600m relating to cost reduction and $150m relating to the implementation of the new FAST IT platform and the integration of the IT infrastructure of the two companies.

We now anticipate a cost reduction $200m more than anticipated but the one-off cost associated with this increase is expected to be only $30m.

Due to additional resources required to stabilize and remediate the FAST platform we now anticipate the exceptional costs relating to FAST and IT infrastructure integration. Our high-level estimate is this will increase by $180m to $270m. The costs of the infrastructure harmonization project remain on target.

As a result, we now anticipate that total exceptional costs in relation to the HPE Software acquisition and integration will be in the region of $960m.

An exceptional tax credit of $690.2m (2017: $nil) in the six months ended 30 April 2018 relates to the impact of US tax reforms, comprised of a credit of $934.0m in respect of the re-measurement of deferred tax liabilities and a transition tax charge of $243.8m payable over eight years. 

Further information on exceptional costs can be found in note 7 to the interim financial statements.

Net finance costs

Net finance costs were $132.7m in the six months ended 30 April 2018, compared to $46.9m in the comparable period last financial year. The increase is reflective of the associated interest on the new term loans put in place as part of the HPE Software transaction.

Taxation

Tax for the six months ended 30 April 2018 was a credit of $688.2m (2017: charge of $16.0m) primarily due to the one-off impact of US tax reforms. The tax charge on Adjusted Profit before tax for the six months ended 30 April 2018 was $115.8m (2017: $59.9m), which represents an effective tax rate ("ETR") on Adjusted Profit before Tax ("Adjusted ETR") of 22.8% (2017: 22.6%). Tax adjustments include a tax charge on Adjusting items totaling $113.8m and a one-off tax credit due to US tax reforms of $690.2m comprised of a credit of $934.0m in respect of the re-measurement of deferred tax liabilities and a transition tax charge of $243.8m payable over eight years. The Group's forecast Adjusted ETR in the medium-term remains at 25%.

The Group's cash tax payments in the six months ended 30 April 2018 were $71.0m (2017: $6.5m). The 'Cash Tax Rate' (being cash tax paid as a percentage of Adjusted EBITDA less exceptional items, capital expenditure and net finance cost) for the six months ended 30 April 2018 was 23.3% (2017: 3.3%). This is higher than the rate in previous six months ($20.5m paid at a 6.6% Cash Tax Rate) due to the timing of tax installment payments. The Cash Tax Rate for the 12 months ended 30 April 2018 was 15.0% (2017: 6.1%) in line with the Group's existing guidance for FY18 and FY19 of 15.0%.

The Cash Tax Rate is expected to be lower than the Adjusted ETR in FY18 and FY19 due to the utilization of US tax attributes in the former HPE Software Group and to be broadly aligned with the Adjusted ETR from FY20 onwards. The Cash Tax Rate, when compared to the Adjusted ETR, is likely to fluctuate period-on-period due to various factors including the timing of installment payments, the rate of deferred tax asset utilization and the timing of settlement of open issues with tax authorities. For additional information on both Adjusted Tax and Cash Tax Rate figures see the "Non-IFRS Measures" section.

Currency impact

During the six months to 30 April 2018, 59.8% of our revenues were contracted in US dollars, 20.5% in Euros, 5.0% in Sterling, 3.3% in CAD dollars and 11.4% in other currencies. In comparison, 46.8% of our costs are US dollar denominated, 16.2% in Euros, 9.8% in Sterling, 1.8% in CAD dollars and 25.0% in other currencies.

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

The currency movement for the US dollar against Euro, Sterling and CAD was a weakening of 13.8%, 10.3% and 5.0% respectively when looking at the average exchange rates in the six months to 30 April 2018 compared to those in the six months to 30 April 2017.

In order to provide CCY comparatives, we have restated the revenue of the Group for the six months ended 30 April 2017 at the same average exchange rates as those used in the reported results for the six months ended 30 April 2018.

Earnings per share

The earnings per share ("EPS") on a basic, diluted and adjusted basis are as follows:

Full details are set out in the "Non-IFRS measures" section of these interim financial statements.

MICRO FOCUS PRODUCT PORTFOLIO

Micro Focus product portfolio - focus on integration, efficiency and cost reduction:

· Pro-forma CCY revenue decline of 8.7% before the impact of deferred revenue haircut, which increases the decline to 10.0%;

· Currency impact improved pro-forma revenue performance by 2.3%;

· Strong focus on cost reduction achieved pro-forma cost reductions of 13.8% within the product portfolio; and

· Adjusted EBITDA margin of 36.5% for the six months ended 30 April 2018, representing a 4.4ppt increase on a pro-forma basis.

REVENUE

Revenue before deferred revenue haircut for the six months ended 30 April 2018 was as follows:

Revenue performance in the six months ended 30 April 2018 has been impacted by a number of factors, which management believes to be largely one-off transitional effects of the combination with HPE software, rather than underlying issues with the end market or the product portfolios. These factors include:

· Issues relating to our new IT system implementation, which has impacted the efficiency of our sales teams, our ability to transact with partners and our cash collection;

· Higher attrition of sales personnel due to both integration and system related issues;

· Disruption of ex Hewlett Packard Enterprise global customer accounts as a result of the demerger of Hewlett Packard Enterprise;

· Continued sales execution issues particularly in North America; and

· Managed reduction in professional services revenue to focus on supporting the sale and maintenance of our software portfolio.

Since identifying these issues, substantial investment has been made into stabilizing the new IT platform and whilst further work is required in order for the platform to work as needed, actions have been taken to minimise the impact on the sales organization. Sales force attrition continues to be a focus of the management team and a number of initiatives have been put in place to address the root causes.

Since identifying the issues in the management of global accounts, we have put into place and are industrializing specific programs with the top 150 key global accounts and 15 key Alliance partners. This includes senior leadership sponsorship of each relationship, an Account Executive responsible for all of our business with a client and the development of appropriate account plans.

Licence Revenue

The Licence revenue declined by 18.4% in the six months ended 30 April 2018 on a pro-forma constant currency basis. Revenue declined year-on-year in all regions, most significantly in the Americas due primarily to quota carrying field sales capacity. At a Product Group level, revenue declined in all product groups. As a result of the actions taken above, the rate of decline is beginning to stabilize across the product groups as sales execution improves.

Maintenance Revenue

Maintenance revenue declined by 3.5% in the six months ended 30 April 2018 on a pro-forma constant currency basis. The Maintenance declines have been impacted marginally by the attach rate of new licence sales. Renewal rates vary at a product level but across the portfolio, we continue to see renewal rates consistent with historical rates.

SaaS Revenue

SaaS revenue increased by 8.8% in the six months ended 30 April 2018 on a pro-forma constant currency basis. The SaaS offering continues to grow in high single digits driven primarily by continued strong double-digit growth in ADM, ITOM, and Security with low single-digit growth in the largest SaaS business of IM&G.

Consulting Revenue

Consulting revenue declined by 27.5% in the six months ended 30 April 2018 on a pro-forma constant currency basis. The managed decline in consulting revenue can be attributed to the Group's desire to focus on consulting engagements, which are directly related to the software portfolio.

ADJUSTED EBITDA

The Micro Focus product portfolio generated an Adjusted EBITDA of $654.5m, at an Adjusted EBITDA margin of 36.5%. This represents a 4.4ppt increase in pro-forma Adjusted EBITDA margin between the periods.

The ability to drive operational efficiencies within the two businesses via integration was a key thesis for the deal and remains a key strategic objective of management. Total costs within the Micro Focus Product Portfolio in the six months ended 30 April 2018 were $1,136.8m. This reflects a reduction of $182.3m on the comparable pro-forma period to 30 April 2017.

The key drivers for cost reduction between the periods include:

· Gross Margin improvement in SaaS and Licence;

· Concerted spend reduction efforts across central functions;

· A more focused approach to product development including more rigorous application of the four box model;

· Efficiencies in the sales & marketing organization as the business continues to benefit from fully integrating the sales organization from 1 November 2017;

· Spend reduction is primarily in personnel costs, including the removing of duplicative roles across the two organizations.

We continue to see opportunities in respect of operational efficiencies and applying the Micro Focus operating model to the enlarged portfolio and remain focused on increasing the Micro Focus Product Portfolio margins to the levels achieved historically by the Group.

SUSE PRODUCT PORTFOLIO

SUSE product portfolio - focus on investing for growth:

· CCY revenue growth of 16.8% in the six months ended 30 April 2018;

· Currency impact increased revenue by 0.4%;

· TCV increased by 11.2% to $212.2m at CCY over the same period;

· ACV increased by 10.5% to $139.2m at CCY over the same period;

· Adjusted EBITDA at $56.0m representing 22.8% growth on comparative period; and

· Adjusted EBITDA margin increased 1.4ppts to 30.6%.

REVENUE

Subscription Fee Revenue within the SUSE product portfolio increased by 16.4% on a CCY basis to $181.0m in the six months ended 30 April 2018. All three regions contributed to the growth, each delivering double-digit growth.

Good performance in new TCV in the six months to 30 April 2018 (11.2% growth on comparative period at CCY) contributed to double digit revenue growth. Americas trails on revenue growth relative to EMEA and Asia Pacific and Japan, primarily as a result of weaker TCV performance in the six months to October 2017. Americas demonstrated a turnaround in performance in the six months to 30 April 2018, and has set the foundation for sustainable recurring improved performance on revenue.

Total Contract Value ("TCV") and Annual Contract Value ("ACV") Performance

TCV represents the gross billings for the six months ended 30 April 2018 of $212.2m, an increase of 11.2% compared to the six months ended 30 April 2017 of $190.9m at CCY. The weighted average contract duration of transactions modestly increased to 29 months in the six months ended 30 April 2018 from 28 months in the six months ended 30 April 2017.

The 'in period yield' from TCV to revenue increased to 25% in the six-months ended 30 April 2018 from 22% in the six months ended 30 April 2017. 'In period yield' represents the proportion of TCV generated in the period that can be recognized as Subscription Fee Revenue ("SFR") in the same period. A contributor to the increase in 'in period yield' is high growth in billings derived through Public Cloud Service providers, which is predominantly reported and accounted for in arrears of consumption and thus has a very high 'in period yield'. Net new subscription TCV increased by 18.4% period-on-period and renewal subscriptions TCV saw a modest increase of 0.5% period-on-period.

Net new subscription contracts are derived from the sale of subscriptions to new logo customers and existing customers expanding the footprint of the existing product portfolio or subscribing to new product solutions.

Renewal subscription TCV will always be correlated to the available renewal opportunity pool and is also largely influenced by the timing of returning multi-year renewal opportunities. As we are seeing a shift of SUSE 'on premise' workloads to SUSE 'off premise' workloads, expectation is for a level of erosion in the monetary value of the available renewal opportunity pool. Another contributor to erosion in the renewal opportunity pool lies in SUSE customers consuming a proportion of required subscriptions through Independent Hardware Vendors, relative to the initial sale being direct or through a value added reseller. This is corroborated by the increase we had in ACV derived through Independent Hardware Vendors and Public Cloud Service Providers of 14.3% and 49.1% respectively in the six-months to 30 April 2018.

ACV measures the first 12-months duration equivalent of TCV. ACV grew to $139.2m, an increase of 10.5% from the six months to 30 April 2017 of $126.0m at CCY. ACV removes the impact of multi-year TCV and is a clearer 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. ACV growth is broadly in line with TCV growth, with the modest difference to TCV growth a reflection of a one-month increase in weighted average contract duration.

ADJUSTED EBITDA

The characteristics of the SUSE Product Portfolio require a different approach to the Micro Focus Product Portfolio due to the growth profile of the business' Open Source offerings. As such, SUSE operates at a lower Adjusted EBITDA margin in order to invest appropriately in delivering the strategy of sustainable and profitable revenue growth.

In the six months ended 30 April 2018, SUSE generated $56.0m of Adjusted EBITDA at a margin of 30.6%. The expectation within the SUSE portfolio is to continue the acceleration of investments into emerging technologies. As a result, SUSE is likely to operate at a reduced margin relative to current margin levels in future periods.

CASH GENERATION

The Group's Adjusted cash conversion ratio (defined as cash generated from operations divided by Adjusted EBITDA less exceptional items) for the six months ended 30 April 2018 was 96.1% compared to 137.3% in the comparable period.

The cash flow for the Group for the six months ending 30 April 2018 was:

The Group generated $213.4m of free cash flow in the six months ended 30 April 2018 compared to $298.2m in the six months ended 30 April 2017. This free cash flow was achieved during a time of significant disruption to the business.

The systems implementation on the HPE Software operations has had a substantial impact on free cash flow and is the primary driver for the $177.1m working capital outflow in the six months ended 30 April 2018.

Between 31 October 2017 and 30 April 2018, the Days Sales Outstanding ("DSO") increased from 65 days to 94 days as the newly implemented IT environment caused material disruption within the order to cash process. Within the existing IT environment, DSO for the period was 50 days (30 April 2017: 46 days). This compares to the new FAST environment, where the disruption was a key driver in the increase in DSO to 104 days (30 April 2017: 71 days).

These invoicing issues are largely resolved and as such the impact on cash flows is considered short term and will unwind over the course of the next six months resulting in stronger free cash flows and cash conversion ratios over and above those seen in the historical comparatives for the remainder of the fiscal year.

In the six months ended 30 April 2018, the Group made the final working capital payment of $225.8m to HPE and paid dividends of $156.2m. The net amount payable to HPE primarily related to cash acquired within the HPE software entities partially offset by a number of adjustments as set out in the transaction documents. The final amount payable to HPE was lower than the $289.0m estimated at 31 October 2017, as the completion statements were finalised and agreed by both parties.

NET DEBT

As at 30 April 2018, Net Debt was $4,337.4m (30 April 2017: $1,410.6m, 31 October 2017: $4,151.7m). This represents an Adjusted EBITDA / Net Debt ratio as follows:

The Adjusted Net Debt, after taking into account the provisional amounts due to HPE as at 31 October 2017 was $4,409.7m. For additional information on Net Debt see the "Non-IFRS Measures" section.

The board continues to target a modest level of gearing for a company with the cash generating qualities of Micro Focus with a target net debt to Adjusted EBITDA multiple of 2.7 times. We are confident that this level of debt will not reduce our ability to deliver our strategy, 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. The level of interest payments on the term loans remain at a manageable level relative to the scale of the Group. In addition, the business benefits from an interest rate swap for $2.2bn of the term loans which fixes the amount of interest payable for the duration of the Term loans.

The movements on the Group loans in the six months to 30 April 2018 were as follows:

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

INTEREST RATE SWAPS

The Group hold interest rate swaps to hedge against the cash flow risk in the LIBOR rate charged on $2,250.0m of the debt issued by Seattle Spinco, Inc. from 19 October 2017 to 30 September 2022. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receives 1 month USD LIBOR.

CONTRACTUAL CASH OBLIGATIONS

The following table reflects a summary of obligations and commitments outstanding as of 30 April 2018:

DIVIDEND

The board has adopted a dividend policy such that it is two times covered by the adjusted earnings of the Group. In light of the move to an 18-month accounting period there will be two interim dividends and a final dividend in line with this policy. The directors are declaring an interim dividend of 58.33 cents per share.

The dividend will be paid in Sterling equivalent to 43.86 pence per share, based on an exchange rate of £1 = $1.33 being the rate applicable on 10 July 2018, the date on which the board resolved to propose the dividend. The dividend will be paid on 24 August 2018 to shareholders on the register at 3 August 2018.

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 have not changed, with the exception of the SUSE business disposal risk, from those set out in the Annual Report and Accounts 2017 (pages 36 to 43):

· Products;

· Go to Market models;

· Competition;

· Employees;

· Business strategy and change management;

· IT systems and information;

· Legal and regulatory compliance;

· Intellectual property;

· Treasury;

· Tax;

· Macro-economic environment (including Brexit); and

· The risks associated with the disposal of the SUSE business will be set out in the circular to shareholders.

As outlined in the Annual Report and Accounts 2017 (page 37), following the completion of the HPE Software transaction, the potential post completion risks and uncertainties outlined in the Annual Report related to the transaction are now included in our principal risk management processes.

Chris Kennedy

Chief Financial Officer

10 July 2018

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that, to the best of their knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

· the interim management report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules , being an indication of important events that have occurred during the first 12 months of the period 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 18-month period; and

b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first 12 months of the current financial period and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so. 

The current executive directors of the Company are Kevin Loosemore, Stephen Murdoch, Nils Brauckmann, and Chris Kennedy.

The current non-executive directors of the Company, all of whom are independent are Karen Slatford, Richard Atkins, Amanda Brown, Darren Roos, Silke Scheiber and Lawton Fitt.

Biographies for each director are included on the Company's website: www.microfocus.com.

By order of the board,

10 July 2018

Non-IFRS measures

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

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

The non-IFRS measures may not be comparable to other similarly titled measures used by other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Group's operating results as reported under IFRS.

An explanation of the relevance of each of the non-IFRS measures, a reconciliation of the non-IFRS measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below. The Group does not regard these non-IFRS measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS.

Impact of Deferred Revenue Haircut

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

EBITDA and Adjusted EBITDA

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

Adjusted EBITDA is comprised of EBITDA (as defined above), adjusted for exceptional items, share based compensation, amortization and impairment of development costs, foreign exchange gains/losses and net capitalization/amortization of development costs.

These items are excluded from Adjusted EBITDA because they are individually or collectively material items that are not considered to be representative of the trading performance of the Group. Management believes that Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the trading performance of our business. Adjusted EBITDA is the primary measure used internally to measure performance and to incentivize and reward employees.

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

EBITDA and Adjusted EBITDA have limitations as analytical tools. Some of these limitations are:

· they do not reflect the Group's cash expenditures or future requirements for capital expenditure or contractual commitments;

· they do not reflect changes in, or cash requirements for, the Group's working capital needs;

· they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Group's debt;

· they are not adjusted for all non-cash income or expense items that are reflected in the Group's statements of cash flows;

· the further adjustments made in calculating Adjusted EBITDA are those that management consider are not representative of the underlying operations of the Group and therefore are subjective in nature; and

· although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

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

Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group's financial performance. These items are collectively totaled and identified as "exceptional items" (note 7).

Adjusted Profit before tax

Adjusted Profit before tax is defined as profit before tax excluding the effects of share-based compensation, the amortization of purchased intangible assets, and all exceptional items. Adjusted Profit before tax is only presented on a consolidated basis because management believes it is important to the understanding of the Group's effective tax rate. When presented on a consolidated basis, Adjusted Profit before tax is a non-IFRS measure.

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

Adjusted Effective Tax Rate

The tax charge on Adjusted Profit before tax for the six months ended 30 April 2018 was $115.8m (2017: $59.8m), which represents an effective tax rate on Adjusted Profit before tax ("Adjusted ETR") of 22.8% (2017: 22.6%). The calculation of the Adjusted ETR is set out below.

In computing Adjusted Profit before tax for the six months ended 30 April 2018, $576.3m of adjusting items have been added back and the associated tax is $113.8m (see Adjusted Profit before tax section above). Exceptional tax items of $690.2m (2017: $nil) shown above relate to the impact of US tax reforms, comprised of a credit of $934.0m in respect of the re-measurement of deferred tax liabilities and a transition tax charge of $243.8m payable over eight years. 

The tax charge on Adjusted Profit before tax for the 12 months ended 30 April 2018 was $248.5m (2017: $123.9m), which represents an effective tax rate on Adjusted Profit before tax ("Adjusted ETR") of 25.9% (2017: 22.9%). The calculation of the Adjusted ETR is set out below.

Cash Tax Rate

The 'Cash Tax Rate' is calculated as cash tax paid expressed as a percentage of Adjusted EBITDA less exceptional items, capital expenditure and net finance costs. The Cash Tax Rate is presented because the Adjusted ETR is impacted by non-cash movements so does not provide a clear view of the Group's cash tax payments as a proportion of earnings. The Group's Cash Tax Rate has historically been lower than the Adjusted ETR as a result of tax attributes acquired as part of the Group's historical acquisition activities. The Cash Tax Rate is likely to fluctuate period-on-period due to various factors including the timing of instalment payments, the rate of deferred tax asset utilization and the timing of settlement of open issues with tax authorities.

Adjusted Earnings per Share and Diluted Adjusted Earnings per Share

The Adjusted Earnings per Share ("EPS") is defined as Basic EPS where the earnings attributable to ordinary shareholders are adjusted by adding back all exceptional items, share-based compensation charge and the amortization of purchased intangibles. These are presented as management believe they are important to understanding the change in the Group's EPS.

Free Cash Flow

Free cash flow is defined as cash generated from operations less interest payments and loan costs, tax, purchase of intangible assets and purchase of property, plant and equipment. This is presented as management believe it is important to understanding the Group's cash flow.

Net Debt and Adjusted Net Debt

Net debt is defined as cash and cash equivalents less net borrowings and finance lease obligations. At 31 October 2017, Adjusted Net Debt takes into account the provisional amounts due to and from HPE in respect of the closing balance sheet and net working capital position. These are presented as management believe they are important to understanding the change in the Group's debt position.

Constant Currency

The Group's reporting currency is the U.S. dollar, however, the Group's significant international operations give rise to fluctuations in foreign exchange rates. To neutralize foreign exchange impact and to better illustrate the underlying change in results from one year to the next, the Group has adopted the practice of discussing results on as an reported basis and in constant currency.

The Group uses US dollar-based constant currency models to measure performance. These are calculated by restating the results of the Group for the comparable period at the same average exchange rates as those used in reported results for the current period. This gives a US-dollar denominated income statement, which excludes any variances attributable to foreign exchange rate movements.

The most important foreign currencies for the Group are: Pounds Sterling, the Euro and Canadian Dollar. The exchange rates used are as follows:

Pro-forma CCY Revenue and Pro-forma Adjusted EBITDA Comparatives

Pro-forma CCY Revenue is defined as the revenue for the six months ended 30 April 2017 for the existing Micro Focus Group, restated at exchange rates as at 30 April 2018, together with the revenue for the HPE Software business for the same period, as reported.

Pro-forma Adjusted EBITDA is defined as the reported Adjusted EBITDA (as defined above) for the six and 12 months ended 30 April 2017 for the existing Micro Focus Group together with HPE Software business.

The HPE Software business pro-forma CCY Revenue and pro-forma Adjusted EBITDA are under US GAAP and HPE legacy accounting policies, adjusted for divestitures, as derived from HPE Software management accounts. The Group has provided pro-forma revenue and pro-forma Adjusted EBITDA as it provides a suitable basis for comparing the performance of the Group in the current period.

Micro Focus International plc

Condensed Consolidated Statement of Comprehensive Income (unaudited)

For the six months ended 30 April 2018

The accompanying notes are an integral part of these unaudited Condensed Consolidated Interim Financial Statements.

Micro Focus International plc

Condensed Consolidated Statement of Comprehensive Income (unaudited)

For the six months ended 30 April 2018

The accompanying notes are an integral part of these unaudited Condensed Consolidated Interim Financial Statements.

Micro Focus International plc

Condensed Consolidated Statement of Comprehensive Income (unaudited)

For the 12 months ended 30 April 2018