6th Dec 2007 07:01
Micro Focus International plc06 December 2007 6 December 2007 Micro Focus International plc Interim management report for the half-year to 31 October 2007 Micro Focus achieves record H1 revenues and profitability driven bydouble digit organic growth and acquisitions Micro Focus International plc ("Micro Focus", "the Company" or "the Group", LSE: MCRO.L) announces interim results for the half-year to 31 October 2007. Key financial highlights• Revenue up 38% to $108.9m (2006: $79.0m)• Adjusted operating profit* up 34% to $41.0m (2006: $30.4m)• Adjusted EBITDA* up 34% to $41.8m (2006: $31.3m)**• Adjusted profit before tax* up 31% to $41.7m (2006: $31.8m)• Adjusted earnings per share* 14.58 cents (2006: 12.17 cents)***• Cash balance as at 31 October 2007 of $50.7m (2006: $68.2m)o $45.9m cash utilised during H1 to fund the acquisition andrestructuring of Acucorp, Inc. ("Acucorp")• Cash generated from continuing operations $29.8m (2006: $21.2m)• Interim dividend increased 20% to 3.6 cents per share (2006: 3 cents per share) • Expect second half revenues to be broadly similar to those of the first half• Expect to maintain EBITDA margin at a consistent level in the second half (38.4%)• Expect continuing double digit near term growth from the core business at constant currencies • Operating profit $31.9m (2006: $30.0m)• EBITDA** $34.7m (2006: $30.9m)• Profit before tax $32.6m (2006: $31.4m)• Basic earnings per share 11.40 cents (2006: 12.03 cents) *** Business Highlights • 21% organic revenue growth achieved for the half-year • 17% organic revenue growth at constant currencies for the half-year • 38% total revenue growth including the positive impact of recent acquisitions • Total North American organic revenue growth of 13% • Direct sales into Global 2000 targets progressing well with larger value licence fee transactions ahead of expectations in the first half • Integration of Acucorp now complete * In assessing the performance of the business the directors use "AdjustedEBITDA", "Adjusted operating profit", "Adjusted profit before tax" and "Adjusted earnings per share", being the relevant statutory measures, prior toexceptional items, amortisation of purchased intangibles and share basedcompensation. Exceptional items, share based compensation and amortisation ofpurchased intangibles are detailed in note 9.** EBITDA and Adjusted EBITDA is reconciled to operating profit in note 9*** Earnings per share are detailed in note 7 Stephen Kelly, Chief Executive Officer of Micro Focus, commented: "Over the past six months, we have delivered a strong set of financial resultsand made our second acquisition to further our strategic aims. We have againsuccessfully executed ahead of our initial expectations. Micro Focus benefits from having a business model with a high proportion ofpredictable and recurring revenues. This robust model, together with themotivation on the part of CIOs and company boards to get more out of theirexisting IT assets, means we should be well positioned either side of theeconomic cycle. Over the past five years our second half-year revenue performance has typicallybeen above that achieved in the first half-year. However, after such a positivestart to the year it is appropriate to assume that second half-year revenueswill remain broadly similar to those achieved in the first half-year. We aim toachieve profitable revenue growth and, as such, we will look to maintain EBITDAmargins at a consistent level for the second half-year. Following the 2006 strategic review we were confident of achieving single digitorganic growth and our stated aim has been to drive for consistent double digitgrowth. We can now see continuing double digit near term growth at constantcurrencies from the core business. A robust and sustainable market exists to support our growth strategy and ourkey focus remains on organic growth although we continue to review the potentialfor acquisitions in support of this strategy." EnquiriesMicro Focus Tel: +44 (0)1635 32646Stephen Kelly, Chief Executive OfficerNick Bray, Chief Financial Officer Financial Dynamics Tel: +44 (0)20 7831 3113Harriet KeenHaya Chelhot About Micro Focus Micro Focus provides innovative software that helps companies to dramaticallyimprove the business value of their enterprise applications. Micro FocusEnterprise Application Modernisation software enables customers' businessapplications to respond rapidly to market changes and embrace modernarchitectures with reduced cost and risk. Chairman's statement I am pleased by our performance over the past six months. We have achievedsignificant organic revenue growth whilst maintaining our margin and increasingour profitability. In addition, we successfully integrated Acucorp, a companyacquired in May 2007. We acquired and integrated HAL KS in the second half oflast year. Both acquisitions have contributed to our first half-yearperformance. Revenue growth combined with a firm control of expenses has resulted in asignificant increase in adjusted operating profit. We continue to makeinvestments in the areas of sales and marketing to support future growth whilstnot sacrificing margins. The performance achieved over the past six months reflects well on the entireteam and highlights the strong fundamentals of the business. We have first ratetechnology solutions, a loyal and satisfied customer base and a market leadingposition in a substantial, sustainable and growing market place. In line with our strategy, we have now acquired and successfully integrated twoacquisitions in the past twelve months. These have enabled us to consolidate ourmarket position and provide further opportunities for profitable growth. Whileorganic growth remains our key focus we have demonstrated that this can befurther supplemented with profitable growth through acquisitions. The Board continues to adopt a progressive dividend policy reflecting thelong-term earnings and cash flow potential of Micro Focus and I am pleased toannounce a 20% increase in the interim dividend to 3.6 cents per share. Wefinished the half-year with cash of $50.7m, and generated $29.8m of cash fromcontinuing operations. Our business model has a low ongoing capital requirementand delivers strong cash generation. During the first half-year, $45.9m of cashwas used to fund the acquisition and restructuring of Acucorp, Inc. Should otheracquisition opportunities arise that further our strategic aims, we have thefinancial strength and flexibility to pursue this growth option. We have a very strong blend of new and long serving talent in the business andare committed to evolving our management and staff base to support the needs ofa growing business. The Board would like to thank all our employees for their continued hard workand commitment throughout the half-year. Our foundations are well establishedand we are building for the future. We remain focused on profitable revenue growth and I am confident in theCompany's ability to continue to deliver value to all of its stakeholders. MicroFocus is well positioned for the future. Kevin Loosemore, Chairman Chief Executive Officer's statement Strategy The strong results achieved during the first half-year lend further evidence tothe key findings of the strategy review carried out in the six months to October2006, namely: • A firm opportunity exists for all of our solution areas; Application Development. Application Modernisation and Application Portfolio Management• All solution areas combined can support solid growth over the long-term• Our key focus is organic growth; plus acquisition opportunities exist• Our primary opportunity is through sales to larger organisations Following the strategic review we were confident of achieving single digitorganic growth and our stated aim has been to drive for consistent double digitorganic growth. We can now see continuing double digit near term growth atconstant currencies from the core business. For 30 years, Micro Focus has influenced and innovated in the EnterpriseApplications market. We now have a leading position in the EnterpriseApplication Modernisation market. Major corporations are increasingly becomingaware that they have the option of obtaining all of the required businessbenefits through modernising existing applications rather than taking on thehigh risk and costly alternatives of rewriting these applications or replacingthem with a packaged solution with little business benefit. Execution Over the past six months, we have delivered a strong set of financial resultsand made our second acquisition to further our strategic aims. Whilst we stillhave many areas on which to improve, we have again successfully executed aheadof our initial expectations. The sales team has been further strengthened and we will continue to invest todrive the business forward. It has been particularly encouraging to see theimproved performance in our North American operation during the first half-year. We appointed a new North American leader in February 2007 who has experience ofsuccessfully running our North American channel business for many years. Whilstearly days, he has now succeeded with his team in achieving a solid performancefrom our total North America operation in the first half-year and isestablishing firm foundations to support future growth. Outside of NorthAmerica, it was again encouraging to see a solid European performance and wewere delighted with the performance from our Japanese operation. We continue to refine our marketing and delivery capabilities with a strongfocus on developing senior level contacts within our target customers. Withsignificant momentum building around the "modernisation message", it has beenencouraging to see the company establish thought leadership in this area. Allmarketing spend is considered to be investment and is measured and monitored assuch. Our strategy review identified the major growth opportunity around larger valuelicence fee transactions into the Global 2000 ("G2000") companies. I amencouraged that we again signed a number of such deals in the first half-yearcarrying on from our success in the second half-year last year. In addition torevenues from new customers, new revenues from our existing customer base werevery encouraging. While organic revenue growth is our key focus, the strategy review highlightedthe potential for further profitable revenue growth through acquisitions. On 4May 2007 we made our second acquisition, Acucorp for $40.9m. Acucorp providestechnology that is highly complementary to Micro Focus's core business in theCOBOL Development Tool space as well as providing the opportunity for MicroFocus to expand its reach into the small and medium-sized enterprise ("SME")markets. The integration is complete and full year revenues are now expected tobe approximately 15% ahead of our original expectations (prior guidanceapproximately $17.0m). HAL KS, acquired in November 2006 and already fully integrated, provides marketleading technology for APM, a market which we remain confident is robust andgrowing. The performance of the business in the first half was slightly weakerthan we had hoped due to the transition from product to solutions sales takinglonger than anticipated. Management is firmly focused on enhancing salesexecution in this area. If we are to meet our growth aspirations then it is imperative that staff in allareas of the business see themselves as productive members of the Micro Focusteam, not just employees. We continue to work to improve the culture of ourorganisation and our aim is to continue to build a company for the long term,delivering outstanding results and superior shareholder value. Summary and Outlook We are encouraged by the progress made at Micro Focus over the past six months,especially in terms of our progress in North America, reflecting the strongfundamentals of the business. Micro Focus benefits from having a business model with a high proportion ofpredictable and recurring revenues. Typically, just under half of Group revenueis derived from low risk maintenance revenues and a significant proportion oflicence fee revenue comes from royalties from licences already sold through ournetwork of Independent Software Vendors. This robust model, together with themotivation on the part of CIOs and company boards to get more out of theirexisting IT assets, means we should be well positioned either side of theeconomic cycle. Maintenance growth is driven by the retention of existing customers as well asthe addition of new maintenance revenue associated with the sale of newlicences. An encouraging performance in both of these areas in the periodpositions us well for full-year growth. The smallest proportion of our revenuesis derived from our consultancy services and it is intended that these revenueswill remain a similar proportion of total revenues for the full-year. Thus, future revenue growth is largely dependent on driving licence sales. Thefirst half-year results include the benefit of a number of larger valuetransactions (as was the case in the second half last year). Such prospectivenew licence opportunities remain in our pipeline for the second half of thisyear, although by their very nature and size they are less predictable. The integration of Acucorp is now complete. On 28 June 2007 we had providedguidance that full-year revenues would be approximately $17.0m and can reportthat revenues are now expected to be approximately 15% ahead of this withmargins slightly ahead of those achieved in the existing Micro Focus business.The related restructuring charge was originally expected to be approximately$8.0m and we are pleased that the charge has come in $1.9m lower at $6.1m,predominantly due to lower exit costs on facility leases combined with a fasterintegration than originally planned. It should be noted that when referring to core organic growth we are excludingany impact of the results from the acquired business of HAL KS and Acucorp. Withboth businesses now integrated into Micro Focus, current and future guidancerelates to growth for the total business. We have been encouraged by the Adjusted EBITDA margins achieved in the sixmonths to 31 October 2007 (38.4%), consistent with the full year to April 2007(38.0%) yet above the margin achieved in the second half-year last year (36.7%).Our stated aim is to achieve profitable revenue growth and as such we will lookto maintain EBITDA margins at a consistent level for the second half-year. As a business, we have made encouraging progress over the past six monthsdelivering results above our original expectations. Over the past five years oursecond half-year revenue performance has typically been above that achieved inthe first half-year. However, after such a positive start to the year it isappropriate to assume that second half-year revenues will remain broadly similarto those achieved in the first half-year. Following the strategic review we were confident of achieving single digitorganic growth at constant currencies and our stated aim has been to drive forconsistent double digit growth. We can now see continuing double digit near termgrowth at constant currencies from the core business. A robust and sustainable market exists to support our growth strategy and ourkey focus remains on organic growth although we continue to review the potentialfor acquisitions in support of this strategy. Stephen Kelly, Chief Executive Chief Financial Officer's review Revenue for the half-year ended 31 October 2007 increased to $108.9m (2006:$79.0m). Revenue for the half-year by geographic region was as follows: 31 October 30 April 31 October 2007 2007 2006 $m % $m % $m % North America 46.3 42.5 34.9 37.7 35.7 45.2Europe and the Middle East 44.3 40.7 41.6 44.9 30.2 38.2Rest of the World 18.3 16.8 16.1 17.4 13.1 16.6Total revenue 108.9 100.0 92.6 100.0 79.0 100.0 Our North America operations produced a much improved performance showing solidgrowth as compared to both the six months to 31 October 2006 and six months to30 April 2007. A new senior leadership team was established during quarter fourlast year and a number of new sales hires have since taken place. Approximately44% of all Acucorp revenues are derived in North America and this hascontributed to the first half-year improvement. The existing Micro Focusbusiness achieved double digit organic revenue growth. Our European operations are managed by an experienced Micro Focus leadershipteam. We strengthened our UK operation towards the end of 2006 and again it hasbeen encouraging to see the turnaround in this operation since then with the UKsignificantly increasing licence fees in the half-year as compared to the priorhalf-year. Our Rest of the World operations had another positive half-year with ourJapanese business producing significant double digit revenue growth half-year onhalf-year. Our Japanese operation has an experienced team in place which hasdelivered consistent year-on-year revenue growth over a considerable period oftime. Revenue for the half-year by category was as follows: 31 October 30 April 31 October 2007 2007 2006 $m % $m % $m % Licence fees 53.1 48.7 44.9 48.5 37.7 47.7Maintenance fees 50.3 46.2 43.0 46.4 39.1 49.5Consultancy fees 5.5 5.1 4.7 5.1 2.2 2.8Total revenue 108.9 100.0 92.6 100.0 79.0 100.0 Revenue improved across all streams for the half-year. As compared to the sixmonth period to 31 October 2006, licence fees increased by $15.4m or 40.8% to$53.1m (2006: $37.7m). As with the half-year to 30 April 2007, in the currenthalf-year we signed a number of larger value transactions, the single largestdeal being $1.5m. A number of large contracts remain in our pipeline although,by their very nature, they are unpredictable. The underlying licence fee growthin the core business excluding the impact of HAL KS and Acucorp, and at constantcurrencies, was approximately 20%. Maintenance revenues increased by $11.2m or 28.6% to $50.3m (2006: $39.1m).Maintenance revenues are recognised evenly over the life of each contract, whichis typically twelve months. As such, the profit and loss account recognition ofmaintenance revenue lags the initial licence fee sale. The underlyingmaintenance fee growth in the core business excluding HAL KS and Acucorp, and atconstant currency, was approximately 10%. Consulting revenues showed a positive improvement as against the prior yeardriven by growth in both the core Micro Focus revenues and the additionalconsulting revenues as a result of the acquisition of HAL KS, this company andsolution having a higher mix of consulting revenues as compared to the MicroFocus Application Development Tools and Modernisation solutions. The impact of exchange rate movements in the year was to improve revenues byapproximately 4%, which forms the basis of the constant currency comparisonsabove. Improvements in Sterling and the Euro as compared to the US dollar werein part offset by a weakness in the Japanese Yen. It should be noted that with agreater proportion of the cost base outside the US, the movement in exchangerates led to an increase in reported costs of approximately 6%. On a US$ basisthe absolute increase in costs due to exchange rates was broadly similar toabsolute increase in US$ revenues. Hence profitability was similar on a constantcurrency or actual US$ basis. Costs Cost of sales for the half-year increased by 40% to $11.2m (2006: $8.0m). Thecosts in this category predominantly relate to our consulting and helplinesupport operations. Costs within the consulting organisation increased in linewith increased revenues. It should be noted that where possible we use externalconsulting resources to provide consulting services, hence these costs haveincreased substantially in line with the increase in consulting revenues. Selling and distribution costs increased by 49% to $29.7m (2006: $19.9m). Wehave made significant investments in the sales marketing functions to supportgrowth. This cost category also includes $0.9m of amortisation in respect ofintangible assets recognised on the acquisition of Acucorp. Research and development expenses increased to $14.2m (2006: $10.8m). Thecurrent year figure includes $1.1m (2006: nil) of amortisation in respect ofintangible assets acquired with the acquisitions of HAL KS and Acucorp. Administrative expenses, excluding exceptional items of $6.1m (2006: nil),reflecting the restructuring of the Acucorp business acquired on 4 May 2007 andstock compensation of $0.9m (2006: $0.3m), increased to $14.7m (2006: $9.7m).The increase in costs includes costs of the acquired businesses as well asexpanding the Group's support functions to facilitate current and future growth. Operating profit Operating profit was $31.9m (2006: $30.0m). Adjusted operating profit was $41.0m(2006: $30.4m), the improvement being driven by increased revenues and tightlycontrolled increases in costs. Adjusted EBITDA Adjusted EBITDA increased by 33.5% to $41.8m (2006: $31.3m) as a result of thefactors described above. Net finance income Finance income was $0.8m (2006: $1.4m). Income reduced due to a lower averagecash balance in the period following the acquisition of Acucorp. Taxation Tax for the period was $9.8m (2006: $7.4m) based on increased profits. TheGroup's effective tax rate is 30.0% (2006: 23.5%). The effective tax rate hasincreased due to an increased proportion of profits being earned and taxed inthe United States, following the acquisition of Acucorp, at an effective taxrate of 38%. Additionally in the prior half-year a tax deduction had arisen onthe stock options in issue. Excluding the effects of this beneficial taxdeduction, the effective tax rate in the prior half-year was 26.8%. Profit after tax Profit after tax decreased by 4.9% to $22.8m (2006: $24.0m), primarily driven bythe one off restructuring charges on the purchase of Acucorp of $6.1m (2006:nil) and the amortisation of purchased intangibles of $2.0m relating to the HALKS and Acucorp acquisitions (2006: nil). Cash flow At 31 October 2007, the Company's cash balance was $50.7m (2006: $68.2m). TheGroup generated cash from continuing operations of $29.8m (2006: $21.2m) whichwas offset by outflows of $45.9m in respect of the acquisition and restructuringof Acucorp as well as corporation tax payments of $5.9m (2006: $0.4m) anddividends of $14.0m (2006:$8.0m). Dividend The Board continues to adopt a progressive dividend policy reflecting thelong-term earnings and cash flow potential of Micro Focus whilst targeting alevel of dividend cover for the financial year ending 30 April 2008 ofapproximately 2.5 times on a pre-exceptional earnings basis. In line with theabove policy, the directors recommend payment of an interim dividend in respectof the half-year to 31 October 2007 of 3.6 cents per share, an increase of 20%above the interim dividend of 3 cents per share for the half-year to 31 October2006. The interim dividend will be paid on 31 January 2008 to shareholders onthe register on 4 January 2008. Whilst the Group as a whole has a deficit in its profit and loss reserve, thedirectors of Micro Focus International plc have concluded that the Company hassufficient reserves to enable the payment of the interim dividend. Dividends will be paid in sterling based on an exchange rate of £ = $2.04,equivalent to 1.76 pence per share, being the rate applicable on 5 December2007, the date of recommendation of the dividend by the Board. Principal risks The directors consider strategic, operational and financial risks and identifyaction to mitigate those risks. These risk profiles are updated formally atleast annually. The directors consider the principal risks and uncertainties for the remainingsix months of the financial year to be the value and timing of customer orders. Nick Bray, Chief Financial Officer Micro Focus International plcConsolidated income statement Six months ended Six months ended Year ended 31 October 2007 31 October 2006 30 April 2007 (unaudited) (unaudited) (audited) Note $'000 $'000 $'000Revenue 5 108,892 78,966 171,590Cost of sales (11,240) (8,052) (18,148)Gross profit 97,652 70,914 153,442 Selling and distribution costs (29,676) (19,948) (45,592) Research and development expense (14,262) (10,811) (23,051) Administrative expenses (21,829) (10,133) (27,532)Operating profit 5 31,885 30,022 57,267 Analysed as: Operating profit before exceptional items 38,033 30,022 62,128Exceptional items 9 (6,148) -* (4,861)*Operating profit 31,885 30,022 57,267 Finance costs (9) (5) (70)Finance income 768 1,370 2,810Profit before tax 32,644 31,387 60,007 Taxation 10 (9,816) (7,377) (16,143)Profit after tax 22,828 24,010 43,864 Earnings per share expressed in cents per share 7 - basic 11.40 12.03 21.96 - diluted 11.01 11.89 21.37 Earnings per share expressed in pence per share - basic 5.67 6.43 11.49 - diluted 5.47 6.36 11.18 * Stock-based compensation has been reclassified from exceptional tonon-exceptional items, as disclosed in note 9. The accompanying notes are an integral part of these consolidated financial statements. Micro Focus International plcConsolidated balance sheet 31 October 2007 31 October 2006 30 April 2007 (unaudited) (unaudited) (audited) Note $'000 $'000 $'000AssetsNon-current assetsGoodwill 70,830 42,404 42,533Other intangible assets 36,310 7,289 18,245Property, plant and equipment 4,169 2,154 2,543Deferred tax assets 10,281 7,993 10,813 121,590 59,840 74,134Current assetsInventories 247 305 255Trade and other receivables 11 57,957 42,342 44,031Cash and cash equivalents 50,709 68,223 84,971 108,913 110,870 129,257 Total assets 230,503 170,710 203,391 LiabilitiesCurrent liabilitiesTrade and other payables 12 86,432 62,864 76,612Current tax liabilities 20,581 18,156 17,023Financial liabilities - borrowings - 118 72 107,013 81,138 93,707Non-current liabilitiesNon-current deferred income 6,600 6,585 7,265Deferred tax liabilities 14,916 8,353 10,873Financial liabilities - borrowings - 41 41 21,516 14,979 18,179 Net assets 101,974 74,593 91,505 Shareholders' equityCapital and reserves attributable to the Company'sequity holdersShare capital 36,819 36,712 36,767Share premium 104,125 103,644 104,054Profit and loss deficit (13,707) (38,895) (23,394)Foreign currency translation reserve 1,822 217 1,163Other reserves (deficit) (27,085) (27,085) (27,085) Total shareholders' equity 101,974 74,593 91,505 The accompanying notes are an integral part of these consolidated financial statements. Micro Focus International plcConsolidated cash flow statement Six months ended Six months ended Year ended 31 October 2007 31 October 2006 30 April 2007 (unaudited) (unaudited) (audited) Note $'000 $'000 $'000Cash flows from operating activitiesNet profit for the period 22,828 24,010 43,864Adjustments forNet interest (759) (1,365) (2,740)Taxation 9,816 7,377 16,143Depreciation 758 514 1,169Loss on disposal of property, plant and equipment 2 2 26Amortisation of intangibles 4,807 2,834 5,972Share-based compensation 946 390 849Changes in working capital:Inventories 63 26 76Trade and other receivables (9,418) (4,666) (5,532)Payables and other non-current liabilities 788 (7,883) (1,657)Cash generated from continuing operations 29,831 21,239 58,170 Interest received 775 1,321 2,780Interest paid (9) (5) (70)Tax paid (5,903) (365) (7,316)Net cash from operating activities 24,694 22,190 53,564 Cash flows from investing activitiesPayments for intangible assets (2,549) (2,486) (5,456)Purchase of property, plant and equipment (2,016) (286) (830)Acquisition of subsidiary 14 (41,647) - (4,832) Net cash acquired with subsidiary 14 678 - (1,218)Net cash used in investing activities (45,534) (2,772) (12,336) Cash flows from financing activitiesProceeds from issue of ordinary share capital 52 71 125Repayment of borrowings (117) - (46)Dividends paid to shareholders 8 (14,016) (7,983) (13,981)Net cash used in financing activities (14,081) (7,912) (13,902)Effects of exchange rate changes 659 651 1,579Net (decrease) increase in cash and cash (34,262) 12,157 28,905equivalentsCash and cash equivalents at beginning of period 84,971 56,066 56,066Cash and cash equivalents at end of period 50,709 68,223 84,971 The accompanying notes are an integral part of these consolidated financial statements. Micro Focus International plcConsolidated statement of changes in shareholders' equity (unaudited) Foreign currency Other Profit and Share Share translation Reserves loss reserve capital premium reserve (deficit) (deficit) Total $'000 $'000 $'000 $'000 $'000 $'000 Balance as at 1 May 2006 36,644 103,641 (432) (27,085) (55,267) 57,501 Currency translation differences - - 649 - - 649Profit for the period - - - - 24,010 24,010Dividends - - - - (7,983) (7,983)Issue of share capital 68 3 - - - 71Movement in relation to share options - - - - 345 345Balance as at 31 October 2006 36,712 103,644 217 (27,085) (38,895) 74,593 Currency translation differences - - 946 - - 946Profit for the period - - - - 19,854 19,854Dividends - - - - (5,998) (5,998)Issue of share capital 55 - - - - 55Movement in relation to share options - 410 - - 10 420Deferred tax on share options - - - - 1,635 1,635Balance as at 30 April 2007 36,767 104,054 1,163 (27,085) (23,394) 91,505 Currency translation differences - - 659 - - 659Profit for the period - - - - 22,828 22,828Dividends - - - - (14,016) (14,016)Issue of share capital 52 - - - - 52Movement in relation to share options - 71 - - 875 946Deferred tax on share options - - - - -Balance as at 31 October 2007 36,819 104,125 1,822 (27,085) (13,707) 101,974 The accompanying notes are an integral part of these condensed financial statements. Notes to condensed consolidated half-yearly financial information 1. General Micro Focus International plc is a limited liability company incorporated,domiciled and registered in the United Kingdom. The registered office addressis The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN. The Company has its listing on the London Stock Exchange. This condensed consolidated half-yearly financial information was approved forissue on 5 December 2007. These interim financial results do not comprise statutory accounts within themeaning of section 240 of the Companies Act 1985. Statutory accounts for theyear ended 30 April 2007 were approved by the board of directors on 31 July 2007and delivered to the Registrar of Companies. The report of the auditors onthose accounts was unqualified, did not contain an emphasis of matter paragraphand did not contain any statement under Section 237 of the Companies Act 1985. 2. Basis of preparation This condensed consolidated half-yearly financial information for the half-yearended 31 October 2007 has been prepared in accordance with the Disclosure andTransparency Rules of the Financial Services Authority and with IAS 34, "Interimfinancial reporting" as adopted by the European Union. The half-yearlycondensed consolidated financial report should be read in conjunction with theannual financial statements for the year ended 30 April 2007, which have beenprepared in accordance with IFRSs as adopted by the European Union. 3. Accounting policies The accounting policies adopted are consistent with those of the annualfinancial statements for the year ended 30 April 2007, as described in thosefinancial statements. The following new standards, amendments to standards or interpretations aremandatory for the first time for the financial year ending 30 April 2008, buthave no material impact on the group. • IFRIC 9, "Reassessment of embedded derivatives", effective for annual periods beginning on or after 1 June 2006. • IFRIC 10, "Interims and impairment", effective for annual periods beginning on or after 1 November 2006. This interpretation has not had any impact on the timing or recognition of impairment losses as the group already accounted for such amounts using principles consistent with IFRIC 10. • IFRS 7, "Financial instruments: Disclosures', effective for annual periods beginning on or after 1 January 2007. • IAS 1, "Amendments to capital disclosures, effective for annual periods beginning on or after 1 January 2007. • IFRIC 11, "IFRS 2 - Group and treasury share transactions", effective for annual periods beginning on or after 1 March 2007 The following new standards, amendments to standards and interpretations havebeen issued, but are not effective for the financial year ending 30 April 2008and have not been early adopted. • IFRIC 12, "Service concession arrangements", effective for annual periods beginning on or after 1 January 2008. • IFRS 8, "Operating segments", effective for annual periods beginning on or after 1 January 2009, subject to EU endorsement. 4. Functional currency Items included in the financial statements of each of the group's entities aremeasured using the currency of the primary economic environment in which theentity operates ("the functional currency"). The consolidated financialstatements are presented in US Dollars, which is the Company's functionalcurrency. 5. Segment information Geographical segments for the six months ended 31 October 2007: North Europe and the America Middle East Rest of the world Total $'000 $'000 $'000 $'000Total segment revenue 46,292 44,273 18,327 108,892 Segment operating result before exceptional items 5,734 31,089 1,210 38,033Exceptional items (3,114) (3,034) - (6,148)Segment operating profit 2,620 28,055 1,210 31,885 Geographical segments for the six months ended 31 October 2006: North Europe and the America Middle East Rest of the world Total $'000 $'000 $'000 $'000Total segment revenue 35,704 30,167 13,095 78,966 Segment operating result before exceptional items 1,133 28,592 297 30,022Exceptional items - - - -Segment operating profit 1,133 28,592 297 30,022 There is no material difference between revenue by origin and revenue bydestination. All revenue is derived from external customers. The results for the six months to 31 October 2007 include those of Acucorp, Inc.which was acquired on 4 May 2007 (see note 14) and HAL Knowledge Solutions SpAacquired on 2 November 2006. 6. Supplementary information Set out below is an analysis of revenue recognised between the principal productcategories, which the directors use to assess the future revenue flows from thecurrent portfolio of customers. Six months Six months ended 31 ended 31 October 2007 October 2006 (unaudited) (unaudited) $'000 $'000Licence 53,035 37,675Maintenance 50,319 39,115Consulting 5,538 2,176Total 108,892 78,966 7. Earnings per share The calculation of basic earnings per share has been based on the earningsattributable to ordinary shareholders of the Company and the weighted averagenumber of shares for each period. The weighted average number of shares used inthe calculation was 200,164,000 (31 October 2006: 199,558,000; 30 April 2007:199,744,000). The diluted earnings per share has been calculated after taking account of theshare options. The weighted average number of shares used in the calculation was207,312,000 (31 October 2006: 201,889,000; 30 April 2007: 205,306,000). Basic earnings per share, excluding exceptional items, share based compensationand amortisation of purchased intangibles ("adjusted earnings per share") was14.58 cents (H1 2007: 12.17 cents, FY2007: 24.21 cents) Adjusted earnings pershare is calculated after adjusting for the post-tax effect of exceptionalitems, share based compensation and amortisation of purchased intangibles of$6,347,000 (H1 2007: $273,000; FY2007: $5,019,000). 8. Dividends A dividend of $14.0 million was paid during the period to 31 October 2007 of 7cents per share (2006: $8.0 million or 4 cents per share). In addition, the directors propose an interim dividend of 3.6 cents per share(2006: 3 cents per share) payable on 31 January 2008 to shareholders who are onthe register at 4 January 2008. This interim dividend, amounting to $7.2million (2006: $6.0 million) has not been recognised as a liability in thishalf-yearly report. 9. Reconciliation of operating profit to EBITDA Six months ended Six months ended Year ended 31 October 2007 31 October 2006 30 April 2007 (unaudited) (unaudited) (audited) $'000 $'000 $'000Operating profit 31,885 30,022 57,267Exceptional items - reorganisation costs 6,148 - 4,861Share-based compensation charge 946 390 849Amortisation of purchased intangibles 1,973 - 532Adjusted operating profit 40,952 30,412 63,509Depreciation 758 514 1,169Amortisation of software 77 364 608Adjusted EBITDA 41,787 31,290 65,286 EBITDA 34,693 30,900 59,576Exceptional items - reorganisation costs 6,148 - 4,861Share-based compensation charge 946 390 849Adjusted EBITDA 41,787 31,290 65,286 The directors use EBITDA and EBITDA before exceptional items and share-basedcompensation ("Adjusted EBITDA") as key performance measures of the business. In prior periods the directors considered share-based compensation to be of anexceptional nature due to the accelerated payments made at the time of thecompany's floatation. The directors have reviewed the classification andbelieve that on an on-going basis these costs are no longer of an exceptionalnature and have reclassified the expenditure accordingly. The impact is to reduce exceptional items by $946,000 (H1 2007: $390,000, FY2007: $849,000). 10. Taxation Tax for the half-year ended 31 October 2007 was $9.8 million (2006: $7.4million). The Group's effective tax rate is 30% (2006: 23.5%). In accordance with IAS 34 the tax expense recognised in the income statement forthe half-year is calculated on the basis of the estimated effective full-yeartax rate. 11. Trade and other receivables 31 October 2007 31 October 2006 30 April 2007 (unaudited) (unaudited) (audited) $'000 $'000 $'000Trade receivables 45,105 34,500 35,392Other receivables 6,617 2,023 2,270Prepayments 4,727 3,213 4,581Accrued income 1,508 2,606 1,788 Total 57,957 42,342 44,031 12. Trade and other payables - current 31 October 2007 31 October 2006 30 April 2007 (unaudited) (unaudited) (audited) $'000 $'000 $'000Trade payables 5,562 1,762 4,374Other tax and social security payable 4,214 2,720 185Accruals 21,347 15,456 21,750Deferred income 55,309 42,926 50,303 Total 86,432 62,864 76,612 13. Related party transactions As described in the 2007 Annual Report, two non-executive directors of theCompany are also directors in Golden Gate Capital who held 35% of the Company'sissued share capital at 31 October 2007. There were no related partytransactions with this company or with any other company during the half-yearended 31 October 2007. 14. Business combinations On 4 May 2007, the group acquired 100% of the share capital of Acucorp, Inc.,for $40.9 million, paid in full on completion. A fair value review was carried out on the assets and liabilities of thebusiness, resulting in the identification of intangible assets. The fair valuesare based on a provisional assessment pending final determination of some assetsand liabilities. The acquired business contributed revenues of $10.7 million and a loss beforetax of $1.2 million (after exceptional costs of $6.2 million), to the group forthe period from acquisition to 31 October 2007. Details of the net assets acquired and goodwill are as follows: Carrying value Provisional at acquisition fair value $'000 $'000Intangible assets 70 20,245Property, plant and equipment 445 445Inventories 55 55 Trade and other receivables 4,517 4,517Cash and cash equivalents 678 678Tax receivable 1,188 1,188 Trade and other payables (8,371) (8,371) Net deferred tax assets 262 262Net assets/(liabilities) (1,156) 19,019Goodwill 22,628Consideration 41,647Consideration satisfied by:Cash paid 41,647 Outflow of cash to acquire business, net of cash acquired: Cash consideration 40,928Acquisition costs 719Cash acquired (678)Total 40,969 The intangible assets acquired as part of the acquisition can be analysed asfollows: Trade Name 1,175 Software 7,818 Customer relationships 10,960Non-compete agreements 292Total 20,245 Goodwill includes non-identifiable intangible assets which do not meet theseparable and reliably measurable criteria including business processes,know-how and work force related industry specific knowledge and technicalskills. Statement of directors' responsibilities The directors confirm that this set of financial statements has been prepared inaccordance with IAS 34 as adopted by the European Union, and that the interimmanagement report herein includes a fair review of the information required byDTR 4.2.7 and DTR 4.2.8. The directors of Micro Focus International plc are listed in the Micro FocusInternational plc Annual Report for 30 April 2007. A list of current directorsis maintained on the Company's website: www.microfocus.com By order of the board Stephen Kelly Nick BrayChief Executive Officer Chief Financial Officer5 December 2007 5 December 2007 Independent review report to Micro Focus International plc Introduction We have been engaged by the Company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 31October 2007, which comprises the income statement, balance sheet, statement ofchanges in equity, cash flow statement and related notes. We have read the otherinformation contained in the half-yearly financial report and considered whetherit contains any apparent misstatements or material inconsistencies with theinformation in the condensed set of financial statements. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half-yearlyfinancial report in accordance with the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority. As disclosed in note 2, the annual financial statements of the group areprepared in accordance with IFRSs as adopted by the European Union. Thecondensed set of financial statements included in this half-yearly financialreport has been prepared in accordance with International Accounting Standard34, "Interim Financial Reporting", as adopted by the European Union. Our responsibility Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half- yearly financial report based on ourreview. This report, including the conclusion, has been prepared for and onlyfor the Company for the purpose of the Disclosure and Transparency Rules of theFinancial Services Authority and for no other reason. We do not, in producingthis report, accept or assume responsibility for any other purpose or to anyother person to whom this report is shown or into whose hands it may come savewhere expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410, "Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity" issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed set of financial statements in the half-yearly financialreport for the six months ended 31 October 2007 is not prepared, in all materialrespects, in accordance with International Accounting Standard 34 as adopted bythe European Union and the Disclosure and Transparency Rules of the UnitedKingdom's Financial Services Authority. PricewaterhouseCoopers LLPChartered AccountantsReading5 December 2007 Notes: (a) The maintenance and integrity of the Micro Focus International plc website is the responsibility of the directors; the work carried out by theauditors does not involve consideration of these matters and, accordingly, theauditors accept no responsibility for any changes that may have occurred to theinterim report since it was initially presented on the web site. (b) Legislation in the United Kingdom governing the preparation anddissemination of financial information may differ from legislation in otherjurisdictions. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MCRO.L