8th Dec 2006 07:01
Micro Focus International plc08 December 2006 8 December 2006 Micro Focus International plc Interim results for the half year to 31 October 2006 Solid operational progress with increase in profitability Micro Focus International plc ("Micro Focus", "the Company" or "the Group", LSE:MCRO.L) announces interim results for the half year to 31 October 2006. Key financial highlights • Turnover up 8% to US$79.0m (2005: US$72.9m)• Operating profit before exceptional items* up 55% to US$30.4m (2005: US$19.6m)• EBITDA** before exceptional items* up 53% to US$31.3m (2005: US$20.5m)• Profit before tax up 143% to US$31.4m (2005: US$12.9m)• Basic earnings per share 12.03 cents (2005: 4.66 cents)• Net cash balance as at 31 October 2006, US$68.1m (31 October 2005: US$38.6m)• Interim dividend increased 50% to 3 cents per share (2005: 2 cents per share)• Operating profit US$30.0m (2005: US$13.7m)• EBITDA** US$30.9m (2005: US$14.6m) * Exceptional items are detailed in note 5** EBITDA is reconciled to operating profit in note 5*** Earnings per share are detailed in note 4 Stephen Kelly, Chief Executive Officer of Micro Focus, commented: "We are encouraged by the progress made at Micro Focus over the past six months.Satisfactory year-on-year revenue growth, combined with a firm control ofexpenses, has resulted in a significant increase in profits versus the priorperiod. We have completed the Strategy Review which confirms the long-term market forour products and solutions. For 30 years, Micro Focus has influenced andinnovated in the Enterprise Applications market and is now leading modernisationin this market. The primary focus of the new management team is to achieve sustainable,profitable growth and to enhance shareholder value. We continue to focus firmlyon sales execution as well as ensuring improvement from all supportingfunctions." EnquiriesMicro Focus Financial DynamicsStephen Kelly, Chief Executive Officer Giles SandersonNick Bray, Chief Financial Officer Harriet KeenTel: +44 (0)1635 32646 Haya Chelhot Tel: +44 (0)20 7831 3113 Online video interviews with Chief Executive Stephen Kelly and Chief FinancialOfficer Nick Bray can be viewed free at www.microfocus.com and www.cantos.com. 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 encouraged by the performance achieved over the past six months. We havereturned to revenue growth and have significantly increased our profitability. Most importantly, we have been establishing a new management team which has thedepth and skills necessary to drive this business forward. It is pleasing to seethat Stephen Kelly (CEO, appointed 1 May 2006), Nick Bray (CFO, appointed 3January 2006) and Mike Shinya (COO, appointed 1 August 2006) have establishedthemselves so quickly. On 6 April 2006 the Company announced a cost reduction programme to improveoverall returns while maintaining the fabric of the business and the Company'ssales capability. Since then, revenue growth combined with a firm control ofexpenses has resulted in a significant increase in profitability and we continueto invest to support future growth. I am pleased to announce a 50% increase inthe interim dividend to 3 cents per share. The Board would like to thank all of Micro Focus' employees for their continuedhard work and commitment throughout the past six months. We have experiencedsignificant change but we emerge much stronger as a result. The first half-year results are encouraging and Micro Focus remains focused ongrowth. I remain confident in the Company's ability to deliver value to all ofits stakeholders. Kevin Loosemore, Chairman Chief Executive Officer's statement Execution Over the past six months we have strengthened the management team, completed aStrategy Review and delivered a solid set of financial results. Whilst we stillhave many areas on which to improve, we have successfully executed onstabilising the business and have executed ahead of our initial expectations. Poor sales execution was, as has already been identified and highlighted, theroot cause of the fall in revenues in the year to 30 April 2006. The sales teamhas been strengthened and significant emphasis has been placed on refining ourgo-to-market strategy and our direct sales execution capability. Appropriatefocus is also being applied to all other functions within the business to ensureobjectives are aligned to drive future revenue growth. The Company continues to have an enviable customer base with approximately fiftypercent of turnover derived from secure and predictable maintenance revenues.The growth achieved in maintenance over the past six months has beenencouraging. The combination of revenue growth and cost reductions has produced a materialimprovement in net profits during the period. We acquired HAL Knowledge Solutions SPA following the period end. Thisacquisition expands our existing APM solution and we believe it now provides uswith a market leading position from which to take advantage of the rapidlyevolving APM space. Our Company now has firm financial foundations to support a platform for growth.The net cash balance at 31 October 2006 was US$68.1m, up from US$38.6m as at 31October 2005 as a result of improvements in the underlying trading performance. Strategy Review The strategy review was undertaken by a combined external and internal team withextensive external data, analysis and input. I am pleased to report that thereview confirmed and further clarified the Board's view of our business. - A firm market exists for all four of our solution areas; COBOL tools,modernisation (leverage and extend), migrations (lift and shift) and ApplicationPortfolio Management ('APM'). - Whilst growth rates may vary, in aggregate all four solution areascombined can support growth over the long-term. - Our core business remains predominantly based around the sale ofCOBOL tools. We are the leading worldwide player in this market and we willcontinue to invest to maintain this position. - Our opportunity, and at the same time our key challenge, is to expandour enterprise solution sales capability. Over the past two years in both ourmodernisation and migration solutions, we believe we have established bothmarket awareness and a leading position. We will focus firmly on thego-to-market strategy in these areas to capitalise on this. - Micro Focus will continue to focus on direct sales with support fromaligned System Integrator partners - Whilst still in its infancy, the APM market provides both significantgrowth potential and the ability to leverage our other solutions into seniorexecutives at key corporate clients. APM allows management to better understandthe Enterprise Applications developed by their organisations over many decadesand thereby allows them to determine the appropriate option to deploy on anongoing basis - be that modernising into Service Oriented Architecture ("SOA"),enhancing and extending valuable applications to address new businessrequirements, migrating applications to lower cost platforms, or making betteruse of COBOL and other tools. The acquisition of HAL Knowledge Solutions SPAsignificantly enhances our execution capability in this space. Micro Focus intends to host an event for analysts in early 2007 to provide moredetail around the Strategy Review.. To ensure sustainable growth, we are focused on linking our strategy to specificactions for executives and establishing the right cultures and values to helpdrive effective execution. Outlook The outlook for the core business excluding the impact of the acquisition of HALKnowledge Solutions (HAL KS) is detailed below. Our expectations with regard toHAL KS are discussed in the Chief Financial Officer's Review. Future revenue growth will be largely dependent on driving licence sales. It wastherefore particularly pleasing to see the level of first half-year licencefees, achieved with minimal contribution from large transactions. Our largestlicence contract during the first half year was US$0.7m. In prior periods, theCompany had benefited from contracts significantly in excess of this value. Anumber of large contracts remain in our pipeline although by their very nature,they are unpredictable. As reported in the preliminary results, we had expected maintenance revenues tobe broadly flat year on year. However, the solid first half of licence feescombined with an encouraging renewal rate, price increases and a focus onclosing contracts in negotiation has resulted in positive growth. The smallest proportion of our revenues is derived from our consultancy servicesand it is intended that these revenues will remain a similar proportion of totalrevenues for the year ahead. As a result of the above, we expect full year total revenue growth in the rangeof 7% to 10% as compared to the prior year. Sustainable and profitable revenue growth is the key factor that will determinethe long-term success of the Company. Management's emphasis will continue to beon licence fee sales to drive growth. As a business, we have made positive progress over the past six months. We havedeveloped a clearly scoped out strategy to work to and a firm focus on executionand tight cost control. The revenue outcome for the year will be determinedprimarily by the license fee performance in the second half. Sales and marketingcosts are expected to be slightly higher in the second half year as we look tofurther strengthen our go to market execution capability. We are encouraged by the progress to date but are conscious that there isfurther work to do. Stephen Kelly, Chief Executive Chief Financial Officer's review Turnover for the half year ended 31 October 2006 increased to US$79.0m (2005:US$72.9m). Turnover for the half year by geographic region was as follows: 31 October 30 April 31 October 2006 2006 2005 US$m % US$m % US$m % North America 35.7 45.2 33.8 47.7 35.1 48.1Europe and the Middle East 30.2 38.2 28.3 40.0 25.7 35.3Rest of the World 13.1 16.6 8.7 12.3 12.1 16.6Total turnover 79.0 100.0 70.8 100.0 72.9 100.0 Whilst revenue growth was achieved across all areas, as compared to the priorhalf year period to 31 October 2005, growth was primarily driven from ourEuropean operations, notably our smaller territories in Benelux, France andItaly along with our distributor channel. Our UK and North America operationsproduced results below the performance levels expected from geographicterritories with such a high concentration of resource, existing customers andmarket potential. However, it should be noted that during the six month periodto 31 October 2005, the North American operation closed a license fee deal forUS$3.0m. Similarly, it is encouraging to see the improvement in our Rest of the Worldoperations, highlighted by a weak third quarter in the prior year to 30 April2006. Turnover for the half year by category was as follows: 31 October 30 April 31 October 2006 2006 2005 US$m % US$m % US$m % License fees 37.7 47.7 32.8 46.3 35.2 48.3Maintenance fees 39.1 49.5 36.5 51.6 35.4 48.6Consultancy fees 2.2 2.8 1.5 2.1 2.3 3.1Total turnover 79.0 100.0 70.8 100.0 72.9 100.0 It can be seen that the increase in total revenues for the half year related tothe improvement in both licence and maintenance revenues. Licence fees increasedby US$2.5m or 7.1% to US$37.7m for the half year ended 31 October 2006 (2005:US$35.2m). Encouragingly, the growth in licence fee revenues was achieved by anincreased volume of lower value orders. A number of large contracts remain inour pipeline although by their very nature, they are unpredictable Maintenance revenues increased by US$3.7m or 10.5% to US$39.1m for the half yearended 31 October 2006 (2005: US$35.4m). Maintenance revenues are recognised evenly over the life of each contract, whichis typically twelve months. As such, the profit and loss recognition ofmaintenance revenue lags the initial licence fee sale. Thus, it was encouragingto see the increase in maintenance revenues following the disappointing licencefee performance in the second half of the year to 30 April 2006. Whilst thesolid first half year of licence fees is encouraging, the major factors drivinggrowth in the six months to 31 October 2006 are as follows: - An improvement in the renewal rate of existing customers.- Modest annual price increases to existing customers.- A focus on closing "contracts in negotiation" and the introduction of an automatic renewal process for our customers. Consulting revenues showed a modest decline against the comparative first halfyear but represent only a minor proportion of total revenues. Costs It has been pleasing to see the reduction in costs following the restructuringof the business announced on 6 April 2006. A firm control of expenses has beenestablished and will be maintained on an ongoing basis. The cost reductionprogramme was designed to improve overall returns while maintaining the fabricof the business. Cost of sales for the half year ended 31 October 2006 reduced by 12.9% toUS$8.1m (2005: US$9.3m). The costs in this category predominantly relate to ourconsulting and helpline support operations. Costs within the consultingorganisation have been reduced and its performance has improved substantially. Selling and distribution costs reduced to $19.9m for the half year ended 31October 2006 (2005: US$24.4m). Headcount levels are broadly consistent year onyear and the reduction reflects lower travel and entertainment, marketingexpense and commission payments. Research and development expenses for the half year were broadly consistent atUS$10.8m (2005: US$11.2m). Underlying administrative expenses, excluding exceptional items of US$0.4m(2005: US$6.0m), increased to US$9.7m (2005: US$8.3m). This cost categorycontains US$0.8m in relation to exchange losses in the period to 31 October2006. In the prior period, costs were reduced by exchange gains of US$0.3m. Assuch, underlying administrative expenses have increased by US$0.3m or 3%. Operating profit Operating profit for the period was US$30.0m (2005: US$13.7m). Operating profitbefore exceptional items was US$30.4m (2005: US$19.6m),the improvement beingdriven by the combination of improved revenues and reduced costs. EBITDA EBITDA before exceptional items increased by 52.7% to US$31.3m (2005: US$20.5m)for the half year ended 31 October 2006. Net interest income The IPO proceeds in May 2005 allowed the Company to repay all its outstandingloan balances. Since this time, interest has been generated on the available netcash balance. Interest income of US$1.4m was achieved in the half year to 31October 2006 as compared to a net interest expense of US$0.8m in the first halfof the prior period. During the prior first half year, US$0.7m of the expenserelated to penalties on the early repayment of debt which the Company deemedappropriate to avoid higher interest charges. Taxation Tax for the half year ended 31 October 2006 was US$7.4m (2005: US$3.9m) based onincreased profits. The Group's effective tax rate is 23.5% (2005: 30%). As aresult of the significant increase in the share price in the six month period to31 October 2006, a tax deduction has arisen on the stock options in issue.Excluding the effects of this beneficial tax deduction, the underlying effectivetax rate was 26.8%. Profit for the period Profit after tax for the period ended 31 October 2006 increased by 167% toUS$24.0m (2005: US$9.0m) driven by a significant improvement in operatingperformance combined with lower exceptional charges. Cash flow For the half year ended 31 October 2006, the Company generated a net cash inflowfrom operating activities of US$22.2m (2005: US$10.3m). At 31 October 2006, theCompany's net cash balance was US$68.1m (2005: US$38.6m). Dividends of US$8.0mwere paid in the period. 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 2007 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 cents per share, an increase of 50%above the interim dividend of 2 cents per share for the half year to 31 October2005. The interim dividend will be paid on 31 January 2007 to shareholders onthe register on 5 January 2007. 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 £ = US$1.96,equivalent to approximately 1.53 pence per share, being the rate applicable on 7December 2006, the date of recommendation of the dividend by the Board. Acquisition of HAL Knowledge Solutions SPA On 2 November 2006, Micro Focus announced that it had agreed to acquire HALKnowledge Solutions SPA (HAL KS), a leading provider of Application PortfolioManagement software in order to enhance the Company's enterprise applicationmodernisation capabilities. The transaction successfully closed on 10 November2006. HAL KS has been acquired by Micro Focus for a total consideration ofUS$3.5m in cash, subject to a net asset adjustment.. In the year to 31 December 2005, HAL KS reported a net loss before tax ofUS$4.5m and its gross assets as at 31 December 2005 were US$9.5m. Following theacquisition, we are now restructuring the business to reduce costs, with anexpected restructuring charge of approximately US$4.0m, falling in the currentfinancial year. HAL KS was acquired with net balance sheet liabilities ofapproximately US$4.5m. For the six month period to 30 April 2007, revenues are expected to be in therange of US$4.0m to US$5.0m. Excluding the associated restructuring charge, thebusiness is expected to break even in the six month period to April 2007. Nick Bray, Chief Financial Officer Micro Focus International plcConsolidated income statement Six months ended Six months ended Year ended 31 October 2006 31 October 2005 30 April 2006 (unaudited) (unaudited) (audited) $'000 $'000 $'000 Turnover 78,966 72,859 143,688Cost of sales (8,052) (9,302)* (17,552)*Gross profit 70,914 63,557 126,136 Selling and distribution costs (19,948) (24,374) (48,500) Research and development (10,811) (11,225)* (21,714)* Administrative expenses (10,133) (14,301)* (33,189)*Operating profit 30,022 13,657 22,733 Analysed as:Operating profit before exceptional items 30,412 19,615 36,946Exceptional items (390) (5,958) (14,213)Operating profit 30,022 13,657 22,733 Interest payable and similar charges (5) (1,158) (1,137)Interest receivable and similar income 1,370 362 962Profit before tax 31,387 12,861 22,558 Taxation (7,377) (3,858) (6,332)Profit for the period 24,010 9,003 16,226 Earnings per share expressed in cents per share - basic 12.03 4.66 8.25 - diluted 11.89 4.61 8.17 Earnings per share expressed in pence per share - basic 6.43 2.61 4.68 - diluted 6.36 2.58 4.63 Note: Dividends recognised in the period amounted to US$7,983,000 (six months ended 31October 2005: nil), or 4c per share. The interim dividend proposed but notrecognised in these interim financial statements amounted to US$5,994,000 (sixmonths ended 31 October 2005: US$3,987,000), or 3c per share (six months ended31 October 2005: 2c per share). * Certain costs have been reclassified between Cost of Sales, Research andDevelopment and Administrative expenses as disclosed in note 2. Micro Focus International plcConsolidated balance sheet 31 October 2006 31 October 2005 30 April 2006 (unaudited) (unaudited) (audited) $'000 $'000 $'000ASSETSNon current assetsGoodwill 42,404 42,404 42,404Intangible assets 7,289 7,753 7,637Property, plant and equipment 2,154 2,236 2,386Deferred tax assets 7,993 7,748 7,718 59,840 60,141 60,145Current assetsInventories 305 259 331Trade and other receivables 42,342 36,321 37,629Cash and cash equivalents 68,223 38,846 56,066 110,870 75,426 94,026Total assets 170,710 135,567 154,171 LIABILITIESCurrent liabilitiesTrade and other payables 62,864 53,168 70,516Current tax liabilities 18,156 14,299 10,777Financial liabilities - borrowings 118 118 117 81,138 67,585 81,410Non-current liabilitiesNon-current deferred income 6,585 5,915 6,720Deferred tax liabilities 8,353 7,748 8,446Financial liabilities - borrowings 41 154 94 14,979 13,817 15,260Net assets (liabilities) 74,593 54,165 57,501 SHAREHOLDERS' EQUITYCapital and reservesCalled up share capital 36,712 36,595 36,644Share premium 103,644 104,475 103,641Profit and loss reserve (deficit) (38,895) (58,838) (55,267)Foreign currency translation reserve 217 (982) (432)Other reserves (27,085) (27,085) (27,085)Total shareholders' equity (deficit) 74,593 54,165 57,501 Micro Focus International plcConsolidated cash flow statements Six months ended Six months ended Year ended 31 October 2006 31 October 2005 30 April 2006 (unaudited) (unaudited) (audited) $'000 $'000 $'000Cash flows from operating activitiesProfit for the period 24,010 9,003 16,226Adjustments forNet interest (1,365) 796 175Taxation 7,377 3,858 6,332Depreciation 514 480 1,006Loss on disposal of property 2 - 17Amortisation of intangibles 2,834 2,934 5,433Share-based compensation 390 (500) (224)Changes in working capital:Inventories 26 91 19Trade and other receivables (4,666) 13,923 12,615Payables and other non-current liabilities (7,883) (17,752) 371Cash generated from continuing operations 21,239 12,833 41,970 Interest received 1,321 365 666Interest paid (5) (1,829) (1,551)Tax paid (365) (1,074) (6,103)Net cash from operating activities 22,190 10,295 34,982 Cash flows from investing activitiesPurchase of intangible assets (2,486) (2,604) (4,986)Purchase of tangible fixed assets (286) (440) (1,123)Proceeds on disposal of tangible fixed assets - - -Net cash used in investing activities (2,772) (3,044) (6,109) Cash flows from financing activitiesNet proceeds from issue of ordinary share 71 110,500 109,823capitalNet proceeds from issue of new bank loan - - -Repayment of borrowings - (111,250) (111,250)Dividends paid to shareholders (7,983) - (3,987)Net cash used in financing activities (7,912) (750) (5,414) Effects of changes in exchange rates 651 (525) (263)Net increase in cash and cash equivalents 12,157 5,976 23,196Cash and cash equivalents at beginning of 56,066 32,870 32,870periodCash and cash equivalents at end of period 68,223 38,846 56,066 Micro Focus International plcStatement of Changes in Shareholders' Equity (unaudited) Foreign Profit and Currency Share Share loss Translation Other Total Capital Premium Reserve reserve Reserves Equity (deficit) $'000 $'000 $'000 $'000 $'000 $'000 Balance as at 1 May 2005 1 3,376 (67,869) (169) - (64,661) Currency translation differences - - - (813) - (813)Profit for the period - - 9,003 - - 9,003Value of share options issued under Employee Option - - 28 - - 28PlanShare for share exchange 27,085 - - - (27,085) -Issue of share capital 9,509 101,099 - - 110,608Balance as of 31 October 2005 36,595 104,475 (58,838) (982) (27,085) 54,165 Currency translation differences - - - 550 - 550Profit for the period - - 7,223 - - 7,223Dividends - - (3,987) - - (3,987)Value of share options issued under Employee Option - - 335 - - 335PlanIssue of share capital 49 (834) - - - (785)Balance as of 30 April 2006 36,644 103,641 (55,267) (432) (27,085) 57,501 Currency translation differences - - - 649 - 649Profit for the period - - 24,010 - - 24,010Dividends - - (7,983) - - (7,983)Value of share options issued under Employee Option - - 345 - - 345PlanIssue of share capital 68 3 - - - 71Balance as of 31 October 2006 36,712 103,644 (38,895) 217 (27,085) 74,593 Notes 1) Basis of preparation These financial statements comprise the consolidated interim balance sheets asof 31 October 2006 and 31 October 2005 and related consolidated interimstatements of income and cash flows for the six months then ended of Micro FocusInternational Plc (hereinafter referred to as 'the interim financialstatements'). These interim financial statements have been prepared on a basisconsistent with the accounting policies set out in Micro Focus Internationalplc's annual report for the year ended 30 April 2006. The interim financialstatements should therefore be read in conjunction with the 2006 annual report.The interim financial statements have been issued in accordance with the ListingRules of the Financial Services Authority. The group has chosen not to adoptIAS 34 'Interim financial statements' in preparing these interim financialstatements. These interim financial statements have been prepared under the historical costconvention. The preparation of financial statements require estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Although the estimates are based on management's bestknowledge of the amounts, events or actions, actual results may differ fromthose estimates. Copies of the interim results for the six months ended 31 October 2006 will besent to all shareholders. Details can also be found on the company's website atwww.microfocus.com. Further copies of the interim results and copies of theaccounts for the year ended 30 April 2006 can be obtained by writing to theCompany Secretary, Micro Focus International plc, Old Bath Road, Newbury,Berkshire, RG14 1QN. This announcement was approved by the Board of Micro Focus International plc on7 December 2006. 2) Reclassification of expenditure The directors have reviewed the classification of certain expenditure within theIncome Statement and believe, to be consistent with software industry accountingpractices, in order to aid comparison, it is more appropriate to classify thefollowing costs differently than was reported in prior periods. a) Cost of customer support - these costs were previously included withinAdministrative Expenses and have been reclassified as Cost of Sales. The impactof the change is to increase Cost of Sales by $4,651,000 (H1 2006: $5,302,000,FY06 $10,074,000) and decrease Administrative Expenses by a correspondingamount. b) Amortisation of research and development - these costs relating tocapitalized salaries were previously amortised through Cost of Sales. Theamortization has been reclassified as Research and Development Expenditure Theimpact of the change is to decrease Cost of Sales by $2,470,000 (H1 2006:$2,508,000, FY06 $4,626,000) and increase Research and Development Expenditureby a corresponding amount. 3) 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. 4) 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 199,558,000 (31 October 2005:192,990,000; 30 April 2006:196,709,000). The diluted earnings per share has been calculated after taking account of theshare options. The weighted average number of shares used in the calculation was201,889,000 (31 October 2005: 195,394,825; 30 April 2006: 198,711,000). Diluted earnings per share excluding exceptional items was 11.18 cents (H1 2006:7.20 cents, FY2006: 14.23 cents). Diluted earnings per share is calculatedafter adjusting for the post-tax effect of exceptional items of $277,000 (H12006: $5,064,000, FY2006: $12,059,000). 5) Reconciliation of operating profit to EBITDA Six months ended Six months ended Year ended 31 October 2006 31 October 2005 30 April 2006 (unaudited) (unaudited) (audited) $'000 $'000 $'000 Operating profit 30,022 13,657 22,733Depreciation 514 475 1,006Amortisation of Software 364 426 806EBITDA 30,900 14,558 24,545Exceptional items:IPO-related costs - 6,458 6,909Reorganisation costs - - 7,403Share-based compensation 390 (500) (224)Management charges - - 125EBITDA before exceptional items 31,290 20,516 38,758 In calculating EBITDA the amortization of Research and Development expenditureis not added back to operating profit, as the directors believe by doing soEBITDA provides a better measure of the cash generation of the business.Amortisation of Research and Development expenditure in the current period was$2,470,000 (H1 2006: $2,508,000, FY 2006 $4,626,000). 6) Segmental information Six months ended Six months ended Year ended 31 October 2006 31 October 2005 30 April 2006Geographical analysis of turnover (unaudited) (unaudited) (audited) $'000 $'000 $'000 North America 35,704 35,023 68,847Europe and the Middle East 30,167 25,740 54,038Rest of the World 13,095 12,096 20,803Total 78,966 72,859 143,688 There is no material difference between turnover by origin above and turnover bydestination. All turnover is derived from external customers. 7) Supplemental information Set out below is an analysis of turnover recognised between the principalproduct categories, which the directors use to assess the future revenue flowsfrom the current portfolio of customers. Six months ended Six months ended Year ended 31 October 2006 31 October 2005 30 April 2006Turnover (unaudited) (unaudited) (audited) $'000 $'000 $'000 License fees 37,675 35,160 67,985 Maintenance fees 39,115 35,388 71,860 Consultancy fees 2,176 2,311 3,843 Total 78,966 72,859 143,688 8) Taxation Tax for the half year ended 31 October 2006 was US$7.4m (2005: US$3.9m) based onincreased profits. The Group's effective tax rate is 23.5% (2005: 30%). As aresult of the significant increase in the share price in the six month period to31 October 2006, a tax deduction has arisen on the stock options in issue.Excluding the effects of this beneficial tax deduction, the underlying effectivetax rate was 26.8%. 9) Trade and other receivables 31 October 2006 31 October 2005 30 April 2006 (unaudited) (unaudited) (audited) $'000 $'000 $'000 Trade debtors 34,500 27,596 29,377Prepayments 3,213 3,089 3,959Accrued income 4,629 5,636 4,293 Total 42,342 36,321 37,629 10) Trade and other payables 31 October 2006 31 October 2005 30 April 2006 (unaudited) (unaudited) (audited) $'000 $'000 $'000 Trade payables 1,762 2,058 1,944Other tax and social security payable 2,720 2,593 2,468Accruals 15,456 10,010 20,511Deferred income 42,926 38,507 45,593 Total 62,864 53,168 70,516 11) Post balance sheet events On 2 November 2006, Micro Focus announced that it had agreed to acquire HALKnowledge Solutions SPA (HAL KS), a leading provider of Application PortfolioManagement software in order to enhance the Company's enterprise applicationmodernisation capabilities. The deal successfully closed on 10 November 2006.HAL KS has been acquired by Micro Focus for a total consideration of US$3.5m incash, subject to a net asset adjustment.. In the year to 31 December 2005, HAL KS reported a net loss before tax ofUS$4.5m and its gross assets as at 31 December 2005 were US$9.5m. Following theacquisition, we are now restructuring the business to reduce costs, with anexpected restructuring charge of approximately US$4.0m, falling in the currentfinancial year. HAL KS was acquired with net balance sheet liabilities ofapproximately $4.5m. Independent review report to Micro Focus International plc Introduction We have been instructed by the company to review the financial information forthe six months ended 31 October 2006 which comprises consolidated interimbalance sheet as at 31 October 2006 and the related consolidated interimstatements of income, cash flows and changes in shareholders' equity for the sixmonths then ended and related notes. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The Listing Rulesof the Financial Services Authority require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out inNote 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 October 2006. PricewaterhouseCoopersChartered AccountantsReading7 December 2006 Note: The maintenance and integrity of the Micro Focus International Plc web site isthe responsibility of the directors; the work carried out by the auditors doesnot involve consideration of these matters and, accordingly, the auditors acceptno responsibility for any changes that may have occurred to the interim reportsince it was initially presented on the web site. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MCRO.L