Micro Focus International : Interim Results 2020 (Press Release)

7 July 2020

Micro Focus International plc

Interim results for the six months ended 30 April 2020

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 2020.

Key highlights:

• • Revenue performance consistent with the guidance given at the time of our full year results on 4 February 2020 and our COVID-19 update of 18 March 2020. COVID-19 led to delays in buying behaviours with customers in April 2020 and reduced revenue by at least 2% period on period.

• • Impact of COVID-19 largely mitigated at Adjusted EBITDA1 level due to close management of the cost base. Adjusted EBITDA margin1 (after adopting IFRS 16) of 38.0% (30 April 2019: 39.9% CCY).

• • The Group recorded a goodwill impairment charge of $922.2m in the period (30 April 2019: $nil) attributable to the increased economic uncertainty as a result of COVID-19, which has led to an increase in the pre-tax discount rate and expected disruption to new sales activity and timing pressure on renewals.

• • As a result, the Group generated a statutory operating loss from continuing operations of $906.7m (30 April 2019: Operating profit of $32.6m).

• • The Group continues to make progress against our strategic initiatives to improve operational efficiency and simplification, as well as to strengthen our product alignment with customer needs. Accordingly, we continue to make incremental investments in our operations as far as possible in light of COVID-19.

• • Successful refinancing of $1.4bn Term Loan in May 2020. The Group has no term loan maturities until June 2024.

• • The Group had cash and cash equivalents of $808.1m as at 30 April 2020 (31 October 2019: $355.7m), which reflects $633.1m of Operating cash1 and $175.0m of RCF drawn as a precautionary measure. The Group's available liquidity totals $1.1bn.

• • Strong cash performance, with Adjusted Cash Conversion1 of 131.5% (30 April 2019: 115.1%) and free cash flow1 of $304.9m in the six months ended 30 April 2020 (30 April 2019: $419.5m).

• • Cash generated from operating activities of $560.4m for the six months ended 30 April 2020 (30 April 2019: $622.6m).

The table below shows the key results for the Group for the six months ended 30 April 2020:

Six months	Six months
ended	ended	Growth
Results at a glance	30 April 2020	30 April 2019	/(Decline)
(unaudited)	(unaudited)2	%
Alternative performance measures from continuing operations1
Revenue (versus CCY comparatives)	$1,454.2m	$1,638.6m	(11.3)%
Adjusted EBITDA (versus CCY comparatives)	$552.2m	$653.2m	(15.5)%
% Adjusted EBITDA margin (versus CCY comparatives)	38.0%	39.9%	(1.9) ppt
Adjusted Diluted Earnings per Share ("EPS") - continuing operations	72.10c	85.53c	(15.7)%
Net Debt/Adjusted Net Debt	$4,312.0m	$3,807.5m	(13.3)%
Net Debt(Adjusted Net Debt)/ Adjusted EBITDA ratio	3.4 times	2.7 times
Statutory Results
Revenue - continuing operations	$1,454.2m	$1,657.1m	(12.2)%
Operating (loss)/profit - continuing operations	$(906.7)m	$32.6m	(2,881.3)%
(Loss)/profit for the period	$(1,032.0)m	$1,397.1m	(173.9)%
Basic EPS - continuing operations	(308.40)c	(18.79)c	(1,541.3)%
Diluted EPS - continuing operations	(308.40)c	(18.79)c	(1,541.3)%

1 The definition and reconciliations of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Diluted EPS, Operating cash, Net Debt, Adjusted Net Debt, Adjusted Cash Conversion, Free Cash Flow and Constant Currency ("CCY") are in the "Alternative Performance Measures" section of this Interim Statement.

2 On 1 November 2019, the Group adopted IFRS 16. The results for the six months ended 30 April 2019 have not been restated for the adoption of this accounting standard.

Stephen Murdoch, Chief Executive Officer, commented:

"I am proud of our employees' resilience and professionalism throughout the unprecedented disruption caused by the COVID-19 pandemic. Micro Focus' business continuity plans have been highly effective and we continue to adapt our working practices to continue supporting our customers and partners. Our performance during the period has been consistent with our guidance and the successful refinancing of our debt despite the challenging market conditions demonstrates confidence in the underlying strengths of our model. Going forward, we see significant opportunities to improve our business and we will continue to progress initiatives to strengthen and simplify our business operations, and stand ready to take further actions if required in these uncertain times."

This announcement contains information that was previously Inside Information, as that term is defined in the Market Abuse Regulation (Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014) and successor UK legislation.

Results conference call

A conference call to cover the results for the six months ended 30 April 2020 will be held today at 1.30pm BST. The call will be accompanied by slides.

A live webcast and recording of the presentation will be available athttps://investors.microfocus.com/ during and after the event. For dial in only, access numbers are as follows:

UK & International: [phone]

UK Toll Free: 0808 109 0700

USA: [phone]

USA Toll Free: 1 866 966 5335

Enquiries:

Micro Focus

Tel: [phone]

Stephen Murdoch, Chief Executive Officer Brian McArthur-Muscroft, Chief Financial Officer Ben Donnelly, Investor relations

Brunswick

Sarah West Jonathan GlassTel: [phone]

About Micro Focus

Micro Focus (LSE: MCRO.L, NYSE: MFGP) is an enterprise software Company supporting the technology needs and challenges of customers globally. Our solutions help organisations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Within the Micro Focus Product Portfolio are the following product groups: Application Modernisation & Connectivity, Application Delivery Management, IT Operations Management, Security, and Information Management & Governance. For more information, visit:www.microfocus.com.

Forward-looking statements

Certain statements in these interim results 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

Our revenue performance during the period is in line with the guidance we issued at the time of the full year results announced in February 2020, supplemented by the additional specific guidance issued on 18 March 2020 to explain our expectations of the impact of the pandemic on our revenue performance. Strong cost management has largely mitigated the impact of the COVID-19 related decline in revenues on our Adjusted EBITDA performance.

On 29 May 2020, we successfully refinanced our 2021 term loans, with the oversubscribed offer demonstrating confidence in our business model. As a result, we are now fully financed with no term loan maturities until June 2024.

At the time of our full year results on 4 February 2020, we shared the output of our Strategic and Operational Review, and the initiatives we are implementing to strengthen our business. We are continuing to make progress in executing this plan, albeit with the additional complexity and impact of the COVID-19 pandemic, which may require us to adapt our approach in response to the opportunities and threats arising from continued market disruption. Progress over the coming months will be focused on simplifying and strengthening our business operations, improving the way we sell to and serve our customers, and ensuring our product development is as relevant and effective as possible.

COVID-19

The six months ended 30 April 2020 saw significant change and has affected Micro Focus' business in many areas as we have reacted to the practical and macro-economic impacts of COVID-19. I am proud of the way our organisation has responded in these past months and our primary focus remains the health and safety of our employees and delivering business continuity for our customers and partners. We have acted proactively, learning and adapting our ways of working to be as effective as possible during this period of uncertainty.

Over the course of March and April, we transitioned to remote working whilst continuing to operate the business and support customers. More than 90% of our people are working from home and we now have open 11 of our 101 offices, mainly in Asia.

We have developed and executed a comprehensive internal communications programme to reassure and inform staff at this difficult time. Our people have adapted to find effective 'remote' working models in support of our customers. Additionally, we have hosted our European and North American customer events, Micro Focus Universe, in virtual format for the first time. These events saw 4,000 customers and partners attend live sessions explaining how Micro Focus can support and help accelerate their digital transformation programmes.

We will continue to take a considered and phased return to an office environment, but this will not be on the same basis as before. Instead, we will learn from this experience to re-think how we collaborate, innovate and work to adopt a more flexible hybrid model going forward.

We believe our core customer proposition of helping customers navigate the need to build, operate, secure and analyse the enterprise as they drive their digital transformation programmes is even more relevant today as companies seek to rebuild and reshape their businesses. In helping organisations to bridge the gap between existing and emerging technologies, we enable our customers to balance the need to both run and transform their business and to deliver innovation faster with less risk. We are continually refining our approach and offerings such that we offer sharper, more focused solutions for our customers within this new macro context.

Performance in the period

Our performance during the period was consistent with guidance given at the time of our full year results on 4 February 2020, taking into account the expected disruption to new sales activity which we highlighted in our COVID-19 update of 18 March 2020.

The Group reported revenues of $1,454.2m (2019: $1,638.6m CCY, $1,657.1m reported). This is a decline of 11.3% on a CCY basis and 12.2% on a reported basis. Within this overall result there were examples of good progress but also some disappointing performances, most notably in ITOM where initial corrective actions have been identified and are being executed with a more detailed assessment of additional actions required being conducted in parallel.

The Group identified a slowdown in customer buying behaviour in April 2020 resulting in a deferral of projects involving new licence and services revenues as well as delays to some maintenance renewals. The impact of this is estimated to be at least 2% on revenues in the period.

The impact of this COVID-19 related revenue reduction on Adjusted EBITDA has been largely mitigated due to the management of variable and discretionary costs in addition to a reduction in certain costs as a direct result of COVID-19. Therefore, Adjusted EBITDA was $552.2m (2019: $653.2m CCY) which represents an Adjusted EBITDA margin of 38.0% (2019: 39.9% CCY).

The Group recorded an impairment charge of $922.2m in relation to the carrying value of Goodwill. This impairment charge is attributable to the increased economic uncertainty as a result of COVID-19, which has led to an increase in the pre-tax discount rate and expected continued disruption to new sales activity and timing pressure on renewals. This means that, on a statutory reported basis, the business generated an Operating loss of $906.7m in the six months ended 30 April 2020 (2019: $32.6m operating profit).

The Group continues to generate approximately 70% of revenues from recurring sources with broad based and longstanding customer relationships. Our products support mission critical business applications which are core to the value propositions of the world's largest companies. The customers we serve are geographically diverse and often multi-national across a range of sectors.

Further narrative in respect of the financial performance can be found in the Financial Review section of this report.

Strategic and Operational Review update

In February, at the time of our full year results, we announced a number of initiatives which underpin the delivery of our FY23 corporate vision. These initiatives, combined with existing programmes, are designed to make our business more efficient, agile and better aligned to our customers' needs:

Evolve our operating model to accelerate and improve the visibility of our product strategies and drive more differentiation. Specifically, in the period important hires have been made and planned organisational changes are progressing to drive more operational autonomy and effectiveness in our Security and Vertica product groups.

Transform our Go-to-Market function to improve sales effectiveness. In recent weeks, we have implemented a new global operating plan and management system. This is supported by the deployment of a consistent sales methodology and programmes for team enablement. The Go-to-Market organisation is being simplified and resources re-aligned to ensure more balance across our different revenue streams and product portfolios. This framework is the foundation for delivering increased sales effectiveness and productivity over time.

Accelerate the transition of certain portfolios to SaaS or Subscription to address market opportunities where these models are emerging or becoming the de facto market standard. This transition will take place over multiple financial periods. Work to date has focused on comprehensive planning to develop these customer offerings for our Security and Big Data products.

Complete systems and operational simplification priorities to deliver a robust and efficient operating platform. The transition to remote working had an impact on our core systems transformation programme (Stack C). This is a global programme being executed principally in the UK, USA and India in conjunction with our Systems Integration partners. As communicated previously we had two possible cut over plans as we seek to balance speed and our compliance obligations under the Sarbanes-Oxley Act which limit the timeframes within which we can make substantive changes to our operational controls. The move of this complex programme to remote working has been executed effectively but the impact of doing this at a critical time in the project means that we have now moved to our alternative cutover planning scenario of November 2020 and February 2021 versus May and November 2020. This will potentially impact the costs of the programme but work is underway to mitigate this as much as possible. The full extent of the impact is also heavily dependent on lockdown restrictions in key geographies.

Overall, the company has reacted quickly to mitigate the immediate and developing macro risks whilst continuing to make progress on these initiatives. We are currently executing broadly as planned but are continually assessing the pace and focus of these initiatives as we get more clarity on the operational and financial impacts of COVID-19.

Board update

The Group has continued to strengthen the experience and expertise of our board in the period by adding two new Non-Executive Directors.

Robert Youngjohns and Sander Van't Noordende joined the board in April and June respectively. Robert brings a number of years' experience in global enterprise software companies and having previously led the HPE Software division, has a deep understanding of the HPE Software products and the markets in which they operate. Sander has previously spent 32 years at Accenture and his expertise and experience in managing significant change will be very relevant as we execute on our strategic initiatives.

The board and management team continue to have confidence in the fundamentals of the business and a clear understanding of the work which needs to be done. We would like to thank our employees for their continued professionalism and hard work through these unprecedented times.

Capital allocation and dividend

In March 2020, the board decided to suspend the FY19 final dividend as uncertainty increased regarding the scale and potential impact of COVID-19 on the global economy and hence on the Group. Subsequently this FY19 final dividend totalling $190m was cancelled in order to conserve cash, of which approximately $143.0m was used to reduce gross debt as part of the refinancing in May 2020.

The Group successfully refinanced our $1.4bn term loan facility in May 2020, meaning the Group's next term loan maturity date is June 2024.

Given the heightened macro-economic uncertainty, we continue to believe it is right to approach the current financial period with a reduced risk appetite and heightened sense of caution. Consequently, the Group will not be paying an interim dividend.

This is not a decision the board has taken lightly and we appreciate the patience of our shareholders as we work through these unprecedented times.

It is the board's intention to propose a final dividend in relation to the current financial year to the extent it is prudent to do so within the context of our business performance and the macro economic environment.

Group Outlook

Micro Focus delivers mission-critical enterprise software, across multiple geographies and serving every vertical sector. The majority of our revenues are contractual and recurring in nature and the resilience this affords can be seen in the company's ability to generate cash and manage costs as required. The Company's balance sheet is strong, and the recent successful refinancing of the Company's debt, despite current market conditions, underlines the attractiveness of Micro Focus' financial model. The board and management team are committed to delivering the initiatives announced earlier this year. We are confident this work will improve and simplify operations, strengthen product portfolios, sharpen our ability to address the needs of our customers and deliver attractive and sustainable shareholder returns over the long term.

Despite the resilience of Micro Focus' customer proposition and financial model, the ultimate impact on the global economy of the COVID-19 pandemic remains unclear, as does the timing and extent to which that impact flows through into customer spending plans on enterprise software. Our current assumption is macro-economic conditions are unlikely to improve in the second half of the financial year. As a minimum, we continue to believe it appropriate to be prepared for further disruption to our new sales activity and timing pressure on renewals.

The Group's diversified and recurring revenue base and our highly cash generative business model represent solid foundations from which to execute any additional actions required in the event the pandemic has a prolonged impact on trading performance.

Stephen Murdoch

Chief Executive Officer 6 July 2020