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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Micro Focus International Plc | LSE:MCRO | London | Ordinary Share | GB00BJ1F4N75 | ORD 10P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 532.00 | 531.60 | 531.80 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| 0 | 0 | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMMCRO
RNS Number : 7874K
Micro Focus International plc
12 July 2017
12 July 2017
Micro Focus International plc
Unaudited preliminary results for the year ended 30 April 2017
Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L), the global enterprise software product group, announces unaudited preliminary results for the year ended 30 April 2017.
Revenues in the year were $1,380.7m, slightly above the mid-point of management's guidance range, 0.9% lower than the prior year's pro-forma constant currency ("pro-forma CCY") revenues, $1,392.7m. Underlying Adjusted EBITDA** of $640.9m was 4.2% higher than the $615.3m delivered in the prior year on a pro-forma constant currency basis ("pro-forma CCY")*. Adjusted diluted earnings per share increased by 19.7% to 175.65 cents (2016: 146.70 cents) and the full year dividend increased by 32.1% to 88.06 cents (2016: 66.68 cents).
In March 2016 the Company announced it had entered into a definitive agreement to acquire the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. and its subsidiaries (together, "Serena" or "the Serena Group"). The acquisition completed on 2 May 2016 and consequently trading results of Serena are included in the results for the year ended 30 April 2017 set out below.
In September 2016 the Company announced it had agreed with Hewlett Packard Enterprises ("HPE") to merge with the software business assets of HPE ("HPE Software") by way of merger with a wholly owned subsidiary of HPE. The transaction is expected to complete at the beginning of September this year with the listing of consideration shares on the London Stock Exchange ("LSE") and the simultaneous listing of the American Depositary Shares ("ADS") on the New York Stock Exchange ("NYSE"). Exceptional pre-acquisition costs have been incurred in the year and will be incurred up to Completion in FY18.
Key highlights
-- On a reported basis: o Total revenues of $1,380.7m (2016: $1,245.0m), an increase of 10.9%. o Adjusted EBITDA** of $651.1m (2016: $546.8m), an increase of 19.1%. o Underlying Adjusted EBITDA increased by 20.4% to $640.9m (2016: $532.5m) -- On a pro-forma CCY* basis to provide a better comparison of like-for-like performance:
o Total revenues of $1,380.7m (2016: pro-forma CCY $1,392.7m), a decrease of 0.9%, driven by :
-- Strong SUSE Product Portfolio performance where revenues grew by 21.2% on a pro-forma CCY* basis;
-- On plan performance in Micro Focus Product Portfolio with expected reduction in maintenance and Serena revenues.
o Adjusted EBITDA of $651.1m (2016: pro-forma CCY $629.9m), an increase of 3.4%.
o Underlying Adjusted EBITDA of $640.9m (2016: pro-forma CCY $615.3m), an increase of 4.2%.
-- Underlying Adjusted EBITDA margins improved further to 46.4% (2016: pro-forma CCY 44.2%) through continued focus on operational efficiencies.
-- Completion of the Serena acquisition took place on 2 May 2016 for an Enterprise Value of $540.0m on a cash and debt free basis, partially funded by a share placing in FY16 of 10.9m shares at a price of 1,455 pence raising GBP158.2m ($225.7m) before expenses.
-- Exceptional costs incurred in the year of $97.3m (2016: $27.9m) relate to integration costs, acquisition costs, pre-acquisition costs, property costs, severance and legal costs.
-- Improved cash generation in the year:
o Cash generated from operations was $564.8m (2016: $456.1m) representing 102.0% (2016: 87.9%) of Adjusted EBITDA less exceptional costs.
o Net debt at 30 April 2017 was $1,410.6m (30 April 2016: $1,078.0m) down from $1,625.0m following the Completion of the Serena acquisition on 2 May 2016.
o Net debt to Facility EBITDA** for the year to 30 April 2017 is a multiple of 2.1 times (2016: 1.9 times), reducing from 2.5 times following the acquisition of Serena; medium-term target remains 2.5 times.
-- Growth in diluted adjusted earnings per share of 19.7% to 175.65 cents (2016: 146.70 cents)***
-- Second interim dividend increased by 17.3% to 58.33 cents per share (2016: final dividend 49.74 cents per share) resulting in a full year dividend of 88.06 cents per share (2016: 66.68 cents per share), an increase of 32.1% in line with twice covered dividend policy.
Statutory results
-- Operating profit of $293.4m (2016: $294.9m) -- Profit before tax of $196.3m (2016: $195.4m) -- Basic earnings per share of 68.88 cents (2016: 74.50 cents) a decrease of 7.5%***
The table below shows the reported results for the Group at actual exchange rates for the year ended 30 April 2017 and the year ended 30 April 2016 together with pro-forma CCY comparatives:
Hot Features
Premium
Results at a glance Year Year Growth Year
ended ended /(Decline) ended
30 April 30 April 30 Apr
2017 2016 Pro-forma 2016
CCY* %
================================ =========== ================= ============ ==========
Revenue
Total Revenue $1,380.7m $1,392.7m (0.9%) $1,245.0m
* Licence $308.4m $333.0m (7.4%) $304.8m
* Maintenance $720.7m $754.5m (4.5%) $644.5m
* Subscription $298.7m $245.5m 21.7% $248.9m
* Consultancy $52.9m $59.7m (11.4%) $46.8m
NON GAAP MEASURES
-------------------------------- ----------- ----------------- ------------ ----------
Adjusted EBITDA** $651.1m $629.9m 3.4% $546.8m
Underlying Adjusted
EBITDA** $640.9m $615.3m 4.2% $532.5m
STATUTORY MEASURES
-------------------------------- ----------- ----------------- ------------ ----------
Profit before tax $196.3m $278.1m (29.4)% $195.4m
Earnings per share
***
Basic 68.88c (7.5)% 74.50c
Diluted 66.51c (7.1)% 71.61c
Diluted adjusted 175.65c 19.7% 146.70c
Dividend per share 88.06c 32.1% 66.68c
Net debt $1,410.6m 30.9% $1,078.0m
================================ =========== ================= ============ ==========
* Group results presented for the year ended 30 April 2017 include the post-acquisition period results for Serena, GWAVA, OpenATTIC and OpenStack. Due to the significant size of the Serena acquisition the directors believe that the Group results are better understood by looking at the comparative results on a pro-forma basis for the combination of Base Micro Focus and Serena. The directors do not consider the other acquisitions to be of a significant size and therefore have not presented their results in the pro-forma comparatives.
Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena's revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus' experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the year ended 30 April 2017 the directors have combined the unaudited financials for Serena for the year ended 31 January 2016 with the audited figures for Base Micro Focus for the year ended 30 April 2016. From the date of acquisition, 2 May 2016 to 30 April 2017, Serena contributed $144.8m to revenue and $72.2m to profit, before any allocation of management costs and tax.
** In assessing the performance of the business, the directors use non GAAP measures "Adjusted Operating Profit", "Adjusted Operating Costs" and "Adjusted earnings per share", being the relevant statutory measures, prior to exceptional items, amortization of purchased intangibles and share based compensation. "Adjusted EBITDA" is the Adjusted Operating Profit prior to depreciation and amortization of purchased software. Underlying Adjusted EBITDA removes the impact of net capitalization/amortization of product development costs and foreign currency gains and losses from Adjusted EBITDA whilst Facility EBITDA is Adjusted EBITDA before amortization and impairment of capitalized product development costs. A reconciliation of these profit measures is given in note 8.
*** Earnings per share are detailed in note 13.
Kevin Loosemore, Executive Chairman of Micro Focus, commented:
"This has been a significant year for Micro Focus with the announcement of the combination with HPE Software to create one of the world's largest pure play software companies. The transaction is on track to complete on 1 September when Micro Focus will list the consideration shares on the London market and the American Depositary Shares on the New York Stock Exchange.
Operationally we have delivered revenue of $1,380.7m, slightly above the mid-point of the zero to minus 2% growth rate range given at the beginning of the year when compared with pro-forma CCY revenues for FY16, with revenues 0.9% down from $1,392.7m.
Mergers and acquisitions continue to be a key component of our strategy. Whilst the key strategic announcement in the period was the HPE Software transaction we also completed the acquisitions of Serena, GWAVA Inc., OpenATTIC, and the OpenStack IaaS and Cloud Foundry PaaS talent and technology assets. Over the last six years we have completed and successfully integrated 10 acquisitions and on completion of the HPE Software transaction will have increased the revenue of the business approximately 10 fold since 2011.
Micro Focus sets out to deliver consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on that strategy. These returns can be further enhanced by the appropriate deployment of capital in value enhancing acquisitions.
As promised, immediately prior to completion of the HPE Software transaction, we will declare a return of value of $500m, approximately $2.17 per share, to our existing shareholders. They have also seen their dividend increase to 88.06 cents from 66.68 cents per share last year in line with our twice covered dividend policy."
Enquiries:
Micro Focus Tel: +44 (0) 1635 32646 Kevin Loosemore, Executive Chairman Mike Phillips, Chief Financial Officer Tim Brill, IR Director Powerscourt Tel: +44 (0) 20 7250 1446 Juliet Callaghan Simon Compton
About Micro Focus
Micro Focus (LSE: MCRO.L) is a global enterprise software Company supporting the technology needs and challenges of the Global 2000. Our solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Our product portfolios are Micro Focus and SUSE. Within Micro Focus our solution portfolios are COBOL Development and Mainframe Solutions, Host Connectivity, Identity and Access Security, IT Development and Operations Management Tools, and Collaboration and Networking. For more information, visit: www.microfocus.com. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, cloud infrastructure and storage solutions that give enterprises greater control and flexibility. For more information, visit: www.suse.com.
Forward-looking statements
Certain statements in this preliminary statement of 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.
Executive Chairman's Statement
The year ended 30 April 2017 was a significant year for the Group. On 7 September 2016 the Company and Hewlett Packard Enterprise ("HPE"), announced that they had agreed that Micro Focus would acquire HPE's software business segment ("HPE Software") by way of merger with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software. This major transaction is on track to close at the beginning of September this year with the listing of consideration shares on the London Stock Exchange ("LSE") and the simultaneous listing of the ADS on the NYSE ("Completion"). Micro Focus existing shareholders will also be entitled to receive a Return of Value which in total will be $500m that will be declared immediately prior to Completion.
This will create a global infrastructure software business with pro-forma revenues in the 12 months to 30 April 2017 of approximately $4.4 billion and Underlying Adjusted EBITDA of approximately $1.4 billion making it one of the largest dedicated software companies in the world and a leading technology stock on the LSE. Following Completion we will align our financial year end to 31 October and will initially report an 18 month financial period ending 31 October 2018. This will enable us to launch the new Company's financial year with effect from 1 November 2017.
During the year ended 30 April 2017 the Micro Focus business traded in line with the expectations we had set at the beginning of the year. This was achieved during a year of significant change and distraction as we;
-- Completed the acquisition of Serena Software Inc. ("Serena"), together with three other smaller acquisitions;
-- Integrated Serena into the Micro Focus Product Portfolio; -- Entered the FTSE 100 on 6 September 2016; -- Became the spin/merge partner for HPE Software; -- Began to work on the plan for integrating HPE Software; -- Completed required regulatory filings in the UK, USA and elsewhere; -- Refinanced the Company's existing debt; and
-- Raised new banking facilities to enable the Completion of the HPE Software transaction and the Return of Value.
We have believed for some time that there are significant segments of the infrastructure software market that have matured. The response to this is consolidation. To be successful in this stage of a market both operational effectiveness and scale are critical. We believe that Micro Focus is now well positioned to lead in this space.
There is a clear customer requirement for a company that can innovate and extend the life of mature software assets.
Like the Attachmate Group ("TAG") and Serena acquisitions, the combination with HPE Software has clear business logic to extend Micro Focus' market presence in mature infrastructure software segments; to increase the operational efficiency of the combined Group; to deliver effective product management focused on customer centered innovation and improve sales productivity. It is 100% consistent with the Company's strategy which, as you will see in the following pages, has not had any significant changes from the plan laid out five and a half years ago. Micro Focus sets out to deliver consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on that strategy. These returns can be further enhanced by the appropriate deployment of capital in value enhancing acquisitions.
The Company has a business strategy, a financial strategy, an operating plan and an incentive strategy that all support our objective to achieve 15% to 20% compound annual return for shareholders. Since IPO in 2005 until 30 April 2017, the annual compound shareholder return over 12 years has been 29.3%. Adjusted diluted earnings per share have grown from 14.23 cents in 2006 to 175.65 cents in 2017 and dividends per share have grown from 6 cents to 88.06 cents with respective compound annual growth rates of 25.7% and 27.7% respectively.
When we announced the acquisition of TAG on 15 September 2014 we set out the four phase plan below for the combination of the businesses whilst continuing to deliver sustainable shareholder returns.
Financial FY2015 FY2016 FY2017 FY2018
Year
---------- --------------------------------------------- ------------------------------------------- --------------------------------- ---------------------------------
Phase Assessment Integration Stabilization Growth
---------- --------------------------------------------- ------------------------------------------- --------------------------------- ---------------------------------
Actions
* Deliver plans for FY15 * Standardize systems * Stabilize top line * Top line growth
* Detailed review of combined businesses * Rationalize Properties * Improve GTM productivity * Standardize systems
* Invigorate Product Management * Rationalize Legal entities * Growth from new areas * Rationalize legal entities
* New Go to Market ("GTM") model * Improved profitability
* Maintain/improve cash conversion * Standardize systems
* Rationalize underperforming elements * Rationalize Legal entities
* New market initiatives
---------- --------------------------------------------- ------------------------------------------- --------------------------------- ---------------------------------
The only changes to this original plan which are reflected in the table above are that our detailed review concluded that the integration of systems supporting the new business will extend throughout the four year period and the rationalization of legal entities will extend through FY17 and beyond. This has now been superseded by the plan to adopt new systems being implemented in HPE Software. This software stack will give us one of the most up to date system stacks in the industry and serve as a scale platform for further mergers and acquisition ("M&A") integration.
We have set out a new four phase plan below for the combination of the Micro Focus and HPE Software businesses whilst continuing to deliver sustainable shareholder returns.
Financial FY2017 FY2018 FY2019 FY2020
Year
---------- --------------------------------------------- ------------------------------------------- ------------------------------------ ------------------------
Phase Assessment Integration Stabilization Growth
---------- --------------------------------------------- ------------------------------------------- ------------------------------------ ------------------------
Actions
* Deliver plans for FY17 * Standardize systems * Stabilize top line * Top line growth
* Detailed review of combined businesses * Rationalize Properties * Improve GTM productivity * Click and repeat!
* Invigorate Product Management * Rationalize Legal entities * Growth from new areas
* New Go to Market ("GTM") model * Improved profitability
* Maintain/improve cash conversion * Standardize systems
* Rationalize underperforming elements * Rationalize Legal entities
* New market initiatives
---------- --------------------------------------------- ------------------------------------------- ------------------------------------ ------------------------
The acquisition of HPE Software may delay the return to revenue growth as we consolidate the HPE Software products. As with prior transactions we expect HPE Software's revenue trend to continue its historical decline until significant change has been implemented. This integration will be delivered by the four year plan that will consolidate and strengthen the combined business, with the goal of delivering modest revenue growth in the medium-term as well as underpinning our margin improvement objectives.
We are building a strong platform with the addition of HPE Software. Once we achieve our target cash conversion ratio for the Enlarged Group of 90% to 95% we will generate significant free cash flows from which we can deliver significant returns of value to our shareholders and/or further highly accretive acquisitions.
Following our integration review in 2015 we decided that the Group should operate two product portfolios, Micro Focus and SUSE, and have reported the business this way since 1 May 2015.
Since April 2011, I have held the roles of both Chairman and Chief Executive Officer ("CEO"). In December 2015 we announced that effective from 1 February 2016, I would be Executive Chairman and that Stephen Murdoch and Nils Brauckmann would become CEO of Micro Focus and CEO of SUSE respectively. Stephen and Nils discuss the operating performance of their respective portfolios for the year completed in the CEO reports.
Our performance in the year
Micro Focus Group delivered revenues and Underlying Adjusted EBITDA of $1,380.7m and $640.9m respectively (2016: $1,245.0m and $532.5m). On a pro-forma constant currency ("CCY") basis the revenue reduced by 0.9% which is just above the mid-point of the guidance range given at the beginning of the year and re-confirmed at the interims.
Our net debt at 30 April 2017 was $1,410.6m and represents a multiple of 2.1 times Facility EBITDA of $673.4m, against our target of 2.5 times.
We would like to thank our employees for their continued dedication, commitment and hard work in delivering the full year results.
For the year ended 30 April 2017 bonuses were paid to executive management and non-commissioned staff in Micro Focus in line with the improvement in Underlying Adjusted EBITDA of the Group on a constant currency ("CCY") basis excluding the impact of in year acquisitions. Staff bonuses will be paid at 45.0% of their on target amount reflecting a 4.5% increase in Underlying Adjusted EBITDA of Micro Focus on a CCY basis excluding the impact of in year acquisitions. Executive Management received the same percentage.
Non-commissioned staff fully aligned with SUSE, were targeted 50% on improvement in Underlying Adjusted EBITDA of the Group on a CCY basis excluding the impact of in year acquisitions and 50% on delivery of Annual Contract Value ("ACV") growth targets in SUSE. Their bonus payment is 75.5% of their on target amount, reflecting stronger than targeted achievement in the ACV component.
The amount charged to the consolidated statement of comprehensive income in respect of the Corporate Bonus plan in the actual results for the year ended 30 April 2017 was $20.8m (2016: $45.6m).
Delivering value to shareholders
The board has adopted a very clear plan of value creation.
Our priority is to improve the performance of the business in order to maximize the opportunity to generate modest revenue growth in the medium-term. At the same time we have created flexibility to allow value creation to shareholders through cash distributions or acquisitions as appropriate. We deliver value to our customers through customer centered innovation. We will do nothing that will constrain our ability to achieve organic growth and we are currently investing significant amounts on activities designed to enhance growth.
The TAG and HPE Software transactions are transformational in terms of the size of the Group from an operating point of view. It involves the type of transformation that many companies would have said that they needed to go private to achieve out of the public eye. The board and management of Micro Focus believe that it is quite possible to do this on the public market and deliver the resulting increase in value to existing shareholders.
The HPE Software transaction was also transformational in terms of market capitalization. The day before the announcement of the transaction Micro Focus had a market capitalization of GBP4,480.7m which had increased to GBP5,944.0m by 30 April 2017. This increased scale drew the attention of a new set of public company institutional investors and also meant that some existing institutional investors would be unable to hold their investments as we had become too big. We will also list in the USA through an ADS which further expands Micro Focus relevant investor base.
Working with our brokers, Numis Securities, we set about establishing a significant increase in our investor relations and outreach to the HPE shareholder base. Following this activity approximately 30% of the Company's shares are now held in North America.
The board continues to target a net debt to Facility EBITDA multiple of approximately 2.5 times. This is a modest level of gearing for a company with the cash generating qualities of Micro Focus. We are confident that this level of debt will not reduce our ability to deliver growth, invest in products and/or make appropriate acquisitions. As the integration of the businesses continues the board will keep the appropriate level of debt under review.
In order to complete the acquisition of HPE Software the Company has extended its revolving credit facility from $375.0m to $500.0m, refinanced its term loan debt of $1,515.2m with an improved repayment profile and raised new term loan debt of $3,485m to complete the transaction and make the Return of Value.
At 30 April 2017 we had net debt of $1,410.6m representing a net debt to Facility EBITDA of 2.1 times. On closing of the HPE Software transaction net debt will be approximately $4.6 billion representing approximately 3.3 times net debt to pro-forma Facility EBITDA for the 12 months ended 30 April 2017.
The board has adopted a dividend policy of being two times covered by the adjusted earnings of the Group. This policy has delivered a proposed second interim dividend of 58.33 cents (2016: 49.74 cents per share), which represents a 17.3% increase on last year's final dividend and gives a total proposed dividend for the year of 88.06 cents per share (2016: 66.68 cents), an increase of 32.1%.
The dividend will be paid in Sterling equivalent to 45.22 pence per share, based on an exchange rate of GBP1 = $1.29, the rate applicable on 11 July 2017, the date on which the board resolved to pay the dividend. The dividend will be paid on 25 August 2017 to shareholders on the register at 4 August 2017.
Board changes and succession planning
At the Completion of the HPE Software transaction the board has announced that Chris Hsu will become CEO and Stephen Murdoch will become Chief Operating Office ("COO"). Nils Brauckmann will continue as CEO of SUSE. To ensure delivery of the integration the board has agreed that I will remain Executive Chairman until the announcement of the first full year results after Completion. This is currently expected to be January 2019.
During the year there were a number of other board changes which arose due to the conditions of the agreement to acquire HPE Software ("Merger Agreement").
Effective 15 May 2017, Silke Scheiber and Darren Roos joined the board as two of the three independent Non-Executive Directors nominated by HPE pursuant to the Merger Agreement. Upon Completion, John Schultz, the Executive Vice President and General Counsel of HPE, will join the board as the Non-Executive Director nominated by HPE. The board has determined that Mr Schultz will not be independent. In addition, Chris Hsu, who will become CEO of Micro Focus upon Completion, will join the board at that time. An additional independent Non-Executive Director nominated by HPE and to be approved by the Micro Focus Nomination Committee, is expected to be appointed after Completion.
Steve Schuckenbrock and Tom Virden both resigned as Directors of Micro Focus, effective 25 April 2017, to ensure that the composition of the board remained in line with the UK corporate governance code and met the requirements of the Merger Agreement. We would like to thank Steve and Tom for their significant contributions to Micro Focus.
Stephen Murdoch remains CEO of Micro Focus until Completion and will then become COO and simultaneously step down from the board.
We welcome the new members of our board.
Outlook
Following completion of the acquisition of HPE Software, the Group will change its financial year end to 31 October and will report an 18 month financial period ending 31 October 2018. Assuming the transaction remains on schedule, the first six months will comprise six months of the current Micro Focus business and two months of the HPE Software business. There will then be a full 12 months trading of both businesses.
We anticipate revenues for the current Micro Focus Group business for the six months to 31 October 2017 will be broadly flat on the comparative period. In anticipation of the impending integration of the Micro Focus and HPE Software businesses in November we have put on hold any operational changes in the existing Micro Focus business. We will provide guidance for the combined 12 month period to 31 October 2018 when we report in January 2018 on the Group's performance in the six months ending 31 October 2017.
Having delivered 12 years of approximately 29.3% compound annual returns to investors we believe we have a strong operational and financial model that can continue to scale and provide excellent returns to our shareholders.
Kevin Loosemore
Executive Chairman
12 July 2017
Financial Review
Group results presented for the year ended 30 April 2017 include the post-acquisition period results for Serena, GWAVA, OpenATTIC and OpenStack. Due to the significant size of the Serena acquisition the directors believe that the Group results are better understood by looking at the comparative results on a pro-forma basis for the combination of Base Micro Focus and Serena. The directors do not consider the other acquisitions to be of a significant size and therefore have not presented their results in the pro-forma comparatives.
Serena had a 31 January year end date prior to acquisition. Similar to other software companies with a perpetual licence model Serena's revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Micro Focus' experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro-forma results for the year ended 30 April 2017 the directors have combined the unaudited financials for Serena for the year ended 31 January 2016 with the audited figures for Base Micro Focus for the year ended 30 April 2016. From the date of acquisition, 2 May 2016 to 30 April 2017, Serena contributed $144.8m to revenue and $72.2m to profit, before any allocation of management costs and tax.
A reconciliation between the GAAP and Non-GAAP performance measures is given on page 10 (Revenue), page 13 (Adjusted Operating Profit, Adjusted EBITDA and Underlying Adjusted EBITDA) and note 8. The Group operates two product portfolios (i) Micro Focus and (ii) SUSE. These are the reporting segments and the cash generating units for the Group.
The Micro Focus Product Portfolio contains our mature infrastructure software products that are managed on a portfolio basis akin to a "fund of funds" investment portfolio. This portfolio is being managed with a single product development group that makes and maintains the software, whilst the software is sold and supported through a geographic Go-to-Market ("GTM") organization. Products are organized into five sub-portfolios based on industrial logic. During the year Serena's product set was added to the Development & IT Operations Management Tools sub-portfolio and towards the end of the year GWAVA was added to Collaboration & Networking.
SUSE's characteristics are different due to the Open Source nature and the growth profile of its offerings. During the year SUSE made its first acquisition of OpenATTIC, a storage management software solution, and then took over assets and staff from HPE related to OpenStack Infrastructure as a Service ("IaaS") and Cloud Foundry Platform as a Service ("PaaS") technology.
Our revenue guidance at the beginning of the year was for Group revenues for the full year to grow between zero% and minus 2% when compared to the pro-forma CCY revenues of the comparable period with growth in SUSE expected to partially offset the anticipated decline in the Micro Focus Product Portfolio based on the revenue trends in the sub-portfolios.
The performance in the year was in line with management's guidance with overall revenues declining by 0.9% when compared to pro-forma CCY revenues.
The portfolios have directly controlled costs and then an allocation of the costs of the support functions that are centrally managed. Set out in the table below are the profitability metrics for our two product portfolios including the breakdown of Adjusted Operating Profit for the year and the reconciliation between Adjusted Operating Profit, Adjusted EBITDA and Underlying Adjusted EBITDA (note 8):
Year ended Year ended Year ended
30 April 2017 30 April 2016 30 April 2016
As reported Pro-forma As reported
Actual CCY (1) Actual
---------------------------- ---------------------------- ----------------------------
Micro Micro Micro
Focus SUSE Group Focus SUSE Group Focus SUSE Group
$m $m $m $m $m $m $m $m $m
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Segment revenue 1,077.3 303.4 1,380.7 1,142.3 250.4 1,392.7 991.2 253.8 1,245.0
Directly managed
costs (564.1) (178.5) (742.6) (633.0) (143.2) (776.2) (566.4) (145.1) (711.5)
Allocation of centrally
managed costs 26.2 (26.2) - 27.3 (27.3) - 28.9 (28.9) -
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Adjusted
Operating Costs (537.9) (204.7) (742.6) (605.7) (170.5) (776.2) (537.5) (174.0) (711.5)
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted Operating
Profit 539.4 98.7 638.1 536.6 79.9 616.5 453.7 79.8 533.5
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Margin 50.1% 32.5% 46.2% 47.0% 31.9% 44.3% 45.8% 31.4% 42.9%
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted Operating
Profit 539.4 98.7 638.1 536.6 79.9 616.5 453.7 79.8 533.5
Depreciation of
property, plant
and equipment 9.7 2.1 11.8 10.0 1.7 11.7 9.7 1.7 11.4
Amortization of
software intangibles 1.1 0.1 1.2 1.6 0.1 1.7 1.7 0.2 1.9
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Adjusted EBITDA 550.2 100.9 651.1 548.2 81.7 629.9 465.1 81.7 546.8
Foreign exchange
credit (2.9) (2.0) (4.9) (3.0) (0.3) (3.3) (2.6) (0.3) (2.9)
Net capitalization
of product development
costs (5.3) - (5.3) (11.3) - (11.3) (11.4) - (11.4)
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
Underlying Adjusted
EBITDA 542.0 98.9 640.9 533.9 81.4 615.3 451.1 81.4 532.5
------------------------ -------- -------- -------- -------- -------- -------- -------- -------- --------
(1) unaudited
The breakdown in revenue within the two product portfolios by revenue type in the year to 30 April 2017 compared to the pro-forma CCY and reported revenues in the year to 30 April 2016 is shown in the table below:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma Growth/ As reported
Actual CCY (1) (Decline) Actual
$m $m % $m
------------------------ ------------- ----------- ----------- -------------
Micro Focus Product
Portfolio
Licence 308.4 333.0 (7.4%) 304.8
Maintenance 720.7 754.5 (4.5%) 644.5
Subscription - - - -
Consultancy 48.2 54.8 (12.0 %) 41.9
------------------------ ------------- ----------- ----------- -------------
1,077.3 1,142.3 (5.7%) 991.2
------------------------ ------------- ----------- ----------- -------------
SUSE Product Portfolio
Licence - - - -
Maintenance - - - -
Subscription 298.7 245.5 21.7% 248.9
Consultancy 4.7 4.9 (4.1%) 4.9
------------------------ ------------- ----------- ----------- -------------
303.4 250.4 21.2% 253.8
------------------------ ------------- ----------- ----------- -------------
Total Revenue
Licence 308.4 333.0 (7.4%) 304.8
Maintenance 720.7 754.5 (4.5%) 644.5
Subscription 298.7 245.5 21.7% 248.9
Consultancy 52.9 59.7 (11.4%) 46.8
------------------------ ------------- ----------- ----------- -------------
Revenue 1,380.7 1,392.7 (0.9%) 1,245.0
======================== ============= =========== =========== =============
(1) unaudited
The table below provides the proportion of revenue delivered during FY17 by each of the portfolios and the comparison to the pro-forma CCY and reported FY16 revenues with Micro Focus broken out into its sub-portfolios:
Percentage Percentage Percentage
of of of
FY17 Revenues FY16 Revenues FY16 Revenues
As reported Pro-forma As Reported
CCY(1)
---------------------------------------- -------------- --------------- --------------
COBOL Development & Mainframe
Solutions ("CDMS") 19.2% 18.5% 20.8%
Host Connectivity ("HC") 12.7% 14.1% 15.9%
Identity, Access & Security ("IAS") 15.0% 15.4% 17.4%
Development & IT Operations Management
Tools ("Development & ITOM") 20.6% 22.7% 12.6%
Collaboration & Networking ("C&N") 10.5% 11.3% 12.9%
Micro Focus Portfolio 78.0% 82.0% 79.6%
SUSE Portfolio 22.0% 18.0% 20.4%
---------------------------------------- -------------- --------------- --------------
Micro Focus Group 100.0% 100.0% 100.0%
---------------------------------------- -------------- --------------- --------------
(1) unaudited
We provide additional Key Performance Indicators ("KPIs") for the SUSE Product Portfolio. Total Contract Value ("TCV") is the amount invoiced to customers (excluding sales tax) in respect of new contracts and renewals completed in the year. The weighted average contract length expressed in months, reflecting the duration of the TCV is also being provided as growth in TCV alone without this information is potentially misleading. Finally we provide Annual Contract Value ("ACV") which aims to normalize contract length by only including the first 12 months of each new contract or renewal included within TCV. Where the contract length is less than 12 months all of the TCV is included in ACV.
We are not providing renewal rate information for SUSE or Micro Focus. Our methodology is still being refined in order to accommodate data from our multiple systems and we will seek to standardize on a single measure after Completion and integration with the HPE Software business. Once we have a common methodology and are content with the data we will provide clear explanations of both. In the meantime we believe that following the trends on the maintenance revenue for the Micro Focus sub-portfolios and subscription revenues for SUSE provides the best guidance on performance.
The table below shows revenues for the year by region for the year to 30 April 2017 compared to the pro-forma CCY revenue and reported revenue for the year ended 30 April 2016:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma Growth/ As reported
Actual CCY (1) (Decline) Actual
$m $m % $m
Micro Focus
North America 591.4 627.1 (5.7%) 525.2
International 389.7 415.0 (6.1%) 377.0
Asia Pacific
& Japan 96.2 100.2 (4.0%) 89.0
--------------- ------------- ----------- ----------- -------------
Total 1,077.3 1,142.3 (5.7%) 991.2
--------------- ------------- ----------- ----------- -------------
SUSE
North America 121.8 108.7 12.1% 108.6
International 142.8 111.6 28.0% 115.6
Asia Pacific
& Japan 38.8 30.1 28.9% 29.6
Total 303.4 250.4 21.2% 253.8
--------------- ------------- ----------- ----------- -------------
Group
North America 713.2 735.8 (3.1%) 633.8
International 532.5 526.6 1.1% 492.6
Asia Pacific
& Japan 135.0 130.3 3.6% 118.6
Total revenue 1,380.7 1,392.7 (0.9%) 1,245.0
--------------- ------------- ----------- ----------- -------------
(1) unaudited
Detailed analysis of the revenue performance of each of the product portfolios is provided in the CEO reports.
Reconciliation of pro-forma CCY revenues to reported revenues for the year ended 30 April 2016
Year ended
30 April
2016
----------------- -----------
Micro Focus
As reported 991.2
Serena 162.4
Currency impact (11.3)
----------------- -----------
Pro-forma CCY 1,142.3
----------------- -----------
SUSE
As reported 253.8
Currency impact (3.4)
----------------- -----------
Pro-forma CCY 250.4
----------------- -----------
Total Revenue
As reported 1,245.0
Serena 162.4
Currency impact (14.7)
----------------- -----------
Pro-forma CCY 1,392.7
----------------- -----------
Operating costs
The operating costs (including exceptional costs of $97.3m) for the year ended 30 April 2017 compared with pro-forma CCY and reported operating costs* for the year ended 30 April 2016 are shown below:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma Increase/ As reported
Actual CCY (1) (Decrease) Actual*
$m $m % $m
Cost of goods sold 237.2 252.5 (6.1%) 230.2
Selling and distribution 467.1 440.9 5.9% 416.3
Research and development 180.1 181.2 (0.6%) 164.6
Administrative expenses 202.9 140.3 44.6% 139.0
-------------------------- ------------- ----------- ------------ -------------
Total operating
costs 1,087.3 1,014.9 7.1% 950.1
-------------------------- ------------- ----------- ------------ -------------
(1) unaudited
*Re-classification of costs for Consolidated Statement of Comprehensive Income Presentation
As part of the HPE Software transaction the Company's shares and ADS will be listed on the London and New York Stock Exchange respectively. As part of the regulatory filing process in the USA the Group has reviewed its consolidated statement of comprehensive income presentation and has decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. This presentation complies with IFRS and, in the view of the Company's Audit Committee, provides investors with a consolidated statement of comprehensive income presentation that is more comparable with other software companies listed on both markets.
Cost of goods sold
On a pro-forma CCY basis, cost of goods sold for the year decreased by $15.3m to $237.2m (2016: pro-forma CCY $252.5m) of which the exceptional costs were $2.9m (2016: pro-forma CCY $2.8m). The costs in this category predominantly relate to our consulting and helpline support operations, amortization of product development costs and amortization of acquired technology intangibles. Excluding exceptional items, amortization of product development costs of $22.4m (2016: pro-forma CCY $19.5m) and amortization of acquired technology intangibles of $69.1m (2016: pro-forma CCY $75.2m) cost of goods sold decreased by $12.2m to $142.8m (2016: pro-forma CCY $155.0m). The decrease is due primarily to a $7.2m reduction in staff related costs and the year-on-year impact of the reduction in Consultancy revenues.
On a reported basis, costs of goods sold in the year increased by $7.0m to $237.2m (2016: reported* $230.2m). Cost of sales increased primarily due to the acquisition of Serena and GWAVA ($17.7m and $0.7m respectively) and exceptional items of $0.7m to $2.9m (2016: reported $2.2m), offset by exchange rate differences of $1.4m and a reduction in staff related costs of $8.6m. Exceptional items are discussed later in this section.
Selling and distribution costs
On a pro-forma CCY basis, selling and distribution costs increased by $26.2m to $467.1m (2016: pro-forma CCY $440.9m). Excluding the amortization of purchased trade names and customer relationships intangible assets of $143.8m (2016: pro-forma CCY $106.7m), selling and distribution costs decreased by $10.9m to $323.3m (2016: pro-forma CCY $334.2m). Within these costs were exceptional costs of $5.5m (2016: pro-forma CCY $3.8m), thus the underlying costs were $317.8m (2016: pro-forma CCY $330.4m), a reduction of $12.6m (3.8%) on the prior year on a pro-forma CCY basis. Reductions include travel and office costs of $4.2m, staff related costs of $2.1m and marketing costs of $1.9m.
On a reported basis, selling and distribution costs in the year increased by $50.8m to $467.1m (2016: reported $416.3m).The acquisition of Serena and GWAVA increased selling and distribution costs by $21.7m and $1.4m respectively. Excluding the acquisitions in the year, selling and distribution costs increased by $27.7m to $444.0m (2016: reported $416.3m). This increase in selling and distribution costs includes an increase in exceptional items of $1.1m to $5.5m (2016: reported $4.4m), an increase in the amortization of purchased intangibles of $37.1m to $143.8m (2016: reported $106.7m) primarily offset by a reduction in staff related costs of $6.2m, a reduction in marketing costs of $2.0m and exchange rate differences of $5.2m. Exceptional items are discussed later in this section.
Research and development expenses
On a pro-forma CCY basis, research and development costs decreased by $1.1m to $180.1m (2016: pro-forma CCY $181.2m). Excluding exceptional costs of $6.8m (2016: pro-forma CCY $5.8m), the resultant costs were $173.3m (2016: pro-forma CCY $175.4m) a decrease of $2.1m (1.2%). Research and development costs are equivalent to approximately 13.0% of revenue (2016: pro-forma CCY 13.0%).
On a reported basis, research and development expenses in the year increased by $15.5m to $180.1m (2016: reported $164.6m). The acquisition of Serena and GWAVA increased research and development costs by $17.3m and $1.1m respectively. Excluding acquisitions in the year research and development expenses decreased by $2.9m to $161.7m (2016: reported $164.6m). The decrease related to a reduction in staff related costs of $8.6m and exchange rate differences $2.8m offset by an increase in exceptional items of $5.5m to $6.8m (2016: reported $1.3m) and a decrease in the capitalization of product development costs of $3.2m to $27.7m (2016: $30.9m). Exceptional items are discussed later in this section.
At 30 April 2017 the net book value of capitalized product development costs on the consolidated statement of financial position was $49.1m (2016: $43.2m). The impact of net capitalization of internal product development costs was $5.3m (2016: net amortization pro-forma CCY $11.4m).
Administrative expenses
On a pro-forma CCY basis, administrative expenses increased by $62.6m to $202.9m (2016: pro-forma CCY $140.3m). Excluding share based compensation of $34.5m (2016: pro-forma CCY $30.2m), exceptional costs of $82.0m (2016: pro-forma CCY $12.5m) and an exchange gain of $4.9m (2016: pro-forma CCY gain of $3.3m), administrative expenses decreased by $9.6m (9.5%) to $91.3m (2016: pro-forma CCY $100.9m). The decrease has arisen mostly from a reduction in staff related costs of $8.5m.
Share based compensation was $34.5m (2016: pro-forma CCY $30.2m), being ASG costs of $13.6m (2016: pro-forma CCY $10.4m), LTIP costs of $19.8m (2016: pro-forma CCY $18.9m) and Sharesave Scheme costs of $1.1m (2016: pro-forma CCY $0.9m).
On a reported basis, administrative expenses in the year increased by $63.9m to $202.9m (2016: reported $139.0m). The acquisition of Serena and GWAVA increased administrative expenses by $10.4m and $2.2m respectively. Exceptional items included in administrative expenses increased $61.9m to $82.0m (2016: reported $20.1m), share-based payments increased by $5.7m to $34.5m (2016: reported $28.8m) and exchange gains increased by $2.0m to $4.9m (2016: reported $2.9m). Excluding acquisitions in the year, exceptional items, share-based payments and exchange gains, administrative expenses decreased by $14.3m to $78.7m (2016: reported $93.0m). The decrease relates primarily to a reduction in staff related costs of $12.2m. Exceptional items are discussed later in this section.
Amortization of intangibles for the year was $236.4m (2016: reported $203.3m). This growth is as a result of the acquisition of Serena and GWAVA during the year.
Exceptional items
Exceptional items in the year were $97.3m (2016: pro-forma CCY $24.9m, reported $27.9m) including:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma As reported
Actual CCY(1) Actual
$m $m
$m
---------------------------- ------------- ----------- -------------
Integration costs 27.7 21.4 23.6
Acquisition costs 2.6 0.5 0.5
Pre-acquisition costs 58.0 5.1 5.6
Property costs 5.5 6.1 6.0
Severance and legal costs 3.5 (5.2) (4.8)
Royalty provision releases - (3.0) (3.0)
---------------------------- ------------- ----------- -------------
97.3 24.9 27.9
---------------------------- ------------- ----------- -------------
(1) unaudited
On a reported basis exceptional items increased by $69.4m, or 248.7% to $97.3m in the year ended 30 April 2017 (2016: reported $27.9m). The increase was as a result of an increase in pre-acquisition costs of $52.4m relating to the proposed combination with HPE Software, an increase in integration costs of $4.1m in bringing acquired businesses together with the heritage Micro Focus business, an increase in severance costs of $8.3m primarily related to the Serena acquisition, an increase in acquisition costs of $2.1m, the non-recurrence of the $3.0m royalty provision release, offset by a decrease in property costs of $0.5m.
The pre-acquisition costs relate to the acquisition of HPE Software which was announced in September 2016 and is currently expected to complete on 1 September 2017. These costs relate to accounting, legal and commercial due diligence work, legal work on the various agreements, professional advisors fees and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.
The integration costs relate to work done in bringing together the base Micro Focus, TAG, Serena and GWAVA organizations into one organization.
The acquisition costs relate to due diligence work, legal work on the acquisition agreements and professional advisors fees on the acquisition of Serena and GWAVA.
Currency impact
During the year to 30 April 2017, 62.4% of our revenues were contracted in US dollars, 21.2% in Euros, 4.5% in Sterling, 3.6% in Yen and 8.3% in other currencies. In comparison, 50.7% of our costs are US dollar denominated, 12.2% in Sterling, 19.6% in Euros, 1.7% in Yen and 15.8% in other currencies.
This weighting of revenue and costs means that if the US$: Euro or US$: Yen exchange rates move during the year, the revenue impact is greater than the cost impact, whilst if US$: Sterling rate moves during the year the cost impact exceeds the revenue impact. Consequently, actual US$ EBITDA can be impacted by significant movements in US$ to Euro, Yen and Sterling exchange rates.
The currency movement for the US dollar against Sterling and Euro was a strengthening of 13.9% and 1.5% respectively and the Yen weakened by 10.1% when looking at the average exchange rates in the year ended 30 April 2017 compared to those in the year ended 30 April 2016. In order to provide CCY comparatives, we have restated the pro-forma results of the Group for the 12 months ended 30 April 2016 at the same average exchange rates as those used in reported results for the year ended 30 April 2017.
Intercompany loan arrangements within the Group are typically denominated in the local currency of the overseas affiliate. Consequently, any movement in the respective local currency and US$ will have an impact on the converted US$ value of the loans. This foreign exchange movement is taken to the consolidated statement of comprehensive income. The Group's UK Corporation Tax liability is denominated in Sterling and any movement of the US$: Sterling rate will give rise to a foreign exchange gain or loss which is also taken to the consolidated statement of comprehensive income. The foreign exchange gain for the period is approximately $4.9m (2016: pro-forma CCY gain of $3.3m).
Adjusted Operating Costs and Total Operating Costs
Adjusted Operating Costs were $742.6m (2016: pro-forma CCY $776.2m) a fall of $33.6m. The reduction in Adjusted Operating Costs arose mostly from a reduction in staff related costs of $23.9m. Total Operating costs were $1,087.3m (2016: pro-forma CCY $1,014.9m) an increase of $72.4m.
Adjusted EBITDA and Underlying Adjusted EBITDA
Adjusted EBITDA in the year increased by $21.2m to $651.1m (2016: pro-forma CCY $629.9m).
Underlying Adjusted EBITDA in the year increased by $25.6m to $640.9m (2016: pro-forma CCY $615.3m) at a margin of 46.4% (2016: pro-forma CCY 44.2%). The increase in Underlying Adjusted EBITDA is larger than the increase in Adjusted EBITDA as Adjusted EBITDA does not include the impact of net capitalization of product development costs and foreign exchange gains or losses.
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
Pro-forma
As reported CCY(1) Growth/ As reported
Actual (Decline) Actual
$m $m % $m
Revenue 1,380.7 1,392.7 (0.9%) 1,245.0
----------------------------------- ------------- ----------- ----------- -------------
Adjusted EBITDA 651.1 629.9 3.4% 546.8
Foreign exchange
gain (4.9) (3.3) (2.9)
Net (capitalization)/amortization
of product development
costs (5.3) (11.3) (11.4)
----------------------------------- ------------- ----------- ----------- -------------
Underlying Adjusted
EBITDA 640.9 615.3 4.2% 532.5
----------------------------------- ------------- ----------- ----------- -------------
Underlying Adjusted
EBITDA Margin 46.4% 44.2% 5.0% 42.8%
----------------------------------- ------------- ----------- ----------- -------------
(1) unaudited
Both revenue and EBITDA in the year ended 30 April 2017 have been reduced by the unwinding of the fair value deferred revenue haircut of $10.1m (2016: pro-forma CCY $16.6m reported $16.6m) that was applied as part of the acquisitions of TAG, Serena and GWAVA.
Reconciliation of pro-forma CCY Adjusted EBITDA and Underlying Adjusted EBITDA to reported Adjusted EBITDA and Underlying Adjusted EBITDA for the year ended 30 April 2016.
Adjusted Underlying
Operating Adjusted Adjusted
Profit EBITDA EBITDA
$m $m $m
----------------- ----------- ----------- -----------
Micro Focus
As reported 453.7 465.1 451.1
Serena 80.5 81.3 80.9
Currency impact 2.4 1.8 1.9
----------------- ----------- ----------- -----------
Pro-forma CCY 536.6 548.2 533.9
----------------- ----------- ----------- -----------
SUSE
As reported 79.8 81.7 81.4
Currency impact 0.1 - -
----------------- ----------- ----------- -----------
Pro-forma CCY 79.9 81.7 81.4
----------------- ----------- ----------- -----------
Total
As reported 533.5 546.8 532.5
Serena 80.5 81.3 80.9
Currency Impact 2.5 1.8 1.9
----------------- ----------- ----------- -----------
Pro-forma CCY 616.5 629.9 615.3
----------------- ----------- ----------- -----------
Operating profit
Operating profit was $293.4m (2016: pro-forma CCY $377.8m). Within the operating profit is $97.3m (2016: pro-forma CCY $24.9m) of exceptional costs. Adjusted operating profit was $638.1m (2016: pro-forma CCY $616.5m).
Net finance costs
Net finance costs were $95.8m (2016: pro-forma CCY $97.5m) including:
-- The amortization of $14.2m of prepaid facility arrangement, original issue discounts and facility fees incurred on the Group's loan facilities (2016: pro-forma CCY $13.9m);
-- Loan interest and commitment fees of $81.9m (2016: pro-forma CCY $84.0m); -- Interest on pension liability $0.6m (2016: pro-forma CCY $0.5m); -- Other interest costs of $0.1m (2016: pro-forma CCY $0.1m); offset by -- $1.0m (2016: pro-forma CCY $1.0m) of interest received.
Net finance costs have decreased by $1.7m on a pro-forma CCY basis, mostly due to reduced loan interest and commitment fees ($2.1m) offset by an increase in the amortization of prepaid facility arrangement, original issue discounts and facility fees ($0.2m).
Profit before tax and adjusted profit before tax
Profit before tax for the year ended 30 April 2017 was $196.3m (2016: pro-forma CCY $278.1m). The profit before tax has decreased by $81.8m in the year when compared to the 2016 pro-forma CCY as a result of an increase in exceptional costs of $72.4m, an increase in the amortization of purchased intangibles following the Serena and GWAVA acquisitions of $29.3m, an increase in the share based compensation charge of $4.3m, offset by an improvement in Underlying Adjusted EBITDA margin to 46.4% (2016: pro-forma CCY 44.2%).
Profit before tax increased by $0.9m on a reported basis from $195.4m in the year ended 30 April 2016 to $196.3m for the year ended 30 April 2017.
Adjusted profit before tax was $541.0m (2016: pro-forma CCY $516.8m, reported $434.0m) and the table below shows the reconciliation between profit before tax and adjusted profit before tax:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
Pro-forma
As reported CCY (1) Growth/ As reported
Actual (Decline) Actual
$m $m % $m
Profit before tax 196.3 278.1 (29.4%) 195.4
Share based compensation 34.5 30.2 14.2% 28.8
Amortization of
purchased intangibles 212.9 183.6 16.0% 181.9
Exceptional costs 97.3 24.9 290.8% 27.9
Adjusted profit
before tax 541.0 516.8 4.7% 434.0
-------------------------- ------------- ----------- ----------- -------------
(1) unaudited
Taxation
The tax charge for the period was $38.5m (2016: $32.4m) with the Group's effective tax rate ("ETR") being 19.6% (2016: 16.6%). The ETR on adjusted profit before tax ("Adjusted ETR") was 22.9% (2016: 23.1%) as set out in the following table.
Year ended 30 April Year ended 30
2017 April 2016
--------------------------------- ---------------------------------
Adjusted Adjusted
Actual Adjusts measures Actual Adjusts Measures
$m $m $m $m $m $m
-------------------- --------- ---------- ---------- --------- ---------- ----------
Profit before tax 196.3 344.7 541.0 195.4 238.6 434.0
Taxation (38.5) (85.5) (124.0) (32.4) (67.8) (100.2)
-------------------- --------- ---------- ---------- --------- ---------- ----------
Profit after tax 157.8 259.2 417.0 163.0 170.8 333.8
-------------------- --------- ---------- ---------- --------- ---------- ----------
Effective tax rate 19.6% 22.9% 16.6% 23.1% -------------------- --------- ---------- ---------- --------- ---------- ----------
In computing adjusted profit before tax, $344.7m of adjustments have been made for the items shown in the adjusted profit before tax section, of which the associated tax is $85.5m. The adjusted ETR for the year ended 30 April 2017 of 22.9% is consistent with 2016 (23.1%).
The Group is forecasting an Adjusted ETR in the medium-term, including HPE Software, of approximately 33%. The increase compared to previous medium-term guidance, excluding HPE Software, of 23% to 27% is due primarily to the expected higher proportion of profits subject to higher US tax rates, including US taxes arising on the repatriation of profits from subsidiaries of HPE Software through the US to the UK. The Group is guiding to a cash tax rate on "Cash Profits" (Underlying Adjusted EBITDA less exceptional items, capital expenditure and interest) for the Enlarged Group of 30%.
The forecast Adjusted ETR is subject to various factors including:
-- Changes in tax legislation in the main jurisdictions in which the Group operates (for example, discussions are ongoing in relation to potentially significant tax reforms in the US);
-- The geographical mix of profits (as mentioned above, the proportion of profits subject to US tax is likely to increase following the HPE Software acquisition);
-- The risk of challenge from tax authorities to the allocation of profits across the Group in response to the OECD's Base Erosion and Profit Shifting project;
-- Investigations and proposals of the European Commission; -- The tax consequences arising from the UK's exit from the European Union; and -- The resolution of open issues with tax authorities.
The Group's cash taxes paid in the period were $24.6m (2016: $79.3m). Cash tax payments in the current year were lower than in the prior year for the following reasons:
-- In 2016 the Group paid $24.5m in respect of an Accelerated Payment Notice issued by HMRC in relation to the historic tax issue disclosed in previous years, which impacts UK tax returns from 2009 until 2015; and
-- In 2016 the Group paid $27.2m in respect of forecast US Federal income tax liabilities. Following a recalculation in 2016 of the impact of temporary differences, including the offset of brought forward deferred tax assets, these liabilities were significantly lower than was initially anticipated. Of the resulting overpayment, $8m was refunded in 2017 and the remainder has been offset against current year Federal Tax liabilities.
The forecast cash tax rate is an average over the medium-term. The cash tax rate, when compared to the Adjusted ETR, is likely to fluctuate significantly year-on-year due to various factors, including the following:
-- As a general matter, temporary differences often result in substantial shifts of cash tax payments from one period to another;
-- In particular, the rate at which recognised deferred tax assets (brought forward tax losses and credits) are utilized is likely to vary significantly year-on-year, with the rate of utilization currently forecast to decrease significantly over the medium-term period;
-- The final tax liability for a particular territory and year can often vary significantly from the estimates on which instalment payments have been made, resulting in under and over payments (such as the overpayment mentioned above in the US in 2016); and
-- The timing of the settlement of open issues with tax authorities is uncertain and can lead to significant one-off increases in the cash tax rate (such as the one mentioned above in the UK in 2016).
Tax liabilities are recognized when it is considered probable that there will be a future outflow of funds to a taxing authority. Tax provisions are based on management's interpretation of country specific tax law and are measured using the single best estimate of likely outcome approach. Management uses in-house tax experts, professional advisors and previous experience when assessing tax risks. Within current tax liabilities is $49.1m (2016: $27.9m) in respect of provisions for uncertain tax positions, the majority of which relates to the risk of challenge from tax authorities to the geographic allocation of profits across the Group. The Group does not anticipate that there will be any material reversal of these provisions in the next 12 months. Due to the uncertainty associated with such tax items, it is possible that at a future date, on conclusion of open tax matters, the final outcome may vary significantly.
As disclosed previously, the Group benefited from a lower cash rate of tax in recent years as a result of an on-going claim with HMRC in the UK, based on tax legislation, impacting its tax returns for the years ended 30 April 2009 through to 2015. The Group maintains a provision for the potential liability in its consolidated financial statements. The remaining provision at 30 April 2017 is $5.2m (including interest on overdue tax of $3.0m) compared to $5.6m at 30 April 2016. Subsequent to 30 April 2017 the Group paid a further $2.2m to HMRC following the receipt of a further Accelerated Payment Notice. When the tax position is agreed with HMRC, then to the extent that the tax liability is lower than that provided in the consolidated statement of financial position, there would be a positive benefit to the tax charge in the consolidated statement of comprehensive income in the year of settlement and a refund of any amounts paid under the Accelerated Payment Notices in excess of the agreed liability.
Profit after tax
Profit after tax decreased by 3.2% to $157.8m (2016: $163.0m reported).
Goodwill
The largest item on the consolidated statement of financial position is goodwill at $2,828.6m (2016: $2,436.2m) arising from acquisitions made by the Group. In the year goodwill has increased due to the acquisition of Serena ($379.6m) and GWAVA ($12.8m). There was no goodwill increase relating to the acquisitions of OpenATTIC and OpenStack.
Capital structure of the Group
As at 30 April 2017 the market capitalization of the Group was GBP5,944.0m (2016: GBP3,496.5m), equivalent to $7,667.8m ($5,104.9m) at an exchange rate of $1.29 to GBP1 (2016: $1.46 to GBP1). The net debt of the Group was $1,410.6m (2016: pro-forma including Serena $1,625.0m), all denominated in US$, resulting in an Enterprise Value of $9,078.4m (2016: $6,729.9m). The board believes that this capital structure is appropriate for the Group's requirements.
The debt facilities of the Group were put in place at the time of the acquisition of TAG on 20 November 2014 and totaled $2,000.0m under a credit agreement comprising a $1,275.0m seven year Term Loan B, a $500.0m five year Term Loan C and a $225.0m Revolving Facility (together "the Existing Facilities"). As part of the Serena acquisition additional Revolving Facilities commitments of $150.0m in total were obtained on 2 May 2016 from Barclays, HSBC and The Royal Bank of Scotland.
During the current financial year mandatory repayments of $9.6m of the Term Loan B and $37.5m of the Term Loan C were made together with a draw-down of $180.0m and repayment of $325.0m of the Revolving Facility. As part of the debt raising relating to the HPE Software transaction the Term Loan C was rolled into the Term Loan B-2 facility on 28 April 2017.
At 30 April 2017, $80.0m of the Revolving Facility was drawn together with $1,515.2m of Term Loan B-2 giving gross debt of $1,595.2m drawn.
During the year ended 30 April 2017 the Group renegotiated its debt facilities.
On 1 August 2016 the Company allocated a re-pricing of its senior secured Term Loan B which reduced its ongoing interest payments. The interest rate was reduced from 4.25% to 3.75% and the LIBOR floor was reduced from 1.00% to 0.75%. All other terms of the Group's Credit Facilities remained the same.
The terms of the Micro Focus debt facilities from 1 August 2016 to 28 April 2017 were as follows:
-- Syndicated senior secured tranche B term loan facility ("Term Loan B") , with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 1.00% per annum, with an original issue discount of 1.00% and a seven year term;
-- A syndicated senior secured tranche C term loan facility ("Term Loan C"), with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 10.00% per annum, with an original issue discount of 1.5% and a five year term; and
-- A senior secured revolving credit facility of $375.0m, ("Revolving Facility"), with an interest rate of 3.50% above LIBOR on amounts drawn (and 0.50% on amounts undrawn) thereunder and an original issue discount of 0.50%.
The Revolving Facility was increased from $225.0m to $375.0m on 2 May 2016 as part of the funding for the Serena acquisition (note 20).
New Facilities
The Company announced on 21 April 2017 the successful syndication of the new credit facilities (the "New Facilities") on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., a wholly owned subsidiary of HPE that will hold HPE Software. At Completion of the HPE Software transaction, currently anticipated to be 1 September 2017, Seattle SpinCo. Inc. will be merged with a wholly owned subsidiary of Micro Focus in the Transaction.
The New Facilities comprise a $500.0m Revolving Credit Facility at LIBOR plus 3.50% (subject to a LIBOR floor of 0.00%) placed with a number of financial institutions and $5,000.0m of term loans. The new term loans are priced as follows:
New Facilities drawn as at 30 April 2017:
-- In relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5m due November 2019 were offered a cashless roll of their investment into the existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) and as a result of the cashless rollover increased in size from $1,102.7m to $1,515.2m, effective from 28 April 2017.
New Facilities not drawn as at 30 April 2017 were as follows:
HPE Software Facilities:
-- The new $2,600.0m senior secured seven year term loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%;
Micro Focus Facilities:
-- The new $385.0m senior secured seven year term loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
-- The new Euro 470.0m (equivalent to approximately $500.0 million) senior secured seven year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.
The above new facilities are a modification only of the existing facilities and the unamortized prepaid facility arrangement fees and original issue discounts have not been accelerated as a result. The remaining unamortized prepaid facility arrangement fees and original issue discounts will be recognized over the life of the new debt.
As part of the HPE Software transaction, the New Facilities will be used to:
(i) Fund the pre-Completion cash payment by Seattle SpinCo. Inc. to HPE of $2,500.0m (subject to certain adjustments in limited circumstances);
(ii) Fund the Return of Value to Micro Focus' existing Shareholders of $500.0m; and (iii) Pay transaction costs relating to the acquisition of HPE Software.
The balance will be used for general corporate and working capital purposes.
Micro Focus is already benefitting from the reduced interest rate margin and repayment terms on the existing term loans. The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.
At 30 April 2017, $80.0m of the available Revolving Facility of $375.0m was drawn, representing 21.3%. The facility was less than 35% drawn at 30 April 2017 and therefore no covenant test is applicable.
Total equity
The total equity of the Group is $1,613.5m (2016: $1,593.7m) with a merger reserve of $338.1m (2016: $988.1m).
Cash flow and net debt
The Group's cash generated from operations was $564.8m (2016: $456.1m). This represented a cash conversion ratio when compared to Adjusted EBITDA less exceptional items of 102.0% (2016: 87.9%).
2017 2016
$m $m
-------------------------------- ------- -------
Cash generated from operations 564.8 456.1
Adjusted EBITDA 651.1 546.8
Less: Exceptional items (97.3) (27.9)
-------------------------------- ------- -------
553.8 518.9
-------------------------------- ------- -------
Cash conversion ratio 102.0% 87.9%
Cash generated from operations increased by $108.7m in the year ended 30 April 2017 primarily due to an increase in adjusted EBITDA of $104.2m.
As at 30 April 2017 the net debt of the Group was $1,410.6m (2016: $1,078.0m) comprising gross debt of $1,595.2m (2016: $1,787.25m), cash balances of $151.0m (2016: $667.2m) and pre-paid loan arrangements fees of $33.6m (2016: $42.0m).
The most significant cash outflows during the year were;
-- The payment of the final dividend for the year ended 30 April 2016 of $111.0m; -- An interim dividend of $66.5m;
-- Payments of $547.5m in respect of the acquisitions of Serena, GWAVA and OpenATTIC (including $316.7m repayment of bank borrowings on acquisition of Serena and net of $68.2m cash acquired);
-- Bank loan net repayments of $192.1m; -- Corporate taxes payments of $24.6m; -- Payment for tangible assets of $11.7m; -- Payment for intangible assets of $31.4m; and -- Interest and loan payments of $87.8m.
Dividend
The board had adopted a dividend policy such that it is two times covered by the adjusted earnings of the Group. In light of the impending HPE Software transaction the directors are paying a second interim dividend for the year of 58.33 cents (2016: final dividend 49.74 cents per share), which represents a 17.3% increase on last year's final dividend and gives a total proposed dividend for the year of 88.06 cents per share (2016: 66.68 cents), an increase of 32.1% compared to last year.
The dividend will be paid in Sterling equivalent to 45.22 pence per share, based on an exchange rate of GBP1 = $1.29 being the rate applicable on 11 July 2017, the date on which the board resolved to propose the dividend. The dividend will be paid on 25 August 2017 to shareholders on the register at 4 August 2017.
Group risk factors
As with all businesses, the Group is affected by certain risks, not wholly within our control, which could have a material impact on the Group's long-term performance and cause actual results to differ materially from forecast and historic results.
Mike Phillips
Chief Financial Officer
12 July 2017
CEO Review - Micro Focus Product Portfolio
Introduction
The Micro Focus Product Portfolio represents 78.0% of total Group revenue in FY17 (2016: pro-forma CCY 82.0%).
From within the Micro Focus Product Portfolio we also manage, for the Group overall, the corporate support functions of HR, IT, Facilities, Finance, Legal and the Project Management Office ("PMO") for acquisitions and integration. In addition we manage the delivery of a shared service for other elements of support to the SUSE portfolio enabling SUSE to directly control what they need to execute with speed and flexibility whilst leveraging the larger Group where effective as SUSE builds scale. During FY17 this shared service approach was phased out to further enable the SUSE team to execute autonomously such that in FY18 only the corporate support functions are shared with all other resources dedicated to either SUSE or Micro Focus. Wherever practical the corporate support functions staff are dedicated to product portfolios, including SUSE, in order to provide the additional benefit of specialization whilst leveraging the scale of the shared function.
Progress in FY17
During 2017 our main priority has been completing the integration of the different businesses into a more coherent whole, focused on consistent and sustained financial performance and the delivery of innovation that matters to customers - what we call customer centered innovation. This means helping customers solve the real world challenges they face today as they wrestle with balancing the ever increasing requirements for I.T. to deliver new capabilities and support new business models with the demands of securing and running day to day operations. We achieve this through the rigorous application of our FOUR-BOX MODEL which has at its core direct engagement with customers to enable highly targeted product development and delivery.
Highlights include:
-- Our focus on delivering customer centered innovation continued to gather momentum:
o Delivered 185 product releases or significant enhancements in FY17 with each sub-portfolio improving the levels of customer engagement and cadence of product delivery;
o Integration of Serena and acquisition and integration of GWAVA completed on time and now executing as integral parts of the Micro Focus portfolio, adding further depth and new capabilities within Development & ITOM and C&N respectively; and
o Removed dependency on third party intellectual property in key strategic elements of our IAS portfolio.
-- Integration of the business into a coherent whole is now broadly complete as evidenced by the progress on removing sub-branding, completely redesigning our websites, transitioning to a geographic Go-to-Market ("GTM") model globally and creating an integrated approach to product development and management. The remaining focus area is on IT systems, where our stated goal of driving standardization will take longer to deliver than originally anticipated. As a result of the planned merger with HPE Software we have decided to implement the new set of systems being built for HPE Software for the Group as a whole. This will enable more effective integration of the existing Group with HPE Software and the creation of a more flexible platform from which to execute our strategy but it remains a very significant undertaking.
-- Financial performance in the year was in line with expectations, with progress in Maintenance Fee Revenue being somewhat offset by performance in Licence Fee Revenue where the loss to a competitor of an entire sales team and management structure caused three to five months of disruption which impacted our Host Connectivity business principally.
Revenue for the year ended 30 April 2017 by product portfolio compared to pro-forma CCY and reported revenue for the year ended 30 April 2016 is shown in the table below:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma Growth/ As reported
Actual CCY(1) (Decline) Actual
$m $m % $m
Micro Focus Product
Portfolio
CDMS
Licence 106.0 104.2 1.7% 104.7
Maintenance 149.7 145.0 3.2% 145.2
Consultancy 9.5 8.8 8.0% 8.9
----------------------------- ------------- ----------- ------------ -------------
265.2 258.0 2.8% 258.8
----------------------------- ------------- ----------- ------------ -------------
Host Connectivity
Licence 69.2 89.0 (22.2%) 89.9
Maintenance 104.4 105.2 (0.8%) 105.4
Consultancy 1.8 2.8 (35.7%) 2.9
----------------------------- ------------- ----------- ------------ -------------
175.4 197.0 (11.0%) 198.2
----------------------------- ------------- ----------- ------------ -------------
Identity, Access &
Security
Licence 48.6 51.7 (6.0%) 52.4
Maintenance 140.0 140.6 (0.4%) 142.2
Consultancy 18.4 22.0 (16.4%) 22.1
----------------------------- ------------- ----------- ------------ -------------
207.0 214.3 (3.4%) 216.7
----------------------------- ------------- ----------- ------------ -------------
Development & IT Operations
Management Tools
Licence 55.4 64.4 (14.0%) 33.9
Maintenance 215.9 235.9 (8.5%) 121.3
Consultancy 13.9 15.5 (10.3%) 2.2
----------------------------- ------------- ----------- ------------ -------------
285.2 315.8 (9.7%) 157.4
----------------------------- ------------- ----------- ------------ -------------
Collaboration & Networking
Licence 29.2 23.7 23.2% 23.9
Maintenance 110.7 127.8 (13.4%) 130.4
Consultancy 4.6 5.7 (19.3%) 5.8
----------------------------- ------------- ----------- ------------ -------------
144.5 157.2 (8.1%) 160.1
----------------------------- ------------- ----------- ------------ -------------
Micro Focus Product
Portfolio
Licence 308.4 333.0 (7.4%) 304.8
Maintenance 720.7 754.5 (4.5%) 644.5
Consultancy 48.2 54.8 (12.0%) 41.9
----------------------------- ------------- ----------- ------------ -------------
1,077.3 1,142.3 (5.7%) 991.2
----------------------------- ------------- ----------- ------------ -------------
(1) unaudited
Revenue for the Micro Focus Product Portfolio declined by 5.7% on a pro-forma CCY basis.
Licence revenue
Licence revenue declined by 7.4% (2016: 4.8%) on a pro-forma CCY basis. There was year-on-year Licence revenue growth in CDMS and Collaboration & Networking offset by declines in the other sub-portfolios.
Maintenance revenue
Maintenance revenues declined by 4.5% (2016: 6.1%) on a pro-forma CCY basis. This was primarily in Development & ITOM Tools and Collaboration & Networking. The fair value deferred revenue haircut reduced maintenance by $6.9m (2016: $10.2m). Excluding this, underlying maintenance revenues fell by 4.9% (2016: 6.2%).
Consultancy revenue
Consultancy revenues declined by 12.0% (2016: 15.2%) on a pro-forma CCY basis as we completed the implementation of the established Micro Focus policy of focusing only on consulting business that supports our licence business.
CDMS revenues were $265.2m; a growth of 2.8% on a pro-forma CCY basis compared with the year to 30 April 2016. This portfolio continues to show annual revenue growth underpinned by Visual COBOL and Enterprise Developer which highlights the continuing value customers derive from our CDMS products in support of their mission critical applications. Licence revenues grew by 1.7% ($1.8m), Maintenance revenues grew by 3.2% ($4.7m) and Consulting revenues grew by 8.0% ($0.7m).
Host Connectivity revenues declined by 11.0% ($21.6m) in the year on a pro-forma CCY basis. Licence revenues declined by 22.2% ($19.8m) mostly as a result of the loss to a competitor of an entire sales team and management structure. Maintenance revenues declined marginally by 0.8% ($0.8m) and there was a decline in Consulting revenues of 35.7% ($1.0m).
Identity, Access & Security revenues declined by 3.4% ($7.3m) in the year on a pro-forma CCY basis. Licence revenues declined by 6.0% on pro-forma CCY basis due to a lack of large scale projects in customers which is an area of real strength for our products and increased competition in this market from niche players for the smaller more point solutions. We will continue to drive for growth in this area but expect that this will take time to be delivered. Maintenance revenues declined by 0.4% ($0.6m).
Development & IT Operations Management Tools revenues which now include Serena, were $285.2m; a 9.7% ($30.6m) decline on pro-forma CCY basis. $20.0m of the decline was in Maintenance revenues which declined by 8.5% compared with 11.3% in the prior year. Licence revenues declined in the period by $9.0m partly due to lower sales of our Serena products which had a number of large licence sales in the prior year. Consulting revenues declined by 10.3% ($1.6m).
Collaboration & Networking revenues which now include GWAVA were $144.5m, a decline of 8.1% ($12.7m) on pro-forma CCY basis. Licence revenue grew by 23.2% ($5.5m). Maintenance revenue declined by 13.4% ($17.1m) in the period compared with 15.8% in the prior year.
Regional Revenue Performance
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
Pro-forma As reported
As reported CCY(1) Growth/
Actual (Decline) Actual
$m $m % $m
--------------- ------------- ----------- ----------- -------------
North America 591.4 627.1 (5.7%) 525.2
International 389.7 415.0 (6.1%) 377.0
Asia Pacific
& Japan 96.2 100.2 (4.0%) 89.0
--------------- ------------- ----------- ----------- -------------
Total 1,077.3 1,142.3 (5.7%) 991.2
--------------- ------------- ----------- ----------- -------------
(1) unaudited
North America started the year promisingly but had a disappointing third quarter which resulted in year-on-year revenue decline of 5.7% (2016: 6.4% decline) for the full year. The Federal business performed very well and CDMS execution improved throughout the year to deliver year-on-year growth within which Mainframe Solutions won exciting new customers and projects. Host Connectivity was down significantly mostly due to disruption and the impact of losing an entire sales team and management structure to a competitor causing both performance and pipeline development issues.
International had a challenging year with revenue decline year on year of 6.1% (2016: 4.6% decline). This region like in North America experienced challenges in the Host Connectivity and IAS markets. CDMS was broadly flat. France performed well and Germany and Nordics improved significantly in the second half but this was not enough to make up for weaknesses in the other territories.
Asia Pacific & Japan saw a 4.0% year on year revenue decline (2016: 10.6% decline). Licence revenues were marginally ahead of last year and maintenance revenues were in line with trend. Strength in Japan and Australia was offset by weakness in India & Asia. The Australia business was rebuilt to ensure that the correct teams were in place to execute consistently and improve the overall capabilities locally and these changes started to deliver improvements from very early in FY17. There were some excellent wins in IAS that demonstrate what can be delivered when skill and execution levels are maintained.
Adjusted operating profit and Underlying Adjusted EBITDA
The table below shows the Adjusted Operating Profit for the portfolio together with a comparison to the pro-forma CCY and reported figures for the year ended 30 April 2016:
Year Year Year
ended ended Ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma As reported
Actual CCY (1) Actual
$m $m
$m
--------------------------- ------------- ----------- -------------
Segment revenue 1,077.3 1,142.3 991.2
Directly managed costs (564.1) (633.0) (566.4)
Allocation of centrally
managed costs to SUSE 26.2 27.3 28.9
--------------------------- ------------- ----------- -------------
Total Adjusted Operating
costs (537.9) (605.7) (537.5)
--------------------------- ------------- ----------- -------------
Adjusted Operating Profit 539.4 536.6 453.7
--------------------------- ------------- ----------- -------------
Margin 50.1% 47.0% 45.8%
--------------------------- ------------- ----------- -------------
(1) unaudited
The directly managed costs are those costs specifically managed by the CEO of the Micro Focus Product Portfolio. In the year ended 30 April 2017 some of the management of the Asia Pacific and Japan ("APJ") sales organization moved under the direct management of SUSE. All the Group central support costs are managed by the Micro Focus portfolio group and the allocation of these costs to SUSE is based on an appropriate methodology. In the year ended 30 April 2018, SUSE will manage directly all their own consulting services and maintenance renewals activities.
The adjusted operating profit was $539.4m, delivering a margin of 50.1% which compares with the margin in the pro-forma CCY numbers for the year ended 30 April 2016 of 47.0%. The increase in margin arises because of the continuing actions taken in managing costs.
The table below shows the reconciliation between Adjusted Operating Profit and Underlying Adjusted EBITDA with a comparative of the pro-forma CCY and reported figures for the year ended 30 April 2016:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma As reported
Actual CCY (1) Actual
$m $m
$m
---------------------------- ------------- ----------- -------------
Adjusted Operating Profit 539.4 536.6 453.7
Depreciation of property,
plant and equipment 9.7 10.0 9.7
Amortization of software
intangibles 1.1 1.6 1.7
---------------------------- ------------- ----------- -------------
Adjusted EBITDA 550.2 548.2 465.1
Foreign exchange credit (2.9) (3.0) (2.6)
Net capitalization of
product development costs (5.3) (11.3) (11.4)
---------------------------- ------------- ----------- -------------
Underlying Adjusted EBITDA 542.0 533.9 451.1
---------------------------- ------------- ----------- -------------
(1) unaudited
The Underlying Adjusted EBITDA improved by $8.1m in the year on a pro-forma CCY basis primarily due to the staff related cost actions taken during the year.
Outlook
We have achieved a great deal over the last 12 months and enter the new financial year with stronger foundations than a year ago. We continue to focus on improving the way in which we operate to maximise the efficiency of the organization.
The Group has undergone huge change in FY16 and FY17 but the one constant has been clarity of strategy and the associated focus on aligning operational execution to the delivery of that strategy. Looking forward to FY18 this focus will continue with our key priorities being:
-- Delivery of our financial plan;
-- Continuing to operationalize the FOUR-BOX MODEL to better align resources to optimize the performance of each sub-portfolio; and
-- Planning for and subsequent integration with HPE Software following Completion of the transaction.
Stephen Murdoch
Chief Executive Officer
Micro Focus
12 July 2017
CEO Review - SUSE Product Portfolio
Introduction
The SUSE product portfolio represented 22.0% of the total Group revenue in FY17 (2016: pro-forma CCY revenue 18.0%).
SUSE has continued with the mandate to deliver "accelerated, sustainable and profitable revenue growth" and has continued to invest in the business to support this vision. FY17 has been another successful year for SUSE with growth in revenue, Annual Contract Value ("ACV"), Total Contract Value ("TCV") and Underlying Adjusted EBITDA.
SUSE created additional capacity with the objective of sustainable profitable growth, by expanding the SUSE headcount across all of the key disciplines and SUSE also completed two technology led acquisitions during the fiscal year. Closer alignment of critical support functions continued during the year, as we aligned SUSE Services and SUSE Renewals to have dedicated leaders reporting into SUSE Sales leadership. In FY17, we continued to strengthen our partner eco system, with continued investment in broadening and deepening the partnership with Alliances, OEM, two tier distributors, value add resellers, cloud service providers and system integrators. We continue with our concerted effort to broaden the ISV partnership and accredit SUSE offerings on critical and relevant business applications. SUSE continues to rely on sustained growing contribution from these strategic partnerships for its overall success.
Technology acquisitions during the year:
During the year, SUSE acquired OpenStack IaaS and Cloud Foundry based PaaS technology from HPE together with a workforce of 105 Engineers. This will strengthen SUSE's existing OpenStack Cloud (IaaS) offering and also SUSE's Cloud Foundry PaaS offering when brought to market. The acquisition also enables SUSE to broaden its Original Equipment Maintenance ("OEM") partnership with HPE to now include SUSE's OpenStack Infrastructure as a Service ("IaaS"), Enterprise Linux and Software Defined Storage solutions as well as fast track provision of more comprehensive offerings in the OpenStack IaaS and Cloud Foundry Platform as a Service ("PaaS") space to all of its IHVs and alliance partners.
SUSE also acquired distributed storage management technology from OpenATTIC together with eight Engineers, which was a group within IT Novum GmBH, a German registered company. This will enable SUSE to strengthen SUSE Enterprise Storage and its open source, software defined distributed storage offering by adding advanced storage management capabilities to the solution.
We continued to extend SUSE's presence and contribution in key Open Source projects and relevant industry groups both in support of strengthening our contribution to Open Source innovation and development efforts as well as in support of our partner and enterprise customer relationships.
SUSE - Key Financial Metrics
SUSE provides technical support together with rights to updates, patches and security fixes for its Open Source solutions on a subscription basis with revenues being recognised rateably over the period of the contract. The key metrics are Revenue, TCV and ACV of the TCV. The ACV represents the value of the first 12 months of each contract reported as TCV.
Revenue
The table below provides a breakdown of the revenue for the year and a comparison to FY16 on a pro-forma CCY basis and as reported.
SUSE Product Portfolio
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma Growth/ As reported
Actual CCY (1) (Decline) Actual
$m $m % $m
-------------- ------------- ----------- ----------- -------------
Subscription 298.7 245.5 21.7% 248.9
Consultancy 4.7 4.9 (4.1%) 4.9
-------------- ------------- ----------- ----------- -------------
303.4 250.4 21.2% 253.8
-------------- ------------- ----------- ----------- -------------
(1) unaudited
The SUSE Product Portfolio revenue increased by 21.2% to $303.4m compared with the pro-forma CCY revenues for FY16 of $250.4m, with the Subscription revenue increasing by 21.7% to $298.7m (2016: pro-forma CCY $245.5m). The Subscription revenue is net of the fair value deferred revenue haircut of $3.2m (2016: $6.4m). Prior to this adjustment Subscription revenue grew by 19.8%.
Regional revenue performance
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma Growth As reported
Actual CCY (1) Actual
$m $m % $m
---------------------- ------------- ----------- --------- -------------
North America 121.8 108.7 12.1% 108.6
International 142.8 111.6 28.0% 115.6
Asia Pacific & Japan 38.8 30.1 28.9% 29.6
---------------------- ------------- ----------- --------- -------------
303.4 250.4 21.2% 253.8
---------------------- ------------- ----------- --------- -------------
(1) unaudited
International and Asia Pacific & Japan regions have shown strong growth in revenue of 28.0% and 28.9% respectively. Growth in these regions was derived across all routes to market together with securing new business with large enterprise accounts. We are pleased to note that the change to specializing and aligning the field sales and marketing resources to SUSE in the Asia Pacific & Japan has enabled setting the foundation for sustained profitable revenue growth.
Revenue growth in North America was lower than expected, with some of the larger transactions not closing within the fiscal year as expected. We expect to see continuing growth in FY18.
TCV and ACV
TCV represents the gross billings for the year of $339.1m, an increase of 11.6% from the pro-forma CCY for FY16 of $303.8m. The weighted average contract duration marginally reduced to 28 months in FY17 from 29 months in FY16. The 'in fiscal year yield' from TCV to revenue remained broadly the same at 34% in FY17 as it was in FY16. 'In fiscal year yield' represents the proportion of TCV generated in the fiscal year that can be recognized as Subscription Fee Revenue ("SFR") in the same fiscal year. As the weighted average contract duration reduces, we would generally expect to get a higher 'in fiscal year yield'. Net new subscription TCV increased by 12.4% year-on-year and renewal subscriptions TCV grew by 10.4% year-on-year. Net new subscription contracts are derived from sale of subscriptions to new logo customers and existing customers expanding footprint of existing product portfolio or subscribing to new product solutions.
ACV measures the first 12 months duration equivalent of TCV. ACV grew to $220.1m, an increase of 15.7% from the pro-forma CCY for FY16 of $190.3m. ACV removes the impact of multi-year TCV and is a cleaner KPI on the performance of the business. Where subscription term is less than 12 months, all of the subscription TCV billing is included in the ACV measure.
Regional TCV performance
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 Growth/ 2016
As reported Pro-forma (Decline) As reported
Actual CCY (1) Actual
$m $m % $m
---------------------- ------------- ----------- ------------ -------------
North America 117.3 137.3 (14.6%) 137.3
International 175.4 131.1 33.8% 128.9
Asia Pacific & Japan 46.4 35.4 31.1% 35.1
---------------------- ------------- ----------- ------------ -------------
339.1 303.8 11.6% 301.3
---------------------- ------------- ----------- ------------ -------------
(1) unaudited
Regional ACV performance
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 Growth/ 2016
As reported Pro-forma (Decline) As reported
Actual CCY(1) Actual
$m $m % $m
---------------------- ------------- ----------- ------------ -------------
North America 84.2 88.4 (4.8%) 81.7
International 99.7 75.6 31.9% 67.8
Asia Pacific & Japan 36.2 26.3 37.6% 25.3
---------------------- ------------- ----------- ------------ -------------
220.1 190.3 15.7% 174.8
---------------------- ------------- ----------- ------------ -------------
(1) unaudited
North America had below expected performance on TCV and ACV, declining by 14.6% and 4.8% respectively. Timing of some of the larger enterprise multi-year renewals together with deferral of some of the larger enterprise deals contributed to this decline.
International achieved strong TCV and ACV growth at 33.8% and 31.9% respectively. Good solid performance across all countries in the region together with closing of some large enterprise deals contributed to this outstanding growth.
Asia Pacific & Japan had very strong performance in TCV and ACV, growing by 31.1% and 37.6% respectively. We continue to have strong performance in China and Japan, and are also continuing to win new accounts in some of the other key markets in the region. The region continues to get good traction and growing revenue streams on local OEM relationships and also by leveraging the global agreements we have in place with key independent hardware vendors and cloud service providers.
ACV contribution by route to market
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 Growth/ 2016
As reported Pro-forma (Decline) As reported
Actual CCY (1) Actual
$m $m % $m
------------------------- ------------- ----------- ------------ -------------
Direct 47.3 41.5 14.0% 37.2
Indirect 87.1 72.3 20.5% 61.8
Global Service Partners 80.2 70.6 13.6% 63.8
OEM (Embedded Systems) 5.5 5.9 (6.8%) 12.0
------------------------- ------------- ----------- ------------ -------------
Total 220.1 190.3 15.7% 174.8
------------------------- ------------- ----------- ------------ -------------
(1) unaudited
Direct represents customers that have a master licence agreement with SUSE and subscribe directly with SUSE or via authorized fulfillment partners.
Indirect represents customers that subscribe via the SUSE Value Added Reseller network and predominantly through a two tier distribution model.
Global Service Partners represents primarily Independent Hardware Vendors who sell SUSE subscriptions alongside the sale of their respective hardware and subscriptions generated from cloud service providers.
OEM (Embedded Systems) represents entities that embed SUSE subscriptions within the sale of their respective specialized appliance offerings.
We continue to see significant growth in Direct, Indirect and Global Service Partners routes to market, growing by 14.0%, 20.5% and 13.6% respectively.
We also see a trend of customers, who purchased subscriptions at the outset direct and through Value Added Resellers, subsequently subscribing through Global Service Partners. We continue to see strength in the Value Added Reseller network, where we have seen significant growth in ACV during the fiscal year.
OEM (Embedded Systems) transactions tend to be large, custom, specialized and binary in nature, and thus year on year fluctuations in ACV generated are to be expected.
The table below shows the percentage share of ACV by the different routes to market in FY17 compared to FY16 pro-forma CCY.
Year Year
ended ended
30 April 2017 30 April 2016
As reported Pro-forma CCY(1)
Actual
% %
------------------ --------------- ------------------
GSP 36% 37%
Indirect (Value
Added Reseller) 40% 38%
Direct 22% 22%
OEM 2% 3%
------------------ --------------- ------------------
100% 100%
------------------ --------------- ------------------
(1) unaudited
In aggregate the ACV mix by route to market remains stable in the year ended 30 April 2017 compared to the year ended 30 April 2016 as we saw homogenous contribution to SUSE's growth from the various routes to market.
SUSE Adjusted Operating Profit and Adjusted EBITDA
The table below shows the Adjusted Operating Profit for the SUSE Product Portfolio and compares it against the pro-forma CCY numbers for FY16:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma As reported
Actual CCY (1) Actual
$m $m $m
--------------------------- ------------- ----------- -------------
Revenue 303.4 250.4 253.8
Directly managed costs (178.5) (143.2) (145.1)
Allocation of centrally
managed costs from Micro
Focus (26.2) (27.3) (28.9)
--------------------------- ------------- ----------- -------------
Total Adjusted Operating
costs (204.7) (170.5) (174.0)
--------------------------- ------------- ----------- -------------
Adjusted Operating Profit 98.7 79.9 79.8
--------------------------- ------------- ----------- -------------
Margin 32.5% 31.9% 31.4%
--------------------------- ------------- ----------- -------------
(1) unaudited
SUSE Adjusted Operating Profit for the year was $98.7m at a profit margin of 32.5%. This is compared to the year ended 30 April 2016 pro-forma CCY Adjusted Operating Profit of $79.9m, which is an increase of $18.8m (23.5%). Profit margin improved to 32.5%, an increase of 0.6% (2016: 31.9%). We have seen a significant increase in directly managed costs in SUSE that is consistent with the continuation of investments being made to deliver the SUSE growth charter. Reduction in allocation of centrally managed costs is a combination of Asia Pacific & Japan moving to directly managed costs from allocated costs in FY16 together with some synergy benefits and efficiencies driving reduced allocation of costs for centrally managed functions.
The table below shows the reconciliation between Adjusted Operating Profit and Underlying Adjusted EBITDA for SUSE:
Year Year Year
ended ended ended
30 April 30 April 30 April
2017 2016 2016
As reported Pro-forma As reported
Actual CCY (1) Actual
$m $m $m
------------------------------- ------------- ----------- -------------
Adjusted Operating Profit 98.7 79.9 79.8
Depreciation of property,
plant and equipment 2.1 1.7 1.7
Amortization of software
intangibles 0.1 0.1 0.2
------------------------------- ------------- ----------- -------------
Adjusted EBITDA 100.9 81.7 81.7
Foreign exchange credit (2.0) (0.3) (0.3)
Net capitalization of product - - -
development costs
------------------------------- ------------- ----------- -------------
Underlying Adjusted EBITDA 98.9 81.4 81.4
------------------------------- ------------- ----------- -------------
(1) unaudited
Deferred revenue
We continue to have year on year steady growth in the deferred revenue balance. At 30 April 2017 SUSE's total deferred revenue balance was $374.3m (2016: $326.8m), an increase of $47.5m (14.5%) year-on-year. 56.4% of this increase in deferred revenue balance is recognizable revenue in the next 12 months and 82.6% recognizable in 24 months.
Headcount
At the end of April 2016, direct headcount in SUSE was 641 increasing to 936 by 30 April 2017, a net increase of 295 heads (46.0%) in the fiscal year, which includes the additional heads joining from the OpenATTIC acquisition in November 2016 and from the acquisition of OpenStack and Cloud Foundry assets in March 2017. The increased investment in direct headcount is primarily in Engineering, Product Management, Sales, Marketing, Product Marketing and Alliances to address the opportunity we see in the market for SUSE's existing offerings together with new opportunities in OpenStack IaaS, Software Defined Distributed Storage based on Ceph technology and with public cloud service providers.
In addition to the direct headcount, the SUSE portfolio received in the year ended 30 April 2017 support from SUSE dedicated employees, who are organizationally aligned in the shared service functions of the Group. Most prominently in Renewal Sales, Consulting, Customer Care, Sales Operations and other corporate operations functions. These add up to approximately 201 full-time equivalents ("FTEs"), which brings the total SUSE dedicated headcount supporting the SUSE business and customers to approximately 1,137 FTEs at the end of April 2017.
Outlook "Sustainable, Profitable Revenue Growth"
For FY18 SUSE will focus on the successful execution of SUSE's mandate for sustainable, profitable revenue growth. The objective is to grow revenue ahead of growth rates for relevant markets.
Nils Brauckmann
Chief Executive Officer
SUSE
12 July 2017
Consolidated statement of comprehensive income
for the year ended 30 April 2017
Year ended 30 Year ended 30 April
April 2017 2016*
---------------------------- ------ ------------------------------------ ------------------------------------------
Before
exceptional Exceptional Before exceptional Exceptional
items items Total items items Total
Note $'000 $'000 $'000 $'000 $'000 $'000
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Revenue 5,6 1,380,702 - 1,380,702 1,245,049 - 1,245,049
Cost of sales comprising:
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
- Cost of sales (excluding
amortization of capitalized
product development
costs and acquired
technology
intangibles) (142,724) (2,949) (145,673) (133,260) (2,172) (135,432)
- Amortization of product
development costs 15 (22,398) - (22,398) (19,515) - (19,515)
- Amortization of acquired
technology intangibles 15 (69,098) - (69,098) (75,227) - (75,227)
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Cost of sales (234,220) (2,949) (237,169) (228,002) (2,172) (230,174)
Gross profit 1,146,482 (2,949) 1,143,533 1,017,047 (2,172) 1,014,875
Selling and distribution
costs (461,605) (5,479) (467,084) (411,961) (4,372) (416,333)
Research and development
expenses comprising
:
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
- Expenditure incurred
in the year (200,976) (6,792) (207,768) (194,265) (1,258) (195,523)
- Capitalization of
product development
costs 15 27,664 - 27,664 30,877 - 30,877
Research and development
expenses (173,312) (6,792) (180,104) (163,388) (1,258) (164,646)
Administrative expenses (120,864) (82,038) (202,902) (118,911) (20,051) (138,962)
Operating profit 5 390,701 (97,258) 293,443 322,787 (27,853) 294,934
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Analyzed as:
Adjusted Operating Profit 8 638,068 - 638,068 533,514 - 533,514
Share based compensation 9 (34,506) - (34,506) (28,793) - (28,793)
Amortization of purchased
intangibles 15 (212,861) - (212,861) (181,934) - (181,934)
Exceptional items 7 - (97,258) (97,258) - (27,853) (27,853)
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Operating profit 390,701 (97,258) 293,443 322,787 (27,853) 294,934
Share of loss of associates
and gain on dilution
of investment 17 (1,254) - (1,254) (2,190) - (2,190)
Finance costs 10 (96,824) - (96,824) (98,357) - (98,357)
Finance income 10 979 - 979 1,009 - 1,009
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Net finance costs (95,845) - (95,845) (97,348) - (97,348)
Profit before tax 293,602 (97,258) 196,344 223,249 (27,853) 195,396
Taxation 11 (50,174) 11,633 (38,541) (39,259) 6,835 (32,424)
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Profit for the financial
year 243,428 (85,625) 157,803 183,990 (21,018) 162,972
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Attributable to:
Equity shareholders
of the parent 243,531 (85,625) 157,906 183,912 (21,018) 162,894
Non-controlling interests 27 (103) - (103) 78 - 78
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Profit for the financial
year 243,428 (85,625) 157,803 183,990 (21,018) 162,972
---------------------------- ------ ------------ ----------- --------- ------------------ ----------- ---------
Year ended 30 Year ended 30 April
April 2017 2016
------------------------------------ ------------------------------------
Before Before
exceptional Exceptional exceptional Exceptional
Items Items Total Items Items Total
Note $'000 $'000 $'000 $'000 $'000 $'000
------------------------------- ---- ------------ ------------- ------- ------------ ------------- -------
Profit for the financial
year 243,428 (85,625) 157,803 183,990 (21,018) 162,972
------------------------------- ---- ------------ ------------- ------- ------------ ------------- -------
Other comprehensive
(expense)/income:
Items that will not
be reclassified to profit
or loss
Actuarial gain on pension
liabilities schemes 24 402 - 402 2,697 - 2,697
Actuarial gain on non-plan
pension assets 24 130 - 130 3,104 - 3,104
Deferred tax movement
on pensions (325) - (325) (1,745) - (1,745)
Items that may be subsequently
reclassified to profit
or loss
Currency translation
differences (5,953) - (5,953) (3,458) - (3,458)
Other comprehensive
(expense)/income for
the year (5,746) - (5,746) 598 - 598
Total comprehensive
income for the year 237,682 (85,625) 152,057 184,588 (21,018) 163,570
------------------------------- ---- ------------ ------------- ------- ------------ ------------- -------
Attributable to:
Equity shareholders
of the parent 237,785 (85,625) 152,160 184,510 (21,018) 163,492
Non-controlling interests 27 (103) - (103) 78 - 78
------------------------------- ---- ------------ ------------- ------- ------------ ------------- -------
Total comprehensive
income for the year 237,682 (85,625) 152,057 184,588 (21,018) 163,570
------------------------------- ---- ------------ ------------- ------- ------------ ------------- -------
Earnings per share expressed cents cents
in cents per share:
- basic 13 68.88 74.50
- diluted 13 66.51 71.61
Earnings per share expressed pence pence
in pence per share:
- basic 13 53.25 49.59
- diluted 13 51.42 47.66
* In the year ended 30 April 2017, the Company has reviewed its consolidated statement of comprehensive income presentation and has decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. The year ended 30 April 2016 comparatives have also been re-classified (note 3).
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated statement of financial position
as at 30 April 2017
2017 2016
Note $'000 $'000
----------------------------------- ---- --------- ---------
Non-current assets
Goodwill 14 2,828,604 2,436,168
Other intangible assets 15 1,089,370 966,555
Property, plant and equipment 16 40,956 40,867
Investments in associates 17 11,457 12,711
Long-term pension assets 24 22,031 22,272
Other non-current assets 3,093 4,002
Deferred tax assets 208,253 198,757
4,203,764 3,681,332
Current assets
Inventories 64 93
Trade and other receivables 18 289,509 268,186
Current tax receivables 1,637 18,016
Cash and cash equivalents 150,983 667,178
Assets classified as held for sale - 888
----------------------------------- ---- --------- ---------
442,193 954,361
----------------------------------- ---- --------- ---------
Total assets 4,645,957 4,635,693
----------------------------------- ---- --------- ---------
Current liabilities
Trade and other payables 19 170,042 188,090
Borrowings 20 71,184 275,256
Provisions 23 20,142 10,545
Current tax liabilities 42,679 22,426
Deferred income 21 640,650 565,480
944,697 1,061,797
Non-current liabilities
Deferred income 22 223,786 196,483
Borrowings 20 1,490,352 1,469,953
Retirement benefit obligations 24 30,773 31,669
Long-term provisions 23 11,937 14,354
Other non-current liabilities 4,191 3,671
Deferred tax liabilities 326,731 264,038
2,087,770 1,980,168
----------------------------------- ---- --------- ---------
Total liabilities 3,032,467 3,041,965
----------------------------------- ---- --------- ---------
Net assets 1,613,490 1,593,728
----------------------------------- ---- --------- ---------
2017 2016
Note $'000 $'000
------------------------------------- --- ---- --------- ---------
Capital and reserves
Share capital 25 39,700 39,573
Share premium account 192,145 190,293
Merger reserve 26 338,104 988,104
Capital redemption reserve 26 163,363 163,363
Retained earnings 902,183 228,344
Foreign currency translation deficit (22,959) (17,006)
Total equity attributable to owners
of the parent 1,612,536 1,592,671
------------------------------------------ ---- --------- ---------
Non-controlling interests 27 954 1,057
------------------------------------------ ---- --------- ---------
Total equity 1,613,490 1,593,728
------------------------------------------ ---- --------- ---------
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated statement in changes in equity
for the year ended 30 April 2017
Total
Foreign equity
currency attributable
Share Retained translation Capital to owners
Share premium (deficit)/ reserve redemption Merger of the Non-controlling Total
capital account earnings (deficit) reserves reserve parent interests equity
Note $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Balance as
at 1 May 2015 39,555 16,087 (96,479) (13,548) 163,363 1,168,104 1,277,082 979 1,278,061
Profit for
the financial
year - - 162,894 - - - 162,894 78 162,972
Other
comprehensive
income for
the year - - 4,056 (3,458) - - 598 - 598
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Total
comprehensive
income - - 166,950 (3,458) - - 163,492 78 163,570
Transactions
with owners:
Dividends 12 - - (105,159) - - - (105,159) - (105,159)
Share options:
Issue of share
capital 25 18 950 (70) - - - 898 - 898
Movement in
relation to
share options - - 23,582 - - - 23,582 - 23,582
Corporation
tax on share
options - - 1,545 - - - 1,545 - 1,545
Deferred tax
on share options - - 8,490 - - - 8,490 - 8,490
Share placement:
Issue of share
capital -
share placement - 176,235 49,485 - - - 225,720 - 225,720
Share placement
issue costs - (2,979) - - - - (2,979) - (2,979)
Reallocation
of merger
reserve 26 - - 180,000 - - (180,000) - - -
Total movements
for the year 18 174,206 324,823 (3,458) - (180,000) 315,589 78 315,667
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Balance as
at 30 April
2016 39,573 190,293 228,344 (17,006) 163,363 988,104 1,592,671 1,057 1,593,728
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Profit for
the financial
year - - 157,906 - - - 157,906 (103) 157,803
Other
comprehensive
expense for
the year - - 207 (5,953) - - (5,746) - (5,746)
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Total
comprehensive
income/(expense) - - 158,113 (5,953) - - 152,160 (103) 152,057
Transactions
with owners:
Dividends 12 - - (177,535) - - - (177,535) - (177,535)
Treasury shares
purchased - - (7,678) - - - (7,678) - (7,678)
Share options:
Issue of share
capital -
share options 25 127 1,852 (90) - - - 1,889 - 1,889
Movement in
relation to
share options - - 23,952 - - - 23,952 - 23,952
Corporation
tax on share
options - - 4,081 - - - 4,081 - 4,081
Deferred tax
on share options - - 22,996 - - - 22,996 - 22,996
Reallocation
of merger
reserve 26 - - 650,000 - - (650,000) - - -
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Total movements
for the year 127 1,852 673,839 (5,953) - (650,000) 19,865 (103) 19,762
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
Balance as
at 30 April
2017 39,700 192,145 902,183 (22,959) 163,363 338,104 1,612,536 954 1,613,490
----------------- ---- ------- ------- ---------- ----------- ---------- --------- ------------ --------------- ---------
The accompanying notes are an integral part of these Consolidated Financial Statements.
Consolidated statement of cash flows
for the year ended 30 April 2017
2017 2016*
Note $'000 $'000
--------------------------------------------- ---- --------- ---------
Profit after tax 157,803 162,972
Adjustments for:
Net interest 10 95,845 97,348
Taxation 11 38,541 32,424
Share of results of associates 17 1,254 2,190
--------------------------------------------- ---- --------- ---------
Operating profit 293,443 294,934
Research and development tax credits (2,998) (2,041)
Depreciation 16 11,794 11,419
Loss on disposal of property, plant
and equipment 16 520 109
Amortization of intangibles 15 236,434 203,313
Share-based compensation 9 34,506 28,793
Exchange movements (4,890) (2,915)
Provisions movements 23 47,266 12,985
Changes in working capital:
Inventories 29 28
Trade and other receivables 10,224 (49,175)
Payables and other liabilities (33,252) 30,923
Provisions utilization 23 (43,476) (55,639)
Deferred income 15,375 (16,603)
Pension funding in excess of charge
to operating profit (183) (18)
--------------------------------------------- ---- --------- ---------
Cash generated from operations 564,792 456,113
Interest paid (81,115) (91,807)
Bank loan costs (6,654) (1,805)
Tax paid (24,644) (79,282)
--------------------------------------------- ---- --------- ---------
Net cash generated from operating activities 452,379 283,219
Cash flows from investing activities
Payments for intangible assets 15 (31,438) (34,488)
Purchase of property, plant and equipment 16 (11,727) (10,281)
Interest received 979 1,009
Payment for acquisition of business 28 (299,061) (9,960)
Repayment of bank borrowings on acquisition
of businesses 28 (316,650) -
Net cash acquired with acquisitions 28 68,173 106
Net cash used in investing activities (589,724) (53,614)
Cash flows from financing activities
Investment in non-controlling interest 27 (2) -
Proceeds from issue of ordinary share
capital 25 1,979 968
Purchase of treasury shares (7,678) -
Proceeds from share capital placement - 225,720
Costs associated with share placement - (2,979)
Repayment of bank borrowings 20 (372,062) (157,750)
Proceeds from bank borrowings 20 180,000 245,000
Dividends paid to owners 12 (177,535) (105,159)
--------------------------------------------- ---- --------- ---------
Net cash (used in)/generated from financing
activities (375,298) 205,800
2017 2016*
$'000 $'000
--------------------------------------- --------- ------- Effects of exchange rate changes (3,552) (9,551) --------------------------------------- --------- ------- Net (decrease)/increase in cash and cash equivalents (516,195) 425,854 Cash and cash equivalents at beginning of year 667,178 241,324 --------------------------------------- --------- ------- Cash and cash equivalents at end of year 20 150,983 667,178 --------------------------------------- --------- -------
The accompanying notes are an integral part of these Consolidated Financial Statements.
* Provision utilization consisting of cash payments of $55.6m for the year ended 30 April 2016, has been revised from provision movements to working capital movements with a corresponding impact on the effects of exchange rate changes line. Subsequent to the revision, the remaining amounts presented in provision movements represent expenses net of reversals recorded within the Consolidated Statement of Comprehensive Income. The presentation of bank loan costs paid of $1.8m for the year ended 30 April 2016, has been revised from cash flows from financing activities to cash flows from operating activities as management determined they were inappropriately presented within cash flows from financing activities. Management do not believe these corrections are material, individually or in the aggregate, to the Consolidated Financial Statements in any periods. The revision did not impact the Consolidated Statements of Comprehensive Income, Consolidated Statements of Financial Position and Consolidated Statements of Changes in Equity in any periods.
The principal non- cash transaction in the year ended 30 April 2017 was the cashless rollover of Term Loan C to Term Loan B-2.
Notes to the financial statements (unaudited)
1. General information
Micro Focus International plc ("Company") is a public limited Company incorporated and domiciled in the UK. The address of its registered office is, The Lawn, 22-30 Old Bath Road, Newbury, RG14 1QN, UK. Micro Focus International plc and its subsidiaries (together "Group") provide innovative software to clients around the world enabling them to dramatically improve the business value of their enterprise applications. As at 30 April 2017, the Group had a presence in 40 countries (2016: 39) worldwide and employed approximately 4,800 people (2016: 4,200).
The Company is listed on the London Stock Exchange.
Following Completion of the acquisition of HPE Software, the Group intends to align our financial year end to 31 October and will report an 18 month financial period ending 31 October 2018.
2. Basis of preparation
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB") and in conformity with IFRS as adopted by the European Union (collectively "IFRS").
The consolidated financial statements have been prepared on a going concern basis under the historical cost convention.
The annual report and accounts for the year ended 30 April 2017 will be finalized on the basis of the financial information presented by the directors in this unaudited preliminary announcement and will be delivered accordingly to the Registrar of Companies.
3. Accounting policies
Other than as described below, the accounting policies adopted are consistent with those of the Annual Report and Accounts for the year ended 30 April 2016, apart from standards, amendments to or interpretations of published standards adopted during the year, certain cash flow classification described in consolidated statements of cash flows; and the re-classification of costs in the consolidated statement of comprehensive income.
Re-classification of costs for Consolidated Statement of Comprehensive Income Presentation
As part of the HPE Software transaction the Company's shares and ADS will be listed on the London and New York Stock Exchange respectively. As part of the regulatory filing process in the USA the Group has reviewed its consolidated statement of comprehensive income presentation and has decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. This presentation complies with IFRS and, in the view of the Company's Audit Committee, provides investors with a consolidated statement of comprehensive income presentation that is more comparable with other software companies listed on both markets. The year ended 30 April 2016 comparatives have also been re-classified and additional detail is provided on the face of the consolidated statement of comprehensive income this year.
(a) The following standards, interpretations and amendments to existing standards are now effective and have been adopted by the Group:
- Amendment to IAS 16, 'Property, plant and equipment' and IAS 38, 'Intangible assets', on depreciation and amortization applies for periods beginning on or after 1 January 2016. In this amendment the IASB has clarified that the use of revenue based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.
- Annual Improvements 2014 includes amendments to IFRS 5, 'Non-current Assets Held For Sale and Discontinued Operations', IFRS 7, 'Financial Instruments: Disclosures', IAS 19, 'Employee Benefits' and IAS 34, 'Interim Financial Reporting' applies for periods beginning on or after 1 January 2016.
- Amendment to IAS 1, 'Presentation of financial statements' as part of the IASB initiative to improve presentation and disclosure in financial reports, effective for annual periods beginning on or after 1 January 2016.
- Amendment to IAS 27, 'Separate financial statements' on the equity method applies to periods beginning on or after 1 January 2016. These amendments allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements.
The amendments above do not have a material impact to the consolidated financial statements.
(b) The following standards, interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group:
- IFRS 15 'Revenue from contracts with customers' establishes the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Application of the standard is mandatory for annual reporting periods starting from 1 January 2018 onwards. Earlier application is permitted. The standard replaces IAS 18 'Revenue' and IAS 11 'Construction contracts' and related interpretations clarifications. Please refer to below for a more detailed assessment to-date on implementing this standard.
- IFRS 9 'Financial instruments'. This standard replaces the guidance in IAS 39 and applies to periods beginning on or after 1 January 2018. It includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit loss model that replaces the current incurred loss impairment model.
- Amendments to IAS 7, 'Statement of cash flows' on disclosure initiative are effective on periods beginning on or after 1 January 2017, subject to EU endorsement. This amendment introduces an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities and is part of the IASB's Disclosure Initiative, which continues to explore how financial statement disclosure can be improved.
- Amendments to IAS 12, 'Income taxes' on recognition of deferred tax assets for unrealized losses are effective on periods beginning on or after 1 January 2017, subject to EU endorsement. These amendments clarify how to account for deferred tax assets originated from unrealized loss in debt instruments measured at fair value.
- Amendments to IFRS 2, 'Share based payments' on clarifying how to account for certain types of share based payment transactions are effective on periods beginning on or after 1 January 2018, subject to EU endorsement. These amendments clarify the measurement basis for cash-settled share-based payments and the accounting for modifications that change an award from cash-settled to equity-settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the employee's tax obligation associated with a share based payment and pay that amount to the tax authority.
- IFRS 16, 'Leases' addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 'Leases', and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted if the entity is adopting IFRS 15 'Revenue from contracts with customers' at the same time, subject to EU endorsement.
- Annual improvements 2014-2016 include amendments to IFRS 1, 'First-time adoption of IFRS', IFRS 12, 'Disclosure of interests in other entities' and IAS 28, 'Investments in associates and joint ventures' regarding measuring an associate or joint venture at fair value applies for periods beginning on or after 1 January 2018, subject to EU endorsement.
- IFRIC 22, 'Foreign currency transactions and advance consideration' addresses foreign currency transactions or parts of transactions where there is consideration that is denominated or priced in a foreign currency. The interpretation provides guidance for when a single payment/receipt is made as well as for situations where multiple payments/receipts are made, effective for annual periods beginning on or after 1 January 2018, subject to EU endorsement.
- Clarifications to IFRS 15 'Revenue from Contracts with Customers' are effective on periods beginning on of after 1 January 2018, subject to EU endorsement. These amendments comprise clarifications of the guidance on identifying performance obligations, accounting for licences of intellectual property and the principal versus agent assessment (gross versus net revenue presentation).
- IFRIC 23, 'Uncertainty over Income Tax Treatments' clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. This interpretation is effective for annual periods beginning on or after 1 January 2019, subject to EU endorsement.
For IFRS 9, IFRS 16, IFRIC 22 and IFRIC 23, it is too early to determine how significant the effect on reported results and financial position will be. The impact of IFRS 15 is discussed below. The impact of the other standards, amendments and interpretations listed above will not have a material impact on the consolidated financial statements.
Impact of IFRS 15 'Revenue from contracts with customers'
On 28 May 2014, the IASB issued IFRS 15 'Revenue from Contracts with Customers'. The new revenue recognition standard will be effective for us starting 1 November 2018, following the announcement of the new year-end date. We do not plan to adopt IFRS 15 early. The standard permits two possible transition methods for the adoption of the new guidance:
-- Retrospectively to each prior reporting period presented in accordance with IAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors", or
-- Retrospectively with the cumulative effect of initially applying the standard recognized on the date of the initial application (cumulative catch-up approach).
We currently plan to adopt the new standard using the cumulative catch-up approach. We are in the process of assessing the impact developing our future IFRS 15 revenue recognition policies and adjusting the relevant business processes to adopt these new policies. We have established a project across Micro Focus' business to review the impacts of IFRS 15 and as part of this effort, the most notable difference to date is in relation to certain incremental costs of obtaining a contract. IFRS 15 requires the capitalization and amortization of certain in-scope sales commissions and third party costs to match the recognition of the associated revenue. An evaluation study is underway to determine the potential impact to the consolidated financial statements in the year of adoption. There will be no impact to cash flows.
IFRS 15 may change the way we allocate a transaction price to individual performance obligations which can impact the classification and timing of revenues. Further analysis of the requirements is currently being undertaken to understand the possible impact, if any.
In addition to the effects on our consolidated statement of comprehensive income, we expect changes to our consolidated statement of financial position (in particular due to the recognition of contract assets/contract liabilities, the differentiation between contract assets and trade receivables, the capitalization and amortization of costs of obtaining a contract and an impact in retained earnings from the initial adoption of IFRS 15) and changes in quantitative and qualitative disclosure to be added.
We will continue to assess all of the impacts that the application of IFRS 15 will have on our consolidated financial statements in the period of initial application, which will also significantly depend on our business and Go-to-Market strategy in FY18. The impacts, if material, will be disclosed, including statements on if and how we apply any of the practical expedients available in the standard.
4. Functional currency
The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Group's entities are measured in the functional currency of each entity. The Group uses the local currency as the functional currency, except for two entities based in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited) and the parent company, where the functional currency is the US dollar.
5. Segmental reporting
In accordance with IFRS 8, 'Operating Segments', the Group has derived the information for its operating segments using the information used by the Chief Operating Decision Maker ("the Executive Committee") for the purposes of resource allocation and assessment of segment performance. The Group's reportable segments under IFRS 8 are as follows:
Micro Focus - The Micro Focus Product Portfolio segment contains mature infrastructure software products that are managed on a portfolio basis akin to a "fund of funds" investment portfolio. This portfolio is managed with a single product group that makes and maintains the software, whilst the software is sold and supported through a geographic Go-to-Market organization. The products within the Micro Focus Product Portfolio are grouped together into five sub-portfolios based on industrial logic: CDMS, Host Connectivity, IAS, Development & ITOM and Collaboration & Network.
SUSE - The characteristics of the SUSE Product Portfolio segment are different from the Micro Focus Product Portfolio due to the Open Source nature of its offerings and the growth profile of those offerings. SUSE provides and supports enterprise-grade Linux and Open Source solutions. The SUSE Product Portfolio comprises: SUSE Linux Enterprise Server and Extensions, SUSE OpenStack Cloud, SUSE Enterprise Storage, SUSE Manager and SUSE Linux Enterprise Desktop and Workstation Extension.
Operating segments are consistent with those used in internal management reporting and the profit measure used by the Executive Committee is Adjusted Operating Profit. Centrally managed costs are allocated between Micro Focus and SUSE segments based on identifiable segment costs with the remainder allocated based on other criteria including revenue and headcount.
Operating segments for the year ended 30 April 2017:
Note Micro SUSE
Focus Total
$'000 $'000 $'000
--------------------------------- ----- ---------- ---------- ----------
Segment revenue 1,077,273 303,429 1,380,702
Directly managed costs (564,072) (178,562) (742,634)
Allocation of centrally managed
costs 26,196 (26,196) -
Total segment costs (537,876) (204,758) (742,634)
--------------------------------- ----- ---------- ---------- ----------
Adjusted Operating Profit 8 539,397 98,671 638,068
---------- ----------
Exceptional items 7 (97,258)
Share based compensation charge 9 (34,506)
Amortization of purchased
intangibles 15 (212,861)
--------------------------------- ----- ---------- ---------- ----------
Operating profit 8 293,443
Share of results of associates 17 (1,254)
Net finance costs 10 (95,845)
--------------------------------- ----- ---------- ---------- ----------
Profit before tax 196,344
--------------------------------- ----- ---------- ---------- ----------
Total assets 4,645,957
--------------------------------- ----- ---------- ---------- ----------
Total liabilities 3,032,467
================================= ===== ========== ========== ==========
Operating segments for the year ended 30 April 2016:
Note Micro SUSE
Focus Total
$'000 $'000 $'000
--------------------------------- ----- ---------- ---------- ----------
Segment revenue 991,233 253,816 1,245,049
Directly managed costs (566,406) (145,129) (711,535)
Allocation of centrally managed
costs 28,883 (28,883) -
Total segment costs (537,523) (174,012) (711,535)
--------------------------------- ----- ---------- ---------- ----------
Adjusted Operating Profit 8 453,710 79,804 533,514
---------- ----------
Exceptional items 7 (27,853)
Share based compensation charge 9 (28,793)
Amortization of purchased
intangibles 15 (181,934)
--------------------------------- ----- ---------- ---------- ----------
Operating profit 8 294,934
Share of results of associates 17 (2,190)
Net finance costs 10 (97,348)
--------------------------------- ----- ---------- ---------- ----------
Profit before tax 195,396
--------------------------------- ----- ---------- ---------- ----------
Total assets 4,635,693
--------------------------------- ----- ---------- ---------- ----------
Total liabilities 3,041,965
================================= ===== ========== ========== ==========
The operating segment split of depreciation on property, plant and equipment and the amortization of purchased software intangibles is reported in note 8.
6. Analysis of revenue by product
Set out below is an analysis of revenue recognized between the principal product portfolios for the year ended 30 April 2017.
Micro Focus
-----------------------------------------------------------------------------
Development
Identity, & IT
Access Operations Total
Host & Management Collaboration Micro SUSE
CDMS Connectivity Security Tools & Networking Focus Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
-------------- -------- ------------- ---------- ------------ -------------- ---------- -------- ----------
Licence 105,962 69,158 48,635 55,464 29,175 308,394 - 308,394
Maintenance 149,668 104,400 140,032 215,843 110,726 720,669 - 720,669
Subscription - - - - - - 298,651 298,651
Consulting 9,530 1,857 18,354 13,860 4,609 48,210 4,778 52,988
Total 265,160 175,415 207,021 285,167 144,510 1,077,273 303,429 1,380,702
-------------- -------- ------------- ---------- ------------ -------------- ---------- -------- ----------
Set out below is an analysis of revenue recognized between the principal product portfolios for the year ended 30 April 2016.
Micro Focus
----------------------------------------------------------------------------
Development
&
IT Total
Identity, Operations Micro SUSE
Host Access Management Collaboration Focus
CDMS Connectivity & Security Tools & Networking Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000
-------------- -------- ------------- ----------- ------------ -------------- -------- -------- ----------
Licence 104,737 89,862 52,360 33,918 23,943 304,820 - 304,820
Maintenance 145,180 105,381 142,209 121,310 130,371 644,451 - 644,451
Subscription - - - - - - 248,903 248,903
Consulting 8,911 2,920 22,083 2,219 5,829 41,962 4,913 46,875
Total 258,828 198,163 216,652 157,447 160,143 991,233 253,816 1,245,049
-------------- -------- ------------- ----------- ------------ -------------- -------- -------- ----------
7. Exceptional items
The exceptional costs of $97.3m for the year ended 30 April 2017 (2016: $27.9m) shown in the consolidated statement of comprehensive income relate to costs incurred on the acquisition costs relating to Serena and GWAVA (note 28), pre-acquisition costs relating to HPE Software and integration costs for acquired businesses.
2017 2016
Reported within Operating profit: $'000 $'000
----------------------------------- ------- --------
Integration costs 27,696 23,634
Acquisition costs 2,597 531
Pre-acquisition costs 58,004 5,569
Property costs 5,525 5,964
Severance and legal costs 3,436 (4,845)
Royalty provision release - (3,000)
97,258 27,853
----------------------------------- ------- --------
Integration costs of $27.7m for the year ended 30 April 2017 (2016: $23.6m) arose from the work done in bringing together the Base Micro Focus, TAG, Serena and GWAVA organizations into one organization. Other activities include: development of a new Group intranet and website, system integration costs.
The acquisition costs of $2.6m for the year ended 30 April 2017 are external costs in evaluating and completing the acquisitions of Serena Software Inc., GWAVA Inc. and OpenATTIC completed during the year ended 30 April 2017 (2016: acquisition of Authasas BV $0.5m). The costs mostly relate to due diligence work, legal work on the acquisition agreements and professional advisors on the transaction.
Pre-acquisition costs of $58.0m for the year ended 30 April 2017 (2016: $5.6m) relate to the acquisition of HPE Software, which was announced in September 2016 and is expected to complete in the third quarter of calendar year 2017 (note 29). The costs mostly relate to due diligence work, legal work on the acquisition agreements, professional advisors on the transaction and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.
The property costs of $5.5m for the year ended 30 April 2017 (2016: $6.0m) relate to the cost of exiting entire buildings or floors of buildings which the Group are leasing following the integration of the TAG and Serena businesses. The majority of the costs relate to TAG and Serena properties in North America.
Severance and legal costs of $3.4m for the year ended 30 April 2017 (2016: $4.8m releases) relate mostly to termination costs for senior Serena executives after acquisition.
Royalty provision releases of $3.0m for the year ended 30 April 2016 related to provisions no longer required as a result of new contracts being concluded with a third party.
The estimated total tax effect of exceptional items is a credit to the income statement of $11.6m for the year ended 30 April 2017 (2016: $6.8m).
8. Reconciliation of operating profit to EBITDA
Note 2017 2016
$'000 $'000
------------------------------------------------ ----- --------- ---------
Operating profit 5 293,443 294,934
Exceptional items 7 97,258 27,853
Share-based compensation charge 9 34,506 28,793
Amortization of purchased intangibles 15 212,861 181,934
------------------------------------------------ ----- --------- ---------
Adjusted Operating Profit 638,068 533,514
Depreciation of property, plant and
equipment 16 11,794 11,419
Amortization of purchased software intangibles 15 1,175 1,864
------------------------------------------------ ----- --------- ---------
Adjusted EBITDA 651,037 546,797
Amortization and impairment of product
development costs 15 22,398 19,515
------------------------------------------------ ----- --------- ---------
Facility EBITDA 673,435 566,312
------------------------------------------------ ----- --------- ---------
Operating profit 5 293,443 294,934 Amortization of intangible assets 15 236,434 203,313 Depreciation of property, plant and equipment 16 11,794 11,419 ------------------------------------------------ ----- --------- --------- EBITDA 541,671 509,666 Amortization and impairment of product development costs 15 (22,398) (19,515) Share-based compensation charge 9 34,506 28,793 Exceptional items 7 97,258 27,853 ------------------------------------------------ ----- --------- --------- Adjusted EBITDA 651,037 546,797 Foreign exchange credit (4,890) (2,915) Net capitalization of internal product development costs * 15 (5,266) (11,362) ------------------------------------------------ ----- --------- --------- Underlying Adjusted EBITDA 640,881 532,520 ------------------------------------------------ ----- --------- ---------
*Net capitalization of internal product development costs of $5.3m (2016: $11.4m capitalization) is calculated as additions to intangible product development costs of $28.3m (2016: $31.4m), excluding external consultants product development costs of $0.6m (2016: $0.5m) less amortization and impairment of the product development costs intangibles in the year of $22.4m (2016: $19.5m).
The table below provides the operating segments split for the year ended 30 April 2017 and 30 April 2016:
2017 2016
-------------------------------- ---------------------------------
Micro SUSE Total Micro SUSE Total
Focus Focus
$'000 $'000 $'000 $'000 $'000 $'000
--------------------------- ---------- -------- ---------- ----------- ------- -----------
Adjusted Operating
Profit 539,397 98,671 638,068 453,710 79,804 533,514
Depreciation of property,
plant and equipment 9,704 2,090 11,794 9,736 1,683 11,419
Amortization of purchased
software intangibles 1,070 105 1,175 1,679 185 1,864
--------------------------- ---------- -------- ---------- ----------- ------- -----------
Adjusted EBITDA 550,171 100,866 651,037 465,125 81,672 546,797
Foreign exchange credit (2,901) (1,989) (4,890) (2,584) (331) (2,915)
Net capitalization
of product development
costs (5,266) - (5,266) (11,362) - (11,362)
--------------------------- ---------- -------- ---------- ----------- ------- -----------
Underlying Adjusted
EBITDA 542,004 98,877 640,881 451,179 81,341 532,520
--------------------------- ---------- -------- ---------- ----------- ------- -----------
The directors use the Adjusted Operating Profit as the performance measure of the business.
The use of these alternative performance measures is consistent with those used by sell-side equity analysts who write research on the Group and how institutional investors consider the performance of the Group.
Facility EBITDA was the measure used under the Group's $420m Revolving Credit Facility to determine the Net Debt to Facility EBITDA covenant calculation. Whilst the $420m facility was repaid and cancelled as part of the refinancing on the acquisition of TAG, for consistency the directors will continue to use the metric Net Debt to Facility EBITDA. These measures are not defined in IFRS and thus may not be comparable to similarly titled measures by other companies.
9. Share-based payments
The share-based compensation charge for the year ended 30 April 2017 was $34.5m (2016: $28.8m) including $10.6m (2016: $5.2m) relating to employer taxes. The increase in the period is as a result of the additional employer taxes that would be payable as a result of the increase in the share price.
10. Finance income and finance costs
2017 2016
$'000 $'000
------------------------------------------------------------- ------- -------
Finance costs
Finance costs on bank borrowings 81,157 82,369
Commitment fees 796 1,108
Amortization of facility costs and original issue discounts 14,219 13,762
-------------------------------------------------------------- ------- -------
Finance costs on bank borrowings 96,172 97,239
Interest on tax provisions - 525
Net interest expense on retirement obligations (note 24) 565 467
Other 87 126
Total 96,824 98,357
-------------------------------------------------------------- ------- -------
2017 2016
$'000 $'000
----------------------------------------------- ------- -------
Finance income
Bank interest 438 377
Interest on non-plan pension assets (note 24) 404 333
Other 137 299
Total 979 1,009
------------------------------------------------ ------- -------
Net finance cost 95,845 97,348
------------------------------------------------ ------- -------
11. Taxation
2017 2016
$'000 $'000
------------------------------------------------- --------- ---------
Current tax
Current year 65,005 40,894
Adjustments to tax in respect of previous years 1,698 (20,570)
Impact of change in tax rates - -
------------------------------------------------- --------- ---------
66,703 20,324
------------------------------------------------- --------- ---------
Deferred tax
Origination and reversal of timing differences (22,426) (4,145)
Adjustments to tax in respect of previous years (4,445) 17,030
Impact of change in tax rates (1,291) (785)
------------------------------------------------- --------- ---------
(28,162) 12,100
------------------------------------------------- --------- ---------
Total 38,541 32,424
------------------------------------------------- --------- ---------
A deferred tax credit of $23.0m (2016: $8.5m credit) as at 30 April 2017 and corporation tax credit of $4.1m (2016: $1.5m credit) as at 30 April 2017 have been recognised in equity in the year in relation to share options. A deferred tax debit of $0.3m (2016: $1.7m) as at 30 April 2017 has been recognised in the consolidated statement of comprehensive income in the year in relation to the defined benefit pension schemes.
The tax charge for the year ended 30 April 2017 is lower than the standard rate of corporation tax in the UK of 19.92% (2016: 20.0%). The differences are explained below:
2017 2016
$'000 $'000
----------------------------------------------------- --------- ---------
Profit before taxation 196,344 195,396
Tax at UK corporation tax rate 19.92% (2016: 20.0%) 39,112 39,079
Effects of:
Tax rates other than the UK standard rate 18,740 15,002
Intra-group financing (15,636) (14,445)
UK patent box benefit (7,634) (7,593)
US R&D tax credit incentives (2,200) (1,800)
Movement in deferred tax not recognized 200 (759)
Effect of change in tax rates (1,291) (237)
Expenses not deductible 9,997 7,737
----------------------------------------------------- --------- ---------
41,288 36,984
Adjustments to tax in respect of previous years:
Current tax 1,698 (20,570)
Deferred tax (4,445) 16,010
----------------------------------------------------- --------- ---------
(2,747) (4,560)
Total taxation 38,541 32,424
----------------------------------------------------- --------- ---------
Tax rates, other than the UK standard rate, includes an increase in provisions of $14.8m (2016: $0.8m) for uncertain tax positions relating to the risk of challenge from tax authorities to the geographic allocation of profits across the Group.
The Group realized benefits in relation to intra-group financing of $15.6m for the year ended 30 April 2017 (2016: $14.4m). The benefits mostly relate to arrangements put in place to facilitate the acquisitions of TAG and Serena.
Benefits from the UK patent box regime amounted to $7.6m for the year ended 30 April 2017 (2016: $7.6m).
The Finance Act 2016, which provides for a reduction in the main rate of UK corporation tax to 17% effective from 1 April 2020, was substantively enacted on 6 September 2016. This rate reduction has been reflected in the calculation of deferred tax at the balance sheet date and has reduced the tax charge in the consolidated statement of comprehensive income by $1.3m. This reflects the net impact of the re-measurement of deferred tax balances, in particular liabilities relating to intangibles.
The expenses not deductible increase the tax charge in the consolidated statement of comprehensive income by $10.0m (2016: $7.7m). The increase is due to non-deductible costs incurred in relation to the acquisitions of Serena and GWAVA and costs incurred in relation to the forthcoming HPE Software transaction.
The Group realised a net credit in relation to the true-up of prior year current and deferred tax estimates of $2.7m for the year ended 30 April 2017 (2016: $4.6m). In the year ended 30 April 2016, there was a significant movement between current and deferred tax in the US as a result of the Group being able to utilize significantly higher deferred tax assets (losses and tax credits) against prior year current (federal and state) tax liabilities than previously anticipated.
12. Dividends
2017 2016
Equity - ordinary $'000 $'000
-------------------------------------------- -------- --------
2016 final paid 49.74 cents (2015: 33.00
cents) per ordinary share 111,023 70,015
2017 interim paid 29.73 cents (2016: 16.94
cents) per ordinary share 66,512 35,144
-------------------------------------------- -------- --------
Total 177,535 105,159
-------------------------------------------- -------- --------
The directors are proposing a second interim dividend in respect of the year ended 30 April 2017 of 58.33 cents per share which will utilize approximately $134m of total equity. The directors have concluded that the Company has sufficient distributable reserves to pay the dividend. It has not been included as a liability in these financial statements as it has not yet been approved by shareholders.
13. Earnings per share
The calculation of the basic earnings per share has been based on the earnings attributable to owners of the parent and the weighted average number of shares for each year.
Year ended 30 April Year ended 30 April
2017 2016
Weighted
Weighted average
average Per Per number Per Per
Total number share share Total of share share
earnings of shares amount amount earnings shares amount amount
$'000 '000 Cents Pence $'000 '000 Cents Pence
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Basic EPS
Earnings attributable
to ordinary
shareholders
(1) 157,906 229,238 68.88 53.25 162,894 218,635 74.50 49.59
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Effect of dilutive
securities
Options 8,165 8,847
Diluted EPS
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Earnings attributable
to ordinary
shareholders 157,906 237,403 66.51 51.42 162,894 227,482 71.61 47.66
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Supplementary
EPS
Basic EPS 157,906 229,238 68.88 53.25 162,894 218,635 74.50 49.59
Adjusted items(2) 344,625 238,580
Tax relating
to above items (85,527) (67,766)
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Basic EPS -
adjusted 417,004 229,238 181.91 140.63 333,708 218,635 152.63 101.60
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Diluted EPS 157,906 237,403 66.51 51.42 162,894 227,482 71.61 47.66
Adjusted items(2) 344,625 238,580
Tax relating
to above items (85,527) (67,766)
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
Diluted EPS
- adjusted 417,004 237,403 175.65 135.80 333,708 227,482 146.70 97.65
----------------------- ----------- ----------- --------- --------- ----------- --------- --------- ---------
(1) Earnings attributable to ordinary shareholders is the profit for the year ended 30 April 2017 of $157,803,000 (2016: $162,972,000), excluding the loss attributable to non-controlling interests of $103,000 (2016: profit of $78,000).
(2) Adjusted items comprise amortization of purchased intangibles $212,861,000 (2016: $181,934,000), share-based compensation $34,506,000 (2016: $28,793,000) and exceptional items $97,258,000 (2016: $27,853,000). Estimated tax relief on these items is as shown above.
The weighted average number of shares excludes treasury shares that do not have dividend rights (note 25).
Earnings per share, expressed in pence, has used the average exchange rate for the year ended 30 April 2017 of $1.29 to GBP1 (2016: $1.50 to GBP1).
14. Goodwill
2017 2016
Note $'000 $'000
------------------------------------------------------------------------- ----- ---------- ----------
Cost and net book amount
At 1 May 2,436,168 2,421,745
Hindsight adjustment 28 - 5,583
Acquisitions 28 392,436 8,840
At 30 April 2,828,604 2,436,168
------------------------------------------------------------------------- ----- ---------- ----------
A segment-level summary of the goodwill allocation is presented below:
Micro Focus 1,969,038 1,576,602
SUSE 859,566 859,566
------------------------------------------------------------------------- ----- ---------- ----------
At 30 April 2,828,604 2,436,168
------------------------------------------------------------------------- ----- ---------- ----------
The Group has two operating segments: Micro Focus Product Portfolio and SUSE Product Portfolio.
The hindsight period adjustments in the year ended 30 April 2016 relate to transactions that occurred within 12 months of the acquisition date and are attributable to TAG acquired during the year ended 30 April 2015.
The additions to goodwill in the year ended 30 April 2017 relate to the acquisition of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. ("Serena") and GWAVA Inc. ("GWAVA") (note 28).
Of the additions to goodwill, there is no amount that is expected to be deductible for tax purposes.
15. Other intangible assets
Purchased intangibles
Product
Purchased Development Customer
software costs Technology Trade names relationships Total
$'000 $'000 $'000 $'000 $'000 $'000
-------------------- ------------ ------------------- ------------- -------------- ---------------- ------------
Cost
At 1 May 2016 22,028 185,546 303,672 217,510 761,634 1,490,390
Acquisitions (note
28) - - 95,245 22,111 210,744 328,100
Additions 3,162 27,664 - - - 30,826
Additions -
external
consultants - 612 - - - 612 Exchange adjustments (555) - - - - (555) -------------------- ------------ ------------------- ------------- -------------- ---------------- ------------ At 30 April 2017 24,635 213,822 398,917 239,621 972,378 1,849,373 -------------------- ------------ ------------------- ------------- -------------- ---------------- ------------ Accumulated amortization At 1 May 2016 20,061 142,297 153,888 22,854 184,735 523,835 Charge for the year 1,175 22,398 69,098 15,995 127,768 236,434 Exchange adjustments (266) - - - - (266) -------------------- ------------ ------------------- ------------- -------------- ---------------- ------------ At 30 April 2017 20,970 164,695 222,986 38,849 312,503 760,003 -------------------- ------------ ------------------- ------------- -------------- ---------------- ------------ Net book amount at 30 April 2017 3,665 49,127 175,931 200,772 659,875 1,089,370 -------------------- ------------ ------------------- ------------- -------------- ---------------- ------------ Net book amount at 30 April 2016 1,967 43,249 149,784 194,656 576,899 966,555 -------------------- ------------ ------------------- ------------- -------------- ---------------- ------------
Expenditure for the year ended 30 April 2017 totaling $31.4m (2016: $34.5m) was made in the year, including $28.3m in respect of product development costs and $3.2m of purchased software. The acquisitions of Serena, GWAVA and OpenATTIC in the year ended 30 April 2017 gave rise to an addition of $328.1m to purchased intangibles (note 28).
Of the $28.3m of additions to product development costs, $27.7m (2016: $30.9m) relates to internal product development costs and $0.6m (2016: $0.5m) to external consultants' product development costs.
At 30 April 2017, the unamortized lives of technology assets were in the range of two to 10 years, customer relationships in the range of one to 10 years and trade names in the range of 10 to 20 years.
Included in the consolidated income statement for the year ended 30 April 2017 was:
2017 2016
$'000 $'000
----------------------------------------------------------- --------- ---------
Cost of sales:
* amortization of product development costs 22,398 19,515
* amortization of acquired purchased technology 69,098 75,227
Selling and distribution:
* amortization of acquired purchased trade names and
customer relationships 143,763 106,707
Administrative expenses:
* amortization of purchased software 1,175 1,864
----------------------------------------------------------- --------- ---------
Total amortization charge for the year 236,434 203,313
Research and development:
* capitalization of product development costs (27,664) (30,877)
----------------------------------------------------------- --------- ---------
In the year ended 30 April 2017, the Group has reviewed its consolidated income statement presentation and has decided to re-classify both amortization of capitalized product development costs and amortization of acquired technology intangibles from research and development expenses to costs of sales. The year ended 30 April 2016 comparatives have also been re-classified and additional detail is provided on the face of the consolidated income statement.
Reconciliation of previously reported in the year ended 30 April 2016:
Research
and development
Cost of expenses
sales $'000
$'000
------------------------------------- ---------- -----------------
As previously reported 135,432 259,388
Amortization of product development
costs 19,515 (19,515)
Amortization of acquired technology
intangibles 75,227 (75,227)
------------------------------------- ---------- -----------------
After re-classification 230,174 164,646
------------------------------------- ---------- -----------------
16. Property, plant and equipment
Freehold land Leasehold Computer Fixtures
and buildings improvements equipment and fittings Total
$'000 $'000 $'000 $'000 $'000
---------------------------------------- -------------- ------------- ---------- ------------- --------
Cost
At 1 May 2016 15,183 23,418 25,455 5,604 69,660
Reclassified from assets held for sale 888 - - - 888
Acquisition - Serena (note 28) - 1,068 648 211 1,927
Acquisition - GWAVA (note 28) - - 111 84 195
Additions 75 3,536 7,739 377 11,727
Disposals - (450) (589) (218) (1,257)
Exchange adjustments (1,783) (303) (749) (21) (2,856)
---------------------------------------- -------------- ------------- ---------- ------------- --------
At 30 April 2017 14,363 27,269 32,615 6,037 80,284
---------------------------------------- -------------- ------------- ---------- ------------- --------
Accumulated depreciation
At 1 May 2016 1,571 8,814 16,741 1,667 28,793
Charge for the year 454 4,170 6,132 1,038 11,794
Disposals - (79) (560) (98) (737)
Exchange adjustments (174) (154) (250) 56 (522)
---------------------------------------- -------------- ------------- ---------- ------------- --------
At 30 April 2017 1,851 12,751 22,063 2,663 39,328
---------------------------------------- -------------- ------------- ---------- ------------- --------
Net book amount at 30 April 2017 12,512 14,518 10,552 3,374 40,956
---------------------------------------- -------------- ------------- ---------- ------------- --------
Net book amount at 1 May 2016 13,612 14,604 8,714 3,937 40,867
---------------------------------------- -------------- ------------- ---------- ------------- --------
Depreciation for the year ended 30 April 2017 of $11.8m (2016: $11.4m) is included within administrative expenses in the consolidated statement of comprehensive income.
17. Investments in associates
Open Invention Network LLC ("OIN"), a strategic partnership for the Group, licences its global defensive patent pool in exchange for a pledge of non-aggression which encourages freedom of action in Linux and the sharing of new ideas and inventions. There are no significant restrictions on the ability of associated undertakings to transfer funds to the parent. There are no contingent liabilities to the Group's interest in associates.
At 30 April 2017 the Group had a 12.5% interest ($11.5m) (2016: 14.3%, $12.7m) investment in OIN. There are eight (2016: seven) equal shareholders of OIN, all holding 12.5% (2016: 14.3%) interest, and each shareholder has one board member and one alternative board member. The Group exercises significant influence over OIN's operation and therefore accounts for its investment in OIN as an associate.
The Group uses the equity method of accounting for its interest in associates. The following table shows the aggregate movement in the Group's investment in associates:
2017 2016
$'000 $'000
-------------------------------------- -------- --------
At 1 May 12,711 14,901
Gain on dilution of investment 966 -
Share of post-tax loss of associates (2,220) (2,190)
-------------------------------------- -------- --------
(1,254) (2,190)
At 30 April 11,457 12,711
-------------------------------------- -------- --------
Details of the Group's principal associates are provided below.
Company name Country of incorporation and principal Proportion held Principal activities
place of business
--------------------------- ---------------------------------------- ---------------- -----------------------------
Open Invention Network LLC USA 12.5% Sale and support of software
--------------------------- ---------------------------------------- ---------------- -----------------------------
The accounting year end date of the associate consolidated within the Group's financial statements is 31 December, and we obtain its results on a quarterly basis. The Group records an adjustment within the consolidated financial statements to align the reporting period of the associate and the Group. The assets, liabilities, and equity of the Group's associate as at 31 March and the revenue and loss of the Group's associate for the period ended 31 March with the corresponding adjustment to align the reporting period was as follows:
31 March 2017 31 March 2016
$'000 $'000
------------------------- -------------- --------------
Non-current assets 43,649 45,666
Current assets 50,137 44,058
Current liabilities (604) (584)
Non-current liabilities (527) (270)
------------------------- -------------- --------------
Equity (92,655) (88,870)
------------------------- -------------- --------------
17. Investments in associates
31 March 31 March
2017 2016
$'000 $'000
----------------------------------------- --------- ---------
Revenue - -
Net loss 16,212 15,867
----------------------------------------- --------- ---------
2017 2016
$'000 $'000
----------------------------------------- --------- ---------
Loss attributable to the Group for the
period ended 31 March (14.3% ownership
to 6 June 2016, 12.5% thereafter) 2,095 2,267
Adjustment on estimated April result
attributable to the Group 125 (77)
----------------------------------------- --------- ---------
Loss attributable to the Group for the
period ended 30 April (14.3% ownership
to 6 June 2016, 12.5% thereafter) 2,220 2,190
----------------------------------------- --------- ---------
18. Trade and other receivables
2017 2016
$'000 $'000
----------------------------------------------------- -------- --------
Trade receivables 266,225 248,759
Less: provision for impairment of trade receivables (2,599) (4,486)
----------------------------------------------------- -------- --------
Trade receivables net 263,626 244,273
Prepayments 23,239 21,694
Other receivables 1,534 1,651
Accrued income 1,110 568
----------------------------------------------------- -------- --------
Total 289,509 268,186
----------------------------------------------------- -------- --------
At 30 April 2017 and 30 April 2016, the carrying amount approximates to the fair value.
19. Trade and other payables - current
2017 2016
$'000 $'000
------------------------- -------- --------
Trade payables 16,891 20,793
Tax and social security 3,032 10,425
Accruals 150,119 156,872
Total 170,042 188,090
------------------------- -------- --------
At 30 April 2017 and 2016, the carrying amount approximates to the fair value. Accruals include employee taxes, acquisition fees, vacation and payroll accruals including bonuses and commissions.
20. Borrowings
2017 2016
$'000 $'000
------------------------------------------ ---------- ----------
Bank loan secured 1,595,188 1,787,250
Unamortized prepaid facility arrangement
fees and original issue discounts (33,652) (42,041)
------------------------------------------ ---------- ----------
1,561,536 1,745,209
------------------------------------------ ---------- ----------
2017 2016
----------------------------------------- --------------------------------------
Unamortized Unamortized
prepaid prepaid
facility facility
Bank arrangement Bank arrangement
loan fees Total loan fees Total
secured and original secured and original
issue discounts issue
discounts
Reported within: $'000 $'000 $'000 $'000 $'000 $'000
--------------------- ---------- ----------------- ---------- ---------- -------------- ----------
Current liabilities 83,788 (12,604) 71,184 287,750 (12,494) 275,256
Non-current
liabilities 1,511,400 (21,048) 1,490,352 1,499,500 (29,547) 1,469,953
--------------------- ---------- ----------------- ---------- ---------- -------------- ----------
1,595,188 (33,652) 1,561,536 1,787,250 (42,041) 1,745,209
--------------------- ---------- ----------------- ---------- ---------- -------------- ----------
2017 2016
$'000 $'000
--------------------------- ------------ ------------
Cash and cash equivalents 150,983 667,178
Less borrowings (1,561,536) (1,745,209)
--------------------------- ------------ ------------
Net debt (1,410,553) (1,078,031)
--------------------------- ------------ ------------
During the year ended 30 April 2017 the Group renegotiated its debt facilities.
On 1 August 2016 the Company allocated a re-pricing of its senior secured Term Loan B which reduced its ongoing interest payments. The interest rate was reduced from 4.25% to 3.75% and the LIBOR floor was reduced from 1.00% to 0.75%. All other terms of the Group's Credit Facilities remained the same. The terms of the Micro Focus debt facilities from 1 August 2016 to 28 April 2017 were as follows:
-- Syndicated senior secured tranche B term loan facility ("Term Loan B") , with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 1.00% per annum, with an original issue discount of 1.00% and a seven year term;
-- A syndicated senior secured tranche C term loan facility ("Term Loan C"), with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 10.00% per annum, with an original issue discount of 1.50% and a five year term; and
-- A senior secured revolving credit facility of $375.0m, ("Revolving Facility"), with an interest rate of 3.50% above LIBOR on amounts drawn (and 0.50% on amounts undrawn) thereunder and an original issue discount of 0.50%.
The Revolving Facility was increased from $225.0m to $375.0m on 2 May 2016 as part of the funding for the Serena acquisition (note 28).
New Facilities
The Company announced on 21 April 2017 the successful syndication of the new credit facilities (the "New Facilities") on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo, Inc., a wholly owned subsidiary of HPE that will hold HPE Software. Post 30 April 2017, Seattle SpinCo Inc. will be merged with a wholly owned subsidiary of Micro Focus in the HPE Software Transaction.
The New Facilities comprise a $500.0m Revolving Credit Facility at LIBOR plus 3.50% (subject to a LIBOR floor of 0.00%) placed with a number of financial institutions and $5,000.0m of term loans. The new term loans are priced as follows:
New facilities drawn as at 30 April 2017:
-- In relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5m due November 2019 were offered a cashless roll of their investment into the existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) and as a result of the cashless rollover increased in size from $1,102.7m to $1,515.2m, effective from 28 April 2017.
Facilities not drawn down at 30 April 2017 were as follows:
HPE Software facilities:
-- The new $2,600.0m senior secured seven year Term Loan B issued by Seattle SpinCo, Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%.
Micro Focus facilities:
-- The new $385.0m senior secured seven year Term Loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
-- The new Euro 470.0m (equivalent to $500 million) senior secured seven year Term Loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.
The above new facilities are a modification only of the existing facilities and the unamortized prepaid facility arrangement fees and original issue discounts have not been accelerated as a result. The remaining unamortized prepaid facility arrangement fees and original issue discounts will be recognized over the life of the new debt.
As part of the HPE Software merger, due to complete in the third quarter of calendar year 2017, the New Facilities will be used to:
(i) Fund the pre-Completion cash payment by Seattle SpinCo Inc. to HPE of $2,500.0m (subject to certain adjustments in limited circumstances);
(ii) Fund the Return of Value to Micro Focus' existing Shareholders of $500.0m; and (iii) Pay transaction costs relating to the acquisition of HPE Software.
The balance will be used for general corporate and working capital purposes.
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.
At 30 April 2017, $80.0m of the available Revolving Facility of $375.0m was drawn, representing 21.3%. The facility was less than 35% drawn at 30 April 2017 and therefore no covenant test is applicable.
The movements on the Group loans in the year were as follows:
Term Loan Term Loan Term Loan Revolving Total
B-2 B C Facility
$'000 $'000 $'000 $'000 $'000
------------- ---------- ------------ ---------- ---------- ----------
At 1 May
2016 - 1,112,250 450,000 225,000 1,787,250
Repayments - (9,562) (37,500) (325,000) (372,062)
Draw downs - - - 180,000 180,000
Transfer 1,515,188 (1,102,688) (412,500) - -
------------- ---------- ------------ ---------- ---------- ----------
At 30 April
2017 1,515,188 - - 80,000 1,595,188
------------- ---------- ------------ ---------- ---------- ----------
Borrowings are stated after deducting unamortized prepaid facility fees and original issue discounts. Facility arrangement costs and original issue discounts are amortized between four and six years. The fair value of borrowings equals their carrying amount.
21. Deferred income - current
2017 2016
$'000 $'000
----------------- -------- --------
Deferred income 640,650 565,480
----------------- -------- --------
Revenue not recognized in the consolidated statement of comprehensive income under the Group's accounting policy for revenue recognition is classified as deferred income in the consolidated statement of financial position to be recognized in future periods. Deferred income primarily relates to undelivered maintenance and subscription services on billed contracts.
22. Deferred income - non-current
2017 2016
$'000 $'000
----------------- -------- --------
Deferred income 223,786 196,483
----------------- -------- --------
Revenue not recognized in the consolidated statement of comprehensive income under the Group's accounting policy for revenue recognition is classified as deferred income in the consolidated statement of financial position to be recognized in future periods in excess of one year. Deferred income primarily relates to undelivered maintenance and subscription services on multi-year billed contracts.
23. Provisions
2017 2016
$'000 $'000
---------------------------------- ------- -------
Onerous leases and dilapidations 16,243 18,176
Restructuring and integration 12,132 3,523
Legal 3,220 1,920
Other 484 1,280
---------------------------------- ------- -------
Total 32,079 24,899
---------------------------------- ------- -------
Current 20,142 10,545
Non-current 11,937 14,354
---------------------------------- ------- -------
Total 32,079 24,899
---------------------------------- ------- -------
Onerous
leases Restructuring
and and
dilapidations integration Legal Other Total
$'000 $'000 $'000 $'000 $'000
--------------------------- -------------- --------------- ------- ------- --------
At 1 May 2016 18,176 3,523 1,920 1,280 24,899
Additional provision in
the year 4,584 48,498 98 501 53,681
Acquisitions (note 28) - 1,201 2,844 - 4,045
Utilization of provision (5,527) (37,712) (120) (117) (43,476)
Released (857) (2,886) (1,492) (1,180) (6,415)
Exchange adjustments (133) (492) (30) - (655)
At 30 April 2017 16,243 12,132 3,220 484 32,079
--------------------------- -------------- --------------- ------- ------- --------
Current 4,406 12,132 3,220 384 20,142
Non-current 11,837 - - 100 11,937
--------------------------- -------------- --------------- ------- ------- --------
Total 16,243 12,132 3,220 484 32,079
--------------------------- -------------- --------------- ------- ------- --------
Onerous leases and dilapidations provisions
The onerous lease and dilapidations provision relates to leased Group properties and this position is expected to be fully utilized within nine years. The provision was increased by $4.6m, mostly due to a lengthening in the estimated time to sublease a North American property.
Restructuring and integration provisions
Restructuring and integration provisions addition in the year ended 30 April 3017 includes severance and integration work undertaken in bringing together the Base Micro Focus, TAG, Serena and GWAVA organizations into one organization. This includes, amongst other activities; development of a new Group intranet and website and system integration costs. Restructuring and integration provisions also included provisions relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business. Releases in the period relate to IT programs no longer continuing in light of the HPE Software acquisition (none of which was capitalized) and the release of provisions established for the Group reorganization in March 2016. The provisions as at 30 April 2017 are expected to be fully utilized within 12 months.
Legal provisions
Legal provisions in the year ended 30 April 2017 and 2016 include management's best estimate of the likely outflow of economic benefits associated with a number of small ongoing legal matters. Releases of legal provisions in the year ended 30 April 2017 relate to legal matters now resolved.
Other provisions
Other provisions as at 30 April 2017 include primarily:
-- $0.5m relating to potential future fees;
-- $nil relating to tax due for pension and bonus payments prior to July 2011 for a subsidiary in Brazil (2016: $0.2m); and
-- $nil remaining provision for potential customer claims (2016: $1.0m).
Releases of other provisions in the year ended 30 April 2017 related to the potential customer claims and Brazil tax matters now resolved.
24. Pension commitments
2017 2016
$'000 $'000
-------------------------------- --- -------- --------
Within non-current assets
:
Long-term pension assets 22,031 22,272
------------------------------------- -------- --------
Within non-current liabilities:
Retirement benefit obligations (30,773) (31,669)
------------------------------------- -------- --------
There are four (2016: three) defined benefit plans in Germany under broadly similar regulatory frameworks. All of the plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life in the case of retirement, disability and death. The level of benefits provided depends not only on the final salary but also on member's length of service, social security ceiling and other factors. Final pension entitlements are calculated by our Actuary at Swiss Life. They also complete calculations for cases of death in service and disability. There is no requirement for the appointment of Trustees in Germany. The schemes are administered locally with the assistance of German pension experts. All four plans were closed for new membership. During the year ended 30 April 2017 a pension scheme arrangement in Germany was identified as requiring reclassification under German law from a defined contribution scheme to a defined benefit scheme.
Long-term pension assets
Long-term pension assets relate to the reimbursement right under insurance policies held by the Company with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan and are subject to the creditors of the Group. Such reimbursement rights assets are recorded in the consolidated statement of financial position as long-term pension assets. Fair value of the reimbursement right asset is deemed to be the present value of the related obligation because the right to reimbursement under the insurance policies exactly matches the amount and timing of some or all of the benefits payable under the defined benefit plan.
The movement on the long-term pension asset is as follows:
2017 2016
$'000 $'000
------------------------------------------------------------- -------- -------
As at 1 May 22,272 14,076
Hindsight adjustment - 3,917
Interest on non-plan assets (note 10) 404 333
Benefits paid (110) (8)
Contributions 442 475
Included within other comprehensive
income:
* Actuarial (loss)/gain on non-plan assets (2,134) 3,104
2,264 -
* Reclassification from defined contribution scheme to
defined benefit scheme
------------------------------------------------------------- -------- -------
130 3,104
Foreign currency exchange (loss)/gain (1,107) 375
As at 30 April 22,031 22,272
------------------------------------------------------------- -------- -------
Retirement benefit obligations
$1.2m (2016: $1.3m) is included in the consolidated statement of comprehensive income in respect of the German defined benefit pension arrangements being a current service charge of $0.6m (2016: $0.8m) and a net finance charge of $0.6m (2016: $0.5m).
The contributions for the year ended 30 April 2018 are expected to be broadly in line with the current year.
The key assumptions used for the German scheme were:
2017 2016
--------------------------------------- ------ ------
Rate of increase in final pensionable
salary 2.00% 2.60%
Rate of increase in pension payments 2.00% 2.00%
Discount rate 1.95% 1.70%
Inflation 2.00% 2.00%
--------------------------------------- ------ ------
The mortality assumptions for the German scheme are set based on actuarial advice in accordance with published statistics and experience in the territory, specifically German pension table 'Richttafeln 2005 G' by Prof. Dr. Klaus Heubeck.
The net liability included in the consolidated statement of financial position arising from obligations in respect of defined benefit schemes is as follows:
2017 2016
$'000 $'000
------------------------------------- -------- --------
Present value of funded obligations 36,480 37,524
Fair value of plan assets (5,707) (5,855)
30,773 31,669
------------------------------------- -------- --------
The retirement benefit obligation has moved as follows:
2017 2016
------------------------------------ ------------------------------------
Defined Scheme Retirement Defined Scheme Retirement
benefit assets benefit benefit assets benefit
obligations obligations obligations obligations
$'000 $'000 $'000 $'000 $'000 $'000
------------------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
At 1 May 37,524 (5,855) 31,669 38,224 (5,482) 32,742
Current service cost 625 - 625 760 - 760
Benefits paid (197) 87 (110) (100) 84 (16)
Contributions by plan
participants - (114) (114) - (126) (126)
Interest cost/(income) 660 (95) 565 546 (79) 467
Included within other
comprehensive income:
Remeasurements - actuarial
losses:
- - - - - -
* Demographic
* Financial (2,821) - (2,821) (2,024) - (2,024)
* Experience (568) - (568) (565) - (565)
* Actuarial return on assets excluding amounts included
in interest income - (9) (9) - (108) (108)
Reclassification from
defined contribution
scheme to defined
benefit scheme 2,996 - 2,996 - - -
------------------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
(393) (9) (402) (2,589) (108) (2,697)
Foreign currency exchange
changes (1,739) 279 (1,460) 683 (144) 539
------------------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
At 30 April 36,480 (5,707) 30,773 37,524 (5,855) 31,669
------------------------------------------------------------- ------------ -------- ------------ ------------ -------- ------------
Sensitivities
The table below provides information on the sensitivity of the defined benefit obligation to changes to the most significant actuarial assumptions. The table shows the impact of changes to each assumption in isolation, although, in practice, changes to assumptions may occur at the same time and can either offset or compound the overall impact on the defined benefit obligation.
These sensitivities have been calculated using the same methodology as used for the main calculations. The weighted average duration of the defined benefit obligation is 25 years.
Change in Change in
Assumption defined
benefit
obligation
-------------------------------------- ------------- ------------
Discount rate for scheme liabilities 0.50% (10.6%)
Price inflation 0.25% 3.60%
Salary growth rate 0.50% 1.40%
-------------------------------------- ------------- ------------
An increase of one year in the assumed life expectancy for both males and females would increase the defined benefit obligation by 2.9% as at 30 April 2017 (2016: 2.9%). The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to previous years.
25. Share capital
Ordinary shares at 10 pence each as at 30 April 2017 (2016: 10 pence each)
2017 2016
--------------------- ---------------------
Shares $'000 Shares $'000
---------------------------------------- ------------ ------- ------------ -------
Issued and fully paid
At 1 May 228,706,210 39,573 228,587,397 39,555
Shares issued to satisfy option awards 968,269 127 118,313 18
Share placement issues - - 500 -
At 30 April 229,674,479 39,700 228,706,210 39,573
---------------------------------------- ------------ ------- ------------ -------
Share issued during the year
During the year ended 30 April 2017, 968,269 ordinary shares of 10 pence each (2016: 118,313) were issued by the Company to settle exercised share options. The gross consideration received was $2.0m (2016: $1.0m). Shares issued to satisfy option awards options related to exercises of the Incentive Plan 2005 and Sharesave and Employee Stock Purchase Plan 2006. Of these exercises in the year ended 30 April 2017 the majority were settled by new share issues and some were settled by utilizing the remaining treasury shares and shares from an employee benefit trust.
At 30 April 2017 no treasury shares were held (2016: 29,924) such that the voting rights and number of listed shares at 30 April 2017 were 229,674,479 (2016: 228,676,286). Treasury shares were fully utilized during the year to satisfy share option exercises.
Potential issues of shares
Certain employees hold options to subscribe for shares in the Company at prices ranging from nil pence to 1,875.6 pence under the following share option schemes approved by shareholders in 2005 and 2006: the Long-Term Incentive Plan 2005, the Additional Share Grants, the Sharesave Plan 2006 and the Employee Stock Purchase Plan 2006.
The number of shares subject to options at 30 April 2017 was 8,607,889 (2016: 9,264,743).
26. Other reserves
Capital
redemption Merger
reserve reserve Total
$'000 $'000 $'000
As at 1 May 2015 163,363 1,168,104 1,331,467
Reallocation of merger
reserve - (180,000) (180,000)
As at 30 April 2016 163,363 988,104 1,151,467
Reallocation of merger
reserve - (650,000) (650,000)
------------------------- ------------ ---------- ----------
As at 30 April 2017 163,363 338,104 501,467
------------------------- ------------ ---------- ----------
The Company has transferred an amount from the merger reserve to retained earnings pursuant to the UK company law. The parent company transferred the investment in TAG to a wholly owned sub for an intercompany receivable in the amount of $1,373m. To the extent the loan is settled in qualifying consideration, an amount of $650m from the merger reserve is transferred to retained earnings (2016: $180.0m) that is available for dividend distribution to the parent company shareholders.
27. Non-controlling interests
On 22 December 2016 a payment of 170,350 JPY ($1,533) was made to a minority shareholder of Novell Japan Ltd to acquire 170,350 ordinary 1 JYP shares held. As a result of this the Group's shareholding increased from 71.5% to 74.7%.
2017 2016
$'000 $'000
---------------------------------- ------ ------
At 1 May 1,057 979
Share of (loss)/profit after tax (103) 78
---------------------------------- ------ ------
At 30 April 954 1,057
---------------------------------- ------ ------
Non-controlling interests relate to the companies detailed below:
Company name Country of incorporation and principal place of business 2017 2016
Proportion Proportion
held held
------------------ ---------------------------------------------------------- ------------ ------------
Novell Japan Ltd Japan 74.7% 71.5%
------------------ ---------------------------------------------------------- ------------ ------------
28. Business combinations
Summary of acquisitions
Consideration
--------------------------------
Carrying Fair
value value Hindsight
at acquisition adjustments adjustments Goodwill Shares Cash Total
$'000 $'000 $'000 $'000 $'000 $'000 $'000
-------------------- ---------------- ------------- -------------- ---------- ---------- -------- ----------
Acquisitions in
the year ended 30
April 2017
Serena Software
Inc. 147,260 (249,306) - 379,669 - 277,623 277,623
GWAVA Inc. 618 3,062 - 12,767 - 16,447 16,447
OpenATTIC - 4,991 - - - 4,991 4,991
OpenStack - - - - - - -
147,878 (241,253) - 392,436 - 299,061 299,061
Acquisitions in
the year ended 30
April 2016
Authasas BV 1,110 10 - 8,840 - 9,960 9,960
Acquisitions in
the year ended 30
April 2015
TAG (501,338) (225,796) (5,583) 2,118,933 1,386,216 - 1,386,216
(352,350) (467,039) (5,583) 2,520,209 1,386,216 309,021 1,695,237
-------------------- ---------------- ------------- -------------- ---------- ---------- -------- ----------
Acquisitions in the year ended 30 April 2017
1. Acquisition of Serena Software Inc.
On 2 May 2016, the Group acquired the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. ("Serena") and its subsidiaries for $277.6m, payable in cash at Completion. The Group then repaid the outstanding Serena bank borrowings of $316.7m as at 2 May 2016, making the total cash outflow for the Group of $528.5m, net of cash acquired of $65.8m. The transaction costs for the Serena acquisition were $0.9m ($0.5m was incurred in the year ended 30 April 2016).
The acquisition is highly consistent with the Group's established acquisition strategy and focus on the efficient management of mature infrastructure software products.
Serena is a leading provider of enterprise software focused on providing Application Lifecycle Management products for both mainframe and distributed systems. Whilst Serena is headquartered in San Mateo, California the operations are effectively managed from offices in Hillsboro, Oregon and St. Albans in the United Kingdom. It operates in a further 10 countries. The Serena Group's customers are typically highly regulated large enterprises, across a variety of sectors including banking, insurance, telco, manufacturing and retail, healthcare and government.
Serena was integrated into the Micro Focus Product Portfolio and the revenues reported in the Development and IT Operations Management Tools sub-portfolio.
The transaction was funded through the Group's existing cash resources together with additional debt and equity finance arranged through Barclays, HSBC, the Royal Bank of Scotland and Numis Securities. On the 2 May 2016, the Group's existing revolving credit facility was extended from $225m to $375m and the Group raised approximately GBP158.2m (approximately $225.7m) through a Placing underwritten by Numis Securities incurring $3.0m of costs associated with the Placing in March 2016.
A fair value review was carried out and finalized on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
Details of the net assets acquired and goodwill are as follows:
Carrying Fair value
value at adjustments Fair value
acquisition
$'000 $'000 $'000
------------------------------- ------------- ------------- -------------
Goodwill 462,400 (462,400) -
Intangible assets - purchased
(1) - 317,700 317,700
Intangible assets - other 79 - 79
Property, plant and equipment 1,927 - 1,927
Other non-current assets 167 - 167
Deferred tax asset 15,347 - 15,347
Trade and other receivables 27,362 - 27,362
Cash and cash equivalent 65,784 - 65,784
Borrowings - short-term (27,712) - (27,712)
Trade and other payables (11,766) - (11,766) Provisions - short-term (4,045) - (4,045) Current tax liabilities (3,173) - (3,173) Deferred income - short-term (2) (72,217) 3,761 (68,456) Deferred income - long-term (2) (14,853) 798 (14,055) Borrowings - long-term (288,938) - (288,938) Other non-current liabilities (717) - (717) Deferred tax liabilities (3) (2,385) (109,165) (111,550) ------------------------------- ------------- ------------- ------------- Net assets/(liabilities) 147,260 (249,306) (102,046) Goodwill (note 14) 379,669 ------------------------------- ------------- ------------- ------------- Consideration 277,623 ------------------------------- ------------- ------------- ------------- Consideration satisfied by : Cash 277,623 ------------------------------- ------------- ------------- -------------
The fair value adjustments relate to:
(1) Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Serena;
(2) Deferred income has been valued taking account of the remaining performance obligations; and
(3) A deferred tax liability has been established relating to the purchase of intangibles.
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 15):
Fair value
$'000
------------------------ -----------
Technology 86,100
Customer relationships 210,200
Trade names 21,400
------------------------ -----------
317,700
------------------------ -----------
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company's existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $379.7m has been capitalized.
From the date of acquisition, 2 May 2016 to 30 April 2017, the acquisition contributed $144.8m to revenue and $72.2m to profit, before any allocation of management costs and tax. There is no difference in results between 1 May and 2 May 2016.
2. Acquisition of GWAVA Inc.
On 30 September 2016, the Group acquired the entire share capital of GWAVA Inc. ("GWAVA") and its subsidiaries for $16.4m, payable in cash at Completion. The transaction costs for the GWAVA acquisition were $1.5m.
The acquisition is highly consistent with the Group's established acquisition strategy and focus on the efficient management of mature infrastructure software products.
GWAVA is a leading company in email security and enterprise information archiving (EIA). GWAVA has approximately 90 employees, based in the US, Canada and Germany. More than a million users across 60 countries rely on its products in over 3,000 customer organizations, supported by GWAVA's global team, with a further 1,000 GWAVA business partners collaborating closely to ensure successful customer solutions. In addition to GWAVA's award winning EIA product Retain, GWAVA has a full suite of products to protect, optimize, secure and ensure compliance for customers running Micro Focus GroupWise.
A provisional fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. At the time these consolidated financial statements were authorized for issue, the Group had not yet fully completed its assessments of the GWAVA acquisition.
Details of the net assets acquired and goodwill are as follows:
Carrying Fair value
value at adjustments Fair
acquisition value
$'000 $'000 $'000
------------------------------- ------------- ------------- --------
Intangible assets - purchased
(1) - 5,330 5,330
Intangible assets - other (2) 1,180 (1,180) -
Property, plant and equipment 195 - 195
Trade and other receivables 3,096 - 3,096
Cash and cash equivalent 2,389 - 2,389
Trade and other payables (1,331) - (1,331)
Deferred income - short-term
(3) (4,094) 324 (3,770)
Deferred income - long-term (817) - (817)
Deferred tax liabilities (4) - (1,412) (1,412)
------------------------------- ------------- ------------- --------
Net assets 618 3,062 3,680
Goodwill (note 14) 12,767
------------------------------- ------------- ------------- --------
Consideration 16,447
------------------------------- ------------- ------------- --------
Consideration satisfied by
:
Cash 16,447
------------------------------- ------------- ------------- --------
The fair value adjustments relate to:
(1) Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of GWAVA Inc.;
(2) Other intangible assets relating to historic IP has been written down to $nil;
(3) Deferred income has been valued taking account of the remaining performance obligations; and
(4) A deferred tax liability has been established relating to the purchase of intangibles.
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 15):
Fair value
$'000
------------------------ -----------
Technology 4,075
Customer relationships 544
Trade names 711
------------------------ -----------
5,330
------------------------ -----------
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company's existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $12.8m has been capitalized. From the date of acquisition, 30 September 2016 to 30 April 2017, the acquisition contributed $5.8m to revenue and a profit of $0.4m.
The estimated results of the above acquisition if it had been made at the beginning of the accounting year, 1 May 2016, to 30 April 2017 would have been as follows:
Continuing $m ----------------------- ---- Revenue 9.6 Profit for the period 0.5 ----------------------- ----
The estimated results of the Group if the acquisition had been made at the beginning of the accounting year, 1 May 2016, to 30 April 2017 would have been as follows:
Continuing $m --------------------- -------- Revenue 1,384.5 Profit for the year 157.0 --------------------- --------
The above figures are based on information provided to Micro Focus by GWAVA and the results since acquisition.
3. Acquisition of OpenATTIC
On 1 November 2016 the Group acquired the OpenATTIC storage management technology and engineering talent from the company it-novum GmbH for a cash consideration of 4.7m Euros ($5.0m). The OpenATTIC technology aligns perfectly with our strategy to provide open source, software defined infrastructure solutions for the enterprise and will strengthen SUSE Enterprise Storage solution by adding enterprise grade storage management capabilities to the portfolio. The transaction costs for the OpenATTIC acquisition were $1.2m.
A provisional fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. The fair value review will be finalized in the next reporting period.
Details of the net assets acquired and goodwill are as follows:
Carrying Fair value
value at adjustment Fair value
acquisition
------------------------------- -------------- ------------ -------------
$'000 $'000 $'000
------------------------------- -------------- ------------ -------------
Intangible assets - purchased
technology - 4,991 4,991
Net assets - 4,991 4,991
Goodwill -
------------------------------- -------------- ------------ -------------
Consideration 4,991
----------------------------------------------- ------------ -------------
Consideration satisfied by
:
Cash 4,991
----------------------------------------------- ------------ -------------
From the date of acquisition, 1 November 2016, to 30 April 2017 the acquisition contributed the following:
$m
--------------------- ------
Revenue -
Loss for the period (0.4)
--------------------- ------
The estimated results of the Group if the acquisition had been made at the beginning of the accounting year, 1 May 2016, to 30 April 2017 would have been as follows:
Pro-forma $m --------------------- -------- Revenue 1,380.7 Profit for the year 157.1 --------------------- -------- 4. Acquisition of OpenStack
During the year, the Group acquired purchased technology and talent from HPE for $nil consideration that will expand SUSE's OpenStack Infrastructure-as-a-Service ("IaaS") solution and accelerate SUSE's entry into the growing Cloud Foundry Platform-as-a-Service ("PaaS") market, subject to regulatory clearances. The last regulatory clearance was received on the 8 March 2017 and the deal was completed then.
The acquired OpenStack technology assets were integrated into SUSE OpenStack Cloud and the acquired Cloud Foundry and PaaS assets will enable SUSE in the future to bring to market a certified, enterprise-ready SUSE Cloud Foundry PaaS solution for all customers and partners in the SUSE ecosystem. Additionally, SUSE has increased engagement with the Cloud Foundry Foundation, becoming a platinum member and taking a seat on the Cloud Foundry Foundation Board.
As part of the transaction, HPE has named SUSE as its preferred open source partner for Linux, OpenStack IaaS and Cloud Foundry PaaS. HPE's choice of SUSE as their preferred open source partner further cements SUSE's reputation for delivering high-quality, enterprise-grade open source solutions and services.
The Group has carried out a provisional fair value assessment of the OpenStack assets and liabilities, resulting in the identification of intangible assets and liabilities with a $nil value. The Group will continue to assess and finalize this in the next reporting period.
From the date of acquisition, 8 March 2017, to 30 April 2017 the acquisition contributed the following:
$m
--------------------- ------
Revenue 0.3
Loss for the period (2.7)
--------------------- ------
The estimated results of the Group if the acquisition had been made at the beginning of the accounting year, 1 May 2016, to 30 April 2017 would have been as follows:
Pro-forma $m --------------------- -------- Revenue 1,382.8 Profit for the year 141.5 --------------------- --------
29. Post Balance Sheet Events
1 Proposed merger with HPE Software
On September 7, 2016, the Company announced that it had entered into a definitive agreement with HPE on the terms of a transaction (the "Transaction") which provided for the combination of HPE's software business segment ("HPE Software") with the Company by way of a merger (the "Merger") with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software for the purposes of the Transaction. At the time of announcement HPE Software was valued at $8.8bn.
The Transaction is currently expected to complete on 1 September 2017. Our shareholders voted unanimously in favor of the Transaction. They also approved a return of value of $500m which will be declared immediately before Completion.
2 Dividends
The directors announced a second interim dividend of 58.33 cents per share (2016: 49.74 cents per share). The dividend will be paid in Sterling equivalent to 45.22 pence per share, based on an exchange rate of GBP1 = $1.29 being the rate applicable on 11 July 2017, the date on which the board resolved to propose the dividend. The dividend will be paid on 25 August 2017 to shareholders on the register at 4 August 2017.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
July 12, 2017 02:00 ET (06:00 GMT)
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