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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 : 2257Q
Micro Focus International plc
24 February 2021
24 February 2021
Micro Focus International plc
2020 Annual Financial Report and Notice of AGM
Micro Focus International plc (the "Company") announces that it has today published its Annual Report and Accounts for the 12 months ended 31 October 2020 (the "2020 Annual Report"), the Notice of the 2021 Annual General Meeting ("AGM Notice") and the forms of proxy for use at that Annual General Meeting (the "Forms of Proxy").
The Annual General Meeting will be held on 25 March 2021 at 3pm (UK time) at the Company's offices at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN, United Kingdom.
In light of the COVID-19 pandemic, and the UK Government's ongoing guidance regarding social distancing and the prohibition of public gatherings, the arrangements and format of the AGM have again been altered this year in order to protect the health and well-being of shareholders and other attendees. Accordingly, the Company will make arrangements such that the quorum requirements of the AGM are satisfied through the attendance of a minimum number of people (comprised of the Company's management) so that functional business of the AGM can be carried out.
The AGM will otherwise be held as a closed meeting and shareholders are respectfully asked not to make plans to attend the AGM as they (and any appointed proxies (other than the chair of the AGM) or corporate representatives) will not be granted access to the AGM in person. Accordingly, we encourage all shareholders to submit a Form of Proxy to appoint the chair of the AGM to vote on their behalf in accordance with their instructions.
Despite these exceptional circumstances, the board is keen to maintain engagement with shareholders and in order to facilitate this, shareholders are invited to submit questions. Details of how to ask a question, and where responses will be made available, are set out in the Notice of Meeting and on the Annual and General Meetings page on the Company's investors' website.
The 2020 Annual Report and the AGM Notice will also be available shortly on the Company's investors' website at www.microfocus.com/en-us/investors .
In accordance with Listing Rule 9.6.1, the 2020 Annual Report, the AGM Notice and the Forms of Proxy have been submitted to the National Storage Mechanism and will be available shortly at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
In accordance with DTR 6.3.5 R, the information set out in the Appendix to this announcement is extracted in full unedited text from the 2020 Annual Report and should be read in conjunction with the Company's Preliminary Results Announcement issued on 9 February 2021, which can be found at www.microfocus.com/en-us/investors and which included a condensed set of the Company's consolidated financial statements, information on important events which occurred during the year and th eir impact on the financial statements . Together, these constitute the material required to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the 2020 Annual Report in full.
SEnquiries:
Micro Focus Tel: +44 (0)1635 32646 Stephen Murdoch, CEO Investors@microfocus.com
Brian McArthur-Muscroft, CFO
Ben Donnelly, Investor relations
Brunswick Tel: +44 (0) 20 7404 5959 Sarah West MicroFocus@brunswickgroup.com
Jonathan Glass
Notes to Editors:
About Micro Focus
Micro Focus (LSE: MCRO.L, NYSE: MFGP) is a global enterprise software company supporting the technology needs and challenges of the Global 2000. Our solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Our product portfolios are Security, IT Operations Management, Application Delivery Management, Information Management & Governance and Application Modernization & Connectivity. For more information, visit: www.microfocus.com.
APPIX
Page and note numbers in this Appendix refer to the 2020 Annual Report.
1. Principal risks and uncertainties
The following information has been reproduced from pages 63 to 73 of the 2020 Annual Report:
Principal Risks and Uncertainties
Principal risks and uncertainties
In common with all businesses, the Group could be affected by risks and uncertainties that may have a material adverse effect on its business operations and achieving its strategic objectives including its business model, future performance, solvency, liquidity and/or reputation. This includes any new, emerging or continuing direct or indirect risks posed by COVID-19. These risks could cause actual results to differ materially from forecasts or historic results. Accepting that risk is an inherent part of doing business, the board is mindful of the interdependencies of some risks. Where possible, the Group seeks to mitigate risks through its risk management framework, internal controls and insurance, but this can only provide reasonable assurance and not absolute assurance against material losses. In particular, insurance policies may not fully cover all of the consequences of any event, including damage to persons or property, business interruptions, failure of counterparties to conform to the terms of an agreement or other liabilities. The following are the principal risks and uncertainties, potential impacts and mitigations that are relevant to the Group as a provider of software products and associated services at this time. They do not comprise all of the risks associated with the Group and are not set out in priority order. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the Group.
The net risk movement from the prior period for each principal risk has been assessed and presented in the tables below.
Hot Features
Premium
Products
Risk Trend: No change Link to strategy: Delivering Risk Category: Marketplace
innovation, SaaS and
Subscription
------------ ---------- ----------------------------- ---------------------------
Principal risk description
To remain successful, the Group must ensure that its products
continue to meet the requirements of customers and investment
must be effectively balanced between growth and mature products.
Investment in research and innovation in product development
is essential to meet customer and partner requirements in order
to maximise customer value, revenues and corporate performance.
The Group has a large number of products, at differing stages
of their life cycle. The extent of investment in each product
set needs to be managed and prioritised considering the expected
future prospects and market demand.
Potential impact
If products do not meet the requirements of customers, they will
seek alternative solutions, resulting in the loss of existing
maintenance and new revenue opportunities and the cancellation
of existing contracts. Insufficient focus on key research and
development projects may damage the longterm growth prospects
of the Group. The Group's business and reputation may be harmed
by innovation that falls behind competitors, or by errors or
defects in its products.
How we manage it
As set out in the Chief Executive's Strategic review on pages
14 to 17, a key initiative of the Group's three-year plan is
to take a more definitive approach to delivering Subscription
and SaaS-based offerings as a key part of the strategy and to
accelerate the transition to these models where appropriate within
the Group's portfolios. The transition is being managed over
multiple financial periods with initial focus on products where
this model is the emerging or de-facto market standard. Additionally,
in FY20 the Group began to take a differentiated approach to
investment and operational management in Security and Big Data.
The priorities remain delivering new innovation in response to
rapidly changing market opportunities, expanded cloud and cross-industry
use case support and further developing existing and new SaaS
and Subscription offerings.
As set out on pages 18 and 19 (Our markets) the Group aligns
resources and develops propositions across four main outcomes
for its customers: Accelerate application delivery; Simplify
IT transformation; Strengthen cyber resilience; and Analyse in
time to act. To improve the interaction between product management,
product development, sales and marketing we implemented a new
end-to-end planning process. The Micro Focus Product Portfolio
consists of five product groups with more than 300 product lines,
as set out on pages 28 to 31 (Our business model), which are
uniquely positioned to help customers address digital transformation,
run and transform their business and maximise existing software
investments. Continued evolution of product strategy occurs as
part of the annual product planning process, where senior leaders
from across the business determine appropriate product sales,
marketing and investment strategies to best align to the market
opportunities. More details on the business model can be found
on pages 28 to 31.
Sales/Go-To-Market ("GTM") Models
Risk Trend: Increased Link to strategy: Go-To-Market Risk Category: Marketplace
------------ ---------- ------------------------------- ---------------------------
Principal risk description
For the Group to succeed in meeting sales revenue and growth
targets, it requires successful GTM models across the full Product
Portfolio, with effective strategies and plans to exploit all
routes to market, including direct and channel/ partner led sales.
In addition, the Group must focus the sales force on targeted
customer segments and ensure appropriate responses to the market
dynamics related to changes in customer buying behaviours. Effective
GTM models may be more successful if accompanied by compelling
Micro Focus brand awareness programmes. The Group is dependent
upon the effectiveness of its sales force and distribution channels
to drive licence and maintenance sales and a reference-based
selling model. This risk was increased given the COVID-19 restrictions
across various regions, from time to time in the period.
Potential impact
Poor design and/or execution of GTM plans may limit the success
of the Group by targeting the wrong customers through the wrong
channels and positioning the wrong product or solution offerings,
reducing the value that customers receive from Micro Focus.
How we manage it
As set out in the Chief Executive's Strategic review on pages
14 to 17, a key initiative of the Group's three-year plan is
to deliver consistent, sustained improvement to revenue performance
through increases in sales productivity and the more effective
alignment of resources to opportunity. The GTM team has made
positive improvements to operationalise the recommendations set
out at the beginning of the year, including good progress in
the development of the Group's customer and partner propositions.
Across the five product categories that the Group reports against,
the Group has great depth of capability and experience to help
its customers address some of the most complex challenges they
face. To best enable the Group's customers and exploit this capability,
the Group is aligning resources and developing compelling propositions
across four customer outcomes - Accelerate application delivery;
Simplify IT transformation; Strengthen cyber resilience; and
Analyse in time to act.
As a result of the COVID-19 pandemic and the increase to 90%
of our employees working from home, Micro Focus has invested
further in additional resources to support the transition to
virtual selling and customer engagement. Sales enablement and
execution has received considerable attention and improvement
measures have focused on improving consistency of approach and
simplifying the organisational structure to support more effective
and efficient decision making, greater accountability and a holistic
approach to customer success. This has been achieved through
the further removal of unnecessary global structures and management
layers, and the introduction of a single global sales methodology
based on value-driven outcomes. Further measures are being put
in place to improve productivity and predictability. Other organisational
changes that were made to align marketing and product teams,
and to build a consistent approach to sales enablement globally,
have been operationalised and continue to reflect the changing
demands of the business.
Industry events, such as Micro Focus Universe, successfully adapted
to a virtual format given COVID-19 restrictions, help showcase
the Group's Product Portfolio and strengthen customer, partner
and industry relationships. Additionally, The Group coordinates
a programme of subject matter expert led media engagement on
industry innovation and emerging industry trends, targeted mainly
around social and web media, that serve to further increase brand
awareness.
Competition
Risk Trend: Increased Link to strategy: Risk Category: Marketplace
Delivering innovation,
SaaS and Subscription
------------ ---------- ------------------------ ---------------------------
Principal risk description
Comprehensive information about the markets in which Micro Focus
operates is required for the Group to assess competitive risks
effectively and to perform successfully. The Group operates in
a number of competitive markets and success in those markets
depends on a variety of factors. This risk increased in the period
due to the on-going pace and scale of change across the IT competitive
landscape.
Potential impact
Failure to understand the competitive landscape adequately and
thereby identify where competitive threats exist may damage the
successful sales of the Group's products. If the Group is not
able to compete effectively against its competitors, it is likely
to lose customers and suffer a decrease in sales, which may result
in lost market share and weaker financial performance.
How we manage it
Group product plans contain an analysis of both traditional and
emerging competitive threats and subscriptions to industry analyst
firms are leveraged to better understand market dynamics and
competitor strategies. In addition, customer surveys and customer
advisory boards are used to validate product direction - both
standalone and in the context of competitors. Micro Focus continues
to monitor and review intelligence on market threats to focus
on offering best in class service to customers. Marketing and
product teams monitor a variety of metrics (such as NPS, including
competitive benchmark) to analyse customer satisfaction relative
to industry benchmarks.
Employees and Culture
Risk Trend: Increased Link to strategy: Risk Category: Infrastructure
Complete core systems
------------ ---------- ----------------------- ------------------------------
Principal risk description
The recruitment and retention of highly skilled and motivated
employees at all levels of the Group is critical to the success
and future growth of the Group in all countries in which it operates.
Employees require clear business objectives and a well communicated
vision and set of values for the Group to achieve high levels
of employee engagement and a common sense of corporate purpose
among the workforce. This risk was increased given the COVID-19
restrictions across various regions, from time to time in the
period.
Potential impact
Failure to attract, develop and retain skill sets, particularly
in sales and research & development, may hinder the Group's sales
and development plans. Weak employee engagement, organisational
alignment and inadequate incentivisation may lead to poor performance
and instability. It could also have an adverse impact on the
realisation of strategic plans.
How we manage it
Developing the most appropriate culture, aligned to driving productive
management behaviours focused on delivering business priorities,
is critical. During the period the Group pivoted to have more
than 90% of its employees working from home due to the COVID-19
pandemic. Productivity tools were rolled out to enable effective
home working and employee connectedness. Training was rolled
out across the Group for both employees and managers, with a
particular focus on employee support and wellbeing. Further details
of the actions taken by the Group to support its employees are
provided in Our Impact section on pages 35 and 36.
The Group has policies in place to help ensure that it is able
to attract and retain employees of a high calibre with the required
skills. These policies include training, career development and
long-term financial incentives. Succession plans have been developed
and are in place for key leadership positions across the Group.
In the period, the Group also took significant action to develop
its management capability both internally, by training and promotions,
and through external hires. The Group continued to attract external
hires during the period and rolled out initiatives to ensure
continued effective hiring practices and candidate on-boarding
experience in a virtual environment. Regular communications during
the period focused on keeping the workforce updated on business
objectives, progress against the strategic plan and the Group's
overall response to COVID-19. Attrition dropped in the period.
IT Systems and Information
Risk Trend: Increased Link to strategy: Risk Category: Infrastructure
Complete core systems
------------- ---------- ----------------------- ------------------------------
Principal risk description
The Group's operations, as with most businesses, are dependent
on maintaining and protecting the integrity and security of the
IT systems and management of information. Following the integration
of the HPE Software business the Group continues to operate on
two IT architectures with the attendant complexity to business
operations and the control environment. As set out in the Chief
Executive's Strategic review on pages 14 to 17, work continues
to transition the Group to a simplified IT systems architecture.
The transition may be more time consuming and costly than anticipated,
given the amount of change management that is involved. This
risk was increased given the COVID-19 restrictions across various
regions, from time to time in the period.
Potential impact
Disruption to the IT systems could adversely affect business
and Group operations in a variety of ways, which may result in
an adverse impact on business operations, revenues, customer
relations, supplier relations, and reputational damage. Dependency
on IT providers could have an adverse impact on revenue and compliance
in the event that they cannot resume business operations.
How we manage it
As set out in the Chief Executive's Strategic review on pages
14 to 17, completion of simplification programmes that form the
platform for improved operational effectiveness and agility remain
a priority for the business. Key within this is the migration
to one set of core IT systems. This is a global programme being
executed principally in the UK, USA and India in conjunction
with our Systems Integration partners. We have made good progress
against our objectives for the programme during the period, with
the first phase of employees transitioned on 13 January to the
new IT infrastructure and the transition of remaining employees
to occur later in the year. Further details regarding the IT
transformation programme can be found in the Chief Executive's
Strategic review on pages 14 to 17.
During the period the Group pivoted to have more than 90% of
its employees working from home as a result of the COVID-19 pandemic.
To support the increased demands on remote IT services and respond
to other emerging IT requirements across the business, a centralised
IT incident management team was established and continues to
operate, reporting into a cross-functional operational response
team (ORT). Further detail regarding the Group's response to
COVID-19 is detailed on page 61.
To maintain the required control environment the Group relies
upon automated, semi-automated and manual controls together with
a combination of preventative and detective controls. The IT
control environment continues to be improved as part of the implementation
of controls to meet SarbanesOxley Act 2002 (SOX) compliance,
as set out on pages 90 and 91.
A vendor management process is in place and continues to be improved,
to allow for better involvement and engagement with third party
IT providers.
Business Strategy and Change Management
Risk Trend: Increased Link to strategy: Delivering Risk Category: Marketplace
innovation, SaaS and
Subscription, Go-To-Market,
Complete core systems
------------ ---------- ----------------------------- ---------------------------
Principal risk description
The Group is engaged in a number of major change projects, including
acquisitions and divestments, to shape and grow the business
by strengthening the portfolio of products and capabilities and
IT projects to standardise systems and processes. The continued
integration of the HPE Software business is complex, with a range
of integration and transformation risks. The integration of the
HPE Software business with the existing businesses carried on
by the Group may be more time consuming and costly than anticipated.
The Group is also executing a series of operational transformation
initiatives. These projects expose the Group to significant transformation
risks. The Group's strategy may involve the making of further
acquisitions or divestments to protect or enhance its competitive
position and failure to identify, manage, complete and integrate
acquisitions, divestments and other significant transactions
successfully could have a material adverse effect on the Group's
business.
Further, the Group is progressing with a number of initiatives
stemming from the Strategic & Operational Review carried out
in the previous financial year, which may further increase disruption
to 'business as usual' activities across the Group. This risk
was increased given the COVID-19 restrictions across various
regions, from time to time in the period.
Potential impact
Failure to successfully analyse, execute and coordinate the implementation
and delivery of the core systems and associated business processes
with the various integration, divestment and transformation programmes
may result in the disruption of the on-going business without
delivering the anticipated strategic and operational benefits
of such transactions and/or initiatives. In addition, this may
affect the ability to execute strategic plans for growth.
How we manage it
As detailed in the Chief Executive's Strategic review on pages
14 to 17, the Group's three-year plan includes initiatives that
are focused around two key objectives. Firstly, evolving our
business model to ensure we continually adapt to changes in the
market to deliver value and capture growth opportunities. Secondly,
delivering operational excellence through business process and
infrastructure simplification with a relentless focus on improving
levels and consistency of execution.
The focus remains on delivering targeted, relevant business outcomes
and the simplification of business operations to equip and enable
the sales organisation, simplify operational support and improve
compliance capability. The Group continues to execute multiple
programmes to deliver on these aims. Programme risks and interdependencies
are managed carefully including the utilisation of detailed deep
dives, cross-functional and cross-programme review sessions and
a cadence of weekly and monthly risk reviews, to ensure that
execution of the various programmes is successfully aligned to
minimise disruption to 'business as usual'. Given the volume
of concurrent transformation activity being delivered across
the business, the Group has put in place governance structures
to manage change for the business in a structured manner. These
governance structures continue to evolve to meet the changing
needs of the business.
As noted within the 'IT systems and information' risk on page
67, the Group has made good progress in the IT transformation
programme to transition to one set of core IT systems. The transition
of both historical Micro Focus and HPE Software systems to the
new simplified systems architecture will build a solid base for
improved execution.
Legal and Regulatory Compliance
Risk Trend: Increased Link to strategy: Risk Category:
Complete core systems Reputational
---------------- ------------ ----------------------------- -------------------
Principal risk description
The Group operates across a number of jurisdictions and two regulated
exchanges. Compliance with national and regional laws and regulations,
including those that relate to ESG matters, such as Task Force
on Climate-related Disclosure ("TCFD") requirements, is essential
to successful business operations. The Group may be involved
in legal and other proceedings from time to time, and as a result
may face damage to its reputation or legal liability. The Group
has entered into various acquisitions and disposals over recent
years and may be subject to, or have the benefit of, certain
residual representations, warranties, indemnities, covenants
or other liabilities, obligations or rights. The Group has a
variety of customer contracts in a variety of sectors, including
Government clients. This risk was increased in the period due
to the variety COVID-19 restrictions in place across regions
in which the Group operates and the heightened complexity this
posed to securing personal and/or sensitive information, particularly
in work-from-home settings.
Potential impact
Failure to comply could result in civil or criminal sanctions
(including personal liability for directors), as well as possible
claims, legal proceedings, fines, loss of revenue and reputational
damage.
How we manage it
The Group has in place policies and procedures to mitigate these
risks. The Group's legal and corporate compliance team, including
specialist external advisers as required, monitor and review
compliance. During the period, the operational risk and compliance
committee, which reports to the audit committee continued to
meet regularly to monitor cross-functional risk management and
compliance activity. The Group is committed to ensuring on-going
compliance with anti-bribery and corruption, data protection
and market abuse and insider dealing laws and has in place a
Code of Conduct with supporting training materials. Mandatory
Code of Conduct online training is provided annually and during
the year was completed by all employees. In addition, virtual
anti-corruption and anti-fraud training was carried out widely
across the regions in which the Group operates, with particular
focus on higher risk territories.
The Group maintains processes and policies to ensure it is compliant
with data protection requirements imposed by data protection
and privacy laws, including GDPR. Data protection and privacy
compliance is driven and monitored by the Group's legal and corporate
compliance team, supported by technical and other subject matter
experts as required. Data protection compliance is built into
the Group's corporate-wide information security management system
and is kept under review to ensure that required standards are
met. The compliance environment is also strengthened by the implementation
of SOX controls, as set out on pages 90 and 91.
Intellectual Property ("IP")
Risk Trend: No change Link to strategy: Risk Category: Marketplace
Complete core systems
------------- ----------- ----------------------- ---------------------------
Principal risk description
The Group is dependent upon its IP and its rights to such IP
may be challenged or infringed by others or otherwise prove insufficient
to protect its business. The Group's products and services depend
in part on IP and technology licensed from third parties. Third
party claims of IP infringement against the Group may disrupt
its ability to sell its products and services.
Potential impact
This IP risk could adversely affect the ability of the Group
to compete in the market place and affect the Group's revenue
and reputation.
How we manage it
There are procedures in place across the Group to ensure the
appropriate protection and use of the Group's brands and IP and
these are monitored by the Group's IP panel and legal IP team.
Treasury
Risk Trend: No change Link to strategy: Risk Category:
Complete core systems Financial
--------------- ------------ --------------------------- ------------------
Principal risk description
The Group's operational and financial flexibility may be restricted
by its level of liquidity, indebtedness and covenants. Financing
costs could increase or financing could cease to be available
in the long-term. The Group may incur materially significant
costs if it breaches its covenants under its banking arrangements.
The Group targets a net debt to Adjusted EBITDA ratio of 2.7
times and may require additional debt funding in order to execute
its strategy. The Group is exposed to interest rate risk related
to its variable rate indebtedness, which could cause its indebtedness
service obligations to increase significantly.
The Group operates across a number of jurisdictions and so is
exposed to currency fluctuations.
Potential impact
Insufficient access to funding could limit the Group's ability
to achieve its desired capital structure or to complete acquisitions.
An increase in interest rates could have a significant impact
on business results.
The relative values of currencies can fluctuate and may have
a significant impact on business results.
How we manage it
The Group has significant committed financing facilities in place
which were refinanced during the period, the earliest of which
matures in June 2024. The Group closely monitors its liquidity
and funding requirements to ensure it maintains sufficient headroom
to meet its operational requirements. During the period, as a
precautionary measure in response to the COVID-19 pandemic, the
Group suspended the payment of dividends in order to maximise
available liquidity during a period of increased economic uncertainty.
The Group seeks to maintain strong relationships with its key
banking partners and lenders and to proactively monitor the loan
markets. The Group also has strong engagement with the providers
of equity capital, which represents an alternative source of
capital.
The Group holds interest rate swaps to hedge against the cash
flow risk in the LIBOR rate charged on $2,250m of total borrowings
for the period to 30 September 2022. Under the terms of the interest
rate swaps, the Group pays a fixed rate of 1.94% and receives
one month USD LIBOR.
Monitoring policies and procedures are in place to reduce the
risk of any covenant breaches under the Group's banking arrangements.
At 31 October 2020, $nil of the Revolving Facility was drawn.
As a covenant test is only applicable when the Revolving Facility
is drawn down by 35% or more, and $nil of the Revolving Facility
was drawn at 31 October 2020, no covenant test is applicable.
Currency fluctuations are monitored by the Treasury Risk Committee
on an on-going basis. Key currency exposures are detailed on
page 207. Changes in foreign exchange rates are monitored, exposures
regularly reviewed and actions taken to reduce exposures where
necessary. The Group provides extensive constant currency reporting
to enable investors to better understand the underlying business
performance.
Tax
Risk Trend: Decreased Link to strategy: Risk Category:
Complete core systems Financial
--------------- ------------ --------------------------- ------------------
Principal risk description
The tax treatment of the Group's operations is subject to the
risk of challenge by tax authorities in all territories in which
it operates. Cross-border transactions may be challenged under
tax rules and initiatives targeting multinationals' tax arrangements.
International tax rules continue to develop at each of the OECD,
EU and national levels and the pace of change may increase in
the short-term as a result of the US election and the COVID-19
pandemic. Future changes to tax laws could adversely affect the
Group across the territories in which it operates.
As a result of the HPE Software merger, the Group may be required
under the Tax Matters Agreement entered into with HPE (the "TMA")
to indemnify HPE, if actions undertaken by the Group affect the
tax treatment of the separation of the HPE Software business
from HPE.
Potential impact
Tax liabilities in the territories in which the Group operates
could increase as a result of either challenges of existing positions
by tax authorities or future changes in tax law. Specifically,
given the substantial operations in the US any changes in tax
policy that might arise from the results of the US election could
have a significant impact on the Group. Furthermore, if the Group
is required to make indemnification payments to HPE under the
TMA, these could be substantial.
How we manage it
Tax laws, regulations and interpretations are kept under on-going
review by the Group and its advisors. The Group also reviews
its operations, including the structuring of intra-Group arrangements,
on a periodic basis to ensure that all relevant laws are complied
with and that risks are identified and mitigated appropriately.
External professional advice is obtained ahead of significant
transactions or structuring activity, and to support positions
taken in financial statements and local tax returns where there
is significant uncertainty or risk of challenge.
During the period, a governance framework and process has been
in operation to remind relevant employees of the requirements
and guiding principles to comply with the obligations under the
TMA. The risk of actions taken by the Group impacting the tax
treatment of the HPE transaction diminish over time and is now
considered to be low.
Macro-Economic Environment, Pandemic and Brexit
Risk Trend: Increased Link to strategy: Risk Category: Marketplace
Go-To-Market
------------- ---------- ------------------ ---------------------------
Principal risk description
The Group's businesses may be subject to inherent risks arising
from the general and sector specific economic, public health
and political conditions, including as a result of any pandemics
or natural disasters, in one or more of the markets in which
the Group operates. This is heightened by the fact the Group
sells and distributes its software products globally. Exposure
to political developments in the United Kingdom, including the
terms and manner of the UK's withdrawal from the EU, could have
an adverse effect on the Group. Further deterioration of the
macro environment could result in more conservatism and longer
decision making cycles within the Group's customer base. This
risk was increased given the COVID-19 restrictions across various
regions, from time to time in the period.
Potential impact
Adverse economic conditions could affect sales, and other external
economic or political matters, such as price controls, could
affect the business and revenues.
How we manage it
The spread of jurisdictions allows the Group to be flexible to
adapt to changing localised market risks, including navigating
the effects of COVID-19 across different geographies.
The Group has business continuity plans and crisis management
procedures in place in the event of political events, pandemics
or natural disasters.
The Brexit Working Group (BWG) continued meeting throughout the
year and following analysis of the EU-UK Trade and Cooperation
Agreement agreed on 30 December 2020, the Group's mitigations
and preparatory activity continued, preparing the Group for the
transition. The areas reviewed for possible impacts included
people, tax, transfer pricing, commercial contracts (buy and
sell), privacy and data protection, intellectual property and
regulatory matters. The BWG is phasing workstreams back into
Group functions that will continue to work through changes. We
recognise that it is early in the implementation of new rules
and regulations and the position will continue to be monitored
for any new or emerging risk areas.
COVID-19
Risk Trend: New Risk Link to strategy: Risk Category: Marketplace
Go-To-Market
-------------- ---------- ------------------- -----------------------------
Principal risk description
The Group, like all businesses, is navigating through a period
of disruption, as it has responded to the practical and macroeconomic
impacts of COVID-19. COVID-19 still presents fast moving, and
in some areas unpredictable, direct and indirect risks to the
Group's businesses. The Group may be subject to inherent risks
arising from the continuation of the on-going COVID-19 pandemic.
Further deterioration of the macro environment could result in
more conservatism and longer decision making cycles within the
Group's customer base.
Potential impact
Adverse economic conditions arising as a result of the continuation
of the COVID-19 pandemic could affect sales performance and business
operations.
How we manage it
The Group acted quickly at the commencement of the COVID-19 pandemic,
reviewing the existing BCP structures and enhancing governance,
through the establishment of a COVID-19 Steering Committee, to
provide a strategic platform to identify and address the emerging
risks of COVID-19 across the enterprise. The status of key COVID-19
operational risks is monitored in real time through reporting
provided daily to the COVID-19 Operational Response Team on indicators
such as rates of infection, illness and facility occupancy levels.
Further details on the Group's response and management of COVID-19
are provided on page 61 and additional details on how COVID-19
has impacted specific risks are provided in the respective risks
set out in this section.
Cyber Security
Risk Trend: Increased Link to strategy: Complete Risk Category: Infrastructure
core systems
------------ ---------- --------------------------- ------------------------------
Principal risk description
There could be a data security breach (Micro Focus data or customer
data) involving personal, commercial or product data, either
directly from Micro Focus or a third party. This could occur
as a result of a malicious or criminal act, or an inadvertent
system error. This risk was increased in the period due to the
general increased threat of cybercrime and sudden increase of
work-from-home employees caused by COVID-19 restrictions across
various regions, from time to time in the period.
Potential impact
Data loss, which could harm client and customer relationships,
compliance and/or perception of the effectiveness of the Group's
products.
How we manage it
The Group works continually to counter the risk posed by the
current and emerging cyber security threat landscape. The cyber
team manages the security of the Group's data, technology and
training programme to protect the performance, security and availability
of the Group's IT systems. Group-wide cyber policies and processes
are in place. Cyber security testing in critical areas of the
business is on-going, Group-specific vulnerabilities are reviewed
and continually managed, incident response is in place for the
Group, monitoring tools for unusual activity are in place, a
cyber security training course is available for new hires and
awareness material is available on the intranet. The cyber team
works closely with the UK National Cyber Security Centre ("NCSC")
and is part of the NCSC collaboration portal. The threat posture,
including in response to COVID-19, is continually reviewed and
managed.
Internal Controls over Financial Reporting
Risk Trend: No Change Link to strategy: Risk Category:
Complete core systems Financial
--------------- ------------- --------------------------- ------------------
Principal risk description
Internal controls over financial reporting may not prevent or
detect an error, fraud, financial misstatement or other financial
loss, leading to a material misstatement in the Group's financial
statements.
Potential impact
Failure to discover and address any material weaknesses or deficiencies
in the Group's internal controls over financial reporting could
result in material misstatement in the Group's financial statements
and impair the Group's ability to comply with applicable financial
reporting requirements and related regulatory filings on a timely
basis. Based on the assessment as at 31 October 2020, management
identified a material weakness in the Group's internal controls
over financial reporting, relating to inadequate controls surrounding
existing IT applications, in particular regarding change management
and access controls. As a result of those deficiencies, automated
controls and controls over information produced by the entity
related to those applications could not be relied upon. Please
refer to the FY20 annual report on SOX compliance as set out
on pages 90 and 91. Although the Group continues to implement
measures to address and remediate this material weakness, failure
to do so, and the risk that other deficiencies may be identified,
could also result in an adverse reaction in the financial markets
due to a loss of confidence in the reliability of the Group's
financial statements and could have a material adverse effect
on the Group's business, financial condition, results of operation
and prospects.
How we manage it
The Group has a cross-functional SOX steering group chaired by
the CFO, reporting to the audit committee to implement, review
and monitor SOX compliant internal controls and any required
remediation. Further details of the Group's SOX compliance programme
and FY20 annual report on SOX compliance are set out on pages
90 and 91.
2. Related Party Transactions
The following information has been reproduced from note 31 to the consolidated financial statements contained in the 2020 Annual Report:
31. Related party transactions
The Group's related parties are its subsidiary undertakings, key management personnel and post-employment benefit plans.
Subsidiaries
Transactions between the Company and its subsidiaries have been eliminated on consolidation.
Remuneration of key management personnel
The remuneration of key management personnel of the Group (which is defined as members of the executive committee including executive directors) is set out in note 29. There are no loans between the Group and the key management personnel.
Transactions with other related parties
The following transactions occurred with other related parties:
-- Contributions made to pension plans by the Group on behalf of employees are set out in note 22.
-- Sales and purchases of goods and services between related parties are not considered material.
3. Directors' responsibility statement
The following information has been reproduced from page 130 of the 2020 Annual Report:
On behalf of the board of directors, we confirm that to the best of our knowledge:
-- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
-- the Strategic report and the Directors' report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Stephen Murdoch Brian McArthur-Muscroft
Chief Executive Officer Chief Financial Officer
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END
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