Micro Focus shares slump despite revenue growth

Micro Focus reported 40 per cent revenue growth but still saw its share price plummet

Micro Focus has seen its share price drop

Software provider and IT consultancy Micro Focus today saw its share price drop by 24 per cent after cutting its full-year revenue guidance. Its 40 per cent revenue growth was the result of acquisitions, and below original expectations.

"The revenue growth was largely due to the acqusitions of Compuware's testing business and Borland," stated Philip Carnelly, research director at TechMarketView.

He explained that a higher rate of growth was expected, and when it did not happen, the company's value had to be recalibrated.

"Financial analysts modelled a certain level of growth into their projected share price which hasn't happened. So they have had to reset those expectations and come up with what they feel is a fair target share price," said Carnelly.

When making their original predictions on its growth, Micro Focus was guilty of over-confidence in a weak market.

"Micro Focus was a little bit over optimistic about the market generally. The market is still quite weak," Carnelly said. "Neither the European nor US markets have picked up as much as expected."

Carnelly also explained that the company's low-end, high-volume business had not performed as expected, and some larger deals it had been expected to land in the first quarter had been delayed until later in the year.

In a bid to strengthen the business, three new senior appointments have been made by chief executive Nigel Clifford, who himself only took on the role in May.

Carnelly commented: "It has to be significant that they decided to get a new head of sales, a new head of marketing and new head of professional services. The new CEO obviously wasn't impressed with what he found, otherwise he wouldn't be bringing in all these new people. It was also unfortunate that CFO Nick Bray left a few months ago, he was a very execution-oriented guy. That may have reduced pressure on the sales teams, [lowering performance]."

Marketing is currently Micro Focus's chief area of weakness, according to Carnelly. He explained that the organisation has a unique ability to move COBOL legacy systems into the cloud, but no reference has been made about this to the media, and the solution has not been well marketed.

"They didn't have a chief marketing officer at all before [the new hires]. That should set off alarm bells for a software products company. You're up against a lot of companies that have a very good marketing arm," Carnelly said. "Nigel Clifford isn't a Steve Jobs-style evangelist, he's an operational execution type of person. To grow the business they need a strong marketing person. They've done exactly the right thing in those hires in principle."

Carnelly concluded positively by suggesting that the company could still finish the year in a strong position.

"At heart there is nothing wrong with the business. If they get the marketing right, in six months' time they might look a lot better, and the share price might rebound."