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Edited Transcript of MCRO.L earnings conference call or presentation 14-Feb-19 1:30pm GMT

Preliminary 2018 Micro Focus International PLC Earnings Call

Berkshire Feb 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Micro Focus International PLC earnings conference call or presentation Thursday, February 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian David McArthur-Muscroft

Micro Focus International plc - Executive Officer

* Stephen Murdoch

Micro Focus International plc - CEO & Director

* Tim Brill

Micro Focus International plc - Director of Corporate Communications & IR

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Conference Call Participants

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* Charles Brennan

Crédit Suisse AG, Research Division - Research Analyst

* George Christopher O'Connor

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* James Arthur Goodman

Barclays Bank PLC, Research Division - Research Analyst

* John Peter King

BofA Merrill Lynch, Research Division - Research Analyst

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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Tim Brill, Micro Focus International plc - Director of Corporate Communications & IR [1]

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This earnings call covers the 18-month period to the 31st of October, 2018. Due to the transformational nature of the HPE Software business acquisition and the fact that this is an 18-month period under review compared to the preceding 12-month period, the comparative financial performance is also presented on a pro forma basis. The pro forma results include the discontinued SUSE business and the 12 months of results for the acquired HPE Software business in both the 12 months ended 31st of October, 2018 and the 12 months ended 31st of October, 2017.

To recap, the group today consists of 2 portfolios: SUSE and the Micro Focus product portfolio, MFPP.

This call will focus primarily on the pro forma constant currency performance for both the group and the continuing operations of the business, MFPP, assuming the SUSE transaction completes as scheduled in the first calendar quarter of 2019.

In addition to the slides that accompany this call, we've posted the consensus of analyst forecasts onto the Micro Focus' Inventor Relations website.

I'm joined by Stephen Murdoch, CEO; Kevin Loosemore, Executive Chairman; and also by Brian McArthur-Muscroft, who joins Micro Focus as CFO as already announced back on 5th of November, 2018. Brian takes up his CFO role next week, but we're delighted to have him here today as part of the team.

In a moment, I'll hand over to Stephen for some comments on our performance in the period, but do please note that for those of you already accessing the webcast facility accompanying this call, you will see a few slides to support Stephen's comments.

For those participating only by phone, the webcast and slides can be accessed through the front page of the IR section of the Micro Focus website and a recording of this call and those slides will be available shortly afterwards.

I'd now like to hand over to Stephen for some introductory remarks before we open this up to Q&A.

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Stephen Murdoch, Micro Focus International plc - CEO & Director [2]

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Thank you, Tim. Good afternoon, good morning and thank you for joining this earnings call. I'd like to summarize the period under review by covering the highlights and the progress made, an overview of our financial performance, before moving on to look at our forward-looking priorities and concluding with our outlook and guidance. We'll then turn over to Q&A.

I'm encouraged by the progress we've made over recent months. In March, we issued guidance of our revenue decline in the range of minus 6% to minus 9% for the 12 months to October 2018.

We're announcing today that we're better than this full year guidance, having delivered a pro forma constant currency revenue decline of 5.3%. Constant currency revenue from MFPP, as Tim said, our continuing operations, declined 7.1%.

In terms of adjusted EBITDA margin, we've consistently communicated that we see many opportunities to improve margins following the HPE Software transaction. We have made further progress in capturing these opportunities with pro forma adjusted EBITDA margins expanding to 37.7% compared to the 33.3% in the prior period. At actual exchange rates, this represents a 9.2% increase in pro forma adjusted EBITDA to $1.529 billion.

MFPP saw an adjusted EBITDA margin expansion to 38.4%, which is $1.414 billion.

We continue to see opportunities in respect of operational efficiencies and remain focused on continuous improvement to deliver growth in adjusted EBITDA year-over-year as we've demonstrated consistently historically through the application of the Micro Focus operating model. The 5.1 percentage point increase in MFPP adjusted EBITDA margin to 38.4% reflects a focus on accelerating the cost reduction opportunities in areas which were largely independent of system and process dependencies, as well as strong sales execution at the end of the period.

We expect the current financial year to benefit from the full year impact of savings already realized in FY '18, as well as those arising from our continuous improvement programs, although this will be tempered by focus on stabilization as we invest in the information systems and build the operational platforms which will enable further efficiencies to benefit FY '20 and beyond.

Company continues to deliver strong free cash flow, generating more than $750 million during the last 12 months of the reporting period. We benefit from a strong balance sheet with net debt at the 31st of October, 2018, of $4.25 billion, representing a gearing of 2.8x adjusted EBITDA. This net debt figure includes $171.7 million of on-market share repurchases. Excluding this, we would have achieved our medium-term gearing target of 2.7x in 14 months as opposed to the 24 months we set as a target back at the time of completion of the HPE Software business transaction.

The forthcoming sale of SUSE for $2.53 billion is on track to complete within the current calendar quarter as scheduled. I'll comment later on our plans for the proceeds from the sale.

Finally, I'm delighted to report a final dividend per share for the 18-month period of $0.5833, meaning that we've provided shareholders with an annualized 14.5% growth in full year dividend compared to the last audited period of the 12 months to the 30th of April, 2017. The total dividend per share is $1.5126 for the 18-month period.

Notwithstanding this part on the dividends during the past 18-month period, the dividend policy remains unchanged at 2x covered by the adjusted earnings of the company. In future periods, we will return to our approach of paying a single interim and a final dividend for the financial year.

Moving to progress. As communicated in July 2018, when we delivered our last results announcement, our revenue performance had been impacted by a number of factors, which we consider to be largely one-off transitional effects of the combination with the HPE Software business rather than underlying issues with the end-market of our product portfolios. We are very clear on our belief that the need to return to a robust application of the proven Micro Focus business model was key to correcting these issues and getting back to delivering customer and shareholder value through effective product and portfolio management, coupled with operational efficiency and consistent disciplined capital allocation.

Since identifying these issues, the focus has been on driving operational improvements and heightened levels of execution across the company through simplifying processes and removing inefficient structure that allows for better alignment of resources.

Today's results demonstrate progress as we simplify operations to deliver improved execution and better enable our team to deliver consistently and for the long term.

The 2 critical areas of go-to-market and IT systems merit further detail. In go-to-market, we have corrected organizational design issues to ensure better customer coverage and improved accountability. This has been underpinned by simpler, more effective processes and a disciplined sales management process that has been implemented globally to begin to drive the consistently high levels of sales execution expected from the organization.

We have invested in improved enablement and training to better equip the teams. In addition, their hiring engine has been reengineered and is now functioning effectively. It's anticipated that the combination of more empowerment through clarity of accountability, better enablement, improved hiring and onboarding, we'll see attrition levels continue to trend down.

To recap on IT systems. Following the HPE Software transaction, we envisaged that we would migrate the existing Micro Focus business onto a new set of IT systems designed and implemented by HPE to support the carve-out and sale of their software business.

As previously communicated, challenges with these systems had a significant operational impact. These systems are now stable and able to support the operations of the business, but still require more manual intervention than we want. These issues also slowed our plan to migrate to a single IT platform. This is now being addressed through the previously announced project to build the future simplified systems architecture for the group, which on completion will deliver the required platform to support ongoing operational improvements.

Within the Micro Focus product portfolio, we have 5 product categories, within which we have more than 300 products. We've invested significant time and attention to clarifying and strengthening our customer and product propositions at the individual product level with more than 500 product releases delivered in the year. These range from small functional updates through to completely re-architected solutions and highly innovative new capabilities. This represents a great depth of capability and experience to help our customers address some of the most complex challenges they face.

To help customers better leverage this breadth and depth, we've also invested further in the development of broader overall propositions focused around 4 key focus areas: Enterprise DevOps, hybrid IT management, security risk and governance and predictive analytics. These key focus areas are highly relevant for our 40,000 customers as they navigate their business challenges and the opportunities presented day-to-day, and also as they attempt to drive what is increasingly being called digital transformation.

We're more convinced than ever that we have a unique combination of products and propositions that help customers both drive return on investment and value from their existing investments and drive value from new innovation and trends.

I'm incredibly proud of the work done by the team to deliver the progress we're reporting today. I believe we have made great strides to get Micro Focus back on track, but we continue to have much to do going forward to capture the significant additional opportunity we see in front of us.

Let me comment a little more detail on some of the financials for the Micro Focus product portfolio. Within the 6.9% constant currency revenue decline for the 12-month period, the decline rate moderated to 5% in the second half compared to 8.7% in the first half.

The performance across the 5 product groups and the regions are provided in the full financial results announcement, so I won't comment further, so that we can get onto the Q&A opportunity. But I would like to take this opportunity to remind everyone of our portfolio management approach, delivering blended performance indicative of improving trend lines overall and better operational performance.

The ongoing optimization of our operations is designed to deliver strong operating margins through the realization of cost efficiencies at pace, but balanced carefully with the continued delivery of our core value proposition of making, selling and supporting infrastructure software solutions that customers value and rely on.

Cost reductions of 12.8% year-on-year in the Micro Focus product portfolio were a key part of the 5.1 percentage point improvement in margins and reflect the focus on accelerating cost reduction in areas which were largely independent of system and process dependences. As covered previously, we expect the current financial year to benefit from the full year impact of savings already realized in FY '18 as well as those arising from our continuous improvement programs, although this will be tempered by a focus on stabilization as we invest in the information systems and build the operational platforms, which will enable further efficiencies to benefit FY '20 and beyond.

Looking again at the group financial performance, our focus remains on operational rigor coupled with robust financial and capital allocation discipline. Cash conversion for the business was strong at 105%, and we delivered free cash flow of $755.4 million in the last 12 months.

Micro Focus is a business which generates a significant amount of cash, and we continue to stay committed to our long-term cash conversion rate goal of 90% to 95%.

Our balance sheet is strong with net debt providing a modest level of gearing for our company with our cash-generating qualities. And we're confident this supports the ability to deliver on our strategy, invest in our products and make appropriate acquisitions. The board will keep the appropriate level of debt under review, and Micro Focus will be consistent in its policy of not holding surplus cash on the balance sheet.

Looking forward, our priorities, our operational plan focuses on the continued stabilization of revenues coupled with comprehensive and targeted cost management. These goals are met by staying true to the Micro Focus business model, running operations as effectively and efficiently as possible to maximize cash generation while driving our key integration priorities, notably improved IT systems and back office functions through to completion.

On the 2nd of July, 2018, we announced definitive terms subject to shareholder approval for the sale of SUSE for a total cash consideration of $2.535 billion. We believe this price represents a highly attractive enterprise valuation for SUSE at a multiple of approximately 7.9x revenue and 26.7x adjusted operating profit for the 12 months to October 2017. And it reflects an excellent return on the investments we've made to support and grow this business.

When we acquired SUSE in November 2014 as part of the $2.3 billion Attachmate Group transaction, SUSE was contributing 20% of Attachmate Group revenues. A little more than 4 years on and we're selling that 20% of revenues from the $2.3 billion price tag for $2.535 billion. In line with our capital allocation strategy, we intend to return the proceeds to shareholders after tax, transaction costs and any required debt payments have been accounted for.

The completion of the transaction is anticipated to be in the first calendar quarter of this year.

We will keep customers at the center of all we do. The business environment in which our customers operate is increasingly competitive, and the systems, applications and infrastructure that underpin the business operations are highly complex.

Customers want and need a partner for the long term that is committed to and capable of helping them modernize and protect their existing technology, adopt innovation and leverage new business models, whilst always maximizing the value and return from existing investments.

As we look forward, today we are issuing constant currency revenue guidance for the continuing business of minus 4% to minus 6% for the 12 months through the 31st of October, 2019, compared to the 12 months ending 31st of October, 2018.

We continue to target a net debt of 2.7x adjusted EBITDA, together with a regular dividend twice covered by adjusted earnings.

Performance in the first quarter of FY '19, the quarter ended 31st of January, 2019, is in line with this guidance.

Before we turn the call over to Q&A, let me finish by restating that Micro Focus' strategy and business model are designed to deliver customer value and strong consistent shareholder returns over the long term. We are encouraged by the progress over recent months, and we see significant opportunity ahead.

With that, I'd like to turn this call over to Q&A. Tim, let me hand back to you.

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Tim Brill, Micro Focus International plc - Director of Corporate Communications & IR [3]

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Stephen, thank you very much. Thank you again to all our participants for joining this call and webcast. If I could now ask Helena to take us through the instructions to ask those calls -- ask those questions. (Operator Instructions) Helena, over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from James Goodman.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [2]

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It's on the guidance, so the minus 4% to minus 6% that you've guided to. If we look at the exit rates at minus 5%, and I appreciate you have a drag on maintenance this year and consultancy will continue to go down, but to what extent are you factoring in the license base being soft in the comparative? And to what extent is there conservatism in that? And how does that flow through to EBITDA? Are we still right to be thinking in terms of the business overall targeting something in the order of 5% to 10% EBITDA growth?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [3]

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James, the -- yes, we think that 4% to 6% is the right guidance for the coming period. Longer term, we expect this year to clean through the consulting revenues. So there's still some way to go to get back to the levels that we think are of the right strategic levels to support the rest of the business. We've also got some work to do to clean up the SaaS portfolio. We've got some tremendous capabilities in the SaaS portfolio, but we've also got some offers that need to be reengineered and reshaped. So there's a short-term headwind there. So you factor all of that through and it leaves the revenues in license and maintenance as the variable. Longer term, we think that plays through into a continued moderation, better than we're guiding to this year, but this year is a sensible way station on that journey.

In terms of margin, we're still -- our ambition is still to drive this business back up towards the margin revenue -- the margin profile of the Micro Focus business prior to the HPE transaction. As you know, we got that up just north of 50. So we're going to seek every improvement opportunity we can on that journey. We've done quite a lot of work with you and your colleagues to get a better, more informed view of how we see the future. That's represented in the consensus -- company consensus view on the website. Yes, and we think that's a sensible basis to be looking at the next couple of periods in terms of margin.

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Operator [4]

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We will now take our next question from Mr. Michael Briest.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [5]

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A couple from me. Can you just remind us of the -- through reasoning behind the Hewlett Packard working capital settlement? So it's about $226 million that's going through the acquisition costs related to sort of truing up on working capital. And related to that, it looks like the bad debt provision on the acquired balance is dropped from $53 million to $22 million. Should we assume those debts were collected? And that would have flowed through as a profit contribution? And then I've just got one for Stephen on the sort of velocity of the business going forward.

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Brian David McArthur-Muscroft, Micro Focus International plc - Executive Officer [6]

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This is Brian. Just to take up the debt provision. You can't see -- I'll need to take you through it separately, but actually underlying the debt provision hasn't come down by that $20 million. It just appears elsewhere in the accounts now. So actually, the provision is still there and it is against those older balances that we are still working on at the moment. So you shouldn't assume that there's any P&L benefit in the year from a reduction in that provision.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [7]

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Can you just remind us why you're paying them $225 million?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [8]

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I'll need to come back to you on that makeover. Just -- we'll get you the proper explanation through the offline. Okay?

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [9]

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Yes. Okay, I understand. It's Brian's week minus 1. But just for you Stephen, then. I mean, assuming everything's fixed in the next 9, 12 months, do you think the minus 4% to minus 6% is the sustainable run rate of this business? Or should we be thinking for the minus 2%, minus 3% as the ambition for the top line?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [10]

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The latter. Yes. So if you do the wash through that I touched on earlier in terms of consulting revenue and SaaS revenues and you play that forward into the 2020 time frame, then there's a 1- to 2-point benefit there in that. So we just need to get after executing that. Then we're back. We'll have another year under our belt of the sustained and disciplined execution on the maintenance base that we've -- that we're used to doing. Remember those 5 levers on the maintenance base, including win backs and price optimization that we weren't as disciplined in for the first 6 months of last year. So that will play through. And then we're doing a lot of work in the portfolio and license. We got some phenomenal products in growth markets. And we -- like always, we will seek to do the right things in terms of driving growth where there is growth and optimizing cash where there is less growth. And hopefully the whole lot balances out, and we're much more in your second range, Michael, than your first range.

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Operator [11]

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We will now take our next question from Mr. John King.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [12]

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Actually just to dig back into what Michael was just asking about the trajectory and the growth rate. I mean, obviously, I appreciate that you've had for a number of years the aspiration to get towards the fastest growth. But obviously, in the last 3 or 4 years, it hasn't happened. It hasn't really happened within the Micro Focus portfolio before HPE. And it doesn't seem as though HPE itself has managed to deliver that. So I'm just wondering what gives you the confidence? I mean, you've obviously got a business here that's gone from a pro forma margin in the high 20s up to one that you're shooting towards a mid-40s margin. So either one of us thought that, that would put further incremental pressure on the growth rate. So what is it that perhaps HPE was doing wrong or you were doing wrong previously that you think will bolster the growth rates?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [13]

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John, well, the -- Micro Focus pre-HPE did get pretty close to flat. The -- what are we doing differently? Well, it all comes back to this idea of customer-centered innovation. So every dollar we spend in product development is directly attributable to an outcome that we believe we can make happen with the customer base or the market more broadly. So we don't get distracted by pursuing unrealistic ambitions for a piece of technology. We ground ourselves in how the customer sees that technology and how the customer wants to optimize value from it. Sometimes that means that we are extending the productive life of a terminally declining asset. Overall, we're extending our productive life for years, sometimes decades, with all of the customer value that, that brings and all of the cash generation that, that brings. At the other end of the spectrum, we've got products that are growing 30% and 40% compound. So we're trying to deploy our resources appropriate to the outcome. And over time, deliver more weight to the growing parts than the declining parts. And then the whole thing moderates towards flat.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [14]

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Understood. If I could just squeeze one in. You mentioned to release the attachment rates improving to help the maintenance, I think, in the second half. Just -- could you give us a rough estimate as to what the attachment rate is on licenses at this point?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [15]

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It's actually win backs we talk about improving, sort of -- we have -- the system issues we had in the first 6 months meant that we were not -- we didn't have the bandwidth within the sales team to actually do the more difficult job of talking to customers that have gone off maintenance about getting back onto maintenance. So it was more of that in the second half that was a catch up. The maintenance renewal rates are broadly consistent. There hasn't been a material shift one way or the other. We don't have a single figure, John, because we don't have a single historical base of data. So I can compare at the product level and sometimes at the portfolio level, but I can't always compare at the portfolio level and I can't compare across portfolio because all the historical data was built up on a different basis. So I can track and manage trend. But for you to look at it overall, the better number to look at is the overall revenue trend.

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Operator [16]

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We will take our next question from Ms. Stacy Pollard.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [17]

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One -- kind of following up on that same theme just one more time. Do you see revenue stabilizing towards your midterm or long-term rate, which was once upon a time 1%? And then how long might that take? And then the sort of other question that was really the original. Can you talk about the timing of SUSE disposal? And would you now return most of the after-tax cash towards -- to shareholders, since your leverage is already close to your target?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [18]

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Yes. I'm not sure I can say very much more on the growth topic, Stacy. I think I kind of laid out the game plan there, which is clean out the consulting revenue, get the SaaS revenue to where it's a strategic piece of the portfolio. And then look to apply the model to moderate rates of decline and drive growth at the individual product level. Over time, we believe that moderates the revenue back into the kind of range that we've touched on. SUSE, basically, we think the net proceeds will be just over the $2 billion to $2.055 billion. From that we'll have some transaction costs and any required debt repayment. Once those things are done, then we'll settle -- we'll return the rest to shareholders. The timing is on track for the end of this calendar as per the original plan. And then we'll seek to do the returns just as soon as it's practical thereafter.

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Operator [19]

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We will now take our next question from Charles Brennan.

Apologies, Charles has been disconnected.

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [20]

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Can you hear me?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [21]

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Charles?

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Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [22]

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Yes, I've got 2 quick questions, if I can. The first is just on the product categories. You talked about there being sort of 5 big categories for Micro Focus. And you've given some detail in the appendix to the growth rates you saw last year. How should we think about that going into the current year? Which one of those do you think has been impacted most by some of the operational issues? And how do we think about growth across those 5 segments? And secondly, just as a quick follow-up, we've got an industry where the market is generally moving from license to SaaS. Here, it looks like the SaaS growth rates have slowed down. Can you talk about what's happened there during the last 6 months? And are you seeing any structural shift away from license to cloud subscription revenues?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [23]

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Sure, Charlie. So there's 2 or 3 parts to your question. Where did we -- was there a portfolio that saw more disruption? ITOM probably did. ITOM was heavily weighted in the U.S., and we had more disruption in the U.S. So almost as a secondary causal factor, it was probably felt in ITOM. How you should think about the portfolios is -- within each of -- there's 300 products across those 5 categories. And we run portfolios within portfolios. So you should look at the historic -- the AMC business. Historically, we've been trying to drive consistently over the long term to be broadly flat. Security's a growing market. We've got some work to do in our portfolio to get it into the shape where we participate as much in that growth as we would like, and that work's well underway. The ADM space is where your question on SaaS plays most for us, where there is much more active deployment model choice playing out with the customers, and I'll come back and touch on that in a second. And then in ITOM, we've got work to do, but we've had -- fundamentally re-architected the portfolio, really excited about what we think we can do for the long term. But we need to get some proof points on the board to show that. In terms of SaaS, there's a couple of dynamics at play. Firstly, SaaS for us is a deployment model, consumption model, so we do everything from license and -- typical perpetual license and maintenance models, subscription, term licensees and SaaS. And we will seek to give customers flexibility and choice across all of those models wherever it's appropriate. So for example, in COBOL, we can have subscription-oriented deployments in our COBOL portfolio for instance. So it's a deployment model choice piece. What's happening specifically in the line that we call SaaS is that there was a correction done to the compensation model in the first half -- that was implemented in the first half of last year that was an overcorrection. So the -- we entered the year with a sales compensation model that very significantly skewed compensation toward SaaS. Then it was overcorrected back to a parity situation. So we've now fixed that and we've got the appropriate compensation models for each piece of the portfolio, but it will take us time to rebuild the pipeline back. So that one, if you think of -- is an execution issue that we've corrected, and we now need to follow it through. There is also a portfolio piece, which is -- some of the offers are badly conceived. They're architected in the wrong way. And we've -- we're cleaning all of that up and re-architecting the solutions so we can deploy them flexibly in any of the public clouds or in a hybrid context. That work is well underway, but it will take longer to yield through. And then there are just some pieces in the portfolio that just aren't really the right revenue streams for the longer term and consistent with how we've approached consulting, where it's not a strategic revenue stream for the long term, we take the pain of cleaning up as quickly as we can. So it's a blend of all of those things, Charlie.

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Operator [24]

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(Operator Instructions) We will now take our next question from George O'Connor.

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George Christopher O'Connor, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [25]

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Stephen, can you talk at all about pricing across the 5 divisions, please, to help us on the modeling side? Secondly, what is the staff count today? And can you give us any view in terms of how much DevOps revenue you might have?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [26]

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I really can't give you a pricing view across the 5 portfolios except that we'd see our software represents incredible value for money, given the ROIs that customers receive on it. There are so many products in each of the portfolios. The pricing dynamics are very different in each one of the individual products, let alone the portfolio level, George. And that's part of the secret of the model, is you optimize at that level, you don't generalize at the top level. In terms of DevOps, well, we've reorchestrated our value proposition into the 4 focus areas I mentioned in my opening remarks, part of which is Enterprise DevOps. And that is -- we're one of the -- we think the only company that can do mainframe to mobile DevOps at an enterprise scale, but it's not an individual portfolio. It's pieces of the AMC portfolio. It's pieces of the ADM portfolio. And it's actually pieces of the ITOM portfolio. And then we're also building into security. So it's really DevSecOps. So it's more a proposition play for us that makes it easier for the customers to consume the portfolio rather than it's something that we're tracking and driving the business performance on. So sorry to be a little elusive on the point. I just can't answer it with the granularity you've asked. Staff count, we're between 14,000 and 15,000.

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George Christopher O'Connor, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [27]

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Okay. And is there an issue around staff bonuses this year? Do they get paid?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [28]

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Well, the bonus is based on constant currency EBITDA growth year-on-year. Flat is no bonus and 10% growth is 100% bonus. And there's a straight line in between. And the constant -- the actual EBITDA growth was 9.2%. The best calculation we have for the constant currency EBITDA growth, given the HPE transaction is 7.6%. And the staff bonus is therefore 76%.

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Operator [29]

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We will now take our next question from Mr. James Goodman.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [30]

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I wanted to follow-up actually on the IT migration that you mentioned in your introductory remarks. And I've seen the statement that you talk about having slowed your plan to migrate to 1 system. I may be showing my ignorance, but the last time I looked at this issue, I thought the intention still was to move Micro Focus on to the rebuild that HPE had been through. So can you just give us a bit more detail there around what the plan is in terms of this new system that you mentioned? And as that relates to working capital, which I think was the issue at the first half, not being able to bill and collect correctly, how significant a working capital inflow do you expect in '19 as a result?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [31]

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Okay, James. So we are categorically going to move to 1-set systems. That is a derivative of the systems that we got as part of the HPE transaction. So the way to think about it is we're doing less of a big buying and more of a phased evolution to that. So the front end -- so the pieces that the sales force used to do their day jobs, so the CRM systems, the territory management systems, the commission planning systems, those will all be on a single set for the company during the first 6 months of this year. The back end -- so the HR systems will be on a single instance of Workday for the company by the half year calendar again. And then now through to roughly the middle of next year is when we change the core engine at the middle, which is the billing -- the ERP engine, so NetSuite. And that design work happens now. The implementation work happens through the first 6 months of next year. And that's where the -- and we moved the original Micro Focus business there first, and then we moved the heritage HPE systems there second. So there's a very phased, much more balanced risk profile of getting to that single set of systems, but we will be on those single systems. And that's the foundational layer for ongoing operational improvement in late 2020 into 2021. The working capital inflow, somewhere around $200 million, James.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [32]

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Right. Okay. And just to conclude on the IT system. You -- do you have a high degree of confidence that you can achieve that within the envelope of exceptionals that you've announced previously, the $960 million?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [33]

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We will not increase the exceptional envelope of $960 million.

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Operator [34]

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We will now take our next question from Mr. Michael Briest.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [35]

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Just a couple of follow-ups from me. Firstly, Vertica, I seem to recall was separated out from the -- I think it was information management and governance division in the last set of numbers, not today. Is that a strategic decision? Is that now seen as core rather than something that might be sold? And then secondly, COBOL had a very strong second half. I'm estimating over 50% license growth. I mean, I know there has been some sales execution issues. But is any of that attributable to the IBM zSeries cycle? Do you think that there could be a sort of product cycle here, which is helpful over the next 12 to 18 months? Or was it just catch up from previous poor sales execution?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [36]

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First, Michael, it's nothing to do with the zSeries refresh cycle. Our COBOL is distributed, not mainframe. But what we do we have is a really world-class set of tools for helping customers modernize and/or replatform mainframe workload, and that is continuing to perform very well. So we think it's a combination of good execution, and the fact that we've told you over a number of years that this business is up some years and down the other. But for the longer term, it's a really stable business. So that's the dynamic that you're seeing play out there. Candidly, the disclosure of Vertica was a mistake. And we know -- it's part of the information management and governance portfolio. We are making very significant investments into it. We've got an unbelievable roster of customers. What we've done is, again, re-architected the solutions, so that you can now separate compute power and storage, which allows us to put it onto the public cloud marketplace and really start to build our run rate business within there to complement the big transactional pieces of the business when some of the biggest internet companies in the world make a buy. Vertica is a big buy. So it's inherently lumpy in that respect. We're trying to offset that lumpiness with a run rate recurring business. And once we have both of those things, we'll have a stable, predictable, growing Big Data business, which then, of course, gives you optionality.

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Operator [37]

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We will now take our next question from John King.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [38]

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So 3 quick ones, I hope. So firstly on the Atalla divestment. The -- what kind of margins and growth rates with -- the assets [seeing]? It just seems like quite a low multiple that you got there. And then any other -- any appetite for large-scale M&A this year? Is that a little bit early? And lastly, any commentary around the seasonality of growth that you might expect this year?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [39]

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Atalla was basically a nonstrategic piece of the portfolio. It was, in essence, a hardware appliance-based solution. One of our underpinning commitments to the company is that we were committed to the customer base for the long term. We couldn't be committed to that customer base for the long term because we don't know how to run a hardware supply chain, which is what that business needs. So we found an appropriate strategic home for the asset, and therefore, for the customer base. And we think the disposal price was appropriate. That does give us a little bit of a revenue headwind this year because it's been disposed of and we haven't restated. Low 20s is the revenue headwind that presents. Large-scale M&A, well, we've always been very disciplined in that we seek to do the right deal at the right price. And we always weigh up the risk-adjusted returns from doing the specific deal with the alternative of giving cash back to the shareholders. So nothing has changed there. We will seek appropriate, more technology-oriented tuck-ins, which we've actually done one in the last year already. So those are just ways of accelerating development, rendering our portfolio. So we've never stopped looking at that. There are no plans for a large-scale M&A. But equally, we'll always be looking and understanding the dynamics in the marketplace so we're in a position to react if we think that's in the best interest of shareholders. Seasonality of growth, a little bit second-half weighted to first-half weighted.

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John Peter King, BofA Merrill Lynch, Research Division - Research Analyst [40]

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I guess that goes against the comps. It feels as though the Q1 comp would have been the softest of year, so maybe -- what's driving that?

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Stephen Murdoch, Micro Focus International plc - CEO & Director [41]

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Typical seasonality in our business is -- we -- Software businesses on the whole have a big Q4. It's always the case. And even when we bought companies and we've moved to year-end, the spike in Q4 moves to the new Q4. It's completely counterintuitive, but that's what happens. And candidly, we still got lots of things that we're fixing in the business.

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Operator [42]

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There are no further questions at this time. I would like now to turn the conference back to yourself, Mr. Tim Brill, go ahead.

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Tim Brill, Micro Focus International plc - Director of Corporate Communications & IR [43]

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Thank you, operator. On behalf of the whole management team, thank you for your time this afternoon, this morning if you're dialing in from the U.S. Really pleased to see so much interest in the Micro Focus investment proposition, around 250 of you on the webcast and the phone today. Don't hesitate to follow-up with this if you got any remaining questions.

Thank you again for your time.

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Operator [44]

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Ladies and gentlemen, this concludes today's conference call.

Thank you for your time.