Micro Focus – now the migration challenge begins

(By Philip Carnelley, 12 August 2009, 10.00) Micro Focus has issued a fairly low-key Q1 IMS (see here), stating that trading was “in-line with management expectations” and that management is “confident [of] a solid first half performance”. But that’s just looking 3 months ahead. The main point of interest is what it had to say about the longer term now it’s closed the Borland and Compuware ASQ acquisitions (see Busy day for Micro Focus!). These two deals add $150m (that’s about 55% extra) to the top line. It paid around $190m for the two, not bad given that average PSR in the software sector is around 2–2.5x. The acquisitions will depress margins in the short term – Borland was leaking cash towards the end – but Micro Focus has a track record in bringing acquired businesses up to its own profit levels (around 40%­ EBITDA).

However as we have previously noted (Micro Focus – Deja Vu?), Micro Focus is expanding significantly in business and technology terms. It faces very strong competition in its new chosen space of testing and software quality, from the biggest IT companies in the world: HP and IBM. To meet its own internal efficiency targets and, more important, to retain and build its client base, it needs a converged and very competitive product suite. We expect Micro Focus to try to migrate its customers on to fewer product lines, which means it needs to come up with a route map and a persuasive story for both clients and prospects. We look forward to hearing, and assessing, that story very soon.