Why Shares of Micro Focus International Slumped Today

What happened

Shares of Micro Focus International (NYSE: MFGP) slumped on Monday after the company reported its interim results for the six months ending on Oct. 31. This was the first report following the completion of the merger of its wholly owned subsidiary with the software business segment of Hewlett-Packard Enterprise. While the merger drove revenue higher, sales slumped on a comparable basis. The stock was down about 17% at 11:55 a.m. EDT.

So what

Micro Focus reported six-month revenue of $1,234.5 million, up 80% year over year. License revenue soared 121% to $327.7 million, maintenance revenue jumped 68% to $611.5 million, subscription revenue rose 13.9% to $162.6 million, and consultancy revenue surged 177% to $80.3 million. Software-as-a-service revenue was $52.4 million, all of which was the result of the merger.

A declining stock chart.

Image source: Getty Images.

HPE Software contributed $569.8 million to this total, while existing Micro Focus and SUSE businesses contributed $664.7 million. On a comparable basis, excluding the impact of the merger, revenue was down 2.9% year over year. Micro Focus revenue fell 7% year over year on a constant-currency basis, while SUSE revenue rose 13.1%.

Earnings per share slumped 9.1% year over year to 34.64 cents. On an adjusted basis, EPS rose 16.4% to $1.04. The company expects revenue to decline by 2% to 4% in the year ending in October 2018 on a pro forma basis.

Now what

Micro Focus doesn't expect revenue growth to return until fiscal 2020. The company's financial model calls for standardizing systems and rationalizing properties in 2018, stabilizing the top line and improving its new Go to Market model in 2019, and finally achieving top-line growth in 2020. This drawn-out timeline may have fallen short of expectations, leading investors to punish the stock.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.