What happened
Shares of enterprise-software company Micro Focus International (MFGP) surged higher on Wednesday after the company released preliminary full-year results for its fiscal 2020. Financial results were down compared to last year, but perhaps investors are encouraged that the company still believes it's on track to achieve its three-year goals. As of noon EST, the stock was up 30%.
So what
When official fiscal 2020 results come out, Micro Focus expects to report revenue of $3 billion. Adjusting for fluctuations in currency, that represents a 10% year-over-year decline. The first half of the year was hardest hit, with revenue down 11% from the prior-year period. But the second half of fiscal 2020 wasn't much better with a 9% decline.
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Concerning profitability, Micro Focus' release only included a non-GAAP figure known as earnings before interest, taxes, depreciation, and amortization (EBITDA). The company's EBITDA margin is expected to be around 39% for fiscal 2020, slightly lower than the 41% margin it enjoyed in fiscal 2019.
Now what
For now, Micro Focus International has a net debt position of $4.2 billion, but it fortunately had enough cash flow to whittle that down by $400 million over the past year. With $1 billion in current liquidity, it believes it has sufficient means to improve its balance sheet and continue to execute on its long-term vision.
Part of Micro Focus' three-year plan is to transition more software products into a Software-as-a-Service (SaaS) model to have more predictable revenue. That strategy can take time to execute, and even longer to appear beneficial in a financial report, due to the difference in the timing of revenue recognition. Therefore, investors today should be prepared to show patience for the strategy to pay off.
