Logo of jester cap with thought bubble with words 'Fool Transcripts' below it

Image source: The Motley Fool.

Micro Focus International PLC (NYSE:MFGP)
Q2 2018 Earnings Conference Call
Jul. 11, 2018 4:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Tim Brill -- Investor Relations Director

Thank you for joining us today. My name's Tim Brill, investor relations director at Micro Focus, and welcome to all of you in the room here and also to all those joining the live webcast. That webcast will be recorded and posted on to our investor relations pages of the website. We've got a few joining us as we get started, but we will get going because I know we've got the live webcast running.

Delighted to welcome you to Micro Focus' six-month interim period for the period to 30th of April 2018. And we'll follow our usual format this morning of taking you through a few slides and then opening up for Q&A. So if you could hold your questions till we get to the question-and-answer session, that would be much appreciated. I'm joined this morning by Stephen Murdoch, chief executive; Chris Kennedy, CFO; and Kevin Loosemore, executive chairman. And if I could start by handing over to Stephen.

Stephen Murdoch -- Chief Executive Officer

Thank you, Tim. Good morning, everyone. So let's start by just recapping this six months. Overall, I would describe it as a solid performance, early signs of the revenue -- rate of revenue decline moderating.

And really encouraging improvements in the integration, particularly in terms of pace and the overall tone around of the business. Strong EBITDA performance, up 6.4%, and now at 36 points. And we're delighted to be able to present the shareholders with an opportunity to crystallize significant value from the SUSE business. So that will be subject, obviously, to shareholder approvals, but after which we are expecting to have more than $2 billion to be able to return.

There's now been a full and robust application of the Micro Focus model, and to recap, we've been refining that model since 2011 through the 17 acquisitions we've done since then. We always seek to improve and continually refine that model so it gets better. It's now being applied very robustly and very consistently. And that will help not only with the individual execution at that granular level but it will also help with the cultural realignment that we need to do. We're reiterating the dividend policy I've twice covered in the second interim, dividend of $0.583.

And I also want to take this opportunity to underscore that this is a business that generates a lot of cash, so we're now operating with more than $1 billion worth of operating cash. We've got a really strong balance sheet, no debt covenant issues. So really believe there's a foundation from which we can look very positively into the future. I want to take a second, because we never actually in these sessions talk about customers, so I want to take a moment and talk about customers.

We have a really broad and diversified customer base across 50 countries. We deliver mission-critical software. This is fundamental to these companies' business operations every day. And that's everything from as diverse as the highly complex testing of the software that's now embedded in Boeing products, so the software that's embedded in BMW cars, through to parrying the insights-driven business models of people like Uber, where the behavioral analytics, the dynamic pricing is powered by our technology, or Cerner, where they're using our technology to deliver deeper, more predictive insights into the general healthcare environment in which they operate.

We also just as a little bit of fun facts, we're fundamentally important to the mobile networks in terms of the cellular traffic, to the ATM networks, and we even do communications in the Hubble telescope. So this is incredibly deeply embedded, very important mission-critical software for these -- for our customers. We also have a very clear view of the market. So our customers live in what we describe as a multi-generational, multidimensional IT environment.

They have everything from mainframes to distributed IT to public cloud to private cloud to hybrid cloud and increasingly, adoption of Internet of Things. What we do is focus on what we call customer-centered innovation, and that's innovation that delivers material impact to the challenges of living in this complex environment at the same time as having reducing run budgets and very heightened operational threat environments in terms of security. So we do everything from enabling new use cases so COBOL in the cloud or the dynamic pricing user behavior analytics I mentioned previously, all the way through to just delivering capability that allows customers to extend productive use of assets that we've already installed, avoiding cost, risk, and unnecessary expense of having to move simply because the technology's evolved. And we call that bridging the old and the new -- not to the new because that suggests a destination, and for our customers, derivatives of this world will always be the reality, and it's how you enable them to optimize prior investments and embrace and leverage new use cases, which is the key to success. I mentioned that we're pleased with progress in integration. In terms of pace, and particularly tone.

And the essence is, we allowed the business to get too complicated. As a consequence, the execution was slower and the levels of accountability were unclear. We believe we've taken some decisive steps to begin to correct that. These range from the removal of basically unnecessary global structures and the sales force, unproductive management layers, the combination of which allows us to push more capability to the front line, in other words, much closer to the customer, pushing more decision-making authority closer to the customer.

And all the way through to the much more simpler and prosaic things of fewer meetings with fewer attendees, just pace, tone, sense of urgency in terms of the execution. We've got work still to do on attrition. It's still at an elevated level, and we still have hot spots within it. And we're actually working on both ends of that problem now.

So the first is velocity at the front end. So how quickly can we bring talent into the business? And a good example of progress there is the process in North America is now 50% faster than it was in March. But it's also important that you focus on the other end, which is retaining the talent that you already have, and there, the steps we've taken are all focused on enablement. So training, clearer customer propositions, more effective training in terms of how to deliver those propositions. We've also had some of the more basics that need corrected, for example, our systems problems meant we weren't paying the sales reps on what they'd actually sold, we'd been paying them on estimates.

So we've now -- and sales reps like to be paid -- so we've now worked our way through that and we're now paying accurately. We think the combination of both of those things will normalize attrition over time, and we're working to accelerate that. For example, again, in North America, we expect to be at the required headcount by the end of this fiscal. So good progress.

Systems. FAST is now stable. All the core business processes operate end to end and operate effectively. Now, getting to that point requires too much manual intervention, so it's constraining our overall operational effectiveness and it's certainly constraining our long term.

So we will now take the steps to remediate and simplify that architecture such that it is the platform on which to move the whole company and the platform onto which we consolidate and that's the priority and focus now as we look forward. The rest of the integration, and it's easy to overlook the amount of heavy lifting now there is, but the rest of it's on track. So the progress -- the project to remove our remaining dependency on the shared technical infrastructure of HPE is on track to deliver on budget and on timescale as per the original plan. We continue, as we always do, to make real progress on rationalizing our global real estate, with 41 sites closed, consolidated since the beginning of the period.

And in terms of final piece of the puzzle, in terms of extracting ourselves from HPE, is the transition services agreement, and we're now pretty much 80% through that. So we've closed 58 so far and we've got 14 more to do that will be done by the end of the fiscal and then the last two will get done by the end of the year to be coincident with the completion of the shared infrastructure project. So solid progress, most encouragingly is pace and tone around the progress. In terms of driving control and discipline, we've got one single 2020 plan, now created with the senior leadership team.

So a shared joint plan. That has multiple elements, one of which is a short-term, 90-day, what needs to get done and accomplished in the next 90 days, and how do we have a fast start into the next fiscal in terms of our FY '19 readiness. Between the three of these things, we're tracking, managing, or planning for thousands of tasks on a weekly basis.

So what's the discipline and structure behind driving that pace and tone I've referenced earlier? We have an operating model that we know works. It's grounded in a number of fundamental principles, the key of which is that we drive clarity in what we're trying to accomplish in the market with the product portfolio.

We make bets. So we make decisions, we align resources, and we align execution against those decisions, and we learn quickly and course-correct. So when I talk about the application of the model being robust and pervasive, the intent is that this is the set of behaviors that therefore enable the consistent delivery of returns, that we have a track record over our previous acquisitions and integrations of delivery.

Looking forward, our priority is pretty straightforward. First, maintain the focus on generating really high and strong levels of cash, moderating the rates of revenue decline consistently, and underpinning that with robust cost plans that enable us to be confident in delivering EBITDA margins in the mid-40s.

Assuming shareholder approval, then we'll execute the SUSE transaction and enable the shareholders to crystallize that value. And as I've said a couple of times, we'll apply the model rigorously. And what that means is granular execution at the product level, performance based on accountable behaviors at the people level, fit-for-purpose IT and processes at the operational level. We do those things.

We keep the customer at the center of all that we do. We execute with real pace, a real sense of urgency and a real sense of accountability in the organization. Outlook and guidance. Pretty straightforward, we're reiterating guidance on revenue, EBITDA margin percentage, and net debt, and we're reconfirming our focus on delivering TSRs of 15% to 20% sustainably for the long term.

OK. So with that, I'm going to hand over to Chris. Thank you.

Chris Kennedy -- Chief Financial Officer

Thanks, Stephen. Going to go through the financial review now. I'm going to present the numbers for the six months to April '18. And for the P&L comparators, we're going to be using pro forma for the period to 30th of April '17 so you can make the right comparisons.

There are reported numbers for the six months and the 12 months in the statement.

I think the first thing to say is that the HPE transaction has transformed the scale and the absolute-dollar profit-generating and cash-generating ability of the business. And that provides us with a firm platform to then consolidate within the sector. In terms of the short-term performance, revenue after haircut at constant currency was just under GBP 2 billion, an 8% decline. That's weaker than we thought at the time of the transaction, but at the, toward the upper end of the guidance that we gave back in March.

We continue to believe that the revenue decline in MFPP of 8.7% is significantly impacted by the transition issues that we talked about in March. And after the actions we've taken in Q2, we have seen a gradual tempering of the revenue decline, which does give us confidence for the medium term. And, as Stephen said, cost management has been really strong. We've shown an adjusted EBITDA margin improvement of 4.2% and we're ahead of plan. Despite the systems issues that we highlighted in March, which have meant that DSOs are still elevated above normal levels, we have been generating a strong amount of cash and we do expect those DSOs to unwind in the second half, so you'll see that coming back.

We've declared a dividend of $0.5833. And just to reiterate what Stephen said, this is the second interim dividend of an 18-month period. So we're looking at a dividend policy that will deliver a twice-covered dividend for that 18 months. The comparator on this slide is the final dividend for the 12 months to April '17, so you're comparing an interim to a final.

We continue to deleverage post-deal on the adjusted debt level measure that we talked about in January. We've delevered from 3.1 at the end of October '17 to 3 at the end of April. And we still expect to hit our leverage target of 2.7 times midway through next fiscal year without the SUSE transaction. So that's the organic deleveraging. I wanted to just talk about cash tax as well. Cash tax in FY '18 and FY '19 is going to be 15%.

That is significantly lower than we used to model the transaction back in 2016. And then that cash tax rate will gradually tend toward our effective tax rate from 2020 onwards of around 25%. Again, that ETR is substantially lower than the one we used for modeling at the time of the deal. So let's have a look at the revenue in the half.

This is constant currency, shows the absolute-dollar decline and the percentage constant-currency decline year on year for each of the different types of revenue streams, and you can see that licensing is the clear outlier in the six-month period.

Maintenance has been slightly affected in the period by the lower attach as a result of lower licensing. SaaS continues to perform well. The professional services income, which is down 27, just over 27%, that is a managed decline in the services income. So we've focused that business now on solely supporting the sale and the support of our software.

And then finally, the deferred-revenue haircut is, has an impact of about 1.1 points in this half. That will unwind in the second half over the full year. The impact year on year of that deferred-revenue haircut is not material. Here's a cut by -- of the revenue by geography and by product.

I'm sure we'll have lots of questions on this later, so I'll keep it brief. The key messages I take out of the slide is 1) the decline in the Americas is much greater than in the other geographies. So that gives us some comfort that the declines are due to transitional issues. The other thing to point out, again, is that it's across all product groups in the MFPP portfolio.

So, again, it looks more like an execution than a product issue. And just to highlight that, obviously, SUSE had a really good period with 16.10% revenue growth this year.

So if I switch now into the two sides of the business, this is the Micro Focus Product Portfolio first and then SUSE second. We talked about the revenue. What I'd like to focus on is the EBITDA growth.

The margin has increased by 4.4 points in the period, and that's due to GBP 182 million -- $182 million of cost takeout in this half compared to the pro forma six months in the prior year. The cost program is ahead of plan. It's in line -- and in line with our integration plan, we think we've got a lot of opportunity to continue to simplify through real estate reduction, simplification, back-office consolidation, and delayering of management. So this -- we're ahead of plan and there's more to go after, and that gives us confidence that in the medium term, we'll be able to hit that mid-40s percent EBITDA margin percentage.

SUSE, a really good six months, as I said. Revenue growth, 16.1%; EBITDA up 22 -- over 22%. And as Stephen said last week, we announced the sale for $2.535 billion. That sale rationale was solely about value creation for shareholders and, in our opinion, it was a good deal for the shareholders and for the customers and our people.

-- 7.9 times revenue, 26.7 times adjusted operating profit, which we think is a good consideration. And we'd like to highlight that under Micro Focus' ownership, there's been a huge amount of investment in SUSE, and this has realized now a huge amount of value for shareholders.

The deal, if approved, will probably complete early in next calendar year, so early in '19 calendar. So at the year-end, SUSE will be included in our results. The guidance Stephen gave you includes SUSE.

But for presentation purposes, when we get to the year-end for statutory reporting, provided shareholders approve the deal, then it will be classified as an asset held-for-sale and so the presentation will be slightly different than you've seen in these results.

I'm not going to dwell on this slide. Currency is difficult to model in Micro Focus and principally because revenues are mainly recognized off the balance sheet and they are recognized at an exchange rate at the time that the revenue was billed, which can be months or even years before. Whereas costs, we use the rate at the point of invoice, and that's generally in years. So there is a mismatch in timing between exchange rates.

But on this slide, we give you the mix of revenues and cost by all the major currencies that affect our performance. And we've given you the rates as well as of the period. So hopefully, you can use those to model. Stephen said it, I'll say it again, Micro Focus is a highly cash-generative business.

In the half, before the working capital movement, we generated $672 million of operating cash flow. The comparator here is as reported, but it's a 122% increase year on year, reflecting the new size and scale of the business.

The movement in working capital is overwhelmingly driven by the invoicing issues that we flagged in March. DSOs at the end of April were at 94 days versus 65 days at the end of October. Absent these issues, cash conversion would have been above 100%, which is normal for this period, as you can see from the prior year.

The bulk of the invoicing and cash-allocation issues in the system have been fixed, so what we're doing today, we're issuing a very high proportion of invoices to customers, but we're still dealing with the backlog of the issues that we suffered in Q1 going into Q2. We're working through those issues. We've made very good progress. By the end of May, DSOs were 11 days better than this.

So in just one month, we made an 11-day dent in that DSO backlog. And we are confident that toward the end of the year and into the medium term, we'll return back to more normal levels of DSO, probably slightly higher than the historic Micro Focus because HPE had different payment terms, but broadly speaking, back to historic levels. A lot of the people that I spoke to on the road show wanted a bit more information about exceptionals and what's happening there. So this slide has the exceptionals solely related to HPE.

In the comparator, you've got -- in the statement, that includes exceptionals relating to previous transactions. So we've tried here to isolate just those that are involved with HPE. Up to October, it was $12 million. In the half, it was $188.8 million, so that's $201.20 million to date.

It falls into three main categories: it's program spend on third-party advisors and program management; it's legal, real estate, and severance; and then you've got the external costs associated with the FAST IT stack implementation. In terms of phasing of the exceptionals, you can expect somewhere around $300 million in the second half of this year, or the third six months of this 18-month period, $300 million to $350 million in FY '19, and then the balance in FY '20 as we capture the last cost savings as a result of moving to a single integrated system. In total, exceptional costs we expect to be $210 million higher than we previously estimated. We previously estimated $750 million.

The exceptionals fall into two buckets. There's a bucket which is the $600 million that we ascribed to take out $600 million of costs. So $600 million one-off costs, $600 million annualized cost takeout. We now expect to be able to deliver $800 million of annualized cost takeout, so an increase of $200 million on the cost takeout, for an additional one-off cost of $30 million.

So the $600 million becomes $630 million, the cost saving goes from $600 million to $800 million. On the IT systems, that's more disappointing. We had anticipated $150 million of costs for the migration of Micro Focus to a stable FAST system and a further amount for the integration of the IT infrastructure. As Stephen said, the IT infrastructure project is on track, both on time and on budget.

However, as we've gone live with the FAST system, we've discovered we've already incurred significant destabilization costs. Those will continue for at least the next 12 months. And we do believe that we need to do some remediation work to make it fit for purpose before we put the Micro Focus business onto it. So there's an increase of $180 million in IT costs.

I just want to finish by affirming the strength and the quality of the balance sheet. The graph on my right is -- just shows the deleveraging after the last major acquisition we made, and this acquisition is no different. We're already starting to deleverage and that will continue, even absent the SUSE transaction if it goes ahead. And the chart on the -- on my left is the debt-repayment profile over the next five years, and you can see that there's minimal amortization of principal over the next three years, with the first major repayment tranche in 2021.

We've got in addition to this a $500 million undrawn RCF facility and interest is handsomely covered. So you can see that the capital structure is robust. We've got strong cash generation. And we feel that we are now in a position to resume our position as a consolidator in the sector.I'm going to hand over to Kevin to give some concluding remarks. Thank you.

Kevin Loosemore -- Executive Chairman

Thank you, Chris. Good morning, everyone. First, I'd like to thank Chris and Stephen and the rest of the team for the huge amount of work they've done in the last three months in execution. I'd like to thank Nils, who has led SUSE ably for the last four years since we acquired the Attachmate business and will be stepping off the board to concentrate on closing that transaction and taking it on to the next phase of its development.

And also Mike Phillips, who for the last six months has worked with Nils on that transaction and also the Atalla transaction that you saw announced a month or so ago.I don't want to underestimate the challenges of the transition. There's a lot of work going on. It's a challenging transition. And if you take that we are nearly two years from the announcement of the transaction in September 2016, we think we're about a year behind where we wanted to be at this stage.

So first off, we have to acknowledge that. Notwithstanding that, we are confident that actually we will get through the transition. And what this slide is aiming to do is to talk about the Micro Focus equity story post-SUSE, when SUSE -- the transaction has happened, and actually remind ourselves of some of the basics which haven't changed. We believe the infrastructure software market in large part is mature and will consolidate. We think the people that will win in that consolidation will be players of scale with operational efficiency because that's what happens in every other industry in the world.

We believe that we will create the business that can do that by integrating the HPE software assets into it. We will operate at mid-40s percent margins in the 2020 time frame with a view to seeing how we improve them going forward. The business at the end of it will be generating circa $1 billion in free cash flow. It's already $1 billion of operating cash flow.

This quarter alone, our dividend is 3.5%. You could argue that's because the stock prices are short-term low. And if that sorts out, the percentage dividend will decline. But the 3.5% for the half-year dividend and there's another dividend to come at the end of the year.

So at the end of the day, we will have a huge cash machine positioned well, play in this part of the market, but we shouldn't underestimate the work we still need to do to do that. Critical to that is stabilization of revenue decline. That doesn't mean that by 2020, revenue will be flat. It means that we will reduce the rate of decline as we go forward into 2020.

And if you look back to Attachmate and see what happened there, initially, it started at 4% decline, then it became 2% decline, then we got close to 0 before this transaction. So we're looking to stabilize. The business does not need to get to flat revenue to produce the kind of shareholder returns, but it is dependent on being a consolidator of a consolidating market and producing huge cash in order to even make those returns to shareholders.

Another thing we've not changed is we've not changed our twice dividend cover -- twice-covered dividend policy. We've not changed our 2.7 times debt leverage policy. And we've not changed the fact that we will not hold on to cash going forward. We would return cash to shareholders. So I just wanted to bring us back to what the purpose of the business is, what we will end up creating, but not to minimize the challenges and the effort and the huge amount of hard work our employees are doing at the moment to actually make it happen, for which we're extremely grateful to our employee base. So with that, I'd like to invite Chris, Stephen, Nils, to join me for Q&A, which I think Tim is going to chair.

Questions and Answers:

Tim Brill -- Investor Relations Director

Thank you, Kevin. So while my colleagues get to their seats, just to pose the usual request. We hope, more than an expectation, if you could please start with one question each, we will run through and get as many questions in as we can.

James, looks like you're ready with a mic already in your hand.

James Goodman -- Barclays -- Analyst

Thank you. It's James Goodman from Barclays. I'll ask one. If you could just let us in, please, a little bit more into your thought process around the SUSE disposal.

And what I mean by that is, why that was preferable to a demerger? Why you consider the right level of returns to be nearly the full amount rather than paying down your debt? And that's the question.

Kevin Loosemore -- Executive Chairman

OK. The SUSE business claim, as you all know, is part of the Attachmate transaction when it was a significantly smaller business. And I remember clearly at the time being asked whether it fitted with Micro Focus, given that we didn't know how to run a growing software business. And our reply was, well, we'd never had one, but we thought we did know how to run it and we ran it as a semi-independent business.

During that time, Nils has driven the business. Stephen has supported it from the Micro Focus side, and we've made it semi-independent within the structure. And we'd always said that it wasn't our job to own the asset, it was our job to create value for shareholders from the asset. And right from the start, we said there were three tests, which were, was it being reflected in the share price? Could we fund the operational expense that we needed to not constrain it in growing? And could we do the acquisitions it may need going forward in terms of supporting the longer-term vision? And if we ever got to the point where we didn't think those were the case, then we should look to separate. For most of that period, we thought that a demerge was probably the most efficient route because of tax considerations.

That changed to some degree when the U.S. tax regime changed and effectively reduced that drag by half. About the -- forget quarters, but in September-ish of last year, we started a project looking at whether we should separate the SUSE, and we did a five-year plan with Nils. We concluded that we could fund the operational expense that was needed for the business but we would probably need to reduce the margins from 32% down to about 27% was our estimate to fund the organic piece.

The thing we concluded we probably couldn't do going forward was that if SUSE needed to move into the middleware space where Red Hat is growing and the infrastructure, we think the Linux infrastructure market was stabilizing and so would eventually turn into decline, to follow Red Hat into the middleware space probably needed acquisitions which wouldn't meet our capital structure. And at that point, we looked at whether we should do an IPO of the business and the amount of effort and work that that would take, or we looked at whether we should actually sell the business.

In the last six months, I think I talked to 10 sponsors, six strategics, and we ended up concluding the most effective way of transacting the right price in this instance was to do a sale to, in the end, EQT. That was far less distraction for the rest of the management team with all the other HPE transactions going on. We believe we've realized the value, which is, A) more than we paid for the whole of the Attachmate Group -- so the other $400 million of EBITDA came for free -- but B) actually, we think is in excess of most of our shareholder expectations.

Now, there will always be the odd one that thinks you might have done better, but I think we're fairly relaxed that the process got to a very good price.

So that's how it came about. In terms of returns, our strategy remains 2.7 times covered. We don't see any reason we should change that, our interest cover on our -- sorry, our cash cover on our interest is 4 times even with troubled execution, so there's no risk to the balance sheet. So we think our strategy of returning cash is still an appropriate strategy.

Tim Brill -- Investor Relations Director

Thank you, James. Steve, you had a question next. Sorry, middle row, about four up. If you could hang on for a microphone since we're webcasting it, that would be great.

And then, Amit, you had a question, yes?

Steve Goulden -- Deutsche Bank -- Analyst

Sure. It's Steve Goulden from Deutsche Bank. Could you just give us a bit more color on the, firstly, the $40 million license sale that you closed in the half? And also just the sort of, the commentary around improving revenue environment. What kind of -- what kind of color are you seeing there? And when you say that by FY '20, obviously, the revenue declines will have significantly normalized, what gives you the confidence there? Because, obviously, within the results today, maintenance revenue was down 3.5%.

So it would -- we'd assume that getting revenue back on track kind of assumes a bit of improvement there as well with the declining license number.

Stephen Murdoch -- Chief Executive Officer

OK. So the $40 million deal was a deal that the team had been working on for some time, and the opportunity presented itself to close it earlier. So the team did a real good job and got it done, and that moved it from the second half into the first half. There's nothing more to it than that.

In terms of the overall sales environment, well, if we look short term and then I'll come back and touch on long term, short term, we have improvements to make in execution. Those range from simplifying the structure that I touched on earlier so that there's more accountability, more speed of decision making, more authority closer to the customer, so that they can actually be easy to do business with and transact. So we've removed pretty much all the global structures. We've collapsed management layers. It's about 135 managers coming out in total, just to improve that speed and urgency.

We're also upping the pace of our hiring. So we get people to the opportunity areas faster so we can respond quicker. And then in terms of enablement, just making sure they're empowered and trained correctly to deliver the communication and the value that we offer more effectively every day. So that's short term.

Longer term, it's really about the customer-centered innovation approach to the road maps. So how do we build robustly across each one of the product lines, the feedback mechanisms, the engagement mechanisms that we have a track record of doing across the original portfolio, such that those road maps are very specifically tailored to the pain points that customers see today in their environments, and therefore, their willingness to prioritize spend on our products over other competing pressures increases. So that's a little bit of the longer term. In terms of moderating the revenue declines, the best way to think about this is continuous improvement every day, every week, every month.

So we're seeking to moderate the rate of decline in the second half versus the first half, carry that momentum forward into '19, then, again, into '20. And from that point, there will be stability in terms of the rate of decline within the business and the model begins to work correctly. And then we'll look how we supplement that with accretive acquisitions, as we always do.

Tim Brill -- Investor Relations Director

Thank you. Amit, did you have a question? Mic just coming to you.

Amit Harchandani -- Citi -- Analyst

Good morning. I'm Amit Harchandani from Citi. In terms of the leverage that you have talked about, achieving 2.7 times by the middle of next year organically and returning majority of the proceeds from the acquisition -- sorry, from the SUSE divestiture potentially to shareholders, is it fair for us to assume that meaningful M&A is now off the records until at least FY '20? Because, clearly, you would need your balance sheet to go down a bit more before you can potentially do a debt. So just trying to understand your thoughts on M&A a bit more going forward.

Stephen Murdoch -- Chief Executive Officer

Yes. Our thoughts on M&A haven't changed. We've always stated that we won't be a forced buyer. So it has to be the right asset at the right price.

And to make sure we're in a position to do that, we're continually in the marketplace, understanding shifts and changes and where those assets might exist and when they might become available for us to do this.

So there'll be no change in that period. As Chris said, the transaction should close Q1 next fiscal. And between now and then, we'll continue to look for things that we think would be value-accretive for the long term for the shareholders. And if we find something that's appropriate, then we'll consider it, we'll assess it, and if appropriate, we'll present it to the shareholders.

Tim Brill -- Investor Relations Director

Thanks, Amit. Gautam, in the middle there, please. If somebody could help pass the mic there, and then George.

Gautam Pillai -- Goldman Sachs -- Analyst

Thank you. Gautam Pillai from Goldman Sachs. Can you give some more flavor on the $200 million incremental cost synergies which you have highlighted? Is it specifically coming from more employee rationalization or more G&A savings? And what has changed since the last update for you to find the savings?

Chris Kennedy -- Chief Financial Officer

So we're ahead of plan already, so that gives us confidence that we can deliver that additional $200 million. And as both Stephen and I said in the presentation, that cost takeout comes from every line of the P&L. So we've done a big procurement exercise. We continue to do work on the procurement side and we can see value in that. There's still a lot more to go on real estate rationalization.

And then we really haven't -- with the systems stabilization going on, we haven't yet realized the synergies that we can see in the back office. So how I would characterize it is, so far, we've integrated the go-to-market teams and we've -- the product groups are now working as one. We still need to address costs in the back office. And we still -- there's more to go in terms of simplifying structures.

And as Stephen said, that's -- there's a double benefit on that, that cost gets taken out. But as importantly, decision-making gets speeded up and the business is moving with more pace and more agility.

Tim Brill -- Investor Relations Director

George, then Charlie.

George O'Connor -- Stifel Financial Corp. -- Analyst

Thank you. George O'Connor from Stifel. What's the staff count at the moment?

Stephen Murdoch -- Chief Executive Officer

Just under 1,630.

George O'Connor -- Stifel Financial Corp. -- Analyst

Okie dokie. And how much are SUSE staff?

Stephen Murdoch -- Chief Executive Officer

Nils? Can't remember the number upfront.

Nils Brauckmann -- Chief Executive Officer, SUSE

Direct staff, 1,300, and then there's a couple of resources that are sitting in the overall organization that are supporting SUSE as dedicated heads, roughly another 150.

George O'Connor -- Stifel Financial Corp. -- Analyst

Sorry, I'm getting old, I didn't hear properly. Did you say you're giving a ROV [ph] of $2 billion next year?

Stephen Murdoch -- Chief Executive Officer

The -- we expect to have about $2 billion from the sale of SUSE that we will have available to deliver returns. So we haven't decided the shape of that return yet, George, because we haven't completed the transaction. But we have said throughout history, we don't hold cash on the balance sheet. We'll either look for an accretive use of that cash in terms of M&A or we'll find an effective way to return it to the shareholders.

George O'Connor -- Stifel Financial Corp. -- Analyst

Thank you.

Tim Brill -- Investor Relations Director

Thanks, George. Charlie and then Julian.

Charlie Brennan -- Credit Suisse -- Analyst

Yes. It's Charlie Brennan here from Credit Suisse. Can I just start with one of you, Kevin, you talked about the business having $1 billion of free cash flow after SUSE. That sounds a little bit higher than I would have expected.

Can you just give us a very stylistic view of what a cash flow statement would look like to get you to $1 billion of free cash flow? And particularly if you could touch on the restructuring charge you're embedding in that. Obviously, you've talked about your 15% to 20% return requiring M&A, so what's the restructurings embedded in that? And then secondly, a broader question. It seems like the level of heavy lifting required now is probably a little bit greater than you originally anticipated and the financial rewards for you for doing that seem a little bit lower than you might have originally anticipated. Can you just talk about your personal commitment beyond 2019, and then more broadly, what you're doing to try and incentivize people to go through this period of transition? Thank you.

Tim Brill -- Investor Relations Director

Any more questions, Charlie?

Charlie Brennan -- Credit Suisse -- Analyst

I'll stop there. I'm happy to go on, but --

Tim Brill -- Investor Relations Director

You pass it to Julian. Thank you.

Kevin Loosemore -- Executive Chairman

I was relieved you've got the other questions because I thought it was a finance-direct question, which I'm probably not qualified to answer. The -- clearly, to get to that point of cash flow is post-restructurings, once the restructuring has gone through. And, yes, there could be plus or minus 10% on that kind of number by the time you work it, sorry, because it will depend on the revenues and everything else. But I want to give people a feel for the kind of quantum of the size of the engine that is being built.

The heavy lifting is undeniable. These guys are working very hard, as is everyone in the business. The incentive structures below board, we've already taken action to address some of those below board where we think that that is a constraint. And so that's already put in place.

And, personally, I've said to the board, I'm happy to stay through the journey and I've offered to stay through end of 2020 if that's what the board want me to do. So I'm sure others may have other views as to what they want me to do. But our job at the moment is to actually get this done. We didn't run away from the business in 2010 when it had a hiccup, and we're not going to run away from the business in 2018 because it's got a hiccup.

Tim Brill -- Investor Relations Director

Thanks. Julian and then John.

Julian Yates -- Investec -- Analyst

Yes. Just going back to the cost savings. The $800 million is obviously quite a big number. Could you help us think about that in terms of, I guess, as part of the cost of goods sold, there's that pocket a bit, but in terms of the percentage of opex for the entire business you're looking to take out over the next few years? And clearly, the underlying market focus, [Garbled] this was quite a lean business before it came into this, so that would imply even more as a high percentage from the HPE business.

And with that in mind, how do you -- how confident are you that that won't impact the top line as we go two, three years down the line with that percentage levels of cost coming up?

Chris Kennedy -- Chief Financial Officer

So what we said is that we're ahead of plan. So $500 million is actually already -- has been done from the point of transaction to now. There's $300 million prospectively. So that's around sort of 14%, 15% of the cost base.

We have a clear -- we've got clear line of sight. We've got -- we've spent some time on that plan. We've got 41 different initiatives, which we've clustered into sort of 12 big buckets. And as Stephen said in the presentation, I think the really important thing for me around this plan is that we've got buy-in from all of the senior leadership teams and their leadership teams underneath them.

So we're confident that we can do this without impacting the revenue trajectory. And as I said, actually, counterintuitively, some of this cost action I think will actually help us improve revenue by getting us to speed up and be more agile.

Julian Yates -- Investec -- Analyst

And if it wasn't the impact, if revenues were to come in maybe slightly less than you were expecting, is there a scope to take more out? How should we envisage that on a sort of a, I guess a business-plan scenario that you've put out there?

Chris Kennedy -- Chief Financial Officer

Our going-in assumption is that, subject to kind of normal swings in that revenue trajectory, we'll course-correct and we'll -- what we're focused on is delivering that mid-40s percent adjusted EBITDA margin. So we'll adjust accordingly.

Tim Brill -- Investor Relations Director

Julian, could you pass the mic to John? Thank you.

John King -- Merrill Lynch -- Analyst

Thank you. It's John King from Merrill Lynch. So just a follow-up really on Julian's question. What do you think -- ex-SUSE, obviously, what's the run rate of growth, organic growth that you see in the portfolio as it will be? Feels like Micro Focus core was down in the mid-single digits in the last few years.

It's hard to see what HPE was doing obviously because there's a number of moving parts to that business as you went through. But I guess, what's that number? And if that's below where you think you can get to, why do you think you can get to that with a lower cost base, if that makes sense?

Tim Brill -- Investor Relations Director

Do you want to go?

Stephen Murdoch -- Chief Executive Officer

Yes. The -- basically, the minus 10% is the MFPP piece today. Plan is the full year, we see that moderate and we carry that forward into '19. I couldn't sit here today and say where that ends up in '20.

What I can say is we've got line of sight of the actions necessary to moderate it in H2 and to continue that momentum into '19.In terms of underpinning the EBITDA margin in the mid-40s, we've got multiple revenue scenarios and we've got cost scenarios that underpin each of those. Clearly, if the revenue is a little bit -- is in the upper end of those scenarios, then it gives us more flexibility in terms of what we do with cost.

John King -- Merrill Lynch -- Analyst

So what I meant there was. if you look back at what you bought from HPE, what was the kind of underlying growth rate in the last five years of those assets?

Stephen Murdoch -- Chief Executive Officer

I don't think I even --

Chris Kennedy -- Chief Financial Officer

It was very similar to -- from the stats I've been able to pull out, it's very similar to what the ex-SUSE Micro Focus portfolio was.

Tim Brill -- Investor Relations Director

OK. John, can you pass the mic behind you to Michael? Thank you.

Michael Briest -- UBS -- Analyst

Thanks. Michael Briest at UBS. If I sort of think about the 2020 trajectory, I'm sort of thinking maybe about $1.50 billion of EBITDA, maybe $1.60 billion ex-SUSE. And previously, you're looking for $2 billion, and I appreciate SUSE might have been $150 million of that.

But you're talking about an extra $200 million of cost savings. Are we assuming all the rest is just revenue lost or will 2021 get a bigger benefit from the extra cost savings, if you like, because you talk about achieving $300 million by the end of full year '20. Is it cascading into 2021? And then just a small follow-up on Vertica. You're breaking that out separately in some of the analysis.

I think HPE paid $300-odd-million for it several years ago. Is this your new sort of SUSE part two Part 2, are you sort of highlighting that as a growth engine, which may be treated differently in time?

Stephen Murdoch -- Chief Executive Officer

I'll take the second part first.

Tim Brill -- Investor Relations Director

Yes.

Kevin Loosemore -- Executive Chairman

Can I just start first? The original statement was $195.10 million by April 2021, of which SUSE was $175 million, so that was your base point. And then we moved the year-end, so if we move the April '21 to October '20. So that's the -- I think we said $2 billion and SUSE $100 million.

Michael Briest -- UBS -- Analyst

There's an extra $200 million in cost savings?

Kevin Loosemore -- Executive Chairman

Yes, yes. That's [Inaudible]. But it's $195 million minus $175 million gives you the original number, minus SUSE. That's just the starting point.

Stephen Murdoch -- Chief Executive Officer

So we've got assets in the portfolio we think can deliver really strong growth, but what we need to do is get after proving that that can be delivered sustainably rather than in a lumpy fashion. The Vertica product's outstanding, but we've got similarly fantastic assets in our security portfolio. And even within lovely old COBOL, we still have pieces of that growing double digit. So the model requires we apply the appropriate level of focus and investment depending on the stage of maturity of the product, and clearly where there's growth in the marketplace and we have assets that serve that growth, then we seek to accelerate those.

Vertica's a key one of those. But there's a lot of assets in the company that we feel that we should be doing better with, and we intend to do better with them over time through the application of the model.

Tim Brill -- Investor Relations Director

Will?

Will Wallis -- Numis -- Analyst

Will Wallis from Numis. Can you talk about the FAST, the increase in the costs in FAST a little bit more? To what extent is that just dealing with money workarounds and the costs of that over the course of the next, however long? How do you expect that $270-odd million to phase over the next couple of years? And where would you see the main risk points being in that?

Stephen Murdoch -- Chief Executive Officer

We'll double team on that, even with phasing. The -- to date, the costs have all been about remediating the systems. So that's all been getting it stable, money workaround, fixing, putting in place the workarounds. Looking forward, there's a combination of an ongoing piece of that, but mostly it's about simplification and remediation of the stacks such that the architecture is simpler, the data and process model are fit for purpose for a software company, and then we have the platform in which to move the existing -- the heritage Micro Focus business, if you think about it that way -- onto that simplified stack.

And then we believe that stack then represents a platform that makes sense to consolidate further as we look forward. So the incremental is to get it to that point.

We still have the budgeted amount for moving the original Micro Focus business, that's not changed. We still have the infrastructure piece in the original $150 million. That's not changed and that's on track and budget. This is all about taking what we expected to be fit-for-purpose stack at completion and actually making it the fit-for-purpose stack it needs to be.

Will Wallis -- Numis -- Analyst

And the timing?

Chris Kennedy -- Chief Financial Officer

And in terms of phasing, it's heavily dependent on the IT program and I should say these are high-level estimates we've got in here at the moment. So -- but assuming that Micro Focus goes onto the stack toward the back end of next calendar year, then you've roughly, of that additional $180 million, you've got around $120 million in the next fiscal year and the balance running on it to the early part of 2020.

Tim Brill -- Investor Relations Director

I'm conscious we're close to the hour but -- so if anybody does need to get away, please don't let us hold you up, but we will push on with any further questions if people have further. So John? Will, can you --

John King -- Merrill Lynch -- Analyst

So just a quick question. Can you say what the attrition rate actually was for the first half of the year?

Stephen Murdoch -- Chief Executive Officer

I honestly can't remember off the top of my head what the total annualized attrition is. It remains higher than we would like but it's beginning to moderate. And it's a reasonably volatile metric. It always spikes after bonus time and always spikes after commission at the year-end.

Dies down over holiday periods. And so we're really just focused on getting it to normalized levels for the longer term and reshifting the weight of resources back closer to the front end.

Tim Brill -- Investor Relations Director

OK. Any more? Paul in the middle. Sorry, bit of a --

Paul Morland -- Canaccord Genuity -- Analyst

Just on the margin, you still talk about some mid-40s EBITDA margin. I just want to understand why ex-SUSE and with the extra 200 that doesn't move up a little bit? Just taking SUSE up, takes it up about by, I think, 200 basis points or so, 150 basis point.

Chris Kennedy -- Chief Financial Officer

Yes. And then if you work through the 200, you will get to around -- and then you make your assumptions about revenue, that you should be getting into the mid-40s margin number on the remainder -- remaining business.

Paul Morland -- Canaccord Genuity -- Analyst

That was the original target I thought when the -- with the 600 right at the beginning. The original target was sort of 45% when the cost savings were targeted at 600. Now they're 800 and ex-SUSE, that included SUSE, the original.

Chris Kennedy -- Chief Financial Officer

And you've got a revenue number that's lower than was originally anticipated when you were factoring in that, the cost takeout.

Paul Morland -- Canaccord Genuity -- Analyst

OK, OK. but that does include the full 200? It's not that the 200 comes in, in 2021, as Michael was relating --

Chris Kennedy -- Chief Financial Officer

No, no. That's -- no, the intention is to deliver those cost savings. As I said, the final piece of that cost saving will come in the early part of 2020 when we get the benefit of a single set of integrated systems.

Tim Brill -- Investor Relations Director

OK. Any further? Gautam, another one?

Gautam Pillai -- Goldman Sachs -- Analyst

A quick one. How were the maintenance renewal rates in the half year? Were they better or worse than expectations?

Stephen Murdoch -- Chief Executive Officer

Maintenance renewal rates. Broadly, no material changes on trend. The methodologies that we have for tracking that are different across the portfolios just because of the heritage. So we've said, look at trends and look at changes in trends in aggregate rather than each of the individuals, but there's no material shift at any of the individual portfolios the merits singling out.

Tim Brill -- Investor Relations Director

Amit, did you have another question?

Amit Harchandani -- Citi -- Analyst

Just a quick follow-up. Amit Harchandani from Citi. In terms of -- in the past, you gave us an EBITDA improvement target which was discussed earlier and now you have shifted to a mid-40s kind of a margin target. Clearly, a reflection of some uncertainty around revenue growth as we look forward.

Would it be fair to say, given the amount of recurring revenue in your business today, that that uncertainty you see is more a function of your internal systems not being where you want them to be, and maybe potentially six months down the line, you may be in a position to give us a clearer EBITDA improvement target and have a clearer visibility on the organic growth? Or has something changed in the industry, be it competitive dynamics or something else, which has reduced the revenue growth visibility for you?

Stephen Murdoch -- Chief Executive Officer

We don't believe there's anything that's shifted fundamentally in the marketplace, and there's multiple points of proof on that that we've investigated. Chris mentioned some, about differences between our geography -- performance in our geographies. And if you look one click below that, it's even differences with one product in one geography growing and the same product in other geography declining. So we don't think there's a fundamental shift in the marketplace.

We have got, including SUSE, around 70% of our revenues recurring today. But we still have a license business that's highly volatile and back-end-loaded in the quarter. And over the four years of Attachmate ownership, we moved the weighting first half to second half by 5 points. And we moved the weighting within the quarter -- within the halfs and we rebalance that.

We moved the weighting within the months. So we're going to keep trying to improve that predictability by the granular execution necessary to move things out of Month 3 into Month 2, out of H -- Q2 into Q1, etc., and that gives us a sense of confidence in terms of predictably once we get that done. Short term, moderate the revenue declines in H2, carry that momentum into '19 and then revisit.

Tim Brill -- Investor Relations Director

Thanks, Amit. OK, with that, we've kept you a little bit longer than the hour. Thank you, everybody, for coming. On behalf of the Micro Focus management team, thanks for your time today, and thank you to everybody joining us via the webcast.

To reiterate, a recording of this meeting will be made available later this morning on the IR pages of the Micro Focus website. As ever, any feedback on discussions you have over the next few days, we're all ears and interested to hear as we work our way around a series of investor meetings here and in the U.S. over the next two weeks. Thank you for your time.

Stephen Murdoch -- Chief Executive Officer

Thanks, everyone.

Duration: 61 minutes

Call Participants:

Tim Brill -- Investor Relations Director

Stephen Murdoch -- Chief Executive Officer

Chris Kennedy -- Chief Financial Officer

Kevin Loosemore -- Executive Chairman

James Goodman -- Barclays -- Analyst

Steve Goulden -- Deutsche Bank -- Analyst

Amit Harchandani -- Citi -- Analyst

Gautam Pillai -- Goldman Sachs -- Analyst

George O'Connor -- Stifel Financial Corp. -- Analyst

Nils Brauckmann -- Chief Executive Officer, SUSE

Charlie Brennan -- Credit Suisse -- Analyst

Julian Yates -- Investec -- Analyst

John King -- Merrill Lynch -- Analyst

Michael Briest -- UBS -- Analyst

Will Wallis -- Numis -- Analyst

Paul Morland -- Canaccord Genuity -- Analyst

More MFGP analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

10 stocks we like better than Micro Focus International PLC
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Micro Focus International PLC wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

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