What happened
Shares of U.K.-based technology company Micro Focus International (MFGP) got crushed on Tuesday morning after it provided interim results for the six-month period that ended April 30. Investors didn't like what they saw. As of 12:25 p.m. EDT, the stock was down 18.5%.
So what
During the first two quarters of its fiscal 2020, the software and information technology company's revenue declined 11% from the comparable period of the prior fiscal year. The company divides its revenue into four segments, and all four lost ground, including its "software-as-a-service and other recurring revenue" segment.
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Micro Focus International noted that its customers began delaying software license renewals and regular maintenance in April. On one hand, the company said this changing behavior only had a 2% negative impact on overall revenue. However, given that the period ended on April 30, that late development was apparently a profound shift. If this customer behavior continues, the impact could become much more significant.
The drop in revenue resulted in an even bigger drop in profitability. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $552 million -- down 16% year over year. However, Micro Focus International's adjusted EBITDA factored out big-ticket negatives like goodwill writedowns and acquisition costs. Its actual paper loss from continuing and discontinued operations was $1 billion.
Now what
Micro Focus International touts itself as the seventh-largest software company in the world, showing it has been a major player in the past. Many technology companies have transitioned to a growing, predictable SaaS model, but Micro Focus has been slow to follow that trend. However, it decided in February to transition to this model with the goal of stabilizing its revenue by fiscal 2023.
Revenues from Micro Focus International's SaaS and recurring revenue segment declined 13% during its last two quarters. If that business is indeed to be future of the company, it's sure off to a slow start. That would concern me if I were a shareholder.
