Insights

Why Micro Focus Stock Fell Sharply on Wednesday

What happened

Shares of enterprise software company Micro Focus (NYSE: MFGP) tumbled on Wednesday. The stock fell by as much as 16.9%, and was down by 15.3% as of 3:15 p.m. ET.

The pullback followed the release of the tech company‘s interim results for the six-month period that ended April 30. A year-over-year decline in revenue seems to have spooked some investors. 

So what

Micro Focus reported revenue of $1.3 billion for the period, down 6.8% year over year on a constant-currency basis when excluding Digital Safe (an asset it sold for $63 million) from the comparison. In addition, the company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) as a percentage of revenue narrowed. The important profitability margin metric came in at 35.4%, compared to 36.7% in the prior-year period. The primary cause for that slimmer margin, management explained, was the decline in revenue.

However, free cash flow for the period was up 36.2% year over year to $190 million.

Now what

Management noted that some of its revenue sources have seen consistent growth more recently, but those gains aren’t showing up in a meaningful way yet in the consolidated results. As such, investors are likely hoping the company can eventually reverse its declining revenue trend. But in the meantime, Micro Focus is also focusing on a cost reduction program, which has already helped reduce its base costs by $150 million on an annualized basis (gross of inflation).

Management also notably said in its press release on Wednesday that it is working to mitigate “increased risks” from the macro-economic environment.

Daniel Sparks has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool recommends Micro Focus. The Motley Fool has a disclosure policy.

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