Customer Centred Innovation

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Customer Centred Innovation Micro Focus International plc Annual Report and Accounts 2017 Customer centred innovation Annual Report and Accounts 2017 WorldReginfo - 9dafdbfc-c6b5-404f-afc2-19c9a0aa72f4 Key highlights Revenue ($m) Adjusted Operating Profit ($m) Adjusted EBITDA ($m) $1,380.7m $638.1m $ 651.1m 17 1,380.7 17 638.1 17 651.1 16 1,245.0 16 533.5 16 546.8 15 834.5 15 347.8 15 357.6 14 433.1 14 187.5 14 192.0 13 412.2 13 182.2 13 186.3 Adjusted profit before tax ($m) Profit before tax ($m) Cash generated from continuing $ 541.0m $196.3m operations ($m) $564.8m 17 541.0 17 196.3 17 564.8 16 434.0 16 195.4 16 456.1 15 294.4 15 91.4 15 288.7 14 179.6 14 147.8 14 206.8 13 176.1 13 151.5 13 192.4 Diluted Adjusted earnings Diluted earnings per share (c) Total dividend per share (c) per share (c) 66.51c 88.06c 175.65c 17 175.65 17 66.51 17 88.06 16 146.70 16 71.61 16 66.68 15 129.43 15 56.71 15 48.40 14 97.48 14 82.35 14 44.00 13 84.87 13 75.23 13 40.00 Our four phase plan Phase 1 FY17: Phase 2 FY18: Phase 3 FY19: Phase 4 FY20: Assessment Integration Stabilization Growth Actions: Actions: Actions: Actions: – Deliver plans for FY17 – Standardize systems – Stabilize top line – Top line growth – Detailed review of combined – Rationalize Properties – Improve GTM productivity – Click and repeat! businesses – Rationalize Legal entities – Growth from new areas – Invigorate Product – New Go to Market – Improved profitability Management (“GTM”) model – Standardize systems – Maintain/improve cash – Rationalize Legal entities conversion – Rationalize underperforming elements – New market initiatives WorldReginfo - 9dafdbfc-c6b5-404f-afc2-19c9a0aa72f4 Who we are Overview Micro Focus specializes in managing predominantly mature infrastructure software assets which have been delivering value to significant numbers of customers over long periods of time. A global infrastructure software business focused on report Strategic operational effectiveness and scale, with revenues of $1,380.7m and Underlying Adjusted EBITDA of $640.9m. What we do Our customer centred innovation helps organizations bridge governance Corporate the old and the new, enabling them to leverage additional value from their investments in critical IT infrastructure and business applications. By enabling our customers to link their investments in statements notes and financial Consolidated established technology with the latest innovation, Micro Focus helps organizations gain incremental and sustainable returns on investments they have already made and to preserve and protect their data and business logic. statements notes and financial Company Contents IFC Key highlights 97 Consolidated financial statements and notes IFC Our four phase plan 98 Independent auditors’ report to the members of Micro Focus International plc 02 Strategic report 106 Consolidated financial statements and notes information Additional 03 Executive Chairman’s statement 11 Financial review 165 Company financial statements and notes 20 CEO Review – Micro Focus Product Portfolio 166 Independent auditors’ report to the members 27 CEO Review – SUSE Product Portfolio of Micro Focus International plc 34 Key performance indicators 168 Company financial statements and notes 36 Principal risks and uncertainties 44 Viability statement 178 Additional information 45 Corporate social responsibility 179 Worldwide offices 182 Historical summary 50 Corporate governance 183 Key dates and share management 51 Executive Chairman’s introduction 184 Company information 52 Board of directors 54 Corporate governance report 60 Audit committee report 68 Nomination committee report 70 Directors’ Remuneration report 92 Directors’ report Micro Focus International plc Annual Report and Accounts 2017 01 WorldReginfo - 9dafdbfc-c6b5-404f-afc2-19c9a0aa72f4 Section Number 2 —— Strategic report 03 Executive Chairman’s statement 11 Financial review 20 CEO Review – Micro Focus Product Portfolio 27 CEO Review – SUSE Product Portfolio 34 Key performance indicators 36 Principal risks and uncertainties 44 Viability statement 45 Corporate social responsibility 02 Micro Focus International plc Annual Report and Accounts 2017 WorldReginfo - 9dafdbfc-c6b5-404f-afc2-19c9a0aa72f4 Executive Chairman’s statement The year ended 30 April 2017 was a significant year for the plan laid out five and a half years ago. Micro Focus sets out to deliver Overview Group. On 7 September 2016 the Company and Hewlett consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue Packard Enterprise (“HPE”), announced that they had agreed growth, industry leading margins and strong cash conversion will ensure that that Micro Focus would acquire HPE’s software business Micro Focus can deliver on that strategy. These returns can be further enhanced segment (“HPE Software”) by way of merger (“Merger”) with by the appropriate deployment of capital in value enhancing acquisitions. a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software. This major transaction is on track The Company has a business strategy, a financial strategy, an operating plan and an incentive strategy that all support our objective to achieve 15% to 20% to close at the beginning of September this year with the compound annual return for shareholders. Since IPO in 2005 until 30 April 2017, Strategic report listing of consideration shares on the London Stock Exchange the annual compound shareholder return over 12 years has been 29.3%. (“LSE”) and the simultaneous listing of American Depositary Adjusted diluted earnings per share have grown from 14.23 cents in 2006 to Shares (“ADS”) on the New York Stock Exchange (“NYSE”) 175.65 cents in 2017 and dividends per share have grown from 6 cents to (“Completion”). Micro Focus existing shareholders will also 88.06 cents with respective compound annual growth rates of 25.7% and 27.7% respectively. be entitled to receive a Return of Value which in total will be $500m that will be declared immediately prior to Completion. When we announced the acquisition of TAG on 15 September 2014 we set out the four phase plan on page 4 for the combination of the businesses whilst This will create a global infrastructure software business with pro-forma continuing to deliver sustainable shareholder returns. revenues in the 12 months to 30 April 2017 of approximately $4.4 billion and governance Corporate Underlying Adjusted EBITDA of approximately $1.4 billion making it one of the The only changes to this original plan which are reflected in the table on largest dedicated software companies in the world and a leading technology page 4 are that our detailed review concluded that the integration of systems stock on the LSE. Following Completion we will align our financial year end supporting the new business will extend throughout the four year period to 31 October and will initially report an 18 month financial period ending and the rationalization of legal entities will extend through FY17 and beyond. 31 October 2018. This will enable us to launch the new Company’s financial This has now been superseded by the plan to adopt new systems being year with effect from 1 November 2017. implemented in HPE Software. This software stack will give us one of the most up to date system stacks in the industry and serve as a scale platform During the year ended 30 April 2017 the Micro Focus business traded in line for further Mergers and Acquisition (“M&A”) integration. with the expectations we had set at the beginning of the year. This was statements notes and financial Consolidated achieved during a year of significant change and distraction as we; We have set out a new four phase plan on page 4 for the combination of the Micro Focus and HPE Software businesses whilst continuing to deliver – Completed the acquisition of Serena Software Inc. (“Serena”) together sustainable shareholder returns. with three other smaller acquisitions; The acquisition of HPE Software may delay the return to revenue growth as we – Integrated Serena into the Micro Focus Product Portfolio; consolidate the HPE Software products. As with prior transactions we expect HPE Software’s revenue trend to continue its historical decline until significant – Entered the FTSE 100 on 6 September 2016; change has been implemented. This integration will be delivered by the four year plan that will consolidate and strengthen the combined business, with the – Became the spin/merge partner for HPE Software; goal of delivering modest revenue growth in the medium-term as well as statements notes and financial Company underpinning our margin improvement objectives. – Began to work on the plan for integrating HPE Software; We are building a strong platform with the addition of HPE Software. – Completed required regulatory filings in the UK, USA and elsewhere; Once we achieve our target cash conversion ratio for the Enlarged Group of 90% to 95% we will generate significant free cash flows from which we can – Refinanced the Company’s existing debt; and deliver significant returns of value to our shareholders and/or further highly accretive acquisitions. – Raised new banking facilities to enable the Completion of the HPE Software transaction and the Return of Value. Following our integration review in 2015 we decided that the Group should Additional information Additional operate two product portfolios, Micro Focus and SUSE, and have reported the We have believed for some time that there are significant segments of the business this way since 1 May 2015. infrastructure software market that have matured. The response to this is consolidation. To be successful in this stage of a market both operational Since April 2011, I have held the roles of both Chairman and Chief Executive effectiveness and scale are critical. We believe that Micro Focus is now Officer (“CEO”).
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