The headline for the announcement released on 22/06/22 at 0700 BST under RNS No 7176P was incorrect and should read Interim Results.

The announcement text is unchanged and is reproduced in full below.


22 June 2022

Micro Focus International plc

Interim results for the six months ended 30 April 2022

 

 

Micro Focus International plc ("the Company" or "the Group", LSE: MCRO.L, NYSE: MFGP), the international software product group, announces unaudited interim results for the six months ended 30 April 2022 ("H122").

 

"Delivering on our objectives, improving free cash flow and reducing leverage"

 

Financial highlights

 

·       Revenue of $1.3bn (H121: $1.4bn), representing a year-on-year decline of 6.8% on a constant currency ("CCY") basis¹ excluding Digital Safe and 11.0% on a reported basis (including Digital Safe at actual rates).

·       Several sub-portfolios are now delivering consistent growth not yet visible at a Product Group level, but we anticipate this will deliver overall growth in CyberRes ahead of schedule and AMC as our mainframe modernisation offering continues to ramp.  

·       Encouraging progress in delivering group simplification with our cost base reducing by approximately $150m on an annualised basis gross of inflation.

·       Adjusted EBITDA¹ of $449m (H121: CCY $511m) at a margin of 35.4% (H121: CCY 36.7%), reflecting the reduction in revenue in the period, partially offset by our cost reduction programme.

·       Operating profit of $35m for H122 (H121: loss of $155m) reflecting the above impacts as well as a significant reduction in exceptional spend and the one-off profit on disposal of Digital Safe of $63m. Cash generated from operations also increased to $485m (H1 21: $468m).

·       This improved quality of earnings underpinned free cash flow¹ growth of 36.2% year-on-year to $190m (H121: $140m).

·       Net debt¹ of $3,651m (Oct-21: $4,196m), representing a net leverage ratio of 3.7 times with a 0.3 decrease since 31 October 2021.

·       Interim dividend of 8 cents per share (H121: 8.8 cents), consistent with 5x covered policy.

 

Operational highlights

 

·      Customer attrition rates have stabilised or improved across a number of key portfolios for a further two quarters.

·      Mainframe modernisation offering continues to deliver strong revenue growth and the launch of the AWS' offering in June 2022 as planned provides further opportunity to accelerate this growth. 

·      Completion of Debricked acquisition within CyberRes, a developer-centric open source intelligence company aimed at innovating how organisations secure their software supply chain for today and the future.

·      Sale of Digital Safe for $375m now completed.

·      Continued improvements across all product portfolios with 28 major product launches in the period, including multiple new SaaS offerings.

·      Key milestones achieved in our planned transition to product group operating model, with expectation that we will be able to report individual segments from FY23.

 

Outlook

 

·      No change to expectations for revenue, costs or cash for FY22.

·      We are working to mitigate the increased risks arising from the macro-economic environment.

·      Our strategic priorities for FY23 exit trajectory remain unchanged.

 

	H122	H121	Growth /(Decline)
	Reported	(CCY)
Alternative performance measures from continuing operations1
Micro Focus (excluding Digital Safe)	$1,243.7m	$1,334.7m	(6.8)%
Digital Safe	$25.9m	$56.5m	(54.2)%
Revenue	$1,269.6m	$1,391.2m	(8.7) %
Micro Focus (excluding Digital Safe)	$436.8m	$482.6m	(9.5) %
Digital Safe	$12.3m	$28.1m	(56.2) %
Adjusted EBITDA*	$449.1m	$510.7m	(12.1) %
% Adjusted EBITDA margin*	35.4%	36.7%	(1.3) ppt
	Reported	Reported
Statutory Results
Revenue - continuing operations	$1,269.6m	$1,425.7m	(11.0) %
Operating profit / (loss) - continuing operations	$35.3m	$(154.8)m	122.8 %
Loss for the period	$(24.4)m	$(218.9)m	88.9%

¹ The definition and reconciliations of Adjusted EBITDA, Adjusted EBITDA Margin, Net Debt, Free Cash Flow, Adjusted Free Cash Flow and Constant Currency ("CCY") are in the "Alternative Performance Measures" section of this Interim Statement. The definition of Adjusted EBITDA has been amended as set out in the "Alternative Performance Measures" section of this Interim Statement. This change has consequential impacts on the calculated values for Adjusted EBITDA Margin and Adjusted Cash Conversion. All comparative amounts are stated under the amended definition.

 

 

Stephen Murdoch, Chief Executive Officer, commented:   

 

"In H1 we improved free cash flow, reduced leverage, and made progress against the strategic objectives we outlined in November. I am encouraged by the strides taken to become increasingly customer centric, building growth in key portfolios, and increasing our quality of earnings.

 

We have delivered these results against an increasingly volatile market backdrop with customer demand to date remaining robust, demonstrating the mission critical nature of our solutions."

 

 

Results conference call

A conference call to cover the results for H122 will be held today at 1.30pm UK Time. The call will be accompanied by slides. 

 

A live webcast and recording of the presentation will be available at https://www.microfocus.com/en-us/investors during and after the event. For dial in only, access numbers are as follows: 

 

UK & International:                    +44 (0) 33 0551 0200

UK Toll Free:                             0808 109 0700

US:                                             +1 212 999 6659

USA Toll Free:                            1 866 966 5335

 

Enquiries:

 

Micro Focus	Tel: +44 (0) 1635 565200
Stephen Murdoch, Chief Executive Officer	Investors@microfocus.com
Matt Ashley, Chief Financial Officer
Ben Donnelly, Head of Investor Relations
Brunswick	Tel: +44 (0) 20 7404 5959
Sarah West	MicroFocus@brunswickgroup.com
Jonathan Glass

About Micro Focus

Micro Focus (LSE: MCRO.L, NYSE: MFGP) is an enterprise software Company supporting the technology needs and challenges of customers globally. Our solutions help organisations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Within the Micro Focus Product Portfolio are the following product groups: Application Modernisation & Connectivity, Application Delivery Management, IT Operations Management, Security, and Information Management & Governance. For more information, visit: www.microfocus.com.

 

Forward-looking statements

Certain statements in these interim results are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. The Group undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

 

Operational review 

 

Performance in the period

We have delivered on our objectives for the first half of FY22. In summarising progress in the first half, we are marginally behind our original revenue plans in part due to the suspension of our operations in Russia. This impacted revenue performance by approximately half a point, and we are working to absorb the revenue impact of this. Our cost control and cash performance in the half has been strong.

 

The Group reported revenues of $1,270m (H121: $1,391m CCY, $1,426m reported). This is a decline of 6.8% for the on-going group (i.e. excluding Digital Safe) on a CCY basis. Our revenues in Russia in FY21 were $39m and we anticipated a similar level of performance in FY22. We are working to mitigate the associated EBITDA impact through tight cost management. To date, we have seen limited tangible impact from the threat of a more challenging macro-environment. Typically, such environments tend to delay rather than stop digital transformation agendas as customer project spend gets increased scrutiny and approval cycles extend. Execution becomes key in ensuring projects leveraging our software remain a priority for our customers. As a Company, we deliver proven products to a wide distribution of customers, sectors, and geographies.  Our value proposition resonates with our customers who rely on us to maximise ROI on existing investments and bridge their existing technology investments to the emerging themes.

 

 

	H122						CCY % change to H121
	Licence	Maintenance	SaaS	Consulting	Total		Licence	Maintenance	SaaS	Consulting	Total
	$m	$m	$m	$m	$m		%	%	%	%	%
Product portfolio (excl. Digital Safe):
AMC	53.1	152.9	-	5.7	211.7		(11.1) %	(1.1) %	-	14.0 %	(3.5) %
ADM	42.0	188.5	40.5	7.7	278.7		(13.4) %	(7.9) %	13.1 %	(12.5) %	(6.4) %
ITOM	63.6	195.9	2.3	48.4	310.2		(16.9) %	(8.5) %	15.0 %	(6.4) %	(9.9) %
CyberRes	67.1	168.7	20.5	13.8	270.1		1.1 %	(5.8) %	10.8 %	(3.5) %	(2.9) %
IM&G	43.4	119.9	4.5	5.2	173.0		5.3 %	(14.0) %	(26.2) %	(38.8) %	(11.4) %
Micro Focus (excl. Digital Safe)	269.2	825.9	67.8	80.8	1,243.7		(7.9) %	(7.4) %	8.7 %	(8.5) %	(6.8) %
Digital safe	-	-	25.9	-	25.9		-	-	(54.2) %	-	(54.2) %
Total Revenue	269.2	825.9	93.7	80.8	1,269.6		(7.9) %	(7.4) %	(21.2) %	(8.5) %	(8.7) %

 

Licence revenue declined by 7.9%, against what was strong growth in the previous period. Whilst we are in line with our expectations overall, our performance in Licence revenue is disappointing. This decline is because we are still witnessing more volatility within individual periods than we would like. Our growth portfolios are not yet at a scale to fully offset the volatility of our more mature portfolios in which new Licence deals are by nature often large and more cyclical. We have made progress in correcting this, but our work is not yet complete.  Our overall goal is to deliver consistent and sustainable growth in Licence revenue. We have delivered growth in new Licence revenue in CyberRes overall and Big Data for multiple reporting periods and within AMC our Mainframe Modernisation solutions continue to grow strongly even before the contribution from strategic initiatives with AWS. Further improvements are required here, as well as broader based improvements across the target areas within the other portfolios as we seek to reduce volatility. The changes we are making in moving to a Product Portfolio based approach are key to this and are on track but not completed.

 

Maintenance revenue declined by 7.4%, this represents a 2ppt improvement from the exit run rate in H221. This improvement was driven by a combination of the prior year growth in Licence revenue, demonstrating the importance of our Licence objectives; an improvement in the overall renewal rates and a further moderation due to the change in portfolio mix. The actions taken in FY21 are beginning to impact maintenance trends which remains a core objective of the business.

 

SaaS revenue increased by 8.7%, when compared to the first half of FY21. This performance represents the third period of sequential improvement which has been underpinned by the improvements made to our SaaS offerings. We now are in position where SaaS revenues will continue to deliver growth and over the medium term we expect this to accelerate to double digit growth. 

 

Consulting revenue declined by 8.5% and broadly trends in line with new Licence revenue. At a portfolio level, the growth is focused on delivering customer projects to support future software revenue pipeline as demonstrated by the growth in mainframe modernisation projects (within AMC).                               

 

The Group generated Adjusted EBITDA of $449m at a margin of 35.4% (CCY H121: $511m Adjusted EBITDA at 36.7% margin). The Adjusted EBITDA margin reflects the reduction in revenue partially offset by our cost reduction programmes which are phasing ahead of our expectations combined with an element of workforce attrition.

 

The significant change in workforce behaviours as we begin to emerge from Covid-19 has resulted in elevated employee attrition, wage inflation and a more challenging recruitment environment across the technology sector. As a Company, we have taken several important actions to address this including taking comprehensive actions to address remuneration in key roles and geographies and where possible, we have used attrition to deliver our cost saving programme by redeploying staff and reducing the level of exceptional spend required to restructure the Group.

 

Statutory loss before taxation for the period was $43m (H121: loss $280m) driven by a significant reduction in exceptional spend year-on-year, in addition to profit on disposal of Digital Safe of $63.0m in current period.

 

The Group continues to generate significant operating cash flows, with cash generated from operating activities of $485m for H122 (H121: $468m), giving Adjusted Cash Conversion¹ of 113.3% (H121: 120.9%). This improvement has driven free cash flow to increase by 36.2% year-on-year to $190m.

 

Following the disposal of Digital Safe, the Group has reduced both leverage and gross debt since the year end position. As a result, leverage reduced by 0.3x to 3.7x and net debt reduced from $4.2bn at 31 October 2021 to $3.7bn at 30 April 2022. It remains our intention to reduce leverage to approximately 3.0x over the medium term.

 

Further narrative in respect of the financial performance can be found in the Financial Review section of this report.

 

Our portfolio

We take a differentiated approach to innovation at Micro Focus in support of our customers' digital transformation programmes. We focus on helping customers deliver the right balance of cost, risk and speed as they deal with the often-competing challenges of running the business effectively and securely whilst simultaneously driving the change needed to capture new opportunities or deal with new threats.  

 

This means delivering innovation that enables customers to bridge existing investments and capabilities with new use cases and business models.

 

In FY22, we delivered our innovation agenda at pace across our portfolio, with examples such as:

 

- Application Modernisation and Connectivity: AWS launched its Mainframe Modernisation offering in June and together we are already enabling customers to accelerate the modernisation of mainframe applications and workloads to the AWS Cloud.

 

- Application Delivery Management: we released our ValueEdge platform, a modular, cloud-based solution that integrates with our customers' existing toolchains to improve productivity and remove friction with smart automation.

 

- CyberRes: Our continued investment in our portfolio included the acquisition of Debricked which meant our application security testing solution was recognised as a Magic Quadrant leader for the 9^th consecutive year.

 

- IT Operations & Management: the release of Operations Bridge - SaaS, combines the company's proven Full-Stack AIOps platform with the agility of software-as-a-service. This new offering enables IT organisations to gain complete observability, resolve problems faster, drive efficiencies with automation, and transform their data into actionable insights.

 

- Information, Management & Governance: Our Big Data platform launched its Subscription based solution Vertica Accelerator in Q4 2021 and continues to grow subscription bookings.           

 

Micro Focus' social purpose

 

Our purpose is to deliver mission critical enterprise software that powers the digital economy. In delivering our purpose we aim to make sustainable and responsible business part of the way we operate, supporting the local communities we are part of and reducing our own environmental footprint. 

 

We continue to make encouraging progress including the formation of our Environmental, Social and Governance Committee, which we have established to ensure we embed ESG into the core of our operations. In the coming period, we will publish our first sustainability report which outlines our achievements in FY21 and our key areas of focus for the coming periods. I look forward to sharing more about the work of the committee as part of our FY22 Annual Report and Accounts. 

Delivering our objectives

The Group entered the financial period with three clear strategic objectives.

 

Firstly, to transition our business to be product group centric end-to-end such that our competitive positioning and depth of capability are more sharply defined and focused consistently on the right market opportunities. This transition is well advanced in CyberRes and Big Data and we have made encouraging progress in H122 as we begin to extend this across the remaining product portfolios. Core to this is increased levels of specialism in all customer facing roles. Our goal is to accelerate this transition and begin to report more detail by product portfolio to increase visibility of underlying performance from FY23.

 

Secondly, delivering the innovation our customers need packaged such that they can consume it effectively. This centres around improving customer retention rates and ensuring we have the right consumption model (Licence, SaaS or Subscription) for our customers evolving needs. In the period, we have delivered new innovation in each portfolio, improved product roadmaps and enhanced customer communication of these roadmaps. Within this we have released new SaaS capabilities and are helping some of the world's largest companies with their SaaS transformation strategies. These efforts are key to the acceleration of SaaS revenue growth and moderation in the rate of maintenance revenue decline.

 

Finally, capturing the cost efficiencies enabled by the enterprise-wide platform. We are on track to deliver our cost saving targets for FY22 and currently planning the key actions to deliver for FY23.

 

Outlook

Looking forward, based on our year-to-date performance our expectations for revenue, costs and cash for FY22 remain unchanged. We are working to mitigate the increased risks arising from the macro-economic environment wherever possible, and our strategic priorities for FY23 exit trajectory remain unchanged.

 

Stephen Murdoch

Chief Executive Officer

21 June 2022

 

Financial Review

The financial review provides a summary of Micro Focus' results on a statutory basis combined with several Alternative Performance measures ("APMs") which the Board believes are used widely by certain investors to understand the financial performance of business. Further detail on APMs can be found later in this document.

 

	H122	H121
	As reported	CCY	CCY Change
Alternative performance measures:	$m	$m	%
Micro Focus (excluding Digital Safe)	$1,243.7m	$1,334.7m	(6.8) %
Digital Safe	$25.9m	$56.5m	(54.2) %
Revenue	$1,269.6m	$1,391.2m	(8.7) %
Micro Focus (excluding Digital Safe)	$436.8m	$482.6m	(9.5) %
Digital Safe	$12.3m	$28.1m	(56.2) %
Adjusted EBITDA*	$449.1m	$510.7m	(12.1) %
% Adjusted EBITDA* margin	35.4%	36.7%	(1.3) ppt
	H122	H121
	As reported	As reported	Change
Statutory performance measures:	$m	$m	%
Revenue	1,269.6	1,425.7	(11.0) %
Operating profit/(loss)	35.3	(154.8)	122.8%
Operating profit prior to depreciation, amortisation and exceptional items	448.4	516.6	(13.2) %
Loss for the period	(24.4)	(218.9)	88.9%

 

 

Revenue

 

The Group generated revenue of $1,270m in H122 which represents a decline of 11.0% on the results for H121. This decline includes a reduction in revenue following the disposal of Digital Safe and the impact of foreign exchange movements. Excluding these items, the Group's revenues decline by 6.8%.

 

Included within the 6.8% decline is a marginal headwind due to the impact of sanctions imposed following the Russia and Ukraine conflict. During the second quarter, the Group suspended operations in Russia, reducing revenues in H1 by $5.8m (0.3%). In FY21, Russia revenue was approximately $40m, we do not expect to earn any revenue in Russia in the near future.

 

The Group has set out the goal of flat or better revenue as we exit FY23. This stability comes primarily from two key drivers.

 

1.     The capturing of opportunities within growing markets. Over time this is expected to deliver a mix effect to stabilise and ultimately grow Group revenue. In H122, we have continued to make progress with several sub-portfolios now delivering consistent growth over consecutive quarters. This performance is not yet visible at a Product Group level, but we anticipate this will deliver overall growth in CyberRes ahead of schedule and AMC as our mainframe modernisation offering continues to ramp.   

2.     The moderation of maintenance decline through improvements in customer retention.

The work we have done here has driven stabilisation in retention rates and improvements in several portfolios. This in turn has driven a 2ppt improvement in maintenance performance when compared to the exit run rate in H2 21.

 

Revenue performance by Product Group and stream has been discussed in further detail within the CEO statement in this document.

 

Operating costs included in Adjusted EBITDA ("Operating costs")

 

	Operating costs (excluding Digital Safe)			Operating costs (including Digital Safe)
	H122 (Actual) $m	H121 (CCY) $m	Year-on-year change %	H122 (Actual) $m	H121 (CCY) $m	Year-on-year change %
Cost of sales	215.0	211.8	1.5%	220.2	223.4	(1.4)%
Selling and distribution	288.6	316.7	(8.9)%	289.3	318.4	(9.1)%
Research and development	215.9	236.2	(8.6)%	219.6	244.2	(10.1)%
Administrative	96.4	87.4	10.3%	100.4	94.5	6.1%
Other operating income	(9.0)	-	n/a	(9.0)	-	n/a
Operating costs	806.9	852.1	(5.3)%	820.5	880.5	(6.8)%

 

 

On 30 November 2021, the Group announced the intention to remove $400-500m of gross annual recurring cost to achieve a reduction from the FY21 exit cost base.

 

Operating costs declined by 6.8% to $821m in H122 (H121: $881m) on a CCY basis. This decline reflects a reduction of 5.3% of operating costs excluding Digital Safe combined with a further 1.5% in relation to the disposal.

 

Excluding the disposal, the reduction in Operating costs reflects the in-year impact of cost actions and offsetting inflationary increases to the cost base. In H122, the cost programmes have delivered annualised cost savings of approximately $150m of the planned $400m-$500m. This has been partially offset by planned inflationary increases primarily in respect of payroll costs totalling $41m. Like most technology companies, wage inflation and staff attrition have run at elevated levels in H122. Where possible, the Group has sought to use attrition to deliver the cost saving programme by redeploying staff and reducing the level of exceptional spend required to restructure the group (see below).

 

The Group has reduced costs across all cost categories except for administrative expenses. The cost reduction programmes to date are primarily focused on support roles as we seek to maintain sales capacity and software development. The increase in administrative expenses reflects a year-on-year increase in the staff bonus scheme to support retention efforts combined with some incremental investment in our IT platform. In prior periods, such IT costs would have been treated as exceptional however following the completion of integration activities last year these costs are now considered operating costs and are being absorbed by the business as previously guided.

 

The progress made in H1 gives clear line of sight to the cost savings required for FY22.  The Group has identified approximately half of the required cost savings for FY23 and is currently working through the planning process to identify the balance. Currently, we are within the parameters of our original inflation assumptions but remain vigilant of the challenges ahead given the wider macro-economic environment.

 

Adjusted EBITDA

 

The Group generated an Adjusted EBITDA* of $449m, at margin of 35.4% in H122 (H121: $511m, 36.7% on a CCY basis). This adjusted EBITDA included $12m in respect of the 3 months trading of Digital Safe (H121: 6 months trading $28m).

 

Operating profit to Adjusted EBITDA

 

The Operating profit for H122 was $35m, compared to an Operating loss of $155m in H121. This figure includes depreciation, amortisation and exceptional items totalling $413m (H121: $671m).

 

The Group generated an operating profit prior to depreciation, amortisation and exceptional items of $448m in H122 (H121: $517m). This decline reflecting the reduction in revenue largely offset by an overall reduction in operating costs and exceptional items (as outlined below).

 

A reconciliation between Operating loss and Adjusted EBITDA is shown below:

	H122 As reported	H121 As reported	Change
	$m	$m	%
Operating profit/(loss)	35.3	(154.8)	122.8%
Exceptional items (reported in Operating loss)	(41.8)	143.0	(129.2)%
Amortisation of intangible assets	412.9	472.2	(12.6)%
Depreciation of property, plant and equipment and right of use assets	42.0	56.2	(25.3)%
Operating profit prior to depreciation, amortisation and exceptional items	448.4	516.6	(13.2)%
Share-based compensation charge	12.4	8.5	45.9%
Foreign exchange (gain)/loss	(11.7)	5.1	(329.4%)
Adjusted EBITDA* at reported rates	449.1	530.2	(15.3)%
CCY impact	-	(19.5)	n/a
Adjusted EBITDA* at CCY	449.1	510.7	(12.1)%

 

Exceptional items (included within Operating profit / (Loss)) 

 

	H122 As reported  $m	H121 As reported  $m
FY22 / FY23 Cost programme	20.9	-
Profit on disposal of Digital Safe	(63.0)	-
MF/HPE Software business integration-related costs	-	44.5
Legal settlement and associated costs	-	74.6
Other restructuring property costs, severance and legal, acquisition and divestiture costs	0.3	23.9
Total exceptional costs (reported in Operating profit / (loss))	(41.8)	143.0

 

In H122, the Group generated an exceptional credit of $42m compared to an exceptional charge of $143m in H121. The current year exceptional credit reflects a profit on disposal of Digital Safe of $63m partially offset by the costs associated with delivering the FY22 / FY23 cost reduction programme. As a Board, we are committed to reducing the level of exceptional spend incurred by the Group and in the period and following the completion of integration related activity and the IT programme we absorbed such costs within operating costs as outlined above.

The aim here is to improve the quality of earnings and ultimately the cash generation of the business in line with our overall targets. 

 

The Group originally anticipated a total cash cost of delivering these savings of $200m split evenly between FY22 and FY23. In H122, the Group has incurred $21m in respect of this programme and have successfully delivered approximately $150m of annualised savings.

 

The value of annualised cost savings for the programme is slightly ahead of our original expectation, however due to effective management of attrition and redeployment of resources, the total cost of the programme is now expected to be c. $50m in FY22 and $100m in FY23.

 

In H121, exceptional spend predominately related to the remaining HPE integration, the migration to the single IT platform and the settlement of the WAPP legal claim.

 

Further information on exceptional costs can be found in note 7 to the Condensed Consolidated Interim Financial Statements.

 

Net finance costs

 

Net finance costs were $78.2m in H122, compared to $125.2m in H121. Finance income includes $58.6m (H121 nil) of foreign exchange gains following the successful refinancing of $1.6bn of Group debt in January 2022 which ended the net investment hedge on some of our Euro debt. The impact of the Group's cash interest costs is discussed below.

 

Taxation

 

The following table presents both actual and adjusted profit/(losses) before and after taxation:

	H1 22			H1 21
	Reported $m	Adjusting items $m	Adjusted measures* $m	Reported $m	Adjusting items $m	Adjusted measures* $m
(Loss)/profit before tax	(42.9)	287.3	244.4	(280.0)	601.9	321.9
Taxation	15.0	(71.9)	(56.9)	61.1	(156.9)	(95.8)
(Loss)/profit after tax	(27.9)	215.4	187.5	(218.9)	445.0	226.1
Effective tax rate	35.0%		23.3%	21.8%		29.8%

 

The interim tax charge is affected by the timing of certain discrete items such as adjustments to tax in respect of previous periods which may result in an interim rate higher or lower than the full year aETR. 

 

Exceptional tax charges include $19.4m in respect of the disposal of the Digital Safe business.

 

Last year, the Group made a payment of approximately $45m to HMRC in respect of the State aid case which is currently being challenged by the UK government and taxpayer. We have recognised a receivable on the balance sheet in respect of this payment. 

 

On 8 June 2022, the General Court of the Europe Union found against the UK Government/taxpayer. This was a disappointing but not unexpected outcome. We have studied the judgment and, after consulting our advisers, remain of the view that the more likely final outcome is that the UK Government/taxpayer will appeal and will win on appeal.  We have therefore concluded that we should continue to recognise the receivable in full.  We will continue to monitor the progress of the case.

 

Earnings per share

 

The Group's earnings per share ("EPS") on a basic, diluted and adjusted basis are as follows:

	H122	H121	Growth /(Decline)
	cents	cents	%
Total EPS attributable to the ordinary equity shareholders of the Company
Basic EPS	(7.46)	(65.09)	88.5 %
Diluted EPS	(7.46)	(65.09)	88.5 %
Basic Adjusted EPS*	57.34	67.23	(14.7) %
Diluted Adjusted EPS*	57.34	67.23	(14.7) %

 

Full details are set out in the "Alternative performance measures" section of these Condensed Consolidated Interim Financial Statements.

 

Cash Generation

The cash flow for the Group for H122 was:

 

	H122	H121
	$m	$m
Adjusted EBITDA*	449.1	530.2
Exceptional items (excluding gain on disposal)	(21.2)	(143.0)
Other non-cash items	0.8	2.1
Movement in working capital	55.9	78.8
Interest payments and bank loan costs	(129.0)	(111.3)
Tax payments	(77.6)	(128.9)
Purchase of intangible assets, PPE and lease related capital payments	(88.0)	(88.4)
Free cash flow	190.0	139.5
Cash cost of exceptional items	36.8	107.4
Adjusted Free cash flow	226.8	246.9
Adjusted Cash conversion ratio*	113.3%	120.9%

 

The Group generated a free cash flow of $190.0m (H121: $140m). This increase was driven by a significant reduction in both operating and exceptional spend year-on-year as outlined above and a reduction in the taxation payments due primarily to the outflow in relation to the EU state aid payment in H121, which we still expect to recoup in the future once the case is resolved. In addition, the Group's Free cash flow was reduced due to the impact of Digital Safe disposal. Digital Safe's Adjusted EBITDA less finance lease payments totalled $6m (H1 21: $17m).

 

The Group had a working capital inflow of $56m in H122 (H121: inflow $79m). The H121 inflow included the provision movement in respect to the WAPP legal provision of $75m, which was recorded but not paid in the first half of FY21. Normalising for this figure, the group improved working capital year-on-year by $52m.

 

The Group generated Adjusted free cash flow in the period of $227m (H121: $247m).

 

Net Debt

The Group's net debt has decreased from $4.2bn at 31 October 2021 to $3.7bn at 30 April 2022. The reduction in net debt in the period is summarised in the table below:

 

		30 April 2022
		$m
Net debt at 1 November		(4,195.9)
Free cash flow		190.0
Leases included within Free cash flow		35.8
New leases		(20.0)
Net proceeds from the disposal of Digital Safe		363.5
Leases transferred on disposal of Digital Safe		11.4
Lease receivable to be reimbursed by the Digital Safe business		17.2
Net cash for acquisition of DeBricked		(28.4)
Purchase of EBT shares		(67.2)
Dividends paid		(65.2)
FX movement and other		108.3
Net Debt at 30 April		(3,650.5)

 

Leverage

 

Following the disposal of Digital Safe, the Group has successfully reduced leverage and gross debt since the 31 October 2021 balance sheet date:

 

	30 April 2022  $m	31 October 2021 $m
Borrowings	(4,067.0)	(4,548.4)
Cash and cash equivalents	578.7	558.4
Lease obligations	(179.4)	(205.9)
Lease receivable to be reimbursed by the Digital Safe business1	17.2	-
Net debt	(3,650.5)	(4,195.9)
Net Debt / Adjusted EBITDA* ratio	3.7 times	4.0 times

¹ Lease receivable to be reimbursed by the Digital Safe business reflects lease obligations which are retained on the Group's balance sheet but are reimbursed as they are incurred by the Digital Safe business.

 

On 17 January 2022, the Group announced the refinancing of $1.6bn of existing term loans. This refinancing comprised a €750m and a $750m Senior Secured Term Loan B. The new 5-year Facilities were used by the Group to fully refinance its existing Senior Secured Term Loan B Euro facility due June 2024 as well as partially refinance the existing Senior Secured Term Loan B USD facilities also due in June 2024.

 

The new 5-year facilities incur interest at 4.00% above EURIBOR (subject to 0% floor) at an original issue discount of 0.5% on the Euro denominated tranche, and 4.00% above SOFR and CSA (subject to 0.5% floor) at an original issue discount of 1.0% on the US Dollar denominated tranche.

 

The Group continues to manage its exposure to movements in interest rates. The Group holds interest rate swaps to hedge against the cash flow risk in the LIBOR rate charged on $2,250.0m of the debt which expires on 30 September 2022. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.95% and receives one-month USD LIBOR. In addition, the Group has transacted interest rate swaps to hedge the cash flow risk on one-month Term SOFR related to its newly issued $750m debt. The SOFR swaps have an effective date of 21 September 2022 and a maturity date of 28 February 2027 fixing SOFR at 1.656%. The Group continually reviews the currency mix of its borrowings and the projected forward curves associated with the benchmark rates of its debt to assess market risk.

 

In addition to the term loans and cash reserves, the Group has access to a $250.0m revolving credit facility, currently undrawn.

 

Consolidated statement of financial position

 

The Group's Consolidated statement of financial position is presented later in this document. A summarised version is presented below.

 

	30 April 2022 $m	31 October 2021 $m
Non-current assets	7,890.0	8,439.5
Current assets	1,290.7	1,907.1
Total assets	9,180.7	10,346.6
Current liabilities	1,517.0	1,860.9
Non-current liabilities	5,011.4	5,664.7
Total liabilities	6,528.4	7,525.6
Net assets	2,652.3	2,821.0
Total equity	2,652.3	2,821.0

 

 

The net assets of the Group decreased by $169m from $2,821m at 31 October 2021 to $2,652m at 30 April 2022.

 

In the period, the key movements were as follows:

 

·       Non-current assets decreased by $550m to $7,890m primarily due to a $444m decrease in other intangible assets (including primarily $413m of amortisation and $99m of exchange rate changes offset by $48m of additions and $23m in relation to the Debricked acquisition), a decrease in goodwill of $98m primarily resulting from exchange rate changes and a decrease of $34m in plant, property and equipment.

 

·       Current assets decreased by $616m to $1,291m primarily due to a $239m decrease in trade and other receivables and a $370m reduction in current assets held for sale following completion of the disposal of the Digital Safe business.

 

·       Current liabilities decreased by $344m to $1,517m primarily due to a decrease in contract liabilities of $81m, a decrease in trade and other payables of $115m, a decrease in Financial liabilities and a $68m reduction in current liabilities held for sale following completion of the disposal of the Digital Safe business.

 

·       Non-current liabilities decreased by $653m to $5,011m, primarily due to a $485m decrease of Financial liabilities resulting from repayment of borrowings of $364m using the Digital Safe proceeds and a further $126m reduction in borrowings due to foreign exchange movements, a decrease of $62m in retirement benefit obligations and a decrease of $77m in deferred tax liabilities primarily resulting from the impact of amortisation of the Group's intangible assets.

 

·       Total equity decreased by $169m from $2,821m to $2,652m in the six months ended 30 April 2022.This was primarily driven by the loss in the period of $24m, purchase of treasury shares of $67m, dividends paid of $65m and other comprehensive income movements of $27m.

 

Currency impact

The below table presents the key currencies impacting the Group's trading performance. In addition to this, following the re-financing in Q1, the Group holds 33.6% of the group's term loans in Euros. This change has meant the Group is more naturally hedged with operating cash flows and funding mix.

 

	Revenue		Costs
	H122	H121	H122	H121
US Dollar	58.0%	57.3%	41.3%	45.1%
Euros	20.6%	21.3%	12.3%	13.3%
GBP	4.8%	4.5%	15.0%	12.7%
CAD	2.9%	3.2%	2.4%	2.1%
Other	13.7%	13.7%	29.0%	26.8%
Total	100%	100%	100%	100%

 

The currency movement for the US Dollar against Euro, GBP, AUD, INR and JPY was a strengthening of 7.0%, 2.6%, 4.7%, 2.0%, and 9.4% respectively, whilst CAD remained flat when looking at the average exchange rates in H122 compared to those in H121.

 

In order to provide CCY comparatives, the Group has restated the revenue and Adjusted EBITDA for H121 at the same average exchange rates as those used in the reported results for H122. In the six months ended 30 April 2021, the currency impact has decreased the H121 comparable revenue and costs by 2.3% and 1.7% respectively. The net impact for the Group results using CCY was a decrease of the H121 comparable revenue of $34.5m and a decrease of $19.5m in Adjusted EBITDA.

 

Following the refinancing of the Group's debt in February, the amount held in Euros increased by approximately €750m. This increase meant that the currency mix of the Group's debt is closer aligned to the Group's operating cash flows. As a result, the movement in the euro has resulted in a reduction in the Group's debt of approximately $125m in the period, which more than offsets the reduction in Adjusted EBITDA because of currency movements.

 

Dividend

The board proposes an interim dividend of 8 cents. The dividend will be paid on 5 August 2022 to shareholders on the register as at 22 July 2022. The dividend will be paid in pounds sterling and the sterling amount payable per share will be fixed and announced approximately two weeks prior to the payment date, based on the average spot exchange rate over the five business days preceding the announcement date.

Revenue	No change to expectations, working to mitigate impact of Russia.
Costs included within Adj. EBITDA	Expect annualised cost savings of approximately $200m by end of FY22.
Exceptional spend	Now expected to be approximately $50m in FY22 (previously $100m).
Capital expenditure and leases	Approximately $200m per annum.
Taxation	Cash tax of approximately $130m.
Interest	Estimated cash interest including fees associated with refinancing of c.$230m based on current rates.

 

Principal Risks and Uncertainties

In common with all businesses, the Group could be affected by risks and uncertainties that may have a material adverse effect on its business operations and achieving its strategic objectives including its business model, future performance, solvency, liquidity and/or reputation. This includes any new, emerging or continuing direct or indirect risks posed by COVID-19. These risks could cause actual results to differ materially from forecasts or historic results. Accepting that risk is an inherent part of doing business, the Board is mindful of the interdependencies of some risks. The Group remains prepared to implement appropriate new mitigation strategies, and adapt those already in place, to minimise any potential business disruption and will continue to carry out regular and robust assessments and management of the Group's risks. Where possible, the Group seeks to mitigate risks through its Risk Management Framework, internal controls and insurance, but this can only provide reasonable assurance and not absolute assurance against material losses. In particular, insurance policies may not fully cover all of the consequences of any event, including damage to persons or property, business interruptions, failure of counterparties to conform to the terms of an agreement or other liabilities.

 

As noted in the Operational review, the threat of more challenging macro-economic conditions and its effect on customer buying behaviour continues to be closely monitored by the Group. Additionally, the significant change in workforce behaviours as the Group emerges from Covid-19 has resulted in elevated employee attrition, wage inflation and a more challenging recruitment environment across the technology sector. The Group has taken several important actions to address this including taking comprehensive actions to address renumeration in key roles and geographies and where possible, attrition has been used to deliver our cost saving programme by redeploying staff and reducing the level of exceptional spend required to restructure the group.

 

The underlying principal risks and uncertainties facing the Group have not materially changed, from those set out in the Annual Report and Accounts for the 12 months ended 31 October 2021 (the "2021 Annual Report") (pages 61 to 73). The principal risks and uncertainties are set out on pages 61-73 of the 2021 Annual Report under the headings below. They do not comprise all of the risks associated with the Group and are not set out in priority order. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the Group:

 

·              Products;

·              Sales/Go-to-Market models;

·              Competition;

·              Employees and culture;

·              Cyber security;

·              IT systems and information;

·              Business strategy and change management;

·              Legal and regulatory compliance;

·              Intellectual property;

·              Treasury;

·              Tax;

·              Macro-economic environment, political unrest and pandemics;

·              COVID-19; and

·              Internal Controls over Financial Reporting.

 

 

 

These risks could cause future results to differ materially from historic results. The Group still considers these to be the most relevant risks and uncertainties to the business.

 

Matt Ashley

Chief Financial Officer

21 June 2022

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors confirm that, to the best of their knowledge:

 

·      This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK;

 

·      the interim management report includes a fair review of the information required by:

 

a)    DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

 

b)    DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

The current executive directors of the Company are Stephen Murdoch and Matt Ashley.

 

The current non-executive directors of the Company are Greg Lock, Richard Atkins, Amanda Brown, Pauline Campbell, Lawton Fitt and Robert Youngjohns. All of the non-executive directors are independent with the exception of Greg Lock, the Chairman who was considered independent on appointment.

 

Biographies for each director are included on the Company's website: www.microfocus.com.

 

By order of the board,

 

 

Stephen Murdoch	Matt Ashley
Chief Executive Officer	Chief Financial Officer

21 June 2022

 

Alternative performance measures

 

The Group uses certain measures to assess the financial performance of its business. These measures are termed "Alternative Performance Measures" because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS or are calculated using financial measures that are not calculated in accordance with IFRS.

The Group uses such measures to measure operating performance and liquidity in presentations to the Board and as a basis for strategic planning and forecasting, as well as monitoring certain aspects of its operating cash flow and liquidity. The Group believes that these and similar measures are used widely by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity.

The Alternative Performance Measures may not be comparable to other similarly titled measures used by other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Group's operating results as reported under IFRS.

An explanation of the relevance of each of the Alternative Performance Measures, a reconciliation of the Alternative Performance Measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below. The Group does not regard these Alternative Performance Measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS.

As announced on 30 November 2021 the Group has changed the definition of Adjusted EBITDA to exclude capitalised development costs. This change aligns the definition to the definition included in our loan agreements. This change also impacts the calculation of the Adjusted cash conversion ratio and Adjusted EBITDA margin.

In addition, the Group has amended the definition of Adjusted Profit before tax, Adjusted profit after tax, Adjusted Effective tax rate and Adjusted EPS to exclude foreign exchange gains/losses in order to exclude foreign exchange volatility when evaluating the underlying performance of the business and to align the treatment with Adjusted EBITDA. All amended measures are presented on the new basis throughout the document and are indicated by *.

 

A reconciliation to the Alternative Performance Measures prepared on the previous basis is given in the table below:

 

	Six months ended 30 April 2022	Six months ended 30 April 2021
Adjusted EBITDA (FY21 reported basis)	409.8	519.0
Add back: capitalised development	39.3	11.2
Adjusted EBITDA* (FY22 definition)	449.1	530.2
Adjusted EBITDA margin (FY21 reported basis)	32.3%	36.4%
Adjusted EBITDA* margin (FY22 definition)	35.4%	37.2%
Cash conversion ratio (FY21 reported basis)	124.7%	124.5%
Cash generated from Operations (unchanged)	484.6	468.1
Adjusted EBITDA* (FY22 definition)	449.1	530.2
Less: exceptional items (reported in Operating loss)	(21.2)	(143.0)
Adjusted EBITDA less exceptional items (FY22 definition)	427.9	387.2
Adjusted cash conversion ratio* (FY22 definition)	113.3%	120.9%
Adjusted Profit before Tax (FY21 reported basis) Adjusted Profit before Tax* (FY22 definition)	314.7 244.4	316.8 321.9
Adjusted Profit after Tax (FY21 reported basis) Adjusted Profit after Tax* (FY22 definition)	255.6 187.5	222.5 226.1
Adjusted Effective Tax Rate (FY21 reported basis)	18.8%	29.8%
Adjusted Effective Tax Rate* (FY22 definition)	23.3%	29.8%
Adjusted Earnings per share (FY21 reported basis) Adjusted Earnings per share* (FY22 definition)	78.17 57.34	66.15 67.23

 

The Group has reported unaudited results for the six months ended 30 April 2022 with a comparative unaudited period of the six months ended 30 April 2021.

 

Alternative performance measures continued

 

1.              EBITDA and Adjusted EBITDA

 

The Group presents EBITDA because it is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA is defined as net earnings before finance costs, finance income, taxation, depreciation of property, plant and equipment, right-of-use asset depreciation and amortisation of intangible assets. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortisation expense).

Adjusted EBITDA is the primary measure used internally to measure performance and to incentivise and reward employees. The Group defines Adjusted EBITDA as comprising of EBITDA (as defined above), adding back exceptional items including the profit on disposal of discontinued operations, share-based compensation and foreign exchange (gains)/losses.

Adjusted EBITDA margin refers to the measure defined above as a percentage of actual revenue recorded in accordance with IFRS for the year.

Adjusted EBITDA is a key profit measure used by the board to assess the underlying financial performance of the Group. Adjusted EBITDA is stated before the following items for the following reasons:

·      Exceptional items (note 7), including the profit on disposal of discontinued operation, are excluded by virtue of their size, nature or incidence, in order to show the underlying business performance of the Group.

·      Share-based payment charges are excluded from the calculation of Adjusted EBITDA because these represent a non-cash accounting charge for transactions that could otherwise have been settled in cash or not be limited to employee compensation. These charges also represent long-term incentives designed for long-term employee retention, rather than reflecting the short-term underlying operations of the Group's business. The directors acknowledge that there is an on-going debate on the add-back of share-based payment charges but believe that as they are not included in the analysis of segment performance used by the Chief Operating Decision Maker and their add-back is consistent with metrics used by a number of other companies in the technology sector, that this treatment remains appropriate.

·      Foreign exchange movements are excluded from Adjusted EBITDA in order to exclude foreign exchange volatility when evaluating the underlying performance of the business.

The following table is a reconciliation from statutory results for the period to EBITDA and Adjusted EBITDA:

	Six months ended 30 April 2022
	Statutory $m	Intangibles amortisation $m	Depreciation1 $m	Revenue to EBITDA $m	Exceptional costs $m	Share-based payments $m	FX gain $m	Revenue to Adjusted EBITDA* $m
Revenue	1,269.6	-	-	1,269.6	-	-	-	1,269.6
Cost of sales	(364.6)	131.8	11.1	(221.7)	1.5	-	-	(220.2)
Gross profit	905.0	131.8	11.1	1,047.9	1.5	-	-	1,049.4
Selling & Distribution	(561.3)	265.5	5.5	(290.3)	1.0	-	-	(289.3)
Research &     Development	(231.1)	0.5	10.5	(220.1)	0.5	-	-	(219.6)
Administrative expenses	(86.3)	15.1	14.9	(56.3)	(44.8)	12.4	(11.7)	(100.4)
Other Operating Income	9.0	-	-	9.0	-	-	-	9.0
Operating Profit/EBITDA/AEBITDA*	35.3	412.9	42.0	490.2	(41.8)	12.4	(11.7)	449.1
Finance costs	(139.8)
Finance income	61.6
Taxation	15.0
Loss After Tax	(27.9)
Profit from discontinued operations	3.5
Loss for the period	(24.4)
Adjusted EBITDA margin*								35.4%

 

Alternative performance measures continued

 

 

Six months ended 30 April 2021

	Statutory $m	Intangibles amortisation $m	Depreciation1 $m	Revenue to EBITDA $m	Exceptional costs $m	Share-based payments $m	FX loss $m	Revenue to Adjusted EBITDA* $m
Revenue	1,425.7	-	-	1,425.7	-	-	-	1,425.7
Cost of sales	(384.9)	138.3	16.9	(229.7)	1.8	-	-	(227.9)
Gross profit	1,040.8	138.3	16.9	1,196.0	1.8	-	-	1,197.8
Selling & Distribution	(654.1)	317.8	6.7	(329.6)	4.3	-	-	(325.3)
Research & Development	(259.4) (259.4)	-	14.4 14.4	(245.0) (245.0)	(0.4) (0.4)	- -	- -	(245.4) (245.4)
Administrative expenses	(282.1)   (282.1)	16.1   16.1	18.2   18.3	(247.8)   (247.8)	137.3   137.3	8.5   8.5	5.1   5.1	(96.9)   (96.9)
Operating loss/EBITDA/AEBITDA*	(154.8)	472.2	56.2	373.6	143.0	8.5	5.1	530.2
Finance costs	(125.9)
Finance income	0.7
Taxation	61.1
Loss for the period	(218.9)
Adjusted EBITDA margin*								37.2%

¹ Includes depreciation of property, plant and equipment and right-of-use assets.

 

2.           Adjusted Profit before tax

 

Adjusted Profit before tax is presented as it is required for the calculation of the Group's adjusted effective tax rate.

Adjusted profit before tax is defined as loss before tax excluding the effects of, share-based compensation, the amortisation of purchased intangible assets, foreign exchange gains/losses and all exceptional items including profit on disposal of discontinued operation. These items are individually material items and/or are not considered to be representative of the trading performance of the Group:

·      Exceptional items (note 7), including the profit on disposal of discontinued operation, are excluded by virtue of their size, nature or incidence, in order to show the underlying business performance of the Group.

·      Share-based payment charges are excluded from the calculation of Adjusted Profit before tax because these represent a non-cash accounting item. These charges also represent long-term incentives designed for long-term employee retention, rather than reflecting the short-term trading performance of the Group's business. The directors acknowledge that there is an on-going debate on the add-back of share-based payment charges but believe that as they are not included in the analysis of segment performance used by the Chief Operating Decision Maker and their add-back is consistent with metrics used by a number of other companies in the technology sector, that this treatment remains appropriate.

·      Charges for the amortisation of intangible assets acquired in a business combination are excluded from the calculation of Adjusted Profit before tax. This is because these charges are a non-cash accounting item based on judgements about their value and economic life, are the result of the application of acquisition accounting, and whilst revenue recognised in the income statement does benefit from the intangibles that have been acquired, the amortisation costs bear no relation to the Group's trading performance in the period. In addition, amortisation of acquired intangibles is not included in the analysis of segment performance used by the Chief Operating Decision Maker.

·      Foreign exchange movements are excluded from calculation of Adjusted Profit before tax in order to exclude foreign exchange volatility when evaluating the underlying performance of the business.

 

Alternative performance measures continued

 

The following table is a reconciliation from loss before tax for the period to Adjusted profit before tax: Six months ended 30 April 2022   Six months ended 30 April 2021     Continuing Operations Discontinued Operation Total   Continuing Operations Discontinued Operation Total   $m $m $m   $m $m $m   Profit/(loss) before tax (42.9) 3.5 (39.4)   (280.0) - (280.0)   Share-based compensation charge 12.4 - 12.4   8.5 - 8.5   Amortisation of intangibles acquired in a business combination 387.0 - 387.0   445.3 - 445.3   Exceptional items   (41.8)   (3.5)   (45.3)     143.0   -   143.0 Foreign exchange (gain)/loss1 (70.3) - (70.3)   5.1 - 5.1 Adjusting items 287.3 (3.5) 283.8   601.9 - 601.9 Adjusted profit before tax* 244.4 - 244.4   321.9 - 321.9   1 Of the $70.3m foreign exchange gain, $11.7m is included in administrative expenses and $58.6m in finance income.

3.           Adjusted Profit after Tax and Adjusted Effective Tax Rate

 

This is presented because management believe it is important to understanding the Group's tax position on its operating performance. Adjusted Effective Tax Rate is used to assess the trend in the Group tax rate. Adjusted profit after taxation reflects adjusted profit before tax (see above) less the taxation charge associated with these profits. The Adjusted Effective Tax Rate is defined as the reported tax (charge)/credit on continuing operations, less tax on adjusting items on continuing operations (share-based compensation, the amortisation of intangible assets acquired in a business combination, exceptional items and foreign exchange gains/losses), divided by the Adjusted Profit Before Tax on continuing operations (defined above).

The tax charge on Adjusted profit before tax for the six months ended 30 April 2022 was $56.9m (2021: $95.8m charge), which represents an effective tax rate on Adjusted profit before tax ("Adjusted ETR") of 23.3% (2021: 29.8%). The calculation of the Adjusted ETR is set out below.

Effective tax rate	Six months ended 30 April 2022
	Statutory	Adjusting  items	Adjusted  Measures
	$m	$m	$m
(Loss)/profit before tax	(42.9)	287.3	244.4
Taxation	15.0	(71.9)	(56.9)
(Loss)/profit after tax*	(27.9)	215.4	187.5
Effective tax rate*	35.0%		23.3%

 

Effective tax rate	Six months ended 30 April 2021
	Statutory	Adjusting  items	Adjusted  Measures
	$m	$m	$m
(Loss)/profit before tax	(280.0)	601.9	321.9
Taxation	61.1	(156.9)	(95.8)
(Loss)/profit after tax*	(218.9)	445.0	226.1
Effective tax rate*	21.8%		29.8%

 

In computing Adjusted profit before tax for the six months ended 30 April 2022, $287.3m (six months ended 30 April 2021: $601.9m) of adjusting items have been added back along with the associated tax credit of $71.9m (six months ended 30 April 2021: $156.9m credit ) which relates to share-based payments compensation charge of $1.4m credit (six months ended 30 April 2021: $2.1m credit), amortisation of intangible assets acquired in a business combination of $86.2m credit (2021: $120.7m credit), exceptional items of $13.5m charge (six months ended 30 April 2021: $32.6m credit) and foreign exchange gain of $2.2m charge (2021: $1.5m credit).

Alternative performance measures continued

 

4.           Adjusted Earnings per Share and Diluted Adjusted Earnings per Share

 

Adjusted Earnings per Share ("EPS") are presented as management believe they are important to understanding the change in the Group's EPS. The Adjusted EPS is defined as Basic EPS where the earnings attributable to ordinary shareholders are adjusted by adding back all exceptional items including the profit on the disposal of discontinued operation, share-based compensation charge and the amortisation of purchased intangibles, as well as foreign exchange gains/losses because they are individually or collectively material items that are not considered to be representative of the trading performance of the Group.

	Six months ended 30 April 2022	Six months ended 30 April 2021
Cents
EPS from continuing operations attributable to the ordinary equity shareholders of the Company
Basic EPS	(8.53)	(65.09)
Diluted EPS1	(8.53)	(65.09)
Basic Adjusted EPS*	57.34	67.23
Diluted Adjusted EPS*	57.34	67.23
EPS from discontinued operation
Basic EPS	1.07	-
Diluted EPS1	1.07	-
Basic Adjusted EPS*	-	-
Diluted Adjusted EPS*	-	-
Total EPS attributable to the ordinary equity shareholders of the Company
Basic EPS	(7.46)	(65.09)
Diluted EPS1	(7.46)	(65.09)
Basic Adjusted EPS *	57.34	67.23
Diluted Adjusted EPS*	57.34	67.23
Pence
EPS from continuing operations attributable to the ordinary equity shareholders of the Company
Basic EPS	(6.42)	(47.71)
Diluted EPS1	(6.42)	(47.71)
Basic Adjusted EPS*	43.15	49.28
Diluted Adjusted EPS*	43.15	49.28
EPS from discontinued operation
Basic EPS	0.81	-
Diluted EPS1	0.81	-
Basic Adjusted EPS*	-	-
Diluted Adjusted EPS*	-	-
Total EPS attributable to the ordinary equity shareholders of the Company
Basic EPS	(5.61)	(47.71)
Diluted EPS1	(5.61)	(47.71)
Basic Adjusted EPS*	43.15	49.28
Diluted Adjusted EPS*	43.15	49.28

 

¹ The Group reported a loss from continuing and discontinued operations attributable to the ordinary equity shareholders of the Company for the six months ended 30 April 2022. The Diluted EPS is reported as equal to Basic EPS, as no account can be taken of the effect of dilutive securities under IAS 33.

 

Adjusted EPS was used for LTIP performance in the previous period with LTIP vesting applying the previous definition, the reported amount used in LTIP performance was 66.15 cents (48.49 pence).

 

Alternative performance measures continued

 

	Six months ended 30 April 2022	Six months ended 30 April 2021
	$m	$m
Loss for the period and earnings attributable to ordinary shareholders	(24.4)	(218.9)
From continuing operations From discontinued operation	(27.9) 3.5	(218.9) -
Loss for the period and earnings attributable to ordinary shareholders	(24.4)	(218.9)
Adjusting items:
Gain on disposal of discontinued operation	(3.5)	-
Exceptional items	(41.8)	143.0
Share-based compensation charge	12.4	8.5
Amortisation of intangibles acquired in a business combination	387.0	445.3
Foreign exchange (gain)/loss1	(70.3)	5.1
	283.8	601.9
Tax relating to above adjusting items	(71.9)	(156.9)
Adjusted earnings attributable to ordinary shareholders	187.5	226.1
From continuing operations From discontinued operation	187.5 -	226.1 -
Adjusted earnings attributable to ordinary shareholders	187.5	226.1
Weighted average number of shares:	Number (m)	Number (m)
Basic	327.0	336.3
Effect of dilutive securities - Options	-	-
Diluted	327.0	336.3

 

¹ Of the $70.3m foreign exchange gain, $11.7m is included in operating costs and $58.6m in finance income.

 

	Six months ended 30 April 2022				Six months ended 30 April 2021
	Continuing operations	Discontinued operation	Total		Continuing operations	Discontinued operation	Total
	$m	$m	$m		$m	$m	$m
Adjusting items:
Exceptional items, including profit on disposal of discontinued operation	(41.8)	(3.5)	(45.3)		143.0	-	143.0
Share-based compensation charge	12.4	-	12.4		8.5	-	8.5
Amortisation of intangibles acquired in a business combination	387.0	-	387.0		445.3	-	445.3
Foreign exchange (gains)/losses	(70.3)	-	(70.3)		5.1	-	5.1
	287.3	(3.5)	283.8		601.9	-	601.9
Tax relating to above adjusting items	(71.9)	-	(71.9)		(156.9)	-	(156.9)
	215.4	(3.5)	211.9		445.0	-	445.0

 

Alternative performance measures continued

 

5.        Free cash flow and Adjusted free cash flow

 

Free cash flow is presented as it is widely used by securities analysts, investors and other interested parties to understand the Group's cash flow as it provides an indication of the Group's cash generation in the period which is available for investment in debt repayments, dividend payments or other discretionary activity. Free cash flow is defined as cash generated from operations less interest payments, bank loan costs, tax payments, purchase of intangible assets, purchase of property, plant and equipment and interest and capital payments in relation to leases.

Adjusted free cash flow, which is Free cash flow as previously defined excluding the cash impact of exceptional items. This adjusted measure is intended to present the cash-generating qualities of the Group from trading performance only. In our view, this enables an understanding of the Group's underlying trajectory as we deliver our plans.

 

	Six months ended 30 April 2022	Six months ended 30 April 2021
	$m	$m
Cash generated from operations	484.6	468.1
Less:
Interest payments	(105.8)	(110.7)
Bank loan costs	(23.2)	(0.6)
Tax payments	(77.6)	(128.9)
Purchase of intangible assets	(47.6)	(35.8)
Purchase of property, plant and equipment	(4.6)	(10.3)
Lease related capital payments	(35.8)	(42.3)
Free cash flow	190.0	139.5
Exclude the cash impact of exceptional items	36.8	107.4
Adjusted free cash flow	226.8	246.9

 

Cash impact of exceptional items is exceptional credit for the period $41.8m (2021: $143.0m charge) adjusted for the related movements in payables $14.0m (2021: $3.5m), provisions $15.7m (2021: $(63.0)m), non-operating items $63.0m (2021: nil), non-cash items nil (2021: $(2.5)m), and tax on exceptional items $(14.1)m (2021: $(17.8)m) calculated at the weighted average rate of tax applied in the territories the exceptional charges are recognised in. During six months ended 30 April 2021 an additional payment of the EU State Aid tax item $44.2m was recorded as an exceptional cash item by virtue of size and nature as it relates to historic tax structures and was not indicative of current trading performance.

 

6.      Net Debt and Leverage

 

Net debt and Leverage are presented as these are the primary liquidity measures used by management. Net debt is defined as cash and cash equivalents less borrowings and lease obligations and add lease receivables related to lease obligations retained following disposals which are being reimbursed by the acquirer. Leverage is defined as the Net Debt to 12 month trailing Adjusted EBITDA ratio.

 

	30 April 2022	31 October 2021	30 April 2021
	$m	$m	$m
Borrowings	(4,067.0)	(4,548.4)	(4,597.4)
Cash and cash equivalents	578.7	558.4	698.1
Lease obligations	(179.4)	(205.9)1	(219.1)
Lease receivable reimbursed by the Digital Safe business	17.2	-	-
Net debt	(3,650.5)	(4,195.9)	(4,118.4)

1          Includes lease obligations included in current liabilities held for sale, see note 16.

Trailing 12 months Adjusted EBITDA* (continuing operations):
		30 April 2022 $m	31 October 2021 $m	30 April 2021 $m
Six months to 30 April		449.1	530.2	530.2
Six months to 31 October		529.1	529.1	630.8
		978.2	1,059.3	1,161.0
Net Debt / Adjusted EBITDA* ratio		3.7 times	4.0 times	3.5 times

 

Alternative performance measures continued

 

The following table is a reconciliation of the movements in net debt from previously reported periods.

 

		Borrowings	Cash and cash equivalents	Lease receivable	Lease obligations	Net Debt
	Note	$m	$m	$m	$m	$m
At 1 May 2021		(4,597.4)	698.1	-	(219.1)	(4,118.4)
Repayments		8.6	-	-	42.1	50.7
Net cash movement		-	(139.7)	-	-	(139.7)
Facility fee expense		(17.4)	-	-	-	(17.4)
New leases		-	-	-	(23.9)	(23.9)
Interest		-	-	-	(5.1)	(5.1)
The effect of change in foreign exchange rates		57.8	-	-	0.1	57.9
At 31 October 2021		(4,548.4)	558.4	-	(205.9)1	(4,195.9)
Repayments		1,963.4	-	-	40.2	2,003.6
Drawdowns		(1,599.3)	-	-	-	(1,599.3)
Net cash movement		-	20.3	-	-	20.3
Facility fees capitalised		22.3	-	-	-	22.3
Facility fees expenses		(31.4)	-	-	-	(31.4)
Disposals		-	-	17.2	11.4	28.6
New leases		-	-	-	(20.0)	(20.0)
Interest		-	-	-	(4.4)	(4.4)
The effect of change in foreign exchange rates		126.4	-	-	(0.7)	125.7
At 30 April 2022		(4,067.0)	578.7	17.2	(179.4)	(3,650.5)

 

¹ Included lease obligations included in current liabilities held for sale.

 

7.             Adjusted cash conversion ratio

 

Adjusted cash conversion ratio is presented as management believe it is important to understanding the Group's conversion of underlying results to cash. The Group's adjusted cash conversion ratio is defined as cash generated from operations divided by Adjusted EBITDA less exceptional items (reported in Operating loss and excluding any goodwill impairment charge, as these are deemed non-cash related). Adjusted cash conversion ratio is used to track and measure timing differences between profitability and cash generation through working capital management, including seasonality or one-offs.

 

	Six months ended 30 April 2022	Six months ended 30 April 2021
	$m	$m
Cash generated from operations	484.6	468.1
Adjusted EBITDA*	449.1	530.2
Less: exceptional items reported in Operating loss excluding gain on disposal (investing activity)	(21.2)	(143.0)
Adjusted EBITDA* less exceptional items	427.9	387.2
Adjusted cash conversion ratio*	113.3%	120.9 %

 

Alternative performance measures continued

 

8.        Constant Currency

 

The Group's reporting currency is the US Dollar however, the Group's significant international operations give rise to fluctuations in foreign exchange rates. To neutralise foreign exchange impact and to illustrate the underlying change in results from one year to the next, the Group has adopted the practice of discussing results on an as reported basis and in constant currency.

The Group uses US Dollar based constant currency models to measure performance. These are calculated by restating the results of the Group for the comparable period at the same average exchange rates as those used in reported results for the current period. This gives a US Dollar denominated income statement, which excludes any variances attributable to foreign exchange rate movements.

The most important foreign currencies for the Group are: Pounds Sterling, the Euro, Canadian Dollar, Japanese Yen, Indian Rupee, and the Australian Dollar. The exchange rates used are as follows:

 

	Six months ended 30 April 2022			12 months ended 31 October 2021			Six months ended 30 April 2021
	Average	Closing		Average	Closing		Average	Closing
£1 = $	1.33	1.26		1.37	1.37		1.36	1.39
€1 = $	1.12	1.05		1.19	1.16		1.20	1.21
C$ = $	0.79	0.78		0.80	0.81		0.79	0.81
AUD = $	0.72	0.71		0.75	0.75		0.76	0.78
100 INR = $	1.33	1.31		1.36	1.33		1.36	1.35
100 JPY = $	0.85	0.77		0.92	0.88		0.94	0.92