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Why Micro Focus International Stock Surged Today

What happened

Shares of enterprise-software company Micro Focus International (NYSE: MFGP) surged higher on Wednesday after the company released preliminary full-year results for fiscal 2020. Financial results were down compared to last year, but perhaps investors are encouraged that the company still believes it's on track to achieve its three-year goals. As of noon EST, the stock was up 30%.

So what

When official fiscal 2020 results come out, Micro Focus expects to report revenue of $3 billion. Adjusting for fluctuations in currency, that represents a 10% year-over-year decline. The first half of the year was hardest hit, with revenue down 11% from the prior-year period. But the second half of fiscal 2020 wasn't much better with a 9% decline.

Image source: Getty Images.

Concerning profitability, Micro Focus' release only included a non-GAAP figure known as earnings before interest, taxes, depreciation, and amortization (EBITDA). The company's EBITDA margin is expected to be around 39% for fiscal 2020, slightly lower than the 41% margin it enjoyed in fiscal 2019.

Now what

For now, Micro Focus International has a net debt position of $4.2 billion, but it fortunately had enough cash flow to whittle that down by $400 million over the past year. With $1 billion in current liquidity, it believes it has sufficient means to improve its balance sheet and continue to execute on its long-term vision.

Part of Micro Focus' three-year plan is to transition more software products into a Software-as-a-Service (SaaS) model to have more predictable revenue. That strategy can take time to execute, and even longer to appear beneficial in a financial report, due to the difference in the timing of revenue recognition. Therefore, investors today should be prepared to show patience for the strategy to pay off.

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


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