Micro Focus battered after second profit warning

15th Feb 2011 07:41

Shares in legacy software specialist Micro Focus slumped on Tuesday as the company issued its second profits warning in six months. Revenues in the three months to 31 January 2011 were on a par with the preceding six months but were below management expectations, while adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) were also lower than anticipated, and tailed off from the preceding six month period.The company has instigated a major cost cutting programme and will take a restructuring hit of between $14m and $18m in the final quarter of this year after the "disappointing" three months. "It is unlikely that the company will be able to recover the shortfall in revenue and adjusted EBITDA in the remaining three months of the current financial year," it added.Full year revenues are now anticipated to be in the range of $432m to $442m. Underlying earnings are forecast in a range of $159m to $167m, a reduction of around 10% on previous guidance. Taking into account the restructuring charge the full year adjusted EBITDA is forecast in a range of $141m to $153m.As was the case with its profits warning at the end of the first quarter of the current financial year, the company said the shortfall in licence fee revenues was down to a number of larger deals expected at the end of the quarter not coming through in time, or being lost altogether. The problem was particularly noticeable in North America in the company's Cobol development modernisation and migration (CDMM) business.Broker Peel Hunt responded to the announcement by downgrading the stock from "hold" to "sell" and revising its full year revenue forecast down to the bottom of the guidance range at $432m. The broker thinks EBITDA, pre-restructuring costs, will be $159m, giving earnings per share of 32.4p, compared to its previous forecast of 36p.Singer Capital Markets, previously a buyer of the stock, has its forecasts and rating under review, but says the bigger issue now is "one of confidence in the new management team and in the prospects of the business." The broker believes confidence in the management will have been eroded by this profits warning and "with estimates still being downgraded, it is hard to see where the catalyst [for share price appreciation] will be near term."Long time Micro Focus cheerleader Panmure Gordon, which makes a market in the company's shares, has abandoned its positive stance on the stock and switches to a "hold" rating, describing Tuesday morning's statement as "a big disappointment". "It is difficult to find the bright spots - in truth net debt at $5.5m and AMQ [the performance testing business] has some sequential growth are the two," admits analyst George O'Connor.In expectation of the shares getting a kicking in the market - which duly came to pass - O'Connor cut his price target for the stock to 368p from 473p."Given the new products, new team and new execution, today's news is unfortunate . but we stick to our view that the pieces of the puzzle are in place. We hope that this is the last warning," the broker said.