RNS Number : 0798N

Micro Focus International plc

03 August 2017

3 August 2017

Micro Focus International plc

Annual Financial Report

Publication of the Micro Focus International plc Annual Report and Accounts and other Shareholder Documentation

Micro Focus International plc (the "Company") announces that it has today published the following documents:

·     The Annual Report and Accounts for the year ended 30 April 2017 (the "2017 Annual Report"); and

·     The Company's Notice of Annual General Meeting for 2017 ("2017 AGM Notice"), as well as the form of proxy for use at the Annual General Meeting.

The 2017 Annual Report and 2017 AGM Notice are available on the Company's website at www.microfocus.com.  Copies of these documents (as well as the form of proxy) are also available for inspection at the Company's offices in Newbury.

In accordance with Listing Rule 9.6.1, the above documents have been submitted to the National Storage Mechanism and will shortly be available at www.morningstar.co.uk/uk/NSM 

The Annual General Meeting will be held on 4 September 2017 at 9am (UK time) at the Company's offices at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN, United Kingdom.

Jane Smithard

Company Secretary

3 August 2017

Enquiries:

Micro Focus	Tel: +44 (0)1635 565200
Mike Phillips, Chief Financial Officer
Tim Brill, Director,Corporate Communications & IR
Powerscourt	Tel:  +44 (0)20 7250 1446
Juliet Callaghan

About Micro Focus

Micro Focus (LSE: MCRO.L) is a global enterprise software Company supporting the technology needs and challenges of the Global 2000. Our solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. Our Product Portfolios are Micro Focus and SUSE.  Within Micro Focus our solution portfolios are COBOL Development and Mainframe Solutions, Host Connectivity, Identity and Access Security, IT Development and Operations Management Tools, and Collaboration and Networking.  For more information, visit: www.microfocus.com. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, cloud infrastructure and storage solutions that give enterprises greater control and flexibility.  For more information, visit: www.suse.com.

In accordance with Rule 6.3.5(2)(b) of the DTR, the information set out in the Appendix to this announcement is extracted in full unedited text from the 2017 Annual Report and should be read in conjunction with the Company's Final Results Announcement issued on 12 July 2017 both of which can be found at www.microfocus.com.  Together, these constitute the material required by Rule 6.3.5(2)(b) of the DTR to be communicated to the media in full unedited text through a Regulatory Information Service.  This material is not a substitute for reading the 2017 Annual Report in full and page numbers in the Appendix refer to those in the 2017 Annual Report.

Appendix

1.   Statement of directors' responsibilities in respect of the financial statements

The following information has been reproduced from page 96 of the 2017 Annual Report:

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB") and in conformity with IFRS as adopted by the European Union (collectively "IFRS") and company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the group and company for that period. In preparing the financial statements, the directors are required to:

·   Select suitable accounting policies and then apply them consistently;

·   State whether applicable International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB") and in conformity with IFRS as adopted by the European Union (collectively "IFRS") have been followed for the group financial statements and United Kingdom Accounting Standards, comprising FRS 102, have been followed for the company financial statements, subject to any material departures disclosed and explained in the financial statements;

·   Make judgments and accounting estimates that are reasonable and prudent; and

·   Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and company's transactions and disclose with reasonable accuracy at any time the financial position of the group and company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.

The directors are also responsible for safeguarding the assets of the group and company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group and company's performance, business model and strategy.

Each of the directors, whose names and functions are listed in the board of directors section confirm that, to the best of their knowledge:

·   The company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the company;

·   The group financial statements, which have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IASB") and in conformity with IFRS as adopted by the European Union (collectively "IFRS"), give a true and fair view of the assets, liabilities, financial position and profit of the group; and

·   The Directors' Report includes a fair review of the development and performance of the business and the position of the group and company, together with a description of the principal risks and uncertainties that it faces.

In the case of each director in office at the date the Directors' Report is approved:

·   So far as the director is aware, there is no relevant audit information of which the group and company's auditors are unaware; and

·   They have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the group and company's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

By order of the board.

2.   Principal risks and uncertainties

The following information has been reproduced from pages 37 to 43 of the 2017 Annual Report:

The Group, in common with all businesses, could be affected by risks and uncertainties that may have a material effect on its business operations and achieving its strategic objectives including its business model, future performance, solvency or liquidity. These risks could cause actual results to differ materially from forecasts or historic results. The board is mindful of the interdependencies of some risks. Where possible, the Group seeks to mitigate these risks through its RMF and internal controls, but this can only provide reasonable assurance and not absolute assurance against material losses. 

The following are the principal risks and uncertainties, potential impacts and mitigations that are relevant to the Group as a provider of software products and associated services at this time. The risk movement from the prior year has been assessed and noted against each risk as has the alignment with the business, in accordance with the key below. There may be other risks which could emerge in the future.

Please also refer to the section on internal controls within the corporate governance report on pages 65 to 66.

Risk movement from the prior year

↑  Risk increased        ↓  Risk decreased       ↔  Risk remained the same

Products     ↔
Risk	Potential impact	Mitigation
To remain successful the Group must ensure that its products continue to meet the requirements of customers. Investment in research and innovation in product development is essential to meet customer and partner requirements in order to maximize revenues and corporate performance.  The Group has a large number of products, at differing stages of their life cycle.  The extent of investment in each product set needs to be managed and prioritized considering the expected future prospects, to ensure an effective balance between growth and legacy products.	If products do not meet the requirements of customers they will seek alternative solutions, resulting in the loss of new revenue opportunities and the cancellation of existing contracts.  Insufficient focus on key research and development projects may damage the long-term growth prospects of the Group.	The Group continued to improve the interaction between Product Management, Product Development, Sales and Marketing. The Group's structured approach to managing its products was further enhanced during the year to ensure alignment to the Four Box Model. The Group operates as two product portfolios Micro Focus and SUSE.  All of Micro Focus's products are managed through the global product management and development organization, with a geographic GTM organization. To capitalize on the growth potential of the SUSE Product Portfolio these are managed separately and dedicated resources concentrate on the development, customer care and sales, marketing and engineering. At Micro Focus on 2 May 2016 we completed the acquisition of Serena, a leading provider of Application Lifecycle Management products. On the 30 September 2016 we completed the acquisition of GWAVA  a leading company in email security and enterprise information archiving based in the US, Canada and Germany. At SUSE on 1 November 2016 we acquired OpenATTIC storage management and engineering talent from the company it-novum. On 7 September 2016 it was announced that SUSE was to become HPE's preferred Linux partner and explore additional collaboration. On the 30 November 2016 it was announced that it had reached agreement with HPE on the acquisition of technology and talent to expand SUSE's OpenStack Infrastructure-as-a-service solution and accelerate SUSE's entry to the Cloud Foundry Platform-as-a-service market. The acquisition was completed on 8 March 2017. SUSE also appointed a dedicated Chief Technology Officer in the year.
Go to Market  ("GTM") models  ↔
Risk	Potential impact	Mitigation
For the Group to succeed in meeting revenue and growth targets it requires successful GTM models across the full product portfolio, with effective strategies and plans to exploit channel opportunities and focus the sales force on all types of customer categories.  In addition, effective GTM models may be more successful if accompanied by compelling Micro Focus and SUSE brand awareness programmes.	Poor execution of GTM plans may limit the success of the Group by targeting the wrong customers through the wrong channels and using the wrong product offerings.	The business operates under a global product group with geographic GTM sales organizations. Revenue plans are supported by a range of measures to monitor and drive improvements in GTM operating models in both Micro Focus and SUSE.  The dedicated sales teams operate by portfolio but management are targeted on the sales of both Micro Focus and SUSE Product Portfolios. Operationally there are quarterly business reviews with all geographies and monthly reviews with regional presidents, the President of Sales for Micro Focus and SUSE participate in their respective weekly management team meetings to review sales performance and GTM priorities.  Customer sales cycles are reviewed regularly and a bid review process is in place to monitor and maximize customer revenue opportunities. In addition to sales performance reviews, marketing and product development programmes are assessed regularly to optimize levels of qualified pipeline and ensure that marketing programmes are supported by appropriate product offerings.  A series of measures are in place to focus the direction of the sales force towards a broad range of customer categories. These measures include detailed bid management, tailored quota targets and robust pre-sales management.  In addition, brand awareness programmes are in place and reviewed on an on-going basis to draw on differentiated and consistent PR plans across key geographies. These are supported by targeted industry analyst relations to reach and raise Micro Focus and SUSE brand awareness through key marketplace influencers. Brand building is also supported by growing a customer reference programme and online programmes such as effective search engine optimization, use of social media and improved corporate websites.  The Product to Market process is standardized so that execution is on a consistent basis. Micro Focus continued to run the internal sales certification programme, to improve the level of expertise across the sales force and the Micro Focus Sales Academy, the initiative through which it hires graduate sales representatives to enhance the sales capability and train up new talent with the potential to progress within the sales organization. At SUSE a President of Global Sales was appointed in the year. A new Partner Programme strategy was also implemented across the business.
Competition  ↔
Risk	Potential impact	Mitigation
Comprehensive information about the markets in which Micro Focus and SUSE operate is required for the Group to assess competitive risks effectively and to perform successfully.	Failure to understand the competitive landscape adequately and thereby identify where competitive threats exist may damage the successful sales of the Group's products.	Group product plans contain analysis of competitive threats and subscriptions to industry analyst firms are leveraged to better understand market dynamics and competitor strategies. In addition, customer contact programmes are analyzed for competitive intelligence. Micro Focus and SUSE continue to monitor and review intelligence on market threats to focus on offering best in class service to customers.
Employees ↔
Risk	Potential impact	Mitigation
The retention and recruitment of highly skilled and motivated employees, at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it operates.  Employees require clear business objectives, and a well communicated vision and values, for the Group to achieve alignment and a common sense of corporate purpose among the workforce.	Failure to retain and develop skill sets, particularly in sales and research and development may hinder the Group's sales and development plans. Weak organizational alignment and inadequate incentivization may lead to poor performance and instability. It could also have an adverse impact on the realization of strategic plans	The Group has policies in place to help ensure that it is able to attract and retain employees of a high caliber with the required skills. These policies include training, career development and long-term financial incentives. Leadership training schemes are in place to support management development and succession plans. The Group also has in place a performance management and appraisal system.  The measures for talent management will continue to be enhanced to ensure a rigorous recruitment and retention process which is aligned to business as usual as well as the strategic plans for the Group. Succession plans have been developed and are in place for key leadership positions within the Company. In the year the Group took significant action to develop its management capability both internally, by training and promotions, and through external hires. In the year the Group appointed a dedicated HR Talent Manager.
Business strategy and change management  ↑
Risk	Potential Impact	Mitigation
The Group is engaged in a number of major change projects including acquisitions to grow the business by strengthening the portfolio of products and capabilities, IT projects and projects to standardize systems and processes. The successful integration of businesses will build a solid base for further expansion. These projects expose the Group to transformation risks. The acquisition of HPE Software is a complex transaction with a range of integration risks.	Failure to analyze, execute and co-ordinate the various projects successfully may result in the disruption of the ongoing business without delivering the benefits of the operational efficiencies and/or commensurate increase in revenues. In addition this may affect the ability to execute strategic plans for growth. The risk increased in the year to reflect the risks associated with the acquisition of HPE Software.	The Group has an established acquisition strategy and focus on efficient execution in the mature infrastructure software products. The Group announced the acquisition of HPE Software on 7 September 2016 and Completion is currently expected to be 1 September 2017.    The project is run in the dedicated IMO by an appropriately experienced team, utilizing external resources as required. There are detailed and robust governance disciplines around each project. The board monitors and reviews progress. The Group has a dedicated Group Business Operations and Integration Director to ensure that execution of the various projects are successfully aligned so as to minimize any disruption to business as usual. On 17 January 2017 Chris Hsu was announced as the CEO of the Enlarged Group (following Completion of the acquisition of HPE Software) at the same time Stephen Murdoch will become COO of the Enlarged Group, part of a strong and fully aligned leadership team to deliver the full potential of the transaction.
IT systems and information  ↑
Risk	Potential Impact	Mitigation
The Group's operations, as most businesses, are dependent on maintaining and protecting the integrity and security of the IT systems and management of information. The Group may experience a major breach of system security or cyber-attack. The external threat profile is generally increasing as are the regulations around data protection.	Disruption to the IT systems could adversely affect business and Group operations in a variety of ways, which may result in an adverse impact on revenues and reputational damage. The risk increased in the year to reflect the increase in the general external cyber risk environment.	The Group has in place a highly skilled technology team which constantly monitors and reviews the performance and availability of the Group IT systems including any risk of cyber- attack. Policies and processes are in place for the protection of business and personal information. The Group has in place well established and tested business continuity plans. The Group seeks to mitigate cyber risks with a range of measures including monitoring of threats and testing of cyber response procedures and equipment.
Legal and regulatory compliance   ↔
Risk	Potential impact	Mitigation
The Group operates across a number of jurisdictions. Compliance with national and regional laws and regulations is essential to successful business operations.	Failure to comply could result in civil or criminal sanctions as well as possible fines and reputational damage.	The Group has in place policies and procedures to mitigate these risks. The Group's legal and regulatory team, enhanced by specialist external advisors as required, monitor and review compliance. There is a Compliance Committee and a Market Abuse and Insider Dealing Committee which report into the board. All staff are subject to mandatory compliance training. During the year the Group established an executive Financial Reporting Group (FRG) to monitor, review and manage the risks associated with financial reporting across the Group. The FRG reports to the audit committee.
Intellectual property   ↔
Risk	Potential Impact	Mitigation
Failure to adequately protect the Group's Intellectual Property and brands. Some of the Group's products utilize Open Source technology which is dependent upon third party developers.	Failure could adversely affect the ability of the Group to compete in the market place and affect the Group's revenue and reputation.	There are procedures in place across the Group to ensure the appropriate protection and use of the Group's brands and intellectual property, which are monitored by the IP Panel and Legal team.
Treasury   ↔
Risk	Potential Impact	Mitigation
The Group operates across a number of jurisdictions and so is exposed to currency fluctuations. The risk of foreign exchange fluctuations may be increased as a result of Brexit. The Group targets a Net Debt to Facility EBITDA ratio of 2.5 times and may require additional debt funding in order to execute its acquisition strategy.	The relative values of currencies can fluctuate and may have a significant impact on business results. Insufficient access to funding could limit the Group's ability to achieve its desired capital structure or to complete acquisitions.	The Group's operations are diversified across a number of currencies.  Changes in foreign exchange rates are monitored and exposures regularly reviewed and actions taken to reduce exposures where necessary. The Group provides extensive constant currency reporting to enable investors to better understand the underlying business performance. The Group has significant committed facilities in place, the earliest of which matures in November 2021 and sufficient headroom to meet its operational requirements. The Group seeks to maintain strong relationships with its key banking partners and lenders and to proactively monitor the loan markets. The Group also has strong engagement with the providers of equity capital, which represents an alternative source of capital.
Tax   ↔
Risk	Potential Impact	Mitigation
The tax treatment of the Group's cross-border operations is subject to the risk of challenge under tax rules and initiatives targeting multinationals' tax arrangements, including the OECD's Base Erosion and Profit Shifting project and EU state aid rules.	Tax liabilities in various territories in which the Group operates could be significantly higher than expected.	Tax laws, regulations and interpretations are kept under ongoing review by the Group and its advisors. The Group reviews its operations, including the structuring of intra-group arrangements, on a periodic basis to ensure that risks are identified and mitigated accordingly. External professional advice is obtained to support positions taken in financial statements and local tax returns where there is significant uncertainty or risk of challenge.
Macro-economic environment  ↑
Risk	Potential Impact	Mitigation
The Group operates a global business and is exposed to a variety of external economic and political risks which may affect the Group's business operations and execution of the strategy.	Adverse economic conditions could affect sales, and other external economic or political matters, such as price controls, could affect the business and revenues. The risk increased in the year to reflect Brexit and the potential general external political environment.	The spread of jurisdictions allows the Group to be flexible to adapt to changing localized risk to a certain extent. The Group has business continuity plans and crisis management procedures in place in the event of political events or natural disasters. The Group have a Brexit Working Group with processes in place to assess, respond, monitor and track the impact of Brexit on our businesses, and associated risks, as matters progress and how the business can seek to mitigate these risks.

3.   Related party transactions

The following information has been reproduced from page 157 of the 2017 Annual Report:

Transactions between the Company and its subsidiaries have been eliminated on consolidation. The remuneration of key management personnel of the Group (which is defined as members of the executive committee) including executive directors is set out in note 33. 

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