Wednesday, 10 December 2008

Micro Focus (update)

(By Anthony Miller) The ‘killer stat’ for me comes from a recent Datamonitor report, which claims there are some 200 billion lines (count them!) of COBOL code in live operation, growing at 5bn a year. Now, whether the number really is 200bn or half that or whatever, who cares? What’s pretty clear is that there’s still a heck of a lot of COBOL out there running on legacy mainframes, especially in the financial services sector, and precious little of it is going to be replaced any time soon.

Enter Micro Focus chanting its ‘modernise and migrate’ mantra, and CIOs – and CFOs – take notice, especially now. CEO Steve Kelly made the point that application ‘modernisation’ costs about 10% of implementing a new package and can generally be completed in months rather than years. Probably true, but that’s not to say you’d get all the extra function a decent, modern package would bring, as the likes of, say, Temenos would probably attest. But that’s splitting hairs in today’s ‘make do and mend’ climate. And Kelly would also counter that some legacy apps are so customised that there’s a risk that replacing them with a package would lose some of the ingrained competitive edge functionality. You can argue the toss but you can’t really argue with the numbers which, as I mentioned in my brief comment below, generally look pretty good.

There’s still room for improvement, though, which is actually good news. For example, Rest of World revenues (mainly Japan) continued their downward trend, and management is putting more attention into these markets (yes, even emerging markets run COBOL code!). And Micro Focus’ consulting business (4% of the $136m half-year revenues) fell 6% like-for-like. But on the positive side, maintenance revenues are now 48% of the total, up 2% points yoy, and they still have $41m net cash in the bank even after a recent slew of acquisitions.

The Micro Focus of today just looks so much more ‘vital’ (in all respects) than in days of yore (remember the disastrous Merant era?) and investors appear to be taking notice. As you’ll see in the chart above, Micro Focus’ shares (in blue) have held up well this year compared to the other top UK software stocks, and looks like it could edge out Misys as the UK’s third largest by market cap. By the way, Misys is some three times larger by revenues and one-third as profitable. Mind you, at around £550m cap, both have a long way to catch up with Sage and Autonomy (each over £2bn cap) but who knows what could happen in this crazy market?
Post Script: Nice to see The Times singing from the ‘make do and mend’ hymn book (see here). Wonder where they got that tune from?

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