Micro Focus International plc Interim Results for the Half Year to 31 October 2006.

Solid Operational Progress with Increase in Profitability

LONDON -- Micro Focus International plc ("Micro Focus", "the Company" or "the Group", LSE: MCRO) announces interim results for the half year to 31 October 2006.

Key financial highlights

* Turnover up 8% to US$79.0m (2005: US$72.9m)

* Operating profit before exceptional items* up 55% to US$30.4m (2005: US$19.6m)

* EBITDA** before exceptional items* up 53% to US$31.3m (2005: US$20.5m)

* Profit before tax up 143% to US$31.4m (2005: US$12.9m)

* Basic earnings per share 12.03 cents (2005: 4.66 cents)

* Net cash balance as at 31 October 2006, US$68.1m (31 October 2005: US$38.6m)

* Interim dividend increased 50% to 3 cents per share (2005: 2 cents per share)

* Operating profit US$30.0m (2005: US$13.7m)

* EBITDA** US$30.9m (2005: US$14.6m)

* Exceptional items are detailed in note 5












** EBITDA is reconciled to operating profit in note 5












*** Earnings per share are detailed in note 4
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Online video interviews with Chief Executive Stephen Kelly and Chief Financial Officer Nick Bray can be viewed free at www.microfocus.com and www.cantos.com.

About Micro Focus

Micro Focus provides innovative software that helps companies to dramatically improve the business value of their enterprise applications. Micro Focus Enterprise Application Modernisation software enables customers' business applications to respond rapidly to market changes and embrace modern architectures with reduced cost and risk.

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Chief Financial Officer's review

Turnover for the half year ended 31 October 2006 increased to US$79.0m (2005: US$72.9m).

Turnover for the half year by geographic region was as follows:

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Whilst revenue growth was achieved across all areas, as compared to the prior half year period to 31 October 2005, growth was primarily driven from our European operations, notably our smaller territories in Benelux, France and Italy along with our distributor channel. Our UK and North America operations produced results below the performance levels expected from geographic territories with such a high concentration of resource, existing customers and market potential. However, it should be noted that during the six month period to 31 October 2005, the North American operation closed a license fee deal for US$3.0m.

Similarly, it is encouraging to see the improvement in our Rest of the World operations, highlighted by a weak third quarter in the prior year to 30 April 2006.

Turnover for the half year by category was as follows:

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It can be seen that the increase in total revenues for the half year related to the improvement in both licence and maintenance revenues. Licence fees increased by US$2.5m or 7.1% to US$37.7m for the half year ended 31 October 2006 (2005: US$35.2m). Encouragingly, the growth in licence fee revenues was achieved by an increased volume of lower value orders. A number of large contracts remain in our pipeline although by their very nature, they are unpredictable

Maintenance revenues increased by US$3.7m or 10.5% to US$39.1m for the half year ended 31 October 2006 (2005: US$35.4m).

Maintenance revenues are recognised evenly over the life of each contract, which is typically twelve months. As such, the profit and loss recognition of maintenance revenue lags the initial licence fee sale. Thus, it was encouraging to see the increase in maintenance revenues following the disappointing licence fee performance in the second half of the year to 30 April 2006. Whilst the solid first half year of licence fees is encouraging, the major factors driving growth in the six months to 31 October 2006 are as follows:

* An improvement in the renewal rate of existing customers.

* Modest annual price increases to existing customers.

* A focus on closing "contracts in negotiation" and the introduction of an automatic renewal process for our customers.

Consulting revenues showed a modest decline against the comparative first half year but represent only a minor proportion of total revenues.

Costs

It has been pleasing to see the reduction in costs following the restructuring of the business announced on 6 April 2006. A firm control of expenses has been established and will be maintained on an ongoing basis. The cost reduction programme was designed to improve overall returns while maintaining the fabric of the business.

Cost of sales for the half year ended 31 October 2006 reduced by 12.9% to US$8.1m (2005: US$9.3m). The costs in this category predominantly relate to our consulting and helpline support operations. Costs within the consulting organisation have been reduced and its performance has improved substantially.

Selling and distribution costs reduced to $19.9m for the half year ended 31 October 2006 (2005: US$24.4m). Headcount levels are broadly consistent year on year and the reduction reflects lower travel and entertainment, marketing expense and commission payments.

Research and development expenses for the half year were broadly consistent at US$10.8m (2005: US$11.2m).

Underlying administrative expenses, excluding exceptional items of US$0.4m (2005: US$6.0m), increased to US$9.7m (2005: US$8.3m). This cost category contains US$0.8m in relation to exchange losses in the period to 31 October 2006. In the prior period, costs were reduced by exchange gains of US$0.3m. As such, underlying administrative expenses have increased by US$0.3m or 3%.

Operating profit

Operating profit for the period was US$30.0m (2005: US$13.7m). Operating profit before exceptional items was US$30.4m (2005: US$19.6m),the improvement being driven by the combination of improved revenues and reduced costs.

EBITDA

EBITDA before exceptional items increased by 52.7% to US$31.3m (2005: US$20.5m) for the half year ended 31 October 2006.

Net interest income

The IPO proceeds in May 2005 allowed the Company to repay all its outstanding loan balances. Since this time, interest has been generated on the available net cash balance. Interest income of US$1.4m was achieved in the half year to 31 October 2006 as compared to a net interest expense of US$0.8m in the first half of the prior period. During the prior first half year, US$0.7m of the expense related to penalties on the early repayment of debt which the Company deemed appropriate to avoid higher interest charges.

Taxation

Tax for the half year ended 31 October 2006 was US$7.4m (2005: US$3.9m) based on increased profits. The Group's effective tax rate is 23.5% (2005: 30%). As a result of the significant increase in the share price in the six month period to 31 October 2006, a tax deduction has arisen on the stock options in issue. Excluding the effects of this beneficial tax deduction, the underlying effective tax rate was 26.8%.

Profit for the period

Profit after tax for the period ended 31 October 2006 increased by 167% to US$24.0m (2005: US$9.0m) driven by a significant improvement in operating performance combined with lower exceptional charges.

Cash flow

For the half year ended 31 October 2006, the Company generated a net cash inflow from operating activities of US$22.2m (2005: US$10.3m). At 31 October 2006, the Company's net cash balance was US$68.1m (2005: US$38.6m). Dividends of US$8.0m were paid in the period.

Dividend

The Board continues to adopt a progressive dividend policy reflecting the long-term earnings and cash flow potential of Micro Focus whilst targeting a level of dividend cover for the financial year ending 30 April 2007 of approximately 2.5 times on a pre-exceptional earnings basis. In line with the above policy, the directors recommend payment of an interim dividend in respect of the half year to 31 October 2007 of 3 cents per share, an increase of 50% above the interim dividend of 2 cents per share for the half year to 31 October 2005. The interim dividend will be paid on 31 January 2007 to shareholders on the register on 5 January 2007.

Whilst the Group as a whole has a deficit in its profit and loss reserve, the directors of Micro Focus International plc have concluded that the Company has sufficient reserves to enable the payment of the interim dividend.

Dividends will be paid in sterling based on an exchange rate of [pounds sterling] = US$1.96, equivalent to approximately 1.53 pence per share, being the rate applicable on 7 December 2006, the date of recommendation of the dividend by the Board.

Acquisition of HAL Knowledge Solutions SPA

On 2 November 2006, Micro Focus announced that it had agreed to acquire HAL Knowledge Solutions SPA (HAL KS), a leading provider of Application Portfolio Management software in order to enhance the Company's enterprise application modernisation capabilities. The transaction successfully closed on 10 November 2006. HAL KS has been acquired by Micro Focus for a total consideration of US$3.5m in cash, subject to a net asset adjustment.

In the year to 31 December 2005, HAL KS reported a net loss before tax of US$4.5m and its gross assets as at 31 December 2005 were US$9.5m. Following the acquisition, we are now restructuring the business to reduce costs, with an expected restructuring charge of approximately US$4.0m, falling in the current financial year. HAL KS was acquired with net balance sheet liabilities of approximately US$4.5m.

For the six month period to 30 April 2007, revenues are expected to be in the range of US$4.0m to US$5.0m. Excluding the associated restructuring charge, the business is expected to break even in the six month period to April 2007.

Nick Bray, Chief Financial Officer

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Notes

1) Basis of preparation

These financial statements comprise the consolidated interim balance sheets as of 31 October 2006 and 31 October 2005 and related consolidated interim statements of income and cash flows for the six months then ended of Micro Focus International Plc (hereinafter referred to as 'the interim financial statements'). These interim financial statements have been prepared on a basis consistent with the accounting policies set out in Micro Focus International plc's annual report for the year ended 30 April 2006. The interim financial statements should therefore be read in conjunction with the 2006 annual report. The interim financial statements have been issued in accordance with the Listing Rules of the Financial Services Authority. The group has chosen not to adopt IAS 34 'Interim financial statements' in preparing these interim financial statements.

These interim financial statements have been prepared under the historical cost convention.

The preparation of financial statements require estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the estimates are based on management's best knowledge of the amounts, events or actions, actual results may differ from those estimates.

Copies of the interim results for the six months ended 31 October 2006 will be sent to all shareholders. Details can also be found on the company's website at www.microfocus.com. Further copies of the interim results and copies of the accounts for the year ended 30 April 2006 can be obtained by writing to the Company Secretary, Micro Focus International plc, Old Bath Road, Newbury, Berkshire, RG14 1QN.

This announcement was approved by the Board of Micro Focus International plc on 7 December 2006.

2) Reclassification of expenditure

The directors have reviewed the classification of certain expenditure within the Income Statement and believe, to be consistent with software industry accounting practices, in order to aid comparison, it is more appropriate to classify the following costs differently than was reported in prior periods.

a) Cost of customer support - these costs were previously included within Administrative Expenses and have been reclassified as Cost of Sales. The impact of the change is to increase Cost of Sales by $4,651,000 (H1 2006: $5,302,000, FY06 $10,074,000) and decrease Administrative Expenses by a corresponding amount.

b) Amortisation of research and development - these costs relating to capitalized salaries were previously amortised through Cost of Sales. The amortization has been reclassified as Research and Development Expenditure The impact of the change is to decrease Cost of Sales by $2,470,000 (H1 2006: $2,508,000, FY06 $4,626,000) and increase Research and Development Expenditure by a corresponding amount.

3) Functional currency

Items included in the financial statements of each of the group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in US Dollars, which is the Company's functional currency.

4) Earnings per share

The calculation of basic earnings per share has been based on the earnings attributable to ordinary shareholders of the company and the weighted average number of shares for each period. The weighted average number of shares used in the calculation was 199,558,000 (31 October 2005:192,990,000; 30 April 2006:196,709,000).

The diluted earnings per share has been calculated after taking account of the share options. The weighted average number of shares used in the calculation was 201,889,000 (31 October 2005: 195,394,825; 30 April 2006: 198,711,000).

Diluted earnings per share excluding exceptional items was 11.18 cents (H1 2006: 7.20 cents, FY2006: 14.23 cents). Diluted earnings per share is calculated after adjusting for the post-tax effect of exceptional items of $277,000 (H1 2006: $5,064,000, FY2006: $12,059,000).

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In calculating EBITDA the amortization of Research and Development expenditure is not added back to operating profit, as the directors believe by doing so EBITDA provides a better measure of the cash generation of the business. Amortisation of Research and Development expenditure in the current period was $2,470,000 (H1 2006: $2,508,000, FY 2006 $4,626,000).

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There is no material difference between turnover by origin above and turnover by destination. All turnover is derived from external customers.

7) Supplemental information

Set out below is an analysis of turnover recognised between the principal product categories, which the directors use to assess the future revenue flows from the current portfolio of customers.

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8) Taxation

Tax for the half year ended 31 October 2006 was US$7.4m (2005: US$3.9m) based on increased profits. The Group's effective tax rate is 23.5% (2005: 30%). As a result of the significant increase in the share price in the six month period to 31 October 2006, a tax deduction has arisen on the stock options in issue. Excluding the effects of this beneficial tax deduction, the underlying effective tax rate was 26.8%.

9) Trade and other receivables 

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10) Trade and other payables 

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11) Post balance sheet events

On 2 November 2006, Micro Focus announced that it had agreed to acquire HAL Knowledge Solutions SPA (HAL KS), a leading provider of Application Portfolio Management software in order to enhance the Company's enterprise application modernisation capabilities. The deal successfully closed on 10 November 2006. HAL KS has been acquired by Micro Focus for a total consideration of US$3.5m in cash, subject to a net asset adjustment..

In the year to 31 December 2005, HAL KS reported a net loss before tax of US$4.5m and its gross assets as at 31 December 2005 were US$9.5m. Following the acquisition, we are now restructuring the business to reduce costs, with an expected restructuring charge of approximately US$4.0m, falling in the current financial year. HAL KS was acquired with net balance sheet liabilities of approximately $4.5m.

Independent review report to Micro Focus International plc

Introduction

We have been instructed by the company to review the financial information for the six months ended 31 October 2006 which comprises consolidated interim balance sheet as at 31 October 2006 and the related consolidated interim statements of income, cash flows and changes in shareholders' equity for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information.

Directors' responsibilities

The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed.

This interim report has been prepared in accordance with the basis set out in Note 1.

Review work performed

We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Review conclusion

On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 31 October 2006.

PricewaterhouseCoopers

Chartered Accountants

Reading

7 December 2006

Note:

The maintenance and integrity of the Micro Focus International Plc web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the web site.