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In the wake of Micro Focus’s share price crash, rivals attack

23 March 2018
Competing software testing companies seek to profit from the collapse in Micro Focus's share price after warnings of declining revenues. Some claim they saw it coming

On March 19, Micro Focus, the largest software company in the UK, warned that its year-on-year revenue decline would be worse than it had previously expected. The company's share price plunged 55% on the day. Even with some recovery in sentiment later in the week, competitors of Micro Focus in the quality assurance marketplace continue to use the uncertainly around the software giant to their advantage.

Berkshire-based Micro Focus, which has pursued a strategy of acquiring legacy software brands – culminating in its $8.8 billion acquisition of HPE in September 2017 – attributed its revenue warning to issues with the integration, which had led to lower-than-expected licence income, problems with its new IT system and a loss of sales staff. The firm also announced that CEO Chris Hsu, who took over the company following the merger with HPE, had stepped down to pursue other interests, and that he would be replaced by Stephen Murdoch, Micro Focus’s COO.

Earlier in the week, the Financial Times reported that Northern Trust Capital Markets ended its recommendation on Micro Focus on March 14, saying the company was “not expensive but we don’t know how it can grow profits beyond its integration plan”. According to Northern Trust, Micro Focus has also suffered from a lack of exposure to  artificial intelligence, a major trend in the tech industry.

Following the Micro Focus news, Panaya, the Israel-based developer of software quality assurance solutions owned by Infosys, the giant Indian software integrator, released a white paper warning customers not to get caught up in the aftermath of Micro Focus’s decline. In the white paper, the company, which provides an SaaS-based test management solution, claimed that Micro Focus QC, Micro Focus’s test management solution, wasn’t “relieving the complexity of testing” and urged its audience turn to its own offering.

Panaya called out Micro Focus’s solution as having a technically-oriented user interface and experience, consistent with the IT side of testing, rendering it useless to the business side of testing. “The result is a solution that lacks key components like collaboration, business process centricity, documentation, visibility and automated process handling – all conducive to delivering application changes faster,” the company said in the paper.

Stephane Jammet, Managing Director at Neotys, a rival of Micro Focus specialising in performance testing, said that the scale of the share price drop came as a surprise, but he maintains that the problems at Micro Focus were apparent even before the $8.8 billion merger with HPE. “It’s a daunting task to manage such a merger – in this case you have a smaller player swallowing the larger,” he explained. “And if you look at how the HPE software business was going, there had already been challenges and a change of pace since its purchase of Mercury. Add to the mix that the testing market is evolving and new customer requirements driven by DevOps and automation mean customers want innovation. In any case, it’s a challenge to innovate at the pace of the market. We are also seeing customers move away from legacy stacks and turning to more specialised solutions like NeoLoad, Neotys' load and stress testing tool.”

Jammet added: “I’m sure the decision by the CEO to stand down was unexpected for Micro Focus and the forecast was a disappointment for them. It will take time for Micro Focus to realign the new company and deliver on it. And they will have to work hard to deliver value to their customers.”

At the time of the merger with HPE, some of Micro Focus's competitors told QA Financial that the HPE merger would lead to a loss of market share. Commenting on the acquisition in September 2017, Nikhil Kaul, Boston-based Product Marketing Manager at SmartBear, one of HPE’s direct competitors and a developer of testing products that integrate with open source tools, explained: “Micro Focus will not actively develop HPE products,” he said. “Instead they will keep the business as a cash cow and reinvest the money elsewhere.”

“Historically they come into a mature business and then increase profit margins by cutting costs,” he added. Kaul predicted that Micro Focus would struggle to absorb the challenge of the merged business and explained that the deal was a “venture into uncharted territories for them”.

Sandeep Johri, CEO of Tricentis, the Austrian test automation specialist, described Micro Focus as "a hospice for software", during his presentation at Tricentis's client event in Vienna last October. While Micro Focus is arguably a long way from dead, it also seems a long way from delivering the new business lines that will reassure investors.

[Photo copyright: © 2017 Bloomberg Finance LP]

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