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April 7, 1988

MICRO FOCUS BIDS TO REGAIN THE CONFIDENCE OF A DISENCHANTED CITY

By CBR Staff Writer

Later this month Cobol software products developer Micro Focus Plc will announce its end of year results: City analysts are forecasting profits of at least UKP1m. Three years ago, Micro Focus shares tumbled all the way to 100 pence from 970p: now some analysts are pencilling in profits upwards of UKP2.5m for the coming financial year. Is a recovery as spectacular as its fall from grace finally underway? A flurry of announcements during the year – ranging from new products through alliances with major manufacturers in the US and Japan to distribution deals in Europe suggest that the company has been laying firm foundations for such a recovery. For the financial years ended January l986 and l987 Micro Focus registered static turnover hovering around UKP13m but with losses improving to UKP280,000 in 1986 from UKP1.4m in 1985. During the half year to July l987 the company recorded a marginal net profit of UKP29,000 on turnover up 23% at UKP7m. That’s when City profit expectations rose to the UKP1m mark. Nothing spectacular perhaps, but recovery all the same. So how has this come about? Micro Focus managing director Colin West said the root cause of the company’s problem was over-dependence on sales to manufacturers. When the bottom fell out of that market Micro Focus’ OEM customer base was severely eroded. Graveyard So to prevent this happening again the company has increased its direct sales, mainly to DP managers and systems integrators. Micro Focus is also selling through value added resellers and in countries where it does not have offices – through distributors. Direct sales now account for 50% of the company’s turnover and it intends to increase this to around 55%. The geographic spread has also widened and in the US market, which is notorious as a graveyard of the ambitions of British high tech companies, Micro Focus can boast 48% of its sales. Japan accounts for 19% and Europe takes the 33% balance. Today the company employes 240 staff worldwide – 110 of them in the UK and is currently recruiting in both sales and development. The impression that the company gives is that is really is go ing places now. During the past year deals with other computer makers and new products – such as its Cobol/2 Workbench which bundles the Cobol/2 compiler and the Workbench applications development kit, have reinforced this image of the company. Like Ashton-Tate, Microsoft and Lotus it is a market leader, and everybody but the City recognises the fact. But the bottom line for a company like Micro Focus must be the quality and ability the company has in moving product.

And it is in the marketing rather than development of its products that Micro Focus has managed to deliver some important changes through launches and alliances with major players. It’s been very much a matter of getting down and getting on with the business, West said. There are signs that hard graft is now beginning to pay off. In the US, the company now counts an increasing number of Fortune 500 companies among its clients, and earlier this year it signed a $600,000 deal to supply the US Air Force with Cobol Workbench for developing and maintaining OS/VS Cobol programmes for IBM mainframes. According to West, developments in 16-bit and 32-bit technology since 1985 have made Micro Focus’ ideas for its Workbench product possible as the micro-based development of Cobol applications for mainframes became a reality. During 1987 the company introduced the new Cobol standard ANSI 85 in its new MS-DOS- and Unix-based Cobol/2 product range. Micro Focus has also introduced new versions of its Workbench and new generation technology for RISC environments. After initially concentrating on the Motorola 68000 and Intel 386 Unix markets Micro Focus now has a code generator for Sparc-based Unix machines. The company sees great potential in this environment as Sparc users start to pursue business markets, and will ship its first products during the second half of this year. The quiet growth of the Unix market, and the not so quiet growth of the Sun Sparc allows Micro Focus genuine

access to the groundswell of both opinion and hard cash that is supporting Unix. During the past year Micro Focus became the first company to have its product, the Cobol/2 compiler certified to Ansi 85 High Level standard under MS-S/2; IBM endorsed Micro Focus products for SAA and PS/2; Micro Focus struck a deal to supply its compiler as standard on Hewlett Packard’s HP-UX Unix-based minis; in Japan OEM deals were signed with Fujitsu and Matsushita for its High Performance Level II Cobol to add the the deal it already has there with IBM; and AT&T said it would supply Micro Focus Cobol V.1.5 on its 3B systems and Cobol/2 on its 6386 WorkGroup System. But despite all the encouraging news, a word or two of caution is still in order. One product company Essentially it remains a one product company in that its offerings are based around Cobol. On the horizon there may be a threat to Cobol from super-high-level applications development languages, the so-called fourth generation languages. If a standard emerges among these, it could challenge Cobol’s position as the most widely-used business applications development environment. But in one form or another people have been saying that for almost 20 years, and it still hasn’t happened. And IBM’s Systems Applications Architecture also contains a commitment to Cobol as standard. Questions must also be raised about the company’s performance in Europe which is likely to be relatively disappointing set against successes in the US and Japan. But while the personal computer market grows and the market for micro Cobol applications development tools holds up Micro Focus will go from strength to strength. When Micro Focus’ shares plummeted, the company’s relationship with the City suffered a severe setback. Now one of the company’s priorities must be to thaw its frosty relationship with the Square Mile. West seems to think the company’s return to profitability will go a long way towards restoring City confidence. I don’t know if we were on particularly bad terms with the City but the share price reflects the fact that business had not been good. When one is reporting losses it’s very difficult for the City to think positively. But now the shares, at around 145 pence, look moderately cheap on a prospective price-earnings ratio of 8 on the profit forecasts doing the rounds.

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