Could Micro Focus be about to raise its audit game. Again?

The media reported on Monday that Micro Focus International’s “lower than expected license income” has resulted in a projected fall in revenues of 6%-9% (higher than the 2%-4% originally anticipated in May 2017 ahead of the takeover), and the resignation of its CEO. While the share price has seen a small recovery, the market reaction has wiped approximately 50% off the company’s market capitalization.

Throughout its history, Micro Focus has acquired many technologies that support legacy systems, allowing IT organizations to avoid the headache of migrating to newer technologies. It has also acquired many technologies with a ‘locked-in’ customer base (customers that are either reluctant or unable to migrate to competitive solutions).  Micro Focus has also been known as one of the more aggressive auditors of its users, and it has been more willing than many other vendors to resort to litigation in the event of a dispute. 

What was expected from the Micro Focus/HPE Merger?

Market response to the merger was mixed, with financial analysts focusing on the ownership split and the size of the deal, and the scale of the challenge ahead with Micro Focus moving from gradual growth through small acquisitions to trebling its workforce and potentially doubling revenues. At the time, Kevin Loosemore (Micro Focus executive chairman) told the Financial Times that the HP product set was a good fit because there was more margin to be made from looking after existing customers than inventing the next big thing.

This may well have reinforced reservations as to whether Micro Focus, traditionally focused on supporting legacy applications, would have the appetite or ability to drive development for the growth products it was acquiring. There were also concerns about the extension of audit activity to the HPE software portfolio (HPE had traditionally carried out very little audit activity and most of that had been focused on the quality management and testing products).

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Micro Focus International’s “lower than expected license income” has resulted in a projected fall in revenues of 6%-9%

How much revenue comes from audits?

Although I’m often asked what proportion of a vendor’s revenues are made up from audit income rather than from new software sales or support and maintenance revenues, this isn’t something that businesses are typically required to account for. All sales resulting from software audits usually fall under either ‘new license sales’ or ‘support & maintenance’ as they can be legitimately claimed to be one or the other. While there is less room for leverage, and contract terms relating to license non-compliance mean that contractual discounts do not apply, audit settlements are indeed new license purchases because they are either back-maintenance payments or payments in advance for an agreed period (usually somewhere between 12 and 36 months).

Since the acquisition of The Attachmate Group in 2014 there has been an increase in customers seeking help with audits across the Micro Focus product set, and during this time, several license compliance roles at Micro Focus were advertised, primarily in the UK and Europe. A quick check of the Micro Focus website on Monday resulted in nine such vacancies, with one in the Philippines, one in Germany and the rest in the United States, which reflects the industry-wide change in audit focus from Europe to North America over the past 5-10 years. Recruitment at this level does, however, suggest continued growth in compliance activity in the foreseeable future.

Common compliance issues

The most common compliance issues identified by Micro Focus customers going through audits include:


Longstanding reputation for effective revenue-generation through audits

Micro Focus’s reputation as an aggressive auditor is longstanding and the acquisition of The Attachmate Group in 2014 only reinforced that, as Attachmate itself had a record of effective and aggressive auditing. As many of the products owned by the group are legacy products, with very little either in the way of growth within its existing customer base (often the user-base is decreasing as new systems are introduced) or need for its products from new customers, audit has been an effective way to maintain income for these products. It appears that Attachmate’s audit activity broadened following its acquisition by Micro Focus to include NetIQ and SUSE both of which were growth products whose customers do not generally expect to experience audits, rather than confining them to the terminal emulation software and Novell product set as had previously been the case.

tactical vendor-focused SAM leaves organisations vulnerable

For many organizations such legacy products are often an area of vulnerability, with Software Asset Management (SAM) activities focused on vendors with whom there is regular interaction (purchases, maintenance payments) or whose software is widely and actively used. When software is only visible to a small audience, no new purchases are being made and maintenance is no longer being paid, it is easy for organizations who are managing their software assets in a tactical fashion (focusing on a vendor-by-vendor approach) to miss risk indicators relating to legacy software and systems.

Recommended actions

Those organizations who manage software on a vendor-by-vendor basis should take urgent action to include all Micro Focus owned products in their SAM programs and make plans for dealing with any issues with identified in a proactive fashion. If necessary, seek advice from a licensing specialist to clarify any potential issues.

By contrast, those who take a process-based approach may well be aware of the potential issues. Where prioritization is managed by applying a weighting to the known licensing deltas, IT Asset Managers, software asset managers, compliance managers, risk managers or others with responsibility for assessing licensing risk should consider increasing the weighting for all products in the Micro Focus portfolio given today’s news.

It’s possible that Micro Focus could play to their strengths, and a focus on audit is the most obvious way for it to minimize the impact of its decline in revenue and increase license sales.

Being audited regularly? Got an enterprise agreement renewal due soon? Why not get in touch with one of our Audit Defense experts for some advice?