The standout performer on the UK 100 this morning is software company Micro Focus International after a shining set of expectation-beating results have seen it buck the overall market downtrend.

A half year report that saw earnings shoot up by 22% and pre-tax profits increase by over 14%, just a matter of weeks after the company was added to the blue-chip UK index, has resulted in a 5% rally in the value of its share price this morning, massively outperforming an otherwise cautious marketplace ahead of the Fed’s monetary policy announcement this evening.

The firm was thrust into the market spotlight in September as it continued its vast 2016 M&A run. This time a proposed merger with Hewlett Packard Enterprise‘s software assets – comprising what remains of Autonomy, the notorious $11bn HP acquisition that resulted in billions of dollars of write-offs soon after its purchase – to be completed in 3Q17. The deal marked a significant change in direction for  the UK’s tech sector, where of late foreign takeovers have been running the show, and propelled MCRO from a mid-sized software stalwart to one of the largest tech entities in the UK.

Micro Focus’ recent run of high profile, high value acquisitions are all aimed at maintaining the company’s cash flow and shoring up sales in the process. The firm focuses on updating the compatibility of aging software with new hardware, along with the high margin returns that it offers. Therefore, in a world growing ever more reliant on ever-updating technology, the firm’s ability to capitalise through the purchase of cheap, out-dated assets such as HP’s software wing (which includes former multi-billion dollar acquisitions Mercury Interactive and Arcslight along with Autonomy),  in order to compete on a global level could help the company continue to turn a profit.

However, this morning’s report also outlined rising one-off costs to $41m which can be attributed to the beginning of the aforementioned merger process, alongside the completion of its $540m purchase of the US firm Serena Software back in May of this year; this figure is expected to almost double to $80m for the second half of the year once the HP deal is completed. A worry for some investors is that these mounting integration, pre-acquisition and acquisition costs could end up denting profitability for a firm that prides itself on reversing depreciating assets into highly sought after profit makers, providing attractive returns.

Whilst Micro Focus’s results are very much orientated by the timing of deals, suggesting that today’s positive performance might have no bearing on its future, it is likely that once completed the firm’s expansion with HPE should provide the firm with a significantly larger product platform from which to offer its clients. Yet a refusal for the company to get carried away with future outlook was echoed by the company’s reiterance of its full-year revenue guidance between -2% and 0% despite the glowing release.

Can the firm manage the size of rising exceptional costs in order to maintain its increasing profitability or will the mammoth HP deal prove a move too many for the plucky UK tech company’s margins?

Henry Croft, Research Analyst, 14 December