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Sophos expects subdued trading conditions to continue

Last updated: 22:05 18 Jan 2019 AEDT, First published: 19:05 18 Jan 2019 AEDT

Cybersecurity
More than 25,000 net new customers have been added in the current fiscal year

Cybersecurity outfit Sophos Group PLC (LON:SOPH), which issued a profit warning in November, said its performance continued to be subdued sending its shares down by over a fifth.

In the final three months of 2018 – the third quarter of the company’s fiscal year – billings were up 2% year-on-year on a constant currency (CC) basis.

READ: £400mln wiped from Sophos’s value as it fails to repeat two key targets for next year

The group now expects the trends in the fiscal third quarter to generally continue into the current quarter, which would result in a modest decline in full-year billings on a CC basis.

Group revenue rose 7.3% to US$178.0mln from US$165.9mln the year before, driven by a 15% increase (on a CC basis) in subscription revenue.

Year-to-date performance is a mixed bag

In the first nine months of the fiscal year, adjusted operating profit was up 157% on the same period of 2017, while reported operating profit of US$51mln marked a move into the black after the company made a loss of US$25mln in the corresponding period of 2017.

Cash earnings before interest, tax, depreciation and amortisation (EBITDA) was down 8% year-on-year.

Net cash flow from operations clocked in at US$100mln while ungeared free cash flow was broadly unchanged from a year earlier.

"Sophos remains strongly positioned from a technology, product, and strategic perspective. We are confident in our strengthening product platform and how it positions us for the future,” said Kris Hagerman, the chief executive officer of Hagerman.

Slowing billings growth

Russ Mould, investment director at AJ Bell commented: “Cybersecurity is a growth area but that does not mean companies operating in this space are guaranteed to be successful – Sophos being a case in point.

“Its third-quarter update showed a return to profit backed by double-digit growth in revenue. “However, the level of billings – or new business invoiced in the period under review – offers a better measure of how sustainable growth is. Revenue, after all, can include income from previously-agreed contracts.

“Here the picture is much less encouraging. Billings were up just 2% in the third quarter and 2% for the financial year-to-date. And this is giving investors the collywobbles, just as it did when Sophos reported billings growth of 3% in a first-half update.”

Mould continued: “The slowing billings growth is putting cash earnings under some pressure and suggests that, unless the company has something spectacular up its sleeve for the fourth quarter, full-year expectations will have to be downgraded.

He concluded: “The company enjoyed a strong run following its summer 2015 stock market debut, but the shares have halved in the last 12 months.

“They now trade just 25% higher than the 225p issue price from the IPO and 17% up on the closing price on the first official day of trading. As such, chief executive Kris Hagerman’s position may be coming under increasing scrutiny.”

In late morning trading, Sophos shares were 22.3% lower at 292.80p.

 -- Adds analyst comment, updates share price --

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