Investors in Sophos (SOPH) had quite a ride last year. High-profile ransomware attacks including ‘WannaCry’ in May and so-called ‘Petya’ in June drove increased interest in the cyber-security company. Indeed, its shares climbed nearly 150 per cent over the course of 2017 – supported by strong billings growth. However, as the share price skyrocketed, some became worried that the stock was overvalued. Management would need to maintain, or improve upon, the momentum seen so far to allay such fears.
Alas for Sophos, its third-quarter performance did not come up to scratch. With expectations so high, the market’s dramatic response was perhaps inevitable; shares fell by nearly a fifth on the day. Billings for the three months to December rose by 18.7 per cent to $194.8m (£140m); a lower rate than the 22 per cent achieved in the first half, and indeed the huge 29 per cent growth achieved in the second quarter alone. Meanwhile, adjusted operating profit of $15.3m was down 6.1 per cent year-on-year. The difference was even greater on a nine-month basis; $30.4m, down 19.6 per cent year-on-year.
The group also reported unlevered free cash flow of $16.8m for the third quarter, down 7.2 per cent against the same period a year earlier. That said, this was up 9.8 per cent on a nine-month basis to $88.2m.
Despite this setback, chief executive Kris Hagerman sounded upbeat. He said that as the business “continues to post strong growth”, the board remained confident in the full-year outlook and the group’s longer-term prospects.
Analysts at Numis seemed less optimistic, changing their recommendation from ‘Add’ to ‘Hold’. They noted that “the slowdown in billings is a little worrisome, particularly given the renewals tailwind in the quarter”. For now, they have left their full-year forecasts unchanged – assuming the fourth quarter grows “at least at Q3’s rate”.
