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Sophos slumps again

Management expects full-year billings to dip, after a disappointing nine months
January 18, 2019

Shares in Sophos (SOPH) tumbled by more than a fifth after the cyber-security group warned that it expects a “modest decline” in constant-currency billings for the year to March. Billings grew by just 2 per cent over the first nine months of the 2019 financial year, compared with a rise of 20 per cent during the same period last year. Bosses expect a “subdued performance” to continue into the final quarter.

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Sophos cited a “challenging prior-year comparable”, after 2017’s infamous ransomware attacks spurred urgent demand for cyber-security products. And while the renewal rate for existing customers reached 122 per cent in the third quarter – up from 121 per cent in the second quarter, and 118 per cent over the first-half overall – this was offset by a decline in new-customer and hardware billings.

There were other positive glimmers, including Sophos’s addition of more than 25,000 net new customers over nine months – with more than 9,000 in the third quarter – taking total customers to 327,000.

Chief financial officer Nick Bray pointed to the more “traditional” numbers within the release. A 14 per cent rise in revenues year-to-date was buoyed by 18 per cent growth in subscription sales. Moreover, while adjusted cash profits declined by 8 per cent to $104m, reported operating profits came in at $51m – up from losses of $25m.

However, this is not the first time that management’s guidance has shifted in the past year or so. Within the 2018 preliminary results last May, bosses maintained targets for the 2020 financial year – including annual billings of around $1bn (£0.77bn) and adjusted operating profits of over $100m. These targets were not reiterated at the 2019 half-year stage in November. Here, the company said it expected a “modest improvement” in second-half constant-currency billings growth against the first, though it did expect to see a “significant improvement” in overall constant-currency year-on-year billings growth in FY2020.

Broker Stifel has revised billings estimates for FY2019 from $799m to $766m. It expects adjusted pre-tax profits of $49.7m and EPS of 11.8ȼ in FY2019 (FY2018: $33.8m and 9.4ȼ).