FTSE350: Hope amidst uncertainty for software stocks

Indeed, that’s one reason why Alfa Financial Software (ALFA) is absent from the table below, despite having featured in last year’s FTSE 350 review. The market value of Alfa – which provides software to the asset finance industry – now languishes below £400m, after a profit warning last June sent its shares plummeting.

Still, recent updates from fellow tech stocks have offered some suggestion that the sell-off isn't entirely connected to trading. Investors can therefore look forward to some instances of improved, or at least stabilised, performance in 2019 – even if uncertainty remains the watchword. And while we were correct in our anticipation last year of further M&A activity in this sector – see Ion’s acquisition of Fidessa – there are signs that companies are now renewing their focus on internal investment and returns to shareholders.

Accordingly, in November, Micro Focus extended its share buyback programme from $171m to $400m – delivering a relatively encouraging full-year trading update in the same breath. This was welcome news, after the stock collapsed in March when Micro Focus cut its full-year sales guidance and announced the departure of chief executive Chris Hsu. Looking ahead, the group is selling its open-source software business ‘SUSE’ for $2.5bn, and we may learn more about the use of these proceeds within February’s preliminary numbers.

November also proffered hints of positivity within Sage’s preliminary numbers, after a choppy few months saw management cut full-year organic sales guidance by one percentage point in April, and the news in August of chief executive Stephen Kelly’s departure. A first-quarter FY2019 update revealed a 7.6 per cent increase in organic sales. Recurring revenues rose 10.5 per cent, supported by subscription growth.

Meanwhile, Sophos’s shares plunged on its November interims. At the time, it failed to reiterate earlier targets for billings and adjusted operating profits. The shares then tumbled again on a recent trading update. Third-quarter and year-to-date billings to December rose just 2 per cent at constant currencies. Sophos cited a “challenging prior-year comparable”. It expects third-quarter trends to “generally continue” into the fourth quarter, causing a “modest decline” in full-year constant currency billings. Year-to-date, revenues rose 14 per cent and the group saw a $51m operating profit, up from a $25m loss. There’s also a new cyber-security kid on the block: Avast (AVST), which floated last May.

Broker Shore Capital highlights differences between the two, including the fact that Avast takes a substantial proportion of revenues from consumer antivirus desktop products, while Sophos has “virtually zero” presence in the consumer market. Such a specialism could serve Avast well if conditions sour, and Barclays expects the consumer end-point security market to be “resilient in an economic slowdown”.