Sophos sinks as growth stays subdued against tough comparators
By Josh White
Date: Friday 18 Jan 2019
(Sharecast News) - Security software provider Sophos Group said it expects to see a modest decline in full-year constant current billings.
The FTSE 250 company reported 2% growth in constant currency billings for both the third quarter ended 31 December and the nine months of the year to date, having previously expected a "modest improvement" in billings growth compared to the first half.
The continued subdued performance was set against the context of a "challenging" prior-year comparable figures, Sophos said, adding that it saw a further sequential improvement in the renewal rate to existing customers in the third quarter to 122%.
That, however, was offset by a modest decline in billings from new customers, as well as a decline in hardware billings.
Central billings were ahead 22% for the year-to-date and 29% in the third-quarter at constant currency, while end user billings rose by 6% in the third-quarter at constant currency - an improvement over the small constant currency decline experienced in the first half.
"We now expect the trends in the third quarter to generally continue into the fourth quarter, which would result in a modest decline in full-year constant currency billings," the Sophos board said in its statement.
Sophos reported "positive" initial customer response to its 'Intercept X Advanced with EDR' product, following a successful launch at the end of the third quarter, while network operations saw a small benefit from the launch of 'XG Firewall v17.5' late in the period, although overall subscription growth in the division was offset by lower hardware billings.
Revenue was up 14% year-to-date on both a reported and constant currency basis to $527.5m, which was primarily driven by continued growth in subscription revenue.
Subscription revenue increased by 18% in the year-to-date and 15% in the third-quarter at constant currency, benefiting from prior-period subscription billings and offsetting a reduction in hardware revenue.
Deferred revenue rose 8% year-on-year, which was said to be the result of the deferral of billings, net of the impact of currency movements from the strengthening of the dollar in the period.
Sophos also said that its profitability had "significantly improved", with its adjusted operating profit ahead 157% year-to-date, driven by strong growth in revenue.
The company's reported operating profit was $51m for the year-to-date, compared to a prior-period loss of $25m.
Cash EBITDA declined 8% for the year-to-date to $103.9m, which Sophos said reflected the subdued billings performance, while cash flow performance was described as "strong" in the context of a strong prior-year comparative period.
Net cash flow from operations was $100m, and unlevered free cash flow was "broadly unchanged" for the year-to-date.
The firm added more than 25,000 net new customers for the year so far, including more than 9,000 in the third-quarter, with total customer numbers standing at 327,000.
"Sophos remains strongly positioned from a technology, product, and strategic perspective," said chief executive officer Kris Hagerman.
"We are confident in our strengthening product platform and how it positions us for the future."
The shares tumbled 24% to 284.6p in early trade on Friday, coming close to a two-year low.
Broker Liberum noted that this was the third consecutive full-year guidance downgrade "and it now looks like new product launches will not be able to offset the strong performance in FY'18".
Analyst Martin O'Sullivan at Shore Capital said that Sophos's previously expections of modest improvement in billings growth "appears more of a stretch".
"In our view, the subdued Q3 outturn for billings and cash EBITDA implies downgrades to full year expectations, particularly around cash EBITDA (where consensus is for $178m), without a material pick in billings in Q4, which Sophos is not guiding for in today's statement," said O'Sullivan, though he was encouraged by profitability improving and that cash flow remained "creditable".
"We provisionally expect to ease down our estimates for FY19 and FY20 by c1% at the billings line and likely more for Cash EBITDA and unlevered free cash flow. Although Sophos already trades at a significant discount to its peer group on cash flow and EV/Sales metrics, we expect a negative reaction this morning."
Email this article to a friend
or share it with one of these popular networks:
You are here: news
10 Lower Thames St,
London EC3R 6EN