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Sophos - an encouraging start to the year

George Salmon | 12 July 2019 | A A A
Sophos - an encouraging start to the year

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Sophos Group plc Ordinary 3p

Sell: 450.00 | Buy: 450.50 | Change 6.10 (1.36%)
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Sophos has issued a trading update for the three months to 30 June 2019, the first quarter of its financial year.

New billings have returned to growth, and CEO Kris Hagerman described the period as an encouraging start to the year.

The shares rose 3% on the news.

In a separate announcement, the group also confirmed the departure of CFO Nick Bray.

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Our view

2018 was a pretty horrible year for investors in the IT security group. With the network business really struggling, the group repeatedly missed guidance. A couple of more solid results has gone some way to patching up the group's damaged credibility, but there's still some way to go.

Whoever takes over as CFO won't be tasked with delivering fireworks, merely a few more quarters of stability. And they'll be helped by the fact that Sophos is, on paper, an attractive business.

High profile attacks on companies and governments mean there's increasing demand for cyber-security. Not only that, Sophos has market-leading products, and offers a high standard of both network and end user protection. Customers benefit from a joined up service under a centralised system, with sales conducted through a network of over 47,000 independent partners.

Contracts usually run for up to 3 years and Sophos has delivered impressive results when renewal time comes round, increasing the value of existing contracts through upselling and tacking on additional products.

Low capital requirements mean cash flows are significant. Although there's a yield on offer, it's just 1.1% at present, with spare cash being ploughed back into research and growth.

All this means Sophos should have long term potential. However, first and foremost investors need to be able to trust the group to hit guidance. If it proves capable of that, focus could start to shift back to what we think is a positive underlying investment case.

The shares change hands for just shy of 18 times expected cash flows per share, which is around the average since listing.

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First quarter results

Revenue of $180.2m increased by 3% year-over-year ("YOY"), or by 7% at constant exchange rates. That reflects a 10% increases in subscription revenue, including a 78% underlying increase from the group's all-in-one partnerships with Managed Service Providers (MSPs). That progress more than offset the 11% fall in hardware sales.

Billings, which more accurately reflects the levels of business written in the quarter, rose by 9% at constant exchange rates driven by a 43% rise in the group's 'next generation' products, which now make up 54% of billings. The group's renewal rate was 118% in the period, compared to 115% in the prior year.

Adjusted operating profit rose 10% to $24.1m, which excludes the impact of a one-off exceptional restructuring charge. Net operating cash flow improved 34.7% to $54.4m, boosted by working capital changes.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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