Sophos operationally strong despite wider loss

End user and network security solutions provider Sophos Group issued its audited results for the year to 31 March on Wednesday, with reported billings growing 18.2% to $632.1m, or by 19.9% at constant currency, with the board reporting “strong” momentum across all regions and products in both new business and renewals.

The FTSE 250 company said cash flow growth was “exceptionally strong”, with unlevered free cash flow almost tripling to $133.4m.

It described performance from Sophos Central as “very strong”, growing 220% to $87.7m and now representing 17.1% of subscription billings, rising from 6.5%.

End user security increased by 24.4% to $298.5m, and network security grew by 17.8% to $319.1m at constant currency, which the board said reflected continued market share gains.

Sophos’ operating loss widened over the prior year, which the board said was primarily as a consequence of cost increases associated with the strong growth in billings, whilst the majority of revenue was deferred and recognised over time.

Deferred revenue grew 16.5%, or $82.3m to $581.0 million, increasing the visibility of future revenue growth.

The company’s cash EBITDA margin increased by 110 basis points to 23.7%.

Its net renewal rate - including cross-sell and upsell - increased to 106% from 102% year-on-year, with UTM/endpoint cross-sell at 9.6%, improving from 7.4%.

Among the operational highlights was the September launch of Intercept X, which the firm described as a “next-generation” endpoint protection application, featuring signature-less anti-exploit and anti-ransomware capabilities, already with more than 8,000 customers.

It said the integration of Invincea's machine learning technology was progressing well, with a new endpoint protection solution expected to be available in Sophos Central in 2017.

The board declared a final dividend of 3.3 cents per share - an increase of 200% - taking the total dividend for the year to 4.6 cents, or an increase of 156% over the prior year.

“FY17 was another strong year for Sophos, in which we made significant progress against our strategic goals, and delivered operational and financial performance above our expectations,” said chief executive officer Kris Hagerman.

“We have a differentiated strategy of delivering innovative, simple, and highly effective cybersecurity solutions for mid-market enterprises, synchronizing across end user and network security - all in partnership with our channel.”

Encouragingly, Hagerman said the strong momentum at the heart of its performance was manifest across all major regions and products, and in both new business and renewals.

“We have issued a medium term outlook as a sign of our confidence in delivering sustainable growth in billings and profitability over the longer-term.”

That outlook said that for FY18, Sophos expected mid to high-teens billings growth, a 50-100 basis point improvement in the cash EBITDA margin and unlevered free cash flow coming from a high base in FY17, broadly unchanged.

For the medium-term, the company anticipated achieving billings of around $1bn, unlevered free cash flow in the range of $220m to $240mn and around a 100-150 basis point cash EBITDA margin improvement per annum, giving an adjusted operating profit of more than $100m by FY20.