Sophos to buy US software company for $120m, improves outlook

Cyber security firm Sophos is to buy US software company Invincea for up to $120m in order to consolidate its position in the growing next-generation firewall market, while it said that billings and revenue grew in the third quarter and offered an improved outlook for the year.

The FTSE 250 firewall company will buy Invincea, a developer of patented advanced next-generation malware protection, for $100m in cash on closing of the deal plus up to $20m for an earn-out related to growth achieved during the first year of ownership.

Invincea Labs, a division of Invincea that has been separately managed and operated since 2010, will be de-merged prior to the acquisition and is not part of the deal.

The acquisition, which will be funded through cash resources and an extension of the company's existing credit facilities, is subject to regulatory approval and is expected to complete by the end of the current fiscal year. It is also expected to be broadly neutral to cash earnings before interest, tax, depreciation and amortisation (EBITDA) in its first full year of ownership and thereafter.

Sophos said that the acquisition would extend and consolidate its lead in the growing next-generation endpoint market, as it has already launched Intercept X, its first next-generation product, built on its existing technology and technology integrated through the acquisition of SurfRight in December 2015.

Endpoints are everything from desktop computers to laptops, servers, mobile devices, embedded devices, SCADA systems, and even Internet-of-Things devices.

The company hopes to use the sale approach with Invincea and integrate it into the Sophos Central endpoint product line to incorporate Invincea's machine learning technology.

Invincea recorded billings of $13.4m, revenue of $9.8m and a loss before tax of $11.8m in the year ended 31 March 2016, and its gross assets were worth $15.7m.

Sophos chief executive Kris Hagerman said: "By adding Invincea to our portfolio, Sophos is executing on its vision to assemble the most powerful technologies to provide the very best, cutting-edge defenses for our customers.

“Invincea will strengthen Sophos' leading next-gen endpoint protection with complementary predictive defenses that we believe will become increasingly important to the future of endpoint protection and allow us to take full advantage of this significant new growth opportunity."

Meanwhile, in the third quarter ended 31 December 2016, billings grew 16.1% to $164.1m, or 18.3% on constant currency, compared to last year, while revenue increased 11% to $134.8m, or 13.4% at constant currency, due to growth in subscription revenue.

Unlevered free cash flow climbed 28.4% to $18.1m and by 136.2% to $80.3m for the year to date. The company improved its outlook for the year, with unlevered free cash flow now expected to more than double.

Shares in Sophos were up 5.19% to 283.70p at 0812 GMT.

The cloud-based security platform was one of the top share price risers on Wednesday, said Accendo Markets analyst Mike van Dulken, due to its very successful first full quarter for Intercept X and, perhaps more importantly, the return of operating profit to the black.

"Management’s strong visibility over future billings, revenues and profitability and free cash flow up 28% appears to be underpinning bullishness, sending the shares for a test of all-time highs from Nov 2015."

House broker Numis admitted the revenue mix was surprising, with Endpoint very strong and Network weak, and on a trailing twelve month basis Endpoint is seen as circa 20% and Network circa 16%, "a surprisingly inversion of the kind of growth profile expected at the time of IPO" in 2015.

"We think this highlights the opportunity and risk - the company is successfully innovating and acquiring to deliver new products to new and existing customers, thus outperforming its market and generating strong cash.

"However, medium term visibility of product cycle changes is limited and Sophos has been relatively dependent on acquisition to meet these. In our view, the fundamental merits of the financial model remain under-appreciated by the market and we see ongoing opportunity for rerating as the company continues to deliver."