Sophos Group plc Adjusted operating profit up 87% to $109 million

Sophos Group plc (LON:SOPH), a leading provider of next-generation cloud-enabled enduser and network cybersecurity solutions, today issued its audited results for the year-ended 31 March 2019.

Financial highlights

· Total group revenue up 11% to $711 million (an increase of 12% at constant currency)

– Strong growth in subscription revenue,(3) up 16% year-on-year (an increase of 17% at constant currency)

· Billings(4) flat YOY at constant currency, reflecting a challenging YOY compare

– Group net renewal rate of 124%, compared to 140% in FY18 which reflected elevated levels of cross-sell

– Total billings were affected by a mix shift, with stronger growth in smaller customers particularly driven by managed service provider (“MSP”) monthly billings, and a modest reduction in the number of larger transactions compared to the prior-year period

– Weaker Network hardware billings as customers extended refresh cycles

– Total subscription renewal base now exceeds $1.2 billion, with the renewal base for FY20 up by 14% at actual rates (19% at constant currency), representing an increase of $55 million to $436 million

– Strong growth in net new term customer additions to over 335,000 total customers, from 300,000 in FY18; now in excess of 382,000 when including MSP customers

– 119% growth in MSP billings(5) to $19 million, with ARR(6) now at $27 million

· Continued strong demand for our next generation (“next-gen”) solutions

– Next-gen business, including Sophos Central and XG Firewall, grew 30% at constant currency to $340 million, and now represents 47% of billings

– Within next-gen business, Sophos Central billings up 23% to $228 million, off a strong compare

· Step change improvement in adjusted operating profit(3)

– Adjusted operating profit increased by 87% to $109 million, from $58 million in FY18; driven by revenue growth and operating leverage, as well as a one-off benefit from the reduction in variable performance-related pay in the period

– Cash EBITDA(7) declined by 16% from $199 million to $168 million as we continue to invest for growth

· Profit before taxation increased to $54 million, from a loss before taxation of $(41) million in FY18

· Net cash flow from operating activities of $143 million broadly unchanged year-on-year with close management of working capital and after lower exceptional items

· Final dividend of 3.7 cents per share, an increase of 6% over the prior year

– Total dividend for the year of 5.2 cents, an increase of 6%

Financial summary

Outlook

We believe the drivers are in place for continued future revenue growth, principally driven by growth in our subscription business, especially in our next-generation products. We intend to continue to invest to support this growth, with a return to operating profit margin leverage after FY20.

Note: Our guidance is now focused on revenue and adjusted operating profit, as we view the billings metric as becoming less indicative of the medium-term growth in our business; this will increasingly be the case as MSP revenues expand, as more of our products are delivered as a service, and due to the short-term variations in the renewal rate that can occur due to external factors and the timing of product releases.

Chief Executive Officer, Kris Hagerman, commented:

“Despite the challenges we faced in FY19, we are pleased with the strategic progress we made during the year. The demand environment for cybersecurity solutions continues to be robust, and we are confident that we are well positioned competitively, especially as more organisations move to adopt next-generation cybersecurity offerings. Increasingly, organisations of all sizes are looking for cloud-native solutions, centralised administration, integrated products, AI-powered protection, openness, and a service-oriented approach to security. Our next-gen solution set and strategy align well with these demands and have helped Sophos deliver strong growth in subscription revenue and customer count. We have become a leader in the next-gen cybersecurity market, and we are excited about the road ahead.”