Today’s third quarter update from UK cyber security firm Sophos (SOPH) makes for interesting reading.

What the market is focusing on is the big hit to operating cash flow and hefty operating losses. In the three months to 31 December 2017 (the company’s third quarter) adjusted operating profit declined by 6.1% to $15.3m and operating cash performance fell 2.2% to $17.5m.

It’s worth noting that even on the company’s preferred metrics of cash EBITDA (earnings before interest, tax, depreciation and amortisation) and unlevered free cash flow, there are still firm declines. These numbers fell 5.3% and 7.2% to $46.7m and $16.8m respectively.

PRICED TO PERFECTION

Considering that the share price had rallied nearly 130% since last April (yesterday’s 621.5p close was just 47p shy of record highs), today’s 13.5% share price slump may not look particularly heavy-handed. Many would say that the stock had been priced for perfection.

That said, underlying trends are largely positive. Growth is actually accelerating. Third quarter sales versus the half year figures show a 23% increase to $166m. The fact that this overtook billings growth, up 19% to $195m, for the first time in several years is also worth noting.

FASTER AND BETTER QUALITY GROWTH

This is largely thanks to subscription service feed-ins from prior years now starting to come through to the profit and loss account.

A strong subscription performance from Sophos Central (which has been motoring since its release) and Endpoint security, hint towards increasingly sticky income trends, which is great for future revenue predictability.

What also appears to have happened in Q3 is a big marketing push on the company’s new line of XG Firewall products and newly improved InterceptX, its artificial intelligence malware defence suite. This looks the most likely reason for the profit and cash performance drift in Q3.

Is that a one-off or part of a considered and consistent push for an end user land grab? For the answer to that question we’ll have to wait for full year figures to 31 March 2018, likely to be published sometime in mid-May.

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Issue Date: 08 Feb 2018