Growth is being strangled by intensifying competition for UK cyber security tools supplier Sophos (SOPH), as today’s third quarter billings blow makes all too clear.

At 10am the share price is down more than 20% at 296p, valuing the FTSE 250 firm at £1.42bn.

Today’s trading update shows no sign of improvement from sluggish trading in the first half, with constant currency billings up just 2% in both the quarter (to $194m) and the year to date.

The company blames a decline in new customer billings, where net new customers were up 3% to 327,000, and hardware.

But of even greater concern is the threat that things will get worse, with the company warning that full year constant currency billings will decline.

NUTS AND BOLTS FOR SAFE ONLINE USE

Sophos provides a range of endpoint, unified threat management, cloud, network, and mobile cyber security solutions on a global basis, mainly to mid-market customers.

But much of its mid-market lunch now appears to be getting eaten by bigger and better-known players, and by a relative explosion of nimble new operators entering the scene. Think Check Point, FireEye, Symantec and Fortinet on the former, Carbon Black, Tenable, Cylance and Crowdstrike for the new upstarts.

‘We suspect overall it is now starting to see real competitive pressure in the endpoint and network security market, particularly in its core mid-market customer base,’ says Indraneel Arampatta of technology consultancy Megabyte.

GROWING CONCERN

This is a big deal for investors because in fundamentally calls into question the company’s longer-term growth potential, as we flagged in November.

Billings is new business invoiced in the period under review, whereas revenue can include income from previously signed multi-year contracts, which makes billings a ‘better measure of how sustainable growth is,’ according to AJ Bell’s Russ Mould, the investment platform’s investment director.

Previous targets set by Sophos for $1bn in annual billings and in excess of $100m in adjusted operating profit were effectively forgotten last year, one in which the company saw three share price shocks that kick-started the stock’s slump from over 600p to half that today.

CUT TO FORECASTS, AGAIN

Shore Capital’s Martin O’Sullivan is only anticipating trimming his billings estimates for full year (to 31 March) 2019 and 2020 by around 1%, but the impact is likely to be bigger on the cash EBITDA line (earnings before interest, tax, depreciation and amortisation), the widely used measure of profitability for Sophos.

The analyst had been forecasting for roughly $794m and $913m respectively on billings, and $175.2m and $204.1m cash EBITDA before today’s news, reduced back in November.

If and how Sophos is able to react to these new challengers will dictate the future direction of the shares.


Issue Date: 18 Jan 2019