On the face of it today’s interim results from IT security firm Sophos (SOPH) look pretty decent.

Revenue was broadly in line at $350m, up 18% year-on-year, the company continues to expand it route to market through a bolstered channel partner network (more than 43,000, up from 39,000 in March and 30,000 18 months ago), while overall customer numbers have risen to 317,000.

INVESTORS TAKE FLIGHT

So why has the share price been battered today? At 11.30am the stock is 26% down at 338p. It was trading at 639p as recently as June.

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.

To cut to the chase, investors are becoming spooked by the idea that growth momentum is running out of steam.

This is best illustrated by looking at billings versus revenue. In Sophos case, billings is new business invoiced in the period under review, whereas revenue can include income from previously signed multi-year contracts.

REVENUE VS BILLINGS

That revenue growth is 18% versus billings of 3% suggests that revenues are supported by chunks of income flowing from contracts signed in the past. The fact that previous targets for $1bn in annual billings and in excess of $100m in adjusted operating profit don’t get a look in in today’s announcement suggests that these goals have been mothballed.

‘We provisionally expect to ease down our estimates for full year 2019 (to 31 March) and 2020 by circa 5% at the billings line,’ confirms Shore Cap today.

But the bigger question remains, is the slowdown in billings growth a short-term blip or a reflection of this enormously competitive industry?

‘Against the still-high valuation ahead of this statement, despite a sharp fall in the shares following the July update, the share price reaction this morning is not really a surprise,’ says Indraneel Arampatta of IT analysis consultancy Megabuyte.

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account. AJBell logo

Issue Date: 07 Nov 2018