TIDMSOPH
RNS Number : 5499G
Sophos Group Plc
07 November 2018
Sophos Group plc
Interim results for the six-month period-ended 30 September
2018
Billings in line with expectations; strong revenue, profit, and
cash performance
Oxford, 7 November 2018. Sophos Group plc (the "Group" / LSE:
SOPH), a leading provider of cloud enabled enduser and network
security solutions, today issues its interim results for the
six-months to 30 September 2018 ("H1 FY19").
Financial and operational highlights
-- In line with the expectations outlined at the time of the Q1
update in July, H1 FY19 billings(1) increased by 3% to $353
million, a rise of 2% at constant currency to $361 million
- The renewal rate at 118% in the H1 FY19 period (or 121% in Q2
FY19), compared to 142% a year ago, as cross-sell activity in our
Enduser business returned to more sustainable levels following
elevated growth in the comparative period
- Continued robust growth in Sophos Central; now accounting for
around one third of subscription billings with 77,000 customers on
the integrated cloud management platform
- Further expansion in the partner channel and customer base,
with over 43,000 channel partners and 317,000 customers
-- Revenue(2) for H1 FY19 grew by 18%, or 16% at constant
currency, to $350 million, with 20% growth in subscription revenue
at constant currency, reflecting the strength of our subscription
model and billings growth in prior years
-- Profit before tax of $26 million, reflecting strong revenue
contribution, a foreign exchange benefit, and fair value
adjustments, compared to a loss before tax of $36 million in the
comparative period
-- Modest improvement in operating cash flow and unlevered free
cash flow(3) against the comparative period
-- Strong product and innovation pipeline during FY19:
successful H1 release of Intercept X for Server, already gaining
good traction with customers; in H2 the Group plans to release
significant new versions of its flagship endpoint and firewall
products: Intercept X Advanced with Endpoint Detection and Response
("EDR"), and XG Firewall v17.5 with Sophos Central cloud management
and significant new synchronized security features
Outlook
We are confident that we are well positioned to deliver future
growth. We have a strong innovation pipeline and are making a
significant investment in our strategic Sophos Central cloud
platform. We now expect a modest improvement in constant currency
billings growth in H2 FY19 compared to the first half, as we
continue to work through challenging year-on-year comparatives. For
FY20, we enter the year with strong growth in our subscription
renewals base, and hence, assuming a stable renewal rate, we would
anticipate a significant improvement in the rate of overall
constant currency year-on-year billings growth.
Financial highlights
H1 FY19 H1 FY18(2) Growth
--------- ------------ --------
$M $M %
GAAP
Revenue 349.5 296.8 17.8
Profit/(loss) before taxation 26.0 (35.5) NM
Net cash flow from operating
activities 81.5 80.7 1.0
Non-GAAP
Billings 352.7 341.5 3.3
Cash EBITDA(4) 54.0 66.6 (18.9)
Unlevered free cash flow 71.6 71.4 0.3
Kris Hagerman, Chief Executive Officer, commented:
"Sophos continues to make solid progress in advancing our
strategy of delivering advanced and highly effective cybersecurity
solutions to IT professionals at organizations of all sizes. We saw
continued growth and momentum in Sophos Central, our strategic
cloud management platform, with now over 77,000 customers. And we
are well on track to deliver two significant new releases in our
flagship products - Intercept X with EDR, and XG Firewall v17.5 -
which we believe will further deliver on the promise of
synchronized security, and position us well in the market for
next-generation security solutions, for H2 and beyond."
About
The Sophos Group is a leading global provider of cloud-enabled
enduser and network security solutions, offering organisations
end-to-end protection against known and unknown IT security threats
through products that are easy to install, configure, update and
maintain. For further information visit: www.sophos.com. The Group
has over 30 years of experience in enterprise security and has
built a portfolio of products that protects over 317,000
organisations and over 100 million endusers in 150 countries,
across a variety of industries.
Forward-looking statements
Certain statements in this announcement constitute
"forward-looking statements". These forward-looking statements
involve risks, uncertainties and other factors that may cause the
Group's actual results, performance or achievements, or industry
results, to be materially different from those projected in the
forward-looking statements. These factors include: general economic
and business conditions; changes in technology; timing or delay in
signing, commencement, implementation and performance or
programmes, or the delivery of products or services under them;
structural change in the security industry; relationships with
customers; competition; and ability to attract personnel. You are
cautioned not to rely on these forward-looking statements, which
speak only as of the date of this announcement. The Group
undertakes no obligation to update or revise any forward-looking
statement to reflect any change in expectations or any change in
events, conditions or circumstances.
Contact
Sophos Group plc Financial Public Relations
Tel: +44 (0) 1235 559 933 James Macey White / Matt Low
Kris Hagerman, Chief Executive Officer Tulchan Communications
Nick Bray, Chief Financial Officer Tel: +44 (0) 20 7353 4200
Derek Brown, Vice President Investor
Relations
Conference call and webcast
Sophos management will be hosting an analyst meeting to discuss
the H1 results at the offices of UBS, 5 Broadgate, London EC2M 2QS
at 09:30 GMT today. Please register your attendance by contacting
tulchan_sophos@tulchangroup.com.
This event is also accessible via conference call and
audio-webcast, for registered participants. A replay of the
audio-webcast will be also accessible via the Sophos investor
website following the presentation. To register for the webcast and
access the presentation materials please visit:
https://investors.sophos.com/events-and-presentations. Participants
are advised to visit the website at least 15 minutes prior to the
commencement of the call, in order to register and, for those
accessing the webcast, download and install any audio software that
may be required.
Conference call dial in details:
+44 (0) 330 336 9127 (UK) / 0800 358 6377 (toll free)
+1 929 477 0324 (US) / 800 458 4121 (toll free)
Confirmation code: 4928445
NB: Conference call participants will be able to ask questions
during the Q&A session, but those on the webcast will be in a
listen-only mode.
1. Billings represents the value of products and services
invoiced to customers after receiving a purchase order from the
customer and delivering products and services to them, or for which
there is no right to a refund. Billings does not equate to
statutory revenue.
2. Restated for the adoption of IFRS 15 "Revenue from Contracts
with Customers"; see note 2 of the Financial Statements for further
details
3. Unlevered free cash flow represents Cash EBITDA less
purchases of property, plant and equipment and intangibles, plus
cash flows in relation to changes in working capital and
taxation.
4. Cash earnings before interest, taxation, depreciation and
amortisation ("Cash EBITDA") is defined as the Group's operating
profit / (loss) adjusted for depreciation and amortisation charges,
any gain or loss on the sale of tangible and intangible assets,
share option charges, the net deferral of sales related costs,
unrealised foreign exchange differences and exceptional items, with
billings replacing recognised revenue.
Chief Executive Officer's Review
Operational and strategic progress
In the first half of the financial year, billings increased by
3% to $352.7 million, a rise of 2% at constant currency, in line
with the expectations we outlined at the time of the Q1 trading
update in July. Group revenue for H1 FY19 increased by 18%, or 16%
at constant currency, to $349.5 million, reflecting the strength of
our subscription model and billings growth in prior years.
As a result of strong revenue growth, we are reporting a profit
before tax of $26.0 million. Our Cash EBITDA margin fell to 15%,
from 20% a year ago reflecting lower than expected billings, and
continued investment in research and development and sales and
marketing to drive future growth. Cash flow remained strong, with
operating cash flow and unlevered free cash flow modestly up on the
comparative period.
As discussed at the time of the Q1 trading update in July, the
year on year growth rate was impacted by a challenging comparable
in our Enduser business, given the dramatic acceleration in demand
we witnessed in the comparative period as customers urgently
invested in protection against high-profile, global ransomware
outbreaks.
The effect of this extraordinary boost to demand was most
evident in the elevated renewal rates we saw a year ago, at 142%,
reflecting heightened levels of cross-selling activity to existing
customers. This activity has returned to more sustainable levels in
H1 FY19, with a renewal rate of 118% for the six-month period.
Sophos delivers innovative, simple and highly-effective
cybersecurity solutions spanning both the endpoint and the network,
which synchronize and work together as a system. Our solutions are
managed through Sophos Central, our single, integrated cloud
management platform, all sold 100% through the channel. This
remains a highly differentiated strategy, which continues to
resonate well with our partners and customers.
Sophos Central is fundamental to our long-term strategy and
success, hence we are encouraged to see continued good growth in
billings in the period. Sophos Central now accounts for around a
third of subscription billings, and more than 77,000 customers are
now managing their Sophos cybersecurity solutions via the platform.
We also saw further solid growth from Intercept X, with more than
34,000 customers now benefiting from its industry-leading next-gen
endpoint protection. We are achieving this growth both from
attracting new customers to Sophos Central and as existing
on-premise customers make the transition to the platform.
Sophos Central drives cross-sell and improves average customer
spend over time. Indeed, in our target market, i.e. businesses with
fewer than 5,000 employees, the average spend per customer on
Sophos Central now exceeds the average for an on premise customer
by around 15%. This reflects the fact that more than 55% of Sophos
Central customers now have more than one product.
In the first half of the year, we grew our customer base to over
317,000 customers and over 43,000 partners, of whom 7,300 are now
'blue-chip' partners, the most productive group within our partner
channel.
Technology and innovation
At a recent customer event in London we announced the imminent
launch of Endpoint Detection and Response ("EDR"), a significant
addition to our Intercept X endpoint protection capabilities. With
all the benefits of the Sophos deep learning, neural network-based
advanced detection, backed by on-demand access to intelligence
curated by SophosLabs, Intercept X Advanced with EDR enables
businesses of all sizes, including those with limited resources, to
identify and prevent cyberattacks in real time with threat-tracking
and first-responder forensics at their fingertips. The early access
program has proved very encouraging, with several hundred customers
already participating and the Intercept X Advanced with EDR product
is now deployed on around twenty thousand endpoints.
In addition, we also delivered Intercept X for Server during the
first half, significantly advancing our existing server protection
offering through the addition of deep learning and anti-exploit
capabilities. Intercept X for Server protects the high value
information that is typically stored on servers and targeted by
cybercriminals, delivering a major benefit to organisations of all
sizes, and especially small and medium-sized businesses ("SMBs")
who are potentially more at risk than larger, well-resourced
enterprises.
We expect to deliver a new version of our next-gen firewall,
Sophos XG Firewall v.17.5, later this year, which will include,
among its many new features, Sophos Central management and
additional synchronized security features, including lateral
movement detection, to prevent threats from spreading on the same
network segment, and synchronized user ID.
Industry and channel recognition
In a recent protection test report, SE Labs rated Intercept X
Advanced number one for both enterprise endpoint protection and
small business endpoint protection. This was the first public test
of Intercept X Advanced, which combines Intercept X and Cloud
Endpoint Advanced, in which Sophos was able to block all public and
targeted attacks, minimizing false positives and handling
legitimate applications correctly. These impressive results
followed Sophos being awarded a number one ranking for malware and
exploit protection by MRG Effitas, another leading independent IT
security-testing organisation.
Once again, Sophos was positioned in the "Leaders" quadrant of
Gartner, Inc.'s 2018 "Magic Quadrant for Unified Threat Management
(SMB Multifunction Firewalls)". Sophos is the only vendor to be
consistently recognised as a Leader by Gartner in both the Magic
Quadrant for Endpoint Protection Platforms and the Magic Quadrant
for Unified Threat Management.
We were also delighted to be recognised once more as the
'overall winner' for both Network Security and Endpoint Security in
CRN's 2018 Annual Report Card (ARC) Awards, in recognition of the
high quality and innovative product and program offerings we
deliver to our partner channel. Sophos is in a unique position to
offer an intelligent synchronized security system, which is
recognised by partners and reflected in the ARC survey results.
Sophos ranked highest in all sub-categories and topped the new
sub-category for managed and cloud services.
Outlook
The market opportunity remains significant, and we have
continued to add new customers, whilst expanding and supporting our
channel. We continue to invest in innovation, with the successful
launch of Intercept X for Server in the first half, and we have
already begun delivering on a strong product release cycle in the
second half of the year, including Intercept X Advanced with EDR,
and Sophos XG Firewall v17.5.
We are confident that we are well positioned to deliver future
growth. We now expect a modest improvement in constant currency
billings growth in H2 FY19 compared to the first half, as we
continue to work through challenging year-on-year comparatives. For
FY20, we enter the year with strong growth in our subscription
renewals base, and hence, assuming a stable renewal rate, we would
anticipate a significant improvement in the rate of overall
constant currency year-on-year billings growth.
Kris Hagerman
Chief Executive Officer
Financial Review
Billings at reported exchange rates increased by 3.3 per cent to
$352.7 million. As flagged with the Q1 trading statement in July,
this performance reflects a challenging prior-year comparison,
where Enduser product demand had been significantly boosted by the
high-profile ransomware attacks in 2017. In addition to this,
albeit of lesser extent, the Group experienced a headwind to
Network billings as a result of a legacy product transition in the
first half.
Revenue growth was strong in the half-year ended 30 September
2018 as prior-period subscription billings converted into revenue
with reported growth of 17.8 per cent, or 15.7 per cent at constant
currency. Deferred revenue at the end of the period increased to
$701.8 million from $627.3 million a year ago; this represents a
decline from $728.6 million at 31 March 2018, principally due to
foreign exchange variances from the weakening of euro and sterling
against the US Dollar. The deferred revenue balance gives the Group
good visibility of future revenue, with $401.5 million of the
deferred revenue due for recognition in less than one year, an
increase of 12.6 per cent over the prior-year.
The Group made an operating profit of $27.0 million in the
period and adjusted operating profit increased by $34.2 million to
$49.9 million, primarily as a result of strong revenue growth and
the benefit of a foreign exchange gain of $6.0 million, compared to
a foreign exchange loss of $5.0 million in the comparative
period.
Cash flow from operating activities and unlevered free cash flow
both modestly increased over the prior-year, benefiting from timing
of investing activity and the careful management of working capital
in the current period.
The table below presents the Group's financial highlights on a
reported currency basis:
H1 FY19 H1 FY18(1) Growth
--------- ------------ --------
$M $M %
GAAP
Revenue 349.5 296.8 17.8
Profit/(loss) before taxation 26.0 (35.5) NM
Net cash flow from operating
activities 81.5 80.7 1.0
Non-GAAP
Billings 352.7 341.5 3.3
Cash EBITDA 54.0 66.6 (18.9)
Unlevered free cash flow 71.6 71.4 0.3
1. Restated for the adoption of IFRS 15, see note 2 of the
Financial Statements for further details
Billings
Group reported billings increased by $11.2 million to $352.7
million in the half-year ended 30 September 2018, from $341.5
million in the comparative period. This represented a 3.3 per cent
reported growth or 1.6 per cent on a constant currency ("CC")
basis.
H1 FY19 H1 FY18 Growth Growth
------------ ------------ ------------ --------
$M $M % %
(Reported) (Reported) (Reported) (CC)
Billings by Region:
- Americas 121.5 116.6 4.2 4.3
- EMEA 186.2 175.1 6.3 2.4
- APJ 45.0 49.8 (9.6) (7.8)
------------ ------------ ------------ --------
352.7 341.5 3.3 1.6
------------ ------------ ------------ --------
Billings by Product:
- Network 168.4 160.0 5.3 3.3
- Enduser 166.5 167.4 (0.5) (2.0)
- Other 17.8 14.1 26.2 26.1
------------ ------------ ------------ --------
352.7 341.5 3.3 1.6
------------ ------------ ------------ --------
Billings by Type:
- Subscription 294.5 285.3 3.2 1.6
- Hardware 52.6 51.9 1.3 (0.4)
- Other 5.6 4.3 30.2 26.7
------------ ------------ ------------ --------
352.7 341.5 3.3 1.6
------------ ------------ ------------ --------
Billings by region
Americas
Billings attributable to the Americas increased by $4.9 million
to $121.5 million in the period, representing 4.2 per cent growth
on a reported and 4.3 per cent on a constant currency basis; this
increase was driven by UTM and OEM growth.
EMEA
Billings attributable to EMEA increased by $11.1 million to
$186.2 million in the period, representing 6.3 per cent growth on a
reported basis and 2.4 per cent growth on a constant currency
basis. This increase was spread across Enduser and Network
products, with a more challenging prior-year comparison for
Enduser.
APJ
Billings attributable to APJ decreased by $4.8 million to $45.0
million in the period, representing 9.6 per cent on a reported
basis and 7.8 per cent on a constant currency basis. The decrease
in the region being driven by both Enduser and Network
products.
Billings by product
Network products
The Group's billings attributable to Network products increased
by $8.4 million to $168.4 million in the period, representing 5.3
per cent growth on a reported basis and 3.3 per cent on a constant
currency basis. Growth was in part negatively impacted by a legacy
product transition flagged at the time of the Q1 trading update in
July.
Enduser products
The Group's billings attributable to Enduser products decreased
by $0.9 million to $166.5 million in the period. Cross-selling
activity to existing customers returned to more sustainable levels
in the second quarter, following a period of accelerated demand in
the comparative period, significantly boosted at that time by
high-profile ransomware attacks.
Billings by type
Subscription billings increased by $9.2 million to $294.5
million in the period, representing 3.2 per cent growth on a
reported basis and 1.6 per cent growth on a constant currency
basis. Hardware billings increased by 1.3 per cent to $52.6
million.
Key billings metrics
Billings from new customers
Billings from new customers, including all MSP billings and
excluding OEM and consumer, remained consistent at 25 per cent of
total billings compared to 24 per cent in the period-ended 30
September 2017 with a growth of 7.8 per cent on a reported
basis.
Retention and renewal rates
The Group's net retention and renewal rates include the impact
of cross-selling and upselling, which helps the Group evaluate the
success of its strategy to broaden the sales of its product
portfolio to existing customers. The Group's net trailing
twelve-month retention rate decreased from 108.1 per cent at 30
September 2017 to 106.7 per cent at 30 September 2018. The Group's
trailing twelve-month renewal rate decreased to 128.5 per cent from
139.4 per cent, principally affected by lower levels of
cross-selling activity to existing customers against the
comparative period, as well as a smaller headwind from a legacy
product transition in Network.
Billings by size
Sophos' products are suitable for organisations of any size but
are specifically tailored for the Group's target market of
mid-market enterprises, typically with fewer than 5,000 employees.
The proportion of billings to this target market remained stable at
87 per cent in the period.
Billings by length of contract
Subscription agreements are of differing durations and are
generally between one and three years in length. The last twelve
months weighted average contract length at 30 September 2018 was
27.2 months, a small decrease on the 27.6 months in the comparative
period, due in part to the growth in monthly billings from the
Group's MSP business.
Cross-sell and upsell opportunities
As the threat landscape evolves and Sophos continues to
innovate, there is an opportunity to cross-sell additional products
and services, or to upsell enhanced versions of products or
additional licences to existing customers.
The percentage of customers who own both a Sophos Endpoint and
UTM product has continued to improve. At 30 September 2018,
approximately 11.7 per cent of customers had both a UTM product and
an Endpoint product compared to 10.5 per cent of customers at 30
September 2017.
Across the entire installed base, customers currently have on
average 1.4 products, leaving significant room for future
cross-selling activity. Sophos Central is a fundamental driver of
the cross-sell strategy. As customers move onto the cloud platform
and take additional products, the Group's cross-sell metrics have
improved, in particular the average customer spend and the average
number of products per Sophos Central customer, the latter higher
than the group average at 1.7.
Revenue and deferred revenue
The Group adopted IFRS 15 "Revenue from Contracts with
Customers" in the current year and has therefore restated the
results for the prior-year on a consistent basis, see note 2 of the
Financial Statements for further details.
The Group's revenue increased by $52.7 million, or 17.8 per
cent, to $349.5 million in the half-year ended 30 September 2018.
Subscription revenue was notably strong in the period, with growth
of 21.7 per cent, as a consequence of strong prior-period billings
growth now being released from deferred revenue.
H1 FY19 H1 FY18(1) Growth Growth
--------------- --------------- -------------- --------
%
$M (Reported) $M (Reported) % (Reported) (CC)
Revenue by Region:
- Americas 123.1 105.4 16.8 16.7
- EMEA 180.6 148.0 22.0 17.3
- APJ 45.8 43.4 5.5 7.3
--------------- --------------- -------------- --------
349.5 296.8 17.8 15.7
--------------- --------------- -------------- --------
Revenue by Product:
- Network 163.2 148.7 9.8 7.6
- Enduser 170.2 134.7 26.4 24.3
- Other 16.1 13.4 20.1 19.1
--------------- --------------- -------------- --------
349.5 296.8 17.8 15.7
--------------- --------------- -------------- --------
Revenue by Type:
- Subscription 290.9 239.0 21.7 19.6
- Hardware 52.9 52.7 0.4 (1.4)
- Other 5.7 5.1 11.8 9.4
--------------- --------------- -------------- --------
349.5 296.8 17.8 15.7
--------------- --------------- -------------- --------
1. Restated for the adoption of IFRS 15, see note 2 of the
Financial Statements for further details
The majority of the Group's billings, which are recognised over
the life of the contract, relate to subscription products (H1 FY19:
83.5 per cent; H1 FY18: 83.5 per cent), with the benefit from
increased billings being spread over a number of years on the
subsequent recognition of deferred revenue. Revenue in the period
of $349.5 million comprised $231.4 million from the recognition of
prior-period deferred revenues and $118.1 million from in-period
billings. The deferred revenue balance at the end of the period of
$701.8 million increased $74.5 million year-on-year, an increase of
11.9 per cent. This was mainly due to a net deferral of billings
over that trailing twelve-month period amounting to $88.1M
partially offset by a net currency revaluation of $13.6 million,
because of the weakening of the euro and sterling against the US
Dollar.
Revenue in the Americas increased by 16.8 per cent to $123.1
million in the half-year ended 30 September 2018, supported by the
recognition of prior-period Enduser billings from the Sophos
Central platform.
EMEA revenue increased by 22.0 per cent to $180.6 million in the
half-year ended 30 September 2018 with growth in particular in
Enduser but also aided by Network sales.
APJ revenue increased by 5.5 per cent to $45.8 million in the
half-year ended 30 September 2018, growth being due to Enduser
products.
Cost of sales
Cost of sales increased by $6.7 million to $72.9 million in the
period. This was due to increased hosting costs as more of the
Group's customers move to cloud managed products, costs associated
with supporting the Group's products and services that naturally
increase as the Group grows and the impact of a change in mix of
the hardware sold.
Sales and marketing
Sales and marketing expenses increased by $13.4 million or 11.4
per cent, to $131.0 million in the period, albeit this increase was
tempered by lower levels of commissions. Sales and marketing
expenses are targeted to increase below the rate of billings growth
to enable them to continue to support the business and channel
whilst also being leveraged as the Group grows.
Research and development
Research and development expenses increased by $5.9 million, or
8.7 per cent, to $74.0 million in the period. The Group has a
strong focus on new and enhanced products to address the
significant market opportunity that it believes exists and
allocates resources accordingly. Research and development
expenditure is broadly targeted to grow at the rate of
billings.
General finance and administration
General finance and administration expenses, excluding
exceptional items, foreign exchange and the amortisation of
intangible assets, increased by $5.9 million, or 13.9 per cent, to
$48.3 million in the period. The increase was due to a higher
share-based payment expense, which increased by $2.4 million to
$23.1 million, due to both business growth and an increase in the
share price at the point RSUs were issued, and underlying general
finance and administration expenses which increased by 16.1 per
cent to $25.2 million, reflecting the annualised increase resulting
from prior-period investments as well as certain ongoing compliance
costs that have increased over the prior-year.
Exceptional items, included within general finance and
administration expenses, were a net credit of $5.5 million in the
period, compared to a net expense of $6.9 million in the
prior-year. The current period credit arose on fair value changes
in acquisition contingent consideration, partially offset by
restructuring costs.
Amortisation of intangible assets
Amortisation of intangible assets decreased by $6.0 million, or
43.5 per cent, to $7.8 million in the period. The decrease was due
to the Group's reducing balance amortisation policy and the absence
of acquisitions in the current period.
Currency movements and impact
The Group recorded a foreign exchange gain of $6.0 million in
the period, compared with a loss of $5.0 million in the comparative
period, which resulted from a weakening of the euro and sterling
against the US Dollar.
Cash EBITDA
Cash EBITDA decreased by 18.9 per cent to $54.0 million in the
period. Cash EBITDA margins decreased to 15.3 per cent from 19.5
per cent in the prior-period, due to costs growing at a faster rate
than billings; billings growing more slowly due to the difficult
compare in the first half. The reconciliation of Cash EBITDA to
operating loss is included in note 3 of the Financial
Statements.
Adjusted operating profit
Adjusted operating profit increased by $34.2 million to $49.9
million in the period, resulting from strong revenue growth and
also benefiting from a foreign exchange gain following the
weakening in the period of sterling and the euro versus the US
Dollar. The reconciliation of adjusted operating profit to
operating loss is included in note 3 of the Financial
Statements.
Operating profit
Operating profit was $27.0 million in the period, compared to a
loss of $23.2 million in the comparative period. This was
principally driven by strong growth in revenue, a foreign exchange
gain from a loss in the prior-period, a decrease in the
amortisation charge and an exceptional credit. Underlying costs are
managed in line with business performance.
Net finance costs
Net finance costs decreased by $11.3 million to $1.0 million in
the period, due mainly to foreign exchange gains on euro
denominated debt following the strengthening of the US Dollar.
Underlying interest expense was flat compared to the comparative
period.
Income tax
The Group's tax charge for the half year was $15.0 million (H1
FY18: $2.8 million) with an effective tax rate of
57.7 per cent (H1 FY18: -7.9 per cent). The tax charge is higher
than the prior-period primarily due to the Group generating a
profit, compared with a loss in the comparative period.
Profit before tax and profit for the period
Profit for the period increased by $49.3 million to a profit of
$11.0 million in the period, from a loss of $38.3 million in the
comparative period. This principally reflected the improved
operating result and a decrease in net finance costs resulting from
foreign exchange differences, which were partly offset by an
increase in the tax charge.
Cash flow
Net cash flow from operating activities increased to $81.5
million from $80.7 million in the prior period. The small increase
was due to a decrease in exceptional items and continued management
of working capital.
H1 FY19 H1 FY18(1)
-------- -----------
$M $M
Cash EBITDA(2) 54.0 66.6
Net deferral of revenue (3.2) (44.7)
Net deferral of expenses (0.8) 1.9
Foreign exchange 5.7 (2.7)
Depreciation (5.8) (5.4)
-------- -----------
Adjusted operating profit 49.9 15.7
-------- -----------
Net deferral of revenue 3.2 44.7
Net deferral of expenses 0.8 (1.9)
Exceptional items(3) (1.4) (6.9)
Depreciation 5.8 5.4
Foreign exchange (5.7) 2.7
Change in working capital(2) 36.4 29.0
Corporation tax paid(2) (7.5) (8.0)
-------- -----------
Net cash flow from operating activities 81.5 80.7
-------- -----------
Exceptional items(3) 1.4 6.9
Net capital expenditure(2) (11.3) (16.2)
-------- -----------
Unlevered free cash flow 71.6 71.4
-------- -----------
1. Restated for the adoption of IFRS 15, see note 2 of the
Financial Statements for further details
2. Unlevered free cash flow also represented by the sum of the
marked rows and has been presented to enhance understanding of the
Group's cash generation capability
3. Excludes non-cash movements on exceptional items
Changes in working capital
The change in working capital remained positive with the
variance year-on-year due to continued close control of receivables
and payables; with debtors' days outstanding consistent at 42
days.
Capital expenditure
Capital expenditure primarily comprises property, plant and
equipment as well as intangible assets. Net capital expenditure
decreased by $4.9 million in the period, mainly a result of the
phasing of planned expenditure being more equally phased between
the first and second-half of the current financial year compared to
a first-half weighting in the prior-year.
Cash taxation
Corporation tax paid in the period is broadly in line with the
prior-period.
Financing
There were no changes in the financing of the Group in the
half-year with net debt decreasing to $131.4 million from $221.8
million in the comparative period and $186.3 million at 31 March
2018 as a result of continued strong net cash flows and the absence
of any merger and acquisition activity in the period.
Dividends
The Directors recommend that the half-year and final dividends
be paid in the approximate proportions of one third and two thirds
respectively of the total expected annual dividend. Accordingly,
the Directors have recommended that the Company will pay an interim
dividend in respect of the year-ending 31 March 2019 amounting to
1.5 US Cents per share, a seven per cent increase over the prior
half-year dividend of 1.4 US Cents per share. The interim dividend
would be paid on 14 December 2018 to all shareholders on the
register on 16 November 2018.
Nick Bray
Chief Financial Officer
Principal risks and uncertainties
The principal risks and uncertainties which could have a
material impact on the Group's long-term performance set out in the
last annual report and financial statements, dated 16 May 2018,
remain valid at the date of this report. These risks and
uncertainties (in no specific order) are:
-- Recruitment and retention of key personnel
-- Defects or vulnerabilities in products or services
-- False detection of threats
-- IT security and cyber risk
-- Product portfolio management
-- Disruption to day-to-day Group operations
Following the decision by the UK population to exit, in due
course, from the European Union ("Brexit"), the Directors have
continued to keep under consideration the expected impact of Brexit
on the Group. The Group operates internationally with a diverse
geographic spread which results in only 12 per cent of the Group's
revenue being sourced from the UK. Whilst the fluctuations in the
sterling exchange rate impacts on those UK revenues these are, to a
degree, balanced with sterling denominated costs which mitigates
the impact on the US Dollar functional currency of the Group. The
exact nature of the trading arrangements between the UK and the EU
subsequent to the UK's exit from the EU currently remains uncertain
and consequently the Directors have considered a number of
scenarios and the Group's potential responses to them. This
scenario planning has included anticipating changes to the
operations of the Group and its supply chain, which are not
considered to be significant or posing a heightened risk to the
Group. The impact of
Brexit on the current and future employees has also been
considered and while there may be some disruption or changes in the
UK, these are not currently anticipated to materially affect one of
the Group's principal risks, the 'Recruitment and retention of key
personnel'.
Directors' responsibility statement
We confirm that to the best of our knowledge:
-- The condensed set of financial statements has been prepared
in accordance with IAS 34 Interim Financial Reporting
-- The interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the condensed set of financial statements; and a description of
the principal risks and uncertainties for the remaining six months
of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in
the first six months of the current financial year and that have
materially affected the financial position or performance of the
entity during that period; and any changes in the related party
transactions described in the last annual report that could do
so.
By order of the Board
Kris Hagerman, Chief Executive Officer Nick Bray, Chief
Financial Officer
6 November 2018 6 November 2018
CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE SIX-MONTHSED 30 SEPTEMBER 2018
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
Restated - Restated
Unaudited note 2 - note 2
Note $M $M $M
------------------------------------- ----- ------------- ------------- -----------
Revenue 4 349.5 296.8 639.0
Cost of sales (72.9) (66.2) (144.0)
------------------------------------- ----- ------------- ------------- -----------
Gross profit 276.6 230.6 495.0
Sales and marketing (131.0) (117.6) (239.9)
Research and development (74.0) (68.1) (145.8)
General finance and administration: (44.6) (68.1) (134.5)
------------------------------------- ----- ------------- ------------- -----------
- Underlying (25.2) (21.7) (46.9)
- Share-based payments 5 (23.1) (20.7) (42.3)
- Exceptional items 6 5.5 (6.9) (13.2)
- Amortisation of intangible
assets (7.8) (13.8) (25.2)
- Foreign exchange gain /
(loss) 6.0 (5.0) (6.9)
------------------------------------- ----- ------------- ------------- -----------
Operating profit / (loss) 27.0 (23.2) (25.2)
Finance income 0.4 0.3 0.3
Finance expense 7 (1.4) (12.6) (20.7)
------------------------------------- ----- ------------- ------------- -----------
Profit / (loss) before taxation 26.0 (35.5) (45.6)
Income tax charge 8 (15.0) (2.8) (15.3)
------------------------------------- ----- ------------- ------------- -----------
Profit / (loss) for the period 11.0 (38.3) (60.9)
------------------------------------- ----- ------------- ------------- -----------
Earnings per share (US Cents) 9
Basic EPS 2.3 (8.3) (13.2)
Diluted EPS 2.2 (8.3) (13.2)
Adjusted operating EPS 10.6 3.5 11.5
Diluted adjusted operating
EPS 10.1 3.3 10.8
------------------------------------- ----- ------------- ------------- -----------
The accompanying notes form an integral part of these financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE
INCOME
FOR THE SIX-MONTHSED 30 SEPTEMBER 2018
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
Restated - Restated
Unaudited note 2 - note 2
$M $M $M
--------------------------------------- ------------- ------------- -----------
Profit / (loss) for the period 11.0 (38.3) (60.9)
Other comprehensive losses:
Items that will not be reclassified - - -
subsequently to profit or loss:
Items that may be reclassified
subsequently to profit or
loss:
- Exchange differences arising
on translation of foreign operations (1.6) (0.3) (2.6)
---------------------------------------- ------------- ------------- -----------
Total other comprehensive
losses (1.6) (0.3) (2.6)
Comprehensive profit / (loss)
for the period 9.4 (38.6) (63.5)
---------------------------------------- ------------- ------------- -----------
The accompanying notes form an integral part of these financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AT 30 SEPTEMBER 2018
Company registered number: 09608658
30 September 30 September 31 March
2018 2017 2018
Restated - note Restated
Unaudited 2 - note 2
Note $M $M $M
------------------------------- ----- ------------- ---------------- ----------
Non-current assets
Intangible assets 11 851.5 874.3 869.9
Property, plant and equipment 12 22.0 26.6 25.4
Deferred tax asset 120.7 135.8 120.7
Other receivables 0.6 1.0 1.3
------------------------------- ----- ------------- ---------------- ----------
994.8 1,037.7 1,017.3
Current assets
Tax assets 5.9 9.4 8.2
Inventories 18.1 21.3 16.0
Trade and other receivables 162.0 160.6 222.5
Cash and cash equivalents 171.4 81.1 120.0
------------------------------- ----- ------------- ---------------- ----------
357.4 272.4 366.7
------------------------------- ----- ------------- ---------------- ----------
Total assets 1,352.2 1,310.1 1,384.0
------------------------------- ----- ------------- ---------------- ----------
Current liabilities
Trade and other payables 124.5 135.2 134.1
Deferred revenue 13 401.5 356.7 407.9
Income tax payable 29.7 25.2 23.0
Financial liabilities 14 0.6 18.4 17.4
Provisions - 0.4 -
------------------------------- ----- ------------- ---------------- ----------
556.3 535.9 582.4
Non-current liabilities
Trade and other payables 7.6 9.3 8.2
Deferred revenue 13 300.3 270.6 320.7
Financial liabilities 14 303.2 303.7 306.8
Provisions 1.3 1.3 1.4
Deferred tax liabilities 12.8 18.3 14.5
------------------------------- ----- ------------- ---------------- ----------
625.2 603.2 651.6
------------------------------- ----- ------------- ---------------- ----------
Total liabilities 1,181.5 1,139.1 1,234.0
------------------------------- ----- ------------- ---------------- ----------
Net assets 170.7 171.0 150.0
------------------------------- ----- ------------- ---------------- ----------
Represented by:
Share capital 22.3 21.8 22.0
Share premium 125.1 120.3 122.3
Merger reserve (200.9) (200.9) (200.9)
Retained earnings 111.1 145.9 116.8
Share-based payment reserve 146.7 113.6 121.8
Translation reserve (33.6) (29.7) (32.0)
------------------------------- ----- ------------- ---------------- ----------
Total equity 170.7 171.0 150.0
------------------------------- ----- ------------- ---------------- ----------
The accompanying notes form an integral part of these financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX-MONTHSED 30 SEPTEMBER 2018
Share-based
Share Share Merger Retained Payment Translation
Capital Premium Reserve Earnings Reserve Reserve Total
$M $M $M $M $M $M $M
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
At 1 April 2017 restated
- note 2 21.6 118.4 (200.9) 199.5 68.9 (29.4) 178.1
Loss for the period: - - - (38.3) - - (38.3)
Other comprehensive
profit or loss: - - - - - (0.3) (0.3)
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
Total comprehensive
loss - - - (38.3) - (0.3) (38.6)
Share options exercised 0.2 1.9 - - - - 2.1
Share-based payments
expense - - - - 18.2 - 18.2
Share-based payments
tax - - - - 26.5 - 26.5
Cash dividend - - - (15.3) - - (15.3)
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
At 30 September 2017 21.8 120.3 (200.9) 145.9 113.6 (29.7) 171.0
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
At 1 April 2018 restated
- note 2 22.0 122.3 (200.9) 116.8 121.8 (32.0) 150.0
Profit for the period: - - - 11.0 - - 11.0
Other comprehensive
profit or loss: - - - - - (1.6) (1.6)
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
Total comprehensive
profit - - - 11.0 - (1.6) 9.4
Share options exercised 0.3 2.8 - - - - 3.1
Share-based payments
expense - - - - 20.6 - 20.6
Share-based payments
tax - - - - 4.3 - 4.3
Cash dividend - - - (16.7) - - (16.7)
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
At 30 September 2018 22.3 125.1 (200.9) 111.1 146.7 (33.6) 170.7
-------------------------- --------- --------- --------- ---------- ------------ ------------ -------
The accompanying notes form an integral part of these financial
statements.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX-MONTHSED 30 SEPTEMBER 2018
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
Restated - Restated
Unaudited note 2 - note 2
Note $M $M $M
-------------------------------------- ----- ------------- ------------- -----------
Profit / (loss) for the period 11.0 (38.3) (60.9)
Adjusted for:
Depreciation 5.8 5.4 11.6
Amortisation of intangible
assets 7.8 13.8 25.2
Amortisation of fair value adjustment
on deferred income (0.1) (0.1) 1.0
Fair value adjustment to contingent
consideration (6.9) - 0.2
Foreign exchange (5.7) 2.7 8.1
Share-based payments 5 20.6 18.2 39.6
Finance income (0.4) (0.3) (0.3)
Finance costs 7 1.4 12.6 20.7
Income tax charge 15.0 2.8 15.3
-------------------------------------- ----- ------------- ------------- -----------
48.5 16.8 60.5
(Increase) / decrease in inventories (2.8) (4.3) 1.7
Decrease / (increase) in trade
and other receivables 54.4 27.0 (31.3)
(Decrease) / increase in trade
and other payables (14.4) 4.0 10.4
Increase in deferred revenue 3.3 45.1 128.7
Increase / (decrease) in provisions - 0.1 (0.2)
-------------------------------------- ----- ------------- ------------- -----------
Cash generated from operations 89.0 88.7 169.8
Income taxes paid (7.5) (8.0) (22.1)
-------------------------------------- ----- ------------- ------------- -----------
Net cash flow from operating activities 81.5 80.7 147.7
--------------------------------------------- ------------- ------------- -----------
Investing activities
Purchase of property, plant
and equipment (4.8) (6.8) (10.0)
Acquisition of subsidiary
net of cash acquired 15 (10.0) (3.1) (4.9)
Purchase of intangible assets (6.5) (9.4) (11.1)
Finance income 0.4 0.3 0.3
-------------------------------------- ----- ------------- ------------- -----------
Net cash flow from investing activities (20.9) (19.0) (25.7)
--------------------------------------------- ------------- ------------- -----------
Financing activities
Proceeds from issue of shares 3.1 2.1 4.2
Dividends paid - - (21.8)
Repayment of borrowings 15 - (50.0) (50.0)
Transaction costs related
to borrowings - (0.1) (0.1)
Finance lease payments - - (0.1)
Finance costs (4.8) (4.8) (9.1)
-------------------------------------- ----- ------------- ------------- -----------
Net cash flow from financing activities (1.7) (52.8) (76.9)
--------------------------------------------- ------------- ------------- -----------
Increase in cash and cash equivalents 58.9 8.9 45.1
Net foreign exchange differences (7.5) 4.1 6.8
Cash and cash equivalents
at the start of period 120.0 68.1 68.1
-------------------------------------- ----- ------------- ------------- -----------
Cash and cash equivalents at the
end of period 171.4 81.1 120.0
--------------------------------------------- ------------- ------------- -----------
The accompanying notes form an integral part of these financial
statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODED 30 SEPTEMBER 2018
1 GENERAL INFORMATION
Sophos Group plc is incorporated and domiciled in the UK. The
Company's registered address is:
Sophos Group plc, The Pentagon, Abingdon Science Park, Abingdon,
Oxfordshire, OX14 3YP, United Kingdom.
The Interim Financial Statements were approved by the Board on 6
November 2018 for issue on 7 November 2018.
These Interim Financial Statements do not comprise statutory
accounts within the meaning of section 434 of the Companies Act
2006. Statutory accounts for the year-ended 31 March 2018 were
approved by the Board of Directors on 16 May 2018 and delivered to
the Registrar of Companies. The report of the auditors on those
accounts was unmodified, did not contain an emphasis of matter
paragraph and did not contain any statement on other matters
prescribed by the Companies Act 2006.
These Interim Financial Statements have been reviewed by the
auditor, but not audited.
2 BASIS OF PREPARATION
The Interim Financial Statements have been prepared in
accordance with IAS 34 "Interim Financial Reporting" as adopted by
the European Union and as issued by the International Accounting
Standards Board, and the Disclosure and Transparency Rules of the
Financial Conduct Authority. The Interim Financial Statements
should be read in conjunction with the Annual Report and
Consolidated Financial Statements for the year-ended 31 March 2018,
which have been prepared in accordance with international financial
reporting standards as adopted by the European Union and IFRSs as
issued by the International Accounting Standards Board,
collectively "IFRS".
The Interim Financial Statements have been prepared under the
historical cost convention and are presented in US dollars. All
values are rounded to the nearest 0.1 million ($M) unless otherwise
indicated. The Directors are satisfied that, at the time of
approving the condensed consolidated financial statements, it is
appropriate to continue to adopt a going concern basis of
accounting.
ACCOUNTING POLICIES
The accounting policies adopted in preparation of the Interim
Financial Statements are consistent with those used to prepare the
Group's consolidated financial statements for the year-ended 31
March 2018, with the exception of the adoption of IFRS 15 "Revenue
from contracts with customers" the impact of which is detailed
below. The expected impact of the application of other new and
revised international financial reporting standards, IFRS 16
"Leases" in particular, are discussed in note 2 of the Groups
consolidated financial statements for the year-ended 31 March
2018.
Adoption of IFRS 15
The Group has adopted IFRS 15 Revenue from Contracts with
Customers ("IFRS 15") in the year-ending 31 March 2019 and in doing
so has applied the retrospective transition approach. Consequently,
the results for the half-year ended 30 September 2017 and the
full-year ended 31 March 2018 have been restated on the same
basis.
The adoption of IFRS 15 principally impacted the Group in three
ways:
- The earlier recognition of revenue on certain termed licence
software products; where they are adjudged to have a distinct
performance obligation element that transfers the benefit of
ownership at the point of sale rather than over the life of the
licence;
- the recognition of rebates in line with the recognition of
revenue over the term of the licences sold; and,
- the deferral of commissions and other incremental costs
incurred to obtain a contract with a customer in-line with the
recognition of revenue.
2 BASIS OF PREPARATION CONTINUED
The impact of the adoption of IFRS 15 on the previously reported
results is as follows:
Six-months ended 30 Year-ended 31 March 2018
September 2017
--------------------------------------- -------------------------------------------
IFRS
As previously 15 As previously IFRS 15
reported adjustment Restated reported adjustment Restated
$M $M $M $M $M $M
-------------- ------------ --------- ------------------ ------------ ---------
Revenue 298.1 (1.3) 296.8 640.7 (1.7) 639.0
Cost of sales (65.8) (0.4) (66.2) (143.3) (0.7) (144.0)
Sales and marketing
expense (119.9) 2.3 (117.6) (249.0) 9.1 (239.9)
Operating loss (23.8) 0.6 (23.2) (31.9) 6.7 (25.2)
Income tax (2.7) (0.1) (2.8) (14.0) (1.3) (15.3)
Loss for the period (38.8) 0.5 (38.3) (66.3) 5.4 (60.9)
Deferred tax asset 140.8 (5.0) 135.8 125.8 (5.1) 120.7
Trade and other
receivables 122.4 38.2 160.6 177.8 44.7 222.5
Total assets 1,276.9 33.2 1,310.1 1,344.4 39.6 1,384.0
Deferred revenue 654.4 (27.1) 627.3 755.7 (27.1) 728.6
Deferred tax liabilities 11.1 7.2 18.3 6.0 8.5 14.5
Total liabilities 1,159.0 (19.9) 1,139.1 1,252.6 (18.6) 1,234.0
Net assets 117.9 53.1 171.0 91.8 58.2 150.0
-------------- ------------ --------- ------------------ ------------ ---------
Earnings per share
(US cents)
Basic and diluted
EPS (8.4) 0.1 (8.3) (14.4) 1.2 (13.2)
Adjusted operating
EPS 3.3 0.2 3.5 10.0 1.5 11.5
Diluted adjusted
operating EPS 3.1 0.2 3.3 9.5 1.3 10.8
-------------- ------------ --------- ------------------ ------------ ---------
3 ALTERNATIVE PERFORMANCE MEASURES ("APMs")
The Group uses certain financial measures that are not defined
or recognised under IFRS. The Directors believe that these non-GAAP
measures supplement GAAP measures to help in providing a further
understanding of the results of the Group and are used as key
performance indicators within the business to aid in evaluating its
current business performance. The measures can also aid in
comparability with other companies, particularly in the
cybersecurity industry, who use similar metrics. However, as the
measures are not defined by IFRS, other companies may calculate
them differently or may use such measures for different purposes to
the Group. Constant currency measures have limitations,
particularly as the currency effects that are eliminated may
constitute a significant element of the Group's revenue and
expenses and could materially impact the Group's performance. The
Directors do not evaluate the Group's results and performance on a
constant currency basis without also evaluating the Group's
financial information prepared at actual foreign exchange rates in
accordance with IFRS.
BILLINGS
Billings represent the value of products and services invoiced
to customers after receiving a purchase order from the customer and
delivering products and services to them, or for which there is no
right to a refund. Billings do not equate to statutory revenue.
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
---------------------------- ------------- ------------- -----------
Revenue 349.5 296.8 639.0
Net deferral of revenue 3.2 44.7 129.6
----------------------------- ------------- ------------- -----------
Billings 352.7 341.5 768.6
----------------------------- ------------- ------------- -----------
Currency revaluation 8.3 13.8 18.7
----------------------------- ------------- ------------- -----------
Constant currency billings 361.0 355.3 787.3
----------------------------- ------------- ------------- -----------
3 ALTERNATIVE PERFORMANCE MEASURES ("APMs") CONTINUED
ADJUSTED OPERATING PROFIT AND CASH EBITDA
Adjusted operating profit provides a supplemental measure of
earnings that facilitates review of operating performance on a
period-to-period basis by excluding non-recurring and other items
that are not indicative of the Group's underlying operating
performance.
Cash earnings before interest, taxation, depreciation and
amortisation ("Cash EBITDA") is defined as the Group's operating
profit / (loss) adjusted for depreciation and amortisation charges,
any gain or loss on the sale of tangible and intangible assets,
share option charges, the net deferral of sales related costs,
unrealised foreign exchange differences (on the basis that they are
non-cash income and expenses) and exceptional items, with billings
replacing recognised revenue.
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
--------------------------------- ------------- ------------- -----------
Operating profit / (loss) 27.0 (23.2) (25.2)
Amortisation of intangible
purchased assets 7.8 13.8 25.2
Share-based payment expense 20.6 18.2 39.6
Exceptional items (5.5) 6.9 13.2
---------------------------------- ------------- ------------- -----------
Adjusted operating profit 49.9 15.7 52.8
---------------------------------- ------------- ------------- -----------
Depreciation 5.8 5.4 11.6
Foreign exchange (gain) /
loss - unrealised (5.7) 2.7 8.1
Net deferral of revenue 3.2 44.7 129.6
Net deferral of related selling
expenses 0.8 (1.9) (8.4)
---------------------------------- ------------- ------------- -----------
Cash EBITDA 54.0 66.6 193.7
---------------------------------- ------------- ------------- -----------
UNLEVERED FREE CASH FLOW
Unlevered free cash flow represents net cash flow from operating
activities adjusted for exceptional items and net capital
expenditure. Unlevered free cash flow provides an understanding of
the Group's cash generation and is a supplemental measure of
liquidity in respect of the Group's operations without the
distortions of exceptional and other non-operating items.
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
---------------------------------- ------------- ------------- -----------
Net cash flow from operating
activities 81.5 80.7 147.7
Exceptional items - cash settled 1.4 6.9 13.0
Net capital expenditure (11.3) (16.2) (21.1)
----------------------------------- ------------- ------------- -----------
Unlevered free cash flow 71.6 71.4 139.6
----------------------------------- ------------- ------------- -----------
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
--------------------------- ------------- ------------- -----------
Cash EBITDA 54.0 66.6 193.7
Net capital expenditure (11.3) (16.2) (21.1)
Change in working capital 36.4 29.0 (10.9)
Corporation tax paid (7.5) (8.0) (22.1)
---------------------------- ------------- ------------- -----------
Unlevered free cash flow 71.6 71.4 139.6
---------------------------- ------------- ------------- -----------
4 SEGMENT INFORMATION
For internal management reporting purposes, the operating
segments are determined to be geographic segments as the Group's
risks and rates of return are affected predominantly by the
different economic environments. This is consistent with the
information provided to the Chief Operating Decision Maker. The
Group has only one operating segment based on product on the basis
that the products and services offered to external customers are
very similar and therefore do not result in different risks and
rates of return for the Group. The Group's geographical segments
are based on the location of the Group's operations consisting of
Europe, Middle East and Africa ("EMEA"), The Americas and Asia
Pacific and Japan ("APJ").
Billings are classified by the geographic location of the direct
customers, OEMs and distributors that purchase our products. The
geographic location of OEMs or distributors may be different from
that of end customers.
The accounting policies of the reportable segments are the same
as the Group's accounting policies. Segment profits represent the
profit earned by each segment without allocation of central
administration costs including Directors' salaries, finance costs
and income tax expense. This is the measure reported to the Chief
Operating Decision Maker, the Chief Executive Officer, and Senior
Management Team for the purposes of resource allocation and
assessment of segment performance. Transfer prices between
geographical segments are set on an arm's length basis in a manner
similar to transactions with third parties.
The following tables present billings and expenditure regarding
the Group's geographical segments for the six-months ended 30
September 2018 and 30 September 2017.
Americas EMEA APJ Total
Six-months ended 30 September 2018 $M $M $M $M
-------------------------------------- --------- ------- ------- --------
Billings 121.5 186.2 45.0 352.7
Regional cost of sales (6.4) (17.5) (5.7) (29.6)
-------------------------------------- --------- ------- ------- --------
Regional gross margin 115.1 168.7 39.3 323.1
-------------------------------------- --------- ------- ------- --------
Regional sales and marketing expense (38.6) (43.0) (16.0) (97.6)
-------------------------------------- --------- ------- ------- --------
Regional operating profit 76.5 125.7 23.3 225.5
-------------------------------------- --------- ------- -------
Revenue deferral (3.2)
Central costs (181.7)
Amortisation (7.8)
Depreciation (5.8)
-------------------------------------- --------- ------- ------- --------
Operating profit 27.0
-------------------------------------- --------- ------- ------- --------
Americas EMEA APJ Total
Six-months ended 30 September 2017 $M $M $M $M
-------------------------------------- --------- ------- ------- --------
Billings 116.6 175.1 49.8 341.5
Regional cost of sales (7.0) (17.1) (7.7) (31.8)
-------------------------------------- --------- ------- ------- --------
Regional gross margin 109.6 158.0 42.1 309.7
-------------------------------------- --------- ------- ------- --------
Regional sales and marketing expense (37.8) (36.7) (16.2) (90.7)
-------------------------------------- --------- ------- ------- --------
Regional operating profit 71.8 121.3 25.9 219.0
-------------------------------------- --------- ------- -------
Revenue deferral (44.7)
Central costs (178.3)
Amortisation (13.8)
Depreciation (5.4)
-------------------------------------- --------- ------- ------- --------
Operating loss (23.2)
-------------------------------------- --------- ------- ------- --------
4 SEGMENT INFORMATION CONTINUED
Six-months Six-months
ended ended
30 September 30 September
2018 2017
Unaudited Restated
Revenue from external customers by country $M $M
-------------------------------------------- ------------- -------------
UK 41.2 33.2
USA 109.0 94.4
Germany 72.0 59.0
Other countries 127.3 110.2
--------------------------------------------- ------------- -------------
Total revenue 349.5 296.8
--------------------------------------------- ------------- -------------
Six-months Six-months
ended ended
30 September 30 September
2018 2017
Unaudited Restated
Revenue from external customers by type $M $M
----------------------------------------- ------------- -------------
Subscription 290.9 239.0
Hardware 52.9 52.7
Other 5.7 5.1
------------------------------------------ ------------- -------------
Total revenue 349.5 296.8
------------------------------------------ ------------- -------------
5 SHARE-BASED PAYMENT EXPENSE
For the six-months ended 30 September 2018, the Group has
recognised equity and cash-settled share-based payment expenses as
follows:
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
----------------------------------- ------------- ------------- -----------
Equity-settled transactions 20.6 18.2 39.6
Cash-settled transactions 2.5 2.5 2.7
------------------------------------ ------------- ------------- -----------
Total share-based payment expense 23.1 20.7 42.3
------------------------------------ ------------- ------------- -----------
The Group has made awards under its share-based payment plans
with a weighted average share price ("WASP") on the grant date as
follows:
Six-months ended Six-months ended Year-ended
30 September 2018 30 September 2017 31 March 2018
Number WASP Number WASP Number WASP
000's GBP pence 000's GBP pence 000's GBP pence
---------------- -------- ---------- -------- ---------- ------- ----------
RSUs 4,736 592.56 5,977 448.27 6,337 453.14
PSUs 1,224 595.75 1,719 440.50 1,719 440.50
SAYE - Options 817 594.07 917 463.68 1,667 317.20
---------------- -------- ---------- -------- ---------- ------- ----------
Total awards 6,777 593.32 8,613 448.36 9,723 427.60
---------------- -------- ---------- -------- ---------- ------- ----------
6 EXCEPTIONAL ITEMS
Exceptional items are those that in the judgement of the
Directors need to be disclosed by virtue of their size, nature or
incidence, in order to draw the attention of the reader and to show
the underlying business performance of the Group. Such items are
included within the income statement caption to which they relate
and are separately disclosed on the face of the consolidated
statement of profit or loss.
During the six-months to 30 September 2018, restructuring and
integration costs of $1.2M (H1, FY18: $5.7M) and legal costs of
$0.3M (H1, FY18: $1.2M) in relation to the defence of certain
intellectual property litigation were incurred. Additionally, a
$6.9M non-cash fair value adjustment to the contingent
consideration due to the former owners of Invincea, Inc. was
credited to exceptional items on agreement and payment of the final
settlement. The reduction in the Group's tax charge in respect of
these items amounted to $0.3M (H1, FY18: $1.2M).
7 FINANCE EXPENSE
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
--------------------------------------- ------------- ------------- -----------
Interest expense on loans
and borrowings 4.7 4.6 8.7
Other interest and bank charges 0.2 0.1 0.3
---------------------------------------- ------------- ------------- -----------
4.9 4.7 9.0
Accretion on contingent consideration 0.1 0.6 0.9
Foreign exchange (gain) /
loss on borrowings (4.1) 6.8 9.6
Amortisation of facility fees 0.5 0.5 1.2
---------------------------------------- ------------- ------------- -----------
Total finance expense 1.4 12.6 20.7
---------------------------------------- ------------- ------------- -----------
8 TAXATION
The Group calculates the period income tax expense using the tax
rate that would be applicable to the expected total annual
earnings. The income tax expense for the six-month period ended 30
September 2018 was $15.0M (H1, FY18: $2.8M) representing an
effective tax rate of 57.7% (H1, FY18: -7.9%).
9 EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing the
profit for the period attributable to equity holders of the parent
company by the weighted average number of ordinary shares
outstanding during the period.
Diluted EPS is calculated by dividing the profit for the period
attributable to equity holders of the parent company by the
weighted average number of ordinary shares outstanding during the
period plus the weighted average number of shares that would be
issued if all dilutive potential ordinary shares were converted
into ordinary shares. In accordance with IAS 33, the dilutive
earnings per share are without reference to adjustments in respect
of outstanding shares when the impact would be anti-dilutive.
Adjusted operating EPS is calculated by dividing the adjusted
operating profit for the period, attributable to equity holders of
the parent company by the weighted average number of ordinary
shares outstanding during the period.
In each case, the weighted average number of shares takes into
account the weighted average number of own shares held during the
period.
The following table sets out the income and share data used in
calculating EPS:
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
-------------------------------- ------------- ------------- -----------
Profit / (loss) for the period
attributable to the equity
holders of the Company 11.0 (38.3) (60.9)
--------------------------------- ------------- ------------- -----------
Adjusted operating profit
for the period attributable
to the equity holders of the
Company - (see note 3) 49.9 15.7 52.8
--------------------------------- ------------- ------------- -----------
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
Weighted average number of
shares (000's): 472,924 457,988 459,969
--------------------------------- ------------- ------------- -----------
Effects of dilution from:
Share options 10,073 12,384 11,475
Restricted stock units 13,737 15,327 17,125
--------------------------------- ------------- ------------- -----------
Diluted 496,734 485,699 488,569
--------------------------------- ------------- ------------- -----------
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
Unaudited Restated Restated
US Cents US Cents US Cents
-------------------------------- ------------- ------------- -----------
Basic EPS 2.3 (8.3) (13.2)
Diluted EPS 2.2 (8.3) (13.2)
Adjusted operating EPS 10.6 3.5 11.5
Diluted adjusted operating
EPS 10.1 3.3 10.8
--------------------------------- ------------- ------------- -----------
10 DISTRIBUTIONS MADE AND PROPOSED
The Directors recommended a final dividend for the year-ended 31
March 2018 of 3.5 US Cents. This was approved at the Annual General
Meeting held on 30 August 2018. Accordingly a final dividend of 3.5
US Cents per ordinary share (FY18: 3.3 US Cents) was paid on 12
October 2018 (FY18: 13 October 2017) to those members whose names
were on the register of members on 12 September 2018 (FY18: 15
September 2017).
The Directors approved an interim dividend for the year-ending
31 March 2019 of 1.5 US Cents (H1, FY18: 1.4 US Cents) per ordinary
share on 6 November 2018. Accordingly an interim dividend of 1.5 US
Cents will be paid on 14 December 2018 (FY18: 15 December 2017) to
those members whose name is on the register on 16 November 2018
(FY18: 17 November 2017). The interim dividend is not recognised as
a liability at the reporting period-end.
11 INTANGIBLE ASSETS
The Group spent $1.5M on intangible assets in the six-months
ended 30 September 2018. The net book value of the Group's
intangible assets at the end of the period are analysed as
follows:
Intellectual
Goodwill property Software Others Total
Net book value $M $M $M $M $M
---------------------- --------- ------------- --------- ------- -------
At 1 April 2018 826.1 28.0 10.8 5.0 869.9
Additions - - 1.5 - 1.5
Amortisation - (3.8) (2.8) (1.2) (7.8)
Exchange movement (11.3) - (0.8) - (12.1)
---------------------- --------- ------------- --------- ------- -------
At 30 September 2018 814.8 24.2 8.7 3.8 851.5
---------------------- --------- ------------- --------- ------- -------
Intellectual
Goodwill property Software Others Total
Net book value $M $M $M $M $M
---------------------- --------- ------------- --------- ------- -------
At 1 April 2017 809.3 26.7 11.8 8.2 856.0
Additions - 14.8 4.6 - 19.4
Amortisation - (7.8) (3.8) (2.2) (13.8)
Exchange movement 11.7 (0.1) 0.7 0.4 12.7
---------------------- --------- ------------- --------- ------- -------
At 30 September 2017 821.0 33.6 13.3 6.4 874.3
---------------------- --------- ------------- --------- ------- -------
12 PROPERTY, PLANT AND EQUIPMENT
The Group spent $4.8M on property, plant and equipment in the
six-months ended 30 September 2018 (FY18: $6.8M). The net book
value of the Group's assets at the end of the period are analysed
as follows:
Land and Plant and Fixtures
Buildings Machinery and Fittings Total
Net book value $M $M $M $M
---------------------- ----------- ----------- -------------- ------
At 1 April 2018 7.3 14.8 3.3 25.4
Additions 1.1 3.2 0.5 4.8
Depreciation (1.3) (4.1) (0.4) (5.8)
Exchange movement (1.5) (0.7) (0.2) (2.4)
---------------------- ----------- ----------- -------------- ------
At 30 September 2018 5.6 13.2 3.2 22.0
---------------------- ----------- ----------- -------------- ------
Land and Plant and Fixtures
Buildings Machinery and Fittings Total
Net book value $M $M $M $M
---------------------- ----------- ----------- -------------- ------
At 1 April 2017 6.8 13.9 2.7 23.4
Additions 1.2 4.9 0.7 6.8
Depreciation (1.3) (3.7) (0.4) (5.4)
Exchange movement 1.3 0.3 0.2 1.8
---------------------- ----------- ----------- -------------- ------
At 30 September 2017 8.0 15.4 3.2 26.6
---------------------- ----------- ----------- -------------- ------
13 DEFERRED REVENUE
The movement in the Group's deferred revenue balance was as
follows:
30 September 30 September 31 March
2018 2017 2018
$M $M $M
----------------------------------- ------------- ------------- ---------
Current 407.9 315.0 315.0
Non-current 320.7 238.8 238.8
------------------------------------ ------------- ------------- ---------
At 1 April 728.6 553.8 553.8
------------------------------------ ------------- ------------- ---------
Billings 352.7 341.5 768.6
Revenues (349.5) (296.8) (639.0)
------------------------------------ ------------- ------------- ---------
Net deferral 3.2 44.7 129.6
------------------------------------ ------------- ------------- ---------
Translation and other adjustments (30.0) 28.8 45.2
------------------------------------ ------------- ------------- ---------
Current 401.5 356.7 407.9
Non-current 300.3 270.6 320.7
------------------------------------ ------------- ------------- ---------
At end of period 701.8 627.3 728.6
------------------------------------ ------------- ------------- ---------
14 FINANCIAL LIABILITIES
Total financial liabilities at the end of the reporting period,
measured at amortised cost, are as follows:
30 September 30 September 31 March
2018 2017 2018
$M $M $M
-------------------------------- ------------- ------------- ---------
Contingent consideration 0.6 18.4 17.4
--------------------------------- ------------- ------------- ---------
Total current financial
liabilities 0.6 18.4 17.4
--------------------------------- ------------- ------------- ---------
Non-current instalments
due on bank loans due between
two and five years 304.7 305.9 308.8
Contingent consideration 0.4 0.9 0.5
Unamortised facility fees (1.9) (3.1) (2.5)
--------------------------------- ------------- ------------- ---------
Total non-current financial
liabilities 303.2 303.7 306.8
--------------------------------- ------------- ------------- ---------
Total financial liabilities 303.8 322.1 324.2
--------------------------------- ------------- ------------- ---------
The following terms apply to the bank loans outstanding at 30
September 2018:
Principal Principal
Facility Interest Margin M $ M
------------ ---------- ------- ---------- ----------
Facility A Libor 1.25% $ 235.0 235.0
Facility B Euribor 1.25% EUR 60.0 69.7
------------ ---------- ------- ---------- ----------
304.7
----------
Both Facility A and Facility B are repayable in full at the end
of the 60-month term on 1 July 2020. The margin payable on both
facilities is dependent upon the ratio of the Group's net debt to
Cash EBITDA as defined in the facility agreement.
The bank loans are secured by fixed and floating charges over
the trade and assets of certain Group companies.
15 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
ACQUISITION OF SUBSIDIARIES NET OF CASH ACQUIRED
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
$M $M $M
------------------------------- ------------- ------------- -----------
Consideration paid, satisfied
in cash
- Invincea, Inc. 9.4 1.9 3.7
- Intellectual Property -
Silent Break Security LLC 0.6 - -
- Reflexion Networks Inc. - 1.2 1.2
Acquisition of subsidiaries
net of cash 10.0 3.1 4.9
-------------------------------- ------------- ------------- -----------
During the six-months ended 30 September 2018, the Group paid
$9.4M (H1, FY18: $1.9M) to the previous owners of Invincea, Inc.
and $0.6M (H1, FY18: $nil) to the previous owners of the
"PhishThreat" product range. The contingent consideration has been
calculated based on the billings of the Invincea, Inc. product
range for the quarter-ended 31 March 2018 and for the "PhishThreat"
product range for the twelve months ended 28 February 2018.
RECONCILIATION OF MOVEMENT IN NET DEBT
Effect of
movements
Non-cash in
31 March 30 September
2018 Cash flow movements exchange rates 2018
$M $M $M $M $M
--------------------------- --------- ---------- ---------- --------------- -------------
Cash and cash equivalents (120.0) (58.9) - 7.5 (171.4)
--------------------------- --------- ---------- ---------- --------------- -------------
Bank loans 306.3 - 0.6 (4.1) 302.8
--------------------------- --------- ---------- ---------- --------------- -------------
Gross debt 306.3 - 0.6 (4.1) 302.8
--------------------------- --------- ---------- ---------- --------------- -------------
Net debt 186.3 (58.9) 0.6 3.4 131.4
--------------------------- --------- ---------- ---------- --------------- -------------
Effect of
movements
Non-cash in
31 March 30 September
2017 Cash flow movements exchange rates 2017
$M $M $M $M $M
--------------------------- --------- ---------- ---------- --------------- -------------
Cash and cash equivalents (68.1) (8.9) - (4.1) (81.1)
--------------------------- --------- ---------- ---------- --------------- -------------
Obligations under
finance leases 0.1 - - - 0.1
Bank loans 345.6 (50.1) 0.5 6.8 302.8
--------------------------- --------- ---------- ---------- --------------- -------------
Gross debt 345.7 (50.1) 0.5 6.8 302.9
--------------------------- --------- ---------- ---------- --------------- -------------
Net debt 277.6 (59.0) 0.5 2.7 221.8
--------------------------- --------- ---------- ---------- --------------- -------------
16 PRINCIPAL EXCHANGE RATES
Six-months Six-months
ended ended Year-ended
30 September 30 September 31 March
2018 2017 2018
Translation of Sterling into
US Dollar ($:GBP1.00)
Average 1.3405 1.2902 1.3264
Closing 1.3041 1.3417 1.4028
Translation of Euro into US
Dollar ($:EUR1.00)
Average 1.1844 1.1319 1.1664
Closing 1.1616 1.1822 1.2299
------------------------------- ------------- ------------- -----------
When calculating performance measures on a constant currency
basis the Group uses the closing balance sheet rate of the previous
year.
17 RELATED PARTY TRANSACTIONS
There are no related party transactions that have materially
affected the financial position or performance of the Group during
the period which would require disclosure under rule DTR 4.2.8R of
the Disclosure and Transparency Rules. Transactions with related
parties are fully disclosed in note 30 to the 2018 Annual
Accounts.
18 EVENTS AFTER THE REPORTING PERIOD
There are no material events after the reporting period that
require disclosure under IAS10.
INDEPENDENT REVIEW REPORT TO SOPHOS GROUP PLC
FOR THE SIX-MONTH PERIOD ENDED 30 SEPTEMBER 2018
CONCLUSION
We have been engaged by the company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 30 September 2018 which comprises the Condensed
Consolidated Statement of Profit or Loss, Condensed Consolidated
Statement of Other Comprehensive Income, Condensed Consolidated
Statement of Financial Position, Condensed Consolidated Statement
of Changes in Equity, Condensed Consolidated Cash Flow Statement,
and the related explanatory notes.
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 30
September 2018 is not prepared, in all material respects, in
accordance with IAS 34 Interim Financial Reporting as adopted by
the EU and issued by the International Accounting Standards Board
("IASB"), and the Disclosure Guidance and Transparency Rules ("the
DTR") of the UK's Financial Conduct Authority ("the UK FCA").
SCOPE OF REVIEW
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity issued by the Auditing Practices Board for use in the
UK. A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures. We read the other information contained in the
half-yearly financial report and consider whether it contains any
apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
DIRECTORS' RESPONSIBILITIES
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the DTR of the UK FCA.
As disclosed in note 2, the annual financial statements of the
group are prepared in accordance with International Financial
Reporting Standards as adopted by the EU and as issued by the IASB.
The directors are responsible for preparing the condensed set of
financial statements included in the half-yearly financial report
in accordance with IAS 34 as adopted by the EU and as issued by the
IASB.
OUR RESPONSIBILITY
Our responsibility is to express to the company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
THE PURPOSE OF OUR REVIEW WORK AND TO WHOM WE OWE OUR
RESPONSIBILITIES
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Robert Seale
For and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square
London
E15 4GL
6 November 2018
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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