Sophos shares plunge on 'modest' growth guidance
Sophos Group
580.40p
16:40 28/02/20
Shares in cyber security firm Sophos fell sharply on Wednesday as the company said it now expected a “modest improvement” in billings growth in the second half of the year against “challenging” year-on-year comparatives.
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Sophos said first half billings were up 3.3% year-on-year over its fiscal first half , while pre-tax profit came in at $26m compared to a $36m loss in the comparative period.
“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,” chief executive Kris Hagermen said.
“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 the first half of 2019, with a renewal rate of 118% for the six-month period.”
Hagermen said Sophos entered the full 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”.
Sophos shares fell as much as 38% to around 18-month lows in early trading on Wednesday, but by mid afternoon were down 27% at 334.6p.
JPMorgan Cazenove read the new guidance of a “modest improvement" in billings growth compared to the first half as meaning 5% or lower, whereas the consensus forecast was for 12%, while the significant improvement for 2020 "leaves a wide range for interpretation", with analysts pencilling in 10% compared to the previous consensus of 16%.
As a result the billings growth forecast was cut to 4% for the second half and 12% for 2020.
Caz downgraded its rating on the shares to 'neutral' from 'overweight' and reduced its price target to 420p from 600p as the analysts "struggle to see opportunity for positive momentum in the near term, and now need to see sequential evidence of stronger billings delivery before we could think about turning more constructive".