TIDMSOPH
RNS Number : 6827O
Sophos Group Plc
09 November 2016
Sophos Group plc
September 2016, H1, FY17 Interim Results
Strong H1 performance; full-year outlook reaffirmed
Oxford, 9 November 2016. 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 2016 ("H1, FY17").
H1, FY17 H1, FY16 Growth
--------------- --------------- --------------
$M (Reported) $M (Reported) % (Reported)
Non-GAAP measures:
Billings(1) 279.8 242.0 15.6
Cash EBITDA(2) 50.9 45.5 11.9
Unlevered free cash flow(3) 62.2 19.9 212.6
GAAP measures:
Revenue(4) 256.9 234.2 9.7
Operating loss (24.6) (13.4) n.m.
Net cash flow from operating
activities 63.3 4.6 n.m.
Financial and operational highlights
-- H1, FY17 like-for-like(5) billings up 15.1 percent
year-on-year to $282.3 million ("YOY") (15.6 percent reported)
- New customer billings(6) up 19.9 percent YOY, driven by
Unified Threat Management and Sophos Central platform (c. +150
percent YOY)
- Like-for-like subscription billings increased by 19.4 percent YOY (19.7 percent reported)
- Cross sell of UTM and Endpoint improved to 8.4 percent (H1, FY16: 6.4 percent)
- Renewal rate, including upsell, improved to 104.1 percent (H1, FY16: 100.5 percent)
-- Reported revenue grew 9.7 percent YOY and 10.4 percent on a
constant currency basis, driven by subscription revenue which
increased 12.7 percent YOY
-- Deferred revenue balance increased to $511.3 million (FY16:
$498.7 million) driven by strong billings growth
-- Cash EBITDA margin 18.2 percent (H1, FY16: 18.8 percent),
reflecting further investment in R&D; the company continues to
expect modest YOY margin improvement for FY17
-- Operating loss increased as a consequence of increased
R&D investment, a higher share-based payment expense and for
the period a higher deferral of revenue from a shift in the mix of
billings to recurring subscription contracts
-- Unlevered free cash flow of $62.2 million, a significant
increase YOY due to improvements in operating performance and cash
management and in part aided by first/second half phasing
-- Significant innovation during the period, with release of new
next-generation endpoint protection product, Sophos Intercept X,
further extension of Sophos Central cloud-based management
platform, and the industry's first synchronized encryption product,
Sophos SafeGuard
-- Proposed interim dividend of 1.3 US Cents per share(+86 percent YOY)
Kris Hagerman, Chief Executive Officer, commented:
"We are pleased with our first half results which were in-line
with our outlook, and especially pleased with our cash flow
performance which was ahead of our outlook. We continued to outgrow
the IT security market, supported by a strong demand environment in
our target market, industry-leading technology, the quality and
reach of our extensive partner channel, the consistency of our
operational execution, and the strength of our financial model,
where we benefit from high levels of recurring subscription
business.
As we enter the second half of the fiscal year we expect
continued strong growth, in particular as we benefit from key new
product releases in next-generation endpoint and next-generation
firewall, and the continued momentum of our Sophos Central cloud
management platform."
Outlook
For the year-ending 31 March 2017, the Board continues to expect
to deliver mid-teens percentage billings growth on a like-for-like
basis whilst also delivering modest cash EBITDA margin expansion,
reflecting the operational leverage in the business. Revenue growth
is expected to be mid-teens. Unlevered free cash flow is expected
to approximately double in FY17.
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 please 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 240,000
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 Brunswick Group
Kris Hagerman, Chief Executive Officer Tel: +44 (0) 20 7404 5959
Nick Bray, Chief Financial Officer
Derek Brown, Investor Relations
Conference call and webcast
Sophos management will host a conference call and audio-webcast,
for registered participants, at 09:30 (GMT) today. 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
Conference calls dial in details:
Telephone:
+44(0)20 3140 8286 (UK)
+1 718 354 1152 (US)
Conference call confirmation code: 9344899
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, in order to download and
install any audio software that may be required.
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 for undelivered items. Billings does
not equate to statutory revenue.
2. Cash earnings before interest, taxation, depreciation and
amortisation ("Cash EBITDA") is defined as the Group's operating
(loss)/ profit adjusted for depreciation and amortisation charges,
any gain or loss on the sale of tangible and intangible assets,
share option charges, unrealised foreign exchange differences and
exceptional items, with billings replacing recognised revenue.
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. The majority of billings are for licence subscriptions which
are recognised as revenue over the period of the contract. Revenue
growth is primarily a function of prior period billings and hence
will not yet reflect the improved billings performance of the
current period.
5. Like-for-like billings represent billings on a constant
currency basis excluding disposals and including acquisitions from
the point of acquisition plus the pre-acquisition billings of any
acquired companies on a reported basis. Like-for-like billings are
presented to enhance comparability.
6. Excludes the acquired businesses of Cyberoam, Reflexion and
SurfRight on a constant currency billings basis.
Chief Executive Officer's Review
Operational review
In the first half of the financial year, Sophos continued to
build upon the success of our highly differentiated strategy to
deliver a superior security platform for a massive addressable
market of over 60 million small and mid-market enterprises
worldwide. Our commitment to offering a complete and advanced
security portfolio that is integrated and managed through a single,
easy-to-use cloud-based platform, sold and supported through a 100
percent channel sales model continues to resonate with our
customers and partners, and sets us apart from other vendors.
Our results for the first half of the year reflected strong
demand for our industry-leading technology in both enduser and
network security, the quality and reach of our extensive partner
channel, the consistency of our operational execution and the
strength of our financial model, where we benefit from high levels
of recurring subscription business. Our customer numbers grew to
over 240,000 from approximately 220,000 at the prior year-end. Our
differentiated strategy is working, and is translating into
progress across our key financial and operating metrics. We
generated like-for-like billings growth of over 15 percent, and
strong cash flow generation. We enhanced our cross-sell and up-sell
within our existing customer base, we continued to grow our new
customers, and we also grew our partner ecosystem.
During the first half of the year our operating loss increased
from $13.4 million to $24.6 million, reflecting increased R&D
investment, additional share-based payments and for the period a
shift in the mix of billings to recurring subscription contracts
where revenue is deferred and recognised over the contract
length.
The performance from Sophos Central, our integrated
cloud-managed security platform was a highlight, growing to over
30,000 customers and contributing more than 10 percent of
subscription billings for the first time - more than doubling both
billings and revenue in the period compared to a year ago. In H1,
over 50 percent of new customer billings for endpoint were on
Sophos Central. Sophos Central is not only a highly differentiated
offering, but also is a catalyst driving multiple other
opportunities, including improved cross-sell and up-sell, and
enhanced relationships, margin opportunity, and customer
penetration with our reseller partners.
We further strengthened our management team during the first
half. Tony Young joined in the role of Chief Information Officer
(CIO) responsible for the strategy, security and management of the
global IT organisation at Sophos. In early October we also
announced the appointment of Eleanor Lacey as Senior Vice President
and General Counsel.
Continued focus on innovation
Sophos is committed to delivering advanced, innovative,
enterprise-grade security to our customers in a way that is easy to
deploy, manage, and use. We believe that by building a complete
portfolio of effective and highly-rated individual IT security
offerings, and then meaningfully integrating them to actively
communicate with each other, all managed in a single cloud-based
platform, we can deliver better and easier to use protection than
competitors' standalone offerings.
In the period we delivered a number of next-generation
enhancements to our flagship Endpoint Protection product and
introduced an exciting, signature-less anti-exploit,
anti-ransomware, and root cause analytics product called Intercept
X. Intercept X is a new product that runs alongside any endpoint
protection product from any vendor (including our Sophos Central
cloud endpoint offering) to enhance protection against zero-day
threats and previously unknown ransomware. Its high detection
rates, ease of installation, cloud-based management, and powerful
analytics are opening new opportunities for our partners
world-wide, and the interest we have seen from customers for this
product has been dramatic since its launch in late September. In
the five weeks from the launch of Intercept X through the end of
October, we hosted over 12,000 customers in more than 50 online
webinars to learn more about Intercept X.
Intercept X also represents a powerful new core component of
Sophos' synchronized security strategy, as it is fully enabled with
the Sophos Security Heartbeat(TM) to share threat intelligence with
Sophos' next-generation XG Firewall and SafeGuard Encryption
solutions for a coordinated and automated response to attacks.
In a further enhancement of our synchronized security strategy,
we launched Synchronized Encryption, the next version of SafeGuard
Encryption that protects data against theft from malware, attackers
or accidental leaks. Previously, enterprise-grade encryption has
been considered too difficult and too complex for most mid-sized
organisations to adopt. Synchronized Encryption brings the best
practice of "always-on" file-level encryption to protect data
accessed from mobile devices, laptops, desktops, on-premise
networks and cloud-based file sharing applications. Sophos is the
first vendor to deliver this persistent, transparent and proactive
encryption that protects files across Windows, Mac, iOS or Android
platforms by default.
Expansion of our cloud-based management platform, Sophos
Central, has continued during the period. We enhanced numerous
existing components in Sophos Central, including endpoint security,
server security, mobile security, and MSP and partner-centric
features. We also introduced a host of new offerings to Sophos
Central, including email, encryption, wireless, and web security.
Sophos Central is a differentiated platform that delivers enhanced
protection, improved manageability, and synchronization across
multiple security components; it is resonating with our customers
and partners, and has become a key growth driver for the
company.
Shortly after the period, on October 4, we delivered our XG
Firewall v16.0 next-generation firewall. This represents a
significant advance in our leading firewall offering, with over 100
new features, numerous enhancements to the user experience to
improve navigation, policy management, and logging, and additional
synchronized security features to improve protection, enforcement,
and reporting. To address the growing opportunity in the IaaS
market, Sophos also made the next-generation XG Firewall available
through the Microsoft Azure marketplace, in addition to our
existing AWS offerings, where Sophos is one of the leaders in the
emerging space of security for cloud-based infrastructures.
Channel progress and industry recognition
The quality and reach of our unique 100 percent channel sales
model continued to gain momentum. We grew our overall number of
partners to 26,000, and increased our blue chip partners (those
generating at least 5 transactions in the prior 6 months) from
4,700 at the prior year-end to 5,400.
Sophos continued to be recognised as an industry leader by
leading industry publications. At the 2016 SC Magazine awards in
Europe, Sophos was once again voted the UTM category winner by a
panel of independent judges. In August of 2016, the readers of
Computer Reseller News ("CRN"), the leading channel publication in
the U.S, voted Sophos the overall winner in two security-related
categories, Data Security and Network Security, and for Product
Innovation in the Endpoint Security category at the Annual Report
Card ("ARC") awards. In the U.K, CRN named Sophos the winner in
both the Technology Innovation and Best Website categories at their
annual awards. Sophos also continued to receive positive
recognition and endorsement from industry analysts. Gartner again
recognised Sophos as a "Leader" in the 2016 UTM Magic Quadrant, for
the fifth consecutive year. And in October, Sophos was positioned
as a "Leader" in the Forrester Wave(TM) report for Endpoint
Security Suites, Q4 2016, and received the highest scores in the
strategy category.
I'd like to thank our employees and partners for all their
contributions in this successful first half and for delivering on
our vision of complete and intelligent security made simple, to
protect our growing group of customers of all sizes, all over the
world.
Kris Hagerman
Chief Executive Officer
Financial Review
Trading for the half-year was in-line with our outlook, with
like-for-like billings growth at 15.1 percent as the Group
experienced growth across all regions and major product types.
Revenue grew 10.4 percent on a constant currency basis, with
subscription revenue growing at 12.7 percent and total revenue
growing at 9.7 percent on a reported basis.
The strong billings performance in the half-year resulted in an
increase in the deferred revenue balance of $12.6 million to $511.3
million as of 30 September 2016, despite a negative translation
impact of $10.3 million primarily caused by the devaluation of
sterling against the US Dollar. This performance reinforced the
visibility and sustainability of the Sophos subscription based
business model. The Group targets investment to drive subscription
billings growth and hence much of the positive impact of the half
year's billing activity will be seen in future years' revenue.
Billings to new customers grew 19.9 percent YOY. In addition,
the renewal rate and cross-sell rate to existing customers, of
which there are now in excess of 240,000, continue to improve. This
combination of new customer growth, combined with improving
retention and cross-sell metrics across an expanding customer base
underpins the Group's confidence for future billings growth.
Cash EBITDA increased 11.9 percent YOY to $50.9 million and
margins were at 18.2 percent as the Group grew billings and
continued to invest in research and development to drive future
billings growth. Going forward, research and development and
marketing investments are anticipated to increase generally in line
with billings growth. The Group expects to continue to leverage
other functions to support continued margin expansion.
The operating loss increased YOY, the most significant variance
being attributable to an increase in share-based payments arising
from the impact of share units issued at the time of the Company's
initial public offering in the prior year.
Unlevered free cash flow and net cash flow from operating
activities both grew significantly to $62.2 million and $63.3
million respectively. It is expected that unlevered free cash flow
will approximately double in FY17, compared to the prior full-year
performance of $46.4 million.
The table below presents the Group's financial highlights:
H1, FY17 H1, FY16 Growth
--------------- --------------- --------------
$M (Reported) $M (Reported) % (Reported)
Billings 279.8 242.0 15.6
Revenue 256.9 234.2 9.7
Cash EBITDA 50.9 45.5 11.9
Operating loss (24.6) (13.4) n.m.
Unlevered free cash flow 62.2 19.9 212.6
Net cash flow from operating
activities 63.3 4.6 n.m.
Billings
The Group's reported billings increased by $37.8 million from
$242.0 million in the half-year ended 30 September 2015 to $279.8
million in the half-year ended 30 September 2016, with growth in
all regions, major products and types as detailed below. This
represented 15.6 percent reported growth or 15.1 percent growth on
a like-for-like basis. The variance between the reported and
like-for-like billing growth rates represents the impact of both
currency and acquisitions.
H1, FY17 H1, FY16 Growth Growth
--------------- --------------- -------------- -------------------
%
$M (Reported) $M (Reported) % (Reported) (Like-for-like)
Billings by Region:
- Americas 93.1 87.4 6.5 5.7
- EMEA 144.1 115.3 25.0 25.8
- APJ 42.6 39.3 8.4 5.0
--------------- --------------- -------------- -------------------
279.8 242.0 15.6 15.1
--------------- --------------- -------------- -------------------
Billings by Product:
- Network 145.5 122.9 18.4 17.8
- Enduser 120.8 104.3 15.8 15.4
- Other 13.5 14.8 (8.8) (9.4)
--------------- --------------- -------------- -------------------
279.8 242.0 15.6 15.1
--------------- --------------- -------------- -------------------
Billings by Type:
- Subscription 223.1 186.4 19.7 19.4
- Hardware 50.5 49.9 1.2 0.8
- Other 6.2 5.7 8.8 3.3
--------------- --------------- -------------- -------------------
279.8 242.0 15.6 15.1
--------------- --------------- -------------- -------------------
The Group's billings are primarily comprised of subscription
agreements, which represented 79.7 percent of the Group's billings
in H1, FY17. Subscription agreements are paid in full upfront with
revenue being recognised on a deferred basis over the life of the
agreements, which can vary from one to five years, resulting in a
highly visible and predictable future revenue stream.
Billings by region
Americas
Billings attributable to the Americas increased by $5.7 million
to $93.1 million in the half-year ended 30 September 2016,
representing 6.5 percent growth on a reported basis and 5.7 percent
on a like-for-like basis. The YOY increase was driven by Network
growth and continued adoption of the Sophos Central platform.
Reported growth includes the impact of billings from Reflexion, a
cloud-based Email security company acquired in June 2015. The first
half-year growth rate was influenced by the timing of renewals.
EMEA
Billings attributable to EMEA increased by $28.8 million to
$144.1 million in the half-year ended
30 September 2016, representing 25.0 percent growth on a
reported basis and 25.8 percent growth on a like-for-like basis.
This increase was due to Network growth across new and existing
customer business and Enduser growth supported by a substantial
increase in the adoption of the Sophos Central platform, which has
gained momentum a few quarters behind the Americas, and the
contribution from a material contract with an existing customer in
the UK.
APJ
Billings attributable to APJ increased by $3.3 million to $42.6
million in the half-year ended 30 September 2016, representing 8.4
percent growth on a reported basis and 5.0 percent growth on a
like-for-like basis primarily driven by the impact of currency.
Growth in the region was driven by Enduser billings; as Network
billings in the prior year were assisted by a very strong
performance in Japan.
Billings by product
Network products
The Group's billings attributable to Network products increased
by $22.6 million to $145.5 million in the half-year ended 30
September 2016, representing 18.4 percent growth on a reported
basis and 17.8 percent growth on a like-for-like basis. This was
due to 17.0 percent like-for-like growth in UTM sales and an
improved performance from the Email and Web products.
Enduser products
The Group's billings attributable to Enduser products increased
by $16.5 million to $120.8 million in the half-year ended 30
September 2016, representing 15.8 percent growth on a reported
basis and 15.4 percent growth on a like-for-like basis. Enduser YOY
billings growth was driven by the Sophos Central platform which has
continued to gain traction since its launch and the contribution
from a material contract with an existing customer in the UK.
Billings by type
Subscription billings increased by $36.7 million to $223.1
million in the half-year ended 30 September 2016, representing 19.7
percent growth on a reported basis and 19.4 percent growth on a
like-for-like basis. Hardware billings increased by 1.2 percent to
$50.5 million primarily due to a tough comparative including strong
hardware sales in Japan; partially offset by a small increase in
the proportion of Network billings, which increased from 50.8
percent of billings to 52.0 percent.
Key billings metrics
Billings from new customers
Billings from new customers remained consistent at 25 percent of
total billings.
Retention rates
The Group's results are largely driven by revenue generated from
subscriptions for its products and services, including professional
services and enhanced support services. The Group's net retention
rates include the impact of cross-selling and upselling, which
helps the Group evaluate its success in fully leveraging its broad
product portfolio throughout its installed customer base. The
Group's net retention rate, excluding Cyberoam, improved in the
period from 100.5 percent in the half-year ended 30 September 2015
to 104.1 percent in the half-year ended 30 September 2016.
Billings by size
Sophos' products are designed for the Group's target market,
mid-market enterprises (defined as enterprises with between 100 and
5,000 employees), but are frequently also bought by both smaller
and larger enterprises. In H1, FY17, the proportion of billings to
small and medium sized enterprises remained consistent YOY.
Billings by length of contract
The Group sells subscription agreements of differing durations,
most typically being one to three years in length. The LTM weighted
average contract length for the half-year ended 30 September 2016
was 28.1 months, a small increase on the 27.6 months(1) for the
half-year ended 30 September 2015 due to the material contract with
an existing customer reported at Q1.
The billings analysis of contracts by subscription length for
each half-year (1) was as follows:
(Constant Currency) H1, FY17 H1, FY16
--------- ---------
% %
Under one year 35.3 35.8
One to two years 8.0 7.5
Two to three years 44.3 46.8
Greater than three years 12.4 9.9
--------- ---------
(1) Comparatives have been re-stated to be on a total Group
basis
Cross-sell and upsell opportunities
As the IT needs of the Group's existing customers evolve and as
customers realise the benefits of the products and services they
previously purchased, the Group's product portfolio provides an
opportunity to cross-sell additional products and services or to
upsell enhanced versions of products, or additional enduser
licences, or longer subscription periods.
The percentage of customers who own both a Sophos Endpoint and
UTM has continued to improve. At 30 September 2016, approximately
8.4 percent of customers had both a UTM product and an Endpoint
product compared to 6.4 percent of customers at 30 September 2015.
The Group expects this metric to steadily improve over future
periods as more customers take advantage of the benefits of
synchronized security.
Revenue
The Group's revenue increased by $22.7 million, or 9.7 percent,
to $256.9 million in the half-year ended 30 September 2016. On a
constant currency basis, revenue growth for the period was 10.4
percent. This growth was predominantly due to the continuing growth
in subscription billings across all major product groups.
H1, FY17 H1, FY16 Growth Growth
--------------- --------------- -------------- --------
%
$M (Reported) $M (Reported) % (Reported) (CC)
Revenue by Region:
- Americas 88.7 81.2 9.2 9.4
- EMEA 129.6 116.9 10.9 13.4
- APJ 38.6 36.1 6.9 3.0
--------------- --------------- -------------- --------
256.9 234.2 9.7 10.4
--------------- --------------- -------------- --------
Revenue by Product:
- Network 130.1 116.4 11.8 12.2
- Enduser 113.4 103.9 9.1 10.4
- Other 13.4 13.9 (3.6) (5.7)
--------------- --------------- -------------- --------
256.9 234.2 9.7 10.4
--------------- --------------- -------------- --------
Revenue by Type:
- Subscription 199.4 178.2 11.9 12.7
- Hardware 51.2 49.8 2.8 2.4
- Other 6.3 6.2 1.6 6.8
--------------- --------------- -------------- --------
256.9 234.2 9.7 10.4
--------------- --------------- -------------- --------
As the majority of the Group's billings relate to subscriptions
(H1, FY17: 79.7 percent; H1, FY16: 77.0 percent), the benefit from
increased billings is spread over a number of years on the
subsequent recognition of deferred revenue. Reported revenue in the
half-year of $256.9 million comprised $164.0 million from
recognition of prior period deferred revenues and $92.9 million
from new billings. The deferred revenue balance at the end of
September of $511.3 million increased $12.6 million from the end of
the prior year, an increase of 2.5 percent despite a negative
translation impact of $10.3 million resulting from the devaluation
of sterling against the US Dollar.
Revenue in the Americas increased by 9.2 percent to $88.7
million in the half-year ended 30 September 2016 due to growth in
both Network and Enduser sales.
EMEA revenue increased by 10.9 percent to $129.6 million in the
half-year ended 30 September 2016, primarily due to growth in UTM
billings.
APJ revenue increased by 6.9 percent to $38.6 million in the
half-year ended 30 September 2016, predominantly due to strong
growth in Enduser billings, despite a tough compare for Network
revenue in Japan.
Cost of sales
The Group's cost of sales increased by $7.9 million to $58.4
million in the half-year ended 30 September 2016, primarily due to
the continued growth of Network product billings, which have a
larger hardware component.
Sales and marketing
The Group's sales and marketing expenses increased by $12.7
million or 14.3 percent, to $101.4 million in the half-year ended
30 September 2016. Marketing expenses are increasing to broadly
match the investment with billings growth and sales productivity
improved as the Group continued to leverage the channel.
Research and development
The Group's research and development expenses increased by $10.3
million, or 22.6 percent, to $55.9 million in the half-year ended
30 September 2016. This reflected the continued investment in the
development of new products and enhancements of existing products
and the phasing of costs to higher YOY growth in the first half of
the year compared to the second half.
General finance and administration
The Group's general finance and administration expenses,
excluding exceptional items, foreign exchange and the amortisation
of intangible assets, increased by $15.7 million, or 82.2 percent,
to $34.8 million in the half-year ended 30 September 2016. The
increase was almost entirely attributable to the share-based
payment expense, which increased by $14.0 million following the
issue of new equity awards at the time of the Initial Public
Offering of the Company's shares in the prior period. Excluding
share-based payments, exceptional items and the amortisation of
intangible assets, underlying general finance and administration
expenses represented 6.6 percent of billings (H1, FY16: 7.0
percent) as the Group continued to leverage its strong back office
function.
The Group's exceptional items, included within general finance
and administration expenses, decreased by $6.4 million to $19.8
million in the half-year ended 30 September 2016. Prior period
exceptional items included $17.6 million incurred during the
Initial Public Offering of the Company's shares, as well as
acquisition costs and expenses incurred in relation to the defence
or settlement of claims brought against a number of our employees
by their former employer and certain intellectual property
litigation cases. Current period exceptional items relate to
expenses incurred in relation to the defence of certain claims
brought against the Group in relation to the previously announced
intellectual property litigation case brought by Finjan Inc and
includes a $15.0 million provision for a one-time damages award in
a jury verdict to Finjan Inc. This verdict represents the next step
in an ongoing legal process and the Group is considering all
options including an appeal of the verdict.
Amortisation of intangible assets
The Group's amortisation of intangible assets decreased by $4.8
million, or 30.8 percent, to
$10.8 million in the half-year ended 30 September 2016. This
decrease was due to the reduction in amortisation charges
associated with acquisitions in prior years as there were no
acquisitions in the current period and the Group's policy of
amortising acquired intangibles on a reducing balance basis.
Currency movements and impact
The Group's foreign exchange loss was $0.4 million in the
half-year ended 30 September 2016, compared with a loss of $1.9
million in the half-year ended 30 September 2015. This relatively
small net expense is a consequence of the Group's largely naturally
hedged position.
Cash EBITDA
Whilst subscription billings are recognised in the profit and
loss account as revenue over the length of the contract,
substantially all of the costs in connection with the contract are
incurred and recognised in the profit and loss account upfront. The
Directors believe that cash EBITDA (billings less expenses) is a
useful supplemental measure of earnings that provides visibility on
actual cash earned in the period and is a better reflection of the
profitability of the contract signed, as it matches cash inflows
with nearly all of the cash costs of delivering the relevant
service to the customer.
On a reported basis, cash EBITDA increased by 11.9 percent to
$50.9 million in the half-year ended 30 September 2016. On a
constant currency basis, cash EBITDA growth was 7.0 percent as a
result of the continued improvement in billings partially offset by
further investment in research and development as the Group
continues to innovate and release new products. Cash EBITDA margins
decreased year over year to 18.2 percent from 18.8 percent as a
result of the continued investment for growth, referred to
above.
Operating loss
The Group's operating loss was $24.6 million in the half-year
ended 30 September 2016 compared to a loss of $13.4 million in the
prior year largely as a consequence of an increased share-based
payment expense, following the issue of equity instruments at the
time of the Initial Public Offering and higher research and
development expenses.
Net finance costs
The Group's net finance costs decreased by $25.7 million to $3.8
million in the half-year due to the impact of the Initial Public
Offering of the Company's shares in the prior year, the proceeds of
which enabled the repayment of both the amounts due to the previous
parent company and $87.7 million of bank debt.
Income tax
The Group's tax charge for the half year was $5.7 million (H1,
FY16: $4.2 million) with an effective tax rate of -20.1 percent
(H1, FY16: -9.8 percent). As in the prior year, the tax charge
arises against a reported loss for the period as a consequence of
local subsidiary taxable profits.
Loss for the period
The Group's loss for the period decreased by $13.0 million, from
a loss of $47.1 million in the half-year ended 30 September 2015 to
a loss of $34.1 million in the half-year ended 30 September 2016
predominantly reflecting the reduction in exceptional expense items
and a decrease in finance expenses.
Cash flow
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. Unlevered
free cash flow is presented to enhance understanding of the Group's
cash generation capability.
H1, FY17 H1, FY16
--------- ---------
$M $M
Adjusted EBITDA 28.0 37.7
Billings deferral 22.9 7.8
--------- ---------
Cash EBITDA 50.9 45.5
Net capital expenditure (5.9) (10.9)
--------- ---------
Operating cash flow 45.0 34.6
--------- ---------
Change in working capital(1) 22.2 (1.1)
Corporation tax paid (5.0) (13.6)
--------- ---------
Unlevered free cash flow 62.2 19.9
--------- ---------
Unlevered free cash flow increased to $62.2 million. The
improvement was boosted by: lower YOY net capital expenditure;
reduced YOY cash tax payments; a significant improvement in working
capital and, in part, aided by first/second half phasing.
Unlevered free cash flow can be reconciled to the statutory
measure of net cash from operating activities as follows:
H1, FY17 H1, FY16
--------- ---------
$M $M
Net cash flow from operating activities 63.3 4.6
Exceptional items(1) 4.8 26.2
Net capital expenditure (5.9) (10.9)
Unlevered free cash flow 62.2 19.9
--------- ---------
(1) Excludes the non-cash movement on the provision for the
claim brought against the Group in relation to an intellectual
property litigation case
Net cash flow from operating activities significantly increased
YOY to $63.3 million from $4.6 million in the prior period, nearly
all attributable to the significant improvement in working
capital.
Changes in working capital
Positive working capital changes YOY were largely due to the
normalisation of creditor balances and an improvement in debtors'
days outstanding to 43 days (FY16: 44 days). Prior year working
capital changes including outflows for significant accrued and
payable amounts expensed in FY15.
Capital expenditure
The Group's capital expenditure primarily comprises property,
plant and equipment as well as intangible assets. In the half-year
ended 30 September 2016, net cash capital expenditure decreased by
$5.0 million YOY, as expenditure in the current year is weighted
more to the second half.
Cash taxation
Corporation tax paid in the period is lower than in the
comparative period due to the comparative period including
settlements for prior years and in part due to timing of payments
with most of the cash tax due for payment in H2 of the current
year.
Financing
In connection with the Initial Public Offering of the Company's
shares that was completed in July 2015, the Group refinanced its
external borrowings. In the first half of FY17 the Group repaid the
associated revolving credit facility which had been drawn to
partially finance the acquisition of SurfRight in December
FY16.
Dividends
The Directors continue to adopt a progressive dividend policy,
reflecting the cash generative nature and long-term earnings
potential of the Group. The Directors recommend that the half-year
and final dividend 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 2017 amounting to 1.3 US Cents per share, an 86 percent
increase over the prior half year dividend of 0.7 US Cents per
share. The interim dividend will be paid on 16 December 2016 to all
shareholders on the register on 18 November 2016.
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 25 May 2016,
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 recent decision by the U.K. population to exit, in
due course, from the European Union ("Brexit"), the Directors have
considered whether or not this will manifest itself as an
additional risk to the Group. On the basis that only 12 percent of
the Group's revenue is sourced from the UK, reflecting the global
diversity of the Group's operations, and as the recent devaluation
of the sterling exchange rates has a minor benefit to the Group,
given more sterling denominated costs than revenues in a US Dollar
denominated functional currency Group, Brexit is not considered to
be a principal risk for the Group.
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 as adopted by
the EU
-- The interim management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure 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 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 Nick Bray
Chief Executive Officer Chief Financial Officer
8 November 2016 8 November 2016
Condensed Consolidated Income Statement
For the six-months ended 30 September 2016
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Note Unaudited Unaudited Audited
$M $M $M
------------------------------------- ----- ------------- ------------- ---------
Revenue 3 256.9 234.2 478.2
Cost of sales (58.4) (50.5) (104.4)
------------------------------------- ----- ------------- ------------- ---------
Gross profit 198.5 183.7 373.8
Sales and marketing (101.4) (88.7) (184.0)
Research and development (55.9) (45.6) (99.6)
General finance and administration: (65.8) (62.8) (122.9)
- Underlying (18.6) (16.9) (35.7)
- Share-based payments 5 (16.2) (2.2) (16.3)
- Exceptional items 6 (19.8) (26.2) (41.9)
- Amortisation of intangible
assets (10.8) (15.6) (29.2)
- Foreign exchange (loss)/gain (0.4) (1.9) 0.2
------------------------------------- ----- ------------- ------------- ---------
Operating loss (24.6) (13.4) (32.7)
Finance income - 0.4 0.7
Finance expense 7 (3.8) (29.9) (36.4)
------------------------------------- ----- ------------- ------------- ---------
Loss before taxation (28.4) (42.9) (68.4)
Income tax charge 8 (5.7) (4.2) (3.5)
------------------------------------- ----- ------------- ------------- ---------
Loss for the period (34.1) (47.1) (71.9)
------------------------------------- ----- ------------- ------------- ---------
Earnings per Share ($ cents) 9
Basic and diluted EPS (7.6) (11.0) (16.4)
Adjusted EPS 11.3 10.6 27.5
Condensed Consolidated Statement of Other Comprehensive
Income
For the six-months ended 30 September 2016
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
----------------------------------------------- ------------- ------------- ---------
Loss for the period (34.1) (47.1) (71.9)
Other comprehensive (losses) /
gains:
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 (0.5) 1.7 (2.9)
------------------------------------------------ ------------- ------------- ---------
Total other comprehensive (losses)
/ gains (0.5) 1.7 (2.9)
Comprehensive loss for the year (34.6) (45.4) (74.8)
------------------------------------------------ ------------- ------------- ---------
Condensed Consolidated Statement of Financial Position
At 30 September 2016
Registered number 9608658
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
Note $M $M $M
------------------------------- ----- ------------- ------------- ---------
Non-current assets
Intangible assets 11 744.3 728.7 756.6
Property, plant and equipment 12 22.0 27.6 24.9
Deferred tax asset 78.5 52.9 73.9
Other receivables 0.6 0.8 0.8
------------------------------- ----- ------------- ------------- ---------
845.4 810.0 856.2
Current assets
Inventories 19.5 12.9 18.7
Trade and other receivables 99.9 95.3 129.8
Cash and cash equivalents 90.0 68.2 66.8
------------------------------- ----- ------------- ------------- ---------
209.4 176.4 215.3
Total assets 1,054.8 986.4 1,071.5
------------------------------- ----- ------------- ------------- ---------
Current liabilities
Trade and other payables 73.8 68.2 76.4
Deferred revenue 14 293.9 259.7 286.5
Income tax payable 18.6 9.0 11.2
Financial liabilities 15 1.2 0.1 26.2
Provisions 0.3 0.2 0.3
------------------------------- ----- ------------- ------------- ---------
387.8 337.2 400.6
Non-current liabilities
Trade and other payables 0.9 0.7 0.8
Deferred revenue 14 217.4 185.7 212.2
Financial liabilities 15 299.3 298.4 300.9
Provisions 16.0 0.3 1.0
Deferred tax liabilities 8.5 9.6 10.1
542.1 494.7 525.0
------------------------------- ----- ------------- ------------- ---------
Total liabilities 929.9 831.9 925.6
------------------------------- ----- ------------- ------------- ---------
Net assets 124.9 154.5 145.9
------------------------------- ----- ------------- ------------- ---------
Represented by:
Share capital 21.5 21.3 21.3
Share premium 116.5 114.9 115.9
Merger reserve (200.9) (200.9) (200.9)
Other reserves (0.1) (0.2) (0.1)
Retained earnings 166.6 233.4 205.7
Share-based payment reserve 54.0 13.6 36.2
Translation reserve (32.7) (27.6) (32.2)
Total equity 124.9 154.5 145.9
------------------------------- ----- ------------- ------------- ---------
Condensed Consolidated Statement of Changes in Equity
For the six-months ended 30 September 2016
Share-
based
Share Share Merger Other Retained payment Translation Total
capital premium reserve reserves earnings reserve reserve Unaudited
$M $M $M $M $M $M $M $M
---------------------- --------- --------- --------- ---------- ---------- --------- ------------ -----------
At 1 April 2015
adjusted(1) 552.6 - (200.9) 10.4 (750.0) 11.4 (29.3) (405.8)
Loss for the period: - - - - (47.1) - - (47.1)
Other comprehensive
profit or loss: - - - - - - 1.7 1.7
---------------------- --------- --------- --------- ---------- ---------- --------- ------------ -----------
Total comprehensive
loss - - - - (47.1) - 1.7 (45.4)
Reserve transfer - - - (10.4) 10.4 - - -
Shares issued - 485.3 - - - - - 485.3
Capital reduction (533.0) (485.4) - - 1,020.1 - - 1.7
EBT treasury shares - - - (0.2) - - - (0.2)
Primary proceeds 1.7 123.3 - - - - - 125.0
Share issue expense - (9.0) - - - - - (9.0)
Share options
exercised - 0.7 - - - - - 0.7
Share-based payments
expense - - - - - 2.2 - 2.2
--------- --------- --------- ---------- ---------- --------- ------------ -----------
At 30 September
2015 21.3 114.9 (200.9) (0.2) 233.4 13.6 (27.6) 154.5
---------------------- --------- --------- --------- ---------- ---------- --------- ------------ -----------
At 1 April 2016 21.3 115.9 (200.9) (0.1) 205.7 36.2 (32.2) 145.9
Loss for the period: - - - - (34.1) - - (34.1)
Other comprehensive
profit or loss: - - - - - - (0.5) (0.5)
---------------------- --------- --------- --------- ---------- ---------- --------- ------------ -----------
Total comprehensive
loss - - - - (34.1) - (0.5) (34.6)
EBT treasury shares - - - - - - - -
Share options
exercised 0.2 0.6 - - - - - 0.8
Share-based payments
expense - - - - - 15.5 - 15.5
Share-based payments
deferred tax - - - - - 2.3 - 2.3
Cash dividend - - - - (5.0) - - (5.0)
At 30 September
2016 21.5 116.5 (200.9) (0.1) 166.6 54.0 (32.7) 124.9
---------------------- --------- --------- --------- ---------- ---------- --------- ------------ -----------
(1) Sophos Group plc listed its shares on the London Stock
Exchange on 1 July 2015. The Group has applied the principles of
reverse acquisition accounting under IFRS 3 - Business Combinations
in preparing the consolidated financial statements. By applying the
principles of reverse acquisition accounting, the Group is
presented as if Sophos Group plc has always owned Shield Midco
Limited, the largest company for which consolidated financial
statements were previously produced under IFRS. Accordingly, the
comparative balances at 1 April 2015 have been adjusted to reflect
this when compared to the 1 April balance in the Half-Year
Financial Report for 2015.
Condensed Consolidated Statement of Cash Flows
For the six-months ended 30 September 2016
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
Note $M $M $M
----------------------------------------- ----- ------------- ------------- ---------
Loss for the year (34.1) (47.1) (71.9)
Adjusted for:
Depreciation 4.4 4.0 8.4
Amortisation of intangible assets 10.8 15.6 29.2
Amortisation of fair value adjustment
on deferred income (0.8) (0.8) (1.8)
Foreign exchange 2.1 3.1 2.4
Share-based payments 5 15.5 2.2 15.0
Finance income - (0.4) (0.7)
Finance costs 3.8 29.9 36.4
Income tax charge 5.7 4.2 3.5
----------------------------------------- ----- ------------- ------------- ---------
7.4 10.7 20.5
Increase in inventories (1.9) (0.3) (6.7)
Decrease / (increase) in trade
and other receivables 26.5 17.1 (16.1)
Decrease in trade and other payables (3.2) (17.8) (10.9)
Increase in deferred revenue 24.5 9.0 59.4
Increase / (decrease) in provisions 15.0 (0.5) 0.3
----------------------------------------- ----- ------------- ------------- ---------
Cash generated from continuing
operations 68.3 18.2 46.5
Income taxes paid (5.0) (13.6) (25.2)
----------------------------------------- ----- ------------- ------------- ---------
Net cash flow from operating activities 63.3 4.6 21.3
------------------------------------------------ ------------- ------------- ---------
Investing activities
Purchase of property, plant and
equipment (4.2) (5.7) (8.5)
Acquisition of subsidiary net
of cash acquired (1.2) (15.0) (46.0)
Purchase of intangible assets
- software (1.7) (5.2) (8.3)
Finance income - 0.4 0.7
----------------------------------------- ----- ------------- ------------- ---------
Net cash flow from investing activities (7.1) (25.5) (62.1)
------------------------------------------------ ------------- ------------- ---------
Financing activities
Proceeds from issue of shares 0.7 125.7 126.2
Transaction costs related to the
issue of shares - (9.0) (8.6)
Dividends paid - - (3.1)
Proceeds from borrowings 16 - 301.9 326.9
Repayment of borrowings 16 (25.0) (389.6) (389.6)
Transaction costs related to borrowings 16 - (3.9) (4.4)
Finance lease payments (0.1) (0.1) (0.1)
Finance costs (4.9) (8.6) (12.9)
Net cash flow from financing activities (29.3) 16.4 34.4
------------------------------------------------ ------------- ------------- ---------
Increase / (decrease) in cash
and cash equivalents 16 26.9 (4.5) (6.4)
Net foreign exchange differences 16 (3.7) 0.1 0.6
Cash and cash equivalents at the
start of period 16 66.8 72.6 72.6
Cash and cash equivalents at the
end of period 16 90.0 68.2 66.8
----------------------------------------- ----- ------------- ------------- ---------
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 8
November 2016 for issue on 9 November 2016.
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 2016 were
approved by the Board of Directors on 25 May 2016 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.
The Interim Financial Statements have been reviewed 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 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 2016,
which have been prepared in accordance with international financial
reporting standards as adopted by the European Union.
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.
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 2016.
3. Segment information
For management reporting purposes, the primary segment reporting
format is determined to be geographic segments, as the Group's
risks and rates of return are affected predominantly by the
different economic environments in which the Group operates. The
Group has only one secondary business segment, 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 EMEA
(Europe, Middle East and Africa), The Americas and APJ (Asia
Pacific and Japan).
Billings is 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 for undelivered items. Billings does not equate
to statutory revenue. Billings are classified by the geographic
location of direct customers, OEMs and the distributors which
purchase our products. The geographic location of OEMs or
distributors may be different from that of the 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.
3 Segment information (continued)
The following tables present Billings and expenditure regarding
the Group's geographical segments for the six-months ended 30
September 2016 and 30 September 2015.
Total
Americas EMEA APJ Unaudited
Six-months ended 30 September $M $M $M $M
2016
--------------------------------- --------- ------- ------------- -------------
Billings 93.1 144.1 42.6 279.8
Regional cost of sales (7.6) (17.5) (7.3) (32.4)
Regional gross margin 85.5 126.6 35.3 247.4
--------------------------------- --------- ------- ------------- -------------
Regional sales and marketing
expense (30.7) (33.6) (14.7) (79.0)
-------------
Regional operating profit 54.8 93.0 20.6 168.4
--------------------------------- --------- ------- -------------
Revenue deferral (22.9)
Central costs (154.9)
Amortisation (10.8)
Depreciation (4.4)
Operating loss (24.6)
--------------------------------- --------- ------- ------------- -------------
Total
Americas EMEA APJ Unaudited
Six-months ended 30 September $M $M $M $M
2015
--------------------------------- --------- ------- ------------- -------------
Billings 87.4 115.3 39.3 242.0
Regional cost of sales (6.5) (16.3) (7.9) (30.7)
Regional gross margin 80.9 99.0 31.4 211.3
--------------------------------- --------- ------- ------------- -------------
Regional sales and marketing
expense (26.3) (28.0) (14.3) (68.6)
-------------
Regional operating profit 54.6 71.0 17.1 142.7
--------------------------------- --------- ------- -------------
Revenue deferral (7.8)
Central costs (128.7)
Amortisation (15.6)
Depreciation (4.0)
Operating loss (13.4)
--------------------------------- --------- ------- ------------- -------------
Six-months Six-months
ended ended
30 September 30 September
2016 2015
Unaudited Unaudited
Revenue from external customers
by country $M $M
--------------------------------- --------- ------- ------------- -------------
UK 29.6 29.2
USA 80.3 74.1
Germany 50.3 43.6
Other countries 96.7 87.3
Total revenue 256.9 234.2
--------------------------------- --------- ------- ------------- -------------
3 Segment information (continued)
Six-months Six-months
ended ended
30 September 30 September
2016 2015
Unaudited Unaudited
Revenue from external customers
by type $M $M
--------------------------------- ------------- -------------
Subscription 199.4 178.2
Hardware 51.2 49.8
Other 6.3 6.2
Total revenue 256.9 234.2
----------------------------------- ------------- -------------
4 Reconciliation of operating loss to Cash EBITDA
Cash EBITDA is defined as the Group's operating loss adjusted
for depreciation and amortisation charges, any gains or losses on
the sale of tangible and intangible assets, share option charges,
unrealised foreign exchange differences and exceptional items with
billings replacing revenue.
The Directors believe this measure is a more appropriate
earnings and cash flow measure than EBITDA.
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
-------------------------------------- ------------- ------------- ---------
Operating loss (24.6) (13.4) (32.7)
Depreciation 4.4 4.0 8.4
Amortisation of intangible purchased
assets 10.8 15.6 29.2
Share-based payments expense 15.5 2.2 15.0
Exceptional items 19.8 26.2 41.9
Foreign exchange loss 2.1 3.1 2.4
--------------------------------------- ------------- ------------- ---------
Adjusted EBITDA 28.0 37.7 64.2
Net deferral of revenue 22.9 7.8 56.7
Cash EBITDA 50.9 45.5 120.9
--------------------------------------- ------------- ------------- ---------
Billings 279.8 242.0 534.9
Net deferral of revenue (22.9) (7.8) (56.7)
Revenue 256.9 234.2 478.2
--------------------------------------- ------------- ------------- ---------
5 Share-based payment expense
For the six-months ended 30 September 2016 the Group has
recognised equity and cash settled share-based payments expense as
follows:
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
----------------------------------- ------------- ------------- ---------
Cash-settled transactions 0.7 - 1.3
Equity-settled transactions 15.5 2.2 15.0
--------------------------------------
Total share-based payment expense 16.2 2.2 16.3
-------------------------------------- ------------- ------------- ---------
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 Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
Number WASP Number WASP Number WASP
000's GBP pence 000's GBP pence 000's GBP pence
--------------- ------- ------------- ------- ------------- ------- ----------
RSU's 9,066 182.74 9,280 265.00 9,630 264.75
PSU's 3,900 183.36 2,879 265.00 2,879 265.00
SAYE -Options 1,882 201.65 - - - -
Total awards 14,848 185.52 12,159 265.00 12,509 264.81
--------------- ------- ------------- ------- ------------- ------- ----------
6 Exceptional items
Exceptional items are those that in the Directors' judgment 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 more accurately. Such
items are included within the income statement caption to which
they relate and are separately disclosed on the face of the
consolidated income statement within General finance and
administration expenses.
During the six months to 30 September 2016, legal costs of
$19.8M (H1, FY16: $5.8M) were incurred in relation to the defence
of certain intellectual property litigation. The costs include a
$15.0M provision for a one-time damages award in a jury verdict to
Finjan Inc. related to claims of patent infringement by Sophos,
Inc. This verdict represents the next step in an ongoing legal
process and the Group is considering all options including an
appeal of the verdict. The reduction in the Group's tax charge on
these items amounted to $4.0M (H1, FY16: $2.6M).
In addition, in the prior year, during the six months to 30
September 2015, Initial Public Offering ("IPO") costs of $17.6M,
acquisition related expenses of $1.6M, and restructuring and
integration costs of $1.2M resulted in total Exceptional items of
$26.2M. The reduction in the Group's tax charge on these items
amounted to $3.1M.
7 Finance expense
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
--------------------------------------- ------------- ------------- ---------
Interest expense on loans and
borrowings 4.0 6.8 11.0
Other interest, bank charges and
swap settlements 0.2 0.3 0.5
---------------------------------------- ------------- ------------- ---------
4.2 7.1 11.5
Accretion on Subordinated Preference
Certificates - 13.5 13.5
Accretion on contingent consideration 0.1 - 0.2
Foreign exchange (gain) / loss
on borrowings (0.9) 3.1 4.4
Amortisation of facility fees 0.4 0.5 0.9
Facility fees expensed on settlement
of debt - 5.7 5.9
Total finance expense 3.8 29.9 36.4
---------------------------------------- ------------- ------------- ---------
Subordinated Preference Certificates with a value of $485.3M
were capitalised on 26 June 2015 as part of the Group
reorganisation leading up to the Initial Public Offering of the
Company's shares. Accordingly, the accretion expense of $13.5M for
the six-month period to September reflects the accretion from 1
April 2015 to 26 June 2015. Prior to capitalisation, the
Subordinated Preference Certificates were disclosed within Trade
and other payables.
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 2016 was $5.7m (H1, FY16: $4.2M) representing an
effective tax rate of (20.1%) (H1, F16: (9.8%)).
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
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 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 EPS is calculated by dividing the Cash EBITDA for the
period attributable to equity holders of the parent by the weighted
average number of ordinary shares outstanding during the
period.
In each case, the weighted average number of shares take into
account the weighted average number of own shares held during the
period.
9 Earnings per share (continued)
The following reflects the income and share data used in
calculating EPS:
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$'M $'M $'M
----------------------------------------- ------------- ------------- ---------
Loss for the period attributable
to the equity holders of the company (34.1) (47.1) (71.9)
------------------------------------------ ------------- ------------- ---------
Cash EBITDA for the period attributable
to the equity holders of the company
- (see note 4) 50.9 45.5 120.9
------------------------------------------ ------------- ------------- ---------
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
----------------------------------------- ------------- ------------- ---------
Weighted average number of shares
(000's): 450,239 429,034 438,640
------------------------------------------ ------------- ------------- ---------
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
$ Cents $ Cents $ Cents
----------------------------------------- ------------- ------------- ---------
Basic and diluted EPS (7.6) (11.0) (16.4)
------------------------------------------ ------------- ------------- ---------
Adjusted EPS 11.3 10.6 27.5
------------------------------------------ ------------- ------------- ---------
10 Distributions made and proposed
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
Cash Dividends on ordinary shares
declared and paid $M $M $M
------------------------------------- -------------- -------------- ---------
Interim dividend for year-ending 31
March at 0.7 US Cents per share - - 3.1
Total cash dividends paid - - 3.1
-------------------------------------- -------------- ------------- ---------
The Directors recommended a final dividend for the year-ended 31
March 2016 of 1.1 US Cents. This was approved at the Annual General
Meeting held on 14 September 2016. Accordingly a final dividend of
1.1 US Cents per ordinary share was paid on 14 October to those
members whose names were on the register of members on 16 September
2016.
The Directors approved an interim dividend for the year-ending
31 March 2017 of 1.3 US Cents (H1, FY16: 0.7 US Cents) per ordinary
share on 8 November 2016. The interim dividend is not recognised as
a liability at 30 September 2016.
11 Intangible assets
The Group spent $1.7M on intangible assets in the six-months
ended 30 September 2016. The net book value of the Groups
intangible assets at the end of the period are analysed as
follows:
Intellectual Total
Goodwill property Software Others Unaudited
Net Book Value $M $M $M $M $M
--------------------------- --------- ------------- --------- ------- -----------
At 1 April 2016 716.1 12.6 15.3 12.6 756.6
Additions - - 1.7 - 1.7
Charge for the period - (4.0) (3.6) (3.2) (10.8)
Exchange movement (1.9) - (1.2) (0.1) (3.2)
---------------------------
At 30 September 2016 714.2 8.6 12.2 9.3 744.3
--------------------------- --------- ------------- --------- ------- -----------
Intellectual Total
Goodwill property Software Others Unaudited
Net Book Value $M $M $M $M $M
--------------------------- --------- ------------- --------- ------- -----------
At 1 April 2015 669.6 19.4 13.5 16.8 719.3
Additions - - 5.2 - 5.2
Acquired through business
combinations 10.6 1.9 - 5.8 18.3
Charge for the period - (7.1) (2.7) (5.8) (15.6)
Exchange movement 1.3 (0.1) 0.2 0.1 1.5
---------------------------
At 30 September 2015 681.5 14.1 16.2 16.9 728.7
--------------------------- --------- ------------- --------- ------- -----------
12 Property plant and equipment
The Group spent $4.2M on property, plant and equipment in the
six-months ended 30 September 2016. The net book value of the
Group's assets at the end of the period are analysed as
follows:
Land and Plant Fixtures Total
Buildings and Machinery and Fittings Unaudited
Net Book Value $M $M $M $M
----------------------- ----------- --------------- -------------- -----------
At 1 April 2016 11.7 10.5 2.7 24.9
Additions 0.4 3.2 0.6 4.2
Charge for the period (1.3) (2.7) (0.4) (4.4)
Exchange movement (2.3) (0.3) (0.1) (2.7)
------------------------
At 30 September 2016 8.5 10.7 2.8 22.0
------------------------ ----------- --------------- -------------- -----------
Land and Plant Fixtures Total
Buildings and Machinery and Fittings Unaudited
Net Book Value $M $M $M $M
----------------------- ----------- --------------- -------------- -----------
At 1 April 2015 13.4 9.2 2.5 25.1
Additions 0.7 4.6 0.4 5.7
Charge for the period (1.2) (2.4) (0.4) (4.0)
Exchange movement 0.4 0.4 - 0.8
------------------------
At 30 September 2015 13.3 11.8 2.5 27.6
------------------------ ----------- --------------- -------------- -----------
13 Business combinations
There were no acquisitions in the six-months ended 30 September
2016.
In the prior period, on 5 June 2015, Sophos Inc. acquired 100%
of the share capital of Reflexion Networks Inc., a leader in e-mail
security, archiving and encryption. Reflexion Networks Inc. was
acquired to further enhance the Group's Cloud product offering.
Acquisition related expenses of $0.8M have been excluded from
the consideration transferred and have been recognised as an
expense within General finance and administration - exceptional
items.
Assets acquired and liabilities assumed on the day of
acquisition were as follows:
Book Fair
value Adjustment value
$'M $'M $'M
-------------------------------------------------- ------- ----------- -------
Non-current assets:
Intangible assets
Intellectual Property - 1.9 1.9
Customer relationships - 5.8 5.8
Other non-current assets 0.4 - 0.4
-
Current Assets: -
Trade and other receivables 0.5 - 0.5
Non-Current Liabilities
Deferred tax liability - 3.1 3.1
Current liabilities:
Deferred revenues 0.2 - 0.2
Trade and other payables 0.7 - 0.7
Lease obligations 0.2 - 0.2
Net assets recognised at the date of acquisition (0.2) 4.6 4.4
-------------------------------------------------- ------- ----------- -------
Cash paid 15.0
Goodwill arising on acquisition - Reflexion
Networks Inc. 10.6
-------------------------------------------------- ------- ----------- -------
Prior to the acquisition, Reflexion Networks Inc. operated in a
complimentary market sector to the Group and, accordingly, the
results of Reflexion Networks Inc. are incremental to those of the
Group. Revenue of $234.1M for the six-months to September 30, 2015
includes $2.0M in respect of Reflexion Networks Inc. The impact of
Reflexion Networks Inc. on the operating loss of the Group for the
period is insignificant. Had Reflexion Networks Inc. been owned
since 1 April 2015, revenue for the six-months to 30 September 2015
would have increased over the reported revenue by approximately
$1.0M. The impact on the operating loss of the Group would have
been insignificant.
14 Deferred revenue
The movement in the Group's deferred revenue balance was as
follows:
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
----------------------------------- ------------- ------------- ---------
Current 286.5 251.4 251.4
Non-current 212.2 181.9 181.9
At 1 April 498.7 433.3 433.3
------------------------------------ ------------- ------------- ---------
Billings 279.8 242.0 534.9
Revenues (256.9) (234.2) (478.2)
Translation and other adjustments (10.3) 4.3 8.7
------------------------------------ ------------- ------------- ---------
Current 293.9 259.7 286.5
Non-current 217.4 185.7 212.2
At end of period 511.3 445.4 498.7
------------------------------------ ------------- ------------- ---------
15 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
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
----------------------------------------- ------------- ------------- ---------
Current instalments due on finance
leases 0.1 0.1 0.1
Current instalments due on bank
loans - - 25.0
Contingent Consideration 1.1 - 1.1
------------------------------------------ ------------- ------------- ---------
Total current financial liabilities 1.2 0.1 26.2
------------------------------------------ ------------- ------------- ---------
Non-current instalments due on finance
leases within 5 years 0.1 0.1 0.1
Non-current instalments due on
bank loans 302.4 302.0 303.4
Contingent consideration - - 1.0
Unamortised facility fees (3.2) (3.7) (3.6)
------------------------------------------ ------------- ------------- ---------
Total non-current financial liabilities 299.3 298.4 300.9
------------------------------------------ ------------- ------------- ---------
Total financial liabilities 300.5 298.5 327.1
------------------------------------------ ------------- ------------- ---------
The fair value of the Group's bank loans equal their carrying
amount, and are repayable as follows:
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
-------------------------------- ------------- ------------- ---------
$M $M $M
Due within one year - - 25.0
Due between two and five years 302.4 302.0 303.4
Total bank loans 302.4 302.0 328.4
--------------------------------- ------------- ------------- ---------
15 Financial liabilities (continued)
The following terms apply to the bank loans outstanding at 30
September 2016:
Principal Principal
Facility Interest Margin M $ M
------------ ---------- ------- ---------- ----------
Facility A Libor 2.00% $ 235.0 235.0
Facility B Euribor 2.00% EUR 60.0 67.4
------------ ---------- ------- ----------
302.4
----------
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.
16 Notes to the consolidated statement of cash flows
Acquisition of subsidiary net of cash acquired:
Six-months Six-months Year-
ended ended ended
30 September 30 September 31 March
2016 2015 2016
Unaudited Unaudited Audited
$M $M $M
------------------------------------------- ------------- ------------- ---------
Consideration paid, satisfied in cash
- Surfright B.V. and Threatstar Holdings
B.V. - - 31.8
- Reflexion Networks Inc. 1.2 15.0 15.0
Net cash purchased - - (0.8)
Acquisition of subsidiaries net of cash 1.2 15.0 46.0
------------------------------------------- ------------- ------------- ---------
During the six-months ended 30 September 2016, the Group paid
$1.2M to the previous owners of Reflexion Networks Inc. in
accordance with the purchase agreement. The consideration has been
calculated based on the billings of the Reflexion Inc. product
range for the year-ended 31 December 2015.
16 Notes to the consolidated statement of cash flows (continued)
Reconciliation of movement in net debt:
Effect
of
movements
31 March in 30 September
2016 Non-cash exchange 2016
Audited Cash flow Movements rates Unaudited
$M $M $M $M $M
--------------------------- --------- ---------- ---------- ---------- -------------
Cash and cash equivalents (66.8) (26.9) - 3.7 (90.0)
--------------------------- --------- ---------- ---------- ---------- -------------
Obligations under finance
leases 0.2 (0.1) - - 0.1
Bank loans 324.7 (25.0) 0.4 (0.9) 299.2
Gross debt 324.9 (25.1) 0.4 (0.9) 299.3
--------------------------- --------- ---------- ---------- ---------- -------------
Net debt 258.1 (52.0) 0.4 2.8 209.3
--------------------------- --------- ---------- ---------- ---------- -------------
Effect
of
movements
31 March in 30 September
2015 Non-cash exchange 2015
Audited Cash flow Movements rates Unaudited
$M $M $M $M $M
Cash and cash equivalents (72.6) 4.5 - (0.1) (68.2)
--------------------------- --------- ---------- ---------- ---------- -------------
Obligations under finance
leases 0.1 (0.1) 0.2 - 0.2
Bank loans 380.6 (91.5) 6.2 3.0 298.3
-------------
Gross debt 380.7 (91.6) 6.4 3.0 298.5
--------------------------- --------- ---------- ---------- ---------- -------------
Net debt 308.1 (87.1) 6.4 2.9 230.3
--------------------------- --------- ---------- ---------- ---------- -------------
17 Events after the reporting period
On 20 October 2016, Sophos Limited acquired 100% of the share
capital of Barricade Security Systems Limited ("Barricade"), a
company incorporated in Ireland, for a cash consideration of $1.9M.
Barricade is a start-up cloud security company.
The acquisition is subject to final adjustments for working
capital and cash so the Group is unable to provide full business
combination disclosure at this time.
Independent review report to Sophos Group plc
For the six-months ended 30 September 2016
Introduction
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 2016 which comprises the condensed
consolidated income statement, the condensed consolidated statement
of comprehensive income, the condensed consolidated balance sheet,
the condensed consolidated cash flow statement, the condensed
consolidated statement of changes in equity and the related
explanatory notes. We have read the other information contained in
the half-yearly financial report and considered whether it contains
any apparent misstatements or material inconsistencies with the
information in the condensed set of financial statements.
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 Disclosure and Transparency Rules ("the DTR")
of the UK's Financial Conduct Authority ("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.
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 IFRSs as adopted by the EU.
The condensed set of financial statements included in this
half-yearly financial report has been prepared in accordance with
IAS 34 Interim Financial Reporting as adopted by the EU.
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.
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. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing
(UK and Ireland) 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.
Conclusion
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 2016 is not prepared, in all material respects, in
accordance with IAS 34 as adopted by the EU and the DTR of the UK
FCA.
Tudor Aw (Senior Statutory Auditor)
For and on behalf of KPMG LLP
Chartered Accountants, London
8 November 2016
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR DBBDBGBGBGLI
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