7 November Sophos Group plc H1 FY19 Results

Transcription

1 7 November 2018 Sophos Group plc H1 FY19 Results

2 Safe Harbour Cautionary Statement The following presentation is being made only to, and is only directed at, persons to whom such presentation may lawfully be communicated ( relevant persons ). Any person who is not a relevant person should not act or rely on this presentation or any of its contents. Information in the following presentation relating to the price at which relevant investments have been bought or sold in the past or the yield on such investments cannot be relied upon as a guide to the future performance of such investments. For the avoidance of doubt, nothing in this presentation should be construed as a profit forecast. The information, statements and opinions contained in this presentation do not constitute a public offer under any applicable legislation, an offer to sell or solicitation of any offer to buy any securities or financial instruments in Sophos Group plc (the Company ) or any company which is a subsidiary of the Company. Further this presentation does not provide any advice or recommendation with respect to any such securities or other financial instruments. The release, publication, or distribution of this presentation in certain jurisdictions may be restricted by law, and therefore persons in such jurisdictions into which this presentation is released, published or distributed should inform themselves about, and observe, such restrictions. Forward-looking Statements Certain statements contained in this presentation constitute forward-looking statements. All statements other than statements of historical facts included in this presentation, including, without limitation, those regarding the Company s financial condition, business strategy, plans and objectives, are forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including, for example, the terms believes, estimates, anticipates, expects, intends, may, will, or should or, in each case, their negative or other variations or comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company s present and future business strategies and the environment in which the Company will operate in the future. Such risks, uncertainties and other factors include, among others: inherent difficulty in predicting customer behaviour; customers may not respond as we expected to our sales and marketing activities; the competitive environment; our ability to adapt to technological change; business interruption or failure of our systems architecture and communication systems; problems with implementing upgrades to our applications and supporting information technology infrastructure; any failure to properly use and protect personal customer information and data; our ability to manage and maintain third party business partnerships; increased regulation of our businesses; changes in laws; any failure to process transactions effectively; any failure to adequately protect against potential fraudulent activities; any significant quality problems or delays; the global macro-economic environment; the potential for one or more countries exiting the Eurozone; the implications of the exercise by the United Kingdom (the UK ) of Article 50 of the Treaty of Lisbon and the disruption that may result in the UK and globally from the withdrawal of the UK from the European Union; our inability to attract, retain and develop talented people; our ability to repurchase shares; our inability to adequately protect our intellectual property rights; disruptions, expenses and risks associated with any acquisitions and divestitures; amortisation of acquired intangible assets and impairment charges; our use of debt to finance acquisitions or other activities; and the cost of, and potential adverse results in, litigation involving intellectual property, competition authority, shareholders and other matters. These forward-looking statements speak only as at the date of this presentation. Except as required by the Financial Conduct Authority, or by applicable law, the Company does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise. 2

3 Business Update Kris Hagerman, CEO

4 H1 FY19 Summary Modest H1 billings growth; strong revenue, profit, and cash performance Modest H1 billings growth, primarily due to difficult year-over-year compare o Return to more sustainable renewal rates counteracted strong growth in renewal base o Cross-sell activity levels in Enduser business returned to more sustainable levels o Small negative effect from legacy product transition in Network business Strong revenue, profit, and cash performance o Strong revenue and profit: revenue +18% and H1 profit before tax of $26 million o Operating and unlevered free cash flow up modestly YOY, on strong compare Further strategic progress o Both Sophos Central and Intercept X saw good growth in the period o Continued growth in customer base and partner ecosystem o Delivering on strong innovation pipeline: Intercept X Advanced with EDR and XG Firewall v17.5 on track for November GA Outlook o Modestly improving constant currency billings growth in H2, and good revenue growth o We enter FY20 with strong growth in our renewals base and, assuming stable renewal rates, anticipate a significant improvement in overall constant currency YOY billings growth 4

5 Financial Performance Overview Modest H1 billings growth; strong revenue, profit, and cash performance +1.6% Constant Currency Billings (1) Subscription billings +1.6% Total billings +3.3% at reported rates $54.0M Cash EBITDA (2) vs. $66.6M H1 FY18 Impacted by billings performance $71.6M Unlevered Free Cash Flow (3) vs. $71.4M H1 FY18 Consistent YOY due to working capital management +15.7% $49.9M $81.5M Constant Currency Revenue (4) Subscription revenue growth of 19.6% Total revenue +17.8% at reported rates Adjusted Operating Profit (4)(5) vs. $15.7M H1 FY18 Strong revenue performance and FX benefit Net Cash Flow from Operations vs. $80.7M H1 FY18 Reflects decrease in exceptional items and working capital management 5

6 Significant Product Delivery Pipeline in H2 FY19 Sustained investment in innovation to deliver advanced cybersecurity Intercept X Advanced with EDR: Target GA November, 2018 o Powerful new Endpoint Detection and Response with deep learning, neural network-based advanced detection, and on-demand access to intelligence curated by SophosLabs o Enables organizations of all sizes, and especially those with limited resources, to identify and prevent cyberattacks in real time with threat tracking and forensics o Beta program began in mid-september and has been one of our most successful ever, with over 750 customers participating and over 20,000 endpoints now deployed with Sophos EDR XG Firewall v17.5: Target GA November, 2018 o Integrated cloud management as part of Sophos Central o Additional synchronized security features, including lateral movement detection -- to prevent threats from spreading on the same network segment 6

7 (intercept X with EDR image) Unmatched endpoint protection. 7

8 Intelligent EDR for Any Organization TRADITIONAL EDR INTELLIGENT EDR Insights Humanized, Prioritized, and Actionable IT Generalists Explore Search, Investigate, and Hunt Data Correlated, Contextualized, and Organized Analysts, IR, and SOC Specialists and Products AI-Powered Insight Replicates hard-to-find capabilities such as security analysts, malware analysts, and threat intelligence analysts. 8

9 The world's best visibility, protection, and response.

10 Sophos Central Management Addition of XG Firewall support makes Sophos Central an even more powerful platform Manage across endpoint and network from single console Secure XG remote access and device management with single sign on View availability status, license details, performance reporting, security status, etc. Manage XG firmware updates and store configuration backups in Central Zero-touch setup of new XG appliances 10

11 Q2 FY14 Q3 FY14 Q4 FY14 Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY17 Q3 FY17 Q4 FY17 Q1 FY18 Q2 FY18 Q3 FY18 Q4 FY18 Q1 FY19 Q2 FY19 BILLINGS ($M) Sophos Central Continued growth and strong metrics in our strategic cloud management platform $70 $60 $50 $40 $30 Today, primarily used for Enduser Security On average, customer spend is c.15% greater* On average, customers have c.1.7 products ** (c.1.4 for Group) Over 50% have more than 1 product (versus 25% overall) Soon to add XG Firewall v17.5, managed inside Sophos Central 80,000 70,000 60,000 50,000 40,000 30,000 CUSTOMERS $20 20,000 $10 10,000 $0 0 * For customers with 5,000 or fewer employees ** For # products per customer, all Endpoint solutions rank as one product category (i.e. SEC, CEA, CIX); other categories are Server, Mobile, Encryption, UTM + Wireless, Web and 11

12 Financial Results Nick Bray, CFO

13 Billings Performance Billings growth of 3.3%, or 1.6% at constant currency REPORTED BILLINGS BY TYPE ($M) BILLINGS DRIVERS HARDWARE AR: +1.3% CC: -0.4% SUBSCRIPTION AR: +3.2% CC: +1.6% Brand new customer billings (6) up 6% at constant currency Existing customers renewal rates (7) for the sixmonth period at 118% from 142% in H1 FY18, with a modest improvement Q2 FY19 over Q1 FY19 High visibility of the renewal book H1 FY18 H1 FY19 13

14 Billings Performance Billings growth of 3.3%, or 1.6% at constant currency REPORTED BILLINGS BY TYPE ($M) REPORTED BILLINGS BY PRODUCT ($M) REPORTED BILLINGS BY REGION ($M) HARDWARE AR: +1.3% CC: -0.4% APJ AR: -9.6% CC: -7.8% NETWORK AR: +5.3% CC: +3.3% AMERICAS AR: +4.2% CC: +4.3% SUBSCRIPTION AR: +3.2% CC: +1.6% ENDUSER AR: -0.5% CC: -2.0% EMEA AR: +6.3% CC: +2.4% H1 FY18 H1 FY19 H1 FY18 H1 FY19 H1 FY18 H1 FY19 14

15 Key Billings Metrics Stability in key metrics; improvement in proportion of business from new customers BILLINGS BY CUSTOMER TYPE (6) BILLINGS BY SIZE (Employees) BILLINGS BY LENGTH OF CONTRACT (8) PERCENTAGE OF CUSTOMERS WITH UTM AND ENDPOINT 13% 13% > 5, % 8.4% 3+ YEARS 76% 75% EXISTING 47.9% 46.6% 2-3 YEARS 87% 87% < 5, % 6.7% 1-2 YEARS 24% 25% NEW 34.9% 38.3% <1 YEAR GROWTH +120 bps 10.5% 11.7% H1 FY18 H1 FY19 H1 FY18 H1 FY19 H1 FY18 H1 FY19 Weighted average contract length (9) of 27.2 months, a small decrease on 27.6 months in comparative period H1 FY18 H1 FY19 15

16 Revenue Performance Revenue (4) growth of 17.8%, or 15.7% at constant currency (only a small impact from IFRS 15) REPORTED REVENUE BY TYPE ($M) REPORTED REVENUE BY PRODUCT ($M) REPORTED REVENUE BY REGION ($M) HARDWARE AR: +0.4% CC: -1.4% NETWORK AR: +9.8% CC: +7.6% APJ AR: +5.5% CC: +7.3% AMERICAS AR: +16.8% CC: +16.7% SUBSCRIPTION AR: +21.7% CC: +19.6% ENDUSER AR: +26.4% CC: +24.3% EMEA AR: +22.0% CC: +17.3% H1 FY18 H1 FY19 H1 FY18 H1 FY19 H1 FY18 H1 FY19 16

17 Deferred Revenue by Year of Recognition YOY growth in deferred revenue (4) despite FX headwinds REPORTED REVENUE BY SOURCE ($M) DEFERRED REVENUE ($M) Revenue from in-period hardware billings (+0.8%; CC: -1.3%) Revenue from in-period subscription and other billings (+17.8%; CC:+17.1%) >3 YEARS 2-3 YEARS 1-2 YEARS +11.9% +2.2% +4.8% +14.7% Opening period deferred revenue release (+22.4%; CC: +19.9%) < 1 YEAR +12.6% H1 FY18 H1 FY19 H1 FY18 H1 FY19 17

18 Expense Performance Maintaining appropriate levels of investment to support future growth COST ANALYSIS ($M) (10) COSTS AS % OF BILLINGS (10) GF&A +15.3% R&D +8.8% 79.8% 6.9% 19.3% 84.9% 7.7% 20.4% GF&A R&D SALES & MKTG +8.7% 34.6% 36.4% SALES & MKTG COST OF SALES +10.6% 19.0% 20.4% COST OF SALES H1 FY18 H1 FY19 H1 FY18 H1 FY19 18

19 Cash EBITDA and Statutory Income Statement Strong performance in revenue and profitability CASH EBITDA RECONCILIATION $M H1 FY18 H1 FY19 Cash EBITDA Net deferral of revenue (44.7) (3.2) Net deferral of expenses 1.9 (0.8) Depreciation (5.4) (5.8) Unrealised foreign exchange loss (2.7) 5.7 Adjusted operating profit (4) STATUTORY INCOME STATEMENT (4) $M H1 FY18 H1 FY19 Billings Net deferral of revenue (44.7) (3.2) Revenue Cost of sales (66.2) (72.9) Gross profit Sales and marketing (117.6) (131.0) Research and development (68.1) (74.0) General finance and administration (24.2) (27.7) FX profit/loss (5.0) 6.0 Adjusted operating profit Amortisation (13.8) (7.8) Share based payment expense (18.2) (20.6) Exceptional items (6.9) 5.5 Operating result (23.2) 27.0 Net interest expense (12.3) (1.0) Result before tax (35.5) 26.0 Tax (2.8) (15.0) Result for the period (38.3)

20 Cash Flow Consistent ufcf year-on-year ADJUSTED OPERATING PROFIT (4) TO UFCF RECONCILIATION $M H1 FY18 H1 FY19 Adjusted operating profit Net deferral of revenue Net deferral of expenses (1.9) 0.8 Exceptional items* (6.9) (1.4) Depreciation Unrealised foreign exchange 2.7 (5.7) Change in working capital Cash tax (8.0) (7.5) Net cash from operating activities Exceptional items* Capex (16.2) (11.3) Unlevered FCF WORKING CAPITAL $M H1 FY17 H1 FY18 H1 FY19 Change in working capital Working capital: Growing with the business Capex: Equal phasing between H1 and H2 in current-year; phased more to first-half in prioryear *Excludes non-cash items 20

21 Renewal Rate 5-Year Renewal Rate and Implications for H2 Return to sustainable renewal rates after period of accelerated demand Sophos Cloud Endpoint Sophos Central Accelerated Demand: Ransomware Outbreaks Intercept X Release Intercept X FY15: 101 FY16: 109 FY17: 129 FY18: 140 Sophos Central o o o Started with Endpoint, other products gradually introduced over the period Majority today is still Endpoint Cross-sell and upsell driving higher renewal rates Implications for H2 FY19 o o o Expect renewal rate to improve further from H1 levels Stronger Q3 with headwind in Q4 Strong product pipeline of additional Sophos Centralmanaged products (EDR, XG Firewall 17.5, etc.) Quarterly % 21

22 $ million Renewal Rate, Renewal Book, and Implications for FY % Renewal book +11% Renewal rate +20pts Net Billings Effect +31% % Renewal book +19% Renewal rate +11pts Net Billings Effect +30% % FY19 o o Good growth in the annual renewal book, +21% to $381 million Moderating renewal rate counteracting this growth Implications for FY Renewal Rate: 109% Renewal Rate: 129% Renewal Rate: 140% o o We have another year with good growth in the renewal book, increasing by c.20% (c.$80 million) Assume a broadly stable renewal rate, leads to a return to growth 0 FY16A FY17A FY18A Subscriptions, existing Hardware, OEM & Other Subscriptions, new 22

23 Outlook Modestly improving constant currency billings growth in H2 FY19, and strong revenue growth o Still working through challenging YOY comparatives Expect significant improvement in constant currency billings growth in FY20 o Enter the year with strong growth in renewals base o Assume a stable renewal rate 23

24 Summary and Outlook Kris Hagerman, CEO

25 Summary We are working our way through the challenging compares from a year ago Financial model remains solid: strong revenue growth, profit, and cash generation Continued growth and momentum in Sophos Central, our strategic cloud platform Continued product innovation to take advantage of growing market opportunity o Intercept X Advanced with EDR o XG Firewall v17.5 Our fundamentals are strong and we are confident of delivering future growth 25

26 Q&A

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28 End Notes (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) 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. (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) Restated for the adoption of IFRS 15 Revenue from contracts with customers (see next slide). (5) Adjusted operating profit represents the Group s operating profit/(loss) adjusted for amortisation charges, share option charges and exceptional items. (6) Constant currency, includes all MSP billings and excludes OEM and consumer billings. (7) Renewal rate calculated as value of contracts renewed in a period / contracts up for renewal in the period. Calculation is at constant currency and includes upsell and crosssell. (8) Constant currency billings (9) Last twelve months weighted average contract length is calculated on a constant currency billings basis. (10) Expenses included within the definition of cash EBITDA at actual exchange rates. 28

29 Impact of IFRS 15 Limited impact on revenue; main impact on commission costs deferral $M IMPACT ($M) Six-months ended 30 September 2017 Year-ended 31 March 2018 As previously reported IFRS 15 Restated As previously reported IFRS 15 Restated Revenue (1.3) (1.7) 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) KEY CHANGES Earlier recognition of revenue on certain products Deferral of commissions and other incremental costs incurred to obtain a contract with a customer Trade and other receivables Deferred tax (net) (12.2) (13.6) Deferred revenue (654.4) 27.1 (627.3) (755.7) 27.1 (728.6) Net assets

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