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IT security specialist Sophos slides despite positive results

Discussion in 'Market News' started by Lily, Feb 9, 2016.

  1. Lily

    Lily Forum Member

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    Company hit by concerns about sector being overvalued

    IT security products business Sophos has seen its shares come under attack despite an upbeat trading statement.

    The company, which makes products to defend against malware, spyware and other security issues, said its third quarter billings had climbed 17.4% year on year. It confirmed its full year outlook for billings to grow in the high teens to 20%.

    The fourth quarter sees a tougher comp from the billings growth perspective, which we think will lead to a slightly lower growth rate than the third quarter but still comfortably double-digit. The key challenge remains the decline in sector valuations - in isolation we think our original target multiple of 20 times 2017 free cash flow for Sophos looks reasonable given the double digit growth and scope for margin expansion, but having reduced this to 18 times after the first half, further sector valuation declines mean we now pull it back to 15 times. The key risks we see are renewal rates, technology change/product cycles, and integration of past and possible future acquisitions.

    The peers we selected at IPO are down an average 39% [which reflects] global investor concerns about relatively short product cycles, and the need to stay on top of technology and threat evolution. In this respect we think Sophos is ahead of the pack hence our clear premium target multiple.

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