Today’s first-quarter trading update from cybersecurity solutions provider Sophos Group (LSE: SOPH) has sent the stock plummeting and it’s down around 20% as I write. Is this a good opportunity to pick up a few of the shares on the cheap?
The FTSE 250 company says its products help secure the networks used by around 100m people across 150 countries and 100,000 businesses including well-known names such as Pixar, Under Armour, Northrop Gumman, Xerox, Ford, Avis and Toshiba. The operation is large and heading towards what looks like sustainable annual profits. The company’s strategy involves keeping IT security simple and reliable as networks grow in complexity, which involves managing networks, servers and devices through the cloud.
Good, but not as good as expected
The full first-quarter trading update – covering the months of April, May and June – is scheduled for release on 26 July. But in today’s update the firm said it expects to report growth in billings for the first quarter of the year up 6% compared to the equivalent period last year and up 2% at constant currency rates. The directors said there was a strong performance in revenue and cash flow driven by a “strong demand environment.”
That all sounds good but Q1 billings are lower than previously expected, so the company is actually reporting a ‘miss’ on anticipated business volumes, which could explain the share-price tumble. The firm points to its Enduser security business as being responsible for the shortfall because it “faced a particularly challenging comparable.”
A miss on expectations it might have been, but underlying Enduser billings growth in the first quarter of 2018 was up 50% at constant currency rates after adjusting for a material contract that affected the figures in 2017, which is impressive and a good indicator that the growth story here remains on track. The directors reckon that high-profile global ransomware attacks, such as that by WannaCry, drove “the significant increase in demand for our Endpoint protection solutions.” The firm’s new next-generation endpoint solution, Intercept X, made a maiden contribution to the billing mix in the first quarter, which also helped the outcome.
Earnings set to rise
Looking forward, the company expects the same factors to influence the second quarter of the year, which will be measured against an “easier” prior-year comparable. Then, “as the prior-year comparators normalise,” the firm is anticipating ongoing constant currency billings growth measurable in mid-teen percentages in the second half of the year. Meanwhile, City analysts following the firm expect earnings to decline 6% for the trading year to March 2019 before shooting up around 44% the year after that.
Even after today’s share-price fall, the forward price-to-earnings ratio sits around 50, so the shares aren’t cheap when measured against these green-shoot earnings. But there’s a tangible growth story unfolding, which makes me keen to keep an eye on the stock with the idea of picking up a few shares at opportune moments.