Market makers did their own hacking attack on the share price of Sophos Group PLC (LON:SOPH) after the cybersecurity specialist reported sub-par billings growth.
The shares lost a fifth of their value as the group reported lower-than-expected year-on-year (YOY) billings growth for the three months to the end of June – the first quarter of Sophos's financial year.
READ: Sophos quick out of the traps with upbeat statement
The group said it expects to report YOY first quarter billings growth of roughly 6% (2% at constant currency), compared to billings growth in the preceding quarter of around 23% (16% at constant currency).
Sophos £SOPH could get hit hard this morning. Big miss vs what I think ppl were expecting! But long term outlook stays the same so maybe more than -10 would be harsh
— eric (@EricUKinvestor) July 5, 2018
The group said the drab growth was primarily down to its Enduser security business, which in the corresponding period a year earlier had enjoyed a sparkling performance thanks to high-profile ransomware attacks such as the WannaCry virus.
READ: Four "wannacry" plays to consider from Hybridan Research
Sophos pointed out that the comparatives get easier in the second quarter and that “as the prior-year comparators normalise, we expect a return to mid-teens constant currency billings growth in the second half of the year”.
The group's long-term outlook remains unchanged but the market was clearly spooked, with the shares slumping to 492.8p from 615.5p overnight.
Nicholas Hyett, an equity analyst at Hargreaves Lansdown, hit the nail pretty much on the head when he wrote: “Sophos is meant to be a high growth stock – so a 2% underlying increase in billings was never going to cut the ice with investors."
Hyett said it was of more concern that management gave no indication of a slow-down when it released its full-year results, just seven weeks ago, when management must already have been seeing signs of trouble ahead.
"Management seem confident that this is a short-term blip in the long-term trend, but it’s difficult to understand why it’s taken them by surprise, and casts doubt over future projections. In the long run we still think Sophos has an attractive position in a growing market, but management now have some serious work to do rebuilding credibility," Hyett said.
Not the first disappointment
Russ Mould, the investment director at AJ Bell, also laid into management, saying it wasn't the first time that Sophos has failed to deliver. "The business’s third quarter update in February also saw billings behind expectations," Mould observed.
“One would have thought cyber security is a booming industry given a succession of high profile cyber attacks raising awareness of the issue with corporates and consumers. So why is Sophos failing to achieving expected growth levels?" Mould asked.
“It looks like a classic case of people thinking all companies serving hot sectors are guaranteed to see sustained growth at high levels.
“At the end of the day, cyber security is just like many other markets – highly competitive and customers are often reluctant to pay for services when they can get some level for free.
“Sophos needs to convince its customers that it is worth paying for additional defensive solutions, in order to cross sell services and encourage existing clients to renew contracts. There is certainly evidence that it has been successful with this in the past, it’s just the pace of growth which is likely to remain uncertain for now,” Mould concluded.
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