Sophos Group Regulatory News (SOPH)

Sophos Group plc

September 2015, FY16 Interim Results

Strong momentum and execution in the three-months since IPO

Raising full-year outlook

London, 11 November 2015. 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 2015 ("H1, FY16").

Financial Highlights

· Trading ahead of management expectations in the first half; with an upgrade to both the full-year like-for-like1 billings growth and cash EBITDA2 margin outlook 

· H1 like-for-like billings growth of 24.2 percent year-over-year ("YOY") with growth across all major regions and product categories

· Reported billings grew 12.8 percent YOY, reflecting significant currency headwinds including the devaluation of the Euro and Sterling against the US Dollar

· Billings growth driven by both strong new customer wins and an improvement in the retention rate of existing customers

· Reported revenue up 8.9 percent YOY, estimated 17 percent YOY growth at constant currency

· Twelve months to September weighted average contract length6 consistent YOY at 27.9 months

· Reported Cash EBITDA up 8.9 percent, 23.0 percent YOY growth at constant currency

· Operating (Loss) / Profit lower YOY mainly reflecting $17.6 million of exceptional items connected with the Group's initial public offering of shares and a YOY variance in unrealised foreign exchange gains of $7.6 million

· Unlevered Free Cash Flow lower YOY due to phasing of capital expenditure, but above internal expectations

· Net Cash Flow from Operating Activities lower YOY mainly reflecting the $17.6 million of costs incurred on the Group's initial public offering of shares

· Interim dividend of 0.7 US cents per share; the Group is targeting a full year dividend payment of 20 percent of free cash flow

Operational Highlights

· Continued market share gains as Sophos outperformed industry market growth rates in both network security and enduser security

· Robust product delivery in H1 of new products and major version and feature upgrades across the Group's network and enduser security portfolio, as well as adding support for the latest operating system versions of Windows, Mac, Android and iOS

· Early November release of Sophos XG Firewall delivering a Unified Threat Management ("UTM") / Next Generation Firewall product that combines the best of Sophos and Cyberoam; and delivery of Sophos Security Heartbeat™, part f our synchronized security strategy (Project Galileo) to actively share valuable security intelligence between Sophos endpoint and network security products.

· Drove increased brand awareness via continued channel-oriented sales and marketing events, social media initiatives, and extension of Sophos' successful free tools program, including releasing a free Linux server protection pool and a public beta of Sophos Home, a cloud-managed, easy-to-use, no-hassles anti-malware and web filtering solution for PCs and Macs that will be free for home users and families

· Acquired Reflexion Networks Inc., a SaaS-based offering providing security, archiving, encryption and business continuity for email, adding more than 17,000 customers and over 2,200 partners/ managed service providers ("MSPs") to the Sophos ecosystem

· Placed in the "Leaders" quadrant for both UTM and Mobile data protection in latest Gartner Magic Quadrant reports

· Finished first in all three security-related categories, Client Security Software, Network Security Appliances, and Network Security Software, at the Computer Reseller News (CRN) Annual Report Card (ARC) awards for the second straight year

Kris Hagerman, Chief Executive Officer, commented:

"Cybersecurity remains the number one priority for IT executives across enterprises of all sizes, and within an environment of strong secular growth in IT security, Sophos continues to outperform the market in each of our core segments of enduser and network security. The first half has been marked by continued strength across all major regions and product categories, with our performance exceeding our internal expectations. Our leading product portfolio, commitment to "security made simple", and a "channel first" sales strategy enabled us to both attract a significant number of new customers and grow our billings from existing customers. Based on our results in H1 and our confidence in H2, we are raising our full-year outlook for both billings and Cash EBITDA."

Outlook

In the prior year to March 2015, YOY growth of like-for-like quarterly billings was 9 percent in Q1, 16 percent in Q2, 18 percent in Q3 and 24 percent in Q4. YOY growth of like-for-like billings in Q1 FY16 of 25 percent has been followed by 24 percent growth for Q2 FY16. This equates to 24 percent like-for-like billings growth for the first half-year and is ahead of our internal projections. 

After this strong start to the year, the Group has improved its outlook for FY16 like-for-like billings growth, to now be in the range of high teens to 20 percent. This reflects a strong performance in the first half of the year and a second half expectation of mid to high teens like-for-like billing growth. In addition, aided by the operating leverage in our model, we expect full-year cash EBITDA margins for FY16 to now slightly exceed the original outlook of 21.3 percent for the year. Based on current exchange rates, the currency headwind experienced in H1 of 11 percent is expected to reduce to approximately 8 percent for the full year.At the time of our Q1 trading statement, the Group reported that Cash EBITDA phasing was expected to be approximately one third in the first half and two thirds in the second half; in line with historical trends. Following a strong billings performance, H1 cash EBITDA is now expected to be slightly higher than one third of the full-year. This is despite a more equal spread in marketing costs across the year than in previous periods. 

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 200,000 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

Management will be hosting an analyst meeting to discuss the Interim Results at 09:30am London time; at 18 Lincoln's Inn Fields, London, WC2A 3ED. An audio webcast will be available on this link: http://cache.merchantcantos.com/webcast/webcaster/4000/7464/16532/54098/Lobby/default.htm and there will be a dial-in facility provided on +44 (0) 20 3003 2666. A recording of the meeting will also be available for one week after the event on the Company's website.

1. 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.

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, stock option charges, unrealised foreign exchange differences and

exceptional items, with billings replacing recognised revenue.

3. 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.

4. 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.

5. The majority of billings are for license 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.

6. Constant currency billings excluding Cyberoam and Reflexion.

CHIEF EXECUTIVE OFFICER'S REVIEW

Operational Review

Sophos continues to outperform market growth rates in both of our core segments: network security and enduser security. We expect this success to continue with strong new product releases and innovations delivered during the first-half to extend and deepen our security portfolio. Among these are a new server lockdown product, a new release of our SafeGuard data encryption product, a new release of Sophos Web Appliance, a new version of Sophos Mobile Control, a new version of our UTM / Next Generation Firewall that supports auto-scaling for Amazon Web Services ("AWS"), and additional Wi-Fi access point offerings. In addition to adding support for the latest Windows, Mac, Android and iOS operating systems to our portfolio, we have also delivered download reputation and malicious traffic detection features to advance our next-generation endpoint security capabilities. Sophos also added significant new capabilities to our cloud-managed security platform, including a Sophos Cloud Web Gateway, Sophos Mobile Security, Linux server protection, and a Sophos Cloud Partner Dashboard to enhance the ability of our channel partners and MSPs to monitor and manage the IT security estates of their customers. 

Although outside the first half reporting period, in early November Sophos announced the general availability of Sophos XG Firewall which is an exciting new UTM / next-generation firewall platform that combines the best of Sophos and Cyberoam technologies. At the same time, Sophos announced the availability of Sophos Security Heartbeat™ which is part of our Synchronised Security strategy (project codename "Galileo"). This revolutionary technology actively and continuously shares intelligence between endpoint and network security solutions to find threats faster, identify compromises sooner, and automate the response to an attack. This can reduce the time and resources required from IT organisations in the discovery and remediation of malware and cyber-attacks. Early reports indicate that our partner and customer communities are excited about these two new offerings, due to their capabilities and their differentiation vs. competitors' products. 

Sophos continued to work closely with our global network of channel partners and invest to expand Sophos' brand awareness. In addition to numerous channel-oriented sales and marketing events and social media initiatives, we extended our successful free tools portfolio by introducing a new free Linux server protection offering. In October we also began to introduce a public beta of Sophos Home, a cloud-managed, easy-to-use anti-malware and web filtering solution for PCs and Macs that will be free for home users and families. Early beta feedback on Sophos Home has been very positive. 

As previously reported, Sophos acquired Reflexion Networks Inc. on 5 June 2015 for cash consideration of $15 million. Reflexion is a leader in cloud-based security, archiving, encryption and business continuity for email services, and brings more than 17,000 additional customers and over 2,200 partners, most of which are MSPs, into the Sophos ecosystem. This acquisition enables Sophos to add software-as-a-service (SaaS) email security to the Sophos Cloud platform and delivers enterprise-grade email security in an affordable and simple-to-manage solution. The acquisition of Reflexion is consistent with Sophos' innovation strategy, in which we continue to innovate both through internal product development and by making selective strategic acquisitions to enhance and expand our product roadmap.

Sophos continued to be recognized as an industry leader by industry publications. At the 2015 SC Magazine awards, Sophos was voted the UTM category winner by a panel of independent judges. Furthermore, in August of 2015, the readers of Computer Reseller News ("CRN"), the leading channel publication, voted Sophos the Annual Report Card ("ARC") winner in all three security-related categories: Client Security Software, Network Security Appliances, and Network Security Software. This is the second year in a row that CRN has named Sophos best in class for all security-related categories, an accomplishment that had never been achieved by any vendor prior to last year. 

During the first half Sophos also continued to receive positive recognition and endorsement from industry analysts. Gartner once again recognised Sophos as a "Leader" in both the 2015 Mobile Data Protection Magic Quadrant and the 2015 UTM Magic Quadrant. In addition, Sophos was placed in the "Visionary" quadrant of the Enterprise Mobility Management ("EMM") Magic Quadrant and is the only IT security vendor to appear in the report. Forrester Research also recognised Sophos as "one of the most significant vendors in the EMM space" with "robust endpoint, encryption and EMM products" in the EMM Wave report, published in June.

I thank our employees and partners for helping us deliver a successful first half and for delivering the security and protection technologies our customers demand and deserve. 

CHIEF FINANCIAL OFFICER'S REVIEW

Financial Review

The table below presents the Group's financial key performance indicators for the period (in reported currency):

Billings

The Group's reported billings increased by $27.5 million from $214.5 million in the period-ended 30 September 2014 to $242.0 million in the period-ended 30 September 2015, representing 12.8 percent reported growth or 24.2 percent on a like-for-like growth basis, with growth in all regions, products and types as detailed below. The significant variance between the reported and like-for-like billing growth rates was predominantly due to the 18 percent devaluation in the Euro which significantly impacted our reported growth rate in the EMEA region.

The Group's billings are primarily composed of subscription agreements, which represent 77 percent of the Group's billings for the half-year to 30 September 2015, resulting in a predictable revenue stream. Subscription agreements are typically paid in full up front with revenue being recognised on a deferred basis over the life of the agreements, which can vary from one to five years.

Billings by region

Americas

Reported billings attributable to Americas increased by $19.1 million to $87.4 million in the period-ended 30 September 2015, representing 28.0 percent growth on a reported based and 25.8 percent on a like-for-like growth basis. This increase was driven by new customer growth across both enduser and network, and an increase in the existing customer retention rate. Enduser new customer growth was positively impacted by significant cloud adoption. Enduser and Network like-for-like growth rates were broadly similar. Reported growth includes the impact of billings from Reflexion Inc., a cloud-based Email security company acquired in June 2015; like-for-like billings growth adjusts for this (and currency) to show like-for-like organic period-over-period performance.

EMEA

Billings attributable to EMEA increased by $1.6 million to $115.3 million in the period-ended 30 September 2015, representing 1.4 percent growth on a reported based and 19.2 percent on a like-for-like growth basis. This increase was primarily due to Network growth in new customer business. Enduser billings also continued to grow, albeit more modestly. As anticipated, EMEA's reported billings for the first-half were negatively impacted by the strengthening US Dollar, the impact of which is expected to moderate over the second-half of the year should exchange rates remain at or near their current level.

APJ

Billings attributable to APJ increased by $6.8 million to $39.3 million in the period-ended 30 September 2015, representing 20.9 percent growth on a reported based and 36.8 percent on a like-for-like growth basis. Network billings growth was particularly strong in Japan in the period, but similar to EMEA, currency headwinds from the strengthening dollar impacted on reported billings growth.

Billings by product

Network products

The Group's billings attributable to Network products increased by $21.4 million to $122.9 million in the period-ended 30 September 2015, representing 21.1 percent growth on a reported based and 34.3 percent on a like-for-like growth basis. This was primarily due to 42% like-for-like growth in UTM sales that grew strongly in all regions and across both new and existing customers, with new UTM billings growth particularly strong at 59 percent.

Enduser products

The Group's billings attributable to Enduser products increased by $4.1 million to $104.3 million in the period-ended 30 September 2015, representing 4.1 percent growth on a reported based and 14.5 percent on a like-for-like growth basis. Enduser billings growth was primarily driven by Endpoint and Mobile with 22 percent growth in new customer business underpinned by strong cloud sales.

Billings by type

The percentage of hardware billings increased in the period as the Group's UTM billings increased its overall share of the total. In particular hardware billings were driven by the high growth in new customer UTM sales of 59 percent, new customers buying both hardware and software, whilst existing customers often renew software that continues to run on previously acquired hardware.

Key billings metrics

Billings from brand new customers

Billings from brand new customers grew at an even faster rate than billings from existing customers. Sophos Network billings from new customers increased as a percentage of total billings to 32 percent from 29 percent in the prior period. Enduser billings from new customers have increased to 18 percent from 17 percent in the prior period. Total billings from new customer as a percentage of billings increased to 25 percent from 22 percent in the prior period.

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 instances of cross-selling and up-selling, which helps the Group evaluate its success in fully leveraging its broad product portfolio. The retention rate improved in the period. In the twelve months to September FY16 the Group's net retention rates, excluding Cyberoam, improved to 100.5 percent from 99.7 percent in the twelve months to September FY15.

Billings by size

Sophos billings (excluding those billings made by Cyberoam) to mid-market enterprises (defined as comprising enterprises with between 100 and 5,000 employees), the Group's target market, have remained consistent with the prior period at 56 percent of total billings (H1, FY15: 55 percent).

Billings by length of contract

The average contract length for the twelve months to September FY16 was 27.9 months, consistent with the 27.8 months for the twelve months to September FY15.

Average contract length

The billings analysis of contracts by subscription length is shown below:

Cross-sell and Upsell Opportunities

As the IT needs of the Group's existing customers evolve, or as they 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 their existing products through the sale of additional enduser licences or longer subscription periods.

During the period, the Group saw an improvement in cross-selling. At 30 September 2015, approximately 6.4 percent of customers had both a UTM product and an Endpoint product compared to 4.6 percent of customers at 30 September 2014.

Revenue

The Group's revenue increased by $19.1 million, or 8.9 percent, to $234.2 million in the six-months ended 30 September 2015; the Group estimates that on a constant currency basis, revenue growth for the period would have been approximately 17 percent. As the majority of the Group's sales relate to subscriptions, the benefit from increased billings is spread over a number of years on the subsequent recognition of deferred revenue. The increase in revenue in the six-months to 30 September 2015 is partly as a consequence of the improvement in UTM hardware billings, which are recognised in the same period, supported by continuing YOY growth in subscription billings across all major product groups. The impact of currency headwinds in both EMEA and APJ meant that despite reporting strong like-for-like subscription billings growth of 16.6 percent, EMEA and APJ both reported reductions in subscription revenues.

A further analysis of subscription revenue by region is set out below to illustrate the impact of changes in exchange rates:

Cost of sales

The Group's cost of sales increased by $9.1 million, or 22.0 percent, to $50.5 million in the period-ended 30 September 2015 primarily due to the growth of Network product billings, which have a larger hardware component.

Sales and marketing

The Group's sales and marketing expenses increased by $8.4 million or 10.5 percent, to $88.7 million in the period-ended 30 September 2015. The increase reflected continued investment in these functions as billings grow, as well as a more balanced distribution of the costs in the current year compared with the prior year that had a higher proportion of costs in the second half.

Research and development

The Group's research and development expenses increased by $7.6 million, or 20.0 percent, to $45.6 million in the period-ended 30 September 2015. This reflected the continued investment in the development of new products and enhancements of existing products, including higher headcount as a consequence of the acquisition of Reflexion Networks in the period.

General finance and administration

The Group's underlying general finance and administration expenses increased by $1.6 million, or 9.1 percent, to $19.1 million in the period-ended 30 September 2015. The increase was almost entirely attributable to the share based payment expense.

The Group's exceptional items included within general finance and administration expenses increased by $22.3 million to $26.2 million in the period-ended 30 September 2015. The increase in exceptional items was mainly due to costs of $17.6 million incurred during the Company's initial public share offering, as well as acquisition costs and legal expenses incurred in relation to the defence of certain intellectual property litigation.

Amortisation of intangible assets

The Group's amortisation of intangible assets decreased by $10.5 million, or 40.2 percent, to $15.6 million in the period-ended 30 September 2015. This decrease was due to the reduction in amortisation charges associated with acquisitions in prior periods exceeding the charge in the period from the acquisition of Reflexion.

Currency Movements and Impact

The weakening of the euro as compared to the U.S. dollar negatively impacted the Group's reported billings and profit growth rate in the period-ended 30 September 2015. This is particularly the case for Subscription revenues which are recognised on a deferred basis over the life of the agreements, which can vary from one to five years. Assuming exchange rates remain constant then the currency headwind experienced in H1 of 11 percent is now expected to reduce to approximately 8 percent for the full year.

The Group's foreign exchange loss was $1.9 million in the period-ended 30 September 2015, compared with a gain of $4.2 million in the period-ended 30 September 2014. This change was primarily due to the moderate weakening of the US Dollar compared to Sterling and the Euro having strengthened throughout the prior period.

Cash EBITDA

Cash EBITDA is an appropriate supplemental measure of earnings and cash flow due to the recognition of revenue from subscription billings rateably over subsequent periods, and accordingly the Directors believe it provides visibility on actual cash at hand even if the associated revenue has yet to be recognised.

Operating profitThe Group's operating (loss) / profit was $(13.4) million in the period-ended 30 September 2015 compared to $12.1 million in the prior period. After adding back exceptional items, gains on group asset disposals and foreign exchange gains and losses, the operating profit was $14.7 million in the period-ended 30 September 2015 compared to $11.6 million in the prior period, an increase of 26.7%,

Net Finance Costs

The Group's net finance costs decreased by $0.4 million to $29.5 million due to the impact of the initial public offering, which resulted in the repayment of both the Subordinated Preference Certificates and $87.7 million of bank debt. These underlying improvements were offset by an $11.7 million variance in foreign exchange gain on borrowings and a $5.7 million expense relating to the write-off of un-amortised capitalised finance fees that originally arose on the repaid external debt facility.

Income tax credit / (charge)

The Group's income tax charge increased by $2.2 million from a charge of $2.0 million in the period-ended 30 September 2014 to a charge of $4.2 million in the period-ended 30 September 2015. As in the prior year, a tax charge arises against the reported loss for the period as a consequence of local subsidiary taxable profits.

Loss for the period

The Group's loss for the period increased by $27.3 million, from a loss of $19.8 million in the period-ended 30 September 2014 to a loss of $47.1 million in the period-ended 30 September 2015 predominantly reflecting exceptional expense items arising as a result of the IPO.

Unlevered Free 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. Unlevered free cash flow can be reconciled to the statutory measure of net cash from operating activities as follows:

Unlevered free cash flow is considered a useful supplemental measure for comparing the Group's liquidity in respect of its operations from period to period without the distortions of exceptional and other non-operating items and can be reconciled to Cash EBITDA as follows:

The Group's capital expenditure primarily comprises property, plant and equipment as well as intangible assets. In the period-ended 30 September 2015, net cash capital expenditure increased by $8.4 million YOY. The prior period comparative included the disposal of property that was surplus to requirements for $3.0 million; thus the underlying capital expenditure outflow was $5.5 million. The period-on-period increase in cash outflow is mainly a consequence of phasing, which for the current year has a heavier weighting to the first half, compared to the prior year which had a weighting toward the second half. The increased YOY capital expenditure is a result of expanding facilities in our India operation as well as operational system improvements that reduce difficulties for our partners and customers in doing business with Sophos.

Working capital performance was robust during the period with the change in net working capital remaining largely consistent with the prior year. This reflects decreases in trade receivables, from their peak at the end of March, the end of the Group's busiest quarter, being matched by decreases in trade and other payables.

Corporation tax amounts paid in the period are lower than those in the comparative prior period as amounts paid in the prior period related to both that period and earlier periods for Germany.

Balance Sheet

A number of balances were impacted by the initial public offering completed in July 2015 including the re-financing of the bank loan and net repayment of $87.7 million of the term facility, the capitalisation of the shareholder loan, a capital reorganisation of the shares in issue and an issuance of new shares.

Deferred Revenue increased by $12.1 million from the prior year-end to $445.4 million as at 30 September 2015. This was due to continued growth in subscription billings that are deferred for recognition in future periods and a partial reversal of the foreign exchange impact experienced at the end of the prior year following the marginal weakening of the US Dollar.

Dividends

At the time of the Company's IPO, the Directors indicated an intention to adopt a progressive dividend policy, reflecting the cash generative nature and long-term earnings potential of the Group. The Directors intend to target a dividend of 20 percent of free cash flow for the financial year. 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 a half-year dividend in the year-ending 31 March 2016 amounting to 0.7 US cents per share.

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 prospectus, dated June 2015, and the last annual report and financial statements remain valid at the date of this report. These risks and uncertainties include:

· Actual, possible, or perceived defects or vulnerabilities in the Group's products or services

· Rapidly changing technologies

· Compliance with export control and economic sanction laws

· Reliance on distributors and third-party channel partners

· Intellectual property protection and litigation

· Risk of targeted disruption of systems

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

10 November 2015 10 November 2015

Condensed Consolidated Income Statement

For the six-months ended 30 September 2015

(1) Billings at $242.0M (H1, FY15: $214.5M) 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 do not represent the Group's statutory revenue. Please refer to note 4 for more detail.

Condensed Consolidated Statement of Other Comprehensive Income

For the six-months ended 30 September 2015

Condensed Consolidated Balance Sheet

As at 30 September 2015

Registered number 9608658

Condensed Consolidated Statement of Changes in Equity

For the six-months ended 30 September 2015

Condensed Consolidated Cash Flow Statement

For the six-months ended 30 September 2015

Notes to the Interim Financial Statements

For the six-months ended 30 September 2015

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 10 November 2015 for issue on 11 November 2015 and have been reviewed but not audited.

These Interim Financial Statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006.

Prior to the Initial Public Offering, Shield Midco Limited was the largest group for which consolidated financial statements were produced. Statutory accounts for that company for the year-ended 31 March 2015 were approved by the Board of Directors on 1 June 2015 and were delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

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 2015, which have been prepared in accordance with international financial reporting standards as adopted by the European Union.

The Interim Financial Statements has 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 2015.

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.

The following tables present Billings and expenditure regarding the Group's geographical segments for the six-months ended 30 September 2015 and 30 September 2014.

Revenues from external customers by country:

Revenue recognised in the Consolidated Statement of Profit or Loss is analysed as follows:

4 Reconciliation of Cash EBITDA

The senior management team use EBITDA adjusted for share based payment expense, any gain or loss on the sale of tangible and intangible assets, foreign exchange differences on debt, other unrealised foreign exchange differences and exceptional items ("Adjusted EBITDA") as a key performance measure of the business.

Additionally, management has defined cash EBITDA as adjusted EBITDA with billings replacing recognised revenue. Management believes this measure is a more appropriate earnings and cash flow measure than EBITDA.

Reconciliation of Operating Loss to Cash EBITDA

5 Share based payment expense

On August 7, 2015, and in connection with the admission of the Company's shares for trading on the London Stock Exchange, the Company awarded Restricted Share Units ("RSU's"), Performance Share Units ("PSU's") and Cash based phantom awards ("phantom awards") with a Fair Market Value of $4.16 each under the Sophos Group plc Long Term Incentive Plan 2015.

RSU's and phantom awards vest as to 25% (20% in the case of RSU's with a 5 year vesting period) on the anniversary of the award and the remaining 75% (or 80% in the case of RSU's with a 5 year vesting period) quarterly thereafter.

PSU's vest on one vesting date following a three year vesting period which will comprise three financial years. The awards are divided into three equal parts which will each be subject to an individual annual performance condition linked to the financial performance of the Group.

For the six-month ended September 30, 2015 the Group has recognised equity settled share based payments of $2.2M (H1, FY15: $0.7M) and cash settled share based payments of $0.1M (H1, FY15: $Nil).

6 Exceptional items

Exceptional items are those that in management's 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 September 30, 2015, Initial Public Offering ("IPO") costs of $17.6M (H1, FY15: $Nil), acquisition related expenses of $1.6M (H1, FY15: $0.2M), restructuring and integration costs of $1.2M (HY1, FY15: $0.7M) and legal costs incurred in relation to the defence of certain intellectual property litigation of $5.8M (H1, FY15: $3.0M) resulted in total Exceptional items of $26.2M (H1, FY15: $3.9M). Tax credits on these items amounted to $3.1M (H1, FY15: $1.4M).

7 Finance Expense

Subordinated Preference Certificates with a value of $485.3M were capitalised on June 26, 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 April 1, 2015 to June 26, 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 September 30, 2015 was $4.2m (H1, FY15: $2.0M) representing an effective tax rate of (10%) (H1, F15: (11%)).

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.

The following reflects the income and share data used in calculating EPS:

10 Dividends

At the time of the Company's IPO, the Directors indicated an intention to adopt a progressive dividend policy, reflecting the cash generative nature and long-term earnings potential of the Group. The Directors intend to target a dividend of 20 percent of free cash flow for the financial year. 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 a half-year dividend in the year-ending 31 March 2016 amounting to 0.7 US cents per share. This first interim dividend in respect of the year-ending 31 March 2016 will be paid on 18 December 2015 to shareholders on the register at the close of business on 20 November 2015.

11 Intangibles