Sophos Group Regulatory News (SOPH)

Sophos Group plc

Interim results for the six-month period-ended 30 September 2019

Revenue growth of 8% and Billings growth of 9% at constant currency ("CC") year-on-year ("YOY");

Progress in next-gen transition and growth in Sophos Central

Oxford, 6 November 2019. Sophos Group plc (the "Group" / LSE: SOPH), a leading provider of next-generation cloud-enabled enduser and network cybersecurity solutions, today issues its interim results for the six-months to 30 September 2019 ("H1 FY20").

Financial highlights

·; Reported Group revenue of $365.8 million grew 5% YOY (+8% CC)

- Subscription revenue remained the principal driver of YOY growth, increasing by 8% (+11% CC), and offsetting an 8% reduction in revenue from hardware (-5% CC)

·; Reported Group billings(1) of $372.0 million increased by 5% YOY (+9% CC)

- Next-gen(2) billings grew 40% CC to $208.6 million (H1 FY19: $148.6 million); Sophos Central grew 47% CC to $134.8 million (H1 FY19: $92.0 million)

- Group net renewal rate improved to 121% (H1 FY19: 118%)

- Enduser billings (+14% CC) benefited from cross-sell and recent product launches

- Growth in Network subscription billings (+8% CC) was partially offset by a decline in hardware (-5% CC)

- Annual-recurring revenue ("ARR"(3)) from MSP(4) grew by 79% at CC to $32.5 million (H1 FY19: $18.1 million)

- New customer billings (+6% CC) benefited from MSP, closing with 409K total customers (FY19: 382K)

·; Loss before tax of $1.5 million (H1 FY19: profit before tax of $26.0 million)

- Reflects combination of the negative impact from exceptional restructuring and legal costs in the current period versus an exceptional credit which benefited the prior-year comparator

- Adjusted operating profit(5) was broadly flat at $49.4 million, reflecting further planned investment

- Cash EBITDA(6) increased by 24%, from $54.0 million to $66.8 million, with the rate of growth benefiting from the introduction of IFRS 16 - Leases ("IFRS 16") (+10% pre IFRS 16)

·; Net cash flow from operating activities increased by 15% YOY to $93.8 million

- Helped by the expected phasing of some costs toward the second-half of the year and the introduction of IFRS 16 (+6% pre IFRS 16)

Financial summary

Note: On 14 October 2019, the Group announced a recommended cash offer of US$7.40 per Sophos Share from Surf Buyer Limited, a company owned by funds managed and/or advised by Thoma Bravo LLC. The details of the offer are set out in the announcement, which is available at investors.sophos.com. Consequently, as indicated at the time of the announcement, no interim dividend is proposed.

Chief Executive Officer, Kris Hagerman, commented:

"Our performance in H1 FY20 shows the continued progress we are making towards fully transitioning our business to next-generation cybersecurity. As we pursue this strategy, we are benefiting from our advanced capabilities and investments in the cloud, machine-learning, APIs, synchronized security, automation, managed threat response and more, to deliver enterprise-grade protection to organisations of any size."

About

As a worldwide leader in next-generation cybersecurity, Sophos protects over 409,000 organizations of all sizes in more than 150 countries from today's most advanced cyberthreats. Powered by SophosLabs - a global threat intelligence and data science team - Sophos' cloud-native and AI-enhanced solutions secure endpoints (laptops, servers and mobile devices) and networks against evolving cybercriminal tactics and techniques, including automated and active-adversary breaches, ransomware, malware, exploits, data exfiltration, phishing, and more. The award-winning Sophos Central cloud-based platform integrates Sophos' entire portfolio of best-of-breed products, from the Intercept X endpoint solution to the XG Firewall, into a single system called Synchronized Security. Sophos products are exclusively available through a global channel of more than 53,000 partners and Managed Service Providers ("MSPs"). Sophos also makes its innovative commercial technologies available to consumers via Sophos Home. The company is headquartered in Oxford, U.K., and is publicly traded on the London Stock Exchange under the symbol "SOPH". More information is available at www.sophos.com.

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

Conference call and webcast

Sophos management will be hosting a conference call to discuss the financial results for H1 FY20 today at 09:30 GMT.

This event is also accessible via audio-webcast, for registered participants. A replay of the audio-webcast will be also accessible via the Sophos investor website following the presentation. To register for the webcast and access the presentation materials please visit:

https://investors.sophos.com/events-and-presentations

Please dial into the conference call 5-10 minutes prior to the start time using the number/conference ID below:

Telephone:

+44 (0) 20 7192 8000 (UK) / 0800 376 7922 (toll free)

+1 631 510 7495 (US) / +1 866 966 1396 (toll free)

Conference call confirmation code: 6745729

Participants are advised to visit the website at least 15 minutes prior to the commencement of the call, to register and, for those accessing the webcast, to download and install any audio software that may be required.

NB: Conference call participants will be able to ask questions during the Q&A session, but those on the webcast will be in a listen-only mode.

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. The next-gen product portfolio consists of the Group's most advanced products, managed in Sophos Central, notably including Sophos Intercept X for endpoint protection and the Sophos XG Firewall.

3. Annual Recurring Revenue is defined as the annualised equivalent of term licenses, subscription agreements and maintenance contracts including OEM and MSP but excluding perpetual licenses.

4. MSP Billings exclude Reflexion.

5. Adjusted Operating Profit represents the Group's operating profit / (loss) adjusted for amortisation charges, share option charges and exceptional items.

6. 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, unrealised foreign exchange differences and exceptional items, with billings replacing recognised revenue.

7. Growth adjusted to eliminate the impact of IFRS 16 - Leases in the current period; see note 2 of the Financial Statements for further details.

8. 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.

Chief Executive Officer's Review

Financial and Strategic Progress

In the first half of the financial year, billings increased by 5 per cent to $372 million, a rise of 9 per cent at constant currency. Group revenue also increased by 5 per cent to $366 million, or 8 per cent at constant currency. We saw continued strength in our subscription business, with currency-adjusted revenue from subscriptions growing by 11 per cent in the first-half of the year. Managed Service Providers ("MSPs")billings increased by 83 per cent resulting in ARR of $33 million, up 79 per cent over the prior-year period ARR.

We made further progress in our transition to next-gen cybersecurity. Billings from our next-gen portfolio increased by 40 per cent in the first-half of the year and now account for 56 per cent of total Group billings. Sophos Central, our single, integrated next-gen cloud management platform, continues to enable and underpin this growth. Sophos Central billings increased by 47 per cent over the prior-year period, and now account for over 40 per cent of total subscription billings.

Sophos Central remains pivotal to our strategy, driving cross-sell and raising average spend per customer over time. In addition, the Sophos Central platform enables us to deliver intuitive, highly effective cybersecurity solutions, spanning endpoint, network, and cloud security, which are synchronized and work together as a system, and are managed entirely in the cloud.

Our cross-sell opportunity is reflected in our net renewal rates, which include cross-sell and upsell. In the first-half we saw a modest improvement in the net renewal rate to 121 per cent, compared with 118 per cent in the prior-year period. We are still at an early stage in our cross-sell strategy, with 26 per cent of our customers currently purchasing more than one product. Whilst this is to be viewed against the context of a rapidly expanding customer base, we have a clear opportunity to increase product penetration over time.

During the first-half of the year, our Enduser security business delivered 14 per cent constant currency growth in billings, supported by recent successful product launches. Meanwhile, we achieved an improved net renewal rate for subscriptions in Network security, delivering growth of 8 per cent, although this was partially offset by a decline in hardware sales in the period.

We reported a statutory loss before tax of $2 million, compared to a profit before tax of $26 million in the prior-year period, mainly resulting from the negative effect of exceptional items relating to restructuring and legal costs. Excluding these effects, adjusted operating profit in the first-half of the year was broadly flat year-on-year at $49 million, reflecting the further planned investment we have made in the business.

We saw continued growth in net new customers in the first-half of the year, with over 409,000 total customers as at the end of September 2019. This represents growth of 29 per cent compared to the end of the comparative period, with an additional 27,000 net new customers added during the six-month period since the end of March 2019.

Technology and Innovation

We continued to innovate in the period, and recently launched our Managed Threat Response ("MTR") service, offering a fully managed threat detection and response service, built on Intercept X Advanced with Endpoint Detection and Response ("EDR") and backed by a dedicated 24/7 security team. Sophos MTR fuses machine-learning with expert analysis for improved threat hunting and detection, deeper investigations of alerts and targeted actions to eliminate threats. Sophos MTR is available as a re-sellable service by MSP partners.

We also recently delivered Sophos Cloud Optix as an agentless Software as a Service ("SaaS") offering via the Amazon Web Services ("AWS") marketplace, for automatic Cloud asset discovery, the detection of Cloud security vulnerability and misconfigurations, and threat response for AWS customers.

In early October we launched the early access program for XG Firewall v18, available to all Sophos partners and customers. This release delivers substantial new features and capabilities, including the Xstream Architecture, for new levels of visibility, protection, and performance, in addition to Threat Intelligence Analysis, and a broad range of innovative enhancements to streamline deployment and manageability.

Industry and Channel Recognition

Once again, we were positioned as a Leader in the Gartner Magic Quadrant for Endpoint Protection Platforms (August 2019), the eleventh consecutive time we have been positioned as a Leader. In addition to this recognition, Sophos Intercept X was rated as having the highest security effectiveness and best value by NSS Labs in their Advanced Endpoint Protection Group Test for 2019, and MRG Effitas rated Intercept X as #1 for malware and exploit protection.

We were also delighted to achieve a clean sweep at the CRN Annual Report Card ("ARC") awards, which recognises vendors for outstanding channel performance. Participating solution providers voted Sophos the best in all three security categories: network, endpoint, and data, as well as in all twelve of their sub-categories.

Kris Hagerman

Chief Executive Officer

5 November 2019

Financial Review

For H1 FY20, in constant currency, Sophos delivered a 7.9 per cent increase in total revenue, driven by a 11.1 per cent increase in subscription revenue. Total reported revenue grew 4.7 per cent, whilst reported subscription revenue grew 7.8 per cent. Deferred revenue at the end of the period increased to $732.5 million from $701.8 million a year ago, representing a reported growth of 4.4 per cent; lower than revenue growth due to $15.8 million of foreign exchange revaluation, principally arising from the weakening of euro and sterling against the US dollar. The deferred revenue balance gives the Group good visibility of future revenue, with $428.6 million of the deferred revenue due for recognition in less than one year, an increase of 6.7 per cent over the comparative period, or 10.4 per cent at constant currency.

Billings at reported exchange rates increased by 5.5 per cent to $372.0 million (8.7 per cent at constant currency), within which subscription billings, which grew by 9.2 per cent year-on-year to $321.6 million (12.4 per cent at constant currency), were particularly strong.

The Group made an operating profit of $4.4 million in the period and adjusted operating profit remained flat at $49.4 million. Strong revenue growth was offset by increased overhead spend, particularly in go to market costs. As further set out in Note 6, the Group also incurred an exceptional charge of $14.3 million, compared to an exceptional credit in the comparative period of $5.5 million.

The Group reports a loss before taxation down by $27.5 million to $(1.5) million from a profit of $26.0 million in the comparative period, primarily as a consequence of the exceptional charge. Finance expenses increased in part due to the impact of IFRS 16 and prepaid fees expensed on debt repayment, partially offset by foreign exchange gains in the current period from the strengthening of the US dollar against both sterling and the euro. The Group reports a loss for the half-year ended 30 September 2019 of $(7.6) million, decreased by $18.6 million when compared to a profit of £11.0 million in the prior-period.

Cash flow from operating activities increased by $12.3 million to $93.8 million, from $81.5 million in the prior half-year. The overall increase was due to a combination of the impact of IFRS 16 and an improved use of working capital. Unlevered free cashflow increased by $18.8 million to $90.4 million representing the increase in net cash flow from operating activities adjusted for the cashflow impact of exceptional items.

The table below presents the Group's financial highlights on a reported basis:

1. Growth adjusted to eliminate the impact of IFRS 16 - Leases in the current period; see note 2 of the Financial Statements for further details

2. Definitions and reconciliations of non-GAAP measures are included in note 3

Revenue and deferred revenue

The Group's revenue increased by $16.3 million, or 4.7 per cent, to $365.8 million in the half-year ended 30 September 2019. Subscription revenue was notably strong in the period, with reported growth of 7.8 per cent, or 11.1 per cent on a constant currency basis, assisted by incremental growth of the MSP channel in the current period.

Revenue in the period of $365.8 million comprised $247.3 million from the recognition of prior-period deferred revenues and $118.5 million from in-period billings. The majority of the Group's billings, which are recognised over the life of the contract, relate to subscription products (H1 FY20: 86.5 per cent; H1 FY19: 83.5 per cent), with the benefit from increased billings being spread over a number of years on the subsequent recognition of deferred revenue. The deferred revenue balance at the end of the period of $732.5 million increased $30.7 million year-on-year, an increase of 4.4 per cent. This was mainly due to a net deferral of billings amounting to $52.7 million partially offset by a net currency revaluation of $22.0 million, a consequence of the weakening of the euro and sterling against the US Dollar during the period. Deferred revenue due within one year at the balance sheet date of $428.6 million increased by 6.7 per cent at actual rates or by 10.4 per cent in constant currency.

Revenue in the Americas increased by $10.7 million or 8.7 per cent to $133.8 million in the half-year ended 30 September 2019, supported by the recognition of prior-period billings from the Sophos Central platform and the growth of the MSP channel in the current period.

EMEA revenue increased by $3.3 million or 1.8 per cent to $183.9 million in the half-year ended 30 September 2019, with growth in Enduser in particular.

APJ revenue increased by $2.3 million, or 5.0 per cent to $48.1 million in the half-year ended 30 September 2019, with good growth in both Enduser and Network product sales.

Billings

Group reported billings increased by $19.3 million or 5.5 per cent to $372.0 million in the half-year ended 30 September 2019. This represented an 8.7 per cent increase on a constant currency ("CC") basis.

Billings by region

Americas

Billings attributable to the Americas increased by $15.1 million to $136.6 million in the period, representing a 12.4 per cent growth on a reported basis and 12.6 per cent on a constant currency basis; this increase largely driven by an increase in Enduser products on the Sophos Central platform, with strong billings in Intercept X, the Group's next-gen endpoint product.

EMEA

Billings attributable to EMEA decreased by $1.2 million to $185.0 million in the period, representing a 0.6 per cent reduction on a reported basis and 4.6 per cent growth on a constant currency basis. As in the Americas, growth was driven by the stronger performance of Central Enduser products.

APJ

Billings attributable to APJ increased by $5.4 million to $50.4 million in the period, representing a 12.0 per cent growth on a reported basis and 14.7 per cent growth on a constant currency basis. The increase being driven by growth in both the Enduser and Network products.

Billings by product

Network products

The Group's billings attributable to Network products remained flat at $169.4 million in the period, compared to $168.4 million in the comparative period, representing 0.6 per cent growth on a reported basis and 4.0 per cent on a constant currency basis. The continued growth of subscription billings is partially offset by lower hardware billings particularly to existing customers; with some early signs of recovery in hardware sales toward the end of the period.

Enduser products

The Group's billings attributable to Enduser products increased by $18.1 million to $184.6 million in the period representing a 10.9 per cent growth on a reported basis and a 14.0 per cent on a constant currency basis. The increase driven by recent successful product launches and increasing significance of the MSP channel in the period which delivers monthly billings.

Billings by type

Subscription billings 

The Group's billings attributable to subscriptions increased by $27.1 million to $321.6 million in the period, representing 9.2 per cent growth on a reported basis and 12.4 per cent growth on a constant currency basis. Within subscription billings, amounts invoiced to managed service providers ("MSPs") increased year-on-year which, combined with overall deal size remaining stable.

Hardware billings 

The Group's billings for hardware decreased by $4.3 million to $48.3 million, representing 8.2 per cent fall on a reported basis and 4.9 per cent fall on a constant currency basis. This was mainly a consequence of the previously reported legacy product transition and lower hardware sales, particularly to existing customers; though there were some early signs of recovery in hardware sales toward the end of the period.

Key billings metrics

Billings from new customers

Billings from new customers, including all MSP billings and excluding OEM and consumer, remained largely consistent at 24.5 per cent of total billings compared to 25.5 per cent in the half-year ended 30 September 2018.

Renewal rate

The Group's renewal rate includes the impact of cross-selling and upselling and increased to 120.8 per cent from 117.9 per cent in the comparative period.

Billings by size

Sophos' products are suitable for organisations of any size but are specifically tailored for the Group's target market of mid-market enterprises, typically with fewer than 5,000 employees. The proportion of billings to this target market remained stable at 88 per cent in the period compared to 87 per cent in the half-year ended 30 September 2018.

Billings by length of contract

Subscription agreements sold by the Group are of differing durations and are generally between one and three years in duration. The last twelve months' weighted average contract duration, which provides an indication of the period over which future revenue will be recognised, was 26.3 months for the half-year ended 30 September 2019, a small decrease on the 27.2 months for the half-year ended 30 September 2018, due primarily to the growth in monthly billings to new customers from the Group's MSP business which increased from 2.3 per cent of total billings in the prior-period to 3.8 per cent in the current period.

The billings analysis of contracts by subscription length for each year was as follows:

Cross-sell and upsell opportunities

As the threat landscape evolves and Sophos continues to innovate, there is an opportunity to cross-sell additional products and services, or to upsell enhanced versions of products or additional licences to existing customers.

The percentage of customers who own both a Sophos Endpoint and UTM product has continued to improve. At 30 September 2019, approximately 12.2 per cent of customers had both a UTM product and an Endpoint product compared to 11.7 per cent of customers at 30 September 2018.

Across the entire installed base, customers currently have on average 1.4 products. Sophos Central is a key driver of the cross-sell strategy; as customers move onto the cloud platform and take additional products.

Cost of sales

Cost of sales increased by $2.5 million to $75.4 million in the period. This was due to increased hosting costs as more of the Group's customers move to cloud managed products, costs associated with supporting the Group's products and services that naturally increase as the Group grows, partially offset by a reduction in hardware costs driven by the volume of sales.

Sales and marketing

Sales and marketing expenses increased by $5.7 million or 4.4 per cent, to $136.7 million in the period. Sales and marketing expenses are targeted to grow at slightly less than the rate of billings growth, which increased 5.5 per cent, in order to provide margin leverage.

Research and development

Research and development expenses increased by $3.0 million, or 4.1 per cent, to $77.0 million in the period, in part as a consequence of the impact of recent technology "tuck-in" acquisitions. The Group has a strong focus on new and enhanced products to address the significant market opportunity that it believes exists and allocates resources accordingly. Research and development expenditure, which in both the current and prior-period was expensed to the consolidated statement of profit or loss in full, is broadly targeted to grow at the rate of billings.

General finance and administration

General finance and administration expenses, excluding exceptional items, foreign exchange and the amortisation of intangible assets, increased by $1.4 million, or 2.9 per cent, to $49.7 million in the period. The increase was due to an increase in underlying general finance and administration expenses partially offset by a lower share-based payment expense, which decreased by $2.1 million to $21.0 million. Underlying general finance and administration expenses increased by 13.9 per cent or $3.5 million, to $28.7 million, predominantly due to a reduction of $5.4 million in unrealised foreign exchange gains compared to the comparative period.

Exceptional items, included within general finance and administration expenses, were a net expense of $14.3 million in the period, compared to a net credit of $5.5 million in the prior-year. The current period expense arose as a result of restructuring costs, legal costs, and legal and professional fees incurred in connection with a review of apparent non-compliance with certain regulatory matters pertaining to the use of some of the Group's products in certain overseas territories.

Amortisation of intangible assets

Amortisation of intangible assets increased by $2.5 million, or 32.1 per cent, to $10.3 million in the period. The increase was due to the three acquisitions completed by the Group in the first six-months of the calendar year.

Currency movements and impact

The Group recorded a realised foreign exchange gain of $2.0 million in the period resulting from a weakening of the euro and sterling against the US Dollar; compared with a realised gain of $6.0 million in the comparative period.

Cash EBITDA

Cash EBITDA increased by $12.8 million or 23.7 per cent to $66.8 million in the period. Cash EBITDA margins increased to 18.0 per cent from 15.3 per cent in the prior-period, primarily due to the impact of IFRS 16 which removes operating lease expenses from adjusted operating profit. The underlying growth in Cash EBITDA excluding the impact of IFRS 16 being 10 per cent. The reconciliation of Cash EBITDA to operating profit is included in note 3.

Adjusted operating profit

Adjusted operating profit remained broadly similar at $49.4 million, compared to $49.9 million in the comparative period. This is predominantly as a result of improved revenue for the period offset by sales and marketing, and research and development investment. The reconciliation of adjusted operating profit to operating profit is included in note 3.

Operating profit

Operating profit was $4.4 million in the period, compared to a profit of $27.0 million in the comparative period which represents a reduction of $22.6 million. Strong revenue growth was offset by increased overhead spend, but principally by an exceptional loss of $14.3 million compared to an exceptional credit in the comparative period of $5.5 million.

Net finance costs

Net finance costs increased by $4.9 million to $5.9 million in the period, due in part to the impact of IFRS 16, resulting in the recognition of additional expense, and prepaid fees expensed on debt repayment in the period.

Income tax

The Group's tax charge for the half year was $6.1 million (H1FY19: $15.0 million), with an effective tax rate of -406.0% (H1FY19: 57.7%). The tax charge is lower than the prior-period due to the group generating a loss in the period, compared to a profit in the comparative period.

Profit before tax and profit for the period

The Group's loss before tax for the half-year was $1.5 million, a decrease of $27.5 million from a profit of $26.0 million in the prior-year, whilst the Group's loss for the half-year ended 30 September 2019 of $7.6 million represents a decrease of $18.6 million from a profit of $11.0 million in the prior-period. This is as a result of strong revenue growth offset by increased Sales and Marketing and Research and Development investment, IFRS 16 and exceptional items.

Cash flow

Net cash flow from operating activities increased by $12.3 million to $93.8 million from $81.5 million in the prior period. The overall increase was due to both the impact of IFRS 16 and the continued strong management of working capital.Unlevered free cashflow increased by $18.8 million to $90.4 million from $71.6 million in the prior-period representing the increase in net cash flow from operating activities adjusted for the cashflow impact of exceptional items.

1. Unlevered free cash flow is also represented by the sum of the marked rows and has been presented to enhance understanding of the Group's cash generation capability

2. Excludes non-cash movements on exceptional items

Changes in working capital

Working capital is closely monitored by the Group. The change in working capital continues to reflect growth in the business and remains positive in part due to continued close control of both payables and receivables, with debtors' days outstanding consistent with the comparative period at 42 days.

Capital expenditure

Capital expenditure primarily comprises the acquisition of intangible assets as well as property, plant and equipment. Net capital expenditure decreased by $1.2 million from $11.3 million to $10.1 million in the current period, largely a consequence of the timing of expenditure during the year.

Cash tax

Cash tax remains payable because of profits arising in local subsidiaries. Corporation tax paid of $6.6 million is similar to the comparative period of $7.5 million. Royalties paid to higher tax jurisdictions also declined as acquisitions were integrated into the Group.

Financing

Reported net debt (excluding the impact of IFRS 16-Leases) decreased to $70.5 million from $131.4 million in the comparative period and $127.7 million at 31 March 2019 as a result of continued strong cash flows achieved by the Group.

During the period, the Group also entered into a new $305 million revolving credit facility agreement and drew down on this new facility to enable repayment of the previous term loan, resulting in the overall decrease in gross debt. Further analysis of movements on a cash basis is set out in note 15.

Dividends

Following the recommended $7.40 per share cash acquisition offer for the entire issued and to be issued share capital of Sophos Group Plc by Surf Buyer Limited, a company owned by funds managed and / or advised by Thoma Bravo LLC on 14 October 2019 (see note 10 for further details), the Directors have not declared, and do not intend to declare, an interim dividend in respect of the year-ending 31 March 2020 (FY19: interim dividend 1.5 US cents per share).

Nick Bray

Chief Financial Officer

5 November 2019

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 last annual report and financial statements, dated 16 May 2019, remain valid at the date of this report. These risks and uncertainties (in no specific order) are:

·; Recruitment and retention of key personnel

·; Defects or vulnerabilities in products or services

·; False detection of threats

·; IT security and cyber risk

·; Product portfolio management

·; Disruption to day-to-day Group operations

·; Processes, controls and compliance

Following the decision by the UK population to exit, in due course, from the European Union ("Brexit"), the Directors have continued to keep under consideration the expected impact of Brexit on the Group. The Group operates internationally with a diverse geographic spread which resulted in only 12 per cent of the Group's H1 FY20 revenue being sourced from the UK. Whilst the fluctuations in the sterling exchange rate impacts on those UK revenues these are, to a degree, balanced with sterling denominated costs which mitigates the impact on the US Dollar functional currency of the Group. The exact nature of the trading arrangements between the UK and the EU subsequent to the UK's exit from the EU currently remains uncertain and consequently the Directors have considered a number of scenarios and the Group's potential responses to them. This scenario planning has included anticipating changes to the operations of the Group and its supply chain, which are not considered to be significant or posing a heightened risk to the Group. The impact of Brexit on the current and future employees has also been considered and while there may be some disruption or changes in the UK, these are not currently anticipated to materially affect one of the Group's principal risks, the 'Recruitment and retention of key personnel'.

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

·; The interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance 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 Guidance 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, Chief Executive Officer Nick Bray, Chief Financial Officer

5 November 2019 5 November 2019

CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS

FOR THE SIX-MONTHS ENDED 30 SEPTEMBER 2019

The Group has initially applied IFRS 16-Leases using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying the standard is recognised in retained earnings at the date of initial application. See note 2.

The accompanying notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX-MONTHS ENDED 30 SEPTEMBER 2019

The accompanying notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AT 30 SEPTEMBER 2019

Company registered number: 09608658

The Group has initially applied IFRS 16-Leases using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying the standard is recognised in retained earnings at the date of initial application. See note 2.

The accompanying notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX-MONTHS ENDED 30 SEPTEMBER 2019

The Group has initially applied IFRS 16-Leases using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying the Standard is recognised in retained earnings at the date of initial application. See note 2.

The accompanying notes form an integral part of these financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX-MONTHS ENDED 30 SEPTEMBER 2019

The Group has initially applied IFRS 16-Leases using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of initially applying the standard is recognised in retained earnings at the date of initial application. See note 2.

The accompanying notes form an integral part of these financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX-MONTH PERIOD ENDED 30 SEPTEMBER 2019

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 5 November 2019 for issue on 6 November 2019.

These Interim Financial Statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year-ended 31 March 2019 were approved by the Board of Directors on 15 May 2019 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unmodified, did not contain an emphasis of matter paragraph and did not contain any statement on other matters prescribed by the Companies Act 2006.

These Interim Financial Statements have been reviewed by the auditor, but not audited.

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 as issued by the International Accounting Standards Board, 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 2019, which have been prepared in accordance with international financial reporting standards as adopted by the European Union and IFRSs as issued by the International Accounting Standards Board, collectively "IFRS".

The Interim Financial Statements have 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. The Directors are satisfied that, at the time of approving the condensed consolidated financial statements, it is appropriate to continue to adopt a going concern basis of accounting.

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 2019, with the exception of the adoption of IFRS 16-Leases the impact of which is detailed below. The expected impact of the application of other new and revised international financial reporting standards were discussed in note 2 of the Groups consolidated financial statements for the year-ended 31 March 2019.

Adoption of IFRS 16-Leases

The Group has adopted IFRS 16-Leases ("IFRS 16") on 1 April 2019 for the year-ending 31 March 2020, and in doing so has applied the modified retrospective transition approach. Consequently, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance in retained earnings on 1 April 2019, with no restatement of comparative information.

Leases previously classified as operating leases under IAS 17 have been recognised as follows on 1 April 2019:

- A lease liability measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate on adoption

- A right-of-use asset with a carrying amount as if IFRS 16 had been applied since the commencement date of the lease but discounted using the incremental borrowing rate on adoption.

On adoption of IFRS 16, the Group has elected to apply the recognition exemptions for short-term and low-value asset leases for which payments will continue to be recognised as an expense on a straight-line basis.

On 1 April 2019, the Group recognised a lease liability of $72.6M (see note 14), right-of-use assets of $64.9M (see note 12), and an adjustment to opening retained earnings of $7.7M.

3. ALTERNATIVE PERFORMANCE MEASURES ("APMs")

The Group uses certain financial measures that are not defined or recognised under IFRS. The Directors believe that these non-GAAP measures supplement GAAP measures to help in providing a further understanding of the results of the Group and are used as key performance indicators within the business to aid in evaluating its current business performance. The measures can also aid in comparability with other companies, particularly in the cybersecurity industry, who use similar metrics. However, as the measures are not defined by IFRS, other companies may calculate them differently or may use such measures for different purposes to the Group. Constant currency measures have limitations, particularly as the currency effects that are eliminated may constitute a significant element of the Group's revenue and expenses and could materially impact the Group's performance. The Directors do not evaluate the Group's results and performance on a constant currency basis without also evaluating the Group's financial information prepared at actual foreign exchange rates in accordance with IFRS.

BILLINGS

Billings represent 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 do not equate to statutory revenue.

ADJUSTED OPERATING PROFIT AND CASH EBITDA

Adjusted operating profit provides a supplemental measure of earnings that facilitates review of operating performance on a period-to-period basis by excluding non-recurring and other items that are not indicative of the Group's underlying operating performance.

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 (on the basis that they are non-cash income and expenses) and exceptional items, with billings replacing recognised revenue.

3. ALTERNATIVE PERFORMANCE MEASURES ("APM's") CONTINUED

UNLEVERED FREE CASH FLOW

Unlevered free cash flow represents net cash flow from operating activities adjusted for exceptional items and net capital expenditure. Unlevered free cash flow provides an understanding of the Group's cash generation and is a supplemental measure of liquidity in respect of the Group's operations without the distortions of exceptional and other non-operating items.

1 Both operating profit and adjusted operating profit have benefitted by $0.7M in the six-months ended 30 September 2019 when compared to the comparative period as a result of the modified retrospective application of IFRS 16 Leases, whereby $7.4M of operating leases have been replaced by $6.7M of depreciation on right-of-use assets.

2 Both Cash EBITDA and Unlevered free cash flow have benefitted by $7.4M in the six-months ended 30 September 2019 when compared to the comparative period as a result of the modified retrospective application of IFRS 16 Leases, whereby $7.4M of operating lease payments have been removed from the operating profit.

4. SEGMENT INFORMATION

For internal management reporting purposes, the operating segments are determined to be geographic segments as the Group's risks and rates of return are affected predominantly by the different economic environments. This is consistent with the information provided to the Chief Operating Decision Maker. The Group has only one operating segment based on product 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 Europe, Middle East and Africa ("EMEA"), The Americas and Asia Pacific and Japan ("APJ").

Billings are classified by the geographic location of the direct customers, OEMs and distributors that purchase our products. The geographic location of OEMs or distributors may be different from that of 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.

Transfer prices between geographical segments are set on an arm's length basis in a manner similar to transactions with third parties.

4. SEGMENT INFORMATION CONTINUED

The following tables present billings and expenditure regarding the Group's geographical segments for the six-months ended 30 September 2019 and 30 September 2018.

5. SHARE-BASED PAYMENT EXPENSE

For the six-months ended 30 September 2019, the Group has recognised equity and cash-settled share-based payment expenses as follows:

The Group has made awards under its share-based payment plans with a weighted average share price ("WASP") on the grant date as follows:

6. EXCEPTIONAL ITEMS

Exceptional items are those that in the judgement of the Directors 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. Such items are included within the income statement caption to which they relate and are separately disclosed on the face of the Consolidated Statement of Profit or Loss. 

During the six-months to 30 September 2019, the Group incurred restructuring costs of $7.1M, primarily in relation to the product development teams in Germany, (H1 FY19: $1.2M relating to the finalisation of a project started in FY18) and legal costs in relation to the defence of certain intellectual property litigation of $0.1M (H1 FY19: $0.3M). Additionally, legal and professional fees of $7.1M (H1 FY19 $nil) were incurred in connection with a review of apparent non-compliance with certain regulatory matters pertaining to the use of some of the Group's products in certain overseas territories. The tax relief on these items amounted to $2.7M (H1 FY19: tax charge $0.3M).

7. FINANCE EXPENSE

8. TAXATION

In the current period, the Group calculates the period income tax expense based on an estimate of the effective annual income tax rate applicable by jurisdiction and/or income/expense category where appropriate, for the full financial year. The income tax expense for the six-month period ended 30 September 2019 was $6.1M (H1 FY19: $15.0M) representing an effective tax rate of -406.0% (H1 FY19: 57.7%).

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 company 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 company 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 operating EPS is calculated by dividing the adjusted operating profit for the period, attributable to equity holders of the parent company by the weighted average number of ordinary shares outstanding during the period.

In each case, the weighted average number of shares takes into account the weighted average number of own shares held during the period.

The following table sets out the income and share data used in calculating EPS:

10. DISTRIBUTIONS MADE AND PROPOSED

The Directors recommended a final dividend for the year-ended 31 March 2019 of 3.7 US cents. This was approved at the Annual General Meeting held on 25 September 2019. Accordingly, a final dividend of 3.7 US cents per ordinary share (FY19: 3.5 US cents) was paid on 11 October 2019 (FY19: 12 October 2018) to those members whose names were on the register of members on 20 September 2019 (FY19: 21 September 2018).

Following the recommended $7.40 per share cash acquisition offer for the entire issued and to be issued share capital of Sophos Group Plc by Surf Buyer Limited, a company owned by funds managed and/or advised by Thoma Bravo LLC on 14 October 2019, the Directors have not declared, and do not intend to declare, an interim dividend in respect of the year-ending 31 March 2020 (FY19: interim dividend 1.5 US cents per share).

11. INTANGIBLE ASSETS

The Group spent $2.6M on intangible assets in the six-months ended 30 September 2019. The net book value of the Group's intangible assets at the end of the period are analysed as follows: