Monday, 21 September 2009

Sophos: growing revenues again, but not profits

(By Philip Carnelley, 21 Sep 09, 08:30) In our piece on Iris on Friday (Iris accounts for itself) we erroneously endorsed its claim to be the largest privately owned software company headquartered in the UK. An eagle-eyed reader pointed out we’d overlooked Sophos, the security software vendor. And indeed we had. Sophos was founded in the UK in 1985 by Dr Peter Lammer and Dr Jan Hruska and has its UK HQ in Abingdon. So, to put the record straight: Sophos is the largest, with £125m in revenues, just pipping Iris (£119m) at the post.

We are kicking ourselves because we had Sophos in our database. But had neglected to write up their latest annual results, which were quietly filed at Companies House in the middle of the August holiday season with no public announcement. The report tells an interesting story. Sophos is a large and growing firm, and no wonder: IT security is one of the biggest headaches for any CIO and gets ever more so by the day. Sophos’s products are well-respected and sold around the world. During the year Sophos added to its armoury with the acquisition of German company
Ultimaco – see Sophos – battling the giants – for £162m, which added around €58m to its top line (pro-forma). This acquisition catapulted them to the top of the privately held UK-HQ’d software company rankings - ahead of Iris.

Sophos' revenues for FY09, as reported, grew 49%, to £125m for the year with most of this coming from the acquisition discussed above. Excluding acquisitions, revenue growth was 22% in UK£ but a somewhat more pedestrian 5% in US$ – still acceptable in today’s climate. (US dollars are relevant: much of its revenue is earned in dollars or dollar-linked currencies, and also because its major competitors report in dollars. Symantec also reported 5% growth for FY09). Sophos’ revenue is fairly widely spread geographically: US 36%; UK 22%, Europe 29% and RoW 13%. Growth was over 50% in all regions except the UK (9%). Sophos reported a small adjusted operating profit: up one-third, to £2.1m. But, in large part due to the acquisition, the true operating loss widened, from £7.8m to £22.4m, and net losses reached £15m (£3m). The company now boasts an enviable 21 years of revenue growth, but has not made an operating or net profit since FY05/06.

However, we are pleased to note that Sophos writes off all software R&D as an expense in the year it is incurred. R&D amounted to £33.8m in FY09. Although we disapprove, they could have capitalised this as some others do. That would have transformed the current year’s P&L account!

Thus, while the company remains small compared to gorilla-in-the-market Symantec (c$6bn in revenues) as well as others like McAfee and of course Microsoft, it is holding its own, growing market share and making potentially smart acquisitions. It has strong cashflow, and advance billings are considerably ahead of revenues. As we said above, security is a hot area right now. Last year, UK-headquartered MessageLabs was snapped up by Symantec for £400m (See our 30th Oct 08 post - Symantec buys Messagelabs). That was a massive 5.5x revenues, making Sophos ‘worth’ nearly £700m/$1b on a similar multiple. Sophos was considering an IPO back in late 2007, then pulled it, blaming "market conditions." Perhaps the time will soon be coming when it tries again.

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