Shares in UK Index cybersecurity company Sophos have taken a hammering today following a disappointing set of half-year results. After multiple suspensions in early trading, which saw the shares fall as low as 280p (-38.6%) the shares have now pulled back to a less catastrophic, though still bruising, 335p (-26.5%).

Why such a drastic share price move? Let’s unpick the results.

To the untrained eye, Sophos H1 results presented a fairly benign picture (PR department hard at work). Revenues grew 17.8% year-on-year and the company actually turned a pre-tax profit of £26m after suffering a £35.5m loss a year earlier. All is well? As usual, the devil was in the detail.

First half’s billings grew only 3.3% year-on-year (+1.6% on a constant currency basis) and billings growth in the second half is expected to improve at a “modest” pace. Growth in Europe (53% of Sophos’ billings) actually benefited from currency moves, with billings up 6.3% (+2.4% once FX moves are stripped out), while billings in Asia-Pacific region actually decreased by 9.6%.

Adding insult to injury, this wasn’t the first time Sophos billing numbers disappointed investors this year. In full-year results published mid-May, the company promised mid-teen percentage growth for 2018. In a July trading update, it admitted to lower than anticipated first quarter growth, but stuck to its guns with guidance of “mid-teens billings growth” in H2.

The final nail in the coffin today, however, is first half billings growth +1.6% (consensus +4-5%), with a “modest” improvement in H2 (likely meaning <5% growth vs. ~12-15% estimate). After a string of broken promises and missed expectations, its no wonder the shares have tanked.

Despite the brutal pounding, traders haven’t written off Sophos completely. At 335p, the shares are now trading at levels last seen 19 months ago, in April 2017. Some, including analysts at Morgan Stanley, see it as “a very attractive buying opportunity” and say that they “would remain buyers here”.

As the shares are now 48.5% off their 2018 highs, it’s hard to fault their logic, though the share price recovery would of course depend on Sophos achieving (it probably now even needs to exceede) its FY billings growth target to make up for the broken promises of 2018.

The question for investors is whether they still see a long-term future with the company suffering a crisis of trust. Or whether the massive share price losses this morning are a knee-jerk market overreaction to a disappointing update and that the shares will bounce even further from the morning’s losses.

And with the shares now trading at multi-month lows, could Sophos elicit some potential M&A interest from private equity investors similar to the takeover approach for rival Symantec by Thoma Bravo (Symantec shares jumped +15.8% on Tuesday’s Reuters report)?

Sophos is already +19.6% off it its worst levels today (+27% at its rebound best). Is the rebound over, or can the shares recover even more of today’s lost ground?

Artjom Hatsaturjants, Research Analyst, 7 November 2018