EFTA01385535.pdf

> TMT Deutsche Bank ED Sophos - Alex Tout, BUY, close 600p, 790p tgt, 32% upside • A significant player in IT security market with differentiation from its balanced portfolio across Endpoint and Network security We forecast substantial billings growth (USDm) • Increasing confidence in management forecasts to FY20 due to traction 1400 1,366 with Intercept X and Central and high renewal rates (139% in 1H18). This 1,220 1200 • 1.070 supports double-digit billings growth to FY22E. 1000 - 923 ■ Highly supportive end market demands as customer senior management 774 increase focus on cyber security (particularly after the WannaCry and 6 800 i 1632 NotPetya attacks) 476 535 - Sophos has the right product offering to benefit with its significant focus 400 - on Endpoint 200 • Continued margin improvement due to lower new customer billings mix 0 + 'T — I. and hence lower sales and marketing cost as a % of billings, as well as FY15 FY16 FY17 • FY18 FY19 FY20 FY21 FY22 Source: Company Rings further scale on G&A spend. • We believe recent weakness is driven by: 1) director selling; 2) Apax placing c10% of market cap, causing short term oversupply; 3) the tech selloff Cash EBITDA and adjusted operating profit margins improving driving selling among shorter-term holders 35% Cash EBITDA margin Adj. op. margin • Valuation attractive at 21x CY18E EV/uFCF (adjusted for SBC) given its 30% 20% uFCF CAGR (FY19-22E). 25% -I - This compares to peers Palo Alto Networks (39x), Fortinet (19x) and 20% Check Point Software (18x), all of whom are more geared to the slowing Network security market and have lower FCF growth. 15% I ■ Catalysts: launch of fully Al based next gen Endpoint product Intercept X v2 10% in January, 3Q18 results 08-Feb 5% Related DB Research: 0% 1- FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 1H18 Review. TP Raised to 790p (Tout), Source: Company filings utsche Bank Research- European Equity Focus -January 2018 3r:: CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) DB-SDNY-0086821 CONFIDENTIAL SDNY_GM_00233005 EFTA01385535