Annual Report
2016
Sophos Group plc
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A Proven Global Leader
in Delivering Complete IT
Security to the Mid-Market
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 protect
over 220,000 organisations and over 100 million endusers in 150 countries
across a variety of industries.
CONTENTS
Introduction
2016 Performance Highlights
At a Glance
Chairman’s Statement
Strategic report
Business Model
Investment Proposition
Market
Strategy
Key Performance Indicators
01
02
04
08
10
12
14
15
Chief Executive Officer’s Statement 16
Geographical Review
18
Product Review
Financial Review
Principal Risks and
Risk Management
Corporate Responsibility Report
Governance
Board of Directors
20
24
30
34
38
Financial statements
Independent Auditor's Report
Consolidated Financial
Statements and Notes
Company Financial
Statements and Notes
Glossary
Company Information
71
75
119
123
124
Corporate Governance Statement 40
Nomination Committee Report
45
Audit and Risk Committee Report 46
Annual Statement of the
Remuneration Committee
Chairman
Directors’ Remuneration Policy
Annual Report on Remuneration
Directors’ Report
52
53
59
66
HIGHLIGHTS
• Continued market share gains throughout the year to 31 March
2016 ("FY16") as Sophos outperformed industry market growth
rates for both network security and enduser security
• Sophos remains the only security vendor with balance and scale
in network and enduser security products, supported by a unique
cloud management platform
• Sophos was the first company to deliver synchronized security
through the launch of its next-generation firewall that actively
shares valuable security intelligence directly with the Sophos
endpoint via the Sophos Security Heartbeat™ technology
• Granted six US patents in the year for innovative methods in
threat detection and remediation
• Sophos continued to be recognised as a leader by independent
industry analysts, for both enduser and network products
• Strong FY16 reported financial performance, despite significant
currency headwinds, across all products and regions
• Growth driven by retaining existing customers at higher billings
levels through up-sell and cross-sell, enhanced by new customers
representing a higher proportion of total billings
For further Investor information:
investors.sophos.com
p123
Definitions of non-GAAP measures
are included in the Glossary.
01
+19.7%
Like-for-like
billings growth
+7.1%
Revenue
growth
$120.9M
Cash EBITDA
$32.7M
Operating loss
$46.4M
Unlevered free
cash flow
$21.3M
Net cash flow
from operating
activities
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 02
OVERVIEW ► AT A GLANCE
AT A GLANCE
Complete Security. Made Simple.
Our mission is to be the best in the world at delivering complete IT security to
mid-market enterprises and the channel that serves them.
Endpoint
Server
UTM and Next-Gen Firewall
Web
Mobile
Encryption
Wireless
Email
$535M
Billings
$478M
Revenue
220K
Enterprise
customers
100M+
Endusers
03
Global Reach. Global Success.
Founded in Oxford and headquartered in Abingdon, Oxfordshire, Sophos has over 40 offices
across the world. SophosLabs operations are located in Abingdon, Vancouver and Sydney,
with product development centres of excellence concentrated in the UK, Germany, India,
Canada, Austria, and the United States.
20,000+
Channel
partners
2,900
Employees
30 year
Operating
history
$38bn
Market growing
at 7%
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 04
OVERVIEW ► CHAIRMAN’S STATEMENT
CHAIRMAN’S STATEMENT
FY16 was a momentous year for Sophos. After 30 years of growth and success as a private company, Sophos became the largest
software initial public offering on the London Stock Exchange, ever. In its first year as a public company, Sophos has exceeded its
key financial and operating targets and has continued to post above-market growth in each of its core markets of network security
and enduser security. Underpinning this performance were very healthy customer renewal rates combined with aggressive growth
in new customer acquisition.
In addition to delivering strong operating
and financial performance for FY16, we
continue to build a solid foundation for
ongoing market share growth and success.
Cybersecurity remains very high on the
agenda for IT departments and, now
more than ever, for management teams
and boards at organisations of every size.
Providing a truly effective, affordable,
and manageable solution to protect
organisations against cybercrime is a
massive and growing need and opportunity.
At Sophos, we focus on this opportunity
through our mission to be the best in the
world at delivering complete IT security to
mid-market enterprises and the channel that
serves them.
Our strategy to synchronize multiple and
previously disparate security disciplines,
to deliver complete security made simple,
to leverage the cloud to both manage and
deliver our security solutions, we believe
is highly differentiated and compelling.
Together with our rigorous focus on mid-
market enterprises and our "Channel First"
sales approach, we are strongly positioned
to continue delivering superior value to our
customers in this large and growing security
market, and thereby provide growing long-
term value to our shareholders.
The Sophos Board has evolved and
developed over the years to support the
Company as we seek to take full advantage
of the significant market opportunity in
cybersecurity. Paul Walker joined the Board
in 2015 as our Senior Independent Director,
adding considerable knowledge of, and
experience in the mid-market customer
segment, as well as executive operating
experience of a global company publicly
listed in the UK. We are confident that we
have a balanced, experienced and engaged
team with highly relevant background, skills
and track record to guide Sophos forward.
Our first year as a listed company has been
energising both in terms of accomplishments
as well as momentum into FY17. On behalf
of our Board, thank you to our Sophos
family of employees all around the world
for your dedication, innovation, and hard
work to make it happen for our customers,
partners and shareholders; thank you
to our customers and partners for your
business and confidence in our offerings and
capabilities; thank you to our shareholders
for your confidence and support. We
appreciate it very much and continue to
work hard to keep earning it.
Peter Gyenes
Non-Executive Chairman
SOPHOS IS STRONGLY POSITIONED TO
TAKE ADVANTAGE OF THE OPPORTUNITY
AHEAD WITH DIFFERENTIATED OFFERINGS
PROVIDING SUPERIOR VALUE TO
CUSTOMERS AND THEREBY BUILDING
LONG-TERM SHAREHOLDER VALUE.
05
AWARDS
Sophos continued to gain industry recognition from leading publications, industry analysts and testing organisations for its market-leading
products. Below is just a small selection of awards and accolades given to Sophos in FY16.
SC MAGAZINE:
“Best UTM Solution – Sophos SG Series UTM”
PC PRO TECH EXCELLENCE:
“Security Product of the Year for Sophos Cloud”
AV-TEST:
“Best Free Android Protection 2015 – Sophos Mobile Control for Android”
INGRAM MICRO 2016 EXPERIENCE AWARDS:
“Vendor of the Year – Security”
VAR INDIA:
“Best Security Company in India”
COMPUTER RESELLER NEWS ANNUAL REPORT CARD:
“Winner – Client Security Software; Winner - Network Security Appliances;
Winner – Network Security Software”
CRN ICT SUMMIT:
“IT Security Vendor of the Year, as voted by readers”
COMPUTER RESELLER NEWS:
“5 Star Rating: Sophos Channel Partner Program”
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 06
STRATEGIC REPORT
Synchronized
Security
A revolution for
network and
endpoint protection
and management
SYNCHRONIZED SECURITY
• Synchronized security automates incident
response via instant sharing of threat,
security and health information between
endpoint and network. It eliminates the
manual work of trying to figure out the
who, what and when of a compromise
• The Security Heartbeat™ pulses
continuous, real-time information about
suspicious behaviour or malicious activity
between cloud-managed endpoints and
the Sophos XG Firewall
• With Security Heartbeat™, organisations
of any size can advance their defences
against increasingly coordinated and
stealthy attacks and drive a dramatic
reduction in the time and resources
required to investigate and address
security incidents
•
IT organisations can benefit from
advanced threat protection capabilities
without requiring additional agents,
expense, layers of complex management
tools or logging and analysis tools
•
If suspicious traffic is identified by the
firewall, or malware is detected on the
endpoint, security and threat information
is instantly and securely shared via the
Security Heartbeat
• The Security Heartbeat is fully enabled
and included as part of the Sophos XG
Firewall and Sophos cloud-managed
endpoint protection
SECURITY HEARTBEAT
– HOW DOES IT WORK?
• When a new Sophos protected endpoint
is added to the network, its Security
Heartbeat automatically connects to
the local Sophos XG Firewall and the
endpoint immediately starts sharing
health status
• The firewall can automatically take action
to isolate the endpoint from internal
and/or external networks and trigger
additional action on the endpoint to
mitigate risk and prevent data loss
• After the threat has been removed, the
endpoint uses the Security Heartbeat
to communicate an updated health
status back to the network, which
then re-establishes normal service
to the endpoint
OVERVIEW
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
07
SECURITY
HEARTBEAT™
“ESG has confirmed that Sophos’ Security
Heartbeat provided nearly instantaneous
communication between Sophos’ Endpoint
Protection and Sophos XG Firewall
solutions and enabled them to work
together, providing enhanced detection,
source identification and automated
incident response.
Through our hands-on testing, ESG Lab
validated that Sophos’ integrated approach
— providing bi-directional communication
and control between network and endpoint
security solutions — enables organisations
to implement policies to enable or restrict
access to critical resources based on
endpoint health. This level of automation
can be extremely valuable, enabling already
overburdened IT administrators to keep up
with the ever-increasing pace of threats and
attacks and reducing time to response from
hours to seconds.”
ESG Lab Review, January 2016
“No other company is close to delivering
this type of synchronized and integrated
communication between endpoint and
network security products. For the mid-
market, the time and resource savings will
be very compelling as their ability to stay
ahead of increasingly sophisticated threats
with today’s products will only become
more challenging.”
Christian Christiansen, Vice President,
Security Products, IDC
“There will never be a perfect security
solution that stops all the threats. But, with
Sophos we are getting close to perfect.
This approach to synchronized security
from Sophos allows everything to talk to
one another and is a game changer for
the industry.”
Michelle Drolet, CEO, Towerwall,
a Sophos Partner
“What Sophos is doing to deliver
synchronized security with the new XG
Firewall is impressive. As a company, we are
looking forward to how the network will be
integrated fully with the endpoint, saving
us the amount of time it typically takes to
research threats, act on them, and actively
manage security for the entire organisation.”
Timothy Speakman, System Administrator,
Contra Costa Health Services,
a Sophos customer
“Adding a Sophos XG appliance to add
network security to our endpoint protection
made sense. We were looking for the ability
to manage multiple sites, now with Sophos
UTM and Cloud Endpoint, we can manage
every site much more efficiently.”
JD Morecraft, F.C. Tucker Company, Inc.
08
STRATEGIC REPORT ► OUR BUSINESS MODEL
OUR BUSINESS MODEL
Sophos has a unique strategy to pursue a massive and growing market opportunity in IT security.
What we do and how we offer it:
INNOVATE
CONTINUED INVESTMENT IN R&D TO
ENSURE ONGOING PRODUCT INNOVATION
Sophos develops products designed to offer complete
security, made simple. This is critical for mid-market
enterprises who face many of the same IT security
threats as larger organisations, but do not have access to
the same level of financial and IT personnel resources.
Sophos is a leading provider of both enduser security
and network security, with a proven business at scale
in each. Sophos recently introduced its synchronized
security strategy which allows endpoint
and network security products to directly
share threat intelligence to more
effectively protect against today's
sophisticated threats.
E
T
NO V A
IN
INSIGHT
WORLD-CLASS THREAT
INTELLIGENCE THROUGH SOPHOS LABS
At the heart of our solutions is SophosLabs, a 24-hour
threat research and intelligence centre, providing
real-time cloud-enabled security intelligence that
updates our products multiple times each day. With
a combination of ‘‘big data’’ automated analytics
and human discovery and analysis of malware,
vulnerabilities, intrusion attempts, spam, potentially
unwanted applications and compromised or malicious
websites, SophosLabs efficiently processes millions
of operations on a daily basis and addresses
nearly every area of IT security.
S
E
L
L
Security
made simple
Sophos offers leading global
IT security solutions, for
organisations of any size:
• Cloud security
• Network security
• Enduser security
T
H
G
I
S
IN
SELL
VIA A “CHANNEL
FIRST” SALES MODEL
We operate a “channel first” business model that
drives billings through the proactive selling activities
of thousands of channel partners worldwide. Other
security players sell through multiple channels
including their own direct sales organisations,
resulting in inevitable conflict and confusion.
D
ELIVE
R
DELIVER
NEXT-GENERATION SECURITY
ENABLED BY THE CLOUD
Sophos aggressively leverages cloud computing
technologies to both manage and deliver security
more effectively. Cloud computing is at the heart of
SophosLabs, the security intelligence foundation for
Sophos. Many Sophos products further leverage the
cloud in numerous ways to deliver more effective,
real-time security. And Sophos Central is a cloud-
based management platform that provides both
end user customers and channel partners with a
single, integrated console to manage multiple Sophos
security products providing a unified view across an
organisation’s IT security environment.
OVERVIEW
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
09
What makes us unique:
How we create value:
• Focus on security
• Focus on mid-market
enterprises
• Product strategy of delivering
complete IT security, made
simple
• Broad portfolio of leading,
enterprise-grade security
technologies
• Leadership in both network
and enduser security, allowing
synchronized security that
shares threat intelligence
• Leveraging the cloud for
more effective delivery and
management of security
• Channel First sales strategy
• SophosLabs, one of the
world’s leading IT security
threat intelligence centres
• Established brand, built on
long-standing relationships
with customers and partners
developed over 30+ years
• Presence in more than
150 countries
• Global network of more
than 20,000 partners
• Experienced leadership team,
whose interests are aligned
with those of the Group
FOR OUR
SHAREHOLDERS
• Scale, healthy
profitability and cash
flow, and above-
market growth
• Long-term visibility,
predictability
and resilience of
billings and revenue
streams from
subscription model
FOR OUR CUSTOMERS
• Leading, trusted,
enterprise grade
security solutions
engineered for
organisations of
all sizes to deliver
complete security,
made simple
• Choice of deployment
option, choice of
partner, choice of best
of breed solutions that
work better together
FOR OUR PARTNERS
• 100% “Channel First”
commitment
• Industry-leading
channel programs
and operational
systems designed to
help partners grow
their revenue and
profit margin
10
STRATEGIC REPORT ► INVESTMENT PROPOSITION
INVESTMENT PROPOSITION
Compelling
Industry
Fundamentals
Our market
presents a huge
opportunity…
• IT Security is a $38 billion
market estimated to grow at
7 percent through 2019
• The attack surface for cyber
threats is ever expanding
• The vanishing perimeter
due to cloud-based services,
social media, remote offices,
Internet of Things, roaming
workers and BYOD brings new
security challenges
• Business leaders have a
growing awareness of
the risk associated with
cyber-attacks, the leakage
of sensitive data and the
implications of increased
regulatory compliance
• Attacks are becoming
more sophisticated as the
‘crimeware-as-a-service’
economy grows
Unique
Strategy
Attractive
Financial Model
Our clear and
compelling
strategy…
• Sophos is solely focused
on security
• Sophos focuses on
mid-market enterprises
• The Group’s product strategy
delivers complete IT security,
made simple
• Sophos is the only security
player that is a balanced
leader in scale in both network
and enduser security, allowing
synchronized security that
shares threat intelligence
• Leveraging the cloud for
more effective delivery and
management of security
• A 100% "Channel First"
sales strategy
Our strong
financial
position…
• Strong momentum in billings
growth in both Network and
Enduser segments across
all regions
• Sustainable billings
• Strong new customer
growth combined with
strong renewal rates
• High revenue visibility
and predictability driven
by large, diversified pre-
paid subscription billings
on the balance sheet for
deferred recognition
• Strong cash conversion
• Disciplined investment to
drive top line growth
…for which we are
uniquely positioned
to succeed.
…resonates with
customers and
partners.
…is underpinned
by high renewal
rates and
recurring revenues.
11
Established and
Recognised Brand
Experienced
Management Team
Exciting Growth
Opportunities
Our brand
promise of ‘security
made simple’…
Our experienced
management
team…
Our numerous
growth
opportunities...
• Extensive experience in
running $500 million +
technology organisations
• Proven track records, each
with more than 20 years of
experience in their field
• Committed to our vision
and strategy for security
made simple
• Our ethos of simplicity spans
all we do at Sophos, from
product development to our
go-to-market efforts
• A metrics-driven marketing
approach is complemented
by highly creative digital
marketing, educational in-
person events and aggressive
social media and PR outreach
• Sophos maintains an intense
focus on connecting with
our customers using a clear,
prescriptive and authentic
voice across all media
• Sophos has earned a
reputation as a trusted source
of IT security information
• Market share expansion,
especially among mid-
market enterprises
• Global expansion
• Drive up-sell and cross-sell
opportunities
• Recruit additional partners
and enhance productivity
of existing partners
• Introduce new products,
developed organically
and acquired through
disciplined M&A
• Continue to enhance Sophos’
brand visibility and awareness,
leading to incremental new
sales engagements
…drives a deep and
lasting connection
with customers
and partners.
…leads our global
team to translate our
mission and strategy
into reality.
…provide multiple
vectors for Sophos
to continue to
outperform the IT
security market.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 12
STRATEGIC REPORT ► OUR MARKET
OUR MARKET
Today, commercial cybercrime thrives on many of the same drivers as the legitimate business world it preys upon:
innovation, response to market opportunities, operational and commercial optimisation and heavy reinvestment to
support future growth. Due to the amounts of money involved, we see everyday cybercriminals with the financial
muscle, motivation and sophistication approaching that of state-sponsored or advanced persistent threat actors.
Today’s Threat
Environment
When we review today’s threat
environment, we see four basic intents for
cyberattack: nation or state-sponsored
disruption, industrial espionage, hacktivism
and commercial gain. The first three usually
target large organisations or high-profile
individuals and get the most attention
in the media, but the motivator for the
majority of cybercrime is financial gain.
The biggest threat today comes from
groups of professional, highly organised
commercial cybercriminals.
These commercial cybercriminals use
sophisticated malware at an industrial
scale. The components that make up these
attacks come from highly skilled individuals
who specialise in creating exploit code or
malware. This lowers the barrier to entry for
those with little or no technology skill but
the desire to become a cybercriminal. The
key performance indicators for these cyber-
attack businesses is return-on-investment
(“ROI”) and customer service, whether
that be producing malware as a service or
providing victims of ransomware with a
streamlined and user-friendly experience
for paying the ransom-takers. Who the
victim is makes no difference beyond what
the attackers need to know about them to
create and carry out more effective attacks
with a higher return.
Commercial cybercriminals relentlessly
target the most vulnerable systems,
software and companies. Where there
is a weakness, the commercial malware
authors will exploit it. We have seen a trend
to build sophisticated development and
delivery processes, e.g. automation and
malware testing before release. Also, rather
than individual targeting, we are seeing
extensive ’market testing’ for the purpose
of optimising the attack and increasing its
likelihood of success.
Today we continue to see the majority
of attacks carried out against Windows,
because that is where the greatest return
is for commercial malware. But we see
growing evidence of malware authors
pushing into other platforms – Mac,
Android, Linux and even attempting cross-
platform malware such as using the Java
platform. We have seen a growing number
of ransomware families, such as Locky and
Cerber, as commercial malware authors
see opportunity in this lucrative “business
model”. Recently we saw the emergence
of the first type of ransomware targeting
the Mac. The renowned poor security of
web servers used by smaller organisations
is leading to an increase in attacks on
content management systems with new
forms of ransomware that encrypt web
server content.
Classic or well-known techniques are
becoming more widespread and easier to
execute through pre-packaged components
or provided as a service. For targeted
spear-phishing attacks, cybercriminals
have become more skilled with social
engineering that is pixel perfect, with many
companies falling for scams and sharing
valuable data such as employee HR and tax
records. Some attackers identify high-value
social engineering targets with automated
processes, and once a target is acquired,
hand it over to a human operator to run
the scam.
Despite the best efforts of law enforcement
and its industry partners, cybercrime
is persistent and difficult to eradicate
because the threat actors are widespread
and their infrastructure dispersed. The
threat is everywhere and indifferent to who
you are. As the commercial cybercrime
underworld continues to thrive, we expect
that these trends will make cyber threats
more pervasive and more difficult to
contain than ever before, thus making a
comprehensive security strategy a necessity
for every organisation.
DESPITE THE BEST EFFORTS OF LAW ENFORCEMENT AND
ITS INDUSTRY PARTNERS, CYBERCRIME IS PERSISTENT AND
DIFFICULT TO ERADICATE BECAUSE THE THREAT ACTORS ARE
WIDESPREAD AND THEIR INFRASTRUCTURE DISPERSED. THE
THREAT IS EVERYWHERE AND INDIFFERENT TO WHOM YOU ARE.
13
IT Security a $38B Market
Growing at 7%
EXPANDING
ATTACK SURFACE
GROWING RISK
AWARENESS
$38B
IT Security Market 1
VANISHED
PERIMETER
INCREASED ATTACK
SOPHISTICATION
1 Source for c.$38B IT security market (hardware + software) is IDC WW IT Security Products 2015-2019 Forecast: Comprehensive Security Product Review
(December 2015, IDC #US40709015) and represents expected market size in 2016. Growth of 7% represents 2015E-2019E CAGR
IT Security Market
Analysis from the major industry analysts
agrees that the IT security market will
continue to grow at a CAGR of approximately
7 percent over the next few years. Industry
analysts also agree that IT spending in the
small to mid-size enterprise will continue to
grow at a rate above that of the enterprise
market, particularly on mobile and tablet
investment. Achieving data security and
compliance with government regulation is
seen as key driver for investment by CIOs in
Europe and the US in particular.
In 2016, the pressure on businesses to
secure customer data and safeguard
intellectual property will increase as
legislators respond to the rising severity
of data breaches. This could have a far-
reaching impact on how businesses
approach security, including the high-risk
and potentially sensitive area of securing
corporate data on an employee’s personal
device. The EU Data Protection regulation
will come into force across Europe by the
end of 2017, bringing more severe penalties
for non-compliance. It has numerous
components but one key takeaway is that
European businesses will now be held
responsible for the protection of the data
they process, including cloud providers and
other third parties.
The increase in targeted and organised
attacks is impacting the way businesses
approach security. There is no difference
between the security required by an
enterprise and that required by a small
business other than in the scale and
resources to manage it. Small businesses face
a significant competitive disadvantage if they
cannot respond effectively to incidents, and
face the same penalties as the enterprise. The
ability for security solutions to directly share
information and automate incident response
through synchronized security technology,
brings the complex and costly Security
Incident and Event Management (“SIEM”)
capabilities utilised by the enterprise, to
businesses of all sizes. This ability for security
systems that work better together and reduce
the need for IT admin intervention can level
both the competitive playing field with larger
enterprises and improve security against
sophisticated attack.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 14
STRATEGIC REPORT ► OUR STRATEGY
OUR STRATEGY
The Sophos mission is to be the best in the world at delivering complete IT security to mid-market enterprises
and the channel that serves them. This mission is built on the following six fundamental strategy pillars which have
been and will continue to be key to our success.
Focus on
security solutions
Sophos remains committed to IT security, and we believe our focus gives us an advantage vs.
other players who often try to address multiple and unrelated areas of technology. The Group
is the only security vendor who has built a leading and balanced business at scale in enduser
and network security. We continue to invest in technology and market leadership to support
our security-only strategy, adding depth and breadth to our security portfolio through both
organic development and where appropriate by targeted and disciplined acquisitions.
Focus on mid-market
enterprises
Most security vendors spend the bulk of their resources addressing the large enterprise, the
world’s 5,000 largest organisations. At Sophos we are explicitly focused on the other 50 million
small and mid-market enterprises worldwide. They face many of the same IT security threats
as large enterprises, but do not have the same financial resources and access to large numbers
of highly experienced IT security professionals to address their security needs.
Complete security,
made simple
Sophos is committed to delivering industry-leading, enterprise-grade security solutions that
are at the same time simple and easy to deploy, manage and use. The Group’s view is that
“complexity is the enemy of security”, and that simple, integrated solutions that work as a
system can deliver both better security that is also easier to manage, for organisations of
any size.
Deliver complete
end-to-end capabilities
spanning from enduser
to network protection
Sophos continues to develop its comprehensive portfolio of security technologies including
endpoint, mobile and server security, data encryption, web protection, email protection,
unified threat management and next-generation firewall, secure Wi-Fi and VPN technology.
Sophos has embarked on a multi-year strategy to bring these different products together
to deliver on a strategy of synchronized security. Synchronized security automates incident
response by sharing threat, security and health information across multiple individual security
components, including endpoints and next-generation firewalls. It eliminates the manual work
of trying to figure out the who, what and when of a compromise.
Cloud at the core
of current and
future strategy
Sophos continues to drive its cloud-enabled competitive advantage, adding key capabilities
and products to its single, integrated cloud-based management and reporting platform.
With new enhancements to our partner-centric management console, channel partners
are able to more easily drive up-sell and cross-sell, as well as manage, update and configure
their customers’ solutions remotely, thereby reducing overhead and business expense and
improving their profit margin.
Clear “channel first”
sales strategy
Sophos continues to drive a channel-only sales model. During 2015, Sophos launched a
new and simplified partner program and completely redesigned its partner portal with
innovative remote management options and automated digital marketing capabilities.
During the development of the synchronized security strategy, Sophos collaborated with
partners to support cross-sell and up-sell opportunities that simplify both the partner and
customer experience.
15
KEY PERFORMANCE INDICATORS
The Group utilises a number of Key Performance Indicators (“KPIs”), the definitions of which are included in the
glossary, to measure performance against our strategy. A description of these KPIs and performance against them
during the period is set out below:
$534.9M
Billings
2015: $476.0M
$478.2M
Revenue
2015: $446.7M
$120.9M
Cash EBITDA
2015: $101.4M
$46.4M
Unlevered free cash flow
2015: $65.3M
28.6 months
Weighted average
contract length
2015: 28.0 months
102%
Renewal rate
2015: 100%
7.4%
Endpoint-UTM
cross-sell
2015: 5.6%
Description
Performance 2016
Billings represents the value of products
and services invoiced to customers. Cash
is received at the start of a subscription
period and consequently billings become
our key forward indicator of future
performance.
Billings growth has been experienced
across all major regions and product
categories with particularly strong growth
in new customer and UTM billings.
Further discussion of billings is included
on page 24.
Revenue reflects the element of billings
recognised in the period including from
companies acquired from the date of their
acquisition. The majority of billings are for
subscription contracts that are recognised
rateably over the contract term.
Strong revenue growth has been
experienced in the Group’s Network
products, aided by immediate recognition
of associated hardware. Further discussion
on revenue is included on page 27.
Cash EBITDA provides visibility on actual
cash earned by the Group during the
period, even if the associated revenue
for that period's billings has not yet
been recognised.
Cash EBITDA increased YOY reflecting the
strong billings growth and ability of the
Group to leverage its cost base to ensure
that the cash EBITDA margin (cash EBITDA
as a percentage of billings) also increased.
Unlevered free cash flow is a measure
that provides information about the
amount of cash generated by the
Group’s business.
In line with the Board's expectations, the
YOY reduction is due to anticipated one-
off, prior-year working capital movements.
The weighted average contract length,
measured over the prior twelve month
period, gives the Group an indication of
the period over which future revenue will
be recognised.
The weighted average contract
length increased marginally in the
year due to a small number of longer
term Japanese deals; excluding these
deals, the underlying length remained
consistent YOY.
Renewal rate (including up-sell and cross-
sell) is a measure of long-term value of
end user agreements and the Group’s
ability to retain end users.
There has been continued improvement
in renewal rate as the Group successfully
leveraged its product portfolio.
The continued growth of the business
partially depends on successfully selling
additional products and services to
existing customers. Customers can
derive greater value by owning multiple
products from the Group as they benefit
from synergies in management, support
and functionality.
The level of endpoint-UTM cross-
ownership has increased consistently
through the year reflecting the ability
of the Group to demonstrate to its
customer the benefits of cross-ownership
of products.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 16
STRATEGIC REPORT ► CHIEF EXECUTIVE OFFICER’S STATEMENT
CHIEF EXECUTIVE OFFICER’S STATEMENT
We are pleased with our strong performance during our first year as a public company. The year has been marked by
sustained strength across all major regions and product categories, with our financial and operational performance
exceeding the Board’s expectations set at the start of the year and at the upper-end of our revised outlook. Our leading
product portfolio, innovation to drive our strategy of synchronized security, commitment to “security made simple” and
“channel first” sales strategy enabled us to grow our billings and revenue across both new and existing customers.
Sophos had a successful inaugural year as a
public company, as we continued to benefit
from strong underlying fundamentals in
the cybersecurity market, a unique and
compelling strategy and consistent, solid
operational execution.
In FY16 we outperformed the Board’s
expectations for both top-line billings and
profitability, and produced a result at the
upper end of our revised expectations, which
we increased at the time of our interim
results in November 2015. We grew billings
19.7 percent year-over-year (“YOY”) on a
like-for-like basis and we grew cash EBITDA by
31.6 percent at constant currency, resulting
in a cash EBITDA margin of 22.6 percent. We
remain confident that we will continue to
deliver strong FY17 growth in billings, strong
profitability with a modest cash EBITDA
margin expansion and an approximate
doubling in unlevered free cash flow.
We continue to make steady, consistent
progress in fulfilling our mission to be the
best in the world at delivering complete
IT security to mid-market enterprises and
the channel that serves them. IT security
continues to be the top priority for IT
administrators at organisations of every size,
as threats continue to grow in both volume
and sophistication, driving a $38 billion
market growing at 7 percent. Meanwhile, the
vendor community continues to be complex
and fragmented, with numerous overlapping
products, mostly designed for large
enterprises, and conflicting claims about
which proven and new techniques are
most effective; it is against this backdrop that
Sophos’ vision of “complete security made
simple” is proving both differentiated and
highly effective.
At the heart of any technology company’s
success is product delivery and in FY16
Sophos delivered a robust set of new
and enhanced offerings. We also made
substantial progress in our strategy to
deliver synchronized security and establish a
cloud-enabled platform through which all our
products can be managed in a single “pane
of glass”, and through which all our products
can actively communicate with each other
and share and act on security intelligence.
Highlights in product delivery included:
• a new version of our SG UTM featuring
Sophos Sandstorm, a cloud-based
sandboxing service;
• the new XG Firewall, our future
direction in UTM and next-generation
firewalls, featuring synchronized
security through the Sophos Security
HeartbeatTM technology;
• next-generation endpoint capabilities
such as malicious traffic detection and
download reputation;
• one-click server lockdown, providing
advanced and integrated application
whitelisting and anti-malware, with
unprecedented ease of deployment;
• the launch of a new cloud-based email
security offering, through the acquisition
of Reflexion Networks; and
• the introduction of a new cloud-based
web security offering, integrated
into Sophos Central, our cloud-based
management console.
In addition to organic development, Sophos
continues to take advantage of focused,
disciplined M&A activity to enhance and
deepen our existing offerings, or to enter new
markets that we feel fit well with our mission,
our strategy, and our product portfolio.
Sophos is the only IT security vendor in the
world that is a proven, balanced leader in
both the enduser and network security
markets. We are also driving a new wave of
security innovation through our strategy of
synchronized security.
OUR DIFFERENTIATED MISSION AND STRATEGY CONTINUE
TO RESONATE WITH OUR CUSTOMERS AND PARTNERS
AND ARE AT THE CORE OF OUR GROWING MOMENTUM. WE
CONTINUE TO GAIN SHARE, AS WE OUTPERFORM MARKET
GROWTH RATES IN BOTH OF OUR CORE SEGMENTS,
NETWORK SECURITY AND ENDUSER SECURITY. WE
BELIEVE WE ALSO HAVE PLENTY OF ADDITIONAL
“RUNNING ROOM”, AS WE ONLY HAVE ABOUT 5%
SHARE IN EACH OF THESE MARKETS.
17
Billings ($M)
16
15
14
13
534.9
476.0
388.1
371.6
12.9%
CAGR
Security remains a top priority for
organisations of all sizes and continues to
be a truly mission critical investment area.
I continue to hear from our customers that
they struggle to find the personnel and
budget resources to effectively protect
their organisations. They are looking for
vendors who can help them stay secure,
cost effectively, and also who can help
them simplify their infrastructure, rather
than make it more complex and more
difficult to manage.
We believe we are uniquely positioned in the
industry to meet this demand and I remain
extremely confident in our future prospects.
I would like to add my personal thanks
to every Sophos employee, partner and
supporter whose hard work and commitment
are so pivotal to our success, and whose
actions help protect hundreds of thousands
of organisations all over the world, every day.
Kris Hagerman
Chief Executive Officer
25 May 2016
We are driving greater brand awareness in
our key markets and will remain focused
on this effort during FY17 with creative
and innovative marketing such as IT-centric
social media campaigns, an expansion of
our free tools and a continued focus on
providing clear and practical IT security
advice for businesses. One notable
advance in our free tools during the year
was the introduction of Sophos Home, a
cloud-managed, easy-to-use anti-malware
and web filtering solution for PCs and
Macs in the home. Although there are
many free antivirus tools for home users
available on the market, ours is designed
for the modern household, supports both
the Microsoft Windows and Apple Mac
operating environments, is completely
cloud-enabled and is differentiated
in its simplicity, ease of use and un-
annoying user design. Sophos Home is
now generating thousands of new users
every day for Sophos, providing a positive
introduction to Sophos and enhancing our
brand visibility and awareness, which in
turn makes it easier for our sales teams and
channel partners to sell our products to
enterprises of all sizes.
During FY16 Sophos continued to receive
positive recognition and endorsement
from industry analysts, such as Gartner and
Forrester for key products in our network and
enduser portfolio. Sophos has also continued
to be recognised during the financial year as
a leader by industry publications such as SC
Magazine and Channel Reseller News (“CRN”).
We are particularly pleased that Sophos
continued to gain recognition in the
industry as a great place to work, which
supports our ability to attract and retain
world-class talent. Sophos was rated as one
of the “Top 30 medium sized businesses
to work for undergraduates” in the UK by
ratemyplacement.com and in the “Top 100
Places to Work for Graduates” in the UK by
The Job Crowd. Sophos was also named as
a “Dream Company to Work For” by World
HRD Congress in India. Our people drive
our success and as we continue to grow our
business we constantly look for new ways
to enhance our work environment, so our
team members can do the very best work
of their careers here at Sophos and feel
excited and fulfilled about doing so.
We began by linking our Endpoint and next-
generation firewall products. But our vision
extends far beyond that as, over time, we
look to integrate our entire product portfolio
into a single platform, all managed in a single
console, available either in the cloud or
on-premise.
We believe this approach has numerous
benefits to our customers, to our partners
and to our business model, including:
• differentiation versus other
security vendors;
• enhanced and more proactive security,
by generating actionable, detailed
intelligence and addressing the vulnerable
“white spaces” that exist between isolated
products from multiple vendors that do
not communicate with each other;
• easier deployment, management,
and use;
• enhanced ability for partners to
cross-sell and up-sell, to grow their
top-line billings; and
•
improvement in partner profitability
as they can manage across multiple
customers, remotely, providing more
effective utilisation of their valuable
technical staff.
Our differentiated mission and strategy
continue to resonate with our customers and
partners and are at the core of our growing
momentum. We continue to gain share, as
we outperform market growth rates in both
of our core segments, network security and
enduser security. We believe we also have
plenty of additional “running room”, as we
only have about 5 percent share in each of
these markets.
We posted significant growth in both
existing customer billings and new customer
billings in each of our major regions. Our
retention rate for our existing customers
also improved, as they responded positively
to the enhancements we made across our
product portfolio. We added over 5,000
new partners and our total is now in excess
of 20,000. Within our partner base we have
grown our strongest and most active “Blue
Chip” partners, those who conduct more
than five transactions in the prior six-month
period, by 38 percent to approximately 4,700.
The number of our Blue Chip partners that
sell both Enduser and Network products
increased by 37 percent YOY. We will continue
to develop our partner base to deliver
sustainable billings and growth at an efficient
sales expense.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 18
STRATEGIC REPORT ► GEOGRAPHICAL REVIEW
GEOGRAPHICAL REVIEW
As predicted, operations in the Americas and APJ
continue to grow at higher rates than in EMEA,
even though operations in EMEA are expected
to continue to grow at rates that exceed those
of the market.
In the year-ended 31 March 2016, the Group generated 35
percent, 49 percent and 16 percent of its billings from end
customers in the Americas, EMEA and APJ, respectively.
The Directors believe that the Group’s strong history
and footprint in Europe as well as its global operational
improvements and its network of more than 20,000 channel
partners, provide it with a significant opportunity to
grow billings across all of its key geographical regions.
As a result, the Group intends to continue to invest in
marketing to improve brand awareness as well as its
sales teams and channel partner relationships to improve
end customer reach in regions that are currently under-
represented in the Group’s billings, largely because the
Group entered those markets later as it expanded
outward from its U.K. headquarters.
AMERICAS
Americas saw new customer growth across both
Network and Enduser portfolios and a reported
billings growth of 22.9 percent. Cloud platform
adoption was a significant contributor.
187.9
152.9
124.6
14
15
FY16
THREE-YEAR BILLINGS $M
Like-for-like Billings grew
YOY 20.5 percent
576
35%
35%
EMPLOYEES
OF TOTAL BILLINGS
OF TOTAL REVENUE
19
Headquarters in Abingdon, UK
EMEA
Billings in EMEA were driven by a strong Network business
primarily due to sales to new customers. Enduser grew
more modestly with the cloud-based management platform
beginning to gain momentum. Total reported billings
growth was 3.3 percent YOY; significantly impacted by
currency headwinds.
APJ
Similar to EMEA, but to a lesser extent, currency headwinds
affected reported billings growth which was 22.8 percent
on a reported basis. Network billings were particularly
strong in Japan.
255.5
264.0
215.9
14
15
16
THREE-YEAR BILLINGS $M
Like-for-like Billings grew
YOY 15.5 percent
83.0
67.6
47.6
14
15
16
THREE-YEAR BILLINGS $M
Like-for-like Billings grew
YOY 33.1 percent
1,168
49%
50%
955
16%
15%
EMPLOYEES
OF TOTAL BILLINGS
OF TOTAL REVENUE
EMPLOYEES
OF TOTAL BILLINGS
OF TOTAL REVENUE
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 20
STRATEGIC REPORT ► PRODUCT REVIEW
PRODUCT REVIEW
Sophos is the only security vendor at scale with a leading and balanced product portfolio across endpoint
and network security. Sophos continues to expand all its product capabilities, most notably the integration
of enduser and network security and Sophos Central, our strategic cloud-based management platform
used both by end customers and channel partners.
Sophos further enhanced its cloud-enabled security management strategy with the evolution of Sophos Cloud from a cloud-based
administration console for several enduser security products to a fully integrated endpoint and network security management platform
that will be available in the cloud and on-premise, Sophos Central. This new management platform includes role-based interfaces for
partners, IT administrators and end users. The platform is designed to simplify the sales, service and support that our partners can
deliver to customers and will also improve the levels of protection for these customers. In late 2015, Sophos opened a new Frankfurt
data centre which allows customers in Germany to keep their data in-country, and customers in the rest of continental Europe will
also benefit from having a centrally-located data centre with data staying within the EU. Our priority for FY16 was delivering the first
phase of our synchronized security strategy, with the release of the Sophos Cloud endpoint and Sophos XG Firewall featuring innovative
Security HeartbeatTM technology. Synchronized security offers deep, meaningful and intelligent integration between enduser and
network security and with our Sophos Central management platform, dramatically simplifies the ability for an end customer or channel
partner to purchase and deploy additional products, and will help channel partners and end customers manage overall IT security
through a single unified interface.
Key product enhancements and launches:
SOPHOS MOBILE CONTROL 6
Developed to include Sophos Secure Email,
a personal information management (PIM)
container solution for email, calendar and
contacts. Personal and corporate data
can be separated, allowing organisations
to manage business data security while
enhancing user privacy. IT administrators
can remotely provision email to employee
mobile devices across popular platforms,
including iOS and Android.
SOPHOS SERVER PROTECTION
ADVANCED
Integrates server application whitelisting
with anti-malware to deliver single-
click server lockdown, using the simple,
intuitive Sophos Central management
console that makes it easy to deploy,
manage and maintain. By locking a known-
good server configuration and building in
automatic trust of known-good updaters
and linked DLLs, Sophos Server Protection
Advanced reduces the administrative time
needed to lock down multiple servers
from weeks to just minutes, by simplifying
configuration and only allowing approved
or whitelisted applications to run.
The underlying trends driving growth in
the Enduser segment include the adoption
of advanced threat protection features,
the increased use of anomaly-based
malware detection, the expansion of bring
your own device (‘‘BYOD’’) computing
environments, the proliferation of
mobile computing devices, the growing
importance of encryption and data
protection, the increased adoption of
cloud-based security offerings and the
integration of enduser and network
security technologies to address next-
generation threats.
Sophos continues to enhance and expand
next-generation capabilities in enduser
products as sophisticated threats evolve:
Anti-malware technologies
• Behaviour analytics
• Reputation management
• Malicious traffic detection
Incident Response technologies
• Security Heartbeat™
• Encryption key shredding
• Malware removal
• Root cause analytics
(currently in beta)
The acquisition of SurfRight B.V.
adds the following capabilities:
• Exploit prevention
• Anti-ransomware
• Memory/process protection
Billings
16
15
14
$238.2M
$224.1M
$204.1M
45%
OF TOTAL
BILLINGS
Revenue
16
15
14
$211.9M
$210.0M
$207.4M
44%
OF TOTAL
REVENUE
21
SOPHOS SANDSTORM
To complement our existing malware
protection capabilities, Sophos introduced
a new advanced persistent threat and
zero day malware security technology that
provides signatureless protection. Sophos
Sandstorm determines potential threat
behaviour across multiple operating
systems including Windows, Mac and
Android on either physical or virtual
hosts, on networks, web mail, Word,
PDF and more than 20 file types and
mobile applications. Sophos Sandstorm
is available as a subscription option in
Sophos Email Appliance 4.0 and Sophos
UTM 9.4.
SOPHOS WEB GATEWAY
The updated Sophos Web Gateway
provides advanced cloud-delivered
protection for users, devices and data
across multiple operating systems
regardless of their location, and is
managed by Sophos Central. The latest
version of the Sophos Web Appliance
includes a new proxy engine with up to 7
times the scanning performance on the
same hardware and improved granular
controls over features like chat, games
and comments to manage the use of
popular social media apps.
SOPHOS EMAIL APPLIANCE
Sophos Sandstorm protection has been
added to the Sophos Email Appliance
(SEA) along with new Sophos Delay
Queue technology. This sophisticated
enhancement is designed to address the
problem of Snowshoe Spam and further
advances threat prevention, along with
Sophos Time-of-Click protection to block
malicious email URLs, protecting against
stealthy, delayed, spear phishing attacks.
Billings
16
15
14
$158.5M
50%
OF TOTAL
BILLINGS
Revenue
16
15
14
$239.0M
$206.5M
$143.7M
50%
OF TOTAL
REVENUE
Research and development for the
Network product portfolio continues to
be focused on enhancing next-generation
firewall and advanced protection
technology to address the increase in
web-based infection, browser-based
exploits and threats embedded in email;
the increased adoption of cloud-based
security offerings; and the integration of
enduser and network security technologies
to address next-generation threats.
$266.7M
$223.7M
Key product developments and launches
include:
SOPHOS XG FIREWALL
In late 2015, Sophos introduced the
new Sophos XG Firewall that combined
the best of our Cyberoam and Sophos
firewall technology into an innovative
next-generation firewall platform. XG
Firewall introduced a number of advances,
including Sophos Security HeartbeatTM
which links Sophos Endpoint Protection
with the XG Firewall to share important
context and status information to improve
protection and enable new types of
firewall policies based on Endpoint status
and health. Other innovations included a
new intuitive user-interface, broad Layer-8
user identity awareness, unified policy
model, user and application risk reporting,
and FastPath packet optimization. In
March 2016, the XG 135w model was
awarded a 5-star A-List rating in the UK’s
PC Pro Magazine.
SOPHOS UTM
Our trusted Sophos UTM running on SG
Series appliances remains a critical part
of our network security portfolio, offering
a great mix of simplicity, performance,
protection and value. The latest version,
UTM 9.4, was released in March 2016 with
the addition of Sophos Sandstorm next-
generation threat protection for targeted
and evasive threats, and support for the
latest RED 15w and AP 15C hardware.
We also added Auto Scaling technology
to the Sophos UTM solution designed for
Amazon Web Services (“AWS”).
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 22
STRATEGIC REPORT
Technology acquisitions
that accelerate
leadership in endpoint
and network
Astute acquisitions drive
customer, partner and
shareholder value
EMAIL PROTECTION IN THE CLOUD
In June 2015, Sophos acquired Reflexion
Networks Inc. ("Reflexion") for a cash
consideration of $15 million to accelerate
the delivery of advanced email protection in
the cloud. The solution from Reflexion had
been developed for the needs of the mid-
market and was designed to be offered as a
managed service through channel partners.
As Sophos integrates this technology as
part of Sophos Central, it will complement
the existing Sophos Secure Email Appliance
by giving customers the choice of a cloud-
based email security solution or an on-site
appliance solution.
Reflexion developed its products to address
the same target market, sales model and
integrated solution strategy that Sophos
has established. For our partners, this
acquisition also strengthens our managed
service provider ("MSP") portfolio. The
ability to sell managed services offers an
additional and predictable revenue stream
to partners who have the capacity to
manage security for their customers on an
ongoing basis.
The acquisition of Reflexion strengthens
the Sophos product set by adding a rich
cloud-based email security, continuity and
archiving solution. Reflexion's innovative,
easy-to-deploy and easy-to-manage security
platform provides:
• A cloud-based email filtering engine
enabling full protection for email
interactions without requiring additional
on-site technology
• Near instantaneous protection from
emerging threats by supplying real-time
threat intelligence from the cloud
• A simple and intuitive management
experience designed for small and
mid-market enterprises or pragmatic
enterprises of any size
At the time of acquisition, Reflexion had
over 17,000 customers worldwide. More
than 2,000 MSPs sell its cloud services
every month.
The IT and cyber-crime landscape is ever-
evolving, so consistent innovation is required
to keep customers protected from the
latest threats. Sophos has a rich heritage of
internal innovation as well as an exceptional
track record for acquiring and integrating
technology from other companies. In FY16
Sophos made two acquisitions to accelerate
the delivery of advanced security solutions.
OVERVIEW
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
23
NEXT-GENERATION
ENDPOINT TECHNOLOGY
Sophos is recognised as a leader in
endpoint protection today, with a growing
set of next-generation technologies such
as behaviour-based analytics, Malicious
Traffic Detection, Sophos System Protector,
crowd sourced application reputation and
many other technologies. Sophos acquired
SurfRight B.V. ("SurfRight") in December
2015 for a cash consideration of $31.8
million to further strengthen Sophos’
leading endpoint protection technology
with next-generation defence tactics that
can be delivered either on premise or in
the cloud.
SurfRight is recognised as an innovator in
signature-less next-generation endpoint
threat detection and response ("ETDR") and
advanced threat prevention. SurfRight has
developed a portfolio of technologies that
prevent, detect and remediate zero-day
and sophisticated attacks by interrupting
malware and advanced persistent threat
("APT") vectors. SurfRight’s real-time anti-
exploit technology focuses on detecting
and preventing the memory manipulations
and abuses that allow malicious code to
run in the first place. Generic prevention
of exploits at this early stage in the attack
chain is a key enhancement to endpoint
security mechanisms and can help
thwart malicious code in the processor
and memory. The portfolio also includes
anti-espionage technology and enhanced
protection against ransomware attacks such
as CryptoLocker.
SurfRight’s technology will also further
enhance the effectiveness of Sophos’
synchronized security strategy, in which
multiple components of security protection
actively and continuously communicate
with each other.
This innovative approach leads to faster threat
detection and a dramatic reduction in the
time and resources required to investigate
and remediate security incidents.
24
STRATEGIC REPORT ► FINANCIAL REVIEW
FINANCIAL REVIEW
Trading for the year closed at the upper end of the Board's expectations with like-for-like billings growth of
19.7 percent as the Group experienced strong growth across all regions and products. Revenue grew
15.6 percent on a constant currency basis, or 7.1 percent on a reported basis.
The table below presents the Group’s financial highlights
(in reported currency):
Growth
FY15
$M
Reported
%
Like-for-
like %
Billings
Revenue*
Cash EBITDA*
FY16
$M
534.9
478.2
120.9
476.0
446.7
101.4
Operating loss
(32.7)
(0.5)
12.4
7.1
19.2
n/m
46.4
65.3
(28.9)
Unlevered free
cash flow
Net cash flow from
operating activities
19.7
15.6
31.6
n/a
n/a
21.3
59.9
(64.4)
n/a
* Like-for-like growth rates for revenue and cash EBITDA are presented on a constant currency
basis but do not adjust for pre-acquisition revenues and profits.
Definitions of non-GAAP measures are included in the glossary.
The strong billings performance in the year resulted in an increase
in the deferred revenue balance of $65.4 million to $498.7 million
as at the end of March 2016; of which $286.5 million which will be
recognised as revenue in FY17, up 14 percent YOY, highlighting the
visibility and sustainability of the Sophos subscription based business
model. The Group targets investment to drive subscription billings
growth and hence much of the positive impact of the year’s billing
activity will be seen in the profit and loss account of future years.
Billings to new customers grew 33.0 percent YOY. In addition, the
renewal rates and cross-sell rates to existing customers, of which
there are now in excess of 220,000, continue to improve. This
combination of new customer growth combined with improving
retention and cross-sell metrics across an expanding customer base
underpins the Group's confidence for future billings growth.
Cash EBITDA increased to $120.9 million and margins improved
to 22.6 percent as the Group grew billings and leveraged
its operating expense base. Research and development and
marketing investments are anticipated to increase in line with
billings growth going forward. The Group expects to continue to
leverage other functions to support margin expansion.
The operating loss widened YOY in line with the Board’s
expectations as a result of exceptional items, predominantly
associated with the cost of the IPO. Before exceptional items the
Group made an operating profit of $9.2 million.
Unlevered free cash flow was also in line with the Board’s
expectations and below the prior year due to one-time
nonrecurring items. It is expected that unlevered free cash flow
will approximately double in FY17 as working capital normalises
and the level of anticipated profit improves, driven by continued
billings growth and modest margin expansion. Net cash flow from
operating activities was predominantly impacted by $41.9 million
of exceptional items and is expected to significantly increase in
the year ahead.
BILLINGS
The Group’s reported billings increased by $58.9 million from
$476.0 million in the year-ended 31 March 2015 to $534.9 million in
the year-ended 31 March 2016, with growth in all regions, products
and types as detailed below. This represented 12.4 percent
reported growth or 19.7 percent growth on a like-for-like basis.
The variance between the reported and like-for-like billing growth
rates represents the impact of both currency and acquisitions. This
significant variance was predominantly due to the devaluation in
the average Euro rate which impacted the reported growth rate in
the EMEA region.
The Group’s billings are primarily comprised of subscription
agreements, which represented 79 percent of the Group’s billings
in FY16. Subscription agreements are paid in full upfront with
revenue being recognised on a deferred basis in accordance with
accounting standards over the life of the agreements, which
can vary from one to five years, resulting in a highly visible and
predictable future revenue stream. There was an immaterial
billings contribution from Reflexion and SurfRight in the
respective periods post-acquisition.
BILLINGS GREW 19.7 PERCENT YEAR-ON-YEAR, WELL ABOVE THE GROWTH
IN THE MARKET OF 7 PERCENT CAGR, WITH STRONG GROWTH ACROSS
ALL REGIONS AND PRODUCTS IN BOTH CUSTOMER RENEWALS AND
NEW CUSTOMERS, SUPPORTING GROWTH IN BOTH CURRENT YEAR AND
DEFERRED REVENUE.
25
Enduser new customer growth was positively impacted by
significant adoption of the Sophos Central platform. Reported
growth includes the impact of billings from Reflexion, a cloud-based
Email security company acquired in June 2015; like-for-like billings
growth adjusts for the acquisition and currency.
EMEA
Billings attributable to EMEA increased by $8.5 million to $264.0
million in the year-ended 31 March 2016, representing 3.3 percent
growth on a reported basis and 15.5 percent growth on a like-for-
like basis. This increase was primarily due to Network growth in new
customer business. Enduser billings also continued to grow, albeit
more modestly, with adoption of the Sophos Central platform now
starting to gain momentum, a few quarters behind the Americas. As
anticipated, EMEA’s reported billings for the year were negatively
impacted by the strengthening US Dollar, the impact of which
moderated over the second-half of the year.
APJ
Billings attributable to APJ increased by $15.4 million to $83.0 million
in the year-ended 31 March 2016, representing 22.8 percent growth
on a reported basis and 33.1 percent growth on a like-for-like basis.
Network billings growth was particularly strong in Japan in the year,
assisted by a number of larger one-time deals, but similar to EMEA,
currency headwinds from the strengthening US Dollar impacted on
reported billings growth.
Growth
FY16
$M
FY15
$M
Reported
%
Like-for-
like %
Billings by Region:
– Americas
– EMEA
– APJ
Billings by Product:
– Network
– Enduser
– Other
Billings by Type:
187.9
264.0
83.0
152.9
255.5
67.6
534.9
476.0
266.7
238.2
30.0
534.9
223.7
224.1
28.2
476.0
– Subscription
422.8
384.9
– Hardware
– Other
99.0
13.1
78.4
12.7
534.9
476.0
22.9
3.3
22.8
12.4
19.2
6.3
6.4
12.4
9.8
26.3
3.1
12.4
20.5
15.5
33.1
19.7
27.5
13.4
9.1
19.7
16.5
37.7
10.2
19.7
Billings by region
Americas
Billings attributable to the Americas increased by $35.0 million
to $187.9 million in the year-ended 31 March 2016, representing
22.9 percent growth on a reported basis and 20.5 percent on a
like-for-like basis. This increase was driven by new customer growth
across both Enduser and Network, and an increase in the existing
customer retention rate.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 26
STRATEGIC REPORT ► FINANCIAL REVIEW
FINANCIAL REVIEW CONTINUED
Billings by product
Network products
The Group’s billings attributable to Network products increased by
$43.0 million to $266.7 million in the year-ended 31 March 2016,
representing 19.2 percent growth on a reported basis and 27.5
percent growth on a like-for-like basis. This was primarily due to
31.2 percent like-for-like growth in UTM sales that grew strongly in
all regions and across both new and existing customers. The
Network like-for-like three-year CAGR was 19.8 percent.
Enduser products
The Group’s billings attributable to Enduser products increased by
$14.1 million to $238.2 million in the year-ended 31 March 2016,
representing 6.3 percent growth on a reported basis and 13.4
percent growth on a like-for-like basis. Enduser YOY billings growth
was primarily driven by the cloud platform. The like-for-like three-
year CAGR was 8.8 percent.
Billings by type
The percentage of hardware billings increased to 18.5 percent in
the year (2015: 16.5 percent), reflecting the higher proportion of
Network billings, which increased from 47.0 percent of billings to
49.9 percent, and growth in UTM billings in particular.
Key billings metrics
Billings from new customers
Billings from new customers grew at an even faster rate than billings
from existing customers. Total billings from new customers grew
faster than in FY15, increasing 33.0 percent YOY and as a percentage
of billings increased to 25 percent from 23 percent in the prior year.
Sophos Network billings from new customers grew 36.2 percent YOY
and increased as a percentage of Network billings to 32 percent from
31 percent in the prior year. Enduser billings from new customers
grew 28.3 percent YOY and have increased as a percentage of
Enduser billings to 19 percent from 17 percent in the prior year.
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 the impact of cross-selling and up-selling, which helps
the Group evaluate its success in fully leveraging its broad product
portfolio throughout its installed customer base. The Group's net
retention rate, excluding Cyberoam, improved in the year from
100.2 percent in the year-ended 31 March 2015 to 101.9 percent
in the year-ended 31 March 2016.
Billings by size
Sophos products are designed for the Group’s target market, mid-
market enterprises (defined as enterprises with between 100 and
5,000 employees), but are frequently also bought by both smaller
and larger enterprises. In FY16, the proportion of billings to each of
the customer size groups remained largely consistent YOY.
Billings by length of contract
The Group sells subscription agreements covering a range of
durations, most typically being one to three years in length. The
average contract length for the year-ended 31 March 2016 was
28.6 months, a small increase on the 28.0 months for the year-ended
31 March 2015 due to a small number of longer-term deals in Japan.
Excluding these longer-term deals in Japan, average contract length
would have remained stable.
The billings analysis of contracts by subscription length was
as follows:
(Like-for-like billings, excluding Cyberoam, Reflexion
and SurfRight)
Under one year
One to two years
Two to three years
Greater than three years
FY16
%
32.8
8.2
46.7
12.3
FY15
%
33.5
8.3
45.3
12.9
Cross-sell and up-sell opportunities
As the IT needs of the Group’s existing customers evolve and as
customers 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 up-
sell enhanced versions of products, or additional enduser licences,
or longer subscription periods.
Following the launch during the year of the Group’s synchronized
security strategy, and the introduction of new products incorporating
Sophos Security HeartbeatTM technology, the percentage of
customers who own both a Sophos Endpoint and UTM has
continued to improve. At 31 March 2016, approximately 7.4 percent
of customers had both a UTM product and an Endpoint product
compared to 5.6 percent of customers at 31 March 2015. The Group
expects this metric to steadily improve over future periods as more
customers take advantage of the benefits of synchronized security.
The cloud platform also facilitates easier cross-sell of other products
beyond endpoint, such as server, mobile and web security; and
over time the Group expects to extend this platform to incorporate
the Group’s entire product portfolio, including encryption, email
security, web security, Wi-Fi, and UTM/NGFW. Many of the
Group’s customers do not yet deploy all of these essential security
components from any vendor and as such this represents further
cross-sell opportunities over and above the Group’s core Endpoint
and UTM products.
27
Revenue
The Group’s revenue increased by $31.5 million, or 7.1 percent,
to $478.2 million in the year-ended 31 March 2016. On a constant
currency basis, revenue growth for the year was 15.6 percent.
This growth was due to a combination of continuing growth
in subscription billings across all major product groups and an
improvement in UTM hardware billings, which are recognised as
revenue in the same period as the billing.
As the majority of the Group’s revenue relates to subscriptions
(FY16: 76.3 percent; FY15: 79.4 percent), the benefit from increased
billings is spread over a number of years on the subsequent
recognition of deferred revenue. Reported revenue in the year
of $478.2 million comprised $251.4 million from recognition of
prior year deferred revenues and $226.8 million from new billings.
The deferred revenue balance at the end of the year of $498.7
million increased $65.4 million YOY, $286.5 million of which will be
recognised as revenue in FY17, an increase of 14 percent YOY.
Revenue by Region:
– Americas
– EMEA
– APJ
Revenue by Product:
– Network
– Enduser
– Other
Revenue by Type:
– Subscription
– Hardware
– Other
FY16
$M
FY15
$M
Growth
%
166.1
239.5
72.6
150.6
233.5
62.6
478.2
446.7
239.0
211.9
27.3
478.2
364.7
100.9
12.6
478.2
206.5
210.0
30.2
446.7
354.8
80.0
11.9
446.7
10.3
2.6
16.0
7.1
15.7
0.9
(9.6)
7.1
2.8
26.1
5.9
7.1
Revenue in the Americas increased by 10.3 percent to $166.1 million
in the year-ended 31 March 2016 due to growth both in Network
sales, including the UTM hardware component, and growth in
Enduser revenue which is predominantly made up of subscription
based products.
Though impacted by foreign exchange headwinds for much of the
year, EMEA revenue increased by 2.6 percent to $239.5 million in the
year-ended 31 March 2016, primarily due to growth in UTM billings.
APJ revenue increased by 16.0 percent to $72.6 million in the year-
ended 31 March 2016, also predominantly due to strong growth in
UTM billings.
The impact of currency headwinds in both EMEA and APJ meant that
despite reporting strong like-for-like subscription billings growth of
16.5 percent, EMEA and APJ both reported headline 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:
Americas
EMEA
APJ
Total subscription
FY16
$M
FY15
$M
Growth
%
141.7
130.4
176.0
177.3
47.0
47.1
364.7
354.8
8.7
(0.7)
(0.2)
2.8
Cost of Sales
The Group’s cost of sales increased by $15.1 million, or
16.9 percent, to $104.4 million in the year-ended 31 March 2016,
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 $8.6 million
or 4.9 percent, to $184.0 million in the year-ended 31 March 2016.
Marketing expenses are increasing to broadly match the investment
with billings growth. Sales expenses are increasing more slowly as
the Group starts to leverage its strong channel model.
Research and Development
The Group’s research and development expenses increased by
$17.8 million, or 21.8 percent, to $99.6 million in the year-ended
31 March 2016. 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 and SurfRight in the year. As with marketing
investment, research and development investment is targeted to
now broadly grow in line with billings.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 28
STRATEGIC REPORT ► FINANCIAL REVIEW
FINANCIAL REVIEW CONTINUED
General Finance and Administration
The Group’s underlying general finance and administration
expenses increased by $13.6 million, or 35.4 percent, to $52.0
million in the year-ended 31 March 2016. The increase was almost
entirely attributable to the share-based payment expense, which is
higher following the issue of new equity awards at the time of the
Company’s IPO. Excluding share-based payments and exceptional
items, the underlying general finance and administration expenses
decreased YOY, and now represent 6.7 percent of billings (FY15: 7.8
percent) as the Group leverages its strong back office function.
Operating Loss
The Group’s operating loss was $32.7 million in the year-ended
31 March 2016 compared to a loss of $0.5 million in the prior year.
After adding back exceptional items, as explained above, gains on
group asset disposals and foreign exchange gains and losses, the
operating profit was $9.0 million in the year-ended 31 March 2016
compared to $14.2 million in the prior year. The YOY reduction
was a consequence of investment in FY16, the positive impact of
which will be reflected as revenue in the profit and loss account of
future years.
The Group’s exceptional items included within general finance and
administration expenses increased by $24.6 million to $41.9 million in
the year-ended 31 March 2016. The increase was mainly due to costs of
$17.8 million incurred during the Company’s IPO, as well as acquisition
costs and expenses incurred in relation to the defence or settlement
of claims brought against a number of our employees by their former
employer and certain intellectual property litigation cases.
Amortisation of Intangible Assets
The Group’s amortisation of intangible assets decreased by $18.4
million, or 38.7 percent, to $29.2 million in the year-ended 31 March
2016. This decrease was due to the reduction in amortisation charges
associated with acquisitions in prior years exceeding the charge in the
year from the FY16 acquisitions of Reflexion and SurfRight.
Currency Movements and Impact
The weakening of the Euro as compared to the US Dollar negatively
impacted the Group's reported billings and profit growth rate in the
year-ended 31 March 2016.
The Group’s foreign exchange gain was $0.2 million in the year-
ended 31 March 2016, compared with a gain of $2.6 million in the
year-ended 31 March 2015. This change was primarily due to the
moderate weakening of the US Dollar compared to Sterling and the
Euro having strengthened throughout the prior year.
Cash EBITDA
Whilst subscription billings are recognised in the profit and loss
account as revenue over the length of the contract, substantially all
of the costs in connection with the contract have been incurred and
are recognised in the profit and loss account upfront. The Directors
believe that cash EBITDA is a useful supplemental measure of
earnings that provides visibility on actual cash earned in the period
and is a better reflection of the profitability of the contract signed,
as it matches cash inflows with nearly all of the cash costs of
delivering the relevant service to the customer.
On a reported basis, cash EBITDA increased by 19.2 percent to
$120.9 million in the year-ended 31 March 2016. On a constant
currency basis, cash EBITDA growth was 31.6 percent as a result of a
combination of strong billings and operational leverage, particularly
within the back office and sales functions. Cash EBITDA margins
improved year over year to 22.6 percent from 21.3 percent.
Net Finance Costs
The Group’s net finance costs decreased by $18.1 million to $35.7
million in the year due to the impact of the IPO, the proceeds of
which enabled the repayment of both the amounts due to the
previous parent company and $87.7 million of bank debt. These
underlying improvements were offset by a $27.1 million variance
in foreign exchange gain on borrowings and a $5.9 million expense
relating to the write-off of un-amortised capitalised finance fees
that originally arose on the repaid external debt facility.
Income Tax
The Group’s tax charge for the year was $3.5 million (FY15: $5.7
million) with an effective tax rate of -5 percent (FY15: -11 percent).
The charge is driven by both the profit mix amongst the key
jurisdictions in which the Group operates and by a number of one-
time events.
Following the IPO, the Group has increased the proportion
of employee remuneration associated with share-based
compensation, the cost of which can be claimed as a statutory
deduction in at least two of the key jurisdictions in which the
Group operates, including the UK and the US. This resulted in the
recognition of a deferred tax asset in FY16 of $13.7 million, of which
$3.5 million has been recognised through the income statement.
During FY16 the Group has also elected to adopt the new Research
& Development (R&D) Expenditure Credit regime introduced by the
UK Government with effect from 1 April 2013 and has benefitted
from a $5.3 million credit to the tax charge in respect of the three
years to 31 March 2016.
Loss for the Year
The Group’s loss for the year increased by $11.9 million, from a
loss of $60.0 million in the year-ended 31 March 2015 to a loss
of $71.9 million in the year-ended 31 March 2016 predominantly
reflecting exceptional expense items.
29
Capital Expenditure
The Group’s capital expenditure primarily comprises property, plant
and equipment as well as intangible assets. In the year-ended 31
March 2016, net cash capital expenditure increased by $4.9 million
YOY. The prior year comparative included the disposal of property
that was surplus to requirements for $3.0 million; the underlying
capital expenditure outflow was $14.9 million. The increased YOY
capital expenditure is a result of expanding facilities in the Group’s
India operation as well as operational system improvements that
enhance the Group’s ability to transact business with its partners
and customers.
Cash Taxation
Corporation tax amounts paid in FY16 were slightly lower than in
FY15 largely due to a number of catch-up payments made in FY15
in relation to earlier years. Cash tax is driven by the profits mix
amongst the key jurisdictions in which the Group operates and by
acquisitions in recent years. A cash tax payment of $2.8 million also
arose in FY16 due to the distribution of dividends from India.
Financing
In connection with the IPO process that was completed in July 2015,
the Group refinanced its external borrowings. In the third quarter
of FY16 the Group drew down a portion of the associated revolving
credit facility to partially finance the acquisition of SurfRight.
At 31 March 2016, the ratio of net debt to cash EBITDA was 2.1
times, which in the absence of future acquisitions will improve as a
consequence of the cash generative nature of the Group.
Dividends
At the time of the 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
propose to pay a final dividend for the year-ended 31 March 2016 of
1.1 US Cents per share, giving a total dividend for the year of 1.8 US
Cents per share. The final dividend, subject to shareholder approval,
will be paid on 14 October 2016 to all shareholders on the register
on 16 September 2016.
Nick Bray
Chief Financial Officer
25 May 2016
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.
Cash EBITDA
Net capital expenditure
Operating cash flow
Change in working capital
Corporation tax paid
Unlevered free cash flow
FY16
$M
120.9
FY15
$M
101.4
(16.8)
(11.9)
104.1
(32.5)
(25.2)
46.4
89.5
1.5
(25.7)
65.3
In line with the Board's expectations, unlevered free cash flow
reduced to $46.4 million predominantly due to anticipated one-
time working capital movements.
Unlevered free cash flow can be reconciled to the statutory
measure of net cash from operating activities as follows:
Net cash flow from operating activities
Exceptional items
Net capital expenditure
Unlevered free cash flow
FY16
$M
21.3
41.9
(16.8)
46.4
FY15
$M
59.9
17.3
(11.9)
65.3
Net cash from operations reduced to $21.3 million mainly as a result
of the increased exceptional items related to the IPO and expenses
incurred in the defence or settlement of claims brought against a
number of our employees by their former employer and certain
intellectual property litigation cases.
Changes in Working Capital
Working capital changes YOY were largely due to the FY15 balance
sheet including accrued and payable amounts in relation to closure
of one office, the “Cloudburst” brand awareness marketing program
and extraordinary bonus and commission payments arising from
FY15 over-performance. Working capital at the end of the current
year reflects an increased volume of trade occurring as well as
prepayments for FY17 partner conferences that are being held
earlier than in the prior year. Despite trade receivables increasing
due to billings growth, DSO has decreased marginally to 44 days
(FY15: 45 days).
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 30
STRATEGIC REPORT ► PRINCIPAL RISKS AND RISK MANAGEMENT
PRINCIPAL RISKS AND RISK MANAGEMENT
Principal risks are identified through a business-wide risk assessment process, along with an evaluation of the strategy
and operating environment of the Group. The risk review process encompasses the identification, management and
monitoring of risks in each business area. This process includes an assessment of the risks to determine the likelihood
of occurrence, the potential impact and the adequacy of mitigation or controls already in place.
A full review is then undertaken by the Risk and Compliance Committee, who evaluate the principal risks of the Group with reference to its
strategy and operating environment. The Audit and Risk Committee monitors these processes, reviewing the Group’s Consolidated
Risk Register and reporting material risks to the Board.
STRUCTURE OF RISK MANAGEMENT
SOPHOS GROUP PLC BOARD
Audit and Risk Committee
Risk and Compliance
Committee
Internal
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Strategic
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Financial
Read more about the Group's risk environment and internal controls on page 48.
31
The Directors consider the following matters to be the principal risks and uncertainties (in no specific order) affecting the Group:
HOW IT IMPACTS US
WHAT WE ARE DOING
RISK
MOVEMENT
RECRUITMENT
AND RETENTION
OF KEY
PERSONNEL
The ongoing success of the Group is
dependent on attracting and retaining
high quality employees at all levels in the
business who can effectively implement
the Group’s strategy.
Failure to attract, retain or develop high
quality employees across the business
could limit the Group’s ability to deliver
its business plan commitments.
DEFECTS OR
VULNERABILITIES
IN PRODUCTS
OR SERVICES
The Group’s products and services
are complex, and as such they have
contained and may in the future
contain design or manufacturing
defects or errors that are not detected
until after their commercial release
and deployment by end customers.
These defects could cause the Group’s
products or services to be vulnerable
to security attacks, cause them to fail
to help security networks, temporarily
interrupt end customers’ networking
traffic, fail to prevent or detect viruses
or similar threats. Further, due to the
evolving nature of threats and the
continual emergence of new threats,
the Group may fail to identify and
update its threat intelligence or other
virus databases in time to protect end
customers’ networks and devices.
As a result, actual or perceived defects
or vulnerabilities in the Group’s products
or services, the failure of the Group’s
products or services to prevent a security
threat, could harm the Group’s reputation
and divert the Group’s resources.
Making Sophos a great place to work is
central to the Group’s strategy.
Sophos is committed to a strong
recruitment process supported by robust
remuneration programs which are
benchmarked appropriately. Additionally,
Sophos has a commitment to all levels of
training throughout the organisation.
Reward schemes are continuously
evaluated to drive and reward performance
and ensure the retention of key talent.
Annual employee engagement surveys
enable progress of our people actions to be
monitored, areas of improvement identified
and necessary actions performed.
The Group is committed to extensive test
cycles and quality procedures, which are
subject to continuous improvement.
Sophos employs a combination of
internal and external quality reviews and
testing of products, including source
code reviews, public and private third
party efficacy testing, and various forms
of penetration testing. We encourage a
healthy collaboration with the security
research community, as described
in our Responsible Disclosure Policy:
https://www.sophos.com/security.
Further, we protect the privacy and
security of our customers worldwide
through our pledge to never engineer
backdoors into our products as
described here: https://www.sophos.
com/nobackdoors
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 32
STRATEGIC REPORT ► PRINCIPAL RISKS AND RISK MANAGEMENT
PRINCIPAL RISKS AND RISK MANAGEMENT CONTINUED
HOW IT IMPACTS US
WHAT WE ARE DOING
RISK
MOVEMENT
FALSE
DETECTION
OF THREATS
IT SECURITY
AND CYBER RISK
Sophos is committed to investment
in its world class security research
labs facility with emphasis placed
on staff training, testing and quality
procedures.
Moreover, there is a continuous
proactive focus on improvement of
processes to enable early detection
of a false positive event, as well as
applying a ‘lessons learnt’ approach
through root cause analysis.
Sophos acknowledges the inherent risk
associated with a false positive incident
within the industry and is committed to
ensuring there are mitigating processes
in place to manage any incident, large
or small, in order to minimise the
impact on our customers.
Sophos has a dedicated Cyber Security
Team which is focused on investigation
and mitigation of risks related to
cyber-attack. The Group is focused
on day-to-day active monitoring
processes to identify and deal with IT
security incidents, and also implements
continual improvements in the IT
security technology, education and
awareness and policies that combine in
the overall security posture of Sophos.
The Group’s products may falsely
detect threats or malware that do not
actually exist in applications or content
based on the Group’s classification
of application type, virus, malware,
vulnerability exploits, data or URL
categories (known as "false positives").
These false positives, while inherent
in the Group’s industry, may impair
the perceived reliability of the Group’s
products and may therefore adversely
impact market acceptance of the
Group’s products.
If the Group’s products restrict
important files or applications based
on falsely identifying them as malware
(or some other item that could be
restricted), this could adversely affect
end customers’ systems and cause
material system failures. Any such
false identification of important files
or applications could result in negative
publicity, damage to the Group’s
reputation, loss of end customers
and sales, increased costs to remedy
any problem and risk of litigation,
any of which could have a material
adverse effect on the Group’s financial
condition and operating results.
As a provider of IT security products,
the Group is a high profile target and
the Group’s networks and products
may have vulnerabilities that have
from time to time been, and may in
the future be, targeted by attacks
specifically designed to disrupt the
Group’s business and harm the
Group’s reputation.
If an actual or perceived breach of
security occurs in the Group’s internal
systems, it could adversely affect the
market perception of the Group’s
products. In addition, a security breach
could affect the Group’s ability to
operate its business, including the
Group’s ability to provide support
services to end customers.
33
PRODUCT
PORTFOLIO
MANAGEMENT
HOW IT IMPACTS US
WHAT WE ARE DOING
RISK
MOVEMENT
Sophos has an extensive number
of products, enhanced further by
acquired technologies. The extent of
investment in each product needs to
be managed and prioritised, taking into
account the expected future prospects.
Additionally, consideration must be
given to the ability to adequately
support the entire product range.
Failure to manage the product
portfolio adequately could result in
inappropriate investment focus in
relation to research and innovation
in product development. This could
result in products that do not meet
the requirements of customers or
partners and the risk they will look to
alternative solutions, leading to the
potential loss of both new and existing
revenue streams.
Additionally, insufficient focus on key
research and development projects
may damage the long-term growth
prospects of the Group.
Sophos continues to focus on and
improve the interaction between
Product Management, Product
Development, Sales and Marketing and
all Support functions in an integrated
product development approach.
Internal processes are run to identify
opportunities for standardisation and
consistency across products lines.
This helps to eliminate redundancy,
reduce development and support cost
and improve partner and customer
experience through a more predictable
and coherent product portfolio.
Additionally, Sophos customers and the
partner community continue to be an
invaluable resource in guiding portfolio
management decisions. They provide
immediate and constant feedback
on how well Sophos is meeting their
requirements and what improvements
Sophos can make to its current
offering, as well as opportunities for
portfolio consolidation or expansion.
During the year-ended 31 March 2016,
the Group strengthened its product
portfolio through the acquisition of
Reflexion Networks Inc and SurfRight BV.
DISRUPTION
TO DAY TO
DAY GROUP
OPERATIONS
Sophos is at risk of disruption to its
day to day operations from a disaster
incident, which may seriously impact IT
systems or access to office space.
A failure in the operation of the Group’s
key systems or infrastructure on which
the Group relies could cause a failure of
service to our customers and negatively
impact the Sophos brand.
Sophos has made significant
investments in the technology and
infrastructure of the Group to ensure it
continues to support the growth of the
organisation.
Additionally, incident management
procedures and escalation processes
are in place as well as maintaining
security, business continuity and
disaster recovery plans. Ongoing
updates and testing of these plans is
underway.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 34
STRATEGIC REPORT ► CORPORATE RESPONSIBILITY REPORT
CORPORATE RESPONSIBILITY REPORT
EMPLOYEES
The Group promotes a culture where people can achieve and be
recognised for their achievements, where people have the support
they need to develop themselves and where people are valued
and treated with respect. The Group continues to operate by its
core values: simplicity, empowerment, passion, innovation, and
authenticity. To aid with the development of all of the Group’s
employees, unlimited access has been made available to one of the
largest independent online libraries of e-learning courses in the
world for technical, personal and leadership skills development,
in addition to role specific training and access to Instructor-Led
Training ("ILT") aligned to their development and career aspirations.
The Group is committed to providing equal opportunities and
recruits and promotes staff on the basis of their experience,
qualifications, skills and attitude.
At the end of the financial year the gender breakdown of
employees and Directors was:
Executive &
Non-Executive
Directors
Senior
Managers*
1
8
13
70
Employees
600
2,194
Female
Male
The Group actively engages with local universities in our key
locations and offers internships and working student opportunities
in Canada, the US, UK, Germany and Austria. In the UK, the Group
has established an intern and graduate program, supporting
students through a full-year paid internship and provide support,
expertise and guidance for their final year projects. Many of the
interns receive permanent offers to join Sophos post-graduation,
as well as financial assistance for their final year of study.
COMMUNITY & CHARITIES
Sophos employees come from many countries and walks of life,
but all share the same core values, including a commitment to
help others and make a positive impact in the communities where
they live and work. From the global headquarters in the UK, to the
offices in India, Hungary, the Philippines and many other places,
Sophos’ corporate social responsibility efforts stretch across
the world.
In the UK the Group continued its long-term support for the
Prince’s Trust; based in the UK the Trust supports 13 to 30 year olds
who are unemployed, struggling at school or at risk of exclusion.
Amongst other activities, during the year, a team from the UK office
completed the three-peaks challenge, raising £6,000 for the charity.
Around the world the Group has supported a number of charities
and community projects including:
* The Group has defined Senior Managers as members of the Senior
Management Team and their direct reports (excluding Executive
Directors separately reported).
• The Polio Foundation
• Association de Damas de Fillipinas
The Group conducts a global Employee Opinion Survey on an
annual basis to gain feedback from employees and help identify
and deliver actions that will increase employee engagement and
company performance. Sophos will continue to identify and drive
actions on a global, location and functional basis.
• Télévie
• DELTA
• Global Jet Watch Project
CASE STUDY: GIRLS IN CODING DAY
In November 2015, Sophos hosted its
first ever ‘Girls in Coding’ event at the
Groups’ headquarters in Abingdon. The
event was designed to engage, motivate
and challenge the brightest aspiring young
female programmers in Oxfordshire;
boosting confidence and encouraging girls
to compete in what has traditionally been a
male-orientated field.
Forty two students battled against each
other in eight teams as they undertook
four DEFCON-style coding challenges and
participated in presentations from a number
of women in senior technical roles within
the Group as well as Simon Reed, VP of
Sophos Labs.
One of the students said “It was challenging
in a way that I really like – you know you can
do it but it takes a lot of effort and that’s
something that I really like as I like problem
solving… I was already thinking about a
career in coding but I didn’t know quite yet.
Today has really helped me decide.”
35
ENVIRONMENT
The Group is committed to effectively managing and improving
its environmental performance and minimising the impacts
of the business on the environment, by driving continual
environmental improvement.
The Group accepts that it bears a responsibility for ensuring
that a continuing contribution is made to improve the quality of
the environment and aims to continue to achieve this through
management of its premises, control of its operations and
encouraging its staff to act and work in an environmentally
friendly manner.
Practical means of complying with this policy include existing,
ongoing and planned procedures:
Premises
• Continual efforts to minimise energy loss
• Continual efforts to improve the efficient use of energy
Employees
• Employees being encouraged to share transportation
• Employees being encouraged to use alternative means of
more environmentally friendly transport and facilities to
accommodate that will be provided
• Employees are encouraged to minimise waste and
recycle wherever possible
Operations
• Wherever possible recyclable materials will continue to
be used in packaging operations
• Suppliers being asked to pursue a policy of supplying
goods in recyclable materials
• The use of non-recyclable materials reduced to a minimum
• The policy of using the minimum quantity of packaging
consistent with ensuring the maintenance of product protection,
quality and safety will be further developed
• Continual reduction in energy wastage
• Wherever possible materials will continue to be recycled,
• When procuring new equipment, ensuring it not only meets
the business needs long-term but is also energy efficient
• The premises will continue to be kept in a good state of repair
• The grounds will continue to be cultivated in an environmentally
friendly manner
or collected for recycling
STRATEGIC REPORT APPROVAL
The Strategic report on pages 6 to 37 was approved by the
Board on 25 May 2016 and signed on its behalf by:
Kris Hagerman
Chief Executive Officer
CASE STUDY: ADOPTING A VILLAGE
A Sophos group company has adopted a
rural village in India to uplift the lives of
350 families living in the village. The aim is
to improve education, health care, family
welfare, infrastructure, sanitation and
sustainable livelihood patterns in the village.
More than 100 employees have volunteered
to work a few hours every week at the
village to teach over 200 students.
The initiatives taken, and continue to take,
for uplifting the lives of the rural and urban
poor are an important part of who we are.
Sophos believes there is a long way to go
before a better future is delivered to the
underprivileged and until we achieve this
objective, we will continue our efforts to
better their lives.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 36
STRATEGIC REPORT
Dance like no o ne’s watching,
encrypt like eve ryone is.
Building the
Sophos brand
GROWING AWARENESS OF SOPHOS
BRAND DRIVES MOMENTUM FOR
CHANNEL PARTNERS
To sustain a clear voice and connection
to our partners and customers Sophos
adheres to the “simple” philosophy in
marketing. It is authentic in voice, genuine
in sentiment and the voice of reason in a
scary world. We have a maniacal focus on
what’s important to our customers and
we try to do it with a bit more personality
than what is “typical” for the industry.
This makes our marketing seem somewhat
unconventional. But it works, and our
customers and partners appreciate it.
FREE TOOLS
Nothing helps connect a technology
brand with IT professionals more than
the technology itself. Although Sophos is
focused on mid-market enterprises, we
realise that everyone, whether at work or
at home, needs effective, simple security
that “just works”. To expand the number
of people who are familiar with the
Sophos brand and to enable our enterprise
customers to protect their employees at
home, we have developed a range of free
tools to protect home computing users.
These include a free home version of our
UTM, anti-virus for Mac, virus removal
tools, free Android security, free Linux
OVERVIEW
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
37
Dance like no o ne’s watching,
encrypt like eve ryone is.
: P
server security and most recently Sophos
Home, a cloud-managed PC and Mac home
protection solution.
SOCKS
IT professionals like socks. Last year Sophos
gave out free IT themed socks for Sys Admin
Appreciation Day as a gesture of gratitude
to all the unsung IT heroes across the globe.
The socks became so popular that we made
them available year-round. We now have
hundreds of thousands of IT sock-wearing
devotees and more than a few potential
sales leads that may need an updated IT
security solution now or in the future.
And it’s not just socks. Sophos has become
so popular that we’ve starting offering
Sophos-branded lunchboxes, hiking gear
and even surfboards.
NAKED SECURITY
Naked Security is a highly respected
security industry news source that Sophos
publishes five days a week. With more than
600,000 unique visitors per month and
more than 40,000 subscribers to the daily
newsletter, it reaches more individuals than
many commercial security news services.
The award-winning “Chet Chat” podcast
garners about 4,000 listens per episode.
The editorial explains security-related news
and events in plain language. It is often
quoted in the industry media as a trusted
source of information. The regular article
contributors are security experts and
researchers at Sophos with more than 20
years of front-line experience.
OUT OF HOME ADVERTISING
In 2015 Sophos started testing some out
of home advertising concepts to enhance
brand awareness in certain key markets.
The results exceeded our expectations with
web traffic in those markets increasing by
221 percent during the test period. Like
with our other marketing efforts, our aim is
to connect with our target audience, show
a bit of personality and let the market know
that Sophos understands what it takes to
keep organisations secure.
VIDEOS
Video content is the most effective and
compelling online communication method
today. Sophos has a dual strategy of
educational content and quirky engaging
videos that are designed to connect with
our customer and partner audiences, often
with humour. Many of these are shared
across social media and support our global
marketing campaigns. In recent years, we
have marked occasions such as Christmas,
Mother’s Day, Sys Admin Day and other
holidays with special videos that connect
directly with our audiences and help Sophos
to stand out in the marketplace with a
unique voice.
MARKETING METRICS
Sophos marketing is a metrics-driven
organisation with detailed ROI and
marketing influence metrics. Throughout
FY16 we’ve continued to see steady
improvement of our marketing metrics
across all geographies and product
lines. With our "channel first" approach,
we dedicate a large percentage of our
marketing budget to partner recruitment,
partner enablement and partner co-
marketing activities. As with our sales
strategy, we seek to get channel leverage by
focusing time, effort and resources on our
most productive partners in each country.
38
GOVERNANCE ► BOARD OF DIRECTORS
BOARD OF DIRECTORS
Peter Gyenes
Non-Executive Chairman
Peter Gyenes joined the Sophos Board in
2006, bringing experience with corporate
growth and value creation to our vision for
integrated threat management leadership.
Peter was most recently the Chairman
and Chief Executive Officer of Ascential
Software Corporation, until its acquisition
by IBM in April 2005. He brings to Sophos
four decades of experience in technical,
sales, marketing and general management
positions within the computer systems and
software industry in the Americas, Europe
and Asia/Pacific. Peter has a bachelor's
degree in mathematics and an MBA from
Columbia University in New York. He serves
on the Boards of Intralinks Holdings Inc.,
Pegasystems Inc., RealPage Inc., Carbonite
Inc., Epicor Software Corporation and the
Massachusetts Technology Leadership
Council (Trustee Emeritus).
Kris Hagerman
Chief Executive Officer
Kris Hagerman joined Sophos in 2012 as
CEO; he is responsible for all aspects of
Sophos’ strategic direction and business
operations. Prior to Sophos, Kris was CEO of
Corel Corporation. Previously, Kris served as
group president, data centre management at
Symantec, where he led a business of more
than $1.5 billion that represented nearly
30 percent of Symantec’s global revenue.
Prior to Symantec, Kris was executive vice
president and GM, storage and server
management at Veritas Software where
during his tenure, the company grew
from $1 billion in revenue to more than
$2 billion, prior to its acquisition by
Symantec. Earlier in his career, Kris was
founder and CEO of BigBook, an online
yellow pages service and founder and CEO
of Affinia, an online contextual advertising
network. Kris also held positions at Silicon
Graphics and McKinsey & Company. Kris
has a bachelor’s degree in Russian and
economics from Dartmouth College, an
M.Phil. in international relations from
Cambridge University, and an MBA from
the Stanford Graduate School of Business.
Nick Bray
Chief Financial Officer
Nick Bray joined Sophos as Chief Financial
Officer in 2010 having worked in the
technology sector for over 20 years. Nick
has extensive international operational skills
combined with significant public company
experience, having previously been the CFO
of listed companies on both the London Stock
Exchange and Nasdaq. He has successfully
accelerated organic growth both at Sophos
and prior organisations through acquisition,
having now acquired and integrated in
excess of ten companies, funding for these
transactions being raised in both the UK and
US debt markets. Before joining Sophos, Nick
was Group CFO at Micro Focus International
plc, where he was instrumental in the
company tripling revenue and increasing
market capitalisation from circa £200 million
to in excess of £1 billion. Nick has also held
Group CFO roles at Fibernet Group plc
and Gentia Software plc, as well as senior
financial positions at Comshare Inc. and Lotus
Software. Nick has a first class bachelor’s
degree in civil engineering from Aston
University, UK, and is a qualified chartered
accountant having trained with PwC.
39
Sandra Bergeron
Independent Non-Executive Director
Sandra Bergeron joined in 2010. She has
previously served as a Director of Tipping
Point, Netegrity, Nuance Communications,
TriCipher, and ArcSight, until their
acquisitions. During a ten-year career
at McAfee, Inc Sandra held a number of
key executive positions, including head
of research and development, head of
corporate strategy, and president of
PGP Security. Sandra holds an MBA from
Xavier University in Cincinnati, Ohio and a
bachelor's in business administration (Cum
Laude) from Georgia State University. Sandra
serves as a Director of F5 Networks, Inc. and
Qualys Inc.
Edwin Gillis
Independent Non-Executive Director
Edwin Gillis joined in 2009. He is currently
a Director and Chairman of the Audit
Committee of AppNexus, LogMeIn, Sprinklr,
and Teradyne Corporation. He has held
senior roles at Symantec Corporation,
Veritas Software, Parametric Technology
and Lotus Development Corporation, and
spent 15 years with Coopers & Lybrand as
a CPA and general practice partner. Edwin
has a bachelor’s degree in government from
Clark University in Massachusetts, a master’s
degree in international relations from the
University of Southern California and an
MBA from Harvard Business School.
Roy Mackenzie
Non-Executive Director
Roy Mackenzie joined in 2010. He joined
Apax Partners in 2003 and is a partner in the
technology and telecom team. Previously,
Roy worked at McKinsey & Company, Inc.,
focusing on consulting clients in the high
technology sector and also held product
management positions at Psion Computers.
While at Apax, Roy worked on a number of
investments including NXP Semiconductors,
and King.com. He holds an MBA from
Stanford Graduate School of Business
and a master's degree in engineering
from Imperial College, London. Roy is
currently also a Director of Epicor Software
Corporation and Exact Holdings NV.
Steve Munford
Non-Executive Director
Steve Munford served as Sophos’ CEO from
2006 to 2012, he led the company through
a period of dramatic growth, more than
tripling billings. Prior to his role as CEO,
Steve was President of Sophos for North
America and then became COO, responsible
for the day-to-day running of the company
and its senior management team. Previously,
he was President of ActiveState before its
acquisition by Sophos. Under his leadership,
ActiveState established itself as a global
leader in email security software. Steve has
a bachelor's degree in economics from the
University of Western Ontario and has an
MBA from Queen's University, Ontario. Steve
is also a Director of Actenum, Alert Logic,
Carbonite Inc., Teradici, Elastic Path, Quick
Mobile and Utimaco Inc.
Salim Nathoo
Non-Executive Director
Salim Nathoo joined in 2010. He is a partner
and co-head of Apax Partners' technology
and telecom team. He joined Apax Partners
in 1999 and has been involved in a variety of
technology focussed investments including
Evry, Global Logic, Orange Switzerland,
iGATE, Weather Investments, Tim Hellas,
and SMART Technologies. Before he joined
Apax Partners, Salim worked at McKinsey &
Company, Inc., where he focused extensively
on telecommunications. Salim also held
sales, marketing and technical positions
at NYNEX CableComms Ltd. and IBM. He
earned a master's degree in mathematics
from St. John's College, Cambridge and an
MBA from INSEAD. Salim currently serves on
the Boards of Evry ASA and Global Logic.
Paul Walker
Senior Independent Director
Paul Walker joined in 2015. Paul brings
more than 30 years of technology and
senior leadership experience to the Board of
Sophos, having served for 16 years as Chief
Executive Officer of Sage Group plc., a leader
in business solutions for small and medium
businesses. Paul has previously served on
the Boards of Diageo plc., My Travel Group
plc. and Ernst & Young. Paul qualified as a
Chartered Accountant with Ernst & Young,
having graduated from York University with
a degree in economics. Paul is currently
Non-Executive Chairman of Perform Group
Ltd and Non-Executive Chairman of Halma
plc. He is also a Non-Executive Director
for WANdisco plc. and Experian plc and
serves on the Boards of Epicor Software
Corporation and Newcastle Science
City Partnership.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 40
GOVERNANCE ► CORPORATE GOVERNANCE STATEMENT
CORPORATE GOVERNANCE STATEMENT
Dear Shareholder
At Sophos, all our stakeholders are important to us. The design and operation of a robust governance structure appropriate for a
group of Sophos’ scale and ambition is critical to meeting their needs. Our approach to governance is based on the concept that good
corporate governance enhances long-term shareholder value and sets the culture, ethics and values for the rest of the Group.
The Board has ultimate responsibility for reviewing and approving the Annual Report and Accounts and it has considered and endorsed
the arrangements for their preparation. The Directors confirm the Annual Report and Accounts, taken as a whole, is fair, balanced and
understandable and provides the information necessary for shareholders to assess the Group's position and performance, business
model and strategy.
Peter Gyenes
Non-Executive Chairman
UK CORPORATE GOVERNANCE CODE
This report, which is available on the Company’s website, explains the key features of the Company’s governance structure to provide a
greater understanding of how the main principles of the UK Corporate Governance Code (“Code”), published in September 2014 by the
Financial Reporting Council (“FRC”), have been applied and to highlight areas of focus during the period. The Code can be found on the
FRC’s website at at www.frc.org.uk.
The Company was incorporated on 26 May 2015 and achieved premium listing on the London Stock Exchange on 1 July 2015. In the one
month period prior to listing work was done by the Company to ensure it had appropriate governance structures and policies in place so
as to comply with the Code before the Company’s shares were admitted to trading. Accordingly, the corporate governance statement and
the reports of the Audit and Risk, Remuneration, and Nomination Committees explain how the provisions and principles of the FCA Listing
Rules, Disclosure and Transparency Rules and the Code have been applied in the period from listing to 31 March 2016.
GOVERNANCE CHANGES IN PREPARATION FOR LISTED STATUS
In preparation for the Company’s listing, it was recognised that although the internal governance processes were fit for purpose,
additional work was required to enhance these processes to meet the obligations of being a company listed on the London Stock
Exchange. Accordingly, a number of work streams were put in place to ensure that the Company’s operations as a listed company
complied with relevant regulation and guidance. Work undertaken included the creation and embedding of the necessary policies
and procedures to meet the various corporate governance and regulatory requirements applicable to the Company post-listing.
COMPLIANCE WITH THE CODE
In the period from listing to 31 March 2016 the Company complied with all the principles and provisions of the Code, except as set
out below:
Code provision B.1.2 recommends that at least half the Board of Directors of a UK-listed company, excluding the Chairman, should
comprise Non-Executive Directors determined by the Board to be independent. The Board considers that the Company does not comply
with the requirements of the Code in this respect, however the Company intends to move towards compliance with this requirement
within a reasonable period of time. In furtherance of this goal, the Board recently commenced a process to identify and recruit one or more
potential candidates to serve as Non-Executive Directors. The Board currently expects to have at least one new Independent Non-Executive
Director appointed to the Board before 31 December 2016; although, there can be no assurance that suitable candidates will be identified,
that they will accept the appointment, or that the appointment can be completed within the Board’s desired timeline.
The Directors who are not considered independent are:
Peter Gyenes – in accordance with the Code the test of independence is not appropriate for a Chairman following their appointment.
Kris Hagerman and Nick Bray – due to the executive nature of their roles they are not considered to be independent.
Steve Munford – was CEO of the Group between 2006 and 2012 and accordingly is not considered to be independent.
Salim Nathoo and Roy Mackenzie – are shareholder appointed Directors and accordingly are not considered to be independent.
HOW THE BOARD WORKS
41
THE BOARD AND ITS COMMITTEES
The Board is responsible for the effective oversight of the Company. It also agrees the strategic direction and governance structure that
will help achieve the long-term success of the Company and deliver shareholder value. The Board takes the lead in areas such as strategy,
financial policy and making sure a sound system of internal control is maintained. The Board’s full responsibilities are set out in the schedule
of matters reserved for the Board described below. The Board delegates authority to its Committees to carry out certain tasks on its behalf,
so that it can operate efficiently and give the right level of attention and consideration to relevant matters.
Responsibilities of the Board
The Board has approved a schedule of matters reserved for its decision; specifically, the Board is responsible for:
• Guiding the Group’s long-term strategic aims, leading to its approval of the Group’s strategy and its budgetary and business plans
• Approval of significant investments and capital expenditure
• Approval of annual and half-year results
• Approval of the dividend policy, payment of the interim dividend and the recommendation of final dividends
• Ensuring maintenance of a sound system of internal control and risk management
• Ensuring adequate succession planning for the Board and senior management (taking into account the recommendations of the
Nomination Committee)
• Determining the remuneration policy for the Directors and the senior management team (taking into account the recommendations
of the Remuneration Committee)
Board Focus During the Year
• Strategy: During FY16, the Board worked with management to identify and anticipate industry trends to ensure that the Company’s
strategy is designed to address these trends as well as other industry dynamics, such as the competitive landscape. The Board also
considered acquisition opportunities to advance the Company’s strategy. During FY16, the Board approved two acquisitions.
• Financials: During FY16, the Board reviewed the Company's operating results and financial statements with management and the
Company's external auditors. The Board also reviewed and approved the operating plan for the fiscal year.
• The Company’s listing on the London Stock Exchange: In anticipation of the Company’s listing on the London Stock Exchange in FY16,
the Board undertook a review of the Company’s governance structure, internal controls, compliance requirements, compensation
arrangements and other aspects of the Company’s operations that are relevant for a listed company.
• Governance: As noted above, the Board undertook a comprehensive review of its governance structure in FY16. As a result of this
review, the Board considered and approved governance policies designed to ensure its compliance with the requirements applicable to
a publicly listed company, including the Code.
• Business performance: In FY16, the Board received and reviewed reports from management on the performance of the Company’s
business. The Board engaged in discussions with management on various aspects of business performance, including business drivers,
industry trends, risks, opportunities and the competitive landscape.
Board Committees
In June 2015 the Board established the Audit and Risk Committee (Chaired by Edwin Gillis) to oversee financial reporting, internal control
and the management of the risks the Company faces. The Board also established a Nomination Committee (chaired by Peter Gyenes) to
lead the process for appointments to the Board and a Remuneration Committee (chaired by Paul Walker) which has the responsibility of
helping to develop and manage the Company’s Remuneration Policy.
The various committee reports can be found on pages 45 to 65 and each committees’ full terms of reference are available on our website.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 42
GOVERNANCE ► CORPORATE GOVERNANCE STATEMENT
CORPORATE GOVERNANCE STATEMENT CONTINUED
Table of Attendance
The table below summarises the attendance of the Directors and committee members at the scheduled Board and committee meetings
held during the year:
Director
Peter Gyenes*
Kris Hagerman
Nick Bray
Sandra Bergeron
Edwin Gillis**
Salim Nathoo
Roy Mackenzie
Steve Munford
Paul Walker***
Board
Audit and Risk Committee
Remuneration Committee
Nomination Committee
Held
Attended
Held
Attended
Held
Attended
Held
Attended
6
6
6
6
6
6
6
6
6
5
6
6
6
6
5
6
6
6
–
–
–
4
4
–
–
–
4
–
–
–
4
4
–
–
–
4
3
–
–
3
3
–
–
–
3
3
–
–
3
3
–
–
–
3
1
–
–
1
1
–
1
–
1
1
–
–
1
1
–
–
–
1
The figures in the “held” column represent the number of meetings a Director was eligible to attend and the “attended” column represents the number of meetings attended by
that Director.
* Peter Gyenes is Chairman of the Board and Chairman of the Nomination Committee.
** Edwin Gillis is Chairman of the Audit and Risk Committee.
*** Paul Walker is Chairman of the Remuneration Committee.
Board Composition, Qualification and Experience
The composition, experience and balance of skills on the Board are periodically reviewed to ensure that there is the right mix on the Board
and its Committees and they are working effectively. There are currently nine Directors on the Board, which comprises a Non-Executive
Chairman (who, for the purposes of the Code was independent on appointment), two Executive Directors, three Independent Non-
Executive Directors and three Non-Executive Directors who are considered by the Board not to be independent for the purpose of the
Code. The current members of the Board have a wide range of skills and experience. The Board believes that a membership that combines
detailed knowledge of the Group’s operations, the technology industry and leading a company listed on the London Stock Exchange are
crucial to the Board's ability to lead the Company successfully.
Key Board Roles
Chairman
• Leads the Board
Chief Executive Officer
• Leads the management team
• Promotes a high standard of corporate governance
• Develops proposals for the Board to consider
• Facilitates effective contributions by the
• Oversees implementation of all Board-approved actions
Non-Executive Directors
• Supports the Chairman to ensure that appropriate governance
• Promotes a culture of openness and debate
standards spread through the organisation
• Encourages constructive relations between
Executive and Non-Executive Directors
• Ensures that the Board is made aware of the employees' views
on relevant issues
Interaction between the Chairman and Chief-Executive
The division of responsibilities between the Chairman, Chief Executive Officer and Senior Independent Director is set out in writing and
agreed by the Board.
The roles of the Chairman and the Chief Executive Officer are separate with a distinct division of responsibilities. The partnership between
Kris Hagerman and Peter Gyenes is based on mutual trust and facilitated by regular contact between the two. The separation of authority
enhances independent oversight of the executive management by the Board and helps to ensure that no one individual on the Board has
unfettered authority.
43
The Role of Non-Executive Directors
Senior Independent Director
Non-Executive Directors
• Acts as intermediary between Directors when required
• Constructively challenges management proposals
• Works closely with the Chairman, acting as a sounding
• Help develop proposals on strategy
board and providing support
•
Is available to shareholders and other Non-Executives to
address any concerns or issues they feel have not been adequately
dealt with through the usual channels of communication
• Have a prime role in appointing and, where necessary,
removing Executive Directors
• Have an integral role in succession planning
Non-Executive Director Independence
The Board considers and reviews the independence of each Non-Executive Director on an annual basis as part of the Directors’
performance evaluation. In carrying out the review, consideration is given to factors such as their character, judgement, commitment
and performance on the Board and relevant committees and their ability to provide objective challenge to management.
The Board considers its Independent Non-Executive Directors bring strong judgement and considerable knowledge and experience to
the Board’s deliberations. The Code requires a company to state its reasons if it determines that a Director is independent in certain
circumstances, including where a Director holds cross-directorships or participates in the Company’s share option or performance related pay
scheme. As noted in the Annual Report on Remuneration on page 65, Paul Walker participates in a restricted share arrangement. Paul is also
a Director of Epicor Software Corporation of which Peter Gyenes and Roy Mackenzie are also Directors. Notwithstanding these arrangements,
the Board considers Paul to be independent in character and judgement. This is evidenced by the valuable contributions he makes at Board
and Committee meetings, and in particular, the knowledge and experience he brings to his role as Chairman of the Remuneration Committee.
Additionally, Peter Gyenes is a Director of Carbonite Inc., of which Steve Munford is also a Director. The Code provides that the Chairman
of a company should be independent on appointment. The Board considers that Peter Gyenes, the Chairman, was independent upon
appointment and that he continues to be independent notwithstanding the cross-directorships described above.
Appointment and Tenure
All Non-Executive Directors serve on the basis of letters of appointment which are available for inspection upon request. The letters of
appointment set out the expected time commitment of Non-Executive Directors who, on appointment, undertake that they will have sufficient
time to meet what is expected of them. Non-Executive Directors are appointed for an initial three year term and the continuation of their
appointment is conditional on satisfactory performance and subject to annual re-election at the Company’s Annual General Meetings.
Executive Directors serve on the basis of service agreements which are also available for inspection upon request. Further details on the
Executive Directors’ service agreements are included in the Annual Report on Remuneration, on page 58.
Director Induction and Training
The Chairman, with the support of the Company Secretary, is responsible for the induction of new Directors and ongoing development of
all Directors. As part of its preparation for the Company’s listing on the London Stock Exchange, the Board received full, formal and tailored
training to prepare the Board for service on a listed company Board. New Directors will receive a full, formal and tailored induction on
joining the Board designed to provide an understanding of the Group’s business, governance and key stakeholders. The induction process
may include provision of an induction pack, operational site visits, meetings with key individuals and the Company’s advisors, and briefings
on key business, legal and regulatory issues facing the Group.
As the business environment changes, it is important to ensure the Directors’ skills and knowledge are refreshed and updated regularly.
Accordingly, the Company Secretary ensures that updates on corporate governance, regulatory and technical matters are provided to
Directors at Board meetings and by means of communications or special sessions in between formal Board meetings. In this way, Directors
keep their skills and knowledge relevant so as to enable them to continue to fulfil their duties effectively.
Information and Support Available to Directors
All Board Directors have access to the Company Secretary, who advises them on Board and governance matters. The Chief Executive Officer
and the Company Secretary work together to ensure that Board papers are clear, accurate, delivered in a timely manner to Directors, and of
sufficient quality to enable the Board to discharge its duties. As well as the support of the Company Secretary, there is a procedure in place
for any Director to take independent professional advice at the Company’s expense in the furtherance of their duties, where considered
necessary or advisable.
Director Election
Following recommendations from the Nomination Committee, taking into account the results of the Board's performance evaluation
process, the Board considers that all Directors continue to be effective, committed to their roles and have sufficient time available to
perform their duties. In accordance with the Company’s Articles of Association and provision B.7.1 of the Code all Directors will be subject
to annual re-election. All Directors will seek election at the Company’s first AGM in 2016 as set out in the Notice of AGM.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 44
GOVERNANCE ► CORPORATE GOVERNANCE STATEMENT
CORPORATE GOVERNANCE STATEMENT CONTINUED
Directors’ Conflicts of Interest
Directors have a statutory duty to avoid situations in which they have, or may have, interests that conflict with those of the Company,
unless that conflict is first authorised by the Directors. This includes potential conflicts that may arise when a Director takes up a position
with another company. The Company’s Articles of Association allow the Board to authorise such potential conflicts, and there is in place a
procedure to deal with any actual or potential conflict of interest. The Board deals with each appointment on its individual merit and takes
into consideration all the circumstances.
Salim Nathoo is a partner at Apax Partners LLP and Roy Mackenzie is a partner at Apax Partners, LP. Apax Partners, LP is a wholly-owned
subsidiary of Apax Partners LLP. Both Apax Partners, LP and Apax Partners LLP are advisors of the Apax Funds, which wholly own Pentagon
Lock Sarl, Pentagon Lock 6-A Sarl, Pentagon Lock 7-A Sarl and Pentagon Lock US Sarl (collectively “Apax”). Following the admission of the
Company’s shares to the London Stock Exchange Apax controlled 35.2 percent of the voting rights in the Company and at 31 March 2016
controlled 22.3 percent of the voting rights in the Company.
In April 2016 the Board was notified that Steve Munford had been appointed a Director at Utimaco Inc, a subsidiary of Utimaco GmbH
which supplies professional cybersecurity solutions. This appointment has been authorised by the Board and has been included in the
conflicts register.
Board Evaluation and Effectiveness
The Board and its Committee were formed upon IPO in June 2015 and in January 2016 an internal evaluation commenced and was
conducted by the Company Secretary under the direction of the Senior Independent Director. The Company Secretary had distributed a
tailored, high level questionnaire for the Directors completion. The questionnaire was structured to provide Directors with an opportunity
to express their views about:
• the performance of the Board and its Committees, including how Directors work together as a whole;
• the balance of skills, experience, independence and knowledge of the Directors;
•
individual performance, particularly considering whether each Director continues to make an effective contribution.
SHAREHOLDER ENGAGEMENT
Responsibility for shareholder relations rests with Nick Bray, the Group's Chief Financial Officer. He ensures that there is effective
communication with shareholders and is responsible for ensuring that the Board understands the views of shareholders. Mr Bray
is supported by the Group's corporate brokers with whom he is in regular dialogue. As a part of a comprehensive investor relations
programme, formal meetings with investors are scheduled to discuss the Group’s interim and final results. In the intervening periods, the
Company continues its dialogue with the investor community by meeting key investor representatives and holding investor roadshows.
ANNUAL GENERAL MEETING
The Company’s first Annual General Meeting (“AGM”) will take place at 15:00 on 14 September 2016 at The Pentagon, Abingdon Science
Park, Abingdon, OX14 3YP. All shareholders have the opportunity to attend and vote, in person or by proxy, at the AGM. The notice of the
AGM can be found on our website and in a booklet which is being mailed out at the same time as this Report. The Notice of AGM sets out
the business of the meeting and an explanatory note on all proposed resolutions. Separate resolutions are proposed in respect of each
substantive issue. The AGM is the Company’s principal forum for communication with private shareholders.
RISK MANAGEMENT AND INTERNAL CONTROLS
The Audit and Risk Committee report explains the process carried out for the assessment of the effectiveness of the Company’s risk
management and internal control systems on page 50.
EXTERNAL AUDITOR
KPMG have expressed their willingness to continue as the Company’s auditor. As outlined in the Audit and Risk Committee report on page
51, resolutions proposing their reappointment and to authorise the Audit and Risk Committee to determine their remuneration will be
proposed at the 2016 AGM.
By order of the Board
D Ari Buchler
Company Secretary
25 May 2016
45
NOMINATION COMMITTEE REPORT
The Nomination Committee is chaired by Peter Gyenes, and its other members are Paul Walker, Sandra Bergeron and Edwin Gillis, who are
independent Non-Executive Directors, and Roy Mackenzie, who is a Non-Executive Director.
ROLE AND RESPONSIBILITIES
The Committee assists the Board in discharging its responsibilities relating to the composition and make-up of the Board and any Committees
of the Board. It is also responsible for periodically reviewing the Board’s structure and identifying potential candidates to be appointed as
Directors or Committee members as the need may arise. The Committee is responsible for evaluating the balance of skills, knowledge and
experience as well as the size, structure and composition of the Board and Committees of the Board, retirements and appointments of
additional and replacement Directors and Committee members and makes appropriate recommendations to the Board on such matters.
A copy of the Committee terms of reference is available on the Company’s website.
MEETINGS DURING THE YEAR
The Committee met once in the period from listing to the financial year end. At that meeting the Committee:
• reviewed the terms of reference;
• requested a review of the succession plans for senior management be undertaken to ensure a pipeline of talent was maintained for
the continued success of the Company;
• considered the annual time requirement of Non-Executive Directors;
• reviewed the composition of the Board and its Committees, including the Chairmanship of each Committee; and
• recommended a draft Diversity Policy to the Board for approval.
PROCESS FOR BOARD APPOINTMENTS
When the Company decides to appoint a Non-Executive Director:
• The Committee Chairman, or search consultants if engaged, will submit a short-list of candidates to members of the Committee
and the Chief Executive Officer for them to review and enable them to suggest other candidates.
• The Committee Chairman, one other Committee member and the Chief Executive Officer will then meet short-listed candidates
selected by the Committee. If the Chairman wishes to proceed with the selection process, the candidate will then be invited to meet
all members of the Committee.
• After meeting the candidate the Committee will decide whether to recommend the candidate to the Board for appointment.
When the Company decides to appoint an Executive Director:
• The Committee Chairman and the Chief Executive Officer or, if engaged, search consultants, will submit a short-list of one or more
candidates to the Committee.
• Some or all of the Committee members will then meet the candidates selected for interview.
• The Committee’s assessments will be reviewed with the Chairman of the Board and the Chief Executive Officer, following which a
candidate may be recommended to the Board for appointment.
DIVERSITY
At the meeting held in November 2015 the Committee requested that the Company’s Diversity Policy be formally codified, and it was
subsequently approved by the Board in February 2016. The policy acknowledges the importance of diversity, including gender diversity,
for the Group and the role the Committee will perform in increasing diversity throughout the Group.
The Board has established the following measurable objectives for achieving diversity on the Board:
• All Board appointments will be made on merit, in the context of the skills, knowledge and experience that are needed for the Board to be effective.
• Ensure long lists of potential Non-Executive Directors include diverse candidates of appropriate merit.
• Encourage the emergence of female candidates and candidates of diverse backgrounds among the non-board senior management talent pool.
• Only engage executive search firms who have signed up to the voluntary Code of Conduct on gender diversity and best practice.
Progress against all of these objectives is ongoing and the Committee will report more fully in the next Annual Report.
Peter Gyenes
Nomination Committee Chairman
25 May 2016
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 46
GOVERNANCE ► AUDIT AND RISK COMMITTEE REPORT
AUDIT AND RISK COMMITTEE REPORT
I am pleased to present our first report on the role and activities of the Audit and Risk Committee following its formation in June 2015 in
preparation for Initial Public Offering of the Company's shares.
MEMBERSHIP OF THE COMMITTEE
The Committee was chaired by me throughout the year, with Sandra Bergeron and Paul Walker being the other members of the Committee.
All members and the Chair are Independent Non-Executive Directors. All of the members of the Committee have extensive experience of
the technology industry and I am the Independent Non-Executive Director with recent, relevant, financial experience. During the year-
ended 31 March 2016, the Committee met four times. The table below summarises the attendance of members at committee meetings:
Edwin Gillis
Sandra Bergeron
Paul Walker
Eligible to attend
Attended
4
4
4
4
4
4
Only members of the Committee have the right to attend meetings, though the Committee may invite others to attend if it is considered
appropriate or necessary. The external auditors are invited to attend meetings of the Committee on a regular basis.
ROLES AND ACTIVITIES
The Committee is responsible for monitoring the integrity of the Group’s financial statements, including its annual and half-yearly
reports, interim management statements, preliminary result announcements and any other formal announcements relating to its
financial performance prior to release. The Committee oversees the relationship between the Group and its external auditors and makes
recommendations to the Board on their appointment. In addition, the Committee monitors and reviews the external auditor’s independence
and objectivity and the effectiveness of the audit process, taking into account relevant legal, professional and regulatory requirements.
The terms of reference of the Committee also includes the following responsibilities:
• to review and challenge significant accounting and treasury policies, the clarity and completeness of disclosures in financial reports and
significant estimates and judgements;
• review the findings of the audit with the external auditors;
• where requested by the Board, to review the content of the annual report and accounts and advise the Board on whether, taken as a
whole, it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position
and performance, business model and strategy;
• monitoring and reviewing the effectiveness of the Group’s internal audit function and review and assess the annual internal audit plan;
• to monitor and keep under review the adequacy and effectiveness of the Group’s internal financial controls and internal control and risk
management systems, including a review of the Group’s risk management framework; and
• to review the Group’s policies and procedures for preventing and detecting fraud, its systems and controls for preventing bribery, its
Code of Conduct and its policies for ensuring that the Group complies with relevant regulatory and legal requirements.
The full terms of reference of the Committee can be found on the Company’s website at investors.sophos.com.
During the year-ended 31 March 2016 the Committee:
• reviewed and approved the year-end and interim results and accounts;
• reviewed and approved the quarterly trading statements issued during the year;
• met with the external auditors to review and approve the annual audit plan and receive their findings and reports of the annual audit
and interim review;
• approved the appointment of Ernst & Young LLP (“EY”) as outsourced internal audit providers and the manner in which they would
operate with the Group, including a direct reporting line to the Committee to ensure their independence is maintained;
• reviewed and approved the internal audit plan for the year as well as longer-term objectives and received the results of the work
performed by internal audit; and
• received, reviewed and challenged the half-year and year-end accounting papers prepared by management covering significant
accounting policies, significant transactions, judgemental areas, estimates, disclosures and going concern.
47
SIGNIFICANT ISSUES
The issues considered by the Committee that are deemed to be significant to the Group are set out below.
Revenue recognition
Goodwill and intangibles carrying value
Reporting requirements and presentation
The Group generates revenue from sales of subscriptions, hardware and the
rendering of enhanced support or professional services in connection with
the Group’s Network, Enduser and Cloud-based products. There is a risk
therefore that revenue is inappropriately recognised if revenue is incorrectly
apportioned to a product or service.
A detailed revenue recognition policy is in place and includes rules for
applying fair value to components of multiple element arrangements and
timing of recognition dependent upon the individual nature of the goods or
services sold. Management also provide to the Committee at half-year and
year-end an accounting paper on revenue recognition and a commentary
on the revenue recognised. The Group’s external auditors have reported
to the Committee that they have reviewed the revenue recognition policy
and processes as well as performing detailed testing of revenue recognition
across the year and found revenue to be appropriately accounted for.
As a result of the above and after providing appropriate challenge the
Committee has concluded that the revenue recognition for the Group
is appropriate.
At 31 March 2016, the Group had on its balance sheet goodwill of $716.1
million and intangibles of $40.5 million that has primarily arisen as a
consequence of acquisitions. Management perform impairment reviews
annually, or more frequently if there is an indication of impairment, based
on the Group’s Cash-Generating Units (“CGUs”). The cash flow forecasts
used for each CGU are based on the latest Board-approved long-term
forecasts with an assumed long-term growth rate after the five year period.
Management prepare an accounting paper for review by the Committee that
details the methodology applied, key assumptions used and the impact of
sensitivity analysis.
Having considered the impairment reviews performed, the Committee is
satisfied that the carrying value of goodwill and intangibles at 31 March
2016 is appropriate.
Following the Initial Public Offering of the Company's shares in July 2015,
a number of disclosure and regulatory requirements became relevant for
the first time in this Annual Report as the Company transitioned into life as
a public company. In addition the Group makes use of certain non-GAAP
measures and discloses certain items separately within the consolidated
statement of profit or loss as exceptional items which, in the opinion of the
Directors, enables a better understanding of the performance of the Group.
The use of these measures and disclosures is judgemental in nature
The Committee has received papers during the year from management and
advisors highlighting key new disclosure requirements and has discussed
with both management and advisors the use of non-GAAP measures and
the classification of certain income statement items as exceptional or
underlying. The Committee has also reviewed the disclosures made in this
annual report and has discussed them with the external auditors; so as to
ensure that it is comfortable with the content and presentation made in the
annual report.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 48
GOVERNANCE ► AUDIT AND RISK COMMITTEE REPORT
AUDIT AND RISK COMMITTEE REPORT CONTINUED
INTERNAL CONTROLS AND RISK ENVIRONMENT
Whilst the Board is ultimately responsible for the establishment, monitoring and review of effectiveness of internal control systems
throughout the Group, each of the individual functional leaders drive the process through which risks and uncertainties are identified. The
Board recognises that rigorous internal control systems are critical to managing the risks in achieving its strategic objectives. The Board
further acknowledges that these systems are designed to manage rather than eliminate risk in the Group.
The formal process for identifying, evaluating and managing significant risks faced by the Group is overseen by the Risk and Compliance
Committee, in association with the work performed by the Internal Audit function. The Risk and Compliance Committee have designed the
risk framework in order to capture and evaluate control weaknesses and risks facing the business. Where the Board defines an identified
risk as significant, procedures exist to ensure that necessary action is taken to rectify or mitigate as appropriate.
The aforementioned functions provide additional assurance to the Audit and Risk Committee who have ultimate responsibility for the
oversight and review of the adequacy and effectiveness of the Group’s systems of internal controls.
The external auditors provide a supplementary, independent and autonomous perspective on those areas of the internal control system
which they assess in the course of their work. Their findings are regularly reported to both the Audit and Risk Committee and the Board.
Key elements of the control environment are:
• annual budgets and strategic plans prepared for all business units;
• monitoring of performance against budget and forecast with reporting to the Board on a regular basis;
• monthly review of detailed key performance indicators;
• all contracts are reviewed at a level of detail appropriate to the size and complexity of the contract;
• timely reconciliations are performed for all significant balance sheet accounts;
• clearly defined organisational structure and authorisation lines;
• a Risk and Compliance Committee (formed during the financial year), reviews key business processes, controls and their effectiveness,
as well as identifying, assessing and managing significant control issues; and
• the Audit and Risk Committee, which approves audit plans and assesses the overall appropriateness of the Group’s internal
control environment.
The preparation and issue of financial reports is managed by the Group Finance department, as delegated by the Board. The Group’s
financial reporting process is controlled using the Group accounting policies and reporting systems. The Group Finance department
supports all reporting entities with guidance on the preparation of financial information. In the current year, this process was supported
by the Financial Control and Group & Commercial Finance functions. Each legal entity has a Finance Director or Controller who has
responsibility and accountability for providing information which is in accordance with agreed policies. The financial information for each
entity is subject to a review at reporting entity and Group level by the Chief Financial Officer alongside the Vice Presidents of both Financial
Control and Group & Commercial Finance. The Annual Report is reviewed by the Audit and Risk Committee in advance of presentation
to the Board for approval. Additionally, during the current year, the Finance Director or Controller of each reporting entity completed a
quarterly Financial Reporting Review Questionnaire, which was used to identify control strengths and weaknesses across all financial areas
with any weaknesses being subsequently addressed.
The Group also maintains a Consolidated Risk Register which sets out the nature and extent of the significant risks facing the Group. Each of
the risks is prioritised according to likelihood and impact and the register ensures that all risks identified are either mitigated or managed by
an appropriate owner.
The Directors, through the use of appropriate procedures, systems and the employment of competent personnel, have ensured that
measures are in place to secure compliance with the Company’s obligation to keep adequate accounting records. The accounting records
are kept at the registered office of the Company.
49
HOW WE MANAGE RISK
To enhance effective governance and risk management oversight, the Group has, in this financial year, established an additional layer of risk
management in a Risk and Compliance Committee. This Committee of senior leaders is authorised by the Board to provide an additional
level of assurance to the Audit and Risk Committee in overseeing risk management and internal control activities. It also provides the
business with a framework for risk management, upward reporting of significant risks and policies and procedures.
On a quarterly basis, the Risk and Compliance Committee reviews the status on risk exposures and risk management throughout the
business within the pre-agreed risk management framework. The risk management framework is designed to identify, evaluate, analyse
and mitigate or manage risks appropriate to the achievement of the business strategy.
Identify
Re-evaluate
Risk
Management
Process
Analyse &
evaluate
Develop &
implement
Risk
Management
Plan
The Group takes a two-pronged approach to identifying risks:
1) a bottom-up approach at the business function level; where risks are managed at the operational level with an appropriately defined
escalation process in place for those risks rated as high; and
2) a top-down approach at the senior leadership team level; where the principal risks and uncertainties are identified and managed.
A series of risk identification approaches are used such as risk identification and horizon scanning workshops, interviews and inclusion
of risk discussions into team meetings.
All identified risks are assessed against a pre-defined scoring matrix and prioritised accordingly. Any risks identified in the bottom-up
approach deemed to be rated as higher risk are escalated in line with pre-defined escalation procedures for further evaluation. The
Group's risk appetite is considered by the Board and evaluated to ensure appropriateness of risk management and mitigation.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 50
GOVERNANCE ► AUDIT AND RISK COMMITTEE REPORT
AUDIT AND RISK COMMITTEE REPORT CONTINUED
Following the identification of risks, a risk management plan is developed and implemented; this is managed by the assigned risk owner
with regular feedback to the Risk and Compliance Committee.
Regular reporting of risk management ensures each risk is re-evaluated on a timely basis to ensure that all relevant risks are identified and
managed appropriately and that the Board is focused on the principal risks identified.
Additionally, during the current year subsequent to the Initial Public Offering of the Company’s shares, the Group has assessed the need for
an Internal Audit function and has concluded that the size and complexity of the Group deems this to be necessary. Accordingly, the Group
has employed an externally appointed Internal Audit team. They are responsible for the review and audit of controls within the business
and report to management on the appropriateness and effectiveness of those controls.
The current year Internal Audit plan was developed through a review of formal risk assessments together with consideration of the Group’s
key business processes and functions that could be subject to audit. A similar approach will be employed in relation to the Internal Audit
plan for the coming year. The principal objectives of the Internal Audit plan for both years are:
• to provide confidence that existing and emerging key risks are being managed effectively; and
• to confirm that controls over core business functions and processes are operating as intended.
During the current year, an audit report was issued by the Internal Audit function and reviewed by the Audit and Risk Committee and
the Board. Internal Audit recommendations are closely monitored and a summary of the status of the implementation of Internal Audit
recommendations is made quarterly to the Audit and Risk Committee.
WHISTLE-BLOWING
A whistleblowing policy is in place in the Group enabling employees to confidentially report matters of concern directly to Non-Executive
Directors. The Audit and Risk Committee receives details of any matters raised.
INTERNAL AUDIT
During the financial year, the Group appointed an outsourced Internal Audit function. This function is provided by EY. The Group’s Chief
Financial Officer provides oversight and co-ordination of Internal Audit with support from the Risk and Compliance Committee. In order to
ensure independence, the Internal Audit function has a direct reporting line to the Audit and Risk Committee and its Chairman.
The nature and scope of the Internal Audit plan, developed by EY, was approved by the Audit and Risk Committee, with any subsequent
changes to the plan requiring further approval. The results of the audits were assessed alongside responses from management. Any
outcomes graded as requiring improvement were considered in detail by the Audit and Risk Committee along with the appropriateness of
mitigation plans to resolve the issues identified.
At each meeting, the Audit and Risk Committee received audit reports and updates from the Internal Auditors, in order to ascertain
progress in completing the internal audit plan and to review results of the audits.
The Audit and Risk Committee monitored and reviewed the scope and results of the Internal Auditor's activities as well as its effectiveness
during the financial year.
REVIEW OF EFFECTIVENESS
The Board, through the Audit and Risk Committee, has reviewed and considered the effectiveness of the risk management and system of
internal controls in operation across the Group.
The main objectives of the Group’s internal control systems are:
• to ensure its aims and objectives are met;
• to ensure adherence to management policies;
• to ensure compliance with statutory requirements;
• to safeguard assets; and
• to ensure the relevance, reliability and integrity of information, so ensuring as far as possible the completeness and accuracy of records.
Any system of control can only ever provide reasonable and not absolute assurance that control weaknesses or irregularities do not exist,
or that there is no risk of material errors, losses, fraud, or breaches of laws or regulations. Accordingly, the Group is continually seeking to
improve the effectiveness of its systems of internal control.
51
The Audit and Risk Committee has concluded that the Group’s risk management and system of internal controls is deemed effective.
This is informed by a number of sources:
• the audit work undertaken by the Internal Audit function during this financial year;
• reports issued by the Group’s external auditors; and
• risk management procedures managed and overseen by the Risk and Compliance Committee.
A detailed review of the Group’s management of each principal risk or uncertainty is explained on pages 30 to 33.
EXTERNAL AUDITOR
The Audit and Risk Committee reviews and makes recommendations with regard to the appointment and reappointment of the external
auditors. In making these recommendations, consideration is given to auditor effectiveness and independence, partner rotation and
any other factors that may impact the reappointment of the external auditors. There are no contractual restrictions on the choice of
external auditors.
The Group’s auditors, KPMG LLP, were appointed for the year-ended 31 March 2001 with the audit engagement partner rotation last
occurring for the year-ended 31 March 2011. As the Group listed during the current financial year, in accordance with Ethical Standard 3,
the audit engagement partner may continue to serve for not more than two years after the listing occurred with a maximum term of seven
years in total.
The Audit and Risk Committee is confident that the effectiveness and independence of the external auditors is not impaired in any way.
The Committee will continue to assess the effectiveness and independence of the external auditors. In doing so, they will consider a formal
tender process in accordance with the provisions of the UK Corporate Governance Code.
The external auditors may perform certain non-audit services for the Group, any such non-audit services require pre-approval by the Audit
and Risk Committee and are only permitted to the extent allowed by relevant laws and regulations.
During the year-ended 31 March 2016 the non-audit services provided by KPMG primarily related to their role as reporting accountant for
the Initial Public Offering of the Group’s shares and as a result their non-audit fees exceeded their audit fees for the year. Excluding fees
associated with the Initial Public Offering, the non-audit fees were 47 percent of the audit and audit-related fees for the year compared
to 27 percent for the year-ended 31 March 2015. Except for services related to the Initial Public Offering the non-audit services provided
primarily related to tax compliance activities. Full details of auditor's remuneration is shown in note 9 to the Financial Statements.
REVIEW OF EFFECTIVENESS OF EXTERNAL AUDITORS
An important role of the Committee is to assess the effectiveness of the external audit process. In performing this assessment
the Committee:
• reviewed the annual audit plan and considered the auditors performance against that plan along with any variations to it;
• met with the audit engagement partner to review the audit findings and responses received to questions raised by the Committee;
• held regular meetings with the audit engagement partner, including with the absence of executive management;
• considered their length of tenure;
• reviewed the nature and magnitude of non-audit services provided; and
• reviewed the external auditors own independence confirmation presented to the Committee.
Based on the assessment performed, the Committee has recommended to the Board that a resolution to reappoint KPMG LLP be
proposed at the next Annual General Meeting.
Edwin Gillis
Chairman of the Audit and Risk Committee
25 May 2016
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 52
GOVERNANCE ► REMUNERATION COMMITTEE REPORT
ANNUAL STATEMENT OF THE REMUNERATION COMMITTEE CHAIRMAN
As Chairman of Sophos’ Remuneration Committee, I am pleased to present the Directors’ Remuneration Report for the year-ended
31 March 2016, our first as a UK-listed company, which has been prepared by the Committee and approved by the Board. In line with
the UK reporting regulations, this report is divided into three sections:
• The Annual Statement by the Remuneration Committee Chairman;
• The Directors’ Remuneration Policy, which details Sophos’ remuneration policies and their link to Group strategy, as well as projected
pay outcomes under various performance scenarios; and
• The Annual Report on Remuneration, which focuses on our remuneration arrangements and incentive outcomes for the year under
review and how the Committee intends to implement the Remuneration Policy in FY17
We will be seeking shareholder approval for both our Remuneration Policy and the remuneration report at the Annual General Meeting
("AGM") on 14 September 2016.
REMUNERATION POLICY FOR FY17 AND FUTURE YEARS
Sophos was listed on the London Stock Exchange in July 2015. In advance of its listing, the Sophos Remuneration Committee reviewed the
Company’s remuneration structure to ensure it aligns with the forward looking strategy, is able to motivate and retain the executive team
over the next key phase in the Company’s development, and to ensure it takes into account market practice and best practice for a listed
company. The remuneration structure for Executive Directors, which applies from the date of the AGM, being 14 September 2016, is set
out in the Remuneration Policy on pages 53 to 59.
Our policy is broadly unchanged from that outlined in our IPO prospectus, and our remuneration arrangements reflect that we compete
for talent in a competitive market against other high-technology US West Coast companies. The Committee has also carefully considered
the expectations of UK institutional shareholders in formulating our policy and has included malus and clawback provisions in our incentive
schemes to align with developing best practice. The overarching principles of our Remuneration Policy are to provide a competitive
package of fixed and variable pay that will enable the Group to ensure it can attract and retain executives with the right skills and
experience to drive the long-term success of the Company. The Committee believes that our remuneration arrangements can achieve
these goals through the application of stretching performance targets and strong shareholder alignment through our equity incentives.
Information on the implementation of the policy for FY17 is included in the Annual Report on Remuneration on pages 59 to 65.
REMUNERATION DECISIONS IN FY16
Sophos achieved strong results in the year-ended 31 March 2016, with billings of $534.9 million and cash EBITDA of $120.9 million. The
activities of the Committee and key decisions in FY16 are set out on page 59.
As a result, Kris Hagerman and Nick Bray will receive bonuses of 116 percent and 92 percent of salary, respectively. Following a review of
Group performance and their personal contribution the salaries of the Executive Directors will be increased by 3 percent, effective from 1
July 2016. This is in line with the average increase expected for the wider employee population (c.3 percent).
As foreshadowed in the future remuneration policy in our prospectus, in August 2015, Kris Hagerman and Nick Bray were granted awards
under the Sophos Group Long-Term Incentive Plan 2015 ("LTIP") in the form of restricted share units vesting over four years subject to
continued employment only and in the form of performance share units vesting over three years subject to achievement of annual billings
and cash EBITDA targets. They also received awards related to the IPO in the form of restricted share units vesting over five years subject to
continued employment only, as detailed in the prospectus issued as part of the IPO.
The Committee will continue to monitor market trends and developments over the next year in order to assess ongoing relevance for the
Company’s remuneration practices. The Committee welcomes feedback from our shareholders as we remain committed to an open and
transparent dialogue, and hope to receive your support at the forthcoming AGM.
On behalf of the Remuneration Committee
Paul Walker
Chairman of the Remuneration Committee
25 May 2016
This report, prepared by the Remuneration Committee (‘the Committee’) on behalf of the Board, takes account of the UK Corporate Governance Code and the latest Investment
Association, ISS and PLSA guidelines, and has been prepared in accordance with the provisions of the Act, the Listing Rules of the Financial Conduct Authority and the Large and
Medium-Sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The Act requires the Auditor to report to the Company’s Shareholders on the
audited information within this report and to state whether in their opinion those parts of the report have been prepared in accordance with the Act. The Auditor’s opinion is
set out on pages 71 to 74 and those aspects of the report that have been subject to audit are clearly marked.
53
DIRECTORS’ REMUNERATION POLICY
This section describes the Group’s proposed remuneration policy for Directors which, if approved, will apply for up to three years from the
date of the Annual General Meeting.
The overarching principles of our remuneration policy are to provide a competitive package of fixed and variable pay that will enable the
Group to ensure it has executives with the right skills and experience to drive the success of the Company, and that their remuneration is
linked to shareholder interests and the Company’s long-term success. Our remuneration philosophy is:
• to promote the long-term success of the Company, with stretching performance targets which are rigorously applied
• to provide appropriate alignment between the Company’s strategic goals, shareholder returns and executive reward
• to have a competitive mix of base salary and short and long-term incentives, with an appropriate proportion of the package determined
by stretching targets linked to the Company’s performance
Executive Directors’ fixed and variable remuneration arrangements have been determined taking into account:
• the role, experience in the role, and performance of the Executive Director
• the location in which the Executive Director is working
• remuneration arrangements at UK listed companies of a similar size and complexity
• remuneration arrangements at US high-technology companies of a similar size and complexity, including companies with which the
Company competes for talent
• best practice guidelines for UK listed companies set by institutional investor bodies
FUTURE POLICY TABLE
The key components of Executive Directors’ remuneration are as follows:
Purpose and link to strategy Operation
Maximum opportunity
Performance metrics
Fixed pay
Base salary
To attract and retain
talent of the right calibre
and with the ability to
contribute to strategy, by
ensuring base salaries are
competitive in the relevant
talent market.
Base salaries are reviewed
annually, with reference
to individual performance,
Group performance, market
competitiveness, salary increases
across the Group and the position
holder’s experience, competence
and criticality to the business.
Executive Directors’ salary
increases will normally be in
line with those for the wider
employee population. However,
higher salary increases may be
made where there is a change
in role or responsibilities or a
significant market misalignment.
Individual and Group performance
is taken into account when
determining appropriate
salary levels.
Any increases are generally effective
from 1 July.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 54
GOVERNANCE ► DIRECTORS’ REMUNERATION POLICY
DIRECTORS’ REMUNERATION POLICY CONTINUED
Purpose and link to strategy Operation
Maximum opportunity
Performance metrics
Pension
Provide post-retirement
benefits for participants in
a cost-efficient manner.
Pension contributions are provided,
with a choice of funding vehicles:
US 401(k) savings plan for all US
employees or group personal
pension scheme.
Benefits
To provide competitive
benefits for each role.
Variable pay
Annual bonus
Aims to focus executives
on achieving stretching
financial targets relevant
to the business priorities
for the financial period.
Benefits currently include the
provision of medical and dental
insurance, life and disability
insurance, travel insurance,
personal tax return preparation,
and car allowance.
Reasonable relocation, travel
and subsistence allowances (and,
in certain circumstances, cash
allowances in respect of the
associated tax charge) and other
benefits may be provided based on
individual circumstances.
Performance measures and targets are
set prior to or shortly after the start of
the relevant financial period.
At the end of the financial period,
the Remuneration Committee will
determine the extent to which the
targets have been achieved.
Awards are typically delivered in
cash, however the Committee has
discretion to defer awards in cash
or in shares.
The Committee has discretion to
reduce the bonus in the event of
serious financial misstatement or
misconduct. In extreme cases of
misconduct, the Committee may
claw back annual bonus payments
previously made.
The CEO currently receives a
matching contribution of up to
3 percent of salary under his
US 401(k) savings plan, subject
to the applicable maximum
contribution (US$24,000
for FY16).
The CFO receives up
to 5 percent of salary as
a contribution to a group
personal pension scheme.
Other than in exceptional cases
(such as to replace existing
arrangements for new recruits)
the Committee does not
anticipate pension benefits as
being at a cost to the Company
that would exceed 20 percent of
base salary.
There is no overall maximum
value set out for benefits.
They are set at a level that is
comparable to market practice
and appropriate for individual
and Company circumstances.
The Committee retains the
discretion to amend benefits
in exceptional circumstances
or in circumstances where
factors outside of the Group’s
control have materially
changed (e.g. increases in
insurance premiums).
The maximum bonus
opportunity for Executive
Directors will be up to 200
percent of salary.
Up to 50 percent of maximum
will vest for target performance.
The Committee may award up
to 12.5 percent of maximum for
threshold performance.
None.
None.
The annual bonus will be based on
achievement of stretching financial
targets (e.g. billings, cash EBITDA)
and personal performance.
Personal performance will have a
weighting of no more than a third.
Details of the measures used
during the period under review are
set out on page 60.
The Committee has discretion
to adjust the formulaic bonus
outcome downwards (or upwards
with shareholder consultation)
within the limits of the plan, to
ensure alignment of pay with
the underlying performance of
the business.
55
Purpose and link to strategy Operation
Maximum opportunity
Performance metrics
Long-term incentive plan (‘LTIP’)
Aligns the interests
of executives with
shareholders in growing
the value of the business
over the long-term.
The plan provides for annual awards
of restricted shares, options and
performance shares to eligible
participants. Other than for
restricted shares, vesting is based
on three-year performance.
The Committee has discretion to
reduce any unvested long-term
incentive awards, or to vary the
opportunities for future awards,
in the case of serious financial
misstatement or misconduct. In
extreme cases of misconduct, the
Committee may claw back vested
long-term incentive awards.
Participants are eligible to receive
cash or shares equal to the value
of dividends that would have been
paid over the vesting period on
shares that vest.
Other Arrangements
Shareholding guidelines
To align directors’ interests
with the long-term
interests of shareholders.
Executive Directors are required to
retain a minimum shareholding in the
Company, and are required to retain
at least 50 percent of shares vesting
(after tax) under the LTIP until the
shareholding guideline has been met.
Further details of the level of
shareholding guideline currently in
operation are set out on page 64.
Awards may be made up to a
maximum of 500 percent of
salary in normal circumstances
and up to 750 percent in
exceptional circumstances
(including, but not limited
to, recruiting an individual).
The award size is reviewed in
advance of grant.
No performance-based awards
will vest below threshold. Up
to 25 percent of each element
will vest for achievement of
threshold performance under
each metric, then increase
on a straight-line basis to
full vesting for achieving
stretch performance.
It is anticipated that no more
than 25 percent of aggregate
awards in any one year will
be over restricted shares
or options.
Performance-based awards will
vest on achievement of financial
performance measures, measured
over a three-year performance
period, which may include profit
measures and billings.
Performance-based awards: profit
will receive a weighting of at
least 50%. Other measures may
be considered in future years to
help capture the strategic goals of
the business and may be used in
conjunction with these metrics.
Time-based awards: restricted
shares will begin vesting after one
year, and thereafter vest in equal
instalments on a quarterly basis until
the fourth anniversary of grant based
on continued employment only.
The Committee has discretion to
adjust the formulaic LTIP award
downwards (or upwards with
shareholder consultation), within
the limits of the plan, to ensure
alignment of pay with the underlying
performance of the business.
n/a
n/a
None
None
All-employee schemes
To encourage share
ownership across the
workforce.
SAYE and ESPP schemes are
operated by the Company for
eligible employees, in which
Executive Directors may participate
on the same terms.
Participation is capped at the
prevailing approved limit at the
time eligible employees are
invited to participate, or such
lower limit as determined by the
Remuneration Committee.
Non-Executive Directors’ fees
To reflect the time
commitment in preparing
for and attending
meetings, the duties and
responsibilities of the
role and the contribution
expected from the Non-
Executive Directors.
Annual fee for Chairman.
Annual base fee for Non-Executive
Directors.
Additional fees paid to the
Chairmen of Board Committees.
Additional fees may be paid if
there is a material increase in time
commitment required.
Non-Executive Directors do not
participate in any incentive schemes,
nor do they receive any pension
or benefits (other than nominal
travel expenses and, in certain
circumstances, cash allowances in
respect of the associated tax charge).
Any increases to Non-Executive
Director fees will be considered
as a result of the outcome of a
review process and taking into
account wider market factors,
e.g. inflation. There is no
prescribed individual
maximum fee.
Further details are set out on
page 62.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 56
GOVERNANCE ► DIRECTORS’ REMUNERATION POLICY
DIRECTORS’ REMUNERATION POLICY CONTINUED
NOTES TO THE POLICY TABLE
Performance measure selection and approach to target setting
Cash EBITDA and billings are considered to be the best measures of the Group’s annual performance given our current size and stage
of growth, and will continue to determine annual bonus vesting. The Committee will keep this under review, and may select alternative
measures as the Group evolves and strategic priorities change.
Annual bonus targets will be selected prior to, or shortly after, the start of the financial period. Financial targets will be calibrated with
reference to the Group’s budget for the upcoming financial period and the Group’s performance over the prior financial period.
Threshold and stretch performance levels for performance-based awards under the LTIP will be set at the start of the three-year
performance period. The Committee aims to set stretching but achievable targets, taking account of a range of reference points, including
market consensus and the Group’s strategic plan.
Differences in remuneration policy operated for other employees
Other employee remuneration has the same components as set out in the policy, being base salary, annual bonus, long-term incentive
participation, pension, life assurance and benefit provision. Annual bonus and long-term incentive arrangements share a similar structure
and pay-out arrangement, although the mix between performance-based and time-based awards, and the maximum award, varies by
seniority and role.
Other
In addition to the above elements of remuneration, any commitment made prior to, but due to be fulfilled after, the approval and
implementation of the policy detailed in this report will be honoured, this includes awards made to Directors (both Executive and Non-
Executive) prior to IPO.
PERFORMANCE SCENARIOS
The graphs below provide estimates of the potential future reward opportunities for Executive Directors, and the potential split between
the different elements of remuneration under three different performance scenarios; ‘Minimum’, ‘Target’ and ‘Maximum’.
The potential reward opportunities illustrated are based on the policy which will apply, if approved, from the AGM on 14 September 2016,
applied to the base salaries in force at 1 April 2016. The projected value of LTIP amounts excludes the impact of share price movement or
dividend accrual. The assumptions made in illustrating potential reward opportunities are shown in the table below:
Performance scenario
Fixed pay
Annual bonus
LTIP (performance-
based awards)
LTIP (time-based awards)
Minimum
Target
Maximum
Salary as at most
recent review date.
Benefits and pension
value as for the most
recent financial period.
No annual bonus payable. Threshold not achieved
On target annual
bonus payable
Performance warrants
threshold vesting
Full vesting
Maximum annual bonus
payable
Performance warrants
full vesting
Chief Executive Officer
$000
Maximum
13%
25%
62%
Chief Financial Officer
£000
Maximum
5,449
17%
24%
59%
1,819
Target
Target
25%
25%
50%
2,732
32%
23%
45%
953
Minimum
100%
693
Minimum
100%
303
Fixed pay
Annual Bonus
LTIP
57
APPROACH TO REMUNERATION FOR NEW EXECUTIVE DIRECTOR APPOINTMENTS
In the cases of hiring or appointing a new Executive Director, the Remuneration Committee may make use of all the existing components of
remuneration, as follows:
Component
Base salary
Pension
Benefits
Annual bonus
LTIP
Approach
Maximum opportunity
The base salaries of new appointees will be determined based on the experience and skills
of the individual, relevant market data and their current basic salary.
n/a
Membership of pension scheme or salary supplement on a similar basis to other
executives, as described in the policy table. Other than in exceptional cases (such as
to replace existing arrangements for new recruits) the Committee does not anticipate
pension benefits as being at a cost to the Company that would exceed 20 percent of
base salary.
In line with
Policy Table.
New appointees will be eligible to receive benefits in line with the policy which may
include (but are not limited to) car allowance, medical insurance and life insurance.
n/a
The structure described in the policy table will apply to new appointees with the relevant
maximum being pro-rated to reflect the proportion of employment over the year.
200 percent of
base salary.
New appointees will be granted awards under the LTIP on similar terms as other
executives, as described in the policy table.
Up to 750 percent
of base salary.
All-employee
schemes
New appointees may be eligible to participate in all-employee schemes on the same basis
as other employees.
In line with
Policy Table.
In determining appropriate remuneration for a new Executive Director, the Committee will take into consideration all relevant factors to
ensure that arrangements are in the best interests of the Group and its shareholders. In addition to the remuneration arrangements set
out above, the Committee may make an award in respect of a new appointment to ‘buy out’ incentive arrangements forfeited on leaving
a previous employer, using Listing Rule 9.4.2 R if necessary. In doing so, the Committee will take account of relevant factors including any
performance conditions attached to these awards, the likelihood of those conditions being met and the proportion of the vesting period
remaining. The fair value of any buyout will not exceed that of the award being foregone.
In cases of appointing a new Executive Director by way of internal promotion, the approach will be consistent with the policy for external
appointees detailed above. Where an individual has contractual commitments made prior to their promotion to Board level, the Group will
continue to honour these arrangements. Incentive opportunities for below Board employees are no higher than for Executive Directors,
but measures may vary.
In recruiting a new Non-Executive Director, the Committee will use the policy as set out in the table on page 55.
SERVICE CONTRACTS AND EXIT PAYMENT POLICY
Non-Executive Directors
The appointments of each of the Chairman and the Non-Executive Directors are for a fixed term of three years, commencing on 11 June
2015 and subject to annual re-election by the Company at the AGM. Their letters of appointment set out the terms of their appointment
and are available for inspection upon request. They are not eligible to participate in the annual bonus, nor do they receive any additional
pension or benefits (other than nominal travel expenses) on top of the fees disclosed on page 62. Non-Executive Directors appointment
may be terminated at any time upon written notice or in accordance with the articles and receive no compensation on termination.
Role
Chairman
Appointment date
11 June 2015
Senior Independent Director
11 June 2015
11 June 2015
11 June 2015
Term of appointment
Three years
Three years
Three years
Three years
Non-Executive Director
Peter Gyenes
Paul Walker
Steve Munford
Sandra Bergeron
Edwin Gillis
Salim Nathoo
Roy Mackenzie
Non-Executive Director
Independent
Non-Executive Director
Independent
Non-Executive Director
Non-Executive Director
Non-Executive Director
11 June 2015
Three years
11 June 2015
11 June 2015
Three years
Three years
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 58
GOVERNANCE ► DIRECTORS’ REMUNERATION POLICY
DIRECTORS’ REMUNERATION POLICY CONTINUED
Executive Directors
On 11 June 2015, each of the Executive Directors entered into a service agreement with the Company.
Executive Director
Kris Hagerman
Nick Bray
Role
Chief Executive Officer
Chief Financial Officer
Contract date
11 June 2015
11 June 2015
Notice period
12 months
12 months
The Employer is entitled to terminate an Executive Director’s employment by payment of a cash sum in lieu of notice, equal to (i) the basic
salary that would have been payable, and (ii) the cost that would have been incurred in providing the Executive Director with medical
insurance benefits for any unexpired portion of the notice period (the ‘‘Payment in Lieu’’). The Company can alternatively choose to
continue providing the medical insurance benefits under item (ii) instead of paying a cash sum representing their cost. The Payment in Lieu
will be paid in monthly instalments over the notice period.
In specified circumstances (not involving a change of control, in which case the severance payment applicable is as described below), each
Executive Director is entitled to terminate his employment without notice and receive a severance payment. The severance payment will
be equal to the Payment in Lieu and paid in a single lump sum. The specified circumstances are where either: (a) the Employer terminates
or gives notice to terminate the Executive Director’s employment without cause; or (b) the Executive Director terminates his employment
in response to: a material diminution of his authority, duties, responsibilities or status in a manner inconsistent with his service agreement;
a breach of a fundamental term of his service agreement; a material reduction in his annual basic salary or target bonus opportunity; or
being required to relocate his place of work beyond a specified distance (each a ‘‘Good Leaver Reason’’).
Each Executive Director is entitled to a severance payment, paid in a single lump sum, in the event of a termination of his employment by
his Employer without cause or by the Executive Director for a Good Leaver Reason at any time during a period ending 18 months after any
change of control of the Company (whether by way of a general offer or a scheme of arrangement or compromise) and beginning three
months prior to the announcement of such general offer or scheme of arrangement or compromise. The severance payment will be equal
to the sum of: (i) 150 percent of the Executive Director’s annual basic salary; (ii) 150 percent of the Executive Director’s target bonus for
the Company’s financial year in which the termination occurs; and (iii) the total cost of providing the Executive Director with the benefits
(including pension contributions) to which he is entitled under his service agreement for a period of 12 months.
The Company’s policy on termination payments is to consider the circumstances on a case-by-case basis, taking into account the
executive’s contractual terms, the circumstances of termination and any duty to mitigate. The table below summarises how incentives are
typically treated in different circumstances:
Reason for leaving
Treatment
Bonus
Summary dismissal, resignation Awards lapse.
Good leaver
Change of control
Eligible for an award to the extent that performance conditions have been satisfied, pro-rated for the
proportion of the financial year served, with Committee discretion to treat otherwise.
Eligible for an award to the extent that performance conditions have been satisfied up to the change
of control, pro-rated for the proportion of the financial year served, with Committee discretion to treat
otherwise. Executives may be eligible for an enhanced bonus payment in the case of termination of
employment within 18 months of a change of control, as described above.
Long-term incentives
Summary dismissal, resignation Awards lapse.
Good leaver
Change of control
Outstanding awards will normally be pro-rated to the date of leaving, with Committee discretion to treat
otherwise and with discretion to either test at end of relevant performance periods, or immediately
assess, whether or not relevant performance criteria have been met.
Outstanding awards will normally vest and be tested for performance over the period to change-of-
control, and be pro-rated for time based on the proportion of the period served, with Committee
discretion to treat otherwise. Executives may be eligible for additional vesting in the case of termination
of employment within 18 months of a change of control.
All-employee schemes
Treated in line with applicable
scheme rules
59
EXTERNAL APPOINTMENTS OF EXECUTIVE DIRECTORS
Executive Directors may accept external appointments with the prior approval of the Chairman, provided that such appointments do
not prejudice the executive’s ability to fulfil their duties for the Group. Any fees for outside appointments would normally be retained by
the Director.
CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN GROUP
The Committee takes into account the general basic salary increase being offered to employees elsewhere in the Group when annually
reviewing the salary increases and remuneration for the Executive Directors. Employees have not been consulted in respect of the design
of the Group’s senior executive remuneration policy.
CONSIDERATION OF SHAREHOLDER VIEWS
The Committee takes shareholder feedback into careful consideration when reviewing remuneration and regularly reviews the
Remuneration policy in the context of key institutional shareholder guidelines and best practice. It is the Committee’s policy to consult with
major shareholders prior to making any major changes to its executive remuneration structure.
ANNUAL REPORT ON REMUNERATION
THE REMUNERATION COMMITTEE
The following section provides details of remuneration outcomes for the financial year-ended 31 March 2016 for Executive Directors
who served at Sophos during the year, and how the Remuneration policy will be implemented in FY17. The key responsibilities of the
Committee include:
• determine and monitor the Remuneration policy for the Chairman, Executive Directors and other senior executives it is designated
to consider;
• ensure that the Remuneration policy and reward decisions that support business strategy and sustainable long-term performance;
• set specific remuneration packages which include salary, annual bonus, share incentives, pension and benefits;
• review the Executive Directors’ service contracts;
• review remuneration trends across the Group; and
• approve employee share-based incentive plans and associated performance conditions and targets.
The Committee’s Terms of Reference, which are reviewed regularly, are set out on the Company’s website. During the year, the
Remuneration Committee comprised the following Non-Executive Directors: Paul Walker (Committee Chairman), Peter Gyenes, Sandra
Bergeron, Edwin Gillis.
In FY16, the Committee met three times. Attendance by individual Committee members is reported in the Corporate Governance
Statement on page 42. Only Committee members have the right to attend Committee meetings. The Chairman of the Board (if he is not a
member of the Committee), CEO, HR Director, and Company Secretary (who acts as Committee secretary) attend the Committee’s meetings
by invitation, but are not present when their own remuneration is discussed.
EXTERNAL ADVISERS
Kepler (a brand of Mercer) ("Kepler"), independent remuneration consultants appointed by the Committee in FY16, after consultation
with the Board, continued to act as the remuneration adviser to the Committee during the year. Kepler reports directly to the
Committee Chairman, and is a signatory to and abides by the Code of Conduct for Remuneration Consultants (which can be found at
www.remunerationconsultantsgroup.com). The fees paid to Kepler in respect of work carried out for the Remuneration Committee in
FY16 totalled £30,625. Other than advice on remuneration, no other services were provided by Kepler (or any other part of the MMC
Group of companies) to the Company. The Committee undertakes due diligence periodically to ensure that Kepler remains independent
of the Company and that the advice provided is impartial and objective. The Committee is satisfied that the advice provided by Kepler
is independent.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 60
GOVERNANCE ► ANNUAL REPORT ON REMUNERATION
ANNUAL REPORT ON REMUNERATION CONTINUED
SINGLE TOTAL FIGURE OF REMUNERATION FOR EXECUTIVE DIRECTORS (AUDITED)
The table below sets out the total single figure remuneration received by each Executive Director who served during the year-ended
31 March 2016 and the prior year:
Kris Hagerman ($000)
Nick Bray (£000)
Salary1
Taxable benefits2
Pension3
Single-year variable4
Restricted Stock Units5
Multi-year variable5
Total
1. Amount earned in respect of the year
2015
665
16
8
1,015
–
–
1,704
2016
676
8
9
788
9,173
7,973
18,627
2015
276
10
14
336
–
–
636
2016
276
13
14
255
2,531
1,473
4,562
2. Taxable benefits include: Kris Hagerman: Car allowance (FY16: $3K, 2015: $16K) and health insurance; Nick Bray: Health insurance, critical illness and car allowance (FY16 and
FY15: £10K)
3. The Company’s pension contributions during the year of up to 3 percent and 5 percent of salary for Kris Hagerman and Nick Bray, respectively
4. Bonus payment for performance during the year
5. RSUs: The face value at grant of time-based RSU; Multi-year: The embedded value on date of vesting of performance-based options that vested on IPO
BASE SALARY
During the year the Remuneration Committee reviewed the salaries of Kris Hagerman and Nick Bray, who were each awarded an increase of
3 percent, effective 1 July 2016. The salaries of the Executive Directors are as follows:
Executive Director
Kris Hagerman
Nick Bray
1 July 2015
$679,000
£275,785
1 July 2016
$700,000
£284,000
Increase %
3
3
PENSION AND BENEFITS
Kris Hagerman receives medical and dental insurance, travel insurance, life and disability insurance, a reimbursement of up to US$10,000
per annum for the preparation of his tax returns and, under his Employer’s standard US 401(k) savings plan for all US employees, is entitled
to receive a matching contribution of up to three percent of his salary, subject to any annual maximum contribution applicable to US 401(k)
savings plans from time to time. For 2016, this annual maximum is US$24,000.
Nick Bray is entitled to receive up to five percent of his base salary as a contribution to a group personal pension scheme. He also receives
an annual car allowance of £10,000 (paid monthly), life insurance, private medical and critical illness insurance, travel insurance, personal
accident insurance, and employee assistance programme arrangements.
ANNUAL BONUS FOR FY16
The Group operates an annual performance-related bonus scheme for a number of senior executives including Executive Directors. Bonus
opportunities for FY16 were 196 percent of salary for Kris Hagerman and 156 percent of salary for Nick Bray. Target bonus was 50% of the
maximum opportunity.
The level of annual bonus earned in any one year is based on Group performance against predetermined financial targets for the year
and personal performance. In FY16, the bonus was based 80 percent on billings and cash EBITDA, with 12.5 percent of maximum vesting
for threshold performance and 50 percent for target performance, and 20 percent on personal performance. No bonus is awarded for
performance below the threshold. The financial element payout is based on the lower of the implied payouts for billings and cash EBITDA.
The Company exceeded the targets for both financial measures, and the bonus outcome was therefore 58 percent of maximum for the
financial element. After taking into account personal performance, Kris Hagerman and Nick Bray will receive bonuses of 116 percent and
92 percent of salary, respectively. All of the bonus in respect of FY16 will be paid in cash.
The Committee believes that disclosing financial performance targets in respect of the annual bonus for FY16 in the report would put the
Company at a competitive disadvantage to its international and privately held competitors, which are not subject to similar disclosure
requirements. Given the close link between financial performance targets and the Company’s longer term strategy, targets are not
disclosed in this report but will be disclosed in the annual report for the year-ending 31 March 2017.
61
LONG-TERM INCENTIVE PLAN
As included in the IPO prospectus, on 7 August 2015, Kris Hagerman and Nick Bray were granted awards in connection with the IPO under the
Sophos Group Long-term Incentive Plan 2015 ("LTIP") in the form of restricted share units ("RSU"); details are provided in the table below.
Executive Director
Kris Hagerman
Nick Bray
Date of award
7 August 2015
7 August 2015
Awards made
during the year
Reference price
of award1
Face value of
award (£000)
1,966,292
842,697
225p
225p
4,424
1,896
1. As disclosed in the IPO prospectus, the one-off IPO awards were granted with reference to the IPO price of 225p
The awards are not subject to future performance conditions, and will vest over five years, with 20 percent of the awards vesting on 7
August 2016 and the remainder vesting on a quarterly basis thereafter until 7 August 2020. On 7 August 2015, Kris Hagerman and Nick Bray
were granted further awards under the LTIP in the form of restricted share units and performance share units ("PSU"); details are provided
in the table below.
Executive Director
Date of award
Type of award
Awards made
during the year
Reference price
of award1
Face value of
award (£000)
Kris Hagerman
Nick Bray
7 August
2015
RSU
PSU
RSU
PSU
238,764
716,292
112,359
337,079
225p
225p
225p
225p
537
1,612
253
758
Face value of
award (% of
salary)
124
373
92
275
1. The first annual awards under the LTIP were granted with reference to the IPO price of 225p
The RSU awards are not subject to future performance conditions, and will vest over four years, with 25 percent of the awards vesting
on 7 August 2016 and the remainder vesting on a quarterly basis thereafter until 7 August 2019. The PSU awards vest subject to the
average vesting outcome implied by performance against annual targets over the three years to the financial year-ended 31 March
2018. Targets for the three years are set at the start of the performance period. For FY16 awards, vesting was based on the lower of the
implied payouts for billings and cash EBITDA, with 25 percent vesting for threshold performance, 100 percent for stretch performance,
with up to an additional 25 percent vesting for performance between a super stretch target and maximum target. No awards will vest
for performance below the threshold.
The Committee believes that disclosing annual financial performance targets for FY16, FY17 and FY18 in this report would put the Company
at a competitive disadvantage to its international and privately held competitors, which are not subject to similar disclosure requirements.
Given the close link between financial performance targets and the Company’s longer term strategy targets are not disclosed in this report
but will be disclosed retrospectively in the Annual Report on Remuneration following the end of the performance period. LTIP awards are
subject to malus and clawback provisions.
SINGLE TOTAL FIGURE OF REMUNERATION FOR NON-EXECUTIVE DIRECTORS (AUDITED)
The table below sets out the total single figure remuneration received by each Non-Executive Director who served during the year-ended
31 March 2016 and the prior year:
Peter Gyenes
Sandra Bergeron
Edwin Gillis
Roy Mackenzie
Steve Munford
Salim Nathoo
Paul Walker
Base fee ($000)
Additional fees1 ($000)
Other2 ($000)
Total ($000)
2015
150
45
–
–
154
–
–
2016
230
129
120
–
147
–
120
2015
–
2016
4
–
–
–
–
–
–
–
12
–
–
–
21
2015
–
–
–
–
–
–
290
2016
–
–
–
–
4,642
–
–
2015
150
45
–
–
154
–
290
2016
234
129
132
–
4,789
–
141
1. Additional fees relate to fees for chairing Board Committees
2. Paul Walker: Restricted share agreement entered into in advance of the IPO over 190,694 restricted shares that vest in three equal tranches on the first, second and third
anniversaries of 27 March 2015; they are valued at face value on the date of grant. Steve Munford: The embedded value on date of vesting of performance-based options.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 62
GOVERNANCE ► ANNUAL REPORT ON REMUNERATION
ANNUAL REPORT ON REMUNERATION CONTINUED
EXIT PAYMENTS MADE IN YEAR (AUDITED)
No exit payments were made to Directors in FY16.
PAYMENTS TO PAST DIRECTORS (AUDITED)
No payments were made to past Directors in FY16.
REMUNERATION FOR FY17
Base salary
Salaries for Kris Hagerman and Nick Bray, effective from 1 July 2016, will be $700,000 and £284,000 respectively. This equates to an
increase of 3 percent, which is in line with average increase awarded to the broader employee population of c.3 percent.
Pension and benefits
In line with the Remuneration Policy, the Executive Directors will receive pension contributions of 3-5 percent of salary. They will also
receive benefits in line with the policy.
Annual bonus
For the year-ending 31 March 2017, the Committee will operate the annual bonus using the same framework and measures as used in
FY16. Billings and cash EBITDA targets have been set by the Committee and will require Executive Directors to deliver significant stretch
performance to achieve full payout. Given the close link between these targets and Sophos’ competitive strategy, these financial targets
are considered commercially sensitive and will not be disclosed in advance, but will be disclosed on a retrospective basis in next year’s
Annual Report on Remuneration to the extent that the Committee determines that the targets are no longer commercially sensitive.
100 percent of the bonus will be paid in cash. Bonus payments are subject to malus and clawback provisions.
Long-term incentive plan
In FY17, the Committee intends to grant long-term incentive awards to Executive Directors in line with the stated remuneration policy and
using the same measures as were used in FY16 (see above). Awards will be made over performance share units (at least 75 percent of the
total award) and restricted shares, within the normal policy limits. Full details of the awards will be set out in the Annual Report for the
year-ended 31 March 2017. LTIP awards are subject to malus and clawback provisions.
Non-Executive Director fees (including the Chairman)
With effect from admission, the fees payable to the Chairman of the Board and other Non-Executive Directors (‘NEDs’) are as follows:
Chairman of the Board
NED base fee
Additional fees:
Audit & Risk Committee Chairman
Remuneration Committee Chairman
Nominations Committee Chairman
Senior Independent Director
Fee p.a.
$250,000
$150,000
$15,000
$10,000
$5,000
$15,000
Percentage change in CEO remuneration
The table below shows the percentage change in the CEO’s remuneration from the prior year compared to the average percentage change
in remuneration for all other employees. To provide a meaningful comparison, the analysis is based on a consistent set of employees, i.e.
the same individuals appear in the FY16 and FY15 populations. Kris Hagerman entered into a service agreement with the Company on
11 June 2015, in which his car allowance, previously included in taxable benefits, became part of his base salary. The net impact of this
change on the total fixed element of his remuneration was nil.
Base salary
Taxable benefits
Single-year variable
% change FY15 to FY16
CEO
2
-50
-22
Other employees
4
–
-16
63
Relative importance of spend on pay
The Company completed its IPO in July 2015 and announced its first dividend in the year-ended 31 March 2016. As a result a table showing
annual percentage change in total employee pay expenditure and shareholder distributions (i.e. dividends, share buybacks and return of
capital) will not be presented until the annual report for the year-ending 31 March 2017. As detailed in note 10 to the Financial Statements
the total employee costs for FY16 were $250.3 million (FY15: 216.9 million) an increase of 15.4 percent.
Pay for performance
Under remuneration reporting regulations, companies are required to provide a graph showing the Company’s Total Shareholder Return
("TSR") performance (share price plus dividends paid) compared with the performance of a relevant comparator group since IPO, assuming
a nominal £100 investment in both the Company and the comparator group at the start of the timeframe. Companies are also required to
show the CEO’s single figure of remuneration and actual variable pay outcomes over the same period.
Sophos has chosen to compare its performance against the FTSE250 Index, as the Company became a constituent of the index after
IPO. The table below details the Chief Executive’s single figure of remuneration and actual variable pay outcomes over the same period.
As Sophos completed its IPO in July 2015, TSR data and pay disclosure is available only for the financial year-ending 31 March 2016. Pay
disclosure and TSR is provided below.
£100 invested on Sophos' IPO
£110
£105
£100
£95
£90
Sophos
FTSE250
25 June 2015
31 March 2016
Incumbent
CEO single figure of remuneration ($000)
Annual bonus outcome (% of salary)
PSU vesting outcome (% of max)
2016
Kris Hagerman
$18,627
116
n/a
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 64
GOVERNANCE ► ANNUAL REPORT ON REMUNERATION
ANNUAL REPORT ON REMUNERATION CONTINUED
Directors’ share ownership (audited)
The table below shows the shareholding of each Director against their respective shareholding requirement as at 31 March 2016.
Share and option awards
Subject to
performance
716,292
Subject to
continued
employment
only
3,581,860
337,079
955,056
–
–
–
–
–
–
–
–
127,129
–
–
–
–
–
Vested but not
yet exercised
3,355,655
–
–
–
2,660,884
–
–
–
–
Beneficially
owned
2,134,719
1,100,013
286,631
63,565
1,498,656
214,974
286,631
–
–
Kris Hagerman
Nick Bray
Peter Gyenes
Paul Walker
Steve Munford
Sandra Bergeron
Edwin Gillis
Salim Nathoo
Roy Mackenzie
Shareholding
required
(% of salary)
200
Current
shareholding
(% of salary)
985
Requirement
met
Yes
200
870
Yes
n/a
There have been no changes to shareholdings between 1 April 2016 and 25 May 2016. None of the Directors had an interest in the shares
of any subsidiary undertaking of the Company or in any significant contracts of the Group.
Summary of outstanding share awards
The interests of the Directors in the Company’s share schemes as at 31 March 2016 are summarised in the table below.
Date of
award
Awards
held at
1 Apr 15
Granted
during
the year
Exercised
during the
year
Forfeited
during
the year1
Awards
held at 31
Mar 16
Exercise
price
Market
price at
grant
date
Performance
period
Vesting
period/date Expiry date
Director
Kris Hagerman
Pre-IPO
Options
Pre-IPO
Options
10 Oct 12
1,997,000
10 Oct 12
4,131,725
–
–
LTIP – RSU
7 Aug 15
LTIP – RSU
7 Aug 15
LTIP – PSU
7 Aug 15
–
–
–
1,966,292
238,764
716,292
–
–
–
–
–
315,285
2,312,285
$0.598
$0.598
n/a
1 Aug 13
–1 Aug 17
10 Oct 22
(1,711,551)
2,420,174
$0.598
$0.598
Exit event
1 Jul 15
10 Oct 22
–
–
–
1,966,292
238,764
716,292
–
–
–
265p
265p
265p
n/a
n/a
7 Aug 16
–7 Aug 20
7 Aug 16
–7 Aug 19
6 Aug 25
6 Aug 25
1 Apr 15
–31 Mar 18
1 Apr 18
6 Aug 25
Nick Bray
Pre-IPO
Options
Pre-IPO
Options
1 Feb 11
1,144,170
1 Feb 11
1,144,170
LTIP – RSU
7 Aug 15
LTIP – RSU
7 Aug 15
LTIP – PSU
7 Aug 15
–
–
–
Steve Munford
Pre-IPO
Options
22 Oct 10
204,610
Pre-IPO
Options
Pre-IPO
Options
22 Oct 10 2,065,863
22 Oct 10 2,065,863
–
–
842,697
112,359
337,079
–
–
–
(1,151,792)
7,622
(749,885)
(394,285)
–
–
–
(51,153)
–
–
–
–
–
–
–
–
842,697
112,359
337,079
$0.476
$0.476
n/a
1 Sep 11
–1 Sep 15
1 Feb 21
$0.476
$0.476
Exit event
1 Jul 15
1 Feb 21
–
–
–
265p
265p
265p
n/a
n/a
7 Aug 16
–7 Aug 20
7 Aug 16
–7 Aug 19
6 Aug 25
6 Aug 25
1 Apr 15
–31 Mar 18
1 Apr 18
6 Aug 25
153,457
$0.019
$0.476
n/a 22 Oct 10
22 Oct 20
2,065,863
$0.119
$0.476
n/a
16 Jun 11
–16 Jun 15
22 Oct 20
(926,156)
(698,143)
441,564
$0.119
$0.476
Exit event
1 Jul 15
22 Oct 20
1. Kris Hagerman/Nick Bray: Pre-IPO Options forfeited during the year includes performance awards converted to time vesting awards (315,285 and 7,622 respectively).
65
As outlined in the prospectus, Kris Hagerman and Steve Munford continue to hold share options granted under the Pentagon Holdings
Management Equity Plan (“MEP”) that were issued prior to IPO. Nick Bray's (until exercised during FY16) and Steve Munford’s MEP options
(a “Linked Option”) were / are linked to a parallel award under a JOE Agreement. Awards under a JOE agreement entitle the participant to
call for the transfer to him by the Trustee of the JOE agreement of that part of the beneficial interest in any jointly owned shares which vest,
upon payment by the participant of a price specified in the JOE Agreement. Rights under a JOE Agreement may only be exercised to the
extent that a Linked Option has not been exercised and vice versa.
The rules of the MEP provide that 50 percent of a MEP option is subject to time vesting and 50 percent is subject to performance vesting.
On Admission, 66.2 per cent of the awards subject to performance vested. Depending on the length of service of a MEP participant, the
Company may require that a portion of an option which is vested as to performance may only be exercised at a later date.
Steve Munford additionally holds vested share options granted under an option deed with Pentagon Holdings SARL on 22 October 2010.
All share options over shares in Pentagon Holdings SARL were exchanged for new options over shares in Sophos Group plc as part of the
reorganisation of the Group immediately prior to the IPO.
The interests of the Directors in pre-IPO restricted shares as at 31 March 2016 are summarised in the table below.
Restricted
Awards
held at 1
April 2015
Restriction
lifted
during year
Date of
award
Restricted
Awards
held at
31 March
2016
27 Mar 15
190,694
(63,565)
127,129
19 Jan 11
42,995
(42,995)
19 Jan 11
57,326
(57,326)
19 Jan 11
57,326
(57,326)
–
–
–
Director
Paul Walker
Pre-IPO
Restricted Shares
Sandra Bergeron
Pre-IPO
Restricted Shares
Edwin Gillis
Pre-IPO
Restricted Shares
Peter Gyenes
Pre-IPO
Restricted Shares
Exercise
price
Market
price at
grant date
Performance
period
Vesting
period/
date Expiry date
–
–
–
–
$1.5575
n/a
27 Mar 16
–27 Mar 18
$0.476
$0.476
$0.476
n/a
n/a
n/a
19 Feb 11
– 1 Jul 15
19 Feb 11
– 1 Jul 15
19 Feb 11
– 1 Jul 15
n/a
n/a
n/a
n/a
As outlined in the prospectus certain of the Non-Executive Directors held Restricted Shares, details of them are set out below.
Paul Walker entered into a restricted share agreement on 27 March 2015 (the “Acquisition Date”) pursuant to which he acquired 300,000
A shares in Pentagon Holdings SARL. Provided Paul Walker continues as a Director of Sophos, the Restricted Shares shall vest in three equal
tranches on the first, second and third anniversaries of the Acquisition Date.
Sandra Bergeron entered into a restricted share agreement on 19 January 2011 (the “Acquisition Date”) pursuant to which she acquired
450,927 A shares in Pentagon Holdings SARL. The Restricted Shares vested monthly over 5 years from the expiry of one month of the
Acquisition date. On Admission, the vesting of remaining unvested shares was accelerated such that all shares were vested on Admission.
Peter Gyenes and Edwin Gillis entered into restricted share agreements on 19 January 2011 (the “Acquisition Date”) pursuant to which
they each acquired 601,235 A shares in Pentagon Holdings SARL. The Restricted Shares vested monthly over 5 years from the expiry of one
month of the Acquisition date. On Admission, the vesting of remaining unvested shares was accelerated such that all shares were vested at
the IPO.
All Restricted Shares in Pentagon Holdings SARL were exchanged for new shares in Sophos Group plc as part of the reorganisation of the
Group immediately prior to the IPO.
On behalf of the Board
Paul Walker
Chairman of the Remuneration Committee
25 May 2016
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 66
GOVERNANCE ► DIRECTORS’ REPORT
DIRECTORS’ REPORT
The Directors of Sophos Group plc (the “Company”) present their Annual Report on the affairs of the Group, together with the Consolidated
Financial Statements and auditor’s report on the Group for the year-ended 31 March 2016.
STRATEGIC REPORT
The Companies Act 2006 requires the Company to prepare a strategic report which is presented on pages 6 to 37 of the Annual Report
and includes a fair review of the business, a description of the principal risks and uncertainties facing the Group and an indication of likely
future developments.
CORPORATE GOVERNANCE
In accordance with the Disclosure and Transparency Rules (“DTR”) the Group is required to produce a corporate governance statement.
The information to fulfil this requirement is included in the Corporate Governance Statement on pages 40 to 44 and Committee Reports on
pages 45 to 65, which have been incorporated into the Directors’ Report by cross-reference.
DIRECTORS AND DIRECTORS’ INTERESTS
The Directors who held office during the year and up to the date of the signing of this report:
Non-Executive Director and Chairman
Peter Gyenes
Chief Executive Officer
Kris Hagerman
Nick Bray
Chief Financial Officer
Sandra Bergeron Non-Executive Director
Non-Executive Director
Edwin Gillis
Non-Executive Director
Roy Mackenzie
Non-Executive Director
Steve Munford
Non-Executive Director
Salim Nathoo
Non-Executive Director
Paul Walker
A summary of the Directors’ remuneration, employment contracts and interests in the shares of the Company are disclosed within the
Remuneration Report.
Related party disclosures are included in note 32 of the Financial Statements. None of the Directors had an interest in any significant
contracts of the Group or its subsidiaries.
Throughout the year the Company has purchased and maintained Directors’ and Officers’ liability insurance in respect of itself and its
Directors. The Directors also have the benefit of the indemnity provision contained in the Company’s Articles of Association. The Company
has entered into qualifying third-party indemnity arrangements for the benefit of all its Directors in a form and scope which comply with
the requirements of the Companies Act 2006 and which were in force throughout the year and remain in force.
RELATIONSHIP AGREEMENT
From the date of listing to 9 December 2015, Pentagon Lock Sarl, Pentagon Lock 6-A Sarl, Pentagon Lock 7-A Sarl and Pentagon Lock US
Sarl (collectively “Apax”) held more than 30 percent of the shares in the Company. On 26 June 2015, the Company and Apax entered into
a Relationship Agreement which regulates the ongoing relationship between the Company and the controlling shareholder in accordance
with the Listing Rules. The Board can confirm that throughout the period:
• the Company has complied with the agreement’s independence provisions;
• as far as the Company is aware, the controlling shareholder and its associates have complied with the agreement’s independence
provisions; and
• as far as the Company is aware, the controlling shareholder has procured the compliance of non-signing controlling shareholders with
the agreement’s independence provisions.
67
SIGNIFICANT AGREEMENTS
The following significant agreements are in place as of 31 March 2016 that include provisions which would enable the counterparties to
alter or terminate the agreements upon a change of control of the Company following a takeover bid:
• A syndicated secured term loan (“Facility A”) of $235.0 million with an interest rate of LIBOR + 2.25 percent entered into on 1 July 2015,
repayable in full on maturity after five years;
• A syndicated secured term loan (“Facility B”) of €60.0 million with an interest rate of EURIBOR + 2.25 percent entered into on 1 July
2015, repayable in full on maturity after five years; and
• A revolving credit facility agreement (“RCF”) of $30.0 million with an interest rate of LIBOR + 2.00 percent entered into on 1 July 2015.
SHARE CAPITAL AND SUBSTANTIAL SHAREHOLDERS
The share capital of the Company is disclosed in note 28 of the Financial Statements; ordinary shares of 3p each are the only class of share
in issue. As at 31 March 2016 and 20 May 2016 the Company had been notified under DTR5 of the following significant holdings of voting
rights in its shares. It should be noted that these holdings may have changed since notified to the Company, however notification of any
change is not required until the next applicable threshold is crossed:
As at 31 March 2016
As at 20 May 2016
Name
Apax
Jan Hruska
Peter Lammer
Shares held
100,722,776
42,543,360
42,543,360
Standard Life Investments (Holdings) Limited
22,735,577
Oddo Asset Management
N/A
Percentage of
total ordinary shares
22.3
9.41
9.41
5.0
N/A
Shares held
100,722,776
42,543,360
42,543,360
22,735,577
13,633,922
Percentage of
total ordinary shares
22.3
9.41
9.41
5.0
3.02
VOTING RIGHTS
The Articles of Association of the Company allow, subject to any rights or restrictions attached to any shares, on a vote on a resolution on a
show of hands, every member or proxy who is present shall have one vote. Subject to any rights or restrictions attached to any shares, on a
vote on a resolution on a poll, every member present in person or by proxy shall have one vote for every share of which they are the holder.
TRANSFER OF SHARES
The transfer of shares is governed by the Company’s Articles of Association which allows any member to transfer certificated shares in any
usual form or in any other form for which the Board may approve. The Board may, in its absolute discretion, refuse to register a transfer
of a certificated share which is not fully paid, provided that the refusal does not prevent dealings in the Company form taking place on
an open and proper basis. The Board may also refuse to register the transfer of a certificated share unless the instrument of transfer is (i)
lodged, duly stamped (if stampable), at the office or at another place appointed by the Board, accompanied by the certificate for the shares
to which it relates and such other evidence as the Board may reasonably require to show the right of the transfer to make the transfer; (ii)
in respect of only one class of shares; and (iii) in favour of not more than four transferees.
ARTICLES OF ASSOCIATION
The Articles of Association of the Company can be amended only by special resolution.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 68
GOVERNANCE ► DIRECTORS’ REPORT
DIRECTORS’ REPORT CONTINUED
APPOINTMENT AND RETIREMENT OF DIRECTORS
Unless otherwise determined by ordinary resolution, the number of Directors shall be no less than three but is not subject to any maximum
number. The Board may appoint a person who is willing to act to be a Director, either to fill a vacancy or as an additional Director.
At every Annual General Meeting (“AGM”) all the Directors at the date of the notice convening the AGM shall retire from office, if the
Company does not fill the vacancy at the meeting the retiring Director shall, if willing to act, be deemed to have been re-appointed unless
at the meeting it is resolved not to fill the vacancy or unless a resolution for the re-appointment of the Director is put to the meeting
and lost.
A person ceases to be a Director as soon as:
(i)
(ii)
(iii)
(iv)
(v)
notification is received by the Company from the Director that they are resigning or retiring from office;
that person has been absent for more than six consecutive months without permission of the Board and the Board resolves that
their office be vacated;
the person has become physically or mentally incapable of acting as a Director and may remain so for more than three months;
a bankruptcy order is made against that person;
a composition is made with that person’s creditors generally in satisfaction of that person’s debts;
(vi)
that person ceases to be a Director by virtue of any provision of the Act or is prohibited from being a Director by law; or
(vii)
that person is removed from office pursuant to the Articles of Association.
POWERS OF THE BOARD
Subject to provisions of the Companies Act 2006 and the Articles of Association and to any directions given by special resolution, the
business of the Company shall be managed by the Board who may exercise all the powers of the Company.
DIVIDENDS
At the time of the 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 have recommended that the Company pay a final dividend in relation to the year-
ended 31 March 2016 of 1.1 US Cents per share. Subject to shareholder approval, combined with the interim dividend announced of 0.7 US
Cents per share, this gives a total dividend for the year of 1.8 US Cents per share.
ANNUAL GENERAL MEETING
The notice of the AGM which sets out the resolutions to be proposed at the AGM accompanies this annual report. The AGM will be held at
15:00 on 14 September 2016 at The Pentagon, Abingdon Science Park, Abingdon, OX14 3YP.
EMPLOYEES
The Group continues to invest to drive future growth. A key objective of the Group is to achieve a shared commitment by all employees
to the success of the business. Throughout the Group there is consultation between employees and management on matters of mutual
interest and information is disseminated through team and Company briefings, an intranet and individual development reviews. Employees
are encouraged to promote and participate in the progress and profitability of the Group through the share option plans and other
incentive schemes.
The Group provides full consideration to applications for employment from disabled persons where the requirements of the role can be
adequately fulfilled by a disabled person. Where existing employees become disabled it is the Group’s policy, wherever practicable, to
provide continuing employment under normal terms and conditions and to provide training and career development to disabled employees
wherever appropriate.
RESEARCH AND DEVELOPMENT
The Group continues to undertake research and development activity relating to its principal activities. In the year-ended 31 March 2016,
the Group spent 18.6 percent of its billings on research and development (2015: 17.2 percent).
POLITICAL DONATIONS
The Group’s policy is not to make any political donations. Accordingly, no political donations have been made in the year-ended
31 March 2016 or the year-ended 31 March 2015.
SHARE OPTION PLANS
The Group operates a number of share option plans to motivate and retain staff and align their interests with shareholders. Details of
these schemes are set out in note 30 to the Financial Statements.
69
FINANCIAL INSTRUMENTS
Details of the Group's financial risk management policies and risks are set out in note 27 to the Financial Statements.
AUTHORITY TO ALLOT SHARES AND AUTHORITY TO PURCHASE OWN SHARES
At a general meeting held on 28 June 2015 the Company was authorised to make market purchases (within the meaning of section 693(4))
of the Companies Act 2006) up to 45,000,000 shares. The Company was given authority by way of written resolution of the shareholders of
the Company on 26 June 2015 to issue up to an aggregate nominal amount of £1,500,000,000.
SHARES HELD IN THE EMPLOYEE BENEFIT TRUST
The Trustees of the Employee Benefit Trust will abstain from voting or exercising any other rights in respect of any shares held by them and
in which no beneficial interest is held by any beneficiary unless otherwise directed by the Company.
GREENHOUSE GAS EMISSIONS
The Greenhouse Gas Emissions (“GHG”) disclosures for the Group have been shown for the year-ended 31 March 2016, consistent with
the Group’s financial year. As this is the first year that the Group is required to disclose the GHG data, no comparatives have been shown.
The calculation of the disclosures has been performed in accordance with Greenhouse Gas Protocol Corporate Standard and using the UK
government’s DEFRA conversion factor guidance for the year reported.
The operations of the Group that primarily release GHG includes usage of electricity and gas of our owned and leased offices, business
travel and usage of vehicles. The current year reporting covers all of our material operations and locations which includes over 75 percent
of our year-end employees. Where information has not been directly available for the offices, estimates based on size and headcount
have been applied. The Group is developing its GHG data gathering capabilities that will, in the coming year, increase the breadth of data
captured as well as the number of offices for which direct information is available.
The Group's chosen intensity ratio is tonnes of CO2 equivalent per million US Dollars of billings as it reflects the impact of the growth of the
business with emissions and with the strategy of the Group.
Year-ended 31 March 2016
Usage of fuel and operation of buildings
Electricity purchased for own use
Business travel (air and car)
Total
Intensity ratio – tCO2e per $M of billings
tCO2e
2,099.3
3,024.7
4,039.4
9,163.4
17.1
GOING CONCERN
Having made appropriate enquiries and considered the Group’s forecasts, the Directors consider that the Group has sufficient resources
to continue for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Financial Statements.
Further details regarding the adoption of the going concern basis can be found in the viability statement below.
VIABILITY STATEMENT
The Directors have assessed the viability of the Group over a three-year period, taking into account the Group’s current position and the
potential impacts of the principal risks documented on pages 30 to 33 of the Annual Report. Based on this assessment, the Directors
confirm that they have a reasonable expectation that the Company will be able to continue to operate and to meet its liabilities as they
fall due over the three years to 31 March 2019.
The Group prepares annually, and on a rolling basis, a strategic plan, which is predicated on a detailed year one budget and higher level
forecasts thereafter. The output of this plan is used to perform debt and associated covenant headroom profile analysis, which includes
sensitivity to business as usual risks such as billings and EBITDA impacts. A bottom-up operating plan is prepared on an annual basis for
presentation to the Board.
Following assessment of the planning process, the Directors have determined that a three-year period is an appropriate period over which
to assess the Group’s viability. Whilst the Directors have no reason to believe that the Group will not be viable over a longer period; the
period of three years has been chosen to provide a greater degree of certainty and, in the view of the Directors, provides an appropriate
long-term outlook.
In making this viability statement, the Board carried out a robust assessment of the principal risks facing the Group, including those that
would threaten its business model, future performance, solvency or liquidity. Where individual principal risks did not impact the future
viability of the Group, consideration was given to potential principal risk combinations. The process of identifying, assessing and managing
our principal risks is described in the Audit and Risk Committee Report on pages 46 to 51.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 70
GOVERNANCE ► DIRECTORS’ REPORT
DIRECTORS’ REPORT CONTINUED
POST BALANCE SHEET EVENTS
There have been no material events from 31 March 2016 to the date of this report.
AUDITORS
KPMG LLP has expressed their willingness to continue in office as auditors of the Company and accordingly a resolution for the
re-appointment of KPMG LLP as auditors of the Company is to be proposed to the shareholders at the AGM.
DISCLOSURE OF INFORMATION TO AUDITORS
The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no
relevant audit information of which the Company’s auditors are unaware and each Director has taken all the steps that he or she ought to
have taken as a Director to make them aware of any relevant audit information.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE
FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare group and parent company financial statements for each financial year. Under that law
they are required to prepare the group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have
elected to prepare the parent company financial statements in accordance with UK Accounting Standards, including FRS 102, the Financial
Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of
the state of affairs of the group and parent company and of their profit or loss for that period. In preparing each of the group and parent
company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; and
• for the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any
material departures disclosed and explained in the financial statements.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure
that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’
Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that
they face.
By order of the Board
D Ari Buchler
Company Secretary
25 May 2016
GOVERNANCE
FINANCIAL STATEMENTS
71
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SOPHOS GROUP PLC ONLY
Opinions and conclusions arising from our audit
1. Our opinion on the financial statements is unmodified
We have audited the financial statements of Sophos Group plc for the year-ended 31 March 2016 set out on pages 75 to 122. In
our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2016
and of the Group’s loss for the year then ended;
• the group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted
by the European Union;
• the parent company financial statements have been properly prepared in accordance with UK Accounting Standards FRS 102 The
Financial Reporting Standard applicable in the UK and Republic of Ireland; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the
group financial statements, Article 4 of the IAS Regulation.
2. Our assessment of risks of material misstatement
In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our
audit, in decreasing order of audit significance, were as follows:
Revenue ($478.2m)
Refer to the Audit and Risk Committee Report on pages 46 to 51 and note 5 on page 91 (notes to the consolidated financial statements).
The Risk:
As the Group expands and product portfolios evolve, there can be considerable risk associated with recognising revenue on contracts
containing multiple elements. A significant audit risk has been recognised with regards to such multiple element arrangements as
judgement is required in allocating the consideration receivable to each element of the arrangement. This requires the fair value for each
separable element of the arrangement to be estimated. In estimating the relative fair values of each element, management make reference
to list prices of individual elements and discounts given on the total contract. This judgement could materially affect the timing and
quantum of revenue and profit recognised in each period.
Our Response:
Our procedures included evaluating the operating effectiveness of revenue allocation controls, including IT system controls and assessing
the appropriateness of the Group’s principles in determining the relative fair value of each separable element of the arrangement against
applicable accounting standards. We selected a sample of Group billings from throughout the year and recalculated the relative fair values
of each element to assess if the determination of relative fair values of each separable element was in in line with Group Policy. We also
assessed the adequacy of the Group’s disclosure about estimation uncertainty regarding the determination of fair values of multiple
element arrangements.
Carrying Value of Intangible Assets and Goodwill ($756.6m)
Refer to the Audit and Risk Committee Report on pages 46 to 51 and note 17 on pages 98 (notes to the consolidated financial statements).
The Risk:
The Group carries significant goodwill and intangible assets, resulting from business acquisitions across several geographic locations. There
is a risk that the carrying value of goodwill and intangible assets is not supported by the performance of the Group in geographies where
global and local economic conditions have negatively affected profitability, or where there are poor trading conditions. Management tests
the Group’s goodwill and indefinite life intangible assets for impairment annually, and definite life intangible assets whenever there is an
indication of an impairment. Due to the inherent uncertainty involved in forecasting and discounting future cash flows which forms the
basis of the recoverability assessment and the subjectivity of key assumptions in impairment models, this is one of the key judgmental areas
on which our audit is focused.
OVERVIEWSTRATEGIC REPORT 72
FINANCIAL STATEMENTS ► INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT CONTINUED
Our Response:
Our audit procedures included evaluating through examination of trading performance, consideration of economic and market data, and
queries of management, whether indicators of impairment such as significant changes in business environment have been identified and
assessing whether these have been appropriately evaluated in the Group’s impairment evaluation process and models.
We assessed the rigour of the Group’s budget and discounted cash flow forecast impairment models used to support the carrying value
of intangible assets and goodwill. We challenged the assumptions for key inputs used by management in their forecasts such as projected
market growth, future capital expenditure levels, revenue growth rates, inflation, and cost projections, and compared them to externally
derived data where relevant, as well as our expectations based on our knowledge and experience of the Group. We evaluated the historical
accuracy of the Group’s forecasts by comparing actual to budgeted results. We applied specialist impairment tools to perform a sensitivity
analysis over key assumptions and discount rates used to assess the impact on recoverability of the assets.
We compared the results of the discounted cash flows against the Group’s market capitalisation to determine if there were any significant
differences that required further examination
We also considered the adequacy of the Group’s disclosures in respect of the sensitivities and key risks inherent in those calculations and if
they have met the requirements of relevant accounting standards.
Classification of Exceptional Expenses ($41.9m) and Presentation of Non-GAAP Measures
Refer to the Audit and Risk Committee Report on pages 46 to 51 and note 7 on page 91 (notes to the consolidated financial statements).
The Risk:
The Group presents alternative income statement measures to operating loss for the period within the consolidated income statement
and throughout the Annual Report. The Directors believe that the separate identification of exceptional items and the presentation of
the following Non-GAAP measures of Billings ($534.9m), Cash EBITDA ($120.9m), and Unlevered Free Cash Flow ($46.4m), provides clear
and useful information on the Group’s underlying trading performance. However, when improperly used and presented, these kind of
measures might prevent the Annual Report from being fair, balanced and understandable by focusing on only part of the performance. The
determination of whether an item should be separately disclosed as an exceptional item or other adjustments requires judgement on its
nature and incidence, as well as whether it provides a better understanding of the Group’s underlying trading performance. Therefore, this
is one of the key judgement areas on which our audit is concentrated.
Exceptional items in the current year comprised of Initial Public Offering Costs ($17.8m), acquisition related expenses ($1.7m), restructuring
and integration costs ($2.6m) and litigation costs ($19.8m).
Our Response:
Our audit procedures included assessing and challenging the judgements made by Directors of the Group regarding their determination of
exceptional items and other adjustments in the presentation of Non-GAAP measures. We evaluated the presentation and completeness of
material or unusual transactions for appropriate classification within the financial statements by assessing whether these items fulfil the
criteria to require separate disclosure in accordance with IAS 1 “Presentation of financial statements”. We also assessed whether, in judging
what to include in exceptional items, the Directors took appropriate regard to guidance issued by the Financial Reporting Council on the
reporting of exceptional items. We then assessed the application of these principles by assessing whether the approach taken to identify
exceptional items was consistent between gains and losses; assessing whether the same category of material items are treated consistently
each year; assessing whether the tax effects of exceptional items are explained; by agreeing amounts incurred in the year to underlying
documentation and supporting information; and by using our knowledge of the Group’s transactions throughout the audit to consider the
completeness of exceptional items.
We assessed whether the separate disclosure and related commentary of exceptional items and alternative Non-GAAP measures of Billings,
Cash EBITDA and Unlevered Cash Flow throughout the Annual Report and Accounts placed disproportionate emphasis on those component
of performance; whether the alternative measures provided meaningful measures of trading performance; whether adjusted results and
alternate measures were adequately reconciled to IFRS numbers with sufficient prominence given to that reconciliation; and whether the
underlying financial information is not otherwise misleading.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at $4.78m (2015: $6.5m), determined with reference to a benchmark of
Group revenue, of which it represents 1% (2015: 1.5%). We consider revenue to be the most appropriate benchmark as it provides a more
stable measure year on year than Group Loss before tax. We note as indicated above, that with the increased risks associated as a listed
entity, materiality has decreased year on year.
We reported to the Audit Committee all corrected or uncorrected identified misstatements exceeding $0.235m (2015: $0.3m), in addition
to other identified misstatements that warranted reporting on qualitative grounds.
Of the Group’s 28 (2015: 25) reporting components, we subjected 10 (2015: 10) to audits for group reporting purposes and 2 (2015: 2)
to specified risk-focused audit procedures. The latter were not individually significant enough to require an audit for group reporting
purposes, but did present specific individual risks that needed to be addressed.
GOVERNANCE
FINANCIAL STATEMENTS
73
The components within the scope of our work accounted for the following percentages of the group’s results:
Group Revenue
1%
Group Billings
1%
99%
99%
Full Audit Scope
Analysis Aggregated at Group level
Full Audit Scope
Analysis Aggregated at Group level
Group Loss before Tax
11%
1%
Group Total Assets
4%
6%
88%
90%
Full Audit Scope
Specified Risk-focused Audit Procedures
Analysis Aggregated at Group level
Full Audit Scope
Specified Risk-focused Audit Procedures
Analysis Aggregated at Group level
The Group team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and
the information to be reported back. The Group team approved the component materialities, which ranged from $2.75m to $3.9m (2015:
$3m to $4.2m), having regard to the mix of size and risk profile of the Group across the components. The work on 6 of the 12 components
(2015: 6 of the 12 components) was performed by component auditors and the rest by the Group team.
The Group team visited 2 (2015: 1) component locations in Germany and India (2015: Germany). Telephone conference meetings were
also held with these component auditors and all others that were not physically visited. At these visits and meetings, the findings
reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the
component auditor.
OVERVIEWSTRATEGIC REPORT 74
FINANCIAL STATEMENTS ► INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITOR'S REPORT CONTINUED
4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
5. We have nothing to report on the disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to:
• the Directors’ Viability Statement on page 69, concerning the principal risks, their management, and, based on that, the Directors’
assessment and expectations of the Group’s continuing in operation over the 3 years to 31 March 2019; or
• the disclosures in note 3.2 of the financial statements concerning the use of the going concern basis of accounting.
6. We have nothing to report in respect of the matters on which we are required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified
other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a
material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement that
they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the group’s position and performance, business model and strategy; or
• the Audit Committee Report does not appropriately address matters communicated by us to the Audit Committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
• the Directors’ statements, set out on page 69, in relation to going concern and longer-term viability; and
• the part of the Corporate Governance Statement on pages 40 to 44 relating to the company’s compliance with the eleven provisions of
the 2014 UK Corporate Governance Code specified for our review.
We have nothing to report in respect of the above responsibilities.
SCOPE AND RESPONSIBILITIES
As explained more fully in the Directors’ Responsibilities Statement set out on page 70, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial
statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. This report is made solely to
the company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on
our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this report as if set out in full and should be read to
provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
Tudor Aw (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
25 May 2016
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
For the year-ended 31 March 2016
75
Revenue
Cost of sales
Gross profit
Sales and marketing
Research and development
General finance and administration:
– Underlying
– Share-based payments
– Exceptional items
– Amortisation of intangible assets
– Foreign exchange gain
Operating loss
Finance income
Finance expense
Loss before taxation
Income tax charge
Loss for the period
Earnings per Share ($ cents)
Basic and diluted EPS
Adjusted EPS
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
478.2
(104.4)
373.8
(184.0)
(99.6)
(122.9)
(35.7)
(16.3)
(41.9)
(29.2)
0.2
(32.7)
0.7
(36.4)
(68.4)
(3.5)
(71.9)
(16.4)
27.5
446.7
(89.3)
357.4
(175.4)
(81.8)
(100.7)
(36.9)
(1.5)
(17.3)
(47.6)
2.6
(0.5)
1.1
(54.9)
(54.3)
(5.7)
(60.0)
(14.7)
24.8
Note
5
7
12
12
13
14
14
All of the loss for the year is attributable to equity shareholders of the parent company.
The notes on pages 80 to 118 form an integral part of these financial statements.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
76
FINANCIAL STATEMENTS ► CONSOLIDATED STATEMENT OF OTHER COMPRHENSIVE INCOME
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
For the year-ended 31 March 2016
Loss for the period
Other comprehensive losses:
Items that will not be reclassified subsequently to profit or loss:
Items that may be reclassified subsequently to profit or loss:
– Exchange differences arising on translation of foreign operations
Total other comprehensive losses
Comprehensive loss for the year
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
(71.9)
(60.0)
–
(2.9)
(2.9)
(74.8)
–
(7.1)
(7.1)
(67.1)
All of the comprehensive loss for the year is attributable to equity shareholders of the parent company.
The notes on pages 80 to 118 form an integral part of these financial statements.
FINANCIAL STATEMENTS ► CONSOLIDATED STATEMENT OF OTHER COMPRHENSIVE INCOME
77
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 March 2016
Registered number 9608658
Non-current assets
Intangible assets
Property, plant and equipment
Deferred tax asset
Other receivables
Current assets
Investments
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Deferred revenue
Income tax payable
Financial liabilities
Provisions
Non-current liabilities
Trade and other payables
Deferred revenue
Financial liabilities
Provisions
Deferred tax liabilities
Total liabilities
Net assets/(liabilities)
Represented by:
Share capital
Share premium
Merger reserve
Other reserves
Retained earnings/(deficit)
Share-based payment reserve
Translation reserve
Total equity
Note
31 March 2016
$M
31 March 2015
$M
15
16
18
19
22
20
19
21
23
24
25
26
23
24
25
26
18
28
756.6
24.9
73.9
0.8
856.2
–
18.7
129.8
66.8
215.3
1,071.5
76.4
286.5
11.2
26.2
0.3
400.6
0.8
212.2
300.9
1.0
10.1
525.0
925.6
145.9
21.3
115.9
(200.9)
(0.1)
205.7
36.2
(32.2)
145.9
719.3
25.1
47.2
0.4
792.0
0.6
12.5
110.5
72.6
196.2
988.2
557.0
251.4
10.7
2.9
0.7
822.7
0.7
181.9
377.8
0.3
10.6
571.3
1,394.0
(405.8)
552.6
–
(200.9)
10.4
(750.0)
11.4
(29.3)
(405.8)
These financial statements were approved by the Board of Directors on 25 May 2016, and were signed on its behalf by:
Nick Bray
Chief Financial Officer
The notes on pages 80 to 118 form an integral part of these financial statements.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 78
FINANCIAL STATEMENTS ► CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year-ended 31 March 2016
At 1 April 20142
Loss for the period:
Other comprehensive profit or loss:
Total comprehensive loss
Share-based payments expense
At 31 March 2015
Loss for the period:
Other comprehensive profit or loss:
Total comprehensive loss
Reserve transfer
Shares issued3
Capital reduction4
EBT treasury shares
Primary proceeds
Share issue expenses
Share options exercised
Disposal of EBT treasury shares
Share-based payments expense
Share-based payments deferred tax
Cash dividend (note 29)
At 31 March 2016
Share
Capital
$M
552.6
–
–
–
–
552.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
485.3
(533.1)
(485.2)
–
1.7
–
0.1
–
–
–
–
–
123.3
(8.6)
1.1
–
–
–
–
Share
Premium
$M
Merger
Reserve
$M
Other
Reserves1
$M
Retained
Earnings
$M
Share-
Based
Payment
Reserve
$M
Translation
Reserve
$M
Total
$M
(200.9)
10.4
(690.0)
10.0
(22.2)
(340.1)
–
–
–
–
–
–
–
–
(60.0)
–
(60.0)
–
(200.9)
10.4
(750.0)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10.4)
–
–
(0.2)
–
–
–
(71.9)
–
(71.9)
10.4
–
1,020.4
–
–
–
–
0.1
(0.1)
–
–
–
–
–
(3.1)
–
–
–
1.4
11.4
–
–
–
–
–
–
–
–
–
–
–
15.0
9.8
–
36.2
–
(7.1)
(7.1)
–
(60.0)
(7.1)
(67.1)
1.4
(29.3)
(405.8)
–
(2.9)
(2.9)
–
–
–
–
–
–
–
–
–
–
–
(71.9)
(2.9)
(74.8)
–
485.3
2.1
(0.2)
125.0
(8.6)
1.2
–
15.0
9.8
(3.1)
(32.2)
145.9
21.3
115.9
(200.9)
(0.1)
205.7
1
At 31 March 2016 other reserves comprise own shares held in an Employment Benefit Trust.
2
Sophos Group plc listed its shares on the London Stock Exchange on 1 July 2015. The Group has applied the principles of reverse acquisition accounting under IFRS 3 –
Business Combinations in preparing the consolidated financial statements. By applying the principles of reverse acquisition accounting, the Group is presented as if Sophos
Group plc has always owned Shield Midco Limited, the largest company for which consolidated financial statements were previously produced under IFRS. On 26 June 2015
Sophos Group issued 333,037 Ordinary, A-Class and C shares of £0.75 each together with 1,009,869 Preference shares of £0.10 each in consideration for the purchase of the
issued share capital of Pentagon Holdings SARL.
3
On 26 June 2015 Sophos Group plc issued 14 shares at nominal £0.001 in consideration for the purchase of $485.3m of Preferred Equity Certificates issued by Pentagon
Holdings SARL.
4 On 1 July 2015 Sophos Group plc reorganised its share capital and share premium to comprise 414,654,813 Ordinary shares of £0.03 each creating distributable reserves.
The notes on pages 80 to 118 form an integral part of these financial statements.
79
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year-ended 31 March 2016
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
Note
Loss for the year
Adjusted for:
Depreciation
Amortisation of intangible assets
Amortisation of fair value adjustment on deferred income
Foreign exchange
Share-based payments
Finance income
Finance costs
Income tax charge
Increase in inventories
increase in trade and other receivables
(Decrease)/increase in trade and other payables
Increase in deferred revenue
Increase/(decrease) in provisions
Cash generated from continuing operations
Income taxes paid
Net cash flow from operating activities
Investing activities
Disposal of subsidiary undertakings
Purchase of property, plant and equipment
Acquisition of subsidiaries net of cash acquired
Purchase of intangible assets – software
Proceeds on sale of assets
Finance income
Net cash flow from investing activities
Financing activities
Proceeds from issue of shares
Transaction costs related to the issue of shares
Dividends paid
Proceeds from borrowings
Repayment of borrowings
Transaction costs related to borrowings
Finance lease payments
Finance costs
Net cash flow from financing activities
(Decrease)/increase in cash and cash equivalents
Net foreign exchange differences
Cash and cash equivalents at the start of period
Cash and cash equivalents at the end of period
The notes on pages 80 to 118 form an integral part of these financial statements.
(71.9)
8.4
29.2
(1.8)
2.4
15.0
(0.7)
36.4
3.5
20.5
(6.7)
(16.1)
(10.9)
59.4
0.3
46.5
(25.2)
21.3
–
(8.5)
(46.0)
(8.3)
–
0.7
(62.1)
126.2
(8.6)
(3.1)
326.9
(389.6)
(4.4)
(0.1)
(12.9)
34.4
(6.4)
0.6
72.6
66.8
30
12
12
34
34
12
34
34
34
21
(60.0)
8.3
47.6
(3.5)
(2.0)
1.4
(1.1)
54.9
5.7
51.3
(8.1)
(15.8)
27.0
32.7
(1.5)
85.6
(25.7)
59.9
4.5
(7.3)
(10.2)
(7.6)
3.0
1.1
(16.5)
–
–
–
–
(4.0)
(0.2)
(0.1)
(21.8)
(26.1)
17.3
(8.8)
64.1
72.6
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year-ended 31 March 2016
1 GENERAL INFORMATION
Reporting entity
Sophos Group plc (“the Company”) is a company domiciled in the United Kingdom. The Company’s registered office is Sophos Group plc,
The Pentagon, Abingdon Science Park, Abingdon, Oxfordshire, OX14 3YP, United Kingdom. The consolidated financial statements of the
Company as at and for the year-ended 31 March 2016 comprise the Company and its subsidiaries (together referred to as “the Group”). The
Group is a leading provider of cloud enabled enduser and network security solutions.
Prior to the Initial Public Offering of the Company’s shares, Shield Midco Limited was the largest Company 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 APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRSs”)
The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective. The Directors are still
evaluating the impact on the Group of IFRS 16 – Leases, which was issued in January 2016 and becomes effective for annual periods
beginning on or after January 2019. The Directors do not anticipate that the following IFRSs will have a significant effect on the Group’s
consolidated financial information:
Effective for annual periods beginning on or after January 2016:
Amendments to IFRS 10 – “Consolidated Financial Statements”
Amendments to IFRS 11 – “Joint Arrangements”
Amendments to IFRS 12 – “Disclosure of Interests in Other Entities”
Amendments to IAS 16 – “Property, Plant and Equipment”
Amendments to IAS 27 – “Separate Financial Statements”
Amendments to IAS 28 – “Investments in Associates and Joint Ventures”
Amendments to IAS 38 – “Intangible Assets”
Effective for annual periods beginning on or after January 2017:
Amendments to IAS 7 – Statement of Cash Flows
Amendment to IAS12 – Income Taxes
Effective for annual periods beginning on or after January 2018:
IFRS 9 (2014) – “Financial Instruments”
Based on the latest available guidance, the Directors have made an initial assessment of the impact of IFRS 15 “Revenue from contracts
with customers”, which is effective for annual periods beginning on or after 1 January 2018, and have concluded that there may be a
material impact on the Group’s consolidated financial information as a result of the deferral of commissions and rebates in line with the
recognition of revenue, and the accelerated recognition of certain software revenue where the Group has no remaining vendor obligations.
The provisional estimate of this impact on results, had it been effective for the reported periods, is summarised as follows:
Increase in revenue
Decrease/(increase) in expenses
Increase in operating profit
Increase/(decrease) in cash EBITDA
Increase in other receivables
Decrease in deferred revenue
2016
$M
3.4
0.2
3.6
0.2
20.5
25.2
2015
$M
5.0
3.4
8.4
3.4
20.8
21.3
FINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OVERVIEW
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
81
3 SIGNIFICANT ACCOUNTING POLICIES
3.1 Statement of compliance
The consolidated financial statements have been prepared using International Financial Reporting Standards as adopted by the European
Union (“Adopted IFRSs”) as they apply to the Group.
3.2 Going Concern
The Group has considerable financial resources together with contracts with a large number of customers and across different geographic
areas and industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual financial statements.
Further information regarding the Group’s business activities, together with the factors likely to affect its future development, performance
and position is set out in the Strategic Report on pages 6 to 37. Further information regarding the financial position of the Group, its cash
flows, liquidity position and borrowing facilities are described in the Strategic Report and the notes to the financial statements. In addition,
note 27 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk
management objectives, and its exposures to credit risk and liquidity risk.
3.3 Basis of consolidation
The consolidated historical financial information has been prepared under the historical cost convention and is presented in US Dollars. All
values are rounded to the nearest 0.1 million ($M) unless otherwise indicated. The functional currency of Sophos Group plc is US Dollars.
The Group uses US Dollars as its presentation currency to aid comparability of its financial information with that of its peers; whose
information is generally presented in US Dollars.
The accounting policies used in preparing the consolidated historical financial information for the year-ended 31 March 2016 have been
consistently applied to all years presented and are set out below.
The historical financial information consolidates the financial information of Sophos Group plc and the entities it controls (its subsidiaries) at
31 March 2016. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity
so as to obtain benefits from its activities.
The financial information of the subsidiaries is prepared for the same reporting period as the parent Company, using consistent
accounting policies.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be
consolidated until the date that such control ceases.
All intra-Group balances, transactions, income and expenses and profits and losses resulting from intra-Group transactions that are
recognised in the statement of financial position of the individual reporting entities, are eliminated in full on consolidation.
3.4 Foreign currency translation
The individual historical financial information of each Group company is prepared in the currency of the primary economic environment
in which it operates (its functional currency). Each entity in the Group determines its own functional currency and items included in the
historical financial information of each entity are measured using that functional currency.
In preparing the financial information of the individual companies, transactions in foreign currencies are recorded at the rate of exchange
prevailing at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the exchange rate prevailing
at the reporting date. All exchange differences are taken to the Consolidated Statement of profit or loss, except for differences on
monetary assets and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until
the disposal of the net investment, at which time they are recognised in the consolidated statement of profit or loss. Tax charges and
credits attributable to exchange differences on those borrowings are also dealt with in equity. Non-monetary items that are measured in
terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Any goodwill
arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on
the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.
On consolidation, assets and liabilities of foreign subsidiaries are translated into the presentation currency (US Dollars) at the exchange
rate prevailing at the reporting date. Income and expense items are translated into US Dollars at the prior month closing rate to that in
which the transaction took place because they approximate the rate of exchange at the transaction dates. Exchange differences arising
on the translation of opening net assets of entities whose functional currency is not US Dollars, together with differences arising from the
translation of the net results at average or actual rates to the exchange rate prevailing at the reporting date, are taken to equity.
On disposal of a foreign entity, the deferred accumulated amount recognised in equity relating to that particular foreign operation is
recognised in the consolidated statement of profit or loss.
82
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
3.5 Critical accounting judgments and key sources of estimation uncertainty
The preparation of historical financial information requires management to make estimates and assumptions that affect the amounts
reported for assets and liabilities as at the reporting date and the amounts reported for revenues and expenses during the period. The
nature of estimation means that actual outcomes could differ from those estimates.
In the process of applying the Group’s accounting policies described in this note, management has made the following judgments that have
a significant effect on the amounts recognised in the historical financial information.
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting date, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below:
Revenue
The Group sells software products under fixed term contracts and perpetual licences. Where there is a multi-element arrangement, the
consideration receivable is allocated to each element of the arrangement and this is done on the basis of an estimate of their respective fair
values. In determining the relative fair values of each element, management make reference to current prices of individual elements and
adjust this by its relative share of discounts applied to the entire sale.
Deferred taxation
Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against
which the losses can be utilised. Management judgment is required to determine the amount of deferred tax assets that can be recognised,
based upon the likely timing and level of future taxable profits, together with future tax planning strategies. Further details are contained in
note 18.
Impairment of goodwill and intangibles
The Group determines whether goodwill and intangible assets are impaired on at least an annual basis. This requires an estimation of the
“value in use” of the cash-generating units to which the goodwill and intangible assets are allocated. Estimating a value in use amount
requires management to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable
discount rate in order to calculate the present value of those cash flows.
Share-based payments transactions
The fair value of employee share options and share warrants issued to third parties are measured using the Black-Scholes model.
Measurement inputs include share price on the measurement date, exercise price of the instrument, expected volatility (based on
weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of
the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate.
Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.
The fair value of Restricted share units and Performance share units is equal to the market price of the underlying shares on the day of
the grant.
Research and development costs
Development costs are capitalised in accordance with the accounting policy in this note. Determining the amounts to be capitalised
requires management to make assumptions regarding the capitalisation criteria requirements of IAS 38 – Intangible assets.
Business combinations
Management is required to make an assessment of the intangible assets to be recognised as a result of the business acquisition.
Furthermore, management is required to make an assessment as to whether the intangible assets are separable and their fair values as at
the time of acquisition. This is based on certain assumptions including the expected future cash flows arising from use of the intangibles,
discount rates and estimated economic lives of the intangibles.
Provisions
The Group measures provisions at management’s best estimate of the amount required to settle the obligation at the balance sheet
date, discounted where the time value of money is considered material. These estimates take account of available information, historical
experience and the likelihood of different possible outcomes. Both the amount and the maturity of these liabilities could be different from
those estimated.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 83
3.6 Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably
measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or
duty. The following specific recognition criteria must also be met before revenue is recognised:
Revenue from software licenses and service contracts
The Group sells software products under fixed term contracts and perpetual licenses. Where there is multi-element arrangement
revenue is allocated to each element on a fair value basis, based on the price at which the respective elements are usually sold separately,
regardless of any separate prices stated within the contract. The portion of the revenue allocated to an element is recognised when the
revenue recognition criteria for that element has been met.
Fixed term contracts
Customers who receive software products at the start of the contract under a fixed term license, and are entitled to receive regular
updates and upgrades for the duration of the license term which runs for periods ranging from 1 to 5 years.
Revenue for these fixed rate contracts is recognised rateably over the period that the contractual obligation exists.
Accrued and deferred revenue arising on long-term contracts is included in receivables as accrued income and payables as deferred
revenue as appropriate.
Where the Group contracts with an original equipment manufacturer (OEM) or a service provider, rather than an end user, it mirrors the
above policy and recognises the revenue in line with the contractual terms granted to the end user.
Perpetual licenses
Revenue is recognised immediately where customers purchase software products under a perpetual license. Revenue in respect of support
and maintenance contracts associated with perpetual licenses is recognised rateably over the life of the support/maintenance contract.
Sale of goods
Where software licenses and hardware and are sold together, if the software is not essential to the functionality of the tangible product,
then the revenue from the sale of goods is recognised immediately. However, where the software is essential to the functionality of the
tangible product and the hardware cannot function without the software, revenue from the sale of goods is recognised rateably over the
period of the associated software license contract.
Interest income
Revenue is recognised as interest accrues using the effective interest method. The effective interest rate is the rate that exactly discounts
estimated future cash receipts through the expected life of the financial instrument to its net carrying amount.
3.7 Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Cost comprises the
aggregate amount paid and the fair value of any other consideration given to acquire the asset and includes costs directly attributable to
making the asset capable of operating as intended.
Except for freehold land, depreciation is provided to write off the cost less the estimated residual values of all property, plant and
equipment on a straight-line basis over their estimated useful life as follows:
Freehold buildings
Leasehold improvements
Computer equipment
Other plant and equipment
Motor vehicles
Fixtures and fittings
25 years
Over the lease period
3 years
5 years
4 years
6 – 10 years
The carrying values of property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate the
carrying value may not be recoverable and are written down immediately to their recoverable amount.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Any gain or loss arising on de-recognition of the asset is included in the Consolidated Statement of profit or
loss in the period of de-recognition.
The residual values, useful lives and methods of depreciation of the assets are reviewed, and adjusted if appropriate, at each financial year-end.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 84
For the year-ended 31 March 2016
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
3.8 Business combinations and goodwill
Business combinations are accounted for using the acquisition accounting method. This involves recognising identifiable assets (including
previously unrecognised intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired
business at fair value.
Business combinations on or after 1 April 2004 are accounted for under IFRS 3. Any excess of the cost of the business combination over
the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities is recognised in the Consolidated
Statement of Financial Position as goodwill and is not amortised. To the extent that the net fair value of the acquired entity’s identifiable
assets, liabilities and contingent liabilities is greater than the cost of the investment, a gain is recognised immediately in the consolidated
statement of profit or loss. Goodwill recognised as an asset as at 31 March 2004 is recorded at its previous carrying amount under
UK GAAP and is not amortised.
After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for
impairment, at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired. Goodwill
assets considered significant in comparison to the Company’s total carrying amount of such assets have been allocated to cash-generating
units or groups of cash-generating units. Where the recoverable amount of the cash-generating unit is less than its carrying amount
including goodwill, an impairment loss is recognised in the consolidated statement of profit or loss.
The carrying amount of goodwill allocated to a cash-generating unit is taken into account when determining the gain or loss on disposal of
the unit, or of an operation within it.
3.9 Intangible assets
Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses.
Intangible assets acquired separately from a business are carried initially at cost. An intangible asset acquired as part of a business
combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its fair value can
be measured reliably. Expenditure on internally developed intangible assets is taken to the Consolidated Statement of profit or loss in the
period in which it is incurred to the extent that the expenditure does not qualify for capitalisation under research and development costs.
Where computer software is not an integral part of a related item of computer hardware, the software is classified as an intangible
asset. The capitalised costs of software for internal use include external direct costs of materials and services consumed in developing or
obtaining the software, and incremental payroll and payroll-related costs arising from the assignment of employees to implementation
projects. Capitalisation of these costs ceases no later than the point at which the software is substantially complete and ready for its
intended internal use.
Intangible assets with a finite life have no residual value and are amortised over their expected useful lives as follows:
Intangible assets arising on acquisition of subsidiaries
Intellectual property relating to Unified Threat Management technology
Other intellectual property
Brand names
Customer base
Other purchased intangible assets
All other intangibles
–
–
–
–
65% reducing balance basis
35% reducing balance basis
35% reducing balance basis
45% – 49% reducing balance basis
–
3 years (straight-line basis)
The amortisation expense on intangible assets with finite lives is recognised in the consolidated statement of profit or loss as a general
finance and administration cost. The amortisation period and the amortisation method for an intangible asset with a finite useful life are
reviewed at least annually.
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying value
may not be recoverable.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such
intangibles are not amortised. The term of their useful life is reviewed annually to determine whether indefinite life assessment continues
to be appropriate.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 85
3.10 Research and development costs
Expenditure on research activities is expensed as incurred.
Development expenditure is recognised as an intangible asset when its future recoverability can reasonably be regarded as assured and
technical feasibility and commercial viability can be demonstrated.
During the period of development, the asset is tested for impairment annually. Following the initial recognition of the development
expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated
impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over
the period of expected future sales.
Development expenditure incurred on minor or major upgrades, or other changes in software functionalities does not satisfy the criteria,
as the product is not substantially new in its design or functional characteristics. Such expenditure is therefore recognised as an expense in
the Consolidated Statement of profit or loss as incurred.
3.11 Impairment of assets
At least annually, or when otherwise required, management reviews the carrying amounts of the Group’s tangible and intangible assets to
determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of any impairment loss.
Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of
money as well as risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the
asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately in the
Consolidated Statement of profit or loss.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable
amount, but not beyond the carrying amount that would have been determined had no impairment loss been recognised for the asset in
prior years. A reversal of an impairment loss is recognised immediately as income in the Consolidated Statement of profit or loss, although
impairment losses relating to goodwill may not be reversed.
3.12 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost includes all costs incurred in bringing each product to its present
location and condition. The cost of raw materials, consumables and goods for resale is based on the purchase cost and is determined on a
first-in, first-out basis.
Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal.
3.13 Financial instruments
Financial assets and liabilities are recognised in the Group’s statement of financial position when the Group becomes party to the
contractual provisions of the instrument. When financial instruments are recognised initially they are measured at fair value, being the
transaction price plus, in the case of financial assets and financial liabilities not at fair value through profit or loss, directly attributable
transaction costs.
Trade receivables
Trade receivables, which generally have 30-90 day terms, are carried at original invoice amount, including value added tax and other sales
taxes, less an estimate made for doubtful receivables based on a review of any outstanding amounts at the period end and on historical
performance. Provision for bad debts is made in the period in which they are identified.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and bank deposits repayable in 90 days or less. For the purpose of the Consolidated
Statement of Cash Flows, cash and cash equivalents consist of cash in hand and bank deposits net of outstanding bank overdrafts.
Trade payables
Trade payables are recognised at cost, which is deemed to be materially the same as the fair value.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 86
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
Classification of shares as debt or equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.
When shares are issued, any component that creates a financial liability of the Group is presented as a liability in the Consolidated
Statement of Financial Position; measured initially at fair value net of transaction costs and thereafter at amortised cost until extinguished
on conversion or redemption. The corresponding dividends relating to the liability component are charged as interest expense in the
Consolidated Statement of profit or loss.
Equity instruments issued by the Company are recorded as the proceeds received, net of direct issue costs. Equity instruments are
classified according to the substance of the contractual arrangements entered into.
Interest bearing loans and borrowings
Obligations for loans and borrowings are recognised when the Group becomes party to the related contracts and are measured initially at
fair value less directly attributable transactions costs.
After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective
interest method.
Gains and losses arising on the re-purchase, settlement or other cancellation of liabilities are recognised respectively in finance income and
finance expense.
Derivative financial instruments
The Group sometimes uses derivative financial instruments, principally forward foreign currency contracts to reduce its exposure to
exchange rate movements and interest rate caps to reduce its exposure to fluctuating interest rates. The Group does not hold or issue
derivatives for speculative or trading purposes.
Derivative financial instruments are recognised as assets and liabilities measured at their fair values at the reporting date. Changes in
the fair values are recognised in the Consolidated Statement of profit or loss and this is likely to cause volatility in situations where the
carrying value of the hedged item is either not adjusted to reflect fair value changes arising from the hedged risk or is so adjusted but
that adjustment is not recognised in the Consolidated Statement of profit or loss. Provided the conditions specified by IAS 39 — Financial
Instruments are met, hedge accounting may be used to mitigate this volatility.
3.14 Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received
and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the lease term.
3.15 Provisions
A provision is recognised when the Group has a legal or constructive obligation as a result of a past event and it is probable that an outflow
of economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the
effect is material, expected future cash flows are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific
to the liability.
Where the Group expects some or all of a provision to be reimbursed, for example under an insurance policy, the reimbursement is
recognised as a separate asset but only when recovery is virtually certain.
The expense relating to any provision is presented in the consolidated statement of profit or loss net of any reimbursement.
Where discounting is used, the increase in the provision due to unwinding the discount is recognised as a finance cost.
3.16 Taxation
Current tax is based on the taxable profit for the period. Taxable profit differs from net profit as reported in the consolidated statement of
profit or loss because it excludes items of income or expense that are taxable or deductible in other financial years and it further excludes
items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 87
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
historical financial information and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets
are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be
utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the
initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor
the accounting profit.
As explained under ‘Share-based payments’ below, a remuneration expense is recorded in the consolidated statement of profit or loss
over the period from the award date to the vesting date of the relevant options. Where there is a temporary difference between the
accounting and tax bases, a deferred tax asset may be recorded. Any deferred tax asset arising on share option awards is calculated as the
estimated amount of tax deduction to be obtained in the future (based on the Group’s share price at the reporting date) pro-rated to the
extent that the services of the employee have been rendered over the vesting period. If this amount exceeds the cumulative amount of the
remuneration expense at the statutory rate, the excess is recorded directly in equity, against retained earnings. Similarly, current tax relief
in excess of the cumulative amount of the remuneration expense at the statutory rate is also recorded in retained earnings. Deferred tax
assets have only been recognised in jurisdictions in which future tax deductions are expected.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is
able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable
future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in the consolidated statement of profit or loss, except when it relates to items charged or credited
directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and deferred tax liabilities are offset
if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same
taxation authority.
3.17 Pensions and other post-retirement benefits
The Group operates defined contribution pension schemes for its employees. The assets of the schemes are held separately from those
of the Group in independently administered funds. Contributions to defined contribution schemes are recognised in the Consolidated
Statement of profit or loss in the period in which they become payable.
3.18 Share-based payments
Employees (including senior executives) of the Group receive remuneration in the form of share-based payment transactions, whereby
employees render services as consideration for equity instruments (“equity-settled transactions”).
The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted.
The fair value is determined by using an appropriate pricing model, further details of which are given in note 30.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, ending on the date on which the
relevant employees become fully entitled to the award.
At each reporting date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has
expired and management’s best estimate of the achievement or otherwise of non-market conditions and of the number of equity
instruments that will ultimately vest or, in the case of an instrument subject to a market condition, be treated as vesting as described
above. The movement in cumulative expense since the previous reporting date is recognised in the consolidated statement of profit or loss,
with a corresponding entry in equity.
Where the terms of an equity-settled award are modified or a new award is designated as replacing a cancelled or settled award, the
cost based on the original award terms continues to be recognised over the original vesting period. In addition, an expense is recognised
over the remainder of the new vesting period for the incremental fair value of any modification, based on the difference between the fair
value of the original award and the fair value of the modified award, both as measured on the date of the modification. No reduction is
recognised if this difference is negative.
Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised
in the consolidated statement of profit or loss for the award is expensed immediately. Any compensation paid up to the fair value of the
award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the
Consolidated Statement of profit or loss.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 88
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
3.19 Exceptional items
Exceptional items are those that in the judgment 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 more accurately. Such items are
included within the income statement caption to which they relate, and are separately disclosed either in the notes to the consolidated
financial statements or on the face of the consolidated income statement.
3.20 Events after reporting date
Events between the reporting date and the date the financial statements are approved, favourable and unfavourable, providing evidence
of conditions that existed at the reporting date, adjust the amounts recognised in the financial statements. Those that indicate conditions
arising after the reporting date are disclosed but are not recognised within the financial statements.
4 SEGMENT INFORMATION
For internal 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. This is consistent with the
information provided to the Chief Operating Decision Maker. 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 Europe, Middle East and Africa
(“EMEA”), The Americas and Asia Pacific and Japan (“APJ”).
Billings are 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. A disclosure of revenue by region is included
in the Financial Review on page 27.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 3. 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.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 89
Geographical segments
The following tables present Billings, expenditure and certain asset information regarding the Group’s geographical segments for the year-
ended 31 March 2016 and 31 March 2015.
Year-ended 31 March 2016
Billings
Regional cost of sales
Regional gross margin
Regional sales and marketing expense
Regional operating profit
Revenue deferral
Central costs
Amortisation
Depreciation
Operating loss
Year-ended 31 March 2015
Billings
Regional cost of sales
Regional gross margin
Regional sales and marketing expense
Regional operating profit
Revenue deferral
Central costs
Amortisation
Depreciation
Operating loss
Other Segment information
Segment Assets
Americas
EMEA
APJ
Total segment assets
Unallocated assets
Consolidated total assets
Americas
$M
187.9
(13.3)
174.6
(55.4)
119.2
Americas
$M
152.9
(11.1)
141.8
(48.0)
93.8
EMEA
$M
264.0
(34.6)
229.4
(60.2)
169.2
EMEA
$M
255.5
(27.7)
227.8
(58.1)
169.7
APJ
$M
83.0
(15.8)
67.2
(28.1)
39.1
APJ
$M
67.6
(11.3)
56.3
(25.9)
30.4
Total
$M
534.9
(63.7)
471.2
(143.7)
327.5
(56.7)
(265.9)
(29.2)
(8.4)
(32.7)
Total
$M
476.0
(50.1)
425.9
(132.0)
293.9
(29.3)
(209.2)
(47.6)
(8.3)
(0.5)
31 March 2016
$M
31 March 2015
$M
311.8
568.1
117.7
997.6
73.9
1,071.5
290.4
522.7
127.3
940.4
47.8
988.2
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
90
4 SEGMENT INFORMATION CONTINUED
Unallocated assets relate to financial instruments and corporation and deferred tax.
Depreciation and amortisation
Americas
EMEA
APJ
Total depreciation and amortisation
Additions to non-current assets
Americas
EMEA
APJ
Total additions to non-current assets
Additions to non-current assets exclude financial instruments and deferred tax assets.
Non-current assets by country
UK
USA
Germany
Other countries
Total non-current assets by country
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
7.1
27.8
2.7
37.6
12.1
38.6
5.2
55.9
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
1.8
11.9
3.1
16.8
1.4
11.2
2.2
14.8
31 March 2016
$M
31 March 2015
$M
27.5
2.9
2.5
8.1
41.0
28.3
2.3
2.1
6.4
39.1
Non-current assets by country exclude financial instruments, goodwill, IP, other intangibles and deferred income taxes.
Revenue from external customers by country
UK
USA
Germany
Other countries
Total revenue from continuing operations
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
58.9
151.3
89.3
178.7
478.2
59.0
136.5
91.1
160.1
446.7
The Group’s revenue is diversified across its entire end customer base and no single end customer or channel partner accounted for greater
than 10% of the Group’s billings; in 2016 two distributors accounted for 17% and 12% each of Group billings which were attributable to all
segments of the Group (2015: two distributors at 14% and 13% each).
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5 REVENUE
Revenue recognised in the Consolidated Statement of profit or loss is analysed as follows:
Subscription
Hardware
Other
Total
91
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
364.7
100.9
12.6
478.2
354.8
80.0
11.9
446.7
6 RECONCILIATION OF OPERATING LOSS TO CASH EBITDA
Cash EBITDA is defined as the Group's operating loss adjusted for depreciation and amortisation charges, any gains or losses on the
sale of tangible and intangible assets, share option charges, unrealised foreign exchange differences and exceptional items with billings
replacing revenue.
The Directors believe this measure is a more appropriate earnings and cash flow measure than EBITDA.
Operating loss
Depreciation
Loss on group asset disposal
Amortisation of intangible purchased assets
Share-based payments expense
Exceptional items and other adjustments
Foreign exchange loss/(gain)
Adjusted EBITDA
Net deferral of revenue
Cash EBITDA
Billings
Revenue
Net deferral of revenue
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
(32.7)
8.4
–
29.2
15.0
41.9
2.4
64.2
56.7
120.9
534.9
(478.2)
56.7
(0.5)
8.3
–
47.6
1.4
17.3
(2.0)
72.1
29.3
101.4
476.0
(446.7)
29.3
7 EXCEPTIONAL ITEMS
Exceptional items are those that in the Directors 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 year-ended 31 March 2016, Initial Public Offering (“IPO”) costs of $17.8M (2015: $Nil), acquisition related expenses of $1.7M
(2015: $3.3M), restructuring and integration costs of $2.6M (2015: $6.5M) and costs incurred in relation to the defence and settlement
of certain intellectual property litigation of $19.8M (2015: $7.5M). The IP litigation costs includes a one-time payment to Fortinet Inc. on
9 December 2015 in respect of the settlement of all outstanding litigation, including various claims asserted by Fortinet Inc. against the
Group and a number of former Fortinet Inc. employees employed by the Group and the respective patent claims the parties had asserted
against each other. This resulted in total Exceptional items of $41.9M (2015: $17.3M). Tax credits on these exceptional items amounted to
$5.3M (2015: $6.2M).
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 92
8 LOSS ON ORDINARY ACTIVITIES
The loss on ordinary activities before taxation is stated after charging:
Depreciation of property, plant and equipment
Amortisation of intangible assets
Research and development expenditure
Operating lease rentals:
Property
Other
Pension scheme contributions
Impairment of trade receivables
Net foreign currency differences
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
8.4
29.2
99.6
8.9
1.4
6.7
0.5
(0.2)
8.3
47.6
81.8
9.3
1.4
5.1
0.8
(2.6)
9 AUDITOR’S REMUNERATION
The Group paid the following amounts to its auditors in respect of the audit of the historical financial information and for other services
provided to the Group.
Audit of the financial statements
Subsidiary local statutory audits
Total audit fees
Taxation compliance services
Other assurance services1
Total non-audit fees
1 Other assurance servises relate to the Company's Initial Public Offering.
10 EMPLOYEE COSTS
Wages and salaries
Social Security costs
Pension costs
Other costs
Share-based payments (note 30)
Total employee costs
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
0.3
0.2
0.5
0.2
1.1
1.3
–
0.5
0.5
0.1
0.1
0.2
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
200.5
19.1
6.7
7.7
234.0
16.3
250.3
185.3
19.2
5.1
5.8
215.4
1.5
216.9
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The average number of employees during the period, analysed by category, was as follows:
Technical
Sales and marketing
Administration
Total average number of employees
11 DIRECTORS’ REMUNERATION
Directors' emoluments
Share-based payment – equity-settled
Total Directors' emoluments
93
Year-ended
31 March 2016
Year-ended
31 March 2015
1,487
934
278
2,699
1,229
797
214
2,240
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
3.0
5.2
8.2
3.3
0.3
3.6
Directors’ remuneration represents all emoluments and aggregate contributions to pension schemes earned during the year as a Director
of Sophos Group plc and its subsidiaries. Further details can be found in the Group’s Remuneration Report on pages 58 to 65.
12 FINANCE INCOME AND EXPENSE
Finance income
Interest on bank deposits
Finance expense
Interest expense on loans and borrowings
Other interest, bank charges and swap settlements
Accretion on Subordinated Preference Certificates
Accretion on contingent consideration
Foreign exchange loss/(gain) on borrowings1
Amortisation of facility fees
Facility fees expensed on settlement of debt
Total finance expense
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
0.7
1.1
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
11.0
0.5
11.5
13.5
0.2
4.4
0.9
5.9
36.4
20.8
0.9
21.7
54.8
–
(22.7)
1.1
–
54.9
1
Prior to the Initial Public Offering of the Company’s shares, Shield Midco Limited was the largest Company for which consolidated financial statements were produced.
Statutory accounts for that company for the year-ended 31 March 2015 included foreign exchange losses and gains on borrowings within the operating result rather than as
part of interest expense.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 94
13 TAXATION
UK corporation tax for the year-ended 31 March 2016 is calculated at 20% (2015:21%) of the estimated assessable loss for the period.
Current income tax:
UK corporation tax
Adjustments in respect of previous years UK corporation tax
Overseas tax before exceptional items
Overseas tax on exceptional items
Adjustment in respect of previous years
Total current tax charge
Deferred tax:
Origination and reversal of temporary differences
Origination and reversal of temporary differences on exceptional items
Adjustment in respect of previous years
Total deferred tax credit
Total income tax charge
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
(2.0)
(2.7)
30.4
(1.0)
0.6
25.3
(15.9)
(4.2)
(1.7)
(21.8)
3.5
–
–
29.5
(6.2)
1.5
24.8
(13.9)
–
(5.2)
(19.1)
5.7
An election was made in the period for Sophos Limited to be included within the new UK Research & Development (R&D) Expenditure
Credit regime for the FY14 and FY15 tax periods, this has resulted in the UK prior year current tax adjustment shown above.
The charge for the year-ended can be reconciled to the loss for the period before taxation per the Consolidated Statement of profit or loss
as follows:
Loss for the year before taxation
Loss for the year before taxation multiplied by the standard rate of
corporation tax in the UK of 20% (2015: 21%)
Effects of:
Adjustments in respect of previous years
Change in tax rate during the year
Expenses not deductible for tax purposes
Losses not recognised
Higher tax rates on overseas earnings
Research and development and other tax credits
Other movements
Charge for taxation on loss for the year
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
(68.4)
(13.7)
(54.3)
(11.4)
(4.2)
1.1
7.0
6.8
8.7
(3.2)
1.0
3.5
(3.7)
1.6
6.0
8.0
7.3
(1.7)
(0.4)
5.7
The Group’s taxation strategy is closely aligned to its business strategy operational needs. Oversight of taxation is within the remit of the
Audit and Risk Committee composed of Independent Non-Executive Directors. The Chief Financial Officer is responsible for tax strategy
supported by a global team of tax professionals.
There is an ongoing risk, with changes to taxation law or perceptions on tax planning strategies in multiple territories where the Group
operates, that could lead to a higher effective tax rate. Legislative change in key territories is being monitored and acted upon. Sophos
strives for an open and transparent relationship with all revenue authorities. A tax authority may seek adjustment to the filing position
adopted by a Group company and it is accepted that interpretation of complex regulations may lead to additional tax being assessed.
Uncertain tax positions are monitored regularly and the provision made in the accounts was appropriate.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
95
14 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:
Loss for the period attributable to the equity holders of the Company
Cash EBITDA for the period attributable to the equity holders of the Company (see note 6)
Weighted average number of shares (000’s):
Basic and diluted EPS
Adjusted EPS
Year-ended
31 March 2016
$’M
Year-ended
31 March 2015
$’M
(71.9)
120.9
(60.0)
101.4
Year-ended
31 March 2016
Year-ended
31 March 2015
438,640
408,207
Year-ended
31 March 2016
$ Cents
Year-ended
31 March 2015
$ Cents
(16.4)
27.5
(14.7)
24.8
The weighted average number of shares used in the calculation for the current and comparative periods reflects the shares in issue after
adjusting for the capital restructuring.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 96
15 INTANGIBLE ASSETS
Cost
At 31 March 2014
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
At 31 March 2015
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
Goodwill
$M
694.1
Intellectual
property
$M
360.4
–
1.4
–
(25.7)
669.8
–
41.6
–
4.9
–
9.9
–
(8.9)
361.4
–
5.6
–
1.9
At 31 March 2016
716.3
368.9
Amortisation/Impairment loss
At 31 March 2014
Charge for the period
Disposals
Effect of movements in exchange rates
At 31 March 2015
Charge for the period
Disposals
Effect of movements in exchange rates
At 31 March 2016
Net book value
At 31 March 2015
At 31 March 2016
–
0.2
–
–
0.2
–
–
–
0.2
669.6
716.1
330.0
20.6
–
(8.7)
341.9
12.7
–
1.7
356.3
19.5
12.6
Software
$M
25.7
7.6
–
(1.1)
(3.2)
29.0
8.3
–
(0.1)
(1.0)
36.2
12.5
5.4
(0.7)
(1.8)
15.4
6.2
(0.1)
(0.6)
20.9
13.6
15.3
Others
$M
274.2
–
–
–
(15.5)
258.7
–
6.2
–
2.3
Total
$M
1,354.4
7.6
11.3
(1.1)
(53.3)
1,318.9
8.3
53.4
(0.1)
8.1
267.2
1,388.6
234.3
21.4
–
(13.6)
242.1
10.3
–
2.2
254.6
16.6
12.6
576.8
47.6
(0.7)
(24.1)
599.6
29.2
(0.1)
3.3
632.0
719.3
756.6
Intellectual property is written off on a reducing balance basis over its estimated useful life of up to fifteen years.
Software is amortised on a straight line basis over 36 months.
Within Other intangibles, brand names are amortised on a reducing balance basis over a period of up to twenty years, and the customer
base on a reducing balance basis over a period of up to fourteen years.
The Group has not capitalised development costs in the year-ended 31 March 2016 (2015: $Nil).
The Group does not have any intangible assets with indefinite useful lives.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
97
Total
$M
59.8
7.2
0.2
(8.7)
(11.8)
46.7
8.5
1.6
(0.8)
(1.7)
54.3
25.8
8.3
0.2
(5.8)
(6.9)
21.6
8.4
0.9
(0.8)
(0.7)
29.4
25.1
24.9
16 PROPERTY, PLANT AND EQUIPMENT
Cost
As at 31 March 2014
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2015
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2016
Depreciation
As at 31 March 2014
Charge for the year
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2015
Charge for the year
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2016
Net book value
At 31 March 2015
At 31 March 2016
Land and
Buildings
$M
Plant and
Machinery
$M
Fixtures and
Fittings
$M
34.7
0.2
–
(7.8)
(6.6)
20.5
1.6
–
(0.1)
(1.5)
20.5
12.7
2.6
–
(5.0)
(3.2)
7.1
2.5
–
(0.1)
(0.7)
8.8
13.4
11.7
21.9
5.9
0.2
(0.7)
(4.5)
22.8
5.9
1.5
(0.6)
(0.2)
29.4
12.2
5.2
0.2
(0.7)
(3.3)
13.6
5.1
0.9
(0.6)
(0.1)
18.9
9.2
10.5
3.2
1.1
–
(0.2)
(0.7)
3.4
1.0
0.1
(0.1)
–
4.4
0.9
0.5
–
(0.1)
(0.4)
0.9
0.8
–
(0.1)
0.1
1.7
2.5
2.7
Included in the net book value of property, plant and equipment are assets under finance lease of $0.2M (2015: $0.1M).
There has been no impairment to the property, plant and equipment held by the Group.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
98
17 IMPAIRMENT OF GOODWILL AND INTANGIBLES
Before recognition of impairment losses, the carrying amount of goodwill had been allocated as follows:
Americas
EMEA
APJ
31 March 2016
$M
31 March 2015
$M
253.5
379.3
83.3
716.1
241.7
344.4
83.5
669.6
Impairment of goodwill and intangible assets is tested annually or more frequently where there is indication of impairment.
Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs. If the recoverable amount of an asset or cash-generating unit is estimated to be less than
its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. An impairment loss is
recognised as an expense immediately in the Consolidated Statement of profit or loss.
Goodwill is considered impaired if the carrying value of the cash-generating unit to which it relates is greater than the higher of fair value
less costs of disposal and the value in use.
For the year-ended 31 March 2016, the Directors have reviewed the value of goodwill based on internal value in use calculations. The key
assumptions for these calculations are discount rates, growth rates and expected changes to billings and direct costs during the period.
The Group prepares cash flow forecasts derived from the Directors' most recent financial forecasts for the following five years. The growth
rates for the five year period are based on management’s expectations of the medium-term operating performance of the cash-generating
unit, planned growth in market share, industry forecasts, growth in the market and specific regional considerations. Discount rates have
been estimated based on rates that reflect current market assessments of the Group’s weighted average cost of capital.
The key assumptions used in the assessments in the year-ended 31 March 2016 are as follows:
Long-term regional growth rate beyond 5 years
Discount rate
Americas
%
2.50%
11.00%
The key assumptions used in the assessments in the year-ended 31 March 2015 were as follows:
Long-term regional growth rate beyond 5 years
Discount rate
Americas
%
2.50%
12.00%
EMEA
%
1.50%
10.00%
EMEA
%
3.00%
12.50%
APJ
%
2.00%
12.00%
APJ
%
3.50%
13.00%
As at 31 March 2016, there were no indicators of impairment that suggested the carrying amounts of the Group’s long-lived assets are
not recoverable.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18 DEFERRED TAX
Deferred tax assets and liabilities are attributable to the following:
Deferred income tax assets in relation to:
Deferred revenue
Tax value of carry forward losses of UK subsidiaries
Tax value of carry forward losses of overseas sunsidiaries
Advanced capital allowances of overseas subsidiaries
Share-based payments
Other timing differences
Total
Deferred income tax liabilities in relation to:
Intangible assets
Other timing differences
Total
99
31 March 2016
$M
31 March 2015
$M
35.1
9.3
2.3
6.7
13.7
6.8
73.9
9.6
0.5
10.1
29.9
1.7
3.7
5.7
0.4
5.8
47.2
10.2
0.4
10.6
At the balance sheet date the Group has unused tax losses of $248.5M (2015: 201.7M) available for offset against future profits. A deferred
tax asset has been recognised in respect of $54.6M (2015: $23.5M) of such losses. No deferred tax asset has been recognised in respect of
the remaining $193.9M (2015:$178.1M unutilised) as it is not considered probable that there will be the required type of future trading or
non-trading profits available in the correct entities necessary to permit offset and recognition.
The Group’s tax charge is driven by the profit mix amongst the key jurisdictions in which the Group operates. A deferred tax asset has
been recognised in respect of losses where current forecasts indicate profits will arise in the foreseeable future against which the losses
recognised will be offset.
As at 31 March 2016 the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which
deferred tax liabilities have been recognised was $Nil (2015: $Nil). No liability has been recognised because the Group is in a position to
control the reversal of temporary differences and it is probable that such differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realised or the
liability settled, based on tax rates that have been enacted or substantially enacted at the reporting date. The Finance (No. 2) Act 2015
determined that the main rate of corporation tax would reduce from 20% to 19% with effect from 1 April 2017 and reduced from 19% to
18% with effect from 1 April 2020.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
100
19 TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Prepayments
Amounts due from parent
Other receivables
Total current trade and other receivables
Non-current
Other receivables
Total non-current trade and other receivables
31 March 2016
$M
31 March 2015
$M
103.7
19.0
–
7.1
129.8
0.8
0.8
88.0
13.2
0.8
8.5
110.5
0.4
0.4
Trade receivables are non interest-bearing and are generally on 30-90 day terms depending on the geographical territory in which sales
are generated. The carrying value of trade and other receivables also represents their fair value. During the period ended 31 March 2016 a
provision for impairment of $0.3M (2015: $0.8M) was recognised in operating expenses against receivables.
At 31 March 2016, trade receivables at a nominal value of $0.7M (2015: $0.7M) were impaired and fully provided for. Movements in the
provision for impairment of receivables were as follows:
At 1 April
Charge for the year
Amounts written off
Unused amounts reversed
At 31 March
The analysis of trade receivables that were past due,
but not impaired is as follows:
Up to 3 months
3 to 6 months
Greater than 6 months
Total
20 INVENTORIES
Finished goods and goods for resale
The amount of write-down of inventories included within cost of sales was $1.0M (2015: $3.2M).
31 March 2016
$M
31 March 2015
$M
0.7
0.3
(0.1)
(0.2)
0.7
4.1
0.2
–
4.3
0.9
0.8
(0.2)
(0.8)
0.7
3.1
0.1
0.2
3.4
31 March 2016
$M
31 March 2015
$M
18.7
12.5
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
101
21 CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Short-term deposits
Total cash and cash equivalent
31 March 2016
$M
31 March 2015
$M
49.7
17.1
66.8
59.0
13.6
72.6
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of
between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective
short-term deposit rates.
22 INVESTMENTS
Employee benefit Trust
Brought forward
Shares cancelled on pre-admission restructuring
Own shares transferred to equity
Carried forward
23 TRADE AND OTHER PAYABLES
Current
Trade payables
Accruals
Social security and other taxes
Other payables
Amounts due to parent – loans and accumulated interest
Total current trade and other payables
Non-current
Other payables
Total non-current trade and other payables
31 March 2016
$M
31 March 2015
$M
0.6
(0.4)
(0.2)
–
0.6
–
–
0.6
31 March 2016
$M
31 March 2015
$M
21.8
46.5
5.2
2.9
–
76.4
0.8
0.8
25.8
51.3
5.6
2.4
471.9
557.0
0.7
0.7
Trade payables are non-interest bearing and are normally settled on 30-day terms or as otherwise agreed with suppliers.
Loans and accumulated interest due to parent with a value of $485.3M were capitalised on 26 June 2015 as part of the Group
reorganisation leading up to the Initial Public Offering of the Company’s shares. Prior to capitalisation, the Loans were disclosed within
Trade and other payables.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
102
24 DEFERRED REVENUE
Current
Non-current
At 1 April
Billings deferred during the year
Revenue released to the statement of profit or loss
Translation and other adjustments
Current
Non-current
At 31 March
31 March 2016
$M
31 March 2015
$M
251.4
181.9
433.3
534.9
(478.2)
8.7
286.5
212.2
498.7
265.9
181.9
447.8
476.0
(446.7)
(43.8)
251.4
181.9
433.3
On acquisition of SurfRight B.V. on 3 December 2015, deferred revenue was increased by $1.3M representing the fair value of future
support costs acquired. $0.9M remains unamortised at 31 March 2016.
On acquisition of Cyberoam Technologies Pvt Ltd on 6 February 2014, deferred revenue was increased by $7.1M representing the fair value
of future support costs acquired. $0.4M (2015 : $2.0M) remains unamortised at 31 March 2016.
On acquisition of the Astaro group on 30 June 2011, deferred revenue was reduced by $17.6M representing the fair value of original selling
cost and associated profit. $.0.0 (2015 : $0.3M) remains unamortised at 31 March 2016.
25 FINANCIAL LIABILITIES
The fair values of financial assets and liabilities are included at the price that would be received to sell an asset, or paid to transfer a liability,
in an orderly transaction between market participants at the end of the reporting period. The following methods and assumptions were
used to estimate the fair values:
• Cash and cash equivalents
– approximates to the carrying amount
• Finance leases
• Bank loans
– approximates to the carrying amount
– approximates to the carrying amount
•
Interest rate swaps, caps and floors
– based on the net present value of discounted cash flows
• Receivables and payables
– approximates to carrying amount
Where financial assets and liabilities are measured at fair values their measurement should be classified into the following hierarchy:
• Level 1 – quoted prices (unadjusted) in active markets from identical assets or liabilities
• Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices)
• Level 3 – inputs for the asset or liability that are not based on observable market data
The Group had a Level 3 financial liability of $2.1M of contingent consideration measured at fair value through profit and loss at 31 March
2016 (2015 : $Nil).
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 103
Total financial liabilities at the end of the reporting period were as follows:
Current instalments due on finance leases
Current instalments due on bank loans
Contingent consideration
Unamortised facility fees
Total current financial liabilities
Non-current instalments due on finance leases within 5 years
Non-current instalments due on bank loans
Contingent consideration
Unamortised facility fees
Total non-current financial liabilities
Total financial liabilities
31 March 2016
$M
31 March 2015
$M
0.1
25.0
1.1
–
26.2
0.1
303.4
1.0
(3.6)
300.9
327.1
–
3.9
–
(1.0)
2.9
–
382.7
–
(4.9)
377.8
380.7
Finance leases
The Group has acquired lease obligations on certain of its fixtures and fittings under finance leases with terms of 3 to 5 ½ years and
underlying interest rates ranging from 5.2% – 6.3% per annum as part of the acquisition of Reflexion Inc. At 31 March 2016, the present
value of future lease payments was $0.2M (2015: $0.0).
Contingent Consideration
As part of the purchase agreement with the previous owners of Reflexion Inc., a contingent consideration has been agreed. The
consideration is dependent on the billings of the Reflexion Inc. product range for the calendar years ended 31 December 2015 and ending
31 December 2016 with a maximum payout of $6.5M. The fair value of the contingent consideration at the acquisition date was estimated
at $2.0M. The contingent consideration is due for final measurement and payment to the former shareholders on 5 June 2016 in respect
of billings for the calendar year ended 31 December 2015, and no later than 31 March 2017 in respect of the billings for the calendar year
ending 31 December 2016.
Loans and Borrowings
Included in borrowings are bank loans of $328.4M (2015: $386.6M) as analysed below. This note provides information about the
contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information
about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 27.
Current instalments due on bank loans
Non-current instalments due on bank loans
Total bank loans
The bank loans are repayable as follows:
Due within one year
Due between one and two years
Due between two and five years
Due after more than five years
Total bank loans
31 March 2016
$M
31 March 2015
$M
25.0
303.4
328.4
3.9
382.7
386.6
31 March 2016
$M
31 March 2015
$M
25.0
–
303.4
–
328.4
3.9
3.9
11.7
367.1
386.6
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
104
25 FINANCIAL LIABILITIES CONTINUED
The Group re-financed its bank loans from primary proceeds arising on the IPO on 1 July 2015, reducing the US Dollar borrowing by $71.1M
to $235.0M and reducing the Euro borrowing by €14.1M to €60.0M. Following the re-financing, the following terms apply to the bank loans
outstanding at 31 March 2016:
Facility
Facility – A
Facility – B
Revolving Credit Facility
Repayment and maturity:
Interest
Libor
Euribor
Libor
Margin
2.25%
2.25%
2.00%
Principal
M
$235.0
€60.0
$25.0
Principal
$M
235.0
68.4
25.0
328.4
Facility A ($235.0M), Facility B (€60.0M) and the Revolving Credit Facility (multicurrency up to $30.0M) are repayable in full on the
termination date at the end of the 60-month term on 1 July 2020.
Any utilisation of the Revolving Credit facility is repayable on the last day of its interest period, any amount repaid may be re-borrowed.
The margin payable on the facilities is dependent upon the ratio of the Group’s net debt to cash EBITDA as defined in the facility agreement.
The bank loans are secured by fixed and floating charges over the trade and assets of certain Group companies.
26 PROVISIONS
At 31 March 2014
Arising during the year
Utilised
Released during the year
Disposal of a business
Exchange differences
At 31 March 2015
Arising during the year
Utilised
Released during the year
Disposal of a business
Exchange differences
At 31 March 2016
31 March 2016
Current
Non-current
Total provisions
31 March 2015
Current
Non-current
Total provisions
Restructuring
$M
1.9
0.5
(1.7)
–
–
–
0.7
0.1
(0.5)
–
–
–
0.3
0.3
–
0.3
0.7
–
0.7
Other
$M
0.4
–
–
–
–
(0.1)
0.3
0.6
–
–
–
0.1
1.0
–
1.0
1.0
–
0.3
0.3
Total
$M
2.3
0.5
(1.7)
–
–
(0.1)
1.0
0.7
(0.5)
–
–
0.1
1.3
0.3
1.0
1.3
0.7
0.3
1.0
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
105
Restructuring provision
The opening provision relates to vacant properties which are surplus to the Group’s requirements and are due to be disposed of. This
provision has either been utilised or released during the year. The provision arising in the year-ended 31 March 2016 relates to expenditure
in relation to vacant properties which are surplus to the Group’s requirements and are due to be disposed of, and to the integration of
Cyberoam into the wider Sophos Group.
Other provisions
The opening and closing provisions relate to the Group’s obligations to make good the dilapidations of various leasehold premises at the end
of the lease periods. In France, the Group operates a unfunded, compulsory retirement indemnity plan, payable only if the employees are
working for the Group when they retire. The provision arising in the year-ended 31 March 2016 relates to this retirement indemnity plan.
27 FINANCIAL RISK MANAGEMENT
Financial risk management is conducted at a Group level, applying treasury policies which have been approved by the Board. The major
financial risks to which the Group is exposed relate to interest rate risk, credit risk and movements in foreign currency exchange rates.
Where appropriate, cost effective and practicable, the Group uses various financial instruments to manage these risks. The main purpose of
these financial instruments is to reduce the impact on the Group operations of changes in market rates. No speculative use of derivatives,
currency or other instruments is permitted.
The Directors review and agree policies for managing each of these risks as summarised below:
Liquidity risk
The Group prepares budgets annually in advance. This enables the Group’s operating cash flow requirements to be anticipated and to
ensure sufficient liquidity is available to meet foreseeable needs, financial obligations and to invest any surplus cash assets safely and
profitably. Quarterly covenant tests are performed and monitored by the Directors at quarterly board meetings.
The Group’s objective is to maintain a balance between continuity of funding, minimising finance costs and maintaining flexibility through
the use of short-term deposits and intra-group loan arrangements.
Capital management
The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in
order to support its business and maximise shareholders’ value.
The capital structure of the Group consists of cash and cash equivalents as disclosed in note 21, borrowings as disclosed in note 25
and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings, as disclosed in the
Consolidated Statement of Changes in Equity.
The Group manages its capital structure, and makes adjustments to it, in light of changes in economic conditions. The Group reviews the
capital structure on a regular basis and considers the cost of capital and the risks associated with each class of capital.
Credit risk
The Group’s principal financial assets are cash and bank deposits and trade and other receivables.
The Group’s credit risk is primarily attributable to its trade receivables. In order to manage credit risk the Directors set limits for customers
based on a combination of payment history and third party credit references. Credit limits are reviewed by the credit controller on a regular
basis in conjunction with debt ageing and collection history.
The amounts presented in the Consolidated Statement of Financial Position are net of allowance for doubtful debts. An allowance
for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the
recoverability of cash flows. The expense recognised in the Consolidated Statement of profit or loss in respect of doubtful debts during the
period was $0.3M, as disclosed in note 19.
The Group has no significant concentration of credit risk in trade receivables; exposure is spread over a large number of counterparties
and customers.
With respect to cash and deposits, the Group’s exposure to credit risk arises from the risk of default by the counterparty with a
maximum exposure equal to the carrying amount of these assets. To mitigate this risk, cash and deposits are only held with reputable
banking institutions. The Group reduces the concentrations of credit risk in cash and deposits by holding balances with a number of
separate institutions.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 106
27 FINANCIAL RISK MANAGEMENT CONTINUED
Interest rate risk
The Group is exposed to interest rate risk primarily due to the long-term debt obligations with floating rates of interest.
Interest rate sensitivity
A change of 100 basis points in market interest rates would have increased/(decreased) equity and profit and loss by the amounts
shown below.
Increase in interest rates
Decrease in interest rates
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
(2.3)
2.3
(1.2)
–
Foreign currency risk
The Group is exposed to translation and transaction foreign exchange risk. Several other currencies in addition to the reporting currency
of US Dollar are used, including Sterling and the Euro. The Group experiences currency exchange differences arising upon retranslation
of monetary items (primarily short-term inter-company balances and long-term borrowings), which are recognised as an expense in
the period the retranslation occurs. The Group endeavours to match the cash inflows and outflows in the various currencies; the Group
typically invoices its customers in their local currency, and pays its local expenses in local currency as a means to mitigate this risk.
The Group is also exposed to exchange differences arising from the translation of its subsidiaries’ financial statements into the Group’s
reporting currency of US Dollar with the corresponding exchange differences taken directly to equity.
The following table illustrates the movement that 10% in the value of Sterling or the Euro would have had on the Group’s profit or loss for
the period and on the Group’s equity as at the end of the period.
10% movement in Sterling to US Dollar value
Profit or loss
Equity
10% movement in Euro to US Dollar value
Profit or loss
Equity
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
1.9
25.1
6.9
(7.2)
1.9
22.5
7.2
(4.5)
Any foreign exchange variance would be recognised as unrealised foreign exchange in the Consolidated Statement of profit or loss and have
no impact on cash flows.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 107
28 SHARE CAPITAL
Shares issued and fully paid
At 1 April of £0.75 each1
At 1 April of £0.10 each1
Pre-admission capital restructuring shares2
Initial Public Offering
Issued for cash on exercise of options
At 31 March 2016, Ordinary shares of £0.03 each
Year-ended
31 March 2016
$M
393.5
159.1
(533.1)
1.7
0.1
21.3
000’s
333,037
1,009,869
(928,251)
35,345
2,172
452,172
Year-ended
31 March 2015
$M
393.5
159.1
–
–
–
000’s
333,037
1,009,869
–
–
–
1,342,906
552.6
1
On 26 June 2015, Sophos Group issued 333,037 Ordinary, A-Class and C shares of £0.75 each together with 1,009,869 Preference shares of £0.10 each in consideration for the
purchase of issued share capital of Pentagon Holdings SARL.
2 On 1 July 2015, Sophos Group plc reorganised its share capital and share premium to comprise 414,654,813 Ordinary shares of £0.03 each creating distributable reserves.
29 DISTRIBUTIONS MADE AND PROPOSED
Cash dividends on ordinary shares declared and paid
Interim dividend for year ending 31 March 2016 at 0.7 US Cents per share (FY15: nil)
Total Cash dividends paid
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
3.1
3.1
–
–
The Directors have proposed that the Company will pay a full-year dividend for the year-ending 31 March 2016 amounting to 1.1 US Cents
per share.
Proposed final dividends on ordinary shares are subject to approval at the annual general meeting and are not recognised as a liability at
31 March 2016.
30 SHARE-BASED PAYMENTS
On 25 June 2015, and in connection with the reorganisation of the Group immediately prior to admission of the Company’s shares for
trading on the London Stock Exchange, participants with existing options outstanding under the Pentagon Holdings SARL approved share
plans were offered to exchange their options for new options over shares in Sophos Group plc.
On 11 June 2015, and in connection with the admission of the Company’s shares for trading on the London Stock Exchange, the Company’s
Board of Directors approved the following share-based payment plans:
The Sophos Group Long-term Incentive Plan 2015, (“2015 LTIP”)
The 2015 LTIP plan aims to motivate and retain employees and align their interest with shareholders. Under the plan the remuneration
committee of the Board can award the following types of awards: Performance Share Units, Restricted Share Units, Share Options,
Conditional Share Awards, Cash-Based Awards or Forfeitable Shares.
Sophos Group SAYE option scheme 2015 (“SAYE”)
The SAYE plan aims to encourage wider share ownership amongst UK employees of the Group by offering an HMRC approved share save
scheme, whereby employees are offered options to buy shares at a discount following a pre-set savings period.
Sophos Group 2015 Employee Share Purchase Plan (“ESPP”)
The ESPP plan aims to encourage wider share ownership amongst US employees of the Group by offering options compliant with Section
423 of the Internal Revenue Code. Employees are offered options to buy shares at a discount following a pre-set savings period.
Sophos Group International SAYE option scheme 2015 “(International SAYE”)
The International SAYE plan aims to encourage wider share ownership amongst the Group’s employees outside of the UK and US by offering
options to buy shares at a discount following a pre-set savings period.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 108
30 SHARE-BASED PAYMENTS CONTINUED
Share-based payment expense
The expense recognised for employee services received during the year is as follows:
Cash-settled transactions
Equity-settled transactions
Total share-based payment expense
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
1.3
15.0
16.3
0.1
1.4
1.5
The cash-settled expense comprises cash-based awards together with certain social security taxes. The carrying value of the liability as at
31 March 2016 was $1.1M (2015: $0.1M).
Share Options
The fair value of equity-settled share options granted is estimated as at the date of grant using a Black-Scholes model, taking into account
the terms and conditions upon which the options were granted.
The following table illustrates the weighted average inputs into the Black-Scholes model in the year:
Weighted average share price ($ cents)
Weighted average exercise price ($ cents)
Expected volatility
Expected life of options (years)
Risk free rate
Expected dividends
Year-ended
31 March 2016
Year-ended
31 March 2015
130.63
130.63
0.3266
2.28
0.0057
Nil
79.55
75.81
0.5147
0.65
0.0054
Nil
The weighted average fair value of options granted during the year was $ cents 24.4 (2015 $ cents 13.1).
Expected volatility was determined by calculating the historical share price volatility of comparable listed companies over the expected
life of the options. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may not
necessarily be the actual outcome. An increase in the expected volatility will increase the estimated fair value.
The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The
expected life used in the model has been adjusted, based on management’s best estimate, taking into account the effects of exercise
restrictions, non-transferability and behavioural considerations. An increase in the expected life will increase the estimated fair value.
The fair value of awards with a market condition has been discounted to reflect the probability of meeting the market condition attached to
the options.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
109
The number and weighted average exercise prices (“WAEP”) of, and movements in, share options in the year is set out below:
Outstanding at the start of the year
Awarded
Forfeited
Exercised
Outstanding on Admission
Converted on Admission
Awarded
Forfeited
Exercised
Outstanding at the end of the year
Exercisable at the end of the year
Year-ended
31 March 2016
WAEP
$ cents
39.7
130.5
30.7
25.2
46.0
71.9
–
76.0
42.3
74.5
56.0
Number
000’s
54,951
989
(9,851)
(5,216)
40,873
26,087
–
(1,191)
(2,219)
22,677
13,918
Year-ended
31 March 2015
WAEP
$ cents
30.2
78.9
35.1
35.1
–
–
–
–
–
39.7
25.2
Number
000’s
55,097
11,875
(3,445)
(8,576)
–
–
–
–
–
54,951
11,884
The weighted average share price for options exercised during the year was £ pence 228 (2015: $ cents 75.81).
Options outstanding at the end of the year had the following range of exercise prices and weighted average remaining contractual
terms (“WARCT”):
Exercise price
($ cents)
Number
000’s
31 March 2016
WARCT Years
Number
000’s
31 March 2015
WARCT Years
2.5000
7.5625
30.250
38.000
45.000
58.000
99.000
1.8598
2.5000
11.897
47.589
51.915
59.781
70.794
91.245
155.746
210.808
–
–
–
–
–
–
–
153
446
2,507
1,286
43
12,133
1,144
276
4,199
490
22,677
–
–
–
–
–
–
–
4.2
0.9
4.2
4.2
6.7
6.7
8.2
8.2
8.5
8.9
6.8
2,343
8,006
8,351
25,578
2,360
963
7,350
5.2
5.2
5.2
7.7
9.2
9.5
9.9
54,951
7.3
Outstanding at the end of the year
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
110
30 SHARE-BASED PAYMENTS CONTINUED
Restricted Shares
The following table illustrates the number and weighted average share price (“WASP”) on date of award of, and movements in, non-vested
restricted shares in the year:
Restricted shares
Outstanding at the start of the year
Awarded
Forfeited
Vested
Outstanding on Admission
Converted on Admission
Awarded
Forfeited
Vested
Outstanding at the end of the year
Year-ended
31 March 2016
WASP
$ cents
Number
000’s
548
–
–
(248)
300
191
–
–
(64)
127
67.94
–
–
30.25
99.00
155.75
–
–
155.75
155.75
Year-ended
31 March 2015
WASP
$ cents
30.25
99.00
–
30.25
Number
000’s
568
300
–
(320)
548
67.94
Restricted Share units
The following table illustrates the number and weighted average share price (“WASP”) on date of award, and movements in, restricted
share units (“RSU’s”) and cash based awards granted under the 2015 LTIP:
Restricted share units
Outstanding at the start of the year
Awarded
Forfeited
Vested
Outstanding at the end of the year
Year-ended
31 March 2016
WASP
£ pence
Year-ended
31 March 2015
WASP
£ pence
Number
000’s
–
264.75
265.00
–
264.74
–
–
–
–
–
–
–
–
–
–
Number
000’s
–
9,630
(241)
–
9,389
RSU’s and cash-based 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.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 111
Performance share units
The following table illustrates the number and weighted average share price (“WASP”) on date of award, and movements in, performance
share units (“PSU’s”) granted under the 2015 LTIP:
Performance share units
Outstanding at the start of the year
Awarded
Forfeited
Vested
Outstanding at the end of the year
Year-ended
31 March 2016
WASP
£ pence
Year-ended
31 March 2015
WASP
£ pence
Number
000’s
–
265.00
265.00
–
265.00
–
–
–
–
–
–
–
–
–
–
Number
000’s
–
2,879
(94)
–
2,785
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.
31 PENSION SCHEMES
The Group contributes to money defined contribution pension schemes in the UK and to similar or state pension schemes overseas for the
benefit of the employees and Directors. The assets of the schemes are administered by trusts or other bodies in funds independent from
the Group.
The pension cost charge for the period represents contributions payable by the Group to the funds and amounted to $6.7M (2015: $5.1M).
Contributions of $1.2M (2015: $0.9M) to the defined contribution pension scheme were outstanding, but not overdue, at 31 March 2016.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 112
32 RELATED PARTY TRANSACTIONS
Subsidiaries
The consolidated financial information includes the financial information of Sophos Group plc and the subsidiaries listed in the
following table:
Subsidiary undertaking
Pentagon Holding Sarl1
Shield 1 Ltd1
Shield 1A Ltd1
Shield Holdco Ltd1
Shield Midco Ltd1
Sophos Holdings Ltd1
Sophos Treasury Ltd2
Shield Finance Co Sarl2
Aspen Finance Co Sarl2
Sophos Limited2
Sophos Inc3
Cyberoam Inc6
Reflexion Networks Inc7
Sophos Pty Ltd3
Sophos Sarl3
Sophos KK3
Sophos Italia Srl3
Sophos Inc3
Sophos Nominees Limited3
Sophos AB3
Sophos BV3
Threatstar Holding BV8
Threatstar BV9
SurfRight BV8
Sophos Schweiz AG3
Sophos Iberia Srl3
Sophos Technology Solutions India Private Ltd10
Sophos Technology Pvt Ltd
(formerly Cyberoam Technologies Pvt Ltd)11
Sophos Hong Kong Co Ltd3
Sophos Holdings GmbH3
Sophos Hungary Kft3
Sophos GmbH4
Sophos Technology GmbH4
Astaro Trading AG5
Sophos Taiwan Ltd3
Country of
incorporation
Luxembourg
Principal activity
In liquidation
Class of shares
held
Ordinary
Percentage of
shares held
100%
UK
UK
UK
UK
UK
UK
Pre liquidation/strike off
Pre liquidation/strike off
Pre liquidation/strike off
Pre liquidation/strike off
Holding Company
Financing Company
Luxembourg
In liquidation
Luxembourg
Financing Company
UK
USA
USA
USA
Selling IT security solutions
Selling IT security solutions
Services Company
Selling IT security solutions
Australia
Selling IT security solutions
France
Japan
Italy
Selling IT security solutions
Selling IT security solutions
Selling IT security solutions
Netherlands
Selling IT security solutions
Netherlands
Holding Company
Netherlands
Research and Development
Netherlands
Selling IT security solutions
Switzerland
Selling IT security solutions
Spain
India
India
Selling IT security solutions
Services Company
Selling IT security solutions
Hong Kong
Selling IT security solutions
Germany
Hungary
Germany
Germany
Holding Company
Research and Development
Selling IT security solutions
Research and Development
Switzerland
Historical purchasing entity
Taiwan
Services Company
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Sophos Computer Security Pte Ltd3
Singapore
Selling IT security solutions
Canada
UK
Sweden
Selling IT security solutions
Common
Share nominee company
Selling IT security solutions
1 Shares held by Sophos Group Plc
5 Shares held by Sophos Technology GmbH
9 Shares held by Threatstar Holding BV
2 Shares held by Sophos Holdings Ltd
3 Shares held by Sophos Limited
4 Shares held by Sophos Holdings GmbH
6 Shares held by Sophos Technology Pvt Ltd
(formerly Cyberoam Technologies Pvt Ltd)
10 Shares held by Sophos Limited and Sophos
Nominees Limited
7 Shares held by Sophos Inc
8 Shares held by Sophos BV
11 Shares held by Sophos Limited and Sophos
Technology Solutions India Private Ltd
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 113
Other related parties
During the year the Group entered into transactions, in the ordinary course of business, with other related parties. Transactions entered
into, and trading balances outstanding with other related parties, are as follows:
Apligo GmbH, an entity related through a minority equity investment, manufactured and shipped hardware for the Group’s European
operations prior to a restructuring of the supply chain during the year-ended 31 March 2015. During the year-ended 31 March 2016 the
Group made purchases from Apligo GmbH of $0.4M (2015: $1.8M). At 31 March 2016, the Group had amounts owing to Apligo GmbH of
$Nil (2015: $Nil).
Virus Bulletin Limited, an entity related through common Director’s interest up until the admission of the Company’s shares for trading on
the London Stock Exchange, is a security information portal, testing and certification body .
During the year-ended 31 March 2016, sales to, and purchases from Virus Bulletin Limited were $0.0M (2015: $0.1M) and $0.0M (2015:
0.0M) respectively. At 31 March 2016, Amounts owed by Virus Bulletin were $0.0M (2015: $0.1M), No amounts were due to Virus
Bulletin Limited.
During the year-ended 31 March 2016, no provisions were made for doubtful debts relating to amounts owed by related parties
(2015: $Nil).
Sales and purchases between related parties are made at normal market prices. Outstanding balances with entities other than subsidiaries
are unsecured, interest free and cash settlement is expected within 60 days of invoice. Terms and conditions for transactions with
subsidiaries are the same, with the exception that balances are placed on inter-company accounts with no specified credit period.
The Group has not provided or benefitted from any guarantees for any related party receivables or payables.
The Company and certain subsidiaries have provided unsecured guarantees to certain third parties within the normal course of business,
the majority of which were in favour of certain lenders in respect of some of the Group’s borrowing facilities. As at 31 March 2016, these
guarantees totaled $328.4M (2015: $386.6M) relating to the Group’s financing facilities.
Compensation of key management personnel (including Directors)
Short-term employee benefits
Post-employment benefits
Share-based payments – equity-settled
Total
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
8.6
0.1
8.7
17.4
10.2
0.1
0.7
11.0
As of 31 March 2016, the Group had a receivable of $Nil (2015: $0.2M from two Directors), and $Nil (2015: $0.1M from one senior
manager). All amounts receivable had been received by 22 April 2015.
Short-term employee benefits comprise fees, salaries, benefits and bonuses earned during the year as well as non-monetary benefits.
Post-employment benefits comprise the cost of providing defined contribution pensions to senior management in respect of the
current period.
Share-based payments comprise the cost of senior management’s participation in share-based payment plans for the period as measured
by the fair value of awards in accordance with IFRS2.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
114
33 BUSINESS COMBINATIONS
On 5 June 2015, Sophos Inc. acquired 100% of the share capital of Reflexion Networks Inc., a leader in e-mail security, archiving and
encryption. Reflexion Networks Inc. was acquired to further enhance the Group’s Cloud product offering.
Acquisition related expenses of $0.8M have been excluded from the consideration transferred and have been recognised as an expense
within General finance and administration – exceptional items.
Assets acquired and liabilities assumed on the day of acquisition were as follows:
Book
value
$M
Adjustment
$M
Fair
value
$M
Non-current assets:
Intangible assets
Intellectual Property
Customer relationships
Other non-current assets
Current Assets:
Trade and other receivables
Deferred tax asset
Cash and cash equivalents
Non-Current Liabilities:
Deferred tax liability
Current liabilities:
Deferred revenues
Trade and other payables
Lease obligations
Net assets recognised at the date of acquisition
Cash paid
Contingent consideration (note 25)
Goodwill arising on acquisition – Reflexion Networks Inc.
–
–
0.4
0.5
–
–
–
0.2
0.7
0.2
(0.2)
1.9
5.8
–
–
–
–
3.1
–
–
–
4.6
1.9
5.8
0.4
0.5
–
–
3.1
0.2
0.7
0.2
4.4
15.0
2.0
12.6
Prior to the acquisition, Reflexion Networks Inc. operated in a complimentary market sector to the Group and, accordingly, the results of
Reflexion Networks Inc. are incremental to those of the Group. Revenue of $478.2M for the twelve-months to 31 March 2016 includes
$5.1M in respect of Reflexion Networks Inc. The impact of Reflexion Networks Inc. on the operating loss of the Group for the period is
insignificant. Had Reflexion Networks Inc. been owned since 1 April 2015, revenue for the year-ended 31 March 2016 would have increased
over the reported revenue by approximately $1.0M. The impact on the operating loss of the Group would have been insignificant.
On 3 December 2015, Sophos B.V. completed the acquisition from common shareholders of 100% of the share capital of SurfRight B.V. and
Threatstar Holdings B.V. to enhance the Group's next generation endpoint security offering.
Acquisition-related expenses of $0.4M have been excluded from the consideration transferred and have been recognised as an expense
within General finance and administration – exceptional items.
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
115
Book
value
$M
Adjustment
$M
Fair
value
$M
–
–
–
0.3
0.6
–
0.7
–
–
1.0
0.6
3.7
0.3
0.1
–
–
0.3
–
0.9
1.3
–
2.2
3.7
0.3
0.1
0.3
0.6
0.3
0.7
0.9
1.3
1.0
2.8
31.8
29.0
Assets acquired and liabilities assumed on the day of acquisition were as follows:
Non-current assets:
Intangible assets
Intellectual Property
Customer relationships
Brand
Other non-current assets
Current Assets:
Trade and other receivables
Deferred tax asset
Cash and cash equivalents
Non-Current Liabilities:
Deferred tax liability
Current liabilities:
Deferred revenues
Trade and other payables
Net assets recognised at the date of acquisition
Cash paid
Goodwill arising on acquisition – Threatstar Holdings B.V. and Surfright B.V.
Prior to the acquisition, Threatstar Holdings B.V. and Surfright B.V. operated in a complimentary market sector to the Group and accordingly
the results of the companies are incremental to the Group. Revenue of 478.2M for the twelve months to 31 March 2016 includes $1.1M
in respect of Surfright B.V. The impact of Surfright B.V. and Threatstar Holdings B.V. on the operating loss of the Group is insignificant.
Had both companies been owned since 1 April 2015, revenue for the year-ended 31 March 2016 would have increased over the reported
revenue by approximately $2.2M. The impact on the operating loss would have been insignificant.
In the prior year, on 6 October 2014, Sophos Inc. acquired 100% of the share capital of Mojave Networks Inc. a developer of cloud based
network security technology. Mojave Networks Inc. was acquired to enhance the Group’s Cloud product line.
Acquisition-related expenses of $0.6M have been excluded from the consideration transferred and has been recognised as an expense
within General finance and administration – exceptional items.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
116
33 BUSINESS COMBINATIONS CONTINUED
Assets acquired and liabilities assumed on the day of acquisition were as follows:
Non-current assets:
Intangible assets
Intellectual Property
Current Assets:
Trade and other receivables
Deferred tax asset
Cash and cash equivalents
Current liabilities:
Deferred revenues
Trade and other payables
Net assets recognised at the date of acquisition
Cash paid
Cash payable
Goodwill arising on acquisition – Mojave Networks Inc.
Additions to goodwill in respect of Cyberoam Technologies Pvt Ltd.
Fair value adjustment to fixed assets
Fair value adjustment to Inventories
Final working capital adjustment
Goodwill arising on business acquisitions - Mojave Networks Inc.
Book value
$M
Adjustment
$M
Fair value
$M
–
0.3
0.3
–
0.4
0.2
–
–
–
–
9.9
–
–
–
9.9
–
–
–
–
9.9
0.3
–
0.3
–
0.4
10.1
10.3
–
0.2
0.4
0.7
0.1
1.4
Prior to the acquisition, Mojave Networks Inc. was a start-up technology company pioneering a cloud based approach to mobile and web
security, as a result, the company’s trading result would be insignificant to the Group. Had the company been owned by the Group since
1 April 2014, additional research and development costs of $1.3M would have been incurred.
Goodwill arose in all the above business combinations because the cost of the combination included amounts in relation to the benefit of
expected synergies, future market development and the assembled workforce. These benefits are not recognised separately from Goodwill
because they do not meet the recognition criteria for identifiable intangible assets. None of the goodwill recognised is expected to be
deductible for income tax purposes.
34 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Disposal of subsidiary undertakings
Consideration received, satisfied in cash – Utimaco safeware AG
Disposal of subsidiaries net of cash
Acquisition of subsidiaries net of cash acquired
Consideration paid, satisfied in cash:
– Surfright B.V. and Threatstar Holdings B.V.
– Reflexion Networks Inc.
– Mojave Inc.
– Cyberoam Technologies Pvt Ltd
Net cash purchased
Acquisition of subsidiaries net of cash
Year-ended
31 March 2016
$M
–
Year-ended
31 March 2015
$M
4.5
–
4.5
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
31.8
15.0
–
–
(0.8)
46.0
–
–
10.3
0.2
(0.3)
10.2
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
117
Movement in net debt
Cash at bank and in hand
Short-term deposits
Cash and cash equivalents
Obligations under finance leases
Bank loans
Gross debt
Net debt
Movement in net debt
Cash at bank and in hand
Short-term deposits
Cash and cash equivalents
Obligations under finance leases
Bank loans
Gross Debt
Net debt
31 March 2015
$M
Cash flow
$M
Non-cash
movements
$M
(59.0)
(13.6)
(72.6)
0.1
380.6
380.7
308.1
10.5
(4.1)
6.4
(0.1)
(67.2)
(67.3)
(60.9)
–
–
–
0.2
6.8
7.0
7.0
31 March 2014
$M
Cash flow
$M
Non-cash
movements
$M
(61.9)
(2.2)
(64.1)
0.2
406.4
406.6
342.5
(5.3)
(12.0)
(17.3)
(0.1)
(4.2)
(4.3)
(21.6)
–
–
–
–
1.1
1.1
1.1
35 COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease arrangements
Amount recognised for the year:
Property
Other
Total
Effect of
movements
in exchange
Rates
$M
31 March 2016
$M
(1.2)
0.6
(0.6)
–
4.5
4.5
3.9
(49.7)
(17.1)
(66.8)
0.2
324.7
324.9
258.1
Effect of
movements
in exchange
Rates
$M
31 March 2015
$M
8.2
0.6
8.8
–
(22.7)
(22.7)
(13.9)
(59.0)
(13.6)
(72.6)
0.1
380.6
380.7
308.1
Year-ended
31 March 2016
$M
Year-ended
31 March 2015
$M
8.9
1.4
10.3
9.3
1.4
10.7
At the reporting date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:
Within one year
In the second to fifth years inclusive
After five years
Total
31 March 2016
$M
31 March 2015
$M
10.8
28.0
10.8
49.6
8.6
22.7
9.1
40.4
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
118
35 COMMITMENTS AND CONTINGENT LIABILITIES CONTINUED
Commitments for the acquisition of property, plant and equipment
At 31 March 2016 the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
$0.8M (2015: $2.2M).
Guarantees
At 31 March 2016 the Group had outstanding guarantees provided to third parties of $1.3M (2015:$1.1M).
Legal proceedings
The Group is involved in a number of legal proceedings that are incidental to our business. Although it is possible that adverse decisions (or
settlements) may occur in one or more of the cases, it is not currently possible to estimate the potential loss or losses. The final outcome of
these proceedings, individually or in the aggregate, is not expected to have a material impact on the business.
Litigation is currently in process against an entity within the Group by RPost Holdings Inc. and Finjan Inc. Both companies allege patent
infringements and claim unspecified damages. In accordance with IAS 37.92, the Group does not provide further information on the
grounds that this could seriously prejudice the outcome of the litigation. The Directors are of the opinion that the claims can be successfully
resisted by the Group.
36 PRINCIPAL EXCHANGE RATES
Principal exchange rates
Translation of Sterling into US Dollar ($:£1.00)
Average
Closing
Translation of Euro into US Dollar ($:€1.00)
Average
Closing
37 EVENTS AFTER THE REPORTING PERIOD
There are no material events after the reporting period which require disclosure under IAS 10.
Year-ended
31 March 2016
Year-ended
31 March 2015
1.5057
1.4373
1.0969
1.1395
$1.6238
$1.4845
$1.2749
$1.0740
For the year-ended 31 March 2016NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFINANCIAL STATEMENTS ► NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS COMPANY ONLY STATEMENT OF FINANCIAL POSITION
At 31 March 2016
Registered number 9608658
Non-current assets
Deferred tax asset
Investments
Loan due from subsidiary
Current assets
Trade and other receivables
Amounts due from subsidiaries
Total current assets
Total assets
Current liabilities
Trade and other payables
Amounts due to subsidiaries
Total Liabilities
Net assets
Represented by:
Share capital
Share Premium
Retained earnings
Share-based payment reserve
Total equity
119
Note
31 March 2016
$M
3
4
5
5.9
1,045.3
93.5
1,144.7
0.3
22.3
22.6
1,167.3
0.7
16.7
17.4
1,149.9
21.3
115.9
993.7
19.0
1,149.9
Sophos Group plc was incorporated on 26 May 2015 and as such does not present comparatives of its statement of financial position.
These financial statements were approved by the Board of Directors on 25 May 2016 and were signed on its behalf by:
Nick Bray
Chief Financial Officer
The notes on pages 121 to 122 form an integral part of these financial statements.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
120
FINANCIAL STATEMENTS ► COMPANY ONLY STATEMENT OF CHANGES IN EQUITY
COMPANY ONLY STATEMENT OF CHANGES IN EQUITY
On Incorporation 26 May 2015
Loss for the period:
Total comprehensive loss
Issue Shares
Capital reduction
Primary proceeds
Share issue expenses
Share options exercised
Share-based payments – expense
Share-based payments – deferred tax
Cash Dividend
At 31 March 2016
Share Capital
$M
Share Premium
$M
Retained Earnings
$M
Share Based
Payment Reserve
$M
–
–
–
552.6
(533.1)
1.7
–
0.1
–
–
–
–
–
–
483.1
(483.0)
123.3
(8.6)
1.1
–
–
–
21.3
115.9
–
(21.4)
(21.4)
–
1,018.2
–
–
–
–
–
(3.1)
993.7
–
–
–
–
–
–
–
–
15.0
4.0
–
19.0
Total
$M
–
(21.4)
(21.4)
1,035.7
2.1
125.0
(8.6)
1.2
15.0
4.0
(3.1)
1,149.9
The notes on pages 121 to 122 form an integral part of these financial statements.
For the year-ended 31 March 2016 121
NOTES TO THE COMPANY FINANCIAL STATEMENTS
1 PRINCIPAL ACCOUNTING POLICIES
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the
Company’s financial statements.
Basis of preparation
The Company and its trading subsidiaries have considerable financial resources and a large number of customer contracts across
different geographic areas and industries. As a consequence, the Directors believe the Company is well placed to manage its business
risks successfully.
The Company operates as an investment company for the Sophos Group, holding investments in subsidiaries financed by Group companies.
As the Company is an intrinsic part of the Group’s structure, the Directors have a reasonable expectation that Group companies will
continue to support the Company through trading and cash generated from trading for the foreseeable future. Thus they continue to adopt
the going concern basis in preparing the financial statements.
The financial statements have been prepared in accordance with Financial Reporting Standard 102 (“FRS 102”) and under the historical cost
accounting rules.
Under section 408 of the Companies Act 2006, the Company is exempt from the requirement to present its own profit and loss account.
The company is considered to be a qualifying entity for the purposes of FRS 102 and has applied the exemptions available under FRS 102 in
respect of the cash flow statement and key management personnel compensation.
As the consolidated financial statements of the Company include the equivalent disclosures, the Company has also taken the exemptions
available under FRS 102 in respect of disclosures in respect of share-based payments, financial instruments and the requirements of
Section 33 Related Party Disclosures paragraph 33.7.
Investments
Investments in subsidiary undertakings are stated at cost, less any provision for impairment.
Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or
losses on translation are included in the profit and loss account. Non-monetary assets and liabilities denominated in foreign currencies are
stated at historical foreign exchange rates.
Interest bearing loans and borrowings
Obligations for loans and borrowings are recognised when the Company becomes party to the related contracts and are measured initially
at fair value less directly attributable transactions costs. After initial recognition, interest bearing loans and borrowings are subsequently
measured at amortised cost using the effective interest method. Gains and losses arising on the repurchase, settlement or otherwise
cancellation of liabilities are recognised respectively in finance income and finance expense.
Going Concern basis
The Company operates as an investment company for the Sophos Group, holding investments in subsidiaries financed by Group companies.
As the Company is an intrinsic part of the Group’s structure, the Directors have a reasonable expectation that Group companies will
continue to support the Company through trading and cash generated from trading for the foreseeable future. Thus they continue to adopt
the going concern basis in preparing the financial statements.
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 122
FINANCIAL STATEMENTS ► NOTES TO THE COMPANY FINANCIAL STATEMENTS
NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED
2 PROFIT AND LOSS ACCOUNT
The loss after tax dealt with in the books of the Company was $21.4M. Under section 408 of the Companies Act 2006 the Company is
exempt from the requirement to present its own profit and loss account.
3 INVESTMENTS
At 26 May 2015
Investment in Sophos Holdings Limited
Investment in Sophos Limited
Investment in employee benefit trust
Total
31 March 2016
$M
–
1,035.8
9.4
0.1
1,045.3
The investment in Sophos Holdings Limited, a holding company for the Sophos Group, comprises 100% of the ordinary share capital.
The investment in Sophos Limited comprises share-based payment expenses for equity awards granted to participants employed by Sophos
Limited and its subsidiaries.
4 LOAN DUE FROM SUBSIDIARY
As part of the re-financing of the Group on 1 July 2015, The Company lent $93.5M to Sophos Holdings Limited, a 100% owned subsidiary.
The loan carries a variable interest rate based on the Group’s Senior Facility A loan plus a margin of 0.1% and is repayable in full at the end
of a 60-month term on 1 July 2020.
5 SHARE CAPITAL
Allotted, called up and fully paid shares of £0.03 each
On incorporation 26 May 2015
Share issuance
Initial Public Offering
Issued on exercise of share options
At 31 March 2016
Year-ended
31 March 2016
$M
–
19.5
1.7
0.1
21.3
000’s
–
414,655
35,345
2,172
452,172
6 FUNCTIONAL CURRENCY
Sophos Group plc is registered in England and Wales and has a functional currency of US Dollars, as this is the currency of the primary
economic environment in which the entity operates.
For the year-ended 31 March 2016
123
GLOSSARY
AES
Americas
APJ
Billings
Blue chip
Board
BYOD
Cash EBITDA
Advanced Encryption Standard
North and South America
Asia-Pacific & Japan
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
Channel partners who transact five or more deals in a trailing six-month period
The Board of Directors of Sophos Group plc
Bring Your Own Device
Cash EBITDA is defined as the Group's operating profit adjusted for depreciation and amortisation charges,
any gains or losses on the sale of tangible and intangible assets, share option charges, unrealised foreign
exchange differences and exceptional items with billings replacing revenue
Cash EBITDA margin
Channel first
Cash EBITDA margin is calculated as cash EBITDA as a percentage of billings
The distribution model used by the Group, where products are sold to
end customers through a network of channel partners and distributors
Company
CAGR
Directors
DPI
DMR
EBITDA
EMEA
FDE
FIPS
GHG
Group
HTML5
IASB
IDP
IFRS
IoT
IPO
KPI
Sophos Group plc
Compound annual growth rate
The Executive and Non-Executive Directors of the Company
Deep Packet Inspection
Direct Market Reseller
Earnings before interest, taxation, depreciation and amortisation
Europe, Middle East and Africa
Full Disk Encryption
U.S. Federal Information Processing Standards
Greenhouse gas
The group of companies owned by Sophos Group plc
The fifth revision of the HyperText Markup Language of the internet
used for structuring and presenting content for the world wide web
International Accounting Standards Board
Intrusion Detection and Prevention
International Financial Reporting Standards as adopted by the European Union
Internet of Things
Initial public offering of the Company's shares completed in July 2015
Key Performance Indicator
Like-for-like billings
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.
MSP
OEM
RED
Renewal rate
Secure SSL
SIEM
SI
Managed Service Provider
Original Equipment Manufacturer
Remote Ethernet Device
Renewal rates are calculated by comparing the actual US Dollar amount of contracts renewed in a period
(including instances of cross-sell and up-sell) to the US Dollar amount of total contracts available to be
renewed in that period
Secure Sockets Layer, a standard security technology for establishing an encrypted
link between a server and a client
Security Incident and Event Management
System Integrator
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
UTM/NGFW
Unified Threat Management/Next-Generation Firewall
VAR
VPN
Value-Added Reseller
Virtual Private Network
OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS INVESTOR RELATIONS
investors.sophos.com
investor.relations@sophos.com
AUDITOR
KPMG LLP
15 Canada Square
London
E14 5GL
124
FINANCIAL STATEMENTS ► COMPANY INFORMATION
COMPANY INFORMATION
DIRECTORS
Peter Gyenes
Kris Hagerman
Nick Bray
Sandra Bergeron
Edwin Gillis
Salim Nathoo
Roy Mackenzie
Steve Munford
Paul Walker
REGISTERED OFFICE
Sophos Group plc
The Pentagon, Abingdon Science Park
Abingdon
OX14 3YP
Registered number: 09608658
www.sophos.com
REGISTRAR SERVICES
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
BR3 4TU
PUBLIC RELATIONS
Brunswick Group
16 Lincoln’s Inn Field
London
WC2A 3ED
Annual Report
2016
Sophos Group plc
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