2
2017 Annual Report
and Accounts
A Proven Global Leader in Delivering
Innovative, Simple and Highly Effective
Cybersecurity Solutions
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.
The Group has more than 30
years of experience in enterprise
security and has built a portfolio of
products that protect more than
260,000 organisations and more
than 100 million endusers
in 150 countries across a variety
of industries.
GOVERNANCE
Board of Directors
Corporate Governance Statement
Nomination Committee Report
Audit and Risk Committee Report
Disclosure Committee
42
46
54
57
64
Annual Statement of the
Remuneration Committee Chairman 65
Directors’ Remuneration Policy
Annual Report on Remuneration
Directors’ Report
67
77
88
FINANCIAL STATEMENTS
Independent Auditor’s Report
96
Consolidated Financial
Statements and Notes
Company Financial Statements
and Notes
Glossary
Company Information
100
152
156
157
INTRODUCTION
Highlights
Investment Proposition
Financial Stability and Visibility
Chairman’s Statement
STRATEGIC REPORT
Markets
Business Model
Focus on Strategic Priorities
Key Performance Indicators
01
02
04
06
10
12
14
15
Chief Executive Officer’s Statement 16
Q&A With Management Team
Product Review
Financial Review
19
24
28
Principal Risks and Risk Management 34
Corporate Responsibility Report
38
01
HIGHLIGHTS
ANOTHER HIGHLY SUCCESSFUL YEAR IN WHICH SOPHOS MADE
SIGNIFICANT PROGRESS AGAINST ITS STRATEGIC OBJECTIVES
Financial highlights
Billings1
$632.1M
Cash
EBITDA1
$150.1M
(FY16: $534.9M)
(FY16: $120.9M)
Revenue
$529.7M
(FY16: $478.2M)
Business highlights
Operating
Loss
$44.3M
(FY16: $32.7M)
Adjusted
Operating Profit1
$38.3M
(FY16: $53.4M)
Net Cash Flow
from Operating
Activities
$118.5M
(FY16: $21.3M)
» Strong momentum across all
regions and products
» Focus on driving growth in our
channel and customer base
» Launched next-gen anti-
ransomware solution Intercept X
» Renewal rates from existing
customers improved further
» Sophos Central remained a core
» Cloud at the heart of our
technology strategy
» World-class products and
driver of our business
innovation
» Acquisition of Invincea adds
machine-learning
» Further industry recognition as
a leader in cybersecurity
1 - Definitions and reconciliations of non-GAAP measures are included in note 6 of the financial statements and the glossary
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
02
INVESTMENT PROPOSITION
HIGH VISIBILITY WITH SUBSTANTIAL OPPORTUNITY FOR GROWTH
1.
COMPELLING
INDUSTRY
FUNDAMENTALS
2.
DIFFERENTIATED
STRATEGY
3.
HIGHLY STABLE
AND PREDICTABLE
FINANCIAL MODEL
A large, dynamic growing
market opportunity
A clear and compelling
strategy
High recurring revenues
and renewal rates
» Sophos is solely focused on
cybersecurity and we strive
to deliver industry-leading
technology that is simple to deploy,
use and manage
» We principally sell our software
as a service via recurring, upfront
subscriptions, which provides
significant visibility and stability of
future revenues and cash flows
» We offer enterprise-grade
technology, rated as amongst the
best in the industry, to mid-market
organisations
» Our sales strategy is 100%
“channel first” and as a result of
considerable investment we now
have more than 30,000 partners
» We have a proven ability to deliver
consistent new customer growth
and maintain strong renewal rates
» Our business generates
substantial and growing cash
flows which we reinvest in
driving billings growth for the
future, via innovation, building
brand awareness and sensible
acquisitions
» Security is consistently the top
priority for corporate IT spend
» Total market is estimated to be
worth around $39 billion, growing
at 5-7% per annum, within which
the Group’s products address
markets growing even faster
» The cybersecurity threat
environment is constantly
evolving in scale and
sophistication, presenting new
challenges at a rapid pace to
organisations of all sizes
» Sophos is well-positioned to take
advantage of opportunities as a
leader in high growth areas, for
example next-generation endpoint,
cloud, network and synchronized
security
See Markets p10
for further information
See Strategic Priorities p14
for further information
See Financial Review p28
for further information
03
4.
THE
SOPHOS
BRAND
5.
OPPORTUNITIES
FOR
GROWTH
6.
EXPERIENCED
MANAGEMENT
TEAM
Innovative, simple and
highly effective security
We expect to continue
to outperform the IT
security market
Consistently delivering
against strategic goals
» We are very proud of our brand
» Differentiation is a key driver of
and the ethos of simplicity that it
represents – this spans all we do
at Sophos
» We employ a highly creative digital
marketing approach, utilising
educational in-person events and
social media outreach
» With one of the world’s leading
threat intelligence operations,
SophosLabs, and a reputation for
excellence built over many years,
Sophos is a trusted voice in the
world of cybersecurity
market share gains
» Innovation will remain a key growth
driver, with internal investment
supplemented by sensible,
disciplined technology acquisitions
» Despite a broad international reach
we see opportunities for further
regional expansion
» Our integrated product portfolio,
delivered via the cloud in Sophos
Central, provides significant cross-
sell and upsell opportunities
» We are focused on continuing to
build our partner network and
increasing the productivity of our
existing partners
» Strongly motivated team with the
background and skills to deliver
profitable growth over the long-
term
» Extensive experience in running
large technology businesses,
typically with more than twenty
years of experience in their
respective fields
» Completely aligned in driving
forward the Sophos vision and
strategy of innovative, simple
and highly effective security
See Markets p10
for further information
See Governance Report p46
for further information
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
04
FINANCIAL STABILITY AND VISIBILITY
GROWTH IN THE GROUP’S
SUBSCRIPTION BUSINESS
TODAY FUELS THE
FUTURE RENEWALS BOOK,
UNDERPINNING VISIBILITY
STRONG GROWTH IN BILLINGS DRIVES
DEFERRED REVENUE
Billings have accelerated in recent years following
a significant investment in innovation and our
partner channel.
Billings are closely aligned with cash flows and are
an indicator of growth in the business. Subscription
contracts represent approximately 81 percent of total
billings and around 75 percent of total billings are
derived from existing customers.
The average subscription contract duration, consistent
with prior-year, is close to 28 months, resulting in the
majority of the contract value being booked to deferred
revenue to be recognised over the contract’s lifetime.
This adds to the high levels of visibility into future
revenues and profits.
Principally a subscription business...
$632m
$535m
19%
$476m
19%
81%
21%
79%
81%
FY15
FY16
FY17
Hardware & Other Billings
Subscription Billings
NEW BILLINGS AND HARDWARE SALES
Continued strong growth in new billings, +21 percent in
FY17 and c.40k customers added.
This is principally driven by a strong customer
proposition, as well as the increasing productivity of our
30,000 strong partner channel of which 6,100 are now
“blue chip”.
Hardware sold to existing and new customers generally
refreshes in line with subscriptions.
DEFERRED REVENUE
$
5
8
1
m
$
4
9
9
m
$
4
3
3
m
NUMBER OF CUSTOMERS
14% CAGR in customers
2
6
0
K
2
2
0
K
2
0
0
K
FY15
FY16
FY17
FY15
FY16
FY17
05
With growing renewal rates…
A 100% channel-first strategy...
1
0
6
%
1
0
2
%
1
0
0
%
30k
6.1k
23.9k
20k
4.7k
15.3k
15k
3.4k
11.6k
FY15
FY16
FY17
FY15
FY16
FY17
Blue Chip Partners
Other Partners
HIGH LEVELS OF RECURRING SUBSCRIPTIONS,
PLUS STRONG GROWTH IN NEW BUSINESS,
UNDERPINS STABILITY AND VISIBILITY
The nature of our financial model, which is rooted in
predictable subscription revenues, a growing renewal
base, improving renewal rates and increasing productivity
in our channel ecosystem, gives us strong visibility over
future growth in revenue, profitability and cash flow.
OPERATING PRIORITIES
» Innovate across our product portfolio to enhance capabilities and ease of use
» Leverage the cloud to deliver better security and better manageability
» Advance our synchronized security strategy through meaningful product integration
» Grow our base of channel partners and our most active ‘blue chip’ partners
» Expand Sophos’ brand visibility and awareness
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 06
CHAIRMAN’S STATEMENT
THIS HAS BEEN AN IMPORTANT YEAR IN WHICH SOPHOS HAS DELIVERED
AGAINST ITS COMMITMENTS TO SHAREHOLDERS – OPERATIONALLY,
FINANCIALLY AND STRATEGICALLY.
We are pleased to report continued growth both in
market share and company scale, driven by strong
operating and financial performance.
Our significant growth in billings and free cash flow
over the previous financial year was driven by ongoing
investment in organic and acquired product innovation.
This growth continues to fuel a strengthening talent
pool and an extended reach of our selling and
marketing operations.
Cybersecurity remains a top priority for organisations
of every size, and our rigorous focus on delivering
enterprise-grade IT security to mid-market enterprises
via the channel that serves them differentiates and
strongly positions Sophos in the enormous and growing
global IT security market. This past year we have made
strong progress against our strategic goals in both our
enduser and network security offerings. We have added
significant customer value and expanded our market
opportunity across our product lines through numerous
product enhancements and additions, including through
Sophos Central, our rapidly growing born-in-the-cloud
offering. As we look ahead, we have a robust product
roadmap, with planned offerings that will incorporate
next-generation machine learning and artificial
intelligence technologies, which will further differentiate
Sophos and strengthen the value we deliver to our
customers and channel partners.
We have also strengthened our Board by welcoming
two highly qualified UK-based global executives as
independent non-executive directors.
Vin Murria joined our Board in January and serves on
our nomination and remuneration committees. Vin
is a successful entrepreneur with strong operational
leadership experience in growing UK-based global
technology businesses and associated shareholder
value. Rick Medlock joined our Board in April, bringing
more than thirty years of experience in the financial
management of large international technology
companies in the UK and US. Rick also serves on
our nomination, remuneration and audit and risk
committees. Rick will be appointed Chairman of the audit
and risk committee at the next Annual General Meeting
(“AGM”).
Ed Gillis, our current Chairman of the audit and risk
committee, will be retiring from our Board at the
upcoming AGM after eight years of service. We thank
Ed for his very active and impactful leadership and for
a strong foundation that Rick Medlock will now carry
forward.
FY17 has demonstrated the strength of our offerings
as well as our capacity to execute on our strategy. As
a result, we feel very encouraged about our ability to
continue our growth and profitability trends.
On behalf of our Board, we thank our Sophos employee
team all around the world for your tireless dedication
and good work to serve our customers, our partners,
and our shareholders. We thank our customers and
partners for your much-valued business and confidence
in our capabilities throughout our journey together.
Finally, we say ‘thank you’ to our investors for the trust
you have placed in Sophos. We appreciate your support,
and we will continue to work hard to earn your
continued trust.
Peter Gyenes
Non-Executive Chairman
07
AWARDS
DURING THE YEAR SOPHOS GAINED FURTHER
RECOGNITION OF ITS LEADERSHIP POSITION IN
ITS INDUSTRY
SC Magazine Awards Europe
Best UTM –Sophos UTM
AV-TEST
Sophos Mobile Security for Android – 100% for protection and usability – 10th time running
CRN ARC awards
Winner – Network Security;
Winner – Data Security;
Winner – Product Innovation in Endpoint Security
SE Labs
AAA award for SMB protection – Sophos Endpoint
AAA award for enterprise protection – Sophos Endpoint
GEC Awards 2016
Top Vendor for Endpoint Security
Computing Security Excellence Awards 2016
Firewall Solution and Unified Threat Management Award – Sophos XG Firewall
Computing Security Excellence Awards 2016
Data Encryption Award – Sophos SafeGuard Encryption 8
CRN Tech Innovators Award
Winner – Network Security – Synchronized Security
Channelnomics
Overall Winner – Security Vendor of the Year
AV-Test
Best Android Security 2016 – Sophos Mobile
Computerwoche
Best Solution “Premium Class” – UTM Home Firewall
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 08
Our
Brand
Sophos maintains a
single brand promise –
security made simple.
Sophos believes that complexity
is the enemy of security. In
a crowded marketplace and
within increasingly diverse IT
environments, we concentrate
on making life simpler for the
end user without compromising
security. Sophos differentiates
itself by making enterprise-
grade products that are easy
to sell, easy to deploy and easy
to manage. Making something
more effective by making it
simpler to manage is a difficult
challenge but one our teams rise
to every day.
INTRODUCTION
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
09
Our
Brand
Strategic
Report
Markets
Business Model
Focus on Strategic
Priorities
Key Performance
Indicators
10
12
14
15
Chief Executive
Officer’s Statement 16
Q&A With
Management Team
Product Review
Financial Review
Principal Risks and
Risk Management
19
24
28
34
Corporate
Responsibility Report 38
10
MARKETS
THE DEMAND FOR SECURITY SOLUTIONS CONTINUES TO
GROW. THIS IS CONSISTENT ACROSS THE WORLD AND ACROSS
ORGANISATIONS OF ALL SIZES. INDUSTRY ANALYSTS PREDICT
THAT THE GLOBAL IT SECURITY MARKET1 WILL BE IN EXCESS OF
$39B IN 2017, REACHING AN ESTIMATED $48B BY 2020...
REGULATORY ENVIRONMENT
The current geo-political landscape in Europe and
the US will have an ongoing effect on regulations
and government legislation related to privacy, data
protection and cyber-security. As the UK moves towards
Brexit, we anticipate clarification on the regulations
affecting UK businesses and expect them to remain
largely in line with the current legislation, as much of the
EU proposals are built on UK requirements.
There is currently a heightened focus on cybersecurity
and nation-sate sponsored activity in the US and
increased collaboration is anticipated between private
industry and government agencies in the protection of
US citizens’ data and privacy.
The Investigatory Powers Act that was ratified by the
UK government in December 2016 continues to remain
under scrutiny and was most recently declared unlawful
by the European Court of Justice.
The EU Data Protection regulation (“GDPR”) will take
effect at the end of 2017 and companies holding data
on citizens within the EU will accelerate their readiness
for it. 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.
Indeed, regulatory pressures are here to stay and
companies must continue to invest resources to
ensure compliance.
THREAT LANDSCAPE
The 2016 threat landscape was dominated by two
themes: state-sponsored hacking and cyberwarfare at
the global level; and the specific threats of ransomware
and phishing at the local business level.
These themes demonstrated the challenges that face
all businesses worldwide – attacks can be targeted,
sustained and highly sophisticated, and they can be
opportunistic and random. Cybercrime has reached an
industrial scale and continues to be lucrative.
While the headlines were consumed with high profile
hacking, customers and partners across the world
highlighted ransomware and phishing threats as the
biggest challenge to maintaining security. An increasing
amount of ransomware intercepted by SophosLabs was
now seen to be targeting mobile devices,
especially Android.
Finding vulnerabilities and exploits on new platforms
and devices continued. This year the security research
communities concerns about inherent insecurity in
internet of things (“IoT”) devices became reality after
the Mirai assault against one of several companies
hosting the Domain Name System (“DNS”). That
denial of service attack affected some of the highest
profile media, social media and commercial payment
platforms, in turn impacting millions of users worldwide.
While these new vectors of attack were exploited,
high profile brands disclosed data breaches dating
back to 2013, demonstrating how challenging it is to
identify and investigate breaches at even the most
sophisticated technology-based companies. Indeed, we
also heard reports of an alleged auction of hacking tools
stolen from the US National Security Agency. The year
ended with allegations of nation-state involvement in
the leak of emails during the US election, serving as
a reminder to all that the threat from highly
sophisticated, well-coordinated and well-funded
attackers is a new normal.
11
...THE HIGHLY CONNECTED, HIGHLY COMPLEX IT
ENVIRONMENTS OF TODAY ARE CHALLENGING TO
PROTECT AGAINST THE RISING COMMERCIALISATION AND
INDUSTRIALISATION OF ORGANISED CYBERCRIME
IT Security a $39B Market
Growing at 7.4%
EXPANDING
ATTACK SURFACE
GROWING RISK
AWARENESS
$39B
IT Security Market 1
VANISHED
PERIMETER
INCREASED ATTACK
SOPHISTICATION
1 Source for c.$39B IT security market (hardware + software) is IDC Worldwide IT Security Products Forecast, 2017-2020: Comprehensive Security Products
Forecast Review (March 2017, IDC #US42374417) and represents expected market size in 2017. Growth of 7.4% represents 2015E-2020E CAGR.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 12
BUSINESS MODEL
SOPHOS PRINCIPALLY OPERATES AS A SUBSCRIPTION-
BASED SOFTWARE BUSINESS, WITH A DIFFERENTIATED AND
COMPELLING APPROACH TO ITS CHOSEN MARKET
CUSTOMER
BENEFITS:
SHAREHOLDER
BENEFITS:
OUR FOCUS
Best in class
security, easy
to manage
Scale, above
market growth
OUR FINANCIAL
MODEL
Ongoing,
focussed
investment in
innovation
Software –
as-a-service
model provides
visibility over
future revenues
and cash flows
OUR
COMPETITIVE
ADVANTAGES
Cloud-based,
highly effective,
synchronized
security
Strongly
differentiated
market leader
13
Sophos is one of the world’s leading
providers of cloud-enabled enduser and
network security solutions, providing
customers with end-to-end protection
against known and unknown IT security
threats, through products that are easy to
install, configure, update and maintain.
The Group’s products and services
are suitable for businesses of any size
seeking enterprise-grade security
combined with ease of use.
Through Sophos Central, a single
integrated cloud-based management
platform, customers are able to manage
all their security needs from within a
unified view.
Enduser and network security solutions
are sold primarily on a subscription basis,
via a ‘channel first’ sales model supported
by over 30,000 partners worldwide.
The Group’s scale is a significant
advantage, with over 100 million
endpoints protected and more than
260,000 customers around the globe.
The Group’s security solutions are
underpinned by SophosLabs, a world-
leading 24/7 threat intelligence operation,
employing over 150 people across
four continents.
On average, subscription contracts
are typically three-year commitments,
paid for upfront by the customer, which
provides ongoing updates over the course
of the subscription, based on the evolving
threat landscape.
This software-as-a-service model
consequently provides significant
visibility over future revenues and cash
flows, founded upon a substantial and
growing renewal book and industry-
leading renewal rates, boosted by cross-
sell and upsell opportunities.
The new business signed today feeds
the future renewal base. In addition to
growing the customer base worldwide, a
key element of the Group’s strategy is to
increase the product footprint within the
existing customer base. This is seen as a
significant opportunity, with just 9.6% of
customers using both endpoint and UTM
products today.
The strength and visibility inherent in the
subscription-based financial model is
delivering significant value
to shareholders.
Sophos offers a highly differentiated array
of industry-leading IT security solutions.
The Group is the only security software
vendor of scale with a strong presence in
both enduser and network security. This is
the foundation for the Group’s pioneering
synchronized security strategy, where the
products share contextual information
and thus enhance the protection available
to its customers.
Sophos is a leader in next-generation
endpoint security, with more than half a
million endpoints protected by signature-
less anti-exploit technology. The strongly
differentiated products and strategy
are enabling Sophos to deliver growth
substantially ahead of the market in both
enduser and network security.
Focused investment in innovation,
bolstered by selected technology
acquisitions, supports customers and
partners over the long-term, confirming
the Group’s commitment to deliver
industry-leading, trusted, enterprise-
grade IT security solutions.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 14
FOCUS ON STRATEGIC PRIORITIES
SOPHOS CONTINUES TO CONSOLIDATE ITS POSITION AS
A LEADING VENDOR OF INNOVATIVE, SIMPLE AND HIGHLY
EFFECTIVE IT SECURITY
STRATEGIC GOALS
Focus on
IT security
solutions
Sophos will continue to prioritise its investment in technology and in consolidating
its leadership position as the only security vendor with a balanced business spanning
both enduser and network security. As the Group is committed to IT security, it
believes it has an advantage over competitors who often seek to address disparate
and unrelated areas of technology.
Innovative,
simple,
effective
security
The Group’s industry-leading technologies are amongst the most innovative,
advanced and effective available in the market, but are simple and easy to deploy,
manage and use. Sophos believes that simple, integrated solutions deliver better
security that is easier to manage for organisations of any size and particularly those in
its chosen markets.
Deliver
complete,
end-to-end
cybersecurity
capabilities
The cloud is
at the core of
the Group’s
strategy
‘Channel first’
sales strategy
The Sophos cybersecurity portfolio is comprehensive and spans endpoint, mobile,
server, encryption, web, email, Wi-Fi and UTM/Next-gen firewall. Sophos continues
to make progress on its multi-year strategy to integrate these different products and
enable a synchronized security approach for its customers. Synchronized security
delivers added protection for customers and eliminates manual tasks.
The Group’s customers derive significant benefits from Sophos Central, the single,
integrated cloud-based management and reporting platform. Cloud technology
underpins the channel strategy and it continues to enhance Sophos’ partner-centric
management console, enabling partners to easily manage, update and configure the
Group’s products, and to drive cross-sell and upsell opportunities from within the
Sophos IT security portfolio.
Sophos is committed to its highly successful channel-only sales strategy. The
Group has grown its partner ecosystem to more than 30,000 partners during the
course of FY17, and is seeing considerable success in helping partners to cross-
sell and upsell to existing end users and 6,100 of the partners are now blue-chip
partners, demonstrating higher levels of productivity. The Group is also helping a
growing number of partners as they develop Managed Service Provider (“MSP”)
businesses built around the Sophos product portfolio.
15
KEY PERFORMANCE INDICATORS
To measure performance against the Group’s strategy, a number of Key Performance Indicators
(“KPIs”) are utilised; further explanation of which, including reconciliations to GAAP numbers, is
included in Note 6 of the financial statements and in the glossary. A description of these KPIs and
performance against them during the period is set out below:
Billings
$632.1M
(FY16: $534.9m)
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 a key forward
indicator of future performance.
Continued strong growth in all regions and
products with a particularly strong YOY Q4
performance. See page 29 for a detailed
review of billings.
PERFORMANCE
Revenue
$529.7M
(FY16: $478.2m)
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.
Subscription billings driving revenue growth
into double-digits and trending towards
billings growth rates. See page 30 for a
detailed review of revenue.
Cash EBITDA
$150.1M
(FY16: $120.9m)
Cash EBITDA provides visibility of cash earnings
during the period, even if the associated revenue
for that period’s billings has not yet been
recognised.
Sustained momentum of billings growth
coupled with leveraging of the existing cost
base resulted in an increase in cash EBITDA
and margin (cash EBITDA as a percentage
of billings).
Unlevered free
cash flow
$133.4M
(FY16: $46.4m)
Weighted
average
contract length
28.1 months
(FY16: 27.8 months)
Unlevered free cash flow represents the
amount of cash generated by operations
after allowing for capital expenditure,
taxation and working capital movements.
Strong performance above the Board’s
expectations, driven by growth in billings and
close control of working capital.
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.
Small increase due to material contract
previously announced in Q1. The
comparative has been restated as it is now
measured on a total Group basis.
Renewal rate
106%
(FY16: 102%)
Renewal rate (including upsell and cross-sell)
is a measure of long-term value of end user
agreements and the Group’s ability to retain
end users.
The Group has continued to leverage its
product portfolio, leading to a continued
improvement in the renewal rate.
Endpoint-UTM
cross-sell
9.6%
(FY16: 7.4%)
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.
As the Group has demonstrated the benefits
of cross-ownership of its products, the
level of cross-sell has continued to steadily
increase through the year.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 16
CHIEF EXECUTIVE OFFICER’S STATEMENT
FY17 WAS ANOTHER STRONG YEAR
FOR SOPHOS, IN WHICH WE MADE
SIGNIFICANT PROGRESS AGAINST
OUR STRATEGIC GOALS, AND
DELIVERED OPERATIONAL AND
FINANCIAL PERFORMANCE ABOVE
OUR EXPECTATIONS
A FAST-GROWING CHANNEL
AND CUSTOMER BASE
The number of Sophos partners grew to more than
30,000, up from 20,000 a year ago, and the number of
‘blue-chip’ partners rose from 4,700 to 6,100. In FY17
we added more than 40,000 new customers, with more
than 260,000 organisations now using one or more
Sophos IT security products. With more than 60 million
small and mid-market enterprises around the world who
could benefit from Sophos’ industry-leading security
portfolio, integrated and managed through a single,
easy-to-use cloud-based platform, and sold entirely
through the channel, our opportunity to continue to
grow our market share remains significant.
SOPHOS CENTRAL
A robust, comprehensive commitment to the cloud has
provided Sophos with a growing competitive advantage.
Sophos Central is a single, integrated cloud-based
management and reporting platform that has become a
meaningful driver of the Group’s software subscriptions.
Sophos Central represents 17.1 percent of subscription
billings, having grown by 220 percent in the period.
Leveraging the power of the cloud also allows us to
deliver compelling cross-sell and upsell opportunities
for partners, and many are now building additional
services businesses around the Sophos partner portal,
which enables them to manage, update and configure
their customers’ solutions remotely.
The Group expanded and enhanced Sophos Central
throughout the year, with new endpoint, server and
mobile security solutions, as well as additional partner
and managed service provider (MSP) features. In
addition, Sophos made a number of applications
available on the platform for the first time, including
email, encryption, wireless, and web security.
September 2016 saw the launch of Intercept X,
an exciting next-generation endpoint protection
application, featuring signature-less anti-exploit,
anti-ransomware and root cause analytics capabilities.
Intercept X has resonated extremely well with partners
OVERVIEW
Among the many highlights, the Group saw an 18.2
percent increase in total reported billings to $632.1
million, underpinned by 21.4 percent subscription
billings growth to $513.1 million, as we again delivered
growth in excess of the market in both network and
enduser security. Encouragingly, the strong momentum
at the heart of this performance was manifest across all
major regions and products, and in both new business
and renewals, and accelerated in the second half of
the year. Sophos Central remained a core driver of
our business, delivering growth of 220 percent and
an expanding opportunity for cross-sell and upsell
momentum. Our cash generation was very strong,
with unlevered free cash flow almost tripling to $133.4
million, from $46.4 million in the prior-year.
STRATEGIC PROGRESS
Sophos made significant progress in FY17, consolidating
its position as the leading vendor of innovative, simple,
and highly effective cybersecurity solutions for mid-
market enterprises. A number of factors have helped to
deliver this success which will continue to drive Sophos
forward in the years ahead, including:
» World-class products and innovation that provide
leading enterprise-grade protection validated by
numerous third parties, that at the same time are
easy to deploy, use, and manage
» Cloud-enabled security solutions that include
a single, integrated cloud-based management
console and cloud delivery of multiple security
capabilities
» Synchronized security product strategy, in which
network, endpoint, and all the key offerings in our
product portfolio actively share threat intelligence
information to deliver better protection that is also
easier to manage
» 100% channel sales model
» Deepening and expanding our relationship with our
partners and customers, to drive upsell and cross-sell
17
and customers. In just two quarters since its launch,
more than 8,000 customers have purchased Intercept X
on the Sophos Central cloud-management platform.
WORLD-CLASS PRODUCTS AND INNOVATION
A commitment to industry-leading innovation, focused
on our target customer, combined with a strong
demand backdrop and an increasingly powerful channel
ecosystem enabled Sophos to continue to gain market
share, outpacing market growth rates in both enduser
and network security.
In addition to the launch of Intercept X, there was an
enthusiastic response to the newest release of the
Sophos XG Firewall, helping the Group achieve 17.8
percent growth in network security billings for the
year, at constant currency. With version 16.0 launched
in October 2016, customers are benefiting from over
100 new features and significant enhancements to
the user experience, particularly navigation, policy
management and logging, as well as additional
synchronized security features linking the XG firewall
with endpoint, encryption, mobile, and other security
offerings. Sophos is already a leader in the emerging
cloud-based infrastructure market for security, a
growing opportunity as enterprises adopt infrastructure
as a service via the cloud. XG Firewall version 16.0
introduced support for the Microsoft Azure cloud
platform in addition to the existing support for Amazon
Web Services.
ACQUISITIONS
In February 2017 Sophos announced the acquisition of
Invincea, Inc., a leading developer of advanced next-
generation malware protection, consistently ranked
as among the best performing signature-less, next-
generation endpoint technologies in third-party testing,
rated highly both for high detection and low false-
positive rates. The Invincea endpoint security portfolio
prevents, detects, and remediates zero-day and
sophisticated attacks, and combines neural-network
based machine learning and behavioural monitoring to
enhance detection through artificial intelligence and
stop evasive malware before damage occurs.
Invincea complements and enhances Sophos’ existing
presence in next-generation endpoint protection, a
dynamic new segment that is serving to increase
meaningfully the size and growth rate of the multi-
billion dollar endpoint security market as a whole.
Invincea’s advanced machine learning technology is a
critical element in the broad array of advanced endpoint
technology components that customers will require
in order to protect themselves effectively against the
growing number and sophistication of cyber threats
that face organisations of all sizes. The integration
of the Invincea technology into the Sophos Central
endpoint product line is progressing well, with the first
Sophos products incorporating Invincea’s machine
learning technology expected to be available and sold
via our global channel of over 30,000 partners in 2017,
bringing immediate value to customers.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 18
CHIEF EXECUTIVE OFFICER’S STATEMENT CONTINUED
AN EARLY COMMITMENT TO THE
CLOUD HAS GIVEN SOPHOS A
REAL AND GROWING COMPETITIVE
ADVANTAGE
DEEPENING THE RELATIONSHIP
WITH OUR CUSTOMERS
We further increased the amount of cross-sell and upsell
business with existing customers, a key element of the
Group’s growth strategy. Our net renewal rate achieved
on our subscription business was over 106 percent in the
year, including cross-sell and upsell, versus 102 percent
a year ago. Furthermore, the proportion of customers
purchasing both the Sophos endpoint and unified threat
management (UTM) products was just under 10 percent
at the end of the period, up from 7 percent a year ago. The
continued improvement in these areas demonstrates
the Group’s success in leveraging its product portfolio
and the benefits that both partners and customers are
gaining from an integrated, synchronised approach
to IT security.
INDUSTRY LEADERSHIP
During the year, leading industry analysts including
Gartner and Forrester once again endorsed Sophos as a
leader for products in both enduser and network security.
In addition, Sophos won numerous channel awards,
including 2016 Endpoint Security Innovation winner (CRN
US), 2016 Data Security winner (CRN US), 2016 Network
Security winner (CRN US), 2016 Security Vendor of the
Year (CRN UK), and 2016 Channel Excellence Award
winner - Security Hardware (Channel Partner DACH).
Furthermore, in February 2017, five senior Sophos
executives were named in CRN’s prestigious list of 2017
Channel Chiefs, which represents top leaders in the IT
channel who excel at driving growth and revenue in their
organisations through channel partners.
While we are pleased with the scale, growth, and
momentum we have established, we firmly believe
we are just getting started. Security continues to be a
mission-critical, board-level priority for organisations
of every size that only rises in importance with each
passing year. Delivering true enterprise-grade protection
to mid-market enterprises, in a way that is integrated
and simple to deploy and manage, all sold through the
channel, provides Sophos with a substantial market
opportunity. Our company mission is to be the best in the
world at delivering innovative, simple, and highly-effective
cybersecurity solutions to IT professionals and the channel
that serves them. We believe we are uniquely positioned
to successfully execute against that mission, and as we
do so, our opportunities to continue to grow and succeed,
both operationally and financially, are dramatic.
Sophos’ success is only possible through the
commitment and hard work of our global team of
employees and partners, and I would like to extend my
personal thanks to them for all they do to support and
protect hundreds of thousands of organisations around
the world each day.
Kris Hagerman
Chief Executive Officer
16 May 2017
19
Q & A WITH MANAGEMENT TEAM
Q&A WITH MEMBERS OF THE
SOPHOS SENIOR MANAGEMENT
TEAM
SOPHOS HELPS BUSINESSES TO FOCUS ON WHAT THEY DO BEST BY OFFERING THE INDUSTRY’S
LEADING PROTECTION AGAINST CYBER AND DATA ATTACKS. MEMBERS OF THE MANAGEMENT
TEAM OFFER THEIR INSIGHTS INTO SOME OF THE CHALLENGES AND OPPORTUNITIES FACING
SOPHOS, ITS PARTNERS AND CUSTOMERS, TODAY AND IN THE FUTURE.
MICHAEL VALENTINE
SENIOR VICE PRESIDENT,
WORLDWIDE SALES
Q. When you talk to customers,
what are their most pressing
issues?
A.It really is the need to reduce
complexity. These companies
often have limited IT staff and rarely
a security expert. They struggle to
manage multiple security products
and are even more challenged to
respond to the daily alerts and
notifications they receive. They want
simplicity and flexibility. They want
a seamless experience between
reseller and vendor. They do not
have the expertise to run lengthy IT
procurement projects and rely on
their IT resellers to make the right
choices for them.
For our partners, their concerns are
twofold: what business model do I
adopt; and, how do I hire and retain
the right calibre of sales and sales
engineering staff? The opportunities
offered by MSP and IaaS models are
appealing as more customers move
to AWS or Azure. However, can every
product reseller make the move to
value added or managed services?
It’s a difficult question to answer.
The demand for cybersecurity skills
far outstrips the supply and we are
focused on helping our partners to
train and retain staff within their
companies. Nothing motivates
a sales person like hitting their
targets and we believe that Sophos
can offer the best products on the
market and make business easy to
close. Everyone wants to be on the
winning team and that’s what we
drive towards every day.
Q. Can you tell me about the
importance of the Sophos
partner ecosystem?
A.Without a strong partner
ecosystem, we would have no
business. As a 100 percent channel-
focused company, it is our ability
to educate, enable and incentivise
our channel partners that drives
our growth and enables us to more
quickly enter new markets and scale
up our business.
rely heavily on their resellers for
local support, so we can offer
three different levels of support
without additional investment. Our
customers trust us to develop highly
effective products that will protect
them against today’s sophisticated
threats and we rely on our partners
to deliver the right advice, training
and services to them.
facing Sophos?
Q. What is the biggest challenge
A.There are more than 60 million
businesses in the sweet spot
of our target market and gaining
brand recognition within a vast
market is challenging. We compete
against big established names and
small challenger companies in both
endpoint and network security
markets. We have made huge
progress over the last five years but
we still have work to do in continuing
to make our brand stand out in this
huge market.
We are addressing a huge market
opportunity that relies on its trusted
IT resellers for advice, services and
products to protect their critical
data. Mid-market companies also
We are differentiated against the
competition and gaining traction
with our unique synchronized
security vision, which is supported
by our comprehensive network and
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
20
Q & A WITH MANAGEMENT TEAM CONTINUED
Q&A WITH MEMBERS OF THE
SOPHOS SENIOR MANAGEMENT
TEAM
endpoint security portfolio. However,
much like the rest of the industry,
our security-focused partners have
specialisms in network or endpoint
security and we need to continue to
educate them on both sides of our
portfolio. We are investing heavily
in partner enablement, education
and training to make sure that our
partners are taking advantage of the
opportunity offered by Sophos; both
in terms of more business and with
better security for their customers.
JOE LEVY
CHIEF TECHNOLOGY OFFICER
prioritise what they are doing?
Q. How should customers
A.Know thyself. All endeavours
to enhancing security must
start here. Our information systems
used to relate to physical things,
applications and operating systems
running directly on clients and
servers that we could see, touch,
and count, but they become
more intangible, and abstract
every day. Cloud, virtualisation,
mobile, containers, micro
services and APIs have enabled
unimaginable advancements
in automation, manufacturing,
business intelligence, collaboration,
personalisation, and prediction,
but these come at the costs of
complexity and opaqueness.
In order to protect the
confidentiality, integrity and
availability of our assets, among the
most valuable of which is our data,
we must know that they exist, where
they exist, and what they are worth.
For any security effort to succeed,
it must begin here. Only then can
practicable risk management
strategies be developed and applied.
Q. Are attitudes towards security
changing among your
customers?
A.It is difficult to ignore
the headlines related to
information security incidents.
Whether it is the latest data breach,
the rise of ransomware, reminders
to the fragility of our critical
infrastructure or allegations of
tampering with democracy, hardly
a day goes by without coverage
of some unfortunate exploitation
of weaknesses in our information
systems.
to you?
Q. What does innovation mean
A.Innovation at its core describes
improvement through novelty,
and in the context of information
security its key attribute is
continuous adaptation. Security is
a property of system, so to innovate
in information security requires not
just continuous improvements in
technology, but also in how people
interact with that technology, and
how it interfaces with the rest of our
increasingly interconnected world.
Advancements in computing and
data science have given us a world
where everything is a computer,
everything is connected, and
machines operate autonomously.
Our day-to-day lives increasingly
benefit from and depend on this
new reality and with such leverage
comes high-stake risk. Attackers
exploit flaws in software, fragility
in complex systems, human
susceptibility to social engineering,
and the shroud of anonymity
provided by the internet and
crypto-currencies. Innovation
in information security seeks to
anticipate and stay one step ahead
of this and it should be measured by
its usability, durability, adaptability
and utility in preventing, detecting
and responding to today’s and
tomorrow’s threats.
But every cloud has a silver lining,
and a positive consequence of
these events is a heightened
awareness of the threat. Businesses
of all sectors and sizes, institutions
of learning, corporate boards,
the insurance industry and
governments are increasingly
treating information security
seriously and saliently. Attitudes
toward information security are
shifting from an afterthought that is
taxing or punitive, to a forethought
that is among any project’s core
requirements. We are slowly getting
better at understanding risk in
the abstract. It’s an encouraging
maturation, but we must not allow
ourselves to become inured to the
stream of reminders. We must
be unrelenting in our pursuit of
adaptation and improvement.
21
SIMON REED
VICE PRESIDENT,
SOPHOSLABS
security?
Q. What does Sophos mean by
A. Computers now dominate our
lives. It is part of everything
we do, at work and in our personal
lives. We’ve grown dependent on
technology. Like any tool, it can be
used to benefit our lives, or be used
against us for nefarious purposes.
Security allows us to have the full
benefits that computers can provide
whilst keeping the evil aspects at bay.
Q. What is the best way to stay
ahead of security concerns and
threats?
A. Be a smart consumer of the
benefit of the IT-ization of
our lives. Understand the basics of
staying secure: strong passwords;
prodigious patching; etc. Consider
the downsides as well as the
advantages that can be provided
and make a balanced decision. Stay
careful and cautious online and
when interacting with email and
websites. If it sounds too good to be
true, treat with extreme caution.
DAN SCHIAPPA
SENIOR VICE PRESIDENT
& GENERAL MANAGER,
ENDUSER SECURITY &
NETWORK SECURITY
GROUPS
secure?
Q. Can a company be truly
A. A company can be secure, but
it will never be impervious.
There has never been a security
technology that is perfect, but by
having a broad and interconnected
ensemble of capabilities, a company
can raise the bar high enough that
the attacks return on investment
isn’t worthwhile.
for Sophos?
Q. What is the biggest opportunity
A. Our biggest opportunity is
to take a highly innovative
security portfolio and make it
simple enough for any business to
deploy and secure their business.
Leveraging our portfolio through
the synchronized security approach
to differentiate the reason to use
multiple Sophos products. By
continuously innovating, staying on
the front foot to compete against
the attackers.
Sophos business strategy?
Q. How would you summarise the
A. Deliver innovative, easy to use,
and highly effective security
solutions to enterprises of all sizes.
Have end-to-end experiences that
just work and delight our customers.
Sell this to customers who value
innovation, simplicity and highly
effective security.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS Security made simple.
Network and endpoint protection,
centrally managed and
communicating together.
For stronger, more simple security.
24
25
NETWORK SECURITY PORTFOLIO
SYNCHRONIZED SECURITY MODEL
IN THE NETWORK SECURITY MARKET, SOPHOS
CONTINUES TO INNOVATE WITHIN ITS PORTFOLIO OF
FIREWALL, WIRELESS, EMAIL AND WEB SECURITY.
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During the year, Sophos accelerated performance with advanced protections, adding sandboxing across multiple
products, expanding IaaS (Azure/AWS) firewall protection and driving further integration with the Sophos Central
management platform. At this point, the key products of wireless, email and web are available as on-premise products
that can be managed through Sophos Central.
KEY PRODUCT DEVELOPMENTS
» Sophos XG Firewall 16 is the latest next-generation
firewall. It blocks evasive zero-day threats,
automatically isolates endpoints upon threat
detection or a missing Security Heartbeat™,
identifies unknown application traffic, and adds
enterprise-grade Secure Web Gateway protections
and built-in Data Loss Prevention for email. It is
available as a hardware appliance, software or
virtual appliance, or for Microsoft Azure, extending
support for IaaS environments.
» Sophos Wireless provides a simple, effective way
to manage and secure your wireless networks.
Sophos introduced many features in FY17 to
optimise performance, threat detection, and new
management capability via Sophos Central.
» Sophos Email Security is a proven anti-malware,
anti-spam and anti-phishing solution, now managed
by Sophos Central. Sophos offers email continuity
and emergency inbox in cases of outages or attacks,
a self-service portal for users, easy deployment and
management, and support for Exchange, Office 365,
and G Suite.
» Sophos UTM for AWS is network security for Public
Cloud environments, which includes advanced
protections for intrusion prevention, network packet
inspection, application control, VPN and a web
application firewall. Designed for AWS, Sophos UTM
scales automatically based on traffic changes, and
offers high availability to ensure applications and
users can always connect.
CENTRAL
Sophos Central is an integrated management platform that simplifies the administration
of multiple Sophos products and enables more efficient business management for Sophos
partners and customers. This unified platform for security management is the realisation
of the Groups' synchronized security strategy to enable multiple security products to work
together seamlessly, with simpler management and better security. Key products currently
available through Sophos Central include Sophos Endpoint Security, Sophos Intercept X,
Sophos Mobile, Sophos Server Protection, Sophos Encryption, Sophos Wireless, Sophos Email
Security, Sophos Web Security, and Sophos Phish Threat.
26
27
ENDUSER SECURITY PORTFOLIO
SOPHOS CONTINUES TO ENHANCE AND DEVELOP THE
NEXT-GENERATION CAPABILITIES OF ITS ENDUSER
PRODUCT PORTFOLIO.
CLOUD
INTELLIGENCE
NEXT-GEN ENDPOINT
MOBILE
SERVER
ENCRYPTION
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MANAGEMENT
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SECURITY
Memor y
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Admin
| MANAGE ALL SOPHOS PRODUCTS
Self Service
| USER CUSTOMISED ALERTS
Partner
Analytics
| MANAGEMENT OF CUSTOMER INSTALLATIONS
| ANALYSE DATA ACROSS ALL OF SOPHOS’ PRODUCTS TO CREATE
SIMPLE, ACTIONABLE INSIGHTS AND AUTOMATIC RESOLUTIONS
SophosLabs | 24 X 7 X 365, MULTI-CONTINENT OPERATION
Malware Identities · URL Database · Machine Learning · Threat Intelligence
Genotypes · Reputation · Behavioural Rules · APT Rules · App Identities
Anti spam · DLP · SophosID · Sandboxing · API Everywhere
There is a significant rise in demand for next-generation threat protection as reports of ransomware and
advanced phishing attacks become more numerous and widespread.
Sophos rounded out its comprehensive endpoint
defense strategy with the acquisition of Invincea and
the anticipated introduction of integrated machine-
learning products in FY18. Key products in the
comprehensive defence strategy introduced during
FY17 included:
» Sophos Intercept X delivers next-generation anti-
exploit protections with signature-less threat and
exploit detection, anti-ransomware, root cause
analysis and Sophos Clean for deep forensic-level
malware removal.
» Sophos Mobile 7 is a comprehensive EMM solution
with features for Mobile Device Management
(“MDM”), Mobile Application Management (“MAM”),
Mobile Email Management (“MEM”), Mobile Content
Management (“MCM”) and mobile security.
Customers can manage iOS, Android, and Windows
Mobile devices side-by-side with Windows
computers to ensure a uniform company security
and compliance policy across all devices.
» Sophos Server Protection recently introduced anti-
ransomware, new support of VMware and Microsoft
Hyper-V with Sophos for Virtual Environments, and
added Security Heartbeat technology which can
now isolate servers as part of Synchronized Security
» Sophos Safeguard Encryption provides ‘always-on’
file-level encryption for threat protection of data
accessed from mobile devices, laptops, desktops,
on-premise networks and cloud-based file sharing
applications. Sophos is the first vendor to provide
persistent, transparent and proactive encryption
that protects files across Windows, Mac, iOS or
Android platforms by default.
» Sophos Phish Threat is an advanced phishing
attack simulator and training solution that is fully
integrated with the company’s cloud-based security
management platform, Sophos Central. The core
Phish Threat technology was acquired from Silent
Break Security in December 2016 and integrated
into Sophos Central before launch in January 2017.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
28
FINANCIAL REVIEW
THE GROUP FINISHED
THE YEAR STRONGLY AND
IS INCREASINGLY WELL
POSITIONED TO ACHIEVE
GROWTH FROM BOTH NEW
AND EXISTING CUSTOMERS IN
FY18 AND BEYOND
The key metrics of billings, cash EBITDA and cash flow were all strong in the year. The Group expected cash flow to
show very strong growth in the year, yet the Directors were particularly encouraged that unlevered free cash flow
almost trebled to $133.4 million.
The table below presents the Group’s financial highlights on a reported basis:
Billings
Revenue
Cash EBITDA
Adjusted operating profit
Operating loss
Unlevered free cash flow
Net cash flow from operating activities
FY17
$m
632.1
529.7
150.1
38.3
(44.3)
133.4
118.5
FY16
$m
534.9
478.2
120.9
53.4
(32.7)
46.4
21.3
Growth
%
18.2
10.8
24.2
(28.3)
35.5
187.5
456.3
Definitions and reconciliations of non-GAAP measures are included in note 6 of the financial statements and the glossary
Reported billings grew by 18.2 percent to $632.1 million, while billings in constant currency grew at 19.9 percent to
$648.7 million, revenue grew 12.3 percent on the same basis to $542.1 million, within which subscription revenue
grew 14.4 percent to $420.4 million.
Adjusted operating profit and operating loss were both impacted by the fact that the majority of billings are
subscription contracts where the revenue is deferred to future periods; however, the level of spending is driven by
billings growth and is recognised immediately in the profit and loss account. Accordingly, a strong billings performance
is very positive for the long-term health of the business and cash generation yet the full benefit to the profit and loss
account is in future periods. Deferred revenues increased by $82.3 million in the period further underpinning the
confidence in future revenue growth. The Group finished the year with $581.0 million (FY16: $498.7 million) of deferred
revenue, $330.6 million (FY16: $286.5 million) of which is due for release in the year ahead.
Billings
$632M
$150M
Cash EBITDA
Revenue
$530M
$119M
Net cash flow from operating activities
29
BILLINGS
The Group’s reported billings increased by $97.2 million from $534.9 million in the year-ended 31 March 2016
to $632.1 million in the year-ended 31 March 2017, with growth in all regions, products and types as detailed below.
This represented 18.2 percent reported growth or 19.9 percent growth on a constant currency (“CC”) basis.
The reconciliation of billings to revenue is included in note 6 of the Financial Statements.
Billings by Region:
– Americas
– EMEA
– APJ
Billings by Product:
– Network
– Enduser
– Other
Billings by Type:
– Subscription
– Hardware
– Other
Subscription agreements comprised 81 percent of the
Group’s billings in FY17, an increase from 79 percent in
the prior-year. Subscription agreements are paid in full
upfront with revenue being recognised on a deferred
basis over the life of the agreements, which mainly
range from one to three years in duration, resulting in
a highly visible and predictable future revenue stream.
BILLINGS BY REGION
AMERICAS
Billings attributable to the Americas increased by $29.7
million to $217.6 million in the year-ended 31 March
2017, representing 15.8 percent growth on a reported
basis and 15.9 percent on a constant currency basis.
Network products and sustained adoption of the
Sophos Central platform, including strong sales of new
next-generation endpoint products drove the year-on-
year growth.
EMEA
Billings attributable to EMEA increased by $55.5
million to $319.5 million in the year-ended 31 March
2017, representing 21.0 percent growth on a reported
basis and 25.6 percent growth on a constant currency
basis, reflecting the impact of the strengthening US
Dollar against both Sterling and Euro. Enduser growth
in the region was particularly strong, supported by a
substantial increase in the adoption of the Sophos
Central platform and the contribution from a material
contract with an existing customer in the UK in the first
quarter of the year.
FY17
$m
(Reported)
FY16
$m
(Reported)
Growth
%
(Reported)
Growth
%
(CC)
217.6
319.5
95.0
632.1
311.5
289.7
30.9
632.1
513.1
105.7
13.3
632.1
187.9
264.0
83.0
534.9
266.7
238.2
30.0
534.9
422.8
99.0
13.1
534.9
15.8
21.0
14.5
18.2
16.8
21.6
3.0
18.2
21.4
6.8
1.5
18.2
15.9
25.6
11.0
19.9
17.8
24.4
2.6
19.9
23.3
7.6
2.3
19.9
APJ
Billings attributable to APJ increased by $12.0 million
to $95.0 million in the year-ended 31 March 2017,
representing 14.5 percent growth on a reported basis
and 11.0 percent growth on a constant currency basis.
Growth in the region was driven by Enduser billings;
Network billings in the prior-year were assisted by a
very strong performance in Japan leading to a tough
comparative.
BILLINGS BY PRODUCT
NETWORK PRODUCTS
The Group’s billings attributable to Network products
increased by $44.8 million to $311.5 million in the
year-ended 31 March 2017, representing 16.8 percent
growth on a reported basis and 17.8 percent growth on
a constant currency basis, despite a strong prior-year
comparative from larger deals in Japan. This growth
was balanced across UTM, Email and Web products.
ENDUSER PRODUCTS
The Group’s billings attributable to Enduser products
increased by $51.5 million to $289.7 million in the year-
ended 31 March 2017, representing 21.6 percent growth
on a reported basis and 24.4 percent growth at constant
currency. Sophos Central, incorporating the new next-
generation endpoint product, Intercept X, was a key driver
for Enduser billings growth. Growth was also assisted by
the contribution from a material contract during the first
quarter of the year with an existing customer in the UK.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 30
FINANCIAL REVIEW CONTINUED
BILLINGS BY TYPE
Subscription billings increased by $90.3 million to
$513.1 million in the year-ended 31 March 2017,
representing 21.4 percent growth on a reported basis
and 23.3 percent growth on a constant currency
basis. Encouragingly, Sophos Central billings were
$87.7 million in the year, increasing from $27.4 million
in the prior period and now represent 17.1 percent of
subscription billings up from 6.5 percent in the prior
period. Hardware billings increased by 6.8 percent on
a reported basis, 7.6 percent growth on a constant
currency basis, to $105.7 million primarily due to a
tough comparative from the strong hardware sales in
Japan. The share of subscription billings of total billings
increased marginally in the year as Sophos Central
continued to gain momentum.
KEY BILLINGS METRICS
BILLINGS FROM NEW CUSTOMERS
Billings, at constant currency and excluding
acquisitions, from new customers remained consistent
at 25 percent of total billings and grew 21.3 percent year
over year.
RETENTION RATES
The Group’s results are substantially driven by billings
generated from subscriptions for its products and
services. The Group’s net retention rates include the
impact of cross-selling and upselling, 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
acquisitions, for the year-ended 31 March 2017
improved to 106.3 percent from 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, typically with less than
5,000 employees. In FY17 the proportion of billings to
the Group’s customers with less than 5,000 employees
increased marginally YOY to 83 percent.
BILLINGS BY LENGTH OF CONTRACT
Subscription agreements sold by the Group are of
differing durations, most typically being one to three
years in length. The weighted average contract length
for the year-ended 31 March 2017 was 28.1 months, a
small increase on the 27.8 months 1 for the year-ended
31 March 2016, mainly due to the material contract with
an existing customer in the first quarter.
The billings analysis of contracts by subscription length
for each year1 was as follows:
Constant currency
Under one year
One to two years
Two to three years
Greater than three years
FY17
%
34.3
7.5
46.0
12.2
FY16
%
34.7
8.1
45.9
11.3
1 Comparatives were previously presented excluding Cyberoam and
have now been re-stated to be on a total Group basis
CROSS-SELL AND UPSELL OPPORTUNITIES
The Group continued to demonstrate to its existing
customers the benefits of cross-ownership. A measure
of this success is the percentage of all customers who
own both a Sophos Endpoint and UTM product (being
the primary products of the Enduser and Network
families, respectively). The Group expects this metric to
steadily improve as customers take advantage of the
benefits of synchronized security. At 31 March 2017,
approximately 9.6 percent of customers had both a
UTM product and an Endpoint product compared to 7.4
percent of customers at 31 March 2016.
REVENUE
The Group’s revenue increased by $51.5 million, or
10.8 percent, to $529.7 million in the year-ended 31
March 2017. Revenue at reported rates was impacted
throughout the year by currency headwinds, most
notable a weakening against the US Dollar of Sterling
and the Euro. Accordingly, revenue growth for the
year on a constant currency basis was higher at 12.3
percent, following an increasing trend through the year
which generated Q4 constant currency revenue growth
of 14.7 percent.
The majority of the Group’s billings relate to
subscriptions (FY17: 81.2 percent; FY16: 79.0 percent),
and hence the benefit from increased billings is spread
over a number of years based on the subsequent
recognition of deferred revenue. Revenue of $529.7
million comprised $277.8 million (FY16: $251.4 million)
from recognition of prior-year deferred revenues and
$251.9 million (FY16: $226.8 million) from new billings.
The deferred revenue balance at the end of the year of
$581.0 million increased $82.3 million from the end
of the prior year, an increase of 16.5 percent despite a
negative translation impact of $24.2 million resulting
from the devaluation of Sterling against the US Dollar.
Revenue in the Americas increased by 12.5 percent to
$186.9 million in the year-ended 31 March 2017 due to
growth in both Network and Enduser sales.
31
+12.3%
Constant currency revenue growth
+16.5%
Deferred revenue growth
Revenue by Region:
– Americas
– EMEA
– APJ
Revenue by Product:
– Network
– Enduser
– Other
Revenue by Type:
– Subscription
– Hardware
– Other
FY17
$m
(Reported)
FY16
$m
(Reported)
Growth
%
(Reported)
Growth
%
(CC)
186.9
263.1
79.7
529.7
271.2
231.6
26.9
529.7
410.7
106.7
12.3
529.7
166.1
239.5
72.6
478.2
239.0
211.9
27.3
478.2
364.7
100.9
12.6
478.2
12.5
9.9
9.8
10.8
13.5
9.3
(1.5)
10.8
12.6
5.7
(2.4)
10.8
12.6
13.8
6.4
12.3
14.6
11.4
(1.8)
12.3
14.4
6.3
(0.8)
12.3
EMEA revenue increased by 9.9 percent to
$263.1 million in the year-ended 31 March 2017,
primarily due to growth in UTM billings as much of the
benefit of increased subscription billings is deferred into
future periods.
APJ revenue increased by 9.8 percent to $79.7 million
in the year-ended 31 March 2017, predominantly due to
strong growth in Enduser billings, with lower Network
growth due to a tough compare in Japan.
COST OF SALES
The Group’s cost of sales increased by $16.9 million to
$121.3 million in the year-ended 31 March 2017. This
was primarily due to the continued growth of Network
product billings, many of which have a hardware
component, the growth in Sophos Central products
which are hosted by the Group and higher costs in
the support function which are increasing, albeit at a
rate lower than billings thereby delivering operational
leverage.
SALES AND MARKETING
The Group’s sales and marketing expenses increased
by $26.6 million or 14.5 percent, to $210.6 million in
the year-ended 31 March 2017. Sales and marketing
investments are targeted to drive billings growth.
The Group achieved a growth rate in sales and
marketing costs that was below the rate of growth in
billings, contributing to the anticipated leverage as the
business scales, which is expected to continue.
RESEARCH AND DEVELOPMENT
The Group’s research and development expenses
increased by $18.2 million, or 18.3 percent, to $117.8
million in the year-ended 31 March 2017. This reflects
the significant investment made in new and enhanced
products released in the period and an ongoing focus
on product development. Research and development
investments are broadly targeted to grow at the rate
of billings.
GENERAL FINANCE AND ADMINISTRATION
The Group’s general finance and administration
expenses, excluding exceptional items, foreign
exchange and the amortisation of intangible assets,
increased by $19.8 million, or 38.1 percent, to $71.8
million in the year-ended 31 March 2017. The increase
was substantially due to the share-based payment
expense, which increased by $16.2 million to $32.5
million representing the first full-year charge following
the issue of new equity awards at the time of the
Initial Public Offering of the Company’s shares in
the prior-year.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 32
FINANCIAL REVIEW CONTINUED
Underlying general finance and administration expenses
have increased by 10.1 percent YOY and have decreased
as a proportion of billings as the Group continued to
leverage its strong back office function.
The Group’s exceptional items, included within general
finance and administration expenses, decreased by
$10.5 million to $31.4 million in the year-ended 31
March 2017. Current-year exceptional items relate
predominantly to expenses incurred connected with
the defence of certain claims brought against the Group
in relation to the previously announced intellectual
property litigation case brought by Finjan Inc., including
both the costs of an omnibus agreement entered into
with Finjan Inc. on 30 March 2017 resolving all the
parties’ disputes and associated legal costs. It also
includes acquisition costs incurred in relation to material
acquisitions in the year. Prior-year exceptional items
included $17.8 million incurred during the Initial Public
Offering of the Company’s shares, as well as acquisition
costs and expenses incurred in relation to the defence
or settlement of claims brought against a number of the
Group’s employees by their former employer and certain
intellectual property litigation cases.
AMORTISATION OF INTANGIBLE ASSETS
The Group’s amortisation of intangible assets
decreased by $9.3 million, or 31.8 percent, to $19.9
million in the year-ended 31 March 2017. The decrease
was due to the Group’s policy of amortising acquired
intangibles on a reducing balance basis. In the current
year, the Group’s largest acquisition, Invincea, Inc. was
completed at the very end of the year, therefore limiting
amortisation in the period.
CURRENCY MOVEMENTS AND IMPACT
The Group’s foreign exchange loss was $1.2 million in
the year-ended 31 March 2017, compared with a gain of
$0.2 million in the year-ended 31 March 2016. The loss
arises as a result of the weakening of Sterling and the
Euro against the US Dollar in the year, an impact which
is mostly mitigated by the Group’s largely naturally-
hedged position.
CASH EBITDA
The reconciliation of cash EBITDA to operating loss is
included in note 6 of the Financial Statements.
On a reported basis, cash EBITDA increased by 24.2
percent to $150.1 million in the year-ended 31 March 2017.
The Cash EBITDA margin increased YOY to 23.7 percent
from 22.6 percent in the prior year mainly as the Group
leveraged sales, marketing and back office investments.
ADJUSTED OPERATING PROFIT
Adjusted operating profit provides a supplemental
measure of earnings that facilitates review of operating
performance on a period-to-period basis by excluding
non-recurring and other items that are not indicative
of the Group’s underlying operating performance. The
Directors have chosen to disclose this alternative
performance measure in order to not only allow a focus
on underlying operating performance but also to aid
comparability with other companies that disclose the
same measure. The reconciliation of adjusted operating
loss to operating loss is included in note 6 of the
Financial Statements.
Adjusted operating profit decreased by $15.1 million
to $38.3 million in the year-ended 31 March 2017. The
Group continues to invest to drive billings growth. The
majority of billings are from subscription contracts with
the revenue benefit from increased subscription billings
being deferred into future periods. Accordingly, strong
subscription billings growth, whilst very positive for the
long-term health of the business and cash generation,
can actually show as a detriment to the short-term
income statement with most of the revenues deferred
whilst all spending is recognised as incurred. For this
reason, the Group primarily focuses on billings, cash
EBITDA and cash flow as the key leading indicators and
primary operating metrics of the business.
OPERATING LOSS
The Group’s operating loss was $44.3 million in the
year-ended 31 March 2017, compared to a loss of $32.7
million in the prior year. The increase was mainly due to
an increased share-based payment expense, following
the issue of equity instruments at the time of the Initial
Public Offering, though this increase was partially offset
by decreases in exceptional costs and amortisation.
NET FINANCE COSTS
The Group’s net finance costs decreased by $30.7
million to $5.0 million in the year due to both the
repayment in the prior year of the amounts due to
the previous parent company and, at the time of the
Company’s Initial Public Offering of shares, an $87.7
million repayment of bank debt. In addition, foreign
exchange losses on borrowings in the prior year have
become gains in the current year as the US Dollar has
strengthened and the prior year included a $5.9 million
write-off of un-amortised finance fees that arose on the
repaid external debt facility.
INCOME TAX
The Group’s tax credit for the year was $2.6 million
(FY16: $3.5 million charge) with an effective tax rate
of 5.3 percent (FY16: -5.1 percent). The tax credit
arises against a reported loss for the Group, however
cash tax remains payable as a consequence of taxable
profits in local subsidiaries. The Group also benefited
from participation in the UK research and development
expense credit regime.
33
LOSS FOR THE YEAR
The Group’s loss for the year decreased by $25.2 million,
from a loss of $71.9 million in the year-ended 31 March
2016 to a loss of $46.7 million in the year-ended 31
March 2017, predominantly reflecting the reduction in
finance expenses.
CAPITAL EXPENDITURE
The Group’s capital expenditure primarily comprises
property, plant and equipment as well as intangible
assets. In the year-ended 31 March 2017, net cash
capital expenditure decreased marginally by $0.3 million
on the prior-year.
CASH FLOW
Net cash flow from operating activities significantly
increased YOY to $118.5 million from $21.3 million in
the prior year. The increase was due to billings growth,
leverage of operating expenses and management of
working capital.
Cash EBITDA*
Net deferral of revenue
Foreign exchange
Depreciation
Adjusted operating profit
Net deferral of revenue
Exceptional items
Depreciation
Foreign exchange
Change in working capital*
Corporation tax paid*
Net cash flow from
operating activities
Exceptional items
Net capital expenditure*
Unlevered free cash flow
FY17
$m
150.1
(102.4)
–
(9.4)
38.3
102.4
(31.4)
9.4
–
19.0
(19.2)
118.5
31.4
(16.5)
133.4
FY16
$m
120.9
(56.7)
(2.4)
(8.4)
53.4
56.7
(41.9)
8.4
2.4
(32.5)
(25.2)
21.3
41.9
(16.8)
46.4
* Unlevered free cash flow represented by the sum of marked rows
and has been presented to enhance understanding of the Group’s
cash generation capability.
Unlevered free cash flow increased threefold over
the prior-year to $133.4 million due to billings growth,
significant movements in working capital, reduced
year-over-year cash tax payments and flat net capital
expenditure.
CHANGES IN WORKING CAPITAL
Working capital movements result from an increase in
creditors for activity in the final month of the year while
debtor days outstanding has decreased in the year to
42 days (FY16: 44 days). Prior-year working capital
changes included outflows for significant accrued and
payable amounts expensed in FY15.
CASH TAXATION
Corporation tax paid is lower than in the comparative
year due to the receipt of a research and development
expense credit of $5.5 million in the UK.
FINANCING
In the first half of FY17, the Group repaid its revolving
credit facility which had been drawn to partially finance
the acquisition of SurfRight in December FY16. In the
second half of FY17, the Group agreed an additional
revolving credit facility with its existing lenders in the
amount of $40 million which at year-end was fully
drawn along with $10 million from the original revolving
credit facility in order to partially finance the acquisition
of Invincea, Inc. At 31 March 2017 the ratio of net debt to
cash EBITDA was 1.9 times, a decrease from 2.1 times
as at 31 March 2016; reflecting the cash-generative
nature of the Group.
BREXIT
Following the decision by the UK population to exit, in
due course, from the European Union (“Brexit”), the
Directors have considered whether or not this will
manifest itself as an additional risk to the Group. The
Group’s operations are globally diverse with only 11
percent of the Group’s revenue being sourced from
the UK and as the recent devaluation of the Sterling
exchange rates has a minor benefit to the Group, given
more sterling denominated costs than revenues in a US
Dollar denominated functional currency Group. As such,
Brexit is not considered a principal risk for the Group.
DIVIDENDS
The Directors propose to pay a final dividend for the
year-ending 31 March 2017 of 3.3 US Cents per share
(FY16: 1.1 US Cents), giving a total dividend for the year
of 4.6 US Cents per share (FY16: 1.8 US Cents). The final
dividend, subject to shareholder approval, will be paid
on 13 October 2017 to all shareholders on the register
on 15 September 2017. The Directors continue to adopt
a progressive dividend policy, reflecting the cash-
generative nature of the Group; and accordingly intend
to target continued dividend growth for the financial
year-ending 31 March 2018.
Nick Bray
Chief Financial Officer
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
34
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 area of
the business and this process includes an assessment
of the risks to determine the likelihood of occurrence,
potential impact and the adequacy of the mitigation or
controls already in place. A full review is then undertaken
by the Risk and Compliance Committee (“RCC”), which
evaluates the principal risks of the Group with reference
to its strategy and the operating environment.
The Audit and Risk Committee monitors and challenges
these processes, reviewing the Group’s Consolidated Risk
Register and reporting material risks to the Board. There
may be other risks or uncertainties which could emerge
in the future, however, the Group’s ongoing commitment
to risk management will seek to address and mitigate the
future risks, as and when they become apparent.
STRUCTURE OF RISK MANAGEMENT
R
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SOPHOS GROUP
PLC BOARD
AUDIT AND RISK
COMMITTEE
RISK AND COMPLIANCE
COMMITTEE
INTERNAL AUDIT
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BUSINESS
FUNCTIONS
INTEGRATED BUSINESS
RISK MANAGEMENT
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35
THE DIRECTORS CONSIDER THE FOLLOWING MATTERS TO BE THE PRINCIPAL RISKS AND UNCERTAINTIES
(IN NO SPECIFIC ORDER) AFFECTING THE GROUP:
RISK 1: RECRUITMENT AND RETENTION OF KEY PERSONNEL
How it impacts us
The ongoing success of Sophos 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.
What we are doing about it
Making Sophos a great place to work is central to the
Group’s strategy.
Risk
movement
Sophos are committed to strong recruitment processes
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
recognise performance and ensure retention of key talent.
Annual employee engagement surveys enable the
progress of our people actions to be monitored, areas of
improvement identified and necessary actions performed.
RISK 2: DEFECTS OR VULNERABILITIES IN PRODUCTS OR SERVICES
What we are doing about it
Sophos are committed to extensive test cycles and quality
procedures which are subject to continuous improvement.
Risk
movement
Sophos employs combinations of internal and external
quality reviews and testing of products, including source
code reviews, public and private 3rd party efficacy testing,
automated code tests and various forms of penetration
testing. Sophos also encourages a healthy collaboration
with the security research community, as described in the
Responsible Disclosure Policy:
www.sophos.com/security
In FY17, Sophos took the additional step of introducing
a Bug Bounty program to leverage the skills of thousands
of individuals to help make our products and web
properties more secure.
Further, the Group protects the privacy and security of
its customers worldwide through the pledge to never
engineer backdoors into its products as described here:
www.sophos.com/nobackdoors
How it impacts us
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 and 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 its
end customers’ networks and devices.
As a result, actual or perceived defects
or vulnerabilities in the Group’s
products or services and/or 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
36
PRINCIPAL RISKS AND RISK MANAGEMENT CONTINUED
RISK 3: FALSE DETECTION OF THREATS
How it impacts us
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 customer and
sale, increased costs to remedy any
problem and risk of litigation, any of
which could materially adversely affect
the Group’s financial condition and
operating results.
RISK 4: IT SECURITY AND CYBER RISK
How it impacts us
As a provider of IT security products,
the Group is naturally a 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.
What we are doing about it
Sophos is committed to investment in its world class
Virus Labs facility with emphasis placed on staff training,
testing and quality procedures.
Risk
movement
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 its customers.
Risk
movement
What we are doing about it
Sophos has a dedicated cybersecurity team that is
focused on investigation and mitigation of risks related to
cyber-attack. The team is focused on day-to-day active
monitoring processes to identify and deal with IT security
incidents, and in implementing continual improvements
in the IT security technology, education and awareness
and policies that combine in the overall security posture
of Sophos.
Sophos continues to increase its investment in
cybersecurity.
The Sophos Group maintains cyber insurance to transfer
part of the risk of any deliberate attack to the insurer.
37
Risk
movement
RISK 5: PRODUCT PORTFOLIO MANAGEMENT
How it impacts us
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 be able 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,
which is essential to meet customer
and partner requirements. This could
result in products that do not meet the
requirements of customers or partners
and could increase the risk they will look
to alternative solutions, resulting in 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.
What we are doing about it
Sophos continue 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 eliminate redundancies, reduce development
and support costs and improve partner and customer
experiences through a more predictable and coherent
product portfolio.
Sophos are working to bring all products under a
single cloud management platform to deliver “parity”
(of management features and user experience) and
“portability” (to address any privacy or data sovereignty
issues that our partners/customers might face).
Additionally, during the current financial year, Sophos have
consolidated both Network and Enduser under single
leadership in order to improve synchronized security, cross
business unit interlock and investment efficiencies.
Sophos customer and partner communities continue
to be invaluable resources in guiding portfolio
management decisions. They provide immediate and
constant feedback on how well Sophos are meeting their
requirements, improvements that Sophos can make
to its current offerings and opportunities for portfolio
consolidation or expansion.
During the year-ended 31 March 2017, the Group
strengthened its product portfolio through the acquisition
of Invincea, Barricade and PhishThreat.
RISK 6: DISRUPTION TO DAY TO DAY GROUP OPERATIONS
How it impacts us
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 its customers and negatively
impact the Sophos brand.
What we are doing about it
Sophos has made significant investments in the
technology and infrastructure of the Group to ensure it
continues to support the growth of the organisation.
Risk
movement
Additionally, incident management procedures and
escalation processes are in place as well as maintaining
security, business continuity and disaster recovery plans.
Continual updates and testing of these plans is ongoing.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
38
CORPORATE RESPONSIBILITY REPORT
Case Study: Village adoption
Sophos India, through its ‘Prarambh’ CSR initiative has
adopted a rural village to uplift the lives of 350 families
living there. The aim is to improve education, healthcare,
family welfare, infrastructure, sanitation and sustainable
livelihood patterns in the village.
The plan is to bring about all-round development of the
village by focusing on key areas like education, sanitation,
basic infrastructure, medical facilities and empowerment
of women; Sophos works with the people of the village to
ensure development goals are mutually agreed.
Sophos is a firm believer in using environmentally friendly
technology for the greater good and has installed solar
street lights to help meet the energy requirements of the
village community. There is also a focus on building water
conservation structures with the active involvement
of the villagers, the objective being the preservation of
rainwater and to facilitate agricultural activities.
EMPLOYEES
The Group operates by its core values: simplicity, empowerment, passion, innovation and authenticity. 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. Development
opportunities are made available to all employees through unlimited access 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*
Employees
31 March 2017
31 March 2016
Female
Male
Female
2
17
692
8
79
2,495
1
13
600
Male
8
70
2,194
*
The Group has defined Senior Managers as members of the Senior Management Team and their direct reports (excluding Executive Directors
separately reported).
Each year Sophos conducts an employee opinion
survey to gain direct feedback from employees and
help identify and deliver actions that will increase
employee engagement and company performance.
The results from the survey are reviewed by the senior
management team and are used to drive global, regional
or departmental changes so that the business makes
Sophos a better place to work.
During the year, the Group introduced a global Save as
You Earn (”SAYE”) plan, and an equivalent Employee
Share Purchase Plan (“ESPP”) for US employees to
enable all employees to save and participate in the long-
term success of Sophos.
The Group actively engages with local universities in
our key locations and offers internships and working
student opportunities in Canada, the USA, the UK,
Germany and Austria. In the UK, the Group has an
established intern and graduate program, supporting
students through a full-year paid internship and
provides 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.
39
Education is a core element of the project and
Sophos’ aims include preventing drop-outs after 8th
grade through providing uniforms, bags, books and
transportation to students as well as providing skill
development courses.
To improve the health and wellness of villagers, free
medical check-up camps are organised and a rural
clinic is planned. Sophos also plans to further the cause
of women empowerment in the village by imparting
training in arts, crafts and other skillsets to aid self-
dependence.
COMMUNITY & CHARITIES
Sophos employees share the core values of a
commitment to help others and make a positive impact
in the communities where they live and work. Sophos
encourages and supports these activities and around
the world local Sophos offices support a wide range of
charities and community projects.
During the year, Sophos in the Philippines continued
its annual Sophos Cares project with Santuario de San
Jose. Local staff held collections for donations and
gifts were distributed by eighteen Sophos employees to
forty orphans aged three to seven years old after having
spent quality playtime with the children. In Hungary,
the Budapest office prepared Christmas gift boxes for
children living in poverty, as well as donating their time
and creative skills to raise money for a local charity that
helps support vulnerable people throughout the year. In
the UK, a series of events were held in the year to raise
money for Byte Night in support of Action for Children,
a charity that supports some of the 80,000 young
people who are homeless in the UK through no fault of
their own. UK employees participated in a month-long
series of sponsored events, auctions and fund-raising,
culminating in 26 of the team, headed by the CFO,
sleeping out for a night to raise over £16,000 for
the charity.
MODERN SLAVERY ACT
Sophos is committed to compliance with the
provisions of the Modern Slavery Act 2015. As such,
the Group has a zero-tolerance approach to modern
slavery and is further committed to acting ethically,
transparently and with integrity in all of its business
dealings and relationships. During the year, the Board
adopted the Sophos Group Anti-Slavery and Human
Trafficking Policy and published its Modern Slavery Act
Transparency Statement, each of which can be found
on the Group’s website at www.sophos.com.
ENVIRONMENT
The Group recognises that it has a responsibility for
effectively managing its environmental performance
and minimising the impact of its operations. The Group
is committed to continual environmental improvement
in the management of its premises, operations and
employee engagement. To that end, an Environmental
Sustainability Program has been developed that
will operate over the medium to long term with key
stages of:
» A scoping review to explore in depth Sophos’ current
position, establish appropriate standards for the
Group and perform a gap analysis and action plan to
attain the standards.
» Development of a comprehensive policy, embracing
all aspects of environmental sustainability that
would include a road map for the Group to follow.
» Perform a sustainability materiality audit to identify
and prioritise issues, risks and opportunities to
enable the Group to focus on those activities which
make the most significant contribution to the
business and to sustainable development.
» Greening audit of buildings to explore opportunities
for greening the interior and exterior of building
and site, guided by the principles of sustainability,
biodiversity and health and wellbeing.
STRATEGIC REPORT APPROVAL
The strategic report on pages 10 to 39 was
approved by the Board on 16 May 2017
and signed on its behalf by:
Kris Hagerman
Chief Executive Officer
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 40
Acquisitions
Strong heritage in
driving value from
acquisitions.
MACHINE LEARNING
ANTIVIRUS
In FY17 Sophos acquired neural-
network based machine learning
and behavioural monitoring
technology to enhance malware
detection through artificial
intelligence. Invincea, Inc., a next-
generation endpoint security
company based in the US, had
developed its portfolio to prevent,
detect and remediate zero-day and
sophisticated attacks.
Sophos expects to rapidly integrate
Invincea technology into the
endpoint product line, and make it
available through Sophos channel
partners worldwide.
CLOUD-BASED
ANALYTICS
Sophos acquired a start-up
company that had created a
real-time security monitoring and
analysis technology that leverages
machine learning to monitor
users and devices for anomalous
behaviour, significantly enhancing
the ability to identify malicious or
suspicious activity.
The technology will deliver further
capabilities around user and
entity behaviour analytics and
synchronized security intelligence
through the Sophos Central
management platform.
AUTOMATED, INTEGRATED
SECURITY AWARENESS
The threat of phishing, which
exploits human trust and
behaviour to instigate an attack
on an organisation, is growing
in sophistication and volume.
Sophos has acquired technology
to help customers address the
human side of corporate security.
Sophos has since launched Sophos
Phish Threat, an automated
security training product that can
significantly reduce the potential
for phishing to be successful in
a company, through consistent
training and awareness.
INTRODUCTION
STRATEGIC REPORT
GOVERNANCE
FINANCIAL STATEMENTS
41
GOVERNANCE
Board of Directors
42
Corporate Governance
Statement
46
Nomination
Committee Report
Audit and Risk
Committee Report
54
57
Disclosure Committee 64
Annual Statement
of the Remuneration
Committee Chairman 65
Directors’
Remuneration Policy 67
Annual Report on
Remuneration
Directors’ Report
77
88
42
BOARD OF DIRECTORS
PETER GYENES
KRIS HAGERMAN
NICK BRAY
Non-Executive Chairman
Chief Executive Officer
Chief Financial Officer
Experience: Peter joined the
Sophos Board in 2006, bringing
experience with corporate growth
and value creation to the Group’s
vision for integrated threat
management leadership. He has
four decades of experience in
technical, sales, marketing and
general management positions
within the computer systems and
software industry globally, and
was most recently the Chairman
and CEO of Ascential Software
Corporation. He has also served
on the boards of Applix Inc.,
BladeLogic Software, Epicor
Software Corporation, Lawson
Software, EnerNoc, Cimpress
NV, Intralinks Holdings, Inc. and
webMethods.
Qualifications: BA in Mathematics
and an MBA, Columbia University,
New York.
Other current roles: Director of
Carbonite Inc., Pegasystems
Inc., RealPage, Inc. and is trustee
emeritus of the Massachusetts
Technology Leadership Council.
Experience: Kris joined Sophos in
2012 as Chief Executive Officer.
Kris was most recently CEO of
Corel Corporation, and prior to
that 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 EVP and GM, storage and
server management at Veritas
Software where, during his tenure,
the company’s revenue more than
doubled, before its acquisition by
Symantec. Earlier in his career, Kris
was founder and CEO of BigBook
and prior to that, Affinia. Kris also
held positions at Silicon Graphics
and McKinsey & Company.
Qualifications: BA in Russian and
Economics, Dartmouth College, an
M.Phil. in International Relations,
Cambridge University, and an
MBA, Stanford Graduate School of
Business.
Other current roles: None
Experience: Nick joined Sophos
in 2010 as Chief Financial Officer,
bringing more than 20 years’
experience in the technology
sector, extensive international
operational skills and significant
public company experience on both
the London Stock Exchange and
Nasdaq. Nick was most recently
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. He 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.
Qualifications: First class BA in
Civil Engineering, Aston University,
UK and a qualified Chartered
Accountant.
Other current roles: Non-executive
director of De La Rue plc.
43
SANDRA BERGERON
EDWIN GILLIS
ROY MACKENZIE
Independent Non-Executive Director
Independent Non-Executive Director
Non-Executive Director
Experience: Sandra joined the
Sophos Board in 2010. She has
more than 20 years security,
operations and board advisory
expertise having previously served
as a director of TraceSecurity Inc.,
Tipping Point, Netegrity, Nuance
Communications, TriCipher Inc.,
and ArcSight Inc. Earlier in her
career Sandra spent 10 years at
McAfee, Inc. holding a number of
key executive positions.
Qualifications: MBA from Xavier
University, Cincinnati, Ohio and
a BA in Business Administration
(Cum Laude), Georgia State
University.
Other current roles: Director of F5
Networks, Inc. and Qualys Inc.
Experience: Edwin joined the
Sophos Board in 2009. He has
previously served as a director and
member of the audit committees
at BladeLogic, Endeca, Equalogic
Inc., Plex Systems, Responsys
Inc. and Trizetto. Earlier in his
career, Edwin 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.
Qualifications: BA in Government,
Clark University, Massachusetts,
an MA in International Relations,
University of Southern California
and an MBA, Harvard Business
School.
Other current roles: Director and
chairman of the audit committees
of AppNexus Inc., LogMeIn Inc.,
Sprinklr, and Teradyne Corporation.
Experience: Roy joined the Sophos
Board in 2010. He is a partner of
Apax Partners’ technology and
telecoms team. He joined Apax
Partners in 2003 and has been
involved in a variety of technology
focussed investments including
Epicor Software Corporation, NXP
Semiconductors, and King Digital
Entertainment. 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.
Qualifications: MBA, Stanford
Graduate School of Business and
an MA in Engineering, Imperial
College, London.
Other current roles: Director of
Duck Creek Software, Inc. and
Exact Holdings NV.
Key to Committee Membership:
Audit and Risk Committee
Nomination Committee
Remuneration Committee
Disclosure Committee
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 44
BOARD OF DIRECTORS CONTINUED
RICK MEDLOCK
STEVE MUNFORD
VIN MURRIA
Independent Non-Executive Director
Non-Executive Director
Independent Non-Executive Director
Experience: Rick joined the Sophos
Board in April 2017. Rick has 30
years of experience in the financial
management of large international
technology companies. Currently
the CFO at Worldpay, Rick was
CFO of Misys until December
2013 prior to which, he spent nine
years as CFO of Inmarsat plc and
seven years as CFO and company
secretary of NDS Group plc. He was
also a non-executive director and
chairman of the audit committee of
Edwards Vacuum (Edwards Group
Ltd). He spent the early part of his
career in a variety of roles as CFO of
a number of private equity backed
technology companies in the UK
and the US.
Qualifications: MA in Economics,
University of Cambridge and a
qualified Chartered Accountant.
Other current roles: Chief financial
officer at Worldpay Group plc.
Experience: Steve served as
Sophos’ CEO from 2006 to 2012
prior to which he had been COO, as
well as president of Sophos, North
America. Steve led the company
through a period of dramatic
growth, more than tripling billings.
Previously, he was President of
ActiveState before its acquisition
by Sophos.
Qualifications: BA in Economics,
University of Western Ontario
and MBA from Queen’s University,
Ontario.
Other current roles: Chairman
of Carbonite, Inc. and Elastic
Path Software, Inc., and also
serves on the boards of Actenum
Corporation, Alert Logic, Inc., Apica,
Inc., NetMotion, Inc, QuickMobile
Inc. and Teradici Corporation.
Experience: Vin joined the
Sophos Board in January 2017.
She was founder and CEO at
Advanced Computer Software
and CEO of Computer Software
Group. Previously, Vin was also a
non-executive director of Chime
Communications, Greenko Group
and Concateno. Vin was named
Cisco’s Woman of the Year and
Tech Entrepreneur of the Year in
2012 and in addition, Advanced
Computer Software was named
Tech Company of the Year in 2014.
Qualifications: BSc (Hons), an
MBA, and a Doctorate business
administration (Honorary),
Edinburgh Napier University.
Other current roles: Independent
non-executive director at Softcat
plc and Zoopla Property Group plc,
Senior Advisor - Rothschild Global
Advisory team, and a partner at
Elderstreet Investments.
45
SALIM NATHOO
PAUL WALKER
ELEANOR LACEY
Non-Executive Director
Senior Independent Director
Experience: Paul joined the Sophos
Board in 2015. Paul brings more
than 30 years of technology and
senior leadership experience,
having served for 16 years as
CEO of Sage Group plc. Paul has
previously served on the Boards of
WANdisco plc, Diageo plc, My Travel
Group plc and Ernst & Young.
Qualifications: BA in Economics,
York University, and a qualified
Chartered Accountant having
trained at Ernst & Young.
Other current roles: Non-executive
chairman of Halma plc and Perform
Group Ltd, and a non-executive
director of Experian plc.
Experience: Salim joined the
Sophos Board in 2010. He is a
partner and co-head of Apax
Partners’ technology and telecoms
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.
Previously, 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.
Qualifications: MA in Mathematics,
St. John’s College, Cambridge and
an MBA, INSEAD.
Other current roles: Non-executive
chairman of Evry ASA, and a
director of Global Logic.
General Counsel
and Company Secretary
Experience: Eleanor joined Sophos
in 2016 as SVP General Counsel
and Company Secretary. Most
recently, Eleanor had been SVP,
General Counsel and Corporate
Secretary at SurveyMonkey Inc.
Prior to SurveyMonkey she has held
the roles of General Counsel and
VP of Business Development at
Corel Corporation, VP of Corporate
Development at SupportSoft, Inc.
and VP and General Counsel at Niku
Corporation, prior to its acquisition
by Computer Associates.
Qualifications: J.D., Yale Law
School and BA in History
and English, University of
Massachusetts at Amherst.
Other current roles: None
Key to Committee Membership:
Audit and Risk Committee
Nomination Committee
Remuneration Committee
Disclosure Committee
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 46
CORPORATE GOVERNANCE STATEMENT
and professionalism to the Board throughout his
tenure, for which we are all very grateful. Rick Medlock
will assume the role of chairman of the Audit and Risk
Committee at the time of Ed’s retirement.
Following Ed’s retirement, the Board with the
Nomination Committee will keep the Board’s overall
composition under review and in particular, the
proportion comprised of independent
Non-Executive Directors.
BOARD EVALUATION
Sophos supports the Code principle that each FTSE 350
company should undertake a thorough review of Board
process, practice and culture on an annual basis; with
the input of an external facilitator at least once every
three years. The Board considers such annual reviews
as an essential part of good corporate governance.
During the year, we assessed the effectiveness of
the Board externally for the first time, building on the
findings from the previous year’s internal exercise. We
focused on our effectiveness as a Board as a whole, on
each committee’s effectiveness and the performance
of each individual Director. The evaluation concluded
that the Board continued to operate in a functional,
collegiate way which is committed, effective and
purposeful in seeking to deliver value to shareholders.
In addition, the committee structure in place, together
with orderly and thoughtful refreshment of the Board
in the past year, has ensured that an appropriate level
of specialist support and assurance is available to the
main Board. The review is discussed in more detail on
pages 52 to 53 of this Report.
SHAREHOLDER ENGAGEMENT
At Sophos, all our shareholders are important to us
and the Board looks to encourage and maintain an
open dialogue with them. The design and operation
of a robust, yet evolving governance structure
appropriate for a group of the scale and ambition of
Sophos remains critical to meeting their needs. The
Company’s approach to governance is based firmly
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, under the guidance of its Audit
and Risk Committee. 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
DEAR SHAREHOLDER,
FY17 has been a year of continued successful progress
in our business, as well as in strengthening our status
as a UK public listed company. The Board has kept
under review its policies and procedures created to
meet the various corporate governance and regulatory
requirements applicable to the Company following its
Initial Public Offering (“IPO”) and built upon them in
order to take in to account new regulations, including
the EU Market Abuse Regulation (“MAR”) and the UK
Modern Slavery Act 2015. In response to MAR, the
Board approved the adoption of a new Sophos Dealing
Code, established a Disclosure Committee of the Board
and implemented accompanying internal processes. In
respect of the Modern Slavery Act, the Board approved
the adoption of the Sophos Anti-Slavery and Human
Trafficking policy, together with associated internal
processes, and published the Sophos Modern Slavery
Act Transparency Statement on its website, accessible
from the homepage.
BOARD COMPOSITION AND COMPLIANCE
The Board has forged ahead with its plan to further
strengthen its composition and to comply with
the UK Corporate Governance Code (the “Code”) by
successfully welcoming two new independent Non-
Executive Directors in early 2017. I, and my fellow
Board members, were delighted to welcome Vin Murria
on 3 January 2017 and Rick Medlock, shortly after the
end of the financial year on 3 April 2017. Vin Murria is
a successful entrepreneur with a strong background
in both building and advising technology-based
companies in the UK, and in growing shareholder
value. Vin was previously named Quoted Company
Entrepreneur of the year and Woman of The Year
in the Cisco Everywoman Technology Awards. Rick
Medlock has 30 years of experience in the financial
management of large international technology
companies. His deep understanding and knowledge
of financial management in the technology industry,
and extensive experience with global businesses
listed in both the UK and the US will be of great benefit
to the Board.
In addition, Ed Gillis announced his intention to retire
as an independent Non-Executive Director and
chairman of our Audit and Risk Committee, with effect
from the conclusion of the Company’s 2017 Annual
General Meeting (“AGM”). Ed has been a member of
the Board for eight years, leading the Audit and Risk
Committee, including seeing the Company through its
IPO and he has brought considerable insight, diligence
47
UK CORPORATE GOVERNANCE CODE COMPLIANCE
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 (“the
Code”) have been applied and to highlight areas of focus during the year. The Code can be found on the FRC’s website
at www.frc.org.uk
During the year, the Company complied with all the principles and provisions of the Code, except for Code provision
B.1.2 which recommends that at least half of the Board of Directors of a UK-listed company, excluding the Chairman,
should comprise independent Non-Executive Directors. Following the appointment of Vin Murria, 44 percent of the
Board were considered to be independent at the end of the financial year. Notwithstanding the appointment of Rick
Medlock in April 2017, the Board recognises that the Company will no longer comply with this provision following Ed Gillis’s
retirement at the conclusion of the 2017 AGM. The Board will keep this position under review, and it is their intention to
comply in due course. Full details of independence can be found in the Board of Directors section on pages 50 and 51.
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 and keeps under review, the schedule of matters reserved for its decision; specifically, taking
in to account the recommendations of the relevant Board Committees, 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
• Determining the remuneration policy for the Directors and the senior management team
BOARD FOCUS DURING THE YEAR
• Strategy: During the year the Board held a Board Strategy event and worked with management to:
– discuss the changing business environment for the Company;
– review the Company’s strategy and growth plans and consider the key risks;
– discuss in detail the performance of the Company’s existing portfolio of products, key risks to delivery for the
portfolio, together with the ongoing portfolio management strategy and different portfolio scenarios; and
– integration of completed acquisitions and potential future acquisition opportunities to advance the Company’s
strategy, following three acquisitions executed during FY17.
• Financial statements: During FY17, 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.
•
Business performance: In FY17, 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 48
CORPORATE GOVERNANCE STATEMENT CONTINUED
• Risk: In conjunction with the recommendations of the Audit and Risk Committee, the Board’s review of the Annual
Report included detailed consideration of:
– the identified principle risks of the Company and the continued effective management of those risks in order to
achieve the Company’s strategic objectives;
– the ongoing appropriateness of the adoption of the going concern basis of accounting;
– the appropriateness of the Viability Statement disclosure; and
– that the Annual Report was fair, balanced and understandable and it provided the information necessary to
assess the Group’s position and performance, business model and strategy.
• Governance: The Board took account of the changing corporate governance landscape and kept under review the
ongoing effectiveness of its governance structure in FY17 in order to keep pace. As a result, the Board considered
and approved governance policies designed to ensure its compliance with MAR and the UK Modern Slavery Act
2015, together with the establishment of a Disclosure Committee and the publication of the Sophos Modern
Slavery Act Transparency Statement.
•
Performance: In FY17, the Board undertook an evaluation of its own performance, the performance of its
committees and each individual Director with the assistance of an external facilitator, Duncan Reed of Condign
Board Consulting Limited. As a result, a number of recommendations were made, and actions identified for the
forthcoming year, and are set out on pages 52 to 53 of this Report.
BOARD COMMITTEES
The Board has a number of committees that were established at the time of its IPO, and which support the effective
discharge of its duties. During the year, the Board also established a Disclosure Committee to oversee the disclosure
of information by the Company and to assist it to meet its obligations under MAR and the FCAs Listing Rules and
Disclosure Guidance and Transparency Rules.
The various committee reports can be found on pages 54 to 87 of this Report and each committee’s full terms of
reference are available on the Company’s website at https://investors.sophos.com
Non-Executive Directors
The Non-Executive Directors meet without the Executive Directors present after each scheduled Board meeting, and
at least once a year without the Chairman present.
Senior Management Team
The Senior Management Team (SMT) is comprised of the Chief Executive, Chief Financial Officer and 9 individuals
who head up the key Group functions and each report to the Chief Executive, and support him in the leadership of the
business. Full biographical details of the SMT can be found on the Company’s website at www.sophos.com
The structure of the Committees is set out below:
BOARD OF DIRECTORS
Audit & Risk
Committee
Nomination
Committee
Remuneration
Committee
Disclosure
Committee
Risk & Compliance
Committee
49
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:
Board
Audit and
Risk Committee
Remuneration
Committee
Nomination
Committee
Disclosure
Committee
Director
Peter Gyenes*
Kris Hagerman**
Nick Bray
Sandra Bergeron
Edwin Gillis***
Salim Nathoo
Roy Mackenzie
Steve Munford
Paul Walker****
Vin Murria
All appointments stated are as at 31 March 2017
*
**
***
Peter Gyenes is Chairman of the Board and of the Nomination Committee.
Kris Hagerman is Chairman of the Disclosure Committee.
Edwin Gillis is Chairman of the Audit and Risk Committee.
****
Paul Walker is Chairman of the Remuneration Committee.
Attended of those eligible
Not attended of those eligible
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 combination on the Board and its Committees and they are working effectively. At the date of publication, there
are currently eleven Directors on the Board, which comprises a Non-Executive Chairman (who, for the purposes of
the Code was independent on appointment), two Executive Directors, five independent Non-Executive Directors and
three Non-Executive Directors who are considered by the Board not to be independent for the purposes of the Code.
The current members of the Board have a wide range of skills and experience. The Board believes that crucial to its
ability to lead the Company successfully it requires a membership that combines detailed knowledge of: the Group’s
operations; the technology industry in which the Group operates; leading a global business; and, being listed on the
London Stock Exchange.
KEY BOARD ROLES
INTERACTION BETWEEN THE CHAIRMAN AND CHIEF-EXECUTIVE
The division of responsibilities between the Chairman, Chief Executive Officer and Senior Independent Director is
clearly defined and agreed by the Board. The Board supports the separation of the roles of the Chairman and Chief
Executive and the partnership between Peter Gyenes and Kris Hagerman is based on mutual trust, 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
50
CORPORATE GOVERNANCE STATEMENT CONTINUED
INTERACTION BETWEEN THE CHAIRMAN AND CHIEF-EXECUTIVE continued
The key responsibilities that are attributable to each role are summarised below:
Chairman
• Leads the Board
• Promotes a high standard of corporate governance
• Facilitates effective contributions by the
Non-Executive Directors
• Promotes a culture of openness and debate
• Encourages constructive relations between
Executive and Non-Executive Directors
• Facilitates effective communication by the
Company with its shareholders
• Leads the evaluation of performance of the
Board, its Committees and Directors in accordance
with best practice.
Chief Executive Officer
• Leads the management team
• Facilitates an effective management structure
with appropriate delegation of authorities
• Develops proposals for the Board to consider,
including on Group strategy, annual plans and
commercial objectives
• Responsible to the Board for the operational
activity of the Company
• Oversees implementation of all Board-approved actions
• Supports the Chairman to ensure that appropriate
governance standards spread through the organisation
• Ensures that the Board is made aware of the
employees’ views on relevant issues.
THE ROLE OF NON-EXECUTIVE DIRECTORS
Senior Independent Director
• Acts as intermediary between Directors
when required
• Works closely with the Chairman, acting as a
sounding 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
• Chairs the Nomination Committee on consideration
of succession for the role of Chairman of the Board.
Non-Executive Directors
• Constructively challenges management proposals
• Help develop proposals on strategy
• Have a prime role in appointing and, where necessary,
removing Executive Directors
• Have an integral role in succession planning
• Provide an external, diverse perspective and insight
to consideration of management proposals.
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 and an external, diverse perspective to the consideration of management proposals to
support the Company achieve its strategic aims.
The Board considers its independent Non-Executive Directors bring strong judgement and considerable knowledge
and experience to the Board’s deliberations. The Board considers that the appointments made during the year have
only strengthened this position further. 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.
Paul Walker, as noted in the annual report on Directors’ Remuneration on page 87, participates in a restricted share
arrangement. Notwithstanding this arrangement, the Board considers Paul to be independent in character and
judgement. This continues to be evidenced by his valuable contributions 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., to whose board Steve Munford was appointed Chairman
in March 2016. 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-directorship described above. Steve Munford was also Chief Executive of the
Group between 2006 and 2012 and accordingly is not considered to be independent.
Roy Mackenzie and Salim Nathoo are shareholder appointed Directors and accordingly are not considered independent.
51
By the date of the 2017 AGM, Sandra Bergeron will have served on the Board for seven years. In accordance with the
Code, the Board has determined that Sandra Bergeron has retained independence of character and judgement and
had not formed associations with the Company that might compromise her independent judgement, notwithstanding
her length of service.
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. This will include
attendance at scheduled and emergency Board meetings, meetings of any committee to which they are appointed,
site visits, board strategy away days, meetings with shareholders, meetings as part of the Board evaluation process,
update meetings and training days and meetings of Non-Executive Directors. 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 Directors’ Remuneration Policy,
on page 75.
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. New Directors 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 includes the provision of an induction pack and past Board materials, 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.
Following the conclusion of the recent Board evaluation process, a new selection of training and development
opportunities will be made available to the Board to address any identified areas for focus as well as topical corporate
governance, regulatory and technical matters.
INFORMATION AND SUPPORT AVAILABLE TO DIRECTORS, THE COMPANY SECRETARY
The Board and each Director has unlimited access to the General Counsel and Company Secretary, who advises
the Board and the Board Committees on relevant matters, including compliance with the Company’s policies and
procedures, relevant legislation and regulation, including the Listing Rules and the Code and other governance
standards. The General Counsel and Company Secretary provides guidance to the Board and individual Directors
regarding their duties, responsibilities and powers and ensures the proper administration of the proceedings and
matters relating to the Board. The Chief Executive Officer and the Company Secretary work together to ensure that
Board papers are clear, accurate, delivered in a timely and secure manner to Directors, and are of sufficient quality
to enable the Board to discharge its duties effectively. As well as the support of the General Counsel and 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.
All Directors have access to an online portal to which Board materials are published and Board resources, including
information about the Company and helpful guidance documents for their reference as Directors of a UK listed
company, are available.
DIRECTOR ELECTION AND RE-ELECTION
Following recommendations from the Nomination Committee and taking into account the results of the Board’s
performance evaluation process, the Board considers that each of the Directors proposed for election or re-election is
fully competent to carry out their responsibilities as a Director and as set out earlier, is content that each independent
Non-Executive Director is independent in character and there are no relationships or circumstances likely to affect his
or her character or judgement. In accordance with the Company’s Articles of Association (the “Articles”) and provision
B.7.1 of the Code, all Directors will be subject to annual re-election. All Directors will seek re-election at the Company’s
AGM in 2017 as set out in the Notice of AGM, with the exception of Edwin Gillis who has indicated his intention to retire
at the conclusion of the AGM, and Vin Murria and Rick Medlock who will be standing for election for the first time.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 52
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 Board. This includes potential conflicts that may arise when a
Director takes up a position with another company. The Companies Act 2006 (the “Act”) and the Articles allow the Board
to authorise such potential conflicts, and the Board has adopted a procedure to address these requirements, which
includes the Directors completing detailed conflict of interest questionnaires.
The matters disclosed in the questionnaires are reviewed by the Board following the Directors’ appointments and
annually thereafter and, if considered appropriate, authorised in accordance with the Act and the Articles. The Board
deals with each appointment on its individual merit and takes into consideration all the circumstances. The following
appointments have been authorised by the Board and have been included in the conflicts register for the relevant period.
• 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, and shares a common owner with Apax Global Alpha Limited (collectively “Apax”).
Following the admission of the Company’s shares to the London Stock Exchange in 2015, Apax controlled 35.2
percent of the voting rights in the Company and at 31 March 2017, continued to control more than 20 percent of the
voting rights in the Company.
• Steve Munford is chairman of Carbonite, Inc. which supplies cloud and hybrid data protection solutions, and a
company on whose board Peter Gyenes is also a director. Steve also sits on the board of Alert Logic, Inc. which
supplies security and compliance solutions and until January 2017, sat on the board of Utimaco Inc, a subsidiary
of Utimaco GmbH which supplies professional cybersecurity solutions.
• Ed Gillis sits on the board of LogMeIn, Inc., a leading SaaS company.
• Sandra Bergeron sits on the boards of F5 Networks and Qualys, Inc., suppliers of application delivery networking
and cloud security and compliance management solutions respectively.
• Vin Murria is a Non-Executive Director of Softcat plc, with whom the Company maintains an ongoing customer
relationship, see note 32 of the Financial Statements for details of related party transactions.
BOARD EVALUATION AND EFFECTIVENESS
In accordance with Principle B.6.2. of the Code and corporate governance best practice, it is the Board’s policy to invite
external evaluation of the Board, its Committees and the role of individual Directors every three years. During the
year, it was agreed that the evaluation process for the current fiscal year would be externally facilitated and following
a robust tender process, Duncan Reed of Condign Board Consulting Limited was engaged to conduct the evaluation.
Duncan Reed is independent. His only connection to Sophos Group plc is his work with the Board evaluation.
The results of the evaluation concluded that the Board continued to operate in a functional, collegiate way which is
committed, effective and purposeful in seeking to deliver value to shareholders. In addition, the committee structure in
place, together with orderly and thoughtful refreshment of the Board in the past year, has ensured that an appropriate
level of specialist support and assurance is available to the main Board.
The Board evaluation process was led by the Chairman, in consultation with the Senior Independent Director and
General Counsel and Company Secretary. The approach adopted included observation by Mr Reed at the February
2017 Board Meeting and Strategy event, together with one to one discussions between Mr Reed and each Director,
the General Counsel and Company Secretary and the Deputy Company Secretary.
During the year, the following activities were undertaken as recommendations adopted by the Board from the previous
year’s internal evaluation:
• The Board received regular updates on corporate governance, regulatory and technical matters at Board meetings
in order to build on their understanding of the applicable UK rules;
• With the support of the Nomination Committee and the SVP, Human Resources, the Board;
– considered the Company’s succession plan for each role in the Senior Management Team; and
– monitored the Board’s composition in light of Code provisions and agreed potential Board candidate profiles in
order to secure the appointment of two new independent Non-Executive Directors during the year;
53
• With the support of the Audit and Risk Committee and Head of Internal Audit, the Board placed additional
focus on the consideration of Group risks and in particular, the identification, understanding and management
of those risks;
• With the support of the General Counsel and Company Secretary, the Board undertook an evaluation of the Board,
its Committees and the role of individual Directors in order to continue to assess and improve Board processes.
Following the conclusion of the current year’s evaluation, the Board agreed the following recommendations for
improvement in the next fiscal year:
• Bring greater clarity and focus to the role of the Board, and individuals within it, by providing more directional board
materials and through clearer allocation and management of the Board’s time in disciplined discussions;
• Further promote focused debate at the Board by operating an annual strategic agenda in which the Directors will
input, ensuring that each meeting considers key strategic issues at the most appropriate junctures, alongside the
normal requirements of the quarterly reporting cycle;
• Support the Nomination Committee in crystallising and planning for future Board and Committee rotation,
including scoping and clarifying specifications for key roles, in accordance with the provisions of the Code; and
• Continue working closely with management and the Company’s advisers, to ensure that wider shareholder
sentiment on Company matters is fully explored, understood and weighed.
SHAREHOLDER ENGAGEMENT
Responsibility for shareholder relations rests with the Group’s Chief Financial Officer, supported principally by the
Chief Executive, the Chairman and Senior Independent Director, as appropriate. He ensures that there is effective
communication with shareholders and is responsible for ensuring that the Board understands the views of
shareholders. Mr. Bray and Mr Hagerman are also supported by the Group’s VP of Investor Relations and corporate
brokers with whom they are 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. Non-Executive Directors are
invited to attend meetings in the investor relations programme and welcome the opportunity to meet with our major
shareholders.
ANNUAL GENERAL MEETING
The Company’s next AGM will take place at 3:00 pm on Thursday, 7 September 2017 at the Company’s registered
office. All shareholders have the opportunity to attend and vote, in person or by proxy, at the AGM. The Notice of AGM
can be found on our website at https://investors.sophos.com, and in a circular which is being mailed out at the same
time as this Report.
The Notice of AGM sets out the business of the meeting and explanatory notes 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 62.
EXTERNAL AUDITOR
KPMG LLP have expressed their willingness to continue as the Company’s auditor. As outlined in the Audit and
Risk Committee report on page 63, resolutions proposing their reappointment and to authorise the Audit and Risk
Committee to determine their remuneration will be proposed at the 2017 AGM.
By order of the Board
Eleanor Lacey
Company Secretary
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 54
NOMINATION COMMITTEE REPORT
DEAR SHAREHOLDER,
I am pleased to present our second report on behalf of my fellow Nomination Committee members. The Committee
met three times during the year and has placed a significant amount of focus on the Company’s search for additional
independent non-executive directors, the attendant process for Board appointments and succession planning for
senior management, Board and Committee appointments. Here we set out the key aspects of the Committee’s role in
more detail, together with our main areas of consideration and the activities we have undertaken during the year.
Since our last report to Shareholders, the Committee has also welcomed two new members, following the successful
appointment of two new independent non-executive directors to the Board earlier this year. Vin Murria and Rick
Medlock joined the Company in January and April, respectively; and bring with them a wealth of experience in both the
technology industry and globally-oriented UK listed companies.
COMMITTEE COMPOSITION AND MEETING ATTENDANCE
Peter Gyenes (Chairman)
Sandra Bergeron
Edwin Gillis
Roy Mackenzie
Vin Murria
Paul Walker
Attended of those eligible
Not attended of those eligible
All appointments stated are as at 31 March 2017
The composition of the Committee is in compliance with the Code, which provides that a majority of its members
should be independent non-executive directors. The Committee is chaired by the Chairman of the Board. The
Company Secretary is secretary to the Committee and attends all meetings. Other attendees at Committee meetings
may differ from time to time and, upon invitation from the Committee, include the Chief Executive and other members
of the senior management team.
ROLE AND RESPONSIBILITIES
The Committee is responsible for regularly evaluating the balance of skills, knowledge, experience and diversity of the
Board and its Committees, as well as the size, structure and composition of each. It is also responsible for periodically
reviewing the Board, Committees’ and senior management structure and succession plans, and identifying with
management, the priorities for succession planning in respect of each position. On an annual basis, the committee
considers the re-election of Directors prior to their recommended approval by shareholders. The full terms of
reference of the Committee can be found on the Company’s website at https://investors.sophos.com.
MAIN ACTIVITIES
The Committee has an annual forward agenda, developed from its terms of reference, with standing items that the
Committee considers at each meeting, in addition to any specific matters arising, and topical business or governance
items on which the Committee has chosen to focus. During the year, time was taken, to:
review the performance of external search consultants;
instigate and keep under review the search for at least one new Non-Executive Director;
review the succession plans for senior management, Board and Committee appointments;
•
review the composition of the Board and its Committees, including the chairmanship of each Committee;
• consider the implications for Board composition of the results of the Board performance evaluation process;
•
•
•
•
•
•
•
•
review and recommend the appointment and re-appointment of directors at the Annual General Meeting (AGM)
of the Company.
review the Company’s Diversity Policy and the performance of the Company when measured against it;
review and approve the Committee’s report for inclusion in the Annual Report and Accounts; and
review the annual time requirement of Non-Executive Directors;
review the Committee’s terms of reference;
55
PROCESS FOR BOARD APPOINTMENTS
The Committee is asked to lead, on behalf of the Board, the selection process for new Board appointments as and
when they arise and to make recommendations in respect of such appointments. Following the Committee’s review
of the structure, size and composition of the Board and in particular, having regard to the principles of the Code and
the results of the annual Board performance evaluation process relating to Board composition, the Company initiated
a search for two new independent Non-Executive Directors during the year. During May 2016, the Company engaged
Heidrick & Struggles, independent executive search consultants, with whom the Company has no other connection,
to assist with the search. Heidrick & Struggles is a signatory to and abides by the voluntary Code of Conduct, on
gender diversity and best practice.
Following a rigorous search process, the Company was delighted to appoint Vin Murria and Rick Medlock to the
Board as independent Non-Executive Directors with effect from 3 January 2017 and 3 April 2017, respectively.
In addition, Edwin Gillis has confirmed to the Board his intention to retire and not stand for re-election at the
Company’s 2017 AGM. The Committee is aware that following Edwin’s retirement, the Board will no longer be
compliant with the provision of the Code, that at least half the Board, excluding the Chairman, should comprise
independent Non-Executive Directors, and as outlined in my earlier statement the Company will continue its
process to identify and recruit a further candidate to serve as an independent Non-Executive Director.
The process adopted for searches undertaken during the year is set out below:
• The Committee Chairman, with the consultants, submitted a short-list of candidates to members of the Committee and
the Chief Executive Officer for them to review and, to enable them to suggest other candidates.
• The Committee Chairman, Senior Independent Director, the Chief Executive Officer and Chief Financial Officer each
met the short-listed candidates selected by the Committee. Once it was determined that the Chairman wished to
proceed with the selection process, the candidate was then invited to meet all members of the Board.
• After all Board members had met the candidate, the Committee then determined whether to recommend the
candidate to the Board for appointment.
Where the Company decides to appoint an Executive Director, the process it will adopt is set out below:
• 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.
• The Committee Chairman, Senior Independent Director, Chief Executive Officer and Chief Financial Officer will each
meet the candidates selected for interview. Once determined that the Chairman and Chief Executive Officer wish to
proceed with the selection process, 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.
SUCCESSION
During the year, the Committee conducted a review of succession to SMT roles and identified individuals internally
and externally, as appropriate who would be suited to take on each role. Internal successors were categorised
by their relative readiness to assume any such role and where it was not possible to identify a suitable internal
successor, an external successor would be identified, as and when appropriate. Management would look at the
implementation of developmental plans to address any internal successors relative readiness to assume any such
role. Alongside the ongoing search process outlined above, the Committee had kept a watching brief on succession
to Board roles during the year, and would continue to do so during the current financial year.
DIVERSITY
The Company’s Diversity Policy acknowledges the importance of diversity in its broadest sense, including gender
and ethnicity, for the Group. The Board does not feel it would be appropriate to set absolute targets as it believes
all appointments should be made on merit, although it will take in to consideration the recommendations of the
Davies and Hampton-Alexander reviews for female representation on the Board of at least one third by 2020, and
for recruitment and promotion to the SMT, and their direct reports, to reflect this. Details of diversity within our
workforce, including at Board and at the senior management level, can be found on page 38.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 56
NOMINATION COMMITTEE REPORT CONTINUED
The Board also established the measurable objectives set out below for achieving diversity on the Board and the
Committee firmly believes that in the appointments made since our last report to Shareholders, the Board has
delivered on each of these objectives:
• 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 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.
During the year, the Committee, in recognition of their role in increasing diversity throughout the Group, considered
diversity in its broadest sense when reviewing the succession plans for roles to the Board, Committees and senior
management, and in assessing long-lists of potential candidates for appointment to the Board.
In addition to taking in to account gender, ethnicity and other forms of diversity, the Committee seeks to achieve the optimal
balance of skills, experience, independence and knowledge of Sophos and the industry as a whole amongst the Board and
senior management team, in order to support the Company’s long-term objectives. At 31 March 2017, the proportion of
women on the Board was 20 percent and the proportion of independent Non-Executive Directors (excluding the Chairman)
was 44 percent. Following Rick Medlock’s appointment, the proportion of women on the Board is 18 percent, and the
proportion of independent Non-Executive Directors (excluding the Chairman) is 50 percent.
The Committee will continue to keep these measurable objectives under review and will make recommendations to
the Board for their future adjustment, as appropriate. The Committee is pleased with the Company’s performance
against these objectives to date, but acknowledges that progress is ongoing.
PERFORMANCE EVALUATION
The Nomination Committee’s performance was assessed as part of the Board’s annual effectiveness review. It was
concluded that the Committee operated effectively. In response to the findings of the review, Committee members
will consider and develop the Board rotation and succession road map taking in to account the current and desired
balance of skills and experience, together with, tenure, independence and diversity including as to gender and
the international background of its Directors. As referred to above, the Committee will also keep under review the
Company’s people policies, including Diversity Policy and recommend implementation or revision, where appropriate.
The Committee also undertakes a review of its terms of reference and composition each year. This review last took
place in November 2016, and the full terms of reference of the Committee can be found on the Company’s website, at
https://investors.sophos.com
Peter Gyenes
Nomination Committee Chairman
16 May 2017
57
AUDIT AND RISK COMMITTEE REPORT
DEAR SHAREHOLDER,
I am pleased to present our second report on behalf of my fellow Audit and Risk Committee members. The Committee
met five times during the year and kept under close review the risk management framework put in place following the
Company’s IPO in 2015. Here we have set out the key aspects of the Committee’s role in more detail, together with
the main activities we have undertaken and the significant issues we have considered during the year. Following the
year-end we have also welcomed a new member of the Committee who will become my successor as its Chairman,
following the conclusion of the 2017 AGM later this year. In Rick Medlock, the Committee has acquired a strong
leader with a deep understanding and knowledge of financial management in the technology industry, and extensive
experience with globally-oriented UK-listed companies.
COMMITTEE COMPOSITION AND MEETING ATTENDANCE
Edwin Gillis (Chairman)
Sandra Bergeron
Paul Walker
Attended of those eligible
Not attended of those eligible
All appointments stated are as at 31 March 2017
The composition of the Committee is in compliance with the Principles of the Code, which provides that all members
should be independent Non-Executive Directors. In line with the requirements of the Code and the FRC’s Guidance
on Audit Committees, Edwin Gillis, the Committee Chairman has recent and relevant financial experience through his
previous employment in senior financial positions at large companies, including US listed companies, and is a CPA.
Rick Medlock, who will assume the role of Committee Chairman at the time of Edwin’s retirement, has recent and
relevant financial experience through his current employment as CFO of Worldpay Group plc, and is a qualified
chartered accountant. The Board is also satisfied that all members of the Committee have extensive experience of the
technology industry in which we operate, sufficient to enable the Committee to exercise its duties effectively.
The Company Secretary is secretary to the Committee and attends all meetings. Other attendees at Committee
meetings may differ from time to time and, upon invitation from the Committee, include the Chairman, the Chief
Executive, the Chief Financial Officer and other members of the senior management team. The Committee will
also invite representatives from the internal auditor (Ernst & Young LLP (“EY”)) and the external auditor (KPMG LLP
(“KPMG”)), as required.
ROLES AND RESPONSIBILITIES
The Committee has a fundamental role to play in reviewing, monitoring and challenging the integrity and effectiveness of
the Company’s financial reporting and internal control processes. The Committee also 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 full terms of reference of the
Committee can be found on the Company’s website, at https://investors.sophos.com.
MAIN ACTIVITIES
The Committee has an annual forward agenda, developed from its terms of reference, with standing items that the
Committee considers at each meeting, in addition to any specific matters arising, and topical business or financial
items on which the Committee has chosen to focus. During the year, the work of the Committee fell in to three main
areas as follows:
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AUDIT AND RISK COMMITTEE REPORT CONTINUED
ACCOUNTING, TAX AND FINANCIAL REPORTING
•
reviewed and approved the quarterly trading updates, half-year and annual financial statements and the attendant
significant financial reporting judgements and disclosures;
•
•
•
reviewed and approved the going concern and viability assessment, and external statement issued annually;
reviewed updates on accounting matters, including consideration of relevant accounting standards and underlying
assumptions, and in particular:
– the review and revision of alternative performance measures applied by the Company;
– the impact of changing accounting standards, in particular revenue recognition;
– the codification of accounting for exceptional items; and
reviewed and approved the interim and full-year dividend proposals and adjudged them to be in line with the
Company’s Dividend policy.
RISK MANAGEMENT AND INTERNAL CONTROLS
•
reviewed and approved the internal audit plan for the year as well as longer-term objectives and received regular
updates of the work performed by internal audit and EY, as the outsourced internal audit providers appointed by the
Committee in 2015;
•
•
reviewed and approved the risk assessment process and, in particular the identification and assessment of the
Company’s principal risks and the attendant disclosures; and
received and noted regular updates from the Risk and Compliance Committee (“RCC”), a management committee
established following the IPO and which has a direct reporting line to the Committee, to provide an additional level
of assurance to the Committee.
EXTERNAL AUDITOR
• met with the external auditors, KPMG, to review the annual audit plan and receive their findings and reports of the
annual audit and interim review;
•
•
reviewed with the auditor the outcome of a FRC Audit Quality Review of their 2016 audit of the Company,
undertaken as part of the FRC’s standard quality procedures for which the FRC noted limited planned
enhancements to the audit approach; and
reviewed and approved the external auditor evaluation paper prepared by management covering the auditor’s
independence and objectivity, and evaluation of the effectiveness of the audit process, together with the attendant
recommendation for reappointment.
Key issues covered by the Committee are reported to the subsequent meeting of the Board, and the Board also
receives copies of the minutes of each meeting.
PERFORMANCE EVALUATION
The Audit and Risk Committee’s performance was assessed as part of the Board’s annual effectiveness review. It was
concluded that the Committee operated effectively. In response to the findings of the review, Committee members will
work closely with management and KPMG to address the forthcoming period of transition, including a new lead audit
partner and a new Committee Chairman, from the conclusion of the 2017 AGM. During the year, the Committee plans
to focus on a number of key issues and in particular, review the Group risk appetite and continue to assess the major
risks to the business.
The Committee also undertakes a review of its terms of reference and composition each year. This review last took
place in November 2016, and the full terms of reference of the Committee can be found on the Company’s website,
at: investors.sophos.com.
59
SIGNIFICANT ISSUES
The issues considered by the Committee that are deemed to be significant to the Group are set out below.
Revenue recognition
The Group generates revenue from sales of the Group’s Network and Enduser
products through subscriptions, hardware and the rendering of enhanced support
or professional services. There is a risk that revenue is inappropriately recognised if
revenue is incorrectly apportioned to a product or service.
Reporting requirements
and presentation
The Group has a revenue recognition policy in place that details the application of
relevant standards to the products and services sold by the Group. The policy 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. At half-year and year-end management also provide to the Committee an
accounting paper on revenue recognition, any changes arising from updated standards,
and a commentary on the revenue recognised. The Group’s external auditors have also
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.
Having provided appropriate challenge to management and the external auditors, the
Committee has concluded that the revenue recognition for the Group is appropriate.
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 use of non-GAAP measures and the classification of certain income statement
items as exceptional by the Group have been reviewed by the Committee during the
year with reference to authoritative guidance and regulations as well as through
discussions with management and external advisors. The Committee is satisfied
that the use of such measures is appropriate and enhances the understanding of
the Groups financial performance and its prospects. Furthermore, to ensure such
measures remain relevant, the Group is proposing a change to the non-GAAP measures
that it publishes, as explained further in note 6 to the financial statements.
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.
INTERNAL CONTROLS AND RISK MANAGEMENT
During the year, the Committee received and reviewed reports regarding progress on risk management and the
principal risks identified across the Group. The Committee was satisfied with the risk management process and
with the relevance of the risks identified. It was also satisfied with the level of assurance provided by the Group’s
Internal Audit & Risk Management function, which is supported by EY. The Committee has concluded that sound risk
management and internal control systems have been maintained throughout the year.
During the current year, management have further enhanced the Company’s approach to risk management through
the alignment of the risk identification and budgetary planning processes. Through this alignment management
can ensure appropriate and targeted investment by the Company to address and, where appropriate, to control and
mitigate the identified risks.
Whilst the Board is ultimately responsible for the Group’s systems of risk management and internal control, each of
the individual functional leaders are recognised as key drivers of the process through which risks and uncertainties are
identified. The Board recognises that rigorous internal control systems are critical to managing risk and fundamental
to the achievement of its strategic objectives. The Board further acknowledges that these systems are designed to
manage rather than eliminate risk in the Group.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 60
AUDIT AND RISK COMMITTEE REPORT CONTINUED
The formal process for identifying, evaluating and managing significant risks faced by the Group is overseen by the
RCC in association with the work performed by the Internal Audit & Risk Management function. The RCC has 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.
These 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
Committee and the Board.
Key elements of the control environment are:
• Annual budgets and strategic plans performed for all business units and the Group as a whole
• Monitoring of performance against budget and subsequent forecasts 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
• The management Risk and Compliance Committee that oversees the risk management process
• The Board Audit and Risk Committee that 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’s 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. 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 President of Finance.
The Annual Report is reviewed by the Audit and Risk Committee in advance of presentation to the Board for approval.
Additionally, the Finance Director or Controller of the reporting entity completes a self-certified quarterly Financial
Reporting Review Questionnaire which is 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 are prioritised according to likelihood of occurrence and potential impact to
the Group and the register ensures that all risks are identified, measured and 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.
HOW WE MANAGE RISK
The Sophos Board is ultimately responsible for ensuring effective identification, assessment and management of
risk across the Group. Central to the risk management process is the Group’s culture of openness, transparency and
accountability.
The Internal Audit & Risk Management function manages and drives the risk management framework and operates
on an independent basis providing further assurance to the Board around risk management. The risk management
framework enables a robust assessment of risk appropriate to the achievement of the business strategy, as well as
being simple and easy to follow to ensure it is embedded into the day-to-day business processes across the Group in
order to facilitate risk awareness. This function also ensures that all relevant and significant risks identified across the
business are mapped to the internal audit plan for the year.
61
Identify
Re-evaluate
Risk
Management
Process
Analyse &
evaluate
Develop &
implement
Risk
Management
Plan
On a quarterly basis, the RCC reviews the status of risk exposures and risk management throughout the business as
managed by the Internal Audit & Risk Management function. The RCC is a committee of senior leaders 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. On behalf of the Board, the Committee reviews and challenges the effectiveness of the
risk management process.
The Group takes a two-pronged approach to identifying risks:
1)
2)
A bottom-up approach at the business function level; these risks are managed at the operational level with an
appropriately defined escalation process in place for those risks rated as high.
A top-down approach at the senior leadership team level; these are the principal risks which could have a serious
impact on the strategic business plan of the Group and may encompass several of the risks identified in the
bottom-up approach.
A series of risk identification approaches are used such as risk identification and horizon scanning workshops;
interviews and inclusion of risk discussions in team meetings. Risk registers are fully owned at the business function
level and registers are maintained and reviewed on a quarterly basis.
All identified risks are assessed against our 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.
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 RCC.
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.
WHISTLEBLOWING
A whistleblowing policy is in place in the Group enabling employees to confidentially report matters of concern directly
to Non-Executive Directors. The Committee receives details of any matters raised.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 62
AUDIT AND RISK COMMITTEE REPORT CONTINUED
INTERNAL AUDIT
EY continue to support the Sophos Internal Audit & Risk Management function. The Group’s Chief Financial Officer
provides oversight and coordination of Internal Audit with support from the RCC. In order to ensure independence, the
Internal Audit function has a direct reporting line to the Committee and its Chairman.
The nature and scope of the Internal Audit plan using a risk-based approach, was approved by the 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
Committee along with the appropriateness of mitigation plans to resolve the issues identified.
At each meeting, the 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 Internal Audit plan continues to
be 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. The Committee have monitored and reviewed the scope and
results of the Internal Auditors’ activities as well as the effectiveness of Internal Audit during the financial year.
REVIEW OF EFFECTIVENESS
The Board, through the 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
• 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.
The 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
• Risk management procedures managed and overseen by the Risk and Compliance Committee
• Reports issued by the Group’s external auditors
A detailed review of the Group’s management of each principle risk or uncertainty is explained on pages 34 to 37.
63
EXTERNAL AUDITOR
The 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 and the Committee considers on an annual
basis the need for a formal tender process in accordance with the provisions of the UK Corporate Governance Code.
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 prior financial year,
in accordance with Ethical Standard 3, the audit engagement partner could continue to serve for not more than two
years after the listing occurred with a maximum term of seven years in total. On that basis the audit engagement
partner is to be rotated for the year-ending 31 March 2018.
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 2017 the non-audit services provided by KPMG related primarily to tax compliance
activities. In 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 Company’s shares and as a result their non-audit fees
exceeded their audit fees for that year. Non-audit fees for the year ended 31 March 2017 were 33 percent of the audit
and audit related fees, in the year-ended 31 March 2016, excluding fees associated with the Initial Public Offering, the
non-audit fees were 47 percent of the audit and audit-related fees. Full details of auditor 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 external auditors own independence confirmation presented to the Committee.
reviewed the nature and magnitude of non-audit services provided; and
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
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 64
DISCLOSURE COMMITTEE
COMMITTEE COMPOSITION AND MEETING ATTENDANCE
Kris Hagerman (Chairman)
Nick Bray
Attended of those eligible
Not attended of those eligible
All appointments stated are as at 31 March 2017
The Committee was established by the Board on 8 November 2016 and is chaired by Kris Hagerman, the CEO.
A quorum of two members, including at least one Executive Director is required for the transaction of business.
The Company Secretary is secretary to the Committee and attends all meetings.
ROLE AND RESPONSIBILITIES
The Committee is responsible for the implementation and monitoring of systems and controls in respect of the
identification, management and disclosure of inside information and for ensuring that regulatory announcements,
shareholder circulars, prospectuses and other documents issued by the Company comply with applicable legal or
regulatory requirements. The primary responsibilities of the Committee include:
•
review of the preliminary results announcement, the interim management statements, the half-year results and
any other trading statements;
•
review of information provided to the Committee, consideration of its potential categorisation as inside information
and determination of the date and time at which that inside information first existed within the Company;
• determination of whether any identified inside information gives rise to an immediate disclosure obligation, or
whether it is permissible to delay disclosure; and,
review and approval of announcements in respect of disclosable projects.
•
At each Board and Senior Management Team meeting, transactions or events are considered against the disclosure
obligations of the Company and whether any matter is considered to be price sensitive.
MAIN ACTIVITIES
Key issues reviewed by the Disclosure Committee since its inception, include:
•
•
•
•
•
•
the interim dividend;
the announcement in respect of the interim results for the six-months ended 30 September 2016;
the trading update for the three-months ended 31 December 2016;
the announcement of the acquisition of the commercial software products business of Invincea, Inc.;
the proposed final dividend; and
the preliminary results announcement.
65
ANNUAL STATEMENT OF THE REMUNERATION
COMMITTEE CHAIRMAN
DEAR SHAREHOLDER,
As Chairman of Sophos’ Remuneration Committee, I am pleased to present the Directors’ Remuneration Report for the
year-ended 31 March 2017 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 was approved by shareholders at the 2016 Annual General Meeting
(“AGM”) and details of 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 FY18.
We will be seeking shareholder approval for the Annual Report on Remuneration at the AGM on 7 September 2017.
REMUNERATION DECISIONS IN FY17
Sophos achieved strong results in the year-ended 31 March 2017, with billings of $632 million and cash EBITDA of
$150 million. As a result, Kris Hagerman and Nick Bray will receive bonuses of 110 percent and 88 percent of salary,
respectively.
During the year, Kris Hagerman and Nick Bray were granted awards of 500 percent and 390 percent of salary,
respectively, under the Sophos Group Long-Term Incentive Plan 2015 (“LTIP”) in the form of performance share units
(75 percent of the awards) vesting over three years subject to achievement of annual billings and cash EBITDA targets
and in the form of restricted share units (25 percent of the awards) vesting over four years subject to continued
employment only. No performance share units were due to vest in the year under review.
REMUNERATION FOR FY18
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 2017. This is in line with the average increase expected for the wider
employee population (c.4 percent).
The Committee will operate the annual bonus on the same basis as in FY17. Billings and EBITDA targets have been set by
the Committee and will require Executive Directors to deliver significant stretch performance to achieve full payout. The
bonus will continue to be paid in cash.
In FY18, 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 FY17 (billings and cash EBITDA). Awards will be
made over performance share units (at least 75 percent of the total award) and restricted shares, within the normal
policy limits.
SHAREHOLDER CONSULTATION
The Remuneration Committee consulted with a number of our major shareholders in advance of the 2016 AGM to
provide additional context surrounding our remuneration arrangements, recognising that a number of features are out
of line with typical UK market practice. We believe that this contributed to a number of the votes against both our Policy
and implementation of that remuneration framework last year. The Committee values all of our shareholders’ feedback
and we have provided additional rationale for our remuneration arrangements below. Sophos is also committed to
improving the disclosure in our remuneration reporting, in particular in the disclosure of our short and long-term
incentive targets. Details of the result on the binding vote on the remuneration policy and the advisory vote on the 2016
Annual Report on Remuneration are set out on page 85 of this report.
The policy approved by our shareholders at the 2016 AGM was 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. A number of our shareholders highlighted that the linking of some
of our long-term incentive (25 percent of the total) to time-only vesting shares is not typical FTSE market practice.
The Committee has been conscious of UK institutional investors’ preference for packages to be weighted towards
performance-related pay. However we believe that an element of the long-term incentive in restricted stock was
necessary to provide a competitive package of fixed and variable pay that will enable the Group to attract and retain
executives in the relevant geographies with the right skills and experience to drive the long-term success of the
Company. We believe that, in addition to the performance-based long-term incentive awards, the exposure to the
share price in combination with shareholding guidelines (and the fact that our Executive Directors hold shares in
excess of these guidelines) provides further alignment with shareholders’ interests.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 66
ANNUAL STATEMENT OF THE REMUNERATION
COMMITTEE CHAIRMAN CONTINUED
For FY16, FY17 and FY18, cash EBITDA and billings were considered to be the best measures of the Group’s
performance given our current size and stage of growth. The Committee is aware of some shareholders’ concerns
regarding using the same measures for both the short-term and long-term incentives, and will keep the selection of
measures under review. We may make changes for future incentive cycles as the profile of the business changes.
With regards to our incentive opportunities, awards are calibrated to be competitive in the same market as other
high-technology companies on the US West Coast, where a number of the Company’s executives, including our CEO,
are located. The Committee has reviewed benchmarks against both US and UK companies, and believes incentive
opportunities have been set at the appropriate level to be competitive in the relevant markets, balanced with the fact
that we are UK-listed.
Whilst our Remuneration Policy is not due for renewal until the 2018 AGM, the Committee continues to monitor
developments in remuneration governance, market practice and, most importantly, our shareholders views and will
make adjustments to our remuneration arrangements, if appropriate.
The Committee is aware of recent developments in remuneration governance, including some shareholders’
preference for post-exit share ownership guidelines and the BEIS consultation on the CEO to employee pay ratios. 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
16 May 2017
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
96 to 99 and those aspects of the report that have been subject to audit are clearly marked.
67
DIRECTORS’ REMUNERATION POLICY
This section describes the Group’s remuneration policy for Directors which applies for up to three years from approval
at the Annual General Meeting on 14 September 2016.
The overarching principles of the 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. The
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; and
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; and
• best practice guidelines for UK listed companies set by institutional investor bodies.
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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 68
DIRECTORS’ REMUNERATION POLICY CONTINUED
PURPOSE AND
LINK TO STRATEGY
OPERATION
MAXIMUM
OPPORTUNITY
PERFORMANCE
METRICS
Fixed pay: 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.
None
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 FY17).
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.
Fixed pay: Benefits
To provide
competitive
benefits for each
role.
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.
None
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).
69
PURPOSE AND
LINK TO STRATEGY
OPERATION
MAXIMUM
OPPORTUNITY
PERFORMANCE
METRICS
Variable pay: Annual bonus
Aims to focus
executives
on achieving
stretching
financial targets
relevant to the
business priorities
for the financial
period.
Performance measures and
targets are set prior to or
shortly after the start of the
relevant financial period.
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.
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 annual bonus
will be based on
achievement of
stretching financial
targets (e.g. billings,
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 79.
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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 70
DIRECTORS’ REMUNERATION POLICY CONTINUED
PURPOSE AND
LINK TO STRATEGY
OPERATION
MAXIMUM
OPPORTUNITY
PERFORMANCE
METRICS
Variable pay: 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.
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 percent.
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.
71
PURPOSE AND
LINK TO STRATEGY
OPERATION
MAXIMUM
OPPORTUNITY
PERFORMANCE
METRICS
Other Arrangements: Shareholding guidelines
n/a
n/a
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 is set
out on page 85.
Other Arrangements: 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.
None
None
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 83.
Other Arrangements: 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).
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 72
DIRECTORS’ REMUNERATION POLICY CONTINUED
NOTES TO THE POLICY TABLE
This policy is unchanged in substance since approval at the AGM on 14 September 2016. Other than minor text
changes to ensure this policy remains clear for the reader, a few other minor changes have been made to provide
additional clarity, including updated scenario charts shown below.
PERFORMANCE MEASURE SELECTION AND APPROACH TO TARGET SETTING
EBITDA and billings are considered to be the best measures of the Group’s annual performance given the 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’.
CHIEF EXECUTIVE OFFICER
$000
CHIEF FINANCIAL OFFICER
£000
Maximum
Maximum
13%
25%
62%
5,611
17%
24%
59%
1,872
Target
Target
25% 25% 50%
2,811
32%
23% 45%
980
Minimum
100%
711
Minimum
100%
310
Fixed pay
Annual Bonus
LTIP
73
The potential reward opportunities illustrated are based on the policy approved at the AGM on 14 September 2016,
applied to the base salaries in force at 1 April 2017. 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
Minimum
Target
Maximum
Fixed pay
Annual bonus
LTIP (performance-based awards)
LTIP (time-
based
awards)
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
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
Approach
Maximum
opportunity
Base salary
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
Pension
Benefits
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
Annual bonus
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.
LTIP
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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 74
DIRECTORS’ REMUNERATION POLICY CONTINUED
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 buy out 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 71.
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 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 83. 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.
Non-Executive Director
Role
Appointment date
Term of appointment
Peter Gyenes
Paul Walker
Chairman
Senior Independent
Director
11 June 2015
11 June 2015
Steve Munford
Non-Executive Director
11 June 2015
Sandra Bergeron
Edwin Gillis
Salim Nathoo
Roy Mackenzie
Vin Murria
Rick Medlock
Independent
Non-Executive Director
Independent
Non-Executive Director
11 June 2015
Non-Executive Director
11 June 2015
Non-Executive Director
11 June 2015
3 January 2017
Independent
Non-Executive Director
Independent
Non-Executive Director
Three years
Three years
Three years
Three years
Three years
Three years
Three years
11 June 2015
Three years
3 April 2017
Three years
75
EXECUTIVE DIRECTORS
On 11 June 2015, each of the Executive Directors entered into a service agreement with the Company, which are
available for inspection upon request.
Executive Director
Role
Appointment date
Term of appointment
Kris Hagerman
Chief Executive Officer
11 June 2015
Nick Bray
Chief Financial Officer
11 June 2015
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 Group’s change of control provisions are standard practice in the US (where many of the Group’s executives, including
the CEO, are located) and to renegotiate contracts would likely represent an increased cost for the Company (where this
provision may never be triggered). For future hires, the Committee will consider the appropriateness of the contractual
provisions at that time, taking into account prevailing market practice in the geography that the executive is located.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 76
DIRECTORS’ REMUNERATION POLICY CONTINUED
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
the 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
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.
77
ANNUAL REPORT ON REMUNERATION
THE REMUNERATION COMMITTEE
The following section provides details of remuneration outcomes for the financial year-ended 31 March 2017 for Executive
Directors who served Sophos Group plc during the year, and how the Remuneration policy will be implemented in FY18.
COMMITTEE COMPOSITION AND MEETING ATTENDANCE
Paul Walker (Chairman)
Sandra Bergeron
Edwin Gillis
Peter Gyenes
Vin Murria
Attended of those eligible
Not attended of those eligible
All appointments stated are as at 31 March 2017
The composition of the Committee is in compliance with the Code, which provides that its members should comprise
at least three independent non-executive directors and that the Chairman of the Group may be a member, but
not chair, of the Committee due to his independence at the time of his appointment. The Committee is chaired by
Paul Walker, the Senior Independent Director. The Company Secretary is secretary to the Committee and attends
all meetings. Other attendees at Committee meetings may differ from time to time and, upon invitation from the
Committee, include the Chief Executive and other members of the senior management team, but they are not present
when their own remuneration is set.
ROLE AND RESPONSIBILITIES
The Committee is responsible for overseeing the Group’s Remuneration policy and practices having regard for relevant
legal and regulatory requirements, the provisions and recommendations of the UK Corporate Governance Code and
associated guidance.
The key responsibilities of the Committee include, to:
• determine and monitor the remuneration policy for the Chairman, Executive Directors and the senior management
team it is designated to consider;
• ensure that the remuneration policy and reward decisions support the Sophos business strategy and sustainable
long-term performance;
review the Executive Directors’ service contracts;
• set specific remuneration packages which include salary, annual bonus, share incentives, pension and benefits;
•
•
review remuneration trends across the Group and in the market in which Sophos operates; and
• approve employee share-based incentive plans and associated performance conditions and targets.
MAIN ACTIVITIES
The Committee has an annual forward agenda, developed from its terms of reference, with standing items that the
Committee considers at each meeting, in addition to any specific matters arising, and topical business or governance
items on which the Committee has chosen to focus. The work of the Committee undertaken during the year is
summarised throughout this Report.
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 FY17 totalled £41,621. Kepler (or any other part of the MMC Group
of companies) does not provide other services 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 78
ANNUAL REPORT ON REMUNERATION CONTINUED
PERFORMANCE EVALUATION
The Remuneration Committee’s performance was assessed as part of the Board’s annual effectiveness review. It was
concluded that the Committee operated effectively. In response to the findings of the review, Committee members will
continue to give significant weight to shareholder sentiment whilst balancing this with the recruitment and retention
needs of the business.
The Committee also undertakes a review of its terms of reference and composition each year. This review last took
place in November 2016 and the full terms of reference of the Committee can be found on the Company’s website,
at https://investors.sophos.com
SINGLE TOTAL FIGURE OF REMUNERATION FOR EXECUTIVE DIRECTORS (AUDITED)
The table below sets out the total single figure of remuneration received by each Executive Director who served during
the year-ended 31 March 2017 and the prior year:
Kris Hagerman ($000)
Nick Bray (£000)
Salary1
Taxable benefits2
Pension3
Single-year variable4
Restricted Stock
Units5
All employee
schemes
Multi-year variable6
Total
FY17
695
3
8
772
842
2
–
2,322
FY16
676
8
9
788
9,173
–
7,973
18,627
FY17
282
12
14
250
267
4
–
829
FY16
276
13
14
255
2,531
–
1,473
4,562
1. Amount earned in respect of the year
2. Taxable benefits include: Kris Hagerman: Car allowance (FY17: nil, FY16: $3K) and health insurance; Nick Bray: Car allowance (FY17: £10K,
FY16: £10K), health insurance and critical illness
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, using market price on day of issue, of time-based RSUs
6. 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 2017. The salaries of the Executive Directors are as follows:
Executive Director
Kris Hagerman
Nick Bray
1 July 2017
1 July 2016
Increase %
$721,000
£293,000
$700,000
£284,000
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 2017, 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.
In FY17 he also received 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.
79
ANNUAL BONUS
ANNUAL BONUS FOR FY17
The Group operates an annual performance-related bonus scheme for a number of senior executives including
Executive Directors. Bonus opportunities for FY17 were 200 percent of salary for Kris Hagerman and 160 percent of
salary for Nick Bray. Target bonus was 50 percent 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 FY17, the bonus was based 80 percent on billings and EBITDA,
as defined by the scheme rules, 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 EBITDA, so to
achieve any vesting of this element, executives were required to perform on both billings and EBITDA.
Following consultation with shareholders, the Committee has worked to improve disclosure of retrospective annual
bonus targets. The financial targets for the FY17 annual bonus are no longer considered commercially sensitive,
and are disclosed in full, alongside performance against these targets, below.
Performance measure
Threshold
(12.5% payout)
Target
(50% payout)
Stretch
(100% payout)
Achievement
Implied vesting
(percent of
maximum)
Billings
EBITDA
$595
$142
$642
$153
$770
$184
$649
$155
53
53
Performance was measured using constant currency exchange rates. For levels of performance between the points
set out in the table above, bonus payout was determined on a straight-line, pro-rata basis. The overall bonus payout
was based on the lower of the implied payouts for billings and EBITDA, and was therefore 53 percent of maximum for
the financial element. After taking into account personal performance, including strong financial delivery, supporting
talent retention and succession planning, and delivery of key products into the marketplace in line with the product
strategy, Kris Hagerman and Nick Bray will receive bonuses of 110 percent and 88 percent of salary, respectively.
The entire bonus in respect of FY17 will be paid in cash. The bonus calculations for FY17 is illustrated below:
Maximum
bonus
opportunity
(% of salary)
Weighting
on financial
performance
(% of bonus)
Weighting
on personal
performance
(% of bonus)
Executive
Director
Kris Hagerman
Nick Bray
200%
160%
80%
80%
20%
20%
Financial
measure
outcome
(% of
maximum
for
element)
53%
53%
Personal
performance
outcome (%
of maximum
for element)
Overall
bonus
vesting
(% of
maximum)
FY17
bonus
award
($/£000)
65%
65%
55%
55%
$772
£250
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 80
ANNUAL REPORT ON REMUNERATION CONTINUED
ANNUAL BONUS FOR FY16
For FY16, the level of annual bonus earned was based on Group performance against predetermined billings and
EBITDA, as defined by the scheme rules, targets for the year. In last year’s Annual Report on Remuneration the
Committee committed to disclose the targets for FY16 at the end of the 31 March 2017 financial year. The targets
set for FY16 are no longer considered commercially sensitive and are disclosed in full below, along with performance
against those targets:
Performance measure
Threshold
(12.5% payout)
Target
(50% payout)
Stretch
(100% payout)
Achievement
Implied vesting
(percent of
maximum)
Billings
EBITDA
$482M
$109M
$516M
$116M
$619M
$140M
$533M
$121M
58%
59%
Plan targets were adjusted for acquisitions in the year and performance was measured using constant currency
exchange rates. For levels of performance between the points set out in the table above, bonus payout was
determined on a straight-line, pro-rata basis. The overall bonus payout was based on the lower of the implied payouts
for billings and EBITDA, and was therefore 58 percent of maximum. After taking into account personal performance,
Kris Hagerman and Nick Bray received bonuses of 116 percent and 92 percent of salary, respectively. All of the bonus
in respect of FY16 was paid in cash. The bonus calculation for FY16 is illustrated below:
Maximum
bonus
opportunity
(% of salary)
Weighting
on financial
performance
(% of bonus)
Weighting
on personal
performance
(% of bonus)
Executive
Director
Kris Hagerman
Nick Bray
196%
156%
80%
80%
20%
20%
Financial
measure
outcome
(% of
maximum
for
element)
58%
58%
Personal
performance
outcome (%
of maximum
for element)
Overall
bonus
vesting
(% of
maximum)
FY16
bonus
award
($/£000)
65%
65%
59%
59%
$788
£255
LONG-TERM INCENTIVE PLAN
LTIP AWARDS IN FY17 (AUDITED)
On 14 June 2016, Kris Hagerman and Nick Bray were granted awards under the LTIP in the form of restricted share
units (“RSU”) and performance share units (“PSU”). Details are provided in the table below.
Date of award
Type of
award
Awards made
during the year
Reference
price of award1
Face value
of award
(£000)
Face value
of award2
(% of salary)
Executive
Director
Kris Hagerman
Nick Bray
14 June 2016
RSU
PSU
RSU
PSU
331,201
993,603
149,248
447,744
185.53p
185.53p
185.53p
185.53p
614
1,843
277
831
125
375
97
292
1. Average price of the Shares on the main market of the London Stock Exchange between 10 June 2016 and 14 June 2016.
2. Based on salary as at 1 July 2016.
The RSU awards are not subject to future performance conditions, and will vest over four years, subject to continued
employment, with 25 percent of the awards vesting on 14 June 2017 and the remainder vesting on a quarterly basis
thereafter until 14 June 2020.
The PSU awards vest subject to the vesting outcome implied by performance against annual targets over the three
years to the financial year-ended 31 March 2019, with the award vesting (to the extent that targets are met) on the
third anniversary of grant. Targets for the three years are set at the start of the performance period. For FY16 and FY17
awards, vesting is based on the lower of the implied payouts for billings and cash EBITDA (i.e. the measures are equally
weighted), 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. The face value of
awards in the table above are calculated after application of the potential opportunity above the super stretch target.
No awards will vest for performance below the threshold.
81
PERFORMANCE TARGETS FOR OUTSTANDING PSU AWARDS
The Committee believes that disclosing the individual annual financial performance targets for FY18 and
FY19 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. In response to feedback from our shareholders
in advance of the 2016 AGM, the Committee recognises shareholders request for improved disclosure of long-term
incentive performance targets. Therefore, below is disclosed on a retrospective basis the annual financial targets,
and performance against these targets, for PSU awards made in 2015 and 2016.
2015 PSU AWARDS
Performance measure
Weighting
(% of max)
Performance
period
Billings
50%
Cash EBITDA
50%
FY16
FY17
FY18
FY16
FY17
FY18
Threshold
(25%
vesting)
Stretch
(100%
vesting)
Super
Stretch
(100%
vesting)
Maximum
(125%
vesting)
Financial
year
performance
$448M
$498M
$519M
$560M
$508M
$565M
$597M
$644M
$535M
$632M
To be disclosed in 2018 Annual Report on Remuneration
$99M
$110M
$118M
$127M
$114M
$127M
$143M
$155M
$121M
$150M
To be disclosed in 2018 Annual Report on Remuneration
Note: actual vesting is dependent on the performance against targets for each of the financial years FY16 to FY18 and is based on the lower
of the implied payouts for billings and cash EBITDA (i.e. the measures are equally weighted); sliding scale vesting applies between threshold
and stretch, and super stretch and maximum. Based on two years of performance to 31 March 2017, forecast vesting is c.111% or 89% of
maximum (final total vesting percentage will not be known until the end of the 3-year performance period).
2016 PSU AWARDS
Performance measure
Weighting
(% of max)
Performance
period
Billings
50%
Cash EBITDA
50%
FY17
FY18
FY19
FY17
FY18
FY19
Threshold
(25%
vesting)
Stretch
(100%
vesting)
Super
Stretch
(100%
vesting)
Maximum
(125%
vesting)
One-year
performance
to 31 March
2017
$554M
$615M
$655M
$706M
$632M
To be disclosed in 2018 Annual Report on Remuneration
To be disclosed in 2019 Annual Report on Remuneration
$127M
$142M
$157M
$169M
$150M
To be disclosed in 2018 Annual Report on Remuneration
To be disclosed in 2019 Annual Report on Remuneration
Note: actual vesting is dependent on the performance against targets for each of the financial years FY17 to FY19 and is based on the lower
of the implied payouts for billings and cash EBITDA (i.e. the measures are equally weighted); sliding scale vesting applies between threshold
and stretch, and super stretch and maximum. Based on one year of performance to 31 March 2017, forecast vesting is c.100%, or 80% of
maximum (final total vesting percentage will not be known until the end of the 3-year performance period).
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 82
ANNUAL REPORT ON REMUNERATION CONTINUED
DILUTION LIMITS
It is proposed that Sophos will continue to manage dilution within the context of maintaining award levels within a 10
percent limit over five years, the limit that has applied since our incentive plans were approved at IPO. The Committee
is aware that this is higher than the limit adopted by many UK companies and preferred by many institutional
investors of 5 percent over ten years in respect of discretionary awards and 10 percent over ten years in respect of
all schemes. The Committee believes the higher limit we operate is necessary in part because of the broad-based
nature of our equity plans, under which shares are provided to a large proportion of our employees (including SAYE
and ESPP schemes open to most employees) and are a key part of the Group’s employee compensation package, and
reflects the need to be able to compete with other US and international companies for the high-calibre employees and
executives required to secure Sophos’ future success.
Current dilution under all our incentive schemes is c.5.5 percent, and reflects the front-loaded approach to incentive
grants following our IPO.
SINGLE TOTAL FIGURE OF REMUNERATION FOR NON-EXECUTIVE DIRECTORS (AUDITED)
The table below sets out the total single figure of remuneration received by each Non-Executive Director who served
during the year-ended 31 March 2017 and the prior year:
Peter Gyenes
Sandra Bergeron
Edwin Gillis
Roy Mackenzie
Steve Munford
Vin Murria
Salim Nathoo
Paul Walker
Base fee ($000)
Additional fees1 ($000)
Other2 ($000)
Total ($000)
FY17
FY16
FY17
FY16
FY17
FY16
FY17
FY16
250
150
150
–
150
37
–
150
230
129
120
–
147
–
–
5
–
15
–
–
–
–
4
–
12
–
–
–
–
120
25
21
–
–
–
–
–
–
–
–
–
–
–
–
4,642
–
–
–
255
150
165
–
150
37
–
175
234
129
132
–
4,789
–
–
141
1. Additional fees relate to fees for chairing Board Committees
2. Steve Munford: The embedded value on date of vesting of performance-based options.
EXIT PAYMENTS MADE IN YEAR (AUDITED)
No exit payments were made to Directors in FY17.
PAYMENTS TO PAST DIRECTORS (AUDITED)
No payments were made to past Directors in FY17.
EXTERNAL DIRECTORSHIPS
In FY17 Nick Bray received £39.5k as a Non-Executive Director of De La Rue plc (FY16: nil).
83
REMUNERATION FOR FY18
BASE SALARY
Salaries for Kris Hagerman and Nick Bray, effective from 1 July 2017, will be $721,000 and £293,000, respectively.
This equates to an increase of 3 percent, which is in line with average increase awarded to the broader employee
population of c.4 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 2018, the Committee will operate the annual bonus using the same framework and
measures as used in FY17. Billings and 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 FY18, 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 FY17 (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 2018. LTIP awards are
subject to malus and clawback provisions.
NON-EXECUTIVE DIRECTOR FEES (INCLUDING THE CHAIRMAN)
With effect from IPO, 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 FY17 and FY16 populations.
Base salary
Taxable benefits
Single-year variable
% change FY16 to FY17
CEO
3
-63
-2
Other employees
4
–
-5
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 84
ANNUAL REPORT ON REMUNERATION CONTINUED
RELATIVE IMPORTANCE OF SPEND ON PAY
The following table shows, for FY17 and FY16, the actual expenditure and percentage change in total employee costs
and percentage change in distributions to shareholders.
Shareholder distributions – dividends1
Total employee expenditure2
FY17
$M
10.9
304.6
FY16
$M
3.1
250.3
Change
%
252
22
1. Represents dividends paid. FY16 includes the payment of an interim dividend only, see note 29 of the financial statements.
2.
Total employee expenditure includes wages and salaries, social security costs, pension and other costs and share-based payments, see
note 10 of the financial statements.
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 FY16 and FY17.
£100 invested on Sophos' IPO
£125
£120
£115
£110
£105
£100
£95
£90
25 June 2015
30 September 2015
31 March 2016
30 September 2016
31 March 2017
Sophos
FTSE250
Incumbent
CEO single figure of remuneration ($000)
Annual bonus outcomes (% of maximum)
PSU vesting outcome (% of maximum)
FY17
FY16
Kris Hagerman
Kris Hagerman
$2,322
$18,627
55
n/a
59
n/a
85
STATEMENT OF SHAREHOLDER VOTING
The following table shows the result of the binding vote on the Remuneration Policy and the advisory vote on the 2016
Annual Report on Remuneration at the 14 September 2016 AGM.
For
Against
Withheld
Number
%
Number
%
Number
Remuneration Policy
279,603,831
72.15%
107,903,661
27.85% 4,904,177
2016 Annual Report on Remuneration
286,286,507
72.96%
106,122,511
27.04%
2,650
See the Annual Statement of the Remuneration Committee Chairman on page 65 for further details of shareholder
consultation during the year, and the Committee’s response to the vote on the Remuneration Policy and Annual Report
on Remuneration at the 2017 AGM.
DIRECTORS’ SHARE OWNERSHIP (AUDITED)
The table below shows the shareholding of each Director against their respective shareholding requirement as at
31 March 2017.
Share and option awards
Beneficially
owned
Subject to
performance
Subject to
continued
employment
only
Vested
but
not yet
exercised
Kris Hagerman
2,478,073
1,709,895
2,263,349
4,327,518
Nick Bray
1,210,679
784,823
820,472
Peter Gyenes
286,631
Sandra Bergeron
214,974
Edwin Gillis
286,631
Roy Mackenzie
–
Steve Munford
2,866,194
Vin Murria
Salim Nathoo
Paul Walker
750,000
–
63,565
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
127,129
–
–
–
–
–
153,457
–
–
–
Shareholding
required
(% of salary)
Current
shareholding
(% of salary)
Requirement
met
200
200
1,202
1,158
Yes
Yes
There have been no changes to shareholdings between 1 April 2017 and 16 May 2017. 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, with
the exception of Vin Murria who is also a Non-Executive Director of Softcat plc, with whom the Company maintains an
ongoing customer relationship, see note 32 of the Financial Statements for details of related party transactions.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 86
ANNUAL REPORT ON REMUNERATION CONTINUED
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 16
Granted
during
the year
Exercised
during the
year
Awards
held at
31 Mar 17
Exercise
price
Market
price at
grant
Performance
period
Vesting
period/
date
Expiry
date
Director
– 2,312,285
$0.598
$0.598
n/a
1 Aug 13
–1 Aug 17
10 Oct 22
– 2,420,174
$0.598
$0.598
Exit event
1 Jul 15
10 Oct 22
Kris Hagerman
Pre-IPO
Options
Pre-IPO
Options
10 Oct 12 2,312,285
10 Oct 12 2,420,174
LTIP – RSU 7 Aug 15 1,966,292
LTIP – RSU 7 Aug 15
238,764
LTIP – PSU 7 Aug 15
716,292
–
–
–
–
–
LTIP – RSU 14 Jun 16
– 331,201
LTIP – PSU 14 Jun 16
– 993,603
(589,887) 1,376,405
(89,536)
149,228
–
–
–
716,292
331,201
993,603
–
–
–
–
–
ESPP
ESPP
24 Jun 16
1 Jan 17
–
–
2,495
1,574
(2,495)
–
–
1,574
142p
TBD*
Nick Bray
LTIP – RSU
7 Aug 15
842,697
LTIP – RSU
7 Aug 15
112,359
LTIP – PSU
7 Aug 15
337,079
–
–
–
LTIP – RSU
14 Jun 16
LTIP – PSU
14 Jun 16
SAYE
24 Jun 16
Steve Munford
–
–
–
149,248
447,744
11,111
22 Oct 10
153,457
–
(252,809)
589,888
(42,134)
70,225
337,079
149,248
447,744
–
–
–
–
–
265p
265p
265p
179p
179p
167p
262p
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
7 Aug 18
6 Aug 25
n/a
14 Jun 17 –
14 Jun 20
13 Jun 26
1 Apr 16
– 31 Mar 19
14 Jun 19
13 Jun 26
n/a
n/a
28 Dec 16
28 Dec 16
30 Jun 17
30 Jun 17
–
–
–
–
–
265p
265p
265p
179p
179p
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
7 Aug 18
6 Aug 25
n/a
14 Jun 17 –
14 Jun 20
13 Jun 26
1 Apr 16 – 31
Mar 19
14 Jun 19
13 Jun 26
11,111
162p
202p
n/a
8 Aug 19
8 Feb 20
153,457
$0.019
$0.476
n/a
22 Oct 10
22 Oct 20
Pre-IPO
Options
Pre-IPO
Options
Pre-IPO
Options
22 Oct 10 2,065,863
– (2,065,863)
22 Oct 10
441,564
–
(441,564)
–
–
$0.119
$0.476
n/a
16 Jun 11
–16 Jun 15
22 Oct 20
$0.119
$0.476
Exit event
1 Jul 15
22 Oct 20
* Under Group scheme rules exercise price is to be not less than 85% of the lesser of market value on date of grant and market value on date of exercise.
87
As outlined in the IPO prospectus, Kris Hagerman continues to hold share options granted under the Pentagon
Holdings Management Equity Plan (“MEP”) that were issued prior to IPO. Nick Bray’s (until exercised under the JOE
agreement in FY16) and Steve Munford’s (until exercised under the JOE agreement in FY17) MEP options (a “Linked
Option”) were 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 percent 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 2017 are summarised in the table below.
Restricted
awards
held at
1 Apr 16
Restriction
lifted
during year
Restricted
awards
held at
31 Mar 17
Date of
award
Exercise
price
Market
price at
grant
date
Performance
period
Vesting
period/
date
Expiry
date
Director
Paul Walker
Pre-IPO
Restricted
Shares
27
March
2015
127,129
–
127,129
– $1.5575
n/a
27 Mar 16
– 27 Mar
18
n/a
As outlined in the IPO prospectus certain of the Non-Executive Directors held Restricted Shares, the majority of which
have now vested. 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 or as soon as reasonably practicable thereafter, in accordance with the provisions of the EU
Market Abuse Regulation (596/2014).
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
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 88
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 2017.
There are a number of legal and regulatory requirements with which the Company must comply, such as the
Companies Act 2006 (the Act), the Listing Rules and the Disclosure and Transparency Rules, which are addressed in
this section.
STRATEGIC REPORT
The Strategic Report, which is presented on pages 10 to 39 of this Annual Report, 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, and forms part of this report.
CORPORATE GOVERNANCE
The Corporate Governance Statement set out on pages 46 to 53 and Committee Reports on pages 54 to 87 have been
incorporated into the Directors’ Report by cross-reference.
The majority of the disclosures required under LR 9.8.4 R are not applicable to the Group. The table below sets out the
location of the disclosures for those requirements that are applicable:
Applicable sub-paragraph
Disclosure provided
Publication of unaudited financial information
Financial Review
Details of long-term incentive schemes
Annual Report on Remuneration
Allotment of equity securities
Note 30 to the Financial Statements
Contracts of significance
Agreements with controlling shareholders
Directors’ Report
Directors’ Report
ARTICLES OF ASSOCIATION AND CONSTITUTION
Sophos Group plc is domiciled in England and incorporated in England and Wales under Company Number 09608658.
The Articles of Association of the Company (the “Articles”) may only be amended by a special resolution at a meeting
of the shareholders, as set out in the proposed resolutions contained in the notice of AGM for the 2017 AGM. The Notice
of AGM can be found on our website at https://investors.sophos.com, and in a circular which is being mailed out at the
same time as this Report.
DIRECTORS AND DIRECTORS’ INTERESTS
The Directors who held office during the year and up to the date of the signing of this report:
Peter Gyenes
Kris Hagerman
Nick Bray
Sandra Bergeron
Edwin Gillis
Roy Mackenzie
Rick Medlock
Steve Munford
Vin Murria
Salim Nathoo
Paul Walker
Non-Executive Director and Chairman
Chief Executive Officer
Chief Financial Officer
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive Director (appointed 3 April 2017)
Non-Executive Director
Non-Executive Director (appointed 3 January 2017)
Non-Executive Director
Non-Executive Director
A summary of the Directors’ remuneration, employment contracts and interests in the shares of the Company are
disclosed within the Remuneration Report.
None of the Directors had an interest in any significant contracts of the Group or its subsidiaries, with the exception
of Vin Murria who is also a Non-Executive Director of Softcat plc, with whom the Company maintains an ongoing
customer relationship, see note 32 of the Financial Statements for details of related party transactions.
89
DIRECTORS’ INDEMNITY AND INSURANCE
Throughout the year the Company has purchased and maintained Directors’ and Officers’ liability insurance in
respect of itself and its Directors, and the directors of its Group subsidiaries. The Directors also have the benefit of
the indemnity provision contained in the Articles. 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
Pentagon Lock Sarl, Pentagon Lock 6-A Sarl, Pentagon Lock 7-A Sarl and Pentagon Lock US Sarl (collectively “Apax”)
previously held more than 30 percent of the issued ordinary share capital of the Company and still hold more than 10
percent of the issued ordinary share capital as at 31 March 2017. 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.
SIGNIFICANT AGREEMENTS
The following significant agreements are in place as at 31 March 2017 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 entered into on 1 July 2015;
• a syndicated secured term loan (“Facility B”) of €60.0 million entered into on 1 July 2015;
• a revolving credit facility agreement (“RCF 1”) of $30.0 million entered into on 1 July 2015; and
• a revolving credit facility agreement (“RCF 2”) of $40.0 million entered into on 6 February 2017.
Further details of financing agreements in place are included in note 25 of the Financial Statements.
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 2017 and 11 May 2017 the Company had been notified under DTR 5
of the following significant holdings of voting rights in its shares. It should be noted that these holdings may have
changed since they were notified to the Company, however notification of any change is not required until the next
applicable threshold is crossed:
Name
Apax
Jan Hruska
Peter Lammer
Standard Life Investments
(Holdings) Limited
Old Mutual plc
ODDO Meriten Asset
Management
As at 31 March 2017
As at 11 May 2017
Ordinary
shares held
Percentage of
total ordinary shares
Ordinary
shares held
Percentage of
total ordinary shares
100,722,776
42,543,360
42,543,360
22,724,690
19,821,783
13,633,922
21.91
100,722,776
9.26
9.26
4.94
4.31
2.97
42,543,360
42,543,360
22,724,690
19,821,783
13,633,922
21.88
9.24
9.24
4.94
4.31
2.96
VOTING RIGHTS
The Articles 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 90
DIRECTORS’ REPORT CONTINUED
TRANSFER OF SHARES
The transfer of shares is governed by the Articles 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
from 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 transferor to make the transfer; (ii) in respect of only one class of shares; and
(iii) in favour of not more than four transferees.
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 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) notification is received by the Company from the Director that they are resigning or retiring from office;
(ii)
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;
(iii)
the person has become physically or mentally incapable of acting as a Director and may remain so for more than
three months;
(iv)
a bankruptcy order is made against that person;
(v)
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.
POWERS OF THE BOARD
Subject to provisions of the Companies Act 2006 and the Articles 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
The Directors have recommended that the Company pay a final dividend in relation to the year-ended 31 March 2017
of 3.3 US Cents per share. Subject to shareholder approval, combined with the interim dividend announced of 1.3 US
Cents per share, this gives a total dividend for the year of 4.6 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 and
Accounts. The AGM will be held at 3:00 pm on 7 September 2017 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.
91
RESEARCH AND DEVELOPMENT
The Group continues to undertake research and development activity relating to its principal activities. In the year-
ended 31 March 2017, the Group spent 18.6 percent of its billings on research and development (2016: 18.6 percent).
POLITICAL DONATIONS
The Group’s policy is not to make any political donations. Accordingly, no political donations have been made in either
the year-ended 31 March 2017 or were made in the year-ended 31 March 2016.
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.
BRANCHES
The Group, through various subsidiaries, has established branches in a number of different countries in which the
business operates.
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 ISSUE SHARES AND AUTHORITY TO PURCHASE OWN SHARES
The Company did not repurchase shares during the year or make any shares the subject of a charge. At a general
meeting held on 14 September 2016 the Company was authorised to make market purchases (within the meaning
of section 693(4)) of the Companies Act 2006) up to 45,236,013 of its own ordinary shares and to issue shares up to
an aggregate nominal amount of £4,523,149. The Company is seeking to renew these authorities at the forthcoming
AGM, within the limits set out in the AGM Notice.
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 2017,
consistent with the Group’s financial year. 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 Group’s operations that primarily release GHG includes usage of electricity and gas of owned and leased offices,
business travel and usage of vehicles. The Group reported on its GHG emissions for the first time in the prior-year
report and, as stated at the time, has been developing its GHG data gathering capabilities. The prior-year reporting
covered all material operations and locations that included the majority of employees. In the current year the number
of locations covered has been increased and estimates have been developed to enable reporting for sites where
direct information was not available, including prior-year data. As a result the information shown in the table below
for the year-ended 31 March 2016 has been restated to be on a consistent basis with the current-year approach and
methodology. The Group will continue to build up its GHG reporting capabilities. 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.
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
Year-ended
31 March 2017
tCO2e
219.6
Year-ended
31 March 2016
tCO2e
192.9
4,681.9
4,543.1
9,444.6
14.9
4,819.7
4,039.5
9,052.1
16.9
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 92
DIRECTORS’ REPORT CONTINUED
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 34 to 37 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 2020.
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 profitability
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 57 to 63.
POST BALANCE SHEET EVENTS
There have been no material events from 31 March 2017 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 2017 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.
93
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 parent company 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.
We consider 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.
By order of the Board
Eleanor Lacey
Company Secretary
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 94
Our Team
Sophos is a truly global
company with more than
40 offices around the world,
with major offices in the
UK, USA, Canada, India and
Germany.
Our values unite and drive us
to deliver on our promises for
security made simple. We
strive for simplicity in all we
do. Our leadership empowers
employees to do the right thing,
make the right choices, and take
the right risks for our customers.
We share a passion that extends
beyond our desire to deliver
quality products and customer
satisfaction to support clean
water and sanitation for Indian
villages, to raise awareness and
funds for homelessness in the
UK, and to encourage more girls
into cybercoding careers. We
strive to innovate and challenge
the status quo in order to deliver
on our promise for security
made simple – it requires open
minds and a true understanding
of customer needs. And we
are authentic. True to each
other, true to our promises to
customers and acting with
honesty and integrity in our
working lives.
SOPHOS IS SUCCESSFUL BECAUSE
OF ITS CULTURE, ITS PEOPLE AND ITS
ABILITY TO DELIVER ON ITS PROMISES.
INTRODUCTION
STRATEGIC REPORT
GOVERNANCE
95
Financial
Statements
Independent Auditor’s
Report
96
Consolidated
Financial Statements
and Notes
100
Company Financial
Statements and
Notes
Glossary
152
156
Company Information 157
FINANCIAL STATEMENTS 96
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 2017 set out on
pages 100 to 155. 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 2017 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, including 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.
Overview
Materiality:
group
financial
statements
as a whole
$5.5m (2016:$4.78m)
1% (2016: 1%) of Group Revenue
Coverage
93% (2016:89%) of group loss before tax
Risks of material misstatement
vs 2016
Recurring
risks
Revenue
Exceptional
Expenses & Non-
GAAP Measures
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 (the risk related to the carrying
value of intangible assets and goodwill noted in our prior year audit opinion has been removed as we no longer
considered this risk to be one of those having the greatest effect on our audit given the group’s cash generation
and trading performance in the year and forecast growth):
Revenue
($529.7 million;
2016: $478.2m)
Refer to page 59
(Audit Committee
Report), page 108
(accounting policy)
and page 116
(financial
disclosures).
The risk
Our response
Multiple Element Arrangements:
Our procedures included:
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.
• Fair Value Allocation Control: We evaluated the
operating effectiveness of the revenue allocation
control and assessed the appropriateness of the
Group’s principles in determining the relative fair value
of each separable element of the arrangement against
applicable accounting standards;
• Billings Substantive Sample: We selected a sample
of Group billings from throughout the year and with
reference to list prices and discounts given, we
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;
• Policy: We assessed the Group’s policy in respect of
fair value allocation and revenue recognition against
IAS 18 “Revenue”.
• Disclosure: We assessed the adequacy of the Group’s
disclosure about estimation uncertainty regarding
the determination of fair values of multiple element
arrangements.
97
The risk
Our response
Exceptional
Expenses & Non-
GAAP Measures
Classification of Exceptional Expenses
and Presentation of Non-GAAP
Measures:
Exceptional
Expenses: ($31.4
million; 2016:
$41.9m)
Refer to page 59
(Audit Committee
Report), page
113 (accounting
policy) and page
117-119 (financial
disclosures).
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
($632.1m), Cash EBITDA ($150.1m),
Adjusted operating profit ($38.3m) and
Unlevered Free Cash Flow ($133.4m),
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 requires
judgement on its nature and incidence,
and its use along with presentation of
Non-GAAP measures requires judgement
as to whether they provide a better
understanding of the Group’s underlying
trading performance. Therefore, these
are key judgement areas on which our
audit is concentrated.
Our procedures included assessing and challenging
the judgements made by the Directors of the Group
regarding their determination of exceptional items
and the presentation of Non-GAAP measures.
This included:
• Determination of Exceptional Items: We 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 also
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”, and whether
they were consistent with the Group’s definition
of exceptional items as set out in Note 7. 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;
• Presentation and Prominence of Non-GAAP
Measures: We assessed whether the separate
disclosure and related commentary of exceptional
items and alternative Non-GAAP measures of
Billings, Cash EBITDA, Adjusted operating profit and
Unlevered Cash Flow throughout the Annual Report
and Accounts placed disproportionate emphasis
on those component of performance; whether
such measures were given meaningful labels that
are not GAAP terms; whether they were clearly
described and explained; 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; whether their presentation are in
line with guidance issued by the FRC and European
Securities and Markets Authority with respect to
Alternative Performance Measures; and whether the
underlying financial information is not other
wise misleading.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 98
Independent Auditor’s Report continued
to the members of Sophos Group plc only
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 $5.5m (2016: $4.78m), determined with
reference to a benchmark of Group revenue, of which it
represents 1% (2016: 1%). 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 reported to the Audit Committee all corrected
or uncorrected identified misstatements exceeding
$0.25m (2016: $0.235m), in addition to other identified
misstatements that warranted reporting on qualitative
grounds.
Of the Group’s 28 (2016: 28) reporting components, we
subjected 10 (2016: 10) to audits for group reporting
purposes and 2 (2016: 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.
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 $1m to $3.9m (2016:
$2.75m to $3.9m), having regard to the mix of size and
risk profile of the Group across the components. The
work on 6 of the 12 components (2016: 6 of the 12
components) was performed by component auditors and
the rest by the Group team.
The Group team visited 1 (2016: 2) component location
in Germany (2016: Germany and India). 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.
Group Revenue
$529.7m (2016: $478.2m)
Materiality
$5.5m (2016: $4.78m)
$5.5M
Whole financial statements
materiality (2016: $4.78m)
$3.9M
Range of materiality at 28
components ($1m-$3.9m)
(2016: $2.75m to $3.9m)
$0.25M
Misstatements reported
to the audit committee
(2016: $0.235m)
Group revenue
Group materiality
Group Revenue
Group Billings
98%
2016: 99%
99%
98%
99%
2016: 99%
99%
99%
Group Loss Before Tax
Group Total assets
1%
1%
93%
2016: 89%
88%
92%
5%
6%
94%
2016: 96%
90%
89%
Full scope for group audit purposes 2017
Specified risk-focused audit procedures 2017
Full scope for group audit purposes 2016
Specified risk-focused audit procedures 2016
Analysis aggregated at Group level
99
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 is consistent
with the financial statements.
Based solely on the work required to be undertaken in the
course of the audit of the financial statements and from
reading the Strategic Report and the Directors’ Report:
• we have not identified material misstatements in
those reports; and
•
in our opinion, those reports have been prepared in
accordance with the Companies Act 2006.
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 92,
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 March 2020; 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 92, in
relation to going concern and longer-term viability; and
the part of the Corporate Governance Statement on
pages 46 to 53 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 93, 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
16 May 2017
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
100
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
For the year-ended 31 March 2017
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 (loss) / gain
Operating loss
Finance income
Finance expense
Loss before taxation
Income tax credit / (charge)
Loss for the period
Earnings per share ($ cents)
Basic and diluted EPS
Adjusted EPS
Diluted adjusted EPS
All of the loss for the year is attributable to equity holders of the parent company.
The notes on pages 105 to 151 form an integral part of these financial statements.
Note
5
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
529.7
(121.3)
408.4
(210.6)
(117.8)
478.2
(104.4)
373.8
(184.0)
(99.6)
(124.3)
(122.9)
(39.3)
(32.5)
(31.4)
(19.9)
(1.2)
(44.3)
0.1
(5.1)
(49.3)
2.6
(46.7)
(35.7)
(16.3)
(41.9)
(29.2)
0.2
(32.7)
0.7
(36.4)
(68.4)
(3.5)
(71.9)
(10.3)
(16.4)
8.5
8.1
12.1
11.6
7
12
12
13
14
14
14
101
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year-ended 31 March 2017
Loss for the period
Other comprehensive gains / (losses) :
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
(46.7)
(71.9)
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 gains / (losses)
Comprehensive loss for the year
2.8
2.8
(43.9)
(2.9)
(2.9)
(74.8)
All of the comprehensive loss for the year is attributable to equity holders of the parent company.
The notes on pages 105 to 151 form an integral part of these financial statements.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 102
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
At 31 March 2017
Company registered number: 09608658
31 March
2017
$M
31 March
2016
$M
Note
Non-current assets
Intangible assets
Property, plant and equipment
Deferred tax asset
Other receivables
Current assets
Investments
Tax assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Deferred revenue
Tax liabilities
Financial liabilities
Provisions
Non-current liabilities
Trade and other payables
Deferred revenue
Financial liabilities
Provisions
Deferred tax liabilities
Total liabilities
Net assets
Represented by:
Share capital
Share premium
Merger reserve
Other reserves
Retained earnings
Share-based payment reserve
Translation reserve
Total equity
15
17
13
21
19
20
21
22
23
24
25
26
23
24
25
26
13
28
856.0
23.4
105.3
1.3
986.0
–
7.7
16.2
145.2
68.1
237.2
756.6
24.9
73.9
0.8
856.2
–
–
18.7
129.8
66.8
215.3
1,223.2
1,071.5
107.3
330.6
21.0
71.1
0.4
76.4
286.5
11.2
26.2
0.3
530.4
400.6
3.9
250.4
296.3
1.1
14.4
566.1
1,096.5
0.8
212.2
300.9
1.0
10.1
525.0
925.6
126.7
145.9
21.6
118.4
(200.9)
–
148.1
68.9
(29.4)
126.7
21.3
115.9
(200.9)
(0.1)
205.7
36.2
(32.2)
145.9
These financial statements were approved by the Board of Directors on 16 May 2017 and were signed on its behalf by:
Nick Bray
Chief Financial Officer
The notes on pages 105 to 151 form an integral part of these financial statements.
103
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year-ended 31 March 2017
Share
Capital
$M
552.6
–
–
Share
Premium
$M
–
–
–
Merger
Reserve
$M
(200.9)
–
–
Other
Reserves1
$M
10.4
–
–
Retained
Earnings
$M
(750.0)
(71.9)
–
Share-
Based
Payment
Reserve
$M
11.4
–
–
At 31 March 20152
Loss for the period:
Other comprehensive
profit or loss:
Total comprehensive
loss
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
Loss for the period:
Other comprehensive
profit or loss:
Total comprehensive
loss
Share options
exercised
Disposal of EBT
treasury shares
Share-based
payments expense
Share-based
payments deferred tax
Cash dividends (note
29)
At 31 March 2017
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(533.1)
–
1.7
–
0.1
485.3
(485.2)
–
123.3
(8.6)
1.1
–
–
–
–
21.3
–
–
–
0.3
–
–
–
–
–
–
–
–
115.9
–
–
(200.9)
–
–
–
2.5
–
–
–
–
–
–
–
–
–
–
–
(71.9)
–
(10.4)
(0.2)
–
–
–
–
1,030.8
–
–
–
–
0.1
(0.1)
–
–
(3.1)
205.7
(46.7)
–
(46.7)
–
–
–
–
(10.9)
–
–
–
(0.1)
–
–
–
–
0.1
–
–
–
–
Translation
Reserve
$M
(29.3)
–
(2.9)
Total
$M
(405.8)
(71.9)
(2.9)
(2.9)
(74.8)
–
–
–
–
–
–
–
–
–
–
485.3
2.1
(0.2)
125.0
(8.6)
1.2
–
15.0
9.8
(3.1)
(32.2)
–
2.8
145.9
(46.7)
2.8
2.8
(43.9)
–
–
–
–
–
2.8
0.1
31.3
1.4
(10.9)
–
–
–
–
–
–
–
–
15.0
9.8
–
36.2
–
–
–
–
–
31.3
1.4
–
21.6
118.4
(200.9)
148.1
68.9
(29.4)
126.7
1. At 31 March 2017 other reserves comprise an insignificant number of 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.
4.
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.
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 105 to 151 form an integral part of these financial statements.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
104
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year-ended 31 March 2017
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 (credit) / charge
Decrease / (increase) in inventories
Increase in trade and other receivables
Increase / (decrease) in trade and other payables
Increase in deferred revenue
Increase in provisions
Cash generated from continuing operations
Income taxes paid
Net cash flow from operating activities
Investing activities
Purchase of property, plant and equipment
Acquisition of subsidiaries net of cash acquired
Purchase of intangible assets – software
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
Increase / (decrease) in cash and cash equivalents
Net foreign exchange differences
Cash and cash equivalents at the start of the period
Cash and cash equivalents at the end of the period
The notes on pages 105 to 151 form an integral part of these financial statements.
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
(46.7)
(71.9)
Note
9.4
19.9
(1.0)
–
31.3
(0.1)
5.1
(2.6)
15.3
1.1
(20.5)
37.1
104.4
0.3
137.7
(19.2)
118.5
(11.4)
(101.7)
(5.1)
0.1
(118.1)
2.8
–
(10.9)
50.0
(25.0)
(0.9)
(0.1)
(8.8)
7.1
7.5
(6.2)
66.8
68.1
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
12
34
34
34
22
105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year-ended 31 March 2017
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 March 31, 2017 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
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 do not anticipate that the IFRSs will have a significant effect on the Group’s consolidated financial
information:
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 – Financial Instruments
Amendments to IFRS 2 – Share-based Payment Transactions
IFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 15 “Revenue from contracts with customers” is effective for annual periods beginning on or after 1 January
2018. The Directors have made an assessment of the impact of the standard on the Group based on the final issued
version of the standard and the latest authoritative guidance and have concluded that there will be a material impact
on the Group’s consolidated financial information as a result of the accelerated recognition of certain software revenue
where the Group has no remaining vendor obligations and the deferral of commissions, including other direct costs,
and rebates in line with the recognition of revenue. The estimate of this impact on results, had it been effective for
the reported periods, is an increase in revenue in FY17 of $3.4 million (FY16: $3.0 million) and a decrease in operating
expenses of $1.2 million (FY16: 0.5 million). Other receivables are estimated to increase by $27.3 million (FY16: 24.5
million) while deferred revenue would decrease by $24.4 million (FY16: 22.6 million).
IFRS 16 – LEASES
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 1 January 2019, which for the Group will be the year-ended
31 March 2020. The Group’s major operating lease expenditure is incurred on property lease rentals as set out in note
35 “Commitments and contingent liabilities”.
Following adoption of IFRS 16, the Group will recognise a right of use (“ROU”) asset and a corresponding financial
liability to the lessor based on the present value of future lease payments. In the consolidated statement of profit or
loss, the property lease rentals expenditure will be replaced by amortisation of the ROU asset together with a finance
expense. Alternative performance measures which exclude amortisation, will benefit from the adoption of IFRS 16
through the removal of the leasing charge. In the consolidated statement of cash flows, “Net cash flow from operating
activities” will see an improvement as a result of the amortisation adjustment, with a corresponding increased outflow
in “Net cash flow from financing activities”.
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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 106
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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 10 to 39. 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 and the industry; 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 2017 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 2017. 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 107
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.
3.5 CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
The preparation of historical financial information requires Directors 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, Directors have 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, Directors
make reference to current prices of individual elements and adjust this by its relative share of discounts applied to the
entire sale. See note 5
Classification of exceptional items and presentation of Non-GAAP measures
Directors exercise their judgement in the classification of certain items as exceptional and outside of the Group’s
underlying results. The determination of whether an item should be separately disclosed as an exceptional item or
other adjustments requires judgement on its materiality, nature and incidence, as well as whether it provides clarity on
the Group’s underlying trading performance. In exercising this judgement, Directors take appropriate regard of IAS 1
“Presentation of financial statements’’ as well as guidance issued by the Financial Reporting Council and the European
Securities and Market Authority on the reporting of exceptional items and alternative performance measures. The
overall goal of the Directors is to present the Group’s underlying performance without distortion from one-off or non-
trading events regardless of whether they be favourable or unfavourable to the underlying result. Further details of the
individual exceptional items, and the reasons for their disclosure treatment, are set out in note 7.
Share-based payment transactions
The fair value of employee share options 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. See note 30.
Research and development costs
Development costs are capitalised in accordance with the accounting policy in this note. Determining the amounts to
be capitalised requires Directors to make assumptions regarding the capitalisation criteria requirements of IAS 38 –
Intangible assets. See note 15.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 108
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
3.5 CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY CONTINUED
Business combinations
Directors are required to make an assessment of the intangible assets to be recognised as a result of the business
acquisition. Furthermore, Directors are 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.
See note 33
Provisions
The Group measures provisions at Directors 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. See note 26.
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, 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
Interest income is recognised as interest is accrued.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 109
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
25 years
Leasehold improvements
Over the lease period
Computer equipment
3 – 5 years
Other plant and equipment
Motor vehicles
5 years
4 years
Fixtures and fittings
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.
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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 110
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
3.9 INTANGIBLE ASSETS CONTINUED
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
5 – 15 years reducing balance basis
Brand names
Customer base
15 – 20 years reducing balance basis
6 – 14 years reducing balance basis
Other purchased intangible assets
All other intangibles
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.
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, Directors review 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017
111
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 payment 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.
Classification of equity instruments 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 equity instruments 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 112
3 SIGNIFICANT ACCOUNTING POLICIES CONTINUED
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
expense.
3.16 TAXATION
The income tax charge represents the sum of the current and deferred taxes.
Current tax payable or recoverable is based on the taxable profit for the period. Taxable profit differs from profit
reported in the consolidated statement of profit or loss because some items of income or expense are taxable in
different periods or may never be taxable or deductible. The Group’s liability for current tax is calculated using UK and
foreign rates and laws that have been enacted or substantively enacted by the reporting period date.
A current tax provision is recognised when the group has a present obligation as a result of a past event and it is
probable that the group will be required to settle that obligation. Tax liabilities are recognised when it is considered
probable that there will be a future outflow of funds to a taxing authority. They are measured using the single best
estimate of likely outcome approach. The Group’s current tax provision relates to the management’s judgement of
the amount of tax payable on open tax computations where the liabilities remain to be agreed with authorities. The
uncertain tax items for which provision is made, relate to the interpretation of tax legislation impacting arrangements
entered into in the ordinary course of business. Due to the uncertainty associated with such items, it is possible that at
a future date, on conclusion of open tax matters, the final outcome may vary.
Deferred tax is the tax expected to be payable or recoverable in the future arising from temporary differences between
the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the
computation of taxable profit. It 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.
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. The rate is based on tax rates that have been enacted or substantively enacted by the reporting
period date. Deferred tax is charged or credited in the consolidated statement of profit or loss, except when it relates to
items charged or credited to other comprehensive income or directly to equity, in which case the deferred tax is dealt
with in other comprehensive income or in equity. Deferred tax assets and deferred tax liabilities are offset if a legally
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 113
enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the
income taxes levied in the same taxation authority on either the same entity or on different taxable entities which
intend to settle the current tax assets and liabilities on a net basis.
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 the Directors 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.
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”).
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 114
4 SEGMENT INFORMATION CONTINUED
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. 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 31.
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.
Geographical segments
The following tables present billings, expenditure and certain asset information regarding the Group's geographical
segments for the period ended 31 March 2017 and 31 March 2016.
Year-ended 31 March 2017
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 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
Americas
$M
217.6
(16.2)
201.4
(64.2)
137.2
Americas
$M
187.9
(13.3)
174.6
(55.4)
119.2
EMEA
$M
319.5
(36.5)
283.0
(69.0)
214.0
EMEA
$M
264.0
(34.6)
229.4
(60.2)
169.2
APJ
$M
95.0
(15.2)
79.8
(29.5)
50.3
APJ
$M
83.0
(15.8)
67.2
(28.1)
39.1
Total
$M
632.1
(67.9)
564.2
(162.7)
401.5
(102.4)
(314.1)
(19.9)
(9.4)
(44.3)
Total
$M
534.9
(63.7)
471.2
(143.7)
327.5
(56.7)
(265.9)
(29.2)
(8.4)
(32.7)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 115
Other segment information
Segment assets
Americas
EMEA
APJ
Total segment assets
Unallocated assets
Consolidated total assets
Unallocated assets relate to financial instruments 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
31 March
2017
$M
31 March
2016
$M
332.5
658.1
127.3
1,117.9
105.3
311.8
568.1
117.7
997.6
73.9
1,223.2
1,071.5
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
4.9
22.0
2.4
29.3
7.1
27.8
2.7
37.6
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
2.1
11.5
2.9
16.5
1.8
11.9
3.1
16.8
Additions to non-current assets exclude financial instruments, other receivables and deferred tax assets
Non-current assets by country
UK
USA
Germany
Other countries
Total non-current assets by country
31 March
2017
$M
31 March
2016
$M
20.9
3.4
2.2
10.0
36.5
27.5
2.9
2.5
8.1
41.0
Non-current assets by country exclude financial instruments, goodwill, intellectual property, other intangibles and
deferred income taxes.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 116
4 SEGMENT INFORMATION CONTINUED
Revenue from external customers by country
UK
USA
Germany
Other countries
Total
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
58.7
169.3
103.1
198.6
529.7
58.9
151.3
89.3
178.7
478.2
The Group’s revenue is diversified across its entire end customer base and no single end user accounted for greater
than 10% of the Group’s revenue (2016: none). In 2017 three distributors accounted for 15 percent, 13 percent and
11 percent each of Group billings which were attributable to all segments of the Group (2016: two distributors at 17
percent and 12 percent each).
5 REVENUE
Revenue recognised in the Consolidated Statement of Profit or Loss is analysed as follows:
Revenue by product
Network
Enduser
Other
Total
Revenue by type
Subscription
Hardware
Other
Total
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
271.2
231.6
26.9
529.7
239.0
211.9
27.3
478.2
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
410.7
106.7
12.3
529.7
364.7
100.9
12.6
478.2
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 117
6 ALTERNATIVE PERFORMANCE MEASURES (“APMs”)
The Group uses certain financial measures that are not defined or recognised under IFRS. The Directors believe that
these non-GAAP measures enable a better understanding of the results of the Group and are used as key performance
indicators within the business to aid in evaluating its current business performance. As the measures are not defined
by IFRS other companies may calculate them differently or may use such measures for different purposes than the
Group does, limiting the usefulness of such measures as a comparative. Constant currency measures have limitations,
particularly as the currency effects that are eliminated may constitute a significant element of the Group’s revenue
and expenses and could materially impact the Group’s performance. The Directors do not evaluate the Group’s results
and performance on a constant currency basis without also evaluating the Group’s financial information prepared at
actual foreign exchange rates in accordance with IFRS.
The definition of non-GAAP measures in the year-ended 31 March 2017 is consistent with those presented for the
year-ended 31 March 2016. However, to ensure such measures remain relevant, the Group regularly reviews their
usage and is now proposing a change to the non-GAAP measures that it publishes. The Directors have updated the
key metrics used in the year to enable greater comparability while retaining the key aspects of measures that provide
visibility into the fundamental underlying performance of the Group. Hence in the current year, as explained in the
sections below, both the previous and future metrics have been presented to provide some consistency, whilst in
future annual reports only details of the revised metrics in use in that period will be disclosed.
The reconciliation of non-GAAP measures to GAAP measures is set out below.
BILLINGS
Billings represent the value of products and services invoiced to customers after receiving a purchase order from the
customer and delivering products and services to them, or for which there is no right to a refund. Billings does not
equate to statutory revenue.
In previous periods the Group has also reported like-for-like billings which 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. To aid comparability with peer companies the Group will only be using
actual rate and constant currency billings in the future. As like-for-like billings growth has been previously disclosed,
and in accordance with best practice for a transition in metric disclosures, the figures for the current and comparative
periods are, on this occasion, shown below.
Revenue
Net deferral of revenue
Billings
Currency revaluation
Constant currency billings
Pre-acquisition billings1
Like-for-like billings
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
529.7
102.4
632.1
16.6
648.7
–
648.7
478.2
56.7
534.9
6.2
541.1
3.4
544.5
1
Invincea was acquired on 21 March 2017 and contributed $0.3M of billings in the year-ended 31 March 2017, as a result pre-acquisition billings for
Invincea are excluded from the like-for-like calculation.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 118
6 ALTERNATIVE PERFORMANCE MEASURES (“APMs”) CONTINUED
ADJUSTED OPERATING PROFIT AND CASH EBITDA
Adjusted operating profit provides a supplemental measure of earnings that facilitates review of operating
performance on a period-to-period basis by excluding non-recurring and other items that are not indicative of the
Group’s underlying operating performance.
Adjusted operating profit is a key profit measure used by the Board to assess the underlying financial performance of
the Group. Adjusted operating profit is stated before the following items for the following reasons
• Exceptional items, as set out in Note 7, are those items that in the Directors judgment should be disclosed
separately by virtue of their size, nature or incidence, in order to show the underlying business performance of the
Group more accurately.
• Charges for the amortisation of acquired intangibles are excluded from the calculation of adjusted operating
profit because these charges are based on judgments about their value and economic life, are the result of the
application of acquisition accounting rather than core operations and bear no relation to the Group’s underlying
ongoing performance.
• Share-based payment charges are similarly excluded from the calculation of adjusted operating profit because
these represent a non-cash accounting charge for long term incentives to senior management rather than the
underlying operations of the Group’s business.
On an ongoing basis, the Group will be reporting on adjusted operating profit as it believes that it will improve
comparability of the Group’s results, while also giving insight into the Group’s underlying trading performance.
Cash earnings before interest, taxation, depreciation and amortisation (“Cash EBITDA”) is defined as the Group’s
operating profit / (loss) adjusted for depreciation and amortisation charges, any gain or loss on the sale of tangible and
intangible assets, share option charges, unrealised foreign exchange differences and exceptional items, with billings
replacing recognised revenue and is a useful supplemental measure of earnings that provides visibility on actual cash
earned in the year. Depreciation and unrealised foreign exchange differences are adjusted as they do not represent
cash costs of the business.
Operating loss
Amortisation of intangible purchased assets
Share-based payments expense
Exceptional items
Adjusted operating profit
Depreciation
Foreign exchange loss / (gain)
Net deferral of revenue
Cash EBITDA
Billings
Revenue
Net deferral of revenue (note 24)
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
(44.3)
(32.7)
19.9
31.3
31.4
38.3
9.4
–
102.4
150.1
632.1
(529.7)
102.4
29.2
15.0
41.9
53.4
8.4
2.4
56.7
120.9
534.9
(478.2)
56.7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 119
UNLEVERED FREE CASH FLOW
Unlevered free cash flow represents net cash flow from operating activities adjusted for exceptional items and net
capital expenditure. Unlevered free cash flow provides an understanding of the Group’s cash generation and is a
supplemental measure of liquidity in respect of the Group’s operations without the distortions of exceptional and other
non-operating items.
Net cash flow from operating activities
Exceptional items
Net capital expenditure
Unlevered free cash flow
Cash EBITDA
Net capital expenditure
Change in working capital
Corporation tax paid
Unlevered free cash flow
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
118.5
31.4
(16.5)
133.4
21.3
41.9
(16.8)
46.4
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
150.1
(16.5)
19.0
(19.2)
133.4
120.9
(16.8)
(32.5)
(25.2)
46.4
7 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 on the face of the consolidated income statement within general finance and administration expenses.
During the year-ended 31 March 2017, acquisition related expenses of $7.2M (2016: $1.7M), restructuring and
integration costs of ($0.4M) (2016: $2.6M) and costs incurred in relation to the defence and settlement of certain
intellectual property (“IP”) litigation of $24.6M (2016: $19.8M) were incurred. In the prior-year, Initial Public Offering
(“IPO”) costs of $17.8M were incurred. The current-year Intellectual Property litigation costs include an omnibus
agreement entered into with Finjan Inc. on 30 March 2017 resolving all the parties’ disputes.
This resulted in total exceptional items of $31.4M (2016: $41.9M).Tax relief on these exceptional items amounted to
$4.8M (2016: $5.3M).
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 120
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
2017
$M
Year-ended
31 March
2016
$M
9.4
19.9
117.8
10.8
1.4
6.5
0.1
1.1
8.4
29.2
99.6
8.9
1.4
6.7
0.5
(0.2)
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 non-audit 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 services relates to the Company’s Initial Public Offering in the year-ended 31 March 2016.
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
0.4
0.2
0.6
0.2
–
0.2
0.3
0.2
0.5
0.2
1.1
1.3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 121
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
234.2
22.2
6.5
9.2
200.5
19.1
6.7
7.7
272.1
234.0
32.5
304.6
16.3
250.3
Year-ended
31 March
2017
Year-ended
31 March
2016
1,830
1,487
998
294
934
278
3,122
2,699
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
3.2
7.9
11.1
3.0
5.2
8.2
10 EMPLOYEE COSTS
Wages and salaries
Social security costs
Pension costs
Other costs
Share-based payments (note 30)
Total employee costs
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
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 65 to 87.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 122
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 (gain) / loss on borrowings
Amortisation of facility fees
Facility fees expensed on settlement of debt
Total finance expense
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
0.1
0. 7
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
7.8
0.4
8.2
–
0.2
(4.2)
0.9
–
5.1
11.0
0.5
11.5
13.5
0.2
4.4
0.9
5.9
36.4
13 TAXATION
UK corporation tax for the year-ended 31 March 2017 is calculated at 20% (2016:20%) of the estimated assessable
loss for the period.
Current income tax:
UK corporation tax
Adjustments in respect of previous years UK 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 (credit) / charge
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
(4.0)
(1.1)
22.5
0.1
4.1
21.6
(2.0)
(2.7)
30.4
(1.0)
0.6
25.3
(18.9)
(15.9)
(5.0)
(0.3)
(4.2)
(1.7)
(24.2)
(21.8)
(2.6)
3.5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017
123
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% (2016: 20%)
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
(Credit) / charge for taxation on loss for the year
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
(49.3)
(9.9)
(68.4)
(13.7)
2.7
1.6
(1.8)
1.8
6.5
(5.4)
1.9
(2.6)
(4.2)
1.1
7.0
6.8
8.7
(3.2)
1.0
3.5
The Group’s taxation strategy is aligned to business strategy and operational needs. Oversight of taxation is within the
remit of the Audit and Risk Committee. The Chief Financial Officer is responsible for tax strategy supported by a global
team of tax professionals. 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
a provision made in the accounts where appropriate.
Key influences
The Group’s tax rate is sensitive to the geographic mix of profits and reflects a combination of higher rates in certain
jurisdictions, such as Germany, a low effective rate in the UK due to available tax losses and rates that lie in between.
The group receives incentives in certain jurisdictions. In the UK, the Research & Development Expense Credit resulted
in a lower tax charge in the income statement and a lower net cash tax payment. There is no guarantee that these
incentives will continue to be applicable in future years.
Expected future rate
Over the medium term the tax rate is likely to stabilise as the integration of acquisitions in higher rate jurisdictions are
completed. However, the tax rate may fluctuate if business changes are implemented in response to legislation arising
from the OECD’s Base Erosion & Profit Shifting Project, the UK’s exit from the EU and proposed tax reforms following
the US presidential election. Legislative change in key territories is being monitored and acted upon.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 124
13 TAXATION CONTINUED
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 subsidiaries
Advanced capital allowances
Share-based payments
Other timing differences
Total
Deferred income tax liabilities in relation to:
Intangible assets
Other timing differences
Total
31 March
2017
$M
31 March
2016
$M
37.1
15.4
13.1
6.2
19.7
13.8
105.3
14.4
–
14.4
35.1
9.3
2.3
6.7
13.7
6.8
73.9
9.6
0.5
10.1
Losses
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. At the balance sheet date the Group has
unused tax losses of $336.6M (2016: $248.5M) available for offset against future profits. A deferred tax asset has been
recognised in respect of $118.2M (2016: $54.6M) of such losses. No deferred tax asset has been recognised in respect
of the remaining $218.4M (2016: $193.9M 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.
Share-based payments
A remuneration expense for share based payments 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. This is based on the Group’s
share price at the reporting date so will be impacted by share price movement and is 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.
As at 31 March 2017 the aggregate amount of temporary differences associated with undistributed earnings of
subsidiaries for which deferred tax liabilities have been recognised was $Nil (2016: $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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 125
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 adjusted operating profit for the period attributable to equity holders of the
parent by the weighted average number of ordinary shares outstanding during the period. In the prior-year, adjusted
EPS was calculated on the basis of cash EBITDA. In the current-year, the calculation has been made on the basis of
adjusted operating profit, with an equivalent restatement of the comparative number. This change of basis has been
made to ensure better comparability with other UK listed companies.
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
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
(46.7)
(71.9)
Adjusted operating profit for the period attributable to the equity holders of the Company
(see note 6)
38.3
53.4
Weighted average number of shares (000's):
Effects of dilution from:
Share options
Restricted share units
Diluted weighted average number of shares (000's):
Basic and diluted EPS
Adjusted EPS
Diluted adjusted EPS
Year-ended
31 March
2017
Year-ended
31 March
2016
452,338
438,640
11,434
10,589
17,818
3,992
474,361
460,450
Year-ended
31 March
2017
$ Cents
Year-ended
31 March
2016
$ Cents
(10.3)
(16.4)
8.5
8.1
12.1
11.6
The weighted average number of shares used in the calculation for the comparative period reflects the shares in issue
after adjusting for the capital restructuring.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 126
15 INTANGIBLE ASSETS
Cost
At 31 March 2015
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
At 31 March 2016
Additions
Acquired through business combinations
Effect of movements in exchange rates
Goodwill
$M
Intellectual
Property
$M
669.8
361.4
–
41.6
–
4.9
–
5.6
–
1.9
716.3
368.9
–
99.8
(6.6)
–
21.6
(2.2)
At 31 March 2017
809.5
388.3
Amortisation/Impairment loss
At 31 March 2015
Charge for the period
Disposals
Effect of movements in exchange rates
At 31 March 2016
Charge for the period
Effect of movements in exchange rates
At 31 March 2017
Net book value
At 31 March 2016
At 31 March 2017
0.2
–
–
–
341.9
12.7
–
1.7
0.2
356.3
–
–
7.4
(2.1)
0.2
361.6
716.1
809.3
12.6
26.7
Software
$M
Others
$M
Total
$M
29.0
8.3
–
(0.1)
(1.0)
36.2
5.1
–
(4.2)
37.1
15.4
6.2
(0.1)
(0.6)
20.9
7.0
(2.6)
25.3
15.3
11.8
258.7
1,318.9
–
6.2
–
2.3
8.3
53.4
(0.1)
8.1
267.2
1,388.6
–
1.2
(3.1)
5.1
122.6
(16.1)
265.3
1,500.2
242.1
10.3
–
2.2
599.6
29.2
(0.1)
3.3
254.6
632.0
5.5
(3.0)
19.9
(7.7)
257.1
644.2
12.6
8.2
756.6
856.0
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 3 years.
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 2017 (2016: $Nil).
The Group does not have any intangible assets with indefinite useful lives.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017
127
16 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
2017
$M
31 March
2016
$M
253.0
473.2
83.1
809.3
253.5
379.3
83.3
716.1
Impairment of goodwill and intangible assets is tested annually or more frequently where there is indication of
impairment. The goodwill of $96.4M arising on the acquisition of Invincea Inc., on 21 March 2017 has been initially
allocated to the EMEA CGU. Management will re-assess the allocation of goodwill within 12 months from the
acquisition date based upon synergies provided to each CGU.
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 2017, 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 Directors 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 2017 are as follows:
Long-term regional growth rate beyond 5 years
Discount rate
Americas
%
2.5%
10.5%
EMEA
%
1.5%
10.0%
The key assumptions used in the assessments in the year-ended 31 March 2016 were as follows:
Long-term regional growth rate beyond 5 years
Discount rate
Americas
%
2.5%
11.0%
EMEA
%
1.5%
10.0%
APJ
%
2.0%
11.5%
APJ
%
2.0%
12.0%
As at 31 March 2017, there were no indicators of impairment that suggested the carrying amounts of the Group’s
long-lived assets are not recoverable.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 128
17 PROPERTY, PLANT AND EQUIPMENT
Cost
As at 31 March 2015
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2016
Additions
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2017
Depreciation
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
Charge for the year
Acquired through business combinations
Disposals
Effect of movements in exchange rates
As at 31 March 2017
Net book value
At 31 March 2016
At 31 March 2017
Land and
Buildings
$M
Plant and
Machinery
$M
Fixtures
and Fittings
$M
20.5
1.6
–
(0.1)
(1.5)
20.5
0.9
–
–
(6.4)
15.0
7.1
2.5
–
(0.1)
(0.7)
8.8
2.7
–
–
(3.3)
8.2
11.7
6.8
22.8
5.9
1.5
(0.6)
(0.2)
29.4
9.8
0.5
(0.3)
(2.5)
36.9
13.6
5.1
0.9
(0.6)
(0.1)
18.9
6.0
0.4
(0.3)
(2.0)
23.0
10.5
13.9
3.4
1.0
0.1
(0.1)
–
4.4
0.7
0.1
–
(0.3)
4.9
0.9
0.8
–
(0.1)
0.1
1.7
0.7
–
–
(0.2)
2.2
2.7
2.7
Total
$M
46.7
8.5
1.6
(0.8)
(1.7)
54.3
11.4
0.6
(0.3)
(9.2)
56.8
21.6
8.4
0.9
(0.8)
(0.7)
29.4
9.4
0.4
(0.3)
(5.5)
33.4
24.9
23.4
Included in the net book value of property, plant and equipment are assets under finance lease of $0.1M (2016: $0.2M).
There has been no impairment to the property, plant and equipment held by the Group.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017
129
31 March
2017
$M
31 March
2016
$M
37.1
15.4
13.1
6.2
19.7
13.8
105.3
14.4
–
14.4
35.1
9.3
2.3
6.7
13.7
6.8
73.9
9.6
0.5
10.1
31 March
2017
$M
31 March
2016
$M
–
–
–
–
0.6
(0.4)
(0.2)
–
31 March
2017
$M
31 March
2016
$M
16.2
18.7
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 subsidiaries
Advanced capital allowances
Share-based payments
Other timing differences
Total
Deferred income tax liabilities in relation to:
Intangible assets
Other timing differences
Total
19 INVESTMENTS
Employee benefit Trust
Brought forward
Shares cancelled on pre-admission restructuring
Own shares transferred to equity
Carried forward
20 INVENTORIES
Finished goods and goods for resale
The amount of write-down of inventories included within cost of sales was $0.1M (2016: $1.0M).
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 130
21 TRADE AND OTHER RECEIVABLES
Current
Trade receivables
Prepayments
Other receivables
Total current trade and other receivables
Non-current
Other receivables
Total non-current trade and other receivables
31 March
2017
$M
31 March
2016
$M
123.1
14.1
8.0
103.7
19.0
7.1
145.2
129.8
1.3
1.3
0.8
0.8
Trade receivables are non interest-bearing and are generally on 30-90 day payment 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 2017 a provision for impairment of $0.1M (2016: $0.3M) was
recognised in operating expenses against receivables.
At 31 March 2017, trade receivables at a nominal value of $0.4M (2016: $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
Effects of movements in exchange rates
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
31 March
2017
$M
31 March
2016
$M
0.7
0.1
(0.3)
(0.1)
–
0.4
0.4
–
0.4
0.8
0.7
0.3
(0.1)
(0.2)
–
0.7
4.1
0.2
–
4.3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017
131
22 CASH AND CASH EQUIVALENTS
Cash at bank and in hand
Short-term deposits
Total cash and cash equivalent
31 March
2017
$M
31 March
2016
$M
62.3
5.8
68.1
49.7
17.1
66.8
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.
23 TRADE AND OTHER PAYABLES
Current
Trade payables
Accruals
Social security and other taxes
Other payables
Total current trade and other payables
Non-current
Other payables
Total non-current trade and other payables
31 March
2017
$M
31 March
2016
$M
34.9
53.5
11.5
7.4
107.3
3.9
3.9
21.8
46.5
5.2
2.9
76.4
0.8
0.8
Trade payables are non interest-bearing and are normally settled on 30-day terms or as otherwise agreed with suppliers.
24 DEFERRED REVENUE
Current
Non-current
At 1 April
Billings deferred during the year
Revenue released to the statement of profit or loss
Net deferral
Acquired through business combinations
Translation and other adjustments
Current
Non-current
At 31 March
31 March
2017
$M
31 March
2016
$M
286.5
212.2
498.7
632.1
(529.7)
102.4
4.1
(24.2)
330.6
250.4
581.0
251.4
181.9
433.3
534.9
(478.2)
56.7
1.5
7.2
286.5
212.2
498.7
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 132
24 DEFERRED REVENUE CONTINUED
On acquisition of Invincea, Inc. on 21 March 2017, acquired deferred revenue of $6.1 was reduced by $2.0M
representing the fair value of original selling cost and associated profit. $4.1M (2016: Nil) remains unamortised at
31 March 2017.
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. $0.2M remains unamortised at 31 March 2017.
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 are used to estimate the fair values:
• Cash and cash equivalents
• Finance leases
• Bank loans
•
• Receivables and payables
Interest rate swaps, caps and floors
–
–
–
–
–
approximates to the carrying amount
approximates to the carrying amount
approximates to the carrying amount
based on the net present value of discounted cash flows
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 $21.7M of contingent consideration measured at fair value through
profit and loss at 31 March 2017 (2016: $2.1M). The fair value of the contingent consideration is determined using a
probability-weighted average of outcomes discounted back to acquisition date.
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
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
2017
$M
31 March
2016
$M
0.1
50.0
21.0
71.1
–
0.1
25.0
1.1
26.2
0.1
299.2
303.4
0.7
(3.6)
296.3
367.4
1.0
(3.6)
300.9
327.1
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 2017, the present value of future lease payments was $0.1M (2016: $0.2M)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 133
CONTINGENT CONSIDERATION
Invincea, Inc.
As part of the purchase agreement with the previous owners of Invincea, Inc., a contingent consideration has been
agreed. The consideration is dependent on the billings of products including the intellectual property acquired with
Invincea, Inc. for the 12 month period to 21 March 2018 with a maximum payout of $20.0M. The fair value of the
contingent consideration at the acquisition date was estimated at $19.3M. The contingent consideration is due for
measurement and payment to the former shareholders on 30 June 2017, 30 September 2017, 31 December 2017
and 21 March 2018 respectively.
Silent Break LLC
As part of the purchase agreement with the previous owners of the “PhishThreat” technology, a contingent
consideration has been agreed. The consideration is dependent on the billings of the “PhishThreat” product range
for three annual periods commencing 1 March 2017 and ending on 28 February 2020 with a maximum payout of
$2.0M. The fair value of the contingent consideration at the acquisition date was estimated at $1.2M. The contingent
consideration is due for measurement and payment to the sellers on 28 February 2018, 2019 and 2020 respectively.
Reflexion Inc.
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 05 April 2017 in respect of the billings for the calendar year-ended 31 December 2016.
LOANS AND BORROWINGS
Included in borrowings are bank loans of $349.2M (2016: $328.4M) 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 two and five years
Total bank loans
31 March
2017
$M
31 March
2016
$M
50.0
299.2
349.2
25.0
303.4
328.4
31 March
2017
$M
31 March
2016
$M
50.0
299.2
349.2
25.0
303.4
328.4
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 134
25 FINANCIAL LIABILITIES CONTINUED
The Group entered into an amended Senior Facilities agreement on 6 February 2017, whereby an additional Revolving
Credit Facility was added to the existing agreement. Following the amendment, the following terms apply to the bank
loans outstanding at 31 March 2017:
Facility
Facility – A
Facility – B
Revolving Credit Facility 1
Revolving Credit Facility 2
Interest
Margin
Libor
Euribor
Libor
Libor
1.75%
1.75%
1.50%
2.50%
Principal
M
$ 235.0
€ 60.0
$ 10.0
$ 40.0
Principal
$M
235.0
64.2
10.0
40.0
349.2
REPAYMENT AND MATURITY:
Facility A ($235.0M), Facility B (€60.0M), Revolving Credit Facility 1 (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. Revolving Credit Facility 2 (multicurrency up
to $40.0M) is repayable in full on the termination date of 2 July 2020.
Any utilisation of a 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 2015
Arising during the year
Utilised
Exchange differences
At 31 March 2016
Arising during the year
Utilised
At 31 March 2017
31 March 2017
Current
Non-current
Total provisions
31 March 2016
Current
Non-current
Total provisions
Re-structuring
$M
Other
$M
Total
$M
0.7
0.1
(0.5)
–
0.3
–
(0.3)
–
–
–
–
0.3
–
0.3
0.3
0.6
–
0.1
1.0
0.6
(0.1)
1.5
0.4
1.1
1.5
–
1.0
1.0
1.0
0.7
(0.5)
0.1
1.3
0.6
(0.4)
1.5
0.4
1.1
1.5
0.3
1.0
1.3
Restructuring provision
The opening provision related to expenditure in relation to vacant properties which were surplus to the Group’s
requirements and were due to be disposed of, and the integration of Cyberoam into the wider Sophos Group.
The provisions have been fully utilised in the period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017
135
Other provisions
The opening provisions related to the Group’s obligations to make good the dilapidations of various leasehold premises
at the end of the lease periods. Additionally, In France, the Group operates an 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 2017 relates to both the retirement indemnity plan $0.1M
(2016: $0.6M) and further provisions for dilapidations $0.5M (2016: $ nil).
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 $0.1M, as disclosed in note 21.
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.
Interest rate risk
The Group is exposed to interest rate risk primarily due to the long-term debt obligations with floating rates of interest.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 136
27 FINANCIAL RISK MANAGEMENT CONTINUED
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
2017
$M
Year-ended
31 March
2016
$M
(3.1)
3.1
(2.3)
2.3
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 difference 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
2017
$M
Year-ended
31 March
2016
$M
0.6
25.9
6.5
(11.9)
1.9
25.1
6.9
(7.2)
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 137
28 SHARE CAPITAL
Shares issued and fully paid
At 1 April of £0.75 each
At 1 April of £0.10 each
At 1 April of £0.03 each
Pre-admission capital restructuring shares @ £0.03 each
Initial Public Offering
Issued for cash on exercise of options
At 31 March, Ordinary shares of £0.03
Year-ended
31 March
2017
$M
–
–
000's
–
–
452,172
21.3
Year-ended
31 March
2016
$M
393.5
159.1
000's
333,037
1,009,869
–
–
7,470
459,642
–
–
0.3
21.6
(928,251)
(533.1)
35,345
2,172
452,172
1.7
0.1
21.3
1
2
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.
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 the year-ended 31 March 2016 at $0.007 per share
Final dividend for the year-ended 31 March 2016 at $0.011 per share
Interim dividend for the year-ended 31 March 2017 at $0.013 per share
Total cash dividends paid
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
–
5.0
5.9
10.9
3.1
–
–
3.1
The Directors have proposed that the Company will pay a full-year dividend for the year-ending 31 March 2017
amounting to 3.3 US Cents per share.
Proposed final dividends on ordinary shares are subject to approval at the annual general meeting to be held on
7 September 2017, and are not recognised as a liability at 31 March 2017.
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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 138
30 SHARE-BASED PAYMENTS CONTINUED
Sophos Group 2015 Employee Stock 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.
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
2017
$M
Year-ended
31 March
2016
$M
1.2
31.3
32.5
1.3
15.0
16.3
The cash-settled expense comprises cash-based awards together with certain social security taxes. The carrying
value of the liability as at 31 March 2017 was $1.8M (2016: $1.1M).
SHARE OPTIONS
The fair value of equity-settled share options granted is estimated as at the date of grant using a Black-Scholes model,
taking into account the terms and conditions upon which the options were granted.
The following table illustrates the weighted average inputs into the Black-Scholes model in the year:
Weighted average share price ($ Cents)
Weighted average exercise price ($ Cents)
Expected volatility
Expected life of options (years)
Risk free rate
Dividend yield
Year-ended
31 March
2017
Year-ended
31 March
2016
291.00
234.00
130.63
130.63
42.40%
32.66%
3.20
0.92%
0.62%
2.28
0.57%
Nil
The weighted average fair value of options granted during the year was $ cents 51.75 (2016 $ cents 24.4)
The expected volatility reflects the assumption that the historical share price 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 Directors 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 139
The number and weighted average exercise prices (“WAEP”) of, and movements in, share options during the year are
set out below:
Outstanding at the start of the year
Awarded
Forfeited
Exercised
Outstanding at the end of the year
Year-ended
31 March
2017
WAEP
$ Cents
74.5
234.0
138.6
44.7
99.9
Number
000's
22,677
1,725
(642)
(6,787)
16,973
Year-ended
31 March
2016
WAEP
$ Cents
62.5
205.3
52.7
40.1
74.5
Number1
000's
35,072
631
(7,478)
(5,548)
22,677
Exercisable at the end of the year
10,958
73.8
13,918
56.0
1
Share option activity in the prior-year before Admission has been converted using the share conversion ratio applied to the Pre-admission capital
restructuring.
The weighted average share price for options exercised during the year was £ pence 262 (2016: £ pence 228)
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
2017
WARCT
Years
1.8598
2.5000
11.897
47.589
51.915
59.781
70.794
91.245
155.746
210.808
234.000
153
–
–
676
32
9,972
378
175
3,523
419
1,645
16,973
3.2
–
–
3.2
5.7
5.7
7.2
7.2
7.5
7.9
2.9
5.9
31 March
2016
WARCT
Years
4.2
0.9
4.2
4.2
6.7
6.7
8.2
8.2
8.5
8.9
–
6.8
Number
000's
153
446
2,507
1,286
43
12,133
1,144
276
4,199
490
–
22,677
Outstanding at the end of the year
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 140
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
Year-ended
31 March
2017
WASP
$ Cents
Number
000's
Year-ended
31 March
2016
WASP
$ Cents
Number1
000's
Outstanding at the start of the year
127
155.75
348
106.88
Awarded
Forfeited
Vested
–
–
–
–
–
–
Outstanding at the end of the year
127
155.75
–
–
(221)
127
–
–
78.42
155.75
1
Restricted share activity in the prior-year before Admission has been converted using the share conversion ratio applied to the Pre-admission
capital restructuring.
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
Released
Outstanding at the end of the year
Year-ended
31 March
2017
WASP
£ pence
264.74
187.00
209.94
261.81
215.92
Number
000's
9,389
10,930
(1,652)
(3,317)
15,350
Year-ended
31 March
2016
WASP
£ pence
–
264.75
265.00
–
Number
000's
–
9,630
(241)
–
9,389
264.74
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUEDFor the year-ended 31 March 2017 141
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
Released
Outstanding at the end of the year
Year-ended
31 March
2017
WASP
£ pence
265.00
186.75
203.99
265.00
219.41
Number
000's
2,785
4,090
(745)
(106)
6,024
Year-ended
31 March
2016
WASP
£ pence
–
265.00
265.00
–
Number
000's
–
2,879
(94)
–
2,785
265.00
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 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 $6.5M (2016: $6.7M).
Contributions of $1.5M (2016:$1.2M) to the defined contribution pension scheme were outstanding, but not overdue,
at 31 March 2017.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 142
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year-ended 31 March 2017
32 RELATED PARTY TRANSACTIONS
The consolidated financial information includes the financial information of Sophos Group plc and the subsidiaries
listed in the following table:
Country of
incorporation
Australia
Subsidiary
undertaking
Sophos Pty Ltd3
Canada
Sophos Inc3
France
Sophos Sarl3
Principal activity /
registered address
Selling IT security solutions
Level 11, 1 Elizabeth Plaza, North Sydney, NSW
2060, Australia
Selling IT security solutions
3400, 350-7th Ave SW, Calgary AB T2P 3N9,
Canada
Selling IT security solutions
River Ouest, 80 Quai Voltaire, 95870 Bezons,
France
Germany
Sophos Holdings GmbH3 Holding Company
Sophos GmbH4
Sophos Technology
GmbH4
Hong Kong
Sophos Hong Kong
Co Ltd3
Hungary
Sophos Hungary Kft3
India
Sophos Technology
Private Ltd10
Italy
Sophos Italia Srl3
Japan
Sophos KK3
Luxembourg
Aspen Finance Co Sarl2
Netherlands
Sophos BV3
Threatstar Holding BV8
Threatstar BV9
SurfRight BV8
Singapore
Sophos Computer
Security Pte Ltd3
Selling IT security solutions
Gustav-Stresemann-Ring 1, 65189 Wiesbaden,
Germany
Research and Development
Amalienbadstr. 41/ Bau 52 76227 Karlsruhe,
Germany
Selling IT security solutions
Unit K, 12/F., MG Tower, No. 133 Hoi Bun Road,
Kwun Tong, Kowloon, Hong Kong
Research and Development
Aliz Utca, 1 Office Garden, Irodahaz A Epulet,
1117 Budapest, Hungary
Selling IT security solutions
Sophos House, Saigulshan Complex, Beside
White House, Panchwati Cross Road,
Ahmedabad 380006, Gujarat, India
Selling IT security solutions
Via Tonale 26, CAP 20125 Milano (MI), Italy
Selling IT security solutions
Izumi Garden Tower 10F, 1-6-1 Roppongi,
Minato-ku Tokyo 106-6010 Japan
Financing Company
1-3, Boulevard de la Foire, L-1528, Luxembourg
Selling IT security solutions
Hoevestein 11B, 4903 SE Oosterhout NB,
Netherlands
Holding Company
Research and Development
Selling IT security solutions
Lansinkesweg 4, 7553 AE Hengelo, Netherlands
Selling IT security solutions
60 Paya Lebar Road, #08-13 Paya Lebar Square,
Singapore 409051
Class of
shares held
Ordinary
Percentage
of shares
held
100%
Common
100%
Ordinary
100%
Ordinary
Ordinary
100%
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
Ordinary
Ordinary
100%
100%
100%
Ordinary
100%
143
Country of
incorporation
Spain
Subsidiary
undertaking
Sophos Iberia Srl3
Sweden
Sophos AB3
Switzerland
Sophos Schweiz AG3
Astaro Trading AG5
Taiwan
Sophos Taiwan Ltd3
Turkey
UK
Sophos Turkey Technoji
Ltd Sirketi3
Sophos Holdings Ltd1
Sophos Treasury Ltd2
Sophos Limited2
Sophos Overseas
Limited3
Sophos Nominees
Limited3
USA
Sophos Inc3
Cyberoam Inc6
Reflexion Networks Inc7
Invincea, Inc7
Sandboxie Holdings,
LLC11
Principal activity /
registered address
Selling IT security solutions
Calle Orense 81, 28020 Madrid, Spain
Selling IT security solutions
Färögatan 33, 164 51 Kista, Stockholms län,
Sweden
Selling IT security solutions
Bernstrasse 388, 8953 Dietikon, Switzerland
Historical purchasing entity
Blumenaustr. 28, 8200 Schaffhausen,
Switzerland
Services Company
5F-4, No. 57, Sec. 1 Chongqing S. Road,
Zhongzheng Dist., Taipei City 100 Taiwan (R.O.C.)
Services Company
19 Mayıs Mah. Turaboğlu Sok., Hamdiye Yazgan,
İş M. Apt. No: 4 / 2 Kadıköy, İstanbul, Turkey
Holding Company
Financing Company
Selling IT security solutions
Services Company
Class of
shares held
Ordinary
Percentage
of shares
held
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
Ordinary
Ordinary
Ordinary
100%
100%
100%
100%
Share nominee company
Ordinary
100%
The Pentagon, Abingdon Science Park,
Abingdon, OX14 3YP, UK
Selling IT security solutions
3 Van de Graaff Drive, 2nd Floor, Burlington, MA
01803, USA
Services Company
10 Schalks Crossing Road, Suite 501-329,
Plainsboro, NJ 08536, USA
Selling IT security solutions
1209 Orange St, Wilmington, County of New
Castle DE 19801, USA
Selling IT security solutions
Services Company
Ordinary
100%
Ordinary
100%
Ordinary
100%
Ordinary
Ordinary
100%
100%
2711 Centerville Rd Suite 400, Wilmington, New
Castle, DE 19808, USA
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
6 Shares held by Sophos Technology Private Ltd
10 Shares held by Sophos Limited and Sophos
3 Shares held by Sophos Limited
7 Shares held by Sophos Inc
4 Shares held by Sophos Holdings GmbH
8 Shares held by Sophos BV
Nominees Limited
11 Shares held by Invincea, Inc
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
144
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year-ended 31 March 2017
32 RELATED PARTY TRANSACTIONS CONTINUED
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:
Softcat Plc, an entity related through common Director’s interest from 3 January 2017, is a leading provider of IT
infrastructure and a customer of the Group. The Group made sales of $4.5M to Softcat Plc during the period that the
entity was a related party, and the amount owed by Softcat Plc as at 31 March 2017 was $2.6M.
During the year-ended 31 March 2017, no provisions were made for doubtful debts relating to amounts owed by related
parties (2016: $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 2017, these guarantees totaled $349.2M (2016: $328.4M) 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
2017
$M
Year-ended
31 March
2016
$M
9.7
0.1
16.0
25.8
8.6
0.1
8.7
17.4
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.
145
33 BUSINESS COMBINATIONS
Invincea, Inc.
On 21 March 2017, Sophos Inc. acquired for cash 100% of the share capital of Invincea, Inc., a company based in
Fairfax, Virginia, United States. The acquisition will significantly strengthen the Group’s industry leading next-
generation endpoint protection product by adding Invincea, Inc.’s machine learning and artificial intelligence
technology threats.
Acquisition-related expenses of $4.1M 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:
Non-current assets:
Intangible assets
Intellectual property
Customer relationships
Plant and equipment
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
Goodwill arising on acquisition – Invincea, Inc.
Book value
$M
Adjustment
$M
Fair value
$M
–
–
0.2
1.3
13.8
0.3
18.5
1.2
–
–
–
–
18.5
1.2
0.2
1.3
13.8
0.3
–
8.7
8.7
6.1
3.7
–
5.8
(2.0)
–
–
13.0
4.1
3.7
–
18.8
95.9
19.3
96.4
Prior to the acquisition, Invincea, Inc. operated in a complimentary market sector to the Group and, accordingly, the
results of Invincea, Inc. are incremental to those of the Group. Revenue of $529.7M for the twelve-months to 31 March
2017 includes $0.2M in respect of Invincea, Inc. The impact of Invincea, Inc. on the operating loss of the Group for the
period is insignificant. Had Invincea, Inc. been owned since 1 April 2016, revenue for the year-ended 31 March 2017
would have increased over the reported revenue by approximately $19.1M. The impact on the operating loss of the
Group would have been $7.0M.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
146
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year-ended 31 March 2017
33 BUSINESS COMBINATIONS CONTINUED
Intellectual property – Silent Break Security LLC
On 18 November 2016, Sophos Limited entered into an agreement to buy for cash the trade and assets of Silent Break
Security LLC and acquire the Intellectual Property of “PhishThreat”, a phishing attack simulator used to train users
to spot phishing attacks, dangerous attachments and bogus scripts. The Group also secured the ongoing services of
certain key employees.
Asset acquired
Cash paid
Contingent consideration
Goodwill arising on asset acquisition from Silent Break Security LLC
Fair value
$M
3.1
3.0
1.2
1.1
Had the trade and assets of Silent Break Security LLC been owned since 1 April 2016, the impact on the operating loss
of the Group would have been insignificant.
Barricade Security Systems Limited.
On 20 October 2016, Sophos Limited acquired for cash 100% of the share capital of Barricade Security Systems
Limited, a company based in Cork, Ireland. The company is a start-up company providing cloud-based security
analytics and the acquisition has strengthened the Group’s machine learning and artificial intelligence expertise.
Non-current assets
Trade and other receivables
Trade and other payables
Net liabilities recognised at the date of acquisition
Cash paid
Goodwill arising on acquisition – Barricade Security Systems Limited
Fair value
$M
0.1
0.1
0.5
0.3
1.9
2.2
Prior to the acquisition, Barricade Security Systems Limited had immaterial revenues and all trading ceased on the
day of acquisition. The impact of Barricade Security Systems Limited on the operating loss of the Group for the period
is insignificant. Had Barricade Security Systems Limited been owned since 1 April 2016, the impact on the operating
loss of the Group would have been insignificant.
Reflexion Networks Inc.
In the prior year, on 5 June 2015, Sophos Inc. acquired for cash 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.
147
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
–
–
–
–
1.9
5.8
0.4
0.5
–
–
3.1
3.1
–
–
–
4.6
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.
Surfright B.V and Threatstar Holdings B.V.
In the prior year, on 3 December 2015, Sophos B.V. completed the acquisition for cash 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.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
148
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year-ended 31 March 2017
33 BUSINESS COMBINATIONS CONTINUED
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 B.V. and Surfright B.V.
Book value
$M
Adjustment
$M
Fair value
$M
–
–
–
0.3
0.6
–
0.7
3.7
0.3
0.1
–
–
0.3
–
3.7
0.3
0.1
0.3
0.6
0.3
0.7
–
0.9
0.9
–
1.0
0.6
1.3
–
2.2
1.3
1.0
2.8
31.8
29.0
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.
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.
149
34 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Acquisition of subsidiaries net of cash acquired
Consideration paid, satisfied in cash:
– Invincea, Inc.
– Intellectual Property – Silent Break Security
– Barricade Security Systems Limited
– Surfright B.V. and Threatstar Holdings B.V.
– Reflexion Networks Inc.
Net cash purchased
Acquisition of subsidiaries net of cash
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
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
95.9
3.0
1.9
–
1.2
(0.3)
101.7
–
–
–
31.8
15.0
(0.8)
46.0
31 March
2016
$M
Cash flow
$M
Non-cash
movements
$M
Effect of
movements
in exchange
rates
$M
31 March
2017
$M
(49.7)
(17.1)
(66.8)
0.2
324.7
324.9
258.1
(16.2)
8.7
(7.5)
(0.1)
24.1
24.0
16.5
–
–
–
–
0.9
0.9
0.9
3.6
2.6
6.2
–
(4.1)
(4.1)
2.1
(62.3)
(5.8)
(68.1)
0.1
345.6
345.7
277.6
31 March
2015
$M
Cash flow
$M
Non-cash
movements
$M
Effect of
movements
in exchange
rates
$M
31 March
2016
$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
(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
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
150
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
For the year-ended 31 March 2017
35 COMMITMENTS AND CONTINGENT LIABILITIES
Operating lease arrangements
Amount recognised for the year:
Property
Other
Total
Year-ended
31 March
2017
$M
Year-ended
31 March
2016
$M
10.8
1.4
12.2
8.9
1.4
10.3
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
2017
$M
31 March
2016
$M
12.0
34.8
20.6
67.4
10.8
28.0
10.8
49.6
Commitments for the acquisition of property, plant and equipment
At 31 March 2017 the Group had entered into contractual commitments for the acquisition of property, plant and
equipment amounting to $0.2M (2016: $0.8M)
Guarantees
At 31 March 2017 the Group had outstanding guarantees provided to third parties of $1.2M (2016:$1.3M).
Legal proceedings
The Group is involved in a number of legal proceedings that are incidental to our business. Although it is possible that
adverse decisions (or settlements) may occur in one or more of the cases, it is not currently possible to estimate the
potential loss or losses. The final outcome of these proceedings, individually or in the aggregate, is not expected to
have a material impact on the business.
Litigation is currently in process against an entity within the Group by RPost Holdings Inc. The company allege patent
infringements and claim unspecified damages. In accordance with IAS 37.92, the Group does not provide further
information on the grounds that this could seriously prejudice the outcome of the litigation. The Directors are of the
opinion that the claim can be successfully resisted by the Group.
151
36 PRINCIPAL EXCHANGE RATES
Principal exchange rates
Translation of Sterling into US Dollar ($:£1.00)
Average
Closing
Translation of Euro into US Dollar ($:€1.00)
Average
Closing
Year-ended
31 March
2017
Year-ended
31 March
2016
1.3200
1.2505
1.5057
1.4373
1.1017
1.0696
1.0969
1.1395
When calculating performance measures on a constant currency basis, the Group uses the closing balance sheet rate
of the previous year.
37 EVENTS AFTER THE REPORTING PERIOD
There are no material events after the reporting period which require disclosure under IAS10.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 152
COMPANY ONLY STATEMENT OF FINANCIAL POSITION
At 31 March 2017
Company registered number: 09608658
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 current liabilities
Net assets
Represented by:
Share capital
Share premium
Retained earnings
Share-based payment reserve
Total equity
31 March
2017
$M
31 March
2016
$M
Note
3
4
5
13.6
5.9
1,068.4
1,045.3
93.5
93.5
1,175.5
1,144.7
–
24.0
24.0
0.3
22.3
22.6
1,199.5
1,167.3
0.6
26.2
26.8
0.7
16.7
17.4
1,172.7
1,149.9
21.6
118.4
977.1
55.6
21.3
115.9
993.7
19.0
1,172.7
1,149.9
These financial statements were approved by the Board of Directors on 16 May 2017 and were signed on its behalf by:
Nick Bray
Chief Financial Officer
The notes on pages 154 to 155 form an integral part of these financial statements.
COMPANY ONLY STATEMENT OF CHANGES IN EQUITY
At 31 March 2017
Share
Capital
$M
Share
Premium
$M
Retained
Earnings
$M
Share
Based
Payment
Reserve
$M
On Incorporation 26 May 2015
Loss for the period:
Total comprehensive loss
Issue shares
Capital contribution
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
At 31 March 2016
Loss for the period:
Other comprehensive profit or loss:
Total comprehensive loss
Share options exercised
Disposal of EBT treasury shares
Share-based payments – expense
Share-based payments – deferred tax
Cash dividend
At 31 March 2017
–
–
–
483.1
–
(21.4)
(21.4)
–
(483.0)
1,018.2
–
–
–
552.6
(533.1)
–
1.7
–
0.1
–
–
–
–
–
123.3
(8.6)
1.1
–
–
–
–
21.3
115.9
–
–
0.3
–
–
–
–
–
–
2.5
–
–
–
–
21.6
118.4
–
–
–
–
–
–
–
(3.1)
993.7
(5.6)
(5.6)
–
(0.1)
–
–
(10.9)
977.1
The notes on pages 154 to 155 form an integral part of these financial statements.
153
Total
$M
–
(21.4)
(21.4)
1,035.7
2.1
–
125.0
(8.6)
1.2
–
15.0
4.0
(3.1)
–
–
–
–
–
–
–
–
–
–
15.0
4.0
–
19.0
1,149.9
–
–
–
–
31.3
5.3
–
(5.6)
(5.6)
2.8
(0.1)
31.3
5.3
(10.9)
55.6
1,172.7
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS 154
NOTES TO THE COMPANY FINANCIAL STATEMENTS
For the year-ended 31 March 2017
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.
155
2 PROFIT AND LOSS ACCOUNT
The loss after tax dealt with in the books of the Company was $5.6M (2016: $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
Investment in Sophos Holdings Limited
Investment in Sophos Limited
Investment in employee benefit trust
Total
31 March
2017
$M
31 March
2016
$M
1,035.8
1,035.8
32.6
–
9.4
0.1
1,068.4
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
Issued on exercise of share options and release of RSU's
At 31 March 2017
000's
–
414,655
35,345
2,172
452,172
7,470
459,642
$M
–
19.5
1.7
0.1
21.3
0.3
21.6
6 FUNCTIONAL CURRENCY
Sophos Group plc is registered in England and Wales and has a functional currency of US Dollars.
INTRODUCTIONSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
156
GLOSSARY
Adjusted operating profit
Adjusted operating profit represents the Group’s operating profit/(loss) adjusted for amortisation
charges, share option charges and exceptional items
AES
Americas
APJ
Billings
Blue chip
Board
BYOD
CAGR
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
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
Compound annual growth rate
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
Cash EBITDA margin is calculated as cash EBITDA as a percentage of billings
Channel first
Company
Constant currency
The distribution model used by the Group, where products are sold to end customers through a
network of channel partners and distributors
Sophos Group plc
The group uses US Dollar-based constant currency models to measure performance. These are
calculated by applying a single exchange rate to local currency transactions for both the current
and prior year. This gives US Dollar denominated measures that exclude variances attributable to
foreign exchange rate movements
Directors
The Executive and Non-Executive Directors of the Company
DPI
DMR
EBITDA
EMEA
FIPS
GHG
Group
HTML5
IASB
IDP
IFRS
KPI
Deep Packet Inspection
Direct Market Reseller
Earnings before interest, taxation, depreciation and amortisation
Europe, Middle East and Africa
US 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
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
Managed Service Provider
Original Equipment Manufacturer
Remote Ethernet Device
Renewal rates are calculated by comparing the actual US Dollar amount of contracts renewed into
the following period (including instances of cross-sell and upsell) to the US Dollar amount of total
contracts at the start of the period
Secure Sockets Layer, a standard security technology for establishing an encrypted link between a
server and a client
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
157
INVESTOR RELATIONS
investors.sophos.com
investor.relations@sophos.com
AUDITOR
KPMG LLP
15 Canada Square
London
E14 5GL
COMPANY INFORMATION
DIRECTORS
Peter Gyenes
Kris Hagerman
Nick Bray
Sandra Bergeron
Edwin Gillis
Salim Nathoo
Roy Mackenzie
Rick Medlock
Steve Munford
Vin Murria
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
Tulchan Communications
85 Fleet Street
London
EC4Y 1AE