Why Sophos and TalkTalk just plummeted

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Why Sophos and TalkTalk just plummeted

Markets remain in unforgiving mood if the reaction to today's trading statement by cyber security specialist Sophos (SOPH) is anything to go by.

The company, which has a portfolio of cloud-based products that protect over 280,000 organisations and over 100 million end users in 150 countries, reported that billings rose by 18.7% in the third quarter.

It said strong demand for its services had continued during the three-month period, with no change to the improved guidance it issued in November.

But this wasn't enough for some investors, who noted that billings growth had been 29% higher in the previous quarter. Even though Sophos is up against tougher comparisons due to a product launch a year ago, its shares tumbled 18%.

This left the £2.5 billion FTSE 250 (MCX) stock back where it was in August, having previously been one of the second-tier's best performers of 2017.

The Oxford-based business listed midway through 2015 and did little from a shares perspective until a bullish trading update last spring guided full-year results above analyst expectations.

- Sophos plans major cyber security IPO

This triggered a break higher for the shares, but it now appears that investors are willing to follow the lead of directors in November and take profits after a rise of 140% between April and January this year.

The sell-off comes even though the company offers decent exposure to one of the fastest-growing technology sectors, with businesses and hospitals among those looking for help after a series of ransomware attacks.

Sophos is also a strong cash generator, with net cash flow from operations up by 21% to $98.2 million in today's update, despite the impact of new product releases.

Even this figure was considered a negative for the Sophos share price, which was the biggest faller in the FTSE All-Share Index (ASX) today. If this came as a surprise, then the reaction to the second name on the list should be less of a shock.

Dividend trouble at TalkTalk

Analysts had been warning for some time that TalkTalk Telecom (TALK) may be a candidate to cut its dividend for the second time in a year.

And so it proved today as shares fell by more than 12% to touch record lows. The company also warned that underlying earnings would be significantly lower than November guidance, despite adding 37,000 new customers and growing revenues by 1% in the quarter to December 31.

It also announced a plan to raise £200 million from a share placing, which will go towards building a fibre network that will enable TalkTalk to run much higher broadband speeds. Executive chairman Charles Dunstone and other directors have pledged to contribute up to £40 million in the placing

But with BT (BT.A), Sky (SKY) and Vodafone (VOD) increasing competition in the home broadband market, Dunstone and chief executive Tristia Harrison will have their work cut out to get the share price moving in the right direction again.

Harrison sees average revenues per user stabilising next year, leading to EBITDA growth of 15%, driven by the benefits of a bigger base, lower wholesale charges and significant cost reduction.

The annual dividend will be reduced to 2.5p, but TalkTalk plans to return to a normalised pay-out of 7.5p once leverage is reduced to two times underlying earnings.

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