> TMT Deutsche Bank ED Sophos - Alex Tout, BUY, close 600p, 790p tgt, 32% upside • A significant player in IT security market with differentiation from its balanced portfolio across Endpoint and Network security • Increasing confidence in management forecasts to FY20 due to traction with Intercept X and Central and high renewal rates (139% in 1H18). This supports double-digit billings growth to FY22E. ■ Highly supportive end market demands as customer senior management increase focus on cyber security (particularly after the WannaCry and NotPetya attacks) - Sophos has the right product offering to benefit with its significant focus on Endpoint • Continued margin improvement due to lower new customer billings mix and hence lower sales and marketing cost as a % of billings, as well as further scale on G&A spend. • We believe recent weakness is driven by: 1) director selling; 2) Apax placing c10% of market cap, causing short term oversupply; 3) the tech selloff driving selling among shorter-term holders • Valuation attractive at 21x CY18E EV/uFCF (adjusted for SBC) given its 20% uFCF CAGR (FY19-22E). - This compares to peers Palo Alto Networks (39x), Fortinet (19x) and Check Point Software (18x), all of whom are more geared to the slowing Network security market and have lower FCF growth. ■ Catalysts: launch of fully Al based next gen Endpoint product Intercept X v2 in January, 3Q18 results 08-Feb Related DB Research: 1H18 Review. TP Raised to 790p (Tout), We forecast substantial billings growth (USDm) 1400 1,220 400 - 1632 200 I. 1200 • 1.070 1000 - 923 774 6800 i 476 535 0 + FY15 FY16 FY17 • FY18 FY19 'T FY20 FY21 — FY22 Source: Company Rings 1,366 Cash EBITDA and adjusted operating profit margins improving 35% 30% 25% -I 20% 15% I 10% 5% 0% 1- FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Source: Company filings Cash EBITDA margin Adj. op. margin utsche Bank Research- European