Sophos Well Positioned for MDR, Tuck-In Security Acquisitions -

Sophos' increased efforts in managed services sales may put modest pressure on margins but this will be compensated by faster revenue growth, greater customer loyalty and the opportunity to make tuck-in acquisitions. Those perspectives surfaced in a Fitch Ratings Service report.

To Sophos' credit, the security company has acquired and/or launched multiple security services that are pre-built for MSPs. The result: Managed services, including Managed Threat Response (MTR) and Rapid Response (RR), are likely to be the fastest growing segments for Sophos, according to the credit ratings report. Scott Barlow, VP of global MSP & cloud alliances, leads those channel sales efforts.

Note: MTR essentially is the Sophos term for Managed Detection and Response (MDR).

Sophos: Loyalty to MSPs Fuels Business

Here are eight takeaways about Sophos, according to the ratings service:

Sophos has "leading positions in its key market segments of end-point security and network security, as indicated by high scores from market research firms and customer ratings for its products."

Sophos has "high revenue retention rates exceeding 100% and demonstrates Sophos' ability to retain subscribers and upsell additional products."

The ratings service expects Sophos to generate low double-digit revenue growth in FY23-FY24 as underlying demand for cybersecurity services remain strong.

Sophos should generate very strong free cash flow (FCF) in FY22-FY25 with double-digit margins.

Increasing share of revenues from managed services should also increase customers loyalty. However, the segment may put modest pressure on Sophos' margin as managed services require more support staff.

Sophos will generate about $150 million to $200 million in free cash flow.

The most likely usage of excess cash is bolt-on acquisitions "but we do not rule out debt prepayments as the company had done in 2021."

Fitch expects Sophos to generate EBITDA margin at 20.5% in FY22, declining to 19.5% by FY24 due to increasing share of managed services revenue.

Sophos: Well Positions But Competition Looms

The credit service report bodes well for Sophos, which has a loyal and growing MSP and cloud partner base. Still, competition remains intense as EDR (Endpoint Detection and Response) companies such as CrowdStrike, Cybereason and SentinelOne engage MSPs. Also, dozens of MDR (managed detection and response) companies now compete with Sophos. And MSP-friendly players like Blackpoint Cyber and Huntress are also in the market.