ii view: bad day at the office for Sage as shares slide

Growing its software subscription customer base and offering a progressive dividend. Buy, sell, or hold?

First-quarter trading update to 31 December

ii round-up:

Accounting and business software provider Sage Group (LSE:SGE) today reported an 8% increase in recurring revenues as it continued to push sales of its cloud-based subscription software over former desktop packages. 

Management summarised the quarter as a ‘strong start’ to the year, although left its full-year 2022 estimates unchanged. 

Sage Group shares fell by around 5% in UK trading, having gained more than 15% over the last year. Shares for rival Intuit (NASDAQ:INTU) are up by more than a third in that time, while Microsoft (NASDAQ:MSFT) is up over a fifth. The FTSE 100 index is up around 12%.

Recurring revenues at Sage climbed to £429 million from a first quarter 2021 £398 million, aided by a one-fifth improvement in business cloud sales to £280 million and continued strength in new customer adds. 

Sage Group’s accounting, HR and payroll software serves around 3 million small businesses globally. Most employ less than 30 staff. 

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Customer subscription penetration grew to 73% in this latest quarter from 68% a year ago. Geographically, North America proved the winner with recurring revenues gaining by 11% to £174 million. Northern Europe improved 7% to £102 million. 

First-half results to the end of March are scheduled for 13 May. 

ii view:

Sage employs over 11,000 people and serves customers in more than 20 countries. Over 80,000 accountants advise on and sell Sage solutions. It generates strong cash flows and benefits from sizeable and dependable recurring revenues. Launching its Sage business cloud back in 2018, it has been busy investing in cloud computer connected solutions.

For investors, previous uncertainty created by the pandemic and its impact on Sage’s SME customer confidence to spend should not be forgotten. An estimated price-to-net asset value ratio above the three-year average may also suggest the shares are not obviously cheap. 

However, recurring revenue growth of 8% is up from 4.7% in Q1 2021. A progressive dividend policy which has seen consecutive increases made over more than 15 years offers a key attraction. A forecast and historic dividend yield of over 2% is also not totally derisory in an era of ultra-low interest rates. In all, and with its push towards cloud services ongoing, investors may wish to remain patient. Non-shareholders might take a wait and see approach.

Positives: 

• Strong balance sheet
• Progressive dividend policy

Negatives:

• Investment costs squeezing profit margins
• Continued pandemic uncertainty

The average rating of stock market analysts:

Hold