ii view: Mixed effort from Sage

Profits fell and guidance proved uninspiring, yet recurring revenue jumped. What should investors think?

Full-year results to 30 September 2019

• Revenue up 3.1% to £1.94 billion
• Underlying recurring revenue up 10% to £1.61 billion
• Underlying operating profit down 12.1% to £448 million
• Net debt down 41% to £393 million at 30 September 2019
• Dividend up 2.5% to 16.91p per share

Guidance: 

• Recurring revenue growth of 8-9%
• Organic operating margin is expected to be around 23%

Chief executive Steve Hare said:

"We're very encouraged by the acceleration in recurring revenue in FY19. We entered the year with momentum and added sequential acceleration in recurring revenue (ARR) every month in the year, putting us further ahead in our transition to Sage Business Cloud (SBC) than anticipated. We've also made significant progress in our strategic execution, particularly in the development and roll out of our cloud offerings and the reshaping of our portfolio. 

"We will continue to prioritise high quality recurring revenue growth over software and software related services SSRS, and whilst we do not expect a linear progression in financial performance during this multi-year transition, our recent strong performance and continued progress towards becoming a great software as a service (SaaS) company means that we look forward with confidence."

ii round-up:

Founded in 1981, Sage developed software to help businesses process their accounts information. The company floated on the London Stock Exchange in 1989.

Today, Sage (LSE:SGE) has 13,000 employees and serves over three million customers in 23 countries across the UK and Ireland, mainland Europe, South Africa, Australia, Asia, and Latin America.

Sage has been busy investing in cloud computer connected solutions, launching its Sage Business Cloud back in 2018. The primary operational focus for management is to migrate desktop customers and attract new customers to SBC. 

It reported a mixed performance in these full-year results. Recurring revenue grew by 10.7%, with software subscription revenue growth of nearly 30% to just over £1 billion. 

But profitability was hindered by increased investment in its cloud and subscription products, while guidance for its profit margin in the year ahead was little changed from the current year. 

On a broadly negative day for equity markets, the shares fell by just over 4% in early afternoon UK stock market trading. 

ii view:

Sage generates strong cash flows and benefits from sizeable and dependable recurring revenues. Its software products are used daily by businesses of all sizes on an international basis. In 2017, Sage acquired Intacct, a leading North American provider of cloud Financial Management Solutions. 

From an investor's prospective, a near-20-year record of consecutive dividend increases is not to be ignored. However, sat on a prospective dividend yield of just over 2% and with a current forward price/earnings (PE) ratio comfortably above the 10-year average, the shares look up with events. 

Positives: 

• Recurring revenue now represents 86% of total revenue (FY18: 82%)
• A policy of maintaining the dividend in real terms
• Capital return of £250 million following the proposed sale of Sage Pay

Negatives:

• Underlying operating profit fell by 12.1%
• SSRS revenue down 18%
• Australia & Asia delivered a total revenue decline of 2%, with Asia dragging on growth

The average rating of stock market analysts:

Sell