ii view: Sage buoyed by cloud-based subscription sales

Shares for this FTSE 100 accountancy software maker are down around a fifth year-to-date. We assess prospects. 

First-half results to 31 March

• Organic recurring revenue up 8% to £866 million
• Organic operating profit up 4% to £184 million
• Interim dividend up 4% to 6.3p per share
• Net debt of £650 million, up from £96 million 

Guidance:

• Full-year revenue estimate left unchanged

ii round-up:

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

Organic operating profit excluding business sales and acquisitions rose 4% to £184 million, matching City forecasts, with the interim dividend rising 4% year-over-year to 6.3p per share. 

Sage shares rose marginally in UK trading having fallen by around a fifth year-to-date coming into the results. That’s similar to US mammoth and Windows software maker Microsoft (NASDAQ:MSFT), while US accounting software rival Intuit (NASDAQ:INTU) is down by more than two-fifths. The FTSE All World index is down by close to a fifth. 

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Sage’s business cloud sales grew 21% to £572 million, more than countering a 12% fall in sales of products with the potential to migrate to the data cloud of £225 million.  

Annualised recurring revenues (ARR) rose 10% to £1.78 billion, up from 8% in the second half of 2021, aided by a strong performance across all regions, with growth balanced between new and existing customers.

Profit during the half year was helped by a credit of £7 million, made following a reassessment of its prior customer bad debt provision in relation to the pandemic. 

Accompany management full-year guidance was left unchanged, with the firm expecting organic recurring revenue growth of between 8% and 9%. 

A third quarter trading update is scheduled for 2 August. 

ii view:

Sage Group’s accounting, HR and payroll software serves around 3 million small businesses globally. Most employ less than 30 staff. Sage generates strong cash flows and benefits from sizeable recurring revenues. Launching its Sage business cloud back in 2018, it has been busy investing in cloud computer connected solutions as opposed to former desktop packages. 

For investors, economic outlook uncertainty overshadowing many of its small to medium size business customers offers caution. Some may not survive should a full-blown recessions materialise in key customer regions such as the US, UK and France. An estimated price/earnings ratio of just over 20 times is also in line with the 10-year average, meaning the shares are not necessarily cheap. 

More favourably, group investment in sales growth is ongoing, while revenue guidance has been left unchanged. A progressive dividend policy, which has seen consecutive increases made over more than 15 years, remains a key attraction. While a forecast and historic dividend yield of over 2.5% is not derisory in an era of still low if rising interest rates. On balance, and with an uncertain outlook set against the company’s push towards higher profit margin cloud services, Sage will likely remain of interest to investors with a long-term view.

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Investment costs squeezing profit margins
• Economic outlook uncertainty

The average rating of stock market analysts:

Hold