ii view: Sage Group off to a strong start

by Keith Bowman from interactive investor |

A move from desktop to the cloud is paying dividends for this UK software provider. 

First-quarter trading update to 31 December 2019

  • Revenue up 6.7% to £465 million
  • Unchanged guidance
  • Recurring revenue up 10.7% to £410 million
  • Other revenue down 15.8% to £55 million

Chief financial officer Jonathan Howell said:

"Sage had a strong first quarter as expected.  We have sustained last year's growth momentum into the first quarter of FY20, as we continue to focus on driving recurring revenue through the transition to cloud-based subscription services, in line with our vision to become a great software as a service (SaaS) company.  Looking ahead, we reiterate our guidance for the full year, as outlined in the FY19 results announcement."

ii round-up:

Accounting software provider Sage Group (LSE:SGE), which employs around 13,000 people and serves over three million customers in 23 countries, has reported revenue growth ahead of analyst estimates during its first-quarter.

Momentum from 2019 continued, aided by several factors including the ongoing migration of customers from desktop software packages to cloud servers and a push by governments to digitalise tax. 

Revenues on the same basis grew by 15.1% in Northern Europe and by 11.8% in North America. In line with 2019, other revenue fell by nearly 16% as management continued to prioritise recurring revenue growth. 

Despite the above-forecast performance, group guidance for 2020 was left unchanged, with recurring revenues still expected to grow by 8 to 9%. 

The share price rose by more than 4% in afternoon UK 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. 

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

For investors, Sage is a high-quality British business with a near-20-year record of consecutive dividend increases. However, a forecast one-year dividend yield of just over 2% contrasts with an average for the FTSE 100 index of over 4%, while a forward price/earnings (PE) ratio comfortably above the 10-year average is not obviously cheap. 

Positives: 

  • Recurring revenue now represents 86% of total revenue (FY18: 82%)
  • A policy of maintaining the dividend in real terms

Negatives:

  • Other revenue fell by nearly 16% 
  • Australia & Asia delivered a total 2019 revenue decline of 2%, with Asia dragging on growth

The average rating of stock market analysts:

Sell

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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