ii view: Sage grows profit and the dividend

This business software provider has delivered a solid first half, but Covid-19 is now likely to hinder.

Half-year results to 31 March 2020

• Organic revenue up 5.7% to £935 million
• Organic recurring revenue up 10.3% to £835 million
• Adjusted operating profit up 1% to £218 million
• Dividend per share up 2.5% to 5.93p

Chief executive Steve Hare said:

"Sage has had a strong first half, sustaining last year's growth momentum as we continue to focus on recurring revenue growth, and making good progress in strategic execution. Our key priority has been the health and wellbeing of our colleagues and our service to customers. 

"Despite the near-term uncertainties, I believe our continuing investment into Sage Business Cloud, together with our focus on customers, colleagues and innovation, form a strong base for the future performance of Sage."

ii round-up:

Accounting and business software provider Sage Group (LSE:SGE) reported half-year results to the end of March which were in line with City forecasts.

Factors including a focus on driving recurring revenue through the transition of customers from desktop software packages to cloud-based subscription services helped organic recurring revenue grow by just over 10%.

Sage shares rose by more than 4% in early afternoon UK trading and are down by less than 9% year-to-date. Shares of rival IT companies Micro Focus (LSE:MCRO) and Computacenter (LSE:CCC) have fallen by 58% and 19% respectively over 2020.

Recurring revenue now accounts for 88% of total Sage sales, up from 85% this time last year. Software subscription sales jumped by just over 25% to £582 million. 

But accompanying comments highlighted a halving in new customers over April compared to prior management forecasts, as the impact from Covid-19 begun to take hold. Some customers had been deferring purchase decisions.

Despite the strong first half, the board now believes that it is too early to estimate with confidence the impact of the pandemic on the full year. 

Organic recurring revenue growth is now expected to be below its prior 8% to 9% estimate, with other revenues likely to fall over the second half, hitting the profit margin.    
ii view:

Sage employs around 13,000 people and serves over three million customers in 23 countries. It 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. 

The accounting software provider 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 Sage Business Cloud.

For investors, Sage is a class act, and a 2.5% increase in the dividend payment is not to be ignored given the extremely tough economic backdrop. That said, a forward price/earnings (PE) ratio comfortably above the 10-year average suggests the shares are not obviously cheap. 

Positives: 

• Recurring revenue now represents 88% of total revenue (FY18: 82%)
• Progressive dividend policy

Negatives:

• Cautious accompanying management outlook comments 
• Australia and Asia delivered a total 2019 revenue decline of 2%, with Asia dragging on growth

The average rating of stock market analysts:

Sell

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