ii view: Sage shares surge to 10-month high after beating estimates

This giant of the accountancy software world is growing its cloud-connected customer sales. Buy, sell, or hold? 

Full-year results to 30 September

• Total revenue up 5% to £1.95 billion
• Adjusted operating profit up 2% to £377 million
• Final dividend up 4% to 12.1p per share
• Net debt of £733 million, up from £247 million 

Chief executive Steve Hare said:

"Sage has had a strong year, making good progress as we deliver on our strategic priorities. We significantly accelerated revenue across all key products and regions, expanded our organic operating margin and delivered strong cash flow. 

“Sage Business Cloud solutions enable small and mid-sized businesses to streamline their processes and unlock productivity, helping them to achieve more with less. While we are mindful of macroeconomic uncertainties, I am confident that our resilient business model together with our strategy for delivering efficient growth, centred on our expanding digital network, will enable us to create further long-term value for all our stakeholders."

ii round-up:

Accounting and payroll solutions software provider Sage Group (The) (LSE:SGE) said today that full-year sales would beat City forecasts as demand for its cloud-based products continues to grow. 

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Total revenue climbed 5% year-over-year to £1.95 billion, with adjusted or annualised recurring revenue up 12% and ahead of analyst forecasts at nearer 10%. That pushed underlying operating profit up 2% to £377 million, with management expecting adjusted, or recurring revenue growth for the 2023 year ahead to exceed that achieved in 2022. 

Sage Group shares rose by more than 7% in UK trading having come into this latest announcement down by around a tenth year-to-date. Shares for database software provider Oracle Corp (NYSE:ORCL) are down by a similar amount during 2022, while rival accounting software provider Intuit Inc (NASDAQ:INTU) is down by over a third. 

Sage’s business cloud sales grew by almost a quarter to £1.26 billion, more than offsetting a 15% fall in sales of products with the potential to migrate to the data cloud of £422 million.  

Management’s focus on growing cloud revenues as opposed to desktop products increased Sage Business Cloud penetration to 75%, up from 67% in 2021. 

A final dividend of 12.1p per share means total payments for the year are up 4% at 18.4p per share. 

A first-quarter trading update is likely to be announced in late January. 

ii view:

Sage Group’s accounting, human resources and payroll software serves millions of Small and Mid-sized enterprises (SME) globally. Most employ less than 30 staff. North America generates its biggest slug of sales at just under two-fifths, followed by Central and Southern Europe at just under a third and Northern Europe at around a fifth. Group strategic pushes include building its cloud-based business and expanding its diversity beyond financials. 

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For investors, a highly uncertain economic outlook, including rising interest rates, could see some of its SME customer base go bust. Competition from the likes of Intuit also warrants consideration, as does an estimated price/earnings ratio above the three- and 10-year averages, suggesting the shares are not obviously cheap. 

On the upside, Sage is successfully growing its cloud-connected customer base, and diversity of both product and geographical region has been established, with its total addressable market in estimated to be more than $38 billion including over 67 million businesses. A progressive dividend policy which has seen consecutive increases made over more than 20 years is also noteworthy. 

On balance, and while some caution looks sensible given the uncertain outlook, investors are likely to remain patient with this well-managed business.  

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Uncertain economic outlook
• Valuation not obviously cheap

The average rating of stock market analysts:

Strong hold