ii view: software giant Sage punished for sales slowdown

First-half results to 31 March

• Total revenue up 8% to £1.24 billion
• Adjusted operating profit up 16% to £288 million
• Interim dividend up 7% to 7.45p per share
• New £200 share buyback programme
• Net debt up 32% to £976 million from late September

Chief executive Steve Hare said:

"Our performance reflects the strength of our accounting, HR and payroll solutions, underpinned by ongoing investment in our network platform."

"Small and mid-sized businesses continue to adopt digital technologies to become more productive and efficient. I am confident that our proven strategy will deliver further long-term value to all our stakeholders."

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ii round-up:

Sage Group (The) (LSE:SGE) today detailed half-year profit that beat City forecasts and a new £200 million share buyback programme. But the accounting software provider also flagged a more volatile and uncertain macroeconomic environment, with recurring revenue growth also slower than the previous six-month period.

Growth in first-half sales to late March rose 8% to £1.24 billion, driving adjusted profit up 16% to £288 million. Analysts had forecast profit of £282 million. The Newcastle headquartered company continues to expect growth in full-year organic revenue of 9% or more, but with growth in adjusted annual recurring revenue for this latest period slowing to a gain of 10% from 10.5% in the second half of 2024.

Shares in the FTSE 100 company fell 5% in UK trading having come into these latest results up 7% over the last year. That’s ahead of a 1.5% gain for the FTSE 100 index. US rival and owner of QuickBooks, Intuit Inc (NASDAQ:INTU), is little changed over that time. 

Sage’s accounting and payroll solutions software is used by millions of small and medium sized enterprises (SMEs) across the world. 

Sales of the group’s software located at datacentres or in the Cloud rose 13% year-over-year to £1.02 billion. Other customers continue to use desktop or local server located software. 

The software giant flagged the rollout of its Sage Copilot tool, the group’s AI-powered assistant and now available with key products in the UK, US and Europe to aid productivity and customer insight. 

An interim dividend of 7.45p, and payable to eligible shareholders on 27 June, is up 7% from a year ago. The new £200 share buyback programme follows on from a previous £400 million programme. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Sage shares post the news, flagging a fair value share price of 1,485p per share. A third-quarter trading update is scheduled for 30 July. 

ii view:

Began in 1981, Sage today employs over 10,000 people. North America generated its biggest slug of sales in its last financial year at 45%. That was followed by the UKIA region, comprising Northern Europe (UK & Ireland) and Africa & Asia Pacific, at 29%, with European sales the balance of 26%. Sage’s strategic focuses include building its cloud-based business and expanding its diversity beyond financial accounting.

For investors, a slowdown in adjusted annual recurring revenues could suggest increased customer caution against a backdrop of trade tariff uncertainty. The tough economic backdrop, including raised National Insurance contributions in the UK, could see some of its SME customers not surviving. Competition from Intuit and even other business admin software providers such as Workday is not to be ignored, while a forecast one-year price/earnings (PE) ratio above the 10-year average may suggest the shares are not obviously cheap.  

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On the upside, growth in revenues and the operating profit margin continue to be expected over the full year. Investment in AI powered tools is being made. A diversity of both product and geographical region exists, while more than 20 years of consecutive annual dividend increases leaves the shares on a forecast dividend yield of around 1.7%. 

In all, and despite ongoing risks, this well managed UK tech giant looks to remain deserving of its place in diversified investor portfolios. 

Positives: 

• Product and geographical diversity
• Progressive dividend policy

Negatives:

• Uncertain economic outlook
• Subject to currency movements

The average rating of stock market analysts:

Strong hold