A sunny outlook for Sage

According to technology research advisory firm Gartner, thanks to an attractive economic outlook global tech spending is expected to grow by 2.9 per cent this year following a marginal decline in 2016. Software in particular is expected to be a big beneficiary, with growth forecast at 7.2 per cent.

Of the 72m small and medium-sized businesses in the countries where Sage operates, only around one in 10 currently uses a purchased software solution to manage their accounting and payroll processes. The opportunities for growth are therefore considerable. Experts think that the majority of the increase in software spending will come from cloud-based solutions and the Internet of Things. Respectively, these are expected to grow at a rate of 17 per cent to 2018 and 34 per cent to 2020.

Sage has readied itself for the resultant opportunities. Its newly launched cloud accounting solution, Sage One, attracted 140,000 new subscriptions in the financial year to September 2016. For existing customers the group has also created connected versions of its market-leading products, such as Sage 50, Sage 100 and Sage 300.

Alongside product development, chief executive Stephen Kelly - who joined in late 2014 - has also led a revamp of the group's organisational structure. Services are now provided via subscriptions instead of the old licensing model, which while creating a short-term sales drag, is helping to drive long-term growth prospects, improve the quality of revenue and support margins. Indeed, 70 per cent of revenue is now recurring.

But the 2017 financial year has not got off to a flying start. Recent first-quarter results were disappointing, with organic revenue growth of 5.1 per cent below full-year guidance of 6 per cent. Recurring revenue growth also dipped to 9.6 per cent, from 10.4 per cent last year.

But quarterly fluctuations are not unusual for Sage. Mr Kelly said that revenue growth during 2017 would be "non-linear" when he forecast annual growth of 6 per cent. He and chairman Donald Brydon gave the company their vote of confidence on the day of the first-quarter results when between them they forked out £210,000 for 35,000 shares.

The medium and long-term outlook is still positive. The second half of the current financial year is expected to more than make up for a slack start. During 2017 Sage is expecting to make £50m-worth of cost savings, building on the £51m saved last year. General and administrative expenses, which were at roughly 19 per cent of revenues in 2016, are expected to be cut by 500 to 800 basis points over time. Underlying cash generation is strong and broker JPMorgan thinks that, assuming no large acquisitions, Sage should have net cash by early 2018, which could potentially lead to additional returns for shareholders.