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BT vs Sage: Where’s the spark?

Telecoms companies and payroll software providers should have had an excellent year, but growth at both BT and Sage remains slow.
BT vs Sage: Where’s the spark?
  • Sage revenues rose just 1 per cent in the six months to March 2021, despite lockdown demand for digital payroll software 
  • BT reported a decline in four of its five operating subsidiaries, but Openreach is thriving
  • Should these two companies be doing better considering the opportunities on offer in telecoms and digital software?

When the world went into lockdown in early 2020, investors looked to the US for the companies set to be the major beneficiaries. But many of us shrugged off their achievements: of course Zoom was going to thrive in an environment where everyone is working remotely. 

But capitalising on trends is not always easy. Just look at BT (BT.A) and Sage (SGE). Both of these companies’ recent financial results suggested that the pandemic fallout has been more of a hindrance than a help. On the face of it, that seems ludicrous: BT is a telecoms company which provides the infrastructure to connect everyone to each other (and their TVs); Sage offers digital accounting and payroll solutions to small and medium sized enterprises. The products and services offered by both businesses have been in huge demand in the last year. 

But in the 12 months to March 2021, BT reported a decline in revenues in four of its five operating subsidiaries. The consumer division was hurt by falling demand for sport packages and data roaming, while the enterprise business suffered as management at big businesses rethought the way they pay for telecoms. Sage also hinted that pandemic uncertainty had prevented its customers from making decisions about software investment. Revenue in the first six months of the 2021 financial year rose just 1 per cent.

BT external revenue by division (£m) MAR '16MAR '17MAR '18MAR '19MAR '20MAR '21
Consumer4,5334,8715,00010,58810,2869,788
Enterprise1,0385,0535,2575,9335,7895,340
Global6,5015,4795,0134,7354,3613,731
Openreach2,0422,0622,1452,2002,3592,488
Other2410832923
Total18,90924,08223,74623,45922,82421,370

But blaming poor performance on the pandemic - something that these two companies are not the first to do - is lazy. BT and Sage have failed to capitalise on the opportunity of the last 18 months because they are too old and cumbersome to do so. 

This is not a new issue for either company. BT has been forced to invest in the UK’s fibre connectivity by regulators who have perhaps been too lenient with it in the past. As it has creaked into gear, questions now loom whether it has left its investment too late. Virgin Media and City Fibre have been connecting individual homes to the fibre network for many years - selecting the parts of the country that are easy (and therefore not too expensive) to reach. The 25m homes that BT aims to connect to the full fibre network by 2026 are likely to be in many hard-to-reach locations. Investment in the expansion will not come cheap. 

And it is not the only massive telecoms company which has been spurred into action by the pandemic: Vodafone (VOD) increased its capital expenditure by €500m in the financial year to March 2021 and is “choosing to invest to grow faster,” according to Nick Read, chief executive. That may include investment in the UK’s full fibre networks where it is seeking partnerships, including with BT. 

Vodafone's financial results have been lethargic for too long - perhaps it needs to rethink its dividend
Year to 30 MarTurnover (€bn)Pre-tax profit (€bn)Earnings per share (c)Dividend per share (c)
201747.62.8-7.814.8
201846.63.915.915.1
201943.7-2.6-16.39.0
202045.00.8-3.19.0
202143.84.40.49.0
% change-3NANANA

Sage, meanwhile, has spent almost five years battling to shift its customers to its cloud-based services, which still account for just 65 per cent of group revenues. This is not the first time it has begun the relocation of its customers many years after its competitors - US accounting software group Intuit (US: INTU) began making money from more reliable subscription revenues many years before Sage managed it. 

The question investors must now ask is whether these companies are too cumbersome to capitalise on the opportunities of the future. 

BT: Dividend distraction removed 

BT spent over £1bn per year on dividends between 2015 and 2020 and the obsession with returning money to shareholders is one of the reasons why investment in future growth stalled. This issue has been removed - at least for now - as BT won’t resume paying a dividend until March 2022 at the earliest. Compare that to Vodafone (VOD) - which spent €2.4bn on the dividend in 2021 and is sitting on a net debt pile of €40bn - and BT looks almost lean. 

What’s more, the company’s painful pension deficit has now been revalued at £8bn, down from £11bn at the last triennial valuation. Annual top-ups of £900m in 2022, falling to £600m by 2024 still suggest the cash cost of the pension scheme is likely to be north of £1bn per year. But at least management can account for that within their spending plans. 

Elsewhere, the rollover of the £4.5bn Premier League broadcasting deal which is shared between BT Sport, Sky, Amazon (AMZN) and the BBC is useful as the company begins the sale process of its sports division. And the spectrum required to connect British mobiles to the ever-expanding 5G network has been completed, at a lower cost the BT had first feared. 

BT’s list of woes is undoubtedly smaller than it was when chief executive Philip Jansen took the help in 2019. And although the costs of providing super-fast connectivity are plain to see - capital expenditure was £4.2bn in the financial results and is expected to rise again to £4.9bn in the next financial year - the benefits of this investment are also evident. The rent which BT’s Openreach can charge broadband providers for fibre connectivity is significantly higher than what it can charge for ordinary cables - revenue from fibre enabled products was up 15 per cent in the year. We stick with our buy recommendation.

Sage: Is the moat drying up?

At Sage, the problems might be more permanent. Payroll management, HR and accounting solutions is a competitive landscape and Sage is having to spend more to win over new customers. And while in the past these customers were very sticky, the ease of use of some of the newer accounting and payroll systems means that transitioning to a new provider is not as hard as it used to be. Add in the fact that most software providers now sell via subscription - and therefore pay over time rather than upfront - and the protective moat which surrounds Sage may be getting smaller. 

It is true that the quality investment case remains intact, but there are signs of fragility in these numbers. Operating margins dipped to 20 per cent as the cost of expanding the business increased and customer retention by value fell below 100 per cent. Sage is still struggling to get moving in a dynamic, fast-moving market and its moat may no longer be enough to protect it from attackers. We move to hold.

NameAverage Operating Margin (%)5 year av. ROCE (%)5yr av. FCF (%)
Adobe29.519.9143.0
Experian24.619.6162.9
Intuit27.049.2133.4
RELX25.322.4132.9
Sage 23.719.1133.7