Sage starts to deliver

Sage’s (SGE) name has been popping up at sports event across the country this year to try and encourage smaller businesses to take up its accounting software. Some view marketing as a luxury, but Sage’s management see it as essential and, based on its recent full-year results, it seems to be working.

The headline figure is that annualised recurring revenue (ARR) rose 12 per cent to £2.03bn. This was driven by the addition of new customers, who added £180mn of new ARR. But new customers were also clearly happy with the product, given renewal rate by value rose two percentage points to 101 per cent. In total, 95 per cent of the group's organic revenue is now recurring.

Promisingly, the fastest-growing segment is cloud native – which was driven primarily by the success of Sage Intacct – its US-based cloud accounting software. Recurring revenue from cloud native solutions grew 41 per cent, with cloud native ARR growing £146mn, up from £107mn last year.

Sage Intacct's US revenue rose by 31 per cent year on year. This has helped drive overall North American underlying revenue growth of 12 per cent. North America is now both the fastest-growing and largest geography for Sage. This is promising given that the US’s economy currently looks a lot more robust than Europe and the UK.

The fear with Sage is that because it sells to small- and medium-sized businesses, a severe market downturn could remove potential customers. However, chief executive Steve Hare sees it the other way, and thinks a recession will encourage smaller businesses to invest in software to improve efficiency. He pointed to the fourth quarter, where Sage had its best quarter for customer acquisition, as evidence.

Off the back of these results, Morgan Stanley has increased its 2023 organic revenue growth forecast from 5.2 per cent to 7 per cent. In line with Sage’s guidance, Morgan Stanley is also expecting organic margins to increase to around 22 per cent by 2025 as Sage benefits from its scale.

This certainly looks like a step change in the company’s prospects and the forward consensus PE ratio of 24 doesn’t look prohibitive given the growth prospects in North America. We stick to Buy.

Last IC View: Buy, 667p, 13 May 2022