Sage on course for double-digit revenue growth

The latest trading update from Sage (SGE) reveals that the accounting software company maintained its sales momentum through the final quarter of 2023, enabling it to reiterate full-year guidance of double-digit revenue growth.

In the three months to December, its total revenue grew 10 per cent to £573mn while its cloud computing business grew revenue by 18 per cent. This growth was driven from North America, where revenue was up 13 per cent to £259mn, with a “good performance” from Sage Intacct, the American cloud software company that is acquired in 2017.

There had long been questions over whether Sage would be able to successfully transition its legacy business to the cloud. In his annual letter at the beginning of 2021, Fundsmith’s Terry Smith said the fund was waiting to see “whether the new management team can make the product fit for purpose in the age of the cloud and subscription software and compete effectively with those who can”. 

The last 12 months has proved that it can. Growth has accelerated from the same period last year, when annual organic revenue increased by just 5 per cent. At the same time, recurring revenue growth has accelerated from 8 per cent to 11 per cent.

There is also room for margin expansion as the business continues to scale. In the 12 months to September, the underlying operating margin grew by 1.4 percentage points to 20.9 per cent. However, the fact its gross margin settles around 90 per cent shows it has low variable costs, which suggests it could benefit from operational leverage if it can maintain its double-digit growth.

Valuation is the only issue now, with the market swinging from scepticism to bordering on overconfidence. Sage’s share price has been rising faster than its earnings expectations, meaning it is now trading on a forward price/earnings (PE) ratio of 31. Rather than simply hope, the market now expects this double-digit growth.

Last IC view: Buy, 1,139p, 22 Nov 2023