Join our community of smart investors

Sage acts after sales issues

The accounting software group has seen around 30 senior executives depart since April’s trading update
May 2, 2018

Disappointing news from Sage (SGE) had already been assimilated into the accounting software group’s share price, after it cut full-year organic sales guidance on 13 April. It was perhaps some relief for investors that there were no further downgrades within the official half-year numbers, although a 5 per cent dip in pre-tax profits was unwelcome. Sage offered more detail on the “execution issues” that impacted the first-half performance, and outlined an action plan – the shares ticked up in reply.

IC TIP: Hold at 658p

Organic revenue growth of 6.3 per cent to £908m for the six months to March was about £5m below management’s expectations – attributed to slower and less consistent sales execution. Specifically, the UK faced problems regarding the sale of cloud-connected products and bundled service offerings, which effectively constrained recurring revenue growth in the UK and Ireland. A growth rate of 6.4 per cent was well down on the 11.1 per cent comparative from a year earlier. Such service bundles have now been terminated.

As pre-announced, there was also “slippage” of contracts within Sage’s enterprise division in the Africa Middle East and US, although these should largely recover in the second half. Otherwise, North America traded well – enjoying double-digit growth buoyed by a strong contribution from Intacct, acquired last year. Other regions performed in line, or exceeded, management’s forecasts. And Sage Business Cloud, which launched last October, reported annualised recurring revenues of £336m, which up 57 per cent on a pro-rata basis.

Some may question whether Sage can feasibly achieve its mid-term target to sustain 10 per cent organic sales growth, and a 27 per cent operating margin. Taking “corrective action”, Sage is focusing on growing its subscription revenues to lift recurring revenues. That 'correction' extends to the departure of 30 senior executives since the trading update on 13 April, designed to “simplify the organisation” and accelerate decision-making – too many cooks, as it were.

Analysts at Stifel forecast adjusted cash profit of £552m with EPS of 33.9p for the year to September 2018, against £509m and 33.5p in FY2017.

SAGE (SGE)    
ORD PRICE:658pMARKET VALUE:£7.13bn
TOUCH:658-658.4p12-MONTH HIGH:825pLOW: 536p
DIVIDEND YIELD:2.4%PE RATIO:28
NET ASSET VALUE:109p*NET DEBT:63%
Half-year to 31 MarTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201784018012.65.22
201889917112.55.65
% change+7-5-1+8
Ex-div:10 May   
Payment:1 Jun   
*Includes intangible assets of £2.2bn, or 206p a share