Join our community of smart investors

Sage investors cautious after sales downgrade

The accounting software group has cut its sales guidance for the full year by one percentage point to 7 per cent
April 13, 2018

Shares in Sage (SGE) closed the day 8 per cent down, after the accounting software group cut its sales guidance for the full year by one percentage point to 7 per cent. This stemmed from “inconsistent operational execution” during the six months to March. Translation: while two geographies underperformed, trading was generally good elsewhere. The two problematic regions were Northern Europe, largely the UK and Ireland, and Africa/ Middle East. Overall, organic revenue growth for the first-half came in at 6.3 per cent versus 7.4 per cent a year earlier, and software subscription growth was 25.3 per cent versus 30.7 per cent – below management’s expectations.

IC TIP: Hold at 617p

Northern European sales of high-recurring-revenue subscription products – largely cloud products – were lower than hoped. This contributed to an overall decline in recurring revenue growth to 6.4 per cent from 11.1 per cent. Meanwhile, the Africa and Middle East region endured some contract licence “slippage” for the group’s enterprise product. Essentially, some contracts took longer than expected to come through, but management says much of this work should be recovered in the second half.

The group also reported a lower organic operating margin of 24.5 per cent, down from 25.3 per cent, which it said is in keeping with its plans to front-load investment in the first half while also absorbing losses from acquisitions made in the 2017 financial year.

However, there were some positive signs. Sage’s software and software-related services growth was strong at 7.1 per cent, against a decline of 7.3 per cent the prior year. The Sage Business Cloud also continued to enjoy good annualised recurring revenues of more than £335m, representing a growth rate of more than half. North America reported a double-digit increase in sales, which the company attributed to progress in the US, Canada and Sage Intacct – a provider of cloud financial management solutions in North America. Central Europe and Australia traded well, and elsewhere, France returned to growth in the second quarter.

The news could be viewed in the context of general jitters about big software companies – on 19 March, peer Micro Focus (MCRO) saw its market value cut almost in half after it downgraded sales forecasts due to “largely one-off transitional effects” of its combination with HPE Software – the business it acquired for $8.8bn last September. Shares in cyber-security group Sophos (SOPH) have also faltered on inconsistent billings growth.