2nd May 2018 13:26
LONDON (Alliance News) - Shares in Sage Group PLC were higher on Wednesday as investors overlooked the accounting software firm's weak first half performance, opting instead to focus on its self-help measures and the service-as-a-subscription growth opportunity ahead.
Sage shares were up 1.1% at 643.20 pence on Wednesday.
Last month, Sage lowered its expectations for full year organic revenue growth, citing "inconsistent" operational execution.
The company said it would now be expecting organic revenue growth for its current financial year ending in September to be around 7.0%, compared to the prior guidance of 8.0%, though its guidance for the organic operating margin was unchanged at 27.5%.
The Newcastle-headquartered group had blamed a decline in recurring revenue growth to 6.4% compared to 11% the year before and contract licence slippage in its Enterprise segment in the US and Africa Middle East segments for the profit warning.
On Wednesday, Sage reported 6.3% growth in organic revenue in the half-year to March 31, slowing from 7.4% the year before. Recurring revenue growth rose 6%, decelerating from last year's 11%, more or less in line with the previously flagged slowdown.
Sage again blamed "inconsistent operational execution" for denting its revenue growth, particularly in the UK, as well as the flagged "contract licence slippage" in its Enterprise division.
The company's woes stem from its problematic attempts to convert its small business customers to subscription-based services in order to provide a stable stream of revenue.
Sage said the "root causes" of the execution issues have been identified and management has "already made changes" in order to drive subscription-based revenue.
In a bid to change its fortunes, Sage on Wednesday said that since April 13 around 30 senior executives have left the company. The move was taken in order to simplify the organisation, speed up decision making and improve accountability, it added.
"A modestly positive market reaction reflects relief that the company is addressing its problems and also that guidance has not been reduced further since last month's downgrades," said AJ Bell investment director Russ Mould.
At its Capital Markets Day earlier this year, Sage set out is aim to launch its Sage Business Cloud offering which it said remains "the most comprehensive cloud platform", and that the business opportunity remains significant.
Sage said its total addressable market has a value of USD28.00 billion, with 82 million businesses. In addition, competition in this area of the technology marketplace is fragmented and localised and there is no consistent global competitor.
The market is anticipated to grow at 7% in financial 2018, supported by growth in cloud software of 13%, Sage added.
The group said it its well placed to capitalise on this evolving sector of the technology market, with the shift to the cloud, artificial intelligence and other technology disruption now accelerating in growth and consolidation.
"Over the next three years, management expects recurring revenue to increase from 78% of total revenue to between 85% - 90% of total revenue, driven by subscription, with the remainder comprised of services and processing revenue. Sage has also guided that over the next three years, Sage plans for organic revenue growth to reach 10% on a sustainable basis, under-pinned by Sage Business Cloud as it is rolled out into all regions," the company said.
Sage acquired US cloud financial management services provider Intacct Corp for USD850 million in July 2017.
The company said Intacct has continued to grow strongly, with organic revenue growth of 26% in the first half of 2018, supported by recurring revenue growth of 28% and an accounting rate of return of 31%.
"The rolling mid-term guidance remains that organic revenue growth will reach 10% on a sustainable basis and organic operating profit margins will be at least 27%. Further cost savings of 500 basis points will be delivered over this period and either reinvested for growth or realised as an increase to operating profit margin. Over the long-term, Sage has an aim of achieving organic operating profit margins of at least 30%," the company added.
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