There is nothing terribly surprising in today's half-year figures from Sage (SGE). Headline revenues to end March rose 5% to £657 million, although add in asset disposals and stiff currency headwinds, the real top line reversed 7%. Underlying organic operating profits are up nearly 9% to £180 million.
What is surprising is the announcement that Guy Berruyer, the company's CEO since 2010, wants out. He'll be off at some point before March next year, creating an interesting poser for Sage. Does it repeat its traditional 'recruit from within' policy, in which case US chief Pascal Houillon is perhaps in the box seat, or does it choose to look for fresh blood from outside the Sage family, as many analysts have been calling for. This is a salient point in that the company's ultimate decision could dictate whether Sage sticks to its current cloud plans, or switches tack in the face of mounting competition. It looks to us that this known unknown is the root of today's near-6% share price slump to 397.5p.
Sage is one of the UK’s largest software companies, valued at £4.35 billion, and provides accounting, HR and related applications and services to small and medium sized businesses globally. But it has traditionally sold perpetual licences and is now under enormous pressure to embrace 'the cloud', and a software-as-a-service (SaaS) model.
This is an increasingly crowded space littered with young cloud specialists, such as Netsuite (N:NYSE) in the US, Kashflow and Freeagent here in the UK, and even New Zealand upstart Xero biting into its market share. Sage's answer is Sage One, yet this SaaS suite hasn’t really got going outside of the UK and is struggling badly in the US.
'Despite the positive moves on cloud strategy, Sage remains well behind many of its peers,' say analysts at IT consultancy Megabuyte. Now investors are faced with yet more uncertainty – accelerate its cloud strategy, try something else, buy something else, the options are multiple and the next year, until Berruyer goes, promises to be filled with more questions than answers.
Analysts are not particularly gushing about its immediate prospects. 'Sage is making good progress against its goals, but with the comparatives becoming more challenging, we still remain cautious about the group hitting its 6% organic growth target,' spells out Investec, 'while necessary investment in the business is likely to cramp margin expansion, in our view.' Investec has retained its 'Sell' rating and sees a 320p fair value for the stock, nearly 20% lower than today's level.
Even the more positive number crunchers at Panmure Gordon and Numis can't convince themselves to advise clients to do more than 'Hold' the stock.
Cash flow remains typically strong with operating cash flow at £197 million in today's figures while net debt at the end of March stood at £361 million, after slicing £23 million off borrowings. Yet Sage continues to face fundamental questions about its overall strategy and there seems little likelihood of answers at least until the CEO issue is sorted out.