The UK’s largest software company Sage (SGE) remains trapped in a groundhog day scenario, with its cloud-transition again costing investors in the near-term, and little to lift spirits in the foreseeable future.

Today’s full-year results showed decent resilience given the huge impact the coronavirus has exerted on its core SME (small and medium-sized businesses) market. Yet the steer for organic revenue growth and margins knocked investors sideways, sending the stock tumbling 13% to 589.6p, lows not seen since March.

That made Sage the FTSE’s biggest Friday loser.

Organic revenues grew 3.7% to £1.77 billion while recurring revenues grew 8.5% to £1.59 billion, in-line with the 8% to 9% guided at the start of the year.

But organic operating profit fell 3.7% to £391 million, reflecting heavy ongoing investment in cloud services and a £17 million bad debt provision for Covid-19.

‘All things considered, Covid-19 has not had as much of an impact on Sage as the group was fearing with the business managing to grow recurring revenues in line with expectations set at the start of the year,’ pointed out Megabuyte analyst Cameron Naylor.

Underlying cash conversion was 123% supporting free cash flow (FCF) of £382 million and a 2% increase in the dividend.


But cloud investment continued to take its toll on profits, with organic operating margins of 21.1%, down from 23.8% the year before. It wasn’t so long ago that Sage was running on 27%-plus operating margins and talking about getting to 30%.

Investors can expect worse before it might get better. Organic operating margin is expected to be up to 3% percentage points lower this year, which will surely see 2021’s 22% consensus forecast ripped up.

‘There are once again signs that Sage is needing to play catch-up to keep the business moving forward with margins expected to dip in the current year as a result of required investment,’ said Megabuyte’s Naylor.

The analyst poignantly adds that while Sage margins decline, those of some of its software-as-a-service (SaaS) peers continue to rise, ‘highlighted by Xero’s results last week, which achieved an EBITDA margin of almost 30% in its first half to September 2020.’

Margins from its US peer Intuit were 25% in its latest update.


‘The bigger picture is still fuzzy’, said Stifel technology company analyst George O’Connor on Friday. ‘We have expressed concerns about the outlook for UK SME tech spending given Covid and that many spent on the government’s making tax digital programme last year’.

‘The macro uncertainty means that larger spend is likely to be deferred’, said O’Connor.

‘Sage remains a game of snakes and ladders for investors’, added Shore Cap’s Martin O’Sullivan.

‘Today represents another snake bite of reality around organic growth and margins.’

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Issue Date: 20 Nov 2020