FTSE 100 enterprise software company Sage (SGE) faces has an interesting puzzle to solve as it closes in on its full year end in September and moves into the 2022 fiscal year.

Does it continue to push for growth or does it try to rebuild profit quality and improve operating margins?

Sage provides an array of software suites that are key to the day-to-day running of a business. These include things like accounting (where it cut its teeth), human resources and other business applications for small and mid-sized firms around the world.

Today, more than 13,000 staff support millions of entrepreneurs across 23 countries.

AIMING FOR THE CLOUD

The emergence of cloud computing means Sage is trying to strategically shift away from licence sales and professional services revenue, and to increase its focus on subscription revenue. It is also trying to simplify the business and its product suite, so investors can expect an active divestment programme to be ongoing.

Today’s third quarter update (to 30 June) shows plenty of promise with recurring revenue momentum continuing to build, with the company now steering the market to anticipate recurring revenue growth towards the top of the 3% to 5% range guided at half-year results in mid-May, perhaps a little bit more.

For the third quarter, recurring revenue grew 6.1% to £409 million, or 5% up at £1.220 billion in the nine months to date, including an anticipated 18% decline in other software and software related services and processing revenue to £109 million.

PROFITABILITY PRESSURES

Yet operating margins need repairing too. A few years back the company worked on operating margins of 27% to 28%, with ambitions to push that beyond 30%. The latest margin figure (at the half-year stage) stood at 20.2%.

Sage still believes that 30% is possible down the line, but if it focuses too much on this metric it runs the risk of losing traction with new customers at a time when new cloud-only operators such as Xero and Kashflaw, not to mention its main rival Quick Books-owner Intuit, is intense.

As Megabuyte analyst Lee Prout said today, ‘does it look to accelerate organic growth further or look to recover margins, or aim for a mix of the two?’

Investors seem just as stumped, hence the share price’s meek reaction, down 0.8% to 691.2p, valuing the business at £7.25 billion.

READ MORE ABOUT SAGE HERE

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Issue Date: 29 Jul 2021