- Cloud migration continues to drag on operating margins

- Share price where it was in July 2016

- Income yield of 2.7% and 5% organic growth unlikely to attract investors

Enterprise software firm Sage (SGE) continues to find itself trapped in investment no-man’s land. Is it growth, is it income? no it’s Sage, to borrow the quotation from the 1966 Superman musical? ‘is it a bird, is it a plane? no it’s Superman.’

The Broadway showed bombed. Sage stock hasn’t, but it’s done precious little for six years now.

Sage is one of the UK’s largest software vendors providing accounting, HR and other business applications to small and mid-sized businesses globally.

The company’s strategy of recent years has revolved around transitioning away from licence sales and professional services revenue and increasing the group’s cloud-based subscription revenue.

Today’s half year results show organic revenues rose 5% to £924 million, within which recurring revenues grew 8% to £866 million. That puts it on course for annual recurring revenues of £1.78 billion, up 10% year-on-year, with subscription penetration six percentage points higher at 74%.


Progress, but at what cost? Cloud investment continues to take its toll on profits, with organic operating margins down again to 19.9% despite overall operating profit rising 4% to £184 million. Extrapolating that across the full year to 30 September 2022 implies £368 million, modestly below last year’s £373 million.

Back in 2018, operating profit was £427 million on a 23.1% margin, and it wasn’t that long ago that Sage was reporting 27% margins and ambitiously talking about getting to 30%.

In the meantime, analyst at Stifel are anticipating a full year dividend of 18.2p per share, up 2.8%, following today’s 6.3p proposed first half payout.

That would imply a 2.7% yield based on today’s 666p share price, not a great omen for either growth investors or income seekers.


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Issue Date: 13 May 2022