Sage has released full year results. Organic revenue grew by 6%, with recurring revenue up 9%, driven by strong growth in software subscriptions and the roll-out of new products such as Sage One. Organic operating profit increased by 8% to £380m, and the organic operating profit margin rose to 27.1%. Underlying basic earnings per share increased by 12.6% to 25.00p, enabling the full year dividend to be lifted by 8% to 13.10p per share.
The outlook statement was positive but margin guidance was a little light of analysts' expectations; the shares fell by around 4% in early morning trading.
- Revenue in Europe grew organically by 5%, North America: +4%, International (Africa, Brazil, Australia, Middle East and Asia): +14%.
- Free cash flow increased by 29.2% to £296m.
- Contract renewal rate increased to 84% (FY14: 83%).
- Targeting at least £50m of run-rate annualised savings by the end of FY16, to be reinvested in growth initiatives.
- Expect to deliver organic revenue growth of at least 6% and organic operating margin of at least 27% in FY16.
We like Sage; it generates prodigious cash flows and benefits from a large base of high quality, recurring revenues. The company is very shareholder-friendly - dividends have been maintained or grown every year for the last two decades; and the shares currently offer a prospective yield of 2.5% (variable and not guaranteed).
A key part of Sage's strategy is to increase the proportion of recurring revenues, by encouraging its customers to sign up to a subscription-based model. The group appears to be making good progress in this regard. Recurring revenue increased by 9% in FY15 and now represents 68% of the group total, up from 66% in FY14.
Technology disruption is a risk in this industry, but Sage isn't sitting on its laurels. New products such as Sage One appear to be gathering momentum. The group is seeking to 'leap-frog' first generation cloud competitors through integrated latest generation cloud-platform products and through scalable digital distribution channels. Meanwhile, that large bank of recurring revenues makes it very hard for competitors to make significant inroads.
Following a strong run the shares trade at the top end of their historical valuation range, on a forward price to earnings ratio (P/E) of 20.6x. But few companies offer the prospect of such reliable growth. We feel in an uncertain economic environment, businesses with recurring revenues, robust balance sheets and strong cash flows are likely to remain in demand, although there are no guarantees.
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