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Sage Q1 - organic revenue up 6.6%

Charles Huggins | 27 January 2016 | A A A
Sage Q1 - organic revenue up 6.6%

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Sage Group Ordinary 1 4/77p

Sell: 736.80 | Buy: 737.60 | Change 0.40 (0.05%)
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The accounting, payroll and payment systems specialist has issued a first quarter trading update. Performance was in line with expectations with organic revenue increasing by 6.6%, led by good growth in Europe, balanced by a slower performance in the International region. Organic recurring revenue grew by 10.4%, driven by strong growth in software subscriptions (up 35.7% in Q1). Overall, the group remains confident of achieving its full year guidance of at least 6% organic revenue growth and 27% operating margin. The shares rose by over 3% in early morning trading.

Our view:

Sage generates prodigious cash flows and benefits from a large base of high quality, recurring revenues. The company is very shareholder-friendly - dividends have grown every year for the last two decades; with the shares currently yielding 2.4%.

Sage provides business management software such as accounting and payroll, which are essential to the day-to-day operations of its customers. It can be both difficult and risky for a business to change their accounting software provider, requiring the retraining of staff and smooth transfer of data from old system to new. This leads to a high contract renewal rate (84% last year) and makes the business relatively recession-proof.

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 more than 10% in Q1, with especially strong growth in subscriptions. At the full year stage 68% of revenues were recurring, and this looks likely to rise, given that growth in subscriptions.

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 20.9x. But few companies offer the prospect of such reliable growth.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.