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.
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.
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