Sage achieved 6% organic revenue growth in the first half, led by recurring revenue growth of 10%; and has maintained its full year guidance of at least 6% organic revenue growth and organic operating margin of 27%. The interim dividend rises by 8% to 4.80p per share. The shares were broadly flat in early morning trading.
Within recurring revenue, software subscription grew by 35%, as cloud based products continued to gain traction. This more than offset an 18% fall in Software license revenues, in line with the group's strategy to raise the proportion of higher quality revenue streams. Organic recurring revenue now accounts for 69% of the group total, up from 66% at H1 last year, with the contract renewal rate remaining stable at 84%.
Revenue growth in North America accelerated to 6%, whilst Europe grew at a pace of 7%, both ahead of International, where revenue growth of 5% fell short of the group's expectations.
The operating margin fell one percentage point to 25.4%, meaning organic operating profit grew by only 2% to £189m. This is due to the previously announced investment in sales and marketing which is heavily skewed to the first half. Sage remain on-track to secure annualised savings of c. £50m from General & Admin functions by the end of FY16 with a target payback of under two years.
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 2.3%.
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 10% in H1, with especially strong growth in subscriptions. At the H1 stage 69% 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 21.4x. But we think growth prospects for the business look encouraging.
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