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Sage - 6% Organic revenue growth in Q3

George Salmon | 27 July 2016 | A A A
Sage - 6% Organic revenue growth in Q3

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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: 775.60 | Buy: 776.00 | Change 4.00 (0.52%)
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Sage released a Q3 trading update after the market closed on the evening of 26 July 2016. The shares were up 1% this morning.

  • Organic revenue growth in the quarter is 6%, with year-to-date organic recurring revenue up 10.1%.
  • Software subscription revenue has increased by 33.2% year-to-date, while upfront licence revenues have declined as the transition to subscription relationships progresses
  • Momentum continues in Europe and North America, with an improved performance from the rest of the world

Sage do not believe that the Brexit vote will have a material impact on the underlying operating performance of the business. Although a weaker Sterling has pushed up net debt from £404m to £442 over the quarter, the lower pound is expected to bring a slight tailwind for the rest of this financial year if current exchange rates prevail.

Steve Hare, Chief Financial Officer, remains confident in Sage's business model, and of meeting full year guidance of at least 6% organic revenue growth and 27% organic operating margin.

Our view:

Sage provides business management software such as accounting and payroll in countries all over the world.

By providing services that are essential to the day-to-day operations of its customers, Sage's services continue to be required until a customer goes under. We feel that this makes Sage's business model relatively recession-proof. Although there will always be competitors around, losing customers to the competition has not been a problem of late. Last year Sage had a high customer retention rate of 84%. The potential for problems when transferring to a new provider dissuade many, while the quality of the product on offer has also increased with the introduction of Sage One.

Take-up of Sage One has been increasing steadily, meaning that more customers are now on subscription-based payment models. This gives Sage high quality, recurring revenues.

The capital-light nature of the business means that Sage have strong cash flows, which have translated into a formidable track record of dividend increases. The company has increased the payout every year for the last two decades. With interest rates low and uncertainty around the global economy, Sage's potential to generate dividend growth with a resilient business model have led the shares to re-rate to 23 times earnings. Although this is around double what they traded on 5 years ago, we feel that neither a rate rise nor a significant improvement in global macroeconomic conditions looks likely in the near-term.

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.