Sage has hit its numbers again13 Dec 2016 10:32
Sage has hit its numbers again with this excellent set of results (full year to 30 Sept 16), the published highlights being:
• Achieved organic revenue growth of 6.1% (FY15: 6.0%) and the fastest rate of recurring revenue growth for a decade of 10.4% (FY15: 9.0%);
• Software subscription growth of 32.3% (FY15: 28.9%), in line with the planned transition and planned decline in SSRS revenue of 8.5% (FY15: decline of 0.7%);
• Customers embracing closer subscription relationships with 46% increase in software subscription contracts to just over one million (FY15: 690,000) and an increase in retention rates to 86% (FY15: 84%);
• Accelerating revenue growth in Europe, Africa and Brazil; slower performance in Asia (one off regulatory change in the prior year); growth in North America consistent with last year;
• Underlying cash conversion at 100%, supporting free cash flow of £254m and the 8% increase in full year dividend to 14.15p.
Sage is managing to maintain its performance whilst undertaking a major transformation:
>> Firstly, the conversion to Software-as-a-Service (SAAS) subscription pricing is continuing; and
>> Secondly, the new strategy for growth is reshaping the business quite dramatically.
SAAS pricing: Is very beneficial, customers like it and if fosters increased loyalty/reduces churn but at the cost of a short/medium term hit to revenue recognition. About 70% of revenue is now recurring and the growth rate is accelerating:
2013 – 6%, 2014 – 7%, 2015 – 9%, 2016 - 10.4%
So, at some point and it cannot be too far off this will drive up sales from its current 6% organic growth rate.
New growth strategy: CEO Stephen Kelly is making dramatic changes in pursuit of sales growth with 72% of the top leadership changed in the year. In Sales and Marketing, 300 staff left and 200 recruited with new skills in digital marketing.
The new strategy is a move away from being federated country–specific with many products to fewer global cloud-based products aimed at specific market segments – Start-up, Scale-up and Enterprise. The new entry-level mobile and revamped cloud-based products look attractive. To support this fewer regional language-specific centers will cover the globe. The cost savings generated, £51m p.a. so far, will be ploughed back into marketing and sales to target new customer acquisition.
My opinion: I like Sage’s existing attributes it has a strong economic moat, reflected in attractive margins and excellent cash conversion. It is the only global player in the SME accounting product market and so has the knowledge and expertise to cater to local tax compliance requirements. The new growth strategy makes sense with a new focus on start-ups and the opportunity to dominate this niche globally.
Whilst, it’s still early days and it is not yet reflected in the top-line numbers there is enough in these re
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