Morningstar | Sage Reports Solid First Half; Software Subscription Migration Remains Focal Point; Shares a Premium
Sage reported a solid first-half performance as the company continues to make its shift to cloud connected and/or native recurring revenue products. The first-half announcement was another good chance for relatively new CEO, Steve Hare, to outline his vision for the firm. Hare noted that Sage would be laser focused on three strategic initiatives: customer success, colleague success, and innovation. We remain cautious over the speed at which the firm can make the transition to a full-fledged cloud connected provider of software given prior underperformance and management turnover. However, with Sage noting some outperformance versus expectations in its recurring revenue line and underperformance in its SSRS and processing revenue line (perpetual license sales business) in the first half of the year, we think this could be a positive early illustration of a faster-than-expected migration. Management reiterated its full-year guidance of recurring revenue growth around 8%-9%, SSRS and processing revenue flat to down mid-single-digits, and an organic operating margin within 23%-25%. With the first half performance tracking near our expectations, we reiterate our GBX 615 fair value estimate for this narrow moat software provider. With shares surging since being in 4-star territory last October, we’d suggest a wider margin of safety before investing new capital in Sage.For the first half, statutory revenue rose 6.4% year over year to GBP 957 million. The firm’s total recurring revenue grew 10.2% to GBP 779 million and was underpinned by 28% growth in software subscription revenue as customers move to cloud subscriptions (other recurring revenue attached to license sales declined 10%). While the firm continues to underperform in the important U.S. and French markets, we are cheered by the increasing penetration of recurring revenue (now 83% of total organic revenue) and software subscriptions (up to 52% of total organic revenue from 43% this time last year).
Management used the first-half call to outline its capital allocation policy. First and foremost, the firm remains dedicated to organic investment to drive the ongoing SaaS migration, which we think makes the most sense and remains a key long-term success factor as Sage contends with cloud-native competitors across the globe. To support further success Sage will also consider more bolt-on complementary technology acquisitions, retain its dividend (in real terms), and possibly commit to more shareholder returns if or when excess capital arises.
From a margin standpoint, Sage’s organic operating profit margin fell 160 basis points year over year to 23.2%. The margin performance was in line with our expectations and reflected increased investment in the business. Also, there was an increase in the bonus provision and share based payments. We expect the margin to be around the guided range of 23%-25% for the full year.
Sage Group is a technology provider that assists to manage businesses of all sizes. Co. provides a suite of cloud business management solutions and services including accounting, financials, enterprise management, people, payroll, payments and banking, as well as marketplace apps that can be provisioned to match the exact needs of any business. Co. has three reportable segments in which it operates, being Northern Europe (the U.K. and Ireland), Central and Southern Europe (Germany, Switzerland, Poland, France and Portugal) and NorthAmerica (the U.S., Canada and North America Intacct).
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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