EUR 850.00 For Business Accounts Only

Morningstar | SGE Updated Star Rating from 23 Nov 2018

Sage announced its full year fiscal 2018 results which were in line with our expectations. It has been a tumultuous year for the company with the firm’s transition to a cloud focused, subscription-based business model seeing some disruption along the way. With new CEO Steve Hare recently taking the helm, we expect Sage to focus on increased product innovation via elevated R&D spending, a concerted effort to ease the migration of users to cloud software products, and a simplification of the firm’s product portfolio. We have a cautious view on the success of such efforts though and want to see healthy ongoing adoption of Sage’s business cloud to get more comfort with the long-term success of the user migration. Inconsistent execution from the firm is still a concern and Sage’s turnaround efforts need to start baring fruit before we change our long-term view on the firm. To that end, we roll our model forward one year to account for the full-year result but leave our GBX 615 fair value unchanged on this narrow moat company. We think shares are trading at a discount although we caution investors that the success of the cloud business is anything but assured.

For the full year, statutory revenue rose 7.6% year over year to GBP 1.85 billion, while organic revenue grew 6.8% to GBP 1.82 billion. Sage’s software-as-a-service shift has resulted in 46% of total revenue coming from software subscriptions and GBP 434 million of cloud-related annualized recurring revenue. Cloud connected revenue surged 66% to GBP 280 million and cloud native revenue increased 30% to GBP 153 million, which underlies the firm’s continued push to cloud oriented products.

Issues that plagued the firm in the first half of the fiscal year are being addressed with management keenly focused on recurring revenue growth in the UK & Ireland and alleviating contract slippage within enterprise management. We see some positive early signs with better growth and improved forecasting accuracy in the company’s back half performance, which should help growth in fiscal 2019.

On the margin front, Sage’s organic and underlying operating margins were almost steady year over year, slipping only 10 and 20 basis points, respectively, to 27.8% and 27.2%. Excluding elevated SaaS-related expenditure next year, we expect margins to be stable in the near-term and forecast modest expansion over the medium-term due to efficiency gains and the maturing of the subscription business.