Sage has rediscovered its mojo

Sunday, May 10 2015 by

Sage's Half Year 2015 results confirm that after a period of stagnation it has discovered new recipes to deliver growth.

Sage has suffered from a lack of revenue growth between 2009 and 2011. This has been due to a number of external and internal factors; recession in its key markets; changes to those markets; and unsuccessful diversification (CRM, US Healthcare).

Nevertheless, Sage is a highly rated stock and thus never looks like a bargain. If buying undervalued stock is your game then Sage is unlikely ever to meet your criteria. What Sage does offer is investment in a high quality business with an economic moat – it has strong defensive characteristics so the downside risk is limited.

Accounting software is not a discretionary purchase whatever the economic climate. Once its software is embedded into a business there needs to be a very compelling reason to go through the cost and pain of replacing it. There are always more pressing development priorities for a business than replacing your accounting software – it doesn't confer a competitive advantage. Sage thus has a solid revenue base, strong margins, generates good cash-flow and dividends. These characteristics are appreciated by Mr Market that prices Sage more like a bond than an equity. Sage's economic moat allowed it to continue to increase its dividends and buy-back shares through its period of stagnation whilst sorting out its problems.

Signs of transformation first became apparent early December 2013 as Guy Berruyer, the now x -Chief Executive, said:

"I am pleased to report a strong set of results, with good growth across all regions and our strategic initiatives progressing well. These results highlight the strong appeal of our offering to SMEs, great execution in delivering on our plans and the benefit of a clear strategy, which focuses on our most significant growth opportunities. The strategy is working and growth is accelerating. We remain confident of achieving our target of 6% organic revenue growth in 2015, and anticipate further progress during the year ahead."

With a target of delivering 6% organic growth, the acceleration to 4% up from the 2% near-stagnation previously, suggested a transformation was underway. However, the latest set of results for the half-year to 31st March 2015 confirms that Sage has indeed rediscovered its mojo and organic growth has returned.

Stephen Kelly, Sage's new Chief Executive Officer, said:

"We have delivered a good first…

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The Sage Group plc is a United Kingdom-based company, which provides integrated accounting, payroll and payments solutions. The Company also provides the option of solutions hosted locally and accessed on-premise. The Company's segments include Europe, which consists of France, the United Kingdom and the Ireland, Spain, Germany, Switzerland, Poland, Portugal and Sagepay; and International, which consists of Brazil, Africa, Australia, the Middle East and Asia. It provides solutions that help businesses of all shapes and sizes to manage accounting and finances, manage payments, manage people and payroll, and manage the entire business. Its accounting solutions include sage One, sage Live and sage X3. Its payment solutions include sage Pay and sage Payments. Its payroll solutions include sage One Payroll, sage 50 Payroll and sage X3 People. more »

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24 Posts on this Thread show/hide all

Maddox 20th Nov '15 5 of 24

Hi Guys,

Well the full year results will be out on the 2nd December - so we won't have too long to wait to see whether things are progressing as well as I hope.

Interesting article with Stephen Kelly on the 5th Nov:

'"Even now our growth in subscriptions is 30% plus, so we'll continue to see momentum and healthy growth and that portion of our business will grow faster. And what we've said on perpetual licences business from quarter to quarter is going to go up and down.
And some quarters it might go down."

"Generally the trend is good on licences and the really accelerated growth is on the subscription business. So we do this right and challenge ourselves pretty hard to say within that we want to maintain 28% margin. We are very profitable, create great free cash flow and progressive dividends compared to our competitors. The 28% operating margin underpins the business"

Sage, he says is not expecting a pinch.'

So I think there is cause for optimism, but we'll see....

Regards, Maddox

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Maddox 2nd Dec '15 6 of 24

These results show that Sage is performing well. The key metrics are:

>> Revenue growth target of 6% was met;

>> Operating profit £380m is up 8.3%;

>> Underlying eps 25p up 12.6%;

>> Dividend up 8% to 13.1p; and

>> Free cash flow up 29% to £296m (c. 21% of revenue).

Which on the face of it make the initial c.5% sp drop this morning look a bit excessive, even if you factor in that the analysts seem to have higher expectations than Sage is prepared to accept? Underneath these figures there is a lot of transformation taking place:

>> Move to subscription pricing that depresses revenue in the short-term:

>> Restructuring to become a Global business from a federated country- specific: and

>> Launch of new cloud-based products.

Breezing quickly through what is a huge amount of detail they appear to be making good progress on its transformation plan (as outlined in its Capital Market Day in June 2015). However, it’s still very much early days and there are up-front costs and problems and issues in some areas but also many signs that the strategy is sound, they are doing the right things and it appears to be working.

Regards, Maddox

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Maddox 5th Dec '15 7 of 24

A real roller-coaster of a results day - the shares falling ~35p c.5% on opening but then gradually recovered ending up 0.5p at 577p.

I think I understand what occurred. What I've posted above are the FD's presentation of the figures, but anyone looking at the RNS figures would see an unexpected drop in profits based on the statutory figs - hence the early sp reaction.

Under the required IFRS (International Financial Reporting Standards) treatment Sage had to net-off certain items such as £62m goodwill impairment relating to their acquired Brazilian operations. The goodwill impairment is a non-cash adjustment and in local currency terms Sage's revenue in Brazil grew 8%; but due to Brazil's economic uncertainty and the value of the Real the economic value of their operations has been reduced (i.e. impaired in the jargon). So, looking at the statutory operating profit rather than the organic profit Sage's profit has fallen.

Whilst I understand the rationale I'm not sure that taking these non-cash items through the P&L, in the manner IFRS requires, is particularly helpful - as we've witnessed here.

As I take close account of the cash flow I didn't see the confusion - if I'd better appreciated at the time the reason for the drop I'd have been tempted to take advantage to buy. Presumably IFRS will create similar opportunities elsewhere?

As I write, in what appears to be a delayed re-appraisal of the results, the sp has now bounded ahead to 611p.

Regards, Maddox

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Maddox 27th Jan '16 8 of 24

Q1 Trading Update today - basically in-line and on target (i.e. 6%, Op margin 27%), with Group organic revenue growth up at 6.6%. The transition to subscription billing and away from software licence sales is continuing, which has the effect of depressing revenue growth in the short-term. So, all good, no slip-ups and strategic plan being executed - just what I hoped/expected.

However, what is interesting is the market reaction to this update - sp up 37p to 604.5p (6.5%)as I write - against the backdrop of a very nervous market. It strikes me that the scepticism is waning and Sage's attractions are starting to become more apparent.

So anyone that took advantage of the recent turbulence to get in at the 550-570p range will find themselves with a nice short-term gain of 6% plus and the final dividend of 8.65p xd 11th Feb in prospect.

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Maddox 6th Jul '16 9 of 24

As Sage reaches 15 year highs (646p as I post) amid the post-Brexit turmoil thought it would see how the brokers are positioned(courtesy of Digital Look hTTp://

Strong Buy - 8(1)
Buy - 2(1)
Neutral - 5(6)
Sell - 0(1)
Strong Sell - 6(8)

The numbers in brackets are from 10 May 2015 (sp 543p) when I posted that 'Sage has rediscovered its mojo' hxxp:// So there has been a turnaround in the brokers' opinions. I'm wondering how many of the remaining brokers holding negative views will now factor in the weak sterling picture and revise their opinions?

Whatever, what we can be fairly confident about that is Sage's many customers will be unlikely to ripping out and replacing their Sage accounting packages and its international earnings will be more valuable in sterling terms. Whereas, if Sage manages to maintain its international growth momentum then it might overcome any slow-down in the UK and EU.

We'll be in a position to judge next month with the 3rd Qtr results (reported 22 July last year).

Regards, Maddox

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Maddox 26th Jul '16 10 of 24

Sage breaks 700p closing at 702.5p another high.

Q3 Trading Update (released at 5pm from Sage Summit in Chicago) - Sage on target with Group organic revenue increased by 6.0% in the third quarter, with growth of 6.1% for the first nine months of the year. So hitting their numbers whilst the conversion to Software As A Service (SAAS) - subscription pricing continues (up 33.2%).

Confident of achieving full-year guidance - at least 6% organic revenue and 27% organic operating margin. The H1 margin had slipped to 25% so the £50m cost reduction target in General & Admin expenses is coming through to get back to 27%.

No Brexit impact seen and consider Sage well placed to respond to any changes affecting their customers. Although, cannot be isolated from any general market slow-down.

So, on target and in-line, whilst the business transformation continues.

Regards, Maddox

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Maddox 15th Aug '16 11 of 24

Sage reports a data breach

There is a saying within the cyber security community 'that there are those businesses that have been hacked - and those that don't know that they have been hacked!' These announcements are unfortunately becoming a fact of business life, and destined to increase as mandatory reporting becomes the legal requirement.

Whilst, the news that Sage have suffered an internal breach of security is very disappointing it is unlikely this will cause a material cost to the business. Dido Harding CEO of TalkTalk was embarrassingly inept in handling the reporting their data breach incident last year - but long-term damage has been minimal and the share price has recovered.

It will be interesting to watch how well Sage respond and manage the PR. It is these, what I call, 'acid test' moments that provide a great insight into how good the management team of a business is. A serious challenge such as this, if well handled, can reinforce confidence that you can trust them with your personal investment in their business.

Sage opened nearly 5% down in response to this news but has recovered to 1.35% off at 729p as I write, so presenting a nice opportunity for a quick trade.

Regards, Maddox

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LongbeardRanger 16th Aug '16 12 of 24

In reply to post #146919

Hello Maddox,

Good call here, to say the least!

Looking back at my records, I bought Sage (LON:SGE) shares at the start of 2014, at around 340p, so have done pretty well so far. Things are, so far, turning out as I'd hoped - Sage has a very strong core business and looks to be managing the various technology driven changes quite well.

Obviously there has been significant multiple expansion in the last couple of years, so it could hardly be called cheap, but in this low interest, low growth environment I'm not sure it is expensive either. I'm not adding to my position at the moment, but not selling either.


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Maddox 17th Aug '16 13 of 24

Hi Phil,

Agreed, the impact of the transition to SaaS pricing must be starting to diminish and the new focus on cloud-based products and Global positioning of is a deft move. However, I was astonished to see Sage close 0.5p up on the day of the data breech - quite remarkable resilience.

If you haven't spotted it there is a very nice piece of detailed fundamental analysis by Phil Oakley You cannot argue with the numbers but I also like to take a strategic analysis approach to understand the underlying drivers and competitive positioning. I think that there is still more to come, so I will add on any fall-back in the share price in the wake of profit taking.

Sometimes it pays to buy expensive.....Sage is a case in point.

Regards, Maddox

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LongbeardRanger 17th Aug '16 14 of 24

In reply to post #147201


Thanks. I hadn't seen that analysis by Phil Oakley. I've had a quick look and it is quite thorough and interesting (as his analysis usually is) and takes a perspective on the financials that is quite rare IMO (with a focus on cash generation and returns on capital, DuPont analysis, etc) but which is the hallmark of quite a few successful investors.

I'll take a more detailed look at it over the next couple of days, but I do agree with you that such analysis should be accompanied by a strategic view of developments.

Incidentally, on data breaches, there was a high profile data breach at another of my holdings, Experian (LON:EXPN) , last October. They suffered a breach in relation to data they held on T-Mobile customers which they'd acquired as part of the contract vetting process. The T-Mobile CEO issued a very strongly worded statement:

I think EXPN was down something like 4% on the day of the news, but it's not noticeable now! In fact Experian (LON:EXPN) is up about 50% since then...

Now that doesn't mean that data breaches are irrelevant, of course, but it does suggest that the market is fairly sanguine about them. Of course, that may be wrong, but personally I think they are a risk that you just have to accept if you want to own companies that operate in these kinds of data-driven industries.

Incidentally, you say "sometimes it pays to buy expensive" and I agree with you. You've got to be quite sure you're getting quality, I suppose, but a long history of consistent returns and a degree of confidence in the strengths of the business model are helpful here in my view. 


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Maddox 8th Dec '16 15 of 24

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 results to suggest that the new strategy is beginning to work.

Regards Maddox

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herbie47 8th Dec '16 16 of 24

In reply to post #161710

Just had a look at Sage (LON:SGE) and saw this "The Sage Group plc ("Sage") notes recent media speculation and confirms that it is evaluating potential strategic options for its North American payments business, including a sale. There can be no certainty that this evaluation will lead to any transaction."

I have not been following Sage (LON:SGE) recently, is this why the shares have fallen back lately?

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Maddox 8th Dec '16 17 of 24

Hi herbie,

There is consolidation in the US payments market so there is a short-term opportunity to sell at an advantageous price. I'm not sure that strategically its wise, the synergy between accounting packages and payments is clear - the question is can you leverage it? Sage is certainly trying to - it bought another payments business (a payroll business) this year. So an opportunistic sale is not something that makes much sense - Sage doesn't need the cash and it casts doubt over the strategic thinking if its that fragile to someone with a cheque book , sorry check book.

As to the share price? Mr Market was offering Sage shares for 752p only two months ago and now only 627p - and yet the performance and strategic execution are on track as clear from these results!?! So it seems a market phenomenon - Financial Institutional switching back into mining stocks is one explanation - but who knows, who cares. What is significant is that the price drop has brought the valuation metrics back to roughly where they were back in early 2015 before they really took off. I'm thus more inclined to top-up as I don't see them getting much cheaper (they are never cheap) but I can see them regaining 700p.

Regards Maddox

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herbie47 8th Dec '16 18 of 24

Hi Maddox,
Many thanks for explaining. I will have a look at the price tomorrow. I used to hold shares years ago. I did look at them a few months ago but they had just shot up then.

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LongbeardRanger 8th Dec '16 19 of 24

In reply to post #161746

Hi Maddox,

Good analysis. I am still long Sage and like you, the recent fall makes me more inclined to top up. I too thought the recent results were excellent and am slightly surprised at the share price weakness. Quite a few so called "bond proxies" (Unilever, Reckitts, etc) have suffered of late, possibly due to expectations of rising interest rates and infrastructure investment in the US following Trump's election win, favouring cyclical businesses and undermining the "bond proxy" argument as such shares are, so the theory goes, less attractive in a rising rate environment. Personally I find the whole "bond proxy" argument pretty dubious in general, but particularly so for a business such as Sage which has big growth opportunities as you set out (though of course not without threats as well).

Re payments, I think Sage might perhaps struggle to ever achieve scale in this in the US. I view payments as slightly separate to the likes of payroll processing and am not sure there is necessarily huge crossover between those two areas.


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Maddox 8th Dec '16 20 of 24

Hi Phil,

I agree, I can't understand why you would buy bonds let alone a bond proxy. Its a recipe for getting slowly and predictably poorer.

Regards, Maddox

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herbie47 26th Jan '17 21 of 24

Any views on the 1st quarter trading report, out today?

I see a director has just bought 25,000 shares.

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Maddox 30th Jan '17 22 of 24

Hi herbie,

What is more interesting than the trading update is the share price reaction. Mr Market is in a fickle mood - any negatives and the sp plummets. However, their margin dipped and recovered last year and I have every confidence in them hitting their full year targets of 6% organic growth and 27% margin this year. As such I think that this is an opportunity to top-up. There were plenty of positive points too which Mr Market has ignored.

The other point of interest is their US payments business - its performance was one area of difficulty in Q1 and was already being considered for disposal. It's not clear to me whether this potential sale is opportunistic or whether its just not the right payments business for Sage?

There is also a wider strategic review of their banking and payments offering being headed up by Seamus Smith. Whilst it is clear that Sage believe that integration with payments is an essential part of their offering they are looking at whether they need to own the payments they offer or should they partner? They only currently offer payments in North America, UK & Eire, and South Africa - so how do they address the rest of their territories?

The payment market topography varies widely by geographic market and sector - so buying businesses that fit looks like a challenge - whereas partnering seems more realistic and expedient. Anyway all fascinating stuff for a former payments strategy consultant (which is what I used to be) but I don't think much short-term impact on the p&l.

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Maddox 29th Jul '17 23 of 24

Some very positive aspects to this latest Trading Update from Sage IMHO.

Firstly, on the trading update Sage have reconfirmed their guidance for FY 2017 of at least 6% growth and 27% margin. Ok, no change so what?

Well what is interesting is that the full year targets are not changing even though they are spending $850m on a fast growing but loss making US Cloud Financial Systems business ‘Intacct’. One might have expected that this together with the funding costs and other two recent acquisitions might dent the results a tad – but no. Also, the US payments business now being disposed of has provided a further drag on growth. The implications of all this is that growth is accelerating but is being masked by the investments Sage are making.

Similarly, whilst not significantly impacting the top-line numbers the new Cloud products are gaining customers and move to SAAS pricing and service transformation are all proceeding well.

This situation is not likely to continue indefinitely at some point quite soon the revenue growth and margin improvements are likely to become clearly visible. When it does the current pause in the share price appreciation will end and a further re-rating is likely.

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Maddox 16th Aug '17 24 of 24

Sage up 22p 3.22% to 705p as I post.

Strangely, this appears to be due to a change of heart by UBS analyst Michael Briest that has moved his recommendation to Neutral from Sell, although the price has already shot past his sp target of 680p!
Of course, its worth pointing out that anyone following Michael Briest's previous recommendations would have missed out on a 90% share price gain and 103% total return including dividends in under 3 years. And he's still only moved to 'neutral'?

Regards Maddox

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