Sage could be a pick for the Brexit worriers
Published 06/06/2016 | 02:30
Sage Group, the Newcastle-upon-Tyne software giant, sticks in my mind for a number of reasons.
For a start, Geordie land is not the first place you would think of if you are pondering software development and technological innovation.
But my better reason for remembering Sage is that I recall it being named by the British press as the best performing share of the 1990s. For dyed-in-the-wool share punters, these are the things you don't easily forget.
I started thinking about Sage again in recent months as the business pages became cluttered with the seemingly endless claims and counter-claims over Brexit.
Sage has expanded its international dimensions so much (including an operational surge in Ireland) that it seems prepared for the worst of what the UK electorate may have in mind.
The group is only 35 years old. Its initial emphasis was on providing software packages for the smaller firms. Today, it is one of a small number of technology companies in the FTSE 100, is valued at £6.6bn (€8.4bn), and employs 13,000 with customers in 23 countries worldwide. Its Irish operation employs 300, with Dublin one of two global customer service hubs.
The company generates its sales from what it terms the 'Golden Triangle' of accounting, payroll and payment processing. It reports its revenue stream under the headings of recurring, software-related services and processing.
Recurring revenue is Sage's largest, generating £950m (€1.2bn) globally from activities like maintenance, servicing and subscriptions. Software and related services income of £290m (€370m) is derived from customer training, implementation of services and licences. Processing is the smallest contributor at £160m (€204m) to revenues and includes payments or payroll.
Europe is Sage's largest market with over half of total sales and accounts for £560m (€715m) of recurring income. The US accounts for almost one third of total revenue.
Sales of £1.4bn (€1.8m) showed an increase of 6pc in 2015 and operating profits are up 8pc to £380m (€485m). Revenue and operating profits in the last 10 years both show an increase in excess of 60pc.
The company's margin continues at 27pc, helped by revenue growth and cost discipline. As part of its growth strategy the company recently bolted on Fairsail, a UK cloud developer for mid-sized companies, which follows the purchase of Pay Choice, a US provider of payroll and HR software.
The good news continues in the latest half-year figures. Revenue growth continued but operating profits were down slightly by 2pc. Having dominated the accounting and payroll market for some time, Sage is under pressure to compete with web-based rivals like Intuit, IBM, Xero and Amazon. As a result, the group has undergone a strategic overhaul and plans introducing new mobile and cloud products, hopefully without upsetting its existing customers. The plan involves changing the company's products into two categories; growth and heritage, with the bulk of the R&D being allocated to growth products.
Also included is a cost-saving plan of £50m (€64m) and a reduction in headcount but it will still pursue bolt-on acquisitions. As one executive stated, "acquisitions are in the genes".
The company intends moving away from one-off software sales and licensing to subscriptions, giving it a better income stream. These changes when implemented will significantly change the shape of Sage.
In anticipation, investors have bid the share price to £6.13, not far from its 10-year record of £6.40 achieved earlier this year. While investors are pleased that dividends have increased every year since 2000, Brexit, as mentioned earlier, is a worry. Regrettably, it is hard to recommend the shares at this time and an unwieldy price/earnings multiple of 36 doesn't much help. While the company is performing well, its share price has run ahead of itself. Sage is a resilient company, but expensive.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.