Sage faces a growth challenge in face of competition - Deutsche

Sage will find it challenging to meet its full year targets, reckon analysts at Deutsche Bank, after a weak first quarter and growing competition from the likes of Quickbooks and Xero.

DB, which maintained its 'hold' rating and 740p target price, said organic revenue growth of 6.3%, with 7% growth in recurring revenue, was due to "sales execution issues" and subscription growth slowed to 26% from 30% the prior year.

Management, which blamed the shortfall on a training initiative across the sales force which cost around two weeks of lost productivity, reiterated full year guidance of "around 8% organic and around 27.5% organic operating margin" but said the first half would be closer to 7%, with flat margins year-on-year, which analysts said left the second half "looking particularly challenging".

As a reminder, the analysts noted that Sage changed the 'organic' reporting metric at the end of the last year, with the current definition including the impact of the Intacct and Fairsail acquisitions, along with the US Payments divestment.

Estimating these collectively add around two percentage points to the top line versus last year's reporting metric, on which Sage managed 5.9%, therefore, organic growth has actually declined by around 1.5pp on an 'apples to apples' basis.

"While sales execution may have been a significant factor, competition at the entry level remains tough - Quickbooks continues to discount heavily and both Quickbooks and Xero continue to invest in product innovation, with our channel checks suggesting users now see Xero in particular as more of a 'junior ERP' suite," the research note read.

"Customer and accountant channel feedback uniformly suggests both platforms are considered superior to Sage One and in some cases Sage 50, particularly at the low end, where the significantly more attractive price points are appealing for legacy Sage 50 users.

"This is the first we have heard of sales execution issues in the Sage 50 base, which we believe likely represents ~20% of group revenue and so if share is being eroded at a faster pace than in previous quarters, this is clearly cause for concern."

With little detail given by management around Sage One, other than to say that the focus remains more toward ARR than subscriptions, the analysts felt this suggested that recent efforts to increase pricing to more reasonable levels are constraining subscription growth/driving churn, in line with the experience in 2H17.