Sage confident of reviving growth plans in second half

The FTSE 100 outfit, which was hit by "inconsistent" execution of its new strategy to grow recurring revenue from its cloud-based software suite and some contract slipping in the Middle East and USA, reported an underlying operating profit down 0.7% to £222m. Underlying earnings per share were up 1% at 14.25p.

Having impressed investors and analysts in January's capital markets day before two months later being forced into an embarrassing profit warning, chief executive Stephen Kelly insisted the major market opportunity remained and was "unchanged", with Sage's Business Cloud "the most comprehensive cloud platform in the market to capitalise on this opportunity".

He said the growth to £908m of organic revenue in the first half was around £5m below management's expectations, due to "slower and more inconsistent sales execution than we had planned for" but he and his team have already started carrying out "robust plans" to fix execution issues in the UK in order to accelerate growth through recurring revenue throughout the rest of the year and beyond.

Profit margins are another key component of Sage's medium-term growth aspirations, with no change to guidance for organic operating profit margin to reach "around 27.5%" for the full year and remain above 27% in coming years on the way to reaching a long-term aim of 30%.

For the first half, underlying operating profit margins slipped 80 basis points to 24.5% as Sage front-loaded investment but reduced general admin expenses to 13.8%. Management expected it to recover to around 30% in the second half, as was seen last year.

At the statutory level, revenue was up 7.1% at £899, with operating profit up 3.1% to £186m, profit before tax shrinking 5% to £171m and EPS down 7.6% to 12.5p. The interim dividend was increased 8.2% to 5.65p as underlying cash conversion came out at 99% to support free cash flow of £157m. Net debt was down to £744m from £794m at the end of December.

Operational execution for the majority of geographies was said to remain "robust" with particular success in North America where 10% organic growth reflected progress across USA, Canada and with Sage Intacct, balanced by slippage in Enterprise Management formerly known as Sage X3 contracts in the USA. Much of the slippage is expected to be recovered in the second half.

Sage shares picked up a penny and a half to 638p in early trading on Wednesday.

"Sitting behind the headline number is the interplay between subscription growth and software and software related services growth," said analysts at Shore Capital, with software subscription growth relatively weak at 25.3% versus 30.6% a year ago, whereas SSRS growth was strong at 7.1% versus a decline of 7.3% this time last year.

"At a group level the increasing penetration of software subscription revenue to 44% of total revenue (37%) and recurring revenue of 78% of total revenue represents continuing progress against the strategy."