Since its creation in 1981 as a provider of accounting software for small and medium-sized businesses, Sage Group has grown through acquisitions. Last year it bought Intacct, a North American cloud-based financial software maker, for £627 million, its biggest purchase to date, and Fairsail (now Sage People), a British provider of cloud-based human resources software. However, those purchases have yet to provide the lift required for the company to meet its guidance of 8 per cent revenue growth this year.
Britain’s second biggest quoted technology player yesterday reported group organic revenue growth of only 6.3 per cent in the final three months of last year, the first quarter of its 2018 fiscal year. This included an increase in organic recurring revenue of 7 per cent, driven by a 26 per cent rise in subscription revenues. Traditional software and software-related services revenues increased by 4 per cent.
The Newcastle-based company had warned in advance that first-quarter growth may be soggy, but markets still seemed surprised and shares fell 6.5 per cent to 768¼p, with many investors presumably deciding to take profits after a 21 per cent increase in the share price over the past 12 months. Sage attributed the disappointing growth to heavy investment in training in the first quarter, which it said would delay sales into the second half of the year.
The training reflects the company’s metamorphosis into a cloud computing business. Its sales people are spending two weeks being re-educated about new products and charging structures as Sage moves to subscription-based cloud services, under which clients depend on remote servers hosted on the internet, rather than using servers on their premises. Steve Hare, chief financial officer, said the company expected to feel the benefits of this investment in sales training during the next three months.
Sage noted that its North America unit had performed well. Conversely, a disappointing performance in France, which continues to significantly underperform in comparison with the rest of the group, dragged down overall revenue growth. Part of the problem is that the French business has ceased recording an activation fee with each new cloud-based subscription, to bring it in line with the rest of the company’s practices.
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In its trading statement, Sage flagged that it expected an acceleration in growth throughout the year, including a stronger second quarter. Nonetheless, as analysts at Barclays pointed out, it will need a meaningful step up to an average growth rate of 8.6 per cent for the rest of the year if it is to achieve its 8 per cent target by the end of the year.
There’s an additional worry, too. Under Stephen Kelly, the chief executive introduced in November 2014, Sage has prioritised the migration of customers from maintenance and support plans to subscription-based plans. This produces less lumpy revenue, but over time also means that further growth becomes progressively harder to achieve because increasingly it requires a shift to genuine new business.
Sage will host a capital markets day in London today, at which its management is expected to lay out the next phase in its transformation plan, provide further detail about the introduction of the Intacct acquisition into Europe and profile some of the new staff who are steering its transformation. It also is likely to focus on cloud initiatives and how it plans to enhance its operating margin.
ADVICE Hold
WHY Management is confident of accelerated growth, but there remains a risk of competitors taking market share
Smart metering systems
The rollout of domestic smart meters to help consumers to monitor how much energy they are using has not been universally welcomed, but you won’t find Smart Metering Systems complaining. It believes that it is faced with a once-in-a-generation opportunity.
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Initially, the Glasgow-based company installed, monitored and maintained meters for businesses, but more recently it has moved into the domestic arena. It looks after more than 1.7 million assets and last month raised £150 million from shareholders to fund an accelerated rollout in the household market. It also has signed agreements to install devices on behalf of several challenger energy companies hoping to take market share from the traditional Big Six.
Analysts at Canaccord Genuity believe that SMS is on course to have a portfolio of about five million domestic meters, or about 10 per cent of the total installed in domestic premises, by 2020, which would enable its revenue to double to about £150 million, in turn generating profit of £52 million. They point out that SMS could reach those targets either through its own installations or potentially by acquiring meters that have already been put in.
As well as maintaining and repairing the devices on behalf of its customers, the company helps to process the data generated to examine how energy is used. It has just hired Kelly Olsen, formerly chief information officer with NHS Property Services, as a non-executive, who will head a new information technology committee to ensure that the company’s strategy in that area is correct.
SMS floated on Aim, the junior stock market, in 2011 at 60p; the recent fundraising was carried out at 690p a share. Indeed, the shares went on to peak at more than 874p last month, although they have lost ground since and in recent days have been below 800p. They fell 20p yesterday to 773p.
Customers tend to be “sticky” meaning that SMS has a solid, long-term outlook of recurring revenue. That and the experienced management team may be among the reasons why Canaccord has a £10 target price on the shares.
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ADVICE Buy
WHY The company is investing to grow and has a record of delivering results