Sage hits £1bn cloud sales – but the UK software giant divides opinion among investors | Business News

Since the takeover of chip designer Arm Holdings in 2016, months after the Brexit vote, the accolade of being Britain’s biggest listed tech company has fallen to Sage.

Yet the £7.5bn company, which provides accounting and payroll software to small and medium-sized businesses, has polarised opinions during recent times.

Terry Smith, one of the UK’s best-known fund managers, offloaded his flagship fund’s shareholding in Sage in May this year.

Terry Smith of Fundsmith
Terry Smith offloaded Sage shares earlier this year

But Nick Train, another very well-known fund manager, is a fan.

Sage is a major shareholding of the two major funds he runs.

At heart is the question of whether Sage, founded in Newcastle-upon-Tyne 40 years ago and which first joined the FTSE 100 22 years ago, would be able to migrate its business to a subscription model – something that would make its earnings more predictable and stable – and adapt to providing its services via the cloud.

Today was the company’s chance to answer that question.

At a headline level, operating profits during the year to the end of September were down 8% to £373m, reflecting the investment required to complete that transition.

But Steve Hare, the chief executive, insisted the investment was paying off.

Sage year-to-date share price chart 17/11/21
Shares are up by more than a third so far this year

He noted that subscription now accounted for 70% of sales, up from 65% at the same point last year, while 67% of revenues were derived from the cloud compared with 60% a year ago.

He told Sky News: “We’re driving up both subscription and the amount of our revenue that comes from Sage Business Cloud which has now reached that milestone of £1bn.

“Over the next 12 months we’ll continue to see that accelerating.

“Probably in three, four years’ time, I’d like to see that up at the 90% level so that the vast majority of what we’re doing in Sage is on subscription and is coming from the cloud.”

Mr Hare said this not only made Sage’s earnings more predictable, it also would also be more convenient for customers, who would have a better idea of what they would be paying for such services in advance.

He said future levels of spending in this field would increase at a slower rate than Sage expects to grow sales.

While that may go some way to satisfying the critics, Mr Hare has now set the company another challenge, which is to broaden its approach and the range of services it offers customers.

He added: “As we look both at slightly larger businesses, where the customer is largely the chief financial officer, down to the smaller sole trader, we’re looking across the whole of what happens in a back office – what is it that people spend their time on that has nothing, really, to do with running their business?

Pay slip
Sage’s payroll software reaches millions of employees globally

“We want to release people so they can run their business and in the case of finance people, that they can look forward rather than backwards – so it’s about offering, whether it be payroll, HR, accounting or anything to do with automating, making digital flows of activity in the back office.”

According to Mr Hare, this ought to be a virtuous circle.

By introducing new services, customers are freed up to build their businesses, while Sage in theory should be able to gain more insights into those customers – allowing it, in turn, to improve the customer experience further.

He told analysts today: “As the experience becomes richer, we attract more customers.

“This means more network activity and, therefore, more data.

“Through artificial intelligence and machine learning, more data powers the insights that we need to build more innovative and compelling customer experiences.

“This, in turn, attracts new customers to the digital network.

“The reason this is such an opportunity for Sage is that we already have access to huge amounts of data.

(FTSE 100 STOCK) An example of software from The Sage Group plc, a leading supplier of business software and services to 6.3 million customers worldwide..Picture date:Tuesday 17 May, 2011. See PA Story FTSE 100 Photo credit should read: Gareth Fuller/PA Wire
Sage supplies software used by millions worldwide

“So, for example, we estimate that over 10 billion invoices are sent and received by Sage customers annually.

“Sage Payroll and Sage HR solutions reach tens of millions of employees globally, including 25% of all employees in the UK.”

For now, investors seem satisfied that Sage is executing on its plans.

Shares of Sage rose by more than 8% – taking their gains for the year so far to 35%.

George O’Connor, of broker Stifel, said: “We continue to like the opportunity afforded by Sage’s cloud migration process…[and] the ‘opportunity’ in the white space increases post the pandemic – [as] more SMEs are created.”

But some followers argue the share price is up with events.

Martin O’Sullivan, analyst at the investment bank Shore Capital, said: “We doubt that Sage can deliver a positive surprise in the next six to nine months without remarkably strong new customer acquisition….while we continue to view Sage as a sound long-term holding as it continues its transition to software subscription, more patience may be needed.”

And the expansion mapped out today by Mr Hare may not be as risk-free as it sounds.

Stephen Kelly is chief executive of accounting software firm Sage
Former chief executive Stephen Kelly had to walk the plank four years ago

One or two investors will worry that expanding into new services means more mergers and acquisitions, which is inherently risky, even though Sage’s track record in buying and integrating businesses is reasonably good.

Mr Hare said today: “We’re looking at similar acquisitions to what we’ve done in the past…things in the kind of potentially hundreds of millions of purchase price.

“But we wouldn’t rule out something a bit more transformational if appropriate.”

A second concern may be that Sage’s customers do not take up the shiny new services it offers them as quickly as it would like them to.

Mr Hare’s predecessor, Stephen Kelly, had to walk the plank four years ago because it was taking longer than expected to persuade Sage’s bigger customers, in particular, to move data from their own servers to the cloud.

So the UK’s biggest listed tech company may continue to divide opinions for a while yet.

Sky News

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