Sage Share Discussion Threads

[maddox] 12/2/2020 10:29

Unfortunately, 'stocktraker7' hasn't bother to read my preceding post - that's because they are only interested in promoting their twitter following. Don't bother clicking the link - nothing of interest.

[maddox] 09/2/2020 13:16

Phil Oakley runs his slide rule over Sage in this weeks Investors Chronicle:



Phil Oakley's article is four pages of very solid analysis. He concludes "Sage’s shift to cloud-based subscription services has yet to pay off. It needs to raise its game. If it doesn’t it could make an attractive takeover target."

As to whether Sage becomes a takeover target (he mentions Microsoft as a potential acquirer) I won't make comment - it's not a very predictable basis for investment. However, I do agree that the key to Sage's prospects are centered on whether it can generate organic growth.

Phil Oakley is very much a numbers guy - but I'm seeing more positive trends in what is essentially the same set of data. For example, he comments that the Q1 organic growth of 6.7% is modest, but from my view point, against fy 2019 of 5.6% and fy 2018 1.7% the underlying trend is clearly in the right direction.

He also highlight's the strong growth of Sage Intacct (28% in 2019) currently only available in the US but being rolled-out this year to the UK, Australia and South Africa. It is this product, aimed at mid-tier firms, that is helping drive the US division's organic revenue growth (11.8% Q1). Might it give a similar boost to organic growth elsewhere in the coming years? Admittedly, its very early days.

The impressive revenue growth of Intuit (Quickbooks) c. 15% and Xero c.30% make Sage's growth look pedestrian. However, these two firms are fighting it out at the entry-level, start-up end of the market: Here the acquisition costs are high and prices very low. Sage is deliberately avoiding aggressively competing directly here but rather focusing its investment on its higher price-point products. And despite its competitors' obvious successful growth rates Sage have repeatedly stated that they are not losing customers.

So, a solid piece of analysis from Phil Oakley, and certainly provided food for thought, however my reading is far more positive. IMHO I think that the organic growth will come through and there is a big global market to go for.

Regards Maddox

[maddox] 28/1/2020 13:35

Following the Q1 update it appears that Canaccord Genuity have upgraded SGE to a Buy with a share price target of 820p ('Neutral' and 770p previously).

Meanwhile three others have reaffirmed their recommendations - but have all increased their share price targets:

Deutsche Bank reiterates 'Sell' with a target price of 725p (650p)
Credit Suisse reaffirms its 'underperform' share price target 640p (610p)
Barclays reiterates 'Underweight' with a target price of 620p (580p)

So Canaccord has broken ranks, it'll be interesting to see whether we get other upgrades if the positive updates continue this year.

Regards Maddox

[maddox] 27/1/2020 14:00

Hi investorschampion,

Like to pick-up on a couple of points. Sage started on their transition to subscription pricing (from licencing) over three years ago and now have 61% penetration. So well down the road now.

The impact of transition is primarily a revenue hit as 12 months of revenue paid up-front becomes one month paid on a rolling basis. Sage has some off-set benefits against this as a portion of the new-subscribers were in fact off-contract using old versions of the software. In order to get access to the HMRC mandatory online submission functionality ('Making Tax Digital') functionality these businesses have to go on-subscription. Also, as the cloud-based subscription products have enhanced functionality there is effectively a price-hike built-in to adoption of the subscription service.

On the other hand, the margin reduction (increased expense) has been use to fund product enhancements and marketing. As it costs a couple of years contribution to win a new customer but that contract tends to rolls on from year to year - its a short-term impact for longer-term value creation.

As you say, this should lead to margin improvement in the future. Intuit's Operating Margin is 27.3% versus Sage 19.7% - so a good benchmark to target. Intuit is also far more highly rated p/e 46 and yield 0.7% (Sage p/e 24 and yield 2.4%). So another couple of interesting comparators as Sage transitions (whether the UK market will ever put a similar p/e multiple on Sage I do however doubt).

So, the Sage strategy is sound, the goals are clear and the ultimate prize too. Still work-in-progress but plan execution looks to be proceeding well.

Regards, Maddox

[maddox] 22/1/2020 11:32

The Brokers Analysts are overwhelmingly negative on Sage:

Strong Buy........2...(6)
Buy...............0...(1)
Neutral...........8...(9)
Sell..............2...(0)
Strong Sell.......7...(3) Brackets are the scores of one month ago
.................19...(19)
Source: Share.com

Their share price targets are similarly pessimistic, for example, James Goodman at Barclays has recently (10 Jan) put 620p share price target and 'underweight' view. (This was an increase on his previous share price target of 580p) I've no idea what Goodman's rationale is - so difficult to contest.

Regards, Maddox

[maddox] 22/1/2020 10:26

Excellent Q1 trading update today. This provides reassurance that the transformation is being successful and the investment is paying-off. Key points:

Recurring Revenue +10.7% - indicates that the SasS transition is proceeding at pace;

Total Organic Revenue +6.7% - better indicates the underlying growth rate (ignoring the switching of existing customers to SaaS contracts);

Sage Business Cloud +12.7% - indicating the strategic shift to a Cloud-based product offering is proceeding well. This is where SGE is 'perceived' to be weak and behind their competitors Xero and Intuit. In fact Sage are fast building a powerful Cloud business with an attractive offering of products built on a common platform (an IT service fabric as they describe it).

So, whilst we're conceding a slower growth in dividend returns whilst investment in the faster pace of transformation takes place - its working well and building future value.

We also have a return of capital once the SagePay disposal completes of c. £250m to come. We don't yet know how SGE intend to make this return however, if returned all in cash would equate to, I estimate, 22p/share (current div is 16.91p).

Regards, Maddox

[mozy123] 22/1/2020 10:14

A positive update this morning - some doubts about sage a year ago but progressing the strategy well it semms.

[mozy123] 20/11/2019 11:43

Happy with the results and the investment catchup needed to become a true competitor to Intuit and other cloud offerings. Sage is one of the best performing companies ever on the ftse index, but playing catchup costs money compared to first mover advantage.

Nick Train states only 1/60 companies globally use accounting software. Happy to hold onto a long runway stock like sage.

[maddox] 20/11/2019 11:19

Hi Spacecake,

Mr Market and the majority of the brokers appear to agree with you.

However, IMHO Sage are doing exactly the right thing and also exactly what they set out to do. Which is investing in sustainable long-term (high quality,high margin) revenue growth. This hits the margin in the short term. It costs roughly twice the annual revenue to recruit a new customer but you then get 10 years plus of that revenue from that customer. So it's a highly profitable investment but you pay for it in the first year - hitting the reported margin and slowing the growth in dividends.

Mr Market and the brokers analysts are being very myopic and short term. And there-in lies the opportunity for the patient far sighted personal investor. The shares are off 33p down to 708p as I post, and with a cash return in prospect from the sale of SagePay. So I'm buying.

Regards Maddox

[spacecake] 20/11/2019 09:17

What they said at last years (2018) outlook statement ...

We expect FY19 organic operating margins to be broadly stable before the impact of around GBP60m of specifically targeted investment to accelerate the transition to SaaS, especially in product and innovation which will also enhance efficiency and effectiveness over time. Including this impact, organic operating margin will be in the range of 23%-25%, maintaining strong free cash flow as a proportion of revenue. Over time, this model will drive a sustainable acceleration in recurring revenue growth whilst enabling strong returns on investment.

The organic operating margin came in at the bottom end at 23.7% and this years outlook is around 23%.
Dividend growth in line with inflation.
Sage seem to be doing an awful lot of work just to stand still.

[maddox] 19/11/2019 16:51

Thought I’d check-out what the brokers’ recommendations are on Sage on the eve of a trading update – hmmm they are not great:

Strong Buy........2...(6)
Buy...............0...(1)
Neutral...........8...(9)
Sell..............2...(3)
Strong Sell.......7...(3) Brackets are the scores of one month ago
.................19...(19)
Source: Share.com

So the brokers have are looking increasingly negatively at Sage. With expectations apparently set so low it will be interesting to see the reaction tomorrow.

Regards, Maddox

[maddox] 18/11/2019 11:06

Sage have agreed the sale of their payments business SagePay to Elavon for £232m which looks like a good price. Based on the units figures for fy 30Sep18 of £41m revenue and £15m profit - sold at 5.66x revenue and p/e 15.47.

They will be booking a profit on disposal of c. £180m.

Whilst payment functionality is an important need for Sage's clients seamless accounting/payments integration with a range of payment service providers (PSPs)is the market need. Thus SagePay didn't fit strategically and will leave Sage a more focused business on its global ambitions and its fast growing Cloud SaaS business.

With Brexit in view it also de-risks the business by reducing the revenue mix away from the UK and £Sterling exposure.

Regards Maddox

[maddox] 11/9/2019 12:53

The news that sage has finally getting around to disposing of its Sage Pay business is to be welcomed. It's difficult to reconcile this with the share price decline the last couple of days. My understanding is that payment acquiring is a competitive market with low margins. It doesn't fit strategically and the capital and resources are better redeployed to building the Cloud SaaS business that is higher margin and fast growing.

Is Mr Mr Market seeing something I'm not I wonder?

[dogwalker] 10/9/2019 21:21

Sage Pay for sale? Why not the whole company while we're at it?

[buywell3] 25/7/2019 10:49

Horrible chart formation now in prospect IMO

Todays price action following the numbers is symptomatic of todays times

Markets are now IMO wobbling

Unchartered waters lie ahead

[dogwalker] 20/6/2019 19:27

Disruptive to our colleagues possibly, apparently. But maybe everything will be fine.

[eipgam] 20/6/2019 17:22

Could be disruptive?