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Sage reduces debt but sales stay subdued

City A.M. Reporter
BRITISH accountancy software firm Sage Group said yesterday it was trading in line with its own expectations, as growth in subscriptions continued to offset subdued software and software-services markets.

Chief executive Paul Walker said he had seen no change in the challenging market conditions in the first quarter, but the group’s large, geographically diverse, customer base left it well positioned for the market recovery.

The Newcastle-based company, which sells business management software to more than 6m small businesses, said strong cash generation helped it to reduce net debt to £392m as of the 31 December from £439m on the 30 September.

Analysts expect the company to report revenue of £1.42bn and pre-tax profit of £322.8m, for the year to end-September, slightly down on the £1.44bn and £307.5m posted in 2009.

“This level of debt leaves Sage comfortably within its banking covenants and is gradually paving the way for Sage to be able to again look at sizeable acquisitions,” said analyst house Piper Jaffray, which kept a “neutral” rating and 229p target price.

It added: “These acquisition opportunities remain key, in our view, in order for Sage to re-ignite its earnings growth.”

Meanwhile, Derek Brown, technology analyst at Seymour Pierce said weak sterling would help first-half revenues but that underlying demand was still a cause for concern.

Sage needs to exit hibernation mode
MORIBUND. Hibernating. Hunkering down. However you put it, the corporate software industry is going nowhere. Sage, the FTSE 100 software company that updated the market yesterday, is no exception. On the face of it, there’s nothing that should spook investors too much. Trading is in-line with expectations and net debt has declined by 11 per cent to £392m, implying 40 per cent gearing and removing worries about covenants.

Sage should also be commended for increasing subscription revenues at a time of stagnating software sales. These revenues, which are earned by selling service contracts – not products – now account for around 65 per cent of turnover. And in 2009, organic subscription revenues rose two per cent against an overall decline of five per cent.

Still, you can only sell service contracts if you’re selling products in the first place; if Sage isn’t shifting software now, subscriptions will take a hit further down the line. Subscription revenues also fell by two per cent in North America last year; with Numis estimating that this region will account for 32 per cent of 2010 earnings, it’s something that management needs to remedy urgently.

Sage says it is well-placed to capitalise on an upturn, but there is always a danger that companies fail to improve their offering during a downturn. Increasingly, the firm’s product is looking dated – especially as web-based software captures the corporate imagination. That could be a far bigger concern for investors. When a company is hibernating, it rarely has the energy to innovate.