Wednesday 20 November 2019 11:20 am

UBS warns of more Sage downgrades as cloud spend hurts annual profit

More downgrades will weigh on Sage’s share price, investors were warned today, as the British software company revealed that its transition to cloud has knocked its annual profit.

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The figures

Sage’s share price fell 4.6 per cent to 708p in early trading as it admitted the costs of investing in cloud products has lowered profit before tax by nine per cent lower year on year to £361m.

Operating profit took an 11 per cent hit to land at £382m, while group revenue rose five per cent to £1.94bn.

Net debt fell from £668m in 2018 to £393m for its latest annual results, while the tech firm also booked a £250m capital return from the sale of Sage Pay. 

Basic earnings per share also slumped 10 per cent to 24.49p, though Sage raised its dividend 2.5 per cent to 16.9p per share.

Why it’s interesting

Sage posted a 10.8 per cent rise in recurring revenue to £1.56bn from its cloud products, and recorded an 18 per cent drop in traditional product sales as customers transition to the cloud.

But it also warned that its operating profit margin shrank 3.4 per cent to 19.7 per cent as it pours money into updating its product line-up.

The company is already selling off Sage Pay for around £250m.

But investment bank UBS cited weaker fourth quarter growth of 3.7 per cent as it warned shareholders that Sage will have to make sacrifices to invest in its cloud transition. 

“Disposals and a 2020 23 per cent margin goal means more downgrades will follow, likely outweighing the impact of a £250m capital return,” the bank said in a note to investors.

Read more: Sage to sell payments arm to US Bancorp subsidiary

What Sage said

Chief executive Steve Hare said:

We’re very encouraged by the acceleration in recurring revenue in FY19. We entered the year with momentum and added sequential ARR every month in the year, putting us further ahead in our transition to Sage Business Cloud than anticipated.

We’ve also made significant progress in our strategic execution, particularly in the development and roll out of our cloud offerings and the reshaping of our portfolio.

We will continue to prioritise high quality recurring revenue growth over SSRS, and whilst we do not expect a linear progression in financial performance during this multi-year transition, our recent strong performance and continued progress towards becoming a great SaaS company means that we look forward with confidence.

Main image credit: Getty Images