Shares of Newcastle-based software giant Sage Group fell more than 9% after it said in a trading update that first half organic revenue growth results “were below management’s expectations, reflecting inconsistent operational execution.”
Sage said its outlook has been revised from around 8% organic revenue growth to around 7% organic revenue growth.
Sage CEO Stephen Kelly said: “Growth in H1 18 was lower than our expectations as the pace of execution has been slower than we planned …
“The revised revenue guidance targets for FY18 reflect both the performance in H1 18, but also our diligence in ensuring that we focus on recurring revenue to drive sustainable acceleration throughout the rest of FY18 as a platform into FY19.
“We will provide a further update on our plans at our H1 18 results announcement on 2 May 2018.”
Sage issued a trading update for the six months ended March 31, 2018, and a revised full-year guidance.
First-half results will be published on May 2, 2018, as planned.
The full statement can be read below:
Summary
‒ H1 18 organic revenue growth results were below management’s expectations, reflecting inconsistent operational execution;
‒ Organic revenue growth of 6.3% (H1 17: 7.4%) was impacted by two factors: a decline in recurring revenue growth to 6.4% in H1 18 (H1 17: 11.1%) and contract licence slippage in the enterprise segment. Software subscription growth was 25.3% (H1 17: 30.6%). Software and software related services (SSRS) growth was 7.1% (H1 17: decline of 7.3%);
‒ The market opportunity for Sage, as outlined at Capital Markets Day 2018 (CMD), remains unchanged;
‒ Operational execution for the majority of geographies remains robust, with increasing focus on driving recurring revenue growth;
‒ Continuing momentum in Sage Business Cloud, with ARR of over £335m, growing at 57%;
‒ Double digit growth in North America, reflecting continuing progress across US, Canada and Sage Intacct;
‒ Organic operating margin of 24.5% (H1 17: 25.3%) in line with management expectations;
‒ Strong cash conversion of 95%, reinforcing business model fundamentals;
‒ FY18 guidance revised from around 8% organic revenue growth and around 27.5% organic operating margin to around 7% organic revenue growth and around 27.5% organic operating margin.
Financial performance
Group organic revenue increased by 6.3% (H1 17: 7.4%) for the first six months of the year.
Organic recurring revenue growth of 6.4% (H1 17: 11.1%) and software subscription growth of 25.3% (H1 17: 30.7%) was lower than management expectations due to inconsistent operational execution. Growth in SSRS of 7.1% (H1 17: decline of 7.3%) was driven by strong performance in the Services business, with growth in Enterprise lower than management expectations due to slippages in some Enterprise licence contracts in the US and Africa Middle East: much of this slippage is expected to be recovered in H2 18.
Sage Business Cloud revenue continued to grow strongly with cloud ARR of over £335m in H1 18, growing at 57%, with acquired businesses of Sage Intacct and Sage People (formerly Fairsail) showing strong continuing momentum in the first six months of the year.
Regionally, growth in Northern Europe and Africa Middle East was below management’s expectations due to inconsistent execution. North America delivered double digit growth, reflecting continuing progress made by management across the US, Canada and Sage Intacct. Central Europe and Australia have also performed well. France, Iberia and Latin America’s performance is in line with expectations, with France showing a return to growth in Q2 18.
Group organic operating margin of 24.5% (H1 17: 25.3%) is in line with our plans to front load investment in H1, as well as absorbing, as anticipated, the losses from acquisitions made in FY17.
The business achieved strong underlying cash conversion of 95%, reinforcing the business model fundamentals of high quality recurring revenue, superior operating margins, strong free cash flow and a progressive dividend.