Sage debt levels surge on weak pound

Software group survives despite downturn

Debt levels at Sage soared in the final three months of last year the software group revealed on Wednesday, due to the weakness of the pound.

Net debt, a substantial proportion of which is denominated in dollars and euros, rose to £649m by December 31 from £541m at the end of September, as a result of currency translation.

However, Sage said it remained comfortable with the levels of debt and remained within its banking covenants and had committed financing facilities in place until 2011.

The update on the group’s debt situation came as Sage revealed that trading for the three months to December 31 was in line with management’s expectations despite the dramatic economic slowdown in the UK, Europe and US where most of the group’s sales are generated.

The Newcastle-based company said strength in subscription services - which provide support for existing customers - was offsetting the impact of a subdued market for software and software-related services.

Paul Walker chief executive, said: “We believe these results demonstrate the continuing resilience of our business model. However, it is still early in our financial year and we remain alert to the challenging economic environment.”

He said the UK business had showed a “resilient” performance in volatile market conditions. But conditions in Europe and North America were challenging.

Sage, which supplies accountancy software and services to nearly 6m small and medium sized businesses, was updating investors on the first quarter of its fiscal year which ended on December 31. Shares in Sage opened down 1.3 per cent on Wednesday at 178.4p.

“After a very strong performance last year and in weakening economic conditions, revenue growth in mainland Europe slowed as anticipated,” the company said. Europe, excluding Britain and Ireland, accounts for about a third of Sage’s turnover.

In North America, where the group generates 40 per cent of its turnover, conditions were “particularly challenging” and this affected performance in all its divisions.

In the rest of the world, it achieved good revenue growth in slowing market conditions.

For the year to September 30 the group reported pre-tax profits of £241m on revenues of £1.3bn.

Software companies are facing a challenging environement as consumers and companies cut back on updating packages in the face of the global recession. Second-quarter results from Microsoft , released last month, showed that even it was feeling the effects of the recession. It reported an 8 per cent drop in operating income and, for the first-time, announced company-wide job losses.

”We continue to believe that Sage will at best report flat constant currency organic revenue growth in full-year 2009 and that it retains fewer operational levers to pull going into this downturn,” wrote Piper Jaffray in a note to clients following the release of the update.

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