Organic revenue setback restricts Sage

Sage saw some stabilisation in its business management software markets but offered little indication of an immediate upturn, even though first-half results were marginally ahead of expectations.

The Newcastle-based software group said turnover from subscriptions continued to offset declines in new sales as revenue for the six months to March 31 fell 4 per cent to £718.9m.

Heavy cost-cutting meant pre-tax profits rose 15 per cent to £159.6m and earnings per share advanced from 7.43p to 8.6p.

However, analysts remained concerned by Sage’s inability to break into new markets. Although it attracted 127,000 new customers in the period, organic revenue contracted 2 per cent compared with a decline of 6 per cent in the six months to September 30.

For the past two decades Sage has been one of the UK’s most successful software companies, but slowing markets have seen investors increasingly treat it as a stable, income-producing stock rather than a growth share deserving of a premium.

Rivals have also pushed more aggressively into offering accounting software over the internet, as so-called “software as a service”, rather than as traditional off-the-shelf software for companies to load on to their own servers.

Paul Walker, who is stepping down as chief executive after 16 years, said there was pent-up demand that would materialise as markets recovered.

“Our customers remain cautious, but the relevance of our products and the compelling nature of our customer support has driven our business in the period,” he said.

The interim dividend rises 3 per cent to 2.58p; net debt fell from £439.4m to £305.3m.

Shares in Sage closed down 4.3p at 241.5p, giving the company a market capitalisation of £3.23bn.

● FT Comment

An instructive comparison on Sage’s results comes from Norway’s Visma, a Sage acquisition target in 2006. It could hardly have been more bullish last month as it reported a buoyant first quarter. Software as a service product drove organic revenue growth of 7.1 per cent. Sage, by contrast, maintains customers will only spend when they see value. Perhaps Mr Walker’s departure will allow a fresh external perspective, but whatever the long-term plan, the new chief will have firepower thanks to strong cash generation. For now, the shares trade at about 12 times 2010 earnings, which is well below the sector average of about 22 times and reflects the lack of top-line growth. But of more concern is the nagging suspicion that Sage is missing out on sweeping changes in the industry.

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