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The UK’s biggest listed technology company has everything a digital evangelist could demand. Cloud computing. Artificial intelligence. A Facebook partnership. Only virtual reality and flying cars are missing. What is this British marvel? Step forward Sage.
Granted, the accounting software group cannot boast Salesforce-like growth rates. Half-year results on Thursday showed organic sales rising 5.7 per cent in the six months to April, while the operating margin was a little over 25 per cent — decent enough for a mature company. In the UK, where more than half of all businesses already pay employees using Sage software, revenue grew 8 per cent.
Sage is successfully switching from its old model of software installations to software subscriptions for cloud-based services. Subscriptions, which have better renewal rates and encourage purchases of related products, have doubled since 2015 to 1.2m. The company’s ability to convert its sales to cash is also reassuring, with £166m of free cash flow, almost a fifth over the same period of last year.
Now the focus is on increasing customer numbers by investing in new products and marketing, like its cute AI accounting chatbot on Facebook Messenger. These should help underpin the company’s 6 per cent sales growth forecast for the full year. The US unit has trailed, so it is good that its North American Payments business is up for sale.
Chief executive Stephen Kelly should be pleased. When he joined in late 2014 the company was hobbled by competition. Switching Sage’s business plan was a delicate operation, given conservative its customer base of small companies.
Peers such as Intuit, Salesforce.com and SAP remain well funded threats. Still, Sage is trading on 21.5 times forecast earnings, below the rest of the sector at around 25 times. The FTSE 100’s sole technology company may not be cool, but nor it should be underestimated.
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