Support contracts help Sage weather downturn

Sage, the UK’s largest software company, beat expectations for first half sales on Wednesday, as the company’s resilient support services business helped it weather the downturn.

Sage, which provides business software for 5.8m small to medium-sized companies, is being hit by global recession, with underlying sales of its software down 15 per cent in the six months to the end of March. However, this was less than the 30 per cent falls in new licence sales seen at peers such as SAP and Dassault Systèmes.

Sage’s software losses were partly offset by growing revenue from support contracts, so that overall underlying sales were down just 4 per cent. Support accounts for more than 60 per cent of revenues.

“Customers are taking a lot longer to buy software, especially in the mid-market,” said Paul Walker, chief executive. “But the support contracts have been crucial in keeping the business ticking over. Our customers are cutting costs all over, but one thing they don’t seem to be cutting is support.”

Sage offers customers a helpline service for around £250 to £500 a year, not just on technical questions but also on issues such as how to handle accounting changes such as the new VAT rate in the UK. It handles around 40,000 calls a day.

The group also said it had cut 4 per cent of its cost base, including around 700 jobs, to achieve savings of £49.3m ($74.5m).

“There are no green shoots at the moment, but conditions are more stable. If they stay like this, we will not need any further cuts,” Mr Walker said.

Currency effects flattered the results, bringing revenues up to £748.4m, up 17 per cent from the same period last year. Pre-tax profits were £139.2m, up 14 per cent from the last year, and earnings per share were nearly 15 per cent higher at 7.44p.

The company raised its interim dividend to 2.5p. The shares rose more than 6 per cent to 196.6p.

FT Comment

It is unusual for a 4 per cent decline in sales to be greeted with a 6 per cent share price rise, but Sage is showing its resilience in an otherwise nightmarish software sector. Support services have always set the company apart, making it difficult for rivals like Microsoft to muscle in. They now look to be able to carry the company through the downturn, apart from in the US, where support revenues declined 3 per cent and software sales were down 22 per cent. The US aside, Sage is in reasonable shape, taking cost out in its typical quiet but efficient style. At around 12 times expected earnings for 2009, Sage trades at a small discount to UK and international peers, but this looks undeserved.

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