There has been plenty of good thinking in Sage’s approach to its business strategy, albeit some of it applied rather later than investors might have hoped.
It was smart of the accountancy and payroll software group to begin to chase revenue growth through regularly renewed subscriptions rather than more unpredictable annual licences, for example. Wise, too, to decide to migrate its customers to the cloud.
Whether there is wisdom in the company’s stock market value, which has taken a tumble since its most recent trading update in July, is another matter.
Sage is one of the UK’s biggest listed technology groups, with a position in the premier FTSE 100 index and a market capitalisation of more than £7.8 billion. Founded in 1981 and known for its accounting software, it also produces other technology packages, including for HR departments, staff management and payroll processing.
The group employs more than 13,000 people supplying customers in 23 countries, ranging from small entrepreneurial start-ups to international corporations.
While the decision to change tack and pursue the harder-to-win but more loyal subscribers who pay monthly or quarterly, rather than once a year, was a sensible one, delivering it has been tricky for Sage and frustrating for its investors.
The slow pace of the transformation, partly because of the reticence of bigger businesses to store their data remotely rather on their own servers, cost Stephen Kelly, 57, the previous chief executive, his job last year. However, the new boss, Steve Hare, 58, seems to have accelerated the process.
Probably the best way to assess progress at Sage is to look at whether what it calls recurring revenues, which comprise subscriptions and maintenance and support contracts, are growing at a faster rate than the sales of licences that they are supposed to replace are declining.
In headline terms here, things look good. Over the nine months to the end of June, recurring revenue rose by 10.6 per cent to £1.18 billion, almost two thirds of which came from subscriptions. This is ahead of the annual increase in recurring revenue of 8 per cent to 9 per cent that Sage had targeted at the beginning of its financial year.
At the same time over the nine months, revenue from software and related services, the vast bulk of which is licence sales, fell by 15.5 per cent to £195 million. The drop was considerably more precipitous than Sage’s previous guidance.
It probably helps to explain why Sage’s shares, which have had a strong run under Mr Hare, have come off since the company’s July update and are nearly 12 per cent below their peak earlier in the year.
The reaction feels overdone. Sage’s revenues from subscriptions are close to four times what it makes from licence sales and grew by an impressive 28.3 per cent over the nine months, at the least indicating that the strategy is bedding in.
Mr Hare is pushing through two other initiatives that should also reassure shareholders. First, he has earmarked £60 million for research and development in a move that should ensure that Sage’s software is well up to speed.
Second, he is bringing to the UK software called Intacct. Acquired in the US two years ago it caters to smaller and mid-sized companies with between 20 and 2,000 employees. Such companies should be more resilient in the likely economic downturn that lies ahead.
Sage’s shares, up 16¾p, or 2.3 per cent, to 736¾p yesterday, are not cheap, trading at 24.5 times Stifel’s forecast earnings for a prospective yield of about 2.1 per cent.
ADVICE Hold
WHY The move to a subscriptions model is clearly working but the shares are expensive
Aston Martin Lagonda
It’s looking rather tight for Aston Martin Lagonda. Even though it downgraded its planned output for this year, the luxury carmaker has to make about 4,000 motors during the second half as well as spend heavily on its forthcoming sports utility vehicle and possible saviour, the DBX.
With capital expenditure this year earmarked at about £300 million and just £127 million in the bank, analysts have concluded that the company is facing a squeeze and is going to have to pursue an additional fundraising to tide it over.
With Aston Martin’s share price on the skids since its flotation last October, it would almost certainly struggle to win backing for an equity issue. Turning to the bond markets will put even further strain on an overstretched balance sheet that has taken its net gearing to 4.7 times the previous 12 months’ adjusted profits before tax and other items.
Aston Martin is known for the use of its sleek sports cars in Bond films and for having gone bankrupt seven times during its lifetime. Its standard range includes the DB11 and the DBS and it also makes specials such as the Valkyrie and Valhalla, all of which have proved popular with wealthy buyers in the US and China.
However, Brexit-related uncertainties have dented sales in the UK and Europe and the average selling price for one of its vehicles, stripping out the specials, has fallen over the past year from £146,000 to £140,000. Last month it cut back the number of cars it plans to make for dealers this year from 7,400 to between 6,300 and 6,500.
The company seems to be pinning its hopes on the DBX, which drivers will be able to order in the spring. Sales of the SUV may yet turn out to be extremely strong but as yet the marque remains unproven.
Although Aston Martin has stuck with its long-term aim of making up to 14,000 cars a year, pressure on the world’s economies is not going to make sales any easier and it will take more than a £200 million bond issue to liberate its financial resources.
In April this column avoided the shares at 937p. Yesterday they rose 2½p to close at 500½p. They trade at 14.1 times Numis’s forecast earnings and with no dividend, so no yield; investors should still steer clear.
ADVICE Avoid
WHY Quality brand but under strain in difficult markets
