Sage CEO hails transition to new cloud era

Sage CEO Stephen Kelly
Stephen Kelly_Sage CEO_AccountingWEB
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Buoyed by a surge in cloud accounting and international software subscriptions, Sage reported statutory revenues up by 19% to £1.715bn in the year to 30 September 2017.

The weakening pound didn’t hurt either, serving up a £157m currency “tailwind” for the full year results. According to Sage the statutory figures also reflected good organic growth and contributions from newly acquired subsidiaries Fairsail and Intacct, net of acquired deferred income.

The statutory statement for revenue is slightly up on the organic figures Sage uses to compare underlying performance (£475m profit on £1.696bn revenue), but the statutory profit figure was a slightly less flattering £348m, a 30% increase on FY16, but at a 20% margin compared to the organic margin of 28%.

The organic figure excludes one-off charges and contributions from recent acquisitions and disposals and neutralises the impact of currency fluctuations to give a more rounded view of year-on-year performance, the company said.

Reporting quibbles aside, it was a good set of results for Sage, fulfilling the management’s key commitment to achieve 6%+ organic growth at a margin of 27%.

In terms of product adoption – particularly of its new cloud products – Sage pointed to:

  • Double digit growth in smaller regions signalling international acceptance of Sage’s new subscription-based business model. Subscription and recurring revenues now account for 78% of the group total, Sage said.
  • 7% growth in Sage’s UK & Ireland home market was spurred by a 25% increase in software subscriptions income. The flagship Sage 50 Accounts program grew 17% on the back of an 85% jump in the cloud-enabled Sage 50c edition. Sage X3, the online enterprise suite, is proving to be an international success and saw revenues rise 48% in the UK.
  • Sage One subscriptions increased 53% in this country, feeding into a 92,000 worldwide increase in subscribers to the Sage One “portfolio” (presumably including payroll customers too) during the year. The 405,000-strong user base is now generating annual recurring revenues of £34m.

“We are a cloud company!” said Sage UK and Ireland managing director Alan Laing at Sage Sessions in Birmingham last week, pointing out that the company now has suitable cloud products for startups (Sage One); scale-up companies (Sage Live) and enterprises (Sage X3). All of these products have been “unified” under Sage Business Cloud and produced annualised recurring revenues of £300m in 2017 – a growth rate of 83%, the Sage results stated.

In a briefing with analysts on the results, Sage CEO Stephen Kelly proclaimed that his initial three-year transformation was bearing fruit, and highlighted the underlying efficiency savings that helped underpin some of his expansion plans.

“Since June 2005, we’ve consistently achieved at least 6% organic revenue growth and at least 27% underlying operating margin,” Kelly said. “This has been achieved whilst restructuring the business and transitioning to subscription… Whilst we have achieved this growth and profitability, under the surface, we strengthened the Sage business model, creating the efficiency and simplicity that we targeted… You could call it building the plane whilst flying it.”

Back on the acqusition trail

After shying away from acquisitons during Kelly’s first years in office, Sage felt confident enough to revert to old ways in 2017 and splashed out £627m (not £654m as originally reported) to acquire US cloud suite Intacct in August, alongside acquisitions of Compass, the benchmarking and collective intelligence platform and HR package Fairsail (rebranded Sage People) earlier in the year. According to the results statement, Sage Intacct surpassed $100m in annual recurring revenues and continues to grow in excess of 30% – mainly catering for scale-up customers in North America.

The consolidated income statement includes revenue of £8m and a loss after tax of £6m Intacct for the period since the acquisition date. The audited results for the year ended 30 September 2017 would have increased by £78m and the profit would have reduced by £17m if Intacct had been included for the whole of the year, the company said. There’s a bit of a mismatch there, suggesting that Intacct may have lost some of its momentum since the acquisition, a situation that is not uncommon with big business software transactions.

Psychologically, Intacct is a slightly disappointing reversion to “old Sage”. Rather than building its own innovative cloud solutions, Sage opted to buy in a readymade customer base at a surprisingly high multiple. The deal is all about the north American market, but raises questions about the company’s focus and commitment to X3 suite and the Sage Live suite, which is nebulously bound up in the Sage Business Cloud brand bundle.

There was also a promise of more acquisitions to come in the annual results statement: Sage will continue to be on the lookout for investments that will accelerate its strategy, such as bolt-on acquisitions of complementary technology or partnerships that will reinforce its “golden triangle” of accounting, HR/payroll and payments systems.

The risk for Sage here is that oing complicating its portfolio with products on different platforms and disconnected pools of legacy users will make it harder for the company to deliver transformative, innovative soluitons across the board.

Don’t forget FreeAgent

No longer is Sage the only listed UK accounting software developer. Edinburgh-based FreeAgent Holdings this week released its interim results to 30 September 2017, showing revenue up 28% for the half-year and a net loss of £1m, down from £1.3m for the same period last year.

If Sage gets to cite organic numbers, then so can FreeAgent, which reported a “gross profit” of £4.6m for the period. With nearly 57,000 users (36,700 in practice, 18,250 direct and 1,800 added since the period end), FreeAgent is projecting £44m of future revenues from its current customers.

In his accompanying note, chief executive Ed Molyneux commented, “One of the primary drivers of both accounting practice and the wider banking channel’s interest in FreeAgent is the forthcoming transition to a digital tax regime – HMRC’s Making Tax Digital (MTD) agenda. Despite a softening in the original highly-ambitious timetable for delivery, work continues apace at both HMRC and with software vendors to support the necessary new interfaces and processes.

“In April 2019 those customers filing VAT returns will do so within the new MTD system, and from 2020 onwards it is highly likely that other areas of business tax will follow suit. FreeAgent is exceptionally well positioned to help businesses manage this transition smoothly, and similarly, despite the delayed timescales, we are seeing accountants and banks alike increasingly keen to support their clients’ migration to digital systems.”

About John Stokdyk

John Stokdyk is the global editor of AccountingWEB UK and AccountingWEB.com.

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