Monday, 4 February 2008

No surprises from Sage

The following is an extract (with permission) from George O'Connor of Panmure Gordon morning note on Sage (with all the forecast and Buy/Sell bits omitted)

There are no surprises either way in Sage’s Q1 IMS – which is not a surprise. Sage reiterated its confidence in the full-year outlook.

IMS highlights
Trading for the period was consistent with expectations outlined at final results. Revenue growth across the territories is described as being “good” in the UK, Mainland Europe is “good”, with Rest of World experiencing “strong growth”. In North America growth is “modest”, while at the Healthcare division Sage expects to see improved revenue growth in the medium term. The search for a new North America CEO is “progressing well”. Cash flow remains strong, and net debt stood at £505m at the end of December 2007. Sage made two acquisitions: KCS, in UK HR & Payroll for £20m; and a majority stake in XRT, treasury and cash management in Europe, for an EV of £43m.

US – the chink in the armour
Sage’s performance has been mixed, despite having a 2.8m customer base. Sage expects to appoint a new North America CEO in H1 2008. There has been concentration on the insipid 1% revenue growth in Sage Healthcare last year but guidance is for 3% revenue growth in 2008E – the IMS suggests that this has yet to be achieved. Meanwhile Verus (payment solutions) goes from strength to strength, racking up 1 4% revenue growth and 42% EBITA margins last year, and from the trade press we learn that it has been integrated with Peachtree – a move that, in our view, should strengthen growth. We gained some insight into Sage’s channel ecosystem as it announced its US Chairman’s Club members – a club for the top new business performers. Despite the anatomy of the US business, 45% of revenue is classic Sage applications, 31% Healthcare, 1 5% industry specific and 9% Versus, of the 17 members there are six construction industry specialists (Accordant, Alliance Solutions, C I S, MIS Group, The Strategies Group and United Solutions). Given the poor economics in that sector, we feel that membership should be a better reflection of the overall business mix and a task of the new US CEO is to build up the rest of the channel ecosystem.

Why do we like Sage?
Sage has a defensible business model with c71% of revenue from services that are in the main based on recurring maintenance revenue. This is a very well established business with a global customer base of over 5.5m. The robust business model has strong cash conversion. Sage is a ‘safety first’ option.

Holway view?
For those readers who emailed saying that Holway's HotViews should be exclusively Holway's Views, can I just add that I couldn't have written the last paragraph better myself. Except I'd have added the word 'Boring' in there somewhere - the accolade of all accolades, of course!

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