Sage Earnings: Solid Progress in Cloud Transformation; Shares Fairly Valued

Narrow-moat Sage Group SGE reported solid first-half results with revenue and profitability slightly ahead of company-compiled consensus and our estimates. Shares reacted positively, up around 4% intraday while peers were generally flat to negative. Overall, first-half results are tracking broadly in line with our long-term view. Consequently, we don’t expect to make a material change to our GBX 810 fair value estimate. At current levels, the shares look fairly valued.

Fiscal 2023 guidance was specified with organic recurring revenue growth now expected to be in the region of 11% versus previous guidance of “above last year,” which was 9%. Operating margin guidance remains more vague at “expected to trend upward in fiscal 2023 and beyond.”

Underlying cloud revenue growth was strong in the first half with a 38% increase in cloud-native products and a 25% increase in cloud-connected products for total Sage Business Cloud growth of 29%, ahead of our 27% estimate. Sage Business Cloud penetration is now at 82%. We expect cloud growth to be mainly driven by Sage Intacct. This was evident in the first half with Sage Intacct’s annual recurring revenue growing 30% in the U.S. and doubling outside the country (albeit from a small base).

We think operating margins have passed trough levels with the majority of the cloud transition complete. Consequently, we expect the underlying operating margin to rise slowly to around the mid-20s as Sage starts to benefit from its high operating leverage. First-half results were tracking our view as the underlying operating margin increased 60 basis points to 20.8%, driven by operating efficiencies as the group scales.