Sage confident as it beats all forecasts

May 9 2008 by Iain Laing, The Journal

BRITAIN’S biggest software company, Sage, has seen half-year profits outstrip analysts’ forecasts and is confident it will continue to beat the credit crunch and achieve record earnings for the year.

The Newcastle company, which has 13,400 staff in 19 countries including 1,400 on Tyneside, was the biggest gainer in the FTSE 100 as its shares jumped more than 7% to 225p yesterday after the confident update.

Sage, which now earns more than half its revenues from providing management solutions rather than simple accountancy software, said pre-tax profits for the six months to March 31 had risen 9% to £138m as it overcame a weak showing in the US. That was not only higher than figures given earlier this year by the company, but £9m above analysts’ forecasts and up from £126.3m a year ago.

It said its businesses in the UK and Europe showed good revenue and profit growth, but performance in the US, another key market, was hit by problems at its healthcare division, which is being restructured.

The group sacked North American chief executive Ron Verni and finance director Jim Eckstaedt last October after disappointing sales figures. Sue Swenson, a former senior manager at Pacific Bell, took charge of the division this month.

Group revenue also rose 9% to £640.4m, £23m higher than market expectations, but revenue in the US was flat. Sage Healthcare represents 11% of the company’s total revenue.

Sage chief executive Paul Walker said the economy was tough in the US but the company was making progress to improve the healthcare division. “We will see the results of what we’re doing in financial year 2009,” he said.

Sage said organic revenue growth, excluding Sage Healthcare, was 8% with 5% growth overall. Subscription revenue grew 12%.

Mr Walker said the results demonstrated the resilience of Sage’s subscription-based business model.

“Almost 60% of our revenues are derived from subscription contracts, allowing us to grow our business through periods of challenging economic conditions,” he said.

“The predictability of our revenue streams and the high degree of recurring subscription revenues, combined with our geographically diverse customer base, give us confidence for the full year.”

The company, which made two acquisitions in the UK in the first half, also said it was looking for opportunities in emerging markets.

The company said Sage 50 – its flagship accountancy software used by small businesses – had recorded double-digit growth. However, payroll products had seen slower growth against a strong performance the previous year.

Sage said the growing popularity of premium support and subscription software had resulted in a double-digit rise in maintenance and support revenues.

The company said: “We anticipate that premium support will continue to increase as a proportion of our revenues in the UK, strengthening the resilience of our business.”

The company posted pre-tax profits of £251.3m for the year to last September 30 and comfortably surpassed the billion-pound sales mark, with annual turnover up 30% to £1.157bn.