I last wrote about the FTSE 100’s integrated accounting, payroll, and payments solutions provider Sage (LSE: SGE) on 22 January when the share price was 771p.
The article was bullish and discussed how the company has been changing its business model to focus on building up recurring revenue by moving customers to cloud-based subscription services.
A FTSE 100 stock with a great trading record
Sage has a great track record of consistently growing revenue, earnings, cash flow and shareholder dividends. And the way the firm is adapting for the modern ways of doing business encourages me to believe there are many more good years ahead for shareholders.
Shortly after that previous article, the coronavirus crash happened. And by 23 March, the stock was as low as about 530p. In hindsight, that would have been a great entry point for new holders and would have neatly side-stepped the one issue that perhaps keeps investors away from Sage – namely, that the valuation has often looked full.
Since March, the share price has been storming back up and stands at 679p, as I write. But I’d still buy this stock and hold it for the long term. This a high-quality operation with ‘sticky’ revenues and, as such, I see it as an attractive growth-oriented and defensive investment. The recovery from the coronavirus crash demonstrates the firm’s resilience.
Perhaps the most interesting figure in today’s half-year results report is the 2.5% increase in the interim dividend. I reckon that decision by the directors speaks volumes about how they see current trading and the immediate prospects of the business. To pay and increase the dividend when many other companies have axed theirs completely in this crisis strikes me as a sign of the strength of the enterprise.
Growing recurring revenue
The company saw an increase in “high quality” recurring revenue of just over 10% in the period. The measure reveals how successful the firm has been attracting new customers and migrating existing customers to subscription and Sage Business Cloud. Overall, organic revenue went up by just under 6%.
Within the figures, we can see the dynamics of Sage’s changing business model in play. There was an almost 26% increase in subscription-based revenue, offset by an almost 20% decline in other revenues. That was due to the managed decline in licence sales and “de-prioritisation” of professional services. Some 88% of the company’s revenue is now recurring, which makes the stock defensive and cash-generating. Ideal for sustaining the progressive shareholder dividend policy.
Covid-19 began to affect non-subscription revenue from the end of March. And now the company is beginning to see the broader effects of the sharp economic downturn caused by the pandemic. Some of the firm’s customers are deferring purchase decisions. Indeed, during April, new customer acquisition was roughly half the level the directors had previously expected.
However, Sage doesn’t intend to make any of its staff redundant and hasn’t furloughed anyone, or taken advantage of other government support schemes. Despite the near-term uncertainty, the directors are “confident” about the company’s long-term strategy. And I reckon Sage looks set to thrive in a world with coronavirus.