Proactive Investors - The Sage Group PLC (LON:SGE)’s trading update to the market yesterday was “a good update... but not that good”, according to analysts at Barclays (LON:BARC).
Some analysts expressed surprise at the approximately 13% uplift in the software company’s share price on the back of its fiscal 2023 results and outlook for the year ahead.
While the software company’s results were in line with expectations, the share price reaction could have been too optimistic, Barclays' analysts said.
In a research note on Thursday, analysts highlighted that Sage’s annual recurring revenue (ARR) growth was lower than in the first half, despite encouraging topline figures.
Recurring revenue grew 11.3% organically for the full year, slightly slower than the 11.5% growth in turnover reported in the first half of the year.
The company added £222 million of ARR on an annual basis, only slightly more than reported at the half-year mark (£217 million), with new customer acquisition driving £190 million, flat on midway through the year.
Sage’s ARR growth was largely driven by cloud native products, but also by Sage 50 and 200, which are legacy products, analysts said.
Barclays analysts said they understand that without rounding the figure for new customer acquisition (NCA), recurring revenue would have only been "slightly higher than six months ago".
Sage’s management team explained on a call that new customer acquisition was driven by cloud native services, which analysts estimate comprise more than half of the sum.
Management said net retention had been “pretty consistent” with churn remaining low and below pre-pandemic levels and prices increasing over the last two years.
Sage has increased its prices by 4-5% these past couple of years and plans to raise them by the same amount next year.
Analysts estimate that the increase in Sage’s reported renewal rate by value to 102%, compared to 101% last year and in the first half, was “due to rounding”.
They estimate that the rate was half a percentage point lower than that for the last three reporting periods, at about 101.5% per quarter.
“On the call, Sage confirmed that ARR grew sequentially by ~3% in Q4, in line with previous quarters (~3% Q3, ~3% Q2, ~2% Q1),” Barclays’ analysts wrote in the research note.
Not all analysts agree, however, that the increase in Sage’s share price was unwarranted.
Analysts at Bank of America (NYSE:BAC) said in a separate research note on Thursday that Sage is expected to achieve similar growth in fiscal 2024 to the headline acceleration achieved in 2023.
They reiterated their recommendation to buy Sage’s stock, raising their share price expectations further, saying “demand remains solid”, and that the company is expected to gain more market share in the US.
Sage is expected to consolidate in the coming months through bolt-on deals.