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Sage: Let’s not all over-react

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Sage is in our portfolio because its transition to subscription services from less reliable license revenues looks like an excellent strategy for the future. Subscription sales are highly reliable and should come with higher margins once the strategy is bedded in.

Sage’s (LON: SGE) management has never made any secret of the fact that short-term revenues might be dented as it shifts its customers to its new subscription model. In the first nine-months of the financial year to September 2019, that is exactly what has happened. Software and software related services (SSRS) revenue dropped 16% to £195m.

Investors who sent the share price up to a peak of 826p (or 27 times forward earnings) at the start of July were clearly disappointed. At one point, the shares were down 16% on the day of the announcement.

We think that represents a buying opportunity. Recurring software subscriptions rose 28% to £752m in the nine months and now contribute more than half the top line. SSRS revenues make up just 16%.

True, margins have narrowed, and Sage expects margins at the lower end of guidance of between 23% and 25% for the year to September 2019, from 28% in 2018. But that’s a…

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