| Abstract: | The enterprise software purveyor experienced a dose of sales weakness in North American market, but international sales carried the day.
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| Keywords: | Sage Software, Sage ERP |
British enterprise software vendor Sage Group continued to benefit from its push into service-enabled software, as it reported that revenue and EBITA for the first half of fiscal 2008 both rose by 9%, to £640.5 million and £138 million, respectively.
Operating margins for the six months ended March 31, 2008, registered a healthy 24%, which CEO Paul Walker attributed, in part, to the company’s emphasis on selling on-demand software subscriptions that provide customers with ongoing business support and product upgrades. The company received about 60% of its revenue from subscription contracts in the half, Walker said. CFO Paul Harrison added that such “recurring revenue” grew by 11%, while non-recurring software sales grew by 3%.
The upbeat report overcame a gloomy first half for Sage Software, the company’s North American division, where sales stagnated at £248. 5 million compared with £249 million in the same period a year earlier, and EBITA dropped 7% to £43.5 million. Sage blamed the decline on difficulties in the healthcare division, which the company is restructuring. Sage Software, the largest unit under the Sage umbrella, welcomed a new CEO this March, and officials are intent on getting the North American division back onto a solid growth track.
Meanwhile, the parent company reported strong growth in other geographic markets, and noted that mainland Europe became the leading contributor to profits, with 35% of EBITA and 36% of revenue, buoyed in part by converting euro sales into the weaker pound sterling. Mainland Europe represented Sage’s strongest gain, as sales and EBITA both jumped 17%, to £229.4 million and £53.9 million, respectively.
Walker said that the SMBs that Sage targets with ERP, CRM, and other software are particularly receptive to service contracts in this difficult economic climate.
“Whether they want to spend more money expanding their software systems in more difficult times is questionable,” Walker told analysts on a conference call. “What they certainly do want is … to have support and they want to have the sort of subscription opportunities that Sage now offers them. We’ve also seen a drive over this period from going from typical bland software contracts to these premium contracts that include software upgrades as part of the service.”
With 1.7 million customers now on subscription contracts, Walker said, “the real focus that Sage has put into this area is really helping to start grow our business.”
In Sage’s home country of the United Kingdom, which it tracks separately from mainland Europe, sales improved 9% to £117.6 million, and EBITA rose 11% to £44.3 million. The company completed the acquisitions of Tekton Group, a vendor of construction industry software, and KCS, a provider of payroll and personnel software. Without the acquisitions, revenue growth was 5%, slightly lower than the company average. “We expect to see that improve as we go into the second half,” Walker said, noting that it revenue grew comparatively slowly because the U.K. government, like Germany, had legislated accounting changes a year earlier.
Sage’s “rest of world” category — mainly South Africa and Australia — rose 16% to £36.6 million, but EBITA was virtually flat at £10 million, largely because the company spent heavily on S. African investments, according to CFO Harrison.
While most of the company’s revenue gains came from organic growth in the first half, Walker said, “acquisitions will continue to remain a central part of our growth strategy.” Harrison said the company’s strong cash flow and debt ratios will assist in its acquisition plans.
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