Sage Group plc, a supplier of enterprise software for small and mid-sized companies, finished fiscal 2007 with strong overall revenue and income growth, though the North American region continued to be a drag on performance.
For the year ended Sept. 30, 2007, revenue increased 30% to £1.16 billion, from £892.4 million in 2006. Much of that growth came from a handful of acquisitions completed during the year; Sage reported that it achieved its 7% forecast of organic growth for the year, mainly reflecting strength in three of its four geographic regions. Meanwhile, current- and prior-year acquisitions accounted for 26% of total revenue.
The bottom line showed similar improvements. Sage Group's EBITA (earnings before interest, tax, and net amortization) increased 20% to £283.2 million, from £235.9 million in fiscal 2006.
License revenue increased 12% in 2007 to £343.7 million, from £308.1 million, with organic growth of 4%. Services revenue rose 39% to £813.9 million, from £584.3 million. More than 59% of Sage's annual service contracts now include a software license element, reported as services revenue.
Sage Group CEO Paul Walker noted on a conference call with analysts this week that 30% of Sage's 5.5 million customers are on service contracts today. Sage added 319,000 new customers in fiscal 2007, 21,000 of them via acquisitions.
In North America, Sage Software Inc.'s revenue grew 54% to £508.1 million, but only 4% came from organic growth. In its interim financial report, the company had forecast better growth in the back half of the year. "It was disappointing not to see an improved organic growth in the second half," Paul Harrison, group finance director, told analysts on the conference call.
While the Mid-Market Division posted 5% organic growth in the second half of the year, the Small Business Division grew only 3%. The company's Peachtree upgrade "didn't resonate as strongly in the market as in recent years," he said, and a contact and customer management product, called ACT!, captured fewer corporate license deals. Of the company's 2006 acquisitions in North America, Verus, now Sage Payment Solutions Division, performed in line with expectations while Emdeon, now Sage Healthcare Division, stumbled, with only 1% growth.
The company spent much of 2007 working to put its North American house in order following what Harrison called a "step change in the scale of our business." Following a May reorganization into four operating divisions, the company announced in October that it would replace its North American CEO and CFO to manage the new divisional approach. On this week's conference call, Walker said he hopes to announce the new team in early 2008.
Sage will continue investing in its North American businesses, Walker said. "Over the last nine years, we clearly have created a significant position in the North American market, generating revenue over $1 billion and $200 million of EBITA [in that time]. Our strategy is to continue to respond to our 2.8 million customers with products and services." He added, "Sage is a customer-led business. We need to sharpen our attention in sales and service support. Service is our competitive advantage. We'll put our investment there."
Sage did not provide specific guidance for the coming year. Walker did note that he expects to see "modest improvement in organic growth."
Walker said he plans to continue the company's growth-by-acquisition strategy. In 2007 alone, the company completed five acquisitions, with a combined value of £73.1 million. Just after the close of fiscal 2007, Sage completed another acquisition, of KCS Global Holdings Ltd. in the United Kingdom, valued at £20 million.
In addition, the company is attempting to read the market's interest in various software delivery models. Walker noted increasing interest in Web-based and on-demand software. Newer customers will want simple online solutions, he said, while established customers will want more customization. In response, Sage will take a hybrid approach to its product introductions over the next three or four years, recognizing that the market will want a mix of desktop applications and Web-based and software-as-a-service options.