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Sage Group's first half profits fall as organic revenue growth misses expectations

Sage raised its interim dividend by 8.2% despite lower-than-expected revenues as it addresses sales execution issues
Shares in Sage are higher after an initial decline

Software company Sage Group PLC (LON:SGE) reported a 5% decline in first half profits as organic revenue growth missed its expectations.

Statutory pre-tax profit fell 5% to £171mln, reflecting charges related to the group’s restructuring and recent acquisitions and disposals.

Organic revenue rose 6.3% to £908mln but the company said growth was £5mln lower than estimated due to “inconsistent operational execution” in the UK on sales of cloud and bundled services as well as contract licence slippage in the enterprise division in Africa Middle East and the US.

READ: Sage Group cuts annual revenue guidance after first half misses expectations

“Organic revenue growth in H1 18 was around £5mlm below our expectations, due to slower and more inconsistent sales execution than we had planned for,” said chief executive Stephen Kelly.

“We have already started the implementation of robust plans to address these execution issues and to accelerate our growth through high-quality recurring revenue throughout the rest of FY18 and beyond.”

North America delivered 10% organic revenue growth, reflecting progress across the US, Canada and Sage Intacct. In Northern Europe revenue growth was 4% while Central  and Southern Europe grew 5% and international gained 4%. 

As announced in an April trading update, Sage has cut its organic revenue growth estimate for 2018 to 7% from 8% previously.

Operating profits and margins fall but dividend hiked

Organic operating profit in the first half fell 0.7% to £222mln as the operating profit margin fell by 80 basis points to 24.5% in line with plans to front-load investment in the first half and absorbing losses from cloud product acquisitions last year.

For fiscal year 2018, the group expects an operating profit margin of 27.5%.

Sage maintained its rolling mid-term guidance for organic revenue growth of 10% and organic operating profit margins of at least 27%.

It said further cost savings of 500 basis points will be delivered over this period and either reinvested for growth or realised as an increase to operating profit margin.

In the long-term, Sage is targeting organic operating profit margins of at least 30%.

Sage raised its interim dividend by 8.2% to 5.65p. 

Shares rose 0.7% to 641p in afternoon trading.

ShoreCap maintains 'buy' rating

"We expect a muted to slightly positive share price reaction, noting in particular the progress in North America, the unchanged FY18 outlook and the slightly better than expected cash conversion," Shore Capital analyst Martin O'Sullivan said.

"We are 'buy' rated on Sage as we balance significant positive traction in the cloud and the US market with what we perceive as a temporary pause (in H1) in the planned acceleration of organic revenue growth."

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