Morning Note: Market news and an update from Sage Group.

Market News

US April CPI came in at 3.4%, in line with expectations. The core reading was 3.6%. Swaps markets are now pricing in two interest rate reductions this year. Austan Goolsbee welcomed the inflation slowdown but said there’s “still room for improvement.” Neel Kashkari repeated the central bank probably needs to keep rates at the current level for “a while longer.” The dollar fell and the 10-year Treasury yield slipped to 4.33%. Gold rose to $2,387 an ounce. The risk-on mood helped the oil price recover some of its recently lost ground and currently trades at $83 a barrel.

US equity markets moved up to a new high last night – S&P 500 (+1.2%), Nasdaq (+1.4%) – with the positive momentum continuing this morning in Asia: Nikkei 225 (+1.4%); Hang Seng (+1.8%); Shanghai Composite (+0.2%). A gauge of China property stocks surged more than 10%.

The FTSE 100 is currently trading 0.3% lower at 8,421. Companies trading ex-dividend this morning include BP (1.15%), Bunzl (1.60%), GSK (0.83%), Kingfisher (3.20%), Shell (0.94%), Tesco (2.63%), and Unilever (0.86%). Sterling trades at $1.2678 and €1.1656.

China sold a record amount of Treasury and US agency bonds in the first quarter, offloading a total of $53.3bn. Its stockpile of Treasuries slid in March to the lowest level since 2009.

Source: Bloomberg

Company News

Sage Group has today released results for the half-year to 31 March 2024. Although the company has made a positive start to the year, it has nudged down its revenue guidance for the full financial year. In response, the shares are down 10% in early trading.

Sage supplies technology that helps businesses of all sizes manage everything from money to people. This is done through Sage Business Cloud, a business management solution comprising Accounting, Financials, Enterprise Management, People & Payroll, and Payments & Banking. Software subscription penetration stands at 81% as the business continues the transition towards subscription and Sage Business Cloud. The group has introduced AI-powered products and services that deliver enhanced productivity and insights, driving value for both existing and new customers, including Sage Copilot, its generative AI-powered digital assistant.

The group is focused on increasing recurring revenue (now c. 97% of the total and 102% by value), delivering attractive operating margins and strong free cash flow, and paying a progressive dividend.

In the six months to 31 March, total revenue grew by 9% in organic terms to £1,152m, reflecting continued robust demand for the group’s solutions and services.

Sage Business Cloud revenue increased by 18% to £915m, including cloud native revenue up 25% to £353m, primarily through new customer acquisition, and by growth in cloud connected revenue from both existing and new customers.

Subscription penetration increased from 79% to 81% driven by growth in subscription revenue of 14% to £937m. Other recurring revenue declined by 2% to £175m.

Annualised Recurring Revenue (ARR) grew by 11% to £2,253m, reflecting growth across all regions balanced between new and existing customers.

Regionally, in North America, revenue grew by 13%, with a good performance from Sage Intacct supported by Sage 50 cloud and Sage 200 cloud. In the UKIA region, revenue increased by 8% driven by cloud solutions for small businesses together with Sage Intacct. In Europe, revenue increased by 6%, with growth across accounting, HR, and payroll solutions.

Underlying operating profit rose by 18% to £254m, with the margin up 160 basis points to 22.0%, driven by operating efficiencies as the group scales the business.

Underlying cash conversion is very strong, at 127%, reflecting continued growth in subscription revenue and good working capital management.

The group has a robust balance sheet, with net debt of £811m and cash and available liquidity of £1.1bn. Financial gearing stands at a comfortable 1.4x net debt to EBITDA. Sage intends to operate in a broad range of 1x to 2x net debt to EBITDA over the medium term, with flexibility to move outside this range as business needs require.

During the period, Sage completed the acquisition of Bridgetown Software, the developer of BidMatrix, a cloud native bid analysis tool for the construction industry, helping Sage to expand its customer proposition beyond financials.

The interim dividend has been increased by 6% to 6.95p, in line with the policy to grow progressively over time. Last month, the group completed a £345m share buyback programme.

Looking ahead, the group now expects organic total revenue growth for full year to September 2024 to be ‘broadly in line with the first half’ (i.e. 9%). This is a slight reduction versus the previous guidance to be ‘to be broadly in line with FY2023’ (i.e. 10%). The group continues to expect operating margins to trend upwards in FY24 and beyond, as it focuses on efficiently scaling the business.

Source: Bloomberg