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July 23, 2015

Sage cloud revenues get steady start

Transition will take two years to implement, says chief executive Stephen Kelly.

By Jimmy Nicholls

Sage claimed it is on course to meet financial expectations on Wednesday following a shake-up of its business model under chief executive Stephen Kelly, who joined the firm last November.

The company said it was confident that it can achieve a 28% operating margin and 6% revenue growth for this financial year as it moves its accountancy software onto the cloud, in a departure from its historic commitment of installing software on-premise.

Should these projections prove accurate it would see Sage achieve a long-held goal to hit 6% organic revenue growth yearly, the firm having previous reported a year-on-year revenue increase of 6.2% for the first half of this fiscal year, to £682m.

Steve Hare, chief financial officer at Sage, said: "The business performance in the quarter showed continued momentum in recurring revenue growth, and overall the performance was encouraging, with the revenue growth rates flattered by a weaker Q3 last year.

"Through Sage’s Customer for Life strategy we anticipate that some quarters will be stronger than others and we are committed to sustainable, profitable growth generating consistent operating margins, yielding strong free cash flow and progressive dividends."

According to data releases by Sage, the number of paying subscriptions for its SMB cloud software Sage One increased to 115,000.

Software subscription contracts at the firm were reported to total 550,000, generating an annualised subscription value of £260m.

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Commenting on the figures, Kelly said the switchover would "take a couple of years to fully implement."

Roger Phillips, an analyst at Investec, told the Financial Times: "Our view remains that the short term is full of low-hanging fruit, but the midterm presents more fundamental strategic challenges."

Sage’s pivot comes amid widespread disruption in the software industry as more and more customers move to the cloud, which software-as-a-service companies claim is more flexible and better value that traditional software licenses.

Software leviathans Microsoft, Oracle, and SAP are making similar moves to challenge the rise of cloud-only software firms such as Salesforce and NetSuite.

In a surprise move in February, Kelly even partnered with Salesforce to push his firm’s accounting software on the firm’s cloud platform, Marc Benioff’s firm having promised not to stray too far from its traditional remit of customer relationship management tools.

Despite this Sage has insisted that it will not force its customers onto the cloud against their will, many firms being reluctant to move because of reliance on legacy systems and concerns over the cost of migration.

Sage is also moving its accounting software onto smartphones, an emerging market for corporate-facing software firms.

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