Cloud investment to squeeze profit at UK's Sage

LONDON (Reuters) - Software company Sage said increased investment in cloud products would squeeze its profit margin and wipe 60 million pounds from annual earnings, sending its shares sharply lower on Friday.

The British company, whose software helps small and medium-sized businesses manage their accounts, payroll and other processes, is focusing on moving its customers to subscriptions and software delivered via the cloud.

CEO Steve Hare said recurring revenue was now 90% of total revenue and Sage Business Cloud penetration was above 60%.

“It’s an important part of our strategy to migrate customer to Sage Business Cloud and use Sage Business Cloud to drive new customer acquisition,” he said in an interview on Friday.

Increased investment in cloud resulted in Sage’s organic operating profit margin falling by 1.7 points to 22.1% in the year to Sept. 30, and it could drop by another 3 points to 19.1% this year, the company said.

“We think it’s important we continue to invest through this cycle,” Hare said, adding that margin recovery would be a “gradual process” as growth came back and the company achieved operational efficiencies.

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Shares in Sage fell to a seven-month low and were trading down 12% at 597 pence at 0940 GMT as analysts said investors would focus on the margin forecast.

Hare said the impact of COVID on small businesses would not be clear until government support ended.

“We’re just a bit cautious in the short term, which is why we are guiding to 3-5% recurring revenue growth (this year)” he said.

Sage reported a 3.7% drop in full-year organic operating profit to 391 million pounds on 3.7% higher total organic revenue of 1.77 billion pounds.

Statutory revenue fell 1.7% to 1.90 billion pounds, broadly in line with expectations.

Reporting by Paul Sandle; Editing by Kate Holton and Elaine Hardcastle