Sage Group Drops Most in 24 Years Over Surprise Warning

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(Bloomberg) -- Sage Group Plc fell by the most in over 24 years Friday, after the U.K.’s largest software company posted a surprise warning that sales had failed to hit expectations.

Shares fell by 20 percent in London, the biggest drop since July 1993, after the company said growth will be hit by a decline in recurring revenue and poor performance in its enterprise software business.

"Growth over the first half of 2018 was lower than our expectations as the pace of execution has been slower than we planned," said Stephen Kelly, chief executive officer, Sage Group.

Sage is currently transitioning to a subscription model, attempting to get new customers to purchase new cloud-based products. However sales in Northern Europe and Africa, Middle East, failed to hit targets.

As a result, 2018 full year guidance has been revised a percentage-point down to around 7 percent organic revenue growth, according to a statement Friday. The organic operating margin of 27.5 percent has remained unchanged.

The collapse in Sage’s share price marks a tough time for U.K. tech companies. In January shares in Micro Focus International Plc slumped the most in almost seven years after predicting falling sales and reporting revenue at its freshly acquired HPE Software business.

Enterprise license contracts in the U.S., Africa and the Middle East also dropped. This compares to North America performing strongly over the last quarter of 2017.

Analyst Doubts

Analyst flagged their concern in January over Sage’s ability to hit its 8 percent target for 2018, after the company posted first quarter organic revenue growth of 6.3 percent.

"While the outlook for the full year 2018 organic operating margin is unchanged at 27.5 percent, clearly there is more uncertainty around whether that is achievable," analysts at Shore Capital said in a note on Friday.

Over the six months ended March 31, organic recurring revenue growth is expected at 6.4 percent, down from 11.1 percent the year previous. Software subscription growth of 25.3 percent is down from 30.7 percent.

"We maintain our view that driving accelerating organic revenue growth in a software company that had been more focused on its installed base is challenging," Adam Wood, an analyst at Morgan Stanley, said in a note, "especially without seeing margins decline to drive the acceleration."

The U.K. software company’s first-half 2018 results announcement is set to be published on May 2.

©2018 Bloomberg L.P.

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