Sage (LON:SGE) has long been held up as a pillar of UK business. Indeed, in 2020 the company’s founder was knighted for his services to our nation’s commercial endeavours.
But it hasn’t always been a star performer in the UK stock market.
Sage was slower than its peers in the US to switch from a licensing to a subscription model. In 2019, when the likes of Intuit and Xero were making most of their revenue from recurring subscriptions, the equivalent figure at Sage was only 51%.
Like many software companies which have made the move from lumpy licensing revenue to subscriptions, margins have taken a bit of a battering along the way. And as Sage‘s transition came later and has taken longer, margins have been weaker than many of its peers.
The company also had a rough time during the pandemic. As it specialises in selling accounting software for smaller businesses (which were disproportionately affected by Covid-19 policies), sales were disappointing.
But in 2025, as Donald Trump marches back into the White House with promises to make small and medium sized American businesses (which contribute 39% of Sage’s top line) great again, the company is sitting in a good position. And its conversion to high margin subscription business has come good at just the right time.
Recurring subscription sales now account for 81% of revenues at Sage. The company’s annual recurring revenue for the year to September 2024 was £2.3bn, an increase of £277m on the previous year. What’s especially impressive about that growth is that it came from both new customers and the upselling of new products and services to existing customers.
Margin are also heading back towards the level investors like to see in software companies. At 19.4%, operating margins aren’t quite at the level achieved prior to the move away from licensing sales, but they’re back on the right track. US peer Intuit, which made the move to subscription before Sage, has reported an average operating margin of 24% over the last four years.
The company also ticks the quality boxes for profitability and cash generation. Return on capital employed has averaged 16% in the last five years and is rising, free cash conversion has averaged more than 100% in that time.
Management have deployed that cash into capital expenditure, especially in research and development. The company has…
