For a country that was the birthplace of the first electronic computer, Britain is light on tech champions. Accountancy software stalwart Sage Group, which has been around for almost 40 years, is a heavyweight, if unexciting, contender. But on Friday it lost its crown as the largest UK listed technology company by market value after investors took fright at news of a tighter squeeze on profit margins.
The 14 per cent fall in share price brought its market capitalisation down to £6.65bn. Cambridge-based Aveva, even older than Sage, weighs in at £6.9bn. Market newbie The Hut Group, an ecommerce company, is not far behind at £6.3bn.
The problem was not Sage’s top line, as sales were in line with expectations. Rather it was the warning of a 3 percentage point hit to operating profit margins in the next fiscal year, after this year’s 1.7 percentage point decline. That could shave as much as a fifth off next year’s earnings.
A history of disappointments compounds dismay. The share price chart resembles a saw tooth pattern. No wonder shares trade at a discount to peers. The enterprise value-to-ebitda ratio is 12.5, a quarter below that of the MSCI world software and services index.
The expected margin squeeze is due to extra investment, two-thirds of which is for product development and a third for extra marketing. It is unclear how much of that will be offset by extra growth, given corporate belt-tightening in tough times. Though the pandemic has accelerated the uptake of digital technology, automating the back office is not a priority for businesses struggling to survive.
Yet Sage is right to step up its research and development spending. That now amounts to 15 per cent of recurring revenues, up from 13 per cent two years ago. Rivals Intuit of California and Australia-listed Xero invest a higher proportion. With the accelerating shift from desktop to the cloud, competition is intensifying. If Sage is to remain in the top ranks of UK tech companies, it will have to innovate to keep up.
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