Sage shares fall 4% as recurring revenue growth slows despite EBIT beat

Investing.com -- Sage Group ’s (LON:SGE) stock fell more than 4% on Thursday following a modest slowdown in recurring revenue growth despite  strong first-half results.

The software company posted a 9% organic revenue growth in line with expectations, and its adjusted operating profit came in about 2% to 3% ahead of forecasts. Earnings per share and free cash flow also exceeded analyst estimates.

Sage reiterated its full-year guidance, expecting organic revenue growth of 9% or above, with operating margins trending upward. 

The company pointed to a more volatile and uncertain macroeconomic environment, but still maintained its outlook for fiscal 2025. 

Analysts expect operating margins to improve by approximately 60 basis points year-over-year to around 23.3%.

Despite these positive results, Sage reported a slowdown in its organic annual recurring revenue growth, a key measure of the company’s recurring revenue base. ARR grew 10.1% in the first half, down from 10.5% in the second half of fiscal 2024. 

Organic recurring revenues also slowed, growing 9.3% in the first half compared to 9.8% in the second half of 2024, and further decelerated to 9.0% in the second quarter.

The company’s overall organic revenue growth showed a more moderate slowdown, decreasing from 9.2% in the second half of fiscal 2024 to 9% in the first half and 8.8% in the second quarter. 

This drop was attributed to the stabilization of non-recurring revenue streams, which helped offset the decline in recurring revenues.

Sage also noted that growth in its Intacct cloud financial management solution remained steady at 21% in the first half of fiscal 2025, in line with the second half of fiscal 2024. This addressed concerns over the performance of Intacct, which had been a topic of scrutiny in previous quarters.

The company’s free cash flow performance exceeded expectations, mainly due to improved working capital management. However, capital expenditures were higher than expected at £35 million, compared to £19 million forecasted. 

Sage indicated that this higher spending was unlikely to continue in the second half of the fiscal year. 

Despite this, the company revised its full-year free cash flow forecast down by about 3%, though this decline was offset by increased forecasts for fiscal 2026 and 2027.

Sage’s operating margin rose 140 basis points year-over-year in the first half, and Morgan Stanley (NYSE:MS) analysts expect the margin to increase by about 75 basis points for the full fiscal year, in line with the company’s usual annual margin expansion range of 50 to 100 basis points. 

The company also announced an additional £200 million share buyback, extending its ongoing capital return program.

Analysts updated their forecasts based on Sage’s first-half performance. They now expect adjusted EBIT to increase by about 1%, with a 23.4% margin for fiscal 2025, up approximately 75 basis points year-over-year. 

Adjusted EPS estimates were also raised, with an additional 2% increase projected for fiscal 2026 and 2027, driven by the additional buyback.