The Swiss bank has abandoned its ‘sell’ recommendation and moved to a neutral position, saying the software firm appears to have accepted that most of the growth opportunities derive from milking the existing customer base.
“In 2015, Sage highlighted the growth potential from new customers – an ambition of reaching one million Sage One customers and 40,000 (1% share) customers for Sage Live were given. Two years on, the emphasis was much more on the latent opportunity in the installed base and little detail was given on new customer acquisition targets,” UBS observed.
UBS calculates that Sage’s 10% organic growth target in 2020 will require around 12% recurring revenue growth, up from 8% in 2017 and just 7% in the first quarter in 2018.
Reading between the lines of management’s comments at its recent Capital Markets Day, UBS thinks Sage is targeting around 8% growth in recurring sales from the installed user base, which would be enough to invest up to an additional £340mln in saless & marketing by 2020 to drive an additional £200mln in sales in 2020.
Following the trading update on January 25, which revealed a weak start to the year, UBS has trimmed its target price to 740p from 745p.
“We note a very competitive environment and continue to see Sage's R&D spending as low in comparison to peers; however, trends in France will likely improve as the year progresses (something which has weighed on growth recently), as the anniversary of ending subscription activation fees passes,” UBS said.