Software giant Sage Group PLC (LON:SGE) was the biggest faller on the FTSE 100 on Thursday after warning that margins will be at the lower end of its guidance.
Revenue growth in the opening nine months of its financial year also fell short of expectations.
READ: Barclays warns of ‘likely’ second-half slowdown for Sage
The company, which makes accounting software for businesses, is pivoting away from its legacy software and software-related services (SSRS) as it seeks to become a “great Software-as-a-Service company”.
Sage had always expected SSRS sales to wind lower in 2019, but the decline has been greater than forecast, dropping by 15.5% to £195mln in the nine months ended 30 June.
Organic revenue growth held back by legacy business
Recurring revenue jumped by 10.6% to £1.18bn in the nine-month period, which analysts described as “relatively strong”.
But the sharp slowdown in SSRS sales meant group organic revenue increased by 5.9% to £1.42bn over the first nine months – below full-year expectations of a 6.1% rise.
“Sage was priced for upgrades going into today’s update which have not materialised due to declining legacy business,” said Shore Capital analyst Martin O’Sullivan.
Weak outlook
Bosses had previously guided for a “flat to mid-single-digit decline” in SSRS revenue this year, but they now estimate sales in this business will fall by more than 15%.
On top of that, operating profit margins for the year will be “at the lower end” of the 23-25% range previously set out.
“We remain encouraged by the progress made in recurring revenue in the first nine months of FY19, reflecting Sage's focus on high-quality subscription and recurring revenue as we continue the transition to becoming a great SaaS company,” said chief financial officer Jonathan Howell.
“We expect full year FY19 recurring revenue growth to slightly exceed guidance of 8-9% and the combined decline in SSRS and processing revenue to be slightly greater than the decline seen in the first nine months of the year.
“We expect organic operating profit margin to be at the lower end of the guided range of 23-25%.”
Shares were down 11% to 727.4p on Thursday morning.