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Sage evaluate options for SagePay

Analysing companies' finances and value from their financial statements using ratios and formulae
TheMotorcycleBoy
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Sage evaluate options for SagePay

#250644

Postby TheMotorcycleBoy » September 10th, 2019, 6:55 am

Sage (SGE) disclosed last night that it is evaluating options for it's Sage Pay business. One of which could be a sale. Since SGE is one of several in my watch/buy list I'm obviously curious as to whether a sale of this CGU would be good or bad for the business as a whole.

For instance:

1. Is SagePay a loss maker?
2. Is SagePay not key to their SaaS or improving ARRs strategy?

I did (rather enthusiastically) have SGE on my catch a falling knife list of limit buys at 670p. I reckon I'll either remove it or knock it down to 600p until I try to figure out what this news implies.

Matt

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Re: Sage evaluate options for SagePay

#250856

Postby JuanDB » September 10th, 2019, 9:41 pm

My reading is that whilst offering cash collection capabilities to their customers is important to Sage, they have decided to do this by partnering with best of breed providers such as Stripe and GoCardless. Hence divesting Sage Pay.

I think the strategic decision is the right one. What confuses me is why they’re divesting rather than migrating the customers on to those partner providers.

Cheers,

Juan.

TheMotorcycleBoy
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Re: Sage evaluate options for SagePay

#250897

Postby TheMotorcycleBoy » September 11th, 2019, 7:06 am

JuanDB wrote:My reading is that whilst offering cash collection capabilities to their customers is important to Sage, they have decided to do this by partnering with best of breed providers such as Stripe and GoCardless. Hence divesting Sage Pay.

That sounds reasonable.

I think the strategic decision is the right one. What confuses me is why they’re divesting rather than migrating the customers on to those partner providers.

TBH, they don't categorically state that they are selling though your surmisal is probably right.
I've just grepped over the 2018 AR for some keywords,

On page 56 they seem downbeat on payroll:
Processing revenue excluding the performance of Sage Payroll Solutions (now held for sale) declined by 2%, whilst SSRS revenue grew at 4% (FY17: 11% decline), following a strong end to the year from Enterprise Management.

(However I'm not totally sure of the significance of the phrase "now held for sale", in above. Hmm...)

On page 57 they are mixed:
In Australia, strong revenue growth of 11% (FY17: 7%) is underpinned by recurring revenue growth of 6% (FY17: 9%) and SSRS growth of 36% (FY17: 2% decline), led by strong performance from both Sage 50 and Payroll.

Since I sometimes find it hard to see the wood for the trees in ARs, I was pleased to see some clarification of terms (page 159):
Processing revenue (Payment processing services Payroll processing services)
Processing revenue is revenue earned from customers for the processing of payments or where Sage colleagues process our customers’ payroll. processing revenue is recognised at the point that the service is rendered on a per transaction basis.

So working under the assumption that regards their reporting "processing revenues" == "revenues obtained from SagePayroll".

Furthermore:
Sage Pay is a payments processing service that is owned by Sage Group.
from https://en.wikipedia.org/wiki/Sage_Pay

I then looked at the segmental revenue breakdown for 2017, 2018, on page 156 and put this table together:


It says to me that, if my earlier assumptions are correct, that Payroll is a small component of their business, and not one in which they see the best growth. So yeah, getting rid of Payroll profitably could well be a good thing for the biz, and let them focus on SaaS and ARR etc.

I'm unsure as to how to answer this question of yours:
What confuses me is why they’re divesting rather than migrating the customers on to those partner providers.

Other than to say, and part in my own experience when firms sell off the chunk of their business, what goes is that part of the customer base, the IP, lease obligations and the staff. They can then also decide "which staff" exactly go, since often in a Tech firm lots of us wander between various projects which may indirectly feed into various CGUs. So I imagine a crafty divestment may be a good thing.

Make sense?

Matt

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Re: Sage evaluate options for SagePay

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Postby JuanDB » September 18th, 2019, 1:00 am

Hi Matt,

Apologies, I missed the notification of your reply.

My point around the divestment is that I understand Sage Pay helps Sage customers collect money from their end customers. I would expect the majority of the Sage Pay customers use that solution as an add on to their Sage accounting solution. So given that the Sage Pay customer will still be a customer of Sage post divestment, what does the divestment achieve? With an ongoing customer relationship it would seem logical to migrate the customers to a partner solution, retain the revenue in exchange for a hit to gross margin in increased COS.

Unless I’m incorrect and the majority of Sage Pay customers are not users of the Sage accounting solutions. In which case divestment would make more sense to me.

I’m not sure you were implying that Sage Pay and Payroll processing are the same solution? I do not believe they are. My understanding is Sage Pay is a receivables solution whereas Payroll sits on the payables side.

Thanks,

Juan.

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Re: Sage evaluate options for SagePay

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Postby TheMotorcycleBoy » September 19th, 2019, 6:49 am

JuanDB wrote:Apologies, I missed the notification of your reply.

No worries, Juan!

My point around the divestment is that I understand Sage Pay helps Sage customers collect money from their end customers. I would expect the majority of the Sage Pay customers use that solution as an add on to their Sage accounting solution.

A ha, I get it.

So given that the Sage Pay customer will still be a customer of Sage post divestment, what does the divestment achieve?

But presumably they (the customer) are no longer a customer for a "Sage Pay service". For Sage, the divestment must surely mean reduced support costs of the divested product. Perhaps they view that net £ effect to be beneficial. Furthermore, the resources (software and support personnel paid by Sage) previously consumed in the support and maintenance could be diverted to other projects, e.g. the Cloud/SaaS business.

With an ongoing customer relationship it would seem logical to migrate the customers to a partner solution, retain the revenue in exchange for a hit to gross margin in increased COS.

I don't quite understand what you mean here Juan.

I’m not sure you were implying that Sage Pay and Payroll processing are the same solution?

Ok. Not really. The term Payroll processing is perhaps confusing. In the table I posted in my last, I introduced Processing (a.k.a. Payroll?) and perhaps this is where the confusion stems. Apologies. I've not yet analysed any Sage report that breaks down revenue regards "solution", only by the means in which (I'm guessing here, see my last post) Sage collect the revenue.

What I had been trying to achieve was to evaluate what I saw as the potential top line impact to Sage as a business, when SagePay is divested. So I looked to the "Segmental Revenue Breakdown" section of the 2018 AR. Unfortunately Sage's accountants provide visibility of product lines, but *seem* broadly speaking to split into the following three:

    (Revenue segment)
  1. Recurring revenue
  2. Software and Related Services
  3. Processing revenue
and after googling and trying to read between the lines I reasoned that revenues accrued from "SagePay" (and perhaps others) were reported within the Processing revenue section. It's quite possible that I was incorrect in making this assumption. However, if I was right, then as the table suggests these revenues contribute a small % of Sage's total and are the area of least growth.

My understanding is Sage Pay is a receivables solution whereas Payroll sits on the payables side.

Based on what you wrote earlier in your last, I understand what you mean. Your understanding is quite possibly correct, I thank you for further enlightening me. :D

Well, FWIW I bought about £1200 of SGE shares sometime last week at 660p per share. I obviously would have liked cheaper, but 660p seemed to the lowest level of support that the market has offered to them over the last few months.

Matt


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