After the £24bn purchase of ARM Holdings by Japan’s SoftBank last year investors in the UK have been searching far and wide for the next publicly-listed domestic tech company capable of rivaling global giants such as Apple. Have they found their answer with payment processor Worldpay (LSE: WPG) or accounting software provider Sage Group (LSE: SGE)?
Ambitious expansion strategy
Worldpay is definitely one of the more likely UK-listed tech firms to make a name for itself across the globe as online and offline usage of credit and debit cards rises precipitously. Sold by RBS to a private equity group in 2010 and then listed on the LSE in late 2015, Worldpay has the scale necessary to compete with giant rivals such as PayPal.
Half-year results to June show just how big Worldpay has grown, with a 15% year-on-year increase in payments processed to 7.2bn and total transaction volume rising 11% to £217bn. Worldpay makes its money by taking a cut of each of these transactions and in the same period recorded a 16% rise in net revenue to £539m.
Growth is being driven both by increasing market share in Worldpay’s core UK market as well as an ambitious expansion strategy that has seen its services introduced to major markets such as Australia and Canada in the past year. Alongside entering new countries, Worldpay is also growing by offering small businesses cash advances linked to anticipated future sales — an interesting method of ensuring customer loyalty.
The company has been very successful in adding both small business and larger multinationals such as Paddy Power Betfair and Cathay Pacific as customers, which bodes well for long term growth potential. And with impressive margins and growing free cash flow, Worldpay has plenty of firepower to bolster expansion efforts into new territories. While it faces tough competition from established competitors and fintech startups alike, I reckon Worldpay has the necessary scale, balance sheet and products to live up to its name and make itself a global giant in the payment processing industry.
Global ambitions thwarted
With the departure of ARM last year, accounting software designer Sage took on the mantle of the UK’s largest listed tech company, But it’s hasn’t been all champagne and caviar for the Newcastle-based company since then. Changing consumer habits and increased competition at home have forced the company into a much-needed turnaround programme that is seeing it re-focus on its core UK market and contemplating the sale of its North American business.
While this likely represents the end of Sage’s global ambitions, at least for the time being, it doesn’t mean the plan is an unwise one. Re-designing its products to take advantage of cloud computing and transitioning to a subscription-based sales system is already paying off for the company. Full year 2016 results saw a solid 6.1% year-on-year rise in organic sales and increase in operating margins from 26.5% to 27.2%. This was largely driven by an 81% year-on-year jump in subscribers for its new cloud-based Sage One product, showing that small business owners are responding well to Sage’s new offerings.
With non-Europe, non-North American international sales only accounting for 13% of 2016 sales, Sage is unlikely to become a globe-spanning UK tech champion if it does decide to sell its North American business. But, with its shares reasonably price at 19 times forward earnings and revamped product lines evidently a hit with customers, Sage is still one to watch in the years ahead.
