Software company Sage said increased investment in cloud products would squeeze its profit margin and wipe £60m from annual earnings, sending its shares sharply lower. 

The British company's software helps small and medium-sized businesses manage their accounts, payroll and other processes.

It is focusing on moving its customers to subscriptions and software delivered via the cloud. 

Chief executive Steve Hare said recurring revenue was now 90% of total revenue and Sage Business Cloud penetration was above 60%. 

"It's an important part of our strategy to migrate customer to Sage Business Cloud and use Sage Business Cloud to drive new customer acquisition," he said in an interview today. 

Increased investment in cloud resulted in Sage's organic operating profit margin falling by 1.7 points to 22.1% in the year to September 30, and it could drop by another 3 points to 19.1% this year, the company said. 

"We think it's important we continue to invest through this cycle," Hare said, adding that margin recovery would be a "gradual process" as growth came back and the company achieved operational efficiencies. 

Shares in Sage fell to a seven-month low and were trading down 12% as analysts said investors would focus on the margin forecast.

Hare said the impact of Covid-19 on small businesses would not be clear until government support ended. 

"We're just a bit cautious in the short term, which is why we are guiding to 3-5% recurring revenue growth (this year)" he said. 

Sage reported a 3.7% drop in full-year organic operating profit to £391m on 3.7% higher total organic revenue of £1.77 billion. 

Its statutory revenue fell 1.7% to £1.90 billion, broadly in line with expectations.