Cloud giants tussle over 2019 results

Tug of War Contest
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Xero, Sage and Intuit continue to battle it out for dominance in the emerging cloud accounting marketplace in a war now being fought on global stock markets.

The mid-May spring announcement season has become a key period in the ongoing battle to shape investor perceptions. This year’s sequence kicked off in Wellington, New Zealand on 16 May with strong annual results from Xero, followed by a fillip for Sage the next day in its half-yearly statement. Q3 figures are due from Intuit QuickBooks in the next few days.

The official results are when the vendors shake off their market-induced coyness and broadcast their latest user numbers far and wide.

UK stands out for Xero

Boasting 36% growth rates in total revenue to NZ$552.8m, Xero added 432,000 new customers to raise its global user base to 1.8m. For the first time, the number of new international subscribers (239,000) exceeded those from Australia and New Zealand (193,000).

Xero reported a net loss for the year up 9% to NZ$27.1m. During the year it bought Hubdoc for $70m and acquired Instafile for an undisclosed sum. With the purchase of these companies, Xero inherits goodwill that needs to be amortised on its balance sheet, but oddly the company blamed the loss on “impairments” in the first half of the year. In contrast, the company said it had turned a profit of $NZ1.4m in the second half of the year.

A spokesperson described the UK as “the stand-out market” in the figures, adding 151,000 users for the year. In what could provide further evidence of MTD’s acceleration of cloud accounting, 108,000 of those new users were added in the six months to 31 March – nearly double the number in the first half of the year.

UK revenues grew 50% to £62m, equivalent to just over 20% of Xero’s global income.

“Xero had exceptional growth in the UK. We achieved record subscriber additions for one country in a 12-month period,” said CEO Steve Vamos in an official video. “We remain well positioned to support small businesses and their advisers in the transition to HMRC’s making tax digital policy this year.”

Sage half-year results

With its 30 September year end, Sage’s annual reporting announcement traditionally falls in December, which means that we’re usually treated to half-year results in mid-May.

Following a muted 2018 for the FTSE-listed accountancy software house, 2019’s half-year statement is upbeat, emphasising Sage’s vision “to become a great SaaS company for customers and colleagues alike”.

Sage CEO Steve Hare is an experienced hand at presenting figures showing the company’s transition from desktop to cloud applications in a favourable light, such as a measure showing a 17% increase in Sage Business Cloud penetration from 27% of customers to 44%.

Which customers are included in that calculation is not explained, nor did Sage publish user figures for Sage Business Cloud Accounting in its half-year statement.

Debates have been simmering in recent weeks on AccountingWEB about non-GAAP sleights of hand, so it may be worth balancing the cloud penetration claim with the more prosaic 6.2% increase in “organic” revenue to £941m for the six months ending on 31 March.

Sage’s organic operating margin of 23.2% was in line with expectations according to CFO Jonathan Howell. The margin was 1.6% down on last year’s half-year rate, due to “increased investment to accelerate strategic execution” and compensation changes to encourage growth.

The signs from AccountingWEB’s annual software survey are that Sage’s cloud accounting program has been left behind in the UK by MTD-fuelled surges by Xero and QuickBooks.

Instead, there may be a more immediate focus within the group on beefing up its presence in the mid-market, where Sage 50c still has a significant presence alongside Sage 200 and the renamed Sage Enterprise Management (formerly X3).

Setting out its broader “software as a service” approach, Sage confirmed it will continue “to invest in cloud native and cloud-connected solutions” with new functionality coming for Sage Enterprise Management and Sage Payroll.

The company also said it was progressing well with work to localise the online Sage Intacct mid-market application, which will be due for launch in the UK “later in 2019”.

More to come from Intuit QuickBooks

To add some spice to the mix, Intuit’s third-quarter results are due in a matter of days. Concluding just a couple of weeks after the end of the US income tax filing season, this is the quarter when the QuickBooks’ developer’s revenues traditionally peak. The Q3 figure is very likely to exceed US$3bn this year and it will be worth looking carefully to see how much revenue was generated by the company’s controversial foray into tax preparation services.

Unless it has experienced a traumatic fall in the adoption rate for QuickBooks Online, the company is likely to announce that its cloud user base exceeds four million users.

About John Stokdyk

John Stokdyk, AccountingWEB head of insight

AccountingWEB’s Head of Insight has been with the site since 1999 and likes to spend his time studying accountants’ technology habits. When not nerding out, you can find him exploring obscure indie music and searching for the perfect organic sourdough loaf from his base in Brighton, UK.

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22nd May 2019 09:29

See my more detailed comments on the Xero results in another thread. In many ways these are the most worrying results yet. The one question investors want answers to - or at least should do - is "What is the strategy now in the USA, is it still betting the house?"

Net cash inflows of $100m look great until you see that $444m came from yet more tapping up of shareholders for readies.

This is JDS Uniphase, Marconi etc. revisited. The board is full of ego, spin and ambition way beyond their abilities from what I can see.

Now this might all work. Xero might usurp QBO and do an "Amazon". They might. But remember Amazon were just one fundraising away from Chapter 11. And lots of would-be Amazons like Friends Reunited just got crushed, never to be heard from again.

These results and the accompanying blurb provoke more questions than they answer, for me.

Thanks (3)