Sage’s results for the year to 30 September demonstrate “organic” revenue growth up 6% to £1.4bn, with statutory profits up by nearly 3% to £194.3m in CEO Stephen Kelly’s first year at the helm.
The company’s results statement for the year explains that Sage adjusted revenue definitions and recognition policies on certain products, to “enable stakeholders to clearly and transparently track performance”. The move, which effectively added £46.7m to last year’s revenue and profit figures, had the opposite effect on the market, which saw the company’s share price drop 5% on Wednesday morning [the price had recovered to the opening level by mid-afternoon - Ed].
Untangling the reported figures requires considerable expertise and patience. Other elements of the report, including the starring role of Sage One and its claimed 173,000 global users, also raise a few questions. For example the claim of 92,000 UK subscribers to Sage One (upgraded to 100,000 by the time the results were released) perpetuates the statistical myth that the program’s accounting and payroll users are different customers.
But numbers aside, the results statement reveals the thinking behind CEO Kelly’s new broom. On taking over last autumn, Kelly undertook a review of the business and distilled his strategy down to five key themes and six strategic KPIs, one of which is adoption of the global cloud accounting engine, Sage One.
The objectives of his strategy include:
- Growing the value of installed customer base
- New customer acquisition
- Technology innovation
- Taking a market-leading position as a champion for entrepreneurs and small and medium businesses
- Moving from federated and disparate product and country operations to “One Sage” to take advantage of its organisational scale
“Sage is seeking to ‘leap-frog’ first generation cloud competitors through integrated latest generation cloud-platform products and through scalable digital distribution channels,” said Kelly in his review of the figures.
Aside from Sage One, much of the company’s focus during the past year has been on product development, including the Sage Impact suite for accountants and Sage Live, both of which were conceived and brought to market since Kelly joined Sage.
The company has also been wrestling with a continuing “substitution effect” as it switches from sales of software and related services (SSRS) to recurring, subscription-based income. So while SSRS organic revenue decline of 1% to £287m in the year, Sage experienced 28% growth in its annualised software subscriber base to £344m. Growth in revenue from processing services such as Sage Pay, reported separately for the first time, was up to £161m.
In the UK and Ireland revenue grew organically by 6% to £279m. Sage 50 products continue to do the business for Sage in its home country and abroad. Part of the success story here has been the impact of auto enrolment, for which Sage added a subscription-based pension module in Sage 50 Payroll. This has been adopted by 58% of UK payroll customers staging into auto enrolment during the past year, the company reported.
The Sage Drive cloud storage facility that links to Sage’s desktop applications attracted 20,000 new users during the year. Not surprisingly, the annual results statement does not mention some of the problems experienced by Sage Drive users.
Nevertheless, those glitches and the whirlwind development timetables adopted for Sage Impact and Sage Live reflect a surprising level of dynamism on the technology front during Kelly’s first year in charge. The company is facing a huge challenge to sustain the kind of growth the City expects, while still keeping the customers satisfied with both new cloud systems and older desktop products.
As has been the case for decades, Sage is a master at painting a “steady as she goes” picture in its financial results, but what the analysts and executives need to remember is that the user experience on the ground still counts for a major part of its continuing growth. Kelly and his colleagues have a delicate balancing act ahead of them in the next few years.