Sage sacrifices short-term growth for cloud shift
New Sage CEO Steve Hare has said that the company is prepared to sacrifice short-term revenue growth in order to focus on the firm’s cloud future.
In a statement issued alongside the company’s September year-end results, the UK’s largest listed technology company said it was intending to shift more of its customer base to the cloud by spending £60m on R&D and product improvements.
Hare, who took over as CEO last month after replacing Steven Kelly on an interim basis earlier in the year, said that the software house was trying to do “a bit too much all at the same time” and had been too focused on selling “on-off things”. He promised to concentrate on accelerating Sage’s transition to becoming a cloud-first business by investing further resource in Sage Business Cloud.
Year end results
For year end September 2018 Sage posted organic revenue of £1.82bn, up 6.8% year on year – in line with its revised guidance issued in April which pointed to “inconsistent operation execution” in its sales force – and slightly down on the 7% originally forecast.
Sage’s profit before tax rose 16.4% to £398m with a margin of 27.2%. Recurring revenue growth was 6.7% at £1.441bn compared to 10% for September 2017, and subscription growth fell from 30.9% in 2017 to 25.2% (£839m) this year.
Sage’s management expectations for the next financial year, according to the statement, are that growth in its software and software-related services such as licences, training and implementation will be “flat or decline mid-single digits” with recurring revenue growth of 8% to 9%, and the firm warned that its margin could slip to between 23% and 25%.
According to the software vendor, any potential decline in these revenue streams will be down to the company’s focus on driving subscription and recurring revenue. “As the business accelerates the pace of transition towards subscription, the organic revenue growth rate may decrease in the short-term,” read the statement.
‘Trying to do too many things’
Quoted in the Telegraph, Hare said the company has been trying to “do a bit too much all at the same time.
“If you go back four years, said Hare, “Sage had been a little slow to create the cloud capability that it needed, although a huge amount has been done over the past couple of years to accelerate that.
“Because we were trying to do too many things, and trying to accelerate our overall top-line revenue, we also became a little over-focused on selling on-off things. I think those things are important, but only really as enablers.”
The former Sage CFO went on to state that the company’s focus should be first and foremost to “transition our customers onto the cloud on subscription, and add new customers as well”.
Competition has grown significantly in the North East-based operator’s key markets over the past few years, with cloud competitors Intuit QuickBooks and Xero growing subscriber numbers and both announcing moves into compliance.
However, Hare remained optimistic that the tech giant was well-positioned to fight off any challengers.
“There are a lot of smaller tech startups in the UK,” he said, “but there is a bit of a trend that as those companies grow they tend to get bought, so by the time you get to a bigger size, there are less of them.
“There is a wider tech ecosystem in the UK, and I'm optimistic that going forward we'll hang on to more of that," he added.