Sage sacrifices short-term growth for cloud shift

Sage Steve Hare
Sage
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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”.

Stiff competition

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.

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06th Dec 2018 12:20

I hope he is planning on scrapping the existing pile of crap and starting from scratch!

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to MissAccounting
06th Dec 2018 16:13

I had a bookkeeper from one of my larger clients upgrade their 2005 ish version of SAGE to the new cloud version.

hurrah I thought, bye bye ancient software, my last client on desktop sage gone. Victory dance.

Turns out its essentially the same shockingly out of date desktop software from the 1980's, bolted to a cloud data base. The only way I could use it other than installing a full desktop version of sage on my office machine (no thanks) was to use a remote log in to a desktop on the client site.

It still an embarrassingly poor bit of kit, I cant really understand why people still use it other than the fact most bookkeepers are not too bright and wont learn anything else.

Its like driving a classic car, nice for its time and a nostalgia trip, not not much good for serious use day to day.

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to MissAccounting
06th Dec 2018 21:25

Harsh but true:-)

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06th Dec 2018 12:25

I tried the micro business Sage One Start 6 months ago and was not impressed. It was very slow to use and cumbersome.

When I reviewed the VAT report, e.g. when I client asks me to review at the quarter end it gave no details of the transactions, just 'Invoice' and 'Payment' or something like that. Totally useless.

I'm sticking with the desktop version that I've used for years and is excellent for the price and support.

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06th Dec 2018 12:30

Wish they would concentrate on getting Tas to the cloud.
A much more superior product due to is drill down facilities. Can always find the original transactions fast
Clients find it a much more easier product to use and understand. Unfortunately as soon as they got the product
they done very little. Shows how good it was to start with.

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By johnt27
to klerg000
10th Dec 2018 17:00

No chance of TAS moving to the cloud with Sage as it's no longer supported. If you want inbuilt MTD compliance you have to switch to Sage 50 etc or get yourself some bridging software.

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By djn
06th Dec 2018 12:33

I wish they could put sage 50 in the cloud at a reasonable price.

At the moment it's something like 120 per month which is crazy.

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06th Dec 2018 12:47

It is too little and too late— after 40-years of producing crap software.

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By Dandan
06th Dec 2018 20:00

Not wanting to sound negative but need to express my doubts about this shift, at a cost of £60 million.

Sage 50 is pretty awful and they could invest a little bit to make it much better software. It would cost so little and yet make so many happy.

"Cloud" has become a trendy word and everyone wants to sound trendy and cool but I have serious doubt about the future of cloud.

Given that almost every large company's database has been hacked (Airlines , BT,all banks, NHS, HMRC, Major hotels...in fact practically every company in the uk to whom people have provided personal information), I fear that , once open banking becomes active in cloud accounting software, horror stories will start appearing on a regular basis in the front news.

I predict a backlash , with people moving back to the safety of desktop. The few desktop providers will become multi-millionaires whilst the cloud companies will be billions into debt

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By NH
to Dandan
06th Dec 2018 13:14

[quote=Dandan]

Sage 50 is pretty awful and they could invest a little bit to make it much better software. It would cost so little and yet make so many happy.

That is exactly the way I feel about Sage One Cloud, all the others do it quicker and better and it really would not take much to improve it

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to Dandan
06th Dec 2018 15:20

""Cloud" has become a trendy word and every one wants to sound trendy and cool"

Oh my goodness, so I've been trendy and cool for 7 years, that's a first, don't tell the kids!

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to Paul Scholes
08th Dec 2018 13:00

Hi Paul , what took you so long!

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to Paul Scholes
08th Dec 2018 13:01

duplicate

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to carnmores
08th Dec 2018 17:31

You can say that again!

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06th Dec 2018 13:32

Does anyone know what he means by 'on-off' things? And 'organic' revenue? I have not come across these terms before and they seem quite important...

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06th Dec 2018 13:37

Having a monopoly on the sector for so many years made Sage the laziest Software Company I have ever come across.

Their complete failure to innovate or to even try to keep up with last decades tech is utterly beyond belief.

Their mantra of "why fix anything when our customers have nowhere else to go" has served their bottom line well for many years...

Until now!

Sage now have some serious competition in the SME space with credible investment. They were caught sleepwalking and they are now scrambling to catch up.

Technically the likes of sage 50 (non cloud) is prehistoric. Sage 50 (cloud) is functionally so far behind the competition it is not a viable option.

Sage is currently paying the price for years of complacency and taking their customers for granted.

I guess they are listening now!

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By Jdopus
to coastline
06th Dec 2018 14:21

Agreed 100%. For me at least they've burned all my goodwill with their complete complacency and crap products. I made the mistake of giving their payroll software a chance last year and after eventually getting fed up at their poor support and lack of basic functionality I discovered that even the cheapest of competing products is superior in every single way to Sage's expensive offering.

Good riddance.

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to Jdopus
07th Dec 2018 09:46

They have treated their customers with contempt for years. How many other software providers have an expensive help line that due to the buggy software, is a "must have"

I always thought they deliberately made their software bad to sell the helpline support.

The only thing that saves them is that many bookkeepers and accountants have grown up with it, and no nothing else, and when they do look at other software it so alien they cant use it like they do sage and don't like it.

However many of these are now retiring, so you can only price gouge so often, as with their huge charges for MtdfV before people step away.

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06th Dec 2018 15:27

We all know that Sage is as MissAccounting described so eloquently!
But I do wish AAT would open their eyes rather than push their students into getting a qualification just on Sage.
My assistant is taking the AAT and is being 'forced' down this route although I use something else.
However... looking at AAT jobs all accountants want Sage. I appear to be in a minority.

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By Dandan
to Jennifer Adams
06th Dec 2018 19:59

Jennifer Adams wrote:

But I do wish AAT would open their eyes rather than push their students into getting a qualification just on Sage.

I did not know this was happening. Don't they teach how double entry works anymore ? You will never learn how it works until you have done manual postings to T accounts and extracted a TB that balances.

I am not surprised though. The modern audit trend is to write off everything.

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06th Dec 2018 16:00

See my other posts on this topic.

20 years or so ago was pretty much peak Sage, at £8 per share and a lot of happy customers. The balance sheet is strong enough to get there again, in much the same way as it is possible for Man Utd, or Liverpool to become the top dogs in English football again.

But it will take a sea change in strategy to achieve this.

Meanwhile people rave about Xero but their ongoing losses - as far as I know they have never actually reported a profit - mean there is much less margin for error in their business model.

Whilst the product has its flaws - and is not my first choice product, which is VT - QBO is the one player in this market which is the real top dog right now.

For example, a perfectly viable strategy for QBO long term success in the UK market would be to drop its prices by 50%. This would result in short term losses in the UK but it would, for example, cripple Xero's business model right at the time when they are betting the house on massive investment in new areas such as financial reporting.

The other players in the market simply don't have the option of making really aggressive moves like that.

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to mr. mischief
06th Dec 2018 16:59

Do you know how much Xero paid for Instafile?

The published price is £5m

You keep referring to this as betting the house on it. In the scheme of things thats not big bucks, of the $400m they have just raised in the states.

I am a sole trader accountant and have clients that do bigger acquisitions than that.

So hardly betting the house on it, more of a light flutter, which if it works, great, if it doesn't they will still have a house.

Your pricing strategy is also total nonsense as QBO are giving licences away yet are still in second place.

QBO is available £10 for 10 licences and permanantley has 50% off and has done for some time, and have not cut Xero off at all as they have still grown 40% in the last year.

Xero is sold as the best product, not on price so they don't have to discount much in same way that best deal you can get on a Black Friday for an Apple product is maybe 10% off.

Xero at full price is still way cheaper than a full version of Sage.

For me what Sage should do to maintain its position is make Sage 50 current, by getting it work with bank feeds, and products like spotlight etc (as the reporting in Sage 50 has not changed for 30 years) A lot of people still get up and go to work, so making the desktop product more up to date would be a viable option while they get the cloud product up to speed. Some of the the benefits of the cloud are somewhat lost on those who work in a fixed PC , everyday.

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to Glennzy
06th Dec 2018 19:20

Also Intuit is spending a fortune on television adverts. I bet they are spending 3 times a much on UK advertising than UK specific product development.

Xero UK is certainly reporting profits and positive cash generation.

Xero worldwide is showing positive EBITDA and would have had positive cash generation in the six months to 30/9/18 if it hadn't of bought Hubdoc .

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06th Dec 2018 16:01

See my other posts on this topic.

20 years or so ago was pretty much peak Sage, at £8 per share and a lot of happy customers. The balance sheet is strong enough to get there again, in much the same way as it is possible for Man Utd, or Liverpool to become the top dogs in English football again.

But it will take a sea change in strategy to achieve this.

Meanwhile people rave about Xero but their ongoing losses - as far as I know they have never actually reported a profit - mean there is much less margin for error in their business model.

Whilst the product has its flaws - and is not my first choice product, which is VT - QBO is the one player in this market which is the real top dog right now.

For example, a perfectly viable strategy for QBO long term success in the UK market would be to drop its prices by 50%. This would result in short term losses in the UK but it would, for example, cripple Xero's business model right at the time when they are betting the house on massive investment in new areas such as financial reporting.

The other players in the market simply don't have the option of making really aggressive moves like that.

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06th Dec 2018 18:27

That's great news and a surprising shift for Sage. As an ex-Sage manager of their construction division I was always frustrated with Sage's lack of development.

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06th Dec 2018 21:24

I think Sage is facing a Kodak/Blackberry moment, I've never liked its products anyway, QuickBooks Desktop and QBO are much better than Sage equivalents.

QBO is much better (in my opinion) than Xero too. Xero support is e-mail only v QBO phone support and the Xero reporting is very limited v QBO.

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07th Dec 2018 15:49

On the positive front, in all my posts about the rickety finances of Xero, this is the first time any of the Xero fans have responded with points about the finances instead of just ranting about how wonderful the software is.

However, there is a world of difference between Xero - market cap $4bn or so - and Intuit - $50bn or so.

Put very simply, EBITDA butters no parsnips. Profit after tax, and dividends, is what puts bread on the table. Surely on an accountancy website we can all agree about that?

My concern about Xero is nothing to do with the cost of acquisitions, which is minimal. It is that the scale of their ambitions, and resulting software development costs, are not matched by their resources. Or at least it would only take a relatively small bump in the road to knock the whole thing down.

Whereas, with Intuit, a whole series of big bumps in the road would be needed.

EBITDA is for the fairies in my view in a company like Xero. It seems to me that they have a pretty aggressive accounting policy when it comes to capitalising software costs. For example, it appears the costs of the UK payroll module are on the balance sheet, how many users on here can see much value in that?

So, given that, is it really OK to ignore the amortisation of those costs when we are trying to look behind the Xero reported numbers to get a true picture of the business performance?

NO NO NO NO NO !!!!

Of course it is not. Xero exists to develop software, surely. So conveniently ignoring the amortisation of those costs is for the faries, and not for qualified accountants.

I am not arguing for a change in accounting policy or for new accounting rules. I've made some very good investments in companies over the years when they move into profit with more conservative accounting than Xero has. Avoiding software companies with aggressive accounting on issues like accrued income and software capitalising pays dividends, just like the companies, such as Intuit, who avoid such approaches.

Dividends. Now there's a thing. When it comes to those, it is Xero by name and Zero by nature.

I am the first person to admit to bias on this issue, which I am trying hard to overcome. When I first came across Xero 3 years ago it was making a massive noise and comparing itself favourably to QBO. So when I went to the investor section of the Xero website and saw the balance sheet it was a massive downer, from which I have never recovered. I admit that.

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07th Dec 2018 16:39

Ebitda is for the fairies ???

What world do you live in, it seems one populated by fairies

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07th Dec 2018 18:48

A world of profits after tax, positive cash flows and decent dividends. That's my world.

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07th Dec 2018 19:44

.

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08th Dec 2018 13:08

its horses for courses obviously but i much prefer QBO to Xero, posssibly because i was an early adopter of Quickbooks v2 in 1992 and apart from a vat hiatus with v8 its in all ways a far superior product to sage which i used from 1985 to 1993

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to carnmores
08th Dec 2018 13:59

I agree wholeheartedly with Carnmores. When clients ask me to recommend a cloud product it is QBO for me, and to be honest it is not in any sense a close call.

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