Sage cutting jobs, outlook weak

It is little more than rumour being spread by Deutsche Bank in the FT but it looks like Sage will have to shed jobs:

Deutsche estimated that Sage might be able to cut up to 455 staff, or 3 per cent of its total, at an exceptional cost of £18m.

That would require the group to claw back 60-70 per cent of restructuring costs by the year-end to meet forecasts, Deutsche said. It repeated its “buy” advice.

Should anyone be worried? Let’s be clear – Sage isn’t going away any time soon but the relative small amount of restructuring cost involved requiring such a hefty clawback indicates just how thin Sage’s net is becoming. I’ve previously warned about Sage’s balance sheet and vulnerability to currency swings:

Cash is king and the fact a weakening pound improved results but worked against the debt position tells me they didn’t hedge very well. A ballooning of £108 million or some 20% in three months is of concern. The fact the company remains within covenants will mollify their bankers but there will need to be a major currency adjustment for Sage to be more comfortable. Who wants to bet on that?

I also talked about weakening demand and an increased dependency on support income. That holds true across all its lines of business. In the UK, Line 50/Payroll is pretty much the only product that’s not close to being on life support.

Earlier in the month, The Guardian picked up on a separate analyst assessment which said:

Our update meeting with Sage confirms that the business is now in organic decline due to tough end markets in all three major regions. However, early-stage cost-cutting has limited the damage temporarily. The worry for the second half of 2009 is that accelerating weakness in Europe, particularly France, where cost reduction is more difficult than in the UK & US, may hit margins.

“The big question mark remains support contract growth – this has offset licence weakness so far, but with high premium support penetration in most of Europe and >50% in UK, our concern is that contract cancellations and reduction to basic support levels could mean downgrades.

[My emphasis added]

This is exactly what I expected to happen when I commented on the interim statement. Sage has a structural problem that makes it difficult for it to grow its market. Even though it is widely known that many SMBs are under served in the accounting market, Sage has not been able to find a way to successfully compete in the  saas/on-demand space. By now it should be ramping business nicely. Instead of which it is only able to call upon some 5,000 registered users of its free billing service. Contrast that with upbeat stories coming from all the saas vendors I speak with and it is easy to see how Sage can be characterized as having dropped the ball.

SageLive is still off the air, some six weeks after security problems forced it to tear down its nascent on-demand offering. I don’t believe the ‘fix’ needed to resolve the issues is as deep as some make out. I’m reckoning that resources are struggling to re-engineer a service that has been found to be flawed in many areas.

While US resellers continue to find ways of getting products like MAS90 into the market, the Emdeon millstone is a genuine worry. Emdeon, which serves the healthcare market, should represent a viable and vibrant division, even in harsh economic conditions. However, if the customer portfolio quality is not up to snuff then it is difficult to see how even this once thought of jewel can ride to the rescue.

At the risk of sounding pompous, Sage’s biggest flaw is that it is incapable of heeding advice from those that understand SMB market dynamics. It says it listens to its Sage Accountants’ Club but offers them little in return other than more marketing. After three years of on/off conversations I’ve had with Sage about saas/on-demand it seems to have no more of a clue today than it did when I first talked to them about it. Instead, it relies on what I see as self serving marketing research that isn’t advancing its case. The net result is that rather than channeling resources intelligently, it ends up wasting money.

Love or hate it, Sage remains a powerful force in the market place. But…to describe it as a bellweather any longer is now taking it a bit too far. Others are succeeding where it is failing, and deriving better value in the process.

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Tagged as: Deutsche Bank, Sage Software, SageLive, The Sage Group