Sage has released its first half results to 31st March 2012. For all Guy Berruyer’s PR spin they make depressing reading and the markets know it. As I am writing this, Sage stock price is off 4.35% in morning trading. What worries me is that the full press release takes one more step towards obfuscating the underlying trends. This is a company that is becoming less rather than more transparent in the explanation of its financial position. But – if you work through the release then some nuggets emerge.
Let’s get a couple of things out the way. In the UK, Sage 50 and X3 are cratering. Now to the highlights from the blurbs:
- 129,000 new paying customers added in the period (H1 2011: 131,000)
- Subscription revenues continue to deliver good growth, reflecting progress in premium support and the ongoing strategic shift from software revenue to recurring support contracts
- 81% renewal rate on support contracts maintained reflecting high quality customer service and value-added features (H1 2011: 81%)
- Good progress in implementing our web strategy, including our alliance with Microsoft on the Windows Azure Cloud platform and the imminent launch of Sage One in North America
You would think that the addition of 129K customers is a good thing but from the little detail available we can readily deduce that rather than contributing to increased revenue, they are at best helping Sage to hold the line. In other words, despite the talk about organic growth, Sage is achieving more per customer than it was in the past but there are less of them. This is not sustainable in a market where cloud pricing is stable. An 81% renewal rate on support contracts bolsters that theory as customers move to cloud solutions. In fact, an effective loss of business means that year over year from 2010, Sage’s business when measured on volume has shrunk by a third, offset by price hikes in some places and additional subscription revenues coming in at lower prices elsewhere. Again, unsustainable. Berruyer’s take is artful:
Revenue performance in the period reflects the strategic switch to subscription revenues, which has exceeded our expectations. It also reflects the challenging economic conditions, particularly in Europe, and we remain watchful of the broader business environment in this region. Nevertheless, we have delivered a resilient financial and operational performance.
Interesting. All other companies I am watching in the SME space are growing revenue in the markets to which he refers at more than double digit rates although there are regional variations. The PIGS (Portugal, Ireland, Greece and Spain) are markets that can best be described as ‘in the crapper’ for costly solutions while the UK continues to show strong cloud growth at the expense of on-premise alternatives. Germany has continued to remain relatively strong but there, the incumbents are capitalising on an economy that has fared better than most others and where business can still afford (just) to invest. Sage appears to agree with that assessment.
The one bright spot is Sage’s payment processing business it acquired a few years back. Automated payment process handling is a natural fit in markets where revenue is declining or static because it helps to accelerate cash flow. The addition of mobile solutions also makes sense and will contribute to growth in this LOB. I am surprised though that Sage has not made more of the mobile opportunity that I see as exploding in all markets. Now to the cloud. Sage says:
In the UK & Ireland, where the market is still in its early stages, Sage One continues to exhibit strong momentum, more than doubling its customer numbers in the last 6 months. In December 2011, we launched Sage One Payroll in the UK & Ireland and already have more than 2,000 free trial users. We will be launching Sage One in North America imminently. This is a key initiative for our entry-level offering in North America and will bring a differentiated offer to the market.
What? Doubled? From 1,500 last reported? And NO paying customers for Sage One Payroll? That’s staggeringly poor in a market where I am seeing individual vendors achieving sign ups exceeding that rate PER MONTH. Given the likely Sage marketing spend, this must be a massively loss making business unit. Is Sage learning from its past mistakes? Doesn’t look like it.
In the mid-market segment, we launched Cloud versions of our existing leading products including Sage ERP MAS 90 Online in North America and Office Line 365 in Germany. We also announced our alliance with Microsoft to develop certain ERP solutions on the Windows Azure Cloud platform. The focus of development will start in Europe with Sage 200 in the UK and Sage Murano in Spain. These solutions are in development, will be rolled out to a small number of pilot sites in the coming months and will come to market in 2013.
Quite what this will look like remains to be seen but here, Sage has an uphill struggle. NetSuite is the company to beat and from what I have seen, they are creaming it at the expense of others, including Sage. NetSuite has more than 10 years in this game so it is hard to see how Sage can come to market with functionally competitive offerings unless it plans to fill in the gap between its traditional very small business and mid market. This has been a notoriously difficult market in which to do well and I suspect that over time, those vendors we usually associate with the VSB market will fill this space as they flesh out functionality. For what it’s worth, NetSuite abandoned that space a few years ago as it found that its cost structure didn’t allow it to successfully support this segment. Even assuming that Sage capitalises on its brand (something that is not a given) they will need to find a compelling price point.
What can we deduce? As I have stated on many occasions in the past, Sage is in long term decline at the revenue level. Its only hope going forward is to continue using its financial muscle to acquire. But even then, the opportunities are shrinking. As it replaces traditional licence and support business it will increasingly find that the smaller competitors of today will lead the way in taking up new business. Unless Sage can truly learn from these newer players, it is only a matter of time before it implodes. It has time to get that done but the clock is ticking and this management team is running out of options.