There’s an interesting Twitter exchange going on right now as Sage gets its analyst day underway in Newcastle.
The gist of it goes like this: Sage is now being outgunned by the SaaS/cloud players (which I have said the last two plus years) and has little wiggle room to grow in the face of reported EU market weakness. Elsewhere, I know that investment advisers are viewing Sage as either a straight dividend play or a potential private equity target. Both alternatives would send a strong signal that their days of leading the market are over. There is another alternative which few are considering.
Just as Sage is in the doldrums, vendors like Salesforce.com are in the ascendency. Sage makes plenty of money but is seen as having a limited future. Salesforce.com is barely profitable but is on a high growth trajectory. Salesforce.com has an $17.7 billion market cap while Sage is around $5.5 billion. Salesforce.com revenues are tracking $3 billion. Sage revenue is tracking around $2 billion. Doesn’t make sense does it except in the context of the future revenue and profit streams that analysts are expecting.
So how might Sage turn its fortunes around?
Most people I know believe the toughest thing to do is turn the culture around from one where acquiring IP is the business model to one where servicing the customer using cloud technologies rules the day. That’s a commonly agreed thought stream. It’s also agreed that making culture changes is difficult.
I dont think this is as difficult in Sage’s case as many believe. It’s not as though there is an army of high earning sales people to worry about. There is a large channel of resellers who have become disillusioned in recent times. But so what? Where are they going to go if Sage turns around and says ‘game over?’ This is a problem for all software vendors that have a reseller model. Sage just happens to be the big dog in many markets.
The real problem lies in the boardroom. When Paul Walker stepped down as CEO, the company had a golden opportunity to usher in a fresh set of eyes. Instead, it opted for a more refined version of what went before. How that decision was reached remains a mystery but you can bet that institutional investors didn’t have faith in the management team to make radical changes. You can also bet that the existing management didn’t have the stomach or vision to make change.
Now it is becoming apparent that its core European markets are vulnerable, Sage is once again trying to buy its way out of trouble. This time in Brazil with a £125 majority stake in that SME market. It is at best a stop gap.
If the powerful institutional investors were prepared to step back and see how Sage could once again find sustainable growth – and that has to come via a change in the business model – then it is conceivable that Sage could once again become relevant. Acquisition will not do it now or in the long term.
But Sage has one asset it is easy to overlook – its support centres. These might not be the best in the world but they are experienced. It would not take a huge ask to mould these into the kind of service agents needed for a cloud play. Sage also has SagePay – one of the truly bright stars in its constellation of acquired softwares. That could be massively leveraged beyond where it is today.
There is enough maintenance and service revenue for Sage to make the kinds of change I believe are needed without killing the share price. It would require root and branch management surgery but it is do-able. There are precendents. Ariba springs to mind. The question now comes – will investors insist on change or sit back waiting to cash out? The longer they wait, the less they’ll achieve. But which is preferable – a slow, lingering death or life saving yet painful surgery?