Sage In Trouble

Gary Clarke (MD of M4 Systems) "I’m especially amused by a comment in the FT that ‘Sage has also been struggling to get its network of resellers to push sales hard enough’. Instead of pushing sales and marketing, and making hundreds of incoherent takeovers, maybe they should be thinking about R&D and building a world class product".

Microsoft’s commitment to R&D is one of the prime reasons why M4 Systems focuses exclusively on the Microsoft platform. Microsoft has been investing over US$2 billion per annum in the Business Solutions (Dynamics) division over the past few years: a dramatic figure considering this is around 30% of the total R&D budget compared to sales being only 2% of total Microsoft sales. So the R&D intensity for Business Solutions is over 15 times that for mature divisions, such as Windows client. This M4 Systems believes clearly demonstrates Microsoft’s commitment and indicates where future growth is expected.

We are therefore not surprised by the following analyst comment:

"Sage faces far stronger competition in the US than in most other markets. In particular, we see Microsoft Dynamics competing ever more strongly at the top-end of Sage’s market. SAP is also re-doubling its efforts here," said David Bradshaw, analyst at Ovum.

Sage’s top US executives quit

By Maggie Urry and Maija Palmer in London
Published: October 11 2007 08:46 | Last updated: October 11 2007 21:31

Sage Group on Thursday said the chief executive and chief financial officer of its US business were leaving "with immediate effect", as its regional arm showed lacklustre performance.

A trading update revealed that growth in the North American business was the weakest of the group’s four territorial divisions in the year to end-September, with sales up 4 per cent, against 7 per cent across the group.

Paul Walker, chief executive of the Newcastle-based software group, had said at the half-year stage that he expected revenue growth in North America to accelerate in the second half, but Paul Harrison, group finance director, on Thursday said that had not happened.

Mr Walker said that following a restructuring of the US business into four operating divisions, "there was a need for a change of style in the management in North America".

Ron Verni, the US chief executive, was also a Sage board member and has resigned from that role. He is expected to receive compensation similar to his annual base salary of $693,000 (£340,000). Jim Eckstaedt, the US finance chief, is also expected to receive a pay-off.

Shares in the company fell as much as 8 per cent on Thursday, before recovering to close down more than 3 per cent to 243¼p.

Andrew Wood, analyst at Exane BNP Paribas, said: "While the bears will highlight this [management] change as a negative and a sign of deeper problems, we see it as an aggressive management team aiming to drive improved performance."

In July Sage parted company with Andrew Corbin, head of its US healthcare division, and Mr Walker said a replacement would be appointed soon.

Sales in North America were £508m, nearly half of Sage’s total, and earnings before interest, tax and amortisation (ebita) were £100m. The UK increased revenues to £224m and ebita to £83m. Despite slow US growth, Sage said results for the year would be in line with expectations, with ebita of £283m, up 18.4 per cent.

Why staid Sage was forced to act tough

By Maija Palmer in London
Published: October 11 2007 21:31 | Last updated: October 11 2007 21:31

Sage’s decision to axe the chief executive and chief finance officer of its US division on Thursday shocked investors, who are not used to seeing blood in the boardroom of the business software company.

Sage, which is the UK’s largest software company and the only one in the FTSE 100, has a reputation for being staid but stable, an uneventful haven for risk-adverse technology investors.

The departure of Ron Verni, the US chief executive, and Jim Eckstaedt, the finance officer of the division "with immediate effect" was unusual.

However, the North American business has become an increasing concern over the last year. The division accounts for nearly half of group revenues – £508m for the year to the end of September – but is not growing as fast as the rest of the business. Sales growth was just 4 per cent, compared with 7 per cent for the overall company.

"We needed a change of style in managing the business," said Paul Walker, chief executive. "North American performance has not been as good as we would have liked. We’ve done OK, but we could have done better.

"This is something I have been considering for a while. The US executives did a good job in building the business but now it needs a different steer."

North America is home turf for Sage’s two biggest competitors, Microsoft and Intuit, who offer accounting and other back office software for the small and medium-sized businesses that are Sage’s key customers. Investors have long been concerned that competition could hold the company back in the region.

"Its been an ongoing problem. The US business has lagged for a long time and the competitive forces are increasing," said Julian Yates, analyst at Investec.

In addition, last year Sage made what was seen as one of its riskiest acquisitions in the US, the £297m purchase of Emdeon, which provides software for doctors surgeries. Some investors feared the move into healthcare was a step too far from Sage’s core strengths.

This year Sage reorganised the US business into four vertical divisions to try to accelerate growth – a recognition that its North American plans were not progressing as well as they should.

Thursday’s management changes made it clear there was still further to go before US issues are resolved. Last spring, Mr Walker had forecast an acceleration in sales growth but on Thursday he was forced to admit this had not happened. "They needed to do something different to shake up the company," said Mr Yates. "It is good that they are making changes, although it created near-term instability."

"It feels like they are finally stepping up to the plate and saying these growth rates are not good enough," said George O’Connor, analyst at Panmure Gordon.

The factors holding back recent US growth in fact appear quite minor.

There was a delay in the release of a particular software product and Sage’s Timberline business, which provides software to construction companies, has seen a slowdown as the credit squeeze has hit building work in the US.

Sage has also been struggling to get its network of resellers to push sales hard enough.

"We maintain that Sage’s US issues are transitory, company-specific and not reflective of any change in either competitive dynamics or underlying demand," said Adam Shepherd, analyst at Dresdner.

If Sage can find a new strong US management team, many expect the shares, which are trading at their lowest multiple for four years, to see recovery.

However, Sage will have to be careful that it does not build a reputation for management turmoil.