December 5, 2012 12:05 pm

Sage story should be about sales

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Case for software group shouldn’t be shareholder payouts

Talking about growth is supposed to be the easy part. Even as mature sectors skip lightly over the outlook for sales to boast about improved margins and increased profitability, tech stocks should be able to brag about revenues. But this is exactly where Sage is struggling.

The FTSE 100 maker of bean-counting software for small and medium-sized businesses reported organic revenue growth of just 2 per cent for the year to end-September. This is going backwards compared with the 4 per cent achieved the previous year and the 6 per cent target set by chief executive Guy Berruyer for 2015.

One core problem for Sage is its geographical exposure. Europe makes up almost 60 per cent of revenues and France, which is moving from flat to challenging, is one of its biggest markets. Recession-hit Spain also looms large.

Europe’s growth was just 1 per cent in 2012 and analysts believe it will need to be growing at 3 per cent to 4 per cent a year if Sage is to meet its 2015 target. Good luck with that one.

The other core problem is that it was a late entrant into cloud computing, certainly in the US. In this context, the impressive growth in customer numbers is a reminder of how small the business is in absolute terms. Since, as Mr Berruyer acknowledged, customers do not want to change accounting software every year, it will be a while before the cloud’s effect on sales is more than minimal. By contrast, the 5 per cent increase in subscription revenue is genuinely encouraging.

If sceptical shareholders prefer to be won over by cash, Sage can take that approach too. It has returned almost £300m to investors through a share buyback programme that went beyond disposal proceeds: a sizeable amount for a group with a market value of £3.6bn. But the core investment case for a tech stock shouldn’t be shareholder payouts. After slipping 3.5 per cent during the day, the shares closed at 300.4p, putting the stock on a forward p/e of 14-15x. This looks expensive for a group that lacks a compelling line about the top line.

Setting a good example

Suggestions that banks should engage in good works to make up for the misdeeds of the sector conjure up an image of pinstripes among the poor. But Martin Wheatley, head honcho of the Financial Services Authority, has in mind something closer to home.

He wants big users of interbank lending rates to take part in the rate-setting process, even if they don’t want the hassle and cost. He is right. The involvement of such banks is critical to restoring the credibility of lending rates undermined by attempts to rig the market.

It is also a good plan to replace the amateurism of the British Bankers’ Association which sponsored the rate-setting process with an independent and formally regulated administrator. The moves could act as a template for regulators elsewhere seeking to restore trust in equivalent rates.

The banks should co-operate. No one is likely to hand out good conduct medals. But if they look like they have to be forced to repair even the damage the sector has done, then rehabilitation will take much, much longer.

Tesco’s fowl deed

It is appropriate that Tesco chief executive Philip Clarke is preparing to axe Fresh & Easy just after Thanksgiving, a time when US turkeys rightly feel nervous, writes Jonathan Guthrie. The US food store chain was a folie de grandeur of predecessor Sir Terry Leahy. It was never going to succeed because of its limited scale, high costs and poor instinct for US tastes (its website offers the British “pub classic” of shepherd’s pie under an “American Kitchen” banner).

Tesco plans to sell the business through investment bank Greenhill. The supermarket chain is one of the best-flagged distressed asset sellers. Chances of avoiding a write-off against the £1.1bn value of Fresh & Easy on Tesco’s balance sheet look slim.

Sir Terry suffers some impairment of his own, of the reputational kind, from Fresh & Easy’s failure. But he remains a towering figure in retail for making Tesco the UK’s dominant grocer.

The jury is still out on Mr Clarke, almost two years into the job. Calling time on the chain’s stateside escapade is a first step towards winning a City following. All he has to do now is to turn round the core UK operation and push successfully into nascent Asian grocery markets. Easily said.

Mr Clarke should have wrung Fresh & Easy’s neck long ago. But his dithering was a sin of omission rather than commission. He can yet atone.


Tesco: jonathan.guthrie@ft.com

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