The image is all motivational speeches and sales pitches. The reality of running a business is mostly an unglamorous slog. Picture instead a day of booking invoices, managing payroll and paying tax. This is the opportunity for Sage Group as entrepreneurs shift from shoeboxes of receipts to spreadsheets to the cloud. That is, as long as they do not bungle their chance. This will have been the concern for investors reading Monday’s headlines about a loss of client data at the business management software company, just the sort of snafu that trips up those that grow too fast.
In fact, after falling 4 per cent, Sage’s shares recovered to finish flat. The breach concerned individual error more than systemic failure. A more persistent problem at Sage is growth. Its sales, at about £1.4bn, rose tenfold since 1996, but have mostly meandered sideways since 2013. This cannot go on if Sage is to justify its hotly rated shares, which trade on 25 times this year’s earnings. The more bullish analysts think growth will resume: Jefferies predicts sales will hit £1.9bn by 2018, for example.
The broad reason for optimism is what Sage calls the vast “white space” of smaller companies still not using any accounting software. A narrower one is the arrival of a new leadership in late 2014, including its first externally appointed chief executive, Stephen Kelly. Fresh from helping the UK government cut costs, he has set about tackling Sage’s organisational fragmentation (105 management databases, 139 offices). £50m of savings were found last year.
The leadership is also confident it can shift towards a more subscriber- and cloud-based model without sacrificing market share or margin. This might prove difficult, says UBS; the cloud has lower entry barriers and threatens more competition. Now the UK’s biggest tech firm (once SoftBank completes its takeover of Arm), Sage needs a strong return to its innovative beginnings to keep its clients sticky. Moves such as the development of a chatbot as a helper to overworked freelancers look promising. The sheer hassle of shifting software providers is another helpful factor.
Sage promises investors not to let margins slip, a commitment only partly within its control. But absent an aggressive rival willing to spend heavily to steal its customers, its high rating looks safe enough for now.
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