Sage shakes off conservative image with digital push

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Sage, the British accountancy software company, is promising to “shed the shackles of conservatism” through a long-awaited strategic overhaul to boost its ability to compete with cloud-based rivals.

The UK’s largest software group by market capitalisation is attempting to attract millions of new customers with a suite of mobile accounting apps that could allow business owners to run their company books from a smartphone.

The Newcastle-based company, which has built its name selling boxed CDs of computer software to about 6m customers worldwide, from small enterprises to large corporations, will reveal the shake-up to investors on Wednesday.

The changes build on Sage’s efforts in recent years to strengthen its internet, mobile and payments products in the face of stiff opposition from cloud-based competitors such as Xero, Intuit and NetSuite.

The FTSE 100 company will also restructure its operations to reduce costs and free up funds to expand its marketing budget.

“Honestly, if we really get our act together, we can be number one in this market globally,” said Stephen Kelly, who took over as Sage chief executive in November. “We certainly will shed the shackles of conservatism.”

Sage’s growth plans remain cautious, at least in the short term. It has previously outlined a target of 6 per cent organic revenue growth by this year — a goal it achieved in May, when it said first-half revenues had increased by 6.2 per cent year-on-year to £682m.

Some analysts have told the company that the target should not be a “ceiling” on its ambitions. But Mr Kelly said the next two to three years would be a “transition period”, where the company would maintain current targets. As well as the 6 per cent revenue growth goal, it is aiming for a profit margin of 28 per cent and to steadily increase its dividend.

The company’s shares fell 6 per cent to 516p on Wednesday.

Mr Kelly stressed that there would be “no forced migrations” for existing customers, meaning the company would not attempt to push millions of Sage users on to its new cloud-based offerings against their will and would continue to provide support for old versions of its software.

George O’Connor, an analyst at Panmure Gordon, was sceptical as to whether Sage could succeed in its efforts to change.

“Looking at McKinsey’s research, less than a quarter of organisational redesign efforts succeed, 45 per cent run out of steam after getting under way, and a third fail to meet objectives or improve performance after implementation,” he said.

Other analysts commented on the fine balancing act Mr Kelly must perform. Shareholders are eager for the business to continue its steady, if unspectacular, growth. But Sage must also find ways of shifting away from its legacy products, as customers increasingly take-up internet and mobile solutions.

Mr Kelly said the transition period would give the company breathing room to transform, with stronger growth expected after this time.

Sage is attempting to move clients from paying licence fees to subscriptions, which will provide more stable, long-term revenues. In May, it showed progress with this strategy, reporting that organic recurring revenues had increased 7.7 per cent year-on-year to £499m during the six months to March 31.

Steve Hare, Sage’s chief financial officer, said its aim was for recurring revenues, which account for three quarters of its sales, to reach up to 90 per cent of its overall revenues.

Mr Kelly also indicated that Sage’s worldwide operations would undergo a restructuring. The company is likely to close some of the 135 facilities it runs around the world, focusing resources on larger “hubs” in cities such as Newcastle in the UK, Dublin in Ireland and Atlanta in the US.

The savings made from this streamlining would help increase its marketing budget, currently £107m, and focus on digital advertising, such as seeking to improve Sage’s product rankings within Google search results.

Mr Kelly said there would also be a renewed focus on attracting new customers, such as through Sage One, a product aimed at small businesses and start ups.

The company has 115,000 subscribers for Sage One, but aims to lift that to 1m in the next few years. The product’s success will be a key indicator of its prospects, as it is viewed as a gateway into selling other Sage products to these businesses.

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