Stable Sage gets jolt to uncertain future

Sage, one of the UK’s largest and most stable tech companies, suffered a jolt on Monday when it announced that its long-serving chief executive, Paul Walker, is to step down. He has held the position for the past 16 years.

Mr Walker, who said he wants to pursue other challenges, has presided over a period of growth at the FTSE 100 accounting software specialist, turning it into a multinational serving 6.1m customers.

Since his appointment in 1994, Sage has outperformed the FTSE 100 by 1,390 per cent. But despite that performance, some in the City are convinced that the time has come for a change.

“There’s a feeling that it’s all gone a bit stale,” said Ian Spence, an analyst at IS Research. “There’s no new blood. They don’t have a particularly clear strategy, just more of the same selling to customers and through channels. It was good in the ’90s and the last decade. It’s just not that relevant any more.”

With a healthy dividend yield on offer, investors have increasingly seen Sage as a stable, income-producing stock rather than a growth share deserving of a high PE ratio. Nevertheless, the company has been seeking to expand. Sage enjoyed bumper growth over the past two decades as small businesses began keeping electronic records.

As it matured, Sage focused on acquisitions to provide new impetus and acquire more customers, pushing itself deeply into debt in 2006 when it spent £617.5m ($947m) on deals. That included its largest-ever deal: the £307m purchase of Emdeon Practice Services.

But the recession has dulled its appetite for deals. After making seven big acquisitions in 2006, five in 2007 and three in 2008, Sage did not complete any in 2009.

The result has been subdued top-line growth. Sage’s customers are reliable – software that holds all the data about company accounts is rarely replaced – but showed little appetite for extra spending last year.

In the year to September 30 2009, underlying sales fell by 4 per cent to £1.44bn, yet Sage added 245,000 customers in the year and renewal rates on support contracts – such as telephone help lines – were steady at 81 per cent.

The accompanying cash flow enabled the company to reduce net debt by £101.6m to £439.4m, and to raise its dividend by 3 per cent to 7.43p.

The story is unlikely to change soon. In December, Mr Walker was forecasting no revenue growth in 2010 and said that it could be 2011 before smaller companies started to lift spending. The group will report first-half results on May 5.

“It had all become a bit easy for them,” said one analyst, who declined to be named. While Sage has stalled, rivals have been attacking its market.

In the US, Microsoft and SAP have targeted the top end of Sage’s market while Kashflow and Netsuite have targeted smaller potential customers.

All are offering accounting software over the internet, as so-called “software as a service”, rather than as traditional off the shelf software for companies to load onto their own servers.

Sage has been sceptical of the appetite for software as a service among its small business clients, and its own offering has been troubled. Its product, SageLive, was withdrawn after operating problems but is due for re-release later this year.

Analysts say that Mr Walker’s replacement will need to take into account the changes in the software industry. “Here [the appointment] is about understanding technology trends,” said Kevin Ashton, analyst at Canaccord Adams. “They need to create something more modern and in tune with the times.”

Paul Harrison, the group’s finance director and Paul Stobart, head of the UK and Irish business, have been mentioned as possible replacements, but analysts fear that the appointment of either of them would send the wrong message to the City about Sage’s desire for change. Other internal candidates include Sue Swenson, appointed head of the US division in 2008, and David Clayton, the former Credit Suisse First Boston analyst who is head of M&A and strategy, both of whom are relative newcomers.

Stephen Kelly, the highly rated former chief executive of Micro Focus International, has also been linked to the position.

“It’s quite an interesting time for a new person to come in,” said George O’Connor, an analyst at Panmure Gordon. “Its core peer, Intuit, is improving and seeing upgrades. With debt being paid down, it’ll be an attractive position.”

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