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When Sage Group’s shares surged 19 per cent in November as it announced its full-year results, it said something about how unreliable the UK’s largest software company had become. It raised its dividend and announced a £400mn share buyback, but investors were as much relieved as delighted.
Sage has had a bumpy decade as it tried to convert its desktop software used by millions of small businesses to cloud computing. For a while, it seemed it might not succeed. “It felt like we were starting to squabble among ourselves as to whose fault it was,” says Steve Hare, chief executive.
The mood has become more positive in Cobalt Park in North Tyneside where 1,200 Sage employees, including 400 software developers, work at its head office. This is not Silicon Valley — the closest ocean is the North Sea facing nearby Whitley Bay, rather than the Pacific — but the FTSE 100 company founded in Newcastle in 1981 has regained its momentum.
There is still much to achieve; the company remains dwarfed in value by Intuit, the Mountain View business behind the US small business software package QuickBooks. While Sage’s market capitalisation has risen 93 per cent in the past five years to £11.4bn last week, Intuit is worth about $165bn (both have been affected by global business uncertainty this year).
Sage is also being crowded by smaller peers, notably Xero, the New Zealand cloud computing platform for small enterprises that sapped its business in the mid-2000s. Sage relied for too long on the incumbency effect of Sage 50, a venerable programme with roots dating to 1989. Stephen Kelly, Hare’s predecessor, was removed in 2018 as it responded clumsily.
It is growing faster and more smoothly now, with 83 per cent of revenues coming from subscriptions last year. Some UK small businesses that were happy with desktop Sage 50 software complained of being strong-armed into converting to cloud versions, but Sage has rewarded the US funds that now make up 40 per cent of its shareholder base by pushing ahead.
Hare notes the valuation that Intuit achieved with consistent growth: “For quarter after quarter, they hit 10 to 12 per cent revenue growth and mid-30s margins (Sage had a 23 per cent operating profit margin last year) . . . so they got into a feelgood factor.” Sage traditionally grew slower and relied on acquisitions such as its $850mn takeover of the US cloud start-up Intacct in 2017.
Sage cannot just be a UK champion in a fragmented global market. It offers 185 products across countries including France, Germany and the US, but the industry is consolidating across borders. “You start to see winners and losers in technology. I’m determined to be one of the winners,” Hare says.
Kevin Permenter, senior director for enterprise applications research at the research group IDC, says Sage ought to rationalise further to avoid “splitting its time and energy” on older products. But “you can see from the momentum the company has made a turn . . . I would expect it to grow rapidly as it embraces cloud native principles and artificial intelligence.”
The benefits of cloud computing are clear in Sage’s results. Its revenues rose 12 per cent in the US last year, compared with 7 per cent in the UK and Ireland, largely because of Intacct’s growth. The software (now called Sage Intacct) is mainly aimed at medium-sized companies and has given Sage in the UK a chance to recruit small companies lost to Xero as they expand.
It is trying not to miss the AI opportunity in the same way that it was late to the cloud transition. Last year, it started rolling out an AI upgrade called Sage Copilot to its software products that can suggest changes and point out possible mistakes in accounting records. Hare likens the current iteration of AI tools to “a very intelligent toddler” but it is growing up rapidly.
Sage’s future also depends on culture. It is clear, talking to executives on a recent visit, that the company is happier. It is one of the North-East’s largest employers, and has a natural Tyneside warmth. It cannot relapse into complacency, though. “You don’t have to be unkind or nasty to each other, you have to be demanding,” Hare says.
While Sage is doing better than before, it must keep accelerating. There is no sign of small companies needing less technology: the UK is among countries mandating the use of financial software in filling tax returns. But it has to seize the day, or others will.
john.gapper@ft.com