Sage's odd interim statement

You would have thought that at a time when investors and other industry watchers are looking for more transparency that companies would go out their way to provide as much information as possible. Not Sage. These days, you have to dig through the .com site to find the investors’ area but that’s only the start of your issues.

On February 4th, Sage issued a brief ‘interim management statement’ about performance in the final part of the year ended December 31st, 2008. No top line figures, in fact almost no figures at all other than a bland statement concerning trading and an indication of the company’s net debt position:

Trading for the period was consistent with management expectations at the time of the 2008 preliminary results announcement on 3 December 2008. Continued strength in subscription revenues has offset the impact of a subdued market for software and software-related services.

Our UK business showed a resilient performance in volatile market conditions. After a very strong performance last year and in weakening economic conditions, revenue growth in Mainland Europe slowed as anticipated. North America is operating in particularly challenging market conditions, which affected performance in all divisions. Rest of World experienced good revenue growth in slowing market conditions.

The weakening of sterling had the effect of enhancing the Group’s results for the period. Cash generation remained strong, and the Group continues to pay down gross debt. However, the impact of currency translation increased reported net debt to £649m as at 31 December 2008 (30 September 2008: £541m). The Group remains comfortably within its banking covenants with committed financing facilities in place until 2011.

Paul Walker, Chief Executive, commented: “We are pleased to report that, despite volatile conditions in many of our markets, overall trading remained in line with our expectations at the time of our preliminary results in December 2008. Subscription revenues continue to show good growth, offsetting the anticipated contraction in software and software-related services. We continue to manage our cost base to protect profitability. We believe that these results demonstrate the continuing resilience of our business model. However, it is still early in our financial year, and we remain alert to the challenging economic environment.”

[My emphasis added.]

What do we make of that? Well – without much else to go on it’s pretty difficult to be certain. John Oates at The Register described the results as ‘Sage struggles.’  However, here’s a few pointers:

• Cash is king and the fact a weakening pound improved results but worked against the debt position tells me they didn’t hedge very well. A ballooning of £108 million or some 20% in three months is of concern. The fact the company remains within covenants will mollify their bankers but there will need to be a major currency adjustment for Sage to be more comfortable. Who wants to bet on that?
• Sage is the classic leveraged company that has grown through acquisition. Even though it may generate plenty of free cash, it is now dependent upon subscription revenues to fuel any growth. Given it made few acquisitions in 2008 and they only totaled £35 million, expect almost nothing of any consequence as the company hunkers down.
• Note the emphasis on protecting profitability. That’s a reflection of its shift towards support services rather than innovation and a weakening market for its product lines.
• Sage’s investment in innovation has been historically poor. With so many acquisitions, I estimate that a good 70-80% of R&D goes on maintaining and fixing the existing application set. Since that total is around 9-10% of total revenue, it’s not hard to see there is little money for taking product forward. Think £35 million across all product lines. That’s a flea bite for a company generating £1.3 billion.
• Its recent brush with on-demand has not got off to a good start, despite a claimed 18 months’ development. As of today, SageLive remains closed more than a week after security problems left the company with little alternative but to take the service offline. Sage has told me they will provide an update as soon as they can. In the meantime, how will the launch be funded as the company looks to reach out to the growing on-demand market? How will it convince its accounting channel that it is delivering a solid product?
• The biggest question mark must be over the Americas. Sue Swenson, the US CEO has almost been invisible since her appointment and I notice the company appointed yet another CTO in January. At the recent US kickoff, channel partners were shown very little of consequence they can offer as ‘new’ to customers. I believe the Emdeon healthcare division remains unstable but is a millstone from which Sage cannot extricate itself. In theory, this should be a relatively solid market even in these turbulent times yet the company has gone backwards almost since day one.

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Tagged as: on-demand, SAAS, Sage Software