Wednesday, 3 December 2008

Recurring revenues keep Sage growing

(By Anthony Miller) It was the 10% growth in Sage’s subscription revenues (includes combined software/support contracts, maintenance and transaction processing) that rather saved the year for Sage (see FY08 results here), as business in its core UK and US markets weakened.

Organic group revenue growth of 3% masked dramatically differing fortunes among Sage’s country markets and business lines. In the UK (19% group revenues) , Sage’s flagship low-end product, Sage 50, helped drive the 3% organic growth (FY07: 7%) as high-end products got hit by the market downturn. Europe (35% group revenues) was more of a success story, with 9% organic growth (FY07: 10%), but with greatest weakness in Sage’s German-speaking markets (+1%). Spain (+25%) and Poland (+18%) were the stars. Rest of World revenues grew 14% organically (FY07: 17%) and remain 7% of group sales.

It was North America, now 39% of group revenues and 29% of OP, which suffered most. Sage’s traditional software businesses grew barely 1%, depressed by flat revenues in core Peachtree and MAS product ranges, while Sage’s industry-specific products managed 3% growth. As expected, it was Sage’s troubled Healthcare division, the erstwhile Emdeon Practice Services, which hit Sage's performance, with revenues down 11%, dragging total NA revenues down 3% (FY07: +4%). Healthcare represents 28% of Sage’s North American business and 11% of the group. Healthcare still lacks a CEO, though Sage’s new North American CEO, Sue Swenson, and new Healthcare COO, Lindy Benton, are in effect sharing the thankless role.

I have always believed that Sage’s Aug. ’06 acquisition of Emdeon was a stitch way beyond its usual ‘knitting pattern’. Irrespective of the bullish outlook for the computerisation of the highly fragmented US healthcare system (ring any bells?) there seem to be few signs that Sage is seeing any of the benefits (a fear I hold to some extent for Misys too).

At this morning’s briefing I asked CEO Paul Walker about Sage’s rather low key ‘announcement’ of its entry-level SaaS offering, Sage Live (see Kashflow ‘outs’ Sage!). He confirmed that Sage's SaaS products (including Peachtree Online in the US) are targeted at start-ups and very small businesses to bring them into the Sage fold, much as we had mooted. Sage’s SaaS revenues are still tiny (sub-£5m vs. Sage’s £1.3bn group revs) and are unlikely to become any meaningful contributor for some years. It must be said, the Sage brand counts for quite a bit in the UK and therefore Sage Live may eventually prove tough competition for the likes of Kashflow.

But in the end, it’s Sage’s incredibly resilient support and maintenance contracts which remain the backbone of the business. Sage has been very creative developing new tiered support offerings, witness combined support and software upgrade contract revenues growing 12%. While the prospects for new licence sales and upgrades look rather bleak in Sage’s mature markets, at least the cash should keep flowing.

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