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Sage’s solid reputation shaken

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Sage’s solid reputation shaken

Technology sector

Sage’s solid reputation shaken

UK’s biggest listed tech company suffers missed targets and searches for new chief

Donald Brydon, chairman of Sage, is hopeful a new chief executive will be in place by Easter © FT montage / Charlie Bibby

Britain’s largest listed technology company is nestled incongruously on the outskirts of Newcastle in the industrial north-east of England. The Sage Group, a fixture in the FTSE 100 since the turn of the century, has garnered a reputation as a solid software company in a volatile sector.

Yet Sage is enduring an uncomfortable rocky period. Its shares surpassed 800p at the start of the year for the first time since the tech boom 18 years ago, but it has had a rough ride since. The company issued warnings in January and April which undermined confidence in its midterm growth targets.

That culminated in the departure last week of Stephen Kelly, the “outsider” chief executive, who had been poached from the government four years ago, where he was chief operating officer of the Cabinet Office. It was the first time Sage has sacked a leader in its near-40 year history.

Mr Kelly cut a distracted figure in recent months, according to multiple people with direct knowledge of the situation, leading Donald Brydon, chairman of Sage, to consider whether he was the best person to continue to lead the business.

Mr Kelly had also dismissed a significant number of managers in recent months to deal with the “execution” issues that triggered the earlier warnings. That caused friction within the business. “The coach had lost the dressing room,” said one person.

It is the second time within a year that Mr Brydon, the City grandee, has been in the limelight over the departure of a well-regarded chief executive, after claims he “forced out” Xavier Rolet at the London Stock Exchange last year.

Steve Hare, the finance director, has taken on the role of interim chief operating officer but has ruled himself out of the running. He said the company needed to “slow things down” and focus on its priorities and to simplify its business both in terms of products and processes.

Mr Brydon is hopeful that a new chief executive will be in place by Easter. He wants a leader who can fully transform Sage into a subscription business, known as Software as a Service, and away from its traditional licence-based model, something that will take “real, hard grinding work”.

“We need to get a CEO that has SaaS in their veins. It is not a learned behaviour,” Mr Brydon said.

Sage does not have the high-tech reputation of many of its peers but it has played a central role in modernising the back office of British small business over the past three decades.

More than 50 per cent of British companies use Sage to pay their workers. It also has an enviable global footprint. Its 3m customers around the world moved more than £3tn through their accounts using its software last year.

Sage has always operated at the blunt end of the technology market. It was founded over a dining table in 1981, when a printworks owner convinced three friends, including a specialist in gravitational mathematics who had worked on the first moon landing, that the dawn of the age of the home computer opened the door for “cheap and cheerful” software.

Its low-tech approach paid off as it became a defensive play in the sector. It was the first UK technology company to pay a dividend and it was the only technology business to maintain its position in the FTSE 100 when the tech bubble burst.

Mr Kelly’s appointment was, however, a sign that a shake-up was needed. Mr Brydon said the company was too reactive — it would wait for the phone to ring to get a sale — and it needed to seize the cloud computing opportunity as smaller rivals such as Xero and MYOB scooped up a new generation of small business owners.

Xero, founded in New Zealand a decade ago, has grown to a value of A$6.6bn (US$4.8bn) as it took market share.

Mr Kelly immediately cut the company’s jet account. He overhauled the workforce with about 4,000 people replaced and landed its largest acquisition, the $850m takeover of US company Intacct. That ended a long period of missed opportunities in the M&A market after it missed out on large deals including Visma and MYOB.

Mr Kelly is described as a “Marmite figure” and a “showman” by Richard Holway, the founder of TechMarketView and a Sage shareholder, who presided over a 50 per cent rise in the share price since he took over. His record was tainted by the warnings this year. “Clearly the move to a new model has not gone as well as Kelly had expected,” Mr Holway said.

Gary Turner, head of the UK division of Xero, said Mr Kelly had been constrained by institutional investors who did not want to sacrifice profitability to drive innovation.

“This has forced them down an intermediate route focused on defensively renovating existing revenue lines and introducing subscription pricing, but which has otherwise been more of a rhetorical transformation which has fallen shy of making the significant strategic plays they need to make,” said Mr Turner.

Cloud revenue has grown to almost £400m a year, up 57 per cent on year, which according to George O’Connor, an analyst with Stifel, makes it the 12th largest listed cloud vendor in the world. However, the overall organic growth rate at Sage is forecast to be 7 per cent this year, compared with the 6 per cent posted under Mr Kelly’s predecessor Guy Berruyer four years ago.

The slow turnround of Sage and its low valuation compared with sector peers could reignite the debate about its future and whether a new leader should look to break it up by selling off legacy product lines or even selling the whole company, according to Mr O’Connor.

Sage botched its first foray into the cloud in 2009. The next CEO has the tough task of speeding up the business model change while keeping happy investors who value its reliability.

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