Graham Wylie, a computing and statistics graduate started Sage in 1981 when he developed the original Sage accounts package. (He is still with the company as Managing Director of Sage
Through the 1980sf Sage increasingly came to dominate the
In the late 80s management attempted to adapt the original
In 2001 management decided to expand their product range by offering a CRM software package for SMEs. (Customer relationship management). This was achieved through the acquisition of a company called Interact. This was seen as a logical expansion as CRM uses a lot of the information that accounting packages create. For example a sales manager might find it useful to know whether a customer regularly pays on time.
One of the features that Sage believes makes them unique is their after sales support service. They offer all purchasers of their software a period of free call centre based support and then when the customer sees the benefit of this support they offer them a contract. This support is not just about the technicalities of the software because Sage also provide advice on accounting issues. This is particularly attractive to SMEs because they generally do not have IT or accounting specialists. This strategy has not been adopted by Sagefs competitors who have attempted to provide software based support. (click on gHelph). Accountancy firms certainly do not want to have to provide this type of ad hoc support and therefore accountants have tended to recommend the Sage product.
Breakdown of Sales:
Sage do not give a breakdown of profit by division because they claim that they need to keep it secret for competition reasons. Deutsche Bank have made the following estimates of how profits have progressed over time by division.
If these Deutsche Bank estimates are correct it makes sense for Sage to sell the software cheap and lock in the customer to a high margin support contract.
Sales and Profits by Geography:
Sage is most profitable in the
18% of US customers take support contracts which is a long way behind the 70% figure for the
Sage in total now has 2.9m customers and in addition to selling them support contracts they also hope to increasingly provide accounting software tailored to the needs of specialist industries. For example 10% of customers are small accountancy practices. Sage have software particularly designed to suit the accounting needs of accountants. They also believe that this results in accountants recommending Sage to their clients.
I have attached in Appendix 1 some statistics from Intuit showing the size and growth potential of the small business market in the
Appendix 2 represents the competitive landscape. At first sight names like Microsoft, Oracle, SAP and Intuit scare me to death. My initial reaction was to believe that Sage will be eaten alive by these gorillas. Sage made a reasonable case as to why it will be difficult to penetrate their customer base and why they will be in a position to grow further. Sage make the following points about their existing 2.9m customers:
- 95% of customers employ less than 100 people
- 95% of customers have turnover of less than $10m
- 97% of customers have less than 20 PCs in their company
- Less than 1% of customers are multinationals.
- Average license price <$1000.
As far as I can ascertain Microsoft, Oracle and SAP do not really service this very small customer market and they certainly do not provide the same type of support.
Sage themselves admit that this makes Intuit their biggest competitor but so far Intuit have not attempted to become a serious player in Europe. This makes the
Sage also point out that their route to market is different to most of their competitors. They use VARS (Value added resellers) who are more likely to be used by SMEs. These VARS tend to be local PC and technology shops.
Sage is similar to most software companies in the way they have a tiny cost of goods sold giving them 90% gross margins. Their biggest single costs are labour costs that are split between R&D and SGA. In the case of Sage a major part of this is the cost of support staff in the call centers. Sage spend 10% of revenue on R&D which is at the lower end of software companies. (Maybe software engineers are cheap in
Staff costs are 39% of revenue and the company claim that a substantial proportion of these staff have 3rd level qualifications. This suggests that there will be constant upward pressure on costs.
As in all software companies I believe that this is not the most important issue. The key question is the quality of the software and the strategy adopted by management.
PROFITABILITY AND RETURNS
Sep. year end.
On the face of it Sage is very profitable and has generated great returns. The more important question is whether the acquisitions that they have made will be able to generate similar levels of profits and returns. This is why I have included a figure for transaction CFROI.
Peer group comparison
The two pure competitors for Sage are Intuit and Exact. Exact has a market capitalization of Eu300m so is too small for us. Intuit is a good company but is currently not as profitable as Sage.
EV/ Revenue = 3.4x Dividend Yield = 0.3%
Sage looks good value relative to its peer group on a P/E basis (apart from Exact which is too small). Holt believes that Sage is the best value in the group but there may be questions over the assumptions that they use. I have attached the Holt model in Appendix 3.
Net Debt/ Equity = 35%. Total borrowings = 228m. Bank debt =198m Senior notes= 30m. Bank debt facility in place to 2006. Senior notes payable in equal installments from 2001 to 2005. Coupon on notes=6.77%.
Interest cover = 16x.
Free cash flow for 02 (assuming no more acquisitions) should be at least 50m.
As long as Sage do not borrow to make a big acquisition I think their balance sheet is fine.
As I mentioned in the introduction the original founder is still head of Sage
CEO of the group is Paul Walker who joined in 1984 as company accountant .
The CFO presented in
Overall it appears like a reasonably stable team.
There may be a small issue over management funding gpeth projects because the company has just announced a $10m sponsorship of a new centre for music based in
LIQUIDITY/ MOMENTUM / SENTIMENT
Market Cap. $2.5bn
Average daily volume 8.1m shares (value $15m)
FTSE 100 weight 0.17%
Beta v FTSE 1.6
Not the biggest company in our universe but I believe that it is liquid enough for our requirements.
There is a small possibility that it could fall out of the FTSE100. A couple of weeks ago at the low of the share price it fell to 97th. This would obviously hurt the share price. The review date is Sep. 11th so we should be careful if markets and technology stocks are weak around that date.
I would like to add Sage to the portfolio with a target price of 212p which is taken directly from Holt.
SAGE (K. Power 22/8/02)
Sage is the biggest supplier of accounting software packages to small enterprises in the
The Deutsche Bank analyst, Kevin Ashton does a good job of describing what makes Sage special :
I believe that because most small companies cannot afford to hire their own accountants and technology specialists, they really need the Sage support service. This model of telephone support is Sagefs key strength.
Here are the key numbers:
I think the investment case for Sage is strong because :
- It is a market leader
- It has created a barrier to entry through its support service
- It is not capital intensive
- It generates good cash flow
- Growth prospects look reasonable
- It is on a reasonable valuation both absolute and relative.
I therefore recommend that we buy with a target price of 212p. (Current price 141p)
GRAPH 1 SAGE 1 YEAR RELATIVE ( V FTSE & Nasdaq)
GRAPH 2 SAGE 3 YEAR RELATIVE ( V FTSE & Nasdaq)
GRAPH 3 SAGE EARNINGS ESTIMATES
GRAPH 4 SAGE MAJOR HOLDERS