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Being big, technologically advanced and able to serve giant clients is a pretty formidable moat. That’s what has powered shares in giant European software maker SAP over the past year. But the little guy sometimes gets a chance to catch up. Witness Sage, a rare inhabitant of the British tech landscape, whose stock rose by a fifth on strong annual results on Wednesday to reach almost £13bn of market capitalisation.
To some extent, this is a relief rally. Sage’s business model — which involves selling HR, accountancy and payroll software to small and medium-sized enterprises — had been under some pressure. Titchier businesses tend to be disproportionally hit by interest rate rises, which may make them reluctant to splash out on new tech. Sage had earlier this year dampened growth expectations.
The last quarter of the year proved reassuring, however. Recurring revenue growth reached 11 per cent for the full year, and margins improved 2.2 percentage points to 22.7 per cent. Indeed, the company is within sight of Silicon Valley’s “rule of 40”, a shorthand metric that adds sales growth and profitability together to gauge a company’s quality. It should make further progress on both.
For one thing, a waning interest rate cycle should unwind some of the pressure on Sage’s target client base. In the US, the source of around half of Sage’s business, tax cuts and tariffs favoured by President-elect Donald Trump should also provide smaller, domestically focused businesses with a boost compared to their bigger rivals — as evidenced by their relative performance since early November.
Secondly, artificial intelligence is making digital tools more useful. Nowadays, accounting software doesn’t just spit out numbers. It identifies late payers, and those likely to be late payers. It even prepares a draft email to chivvy them along. The gap between AI-enabled software and that musty old spreadsheet some small businesses still rely on is growing. That should encourage customers to write cheques.
Sage is by no means a technology leader, as yet. Its share of revenue from cloud native products — as opposed to stuff that lives on one’s desktop — has tripled to 31 per cent over the past five years, according to Michael Briest at UBS, still well behind US competitor Intuit.
Yet while the group does not top the league tables — and at £12.8bn, its market capitalisation is around one-twentieth that of SAP — it should be several rungs higher than smaller local software providers and legacy tools. Improving conditions in its core market should mean small can still be super.
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