Global ambitions

Paul Walker has good reason for feeling pleased with himself. Sage, his Newcastle-based software company, was the stock market darling of the last decade and its shares remain bouyant as other high-tech stars crash to earth. But where do they go from here?
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The Independent Online

As the man who has presided over one of the most dramatic and sustained company share price rises in recent years, Paul Walker might be entitled to be a little smug. Sage, the computer software company where he has been chief executive since 1994, was the UK stock market's star performer of the 1990s. Since floating on the London Stock Exchange in 1989, the market capitalisation of the world's largest provider of accounting software to small and medium-sized businesses has soared from £21m to more than £8bn.

But, as many another stock market darling has found, the City can be a fickle friend - and Mr Walker is taking nothing for granted. As he says, "the pressure is on".

Nothing better illustrates that than the reaction to last week's interim results - pre-tax profits up 52 per cent at £54m, on turnover ahead 53 per cent at £202.5m for the six months to end-March. Rather than marvelling at how the company continues to enjoy margins of 26 to 27 per cent overall and 40 per cent in the UK, commentators concentrated on signs of a slowing sales growth and Sage's limited success with its initial forays into electronic business.

Much of this can be attributed to the new scepticism that has embraced the market in response to the recent high-tech volatility and the end of the heady levels of activity associated with the Year 2000 problem. Though not as vulnerable as some, Sage has seen its shares fall back sharply from their 12-month high of 995p. They are now trading at about 670p.

Some of this scepticism can be put down to Mr Walker. An avuncular 42-year-old Yorkshireman, he is given to pithy remarks about rivals. While he was presenting last week's results he said he would rather "buy a barn in the country" than the struggling Dutch business software company Baan. But he is highly regarded by analysts for honesty and straightforwardness.

And although he has held the top job for some time, the caution of his accountancy training shows through. At last week's proceedings he introduced what he called a "reality check", stressing that the company was not expecting its recent internet-related offerings to make money for some time. If that is in marked contrast to some of the pronouncements from companies, he is making no apologies. It is a view based on Sage's knowledge of its 2.3 million small-business customers.

Paying proper attention to customers has played a large part in the Sage success story. "Customer focus has become an over-used term," says Mr Walker. "But we tend to think we're customer-led, as opposed to being product-led. Many IT companies have been product-led and technology-led, and, to some extent, ignored what customers really needed. We acknowledge that SMEs (small and medium-sized enterprises) need support. They need help and we need to research their needs."

The company has taken this approach since its beginnings in the early 1980s. And Mr Walker believes the decision to keep the company based in Newcastle rather than move to a corporate tower in London helps keep the executives' feet on the ground - apart from allowing them enjoyably convenient commutes to work that rouse envy in the South-east. Mr Walker recently said the only day it does not take him seven minutes to get from his office to his wife and three young children is Friday - because he meets old friends in a pub for another exercise in keeping grounded.

This understanding means Sage executives realise small business owners tend to be resistant to change. So they are not, for example, expecting them to rush to sign up for a product that enables them to do their accounting over the internet, especially in view of the widespread concern about the havoc caused by viruses, such as the "Love Bug". Mr Walker says: "Very few businesses have started to integrate their desktop with the Web." Sage still has 100,000 customers using the DOS computer operating system rather than Windows. "It shows how conservative people are."

Sage, he adds, aims to become an internet gateway for small businesses, meeting their demands and offering the right products and service. To do this the company is prepared to educate customers in the benefits of such developments as "application service providers", which enable software to be rented online. But it will be a slow process.

The company will also continue the approach that has served it so well so far. This involves keeping in close contact with every business to which it sells a software package. Customer support and responsibility for product upgrades stays with Sage, rather than - as is common - being outsourced to dealers (referred to by Sage as value-adding resellers, or VARs).

The result is legendary customer loyalty among small business owners who are too busy to shop around provided they feel looked after. The company has recently been highlighting to the City that fully 60 per cent of revenues come from selling support contracts and upgrades to existing customers. Paul Harrison, the recently appointed finance director, says: "It gives a predictability to the business."

And that is what the analysts love. Matthew Hammond of Credit Suisse First Boston, says: "Sage still has one of the most robust models of the sector, delivering consistent high-quality earnings growth."

By today's technological standards, Sage products are hardly cutting-edge. But the company has had a knack for spotting how the market was going to develop.

The Sage story starts in 1981, just before the personal computer revolution. David Goldman, then running a printing business in the area called Campbell Graphics, and Graham Wylie, a young Newcastle University graduate, started working with a US consultant to develop software solutions for small businesses.

Mr Goldman had met Paul Muller, a visiting American computer consultant who had produced some of the mathematical calculations for the lunar landings of the late 1960s. When Mr Goldman told him his biggest problem was working out how much each job was going to cost, Mr Muller wrote a software program to help. Mr Wylie got Sage started by packaging and selling the software to other printers.

Soon after Sage was born, Alan Sugar's Amstrad took a great step towards making computers accessible to small businesses by introducing a glorified word processor with printer attached. Two weeks after the launch, Sage's founders came up with a compatible generic book-keeping software package. The company's sales shot up from a handful to hundreds a month and soon the company passed Pegasus, its arch-rival to this day, to became the UK market leader.

Mr Walker, who joined as company accountant in 1984 and became finance director in 1987, says the flotation two years later was chiefly an exit route for the venture capitalists who had backed the company early on. But "one of the big benefits of floating and ceasing to be a private business is that we have to be much more formal and precise about what our strategic plan is and how we're going to develop that".

That plan is to make the most of what in 1990 was a highly fragmented accounting software market and build a formidable customer base that can be used as an engine for recurring revenues. Consequently, the decade that saw Sage's share price soar through the roof also saw a relentless series of acquisitions - in Britain, continental Europe and the United States.

The stakes are larger since the company started the process by purchasing DacEasy of the US in 1991 for what now seems a puny $18m. Best Software, another US company, in February cost £285.4m. But the principle has largely remained - picking companies for their customer bases, then applying Sage management techniques to make them more profitable.

The second part of the equation can make Sage look ruthless. A complete new management team was installed at Tetra, the UK business serving medium-sized businesses Sage acquired last year. But Mr Walker rejects this. "I'd use the word 'fair'," he says, adding that if the existing management is uncomfortable with the new way of operating it will not be happy - and by extension the employees will not be won over.

At Sage, they do not believe in change for the sake of it. Mr Wylie has been there from the start, and the chairman, Michael Jackson, has been a director since Mr Walker arrived in 1984. Kevin Howe, the director responsible for the US operation, has been on the board since 1991. "We've had a lot of stability," says Mr Walker. Until co-founder David Goldman retired in 1997, essentially the same team had been in place for 13 years. Mr Goldman died last year.

Long service is a feature of the workforce, too. Being away from the South-east, where myriad firms constantly compete for workers, helps with staff retention. So does a share-option scheme that encourages employees to commit for three to five years. Sage's many employee shareholders are unlikely to see the sort of returns they have enjoyed for a decade.

But, though internet-related riches may be some way off, Mr Walker is confident the core business can continue to grow. Germany is expanding fast, and the company's toehold in the Far East is developing. Then there are opportunities in Italy and Spain and in the emerging eastern European economies.

Though the past year or so has seen the acquisition of what Mr Jackson calls "a bit of technology" to fuel the move to the Web, the story remains the same - buying customer bases that, unusually in the high-tech world, generate huge amounts of cash.