Thursday, May 10, 2012
Sage R&D - bang for its buck (or pound)?
Sage announced their interim's this week, to the slight disappointment of the market. There is growing concern that as organic growth continues to trend in the mid-single digits, and acquisitions are hard to come by, the company will start to approach ex-growth with a knock-on effect to valuation etc.
George O (Panmure) picked up on the fact that Sage supports 270 different products on 70 different platforms.
He also made a headline comparison between R&D spend at Sage and some of its obviously comparable companies. Sage spends 11% of revenue on R&D, in contrast to 12.5% at Microsoft and 21% at Intuit. He adds that if anything there should be a higher spend on R&D than at present. (Note 5-year comparative share performance).
Whilst I accept this point, there is a more stark comment to be made.
With 11% (or in absolute terms 160m GBP) invested annually in 270 different products on so many different platforms, the only real progress they can make is small incremental steps to maintain and evolve the products, at best, rather than push a more innovative product offering.
Within the other companies he mentioned (and true of most of the global software players) there is a global approach to product development and thus the effectiveness of the spend is magnified greatly.
Unless Sage allocates investment to blue sky thinking and more creative approaches to partnering/investing/acquiring tech rather than market share, they will continue to struggle in their efforts to generate real growth. Unfortunately attempts to generate these ideas internally have not yet been successful enough. One just has to look at the several years and attempts made by the company to launch a joined-up SaaS strategy, never mind product, to understand the difficulty it is in.
Given the amazing position that the company has, very large, global and loyal customer base, and a highly visible and reliable P&L, it could afford to be a little more expansive in its approach to creating long term growth engines for the business.
Part of the solution will be to realise that (at least for the time being) the era of growth via acquiring market share has passed. This will force the company into looking more organically for that growth.
I have always been of the view that there is sufficient talent within the company to rediscover the growth, it does however need to show confidence and leadership to make this happen.