MARKET COMMENT
Sage Can Avoid A Microsoft Stuffing
By David Kuo (TMFDragon)
December 5, 2001
Carburton Street, London -- Any company that has had the misfortune of engaging in a head-to-head with Microsoft (Nasdaq: MSFT) will know that the software giant always get the final word. You can have the best technology in the world, but Microsoft, with its superior points of presence, will always be in a stronger marketing position. Techies may argue the toss about Lotus being better than Excel, or WordPerfect being more advanced than Microsoft Word. But ultimately, when Microsoft decides to enter into a market, be it spreadsheets, databases or word processing, the competition had better batten down the hatches.
Sage (LSE: SGE), the small business accounting software developer, is likely to find itself up against the software behemoth. Microsoft wants a piece of the Small to Medium Enterprise (SME) market and plans to launch Small Business Manager, a software product aimed at businesses with fewer than 40 employees. This move could put a significant dent in Sage's plans for the future. But for now, Sage is still enjoying healthy growth in revenues and profits. Today, Sage reported annual pre-tax profits rising 12% to £121m on sales that increased 17% to £484m. Improvements were seen in the UK, Europe and the US with nearly a quarter of a million new users added during the year. Sage customers now total 2.8 million.
There is little doubt that Microsoft will capture a large proportion of the SME accounting software market. However, all is not lost for Sage. Microsoft, because of the sheer size of its operation, has to widen its competitive scope and direct its attention across a broad target of customers. Its enormity will also allow it to dominate through a better cost structure. But this will provide Sage with an opportunity to focus on a narrower target with perhaps a more differentiated product and enhanced customer service. This might lead to slower growth in top line sales, but also to much healthier margins both at the operating level and at the bottom line.
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