For some time now I have felt that KashFlow is in need of adult supervision. Duane Jackson, CEO has done a great job in building up a business from nothing with minimal investment and a lot of help from Lord Young. But it has needed more seasoned hands to take the company to the next step. It is a credit to Jackson that he has understood his limitations and appointed Raj Patel, the former CEO Exact Software as vice chairman.
Richard Holway, veteran analyst of the British software space sums up the position nicely:
“I’ve followed KashFlow for many years. They really have given Sage, and other established companies in the market, a run for their money. It’s difficult enough to grow a company from scratch to £1m, but even more difficult to make the transition from ‘startup run by the founder’ to the next stage. The appointment of highly experienced new executives to join Duane Jackson is extremely good news and bodes well for the future of KashFlow and its customers”
What does Patel have to say?
"With incumbent players struggling in a changing macro-economic environment where new businesses are formed every day, a huge growth opportunity emerges. Duane was one of the first IT entrepreneurs to envisage and capitalise on it. With its track record, innovative products, superior customer engagement and growth plans for the coming years I am convinced KashFlow will further its lead. I am excited to be able to play a role in this journey and look forward to working with our team, our customers and our partners in making what has already been great journey even greater."
All fairly standard PR stuff except for a couple of small points.
- Patel has skin in the game having made an investment in the company, rumoured to be £1 million.
- While continuing to hold the CEO role, Jackson is stepping back, ostensibly to invest more time (and presumably some money as well) into Prince's Trust related startups.
I'm not so sure about this second point. Founders often bring things to the table that no professional manager (because that's what Patel is) can provide. In this case, Jackson has been the perennial thorn in Sage's side that Jackson has mercilessly exploited, largely to the company's benefit but also providing talking points around which the whole industry has coalesced. It is not clear from this announcement whether Jackson will continue to have the interest to keep stirring the pot.
However, KashFlow and the industry can perhaps draw comfort from the fact that most investors now see Sage not as a growth company but one that can be milked for dividends and the impact of share buy-backs. Or at least that is the hope. In a detailed report from Numis, we see proof positive of what I have been saying for years: Sage is on the skids and has no real cloud strategy. Numis hope that Sage will wake up to the problems and force march its customers to a subscription model.
"One possible way to migrate customers to a ‘compulsory support’ model is through migration to cloud delivery, where recurring monthly payments now seem to be accepted as the norm. Since cloud delivery potentially relieves the customer of the costs and effort of maintaining their own infrastructure, at negligible marginal cost to Sage, this delivery model enables a repricing that benefits both Sage whislt still, overall, saving money for the customer. We think the dynamics of this are little different to the support modelling we showed earlier, in Table 5, albeit at a higher price to reflect the extra value from Sage hosting the application for the customer.
"Interestingly despite the scale of opportunity here, Sage has been, in our view, extremely poor at quantifying this or providing any useful statistics to the investment community. Indeed, our analysis suggests that Sage’s own figures, as presented at its capital markets day, potentially understate the upside from an all-subscription model."
I hate to say it but while the diagnosis might be right this analyst prognosis reflects a very poor understanding of cloud market mechanics. Numis is making the massive assumption that Sage's brand tied to its bulk will provide enough inertia to carry the day. That is far from a given. Does anyone remember McCormack and Dodge? Walker International? Back in the day these were two powerhouse accounting software vendors that are no longer with us. They absolutely dominated the marketplace but were squished by a technology shift that gave birth to SAP, Oracle, Great Plains and ... Sage. As I look over the landscape I see the same history repeating itself. Today we have KashFlow at the SME end, NetSuite in the mid market and Workday at the top of the enterprise market powering along. Sage? In decline.
To put this into perspective, Workday IPO'd last month at a whopping $8 billion valuation and a 75 per cent premium on the strike price. That's after seven years in existence, 350'ish customers and much less than $200 million in annual revenue. Sage's valuation today? £4.17 billion or roughly $6.7 billion after 30 years in the business and millions of customers who are being soaked for increased fees with little to show in return. Go figure where the future lays. I know what I think.
