If Smith sold out of fear that Sage was on the wrong end of disruption, he was not alone. As a long-established provider of software to small businesses, it is having to switch from selling its software as a one-time purchase in the form of a CD or download to providing it as a service hosted online in the “cloud”.
Many younger rivals have only ever offered their software in the cloud, a model also known as “software as a service” or Saas, which involves charging customers a regular subscription for as long as they use the software. Some investors doubted that Sage could compete as a Saas provider against newer competitors that have specialised in it from the start.
But the British company is making progress: more than half of its business has now been migrated to the cloud. However, even when the transition proceeds smoothly from an operational point of view, financially it can look bad: revenues tend to fall in the short term if instead of selling a piece of software for say £1,000 in one go you start to receive £30 a month instead. And the transition requires investment.
After a year or two, however, you will have recouped much of the shortfall and have a smoother, more reliable long-term revenue stream.
“You see the same pattern again and again when long-established firms are forced to change the way they work as the world goes digital,” said Nick Clay of RWC, whose Global Equity Income fund recently invested in Sage.
“Look at Reed Elsevier [now RelX], the academic publisher: its transition from selling printed books and journals to online publishing was very messy and some investors thought it would destroy the firm.” But after a sticky period about a decade ago the shares recovered strongly.
He added: “Now people think new disrupters will take Sage’s business, but it has loyal customers and now that 50pc of those customers have transitioned to the cloud it will start to see the benefits. You have to have patience, but the flags are going from amber to green, and the stock yields a forecast 2.7pc so we are being paid to wait.”