The UK’s software king sees a soft recovery for the economy in 2010

After 16 years as chief executive of Britain’s IT giant Sage, Paul Walker says it is time to move on to one last hurrah.

Earlier this week, the 52-year-old boss of the Newcastle-based firm said he would leave the business he first joined in 1984 when a successor can be found at some point over the next 12 months.

He says: “I could not have done this a year ago because we were still in recession. But the firm is beginning to emerge from that in good shape. And I want to try new things before I retire.”

Walker says he is keen to either take on a big job at a big company or use his vast experience to advise a number of smaller, growing firms.

However, investors at Sage, which is valued at £3.4bn and which sells accounting software and services to 6.1m small and medium-sized businesses worldwide, will have their immediate focus on the firm’s half-year results on 5 May.

They will cast a keen eye on the progress the firm has made to turn around its US division, which accounts for 40 per cent of sales but lags the pace of growth of other regions.

Analysts will also want to see when Sage, which has bought over 110 rivals since it was founded in 1981, will get back on the acquisition trail as the economic recovery begins to slowly take hold.

And lastly, the market will also want to know how quickly the firm, which processes the pay of one in four working people in the UK and employs 13,400 worldwide, is moving toward online software of the kind pioneered by Google, as opposed to the desktop products that make up the bulk of its current range.

Sheffield-born Walker seems relaxed at the prospect of facing these questions from his investors in a few weeks time. It may be down to the fact that he has done this many times before. He has been chief executive since 1994, and joined the firm a decade before as an accountant from Arthur Young (now part of Ernst & Young).

He swings from side-to-side in a swivel chair in a large pine boardroom in the firm’s campus-style headquarters, which holds 1,400 staff in Gosforth, four miles outside Newcastle city centre.

“We are in a strong position,” says a thoughtful Walker. He points out the firm raised $300m (£195m) in a private placement in March to pay down debt. This comes on top of the business last year cutting its debt by £47m to £392m; bank facilities don’t have to be renewed until 2011.

In December Sage posted full-year pre-tax profits down two per cent at £307.5m, and sales down four per cent at £1.4bn in line with forecasts. During the year the firm added 245,000 customers, but Walker said at the time he still could not see “a general recovery in our markets”.

He moved to cut costs by axing 1,000 jobs worldwide, mainly in marketing and sales, saving £54m. Walker also upped the dividend three per cent to 7.4p, and maintained its research and development (R&D) budget, crucial to the growth of an IT firm, at £174.6m, which cheered investors. Walker says he will keep his R&D budget at this level throughout 2010.

Walker also said in December the firm, which joined the FTSE 100 in 1999, would be “well positioned to take advantage of the future economic upturn”.

The market consensus expects Sage to post 2010 half-year earnings before interest, tax and amortisation of £171m, up 1.5 per cent on the same period last year, on sales of £714m, down 4.6 per cent on 2009. Sage says it is “comfortable” with these estimates.

Some analysts have speculated Sage might begin to take great strides on its trio of questions as early as next month, but they look set to be disappointed.

Back in his company boardroom Walker says the firm is not ready for a return to making acquisitions at the pace investors had become used to. He says: “In the 1990s we went out and acquired a customer base. We have that. The market is more mature now. We will focus on selling more products and services into our customer base.”

Walker adds: “We are more likely to do bolt-on acquisitions rather than transformational deals.”

Walker shocked the markets in 2007 by dismissing Ron Verni, the head of its US unit, and Jim Eckstaedt, its chief financial officer, after the region grew four per cent over the year, compared to 10 per cent at the time in mainland Europe and 17 per cent in the rest of the world.

Sage had bought Emdeon, a US software records business for doctors’ surgeries for £297m in 2006.?It was one of the group’s biggest acquisitions and it expected a bigger boost from that business.

Walker says: “The business had grown too big for the current management. We probably grew too fast in the US.” Walker brought in Sue Swenson from US technology firm New Motion to revive the US operations in March 2008.

He says: “She has built up a good team around her and they have looked closely at the unit and the products we sell into that market.”

But Walker warns investors that they should not look to see radical improvements by May.

He says: “As the US economy begins to pick up, we think our business there will also grow.” Walker adds that over the next 12 to 18 months, “I would expect to see the sort of growth you would expect of a market of that size.”

The US is also where Sage’s two biggest rivals are based: Microsoft, whose Business Solutions caters for small businesses, and Californian-based Intuit, which sells mainly into the US market.

There has been a lot of interest in online products that hold data on remote mainframe servers rather than on company desktop computers. But Walker, who says that 80 per cent of his customers work in businesses of 25 people or less, sees little clamour for these high-tech services from his clients.

He says: “This will suit younger people who start businesses and who are used to working this way. But a lot of other businesses like the security of knowing their accounts and sales information is stored on their desktops.”

Walker adds that online software sales currently account for two to three per cent of his sales, and would not be surprised to see if they were still less than half of group sales in five years’ time.

Although this recession is the most severe Walker has been through, because of the length of time he and his team have been in the industry he says Sage was able to anticipate its broad currents.

He says: “We knew that existing customers would spend less. And there would be an increase in very small customers – people who have been made redundant and are starting up on their own.”

Walker says that across Europe – except for recession-hit Spain – he is starting to see firms upgrade their existing software but he does not expect the firm to add any more than one to two per cent to its sales in 2010.

But he does expect profits to hold up due to cost cutting, as well as its service and maintenance business.

This unit accounts for 70 per cent of the group’s sales and sees firms pay between £500 and £1,200 a year for a phone service that offers advice to small businesses on anything from tax codes in Germany to how to process maternity leave.

He forecasts it will be 2011 before the firm will “get back to pre-recession growth rates”.

Over his 16-year stewardship of the business, Walker has shepherded the firm through the dotcom bust and several other recessions, and seems set to do so again. He has built up one of Britain’s truly global IT successes. His investors will have cause to wish him well on 5 May.