Sage slips on competition concerns as rival Xero targets UK / Analysts say Sage could lose market share to new entrant in key cloud accounting market

Over in the U.K. we read the Market Forces Live Blog @ The Guardian writes:  Sage has lost more than 3% on growing competition fears.   New Zealand based rival Xero was in London this week to outline its plans for the UK accounting software market, Sage's key strength. Analysts at Morgan Stanley issued an underweight rating on Sage after hearing what Xero had to say:

We attended the Xero analyst briefing in London, where Xero presented its strategic plan for the UK and global cloud accounting market, with a cloud offering that appears more developed than Sage's in terms of global coverage, user base, scale of investment to date, integration and ease of use. We remain concerned about Sage's ability to maintain dominant share in this fast-growing market.

Xero provides cloud accounting software for small businesses and has become a world leader in online accounting, with 200,000 customers and expecting 80% revenue growth in 2014 (versus Sage's expectation for 4%). It highlighted that 60% of customer wins come from incumbent accounting platforms (Sage, Intuit, etc.). This figure illustrates the risks incumbent vendors face, in our view, as cloud understanding and adoption increases in the small business customer base.

The company highlighted that a total of 1,256 accounting practices have adopted Xero in the UK. This compares to 82 practices that have adopted Sage One. This has driven customers of above 22,000 in the UK for Xero, versus the 12,000 customers Sage has reported on Sage One.

Where could we be wrong? Sage has a dominant position in the UK and a leadership position in several Continental European markets. Accounting software is sticky, so Sage has time to respond – in the UK due to its dominance and in Europe where software as a service demand is lower. Sage could use its strong market position, cash flow and balance sheet to become more competitive in this market, reducing scope for new entrants to take share.

Meanwhile Credit Suisse issued an underperform note and identified other problems for Sage as well as Xero:

Three pieces of news this week serve as a useful reminder that Sage remains at risk from cloud providers. At the large-end, Netsuite is actively looking to take market share, at the smaller end we continue to see Sage as a laggard to more innovative competitors such as Xero, while Intuit has reiterated guidance for 10%-12% growth, materially faster than the 3%-4% growth that is expected at Sage.

Netsuite has commissioned YouGov to survey 531 ERP [Enterprise Resource Planning] users. The key criticism of Sage is that only 13% of Sage customers can access their software online, less than half the average of every other software company mentioned in the survey. The midmarket only accounts for around 15% of Sage revenues and Netsuite has a 'confrontational' marketing style. So these comments likely overstate the risks to Sage. Nevertheless, it is hard to argue with the divergence in growth rates between the two companies, and Netsuite is obviously taking share.

All this has conspired to send Sage 12.5p lower to 334.6p.

Heading in the other direction was Shire, which has slipped recently on growth worries. Its shares have now recovered 14p to £25.03, with Morgan Stanley (again) saying:

Shire's shares have come under pressure this week due to fears that Vyvanse script trends are underperforming expectations. However, we believe a strong performance in [ulcerative colitis drug] Lialda combined with cost flexibility will allow Shire to comfortably meet its 2013 profit guidance.