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The Sage Group plc unaudited results for the six months ended 31 March 2014

Revenue growth momentum maintained, with subscription a key driver

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FINANCIAL SUMMARY1

H1 2014 H1 2013 Change
Organic revenue £657m £626m +4.9%
- Organic recurring revenue £472m £441m +6.9%
- Organic software and software-related services revenue (“SSRS”) £185m £185m +0.1%
Organic operating profit £180m £165m +8.9%
Organic operating profit margin 27.4% 26.4% +100bps
Underlying2 basic earnings per share (“EPS”) 11.12p 10.27p +8.3%
Underlying2 cash conversion 110% 112% n/a
Ordinary interim dividend per share (“DPS”) 4.12p 3.88p +6.2%

STATUTORY2

H1 2014 H1 2013 Change
Revenue £657m £708m -7%
Operating profit/(loss) £174m (£1m) n/a
Profit/(loss) before income tax £165m (£8m) n/a
Basic EPS 10.58p (6.28p) n/a

1 Refer to Appendix II on page 13 for information on Non-GAAP measures.

2 Prior period statutory and underlying figures include the contribution of non-core products disposed of in March and April 2013. The prior period statutory operating loss is due to an exceptional item of £180m relating to these disposals.

Financial highlights – higher organic revenue growth momentum maintained

  • Organic revenue growth of 5% maintains the higher growth established in H2 2013 and represents good acceleration against the same period last year (H1 2013: 3%);
  • Growth in software subscription revenue has been the main driver behind a 7% increase in organic recurring revenue (H1 2013: 6%). Recurring revenue now accounts for 72% of Group revenue;
  • Organic SSRS revenue growth in North America and AAMEA was offset by continued contraction in Europe, leaving SSRS revenue flat overall (H1 2013: 3% contraction); and
  • The increase in organic operating profit margin to 27.4% primarily reflects a reduction in overheads that previously supported disposed non-core products, alongside disciplined cost management and revenue growth. This has returned organic operating margin to the underlying trend of 27%.

Strategic highlights – good progress with software subscription transition

  • Annualised value of software subscriber base increased 24% to £201m (H1 2013: £162m), representing good
    growth that builds on a significant base of over 400,000 software subscription contracts across the Group;
  • High quality nature of software subscription revenue evidenced by the increase in the recurring contract renewal rate to 83% (H1 2013: 81%);
  • Strong market position established in the UK & Ireland with Sage One, our cloud solution for smaller businesses, where paying subscriptions in that market have almost trebled to 33,000 over the last 12 months;
  • 7% organic revenue growth for Sage ERP X3 (H1 2013: 8%), our global ERP solution for mid-market customers, with good growth of 22% outside of France; and
  • 15% increase in the number of integrated payments customers to 15,200 (H1 2013: 13,200), with good adoption in the UK, building on a more established base in North America.

Guy Berruyer, Chief Executive Officer, said: “This is a good set of results, with the increase in organic recurring revenue growth demonstrating that the strategy is working well. Sage is changing, with greater focus, investment in technology to address customer needs and the move to subscription all delivering results. We remain confident that the good first half performance will be carried through to the full year, and of achieving our target of 6% organic revenue growth in 2015.”

Enquiries:
The Sage Group plc
+44 (0) 191 294 3068
Guy Berruyer, Chief Executive Officer
Steve Hare, Chief Financial Officer
Murdo Montgomery, Investor Relations

Tulchan Communications +44 (0) 20 7353 4200
David Shriver
Jonathan Sibun

An analyst presentation will be held at 8.45am today at the London Stock Exchange plc, 10 Paternoster Square, London, EC4M 7LS. A live webcast of the presentation will be hosted on www.sage.com/investors, dial-in number +44 (0) 20 3139 4830, pin code: 10769950#. A replay of the call will also be available for two weeks after the event: Tel: +44 (0) 20 3426 2807, pin code: 647353#

Non-GAAP measures
Unless stated otherwise, growth rates in the Chief Executive Officer’s review and Chief Financial Officer’s review are on an organic basis. For information on the calculation of Non-GAAP measures and why they are used, please see Appendix II on page 13.

Rounding
As a result of rounding throughout this document, it is possible that tables may not cast and change percentages may not calculate precisely.

Chief Executive Officer’s review
Revenue growth momentum maintained, with subscription a key driver
Organic revenue growth of 5% (H1 2013: 3%) maintains the momentum of 5% organic revenue growth established in the second half of 2013 and represents a strong acceleration over the same period last year. The acceleration in recurring revenue growth, supported by subscription, shows our strategy to accelerate growth is working and we reiterate our confidence in meeting our 2015 organic revenue growth target of 6%.

We are committed to delivering on our strategic priorities to accelerate growth, which are to drive business model change through subscription and to bring the benefits of cloud, mobility and connected services to our customers. We are doing this by working differently and targeting investment to our most significant growth opportunities.

It is worth reflecting on where the business has come from since we communicated our strategy for growth in July 2012. Almost two years on, I am pleased to report significant progress against our plans.

Subscription growth drives stronger recurring revenue
We have delivered good growth in subscription revenue. During the period, the annualised value of the software subscriber base grew by 24% to £201m (H1 2013: £162m). Subscription has been a primary driver of the acceleration in organic recurring revenue to 7% (H1 2013: 6%). This is high quality revenue, evidenced by the increase in the contract renewal rate to 83% (H1 2013: 81%). This growth builds on a significant subscription base, with over 400,000 subscription contracts for software products across the Group.

We have established a strong market position with Sage One in the UK
We continue to make good progress with Sage One in the UK & Ireland (“UKI”). Over the last 12 months we have almost trebled the number of paying subscriptions in UKI to 33,000 at the end of March 2014.

Sage One is available in nine countries across Europe and North America, with progress outside of UKI at an early stage. We are well placed to see growth as cloud adoption accelerates in markets where we have a leadership position more generally. Our progress in the US has been slow, but we continue to invest for growth and have strengthened the product portfolio with the launches of Sage One Invoicing and Sage One Accountant Edition.

We have a significant number of small businesses using our cloud products globally. Our portfolio of Software-as-a-Service (“SaaS”) solutions for start-up and small businesses includes Sage One and other cloud products in Germany, France and South Africa. Adoption of these products is scaling well, with almost 60,000 paying subscription contracts at the end of the period, an increase of over 160% in the last 12 months.

We offer small to medium-sized businesses a clear migration path to the cloud
For businesses with existing systems, the benefits of the cloud must be weighed against the constraints. Our hybrid cloud solutions make this assessment simpler by offering the advantages of a cloud environment, including outsourced infrastructure, mobility and more flexible pricing models, without compromising on customisation and control over data.

Sage 200 Online in UKI and Sage Murano Online in Spain are the first of our hybrid cloud small to medium sized business (“SMB”) products to become commercially available. We have seen how the availability of a cloud version gives customers the confidence to invest in ERP solutions, either by moving directly to the cloud or by investing in the on-premise solution with confidence in the product’s future capability. The next few months completes the hybrid cloud launch of our leading ERP products in five of our largest markets, with Sage 100 Online already available in France, Sage 300 Online launching in North America next month and Sage Office Online launching later this year in Germany.

Good international performance by Sage ERP X3, our global solution for the mid-market
Overall organic revenue growth for Sage ERP X3 for the period of 7% (H1 2013: 8%) is below our expectations for double-digit growth, with the market environment in France acting as a constraint on growth. The product continues to perform very well internationally, growing organically by 22% outside of its home market of France, and non-French revenue now accounts for 52% of global Sage ERP X3 revenue. Overall, I remain confident that Sage ERP X3 will sustain the double-digit revenue growth that reflects our ambitions for this product going forward.

Next week we are announcing the global launch of Sage ERP X3 version 7, which is a major update that introduces an entirely redesigned user experience with mobility and web access at its core.

We have a significant growth opportunity with connected services
Our connected services strategy includes payments solutions that are integrated with the core application, mobility, and connected features that perform a specific function and complement the core application. These offerings are typically only available on subscription and represent a significant opportunity to increase our “share of wallet” by offering greater value to our customers.

We continue to see good growth in the number of Sage accounting customers using an integrated payments solution, with 15% growth in the period to 15,200 customers (H1 2013: 13,200). This cross-sell generates annual revenue in excess of £20m.

We are excited about the opportunities offered by mobility. In North America, a suite of Sage mobile apps are commercially available, which run on tablets and smartphones and connect users to on-premise core application data.

We are also excited about our opportunity with connected features, and the launch of an Auto-enrolment module in UKI represents a good example of how we intend to deliver these to our customers going forward. Whilst it remains early days for the adoption of mobility and connected features, we believe this could be a significant opportunity over the medium to long-term.

Sage is changing in response to an evolving market and is in a strong position
We understand that businesses make informed decisions when investing in their infrastructure and will typically appraise the merits of changing their business software and the pricing model that best suits their needs. We have transformed the products and services we offer our customers over the last two years in response to the insight we have over the evolving trends in our markets. This is why we offer customers choice; choice of deployment in the cloud, on-premise or connected on-premise, and choice of subscription or perpetual licence.

We are supporting our transformation through increased investment in our highest growth opportunities, which we categorise as our Invest products. Research and development and sales and marketing expenditure on Invest products has increased by 15% compared to the same period last year. This disciplined approach to resource allocation allows us to both accelerate revenue growth and support profitability, which is reflected in the margin target we set out in July 2012 for 100 to 200 basis points of improvement by 2015. Our current investment plans, which are designed to capture the significant opportunities offered by mobility, connected services and the cloud, mean we will be targeting the lower end of this range for 2015.

The Board
During the period, we announced the appointment of Steve Hare to the Board as Chief Financial Officer, effective from 3 January 2014. We also announced the appointment of two new non-executive directors to the Board, namely Drummond Hall and Inna Kuznetsova, effective from 1 January 2014 and 6 March 2014 respectively. In November 2013, Mark Rolfe and Ian Mason retired from their roles on the Board as non-executive directors.

Summary and outlook
This is a good set of results, with the increase in organic recurring revenue growth demonstrating that the strategy is working well. Sage is changing, with greater focus, investment in technology to address customer needs and the move to subscription all delivering results. We remain confident that the good first half performance will be carried through to the full year, and of achieving our target of 6% organic revenue growth in 2015.

Guy Berruyer
Chief Executive Officer