21 November 2018
Sharpening the focus to accelerate the transition to SaaS
|Of which, subscription||£839m||£670m||25.2%|
|Software and software related services (SSRS) revenue||£323m||£300m||7.6%|
|Organic operating profit||£505m||£4752m||£30m|
|Organic operating profit margin||27.8%||28.0%||(0.2%)|
|Return on capital employed||23.0%||26.9%||(3.9%|
|Net debt: EBITDA||1.2x||1.6x||N/A|
|Underlying cash conversion||96%||95%||100bps|
|Free cash flow as a proportion of revenue||19%||15%||400bps|
|Ordinary dividend per share||16.50p||15.42p||7.0%|
|Organic revenue including impact of asset held for sale||£1,857m||£1,741m||6.6%|
|Underlying operating profit margin||27.2%||27.3%||(0.1%)|
|Revenue from continuing operations||£1,846m||£1,715m||7.6%|
|Profit before tax||£398m||£342m||16.4%|
|Basic EPS (total operations)||27.21p||27.80p||(2.1%)|
Sage’s vision is to become a great SaaS business for customers and colleagues alike. Sage has made significant progress towards building a SaaS business with 46 % software subscription revenue and £434m of cloud ARR. In FY19 and beyond, management believe it is essential to accelerate the transition to a SaaS business by sharpening the focus on customers, colleagues and innovation in order to unlock the potential for significant value creation at Sage.
By embracing a closer relationship with customers, putting them and colleagues at the heart of the business, Sage will drive greater customer satisfaction and increase lifetime contract value. This model will drive a sustainable acceleration in recurring revenue growth, underpinned by strong free cashflow, whilst enabling an efficient return on investment.
In order to do this, the key initial priorities for FY19 have been identified :
Steve Hare, CEO, said :
“Sage has shown stronger performance in the second half of FY18. The renewed focus on high-quality subscription and recurring revenue has generated momentum as we exited the year. As CEO I will put customers, colleagues and innovation at the heart of everything we do to accelerate the transition to becoming a great SaaS business. That means investing further resource in Sage Business Cloud, a continued commitment to customer success and a culture which values the individuals and promotes collaboration. Increased investment in these areas will lead to an acceleration in high-quality sustainable recurring revenue growth.”
Full year guidance for FY19 is based on the continuing operations of the business, on an IFRS15 like-for-like basis and at constant exchange rates. On this basis, management expects FY19 recurring revenue growth of between 8 % to 9 % with SSRS and processing revenue expected to be flat or decline mid-single digits, driven by our focus on driving subscription and recurring revenue. As the business accelerates the pace of transition towards subscription, the organic revenue growth rate may decrease in the short-term.
We expect FY19 organic operating margins to be broadly stable before the impact of around £60m of specifically targeted investment to accelerate the transition to SaaS, especially in product and innovation which will also enhance efficiency and effectiveness over time. Including this impact, organic operating margin will be in the range of 23 %-25 %, maintaining strong free cash flow as a proportion of revenue. Over time, this model will drive a sustainable acceleration in recurring revenue growth whilst enabling strong returns on investment.
The impact of the transition to IFRS 15 is not anticipated to be significant with a net increase to FY19 opening reserves of £23m, resulting primarily in deferral of commission fees and unbundling of subscription revenue, offset by deferral of contract sign-on fees. Full disclosure on page 28.