The Sage Group plc unaudited results for the six months ended 31 March 2019

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Overview

• Strong growth in high quality recurring revenue, underpinned by software subscription, reflecting successful strategic execution;
• Operating margin in line with expectations;
• Strong underlying cash conversion;
• Full year outlook shows continuing confidence in recurring revenue growth in the remainder of FY19.

¹Please see Appendix I for guidance of the usage and definitions of the Alternative Performance Measures

²Statutory, underlying and organic numbers in H119 are on an IFRS15 basis.

³Organic revenue and operating profit for H118 is restated to aid comparability with FY19. The definition of organic measures and the basis for the H118 proforma IFRS 15 adjustments can be found in appendix 1. Unless otherwise specified, all references to revenue, profit, and margins are on an organic basis.

H119 Financial Performance

• Organic total revenue growth of 6.2%, reflecting strong growth in high quality recurring revenue of 10.2%, underpinned by software subscription growth of 27.7%, offset by an 11.8% decline in SSRS, reflecting the continued transition to subscription and 2.8% growth in processing;
• Growth in recurring revenue, driven largely by strength in North America at 12% and Northern Europe (UK & Ireland) at 14%;
• Organic operating margin of 23.2% reflecting performance in the business, offset by increased investment to accelerate strategic execution and an increase in colleague variable compensation in line with the strong business performance and the commitment to colleague success;
• Non-recurring gain of £13m (H118: charge of £1m), reflecting the gain on disposal of US Payroll Processing of £27m, offset by property restructuring costs of £14m;
• Underlying cash conversion of 151%, reflecting an improvement in the receivables collections process, the continued transition away from license contracts which attract longer payment terms, and lower levels of FY18 bonus payout in H119. Underlying cash conversion is expected to trend downwards in H219 versus H119. Free cash flow of £257m and net debt to EBITDA ratio of 0.8x;
• An increase in interim dividend of 2.5% to 5.79p, in line with the policy of maintaining the dividend in real terms going forward.

Progress in strategic execution

Sage’s vision is to become a great SaaS company for customers and colleagues alike. Highlights in strategic execution in H119 include:

• In customer success, Sage has continued the roll-out of the single CRM system and digitization of customer service functions, which over time enhances the relationship with the customer, improving retention rates and increasing contract values;
• In colleague success, Sage continues to build a culture that fosters collaboration, open honest dialogue, and where colleagues feel connected to the vision, putting customers at the heart of all conversations;
• In innovation:
  • The project to internationalize Intacct continues to progress well with the solution due to launch in Australia and the UK later in 2019;
  • Sage continues to invest in cloud-native and cloud-connected solutions with significant functionality added to Sage Enterprise Management, Sage Payroll cloud and Sage cloud-connected accounts solutions;
  • Executive Committee strengthened with internal promotions to reinforce the focus on innovation and SaaS.

Continuing progress in strategic execution has resulted in:

• Annualized recurring revenue⁴ (ARR) growth of 10.2% to £1,545m reflecting continuing momentum in the recurring revenue of the business;
• Recurring revenue now represents 83% of total revenue with 52% software subscription penetration as the business continues the transition towards subscription and Sage Business Cloud;
• Future Sage Business Cloud opportunity (Sage Business Cloud and products with the potential to migrate) recurring revenue growth of 12% and total revenue growth of 8%. Sage Business Cloud penetration of 44% reflecting continuing progress in the shift towards cloud-connected and cloud-native solutions;
• Renewal by value⁵ remains strong at 100%, demonstrating the strength of the existing customer base.

Steve Hare, CEO, said:

“We are encouraged by the strong start to FY19. Sage’s vision is to become a great SaaS company and by focusing on customers, colleagues, and innovation we are starting to see evidence of successful strategic execution. This is reflected in the strong performance in high-quality recurring revenue, underpinned by subscriptions in the first half of the year. We will continue to focus on driving high-quality recurring and subscription revenue in the second half of the year.”