Sage : H1 2020 results presentation

Sage Interim Results

2020

13 May 2020

#SageResults

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• Certain statements contained in this presentation constituteforward-looking statements. All statements other than statements of historical facts included in this presentation, including, without limitation, those regarding the Company's financial condition, business strategy, plans and objectives, are forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will", or "should" or, in each case, their negative or other variations or comparable terminology. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future. Such risks, uncertainties and other factors include, among others: Inherent difficulty in predicting customer behaviour; customers may not respond as we expected to our sales and marketing activities; the competitive environment; our ability to adapt to technological change; business interruption or failure of our systems architecture and communication systems; problems with implementing upgrades to our applications and supporting information technology infrastructure; any failure to properly use and protect personal customer information and data; our ability to manage and maintain third party business partnerships; increased regulation of our businesses; any failure to process transactions effectively; any failure to adequately

protect against potential fraudulent activities; any significant quality problems or delays; the global macroeconomic environment; our inability to attract, retain and develop talented people; our ability to repurchase shares; our inability to adequately protect our intellectual property rights; disruptions, expenses and risks associated with any acquisitions and divestitures; amortisation of acquired intangible assets and impairment charges; our use of debt to finance acquisitions or other activities; and the cost of, and potential adverse results in, litigation involving intellectual property, competition authority, shareholder and other matters. These forward-looking statements speak only as at the date of this presentation. Except as required by the Financial Conduct Authority, or by law, the Company expressly excludes any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise. Nothing in the foregoing is intended to or shall exclude any liability for, or remedy in respect of, fraudulent misrepresentation.

• Rounding
  As a result of rounding throughout this document, it is possible that tables may not cast and change percentages may not calculate precisely.
• Terminology
  Unless stated otherwise all references to revenue are organic.
• Materiality
  Only figures over £1m are considered to be material for the purposes of this presentation.

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Steve Hare, CEO

Overview

Financial review

Strategic progress & outlook Q&A

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Sage Group plc Interim Results 2020

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Highlights of a strong first half

Financial	Strategic	Focus
performance	execution

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Our response to COVID-19

Colleague	Support for	Executing
wellbeing	customers	our strategy

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Jonathan Howell, CFO

Overview

Financial review

Strategic progress & outlook Q&A

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Financial highlights

High quality	On target	Strong cash	Resilient
recurring
margin	conversion	balance sheet
revenue growth
10.3%	22.8%	127%	£1.3bn1

1. Cash and available liquidity as at 31 March 2020

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P&L summary

	H1 20	H1 19	Change
	£m	£m	%
Total Organic Revenue	£935m	£885m	+5.7%
Recurring revenue	£826m	£749m	+10.3%
Organic operating profit	£213m	£207m	+3.0%
Organic operating profit margin %	22.8%	23.4%	-0.6% pts
Underlying operating profit	£218m	£216m	+0.9%
Underlying operating profit margin %	22.4%	22.9%	-0.5% pts

Underlying basic EPS	13.75p	13.78p	-0.2%
Dividend per share	5.93p	5.79p	+2.5%
Annualised Recurring Revenue (ARR)	£1,693m	£1,541m	+9.8%

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Revenue categories

£935m +5.7%

Software	£464m
subscription	+26%
	£582m

+10.3%

Recurring

revenue

Other recurring	£285m				-15%
	£244m
Other (SSRS and
£136m	£109m	-20%
processing)
	H1 19	H1 20

Recurring

revenue

penetration

88%

Software

subscription penetration

62%

Renewal by value

101%

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Portfolio view of recurring revenue

£826m +10.3%

Cloud native

Cloud connected

To be migrated

Non-Sage Business Cloud

		£105m	+31%
£80m
			Sage
£210m		£307m	+46%
		Business Cloud
				+12%	penetration
				56%
				Future Sage
£362m		-12%	Business
£319m	Cloud
			Opportunity

£97m	£95m	-2%
H1 19	H1 20

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Regional overview

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North America

H1 20 performance

US (excluding Sage Intacct)

• 7% recurring revenue growth
• Cloud connected growth driven by Sage 200 migrations

Canada

• 10% recurring revenue growth
• Sage 50 cloud connected solutions driving growth

Sage Intacct

• Recurring revenue growth 31%
• Strength from both new customer acquisition and existing customers

70%		59%
	Software
		subscription
		penetration
		H1 19: 55%
Sage Business Cloud
penetration
H1 19: 64%
Organic Revenue by Category	H1 20	H1 19	Growth
Organic total revenue		£343m	£314m	+9%
Organic recurring revenue		£311m	£278m	+12%
Sub-region view - recurring revenue	H1 20	H1 19	Growth
US (excluding Sage Intacct)		£196m	£183m	+7%
Canada		£46m	£42m	+10%
Sage Intacct		£69m	£53m	+31%

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Northern Europe

H1 20 performance

• Recurring revenue growth 13%
• • Sage Business Cloud penetration now at 80%
  • Reflecting strong growth in H2 19 and new Sage 50 cloud connected contracts added in H1 20
  • Encouraging early performance of Sage Intacct in the UK

84%

80%

Software

subscription penetration

H1 19: 63%

Sage Business Cloud

penetrationH1 19: 59%

Organic Revenue by Category	H1 20	H1 19	Growth
Organic total revenue	£198m	£179m	+10%
Organic recurring revenue	£187m	£165m	+13%

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Central and Southern Europe

H1 20 performance

France

• 4% recurring revenue growth
• Growth driven by cloud connected products in FY19 aided by new contracts in H1 20

Central Europe

• 9% recurring revenue growth Iberia
• 8% recurring revenue growth
• Growth in Sage 50 and Sage 200 cloud connected portfolio and local products

35%		52%
	Software
		subscription
		penetration
		H1 19: 43%
Sage Business Cloud
penetration
H1 19: 21%
Organic Revenue by Category		H1 20	H1 19	Growth
Organic total revenue	£297m	£298m	0%
Organic recurring revenue	£250m	£236m	+6%
Sub-region view - recurring revenue		H1 20	H1 19	Growth
France	£120m	£116m	+4%
Central Europe		£68m	£63m	+9%
Iberia		£62m	£57m	+8%

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International

H1 20 performance

Africa and Middle East

• 15% recurring revenue growth
• Local products and continued strong performance in Sage Accounting

Australia and Asia

• 2% recurring revenue growth

12%	62%
Software
	subscription
	penetration
	H1 19: 56%
Sage Business Cloud
penetration
H1 19: 8%
Organic Revenue by Category	H1 20		H1 19	Growth
Organic total revenue	£97m	£94m	+3%
Organic recurring revenue	£78m	£70m	+11%
Sub-region view - recurring revenue	H1 20		H1 19	Growth
Africa & Middle East	£53m	£46m	+15%
Australia & Asia	£25m	£24m	+2%

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Strong cash flow and financial position

Underlying	£218m
operating profit
Depreciation and	£29m
amortisation
Share-based payments	£9m
Net changes in working	£36m
capital
Net capital expenditure	(£16m)
Underlying cash flow
from operating	£276m
activities

See appendix for definitions

Underlying cash
flow from operating	£276m
activities
Non-recurring items	(£2m)
Net interest paid	(£12m)
Income tax paid	(£39m)
Foreign exchange	£4m
movements
Free cash flow	£227m

Key metrics

	Underlying cash	127%
	conversion
	Cash and available	£1.3bn
	liquidity
	Closing net debt	(£238m)
	Net debt leverage	0.5x
	ROCE	20.5%

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Capital allocation

To become a great SaaS company for customers and colleagues alike

1	2	3	4
Organic	M&A and portfolio	Maintain the ordinary	Additional
investment	rationalisation	dividend in real terms	returns

Strong and stable financial position

Broad range of 1.0x - 2.0x net debt: EBITDA over the medium term Comfortable with our current position given uncertain environment

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Summary

High quality	On target	Strong cash	Resilient
recurring
margin	conversion	balance sheet
revenue growth
10.3%	22.8%	127%	£1.3bn1

1. Cash and available liquidity as at 31 March 2020

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Steve Hare, CEO

Overview

Financial review

Strategic progress & outlook

Q&A

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Sage Group plc Interim Results 2020

19

Transitioning the business

	Software
	subscription	Software
	44%
	subscription
Recurring
Recurring	62%	Recurring	Software
revenue 78%
	revenue 88%		revenue >90%	subscription
				>90%

Maintenance

• Support 34%

Maintenance

& Support

26%

Other	Other
22%	Other
	12%	<10%
FY 18	H1 20	Future

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Building ARR

Opening ARR1

100%

£1.54bn

Existing customers

Churn

Migration, upsell & cross-sell

Renewal by value	101%	£1.56bn

New customers

Reactivations

New customer acquisition

Closing ARR	110%	£1.69bn

1. As at the end of the comparative period (31 March 2019)

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Customer success

Taking a customer-centric approach to everything we do

H1 20 progress - Small

• Focus onend-to-end experience and product integration
• Focus on accountants

H1 20 progress - Medium

• Simplified industry vertical focus
• Partner engagement

COVID-19

• Coronavirus hubs and webinars
• Help access government funding
• New software module

KPIs:NPS, renewal by value

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Colleague success

Culture that values individuals & encourages collaboration

H1 20 progress

• Investment in leaders and colleagues
• Embedded values and behaviours
• Sage Foundation support

COVID-19

• All colleagues working from home
• Networking groups and eLearning
• Support for physical and mental wellbeing

KPIs: eNPS, which in turn drives customer NPS

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Innovation - Sage Business Cloud vision

Enabling organizations to thrive in the era of digital transformation

MARKETPLACE

		SAGE DESIGN SYSTEM
APPLICATIONS	SERVICES	DIGITAL EXPERIENCE SERVICES
		CUSTOMER JOURNEY

PLATFORMS

SAGE ID AND DIRECTORY

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Innovation - highlights

Solving customer problems by doing things differently

H1 20 progress - Small

• Sage Accounting Professional soft launch in UK
• CakeHR cloud solution for small businesses

H1 20 progress - Medium

• Sage Intacct growth in new geographies
• Sage Intacct Construction launched

Sage Business Cloud environment

• Trust Fabric blockchain initiative with AWS
• Sage AI Labs created
• Sage Business Cloud Marketplace launched

KPIs:Sage Business Cloud penetration and availability of cloud native solutions

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Innovation - Sage Business Cloud portfolio

	Cloud Connected			Cloud Native
				People & Payroll
	Accounting & Financials
	Sage X3
			Sage Intacct		Sage People
	Sage 200 Cloud

MEDIUM

Sage 50 Cloud	CakeHR
	Sage Accounting
Sage 50 Payroll	Sage Payroll
SMALL

Sage Service Fabric

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FY20 guidance

As a result of COVID-19, we expect:

• Organic recurring revenue growth to be below the previously guided range of 8% to 9%

• Decline in other revenue (SSRS and processing) to accelerate significantly in the second half

• An associated impact on margin

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Key messages

Strong first	Resilient	Investing for
the long
half	business
term

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Q&A

#SageResults

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Appendix

Strategic KPIs

ARR	Subscription	Sage Business	Renewal
	penetration	Cloud penetration	by value
+10%	62%	56%	101%

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Appendix

Balance sheet strength

Net debt	Cash and	Cash and cash	Undrawn
leverage ratio	available liquidity	equivalents	facilities
0.5x	£1.3bn	£912m	£413m

Debt facilities:

• Syndicatedmulti-currency Revolving Credit Facility of £715m, expiring in February 2025, with £302m (H1 19: £274m) drawn as at 31 March 2020
• Syndicated Term Loan of £200m put in place in September 2019, expiring in September 2021 and fully drawn
• US private placement loan notes totalling £519m (H1 19: £497m), with a range of maturities between May 2020 and May 2025

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Glossary

Measure/Description

Underlying (revenue and profit) measures

Underlying measures are adjusted to exclude items which would distort the understanding of the performance for the year or comparability between periods:

• Recurring items include purchase price adjustments including amortisation of acquired intangible assets and adjustments made to reduce deferred income arising on acquisitions,acquisition-related items, FX on intercompany balances and fair value adjustments; and
• Non-recurringitems that management judge to be one-off or non-operational such as gains and losses on the disposal of assets, impairment charges and reversals, and restructuring related costs.

All prior period underlying measures (revenue and profit) are retranslated at the current year exchange rates to neutralise the effect of currency fluctuations.

Organic (revenue and profit) measures

In addition to the adjustments made for Underlying measures, Organic measures:

• Exclude the contribution from discontinued operations, disposals and assets held for sale of standalone businesses in the current and prior period; and
• Exclude the contribution from acquired businesses until the year following the year of acquisition; and
• Adjust the comparative period to present prior period acquired businesses as if they had been part of the Group throughout the prior period.

Acquisitions and disposals where the revenue and contribution impact would be immaterial are not adjusted.

Underlying cash flow from operating activities

Underlying Cash Flow from Operating Activities is Underlying Operating Profit adjusted for non-cash items, net capex (excluding business combinations and similar items) and changes in working capital.

Underlying cash conversion

Underlying Cash Flow from Operating Activities divided by Underlying (as reported) Operating Profit.

EBITDA

EBITDA is Underlying Operating Profit excluding depreciation, amortisation and share based payments.

Annualised recurring revenue

Annualised recurring revenue ("ARR") is the normalised organic recurring revenue in the last month of the reporting period, adjusted consistently period to period, multiplied by twelve. Adjustments to normalise reported recurring revenue include those components that management has assessed should be excluded in order to ensure the measure reflects that part of the contracted revenue base which (subject to ongoing use and renewal) can reasonably be expected to repeat in future periods (such as non-refundable contract sign-up fees).

Renewal Rate by Value

The ARR from renewals, migrations, upsell and cross-sell of active customers at the start of the year, divided by the opening ARR for the year.

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Glossary

Measure/Description

Free cash flow

Free Cash Flow is Cash Flow from Operating Activities minus non-recurring cash items, interest paid, tax paid and adjusted for profit and loss foreign exchange movements.

% Subscription Penetration

Organic software subscription revenue as a percentage of organic total revenue.

% Sage Business Cloud Penetration

Organic recurring revenue from the Sage Business Cloud (native and connected cloud) as a percentage of the organic recurring revenue of the Future Sage Business Cloud Opportunity.

Return on Capital Employed

ROCE is calculated as:

• Underlying Operating Profit; minus
• Amortisation of acquired intangibles; the result being divided by
• The average (of the opening and closing balance for the period) total net assets excluding net debt, provisions fornon-recurring costs and tax assets or liabilities (i.e. capital employed)

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Glossary - Revenue types

Measure/Description

Revenue Type	Description
Recurring revenue	Recurring revenue is revenue earned from customers for the provision of a good or service over a contractual term, with the customer being unable to
Subscription contracts	continue to benefit from the full functionality of the good or service without ongoing payments.
Maintenance and support contracts
	Subscription revenue is recurring revenue earned from customers for the provision of a good or service over a contractual term. In the event that the
	customer stops paying, they lose the legal right to use the software and the Group has the ability to restrict the use of the product or service.
	Subscription revenue and maintenance and support revenue are usually recognised on a straight-line basis over the term of the contract as control is
	transferred to the customer (including non-specified upgrades, when included). An exception is revenue from term licences embedded within a
	subscription contract for software with significant standalone functionality which are expected to recur upon renewal of the subscription offering. Revenue
	for these term licences is recognised when control is transferred at inception of each subscription contract period.
Other revenue	Perpetual software licences with significant standalone functionality and specified upgrades revenue are recognised when the control relating to the
Perpetual software licences	licence has been transferred. This is when the goods have left the warehouse to be shipped to the customer or when electronic delivery has taken place.
Upgrades to perpetual licences
Professional services	Other product revenue (which includes hardware and stationery) is recognised as the products are shipped to the customer.
Training
Hardware and stationery	Other services revenue (which includes the sale of professional services and training) is recognised when delivered, or by reference to the stage of
completion of the transaction at the end of the reporting period. This assessment is made by comparing the proportion of contract costs incurred to date to
Payment processing services
the total expected costs to completion.
Payroll processing services
	Processing revenue is revenue earned from customers for the processing of payments or where Sage colleagues process our customers' payroll.
	Processing revenue is recognised at the point that the service is rendered on a per transaction basis.

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Thank you

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