Sage Full Year Results

2020

20 November 2020

#SageResults

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Sage Group plc Full Year Results 2020

Safe Harbour

The following presentation is being made only to, and is only directed at, persons to whom such presentation may lawfully be communicated ("relevant persons"). Any person who is not a relevant person should not act or rely on this presentation or any of its contents. Information in the following presentation relating to the price at which relevant investments have been bought or sold in the past or the yield on such investments cannot be relied upon as a guide to the future performance of such investments.

  • This presentation does not constitute an offering of securities or otherwise constitute an invitation or inducement to any person to underwrite, subscribe for or otherwise acquire securities in The Sage Group plc (the "Company") or any company which is a subsidiary of the
    Company
  • The release, publication or distribution of this presentation in certain jurisdictions may be restricted by law, and therefore persons in such jurisdictions into which this presentation is released, published or distributed should inform themselves about, and observe, such restrictions.
  • Certain statements contained in this presentation constitute forward-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 macro-economic 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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Sage Group plc Full Year Results 2020

2

Steve Hare, CEO

Overview

Financial review

Strategic progress & outlook Q&A

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Sage Group plc Full Year Results 2020

3

Our purpose

Our purpose is to transform the way people think and work, so their organisations can thrive.

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Sage Group plc Full Year Results 2020

4

Key messages

Business

Strategic

Confidence

performance

execution

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Sage Group plc Full Year Results 2020

5

Jonathan Howell, CFO

Overview

Financial review

Strategic progress & outlook Q&A

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Sage Group plc Full Year Results 2020

6

Significant progress since FY18

FY18

FY20

Subscription

45%

65%

penetration

Sage Business Cloud

31%

61%

penetration

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Sage Group plc Full Year Results 2020

7

FY20 Financial highlights

High quality

On-target

Strong cash

Resilient

recurring

margin

conversion

balance sheet

revenue growth

8.5%

22.1%

123%

£1.2bn1

1 Cash and available liquidity as at 30 September 2020

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Sage Group plc Full Year Results 2020

8

P&L summary

FY20

FY19

Change

£m

£m

%

Total Organic Revenue

£1,768m

£1,705m

+3.7%

Recurring revenue

£1,592m

£1,468m

+8.5%

Organic operating profit

£391m

£406m

-3.7%

Organic operating profit margin %

22.1%

23.8%

-1.7 ppts

Underlying operating profit

£411m

£441m

-6.7%

Underlying operating profit margin %

21.6%

23.2%

-1.6 ppts

Underlying basic EPS

27.43p

27.88p

-1.6%

Dividend per share

17.25p

16.91p

+2.0%

Annualised Recurring Revenue (ARR)

£1,611m

£1,538m

+4.8%

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Sage Group plc Full Year Results 2020

9

Phasing of growth

Recurring revenue

Year-on-year growth

Sequential growth

ARR

Year-on-year growth

Sequential growth

Organic operating profit

H1 20

H2 20

£m

£m

£787m

£805m

+10%

+7%

+5%

+2%

£1,590m

£1,611m

+10%

+5%

+4%

+1%

£206m

£185m

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Sage Group plc Full Year Results 2020 10

Revenue categories

£1,768m +3.7%

Software

£947m

£1,141m

+21%

subscription

£1,592m

+8.5%

Recurring

Other recurring

£521m

revenue

£451m

-13%

Other (SSRS and

£237m

£176m

-26%

processing)

FY19

FY20

Recurring

revenue

penetration

90%

Software

subscription penetration

65%

Renewal by value

99%

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Sage Group plc Full Year Results 2020 11

Portfolio view of recurring revenue

Cloud native

£172m

Cloud connected

£480m

To be migrated

£634m

Non-Sage

£182m

Business Cloud

FY19

£1,592m

+8.5%

£222m

+29%

Sage

£636m

+33%

Business Cloud

+10%

penetration

61%

Future Sage

Business

Cloud

£557m

-12%

opportunity

£177m -2%

FY20

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Sage Group plc Full Year Results 2020 12

Regional overview

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Sage Group plc Full Year Results 2020 13

North America

FY20 performance

Sage Intacct

  • Recurring revenue growth of 26%
  • Strength from both new customer acquisition and existing customers

US (excluding Sage Intacct)

  • 7% recurring revenue growth
  • Cloud connected growth driven by both migrations and new customer acquisition

Canada

  • 8% recurring revenue growth
  • Sage 50 cloud connected solutions driving growth

71%

61%

Software

subscription

penetration

FY19: 56%

Sage Business Cloud

penetration

FY19: 66%

Organic Revenue by Category

FY20

FY19

Growth

Organic total revenue

£692m

£641m

+8%

Organic recurring revenue

£634m

£572m

+11%

Sub-region view - recurring revenue

FY20

FY19

Growth

US (excluding Sage Intacct)

£397m

£372m

+7%

Canada

£93m

£86m

+8%

Sage Intacct

£144m

£114m

+26%

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Sage Group plc Full Year Results 2020 14

Northern Europe

FY20 performance

Recurring revenue growth of 9%

  • Sage Business Cloud penetration now at 82%
  • Reflecting continued success in cloud connected accounting and payroll solutions
  • Cloud native growth driven by Sage Accounting and Sage People, supported by Auto Entry and CakeHR
  • Sage Intacct in the UK has grown rapidly since launch in November 2019

82%

85%

Software

subscription

penetration

FY19: 70%

Sage Business Cloud

penetration

FY19: 67%

Organic Revenue by Category

FY20

FY19

Growth

Organic total revenue

£395m

£371m

+6%

Organic recurring revenue

£377m

£345m

+9%

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Sage Group plc Full Year Results 2020 15

Central and Southern Europe

FY20 performance

France

  • 4% recurring revenue growth
  • Growth driven by strong performance in cloud connected solutions
  • Accelerating growth in cloud native solutions Central Europe
  • 6% recurring revenue growth

Iberia

  • 3% recurring revenue growth
  • Growth in cloud connected accounting solutions

40%

55%

Software

subscription

penetration

FY19: 46%

Sage Business Cloud

penetration

FY19: 27%

Organic Revenue by Category

FY20

FY19

Growth

Organic total revenue

£544m

£556m

-2%

Organic recurring revenue

£467m

£448m

+4%

Sub-region view - recurring revenue

FY20

FY19

Growth

France

£246m

£237m

+4%

Central Europe

£97m

£91m

+6%

Iberia

£124m

£120m

+3%

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Sage Group plc Full Year Results 2020 16

International

FY20 performance

11% recurring revenue growth

  • Continued strong performance in local products and Sage Accounting in Africa & Middle East
  • Growth in cloud native solutions, principally Sage Intacct and Sage People in Australia

14%

62%

Software

subscription

penetration

FY19: 53%

Sage Business Cloud

penetration

FY19: 11%

Organic Revenue by Category

FY20

FY19

Growth

Organic total revenue

£137m

£137m

-

Organic recurring revenue

£114m

£103m

+11%

Sub-region view - recurring revenue

FY20

FY19

Growth

Africa & Middle East

£101m

£90m

+12%

Australia & Asia

£13m

£13m

+3%

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Sage Group plc Full Year Results 2020 17

Strong cash flow and financial position

Cash and liquidity

Free cashflow

Underlying cash

conversion

£1.2bn

£382m

123%

Net debt

Net debt leverage

£151m 0.3x

See appendix for definitions

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Sage Group plc Full Year Results 2020 18

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 to EBITDA over the medium term Comfortable with our current position given uncertain environment

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Sage Group plc Full Year Results 2020 19

Summary

High quality

On target

Strong cash

Resilient

recurring

margin

conversion

balance sheet

revenue growth

8.5%

22.1%

123%

£1.2bn1

1 Cash and available liquidity as at 30 September 2020

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Sage Group plc Full Year Results 2020 20

Steve Hare, CEO

Overview

Financial review

Strategic progress & outlook

Q&A

#SageResults

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Sage Group plc Full Year Results 2020 21

Our Purpose, Vision and Strategy

Purpose

To transform the way people think and work so their organizations can thrive

Vision

To become a great SaaS company for customers and colleagues alike

Strategic Lenses

Customer Success

Colleague Success

Innovation

Values and Behaviours

We do the right thing

Start with our customer

Together we succeed

Innovate to win

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Sage Group plc Full Year Results 2020 22

Focus and simplification

Revenue mix (as reported)

Cloud native

8%

13%

Cloud connected

13%

37%

To be migrated

60%

38%

Non-Sage

19%

Business Cloud

12%

FY18

FY20

  • We have delivered on our 2018 priority to shift the business mix
  • Cloud connected has been driven by migrations
  • Cloud native has been driven by new customer acquisition

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Sage Group plc Full Year Results 2020 23

Strategic progress scorecard

We have delivered on our 2018 priorities, and are clear on our future focus

Delivery on our 2018 priorities

Investment and focus on small and medium customer needs

Culture, values and behaviours

R&D investment, global products, AI focus

Strategic lenses

Customer success

Colleague success

Innovation

Future focus

Customer experience, Start with the customer

Colleague experience including Diversity & Inclusion

Enrich Sage Business Cloud

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Sage Group plc Full Year Results 2020 24

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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Sage Group plc Full Year Results 2020 25

Sage Business Cloud vision

Enabling digital connections

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Sage Group plc Full Year Results 2020 26

Customer context

Only 17% of small businesses were planning to invest in digital technology pre-COVID

73% have invested in digital technology in the last six months

DPR Motorsport

67% of small businesses now want to invest more in technology

Roobba Furniture

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Sage Group plc Full Year Results 2020 27

Strategic priorities for FY21 and beyond

Sage Business Cloud

Winning in our

Embedding SaaS

powered by Cloud Native

target markets

capability & culture

• Leverage our cloud portfolio

• Defend and grow Northern

• People (talent) and process

Supporting customers in

Europe small

• Culture - customer centric,

digital transformation

• Develop North America

inclusive and fast-paced

New customer acquisition

medium

and migration

• Grow Sage Business Cloud

in all regions

Additional investment in sales & marketing and product development in FY21 to drive growth

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Sage Group plc Full Year Results 2020 28

Outlook

Against the uncertain economic backdrop, for FY21 we currently expect:

• Organic recurring revenue growth in the region of 3-5%, weighted towards the second half

• Other revenue (SSRS and processing) to continue to decline in line with strategy

• Organic operating margin up to three percentage points below last year, depending on level of additional investment

Looking beyond FY21, we expect margins to trend upwards over time, as our investment drives recurring revenue growth and operating efficiencies

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Sage Group plc Full Year Results 2020 29

Key messages

Business

Strategic

Confidence

performance

execution

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Sage Group plc Full Year Results 2020 30

Q&A

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Sage Group plc Full Year Results 2020 31

Appendix

Strategic KPIs

ARR

Subscription

Sage Business

Renewal

penetration

Cloud penetration

by value

4.8%

65%

61%

99%

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Sage Group plc Full Year Results 2020 32

Appendix

Building ARR

Opening ARR1

100%

£1.54bn

Churn

Migration, upsell & cross-sell

Existing customers

Renewal by value

99%

£1.52bn

Reactivations

New customer acquisition

New customers

Closing ARR

105%

£1.61bn

1. As at the end of the comparative period (30 September 2019)

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Sage Group plc Full Year Results 2020 33

Appendix

Balance sheet strength

Net debt

Cash and

Cash and cash

Undrawn

leverage ratio

available liquidity

equivalents

facilities

0.3x

£1.2bn

£848m

£398m

Debt facilities:

  • Syndicated multi-currency Revolving Credit Facility of £692m, expiring in February 2025, with £294m (FY19: £45m) drawn as at 30 September 2020
  • Syndicated Term Loan of £200m, expiring in September 2022 and fully drawn
  • US private placement loan notes totalling £387m (FY19: £497m), with a range of maturities between January 2022 and May 2025

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Sage Group plc Full Year Results 2020 34

Appendix

Cashflow reconciliation

Underlying operating profit

£411m

Depreciation and

£56m

amortisation

Share-based payments

£29m

Net changes in working capital

£45m

Net capital expenditure

(£36m)

Underlying cash flow from operating

£505m

activities

Underlying cash flow from operating

£505m

activities

Non-recurring items

(£4m)

Net interest paid

(£26m)

Income tax paid

(£93m)

Foreign exchange movements

-

Free cash flow

£382m

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Sage Group plc Full Year Results 2020 35

Appendix

Bridge to assets held for sale and disposals

ARR

Recurring revenue

Total revenue

Operating profit

£m

FY20

Growth

FY20

Growth

FY20

Growth

FY20

Growth

Organic

1,611

+4.8%

1,592

+8.5%

1,768

+3.7%

391

22.1%

Central & Southern Europe1

41

41

46

8

International2

41

41

52

7

Organic (incl. assets held for sale)

1,693

+4.5%

1,674

+8.2%

1,866

+3.3%

406

21.8%

Disposals in FY203

20

37

5

Underlying

1,694

+6.8%

1,903

-

411

21.6%

  1. Includes Sage's businesses in Poland and Switzerland
  2. Includes Sage's businesses in Asia and Australia (excluding global products) and South African payroll outsourcing
  3. Includes Sage Pay and Sage's Brazilian business

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Sage Group plc Full Year Results 2020 36

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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Sage Group plc Full Year Results 2020 37

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 for non-recurring costs and tax assets or liabilities (i.e. capital employed)

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Sage Group plc Full Year Results 2020 38

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 licence

Perpetual software licences

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 the total

Payment processing services

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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Sage Group plc Full Year Results 2020 39

Thank you

© 2020 The Sage Group plc or its licensors. Sage, Sage logos, Sage product and service names mentioned herein are the

trademarks of The Sage Group plc or its licensors. All other trademarks are the property of their respective owners.

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Sage Group plc published this content on 20 November 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 20 November 2020 08:30:04 UTC