Sage : Half Year 2021 Results presentation transcript

Sage 2021 Interim

Results

Friday, 14th May 2021

Sage 2021 Interim Results

Friday, 14th May 2021

Opening Remarks

Steve Hare

CEO, Sage

Good morning and a warm welcome to Sage's 2021 first half results presentation. I'm going to start with a few brief opening remarks, and then Jonathan will take you through the numbers. I'll then come back and update you on Sage's strategic progress and outlook, and give some insight into the momentum that we've created.

Key messages

So, let's start with the highlights. Sage has had a good first half, despite the continued disruption during the period, and I'm pleased with the progress. We've achieved recurring revenue growth of 4.4% and this is in the upper half of our guidance range for the full year. We grew ARR by 4.2% and our growth strengthened during the period. In the second quarter, Sage increased sequential ARR at the fastest rate since the end of FY19. And importantly, this was driven by cloud native ARR growth of 36%. This in turn was underpinned by increasing levels of new customer acquisition and supported by migrations. This is in line with the strategic priorities that we set out at our FY20 results in November.

So, with this performance in mind, I'd like to focus on three key messages, starting with the opportunity.

Our market opportunity is growing. Our customers have been resilient during the pandemic, adapting their business models to the new reality, and now, as we look towards recovery, small and medium sized businesses are accelerating their investment in digital technology as they prioritise flexibility, resilience and productivity. And as the economic environment improves, optimism among our customers is increasing.

Secondly, our capabilities. These position Sage well for this opportunity. Our global scale combined with local expertise gives us a unique understanding of the needs of small and medium sized businesses. Our solutions enable businesses to be more productive by automating processes and providing better business insights, continuously enriched through innovation. Our customers tell us that our people and our dedication to solving their problems differentiates Sage, and I'd like to take this opportunity to thank all of my colleagues for their determination and hard work over this last year.

Our well-established partner network of accountants and re-sellers, together with a growing ecosystem of ISVs, enhances our capabilities and reach.

And thirdly, execution. We are consistently executing in line with our strategy. We continue to rapidly grow Sage Business Cloud revenues, up 18% in the first half. This is at the heart of our strategy. Ultimately, I want all of our customers to be on Sage Business Cloud, where they can benefit from Sage's cloud services as part of a connected digital environment.

Our strategic investment is on track as we increase our spending on sales and marketing, and accelerate innovation through R&D. And we've largely completed our disposals programme, resulting in a leaner Sage that's focused on growth across all of our markets.

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Sage 2021 Interim Results

Friday, 14th May 2021

So, now I'm going to hand over to Jonathan, who's going to take us through the financial review of the first half.

Financial Performance

Jonathan Howell

CFO, Sage

Thank you, Steve, and good morning. To start with, I'll run through our financial highlights, which demonstrate the strong performance in the first half.

And as you can see, we've continued to make good strategic progress, with consistent execution against our plans.

Financial highlights

With that in mind, the key messages are firstly, high-quality recurring revenue growth of 4.4%. This was driven by good progress in new customer acquisition across Sage Business Cloud, and was against strong comparators. Secondly, on-target margin. The organic operating margin of 20.2% is in line with our targets. This reflects good business performance and planned investment to accelerate growth. And finally, strong cash conversion at 133%. This continues to be over 100% and remains a core strength of Sage.

P&L summary

Turning now to the P&L. And first, to be clear, the numbers in this presentation are on an organic basis. Total revenue has increased by 1.4% to £890 million, and recurring revenue is up by 4.4% to £811 million. Organic operating profit is at £180 million at a margin of 20.2%. This reflects planned investment to accelerate growth across Sage Business Cloud. As a result of this investment, underlying operating profit is £191 million, which is 11% lower than last year. And underlying EPS is 12.14 pence. We've increased the interim dividend by 2% to 6.05 pence. This reflects the strong performance and cash generation in the first half and is in line with our policy to maintain the dividend in real terms.

Moving on to ARR, this has increased by 4.2% to £1.6 billion. Renewal by value reduced slightly, to 97%. This was in line with the second half of FY20, reflecting our focus on customer retention, resulting in lower levels of upsell. And churn has remained stable, in line with pre-Covid levels. Importantly, this means that we've added some £110 million of ARR from new customer acquisition and reactivations in the last 12 months, up from £90 million at FY20. In line with expectations, our cloud native solutions have performed particularly well, with ARR growth of 36%.

Revenue bridge

Turning now to the revenue bridge. Our focus remains on growing Sage Business Cloud in both cloud native and cloud-connected solutions. Growth of some £71 million, or 18%, reflects strong progress in accelerating new customer acquisition, together with continued migrations. Accordingly, revenue to be migrated decreased by £30 million, in line with expectations. Importantly, cloud native solutions now represent 16% of recurring revenue, up from 13% last year. This demonstrates good execution of our strategy, with a shift in revenues towards Sage Business Cloud.

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And the impact of all this is Sage Business Cloud penetration, which is now 65%. This is up from 61% at FY20.

Revenue categories

So now looking at revenue categories. As you can see, we've delivered recurring revenue growth of 4.4% against strong comparators. This is underpinned by strong growth in subscription of 11%, to £608 million, which is an increase of nearly £60 million. This was driven by growth from new and existing customers, principally in North America, Northern Europe and France. Other recurring revenue, which is largely maintenance and support, decreased by 10%, due to the ongoing migration of customers to subscription contracts. And as expected, other revenue decreased by 21% to £79 million. It is worth reiterating that over 90% of our revenue is now recurring, and 68% of our revenue is from subscription, up from 65% at FY20.

Portfolio view of revenue

Now turning to the usual portfolio view of revenue. The overall future Sage Business Cloud opportunity continues to show strong performance with recurring growth of 6%. And as I mentioned, Sage Business Cloud penetration is now at 65%. The key points to note are cloud native solutions have delivered recurring growth of 30%, to £130 million. This was mainly driven by continued good growth in Sage Intacct, together with accelerating growth in other cloud native solutions. The growth in cloud connected revenue of 14% to £345 million is principally driven by the International region, with continued growth in North America and Northern Europe. And recurring revenue in the Non-Sage Business Cloud portfolio decreased by 8% to £82 million, in line with our expectations.

North America

Looking now at the regions, North America delivered recurring revenue growth of 6% and Sage Business Cloud penetration is now at some 73%. Cloud native growth is driven by Sage Intacct, resulting in recurring growth of 19% to £78 million. And growth in cloud connected is driven by both existing customer migration and new customer acquisition in both the Sage 50 and Sage 200 franchises.

Northern Europe

Northern Europe had recurring revenue growth of 3% and Sage Business Cloud penetration is now at some 85%. This reflects accelerating growth in cloud native solutions and continued success in Sage 50 cloud connected. Cloud native growth is driven by new customer acquisition in accounting and HR solutions, supported by ongoing migrations. And Sage Intacct continues to build good momentum in ARR.

International

And finally, the International region, which now includes Central and Southern Europe. Recurring revenue grew by 4% and Sage Business Cloud penetration now stands at 43%, compared to 32% last year. France, which is the largest country in this region, grew recurring revenue by 5%. This was driven by growth across the Sage Business Cloud. And Africa and APAC delivered strong recurring growth of 8%. This reflects a good performance in local products and cloud native solutions, particularly Sage Accounting in Africa. This was offset by a decline of 4% in Iberia, reflecting a reduction in maintenance and support revenues.

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Sage 2021 Interim Results

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Strategic investment to drive growth

Looking now at the evolution of our cost base, our planned strategic investment remains on track. This is helping drive growth across Sage Business Cloud, including the very good performance in our cloud native solutions. In line with these plans, investment in sales and marketing has increased to £340 million. This represents 42% of recurring revenue, an increase of 100 basis points. And investment in product development grew by 240 basis points to £135 million. This now represents some 17% of recurring revenue. Steve will give more colour on this later.

Strong cash generation

Turning now to the cash flow, this remains a core strength of the business. Cash conversion of 133% continues to be strong. Importantly, this has now been over 100% for more than two years. And as you can see from the bridge, working capital improvements are the key driver of this, due to growth in subscription revenue and continued strength in debtor collections. Net of interest and tax, this has generated free cash flow of £190 million.

Robust financial position

Now turning to the balance sheet and leverage, as a result of particular focus in recent years, Sage has a resilient balance sheet and strong liquidity, which has served us well during this period of economic uncertainty. The group has over £700 million of cash and also undrawn facilities of almost £700 million. This means that cash and available liquidity totals nearly £1.4 billion. The group issued a £350 million bond in March, extending its debt maturity profile and diversifying its sources of funding. Net debt has reduced to £96 million and net debt to EBITDA is now 0.2 times.

Capital allocation

Turning now to capital allocation, our policy remains unchanged. We will continue to focus on organic investment and acquisitions, to accelerate execution against our strategy. We will maintain the dividend in real terms and therefore we've increase the interim dividend by 2%. And lastly, we will consider returning surplus capital to shareholders. In line with this, Sage announced in March the launch of a £300 million share buyback. This reflects both the sale proceeds from recent disposals and strong cash generation. As I mentioned, our leverage ratio is currently 0.2 times. Over time, we expect to move back to our medium-term range of 1 to 2, through organic investment, M&A and capital returns.

Summary

And so to summarise, Sage has delivered a strong and consistent performance, resulting in recurring revenue growth of 4.4%. Secondly, we've delivered an organic operating margin of 20.2%, in line with our targets. And finally, strong cash conversion of 133%. This remains a core strength for Sage.

Thank you and now I'll hand back to Steve.

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