Sage Group plc (LON:SGE) has announced its results for the six months to 31 March 2023 (unaudited).
Consistent execution drives strong momentum
Steve Hare, Chief Executive Officer, commented:
“Sage performed strongly in the first half, accelerating revenue growth, increasing profitability and making further progress against our strategic priorities. Our investments in technology and in sales and marketing are continuing to drive results, as small and mid-sized businesses increasingly choose Sage as a valued partner to transform the way they work.
“Our purpose is to knock down barriers so everyone can thrive. We are committed to delivering innovative, AI-powered services that make our customers’ lives easier and their organisations more productive and resilient. Sage’s global platform, centred on our expanding digital network, is enabling us to leverage our scale and collective expertise to maximise the significant opportunities we see across our markets.
“Small and mid-sized businesses are continuing to digitise, despite the macroeconomic uncertainty, and through our trusted technology and human approach Sage is well positioned to support them. I am confident that our proven strategy will enable us to deliver further efficient growth.”
| Underlying Financial APMs | H1 23 | H1 2 | Change | OrganicChange |
| Annualised Recurring Revenue (ARR) | £2,100m | £1,878m | +12% | +12% |
| Underlying Total Revenue | £1,087m | £989m | +10% | +10% |
| Underlying Recurring Revenue | £1,039m | £925m | +12% | +12% |
| Underlying Operating Profit | £227m | £199m | +14% | +19% |
| % Operating Profit Margin | 20.8% | 20.2% | +0.6 ppts | +1.6 ppts |
| EBITDA | £275m | £243m | +13% | |
| % EBITDA Margin | 25.2% | 24.6% | +0.6 ppts | |
| Underlying Basic EPS (p) | 15.68p | 13.83p | +13% | |
| Underlying Cash Conversion | 117% | 120% | -3 ppts | |
| Statutory Measures | H1 23 | H1 22 | Change | |
| Revenue | £1,087m | £934m | +16% | |
| Operating Profit | £157m | £204m | -23% | |
| % Operating Profit Margin | 14.4% | 21.8% | -7.4ppts | |
| Basic EPS (p) | 9.78p | 14.84p | -34% | |
| Dividend Per Share (p) | 6.55p | 6.30p | +4% |
Please note that tables may not cast and change percentages may not calculate precisely due to rounding.
Financial highlights
· Underlying recurring revenue increased by 12% to £1,039m, underpinned by strong Sage Business Cloud growth of 29% to £787m. Underlying total revenue grew by 10% to £1,087m.
· Underlying operating profit increased by 14% to £227m, with margin increasing by 60 basis points to 20.8% driven by operating efficiencies as we scale the Group.
· EBITDA increased by 13% to £275m, with margin increasing by 60 basis points to 25.2%.
· Statutory operating profit decreased by 23% to £157m due to the change in recurring and non recurring items, including a £49m one-off gain in the prior period relating to the disposal of Sage Switzerland.
· Underlying basic EPS up 13% to 15.68p, reflecting the growth in underlying operating profit.
· Continued strong cash performance, with cash conversion of 117% reflecting growth in subscription revenue and continued good working capital management.
· Robust balance sheet, with £1.2bn of cash and available liquidity and net debt to EBITDA of 1.3x.
· Interim dividend up 4% to 6.55p, in line with our progressive policy.
Strategic and operational highlights
· Underlying annualised recurring revenue (ARR) up 12% to £2,100m (H1 22: £1,878m), reflecting a strong performance across all regions, with growth balanced between new and existing customers.
· £190m of ARR added through new customer acquisition on an organic basis since H1 22, up from £150m in the prior year.
· Cloud native ARR up 30% to £612m (H1 22: £470m), driven by new customers and supported by migrations from cloud connected and desktop products.
· Renewal rate by value of 101%, ahead of last year (H1 22: 100%), with continued good retention rates and strong sales to existing customers.
· Sage Business Cloud penetration of 82% (H1 22: 72%), enabling more customers to connect to Sage’s cloud services and ecosystem via Sage’s digital network.
· Subscription penetration of 78% (H1 22: 73%), reflecting continued focus on attracting new customers and migrating existing customers to subscription contracts.
· Strong strategic progress, as we expand the availability of global solutions across the Group and scale Sage’s digital network to power innovative features and AI-enabled services.
Outlook
Building on strong momentum in the first half, we now expect organic recurring revenue growth for FY23 to be in the region of 11%, driven by continued strength in Sage Business Cloud. We continue to expect other revenue (SSRS) to decline, in line with our strategy. Operating margins are expected to trend upwards in FY23 and beyond, as we focus on efficiently scaling the Group.
A presentation for investors and analysts will be held at 8.30am UK time. The webcast can be accessed via sage.com/investors or directly via the following link: https://edge.media-server.com/mmc/p/phr76hz5. To join the conference call, please register via: https://register.vevent.com/register/BIe70cc49034ad4da4a1888cdaa81177a1.
Business Review
Sage delivered a strong first half, with revenue growth accelerating compared to the prior year, and underlying and organic operating margins trending upwards, driven by consistent strategic execution.
Overview of results
The Group achieved underlying recurring revenue growth of 12% to £1,039m (H1 22: £925m) in the first half, underpinned by a 29% increase in Sage Business Cloud revenue to £787m, and underlying total revenue growth of 10% to £1,087m (H1 22: £989m). Regionally, North America increased recurring revenue by 17% to £467m, with a strong performance from Sage Intacct and cloud connected solutions, while UKIA grew recurring revenue by 11% to £303m, driven by a strong cloud native performance together with growth in Sage 50 cloud. In Europe, recurring revenue increased by 6% to £269m, with growth across the Sage Business Cloud portfolio partly offset by the disposal of the Swiss business in FY22.
Organic recurring revenue also grew by 12% to £1,039m (H1 22: £931m), while organic total revenue grew by 10% to £1,087m (H1 22: £992m).
Our focus on growing cloud revenues has increased Sage Business Cloud penetration to 82%, up 10 percentage points compared to H1 22. We have also continued to grow software subscription revenues, leading to a rise in subscription penetration of 5 percentage points to 78%. As a result of the evolving business mix, 96% of the Group’s revenue is now recurring.
Revenue growth by portfolio
The portfolio view breaks down Sage’s underlying recurring revenue by strategic product portfolio. Our principal focus is to grow Sage Business Cloud, by attracting new customers and migrating existing customers and products to cloud native and cloud connected solutions. Sage Business Cloud customers can connect to a range of cloud services as part of Sage’s digital network, leading to deeper customer relationships and higher lifetime values.
| Underlying Recurring Revenue by Portfolio | H1 23 | H1 22 | Change | OrganicChange |
| Cloud native | £285m | £206m | +38% | +32% |
| Cloud connected | £502m | £403m | +25% | +25% |
| Sage Business Cloud | £787m | £609m | +29% | +27% |
| Products with potential to migrate | £177m | £241m | -27% | -25% |
| Future Sage Business Cloud Opportunity | £964m | £850m | +13% | +13% |
| Non-Sage Business Cloud | £75m | £75m | – | +1% |
| Underlying Recurring Revenue | £1,039m | £925m | +12% | +12% |
| Sage Business Cloud Penetration | 82% | 72% |
Underlying recurring revenue from cloud native solutions grew by 38% to £285m, driven by Sage Intacct together with other solutions including Sage Accounting, Sage Payroll and Sage HR, largely through new customer acquisition and supported by migrations. Organic cloud native recurring revenue growth, which is adjusted for the contribution from last year’s acquisitions of Brightpearl, Futrli and Lockstep, was 32%.
Underlying recurring revenue from cloud connected solutions increased by 25% to £502m, reflecting good growth in the Sage 50 and Sage 200 franchises driven by existing and new customers, together with significantly faster migration of products to Sage Business Cloud through the integration of cloud functionality. Overall, the Future Sage Business Cloud Opportunity, which represents products in or with a clear pathway to Sage Business Cloud, has performed strongly with recurring revenue growth of 13%.
The revenue performance of the Non-Sage Business Cloud portfolio is in line with expectations and reflects the ongoing strategy to focus on solutions with a clear pathway to Sage Business Cloud.
ARR growth
Sage’s underlying ARR increased by 12% to £2,100m (H1 22: £1,878m), reflecting strong growth balanced between new and existing customers. This was underpinned by cloud native ARR growth of 30% to £612m (H1 22: £470m), with a continued strong performance from Sage Intacct together with other solutions including Sage Accounting, Sage Payroll and Sage HR. Organic ARR also increased by 12% to £2,100m (H1 22: £1,883m).
Renewal rate by value of 101% (H1 22: 100%) is ahead of last year reflecting good retention rates and strong sales to existing customers, including a good performance in customer add-ons and targeted price rises.
In total, Sage has added £190m of ARR through new customer acquisition on an organic basis over the last 12 months, up from £150m a year earlier.
Progress towards our strategic priorities
Sage focuses on five strategic priorities that help us create long-term value for our stakeholders, as part of our strategic framework for growth. Our progress towards these priorities is outlined below.
· Scale Sage Intacct: Sage Intacct continues to grow strongly, supported by our focus on product enhancements and sales and marketing optimisation. We have further extended Sage Intacct’s reach into new geographies and verticals, including launching Sage Intacct in continental Europe, starting with France. Sage Intacct Construction is making good progress in the US, complemented by the recent acquisition of Corecon, a cloud native project management solution for the construction industry, while Sage Intacct Manufacturing is now available in six countries across the Group. Reflecting this progress, Sage Intacct’s ARR grew by 30% in the US over the last year, while outside the US it doubled.
· Expand medium beyond financials: We also aim to drive growth by delivering benefits for mid-sized businesses beyond core accounting. Our AI-powered service to automate accounts payable processes, significantly reducing invoice handling costs and data entry error, has now been launched and is gaining traction with customers on Sage Intacct in the US, Sage 50 in France and Sage Accounting in the UK, with further expansion planned. Following rapid growth in the US and Canada, Sage Intacct Planning, our budgeting and planning tool, is now also available in the UK, South Africa and Australia.
· Build the small business engine: Sage continues to achieve good levels of growth from its small business solutions, including Sage Accounting, Sage HR and Sage 50. In the UK, the number of accountants adopting Sage for Accountants, our accountancy practice management suite, has more than doubled over the last six months to almost 5,000, and building on this success we have now launched Sage for Accountants in Canada. We have also launched a new tier of Sage Accounting in the UK, initially provided through Sage for Accountants, to help those taxpayers with the simplest of tax affairs to digitise their record keeping and tax submissions.
· Scale the network: Sage’s digital network enables us to connect organisations to their accountants, tax authorities, customers and suppliers. Scaling the network creates a virtuous circle, with more data powering AI solutions that enable richer customer experiences. We are growing the network by connecting more existing products, expanding the availability of global solutions including Sage Intacct, and developing new solutions such as Sage Active, our cloud-native, multi-legislation business management solution for SMBs, that was built for the European market and recently launched in France. The acquisition of Lockstep has also accelerated our strategy by bringing new AI-driven workflow automation tools to the digital network.
· Learn and disrupt: We continue to learn and invest in disruptive technologies to ensure we remain at the forefront of our markets. We have made strong progress in leveraging our digital network to embed AI-powered features across Sage Business Cloud, helping to automate workflows from data ingestion through to transaction classification. In the first half, we launched our AI-powered accounts payable automation solution, expanded our outlier detection service, and made Sage Intelligent Time, our AI-powered time assistant, available in new markets. Looking ahead, we have a strong AI pipeline, and through continued investment and our strategic partnerships we aim to be a leader in this critical area, helping both Sage and our customers become more effective and more productive.
Colleagues
Management continues to focus on building an inclusive, high-performing and accountable culture, in which every colleague can perform at their best. Key to this is our listening strategy, through which colleagues have the opportunity to share experiences and insights. Our most recent all-colleague pulse survey achieved a record 87% response rate and resulted in a strong score for colleague satisfaction.
To develop and retain the best talent we continue to invest in mentoring and training schemes, both in house and in conjunction with third parties such as London Business School. We have also launched a new internal talent marketplace to enhance workforce mobility and agility. Our holistic approach to colleague wellbeing includes a sharper focus on ‘healthy finances’ in response to the cost-of-living crisis, and an improved range of benefits to support mental health.
Sage is committed to creating a diverse and equitable company which fully represents the customers we serve and the communities we recruit from. In December we published our first diversity, equity and inclusion (DEI) impact report, highlighting progress towards our DEI strategy. This included an improvement in gender diversity, with one third of leadership teams meeting our FY26 gender diversity target, up from 19% at the beginning of FY22. We have also enhanced our diversity training and resources, holding education and awareness workshops, and partnering with Neurodiversity in Business to help drive best practice in neurodiversity recruitment, retention and empowerment.
Sustainability and Society
Sage plays a key role in supporting SMBs which form the backbone of economies around the world, helping bring prosperity to their owners, employees and communities. Through our Sustainability and Society strategy, Sage supports sustainable and inclusive economic growth so everyone can thrive. During the first half, Sage colleagues, customers and partners contributed over 56,000 volunteering hours to support charitable and environmental causes.
In December, the Science Based Targets Initiative (SBTi) validated our target to halve our carbon emissions by 2030 against a 2019 baseline, underlining our commitment to achieve net zero emissions by 2040 through robust initiatives addressing our supply chain, properties, products and colleague actions. We are also supporting SMBs on their own journey to net zero, with Sage Earth, our innovative carbon accounting solution acquired in October, now available to support UK-based Sage Accounting and Sage 50 customers looking to measure and improve their environmental footprint. In addition, we launched a report at COP 27 featuring insights from over 4,000 SMBs across the UK and South Africa, and quantifying their impact and influence on the environment and the economy.
Through Sage Foundation, which supports Sage’s volunteering, fundraising and social partnerships, we aim to support local communities and knock down barriers to entrepreneurship. In the first half, we have continued to support thousands of entrepreneurs in underserved communities with loan funds and grants through our partnerships with Kiva and The BOSS Network. In addition, we are helping to develop STEM skills in over 10,000 young people in the UK through our partnership with the Institute of Engineering and Technology, and we have now also expanded this initiative to Germany.
Sage has an ESG rating from MSCI of ‘AAA’, indicating we are a leader in the software and services industry in managing the most significant ESG risks and opportunities.
Financial Review
The financial review provides a summary of the Group’s results on a statutory and underlying basis, alongside its organic performance. Underlying measures allow management and investors to understand the Group’s financial performance adjusted for the impact of foreign exchange movements and recurring and non-recurring items, while organic measures also adjust for the impact of acquisitions and disposals.
Statutory and underlying financial results
| Financial results | Statutory | Underlying | ||||
| H1 23 | H1 22 | Change | H1 23 | H1 22 | Change | |
| North America | £483m | £376m | +28% | £483m | £420m | +15% |
| UKIA | £311m | £284m | +10% | £311m | £284m | +10% |
| Europe | £293m | £274m | +7% | £293m | £285m | +3% |
| Group total revenue | £1,087m | £934m | +16% | £1,087m | £989m | +10% |
| Operating profit | £157m | £204m | -23% | £227m | £199m | +14% |
| % Operating profit margin | 14.4% | 21.8% | -7.4 ppts | 20.8% | 20.2% | +0.6 ppts |
| Profit before tax | £139m | £189m | -27% | £210m | £185m | +13% |
| Net profit | £100m | £152m | -34% | £160m | £141m | +13% |
| Basic EPS | 9.78p | 14.84p | -34% | 15.68p | 13.83p | +13% |
The Group achieved statutory and underlying total revenue of £1,087m in the first half. Statutory total revenue increased by 16% compared to the prior period, reflecting underlying total revenue growth of 10% together with a 6-percentage point foreign exchange tailwind, principally relating to the US Dollar in North America.
Statutory operating profit decreased by 23% to £157m, reflecting a 14% increase in underlying operating profit to £227m offset by changes in recurring and non-recurring items, including higher M&A related charges and a property restructuring charge in H1 23 together with a one-off gain on the disposal of Sage Switzerland in the prior period (see page 9).
Statutory basic EPS decreased by 34% to 9.78p, reflecting a higher statutory net finance cost and the post-tax impact of non-recurring items. Underlying basic EPS increased by 13% to 15.68p.
Revenue – underlying and organic reconciliation to statutory
| Total revenue bridge | H1 23 | H1 22 | Change |
| Statutory | £1,087m | £934m | +16% |
| Recurring items[13] | – | £1m | |
| Impact of FX[14] | – | £54m | |
| Underlying | £1,087m | £989m | +10% |
| Disposals | – | (£5m) | |
| Held for sale | – | (£2m) | |
| Acquisitions | – | £10m | |
| Organic | £1,087m | £992m | +10% |
Statutory, underlying and organic total revenue was £1,087m in H1 23. Underlying revenue in H1 22 of £989m reflects statutory revenue of £934m retranslated at current year exchange rates, resulting in a foreign exchange tailwind of £54m, together with a £1m fair value adjustment to deferred income relating to the acquisition of Brightpearl.
Organic revenue in H1 22 of £992m reflects underlying revenue of £989m, adjusted for £5m of revenue from Sage’s business in Switzerland which was sold during the prior period, £2m of revenue from the South African payroll outsourcing business which was held for sale, and £10m of revenue from Brightpearl, Futrli and Lockstep which were acquired during FY22.
Revenue by type
| Underlying revenue mix | H1 23 | H1 22 | Change | Organic change | |
| Software subscription revenue | £853m | £724m | +18% | +17% | |
| Other recurring revenue | £186m | £201m | -7% | -7% | |
| Underlying recurring revenue | £1,039m | £925m | +12% | +12% | |
| Other revenue (SSRS) | £48m | £64m | -24% | -22% | |
| Underlying total revenue | £1,087m | £989m | +10% | +10% | |
| Subscription Penetration | 78% | 73% | |||
Underlying recurring revenue grew by 12% to £1,039m, supported by an 18% increase in software subscription revenue to £853m, reflecting the continued focus on attracting new customers and migrating existing customers to subscription and Sage Business Cloud. The decline in other recurring revenue of 7% to £186m reflects customers migrating from maintenance and support to subscription contracts. Other revenue (SSRS) declined by 24% to £48m, in line with our strategy to transition away from licence sales and professional services implementations. Underlying total revenue increased by 10% in H1 23 to £1,087m.
Revenue performance by region
| North America | H1 23 | H1 22 | Change | Organic change |
| Underlying total revenue | £483m | £420m | +15% | +14% |
| Underlying recurring revenue | £467m | £398m | +17% | +16% |
| % Sage Business Cloud Penetration | 84% | 76% | +8 ppts | +8 ppts |
| % Subscription Penetration | 77% | 70% | +7 ppts | +7 ppts |
| Underlying recurring revenue | H1 23 | H1 22 | Change | Organic change |
| US | £405m | £343m | +18% | +16% |
| Of which Sage Intacct | £150m | £115m | +30% | +30% |
| Canada | £62m | £55m | +13% | +13% |
North America achieved underlying recurring revenue growth of 17% to £467m and total revenue growth of 15% to £483m. Adjusting for the impact in the US of the acquisitions of Brightpearl and Lockstep during FY22, organic recurring and total revenue growth was 16% and 14% respectively. Sage Business Cloud penetration increased to 84%, up from 76% in the prior year, driven by growth in cloud native and cloud connected solutions, while subscription penetration increased to 77%, up from 70% in the prior year.
Cloud native growth was driven primarily through Sage Intacct, which delivered strong recurring revenue growth of 30% to £150m, reflecting continued success in attracting new customers and supported by strong sales to existing customers.
Recurring revenue in the US increased by 18% to £405m, driven by Sage Intacct alongside cloud connected growth across the Sage 200 and Sage 50 franchises, as well as success in migrations to Sage Business Cloud. Total revenue for the US increased by 16% to £420m.
In Canada, recurring revenue increased by 13% to £62m and total revenue by 11% to £63m, driven mainly by Sage 50 cloud and Sage 200 cloud solutions, together with strong growth in Sage Intacct.
| UKIA | H1 23 | H1 22 | Change | Organic change |
| Underlying total revenue | £311m | £284m | +10% | +8% |
| Underlying recurring revenue | £303m | £273m | +11% | +10% |
| % Sage Business Cloud Penetration | 88% | 76% | +12 ppts | +12 ppts |
| % Subscription Penetration | 89% | 87% | +2 ppts | +2 ppts |
| Underlying recurring revenue | H1 23 | H1 22 | Change | Organic change |
| UK & Ireland (Northern Europe) | £230m | £209m | +10% | +8% |
| Africa & APAC | £73m | £64m | +15% | +14% |
In the UKIA region, underlying recurring revenue grew by 11% to £303m and total revenue grew by 10% to £311m. Adjusting for the impact in the UK & Ireland of the acquisitions of Brightpearl and Futrli during FY22, organic recurring and total revenue growth was 10% and 8% respectively. Sage Business Cloud penetration reached 88%, up from 76% in the prior year, while subscription penetration increased to 89%, up from 87% in the prior year.
In the UK & Ireland, recurring revenue increased by 10% to £230m, reflecting growth in cloud native solutions, supported by further growth in Sage 50 cloud. Cloud native revenue growth was driven by continued growth in small business solutions, including Sage Accounting, together with Sage Intacct which is now starting to scale rapidly through both the direct and partner channels. Total revenue in the UK & Ireland increased by 10% to £233m.
Africa & APAC delivered strong recurring revenue growth of 15% to £73m, driven by growth in both cloud native solutions and local products. Total revenue in Africa & APAC increased by 10% to £78m.
| Europe | H1 23 | H1 22 | Change | Organic change |
| Underlying total revenue | £293m | £285m | +3% | +4% |
| Underlying recurring revenue | £269m | £254m | +6% | +8% |
| % Sage Business Cloud Penetration | 70% | 61% | +9 ppts | +8 ppts |
| % Subscription Penetration | 69% | 65% | +4 ppts | +4 ppts |
| Underlying recurring revenue | H1 23 | H1 22 | Change | Organic change |
| France | £142m | £133m | +7% | +7% |
| Central Europe | £60m | £59m | +3% | +10% |
| Iberia | £67m | £62m | +7% | +7% |
Europe achieved underlying recurring revenue growth of 6% to £269m and total revenue growth of 3% to £293m. Adjusting for the impact of the disposal of the Swiss business in FY22, organic recurring revenue growth and total revenue growth was 8% and 4% respectively. Sage Business Cloud penetration increased significantly to 70%, up from 61% in the prior year, while subscription penetration reached 69%, up from 65% in the prior year, driven by growth from new and existing customers together with migrations.
In France, recurring revenue increased by 7% to £142m, with a strong performance in cloud connected, particularly Sage 200 cloud, together with growth in cloud native solutions. Total revenue in France increased by 5% to £148m.
Central Europe achieved recurring revenue growth of 3% to £60m, while total revenue decreased by 3% to £71m. Adjusting for the disposal of the Swiss business, organic recurring and total revenue growth in Central Europe was 10% and 3% respectively. Growth in the region was driven by Sage Business Cloud, with a particularly strong performance in HR solutions.
In Iberia, recurring revenue increased by 7% to £67m, with continued success in cloud connected supported by growth in cloud native solutions. Total revenue grew by 5% to £74m.
Operating profit
The Group increased underlying operating profit by 14% to £227m (H1 22: £199m). Underlying operating margin increased by 60 basis points to 20.8% (H1 22: 20.2%), driven by operating efficiencies as we scale the Group. On an organic basis, adjusting for the full-year impact of acquisitions and disposals during FY22, operating profit increased by 19% to £227m (H1 22: £191m), and margin increased by 160 basis points to 20.8% (H1 22: 19.2%).
Operating profit – underlying and organic reconciliation to statutory
| Operating profit bridge | H1 23 | H1 22 | ||
| Operating profit | Operating margin | Operating profit | Operating margin | |
| Statutory | £157m | 14.4% | £204m | 21.8% |
| Recurring items[15] | £50m | – | £34m | – |
| Non-recurring items: | ||||
| · Property restructuring | £20m | – | – | – |
| · Gain on disposal of subsidiaries | – | – | (£49m) | – |
| · Reversal of restructuring costs | – | – | (£6m) | – |
| Impact of FX[16] | – | – | £16m | – |
| Underlying | £227m | 20.8% | £199m | 20.2% |
| Disposals | – | – | – | – |
| Held for sale | – | – | (£1m) | – |
| Acquisitions | – | – | (£7m) | – |
| Organic | £227m | 20.8% | £191m | 19.2% |
The Group achieved a statutory operating profit in H1 23 of £157m (H1 22: £204m). Underlying and organic operating profit of £227m in H1 23 reflects statutory operating profit adjusted for recurring and non-recurring items. Recurring items of £50m (H1 22: £34m) comprise £26m of amortisation of acquisition-related intangibles (H1 22: £18m) and £24m of M&A related charges (H1 22: £15m). In H1 22, there was a further £1m of deferred income adjustment relating to the acquisition of Brightpearl.
Non-recurring items in H1 23 comprise a £20m charge for a property restructuring programme following a strategic review of the Group’s property portfolio. The programme is expected to be completed by 30 September 2023. In the prior year, non-recurring items comprised a £49m gain on disposal from the sale of Sage’s business in Switzerland, together with a £6m reversal of employee restructuring costs.
In addition, the retranslation of H1 22 operating profit at current year exchange rates has resulted in an operating profit tailwind of £16m. This has led to a 60-basis point margin tailwind from foreign exchange to 20.2% (H1 22 underlying as reported: 19.6%).
Organic operating profit of £191m in H1 22 reflects underlying operating profit of £199m adjusted for £1m of operating profit from the South African payroll outsourcing business, which was held for sale, and £7m of operating losses from businesses acquired during the period.
EBITDA
EBITDA was £275m (H1 22: £243m) representing a margin of 25.2%. The increase in EBITDA principally reflects the improvement in underlying operating profit.
| H1 23 | H1 22 | Margin | |
| Underlying operating profit | £227m | £199m | 20.8% |
| Depreciation & amortisation | £28m | £28m | |
| Share based payments | £20m | £16m | |
| EBITDA | £275m | £243m | 25.2% |
Net finance cost
The statutory net finance cost for the period increased to £18m (H1 22: £15m), primarily reflecting the impact of interest on new debt issuances, and is broadly in line with the underlying net finance cost of £17m (H1 22: £14m).
Taxation
The underlying tax expense for H1 23 was £50m (H1 22: £44m), resulting in an underlying tax rate of 24% (H1 22: 24%). The statutory income tax expense for H1 23 was £39m (H1 22: £37m), resulting in a statutory tax rate of 28% (H1 22: 20%).
The difference between the underlying and statutory rate in H1 23 primarily reflects non-deductible M&A activity-related items. The H1 23 underlying tax rate is unchanged from H1 22 due to the offsetting impact of an increase in the UK corporation tax rate against a decrease in the French corporate tax rate.
Earnings per share
| H1 23 | H1 22 | Change | |
| Statutory basic EPS | 9.78p | 14.84p | -34% |
| Recurring items | 4.46p | 2.97p | |
| Non-recurring items | 1.44p | (5.19)p | |
| Impact of foreign exchange | – | 1.21p | |
| Underlying basic EPS | 15.68p | 13.83p | +13% |
Underlying basic EPS increased by 13% to 15.68p, reflecting higher underlying operating profit.
Statutory basic earnings per share decreased by 34%, with the increase in underlying basic earnings per share offset by the change in post-tax impact of recurring and non-recurring items, including higher M&A related charges and a property restructuring charge in H1 23 together with a one-off gain on the disposal of Sage Switzerland in the prior period.
Cash flow
Sage remains highly cash generative with underlying cash flow from operations of £266m (H1 22: £220m), representing underlying cash conversion of 117% (H1 22: 120%). This strong cash performance reflects further growth in subscription revenue and continued good working capital management. Free cash flow of £194m (H1 22: £167m) largely reflects strong underlying cash conversion.
| Cash flow APMs | H1 23 | H1 22 (as reported) |
| Underlying operating profit | £227m | £183m |
| Depreciation, amortisation and non-cash items in profit | £27m | £26m |
| Share based payments | £20m | £16m |
| Net changes in working capital | £2m | £3m |
| Net capital expenditure | (£10m) | (£8m) |
| Underlying cash flow from operations | £266m | £220m |
| Underlying cash conversion % | 117% | 120% |
| Non-recurring cash items | (£8m) | (£12m) |
| Net interest paid and derivative financial instruments | (£28m) | (£14m) |
| Income tax paid | (£35m) | (£27m) |
| Profit and loss foreign exchange movements | (£1m) | – |
| Free cash flow | £194m | £167m |
| Statutory reconciliation of cash flow from operations | H1 23 | H1 22 (as reported) |
| Statutory cash flow from operations | £251m | £193m |
| Recurring and non-recurring items | £24m | £36m |
| Net capital expenditure | (£10m) | (£8m) |
| Other adjustments including foreign exchange translations | £1m | (£1m) |
| Underlying cash flow from operations | £266m | £220m |
Net debt and liquidity
Group net debt was £691m at 31 March 2023 (30 September 2022: £733m), comprising cash and cash equivalents of £575m (30 September 2022: £489m) and total debt of £1,266m (30 September 2022: £1,222m). The Group had £1,205m of cash and available liquidity at 31 March 2023 (30 September 2022: £1,270m).
The decrease in net debt in the period is summarised in the table below.
| H1 23 | H1 22 (as reported) | |
| Net debt at 1 October | (£733m) | (£247m) |
| Free cash flow | £194m | £167m |
| New leases | (£9m) | (£4m) |
| Disposal of businesses | – | £38m |
| Acquisition of businesses | (£14m) | (£223m) |
| M&A and equity investments | (£16m) | (£14m) |
| Dividends paid | (£123m) | (£119m) |
| Share buyback | – | (£249m) |
| FX movement and other | £10m | £1m |
| Net debt at 31 March | (£691m) | (£650m) |
The Group’s debt is sourced from a syndicated multi-currency Revolving Credit Facility (RCF), and from sterling and euro denominated bond notes. The Group’s RCF was refinanced in December 2022 into a new facility of £630m which expires in December 2027, with an extension option for up to two further years subject to specific provisions. At 31 March 2023, the RCF was undrawn (H1 22: undrawn).
The Group’s sterling denominated bond notes comprise a £400m 12-year bond, issued in February 2022, with a coupon of 2.875%, and a £350m 10-year bond, with a coupon of 1.625%, issued in February 2021.
The Group established a Euro Medium Term Note (EMTN) programme in January 2023 and issued €500m of 5-year notes in February 2023, with a coupon of 3.82%. This issuance funded the repayment of the Group’s outstanding US private placement loan notes totalling £326m (US$400m), and enabled the Group to extend the maturity of its debt portfolio and to diversify its funding sources.
Sage has an investment grade issuer credit rating assigned by Standard and Poor’s of BBB+ (stable outlook).
Capital allocation
Sage maintains a disciplined approach to capital allocation, with a focus on accelerating strategic execution through organic and inorganic investment, including through acquisitions and partnerships to enhance Sage Business Cloud and further develop Sage’s digital network. During the period Sage completed the acquisition of Spherics, an innovative carbon accounting solution.
Sage has a progressive dividend policy, intending to grow the dividend over time while considering the future capital requirements of the Group. Reflecting the Group’s strong business performance and cash generation during the first half, we have increased the interim dividend by 4% to 6.55p. The Group also considers returning surplus capital to shareholders.
| H1 23 | H1 22 (as reported) | |
| Net debt | £691m | £650m |
| EBITDA (Last Twelve Months) | £520m | £439m |
| Net debt/EBITDA Ratio | 1.3x | 1.5x |
The Group’s EBITDA over the last 12 months was £520m, resulting in a net debt to EBITDA leverage ratio of 1.3x, down from 1.5x in the prior year principally due to the improvement in EBITDA. Group return on capital employed (ROCE) for H1 23 was 19% (H1 22 as reported: 19%).
Sage Group intends to operate in a broad range of 1-2x net debt to EBITDA over the medium term, with flexibility to move outside this range as business needs require.
Going concern
The Directors have robustly tested the going concern assumption in preparing these financial statements, taking into account the Group’s strong liquidity position at 31 March 2023 and a number of downside sensitivities, and remain satisfied that the going concern basis of preparation is appropriate. Further information is provided in note 1 of the financial statements on page 20.
External audit tender
The Group’s external auditors, Ernst & Young LLP, were first appointed for the year ended 30 September 2015. In accordance with applicable regulations, which include a requirement for audit tendering at least every 10 years, the Audit and Risk Committee has decided to run a tender process which is expected to conclude later this year. Subject to shareholder approval, this will allow a potential new audit firm to take up the role and conduct the audit for the year ended 30 September 2025.
Foreign exchange
The Group does not hedge foreign currency profit and loss translation exposures and the statutory results are therefore impacted by movements in exchange rates. The average rates used to translate the consolidated income statement and to normalise prior year underlying and organic figures are as follows:
| Average exchange rates (equal to GBP) | H1 23 | H1 22 | Change |
| Euro (€) | 1.14 | 1.19 | -4% |
| US Dollar ($) | 1.20 | 1.34 | -11% |
| Canadian Dollar (C$) | 1.62 | 1.70 | -5% |
| South African Rand (ZAR) | 21.13 | 20.62 | +2% |
| Australian Dollar (A$) | 1.78 | 1.85 | -4% |
