The Sage Group organic operating margin of 22.1%

The Sage Group plc (LON:SGE) has announced its audited results for the year ended 30 September 2020.

• Continued strong growth in high quality organic recurring revenue of 8.5%, in line with guidance at the start of the year, with 90% of total revenue now recurring
• Organic operating margin of 22.1%, reflecting ongoing investment in the business
• Sustained strong cash generation, with underlying cash conversion of 123%
• Resilient balance sheet, with c. £1.2bn of cash and available liquidity; net debt to EBITDA ratio of 0.3x
• Good progress in strategic execution, with software subscription penetration of 65% and Sage Business Cloud penetration of 61%
• Further targeted investment planned for FY21 to drive future growth, led by cloud native solutions

As a result of rounding throughout this document, it is possible that tables may not cast, and change percentages may not calculate precisely.

FY20 Financial Performance

• Organic recurring revenue (excluding assets held for sale) increased by 8.5% to £1,592m, underpinned by software subscription revenue growth of 20.5% to £1,141m. This was offset by a 26.1% decrease in other revenue (SSRS and processing) to £176m. Total organic revenue grew by 3.7% to £1,768m.
• Including assets held for sale3, recurring revenue growth increased by 8.2% to £1,674m, underpinned by software subscription revenue growth of 20.2% to £1,197m, and offset by a 25.8% decrease in other revenue (SSRS and processing) to £192m. Total revenue grew by 3.3% to £1,866m.
• Growth in recurring revenue reflects the continued focus on attracting new customers and migrating existing customers to subscription and Sage Business Cloud, with particular strength in Northern Europe and North America.
• Decrease in other revenue (SSRS and processing) is in line with our strategy to transition to subscription revenue and away from licence sales and low margin professional services implementations. As expected, this reduction accelerated in the second half due to the impact of COVID-19.
• Organic operating profit of £391m, representing a margin of 22.1% (FY19: 23.8%), reflects continued investment to drive strategic execution, and a £17m bad debt provision in connection with COVID-19. Including assets held for sale, operating profit was £406m, a margin of 21.8%.
• Non-recurring gain of £46m (FY19: loss of £14m) includes a £141m net gain on disposals (Sage Pay and the Brazilian business), offset by office relocation and property restructuring charges of £54m, a £19m charge for goodwill impairment in respect of the Asian business as previously announced, and restructuring charges of £22m reflecting the move away from low margin professional services revenue.
• Continued strong cash generation, with cash conversion above 100% for the second consecutive year. Cash conversion of 123% (FY19: 129%) reflects continued growth in software subscription and sustained improvements in working capital, with particular success in the collection of receivables.
• Resilient balance sheet, with c. £1.2bn of cash and available liquidity (comprising £848m of cash and cash equivalents, and £398m of undrawn facilities), and net debt to EBITDA of 0.3x as at 30 September 2020.
• Full year dividend up 2.0% to 17.25p, including a final dividend of 11.32p. This reflects the Group’s strong business performance, cash generation and liquidity position, and is in line with our policy of maintaining the dividend in real terms.

Progress in strategic execution

• We’ve enhanced customer experience with improved processes and technology, further investing in multichannel support as lockdowns were implemented. We launched online COVID-19 hubs in our major regions with focused content and interactive sessions to help customers navigate the pandemic.
• We’ve continued to focus on embedding our values and on developing and engaging colleagues. This has been central to our COVID-19 response, driving strong teamwork and customer focus while colleagues continue to work largely from home. Our Glassdoor score is now 4.4 out of 5.
• In innovation, we continued to deliver against our product roadmap. We enhanced our small business proposition with the launch of Sage Accounting Plus in the UK and the acquisition of CakeHR. For medium customers we launched Sage Intacct in the UK and South Africa, taking its footprint to five countries. We also integrated AI capabilities including innovations in timesheet management and error detection.
• We continue to reshape the portfolio and increase focus on Sage Business Cloud, completing the disposals of Sage Pay and the Brazilian business in March, with further divestitures planned (including certain businesses within Central & Southern Europe and International, held for sale at the year-end3).

Continued focus on strategic execution has resulted in:

• Recurring revenue increasing to 90% of total revenue (FY19: 86%) with software subscription penetration now at 65% (FY19: 56%).
• Future Sage Business Cloud Opportunity (Sage Business Cloud and products with potential to migrate) recurring revenue growth of 10%. Sage Business Cloud penetration4 increased to 61% (FY19: 51%), reflecting continuing progress in the shift towards cloud connected and cloud native solutions.
• Renewal by value5 reduced slightly to 99% (FY19: 101%), reflecting lower levels of upsell to existing customers during the second half.
• Annualised recurring revenue6 (ARR) increased by 5% to £1,611m, reflecting continued revenue growth despite COVID-19, which particularly impacted the third quarter.

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

2 Organic revenue and operating profit for FY19 is restated to aid comparability with FY20. The definition of organic measures can be found in Appendix 1 with a full reconciliation of organic, underlying and statutory measures on page 10. Unless otherwise specified, all references to revenue, profit and margins are on an organic basis.

3 Assets held for sale at year-end include businesses in Central Europe and International. Further details are included on page 8.

4 Defined as organic recurring revenue from Sage Business Cloud as a proportion of organic recurring revenue from the Future Sage Business Cloud Opportunity.

5 Defined as the closing ARR from customers active at the start of the year, divided by the opening ARR for the year.

6 Defined as the normalised organic recurring revenue in the last month of the reporting period, adjusted consistently period to period, multiplied by twelve.

Strategic priorities for FY21 and beyond

Sage has made considerable progress in its transition to a SaaS business model over the last two years, significantly increasing the proportion of revenue from subscription and Sage Business Cloud, and delivering on the priorities we set out in 2018.

Sage Business Cloud adoption and growth will remain our key objective in FY21 and beyond.  However, with the pace of digital transformation among small and medium businesses now growing, we intend to increase our focus on accelerating cloud native solutions across the Group, initially in our largest markets of Northern Europe and North America. At the same time, cloud connected will remain an important driver of growth, particularly in Continental Europe. We will also focus on further embedding SaaS capability and culture throughout Sage.

To support these strategic priorities, Sage intends to allocate further resource to Sage Business Cloud, in particular to cloud native solutions, and to increase its investment in sales and marketing and product development (R&D).  This will be part-funded by cost savings from the restructuring of our professional services business, and other efficiencies across the Group. Given the uncertain economic environment due to COVID-19, we may flex the level of sales and marketing investment dynamically during the year, in response to market conditions. 

The increased investment is expected to result in a planned reduction in organic operating margin of up to three percentage points. Delivery of these strategic priorities is expected to drive recurring revenue growth and new customer acquisition, generate efficiencies and, over time, lead to significant value creation through sustainable profit and cash generation.

Outlook

Against the uncertain economic backdrop, we currently expect organic recurring revenue growth for FY21 to be in the region of 3% to 5%, weighted towards the second half of the year. We also expect other revenue (SSRS and processing) to continue to decline, in line with our strategy. Organic operating margin is expected to be up to three percentage points below FY20, depending on the level of additional investment we make during the year. 

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

Steve Hare, The Sage Group CEO, said:

“We’ve delivered a strong performance in FY20, achieving recurring revenue growth in line with the guidance we gave at the beginning of the year, despite the COVID-19 pandemic. I would like to thank all of our colleagues and partners for their continuing commitment to our customers, communities and each other during this period. We’ve also made good strategic progress, delivering against our customer, colleague and innovation commitments. While the near term remains uncertain, these foundations position us well to support customers as they adopt digital business models, and I am confident that our additional investment in Sage Business Cloud, and in particular cloud native solutions, will deliver stronger growth and drive the future success of the Group.”