The Sage Group plc Strong recurring revenue growth reflects successful strategic execution

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The Sage Group plc (LON:SGE) today announced unaudited results for the six months ended 31 March 2019

Overview

Strong growth in high quality recurring revenue, underpinned by software subscription, reflecting successful strategic execution;
Operating margin in line with expectations;
Strong underlying cash conversion;
Full year outlook shows continuing confidence in recurring revenue growth in the remainder of FY19.

Alternative Performance Measures (APMs)¹	H119²	H118³	Change
Organic Financial APMs
Organic Total Revenue	£941m	£886m	6.2%
Organic Recurring Revenue	£779m	£707m	10.2%
Organic Operating Profit	£218m	£220m	(0.8%)
% Organic Operating Profit Margin	23.2%	24.8%	(1.6% pts)

Underlying Financial APMs
Underlying Total Revenue	£957m	£912m	4.9%
Underlying Recurring Revenue	£781m	£711m	9.9%
Underlying Operating Profit	£218m	£224m	(2.9%)
% Underlying Operating Profit Margin	22.7%	24.6%	(1.9% pts)
Underlying Basic EPS	13.93p	14.24p	(2.2%)

KPIs
Annualised recurring revenue	£1,545m	£1,402m	10.2%
Renewal Rate by Value	100%	N/A	N/A
% Subscription Penetration	52%	43%	9% pts
% Sage Business Cloud Penetration	44%	27%	17% pts
Underlying Cash Conversion	151%	99%	52% pts

Statutory Measures	H119	H118	% Change
Revenue	£957m	£899m	6.4%
Operating Profit	£210m	£186m	12.9%
% Operating Profit Margin	21.9%	20.7%	1.2% pts
Basic EPS (p)	14.19p	12.50p	13.5%
Dividend Per Share (p)	5.79p	5.65p	2.5%

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

2Statutory, underlying and organic numbers in H119 are on an IFRS15 basis.

3Organic revenue and operating profit for H118 is restated to aid comparability with FY19. The definition of organic measures and the basis for the H118 proforma IFRS 15 adjustments can be found in appendix 1. Unless otherwise specified, all references to revenue, profit and margins are on an organic basis.

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

H119 Financial Performance

Organic total revenue growth of 6.2%, reflecting strong growth in high quality recurring revenue of 10.2%, underpinned by software subscription growth of 27.7%, offset by an 11.8% decline in SSRS, reflecting the continued transition to subscription and 2.8% growth in processing;
Growth in recurring revenue, driven largely by strength in North America at 12% and Northern Europe (UK & Ireland) at 14%;
Organic operating margin of 23.2% reflecting performance in the business, offset by increased investment to accelerate strategic execution and an increase in colleague variable compensation in line with the strong business performance and the commitment to colleague success;
Non-recurring gain of £13m (H118: charge of £1m), reflecting the gain on disposal of US Payroll Processing of £27m, offset by property restructuring costs of £14m;
Underlying cash conversion of 151%, reflecting an improvement in the receivables collections process, the continued transition away from licence contracts which attract longer payment terms and lower levels of FY18 bonus payout in H119. Underlying cash conversion is expected to trend downwards in H219 versus H119. Free cash flow of £257m and net debt to EBITDA ratio of 0.8x;
An increase in interim dividend of 2.5% to 5.79p, in line with the policy of maintaining the dividend in real terms going forward.

Progress in strategic execution

Sage’s vision is to become a great SaaS company for customers and colleagues alike. Highlights in strategic execution in H119 include:

In customer success, Sage has continued the roll-out of the single CRM system and digitisation of customer service functions, which over time enhances the relationship with the customer, improving retention rates and increasing contract values;
In colleague success, Sage continues to build a culture that fosters collaboration, open honest dialogue and where colleagues feel connected to the vision, putting customers at the heart of all conversations;
In innovation:

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o The project to internationalise Intacct continues to progress well with the solution due to launch in Australia and the UK later in 2019;

o Sage continues to invest in cloud native and cloud connected solutions with significant functionality added to Sage Enterprise Management, Sage Payroll cloud and Sage cloud connected accounts solutions;

o Executive Committee strengthened with internal promotions to reinforce the focus on innovation and SaaS.

Continuing progress in strategic execution has resulted in:

Annualised recurring revenue4 (ARR) growth of 10.2% to £1,545m reflecting continuing momentum in the recurring revenue of the business;
Recurring revenue now represents 83% of total revenue with 52% software subscription penetration as the business continues the transition towards subscription and Sage Business Cloud;
Future Sage Business Cloud opportunity (Sage Business Cloud and products with potential to migrate) recurring revenue growth of 12% and total revenue growth of 8%. Sage Business Cloud penetration of 44% reflecting continuing progress in the shift towards cloud connected and cloud native solutions;
Renewal by value5 remains strong at 100%, demonstrating the strength of the existing customer base.

4Defined as the normalised reported recurring revenue in the last month of the reporting period, adjusted consistently period to period, multiplied by twelve.

5Defined as the annualised recurring revenue from renewals, migrations, upsell and cross-sell of active customers at the start of the year, divided by the opening annualised recurring revenue for the year.

Outlook

After strong performance in H119, due to early success with the implementation of our strategy and noting a somewhat softer recurring revenue comparator in H118, we expect FY19 organic recurring revenue growth to be at the top end or slightly exceed the guided range of between 8-9% and expect SSRS and processing revenue to be at the lower end or below the guided range of flat to mid-single digit decline. Overall, expectations for full year FY19 total revenue remain unchanged and the Group maintains its organic operating profit margin guidance of 23-25%.

Steve Hare, CEO, said:
“We are encouraged by the strong start to FY19. Sage’s vision is to become a great SaaS company and by focusing on customers, colleagues and innovation we are starting to see evidence of successful strategic execution. This is reflected in the strong performance in high quality recurring revenue, underpinned by subscription in the first half of the year. We will continue to focus on driving high-quality recurring and subscription revenue in the second half of the year.”

About Sage

Sage is the global market leader for technology that helps businesses of all sizes manage everything from money to people – whether they’re a start-up, scale-up or enterprise. We do this through Sage Business Cloud – the one and only business management solution that customers will ever need.