Full Year Results 21 November 2018

Overview

• FY18 organic revenue growth of 6.8% (6.6% including asset held for sale) and organic operating margin of 27.8% achieved (27.2% including asset held for sale);
• Improvement in H2 18 performance with renewed focus on high-quality subscription and recurring revenue, driving accelerated momentum into FY19, with issues identified in H1 18 addressed;
• Building on this momentum, Sage Business Cloud ARR is now £434m, growing at 51%;
• In FY19 the business will continue to sharpen its focus on accelerating the transition to Software-as-a-Service (SaaS) with key operational priorities identified to do so.

FY18 performance

• Improvement in H2 18 performance with organic revenue growth of 7.0% achieved, driven by renewed focus on high-quality subscription and recurring revenue, with both August and September showing recurring revenue growth in excess of 7% year-on-year and sequential month-on-month growth, driving momentum into FY19;
• Recovery in Northern Europe (UK&I), with sequential increases in recurring revenue growth in every month in H2 18 and in France, which in Q4 18 delivered the strongest quarter since Q1 16; double digit organic and recurring growth was also achieved in North America;
• Strong momentum in cloud connected solutions, delivering ARR growth of 66% and cloud native solutions of Sage Intacct and Sage People, delivering ARR growth of 30% and 49% respectively;
• Recurring revenue represents 79% of revenue and software subscription is 46% of revenue;
• Organic operating margin of 27.8% achieved. Non-recurring charge of £10m, reflecting provisions and settlement of legal disputes and structural redundancies;
• Strong free cash flow of £356m, 19% of revenue, ROCE of 23% and net debt : EBITDA reduced to 1.2x. 7% increase in full year ordinary dividend to 16.50p, with a policy to maintaining the dividend in real terms going forward;
• Sage Payroll Solutions, the US-based payroll outsourcing services business is now classified as held for sale and excluded from organic numbers.

Initial priorities for FY19

Sage’s vision is to become a great SaaS business for customers and colleagues alike. Sage has made significant progress towards building a SaaS business with 46% software subscription revenue and £434m of cloud ARR. In FY19 and beyond, management believe it is essential to accelerate the transition to a SaaS business by sharpening the focus on customers, colleagues and innovation in order to unlock the potential for significant value creation at Sage.

By embracing a closer relationship with customers, putting them and colleagues at the heart of the business, Sage will drive greater customer satisfaction and increase lifetime contract value. This model will drive a sustainable acceleration in recurring revenue growth, underpinned by strong free cashflow, whilst enabling an efficient return on investment.

In order to do this, the key initial priorities for FY19 have been identified:

1. Focus on innovation and accelerating the capability of Sage Business Cloud by:
   • Increasing R&D resource on building out Sage Business Cloud more fully, including embedding emerging technology;
   • Expanding the availability of Sage Business Cloud within our chosen markets, delivering the Sage Intacct internationalisation, starting with Australia and the UK&I;
   • Enhancing the ‘service fabric’ of Sage Business Cloud to improve user experience, migration pathways, micro-services and connectivity of ecosystem.
2. Enhancing customer relationships and colleague experience by investing in best-in-class SaaS systems, tools and training to improve data and customer insights.
   
   Together these initiatives are anticipated to require accelerated investment, with an impact on operating expenses of around £60m in FY19, with approximately two thirds of this investment allocated to product and innovation. Management remains committed to delivering 500bps of cost savings over time.
   
   
3. Simplification of product portfolio to allow further focus on the c.£1.5bn of products that are in, or have a pathway to, Sage Business Cloud. Identifying value creation paths for remaining c.£350m of other products, either under Sage’s ownership, in partnership or through an exit.

Steve Hare, CEO, said:

“Sage has shown stronger performance in the second half of FY18. The renewed focus on high-quality subscription and recurring revenue has generated momentum as we exited the year. As CEO I will put customers, colleagues and innovation at the heart of everything we do to accelerate the transition to becoming a great SaaS business. That means investing further resource in Sage Business Cloud, a continued commitment to customer success and a culture which values the individuals and promotes collaboration. Increased investment in these areas will lead to an acceleration in high-quality sustainable recurring revenue growth.”

Outlook

Full year guidance for FY19 is based on the continuing operations of the business, on an IFRS15 like-for-like basis and at constant exchange rates. On this basis, management expects FY19 recurring revenue growth of between 8% to 9% with SSRS and processing revenue expected to be flat or decline mid-single digits, driven by our focus on driving subscription and recurring revenue. As the business accelerates the pace of transition towards subscription, the organic revenue growth rate may decrease in the short-term.

We expect FY19 organic operating margins to be broadly stable before the impact of around £60m of specifically targeted investment to accelerate the transition to SaaS, especially in product and innovation which will also enhance efficiency and effectiveness over time. Including this impact, organic operating margin will be in the range of 23%-25%, maintaining strong free cash flow as a proportion of revenue. Over time, this model will drive a sustainable acceleration in recurring revenue growth whilst enabling strong returns on investment.

IFRS 15

The impact of the transition to IFRS 15 is not anticipated to be significant with a net increase to FY19 opening reserves of £23m, resulting primarily in deferral of commission fees and unbundling of subscription revenue, offset by deferral of contract sign-on fees. Full disclosure on page 28.

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.

This announcement contains inside information for the purposes of Article 7 of Regulation 596/2014. The person responsible for making this announcement on behalf of the Group is Vicki Bradin (Company Secretary).

For more information, visit www.sage.com

Inquiries:

The Sage Group plc
+44 (0) 191 294 3457
Lauren Wholley, Investor Relations
Amy Lawson, Corporate PR

FTI Consulting
+44 (0) 20 3727 1000
Charles Palmer
Dwight Burden

An analyst presentation will be held at 8.30am today at London Stock Exchange plc, 10 Paternoster Square, London, EC4M 7LS. A live webcast of the presentation will be hosted on www.sage.com/investors, dial-in number +44 (0) 330 336 9105, pin code: 5446730#. A replay of the call will also be available for one week after the event: Tel: +44 (0) 808 101 1153, pin code: 5446730#

1. All revenue numbers throughout this document are organic unless otherwise stated.
2. As reported.
3. The adjusted EPS neutralises the impact of significant acquisitions and disposals by excluding current period acquisitions and current and prior period disposals and by including prior year acquisitions in the comparable period based on the margin achieved by the acquired business in the prior year for the post-acquisition period.