The Sage Group plc

Hello and welcome to Sage's first half results. I'm delighted to be joined today by Jackie Carton, our Group Financial Controller and EVP of Group Finance, whilst Jonathan, our CFO, recovers from a recent operation. And I'm very pleased to say that we expect Jonathan back in the office in early June. So let me take you through the overview. Sage delivered strong results in the first half as we continue to execute on our ambition to be the trusted network for small and mid-sized businesses. We accelerated revenue growth to double digits, expanded our underlying operating margin, and significantly increased free cash flow. So there's three key messages I'd like to emphasize today. Firstly, Sage has built strong momentum, and this is underpinned by broad growth drivers. Across the group, Sage Business Cloud is delivering significant growth, and this includes not only Sage Intact and Cloud Native, but also Sage 50, Sage 200, and Sage X3 across our main markets. Demand for our mission-critical finance, HR, and payroll solutions is robust, and it's growing as SMBs continue to digitize. Secondly, we're accelerating the pace of innovation, expanding our global cloud solutions across our markets, as well as developing new solutions such as Sage Active. Through our growing digital network platform, we're delivering innovative cloud services to customers across Sage Business Cloud. And we're well positioned for the next generation of AI, which we expect will drive significant productivity benefits for customers, for accountants, and for Sage. And finally, our performance is driven by consistent execution in line with our strategy. we are leveraging our global scale and expertise across our markets, while at the same time continuing to use our local knowledge to provide solutions to our customers. We're delivering against our strategic priorities with good progress in all areas, and we're optimising our go-to-market and sales operations, making them more efficient and effective as we focus on scaling the group. Now I'll come back later to talk more about our progress, but for now, I'm going to hand over to Jackie for the financial review.

Thanks, Steve, and good morning, everyone. I'm pleased to be here today to share our first half financial results and our full year outlook. And in summary, as Steve mentioned, it's been another strong period for Sage as we continue to execute in line with our strategy. So let's start with the highlights. And just to remind you that all numbers are now reported on an underlying basis unless otherwise stated. Firstly, we achieved recurring revenue growth of 12% underpinned by continued strength across Sage Business Cloud. This reflects positive momentum in all regions. Secondly, operating margin was 20.8% and has continued to trend upwards as we efficiently scale the business. And finally, our cash conversion was again strong at 117%, driven by continued growth in subscription revenue and good working capital management. Turning to our key growth drivers, ARR growth accelerated to 12%, that's up from 7% this time last year, This growth continues to be well balanced between new and existing customers. And it means that ARR now stands at 2.1 billion. That's up more than 200 million compared to the prior year. Cloud-native ARR growth was 30%, with another strong performance from Sage Intact. And renewal rate by value was 101%, and that's up from 100% this time last year. This was due to good retention rates, strong customer add-ons and targeted price increases. And we've also added 190 million of ARR from new customers, up from 150 million in the previous year. The strength we're seeing across these drivers means that we enter the second half with good momentum. So looking at the P&L, We achieved double digit total revenue growth at 10%, driven by recurring revenue growth of 12% to over 1 billion. Operating profit grew by 14% to 227 million, with margin expanding to 20.8%. On an organic basis, which adjusts for the impact of M&A, operating profit increased by 19%. This has led to growth in underlying EPS of 13% to 15.68 pence. So reflecting the strong performance of the business, we've increased the interim dividend to 6.55 pence and that's up by 4%. As you can see from the revenue bridge, our growth continues to be fueled by Sage Business Cloud, which delivered recurring revenue growth of almost 180 million or 29%. Importantly, this was driven by both cloud native and cloud connected solutions with strength from both new and existing customers. This reflects the growing demand from SMBs for digital solutions to automate workflows and gain better insights. Migrations have also continued to drive growth, especially in cloud connected where the pace of product migration has now accelerated. As a result, revenue to be migrated has decreased by 64 million in line with our strategy. And the impact of all of this is an increase in Sage Business Cloud penetration, which is now 82%. This is up from 72% last year, with an increasing number of customers now able to connect to Sage's cloud services and our ecosystem via the Sage digital network. As you can see here, we saw further growth in software subscription revenues increasing by 18% in the period to over 850 million. As a result, subscription penetration continued to increase up to 78%. And as expected, other recurring revenue and non-recurring revenue continued to decline by 7% and 24% respectively. Recurring revenue now represents 96% of our total. And this really underlines the high quality and resilience of our business. Now let's take a look at the portfolio view, where we saw particularly strong growth across our cloud solutions. The future Sage Business Cloud opportunity showed continued strength with recurring revenue up by 13% to $964 million. And as I mentioned earlier, Sage Business Cloud penetration is now at 82%. Growth of 38% in cloud native to 285 million was driven by new customers and supported by migrations. while growth of 25% in cloud connected to 502 million reflects good growth from existing and new customers together with faster migration of products to Sage Business Cloud. So as you can see, the pace of cloud growth remains significantly ahead of the group as a whole, with Sage Business Cloud growth now at 29%. And in line with our strategy to focus on solutions with a clear pathway to the cloud, recurring revenue in non-SAGE Business Cloud was unchanged at 75 million. Moving now to our regional performance. In North America, we delivered broad-based recurring revenue growth of 17%, mainly driven by the medium segment. Sage Intact continued to grow strongly, driven by further success in attracting new customers and supported by cross-sell and upsell across the existing base. Our Sage 50 and Sage 200 franchises have also significantly contributed to growth in the region. And as a result, Sage Business Cloud penetration increased to 84%, up from 76% this time last year. We've seen continued strength in the UK IA region, where recurring revenue grew by 11%. Growth in the UK and Ireland was 10%. Cloud-native growth in the UK was fuelled by the small business suite, including Sage Accounting, along with Sage Intact, which is now starting to scale rapidly. This was supported by good levels of growth in Sage 50. And in Africa and APAC, growth accelerated to 15%, driven by Sage Accounting, Sage Payroll and Sage Intact. The result of all of this is Sage Business Cloud penetration of 88%, up from 76% last year. And in Europe, recurring revenue growth accelerated to 6%. This includes the impact of the disposal of Sage Switzerland on Central Europe. Organic growth, which excludes the disposal impact, was 8%. In France and Iberia, growth accelerated to 7% driven by a good performance across Sage Business Cloud. In Central Europe, growth was 10% on an organic basis with a strong performance in Sage HR. This has resulted in a significant increase in Sage Business Cloud penetration, now at 70% up from 61% last year. Now the growth we're achieving is fueled by continued investment in the business. As we grow the top line, this creates the headroom for us to invest more in absolute terms, driving sustainable growth, while at the same time, enabling us to expand the margin. This efficient growth resulted in a margin of 20.8%, a 60 basis point increase from the prior year. Investment in sales and marketing is now at 40% of recurring revenue, down from 43% last year, as we drive efficiencies in our sales motion. And investment in R&D, at 17% of recurring revenue, remains a key priority for the group. And we've maintained a disciplined approach to cost. with G&A now running at just 9% of recurring revenue. And importantly, we expect to continue to grow our revenues faster than our costs. Now let's turn to cashflow. Cash generation remains a core strength of Sage. And in the first half, the group generated 266 million of cash from underlying operations. resulting in continued strong cash conversion of 117%. And as a result, free cash flow was 194 million net of interest and tax. Our ability to generate cash supports our strong balance sheet, including cash and available liquidity of 1.2 billion. In February, we issued €500 million of notes under our new EMTM programme, which we used to repay outstanding USPP debt. This has extended our debt maturity profile and diversified our funding sources. We also completed the acquisition of SageEarth, an innovative carbon accounting solution, during the first half. This means that our net debt leverage at 1.3 times is well within our midterm target range of one to two times. And we retain the flexibility to move outside this range should business needs require. And importantly, this gives us significant capacity to support both organic and inorganic growth moving forward. So what does this mean for the outlook? We have built good momentum in the first half, having made further strategic progress to drive strong growth in revenue and margin. Therefore, we are now expecting organic recurring revenue growth to be in the region of 11% for FY23. In other respects, our outlook is unchanged. We continue to expect other revenue to decline in line with our strategy and we expect operating margins to trend upwards in FY23 and beyond, as we continue to focus on efficiently scaling the grip. Thank you, and I'll now hand back to Steve.

Thanks very much, Jackie. So our strong performance in the first half is underpinned by our strategic framework for growth. This guides our actions and shapes our decisions as we fulfill our purpose and ambition. It ensures we're all working towards the same objectives and doing so in the right way in line with our values. And it's driven through our five strategic priorities, which I'm going to talk about shortly, as we seek to deliver value for all of our stakeholders. Now, knocking down barriers starts with our customers. SMBs represent 98% of all businesses in our key markets, and they account for almost two-thirds of private sector jobs. They are the lifeblood of the global economy, and our experience over many years is that they tend to be resilient, agile, and quick to spot opportunity. Now, every week I talk to customers and partners like Ryan Panchu of Vegan Bakery Borough 22, who you can see here on the slide. Now, he told me recently that despite the economic headwinds, he's optimistic and full of ambition. And this is a message I hear again and again. And it's supported by our recent survey of almost 12,000 SMBs, where more than 80% say they're confident about their company's future success. And the majority are set to increase their technology spend over the next year as they continue to digitize. Overall, the number of SMBs consistently grows. Our analysis predicts a million more in our key markets by 2025, as the economy expands and more entrepreneurs pursue their dreams. So against this backdrop, I'm confident in our continued ability to drive growth. We empower SMBs with our solutions, enabling them to automate processes, gain better business insights and comply with regulation. We provide advice and importantly, customers can always access our experts by phone when they need human support. And we use our position to champion and lobby for SMBs, engaging with policy makers to create a more supportive business environment. The foundation of our customer proposition is our digital network, a set of connected products and services, including those shown on the slide, that enable our customers to transform their accounting, HR, and payroll workflows. The network benefits customers by creating connections between business ecosystems, helping to automate workflows both within and between organizations. And from inception, it's been designed as a powerful platform for innovation in the era of artificial intelligence, with unique scale and access to data. So, for example, we've used the digital network to develop our accounts payable automation service, recently launched in the US, the UK and France. We've brought Sage Intelligent Time, our smart time assistant to new markets. And we've expanded our outlier detection service, which learns from customer behavior and is now averaging close to 600,000 predictions per week. That's up sixfold in the last three months. We're also very excited about the developments in generative AI and the new possibilities it opens up for SMBs to boost productivity and elevate human work. And we're already embracing it, starting next week when we'll share with our partners a connected accounting inbox that provides natural language responses built on GPT-4. And importantly, we're building all of these solutions in line with our values, promoting confidence and supporting our ambition to be the trusted network for SMBs. And looking ahead, our continued investment and strategic partnerships position as well to be a leader in this important and fast-moving area. So let's turn to our strategic priorities, starting with scaling Sage Intact. we focused on enhancing the solution and optimizing sales and marketing. And as a result, we grew Sage Intact ARR in the US by around 30%. And outside the US, we doubled it to 25 million pounds, building traction in the UK, Canada, South Africa, and Australia. Across verticals, Sage Intac Construction and Real Estate saw new customer additions up by more than 50%. And just last week, we acquired CoreCon, a cloud-native project management solution for the construction industry. We also issued a major new release of Sage Intac Manufacturing and are working with customers and partners across six countries to drive growth. and feedback continues to be strong. I recently spoke to Phase 3, a professional and managed services provider based in Manchester, and they told me Sage Intacct saves them three days a month of manual effort. And having established Sage Intacct across our English-speaking markets, we're now rolling the solution out in continental Europe, starting with its recent launch in France. Onto our second strategic priority, expanding medium beyond financials. Our new AI-powered service to automate accounts payable is rapidly gaining traction. In the last three months, we processed more than 200,000 invoices for around 3,000 customers across Sage Intact in the US, Sage 50 in France, and Sage Accounting in the UK. Now, this is the same service provided via the digital network to customers of all three solutions, and it's getting some great feedback. Cambio Communities, an affordable housing operator in Michigan, told us accounts payable automation has doubled, if not tripled, their productivity, elevating their team's work and freeing up time to add value in other areas. And following rapid growth in North America, Sage Intac Planning, our powerful budgeting tool, is now also available in the UK, South Africa and Australia. Onto our third strategic priority, which is to 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. And alongside our digital sales, we're also focused on winning over accountants. Sage for Accountants has now been adopted by almost 5,000 practices in the UK, just 18 months after launch. It's fuelling new Sage Accounting customers and it's supporting the strong growth of GoProposal and, futurely, our client onboarding and cash flow advisory solutions. to help accountants better manage their smaller clients. We've also created a new tier of Sage accounting in the UK to help those taxpayers with the simplest of tax affairs. And we've also launched Sage for accountants in Canada with further markets expected to follow. So on to scaling the digital network. which is key to driving the data flows that support more powerful solutions and deliver richer customer experiences. By rapidly growing Sage Business Cloud and the connected services we offer, we are enabling and encouraging more network participation. We're doing this by attracting new customers and by continuing to migrate existing customers and products. And we're making good progress. As Jackie said, Sage Business Cloud penetration is now up to 82%. We're also expanding our global cloud solutions, including Sage Active, a cloud-native multi-legislation solution for SMBs in Europe. We've just launched this in France. And we're developing new services that are powered by the digital network, adding value for customers and for partners, such as Equifax, shown here on the slide, who use our network to streamline credit applications for consumers. So on to our final priority, Learn and Disrupt, where we focus on innovating both organically and via partnerships. including with Microsoft and Amazon Web Services, both top tier sponsors of our partner summit in the US next week. Through Microsoft, we've delivered key integrations with products such as Teams to simplify approval and collaboration workflows. And we've had early access to Copilot, a new AI-based productivity tool to support our sales teams in France. And we continue to build solutions on both the AWS and Azure platforms, providing our customers with flexibility and choice as part of our multi-cloud strategy. So let's turn to our stakeholders, starting with our customers. Now, as I said earlier, I talk to customers every week and I'm always inspired by their optimism and can-do attitude as we deliver innovative solutions that remove friction from their lives. Customer satisfaction is a key focus and whilst we're not complacent, we are really proud to have almost 14,000 five-star customer reviews on Trustpilot. We're driving brand awareness with distinctive global marketing and major sports partnerships, including Major League Baseball, the 100 Cricket and the Rugby World Cup. And these are creating engagement during the recent Guinness Six Nations SAGE content accounted for a third of all rugby TikTok views. And for colleagues, we encourage an inclusive, high-performing and accountable culture. Our latest group-wide Pulse survey achieved a response rate of almost 90% and confirmed that overall colleague satisfaction is strong. And in December, we published our first diversity, equity and inclusion impact report with improved gender diversity amongst our leadership teams. Now I've visited many of our colleagues during the first half in North America, Europe and South Africa, and it's been fantastic to see their engagement and passion. And I'd like to thank all colleagues for their efforts in achieving this first half performance. Onto society, where SAGE supports sustainable and inclusive growth. Our progress towards net zero by 2040 was recognised in April through our inclusion in the Financial Times Europe climate leaders list. And we're also supporting customers on their own journey to net zero, enabling them to use their accounting data to manage their carbon footprints through Sage Earth. And it was a real privilege last month to be there in person to kick off Sage's partnership with Morehouse College in Atlanta, Georgia, to support more young black people pursuing a career in technology. And for shareholders, our overriding objective is to create sustainable growth in shareholder value. Now, the way we're doing this is by growing revenue in absolute terms and by doing so more efficiently over time. Now, there are several attributes to our model that give us confidence in this area. Firstly, our strategic framework is delivering growth in all regions. We're rolling out global cloud solutions across our markets led by Sage Intact. We're adding value to existing and new customers by delivering new cloud services. And we're scaling and leveraging the digital network to deliver innovative AI-powered solutions, transforming the workflows of SMBs. Second, Sage is differentiated by our leading technology, the breadth of our business, and our human touch. We have deep expertise across financials, payroll and HR, serving a wide range of SMBs across diverse geographies. We're supported by a broad ecosystem of partners, accountants, resellers and ISVs who enrich and expand the reach of our offerings. And we combine our solutions with a human touch, providing business advice and expertise backed by human customer support. And finally, as we grow the business in absolute terms, this creates headroom both to increase investment and to expand margins. This is helping us to build a scalable platform to deliver sustained efficient growth. So in conclusion, Sage has had a strong first half, delivering broad-based growth, and we enter the second half with good momentum. Our investments have enabled us to accelerate innovation as we find more ways to help our customers to be more productive and more efficient. And we continue to execute well with consistent delivery against our strategy, giving us confidence in the continued success of the group. So that concludes today's presentation. Thank you very much for watching. And Jackie and I would now be happy to take your questions.