The Sage Group plc

Good morning and welcome to Sage's full year results. I'm delighted to be joined by Jonathan Howell, our CFO. I'm going to start with an overview of our key messages for today. Sage delivered a strong FY23 performance driven by consistent execution. We achieved double-digit revenue growth, expanded our underlying operating margin, and significantly increased free cash flow. Our performance was based on strong, sustained momentum, underpinned by broad growth drivers across the group. Sage Business Cloud continues to deliver significant growth across all of our regions, and importantly, this growth remains well balanced between new and existing customers. And it's supported by the resilience of our business model as small and mid-sized businesses continue to adopt digital technology to become more productive and efficient. And our growth is led by ongoing investment in innovation, driven by our deep knowledge and experience of serving SMBs. We're enhancing our cloud solutions and making them available to more customers in more regions. We're leveraging the breadth of our offering, integrating products across accounting, HR and payroll to provide a seamless customer experience. And through the Sage network, we're developing new digital and AI-powered services and efficiently deploying them across our portfolio, transforming workflows for SMBs. And finally, we are executing consistently with continued progress against our strategic priorities. Having invested significantly in recent years, we're now focused on efficiently scaling the group. And this is driving strong top and bottom line growth. By transforming Sage into a more globally integrated business, we are building a scalable platform for sustainable growth. And I'm confident that as a result, Sage is well positioned for the considerable market opportunities that lie ahead. Now, I'll talk more about our progress later in the presentation, but for now, I'm going to hand over to Jonathan for the financial review.

Thanks Steve and good morning everyone. I'm pleased to share with you today our full year results and also the outlook for the year ahead. As Steve mentioned, it's been another year of strong progress as we continue to execute in line with our plans. Starting with the highlights. Firstly, we delivered recurring revenue growth of 12%. driven by continued strength across Sage Business Cloud, which grew by 25%. Secondly, operating margin was 20.9%, an expansion of 140 basis points as we continue to efficiently scale the business. And finally, our cash conversion was strong at 116%, driven by growth in subscription revenue and good working capital management. Turning to our key growth drivers, ARR growth of 11% was well balanced between new and existing customers, and we added 225 million of ARR, which now stands at almost 2.2 billion. Cloud-native ARR grew at 28%, driven largely by new customers, with a continued strong performance from Sage Intact. and renewal rate by value was 102% up from last year. And this reflects increased sales to existing customers and good retention rates. So turning to the P&L, we achieved double digit total revenue growth of 10%, driven by recurring growth of 12%. Operating profits grew by 18% to 456 million. And on an organic basis, which adjusts for the impact of M&A, it increased by 22%. All this has led to growth in underlying EPS of 22% to 32.3 pence. We've increased the final dividend to 12.75 pence. This takes the full-year dividend to 19.3 pence, which is up 5%. Looking now at the revenue bridge, Our growth continues to be driven by Sage Business Cloud, which delivered recurring revenue growth of almost 330 million. And this was supported by continued migrations, especially in Cloud Connected, where the pace of product migration remains strong. This reflects the growing demand from SMBs for digital solutions to automate their workflows and drive productivity. Software subscription revenues grew by 17% during the year to over 1.7 billion. As a result, subscription penetration continued to increase and now stands at 79%. Recurring revenue now represents 96% of our total and this underlines the high quality and resilience of our business. Now moving to the portfolio view. The future Sage Business Cloud opportunity performed strongly with recurring revenue growth of 12% to more than 1.9 billion. Growth of 34% in cloud native was driven by Sage Intact together with other solutions including Sage Accounting, Sage Payroll and Sage HR. And Cloud Connected increased by 21% to over 1 billion, reflecting growth across the Sage 50 and Sage 200 franchises, together with continued migrations. Recurring revenue in non-Sage business cloud grew by 4%, in line with our expectations. The result is growth in Sage Business Cloud penetration to 84%, with more customers now able to connect to the Sage network. Moving now to our regional performance. In North America, we delivered recurring revenue growth of 16%, driven by the medium segment. Sage Intact continued to grow strongly, reflecting further success in the NCA, together with strong sales to existing customers. Performance in the region was supported by growth in our Sage 200 and Sage 50 franchises. As a result, Sage Business Cloud penetration increased to 86%, up from 79% last year. In the UK IA region, Recurring revenue grew by 10%. Growth in the UK and Ireland was 9%. Cloud-native growth was driven by small business solutions, together with Sage Intact, which is scaling rapidly. This was supported by further growth in Sage 50. In Africa and APAC, growth of 13% was driven by Sage Accounting and Sage Payroll. The result of all this is Sage Business Cloud penetration of 90%, up from 79% last year. And in Europe, recurring revenue growth was 7%, which includes the disposal impact of Sage Switzerland. In France and Iberia, growth was driven by a strong performance in cloud-connected solutions, supported by growth in cloud-native. And in Central Europe, growth was 7%, with a strong performance in Sage HR. And this has resulted in Sage Business Cloud penetration of 73%, up from 64% last year. As we've said previously, our focus is on efficiently scaling the group. As we grow the top line, operating leverage means we can invest more and expand the margin. This in turn leads to sustainable growth. Overall, this has resulted in a margin of 20.9%, an increase of 140 basis points from last year. Investment in sales and marketing stands at 40% of recurring revenue, down from 42% last year, as we continue to drive efficiencies in our sales motion. As investment in R&D at 16%, remains a key priority for the group. G&A is now running at just below 10% of recurring revenue, demonstrating our disciplined approach to cost. Turning to the cash flow, cash generation remains a core strength of Sage. During the year, the group generated $528 million of cash from underlying operations, resulting in continued strong cash conversion of 116% and free cash flow was 404 million net of interest and tax and that's up 37% on the prior year. The group has a strong balance sheet with 1.3 billion of cash and available liquidity and a leverage ratio of 1. In February we issued 500 million of euro notes This has extended our debt maturity profile and diversified our funding sources. And in line with our disciplined capital approach, this morning we announced a share buyback programme of up to £350 million. This reflects our confidence in Sage's future prospects, together with our strong cash generation and robust financial position. And importantly, we retain significant capacity to support both organic and inorganic growth. So what does that mean for the outlook? We retain good momentum as we enter the new financial year, driven by consistent execution. Therefore, we expect organic total revenue growth in FY24 to be broadly in line with last year. And we expect operating margins to trend upwards in FY24 and beyond as we focus on efficiently scaling the group. Thank you. And now back to Steve.

Thanks, Jonathan. The foundation for our strong performance is our strategic framework for growth. More than ever, Sage exists to knock down barriers so that everyone can thrive, starting with our customers, small and mid-sized businesses. Our ambition is to be the trusted network for SMBs, and the Sage network is enabling us to achieve this. And we drive growth through our five strategic priorities, which I'm going to talk about shortly, as we continue to do the right thing for our stakeholders in line with our values. But I'm going to start by reflecting on our achievements over the last five years and the consistent, strong progress that we've made. We've focused on the needs of SMBs, bringing them the benefits of the cloud and increasing Sage Business Cloud penetration to 84%. This has helped drive scale with ARR accelerating to 2.2 billion pounds. We've also ramped up our investment in R&D up 60% over the last five years as we continue to innovate and enhance the value that we bring to our customers. And finally, this is reflected in the high levels of growth across our cloud solutions, including cloud-native ARR, which is now approaching £700 million and represents almost 40% of Sage Business Cloud. In short, we've substantially repositioned the group. And having invested to create momentum, we're now focused on scaling, delivering durable, top-line growth with an expanding margin. So let's turn to what we're currently seeing among our customers. Small and mid-sized businesses who are vital to the global economy, representing 98% of all businesses in our key markets and accounting for two-thirds of private sector jobs. They're typically resilient, dynamic and agile. And experience shows that the number of SMBs consistently grows over time. We recently surveyed more than 15,000 SMBs across the EU, and they told us that faced with economic headwinds, they're investing more in digital technology to help alleviate pain points such as cash flow and late payment issues. And they're excited about the potential for AI to drive innovation and efficiency. Entrepreneurs and finance professionals alike want technology that makes their life simpler, automates repetitive tasks, and saves them time and money. So for example, Pizza Pilgrims in the UK told us that switching to Sage Intact has reduced the time it takes to update their board packs from half a day to five minutes whilst increasing quality and accuracy. Now I've spoken to numerous customers, accountants and partners this year and they've all told me similar stories. The Sage Network is our platform of products and services that benefits customers by connecting business ecosystems and by digitally transforming workflows. It's also our platform for innovation and has enabled us to embed AI into key tasks such as bank reconciliations, invoice processing, error detection and carbon accounting. All of these services become more accurate as they learn from customer behaviour over time. We're particularly excited about the possibilities of generative AI and the significant real-world benefits that it can deliver to SMBs. For our customers, this means automating entire complex workflows, letting software handle routine conversations with third parties, and using technology in a different way to gain powerful insights and human-like assistance. These capabilities will deliver a step change in productivity. And whilst it's early days, we're starting to make these possibilities a reality. Through recently launched products like Sage Network Inbox and Accounts Payable Automation. And through Sage Copilot, our digital assistant, which is now in internal testing. All this is enabled. by the Sage network, which today powers over 7,000 learning models and has already mapped over 50 million supplier relationships, helping our customers to be more productive. Importantly, the network enables us to build services once and then deploy them to customers of solutions across Sage Business Cloud. This accelerates our development cycle and we're doing this in line with our values, promoting confidence and trust with accurate proprietary models underpinned by clear data and AI ethics principles. So let's turn to our strategic priorities, starting with scaling Sage Intact. Our focus here is on continually enhancing the solution, as well as making it available to more customers by extending its reach into new verticals and geographies. And as a result, Sage Intacct grew ARR by a record £100 million in FY23. And in the US, Sage Intacct ARR grew by almost 30%, with particular strength in not-for-profit and construction. Outside the US, growth was more than 80% to over £30 million, with traction continuing to build in recently launched markets including the UK, Canada and South Africa. Now, during the year, we also introduced Sage Intacct to continental Europe, successfully launching into France and with Germany to follow in the coming months. And we're getting some great reviews from customers and partners in these new markets. Pathena Consultant, a French partner, told us they consider Sage Intacct to be the best finance solution not only for SMBs in general, but also for their own business. And they're not the only ones. I've spoken to all of our top French partners, and there is a renewed energy about the opportunities that we see together. And finally, in partnership with PwC, we've introduced a new managed service programme, enabling accountants to offer finance and advisory services to mid-sized clients via Sage Intact. Our next priority involves broadening our value proposition for mid-sized businesses. Now here we're leveraging our capabilities beyond core financials to provide more services in adjacent areas, including payroll, HR, planning and analytics, deepening our customer relationships and increasing the value that we provide. Last month, we expanded Sage Intacct Payroll into Canada, enabling more SMBs to streamline their payroll processes. And earlier in the year, we launched an integration between Sage Intacct, Sage Payroll and Sage HR in South Africa and Canada, creating a seamless experience for customers across all three products. And to help more businesses with effective budgeting, we've expanded Sage Intacct planning beyond the US and into more markets across the group. And we've done the same with Sage Intelligent Time, our AI-powered time tracking tool, which helps professional services businesses more accurately track billable hours. Our third priority is to develop a powerful engine to acquire and serve small business customers. We're seeing continued growth from our small business solutions, including Sage Accounting and Sage 50. And alongside our e-commerce sales, we're also focused on supporting and serving accountants on whom small businesses depend for bookkeeping, compliance and advice. In just two years since launch, Sage for Accountants has been adopted by almost 8,000 practices in the UK, helping accountants manage their entire practice workflow and unlock more profitable client relationships. The solution now integrates with Sage Accounting and Sage 50, as well as third-party products. And extending its reach beyond the UK, we've also launched in Canada. In Europe, we've introduced SageActive, our new multi-legislation business management solution, now launched in France, Spain and Germany. Onto scaling the Sage network, through which we provide connected services that transform the workflows of SMBs. As Jonathan said, with Sage Business Cloud penetration up by nine percentage points, more customers can now connect to and consume services via the network. And the rapid expansion of our end-to-end accounts payable automation service is a good example of how we're driving up network participation. We launched this service earlier in the year bringing new capabilities to Sage Intacct, Sage 50, Sage Accounting and Auto Entry. And in Q4 we processed almost half a million invoices and that's more than double the number from six months earlier. And customers have reported significant efficiencies doubling and in some cases tripling productivity in their accounts payable teams. And finally, as an open platform, the network is also scaling through growth from third-party software vendors as part of our broad ecosystem. This generates incremental consumption-based revenue for Sage, whilst also expanding and enriching the customer experience. Our last priority is to learn and disrupt. This priority is about being at the cutting edge of innovation in the industry, finding new ways to serve customers better and developing deep partnerships to support us. Now, as I said earlier, the Sage network is our platform for innovation and we're using it to put powerful new tools in the hands of SMBs. For example, we recently launched Sage Network Inbox, a connected accounting inbox which provides natural language email responses to queries received by accounting teams. And the early feedback is very promising, as you can see from the slide. We're also testing Sage Copilot, which uses natural language to provide smart analytics and serve as an intelligent companion in decision making. We'll say more about this early next year. And finally, we've ramped up our collaboration with both Microsoft and AWS, launching solutions on both the Azure and AWS platforms and integrating complementary technology. So now let's turn to our stakeholders. Our support for customers goes beyond the technology we build. We also support them with customer service provided by humans. We offer advice on key business issues, for example through our Trust and Security Hub, Business Advice Hub and Member Masterclasses. And we show up for SMBs championing their interests with policy makers across our markets, For example, through the UK Prime Minister's Business Council, where I've consistently lobbied for incentives for small businesses to invest in technology. I've also engaged with numerous shadow cabinet ministers as we've promoted our blueprint for digital-led growth. For colleagues, we target an inclusive, accountable and above all a high performing culture. We invest in providing the resources and opportunities to enable colleagues to thrive, focusing on their wellbeing and continued development. And we're building a diverse workforce that fully represents the world in which we work. We have ambitious targets in this area, and as we progress, it's good to see that in July we were listed amongst top 50 UK employers for gender diversity by The Times. And last month we were recognised by Forbes as being among the world's top companies for women. Onto society, where we take pride in making a difference and aim to multiply our impact by supporting sustainability in SMBs across our markets. During the year, we made progress in delivering on our climate strategy, creating a detailed roadmap to support our science-based targets to reduce emissions. And we've also joined forces with NatWest to develop NatWest Carbon Planner, built using SageEarth and available to all UK businesses to help reduce their carbon footprints. And together with our charity partners like Ashoka, Kiva and The Boss Network, we've helped more than 10,000 underserved entrepreneurs to grow their businesses. And for shareholders, our overriding objective is to create sustainable growth in shareholder value. Our model to achieve this is to grow revenue and to do so more efficiently over time. Firstly, our strategic framework is delivering growth in all our regions. We're rolling out global cloud solutions across our markets led by Sage Intact. and we're adding value to customers by enhancing our products and broadening the proposition we offer them. And we're scaling and leveraging the Sage network to deliver innovative AI solutions, delivering real-world productivity to 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 small and mid-sized businesses across diverse geographies. We're supported by a broad ecosystem of partners, accountants, resellers and ISVs who enrich and expand the reach of our offering. 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. So in conclusion, Sage has had a very good FY23. We've made strong strategic progress, sustaining our momentum throughout the year. We're investing in innovation to lead our growth in the future as we help our customers to become more productive and efficient. and we're executing well with consistent progress against our strategy, leaving us well positioned for continued delivery in FY24 and beyond. So that concludes today's presentation. Thank you very much for watching, and Jonathan and I would now be happy to take your questions.