The Sage Group plc

Good morning and welcome to Sage's first half results presentation. Also with me today is Jonathan Howell, our CFO, and together we're looking forward to presenting a strong set of results to you. So let's start with an overview of our key messages. Sage performed well in the first half. We sustained strong revenue growth underpinned by broad-based drivers across our portfolio of cloud solutions and markets. disciplined cost control has enabled us to drive efficiency, leading to good levels of margin expansion and a significant uplift in EPS and free cash flow. And our business model is resilient as we provide mission critical software and services to help small and mid-sized businesses streamline processes, save time and make better decisions. Secondly, we are investing in innovation as a source of near-term advantage as well as a foundation for long-term success. From small enhancements to major new releases, we're introducing new and improved solutions at pace, driving engagement among customers, accountants and partners. The Sage network, designed as a powerful open platform for innovation, is enabling us to deliver new AI-powered services. These services automate workflows, not just within but between organizations. They connect business ecosystems and they deliver benefits to customers of Sage and beyond. And finally, we continue to execute against our strategy with good progress in all areas. We're leveraging our global scale and expertise, whilst at the same time differentiating our offering with deep local knowledge. And importantly, our top-line expansion enables ongoing investment as we continue to build a scalable platform for strong, sustainable growth. Now, I'll talk more about the progress a little 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 first half results and the outlook for the full year. As Steve mentioned, it's been another strong period for Sage as we continue to execute in line with our plans. So let's start with the highlights. We've achieved total revenue growth of 10%, driven by continued strong demand for our products and services. Our operating profit margin increased to 22%, an expansion of 160 basis points as we efficiently scale the business. This has led to a strong increase in EPS of 23%. And finally, our cash conversion was robust at 127%, driven by growth in subscription revenue and good working capital management. Turning now to ARR growth, renewal rate by value was 102%, up from 101% last year. This reflects increased sales to existing customers and good retention rates as we drive deeper customer relationships. And we've seen sustained levels of growth from new customer acquisition. As a result, ARR increased by 220 million to 2.3 billion. That's up 11% at the first half. Importantly, this growth continues to be well balanced between new and existing customers. So turning to the P&L, total revenue growth of 10% was underpinned by recurring revenue, which grew by 11%. Sage is now a 97% recurring revenue business, demonstrating the high quality and resilient nature of the group. Operating profit grew by 18% to £254 million, reflecting our continued top-line growth and margin expansion. Profit after tax increased by 23% to £186 million, with EPS growing in line with this. We've increased the interim dividend to 6.95 pence, which is up 6%. Across the group, cloud products remain a significant driver of growth, with Sage Business Cloud revenue increasing by 18%. This reflects the growing demand from SMBs for digital solutions to automate their workflows and improve productivity. Within this, cloud native revenue increased by 25%, driven by strong growth from new and existing customers, particularly in Sage Intact. Subscription penetration also continued to increase, and now stands at 81%. Moving now to our regional performance, starting with North America, which represents just under half of group revenue. Here we delivered revenue growth of 13%, driven mainly by the medium segment. Sage Intact continued to perform well, driven by strength across multiple verticals, including not-for-profit and construction. This reflects further success in new customer acquisition, together with strong sales to existing customers. Growth in the region was also driven by Sage 200 and Sage 50. The UKIA region represents almost a third of group revenue and grew at 8%, with a good performance across the portfolio. The UK and Ireland increased by 7%. Revenue from Sage Intact almost doubled compared with the prior period. This reflects strong new customer wins, particularly through the partner channel. Further growth in Cloud Native was achieved in small business solutions, including Sage Accounting. This was supported by a good performance in both Sage 50 and Sage 200. In Africa and APAC, growth of 12% was driven by strength in Sage Accounting, Sage Payroll and Sage HR. And finally in Europe, which represents around a quarter of group revenue, growth was 6%. This reflects a strong performance across accounting, HR, and payroll solutions. In France, growth of 5% was driven by strength in Sage 200 and Sage X3. Central Europe increased revenue by 6%, with strong growth in cloud HR and payroll. And in Iberia, growth of 6% was driven mainly by Sage 200 and Sage 50. 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 22%, a year-on-year increase of 160 basis points. Investment in sales and marketing stands at 39% of total revenue. And investment in R&D, which is at 15%, is a key priority for the group. G&A is running at below 9%, demonstrating our disciplined approach to cost. And cash generation remains a core strength of Sage. Here you can see how the higher profits flow through to cash flow. In the first half, the group generated 322 million of cash from underlying operations, resulting in continued strong cash conversion of 127%. And free cash flow was 240 million net of interest and tax. Our ability to generate cash supports our strong balance sheet, with cash and available liquidity of 1.1 billion. This includes the return of around 350 million to shareholders through our recent share buyback. Our leverage ratio of 1.4 is well within our mid-term target range of 1 to 2 times. We retain significant capacity to support both organic and inorganic growth. We would do this in line with our capital allocation policy, which remains unchanged. So what does that mean for the full year outlook? We expect organic revenue growth for FY24 to be broadly in line with the first half. And we continue to expect operating margins to trend upwards in FY24 and beyond as we focus on efficiently scaling the group. Thank you.

Thanks, Jonathan. Our strong performance is underpinned by our strategic framework for growth. Our purpose is to knock down barriers so that everyone can thrive, starting with our customers. And the way we serve our purpose is through our network. And we drive progress through our five strategic priorities, which I'm going to talk about shortly, as we seek to deliver benefits for all of our stakeholders in line with our values. So let's start with our customers, small and mid-sized businesses who are vital to the global economy. Our small business tracker analyzes data from 130,000 SMBs, and it shows that despite the challenging macro environment, SMBs have remained resilient with rising revenues and profits as they entered 2024. But they continue to face barriers, including cash flow issues caused by late payments and weak productivity growth. Sage knocks down those barriers for SMBs. For businesses like Gemba, a pioneer in virtual reality training shown here on the slide, we use our technology to help them get paid more quickly and we automate their back office processes to drive productivity. And with our market insights showing that less than half of SMBs in Europe currently use accounting and payroll software, our opportunity for growth is significant, particularly given ambitious EU plans to support digitalisation. To increase the value we deliver to customers, we're continually investing in our products. And we focus our investment on two big technology drivers – Firstly, AI to enhance the level of automation and insights that we provide. And secondly, the Sage network, which enables us to connect customers across their ecosystems through our cloud services and solutions. Now, these two drivers are closely linked because it's the connections enabled by Sage network that form the data flows to power our AI models. We've invested in world-class machine learning infrastructure and we're using it to rapidly develop and deploy models that are unique to each customer and trained on their individual data. These are driving more and more AI capabilities throughout our products, including in services such as accounts payable automation, outlier detection and time management. And in April, early adopters went live with Sage Copilot, our digital productivity assistant, as we begin our UK rollout. Using generative AI, Sage Copilot saves time, provides deeper insights, and supports decision-making. And it does all of this through an intuitive, natural language interface. In short, acting like a trusted member of the finance team. With small businesses and accountants now providing us with valuable feedback, we will be deploying it globally over time across our entire customer base. So let's turn to our strategic priorities, starting with scaling Sage Intact. We've invested in innovative features such as improved bank feeds and new dashboards, We've introduced deeper vertical capabilities to help manage operations, for example in non-profit and healthcare. And we've expanded Sage Intacct beyond the US, initially into other English-speaking markets, and more recently into continental Europe. In France, where we launched last year, we're already building traction. The partners I've met with are engaged and excited, and customer feedback is encouraging. Cultures Food, a catering company in Paris, told me that although they've only recently switched to Sage Intact, it's already transforming their operations through real-time data and insights. And earlier this year, we also introduced the solution into Germany. So as a result of all of this, Sage Intech grew ARR by about a quarter in the US, whilst outside the US, it grew by two thirds to 40 million pounds. So on to our second priority, expanding medium beyond financials. This includes extending solutions such as payroll, HR, planning and analytics to customers of our core financial products throughout the group. So, for example, we've integrated Sage HR with Sage Intacct in South Africa and Canada and with Sage 50 in North America, driving powerful HCM capabilities across the portfolio. Also in North America, we've launched Sage Construction Management, an end-to-end cloud suite including pre-build and project management capabilities. This suite further enhances our strong presence in a vertical which saw ARR growth in the first half of almost 20%. And finally, Sage Distribution and Manufacturing Operations is really gaining momentum, with partners and customers across seven countries helping to drive growth. Our third priority is building the small business engine, as we seek to acquire and serve small business customers and accountants. In the UK, we recently launched the Sage for Small Business suite, combining Sage Accounting, Sage Payroll and Sage HR into a single solution with a unified customer experience. Sage for Accountants has been adopted by over 12,000 accountancy firms, which is more than double where we were a year ago. And we're now introducing a tiered proposition to offer accountants more choice, including value-added services from the likes of AutoEntry, GoProposal and Futurely. Beyond the UK, we've also refreshed the proposition for accountants in France, Spain and South Africa to drive growth. So turning to scaling the Sage network, through which we connect business ecosystems and transform customer workflows. By rapidly growing Sage Business Cloud and the connected services that we offer, such as payments, tax filings and invoice processing, we're driving more network participation. So take Accounts Payable Automation as an example. It's one of the fastest growing services we've ever launched, now processing three times as many invoices as a year ago. And with more than 60 million vendor relationships tracked in our network so far, the efficiency of the service continues to grow. Equally promising is our e-invoicing service, also offered as part of the Sage network. This enables SMBs to get paid faster, reduce costs and comply with government mandates, as e-invoicing gathers pace globally. And finally, the network accelerates our development cycle, enabling us, for example, to launch SageActive rapidly in France, Spain and Germany. Our final priority is to learn and disrupt, investing in innovation and partnerships to stay at the forefront of the industry. We've deepened our collaboration with Amazon Web Services with a commitment to develop a domain-specific large language model. This will serve as a foundation for SMBs to navigate accounting and compliance more easily, combining AWS's processing power with our market knowledge. We will also make SageEarth, our easy-to-use carbon accounting solution, available in the AWS marketplace, enhancing distribution and reach. And finally, rapid growth in our innovative partnership with Tide is enabling Sage to acquire more new customers earlier in their lifecycle. Now, our success depends on our ability to deliver for our stakeholders, starting with our customers. Sage helps SMBs succeed by delivering great technology with a human touch. We were delighted to be ranked in the global top 10 of G2's best software companies for 2024. And we champion SMBs across our markets, for example, on environmental issues at COP28 and on AI adoption with the UK government. For colleagues, we foster a high-performance, accountable and inclusive culture. We were pleased to be named by Forbes as one of the world's best employers and by the Financial Times as a European diversity leader. And through partners such as Morehouse College in Atlanta and Teens in AI, we're committed to growing a more diverse talent pipeline. Onto society, where we support inclusive growth so that everyone can thrive. In November, we published our Net Zero Transition Plan with a glide path to reach a 50% reduction in emissions by 2030. And I'm delighted that we recently improved our climate change score from the Carbon Disclosure Project to A-. And for shareholders, our overriding objective is to create sustainable growth in shareholder value. Now we do this by growing revenue and doing so more efficiently over time. Our strategy, underpinned by innovation, is driving significant growth in all regions. We're leveraging our scale by rolling out global solutions across our markets. We're building deeper vertical and broader functional capabilities brought together as suites in a simpler, more integrated proposition. And we're using our expertise and years of investment in AI to deliver a step change in the customer experience. Sage is differentiated by our leading technology, the breadth of our business and our human touch. We have deep local expertise across financials, payroll and HR, serving a wide range of SMBs across diverse geographies. Our network, combined with Sage Copilot, enables customers to save time and benefit from greater insights than ever before. And finally, as we grow the business in absolute terms, this creates the headroom both to increase investment and to expand margins, driving sustained efficient growth. So in conclusion, Sage achieved a strong performance in the first half. We continue to deliver significant growth with cost discipline leading to expanding margins. We're investing in innovation, powering Sage's success now and in the future. And we're executing well with consistent progress against our strategic priorities, giving us confidence for the second half and beyond. So that concludes today's presentation. Thank you very much for watching. And Jonathan and I would be happy to take your questions.