Sage Group plc (LON:SGE) has today announced its unaudited results for the six months ended 31 March 2020.
Strong first half performance driven by strategic progress
– Continued strong growth in high quality organic recurring revenue of 10.3%
– Organic operating margin of 22.8%, reflecting ongoing investment to accelerate strategic execution
– Strong underlying cash conversion of 127%
– Resilient balance sheet, with c. £1.3bn of cash and available liquidity; net debt to EBITDA ratio of 0.5x
– We remain focused on the longer-term opportunity as we transition customers to subscription and Sage Business Cloud, with the FY20 outlook reflecting the current global economic uncertainties
|Alternative Performance Measures (APMs) ||H1 20||H1 19 ||Change|
|Organic Financial APMs|
|Organic Total Revenue||£935m||£885m||+5.7%|
|Organic Recurring Revenue||£826m||£749m||+10.3%|
|Organic Operating Profit||£213m||£207m||+3.0%|
|% Organic Operating Profit Margin||22.8%||23.4%||-0.6% pts|
|Underlying Financial APMs|
|Underlying Operating Profit||£218m||£216m||+0.9%|
|% Underlying Profit Margin||22.4%||22.9%||-0.5% pts|
|Underlying Basic EPS||13.75p||13.78p||-0.2%|
|Underlying Cash Conversion||127%||151%||-24% pts|
|Annualised Recurring Revenue (ARR)||£1,693m||£1,541m||+9.8%|
|Renewal Rate by Value||101%||100%||+1% pt|
|% Subscription Penetration||62%||52%||+10% pts|
|% Sage Business Cloud Penetration||56%||44%||+12% pts|
|Statutory Measures||H1 20||H1 19||% Change|
|% Operating Profit Margin||29.7%||21.9%||7.8% pts|
|Basic EPS (p)||20.56p||14.19p||+44.9%|
|Dividend Per Share (p)||5.93p||5.79p||2.5%|
As a result of rounding throughout this document, it is possible that tables may not cast, and change percentages may not calculate precisely. Please see Appendix 1 for guidance of the usage and definitions of the Alternative Performance Measures.  Organic revenue and operating profit for H1 19 is restated to aid comparability with H1 20. The definition of organic measures can be found in Appendix 1 with a full reconciliation of organic, underlying and statutory measures on page 9. Unless otherwise specified, all references to revenue, profit and margins are on an organic basis.
H1 20 Financial Performance
– Organic total revenue increased by 5.7% to £935m, reflecting growth in recurring revenue of 10.3% to £826m, underpinned by software subscription revenue growth of 25.6% to £582m. This was offset by a 19.6% decrease in other revenue (SSRS and processing) to £109m.
– Growth in recurring revenue of 10.3% reflects the continued focus on attracting new customers and migrating existing customers to subscription and Sage Business Cloud, with particular strength in Northern Europe and North America.
– Decrease in other revenue (SSRS and processing) of 19.6% reflects the managed decline in licence sales and de-prioritisation of professional services revenue as the business continues to focus on subscription, together with the additional impact of COVID-19 towards the end of March.
– Organic operating profit of £213m, representing a margin of 22.8% (H1 19: 23.4%), reflects continued investment to accelerate strategic execution, and includes a £13m increased bad debt provision in connection with COVID-19.
– Non-recurring gain of £92m (H1 19: £13m) includes a £141m net gain on business disposals (Sage Pay and the Brazilian business), offset by office relocation and property restructuring charges of £30m (H1 19: £14m) and a £19m charge for the impairment of goodwill in respect of the Asian business.
– Strong underlying cash conversion of 127% (H1 19: 151%) reflects sustained improvements in working capital and the continued transition to recurring revenue, with free cash flow of £227m (H1 19: £257m).
– Resilient balance sheet, with c. £1.3bn of cash and available liquidity (comprising £912m of cash and cash equivalents, and £413m of undrawn facilities), and a net debt to EBITDA ratio of 0.5x as at 31 March 2020.
– Interim dividend up 2.5% to 5.93p, reflecting strong business performance and cash generation in the first half, and in line with policy of maintaining the dividend in real terms.
Progress in strategic execution
Sage’s vision is to become a great SaaS company for customers and colleagues alike. Highlights of our strategic progress in the first half include:
– To drive customer success, we’ve invested in the end-to-end customer experience, through new ways of working, more efficient processes and improved technology. This has enabled us to respond more effectively to the impact of COVID-19 by providing tailored support and advice to our customers.
– To drive colleague success, we’ve continued to build a customer-centric culture, embedding our values and further investing in colleague development. Strong colleague engagement has been central to Sage’s COVID-19 response, both in the transition to homeworking and in continuing to support customers.
– In innovation, Sage Accounting for Professional Users, our small business solution for cloud-native accounts, has been launched in the UK, while the programme to internationalise Intacct is progressing according to plan. We continue to invest in Sage Business Cloud, creating a single digital environment for all our cloud native and cloud connected products.
– Sage announced the acquisition of CakeHR, a cloud native solution that simplifies and automates HR tasks for small businesses, boosting our cloud offering in the small business segment.
– Sage completed the disposals of Sage Pay and the Brazilian business in March 2020, helping to reshape the Group’s product portfolio and increase focus on Sage Business Cloud.
Continued focus on strategic execution has resulted in:
– Strong annualised recurring revenue  (ARR) growth of 9.8% to £1,693m, reflecting momentum from FY19 and further sequential growth in the first half.
– Recurring revenue now represents 88% of total revenue (H1 19: 85%) with 62% software subscription penetration (H1 19: 52%).
– Future Sage Business Cloud Opportunity (Sage Business Cloud and products with potential to migrate) recurring revenue growth of 12%. Sage Business Cloud penetration  of 56% (H1 19: 44%), reflecting continuing progress in the shift towards cloud connected and cloud native solutions.
– Renewal by value  increased to 101% (H1 19: 100%), demonstrating the strength of the existing customer base. Defined as the normalised organic recurring revenue in the last month of the reporting period, adjusted consistently period to period, multiplied by twelve.  Defined as organic recurring revenue from the Sage Business Cloud as a proportion of the organic recurring revenue of the Future Sage Business Cloud Opportunity.  Defined as the closing ARR from customers active at the start of the year, divided by the opening ARR for the year.
– With Sage’s focus on high quality recurring and subscription-based revenues, and strong liquidity position, the Group has entered the COVID-19 pandemic in a strong operational and financial position.
– Our response to the pandemic has been to ensure the health and wellbeing of our colleagues, to continue serving and supporting our customers and partners, and to remain focused on our SaaS transition strategy.
– We have put in place a range of measures to support our customers and partners, through local online advice hubs and expert customer service, and by working with governments to help our customers directly access the financial support available, facilitating the application process through our software.
– We saw the early impacts of COVID-19 on Other Revenue (SSRS and processing) towards the end of March, as software licence and professional services implementations were affected.
– We have now started to see the broader effects of the sharp economic downturn caused by the pandemic, with some customers deferring purchase decisions, leading to a slowdown in new customer acquisition.
– In April trading, reflecting the above, new customer acquisition was roughly half the level previously expected. We have also seen a slight increase in customer churn.
– In the context of a more challenging growth environment, we are implementing a range of mitigating actions to manage costs and cash in the near-term.
– At this point, Sage does not intend to make any redundancies in response to the economic environment. We also do not intend to furlough any colleagues or make use of government support programmes.
– We will continue to invest for the long term, repositioning the Group strategically and reshaping the portfolio, supported by our resilient balance sheet.
– Despite the near-term uncertainty, we remain confident that we have the right strategy to support our longer-term vision to become a great SaaS company.
While the Group has performed well in the first half, it is too early to quantify with confidence the impact of the pandemic on Sage’s financial performance for the full year. We continue to expect, as we indicated in our trading update on 6 April, that organic recurring revenue growth will be below the previously guided range of 8% to 9%, and that the decline in other revenue (SSRS and processing) will accelerate significantly in the second half, with an associated impact on margin.
Steve Hare, CEO, said:
“Sage Group has had a strong first half, sustaining last year’s growth momentum as we continue to focus on recurring revenue growth, and making good progress in strategic execution. Our key priority has been the health and wellbeing of our colleagues and our service to customers. I am proud of how colleagues have reacted, and how they have supported each other and our customers. Despite the near-term uncertainties, I believe our continuing investment into Sage Business Cloud, together with our focus on customers, colleagues and innovation, form a strong base for the future performance of Sage.”