# Sage Group Strong first half, sustaining last year’s growth momentum

- Link: https://www.directorstalkinterviews.com/sage-group-strong-first-half-sustaining-last-years-growth-momentum/412820397
- Published: 2020-05-13T07:41:22+01:00
- Author: Amilia Stone

**[Sage Group plc](https://www.directorstalkinterviews.com/ftse-company/sage-group/sge.l)**(
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) [1]** | **H1 20** | **H1 19 [2]** | **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 | 
|   |   |   |   | 
| **KPIs** |   |   |   | 
| 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 | 
| Revenue | £975m | £957m | +1.9% | 
| Operating Profit | £289m | £210m | +37.9% | 
|      % 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._

[1] Please see Appendix 1 for guidance of the usage and definitions of the Alternative
Performance Measures.

[2] 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 [3] (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[
4] of 56% (H1 19: 44%), reflecting continuing progress in the shift towards cloud
connected and cloud native solutions.

–      Renewal by value [5] increased to 101% (H1 19: 100%), demonstrating the strength
of the existing customer base.

[3] Defined as the normalised organic recurring revenue in the last month of the
reporting period, adjusted consistently period to period, multiplied by twelve.

[4] 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.

[5] Defined as the closing ARR from customers active at the start of the year, divided
by the opening ARR for the year.

**COVID-19 update**

–     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.

**Outlook**

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.”

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