The Sage Group (LON:SGE) has announced its audited results for the year ended 30 September 2019.
– Strong growth in high quality recurring revenue, underpinned by over £1bn of software subscription revenue;
– Strong underlying cash conversion;
– Organic operating margin in line with expectations;
– Capital return of £250m today announced, following announcement of disposal of Sage Pay;
– Significant progress in strategic execution in FY19 with further momentum into FY20;
– FY20 guidance reflects continuing focus on recurring revenue and Sage Business Cloud.
|Alternative Performance Measures (APMs)||FY19||FY18||Change|
|Organic Financial APMs (excluding assets held for sale)|
|Organic Total Revenue||£1,822m||£1,725m||5.6%|
|Organic Recurring Revenue||£1,559m||£1,406m||10.8%|
|Organic Operating Profit||£432m||£496m||(13.0%)|
|% Organic Operating Profit Margin||23.7%||28.8%||(5.1% pts)|
|Underlying Financial APMs|
|Underlying Total Revenue||£1,936m||£1,878m||3.1%|
|Underlying Recurring Revenue||£1,612m||£1,465m||10.0%|
|Underlying Operating Profit||£448m||£509m||(12.1%)|
|% Underlying Operating Profit Margin||23.1%||27.1%||(4.0% pts)|
|Underlying Basic EPS||28.40p||32.85p||(13.5%)|
|Annualised recurring revenue||£1,685m||£1,496m||12.6%|
|Renewal Rate by Value||101%||101%||–|
|% Subscription Penetration||55%||45%||10% pts|
|% Sage Business Cloud Penetration||48%||29%||19% pts|
|Underlying Cash Conversion||129%||96%||33% pts|
|Statutory Measures||FY19||FY18||% Change|
|% Operating Profit Margin||19.7%||23.2%||(3.4% pts)|
|Basic EPS (p)||24.49p||27.21p||(10.0%)|
|Dividend Per Share (p)||16.91p||16.50p||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.
FY19 Financial Performance
– Organic total revenue (excluding Sage Pay and Brazil, now held for sale) delivered growth of 5.6% to £1,822m, reflecting growth in recurring revenue of 10.8% to £1,559m, underpinned by software subscription revenue growth of 29.4% to £1,004m, offset by a 17.9% decline in SSRS revenue to £255m and a 3.0% decline in processing revenue to £8m;
– Including the impact of Sage Pay and Brazil, the business delivered total revenue growth of 5.2% to £1,915m, recurring revenue growth of 10.7% to £1,611m, software subscription revenue growth of 28.1% to £1,041m, offset by an 18.8% decline in SSRS revenue to £260m and slight decline in processing revenue of 0.5% to £45m;
– Strong growth in recurring revenue of 10.8% and ARR growth of 12.6% reflects the continued focus on attracting new customers and migrating existing customers to subscription and the cloud. Particular strength in recurring revenue growth in Northern Europe and North America at 16% and 12% respectively, and in the Future Sage Business Cloud Opportunity at 13%;
– Decline in SSRS reflects the on-going transition to subscription revenue and a strong SSRS comparator in the prior year;
– Organic operating profit of £432m, a margin of 23.7% (£448m, margin of 23.4% including Sage Pay and Brazil), down from 28.8% in FY18, reflects the increased investment to accelerate strategic execution, combined with increased colleague variable compensation in line with strong business performance and the commitment to colleague success;
– Non-recurring gain of £28m, largely reflecting the disposal of US Payroll Processing, offset by non-recurring charges for property restructuring costs of £28m and £14m for the impairment of the Brazilian asset held for sale;
– Underlying cash conversion of 129%, reflecting an improvement in trade receivables and lower levels of FY18 bonus payout in FY19. Free cash flow of £443m and net debt to EBITDA ratio of 0.8x;
– An increase in full year dividend of 2.5% to 16.91p, in line with the policy of maintaining the dividend in real terms;
– Capital return of £250m today announced, reflecting the expected proceeds from Sage Pay and strong cash generation. Further details to be announced on completion of disposal of Sage Pay.
Progress in strategic execution
Sage’s vision is to become a great SaaS company for customers and colleagues alike. Investment in FY19 has resulted in significant progress in strategic execution to optimise the cloud portfolio and to improve engagement and customer-centric mindset amongst colleagues, as follows:
– Sage Intacct, the leading solution for cloud native in the medium segment, has been launched in Australia and the UK in 2019 with further plans to launch in South Africa in 2020;
– Sage has invested in Sage Accounting in FY19 and will launch a more functionally rich tier of this solution for Professional Users in 2020, starting in the UK. Together, they provide the small business solution for cloud native accounts, to acquire new customers and, over time, offer a migration path for existing Sage 50 customers;
– Sage has also announced the acquisitions of AutoEntry, a provider of data entry automation, and Allocate.AI, technology that enables automation of time tracking, project planning and resource allocation, to enhance Sage Business Cloud;
– Disposal of US Payroll Processing completed February 2019, and disposal of Sage Pay announced November 2019 with agreed proceeds of £232m. Brazilian business classified as held for sale at year end FY19. Both Sage Pay and the Brazilian business were largely held within the ‘Other’ portfolio, outside of Sage’s core strategic focus. Further portfolio optimisation expected in FY20;
– Sage’s organisational design has been re-shaped to provide the business with a more customer-centric view to better serve the small and medium segments of the market, with Executive Committee internal promotions to support this design.
Continuing progress in strategic execution has resulted in:
– Strong annualised recurring revenue (ARR) growth of 12.6% to £1,685m reflecting growing momentum in the recurring revenue of the business;
– Recurring revenue now represents 86% of total revenue (FY18: 82%) with 55% software subscription penetration (FY18: 45%);
– Future Sage Business Cloud opportunity (Sage Business Cloud and products with potential to migrate) recurring revenue growth of 13%. Sage Business Cloud penetration of 48% (FY18: 29%), reflecting continuing progress in the shift towards cloud connected and cloud native solutions;
– Renewal by value remains strong at 101% (FY18: 101%), demonstrating the strength of the existing customer base.
Building on the significant ARR created in FY19, we expect recurring revenue growth of 8-9%, driven by strong on-going performance in the Future Sage Business Cloud Opportunity, as we continue to focus on attracting and migrating customers to Sage Business Cloud. Other revenue (SSRS and processing) is expected to decline by high single digits in line with this focus, and organic operating margin is expected to be around 23%, as Sage continues to invest in the transition to SaaS.
Steve Hare, The Sage Group CEO, said:
“We’re very encouraged by the acceleration in recurring revenue in FY19. We entered the year with momentum and added sequential ARR every month in the year, putting us further ahead in our transition to Sage Business Cloud than anticipated. We’ve also made significant progress in our strategic execution, particularly in the development and roll out of our cloud offerings and the reshaping of our portfolio. We will continue to prioritise high quality recurring revenue growth over SSRS, and whilst we do not expect a linear progression in financial performance during this multi-year transition, our recent strong performance and continued progress towards becoming a great SaaS company means that we look forward with confidence.”