Sage : Full Year 2022 Transcript

Sage Group plc 2022

Full-Year Results

Wednesday, 16th November 2022

Sage Group plc 2022 Full-Year Results

Wednesday, 16th November 2022

Overview

Steve Hare

Chief Executive Officer, Sage Group plc

Welcome

Good morning and a warm welcome to Sage's 2022 full year results. I'm pleased to be joined this morning by Jacqui Cartin, our Group Financial Controller and EVP of Group Finance. As Jonathan, our CFO, is on a short period of medical leave following minor surgery. But I'm very pleased to say Jonathan is recovering well and will be back in the office in a few weeks.

Strong Execution Accelerates Growth

Momentum

Now, I'm going to start with an overview of the key messages for today and it has been a very good year. We've driven growth through strong execution and delivered good financial results. Firstly, the business has increasing momentum. Growth has accelerated in all regions with a strong performance across our cloud solutions. We've increased the pace of delivery of new products, which I'll talk about later, and we've made several key acquisitions to accelerate our strategy, bringing valuable new technologies, capability and talent into the Group. And through our growing digital network we're developing the next generation of AI- powered solutions that will continue to drive the success of Sage in the long-term.

Growth

Secondly, our opportunity for growth is significant. Many businesses face an uncertain economic environment at the moment but small and mid-sized businesses are continuing to prioritise tech investment. Our solutions are mission-critical for millions of SMBs globally, helping customers to streamline processes, unlock productivity and achieve more with less. And this supports our resilient business model. Today 95% of our revenues are recurring and 75% are on subscription. We generate significant and growing cash-backed profits and Sage is underpinned by a strong balance sheet. And this gives me real confidence that we will deliver on our opportunities for growth.

Execution

And finally consistent execution. Building on our significant investment in the business we're making good strategic progress and this has resulted in a strong financial performance. Recurring revenue's up by 9%, operating profit up by 8% with margin expanding to almost 20%. And importantly ARR grew by 12% to over £2 billion and this positions us well for the year ahead. During the year we completed our disposal programme and we're now focused on efficiently scaling the Group and growing revenue and earnings in absolute terms. But for now I'm going to hand over to Jacqui for the financial review.

2

Sage Group plc 2022 Full-Year Results

Wednesday, 16th November 2022

Financial Review and Outlook

Jacqui Cartin

Group Financial Controller and EVP Group Finance, Sage Group plc

FY22 Financial Highlights

Good morning everyone and thanks Steve for the introduction. It's great to be here today to share our financial results for FY22. I'm going to talk you through the highlights, some further detail on our performance and finally the outlook for FY23. In summary, as Steve mentioned, it's been another strong year for Sage. We've continued to execute in line with our strategy with growth accelerating and so we've exited the year slightly ahead of our expectations. So let's look at the highlights. Recurring revenue has grown by over 9% which is above the top end of our guided range. This reflects increasing cloud momentum in all regions. Operating margin has increased to 19.9% trending upwards from last year as we focus on efficiently scaling the business. Finally, our cash conversion has remained strong at 107% driven by continued growth in subscription revenue and good working capital management.

Growth Drivers

So let me give you some more detail on the key growth drivers which really highlight the progress that we've made. ARR growth has increased to 12%. That's up from 8% this time last year. This reflects strong performance across all regions underpinned by balanced growth from both new and existing customers. And as Steve said, this now takes ARR to over £2 billion for the first time.

We've delivered cloud native ARR growth of 38% with particularly strong performance in Sage Intacct. And renewal rate by value was 101% and that's up from 99% this time last year. This was due to good retention rates, strong customer add-ons and targeted price increases. And we also continued to make good progress in new customer acquisition. We've added £180 million of ARR, up from the £140 million in the previous year. So strength across these drivers means that we enter FY23 with good momentum.

P&L Summary

So let's take some time now to look at the P&L. Total revenue growth doubled to over 6% for the year driven by recurring revenue growth of 9% to £1.8 billion. Organic operating profit increased by 8% to £383 million with margin expanding to 19.9%. Underlying operating profit grew by 2% to £377 million and that mainly reflects the impact of disposals made during the prior year. And together with the impact of the recent share buyback programme this has led to growth in underlying EPS of 8% to 25.7 pence. So reflecting the strong business performance we've increased the final dividend to 12.1 pence. That's up 4% and takes the full year dividend to 18.4 pence, also up 4%.

Revenue Bridge

So here's a more detailed view of our performance starting with the revenue bridge. We have seen increasing demand for Sage Business Cloud with recurring revenues up by 24% or almost £250 million. Importantly, this growth was split roughly evenly between cloud native and cloud connected solutions driven by strong demand from both new and existing customers. This reflects the growing demand from SMBs for digital solutions. Migrations have also continued to drive growth, especially in cloud connected where the pace of product

3

Sage Group plc 2022 Full-Year Results

Wednesday, 16th November 2022

migration has now accelerated. As a result, revenue to be migrated decreased by £73 million in line with our strategy. The impact of all of this is an increase in Sage Business Cloud penetration which is 75%, up from 67% last year. And this means that we have an increasing number of customers who are now able to connect to cloud services a part of Sage's digital network.

Revenue Categories

So turning now to our revenue categories. Growth in recurring revenue of 9% was driven by 14% growth in software subscription which reached £1.4 billion. This has increased subscription penetration to 75%, up from 70% last year. And in line with our strategy other recurring revenue and non-recurring revenue continued to decline by 6% and 30% respectively. This has taken recurring revenue up to 95% of our total and this really reinforces the high quality and resilience of our business.

Portfolio View of Recurring Revenue

Now let's take a look at the portfolio view where we saw strong growth across all cloud solutions. The Future Sage Business Cloud Opportunity continues to perform well with recurring revenue up by 11% to £1.7 billion. Growth of 41% in cloud native to £419 million is mainly driven by new customers and migrations. While growth of 17% in cloud connected to £842 million was underpinned by a good performance in the International region and in North America. So as you can see the pace of cloud growth is significantly ahead of the growth as a whole. And as I mentioned earlier, Sage Business Cloud penetration is now at 75%. And in line with our strategy recurring revenue in non-Sage Business Cloud declined by 8% to £141 million.

North America

So moving on to our regional performance which shows growth highlights in all of our regions. In North America we delivered recurring revenue growth of 14% mainly driven by the medium segment. For Sage Intacct strong new customer acquisition, increased renewal rates and higher average contract values have all led to another very strong performance. And in addition our Sage 50 and Sage 200 franchises have significantly contributed to growth in the region. This means that Sage Business Cloud penetration has increased to 79%, up from 73% this time last year.

Northern Europe

In Northern Europe recurring revenue grew by 7%. Growth in cloud native was primarily driven by new customer wins in Sage Accounting, Sage Intacct and Sage People, with cloud connected also increasing driven by continued growth in Sage 50. And the result of this is Sage Business Cloud penetration of 90%, up from 86% this time last year.

International

And in the International region recurring revenue increased by 6%. Growth in France and Germany accelerated to 4% and 9% respectively, driven by good performance across Sage Business Cloud. While growth in Iberia was 3% and that's driven by cloud connected migrations. Africa & APAC growth here accelerated to 10% with momentum building across Sage Accounting and Sage Payroll in particular. And all of this was underpinned by significant growth in Sage Business Cloud penetration, now at 59%, up from 47% last year.

4

Sage Group plc 2022 Full-Year Results

Wednesday, 16th November 2022

Investment Driving Growth and Margin

Now, as we said previously, we've been driving growth by investing in the business. Investment continues to increase in absolute terms, supporting Sage's ongoing growth. However, as we said previously, FY21 was the inflection point. With top line momentum now building, the level of spend is now increasing at a slower rate than revenue. This efficient growth has resulted in margin expansion to around 20% for the year and that's up from around 18.8% in the second half of last year. Investment in sales and marketing is now at 41% of recurring revenue and is helping to drive new customer acquisitions. And investment in R&D is at 16% and remains a key priority for the business. Our approach to investment and cost is highly disciplined with G&A now running at just below 10% of recurring revenue.

Strong Cash Generation

Now let's look at the cash flow. Cash generation is a fundamental strength of Sage and in FY22 the Group generated £402 million of cash from underlying operations. And this has resulted in continued strong cash conversion of 107%. Importantly this is the fourth consecutive year that we've achieved cash conversion over 100%. And as a result free cash flow is £295 million net of interest and tax.

Robust Financial Position

Our ability to generate cash has resulted in a strong balance sheet, including cash and available liquidity of £1.3 billion. During FY22 we completed several acquisitions including Brightpearl, Futrli and Lockstep. We disposed of Sage Switzerland and the payroll outsourcing business in South Africa which completed the disposal programme. And finally we returned £600 million to shareholders through share buybacks between March of last year and January of this year And all of this means that our net debt leverage at 1.6x is now well within our mid-term target range of 1-2x. And this gives us significant capacity to continue to support both organic and inorganic growth. And we retain the flexibility to move outside this range should business needs require.

Outlook

Finally turning to the outlook for the Group. We're entering the year with strong momentum having made good strategic progress to accelerate growth. We therefore expect organic recurring revenue growth to be ahead of that reported in FY22. We also expect other revenue to continue to decline in line with our strategy. And alongside this we expect operating margins to increase in FY23 and beyond as we continue to focus on efficiently scaling the Group. Thank you and I'll now hand back to Steve.

Strategic Update

Steve Hare

Chief Executive Officer, Sage Group plc

Consistent Strong Strategic Progress

Thank Jacqui. Now, as I said earlier, our strong performance has been driven by consistent execution. Firstly, we've made strong progress transforming the Group. By focusing on the needs of our customers we've transitioned them to the cloud and to new cloud services at a

5