Trading update for the six months ended 31 March 2018
The Sage Group plc (the Group) is today issuing a trading update (unaudited) for the six months ended 31 March 2018 and revised FY18 guidance. H1 18 results announcement to be published on 2 May 2018 as planned.
‒ H1 18 organic revenue growth results were below management's expectations, reflecting inconsistent operational execution;
‒ Organic revenue growth of 6.3% (H1 17: 7.4%) was impacted by two factors: a decline in recurring revenue growth to 6.4% in H1 18 (H1 17: 11.1%) and contract licence slippage in the enterprise segment. Software subscription growth was 25.3% (H1 17: 30.6%). Software and software related services (SSRS) growth was 7.1% (H1 17: decline of 7.3%);
‒ The market opportunity for Sage, as outlined at Capital Markets Day 2018 (CMD), remains unchanged;
‒ Operational execution for the majority of geographies remains robust, with increasing focus on driving recurring revenue growth;
‒ Continuing momentum in Sage Business Cloud, with ARR of over £335m, growing at 57%;
‒ Double digit growth in North America, reflecting continuing progress across US, Canada and Sage Intacct;
‒ Organic operating margin of 24.5% (H1 17: 25.3%) in line with management expectations;
‒ Strong cash conversion of 95%, reinforcing business model fundamentals;
‒ FY18 guidance revised from around 8% organic revenue growth and around 27.5% organic operating margin to around 7% organic revenue growth and around 27.5% organic operating margin.
Group organic revenue increased by 6.3% (H1 17: 7.4%) for the first six months of the year.
Organic recurring revenue growth of 6.4% (H1 17: 11.1%) and software subscription growth of 25.3% (H1 17: 30.7%) was lower than management expectations due to inconsistent operational execution. Growth in SSRS of 7.1% (H1 17: decline of 7.3%) was driven by strong performance in the Services business, with growth in Enterprise lower than management expectations due to slippages in some Enterprise licence contracts in the US and Africa Middle East: much of this slippage is expected to be recovered in H2 18.
Sage Business Cloud revenue continued to grow strongly with cloud ARR of over £335m in H1 18, growing at 57%, with acquired businesses of Sage Intacct and Sage People (formerly Fairsail) showing strong continuing momentum in the first six months of the year.
Regionally, growth in Northern Europe and Africa Middle East was below management's expectations due to inconsistent execution. North America delivered double digit growth, reflecting continuing progress made by management across the US, Canada and Sage Intacct. Central Europe and Australia have also performed well. France, Iberia and Latin America's performance is in line with expectations, with France showing a return to growth in Q2 18.
Group organic operating margin of 24.5% (H1 17: 25.3%) is in line with our plans to front load investment in H1, as well as absorbing, as anticipated, the losses from acquisitions made in FY17.
The business achieved strong underlying cash conversion of 95%, reinforcing the business model fundamentals of high quality recurring revenue, superior operating margins, strong free cash flow and a progressive dividend.
The Group outlook has been revised from around 8% organic revenue growth and an organic operating margin of around 27.5% to around 7% organic revenue growth and an organic operating margin of around 27.5%.
The rolling mid-term guidance remains that organic revenue growth will reach 10% on a sustainable basis and organic operating margins will be at least 27%. Further cost savings of 500bps will be delivered over this period and either reinvested for growth or realised as an increase to operating margin. Over the long-term, Sage has an aim of achieving organic operating margins of at least 30%.
Stephen Kelly, Chief Executive Officer, commented:
"Growth in H1 18 was lower than our expectations as the pace of execution has been slower than we planned. The market opportunity as outlined at CMD 2018 remains unchanged. The revised revenue guidance targets for FY18 reflect both the performance in H1 18, but also our diligence in ensuring that we focus on recurring revenue to drive sustainable acceleration throughout the rest of FY18 as a platform into FY19. We will provide a further update on our plans at our H1 18 results announcement on 2 May 2018."
1 The organic revenue definition includes acquired businesses from the beginning of the financial year following their date of acquisition. Adjustments are made to the comparative period to present acquired businesses as if these had been part of the Group throughout the period.
Analyst and investor conference call
Stephen Kelly, CEO and Steve Hare, CFO, will be hosting a conference call at 08.00 am BST today which can be accessed by using the dial-in number +44 (0)330 336 9105 and pin code 3302719. A replay of the call will also be available via a link on our investor relations website, www.sage.com/investors for one week after the event: dial-in number +44 (0) 207 660 0134, pin code 3302719#.
This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014. The figures quoted in this announcement are unaudited and are subject to the review process that will be undertaken for the H1 18 results announcement. The person responsible for arranging for the release of this announcement on behalf of Sage is Miranda Craig (Company Secretary).
The Sage Group plc +44(0) 191 294 3457
Lauren Wholley, Investor Relations
Amy Lawson, Corporate PR
FTI Consulting +44(0) 20 3727 1000
Sage is the global market leader for technology that helps businesses of all sizes manage everything from money to people - whether they're a start-up, scale-up or enterprise. We do this through Sage Business Cloud - the one and only business management solution that customers will ever need, comprising Accounting, Financials, Enterprise Management, People & Payroll and Payments & Banking.
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