Earnings Call: H2 2019

Nov 20, 2019

Good morning, and welcome everyone to Sage's full year FY19 results. Hopefully, most of you know me, but in case you don't, I'm Steve Hare, the Chief Executive of Sage. I have with me today, Jonathan Howell, our CFO. Before we start, as usual, the safe harbor statement, which is also in your packs. The agenda is, I'm going to kick off with a few opening remarks, and then I'll hand over to Jonathan for the financial review. Because this is my first full year as CEO, as well as commenting on the detail of what's happened during the course of the year, I'm also going to make some observations about what's coming over the next 12 to 18 months. Some of what I see as being the characteristics of what a great SaaS company looks like. I'm going to kick off by going through, briefly, financial performance, the strategic execution, and how we've been focusing. I'm going to start with financial performance, which in many respects, has exceeded my expectations, particularly on recurring revenue. We started this year, we started FY19, with real momentum, and we've built sequential annualized recurring revenue every month of the year. We've added GBP 190 million of ARR this year to finish at GBP 1.7 billion, and that's a growth rate of nearly 13%. This growth rate was also balanced in that good progress was made both with our existing customers, but also signing up new customers. We've also delivered absolute recurring revenue growth of 11%, and it's worth just reflecting that this time last year, when I was stood here, that growth rate was under 7%. We've also added GBP 230 million of subscription revenue in the year to reach GBP 1 billion of subscription, a very significant milestone for any SaaS business. Secondly, we've made significant progress in strategic execution. This means that we've continued to build the foundations for the future. As I've said before, how we drive this growth matters. In customer success, we've embraced a closer relationship with our customers, as evidenced by the progress that we've made across migration, reactivation, and new customer acquisition, with customer net promoter scores continuing to improve. In colleague success, we've also shown significant progress. A year ago, morale was low. Colleagues were feeling disengaged. In just one year, we have raised our colleague eNPS scores by 22 points. In innovation, we've made great strides in our cloud portfolio. Sage Intacct has launched in Australia and in the U.K. We've been working on both the functionality and the underlying architecture of Sage Accounting, and have now selected it as the platform for our small business native cloud offering. Thirdly, all of this has been underpinned by focus. This includes making good progress on reshaping the portfolio with the disposal of Sage Pay announced on Monday, and the Brazilian business now held for sale. As a reminder, earlier in the year, we also completed the disposals of the South African payments business and the U.S. payroll processing business. We've also completed two bolt-on acquisitions. This supports our decision to do a GBP 250 million capital return, which Jonathan will talk about in a moment. Overall, I'm very encouraged by how far we've come in the last year. We've delivered both on our FY19 commitments, but through strong strategic execution, we've also strengthened the foundations for the future. I'm going to come back to this future later, but for now, I'm going to hand over to Jonathan to go through the financial review. Thank you, Steve, and welcome to everybody here this morning. To start with, I'll take you through the financial highlights, which demonstrate the consistent performance during the year. The key messages are, firstly, high-quality recurring revenue growth. Sage has delivered good strategic and operational execution, which has led to strong growth in recurring revenue of 10.8%. Secondly, on-target margin. Organic operating margins are in line with our targets, which reflects the strong performance of the business and ongoing investment to drive future growth. And thirdly, strong cash conversion. Cash conversion has been particularly strong in the year and remains a core strength of Sage. Turning now to the P&L. First, to be clear, the numbers in this presentation are on an organic basis, stripping out the impact of assets held for sale, which includes Sage Pay and our business in Brazil. Total revenue for the year has increased by 5.6% to GBP 1.8 billion. Recurring revenue is up 10.8% to GBP 1.6 billion. The organic operating profit is GBP 432 million at a margin of 23.7%, and it's in line with expectations. This reflects good performance in the business, offset by ongoing investment and increased variable compensation in line with strong ARR performance. The underlying operating profit is GBP 448 million. A quick word on tax, the underlying effective tax rate was 27%, and going forward, we expect it to remain in the range of 25%-27%. Underlying EPS is 28.4 pence, which reflects the overall performance of the business. We've increased the full-year dividend by 2.5% to 16.91 pence. This is consistent with the interim dividend and is in line with our policy to maintain the dividend in real terms. Finally, you can see that ARR has increased by 12.6% to some GBP 1.7 billion. This reflects good momentum and sequential growth in high-quality recurring revenue. Now looking at revenue categories. As you can see, we have delivered strong recurring revenue growth of 10.8% to GBP 1.6 billion. This is underpinned by a GBP 230 million increase in software subscription, up 29% from the prior year. We now have over GBP 1 billion of subscription revenue, which is a significant milestone. We've seen particular strength in Northern Europe and North America, with recurring revenue growth of 16% and 12%, respectively. This was driven by good operational performance in the year, assisted somewhat by the weak comparator in the prior year and Making Tax Digital in the U.K. The decline in other recurring of 12% to GBP 554 million reflects the migration of customers to subscription contracts. The SSRS decline of 18% to GBP 255 million reflects the transition towards subscription and a strong comparator in the prior year. It is encouraging to see that 86% of total revenue is now recurring. Software subscription penetration is now at 55%, up from 45% in FY 2018. Renewal by value is now at 101%, and this shows that revenue from existing customers is growing at a faster rate than churn. Overall, a strong performance. Turning to the portfolio view of revenue. Overall, the future Sage Business Cloud opportunity continues to show strong performance with recurring growth of 13%. Importantly, cloud-native solutions have delivered recurring growth of some 27%. Growth in Sage Business Cloud comes from new customer acquisition, reactivation, and migration of customers onto cloud-connected and cloud-native solutions. We also see growth in this portfolio as desktop products develop cloud functionality and join Sage Business Cloud. As a result, cloud-connected growth of 117% includes GBP 94 million of revenue from such products. The impact of all this is Sage Business Cloud penetration, which is now at 48%, up from 29% last year. The flat recurring revenue in the other portfolio is in line with our expectations. We have made good progress, as Steve said, in streamlining the portfolio. We completed disposal of the U.S. payroll business in February, and this week we announced the sale of Sage Pay. Turning now to the regions. Here I will focus on our most important regions, though there is more information on the slides. North America delivered recurring revenue growth of 12% to GBP 573 million, and total revenue growth of 9% to GBP 641 million, and Sage Business Cloud penetration is now at 66%. Cloud Connected has continued to be very strong in North America, with the U.S. nearly at full penetration on Sage 50 Cloud. Over half of the Sage 200 family in the region and Sage 50 in Canada are now Cloud Connected. Cloud native growth in North America is driven also by Sage Intacct, with recurring revenue growth of 29%. Northern Europe, and that is U.K. and Ireland, has been the standout performer in the year. It has delivered recurring revenue growth of 16% to GBP 340 million, and total revenue growth of 10% to GBP 366 million. Again, I just want to call out Sage Business Cloud penetration, which is now at 67%. We have seen a strong performance in Sage 50 Cloud from a combination of migration, new customer acquisition, and reactivation, assisted by Making Tax Digital. Underlying performance in this region has been very good, reflecting the focus on driving subscription revenue. Central and Southern Europe delivered recurring growth of 7% to GBP 490 million, and total revenue growth of 1% to GBP 608. We expect Sage Business Cloud penetration in this region to increase as cloud-connected solutions become more significant. France delivered recurring growth of 5% to GBP 239 million, with growth coming from cloud-connected migrations. Finally, the international region, which now excludes the business in Brazil, which is held for sale. Here we delivered recurring revenue growth of 8% to GBP 156 million, and total revenue growth of 4% to GBP 207 million. Africa and Middle East delivered recurring revenue growth of 12% to GBP 102 million. Turning now to cash flow. Underlying cash flow from operating activities was GBP 577 million. Cash conversion of 129% continues to be strong and reflects an improvement in debtor collections and lower levels of FY 2018 bonus payout in FY 2019. This has led to underlying free cash flow generation of GBP 443 million, some GBP 90 million higher than last year. Net debt has reduced to GBP 393 million, and net debt to EBITDA leverage is now at 0.8 times. Just a word on IFRS 16, which Sage will adopt in FY 2020. This will not have a material impact upon our financial results, but it is expected to yield an increase of 0.3 in the net debt to EBITDA ratio. Finally, I want to remind you of our capital allocation policy, which I set out at the first half. Sage's primary focus remains organic investment in order to move to a SaaS company. Second, the group may consider bolt-on acquisitions of complementary technology that will drive strategy. During the year, we have done some small but strategically important acquisitions. Thirdly, Sage will continue to maintain the dividend in real terms, and the full-year dividend is increased by 2.5% in line with the H1 increase. Then, if there is surplus capital, we will consider making additional returns to shareholders. To that point, we announce today a capital return of GBP 250 million. This return reflects the expected proceeds from the transaction and continued confidence in strong cash generation. We will give more details on the mechanism of the return on completion of the Sage Pay deal. In the medium term, we plan to operate in a broad range of one to two times net debt to EBITDA. We will maintain the flexibility to move slightly outside this range as the business needs require. To summarize, firstly, Sage has shown strong performance in line with the strategy, which has resulted in high-quality recurring revenue growth of 10.8%. Secondly, on-target margin with organic operating margin of 23.7% in line with our full-year target. Thirdly, continued strong cash conversion of 129%, and this remains a core strength for Sage. Overall, this demonstrates yet again the consistent performance that we have achieved throughout the year. Thank you, and now I will hand back to Steve. Thank you, Jonathan. I am going to start with our purpose, vision, and strategic focus. I put this up at the half year, and it has not changed since then, because this is enduring. It provides an anchor point and helps us to determine our priorities. The key to making this a reality is to create the bond or the relationship between these three lenses, so between our customers, our colleagues, and innovation, and to accelerate the transition to Sage Business Cloud. The prize is highly motivated colleagues who delight our customers, who stay longer, buy more, and then in the end, leading to significantly higher lifetime value. When it comes to executing against that purpose, one of the things that really underlines it is focus. A year ago, I stood here, and I said Sage was doing too much and that we needed to focus. I am going to spend a little bit of time just talking about what we have done. It started with strengthening my leadership team. I have added significant technology and SaaS experience to my team, most of whom were promoted from within, allowing for continuity, knowledge retention, and a highly effective and productive team. Secondly, we have made purposeful choices to really drive a ruthless focus on who we serve and how we serve them. It obviously starts with customers. We are being very clear on the type of customer that we serve, small customers and medium customers, and the differing needs of those two types. Because this is a sharper focus than we have done in the past, I am just going to spend a few moments explaining why this is important. A small customer is typically owner-run, with professionals or small teams responsible for finances and HR. Their concerns are around compliance and risk, and they need simple solutions with minimal installation and rapid time to value. Medium customers are often a bit more complex, often scaling, transforming, and so require insights for growth and competitive advantage. These customers are prepared to spend longer integrating their solutions, and the buying decision is typically the CFO. We also serve accountants in practice who in turn support our small business customers. This sharp focus between these two customer segments has driven a more effective commercial positioning and greater clarity across both Sage, but also the market. I should just add that this focus on small and medium customers does not mean that we never serve a micro customer or a large customer, particularly when we are working through partners, but it is not our direct focus. We have also chosen to focus on the software categories of accounting and financials, and people and payroll, and to partner when providing payments and banking solutions. Finally, we are actively managing our portfolio reshaping. As I said in my opening comments, we have done three disposals this year, we have one asset held for sale, and we have done two acquisitions. Underpinning all of this, we have focused on recurring and subscription revenue over all other non-recurring revenue. This year, we have added nearly GBP 300 million of Sage Business Cloud recurring revenue. Jonathan has talked about how the U.K. was a particularly strong driver for this. I am just going to talk a little bit more about how we have driven this growth and indeed how we will do so going forward. We started the year with GBP 1.5 billion of annualized recurring revenue. Obviously, during the year, some customers churn, something we clearly seek to minimize. We then deliver more value to the remaining customers that we have kept through migration, cross-sell, and upsell. In our case, this compensates for churn, as evidenced by our renewal rate by value of 101%. Then we drive new customer acquisition and reactivation. It is worth just emphasizing that this year, new customer acquisition and reactivation delivered nearly GBP 200 million of annualized recurring revenue growth, which is why I referred earlier to the balanced growth. All of these components that I have just described are what we have previously talked about as being waves of growth. This year, we have been particularly successful at achieving this balanced growth across the different categories of driving migration, but also new customer acquisition and reactivation. That is what has underpinned the annualized recurring revenue growth of 13%. Now, in addition, I said that we also entered the year with real momentum, and we've added annualized recurring revenue every month, which has resulted in the absolute level of ARR at the end of FY 2019 being somewhat higher than we expected. Of course, that flows through into FY 2020, as you can see on the chart. In FY 2020, this growth will normalize, which is why we talk about the performance, particularly in ARR, being nonlinear. I'll talk more about this when I refer to guidance. As we continue to build out Sage Business Cloud and the roadmap, this will clearly offer further opportunities to drive growth, both for our existing customers and also new customers. We will continue to focus on retaining customers, upselling, cross-selling, and acquiring new ones. It's really important to look at the balance of what has both been a strong financial performance this year, but also the evidence of strategic execution. Because this is what will drive long-term value and growth, and it's the strategic execution that I'm now going to spend a little bit of time talking about. I'm going to give some thoughts about what good looks like and what you can expect over the next 12 to 18 months. Starting with customers. Customer success means we continue to build on the strength of our relationships with our customers, understanding what they need and becoming an integral part of their lives so that we can help them become more successful. Afianza is a good example. Its owner, Jose Luis, who appears on the screen, has been using Sage since he started his accounting practice. He now employs over 100 people. Afianza uses Sage Cloud Connected solutions to automate as many processes as possible so that his accountants can really focus on high-value consultancy. Sage has been one of the cornerstones of supporting the business and its growth. Our two-way relationship has helped us to respond as they've grown. Of course, this is supported by the best technology and experience through our colleagues. We're really taking customers, transitioning them through two stages. Firstly, moving our customers to a subscription relationship, and then embracing that closer relationship so that we delight every customer and focus on really understanding their needs by providing Sage Business Cloud services that they value. This links to innovation, which I'm going to talk about in a minute. Let me first talk about where we've invested in customer success in FY 2019. Firstly, we've aligned our team structures to support the focus on small and medium customers. We're increasingly pushing decisions closer to the customer, into the regions, and driving a continuous feedback loop from the customer to the business and supporting a deeper knowledge of the customer base. Secondly, our work on solutions and processes is ongoing. We've continued the rollout of the CRM system, backed up by the customer success model, to improve the quality of the data and add more customer insight. Over time, this will also help us to increase the lifetime value of our contracts. This work is pretty much complete in the U.K., with other geographies to follow. We also continue to work on the digitization and integration of customer services. This is ongoing, supplementing phone conversations with web chat, AI, online communities, and also critically, 24/7 support, which increases customer interaction and improves customer experience, which also over time improves customer satisfaction scores. Also, I have to say, compared to the legacy systems in place 12 months ago, these new systems and processes also do wonders for colleague experience. So what are we going to do over the next 12-18 months? Well, a lot of the same, really. We will continue to progress the rollout of the CRM system, the customer success models in the U.S., continue to upgrade systems and experiences in the U.K. and the U.S., followed by other key geographies. But how do you know if we have been successful? Well, we will retain more customers, net promoter scores will improve, as will the renewal rate by value. So what about our people, our colleagues? Sage's people is what makes us unique. I have said before and I will say again, I feel very privileged to lead our 13,000 people. Our people and our culture are ultimately one of the most critical ingredients for success. Colleague success at Sage means continuing to build an inclusive culture, where colleagues feel highly valued and highly motivated, working towards common team goals. Engaged, motivated colleagues are essential to customer success. In the notoriously competitive technology industry, attracting and retaining the best talent is critical. So how do you do this? Well, it starts at the top. You have to build the right culture, and it starts with leadership behaviors. We start by making each other successful, learning from each other, and investing in colleague experience. Then we need to embrace a more customer and colleague-centric mindset. Our colleagues need to focus every day on serving our customers and thinking of new ways to delight them. During FY19, we have made a lot of progress in building a more positive, inclusive culture. We have invested in a development program for the top 40 leaders in conjunction with London Business School. This has driven an aligned, collaborative, and integrated team focused on achieving the SaaS transition. For our people, we have worked hard on increasing engagement and morale. There are many things that I could call out, but one example is something that we call the Big Conversation. This was a three-day online forum to find out what our people care about the most. We had almost 4,000 participants and 9,000 comments. This has helped shape our decision-making, culture, and values. The output of this focus and investment is evidenced in a 22-point improvement in our colleague eNPS scores. So what is coming? Well, we will continue to build on the already great work that we have done, focusing on driving this customer and colleague-centric mindset in all that we do. We will continue with training for colleagues and leaders, and continue to invest in developing and promoting our internal talent. When we are successful, you will see this evidenced in further improvement in our colleague eNPS scores. That, in turn, will drive customer NPS scores, and that, in turn, will drive financial success. Now, another important ingredient is innovation and technology. Innovation means developing solutions that delight our customers and transform how they think and work, solving real pain points, keeping them compliant, and enabling them to be more productive. Now, the half year, I said I would share more on Sage's innovation vision. That's where I'm going to start. Our technology vision is to transform Sage Business Cloud into a comprehensive digital environment composed of cloud platforms, applications, and services, and a thriving partner marketplace, all supported by Service Fabric. We will use Sage's identity management, design system, and digital services to create a unified customer journey with a consistent digital experience, enabling our customers to transform how they work, and also how they consume our services. How are we going to make this technology vision a reality? The first focus is to fill the strategic roadmap so that we have a full range of native cloud products, as well as cloud services that both our cloud native and cloud-connected customers can benefit from. If you look at this chart, you can see we've started to fill each customer segment and software category with a native cloud solution. In both the small and the medium segment, we have selected the platforms that we are now going to build our future around. In the medium segment, we have Sage Intacct. It's launched in Australia and the U.K., and we're already seeing good demand. We've signed our first customers in Australia, UNICEF, and we signed our first U.K. customer, Arlington. In the small segment, as I said in my introduction, we have selected Sage Accounting as the small business platform. We've invested in the development of the current solution, both in the underlying architecture and also delivering enhanced functionality, both to accountants and also our small business customers. We also continue to invest and harness Service Fabric. This supports the development and deployment of services like Making Tax Digital and payments and banking at scale, built once, deployed to many products. The availability of Service Fabric was instrumental in delivering the Intacct internationalization. We continuously seek to add more cloud services that both our cloud native and our cloud-connected customers really want. A really good example of that is in the U.K., where we now have an online payslip service, which has 1.4 million activated users that are originating from the cloud-connected payroll solution. We also continue to acquire innovative solutions, such as AutoEntry, a transformative play in data entry automation, and Allocate AI, bringing the power of AI and machine learning to time tracking, project management, and resource allocation. What's coming? Sage Intacct will be introduced into South Africa during FY20. We will also continue to enhance the capability and functionality for the U.S., Canada, Australia, and the U.K., meaning that Sage Intacct will be available in all major English-speaking regions. In the small segment, we will continue to invest in the Sage Accounting architecture and platform, building on the progress we've already made in FY19. And we will launch in FY20 a more functionally rich tier of this solution for professional users, those users that are more finance-focused require additional capability and management tools. This rollout will start in the U.K., followed by other key geographies. Sage Accounting will be used to both attract new customers, and over time, will also be used to offer a migration path for Sage 50 customers that choose to move to a native cloud solution. We will also continue to leverage on the payroll successes this year, expanding our capabilities in cloud payroll. And we're also considering options to fill out the small segment with a people solution. We will continue to add cloud services and integration that all of Sage's connected customers can use. For example, integrating AutoEntry with all cloud native and cloud connected products. You can track progress by using the published KPIs, Sage Business Cloud penetration, and the availability of cloud native solutions. Let's have a look at outlook. Building on the significant annualized recurring revenue created in FY 2019, we expect recurring revenue growth of 8%-9%, driven by strong ongoing performance in the future Sage Business Cloud opportunity. As we continue to focus on attracting and migrating customers to Sage Business Cloud, other revenue is expected to decline by high single digits in line with this focus. As we continue to invest in the transition to SaaS, the organic operating margin is expected to be around 23%. In closing, we've delivered a strong financial performance this year whilst laying the foundations for the future of the transition. We've shown significant evidence of strategic execution, and all of this has been underpinned by focus. By getting the company to focus on what is most important, we have been successful at delivering significant financial and strategic progress. Thank you. That concludes the presentation, and Jonathan and I would now be delighted to take questions. As always, we would encourage you to try really hard to see whether you can ask one question, maybe in one or two parts, but if you could be as disciplined as possible, that would be fantastic. Maybe start with Stacy. Thank you. Stacy Pollard with J.P. Morgan. An 18-point. No, I'm kidding. Hopefully, it's one big question. Am I right to think that you're expecting to accelerate revenue growth from Q4 into Q1 and H1? How much revenue growth or contribution do you expect from the Intacct going into Australia and the U.K.? Also, what about Sage Accounting upscaling to target the Sage 50 customers migration to the cloud? Is that live, and is that going to be a significant contribution this year as well? Yeah. I think, look, in terms of absolute revenue in FY 2020, both Sage Intacct and Sage Accounting are unlikely to make really material impact. If you think about how Sage Intacct works, the average customer is GBP 20,000, GBP 25,000 a year, but the sell cycle is relatively lengthy. It takes a while for customers to get onboarded. So, if we were to add 30 or 40 customers in either of those territories, that would be quite a significant achievement, but the impact it's going to have in terms of recorded revenue in FY 2020 is relatively small. It's more about building that lifetime value over time, and it's similar with accounting. We have accounting available. It's been available for some time, but this professional tier that we're going to add won't be available until sometime during FY 2020. So the impact it actually has on the year is likely to be modest. What you'll see in the first half of FY 2020 is really a continuation of what you've seen in 2019. Although the 50 penetration is pretty high in the U.K. and the U.S., remember, in the rest of the world, we're only halfway through the migration, and we still have about GBP 700 million of revenue, which is identified as a future Sage Business Cloud opportunity. Migration will continue to be strong, as will new customer acquisition and reactivations. Yeah. I'll just reiterate that last point, which is we're going to see continuation of the Sage 50, Sage 200 migration reactivation story. Some more to do in North America, but then we've got continental Europe, and one of the key statistics that we gave today is that the penetration into the Sage Business Cloud is still at only 48%. So there's still GBP 700 million to do. And then critically, as Steve said, AutoEntry and these new products, real opportunity there for cross-sell and upsell. Okay. Next question. Mike? It's Mohammed Moawalla from Goldman Sachs. Steve, you talked about this nonlinear progression in ARR. Perhaps you could drill into that a bit. Can you talk about the reactivations and new customers? You said it was roughly GBP 200 million. As you talk about balanced growth, can you give us a split of that, and how is that expected to evolve, and how much more reactivation is essentially left to drive some of that recurring tailwind? When I talk about balanced growth, obviously we need to continue to have a sustainable new customer acquisition, both in our small business segment and our medium segment. But at the moment, what is happening is we have a lot of migration. There is still a lot more migration to do, but the mix of that migration is changing. Now, ultimately, renewal rate by value is 101% at the moment. Ultimately, in X year's time, I would like to see that starting to adjust. I have talked previously about Sage Intacct and Sage People both achieve renewal rates by value of 107%. Now, that is easier to do in some ways in the medium segment than it is in small, because in small, churn tends to be higher, so it is harder to achieve those renewal rate by value in small. But I think there is more to come as we build out Sage Business Cloud into this more digital environment. Our opportunity to deliver more value to our existing customers increases. So at the moment, when we sell to our customers, we are cross-selling and upselling. We have things like AutoEntry. But a lot of it is migrating them to the latest versions, so we need to get more value there. Then as we build out the native cloud solutions, the attractiveness of those solutions and the attractiveness of Sage Business Cloud to new customers also clearly enhances. So whilst we are not giving medium-term guidance at this point, you all know that I aspire to get sustainable growth that is coming almost equally from those two things, from our existing customers and from new customers. Depending on how that works out over the years, we will see how far we can drive the growth. But you all know I aspire to get into double-digit growth territory. But when I say it is nonlinear, if you look at what we have done is you can only migrate a customer once. So we are further ahead in terms of the migration, but the normalization of the growth is because there is not as much of that, particularly small business migration to come. But in absolute terms, we have got the ARR. It is there. So as long as we hold onto the customers, we still end up at the end of FY 2020, in absolute terms, probably higher than people expected. But measuring it strictly on percentages year on year is not really what it is about. It is about adding to that recurring revenue pot month after month after month. Do you want to bring the mic into the middle? Morning. Will Wallis from Numis. Could I give a geographic lens to the discussion? If I look at your full-year growth rates in a sort of underlying basis compared to the first half growth rates, your U.K. business or Northern Europe business grew more quickly, which I can understand Making Tax Digital, the ARR effects coming through to revenue in the second half of the year. But your North American business and your Continental European businesses grew more slowly. Are you able to firstly comment on the slower growth within those two latter parts? Secondly, sort of second part to the question, in the U.K., at what point does the Making Tax Digital effect on revenue start to fade? Yeah. First of all, just dealing with the Making Tax Digital, the impact of that really reached its height for us by the late summer, which built that stock of ARR, which we are carrying. That will carry into the first half of FY 2020, but thereafter will begin to diminish. People have asked us, "Can you give an accurate estimate or a quantification of that?" It's virtually impossible to do because ultimately we never know why a customer decides to reactivate or join Sage for the first time. But it has had an impact, and that will carry a little bit into the first half, but will run off over time. But we've achieved it. It's enabled us to accelerate that move to cloud connected and subscription a little bit earlier, which goes back to this waves of growth that we're going to have during this transition. Then looking at the second half in North America and some of the other territories, it's exactly as we said at the half year, and I think at Q1. We've got 100 product categories across a whole lot of geographies. We are moving them to a subscription model, and we're moving them to native cloud and cloud connected, and that will just not be linear. This is going to take a number of years to do, and if you look at subscription revenue, I don't know, four years or so ago, it was about GBP 300 million. We've got to GBP 1 billion, and we just need to look at the medium-term trends. Interestingly, for recurring revenue, we guided at the beginning of last year to 8%-9%. We exceeded our expectations for the reasons that I've just said, which is good. We've moved there faster. But again, we're guiding again to 8%-9%, which we think is a more normalized level of growth for recurring revenue at this stage in the transition. It's obviously not the end destination. The key thing for you to do and for us to do Is just to track those metrics consistently quarter by quarter and to see the underlying trend lines rather than different initiatives in different territories. It's worth probably just maybe a little bit of color in terms of the difference between the U.K. and the U.S. Both the U.K. and the U.S. have a Sage 50 base, but actually the U.S. is more skewed to medium. So we have a much larger franchise in the U.S., obviously both of Sage Intacct, but also our Sage 200 franchise. Whereas the U.K. is much more small-focused, so the Sage 50 franchise or the small business franchise really dominates the U.K. The reason that's an important contrast is because in the U.S., it also means that a lot of that medium business is done through partners. So one of the things we've been working on over the last 12 months is to bring together more closely the Sage Intacct partner group and the rest of Sage partner group. The reason that's important is because we want our existing Sage partners to carry Sage Intacct, so that when they're looking to migrate their customers to cloud native, they are migrating them to Sage Intacct. This goes to some of the non-linearity. That takes time. To sign up, and we have about 40 of our Sage partners now signed up to carry Intacct, but it takes time to go through that process. So in the U.S., with the Sage 200 franchise, for example, there's less new customer acquisition. Because most of the NCA really, particularly in the U.S., is cloud native. So the way that the Sage 200 franchise works is it's much more focused on existing customers, so renewal by value to cross-sell, up-sell, et cetera. Most of the new customer acquisition is coming from Intacct, and to some degree, people, and a little bit of X3, but it's more with Intacct. Once we get that working really well, I would expect that to give us another wave of growth. Whereas in the U.K., it's all been really about getting our Sage 50 customers onto Cloud Connected and introducing Sage Intacct so that it gives us that capability in medium. Okay. Do you want to stick with Michael? Yeah. Thanks, Michael Briest at UBS. Just drilling into Q4, I think when you gave the guidance in July, obviously SSRS was expected to decline, but I am calculating a decline of nearly 30%. I am just wondering, is that as expected or did you see any macro headwinds? Can you talk a bit about the environment? No, it is fundamentally as we expected. This has been a very consistent story throughout the year. Q1, H1, Q3, is the overperformance beyond our expectations in recurring revenue with accelerated migrations and underperformance against our initial expectations at the beginning of the year in relation to SSRS. There are two or three components in there. The biggest component is that previously, at the margins, business that was being sold on license, we are focused on moving to subscription and Cloud Connected. Therefore, we are definitely seeing business moving away that would have previously been done under SSRS to the new subscription arrangements that we have. The other thing that we have called out consistently throughout the year is there is a strong comparator, and Q4 in FY18 was a very strong comparator in SSRS. The business was still driving hard during FY18 for total revenue. Therefore, we are just running against that headwind, and that ramped up in FY18 right the way throughout the year. Then just at the end, and it is not such a large component, certainly towards the back end of the year, there has been X3, there has been a little bit of underperformance in X3. That is on licenses, as we would expect, but also the professional services that is attached to it. But this is the transition. When Steve sort of reset the strategy over a year ago, it is very clear that the organization is pointing towards subscription, native cloud and Cloud Connected. You have seen that SSRS proportion of revenue drop off very rapidly. It is now down at 14%, it will not be too long before it gets to 10% or so. That is absolutely fundamentally what we need to do, and we need to accelerate through this quickly. The good news, though, is that the speed of execution on recurring revenue is exceeding our expectations and most definitely exceeding the rate of decline in SSRS. I mean, the maths just works. Just to be clear, on macro, you are saying Brexit, German bumping around 0% GDP. No impact? I think it is worth just giving a little bit of extra color. SSRS now is what? GBP 250 million or something. About half of that is professional services, where we make little or no money. And it is an enabler. We are here to create a great SaaS business. I do not consider large amounts of professional services to be an integral part of a great SaaS company. It is something which we need to do in order to support our customers in what they need. But the more that we can do professional services through business partners, frankly, the better. One of the dynamics that is at play here is the managing directors are not being encouraged to grow professional services. They are being encouraged to take the right decision for the customer, but if we can use a partner, we do. The second thing is, I have really sharpened the focus around the type of customers that we address. You will notice in the past, in the press release, we have often made virtue of how many large deals we have signed, how many over 100K. You will not hear that again, because that is not the focus. The focus is small and medium customers. Now we will address larger customers from time to time, but we are not here to chase the largest possible single deal size. The third piece on X3 is, particularly as we introduce Intacct into markets, it is very important that we get our positioning between Intacct and X3 correct. X3 is a fantastic solution for certain micro verticals, manufacturing and some more complex supply chain installations. We have historically sold X3 beyond that. As we bring Intacct in and as we get our consistent medium segment product strategy, we are focusing our offerings in the places where they are the right solutions for customers. What does all that mean? It means that, as Jonathan said, in Q4 last year, we were still chasing overall revenue goals. This year, we are focused on doing the right thing for the customer. If you look at the absolute level of SSRS, actually in Q4, I think it was about 3% lower than Q1. It is just that last year, Q4 was 30% higher than any other quarter. So actually, if you look at it sequentially, it is kind of flat to gently decline. Okay, thank you. James Goodman from Barclays. A couple of quick clarifications from me, please. Just firstly on Brazil, I completely understand the Sage Pay disposal, that has been clear for a while. Brazil, I thought was a pretty core accounting software application. Maybe you could give us a little bit more around the rationale for the Brazil disposal. Well, just in the sort of the revenue classification. It is a good question, James. When last year we identified GBP 350 million of revenue, that did not have a pathway to the Sage Business Cloud. I think about two-thirds, three-quarters of that Brazil revenue is in that category, in the GBP 350 million. So it made sense to go into a process to dispose of Brazil because three-quarters of that revenue was never going to get to the Sage Business Cloud. It had previously been identified. If you take that and Sage Pay and some of the end-of-life decisions that we are making, we are about a third of the way through that portfolio at this stage. I think the critical thing here is I am very clear we cannot do everything. So I do not believe to be successful, we need to be the world market leader in 100 countries. We have our top 6, 7 countries are 90% of our revenue. If you look at the total addressable market, likewise, the bulk of that addressable market is in those territories where we already have a pretty strong market position. So I think we should play to our strengths. Brazil has very little in terms of global products. To introduce Sage Business Cloud global products into Brazil is not straightforward because of the uniqueness of the market. My conclusion is it is not a priority, and we are better off focusing our resources in other areas where we will get better returns. Okay, thank you. The other clarification was just on the capital allocation points that you made. I appreciate the cash generation of the business clearly, but at the same time, the last time you updated on dividend, I think you sort of reduced the pace of growth in dividend. When we talked previously about the disposal bucket that you have just spoken to, we thought you were going to keep a hold of the cash flow for M&A. So has there been a slight change in sort of emphasis around M&A? Is it that there is perhaps not the deals you thought there might be in cloud, and therefore you are going back a bit more to cash return? No. Okay. James, good question. Just dealing with the dividend. The dividend we reset about a year ago alongside the real focus on the transition. We have just implemented that at H1. We did 2.5%. That is maintaining it in real terms in a U.K. shareholder context. Also we have just repeated that for the full year. That has not changed now since it was reset over a year ago. In terms of capital allocation, that sort of methodology that we set out at the half year, we are just going to apply that consistently. The emphasis is on organic investment, as you can see through the P&L. We have got a lot of flexibility to bolt on acquisitions. We spent about GBP 60 million or so during the course of this year. Very, very important acquisitions, although relatively small in size, absolutely committed to that dividend. Lastly, though, we will return capital when we have surplus, and we think it is appropriate to, and the key words are surplus. Just to look at our leverage, we were 0.8 at H1. At the year-end, we are 0.8 net debt to EBITDA. We will only do this return when the cash proceeds are received from Sage Pay, GBP 230 million. GBP 250 million will be returned, so it effectively washes its face. On a pro forma basis, we are at 0.8 still. Obviously, as you know, we are saying that we can and will operate within or slightly just outside the 1 to 2 times net debt to EBITDA. So we have got considerable headroom in terms of leverage capability and liquidity to do the deals as well. We have sorted out liquidity during the course of the year. I will pass the mic for Charlie. Yes. It is Charlie Brennan here from Credit Suisse. Just two quick questions from me. Firstly, can I just make sure, is Sage Accounting the old Sage One product? Given that you have effectively de-emphasized selling Sage One into the micro end of the market, I am just wondering why it is the obvious choice for it to become the new Sage 50. I guess alongside that, am I right in thinking Intacct is written in PHP and Sage One in Ruby? In a more simplified Sage, does it make sense to harmonize the business on two separate codes? Then separately, can you just talk about the competitive landscape, specifically, Intuit, I think, is talking more ferociously about attacking the mid-market. I was wondering if you could just make some comments on what you think of their offering, and what you think of their push into mid-market. The answer on Sage Accounting is a qualified yes. It is the old Sage One. But you will recall, we have had many discussions in the past about Sage One, and it was not really a single platform. We had a number of different versions of Sage One. What we have done over time, and in particular this year, is we have created a unified platform. So we have re-architected it. It has a single code base. Now, when you compare that with Sage Intacct, clearly one of the decisions we could have made was to go for a single platform for small and medium. So we could have said, let us take, for example, the Intacct platform, and let us try and make that the platform for everybody. The decision we've made is that the needs of our customers are sufficiently different, Intacct is a very sophisticated offering, and we've decided that the best way to serve our two different customer types is to go onto these two separate platforms. They're sort of, if you like, the medium native financial solution. The center of excellence is San Jose, where Intacct are based. For the Sage Accounting platform, the center of excellence is Newcastle. Service Fabric center of excellence is both Barcelona and to some degree, Newcastle. We are building these different centers of excellence. We have teams that are very capable in all of these different areas. I should say, actually, I have a number of my ExCo in the audience today, but at the end, I know how much you all love coming down and chatting to us at the end. Both Aaron Harris, the CTO, and also Lee Perkins, the chief product officer, will also be here for a few minutes at the end. So if you want more detail on how that works, I'm sure both Aaron and Lee will be delighted to explain it. Just on competitive- Oh, yeah, sorry. Competitive. Look, the competitive landscape is not really changed that much, right? There's a big battle, obviously, at the micro end of the market, which we don't go after head on. We go through accountants. So we do sell to micro customers, but we tend to do it now through accountants. Both our small business competitors are obviously developing greater capability. But I think to a certain degree, that's also about churn, right? We all want to hang on to our customers. As our customers grow and our customers have more sophisticated needs, we don't want to lose them. I think both of our smaller business competitors aren't really showing too much signs of directing their new customer acquisition machine in a different place. But what they're clearly doing is being very focused on reducing churn. Look, we're obviously doing the same, right? We're making our Sage Accounting platform more functionally rich. We're integrating it more into Sage Business Cloud so that our Sage Business Cloud environment is very compelling, and we create this experience for our customers so they never want to leave. Thank you. John King at Bank of America. Just couple of related follow-ups to that. First of all, it's obviously taking your competitors quite a long time to have a cloud-native, competent product which can compete with you. So how long do you think it will take Sage to get the accounting professional product to a point where it's essentially functionally equivalent with Sage 50, or basically appropriate for the majority of your Sage 50 base? If I can sneak in a related follow-up, the similar question really around the mid-market. Obviously, we know that Intacct is- well, the prior strategy was for X3 essentially to address the manufacturing base. So I guess how much of that medium-sized segment can be addressed by Intacct? Obviously, there's also mid-market customers who are in non-English-speaking countries, so just speak to that. Thank you. Yeah. So maybe if we take that second point. It varies by country. Obviously, the addressable market is different in different parts of the world. If you look in places like Africa and Middle East, where there is a lot of manufacturing, the market for a solution like X3, both on-premise and privately hosted, tends to be bigger than if you look at somewhere like the U.K. But the most important thing is that we are disciplined around this micro vertical positioning and marketing. We are here to provide the best solution for our customers, and we are here to make sure that we put our R&D resources into enhancing the capability for those customers, in those countries that we seek to address. What I do not want is, for example, the team in San Jose going flat out to try and make Intacct applicable in manufacturing, if I think that I have a solution in X3 for manufacturing. I would rather they built deeper capability in the areas where they are strong, like services. This is about having strong product management and product marketing across the whole of that medium and small segment, so that we are starting with the customer, and we get the right solution. I think if you look across the total addressable market in the countries that we are currently serving, we are very happy with the offering that we have. Non-English speaking, obviously, there is a decision to come with Intacct as to which is the first non-English speaking country we address, and we are working on that. In the small segment, the first professional tier version will be available in the U.K. for Sage Accounting this year. The answer to your question about migrating Sage 50 is not as straightforward as it sounds. The reason for that is customers vary enormously in terms of how much and which functionality they use. If you are using all of the functionality of Sage 50, then this first version is not going to be quite as functionally rich. But a lot of customers do not. A lot of customers use various proportions of it. Also, a lot of the customers do not want to migrate to cloud native at the moment. What we are doing is we are offering that path, and obviously, we will continue to enhance the professional version. But we want our customers to be in control of when they migrate. We are not here to force migrate them. What we are here to do is get them to be part of Sage Business Cloud, initially as a Cloud Connected customer. Then as they see the benefits of a full cloud native and full digital experience, hopefully we will encourage them to migrate over time. But remember, we have only just migrated most of them to Cloud Connected, so there is probably a bedding-in period. We go back up this way and then over to George. Thanks. It's George from Morgan Stanley. Just talking about margins and your investments you're making, it looks like you're investing another 70 basis points next year. Can you talk about where you're directing that spend? Looking beyond 2020, where do you feel like you are in terms of margin investment? Could we start to see an inflection from there? I'll start here as well. Yeah, just in terms of margin, what you've seen this year is we've just done exactly what we said we were going to do. When the strategy was reset and refocused for this year, we upped investment across the three lenses that Steve identified, customers, colleagues and innovation, and you can see it in the announcement, a lot of what Steve's spoken about. We've done that, and we see absolutely no reason. It's paying dividends. You can see that we are moving, we are transitioning to a SaaS business. We are moving to Cloud Connected and subscription. We are bringing out, in the various quadrants that we described, the products that we need. We're just going to double down and keep investing. That's what you're seeing in the outlook statement. The margin this year, as I say, we delivered what we said we were going to do. We were also helped by an outperformance in recurring revenue as well. We always have to balance the revenue side to the cost side in terms of giving the margin guidance. I think, looking forward, we're not giving guidance, but what's important is that we're in probably two points. We're investing for growth. That's the number one priority. We need to demonstrate to all of you and to our investors that that growth is efficient. In a SaaS business, the absolute level of short-term margin is not necessarily the number one focus. Let me explain. Particularly in the medium segment, we don't disclose detailed SaaS metrics like cost of customer acquisition. To give you a flavor, in the medium segment, the cost of customer acquisition, even world-class, is probably about 2x ACV. If you take something like Intacct, average ACV GBP 25,000. That means the cost of acquiring a customer is GBP 50,000. But those customers, on average, stay 10 years. So the lifetime value of that customer is very high. Also at the moment, Intacct renew at 107%. So the economics are incredibly compelling of growing in the medium segment. But the faster you grow in the medium segment, the lower your margin in the short term. At the moment, we're balancing those things. When I look forward, I'm not necessarily looking in absolute terms for margin accretion, but what I am looking for is to demonstrate efficient growth. You need to know that we are deploying our investment to get efficient returns. We will increasingly seek to demonstrate that to you. Is that Paul? Okay. George? Last week, yeah. Yes, sorry. Yeah. Hi, Paul Crump from Jefferies. I think my first question is, I think in the past you've spoken about capturing profitable customers in Sage Accounting. Can you give us some color on the economics of those customers in the professional segment versus the traditional micro business customers that you captured in the past? If you can just indulge me on the second question. Looking at your 8%-9% guidance, could you just give us a feel for what you're assuming in terms of renewal rates by value? Should we be thinking 101%, 102%, 103%? Could you also give us just an idea of what are the levers behind that? Is it just stickier revenues in the U.K. that are reducing churn there? It would just be helpful to have some color on that is all. If we start with the accounting economics. If you go back a few years, we experimented with Sage Accounting of going direct. We were doing digital marketing, going direct, and seeking to digitize the experience. I said at the time that when we started pulling back from that the economics of that were dreadful. The reason the economics were dreadful was because the cost of customer acquisition was too high, and actually, the churn was also too high. The advantage of professional users is, the ARPU is higher because you are delivering more value. I have said a number of times, serving customers who pay GBP 5, GBP 10 a month is not something we are really set up to do. We can do it through accountants, but doing it direct is not particularly economic. Once you are dealing with professional customers, not only are you delivering more value, but they value in return much more highly customer service and the wider range of things that we offer. Your cost of customer acquisition is similar. Although, because we are marketing to a base we understand, i.e., the Sage 50 base, it is probably a little bit lower. But the churn is lower, the ARPU is higher, and therefore, the economics are just a lot better. In terms of wider renewal rate by value, as I said, in FY 2020, I would not expect improvement in renewal rate by value. Long term, I would. I want to see renewal rate by value going up. But in FY 2020, the mix is such that because it differs across the different segments and the different countries, when we add it up at a total group level, I suspect we will not see much improvement. We may even see it coming back slightly. But the long-term trend, as we get more focused and greater clarity, will be that it will edge up. I would love the whole company to be at the same level as Intacct and People. That will not happen because in the small segment, typically those sort of renewal rates are not achievable. Thank you. George? Hi, thank you. Any further thoughts on portfolio rationalization and the general view that in order to be a great SaaS company, one needs to sell SaaS products only rather than cloud-connected ones? Yeah. So there's two parts to that, really. Portfolio reshaping is an essential part of the strategy. It's not a tactical opportunist thing. It's an essential part of the strategy. We will dispose of things that we think don't fit, and we will acquire things that help us build out Sage Business Cloud, particularly more comprehensively. I think as far as what you define as a SaaS company, our cloud-connected customers are an integral part of the Sage Business Cloud experience. Now, will their experience be as rich as a native cloud customer? No, because the native cloud allows us to deliver a full digitized experience. But we should be under absolutely no misconceptions here, that we are determined that our cloud-connected customers are not second-class citizens. They are an integral part of Sage Business Cloud, and they will benefit tremendously from the services and the functionality that we deliver through Sage Business Cloud. Want to come into the middle here? Probably down to the last few questions now, actually. Thank you. Stefan Slowinski from Exane BNP Paribas. Just wanted to come back on the margin question. Obviously, you have some investments to make in the fabric and the accounting platform. Are you saying that with more visibility now on how the transition to ARR is going and the assumptions around SSRS declines, can we say that 23%, the guidance for next year, is a floor that we should assume going forward? Or as more of these cloud-native products start to ramp globally, you may need to invest more in margin to get those off the ground and to really accelerate the growth of those products? Thank you. Last year, when I'd been CEO for about three weeks or something, I can't remember how long it was, but I deliberately said we're not doing medium-term guidance anymore because I want to keep options open. Now, the key here is whether. If you look at the total addressable market, it's $36 billion, which is sort of a very large number, right? It's a very fragmented market. Therefore, from a market opportunity perspective, the opportunity is enormous. The question is, to what degree do you have the right solutions or the right capability, and can you grow efficiently? If you look at the LTV to CAC numbers, which we don't disclose, but you can look at the best in class in small and best in class in medium. If you invest for accelerated growth, it costs you sales and marketing money to do it. It's why many companies, when they're growing fast, either make less money or make losses. Now, we are in the position where I'm not for one minute suggesting that we would need to go as far as making losses. But I'm not going to commit to a floor or a ceiling. What I'm committing to is that we will need to demonstrate that we are being rational and disciplined about how we pursue growth. But if we see opportunities to grow faster and the economics are compelling, then we will be looking to invest behind that. Okay? Maybe one final question at behind here? Hi, it's Paul Warner from Panmure Gordon. It's a question really around just focused on the recurring revenue growth. So the 10.8%, can you just explain the difference between that and the 10% underlying figure? Is it the 10.8 that we should be comparing with the 10.2 you did in the first half and the 11.4 you did in the third quarter? Am I looking at the right figure there? Yeah. The related part to that is, am I right that the PSP hurdles for this year were 8%-11%, and you have done 13%, so you will get full payout on that. Can you share what the hurdles were for the bonus as well now that the year is over? Thank you. Maybe I will take the second one first, and then Jonathan Howell can answer the first one. Remember, the PSPs are measured over a three-year period. Although we hit 13% in ARR or just below 13% this year, that has to be measured over a three-year period. Actually, the PSPs that were awarded three years ago, which are now vesting, the '17 PSPs because we had low achievement on recurring revenue or lower than expected on '17 and '18, actually that vesting is pretty low. It is just under 15%. Now obviously, if we keep going at the rate we are going, then the PSPs will vest. In terms of the annual bonus, obviously that will all be fully disclosed in the annual report. The fact that we guided to 8-9, and we ended up with an ARR of 13 would suggest that the financial part of the bonuses will pay out at the upper end of the range. Obviously, it varies by country. Yes, it is very simple. In terms of the organic revenue, we report organic revenue, we guide to organic revenue. Organic revenue definition always has assets held for sale excluded. The two assets that are held for sale are obviously Sage Pay, which we have announced the deal which we are awaiting completion on, and also Brazil where we are far advanced into a process. So those are two assets held for sale. The difference is absolutely between underlying and organic is those assets held for sale, the revenue and profit component. It does not make much difference. I think organic, we reported 10.8%. I think if you put those back in, it is about 10.7%. So it is a marginal difference at the recurring revenue line. At the margin line, I think we have reported 23.7, and I think it is 23.5 with those assets removed. Yes. Sorry, the 10.8 goes to 10.7 if you make those adjustments. What about the 10, the underlying? I do not understand why that is affected by the discontinued businesses which are not in recurring, I do not think. The- Basically, just what is the difference between that 10 and the 10.8, and which is the one that is comparable with the 10.2 you did in the first half? The comparator is always the organic number. The differences that you are referring to, you have got the assets held for sale plus the assets that were disposed of during the year. You will see we reported at H1 and in Q1 some disposals that have therefore been removed. Best one we can do is we will give you- There is no consideration. We will give you a bridge. If you want to speak to Lauren offline, we will make sure we give you that bridge. Thank you very much for the questions and good discussion. We look forward to seeing you in six months' time. Thank you.