Earnings Call: H2 2016

Nov 30, 2016

Good morning, and welcome, everybody, both of you who are sitting here with us in the London Stock Exchange, and those of you who are on the phones. We are delighted to have you with us for our FY16 results. As always, we start a note safe harbor statement, which you can find in your packs and also on our website. The agenda for this morning's presentation is outlined on the screen. I will provide a performance in FY16, and then hand over to our Chief Financial Officer, Steve Hare, who will talk through the financial and operating performance of the business. I will then update us on the progress against our plans, and close on the outlook for FY17, before we open up to the floor for questions. 18 months ago, at the Capital Markets Day in June 2015, The Sage management team charted the course for Sage's transformation, and we committed to improve results and deliver financial performance throughout this period. I want our management team to be known for doing what we say, and for providing absolute transparency, identifying what is going well, and the areas that require greater focus. Each time Steve and I have stood up here to announce a set of results since Capital Markets Day, we have been pleased to be able to demonstrate gradually improving progress. Last year, for FY15, we delivered the fastest rate of top-line growth for eight years, at 6%, and shared some early green shoots of progress against our strategy. Today, we stand here on the back of another encouraging set of results that demonstrates another important step forward, with double-digit recurring revenue growth for the first time in a decade. This is underpinned by subscription growth at 32%. Our internal mantra we have shared with you previously is perform and transform. We are performing while taking important steps to improve the underlying quality of our business and support our longer-term growth ambitions. The results you will hear today demonstrate clearly that our strategy is working. We continue to keep our feet firmly on the ground and recognize there is much to do as we focus relentlessly on execution. We have been transparent about the operational risks we face, which mean the journey may not be entirely linear. Last year, we signaled that FY16 was a pivotal year. We have come through this year strongly, the second phase of our transformation, where we are building on the foundations we established over the past 18 months to transform the competitiveness and effectiveness in the market. Now, I would like to hand you over to Steve Hare for the financial performance review. Steve. Thank you, Stephen, and I'd like to add my welcome to today's results presentation. The message for today is that we have done what we said we would do in FY16. We have delivered the overall revenue, recurring revenue, and software subscription growth at or better than guidance. We have delivered an improved operating margin, also in line with guidance, and the level of exceptional charge is where we said it would be. We have delivered the promised cost savings within the two-year payback that we committed to. We also have strong free cash flow and have increased the dividend by 8%. We have completed the first phase of the transformation. However, we are still in the midst of the transition, and there is much to do in FY17. Let's first reflect on the results of FY16. We delivered 6.1% revenue growth, whilst also improving the underlying operating margin by 70 basis points to 27.2%. The quality of the revenue continues to improve, with 70% of it now recurring and 28% of it coming from subscription. We now have over 1 million subscription contracts, up 450,000 two years ago. We achieved double-digit recurring growth for the first time in a decade, delivering 10.4%. It is worth reflecting that if you go back to FY13, the recurring revenue growth was 6%. The following year, in FY14, it was 7%. The year after, in FY15, it was 9%. It is now 10.4%. The exceptional cost of GBP 108 million is comprised of GBP 110 million charge relating to the transformation, offset by a GBP 2 million credit relating to the Archer litigation. I will come back to this later in the presentation. Just to confirm, of the GBP 110 million charge for the transformation, GBP 76 million related to the general and administrative areas, and this has delivered annualized cost savings of GBP 51 million. The remaining GBP 34 million of the GBP 110 million charge related to the go-to-market functions, where we have taken some early steps to address productivity and skill gaps. Consistent with last year, at the bottom of the slide, I show the non-GAAP EBITDA calculation, which as you can see shows we achieved an EBITDA margin of just under 30%. Although not on the slide, just a quick word on tax. We have an effective tax rate of 26%, in line with where we expect it to be. This is higher than the UK corporation tax rate, as we continue to derive much of our profits, such as the USA and France. We would expect to maintain an effective tax rate in the range of 25%-27% in the medium term, as we are committed to being known as a company that pays the taxes due in the jurisdictions in which we operate. Finally, as I said earlier, we have increased our dividend by 8%, maintaining our progressive dividend policy. Turning now to cash. Starting with the first column, underlying operating cash flow of GBP 425 million represents a strong cash conversion of 100%. CapEx was a bit higher this year at GBP 31 million versus GBP 20 million last year. As we invest in internal systems, IT security, and infrastructure, we will continue this increased level of investment as we go forward into FY17. Moving to the second column, free cash flow of GBP 254 million represents 16% of revenue. This is after taking GBP 58 million of exceptional cash costs. Adding those back would have resulted in a free cash flow of 20% of revenue. The significant movement on exchange, which you can see on the chart, is the retranslation of dollar and euro debt into sterling. I've already touched on the trend of recurring revenue. This growth is underpinned by software subscription growth. The first key observation on this slide is that SSRS has declined by 9%. Actually, SSRS software revenue has declined by 15%. We have been able to absorb this decline and still achieve our growth targets. This is one of the key data points that our strategy is working. Processing revenue also grew by 6%, mainly driven by strong payments growth in the U.K. and Ireland, and payroll processing growth in North America and South Africa. The growth in annualized subscriber base is a key metric, and we've achieved 34% growth this year. Sage 50 family of cloud products, both accounting and payroll, have been a big success both in the U.K. as well as in the U.S. and Canada. We would expect this to continue as we enhance our Sage 50 franchise with features like integration into Office 365. The Sage 200 family also made progress in our 2023. Sage X3 are also starting to make an impact. Sage X3 actually is particularly worthy of a call-out, given the majority of the sales are still on perpetual license. You can expect to see Sage Live appearing on this chart next year in FY17. Turning now to the regions and starting with Europe. Europe has the highest penetration of recurring revenue at 78%, but still managed to achieve double-digit recurring revenue growth and grew at 7% overall. The improvement in contract renewal rate to 88%, plus the fact that the U.K. and Ireland, Spain, and Germany all grew above 7% and achieved double-digit recurring revenue growth gives us strong momentum. Subscription penetration in these three countries varies from 14% for Spain, up to just under 35% for U.K. and Ireland. There is still plenty of opportunity to migrate further customers to subscription. Just a word on France, where over 50% of revenue already comes from subscription. The team still achieved 6% overall growth and 8% recurring revenue growth. Also in France, X3 revenue grew by 12%, and there were 20 X3 deals signed in excess of GBP 100,000. Sage One, Sage Live and Sage X3 all made good progress in Europe this year, and the CBC in Dublin is starting to scale. in FY17 across Sage, there will be a number of new product launches, and Stephen will touch on these later. This will be a particular focus for Europe. This in turn will support the focus on acquiring new customers. We will, of course, also retain our focus on supporting our existing customers. Performance in North America was mixed. Overall revenue growth was 4%. However, if you exclude payments, the region achieved 6% growth. Recurring revenue growth was consistent with the prior year at 9%, with contract renewal rates increasing from 87% to 89%, which is the highest of any region. This reflects the historic focus on the installed base and in particular, premium maintenance and support. North America saw an 84% growth in software subscription in FY16, with Sage 50 on subscription being a particular success story in both the U.S. and Canada, each achieving triple digit growth. We also saw real momentum in X3 in the second half of the year, with growth of 18% and a strong pipeline. It is also worth mentioning that Sage Summit was a big success, changing the way that Sage is seen in the market, particularly in the U.S. Stephen will talk more about this and the impact of Sage Summit later. That said, North America does have the lowest recurring revenue mix of all the regions, and subscription represents only 10% of total revenue. With little growth in maintenance and support, a flat payments performance, and an 8% decline in SSRS, the U.S. team need to win new customers and drive harder on subscription, including with the partner channel. There also needs to be a real focus in FY17 on supporting the startup segment in the U.S., and this means acquiring meaningful numbers of Sage One customers. Given the low subscription penetration, North America continues to represent one of our targeted areas for growth. In international Africa, Middle East, and Brazil all achieved double-digit revenue growth and even higher recurring revenue growth numbers. I must call out both South Africa, led by Anton, and Brazil, led by George, where despite very difficult economies, the teams delivered double-digit growth. In the case of Brazil, 12% overall revenue growth and 22% growth in software. In the case of South Africa, 19% growth overall. Asia was disappointing. We did not compensate for the non-recurring revenue from the tax compliance changes in FY15. There were some bright spots, including adding 12,000 Sage One subscriptions in Australia. Overall, in international, Sage One and X3 have led the way in the region as we started to see new customer acquisition starting to work. This region has increased the number of recurring revenue contracts in FY16 by over 25%. We have seen particularly strong momentum with Sage One in Brazil, where we added over 23,000 subscriptions through to the end of September. In the last two months, added a further 10,000 in both October and November to give us just under 50,000 Sage One subscribers in Brazil. This means the international region now has well in excess of 100,000 Sage One subscriptions. The focus for FY17 is to return Asia to growth. The contract renewal rate in this region reflects the higher level of bankruptcies and business closures, and this will also become a more prominent area for focus as the level of subscription penetration increases. Finally, we will continue to support our existing customers and to drive the new customer acquisition in this region. As previously indicated, we have delivered GBP 51 million of annualized cost savings in the general and administrative functions, and of this, around GBP 35 million was delivered in year. The savings are a mixture of people, property, and third-party contracts. We have spent GBP 76 million to achieve these savings to give a payback of just under one and a half years. How have we done it? On people, we have reduced duplication and started to concentrate back office functions into fewer locations. For example, we now have finance shared service centers operating in Atlanta, Johannesburg, and Newcastle. On property, we have reduced our locations from 139 to 78. We have also reinvested into key sites, upgrading facilities in the U.S., the U.K., Poland, and Australia to name a few examples. The other category is largely procurement, where we have been reducing the number of suppliers and putting in place Sage wide agreements. I would emphasize that we continue to favor small and medium-sized suppliers where it makes sense to do so. The remaining GBP 34 million of the GBP 110 million exceptional charge for transformation relates to the go-to-market functions, where we are starting to address change. A good example would be marketing, where we have begun to upskill the team. 300 people have actually left the business from the marketing function, and 200 new dedicated product and digital marketing colleagues have been hired to give but a much higher skilled team. We have also made some early changes in other areas of the go-to-market functions as we start to integrate areas like sales and marketing operations and reduce non-quota sales support roles, particularly in the U.K. and France. We intend to drive further savings in FY17, and there will be at least another GBP 50 million of annualized savings, which will meet the same payback criteria of no more than two years, and which will be reinvested. This does mean we will incur a further exceptional charge in FY17 to be the final exceptional charge for this transformation. The dynamic can be seen more clearly on this slide. This shows the in-year movement rather than the exit rate, which is what I was discussing on the previous slide. I touched on marketing. In marketing, we have rebalanced the split between people cost and program cost down to 39% people and 61% program, which is moving towards industry standards. This, along with the overall increase in investment, means that in marketing, we have increased by more than 35% the investment in program and brand. In sales, we have increased quota-carrying sales resources in every region. R&D investment is not shown on this bridge because it is broadly flat year-over-year as a percentage of revenue. To emphasize, we continue to refocus our engineers towards our next generation of cloud products. In FY17, we will continue this strategy of driving further cost savings to reinvest into the business. In phases of the transformation, we move relatively slowly to address inefficiencies in the go-to-market functions. This is particularly true in sales and service. However, in phase 2, with the arrival of Blair Crump as President responsible for the go-to-market functions, we will start to address productivity in these areas. As I have already mentioned, we started to integrate sales and marketing operations, and we now have a member of the executive team responsible for services. Before I summarize, I want to make it clear that in FY17, we will see the same phasing in margin as we did in FY16 as a result of the weighting of investments into the first half. This means the first-half margin will be lower than the second-half margin, and our guidance is for the year as a whole. In summary, we have done what we said we would. The results show that the strategy is working, and the first phase of the transformation is now complete. As Stephen mentioned earlier, the transformation may not be entirely linear, with key areas like managing the move away from SSRS to subscription high on our agenda. We are now entering the second phase of the transformation with momentum, and we will continue to invest for growth. With that, I will hand back to Stephen. Thanks, Steve. Another encouraging year in terms of financial performance where we ticked all the boxes. Before I move on to the progress we have made in the first phase of our transformation, I want to step back for a few moments to remind ourselves where Sage started this journey and outline our vision for the transformed company we are building. When I joined Sage back in November 2014, I joined a company with a fantastic heritage and assets. The most global player in our market and the only company offering movement of money solutions from sole traders to large businesses, which we classify as market segments of startup, scale-up, and enterprise. Sage was clearly the market leader in desktop accounting and payroll software. But honestly, we had not kept pace with the technology innovation. I referred to Sage back then as a sleeping giant. We had not embraced the cloud and the benefit it offers our customers, so we needed to reawaken. Much of the preceding 18 months has been about putting in place the foundations to allow us to compete and win in the cloud. I will talk shortly about the progress we have made there. But we were never interested in playing catch-up. The rate of innovation in technology today is the fastest and the most exciting I have experienced in my 32 years in the industry. So we have always had an eye on where Sage can lead the market and invent the future for the benefit of the business builders around the world. The cloud is now a table stake. It is the platform that has opened the door to the next wave of innovation, the era of intelligent automation. Sage’s vision is that startup entrepreneurs and business builders will spend no time, yes, zero minutes, doing financial admin by 2020. This is a game changer, and thanks to Sage, it is already becoming a reality. I am blown away every time I spend with the amazing engineers in Sage, when I can clearly see the world of the future. But before we get too carried away, let us just look at the progress Sage has made in our transition, which is all about making this innovation possible. At the Capital Markets Day, we first introduced you to our five strategic pillars. We also outlined the risks and the opportunities to our investors of the radical and rapid evolution required of Sage. We classified everything that has been achieved so far as phase one of the transformation. In this first phase, we've consolidated what was effectively hundreds of disparate and sometimes competing operating companies within 23 countries into a single, aligned, market and customer-facing organization. We've established the foundations that will sustain Sage in the future. This is no mean feat. As we said at Capital Markets Day, this is as much a very complex multi-year transition to fundamentally change the very DNA of the company to embrace technology and to make customer obsession the way of life. With FY 2017, we entered the second phase of this transition with still much to do, but with many of the building blocks in place to increase Sage's effectiveness in the market for our customers. There'll be an increased focus on customer-facing business, which until now has been, as Stephen Kelly said, largely insulated from the transformation. With Blair Crump's recent arrival as commercial President, we expect to see improved consistency, effectiveness, and productivity in sales, service, and marketing. Blair is well advanced in assembling his commercial organization, which has included a creation of a flatter regional structure. As part of Blair's top team, Nancy Harris has been appointed interim leader of our North American region, following her successful tenure as Managing Director of the Canadian business. With Marc Scheipe, our North American President, leaving Sage. Other commercial leadership changes of note include Asia, which has been now combined with Australia to create a single combined sub-region under the new leadership of Peter Bosman. To give you more of a sense of the progress in phase one, I'll run through each of the strategic pillars. First, customers for life. It's an absolute imperative that our existing customers continue on their Sage journey. Our customer for life strategy has underpinned much to be a key factor for growth moving forward. There are a few data points on this slide. In addition, we're building higher quality relationships with our customers through subscription. Software subscription revenue has increased by 32%, and the number of software subscriptions has increased by 46% to just over 1 million, a significant milestone. Cross-sell campaigns are starting to gain traction. In the U.K. and Ireland, 37% of Sage 50 accounts customers also have Sage Payroll. Our net promoter scores measure customer satisfaction, and NPS has increased by 61% on the prior year. All of this improved customer loyalty. By providing excellent levels of customer service, we continue to build our contract renewal rates. The contract renewal rate has grown to 86% in the year, up from 84% in FY 2015. For phase two, we'll continue to invest in our flagship product families, and we've also hired Sue Goble as a proven customer success leader to take our focus on customer. Secondly, winning in the market. New customer acquisition has become a real focus for Sage and is strategic to accelerated growth for the future. We'd obviously like to have gone faster, but FY 2016 marked a turning point where Sage attracted net new customers for the first time in recent history. Our suite of cloud accounting products, designed to win in the market, are showing continued progress. In the startup market, Sage One paying subscribers grew by 81% to 313,000, of which 61,000 were added in the U.K. and Ireland. In the scale-up market, Sage Live has moved out of incubation phase and is starting to generate real traction. Early days for Sage Live, but thanks to Salman Saeed and the CBC team, we saw more new customer wins in the month of November than we achieved in the previous six months, with an average ACV of $1,500. For the enterprise market, X3 revenue grew by 18% in the year, with 74% growth in international region. As Steve mentioned, in July 2016, we hosted Sage Summit, the world's largest gathering of entrepreneurs, and I was very pleased that some of our investors and our analysts here today joined us in Chicago and witnessed the Sage ecosystem firsthand. Our Head of Brand and Events, Van Diamandakis, put on, I think you would all agree, an awesome show. We had 15,000 registered attendees, generated over 1 billion social impressions, and over 3,000 media articles were written from the conference. Our digital marketing strategy is now starting to deliver. We have increased our web domain authority on sage.com, driving a corresponding 77% year-on-year increase in web traffic to the site. We have also increased our social media followers by 220%, leapfrogging our competitors and tripling the engagement with Sage content on social channels, as well as increasing our lead conversion rates. All of this is contributing to a reduction in the cost of customer acquisition. For phase 2, we acknowledge we have still more to do. Now that we have the products, though, and the marketing platforms in place, our focus will be on new customer acquisition at scale through the integrated digital marketing, sales, and service machine and our growing partner ecosystem. Next, for phase 1, we set out to leapfrog. Innovation and invention of awesome technology for business builders is now part of Sage's DNA, with evidence of our progress. Take Sage Live as an example of this, a mobile-first, real-time accounting application for scale-up businesses. The product was developed in just 26 weeks, with early adopter customer input contributing to the build of the product. In FY 2015, the product was in development, and we purposefully held back on releasing to new markets until we knew the product would be fighting weight. Now we have over 600 customers, and with 400 added in the past 90 days alone. Salesforce.com voted Sage Live the most innovative product in their ecosystem for 2016, and we were chosen as the first vendor to go live on the new Salesforce Lightning mobile platform. At the end of July 2016, the world's first accounting chatbot, which now has new users in over 125 different countries. Our vision is that Pegg becomes the personal trainer for the startup business owner. Pegg will chase late payments, raise invoices, and inform the business owner on key metrics like cash flow. Pegg will leverage our investment in artificial intelligence and lead us to the vision of zero admin. As media columnists have written, and I quote, "Hello, Pegg. Goodbye, admin." The thought leadership we have shown with Pegg means that Sage now hosts the largest bot developer community in Europe. Pegg has excited our new technology partners, such as Facebook, Slack, and Microsoft. With a disruptive new messaging platform, Microsoft Teams, launched several weeks ago, Pegg was one of the first bots they chose to showcase to their 1.2 billion potential users. Innovation at Sage is gathering momentum, and we've hardly started. The product roadmaps publicly shared for the first time ever at Sage Summit are witness to the acceleration of technology, invention, and development. More to do here. Fourth, capacity for growth. Steve already talked about some of the progress. You can see some of the individual data points here on the slide, and the headline is that phase 1, we delivered our commitment to create capacity for growth within the existing financial model, which we believe is good discipline. Phase 2 continues to shift the investment for growth and drive simplicity and efficiency from all our functions, including the go-to-market function. Finally, one Sage. We've reduced the fragmentation. This ranges from bringing Sage together as one organization to the implementation of a new consistent operating model and organization design rolled out around the world. Through to more detailed operational examples, such as reducing the number of sales compensation schemes from over 100 to under 10. Colleague engagement also has increased with all-hands meetings and Sage TV broadcasting live to all our colleagues. Recently at the Sage FY 2017 kickoffs, Blair Crump, Steve, and myself visited each major Sage office around the world, meeting approximately 10,000 colleagues, as well as customers, partners, and accountants. We continue to drive colleague engagement through the Sage Foundation, of which we're hugely proud. A staggering 100,000 volunteer hours were donated by our Sage colleagues in the first year of the foundation, and globally, 110 charities benefited from grants awarded by the foundation. Also, we've taken a lead in the technology industry, driving real progress on diversity and inclusion. We can boast 48% ratio of women at Sage, which is high for a technology company. In FY 2015, up to one-third of women on our senior management team comprising our top 150 leaders. Still, we believe more to do. Our focus also extends on governance, assurance, risk management, and our control environment. As part of our Excellence in Governance program, we've introduced a suite of 56 policies. As well as our commitment to profitable growth through the execution of the strategy, we're very committed to doing the business the right way for our colleagues, our customers, our partners, and our shareholders with the highest standards and integrity. Sage was recently recognized in the top four of the FTSE 100 for governance in a study by the Institute of Directors, which is quite an achievement. We want to lead from the front as businesses become more responsible corporate citizens. This is the way of the future, and for Sage, this is now. Bold initiatives like the Sage Foundation are not only the right things to do, but the evidence shows it makes great business sense. For example, Sage Foundation is listed as one of the main reasons why new recruits choose to join Sage. They love the fact that we're a business with a heart, and we give back to our communities. So what's next? I mentioned at the start that we're moving into phase 2 with FY 2017 of our transformation, where we'll build on the foundations we've put in place for the last 18 months to transform the competitiveness and effectiveness in the market. But what do I actually mean by this? There are many examples, but just let's pause, and I give you one example. The pace at which we're developing products in the cloud has accelerated exponentially. In FY 2017, a lot of that hard work comes to fruition. We've rationalized our desktop portfolio over the past 18 months, and if we look at this chart, it shows we will be completing our award-winning cloud product portfolio during FY 2017 for each of our market segments in each of our nine largest countries, which together represent 95% of revenues. What does it mean for a specific country? Let's just take Spain as an example. A country that has not launched new products since 2010. We're launching five major cloud products in the first six months of FY 2017, all in local language and all 100% compliant with the Spanish regulatory environment. Spain is a country where 56% of all payroll taxes. The excitement in the market with Sage launch of these products is palpable. At the macro level, it's worth emphasizing the significance across all Sage's major markets. Let's just pause and look at where the cloud portfolio was around this time two years ago. At that time, just over two years ago, even Sage One, our only cloud solution, was a totally different product in each market. In addition to rolling out new cloud products across our markets in FY 2017, we've invested in moving our Sage One solutions onto a single, scalable code base. With this cloud portfolio, Sage has a unique advantage as the most global cloud vendor in the market, combined with unrivaled expertise in local compliance and a true partner for life, from startup through scale-up to enterprise. This is a massive step forward and a monumental effort from our product teams driven by Nick Goode and Jennifer Warawa. To support these product launches, we'll be investing in building our brand and events in key markets. We're taking Sage Summit on the road to meet the world's business builders, reaching over 30,000 prospects, customers, partners, entrepreneurs. This week, for example, we hosted the first of these with an oversubscribed Sage Summit in France, where Sage has trended on social media in Paris for the last two days. There's a lot planned in FY 2017 as we invest heavily in winning in the market. It's important to remember that our cloud products are building from an emerging base, and it will take time for these to contribute to top-line revenue growth in a meaningful and material way. For FY 2017, our focus on the disruption and winning further market share, most of all, proving the model that we can scale our cloud solutions and deliver scale in new customer acquisition. Our outlook for FY 2017. After an encouraging FY 2016, we take momentum into FY 2017. For FY 2017, our guidance for the full year remains consistent at at least 6% revenue growth and at least 27% operating margin. We will continue to front-load investment in growth in H1 FY 2017, consistent with our execution last year. Consequently, this will give us greater momentum for accelerated growth for the second half of FY 2017 as we leave phase 2. This is an exciting time for Sage, but we clearly still have our feet on the ground and acknowledge there is still much to do. To summarize briefly, FY 2016 has been another year of encouraging performance, with the fastest rate of recurring revenue growth for a decade. There is strong evidence that the strategy is working and strong green shoots of progress. We are focused relentlessly on execution to continue to perform and transform. Steve and I are confident that we are on track with our plans. And with that, I would like to invite Steve back up here, and I will open up for your questions. Thank you. Who would love to go first? Maybe a microphone for Stacy. Thank you. It is Stacy Pollard with JP Morgan. Steve, you mentioned acceleration of growth in recurring revenues. Just to make sure we understand what is driving that, and as we also look forward, can you still accelerate because you are grabbing market share and more white space transition or the conversion from the software subscription? From the software licenses. So that is one question, to understand just how far that can go. Really as a follow-up to that or as a continuation on that, can we also talk about the midterm? When do you think you can accelerate that revenue growth and begin to increase operating margins? What is the kind of timeframe that you do think about that as you pass phase 2, and I guess, go into phase 3 or Yeah, maybe I will kick off Steve. We are clearly signaling we have done phase 1. It is behind us and complete. The foundation is now about phase 2. Blair here, we are really, really focused on the commercial organization and the customer-facing organization. We come out of phase 2, and then we have got all the platforms in place, the products, the people, the capability to accelerate growth. Absolutely, that is the right sequence. If you want to go into the color between subscription and customer for life and new customer acquisition, Steve. Most of the growth today in that recurring revenue is coming from the installed base. It is switching the installed base to subscription, but through cloud enablement of the existing products. The slide I put up on annualized subscriber base, the Sage 50 family of products is the biggest single driver because we have cloud-enabled, particularly in the U.K., Canada, and the U.S. That is driving, that is the carrot, if you like, for customers to switch over to subscription and get the features which come with those cloud-enabled products. I said even in the U.K., we only have 35% of the revenue coming from subscription. We only have two countries where subscription has gone through 50%. That is South Africa and France. So there is still plenty of opportunity to continue to switch the existing customers to subscription and continue to drive, therefore, the recurring revenue growth. However, at some point, obviously, new customer acquisition needs to kick in. I think during the course of FY 2017, with particularly now we have a more comprehensive suite of cloud products, we will start to see the new customer acquisition making a more meaningful impact. If you think about how we might accelerate recurring revenue beyond where it is today, beyond 10%, more of that is going to come from new customer acquisition. Yeah. Can you accelerate overall growth by 18, or would that be pushing it? That would be asking us to guide for 18, Stacy, which we are not doing. But in the medium term, we obviously expect, we have already got 70% of the revenue is recurring, and so 70% of the revenue is growing double digit. As that becomes a higher and higher proportion, at some point, the headline growth has got to increase. The only reason we are being cautious is that we called out the SSRS decline by 9% this year, and the new software sold on perpetual licenses declined by 15%. That is quite a big decline to absorb with the recurring revenue growth. The only reason we are being cautious around that 6% is because we think SSRS will continue to decline at that rate. If you look on the ASB chart, the annualized subscriber chart, for the first time, X3 has appeared. So we are actually selling X3 on subscription as well. Now, if that accelerates, that is really the only last product that we sell on perpetual license. So you could even see SSRS decline accelerate a bit more, which would be a good thing strategically, but it means the headline revenue will stay low for a while. Good. There's no unconscious bias sitting at the front, but the next question with Amit, then we'll pass the mic to someone at the back. Amit. Good morning, gentlemen. Great. Amit Harchandani from Citigroup. I know you're not willing to guide on FY 2018 yet, but in terms of the margin, given that we have gone through one transformation program targeting G&A and the second one targeting go to market, would it be at least realistic to assume some kind of margin expansion starting off in FY 2018? How should we think about the margin trajectory, maybe in broad qualitative terms? Secondly, as an unrelated follow-up, could you maybe talk about competitive dynamics? Some of your peers have talked about impressive growth in the U.K. You've had some sort of moderation of growth in the payments business in North America. If you could touch upon whether competitive dynamics, how do you see them, and what's the plan in place to counter some of the moves your competitors are making? Thank you. Clearly, the first one I'll do. Sure. I think that on the margin, it all depends on how much we spend, really, on sales and marketing. At the moment, as we release cost savings from G&A, it's all being reinvested into sales and marketing. Although we're signaling in FY 2017 that we will address productivity in the go-to-market functions, we will also continue to do so in G&A. There will be more savings coming out of G&A. At the moment, we want to reserve the right to reinvest that into sales and marketing because we believe that we will get a return, and that will help us, therefore, to drive growth. We already spend, if you take just sales and marketing, something around 30% of revenue on sales and marketing. But as we move more and more to a subscription model, the thing to watch really is how much are we spending as a proportion of the run rate. Because it is not about what revenue we recognize in the year, it is about what we are booking in terms of the momentum in the annualized recurring. The level of overinvestment, particularly as we start to get productivity and efficiency, will not be needed. Therefore, we have said, in the medium term, we would expect the margin to drift upwards. But whether that is in 2017 or 2018 depends on whether we think there remains opportunities to invest for growth, because that is the first priority. Then competitive dynamics. At a macro level, I think you have seen, actually, hopefully you saw the products themselves, so you saw Pegg live outside with our colleagues, and you have seen the population of the portfolio. I think defensively, obviously particularly in Continental Europe, I think what we have done is a game changer in terms of how we build products and work to make sure they are 100% compliant all the time. So in January, we had the launch of Sage Live in Germany, Spain, and France, all on the same day, 100% compliant, and it is a virtual team around the world of Leipzig, Barcelona, Bordeaux, Newcastle, Atlanta. I think we really have moved the dial dramatically from our competitors so that we, number one, build on our leverage around the compliance, the knowledge, and the accounting detail, but also the movement of money, because there is increased need for entrepreneurs, money coming in from customers, paying suppliers, paying payroll. Bringing that together is ultimately, I think, the competitive advantage we have. The other thing, at the macro level, we have got a bold vision in terms of zero financial admin for particularly startups and entrepreneurs. We are the only company that can take a startup business, go to scale up for a product like Sage Live, and then go to the enterprise. Some of our enterprise customers, Nando's, Europcar, 20-odd thousand employees. So from a company point of view, if you are starting down in Shoreditch, you want the security that you do not have to switch technology vendors for all these different elements of movement of money, and you have got Sage, and now Sage has got the best products in the marketplace. All those products you saw out there are award-winning products. So I just think it bodes really well. Generally, we welcome competition because it drives us faster and it drives innovation in our product solutions. If you talk about maybe where, I guess, the noise is, it is in the startup segment. So there are competitors, companies like Intuit we have got huge respect for, and other companies there. But one of the companies, just to give you a micro example, a company that is making a lot of noise, but the reality is they sell their unique selling point is all around beautiful software, the user interface. What you see with Pegg, it has completely eliminated that because the user interface is called Facebook Messenger. So why do not you have a conversation with your smartphone and say, "I want to take a photo of invoice," and it gets posted automatically to your ledger. It tells you your cash flow. So I think we are just going to see so much disruption driven by Sage in this area. I am really, really confident. Could you maybe just touch upon North America payments as well? Is the performance there a function of competition or the wider market? Yeah, I think it's more the wider market. I would say we definitely have seen reduced visibility in the North American market for payments. As we've said, it's delivered a flat performance, but I don't think we're alone in seeing that sort of performance in that market. Thank you. Thanks. Got a question? Thank you. Milan Radia, Jefferies. A couple of questions. The first was, within that SSRS number, X3 sits within that. I assume that going forward, it is going to be primarily a perpetual license sale, despite the fact that you have seen a bit of an uptick in the subscription. Is X3 overall now, and therefore presumably the remainder remaining strongly. Presumably, fall away very fast. Once that disappears within the next, say, 3 years, essentially, presumably that will show through in the organic overall revenue growth and within what is left of SSRS. The second question was around U.S. payments. I think just following on from your comments, it is subscale as an operation that you have there in a consolidating segment. How committed do you feel you need to remain to the U.S. payments business, given there is an opportunity probably right now to exit at a sensible price? Well, I will add to maybe payments. Strategically, it is really important to our customers to have that movement of money, that golden triangle we talk about of HCM payroll, accounting underpinning everything, and payments. We have done a lot of work with partnerships in payments, and we will continue that. I think the strategy holds good. Then I think the specifics in the U.S. business partly are scale related, but also the visibility in the marketplace. Then X3, Steve? X3 roughly is just under GBP 100 million business now. You are right, I think we will continue to see the bulk of new business being done on perpetual license. The only thing I would say is it does vary a bit geographically. In the international region, for example, there is more of a propensity to want to do subscription deals. If you think about it, subscription is essentially a financing deal. If your access to funding is a bit more restricted, then doing something on subscription is a lot more attractive than paying an upfront fee. Whereas if you have easy access to finance, then still doing the perpetual license and retaining the flexibility of being able to negotiate your M&S contract can be more attractive. I think, as you say, as we look forward on SSRS, once we have got to a point where most of the other products have already switched over to subscription, we would obviously aim to stabilize or to eliminate the reduction in SSRS by two things. One is the X3 growth. The second thing is that SSRS contains services. This year, the services revenue was pretty flat. If X3 is growing double digit, X3 is one of the products that drives most of the professional services revenue. Whilst we also do a lot of professional services through partners, also as the software provider, there is a lot of service that gets pulled through, particularly with those larger deals. I quoted the 20 larger deals in France over 100K. I do not think in FY17 we will necessarily see ourselves able to have flat SSRS. But as we go through into the medium term, sure, that is something that should be achievable. Thank you, Kevin. Thanks. It is Vijay Anand from Redburn. Firstly, on pricing. For the last couple of years, given the zero inflation or deflationary environment, you have talked about pricing being a less important growth driver. So if you do enter an inflationary environment, can you talk about your ability to raise prices given you have not done so for the last couple of years? And can you also say what have you assumed in your FY17 guidance as well as medium term for pricing? And a quick follow-up, what proportion of SSRS is licenses? Thanks. Okay. Yeah. Do you want to? On pricing, consistent I think with what we said last time. Pricing now really is, if you exclude Brazil and South Africa, which are obviously high inflation environments, we tend to increase prices by no more than inflation. So in the 6% growth, a couple of percent is due to price. But what we're doing is because we're shifting a high number of our customers to new contracts, what we're doing is as we shift people to subscription, we're offering them enhanced value and enhanced functionality. So we are seeking to increase the average revenue per contract. But it's not through just a price increase for the same thing. There may be a price increase bundled into that, but as part of it, you're getting increased value. The way we're selling to customers is not we're using our pricing power just to increase the price for the same thing that you had yesterday. You may be paying more, but you're getting more as well. And that is going to be more of the strategy going forward. The great advantage of the subscription model and also the cloud model is you're not giving people every two or three years a big release drop. What you're doing is you're selling to them more features off a menu. Therefore, there's more options to give people more on a more regular basis. Some of that is price. But as far as the customer's concerned, we're not just jacking up the price. We're giving them more value. And I think that's a very important differentiator. It isn't part of the strategy and it's not part of our assumptions that we will drive growth just by increasing price in the installed base and not delivering. On the split of SSRS, I'll just check my book. Actually, while you're doing that, I'll just give you a real example. I just think we've become a little more. An example in the U.K. is a campaign that's been running called 3Ps which is around payments, payroll, but the trigger point is the auto-enrolment pensions. And they put a bundle together. I think we're getting an incredible high, like a 41% hit rate. Because a lot of small businesses have to now take responsibility around auto-enrolment and employees having pensions. And this has allowed us, as a value bundle, to drive cross-sell, but also within that, just put a very modest below inflation price increase onto a subscription relationship. Yeah. So that's the sort of way it's going. So it's not driven by, I think, inflation and price. It's very much a consideration we build into the value bundling, so a customer feels really good about the value they're getting, and they get a lot more functionality. It's about half. The SSRS is roughly half software and half services. Next question. George. Good morning. A few quickies from me, if you wouldn't mind. What's the client attrition on Sage One, please? Do you want to do them all? Do them all? Okey-dokey. Secondly, great to see you're working on NPS. Could you give us a data point there so we know where it starts from? Then, finally, what's the staff attrition like at Sage? Okay. I will maybe kick off. The only variability, George, is they are very different data points from around the world. Sage One, we are now getting stronger retention, in terms of particularly the U.K., Brazil, and it depends. A lot of it is driven by insolvency as the other factor. On the macro level, Steve is going to look at the data while we do this. Yes. So actually it is two things. It is geography and it is age of contract. Yes. So once you get over six months in established markets like the U.K., the retention rates are very similar to other products. So they are in the high 80s. The U.S. is the complete opposite. In the U.S., to be honest, some months, we still lose as many customers as we acquire. In international markets, again, consistent with the other products, you tend to get a slightly higher attrition rate because there is just higher business closures. But I think the message is, excluding the U.S., once a customer has been with us for six months, it is a very similar experience to the other products. Yes. And on NPS, we have started the journey. So this is the first year we have got consistent measures in every country. And the plans for the future is we actually break it down at the point of interaction. So in customer service, it is off the scale at 90%. However, if you look at it with a couple of exceptions, it drags the overall data down. Particularly, actually, Asia where the NPS is significantly lower because we had some, about a year ago, product quality issues. And that is also reflected probably in the numbers in the business performance. But overall, it was up 61%. The only thing I would do is say that this is the first year, so that is the baseline. And overall, if you look globally, it is, again, very fragmented. If you look at the U.S. partners about two years ago was minus 40. Now it is plus in the teens. So you break it out, but overall, it is 61%. In future years, George, we will give you, because we have got more confidence in the baseline, the baseline, and we will break that out. We have broken some more things out today. We will continue that to give you the transparency. And then colleague engagement, I think there has been a lot of work going on. We have, about, I think 72 of the top 100 have changed in the last couple of years. 35 of those, so half of them, are internal promotions. Right across the company, the head counts actually stayed flat. 13,800. We have hired about 3,000 people over the last year. We have let go about 3,000 people. Most of those actually have been managed. We gave you an example of Mark. We have got Santiago in the front row, who is the executive who led 300 exits, but 200 with new skills, digital skills. The other thing, really pleased that obviously we got 48% female, but I think significantly on the top team, we have gone from 25% a year ago to a third women in our top 150 leaders. So a lot of it is really us managing the skills for the future, but also being very embracing around diversity inclusion. And that is a key part of that, and I think we have got more to do there. But you can imagine, we have not been sitting here twiddling our thumbs in Newcastle and London. We've been hiring 3,000 people. There's been a lot of heavy lifting gone on in phase one to give us the confidence to stand here and talk about phase two and beyond the transformation. We wouldn't consider that to be sustainable. We wouldn't necessarily want to be hiring 3,000 people every year. I think because it's the first phase of the transformation, there's been a lot more proactive management of the skill shift. You've been losing 3,000 people every year. I should have given you some color. When I joined, it was the first time we introduced performance management. We'd never had the honest conversations about performance and outcomes. This year as well, I can share with you, we've got a process we've rolled out right across the company called Values, Strategy, Goals, Metrics, VSGM. Everybody's now cascaded that down into their objectives. Every one of the top 150 have a VSGM that's connected and cascaded from mine, and mine was signed off by the board. If you're driving to Alnwick on a Friday from Newcastle, then you know your objective's connected to Stephen Kelly. Everybody in the company's aligned. That's what we talked about in terms of one operating model rather than hundreds of different operating companies. The other aspect, because of performance management, there's obviously two factors. One is we're driving performance higher to drive a high-performance organization. Also, we need skills for the future right across our firms. We've been investing heavily in those skills. I think if you look at the general sentiment and engagement of our colleagues, it's significant, and things that have been, candidly, game changers and more successful than I could have ever imagined are things like the Sage Foundation, where, particularly if you're in Chicago, you just see incredible work that's going on with veterans, with women, with youth, and the way our colleagues have thrown them into that. We give five days paid by Sage for every colleague in the world to go out and connect into the community and do charitable, nonprofit work. Again, I think we're way ahead of the pack, and I think it's a really powerful tool for recruitment and retention as well. In the middle. A couple of questions on that reason behind that, and how is that going to change going forward? Then secondly, just a quick question on the restructuring budget. Is that GBP 100 million again, or have you mentioned I know it's GBP 50 million of saving, but what's the cash charge for that? Thanks. Yeah. In terms of Sage One, I think the real big takeaway is we've got the product. Again, you can see them outside yourselves. These products are winning awards. Sage One is now on a single code base. You've seen the rollout plans around continental Europe, and the strategy is working. Every country. You look at Brazil, who hadn't launched Sage One a year ago, getting 10,000 new subscribers a month. We're now new subscribers a month. We're now seeing the adoption and acceleration of the products, and therefore, what it speaks to us in the U.S., yes, we're disappointed in terms of Sage One penetration, specifically in the U.S. Canada's gone really well. So overall, around the world, 81% increase in subscribers. You know what we're like. We are tough on ourselves. We'd like to have done better. The U.S. is one area we're going to put a lot more focus, and we're making some changes literally as we speak, to drive that up. But what it says is the product's fine. Big tick in the box. The strategy is absolutely fine. It's the execution where we really need to kind of step it up. Again, it varies a lot by country because it depends on the maturity of the model, and it depends on the channel. Particularly if we acquire customers digitally, through the digital channel, typically, we offer a free trial first. The conversion from trial to paying subscriber, again, as I say, varies enormously by country. But if you take the U.K. as an example, we are typically getting about a quarter of the trial subscribers converting. Once they sign up, if it is through the digital channel, then it normalizes to the retention rates that I was talking about very quickly. The reason for that is that if you acquire through the digital channel, the customer is basically already made the decision to engage. They have gone through the trial. If they convert from the trial, they are a paying subscriber. They are happy. They have made a decision. If we go through third-party channels, particularly if we offer upfront discounting, then you may get a dropout later. For example, if we offer you a low trial rather than a free trial, so maybe we offer you something for a few GBP a month, you are not really committed at that point. You are still trying, right? It is when you actually move into the point where you are paying what I would describe as a kind of proper price for the product, so you have made a conscious decision that this is something that gives you value, that is when you get the hold. The reason it varies by country is partly because probably brand impact. But it also is because we sell slightly differently in each of the countries. In Brazil, for example, you are basically selling compliance. Or you are selling an ability to comply with laws because the laws are complex in Brazil. Once you start using an accounting product, actually you become quite committed to it quite quickly because it makes competition. There is less competition. U.K., you have obviously got a lot of choices. It is easy. You can use spreadsheets. It does vary considerably across the countries. On the restructuring charge, we are saying we will deliver at least GBP 50 million of savings next year with a worse than 2 years. Yes, we are indicating up to GBP 100. As I said in my presentation, we do not want to be known as a management team that constantly has exceptionals. But we think this is a pretty significant transformation. This will be the last exceptional. Then we will go into business as usual. Thanks. It is Paul Morland from Canaccord. It looks like that business is still accelerating. 84% growth in the full year. You did 17% in the first half. But the customers are growing faster, and I am just interested to understand that in the context of what you said about France, and you have done 20 deals there greater than 100K, which suggests the deal size is increasing. But with customers growing faster than revenues, that suggests deal size is decreasing. I wondered if that has anything to do with going more direct, perhaps, than through the channel? Just an understanding around that X3 acceleration. The second question was just around the chart you put up on all the cloud boxes that you are ticking now, and we will complete that chart during the course of this year. I just wondered to what extent, in those products you are using the Force.com platform. I don't think you've mentioned Salesforce today, but my understanding was that the move into the cloud was very much driven by standardization on the Salesforce platform. Thank you. Yeah. Maybe on X3, then we'll come back, and Steve will give you the data. I think there's a couple of things. One of the things we called out, I think a year ago, was the Enterprise Europe business, which is X3, was on the watch list. I think, and I shared with you, I thought the issues were associated with sales and marketing execution. At the time, we were changing the teams, in France, in the U.K., and actually in the U.S. as well. We've seen great international growing at 74%. I think the good news is we're also selling in particular places like France, some larger contract values. But in the areas like the U.S., we've actually seen it as a great way to potentially be an acorn to grow. So companies have put X3 in initially who've got big growth plans. Hopefully we scale with them, particularly on a subscription relationship. The other thing I think, which is probably quite exceptional, we've had this product 10 years. So we've gone from about 3,000 customers to almost 4,000. Just over 4,000. So literally a year, we've increased the customer numbers, and we've just got much better discipline around pipeline management, our conversion rates and building a more scientific sales and marketing model, which is paying through. Do you want to give the data? Yeah. There's a couple of dynamics. One, there is a wide range of deal sizes, because we do kind of relatively light implementations up to these kind of larger 100k pluses, but we also do deals down at sort of 10, 15k as well. There's a geographical mix. So in international, the rate of customer acquisition is growing more quickly. That tends to be an average lower deal size than it would be in Europe or North America. Then on the partnerships. This is, I think again, probably over the last couple of years, a game changer. It would've been inconceivable to be standing here 2 years ago and say top partners for Slack, Facebook, Salesforce, Microsoft, Google, Amazon, all these companies who are household names and Sage is up there, as a pinnacle customer partner in terms of this. So on Salesforce, a really strategic partnership. Actually, Marc Benioff, when he announced with me, Sage Live said for him at Salesforce, this is the most strategic partnership in their 16-year history at the time. The partnership's still going well. We use the Salesforce platform for the Sage Live, and we're using their mobile technologies, their smartphone technology, which is called Lightning, to really accelerate our mobile-first applications with Sage Live as well. That's also got big impact for the accountants because it's got great practice management software as well. So for our accountant solution, that's a really strategic answer. The other platforms that we build on, though, to accelerate our development and innovation is also AWS with Amazon and Azure with Microsoft. So they're the three sort of strategic platforms that we have our solutions and apps built on. But Salesforce, yeah, to answer your question directly, very strategic to Sage, great partner, good technology, and allowed us to really accelerate the development both of Sage Live and also, we're finding the acceleration, working with their sales and marketing teams helping significantly as well. You don't use Salesforce on Sage 50 accounts, for example, or any of the other cloud products? Correct. We use other cloud platforms. We think strategically it makes sense to have two or three. Ultimately, I'm sure that. The other thing, superficially, it sounds like they're all the same. They're not. Salesforce is brilliant on Salesforce1 as a platform. Other technologies are much better at handling data, large massive volumes of data. It really depends what segment of the market we're going for. The market needs for a startup, obviously on the move, typically mobile first, is different from an enterprise where you've got a complex supply chain and you have to understand your supply chain. Therefore, the cloud platform is not a one. Totally endorse Salesforce as an absolutely strategic partner for Sage, and they've been incredibly helpful now beyond in terms of mobility and artificial intelligence. And we use their products internally as well. Yeah. Just one final thing on that. There's no implications of these partnerships for your gross margins going forward? Yeah. They're cloud platforms that effectively are leveraged technologies, and our gross margin is independent of effectively the cloud business growing faster. Yeah. Obviously, we pay them to use their platforms. Part of the strategy is to make sure that you have two or three providers. If you had everything on one supplier, you would be somewhat vulnerable because you have no leverage when it comes to negotiating the royalty that you have to pay them or the fee that you have to pay them to use their platform. But we don't envisage at this point that's going to be a major influencer, in that Stephen says we're using two or three different platforms. I think probably- One more question. Maybe one more, we'll wrap up. One more? Anybody? Wow. Gosh. Well, okay. If no more questions, then we will be around for a few minutes afterwards if you want to come down and have a chat. But thank you very much for your support again. And, I guess we will see you in six months again. Thank you very much. Cheers