Earnings Call: H2 2015

Dec 2, 2015

Hello, and a very warm welcome to everybody here this morning and the folks on the teleconference. For those of you who are on the teleconference, we just started with a brief video that featured real Sage customers. Everyone on that video is a customer. Our business is all about entrepreneurs and championing small and medium businesses around the world who are the powerhouse of every economy. Before we get started, I want to give you a quick overview of the agenda for this morning's presentation. I'll provide a brief summary of the performance of my first year. Then I'll hand over to Steve Hare to take you through the numbers. Then I'll come back and update you on the execution progress of the transformation we outlined at Capital Markets Day in June and close with our outlook for FY16. Please note the safe harbor statement on my left, which you can see in your packs and also on our website. When I joined Sage, I was very excited, as I told you last year. For me, this is a great fit, the combination of my experience in technology and my passion for entrepreneurship. After my first year, I have to say I'm even more excited. I've looked under the covers at U.K.'s greatest and largest and most successful technology company over the years and seen huge potential to create something very special for all our stakeholders. At CMD, we outlined the steps that we're taking to transform the business, and we committed that we would maintain our financial performance through the transformation period. We've exceeded the financial targets, and this represents the fastest rate of growth for eight years. We certainly don't want to get ahead of ourselves, as this management team is early in its tenure. We've opened a new chapter for Sage on the journey for high-quality, sustainable growth and can share with you today some of the early signs. The transformation is already underway. Yes, it will take time, and it may be nonlinear, with inherent operational risks. FY16 is a pivotal year for us, but we're building and have built an experienced team and have a balanced and sequenced approach to ensure our success. We're building momentum and starting to see the first green shoots of progress. I'll come back to talk to these after Steve. We're very reassured by the resilient business model that we have in place, and we mean to continue to deliver financially as we transform. I'd like to pass now to Steve, who will talk you through the highlights of the numbers. Thank you. Thanks, Steve Hare, and morning, everyone. Two main parts to the presentation today. As usual, I will talk through the results for FY 2015, but first I am going to explain the changes that we have made in terms of how we record revenue in order to give improved clarity and transparency, and also give you the context of why we have made these changes. This slide shows our results on the same basis as we have previously reported in order to give a clear like-for-like comparison. The headline is we have achieved our targets. These results are in line with what we presented at the half year, and the momentum in both recurring revenue and subscription revenue has continued. This slide shows the side-by-side reported results against the results using the prior basis to give full transparency of the changes. Why make these changes now? We have completed a comprehensive root-and-branch review of this business. This has included organization, people, process, internal systems, policies, and we want to make sure that we have the capability to scale the business. Part of this is reviewing the reporting to ensure that it is consistent with the new business and operating model. Steve Hare and I wanted to make sure that we had a crystal clear starting point for the next phase that helps all of our stakeholders clearly understand the underlying commercial transactions. We have consulted with our auditors and with the FRC to ensure that we have the best available advice before reaching our conclusions. Just to be clear, these changes have no impact on cash. The only change is how we record revenue. I will talk you through the three changes and show you the impact. The first impact is to change how we account for upfront payments on a number of accounting and payroll products. This involves reclassifying GBP 55 million into recurring revenue and deferring GBP 3 million into FY 2016, therefore reducing SSRS by GBP 58 million. As I will illustrate, this change in definition is driven by the evolution of how we sell and how the customer consumes our products. The history was to sell an on-premise product for both accounting and payroll with a separate perpetual license with an optional maintenance and support contract. The accounting for this is very clear. We recognize the license at the point of delivery and the M&S over the life of the contract. Upgrades would also be recognized at the point of delivery. Our aim is to encourage customers to move to subscription, and as a result, to have one single payment covering a bundled offering. If the customer ceases to pay, then they cannot use the product or the service. Again, the accounting for this is very straightforward, with revenue recognized over the life of the contract. As part of our customer for life strategy, we want to ensure that customers can receive the benefit of a bundled offering while still retaining their on-premise product and deriving value from their perpetual license if that is what they choose. Reacting to this, in the middle of the slide, we illustrate how we have started to sell contracts that have many of the features of a subscription contract, but the software is still on a separate license. However, that license is increasingly bundled into the maintenance and support offering, much more so than in the past. I want to illustrate with two examples. The first is Sage 200 in the U.K. and Ireland. We now sell an annual license key to use the software rather than a perpetual license. And this also requires a concurrent M&S contract. The product is connected, and the product will turn off without the validation of a valid license key. This is essentially the same as subscription. Historically, we would have recognized the revenue on the upfront license at the point of delivery. Whereas now it will be accounted for as subscription, i.e., over the life of the contract, as this reflects the integrated nature of the offering and how the product is being consumed. The second example is Sage 50 Payroll. A perpetual license is actually still sold rather than a license key. However, to maintain the functionality, for example, the updated tax tables, the customer needs to have a current maintenance and support contract. Legally, the product can still be used without an M&S contract, but it does not function as intended because the tax tables are not updated. Now, this is not subscription. However, it is a bundled contract for the products to work as intended. Therefore, I think it is more appropriate that the upfront payment for the license is now recognized as being integrated and is therefore recognized over the life of the contract rather than being recognized upfront. The next change relates to referral commissions paid to independent sales organizations in our North American payments business. Historically, Sage treated the ISO as a business partner and deducted these commissions from revenue, and therefore, showed revenue net. I think it is more transparent and more appropriate to show the revenue gross and to treat the referral commission as a cost. The impact is to increase revenue in the year by GBP 46 million and increase the costs by the same amount. There is therefore no impact on absolute profit. However, because we have revenue with no corresponding increase in profit, the operating margin percentage reduces. This slide illustrates why I think the grossing up is a more appropriate approach. The contractual relationship is between Sage and the end customer. The ISO is not involved in the ongoing relationship. This is very different from, say, a business partner on Sage 300, where the business partner will usually act as a reseller, and therefore, the business partner is a customer of Sage. The final change is to create a new category of revenue called payment processing. Previously, this revenue was included within recurring revenue, and it provides greater transparency to show processing revenue, which is volume driven, separate from software-related recurring revenue. This next slide summarizes and brings together all of the changes. The recurring revenue is impacted by the reclassification from SSRS. The gross up of referral commissions is included in the line, but then gets transferred to processing revenue, i.e., it is part of the 158 million in the next column. Processing revenue is as I have explained, and is mainly payment processing, although there is a small amount of payroll outsourcing included. SSRS revenue reduces due to the upfront payments being deferred. The revenue in FY 2015 increases by GBP 43 million due to the ISO gross up of GBP 46 million, which will obviously continue through into future years. And there is a small deferral of GBP 3 million into FY 2016. So having explained the changes and summarized the impact, I now show all the information on a revised basis as presented in the annual report and accounts. And as you can see, the impact is to reduce the overall revenue growth to 6%, but to increase the recurring revenue slightly to 9%. As previously mentioned, the operating profit is only slightly impacted due to the deferral of the 3 million of revenue. However, the margin percentage reduces more because of the revenue gross up of the ISO referral commissions. To summarize, I believe these changes improve transparency and are consistent with the review of the business that we've undertaken. Going forward, as we accelerate the switch to subscription, we will also look to simplify how we sell to our customers, and this in turn will simplify our revenue recognition further. Organic revenue growth excludes the acquisitions of Exact and PayChoice, which add 35 million of revenue. These will be included as organic in FY 2016. We have chosen not to create any exceptional items this year, but it is worth noting that we've absorbed around 20 million of unplanned investments which will benefit future periods. 15 million of this cost was included in G&A, and 5 million in sales and marketing. Moving through from operating profit, we had an interest charge of 21 million, which is flat year-on-year. Tax of 90 million, which is a reduction in the effective tax rate to 25%, which has been driven by a lower rate in the U.K. and some benefits from prior year tax planning. I would expect 25% to be at the lower end of the range going forward, because I think some of the tax planning will be difficult to sustain, and so I would guide to a range of 25%-27%, with it being more towards the upper end in the medium term. On a statutory basis, we've taken a goodwill impairment charge of 62 million relating to Brazil, given the difficult economic conditions in that country and a more cautious outlook. However, our long-term confidence remains, and achieving 9% recurring revenue growth was a good result. We've also achieved EPS growth of 12.6% due to the lower tax rate and some share buybacks early in the year. Some U.S. investors have asked us to show depreciation and amortization separately, along with the share-based payment charge, in order to aid comparison with our competitors, and so I include it on this slide. Finally, we announced an 8% increase in dividend in line with our progressive dividend policy. I'll now move on to some of the group's cash metrics. Our underlying cash conversion remains strong at 106%, up from 101% last year. Free cash flow of GBP 296 million represents 21% of revenue. The closing net debt is around one times EBITDA. Just pulling a couple of the numbers out, the M&A relates to PayChoice, which was completed in October 2014, and as I mentioned, the buyback of shares was completed in the early part of the year. I'd now like to look at the revenue categories. As I've already mentioned, we achieved a 6% overall revenue growth, driven by a 9% increase in recurring revenue, which in turn was driven by a 29% increase in software subscription. We now have over 690,000 software subscription contracts. I'll call out some strong performance in areas of focus in the regions in later slides, but we are seeing offerings like Sage 50 lead the way in incentivizing customers to move from maintenance and support to subscription. In turn, M&S growth, and therefore the other recurring revenue category on this slide, is relatively flat. We now have 173,000 subscribers globally on Sage One and have announced that in the U.K. we have surpassed 100,000 subscribers. The revenue is now running at just over GBP 1 million a month. Processing revenue is the new category, and this is principally the payments business. 2% growth is not where we want to be. In recent months, we've seen some new account additions starting to accelerate in North America, and Sage Pay's growth has been much more encouraging. Decline in SSRS is a consequence of our strategy, and as we've previously called out, will vary depending on the pace of transition and the level of license sales, particularly on products like X3, where subscription adoption is slower. At the Capital Markets Day, we shared the new product classifications growth and heritage. A year ago, we had 67% of R&D focused on invest products, which was the old category. We now have 87% of R&D on growth products and over 90% of sales and marketing. This focus has meant that all of the revenue growth is now coming from growth products. Initiatives such as core product modernization, including cloud versions of our on-premise products, is really beginning to pay off. We are seeing collaboration across borders on products like Sage Drive. Our growth in annualized subscriber base has been and will remain one of our leading measures. There's a number of strong offerings which have seen the number of subscribers grow to over 690,000. Between Sage 50 accounts and Sage 50 Payroll in the U.K. and Ireland, innovations such as Sage Drive and monetizing enhanced functionality from pension auto-enrolment added GBP 19 million. Sage 50 accounts in the U.S. and Canada contributed GBP 14 million, with Sage Drive being launched in Canada, where we saw a fivefold increase in subscription. Sage Drive will be launched in the U.S. this half. The i7 upgrade to SMB Payroll in France added GBP 14 million. It's important to note that whilst the strategy is working, this is principally driven by enhanced functionality. In previous periods, we've called out that half our growth has come from price. In this period, it's more like a third. On-premise customers are choosing to substitute their M&S contracts for a more integrated subscription offering. Of our Sage 50 customers who are required to comply with the pension regulation, 58% took up the auto-enrollment option. For i7 Payroll in France, 78% of eligible customers have taken up those offerings. To maintain growth, we aim to mirror these initiatives on other products. Although many smaller businesses in the U.K., actually around 80% by volume, have not yet been required to comply with the pension auto-enrolment. Sage One appears on this chart for the first time and has added GBP 4 million to the growth in ASB. As I mentioned earlier, Sage One now has a run rate of just over GBP 1 million of revenue per month. Moving now to the regions. This year, we present the international region for the first time. This region effectively is everywhere outside of North America and Europe and is the old AMEA region plus Brazil. We've taken the opportunity to group these countries together to maximize their similar high-growth economies and the associated white space opportunity. Now taking each region in turn and starting with Europe. Overall growth in Europe was 5%, with recurring revenue growth of 8%. It is worth noting that 75% of revenue in Europe now is recurring. Processing revenue growth of 9%, driven by Sage Pay, is encouraging. We have had some good progress integrating Sage Pay into our products in the U.K. and Ireland. The highlights are noted on the slide, but I would like to emphasize a few of them. A 31% increase in subscription in the U.K. and Ireland. We now have over 20,000 installations for Sage Drive. A 22% increase in subscription in France, driven mainly by the payroll products. Elsewhere in Europe, in Spain, Sage Murano grew by 8%, and in Germany, Sage Office Line grew by 9%. In Enterprise, we have now given full sales responsibility back to the country managers. Despite the overall softness in the enterprise market in Europe, X3 grew by 5% in Europe. If you exclude France, outside of France grew by 19%. It is also worth noting that the regional president for Europe took up his role at the beginning of the year, an internal promotion. The country managers for France and UKI were both internal promotions during the year, and the German country manager was a new external recruit. A great example of seamless transition leadership. In North America, the recurring revenue is at 58% of the total and considerably lower than Europe, but grew three points in the year. Organic revenue of 4% was underpinned by recurring revenue growth of 9%, but overall growth was held back by a slight decline in processing revenue. The recurring revenue growth was achieved by a strong Sage 50 performance in both the U.S. and Canada, with Sage Drive being launched in Canada and due to be launched in the U.S. this half. As I said, this helped a five-fold increase in subscription and combined with X3 growth of 19%, gives us some encouraging signs for this region. Processing revenue growth for the year as a whole was a disappointment. Actions have been taken by the new leadership. In H2, we have added 30 new independent sales organizations, and in Q4 alone, 1,000 new customer accounts were added. Performance in the SMB sector in North America also improved in the second half with a focus on reactivating off-plan customers and launching a refreshed partner program. We also launched the cloud versions of Sage 100 and Sage 300, both on subscription. In international, recurring revenue growth was 14%, the overall recurring revenue mix flat at 65%. Organic revenue growth was almost the same at 14%, but flattered by a one-off SSRS growth of EUR 4 million in Malaysia, driven by legislation changes that we talked about at the interim results. Sage X3 showed particularly strong growth in this region of 33%, with over 20% growth in Africa. This was supplemented by a strong performance in other local growth products for the enterprise-size customers, such as Pastel Evolution and VIP Premier Payroll, both of which showed double-digit growth. We also launched Sage One in Brazil, in Malaysia, and in Australia. In the Brazilian market, we grew 8% in the year with software subscription double digits. This is despite challenging economic conditions, and our strategy in Brazil will focus on winning new customers, supported by global products such as Sage One, which was launched in the second half and has started to show momentum. At the Capital Markets Day, I introduced our plans to create capability and capacity for growth. We are focused on creating one global approach that is scalable while still delivering customer experience locally. As we move into FY 2016, our G&A as a percentage of revenue is 19%. I previously called out a higher number of 21%-22%, but following the implementation of the new organization, we have moved some costs, for example, country managers, that are now focused on sales to be in the right place, i.e., selling costs. G&A this year has also absorbed around GBP 15 million of unplanned non-recurring costs, the benefit of which will come through in later years. However, to counter that, I would flag that our share-based payment charge is likely to rise in the future as we see more vesting, but this will be absorbed within the targets. To allow further investment for growth, we are targeting a run rate saving in G&A in FY 2016 of at least GBP 50 million. This will be reinvested principally in sales and marketing. These savings will come from three main sources: procurement, sites, and headcount. Looking at our current footprint, we have 139 sites and over 12,000 suppliers. Half our sites have less than 50 people based at them. As always, we will always talk to our own people first about any changes. However, we have already taken action. We have served notice on 10 sites, and we started with changes to job roles announced in the U.K. We will periodically update the market on our progress as we go through these changes. Throughout the transition, we will target a minimum two-year payback, and in FY 2016, to drive the GBP 50 million in cost savings, it is likely we will incur an exceptional charge in the region of GBP 100 million. To summarize, we have achieved the targets which were set three years ago and successfully closed out the 2012 strategy. We have created momentum into FY 2016, and there has been and will continue to be strong free cash flow. Stephen and I are confident that we know how to execute through what will be a pivotal year for Sage, and we believe we have the building blocks in place to deliver on our plans. And with that, I would like to hand back to Stephen. Thanks very much, Steve. I spoke in my opening remarks about the opportunities for Sage. Let me just first outline what is happening out there in the industry and the marketplace. I have been in technology for over 30 years, and today I would say it is the most disruptive, exciting time for any of us in terms of technology. For consumers, there has been a massive move over the last few years to mobile and the disruption that it has represented. From literally nowhere, eight years ago, we now have approaching 4 billion smartphones around the planet. There is also just an incredible explosion of data. It is just staggering to realize that 90% of the world's data has been created in the last year. It is estimated that by 2020, the volume of data will increase by 50 times. Not 50%, 50 times. Now, Sage is really well-placed to benefit from these seismic shifts, and we are confident that the future is a world where entrepreneurs will run their businesses the way that consumers live their lives today. Mobile first, leveraging the power of apps and big data. The future is real-time accounting, where entrepreneurs control their business from the palm of their hand. Sage is creating this. Sage has a history of pioneering accounting software with the genesis of the PC revolution back in the 1980s. Innovation has always been at our roots, and we are innovating again in an era of cloud, mobile, social, big data, and analytics. Not just catching up as we might have been in the past, you could argue behind, but leapfrogging the competition and inventing the future. With only 3 million business customers around the world in an addressable market of 70 million businesses, this is a huge white space opportunity and a tremendous opportunity for new customer attraction that we can drive to create that market opportunity. Today, there are millions of small or medium businesses that are not even using an accounting system. Many businesses run themselves on spreadsheets and word processors and lose 2 hours a day to spreadsheets, keeping a manual scorecard of the business. Consumers have taken control of their lives, as we all have, and businesses want that control in the same way. The market is ripe for innovation, and Sage is ideally positioned. In fact, I would argue Sage is the only company that can serve startups, sole traders, through to businesses employing thousands of employees. We are also the only one true global player in our industry. We are the market leader in the majority of the markets we serve. For example, in this economy, the U.K., 54% of businesses pay their employees using Sage. We have an enviable business model with organic growth, strong margins, cash flow, plus disciplined capital management. With the strength of Sage in Europe, our domain expertise and experience, the resistance of customers to changing their accounting solutions, there are significant barriers for the competition. However, we fully have to grasp this opportunity and deliver the sustainable growth which we believe is possible. We have to transform. We are clear about that, and we outlined that at the Capital Markets Day. Let me remind you of CMD and the five pillars. First of all, customers for life. Second, winning in the market. Third, revolutionizing business. Fourth, capacity for growth. Finally, one Sage. Regardless of your favorite expression, we all know that strategy without execution is hallucination. For us, for Steve, myself, this management team, execution and delivery is everything. It is about executing at pace, improving process, systems, and people with a strong culture that makes the business growth sustainable. Preparation for this journey has been understanding the business and fixing the basics. The detail is critically important, and Steve, myself, and the management team have a laser focus on this. Now to our progress. Firstly, on customer for life. Every Chief Executive Officer tells you how important customers are, but we are absolutely deadly serious. Building ever closer relationships underpins our baseline revenue case. I have met thousands of our customers in my first year, and they have told me Sage is indispensable in their business. One headline KPI we measure ourselves and track progress is contract renewals. This year, we've seen a marginal increase from 83% to 84%. Underneath this, there are some encouraging signs that give us confidence that we'll see increasing renewal rates in the years ahead. Our analysis shows that renewals increase to about 90% when customers move to subscription, and increase further when customers take multiple Sage products. That's why we're driving subscription growth. Steve provided the update on the growth of subscription contacts to over 690,000. Therefore, also, we've been active cross-selling. Cross-selling our products to existing customers at an increasing rate. In U.K. and Ireland, for example, the number of our accounting customers buying Sage Pay is up 160%. Keeping focused on our existing customers is critical as we scale. We now are measuring net promoter scores on a global basis, having never consistently done so before. What is especially positive is how our messages with customers and partners and accountants of no end of life and no forced migrations have been so well received by the marketplace. Our assessment would be that we've made some encouraging progress on customer for life, and laid the foundations to drive further improvement, but much more to do. Secondly, winning in the market. We have now, for the first time, a concerted focus on new customer attraction and acquisition so that we can be winning market share. Let me share with you some data points. Sage One, our pure cloud offering to startup businesses, has seen paying subscriptions more than double to 173,000. In U.K. and Ireland, as Steve highlighted, we've exceeded 100,000 subscribers, and Sage One is now the fastest-growing cloud product in the U.K., adding over 4,500 paying subscribers per month. To ensure that we can win in the digital marketplace, we've launched two state-of-the-art customer business centers that will drive world-class digital marketing, lead generation, digital sales, and service. These have only been in operation in Atlanta and Dublin for a couple of months, but we're already seeing results. In the U.S., for example, Sage One is now consistently in the top 10 Google searches for online accounting, having spent the last two years languishing behind. Sage X3, our global solution for the enterprise market, has also seen double-digit growth. Again, having met dozens of these X3 customers, and based on my personal experience of enterprise software, it's unparalleled to have such high levels of product satisfaction. So we see strong potential for accelerated growth with X3. We're building momentum with our global products, winning in key markets, and we've yet to unleash fully the full potential of our new digital marketing capability. So some very early data points of progress, but again, much more to do. Revolutionizing the business. How can Sage become a positive disruptor in the marketplace, the true champion of small to medium businesses and entrepreneurs? We've certainly rediscovered our technology DNA, and we are revolutionizing business for customers, partners, and accountants through the golden triangle of integrated accounting, payroll, and payments, supporting the frictionless movement of money. As I said earlier, the market is changing so fast. In the past, you could argue that Sage may have been slow to react. But in recent months, we have made some bold moves that demonstrate our intent. We aren't interested in playing catch-up. We're genuinely interested in leapfrogging any competition. Let me give you a couple of examples. Sage Live, developed in 26 weeks in partnership with salesforce.com, has already 20 early adopter customers and a strong and growing pipeline. The product is way ahead of anything in the marketplace. One early adopter VP of Finance said, "I never thought an accounting solution would give me goosebumps on my arms." Sage Impact, the industry cloud platform for accountants, was brought to market in 51 days, and again, received rave reviews and awards. It is not just about radical new product launches, but it is also about driving value and innovation for our customers with improvements to existing growth products. We are driving agility and productivity to reduce our development cycles. In the last year alone, we delivered over 200 product enhancements. Our testament to our innovation is that we have now received countless industry awards in the last year. For example, from K2 in the U.S. and Experton in Germany. Innovation does matter to our customers. It is very significant. I have just come back from Vegas, where I spoke at the largest conference for accountants in North America, and we launched two new cloud products there, Sage Match and Sage Value. The feedback was that accountants have seen more innovation in the past 12 months than at any other time from Sage, and also than any other player in the marketplace. This new world of technology is about platforms and open APIs that create ecosystems to innovate at an accelerated pace beyond the capabilities of any one company. That is why we have entered into strategic partnerships with a number of high-profile organizations like Salesforce, Microsoft, Google, PwC, and Deloitte to add to our thousands of existing partners. In terms of revolutionizing business, it is early days, but the evidence and the data points speak for themselves. We have certainly got our technology and innovation mojo right back. Capacity for growth. We are creating capacity for growth through an efficient, scalable organization which underpins a sustainable business model. Steve covered this earlier and highlighted the GBP 20 million of additional investment in FY15 for growth in future periods. This is not just about quantifying efficiencies. We are also building a culture of excellence in governance, excellence in process and systems that can scale as the business grows. The quality of Sage leadership is critical to our success. In the past year, we have changed nearly 40% of our top 100 leaders. The majority are experienced new joiners, complemented with a number of internal promotions. It is not just about the top 100. Across the organization, we are now attracting the best talent from companies like Adobe, Twitter, LinkedIn, Oracle, and Microsoft. We have taken the first steps on our journey to create an efficient, scalable, high-performance organization. Now One Sage, the last of the pillars, but probably a very crucial one, and it underpins everything else we do. You know that historically, Sage was federated, disparate, and fragmented with huge complexity. We are changing this with the implementation of a new global model and with consistent culture, values, and behaviors applied throughout the organization. Implementation of the new organization design has already started, leading with two of our biggest geographies, France and the U.K. Additionally, it might seem like bread and butter to most organizations, but this is the first time we cascaded consistent and aligned objectives from the executive committee all the way through the organization, so every one of our colleagues knows what they are accountable for. As another example, we reduced the number of sales compensation plans from 129 to 4 and aligned the bonus for non-sales colleagues. We have also reduced the performance management systems, having reduced it from 19 to 1. All these move and move at speed, but remove complexity and ambiguity from our organization and drive consistency and consistent measurement towards a high-performance company. All these initiatives were outlined at the FY16 kickoff for our colleagues. It is the first time we have run a program of face-to-face communication with all our 13,000 colleagues at the start of the fiscal year. After the colleagues, from a poll survey, over 80% of our colleagues said they were proud of the steps Sage is taking. It is really important to bring our colleagues on the journey. Innovation, like the new Sage Foundation, has caught the imagination of colleagues and created stronger engagement, is critical as we can only succeed in our vision with our colleagues with us at our shoulder. Bringing this all together, we can demonstrate the momentum that is building around flawless execution on our five strategic pillars. We have customers at the heart of everything we do and build ever-closer relationships. We are developing a relentless focus on new customer acquisition to win market share. We have rediscovered our innovation and technology mojo and are revolutionizing business for our customers. We are not interested in playing catch up. Everything we do will be about leapfrogging the competition and creating capacity for growth. Very importantly, we are building the right culture, the right behaviors, and applying them consistently throughout our organization to get 13,000 colleagues marching to the one Sage tune. Let us turn our attention to outlook. With our transformation, we are building genuine momentum and have positioned ourselves for future sustainable quality growth. We are making first half investments to create further momentum as we exit FY16. During this period of transformation, we are confident of achieving at least 6% organic growth and at least 27% organic operating margin as reported on the revised basis. Taken together, this gives our shareholders long-term sustainable growth, superior margins, and continued strong cash conversion. Everything at Sage needs to be about inventing amazing technology, winning new customers, and growing our customers for life. This is where our time, energy, and investment is focused. In summary, we are certainly pleased with the fastest rate of organic growth for the last 8 years, and we are pleased that we have exceeded the financial targets set 3 years ago. We have started the transformation outlined at CMD in June 2015, and can certainly see now today green shoots of progress as we have shared with you. We will continue to transparently report our progress against these five strategic pillars. Our momentum is building and our strategy is clear. We have much to do to navigate and manage the operational risks. Our balanced and sequenced approach, combined with the experience of the management team and the strong underlying characteristics of the business, give us great confidence. Now I would like to invite Steve to come back and join me, and I would love to take your questions. And if we can do this one question at a time, that would be really helpful, because I know some of you have probably got three or four questions, but we will rotate it round and come back. So who would like to go first? Maybe Mo? Mo, can you Sorry. Yeah, we have got a mic, and this is quite a good hint to sit at the front. You get your first question. Go for it. Yeah. Thanks, Steve Hare. Can you talk a bit about the dynamics in that at least 6% organic growth guidance between the M&S and recurring? Because I think in the fourth quarter, I think the M&S was a little bit better than I think you had anticipated. So how should we think of that, as we move forward? Thanks. Yeah. Do you want to go straight into that, Steve? I think probably consistent with what we said at the Capital Markets Day, the uncertainty is exactly where SSRS will come out. We've got strong recurring revenue growth, and we're confident that from the base that we've got this year of 9% recurring revenue growth, we'll continue to make progress on that. But because the recurring revenue growth is occurring within the installed base, what we're obviously doing is moving more people away from the upfront licenses, and therefore, the underlying, excuse me, the underlying trend on SSRS is down. However, we are still selling X3, particularly on upfront licenses, and therefore, that counteracts that. We don't run the business on a quarter-by-quarter basis, but there will be some reporting periods where SSRS declines, and then there'll be other reporting periods where, either because of X3 growth or because there's some spike in professional services or something with SSRS might give us a little bit of a boost. But on an underlying basis, SSRS is going to decline. Go for it, Amit. Yeah. And then we'll come to the back. Good morning, gentlemen. Amit Harchandani from Citigroup. You talked about the GBP 50 million in savings and a charge being needed in the range of about GBP 100 million. You talked about the various measures that you would be taking to achieve those savings. Could you give us a sense of how the charge breaks down in terms of the measures that you're going for? Is this first of many within the transition phase, or you think this is pretty much what you would need to get to the medium-term ambitions that you have? Thank you. Good question. I'll disappoint you a little bit first in terms of a reluctance to break down the charge. I think it's important that we communicate with our people, what we're doing as we go through country by country and make changes. You won't see us making any big global announcements about what we're doing to drive the cost savings. It will happen country by country as we go through and create operational efficiency, and we'll give progress after we've made those decisions. In terms of the charge for the year, we don't want to get a reputation for being a management team that constantly creates exceptional items and is constantly saying that things are nothing to do with business as usual. Our aim is that we will, in FY16, which we see as the pivotal year, we will take an exceptional charge. We will do the bulk of what we need to do to reshape this business, and we will aim to keep it within FY16. Now, I'm not giving an absolute unequivocal guarantee that there won't be any exceptional charge in FY17, but it is not our aim to constantly draw this out year after year. Efficiency will become part of how we run Sage. In the future, if there's things that we're doing on an ongoing basis, we'll treat that as business as usual. But given the substantive, pivotal nature of what we're doing in FY16, I do think it's appropriate to pull it out as exceptional. Great. Thanks, Amit. Miller? Great. Thank you. Milan Radia from Jefferies. The first question was, Steve, in the past, on the old basis of G&A, you talked about 600 to 700 basis points potentially of margin expansion potential as those kind of number of sites came down and so on. I know you've kind of tweaked down that G&A element a little bit. Where do you sort of now sit in terms of that margin potential, and what kind of timeframe should we think about for that? Yeah. I think the first thing is obviously the GBP 50 million that we're calling out is about 350 basis points. You could say that's a little lower than we've talked about in terms of potential in the past. But the potential we've talked about in the past is over a period of time. What we're doing is committing that in FY 2016, we'll take this sort of initial change and pull those cost savings out. What will happen over a two- to three-year period is, as we start to implement new systems and processes internally, and as we get more of a continuous improvement culture internally, we will also start to drive efficiencies out more naturally. To give you an example, this year, globally, we hired nearly 3,000 people. We can achieve cost savings just by hiring less people. This is not about just removing existing roles. It's also about making sure that if we're growing at 6% per annum, but we're holding G&A, we restructure G&A, and then we hold it reasonably flat, we'll also grow into it. We still see the potential after the transitional years, and we've been asked previously how long is a transitional year? It's probably two to three years. But we have a period where we need to overinvest in sales and marketing in order to invest for growth. That period, there'll come a point where we don't need to overinvest to the same degree, and therefore, by definition, the operating margin will rise. It will rise above what we're saying over the next few years. I think you've got to give us some time to work through the next few years, get the efficiency bedded down, and then, no doubt, we'll come under pressure to identify exactly how much we're going to allow to flow through to the margin eventually. I have in the past said, eventually, I'm sure an operating margin will begin with a three, but we'll see when. Hey, Milan, if you could pass it along to Stacy. I was just going to sneak in one second. Oh. Milan. You said one at a time and not one per person. Oh, sorry. You are kind of extending the rules? Go for it. Just on the U.S. payments side, I suppose, if you talk to a Worldpay, for example, they would cast into doubt the role of the ISOs over time, and they feel that's a kind of shrinking component of the U.S. payments market. I do not know where you stand on that because I know you are still placing a degree of emphasis on the ISOs. Then do you need to own the U.S. payments business? I suppose in the consolidating market, there's a risk that Sage Pay and all of its kind of market starts to look a little bit subscale, potentially. Yeah, I think at the moment, what we are seeing, particularly from the customers, is strong feedback saying the movement of money between accounting, payroll, HR, and payments is huge value, both money going out to suppliers and money coming in from customers. There's value in that, and I think that's definitely playing out in the U.S. Obviously, I would say also, the world of payments is a disruptive market. I talked about disruption. You can accelerate that in the world of payments. Probably appropriate for another day to come back and stargaze the future strategically where we see payments going, but that's probably another Capital Markets Day in six months' time. Today, our customers are in good shape, and I think, again, Steve highlighted in the fourth quarter, particularly under the leadership of Paul Bridgewater in the U.S., we got our arms around the issues, and we are seeing some, again, data points around the progress there. Stacy. Yeah. Thank you. Stacy Pollard with J.P. Morgan. Can you talk more about the competitive environment? You mentioned barriers for the competition, and you also talked about leapfrogging the competition. Can you tell us who you're seeing on a head-to-head basis, where you're winning, when you are, when you're not, that kind of thing? Yeah. Well, I could talk for hours on this. But it's important, and for the last year, we've been very operational. We've met a lot of customers. We've talked to partners, accountants. I'd say if you look at the startup marketplace, you guys have covered that pretty well. I think we were late to that marketplace, particularly in the cloud, but we've really seen a great acceleration, and calling out Lee Perkins sitting here, who runs the U.K. Tremendous performance in terms of Sage One seeing 4,500 subscribers a month, and going beyond the 100,000 subscriber in the U.K. So that's the fastest performing, growing on a monthly basis, cloud solution for startups. So that's great. But I think there we've got more to do in terms of digital marketing, further engagement with accountants. But there are, in that area, and actually what I call the next segment of the sort of 100 employees to 200, you typically find, Stacy, every geography is different. If I go to France, I'll see a different set of competitors than if I go to Spain. If I go to the U.S., I'll see a different set of competitors. If I go to Brazil, I'll see different competitors. And typically, you're seeing companies that have grown up or invented companies in the last 5 to 10 years, but they're very geographically disparate. Good news is, takeaway, Sage is the only global player in this space that's got a presence, strong presence in Europe, strong presence in North America, and places like Canada, we're number one in the marketplace. I think there is strength that we can build on, and that's why it's important to leapfrog and really play out the customer for life around our existing customers because that supports the baseline revenue growth. Then the last one I'll just pause on and reflect on for X3, because obviously now we move up in the enterprise, and we've actually got X3 supporting companies of more than 20,000 employees. So it's very scalable, particularly in the manufacturing area, process industry manufacturing, very competitive. Give you some really granular data from one of the regions where we highlighted this on the watchlist of the U.S.A. It's surprising, actually. We got involved in the U.S. last year, and we had a win rate of 46%. We won 80 new customers. We lost 92. I think 46% works for the arithmetic. The surprising thing is none of the competitors we looked at, because we did win-loss analysis, were the guys that you guys write about. I'll call out a couple of names. There's 20% of the losses are against people you've never heard of. Regional players, very kind of boutique niche players with deep, rich vertical functionality. Never heard of them. There was only two players above 10%, and that was actually Epicor and Microsoft, where we actually came up against them. All the other guys, including the guys you write about, the SAPs, the NetSuites, were less than 10%. There was eight companies, less than 10%, but of more than 3%. Again, what does that tell me? That tells me, actually, huge market opportunity. When you worry about this in enterprise software, particularly at that level, it's when you see a gorilla in the market you're going up against all the time. That's definitely not the case. I think there's a huge opportunity, and when I look at the reference-ability and the strength of our customers, and the feedback they give me on the X3 product, it's just astounding, literally, in terms of the quality of the product, and it does what it says on the tin, the functionality. The customers, 46% win rate, again, just to play back to you, is just almost unheard of in enterprise. You typically would have 30%. The reality, what have we got to do? We've got to show up at more parties. Really simple. We've been hiring sales and marketing in all the geographies. In the area of X3, which we called out on the watch list in Europe, we've changed the structure. That's all being run in the countries, reporting to the managing directors. We've changed the management team there as well. When you look at, if you exclude France, of 19% growth rate for X3, again, I think you can clearly see some strength there. To answer your question, summary is the good news is very disparate competition. Segment by segment, it's different. There's no one who goes from a startup like Sage One through to X3, and you think of a business. Do you want to change your accounting system every five years as you go from 50 employees to 100? Some of our customers on Sage Live started two years ago with 10 consultants. They're now 200 people today. The scale of growth of some of our customers going, particularly from startup through to tens, hundreds of people, there's tremendous benefits from staying with the same supplier. When they feed back to me words like indispensable, it gives me great comfort. The reality is we've got to execute way better, particularly on sales and marketing. Michael. Thanks, Steve Hare. In terms of Sage One, can you talk a bit about the regional performance outside the U.K.? Obviously, you are strong here, but maybe North America specifically. For the mid-market cloud, you mentioned, I think, X3 is now available. Is that multi-tenant? What is your sort of strategy above Sage Live in terms of the multi-tenant offerings? Thanks. Yeah. Start with the first question. We have come breaking the rules of multiple questions. I will try and be brief with my answer. Sage One, disappointed still in North America. We have got about 9,000 subscribers. I think we will see a real. The two elements you have got to have. Well, three. You have got to have a great product. We have got a great product. Secondly, you have got to have accountants, strong engagement. We have got Jennifer leading that worldwide, and we are making huge progress with the accountant channel, and the bookkeepers, because they are very influential recommending accounting solutions to their clients. The third thing is around digital marketing. I share with you, we have yet to unleash the full potential of our digital marketing. We hired a guy called Neil Morgan, who did all this stuff at Adobe, Socialbakers, and made a massive difference. Now we are seeing Sage One in the U.S. as one of the top 10 Google searches. It is coming together, but more to do. Some of the other areas where we actually, through great conviction of George down in Brazil, launched Sage One, and we get, what, 7,000 subscribers within 6 months. So tremendous momentum, you know, in an economy where it is kind of creeping into recession. The other probably notable element from Sage One is we launched it in Australia in the last 6 months, and we now have 1,000 subscribers. So we have got a big plan in ANZ. Sage One, I think we now are available in more than a dozen countries, and we are seeing increase in progress. Then around X3 Cloud, made available with rich functionality using the AWS platform. So it takes the inherent competence and capability from the platforms. As we shift forward, this is a bit of a Capital Markets Day shift, but we are going to move towards multi-tenant cloud platforms right across the piece. Obviously, Salesforce with Salesforce1 is the first real incarnation of that. What we actually see relevant to X3 is a lot of the other guys you probably write about are first-generation cloud. So they invented their cloud architecture pre-mobile, pre-HTML5. Therefore, the stuff we get for free, like different Android device comes out, it is all inherent different UI. They have to recode that. So a lot of them have to hard code right through to a database management system they built for the first-generation cloud systems. So I think we can innovate and disrupt much quicker and drive much better functionality much quicker than any of the competitors out there by going to multi-tenant cloud platforms. David. We will go next. Hi, it's David Toms from Numis. Can we just dig into the seasonality a little bit more for the forthcoming year? You talked about a degree of investment weighting to the first half. Can you just tell us what you think the margin weighting is, and also whether there might be any revenue weighting that's unusual within the year? Yeah, I think the signaling is more it's more the investment from a margin perspective. Obviously, as we drive more to a recurring revenue model, it's very important to state the obvious that we get off to a good start because you cannot catch up by selling perpetual licenses in the second half. So, particularly around digital marketing, we are looking just to make sure that we have the appropriate level of investment to support what we are trying to do in FY 2016. And we are just giving ourselves a little bit of room for maneuver in case we want to over-invest a little bit in the first half. I think in terms of the revenue, the revenue will not be particularly seasonal, so we are not signaling that there will be any particular softness in the revenue in the first half. But we are reserving the ability to maybe be slightly under the margin if we so wish. The margin for the year as a whole will be fine, but it might be a bit more weighted to the first half. It might not be. I am not saying absolutely it will be, but we are reserving our rights, if you like. I am afraid we have got time for one more question, but thank you for your patience waiting. Thanks. It is Vijay from Mirabaud. My question is on the ASP revenue bridge. Looking at that bridge, the contribution from North America is still quite small relative to the size of the market. Could you talk about how you expect the subscription push, the sales and marketing investments to impact performance in this region? Is my understanding right that in order to get North America to grow in line with group average, i.e., 6%, you need more from new customers because you have a relatively small installed base there? Could you talk about that, please? I will kick off and then maybe Steve specifically. In North America, we have done quite a lot of things, and again, we signaled some changes in the management, leadership. Also what was very successful, credit to Alvaro, is driving core product modernization in Europe. I think the guys in France and the U.K. have benefited from that today. Exposing capability of on-premise to the cloud, hybrid Sage Drive, and really taking advantage of a subscriber model, but all the benefits of the cloud as well. In essence, we have been doing that over the last six to nine months in North America as well. We launched something called Sage 100c and Sage 300, and again, got, I would not say rapturous, but really positive feedback from the channel, the partners, and the customers. I see those sort of initiatives that we have taken where we made investments in FY15 as revenue drivers because we are moving that all to the growth products on subscription. I would definitely say in North America, one of the things you should watch for against the metrics, particularly around customer of the life, is America picking up the pace as well regionally. We have got some elements of the foundations in place of investments we have made in FY15 to make that a reality. Yeah. I think the difference, if I can contrast between Europe and North America, is that before both Stephen and I were here, the European management team made a decision to invest in what we have called core product modernization. So they invested in the existing on-premise products like Sage 50 and like Sage 100 in France. And what the European team are doing is using that now as a hook to switch existing customers to subscription by driving value. They are not going to customers and putting prices up. They are going to customers and saying, "Here are features which improve productivity of your business, and it is available on subscription." Historically, we have called out previously, North America drove most of their growth through price and through upselling maintenance and support. So they just upsold through the various tiers. We have, of late, started to switch the investment to the appropriate place in North America. So we have launched Sage 100 and 300 Cloud versions, and we are collaborating across border to launch Sage 50 Drive in the U.S., already launched in Canada. So what you will see in the next year or two is the North American business start to adopt a more, if I can use the phrase, European-style approach to driving value in the installed base. Why is Europe growing so strongly? Why has it got 75% recurring revenue? Mix, because they are focused on their installed base. Actually, with the exception of Sage One, new customer acquisition is not taking off to the degree that it will need to in the next few years at the moment. The growth today is coming from successful management of the installed base, and the good news is two-thirds of the growth is coming from something other than price. What we should do is see North America start to grow more strongly as we see that coming through. And then the second thing is North America is being dragged by the payments business. North America is just over 400 million of revenue, and 100 of that is payments processing, and that is not growing at the moment. So we see that coming through. I do not think we will get back to double digit this year with payments processing in North America, but I do think it will be mid to high single digit, and that will also help to boost the growth. That is great. And I think probably it is worth saying, obviously, that the existing installed customer base supports the baseline of the revenue growth case. And obviously, I think we have been together a year, the management team together a year. We have got a lot of execution to do in operations, but most of what we are talking about is just better sales and marketing execution. We made the bets on the technology and we made the investments. Now it is about following the lead and ensuring we really raise our bar in terms of capability of execution operationally. I am really sorry we have not got any more time for questions. But we will be around for a few minutes. We have got Anna Campopiano, and we have got Simon John, our investor relations. So if there is anything you want to catch up with us offline, then please do so. Simon's details, I think, are on the packs. If there's any questions you've got, then do feel free to contact us. Thank you very much for your support, and thank you for coming today.