Earnings Call: H2 2012

Dec 5, 2012

Annual report

Wow, it's 8:44, and I feel I can start already. Thank you very much for being here today with us. I am delighted to be here to present our year-end results together with Paul Harrison. I will start with the headlines of our financial performance. We have achieved organic revenue growth of 2%. However, in our second half, we have delivered a better performance, growing at 3% organically. I am encouraged by this trend, particularly in North America, where we have achieved 3% growth in our second half versus 1% in the first half. I am also pleased with our margin discipline. We have maintained margins at 27%, and we have continued to invest on those areas of the business where we see greatest growth opportunities. At the same time, cutting costs where we need to. For instance, we have restructured our business in Spain at the end of last fiscal year. Our discipline has supported a 4% increase in the underlying profit before tax. Our business has continued to generate very strong cash flow, and using that cash to deliver greater shareholder returns. In the year, we have returned GBP 437 million to shareholders through buyback and dividend. Taking all this together and given the macro environment, I think we have delivered a solid performance for our financial year with an improved H2. I want to be clear: I remain, and I am, determined for more. At our Investor Day in July, we set out a growth strategy built based on three pillars: focusing the business, capturing the technology opportunity, and the benefits of subscription. Sorry. As well, we said we would provide an enhanced set of KPIs to help you track our progress, and we will show this to you today. In July, we set out targets for 2015. They are shown on the slide. We reiterate our confidence that we can deliver these results. As we said in July, we are not betting to have an uplift from GDP growth in Europe and North America. Equally, we have not a deep or lengthy recession built in our plans. Whilst there is very much more to do, I am very encouraged by the early stages of our momentum and our building our strategy. I think you will see a lot of this today. Before I hand over to Paul, I would like to introduce a new member of our executive team who just joined us as our first-ever Chief Marketing Officer. Amanda Jobbins, if you would stand up. Good morning, everyone. I'm delighted to have a person of Amanda's experience and caliber, and she will complement well the rest of our executive team who you met in July. Now I'd like to hand over to you, Paul. Thanks, Guy, and good morning. I'm pleased to be able to spend the next few minutes talking about our performance in a year that's seen us drive real change in the business against a challenging and mixed economic backdrop. In a few minutes, I'm going to talk about the first of our strategic cornerstones, which is about focusing our business. Before that, I'll run through the financial highlights for FY2012, and I'll start, as usual, with organic growth. Organic revenue growth of 2% reflects two different trends in our revenue mix. Subscription revenues grew organically by 6%, benefiting from further growth in premium support contracts and from a good performance in our payment services business. Software and software-related services, SSRS revenue, declined organically by 5%, and two factors drove that. First, the shift to recurring revenues that I've just mentioned. Secondly, it reflected a weak economic environment in certain of our key markets, particularly Spain and France, which had a significant impact on our mid-market businesses in those countries. Let's see how that plays out between the first half and the second half. Well, recurring revenues now represent 69% of our revenue mix. Here you see growth accelerating in the second half from 5% to 7%. It's just worth pausing as well to look at the chart on the bottom right of the slide, just to see how recurring revenues have grown in our mix over time. A good trend. As the slide shows, SSRS revenues continued to decline across the year. As we moved into the second half, this reflected weakening markets in France and Spain, which of course affects customers' willingness to purchase licenses. Secondly, as I mentioned, the shift to recurring revenues where the second half growth accelerated, as I mentioned. Let's now move to take a look at the revenue performance across our regions. I think at a high level, it's quite striking to see how the trading environment is varying across our business. On the one hand, we have AMEA, and we have Brazil offering strong growth potential now. We do see improvement in the second half in North America. In Europe it's really mixed, with U.K. and Germany faring much better than Spain, and now clearly France. It's that last market, France, which is a material one for Sage, that's the toughest to call right now. Although we did see a deterioration in our second half. That's the big picture. Let's now take a closer look by region. In Europe, organic revenue grew 1%, reflecting a 5% growth in subscription revenues and a 7% contraction in SSRS. As I mentioned, U.K. and Germany continue to feel reasonably solid, the U.K. delivering growth of 4% on the back of a strong performance with support and also in the accountants division in Sage 50. We said at the half year that Germany's growth would slow in the second half. It was 7% in the first half. Nonetheless, a 5% growth for the year represents a good performance with strength both at the SSRS and at the subscription level. We said that Spain was facing significant challenges due to the economic environment, and we expected that country to be in contraction for some time. This contraction of 7% is therefore consistent with those expectations, and we've now taken steps to restructure our Spanish business. I'll return to that in a moment. France continues, as I mentioned, to represent the key risk. Subscription revenues in France continue to deliver good growth rates, resulting particularly from increased selling prices on support. However, SSRS has clearly suffered due to the macro environment and therefore has a bearing on our forecasts. Second half 2012, revenue in France contracted 1%, following growth of 1% in the first half. Finally, we've now split out the performance of our Sage Pay business now that that's moving to a broader European platform rather than being purely a U.K. business. Sage Pay grew organically by 25%, driven by both new customer acquisition and by successful introduction of price increases in the year. Move to North America. In North America, organic revenue grew by 2%, again reflecting a 6% contraction in SSRS and a 4% growth in subscription revenues. As Guy said, overall organic revenue growth improved from 1% in the first half to 3% in the second half. The strategic switch to recurring revenues is continuing really in two ways. First, the adoption of Sage Business Care, which is our premium support offering, was a key feature of the year, particularly for our small business customers in both the U.S. and in Canada. Secondly, during the year, we launched a series of pure subscription options for a number of products. So initially our mid-market products in April, and then more recently Sage ERP X3 and Sage 50 in Canada. As you'd expect, though, this has had a pretty limited impact on FY 2012's numbers. Payments grew by 6%, driven by growth in both merchant numbers and volumes. In particular, the cross-sell revenues of integrated payments now amounts to GBP 17 million of revenue and grew 18% in the year, making the point that it's the integration of adjacent businesses that provides a USP for Sage. As you know, in June 2012, we announced the acquisition of a controlling interest in Folhamatic, and we're pleased with the progress of this business since acquisition. So it's in for three months, in this particular period. It's performed well in that period, contributing revenues of GBP 12.2 million and EBITA of GBP 3 million. So very much in line with our expectations. We supplemented the management team in Brazil with some key appointments, and we strengthened our footprint by completing a couple of important infill acquisitions, one of a business called Cenize, and then after the year end, a business called EBS. Final region, AMEA, saw organic revenue growth of 12%, which represents an 8% growth in SSRS and 15% growth in subscriptions. The powerhouse there was South Africa, which continued to deliver strong organic revenue growth, this time 16%. In that business, it is our core mid-market products, Pastel and VIP Payroll performing well. Sage ERP X3 is making significant progress in that country. Sales actually into the broader African continent have continued to grow well and represent a good future opportunity. Australia grew at 7%, led by good growth in recurring revenues from our key products in the country. Finally, our Middle East and Asian businesses grew by 4% with a particularly strong performance in Singapore. Second half slowdown, you will note from that slide, relates particularly to Malaysia, where political uncertainty compounded underlying market weakness. Okay. Let us move on to profitability now. As you have seen, EBITA increased by 3% with our margin maintained at 27%. These mixed market conditions we are operating in call for agility in our business, focusing resource on areas where we have growth opportunities, and at the same time protecting profitability. We will continue to pursue strategic initiatives where we see the biggest opportunities for growth. That includes products such as Sage ERP X3, Sage One and Payments. We have taken action to protect margins in weaker markets like Spain, where we restructured the business towards the end of the year, absorbing GBP 6.5 million worth of costs into FY 2012. In Europe, margins fall with that restructuring cost, but this has been compensated by the leverage associated with strong growth in AMEA. That is the margin story. I move now to cash flow, and I am pleased once again to report a strong cash performance. Cash from operations were 106% of EBITA, and that is driven cash flow of GBP 248 million. How do we deploy that? As I mentioned earlier, we completed the Folhamatic acquisition, so that accounts for most of the acquisition outflow you see on the slide. Just whilst on acquisitions, Folhamatic demonstrates that M&A remains a key enabler of our strategy, and we will continue to look at opportunities in the areas of technology in both existing and new markets. As you know, we also completed the Sage Healthcare disposal this year, and we received the proceeds from the sale. We have returned all of these proceeds to our shareholders via our initial share buyback program and have subsequently returned another GBP 100 million to shareholders. A further GBP 137 million was returned to shareholders by way of our ordinary dividend, which was rebased, as you will recall, in 2011. This gives us this total return to shareholders in the year, GBP 437 million, that Guy mentioned a little bit earlier. As you have seen, we are proposing to grow our dividend by 4% in FY 2012. At the end of the year, net debt stood at GBP 161.5 million, or 0.4 times EBITA. We remain focused on our target of reaching a one times leverage by midway through next year, with the board continuing to consider all options, both M&A and returns to shareholders. As Guy mentioned, you will recall that we presented a refreshed set of KPIs at our July investor day. The list on this slide is not complete because these are more the financial KPIs. Guy will cover the remaining KPIs that we have not shown here. Some of them are new, and they are presented for the first time, which means there is limited and slightly more anecdotal comparative information, but they mark a start point, and others, of course, are much more familiar to you. I have covered most of them already, with the exception of the KPI around the first of our strategic cornerstones, focusing our business, and I will come back to that in a minute. I think as we look at them in this first few months of executing our strategy, we think we have made a good start. We would have liked to have seen slightly better organic revenue growth this year, but we are not immune to economies, clearly, as evidenced by the 5% fall in SSRS. We are pleased to have maintained margins whilst restructuring in Spain. Our cash generation remains strong, and we are making good progress, as you have seen, towards our leverage target. To sum up, this is not a new slide, but I think it continues to encapsulate all that we are trying to do to drive, one, short-term performance, and secondly, our longer-term strategy. We have delivered a strong set of results given the market backdrop. Normally, that is it from me. But what I want to do is spend a few minutes just talking about the first of our strategic cornerstones, which is around focusing our business. What have we achieved since we spoke to you in July about our strategy? Well, focus starts with an assessment of what is core business, which for us, just to remind you, is the provision of accounting, ERP, payroll, and accountancy and related products for customers ranging in size from startups through to mid-market companies. We have also got some important adjacent businesses which support the core. For example, integrated payments and integrated CRM. During the year, this definition of core business has driven very much our approach to management, the management of our portfolio of businesses. It has led us to dispose of the healthcare business, a business with limited strategic overlap to the rest of Sage, one addressing substantially a non-accounting customer base with highly specific non-financial requirements. On acquisitions, of course, it has led to us establishing this significant footprint in Brazil, a high-growth market, acquiring a business that is highly complementary to Sage. So it was against this core definition that the Brazilian acquisitions were evaluated. And you will recall that we have identified that around 10% of our global revenues are attributable to businesses that we have identified as non-core. As I said in July, we are managing these businesses quite distinctly from our core businesses. So with 10% of our business categorized as non-core, it means 90% of our business is core. And we have categorized products within our core business as invest, harvest, and sunset to determine where resources should be allocated. We are reallocating investment to our invest products away from sunset and harvest. Our invest products clearly represent our most significant growth products now or in the future. So they include Sage ERP X3, Payments, Sage One, but also well-established products such as Sage 50. We have had to reorganize to facilitate this portfolio management approach. So in North America now, all of our R&D resource is under one leader, heralding a much less decentralized approach to resource management there. This same structure is in place in the U.K. and France, meaning that R&D is centralized in our three largest markets rather than being in product silos, which of course facilitates the reallocation of resource. Another important change is in Europe, where in January 2013, we are adopting a pan-European mid-market organizational structure, replacing the country-led mid-market business. We will have one organization under one leader in Europe. We are reporting the allocation of resources by Invest, Harvest, and Sunset for the group as a whole as a KPI for the first time here. Just note one thing, in July when we reported the numbers for FY 2011, that was for our six largest businesses. This is for the group as a whole, so be a little bit cautious about the comparative there. For FY 2012, the split of R&D is 35% for Invest, 53% for Harvest, and 12% for Sunset. For sales and marketing, the split is 42%, 49%, and 9%. Our budget commitments for 2013 call for a significant shift in both R&D and sales and marketing this year, and this is underway now. Now we need to execute with a global mindset to be successful. The initiatives I set out in this slide set out what leveraging global scale and assets actually means in practice. Effectively, we are setting priorities for our businesses which support the global strategy. We are sharpening how we share resources, best practice, and innovation globally. Our global product strategy is based on supporting our current and future growth products. Delivering these products on a global scale is a key driver to accelerating growth. Our global approach also links to technology and subscription cornerstones, and Guy is going to talk to those in a moment. You are familiar with those initiatives, and they remain critical to our success. The update for you is that Guy has created the first group Chief Marketing Officer role with the appointment of Amanda Jobbins. Amanda's focus will include our pricing and our subscription strategies, strategic product marketing, our global relationships, and the leverage of our brand. The creation of this role reflects the importance of a consistent approach in these areas and delivering on our strategy to accelerate growth. There is plenty of momentum, I believe, to the first of our three strategic pillars. Thank you very much. I want to talk about technology. Technology which remains at the heart of our business. First, we are building cloud-based solutions for each of our three segments. Let me go into more details now. Sage One is our global SaaS technology platform for the startup and small business segment. From that platform, we can efficiently develop country solutions which are tailored to local markets quite easily. There is good momentum with Sage One in the U.K., with over 7,500 paying customers now versus 1,000 14 months ago. Our run rate is accelerating from 1,500 in H1 to 3,600 in H2. We have continued to build our channels. For examples, with Barclays, HSBC, Virgin Money, and Google. We recently added an API feature which allows third-party developers to easily connect their application to Sage One, which then increases the ecosystem around Sage One. This all takes time to build. We've launched Sage One in North America this year. In the U.S. this year, in common with the U.K. experience, momentum will build gradually as we enhance our offering and more importantly, as we build our channels of distribution. Other priorities for 2013 will be to expand the Sage One reach by rolling out Sage One in more countries, starting with Germany early calendar 2013, and by launching an enhanced version of Sage One in the U.K., targeting the 5 to 25 employee segment, which typically drives higher revenue per customer. We're bringing our main products for the SMB segments to the cloud. We call that hybrid cloud. Our choice to use the Azure platform means we can smooth our route to market more easily. Our main objective for 2012 has been to develop versions of Sage Murano and Sage 200 that run on the Azure platform. We've delivered on these objectives. Sage 200 in the U.K. is in controlled release phase right now, and Sage Murano in Spain will follow in early 2013. In 2013, we will see development work on hybrid cloud solutions in France, Germany, and in North America. The mid-market space is categorized with customers who have the sophisticated needs of large companies, but the budgets of SMBs. Sage ERP X3 is our compelling offer to that segment. We now have 3,700 customers in 56 countries, and 260 certified business partners for Sage ERP X3. Despite having global revenue growth of only 5% this year, there is real momentum in the international expansion of Sage ERP X3, growing 17% in the year. Revenue outside of France now contributes 43% of total revenue on Sage ERP X3. We continue to see Sage ERP X3 as double-digit revenue growth opportunity for Sage, and we're focused on driving strong performance there. We are developing Sage ERP X3 product in many ways. In 2012, we shipped an important new version, 6.5, and we rolled out subscription pricing first in North America. Later in 2013, we will deliver a cloud-based solution on Sage ERP X3. So much for our three cloud-based solutions for the three segments. I want now to cover connected services, and I'll focus on mobility and on payments. Mobile technology was a key theme at our Sage Summit customer event during this summer. We showed a video that set Sage's vision for how mobile devices and cloud will allow our customers to better manage their business. To access that video, you can scan the code that's down there, and I'm sure we can also supply you with a link. It sets our vision for the future. In Europe, we launched the first very business applications for Windows 8 in France, in Germany, in the U.K., and in Spain. With mobility, we have a great opportunity to expand the number of users per customer. More people accessing data stored in our ERPs will drive higher revenue per customer. But it remains relatively early days in our segment. Payment services globally represents our largest connected service, with revenue just short of GBP 100 million in FY 2012, and double-digit growth in FY 2012. I'm very pleased with the performance of Sage Pay in the U.K., which achieved 25% organic revenue growth. The launch of Sage Pay in Germany in October 2012 was an important milestone in the planned expansion of Sage Pay in Europe, using the Sage Pay infrastructure and just adding to it. It will be followed by Spain in the year. Strategically, we have two exciting opportunities with payments. One is integrated payments, the integration of payments with our back office products. The other one is extensions of our payment capability to mobile devices. Payments integration is a very important cross-sell opportunity, as evidenced by the 18% growth in cross-sell in North America. Integration is a key opportunity for us going forward in Europe. Mobile device payments capability is already available in the U.S. and has allowed us to gain a number of good mid-market accounts there. The market is less mature in the U.K. and in Europe, and we are currently testing our future solution in this market. You've seen all the things we're doing on technology. I will now spend a couple of minutes on our third cornerstone, the benefit of subscription. We showed this slide in July, but it's worth reviewing again as it sets out well the journey we are on with our customers. The transition from basic maintenance to premium support, the second to the third circle here, continues to be important, and we've delivered good performance this year. We've achieved 8% growth in premium contract revenue. Now 71% of group support contracts are premium in nature. The growth there has been driven by performance in the U.K. and in the U.S. Meanwhile, we've maintained our overall renewal rates on support contracts at 81%. I want to move to monthly subscription, the more recent initiative. The transition from perpetual license to monthly subscription pricing is driven by our customers. They want to pay only for what they use. As the difference between on-premise and cloud becomes more blurred over time, a full subscription model will make our customers' lives easier. The way we are designing new connected services, new features, and our pricing model reflect these changes. While subscription pricing represents still a modest percentage of current revenue, it does represent a significant growth opportunity for Sage in the future. During the year, we launched a number of subscription pricing options, first in the U.S. mid-market and then in Europe and South Africa as well. We've done this alongside with the perpetual license offering. We will continue this dual model for most major products, as still a significant portion of our customers are just not yet ready for the cloud. The positive early evidence from the launch of our mid-market subscription offers in North America supports the dual model approach and a measured transition. You've heard about our three cornerstones for growth. The course is set. We're now focused on delivering and executing. We've tracked our progress against KPIs, as Paul Harrison has started to show. I've covered most of the KPIs which are here in my presentation. Looking at these KPIs, how do I feel we're doing with this? Well, I'm very pleased with progress on most areas. I would have liked better numbers on Sage ERP X3, but we're not immune to market environment in France, and I'm still very pleased with our 17% growth outside of France. These KPIs are important internally as well, and I'm embedding them inside our performance culture. To sum up, you've heard a lot today. For me, it boils down to this. Fundamentally, the strength of our business model, the discipline of our management team, coupled with a strategy for growth, focusing the business, capturing the growth, the technology opportunity, and the opportunity of subscription, captures the opportunity for us to grow and make it an exciting future for Sage. In 2013, we anticipate market conditions will remain challenging, but we have experience in managing our business in this environment. We are confident we can deliver on our financial and strategic goals. Thank you. A couple of questions, if I may. First of all, around the SaaS model around Sage One, how is the pipeline looking? What are you expecting in paying customers for 2013? Then perhaps you could give us some insights on the kind of pricing model, what you charge per subscriber per month, and also on the advanced version. I imagine that will be on the same platform, just additional kind of functionality. Perhaps give us an indication what you see an uplift in pricing. One other question. What is the situation in France? It looks that particularly the license model has really dropped off there in the second half. Thanks. All right. If we can do this. We do not communicate our expectations for future business on detail level of Sage One, so I am sorry for that. In terms of price, it is GBP 10 a month. The enhanced version will be exactly on the same platform. Of course, we are enhancing the platform, but we will tailor to companies who have several people working on it. So there will be different profiles and more depth in terms of features. The initial version of Sage One was focused on micro businesses. We are now moving to small businesses. From a price point of view, although I am not sure it is fully set, you can expect about twice the price or something like this, plus multi-user and so on and so forth. France? Yeah. France is important. It is 20% of the group, so GBP 266 million of revenue. As you look over the first and the second half, predictably in a declining environment, what we saw was a slowdown in SSRS. So SSRS revenues contracted 7% first half, contracted 13% second half, given the 10% contraction for the overall year. However, the positive is that our subscription revenues continued to grow 7% first half, 6% second half, given 7% for the year, which gives the overall flat. So, it is the SSRS revenues that have suffered in that environment, most particularly in the mid-market, but still a strong performance through the subscription revenues. Thank you. Yeah, thank you. Question on the U.S. business. Obviously, the improvement in growth here in the second half is encouraging, and you have new products launching that should help momentum going into next year. If we look at some of your peers, there is obviously quite a bit of room to improve growth here for Sage. If you could just maybe give us an update on the strategic actions you are currently undertaking in that business to help growth into next year, and also maybe share with us your expectations for 2013 and beyond for the U.S. Thank you. The strategic efforts in North America are really not different from what we are doing globally. It is about focusing our business. You will remember we divested our Sage Healthcare business to better focus our business. It is capturing the technology opportunity. We are expanding our mobility offering there. We think that there is great potential to increase the number of user per single customer with mobility offerings. If you look at the video, you will see what that looks like, potentially. It is the same set of focused technology and then migrating on subscription. The North American market is more advanced in this. We are happy that since we have launched our mid-market subscription offering, 20% of licenses sold during that period were subscription, and then 80% more traditional. There is a shift here. On this 20%, a good proportion were from customers who are not on contract, which then creates a significant revenue benefit for us of moving this kind of customer on a subscription basis. We do see those benefits start to materialize. It is really early days. It is a very small percentage, but those things accumulate over time. Do you want to add? 2013 North America. We are pleased to see this pickup that we have seen in growth H1, H2, 1%-3%. As we go into 2013, we would like to see, as established, that 3% trajectory for the year, maybe slightly improving it. But a little bit cautious on that. We are certainly hoping to repeat that second half growth performance. Thanks. A couple from me, please. Firstly, on SaaS in the U.K. on Sage One, from a market share perspective, it looks like you had at best 10% share of net new adds in the U.K. for small business, SaaS accounting software. Clearly, that is substantially lower than your existing footprint in the U.K. To avoid losing market share overall, you need to get that number up a lot. I realize you do not want to give targets, but what kind of timeframe do you think it would be reasonable to see your share of net new adds getting up closer to 50%? Secondly, in terms of the U.S. and the premium support numbers, can you give us some kind of quantification of what the impact has been of making premium support mandatory on some product lines? I suspect that has distorted the figures a bit. I just want to know how much that is boosting things in the U.S. on premium support, particularly on Sage 50. I will take the first question, and Paul, you will take the second. Yeah. If you look at the market, the market is about small businesses, micro and small businesses. You cannot forget that there is still a large number of customers who buy traditional desktop software. In terms of performance and market share, there is a progressive shift, an increasing number of customers who are buying an online solution, cloud solution, but it is not all the market. Looking at the SaaS market share only is not the best way to look at market share. We continue to perform very well. We are not putting all our eggs in one basket. We have continued to successfully sell Sage 50 and Instant Accounts. We are building up. I think the ramp-up is satisfactory. I am not going to say more about forecasts. I think we want to prove, and I think the proof so far is pretty good. We've moved healthily, and our numbers are exactly according to our plans for now. In the U.S., certainly the growth, the pickup in growth second half has come principally from the entry levels to the Sage 50 and indeed Sage 50 Canada. It's interesting, the sort of connotation of the word mandatory. I think we would say that actually a lot of that growth is a consequence of customers moving to a premium support model, existing customers moving to premium support model because they see the benefits of that model, to be constantly on the latest version of the software and have access to a highly experienced SME support organization. Most of the growth has come through moving existing customers to that premium model. The mandatory model that you refer to is applicable to new customers, and that is a minority of the overall growth. Two questions, if I may. First of all, given the varying geographical performances that you saw in the second half, as you think of 2013, is the second half organic run rate for the group your kind of expectation going forward for the FY 2013? Secondly, in terms of the kind of overall composition of portfolio, what would be an acceptable level of organic growth for you in the U.S. given the strategic initiatives you're putting in over the medium term? Secondly, how would that change your thinking over that business longer term in terms of you seeing it as part of the group? Or is there a point where if you can't turn it around, would you consider a disposal? I'll take the first of those, Mo. As we think about 2013 in the round, first of all, we hope in 2013 to deliver a 3% organic growth for 2013 overall. I've talked about earlier about the U.S. hopefully providing a slightly better growth than H2 of 2012, but actually we're pretty cautious about Europe and particularly Southern Europe. So when you aggregate that together, which is incidentally very much in line with consensus. That slightly better growth that we expect to see second half will be a consequence of further price increases driving through and some of the benefit of subscription starting to come out. In your second question on North America, the U.S. in particular. We are seeing improvement in our performance. Some of the strategic initiatives, such as subscription, are being pioneered over there, so it is important to us. The medium-term outlook is similar to the rest of the group. We believe we can improve our organic growth there as well as in Europe. As I said, we are not looking so much about having a lift from GDP. Clearly the economic outlook in North America is, provided that the fiscal cliff doesn't happen, is better. With the economic environment, the better performance of our business, why would I think about doing something else and continuing to develop it? Yeah, just a few questions from me actually. Firstly, on the dividend. A 4% dividend increase looks modest in the context of you trying to return capital. Are you seeing more acquisition opportunities and is that why you are preserving the balance sheet? Secondly, I haven't got the statement in front of me, but if I back out the acquisitions and the balance sheet, it looks like deferred income was down year on year. Have I got my maths right and what is the reason behind that? Lastly, just on the customer numbers, you have given us the net adds for the year. Does that include acquisitions? What does acquisitions do to that customer number? Sounds like questions for me. First of all, what we said about the dividend, bear in mind we rebased it substantially in 2011, is that we continue to grow it in line with underlying earnings. The best measure of underlying earnings in the board's view this period is actually adjusted PBT, which grew by 4%. Because obviously at EPS we have got the return to a normalized tax rate. That is how we thought about the ordinary dividend. Now we have successfully, as we have mentioned, deployed a share buyback program which from our perspective offers quite a highly flexible means of returning cash to shareholders and you can assume that we will continue to use that method. As to M&A, you have heard me say this before, but the timing of M&A is incredibly difficult to predict. Throughout my time at Sage there has always been an active pipeline, a number of opportunities we are looking at, but calling the timing can be difficult, but it is there as an opportunity. I think the board has made a very clear commitment about getting to that one times leverage target by midway through next year, and we have reiterated that today. On deferred income, I will just correct your maths if I may. On an organic basis, currency neutral, deferred income has grown 4% in this period, which we are satisfied with. It is perhaps slightly slower growth than we have seen in the past, partly because we have eliminated one or two multi-year contracts in North America and of course we have seen this weakness in the mid-market that feeds through to deferred income. Finally, in terms of customer numbers, we have added 289,000 in the year. Brazil, the principal acquisition, that accounted for 60,000 of that 289. So we have added about 229,000 customers organically in the year, which is a little bit lighter than previous years but not materially so, 15,000, 20,000 lighter than- Like a material drop off in the second half, is that- No, the drop off in the second half is we had Check my numbers. 129. We are about 50,000 second half. So. Hi, good morning. The 81% renewal rate is synonymous with an old school perpetual software business. So what kind of rate are you targeting there? Secondly, Guy, you talked about customers want to pay for what they use, that has been associated with a move in the industry from prepay to post-pay. Have you seen any evidence of that? And finally, on the centralization plan, has that been associated with any staff attrition in terms of people moving on? I will take the first one. The 81% renewal rate, as you observe, has been steady and strong for a number of years. I suppose the question goes to why do nearly 20% of customers not renew their support contract? The answer to that is there are a lot of our customers out there, SMEs, whose business is in reasonably steady state. They will say to us after typically four years, "We're now pretty intimately familiar with the software. We haven't got any further questions. We haven't a study this year. We're going to continue to use it, but we don't feel we need the support contract." That is always going to be around. If an SME's in a steady state, you have to acknowledge that, or we have to acknowledge that, we will see evidence of that. Now, of course, more broadly, as we seek to move those customers to a subscription-based relationship, that dynamic changes because you're paying as you go for the software. On the pure support aspect of the business, I think, A, it's good to have maintained 81% and I don't see it going up to 85% anytime soon, for example, for those reasons. On the prepay versus post-pay, clearly the traditional contract scheme has been prepay. The monthly subscription is, sorry, the first one was prepay a year with monthly subscription is prepay a month. We've seen that trend. Remember, there's a significant opportunity for us, especially in the entry level, where we have only today around 25% contract penetration. With a subscription model, it's going to be a 99% penetration. People can't use if they don't pay subscription. That movement is one we cherish. We want to see more of it. Finally, the move to centralization. We are reallocating resources from products that are mature to the new invest area. We are managing this as well as we can in terms of training, moving people from one team to another. In some cases, it is moving people from one site to another. There will be cases where we will ask a few people to leave and hire another, the same amount of people elsewhere. Net, it is not attrition, but there might be some, especially in North America, where we have a vast geography and where movements are more difficult. Thank you. Hi there. Thank you. Joseph Boyle with Exane. Just a couple of questions, just in the U.K. market, if I may. Just first of all, what was the number of total customers added in the U.K., not just the SaaS customers? Then just thinking on the 6,100 Sage One customers, could you confirm the split between the three sub-products, the accounts, payroll, and the North American version? Then finally, as a follow-up with that, can you confirm that all those customers are paying customers? We understand that some of the payroll promotions were offering the product for free. Thank you. I'll start with the second question, and I'll give you the first output. On Sage One, we're reporting our U.K. numbers only. We are not going to report by country, but we haven't included any U.S. numbers. It's strictly U.K. It's strictly paying customers. Those customers who take payroll and accounts, there are many of them, but I don't have that number here. Those numbers are paying customers in the U.K. 20,000 new customers added U.K. this year. 20,000. All right. Well, one more. Sorry, just two more, if I may. Just on payments, what are you guys doing on mobile? Are you launching also a kind of mobile card reader or dealing with third parties on that? Secondly, from a profitability perspective in 2013, is it fair to assume a kind of flattish margin again for next year? Thanks. Second one is easy. Yes, that is a fair assumption. Absolutely. On the first one, in the U.S., we have a device that plugs into any mobile device that reads cards and which we subsidize for a subscription on payments. That is available. As I said, we have gained a number of good mid-market accounts, thanks to that. Here in Europe and in Canada, it is a bit more complicated because we need Chip and PIN, and those readers are more expensive. We have some test cases going on in the U.K. right now. We are in the process of defining what kind of offering we can do, and the whole pricing environment is more complicated. The market is less mature. We have not fully defined how we are going to play there in Europe, but in the U.S. it is done and it is working to our advantage. We are pretty pleased with it. Do you charge a percentage of the transaction? Well, the price list on payments is a very complicated process. I wouldn't dare trying to do this. Actually, I can't. But there is some of these fixed rates and so on, so forth. Yeah. All right. Well, thank you very much for coming today, and I wish you all a good day. Bye. Thank you.