The Sage Group plc

Darren Fisher - Finance Director Steve Hare - CFO Guy Berruyer - CEO

Stacy Pollard - JP Morgan John King - Merrill Lynch David Toms - Numis Vijay Anand - Espirito Santo Adam Wood - Morgan Stanley Milan Radia - Jefferies Hugo Mills - Citigroup

Good morning. Thank you for joining us today.

I'm delighted to present our full-year results. Together with me we have Darren Fisher, our Group Finance Director.

He's been acting very capably during our search for a permanent CFO. That search ended several weeks ago when we appointed Steve Hare as our Group CFO.

Steve will start early January, and it's my pleasure to introduce Steve Hare to you. Steve, if you would stand up?

Thank you. So to business with our headlines, I'm very pleased to be presenting a strong set of results today.

We've doubled our rate of organic growth to 4% this year with marked acceleration in the second half with 5% growth in the second half. The 6% organic growth in North America is clearly a highlight.

It's great to see the turnaround that our team has achieved in this important market, but our good performance is broad-based with stronger execution across the Board at Sage. We've remained financially disciplined.

We've maintained margins whilst continuing to invest and we’ve returned over GBP 1 billion to shareholders over the past two years, GBP 1 billion. And we’ve delivered success, commercial success, across the business.

We’ve gained on an organic basis 256,000 new customers, an increase of 12% over last year. And our renewal rate, which has been 81% as long as anyone can remember, I guess, now it is 82% and that 1% represents GBP 4 million in the year.

So really good set of numbers, what are the strategic highlights? Sage One, where the UK is leading the way with over 21,000 paying subscriptions at the year end, our UK team really did a great job here.

Sage ERP X3 where revenue growth accelerated to 12% this year and our integrated payment strategies working as evidenced by a 20% growth in payments cross-sell in North America. So great progress, but our technological innovations will only continue to bear fruits is we continue to deliver what customers really want.

This is why we measure Net Promoter Scores, NPS, which is a great indicator of long-term success. NPS tracks customers’ willingness to recommend Sage.

The good news is that NPS has nicely increased across the Board at Sage over the past two years. So, our strategy is working and growth is accelerating.

I will now hand over to Darren.

Thank you, Guy, and good morning, everyone. So, I am going to cover the financial and operational highlights for the year.

And I want to start with the financial KPIs because for me they cover key thing, the financial health in the business. This has been a year of marked improvement in growth.

Organic revenue has doubled to 4% from 2% last year, a strong performance. We’ve maintained margin of 27% in line with our margin commitment at the start of the year.

This reflects both our discipline and the strength of our business as we continue to invest to growth. Underlying EPS is growing 12% partly reflecting this discipline but primarily reflecting the buyback and the share consolidation we produced our share account during the course of the year.

Underlying cash conversion is 112%, demonstrating the continued strong cash generation associated with our business. Turning to financial strength.

We have delivered on our leverage commitment of one times net debt to EBITDA, and interest cover remains strong notwithstanding the increase in gearing to make this commitment and it remains materially above our current requirement of four times, so the KPI scorecard is demonstrating the business is in good health. Looking ahead, we want to continue the journey we’re on to reduce our exposure to cyclical license revenues and to drive higher quality revenue streams.

So how are we doing on this? This slide helps tell the story.

The headline message is strong acceleration in growth during the year driven by high quality recurring revenue and good execution across the business. Recurring revenues continued to deliver good growth during a period of economic uncertainty 6% growth in market remain challenging this is good quality consistent growth.

We were also encouraged to see an improved performance in SSRS this year, supported by return to growth in the second half. Our strategic shifts through recurring revenue continues and that represents 71% of our revenue and bear in mind that only five years ago this was 61%.

Improving revenue mix further is the core of our strategy to deliver to deliver accelerated growth on a sustainable basis. Now the headlines, let's turn our attention to revenue sources of the regional level.

In Europe the picture remains mixed; SSRS remains in contraction and continue to see weakness in new license revenue in markets where economic conditions remain challenging. Such as in Spain and in France where our mid market business in particular finds trading difficult.

Europe has delivered 5% recurring revenue growth, this is a good performance and reinforces the value customers place in support throughout the economic cycle. In the Americas we're seeing encouraging evidence of our focused delivering results.

SSRS returned to growth in North America driven by strong performance by ERP X3. Recurring revenue which is 80% of our revenue in North America grew 7% for the year; this growth reflects great execution on a number of opportunities which I will cover in more detail shortly.

EMEA continues to deliver strong growth in both SSRS and recurring revenue, with South Africa again leading the line. Let's now look at trends within the region more closely.

In Europe organic revenue grew 2% for the year with acceleration in growth in the second half. The standout performance was the UKI which delivered the growth of 5%.

The business continued to execute well in particular on the opportunity presented by the move to real time information implemented by HMRC. The UK business did a really good job at capitalizing on this significant legislative change.

France returned to growth in the second half with the good performance in the small business and SME segments offset by weaker performance in the mid market business. Germany also returned to growth in second half as we expected having being held back to the first half by a tough grow over comparative.

Spain’s rate of contractions lessened throughout the year to end at 2%, new business still remains difficult but we were encouraged as Spain exited the year in modest growth. Sales price growth continued to be very strong at 25%, but business benefited from price increases made in June 2012, resulting in high growth in 2013.

We do not expect to see Sage Pay sustain this level of growth this year; we do however expect it to remain a good double digit growth of business, like you have seen in the second half. So encouraging progress in Europe, the mid market confidence is still somewhat fragile.

North America, delivered growth this year of 6% with 7% in the second half, these numbers speak to the impressive turnaround of the business Steve referenced in his opening remarks. Remember North America delivered growth of 2% last year.

This year we have broken out the North American performance to show safe business solutions which is software and support and safe payment solutions. As you can see safe business solutions grew 6% so what were the highlights?

We executed well on our up sale opportunity, the safe business care our premium support offering, with high value contract supporting revenue growth. Continuing the trend of the half year we’re seeing further growth in the premium support penetration, also the team did a very good job of migrations customs to newer products while achieving growth.

Real evidence of the strategy in action through effective portfolio and management. Our mid market products performed well, Sage ERP X3 delivered a stand out performance.

Revenue increased by nearly 50% and new customer acquisition more than doubled. The payments business delivered solid growth but really it's about our payments cross sell opportunity.

We have seen our focus on this payoff with a 20% increase in integrated payments cross sell revenue. This remains a great opportunity for us and Guy will talk about this little bit later.

All in all very good progress and North America is now delivering really good growth. Brazil is not included in organic revenue until 2014; however the business performed well despite the economic slowdown.

The software business which is predominantly subscription based has continued to show double digit growth. Albeit the economic slowdown has had an effect on the content part of the business.

Overall we have built a significant foothold in Brazil and we're in a great position to benefit from the growth opportunities in this market. In EMEA, organic revenue grew 9%; South Africa continues to perform well with organic revenue growth of 14%.

Our core mid-market products including Sage Evolution people payroll and Sage ERP X3 are driving this growth. Growth in the wider African market is becoming increasingly important.

Revenue grew 20% and that represents 13% of South Africa’s revenue. Sage ERP X3 is doing very well in this market.

Australia grew by 1% reflecting a weak macro environment hitting software revenue. We were pleased however with renewals with the existing customer base.

Turning to profitability; underlying operating profit has increased by 2% which is in line with underlying revenue growth. Margin has been maintained at 27%.

This is in line with the commitment we gave at the start of the year to maintain margins during 2013. I am pleased that our disciplined approach has continued in this period.

Our regions maintained their margins year-on-year by continuing to focus on maintaining their profitability while investing in our strategic priorities. Cash flow; I won’t spend a lot of time on this slide, however there are few points tonight.

Firstly cash flow from operations continued to be strong. Underlying cash conversion 112% demonstrates the key strength of our business, the ability to generate cash.

Secondly; in line with our minimum leverage target, net debt has increased. We have maintained liquidity through increased long-term borrowings at very attractive price.

So our capital structure along with our financial strategy underpinned by core long-term debt, a healthy platform to support the growth of our business. Our approaches supporting this growth continues to be driven by disciplined capital allocation, investing in the business organically all through acquisition or returning cash to our shareholders consistent with our focus on shareholder value, and to illustrate how we drive this approach in practice with my final slide.

Let’s start with investment and R&D. We continue to invest in the business organically through disciplined resource allocation while maintaining the margin.

We've also invested through targeted M&A with the acquisition of EBS growing our portfolio in Brazil. We have completed selective disposals, focusing the business on the core, the proceeds from the disposals have been returned to shareholders.

Our dividend continues to be progressive. We’ve announced today an increase of 6% in line with the increase at the interims.

We returned GBP570 million to shareholders in 2013. And finally, we reported today giving a one times net debt to EBITDA in line with our commitment to increase leverage.

So rigorous capital allocations informs how we support our strategy for growth and how we deliver value for our shareholders. On that note, I will hand it back to Guy, thank you.

Thank you Darren. We set our strategy for growth with you back in July 2012.

You will remember our three cornerstones and our ambition to improve our rate of organic growth to 6% by 2015. Along the way, we’ve reiterated our 6% goal but also we recognized that it’s what not happened overnight, that it would be progressive.

I believe that now we’ve reached a point where I can not only say that our strategy is working but also that growth is accelerating. So our strategy for our growth starts with focus.

That was the first cornerstone. So earlier this year we streamlined our portfolio with the non-core divestitures, so that was important.

But what’s more important is the ongoing allocation of resource of Sage, and I should say reallocation of resources. Remember we’re moving resources from our Harvest and Sunset products to our invest products.

The graph here illustrates a significant reallocation of investment. 50% of R&D spend this year was on invest products, up from a third in the year before.

We’re seeing the same trend on sales and marketing investments albeit at a slower pace as you would expect. Our combined R&D and sales and marketing spend on invest products is that a third in the past 12 months.

So the message here really is that we are investing significantly for growth and we are self funding this investment on our existing business. Let’s talk now about our second cornerstone, investing in technology.

So in the next few minutes I am going to cover, first our technology innovation; I am really going to talk about the technology platforms. Second, I’m going to review our commercial project progress on those technology innovations to measure progress and finally I will discuss the customer angle.

So on innovation, we said we would offer a cloud solution for each of our segments and we’re well advanced on this. We have also said, we would build connected services to give our customer the complete user experience and today they can get their payments solution from us, they can get their mobile apps from us, and then they can get their integrated CRM from us and because it’s all made by Sage, it integrates seamlessly.

So I’m going into more details now, Sage One first. We built this platform with geographic expansion in mind so it’s easy to localize and expand.

Typically 80% of the development is done in Newcastle with 20% done locally. This has allowed our team to tailor the local subtleties in each market such as quotation in France or debit notes in Spain.

It also allows us to launch in new market at pace so we’ve done Germany in March and then we’ve done Spain, France, Portugal, Canada in short succession. So those launches concern Sage One standard which targets the one-to-five employee segment.

For the 5 to 25 employees segment, we were really excited to bring to market Sage One extra to the UK last month. It brings a richer range of features more depths and breadths of functionalities to satisfy more sophisticated businesses.

We are bringing our ERP products to the cloud with hybrid cloud architecture. In order to do this, we build a portal; we call it Sage ERP online, which will support all of our leading ERP products, so again the common technology here.

Two offers are commercially available Sage 200 Online in UK and Sage Murano Online in Spain. So this offers customers a clear migration path to an online solution with one could base maintained for both the online and the on-premise product.

The Sage ERP X3 technology platform is well established and we’re working on exciting ways to improve it further. Including a cloud version and we’ll update you on this in 2014.

So we’re delivering on our promise to bring a cloud solution for each of our segment. We are also giving our customers connected services, connected apps, connected features so that they can enjoy complementary cloud solutions that connect to their existing on-premise software.

Integrated payments is our most significant achievement so far and a great opportunity to drive further growth. In North America, we built a market leading platform called Sage Exchange which enhances the seamless integration of payments.

This is another piece of innovative technology. Every accounting or ERP product we have in North America is already connected and worked with Sage Exchange.

We are excited about mobility too. We introduced the Sage Data Cloud in North America which gives our customers the advantage of cloud based apps connected to their ERP.

At the North American Sage Summit Conference in July, we launched several mobile apps for this platform that allow customers to accept their data and process simple transactions on the move on their smartphone or on the tablet. So as you can see, technological innovation is thriving at Sage.

So now I want to cover, how we’re performing commercially on this technology innovations. Let’s start with Sage One where the model is scaling well.

In the UK, we’re more than tripled the number of paying subscription in past 12 months. What’s interesting from a future point of view is that we have 5,000 accountants and bookkeepers in practice signed up Sage One.

On the other hand, we’ve made slow progress in the U.S., we know it will take time and we’ll continue to strengthen our channels and we’ll bring Sage One Extra to the U.S.in the summer. Now let’s move to another commercial success this year Sage ERP X3.

12 months ago, I told you, I was disappointed with 5% growth for Sage ERP X3. I said I wanted to see more.

Well, now we had 12% growth of Sage ERP X3 this year so it’s really a good year linked to fast growth in the outside of France market, France being the historic home market for Sage ERP X3. We are seeing a 32% increase in the number of certified X3 consultants employed by our business partners, which illustrates how much they are investing to deal with more volume, very encouraging.

So, I continue to expect double-digit growth from this business. I want to touch on my last commercial success on those technology innovations this year integrated payments.

So, integration between payment services and the back-office is hugely valuable for our customers and that means it’s hugely valuable to us too. It drives customer satisfaction and therefore our NPS score.

It increases customer spend and therefore our average revenue and it is sold as subscription which drives greater lifetime value. The size of the price with integrated payments is substantial.

As proof point show we’ve made great progress again this year in North America where we now have 12,500 integrated payments customers and we’ve increased that revenue by 20%. So, in North America we have build $30 million business with cross-selling integrated payments that did not exist four years ago.

In Europe, payments integration is less mature that we are now starting to promote it in the UK. So, to finish the discussion with the technology I want to take, for a second, the customer angle.

Those of you how were at our July Technology Day will recognize here our Sage One customer she was sitting where Darren sits. Going to the Cloud or staying on-premise is not a simple choice for SMEs.

And we know that our customers want more than just technology. This is why we are focused on offering choice, in the Cloud, not in the Cloud or partially in the Cloud.

We believe we are reading the pace and scale of technological change correctly and we’re using this to guide our customers to make the right choice for them. For us customer satisfaction is driven by choice but it is measured by NPS and as I said in my introduction it’s increasing across the board at Sage.

I’m now going to cover the third and final cornerstone of our strategy which is subscription pricing. Why does subscription pricing is relatively modest part of our revenue today, it’s already making a difference in our business.

Let me illustrate some of the ways we sell traditional on-premise products with the subscription relationship. So, we’ve won new customers according to our research they would not have taken our product -- let me start again.

We’ve won new customers who according to our research would have taken products with fewer features if they had both of perpetual license, so up selling. We’ve seen upgrades and migrations become accessible for the same reason.

And finally subscription is also helping us reactivate customers who are using a Sage product but have opted out of support. So, it’s still early days that we’re building our subscription pricing capability.

And along the way we’ve learned that not all subscription pricing leads to a short-term revenue debt, it all depends about the pace and the mix. So, how does this review of our three cornerstones link to our ambition of 6% organic growth?

Our view started with the base line of 3% growth which represented our long term average, additional growth comes from our strategic actions. So, 18 months on what are the key drivers to get us to 6%.

Firstly, accelerated growth from invest products. Within the horizons to 2015, we expect to see material contribution from established invest products such as Sage ERP X3 supported by an increasing contribution from emerging products such as Sage One or hybrid class solutions.

Secondly, there is the up-sell of premium support cross-sell of payments and also subscription pricing on our installed base. Some of this is not new but the delta in growth comes from greater focus and best practice sharing across the Group.

Thirdly, our exposure to higher growth market particularly Brazil and Africa. Brazil becomes organic in 2014 and South Africa continues to deliver very strong growth as you know.

The acceleration in growth to 6% supports our margin commitment. So to conclude, strategy is working and growth is accelerating.

I am confident we will reach our target of 6% growth in 2015. And what I hope I’ve been able to do today is to illustrate the reasons why I am confident.

Thank you. Darren and I will now take questions.

All right so first one here.

I’ve got a couple of questions actually maybe on just on first start with the guidance. There is a very confident maturation of 6% target but you’re slightly cross running your aspirations for margin expansion.

I am wondering whether you’re sort of slightly deemphasizing the margin target as you invest in some of these new areas. And the second one is just a couple of more during questions actually.

I missed the penetration of premium support that’s the number you normally gave us and if we could have that one. And sterling obviously strength in that last few months.

Just the current rates what you think the impact of FX is? Thanks.

Okay, I’ll take the first question and Darren you’ll take the other two. We did say back in July 2012 that we were expecting to expand margin between 100 basis points and 200 basis points.

But clearly that expansion comes with the leverage of higher growth rate. So we expect to see that sort of the hockey stick phenomena.

Whereas on revenue we were very clear by then that this would come gradually there was no hockey stick on revenue and that’s what’s we’re seeing now.

Penetration is 76% I think the last two reports it was 74% and foreign exchange clearly the way we reported our results is neutralized for FX. In terms of guidance what I'd ask is the IR team to help you out with the exchange rates we’re using on the guidance going to full year ’14, so that could be [indiscernible]

Other question.

Morning. Thank you.

Milan Radia from Jefferies. Couple of questions.

In terms of X3, what is the revenue contribution in percentage terms of that? And is the margin potential of that part of the business greater over time than the core ERP products, the cloud transition within that notwithstanding?

And then as you look at pricing levers in the past year and going forward, how much of the organic growth has, would you say, been delivered by pure pricing increases? I think Sage Pay is the only area where you talk about pricing specifically.

And how much of that 6% do you think will come from that pure pricing lever?

Okay, thank you Milan. X3 is about 5% of revenue I don’t have the exact figure and we don’t publish specific revenue figure per products that’s somewhat commercially sensitive.

But on the margin aspect of X3 this is an area where we invest so the margin today would be lower. The margin potential clearly the sustainability of the recurring revenue on a product like Sage ERP X3 is very-very significant.

So we’d expect those margins to improve, but for now it’s actually lower than the rest but that’s the basics of investing. So if you want to ask me Sage One as profitable as Sage 50 today I’d say no because we’re investing on Sage One, Sage 50 is mature product.

So that’s quite natural. I don’t really know whether the margin can be higher or not than the rest to be honest.

Pricing. So we’ve singled out the pricing action on Sage Pay because it’s been a one step price increase significant as opposed to recurring.

We’ve always increased prices around inflation plus-minus and that’s part of our base case so that’s why we’ve not singled it out. So when I say we start from the base of 3% our historic performance that’s including there.

Now within pricing this movement to subscription, that generates high growth, because we have a fare more thickness with subscription than with the traditional modern contract. So the new initiatives inside pricing will drive growth but the traditional share price increase that's part of our base line.

Can you talk a bit about the macro-landscape and to what extent this could act as a tail wind for you to reach that 6% goal? I know in the past you have not really betted on a significant improvement there and I know North America is recovering but the signs or stabilization, if Europe starts to really pick up.

What impact that can have to your business? And then secondly is there any change in your view with regards to the sort of targeted acquisitions particularly in other emerging markets as you look to kind of diversify the geographic base of the business.

Are you considering sort of other M&A in that market?

So on the macro-side you are right when we said 6% organic revenue growth goal back in July 2012, we said we were not expecting help from the economy neither. We said, would we be able to deliver 6% if GDP was contracting throughout down markets.

So it was neither nor. Since July 2012 we have actually had more headwind than tailwind to be honest.

Europe went into recession pretty much throughout except Germany. So in the past two years it's been fairly difficult.

A bit of tailwind maybe but if you look at the current situation in Mainland Europe, not great; is that going to get better? Maybe that's not part of, I always take as a scenario that things are going to stay as they are.

And I make my projections because what do I know whether it's going to get better or worse, it's very difficult. So South Africa and Brazil actually it's more headwind than tailwinds there compared to over two years ago.

So I think it's a mix picture on the macro and I wouldn't bet on tailwinds and I am not betting on tailwinds. In terms of targeted acquisitions we have said in the past three things in the new market new countries.

Within countries additional acquisition such as installed bases of complementary products mature, and then new technology. And clearly there is all sorts of ideas that can lead us to make acquisitions in this third category, and that's evolving.

But the concept of acquiring new technology, acquiring startups that can bring complement to Sage where we don't have the know-how and so is very much on the horizon as it was before. So there is no real change I would say.

Stacy Pollard with JP Morgan. A couple of questions, just kind of similar to Milan's question on margins, can you talk about margins on subscription revenues and Sage 1 and in the long term potential there.

And secondly will you continue your share buyback program and what can we expect in fiscal 2014?

I'll take the first question and hand over the second. Thank you Stacy.

Subscription is more appealing from the revenue growth. From a margin point of view, we think that it's going to be equivalent to any products.

There is the famous question about this first year hit of not having the upfront license. But as I said if we do it progressively it's actually already the case, so it's already built in our numbers.

We started this sometime ago. So every year we have this small portion migrating to subscriptions.

So the first year hit at the current pace we are at is already done in the numbers. The benefit of subscription is really about revenue growth, this about this in our small business category where we have the vast majority of our customers in units, only 25% of them had a support contract today, which mean 75% of people use are Sage product do not have a financial relation with Sage on a yearly basis, they don't pay us on every year.

They buy and upgrade every three, four, five, six years it depends. On the subscription model we have recurring revenue with them as long as they our product.

So that's going to drive revenue growth fundamentally. As to your second product, your question of Sage 1 profitability.

On the cost side we have the cost of hosting but on the un-premise world we have the cost of producing the CD and the manuals which we don't have anymore and we like to provide hefty discounts to retail and as we sell more direct on Sage 1. So from a profitability point of view I expect that once the initial investment phase which is going to run over several years, I expect very nice margins unless price wars would take place.

We’ve not seen real price wars in our business historically. I don’t expect to see that.

But you never know.

Stacy, your question was around capital structure and the buyback, and clearly we're pleased, we’ve been able to report the one times leveraged today, which was great. But then needs to go into maintenance mode clearly, and we like to buyback.

It gives us flexibility and you will continue to see that as a feature as we sort of move forward and we are to make sure we are maintaining that leverage commitment absent anything else, M&A for example.

Just a question on the reallocation of resources. You have done a good job in moving some of the R&D resources towards the invest product.

Can you give us a sense of how much far that you can go with that? What’s the kind of maintenance level that you need to support this Sunset and the Harvest products?

And just secondly on the divestitures that you’ve done this year, can you just quantify? If it is so, how much that will help your organic growth next year, from a calculation perspective?

And secondly, you’re saying that there is any chance of doing further divestitures as we look forward?

Okay, I will take the first question and I will let you do the first part of the second, and then I will pick up the second part of the second. Reallocation of resource; this ongoing, I think the first step was the biggest.

So I do not expect to see as big of a step going forward. But I do expect continuing effort both on R&D and on sales and marketing, but clearly not as fast as the first year.

Divestiture.

So in terms of organic growth, I think you need to look at the 6% target in full year ’15 in the round, we are not looking it in terms of the incremental around the divestitures themselves. It’s not by material, and you need to think about the context of the direction we are taking to get that 6% in full year ’15, more broadly.

Some of these divestitures were actually growing nicely such as non-profit business in U.S. And is there room for further divestiture?

Certainly not of the magnitude we’ve seen, not at all. There will be, there is a possibility for small divestitures, some of them you might even not notice.

But it’s not going to be as at all as substantial as we’ve done.

Just a couple from me. Can you tell us what the ARPU is on Sage one; what you're actually achieving?

And secondly, you talked some of our innovation; Guy, can you tell what recent things that Sage has brought to market first. Because a number of examples you took us through were things that your competitors have had previously, and to me that's not particularly innovative, or has more catch up; so what have you actually brought to market first that no one else had got to market, where the true innovation coming through in Sage?

That is a tough question. Alright, on your first question, we don’t have, we don’t want to publish an ARPU.

This is a competitive environment. We have, the prices are GBP 5 a month for just a cash book and GBP10 a month for Sage one, that where is that discounting.

We have, you know some deal with banks, where we give them some of the margin. There is a little bit of margins to accountants and practice although a lot of them actually don’t really want it.

They prefer to have service. We’ve not discounted outright.

We have made promotions when customers had you know one of the two products we have the account and payroll, so we made promotions for those customers with one to get the second one and give them some months free; but it is just initially. So in long-term there is not discounting there.

And then going forward with Sage One Extra at 25 a month per user, you will see the ARPU go up. And clearly if I look out, not this year, not next year, but three years out Sage One Extra will have a bigger impact on revenue than Sage One Standard.

On innovation where did we have first, as I said, that’s a tough question. So payments integration, clearly this is innovation.

The Sage Exchange platform we have has been innovated by a number of people in the industry as being outstanding. I think, in terms of Sage One we might not have, in first, in the market, I think that’s your theme here.

But in terms of ease of use, we win. And that’s a very important element in terms of very small business, sales traders and so on.

I have a statistic here that people who like Sage One, 52% of them like it first because it’s ease of use. So it is a very telling statistic for me.

Hi. I'm Hugo Mills from Citi.

Just three from me, if that's alright. So first one on your payment integration platform, obviously you've got it out in the U.S.

Any plans to bring it to Europe? And secondly, on the pricing side of things with the new CMO, is there anything you can share with us about how you thinking about pricing differently across the board?

And then thirdly, it’s on Sage One Extra, obviously it’s just launched, it is too early to form an opinion but can you give us a view on what you thinking about how that goes to market, how it is different? Are the channels different at all and how that could develop?

Thanks.

Thanks you. The payment business we have in the U.S.

and the payment business we have in the UK are somewhat different. In the U.S., we are a merchant acquired.

In the UK, we are essentially a gateway. So as a gateway, we move financial information in a safe way to the various intermediaries.

We don’t move money. In the U.S., we move money and that’s a different case.

So Sage Exchange is far more important as a platform because we move money in the U.S. So we’re not take Sage Exchange in the UK for now but the model of integrating payment information into back office, actually that was started in the U.S.

three years ago that methodology that is being brought to the UK and so we’re now starting in the UK as we speak, we’ve started. Looking at pricing in new ways, yes we’re looking at pricing in new ways.

The first thing, the most sort of future looking is about used Sage pricing and we haven’t really done this yet. But with more and more connected services, connected apps, connected features we are thinking about some of those to price per use as opposed to on a monthly subscription basis so that’s one innovation that we’re looking out.

There I forgot this one when I answered to you. We are also looking at how we set prices because historically it’s been fairly rudimentary in the software industry.

You had the license price and maintenance price and support price which was often the percentage of the former. And with again moving to the cloud with far more diversity in terms of connected services and apps, how we set prices for this, how we analyze where the right price is.

So far instant, the mobile app for sales people on the road in the U.S. is, I think if I remember well, $20 a month.

We didn’t arrive at this by accident. We analyzed our market.

We tested prices. So that’s a kind of thing that we’re doing.

And your last question is around Sage One Extra in terms of channels, we don’t envisage any different. With Sage 50, Sage One standard, Sage One Extra, we’ve always had a fairly wide view of channels.

So we sell direct on the phone, direct through our e-Commerce website, through online resellers, through traditional resellers of course through the accountants actually accountants recommendation. So that’s pretty equivalent.

The only real difference is that, I suspect retail will take a lesser role in distributing Sage One Extra than Sage 50.

Thanks, it’s Vijay Anand from Espirito Santo. Two questions for me.

Firstly on renewal rates, Sage has reported 81% renewal rates in 2007, so I was wondering if you can talk a bit more about what led to the increase in FY13. I’m also conscious that, we’ve had some disposals this year, so I was wondering if those disposals have had any impact on this renewal rate.

Secondly on Sage One, the run rate of new paying subscriber additions in the second has more than doubled versus H1. The current run rate seems to be about slightly less than 2000 subscribers per months.

Now, the product has clearly well reached the level of maturity in the UK and you’re launching in new geographies as well. So I was wondering when we think about FY14, should the run rate increase further in terms of the new paying subscribers for Sage One?

Thanks.

I’ll take the first one. In terms of renewal rate, you’re right.

We have had 81% for long number years now, so we’ve now moved to 2%. There are two things to think about here the first one is subscription contracts coming into the mix, they have a lower churn rate, so they have a high renewal rate normally.

So what you’ll see overtime is that something to take in effect. And secondly giving the course this year, we have had legislative change in UK and we have some in Portugal and that tends to have a little bit of an impact on renewals as well.

So there are two things I would be thinking about.

So on Sage One, you know trees do not reach the skies; it’s been by steps. So, there is been events that created steps.

So, I don’t expect to see another doubling of our monthly run rate that would be too optimistic, I think. As to the other markets, we’ve been in this, in the UK for almost three years now and in three taken off this past year until then it was pretty slow.

And mainly in Europe especially Germany and France, Cloud based accounting is really, really much less common than it is in UK or in the U.S. So, I expect this to be a slower up take in the coming period.

The U.S. obviously is a very mature Cloud market and you mentioned earlier Sage One’s take up is been a bit disappointing; maybe what you’re doing to address that.

And secondly on the UK you’re now been operating for three years; what is the turn rate if you like or lifecycle of the customer like you losing 10% a year and naturally actual growth rate and new subscriber is high. And then just finally on subscription, you’ve given us a run rate revenue base what is the actual number of customers who are on the subscription contract today?

Thanks.

Sage One in the U.S., by the way we don’t have the answer to the second question. I don’t know what it is so we’ll come back to you.

And Sage One in the U.S., Sage One as you as you will remember from the UK is really targeting the very small businesses, the sort of sole trader, one or two employee kind of company. Historically Sage in the U.S.

which is Peachtree as it was called before, we’ve always targeted sort of the higher end of the small business segment, 10 employees or more. That’s where our price points were.

So, with Sage One really, we’ve started in the brand new segments where we’ve never operated in U.S. Our brand is certainly not as significant at it is here and so it is very clear to me that it’s going to take time to get those numbers up.

So, what we are doing about it? One of the things I decided was to give the priority to the U.S.

as to localization of Sage One extra so then we get and so the plan is to get this over to the U.S. in the summer.

There is always a risk of one or two months or less here but because we believe that with Sage One extra targeting the types of 25 employees segment this will hit more the sweet spot of where we’ve been in the U.S. We’ve also made some internal changes to deal with the fairly low performance, so we’ve not remained inactive.

And your third question about subscription, I’m not sure I’ve got it. Subscription on-premise product, how many consumers, don't know, we’ll have to come back to you, I’m sorry about this.

Let me try to think, it’s in the upper thousands or low teens thousands. That’s the order of magnitude because that is one number I know and that would be roughly.

Now, premises in U.S. we started with our mid market products, so you’ll expect relatively lower volume.

In France, we’ve been doing very well with reactivating customers in our entry level and our small business segment. So, that brings significant volumes right away.

That so upper 1,000, low teens, around 10.

It’s Adam Wood from Morgan Stanley. Just a few, on the payment side just a follow up on that.

You’ve obviously been running out integration it comes simply from the UK. Could you just give us a quick update on where we are on that and upside you see from that rollout in terms of fairly accelerating the growth from the payment side?

Maybe on the recurring revenues in total, could you give us a feel for volume versus price growth in that side of the business? And I appreciate the premium supports obviously gone quite away but there is obviously system mix to go for.

Can we continue to expect pricing to go up for the reasonable rate in that business? And then finally just on the margin hokey stick comment, does that mean the mass majority of the margin expansion you’ve guided for should be 2015 and therefore ’14 should be relatively limited?

Thank you.

I’ll take the first question I’ll let you handle the volume price mix. And then there is also the premium contracts and then the margin.

You can do the [rest]. Payment in Mainland Europe.

So we’ve launched this in the middle of the year in Germany and Spain. The ecommerce market handled outside of the very large players like Amazon and so on so which is for us the target market.

The UK is bigger than France plus Germany plus Spain. So the addressable market in the UK is vastly superior.

We’ve been going with payments in the UK for six years I forgot exactly the long time. So the answer is it’s going to be a slow uptake in both Germany and Spain; one, because the market, addressable market is slower; second, because we’re just starting.

So I expect most of the growth to come from the UK.

In terms of the premium support mix, I mean you’re right; there is two elements to premium support. Clearly there is the continuation of actually getting people on the premium and also the mix within the tiers.

There is still a lot to go for in both of those. We can continue to bring customers up into premium and we continue to bring people to those tiers.

So we still think there is quite a bit to go and we continue to see an increase in the average selling price. On across volume question I’m sorry I didn’t quite catch that one.

Can you just repeat that one?

On the recurring side of the business just how much of that is volume driven and how much is coming through price increases? I mean I think that mostly price increases [indiscernible]?

The recurring revenue is made up of three things; you have to think about it this way. So firstly there is payments, so we’ve seen some pricing from Sage Pay coming through into the payment side.

We’ve seen volume coming into both of those businesses in the UK and the U.S. as well so there is a mix there, similarly subscription, which will be mainly volume so that’s sits into recurring bucket.

And then when you get into maintenance and support clearly what you’re seeing there is a mix of price but also you’re seeing this tearing effect through premium and you’re seeing the effect of people coming into premium. So you need to break it down a little bit and think of it as a mix of thing too.

In terms of the margin hockey stick you’re right I mean effective what we’re saying is we’ll continue to invest as we move into full year ’14. And what we’d expect to see is that margin accretion coming through a little bit later leveraging the acceleration growth that we’ll see over that period as well.

Well, if there is no more question, I would like to thank you all for coming today and see you in six months.

Thank you.