The Sage Group plc

Stephen Kelly - Chief Executive Officer Steve Hare - Chief Financial Officer

Charlie Brennan - Credit Suisse Mohammed Moawalla - Goldman Sachs Michael Briest - UBS Vijay Anand - Mirabaud Milan Radia - Jefferies David Toms - Numis Tim Kindt - Merrill Lynch Amit Harchandani - Citigroup Paul Morland - Canaccord

Hello and welcome both to the folks who are in the room here at the London Stock Exchange and also those of you who are on the phones. We're delighted to have you with us for our First Half Interim Results for FY ‘16.

Before we get started, I will outline the agenda for this morning's presentation. I will provide a brief overview of Sage's performance for the first half FY ‘16, and then I'll hand over to our Chief Financial Officer, Steve Hare, who will talk you through our financial performance.

Then I'll update you on the operational progress against our plans and close with our outlook for the full year, before opening up to questions from the floor. As always, please note the Safe Harbor Statement, which you will find in your packs and also on our website.

At our Capital Markets Day in June 2015, the Sage management team chartered the course for Sage's transformation. We committed to maintain financial performance throughout the transformation period.

We were transparent about the operational risk we face, which will mean the transformation journey may be non-linear. I want our management team to be known for doing what we say and to provide absolute transparency, identifying what is working well and what areas require greater focus.

When we spoke last December to announce our full-year FY ‘15 results, which were the first public milestone, we were able to demonstrate the first steps in our journey. At that point, we delivered the fastest rate of organic growth for eight years and shared some green shoots of progress against our transformation strategy.

So I'm really pleased to stand here today on the back of an encouraging set of results for the first half that demonstrate continued progress, with improved quality organic revenue growth of 6.2%, and this is underpinned by subscription revenue growth of 35% and double-digit organic recurring revenue growth for the first time this decade. Importantly, we take momentum into the third quarter and are confident of our performance for the full year.

We are performing while taking the important steps in our transformation to improve the underlying quality of our business and support our longer term growth ambitions. The mantra we talk about internally is performed and transformed.

We continue to keep our feet firmly on the ground and recognize there's always much to do as we focus relentlessly on execution. I'll come back and talk to you specifically about the transformation progress during the half, but first, I'd like to hand over to Steve Hare for the financial performance review.

Steve?

Thank you, Stephen, and good morning, ladies and gentlemen. I'd like to add my welcome to you all, and thank you for attending today's half year results presentation.

As usual, I'll take you through the financial and operating performance for the first half and consistent with seeing us delivering results whilst transforming the business. I'll call out what's going well and call out those areas that require more focus.

So on financial progress, we've delivered 6.2% organic revenue growth for the first half, and as I signaled at the time of the Q1 Trading Update, the year-over-year growth in Q2 was marginally slower than Q1, largely due to the non-repeating SSRS revenue that I called out last year in Malaysia. And also, a more balanced phasing this year between Q1 and Q2.

As I'll talk about later, we also achieved double-digit recurring revenue growth, which is obviously a key milestone in the transformation, and has probably occurred slightly earlier than we expected. But I must be cautious and repeat that the transformation may not be entirely linear.

We now have over 2 million recurring and processing contracts of which 842,000 are on subscription. This is up from 561,000, 12 months ago.

We've been investing for growth, and as I flagged at the time of the FY ‘15 full year results, the operating margin percentage was lower in H1, and in line with where we expect it to be. This is very much part of our deliberate plan.

In the second half, we will start to realize the savings secured in G&A as a consequence of the transformation program. Also, in terms of reinvestment, the majority is going into variable cost.

So for example, in marketing, we actually have less head count in marketing, but we've invested more in program spend to give an overall increase in the amount we're spending on marketing. So Stephen and I remain very confident of achieving our full year margin target of at least 27%.

Underlying earnings per share is slightly down due to a combination of the flat operating profit and a higher tax rate, 27% this year versus 25% last year. Again, as I indicated last year, 25% was at the lower end of the likely range, and as we see stronger performance in higher tax jurisdictions, such as the U.S.

and France, the tax rate is likely to move around in the 25% to 27% range. Non-recurring items of 29 million is a net of 31 million charge for business transformation and a credit relating to the settlement of the Archer legal claim in favor of Sage.

I'll talk more about business transformation later, but we are on track to secure at least 50 million of annualized G&A savings by the end of the financial year. Although not on this slide, for information, our non-GAAP EBITDA was 210 million, giving an EBITDA margin of 28%.

And finally, we're increasing the dividend at the interim stage by 8%, consistent with our policy. So, if we turn now to the cash metrics starting with the first column, an underlying operating cash flow of 210 million represents a cash conversion of 111%.

CapEx is slightly higher than last year, as we invest in internal IT systems and infrastructure, and this will continue into the second half. The free cash flow shown in the second column at a 142 million represents 19% of revenue, an excellent conversion during a period of transformation and after exceptional cash costs relating to the transformation of 12 million.

The cash impact of this restructuring will be greater in the second half, where we expect at least half of the charge of 100 million to result in cash-out. Turning to the third column, we have closing net debt of 404 million, and this represents one times trailing 12-month EBITDA.

In terms of the second half and the likely uses of cash, we anticipate some bolt-on acquisitions. CapEx in IT and site infrastructure will continue, and there will be further transformation costs.

So if we look now at the different categories of revenue, and how we achieved our 6% revenue growth. Software subscription grew at 35% driven by the migration of installed-base customers.

This rate of growth is at the high end of the range of what we're likely to see from migrating existing customers. To sustain this level of subscription growth in the future, we'll require more new customer acquisition.

Q2 was the 10th quarter in a row of double-digit subscription growth. Overall, double-digit recurring revenue growth was reported for the first time since 2008.

But back then was driven by price increases and maintenance and support, whereas, now, it's being driven by higher quality subscription growth. The decline in SSRS of 6% is a good leading indicator that the strategy is working.

For all our growth products, except X3, the default customer relationship is now subscription. Within SSRS, software-related services is up 7%, whereas, licenses sold on a perpetual basis is down 18%, so just to repeat and reflect on that, we've delivered 6% overall revenue growth, despite an 18% reduction in perpetual license sales.

This is exactly what we said we would do, made possible by migrating customers to subscription relationships increasingly in the cloud. We set ourselves the challenge of managing the transition to better quality subscription revenues without a so-called double dip, and these results provide evidence that we're starting to meet this challenge.

Processing revenue is up 7%, which is heading in the right direction, but our ambition remains double-digit. A significant contributor to this growth is payroll processing delivered by our PayChoice acquisition in North America made at the start of last year.

The North American Payments business also returned to modest growth. This means that only 18% of Group revenue is now SSRS, so if we turn to the software subscription growth, how we're achieving our growth on subscription.

As I said, we have over 842,000 software subscription contracts now with an annualized subscriber base of 425 million. This is 21% higher than six months ago.

The biggest value contributor is the Sage 50 family of products, particularly in North America and Europe. As an example, the number of Sage 50 subscriptions in North America grew by 25,000 in the first half, driven by Sage 50 cloud.

Another one to pick out is the i7 upgrade in France to Sage 100 where 68% of the base has now converted and around half the revenue in France is now derived from subscription. You can also see on this chart the tail of other, as all of our great products moved to this default relationship of subscription.

Included in this column are initiatives in our Australian business, payroll business, and North American real estate business, and of course, Sage One. Now, before I go on to the regional reviews, I wanted to emphasize that although we organize ourselves regionally, we have strong country managers.

They are responsible for the go-to-market functions. When Stephen and I carry out business reviews, we interact both with the regional and country leadership, ensuring that we have close relationships with the country leadership teams responsible for delivering both customer experience and revenue growth.

In Europe, we had overall revenue growth of 7% and recurring revenue of 9%, resulting in recurring revenue now being 75% of total revenue in Europe. In terms of what went well, there was an increase in the momentum on subscription with growth of 31%.

The Sage 50 family of products with cloud functionality led the way in terms of migrating existing customers to subscription and there was good progress in UK and Ireland, Spain, France and Germany. In terms of areas for more focus, we do need to still do more on cross-sell and the rest of Europe for example Switzerland and Poland need to do better.

We expect to see improvements in these latter two countries in the second half as a result of changes in leadership. In North America, our revenue growth rate of 6% is a marked improvement from the 4% we saw at the year-end.

Recurring revenue growth of 9% which driven by software subscription growth of just under 100%. Sage 50 in North America is following a similar pattern to what we've been seeing in Europe with around 25,000 subscriptions added in the first half.

A third of these were either new customers or reactivations. This growth was driven by Sage 50 Cloud which was available throughout the period in Canada, but was only launched in the U.S.

in February. Processing revenue growth of 6% in North America was supported by a strong performance in payroll processing where we added 1,800 new customers.

We also saw an increase in the cross-sell from the accounts base. Again, as a reminder, this is the PayChoice acquisition that we did at the start of last year.

As a result in the half, SSRS revenue in North America is only 13% of total revenue, the lowest of any region. In terms of focus for North America, we've launched the payment center on April 1, which embeds payments capability into our accounting software, making it easier to cross-sell.

We also need to continue to work with the partner channel to achieve the same success with Sage 100 and Sage 300 Cloud that we have with Sage 50 Cloud. And finally, in North America, we had a flat half with X3 where the pipeline cover was not where it needed to be coming out of Q4.

We've recruited a very experienced leader to lead sales in this segment and he's building a stronger pipeline through H2 and also re-engaging with the partner channel. Overall growth of 5% in international is below our ambitions.

However, Africa continued to perform well with 17% growth and actually 26% growth in recurring revenue. South Africa, like France, now has around half its revenue coming from subscription.

X3 also performed well in the region with 60% growth driven by Africa and over 40 new customers added. And we enter H2 with strong pipeline cover.

Sage One launch is also continued and we reached 10,000 subscriptions in Brazil in less than a year since we launched the product. But in terms of focus, Asia declined as we failed to replace the non-repeating GST sales, a 3.4 million from our Malaysian operation that I flagged last year.

We have new leadership in place in Asia and look forward to a stronger performance in the second half. Growth in Brazil is slightly reduced to 7% from 8% last year, although the software business continues to grow at double-digit despite a very tough economic environment.

So this is a slide that I put up at the year-end results and I just wanted to remind everyone of what I said at that time and to give an update on the progress. So we've seen good progress with the transformation program in the first half, investing 31 million on restructuring of which 22 million was spent on the G&A functions and 9 million was spent on sales and marketing.

I'm going to talk a little bit about precisely what we've done in the first half, starting with G&A. We have actions in place which have already secured annualized savings of 17 million.

We will start to realize these savings in the second half. And as such, G&A for the first half remains at 19% of revenue, which is what we expected.

But some examples of the actions that we've taken to secure the savings that we'll see in the second half include reducing head count across all G&A functions. We've served notice on 46 sites as we rationalize our property portfolio and through procurement initiatives, for example, in Europe, we've consolidated nine different travel booking systems down to one and reduced eight mobile telephony support providers down to one.

In the sales and marketing functions, we have also started incurring costs to accelerate the change in skill sets. In the case of the go-to-market functions, all savings are being reinvested back into these areas, an essential part of aligning the Sage operating model.

In the second half, we will be taking further action to meet our 50 million annualized G&A saving target, including further actions in property and procurement, many of which have commenced since the 31 of March. And as such, we continue to forecast the full-year charge - exceptional charge of around 100 million.

There is a timing difference between the P&L charge and the cash-out. And as I said earlier, we expect about half the 100 million charge to result in cash-out in the year.

As I mentioned earlier, in terms of meeting the full year margin guidance of at least 27%, this will be largely achieved through G&A savings flowing through in the second half and so allowing us to continue to invest in sales and marketing. As Stephen and I have said a number of times, progress with the transformation of Sage is unlikely to be linear.

We have our feet firmly on the ground. We will always call out what's going well and we will identify those areas that require focus.

But in the first half, we have delivered double-digit recurring revenue growth. We'd invested for growth and we'll continue to do so, but we will be disciplined in delivering the increased quality of growth and earnings supported by strong free cash flow.

Significant progress has been made with the transformation. And overall, we're carrying momentum into the second half and beyond and we are where we expected to be in the transition.

Thank you and I'll now hand back to Stephen.

Thanks, Steve. So an encouraging first half in terms of financial performance.

Now, let's talk more about how we're doing in terms of the transformation. Transformation is one of those business words that gets overused frankly.

So, before I move into the progress on our quest, I just want to recap on why Sage needed to transform and what the transformation brings to all our stakeholders. When I joined Sage, I was blown away, as I shared with you, by the market opportunity.

There are some 70 million small and medium businesses in just the geographies, which we already operate in. Less than one in five of these businesses already use any kind of accounting software.

To put the scale of the market opportunity in context, Sage is currently the market leader in the majority of these countries, with a total customer base of only 3 million businesses, small and medium businesses. Combined with the current rate of technology disruption and the consumerization of business IT, the opportunity for accounting technology to penetrate and grow in this market is significant and very tangible.

Now, Sage is a fantastic company with all the components required to win in this market. We have a history of pioneering accounting software with the genesis of the PC revolution way back in the 1980s.

And we are the only true global player, which means we understand the complex tax and compliance regimes, and environments in all the geographies in which we operate and more than anybody else on the planet. We are unique and the trusted technology partner to millions of businesses through all stages of their growth from start-up to scale-up to enterprise.

Our customers describe Sage personally to me as indispensable. Sage was, however, failing to use these competitive advantages.

Our historic, federated and fragmented and de-centralized business model meant that we couldn't fully leverage the scale and the global reach for the benefit of our customers or ourselves. In fact, it was actually hindering our ability to grow.

Our acquisition-led growth strategy compounded the internal fragmentation and complexity. And this fragmentation I've shared with some of you before in terms of 270 different products, 73 different code bases, over 150 different sales compensation plans, 139 sites, 105 databases from management accounting, 21 different CRM systems.

I could go on and on. This starts with a culture of innovation within Sage and created candidly, a bit of a complacent attitude to competition, technology change and winning new markets and customers organically.

The status quo had to change. At the Capital Markets Day in June 2015, Steve and I and the rest of the management team outlined our transformation journey and strategy.

We identified and shared with you five key pillars: Customers for Life, Winning in the Market, Revolutionise Business, Capacity for Growth and One Sage. These five pillars underpin the elements which we all cherish: quality, organic revenue growth, superior margins, strong free cash flow and progressive dividends.

For us, execution and delivery is everything. It's about executing at pace and improving process, systems and people with a strong culture that makes the business growth sustainable.

The areas of fragmentation are reducing, and on today's report card, we highlight some of the progress against each of our five strategic pillars. So firstly, Customers for Life.

It's about putting the customer right at the heart of everything we do, and provide an exception technology service and an experience for our customers. For our customers, this translates ultimately into greater value and success in their businesses.

For Sage, it feeds through to high quality, recurring revenues and a more sustainable business model. To support this objective, we continue to switch our business away from perpetual license model to a subscription model, and in the first half, we achieved double-digit recurring revenue growth for the first time this decade supported by 50% increase in the high quality subscription relationships, and a 90% of these subscription contracts are renewing.

We want our customers to experience the full benefit of Sage's solution across the golden triangle of accounting, payroll and payments. And generally, magic for customers happens when customers start integrating these and gain real-time control of the movement of money in and out of their businesses with no manual hand offs.

We've seen some early successes of cross selling our solutions. For example, in South Africa, we've driven a 26% increase in customers taking both accounting and payroll software.

We are seeing evidence of our solutions genuinely saving customers' time and money, and supporting their business success. Based on a sample of Sage X3 customers, a Forrester survey found that they have obtained a 177% return on investment over three years, a payback on their investment in Sage X3 of just five months.

This is genuinely unheard of in what was previously known as an ERP, Enterprise Resource Planning solution. Secondly, Winning in the Market.

Keeping our existing Customers for Life is absolutely critical, but it's just one side of the equation. We need to add new customers of scale if we have to outpace the market growth and gain market share.

Success in the market hinges on our ability to connect our brand of value proposition with the hearts and the minds of our target audience. And we believe the world of business-to-business and business-to-consumer is continuing to blur and evolve into a human-to-human market.

So, we are investing and transforming our digital and social presence including sage.com. To date, we've consolidated 10 country sites into, about 50 domains into sage.com, and the consolidation continues.

It supported a domain authority increase of over 10% which combined with more effective digital marketing is driving a 130% increase year-on-year of web traffic to sage.com. The improvements we are making are feeding through to a stronger performance of our growth products.

Momentum continues to Sage One, with a 100% year-on-year growth, in paying subscriptions. X3 revenues are now growing at 17% year-on-year.

Thirdly, Revolutionise Business. At our core, Sage is a technology and apps company.

We have to build the best possible products and solutions for our customers for today and tomorrow. And we believe awesome technology wins markets.

In fact, awesome technology creates markets. We're demonstrating more agility in our development with updates to our cloud products with biweekly sprints and an increased emphasis on world-class design user experience, interoperability through open application program interfaces, APIs.

And our focus on innovation has been recognized with many innovation awards around Europe and the U.S. in the past year.

We partnered with Apple recently to build a world-class app exclusively on the iOS platform that we will launch this month and we've received some fantastic feedback from the Apple team about the quality of the product. And I think all of us know that Apple know a thing or two about designing great technology.

Our relationship with Apple shows that Sage is bias towards mobile first when new partnerships with Telcos allow entrepreneurs to run their business from the palm of their hands. We've opened up our platforms to a vibrant ecosystem of independent software vendors, ISVs, around Sage's core domain expertise of accounting, payroll and payments.

We've launched the Sage Marketplace, an online hub, to access partner apps that will integrate to Sage apps. Currently, we are hosting 50 ISVs and this is growing rapidly.

We also announced that we have strengthened strategic partnership with Fairsail to integrate their market-leading cloud human capital management solution with X3 and our golden triangle, therefore, extends to accounting, payments, and integrated human capital management and payroll. We will be unveiling a lot of exciting innovations at Sage Summit this year in Chicago at the end of July and this is the largest gathering of entrepreneurs and small and medium businesses in the world, and we'll be running a dedicated investor track.

We love to host you there personally and show you firsthand some of the revolutionized technology and businesses and the apps that we have been working on in the labs. I was with some of the developers yesterday and I was amazed by some of the leapfrog technologies that we've invented and we'll be showing a lot of those at Sage Summit in July, so do please come along.

Fourthly, Capacity for Growth. This is about improving the underlying efficiency and scalability of our business.

As you heard from Steve, we are on track to deliver 50 million of G&A savings. But efficiency isn't limited to the back office.

As Steve highlighted, we are also now addressing the go-to-market functions and research and development. And we've reinvested the savings into the front office, for example, hiring 180 net new sales heads and testing a newer-line, global digital marketing set of campaigns that is delivering 2,000 incremental leads per week.

And finally, One Sage. A consistent culture that underpins the entire strategy and defines what it means to work at Sage, essentially turning the rhetoric of customer obsession and technology innovation into reality.

So it actually lends and changes the very DNA of Sage. For me this starts with leadership.

The best leaders create an environment to nurture the coach and to flourish. The breadths and the quality of the experience within Sage leadership team is growing with new talent and promotions.

70 of the top 100 leadership team have changed in the last 18 months. This includes 13 new joiners in H1, Gary Dalziel, rock star in the field of engineering and technology.

Van Damme and Dolquist is pioneer in brand strategist, and Jennifer Warawa is completely reinvented in our product market. As I talked about the fantastic talents we are hiring, I just want to pause for a second and recognize a great leader and a friend who has decided to retire at the end of the fiscal year.

Our President of International Region, Ivan Epstein who many of you know who became a great friend and very welcoming of Steve and I joined in the company. Ivan has been instrumental for Sage, having overseen a period of sustained growth in our international business.

I want to thank him very personally for his contribution to Sage and his support for me and Steve and the management team, and particularly to say that he leads a very strong set of country leaders in place. I’m also delighted that Ivan will continue to be involved in Sage beyond October as Chairman of the Sage Foundation following his Executive retirement.

The Sage Foundation is proving fantastic for engaging our colleagues. In the first half, colleagues donated over 250,000 volunteer aid through the Sage Foundation.

And later this week, for example Sage has sponsored in Prince Harry’s Invictus Games in Orlando and over 50 Sage colleagues will be volunteering at the event. So we are invested in training our colleagues to and consistently.

We have launched a single induction site and today 10,000 hours of training have been completed through our online training portal Sage Academy. We continue to make progress, remove fragmentation and achieve greater alignment and consistency.

I am encouraged by all of this progress, but you and I know cultural change doesn’t happen overnight, it’s in the journey. And despite the transparency over a year ago, we shared with you three areas of the business which we were not happy with.

We committed to improvement in 12 months on. We can demonstrate tangible progress in each of these areas.

Firstly, payments in North America returned to modest growth for a period and following flat revenues in the prior year. Secondly, the growth rate of the small to medium business segment in North America has doubled to 5%, and finally Enterprise Europe, following changes in management, revenue is now growing up 5% compared to a revenue decline in the prior year, and S3 in France and UK both grew by more than 20%.

Of course, I’d like to see faster growth in all of these areas, but the trajectory is very encouraging. We continue to challenge our performance in every area of the business and Steve has just taken you through some of our focus areas by region.

So let’s turn our attention to our outlook for FY 2016. After an encouraging H1, we take momentum into the second half, and we build in for a strong FY 2017.

For the full year, we remain confident in organic growth of at least 6% and a margin of at least 27%, while as we continue to transform the business. This is an exciting time for Sage, but we absolutely keep our feet firmly on the ground.

So to summarize briefly, H1 performance has been encouraging. We have taken important steps on our transformation.

We take momentum into the second half. We are confident in delivering our full year guidance.

We recognize that there is so much to do, we are focused to relentlessly on execution to continue to perform and transform. And with that, I’d like to ask Steve to rejoin me and we will open it up to your questions.

And I love to make this request, maybe I said last year one question for analyst, so we will go also with [indiscernible] time to check that we don’t overrun, but we will start with Charlie. We are getting mike for - mikes will come around and maybe just introduce.

Yeah, Charlie Brennan here from Credit Suisse. I think the big question coming out of these results is the emerging trajectory into the second half of the year.

I think if you had to hit your north of 27%, it implies something like, 28.5% margins in the second half. We don’t often see that much margin in volatility of Sage.

Does that mean that something like 28.5% is the right run rate to extrapolate into 2017? Thank you.

So your arithmetic is absolutely correct. So the second half margin will be a bit high, as I said that will be delivered by the G&A savings coming through.

Now structurally, we could continue that rate, the reason we want to continue that rate is because we will reinvest back into sales and marketing, particularly into marketing. So I called out the fact that we are switching really the mix between fixed and variable expenditure.

So in areas like marketing we have less absolute numbers of people, but we are putting more money into program spent, and we are doing with and Steve can talk a bit more about this. We are doing a bit of kind of trial and error here, in terms of putting money in to programs and seeing how it lands and what happens in terms of lead generation across the different products.

So the way to think about it is, we have the levers that we can pull structurally we can make 29% margin. We are choosing not to at this point in time, because we think it’s better reinvest the growth.

But we have always said longer term, when we get through the transitional period, whilst we are not guiding, it is our ambition to make more margin longer term.

This is the major incentive to come early and sit in the front. We will get into questions at the back.

I promise you.

It’s Mohammed Moawalla with Goldman Sachs. We saw the nice tick up in subscription growth again, just to 35%.

Can you talk about the sustainability of this, particularly these are the new products who were coming on stream, and would it be fair to also incorporate from that that this 18% license decline is something that you would continue to kind of maintain a double-digit decline, so just talk about this dynamic between subscription and license just please?

Sure. So I think as I said, I think 35% increase in subscription and is at the high end of what’s sustainable coming only from the installed base.

I think the way to think about it great for the moment is from the materiality perspective, it’s coming from the installed base, we are switching people from maintenance and support into subscription. Now we are offering customers more, we are giving them value with things like in the UK with the enrollment, functionality enrollment, we are giving them clarity enabled products, so we are delivering more functionality to them.

And we should be able to continue to represent, and also those plenty of opportunities to continue to cross sell. But for this to sustain longer term, at some point, new customer acquisition on a more material scale needs to kick in.

And so you where we sustain 35% every time we come out to report maybe not but it will be in the kind of 30 to 35, maybe sometimes it drops to 28, 29, but it will be at that sort of level. And yes SSRS I think, particularly new license sales will probably continue to drop double-digit because the default now apart from expiry is the sales to have to offer subscriptions to default option.

Now I am not saying that we don’t sell perpetual license because customer for the life is the most important part of the strategy, so as the customers put this back hard enough, we will sometimes sell in license, but the default is subscription.

Thanks. Michael Briest of UBS.

Could you talk a little bit about the sector in the heritage products, I mean you used to give that percentage of R&D, but from a revenue perspective what proportion is that. And one of the positive surprises here is that the support revenue is nearly down 1%, and that seems pretty good given the subscription growth, can you maybe breakout what drove that and how the heritage products overall are doing with the revenue piece.

Yeah, maybe I will start, in terms of the investment portfolio we tend to shift it much more towards growth products and cloud based growth products. So the heritage portfolio of over 100 products, now in terms of investment on sales and marketing and R&D, I think 87% and 91% respectively on growth products.

And that was very delivered as part of our strategy. So within a significant pick up on the growth products and a lot of focus on those as Steve said all sold on subscriptions by default.

In terms of the investment, we will continue to do that and the heritage products are called the diversified products, it will be managed and we are still seeing some strong momentum as part of our customer strategy. I think it is both for us as a technology company to say we are not going to end with life products.

So as long as customers are still paying the maintenance and subscription, all the subscription under the relationship, then we will continue to support this, but it means that we have de minimis investment and just actually update them for regulatory changes from the academy, so all the growth is coming from growth products. So the heritage products are not really growing.

90% of the revenue is from the growth products, so we still have a material revenue stream from the heritage products but it is pretty flat. And as Stephen says I think the reason we are able to maintain the maintenance and support level at the moment is really linked back to the fact that we are not end of life in products, we are supporting customers.

We are starting to obviously do some migration. So you know as life [indiscernible] as well as reactivating in bringing customers back on plan.

We are taking existing customers, and we are moving them to subscription. But we have also got very large installed base, I mean if you look at somewhere like North America, Sage 100, Sage 300, we have significant installed base on those products, there hasn’t really been any migration of those customers, and the renewal rates from maintenance and support on those types of customers is very, very high and once we get above really Sage 100 upwards, the more complex products, most customers would have an MNS conflict.

Thanks, it’s Vijay Anand from Mirabaud. I wondered if you could split the incremental subscription contracts between new customers, migrations and reactivations, just so that we have a better feel for how much momentum you require with new customers to sustain that 35% growth in subscriptions.

And on reactivations specifically I think Steve you previously gave us a million customer figure who represent reactivation opportunity for you. Could you update us on how many of those million have been reactivated and whether the million is still a million or have you identified more customers who can be reactivated, thanks.

Okay, so I will start with the last part of the question. So in rough terms, we talked about having 3 million kind of active customers, as defined by a customer who has spent swimming with us in the last three years.

Now all of that, if you go back about 12 months, we had just over 1.8 million contracts, so recurring revenue contracts and which meant we had just over 1 million that we are not on any sort of contract. And the presentation I said, we now gone over 2 million, so we haven’t - the 3 million hasn’t really expanded, but more of them are starting to, starting to come back on the plan.

Now if there is a lot by country, and so if you go to somewhere like North America, I called out that about a third of the subscription ads that we have seen in North America are rather new customers or reactivations, and I think particularly in North America, we haven’t had a lot of strong investments in the existing products, so I have called out in the past that historically Europe and North America to be a slightly different approach. Europe invested in the existing products to offer more features and functionality, North America didn’t.

And what we are now seeing is North America starting to do the same thing and take advantage of the investment on Sage 50. So that’s bringing more customers back in because we have some things that we will offer them.

Whereas in Europe, we are more advanced with that, so I think if you look at somewhere like France where we have 68% penetration on the I7 conversion, we have less opportunity to bring people back on plan, because we are further into the penetration. But I would say broad terms, thinking about a third of the moment is probably reactivations, the rest is migration.

But what we are doing all the time is offering customers more, so if you guys are customers, so we want to migrate into subscription, and it’s exactly the same as that they are currently getting on MNS that they are going to move vastly a reason, and a reason is additional features in functionality. Yeah and probably with the new customer acquisition piece, on some of the products I say for instance is almost as high as 80% with new customers.

So it’s the case, in the last historically, we lost as many customers as we gained. I think we are now seeing signals that we are winning more customers and expanding our customer base particularly on the cloud based products, so even Sage 50 cloud in the US, Steve announced 25,000 new customers, or about almost a third of those are either explanations or making new customers to Sage.

So we are seeing obviously Sage One, we announced 230,000 customers count, 100% increase, almost 80% of those new customers, so we are seeing particularly the cloud based products, customer acquisitions starting to get through, and to Charlie’s first question, we are test driving a lot of digital marketing, investing in sales, 118 new house, the customer business centers, the digital marketing selling and on boarding to actually see kind of what it was, because not anything you think is the revolution of the products in the cloud and mobility, but we also I think there is a revolution taking place at how customers want to interact with the companies to buy products, work digitally, through digital marketing and on boarding as a much less invasive process than it was 10 years ago. So there is a lot of test driving going on experimenting, to see what really works.

So we can start pressing the buttons and scaling up and particularly around winning the market element of the pillars to see all that subscription revenue within the new customers. So we will go to the back, yeah, is that Milan?

Thank you. Milan Radia from Jefferies.

Couple of questions, the first one X3, how solid does that kind of recovery in France field, you are obviously coming off the weak base in a period of prolonged weakness, is that a sustainable trend, and if you could just perhaps comment on the deal value differentials across Africa versus some of the other markets and so on. And then I am struck by the absence of any comments to Sage Live, and I am just wondering how that’s going on, in my mind I have a connection between Sage Live and the performance of the customer service centers that you put in place in a couple occasions, so perhaps how they are doing as well.

Thanks.

So I will handle the first and the last part of that, and handle the middle part, the sandwich to Steve. So in terms of X3, I think I stood up here before Steve and I, and said we will believe the issues we had in enterprise year over on sales and marketing execution.

And I think now we are seeing in the early signs that it is absolutely right. So we have appointed new leadership in France and in the UK and added new folks and put a team in place, and we saw in the UK 25% growth and 20% France, you are right, in France it was off a low base, but we certainly see the pipeline build in over three times cover and even towards five times cover.

So with the right sales and marketing leadership and the focus in international 60% growth, so when you look at the X3 business, you can see that that becomes quite a material part of our business and our success, and I think in terms of the ROI and the customer stats, five months of payback and it speaks for itself. Now we obviously need to turn our attention to Steve in the regional update to the US and we had the VPS sales there who I think could reframe the experience of what we are seeing in Europe.

So I do think it’s sustainable, and I think we should see that business grow, and it’s an area where we are putting some focus to ensure that is the case. And then I will take the last question in terms of Sage Live.

We have lowered the Sage Live in Europe and the UK in February, so a couple of months ago, but again we are seeing some early momentum there, we build out these customer business centers very much on the sort of model of Atlassian and salesforce.com in terms of integrated digital marketing sales and on boarding the service. I will just give you a couple of data when I was in Dublin well three or four weeks ago, and we saw customers coming in and in one instance from hitting the website within three hours they built the product, within a few days they are live on the product, so radically different.

The other aspect we are seeing is quite a lot of momentum but early stages, so that time we are seeing 40% month on month increase in terms of new customers, so good early momentum, but again we don’t want to get ahead of ourselves. The other fact that’s quite interesting is probably a few handfuls of the customers from QuickBooks to Zero as they run out of steam and get to a point in terms of the business that they need a more sophisticated product like Sage Live.

So we saw a number of migrations come from competitors. So I think, again it validates a lot of the things we are test driving in the business to make sure we really test off that can scale up the Atlanta center and Dublin Center probably have about 80 people in between the two of them.

And I think it’s definitely a different way of selling from what we have experienced in the past and it’s very much more fit for the future with marketing servicing and cloud based products. So we are pretty encouraged by Sage Live, but it’s still early days.

And then do you want to do the -

Yeah because I think in terms of sustainability you know our visions for X3 are firmly double-digit and we are seeing it every time, and maybe not this, because we are still sold on perpetual licenses, so we are going to see some lumpiness. And but you know firmly double-digit, France grew this time really for the first time in quite a while, and grew by 20%.

That was driven partly actually to your point and by slightly larger deal sizes. France was one of the countries that took seriously the 500 employee limit that was previously in place, and whereas to be honest, the international region took that limit less seriously.

So we are now seeing in France actually in the pipeline some bigger deals which are contributing to that growth. UK and Ireland also grew 25% in the period and again some good momentum because we have got a new team in there that’s really driving the pipeline.

In terms of having varied by geography specifically in the UK and in France, we are now starting to see a higher average deal size compared to the other regions and in particularly in the emerging regions like Africa, early days in Brazil, places like that, it’s trending to be smaller deal sizes where we are less established. Now some of that is also the partner channel, because you have to have an established partner channel to really grow X3 strongly and in particular the larger the deal gets the more the partner implementations etcetera becomes important.

And we are more established in countries like France to be able to support that.

Yeah Milan [indiscernible] and you’ll see a lot more of this if you come to - there is so hot Sage ecosystem, which includes the Sage marketplace, but as Steve said with the reenergization and particularly of X3 and the momentum of the growth there, the partners are certainly looking pretty hard now, investing for further growth, and I think it was the case when I met the first few partners in my early tenure here. They were effectively hiring people from each other but the marketplace that didn’t see growing and there was not a major focus from any of the partners in terms of investment in the Sage business, in fact some of them are looking outside.

I think that’s not completely turned around but there is a very different sentiment in our US partners, our European partners, as they now can see the momentum, the growth in new customers, new net customers, and nice problem for the technology company to have is issue around implementations and getting the service people out there and consultants to participate with the customers. So there is a mind shift which again speaks to the sustainability of the potential double digit growth of X3.

And these results were partly produced by Sage Live in UK and Ireland on experiment.

So we introduced, well you might not know the phrase about drinking your own champagne we are a technology company using our products. So we are now live in UK business which is fantastic.

David?

David Toms from Numis. On the working capital, Steve, you previously sounded a note of caution about the transition to subscription and a bit of a headwind.

That doesn’t seem to you have the impact the numbers at all. Does the fact that you are selling these prepaid one, two three year deals, I mean that’s no longer an issue or are you still slightly cautious.

I’m still slightly cautious because if we can continue to sell on annual upfront subscription contracts, obviously, we are not going to have an impact and but at the kind of smaller business, there is more of a trend towards monthly, and that’s why I am cautious, if Sage One we go with monthly but with them that’s not material, but as we see Sage 50 for example, leading the way on the shift to subscription, there is some pressure from the business to sell more of that monthly rather annually, and I am not seeing the original cost, as you can imagine the time to keep it annual but at the end of the day we have to say how the market shares went.

An answer David, it was just to make sure you understand it’s very rare, extremely rare that we do multi-year contracts with the customers, it’s extremely rare and we should do more of that candidly. And even if we do multi-year it would be very, very rare for our customers, the standard really is paying year upfront, that’s what we are trying to maintain, which is what most of the companies do, but at the lower end there is more competition.

[Indiscernible] from JP Morgan. Can you talk about Sage One?

You just mentioned it’s, can you speak the white space, and the attrition rate in Sage One and how it’s progressing?

Yeah in terms of Sage One, obviously I think we are seeing momentum 100% growth probably speaks for itself, 230,000 paying subscribers. I think in terms of also the white space we have got some examples, where we launched in Australia only a few months ago and paid months is heading to 1000 new customers, and actually well seven to eight months we launched in Brazil, you know about the Brazilian economy in terms of recession and all the trouble and drive that they have gotten through and we see after seven to eight months they go to 10,000 new subscribers.

So I think it has really proven itself to be a good tool in terms of new customer acquisition and we are doing a lot of work to around part of revolution in technology around Sage One, where without a doubt by the end of this year we will get the best in class product for any micro startup businesses, but I think what people have appreciated now is that we are unique and there is no other player out there that can do startup to scale up to enterprise selling the X3 business. You got businesses running ten to thousands of employees, it is not technology of the heart of the general ledger, and that’s unique and what we want to do is make sure the customer as seamlessly as it is possible.

Do you want to join me…?

So on the attrition, once the customer is being with us for a year, and the retention rates are very similar to other products, 90% but that excludes the US, I will come back to the US but everywhere else after a year it’s about 90% renewal. In the first year, we said a number of times that we are casting the net very widely, we are trying to - it’s a bit of line and grab, we are trying to sign up as many customers as we can and therefore in those early trial periods, in one way just discounting the product to get people in, the attrition rates in those first six months are higher and varied by channel and varied by country.

The US is slightly different, we have said repeatedly that in the US, we are not getting the same traction, we are actually now to over 10,000 subscribers but to be honest we have months where we lose as many customers as we sign up. So the - in those particularly, in the first six months in the US it has particularly marked the attrition rate.

So what we are doing in the US is experimenting with different ways of attracting customers, because we don’t have the same brand recognition, trying to do it digitally, is too expensive to be honest. I mean we do that a bit but hopefully things like the Invictus Games that we are sponsoring will help with the brand presence in North America, but at the moment driving a lot of digital marketing dollars to try and attract people across the web in the US is not really working.

So we are now going - we are now addressing the accountants channels and various other channels. In the UK, specifically through the digital channel we get a much better hit rate, and we get a much better quality of customer, but in the UK we are also using accountants channels, we are using many other third party channels to try and catch that widely.

Now the actual scenario I touched on around telecoms and entrepreneurs on the business from the palm of the hand on the smartphones, you will see us do a more and more partnerships with people like telecoms and media players, and where we can provide awesome software, accountant software Sage One and also the reality is what we are doing in terms of the Live is we will see reactions from some of our competitors where they have revive their products to be competitive with Sage One.

Tim Kindt from Merrill Lynch. Can you give us an update on your current M&A pipeline in terms of - for example potentially some features products which you could add to your portfolio or perhaps some regional potentials you are looking at.

Yeah in terms of the business we announced we did 250 major releases in the last 12 months, from when we setup in December. That momentum is continued and frankly this month’s with the Apple iOS platform release that we are doing which is a completely new product, and so there is continuing momentum there, and I think again at summit we will bring lot of this together and you will see a celebration of technology innovation, and really Sage coming back to our route around entrepreneurs who are the heroes of the economy, and that should give them awesome technology because they deserve it.

Yeah sometimes we will develop stuff internally, and sometimes yes we will acquire. And so you may see us doing bolt-on acquisitions to acquire what we think is good technology and we would include in the release that we have signed a partnership with Fairsail and taken a minority investment in Fairsail, which is a provider of human capital management, which we will integrate into X3 initially.

And again, we're going to do that internally, as well as sell it to our customers. So you could well see us continuing to do that to add things which we think complements our existing products that we can put through our go-to-market channels.

And then, as far as geographic expansion is concerned, we can expand geographically through the customer business centers, so using digital means. But we may also, from time to time, if we think it's compelling, we may do it through acquisition.

There could be an argument to say that acquiring an existing customer base that you then seek to migrate or cross-sell to could be compelling, but it depends on the region. It depends on the segments and products set.

Good morning. Amit Harchandani from Citigroup and thanks for taking my question.

Could you maybe talk about your growth in the context of how do you think the market overall is growing or how the addressable opportunity is growing? And maybe also, again, go back and talk a bit about competition and dynamics?

You've touched upon it for Sage Live, but more broadly, what do you see out there in terms of competition in different geographies and is that influencing - how is that influencing your go-to-market strategy? Thank you.

Maybe I'll start. In terms of growth, we feel that the market of 70 million white space opportunity, we got the 3 million customers.

And obviously we're market leader up here. 53% of the businesses in the UK pay their employees using Sage; down in Spain, 56% of businesses would call their taxis using Sage; likewise, France, Africa, Ireland, and Canada.

However, we think broadly the sentiment of entrepreneurs is pretty positive around the world. Even in areas like Brazil, where there's serious economic headwinds, our software business is still growing double-digit.

So - and South Africa is where we're as flat line in the economy. We saw the results there in terms of sort of 17%, 18% growth as well.

So, I think in terms of if we look at what we're seeing and actually haven't read some of your reports in Gartner and Forrester, the indication seemed to be anything from market growth of sort of 4% to 6% on an annual base over the next three years. So, honestly, that should be our low bar in terms of our ambition, because our ambition is to gain market share.

In terms of the opportunity, I think therefore, is it around these growth products taking cloud-based products. I think we've got an opportunity to leap our competitors.

And then, on your question around competitors, the reality is our competitors are incredibly fragmented which is an advantage to Sage, as long as we can coordinate strategy consistently and execute really well in the economies where we serve. Probably, the for is Intuit in the U.S.

where, I think, they have a very good technology, good company. And, I think, we welcome them as a great competitor because it drives more innovation and adds a little bit more paranoia in us, which is always a good thing.

And then, around Europe, honestly it's very, very fragmented. Typically, in every European market, there's a couple of local sort of competitors and many of those in Europe are owned by private equity firms now.

Down in Africa, again, it's very fragmented now and Asia is pretty fragmented as well. And then, if you look at sort of the top line, the global players, at the very, very top, where we very rarely see them is sort of NetSuite.

But if we look at the - yeah, I'll give you some data from the U.S. We competed with NetSuite on less than 10% of transactions on X3, and we got a win rate of about 50% on X3.

So where we actually see them, we've got the data, so actually, they're not as visible as what the sort of PR machine that you would kind of believe from a U.S. point of view.

Then, in the small and medium business market, it's very fragmented and it tends to be country-based competitors. And then, very much the micro business, you tend to find Intuit, who are a credible competitor and then, obviously, the other folks who get written up about a lot is Zero.

And, I think, in the UK they made a big splash of getting to 100,000 subscribers. The latest data suggests that we're ahead of them in absolute numbers in the UK and we're, actually, attracting new customers and new subscribers on a monthly basis ahead of them as well.

So, I think, again, can we stood here and said, we're probably asleep at the wheel in our domestic market about three years ago, when they came about three years, four years, five years ago. And now, we've caught up and I think, with the product we've got in Sage One, we're getting awards, we're getting independent reviews and it's best-in-class around the world.

So, it's down to really core sales and marketing execution and that's why things like the custom business center and the digital marketing become quite important in terms of scaling those businesses. Anything you want to add?

No

Thank you.

Any other questions? May be last one.

It's Paul Morland from Canaccord. Did you say that the UK X3 business grew at 25%?

I just wondered if - I'd heard from resellers that they weren't doing very well in X3. I just wondered if you may have changed the model a bit there and going a bit more direct than you have historically with the X3 product?

Yeah. In the UK, we've hired someone, I think who is exceptional setup a team and accelerated the business to give the momentum and the growth.

Part of that model is we sell with partners, so with any of the partnership - we've got about 22,000 partners around the world, but it's always sort of the Pareto rule where most of the business is driven by a small percent at the partners. And certainly those UK partners see their business trajectory in the UK expand and grow.

The other thing we've done is introduced something called the Sage Partner Program which, for the first time, is a global programs consistent terms and margins and rates and investment and marketing development funds and all these sort of things that you'd expect from a sort of sophisticated technology company. So, running that program, we got a guy called Alan Laing who set up programs in all our places as well.

So I think if you're talking to resellers in the UK implementers, they should be seeing the momentum and the growth because the numbers are the numbers and we're acquiring new customers in the UK, and we're investing in partners as well, and we want to sell with partners and have them drive the implementation, deploying their consultants and building their businesses.

Yeah. I think there's been a lack of - I think we say really, historically, there's been a lack of focus really on supporting X3 in the UK market.

And we have increased the amount of resource that we have, as Stephen said, in order to support customers direct, but we are also recruiting new partners to help support the expansion. And given the size of the opportunity, our X3 business in the UK is very small.

I mean if you just kind of put it in context, in France, we have about 2,000 X3 customers; in the UK, we have 200. So there's a huge amount of upside and there's no reason why we shouldn't have as many customers in the UK as we have in France.

Can you just tell us how mark through the 18% SSRS - X3?

In the first half, it's probably somewhere - X3 in the first half is about 10% - no, sorry, less than that, 5% of total revenue, something like that. And it's not a 100% on SSRS because we do sell it on subscription in South Africa, but the majority of it is sold on SSRS.

And typically we lead with X3 Cloud offering which was launched last year. So again, the Sage One, Sage Live, X3 are all cloud offerings.

And typically therefore would lead on a subscription model but still a lot of customers particularly in X3 have IT departments and want to buy on-premise software and that's fine too. So - but again, we will see the shift over time, maybe it'll take two to three years where the subscription model and the cloud offering on X3 is the preferred option for customers.

Good. Thank you.

Last question then Charlie, got to be an amazing question, Charlie.

Sorry. It's going to be a pedantic one, I'm afraid.

I noticed there was a slight change in the revenue recognition. You're now including the revenue from business partners I think.

I'm trying to wade through the adjustments here but I'm assuming those revenues are growing above the Group average. Can you just tell us what the impact on organic growth has been from now including that revenue in your calculation?

Are you talking about the payments ISOs or–

Exactly.

Yeah. So, at the yearend, we changed - I think it was three categories but one of the categories was ISOs or independent sales organizations in the payments business where previously we've taken the kind of net into the accounts rather than showing the sale to the end customer.

So what we did at the year-end was growth to that and shows what we're actually billing to the customer and then we show there's a cost to what we're paying to the independent sales organizations. So we've obviously reflected that in these first half results.

And the answer is no, they're not growing any faster than the Group average. So, if we went back to the old revenue recognition and showed these results, we would be at a very similar level.

It's not materially - it doesn't take us below 6% for example.

Good. So I think thanks very much for joining us today.

Encouraging set of first half results, but our management team are very focused on execution, keeping our feet on the ground, but speaking today with great confidence for the full year guidance of at least 6% organic revenue growth and 27% operating margin. Thank you very much.