Stephen Kelly - CEO Steve Hare - CFO

Adam Wood - Morgan Stanley Charlie Brennan - Credit Suisse Michael Briest - UBS Stacy Pollard - JPMorgan David Toms - Numis John King - BofA Merrill Lynch Milan Radia - Jefferies Amit Harchandani - Citigroup Mohammed Moawalla - Goldman Sachs Gerardus Vos - Barclays Capital Neil Steer - Redburn Partners

Hello and good morning. I'm delighted to be here and welcome you to the Sage 2014 results announcement.

And you'll know that it's the first time that Steve Hare, our Chief Financial Officer and I have combined to present results. So it's nice to see so many familiar faces in the audience and it's good to be back.

In terms of myself, I think it's probably worth just opening and saying that for me Sage is my dream job. And that's not just sentimental.

If you look at what I've done for 30 years in my professional career, there's a couple of things I'm really excited about. One is SME, small to medium enterprises and entrepreneurs.

This is the powerhouse of the UK and all developed economies, employing 60% plus of the folks out there across the UK. And the folks who give up their lives and work night and day to build their businesses has always inspired me.

Many of you know also that I'm an angel investor of multiple small to medium enterprises. I've been a director; actually I've led as the Chief Executive of small and medium enterprises.

So I've stood in their shoes and I clearly understand what it takes to build businesses and grow businesses. The other thing I did for the last two years was duties, I guess responsibility on public service and for the last two years, I've been working with British government.

And transformed -- one of the things we did was transform the business relationship between government and small to medium enterprises with spectacular results. And that's really put a lot of small to medium enterprises in good shape in the UK in their dealings with the UK government.

The final thing I'd say around this is the small to medium enterprises is something that definitely inspires people. When you add that to the second element, I've spent 30 years in the world of technology.

So technology is within my DNA and many of you know me from either the NASDAQ technology that delivered great success or more recently, the FTSE company where I was fortunate enough to be Chief Executive and again deliver some success there. So when you combine these elements of passionate about small and medium enterprises and the love of technology and seeing the future of technology and matching that to customer needs, then I think I'm in an ideal place at Sage.

And I feel very fortunate to be standing in front of you today having the responsibility as Chief Executive of Sage. So maybe in terms of today, what's appropriate is to just have opening comments from myself and remarks after -- I think this is my 21st working day.

So after 21 working days, it's fair to say you wouldn't expect conclusions, but I've certainly got some observations to share with you. And then have the meat of the presentation today with Steve Hare, our Chief Financial Officer who will take us through and give us a great insight into 2014, the results.

So let me start with some opening remarks. First of all, around the results themselves.

I think they're a great set of results and credit to Guy and the existing management team for delivering those results. With 5% organic growth and 27.5% operating margins, a very solid and good set of results.

I think that gives us as the management team strong confidence to actually reaffirm management's guidance, supported by the Board for 2015 of 6% revenue growth and 28% operating margin. I think the other thing that you have to fundamentally read into the results and the reaffirmation of the confidence of the management team is the strategy is paying off.

So again credit to Guy for the work done back in 2012 and the strategies put together again. And I think our view, Steve's and my early view is it's a lot of that acceleration and execution of those strategies that will hold us in good profitable growth territory going forward.

So good results, reaffirmation of the guidance and the strategy is working. Now if I look at my reasons to want to be the Chief Executive of Sage, there's a couple of things that are probably worth sharing with you.

And then in the last 21 days these have been reinforced strongly. So first of all, Sage has got a global footprint.

Secondly, I think it's got a very robust and strong business model. And the third aspect that was quite important to me is it's got a heritage of 30 years and it's been proven over those 30 years to be there and ahead of the technology curve and disruption in the technology marketplace with customers.

I think those three things are fundamental. What I wanted to do in my first 21 days is test those, and for me the rubber always hits the road to go and see customers and our people.

And connecting with our people who are delivering fantastic value for our customers, it resonates for me and any Chief Executive. So what I've done in 15 of those 21 days is actually get on a plane and go 25,000 miles and visit pretty much all the locations in North America -- and actually some of you have followed me on Twitter which is great -- on the road trip.

And over that period of time, literally of three weeks, I've been right through all of the US hubs. I've been down in Africa and I've seen all the major European hubs.

So I've got a pretty clear validation, it's not completely extensive. So within that I've met 5,000 of our colleagues around the world and almost 100 customers and partners.

There's a couple of things particularly from the customer sessions that I ran, and customer forums where I got a really strong insight which I think is worthy of sharing with you today. During the customer sessions, there's a couple of things from the human point of view.

The diversity of these businesses is fascinating. So I met people in the business of metal work, in power, electrical businesses, engineering companies, chemical companies, street cleaning companies, beauty products, soap products.

Such a diverse enormous range of businesses we serve across the millions of customers and the SMEs out there. The second thing is the human story.

So there was two occasions where I met multi-generational Sage customers. So mum and dad in a bakery business have actually set up their two children, daughter and son in a video editing media business.

And then we have a Sage 50 customer in the bakery business and a Sage One customer in the cloud for the younger generation. So I think again testimony to being there but also getting ahead and actually supporting the entrepreneurs of tomorrow to grow and be successful in their businesses.

The other thing, there's probably three things that did resonate strongly. As I sat in these customer sessions, probably half a dozen, a dozen customers around the table with myself, talking about their businesses and what they see in terms of their business challenges on my iPad I made a note.

There was a number of times, probably at least half a dozen times, where the customers just said two words, great product; Sage, great product and I made a note of that. The second thing, a number of the customers said it's indispensable, indispensable.

We see you not only here today but absolutely our strategic partner to take this into the world where there is technology disruption and mobility and all the exciting things around social communities and the cloud. So a great product, indispensable, very really resonate.

And the third thing I think that's really important is, particularly in our European businesses is the value and the strength of the local support. Being able to pick up the phone or go on the web and deal with someone who understands that compliance regime, that regulatory regime, that detailed fundamental element that is relevant to say, the German accounting marketplace.

And it just came back stronger and stronger around the quality of the support that Sage provides its customers and the value derived from that and that they're local and available. So those were the kind of three things that the customers came back, which leads me on to the colleagues.

I met over 5,000 colleagues and it's really important to just share a couple of thoughts with you. So I said most of what we're really focused on is around core execution and you know, people like Steve and I are very operational and very focused on execution.

And how that played out with our people when I did these all-hands town hall meetings, was definitely people in Sage are up for increase in pace of execution. And that's the message I'm resonating around the world within Sage, increasing pace.

The other thing that's fundamental, is where it's appropriate 'One Sage'. And again our people are really up for combining and we've seen this with some of the success in terms of the numbers of Sage One with 150% growth in paid subscriptions the value of global products and ultimately global initiatives that make sense and then are delivered through this really strong network of local businesses close to the customer.

So 'One Sage' and increasing pace for our people are fundamental elements. Now in terms of our thoughts, today is really about 2014 results and obviously reaffirmation of the management's guidance around 2015.

What we're doing over the next few months, just to make you aware, I think it's probably too early and you wouldn't expect me to say now I've got all the answers. I've got lots of thoughts, lots of questions and I've validated the core principles that this is a robust business and it's a business built for growth.

So over the next few months, we'll be doing more work on the business model and things you'd expect us to do to be able to come to you after the IMS and after interims, in the summer of 2015 and we're at that point in time planning a Capital Markets Day to share with you the strategy and the opportunities we face in Sage. So just to mark your calendars ahead, that's probably the right and appropriate time to think about really lifting our eyes and looking forward on the opportunities for the future.

So at that point I'd like to introduce Steve Hare, who will take us through the 2014 numbers and then I'll come back and we'll open up for questions and answers. Thanks Steve.

Thanks, Stephen and good morning everyone. It's great being here to present the first full set of results.

Obviously I was here at the interims but to be here to present the first full set is great and it's obviously also encouraging that it's such a good set of results. And I think these results really show that Sage has got some momentum and momentum in a number of areas.

Momentum in the cloud, momentum in subscription and most critically, momentum towards achieving the financial targets which we've set for ourselves. So I'm going to cover first the financial highlights.

So 5% organic growth as Stephen has already said is a key milestone on the route to 6% in 2015. I do expect in 2015 that more of that growth will come in the second half than in the first half.

So I think the first half revenue growth is more likely to be at the lower end of the range. Recurring revenue growth of 7% I think is very significant.

This highlights both the quality of the growth, but also the momentum and the fact that recurring revenue is now 73% of total revenue is also important. Also underpinning that growth was the move to subscription, which I'll come back to.

The organic operating margin of 27.5% demonstrates our continued discipline with respect to profitable growth and cost management. And also the underlying EPS growth of 8% reflects that profitable growth, but also a slightly lower tax rate and also the impact of the share buyback program.

We've also accompanied this with an increase in the dividend of 7%. I should mention that as a result of the review of goodwill, we do have an impairment charge of GBP44 million with respect to Brazil.

This is largely due to the fact that there are now tougher economic conditions when we compare it to the time at which we did the acquisition. At the time we did the acquisition, GDP growth was 8% to 9%.

It's now closer to 1%. The business however did achieve 9% organic growth in FY2014 and we remain optimistic about the prospects for the business.

So this is more of a non-cash accounting adjustment than a reflection of any change in the view of the business prospects. So overall, financially, a good set of numbers, which also supports our financial targets for FY2015.

So on to the non-financial KPIs. We've seen a 29% increase in the annualized value of the software subscriber base, increasing the rate of growth which we reported at the interims when it was 24%.

We are growing our subscription base and this will continue to be a feature as we continue to attract new customers, mainly through Sage One; reactivate existing customers particularly through core product modernization and also migrate from existing maintenance and support contracts to subscription. It was an important, even pivotal year for cloud adoption with an increase of 150% in the number of Sage One paying subscriptions to 86,000.

This was led by the UK and Ireland and also South Africa achieving a very strong performance. The progress in North America was below where we want to be, but we're addressing this, but it will take time.

Hybrid cloud is also starting to get some traction with 1,500 subscriptions. But this is more of a future enabler of growth.

Sage ERP X3 growth of 7% was below our double-digit ambitions and this reflects the weakness that we have in France which we highlighted at the interims, mainly in the direct channel. Outside of France the growth in Sage ERP X3 was 21%.

Integrated payments growth of 14% was okay, but I do think there's a very significant opportunity as the penetration of the installed base for integrated payments remains low. If we turn now to revenue growth, this slide gives you an update of the sources of growth similar to that which we presented to you at the interims.

The theme is very similar with software subscription being the primary growth driver. As I said at the interims, this is increasingly significant.

We're finding that customers like subscription, particularly small business. It gives predictability of cash flow and access to all the latest features.

It also gives Sage a more predictable revenue stream with lower levels of customer attrition. And we continue to manage this transition whilst still delivering on organic growth margin and free cash flow targets.

The operating margin is progressing as we forecast and is on track for the 28% FY2015 target. So let's turn now and just talk a little bit about the regions starting with Europe.

We saw a good increase in growth to 4% from 2% last time, but the real highlight that I would like to pull out is recurring revenue of 7%. Just to pause on that, that means that Europe is in line with the Group in terms of recurring revenue growth.

It's not dilutive to the Group. And that recurring revenue growth has been driven principally by the move to subscription in both France and the UK and Ireland.

As I also commented on at the interims, Southern Europe has now stabilized with both Spain and Portugal showing some growth. Mid-market was highlighted at the interims as being an area of some weakness.

Actions have been taken to address this, including some leadership changes. And although I remain cautious for the first half, I think there are some significant opportunities in mid-market Europe.

Looking forward to FY2015, we can see the trajectory therefore in Europe is supporting our overall 6% growth target. The operating margin nudged up slightly to 28.6%, which was in line with our expectations.

Turning to the Americas, we saw overall growth in the Americas of 5%, with North America up 4% and Brazil up 9%. Recurring revenue was up at 6% as the premium contract up-sell initiative that we've been running in North America continued and we also saw further subscription growth in Brazil.

The North American growth rate of 4% was weaker than last year due mainly to softness in payments particularly in the second half. The situation is now stabilized in the payments business and we expect to see the payments business return to growth.

But I would be cautious about how much we see in the first half. Sage ERP X3 grew strongly from a low base in North America and Brazil was also good at 9% given the economic environment in Brazil.

The acquisition of PayChoice was completed after the year end and we're focused on the integration of this business which is progressing in line with plan. And the operating margin was in line with our expectations at 25.7%.

Turning now to AAMEA where we saw 12% organic growth. This was led by South Africa which achieved 16% and this in a country experiencing pretty difficult economic conditions.

So I think this was an excellent performance and was underpinned by strength in the mid-market. Australia was solid at 6% and in AAMEA we saw a decline in the operating margin due to some additional investment and the greater level of lower margin professional services.

So we continue to focus on moving our resources towards invest products, which remains a very important ingredient of how we're funding the transition of the business. Stephen and I see this as an area of continued focus to ensure that we are allocating resources to the areas that give greatest benefits to both Sage and also to its customers.

So cash flow. Very important that we don't lose sight of how important free cash flow is.

We want to grow this business and continue to grow this business, but we also want to generate free cash flow. For this year, I've retained the conversion methodology that's been used in the past to give consistency, which gives a conversion rate of 107%, slightly lower than the half year due to some working capital timing.

However, going forward, I'm going to change the calculation in order that we use underlying cash from operations, after capital expenditure -- after operating capital expenditure. So on this basis the cash conversion would have been 99%.

The reason for doing this is that I think it gives a better measure in terms of tracking operational performance but also gives greater consistency in terms of how we measure cash conversion internally. Leverage at the year-end was 1.1 times.

Pro forma after the PayChoice acquisition, it would have been 1.3 times. Free cash flow of GBP229 million or around 18% of revenue remains a strong number.

In terms of how we use that free cash flow, we completed our acquisition in Germany. We settled the put and call option on the remaining 25% of our business in Brazil with the Pay Choice acquisition completing post the year end.

We also continued the share buyback program and implemented our progressive dividend policy. So now I'd just like to talk about some of the things that support the future.

I'm going to talk first about the momentum that we have with subscriptions and also how the cloud and the growth opportunities we have across our portfolio underpins our confidence in 2015 and beyond. Firstly, the move high quality subscription revenue continues.

As I mentioned, recurring revenue is now 73% of total revenue. This is up from 71% twelve months ago and likewise software subscription is up from 13% to 16% of the total.

Over time, we'll also see a switch within these numbers as we move more subscriptions -- more maintenance and support customers to subscription. So I expect that that 16% will continue to increase.

So how is Sage going about encouraging customers to move to subscription? The cloud is very important to Sage and to its customers and it enables everything that we're doing particularly in driving the subscription.

Our cloud solutions core product modernization initiatives and a growing portfolio of connected services are providing subscription catalysts to our customers. Our philosophy which we've spoken a number of times before is that we offer customers choice.

We therefore incentivize our customers to move, whether it be to migrate to new products or whether it be to migrate to subscription. And core product modernization is a great example of how this incentive works for the installed base.

This enables existing customers to access new services and we have millions of small and medium sized businesses that use our products and services. And these modernized core products are now helping to drive adoption of subscription as we sell licenses of our subscription rather than license upgrades.

I'm going to give some examples in a minute. But what this does is allow our existing customers to have all the benefits of maintaining their on premise environment, but with the additional benefit of cloud connectivity and mobility.

So when you think about subscription for Sage within the installed base rather than for new customers, don't just think about it as new license revenue displacement. Think about three areas where our installed base gives us opportunities.

Firstly, reactivating existing customers. This drives higher attachment rates, particularly with small business.

Migrating different customers to higher value offering. This drives higher average revenue per user and customer stickiness through migrating existing maintenance and support customers to premium solutions with value-added features.

And cross-sell. Cross-sell to existing customers is driving a higher share of wallet from those customers.

All of these are new sources of revenue which contribute to growth and the cloud provides the building blocks to enable it. What I'd like to do is illustrate three examples, all of which have contributed to revenue growth in FY2014.

The first is Sage Ciel Flex in France. This is a reactivation story.

This is small businesses being attracted to the top tier of subscription with offers which allow mobile cloud capability. All new revenue, no displacement of existing revenue.

The second example is Sage 100 i7. This is a migration of existing customers, on-plan customers who already have a maintenance and support contract, but migrating them to a premium product which is only available on subscription.

As a premium product, customers are attracted to the added value over what they're currently buying and this is the catalyst for them to switch from a standard maintenance and support contract to a subscription contract. In this particular case, for this migration we also charge an upfront activation fee which therefore offsets anything we would have had as an upgrade license fee.

And the third example is auto enrollments in the UK. Pension auto enrollment is a headache for small businesses.

In the UK we have introduced a connected service which allows our customers to deal with this. Previously, this feature is something we would have probably bundled into an existing payroll product, but we decided to offer it as a feature on subscription.

So that's had a very high take up, I think it's something like 60% of our existing Sage 50 payroll customers have taken this feature and it's all additional revenue. So adding value to existing customers is very important, but so is acquiring new ones.

We acquired new customers in a number of areas, but there's two key areas where I'd like to talk about it. One is small customers, principally through Sage One and the other is mid-market ERP through Sage ERP X3.

For small customers, in the UK alone it is estimated that over 1.5 million small businesses still use spreadsheets. This is a significant amount of white space and these potential new customers are clearly attracted to the cloud.

It offers ease of use and no upfront costs. For less than the cost of your monthly mobile phone bill, you can start to enjoy the convenience of using Sage One.

In the mid-market with Sage ERP X3 Version 7, we have a very attractive product which is using all of the benefits of the cloud to give a compelling offer to customers. Adoption and pace of change in the mid-market is slower than small businesses and it's important to be able to offer connected solutions in this segment.

As I said earlier, it was a pivotal year for Sage One. This offering is now available in ten markets with the number of subscriptions increasing by 150% to 86,000.

As part of our global focus we redesigned some of the SaaS offerings to make them part of the Sage One family. If you exclude these redesigned offerings, the Sage One base would have been 53,000.

So I'm just giving you the numbers so you can relate them back to what we've disclosed previously. And of those 53,000, 47,000 was in the UK and Ireland.

We've been very pleased to see the strong momentum in both the UK and Ireland, but also in South Africa. If you look at this graph which is for UK and Ireland, you can see that we were somewhat late to market with our Sage One product.

However, now that we're in the market with both accounting and payroll products, if you look at the adoption rate over the last couple of years, you can start to see how we're capturing that. As I said North America is behind our ambitions.

But again compared to the UK we were a bit later to market in terms of introducing Sage One into the US and Sage One Extra which is the product with deeper functionality which is available in the UK is only just about to introduced in the US. So if you look at this graph compare it to the US in terms of rate of adoption and when we went into the market, that helps explain why we have a bit more work to do in the US in order to get to where we need to be.

And also secondly, we have some work to do around the channel, particularly the accountancy channel which is less developed than it is in the UK. So cloud is making a big difference to Sage and we're using it to improve customer experience for all our customers, both existing and new customers.

Sage is here to serve customers of all generations from young people starting up for the first time through to customers who've been with us for 30 years plus. This slide uses subscription as an example to show the progress and the momentum that Sage has and how we continue to offer customers choice.

We aim to have customers for life. And so the move to subscription will be progressive with greatest pace taking place with smaller customers.

We're pleased with the progress we're making. We've built a strong platform for future growth, but in a way that our customers appreciate and value.

So to conclude, we exit the year with momentum in the cloud, with momentum in subscription and with momentum in revenue growth particularly evidenced by the 7% recurring revenue growth. We reaffirm our guidance of achieving 6% organic revenue growth and 28% operating margin in FY2015.

And we will achieve these targets with momentum and underpinned by strong free cash flow. Stephen and I are already developing a good partnership and we're looking forward to seeing you at the Capital Markets Day and presenting more around how we see increasing the pace of execution in Sage.

And we look forward to seeing you then. Thank you.

Thanks very much Steve. What we'll do now is open it up to your questions.

There are also a couple of things, we've got questions on the conference call line as well, so I might interject those. But it would be really helpful if you could just say your name and the institution you represent as well when you kick off.

Thanks. It's Adam Wood from Morgan Stanley.

I've got two if I could. Just first of all around investment, could you give us a little bit of a feel?

Obviously the software industry is going through a big transition towards cloud software as a service. How do you think the product portfolio at Sage is set up for that?

And following on from that, with the greater move towards subscription and maybe some need to invest, how do you balance that investment? Is it the right time to taking margins up versus maybe investing more in the product portfolio and accelerating that move towards subscriptions?

And then secondly, I know there's around 2 million customers on support and 6 million roughly customer installed base. In terms of 4 million opportunity of getting them onto some sort of payment model, how do you think about that?

How confident are you that those 6 million customers that are actually there, still able to be sold to? And would you think about a forced subscription model rather than a kind of more gentle push towards it?

Thank you.

Okay, maybe a couple of things from the customer space and I'll pass to Steve from the financial perspective. So two things.

One is honestly I get very excited about technology, really excited. So iPads and stuff, I've got about four devices.

When I go and talk to our customers particularly in places like Germany, France, Spain, I see the reality that we're ahead of the curve. And when they're looking at their business and using words like indispensable and we want to help understand -- in Germany there's still all the concerns about data security in the cloud, all that sort of stuff [indiscernible].

And in fact in the session I did in Bad Homburg in Frankfurt, they were sort of saying, Stephen you've gone way too fast on this stuff, so just let's balance it. Now what we're seeking to do is two parts of cloud really.

One is the technology innovation, mobility and all the stuff smack, analytics, all that great stuff. The other thing is the business model change.

So what we've done for our shift to subscription is mirror effectively a cloud revolution in terms of what it means. It means I pay per play which is great.

So if you think about it from a cash flow planning for a small business they will have security and if they have to lay off folks, if they want to pay less, if they take on more folks they need to expand their cost base accordingly. So effectively we're doing a lot of things to what Steve talked about in the shift to subscription and the way from the annuity of support and maintenance to actually mirror that reality.

The other thing we say, in terms of the shift and I think this is credit to Guy and the management team is 2012 clear strategy around embracing the cloud, also a shift in the investment model towards fundamentally the new world and making sure that we always gave our customers a choice there. So I think it's slightly different with some of the other folks particularly in the US who are doing sort of forced migrations.

I think what the customers love about Sage is we give them the choice. And if they're not ready to move their business because they're opening up in a different geography or they're taking on more stuff the last thing they want to do is worry about technology migration.

So to have that security, that they have the choice from Sage, I think it's important. Steve, anything on the financial side?

Yes, I think on the customer numbers I think the way to think about it is as you said roughly 2 million already on existing contracts, whether subscriptions or maintenance and support. There's close to probably another million customers with whom we've had some sort of economic transaction in the last three years.

So it means they've bought a product, but they've gone off plan so they don't have the maintenance and support contracts. And it's those people who are the first priority.

They're the people we've had the most recent contract with. They're the people who we want to use features, new product modernization et cetera to tempt back into the net.

And then in terms of the 6 million, there's obviously people out there who have bought products a long time ago and it's more costly, probably lower probability in terms of targeting them. So we're taking them in that sort of order.

People who we've had more recent contact with first. The other thing is what I said about white space.

I think particularly with Sage One, not just in the UK but in all the other markets in which we offer Sage One. There's a significant opportunity to get people to come into the net for the first time.

And I think that is an important focus as well as reactivating existing customers. I think in terms of the forced subscription model, what we are trying to do is a balance where there are some features, I used auto-enrolment in the UK as an example, where we are not forcing customers to take auto-enrolment but if you want it, it's only available on subscription.

So we are trying to use a gentle -- it's still offering choice but we are not guaranteeing that everything we offer will have both license and the subscription, but you get to choose whether you want to take that additional feature.

Good. And I think Charlie is holding the microphone, so you have --.

Yes. Charlie Brennan here from Credit Suisse.

I've got four, but they're very short questions. The first is just on Sage 50, you launched an updated version of that including a subscription offer.

Can you give us the stats around the numbers of people that took the license option versus the number of people that took the subscription option for Sage 50? The second question is just around your active contract number that looks like its fallen year on year.

How do we reconcile falling active customers with your commitment to ongoing growth? The third one is just on Sage One, there was obviously some very aggressive discounting around August and September, so can you give is some metrics there around the average revenue per user on Sage One?

And the last one just on R&D the headline number looks like it's fallen about 9% year on year. Can you just give us what the organic trend was there?

Thank you.

Four for the price of one Charlie. Steve?

So starting with Sage 50, when we first launched the upgrade around August time we did offer some discounting around the upfront license. So we gave greater choice in the initial launch phase.

And then what we did in September, part way through September and what we are doing now is we are making the subscription a lot more attractive. So if you look at what's happened in September and you look at what's happened over the last couple of months there is the vast majority of people signing up to the new version of Sage 50 are going subscription, but in August it was the other way around but it was only for that one month.

In terms of active contracts there has been some consolidation of contracts. And this is partly as a result of the move from maintenance and support to subscription.

Because what happens in maintenance and support contracts is that typically their product driven. So if you take out a maintenance and support contract, let's use Sage 50 as an example, you'll take it out for Sage 50 accounts and then when you sign up for the Payroll product you'll have a separate contract for Sage 50 Payroll.

So as an individual you would have two contracts, because you've got two separate support contracts for those two products. When you go to subscription it's bundled.

So that two contracts becomes one. So actually the number of true active customers hasn't really fallen.

But what you have seen is a switch, because of the switch particularly from maintenance support to subscription, the number of contracts is lower but the number of customers is not. On Sage One everyone in the small business space attracting new customers is offering deals.

So everyone offers free trials, everyone offers discounts in the early phases in order to attract customers. And we do exactly the same.

In terms of long term, once you've signed up what we are charging for Sage One isn't particularly that much different from what we were charging before, it's just a lot of attractive offers to sign you up in the first place. To give you a feel for average revenues, obviously early days, we quoted that we had 86,000 Sage One subscribers or Sage One subscriptions and the revenue was just over GBP2 million in FY14.

On R&D, R&D on an organic basis continues to tract at around 10% of revenue. I think the way Stephen and I see R&D is that it's something that we are very focused on in terms of how we allocate between the invest products and the other products.

But what I would say is that we have something like 2,200, 2,300 R&D engineers. So sometimes people say well you're sure you're spending enough on R&D, 2,200 engineers feels like a lot to me.

Yes, actually on that Charlie I'll just pick that up. I'm aware of companies in the last 10 years have been involved around the cloud have got product to market in three to six months.

One of the competitors in our space has got 20 engineers, 20, two zero. Another one has got 12 engineers.

We've got over 2,000 engineers. That's why kind of shifting the dial around execution and productivity and the strategy is all well and good but they it's all about the execution of that.

I think we've got plenty of firepower, we feel, in our engineering function to actually look after the customers as they are today with the on premise, pursue the strategy around moving to invest but also significant firepower to build some of the global products like Sage One in the cloud and exploiting the new technologies. We'll go with Michael.

Thanks. Michael Briest at UBS.

Steve, I think you said that for the first half you expected growth to be at the low end of the range. Can you sort of say what that range is or why it will be at the slower first half?

And then in terms of the acquisition/investments I notice you don't repeat the one times leverage target you talk about potentially doing periodic returns of excess cash. Can you talk a little bit about what the balance sheet should look like?

Are you -- do you think maybe the business can run with more leverage than the one times target you've had historically? And then just finally on Sage One can you say maybe what the churn rate is in the UK?

It's been running now for a few years you should have a feel for that statistic. Thanks.

Want me to take those?

Yes.

So H1 growth, the reason I'm being a bit cautious around H1 growth is because I think the areas of weakness that we've pointed to of US payments and European mid-market, where I think we've done a lot of the right things, I'm just a bit cautious about how the pipeline converts. So I can see that it's starting to happen but I'm just a bit cautious around it.

So I think you'll see, we've just reported for the year 4.9% growth, H1 isn't going to be -- H1 will be above that. But I just don't particularly want to be drawn how far above it.

But we -- you've seen from both Stephen and I there is no hesitation whatsoever in reconfirming the guidance for FY15. We just think it might be a bit more backend loaded.

On the capital structure the one times leverage remains the guidance that we are aiming to be there or thereabouts. We are not going to a slave to it arithmetically, so sometimes we might be slightly above sometimes we might be slightly below.

But as a guidance we still expect roughly to be at one times. As we do if we do bolt-on acquisitions we may go above that to do those acquisitions and then bring it back down again as we generate cash.

But there hasn't been any change of policy, but we see it as a guiding principle rather than something that we are a slave to. And on Sage One, yes, in the UK the churn rates are now down into single digits.

Yes, just picking as well, a final point Steve has spent time reaffirming the plans in terms of 2015 and that's why we can stand up here with confidence. And obviously you'd expect me, many of you know me, having met every country manager 90% of the revenue for the fiscal year I asked them the question and look them in the eyes to stand up here today.

So that's the first three weeks of my life at Sage was going round meeting customers, people and spending a little bit of time with country managers and making sure they clearly know our responsibilities. Do you want to -- Stacy -- we'll go -- just for ease of microphone we'll come back to you.

Stacy?

Thanks. Stacy Pollard with JPMorgan.

Just to dig in a little bit around the pricing, so price in question how does you cloud pricing and subscription pricing compare to your on premise license and support? And is it the sort of typical three to four year total cost or from your perspective total revenue where that line crosses?

That's one question. And then the second one, again to follow up on acquisitions, are you still interested in acquisitions?

To what purpose would that be for technology or geography or what interest?

Okay, do you want to -- shall I flip them round do the acquisitions first.

Sure.

So consistency of strategy, consistency with what the Board and I have worked on, consistency of 2012 and PayChoice is a good example of that. So if we can accelerate the strategy then we'll consider acquisitions.

But Steve and I are very execution focused. The other thing I think we should say is around the organic strategy the world of the cloud and what that offer is we can develop products quicker than we could have done 10 years ago.

So we'll certainly focus on that area. And then maybe the first question?

Yes, on the pricing Sage is a -- has historically been a very decentralized business, so there isn't one answer for every country. France, the UK, South Africa, Brazil, North America are doing slightly different things depending on what they think the market conditions are.

And also we are depending on what's common in the marketplace, in some places like the example I quoted in France, we are using activation fees so we are not necessarily making the migration to subscription completely free of charge whereas in other countries we are. But to answer the question at a higher level, if you compare license fees to what we then charge for monthly subscription it tends to be at the lower end of that range that you're talking about.

So if you look at how we are pricing subscription it tends to be more in the two to three years than the three to four. And in some cases it may even be lower, but it's -- but where it's lower it's not necessarily a like for like comparison.

Because where we sell the license we are giving the customer the software with 100% of the functionality. When we move it to subscription, particularly where we are using cloud products, the starting point is a lower level of functionality which you then add to as you go up through the various tiers.

So you can go on the website and you can compare the different pricing between licensing and subscription, but it's not straightforward to compare apples with apples.

We'll take one from over here and then we'll come back to there. Go for it David.

Thanks. It's David Toms from Numis.

Just a couple from me. Digging into Charlie's question a bit about ARPU and the implied ARPU if we assume was 50,000 or so average subscribers for the year on cloud and GBP2 million of revenue.

That's implying ARPU of about GBP3 a month. The figure we were given a year ago was about GBP18.50 a month.

Now I realize these might not be entirely like for like but that's a very, very big difference so can you just explain why the delta is so great there? And then secondly just on working capital, you sort of had a slight throwaway comment when you're running through the numbers saying that return on working capital had been a little bit light.

Given the increasing importance of recurring revenue in the business and the decreasing importance of SSRS why aren't we seeing working capital being a little bit better as you collect that up-front cash from people?

Yes. So if you take the ARPU first, the rate -- if you look at the rate of adoption of Sage One its more backend loaded.

Also these are worldwide figures now, so they include South Africa so pricing in South Africa is generally lower. I think we -- because of the early discounting, because of what it takes to acquire customers it is true that the ARPU is going to be lower in the early stages of us acquiring these customers, because we don't just offer free trials we offer half price deals, we offer very significant discounting in those early months.

But that's the way the model works in this environment. We are competing against people who offer products for free, who offer extremely low pricing.

And we need to capture the customer, we need to get the customer into the Sage One family, get them to understand the benefits of the product. And then we need to get them to replace where the ARPU makes sense.

But in the early days of customer acquisition you will see periods where the ARPU is low. On the working capital, to be honest the biggest reason for the Q4 -- sorry for the slight drop in conversion is we said in the Q3 IMS that Q3 hadn't been -- been a little bit weaker than we'd expected, so therefore by definition Q4 was a bit stronger.

So the revenue has been a bit more backend loaded in Q4. Although -- France would be a good example, in France most of the subscription and most of the maintenance and support contracts we invoice up-front, so we invoice annual contracts up-front.

But it doesn't -- but we still give people credit, so people still get 30/60 days credit. And the DSOs have gone up a little bit in France at the year end.

We haven't seen any real impacts going to subscription in terms of how it's affected cash flow, because most of the maintenance and support contracts were already annual in advance. So even though we switched to subscription most of them are still annual in advance.

In some cases we are going to monthly, so the UK for example Sage 50 subscription is monthly, it's monthly direct debit. So if we see more of a switch to monthly we may see some temporary dips in cash conversion, because if we go from full annual to monthly we may see a dip.

We haven't seen that yet but it's a possibility. So I think there could be some inconsistency on a period by period basis in terms of the cash conversion.

But if you look long term in terms of the trend the more we can get people onto automated billing, automated collection, direct debit that type of thing you're going to get much more predictable cash flows. And that's where we are trying to get to.

Great stuff.

Thanks. It's John King from Merrill Lynch.

Just a couple of questions if it's okay, to follow up on the Sage One side of things. Could you give us any sense as to the adoption in Sage One Extra in the UK?

Obviously you've launched that for a little bit of time now, so just wondering if you're seeing the pick-up there as well. And I suppose related to that if you could just give a view, referring back to the R&D question, how much of your customer base today would have the opportunity of they wanted to, to go out and migrate to a public cloud solution?

And if you look forward at the current rate of development where would that number stand in 12 months hence? How quickly could we see a full portfolio of offering where you're customers could move to the cloud as and when they want to.

So maybe I'll start -- take that. So I think pretty clearly we've done a good job of loving customers, but the reality is we know there's some -- a lot of white space.

Steve referenced the Excel users and also a lot of new entrepreneurs starting businesses. And that's the target audience that we are pursuing with products like Sage One.

What we plan to do in terms of the wider question and R&D and the strategy looking ahead is actually host you back in the summer and give you a view of the strategy. But Steve do you want to -- have you got the data in front of you now?

Yes. So Sage One Extra we've got just under 3,000 of that 86,000 of Sage One Extra.

Go for it Milan.

Thank you. Milan Radia from Jefferies.

Firstly on X3 I guess it continues to attract less attention than Sage One, Sage One Extra as we've seen today. Where have you got to now in terms of number of partners, the average deployment value there?

And where could X3 be in say three years' time as a proportion of revenue? And then on the cloud competitive landscape we've seen NetSuite and others obviously empathize their European expansion plans, witness your own war of words with one of those companies on Twitter.

Are you doing enough to establish your cloud credentials in territories such as Germany? And we've had a little bit about France and the UK but not much discussion around some of those other European countries where the competitors are obviously laying out some infrastructure.

Okay, maybe a double head, I'll start and then pass to you. So I think it's interesting everybody gets very excited about the cloud, the opportunity on the revenue side as well is in the mid-market, and we've got great credentials there with the X3 product line.

So I won't break these out probably every time we get together but for this occasion last year we won 561 new customers with the X3 product line. Interesting enough, as you mentioned one of the companies where we always welcome competition, I think it's good for the market, good for customers, good for us to innovate our product, so we always welcome lots of healthy competition.

And we saw lots of adverts in the Financial Times and welcome companies investing in British advertising. So that's always something we relish.

Now the reality though is, say take the UK as a microcosm on the X3 product line we had a win rate of 66% of sales campaigns we are involved in. And that particular company was seen on less than a handful of transactions.

And the -- actually again the reality of all these things is the customer, so the customer feedback on those where we had a really high win rate was three reasons why they chose Sage X3. One is functionality is superior, secondly big reason around total cost of ownership being less.

And the third reason actually plays straight into our core strength, particularly in Europe, is around local support. They really value local support from local language people, basically down the road or on the phone.

And they were the kind of things that resonated strongly. So I would say we sit here and think there's actually an opportunity for probably better execution.

And certainly as a global product we've had some success we've highlighted the soft spot in terms of France. We've made some management changes around that.

And I think we've certainly got our arms around what needs to be fixed there. Steve, do you want to add anything?

Yes. And we had -- the year end we had -- we've got about 4,800 customers for X3.

And we've got about 290 business partners.

And in terms of where that revenue could get to over say three years?

I don't give guidance. But that's a great question for the summer, great question for the summer and something on our minds for the next few months.

Good morning. Amit Harchandani from Citigroup.

Just one question in terms of your outlook or guidance for 2015, You came across as fairly confident about achieving the same on the top line. If you could just elaborate a bit more on the various drivers that underpin this particular level of confidence, is this the recurring revenue performance in Europe?

Is it the stabilization in North America and the potential improvements? If you could maybe just drill down which drivers you expect to remain stable and where do you expect more confidence to come through the course of the next 12 months.

Thank you.

Yes, I think one of the critical ingredients is Europe. If you look back over the last three years most people's skepticism around the growth trajectory of Sage was around whether Europe as a whole would be a continuing drag on that growth and could we really grow Europe at something around the 6% mark.

I think the fact that we've achieved 7% recurring revenue growth in Europe is pretty significant. We have very strong growth in both UK and France which are the two biggest countries.

We have a lot of momentum around subscription in both of those countries. And also although I'm a bit cautious in the first half I think the opportunity for a recovery in mid-market Europe could be a significant part also, the building block.

And we see North America which has had 4% growth this year, was okay, but we can see reasons why that will bump up a bit next year. So I think if you take AAMEA and Brazil as continuing to be the cornerstone contributors that they've been in the past and then both Europe and North America continue with some of the trajectory that we can currently see, you get to 6%.

Great, do you want to try into the middle with it.

It's Mohammed Moawalla from Goldman Sachs. Stephen, can you talk a bit about the product portfolio?

You talked about the feedback from the customers. You also kind of touched on the big R&D base you have.

Is there room to further accelerate or simplify the product range as you look forward, particularly as you move to these kind of multi-geography cloud products? And is that a big -- how big of a lever this could be on the longer term margin?

And then secondly just to follow up on the payments business in North America, can you just drill a bit Steve onto is this a competitive issue or an execution issue? And you alluded to still a tough first half next year, but what the medium term outlook for that business is.

Okay. Maybe I'll take the first and then second.

So I guess many of you know Steve, myself and I think the opportunity we have with 2,000 engineers around threading the One Sage message and taking forward the 2012 strategy. So what that said is product rationalization, shift the investment towards invest in growth and obviously exploit the opportunities and disruption in the cloud.

And it's our job as the management to ensure that we accelerate that. So the answer is obviously yes.

Could we do better? Yes no doubt about it.

As always any business of our scale there's areas we could do better and improve on. So in terms of where I'd see -- bit of a sneak preview into the summer when we'd love to get you back together and lift our eyes to the next few years of how we can build global products that essentially -- from the US from the German visit, broadly Payroll is probably more country-specific, but generally 60% to 70% global requirements and then the regulatory local requirements are the additional 30%.

In some of the core accounting products it's probably 80%. So that sort of tells me strategies around Sage One and these global products we are driving X3 absolutely means that we've got an excellent position.

And actually ironically being a European company and understand the complexity of the countries around Europe and the different regulatory environment and the compliance requirements, probably quite a significant advantage to us. So then it all comes back to better execution.

And what we'd love to do, again maybe around that, make some progress over the next few months, but in reality come back to you in the summer and lift our eyes up about the opportunity going forward. Do you want to talk to the payments business?

Yes. The payments business is -- for FY14 was essentially flat.

And some of that's market. I think a number of players including Intuit have pointed to the market being a bit more competitive and pricing being tough.

But I do think also we've had some execution issues in terms of how we've gone about addressing the market. We did lose one of our channel partners which also had an impact on the numbers this year.

And I think with some of the actions that we've taken there's reasons why we'll start to see that recovery in that business returning to growth. But the reason I'm cautious is the same reason I'm cautious in mid-market.

When businesses are turning, I've just seen it so many times before, where the pipeline starts to fill but the time it takes to really start to convert that pipeline and really start to see the traction returning to the business, I'm always a bit cautious about how long that's going to take. Now hopefully I'll be positively surprised, but I'm the CFO so I'm paid to be cautious.

it's good Steve is cautious. And on some of these things we don't want to get ahead of ourselves.

Steve has been here less than a year, I've been here 21 working days. So today was all about good results, the affirmation of guidance and then pointing us to the summer where we'll lift our eyes and answer a lot of these of questions that are on your minds.

Maybe one more question. Can I go to the phones first though, we've got a question hopefully be it the voice of god.

Hi, thanks for taking my question. Two if I may.

First on the future growth, if you look for On Sage over the last cycle or so support growth has relatively decent but SSRS has remained weak. And again that was the case in the second half and then for the full year.

When do you think that will kind of come back to growth and what kind of growth would you expect this to deliver over the cycle? And then secondly coming back on the payment business, the largest proportion I believe is in the US where you are competing with larger players and that market is simply commoditizing so that's probably tough for you guys to find therefore there significant kind of growth.

So my question on the US there is would you double up there to gain and the scale you need or is this potentially something you need to build down. And then in Europe where there was more growth still a very fragmented industry but again Sage Pay is relatively small.

So again there a similar kind of question, do you need to consider acquisitions there to accelerate the growth? Thank you.

So if we take the revenue growth question first. We don't really expect to see SSRS return to growth as part of the plans of achieving the 6% organic growth.

And that's really -- the only exception to that would be that we will start to see some -- potentially some greater impact from mid-market. And mid-market is more likely to be licensed than it is subscription, just because of the nature of the way that market is working.

But the reason we don't expect to see strong SSRS growth is because we are driving subscription. So SSRS is largely driven by license fees which are getting replaced by subscription.

From time to time we'll see some pickup because of mid-market and also because of professional services. But if you take the trend over a long period of time we are not expecting to see SSRS growth.

On payments I guess two parts to that, or two parts to the answer. The first is with all the payments businesses part of the reason we own payments businesses is cross-sell.

So whilst the market is more competitive we also have a compelling story to our existing installed base about integrating payments into the offering. And as I said earlier the penetration of that cross-sell, although its greater in North America than it is in Europe, there still remains a significant opportunity and a significant advantage to our customers for offering them integrated solutions including payments.

On the acquisition side I guess I would see payments very similar to the rest of the business in that the right bolt-on acquisitions might well be appropriate for payments, just like they might well be appropriate for the rest of the business. But at the moment we are not singling out payments in any way to say that that's -- it's more of a strategic imperative in payments than it is anywhere else.

It maybe, but it's not something that's a burning platform that we feel we need to action in order to be successful.

Good Steve. We'd love to take loads more of your questions but I think the last one today is in the middle.

Neil Steer, Redburn. In fact I think Steve you've partially answered this question, but it was during the presentation you referred to the integration of the most recent acquisition.

Obviously integration and leverage from M&A activities is not something we are accustomed to seeing in the past from Sage. The question was really what are you doing different in terms of integrating that business now that we perhaps wouldn't have seen under the previous management team?

Well I think I'd refer to Stephen's comments around One Sage. I think in the past Sage was perhaps organized or historically this has slightly changed over time, but originally it was organized really almost as a series of individual businesses, so very independent businesses.

So when an acquisition took place apart from that business joining the family it largely continued to operate in a similar or even the same way as it did before we bought it. When we buy now it will be because we see synergies.

We are not going to buy -- we are not going to acquire things to acquire revenue and just leave it standalone. We will buy things because either from a technology perspective we think we can integrate into our existing suite of products and services to sell to a wider customer base, or it will be because we want to acquire customers which we then cross-sell our existing products into as well.

So PayChoice is a good example of that, the reason we bought PayChoice is because they have a SAAS payroll product. And so there is a two-way opportunity.

We acquire both technology and customers. The customer we acquire we will over time be introducing them to the wider suite of Sage products.

But also we want the Payroll SAAS platform to sell into our existing installed base. So there are clear synergies.

And that's the type of deal that you're likely to see us doing in the future. It's important that they are synergistic value.

And just to be clear that's internationally transferable isn't it?

Yes. Actually in the case of PayChoice for the time being it's a US solution.

It could be that we build on that, but we already -- the reason we did it in the US was because we didn't have a US payroll product really whereas we do in Europe.

That's great. Thank you very much for your attention and support.

And also I just want to say thanks to Guy and the existing management team for a good set of results. And our commitment, Steve and I, as the management team and the Board is to absolutely assure everybody here we are very committed to short, medium and long term success for our investor community, our growth investors and to deliver them excellent returns from Sage.

Thank you very much.