Steve Hare - Chief Financial Officer

James Goodman - Barclays Milan Radia - Jefferies Mohammed Moawalla - Goldman Sachs Charles Brennan - Credit Suisse Michael Briest - UBS Neil Steer - Redburn Partners

Great, thanks very much and good morning, everyone, and thanks for as usual for taking the time to dial into the call. And I'm just going to go through a few headlines for the quarter and then obviously hand over to take everyone's questions.

So in terms of the headlines for the quarter and to be honest similar messages to the results of the half and also the general flavor that we gave at the Capital Markets Day. It's a quarter that shows good momentum, although the Q3 year-on-year growth rate of 7.5% is a little bit flatter by a weak Q3 in 2014, and the year-to-date growth rate overall of 6.6% obviously benefits from one-offs in the first half and again the easier comparison in Q3.

So you would expect me to exercise some caution, but having said that there's - the quarter does show a good underlying recurring revenue growth. I think 9.7% recurring revenue growth for the quarter driven by strong software subscription growth again.

Meaning that, overall the recurring revenue growth for the nine months is 8.3% and so that continues the momentum, which we referred to and which we obviously talked about in some detail at the Capital Markets Day. And the underpin from software subscription, we had a 34% growth in Q3 software subscription revenue, which really underpinned that recurring revenue momentum.

The key thing driving the software subscription continues to be initiatives in the UK and France. Although is now started to see some impact in North America, where we started to push upgrades and reactivations on Sage 50 in North America and that's starting to contribute to the shift to subscription.

SSRS revenue did grow 1.2% organically in the quarter. It's coming from a variety there is including contribution for X3, but we have also seen some displacement moving away from SSRS to subscription.

Particularly North America as I said because obviously the Sage 50, we are now pushing on subscription whereas previously we would have sold on licenses. So in terms of little bit of regional color.

Europe good quarter, France, UK performed well. Tempered by some continued softness in enterprise Europe.

Although, the pipeline color has started to show some signs of improvement. So I think, we may be starting to turn a bit of corner there.

North America, great was showed a better quarter than Q2, which is broadly expected and if you remember last year Q3 for North America was a particularly weak quarter, so easier comparative but nevertheless, some encouraging signs. We saw a little bit of growth in payments in North America for example.

And Brazil continue to deliver reasonable level of growth achieving double-digit. And in AAMEA, Africa and in particular South Africa continues to perform well.

This is one-off contribution we saw from Malaysia in Q2, now Malaysia's returned to a more normal rate of growth. But overall that region, AAMEA region continues to perform strong double-digit growth.

So in terms of what that means, overall obviously reiterate the guidance. We remain confident as we've said a number of times now in delivering the 28% operating margin for FY 2015.

I think, will be at least 6% organic revenue growth. I think the downside risk again saw a 6% organic revenue growth and it's pretty low.

But as we continue to progress the operating model. Transition and in particular the shift to subscription again, as we went through in the Capital Markets Day.

The blended rates of around 6% looks like the right number, but the one to really look forward the year end is to see what sort of momentum, we're achieving in terms of the underlying recurring revenue. And as I said, the fact that now for the nine months that's at 8.3%.

It gives us some encouragement in terms of the momentum in the switch to subscription. So that's the, that's kind of overall message that where I'd sort of summarize is, kind of ticking the box type quarter.

It kind of reiterates and supports the things we've talked about previously and particularly what we talked about in Capital Markets Day and probably a little bit better than we were expecting in some respects. But overall, where we want to be and setting us up to achieve our targets for the full year.

So with that, Lisa. I'd like to hand back to take questions.

I wanted to ask you about the expectation for Q4. You've made some slightly conservative comments perhaps and clearly as you point out, you can make the 6% growth with significantly less than that in the final quarter.

But is there any reason to think, you're not shooting for a straight 6% growth in the final quarter. And then just following up on the geographic comments that you made and perhaps think about any changes since the period end.

I'm thinking specifically about Brazil and whether you anticipate significant turn in any of those geographic outlooks. Thanks.

Okay, in terms of Q4. I think, we've had this 6% target in place for three years and I think, if you go back a 1 year or 2 years , the expectations were that we would struggle to hit a 6%.

And then I think you know as people begin to get more confidence that we might hit the 6%, there's perhaps some skepticism that the way we'd hit it, was to do in a big one-offs in order to get over the line. Since I became CFO, what I really focused on is momentum, is the quality of the revenue.

So we are very focused on making that we drive recurring revenue. Now and as I went through in the Capital Markets Day.

What that means is, as we push hard to move to subscription, we may have quarters were in fact eventually, we definitely will have quarters. Where SSRS declines because we're switching, displacing SSRS revenue into recurring.

Now what's happened so far in Q2 and Q3, is that despite the push into software subscription. We've also managed to get some SSRS growth.

Now, if we get some SSRS growth in Q4 then we'll obviously do better than the 6% because Q4 will end up being a bit higher. But what I'm doing is, is I'm reserving the flexibility and to make sure, that if we come in at say 6.1% that is success because we've achieved the target that we have continually said, we would meet.

If I give an indication that the number might be higher. Let's say something closer to 6.5% and then we come in at 6.2% people say, I didn't meet your advised guidance.

As I said at the Capital Markets Day, the headline organic revenue growth, to be honest whether it's 6% or whether it's 6.3% it's slightly irrelevant. What's important is, what is the recurring revenue growth and that we achieve the independent 6%.

Say, if everything goes well. We could have a slightly better result than 6%.

But what I'm indicating is, 6% is our target and we'll push the recurring revenue growth as hard as we can and continue to deliver on the strategy that we've outlined. I think in terms of the geographies, we have seen a little bit of a better results from Brazil.

Obviously the numbers are small in the context of the group. But I think, we are starting to see a little bit of better momentum there.

The numbers again are small, but you know we have launched Sage One there. We're starting, we have also launched X3.

We're starting to make available the global products in a much wider range of our geographies including Brazil. So that gives us some encouragement, it gives a local team a better opportunity to use those products to start to acquire new customers, which again is very consistent with what we said at the Capital Markets Day.

Okay, thank you.

A couple of questions from me. So the first was, in terms of progression that we saw from 2% to 6%, it was fairly linear.

So an additional income, 0.5 percentage point per half year or per quarter. The trend in terms of recurring revenue growth from here.

Can we expect the same sort of linearity up towards that for the 10% marker in a sustainable fashion? And the second question was around, X3 and making the connection between the performance of X3 as it gets rolled out into new markets and the pipeline breadth is expanded.

Making a connection between that and SSRS growth, is it fair to say that's going to be more perpetual license led than subscription? Thank you.

Thanks, Milan. I think recurring, I think in terms of linearity, it depends how successful we are in terms of acquiring new customers.

I think within the existing installed base as we switch more the upgrades and the reactivation of the existing installed base. Yes, we may.

We'll get as we run various campaigns, we may get some jumps up. But I think broadly speaking it will be a reasonably linear path.

But I think the thing tats' difficult to predict again as we said at the Capital Markets Day is the rates of new customer acquisition not just in Sage One, but also in Sage Life and also to the degree to which, we may use some of the On-Premise products like Sage 50 to require new customers. And so that may mean that we have certain periods of time, where we have specific focus on the where we may see, some better results or which may give us some spikes, we'll have to see.

And in terms of X3, yes I think at the moment we see X3 largely being sold on perpetual license. Overtime, we will make available attractive offerings on subscription.

But at the moment, the focus with X3 is to sign up more customers, is to get greater pipeline and achieve better market share and if the way to do that or the most attractive way to do that with customers is through perpetual licensing, then we'll do it through perpetual licensing because attracting the customer and getting great attraction with X3 is more important than the way we do it. In ideal world, we'd love it all to be on subscription.

But if we have to choose, we'll chose to win the customer because that's the most important thing, that we think we got a great product with X3 and we need to win market share with it.

Got it, thanks very much.

Hi Steve, just looking at your progression in sort of SSRS. I think you had said there were some one-offs benefits in H1.

And I think, to kind of hit your 6% of the low end of the 6% for the full year assuming no material deceleration in recurring. I think implied SSRS is sort of negative.

What scenario sort of do you see that sort of happening is or is that a bit too conservative? And then secondly, you indicated that, there were some improvement in payments in North America, can you give us a bit more color on that and how you expect that to progress and sort of benefit the growth over the next few quarters?

Sure. On SSRS, I think if you look around the different regions.

There is also slightly different dynamic by region. So for example in AAMEA, particularly in South Africa and the greater African continent.

There is still areas of the business not just X3, but also some of the payroll products and indeed, some of the accounting products, where there is still a preponderance to sell on license. So in AAMEA, we continue to have SSRS growth.

Whereas if you look at Europe and North America. In Europe and North America, the trend of SSRS is flat to down.

And the reason it's flat to down is because most of the new business and except Enterprise. So most of the new business we're now doing, whether it be upgrades with existing customers, whether it be trying to reactive existing customers.

Our default is to push subscription. So now as I've said at Capital Markets Day in the end.

The overriding strategy is customer for life. So if a customer is very resistant, we're not going to refuse to sell on licenses.

But we do make subscription, a very attractive offering. So the reason I'm being cautious in Q4 is a direct results of the fact that we're doing so well on the recurring revenue growth because by definition, the harder we push particularly in Europe and North America, to get momentum around subscription, the more we'll sacrifice license sales.

And what I don't want internally, is for the businesses to feel under pressure to do license sales, when they could have done subscription sales just to meet, a kind of artificial target. We will meet the 6% and to be honest, if we wanted to make.

If we wanted to do better than the 6%, so let's say we wanted to hit 6.5% or even if you wanted 7%. We probably could because we can just take the foot off the gas on subscription and I could tell the businesses guys, go and sell licenses and we'd achieve a higher headline, growth rate.

But strategically that's not what we want to do. Strategically we're building the recurring revenue, we're building the quality revenue.

So that's the reason I'm being a bit cautious. I mean, as I said at the Capital Markets Day.

If everything goes to plan, we'll probably do slightly better than the 6%. But the focus to me is, the strategic execution of this recurring revenue and getting the quality there.

In terms of payments, we flagged a while ago, that being some leadership changes including the person who is running the US Payments business and he's got his feet well into the end of the table now is, addressing some of the issues, that we had both in terms of cross selling into our existing base, but also some of the channel relationships with the payments business. And we're starting to see some encouraging early signs there, the business is not back to double-digit growth.

But it's back to a point where it's not, instead of being. Previously it was kind of flat to down, it's now not really drag on growth.

So it's achieving those kind of mid single-digit growth rates. But you know we have hopes that we can start to see returning to where it should be and which is definitely in that kind of double digit territory.

So we said, we had this kind of watch list which we said we wouldn't kind of constantly give a running commentary on in the quarterly results. But I've indicated both in the case of enterprise Europe where we're starting to see some better pipeline cover and also in the case of US payments, where we're just starting to see some more encouraging signs because I think some of the operational actions we've taken is starting to bear fruit.

Okay, that's great. Thank you.

Two questions, if I can? The first one is just around the cannibalization, a fact of subscription in SSRS.

Can you give us some metrics that helps us understand the size of the impacts that are going on, the sort of SSRS cannibalization we've seen so far. I think in the last time, I did numbers on Sage 50 in the UK.

If a 100% of customers took subscription it would be a negative 1% impact on SSRS. Is that about right and what are we saying in the nine month numbers?

So I think, in the full year results. We'll give a bit more granularity around the dynamics of what has happened throughout the year and also a bit more kind of around, how we see that going forward.

But I think, if you think about it's really two parts to it. One is, obviously the new license sales which is the point you're making around cannibalization of new license sales into recurring revenue and subscription, but the second thing that we're starting to do, is we're trying to bundle more of the complete package into subscription.

And what I mean by that, is that initially when we're doing some of the upgrades. We would see, we'd sell somebody an upgrade and we'd sell them that feature on subscription, but they'd still have separately a maintenance and support contract and they didn't necessarily have a complete bundled solution.

what we're trying to do more and more now, is bundle it all together and as a result, maintenance and support, standalone maintenance and support is not really growing. So standalone maintenance and support is starting to flatten out, as we take more of that maintenance and support and bundle it into a subscription contract.

Now what we're obviously trying to do at the same time as we bundle, is we're trying to deliver more value to that customer. So we're not just taking, what they've exist, what they've already got and putting it into a new contract.

We're trying to bundle it in with a new feature, with a new upgrade etc. now part of that is always the trying to take the whole thing and bundle it into a single priced offering rather than having the granularity of the sort of individual component parts.

Now as you said Charlie, the biggest selling product that Sage has is Sage 50, Accounts and Payroll in the UK, and so that's where we're seeing the greater shift. But having said that, we're also seeing a reasonable degree of reactivation.

So the reason, we're not seeing kind of more of a dip in Europe in SSRS is partly because of this is coming from reactivation rather than pure displacement. But if I'll tell you that overall in Europe for the nine months SSRS is kind of flat to slightly down in Europe.

So at the moment, we're managing to kind of successfully balance switching pretty aggressively into subscription. But because we have the core product modernization so we can sell additional features and because we are doing some reactivation.

We're managing to get a reasonably good balance. Now as I said, year-end I'll give a bit more granularity, but in the US we're seeing more of a decline in SSRS because in the US there is less of an opportunity to be honest to, to kind of reactive and therefore the displacement on something like Sage 50, which is something we pushed in this last quarter in the US, the impact of that - is more mass because it's not reactivation, it's switch.

I guess, what I'm trying to judge is, how aggressive is this transition and for how many periods could it act as a drag on the growth for Sage and if you take Sage 50 in the UK, how much of that business is now subscription versus license and how many of your 270 products have you started this journey on?

Yes, so on all of the going forward. I think, if I answer that question two parts.

The first is, as I said at the Capital Markets Day. We're making a commitment over the next couple of years and during the transitional period that we'll have a headline growth rate of 6% and that means that during that period of time, we think we can push hard and the switch to subscription and still achieve an overall 6% growth rate.

But it means that the recurring revenue growth will be much higher than that and I indicated that, there was a likelihood during this transitional period that recurring revenue growth would get up at the double-digit level and for the nine months it's already 8.3% and for the quarter it was 9.7%. So at that high level you can see how that's working.

And then, as we emerged from that transitional period, we'll get to a point where something like 80%, 85% maybe even 90% of the revenue is recurring and then, you'd be able to see very clearly where that's coming from in terms of new customer acquisition, in terms of what's happening in installed base. Now as far as the - which products does it affect?

The default now on growth products. So any products which you categorize as growth product, which are the kind of cool products that we have in each country to drive both new customer acquisition, but also the core products that are installed base, the default now is to put forward a commercial proposition for subscription.

However, it varies by country in terms of how we're pushing it because it depends on the customer reaction to it because we have this override that we don't want to lose our customer. Now I can tell you in the UK and France.

In all areas apart from enterprise, so in the kind of small SSB and SMB sectors, it's going well, it's well received. It's not 100%, it well received.

Whereas an enterprise there is a lot of resistance. Whereas I indicated in Africa, particularly in South Africa.

With the payroll products in particular, there is more resistance and so the transition is slower. But in the UK and France and increasingly now we're starting to see in North America and are starting to get good traction.

Good. And just a quick follow-up, actually.

The statements recently have flagged up the importance of comps in the prior year. Once, we get beyond 2015 and we look into the first half of 2016.

Are you in anyway concerned that the tough comp we saw in the first half of this year, is going to make it hard for you to sustain growth momentum into 2016?

Well the price you pay for starting to perform well, as the comps will become harder. I mean, that the - I think we have we're creating the right momentum.

I think, we've been very clear that not every quarter will be a stellar quarter. You know this is a transitional period and some quarters will be better than others.

But as an overall trajectory, I think, I gave a pretty clear message at the Capital Markets Day, that we can see the ingredients of, how it is that we're going to achieve the objectives that we've set for ourselves. And the next couple of years, were obviously keen in setting the foundations for that.

Perfect, thanks.

Steve, could you maybe give us a breakdown by region of where the subscription revenues come from today? You sort of flagged France and the UK, but is that 80%, 90% of the revenues?

And then just in terms of the mix of drivers of the recurring revenue growth, what proportion of the 7% would have come from price? I think you've said in the past or recently, that that's becoming less of a lever.

And then just finally, on Sage Life, have we got a go live date as yet? I think it was talked about a summer launch, previously.

Thanks.

Okay, thanks for your question. On software, if I give you a bit of color and by region.

Say, we've got an total software subscription for the nine months of something kind of just under $200 million and off that, just over half comes from Europe. And the biggest contributors to the Europe subscription as I've said the initiatives that we have in the UK and France.

And if you then look at the other regions like North America and the switch to subscription in North America is less developed. So a growth rate is stronger, but from a lower base and as I said, the biggest single initiative that we've driven on subscription in North America, both in Canada actually and also in the US, is using the Sage 50 product.

And then, Brazil the numbers are small, but they have a reasonable proportion of their business on subscription and then in the AAMEA region. And it's the both the Pastel Payroll and the VIP Payroll products.

We do a mixture of selling it on license and on subscription. But in the case of the VIP Payroll which is the kind of more mid to upper end.

A greater proportion of the business is still done on license, whereas in the smaller kind of Pastel Payroll, Pastel Accounting increasingly more of that would be starting to be done on subscription. So if you sort of characterize the three regions Europe led by the UK and France and very kind of not advanced by well developed, good momentum, North America is starting to accelerate but coming from lower base.

And AAMEA, the switch is happening, slower and there's a much greater tendency for us to sell the products both on subscription and also license. In terms of price, we signal going forward there'll be less of the growth will come from price.

Yes, price is still important, I'm not trying to say, it's not but we're not pushing above inflationary type prices. So nothing's changed since we talked about it at the Capital Markets Day or indeed the half, but the trend is the overtime less will come from pure price, as oppose to delivering value.

And then on Sage Life, there is nothing new to say, but what I would say is that. We've got Sage Summit next week in New Orleans and I think, as we indicated at Capital Markets Day.

We said that, we would say a bit more about Sage Life at Sage Summit. So next week you'll hear more about the plans in terms of the live launch and customers and so on.

Thanks. Can I just ask a follow up on attrition?

I mean, you've given attrition number by volume of contracts, I think it's about 17% at the minute; I often get asked what that would be in monetary terms. Can you sort of give a sense on the revenue attrition rate?

No that's not assuming, I think we've been asked that before and I think, we have a metric that we disclosed and I think that's the metric, we're going to disclose.

All right, thanks.

Just a quick question. A number of times you've referred in your commentary to the reactivation of customers, and clearly that's had a beneficial impact, I suspect some more over the last 12 months compared to when previous management have referred to that initiative.

I'm just wondering, how do you look at that? Are you benefiting from it effectively, the low-hanging fruit and initial burst of activity on the reactivation side?

Or do you see this as very much something that can continue and benefit you for several years, henceforth?

I think, it is something that we will continue to focus on and I think can give benefit for some years to come. But having said that, we obviously target that part of the installed base, where we think is the greatest likelihood that we have something for that customer that persuades them to reactivate.

And so, again this is not an area that's likely to be particularly linear. We will target groups of people, we will try and offer them something attractive to get them to reactive, but then there may be periods of time, where having reactivated a particular group that we have to wait a while before, there is another group, we can reactivate and what I mean by that, as if, if somebody brought a product 3 years ago and we have a really attractive upgrade from them, then today, they're an obvious target.

If somebody brought a product on a perpetual license a year ago, they're very happy with the product and actually the upgrade for them is less significant, then you may have to wait a little longer before there is something attractive to bring them in. So I think, there is a large number of customers to go after here.

But there will be, on a quarter-by-quarter basis, it will vary how successful we are in terms of bringing people back in, depending on what we have to make it attractive for them because it really needs to be, it needs to be a catalyst, it needs to be features really. The easiest way to get someone to reactivate, is to say look we've got some features which make your life easier, you need to upgrade your product and here's the package.

People won't reactivate without there being some sort of incentive.

Okay, thanks so much.

Thanks very much, Lisa. And thank you everyone for dialling in.

I think in summary, just to pick out a few things. I think, a good solid quarter that shows good momentum.

I think, absolutely in line with the strategy that we've outlined in terms of the momentum around recurring revenue. I know everyone would like greater clarity in terms of what's going to happen with SSRS and over the coming quarters.

But hopefully as I explained at the Capital Markets Day and as I've tried to explain today. During this transitional period, the switch between SSRS and recurring revenue is not an exact science and therefore we need some latitude as we go through this transitional period to be able to drive the recurring revenue.

But the predicting exactly what the balance will be between SSRS and recurring revenue, there's going to be some quarters that are better than others. But I think in terms of the overall momentum, this is a tick in the box and I look forward to speaking to you all again, at the full year results.

Those of you, who are going to Sage Summit next week or, if you're not going it is live. There is a lot of live streaming, please watch the live streaming or follow us on social media, there will be lots of activity on all the social media in terms of what's happening at Summit.

So please keep an eye on that and look forward to speak to you all soon. Thank you.