Trading Update Friday, 13th April 2018

Transcription

1 Trading Update Friday, 13th April 2018

2 Operator: Good day and welcome to The Sage Group Conference Call. Today s conference is being recorded. At this time, I would like to turn the conference over to Stephen Kelly. Please go ahead, sir. Introduction Stephen Kelly Chief Executive Officer, The Sage Group Plc Thank you very much. Good morning, everyone, and thank you for joining the call at very short notice. You may have seen the RNS that was released to the market this morning. We have a responsibility around meeting our regulatory obligations, and we have provided this information to you as soon as possible. Now, just to state before we begin: the information provided in the release today is as much as we can give you at this point in time. We will provide you with a more comprehensive update on information when we do this scheduled H1 FY18 results announcement on the 2 nd May, including the conclusions from our ongoing analysis and the resultant plan to rectify the execution issues identified. So now, I am going to hand you over to Steve Hare, CFO, who will go through the key points with you. Key Financial Updates Stephen Hare Chief Financial Officer, The Sage Group Plc Thanks, Stephen. So, let me give you the initial data points that we have disclosed this morning. The first half of FY18 organic revenue growth was below our expectations, and this was due to inconsistent operational execution. Organic revenue growth for the first six months of the year was 6.3%. Recurring revenue growth was 6.4%, of which software subscription growth was 25.3%, and SSRS growth was 7.1%. We believe the organic revenue growth of 6.3% for the first half was lower than we expected for two main reasons: a declining recurring revenue growth; and contractor license slippage in enterprise, principally in the USA and Africa/Middle East. Sage Business Cloud growth remains strong, with annualised recurring revenue of over 335 million, growing at 57%. If we look regionally, we are operating in line with our expectations in the majority of our geographies. Growth in the biggest market, North America, was double-digit. This reflects continuing progress across the USA, Canada and Sage Intacct. Australia and Central Europe have also performed well, with Iberia and Latin America s growth in line with our expectations. And as planned, France has shown a return to growth in the second quarter. The two regions that delivered weaker performance than expected are Africa/Middle East, and Northern Europe. In Africa/Middle East, as I have mentioned, the principal cause is contract license slippage in the enterprise business. Growth in Northern Europe was below 2

3 expectations due to inconsistent execution, particularly around recurring revenue. As you d expect, we are doing some further work to validate our initial analysis, and we will share this with you on 2 nd May. If you look to margin, organic operating margin of 24.5% is in line with our expectations, and we have delivered strong cash conversion of 95%, reinforcing the business model fundamentals. In view of the slower first half performance, and the importance of driving the strategy through accelerating the rate of recurring revenue growth, we have revised our guidance as follows: FY18 guidance is revised from around 8% organic revenue growth, to around 7% organic revenue growth. The organic operating margin guidance remains unchanged, at 27.5%. And with that, I will hand back to Stephen. Summary Stephen Kelly Chief Executive Officer, The Sage Group Plc Thanks, Steve. So, just to recap, the revenue growth for the first half, FY18, is below our expectations. But our early analysis indicates that this is due to inconsistent operational execution and does not suggest that there is any change in the competitive landscape, nor, indeed, that we ve lost any material business. Based on these early indications, I believe the market opportunity for Sage, as outlined at the Capital Markets Day 2018, remains unchanged. Now, before we hand over to Q&A, it is probably worth emphasising that we have given as much information as we can today, and therefore, we are unable to say much more at this time. Naturally, I m sure you ve got tons of questions, but please bear with us today. We ve a lot more work to do in the next few weeks before we come back to you on 2 nd May. So, on that note, let s open for questions, Cecilia. Q&A Operator: Thank you. If you wish to ask a question at this time, please press *1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press *1 to ask a question. We will now take our first question from John King from Bank of America. Your line is open, please go ahead. John King (Bank of America): Yeah, good morning. Thank you for taking the questions. I ve got two, please. Obviously, you ve poured quite a lot of money into sales and marketing, and up to now that s been somewhat ineffectual. Maybe you can just talk about why you think that is. Do you think there s anything around the competition or the competitive environment that was tougher than perhaps you d originally thought? Or are these squarely operational issues, and if so, what kinds of things could they be? What kinds of operational issues are we talking about? And then the second question is, obviously you re still implying somewhat of an acceleration in H2. Is that something you would see at this point as being weighted towards the fourth 3

4 quarter? And I guess, what gives you the confidence to think that that will come through, given it hasn t quite come through in Q2? Thank you. Stephen Kelly: Okay, John, thank you. Maybe I ll answer the first question, and then I ll ask Steve to cover the second. So, you re correct on the sales and marketing investments and the savings we ve made on the G&A side, but your question regarding the competitive landscape, as I said is basically as it was before. I think squarely, we see these as operational and sales execution areas. We called out a couple of areas based on the early analysis so far, and some of that is contract slippage in the enterprise area, so that s sales execution. And the other area that Steve called out in Northern Europe is around recurring revenue programmes that are in place, and that is essentially operational execution as well. So, just to repeat, we see no change in the competitive landscape, and no evidence of that at this stage, and we ll continue to do our analysis and come back to you on 2 nd May with our detailed plans. Steve, on the second part on the weighting? Stephen Hare: Yeah. I mean, I think, with the obvious caveat that, as is always the case with pre-announcements, limited time. But in the limited time that we ve had, and the work that I ve done with each of the regions, we would expect to be able to demonstrate progress around, particularly, recurring revenue in Q3. So, I think this is a very important point that I think we want to really focus on re-accelerating the recurring revenue growth, and that means not leaving it until the last minute. I mean, I think that s a feature of the sort of software license business, and so we would expect to be able to demonstrate progress in Q3. Stephen Kelly: Thanks, John. Next question. Operator: The next question is from Hans Lettiner[?] from UBS, please go ahead. Hans Lettiner (UBS): Yes, good morning. Thank you for letting me on. I have three questions, if I may. Can you provide an update on Sage One in Q2 and H1 performance? And then, how likely or how comfortable are you now with the 2020 goals to achieve that? And, does the implication of the sales execution and deal slippage and recurring revenues in Northern Europe programmes imply now that you are having some leadership changes pending in these regions? Thank you. Stephen Kelly: Thanks, Hans. Maybe, I ll do the first and the last, and then Steve can look at the sort of medium term. So, in terms of the product line break out, I think it s most appropriate we actually save that until 2 nd May, and we ll give you a detailed update on that. In terms of the areas of slippage and impact on, I guess, structural management, I think again, we ll continue to update you, but it s probably inappropriate at this time. And it s just based on what we are coming to you as quickly as we could with the early analysis, and there will be plenty more with the plans that we share with you on 2 nd May. Steve? Stephen Hare: Yeah, I think on the medium-term goals, I think we ve used the phrase in the press release, rolling mid-term guidance, and what we mean by that is, we see nothing here that in any way changes our view of our mid-term goals. But again, in the time available that we ve had to investigate, what we need to assess now is whether this inconsistent operational execution has cost us any time. So, our medium-term goals, we think are absolutely intact. 4

5 What we have to assess is whether there s going to be any delay following these execution issues. Stephen Kelly: Thanks Hans. Next question. Hans Lettiner: And maybe thank you. Operator: The next question is from Stacy Pollard from JP Morgan, please go ahead. Stacy Pollard (JP Morgan): Hi, thank you very much. Just looking into North America, do you mind splitting out the performance for the core business? I believe and maybe just confirm that I believe it will still run separately for at least fiscal year 2018, just to check if that s correct? And then was Intacct growth slowing, or was that quite consistent? And then a second quick one: what exactly can you detail out in the Enterprise business for us, if anything? Stephen Kelly: Maybe I ll start, Stacy. I think, again, with the early analysis we ve done, we are confident in terms of achieving the double-digit growth overall in North America. We did call out the Enterprise potential slippage there that happened in the second quarter, but all the other areas of the business, including the core I think Steve touched on the connected cloud, Sage Business Cloud, and Sage Intacct as good performers. In terms of the Enterprise business, the second part of your question, again, there was two regions which were affected in terms of the USA, as I ve touched on, and also Africa and the Middle East and it was just contract slippage. But as I said, we saw no material change in terms of the competitive landscape. And then obviously, we ll give you much more on 2 nd May. Next question, Cecilia? Operator: Our next question is from Steven Goulden from Deutsche Bank, please go ahead. Steven Goulden (Deutsche Bank): Hi there. I was just wondering if you could give us a little bit more colour on the subscriptions slowdown. Does this reflect may be a slowdown in progress on the conversion of maintenance to subscription contracts? Anything you could give us there would be helpful. And secondly, on a sort of related point, just sort of backing out the numbers within recurring, it seems that maintenance revenue is probably falling, a ballpark 10%. Could you give us any colour there? Stephen Kelly: Yeah, maybe Steve, do you want to handle that for Steven? Stephen Hare: Yeah. So, I think the subscription growth has still been 25%. Obviously, previously, it had been growing up in the 30s. As far as we can tell, because this is, as I said, inconsistent execution, on the Sage 50 and Sage 200 base in the US, we ve established strong and consistent momentum. We are replicating what we are doing in the US in the UK and, indeed, in other countries, but we ve seen less consistency. Now you may recall, if you go back a year or so ago, actually, we had inconsistency in the US initially, particularly around Sage 200. And then the last few quarters, that s settled down into a regular pattern. What we re seeing in the UK is inconsistency, similar to what we saw early in the journey in the US. So, we think from our initial analysis that we know what we need to do, but we are obviously we said that in the first quarter we taken people off the phones to train them, and we expected to see momentum in the second quarter, and that hasn t come through. But we think we know how to fix this. 5

6 On the MNS, yes, obviously, we are seeing MNS decline substitution as we migrate to subscription. But from a retention perspective, we re not seeing any sort of change in dynamics. So we are not seeing any leakage. MNS is only declining because it s getting substituted with subscription. Stephen Kelly: Thanks, Steven. Next question? Operator: Our next question comes from Mohammed Moawalla from Goldman Sachs, please go ahead. Mohammed Moawalla (Goldman Sachs): Great, thank you. I was wondering, Stephen, if you could comment on whether more deeper kind of go-to-market or kind of organisational changes are required in the UK, particularly as you kind of drive more of the subscription, in terms of kind of getting the execution back on track? Stephen Kelly: Yeah, Mo, thanks for the question. I think it s a fair question, but I think it s probably just inappropriate at this stage, because we ve done the early analysis. We ll be putting our plans together and continuing the analysis, and we ll come back and share with you what the recovery plan is. That could include how we actually organise ourselves for success. So, we ll definitely be sharing some of that with you when we see you and stand up on 2 nd May. Mohammed Moawalla: Right, and just as a follow-up, in terms of you ve obviously been investing in sales and marketing across the group, but do you feel the need that you may need to also kind of either step up shorter-term investments in regions like the UK to try to kind of get things back on track? Stephen Kelly: Yeah. I think, again, part of the work we started but we certainly haven t completed, and we will be continuing to do is just to look at the recovery plans. Part of that you re absolutely right is looking at sales marketing and making sure we get the effectiveness. I think we ve been, and we will continue to be very transparent, with you about what s worked well and what has worked less well. And looking at return on investment in marketing areas is absolutely a pivotal area for us to focus on. Mohammed Moawalla: Okay. Thank you. Operator: As a reminder, to ask a question, please press *1 on your telephone keypad. We will pause for a moment to allow everyone to signal. We will now take our next question from Neil Steer from Redburn. Please go ahead. Neil Steer (Redburn Partners LLP): Hi. Thanks for taking my question. Obviously, you are effectively making an adjustment to the revenue guidance in the full year revenues, yet maintaining the margin guidance. So, where are you taking cost out in order to maintain the operating margin? And I suppose, ultimately, if, in the second half of the year the growth is also consistent at just above 6% and there was no further improvement, would you also be able to maintain the margin guidance at 27.5%? Stephen Kelly: Okay. Now maybe, just in terms of the scorecard provisionally that we ve shared today, is the margins were in line with management expectations and the cash generation conversion was where we are expect it to be. So Steve, in terms of the whole year? 6

7 Stephen Hare: Yeah. So I think, as we said in the past, we already have momentum on cost reduction from G&A, from the back office. We said previously and reiterated at the Capital Markets Day that we were also now starting to look to drive greater efficiency also in the go-to-market area. So, this is not about scaling back sort of front-line quota-bearing sales or front-line service people, but it is about making the support structures, including in go-to-market, more efficient. So, we had already started those programmes and they will continue, and we feel confident, even at this lower guidance, that we can maintain the margin, given the momentum we have on cost reduction. Stephen Kelly: Thanks, Neil. Neil Steer: Thanks. Stephen Kelly: Maybe one more question? Operator: There are no further questions, thank you. Stephen Kelly: No, fine. Thank you. Operator: Thank you. That will conclude Stephen Kelly: So, Cecilia, I ll just close the call. I really appreciate you joining it, particularly at short notice. And we do look forward to seeing you on 2 nd May, where we ll have further analysis done, and we can share with you the plan for the second half, and also for the business on a go-forward basis. Thank you very much. Operator: Thank you. That will conclude today s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect. [END OF TRANSCRIPT] 7