Continuing strong performance and business transformation

Strong performance

• Achieved organic revenue growth of 6.1% (FY15: 6.0%) and the fastest rate of recurring revenue growth for a decade of 10.4% (FY15: 9.0%);
• Software subscription growth of 32.3% (FY15: 28.9%), in line with the planned transition and planned decline in SSRS revenue of 8.5% (FY15: decline of 0.7%);
• Customers embracing closer subscription relationships with 46% increase in software subscription contracts to just over one million (FY15: 690,000) and an increase in retention rates to 86% (FY15: 84%);
• Accelerating revenue growth in Europe, Africa and Brazil; slower performance in Asia (one off regulatory change in the prior year); growth in North America consistent with last year;
• Underlying cash conversion at 100%, supporting free cash flow of £254m and the 8% increase in full year dividend to 14.15p.

FINANCIAL SUMMARY1	FY16	FY15	Change
Organic revenue	£1,567m	£1,477m	+6.1%
–       Recurring revenue	£1,092m	£989m	+10.4%
–       Processing Revenue	£204m	£192m	+6.1%
–       SSRS Revenue	£271m	£296m	-8.5%
Organic operating profit	£427m	£391m	+9.2%
Organic operating profit margin	27.2%	26.5%	+70bps
Underlying basic EPS	27.8p	25.5p	+9.0%
Underlying cash conversion	100%	106%	-6.0%
Ordinary dividend per share	14.15p	13.10p	+8.0%
STATUTORY SUMMARY	FY16	FY15	Change
Revenue	£1,569m	£1,436m	+9.3%
Operating profit	£300m	£297m	+1.1%
Profit before tax	£275m	£276m	-0.4%
Basic EPS	19.28p	18.11p	+6.4%

1. Organic operating profit is stated before non-recurring items (exceptional costs). Unless otherwise stated, all revenue growth measures referred to in the CEO report are stated on the constant exchange organic basis. Refer to Appendix II on page 18 for information on non-GAAP measures and note 3 of the financial statements for details of items excluded from underlying operating profit.

Business Transformation

• The transformation remains on track and progress has been made in FY16 with a targeted organic operating margin of 27.2% (FY15: 26.5%) achieved for the full year;
• Phase one of the transformation is now complete:
• General and administrative (G&A) expense as a proportion of revenue has reduced to 16.5% (FY15: 18.7%);
• Annualised savings of £51m secured within G&A which are being reinvested into go-to-market functions of sales and marketing, with an exceptional cost of £110m recognised in FY16 (£76m of which is associated to G&A savings);
• Senior Management Team is now established to drive forward the next phase of the transformation.

• Phase two of the transformation begins in FY17:
• Increased focus on new customer acquisition through innovative new product launches and continued user experience improvements;
• Continued investment for growth through sales and marketing: we are expanding the Customer Business Centres (CBC) to provide integrated digital marketing, sales and services;
• FY17 annualised cost savings of at least £50m identified with payback of less than two years.

Success in our technology strategy

• Sage One paying subscriptions increase of 81% to 313,000 subscriptions. 54% increase in Sage One revenue in the year;
• X3 revenue growth of 18% in the year and an increase in paying customers of 25%;
• Sage Live launched in two countries in February 2016 and was awarded most innovative product of 2016 by Salesforce.com;
• Sage 50 Accounts delivered triple digit organic subscription software revenue growth in the UKI, US and Canada;
• Sage 50, 100 and 300 cloud innovation and product delivered to market;
• Sage Pegg launch with users in 125 countries – the world’s first Chatbot for an accounting engine.

Stephen Kelly, Chief Executive Officer said:

“FY16 saw Sage continue to deliver on the commitment made at our June 2015 Capital Markets Day to perform and transform. The organic revenue growth of 6% is driven by higher quality recurring revenue, which grew at the fastest rate in a decade. The strategy is working – with customers embracing closer relationships with Sage, evidenced by a 46% increase in the number of subscription contracts and a contract retention rate of 86%.

Phase one of the transformation programme has been successfully delivered. For phase two we have ensured that we have the core management team, processes and culture to deliver the best technology ecosystem for our customers – those business builders that drive the world’s economy, creating jobs, growth and prosperity. Phase two of the transformation will continue to be non-linear and focus on driving more technology innovation with increasing focus on new customer acquisition as well as continuing to improve execution against the strategy for Business Builders. We are already starting to see Sage drive faster innovation, a more customer-obsessed DNA and colleagues making a difference in all of our communities through the Sage Foundation.

For FY17, the second full fiscal year of our transformation, our full year guidance for FY17 is for at least 6% organic revenue growth and at least 27% organic operating margin. We will continue to front-load investment in growth in H117, consistent with our execution last year. Consequently, we anticipate stronger H2 growth and accelerating momentum as we exit FY17.”

Said Anton van Heerden, Executive Vice-President Africa & Middle East:

“I am extremely proud of the team in Africa and the Middle East for delivering exceptional results in FY16 despite the tough external economic challenges we faced.  Our Net Promoter Score is the highest in the Sage Group proving that our customers are truly at the centre of our business. By putting our customers first, we also increased our market share across the region.  We are looking forward to delivering outstanding growth in the new year as we further revolutionize our business and expand our footprint in Africa.”