Sage Business Cloud: Acceleration Starts Here
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The Sage Group PLC — Annual Report and Accounts 2017 and Accounts — Annual Report PLC The Sage Group Sage Business Cloud: Acceleration starts here Annual Report and Accounts 2017 We’ve invested for the future… Sage is the global market leader for technology that helps businesses of all sizes manage everything from money to people – whether they're a start-up, scale-up or enterprise. Our mission is to free Business Builders from the burden of administration, so they can spend more time doing what they love; because when Business Builders do well, we all do. Financial highlights Organic revenue growth Organic operating margin Underlying basic EPS growth % 6.6% 28.0% % 3.5% % 28.0 % 27.1 6.7 6.6 % % 9.0 3.5 16 17 16 17 16 17 Statutory revenue growth Underlying cash conversion Statutory basic EPS growth % % % 19.1% 95% 100 44.2% 95 % 19.1 44.2 % 9.3 % 6.4 16 17 16 17 16 17 About our non-GAAP measures and why we use them Full definitions of underlying and organic can be found within note 2 Throughout the Strategic report we quote two kinds of non-GAAP of the financial statements. measure: underlying and organic. We use these measures in Reconciliations of statutory revenue, operating profit and basic monitoring performance and incentivising management. earnings per share to their underlying and organic equivalents are in Underlying measures allow management and investors to compare the Financial and operating review starting on page 34. performance without the potentially distorting effects of foreign exchange movements, one-off items or non-operational items. Organic measures allow management and investors to understand the like-for-like performance of the business. Strategic report Strategic Acceleration starts here. Governance Our Capital Markets Day in 2015 signified the start of a transformation process which focused on developing the organisational alignment, Financial statements leadership, brand and innovation required to accelerate our strategy. The successful execution of this transformation has provided us with the platform for accelerating, sustainable growth. And it all starts with Sage Business Cloud. Contents Strategic report Governance Financial statements 2 Investing for the future 63 Chairman’s introduction to 110 Independent auditor’s report to the 12 Chairman’s statement corporate governance members of The Sage Group plc 14 Our business model 64 Board of Directors 119 Group financial statements 16 In conversation with the Chief 66 Executive Committee 124 Notes to the Group financial Executive and Chief Financial Officer 68 Corporate governance report statements 20 Our strategy 84 Directors’ remuneration report 178 Company financial statements 32 Our Key Performance Indicators 104 Directors’ report 185 Glossary 34 Financial and operating review 187 Shareholder information 40 Corporate responsibility 41 People 44 Business Builders 46 Community 48 Environment 52 Principal risks and uncertainties The Sage Group plc | Annual Report & Accounts 2017 1 We’ve invested for the future… Transforming our business Developing our model... We’ve improved the margin profile ...moved to a subscription‑based through extensive cost savings… business model... General & Administration ("G&A") expense Software subscription revenue as a % of as a % of organic revenue organic revenue 37% 13.8% 19.1% 37% 13.8% 22% FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 ...acquired new ...and maintained focus on our customers at scale... existing customer base. Cloud Annual Recurring Revenue (£m)* Net Promoter Score** £300m 25 300 25 3 2 FY14 FY15 FY16 FY17 Q115 FY15 FY16 Q417 * Annual recurring revenue (“ARR”) is the value of all components of recurring revenue, annualised for the ensuing year. Cloud ARR includes the contributions of Sage People and Sage Intacct in addition to Sage One, Sage Live, the cloud version of Sage X3 and the cloud-enabled versions of the Sage 50 and Sage 200 families. ** NPS is measured by an external company, Medallia, following the industry prescribed process. This is the first year that we have disclosed NPS and quarterly fluctuations may be expected. 2 The Sage Group plc | Annual Report & Accounts 2017 We’ve invested for the future… Strategic report Strategic Governance ...whilst delivering a compelling investment case Financial statements Higher quality revenue Superior Acceleration operating margin starts here. – 78% of organic revenue is recurring – £59m annualised In FY18 we are changing the – 37% of organic cost savings definition of organic to include revenue is from – G&A expense as a the impact of the acquisitions subscription contracts percentage of revenue of Intacct (now Sage Intacct) and Fairsail (now Sage People). – 9.0% growth in reduced by 360 bps Combined, they are expected organic recurring revenue to 13.8% to contribute around 1% of – 6.6% organic growth. On this basis we revenue growth will be raising our organic revenue growth guidance – 86% renewal rates to around 8%. We expect to continue to Strong cash flow Progressive dividend achieve cost efficiencies that will be more than sufficient to – Underlying cash conversion – We remain one of offset any losses in the of 95% the very few FTSE 100 acquired businesses as they businesses that have scale. We are therefore – Free cash conversion of delivered an increased confident of delivering an revenue of 15% ordinary dividend every organic operating margin year since 1999 of around 27.5% in FY18. The Sage Group plc | Annual Report & Accounts 2017 3 We’ve invested for the future… Welcome to Sage Business Cloud Small and medium-sized businesses are the lifeblood of the economy, driving over two thirds of job creation. 80% People Payments and of these Business Builders work every weekend, with 50% and Payroll Banking working more than 50 hours per week. At Sage we help the real heroes of the economy by using the best technology to offer them integrated software solutions that increase Golden efficiency and insight, freeing up their time so that they Triangle can run their business more effectively. We are the only worldwide company that can offer a complete suite of cloud business management solutions following the journey of a business all the way from start-up, to scale-up, through to enterprise, across the Golden Triangle. All of these cloud solutions can now be accessed through Sage Business Cloud, the one and only cloud business Accounting management platform companies will ever need throughout their business journey. The cloud solution for Launched in October 2017, Sage Business Cloud is designed to start‑up to enterprise support companies of all sizes across a range of verticals. Sage Business Accounting Cloud delivers a powerful set of cloud services including Accounting, Financials, Enterprise Management, People, Payroll, Payments and Winning in the market products Banking, as well as marketplace apps that can be provisioned to match Our cloud accounting solutions allow us to win the exact needs of any business. in the market. Cloud-led technology attracts start-ups to financial software and provides the catalyst for larger Business Builders Sage Business Cloud uses artificial intelligence (AI) and collective to review their existing software and migrate intelligence as technology catalysts to power the cloud products, driving to a Sage cloud solution. intelligent automation, simplicity and ease of use for all our customers, Accounting partners, ISVs and developers. (previously Sage One) Serving customers who need a powerful, essential accounting solution that will enable them to take full control of their finances and help them reduce time spent on manual business administration and navigating complex, expensive accounting tools. Sage Accounting is accessible across any device (smartphone, tablet, laptop, PC) and includes technology advancements in mobile and chatbot technology, enabling day-to-day 4 The Sage Group plc | Annual Report & Accounts 2017 Strategic report Strategic Accounting People Payments and Payroll and Banking Governance Winning in Customer Enterprise the market for life 200k businesses Enterprise Management 300c Financial statements Scale‑up 200c People Pay 5m businesses Intacct 100c Payroll Payments Financials 50c Start‑up 77m businesses Accounting balance visibility, invoice and expense technology, services and not-for-profit can benefit from the best of both worlds, management and next generation verticals. The solution allows for process- retaining the familiarity and functionality of conversational accounting. automation, rich financial and operational desktop, combined with the flexibility and insight, cutting-edge features and seamless automation of the cloud. Financials integration with the customer’s existing (previously Sage Live) application ecosystems. People and Payroll Sage People, our Payroll & Human Capital Serving customers beyond principal Enterprise Management Management (“HCM”) solution, is simple, accounting needs, Sage Financials adds (previously Sage X3) secure and efficient; helping our customers functionality to support more complex to remain compliant, pay their employees financial processing needs. Sage Financials is Sage Enterprise Management is not your accurately and on time, and to deliver a a hub that, when combined with other Sage typical ERP solution. It's a faster, simpler and great employee experience. Business Cloud products and marketplace more flexible industrial-strength business applications, delivers a full end-to-end view of management solution for globally connected, Payments and Banking