TIDMSGE
RNS Number : 8218M
Sage Group PLC
02 May 2018
The Sage Group plc unaudited results for the six months ended 31
March 2018
Wednesday 2 May 2018
Slower H1 recurring revenue: stronger H2 outlook
Operating performance overview
-- No material changes to the financial information or guidance
contained in the announcement made on 13 April 2018, with the
exception of cash conversion, which has improved to 99%;
-- Organic(1) revenue growth of 6.3% (H1 17: 7.4%), reflecting
recurring revenue growth of 6.4% (H1 17: 11.1%), underpinned by
software subscription growth of 25.3% (H1 17: 30.6%) and software
subscription penetration of 44% (H1 17: 37%). SSRS revenue growth
of 7.1% (H1 17: decline of 7.3%) and processing revenue growth of
2.1% (H1 17: 11.3%).
-- Continuing momentum in Sage Business Cloud, with annualised
recurring revenue (ARR) of GBP336m, growing at 57%;
-- Organic operating profit margin(2) of 24.5% consistent with
front-loading investment in H1 and reduction in G&A expense to
13.8% (H1 17: 15.2%(3) );
-- Strong cash conversion of 99%, with free cash flow of 17% of
revenue, and interim dividend of 5.65p (8.2% increase), reinforcing
business model fundamentals;
-- As announced on 13 April 2018, FY18 guidance revised to
around 7% organic revenue growth from around 8% organic revenue
growth and unchanged organic operating profit margin of around
27.5%, with clear plans in place to meet FY18 guidance.
FINANCIAL SUMMARY H1 18 H1 17 Change
------------------------------------ -------- -------- ---------
Organic revenue(4) GBP908m GBP854m 6.3%
- Recurring revenue GBP707m GBP665m 6.4%
- Processing revenue GBP43m GBP42m 2.1%
- SSRS revenue GBP158m GBP147m 7.1%
Underlying operating profit(5) GBP222m GBP224m (0.7%)
Underlying operating profit margin 24.5% 25.3% (80bps)
Underlying basic EPS 14.25p 14.12p 0.9%
Underlying adjusted EPS(6) 14.25p 12.33p 15.5%
Underlying cash conversion 99% 104% (500bps)
Ordinary dividend per share 5.65p 5.22p 8.2%
------------------------------------ -------- -------- ---------
STATUTORY SUMMARY H1 18 H1 17 Change
------------------------------ -------- -------- -------
Revenue GBP899m GBP840m 7.1%
Operating profit GBP186m GBP180m 3.1%
Profit before tax GBP171m GBP180m (5.0%)
Basic EPS (total operations) 12.50p 13.54p (7.6%)
------------------------------ -------- -------- -------
Progress in the year to date
-- Revenue growth in H1 18 was impacted by inconsistent
operational execution in driving recurring revenue growth,
particularly in the UK, and some contract licence slippage in the
Enterprise segment in Africa Middle East and USA;
-- The root causes of execution issues have been identified and
management has already made changes, in order to drive
subscription-based revenue acceleration in H2 18 and beyond, and
improve visibility in the Enterprise segment;
-- Operational execution for the majority of geographies remains
robust, with particular success in North America, delivering double
digit growth, reflecting continuing progress across USA, Canada and
Sage Intacct, balanced by slippage in Enterprise Management
(formerly Sage X3) contracts in the USA;
-- Strong momentum in acquired businesses of Sage Intacct and
Sage People reflects the carefully sequenced integration of these
businesses;
-- The market opportunity for Sage, as outlined at Capital
Markets Day 2018 (CMD), remains unchanged.
Outlook
On 13 April 2018, Sage announced that Group guidance for FY18
was being revised to around 7% organic revenue(7) growth from
around 8% organic revenue growth. There has been no change to
organic operating profit margin guidance at around 27.5% for
FY18.
The rolling mid-term guidance remains that organic revenue
growth will reach 10% on a sustainable basis and organic operating
profit margins will be at least 27%. Further cost savings of 500bps
will be delivered over this period and either reinvested for growth
or realised as an increase to operating profit margin. Over the
long-term, Sage has an aim of achieving organic operating profit
margins of at least 30%.
Stephen Kelly, Chief Executive Officer said:
"The significant market opportunity, as outlined at Capital
Markets Day, is compelling and unchanged. Sage Business Cloud
remains the most comprehensive cloud platform in the market to
capitalise on this opportunity. Organic revenue growth in H1 18 was
around GBP5m below our expectations, due to slower and more
inconsistent sales execution than we had planned for. We have
already started the implementation of robust plans to address these
execution issues and to accelerate our growth through high-quality
recurring revenue throughout the rest of FY18 and beyond. The
revised revenue guidance for FY18 reflects the H1 18 performance,
but also our absolute commitment to ensuring we focus on driving
high-quality subscription revenue, aligned with the strategy."
About Sage
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. We do this
through Sage Business Cloud - the one and only business management
solution that customers will ever need, comprising Accounting,
Financials, Enterprise Management, People & Payroll and
Payments & Banking.
1 Adjustments are made to the comparative period to present
acquired businesses as if these had been part of the Group
throughout the period. See a full definition of organic revenue and
underlying revenue in appendix II.
2 Organic operating profit margin is presented for the current
period only to allow comparability to current period underlying
operating profit margin.
3 The H1 17 comparative is stated on a continuing basis.
4 All revenue numbers throughout this document are organic
unless otherwise stated.
5 In FY18, there is no difference between organic and underlying
operating profit margin.
6 Underlying adjusted EPS neutralises the impact of significant
acquisitions and disposals by excluding current period acquisitions
and current and prior period disposals and by including prior year
acquisitions in the comparable period based on the margin achieved
by the acquired business in the prior year for the post-acquisition
period.
7 The revised organic definition for FY18 is included in
appendix II.
NB: As a result of rounding throughout this document, it is
possible that tables may not cast and change percentages may not
calculate precisely.
For more information, visit www.sage.com
Enquiries:
The Sage Group plc FTI Consulting
+44 (0) 191 294 3457 +44 (0) 20 3727 1000
Lauren Wholley, Investor Relations Charles Palmer
Amy Lawson, Corporate PR Dwight Burden
An analyst presentation will be held at 8.30am today at London
Stock Exchange plc, 10 Paternoster Square, London, EC4M 7LS. A live
webcast of the presentation will be hosted on
www.sage.com/investors, dial-in number +44 (0) 330 336 9105, pin
code: 1759100#. A replay of the call will also be available for one
week after the event: Tel: +44 (0) 808 101 1153, pin
code:1759100#
Chief Executive Officer's review
Operating Performance
Group organic revenue increased by 6.3% (H1 17: 7.4%) for the
first six months of the year, reflecting mixed performance. Some
areas of the business executed well against the strategy to deliver
high quality subscription growth. In other areas, there was
inconsistent operational execution and corrective action has
started to implement recovery plans.
Recurring revenue growth of 6% (H1 17: 11%), underpinned by
software subscription growth of 25% (H1 17: 31%), was impacted in
particular by Northern Europe, although at a Group level the
increasing penetration of software subscription revenue to 44% of
total revenue (H1 17: 37%) and recurring revenue of 78% of total
revenue represents continuing progress in the strategy. Contract
renewal rates (by volume) remain strong at 86% and there is a
continuing focus on improving these further.
Growth in SSRS of 7% (H1 17: decline of 7%) was driven by strong
performance in services and training (14% growth), with growth in
Enterprise Management licences at 12%, with some isolated contract
slippage, of which much is expected to be recovered in H2 18. Other
non-Enterprise Management licences declined 6% as expected.
Processing revenue growth of 2% (H1 17: 11%), was driven mainly by
Northern Europe and North America.
Whilst overall revenue growth in H1 18 was below management's
expectations by around GBP5m, this was largely due to execution
issues in the UK on cloud connected solutions and bundled service
offerings which increased services revenue at the expense of
recurring revenue. These service bundles have been discontinued.
There was also slippage of opportunities in the Enterprise segment
in Africa Middle East and USA which are expected to be largely
recovered in H2.
Growth in other regions was in line with, or exceeded,
expectations. North America delivered double digit growth,
reflecting continuing progress made by management across the USA,
Canada and Sage Intacct, with particular success in driving growth
through cloud connected solutions, balanced as previously
mentioned, by slippage in Enterprise Management contract licences.
Central Europe and Australia have also performed well, both
recording double-digit growth. France, Iberia and Latin America's
performance is in line with expectations, with France, as planned,
returning to growth in Q2 18, driven by new leadership in the
region.
Sage Business Cloud revenue showed further momentum with cloud
ARR of GBP336m in H1 18(8) , growing at 57%, representing GBP131m
of ARR in cloud native solutions (driving new customer
acquisition), growing at 37% and GBP205m of ARR in cloud connected
solutions (customer for life), growing at 72%. Sage Business Cloud
products continued to receive positive market reaction in H1 18,
winning multiple awards. Sage Accounting (formerly Sage One) also
delivered 42% ARR growth with good progress in UK and South
Africa.
Within cloud native products, the acquired businesses of Sage
Intacct and Sage People (formerly Fairsail) showed strong
continuing momentum, with ARR growing at 31% and 62% respectively,
as management continues the carefully sequenced integration of
these businesses.
Group organic operating profit margin of 24.5% is in line with
the plans to front load investment in H1, as well as absorbing, as
anticipated, the losses from cloud product acquisitions completed
in FY17, equivalent to 200bps of extra investment. EBITDA margin
for H1 18 is 26.9% (H1 17: 27.5%).
8 Sage Business Cloud organic revenue recognised in H1 18 was
GBP164m.
9 EBITDA is based on the underlying operating profit, adjusted
for underlying amortisation, depreciation and share based payment
charges.
Areas of focus for immediate improvement
The H1 18 performance reflects execution issues as opposed to
any impact from external competitive dynamics or market conditions.
The root cause analysis is complete and corrective actions are
underway to address these issues to drive acceleration in H2 18 on
a monthly basis and into FY19.
There are three areas of focus that are central to achieving
immediate improvement in the business:
-- Focus on Subscription;
-- Consistency in Enterprise; and
-- Leadership.
In each of these categories there are already regions and
products showing significant success in the business: the focus now
is to use these successes as a consistent blueprint across
Sage.
Focus on subscription
With strong cloud products, Sage will continue to embrace a SaaS
sales culture, focusing on customer obsession and a daily sales
cadence to accelerate recurring revenue in order to address the
market opportunity.
How we have addressed the issue
-- Across Sage, Managing Director (MD) incentives have been
selectively re-aligned to further prioritise subscription revenue
growth during H2 18;
-- In Northern Europe:
o A new sales leader was appointed, with focus on implementing
the US playbook to accelerate migration to Sage 50cloud;
o Nearly 100,000 Sage 50 off-plan customers, who represent the
strongest reactivation opportunities and potentially significant
revenue upside, have been identified and are being targeted to
upgrade to cloud connected solutions;
o Bundled service offerings that enhance SSRS revenue at the
expense of recurring revenue have been discontinued.
Where subscription is already working
-- Sage Intacct and Sage People provide the blueprint of a
successful SaaS business that can be embedded throughout Sage over
time;
-- Sage Business Cloud ARR of GBP336m shows the momentum of
subscription, and if an independent company, would place Sage
Business Cloud in the top 15 of SaaS cloud companies in the world
by ARR.
Enterprise Management
A successful Enterprise business involves building a solid and
predictable pipeline with consistent execution, supported by strong
leadership with clear accountability.
Where we have addressed the issue
-- In Africa Middle East and USA, the appropriate leadership
changes in this segment have been made;
-- A global CRM system for Enterprise Management has been
implemented to track all opportunities consistently and accurately.
The priority now is to ensure all salespeople are using the CRM
with disciplined sales methodology;
-- Of the contract licence opportunities that slipped from H1
18, almost GBP1m of the opportunities closed in April.
Where Enterprise Management is already working
Whilst there have been pockets of inconsistency, it is important
to note that the Enterprise Management business remains robust,
with Enterprise Management revenue in H1 18 growing by 17% (licence
growth of 12%). In France, which represents almost half of the
Enterprise Management business, revenue grew by 29%, with further
success in Northern Europe, Germany and Portugal.
Leadership
It is imperative that Sage has the right leaders who have clear
accountability, act with pace and provide alignment between
functions and regions in order to execute flawlessly against the
strategy.
How we have addressed the issue
Since 13 April around 30 senior executives have left the
business in order to simplify the organisation, speeding up
decision making and improving accountability.
Where leadership is already working
There is successful leadership across the organisation, but a
solid example is in North America. The MD was appointed in this
region 18 months ago and in that time has embedded clear leadership
and consistent direction throughout the North American business,
which is emulated by the regional leadership team. This includes
the successful execution of the migration to Sage 50cloud and Sage
200cloud customers. The region is now growing at over 10% (8%
excluding Sage Intacct), compared to 4%, 18 months ago.
Implementing the above plans will provide not just the underpin
for achieving FY18 guidance but also the momentum into FY19 that
will further accelerate subscription growth.
Strategy - the market opportunity
At CMD 2018, we outlined our vision to emerge as the
acknowledged market leader. The market opportunity remains
significant: Sage's total addressable market has a value of $28bn,
with 82m businesses. Competition is fragmented and localised and
there is no consistent global competitor. Typically, in technology
markets, a global category leader eventually emerges and catalysts
of change such as the shift to the cloud, artificial intelligence
and other technology disruption are now accelerating growth and
consolidation in the market. The market is anticipated to grow at
7% in FY 18, under-pinned by growth in cloud software of 13%.
This market opportunity is unchanged and Sage remains well
placed to capitalise on this growth and consolidation. Sage has a
global reach in 23 countries, with a market leadership position in
many of these countries and a diverse management team. Sage also
has the widest breadth of cloud products under Sage Business Cloud
in the market, which can take a business from start-up to
enterprise across Accounting, Financial Management, People &
Payroll and Payments & Banking. The renewed focus on growth
through subscription and recurring revenue will allow Sage to
accelerate to address the significant market opportunity.
Strategy - addressing the market opportunity
Over the next three years, management expects recurring revenue
to increase from 78% of total revenue to between 85% - 90% of total
revenue, driven by subscription, with the remainder comprised of
services and processing revenue. Sage has also guided that over the
next three years, Sage plans for organic revenue growth to reach
10% on a sustainable basis, under-pinned by Sage Business Cloud as
it is rolled out into all regions.
Progress in strategy
Customers for Life (C4L) - Driving growth through the installed
base
As highlighted at CMD 2018, the profile and growth opportunity
through the installed base is categorised as follows:
-- Re-activating and migrating the off-plan base of customers
from desktop software to the latest cloud connected product;
-- Migrating on-plan customers to subscription and the cloud;
-- Migrating on-premise subscription customers to the cloud;
-- Focusing on customer obsession to further increase retention
rates and provide further value to customers on a cloud
solution.
Progress made in H1 18 reflects:
-- 72% increase in ARR on cloud connected solutions in H1 18, now representing over GBP200m;
-- Particular success in North America where cloud connected ARR
grew by 53%, representing GBP129m of ARR;
-- Contract renewal rates by volume remain strong at 86% and
there is focus on improving these further;
-- Software subscription revenue now represents 44% of total revenue (H1 17: 37%).
Focus in H2 18 reflects continuing the momentum in the already
successful geographies, as well as driving growth throughout other
geographies as Sage continues the roll-out of these solutions.
Winning in the Market - driving new customer
acquisition(NCA)
New customer acquisition has been driven through Sage Business
Cloud solutions of Sage Accounting (formerly Sage One), Sage
Financials (formerly Sage Live), the cloud version of Enterprise
Management (formerly Sage X3), Sage Intacct and Sage People
(Fairsail). Sage Business Cloud also includes cloud connected
solutions, discussed above. In addition, NCA from on-premise
solutions continues to be driven through Enterprise Management.
Progress in H1 18 reflects:
-- Total Sage Business Cloud ARR of GBP336m, growing at 57%;
-- Enterprise Management revenue growth of 17%;
-- Continuing momentum in acquired businesses:
o Sage Intacct delivered ARR growth of 31% in H1 18, driven by
the experienced management team, and has been voted the best place
to work in the San Francisco Bay area by several independent
sources. Sage Intacct is also leveraging the wider Sage family: 14
existing Sage partners are now exclusive sellers of Sage Intacct as
their cloud solution;
o Sage People delivered ARR growth of 62% in H1 18, with four
deals signed over GBP100k ACV in the half, with success in
migrating existing Sage customers in the USA from legacy products
to the cloud-based Sage People platform. Sage People has also been
launched in Germany, Canada and Australia in H1 18, which will
drive further momentum.
The focus for H2 18 is to accelerate growth in subscription
through Sage Business Cloud.
Revolutionise Business - Sage Business Cloud
In October 2017, the Group launched Sage Business Cloud - the
one and only business management platform that customers will ever
need from start-up to enterprise. Sage Business Cloud offers a
powerful set of cloud services, across Accounting, Financial
Management, People & Payroll and Payments & Banking cloud
products, supported by an ecosystem of ISV partners, a Sage
developer platform for APIs, artificial intelligence and the Pegg
bot framework. No other competitor can offer this breadth of cloud
solutions and is equally compelling for new and existing customers,
allowing them to join the platform and grow at any stage of their
business journey.
Progress in H1 18 reflects:
-- Sage Business Cloud launches in Northern Europe, USA and
Canada in October 2017 with further roll-outs in Europe throughout
H1 18.
-- Continued improvements to both Sage Business Cloud products and the platform;
o Under the new Stripe agreement, customers can set up to
receive mobile and web payments in a matter of minutes, rather than
days;
o The integration of Go Cardless into Sage 50 significantly
increases automation, saving customers one day a month in admin and
halving debtor days;
o Sage payroll customers can now access cloud connected
services, enabling customers to manage, store and share information
with their colleagues in line with GDPR, as well as automating
payroll processes and driving efficiencies across their
business.
Capacity for growth - driving superior margins
Management continues to invest in areas of the business that
will yield a strong return on investment, with a focus on variable
spend as opposed to fixed cost to allow agility of investment
decision-making.
Progress in H1 18 reflects:
-- Around 200bps invested in acquired businesses of Sage Intacct
and Sage People which continue to show momentum, with ARR growth of
31% and 62% respectively;
-- In H1 18, G&A expense has reduced to 13.8%, down from
15.2% in H1 17, reflecting continued savings, with an acceleration
of cost savings expected in H2 18.
In H2 18 the aim is to drive further cost savings through
financial and operational discipline across the whole business.
Since 13 April 2018, we have exited 30 senior executives to
simplify decision making and accelerate execution.
Capital allocation
As part of the strategy, management executed on M&A and
disposals during FY17. The transformation included portfolio
rationalisation, with the disposal of North American Payments, and
the acquisitions of Compass, Fairsail (Sage People) and Intacct.
Going forward, Sage will look to continue to invest and accelerate
the execution of the strategy, with a relentless focus on organic
growth, driven by recurring revenue, with bolt-on acquisitions of
complementary technology and partnerships that enhance or
complement Sage Business Cloud, with one small acquisition
completed in the first half of the year.
Sage remains committed to maintaining rigorous financial
discipline and delivering shareholder returns with net debt :
EBITDA leverage of 1.4x, close to the mid-point of the 1-2x
corridor and trending towards 1x at the end of H1 18.
Summary
The strategy as outlined at CMD is strong and the market
opportunity exists for Sage to accelerate quality subscription
growth to become the acknowledged market leader. H1 18 growth of
6.3% was due to slower and less consistent execution than
anticipated. There have been no changes in the external market
conditions or competitiveness of Sage products. Sage has
established clear, robust plans to address the identified execution
issues and to accelerate through subscription growth and drive
recurring revenue throughout the rest of FY18 and beyond.
Looking ahead, Sage will continue to make progress in line with
the strategy, reinforcing the investment case of high quality
recurring revenue, superior operating profit margins, strong free
cash generation and a progressive dividend.
Chief Financial Officer's review
Group performance
Sage achieved organic revenue growth of 6.3% (H1 17: 7.4%) and
an organic operating profit margin of 24.5%. Recurring revenue
growth of 6.4% in H1 18 (H1 17: 11.1%), includes software
subscription growth of 25.3% (H1 17: 30.6%).
The organic definition neutralises the impact of foreign
currency fluctuations and includes the contributions of acquired
businesses from the beginning of the financial year following their
year of acquisition. Adjustments have been made to the comparative
period to present acquired businesses as if these had been part of
the Group throughout the entire period. Contributions from acquired
businesses are excluded in the year of acquisition. The underlying
definition neutralises the impact of foreign currency fluctuations
but includes the contribution from current and prior period
acquisitions, discontinued operations, disposals and assets held
for sale. A reconciliation of underlying operating profit to
statutory operating profit is shown on page 14.
Statutory figures below are based on continuing operations
including the impacts of acquisitions and disposals but excluding
discontinued operations.
Revenue
STATUTORY ORGANIC
----------------------------- -----------------------------
H1 18 H1 17 Change H1 18 H1 17 Change
-------------------- --------- ------- -------- -------- -------
Northern Europe GBP190m GBP180m 6% GBP191m GBP183m 4%
Central & Southern
Europe GBP302m GBP282m 7% GBP302m GBP288m 5%
North America GBP274m GBP241m 13% GBP282m GBP255m 10%
International GBP133m GBP137m (2%) GBP133m GBP128m 4%
Group GBP899m GBP840m 7% GBP908m GBP854m 6%
-------------------- --------- --------- ------- -------- -------- -------
Operating profit
STATUTORY UNDERLYING
---------------------------- ----------------------------
H1 18 H1 17 Change H1 18 H1 17 Change
-------- -------- -------- -------- -------- -------- --------
Group GBP186m GBP180m 3.1% GBP222m GBP224m (0.7%)
Margin 20.7% 21.4% (70bps) 24.5% 25.3% (80bps)
-------- -------- -------- -------- -------- -------- --------
Statutory operating profit is stated after non-recurring costs
incurred relating to business transformation in FY17 and recurring
costs relating to amortisation of acquisition related intangible
assets and other M&A activity related charges.
Revenue mix
Segmental reporting
RECURRING REVENUE PROCESSING REVENUE SSRS REVENUE
--------------------------- ------------------------- ---------------------------
ORGANIC H1 18 H1 17 Change H1 H1 Change H1 18 H1 17 Change
18 17
------------------ --------
Northern
Europe GBP145m GBP145m (1%) GBP19m GBP19m 2% GBP27m GBP19m 46%
Central &
Southern
Europe GBP232m GBP223m 4% - GBP1m (100%) GBP70m GBP64m 8%
------------------ -------- -------- ------- ------- ------- ------- -------- -------- -------
Total Europe GBP377m GBP368m 2% GBP19m GBP20m (3%) GBP97m GBP83m 17%
North America GBP230m GBP203m 13% GBP16m GBP15m 3% GBP36m GBP37m (2%)
International GBP100m GBP94m 8% GBP8m GBP7m 16% GBP25m GBP27m (10%)
-------- -------- ------- ------- ------- ------- -------- -------- -------
Group GBP707m GBP665m 6% GBP43m GBP42m 2% GBP158m GBP147m 7%
% of total
organic revenue 78% 78% 5% 5% 17% 17%
------------------ -------- -------- ------- ------- ------- ------- -------- -------- -------
Recurring revenue
Sage delivered recurring revenue growth of 6% (H1 17: 11%),
driven by the increase in software subscription revenue of 25% (H1
17: 31%), in line with the transition to a subscription model.
Contract renewal rates remain strong at 86% (H1 17: 86%) with
recurring revenue representing 78% of organic revenue (H1 17: 78%).
Software subscription penetration is now 44% of total revenue (H1
17: 37%).
Processing revenue
Processing revenue growth of 2% (H1 17: 11%) is largely driven
by progress in Northern Europe and North America.
SSRS revenue
SSRS revenue grew by 7% (H1 17: decline of 7%) due to strong
performance in professional services and training and growth in
Enterprise Management.
Performance - European regions
ORGANIC REVENUE GROWTH H1 18 H1 17
--------------------------- ------ ------
Northern Europe +4% +8%
--------------------------- ------ ------
Central Europe +11% +8%
France +1% +1%
Iberia +7% +8%
Central & Southern Europe +5% +5%
--------------------------- ------ ------
Total Europe +5% +6%
--------------------------- ------ ------
Revenue in the European regions grew by 5% overall in H1 18 (H1
17: 6%). Within Europe, growth in Northern Europe was impacted by
inconsistent sales execution in driving recurring revenue growth.
Central Europe performed well whilst Iberia's and France's
performance was solid, with France showing a return to growth in Q2
18.
Recurring revenue in Europe grew by 2%, of which software
subscription revenue grew by 18% (H1 17: 21%). Recurring revenue
was flat in both France and Northern Europe, with reacceleration
expected in H2 18. Software subscription revenue now represents 40%
of total revenue in Europe (H1 17: 36%).
Processing revenue declined in Europe by 3% (H1 17: growth of
11%), reflecting growth in Northern Europe, offset by slowing
growth elsewhere.
SSRS revenue grew by 17% (H1 17: decline of 10%) reflecting
strong performance in professional services and training.
Northern Europe
UK & Ireland - increased focus on recurring revenue
required
UK & Ireland revenue grew by 4% (H1 17: 8%) in the year,
reflecting flat performance in recurring revenue, although software
subscription grew by 28% (H1 17: 27%). Software subscription
revenue now represents 45% of total revenue in UK & Ireland (H1
17: 36%). Recurring revenue growth in UK & Ireland was
adversely impacted by bundled service offerings. These service
bundles have been discontinued.
SSRS growth of 46% in the UK & Ireland reflects strong
growth in professional services and training, combined with strong
Enterprise growth due to a number of high value licence sales made
in H1 18.
Sage Accounting revenue grew by 54% in the UK & Ireland,
driven by a 40% increase in average ACV, as the region continues to
promote Sage's premium brand, attracting higher quality customers.
Sage People showed strong momentum in the region, with revenue
growing at 83% (ARR growth 70%). Enterprise Management growth in H1
18 was 23%.
Processing growth of 2% was driven by increased volume in chip
and pin transactions using the Sage Pay gateway.
Focus for H2 18 in Northern Europe is on driving
subscription-based recurring revenue growth through Sage Business
Cloud and, in particular, the continued migration from the
on-premise versions to Sage 50cloud and Sage 200cloud.
Central and Southern Europe
France - recovery underway
France revenue grew by 1% (H1 17: 1%), with the country
returning to growth in Q2 18. The impact of first-year premiums
charged in prior years has been a drag on growth since Q1 17,
although this impact is expected to unwind and have less of an
impact throughout H2 18.
In France, growth has been driven through Enterprise Management,
which increased by 29% in H1 18. Growth of other major products in
France has been impacted by first-year premiums, but there are
signs of success in cloud connected solutions in the Sage 50 and
Sage 200 families, with Sage 200cloud driving strong momentum in
Q2, strongly endorsed by a recovering partner channel.
France has high software subscription penetration of 57% and in
H2 18 management will continue to focus on increasing growth
through software subscription and recurring revenue, selling cloud
connected solutions and driving further improvements in the
recovering partner channel.
Iberia - cloud connected solutions gaining momentum
Organic revenue growth of 7% (H1 17: 8%) was underpinned by
recurring revenue growth of 5% and SSRS revenue growth of 14%.
The region's largest contributor, Sage 50 Accounts continued to
perform strongly with growth of 9%. Growth in the Sage 200 family
of 13% was mainly driven by the value uplift provided by the cloud
connected version launched in FY17.
The focus for Iberia in H2 is to drive acceleration in recurring
revenue through cloud connected solutions.
Central Europe - strong performance with accelerating, double
digit growth
Central Europe delivered strong revenue growth of 11% (H1 17:
8%), a significant acceleration on the prior year, growing both
recurring and SSRS revenue at 12% and 8% respectively.
In Germany, both organic revenue and recurring revenue grew by
13%. Germany's largest product, Sage 200, grew by 24%, driven by a
strong partner channel. SSRS growth has been driven by success in
professional services associated with Sage 200.
In the smaller Central European countries, Poland grew at 11%
due to strong growth from the Sage 50 family, whilst Switzerland
growth was flat, despite recurring revenue growth of 7%.
The focus for Central Europe in H2 is to continue to drive the
high levels of recurring revenue growth through NCA and migration
of the installed-base to subscription and the cloud.
Performance - North American region
ORGANIC REVENUE GROWTH H1 18 H1 17
------------------------ ------ ------
USA +7% +4%
Sage Intacct +26% +32%
Canada +13% +9%
North America +10% +8%
------------------------ ------ ------
Strong growth of 10% (H1 17: 8%) in North America, including
Sage Intacct, was driven by 13% growth in recurring revenue (H1 17:
11%), underpinned by software subscription growth of 51% (H1 17:
70%): software subscription revenue is now 42% of total revenue (H1
17: 31%).
Processing revenue growth of 3% (H1 17: 4%) remains in line with
expectations, whilst SSRS revenue declined by 2% (H1 17: 6%
decline), reflecting deal slippage in Enterprise Management.
USA (excluding Sage Intacct) - cloud connected migrations
driving strong growth
Strong performance in the USA was driven by the successful
migration of customers from Sage 50 and Sage 200 to the cloud
connected versions of these products, with cloud connected revenue
growth of 89%, driving software subscription growth of 74% in the
country.
SSRS revenue has been flat, reflecting growth in Enterprise
Management and professional services and training, offset by a
decline in other licences.
Sage Intacct - showing continuing momentum
Sage Intacct has continued to grow strongly, with organic
revenue growth of 26% in H1 18, underpinned by recurring revenue
growth of 28% and ARR of 31% as management continues the carefully
sequenced integration of this acquisition. Win rates continue to be
strong and the Sage Intacct management team are having a very
positive impact within Sage.
Canada - double digit organic and recurring revenue growth
In Canada, both organic and recurring revenue delivered double
digit growth of 13% and 17% respectively, driven by Sage 200 cloud,
which showed strong momentum in H1 18.
In North America, the focus in H2 18 is continuing the momentum
and value uplift through the Sage 50 and Sage 200 migrations to
cloud connected solutions and to recover the deal slippage from
Enterprise Management.
Performance - International region
ORGANIC REVENUE GROWTH H1 18 H1 17
------------------------ ------ ------
Africa and Middle East +5% +13%
Latin America -1% +22%
Australia & Asia +9% +4%
International +4% +13%
------------------------ ------ ------
Organic revenue in the International region grew by 4% in H1 18
(H1 17: 13%), with recurring revenue growth of 8% (H1 17: 16%),
processing revenue growth of 16% (H1 17: 35%) and SSRS decline of
10% (H1 17: flat). Software subscription revenue in International
is now 60% of total revenue (H1 17: 56%).
Performance in the region has been mixed with strong growth in
Australia balanced by weaker performance from Latin America and
Asia, whilst growth in Africa and Middle East was below management
expectations.
Africa and Middle East - Enterprise deal slippage
Growth in Africa Middle East of 5% (H1 17: 13%) was below
management expectations, largely due to deal slippage in Enterprise
Management. New leadership in the region has implemented a
significant reorganisation of the management team in H1 18.
Recurring revenue growth in Africa Middle East was 11%. Sage
Accounting continued to show strong momentum Africa, with growth of
59% in H1 18.
Focus for the region in H2 18 is to recover Enterprise
Management contract slippage and rebuild the Enterprise pipeline,
as well as starting to drive growth through the new management
team.
Latin America - turbulent economic condition
Revenue in Latin America showed a slight decline 1% (H1 17:
growth of 22%), offset by recurring revenue growth of 2%, in line
with management expectations. Due to the turbulent economic
conditions in the region, since the end of FY17 management has been
focused on driving growth through high quality customers, where
debt collection is less of a risk. Underlying performance in the
region remains robust with Sage Accounting growth of 23% in H1
18.
Australia and Asia
In Australia, strong revenue growth of 12% (H1 17: 8%) is
underpinned by recurring revenue growth of 10% (H1 17: 11%), with
momentum driven by new leadership in the geography.
Asia revenue (accounting for 1% of total revenue) declined by 2%
in the year due to local macroeconomic challenges in this
region.
The focus for H2 18 is to maintain momentum created by new
leadership and to return Asia to growth.
Financial review
H1 18 H1 17
-------------------------------------- -------------------------------- ------------------------------
ORGANIC TO STATUTORY RECONCILIATIONS Operating Operating
Revenue profit Margin Revenue profit Margin
--------------------------------------
Organic GBP908m GBP222m 24.5% GBP854m
Organic adjustments(10) - - (GBP35m)
-------------------------------------- ---------- ----------- ------- --------- ---------- -------
Underlying - Continuing GBP908m GBP222m 24.5% GBP819m GBP207m 25.3%
Discontinued operations - - GBP66m GBP17m
Underlying GBP908m GBP222m 24.5% GBP885m GBP224m 25.3%
-------------------------------------- ---------- ----------- ------- --------- ---------- -------
Discontinued operations - - (GBP66m) (GBP17m)
Impact of foreign exchange(11) - - GBP21m GBP4m
-------------------------------------- ---------- ----------- ------- --------- ---------- -------
Underlying (as reported)
- Continuing GBP908m GBP222m 24.5% GBP840m GBP211m 25.1%
-------------------------------------- ---------- ----------- ------- --------- ---------- -------
Recurring items(12) (GBP9m) (GBP35m) (GBP12m)
Non-recurring items(13) (GBP1m) (GBP19m)
-------------------------------------- ---------- ----------- ------- --------- ---------- -------
Statutory GBP899m GBP186m 20.7% GBP840m GBP180m 21.4%
-------------------------------------- ---------- ----------- ------- --------- ---------- -------
10 Organic adjustments are as per note 2 of the financial
statements
11 Impact of retanslating H1 17 results at H1 18 average
rates
12 Recurring items comprise amortisation of acquired intangible
assets, M&A activity-related items (including adjustments to
acquired deferred income) and fair value adjustments
13 Non-recurring items comprise items that management judge to
be one-off or non-operational including business transformation
costs in FY17
Revenue
Statutory revenue grew by 7% to GBP899m (H1 17: GBP840m),
reflecting organic growth, foreign exchange movements experienced
throughout the year and the impact of recurring items. The impact
of foreign exchange of GBP21m in H1 17 reflects a currency headwind
during the period.
Operating profit
Underlying (continuing) operating profit increased to GBP222m in
line with organic revenue. Statutory operating profit increased by
GBP6m, with the operating profit rising by 3.1% due to the impact
of foreign exchange, combined with recurring and non-recurring
items.
Adjustments between underlying and statutory operating
profit
Non-recurring items relate to the GBP1m loss on disposal of a
small non-core asset. Recurring items are GBP35m combined, of which
GBP16m relate to amortisation of acquisition related intangible
assets and GBP10m M&A activity-related charges. A further GBP9m
relates to an adjustment applied to acquired deferred income. Both
recurring and non-recurring items, GBP36m combined, have been
excluded from the underlying operating profit of GBP222m.
Net finance cost
The statutory net finance cost for the period was GBP15m (H1 17:
GBP11m) and the underlying net finance cost was GBP14m (H1 17:
GBP11m). The difference between underlying and statutory net
finance costs for the period relate to the GBP1m foreign currency
gain on movements on intercompany balances (H1 17: nil) offset by
the GBP2m (H1 17: GBP1m) fair value adjustment charge in relation
to a debt instrument. In H1 FY17, this was offset by a credit of
GBP1m relating to a fair value adjustment of a financial asset.
Taxation
The statutory income tax expense for H1 18 was GBP36m (H1 17:
GBP44m). The effective tax rate on statutory profit before tax was
21% (H1 17: 25%), whilst the underlying tax rate on continuing
operations was 26% (H1 17: 27%).
The difference between the statutory effective tax rate and the
underlying tax rate relates to a non-recurring credit of GBP13m on
the rebasing of deferred tax balances in the USA as a result of the
US Tax Reform and adjusting items in countries with tax rates that
are higher than the UK.
Earnings per share
Underlying basic earnings per share increased by 1% to 14.25p
(H1 17: 14.12p) and statutory basic earnings per share decreased to
12.50p (H1 17: 13.54p) due to increased operating profit offset by
increased recurring charges following the acquisitions of Sage
Intacct and Sage People in FY17. Adjusted for transactions
underlying earnings per share increased by 16% reflecting a 7%
impact from normalisation of the operating profit for the
pre-acquisition period of the acquired businesses based on the FY17
operating profit margin achieved during the post-acquisition period
and an 8% impact from the disposal of the North America Payments
business.
Cash flow and net debt
CASH FLOW H1 FY18 H1 FY17
------------------------------------------------ --------- ---------
Underlying operating profit GBP222m GBP224m
Exchange rate translation movements - GBP5m
------------------------------------------------ --------- ---------
Underlying operating profit (as reported) GBP222m GBP229m
Depreciation/amortisation/impairment/profit GBP17m GBP17m
on disposal
Share-based payments GBP5m GBP5m
Net changes in working capital (GBP5m) GBP2m
Net capital expenditure (GBP18m) (GBP15m)
------------------------------------------------ --------- ---------
Underlying cash flow from operations GBP221m GBP238m
Non-recurring items (GBP21m) (GBP23m)
Net interest paid (GBP12m) (GBP10m)
Income tax paid (GBP29m) (GBP39m)
Exchange movements (GBP2m) -
------------------------------------------------ --------- ---------
Free cash flow GBP157m GBP166m
------------------------------------------------ --------- ---------
CASH FLOW H1 FY18 H1 FY17
------------------------------------------------ --------- ---------
Statutory cash flow from operating activities GBP215m GBP230m
Recurring and Non-recurring items GBP22m GBP23m
Net capital expenditure (GBP18m) (GBP15m)
Eliminate exchange rate translation movements GBP2m -
Underlying cash flow from operating activities GBP221m GBP238m
------------------------------------------------ --------- ---------
Underlying cash conversion 99% 104%
------------------------------------------------ --------- ---------
The Group remains highly cash generative with underlying cash
flows from operating activities of GBP221m, which represents
underlying cash conversion of 99%, down slightly from H1 17,
reflecting an increase in working capital and capex of GBP3m as the
Group invests for growth, combined with strong Enterprise
Management performance which attracts longer payment terms.
A total of GBP110m was returned to shareholders through ordinary
dividends paid. Net debt stood at GBP744m at 31 March 2018 (31
March 2017: GBP434m) with the increase reflecting an increase in
cash spent on acquisitions.
Treasury management
The Group continues to be able to borrow at competitive rates
and currently deems this to be the most effective means of raising
finance. The Group's syndicated bank multi-currency Revolving
Credit Facility (RCF), was renewed in February 2018 and now expires
in February 2023 with facility levels of GBP648m (US$719m and
GBP135m tranches). At 31 March 2018, GBP336m (H1 17: GBP92m) of the
RCF was drawn. Current year RCF drawings were used principally to
fund the acquisitions completed in FY17. A term loan arranged in
July 2017 to partially fund the Intacct acquisition has drawings of
GBP107m ($150m) at 31 March 2018 (H1 17: nil). The term loan
matures in July 2018, with an unconditional option to extend for a
further 12 months.
Total USPP loan notes at 31 March 2018 were GBP502m (US$600m and
EUREUR85m), (H1 17: GBP551m (US$600m and EUR85m)). Approximately
GBP36m (US$50m) of USPP notes are due for repayment in May 2018,
these will be repaid using committed bank facilities.
Foreign exchange
The Group does not hedge foreign currency profit and loss
translation exposures and the statutory results are therefore
impacted by movements in exchange rates.
The average rates used to translate the consolidated income
statement and to neutralise foreign exchange in prior year
underlying and organic figures are as follows:
AVERAGE EXCHANGE RATES (EQUAL H1 18 H1 17 Change
TO GBP)
------------------------------- ------ ------ -------
Euro (EUR) 1.13 1.16 (2%)
US Dollar ($) 1.36 1.24 10%
South African Rand (ZAR) 17.37 16.82 3%
Australian Dollar (A$) 1.75 1.65 6%
Brazilian Real (R$) 4.42 3.99 11%
------------------------------- ------ ------ -------
Capital structure and dividend
With consistent and strong cash flows, the Group retains
considerable financial flexibility going forward. The Board's main
strategic policy remains an acceleration of growth, primarily
organically, supported by targeted bolt-on acquisitions. The growth
underpins the Board's sustainable, progressive dividend policy.
Consistent with this policy, the Board is proposing an 8% increase
in the total ordinary dividend per share for the year to 5.65p per
share (H1 17: 5.22p per share).
Appendix I - Key Performance Indicators ("KPIs") and other
measures
H1 18 FY17 H1 17
------------------------- ------------------------------------------------------------- -------- -------- --------
STRATEGIC KPIs KPI DESCRIPTION
------------------------- ------------------------------------------------------------- -------- -------- --------
As we focus on providing exceptional customer experiences,
we track the response of our customers
by measuring the number of contracts successfully renewed
Customers for life: for the last twelve months as a
Contract renewal rate percentage of those that were due for renewal. 86% 86% 86%
------------------------- ------------------------------------------------------------- -------- -------- --------
Winning in the market:
Adoption of Sage The number of paying subscriptions for our portfolio of Sage
Accounting Accounting products. 431,000 405,000 382,000
------------------------- ------------------------------------------------------------- -------- -------- --------
Winning in the market: The Annual recurring revenue (ARR) for our portfolio of Sage GBP33m GBP31m GBP23m
Adoption of Sage Accounting products.
Accounting
------------------------- ------------------------------------------------------------- -------- -------- --------
Winning in the market:
Adoption of Sage The percentage increase in underlying revenue derived from
Enterprise Management Sage Enterprise Management. 17% 21% 16%
------------------------- ------------------------------------------------------------- -------- -------- --------
Revolutionise business: Our latest technologies are delivered to customers via GBP820m GBP744m GBP633m
Annualised software software subscription relationships
subscription base which drives growth in the ASB, calculated as the amount of
("ASB") organic software subscription
revenue recorded in the last month of the period multiplied
by 12.
------------------------- ------------------------------------------------------------- -------- -------- --------
Investing for growth is enabled by releasing efficiencies in
General and Administrative ("G&A")
expenses. We track progress by expressing G&A as a
Capacity for growth: percentage of revenue (both on an organic
G&A% basis). 13.8% 13.8% 15.2%
------------------------- ------------------------------------------------------------- -------- -------- --------
Doing business the right way is important at Sage. Giving
back to the community through Sage
One Sage: Foundation allows our colleagues to volunteer to work with
Foundation Days charitable causes. 10,000 23,000 10,000
------------------------- ------------------------------------------------------------- -------- -------- --------
FINANCIAL DRIVERS KPI DESCRIPTION H1 18 FY17 H1 17
------------------------- ------------------------------------------------------------- -------- -------- --------
Organic revenue neutralises the impact of foreign exchange
in prior period figures and excludes
the contribution from discontinued operations, disposals
and assets held for sale of standalone
businesses in the current and prior period.
Adjustments are made to the comparative period to present
acquired businesses as if these
had been part of the Group throughout the period following
the year of acquisition. Revenue
from acquired businesses is excluded in the year of
Organic revenue growth acquisition. 6.3% 7.6% 7.4%
------------------------- ------------------------------------------------------------- -------- -------- --------
Underlying operating profit excludes:
* Recurring items including amortisation of acquired
intangible assets, purchase price adjustments made to
reduce deferred income arising on acquisitions,
acquisition-related items and fair value adjustments;
and
* Non-recurring items that management judge to be
one-off or non-operational; The impact of foreign
exchange is neutralised in prior period figures.
No adjustments are made for acquisitions, disposals,
Underlying operating discontinued operations and assets held
profit margin for sale of standalone businesses. 24.5% 27.2% 25.3%
------------------------- ------------------------------------------------------------- -------- -------- --------
Organic operating profit Organic operating profit margin is presented for the current 24.5% N/A N/A
margin period only to allow comparability
to current period underlying operating profit margin and
excludes the impact of current period
acquisitions, disposals, discontinued operations and assets
held for sale of standalone businesses.
------------------------- ------------------------------------------------------------- -------- -------- --------
Underlying basic EPS is defined as underlying profit after
tax divided by the weighted average
number of ordinary shares in issue during the period,
excluding those held as treasury shares.
Underlying profit after tax is defined as profit
attributable to owners of the parent excluding:
* Recurring items including amortisation of acquired
intangible assets, purchase price adjustments made to
reduce deferred income arising on acquisitions,
acquisition-related items, fair value adjustments and
imputed interest; and
* Non-recurring items that management judge to be
one-off or non-operational.
All of these adjustments are net of tax. The impact of
Underlying basic EPS foreign exchange is neutralised in
growth prior period figures. 0.9% 3.5% 2.0%
------------------------- ------------------------------------------------------------- -------- -------- --------
Underlying cash conversion is underlying cash flow from
operating activities divided by underlying
operating profit. Underlying cash flow from operating
activities is statutory cash flow from
operating activities less net capital expenditure and
adjusted for movements on foreign exchange
Underlying cash rates, non-recurring working capital movements and
conversion non-recurring cash items. 99% 95% 104%
------------------------- ------------------------------------------------------------- -------- -------- --------
The net value of cash less borrowings expressed as a
multiple of rolling 12-month EBITDA.
EBITDA is defined as earnings before interest, tax,
depreciation, amortisation of acquired
intangible assets, acquisition-related items, fair value
adjustments and non-recurring items
Net debt leverage that management judge to be one-off or non-operational. 1.4:1 1.6:1 0.9:1
------------------------- ------------------------------------------------------------- -------- -------- --------
Statutory operating profit for the last twelve months excluding
non-recurring items that management
judge to be one-off or non-operational, expressed as a multiple of finance
costs excluding
Interest cover imputed interest for the same period. 23.8x 27.3x 21.8x
---------------- ---------------------------------------------------------------------------- ------ ------ ------
Underlying earnings per share (as reported) divided by the full year
Dividend cover dividend per share. 2.0x 2.1x 2.1x
---------------- ---------------------------------------------------------------------------- ------ ------ ------
Appendix II - Non-GAAP measures
MEASURE DESCRIPTION WHY WE USE IT
------------------------------- ----------------------------------------- ------------------------------------------
Underlying Prior period underlying measures are Underlying measures allow management
retranslated at the current year and investors to compare performance
exchange rates to neutralise without the potentially
the effect of currency fluctuations. distorting effects of foreign
exchange movements, one-off items or
Underlying operating profit non-operational items.
excludes:
* Recurring items: By including part-period
contributions from acquisitions,
discontinued operations, disposals
-- Amortisation of acquired and assets held for sale of
intangible assets and purchase price standalone businesses in the current
adjustments made to reduce and/or prior periods, the
deferred income arising on impact of M&A decisions on earnings
acquisitions; per share growth can be evaluated.
-- M&A activity-related items;
-- Fair value adjustments on
non-debt-related
financial instruments and foreign
currency
movements on intercompany debt
balances; and
-- Non-recurring items that
management judge
are one-off or non-operational.
Underlying profit before tax
excludes:
-- All the items above;
-- Imputed interest; and
-- Fair value adjustments on
debt-related
financial instruments.
Underlying profit after tax and
earnings per share excludes:
-- All the items above net of tax
and non-
recurring tax items that management
judge
are one-off or non-operational.
------------------------------- ----------------------------------------- ------------------------------------------
Organic In addition to the adjustments made Organic measures allow management and
for underlying measures, organic investors to understand the
measures exclude the like-for-like revenue and
contribution from discontinued current period margin performance of
operations, disposals and assets the continuing business.
held for sale of standalone
businesses in the current and prior
period and include acquired
businesses from the beginning
of the financial year following
their year of acquisition.
Adjustments are made to the
comparative
period to present acquired
businesses as if these had been part
of the Group throughout the
period. Contributions from acquired
businesses are excluded in the year
of acquisition. Acquisitions
and disposals which occurred close
to the start of the opening
comparative period where the
contribution impact would be
immaterial are not adjusted.
Organic operating profit margin is
presented for the current period
only to allow comparability
to current period underlying
operating profit margin.
------------------------------- ----------------------------------------- ------------------------------------------
Underlying cash conversion Underlying cash conversion is Underlying cash conversion informs
underlying cash flow from operating management and investors about the
activities divided by underlying cash operating cycle
operating profit. Underlying cash of the business and how efficiently
flow from operating activities is operating profit is converted into
statutory cash flow from cash.
operating activities less net
capital expenditure and adjusted for
movements on foreign exchange
rates, and non-recurring cash items.
------------------------------- ----------------------------------------- ------------------------------------------
Underlying (as reported) Where prior period underlying This measure is used to report
measures are included without comparative figures for external
retranslation at current period reporting purposes where it
exchange rates, they are labelled as would not be appropriate to
underlying (as reported). retranslate. For instance, on the
face of primary financial statements.
------------------------------- ----------------------------------------- ------------------------------------------
Underlying adjusted EPS The underlying adjusted EPS The underlying adjusted EPS measure
neutralises the impact of allows management and investors to
significant acquisitions and compare performance
disposals without the distorting effects
by excluding current period arising from significant acquisitions
acquisitions and current and prior and disposals.
period disposals and by including
prior year acquisitions in the
comparable period based on the
margin achieved by the acquired
business in the prior year for the
post-acquisition period.
------------------------------- ----------------------------------------- ------------------------------------------
Revenue Type DESCRIPTION
---------------------------------------------------- ----------------------------------------------------------------
Recurring revenue Recurring revenue is revenue earned from customers for the
provision of a good or service,
where risks and rewards are transferred to the customer
over the term of a contract, with
the customer being unable to continue to benefit from the
full functionality of the good or
service without ongoing payments. Recurring revenue
includes both software subscription revenue
and maintenance and service revenue.
---------------------------------------------------- ----------------------------------------------------------------
Software subscription revenue Subscription revenue is revenue earned from customers for
the provision of a good or service,
where the risk and rewards are transferred to the customer
over the term of a contract. In
the event that the customer stops paying, they lose the
legal right to use the software and
the Company has the ability to restrict the use of the
product or service. (Also known as
'Pay to play').
---------------------------------------------------- ----------------------------------------------------------------
Software and software related services ("SSRS") SSRS revenue is for goods or services where the entire
benefit is passed to the customer at
the point of delivery. It comprises revenue for software or
upgrades sold on a perpetual license
basis and software related services, including hardware
sales, professional services and training.
---------------------------------------------------- ----------------------------------------------------------------
Processing revenue Processing revenue is revenue earned from customers for the
processing of payments or where
Sage colleagues process our customers' payroll.
---------------------------------------------------- ----------------------------------------------------------------
Annual contract value Annual contact value (ACV) is the value of bookings that
will be generated over the ensuing
year under a given contract or contracts.
---------------------------------------------------- ----------------------------------------------------------------
Annual recurring revenue Annual recurring revenue (ARR) is the value of all
components of recurring revenue, annualised
for the ensuing year.
---------------------------------------------------- ----------------------------------------------------------------
Consolidated income statement
For the six months ended 31 March 2018
Six months Six months Six months Six months Six months Six months Year ended
ended ended ended ended ended ended 30
31 March 31 March 31 March 31 March 31 March 31 March September
2018 2018 2018 2017 2017 2017 2017
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
Underlying Adjustments* Statutory Underlying Adjustments* Statutory Statutory
as reported
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm
=============== ==== =========== ============ =========== =========== ============ =========== ===========
Revenue 2 908 (9) 899 840 - 840 1,715
Cost of sales (62) - (62) (54) - (54) (114)
=============== ==== =========== ============ =========== =========== ============ =========== ===========
Gross profit 846 (9) 837 786 - 786 1,601
Selling and
administrative
expenses (624) (27) (651) (575) (31) (606) (1,253)
Operating
profit 2 222 (36) 186 211 (31) 180 348
Share of loss
of an
associate - - - (1) (1) (2) (1)
Gain on
remeasurement
of existing
investment
in an
associate - - - - 13 13 13
Finance income 2 1 3 1 1 2 10
Finance costs (16) (2) (18) (12) (1) (13) (28)
=============== ==== =========== ============ =========== =========== ============ =========== ===========
Profit before
income tax 208 (37) 171 199 (19) 180 342
Income tax
expense 4 (54) 18 (36) (54) 10 (44) (85)
=============== ==== =========== ============ =========== =========== ============ =========== ===========
Profit for the
period
- continuing
operations 154 (19) 135 145 (9) 136 257
Profit on
discontinued
operations 11 - - - 11 (1) 10 43
=============== ==== =========== ============ =========== =========== ============ =========== ===========
Profit for the
period 154 (19) 135 156 (10) 146 300
* Adjustments are detailed in note 3 to the accounts.
Earnings per
share
attributable
to the owners
of the parent
(pence)
From continuing
operations
Basic 6 14.25p 12.50p 13.46p 12.57p 23.86p
Diluted 6 14.22p 12.48p 13.40p 12.52p 23.78p
=============== ==== =========== ============ =========== =========== ============ =========== ===========
From continuing
and
discontinued
operations
Basic 6 14.25p 12.50p 14.45p 13.54p 27.80p
Diluted 6 14.22p 12.48p 14.39p 13.48p 27.71p
=============== ==== =========== ============ =========== =========== ============ =========== ===========
Consolidated statement of comprehensive income
For the six months ended 31 March 2018
Six months ended Six months ended Year ended
31 March 2018 31 March 2017 30 September 2017
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
============================================================= ================ ================ ===================
Profit for the period 135 146 300
Other comprehensive (expenses)/income for the period
Items that will not be reclassified to profit or loss
Actuarial gain on post-employment benefit obligations - 1 4
Deferred tax charge on actuarial gain on post-employment
benefit obligations - - (1)
- 1 3
============================================================= ================ ================ ===================
Items that may be reclassified to profit or loss
Deferred tax credit on foreign currency movements - - 2
Exchange differences on translating foreign operations (25) 15 (26)
Exchange differences recycled through income statement on
sale of foreign operations - - (32)
(25) 15 (56)
============================================================= ================ ================ ===================
Other comprehensive (expenses)/income for the period, net of
tax (25) 16 (53)
============================================================= ================ ================ ===================
Total comprehensive income for the period 110 162 247
============================================================= ================ ================ ===================
The notes on pages 26 to 41 form an integral part of this
condensed consolidated half-yearly report.
Consolidated balance sheet
As at 31 March 2018
31 March 31 March
2018 2017 30 September 2017
(Unaudited) (Unaudited) (Audited)
Note GBPm GBPm GBPm
======================================================= ===== ============== ============== ==================
Non-current assets
Goodwill 7 1,975 1,589 2,023
Other intangible assets 7 253 102 274
Property, plant and equipment 7 129 121 133
Fixed asset investment 14 - 15
Other financial assets 1 2 2
Deferred income tax assets 65 58 61
2,437 1,872 2,508
======================================================= ===== ============== ============== ==================
Current assets
Inventories 2 3 3
Trade and other receivables 475 445 466
Current income tax asset 4 5 14
Cash and cash equivalents (excluding bank overdrafts) 10 296 309 231
Assets classified as held for sale 11 - 265 1
======================================================= ===== ============== ============== ==================
777 1,027 715
======================================================= ===== ============== ============== ==================
Total assets 3,214 2,899 3,223
======================================================= ===== ============== ============== ==================
Current liabilities
Trade and other payables (290) (322) (337)
Current income tax liabilities (33) (23) (18)
Borrowings (46) (5) (55)
Provisions (21) (34) (37)
Deferred income (652) (624) (585)
Liabilities classified as held for sale 11 - (51) (1)
======================================================= ===== ============== ============== ==================
(1,042) (1,059) (1,033)
======================================================= ===== ============== ============== ==================
Non-current liabilities
Borrowings (906) (642) (914)
Post-employment benefits (22) (24) (22)
Deferred income tax liabilities (31) (19) (46)
Provisions (26) (26) (31)
Trade and other payables (5) (5) (5)
Deferred income (4) (5) (4)
======================================================= ===== ============== ============== ==================
(994) (721) (1,022)
======================================================= ===== ============== ============== ==================
Total liabilities (2,036) (1,780) (2,055)
======================================================= ===== ============== ============== ==================
Net assets 1,178 1,119 1,168
======================================================= ===== ============== ============== ==================
Equity attributable to owners of the parent
Ordinary shares 9 12 12 12
Share premium 9 548 545 548
Other reserves 106 202 131
Retained earnings 512 360 477
======================================================= ===== ============== ============== ==================
Total equity 1,178 1,119 1,168
======================================================= ===== ============== ============== ==================
Consolidated statement of changes in equity
For the six months ended 31 March 2018
Attributable to owners of the parent
========================================================= ===========================================================
Ordinary Retained Total
shares Share premium Other reserves earnings equity
GBPm GBPm GBPm GBPm GBPm
========================================================= ======== ============= ============== ========= =======
At 1 October 2017 (Audited) 12 548 131 477 1,168
========================================================= ======== ============= ============== ========= =======
Profit for the period - - - 135 135
Other comprehensive expenses
Exchange differences on translating
foreign operations - - (25) - (25)
Actuarial loss on post-employment
benefit obligations - - - - -
Deferred tax credit on actuarial
loss on post-employment obligations - - - - -
========================================================= ======== ============= ============== ========= =======
Total comprehensive income
for the period ended 31 March
2018 (Unaudited) - - (25) 135 110
========================================================= ======== ============= ============== ========= =======
Transactions with owners
Employee share option scheme:
* Proceeds from shares issued - - - - -
* Value of employee services, net of deferred
tax - - - 10 10
Dividends paid to owners of the
parent - - - (110) (110)
========================================================= ======== ============= ============== ========= =======
Total transactions with owners
for the period ended 31 March
2018 (Unaudited) - - - (100) (100)
========================================================= ======== ============= ============== ========= =======
At 31 March 2018 (Unaudited) 12 548 106 512 1,178
========================================================= ======== ============= ============== ========= =======
Attributable to owners of the parent
=================================================== =================================================================
Ordinary Retained Total
shares Share premium Other reserves earnings equity
GBPm GBPm GBPm GBPm GBPm
=================================================== ======== ============= ============== =============== =======
At 1 October 2016 (Audited) 12 544 187 310 1,053
=================================================== ======== ============= ============== =============== =======
Profit for the period - - - 146 146
Other comprehensive income
Exchange differences on translating
foreign operations - - 15 - 15
Actuarial loss on post-employment
benefit obligations - - - 1 1
Total comprehensive income
for the period ended 31 March
2017 (Unaudited) - - 15 147 162
=================================================== ======== ============= ============== =============== =======
Transactions with owners
Employee share option scheme:
* Proceeds from shares issued - 1 - - 1
* Value of employee services, net of def
erred tax - - - 4 4
Dividends paid to owners of the
parent - - - (101) (101)
=================================================== ======== ============= ============== =============== =======
Total transactions with owners
for the period ended 31 March
2017 (Unaudited) - 1 - (97) (96)
=================================================== ======== ============= ============== =============== =======
At 31 March 2017 (Unaudited) 12 545 202 360 1,119
=================================================== ======== ============= ============== =============== =======
Consolidated statement of cash flows
For the six months ended 31 March 2018
Six months
ended
Six months
ended 31 March
Year ended
31 March 30 September
2018 2017 2017
(Unaudited) (Unaudited) (Audited)
Notes GBPm GBPm GBPm
===================================================== ===== ============= ============= =============
Cash flows from operating activities
Cash generated from continuing operations 215 217 403
Interest paid (14) (12) (24)
Income tax paid (29) (39) (102)
Operating cash flows generated from discontinued
operations - 13 25
Net cash generated from operating activities 172 179 302
===================================================== ===== ============= ============= =============
Cash flows from investing activities
Acquisitions of subsidiaries, net of cash
acquired 11 (8) (79) (693)
Proceeds on settlement of debt investment - - 7
Purchases of intangible assets 7 (10) (7) (22)
Purchases of property, plant and equipment 7 (10) (8) (30)
Proceeds from sale of property, plant and
equipment 2 - -
Interest received 2 2 2
Disposal of discontinued operations - - 158
Net cash used in investing activities (24) (92) (578)
===================================================== ===== ============= ============= =============
Cash flows from financing activities
Proceeds from issuance of ordinary shares 9 - 1 4
Purchase of treasury shares - - (9)
Proceeds from borrowings 117 133 662
Repayments of borrowings (88) (80) (275)
Movements in cash held on behalf of customers 14 22 5
Borrowing costs (2) (1) (1)
Dividends paid to owners of the parent 5 (110) (101) (157)
Financing cash flows generated from discontinued
operations - 7 4
===================================================== ===== ============= ============= =============
Net cash (used in)/generated from financing
activities (69) (19) 233
===================================================== ===== ============= ============= =============
Net increase/(decrease) in cash, cash equivalents
and bank overdrafts
(before exchange rate movement and reclassification
as held for sale) 10 79 68 (43)
Effects of exchange rate movement 10 (6) 4 (4)
Reclassification as held for sale 10 - (28) -
===================================================== ===== ============= ============= =============
Net increase/(decrease) in cash, cash equivalents
and bank overdrafts 73 44 (47)
Cash, cash equivalents and bank overdrafts
at 1 October 10 213 260 260
===================================================== ===== ============= ============= =============
Cash, cash equivalents and bank overdrafts
at period end 10 286 304 213
===================================================== ===== ============= ============= =============
Notes to the financial information
For the six months ended 31 March 2018
1 Group accounting policies
General information
The Sage Group plc ("the Company") and its subsidiaries
(together "the Group") is a leading global supplier of business
management software to Small & Medium Businesses.
This condensed consolidated half-yearly financial report was
approved for issue by the board of directors on 1 May 2018.
The financial information set out above does not constitute the
Company's Statutory Accounts. Statutory Accounts for the year ended
30 September 2017 have been delivered to the Registrar of
Companies. The auditor's report was unqualified and did not contain
statements under section 498 (2), (3) or (4) of the Companies Act
2006.
Whilst the financial information included in this announcement
has been computed in accordance with International Financial
Reporting Standards ("IFRSs") as adopted by the European Union
("EU"), this announcement does not in itself contain sufficient
information to comply with IFRSs. The financial information has
been prepared on the basis of the accounting policies and critical
accounting estimates and judgements as set out in the Annual Report
& Accounts for 2017.
This condensed consolidated half-yearly financial report has
been reviewed, not audited.
The Company is a limited liability company incorporated and
domiciled in the UK. The address of its registered office is North
Park, Newcastle upon Tyne, NE13 9AA. The Company is listed on the
London Stock Exchange.
Basis of preparation
The financial information for the six months ended 31 March 2018
has been prepared in accordance with the Disclosure and
Transparency Rules of the Financial Conduct Authority and with IAS
34, "Interim Financial Reporting" as adopted by the European Union,
("EU"). The condensed consolidated half-yearly financial report
should be read in conjunction with the annual financial statements
for the year ended 30 September 2017, which have been prepared in
accordance with IFRSs as adopted by the EU.
The directors are satisfied that the Group has sufficient
resources to continue in operation for the foreseeable future, a
period of not less than 12 months from the date of this report.
Accordingly, the consolidated financial information has been
prepared on a going concern basis.
Accounting policies
The accounting policies adopted are consistent with those of the
annual financial statements for the year ended 30 September 2017 as
described in those annual financial statements.
Adoption of new and revised IFRSs
The following new accounting standards may have a material
impact on the Group. They are currently issued but not effective
for the Group for the six-month period ended 31 March 2018:
-- IFRS 9 "Financial Instruments"
-- IFRS 15 "Revenue from Contracts with Customers"
-- IFRS 16 "Leases"
The Group will adopt these standards in line with their
effective dates. IFRSs 9 and 15 will be adopted for the financial
year commencing 1 October 2018, and IFRS 16 for the financial year
commencing 1 October 2019. Explanations of the changes introduced
by the standards, and the status of the IFRS 15 implementation
project, were included in the annual report for the year ended 30
September 2017. An update on the Group's approach to implementing
the standards is provided below.
IFRS 9
The Group is currently in the process of evaluating the impact
of IFRS 9, which is expected to be largely restricted to the
measurement of financial assets, and the earlier recognition of
impairment provisions and costs relating to future credit losses,
including for trade receivables. The Group does not currently hold
complex financial instruments or undertake significant hedging
activities. The evaluation is not yet sufficiently advanced to
enable a reliable quantification of the impact to be estimated.
Decisions on accounting policy choices, including transition
options, are to be finalised during the second half of the current
year.
IFRS 15
The Group's approach to the assessment of the impact and
implementation of IFRS 15, which is ongoing, has not changed during
the period. The Group continues to assess all the impacts that the
application of IFRS 15 will have on its financial statements in the
period of initial application, which will also significantly depend
on its choice of transition, business and go-to-market strategy in
the financial year ending 30 September 2019 and beyond. For
additional details, please refer to pages 126 and 127 of the Annual
Report & Accounts for 2017.
The impacts, if material, will be disclosed no later than the
publication of the Group's trading update for the quarter ending 31
December 2018. This includes statements on whether and how the
Group plans to apply any of the practical expedients available in
the standard.
IFRS 16
The Group has commenced its evaluation of the impact of the
standard, and the implementation project will be completed during
the year ending 30 September 2019.
Critical accounting estimates and judgements
The preparation of financial statements requires the use of
accounting estimates and assumptions by management. It also
requires management to exercise its judgement in the process of
applying the accounting policies. We continually evaluate our
estimates, assumptions and judgements based on available
information. The areas involving a higher degree of judgement or
complexity are described below.
Revenue recognition
Approximately 40% of the company's revenue is generated from
sales to partners rather than to end users. The key judgement in
accounting for the three principal ways in which our business
partners are remunerated is determining whether the business
partner is a customer of the Group in respect of the initial
product sale. The key criteria in this determination is whether the
business partner has paid for and taken on the risks and rewards of
ownership of the software product from Sage. An additional area of
judgement is the recognition and deferral of revenue on bundled
products, for example the sale of a perpetual licence with an
annual maintenance and support contract.
The full revenue recognition policy is disclosed in the 30
September 2017 financial statements.
Goodwill impairment
The judgements in relation to goodwill impairment testing relate
to two key areas. The first is the ongoing appropriateness of the
cash-generating units ("CGUs") for the purpose of impairment
testing. The second relates to the assumptions applied in
calculating the value in use of the CGUs being tested for
impairment.
The carrying value of goodwill and the key assumptions used in
performing the annual impairment assessment are disclosed in the 30
September 2017 financial statements.
Tax provisions
The Group recognises certain provisions and accruals in respect
of tax which involve a degree of estimation and uncertainty where
the tax treatment cannot finally be determined until a resolution
has been reached by the relevant tax authority. This approach
resulted in providing GBP24m as at 31 March 2018 (30 September
2017: GBP25m).
The carrying amount is sensitive to the resolution of issues
which is not always within the control of the Group and it is often
dependent on the efficiency of the legal processes in the relevant
taxing jurisdictions in which the Group operates. Issues can take
many years to resolve and assumptions on the likely outcome have
therefore been made by management.
The nature of the assumptions made by management when
calculating the carrying amounts relates to the estimated tax which
could be payable as a result of decisions with tax authorities in
respect of transactions and events whose treatment for tax purposes
is uncertain. In making the estimates, management's judgement was
based on various factors, including:
-- the status of recent and current tax audits and enquiries;
-- the results of previous claims; and
-- any changes to the relevant tax environments.
When making this assessment, we utilise our specialist in-house
tax knowledge and experience of similar situations elsewhere to
confirm these provisions. These judgements also take into
consideration specialist tax advice provided by third party
advisors on specific items.
Business combinations
When the Group completes a business combination, the
consideration transferred for the acquisition and the identifiable
assets and liabilities acquired are recognised at their fair
values. The amount by which the consideration exceeds the net asset
acquired is recognised as goodwill. The application of accounting
policies to business combinations involves judgement and the use of
estimates. The Group engages external experts when necessary to
support assessments of identifiable assets and liabilities to
recognise.
The fair values of the prior year business combinations are
disclosed in the 30 September 2017 financial statements. There have
been no material acquisitions during the six month period ended 31
March 2018.
Website
This condensed consolidated half-yearly financial report for the
six month ended 31 March 2018 can also be found on our website:
www.sage.com/investors/investor-downloads
2 Segment information
In accordance with IFRS 8, "Operating Segments", information for
the Group's operating segments has been derived using the
information used by the chief operating decision maker. The Group's
Executive Committee has been identified as the chief operating
decision maker in accordance with their designated responsibility
for the allocation of resources to operating segments and assessing
their performance, through the Quarterly Business Reviews chaired
by the President and Chief Financial Officer. The Executive
Committee uses organic and underlying data to monitor business
performance. Operating segments are reported in a manner which is
consistent with the operating segments produced for internal
management reporting.
The Group has been organised into nine key operating segments:
Northern Europe, Central Europe, France, Iberia, North America
(excluding Intacct), North America Intacct, Africa and the Middle
East, Asia (including Australia) and Latin America. With effect
from 1 October 2017, the previous operating segment of Southern
Europe was split into two key operating segments, France and
Iberia, as part of the continued focus to get closer to customers.
For reporting under IFRS 8 for the six months ended 31 March 2018,
the Group is divided into three reportable segments. These segments
and their main operating territories are as follows:
-- Northern Europe (UK & Ireland)
-- Central and Southern Europe (Germany, Austria, Switzerland,
Poland, France, Spain and Portugal)
-- North America (the US, Canada and North America Intacct)
The remaining operating segments of Africa and the Middle East,
Asia (including Australia) and Latin America do not meet the
quantitative thresholds for presentation as separate reportable
segments under IFRS 8, and so are presented together and described
as International. They include the Group's operations in South
Africa, UAE, Australia, Singapore, Malaysia and Brazil.
The reportable segments reflect the aggregation of the operating
segments for Central Europe, France and Iberia, and also of those
for North America (excluding Intacct) and North America Intacct. In
each case, the aggregated operating segments are considered to
share similar economic characteristics because they have similar
long-term gross margins and operate in similar markets. Central
Europe, France and Iberia operate principally within the EU and the
majority of their businesses are in countries within the Euro area.
North America (excluding Intacct) and North America Intacct share
the same North American geographical market.
The revenue analysis in the table below is based on the location
of the customer, which is not materially different from the
location where the order is received and where the assets are
located.
Revenue by segment (Unaudited)
Six months ended 31 March 2018
Underlying Organic Change Change Change
Statutory adjustments Underlying adjustments Organic Statutory Underlying Organic
GBPm GBPm GBPm GBPm GBPm % % %
============== ============ ============= =========== ============ ========= ========== =========== ========
Recurring revenue by segment
Northern
Europe 144 1 145 - 145 0.7% 1.2% (0.5%)
Central and
Southern
Europe 232 - 232 - 232 6.3% 4.0% 4.4%
North America 222 8 230 - 230 18.4% 33.4% 13.1%
International 100 - 100 - 100 0.8% 7.1% 7.6%
============== ============ ============= =========== ============ ========= ========== =========== ========
Recurring
revenue 698 9 707 - 707 7.7% 11.8% 6.4%
============== ============ ============= =========== ============ ========= ========== =========== ========
Software and software related services
("SSRS") revenue by segment
Northern
Europe 27 - 27 - 27 53.8% 53.3% 46.0%
Central and
Southern
Europe 70 - 70 - 70 10.1% 7.8% 8.3%
North America 36 - 36 - 36 (3.0%) 5.5% (2.2%)
International 25 - 25 - 25 (16.2%) (11.4%) (9.7%)
============== ============ ============= =========== ============ ========= ========== =========== ========
SSRS revenue 158 - 158 - 158 6.7% 9.1% 7.1%
============== ============ ============= =========== ============ ========= ========== =========== ========
Processing revenue by segment
Northern
Europe 19 - 19 - 19 2.3% 2.0% 2.0%
Central and
Southern
Europe - - - - - (100.0%) (100.0%) (100.0%)
North America 16 - 16 - 16 (5.6%) 3.3% 3.3%
International 8 - 8 - 8 11.6% 15.8% 15.8%
============== ============ ============= =========== ============ ========= ========== =========== ========
Processing
revenue 43 - 43 - 43 (1.7%) 2.1% 2.1%
============== ============ ============= =========== ============ ========= ========== =========== ========
Total revenue by segment
Northern
Europe 190 1 191 - 191 6.1% 6.5% 4.5%
Central and
Southern
Europe 302 - 302 - 302 6.8% 4.5% 4.9%
North America 274 8 282 - 282 13.4% 27.0% 10.3%
International 133 - 133 - 133 (2.4%) 3.5% 4.2%
============== ============ ============= =========== ============ ========= ========== =========== ========
Total revenue 899 9 908 - 908 7.1% 10.9% 6.3%
============== ============ ============= =========== ============ ========= ========== =========== ========
Six months ended 31 March 2017
Statutory Impact
and underlying of foreign Organic
as reported exchange Underlying adjustments Organic
GBPm GBPm GBPm GBPm GBPm
====================== ================= =========== ============ ============ =======
Recurring revenue by segment
Northern Europe 143 - 143 2 145
Central and
Southern Europe 218 5 223 - 223
North America 187 (14) 173 30 203
International 100 (5) 95 (1) 94
======================== ================= =========== ============ ============ =======
Recurring revenue 648 (14) 634 31 665
======================== ================= =========== ============ ============ =======
Software and software related services
("SSRS") revenue by segment
Northern Europe 18 - 18 1 19
Central and
Southern Europe 63 1 64 - 64
North America 37 (3) 34 3 37
International 30 (3) 27 - 27
======================== ================= =========== ============ ============ =======
SSRS revenue 148 (5) 143 4 147
======================== ================= =========== ============ ============ =======
Processing revenue by segment
Northern Europe 19 - 19 - 19
Central and
Southern Europe 1 - 1 - 1
North America 17 (2) 15 - 15
International 7 - 7 - 7
======================== ================= =========== ============ ============ =======
Processing revenue 44 (2) 42 - 42
======================== ================= =========== ============ ============ =======
Total revenue by segment
Northern Europe 180 - 180 3 183
Central and
Southern Europe 282 6 288 - 288
North America 241 (19) 222 33 255
International 137 (8) 129 (1) 128
======================== ================= =========== ============ ============ =======
Total revenue 840 (21) 819 35 854
======================== ================= =========== ============ ============ =======
Operating profit by segment (Unaudited)
Six months ended 31 March
2018 Change
====================== ========= ====================================== ======= ========= ==========
Underlying Organic
Statutory adjustments Underlying adjustments Organic Statutory Underlying
GBPm GBPm GBPm GBPm GBPm % %
====================== ========= ============ ========== ============ ======= ========= ==========
Operating profit by
segment
Northern Europe 62 3 65 - 65 (9%) (9%)
Central and Southern
Europe 78 2 80 - 80 16% 5%
North America 37 30 67 - 67 0% 63%
International 9 1 10 - 10 13% (45%)
========================= ========= ============ ========== ============ ======= ========= ==========
Total operating profit 186 36 222 - 222 3% 7%
========================= ========= ============ ========== ============ ======= ========= ==========
Six months ended 31 March 2017
======================= ================================================================
Impact
Underlying Underlying of foreign
Statutory adjustments as reported exchange Underlying
GBPm GBPm GBPm GBPm GBPm
======================= ========= ============ ============ =========== ==========
Operating profit
by segment
Northern Europe 68 4 72 - 72
Central and Southern
Europe 67 8 75 1 76
North America 37 8 45 (4) 41
International 8 11 19 (1) 18
========================== ========= ============ ============ =========== ==========
Total operating profit 180 31 211 (4) 207
========================== ========= ============ ============ =========== ==========
Reconciliation of underlying operating profit to statutory
operating profit
Six months ended Six months ended
31 March 2018 31 March 2017
(Unaudited) (Unaudited)
GBPm GBPm
==================================================== ==== ==== ================= =================
Northern Europe 65 72
Central and Southern Europe 80 76
North America 67 41
================================================================ ================= =================
Total reportable segments 212 189
International 10 18
================================================================ ================= =================
Underlying operating profit 222 207
Impact of movement in foreign currency exchange rates - 4
========================================================== ==== ================= =================
Underlying operating profit (as reported) 222 211
Amortisation of acquired intangible assets (16) (9)
Other M&A activity-related items (10) (3)
Adjustment to acquired deferred income (9) -
Non-recurring items (1) (19)
================================================================ ================= =================
Statutory operating profit 186 180
================================================================ ================= =================
3 Adjustments between underlying profit and statutory profit
(Unaudited)
Six months Six months Six months Six months Six months Six months
ended ended ended ended ended ended
31 March 31 March 31 March 31 March 31 March 31 March
2018 2018 2018 2017 2017 2017
Non- Non-
Recurring recurring Total Recurring recurring Total
GBPm GBPm GBPm GBPm GBPm GBPm
=============================== ========== ========== ========== ========== ========== ==========
M&A activity-related
items
Amortisation of acquired
intangibles (16) - (16) (9) - (9)
Loss on disposal of subsidiary - (1) (1) - - -
Adjustment to acquired
deferred income (9) - (9) - - -
Other M&A activity-related
items (10) - (10) (3) - (3)
Other items
Business transformation - - - - (19) (19)
Total adjustments made
to operating profit (35) (1) (36) (12) (19) (31)
Fair value adjustments (2) - (2) - - -
Amortisation of acquired
intangibles - - - (1) - (1)
Gain on remeasurement
of existing investment
in an associate - - - - 13 13
Foreign currency movements
on intercompany balances 1 - 1 - - -
Total adjustments made
to profit before income
tax (36) (1) (37) (13) (6) (19)
=============================== ========== ========== ========== ========== ========== ==========
Recurring items
Acquired intangibles are assets which have previously been
recognised as part of business combinations. These assets are
predominantly brands, customer relationships and technology
rights.
The adjustment to acquired deferred income represents the
additional revenue that would have been recorded in the year had
deferred income not been reduced as part of the purchase price
allocation adjustment made for business combinations.
M&A activity-related items comprise the cost of carrying out
M&A activities including business combinations in the period as
well as acquisition-related remuneration and directly attributable
integration costs arising on business combinations completed in the
prior year.
The fair value adjustment comprises a charge of GBP2m (H1 FY17:
charge of GBP1m) in relation to an embedded derivative asset which
relates to contractual terms agreed as part of the US private
placement debt. In H1 FY17, this was offset by a credit of GBP1m
relating to a fair value adjustment of a financial asset.
Foreign currency movements on intercompany balances of GBP1m (H1
FY17: nil) occurs due to retranslation of intercompany balances
other than those where settlement is not planned or likely in the
foreseeable future.
Non-recurring items
Charges of GBPnil (H1 FY17: GBP19m) have been incurred as a
result of the implementation of the business transformation
strategy, which completed by 30 September 2017. The prior year
charge comprised people reorganisation charges of GBP9m, net
property exit costs of GBP3m and other directly attributable costs,
mainly relating to consultancy and contractors of GBP7m. These
charges were one-off in nature and directly linked to the business
transformation that is under way.
Total cash paid in relation to the business transformation
related accruals and provisions held at 30 September 2017 totalled
GBP21m (H1 FY17: GBP23m) in the period.
Details of loss on disposal of subsidiary can be found in note
11.
The prior year gain on remeasurement of existing investment in
an associate relates to the acquisition of Sage People (formerly
Fairsail).
4 Income tax expense
The effective tax rate on statutory profit before tax was 21%
(six months ended 31 March 2017: 25%) whilst the effective tax rate
on underlying profit before tax for continuing operations was 26%
(six months ended 31 March 2017: 27%). The effective income tax
rate represents the best estimate of the average annual effective
income tax rate expected for the full year, applied to the profit
before income tax for the six months ended 31 March 2018.
US Reform
On 22 December 2017, the US President signed the Tax Cuts and
Jobs Act, which provides for significant and wide-ranging changes
to the taxation of corporations. The reforms are complex and
Regulations are required to prescribe their application. Whilst the
headline change is a reduction in the federal income tax rate from
35% to 21%, a significant number of additional measures have been
incorporated into the US law which increase taxes payable. The most
material tax adjustment included within these financial statements,
as a result of the reduction in the Federal tax rate, is the
recognition of a tax benefit of GBP13m due to a re-measurement of
US deferred tax assets and liabilities at the new lower 21% federal
tax rate. This benefit is excluded from underlying earnings as a
non-recurring credit. The provisions and the regulations will
continue to be monitored and evaluated as and when they are
issued.
EU State Aid
The Group is monitoring developments in relation to EU State Aid
investigations including the EU Commission's announcement on 26
October 2017 that it will be opening a State Aid investigation into
the UK's Controlled Foreign Company regime. The Group does not
currently consider any provision is required in relation to EU
State Aid. The assessment of uncertain tax positions is subjective
and significant management judgement is required. This judgement is
based on interpretation of legislation, management experience and
professional advice.
5 Dividends
Six months Six months
ended ended Year
31 March 31 March ended
2018 2017 30 September
2017
(Unaudited) (Unaudited) (Audited)
GBPm GBPm GBPm
========================================== ============= ============= ==============
Final dividend paid for the year ended 30
September 2016 of 9.35p per share - 101 101
Interim dividend paid for the year ended
30 September 2017 of 5.22p per share - - 56
Final dividend paid for the year ended 30
September 2017 of 10.20p per share 110 - -
========================================== ============= ============= ==============
110 101 157
========================================== ============= ============= ==============
The interim dividend of 5.65p per share will be paid on 1 June
2018 to shareholders on the register at the close of business on 11
May 2018.
6 Earnings per share
Basic earnings per share is calculated by dividing the profit
for the period attributable to owners of the parent by the weighted
average number of ordinary shares in issue during the period,
excluding those held as treasury shares, which are treated as
cancelled.
For diluted earnings per share, the weighted average number of
ordinary shares in issue is adjusted to assume conversion of all
dilutive potential ordinary shares. The Group has dilutive
potential ordinary shares consisting of share options granted to
employees, where the exercise price is less than the average market
price of the Company's ordinary shares during the period.
Underlying
Underlying as reported Six Underlying Statutory Statutory
Six months ended months ended Six months ended Six months ended Six months ended
31 March 31 March 31 March 31 March 31 March
2018 2017 2017 2018 2017
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
================== ================== ================== ================== ================== ==================
Earnings
attributable to
owners of the
parent -
Continuing
operations (GBPm)
Profit for the
period 154 145 142 135 136
================== ================== ================== ================== ================== ==================
Number of shares
(millions)
Weighted average
number of shares 1,082 1,079 1,079 1,082 1,079
Dilutive effects
of shares 2 5 5 2 5
================== ================== ================== ================== ================== ==================
1,084 1,084 1,084 1,084 1,084
================== ================== ================== ================== ================== ==================
Earnings per
share
attributable to
owners of the
parent -
Continuing
operations
(pence)
Basic earnings
per share 14.25 13.46 13.19 12.50 12.57
================== ================== ================== ================== ================== ==================
Diluted earnings
per share 14.22 13.40 13.14 12.48 12.52
================== ================== ================== ================== ================== ==================
Underlying
Underlying as reported Six Underlying Statutory Statutory
Six months ended months ended Six months ended Six months ended Six months ended
31 March 31 March 31 March 31 March 31 March
2018 2017 2017 2018 2017
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
================== ================== ================== ================== ================== ==================
Earnings
attributable to
owners of the
parent -
Continuing and
discontinued
operations (GBPm)
Profit for the
period 154 156 152 135 146
================== ================== ================== ================== ================== ==================
Number of shares
(millions)
Weighted average
number of shares 1,082 1,079 1,079 1,082 1,079
Dilutive effects
of shares 2 5 5 2 5
================== ================== ================== ================== ================== ==================
1,084 1,084 1,084 1,084 1,084
================== ================== ================== ================== ================== ==================
Earnings per
share
attributable to
owners of the
parent -
Continuing and
discontinued
operations
(pence)
Basic earnings
per share 14.25 14.45 14.12 12.50 13.54
================== ================== ================== ================== ================== ==================
Diluted earnings
per share 14.22 14.39 14.06 12.48 13.48
================== ================== ================== ================== ================== ==================
Six months ended Six months ended
31 March 31 March
2018 2017
(Unaudited) (Unaudited)
Reconciliation of earnings - Continuing operations GBPm GBPm
================================================================================== ================ ================
Underlying earnings attributable to owners of the parent 154 142
Impact of movement in foreign currency exchange rates - 3
================================================================================== ================ ================
Underlying earnings attributable to owners of the parent (as reported) 154 145
Transformation costs - (19)
Amortisation of acquired intangible assets and adjustment to acquired deferred
income (25) (10)
Gain on remeasurement of existing investment in an associate - 13
Fair value adjustments to debt-related financial instruments (2) -
Foreign currency movements on intercompany balances 1 -
Other M&A related items (10) (3)
Loss on disposal of subsidiary (1) -
Taxation on adjustments 5 10
Income tax adjustments (note 4) 13 -
================================================================================== ================ ================
Net adjustments (19) (9)
================================================================================== ================ ================
Earnings statutory profit for period 135 136
================================================================================== ================ ================
Six months ended Six months ended
31 March 31 March
2018 2017
(Unaudited) (Unaudited)
Reconciliation of earnings - Continuing and discontinued operations GBPm GBPm
======================================================================= ================ ================
Underlying earnings attributable to owners of the parent 154 152
Impact of movement in foreign currency exchange rates - 4
======================================================================= ================ ================
Underlying earnings attributable to owners of the parent (as reported) 154 156
Net adjustments - Continuing operations (19) (9)
Amortisation of acquired intangible assets - discontinued operations - (1)
Net adjustments (19) (10)
======================================================================= ================ ================
Earnings statutory profit for period 135 146
======================================================================= ================ ================
7 Non-current assets
Other
intangible Property, plant
Goodwill assets and equipment Total
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
GBPm GBPm GBPm GBPm
================================================ ============= ============= ================ =============
Opening net book amount at 1 October 2017 2,023 274 133 2,430
Additions - 10 10 20
Acquisition 8 - - 8
Depreciation, amortisation and other movements - (23) (13) (36)
Exchange movement (56) (8) (1) (65)
Closing net book amount at 31 March 2018 1,975 253 129 2,357
================================================ ============= ============= ================ =============
Other
intangible Property, plant
Goodwill assets and equipment Total
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
GBPm GBPm GBPm GBPm
================================================ ============= ============= ================ =============
Opening net book amount at 1 October 2016 1,659 109 123 1,891
Additions - 7 8 15
Acquisition 103 - - 103
Transfer to held for sale (199) (1) (1) (201)
Depreciation, amortisation and other movements - (15) (12) (27)
Exchange movement 26 2 3 31
Closing net book amount at 31 March 2017 1,589 102 121 1,812
================================================ ============= ============= ================ =============
Goodwill is not subject to amortisation, but is tested for
impairment annually and whenever there is any indication of
impairment. At 31 March 2018, there were no indicators of
impairment to goodwill. Details of the 2017 goodwill impairment
review are provided in the 2017 financial statements. Details of
the current period acquisition has been provided in note 11.
8 Financial instruments
For financial assets and liabilities, the carrying amount
approximates the fair value of the instruments, with the exception
of US senior loan notes due to these bearing interest at fixed
rates. The fair value of borrowings is determined by reference to
interest rate movements on the US $ private placement market and
therefore can be considered as a level 2 fair value as defined
within IFRS 13 with the respective book and fair values included in
the table below.
At 31 March 2018 At 31 March 2017
======================== ========================
Book Value Fair Value Book Value Fair Value
GBPm GBPm GBPm GBPm
====================== =========== =========== =========== ===========
Long term-borrowing 466 463 551 557
Short term-borrowing 36 36 - -
====================== =========== =========== =========== ===========
The Group has a fixed asset investment in an unquoted equity
instrument which is classified as an available-for-sale financial
asset and carried at its fair value of GBP14m (31 March 2017:
GBPnil; 30 September 2017: GBP15m). The fair value of the
instrument is considered to be equivalent to its nominal value as
it currently pays a market rate of interest. This is a level 3 fair
value as defined within IFRS 13.
9 Ordinary shares and share premium
Ordinary
Number of Shares Share premium Total
shares (Unaudited) (Unaudited) (Unaudited)
(Unaudited) GBPm GBPm GBPm
======================== ============== ==================== ===================== ==================
At 1 October 2017 1,120,638,121 12 548 560
Shares issued/proceeds 142,068 - - -
======================== ============== ==================== ===================== ==================
At 31 March 2018 1,120,780,189 12 548 560
======================== ============== ==================== ===================== ==================
Number of Ordinary Share
Shares Shares (Unaudited) Premium (Unaudited) Total (Unaudited)
(Unaudited) GBPm GBPm GBPm
======================== ============== ==================== ===================== ==================
At 1 October 2016 1,119,480,363 12 544 556
Shares issued/proceeds 315,053 - 1 1
======================== ============== ==================== ===================== ==================
At 31 March 2017 1,119,795,416 12 545 557
======================== ============== ==================== ===================== ==================
In the current period, the Group transferred 1,790,815 (H1 FY17:
1,019,166) of treasury shares to the Employee Benefit Trust in
order to satisfy vested PSP awards.
10 Cash flow and net debt
Six months ended Six months ended
31 March 31 March
2018 2017
(Unaudited) (Unaudited)
GBPm GBPm
=============================================================================== ================= =================
Statutory operating profit - continuing operations 186 180
Recurring and non-recurring items 36 31
=============================================================================== ================= =================
Underlying operating profit - continuing operations 222 211
Underlying operating profit - discontinued operations - 18
=============================================================================== ================= =================
Underlying operating profit (as reported) 222 229
Depreciation/amortisation/impairment/profit on disposal of non-current assets 17 17
Share-based payments 5 5
Net changes in working capital (5) 2
Net capital expenditure (18) (15)
=============================================================================== ================= =================
Underlying cash flow from operating activities 221 238
Net interest paid (12) (10)
Income tax paid (29) (39)
Non-recurring items (21) (23)
Exchange movement (2) -
=============================================================================== ================= =================
Free cash flow 157 166
Net debt at 1 October (813) (397)
Acquisitions and disposals of subsidiaries, net of cash (8) (79)
Acquisitions and disposal related items (1) -
Reclassification as held for sale - (8)
Dividends paid to owners of the parent (110) (101)
Exchange movement 31 (15)
Net debt at 31 March (744) (434)
=============================================================================== ================= =================
At At
1 October 2017 31 March 2018
(Audited) Cash flow Non-cash movements Exchange movement (Unaudited)
Analysis of change in net debt (inclusive of finance leases) GBPm GBPm GBPm GBPm GBPm
============================================================== ================ ========= ================== ================= ===============
Cash and cash equivalents 231 71 - (6) 296
Bank overdrafts (18) 8 - - (10)
============================================================== ================ ========= ================== ================= ===============
Cash, cash equivalents and bank overdrafts 213 79 - (6) 286
Liabilities arising from financing activities
Loans due within one year (37) - - 1 (36)
Loans due after more than one year (914) (27) - 35 (906)
Cash held on behalf of customers (75) (14) - 1 (88)
============================================================== ================ ========= ================== ================= ===============
(1,026) (41) - 37 (1,030)
============================================================== ================ ========= ================== ================= ===============
Total (813) 38 - 31 (744)
============================================================== ================ ========= ================== ================= ===============
Included in cash above is GBP88m (31 March 2017: GBP96m, 30
September 2017: GBP75m) relating to cash held on behalf of
customers. This arises as a consequence of providing payment
transaction processing and electronic fund transfer services. The
balance represents cash in transit from third parties to Sage
customers. Accordingly, a liability for the same amount is included
in trade and other payables on the balance sheet and is classified
within net debt.
The Group continues to be able to borrow at competitive rates
and currently deems this to be the most effective means of raising
finance. The Group's current syndicated bank multi-currency
revolving credit facility expires in February 2023 (with an option
to extend for a further two years) following the renewal in H1 FY18
with facility levels of GBP648m (US$719m and GBP135m tranches). At
31 March 2018, GBP336m (H1 2017: GBP92m) of the multi-currency
revolving debt facility was drawn, with the increase due to funding
of the acquisition of Intacct in the prior year net of repayments
funded from free cash flows.
Total US private placement ("USPP") loan notes at 31 March 2018
were GBP502m (US$600 m and EUREUR85m) (H1 2017: GBP551m, US$600m
and EUREUR85m).
At 31 March 2018, the balance outstanding of the Group's term
loan drawn to partially fund the Intacct acquisition was GBP107m
(US$150m) (H1 2017: GBPnil).
11 Acquisitions and disposals
Measurement adjustments to business combinations reported using
provisional amounts
In the financial statements for the year ended 30 September
2017, the acquisition of Intacct Corporation was accounted for
using provisional fair values as the initial accounting for
acquired intangible assets and goodwill was incomplete due to the
short period between the acquisition date and the approval of the
Annual Report. To date, no new information has been obtained that
would have affected the measurement of these provisional amounts,
and therefore no measurement adjustments have been recognised. The
accounting for these amounts will be finalised during the second
half of the year ending 30 September 2018.
Acquisitions made during the period
On 28 March 2018, the Group acquired 100% of the equity capital
of a provider of a budgeting and forecasting solution for cash
consideration of GBP8m. The value of net assets acquired was
GBPnil. Provisional values have been used as it has not been
practical to complete the initial accounting for acquired
intangible assets and goodwill due to the short period between the
acquisition date and the approval of the half-yearly report.
Pending completion of the accounting, the residual excess of
consideration over the net assets acquired has been recognised
entirely as goodwill.
Discontinued operations and assets and liabilities held for
sale
The Group had no discontinued operations during the six-month
period ended 31 March 2018, and had no assets or liabilities held
for sale at 31 March 2018.
Discontinued operations in the six-month period ended 31 March
2017 and the year ended 30 September 2017 relate to the
subsidiaries that formed the Group's North American Payments
business. Assets and liabilities held for sale at 31 March 2017
relate to the subsidiaries that formed the Group's North America
Payments business, the Group's subsidiary Syska GmbH and the
Group's subsidiary Sage XRT Brasil Ltda. Assets and liabilities
held for sale at 30 September 2017 relate to the Group's subsidiary
Sage XRT Brasil Ltda. The North America Payments business and Syska
GmbH were sold during the second half of the year ended 30
September 2017. Sage XRT Brasil Ltda was sold on 30 November
2017.
At 31 March 2017 assets held for sale comprised goodwill of
GBP199m, cash of GBP28m, trade and other receivables of GBP26m and
other assets of GBP12m with liabilities held for sale comprising
trade and other payables of GBP45m and other liabilities of GBP6m.
At 30 September 2017 assets held for sale comprised trade and other
receivables of GBP1m and liabilities held for sale comprised trade
and other payables of GBP1m.
Profit from discontinued operations for the six-month period
ended 31 March 2017 and the year ended 30 September 2017 is
analysed as follows:
Six months Six months Six months Year ended
ended ended ended 30 September
31 March 31 March 31 March 2017
2017 2017 2017 (Audited)
(Unaudited) (Unaudited) (Unaudited) Statutory
Underlying Adjustments* Statutory GBPm
GBPm GBPm GBPm
================================== ============= ============== ============= ================
Revenue 72 - 72 119
Cost of sales (7) - (7) (11)
================================== ============= ============== ============= ==============
Gross profit 65 - 65 108
Selling and administrative
expenses (47) (1) (48) (79)
================================== ============= ============== ============= ==============
Operating profit 18 (1) 17 29
Finance income - - - -
Finance costs - - - -
================================== ============= ============== ============= ==============
Profit before income tax 18 (1) 17 29
Income tax expense (7) - (7) (11)
---------------------------------- ------------- -------------- ------------- --------------
Profit after income tax 11 (1) 10 18
================================== ============= ============== ============= ==============
Gain on disposal of discontinued
operations - - - 27
================================== ============= ============== ============= ==============
Tax on disposal - - - (2)
================================== ============= ============== ============= ==============
Profit for the period 11 (1) 10 43
================================== ============= ============== ============= ==============
*Adjustments comprise amortisation of acquired intangible assets
which have previously been recognised as part of business
combinations.
Cash flow from discontinued operations for the six-month period
ended 31 March 2017 and the year ended 30 September 2017 is
analysed as follows:
Six months Year ended
ended 30 September
31 March 2017
2017 GBPm
Cash flows from: GBPm
====================== =========== ==============
Operating activities 13 25
Investing activities - 158
Financing activities 7 4
====================== =========== ==============
20 187
====================== =========== ==============
Disposals made during the period
On 30 November 2017, the Group sold its subsidiary Sage XRT
Brasil Ltda ("XRT"). Net assets divested were GBP1m, and the
transaction resulted in a loss on disposal of GBP1m. The assets and
liabilities of XRT were presented as held for sale in the Group's
financial statements for the year ended 30 September 2017. Prior to
disposal, the business formed part of the Group's International
reporting segment.
12 Related party transactions
The Group's related parties are its subsidiary undertakings and
Executive Committee members. The Group has taken advantage of the
exemption available under IAS 24, "Related Party Disclosures", not
to disclose details of transactions with its subsidiary
undertakings.
Six months ended Six months ended
31 March 31 March
2018 2017
(Unaudited) (Unaudited)
Key management compensation GBPm GBPm
=========================================== ================= =================
Salaries and short-term employee benefits 3 4
Post-employment benefits - -
Share-based payments 2 1
=========================================== ================= =================
5 5
=========================================== ================= =================
The key management figures given above include directors. Key
management personnel are deemed to be members of the Executive
Committee and are defined in the Group's Annual Report &
Accounts 2017. There have been no changes to the Executive
Committee since the signing of the Group's Annual Report &
Accounts 2017.
13 Events after the balance sheet date
On 30 April 2018, the Group acquired a contact management
software application for GBP9m. The transaction will be accounted
for as the purchase of an intangible technology asset, together
with the assumption of any associated liabilities. The asset will
be amortised over its useful life.
Managing Risk
Risk is inherent within our business activities, and we continue
to prioritise and develop our risk management strategy and
capability in recognition of this. Timely identification of risks,
combined with their appropriate management and escalation, enables
us to successfully run our business and deliver strategic change,
while ensuring that the likelihood and/or potential impact
associated with such risks is understood and managed within our
defined risk appetite.
The Board continues to monitor the risk environment, and reviews
the appropriateness of the principal risks to the business.
Sage completed its annual review of the principal risks, which
considered the business strategy and operational developments. This
has resulted in nine refreshed principal risks which are an
evolution of our prior principal risks. These risks, which we
monitor and report against, are aligned to the successful delivery
of our Strategy and mapped against the strategic pillars to which
they relate recognising our orientation as a SaaS business. Four
risks are externally focused and five risks are enablers. A range
of measures are in place to manage and mitigate these risks.
Other risks are analysed and mitigated via the normal embedded
risk management process.
Principal Risk Content Management and Mitigation
Risk
================== ============================= ===================================================================
Competitive Sage operates across
Advantage multiple geographies * Launch of Sage Business Cloud
Sage does and has the ability
not successfully to capture local market
establish opportunity, and use * Sage Business Cloud is released in United Kingdom and
its competitive its geographically dispersed Ireland, North America, France and Spain
advantage development resources
and then to satisfy customer
leverage need. * A product rename to assist with customer
timely and Sage seeks to position understanding and to allow positioning
relevant itself as a cloud first
product software company, and
innovation leverage its geographic * Recent acquisitions (Sage Intacct and People) are
and development footprint to compete available in Sage Business Cloud
activities head on with a number
and resources of emerging cloud only
to acquire companies, and provide * A licensing model transition strategy is in place
market share. anytime anywhere access.
This will require
Strategic acquisition * Approved subscription revenue targets are defined,
alignment: of new cloud based which span multiple years and support successful and
Winning customers, balanced delivery of our strategy
in the Market and migration of existing
Revolutionise non-cloud based customers.
the business * Ongoing monitoring and review of the approved targets
takes place at country, regional and group levels to
proactively manage the licence transition, and
revenue targets
In progress:
* Ongoing migration of existing customers onto Sage
Business Cloud
* Ongoing deployment of Sage Business Cloud in line
with plans
================== ============================= ===================================================================
Approach Sage provides an extensive
to Market range of products and * A Market and Competitive Intelligence team is
Sage fails services to customers established, with Group responsibility for Market
to develop which support their Intelligence
and maintain needs and provide a
an appropriate natural migration path
blend of as these needs develop. * Brand health surveys are undertaken in order to
channels It is important that understand customer perception of the Sage brand and
to support all Marketing activities its products
the successful are aligned and that
marketing channels to market are
and sale both capable and effective * An approved internal communications plan is delivered,
of its suite in support of Sage's to share market intelligence to build brand awareness
of products goals.
and services,
and enable * Market data is provided through a Market Data portal,
achievement allowing ease of access and improved analysis
of growth
targets.
* Dedicated partner channel managers are in place to
Strategic support the development of partners, and to help
alignment: manage the growth of targeted channels
Customers
for Life
Winning in In progress:
the Market * Ongoing refinement and improvement of market data
through feedback from the business
* Deployment of the Sage Partner Programme to harmonise
management of the indirect channel to market
================== ============================= ===================================================================
Customer To achieve double digit
Success revenue growth, Sage * A Product Marketing team oversees competitive
Sage fails needs to support the positioning and product development
to maintain success of its customers.
a strong Successful customers
focus on grow their business, * A Product Delivery team develops and delivers those
the success and with that growth, products needed by our customers to support their
of its customers require expanded Sage success
by listening product and service
and understanding offerings.
their needs By providing software, * Battlecards are in place for key products in all
at every service and support countries, setting out the strengths and weaknesses
stage of offerings that allow of competitors and their products
their business customers to effortlessly
lifecycle, adapt and grow within
and then Sage Business Cloud * Defined 'customer for life' roadmaps are in place,
providing environment, customer detailing how products fit together, any
them with churn can be reduced, interdependencies, and migration pathways for current
top quality and acquisition of new and potential customers
products, customers migrating
services from competitors increased.
and experiences * Continuous Net Promoter Score (NPS) surveying allows
that support Sage to identify customer challenges rapidly, and
these needs. respond in a timely manner to emerging trends
Strategic In progress:
alignment: * A data-driven Customer Success Framework is being
Customers piloted in Northern Europe. This framework is
for Life designed to enhance the customer experience, and
subsequently reduce customer churn rates
* The results of this pilot will be used to enhance the
Framework as it is rolled out to other major markets
================== ============================= ===================================================================
Innovation As an established technology
Sage fails company, Sage occupies * Market intelligence surveys identify market
to develop a position where it opportunities
and adopt can lever its customer
new technologies and sector knowledge
at pace, to shape the solutions * A Product Delivery team develops and delivers
to deliver in the markets within products
products which it operates.
and services New technologies, and
which shape engineering solutions * Integration of the Pegg chat bot with Sage Accounting,
the market. that exploit these, to enhance the product experience using artificial
continue to emerge and intelligence
Strategic through successful adoption
alignment: and incubation of these
Customers Sage can pioneer solutions
for Life which support and excite In progress:
Revolutionise existing customers, * Prioritised product development based on 'customer
the Business and attract customers for life' roadmaps
from our competitors.
* Simple, smart and open technology strategy to provide
API and microservices through a Sage Developer
Platform
* Strategic acquisition and collaboration to complement
and enable accelerated innovation
* Platform Services delivered to Sage Business Cloud to
enhance value proposition for Cloud adoption
================== ============================= ===================================================================
Ecosystem The development and
Sage does management of Sage's * Dedicated partner and alliance channel managers are
not develop, third party ecosystem in place to support the development of partners, and
manage and allows it to focus on to help manage the growth of targeted channels
maintain core competencies, while
an ecosystem leveraging specific
to support third party skills to * Standardised implementation plans for Sage products
the full enable both delivery that facilitate efficient partner implementation
range of of service and revenue
business generation, such as
activities through the use of third * The Procurement function supports the business with
which enables party APIs. the selection of strategic third party suppliers and
it to grow With this extended negotiation of contracts
at pace. enterprise
come both opportunities
Strategic to grow and develop * Procurement Lifecycle Policy and Procedures are
alignment: the business, while agreed and published. These contain clear roles and
Winning introducing a requirement responsibilities for colleagues and align with
in the Market to understand these existing processes, including investment approval
Capacity organisations and manage
for Growth their performance.
In progress:
* Rationalisation of the third party ecosystem is
continuing to focus on value add activities
* Managed growth of the API estate, including enhanced
product development that enables access by third
party API developers
* Deployment of the Sage Partner Programme to harmonise
management of the indirect channel to market
================== ============================= ===================================================================
Control The application of robust
Environment control frameworks across * Established Global and Regional Risk Committees
Sage's systems processes, and the oversee the risk and internal control environment,
and processes rationalisation and set the tone-from-the-top
do not enable of key internal systems,
effective enables Sage to deliver
and secure in a cloud-based, data-led * Release of a Governance, Risk and Compliance
business operating environment. technology to automate activity, and provide a
operation By transitioning to consolidated view of risk and compliance
across multiple a consolidated set of
geographies core internal systems,
and provide supported by efficient * Shared Service Centres (SSCs) are established in
timely and and reliable controls, Newcastle, Johannesburg and Atlanta, enabling the
reliable Sage can more effectively creation of consistent and consolidated systems and
data in support deliver scalable growth processes
of the One that is less constrained
Sage operating by borders and
model, allowing system-specific * Policy Approval Committee in place to supervise and
it to operate limitations. approve policies within the Sage-wide policy suite
at pace.
Strategic * Customer Business Centres (CBCs) are built around
alignment: core systems to underpin operational consistency and
Capacity expansion, including Salesforce CRM and Sage
for Growth Enterprise for General Ledger activity. As volumes
scale, all new customers for CBC supported products
are being entered directly into these systems
* SSCs in Newcastle and Johannesburg have installed
Sage Enterprise General Ledger
In progress:
* Plans for migration of country General Ledgers into
Sage Enterprise is on track with plans
* An Excellence in Controls initiative to enhance the
supporting control environment is underway
* Continuing deployment of a Governance, Risk and
Compliance technology solution
================== ============================= ===================================================================
Colleagues Sage seeks to establish
Sage fails itself as a cloud technology * Roles and vacancies are benchmarked in the market to
to identify, company, offering anytime, ensure appropriate remuneration
recruit and anywhere solutions to
retain colleagues its customers, and underpin
with appropriate delivery of these goals * Job Descriptions provide criteria against which new
skills and through an appropriately hires and internal transfers are assessed
experience, skilled workforce.
and to By attracting key experience
continually into the business, and * The performance management process identifies
develop these supplementing this through training and development needs for colleagues
colleagues, identification and
to enable development
it to deliver of internal talent, In progress:
its strategy. a stable platform will * An Employee Value Proposition is being developed to
be provided from which drive a consistent experience for all prospective
to deliver its strategic colleagues
Strategic direction.
alignment:
One Sage * Deployment of Leading at Sage training for all
Customers managers within the business to develop leaders
for Life
================== ============================= ===================================================================
Values and Customers reside at
Behaviours the heart of everything * Code of Conduct is in place, and communicated to all
Sage does Sage does, and their colleagues
not establish experience is shaped
an environment by the actions of colleagues
and way of across the business * Alignment of personal Objectives across Sage, with
working as they perform their direct cascade from the Executive Committee
consistent daily roles.
with its By establishing a culture
values and which places the customer * Formal assessment against personal objectives for
behaviours, foremost in colleague each colleague as part of established performance
which rewards minds, and reinforcing management process, which also considers personal
behaviour this behaviour through application of Sage's Values and Behaviours
aligned to alignment of objectives
corporate and rewards, Sage seeks
values, drives to optimise the customer * Whistleblowing and Incident Reporting mechanisms are
delivery, experience, drive in place to allow issues to be formally reported, and
and ensures satisfaction, investigated
the customer and reduce churn.
experience
is optimised. * All colleagues are empowered to take 5 paid
Foundation days each year, to support charities and
provide philanthropic support to the community
Strategic
alignment:
One Sage In progress:
Capacity * Core eLearning modules are being enhanced to include
for Growth wider role based education and ensure they are
relevant and appropriate to colleagues, to drive
awareness
* Scheduled activity by Sage Compliance to support and
empower colleagues to 'do the right thing' and
demonstrate the behaviours required to support a 100%
compliance culture
================== ============================= ===================================================================
Information Sage retains and processes
Management large volumes of information * Accountability is established within both OneIT and
and Protection which supports internal Product for all internal and external data being
Sage fails business operations processed by Sage. Sage Chief Information Security
to adequately and wider service offerings. Officer oversees information security
understand, Much of this is subject
manage and to legislative or regulatory
protect requirements, which * A network of Information Security Officers supports
information, continue to evolve. the business
including Effectively understanding,
cyber exposures managing and protecting
across the this information, can * Formal certification schemes are maintained, across
enterprise. allow Sage competitive appropriate parts of the business, and include
Strategic advantage in the market, internal and external validation of compliance
alignment: and build brand equity
One Sage as a trusted supplier.
Capacity * Secure coding standards are in place for the
for Growth development of new code
* Structured and ad-hoc IT internal audit activity is
undertaken by Sage Assurance against an agreed plan,
and reported to management and the Audit and Risk
Committee
* A Sage information security policy suite is in place
* An Incident Management framework is in place,
including rating of incidents and requirements for
escalation
In progress:
* Awareness training for Information Management and
protection continues to be deployed
* General Data Protection Regulations (GDPR) project
overseeing actions to comply with legislation
* Information Security Risk Management Methodology is
being deployed to provide objective risk information
================== ============================= ===================================================================
Statement of Directors' Responsibilities
The condensed consolidated half-yearly financial report for the
six months ended 31 March 2018 includes the following
responsibility statement.
Each of the Directors confirms that, to the best of their
knowledge:
- the Group consolidated condensed financial statements, which
have been prepared in accordance with IAS34, "Interim Financial
Reporting" as adopted by the EU, give a true and fair view of the
assets, liabilities, financial position and profit of the Group;
and
- the Directors' report includes a fair review of the
development and performance of the business and the position of the
Group, together with a description of the principal risks and
uncertainties that it faces.
The Directors also confirm that the Interim Management Report
herein includes a fair review of information required by 4.2.8R of
the DTR (Disclosure and Transparency Rules).
The Directors of The Sage Group plc are consistent with those
listed in the Group's 2017 Annual Report and Accounts with the
addition of Blair Crump, who was appointed with effect from 1
January 2018. A list of current directors is maintained on the
Group's website: www.sage.com.
On behalf of the Board
S Hare
Chief Financial Officer
1 May 2018
Independent review report to The Sage Group plc
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the half-yearly financial report for the
six months ended 31 March 2018 which comprises Consolidated income
statement, Consolidated statement of comprehensive income,
Consolidated balance sheet, Consolidated statement of changes in
equity, Consolidated statement of cash flows and the related
explanatory notes 1 to 13. We have read the other information
contained in the half yearly financial report and considered
whether it contains any apparent misstatements or material
inconsistencies with the information in the condensed set of
financial statements.
This report is made solely to the company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
The half-yearly financial report is the responsibility of, and
has been approved by, the directors. The directors are responsible
for preparing the half-yearly financial report in accordance with
the Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the half-yearly
financial report based on our review.
Scope of Review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures. A review is substantially less in scope than an
audit conducted in accordance with International Standards on
Auditing (UK) and consequently does not enable us to obtain
assurance that we would become aware of all significant matters
that might be identified in an audit. Accordingly, we do not
express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the half-yearly financial report for the six months ended 31
March 2018 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
1 May 2018
This information is provided by RNS
The company news service from the London Stock Exchange
END
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