Final Results

FOR IMMEDIATE RELEASE 1 December 2004 SAGE PRE-TAX PROFIT UP 20% TO £181.1 MILLION FOR YEAR ENDED 30 SEPTEMBER 2004 The Sage Group plc ('Sage'), a leading supplier of accounting and business management software solutions and related services for small to medium-sized enterprises ('SMEs'), announces its unaudited results for the year ended 30 September 2004. Financial highlights * Turnover increased by 29%* to £687.6m (2003: £533.2m*) * Pre-tax profit increased 20% to £181.1m (2003: £151.0m) * Earnings per share up 21% to 9.90p (2003: 8.16p) * Operating cash flow up 21% to £221.8m (2003: £183.8m) * Proposed dividend raised 41% to 2.33p per share (2003: 1.65p) following a review of our dividend policy Operational and strategic highlights * Expanded portfolio of software and services generated organic revenue growth of 6% * Improved organic revenue growth in the second half of the year in each region * Acquisitions of Softline, SP and ACCPAC established significant presence in South Africa, Australia, Spain, Canada and South-East Asia * 269,000 new customers, in addition to 903,000 customers added with acquired businesses, bringing the customer base to 4.4m businesses (2003: 3.2m), excluding CRM customers * Significantly increased operating margins in new acquisitions Regional analysis* 2004 2003 £m Turnover Operating Turnover Operating profit profit UK 185.7 71.7 170.2 66.6 Mainland Europe 170.3 40.1 139.6 27.1 North America 287.0 62.3 221.3 55.2 Rest of World 44.6 11.5 2.1 0.7 687.6 185.6 533.2 149.6 Foreign exchange - - 27.1 6.3 impact* 687.6 185.6 560.3 155.9 Chairman, Michael Jackson, commented: 'These results show improved organic revenue growth compared to recent reporting periods. They demonstrate the value of our key asset, our large and growing customer base of 4.4 million SMEs, to which we are successfully selling our extensive range of products and services. Our recent significant acquisitions made strong early contributions with integration into the Group proceeding swiftly and effectively. The Board has reviewed its dividend policy in light of the highly cash generative nature of the Group. It has decided to progressively increase the dividend so as to achieve a dividend cover of 3.5 times within two to three years. Dividend cover for 2004 is 4.25 times. Our focus in 2005 will be on growing our customer base, continuing to improve our products and services and developing our recently acquired businesses. We will continue to seek acquisition opportunities which strengthen our market position and meet our investment criteria. The start to the new financial year has been encouraging and we view 2005 with confidence.' Geographical segments as revised for 2004 interim results. Details of the re-analysis of 2003 comparatives are shown at www.sage.com *Foreign currency results for the prior year have been retranslated at current year exchange rates to facilitate comparison of certain of the results within this release. A presentation for analysts will be held at 9.30am today at Deutsche Bank, Winchester House, 1 Great Winchester Street, London EC2N 2DB. The presentation will also be available at www.sage.com. A live audio broadcast of the presentation will also be available for analysts. The dial-in number is +44 (0) 207 162 0181 Enquiries: The Sage Group plc 0191 294 3000 Tulchan Communications 020 7353 4200 Paul Walker, Chief Executive Julie Foster Paul Harrison, Finance Director Kirstie Hamilton Phil Branston, Investor Relations Introduction We are pleased to report a strong performance, with turnover increasing 29%* and earnings per share increasing 21%. During the year, our businesses added 269,000 customers which, together with acquisitions, increased our customer base to 4.4 million. Our growth resulted from serving these customers with an expanded range of products and services and from strong early contributions by our acquisitions. Market trends SMEs continue to demand more from their IT systems in the face of challenging market conditions and increasing regulation. There is therefore a constant requirement to balance a cautious approach to IT investment with a need to be more efficient and to use software to gain greater insight into their business activities. In most cases, SMEs are addressing these challenges by upgrading their current software. However, in increasing numbers, SMEs are purchasing more sophisticated solutions better suited to their growing needs. Additional software is being used to automate key business processes such as sales and customer service, industry-specific production processes and management reporting. Whether adding to their applications or not, SMEs are demanding increasing levels of service so that they can make the best use of their software. In addition, the need for advice and guidance on continually evolving accounting and business regulations, which vary from country to country, remains an important reason to renew support arrangements. We have seen little change to the competitive landscape. When purchasing either support or additional software, SMEs are demonstrating a clear preference to retain their relationships with their current vendors. We continue to compete effectively by offering localised solutions supported by our 21,000 reseller partners around the world. Our locally-based customer support provides a swift response to changes in accounting and business regulations. We believe this differentiates us from our competitors. Our approach to the market Our product range closely reflects the business requirements of SMEs and therefore we continue to attract large numbers of new customers. During the year, our businesses added 269,000 customers and our acquisitions brought a further 903,000 customers, increasing the customer base to 4.4 million (2003: 3.2 million). We have continued to strengthen our product portfolio, reinvesting 29% of software revenue (2003: 26%) into developing new and upgraded solutions for our customers. These include additions to our range of customer relationship management ('CRM') applications and tools for reporting, analytics and forecasting. Our programme of introducing further industry-specific solutions has continued through both acquisitions and in-house product development. In parallel with broadening our product portfolio, we have also extended our range of support services. During the year, 265,000 of the 1.3 million customers that subscribed to support purchased a premium support contract. These contracts provide higher levels of assistance with regulatory compliance, management reporting and information technology problems. Financial review Revenues grew 29%* to £687.6m (2003: £533.2m*). Operating profit rose by 24%* to £185.6m (2003: £149.6m*) and pre-tax profit increased by 20% to £181.1m (2003: £151.0m). Earnings per share grew 21% to 9.90p (2003: 8.16p). The movement in exchange rates had a significant impact on the translation of results into sterling. This arose principally from the 9% decline in the value of the US dollar against sterling. On an unadjusted basis, Group turnover grew by 23% and operating profit grew by 19%. Organic revenue growth was 6%*. We calculate organic growth by removing the contributions of current and prior year acquisitions and of non-core products. Non-core products, which accounted for 4% of Group revenues, are those products where our focus is not on growth but rather on encouraging customers to move, over time, to core solutions. Organic revenue growth improved from 5%* in the first half of the year to 7%* in the second half. In particular, growth in our mid-market businesses increased in the second half of the year following improvements in both our product portfolio and the management of our business partner relationships. Software revenues were £260.3m (2003: £210.8m*), representing organic growth of 3%. This included growth in sales volume. Services revenues were £427.3m (2003: £322.4m*), representing organic growth of 8%. 81% of services revenues related to sales of support contracts. These grew 11% organically. Support revenue growth was a combination of volume growth, with support contracts growing to 1.3 million by the year end (2003: 1.0m) and growth in spend per customer as a result of further take-up of premium support. The Group operating margin was 27% (2003: 28%*). This slight decline reflected the initial dilutive effect of recent acquisitions. Excluding these acquisitions, the Group operating margin improved to 30% (2003: 29%*) resulting from our focus on highly profitable sales to existing customers and on strong cost management. The Group remains highly cash generative with operating cash flow of £221.8m representing 120% of operating profit. This strong cash flow meant that, after expenditure on acquisitions of £170.7m, net debt stood at £131.3m at the year end (30 September 2003: £110.6m). In light of our ongoing strong cash flow, the Board has reviewed its dividend policy. It has concluded that a dividend cover of 3.5 times is appropriate for our business and our dividend payments will be increased over the next two to three years in order to achieve this dividend target. Dividend cover for 2004 is 4.25 times. Accordingly, the proposed final dividend for the year ended 30 September 2004 is being raised 57% to 1.719p per share (2003: 1.095p), giving a dividend for the full year of 2.33p (2003: 1.650p). The final dividend will be payable on 11 March 2005 to shareholders on the register at close of business on 11 February 2005. Acquisitions review We concluded three important acquisitions in 2004, which enabled us both to expand into new territories and to enhance our product portfolio. Through these three acquisitions, we added 903,000 new customers to the Group. In addition, 2004 showed the first material contribution from Timberline, acquired late in 2003. During the year, significant progress was made in integrating and developing each of these businesses. Timberline (acquired in September 2003) provides solutions dedicated to the needs of North American SMEs in the construction and real estate industries. By combining Timberline's leading product and its business partner community with our customer base marketing skills, we have begun to address migration opportunities for our existing customers. In its first complete year in the Group, Timberline contributed revenue of £33.8m and operating profit of £4.2m. SP (acquired in October 2003) is market leader in the small business market in Spain.SP has benefited fromsharing best practice with our Mainland European businesses in customer support and product development. In its first 11 months in the Group, SP contributed revenue of £23.9m and operating profit of £5.4m. Softline (acquired in November 2003) is market leader in the small business market in South Africa and in the specialist payroll and accountants' markets in Australia. Since acquisition, Softline's businesses have focussed on opportunities to offer more support to existing customers and to attract new mid-market customers with enhanced accounting and payroll products. In its first 10 months in the Group, Softline contributed revenue of £39.1m and operating profit of £8.5m, including a small contribution from its North American business. ACCPAC (acquired in March 2004) is a leading vendor of accounting and CRM solutions. This acquisition has strengthened our market position in the US and has established a significant presence for the first time in Canada and in South-East Asia. ACCPAC's CRM product has been added to Sage's CRM portfolio, offering web-based hosting and an intermediate level of sophistication for customers seeking to expand their CRM solution. In its first six months in the Group, ACCPAC contributed revenue of £34.2m and operating profit of £4.1m. Regional review UK UK revenues were £185.7m (2003: £170.2m). Excluding the current year contribution from the ACCPAC acquisition, organic revenue growth was 8%. This growth rate improved from 7% in the first half of the year to 10% in the second half. The programme of regular upgrades to our principal accounting and payroll products resulted in strong software revenue growth. Support revenue growth was underpinned by improved customer service and retention. Additional support was taken up by customers wanting to use their software more effectively, or to comply with new regulations such as those governing web-based payroll filing. Whilst the small business division grew strongly throughout the year, the mid-market division showed improved growth in the second half of the year, due to better management of the reseller partner channel and an improved product portfolio. The operating margin was maintained at 39% (2003: 39%). Whilst the programme of investment in new products and services continued, profitability was sustained by high-margin sales to existing customers and effective cost management. Organic operating profit grew 9%. Mainland Europe Revenues in Mainland Europe were £170.3m (2003: £139.6m*). Organic revenue growth was 5%*. This growth rate improved from 3%* in the first half of the year to 7%* in the second half. Revenue growth was based principally on strong progress in initiatives to help customers migrate to more sophisticated software and support. In addition, new revenue sources were established through the introduction of a number of innovative new software and services offerings. These ranged from simple invoicing solutions for newly-formed SMEs, to integrated accounting, payroll and verticals for the mid-market. The Spanish acquisition, SP, contributed revenue of £23.9m. This reflects a strong contribution from support revenues. An operating margin of 23% was achieved through the profitability of the support business and with the benefit of a rationalisation of product development. The overall operating margin in Mainland Europe rose to 24% (2003: 19%*). This resulted from the focus on high-margin sales to existing customers and effective cost management. Organic operating profit grew 20%. North America Revenues in North America were £287.0m (2003: £221.3m*). Organic revenue growth was 5%*. This growth rate improved from 3%* in the first half of the year to 7% * in the second half. The North American region comprises the small business and the mid-market divisions. Revenues for the small business division were £85.9m (2003: £82.5m *). Its core products are Peachtree (accounting), and ACT! (contact management), which both grew revenues 9%*. Revenues for the mid-market division were £201.1m (2003: £138.8m*) including acquisitions. Core accounting revenues (the MAS range and related products) grew 5%* organically. Mid-market's CRM revenues were affected by the delay in shipment of the SalesLogix upgrade, as highlighted in our interim results announcement. Whilst SalesLogix revenues declined 12% for the full year, they showed improvement in the second half of the year compared to the first half. Two recent acquisitions made significant contributions. ACCPAC contributed revenues in North America of £24.7m at an operating margin of 11%. Timberline contributed revenues of £33.8m at an operating margin of 12%. Both businesses showed improvement in margins compared with pre-acquisition periods. Following the year end, we announced the acquisition of Federal Liaison Services, Inc. ('FLS'), for an enterprise value of £9.7 million. FLS's technology will enhance our payroll service by automating the payment and reporting of tax obligations. The overall operating margin in North America reduced to 22% (2003: 25%) as a result of the initial dilutive effect of acquisitions. With the organic operating margin maintained at 24%, organic operating profit grew 5%. Rest of World This region contributed revenues of £44.6m (2003: £2.1m*) at an operating margin of 26% (2003: 33%*). Softline's South African and Australian businesses together contributed revenue of £34.9m. The operating margin of 24% reflected the focus placed by these businesses on growing support penetration and on selling complementary products such as payroll to their customer bases. ACCPAC contributed revenues of £7.8m at an operating margin of 32%. The principal contribution was from its market-leading business in South-East Asia. People Sage now employs nearly 8,000 people (2003: 5,800), the increase being principally a result of acquisitions. Our people have demonstrated considerable commitment to meeting the needs of our customers, resulting in a number of industry awards for customer service. They have also continued to take an innovative approach to the development of their businesses. Many have played important roles in integrating newly acquired businesses into the Group. We thank our people for their contribution to the year's performance. Outlook Whilst market conditions are substantially unchanged, these strong results show that our growth strategy is gaining momentum in each of our core markets. Our focus in 2005 will be on growing our customer base, continuing to improve our products and services and developing our recently acquired businesses. We will continue to seek acquisition opportunities which strengthen our market position and meet our investment criteria. The start to the new financial year has been encouraging and we view 2005 with confidence. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 30 September 2004 Year ended Year ended 30 September 30 September (Unaudited) (Audited) Continuing Acquisitions Total Total operations 2004 2004 2004 2003 £'000 £'000 £'000 £'000 Turnover 590,443 97,142 687,585 560,345 Operating profit 167,582 18,025 185,607 155,907 Net interest payable (4,463) (4,870) Profit on ordinary activities before 181,144 151,037 taxation Taxation on profit on ordinary (54,343) (46,821) activities Profit on ordinary activities after taxation 126,801 104,216 Equity minority (65) (65) interest Profit for the financial year 126,736 104,151 Equity dividends (29,876) (21,093) Amount transferred to reserves 96,860 83,058 Earnings per share (pence) - basic 9.90p 8.16p Earnings per share (pence) - diluted 9.85p 8.14p Dividend per share (pence) 2.33p 1.65p CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 30 September 2004 Year ended Year ended 30 September 30 September 2004 2003 (Unaudited) (Restated - see note 5) (Audited) £'000 £'000 Profit for the financial year 126,736 104,151 Translation of foreign currency net (53,073) (15,442) investments and related borrowings Total recognised gains and losses relating to 73,663 88,709 the year CONSOLIDATED BALANCE SHEET As at 30 September 2004 30 September 30 September 2004 2003 (Unaudited) (Restated - see note 5) £'000 (Audited) £'000 Fixed assets Intangible assets 996,639 856,370 Tangible assets 123,998 99,243 1,120,637 955,613 Current assets Stocks 3,217 2,667 Debtors 121,597 110,247 Deferred tax asset 9,028 16,559 Cash at bank and in hand 74,341 97,234 208,183 226,707 Creditors: amounts falling due within one year (204,018) (185,306) Net current assets 4,165 41,401 Total assets less current liabilities 1,124,802 997,014 Creditors: amounts falling due after more than (199,675) (170,871) one year Deferred income (190,926) (154,566) Equity minority interest (178) (144) 734,023 671,433 Capital and reserves Called up equity share capital 12,818 12,792 Share premium account 446,284 443,137 Merger reserve 61,111 61,111 Profit and loss account 213,810 154,393 Equity shareholders' funds 734,023 671,433 CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2004 Year ended Year ended 30 September 30 September 2004 2003 (Unaudited) (Audited) £'000 £'000 Net cash inflow from operating 221,812 183,829 activities Returns on investments and servicing of finance Interest received 2,539 1,393 Interest paid (6,510) (5,479) Issue cost of loans (1,428) (225) Net cash outflow from returns on (5,399) (4,311) investments and servicing of finance Taxation Corporation tax paid (23,819) (27,416) Capital expenditure Payments to acquire tangible fixed (47,088) (40,808) assets Receipts from sales of tangible fixed 5,614 242 assets Net cash outflow from capital (41,474) (40,566) expenditure Acquisitions and disposals Purchase of subsidiary undertakings: Net cash consideration - current year (159,771) (66,209) acquisitions - prior year acquisitions (10,897) (7,223) Net cash outflow from acquisitions and (170,668) (73,432) disposals Equity dividends paid (21,842) (24,217) Cash (outflow)/inflow before financing (41,390) 13,887 and management of liquid resources Management of liquid resources (Increase)/reduction in short term (3,756) 131 deposits Financing Shares issued 3,064 1,161 Movement in loan funding 15,479 23,476 Repayment of capital element of finance - (21) leases Net cash inflow from financing 18,543 24,616 (Decrease)/increase in cash in the year (26,603) 38,634 NOTES 1. Analysis of results 2. 2004 2003 Turnover Operating Turnover Operating profit profit (Unaudited) (Unaudited) (Audited) (Audited) £'000 £'000 £'000 £'000 UK 184,075 72,672 170,170 66,624 Mainland 146,356 34,641 139,624 27,087 Europe North America 258,144 59,533 221,338 55,168 Rest of World 1,869 736 2,069 682 590,444 167,582 533,201 149,561 Acquisitions: SP 23,908 5,425 - - Softline 39,067 8,499 - - ACCPAC 34,166 4,101 - - Impact of - - 27,144 6,346 foreign exchange 687,585 185,607 560,345 155,907 The 2004 trading results from businesses located outside the UK were translated into Sterling at the average exchange rates for the period. For our two most significant foreign operating currencies, the US Dollar and the Euro, the resulting rates were £1=$1.80 and £1=€1.47 respectively. Results for the year ended 30 September 2003 have been retranslated at these exchange rates to facilitate the comparison of results. For the 2004 interim results onwards, the geographical presentation of financial results has been modified to reflect the addition and integration of new businesses into the Group. Prior year comparatives under the new geographical analysis are shown at www.sage.com/News.htm 2. Analysis of change in net debt 3. Exchange At 30 At 1 October 2003 Cash flow movement/ September other 2004 (Audited) (Unaudited) £'000 £'000 £'000 £'000 Net cash at bank and in hand 96,146 (26,603) - 69,543 Short term deposits 1,088 3,756 (46) 4,798 Loans due within one year (37,173) 27,470 3,519 (6,184) Loans due after more than one (170,671) (41,521) 12,717 (199,475) year (110,610) (36,898) 16,190 (131,318) 3. Taxation The taxation charge for the year comprises: Year ended Year ended 30 September 30 September 2004 2003 (Unaudited) (Audited) £'000 £'000 Current taxation UK taxation 23,018 18,872 Overseas taxation 19,517 11,795 Deferred taxation 42,535 30,667 11,808 16,154 54,343 46,821 The Group's tax charge is based on the tax rate applicable in each territory in which the Group operates, applied to the relevant profits in that territory. The effective tax rate was 30% (2003: 31%). 4. The unaudited financial information set out above does not constitute the Company's statutory accounts for the year ended 30 September 2004. The accounting policies used as a basis for this preliminary results announcement are consistent with the Company's statutory accounts for the year ended 30 September 2003, other than as described in note 5 below, which have been delivered to the Registrar of Companies. The Group results for the year ended 30 September 2003 have been extracted from those statutory accounts after adjustment for the matter described in note 5. The Auditors' Report on the accounts to 30 September 2003 was unqualified and did not contain a statement under Section 237 of the Companies Act 1985. Accounts to 30 September 2004 will be delivered in due course. 5. The Group has changed its accounting policy with regard to the currency denomination of goodwill. Previously, the amount of goodwill has been fixed at the historic sterling exchange rate at date of acquisition. In order to reflect the underlying local currency asset, goodwill is now accounted for in local currency and retranslated into sterling at the exchange rate ruling at the date of the balance sheet. There was no impact on the profit and loss account for the year ended 30 September 2003. Shareholders' funds and goodwill at 30 September 2003 have been reduced by £44,314,000. 6. Earnings per share The calculation of basic earnings per ordinary share is based on earnings of £ 126,736,000 (2003: £104,151,000) being the profit for the year, and on 1,280,276,310 ordinary 1p shares (2003: 1,276,690,520) being the weighted average number of ordinary shares in issue during the year. The diluted earnings per ordinary share is based on profit for the year of £ 126,736,000 (2003: £104,151,000) and on 1,286,153,099 ordinary 1p shares (2003: 1,280,031,692). 7. Dividends Subject to shareholders' approval, the final dividend of 1.719 pence per share will be paid on 11 March 2005 to shareholders on the register at the close of business on 11 February 2005. 8. The annual report and accounts will be posted to shareholders shortly and thereafter copies will be available from the Secretary, The Sage Group plc, North Park, Newcastle upon Tyne, NE13 9AA.

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