Interim Results

FOR IMMEDIATE RELEASE 11 May 2004 SAGE PRE-TAX PROFIT UP 17% TO £86.7 MILLION FOR HALF-YEAR ENDED 31 MARCH 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 half-year ended 31 March 2004. Highlights Turnover increased by 23%* to £332.5m (2003: £270.3m*) Pre-tax profit increased 17% to £86.7m (2003: £74.3m) Earnings per share up 16% to 4.67p (2003: 4.02p) Operating cash flow up 22% to £122.8m (2003: £100.6m) Dividend raised 10% to 0.611p per share (2003: 0.555p) Recently acquired businesses performing well and integrating swiftly into the Group 146,000 new customers added in the period, in addition to 903,000 customers added with acquired businesses, bringing the customer base to 4.3m customers (2003: 3.1m), excluding CRM Geographical analysis* 2004 First half 2003 First half £m Turnover Operating Turnover Operating profit profit UK 90.8 35.9 84.7 31.9 Mainland Europe 88.8 20.8 71.8 15.4 North America 136.3 30.9 112.6 26.8 Rest of World 16.6 2.5 1.2 0.3 332.5 90.1 270.3 74.4 Impact of foreign - - 11.8 2.7 exchange* 332.5 90.1 282.1 77.1 Chairman, Michael Jackson, commented: 'These results show improved underlying revenue growth compared to recent reporting periods. They demonstrate the value of our key asset, our large and growing customer base of over 4 million SMEs, to which we are successfully selling our extensive range of products and services. They also show the early contribution from our four recent acquisitions where integration into the Group is proceeding swiftly and effectively. Whilst market conditions are substantially unchanged, these strong results show that our growth strategy is gaining momentum in each of our core markets. We therefore continue to view 2004 with confidence.' *Foreign currency results for the period ended 31 March 2003 have been retranslated at current period exchange rates to facilitate comparison of certain of the results within this release. A presentation for analysts will be held at 9.30amtoday 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. In addition, a conference call for US analysts will be held at 5.00pm UK time today. Dial-in details are available from Tulchan Communications. 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 Overview We are pleased to report a strong performance for the period with turnover increasing by 23%* and pre-tax profit increasing by 17%. Against a background of unchanged market conditions, these results reflect further progress in our strategy of selling more products and services to our large and growing customer base of 4.3m small and medium-sized enterprises ('SMEs') together with a first-time contribution from recently acquired businesses. Software revenues grew 15%* in the period to £124.7m (2003: £108.8m*) and represented 38% of Group revenues. Growth was driven by customers purchasing 226,000 additional licences to enhance their software solution. We also continue to invest significantly to attract new customers to the Group. In addition to the 903,000 customers brought in through our acquisitions, we added 146,000 first-time customers in the period. Services revenues grew 29%* in the period to £207.8m (2003: £161.5m*) and represented the remaining 62% of Group revenues. Support contract revenues were a key growth driver and alone accounted for 50% of Group revenues. The growth in support contracts to 1.3m at the period end (2003: 0.9m) was accompanied by a rising average spend by customers who continue to value highly a locally based support service attuned to local market custom and regulation. Revenue growth was enhanced by acquisitions. Excluding the effect of acquisitions, organic revenue growth was 3%*, which, coupled with improvements in margins in existing businesses, led to organic operating profit growth of 11%*. We continue to invest significantly in the development of our products and services. During the period, 27% of software revenues was reinvested into product development to meet the evolving needs of our customers. In particular and in response to growing market demand, we released a number of locally developed solutions designed to meet the needs of specific industries in our core SME markets. We have focussed our efforts on those sectors that contain large numbers of current Sage customers that would potentially benefit from an industry-specific solution. These include the manufacturing, construction and real estate, not-for-profit and professional accountants sectors. This period saw the first significant contributions from three recent acquisitions; Timberline (acquired September 2003), Grupo SP ('SP'), (acquired October 2003), and Softline (acquired November 2003). As detailed in the operational review below, we are making good progress in integrating and developing each of these businesses and, in particular, are encouraged by the opportunities identified to share best practice with more established Sage businesses. ACCPAC (acquired in March 2004), strengthens our product offering and our market positions in attractive new regions. Through these four acquisitions, we added a further 903,000 new customers to the Group. We also welcomed the 2,000 employees of these businesses and at 31 March 2004 the Group employed over 8,000 people. We have seen no change in the competitive landscape during the period. We continue to compete effectively by pursuing our strategy of developing localised solutions supported by our 21,000-strong business partner channel and underpinned by high quality, locally based customer support. Financial Review In the six months to 31 March 2004, turnover grew 23%* to £332.5m (2003: £ 270.3m*). Operating profit rose by 21%* to £90.1m (2003: £74.4m*) and pre-tax profit increased by 17% to £86.7m (2003: £74.3m). Earnings per share grew 16% to 4.67p (2003: 4.02p). The movement in exchange rates had a significant impact on the translation of results into sterling. This resulted principally from the 16% decline in the value of the US dollar against sterling. On an unadjusted basis Group turnover grew by 18% and operating profit grew by 17%. Group operating margins in the period were 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: 28%*) resulting from our focus on the more profitable sale of products and services to existing customers and on strong cost control. The Group remains highly cash generative with operating cash flow of £122.8m being 36% ahead of operating profit. This strong cash flow meant that, notwithstanding expenditure on acquisitions of £162.0m, net debt stood at £ 179.7m at the period end (30 September 2003: £110.6m). The interim dividend is being raised 10% to 0.611p per share (2003: 0.555p). The dividend will be payable on 18 June 2004 to shareholders on the register at close of business on 21 May 2004. Operational Review This review identifies the principal drivers of regional performance throughout the Group. As a result of recent acquisitions, a new region Rest of World, has been created. This has led to a reclassification of prior period revenues as explained in note 1 below. UK The UK business grew revenues by 7% in the period to £90.8m (2003: £84.7m). This growth was achieved through strong sales of products and services to existing customers. Particular success was achieved through increased sales of software upgrades to payroll customers. The operating margin rose to 40% (2003: 38%). Revenue growth, derived in the main from higher margin sales to existing customers, was accompanied by effective cost control resulting in margin gains. Mainland Europe Revenues in Mainland Europe were £88.8m (2003: £71.8m*) including the first-time contribution from the Spanish acquisition, SP. Excluding SP and the prior period acquisition of Concept, revenues grew 3%* to £71.9m (2003: £69.8m *). Market conditions in Mainland Europe remain challenging. Improved growth resulted from strong execution and our focus on providing more products and services to existing customers. Particular progress was made in Mainland Europe on the development of our support offerings. Each of our French, German and Swiss businesses grew support revenues significantly over the prior period. Excluding acquisitions, operating profit grew 17%* over the prior period with operating margins rising to 25% (2003: 22%). This resulted from the profitable contribution of revenue growth referred to above and effective cost control. Our Spanish business, SP, contributed revenues of £11.7m and operating profit of £2.3m in the period. With over 200,000 SME customers, SP is the leading accounting and payroll software business serving smaller SMEs in Spain. Whilst SP will benefit from sharing best practices employed by other Sage businesses, particularly in the area of customer care, our principal initiative in Spain is to establish a presence in the mid-market and so provide a migration path for those SP customers who would benefit from a more sophisticated solution. Whilst this project is at an early stage, we are encouraged by the progress made to date. North America Revenues in North America were £136.3m for the period (2003: £112.6m*) including first-time contributions from Timberline and the North American businesses of ACCPAC and Softline. Together these businesses contributed revenues in North America of £23.9m. Revenues for the Small Business Division were £44.0m (2003: £43.7m*). This division's core products are Peachtree (accounting) and ACT! (contact management). Together, revenues from these product lines grew 4%* to £37.2m (2003: £35.7m*) with both product lines maintaining their strong market positions. The remaining revenues of £6.8m (2003: £8.0m*) related to non-core products where we do not actively pursue growth but rather seek to migrate customers over time to core solutions and maintain minimal product investment to the benefit of operating margins. Mid Market Division revenues were £92.3m (2003: £68.9m*) including the contribution from acquisitions referred to above. The core accounting range, including our market-leading MAS range, grew revenues by 6%*. Our CRM solution, SalesLogix, suffered from a delay in shipment of an upgrade and consequently revenues for this product declined against the prior period. This release is now in the market, which has driven stronger sales in March. Revenue growth from the core product ranges described above, which constitute 84% of overall North American revenues, was 3%*. Excluding the acquisitions referred to above, operating profit grew 7%* to £ 28.5m (2003: £26.8m*). The improvement in operating margins to 25% (2003: 24%) resulted from further efficiencies associated with the reorganisation of our North American business into the two divisions identified above together with the benefit of our focus on our core product range. Timberline contributed revenues of £17.2m and an operating profit of £1.7m. Timberline's business is focussed on the construction and real estate sectors in North America where Sage has over 150,000 customers, principally using our Peachtree product. Our objective is to supplement Timberline's growth by migrating those customers that would benefit from Timberline's enhanced, industry-specific solution. To this end migration programmes are being developed. Timberline's operating margin of 10% for the period is substantially higher than pre-ownership margins reflecting the early cost synergies associated with being part of our US group. ACCPAC contributed revenues in North America of £3.9m and an operating profit of £0.4m. In the period since acquisition we have commenced a review of ACCPAC's operations outside North America to ensure their best fit with Sage's existing operations. We are also evaluating ACCPAC's hosted CRM offering, eWare. Our initial assessment is that this solution will substantially enhance our portfolio of CRM solutions by offering an alternative choice to customers whose businesses best suit the hosted environment. Rest of World This new reporting segment has been created following the acquisition of the South African and Asia-Pacific businesses of both Softline and ACCPAC. It also includes our pre-existing customer relationship management business in Asia-Pacific. This region contributed revenues of £16.6m (2003: £1.2m*) and an operating profit of £2.5m (2003: £0.3m*) in the period. Softline's South African and Australian businesses together contributed revenues of £14.1m and an operating profit of £2.2m to this region. Softline is a market leader in the provision of accounting and payroll software to SMEs in South Africa. During the period we have started to focus on the significant opportunity to introduce more support services for these customers. In Australia, Softline is a market leader in the provision of payroll solutions to SMEs and software for the professional accountants' market. The ACCPAC business in South Africa provides complementary accounting and payroll software for larger SMEs and will create a migration path for those Softline customers seeking greater functionality and flexibility from their software. Softline's Australian business will benefit from the addition of ACCPAC's leading accounting software solutions. Outlook These results show improved underlying revenue growth compared to recent reporting periods. They demonstrate the value of our key asset, our large and growing customer base of over 4 million SMEs, to which we are successfully selling our extensive range of products and services. They also show the early contribution from our four recent acquisitions where integration into the Group is proceeding swiftly and effectively. Whilst market conditions are substantially unchanged, these strong results show that our growth strategy is gaining momentum in each of our core markets. We therefore continue to view 2004 with confidence. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the six months ended 31 March 2004 Six months ended Year ended 31 March 30 September 2004 2003 2003 (Unaudited) (Audited) £'000 £'000 £'000 Turnover 332,501 282,056 560,345 Operating profit 90,058 77,094 155,907 Net interest payable (3,385) (2,835) (4,870) Profit on ordinary activities before taxation 86,673 74,259 151,037 Taxation on profit on ordinary activities (26,869) (23,020) (46,821) Profit on ordinary activities after taxation 59,804 51,239 104,216 Equity minority interest (3) - (65) Profit for the financial period 59,801 51,239 104,151 Equity dividends (7,829) (7,102) (21,093) Amount transferred to reserves 51,972 44,137 83,058 Earnings per share (pence) - basic 4.673p 4.017p 8.16p Earnings per share (pence) - diluted 4.647p 4.001p 8.14p Dividend per share (pence) 0.611p 0.555p 1.65p CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the six months ended 31 March 2004 Six months Year ended ended 30 31 March September 2004 2003 2003 (Unaudited) (Audited) £'000 £'000 £'000 Profit for the financial period 59,801 51,239 104,151 Translation of foreign currency net investments and 21,299 1,494 9,791 related borrowings Total recognised gains and losses relating to the 81,100 52,733 113,942 period CONSOLIDATED BALANCE SHEET As at 31 March 2004 31 March 30 September 2004 2003 (Unaudited) (Audited) £'000 £'000 Fixed assets Intangible assets 1,091,035 900,684 Tangible assets 120,209 99,243 1,211,244 999,927 Current assets Stocks 3,712 2,667 Debtors 124,747 110,247 Deferred tax asset 19,032 16,559 Cash at bank and in hand 116,489 97,234 263,980 226,707 Creditors: amounts falling due within one year (200,696) (185,306) Net current assets 63,284 41,401 Total assets less current liabilities 1,274,528 1,041,328 Creditors: amounts falling due after more than one (290,350) (170,871) year Deferred income (193,427) (154,566) Equity minority interest (147) (144) 790,604 715,747 Capital and reserves Called up equity share capital 12,806 12,792 Share premium account 444,709 443,137 Merger reserve 61,111 61,111 Profit and loss account 271,978 198,707 Equity shareholders' funds 790,604 715,747 CONSOLIDATED CASH FLOW STATEMENT For the six months ended 31 March 2004 Six months ended Year ended 31 March 30 September 2004 2003 2003 (Unaudited) (Audited) £'000 £'000 £'000 Net cash inflow from operating activities 122,788 100,615 183,829 Returns on investments and servicing of finance Interest received 948 546 1,393 Interest paid (4,218) (2,885) (5,479) Issue cost of loans (77) - (225) Net cash outflow from returns on investments and (3,347) (2,339) (4,311) servicing of finance Taxation Corporation tax paid (7,928) (11,987) (27,416) Capital expenditure Payments to acquire tangible fixed assets (26,792) (14,127) (40,808) Receipts from sales of tangible fixed assets 120 137 242 Net cash outflow from capital expenditure (26,672) (13,990) (40,566) Acquisitions and disposals Purchase of subsidiary undertakings: Net cash consideration - current year (152,742) (12,144) (66,209) acquisitions - prior (9,297) (3,917) (7,223) year acquisitions Net cash outflow from acquisitions and disposals (162,039) (16,061) (73,432) Equity dividends paid (14,018) (17,150) (24,217) Cash (outflow)/inflow before financing and (91,216) 39,088 13,887 management of liquid resources Management of liquid resources (Increase)/reduction in short term deposits (484) (92) 131 Financing Shares issued 1,581 238 1,161 Movement in loan funding 109,006 (19,861) 23,476 Repayment of capital element of finance leases - (21) (21) Net cash inflow/(outflow) from financing 110,587 (19,644) 24,616 Increase in cash in the period 18,887 19,352 38,634 NOTES Analysis of results The geographical presentation of financial results has been modified to reflect the addition and integration of new businesses into the Group. We have created one additional reporting unit, 'Rest of World', which encompasses the South African and Asia-Pacific businesses of both the Softline and ACCPAC acquisitions and our pre-existing CRM business. In addition, other non-US CRM and HR businesses have been re-allocated to the regions in which they are managed. The re-allocation of turnover and operating profit is shown below. Turnover Six months ended North UK Mainland Rest of Total Europe World America 31 March 2004 (unaudited) £'000 £'000 £'000 £'000 £'000 Old basis 137,165 85,709 75,320 - 298,194 Re-allocation of businesses: European CRM (4,737) 4,737 - - - European HR (1,837) - 1,837 - - Asia-Pacific CRM (978) - - 978 - New basis 129,613 90,446 77,157 978 298,194 Current year acquisitions SP - - 11,653 - 11,653 Softline 2,715 - - 14,118 16,833 ACCPAC 3,944 344 - 1,533 5,821 Total current year 6,659 344 11,653 15,651 34,307 acquisitions Total 136,272 90,790 88,810 16,629 332,501 Operating profit Six months ended North UK Mainland Rest of Total Europe World America 31 March 2004 (unaudited) £'000 £'000 £'000 £'000 £'000 Old basis 32,186 34,523 18,197 - 84,906 Re-allocation of businesses: European CRM (1,559) 1,559 - - - European HR (208) - 208 - - Asia-Pacific CRM (246) - - 246 - New basis 30,173 36,082 18,405 246 84,906 Current year acquisitions SP - - 2,346 - 2,346 Softline 251 - - 2,172 2,423 ACCPAC 428 (193) - 148 383 Total current year 679 (193) 2,346 2,320 5,152 acquisitions Total 30,852 35,889 20,751 2,566 90,058 Turnover Six months ended North UK Mainland Rest of Total Europe World America 31 March 2003 (unaudited) £'000 £'000 £'000 £'000 £'000 Old basis 121,435 80,190 68,648 - 270,273 Re-allocation of businesses: European CRM (4,502) 4,502 - - - European HR (3,199) - 3,199 - - Asia-Pacific CRM (1,152) - - 1,152 - New basis 112,582 84,692 71,847 1,152 270,273 Foreign exchange 14,019 - (2,087) (149) 11,783 Total 126,601 84,692 69,760 1,003 282,056 Operating profit Six months ended North UK Mainland Rest of Total Europe World America 31 March 2003 (unaudited) £'000 £'000 £'000 £'000 £'000 Old basis 27,188 31,685 15,478 - 74,351 Re-allocation of businesses: European CRM (220) 220 - - - European HR 126 - (126) - - Asia-Pacific CRM (328) - - 328 - New basis 26,766 31,905 15,352 328 74,351 Foreign exchange 3,345 - (643) 41 2,743 Total 30,111 31,905 14,709 369 77,094 Analysis of change in net debt (inclusive of finance leases) At 1 October Cash flow Exchange At 31 2003 movement/other March 2004 (Audited) (Unaudited) £'000 £'000 £'000 £'000 Net cash at bank and in 96,146 18,887 - 115,033 hand Short term deposits 1,088 484 (116) 1,456 Loans due within one (37,173) 27,357 3,472 (6,344) year Loans due after more (170,671) (136,286) 17,116 (289,841) than one year (110,610) (89,558) 20,472 (179,696) Taxation The taxation charge for the period comprises: Six months ended Year ended 31 March 30 September 2004 2003 2003 (Unaudited) (Audited) £'000 £'000 £'000 UK taxation 13,444 11,205 18,872 Overseas taxation 13,425 11,815 27,949 26,869 23,020 46,821 The unaudited financial information set out above does not constitute the Company's statutory accounts for the period ended 31 March 2004. The accounting policies used as a basis for this interim results announcement are consistent with the Company's statutory accounts for the year ended 30 September 2003, 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. 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. Earnings per share The calculation of basic earnings per ordinary share is based on earnings of £59,801,000 (2003: £51,239,000) being the profit for the period, and on 1,279,750,031 ordinary 1p shares (2003: 1,275,648,166) being the weighted average number of ordinary shares in issue during the period. The diluted earnings per ordinary share is based on profit for the period of £59,801,000 (2003: £51,239,000) and on 1,286,848,759 ordinary 1p shares (2003: 1,280,526,175). Dividends The interim dividend of 0.6105 pence per share will be paid on 18 June 2004 to shareholders on the register at the close of business on 21 May 2004.

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