Final Results

Sage Group PLC 6 December 2000 Press Announcement FOR IMMEDIATE RELEASE 6 December 2000 SAGE PRE-TAX PROFIT UP 46% TO £108.7 MILLION FOR YEAR ENDED 30 SEPTEMBER 2000 The Sage Group plc ('Sage'), a leading supplier of accounting and payroll software and related products and services for small to medium-sized enterprises (SMEs), announces its unaudited results for the year ended 30 September 2000. Key points: * Pre-tax profit up 46% to £108.7m (1999: £74.3m) * Turnover increased by 34% to £412.2m (1999: £307.0m) * Operating profit rises by 40% to £111.9m (1999: £79.9m) * Earnings per share up 40% to 5.92p (1999: 4.22p) * Support contracts at 30 September 2000 totalled 779,000 (1999: 648,000) * Dividends for the year raised 10% to 0.386p per share (1999: 0.351p) * Net debt at 30 September 2000 falls to £20.8m (1999: £58.3m) * Geographical analysis: 2000 1999 £m Turnover Operating Turnover Operating profit profit UK 132.1 55.0 99.2 39.6 Mainland Europe 93.7 22.9 85.6 16.3 US 142.6 28.9 118.0 23.3 368.4 106.8 302.8 79.2 Impact of foreign - - 4.2 0.7 exchange* Acquisitions - US 39.4 5.4 - - Acquisitions - 4.4 (0.3) - - Switzerland 412.2 111.9 307.0 79.9 * Foreign currency results for the year ended 30 September 1999 have been retranslated at current year exchange rates to facilitate the comparison of results. Chairman, Michael Jackson stated: 'This strong set of results has been driven by our focus on marketing our broad range of leading products and services to new and existing customers together with our ability to add value to acquisitions. Continued investment in our e-business products and services provides further opportunity for growth. Despite the challenging market environment, the Board is confident about the prospects for the current year.' ENQUIRIES Paul Walker, Chief Executive, or Paul Harrison, Finance Director, on 020 7831 3113 today and on 0191 255 3000 from tomorrow, or Giles Sanderson of Financial Dynamics. ISSUED BY Financial Dynamics Ltd, Holborn Gate, 26 Southampton Buildings, London, WC2A 1PB. Telephone: 020 7831 3113 Overview In a challenging year for our industry, we are pleased to be reporting a strong set of results with turnover up 34%, operating profit up 40%, profit before taxation up 46% and earnings per share up 40%. It is now widely acknowledged that 1999 was a highly unusual year with unparalleled demand from the small to medium-sized enterprise (SME) market for Y2K compliant products. This high level of demand had the effect of bringing forward upgrade decisions that otherwise would have been made later in the cycle. As a consequence of this abnormal acceleration of demand, the trading environment in 2000, particularly in the mid-market, has been difficult. At the entry level, however, momentum was maintained as a result of the continuing emergence of new businesses. At the high end of the SME market, larger companies, having upgraded to Y2K solutions well before December 1999, have started to come back into the market. We were well positioned to respond to these challenging market conditions. Firstly, we have a broad portfolio of products and services designed to meet the needs of all companies in the SME market ranging from entry level start-ups to larger companies with up to 1,000 employees. Secondly, we have a well-established installed base business (selling products and services to our existing customers) which now accounts for 64% of revenues. By placing particular focus on selling our portfolio of products and services to our 2.5 million existing customers, we were able to sustain growth despite the challenging market environment. With regard to sales of new software, we felt the benefit of the strong Y2K effect in the first quarter of the financial year, but thereafter the trading environment underwent significant change. Sales of new software in the second half were lower than those in the first half, although broadly level with the sales achieved in the second half of the previous financial year. For the full year, sales of new software licences were 20% ahead of prior year. Stripping out the effect of acquisitions, sales of new software licences for the year as a whole were broadly in line with 1998/99, a year which benefited from three full quarters of Y2K activity. As regards our installed base business, we made particular progress in selling support contracts to our existing customers with the result that the number of contracts increased to 779,000 (1999: 648,000) by the year end. Upgrade revenue benefited from a concerted effort to encourage our customers to upgrade to more powerful solutions, and this remains a focus of activity for the current year. Installed base sales in the second half were up 13% on the first half of this financial year, and were up 30% on the second half of the previous financial year, and this despite the fact that the prior year benefited from substantial Y2K upgrade revenues. Again, stripping out the effect of acquisitions, underlying growth in installed base revenues was 17%. Hence, even in a challenging market environment we were able to increase revenues to our existing customers. Indeed, average revenue per existing customer increased over the prior year, in part brought about by continuing improvements in our marketing and telesales skills, but also by our ongoing commitment to expand the range of products and services we offer. With regard to the Internet, we have consistently said that the naturally conservative nature of the SME community would lead to slower adoption of e-business products and services than might be the case with large multinationals. What has become clear over the past 12 months is that SMEs are beginning to recognise that the Internet presents significant opportunities to increase revenues, reduce costs and improve efficiencies. In the long term, therefore, we expect customers to invest in our broad range of Internet products and services. In the short term, however, we expect SMEs to remain fairly cautious about investing significant sums in e-business products and services. Our commitment to developing relevant e-business products and services for the SME market is as strong as ever and, despite the challenging market environment, we invested heavily during the year in the development, marketing and support of our e-business products and services. This investment, we believe, is to the long term benefit of the Group. During the past year we have made significant progress in reorganising our Sage Enterprise Solutions (formerly Tetra) and Peachtree businesses; the two major acquisitions of the previous financial year. As a result, both businesses have reported significantly improved results. We acquired Best Software, Inc. in February 2000 and are pleased with the progress that has been made. Best is focusing attention on its market-leading fixed asset, payroll and human resources software products and performance to date is in line with expectations. We are placing particular emphasis on cross-selling these products into our existing large US customer base. Results, dividends and finance In the year ended 30 September 2000, we increased turnover by 34% to £412.2m (1999: £307.0m). Our operating profit rose by 40% to £111.9m (1999: £79.9m) and pre-tax profit improved by 46% to £108.7m (1999: £74.3m). Earnings per share increased by 40% to 5.92p (1999: 4.22p). We are proposing a final dividend of 0.256p per share (1999: 0.233p) making a total of 0.386p per share (1999: 0.351p) for the year, an increase of 10%. Subject to shareholders' approval, the final dividend will be paid on 7 March 2001 to shareholders on the register at the close of business on 9 February 2001. Cash generation continues to be strong across the Group with £105.0m of operating cash flow generated in the year. After interest, tax and dividends, this gave free cash flow of £63.5m. The major acquisition in the year was Best Software, Inc., for a gross cash consideration of £284.4m including costs. This acquisition was financed through a vendor placing of 43,707,488 new ordinary shares, which raised £ 289.7m after costs. Ubiquis SA was acquired for a consideration of £20.6m satisfied by the issue of 2,529,847 new ordinary shares. Other acquisitions were completed in the period for a cash cost of £54.3m. Acquired businesses held £8.3m of cash and £31.5m of short term deposits upon acquisition. After net capital expenditure of £17.4m and other movements of £0.6m, net debt stood at £20.8m at 30 September 2000 (30 September 1999: £58.3m). Operational review In the UK, Sage Software Limited has shown robust growth. The strength of the Sage brand, the breadth of our product portfolio and the size of our reseller channel have enabled us to continue to distance ourselves from the competition. We have also expanded our portfolio of products targeted at the accountants' community. Accountants play an important role in recommending, and increasingly reselling Sage products and we continue to focus our attention on strengthening our relationships with accountants in practice. Virtually all of the top 5,000 firms of accountants in the UK use one or more Sage products. Recent product upgrades in the UK allow existing and new customers to engage in e-commerce activity directly from their desktop, bringing the benefits of connectivity without the need to restructure existing systems. The UK business has also released SiteCreator, the chargeable entry level website creation tool, WebTrader, our entry level e-commerce tool, and other e-business products. Customer reaction has been positive with over 70,000 businesses in the UK asking us to register domain names and reserve webspace in anticipation of establishing a web presence. Over 3,000 have built websites and approximately 400 of these have a trading presence. We have made considerable progress with Sage Enterprise Solutions in its first full year in the Group. The business is now focused on serving the needs of SMEs with revenues of between £5m and £250m. Distribution is via the value added reseller channel which has been expanded significantly over the past year. The previous emphasis on selling very high end solutions to very large corporates using a direct sales force and a large professional services team has been reduced significantly with the consequence that revenues have been impacted adversely by some £5m. It should be noted, however, that this part of Sage Enterprise Solutions' business was loss-making. By concentrating on more profitable revenue via the value added reseller channel, we have been able to increase margins substantially to 22% (1999: 8%). Our product offering has also been simplified making it easier for those of our customers requiring an enhanced solution to upgrade to the Sage Enterprise product suite. Our focus for the year in Mainland Europe has been on developing a broader range of products and services, including e-business solutions, and on expanding our installed base business. In France, where we have greater exposure to the mid-market, second half revenues declined in comparison to the first half. The first half did, however, benefit from a strong first quarter due to the Y2K effect. Our response to these difficult market conditions was to focus even more attention on our installed base activities, particularly support contracts which now number 231,000 (1999: 200,000). Installed base revenues have grown year on year by 29% and there are further opportunities to sell our broad range of installed base products and services into this customer base. One such opportunity comes with the recent launch of eCommerce 100 incorporating technology acquired as part of the Ubiquis acquisition in March 2000. Our efforts in recent years have transformed our German business. A stable, improved reseller channel and a focus on selling additional products and services to our growing customer base have returned this business to profitability. We expect the performance of our German business to continue on this positive trend. In the US, Ron Verni (formerly CEO of Peachtree) was appointed CEO of our US group of businesses. Following the acquisition of Best, we now have three substantial businesses in the US. Ron and his management team will focus their efforts on continuing to integrate the activities of our US businesses and to maximise the opportunities to cross-sell our various products and services to what is now a substantial installed base. We have made significant progress at Peachtree in its first full year of ownership. Operating margins have improved to 14% (1999: 5%) as a result of a strong focus on installed base activities and a simplified product offering. The trading environment in the mid-market in the US, as in France, was difficult, particularly in the second half. This had an impact on revenues at Sage Software, Inc. who, in response, focused even greater attention on selling additional products and services to the installed base. Sage Software, Inc., and Peachtree are working closely together to encourage large Peachtree customers to upgrade to Sage Software, Inc.'s more sophisticated product offerings. Best is now focused on marketing its core fixed asset, payroll and HR software products through our expanded US value added reseller channel. Clearly there are significant opportunities to sell Best's range of speciality products to our substantial US customer base. People We have made a number of key appointments to our management team during the year. Paul Harrison joined the Board as Finance Director on 1 April 2000 having previously been Group Financial Controller. Ron Verni, as mentioned above, was appointed CEO of our US businesses and Peter Dewald joined Sage as CEO of our German business. Prior to joining Sage, Peter was CEO of Apple Germany. Our 5,000 employees worldwide met the challenges of a demanding year and we would like to thank them for their considerable efforts. Outlook Our business has ever increasing geographical spread and scale. Our product portfolio continues to grow both by acquisition and through investment in e-business solutions. This provides further opportunities not only to attract new customers but also to apply our installed base marketing expertise to grow recurring revenues. We are well placed as market leader to continue to consolidate the SME business management software market, and our ability to add value to acquisitions is a further driver of profitable growth. The new year has started well for our entry level businesses, whilst in the mid-market some uncertainty still remains. Yet even in the mid-market lead generation is strong and the reseller channel reports high levels of new business activity. However, the time taken to convert leads is still taking longer than normal. Our installed base business goes from strength to strength, and we will be paying particular attention this year to the opportunity to encourage an increasing number of our customers to upgrade to more sophisticated solutions from Sage. In the US, we have programmes in place to migrate elements of the Peachtree base to Sage Software, Inc.'s MAS90 product range, in France we plan to migrate a proportion of our Ciel customer base to the Sage France product range, and in the UK we are actively encouraging appropriate Line 50 and Line 100 customers to upgrade to Sage Enterprise. In addition to this activity we have programmes in place to cross-sell all of our products and services to our ever increasing installed base of active and loyal customers. Despite the challenging market environment, the Board is confident about the prospects for the current year. Michael Jackson Chairman CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 30 September 2000 Continuing operations 2000 1999 Acquisitions Total Total (unaudited) (unaudited)(unaudited)(audited) £'000 £'000 £'000 £'000 Turnover 368,370 43,783 412,153 307,041 Cost of sales (34,379) (8,687) (43,066) (32,393) Gross profit 333,991 35,096 369,087 274,648 Selling and administrative (227,206) (29,999) (257,205) (194,710) expenses Operating profit 106,785 5,097 111,882 79,938 Interest receivable 3,139 2,195 Interest payable and similar (6,273) (7,820) charges Profit on ordinary activities before taxation 108,748 74,313 Taxation on profit on ordinary activities (34,799) (23,780) Profit on ordinary activities after taxation 73,949 50,533 Equity minority interest 71 (74) Profit for the financial year 74,020 50,459 Equity dividends (4,898) (4,280) Amount transferred to reserves 69,122 46,179 Earnings per share (pence) - 5.92p 4.22p basic Net dividend per share (pence) 0.386p 0.351p CONSOLIDATED BALANCE SHEET As at 30 September 2000 2000 1999 (unaudited) (audited) £'000 £'000 Fixed assets Intangible assets 540,422 186,319 Tangible assets 46,504 36,728 586,926 223,047 Current assets Stocks 2,489 2,254 Debtors 85,369 54,214 Cash at bank and in hand 66,417 31,589 154,275 88,057 Creditors: amounts falling due within one year (110,178) (85,620) Net current assets 44,097 2,437 Total assets less current liabilities 631,023 225,484 Creditors: amounts falling due after more than one year (78,472) (86,947) Deferred income (98,066) (63,194) Equity minority interest (94) (165) 454,391 75,178 Capital and reserves Called up equity share capital 12,680 1,219 Share premium account 432,690 152,297 Merger reserve 61,111 40,545 Profit and loss account (52,090) (118,883) Equity shareholders' funds 454,391 75,178 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 30 September 2000 2000 1999 (unaudited)(audited) £'000 £'000 Profit for the financial year 74,020 50,459 Translation of foreign currency net investments and related (2,963) (1,034) borrowings Total recognised gains and losses relating to the year 71,057 49,425 CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2000 2000 1999 (unaudited)(audited) £'000 £'000 Net cash inflow from operating activities 104,998 110,897 Returns on investments and servicing of finance Interest received 3,029 2,195 Interest paid (5,531) (7,571) Issue cost of loans - (384) Interest element of finance lease rental payments (261) (529) Net cash outflow from returns on investments and (2,763) (6,289) servicing of finance Taxation Corporation tax paid (34,266) (17,509) Capital expenditure Payments to acquire tangible fixed assets (17,786) (10,413) Receipts from sales of tangible fixed assets 389 312 Net cash outflow from capital expenditure (17,397) (10,101) Acquisitions and disposals Purchase of subsidiary undertakings: Net cash consideration - current year acquisitions (329,756) (134,144) - prior year acquisitions (672) (835) Net cash outflow from acquisitions and disposals (330,428) (134,979) Equity dividends paid (4,490) (3,898) Cash outflow before financing and management of liquid (284,346) (61,879) resources Management of liquid resources Decrease/(increase) in short term deposits 29,785 (7,948) Financing Shares issued 298,450 67,406 Share issue costs (7,614) (703) Movement in loan funding 2,464 (8,350) Repayment of capital element of finance leases (5,271) (417) Net cash inflow from financing 288,029 57,936 Increase/(decrease) in cash in the year 33,468 (11,891) NOTES 1. Geographical analysis 2000 1999 Turnover Operating profit Turnover Operating profit (unaudited) (unaudited) (audited) (audited) £'000 £'000 £'000 £'000 UK 132,124 54,965 99,178 39,606 France 71,497 20,631 66,847 17,962 Germany 22,197 2,313 18,793 (1,641) US 142,552 28,876 118,016 23,275 368,370 106,785 302,834 79,202 Impact of foreign - - 4,207 736 exchange* Acquisitions - US 39,385 5,413 - - Acquisitions - 4,398 (316) - - Switzerland 412,153 111,882 307,041 79,938 * Foreign currency results for the year ended 30 September 1999 have been retranslated at current year exchange rates to facilitate the comparison of results. 2. Analysis of change in net debt (inclusive of finance leases) At 1 Cash Acquisitions Other Exchange At 30 October flow movement September 1999 2000 £'000 £'000 £'000 £'000 £'000 £'000 Net cash at bank 21,357 23,878 8,322 - 1,268 54,825 and in hand Short term 7,948 (29,785) 31,481 - 1,546 11,190 deposits Debt (87,560) 2,807 (517) 225 (1,757) (86,802) (58,255) (3,100) 39,286 225 1,057 (20,787) 3. Taxation The taxation charge for the year comprises: 2000 1999 £'000 £'000 UK taxation 18,433 12,106 Overseas taxation 16,366 11,674 34,799 23,780 4. The unaudited financial information set out above does not constitute the Company's statutory accounts for the year ended 30 September 2000. Statutory accounts to 30 September 1999 have been delivered to the Registrar of Companies and those to 30 September 2000 will be delivered in due course. The Group's results for the year ended 30 September 1999 have been extracted from those statutory accounts. The Auditors' Report on the accounts to 30 September 1999 was unqualified and did not contain a statement under Section 237 of the Companies Act 1985. 5. The calculation of earnings per share is based on earnings of £74.0m (1999: £50.5m) and on 1,250,052,239 ordinary 1p shares (1999: 1,194,676,630) being the weighted average number of shares in issue during the year. 6. Subject to shareholders' approval, the final dividend of 0.256 pence per share will be paid on 7 March 2001 to shareholders on the register at the close of business on 9 February 2001. 7. The annual report and accounts will be posted to shareholders shortly and thereafter copies will be available from the Secretary, The Sage Group plc, Sage House, Benton Park Road, Newcastle upon Tyne, NE7 7LZ.


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