Final Results

Sage Group PLC 5 December 2001 Embargoed for release, Wednesday 5 December 2001 SAGE PRE-TAX PROFIT UP 12% TO £121.3 MILLION FOR YEAR ENDED 30 SEPTEMBER 2001 The Sage Group plc (Sage), a leading supplier of business management software solutions and related services for small to medium-sized enterprises (SMEs), announces its unaudited results for the year ended 30 September 2001. Highlights * Turnover increased by 17% to £484.1m (2000: £412.2m) * Pre-tax profit increased 12% to £121.3m (2000: £108.7m) * Earnings per share up 11% to 6.59p (2000: 5.92p) * Dividends for the year raised 10% to 0.425p (2000: 0.386p) * Operating cash flow up 14% to £119.6m (2000: £105.0m) * Acquisition of Interact Commerce Corporation (Interact) for £189m, May 2001 * 248,000 new customers added (excluding Interact), bringing the total to 2.8m (2000: 2.5m) * Support contracts increased 15% to 897,000 (2000: 779,000) * Geographical analysis 2001 2000 £m Turnover Operating profit Turnover Operating profit UK 148.8 56.3 132.1 55.0 Mainland Europe 102.5 26.3 98.2 22.6 US 209.2 45.6 195.0 36.8 460.5 128.2 425.3 114.4 Impact of foreign exchange - - (13.1) (2.5) * Acquisition - US 23.6 0.2 - - 484.1 128.4 412.2 111.9 *Foreign currency results for the year ended 30 September 2000 have been retranslated at current year exchange rates to facilitate comparison of results, in the table above and in the operational review below. Michael Jackson, Chairman, commented: 'Our businesses have continued to win significant numbers of new customers - nearly a quarter of a million - this year. Throughout the Group we continue to find new ways of selling more products and services to existing customers. Our strategy of marketing an ever-expanding product and service offering to an ever-increasing customer base remains our clear focus. As in the past, we will continue to grow our business both organically and through acquisition. Notwithstanding the current economic climate, we believe that the strength of our brands, the breadth of our product offering, the resilience of our channel and the sheer scale of our customer base provide us with a platform for sustained long-term growth. Therefore we look forward to 2002 with confidence '. Enquiries: The Sage Group plc 0191 255 3000 Financial Dynamics 020 7831 3113 Paul Walker, Chief Executive Giles Sanderson / Harriet Keen Paul Harrison, Finance Director Phil Branston, Investor Relations Notes to editors: The Sage Group plc is a leading international supplier of business management software solutions and related products and services for small to medium-sized enterprises. Formed in 1981, the Group was floated on the London Stock Exchange in 1989 and now employs over 5,000 people worldwide in its market-leading companies throughout Europe and the US. Introduction In what was a challenging economic environment for our industry, we are pleased to report, for the year ended 30 September 2001, revenue growth of 17%, pre-tax profit growth of 12% and earnings per share growth of 11%. During the year, we attracted 248,000 new customers to Sage, increasing the size of our installed base by 10% to 2.8 million customers. This increase excludes more than 3 million users acquired with Interact Commerce Corporation (Interact). Our installed base revenues, from selling products and services to our customers, increased by 21% and continued to drive growth, contributing 68% of total revenues (2000: 64%). Last year we set out our intention to become a provider of business management software solutions for small to medium-sized enterprises (SMEs) in our chosen geographic markets. This year we have taken a number of important steps towards achieving this objective. Most importantly, we have broadened our range of products not only through internal development activity but also through a number of significant acquisitions. This broadening of our offering has provided us with the means to sell more products and services both to new and existing customers. In addition, we are progressively expanding our portfolio of e-business products and services. All of our operating companies have continued to focus this year on attracting new customers to Sage. The expansion of our product offering together with innovative channel marketing programmes have stimulated new licence revenues in the year. Our success in recruiting new customers to Sage, particularly at the entry-level, provides, over the longer term, a potent source of new leads for our mid-market businesses. A broader range of products also provides further opportunities to sell more customer support contracts. This activity forms the core of our installed base business model, with support contracts alone contributing 45% of total revenues in the year. The penetration rate of support contracts against registered customers improved over the year. The close relationship we have with our customers allows us to address two types of opportunity to sell extra software and services: first, migrating customers to higher-value accounting software, and second, cross-selling additional business management software products and services, in areas such as payroll, customer relationship management (CRM) and e-business. Whilst the contribution of our e-business revenues is not significant, there are encouraging signs that SMEs are evaluating more closely the benefits that e-business products and services could bring to their businesses. They look to Sage for guidance in this area, to which end we have hosted over 2,000 seminars worldwide designed to demystify e-business and explain the benefits it offers SMEs. In the long-term we remain convinced that e-business will be a stimulus for growth. Each of the acquisitions we have made this year is consistent with our twin objectives of broadening our product portfolio and growing our customer base. The acquisition of Interact brought us market-leading CRM products in ACT! and SalesLogix, and in excess of 3 million users. Other smaller acquisitions added to our range of business management software solutions. In France, we acquired Fasset, a leading provider of fixed asset management software and, after the year-end, a majority holding in Coala, whose products and services address the needs of professional accountancy practices. In the US, we acquired Haitek, which supplies manufacturing software, Platinum for Windows, which offers finance and distribution software and Micro Information Products (MIP), whose solutions target the large US 'not-for-profit' sector which includes schools, colleges, local government, charities and religious organisations. Our focus on meeting the particular needs of our customers with a compelling range of products, distributed through our value-added reseller (VAR) channel and underpinned by the provision of insightful customer support inspires customer loyalty and, we believe, continues to differentiate Sage from its competitors. Financials Turnover grew 17% to £484.1m. Operating profit rose by 15% to £128.4m (2000: £ 111.9m). Pre-tax profit grew 12% to £121.3m (2000: £108.7m). As in previous years, operating cash flow closely reflected operating profit, and rose 14% to £119.6m. Deferred revenues from support contracts grew to £112.8m (30 September 2000: £98.1m). The proposed final dividend is 0.282p per share, making a total of 0.425p (2000: 0.386p), an increase of 10%. Subject to shareholder approval, this will be paid on 8 March 2002. Following the acquisition of Interact, financed through a loan facility, the Group had net debt of £190.9m at 30 September 2001. Operational review UK Continued progress has been made both in developing the existing offering and in addressing new opportunities. Revenues grew by 13% and 46,000 new customers were attracted during the year. Operating margins have declined slightly this year due to a combination of factors. First, in the mid-market, despite a healthy pipeline, closure of sales has proved difficult, leading to lower revenues and margins. Second, we have continued to invest in our e-business products and services in anticipation of future demand. Third, acquisition of lower margin businesses during the year has had a dilutive effect. We are focusing increasing attention on those of our customers who are showing signs of outgrowing their entry-level software and encouraging them to upgrade to more powerful mid-market business management software solutions. This will be an important source of new revenue for our mid-market business. A number of channel marketing programmes have been introduced, providing UK VARs with greater incentives to focus on new licence sales. The initial results from the second half have been encouraging, with increasing numbers of VARs generating increased volumes of new business. Improved VAR accreditation and training will allow VARs to work more closely with Sage in serving our customers. Installed base revenues continue to grow strongly. The customer division has been successful both in selling support contracts and in further improving the quality of customer service. 69,000 support contracts were added in the year. Cross-selling additional products and services to existing customers gathered momentum, particularly to those of our customers with support contracts, who tend to be more willing buyers of additional products and services. Acquisitions during the year expanded the product range and brought many new customers into the business. TAS Software, acquired in February 2001, added 25,000 entry-level accounting customers. Sage in the UK now offers a broad range of business management software solutions, which we are confident will produce significant growth in future revenues. Mainland Europe In France, revenues increased by 4% but this disguises a strong performance in the second half, when revenues increased 27% over the prior year. In addition, we gained 55,000 new entry-level customers. There has been some stimulus to revenues from the full adoption of the Euro in France. Extra demand has been evident not only in new software licence business, but also in take-up of support contracts in preparation for the changeover period. In France we now have an expanded range of business management software solutions for the entry-level market including not only enhanced core accounting products but also newly developed products for key industry-specific markets such as retail, healthcare and construction. Marketing these additional products and services to our installed base of 380,000 entry-level customers will provide further opportunities for revenue growth. We have maintained a strong focus on improving support contract revenues. Incentivising VARs to encourage customers to take up support contracts at the time of the initial purchase of a new software licence has helped to increase the number of support contracts to 254,000. Acquisitions have extended the business management software offering beyond the accounting core. The Fasset suite of fixed asset management applications (1,300 customers) was acquired in August. After the year-end, the acquisition of Coala (3,100 customers) expanded Sage's presence in the French professional accountants' market. In Germany, as in France, there has been some stimulus to revenues from the full adoption of the Euro. We have continued to make improvements to the quality of our customer service as well as to operating efficiencies with the result that, whereas the business was loss-making two years ago, it achieved operating margins of 23% this year (2000: 10%), despite revenues growing by only 5%. The core OfficeLine product is well established as a market leader in its segment, while users of the legacy product ClassicLine have benefited from ongoing modernisation of the product. Growth in Mainland Europe will be driven by continuing improvements to our primary and installed base business models, as well as by the continuing expansion of our product offering. US In the US, in contrast to our competitors, we have a product offering that covers the market from entry-level to mid-market. The experienced central US management team has helped the individual operating companies to work more closely together, and the considerable incremental installed base opportunities that exist in the US are starting to be realised. Acquisitions are being used to build the business management software solutions offering whilst at the same time expanding the customer base. Market conditions have been challenging and were exacerbated by disruption following September's terrorist attacks. The market for new licence sales was especially tough, but despite this our US businesses maintained their market share and the installed base business performed strongly so that revenues (excluding Interact) grew 7% over the prior year. At the entry-level Peachtree attracted 71,000 new customers and successfully pursued a strategy of migrating customers onto new versions, additional modules, and higher-value support contracts, which has resulted in its operating margin increasing to 23% (2000: 14%). The ability to mine the Peachtree customer base for sales leads to mid-market products provides us with a unique opportunity in the US market. The first signs of the success of this are evident in that 26% of new licence unit sales of the mid-market offering, MAS90 were generated from the Peachtree customer base. Best Software offers business management software solutions outside the accounting core. It has focused its business objectives on its market-leading FAS (Fixed Asset) and Abra (Human Resources) applications and has de-emphasised its non-core products. The resulting efficiencies have improved operating margins to 21% (2000: 14%). Best is now well-placed to address the substantial opportunity to cross-sell its products to the large installed base in the US. Acquisitions in the US have added complementary customer bases in strategically important industry-specific markets. Haitek, acquired in March, added a manufacturing module which enhances the mid-market Enterprise Suite offering. MIP, acquired in September with 5,000 customers, established a presence in, and an opportunity to consolidate, the fast-growing non-profit sector. In addition, the acquisition of Platinum For Windows in June added 6,000 mid-market accounting customers. Our US businesses are focused not only on driving growth through new customer acquisition but also on maximising the significant installed base opportunity in the US market. We will continue to benefit from the competitive advantage we have in covering all segments of the SME market. Interact The acquisition of Interact in May 2001 for £189m marked a significant step in our strategy to offer SMEs a comprehensive suite of business management software solutions, by establishing for the first time an offering in the CRM market. The two Interact products, ACT! and SalesLogix, address different needs in the marketplace. ACT! is a product used by 3 million salespeople worldwide which helps the user manage individual contacts very efficiently. SalesLogix is a comprehensive CRM suite enabling an entire organisation to automate sales, marketing and customer service activities. Both products are being actively marketed to SMEs in all our markets. In the contact management field ACT! is a bestseller with few competitors. SalesLogix, a more expensive solution, operates in a more competitive market and has suffered this year from a difficult trading environment in the mid-market. In addition, SalesLogix experienced some sales deferrals in September. Following a detailed review of the product positioning for SalesLogix, we have refocused the product offering to be more compelling to the SME market as a whole rather than just the upper end of the mid-market. The product repositioning, a simplified pricing structure and the launch of a number of innovative channel marketing campaigns are expected to stimulate revenue growth. ACT! and SalesLogix have an estimated user base of more than 3 million. Historically, however, Interact has done very little to sell additional products and services to this substantial installed base. We are developing a range of installed base marketing campaigns to the Interact customer base, focusing in the first instance on support contracts as well as industry-specific versions of ACT! and SalesLogix. We expect this installed base activity to lead to a significant increase in revenues for Interact. Our research confirms that there is strong demand from existing Sage customers for CRM solutions that are tightly integrated to our core accounting products. Over the last few months, we have invested considerable time and effort in building an efficient software integration tool that will allow rich integration between ACT! and Sage accounting software products. The ACT! integration tool is now complete which means that Sage operating companies are able to launch new integrated versions of ACT! In the UK, for example, the launch of Sage Contact Manager powered by ACT! is planned for March 2002. The integration tool that will allow seamless integration between SalesLogix and our accounting products will be completed during calendar 2002. In the meantime our channel partners have access to a number of development toolkits which facilitate integration between SalesLogix and our accounting products. Links, for example, between SalesLogix and our mainstream accounting products in the US, MAS90 and Sage Enterprise, already exist and are being actively marketed to our customer base. Drawing on our experience of integrating acquisitions and improving their operating performance, we are confident of maximising the strategic CRM opportunity represented by Interact, not only as a stand-alone business, but also as a provider of important additional products to sell to our installed bases around the world. People The success of our business is due in large part to the effort, creativity and ingenuity of our people. In the year under review, our people once again made critical contributions right across the organisation with the overall objective of serving our customers more effectively. We continue to nurture the talent of our employees and are investing in training, succession planning and career development programmes throughout the Group. Outlook Our businesses have continued to win significant numbers of new customers - nearly a quarter of a million - this year. Throughout the Group we continue to find new ways of selling more products and services to existing customers. Our strategy of marketing an ever-expanding product and service offering to an ever-increasing customer base remains our clear focus. As in the past, we will continue to grow our business both organically and through acquisition. Notwithstanding the current economic climate, we believe that the strength of our brands, the breadth of our product offering, the resilience of our channel and the sheer scale of our customer base, provide us with a platform for sustained long-term growth. Therefore we look forward to 2002 with confidence. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 30 September 2001 Continuing operations 2001 2000 Acquisitions Total Total (unaudited) (unaudited) (unaudited) (audited) £'000 £'000 £'000 £'000 Turnover 460,582 23,555 484,137 412,153 Cost of sales (49,694) (1,037) (50,731) (43,066) Gross profit 410,888 22,518 433,406 369,087 Selling and administrative (282,658) (22,367) (305,025) (257,205) expenses Operating profit 128,230 151 128,381 111,882 Interest receivable 3,192 3,139 Interest payable and similar (10,256) (6,273) charges Profit on ordinary 121,317 108,748 activities before taxation Taxation on profit on (37,609) (34,799) ordinary activities Profit on ordinary 83,708 73,949 activities after taxation Equity minority interest 32 71 Profit for the financial 83,740 74,020 year Equity dividends (5,515) (4,898) Amount transferred to 78,225 69,122 reserves Earnings per share (pence) - 6.59p 5.92p basic Dividend per share (pence) 0.425p 0.386p CONSOLIDATED BALANCE SHEET As at 30 September 2001 2001 2000 (unaudited) (audited) £'000 £'000 Fixed assets Intangible assets 836,329 540,422 Tangible assets 51,208 46,504 887,537 586,926 Current assets Stocks 2,308 2,489 Debtors 95,248 85,369 Cash at bank and in hand 42,764 66,417 140,320 154,275 Creditors: amounts falling due within one year (138,479) (110,178) Net current assets 1,841 44,097 Total assets less current liabilities 889,378 631,023 Creditors: amounts falling due after more than one year (237,585) (78,472) Deferred income (112,809) (98,066) Equity minority interest (62) (94) 538,922 454,391 Capital and reserves Called up equity share capital 12,725 12,680 Share premium account 437,671 432,690 Merger reserve 61,111 61,111 Profit and loss account 27,415 (52,090) Equity shareholders' funds 538,922 454,391 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 30 September 2001 2001 2000 (unaudited) (audited) £'000 £'000 Profit for the financial year 83,740 74,020 Translation of foreign currency net investments and related borrowings 3,463 (2,963) Total recognised gains and losses relating to the year 87,203 71,057 CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2001 2001 2000 (unaudited) (audited) £'000 £'000 Net cash inflow from operating activities 119,576 104,998 Returns on investments and servicing of finance Interest received 3,302 3,029 Interest paid (9,023) (5,531) Issue cost of loans (1,877) - Interest element of finance lease rental payments (415) (261) Net cash outflow from returns on investments and servicing of finance (8,013) (2,763) Taxation Corporation tax paid (23,184) (34,266) Capital expenditure Payments to acquire tangible fixed assets (11,619) (17,786) Receipts from sales of tangible fixed assets 4,865 389 Net cash outflow from capital expenditure (6,754) (17,397) Acquisitions and disposals Purchase of subsidiary undertakings: Net cash consideration - current year acquisitions (218,474) (329,756) - prior year acquisitions (11,781) (672) Net cash outflow from acquisitions and disposals (230,255) (330,428) Equity dividends paid (5,182) (4,490) Cash outflow before financing and management of liquid (153,812) (284,346) resources Management of liquid resources Decrease in short term deposits 11,212 29,785 Financing Shares issued 2,381 298,450 Share issue costs - (7,614) Movement in loan funding 130,906 2,464 Repayment of capital element of finance leases (2,758) (5,271) Net cash inflow from financing 130,529 288,029 (Decrease)/increase in cash in the year (12,071) 33,468 NOTES 1. Geographical analysis 2001 2000 Turnover Operating profit Turnover Operating profit (unaudited) (audited) (unaudited) (audited) £'000 £'000 £'000 £'000 UK 148,839 56,316 132,124 54,965 France 74,103 21,859 71,440 20,615 Germany/ 28,451 4,473 26,754 1,982 Switzerland US 209,189 45,582 195,019 36,786 460,582 128,230 425,337 114,348 Impact of foreign - - (13,184) (2,466) exchange* Acquisition - US 23,555 151 - - 484,137 128,381 412,153 111,882 * Foreign currency results for the year ended 30 September 2000 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 flow Acquisitions Other Exchange At 30 October Movement September 2000 2001 £'000 £'000 £'000 £'000 £'000 £'000 Net cash at bank and 54,825 (12,071) - - - 42,754 in hand Short term deposits 11,190 (11,212) - - 22 - Debt (86,802) (126,271) (24,973) (490) 4,835 (233,701) (20,787) (149,554) (24,973) (490) 4,857 (190,947) 3. Taxation The taxation charge for the year comprises: 2001 2000 £'000 £'000 UK taxation 22,303 18,433 Overseas taxation 15,306 16,366 37,609 34,799 4. The unaudited financial information set out above does not constitute the Company's statutory accounts for the year ended 30 September 2001. Statutory accounts to 30 September 2000 have been delivered to the Registrar of Companies and those to 30 September 2001 will be delivered in due course. The Group's results for the year ended 30 September 2000 have been extracted from those statutory accounts. The Auditors' Report on the accounts to 30 September 2000 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 £83.7m (2000: £74.0m) and on 1,270,533,875 ordinary 1p shares (2000: 1,250,052,239) being the weighted average number of shares in issue during the year. 6. Subject to shareholders' approval, the final dividend of 0.282 pence per share will be paid on 8 March 2002 to shareholders on the register at the close of business on 8 February 2002. 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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