Final Results

FOR IMMEDIATE RELEASE 2 December 2003 SAGE PRE-TAX PROFIT UP 12% TO Â£151.0 MILLION FOR THE YEAR ENDED 30 SEPTEMBER 2003 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 2003. Financial highlights * Turnover increased by 4% to Â£560.3m (2002: Â£539.8m*) * Operating margin increased by 1.6 percentage points* to 27.8% * Pre-tax profit grew 12% to Â£151.0m (2002: Â£135.2m*) * Earnings per share grew 11% to 8.16p (2002: 7.32p*) * Operating cash flow increased 22% to Â£183.8m (2002: Â£151.2m*) * Proposed dividend 1.650p for the year, an increase of 10% Operational highlights * Strong profit growth in the UK and US * 233,000 new customers added in the year. Over 400,000 customers added through acquisitions after the year-end, taking the customer base to over 3.6 million * Invested Â£177.4m in acquisitions (two of them after the year-end), expanding into 3 new territories: South Africa, Australia and Spain * Support contracts exceed 1 million Geographical analysis 2003 2002 Â£m Turnover Operating Turnover* Operating profit profit* Â£m % growth Â£m % growth Â£m Â£m UK 161.1 3.3% 64.6 12.2% 156.0 57.6 Mainland Europe 134.7 4.3% 29.6 -5.1% 129.2 31.2 US 264.5 3.9% 61.7 17.1% 254.6 52.7 560.3 3.8% 155.9 10.2% 539.8 141.5 Foreign exchange - - 11.9 2.2 impact * 560.3 1.6% 155.9 8.5% 551.7 143.7 *Group turnover and operating profit for the prior year have been retranslated at current year exchange rates to facilitate comparison of certain of the results within this release. Group pre-tax profit and earnings for the prior year have been stated excluding the impact of the one-off Â£6m expense of sponsoring 'The Sage Gateshead'. Chairman, Michael Jackson commented: 'We have continued to deliver good earnings growth in difficult market and economic conditions. We have also made significant progress against our strategic objectives, including the completion of a number of acquisitions in new markets. The start to the new financial year has been encouraging, and with significant earnings enhancement expected from our recent acquisitions, the Board views 2004 with confidence.' Enquiries: The Sage Group plc 0191 294 3000 Tulchan 020 7353 4200 Paul Walker, Chief Executive Julie Foster Paul Harrison, Finance Director Kirstie Hamilton Phil Branston, Investor Relations Introduction We are pleased to announce results which show earnings growth of 11%. During the year we have made further progress in generating more revenue from our customer base, which now numbers over 3.6m. We have also continued our acquisition strategy, completing three significant acquisitions (two of them after the financial year-end), which have opened up new markets and further growth opportunities. Financial overview In the year ended 30 September 2003, we increased turnover by 4% to Â£560.3m (2002: Â£539.8m*). Services revenues grew by 6% to Â£338.7m (2002: Â£319.8m*), and represented 60% of total revenues. 80% of these service revenues came from the provision of support contracts (2002: 78%). Software revenues grew by 1% to Â£ 221.6m (2002: Â£220.0m*), and represented 40% of total revenues. 49% of these software revenues came from sales to existing customers (2002: 45%). Operating profit rose by 10% to Â£155.9m (2002: Â£141.5m*), with the operating margin increased by 1.6 percentage points to 27.8% (2002: 26.2%*). Pre-tax profit improved 12% to Â£151.0m (Â£135.2m*). Earnings per share increased 11% to 8.16p (2002: 7.32p*). These results include a charge of Â£2.0m for the loss on disposal of a non-core division in May 2003. The movement in exchange rates had a significant downward impact on results from overseas businesses. The main factor was the 9% decline in the US dollar against sterling, compared to the prior year, which impacted the 47% of Group revenues originated in the US. This was only partially offset by the 8% appreciation of the euro. Growth rates throughout this statement have been stated at constant exchange rates, but without this adjustment, Group turnover grew 2% and operating profit increased by 9%. The Group's strong earnings and effective cash management created significant growth in cash flow. Operating profit of Â£155.9m generated operating cash flow of Â£183.8m. At 30 September 2003 the Group had net debt of Â£110.6m (2002: Â£ 132.8m) with net interest covered 32 times by operating profit. The acquisitions of Softline and Grupo SP, completed after the year-end, were financed by a combination of additional debt and cash held in the business. The proposed final dividend is 1.095p per share, making a total of 1.650p for the year, an increase of 10%. Subject to shareholder approval, the proposed final dividend will be paid on 12 March 2004 to shareholders on the register as of 13 February 2004. Market trends Sage serves the market for accounting and business management software solutions for small and medium-sized businesses ('SMEs'). In this market, solutions designed to fit SMEs' specific requirements are delivered through local distribution channels, including value-added resellers. During the year, the market has continued to exhibit three broad characteristics. SMEs have continued to exercise caution in their spending on information technology. As a consequence, we have seen no significant change in spending on software. Larger SMEs, who might in a better economic climate replace their solutions, are increasingly focussing on extracting greater value from their existing solutions. Consequently they have invested in upgrades and complementary products. The market serving smaller SMEs is more stable, since newly formed businesses continue to automate their business processes for the first time. SMEs generally have continued to spend strongly on services related to their software, which are often critical to efficient accounting and business processes. Those larger SMEs replacing their solutions are increasingly seeking to purchase systems for a number of their business processes, rather than just for accounting. Often, the solutions they require are industry-specific. The market penetration of industry-specific, business solutions is still relatively low. Sage approach to the market Our response to these economic and market trends has been as follows. Software Recognising that many of our customers are seeking to enhance rather than replace their existing solutions, our upgrade programmes introduce appropriate new features and enhancements for all customers. 373,000 existing customers purchased upgrades during the year. As a result, upgrade revenues grew 10% and represented 37% of software revenues. For those of our customers seeking to replace their solutions, we have developed appropriate migration programmes based on our broad product portfolio. 49,000 existing customers purchased new software during the year. As a result, revenues from the sale of new licences to existing customers represented 12% of software revenues. It is one of our key priorities to attract large numbers of new customers to the Group. Continued investment in our products, brands and marketing programmes resulted in the recruitment of 182,000 new customers during the year, excluding acquisitions. Support 95% of our customers have less than 100 employees, and as a consequence very few of them have in-house IT expertise. Instead they look to Sage to provide support. Since many of our customers are seeking to derive greater value from their existing solutions, we are providing higher tiers of service within our support contract offerings. These were purchased by 250,000 of our support customers during the year. Support revenues grew 8% in the year. Industry-specific solutions During the year, we introduced a number of new solutions tailored for particular industries, including manufacturing, construction and distribution. These solutions were introduced through internal product development and through acquisitions. We now serve over 160,000 of our customers with industry-specific solutions. As a result revenues from industry-specific solutions were 11% of revenues. Competitive position We continue to perform strongly against our competitors by leveraging the key strengths of our business. In a market where a substantial proportion of revenues comes from existing customers, our customer base of over 3.6m SMEs is an important source of revenue opportunities. Our range of localised solutions, expanded by acquisitions, meet the requirements of SMEs by incorporating local business practices and legislation. Our solutions are delivered by an established community of local business partners and backed up by a local support service. We have a product portfolio which meets the needs of both small and large SMEs, and which is continuously developed, not only through acquisitions but also using feedback from the 21,000 customer support calls that we receive each day. These features will continue to differentiate us from our competitors, and are at the core of our growth strategy. Operational review UK UK revenues grew 3% and represented 29% of Group revenues. Revenue growth was generated by sales to smaller SMEs, particularly through sales of upgrades and support to existing customers. The operating margin increased to 40%, from the prior year's 37%, reflecting increased revenues from existing customers and also the benefit of the prior year's re-organisation of the mid-market division. UK operating profit grew 12%. While improving its operating margin, the UK business has continued to invest in its product portfolio. Its migration programme, targeted at smaller SMEs, has been strengthened by the introduction of new products, increasingly addressing the needs of SMEs in specific industries. Mainland Europe Economic conditions in Mainland Europe were the most challenging of all our markets, and were exacerbated by falling demand in the aftermath of the transition to the euro. However, acquisitions enabled revenues to grow by 4%, and Mainland Europe represented 24% of Group revenues. In these conditions, many of our competitors saw a steep decline in business. By contrast, our businesses remained highly profitable, as we were able to take advantage of the sales opportunities that remain within our large customer base. Furthermore, we continued to invest in upgrade programmes and in developing support services for our customers. Businesses acquired in the year contributed low initial margins and therefore overall margins fell to 22% (2002: 24%). US Overall US revenues grew by 4% and represented 47% of Group revenues. The accounting business grew revenues by 2%, while the CRM business grew revenues 13%. Overall US operating margins grew to 23% (2002: 21%), led particularly by the improvement of CRM margins to 18% (2002: 14%). Overall US operating profits grew 17%. In the accounting business, revenues were driven by our core accounting range, where our investment is focused, and in particular by Peachtree's 9% growth. This product range represented 80% of accounting revenues. The balance of revenues came from our legacy products, where we actively seek to migrate customers to core products. With lower investment, these products continue to provide strong profit contributions. The CRM business performed particularly well, due to the success of its upgrade programme, which introduced compelling new features for customers of the ACT! contact management product. In this expanding market, we continue to make significant investments in both marketing and product development. The US business has been built through a series of acquisitions, which have created a large product portfolio and a customer base spanning small and large SMEs. During the year, considerable progress was made in consolidating the US businesses into two divisions, one addressing smaller SMEs and one addressing larger SMEs. The centralisation of certain back-office functions, together with a cohesive approach to our customers and business partners, ensures we continue to build on our strong market presence in the US. Acquisition activity Our acquisition strategy remains core to our approach to the market. We acquire businesses not only to enter new territories, but also to expand our offer in territories where we already have a presence. The acquisition of businesses with well-established brands and customer bases provides opportunities to sell more products and services and so improve profitability. We have made significant progress in our acquisition strategy through one major acquisition during the year, and two further acquisitions after the end of the year. In total, our acquisitions over the year and up to present represent a Â£ 177.4m investment in future growth, supported by our strong operating cash flows. Timberline, acquired in September 2003 for an enterprise value of Â£55.9m, has expanded our US industry-specific offer into a further important market: the construction and real estate sector. We have 150,000 customers in the US construction and real estate sector already using our software. Many of these businesses represent excellent prospects for the Timberline product and we will develop programmes to facilitate migration to this higher-value solution. This acquisition contributed revenues of Â£1.6m in the period and made an operating profit of Â£0.5m. Our acquisition of Grupo SP in October 2003, for an enterprise value of Â£49.1m, established a leading position in the attractive Spanish market. SP specialises in providing solutions for smaller businesses. It is our intention to sell additional products to SP's customer base, and also to extend SP's presence to address the needs of larger SMEs by selling more sophisticated solutions. With the acquisition of Softline, completed in November 2003, for an enterprise value of Â£54.9m, we gained market-leading positions in South Africa and Australia. Softline has well-established brands and large customer bases. We will use our expertise to sell more products and services to Softline's customers. The two acquisitions completed after the end of the year added over 400,000 customers to the Group, bringing our customer base to over 3.6 million businesses. In addition, we made a number of small acquisitions during the year, principally Concept Group in France, acquired in January 2003 for an enterprise value of Â£5.0m. This business provides complementary treasury and consolidation software for SMEs. This acquisition will provide stimulus to cross-selling initiatives, increasing the breadth and value of the solutions offered to our customers. Concept contributed revenues of Â£6.5m in the period and made an operating profit of Â£0.4m. We will grow these businesses by using our customer base marketing expertise not only to sell more products and services to the new customers, but also to sell the acquired products to existing Sage customers. We expect to make further acquisitions as part of our response to the market trends noted above. Our people We place significant emphasis on attracting, developing and retaining our people. The decentralised manner in which we manage our global network of businesses is based on nurturing the entrepreneurship and creativity of our employees. It is their understanding of local customers that enables our businesses to develop products and services appropriate for the marketplace. Our employees have also played an important role in maintaining and improving our levels of local customer service, for which we have won numerous industry awards. We thank all our people for their contribution to the year's performance. Outlook Revenue from services has proven more resilient than the sale of software in the weak economic conditions experienced during the year, and consequently we expect this part of the business to deliver continuing growth. Spending by smaller SMEs has demonstrated less dependence on macro-economic conditions than spending by larger SMEs. Demand from our small business customers is relatively predictable and therefore we expect this segment of our business to continue its growth. Sales to larger SMEs have been more sensitive to economic conditions, but we will continue to grow this part of the business through strong execution of marketing programmes for our expanded product and service range. The Group is therefore positioned to deliver growth in unchanged economic conditions. Growth would be higher in the event of improved conditions since larger SMEs would seek to replace their solutions. The Group's largely fixed cost base means that a significant proportion of incremental revenues will translate into profit growth. The start to the new financial year has been encouraging, and with significant earnings enhancement expected from our recent acquisitions, the Board views 2004 with confidence. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 30 September 2003 2003 2002 (unaudited) (audited) Â£'000 Â£'000 Turnover 560,345 551,731 Cost of sales (51,571) (54,840) Gross profit 508,774 496,891 Selling and administrative (352,867) (353,211) expenses Selling and administrative expenses - sponsorship - (6,000) arrangement Total selling and administrative (352,867) (359,211) expenses Operating profit 155,907 137,680 Interest receivable 1,393 1,519 Interest payable and similar (6,263) (10,045) charges Profit on ordinary activities before taxation 151,037 129,154 Taxation on profit on ordinary (46,821) (40,038) activities Profit on ordinary activities after taxation 104,216 89,116 Equity minority interest (65) (41) Profit for the financial year 104,151 89,075 Equity dividends (21,093) (19,143) Amount transferred to reserves 83,058 69,932 Earnings per share (pence) - basic 8.16p 6.99p Earnings per share (pence) - basic (pre sponsorship 8.16p 7.32p arrangement) Dividend per share (pence) 1.65p 1.500p Notes: The sponsorship arrangement relates to a one-off sponsorship payment of Â£6m in connection with 'The Sage Gateshead'. CONSOLIDATED BALANCE SHEET As at 30 September 2003 2003 2002 (unaudited) (audited) Â£'000 Â£'000 Fixed assets Intangible 900,684 830,908 Tangible 99,243 54,541 999,927 885,449 Current assets Stocks 2,667 2,306 Debtors 110,247 108,219 Deferred tax asset 16,559 28,306 Cash at bank and in hand 97,234 58,795 226,707 197,626 Creditors: amounts falling due within one year (185,306) (177,010) Net current assets 41,401 20,616 Total assets less current liabilities 1,041,328 906,065 Creditors: amounts falling due after more than one (170,871) (157,194) year Deferred income (154,566) (127,019) Equity minority interest (144) (121) 715,747 621,731 Capital and reserves Called up equity share capital 12,792 12,755 Share premium account 443,137 441,859 Merger reserve 61,111 61,111 Profit and loss account 198,707 106,006 Equity shareholders' funds 715,747 621,731 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 30 September 2003 2003 2002 (unaudited) (audited) Â£'000 Â£'000 Profit for the financial year 104,151 89,075 Translation of foreign currency net investments and 9,791 12,233 related borrowings Total recognised gains and losses relating to the 113,942 101,308 year CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2003 2003 2002 (unaudited) (audited) Â£'000 Â£'000 Net cash inflow from operating activities 183,829 145,178 Returns on investments and servicing of finance Interest received 1,393 1,520 Interest paid (5,479) (9,454) Issue cost of loans (225) (180) Interest element of finance lease rental payments - (3) Net cash outflow from returns on investments and (4,311) (8,117) servicing of finance Taxation Corporation tax paid (27,416) (22,645) Capital expenditure Payments to acquire tangible fixed assets (40,808) (19,130) Receipts from sales of tangible fixed assets 242 468 Net cash outflow from capital expenditure (40,566) (18,662) Acquisitions and disposals Purchase of subsidiary undertakings: Net cash - current year acquisitions (66,209) (28,185) consideration - prior year acquisitions (7,223) (19,292) Net cash outflow from acquisitions and disposals (73,432) (47,477) Equity dividends paid (24,217) (5,595) Cash inflow before financing and management of 13,887 42,682 liquid resources Management of liquid resources Reduction / (increase) in short term deposits 131 (1,367) Financing Shares issued 1,161 2,604 Movement in loan funding 23,476 (29,104) Repayment of capital element of finance leases (21) (57) Net cash inflow / (outflow) from financing 24,616 (26,557) Increase in cash in the year 38,634 14,758 NOTES 1. Analysis of results 2003 2002 Turnover Operating Turnover Operating profit profit (unaudited) (unaudited) (audited) (audited) Â£'000 Â£'000 Â£'000 Â£'000 UK 161,123 64,575 155,986 57,625 France 95,031 21,922 95,129 26,146 Germany/Switzerland 39,656 7,709 34,078 5,036 US 208,797 51,706 205,294 45,967 Interact 55,738 9,995 49,307 6,734 560,345 155,907 539,794 141,508 Impact of foreign - - 11,937 2,172 exchange Sponsorship - - - (6,000) arrangement - The Sage Gateshead 560,345 155,907 551,731 137,680 Foreign currency results for the year ended 30 September 2002 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 Acquisi-tions Exchange Other At 30 October flow movement September 2002 2003 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net cash at bank 57,512 38,634 - - - 96,146 and in hand Short term deposits 1,283 (131) - (64) - 1,088 Loans due within (39,076) 39,204 (280) 306 (37,327) (37,173) one year Finance leases due (21) 21 - - - - within one year Loans due after (152,507) (62,455) (226) 7,810 36,707 (170,671) more than one year (132,809) 15,273 (506) 8,052 (620) (110,610) 3. Taxation The taxation charge for the year comprises: 2003 2002 Â£'000 Â£'000 Current taxation UK 18,873 20,066 Overseas 11,794 9,902 30,667 29,968 Deferred taxation 16,154 10,070 46,821 40,038 4. The unaudited financial information set out above does not constitute the Company's statutory accounts for the year ended 30 September 2003. Statutory accounts for the year ended 30 September 2002 have been delivered to the Registrar of Companies and those for the year ended 30 September 2003 will be delivered in due course. The Group's results for the year ended 30 September 2002 have been extracted from those statutory accounts. The Auditors' Report on the accounts for the year ended 30 September 2002 was unqualified and did not contain a statement under Section 237 of the Companies Act 1985. 5. The calculation of basic earnings per share is based on earnings of Â£104.2m (2002: Â£89.1m) and on ordinary 1p shares of 1,276,690,520 (2002: 1,274,526,435) being the weighted average number of shares in issue during the year. 6. Subject to shareholders' approval, the final dividend of 1.095 pence per share will be paid on 12 March 2004 to shareholders on the register at the close of business on 13 February 2004. 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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