Final Results

FOR IMMEDIATE RELEASE 3 December 2002 SAGE PRE-TAX PROFIT UP 11% TO Â£135.2 MILLION FOR YEAR ENDED 30 SEPTEMBER 2002 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 2002. Highlights Turnover increased by 14% to Â£551.7m (2001: Â£484.1m) Pre-tax profit grew 11% to Â£135.2m (2001: Â£121.3m), before one-off Â£6m expense* Operating cash flow grew 26% to Â£151.2m (2001: Â£119.6m), before one-off Â£6m expense* Earnings per share, grew 11% to 7.32p (2001: 6.59p), before one-off expense*. Earnings per share, after one-off expense, of 6.99p Dividend for the year rebased to 1.5p (2001: 0.425p) Over 200,000 new customers added (excluding Interact), bringing the total to 3.0m (2001: 2.8m) Support contract revenue grew 18% whilst support contract units increased 7% to 956,000 (2001: 897,000) Strong financial performance by Interact: operating margin of 14% (2001: 0%) on revenues of Â£54m Geographical analysis: 2002 2001 Â£m Turnover Operating Turnover Operating profit* profit UK 156.0 57.6 148.8 56.3 Mainland Europe 118.8 28.6 105.0 26.6 US 276.9 57.5 226.3 44.7 551.7 143.7 480.1 127.6 Impact of foreign - - 4.0 0.8 exchange 551.7 143.7 484.1 128.4 Foreign currency results for the year ended 30 September 2001 have been retranslated at current year exchange rates to facilitate comparison of results in the table above and in the text below. *The impact of the one-off Â£6m (Â£4m after tax) expense of sponsorship of 'The Sage Gateshead' is excluded here and throughout this announcement unless otherwise stated. Michael Jackson, Chairman, commented: 'The Group continues to win significant numbers of new customers - more than 200,000 this year. Our strategy of marketing an expanding range of relevant products and services to our growing installed base of customers remains our clear focus. Our ability to continue to win new business from our entry-level and mid-market customer bases, as well as to realise the full potential of our CRM business, provides a platform for sustained long-term growth. In addition, we will continue to seek appropriate acquisitions in both existing and new markets. We therefore look forward to 2003 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 accounting and business management software solutions and related products and services for small to medium-sized enterprises. Formed in 1981, Sage was floated on the London Stock Exchange in 1989 and the Group now employs over 5,000 people worldwide. Introduction We are pleased to report another year of strong performance with turnover growth of 14% and pre-tax profit growth of 11%. These results demonstrate the strength of our business model and, in particular, the importance of servicing effectively our large and growing customer base of 3 million SMEs. The year has been characterised by the comparative strength of the entry-level segment of the market where we continue to add large numbers of new customers. With our strong product portfolio, spanning both the entry-level and mid-market segments, we are able to target those customers from our entry-level businesses who are ready to move to more sophisticated products. This drives activity in our mid-market businesses where customers have otherwise adopted a cautious approach to spending. Strong progress has been made with Interact, our customer relationship management (CRM) business, in its first full year in the Group. Its operating margin of 14% on revenues of Â£54m represents a significant improvement over prior years. These results reflect the benefits of repositioning the CRM product range more closely for the SME market, improved channel management and a stronger focus on profitability. Operational Review One of our principal objectives is to attract large numbers of new customers to our businesses. Once a business has become a Sage customer, our goal is to support that business throughout its life cycle. Retaining customers and providing them with a range of products and services (referred to as our installed base model), will continue to be key to delivering strong financial performance. In each of our territories there is a constant flow of new business formations and we are winning a growing share of this market. Through targeted marketing activity we attracted over 200,000 new customers to the Group during the year, 180,000 of which were at the entry-level. A number of these businesses will become mid-market businesses to whom we can sell further products and services. The provision of telephone-based support continues to be an important part of our business, providing 46% of revenues in the year. This important revenue stream has grown 18% this year, reflecting the critical nature of the service we provide. This growth was partly achieved through increasing the number of contracts by 7%. We continue to improve our offering, particularly through the introduction of further tiers of service. At 30 September 2002 we had 956,000 support contracts (2001: 897,000). During the year we took over 6 million calls from customers on support contracts. This dialogue provides us with a unique insight into customers' needs, ensuring our engineering efforts deliver the features customers want. Over this period we invested Â£58m in research and development, representing 26% of licence revenues. We regularly update and expand the functionality of our products. This enables us to pursue our objective of selling upgraded versions of our products and services to existing customers. Upgrades, including new releases for each of our core product lines, contributed 14% of revenue (2001: 14%). In addition to upgrades, we sell new and more sophisticated products to customers who have outgrown their existing software. Furthermore, we also sell complementary products such as Human Resources and CRM software solutions to existing accounting software customers. During the year 36,000 existing customers purchased new products either by migrating to a more sophisticated product, or by buying an additional product. This contributed Â£26.8m of new licence revenue. Our customers increasingly express a preference for software solutions tailored to their particular industry. This trend presents new and substantial opportunities for the Group in terms of providing our customers with industry-specific or 'vertical' solutions. In each of our businesses we have identified industry segments where we have large concentrations of customers. We are addressing the needs of these segments through the development of industry-specific versions of our core products, through close collaboration with specialist value-added resellers, and through acquisition. During the year we made good progress with MIP, acquired at the end of the last financial year, a US business dedicated to providing software and services for the large US 'not-for-profit' sector. In the US our Peachtree customer base alone includes 40,000 not-for-profit organisations, many of whom represent target customers for MIP solutions. Similarly in the US and France respectively, this year we acquired CPASoftware for Â£9.1m, and Coala SA, for Â£14.0m - businesses which serve the professional accountants market. We now have accountants' divisions in our three major regions, not only selling specialist products for professional accountants but also encouraging accountants to recommend Sage products and services to their clients. We are at an early stage in implementing these new and important industry-specific initiatives. Even so, sales of such vertical products contributed 8% of revenues in the year. During the year we took the opportunity to sponsor the new music centre currently under construction in Gateshead. For a one-off cost of Â£4m (after tax) we have secured perpetual naming rights for 'The Sage Gateshead' - a Â£60m international music and cultural centre. This represents significant value given the long-term branding and business benefits that will result from this association. Financials In the year ended 30 September 2002, we increased turnover by 14% to Â£551.7m (2001: Â£484.1m). Operating profit rose by 12% to Â£143.7m (2001: Â£128.4m) and pre-tax profit improved by 11% to Â£135.2m (2001: Â£121.3m). Earnings per share, before the one-off expense of Â£6m (Â£4m after tax) associated with The Sage Gateshead, grew 11% to 7.32p (2001: 6.59p) and after this one-off expense were 6.99p. The annual impairment review of the carrying value of goodwill on acquisitions has been carried out, resulting in no impairment charges. The Group's ability to generate strong cash flow is evidenced by the fact that operating profit of Â£143.7m (2001: Â£128.4m) delivered operating cashflow of Â£ 151.2m (2001: Â£119.6m). At 30 September 2002 the Group had net debt of Â£132.8m (2001: Â£190.9m) with net interest covered 17 times by operating profit. The Group's strong financial performance has led the Board to review its dividend policy. Whilst dividends have consistently grown 10% per annum since flotation in 1989, this growth has not kept pace with that of profit and cash flow. The Board therefore considers it appropriate to increase the payout to shareholders by rebasing the proposed final dividend to 1.343p per share (2001: 0.282p per share) taking the proposed full year dividend to 1.5p per share (2001: 0.425p per share). Subject to shareholder approval, the proposed final dividend will be payable on 14 March 2003 to shareholders on our register on 21 February 2003. Geographical Review UK The UK business grew revenues by 5% and attracted 54,000 new customers. The UK operating margin for the second half of the year was 38% (2001: 36%) which compares to 36% in the first half. This improvement reflects the benefits flowing from the reorganisation of the Enterprise Division as well as from the results of earlier investment in the support business. The reorganisation of the Enterprise Division has resulted in improvements to marketing and channel management activity and has facilitated much closer co-ordination with the rest of the UK business. Following several years of substantial growth, our UK business numbers 1,500 employees. The majority of these are situated in a number of locations in the Newcastle area which creates organisational challenges. During the year we therefore commenced construction of a new facility which will accommodate all Newcastle-based employees. The total capital expenditure associated with this building is expected to be Â£60m, with anticipated completion in mid-2004. Mainland Europe Our French business grew revenues by 17% in the year and added 62,000 new customers. There was a favourable impact on first half results from the introduction of the Euro. In the second half, in the aftermath of the Euro, market activity slowed, although profit levels were protected by tight cost control. In October 2001 we acquired Coala SA. This business provides products and services for accountants in practice and has formed the nucleus of our accountants division in France, contributing operating profits of Â£0.7m on turnover of Â£7.4m in the year. Our German business grew revenues by 7% in the year and added 12,000 new customers. We concluded the acquisition of Gandke & Schubert in the year, for Â£3.0m, which added a further 36,000 customers and significantly improved our presence at the entry-level. Gandke & Schubert broke-even on turnover of Â£ 0.9m. US Our US business (excluding Interact) grew revenues by 10% in the year and added 80,000 new customers. Operating margins were maintained at 22%, despite the impact of the lower margin of the MIP acquisition, reflecting continued progress with the penetration of installed base products and services and the benefits arising from focusing on a smaller number of core products. Our Small Business Division performed well, delivering an operating margin of 23% (2001: 23%) on turnover which grew 10% to Â£71m (2001: Â£64m). Our market share in the important 5-25 employee business segment remains strong, and considerable progress has been made in selling support contracts into our large US customer base. At 30 September 2002 there were 224,000 support contracts (2001: 187,000). Revenues at our Mid-market, Speciality and Not-for-profit Divisions were underpinned by our success in migrating customers from our entry-level software products as well as by cross-selling specialist products, such as FAS (fixed asset management), to accounting software users. In all, 25% of new licence sales were to existing customers. Interact Interact, in its first full year in the Group, contributed an operating profit of Â£7.3m. Its operating margin of 14% on revenues of Â£53.6m reflects a significantly improved financial performance this year in both its ACT! and SalesLogix divisions. Its products have been repositioned to address SME market needs. We released a successful ACT! upgrade, the first for several years, with substantially enhanced functionality. An upgraded version of SalesLogix was also released and was well received by the market. Since acquisition, considerable focus has been placed on the development of an installed base sales model at Interact. Sound progress was made this year with the release of a range of products and services targeted at Interact's existing customers. In addition, the opportunity of selling ACT! and SalesLogix to our existing accounting software customer base remains a clear long-term objective. Interact has made strong progress this year. Its products have been enhanced, its range of services to customers broadened and its channel management significantly improved. It is well positioned as an important and growing part of the Group. People The Group Board has been strengthened by two appointments this year. Tim Ingram joined the Board as a non-executive director in March 2002 and brings with him a wealth of public company experience. Ron Verni, who is CEO of our US Operations, joined the Board in July 2002. Ron has successfully led the process of integrating our US businesses in order that we present a unified face to the customer and drive operational efficiencies. His promotion to the Board reflects the growing importance of our US business to the Group. Michael Robinson joined the Group as Company Secretary and Legal Affairs Director in September 2002. As an experienced commercial lawyer, Michael brings significant expertise to the Group. Outlook The Group continues to win significant numbers of new customers - more than 200,000 this year. Our strategy of marketing an expanding range of relevant products and services to our growing installed base of customers remains our clear focus. Our ability to continue to win new business from our entry-level and mid-market customer bases, as well as to realise the full potential of our CRM business, provides a platform for sustained long-term growth. In addition, we will continue to seek appropriate acquisitions in both existing and new markets. We therefore look forward to 2003 with confidence. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 30 September 2002 2002 2001 (unaudited) (audited) Â£'000 Â£'000 Turnover 551,731 484,137 Cost of sales (54,840) (50,731) Gross profit 496,891 433,406 Selling and administrative (353,211) (305,025) expenses Selling and administrative expenses - sponsorship (6,000) - arrangement Total selling and administrative expenses (359,211) (305,025) Operating profit 137,680 128,381 Interest receivable 1,519 3,192 Interest payable and similar (10,045) (10,256) charges Profit on ordinary activities before taxation 129,154 121,317 Taxation on profit on ordinary activities (40,038) (37,609) Profit on ordinary activities after taxation 89,116 83,708 Equity minority interest (41) 32 Profit for the financial year 89,075 83,740 Equity dividends (19,143) (5,515) Amount transferred to reserves 69,932 78,225 Earnings per share (pence) - basic 6.99p 6.59p Earnings per share (pence) - basic (pre sponsorship 7.32p 6.59p arrangement) Dividend per share (pence) 1.500p 0.425p Notes: The sponsorship arrangement relates to a one-off sponsorship payment of Â£6m for 'The Sage Gateshead'. CONSOLIDATED BALANCE SHEET As at 30 September 2002 2002 2001 (unaudited) as adjusted Â£'000 (see note 5) Â£'000 Fixed assets Intangible 830,908 793,913 Tangible 54,541 51,208 885,449 845,121 Current assets Stocks 2,306 2,308 Debtors 108,219 95,248 Deferred tax asset 28,306 40,789 Cash at bank and in hand 58,795 42,764 197,626 181,109 Creditors: amounts falling due within one year (177,010) (138,828) Net current assets 20,616 42,281 Total assets less current liabilities 906,065 887,402 Creditors: amounts falling due after more than one (157,194) (237,585) year Deferred income (127,019) (112,809) Equity minority interest (121) (62) 621,731 536,946 Capital and reserves Called up equity share capital 12,769 12,725 Share premium account 441,859 437,671 Merger reserve 61,111 61,111 Profit and loss account 105,992 25,439 Equity shareholders' funds 621,731 536,946 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 30 September 2002 2002 2001 (unaudited) (audited) Â£'000 Â£'000 Profit for the financial year 89,075 83,740 Translation of foreign currency net investments and 12,218 3,463 related borrowings Total recognised gains and losses relating to the year 101,293 87,203 CONSOLIDATED CASH FLOW STATEMENT For the year ended 30 September 2002 2002 2001 (unaudited) (audited) Â£'000 Â£'000 Net cash inflow from operating activities 145,178 119,576 Returns on investments and servicing of finance Interest received 1,520 3,302 Interest paid (9,454) (9,023) Issue cost of loans (180) (1,877) Interest element of finance lease rental payments (3) (415) Net cash outflow from returns on investments and (8,117) (8,013) servicing of finance Taxation Corporation tax paid (22,645) (23,184) Capital expenditure Payments to acquire tangible fixed assets (19,130) (11,619) Receipts from sales of tangible fixed assets 468 4,865 Net cash outflow from capital expenditure (18,662) (6,754) Acquisitions and disposals Purchase of subsidiary undertakings: Net cash consideration - current year (28,185) (218,474) acquisitions - prior year (19,292) (11,781) acquisitions Net cash outflow from acquisitions and disposals (47,477) (230,255) Equity dividends paid (5,595) (5,182) Cash inflow/(outflow) before financing and management of liquid 42,682 (153,812) resources Management of liquid resources (Increase)/decrease in short term deposits (1,367) 11,212 Financing Shares issued 2,604 2,381 Movement in loan funding (29,104) 130,906 Repayment of capital element of finance leases (57) (2,758) Net cash (outflow)/ inflow from financing (26,557) 130,529 Increase/(decrease) in cash in the year 14,758 (12,071) NOTES 1. Analysis of results 2002 2001 Turnover Operating Turnover Operating profit profit (unaudited) (unaudited) (audited) (audited) Â£'000 Â£'000 Â£'000 Â£'000 UK 155,986 57,625 148,839 56,316 France 87,411 24,025 74,970 22,115 Germany/Switzerland 31,420 4,588 30,037 4,496 US 223,285 50,118 203,138 44,486 Interact 53,629 7,324 23,117 148 551,731 143,680 480,101 127,561 Impact of foreign - - 4,036 820 exchange Sponsorship - (6,000) - - arrangement - The Sage Gateshead 551,731 137,680 484,137 128,381 Foreign currency results for the year ended 30 September 2001 have been retranslated at current year exchange rates to facilitate the comparison of results. Analysis of change in net debt (inclusive of finance leases) At 1 Cash flow Acquisi-tions Exchange Other At 30 October movement September 2001 2002 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Â£'000 Net cash at bank 42,754 14,758 - - - 57,512 and in hand Short term deposits - 1,367 - (84) - 1,283 Loans due within (7,584) 7,058 (200) 483 (38,833) (39,076) one year Finance leases due (57) 36 - - - (21) within one year Loans due after (226,039) 22,226 - 13,178 38,128 (152,507) more than one year Finance leases due (21) 21 - - - - after more than one year (190,947) 45,466 (200) 13,577 (705) (132,809) Taxation The taxation charge for the year comprises: 2002 2001 Â£'000 Â£'000 Current taxation UK 20,066 22,303 Overseas 9,902 15,306 29,968 37,609 Deferred taxation 10,070 - 40,038 37,609 The unaudited financial information set out above does not constitute the Company's statutory accounts for the year ended 30 September 2002. Statutory accounts for the year ended 30 September 2001 have been delivered to the Registrar of Companies and those for the year ended 30 September 2002 will be delivered in due course. The Group's results for the year ended 30 September 2001 have been extracted from those statutory accounts, subject to any restatement required in connection with the adoption of FRS 19 (see note 5 below). The Auditors' Report on the accounts for the year ended 30 September 2001 was unqualified and did not contain a statement under Section 237 of the Companies Act 1985. Financial Reporting Standard No. 19: Deferred Tax (FRS 19) was published by the Accounting Standards Board in December 2000 and applies to accounting periods ending on or after 23 January 2002. Under FRS 19 the Group is required to recognise deferred tax as a liability or asset if transactions or events giving rise to an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Previously the Group provided for deferred tax using the liability method to the extent that it was probable that liabilities would crystallise in the foreseeable future. Deferred tax unprovided for as at 30 September 2001, and which is now required to be provided for under FRS 19, has been provided for and shown as a prior year adjustment. The impact on the profit and loss account for the year ended 30 September 2002 is Â£10,070,000. There was no impact on the profit and loss account for the year ended 30 September 2001. Shareholders' funds at 30 September 2001 have been reduced by Â£1,976,000, with Â£42,416,000 being adjusted to goodwill. As permitted by FRS 19, the Group has adopted a policy of not discounting deferred tax assets and liabilities. The calculation of basic earnings per share is based on earnings of Â£89.1m (after the costs associated with the sponsorship of The Sage Gateshead) (2001: Â£83.7m) and on 1,274,526,435 ordinary 1p shares (2001: 1,270,533,875) being the weighted average number of shares in issue during the year. Subject to shareholders' approval, the final dividend of 1.343 pence per share will be paid on 14 March 2003 to shareholders on the register at the close of business on 21 February 2003. 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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