REG - Sage Group PLC - Final Results <Origin Href="QuoteRef">SGE.L</Origin> - Part 3
30/11/2016 07:06
- Part 3: For the preceding part double click ID:nRSd4859Qb
Goodwill£m Otherintangibleassets£m Property, plant and equipment£m Total£m
Opening net book amount at 1 October 2015 1,446.0 105.5 122.7 1,674.2
Additions - 7.7 23.5 31.2
Acquisition - 6.4 - 6.4
Disposals - (0.2) (0.1) (0.3)
Depreciation, amortisation and other movements - (29.6) (22.2) (51.8)
Impairment - - (6.6) (6.6)
Exchange movement 212.5 19.5 6.1 238.1
Closing net book amount at 30 September 2016 1,658.5 109.3 123.4 1,891.2
Goodwill£m Otherintangibleassets Property, plant and equipment£m Total
£m £m
Opening net book amount at 1 October 2014 1,433.0 98.1 126.7 1,657.8
Additions - 6.0 16.4 22.4
Acquisition 61.9 34.2 1.0 97.1
Disposals - (0.2) (2.1) (2.3)
Depreciation, amortisation and other movements - (29.1) (18.2) (47.3)
Impairment (62.3) - - (62.3)
Exchange movement 13.4 (3.5) (1.1) 8.8
Closing net book amount at 30 September 2015 1,446.0 105.5 122.7 1,674.2
Goodwill is not subject to amortisation, but is tested for impairment annually at the year-end or whenever there is any
indication of impairment. The Group performed its annual test for impairment in the third quarter of 2016. The recoverable
amount exceeded the carrying value for all CGUs. In the prior year an impairment of £62.3m was recognised, driven by
economic uncertainty in Brazil.
Detail of the current period acquisition has been provided in note 11.
8 Financial instruments
For financial assets and liabilities other than borrowings, the carrying amount of the financial instrument approximates
the fair value of the instruments. At 30 September 2016, USPP borrowings with a carrying value of £577.7m had a fair value
of £602.9m due to bearing interest at fixed rates which are currently higher than equivalent current market fixed rates.
9 Ordinary shares and share premium
Ordinaryshares£m Sharepremium£m Total£m
Number ofshares
At 1 October 2015 1,118,298,748 11.8 541.2 553.0
Shares issued/proceeds 1,181,615 - 3.2 3.2
At 30 September 2016 1,119,480,363 11.8 544.4 556.2
Number of shares Ordinary Shares Share premium £m Total£m
£m
At 1 October 2014 1,115,892,047 11.7 535.9 547.6
Shares issued/proceeds 2,406,701 0.1 5.3 5.4
At 30 September 2015 1,118,298,748 11.8 541.2 553.0
During the year, under the Executive Share Option Scheme, 500,489 14/77p ordinary shares were issued during the year for
aggregate proceeds of £0.9m. Under the Savings-related Share Option Scheme, 675,608 14/77p ordinary shares were issued for
aggregate proceeds of £2.3m.
10 Cash flow and net debt
Reconciliation of profit for the year to cash generated from continuing operations Year ended 30 September 2016£m Year ended 30 September 2015£m
Profit for the year 207.6 194.3
Adjustments for:
Income tax 66.9 81.5
Finance income (5.1) (2.2)
Finance costs 30.0 23.6
Share of loss of an associate 1.0 -
Amortisation and impairment of intangible assets 29.6 29.1
Depreciation and impairment of property, plant and equipment 28.8 18.2
R&D tax credits (2.0) (2.3)
Equity-settled share-based transactions 7.9 9.1
Fair value adjustments and goodwill impairment - 64.5
Exchange movement (0.4) (4.7)
Changes in working capital (excluding effects of acquisitions and disposals of subsidiaries):
- Decrease/(increase) in inventories 0.2 (0.2)
- Increase in trade and other receivables (53.8) (8.4)
- Increase/(decrease) in trade and other payables 50.8 (6.8)
- Increase in deferred income 36.4 22.9
Cash generated from continuing operations 397.9 418.6
Reconciliation of net cash flow to movement in net debt (inclusive of finance leases) 2016£m 2015£m
(Decrease)/increase in cash in the year (pre-exchange movements) (22.7) 90.5
Cash inflow/(outflow) from movement in loans, finance leases and cash held on behalf of customers 133.2 (17.8)
Change in net debt resulting from cash flows 110.5 72.7
Acquisitions (16.4) (21.3)
Non-cash movements (1.0) -
Exchange movement (64.7) (39.6)
Movement in net debt in the year 28.4 11.8
Net debt at 1 October (425.4) (437.2)
Net debt at 30 September (397.0) (425.4)
Analysis of change in net debt (inclusive of finance leases) At Cash flow Acquisitions£m Non-cash movements Exchange movement At 30 September 2016£m
1 October 2015£m £m £m £m
Cash and cash equivalents 263.4 (18.4) (16.4) - 35.9 264.5
Bank overdrafts - (4.3) - - - (4.3)
Cash, cash equivalents and bank overdrafts 263.4 (22.7) (16.4) - 35.9 260.2
Finance leases due within one year (0.6) 0.5 - (0.2) (0.1) (0.4)
Loans due within one year (33.0) 34.7 - (34.7) (5.6) (38.6)
Loans due after more than one year (571.0) 84.9 - 33.7 (81.8) (534.2)
Finance leases due after more than one year (0.4) 0.1 - 0.2 (0.1) (0.2)
Cash held on behalf of customers (83.8) 13.0 - - (13.0) (83.8)
Total (425.4) 110.5 (16.4) (1.0) (64.7) (397.0)
Included in cash above is £83.8m (2015: £83.8m) relating to cash collected from customers. This arises as a consequence of
providing payment processing and electronic fund transfer services. The balance represents cash in transit from third
parties to Sage Customers. Accordingly, a liability for the same amount is included in trade and other payables on the
balance sheet and is classified within net debt.
The Group continues to be able to borrow at competitive rates and currently deems this to be the most effective means of
raising finance. The current Group's syndicated bank multi-currency revolving credit facility expires in June 2019 with
facility levels of £613.5m (£525.2m) which consists both of US$551.0m (£424.8m, 2015: £364.1m) and E218.0m (£188.7m, 2015:
£161.1m) tranches.
At 30 September 2016, £nil (2015: £81.6m) of the multi-currency revolving debt facility was drawn.
Total US private placement ("USPP") loan notes at 30 September 2016 were £575.0m (2015: £525.2m) consisting of US$650m and
EURE85m (2015: US$700m and EURE85m). Approximately £35m (US$50m) of USPP borrowings were repaid in March 2016.
11 Acquisitions and disposals
Acquisitions made during the period
On 2 November 2015 the Group acquired trade and business from People's United Bank, a provider of payroll services for
small and medium sized business in North America, for a total consideration of £6.4m. The transaction price included
deferred consideration of £2.0m, which was fully paid in the year. The acquisition strengthens Sage's position in the large
and growing US payroll market.
The acquisition resulted in the recognition of intangible assets of £6.4m, consisting of customer lists. No goodwill was
recognised.
12 Related party transactions
The Group's related parties are its subsidiary undertakings and Executive Committee members. The Group has taken advantage
of the exemption available under IAS 24, "Related Party Disclosures", not to disclose details of transactions with its
subsidiary undertakings.
Key management compensation 2016 2015
£m £m
Salaries and short-term employee benefits 7.3 10.0
Post-employment benefits 0.5 0.4
Share-based payments 2.7 2.4
10.5 12.8
The key management figures given above include Directors. Key management personnel are deemed to be members of the
Executive Committee.
Supplier transactions occurred during the year between Sage South Africa (Pty) Ltd, one of the Group's subsidiary
companies, and Ivan Epstein, President, International and Executive Committee member. These transactions relate to the
lease of four properties in which Ivan Epstein has a minority and indirect shareholding. During the year £4.0m (2015:
£4.3m) relating to these transactions was charged through selling and administrative expenses. There were no outstanding
amounts payable for the year ended 2016 (2015: £nil).
Supplier transactions occurred during the year between Sage SP, S.L., one of the Group's subsidiary companies, and Álvaro
Ramírez, who held the role of President, Europe and Executive Committee member during the year. These transactions relate
to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the year £0.9m (2015: £1.0m)
relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts
payable for the year ended 2016 (2015: £nil).
These arrangements are subject to independent review using external advisers to ensure all transactions are at arm's
length.
Managing Risk
Risk is inherent within our business activities, and we continue to prioritise and develop our risk management strategy and
capability in recognition of this. Timely identification of risks, combined with their appropriate management and
escalation, enables us to successfully run our business and deliver strategic change, while ensuring that the likelihood
and / or potential impact associated with such risks is understood and managed within our defined risk appetite.
The Board continues to monitor the risk environment, and reviews the appropriateness of the principal risks to the
business.
Currently there are ten principal risks which we monitor and report against. These risks are aligned to successful delivery
of our Strategy and mapped against the strategic pillars to which they relate. A range of measures are in place to manage
and mitigate these risks, while other activities are in the process of
being developed or deployed
Other risks are analysed and mitigated via the normal embedded risk management process.
Licensing Model TransitionSage does not successfully manage its transition to subscription licensing against defined timelines and targets or appropriately adapt its customer approach. Sage is transitioning from a perpetual to a subscription-based licensing model.In addition to providing additional value for customers, this transition assists with cash flow; offers a platform for cross-selling; and lowers attrition rates, which in turn aids revenue forecasting.It also provides regular customer engagement and enhanced opportunities to develop these relationships.The speed of transition needs to be balanced against any reduction in short-term revenues. · An approved licensing model transition strategy is in place· A series of approved subscription revenue targets are defined, which span multiple years and
Strategic alignment: support successful and balanced delivery of our strategy· Ongoing monitoring and review of the approved targets takes place at country, regional and Group levels to
Customers for Life proactively manage the licence transition, and revenue targets· New products are being offered on a subscription only basis, to support achievement of overall
revenue targets· Customer Business Centres (CBCs) are established in North America and Europe to integrate digital marketing, sales and service operations for
customers using Software as a Service (SaaS), and support planned growth ambitions
In progress:
· Additional CBCs are being created, to better manage ongoing customer relationships and the sales cycle
Market IntelligenceSage fails to understand and anticipate changes in the external environment, including customer needs, emerging market trends, competitor strategies and regulatory / legal requirements. Sage has previously operated as a federated set of operating companies, using local definitions and methodologies to capture market data.The alignment of federated activities allows consolidation of data across geographies and product to provide a single Sage view, enabling trends and white space opportunities to be identified.In order to develop a consolidated understanding of its market and customer needs, Sage is developing its market intelligence capability, and aligning this with competitive positioning and product development activities. · A Market and Competitive Intelligence team is established, which has group responsibility for Market Intelligence· Market intelligence surveys are undertaken,
Strategic alignment:Customers for Life to identify market opportunities· Brand health surveys are undertaken in order to understand customer perception of the Sage brand and its products· An approved
Winning in the Market internal communications plan is delivered, to share market intelligence to build brand awareness· Market data is provided through a Market Data portal, allowing ease
of access and improved analysis
In progress:· Action to support the increasing awareness and quality of the Market Data portal· Ongoing refinement and improvement of market data through
feedback from the business
Competitive Positioning and Product DevelopmentSage is unable to clearly identify the approach to market, or deploy competitive advantage, including product development The competitive environment in which Sage operates continues to see significant development.Sage must translate market intelligence into effective strategies targeting attractive market segments with appropriate products and continually work to reinforce competitive superiority.During the transition to 'One Sage' products, we continue to manage the local product base and plan and evolve these in line with longer-term aspirations. · A Product Marketing team is established to oversee competitive positioning and product development· A Product Delivery team is established to develop and
Strategic alignment: deliver products· Battlecards are in place for key products in all countries, setting out the strengths and weaknesses of competitors and their products·
Winning in the Market Defined 'customer for life' roadmaps are in place, detailing how products fit together, and any interdependencies· A BattleApp has been released to provide timely
Capacity for Growth information to sales channels
In progress:
· Prioritised product development based on 'Customer for life' roadmaps· Sage wide standard templates are to be launched for Battlecards to ensure consistent
information is provided· Analysis of product investments is being enhanced to further consider anticipated return on investment
Business Model TransitionSage does not successfully manage its transition to a 'One Sage' operating model against defined timeframes. Sage has operated as a federated set of operating companies.The move to a 'One Sage' model provides enhanced governance, process harmonisation, efficiencies and scalability. · An approved Business Model Transition Strategy is in place, supported by an overarching plan detailing the goal, overall time plan, and scheduled adoption by
Strategic alignment: countries and functions· A programme authority lead is managing transition activity· Clear governance is in place to support the strategy and overarching plan
Capacity for Growth through the Executive Committee and programme steering group· Consolidated operational reporting is in place and provides oversight of progress and supports
consistency of direction, and management of potential conflicts
In progress:
· Country / function transitions are progressing in line with overarching plan· On-going monitoring and management of implementation through the Transformation
Forum, including monitoring of success factors against defined transition activities
Supporting Control EnvironmentSage's control environment, business processes and technology infrastructure do not support the efficient and effective operation of the business Sage's footprint has developed often through acquisition. Aligning and rationalising these systems and processes, is required to support the 'One Sage' operating model. · Established Global and Regional Risk Committees oversee the risk and internal control environment, and sets the tone-from-the-top· Shared Service Centres are
Strategic alignment: established in Newcastle and Johannesburg, enabling the creation of consistent and consolidated systems and processes· The Excellence in Governance initiative has
One SageCapacity for Growth developed a Sage-wide policy suite, alongside colleague training and revision to management structures· Customer Business Centres (CBCs) are built around core
systems to underpin operational consistency and expansion, including Salesforce CRM and Sage's own X3 for General Ledger activity. As volumes scale, all new customers for
CBC supported products are being entered directly into these systems
In progress:
· Shared Service Centres in Newcastle and Johannesburg are in the stabilisation phase following installation of X3 General Ledger· Post stabilisation plans for
migration of other country General Ledgers is on-track with plans· Following the success of the 'Excellence in Governance' initiative, an 'Excellence in Controls'
initiative to enhance the supporting control environment has commenced· Selection and deployment of a Governance, Risk and Compliance technology solution is underway
Information Management and Protection (including cyber)Sage fails to adequately understand, manage and protect information Sage's footprint has developed through a process of acquisition, each arriving with its own processes and activities appropriate to a smaller business, but which did not develop in line with Sage's growth.Harmonising and rationalising these, as necessary, is required to support the 'One Sage' operating model and to allow a business view on all data being held and processed, including management and protection.During 2016, we have broadened the risk to include all data, both internal Sage related information, and external customer related information. · Accountability is established within both OneIT and Product for all internal and external data being processed by Sage. OneIT and Product Services report to the
Strategic alignment: Chief Information Officer and Chief Product Delivery Officer respectively· A network of Information Security Officers supports the business· Formal
One Sage certification schemes are maintained, across appropriate parts of the business, and include internal and external validation of compliance· Structured and ad-hoc IT
internal audit activity is undertaken by Sage Assurance against an agreed plan, and reported to management and the Audit and Risk Committee· A revised Sage
information security policy suite has been launched· The Incident Management framework was revised and updated, to include the rating of incidents and requirements
for escalation
In progress:
· Information Security is being aligned with the existing Governance structures (Global and Regional Risk Committees), to establish clear accountability·
Awareness training for Information Management and protection is being rolled out
Regulatory and Legal FrameworkSage does not understand and operate within the applicable regulatory and legal framework Sage's services operate within a complex regulatory and legal environment. Monitoring this evolving regulatory and legal environment enables timely and appropriate steps to ensure ongoing compliance. · All legal resources across Sage report directly to the General Counsel and Company Secretary· Legal services use internal and external resources to monitor
Strategic alignment: planned and realised changes in legislation· All product contracts are reviewed and approved through Legal services· An agreed suite of policies is in place as
One Sage
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