REG - Sage Group PLC - Half-year Report <Origin Href="QuoteRef">SGE.L</Origin> - Part 3
03/05/2017 07:06
- Part 3: For the preceding part double click ID:nRSC9739Db
UnderlyingSix months ended Underlying Underlying Statutory Statutory
31 March 2017 as reported Six months ended Six months ended Six months ended Six months ended 31 March
(Unaudited) 31 March2016 (Unaudited) 31 March2016 (Unaudited) 31 March2017(Unaudited) 2016 (Unaudited)
Earnings attributable to owners of the parent - Continuing operations (£m)
Profit for the period 145 121 141 136 98
Number of shares (millions)
Weighted average number of shares 1,079 1,075 1,075 1,079 1,075
Dilutive effects of shares 5 7 7 5 7
1,084 1,082 1,082 1,084 1,082
Earnings per share attributable to owners of the parent - Continuing operations (pence)
Basic earnings per share 13.46 11.27 13.11 12.57 9.11
Diluted earnings per share 13.40 11.20 13.03 12.52 9.06
UnderlyingSix months ended Underlying Underlying Statutory Statutory
31 March 2017 as reported Six months ended Six months ended Six months ended Six months ended 31 March
(Unaudited) 31 March2016 (Unaudited) 31 March2016 (Unaudited) 31 March2017(Unaudited) 2016 (Unaudited)
Earnings attributable to owners of the parent - Continuing and discontinued operations (£m)
Profit for the period 156 130 152 146 106
Number of shares (millions)
Weighted average number of shares 1,079 1,075 1,075 1,079 1,075
Dilutive effects of shares 5 7 7 5 7
1,084 1,082 1,082 1,084 1,082
Earnings per share attributable to owners of the parent - Continuing and discontinued operations (pence)
Basic earnings per share 14.45 12.09 14.17 13.54 9.88
Diluted earnings per share 14.39 12.01 14.08 13.48 9.82
Reconciliation of earnings - Continuing operations Six months ended Six months ended
31 March 31 March
2017 2016
(Unaudited)£m (Unaudited)£m
Underlying earnings attributable to owners of the parent 145 141
Impact of movement in foreign currency exchange rates - (20)
Underlying earnings attributable to owners of the parent (after exchange movement) 145 121
Transformation costs and litigation related items (19) (29)
Amortisation of acquired intangible assets (10) (8)
Gain on remeasurement of existing investment in an associate 13 -
Fair value adjustments - 2
Other acquisition-related items (3) -
Taxation on adjustments 10 12
Net adjustments (9) (23)
Earnings statutory profit for period 136 98
Reconciliation of earnings - Continuing and discontinued operations Six months ended Six months ended
31 March 31 March
2017 2016
(Unaudited)£m (Unaudited)£m
Underlying earnings attributable to owners of the parent 156 152
Impact of movement in foreign currency exchange rates - (22)
Underlying earnings attributable to owners of the parent (after exchange movement) 156 130
Net adjustments - Continuing operations (9) (23)
Amortisation of acquired intangible assets - discontinued operations (1) (1)
Net adjustments (10) (24)
Earnings statutory profit for period 146 106
7 Non-current assets
Goodwill Otherintangibleassets Property, plant and equipment Total
(Unaudited)£m (Unaudited)£m (Unaudited) £m (Unaudited)£m
Opening net book amount at 1 October 2016 1,659 109 123 1,891
Additions - 7 8 15
Acquisition 103 - - 103
Transfer to held for sale (199) (1) (1) (201)
Depreciation, amortisation and other movements - (15) (12) (27)
Exchange movement 26 2 3 31
Closing net book amount at 31 March 2017 1,589 102 121 1,812
Goodwill Otherintangibleassets Property, plant and equipment Total
(Unaudited)£m (Unaudited)£m (Unaudited) £m (Unaudited)£m
Opening net book amount at 1 October 2015 1,446 106 123 1,675
Additions - 3 13 16
Acquisition - 6 - 6
Disposals - - (1) (1)
Depreciation, amortisation and other movements - (14) (10) (24)
Exchange movement 74 7 3 84
Closing net book amount at 31 March 2016 1,520 108 128 1,756
Goodwill is not subject to amortisation, but is tested for impairment annually at the year-end or whenever there is any
indication of impairment. At 31 March 2017, there were no indicators of impairment to goodwill. Full details of the outcome
of the 2016 goodwill impairment review are provided in the 2016 financial statements.
Detail of the current period acquisition has been provided in note 11.
8 Financial instruments
For financial assets and liabilities, the carrying amount approximates the fair value of the instruments, with the
exception of US senior loan notes due to these bearing interest at fixed rates which are currently higher than floating
rates. The fair value of borrowings is determined by reference to interest rate movements on the US $ private placement
market and therefore can be considered as a level 2 fair value as defined within IFRS 13 with the respective book and fair
values included in the table below.
At 31 March 2017 At 31 March 2016
Book Value£m Fair Value£m Book Value£m Fair Value£m
Long term-borrowing 551 557 484 495
Short term-borrowing - - 35 36
9 Ordinary shares and share premium
Number of shares (Unaudited) Ordinary Shares Share premium Total(Unaudited)£m
(Unaudited) £m (Unaudited) £m
At 1 October 2016 1,119,480,363 12 544 556
Shares issued/proceeds 315,053 - 1 1
At 31 March 2017 1,119,795,416 12 545 557
OrdinaryShares (Unaudited)£m SharePremium (Unaudited)£m Total (Unaudited)£m
Number ofShares (Unaudited)
At 1 October 2015 1,118,298,748 12 541 553
Shares issued/proceeds 551,880 - 2 2
At 31 March 2016 1,118,850,628 12 543 555
In the current period, the Group transferred 1,019,166 of treasury shares to the Employee Benefit Trust in order to satisfy
vested PSP awards.
In the prior period, the group purchased 385,000 shares at a cost of £2m through the Employee Benefit Trust.
10 Cash flow and net debt
Six months ended Six months ended
31 March 31 March
2017 2016(Unaudited)
(Unaudited) £m
£m
Statutory operating profit - continuing operations 180 137
Recurring and non-recurring items 31 37
Underlying operating profit - continuing operations 211 174
Underlying operating profit - discontinued operations 18 15
Underlying operating profit (as reported) 229 189
Depreciation/amortisation/impairment/profit on disposal of non-current assets 17 15
Share-based payments 5 6
Net changes in working capital 2 15
Net capital expenditure (15) (15)
Underlying cash flow from operating activities 238 210
Net interest paid (10) (9)
Income tax paid (39) (48)
Non-recurring items (23) (12)
Exchange movement - 1
Free cash flow 166 142
Net debt at 1 October (397) (425)
Acquisitions and disposals of subsidiaries, net of cash (79) (6)
Reclassification as held for sale (8) -
Dividends paid to owners of the parent (101) (93)
Purchase of treasury shares - (2)
Exchange movement (15) (19)
Other - (1)
Net debt at 31 March (434) (404)
Analysis of change in net debt (inclusive of finance leases) At Cash flow Acquisitions Reclassification as held for sale Non-cash movements Exchange movement At 31 March 2017
1 October 2016 £m £m £m £m £m (Unaudited)
(Audited) £m
£m
Cash and cash equivalents 264 148 (79) (28) - 4 309
Bank overdrafts (4) (1) - - - - (5)
Cash, cash equivalents and bank overdrafts 260 147 (79) (28) - 4 304
Loans due within one year (38) 39 - - - (1) -
Loans due after more than one year (535) (92) - - - (15) (642)
Cash held on behalf of customers (84) (29) - 20 - (3) (96)
Total (397) 65 (79) (8) - (15) (434)
Included in cash above is £96m (31 March 2016: £133m, 30 September 2016: £84m) relating to cash held on behalf of
customers. This arises as a consequence of providing payment transaction 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 Group's current syndicated bank multi-currency revolving credit facility expires in June 2019 with
facility levels of £625m (US$551m and E218m tranches). At 31 March 2017, £92m (H1 2016: £110m) of the multi-currency
revolving debt facility was drawn, with the decrease due to ongoing repayments funded from free cash flows.
Total US private placement ("USPP") loan notes at 31 March 2017 were £551m (US$600m and EURE85m) (H1 2016: £519m, US$650m
and EURE85m). £41m (US$50m) of USPP borrowings were repaid in March 2017.
11 Acquisitions and disposals
Acquisitions made during the period
On 17 March 2017, the Group obtained control of Fairsail Limited (Fairsail) by acquiring the remaining share capital for a
cash consideration of £89m and cost of replacement share based payments of £1m. The Group now holds 100% of Fairsail's
share capital. Fairsail is a leading Human Capital Management (HCM) cloud provider to mid-sized, multinational companies.
Fairsail is a private entity incorporated in the UK and not listed on any public exchange. The Group became a minority
shareholder in Fairsail in 2016 and subsequently launched a shared product, Sage People. Taking full ownership will build
on the success of that product, and the resulting combined portfolio provides growth opportunities, particularly through
new customer acquisition internationally, and cross-sell to the combined customer base.
Summary of acquisition £m
Purchase consideration
Cash 89
Cost of replacement share based payments 1
Fair value of previously held interest 20
110
Provisional fair value of identifiable net assets (7)
Goodwill 103
Cost of replacement share based payments consists of contingent share awards granted to Fairsail employees under the Sage
Group Restricted Share Plan in place of their existing unvested share option arrangements. The amount treated as
consideration is the fair value of awards attributable to pre-acquisition service. The Group recognised a gain of £13m on
the remeasurement to fair value of its existing investment in an associate. This gain is included on a separate line in the
consolidated income statement.
Provisional fair value of acquisition £m
Cash 10
Trade & other debtors 3
Trade & other creditors (2)
Deferred revenue (4)
Provisional fair value of identifiable net assets acquired 7
Goodwill 103
Total consideration 110
Provisional values have been used as the initial accounting for acquired intangible assets and goodwill is not yet
completed with the short period between the acquisition date and the approval of the half-yearly report making this
impractical. Pending completion of the fair value exercise, the residual excess of consideration over the net assets
acquired has been provisionally recognised entirely as goodwill. Goodwill is expected to reflect benefits from the
assembled workforce and growth opportunities through customer acquisition and cross-sell to the combined customer base. No
goodwill is expected to be deductible for tax purposes.
The outflow of cash and cash equivalents on the acquisition is as follows: £m
Cash consideration 89
Cash and cash equivalents acquired (10)
Net cash outflow 79
Costs totalling less than £1m relating to the business combination have been included in selling and administrative
expenses in the Consolidated income statement as acquisition-related items and relate to advisory, legal and other
professional services.
Immediately prior to the acquisition, the Group had recognised prepaid licences of £1m for Fairsail's products purchased by
the Group prior to the acquisition. At the acquisition date, the Group recognised a loss equal to the carrying of the
prepaid licences. The loss is included in selling and administrative expenses in the Consolidated income statement.
Arrangements have been put in place for retention and performance related payments to remunerate employees of Fairsail for
future services. The costs of these arrangements will be recognised in future periods over the retention and performance
periods. No amounts have been recognised to date.
The amounts of revenue and profit or loss reported by Fairsail since the acquisition date are not material in the context
of the Group as a whole. The revenue of the Group for the six months ended 31 March 2017 would have increased by £5m and
the profit would have reduced by £2m if Fairsail had been included in the Group for the whole of the period.
Disposals made during the period
There were no disposals made in the period.
Discontinued operations and assets and liabilities held for sale
Discontinued operations relate to the subsidiaries forming the Group's North American Payments business. Assets and
liabilities held for sale relate to the subsidiaries forming the Group's North America Payments business, the Group's
subsidiary Syska GmbH and the Group's subsidiary Sage XRT Brasil Ltda. Bids have been received from prospective buyers for
North America Payments business and due diligence is in progress. The North America Payments business was classified as
held for sale at 1 March 2017 and its sale is expected to be finalised during the half-year ending 30 September 2017. The
business forms part of the Group's North America reportable segment. Syska GmbH was classified as held for sale at 31 March
2017. At that date the sale process with the preferred buyer was at an advanced stage and the sale subsequently completed
on 6 April 2017. The business forms part of the Group's Central and Southern Europe reportable segment. See note 13, Events
after the balance sheet date, for further details of the disposal transaction. XRT was classified as held for sale in the
year ended 30 September 2016. Its sale process continues to progress and is expected to complete by 30 September 2017. The
business forms part of the Group's International segment.
At 31 March 2017 assets held for sale comprise goodwill of £199m, cash of £28m, trade and other receivables of £26m and
other assets of £12m with liabilities held for sale comprising trade and other payables of £45m and other liabilities of
£6m. At 31 March 2016 assets and liabilities held for sale were £nil. At 30 September 2016 assets held for sale comprise
trade and other receivables of £1m.
Profit from discontinued operations is analysed as follows:
Six months ended Six months ended Six months ended Six months ended Six months ended Six months ended Year ended 30 September 2016(Unaudited)Statutory £m
31 March 2017(Unaudited) 31 March 2017 31 March 2017 31 March 2016 31 March 2016 31 March 2016
Underlying £m (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Adjustments* Statutory Underlying as reported Adjustments* Statutory
£m £m £m £m £m
Revenue 72 - 72 62 - 62 130
Cost of sales (7) - (7) (6) - (6) (12)
Gross profit 65 - 65 56 - 56 118
Selling and administrative expenses (47) (1) (48) (41) (1) (42) (84)
Operating profit 18 (1) 17 15 (1) 14 34
Finance income - - - - - - -
Finance costs - - - - - - (1)
Profit before income tax 18 (1) 17 15 (1) 14 33
Income tax expense (7) - (7) (6) - (6) (13)
Profit for the period 11 (1) 10 9 (1) 8 20
*Adjustments comprise amortisation of acquired intangible assets which have previously been recognised as part of business
combinations.
Upon disposal, income in relation to cumulative foreign exchange differences that has been recognised in other
comprehensive income relating to the assets and liabilities of the North America Payments business from the date of
acquisition to the date of disposal will be recycled to the income statement.
Cash flow from discontinued operations is analysed as follows:
Cash flows from: Six months ended Six months ended Year ended
31 March 2017£m 31 March 2016£m 30 September 2016£m
Operating activities 13 14 38
Investing activities - - -
Financing activities 7 (1) (8)
20 13 30
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 Six months ended Six months ended
31 March 31 March
2017 2016
(Unaudited)£m (Unaudited)£m
Salaries and short-term employee benefits 4 4
Post-employment benefits - -
Share-based payments 1 2
5 6
The key management figures given above include directors. Key management personnel are deemed to be members of the
Executive Committee and are defined in the Group's Annual Report & Accounts 2016. There have been no changes to the
Executive Committee since the signing of the Group's Annual Report & Accounts 2016, other than Santiago Solanas who left
the Group on 31 March 2017.
13 Events after the balance sheet date
On 3 April 2017, the Group acquired 100% of the equity capital of Startup Compass Inc. (Compass), the provider of a highly
innovative analytics and benchmarking platform, for cash consideration of £5m. The provisional value of net assets acquired
is £nil, comprising principally working capital balances, resulting in provisional goodwill of £5m. Provisional values have
been used as the initial accounting for acquired intangible assets and goodwill is not yet completed due to the short
period between the acquisition date and the approval of the interim consolidated condensed financial statements.
On 6 April 2017, the Group sold its subsidiary Syska GmbH for £2m. Net liabilities divested were £1m, resulting in a gain
on disposal of £3m.
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.
Other risks are analysed and mitigated via the normal embedded risk management process.
Licensing Model TransitionSage does not successfully manage its ongoing transition to subscription licencing 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 Strategic alignment:Customers for Life 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, and enables 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,
Winning in the Market to identify market opportunities· Brand health surveys are undertaken in order to understand customer perception of the Sage brand and its products· An approved
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 developments. 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 in place for key products in all countries, setting out the strengths and weaknesses of competitors and their products· Defined
Winning in the Market '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 Delivery Sage does not successfully deliver a global operating model that supports its growth ambitions Strategic alignment: Sage is embedding its global operating model which provides enhanced governance, process harmonisation, efficiencies and scalability. The effective interaction between all parts of the organisation will allow Sage to grow at pace. · A new Operating Model was implemented in October 2016· A Transformation Forum is in place, which provides governance over project activity supporting the
Capacity for Growth effective delivery of the operating model · Consolidated operational reporting is in place and provides oversight of progress and supports consistency of direction,
and management of potential conflicts. This is overseen by the Programme Management Office (PMO)· A formal gating process through which all projects must pass
In progress: · Defined success criteria established for all projects, which align with delivery of the operating model· Ongoing monitoring and management of
projects through the Transformation Forum, including monitoring of success factors against defined transition activities
Supporting Control EnvironmentSage's control environment, business processes and technology infrastructure does not support the efficient and effective operation of the business. Strategic alignment: 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, sets the tone-from-the-top· Shared Service Centres are
One SageCapacity for Growth
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